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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000 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
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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.I)
1401 Dove Street, Newport Beach, California 92660
(Address of principal executive offices)
(949) 475-3600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K.
On March 27, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $83.4 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 March 27, 2001 was
20,385,456.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in
connection with the 2001 Annual Meeting of Stockholders of the Registrant are
incorporated by reference into Part III.
IMPAC MORTGAGE HOLDINGS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS............................................................ 3
ITEM 2. PROPERTIES.......................................................... 30
ITEM 3. LEGAL PROCEEDINGS................................................... 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................ 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 62
ITEM 11. EXECUTIVE COMPENSATION.............................................. 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 63
SIGNATURES................................................................... 67
2
PART I
Certain information contained in this Report constitutes forward-looking
statements under the Securities Act and the Exchange Act. These forward-looking
statements can be identified by the use of forward-looking terminology
including, but not limited to, "may," "will," "expect," "intend," "should,"
"anticipate," "estimate," or "believe" or comparable terminology. The Company's
actual results may differ materially from those contained in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Item 1. Business--Risk Factors" as well as those
discussed elsewhere in this Report.
ITEM 1. BUSINESS
Impac Mortgage Holdings, Inc. was incorporated in Maryland in August 1995.
References to the "Company" refer to Impac Mortgage Holdings, Inc. ("IMH") and
its subsidiaries, IMH Assets Corporation ("IMH Assets"), Impac Warehouse Lending
Group, Inc. ("IWLG"), and Impac Funding Corporation, (together with its
wholly-owned subsidiary Impac Secured Assets Corporation, ("IFC"). References to
IMH refer to Impac Mortgage Holdings, Inc. as a separate entity from IMH Assets,
IWLG and IFC.
General
Impac Mortgage Holdings, Inc. is a mortgage real estate investment trust
("REIT"), which, together with its subsidiaries and related companies, primarily
operates three businesses: (1) the Long-Term Investment Operations, (2) the
Mortgage Operations, and (3) the Warehouse Lending Operations. The Long-Term
Investment Operations invests primarily in non-conforming residential mortgage
loans and securities backed by such loans. The Mortgage Operations purchases and
sells and securitizes primarily non-conforming mortgage loans. The Warehouse
Lending Operations provides warehouse and repurchase financing to originators of
mortgage loans. The Company elects to be taxed as a REIT for federal income tax
purposes, which generally allows the Company to pass through income to
stockholders without payment of federal income tax at the corporate level.
Long-Term Investment Operations
The Long-Term Investment Operations, conducted by IMH and IMH Assets, a
wholly-owned specialty purpose entity through which IMH conducts its
Collateralized Mortgage Obligations ("CMO") borrowings, invests primarily in
non-conforming residential mortgage loans and mortgage-backed securities secured
by or representing interests in such loans and, to a lesser extent, in second
mortgage loans. Non-conforming residential mortgage loans are residential
mortgages that generally do not qualify for purchase by government-sponsored
agencies such as the Federal National Mortgage Association ("Fannie Mae") and
the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The principal
differences between conforming loans and non-conforming loans include applicable
loan-to-value ratios, credit and income histories of the mortgagors,
documentation required for approval of the mortgagors, type of properties
securing the mortgage loans, loan sizes, and the mortgagors' occupancy status
with respect to the mortgaged properties. Second mortgage loans are mortgage
loans secured by a second lien on the property and made to borrowers owning
single-family homes for the purpose of debt consolidation, home improvements,
education and a variety of other purposes.
Income is earned primarily from net interest income received by IMH on
mortgage loans and mortgage-backed and other collateralized securities acquired
and held in its portfolio. Mortgage loans and mortgage-backed and other
collateralized securities are financed with capital, borrowings provided from
CMOs, warehouse facilities, which are referred to as reverse repurchase
agreements, and borrowings secured by mortgage-backed securities. IFC supports
the investment objectives of the Long-Term Investment Operations by supplying
the Long-Term Investment Operations mortgage loans and mortgage-backed
securities at prices that are comparable to those available through investment
bankers and other third parties.
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Mortgage Loans Held in the Portfolio
The Company originates loans through its network of conduit sellers and
brokers, and invests a substantial portion of its portfolio in non-conforming
mortgage loans and, to a lesser extent, second mortgage loans. The Company also
purchases such loans from third parties for long-term investment and for resale.
Management believes that non-conforming mortgage loans provide an attractive net
earnings profile and produce higher yields without commensurately higher credit
risks when compared with conforming mortgage loans. The Company primarily
originates or purchases "A" or "A-" grade mortgage loans (collectively, "A
Loans", as defined by the Company) and to a lesser extent "B" and "C" grade
mortgage loans (collectively, "B/C Loans", as defined by the company). "A"
grade loans generally have a Fair Isaac Credit Score ("FICO") of 620 or better
and "A-" grade loans generally have a FICO score of 550 or better. The FICO was
developed by Fair Isaac Co., Inc. of San Rafael, California. It is an electronic
evaluation of past and present credit accounts on the borrower's credit bureau
report. This includes all reported accounts as well as public records and
inquiries. The following table summarizes the percentage of mortgage loans by
credit grade in the long term investment portfolio for the periods shown.
At At
December 31, December 31,
2000 1999
------------ ------------
"A" Loans............................ 90.3% 89.1%
"B/C" Loans.......................... 9.7 10.9
----- -----
100.0% 100.0%
===== =====
The Company believes that a structural change in the mortgage banking
industry has occurred which has increased demand for higher yielding
non-conforming mortgage loans. This change has been caused by a number of
factors, including: (1) investors' demand for higher-yielding assets due to
historically low interest rates over the past few years, (2) increased
securitization of high-yielding non-conforming mortgage loans by the investment
banking industry, (3) quantification and development of standardized credit
mortgage loans, and (4) increased competition in the securitization industry,
which has reduced borrower interest rates and fees, thereby making
non-conforming mortgage loans more affordable.
Investments in Mortgage-Backed Securities
Subsequent to 1997, the Company's investment strategy has been to only
acquire or invest in mortgage-backed securities that are secured by mortgage
loans underwritten and purchased by the Mortgage Operations. Prior to 1998, the
Company acquired other collateralized securities secured by loans generated by
third parties. In connection with the issuance of mortgage-backed securities by
IFC in the form of real estate mortgage investment conduits ("REMICs"), IMH has
and may retain senior or subordinated securities as regular interests on a
short-term or long-term basis. Such securities or investments may subject the
Company to credit, interest rate and/or prepayment risks. In general,
subordinated classes of a particular series of securities bear all losses prior
to the related senior classes. Losses in excess of expected losses at the time
such securities are purchased would adversely affect the Company's yield on such
securities and could result in the failure of the Company to recoup its initial
investment. The Company may also acquire REMIC or CMO residual interests created
through its own securitizations or those of third parties. See "--Mortgage
Operations--Securitization and Sale Process," and "--Risk Factors--Value of Our
Portfolio of Mortgage-Backed Securities May be Adversely Affected."
Financing
The Long-Term Investment Operations are primarily financed through the
issuance of CMOs, short-term borrowings under reverse repurchase agreements,
borrowings secured by mortgage-backed securities, and proceeds from the sale of
capital stock. Refer to "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for more information regarding the Company's financing arrangements.
Collateralized Mortgage Obligations. 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. For accounting and tax purposes, the mortgage loans financed through
the issuance of CMOs are treated as assets of the Company, and the CMOs are
treated as debt of the Company, when for accounting purposes the CMO qualifies
as a financing arrangement. Each issue of CMOs is fully
4
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 Long-Term Investment Operations earns
the net interest spread between the interest income on the mortgage loans
securing the CMOs and the interest and other expenses associated with the CMO
financing. The net interest spread may be directly impacted by the levels of
prepayment of the underlying mortgage loans and, to the extent each CMO class
has variable rates of interest, may be affected by changes in short-term
interest rates.
When the Company issues CMOs for financing purposes, it seeks an
investment grade rating for such CMOs by a nationally recognized rating agency.
To secure such a rating, it is often necessary to pledge collateral in excess of
the principal amount of the CMOs to be issued, or to obtain other forms of
credit enhancements such as additional mortgage loan insurance. The need for
additional collateral or other credit enhancements depends upon factors such as
the type of collateral provided, the interest rates paid, the geographic
concentration of the mortgaged property securing the collateral, and other
criteria established by the rating agencies. The pledge of additional collateral
reduces the capacity of the Company to raise additional funds through short-term
secured borrowings or additional CMOs, and diminishes the potential expansion of
its investment portfolio. As a result, the Company's objective is to pledge
additional collateral for CMOs only in the amount required to obtain an
investment grade rating for the CMOs by a nationally recognized rating agency.
Total loss exposure to the Company is limited to the equity invested in the CMOs
at any point in time.
The Company believes that under prevailing market conditions an issuance
of CMOs receiving other than an investment grade rating would require payment of
an excessive yield to attract investors. The Company's CMOs typically are
structured as one-month London interbank offered rate ("LIBOR") "floaters" and
fixed rate securities with interest payable monthly. Interest rates on
adjustable rate CMOs range from 0.18% to 3.60% over one-month LIBOR and from
6.65% to 7.25% on fixed rate CMOs depending on the class of the CMOs issued. The
CMOs are guaranteed for the holders by a mortgage loan insurer, giving the CMOs
the highest rating established by a nationally recognized rating agency.
Reverse Repurchase Agreements. The Company has reverse repurchase
agreements at interest rates that are consistent with the Company's financing
objectives. A reverse repurchase agreement, although structured as a sale and
repurchase obligation, acts as a financing vehicle under which the Company
effectively pledges its mortgage loans and mortgage securities as collateral to
secure a short-term loan. Generally, the other party to the agreement makes the
loan in an amount equal to a percentage of the market value of the pledged
collateral. At the maturity of the reverse repurchase agreement, the Company is
required to repay the loan and correspondingly receives back its collateral.
Under reverse repurchase agreements, the Company retains the instruments of
beneficial ownership, including the right to distributions on the collateral and
the right to vote on matters as to which certificate holders vote. Upon a
payment default under such agreements, the lending party may liquidate the
collateral.
The Company's borrowing agreements require the Company to pledge cash,
additional mortgage loans or additional securities backed by mortgage loans in
the event the market value of existing collateral declines. The Company may be
required to sell assets to reduce its borrowings to the extent that cash
reserves are insufficient to cover such deficiencies in collateral. To reduce
its exposure to the credit risk of reverse repurchase agreement lenders, the
Company enters into such agreements with several different parties and follows
its own credit exposure procedures. The Company monitors the financial condition
of its reverse repurchase agreement lenders on a regular basis, including the
percentage of mortgage loans that are the subject of reverse repurchase
agreements with a single lender. See "--Risk Factors--Inability to Generate
Liquidity May Adversely Affect Our Operations."
Borrowings Secured by Mortgage-Backed Securities. The Company finances a
portion of its mortgage-backed securities portfolio with principal only notes.
The notes represent senior or subordinated interests in trust funds primarily
consisting of a pool of mortgage loans. The notes represent non-recourse
obligations of the Company.
Other Mortgage-Backed Securities. As an additional alternative for the
financing of its Long-Term Investment Operations, the Company may issue other
mortgage-backed securities. The Company may issue mortgage pass-through
certificates representing an undivided interest in pools of mortgage loans. The
holders of mortgage pass-through certificates receive their pro rata share of
the principal payments made on a pool of mortgage loans and
5
interest at a pass-through interest rate that are fixed at the time of offering.
The Company may retain up to a 100% undivided interest in a significant number
of the pools of mortgage loans underlying such pass-through certificates. The
retained interest, if any, may also be subordinated so that, in the event of a
loss, payments to certificate holders will be made before the Company receives
its payments. Unlike the issuance of CMOs, the issuance of mortgage pass-through
certificates will not create an obligation of the Company to security holders in
the event of borrower default. However, as in the case of CMOs, the Company may
be required to obtain various forms of credit enhancements in order to obtain an
investment grade rating for issues of mortgage pass-through certificates by a
nationally recognized rating agency.
Mortgage Operations
The Mortgage Operations, conducted by IFC and Impac Lending Group ("ILG"),
a division of IFC, purchases primarily non-conforming mortgage loans and, to a
lesser extent, second mortgage loans from its network of third party
correspondent sellers, wholesale brokers and retail customers. IFC is the
Mortgage Operations and includes correspondent business along with wholesale and
retail business from ILG. IFC subsequently securitizes and sells loans to
permanent investors, including the Long-Term Investment Operations. All mortgage
loans originated or purchased by IFC will be made available for sale to IMH at
prices that are comparable to those available through third parties at the date
of sale and subsequent transfer to IMH. IMH owns all of the preferred stock of,
and 99% of the economic interest in, IFC, while Joseph R. Tomkinson, Chairman
and Chief Executive Officer, William S. Ashmore, President, and Richard J.
Johnson, Executive Vice President and Chief Financial Officer, are the holders
of all of the outstanding voting stock of, and 1% of the economic interest in,
IFC.
As of December 31, 2000, IFC maintained relationships with 263
correspondent sellers and 983 wholesale brokers. Correspondents originate and
close mortgage loans under IFC's mortgage loan programs on a flow (loan-by-loan)
basis or through bulk sale commitments. Correspondents include savings and loan
associations, commercial banks, mortgage bankers and mortgage brokers. ILG began
operations in January 1999 and markets, underwrites, processes and funds
mortgage loans for both of the Company's 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 Mortgage
Operations as correspondent sellers because they do not meet the higher net
worth requirements. Through the retail division, ILG markets mortgage loans
directly to the public. Both the wholesale and retail divisions offer all of the
loan programs, including Progressive Series and Progressive Express, that are
offered by IFC. IFC can compete effectively with other non-conforming mortgage
loan conduits through its efficient loan purchasing process, flexible purchase
commitment options and competitive pricing and by designing non-conforming
mortgage loans to suit the needs of its correspondent loan originators and their
borrowers, which are intended to provide sufficient credit quality to its
investors. In addition to earnings generated from ongoing securitizations and
sales to third-party investors, the Mortgage Operations supports the Long-Term
Investment Operations of the Company by supplying IMH with non-conforming
mortgage loans and securities backed by such loans.
As a non-conforming mortgage loan conduit, IFC acts as an intermediary
between the originators of mortgage loans that do not currently meet the
guidelines for purchase by government-sponsored entities that guarantee
mortgage-backed securities (i.e. Fannie Mae and Freddie Mac) and permanent
investors in mortgage-backed securities secured by or representing an ownership
interest in such mortgage loans. IFC also acts as a bulk purchaser of primarily
non-conforming mortgage loans. The Company believes that non-conforming mortgage
loans provide an attractive net earnings profile, producing higher yields
without commensurately higher credit risks when compared to mortgage loans that
qualify for purchase by Fannie Mae or Freddie Mac. In addition, based on the
Company's experience in the mortgage banking industry and in the mortgage
conduit business, the Company believes it provides mortgage loan sellers with an
expanded and competitively priced array of non-conforming and, to a lesser
extent, B/C Loan products, timely purchasing of loans, mandatory, best efforts
and optional rate-lock commitments, and flexible master commitments. See
"--Purchase Commitment Process and Pricing."
Marketing and Production
Marketing Strategy. The Company's competitive strategy is to be a low-cost
national acquirer of mortgage loans to be held for long-term investment, sold in
the secondary market as whole loans or securitized as mortgage-backed
6
securities. A key feature of this approach is the use of a large national
network of correspondent originators and wholesale brokers. This allows IFC to
shift the high fixed costs of interfacing with the homeowner to its customers.
The marketing strategy for the Mortgage Operations is designed to accomplish
three objectives: (1) attract a geographically diverse group of both large and
small correspondent originators and brokers, (2) establish relationships with
correspondents and brokers that facilitate their ability to offer a variety of
loan products designed by IFC, and (3) purchase loans and securitize and sell
them in the secondary market or to the Long-Term Investment Operations. In order
to accomplish these objectives, IFC designs and offers loan products that are
attractive to potential non-conforming borrowers and to end-investors in
non-conforming mortgage loans and mortgage-backed securities.
IFC has historically emphasized and continues to emphasize flexibility in
its mortgage loan product mix as part of its strategy to attract and establish
long-term relationships with correspondents and brokers. IFC also maintains
relationships with numerous end-investors so that it may develop products that
they may be interested in as market conditions change, which in turn may be
offered through the correspondent network. As a consequence, IFC is less
dependent on acquiring conforming mortgage loans and has acquired significant
volumes of non-conforming loans. In response to the needs of its non-conforming
mortgage loan correspondents, and as part of its strategy to facilitate the sale
of its loans through the Mortgage Operations, IFC's marketing strategy offers
efficient response time in the purchase process, direct and frequent contact
with its correspondents and brokers through a trained sales force and flexible
commitment programs. Finally, due to the price sensitivity of most homebuyers,
IFC is competitive in pricing its products in order to attract sufficient
numbers of borrowers.
Impac Direct Access System for Lending ("IDASL"). IDASL is not a lead
generator for mortgage brokers, but is an interactive internet system that
enables our customers to access loan status, current pricing, purchase
confirmations and receive consistent and reliable automated loan underwriting
decisions within minutes. In addition, IDASL has an integrated credit-reporting
interface that provides our customers with a very competitive tool enabling them
to render a loan decision at point of sale. IDASL is intended to increase
efficiencies not only for our customers but also for the Mortgage Operations by
significantly decreasing the processing time for a mortgage loan, while
improving employee production and maintaining superior customer service, which
together leads to higher closing ratios, improved profit margins and increased
profitability at all levels of its business operations. Future enhancements to
IDASL, which are expected to be implemented during the second quarter of 2001,
are expected to include the ability to provide automated mortgage insurance
approval, fraud detection and electronic property appraisal that are intended to
further streamline the entire mortgage application and approval process. Most
importantly, IDASL allows IFC to move closer to its correspondents and brokers
with minimal future capital investment while maintaining centralization, a key
factor in the success of the Company's operating strategy. During the fourth
quarter of 2000, IFC's customers increased average monthly volume of loans
submitted through the IDASL system by 27% over third quarter of 2000 loan
submissions. Loan submissions during the fourth quarter of 2000 averaged $555.5
million per month in loan volume as compared to $438.0 million per month during
the third quarter of 2000 and $236.0 million per month during the second quarter
of 2000. By December 31, 2000, substantially all of IFC's correspondents were
submitting loans through IDASL and 100% of all wholesale loans delivered by
brokers were directly underwritten through IDASL.
The Progressive Series Loan Program. The underwriting guidelines utilized
in the Progressive Series Loan Program ("Progressive Series"), as developed by
IFC, are intended to assess the borrower's ability and willingness to repay the
mortgage loan obligation and to assess the adequacy of the mortgaged property as
collateral for the mortgage loan. Progressive Series is designed to meet the
needs of borrowers with excellent credit, as well as those with credit that has
been adversely affected. Progressive Series consists of six mortgage loan
programs. Each program has different credit criteria, reserve requirements,
qualifying ratios and loan-to-value ratio ("LTV") restrictions. Series I is
designed with credit history and income requirements typical of "A" credit
borrowers. In the event a borrower does not fit the series I criteria, the
borrower's mortgage loan is placed into either series II, III, III+, IV, V or
VI, depending on which series' mortgage loan parameters meets the borrower's
unique credit profile. Series II, III, III+, IV, V or VI allow for less
restrictive standards because of certain compensating or offsetting factors such
as a lower LTV, verified liquid assets, job stability, pride of ownership and,
in the case of refinance mortgage loans, length of time owning the mortgaged
property. The philosophy of Progressive Series is that no single borrower
characteristic should automatically determine whether an application for a
mortgage loan should be approved or disapproved. Lending decisions are based on
a risk analysis assessment after the review of the entire mortgage loan file.
Each mortgage loan is individually underwritten with emphasis placed on the
overall quality of the mortgage loan. All Progressive Series
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borrowers are required to have debt service-to-income ratios within the range of
45% to 55% (calculated on the basis of monthly income), depending on the LTV of
the mortgage loan.
The Progressive Express Loan Program. IFC has also developed an additional
program to the Progressive Series, called the Progressive Express Loan Program
("Progressive Express"). The concept of Progressive Express is to underwrite
loans focusing on the borrower's FICO, the borrower's ability and willingness to
repay the mortgage loan obligation, and assessment of the adequacy of the
mortgage property as collateral for the loan. Progressive Express offers six
levels of mortgage loan programs. Progressive Express has a minimum FICO that
must be met by the borrower's primary wage earner and does not allow for
exceptions to the FICO requirement. The FICO requirement is as follows:
Progressive Express I - above 680, Progressive Express II - 680-620, Progressive
Express III - 619-601, Progressive Express IV - 600-581, Progressive Express V -
580-551, and Progressive VI - 550-500. Each Progressive Express program has
different FICO requirements, credit criteria, reserve requirements, and LTV
restrictions. Progressive Express I is designed for credit history and income
requirements typical of "A+" credit borrowers. In the event a borrower does not
fit the Progressive Express I criteria, the borrower's mortgage loan is placed
into either Progressive Express II, III, IV, V or VI, depending on which series'
mortgage loan parameters meets the borrowers unique credit profile.
Mortgage Loans Acquired. A majority of mortgage loans purchased by the
Mortgage Operations are non-conforming mortgage loans. Currently, the maximum
principal balance for a conforming loan is $275,000. Loans that exceed such
maximum principal balance are referred to as "jumbo loans." Non-conforming
mortgage loans generally consist of jumbo loans or other loans that are
originated in accordance with underwriting or product guidelines that differ
from those applied by Fannie Mae and Freddie Mac. Non-conforming loans may
involve greater risk as a result of different underwriting and product
guidelines. A portion of the mortgage loans purchased through the Mortgage
Operations are B/C Loans, as described below, which may entail greater credit
risks than other non-conforming loans. IFC generally does not acquire mortgage
loans with principal balances above $750,000 for "A" quality loans, and $500,000
for B/C Loans. Non-conforming loans purchased by IFC pursuant to its
underwriting programs typically differ from those purchased pursuant to the
guidelines established by Fannie Mae and Freddie Mac primarily with respect to
required documentation, LTV ratios, borrower income or credit history, interest
rates, borrower occupancy of the mortgaged property, and/or property types. To
the extent that these programs reflect underwriting standards different from
those of Fannie Mae and Freddie Mac, the performance of loans made may reflect
higher delinquency rates and/or credit losses.
Mortgage loans acquired by IFC are generally secured by first liens and,
to a lesser extent, second liens on single (one-to-four) family residential
properties with either fixed or adjustable interest rates. Fixed rate mortgage
loans ("FRMs") have a constant interest rate over the life of the loan, which is
generally 15 or 30 years. The interest rate on adjustable rate mortgage loans
("ARMs") are typically tied to an index, such as six-month LIBOR or the one-year
constant maturity Treasury index ("CMT Index") and are adjustable periodically
at various intervals. ARMs are typically subject to lifetime interest rate caps
and periodic interest rate and/or payment caps. The interest rates on ARMs are
typically lower than the average comparable fixed rate loan initially, but may
be higher than average comparable fixed rate loans over the life of the loan.
Currently, IFC purchases (1) FRMs that have original terms to maturity ranging
from 10 to 30 years, (2) ARMs that adjust based on LIBOR or the CMT Index, and
(3) 2-year and 3-year FRMs that adjust to six-month ARMs approximately two to
three years following origination at an interest rate based upon a defined index
plus a spread. Substantially all mortgage loans purchased by IFC fully amortize
over their remaining terms, however, IFC may purchase mortgage loans with other
interest rate and maturity characteristics.
The credit quality of the loans purchased by IFC varies depending upon the
specific program under which such loans are purchased. For example, a principal
credit risk inherent in adjustable rate mortgage loans is the potential "payment
shock" experienced by the borrower as rates rise, which could result in
increased delinquencies and credit losses. In the case of negative amortization
mortgage loans, a portion of the interest due accrues to the underlying
principal balance of the loan, thereby increasing the LTV ratio of the mortgage
loans. As a general rule, mortgage loans with higher LTV ratios are vulnerable
to higher delinquency rates given the borrower's lower equity investment in the
underlying property. Limited documentation mortgage loans, by contrast, must
meet more rigorous criteria for
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borrower credit quality in order to compensate for the reduced level of lender
review with respect to the borrower's earnings history and capacity.
The following table summarizes IFC's mortgage loan acquisitions by type of
loan, including net premiums, for the periods shown:
Year ended Year ended
December 31, 2000 December 31, 1999
----------------- -----------------
(dollars in millions,
except for average loan size)
Non-conforming Loans:
Volume of loans .......................... $ 2,108.5 $ 1,669.4
--------------- -------------
Percent of total volume .................. 99.8% 99.9%
Conforming Loans:
Volume of loans .......................... $ 4.2 $ 2.3
--------------- -------------
Percent of total volume .................. 0.2% 0.1%
--------------- -------------
Total Mortgage Loan Acquisitions ............. $ 2,112.7 $ 1,671.7
=============== =============
Fixed Rate Loans:
Volume of loans .......................... $ 1,555.1 $ 1,037.0
--------------- -------------
Percent of total volume .................. 73.6% 62.0%
Adjustable Rate Loans:
Volume of loans .......................... 557.6 634.7
--------------- -------------
Percent of total volume .................. 26.4% 38.0%
--------------- -------------
Total Mortgage Loan Acquisitions ............. $ 2,112.7 $ 1,671.7
=============== =============
Average Loan Size ............................ $ 155,000 $ 156,000
=============== =============
IFC's loan purchase activities are expected to continue to focus on those
regions of the country where higher volumes of non-conforming mortgage loans are
originated, including California, Florida, Texas, Georgia, New Jersey, New York,
Washington, Illinois, Colorado, and Nevada. The highest concentration of
non-conforming mortgage loans purchased by IFC relates to properties located in
California and Florida because of generally higher property values and mortgage
loan balances. During the years ended December 31, 2000 and 1999, mortgage loans
secured by California and Florida properties accounted for approximately 40% and
13%, respectively, and 44% and 11%, respectively, of mortgage loan acquisitions.
Of the $2.1 billion in mortgage loans acquired during the year ended December
31, 2000, $1.0 billion, or 48%, were acquired from IFC's top ten sellers. During
the year ended December 31, 2000, Express Lending accounted for $223.2 million,
or 11%, of mortgage loans acquired by IFC. No other sellers accounted for more
than 10% of the total mortgage loans acquired by IFC during the year ended
December 31, 2000.
A portion of the mortgage loans acquired by IFC are comprised of B/C
Loans. For the year ended December 31, 2000, such loans accounted for 0.5% of
IFC's total loan acquisitions as compared to 2% of IFC's total loan acquisitions
during 1999. In general, B/C Loans are residential mortgage loans made to
borrowers with lower credit ratings than borrowers of higher quality, A Loans,
and are normally subject to higher rates of loss and delinquency than other non-
conforming loans purchased by IFC. As a result, B/C Loans normally bear a higher
rate of interest and are typically subject to higher fees (including greater
prepayment fees and late payment penalties) than non-conforming A Loans. In
general, greater emphasis is placed upon the value of the mortgaged property
and, consequently, the quality of appraisals, and less upon the credit history
of the borrower in underwriting B/C Loans than in underwriting A Loans. In
addition, B/C Loans are generally subject to lower LTV ratios than A Loans.
Under IFC's B/C Loan program, underwriting authority is delegated only to
correspondents who meet strict underwriting guidelines established by IFC, see
"--Purchase Guidelines, Underwriting Methods, Seller Eligibility and Quality
Control."
9
High Loan-to-Value Loans. High loan-to-value loans ("125 Loans") consist
of second mortgage loans to qualified borrowers who have limited access to
traditional mortgage-related financing generally because of a lack of equity in
their homes. The loans are typically closed-end (usually 15 years), fixed rate,
fully-amortizing loans secured by a first or second lien on the borrower's
primary residence, and are typically used by consumers to pay-off credit card
and other unsecured indebtedness. Almost all of these loans are made in excess
of the value of the underlying collateral available to secure such loans, up to
a maximum of 125% of the property's LTV ratio.
Purchase Commitment Process and Pricing
Master Commitments. As part of its marketing strategy, IFC has established
mortgage loan purchase commitments ("Master Commitments") with sellers that,
subject to certain conditions, entitle the seller to sell and obligate IFC to
purchase a specified dollar amount of non-conforming mortgage loans over a
period generally ranging from six months to one year. The terms of each Master
Commitment specify whether a seller may sell loans to IFC on a mandatory, best
efforts or optional rate-lock basis. Master Commitments do not generally
obligate IFC to purchase loans at a specific price, but rather provide the
seller with a future outlet for the sale of its originated loans based on IFC's
quoted prices at the time of purchase. Master Commitments specify the types of
mortgage loans the seller is entitled to sell to IFC and generally range from $2
million to $50 million in aggregate committed principal amount. The provisions
of IFC's Seller/Servicer Guide are incorporated in each of the Mortgage
Operations' Master Commitments and may be modified by negotiations between the
parties. In addition, there are individualized Master Commitment options
available to sellers, which include alternative pricing structures or
specialized loan products. In order to obtain a Master Commitment, a seller may
be asked to pay a non-refundable up-front or non-delivery fee, or both, to the
Company. As of December 31, 2000, IFC had outstanding Master Commitments with
135 sellers to purchase mortgage loans in the aggregate principal amount of $2.1
billion over periods ranging from six months to one year, of which $1.2 billion
had been purchased or committed to be purchased pursuant to rate-locks.
Sellers who have entered into Master Commitments may sell mortgage loans
to the Mortgage Operations by executing individual, bulk or other rate-locks
(each, a "rate-lock"). Each rate-lock, in conjunction with the related Master
Commitment, specifies the terms of the related sale, including the quantity and
price of the mortgage loans or the formula by which the price will be
determined, the rate-lock type and the delivery requirements. Historically, the
up-front fee paid by a seller to IFC to obtain a Master Commitment on a
mandatory delivery basis is often refunded pro rata as the seller delivers loans
pursuant to rate-locks. Any remaining fee after the Master Commitment expires is
retained by the Mortgage Operations.
Following the issuance of a specific rate-lock, IFC is subject to the risk
of interest rate fluctuations and enters into hedging transactions to diminish
such risk. Hedging transactions may include mandatory or optional forward sales
of mortgage loans or mortgage-backed securities, interest rate caps, floors and
swaps, mandatory forward sales, mandatory or optional sales of futures, and
other financial futures transactions. The nature and quantity of hedging
transactions are determined by the management of IFC based on various factors,
including market conditions and the expected volume of mortgage loan purchases.
Deferred hedging gains and losses are presented on IFC's balance sheet in
mortgage loans held-for-sale. These deferred amounts are recognized upon the
sale or securitization of the related mortgage loans. As of December 31, 2000
and 1999, IFC had $(7,000) and $792,000, respectively, of deferred hedging gains
(losses) included in mortgage loans held-for-sale.
Bulk and Other Rate-Locks. IFC also acquires mortgage loans from sellers
that are not purchased pursuant to Master Commitments. These purchases may be
made on an individual rate-lock basis. Bulk rate-locks obligate the seller to
sell and IFC to purchase a specific group of loans, generally ranging from $1
million to $125 million in aggregate committed principal amount, at set prices
on specific dates. Bulk rate-locks enable IFC to acquire substantial quantities
of loans on a more immediate basis. The specific pricing, delivery and program
requirements of these purchases are determined by negotiation between the
parties but are generally in accordance with the provisions of IFC's
Seller/Servicer Guide. Due to the active presence of investment banks and other
substantial investors in this area, bulk pricing is extremely competitive. Loans
are also purchased from individual sellers (typically smaller originators of
mortgage loans) who do not wish to sell pursuant to either a Master Commitment
or bulk rate-lock. The terms of these individual purchases are based primarily
on IFC's Seller/Servicer Guide and standard pricing provisions.
10
Mandatory, Best-Efforts and Optional Rate-Locks. Mandatory rate-locks
require the seller to deliver a specified quantity of loans to IFC over a
specified period of time regardless of whether the loans are actually originated
by the seller or whether circumstances beyond the seller's control prevent
delivery. IFC is required to purchase all loans covered by the rate-lock at
prices established at the time of rate-lock. If the seller is unable to deliver
the specified loans, it may instead deliver comparable loans approved by IFC
within the specified delivery time. Failure to deliver the specified mortgage
loans or acceptable substitute loans under a mandatory rate-lock obligates the
seller to pay IFC a penalty, and, if IFC's mortgage loan yield requirements have
declined, the present value of the difference in yield IFC would have obtained
on the mortgage loans that the seller agreed to deliver and the yield available
on similar mortgage loans subject to mandatory rate-lock issued at the time of
such failure to deliver. In contrast, mortgage loans sold on a best-efforts
basis must be delivered to IFC only if they are actually originated by the
seller. The best-efforts rate-lock provides sellers with an effective way to
sell loans during the origination process without any penalty for failure to
deliver. Optional rate-locks give the seller the option to deliver mortgage
loans to IFC at a fixed price on a future date and requires the payment of
up-front fees to IFC. Any up-front fees paid in connection with optional
rate-locks are retained by IFC if the loans are not delivered.
Pricing. IFC sets purchase prices at least once every business day for
mortgage loans it acquires for its Mortgage Operations based on prevailing
market conditions. Different prices are established for the various types of
loans, rate-lock periods and types of rate-locks (mandatory or best-efforts).
IFC's standard pricing is based on the anticipated price it receives upon sale
or securitization of the loans, the anticipated interest spread realized during
the accumulation period, the targeted profit margin and the anticipated
issuance, credit enhancement, and ongoing administrative costs associated with
such sale or securitization. The credit enhancement cost component of IFC's
pricing is established for individual mortgage loans or pools of mortgage loans
based upon the characteristics of such loans or loan pools. As the
characteristics of the loans or loan pools vary, this cost component is
correspondingly adjusted upward or downward to reflect the variation. IFC's
adjustments are reviewed periodically by management to reflect changes in the
costs of credit enhancement. Adjustments to IFC's standard pricing may also be
negotiated on an individual basis under Master Commitments or bulk or individual
rate-locks with sellers. See "--Securitization and Sale Process."
Purchase Guidelines, Underwriting Methods, Seller Eligibility and Quality
Control
Purchase Guidelines. IFC has developed comprehensive purchase guidelines
for the acquisition of mortgage loans by the Mortgage Operations. Each loan
underwritten assesses the borrower's FICO, ability and willingness to repay the
mortgage loan obligation and the adequacy of the mortgaged property as
collateral for the mortgage loan. Subject to certain exceptions and the type of
loan product, each purchased loan must conform to the loan parameters and
eligibility requirements specified in IFC's Seller/Servicer Guide with respect
to, among other things, loan amount, type of property, LTV ratio, mortgage
insurance, credit history, debt service-to-income ratio, appraisal and loan
documentation. IFC also performs a full legal documentation review prior to the
purchase of all loans. All mortgage loans originated under IFC's loan programs
are underwritten either by employees of IFC or by contracted mortgage insurance
companies or delegated sellers.
Underwriting Methods. Under all of IFC's underwriting methods, loan
documentation requirements for verifying the borrower's income and assets vary
according to LTV ratios and other factors. Generally, as the standards for
required documentation are lowered, the borrowers' down payment requirements are
increased and the required LTV ratios are decreased. The borrower is also
required to have a stronger credit history, larger cash reserves and an
appraisal of the property that is validated by an enhanced desk and field
review. Lending decisions are based on a risk analysis assessment after the
review of the entire mortgage loan file. Each mortgage loan is individually
underwritten with emphasis placed on the overall quality of the mortgage loan.
Under the Progressive Series program, IFC underwrites one-to-four family
mortgage loans with LTV ratios at origination of up to 97% of the property's
appraised value, depending on, among other things, a borrower's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the mortgaged property. Second lien financing of the mortgaged properties may
be provided by lender's other than IFC at origination, however, the combined LTV
ratio generally may not exceed 100% of the property's appraised value.
Progressive Express has a minimum FICO that must be met by the borrower's
primary wage earner and does not allow for exceptions to the FICO requirement.
Each Progressive Express program has different FICO requirements, credit
criteria, reserve
11
requirements, and LTV ratio restrictions. Under the Progressive Express program,
IFC underwrites single family dwellings with LTV ratios at origination of up to
97% of the property's appraised value. In order for the property to be eligible
for the Progressive Express, it must be a single family residence (1 unit only),
condominium, and/or planned unit development. Under Progressive Express, the
borrower must disclose employment and assets on the application, however there
is no verification of the information.
IFC uses the program parameters as guidelines only. On a case-by-case
basis, IFC may determine that the prospective mortgagor warrants an exception
outside the standard program guidelines. An exception may be allowed if the loan
application reflects certain compensating factors, including (1) the prospective
mortgagor has demonstrated an ability to save and devote a greater portion of
income to basic housing needs, (2) the prospective mortgagor may have a
potential for increased earnings and advancement because of education or special
job training, even if the prospective mortgagor has just entered the job market,
(3) the prospective mortgagor has demonstrated an ability to maintain a debt
free position, (4) the prospective mortgagor may have short term income that is
verifiable but could not be counted as stable income because it does not meet
the remaining term requirements, and (5) the prospective mortgagor's net worth
is substantial enough to suggest that repayment of the loan is within the
prospective mortgagor's ability.
IFC does not publish an approved appraiser list for its correspondent
sellers. Mortgage sellers may select any appraiser of choice, regardless of the
LTV ratio of the related loan, from the seller's approved appraiser list. At the
discretion of the underwriter, a full appraisal, an enhanced desk review
appraisal, or a field review appraisal may be required.
Seller Eligibility Requirements. Mortgage loans acquired by the Mortgage
Operations are originated by various sellers, including savings and loan
associations, banks and mortgage bankers. Sellers are required to meet certain
regulatory, financial, insurance and performance requirements established by IFC
before they are eligible to participate in its mortgage loan purchase program,
and must submit to periodic reviews by IFC to ensure continued compliance with
these requirements. IFC's current criteria for seller participation generally
includes a minimum tangible net worth requirement of $500,000, approval as a
Fannie Mae or Freddie Mac Seller/Servicer in good standing, a Housing and Urban
Development ("HUD") approved mortgagee in good standing or a financial
institution that is insured by the Federal Deposit Insurance Corporation
("FDIC") or comparable federal or state agency, and that the seller is examined
by a federal or state authority. In addition, sellers are required to have
comprehensive loan origination quality control procedures. In connection with
its qualification, each seller enters into an agreement that generally provides
for recourse by IFC against the seller in the event of a breach of
representations or warranties made by the seller with respect to mortgage loans
sold to IFC, which includes but is not limited to any fraud or misrepresentation
during the mortgage loan origination process or upon early payment default on
such loans.
The underwriting program consists of three separate subprograms. IFC's
principal delegated underwriting subprogram is a fully delegated program
designed for loan sellers that meet higher financial and performance criteria
than those applicable to sellers generally. Generally, qualifying sellers have
tangible net worth of at least $1.5 million and are granted delegated
underwriting authority to a maximum loan amount of $500,000 for all mortgage
products under this subprogram. The second subprogram is a delegated program
pursuant to which sellers have tangible net worth of $500,000 to $1.5 million
and are granted delegated underwriting authority to a maximum loan amount of
$300,000. The third program is for sellers with tangible net worth of $500,000
in which sellers are under IFC's non-delegated underwriting program.
IFC has established a delegated underwriting program, which is similar in
concept to the delegated underwriting programs established by Fannie Mae and
Freddie Mac. Under this program, qualified sellers are required to underwrite
loans in compliance with IFC's underwriting guidelines as set forth in IFC's
Seller/Servicer Guide and by individual Master Commitment. In order to determine
a seller's eligibility to perform under its delegated underwriting program, an
internal review is undertaken by IFC's loan committee. In connection with its
approval, the seller must represent and warrant to IFC that all mortgage loans
sold to IFC will comply with IFC's underwriting guidelines. The current
financial, historical loan quality and other criteria for seller participation
in this program generally include a minimum net worth requirement and
verification of the seller's good standing, including the seller's experience
and demonstrated performance, with Fannie Mae or Freddie Mac or HUD. IFC
periodically reviews the sellers participating in its delegated underwriting
program and will retain those sellers that it believes are productive.
12
Mortgage loans acquired under IFC's non-delegated underwriting program are
either fully underwritten by IFC's underwriting staff or involve the use of
contract underwriters. IFC has contracted with several national mortgage
insurance firms that conduct contract underwriting for mortgage loan
acquisitions by IFC. Under these contracts, IFC relies on the credit review and
analysis of the contract underwriter, as well as its own pre-purchase
eligibility review to ensure that the loan meets program acceptance, its own
follow-up quality control procedures, and the representations and warranties of
the contract underwriter. Loans that are not acquired under either delegated or
contract underwriter methods are fully underwritten by IFC's underwriting staff.
In such cases, IFC performs a full credit review and analysis to ensure
compliance with its loan eligibility requirements. This review specifically
includes, among other things, an analysis of the underlying property and
associated appraisal, and an examination of the credit, employment and income
history of the borrower. Under all of these methods, loans are purchased only
after completion of a legal documentation and eligibility criteria review.
Quality Control. IFC performs a post-closing quality control review on a
minimum of 25% of the mortgage loans originated or acquired under the
Progressive Series and Progressive Express programs for complete re-verification
of employment, income and liquid assets used to qualify for such mortgage loans.
Such reviews also include procedures intended to detect evidence of fraudulent
documentation and/or imprudent activity during the processing, funding,
servicing or selling of the mortgage loans. Verification of occupancy and
applicable information is made by regular mail.
Securitization and Sale Process
General. The Mortgage Operations primarily utilizes warehouse lines of
credit and equity to finance the acquisition and origination of mortgage loans
from its customers. When a sufficient volume of mortgage loans with similar
characteristics has been accumulated, generally $100 million to $350 million,
IFC will securitize them through the issuance of mortgage-backed securities in
the form of REMICs or resell them as bulk whole loan sales. The period between
the time IFC commits to purchase mortgage loans and the time it sells or
securitizes such mortgage loans generally ranges from 10 to 90 days, depending
on certain factors including the length of the purchase commitment period, the
loan volume by product type and the securitization process.
Any decision by IFC to issue REMICs or to sell the loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and can eliminate or minimize any long-term
residual investment in such loans. REMIC securities consist of one or more
classes of "regular interests" and a single class of "residual interest." The
regular interests are tailored to the needs of investors and may be issued in
multiple classes with varying maturities, average lives and interest rates.
These regular interests are predominantly senior securities but, in conjunction
with providing credit enhancement, may be subordinated to the rights of other
regular interests. The residual interest represents the remainder of the cash
flows from the mortgage loans (including, in some instances, reinvestment
income) over the amounts required to be distributed to the regular interests. In
some cases, the regular interests may be structured so that there is no
significant residual cash flow, thereby allowing IFC to sell its entire interest
in the mortgage loans. As a result, in some cases, all of the capital originally
invested in the mortgage loans by the Company is redeployed in the Mortgage
Operations.
Each series of mortgage-backed securities is typically fully payable from
the mortgage assets underlying such series, and the recourse of investors is
limited to such assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent the Company holds subordinated
securities, the Company generally bears all losses prior to the related senior
security holders. Generally, any losses in excess of the credit enhancement
obtained are borne by the security holders. Except in the case of a breach of
the standard representations and warranties made by the Company when mortgage
loans are securitized, such securities are non-recourse to the Company.
Typically, the Company has recourse to the sellers of loans for any such
breaches, but there are no assurances of the sellers' abilities to honor their
respective obligations.
Credit Enhancement. REMICs created by the Mortgage Operations are
structured so that one or more of the classes of such securities are rated
investment grade by at least one nationally recognized rating agency. In
contrast to Agency Certificates (pass-through certificates guaranteed by Fannie
Mae or Freddie Mac) in which the principal and interest payments are guaranteed
by the U.S. government or one of its agencies, securities created by the
Mortgage
13
Operations do not benefit from any such guarantee. The ratings for the Mortgage
Operations' REMICs are based upon the perceived credit risk by the applicable
rating agency of the underlying mortgage loans, the structure of the securities
and the associated level of credit enhancement. Credit enhancement is designed
to provide protection to the security holders in the event of borrower defaults
and other losses including those associated with fraud or reductions in the
principal balances or interest rates on mortgage loans as required by law or a
bankruptcy court.
The Mortgage Operations can utilize multiple forms of credit enhancement,
including special hazard insurance, private mortgage insurance reserve funds,
letters of credit, surety bonds, over-collateralization and subordination or any
combination of the foregoing. In determining whether to provide credit
enhancement through subordination or other credit enhancement methods, the
Mortgage Operations takes into consideration the costs associated with each
method. Ratings of mortgage-backed securities are based primarily upon the
characteristics of the pool of underlying mortgage loans and associated credit
enhancement. A decline in the credit quality of such pools (including
delinquencies and/or credit losses above initial expectations), or of any
third-party credit enhancer, or adverse developments in general economic trends
affecting real estate values or the mortgage industry, could result in
downgrades of such ratings.
In connection with the securitization of B/C Loans, the levels of
subordination required as credit enhancement for the more senior classes of
securities issued are higher than those with respect to its non-conforming A
Loans. Similarly, in connection with the securitization of Mortgage loans
secured by second liens, the levels of subordination required as credit
enhancement for the more senior classes of securities issued are higher than
those with respect to its mortgage loans secured by first liens. Thus, to the
extent that the Company retains any of the subordinated securities created in
connection with such securitizations and losses with respect to such pools of
B/C Loans or mortgage loans secured by second liens are higher than expected,
the Company's future earnings could be adversely affected.
Master Servicing and Servicing
Master Servicing
General. IFC generally performs the function of master servicer with
respect to mortgage loans it sells and securitizes. The master servicer's
function includes collecting loan payments from servicers of loans and remitting
loan payments, less master servicing fees receivable and other fees, to a
trustee or other purchaser for each series of mortgage-backed securities or
loans master serviced. In addition, as master servicer, IFC monitors compliance
with its servicing guidelines and is required to perform, or to contract with a
third party to perform, all obligations not adequately performed by any
servicer. A master servicer typically employs servicers to carry out servicing
functions. In addition, IFC acts as the master servicer for all loans acquired
by the Long-Term Investment Operations. With respect to its function as a master
servicer for loans owned by IMH, IFC and IMH have entered into agreements having
terms substantially similar to those described below for servicing agreements.
Master servicing fees are generally 0.03% per annum on the declining principal
balances of the loans serviced. As of December 31, 2000 and 1999, IFC's master
servicing portfolio was $4.0 billion and $2.9 billion, respectively.
IFC offers its sellers of mortgage loans the right to retain servicing. In
the case of servicing retained mortgage loans, the Company will enter into
servicing agreements with the sellers of mortgage loans to service the mortgage
loans they sell to the Company. Each servicing agreement will require the
servicer to service the Company's mortgage loans as required under the Company's
servicing guide, which is generally consistent with Fannie Mae and Freddie Mac
guidelines and procedures. Each servicer will collect and remit principal and
interest payments, administer mortgage escrow accounts, submit and pursue
insurance claims, and initiate and supervise foreclosure proceedings on the
mortgage loans serviced. Each servicer will also provide accounting and
reporting services required by the Company for such loans. The servicer will be
required to follow such collection procedures as are customary in the industry.
The servicer may, at its discretion, arrange with a defaulting borrower a
schedule for the liquidation of delinquencies, provided primary mortgage
insurance coverage is not adversely affected. Each servicing agreement will
provide that the servicer may not assign any of its obligations with respect to
the mortgage loans serviced for the Company, except with the Company's consent.
The following table summarizes delinquency statistics for IFC's master
servicing portfolio based on principal balance for the periods shown (dollars in
millions):
14
At December 31, At December 31,
2000 1999
---------------------- ----------------------
Principal % of Master Principal % of Master
Balance Servicing Balance Servicing
of Loans Portfolio of Loans Portfolio
-------- --------- -------- ---------
Loans delinquent for:
60-89 days .............................. $ 65.8 1.63% $ 30.8 1.07%
90 days ................................. 26.0 0.64 21.1 0.73
------- ---- ------- ----
91.8 2.27 51.9 1.80
Foreclosures pending ........................ 57.1 0.56 47.0 1.64
Bankruptcies pending ........................ 22.5 1.41 26.9 0.93
------- ---- ------- ----
Total delinquencies, foreclosures and
bankruptcies .......................... $ 171.4 4.24% $ 125.8 4.37%
======= ==== ======= ====
Master Servicing Fees. The Company expects to retain master servicing fees
on loans sold. Master servicing fees receivable have characteristics similar to
"interest-only" securities; accordingly, they have many of the same risks
inherent in "interest-only" securities, including the risk that they will lose a
substantial portion of their value as a result of rapid prepayments occasioned
by declining interest rates. Master servicing fees receivable represent the
present value of the difference between the interest rate on mortgage loans
purchased by the Mortgage Operations and the interest rate received by investors
who purchase the securities backed by such loans, in excess of the normal loan
servicing fees charged by either (1) the Mortgage Operations on loans acquired
"servicing released" or (2) correspondents who sold loans to the Mortgage
Operations with "servicing retained" (the "Excess Servicing Fees). Currently,
the secondary market for master servicing fees receivable is limited). IFC
intends to hold the master servicing fees receivable for investment.
Accordingly, if IFC had to sell these receivables, the value received may or may
not be at or above the values at which IFC carried them on its balance sheet.
To the extent that servicing fees on a mortgage loan exceed an adequate
compensation (typically ranging from 0.25% to 0.50% per annum of the mortgage
loan principal amount), the Mortgage Operations will generate Excess Servicing
Fees receivable as an asset that represents an estimated present value of those
excess fees assuming a certain prepayment rate on the mortgage loan. In
determining present value of future cash flows, the Mortgage Operations will use
a market discount rate. Prepayment assumptions will be based on recent
evaluations of the actual prepayments of the Mortgage Operations' servicing
portfolio or on market prepayment rates on new portfolios on which the Mortgage
Operations has no experience and the interest rate environment at the time the
master servicing fees receivable are created. Management of the Company believes
that, depending upon the level of interest rates from time to time, investments
in current coupon master servicing fees receivable may be prudent, and if
interest rates rise, these investments will mitigate declines in income that may
occur in the Mortgage Operations.
Servicing
General. IFC subcontracts or sells all of its servicing obligations under
such loans to independent third parties pursuant to sub-servicing agreements or
the servicing guide. IFC believes that the selection of third-party
sub-servicers or the sale of servicing rights is more effective than
establishing a servicing department within the Company. However, part of IFC's
responsibility is to continually monitor the performance of the sub-servicers or
servicers through monthly performance reviews and regular site visits. Depending
on these sub-servicer reviews, the Company may in the future rely on its
internal collection group to take an ever more active role to assist the
sub-servicer in the servicing of these loans. Servicing includes collecting and
remitting loan payments, making required advances, accounting for principal and
interest, holding escrow or impound funds for payment of taxes and insurance, if
applicable, making required inspections of the mortgaged property, contacting
delinquent borrowers, and supervising foreclosures and property dispositions in
the event of unremedied defaults in accordance with the Company's guidelines.
Servicing fees range from 0.25% per annum for FRMs to 0.50% per annum for B/C
Loans and ARMs on the declining principal balances of loans serviced.
IFC generally acquires all of its loans on a "servicing released" basis.
To the extent IFC finances the acquisition of such loans with its warehouse line
with IWLG, IFC pledges such loans and the related servicing rights to IWLG as
collateral. As a result, IWLG has an absolute right to control the servicing of
such loans (including the right to collect
15
payments on the underlying mortgage loans) and to foreclose upon the underlying
real property in the case of default. Typically, IWLG delegates its right to
service the mortgage loans securing the warehouse line to IFC.
The following table summarizes certain information regarding IFC's
servicing portfolio of mortgage loans for the periods shown (dollars in
millions, except average loan size):
Year ended Year ended
December 31, 2000 December 31, 1999
----------------- -----------------
Beginning servicing portfolio ................ $ 2,393.4 $ 3,714.0
Add: Loan acquisitions ...................... 2,078.8 1,647.7
Less: Servicing transferred .................. (1,266.0) (2,270.8)
Principal paydowns (1) ................. (777.3) (697.5)
----------------- -----------------
Ending servicing portfolio ................... $ 2,428.9 $ 2,393.4
================= =================
Number of loans serviced ..................... 20,664 22,096
Average loan size ............................ $ 118,000 $ 108,000
Weighted average interest rate ............... 9.88% 9.43%
- ----------
(1) Includes normal principal runoff and principal prepayments.
Mortgage Servicing Rights. When the Mortgage Operations purchases loans
which include the associated servicing rights, the allocated price paid for the
servicing rights is reflected on its financial statements as Mortgage Servicing
Rights ("MSRs"). MSRs differ from master servicing fees receivable primarily by
the required amount of servicing to be performed, the loss exposure to the owner
of the instrument, and the financial liquidity of the instrument. In contrast to
MSRs, where the owner of the instrument acts as the servicer, master servicing
fees receivable do not require the owner of the instrument to service the
underlying mortgage loan. In addition, master servicing fees receivable subject
their owners to greater loss exposure from delinquencies or foreclosure on the
underlying mortgage loans than MSRs because a master servicer stands behind the
servicer and potentially the owner of the mortgage loan in priority of payment.
Both MSRs and master servicing fees receivable are purchased and sold in the
secondary markets. However, MSRs are generally more liquid and can be sold at
less of a discount as compared to master servicing fees receivable. During
periods of declining interest rates, prepayments of mortgage loans increase as
homeowners look to refinance at lower rates, resulting in a decrease in the
value of the Company's MSRs. Mortgage loans with higher interest rates are more
likely to result in prepayments. At December 31, 2000 and 1999, IFC had $10.9
million and $15.6 million, respectively, of MSRs.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provides warehouse and
repurchase financing to affiliated companies and to approved mortgage banks,
some of which are correspondents of IFC, to finance mortgage loans during the
time from the closing of the loans to their sale or other settlement with
pre-approved investors. Generally, the non-conforming mortgage loans funded with
such warehouse lines of credit are acquired by IFC. IWLG's warehouse lines are
non-recourse and IWLG looks mainly to the sale or liquidation of the mortgage
loans as a source of repayment. Any claim of IWLG as a secured lender in a
bankruptcy proceeding may be subject to adjustment and delay. Borrowings under
the warehouse facilities are presented on the Company's balance sheets as
finance receivables. IFC's outstanding warehouse line balances on IWLG's balance
sheet are structured to qualify under REIT asset tests and to generate income
qualifying under the 75% gross income test. Terms of affiliated warehouse lines
are based on Bank of America's prime rate with advance rates between 90% and 98%
of the fair value of the mortgage loans outstanding. Outstanding warehouse line
balances to non-affiliates on IWLG's balance sheet may not qualify under REIT
asset tests and may not generate income qualifying under the 75% gross income
test. Terms of non-affiliated warehouse lines, including the commitment amount,
are determined based upon the financial strength, historical performance and
other qualifications of the borrower. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a more detailed discussion of IWLG's warehouse line to IFC.
16
Regulation
The rules and regulations applicable to the Mortgage Operations, among
other things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers, and fix maximum loan amounts. Mortgage loan acquisition
activities are subject to, among other laws, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and
the regulations promulgated that prohibit discrimination and require the
disclosure of certain basic information to mortgagors concerning credit terms
and settlement costs. IFC is an approved Fannie Mae and Freddie Mac
seller/servicer. IFC is subject to the rules and regulations of Fannie Mae and
Freddie Mac with respect to acquiring, processing, selling and servicing
conforming mortgage loans. In addition, IFC is required annually to submit to
Fannie Mae and Freddie Mac audited financial statements, and each regulatory
entity has its own financial requirements for sellers/servicers. For any
conforming mortgage loan activities, IFC's affairs are also subject to
examination by Fannie Mae and Freddie Mac at any time to assure compliance with
the applicable regulations, policies and procedures. Additionally, there are
various state and local laws and regulations affecting the Mortgage Operations.
Mortgage operations also may be subject to applicable state usury statutes. The
Company is presently in material compliance with all material rules and
regulations to which it is subject.
Competition
In purchasing non-conforming mortgage loans and issuing securities backed
by such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers, insurance companies, other
lenders and other entities purchasing mortgage assets. The continued
consolidation in the mortgage banking industry may also reduce the number of
current sellers available to the Mortgage Operations, thus reducing the
Company's potential customer base, resulting in IFC's purchasing a larger
percentage of mortgage loans from a smaller number of sellers. Such changes
could negatively impact the Mortgage Operations. Mortgage-backed securities
issued by the Mortgage Operations and the Long-Term Investment Operations face
competition from other investment opportunities available to prospective
investors. The Company faces competition in its Mortgage Operations and
Warehouse Lending Operations from other financial institutions, including but
not limited to banks and investment banks. Many of the institutions with which
the Company competes in its Mortgage Operations and Warehouse Lending Operations
have significantly greater financial resources than the Company. However, IFC
can compete effectively with other non-conforming mortgage loan conduits through
its efficient loan purchasing process, flexible purchase commitment options and
competitive pricing and by designing non-conforming mortgage loans to suit the
needs of its correspondent loan originators and their borrowers, while providing
sufficient credit quality to its investors.
Employees
As of December 31, 2000, the Company had 212 full- and part-time employees
and 22 temporary and contract employees. IFC employed 199 full- and part-time
employees and 20 temporary and contract employees while IWLG employed 13 and 2,
respectively. Employees and operating management of the Long-Term Investment
Operations and Mortgage Operations are employed by IFC while employees of the
Warehouse Lending Operations are employed by IWLG. The Company believes that
relations with its employees are good. The Company is not a party to any
collective bargaining agreement.
Risk Factors
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating the Company and its business.
17
Inability to Generate Liquidity May Adversely Affect Our Operations
We must access liquidity to continue our operations, grow our asset base
and pay dividends. We have traditionally derived our liquidity from three
sources:
. financing facilities provided to us by others to acquire mortgage
assets;
. whole loan sales and securitizations of acquired mortgage loans; and
. sale of equity securities.
Margin Calls on Financing Facilities May Adversely Affect Our Operations
Prior to the fourth quarter of 1998, we generally had no difficulty in
obtaining favorable financing facilities or in selling acquired mortgage loans.
However, during the fourth quarter of 1998 the mortgage industry experienced
substantial turmoil as a result of a lack of liquidity in the secondary markets.
At that time, investors expressed unwillingness to purchase interests in
securitizations due in part to:
. higher than expected credit losses on many companies' securitization
interests, and
. the widening of returns expected by institutional investors on
securitization interests over the prevailing Treasury rate.
As a result, many mortgage loan originators, including our company, were
unable to access the securitization market on favorable terms, which resulted in
some companies declaring bankruptcy. Originators, like our company, were
required to sell loans on a whole loan basis and liquidate holdings of
mortgage-backed securities to repay financing facilities. However, the large
influx of loans available for sale on a whole loan basis affected the pricing
offered for these loans which in turn reduced the value of the collateral
underlying the financing facilities. Therefore, many providers of financing
facilities initiated margin calls. Margin calls resulted when our lenders
evaluated the market value of the collateral securing our financing facilities
and required us to provide them with additional equity or collateral to secure
our borrowings.
Our financing facilities are short-term borrowings and due to the turmoil
in the mortgage industry during the latter part of 1998 many traditional
providers of financing facilities were unwilling to provide facilities on
favorable terms, or at all. If we cannot renew or replace maturing borrowings,
we may have to sell, on a whole loan basis, the loans securing these facilities
which, depending upon market conditions, may result in substantial losses.
Dependence on Securitizations for Liquidity
We rely significantly upon securitizations to generate cash proceeds to
repay borrowings and to create credit availability. Any reduction in our ability
to complete securitizations may require us to utilize other sources of
financing, which may be on less than favorable terms. In addition, gains on
sales from our securitizations represent a significant portion of our earnings.
Several factors could affect our ability to complete securitizations of our
mortgages, including:
. conditions in the securities markets;
. the credit quality of the mortgage loans originated or purchased by
our Mortgage Operations;
. the volume of our mortgage loan originations and purchases; and
. our ability to obtain credit enhancement.
If we are unable to profitably securitize a significant number of our
mortgage loans in a particular financial reporting period, then it could result
in lower income or a loss for that period. As a result of turmoil in the
securitization market during the latter part of 1998, many mortgage lenders,
including our company, were required to sell mortgage loans on a whole loan
basis under adverse market conditions in order to generate liquidity. Many of
these sales were made at prices lower than our carrying value of the mortgage
loans and we experienced losses. We cannot assure you that we will be able to
continue to profitably sell our loans on a whole loan basis, or at all.
18
Gains on sales from our securitizations have historically represented a
substantial portion of our earnings. Our ability to complete securitizations is
dependent upon general conditions in the securities and secondary markets and
the credit quality of the mortgage loans. In addition, delays in closing sales
of our loans increases our risk by increasing the warehousing period for the
loans, further exposing our company to credit risk.
The market for first loss risk securities (securities that first take a
loss when mortgages are not paid by the borrowers) is generally limited. In
connections with our securitizations, we will endeavor to sell all securities
subjecting us to a first loss risk. If we cannot sell these securities, then we
may be required to hold them for an extended period, subjecting us to a first
loss risk.
Inability to Access Capital Markets May Adversely Affect Our Liquidity and
Operations
Although we believe our current operating cash flows are sufficient to
fund our lending activities and the growth of our mortgage assets, to repay our
financing facilities and to pay cash dividends, we continue to explore
alternatives for increasing our liquidity through additional asset sales and
capital raising efforts. However, we cannot assure you that any of these
alternatives will be available to us, or if available, that we will be able to
negotiate favorable terms. If we cannot raise cash by selling debt and equity
securities, we may be forced to sell our assets at unfavorable prices or
discontinue various business activities. Our inability to access the capital
markets could have a negative impact on our earnings and ability to pay
dividends.
REIT provisions of the Internal Revenue Code require us to distribute to
our stockholders substantially all of our taxable income. These provisions
restrict our ability to retain earnings and renew capital for our business
activities. We may decide in future periods not to be treated as a REIT, which
would cause us to be taxed at the corporate level and to cease paying regular
dividends. Also, to date a large portion of our dividends to stockholders
consisted of distributions by our Mortgage Operations subsidiary to our
Long-Term Investment Operations entity. However, our Mortgage Operations was
not, and is not, required under the REIT provisions to make these distributions.
Since we are trying to retain earnings for future growth, we may not cause our
Mortgage Operations subsidiary to make these distributions in the future. This
would materially affect the amount of dividends, if any, paid by us to our
stockholders.
Our Prior History is Not Reflective of Future Performance
Our historical financial performance is of limited relevance in predicting
our future performance. We began our operations in November 1995. Our future
operating results will depend largely upon our ability to expand our long-term
investment operations, our conduit operations and our warehouse lending
operations. We cannot assure you that we will be able to successfully grow or
that our operations will be profitable in the future. We cannot assure you that
any prior rates of growth can be sustained or that they are indicative of future
results. It is unlikely that any of our future dividends will be equal to or
more than those dividends we have paid in the past.
The loans we purchased to date and included in our securitizations have
been outstanding for a relatively short period of time and our delinquency and
loss experience to date may not be indicative of future results. It is unlikely
that we will be able to maintain our delinquency and loan loss ratios at their
present levels as our portfolio becomes more seasoned.
Our Borrowings and Substantial Leverage May Cause Losses
Risks of Use of Collateralized Mortgage Obligations
To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans and
mortgage-backed securities. We currently prefer to use collateralized mortgage
obligations as financing vehicles to increase our leverage, since mortgage loans
held for collateralized mortgage obligation collateral are retained for
investment rather than sold in a secondary market transaction. Retaining
mortgage loans as collateralized mortgage obligation collateral exposes our
operations to greater credit losses than the use of securitization techniques
that are treated as sales. In creating a collateralized mortgage obligation, we
make a cash equity investment to fund collateral in excess of the amount of the
securities issued. If we experience credit losses
19
on the pool of loans subject to the collateralized mortgage obligation greater
than we expected, the value of our equity investment decreases and we would have
to adjust the value of the investment in our financial statements.
Cost of Borrowings May Exceed Return on Assets
The cost of borrowings under our financing facilities corresponds to a
referenced interest rate plus or minus a margin. The margin varies depending on
factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses
if the returns on our assets financed with borrowed funds fail to cover the cost
of our borrowings.
Default Risks Under Financing Facilities
If we default under our collateralized borrowings, our lenders could force
us to liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we would be required to pay the difference in cash. If we were
to declare bankruptcy, some of our reverse repurchase agreements may obtain
special treatment and our creditors would then be allowed to liquidate the
collateral without any delay. On the other hand, if a lender with whom we have a
reverse repurchase agreement declares bankruptcy, we might experience difficulty
repurchasing our collateral, or enforcing our claim for damages, and it is
possible that our claim could be repudiated and we could be treated as an
unsecured creditor. If this occurs, our claims would be subject to significant
delay and we may receive substantially less than our actual damages.
Risk of Lack of Return of Investment on Liquidation
We have pledged a substantial portion of our assets to secure the
repayment of collateralized mortgage obligations issued in securitizations, our
financing facilities or other borrowings. We will also pledge substantially all
of our current and future mortgage loans to secure borrowings pending their
securitization or sale. The cash flows we receive from our investments that have
not yet been distributed, pledged or used to acquire mortgage loans or other
investments may be the only unpledged assets available to our unsecured
creditors and you if our company were liquidated.
Interest Rate Fluctuations May Adversely Affect Our Operating Results
Our operations, each as a mortgage loan originator and warehouse lender,
may be adversely affected by rising and falling interest rates. Higher interest
rates may discourage potential borrowers from refinancing mortgages, borrowing
to purchase homes or seeking second mortgages. This may decrease the amount of
mortgages available to be acquired by our mortgage operations and decrease the
demand for warehouse financing provided by our warehouse lending operations to
originators of mortgage loans. If short-term interest rates exceed long-term
interest rates, there is a higher risk of increased loan prepayments, as
borrowers may seek to refinance their mortgage loans at lower long-term interest
rates. Increased loan prepayments could lead to a reduction in the number of
loans we service, the fees we receive for loan servicing and our loan servicing
income.
We are subject to the risk of rising mortgage interest rates between the
time we commit to purchase mortgages at a fixed price and the time we sell or
securitize those mortgages. An increase in interest rates will generally result
in a decrease in the market value of mortgages that we have committed to
purchase at a fixed price, but have not yet sold or securitized.
Risks of Repricing of Assets and Liabilities
Our principal source of revenue is net interest income or net interest
spread, which is the difference between the interest we earn on our interest
earning assets and the interest we pay on our interest bearing liabilities. The
rates we pay on our borrowings are independent of the rates we earn on our
assets and may be subject to more frequent periodic rate adjustments. Therefore,
we could experience a decrease in net interest income or a net interest loss
because the interest rates on our borrowings could increase faster than the
interest rates on our assets. If our net interest spread becomes negative, we
will be paying more interest on our borrowings than we will be earning on our
assets and we will be exposed to a risk of loss.
20
Additionally, the rates paid on our borrowings and the rates received on
our assets may be based upon different indices (i.e., LIBOR, U.S. Treasuries,
etc.). If the index used to determine the rate on our borrowings increases
faster than the index used to determine the rate on our assets, we will
experience a declining net interest spread which will have a negative impact on
our profitability and may result in losses.
Risks of Adjustable Rate Mortgages
A significant portion of the mortgage assets held by our long-term
investment operations are adjustable rate mortgages or bear interest based upon
short-term interest rate indices. We generally fund these mortgage assets with
borrowings. To the extent that there is a difference between the interest rate
index used to determine the interest rate on our adjustable rate mortgage assets
and the interest rate index used to determine the borrowing rate for our related
financing, our business may be negatively impacted.
Interest Rate Caps
Adjustable rate mortgages typically have interest rate caps, which limit
interest rates charged to the borrower during any given period. Our borrowings
are not subject to similar restrictions. In a period of rapidly increasing
interest rates, the interest rates we pay on our borrowings could increase
without limitation, while the interest rates we earn on our adjustable rate
mortgage assets would be capped. If this occurs, our net earnings could be
significantly reduced or we could suffer a net interest loss.
Payment Caps
Some of our adjustable rate mortgages may be subject to payment caps
meaning some portion of the interest accruing on the mortgage is deferred and
added to the principal outstanding. Our borrowings do not have similar
provisions. This could cause us to receive less cash on our adjustable rate
assets than the interest due on our related borrowings. Also, the increased
principal amount outstanding as a result of interest deferral may result in a
higher rate of defaults on these loans.
Our Quarterly Operating Results May Fluctuate
Our results of operations, and more specifically our earnings, may
significantly fluctuate from quarter to quarter based on several factors,
including:
. changes in the amount of loans we originate;
. differences between our cost of funds on borrowings and the average
interest rates earned on our loans;
. inability or decisions not to complete significant bulk whole loan
sales or securitizations in a particular quarter; and
. problems generally affecting the mortgage loan industry.
A delay in closing a particular mortgage loan sale or securitization would
also increase our exposure to interest rate fluctuations by lengthening the
period during which our variable rate borrowings under our warehouse facilities
are outstanding. If we were unable to sell a sufficient number of mortgage loans
at a premium during a particular reporting period, our revenues for that period
would decline, which could have a material adverse affect on our operations. As
a result, our stock price could also fluctuate.
Our Share Prices Have Been and May Continue to be Highly Volatile
Historically, the market price of our common stock has been extremely
volatile. During 2000, our stock reached a high of $4.38 and a low of $1.83. On
December 31, 2000, the closing sale price was $2.95. The market price of our
common stock is likely to continue to be highly volatile and could be
significantly affected by factors including:
21
. availability of liquidity;
. volatility in the securitization market;
. whole loan sale pricing;
. margin calls by warehouse lenders;
. actual or anticipated fluctuations in our operating results;
. interest rates;
. prepayments on mortgages;
. valuations of securitization related assets;
. cost of funds; and
. general market conditions.
In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stocks of mortgage
REIT companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock. If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected.
Prepayments of Mortgage Loans May Adversely Affect Our Operations
Mortgage prepayments generally increase when fixed mortgage interest rates
fall below the then-current interest rates on outstanding adjustable rate
mortgage loans. Prepayments on mortgage loans are also affected by the terms and
credit grades of the loans and general economic conditions. Most of our
adjustable rate mortgages and those backing mortgage-backed securities are
originated within six months of the time we purchased the mortgages and
generally bear initial interest rates which are lower than their "fully-indexed"
amount (the applicable index plus the margin). If we acquire these mortgages at
a premium and they are prepaid prior to or soon after the time of adjustment to
a fully-indexed rate, we would not have received interest at the fully-indexed
rate during such period. This means we would lose the opportunity to earn
interest at that rate over the expected life of the mortgage. Also, if
prepayments on our adjustable rate mortgage loans increase when interest rates
are declining, our net interest income may decrease if we cannot reinvest the
prepayments in mortgage assets bearing comparable rates.
We currently acquire mortgages on a "servicing released" basis, meaning we
acquire both the mortgages and the rights to service them. This strategy
requires us to pay a higher purchase price or premium for the mortgages. If any
mortgage loans that we acquired at a premium are prepaid, generally accepted
accounting principles require us to immediately write-off any remaining
capitalized premium amount, which would decrease our interest income.
Value of Our Portfolio of Mortgage-Backed Securities May be Adversely Affected
We invest in mortgage-backed securities known as "interest-only,"
"principal-only," residual interest and subordinated securities. These
securities are either created through our own securitizations or those of third
parties. Investments in residual interest and subordinated securities are much
riskier than investments in senior mortgage-backed securities because these
subordinated securities bear all credit losses prior to the related senior
securities. On a percentage basis, the risk associated with holding residual
interest and subordinated securities is greater than holding the underlying
mortgage loans directly due to the concentration of losses in the subordinated
securities.
We estimate future cash flows from these securities and value them
utilizing assumptions based in part on projected discount rates, mortgage loan
prepayments and credit losses. If our actual experience differs from our
assumptions we would be required to reduce the value of these securities. The
market for our asset-backed securities is extremely limited and we cannot assure
you that we could sell these securities at their reported value or at all or
that we could recoup our initial investment.
We also bear the risk of loss on any mortgage-backed securities we
purchase in the secondary mortgage market. If third parties have been contracted
to insure against these types of losses, we would be dependent in part upon the
creditworthiness and claims paying ability of the insurer and the timeliness of
reimbursement in the event of a default
22
on the underlying obligations. The insurance coverage for various types of
losses is limited, and we bear the risk of any losses in excess of the
limitation or outside of the insurance coverage.
In addition, we may not obtain our anticipated yield or we may incur
losses if the credit support available within certain mortgage-backed securities
is inadequate due to unanticipated levels of losses, or due to difficulties
experienced by the credit support provider. Delays or difficulties encountered
in servicing mortgage-backed securities may cause greater losses and, therefore,
greater resort to credit support than was originally anticipated, and may cause
a rating agency to downgrade certain classes of our securities.
We Undertake Additional Risks by Acquiring and Investing in Mortgage Loans
Risk of Failure to Obtain Credit Enhancements
We do not obtain credit enhancements such as mortgage pool or special
hazard insurance for all of our mortgage loans and investments. Borrowers may
obtain private mortgage insurance, but we only require this insurance in limited
circumstances. During the time we hold mortgage loans for investment, we are
subject to risks of borrower defaults and bankruptcies and special hazard losses
that are not covered by standard hazard insurance (such as losses occurring from
earthquakes or floods). If a borrower defaults on a mortgage loan that we hold,
we bear the risk of loss of principal to the extent there is any deficiency
between the value of the related mortgaged property and the amount owing on the
mortgage loan. In addition, since defaulted mortgage loans are not considered
eligible collateral under our borrowing arrangements, we bear the risk of being
required to finance these loans with funds other than borrowed funds until they
are ultimately liquidated.
Greater Risks from Non-Conforming Mortgage Loans
Non-conforming residential mortgage loans are residential mortgages that
do not qualify for purchase by government sponsored agencies such as the Fannie
Mae and Freddie Mac. Our operations may be negatively affected due to our
investments in non-conforming loans or securities evidencing interests in such
loans. Credit risks associated with non-conforming mortgage loans are greater
than conforming mortgage loans. The interest rates we charge on non-conforming
loans are often higher than those charged for conforming loans. The purchase
market of non-conforming loans has typically provided for higher interest rates
in order to compensate for the lower liquidity. Due to the lower level of
liquidity in the non-conforming loan market, we may realize higher returns upon
securitization of loans than would be realized upon securitization of conforming
loans. However, lower levels of liquidity may cause us to hold loans or other
mortgage-related assets supported by these loans. By doing this, we assume the
potential risk of increased delinquency rates and/or credit losses as well as
interest rate risk. Additionally, the combination of different underwriting
criteria and higher rates of interest leads to greater risk including higher
prepayment rates and higher delinquency rates and/or credit losses.
Second Mortgages Entail Greater Risks
Our security interest in the property securing second mortgages is
subordinated to the interest of the first mortgage holder. If the value of the
property is equal to or less than the amount needed to repay the borrower's
obligation to the first mortgage holder upon foreclosure, all or a portion of
our second mortgage loan will not be repaid.
Geographic Concentration of Mortgage Loans Has Higher Risks
We do not set limitations on the percentage of our mortgage asset
portfolio composed of properties located in any one area (whether by state, zip
code or other geographic measure). Concentration in any one area increases our
exposure to the economic and natural hazard risks associated with that area. We
estimate that a high concentration of the loans included in securitizations in
which we hold subordinated interests are secured by properties in California.
Certain parts of California have experienced an economic downturn in past years
and have suffered the effects of certain natural hazards.
23
Potential Losses Related to Recourse Obligations
Mortgage-backed securities issued in connection with our securitizations
have been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized. While
we have recourse against the sellers of mortgage loans, we cannot assure you
that they will honor their obligations. We also engaged in bulk whole loan sales
pursuant to agreements that provide for recourse by the purchaser against us. In
some cases, the remedies available to a purchaser of mortgage loans from us are
broader than those available to us against those who sell us these loans. If a
purchaser exercises its rights against us, we may not always be able to enforce
whatever remedies we may have against our sellers.
We Undertake Additional Risks in Providing Warehouse Financing
As a warehouse lender, we lend money to mortgage bankers on a secured
basis and we are subject to the risks associated with lending to mortgage banks,
including the risks of fraud, borrower default and bankruptcy, any of which
could result in credit losses for us. Our claims as a secured lender in a
bankruptcy proceeding may be subject to adjustment and delay.
Value of our Mortgage Servicing Rights is Subject to Adjustment
When we purchase loans that include the associated servicing rights, the
allocated cost of the servicing rights is reflected on our financial statements
as mortgage servicing rights. To determine the fair value of these servicing
rights, we use assumptions to estimate future net servicing income including
projected discount rates, mortgage loan prepayments and credit losses. If actual
prepayments or defaults with respect to loans serviced occur more quickly than
we originally assumed, we would have to reduce the carrying value of our
mortgage servicing rights. We do not know if our assumptions will prove correct.
Our Operating Results Will be Affected by the Results of Our Hedging Activities
To offset the risks associated with our mortgage operations, we enter into
transactions designed to hedge our interest rate risks. To offset the risks
associated with our long-term investment operations, we attempt to match the
interest rate sensitivities of our adjustable rate mortgage assets held for
investment with the associated financing liabilities. Our management determines
the nature and quantity of the hedging transactions based on various factors,
including market conditions and the expected volume of mortgage loan purchases.
We do not limit management's use of certain instruments in such hedging
transactions. Although our hedging program currently qualifies for hedge
accounting under generally accepted accounting principles, we cannot assure you
that our hedging transactions will offset our risks of loss, and we could incur
significant losses.
Reduction in Demand for Residential Mortgage Loans and Our Non-Conforming Loan
Products May Adversely Affect Our Operations
The availability of sufficient mortgage loans meeting our criteria is
dependent in part upon the size and level of activity in the residential real
estate lending market and, in particular, the demand for non-conforming mortgage
loans, which is affected by:
. interest rates;
. regional and national economic conditions;
. fluctuations in residential property values; and
. general regulatory and tax developments.
24
If our mortgage loan purchases decrease, we will have:
. decreased economies of scale;
. higher origination costs per loan;
. reduced fee income;
. smaller gains on the sale of non-conforming mortgage loans; and
. an insufficient volume of loans to effect securitizations which
requires us to accumulate loans over a longer period.
Our Delinquency Ratios and Our Performance May be Adversely Affected by the
Performance of Parties Who Sub-Service our Loans
We contract with third-party sub-servicers for the sub-servicing of all
our loans, including those in our securitizations, and our operations are
subject to risks associated with inadequate or untimely servicing. Poor
performance by a sub-servicer may result in greater than expected delinquencies
and losses on our loans. A substantial increase in our delinquency or
foreclosure rate could adversely affect our ability to access the capital and
secondary markets for our financing needs. Also, with respect to loans subject
to a securitization, greater delinquencies would adversely impact the value of
any "interest-only," "principal-only" and subordinated securities we hold in
connection with that securitization.
In a securitization, relevant agreements permit us to be terminated as
servicer under specific conditions described in these agreements, such as the
failure of a sub-servicer to perform certain functions within specific time
periods. If, as a result of a sub-servicer's failure to perform adequately, we
were terminated as servicer of a securitization, the value of any servicing
rights held by us would be adversely impacted.
Intense Competition for Mortgage Loans May Adversely Affect Our Operations
We compete in purchasing non-conforming mortgage loans and issuing
mortgage-backed securities with:
. other mortgage conduit programs;
. investment banking firms;
. savings and loan associations;
. banks;
. thrift and loan associations;
. finance companies;
. mortgage bankers;
. insurance companies;
. other lenders; and
. other entities purchasing mortgage assets.
Consolidation in the mortgage banking industry may adversely affect us by
reducing the number of current sellers to our mortgage operations and our
potential customer base. As a result, we may have to purchase a larger
percentage of mortgage loans from a smaller number of customers, which could
cause us to have to pay higher premiums for loans.
If We Fail to Maintain Our REIT Status We May be Subject to Taxation as a
Regular Corporation
Consequences if We Fail to Qualify as a REIT
We believe that we have operated and intend to continue to operate in a
manner that enables us to meet the requirements for qualification as a REIT for
Federal income tax purposes. We have not requested, and do not plan to request,
a ruling from the Internal Revenue Service that we qualify as a REIT.
25
Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Our continued qualification as a REIT will
depend on our satisfaction of certain asset, income, organizational and
stockholder ownership requirements on a continuing basis.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to stockholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved.
Consequences if We Fail to Qualify as a REIT
Effect of Distribution Requirements
As a REIT, we are subject to annual distribution requirements, which limit
the amount of cash we have available for other business purposes, including
amounts to fund our growth.
Other Tax Liabilities
Even if we qualify as a REIT, we may be subject to certain Federal, state,
and local taxes on our income, property and operations that could reduce
operating cash flow.
Recent Developments
The Tax Relief Extension Act of 1999 was enacted and it contains several
tax provisions regarding REITs. It includes a provision, which reduces the
annual distribution requirement for REIT taxable income from 95% to 90%. It also
changes the 10% voting securities test under current law to a 10% vote or value
test. Thus, subject to certain exceptions, a REIT will no longer be allowed to
own more than 10% of the vote or value of the outstanding securities of any
issuer, other than a qualified REIT subsidiary or another REIT. One exception to
this new test, which is also an exception to the 5% asset test under current
law, allows a REIT to own any or all of the securities of a "taxable REIT
subsidiary." A taxable REIT subsidiary can perform non-customary services as
well as engage in non-real estate activities. A taxable REIT subsidiary will be
taxed as a regular C corporation but will be subject to earnings stripping
limitations on the deductibility of interest paid to its REIT. In addition, the
REIT will be subject to a 100% excise tax to the extent any transaction between
the taxable REIT subsidiary and the REIT is not conducted on an arm's length
basis. Securities of a taxable REIT subsidiary will constitute non-real-estate
assets for purposes of determining whether at least 75% of a REIT's assets
consist of real estate assets. In addition, no more that 20% of a REIT's total
assets can consist of securities of taxable REIT subsidiaries. These new tax
provisions became effective January 1, 2001. In addition, grandfather protection
is provided with respect to the 10% value test for securities of a corporation
held by a REIT on July 12, 1999, but such protection ceases to apply after the
corporation engages in a substantial new line of business or acquires any
substantial asset and also ceases to apply after the acquisition of additional
securities of the corporation by the REIT after July 12, 1999.
Because we currently own more than 10% of the value of IFC, we have made
an election to have IFC become a taxable REIT subsidiary as of January 1, 2001.
Potential Characterization of Distributions or Gain on Sale as Unrelated
Business Taxable Income to Tax-Exempt Investors
If (1) we are subject to the rules relating to taxable mortgage pools or
we are a "pension-held REIT," or (2) a tax-exempt stockholder has incurred debt
to purchase or hold our common stock is not exempt from Federal income taxation
under certain special sections of the Internal Revenue Code, or (3) the residual
REMIC interests we buy generate "excess inclusion income," then distributions to
and, in the case of a stockholder described in (2), gains
26
realized on the sale of common stock by, such tax-exempt stockholder may be
subject to Federal income tax as unrelated business taxable income under the
Internal Revenue Code.
Classification as a Taxable Mortgage Pool Could Subject Us to Increased Taxation
If we have borrowings with two or more maturities and, (1) those
borrowings are secured by mortgage loans or mortgage-backed securities and, (2)
the payments made on the borrowings are related to the payments received on the
underlying assets, then the borrowings may be classified as a "taxable mortgage
pool" under the Internal Revenue Code. If any part of our company was treated as
a taxable mortgage pool, then our REIT status would not be impaired, but a
portion of the taxable income we generated may, under regulations to be issued
by the Treasury Department, be characterized as "excess inclusion" income and
allocated to our stockholders. Any excess inclusion income would:
. not be allowed to be offset by a stockholder's net operating losses;
. be subject to a tax as unrelated business income if a stockholder
were a tax-exempt stockholder;
. be subject to the application of federal income tax withholding at
the maximum rate (without reduction for any otherwise applicable
income tax treaty) with respect to amounts allocable to foreign
stockholders; and
. be taxable (at the highest corporate tax rate) to us, rather than to
our stockholders, to the extent the excess inclusion income relates
to stock held by disqualified organizations (generally, tax-exempt
companies not subject to tax on unrelated business income, including
governmental organizations).
Based on advice of our tax counsel, we take the position that our existing
financing arrangements do not create a taxable mortgage pool. However, the IRS
may successfully maintain that our financing arrangements do qualify as a
taxable mortgage pool. In addition, we may enter into arrangements creating
excess inclusion income in the future.
Our Operations May be Adversely Affected if We are Subject to the Investment
Company Act
We intend to conduct our business at all times so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts entities that are primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate. In order to qualify for this exemption we must
maintain at least 55% of our assets directly in mortgage loans, qualifying
pass-through certificates and certain other qualifying interests in real estate.
Our ownership of certain mortgage assets may be limited by the provisions of the
Investment Company Act. If the Securities and Exchange Commission adopts a
contrary interpretation with respect to these securities or otherwise believes
we do not satisfy the above exception, we could be required to restructure our
activities or sell certain of our assets. To insure that we continue to qualify
for the exemption we may be required at times to adopt less efficient methods of
financing certain of our mortgage assets and we may be precluded from acquiring
certain types of higher-yielding mortgage assets. The net effect of these
factors will be to lower at times our net interest income. If we fail to qualify
for exemption from registration as an investment company, our ability to use
leverage would be substantially reduced, and we would not be able to conduct our
business as described. Our business will be materially and adversely affected if
we fail to qualify for this exemption.
Future Revisions in Policies and Strategies at the Discretion of Our Board of
Directors May be Affected Without Stockholder Consent
Our board of directors, including a majority of our unaffiliated
directors, has established our investment and operating policies and strategies.
We may:
. invest in the securities of other REITs for the purpose of exercising
control;
. offer securities in exchange for property; and
. offer to repurchase or otherwise reacquire our shares or other
securities in the future.
In October 1998, we adopted a repurchase plan to repurchase up to $5.0
million of our common stock in the open market. In 1999, the board of directors
approved common stock repurchases up to an additional $5.0 million, or a total
of $10.0 million. During 1999, we repurchased 2.0 million shares of our common
stock for $9.9 million. During 2000, we adopted a repurchase plan to repurchase
up to $3.0 million of our common stock in the open market. As of
27
December 31, 2000, we had repurchased 991,000 shares for $2.3 million. We may
also underwrite the securities of other issuers, although we have no present
intention to do so. Any of the policies, strategies and activities may be
modified or waived by our board of directors, subject in certain cases to
approval by a majority of our unaffiliated directors, without stockholder
consent.
Effect of Future Offerings May Adversely Affect Market Price of Our
Securities
We intend to increase our capital resources by making additional private
or public offerings of securities in the future. We do not know:
. the actual or perceived effect of these offerings;
. the timing of these offerings;
. the dilution of the book value or earnings per share of our
securities then outstanding; and
. the effect on the market price of our securities then outstanding.
Risk Relating to Common Stock
The sale or the proposed sale of substantial amounts of our common stock
in the public market could materially adversely affect the market price of our
common stock or other outstanding securities.
Risk Relating to Preferred Stock
Our charter authorizes our board of directors to issue shares of preferred
stock and to classify or reclassify any unissued shares of common stock or
preferred stock into one or more classes or series of stock. The preferred stock
may be issued from time to time with terms as determined by our board of
directors. Our preferred stock is available for our possible future financing of
acquisitions and for our general corporate purposes without further stockholder
authorization. In October 1998, our board announced a dividend to all common
stockholders of rights for certain shares of our Series A Junior Preferred
Stock. Our Series A Junior Preferred Stock has terms and conditions which could
have the effect of delaying, deferring or preventing a hostile change in control
of our company. Our board could authorize the issuance of shares of another
class or series of preferred stock with terms and conditions which could also
have the effect of delaying, deferring or preventing a change in control of our
company which could involve a premium price for holders of common stock or
otherwise be in their best interest. The preferred stock, if issued, may have a
preference on dividend payments, which could reduce the assets we have available
to make distributions to our common stockholders.
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns 10% or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between our company
and an interested stockholder unless the board of directors approved the
transaction prior to the party becoming an interested stockholder. The five-year
period runs from the most recent date on which the interested stockholder became
an interested stockholder. The law also requires a supermajority stockholder
vote for such transactions after the end of the five-year period. This means
that the transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares,
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom
the business combination is to be effected.
The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our stockholders' best interests.
28
Maryland Control Share Acquisition Statute
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a stockholder vote. Two-thirds of the shares eligible to vote
must vote in favor of granting the "control shares" voting rights. "Control
shares" are shares of stock that, taken together with all other shares of stock
the acquirer previously acquired, would entitle the acquirer to exercise at
least 20% of the voting power in electing directors. Control shares do not
include shares of stock the acquiring person is entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
our board of directors to call a special meeting of stockholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at
any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then we may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value. We will determine the fair value
of the shares, without regard to voting rights, as of the date of either:
. the last control share acquisition, or
. any meeting where stockholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a stockholders'
meeting and the acquirer becomes entitled to vote a majority of the shares of
stock entitled to vote, all other stockholders may exercise appraisal rights.
This means that you would be able to force us to redeem your stock for fair
value. Under Maryland law, the fair value may not be less than the highest price
per share paid in the control share acquisition. Furthermore, certain
limitations otherwise applicable to the exercise of dissenters' rights would not
apply in the context of a control share acquisition. The control share
acquisition statute would not apply to shares acquired in a merger,
consolidation or share exchange if we were a party to the transaction. The
control share acquisition statute could have the effect of discouraging offers
to acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our stockholders' best interests.
Possible Adverse Consequences of Limits on Ownership of Shares
Our Charter limits ownership of our capital stock by any single
stockholder to 9.5% of our outstanding shares. Our Charter also prohibits anyone
from buying shares if the purchase would result in us losing our REIT status.
This could happen if a share transaction results in fewer than 100 persons
owning all of our shares or in five or fewer persons, applying certain broad
attribution rules of the Internal Revenue Code, owning 50% or more of our
shares. If you or anyone else acquires shares in excess of the ownership limit
or in violation of the ownership requirements of the Internal Revenue Code for
REITs, we:
. will consider the transfer to be null and void;
. will not reflect the transaction on our books;
. may institute legal action to enjoin the transaction;
. will not pay dividends or other distributions with respect to those
shares;
. will not recognize any voting rights for those shares;
. will consider the shares held in trust for the benefit of our
Company; and
. will either direct the affected person to sell the shares and turn
over any profit to us, or we will redeem the shares. If we redeem the
shares, it will be at a price equal to the lesser of:
(a) the price paid by the transferee of the shares, or
(b) the average of the last reported sales prices on the American
Stock Exchange on the ten trading days immediately preceding
the date fixed for redemption by our board of directors.
29
An individual who acquires shares that violate the above rules bears the
risk that (1) he may lose control over the power to dispose of his shares, (2)
he may not recognize profit from the sale of his shares if the market price of
the shares increases and (3) he may be required to recognize a loss from the
sale of his shares if the market price decreases.
Limitations on Acquisition and Change in Control Ownership Limit
The 9.5% ownership limit discussed above may have the effect of precluding
acquisition of control of our company by a third party without consent of our
board of directors.
ITEM 2. PROPERTIES
The primary executive and administrative offices of the Company are
located in Newport Beach, California. The Company has entered into a 10-year
lease expiring May 2008 to use approximately 74,000 square feet of office space
at a rate of $149,000 per month. The Company believes that these facilities will
adequately provide for the Company's future growth needs.
ITEM 3. LEGAL PROCEEDINGS
On August 4, 2000, a complaint captioned Michael P. and Shellie Gilmor v.
Preferred Credit Corporation and Impac Funding Corporation, et. al. was filed in
the Circuit Court of Clay County, Missouri, Case No. CV100-6512CC (a later
duplicate action was filed under the same caption in the same court). The
plaintiffs are contending a purported class action lawsuit that the defendants
violated Missouri's Second Loans Act and Merchandising Practices Act by charging
certain unauthorized origination fees, finders' fees, mortgage broker or broker
fees, or closing fees and costs on second mortgage loans, and thereby committed
conversion from the illegal charge of interest or such costs or fees. IFC was a
purchaser of second mortgage loans originated by Preferred Credit Corporation
which the plaintiffs contend are included in this lawsuit. The plaintiffs are
seeking damages that include a permanent injunction enjoining the defendants,
its successors and any and all persons acting in concert from, directly or
indirectly, engaging in the wrongful acts described therein. It also seeks
disgorgement or restitution of all improperly collected charges and the
imposition of an equitable constructive trust over such amounts for the benefit
of the plaintiffs, the right to rescind the loan transactions, and a right to
offset any finance charges, closing costs, points or other loan fees paid
against the principal amounts due on the loans, actual damages, punitive
damages, reasonable attorney's fees, pre- and post- judgment interest and costs
and expenses. In connection with their claim of conversion, the plaintiffs are
seeking $50.0 million in punitive damages. Damages are unspecified and the
punitive damages in connection with the other claims are not specified. The
Company believes that it has meritorious defenses to such claims and intends to
defend these claims vigorously. Nevertheless, litigation is uncertain, and the
Company may not prevail in this suit.
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 materially adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during
the fourth quarter of 2000.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") under the symbol IMH. The following table summarizes the high, low and
closing sales prices for IMH's Common Stock as reported by the AMEX for the
periods indicated:
2000 1999
--------------------- ---------------------
High Low Close High Low Close
--------------------- ---------------------
First Quarter ................. $4.25 $3.13 $3.50 $6.19 $4.00 $5.00
Second Quarter ................ 4.38 3.06 4.31 6.13 4.38 5.06
Third Quarter ................. 4.19 2.38 2.70 6.13 3.88 4.63
Fourth Quarter ................ 3.20 1.83 2.95 4.81 3.38 4.13
On March 27, 2001, the last reported sale price of the Common Stock on the
AMEX was $4.18 per share. As of March 27, 2001, there were 369 holders of record
(including holders who are nominees for an undetermined number of beneficial
owners) of the Company's Common Stock.
Dividend Reinvestment and Stock Purchase Plan. Pursuant to IMH's Dividend
Reinvestment and Stock Purchase Plan ("DRSPP" or the "Plan"), stockholders can
acquire additional shares of IMH Common Stock by reinvesting their cash
dividends at a 0% to 5% discount of the average high and low market prices as
reported on the AMEX on the Investment Date (as described in the Plan) to the
extent shares are issued by IMH. Stockholders may also purchase additional
shares of IMH Common Stock through the cash investment option at a 0% to 5%
discount of the average high and low market prices as reported on the AMEX
during the three trading days preceding the Investment Date. In July 1999, the
Company suspended its DRSPP.
Share Repurchase Program. During 2000, the Company's Board of Directors
authorized the Company to repurchase up to $3.0 million of the Company's Common
Stock, $.01 par value, in open market purchases from time to time at the
discretion of the Company's management; the timing and extent of the repurchases
will depend on market conditions. The Company intends to effect such
repurchases, if any, in compliance with the Rule 10b-18 under the Securities
Exchange Act of 1934. For the year ended December 31, 2000, the Company
repurchased 991,000 shares of its Common Stock for $2.3 million. The acquired
shares were canceled.
Stockholder Rights Plan. On October 7, 1998, the Company's Board of
Directors adopted a Stockholder Rights Plan in which Preferred Stock Purchase
Rights were distributed as a dividend at the rate of one Right for each
outstanding share of Common Stock. The dividend distribution was made on October
19, 1998 payable to stockholders of record on that date. The Rights are attached
to the Company's Common Stock. The Rights will be exercisable and trade
separately only in the event that a person or group acquires or announces the
intent to acquire 10 percent or more of the Company's Common Stock. Each Right
will entitle stockholders to buy one-hundredth of a share of a new series of
junior participating Preferred Stock at an exercise price of $30.00. If the
Company is acquired in a merger or other transaction after a person has acquired
10 percent or more of Company outstanding Common Stock, each Right will entitle
the stockholder to purchase, at the Right's then-current exercise price, a
number of the acquiring Company's common shares having a market value of twice
such price. In addition, if a person or group acquires 10 percent or more of the
Company's Common Stock, each Right will entitle the stockholder (other than the
acquiring person) to purchase, at the Right's then-current exercise price, a
number of shares of the Company's Common Stock having a market value of twice
such price. Following the acquisition by a person of 10 percent or more of the
Company's Common Stock and before an acquisition of 50 percent or more of the
Common Stock, the Board of Directors may exchange the Rights (other than the
Rights owned by such person) at an exchange ratio of one share of Common Stock
per Right. Before a person or group acquires beneficial ownership of 10 percent
or more of the Company's Common Stock, the Rights are redeemable for $.0001 per
right at the option of the Board of Directors. The Rights will expire on October
19, 2008. The Rights distribution is not taxable to stockholders. The Rights are
intended to enable all the Company stockholders to realize the long-term value
of their investment in the Company.
31
Dividends
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders equal to or greater than its taxable income in
accordance with the Internal Revenue code, which may not necessarily equal net
income as calculated in accordance with generally accepted accounting principles
("GAAP"), determined without regard to the deduction for dividends paid and
excluding any net capital gains. Any taxable income remaining after the
distribution of the regular quarterly or other dividends will be distributed
annually on or prior to the date of the first regular quarterly dividend payment
date of the following taxable year. The dividend policy is subject to revision
at the discretion of the Board of Directors. All distributions in excess of
those required for IMH to maintain REIT status will be made by IMH at the
discretion of the Board of Directors and will depend on the taxable earnings of
IMH, the financial condition of IMH, and such other factors as the Board of
Directors deems relevant. The Board of Directors has not established a minimum
distribution level.
Distributions to stockholders will generally be taxable as ordinary
income, although a portion of such distributions may be designated by IMH as
capital gain or may constitute a tax-free return of capital. IMH annually
furnishes to each of its stockholders a statement setting forth distributions
paid during the preceding year and their characterization as ordinary income,
capital gains or return of capital. Of the total dividends paid during 2000 and
1999, approximately $13.7 million and $4.8 million, respectively, represented a
tax-free return of capital.
The following table summarizes dividends paid or declared by IMH:
Per Share
Stockholder Dividend
Period Covered Record Date Amount
- --------------------------------------------------- ------------------ --------
Quarter ended March 31, 1999....................... April 9, 1999 $0.10
Quarter ended June 30, 1999........................ June 30, 1999 $0.12
Quarter ended September 30, 1999................... September 30, 1999 $0.13
Quarter ended December 31, 1999.................... January 3, 2000 $0.13
Quarter ended March 31, 2000....................... April 10, 2000 $0.12
Quarter ended June 30, 2000........................ July 6, 2000 $0.12
Quarter ended September 30, 2000................... October 11, 2000 $0.12
The Company did not declare a dividend for the quarter ended December 31,
2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statements of operations data for each
of the years in the five-year period ended December 31, 2000, and the
consolidated balance sheet data for the five-year period ended December 31, 2000
were derived from the Company's and IFC's consolidated financial statements
audited by KPMG LLP ("KPMG"), independent auditors, whose reports appear on
pages F-2 and F-33, respectively. Such selected financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements starting on page F-1 and with Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
32
IMPAC MORTGAGE HOLDINGS, INC.
(dollar amounts in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Statement of Operations Data:
Net interest income:
Total interest income ..................... $ 147,079 $ 119,458 $ 163,658 $ 109,533 $ 63,673
Total interest expense .................... 124,096 89,795 121,695 76,577 44,144
--------- --------- --------- --------- ---------
Net interest income ..................... 22,983 29,663 41,963 32,956 19,529
Provision for loan losses ............. 18,839 5,547 4,361 6,843 4,350
--------- --------- --------- --------- ---------
Net interest income after loan loss
provision ............................. 4,144 24,116 37,602 26,113 15,179
Non-interest income:
Equity in net earnings (loss) of IFC ...... (1,762) 4,292 (13,876) 8,316 903
Equity in net loss of ICH ................. -- -- (998) (239) --
Loss on sale of mortgage loans ............ -- -- (3,111) -- --
Gain on sale of securities ................ -- 93 427 648 --
Other income .............................. 4,275 2,517 4,019 1,601 593
--------- --------- --------- --------- ---------
Total non-interest income ............... 2,513 6,902 (13,539) 10,326 1,496
--------- --------- --------- --------- ---------
Non-interest expense:
Write-down on securities available-for-sale 53,576 2,037 14,132 -- --
General and administrative and other
operating expense ....................... 7,314 6,664 6,788 1,851 1,449
Loss on equity investment of ICH .......... -- -- 9,076 -- --
Advisory fees ............................. -- -- -- 6,242 3,347
Termination agreement expense ............. -- -- -- 44,375 --
--------- --------- --------- --------- ---------
Total non-interest expense .............. 60,890 8,701 29,996 52,468 4,796
--------- --------- --------- --------- ---------
Net earnings (loss) ..................... $ (54,233) $ 22,317 $ (5,933) $ (16,029) $ 11,879
========= ========= ========= ========= =========
Net earnings (loss) per share--basic .... $ (2.70) $ 0.83 $ (0.25) $ (0.99) $ 1.34
========= ========= ========= ========= =========
Net earnings (loss) per share--diluted .. $ (2.70) $ 0.76 $ (0.25) $ (0.99) $ 1.32
========= ========= ========= ========= =========
Dividends declared per share ............ $ 0.36 $ 0.48 $ 1.46 $ 1.68 $ 1.61
========= ========= ========= ========= =========
Net earnings (loss) per share before
management termination expense (1) .... $ (2.70) $ 0.76 $ (0.25) $ 1.74 $ 1.32
========= ========= ========= ========= =========
- ----------
(1) Per share amounts exclude the effect of expenses related to the
termination in December 1997 (the "Termination Agreement Expense") of the
Company's Management Agreement with Imperial Credit Advisors, Inc.
("ICAI"), an affiliate of Imperial Credit Industries, Inc. ("ICII").
At December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Investment securities available-for-sale ... $ 36,921 $ 93,206 $ 93,486 $ 67,011 $ 63,506
Mortgage loans held-for-investment and
CMO collateral ........................... 1,389,716 1,313,112 1,181,847 1,052,610 502,658
Finance receivables ........................ 405,438 197,119 311,571 533,101 362,312
Investment in Impac Funding Corporation .... 15,762 17,372 13,246 27,122 9,896
Investment in Impac Commercial Holdings, Inc -- -- -- 17,985 --
Total assets ............................... 1,898,838 1,675,430 1,665,504 1,752,812 972,355
CMO borrowings ............................. 1,291,284 850,817 1,072,316 741,907 474,513
Reverse repurchase agreements .............. 398,653 539,687 323,625 755,559 357,716
Total liabilities .......................... 1,720,398 1,436,586 1,413,898 1,523,782 843,165
Total stockholders' equity ................. 178,440 238,844 251,606 229,030 129,190
33
IMPAC FUNDING CORPORATION
(dollar amounts in thousands, except Operating Data)
Year Ended December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Statement of Operations Data:
Net interest income:
Total interest income ..................... $ 28,649 $ 21,225 $ 48,510 $ 48,020 $ 32,799
Total interest expense .................... 30,056 20,953 40,743 41,628 31,751
-------- -------- -------- -------- --------
Net interest income (expense) ........... (1,407) 272 7,767 6,392 1,048
Non-interest income:
Gain (loss) on sale of loans .............. 19,727 27,098 (11,663) 19,414 7,747
Loan servicing income ..................... 6,286 5,221 7,071 4,109 1,250
Gain (loss) on sale of investment
securities .............................. 51 -- (706) 550 --
Mark-to-market loss on investment
securities .............................. -- -- (805) -- --
Other income .............................. 1,054 979 420 93 --
-------- -------- -------- -------- --------
Total non-interest income (loss) ........ 27,118 33,298 (5,683) 24,166 8,997
-------- -------- -------- -------- --------
Non-interest expense:
General and administrative and other
operating expense ....................... 19,634 14,965 14,385 10,047 7,154
Amortization of mortgage servicing rights . 5,179 5,331 6,361 2,827 613
Write-down of securities available-for-sale 1,537 4,252 -- -- --
Provision for repurchases ................. 371 385 367 3,148 687
Impairment of mortgage servicing rights ... -- 1,078 3,722 -- --
-------- -------- -------- -------- --------
Total non-interest expense .............. 26,721 26,011 24,835 16,022 8,454
-------- -------- -------- -------- --------
Earnings (loss) before income taxes ..... (1,010) 7,559 (22,751) 14,536 1,591
Income taxes (benefit) .................... 770 3,227 (8,738) 6,136 679
-------- -------- -------- -------- --------
Net earnings (loss) ..................... $ (1,780) $ 4,332 $(14,013) $ 8,400 $ 912
======== ======== ======== ======== ========
At December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Mortgage loans held-for-sale ........... $275,570 $ 68,084 $252,568 $620,549 $334,104
Mortgage servicing rights .............. 10,938 15,621 14,062 15,568 8,785
Total assets ........................... 317,163 116,246 313,872 656,944 399,171
Borrowings from IWLG ................... 266,994 66,125 192,900 454,840 327,422
Other borrowings ....................... -- 181 67,058 148,307 --
Due to affiliates ...................... 14,500 14,500 24,382 6,198 54,803
Total liabilities ...................... 301,242 98,698 301,009 629,548 389,175
Total shareholders' equity ............. 15,921 17,548 12,863 27,396 9,996
Operating Data (in millions):
Mortgage loan acquisitions (volume) .... $ 2,113 $ 1,672 $ 2,249 $ 2,571 $ 1,542
Master servicing portfolio at period-end 4,043 2,879 3,714 3,029 1,550
Servicing portfolio at period-end ...... 2,429 2,393 3,714 3,029 1,550
34
ITEM 7. 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 the Securities Act of 1933 and
the Exchange Act of 1934 which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "should," "anticipate,"
"estimate," or "believe" or comparable terminology. The Company's actual results
may differ materially from those contained in the forward-looking statements.
Factors which may cause such differences to occur are discussed in "Item 1.
Business--Risk Factors" as well as those factors discussed below.
General
Impac Mortgage Holdings, Inc. was incorporated in Maryland in August 1995
and operates as a mortgage REIT, which, together with its subsidiaries and
related companies, primarily operates three businesses: (1) the Long-Term
Investment Operations, (2) the Mortgage Operations, and (3) the Warehouse
Lending Operations. The Long-Term Investment Operations invests primarily in
non-conforming residential mortgage loans and securities backed by such loans.
The Mortgage Operations purchases and sells and securitizes primarily
non-conforming mortgage loans. The Warehouse Lending Operations provides
warehouse and repurchase financing to originators of mortgage loans. The Company
elects to be taxed as a REIT for federal income tax purposes, which generally
allows the Company to pass through income to stockholders without payment of
federal income tax at the corporate level. The Company is entitled to 99% of the
earnings or losses of IFC, IMH's non-consolidated REIT qualified subsidiary,
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.
Relationships with Impac Entities
On May 5, 1999, Impac Commercial Holdings, Inc. ("ICH") executed a stock
purchase agreement pursuant to which it issued to Fortress Partners LP
("Fortress") $12.0 million of series B convertible preferred stock of ICH. In
addition, FIC Management Inc. ("FIC"), an affiliate of Fortress, entered into a
definitive agreement with RAI Advisors, LLC ("RAI") for the assignment of RAI's
rights and interests in the management agreement with ICH. In connection with
these transactions, the submanagement agreement among RAI, IMH and IFC was
terminated and a new submanagement agreement was entered into among FIC, IMH and
IFC and the right of first refusal agreement among RAI, ICH, ICCC, IMH and IFC
was terminated. Under the new submanagement agreement, IMH and IFC provided
various services including, accounting, data processing and secondary marketing
to ICH, as Fortress deems necessary. On December 31, 1999, the submanagement
agreement between FIC, IMH and IFC expired and subsequently Messrs. Joseph R.
Tomkinson, Chairman and Chief Executive Officer of IMH, and Frank P. Filipps, an
unaffiliated director of IMH, resigned from the board of directors of ICH.
Many of the officers and directors of the Company are officers, directors
and owners of IFC. The Company owns all of the preferred stock of, and 99% of
the economic interest in, IFC, while Joseph R. Tomkinson, Chairman and Chief
Executive Officer, William S. Ashmore, President, and Richard J. Johnson,
Executive Vice President and Chief Financial Officer, are the holders of all of
the outstanding voting stock of, and 1% of the economic interest in, IFC.
Significant Transactions
Common Stock Exchange Offering
In March 1999, certain stockholders of the Company exchanged 1,359,507
shares of their Common Stock, at an average price of $5.70 per share, for 11%
senior subordinated debentures due to mature on February 15, 2004. The
debentures are unsecured obligations of the Company subordinated to all
indebtedness of the Company's subsidiaries. The debentures bear interest at 11%
per annum from their date of issuance, payable quarterly, commencing May 15,
1999, until the debentures are paid in full. The debentures mature on February
15, 2004, at which the date may be extended once by the Company to a date not
later than May 15, 2004, provided that the Company satisfies certain
35
conditions. Commencing on February 15, 2001, the debentures are redeemable, at
the Company's option, in whole at any time or in part from time to time, at the
principal amount to be redeemed plus accrued and unpaid interest thereon to the
redemption date.
Exchange of Series B Cumulative Convertible Preferred Stock for Series C
Cumulative Convertible Preferred Stock
In February 2000, all shares of Series B 10.5% Cumulative Convertible
Preferred Stock ("Series B Preferred Stock") was exchanged for Series C 10.5%
Cumulative Convertible Preferred Stock ("Series C Preferred Stock") and the
conversion rate was adjusted to $4.72 per share from $4.95 per share convertible
into 5.29661 shares of Common Stock from 5.050505 shares of Common Stock or an
aggregate of 6,355,932 shares of Common Stock from 6,060,606 shares of Common
Stock. Other than the foregoing, the Series C Preferred Stock has the same
rights, preferences and privileges as the Series B Preferred Stock.
Repurchase of Common Stock
During 2000, the Company's Board of Directors authorized the Company to
repurchase up to $3.0 million of the Company's Common Stock. For the year ended
December 31, 2000, the Company repurchased 991,000 shares of its Common Stock
for $2.3 million. The acquired shares were canceled.
Collateralized Mortgage Obligations
The Company issued two CMOs during the year ended December 31, 2000. The
first CMO was issued in January 2000 for $452.0 million and was collateralized
by $428.1 million of adjustable rate mortgages and $27.6 million of residential
loans secured by first or second trust deeds. The second CMO was issued in
November 2000 for $491.6 million and was collateralized by $477.8 million of
adjustable rate mortgages and $19.2 million of residential loans secured by
second trust deeds. The new CMOs completed during 2000 included $144.0 million
of mortgage loan collateral from five previous CMOs. The mortgage loan
collateral from the previous CMOs was "collapsed" into the new CMOs and resulted
in substantially improved capital leverage, lower borrowing costs and reduced
amortization exposure on the $144.0 million of previous CMO collateral.
Additionally, approximately $32.6 million of capital that was invested in the
previous CMOs was released and reinvested in the Company's Long-Term Investment
Operations. The issuance of CMOs provides the Company with immediate liquidity,
a locked-in net interest rate spread and eliminates the Company's exposure to
margin calls on such loans.
Real Estate Mortgage Investment Conduits
IFC issued five REMICs during the year ended December 31, 2000. The
following table presents selected information on the issuance of REMICs during
2000 (dollars in millions):
Issue Issuance Principal
Date Issuance Name Amount Amount
--------- ----------------------------------------------------------
3/27/00 Impac Secured Assets Trust 2000-1.... $ 271.7 $ 275.8
6/27/00 Impac Secured Assets Trust 2000-2.... 269.5 275.0
9/26/00 Impac Secured Assets Trust 2000-3.... 344.7 349.9
11/20/00 Impac Secured Assets Trust 2000-4.... 200.0 200.0
12/21/00 Impac Secured Assets Trust 2000-5.... 200.0 200.0
Status of Acquisition of a California Thrift and Loan
In July 2000, the Company withdrew its application to acquire a California
Thrift and Loan ("Bank"). The decision to withdraw its application was based
upon management's assessment that a mutually acceptable approval to operate the
Bank was not likely. Management does not believe that the decision to withdraw
its application adversely affected the Company's operations and profitability.
The $14.5 million of capital, which had been set aside to capitalize the Bank
upon approval of the application, was redeployed in the Company's operating
businesses and to further grow the Company's balance sheet. The Company may
re-evaluate this decision in the future if there is a
36
change in the regulatory environment regarding residential mortgage lending. All
capitalized expenses associated with the acquisition of the Bank, which were
incurred during the approval process, were written-off during 2000. Total
capitalized expenses written-off by IFC during 2000 represented an after-tax
charge of $781,000 to the Company.
Core Business Operations
Business Strategy: During 1999, the Company initiated a plan to
restructure its balance sheet in order to increase book value per common share,
generate additional liquidity and improve the overall credit quality of its
investment securities and mortgage loan portfolios. To that end, the Company
completed the following transactions during 1999: (1) the exchange of 1.4
million shares of Common Stock for 11.0% senior subordinated debt due 2/15/2004,
(2) a stock repurchase program to repurchase up to $10.0 million of outstanding
Common Stock and (3) the re-securitization of a portion of its investment
securities portfolio. The Company continued to restructure its balance sheet
during 2000 by completing the following transactions: (1) issuing two CMOs for
$943.6 million, which included $144.0 million of mortgage loan collateral from
five previous CMOs, (2) repurchasing $2.3 million of Common Stock, (3) writing-
off $52.6 million of non-performing investment securities available-for-sale
("investment securities") and (4) providing $14.5 million of additional loan
loss provisions to write-off non-performing mortgage loans, including 125 Loans.
In addition to executing the Company's plan to restructure its balance
sheet during 2000, the Company renewed its focus on its core business
operations, the Long-Term Investment Operations, the Mortgage Operations and the
Warehouse Lending Operations, which produced positive operating earnings during
the year ended December 31, 2000. During 2000, the Long-Term Investment
Operations increased its loan portfolio while improving credit quality of
Mortgage Assets on its balance sheet, the Mortgage Operations increased loan
production while the wholesale and retail mortgage platforms operated by ILG
continued to grow and the Warehouse Lending Operations increased average finance
receivables and its customer base.
The Long-Term Investment Operations portfolio of mortgage loans increased
8% to $1.4 billion at December 31, 2000 as compared to $1.3 billion at December
31, 1999. As the long-term loan portfolio grew, the weighted average LTV
decreased to 85% at December 31, 2000 from 86% at December 31, 1999 while
mortgage loans that were 90 or more days past due and real estate owned
(collectively, "Non-performing Loans") decreased 24% to $46.1 million as
compared to $60.7 million, respectively. The loan delinquency rate on loans 60
or more days past due decreased to 4.89% as of December 31, 2000 from 5.43% as
of December 31, 1999. In addition, during 2000 the Company wrote-off
substantially all investment securities secured by HLTV second trust deeds,
investment securities secured by franchise loan receivables and certain sub-
prime subordinated securities, all of which were acquired prior to 1998.
Subsequent to 1997, the Company's investment strategy has been to only acquire
or invest in investment securities that are secured by mortgage loans
underwritten and purchased by the Mortgage Operations due to their superior
historical performance.
The Company believes that increased loan production by the Mortgage
Operations was due to the Company's superior loan programs and services offered
by the Mortgage Operations, and also partly due to the success of the Company's
automated underwriting system, called IDASL, which stands for Impac Direct
Access System for Lending. IDASL has exceeded, and continues to exceed, the
Company's initial expectations as loan submissions through IDASL by the Mortgage
Operations' correspondent sellers and wholesale brokers has increased each
quarter since IDASL's implementation during the first quarter of 2000. Loan
submissions during the fourth quarter of 2000 averaged $555.5 million per month
in loan volume as compared to $438.0 million per month during the third quarter
of 2000 and $236.0 million per month during the second quarter of 2000. By
December 31, 2000, substantially all of IFC's correspondent sellers were
submitting loans through IDASL and 100% of all wholesale loans delivered by
brokers were directly underwritten through IDASL. IDASL is not a lead generator
for mortgage brokers, but is an interactive internet system that enables the
Company's customers to access loan status, current pricing, purchase
confirmations and receive consistent and reliable automated loan underwriting
decisions within minutes. In addition, IDASL has an integrated credit-reporting
interface that provides the Company's customers with a very competitive tool
enabling them to render a loan decision at point of sale. IDASL dramatically
increases efficiencies not only for our customers but also for the Mortgage
Operations by significantly decreasing the processing time for a mortgage loan,
while improving employee production and maintaining superior customer service,
which together leads to higher closing
37
ratios, improved profit margins and increased profitability at all levels of its
business operations. Most importantly, IDASL allows the Mortgage Operations to
move closer to its borrowers with minimal future capital investment while
maintaining centralization, a key factor in the success of the Company's
operating strategy.
Loan production by the Mortgage Operations increased 29% to $2.2 billion
during 2000 as compared to $1.7 billion during 1999 as total originations of 1-4
family properties as forecast by the Mortgage Bankers Association ("MBA")
decreased 20% during 2000 as compared to 1999. According to the MBA, the primary
reason for the forecasted decrease in total 1-4 family originations during 2000
is the decrease in refinance activity. The MBA forecasts a decrease in refinance
activity to 19% of total 1-4 family originations during 2000 as compared to
actual refinance activity of 34% of total 1-4 family originations during 1999.
The Mortgage Operations is less affected by volatile changes in the refinance
market as it continues to rely primarily on purchased money activity as compared
to refinance activity. The Mortgage Operations acquired or originated mortgage
refinances of 19% of total loan production during 2000 and 23% of total loan
production during 1999. Wholesale and retail loan originations generated by ILG,
which was established in January 1999, increased 210% to $276.3 million during
2000 as compared to $89.0 million during 1999. As of December 31, 2000, ILG had
983 approved wholesale mortgage brokers. The Company expects loan originations
at ILG to remain strong during 2001 with the expected implementation of IDASL
with the Mortgage Operations' strategic partner. ILG's strategic partner
supplies mortgage automation software and provides an internet connection to
33,000 users nationwide with direct automated download capabilities to the
Mortgage Operations' products via IDASL. Recently, ILG's strategic partner was
acquired by Ellie Mae, a provider of internet solutions to the mortgage
industry, which the Company believes will further enhance ILG's penetration into
the wholesale lending arena.
In order to mitigate interest rate and market risk, the goal of the
Mortgage Operations during 2001 is to continue to securitize its mortgage loans
more frequently. The Company believes this will require less capital and will
provide more liquidity with less interest rate and price volatility as the
accumulation and holding period of mortgage loans is reduced. The Mortgage
Operations successfully completed two REMIC securitizations in November and
December of 2000 for an aggregate of $400.0 million as compared to one REMIC per
quarter for each of the first three quarters of 2000. Additionally, the Mortgage
Operations completed a REMIC securitization in January of 2001 for $200.0
million.
During the fourth quarter of 2000, the Warehouse Lending Operations
focused on internal restructuring and technology initiatives, including the
development and implementation of a web-based funding and delivery system, with
the overall goal of increasing its customer base and outstanding balances during
2001. The Warehouse Lending Operations continued to provide a consistent
contribution to net earnings during 2000.
The Company did not declare a common stock dividend during the fourth
quarter of 2000 and plans to utilize its tax loss carry forwards during 2001.
The Company believes that it is prudent to take advantage of its tax loss carry
forwards and retain capital to continue the expansion and growth of its core
operating businesses. The Company believes that the retention of earnings will
allow the Company to increase its assets and book value during 2001. The Company
will likely need to pay common stock dividends in 2002 as the tax loss carry
forwards are expected to be completely used. Diluted book value decreased to
$6.67 per common share at December 31, 2000 as compared to diluted book value of
$8.60 per common share at December 31, 1999. Book value declined during 2000 as
the Company wrote-down investment securities of $52.6 million, increased its
allowance for loan losses to absorb realized losses of $17.8 million, primarily
from HLTV loans, and declared preferred and common stock dividends of $10.9
million.
Long-Term Investment Operations: During the year ended December 31, 2000,
the Long-Term Investment Operations, conducted by IMH and IMH Assets, acquired
$430.8 million of mortgages from IFC as compared to $638.3 million acquired
during 1999. Mortgages purchased by the Long-Term Investment Operations during
2000 consisted of $6.5 million of FRMs and $411.8 million of ARMs secured by
first liens on residential property and $12.5 million of fixed rate second trust
deeds secured by residential property. In addition, $213.9 million, or 50%, of
mortgages acquired during 2000 for long-term investment had prepayment penalties
as compared to $222.9 million, or 35%, of mortgages with prepayment penalties
acquired during 1999. During 2000, the Long-Term Investment Operations sold
$55.9 million, in unpaid principal balance, of mortgage loans to third party
investors as compared to $73.2 million of loans sold to third party investors
during 1999. In addition, the Long-Term Investment Operations
38
had investment securities of $36.9 million at December 31, 2000. Of the $36.9
million of investment securities, $29.2 million were subordinated securities
collateralized by mortgages, $7.7 million were "interest only" securities, and
none were subordinated securities collateralized by other loans. During 2000,
the Long-Term Investment Operations acquired no securities created by IFC
through the issuance of REMICs as compared to $22.0 million during 1999.
During 2000, IMH Assets issued CMOs totaling $943.6 million, which were
collateralized by $952.8 million of mortgage loans, as compared to CMOs totaling
$298.1 million, which were collateralized by $316.2 million of mortgage loans,
during 1999. As of December 31, 2000, the Long-Term Investment Operations'
portfolio of mortgage loans consisted of $1.4 billion of mortgage loans held in
trust as collateral for CMOs and $16.7 million of mortgage loans held-for-
investment, of which approximately 26% were FRMs and 74% were ARMs. The weighted
average coupon of the Long-Term Investment Operations portfolio of mortgage
loans was 9.34% at December 31, 2000 with the weighted average margin of 4.17%.
The portfolio of mortgage loans included 90% of non-conforming A Loans and 10%
of B/C Loans. During 2000, constant prepayment rates ("CPR") on the Company's
CMO portfolio decreased to 25% CPR as compared to 37% CPR during 1999. The loan
delinquency rate of mortgages held for long-term investment which were 60 or
more days past due, inclusive of foreclosures and delinquent bankruptcies,
decreased to 4.89% at December 31, 2000 as compared to 5.43% at December 31,
1999.
Mortgage Operations: The Mortgage Operations, conducted by IFC and ILG,
supports the Long-Term Investment Operations of the Company by supplying IMH and
IMH Assets with mortgages for long-term investment. As such, IFC sold $430.8
million, in unpaid principal balance, of mortgages to the Long-Term Investment
Operations as compared to $638.3 million, in unpaid principal balance, of loans
sold during 1999. IFC's mortgage acquisitions increased 24% to $2.1 billion
during 2000 as compared to $1.7 billion of mortgages acquired during 1999.
During 2000, IFC securitized $1.3 billion, in unpaid principal balance, of
mortgages and sold whole loans to third party investors totaling $62.6 million,
in unpaid principal balance, of mortgages. This compares to loan securitizations
of $907.5 million, in unpaid principal balance, of mortgages and whole loan
sales to third party investors of $856.2 million, in unpaid principal balance,
of mortgages during 1999. Loan securitizations and sales during 2000 resulted in
gain on sale of loans of $19.7 million as compared to gain on sale of loans of
$27.1 million during 1999. IFC had deferred revenue of $5.0 million at December
31, 2000 as compared to $7.6 million at December 31, 1999.
IFC's master servicing portfolio increased 38% to $4.0 billion at December
31, 2000 as compared to $2.9 billion at December 31, 1999. Of the $4.0 billion
of mortgage loans master serviced by IFC at December 31, 2000, IFC is the master
servicer for $2.6 billion of loans collateralizing REMIC securities and $1.3
billion of mortgage loans collateralizing CMOs. In addition, of the $4.0 billion
of loans master serviced by IFC, IFC owns servicing rights on $2.4 billion in
unpaid principal balance of mortgages. Mortgages collateralized by properties
located in California represented 39% and 40% of IFC's master servicing
portfolio at December 31, 2000 and 1999, respectively. The loan delinquency rate
of mortgages in IFC's master servicing portfolio which were 60 or more days past
due, inclusive of foreclosures and delinquent bankruptcies, was 4.24% and 4.37%
at December 31, 2000 and 1999, respectively.
Warehouse Lending Operations: The Warehouse Lending Operations, conducted
by IWLG, had outstanding finance receivables of $405.4 million of which $138.4
million was outstanding to external customers. As of December 31, 2000, IWLG had
approved warehouse lines available to 52 external customers totaling $391.5
million as compared to 46 customers totaling $325.0 million as of December 31,
1999. Overall, average finance receivables increased 32% to $418.8 million
during 2000 as compared to $317.5 million during 1999 while average finance
receivables to external customers increased 59% to $134.7 million from $84.8
million, respectively.
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS, INC.
Year Ended December 31, 2000 as compared to Year Ended December 31, 1999
Results of Operations
Net loss for the year ended December 31, 2000 was $(54.2) million, or
$(2.70) per diluted common share, compared to net earnings of $22.3 million, or
$0.76 per diluted common share, for 1999. The loss for 2000 was
39
primarily the result of non-recurring, non-cash accounting charges ("accounting
charges") of $68.9 million. Accounting charges taken during 2000 included the
write-down of $52.6 million of investment securities and additional increases in
the Company's allowance for loan loss of $14.5 million. Due to the continued
deterioration in the performance of collateral supporting specific investment
securities, the Company wrote-off substantially all remaining book value on
these investment securities during 2000, which included all investment
securities secured by HLTV second trust deeds, investment securities secured by
franchise mortgage receivables and certain sub-prime subordinated securities,
all of which were acquired prior to 1998. Starting in 1998, the Company's
investment strategy has been to only acquire or invest in investment securities
that are secured by mortgage loans underwritten and purchased by IFC due to
their superior historical performance. In addition, based on losses and
delinquencies in the HLTV portfolio during 2000, the Company increased the loan
loss allowance to provide for losses inherent in the remaining HLTV second trust
deed portfolio. Lastly, IFC wrote off substantially all of its remaining
investment securities, which were secured by franchise mortgage receivables,
resulting in an after-tax charge to the Company of $1.0 million.
Excluding accounting charges, net operating earnings was $14.7 million, or
$0.54 per diluted common share, as compared to net operating earnings of $22.3
million, or $0.76 per diluted common share, during the same period of 1999. The
decrease in net operating earnings during 2000 was primarily the result of a
$6.7 million decrease in net interest income as compared to 1999. The decrease
in net interest income during 2000 was primarily the result of rising short-term
interest rates, which adversely affected net interest margins on Mortgage
Assets. Although the decrease in short-term interest rates during the first
quarter of 2001 had no effect on 2000 earnings, earnings throughout 2001 should
improve as net interest margins on Mortgage Assets, primarily CMO collateral and
loans held-for-investment, improve.
Net Interest Income
Net interest income decreased 23% to $23.0 million during 2000 as compared
to $29.7 million during 1999. Interest income is primarily interest earned on
Mortgage Assets and includes interest income earned on cash and cash equivalents
and due from affiliates. Interest expense is primarily interest paid on
borrowings on Mortgage Assets and includes interest expense paid on due to
affiliates and senior subordinated debt. Mortgage Assets include CMO collateral,
mortgage loans held-for-investment, finance receivables and investment
securities. Borrowings on Mortgage Assets include CMO financing, reverse
repurchase agreements and borrowings on investment securities.
The decrease in net interest income during 2000 as compared to 1999 was
primarily the result of smaller net interest margins on Mortgage Assets which
decreased to 1.23% during 2000 as compared to 1.84% during 1999 as average
Mortgage Assets increased 13% to $1.8 billion as compared to $1.6 billion,
respectively. Net interest margins on average CMO collateral decreased to
0.47% during 2000 as compared to 0.79% during 1999 as the rapid increase in
short-term interest rates during 2000 resulted in compression of net interest
margins. As short-term interest rates increased rapidly during 2000, CMO
financing costs, which are indexed to one-month LIBOR and adjust every month,
increased at a faster pace than interest rates on CMO collateral, which
primarily have the following characteristics: (1) adjustable rate loans that are
indexed to six-month LIBOR and adjust every six months but are subject to
periodic and lifetime interest rate caps and (2) mortgage loans that have fixed
interest rates for the first two to three years of the loan and subsequently
change to adjustable interest rate loans. Short-term interest rates increased
during 2000 as one-month and six-month LIBOR averaged 6.42% and 6.65%,
respectively, as compared to 5.25% and 5.53%, respectively, during 1999. In
addition, the yield curve during most of 2000 was inverted, which means that
interest rates in the short-end of the yield curve were higher than interest
rates in the long-end of the yield curve. This inverted yield curve also
contributed to compression of net interest margins as interest rates on mortgage
loans set by the Mortgage Operations primarily use the ten-year Treasury yield
as an index plus a margin. Therefore, mortgage loan rates were set using
interest rates on the ten-year Treasury yield which increased at a slower rate
than short-term interest rates on one-month LIBOR, which is used as the index to
establish the borrowing rates on reverse repurchase agreements and CMO
financing.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings for the years ended December 31,
2000 and 1999 and includes interest income on Mortgage Assets and interest
expense related to borrowings on Mortgage Assets only (dollars in thousands):
40
For the year ended December 31, 2000 For the year ended December 31, 1999
-------------------------------------------- --------------------------------------------
Weighted Weighted
Average Avg. % of Average Avg. % of
Balance Interest Yield Portfolio Balance Interest Yield Portfolio
---------- ---------- -------- --------- --------- ---------- --------- ---------
MORTGAGE ASSETS
- ---------------
Subordinated securities
collateralized by mortgages . $ 57,651 $ 7,249 12.57% 3.21% $ 87,107 $ 12,604 14.47% 5.56%
Subordinated securities
collateralized by other loans 2,871 273 9.51 0.16 7,433 834 11.22 0.47
---------- ---------- ---------- ----------
Total investment securities 60,522 7,522 12.43 3.37 94,540 13,438 14.21 6.03
---------- ---------- ---------- ----------
Loan receivables:
CMO collateral ................ 1,198,478 85,923 7.17 66.69 1,119,813 74,096 6.62 71.48
Mortgage loans
held-for-investment ......... 119,326 8,966 7.51 6.64 34,767 2,345 6.74 2.22
Finance receivables:
Affiliated .................. 284,070 28,044 9.87 15.80 232,741 19,566 8.41 14.86
Non-affiliated .............. 134,741 14,280 10.60 7.50 84,783 7,779 9.18 5.41
---------- ---------- ---------- ----------
Total finance receivables .. 418,811 42,324 10.11 23.30 317,524 27,345 8.61 20.27
---------- ---------- ---------- ----------
Total Loan Receivables ..... 1,736,615 137,213 7.90 96.63 1,472,104 103,786 7.05 93.97
---------- ---------- ---------- ----------
Total Mortgage Assets ......... $1,797,137 $ 144,735 8.05% 100.00% $1,566,644 $ 117,224 7.48% 100.00%
========== ========== ========== ==========
BORROWINGS
- ----------
CMO borrowings ................ $1,100,151 $ 80,287 7.30% 67.06% $1,017,992 $ 65,212 6.41% 74.25%
Reverse repurchase
agreements-mortgages ........ 513,987 39,216 7.63 31.33 331,179 21,545 6.51 24.16
Borrowings secured by
investment securities ....... 26,350 3,217 12.21 1.61 6,445 686 10.64 0.47
Reverse repurchase
agreements-securities ....... -- -- -- -- 15,377 998 6.49 1.12
---------- ---------- ---------- ----------
Total Borrowings on
Mortgage Assets ............ $1,640,488 $ 122,720 7.48% 100.00% $1,370,993 $ 88,441 6.45% 100.00%
========== ========== ========== ==========
Net Interest Spread (1) ....... 0.57% 1.03%
Net Interest Margin (2) ....... 1.23% 1.84%
- ----------
(1) Calculated by subtracting the yield on total borrowings on Mortgage Assets
from the yield on total Mortgage Assets.
(2) Calculated by subtracting interest on total borrowings on Mortgage Assets
from interest on total Mortgage Assets and dividing the result by the
average balance of total Mortgage Assets.
Interest income on Mortgage Assets: Interest income on CMO collateral
increased 16% to $85.9 million during 2000 as compared to $74.1 million during
1999 as average CMO collateral increased 9% to $1.2 billion as compared to $1.1
billion, respectively. Average CMO collateral increased as the Long-Term
Investment Operations issued CMOs totaling $943.6 million during 2000, which
were collateralized by $953.7 million of mortgages, as compared to CMOs totaling
$298.1 million, which were collateralized by $316.2 million of mortgages, during
1999. The issuance of new CMO collateral was partially offset by mortgage loan
prepayments, which were $309.7 million during 2000 as compared to $490.0 million
during 1999. Prepayments on CMO collateral was 25% CPR during 2000 as compared
to 37% CPR during 1999 as rising interest rates during 2000 and the acquisition
of loans with prepayment penalties slowed down the pace of loan prepayments
during 2000. The acquisiton of $213.9 million, or 50%, of mortgages acquired
during 2000 by the Long-Term Investment Operations with prepayment penalties and
$222.9 million, or 35%, of mortgages acquired with prepayment penalties during
1999 contributed to less volatility in loan prepayments during 2000. The Company
expects that the higher percentage of mortgages acquired for long-term
investment with prepayment penalties will continue to lead to less volatility in
loan prepayment rates.
41
An increase in the weighted average yield on CMO collateral also
contributed to an overall increase in interest income on CMO collateral during
2000 as compared to 1999. The weighted average yield on CMO collateral increased
to 7.17% during 2000 as compared to 6.62% during 1999. The increase in yield on
CMO collateral during 2000 was primarily due to an increase in interest rates
and a reduction in prepayment rates and therefore the amortization of net
premiums paid in acquiring the mortgage loans held as CMO collateral. During
2000, the Company amortized net premiums on CMO collateral of $10.6 million as
compared to $14.4 million during 1999 as loan prepayment rates decreased during
2000. On a go-forward basis, the Company has less exposure to premium
amortization as net premiums on CMO collateral as of December 31, 2000 was $22.8
million as compared to $28.8 million at December 31, 1999.
Interest income on mortgage loans held-for-investment increased 291% to
$9.0 million during 2000 as compared to $2.3 million during 1999 as average
mortgage loans held-for-investment increased 243% to $119.3 million as compared
to $34.8 million, respectively. Average mortgage loans held-for-investment
increased during 2000 as the Long-Term Investment Operations held and
accumulated mortgage loans over a longer period of time before completing CMOs
as compared to during 1999 when the Company's focus was more towards increased
liquidity and reduced leverage. Additionally, the increase in interest income on
mortgage loans held-for-investment during 2000 benefited by an increase in the
weighted average yield, which increased to 7.51% during 2000 as compared to
6.74% during 1999 as interest rates rose. Interest income on mortgage loans
held-for-investment also includes the effect of amortization of net premiums
paid in acquiring the mortgage loans. As of December 31, 2000, net discounts on
mortgage loans held-for-investment was $208,000 as compared to net premiums of
$2.0 million as of December 31, 1999.
Interest income on finance receivables increased 55% to $42.3 million
during 2000 as compared to $27.3 million during 1999 as average finance
receivables increased 32% to $418.8 million as compared to $317.5 million,
respectively. Average finance receivables increased during 2000 as IFC acquired
and originated $2.1 billion of mortgage loans as compared to loan production of
$1.7 billion during 1999, which resulted in an increase in average finance
receivables to $284.0 million as compared to $232.7 million, respectively. In
addition, average finance receivable to non-affiliates increased by 59% to
$134.7 million during 2000 as compared to $84.8 million during 1999 as IWLG
added customers during 2000. Interest income on finance receivables was also
positively affected by an increase in weighted average yield, which increased to
10.11% during 2000 as compared to 8.61% during 1999 as the average prime rate
rose during 2000. The prime rate is the index the Company uses to determine
interest rates on finance receivables. Average prime during 2000 was 9.23% as
compared to 8.00% during 1999.
Interest income on investment securities decreased 44% to $7.5 million
during 2000 as compared to $13.4 million during 1999 as average investment
securities decreased 36% to $60.5 million as compared to $94.5 million,
respectively. Average investment securities decreased as the Company wrote-off
$52.6 million of investment securities during 2000. Interest income on
investment securities was also negatively affected by a decrease in the weighted
average yield on investment securities, which decreased to 12.43% during 2000 as
compared to 14.21% during 1999. The weighted average yield on investment
securities decreased during 2000 as the Company wrote-off higher yielding
investment securities secured by HLTV second trust deed loans, investment
securities secured by franchise mortgage receivables and certain sub-prime
subordinated securities, which deteriorated during the first half of 2000.
Interest expense on borrowings: Interest expense on CMO borrowings
increased 23% to $80.3 million during 2000 as compared to $65.2 million during
1999 as average borrowings on CMO collateral increased 10% to $1.1 billion as
compared to $1.0 billion, respectively. Average CMO borrowings increased as the
Long-Term Investment Operations issued CMOs totaling $943.6 million during 2000
as compared to CMOs totaling $298.1 million during 1999, which was partially
offset by mortgage loan prepayments of $309.7 million during 2000 as compared to
$490.0 million during 1999. Interest expense on CMO borrowings also increased as
the weighted average yield on CMO borrowings increased to 7.30% during 2000 as
compared to 6.41% during 1999 as average one-month LIBOR, which is the index
used to determine rates on adjustable rate CMO borrowings, was higher during
2000 as compared to 1999. Average one-month LIBOR was 6.42% during 2000 as
compared to 5.25% during 1999. In addition, interest expense on CMO borrowings
is affected by the amortization of securitization costs. Securitization costs
are incurred when a CMO is issued and securitization costs are capitalized and
amortized over the life of the CMO borrowings as an adjustment to the yield.
During 2000, the Company amortized securitization costs of $4.7 million as
compared to $4.2 million during 1999 due to the increase in CMOs issued during
2000. As of December 31, 2000, unamortized
42
securitization costs were $14.1 million as compared to unamortized
securitization costs of $11.9 million at December 31, 1999.
Interest expense on reverse repurchase borrowings, which are used to fund
the acquisition of mortgage loans and finance receivables, increased 82% to
$39.2 million during 2000 as compared to $21.5 million during 1999 as average
reverse repurchase agreements increased 55% to $514.0 million as compared to
$331.2 million, respectively. The increase in average reverse repurchase
borrowings was primarily related to the previously discussed increase in average
finance receivables to IFC and IWLG's external customers. The Warehouse Lending
Operations uses reverse repurchase agreements with investment banks to fund its
short-term loans to affiliates, primarily IFC, and non-affiliates. The weighted
average yield of reverse repurchase agreements collateralized by mortgage loans
increased to 7.63% during 2000 as compared to 6.51% during 1999 as average
one-month LIBOR, which is the index used by the Company's lenders to determine
interest rates on reverse repurchase borrowings, increased during 2000 as
compared to 1999.
Interest expense on borrowings secured by investment securities increased
88% to $3.2 million during 2000 as compared to $1.7 million during 1999 as
average borrowings increased 21% to $26.4 million as compared to $21.8 million,
respectively. During 1999, the Company issued notes collateralized by a portion
of its investment securities portfolio to provide a more stable, long-term
financing source for these assets as compared to previously used short-term
reverse repurchase agreements. The weighted average yield on borrowings secured
by investment securities increased to 12.21% during 2000 as compared to 7.72%
during 1999.
Non-Interest Income
Non-interest income decreased to $2.5 million during 2000 as compared to
$6.9 million during 1999. Non-interest income decreased primarily due to a
decrease in equity in net earnings (loss) of IFC. Equity in net earnings (loss)
of IFC decreased to a loss of $(1.8) million during 2000 as compared to net
earnings of $4.3 million during 1999. In addition to the decrease in earnings at
IFC, servicing income decreased by $680,000 as income from the collection of
prepayment penalties decreased in conjunction with the decrease in loan
prepayments. The decrease in earnings at IFC and servicing fees was partially
offset by in increase of $2.4 million in other income, which was the result of
litigation settlement and an increase in fees from increased warehouse line
activity by IFC and IWLG's external customers.
Equity in Net Earnings (Loss) of IFC
Equity in net earnings (loss) of IFC decreased to a loss of $(1.8) million
during 2000 as compared to earnings of $4.3 million during 1999 primarily due to
a decrease of $7.4 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. For more
information on the results of operations of IFC, refer to "--Results of
Operations--Impac Funding Corporation."
Non-Interest Expense
Non-interest expense increased to $60.9 million during 2000 as compared to
$8.7 million during 1999 primarily due to a $51.6 million increase in write-down
of investment securities. Write-down of investment securities increased to $53.6
million during 2000 as compared to $2.0 million during 1999 as the Company
substantially wrote-off all remaining book value of investment securities
secured by HLTV second trust deeds, investment securities secured by franchise
mortgage receivables and certain sub-prime subordinated securities, all of which
were acquired prior to 1998. After excluding the write-down of investment
securities, non-interest expense increased 9% to $7.3 million as compared to
$6.7 million during 1999, which was the result of a $787,000 write-down of
securitization costs from the collapse of four previous CMOs into new CMOs
completed during 2000.
Credit Exposures
Non-performing Assets. Non-performing assets consist of loans that are 90
days or more delinquent ("non-accrual loans"), including loans in foreclosure
and delinquent bankruptcies, and real estate acquired in settlement of loans, or
43
other real estate owned. It is the Company's policy to place a mortgage loan on
non-accrual status when a loan becomes 90 days delinquent. Any previously
accrued interest will be reversed from income. Non-accrual loans are included in
mortgage loans held-for-sale at IFC and mortgage loans held-for-investment and
CMO collateral at IMH and IMH Assets. The outstanding unpaid principal balance
of non-performing assets totaled $49.9 million at December 31, 2000 as compared
to $63.3 million at December 31, 1999. The decrease in non-performing assets was
primarily due to the sale of delinquent mortgage loans held-for-investment at
IMH, which included 125 Loans, and mortgage loans held-for-sale at IFC. The
carrying amount of other real estate owned, after writing down the mortgage loan
to the broker's price opinion or appraised value, was $4.7 million and $8.8
million at December 31, 2000 and 1999, respectively. The Company recorded losses
on the disposition of other real estate owned of $1.8 million and $2.2 million
during 2000 and 1999, respectively.
The Company monitors its sub-servicers to make sure that they perform loss
mitigation, foreclosure and collection functions according to the Company's
written policies. This includes an effective and aggressive collection effort in
order to minimize mortgage loans from becoming non-performing assets. However,
when resolving non-performing assets, the Company's sub-servicers are required
to take timely and aggressive action. The sub-servicer is required to determine
collectibility under various circumstances, which will result in maximum
financial benefit to the Company. This is accomplished by either working with
the borrower to bring the loan current or by foreclosing and liquidating the
property. The Company performs ongoing reviews of loans that display weaknesses
and believes it maintains adequate loss allowances on the mortgage loans.
The following table summarizes the unpaid principal balance of the
Company's non-performing assets included in its mortgage loan portfolios for the
periods shown (in thousands):
At December 31,
--------------------
2000 1999
------- -------
Mortgage Loans Held-for-Sale:
Non-accrual ........................................ $ 3,680 $ 2,572
Other real estate owned ............................ 148 --
------- -------
Total mortgage loans held-for-sale ............... 3,828 2,572
------- -------
Mortgage Loans Held-for-Investment:
Non-accrual ........................................ 10,197 8,229
In process foreclosures ............................ 3,168 306
------- -------
Total mortgage loans held-for-investment ......... 13,365 8,535
------- -------
CMO collateral:
Non-accrual ........................................ 28,798 42,792
Other real estate owned ............................ 3,883 9,411
------- -------
Total CMO collateral ............................. 32,681 52,203
------- -------
Total mortgage loan portfolios ................. $49,874 $63,310
======= =======
Delinquent Loans. When a borrower fails to make required payments on a
loan and does not cure the delinquency within 60 days, the Company generally
records a notice of default and commences foreclosure proceedings. If the loan
is not reinstated within the time permitted by law for reinstatement, the
property may then be sold at a foreclosure sale. In foreclosure sales, the
Company generally acquires title to the property. At December 31, 2000, loans
that were delinquent 60 days or more, as a percentage of the outstanding
servicing balance of the mortgage loan portfolios, was 4.89% as compared to
5.43% at December 31, 1999. This includes loans in the long-term investment
portfolio. Loans that are 30 days delinquent may experience seasonality and
servicing transfer issues so they are therefore excluded.
The following table summarizes the unpaid principal balance of the
Company's delinquent mortgage loans included in its mortgage loan portfolios for
the periods shown (in thousands):
44
At December 31,
---------------------
2000 1999
-------- --------
Mortgage Loans Held-for-Sale:
60-89 days delinquent .............................. $ 861 $ 1,838
90 or more days delinquent (1) ..................... 3,680 2,572
-------- --------
Total mortgage loans held-for-sale ............... 4,541 4,410
-------- --------
Mortgage Loans Held-for-Investment:
60-89 days delinquent .............................. 115 1,453
90 or more days delinquent (1) ..................... 10,197 8,229
-------- --------
Total mortgage loans held-for-investment ......... 10,312 9,682
-------- --------
CMO collateral:
60-89 days delinquent .............................. 25,098 12,398
90 or more days delinquent (1) ..................... 28,798 42,792
-------- --------
Total CMO collateral ............................. 53,896 55,190
-------- --------
Total mortgage loan portfolios ................. $ 68,749 $ 69,282
======== ========
- ----------
(1) Includes loans in foreclosure and delinquent bankruptcies.
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 0.28%
at December 31, 2000 as compared to 0.27% at December 31, 1999. The Company
recorded net loan loss provisions of $18.8 million during 2000 as compared to
$5.5 million during 1999. The amount provided for loan losses during 2000
increased primarily due to the subsequent disposition or write-off of 125 Loans.
The allowance for loan losses is determined primarily on the basis of
management's judgment of net loss potential including specific allowances for
known impaired loans, changes in the nature and volume of the portfolio, value
of the collateral and current economic conditions that may affect the borrowers'
ability to pay.
Year Ended December 31, 1999 as compared to Year Ended December 31, 1998
Results of Operations
Net earnings for the year ended December 31, 1999 of $22.3 million, or
$0.76 per diluted common share, compared to a net loss of $(5.9) million, or
$(0.25) per diluted common share, for 1998. The loss for 1998 was primarily due
to a global liquidity crisis in the mortgage-backed securitization market, which
occurred during the latter half of 1998. The deterioration of the
mortgage-backed securitization market created liquidity problems as the
Company's lenders made margin calls on their repurchase agreements. In order to
meet margin calls and reduce borrowings on its outstanding reverse repurchase
agreements, the Company sold mortgage loans and mortgage-backed securities at
significant losses. In addition, the Company recorded impairment charges on its
investment securities and recorded a loss on the sale of its equity investment
in ICH. However, as the mortgage-backed securitization market stabilized during
1999, the Company returned to overall profitability, which in large part was due
to the profitability on the sale of its mortgage loans at IFC.
Net Interest Income
Net interest income decreased 29% to $29.7 million during 1999 as compared
to $42.0 million during 1998. The decrease in net interest income during 1999 as
compared to 1998 was primarily the result of lower average Mortgage Assets,
which decreased 20% to $1.6 billion during 1999 as compared to $2.0 billion
during 1998. Average Mortgage Assets decreased during 1999 as compared to 1998
principally due to the sale of mortgage loans during the fourth quarter of 1998
in order to increase liquidity and meet margin calls. The Company continued to
raise liquidity and reduce leverage throughout 1999 as IFC completed monthly
whole loan sales on a servicing released basis. As such,
45
the Long-Term Investment Operations' loan acquisitions from IFC decreased 26% to
$638.3 million as compared to $866.7 million acquired during 1998. Additionally,
due to IFC's decreased loan production and the shorter accumulation and holding
period between monthly whole loan sales, average finance receivables to
affiliates, primarily IFC, decreased 42% to $232.7 million during 1999 as
compared to $403.9 million during 1998. Net interest income also decreased as
the net interest margin on Mortgage Assets decreased to 1.84% during 1999 as
compared to 2.14% during 1998. The decrease in net interest margin on Mortgage
Assets was primarily the result of a decrease in the net interest margin on CMO
collateral to 0.79% during 1999 as compared to 1.26% during 1998. The decrease
in the net interest margin on CMO collateral during 1999 was primarily due to an
increase in amortization of net premiums as a result of higher loan prepayments.
CMO collateral significantly affects changes in net interest income as it
represents the largest percentage of total Mortgage Assets. Average CMO
collateral accounted for 71% of total average Mortgage Assets during 1999 and
63% of total average Mortgage Assets during 1998.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings for the years ended December 31,
1999 and 1998 and includes interest income on Mortgage Assets and interest
expense related to borrowings on Mortgage Assets only (dollars in thousands):
For the year ended December 31, 1999 For the year ended December 31, 1998
-------------------------------------------- --------------------------------------------
Weighted Weighted
Average Avg. % of Average Avg. % of
Balance Interest Yield Portfolio Balance Interest Yield Portfolio
---------- ---------- -------- --------- --------- ---------- --------- ---------
MORTGAGE ASSETS
- ---------------
Subordinated securities
collateralized by mortgages .... $ 87,107 $ 12,604 14.47% 5.56% $ 88,544 $ 11,219 12.67% 4.47%
Subordinated securities
collateralized by other loans .. 7,433 834 11.22 0.47 5,364 709 13.22 0.27
---------- ---------- ---------- ----------
Total investment securities
available-for-sale........... 94,540 13,438 14.21 6.03 93,908 11,928 12.70 4.74
---------- ---------- ---------- ----------
Loan receivables:
CMO collateral ................... 1,119,813 74,096 6.62 71.48 1,244,458 92,011 7.39 62.87
Mortgage loans held-for-
investment ..................... 34,767 2,345 6.74 2.22 149,131 14,373 9.64 7.54
Finance receivables:
Affiliated ..................... 232,741 19,566 8.41 14.86 403,935 34,166 8.46 20.41
Non-affiliated ................. 84,783 7,779 9.18 5.41 87,855 8,242 9.38 4.44
Total finance receivables ..... 317,524 27,345 8.61 20.27 491,790 42,408 8.62 24.85
Total Receivables Loan ........ 1,472,104 103,786 7.05 93.97 1,885,379 148,792 7.89 95.26
---------- ---------- ---------- ----------
Total Mortgage Assets ............ $1,566,644 $ 117,224 7.48% 100.00% $1,979,287 $ 160,720 8.12% 100.00%
========== ========== ========== ==========
BORROWINGS
- ----------
CMO borrowings ................... $1,017,992 $ 65,212 6.41% 74.25% $1,153,985 $ 76,309 6.61% 64.63%
Reverse repurchase agreements-
mortgages ...................... 331,179 21,545 6.51 24.16 605,486 40,439 6.68 33.91
Borrowings secured by investment
securities ..................... 6,445 686 10.64 0.47 -- -- -- --
Reverse repurchase agreements-
securities ..................... 15,377 998 6.49 1.12 26,051 1,700 6.53 1.46
---------- ---------- ---------- ----------
Total Borrowings on Mortgage
Assets ......................... $1,370,993 $ 88,441 6.45% 100.00% $1,785,522 $ 118,448 6.63% 100.00%
========== ========== ========== ==========
Net Interest Spread .............. 1.03% 1.49%
Net Interest Margin .............. 1.84% 2.14%
Interest income on Mortgage Assets: Interest income on CMO collateral
decreased 19% to $74.1 million during 1999 as compared to $92.0 million during
1998 as average CMO collateral decreased 8% to $1.1 billion as compared to $1.2
billion, respectively. Average CMO collateral decreased as the Long-Term
Investment Operations issued CMOs totaling $298.1 million during 1999, which
were collateralized by $316.2 million of mortgages, as compared to
46
CMOs totaling $768.0 million, which were collateralized by $788.2 million of
mortgages, during 1998. Average CMO collateral also decreased due to higher
mortgage loan prepayments, which increased 16% to $490.0 million during 1999 as
compared to $424.1 million during 1998. CPR on CMO collateral was 37% CPR during
1999 as compared to 30% CPR during 1998. However, $222.9 million, or 35%, of
mortgages acquired during 1999 by the Long-Term Investment Operations, had
prepayment penalties as compared to $147.6 million, or 18%, of mortgages
acquired with prepayment penalties during 1998. The Company expects that the
higher percentage of mortgages acquired for long-term investment with prepayment
penalties will lead to a reduction in overall prepayments.
A decrease in the weighted average yield on CMO collateral also
contributed to an overall decrease in interest income on CMO collateral during
1999 as compared to 1998. The weighted average yield on CMO collateral decreased
to 6.62% during 1999 as compared to 7.39% during 1998. The decrease in yield on
CMO collateral during 1999 was primarily due to amortization of net premiums
paid in acquiring the mortgage loans held as CMO collateral and a decrease in
short-term interest rates, which are used as an index to determine interest rate
adjustments on adjustable rate CMO collateral. During 1999, the Company
amortized net premiums on CMO collateral of $14.4 million as compared to $11.7
million during 1998. Amortization of net premiums on CMO collateral increased
during 1999 as compared to 1998 primarily due to the increase in the CPR, as
previously mentioned. However, during 1999 IFC limited premiums paid on loans
without prepayment penalties. During 1999, IFC acquired mortgage loans at a
weighted average price paid of 101.5 as compared to a weighted average price
paid of 102.3 during 1998. As of December 31, 1999, net premiums on CMO
collateral was $28.8 million as compared to $39.4 million at December 31, 1998.
Interest income on mortgage loans held-for-investment decreased 84% to
$2.3 million during 1999 as compared to $14.4 million during 1998 as average
mortgage loans held-for-investment decreased 77% to $34.8 million as compared to
$149.1 million, respectively. Average mortgage loans held-for-investment
decreased due to a decrease in mortgage loan acquisitions by the Long-Term
Investment Operations during 1999 as compared to 1998. Mortgage loans acquired
from IFC by the Long-Term Investment Operations decreased 26% to $638.3 million
as compared to $866.7 million acquired during 1998. As the Company focused on
increased liquidity and reduced leverage during 1999, the Long-Term Investment
Operations reduced its acquisition of mortgage loans to be held for long-term
investment and concentrated on selling mortgage loans at IFC. Additionally, the
decrease in the weighted average yield on mortgage loans held-for-investment
during 1999 as compared to 1998 contributed to the decrease in interest income.
The weighted average yield decreased to 6.74% during 1999 as compared to 9.64%
during 1998. The decrease in the yield on mortgage loans held-for-investment
during 1999 was primarily due to the sale of high-yielding 125 Loans by the
Long-Term Investment Operations to IFC in December of 1998 and a decrease in
mortgage rates during 1999. The majority of 125 Loans that were held by the
Long-Term Investment Operations were sold to IFC. Interest income on mortgage
loans held-for-investment includes the effect of amortization of net premiums
paid in acquiring the mortgage loans. As of December 31, 1999, net premiums on
mortgage loans held-for-investment was $2.0 million as compared to $482,000 as
of December 31, 1998.
Interest income on finance receivables decreased 36% to $27.3 million
during 1999 as compared to $42.4 million during 1998 as average finance
receivables decreased 35% to $317.5 million as compared to $491.8 million,
respectively. The decrease in interest income on finance receivables during 1999
was primarily the result of monthly whole loan sales by IFC as compared to
quarterly securitizations during 1998 and a decrease in loan acquisitions during
1999 as compared to 1998. IFC's loan accumulation and holding period shortened
during 1999 as the Company sought to minimize interest rate and market risk
exposure on its mortgage loans held-for-sale and maintain strong liquidity
levels through monthly whole loan sales. In addition, IFC's loan acquisitions
decreased to $1.7 billion during 1999 as compared to $2.2 billion during 1998.
As such, average outstanding finance receivables to affiliates (primarily IFC)
decreased to $232.7 million during 1999 as compared to $403.9 million during
1998, which resulted in a decrease in interest income to $19.6 million as
compared to $34.2 million, respectively. The weighted average yield on
affiliated finance receivables decreased to 8.41% during 1999 as compared to
8.46% during 1998 as the average prime rate, which is the index the Company uses
to determine interest rates on finance receivables, was lower during 1999 as
compared to 1998. Interest income on finance receivables to non-affiliates
decreased 5% to $7.8 million during 1999 as compared to $8.2 million during 1998
as average outstanding finance receivables to non-affiliates decreased to $84.8
million as compared to $87.9 million, respectively. Interest income on finance
receivables to non-affiliates also decreased as the weighted average yield
decreased to 9.18% during 1999 as compared to 9.38% during 1998 as the average
prime rate was lower in 1999 as compared to 1998.
47
Interest income on investment securities increased 13% to $13.4 million
during 1999 as compared to $11.9 million during 1998 as average investment
securities increased 1% to $94.5 million as compared to $93.9 million,
respectively. Interest income on investment securities primarily increased
during 1999 as the weighted average yield on investment securities increased to
14.21% during 1999 as compared to 12.70% during 1998. The yield on investment
securities increased during 1999 as compared to 1998 as the Long-Term Investment
Operations acquired $18.3 million of securities from IFC that had a higher
weighted average yield than the weighted average yield of the total investment
securities portfolio and also due to a change in yield estimates on the
remaining securities portfolio.
Interest expense on borrowings: Interest expense on CMO borrowings
decreased 15% to $65.2 million during 1999 as compared to $76.3 million during
1998 as average borrowings on CMO collateral decreased 17% to $1.0 billion as
compared to $1.2 billion, respectively. Average CMO borrowings decreased as the
Long-Term Investment Operations issued CMOs totaling $298.1 million during 1999
as compared to CMOs totaling $768.0 million during 1998. The increase in loan
prepayments also contributed to the overall decrease in average CMO borrowings
during 1999 as compared to 1998. The weighted average yield of CMO borrowings
decreased to 6.41% during 1999 as compared to 6.61% during 1998 as average
one-month LIBOR, which is the index used to determine rates on adjustable rate
CMO borrowings, was lower during 1999 as compared to 1998. In addition, interest
expense on CMO borrowings is affected by the amortization of securitization
costs. Securitization costs are incurred when a CMO is issued and securitization
costs are capitalized and amortized over the life of the CMO borrowings as an
adjustment to the yield. During 1999, the Company amortized securitization costs
of $4.2 million as compared to $2.6 million during 1998 due to an increase in
loan prepayments during 1999 as compared to 1998. As of December 31, 1999,
unamortized securitization costs were $11.9 million as compared to unamortized
securitization costs of $12.3 million at December 31, 1998.
Interest expense on reverse repurchase borrowings, which are used to fund
the acquisition of mortgage loans and finance receivables, decreased 47% to
$21.5 million during 1999 as compared to $40.4 million during 1998 as average
reverse repurchase agreements decreased 45% to $331.2 million as compared to
$605.5 million, respectively. The decrease in average finance receivables was
primarily related to the previously discussed decrease in average finance
receivables to IFC. The Warehouse Lending Operations uses reverse repurchase
agreements with investment banks to fund its short-term loans to affiliates,
primarily IFC, and non-affiliates. As IFC shortened the accumulation and holding
period on its mortgage loans held-for-sale and acquired fewer loans during 1999
as compared to 1998, IFC required lower borrowing levels during 1999. The
weighted average yield of reverse repurchase agreements collateralized by
mortgage loans decreased to 6.51% during 1999 as compared to 6.68% during 1998
as average one-month LIBOR, which is the index used by the Company's lenders to
determine interest rates on reverse repurchase borrowings, decreased during 1999
as compared to 1998.
During most of 1999, the Company used investment securities as collateral
to borrow under reverse repurchase agreements to fund the purchase of
mortgage-backed securities and to act as an additional source of liquidity for
the Company's operations. During October 1999, the Company issued notes
collateralized by a portion of its investment securities portfolio to provide a
more stable financing source for these assets. Therefore, combined interest
expense on reverse repurchase agreements and borrowings secured by investment
securities remained unchanged at $1.7 million during 1999 and 1998. The combined
average balance on reverse repurchase agreements and borrowings secured by
investment securities decreased 16% to $21.8 million as compared to $26.1
million, respectively. The weighted average yield on these combined borrowings
increased to 7.72% during 1999 as compared to 6.53% during 1998.
Non-Interest Income
Non-interest income increased to $6.9 million during 1999 as compared to
$(13.5) million during 1998. Non-interest income increased primarily due to an
increase in equity in net earnings (loss) of IFC. Equity in net earnings (loss)
of IFC improved during 1999 as compared to 1998 due to increased profitability
from the sale of mortgage loans. In addition, IFC recorded non-cash write-downs
on MSRs and investment securities held-for-sale during the fourth quarter of
1998. As discussed previously, loss on loan sales and asset write-downs were due
to a deterioration of the mortgage-backed securitization market, which occurred
during the latter part of 1998. As the mortgage market stabilized during 1999,
IFC returned to overall profitability, which in large part was due to
profitability on loan sales.
48
Equity in Net Earnings (Loss) of IFC
Equity in net earnings (loss) of IFC increased to $4.3 million during 1999
as compared to $(13.9) million during 1998. 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. For more information on
the results of operations of IFC, refer to "--Results of Operations--Impac
Funding Corporation."
Equity in Net Loss of ICH
The Company's equity in net loss of ICH decreased to none for 1999 as
compared to a loss of $(998,000) for 1998. The Company recorded no earnings or
loss from ICH during 1999 as the Company sold its holdings of ICH Common Stock
during the fourth quarter of 1998. Prior to the fourth quarter of 1998, the
Company recorded equity in net earnings (loss) in ICH by virtue of the Company's
ownership of 9.8% of ICH's voting Common Stock and 100% of Class A non-voting
Common Stock.
Non-Interest Expense
Non-interest expense decreased to $8.7 million during 1999 as compared to
$30.0 million during 1998. Non-interest expense decreased primarily due to a
decrease in write-down of investment securities, loss on equity investment and
general and administrative and other expense. Write-down of investment
securities decreased to $2.0 million during 1999 as compared to $14.1 million
during 1998 as the mortgage market recovered from the liquidity problems that
occurred during the latter half of 1998. Loss on equity investment decreased to
zero during 1999 as compared to $9.1 million during 1998 as the Company sold
100% of its Common Stock investment in ICH at a loss during the fourth quarter
of 1998. General and administrative and other expense decreased to $1.3 million
during 1999 as compared to $2.3 million during 1998 as the Company sold its
remaining 50% ownership interest in a commercial office building, where the
Company maintains its current headquarters, to ICH during the fourth quarter of
1998. Expenses related to the 50% ownership interest in the property decreased
to none during 1999 as compared to $622,000 during 1998.
Credit Exposures
Non-performing Assets. The outstanding unpaid principal balance of
non-performing assets totaled $63.3 million at December 31, 1999 as compared to
$80.7 million at December 31, 1998. The decrease in non-performing assets was
primarily due to the sale of delinquent mortgage loans held-for-sale at IFC. Of
the total non-performing assets at December 31, 1999 and 1998, other real estate
owned represented $9.7 million and $9.2 million, respectively, in unpaid
principal balance. The carrying amount of other real estate owned, after writing
down the mortgage loan to the broker's price opinion or appraised value, was
$8.8 million and $8.5 million at December 31, 1999 and 1998, respectively. The
Company recorded losses on the disposition of other real estate owned of $2.2
million and $1.7 million during 1999 and 1998, respectively.
The following table summarizes the unpaid principal balance of the
Company's non-performing assets included in its mortgage loan portfolios for the
periods shown (in thousands):
49
At December 31,
--------------------
1999 1998
------- -------
Mortgage Loans Held-for-Sale:
Non-accrual ........................................ $ 2,572 $15,328
Other real estate owned ............................ -- --
------- -------
Total mortgage loans held-for-sale ............... 2,572 15,328
------- -------
Mortgage Loans Held-for-Investment:
Non-accrual ........................................ 8,229 6,870
In process foreclosures ............................ 306 1,437
------- -------
Total mortgage loans held-for-investment ......... 8,535 8,307
------- -------
CMO collateral:
Non-accrual ........................................ 42,792 49,305
Other real estate owned ............................ 9,411 7,739
------- -------
Total CMO collateral ............................. 52,203 57,044
------- -------
Total mortgage loan portfolios ................. $63,310 $80,679
======= =======
Delinquent Loans. At December 31, 1999, loans that were delinquent 30 days
or more, as a percentage of the outstanding servicing balance of the mortgage
loan portfolios, was 10.98% as compared to 12.80% at December 31, 1998.
The following table summarizes the unpaid principal balance of the
Company's delinquent mortgage loans included in its mortgage loan portfolios for
the periods shown (in thousands):
At December 31,
---------------------
1999 1998
-------- --------
Mortgage Loans Held-for-Sale:
60-89 days delinquent .............................. $ 1,838 $ 1,448
90 or more days delinquent (1) ..................... 2,572 15,328
-------- --------
Total mortgage loans held-for-sale ............... 4,410 16,776
-------- --------
Mortgage Loans Held-for-Investment:
60-89 days delinquent .............................. 1,453 271
90 or more days delinquent (1) ..................... 8,229 6,870
-------- --------
Total mortgage loans held-for-investment ......... 9,682 7,141
-------- --------
CMO collateral:
60-89 days delinquent .............................. 12,398 18,695
90 or more days delinquent (1) ..................... 42,792 49,305
-------- --------
Total CMO collateral ............................. 55,190 68,000
-------- --------
Total mortgage loan portfolios ................. $ 69,282 $ 91,917
======== ========
- ----------
(1) Includes loans in foreclosure and delinquent bankruptcies.
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, decreased to 0.27%
at December 31, 1999 as compared to 0.47% at December 31, 1998. The Company
recorded net loan loss provisions of $5.5 million during 1999 as compared to
$4.4 million during 1998. The amount provided for loan losses during 1999
increased primarily due to an increase in foreclosures and the subsequent
disposition of other real estate owned.
50
RESULTS OF OPERATIONS--
IMPAC FUNDING CORPORATION
Year Ended December 31, 2000 as compared to Year Ended December 31, 1999
Results of Operations
Net earnings (loss) decreased to a loss of $(1.8) million during the year
ended December 31, 2000 as compared to net earnings of $4.3 million during the
same period of 1999. The decrease in net earnings was primarily due to a
decrease of $7.4 million in gain on sale of loans, a decrease of $1.7 million in
net interest income (loss) and the accrual of a $1.6 million tax liability.
Net Interest Income (Loss)
Net interest income (loss) decreased to a loss of $(1.4) million during
2000 as compared to net interest income of $272,000 during 1999 as average
mortgage loans held-for-sale increased 23% to $294.6 million as compared to
$240.1 million, respectively. Average mortgage loans held-for-sale increased as
the Mortgage Operations increased total loan acquisitions and originations by
24% to $2.1 billion during 2000 as compared to $1.7 billion during 1999.
However, the decrease in net interest income was due to the rapid increase in
short-term interest rates during 2000. During 2000, the yield on mortgage loans
held-for-sale increased to 9.50% as compared to 8.48% during 1999 while the
yield on borrowings increased to 9.88% as compared to 8.30%, respectively. Net
interest margins on mortgage loans held-for-sale decreased to (0.02)% during
2000 as compared to 0.50% during 1999. Net interest margins decreased during
2000 due to rapid increases in short-term interest rates and inversion of the
yield curve, which occurred during 2000. This inverted yield curve contributed
to compression of net interest margins as interest rates on mortgage loans set
by the Mortgage Operations primarily use the ten-year Treasury yield as an index
plus a margin. Therefore, mortgage loan rates were set using interest rates on
the ten-year Treasury yield which increased at a slower rate than short-term
interest rates on borrowings.
Non-Interest Income
Non-interest income decreased to $27.1 million during 2000 as compared to
$33.3 million during 1999 as gain on sale of loans decreased to $19.7 million on
loan sales and securitizations of $1.4 billion as compared to gains of $27.1
million on loan sales and securitizations of $1.2 billion, respectively. Gain on
sale of loans decreased during 2000 as a result of reduced profitability on
loans sold as compared to loan sales closed during 1999. During 1999, IFC sold
mortgage loans on a whole loan basis for cash, as opposed to sales through
asset-backed securitizations, which occurred during 2000. IFC securitized $1.3
billion in REMICs during 2000 as compared to $360.1 million in REMICs during
1999. The decrease in gain on sale of loans was partially offset by an increase
in loan servicing income during 2000 as compared to 1999. Loan servicing income
increased to $6.3 million during 2000 as compared to $5.2 million during 1999 as
IFC's master servicing portfolio increased to $4.0 billion at December 31, 2000
as compared to $2.9 billion at December 31, 1999.
Non-Interest Expense
Non-interest expense increased to $26.7 million during 2000 as compared to
$26.0 million during 1999. Non-interest expense during 2000 was positively
affected by a decrease of $2.7 million in write-down of investment securities
and a decrease of $1.1 million in impairment of MSRs, which were offset by an
increase of $2.5 million in personnel expense and an increase of $1.0 million in
general and administrative and other expense. Write-down of investment
securities decreased to $1.5 million during 2000 as compared to $4.3 million
during 1999 as IFC wrote-off substantially all remaining book value of
investment securities secured by franchise loan receivables. Personnel expense
increased by 34% to $9.8 million as compared to $7.3 million during 1999
primarily due to an increase in staff as correspondent and wholesale loan
production volumes increased by 29%. Personnel expense also includes
compensation paid to Bank related personnel who were terminated during 2000 when
IFC withdrew its application to acquire a Bank. The increase in general and
administrative and other expense is primarily the result of interest on an
accrued tax liability.
51
Year Ended December 31, 1999 as compared to Year Ended December 31, 1998
Result of Operations
IFC recorded net earnings of $4.3 million during 1999 as compared to a net
loss of $(14.0) million during 1998. Earnings increased during 1999 as compared
to 1998 primarily as the mortgage market stabilized and recovered from the
liquidity crisis, which occurred during the latter part of 1998. As the mortgage
market recovered during 1999, IFC returned to overall profitability, which in
large part was due to the profitability on the sale of its mortgage loans.
During 1998, IFC sold loans at significant losses to meet margin calls and raise
liquidity. In addition, IFC recorded non-cash write-down on MSRs and investment
securities.
Net Interest Income
Net interest income decreased to $272,000 during 1999 as compared to $7.8
million during 1998 as average mortgage loans held-for-sale decreased 50% to
$240.1 million as compared to $476.1 million, respectively. Average mortgage
loans held-for-sale decreased due to the shorter accumulation and holding period
of mortgage loans held-for-sale and a decrease in mortgage loan acquisitions.
During 1999, IFC primarily sold loans monthly on a whole loan basis as opposed
to quarterly securitizations, which occurred during 1998. Monthly whole loan
sales were completed during 1999 in order to reduce interest rate and market
risk exposures and to maintain strong liquidity levels. In addition, mortgage
loan acquisitions decreased 23% to $1.7 billion during 1999 as compared to
mortgage loan acquisitions of $2.2 billion during 1998. Mortgage loan
acquisitions decreased during 1999 as compared to 1998 due to the residual
effects of the deterioration of the mortgage-backed securitization market, which
occurred during the latter part of 1998. In response to the liquidity crisis,
IFC raised interest rates on its loan programs and decreased the amount of
premiums paid on its loan acquisitions, which caused some of IFC's correspondent
sellers to use other sources for the funding of their mortgage loans. During
1999, IFC continued to rebuild its mortgage loan acquisitions to previous levels
by offering its sellers competitive and flexible mortgage products. As such,
mortgage loan acquisitions increased 48% to $548.2 million during the fourth
quarter of 1999 as compared to $370.5 million during the fourth quarter of 1998.
Non-Interest Income
Non-interest income increased to $33.3 million during 1999 as compared to
$(5.7) million during 1998 as gain on sale of loans increased to $27.1 million
during 1999 as compared to $(11.7) million during 1998. In line with the
Company's overall strategy to reduce interest rate and market risk exposure and
to maintain strong liquidity levels, IFC sold mortgage loans on a whole loan
basis for cash during 1999, as opposed to sales through asset-backed
securitizations for non-cash gains, which occurred during 1998. During 1999, IFC
sold mortgages totaling $824.1 million, on a servicing released basis, to third
party investors as compared to loan sales of $856.2 million during 1998. The
sale of loans on a servicing released basis during 1999 reduced IFC's exposure
to further prepayment risk. IFC also securitized $360.1 million in REMICs during
1999 as compared to $907.5 million in REMICs during 1998. The increase in gain
on sale of loans was partially offset by a decrease in loan servicing income
during 1999 as compared to 1998. Loan servicing income decreased to $5.2 million
during 1999 as compared to $7.1 million during 1998 as IFC sold MSRs and
completed loan sales on a servicing released basis. Total unpaid principal
balance of mortgage loans at the time MSRs were sold was $2.3 billion.
Non-Interest Expense
Non-interest expense increased 5% to $26.0 million during 1999 as compared
to $24.8 million during 1998. Non-interest expense during 1999 was positively
affected by decreases in personnel expense and impairment and amortization of
MSRs. Personnel expense decreased 18% to $7.3 million as compared to $8.9
million during 1998. Personnel expense decreased primarily due to a reduction in
staff which occurred during the fourth quarter of 1998 and carried into 1999.
During the fourth quarter of 1998, IFC reduced staff in anticipation of
decreased loan acquisitions due to the deterioration of the mortgage-backed
securitization market. The reduction in staff also contributed to increased
liquidity from operating activities. Impairment of MSRs decreased to $1.1
million during 1999 as compared to $3.7 million during 1998 as the mortgage
market recovered during 1999. Impairment of MSRs recorded in 1998 was primarily
due to the deterioration of the mortgage-backed securitization market.
Amortization of
52
MSRs decreased to $5.3 million as compared to $6.4 million as IFC sold MSRs and
completed whole loan sales on a servicing released basis.
The decreases in personnel expense and impairment and amortization of MSRs
were offset by increases in write-down on securities and general and
administrative and other expense. Write-down on securities increased to $4.3
million during 1999 as compared to zero during 1998. The write-down on
securities was due to the complete write-off of an investment security deemed to
have no value. The increase in general and administrative and other expense
during 1999 was primarily due to costs associated with the operation of the
wholesale and retail origination division, which began operations in 1999, and
costs associated with the application of the Bank charter.
Liquidity and Capital Resources
Overview
Historically, the Company's business operations are primarily funded by
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 through
secondary stock offerings, DRSPP, and its structured equity shelf program ("SES
Program"). The acquisition of mortgage loans and mortgage-backed securities by
the Long-Term Investment Operations are primarily funded by monthly principal
and interest payments, reverse repurchase agreements, CMO financing, and
proceeds from the sale of Common Stock. The acquisition of mortgage loans by the
Mortgage Operations are funded by reverse repurchase agreements, the sale of
mortgage loans and mortgage-backed securities and the issuance of REMICs.
Short-term warehouse financing (finance receivables) provided by the Warehouse
Lending Operations are primarily funded by reverse repurchase agreements. During
2000, the Company issued no new shares of Common Stock through stock offerings,
DRSPP or through its SES Program. During 1999, the Company suspended the
issuance of any new shares of Common Stock under the DRSPP.
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.
Results of Liquidity during 2000
The deterioration of the mortgage-backed securitization market that
resulted in margin calls by the Company's lenders and caused significant
liquidity disruptions during the latter half of 1998 and into 1999 recovered
during 2000 as the Company's warehouse lenders made no margin calls. However,
the market disruptions during 1998 caused several public companies to file for
protection from their creditors under the U.S. Bankruptcy Code. This had the
effect of causing reduced investor confidence with certain sectors of the
financial services industry, particularly Mortgage REITs, which in turn caused
stock prices to fall sharply. As a result of this decline in stock prices, the
Company has been unable to access the capital markets and raise additional cash,
which in turn required the Company to restructure its balance sheet and generate
cash internally to meet its funding needs. IMH and IFC maintained consolidated
average cash balances during 2000 of $20.8 million as compared to $20.5 million
during 1999 as consolidated average assets, after intercompany eliminations,
increased to $1.9 billion from $1.7 billion, respectively.
A significant provider of additional operating liquidity during 2000 was
the collapse of five previously issued CMOs into two new CMO structures, which
provided approximately $32.6 million of capital. This capital represented equity
that was invested in the previous CMOs and was released and reinvested in the
Company's Long-Term Investment Operations. In addition, the collapse of the
previous CMOs improved capital leverage, lower borrowing costs and reduced
amortization exposure on the $144.0 million of previous CMO collateral.
53
During 2000, IFC provided additional liquidity from the sale of servicing
rights through the completion of REMICs on a servicing released basis. IFC sold
servicing rights on $1.3 billion of unpaid principal balance from the completion
of five REMIC securitizations on a servicing released basis during 2000. In
order to mitigate interest rate and market risk, the Mortgage Operations
completed two REMIC securitizations during the fourth quarter of 2000. The
Company believes this will require less capital and will provide more liquidity
with less interest rate and price volatility as the accumulation and holding
period of mortgage loans is reduced. IFC's goal is to continue completing two
REMIC securitizations per quarter during 2001 to reduce interest rate and market
risk. IFC also signed a flow agreement with an investment bank during January
2001, which allows IFC to forward price its REMIC transactions and achieve
greater stability in the execution of its securitizations.
Liquidity provided by balance sheet restructuring and operating activites
was used to repurchase $2.3 million of the Company's Common Stock, pay preferred
and cash dividends of $13.7 million and grow the balance sheet. However, the
Company did not declare a common stock dividend during the fourth quarter of
2000 and plans to utilize its tax loss carry forwards during 2001. The Company
believes that it is prudent to take advantage of its tax loss carry forwards and
retain capital to continue the expansion and growth of its core operating
businesses. The Company believes that the retention of earnings will allow the
Company to increase its assets and book value during 2001. The Company will
likely need to pay common stock dividends in 2002 as the tax loss carry forwards
are expected to be completely used. The Company believes that current liquidity
levels, available financing facilities, liquidity provided by operating
activities and the retention of earnings, as projected for 2001, will adequately
provide for the Company's projected funding needs and asset growth. However, any
future margin calls and, depending upon the state of the mortgage industry,
terms of any sale of Mortgage Assets may adversely affect the Company's ability
to maintain adequate liquidity levels or may subject the Company to future
losses.
Sources of Liquidity
Long-Term Investment Operations: The Long-Term Investment Operations uses
CMO borrowings to finance substantially all of its mortgage loan portfolio.
Terms of the CMO borrowings require that an independent third party custodian
hold the mortgages. The maturity of each class is directly affected by the rate
of principal prepayments on the related collateral. Equity in the CMOs is
established at the time the CMOs are issued at levels sufficient to achieve
desired credit ratings on the securities from rating agencies. The amount of
equity invested in CMOs by the Long-Term Investment Operations is also
determined by the Company based upon the anticipated return on equity as
compared to the estimated proceeds from additional debt issuance. Total credit
loss exposure is limited to the equity invested in the CMOs at any point in
time. At December 31, 2000, the Long-Term Investment Operations had $1.3 billion
of CMO borrowings used to finance $1.4 billion of CMO collateral.
During 1999, the Company re-securitized a portion of its mortgage-backed
securities portfolio with principal only notes. As of December 31, 2000, the
Long-Term Investment Operations had $21.1 million outstanding under these notes,
which were secured by $21.9 million in fair market value of mortgage-backed
securities. The Company still has the ability to borrow funds under the reverse
repurchase agreements secured by investment securities.
Mortgage Operations: The Mortgage Operations has entered into warehouse
line 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
IFC accumulates mortgage loans until the mortgage loans are securitized or sold.
The margins on IFC's reverse repurchase agreements are based on the type of
collateral provided and generally range from 95% to 99% of the fair market value
of the collateral. The interest rates on the borrowings are indexed to prime,
which was 8.50% at December 31, 2000. As of December 31, 2000, the Mortgage
Operations had $267.0 million outstanding under the warehouse line agreements.
During 2000, the Mortgage Operations securitized $1.3 billion of mortgage
loans as REMICs and sold $62.6 million, in unpaid principal balance, of mortgage
loans to third party investors. In addition, IFC sold $430.8 million, in unpaid
principal balance, of mortgage loans to the Long-Term Investment Operations
during 2000.
54
Warehouse Lending Operations: 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 third party lenders. IWLG has an uncommitted repurchase facility
with a major investment bank to finance the Warehouse Lending Operations as
needed. Terms of the reverse repurchase agreement requires that the mortgages be
held by an independent third party custodian giving the Warehouse Lending
Operations the ability to borrow against the collateral as a percentage of the
outstanding principal balance. The borrowing rates vary from 85 basis points to
200 basis points over one-month LIBOR, depending on the type of collateral
provided. The margins on the reverse repurchase agreement is based on the type
of mortgage collateral provided and generally range from 70% to 98% of the fair
market value of the collateral. At December 31, 2000, the Warehouse Lending
Operations had $398.7 million outstanding on the reverse repurchase facility.
Cash Flows
Operating Activities - During 2000, net cash provided by operating
activities was $26.7 million. Cash provided by operating activities was
primarily from loan loss provisions of $18.8 million and amortization of premium
and securitization costs of $15.3 million.
Investing Activities - During 2000, net cash used in investing activities
was $302.5 million. Cash used in investing activities was primarily used to
acquire CMO collateral and mortgage loans held-for-investment and to fund an
increase in outstanding finance receivables.
Financing Activities - During 2000, net cash provided by financing
activities was $273.5 million. Cash provided by financing activities was
primarily from CMO borrowings, net of repayments, which was partially offset by
a decrease in borrowings on reverse repurchase agreements.
Inflation
The Consolidated Financial Statements and Notes 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
A significant portion of the Company's revenues and earnings are derived
from net interest income and, accordingly, the Company strives to manage its
interest-earning assets and interest-bearing liabilities to generate what
management believes to be an appropriate contribution from net interest income.
When interest rates fluctuate, the Company can be adversely affected by changes
in the fair market value of its assets and liabilities and by the interest
spread the Company earns on interest-earning assets and interest-bearing
liabilities. The Company derives income from the differential spread between
interest earned on interest-earning assets and interest paid on interest-bearing
liabilities. Any change in interest rates affect both income received and income
paid from these assets in varying and typically in unequal amounts and may
compress the Company's interest rate margins and adversely affect overall
earnings.
55
Therefore, the Company seeks to control the volatility of the Company's
performance due to changes in interest rates through asset/liability management.
The Company attempts to achieve an appropriate relationship between interest
rate sensitive assets and interest rate sensitive liabilities. Although the
Company manages other risks, such as credit, operational and liquidity risk in
the normal course of business, management considers interest rate risk to be a
significant market risk which could potentially have the largest material effect
on the Company's financial condition and results of operations. As the Company
has only invested or borrowed in U.S. dollar denominated financial instruments,
the Company is not subject to foreign currency exchange risk.
As part of its asset/liability management process, the Company performs
various interest rate simulations that calculate the affect of potential changes
in interest rates on its interest-earning assets and interest-bearing
liabilities and their affect on overall earnings. This analysis assumes
instantaneous parallel shifts in the yield curve and to what degree those shifts
affect net interest income. In addition, various modeling techniques are used to
value interest sensitive mortgage-backed securities, including interest-only
securities. The value of mortgage-backed securities is determined using a
discounted cash flow model using prepayment rate, discount rate and credit loss
assumptions.
Interest Rate Sensitive Assets and Liabilities
Interest rate risk management is the responsibility of the Company's Asset
and Liability Committee ("ALCO"), which reports to the Company's Board of
Director's on a monthly basis. ALCO establishes policies that monitor and
coordinate the Company's sources, uses and pricing of its funds. ALCO also
attempts to reduce the volatility in net interest income by managing the
relationship of interest rate sensitive assets to interest rate sensitive
liabilities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds that amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of falling interest
rates, the net earnings of an institution with a positive gap, theoretically,
may be adversely affected due to its interest-earning assets repricing to a
greater extent than its interest-bearing liabilities. Conversely, during a
period of rising interest rates, theoretically, the net earnings of an
institution with a positive gap position may increase as it is able to invest in
higher yielding interest-earning assets at a more rapid rate than its
interest-bearing liabilities reprice. However, the gap analysis does not take
into consideration constraints on the repricing of interest rates of ARM assets
in a given period resulting from periodic and lifetime cap features, the
behavior of various indexes applicable to the Company's assets and liabilities
or the affects of off-balance sheet financial instruments, particularly interest
rate caps, on net interest income, see "--Changes in Interest Rates."
The Company manages its interest rate risk by (1) retaining adjustable
rate mortgages to be held for long-term investment, (2) selling fixed rate
mortgages on a whole-loan basis, (3) securitizing both adjustable- and fixed
rate mortgages through the issuance of CMOs, and (4) the purchase of LIBOR
interest rate caps, see "--Hedging." The Company retains adjustable rate
mortgages, which are generally indexed to six-month LIBOR and reprice every six
months, to be held for investment or as CMO collateral. The Company also
securitizes both variable- and fixed rate mortgages as CMOs to reduce its
interest rate risk as CMOs provide a net interest spread between the interest
income on the mortgages and the interest and other expenses associated with the
CMO financing. In addition, the Company purchases LIBOR interest rate caps to
provide some protection against any resulting basis risk shortfall on the
related liabilities. The interest rate caps purchased are based upon the
principal balance that would result under an assumed prepayment speed.
The Company does not currently maintain a securities trading portfolio. As
a result, the Company is not exposed to market risk as it relates to trading
activities. The Company's investment securities portfolio is available-for-sale,
which requires the Company to perform market valuations of the portfolio in
order to properly record the portfolio at the lower of cost or market.
Therefore, the Company continually monitors the interest rates of its investment
securities portfolio as compared to prevalent interest rates in the market.
56
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2000 (dollar amounts in
thousands), which are anticipated by the Company to reprice or mature in each of
the future time periods shown. The amount of assets and liabilities shown which
reprice or mature during a particular period were determined in accordance with
the earlier of term to repricing or the contractual term of the asset or
liability as adjusted for scheduled and unscheduled repayments. Unscheduled
prepayment rates are assumed on substantially all of the Company's
mortgage-backed security and loan portfolios and are based on historic loan
prepayment experience and anticipated future prepayments. The table does not
include assets and liabilities that are not interest rate sensitive such as
interest receivables and payables, prepaid expenses and accrued expenses.
Over 5 Fair
2001 2002 2003 2004 2005 Years (4) Total Value
---------- -------- -------- ------- ------- --------- ---------- ----------
Interest sensitive assets:
Cash equivalents .................. $ 17,944 $ -- $ -- $ -- $ -- $ -- $ 17,944 $ 17,944
Average interest rate ......... 4.71% --% --% --% --% --% 4.71%
Investment securities (1) ......... 2,137 1,975 3,728 4,335 5,273 19,473 36,921 36,921
Average interest rate ......... 8.89% 8.66% 8.57% 8.22% 7.46% 8.57% 8.32%
Finance receivables ............... 405,438 -- -- -- -- -- 405,438 405,438
Average interest rate ......... 8.94% --% --% --% --% --% 8.94%
CMO collateral (2) ................ 663,257 393,146 101,151 49,844 $33,387 $132,211 1,372,996 1,365,893
Average interest rate ......... 8.97% 9.04% 9.19% 9.26% 9.44% 7.70% 8.91%
Loans held-for-investment
(3) ............................ 16,246 256 65 51 40 62 16,720 14,698
Average interest rate ......... 2.57% 10.46% 13.13% 13.71% 14.35% --% 2.97%
Due from affiliates ............... 14,500 -- -- -- -- -- 14,500 14,500
Average interest rate ......... 9.50% --% --% --% --% --% 9.50%
---------- -------- -------- ------- ------- --------- ---------- ----------
Total interest-sensitive
assets ......................... $1,119,522 $395,377 $104,944 $54,230 $38,700 $ 151,746 $1,864,519 $1,855,394
---------- -------- -------- ------- ------- --------- ---------- ----------
Average interest rate ......... 8.80% 9.04% 9.17% 9.18% 9.18% 8.82%
Interest sensitive
liabilities:
CMO borrowings .................... $1,113,080 $ 48,804 $ 34,165 $24,648 $18,143 $ 52,444 1,291,284 $1,296,927
Average interest rate ......... 7.01% 6.78% 6.78% 6.78% 6.78% 6.78% 6.99%
Reverse repurchase agreements ..... 398,653 -- -- -- -- -- 398,653 398,653
Average interest rate ......... 7.35% --% --% --% --% --% 7.35%
Borrowings secured by
Securities available-for-sale .. 4,185 3,376 2,722 2,194 1,767 6,880 21,124 17,744
Average interest rate ......... 16.94% 16.95% 16.97% 16.99% 17.02% 17.40% 17.11%
Senior subordinated debt .......... -- -- -- 6,979 -- -- 6,979 4,955
Average interest rate ......... --% --% --% 11.00% --% --% 11.00%
Due to affiliates ................. -- -- -- -- -- -- -- --
Average interest rate ......... --% --% --% --% --% --% --%
---------- -------- -------- ------- ------- --------- ---------- ----------
Total interest-sensitive
liabilities ................... $1,515,918 $ 52,180 $ 36,887 $33,821 $19,910 $ 59,324 $1,718,040 $1,718,279
---------- -------- -------- ------- ------- --------- ---------- ----------
Average interest rate ......... 7.13% 7.07% 7.08% 7.79% 7.36% 7.75% 7.22%
Interest rate sensitivity
gap (5) ........................ $ (396,396) $343,197 $ 68,057 $20,409 $18,790 $ 92,422 $ 146,479
Cumulative interest rate
sensitivity gap ................ $ (396,396) $(53,199) $ 14,858 $35,267 $54,057 $146,479
Cumulative gap ratio% ............. (21.26) (2.85) 0.80% 1.89% 2.90% 7.86%
- ----------
(1) The over 5 year category includes "interest-only" securities of $7.7
million.
(2) Includes unamortized net premiums and unamortized securitization costs of
$22.8 million and $14.1 million, respectively.
(3) Includes unamortized net discounts of $208,000.
(4) CMO collateral and loans held-for-investment include non-accrual loans of
$28.8 million and $10.2 million, respectively.
(5) Interest rate sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
As the Company's estimated interest rate sensitivity gap is negative
during 2001, net interest income could be positively affected by a decrease in
interest rates as more interest-bearing liabilities could reprice downwards
during 2001 than interest-bearing assets. Conversely, an increase in interest
rates could have a negative affect on net interest
57
income during 2001 as more interest-bearing liabilities could reprice upwards
than interest-bearing assets, see "--Changes in Interest Rates. " The estimated
cumulative negative gap during 2001 of $396.4 million compares to an estimated
cumulative negative gap for 2000 of $457.8 million. Since these estimates are
based upon numerous assumptions, such as the expected maturities of the
Company's interest-earning assets and interest-bearing liabilities, the
Company's actual sensitivity to interest rate changes could vary significantly
if actual experience differs from those assumptions used in making the
calculations. In addition, the estimated impacts of parallel shifts in interest
rates and the resulting effect on net interest income does consider increases or
decreases in premium amortization and securitization expenses due to possible
increases or decreases in loan prepayments, which could also vary if actual
experience differs from the prepayment assumptions used.
Changes in Interest Rates
Although the static gap methodology is widely accepted in identifying
interest rate risk, it does not take into consideration changes that may occur
in investment and financing strategies, changes in the yield curve, changes in
hedging strategy, changes in prepayment speeds and changes in business volumes.
Therefore, in addition to measuring interest rate risk via a gap analysis, the
Company measures the sensitivity of its net interest income to changes in
interest rates affecting interest sensitive assets and liabilities using
simulations. The simulations consider the affect of interest rate changes on
interest sensitive assets and liabilities as well as interest rate caps
(off-balance sheet items). Changes in interest rates are defined as
instantaneous and sustained movements in interest rates in 100 basis point
increments. The Company estimates its net interest income for the next twelve
months assuming no changes in interest rates from those at period end. Once the
base case has been estimated, calculations are made for each of the defined
changes in interest rates, to include any associated differences in the
anticipated prepayment speed of loans. Those results are then compared against
the base case to determine the estimated change to net interest income.
The following table (dollar amounts in millions) estimates the financial
impact to net interest income from various instantaneous and parallel shifts in
interest rates based on the Company's on- and off-balance sheet structure as of
December 31, 2000 and 1999. Since, these estimates are based upon numerous
assumptions, such as estimated prepayment rates, the shape of the yield curve
and estimated business volumes, the Company's actual sensitivity to interest
rate changes could differ significantly as compared to actual results.
2001 estimates using 2000 estimates using
balances at 12/31/00 balances at 12/31/99
------------------------ ------------------------
Changes in Interest Rates Change in Net Change in Net
(In Basis Points) Interest Income (1) Interest Income (1)
------------------------ ------------------------
($) (%) ($) (%)
+200 ....................... (5.0) (19) (1.9) (6)
+100 ....................... (4.1) (15) (4.4) (14)
-100 ....................... 6.2 23 2.1 7
-200 ....................... 12.7 48 4.9 16
- ----------
(1) The dollar and percentage changes represent net interest income, for the
next twelve months, in a stable interest rate environment versus the
change in net interest income in the various instantaneous, parallel rate
change simulations.
The estimated decrease in net interest income in an increasing rate
environment during 2001 as compared to 2000 is primarily due to a reduction in
interest income received from interest rate cap agreements. During 2001,
estimated interest income from interest rate caps was $894,000 and $5.0 million
in the up 100 and 200 simulations, respectively, as compared to $2.3 million and
$8.4 million, respectively, for 2000. As actual interest rates decreased during
the first quarter of 2001 and because the forward yield curve is predicting
future interest rate decreases, interest rates are moving further away from the
strike prices on the Company's interest rate caps. Therefore, the rapid decrease
in the forward yield curve is minimizing the affect of interest rate caps in the
up interest rate simulations.
As in 2000, estimated net interest income for 2001 is negatively affected
by upward movements in interest rates due to (1) an estimated negative gap
during year 2001 of $396.4 million, as shown in the static gap table above and
(2) the lag in the repricing of the indices to which the Company's adjustable
rate loans and mortgage-backed securities are
58
tied as compared to the borrowings that fund these assets . As interest rates
increase, an estimated $1.5 billion of the Company's interest rate sensitive
liabilities contractually mature or reprice during 2001 as compared to $1.1
billion of interest rate sensitive assets that are estimated to contractually
mature or reprice during 2001. Additionally, because the Company's adjustable
rate CMO collateral is tied to various indices, primarily six-month LIBOR, and
the corresponding CMO financing is primarily tied to one-month LIBOR, the
Company's interest rate sensitive liabilities reprice faster than its interest
rate sensitive assets, which could create negative results in net interest
income over the near term (12-month horizon) during periods of increasing
interest rates.
However, the Company's balance sheet yields opposite results in periods of
decreasing interest rates. The estimated increase in net interest income in a
decreasing interest rate environment during 2001 as compared to 2000 is
primarily due to the reduction of actual interest rates during the first quarter
of 2001 and the further prediction of interest rate decreases per the forward
yield curve. Estimated net interest income yields much more positive results
during 2001 as compared to 2000 as the forward yield curve is significantly
declining during 2001 which is resulting in more interest rate sensitive
liabilities contractually maturing or repricing much more quickly than interest
rate sensitive assets. The Company expects that net interest margins on CMO
collateral, in particular, will improve significantly during 2001 as CMO
financing is indexed to one-month LIBOR and reprices on a monthly basis.
Conversely, CMO collateral has primarily the following interest rate
characteristics: (1) tied to six-month LIBOR and adjusts every six months or (2)
fixed interest rates for two- and three-year periods and adjustable rate
thereafter.
The following table presents the extent to which changes in interest rates
and changes in the volume of interest rate sensitive assets and interest rate
sensitive liabilities have affected the Company's interest income and interest
expense during the periods indicated. Information is provided on Mortgage Assets
and borrowings on Mortgage Assets, only, with respect to (1) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(2) changes attributable to changes in rate (changes in rate multiplied by prior
volume), (3) changes in interest due to both rate and volume, and (4) the net
change.
Year Ended December 31,
-----------------------------------------
2000 over 1999
-----------------------------------------
Rate/ Net
Volume Rate Volume Change
------ ---- ------ ------
(in thousands)
Increase/(decrease) in:
Subordinated securities collateralized by mortgages .... $ (4,262) $ (1,651) $ 558 $ (5,355)
Subordinated securities collateralized by other loans .. (512) (127) 78 (561)
-------- -------- -------- --------
Total investment securities .......................... (4,774) (1,778) 636 (5,916)
Loan receivables:
CMO collateral ......................................... 5,205 6,186 436 11,827
Mortgage loans held-for-investment ..................... 5,703 267 651 6,621
Finance receivables:
Affiliated ........................................... 4,315 3,411 752 8,478
Non-affiliated ....................................... 4,584 1,206 711 6,501
-------- -------- -------- --------
Total finance receivables .......................... 8,899 4,617 1,463 14,979
-------- -------- -------- --------
Total Loan Receivables ............................... 19,807 11,070 2,550 33,427
-------- -------- -------- --------
Change in interest income on Mortgage Assets ....... 15,033 9,292 3,186 27,511
-------- -------- -------- --------
CMO borrowings ......................................... 5,263 9,079 733 15,075
Reverse repurchase agreements-mortgages ................ 11,893 3,723 2,055 17,671
Borrowings secured by investment securities ............ 2,119 101 311 2,531
Reverse repurchase agreements-securities ............... (998) (998) 998 (998)
-------- -------- -------- --------
Change in interest expense on borrowings on Mortgage
Assets ........................................... 18,277 11,905 4,097 34,279
-------- -------- -------- --------
Change in net interest income .................... $ (3,244) $ (2,613) $ (911) $ (6,768)
======== ======== ======== ========
59
Year Ended December 31,
-----------------------------------------
1999 over 1998
-----------------------------------------
Rate/ Net
Volume Rate Volume Change
------ ---- ------ ------
(in thousands)
Subordinated securities collateralized by mortgages .... $ (182) $ 1,593 $ (26) $ 1,385
Subordinated securities collateralized by other loans .. 274 (107) (42) 125
-------- -------- -------- --------
Total investment securities .......................... 92 1,486 (68) 1,510
Loan receivables:
CMO collateral ......................................... (9,211) (9,621) 917 (17,915)
Mortgage loans held-for-investment ..................... (11,025) (4,317) 3,314 (12,028)
Finance receivables:
Affiliated ........................................... (14,483) (215) 98 (14,600)
Non-affiliated ....................................... (288) (180) 5 (463)
-------- -------- -------- --------
Total finance receivables .......................... (14,771) (395) 103 (15,063)
-------- -------- -------- --------
Total Loan Receivables ............................... (35,007) (14,333) 4,334 (45,006)
-------- -------- -------- --------
Change in interest income on Mortgage Assets ....... (34,915) (12,847) 4,266 (43,496)
-------- -------- -------- --------
CMO borrowings ......................................... (8,989) (2,355) 247 (11,097)
Reverse repurchase agreements-mortgages ................ (18,324) (1,056) 486 (18,894)
Borrowings secured by investment securities ............ -- -- 686 686
Reverse repurchase agreements-securities ............... (697) (10) 5 (702)
-------- -------- -------- --------
Change in interest expense on borrowings on Mortgage
Assets ........................................... (28,010) (3,421) 1,424 (30,007)
-------- -------- -------- --------
Change in net interest income .................... $ (6,905) $ (9,426) $ 2,842 $(13,489)
======== ======== ======== ========
Hedging
The Company conducts certain hedging activities in connection with both
its Long-Term Investment Operations and its Mortgage Operations.
Long-Term Investment Operations. To the extent consistent with IMH's
election to qualify as a REIT, the Company follows a hedging program intended to
protect against interest rate changes and to enable the Company to earn net
interest income in periods of generally rising, as well as declining or static,
interest rates. Specifically, the Company's hedging program is formulated with
the intent to offset the potential adverse effects resulting from (1) interest
rate adjustment limitations on its mortgage loans and securities backed by
mortgage loans, and (2) the differences between the interest rate adjustment
indices and interest rate adjustment periods of its adjustable rate mortgage
loans and mortgage-backed securities secured by such loans and related
borrowings. As part of its hedging program, the Company also monitors on an
ongoing basis the prepayment risks that arise in fluctuating interest rate
environments.
The Company's hedging program encompasses a number of procedures. First,
the Company structures its commitments so that the mortgage loans purchased will
have interest rate adjustment indices and adjustment periods that, on an
aggregate basis, correspond as closely as practicable to the interest rate
adjustment indices and interest rate adjustment periods of the anticipated
financing source. In addition, the Company structures its borrowing agreements
to have a range of different maturities (although substantially all have
maturities of less than one year). As a result, the Company adjusts the average
maturity of its borrowings on an ongoing basis by changing the mix of maturities
as borrowings come due and are renewed. In this way, the Company minimizes any
differences between interest rate adjustment periods of mortgage loans and
related borrowings that may occur due to prepayments of mortgage loans or other
factors.
The Company, based on market conditions, may purchase interest rate caps
to limit or partially offset adverse changes in interest rates associated with
its borrowings. In a typical interest rate cap agreement, the cap purchaser
makes an initial lump sum cash payment to the cap seller in exchange for the
seller's promise to make cash payments
60
to the purchaser on fixed dates during the contract term if prevailing interest
rates exceed the rate specified in the contract. In this way, the Company
generally hedges as much of the interest rate risk arising from lifetime rate
caps on its mortgage loans and from periodic rate and/or payment caps as the
Company determines is in the best interest of the Company, given the cost of
such hedging transactions and the need to maintain IMH's status as a REIT. Such
periodic caps on the Company's mortgage loans may also be hedged by the purchase
of mortgage derivative securities. Mortgage derivative securities can be
effective hedging instruments in certain situations as the value and yields of
some of these instruments tend to increase as interest rates rise and tend to
decrease in value and yields as interest rates decline, while the experience for
others is the converse. The Company intends to limit its purchases of mortgage
derivative securities to investments that qualify as Qualified REIT Assets or
Qualified Hedges so that income from such investments will constitute qualifying
income for purposes of the 95% and 75% gross income tests. To a lesser extent,
the Company, through its Mortgage Operations, may enter into interest rate swap
agreements, buy and sell financial futures contracts and options on financial
futures contracts and trade forward contracts as a hedge against future interest
rate changes; however, the Company will not invest in these instruments unless
the Company is exempt from the registration requirements of the Commodity
Exchange Act or otherwise comply with the provisions of that Act. The REIT
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), may
restrict the Company's ability to purchase certain instruments and may severely
restrict the Company's ability to employ other strategies. In all its hedging
transactions, the Company intends to deal only with counterparties that the
Company believes are sound credit risks. At December 31, 2000 and 1999, the
Company had $974.4 million and $422.0 million, in notional amount, of interest
rate caps, respectively, with a carrying value of $6.8 million and $1.9 million,
respectively.
Mortgage Operations. In conducting its Mortgage Operations, IFC is subject
to the risk of rising mortgage interest rates between the time it commits to
purchase mortgage loans at a fixed price and the time it sells or securitizes
those mortgage loans. To mitigate this risk, IFC enters into transactions
designed to hedge interest rate risks, which may include mandatory and optional
forward selling of mortgage loans or mortgage-backed securities, interest rate
caps, floors and swaps, and buying and selling of futures and options on
futures. The nature and quantity of these hedging transactions are determined by
the management of IFC based on various factors, including market conditions and
the expected volume of mortgage loan purchases.
Forward Contracts
IFC sells mortgage-backed securities through forward delivery contracts
with major dealers in such securities. At December 31, 2000 and 1999, IFC had
$29.0 million and $110.0 million, respectively, in outstanding commitments to
sell mortgage loans through mortgage-backed securities. These commitments allow
IFC to enter into mandatory commitments when IFC notifies the investor of its
intent to exercise a portion of the forward delivery contracts. IFC was not
obligated under mandatory commitments to deliver loans to such investors at
December 31, 2000 and 1999. The credit risk of forward contracts relates to the
counterparties' ability to perform under the contract. IFC evaluates
counterparties based on their ability to perform prior to entering into any
agreements.
Futures Contracts
IFC sells future contracts against five and ten-year Treasury notes with
major dealers in such securities. At December 31, 2000 and 1999, IFC had none
and $10.0 million, respectively, in outstanding commitments to sell Treasury
notes which expire within 90 days.
Options
In order to protect against changes in the value of mortgage loans held
for sale, IFC may sell call or buy put options on U.S. Treasury bonds and
mortgage-backed securities. IFC generally sells call or buys put options to
hedge against adverse movements of interest rates affecting the value of its
mortgage loans held for sale. The risk in writing a call option is that IFC
gives up the opportunity for profit if the market price of the mortgage loans
increases and the option is exercised. IFC also has the additional risk of not
being able to enter into a closing transaction if a liquid secondary market does
not exist. The risk of buying a put option is limited to the premium IFC paid
for the put option. IFC had written option contracts with an outstanding
principal balance of $10.0 million and $20.0 million at December 31, 2000 and
1999, respectively.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to
Impac Mortgage Holdings, Inc.'s Consolidated Financial Statements and
Independent Auditors' Report beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to Impac Mortgage Holdings, Inc.'s definitive proxy statement, to be
filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.'s 2000 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to Impac Mortgage Holdings, Inc.'s definitive proxy statement, to be
filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.'s 2000 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to Impac Mortgage Holdings, Inc.'s definitive proxy statement, to be
filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.'s 2000 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to Impac Mortgage Holdings, Inc.'s definitive proxy statement, to be
filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage
Holdings, Inc.'s 2000 fiscal year.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) All schedules have been omitted because they are either not
applicable, not required or the information required has been
disclosed in the Consolidated Financial Statements and related Notes
to Consolidated Financial Statements at page F-1, or otherwise
included in this Form 10-K.
(b) Reports on Form 8-K--None
(c) Exhibits
Exhibit
Number Description
------ -----------
3.1 Charter of the Registrant (incorporated by reference to the
corresponding exhibit number to the Registrant's Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with
the Securities and Exchange Commission on September 7, 1995).
3.1(a) Certificate of correction of the Registrant (incorporated by reference
to exhibit 3.1(a) of the Registrant's 10-K for the year ended
December 31, 1998).
3.1(b) Articles of Amendment of the Registrant (incorporated by reference to
exhibit 3.1(b) of the Registrant's 10-K for the year ended December
31, 1998).
3.1(c) Articles of Amendment for change of name to Charter of the Registrant
(incorporated by reference to exhibit number 3.1(a) of the
Registrant's Current Report on Form 8-K, filed February 11, 1998).
3.1(d) Articles Supplementary and Certificate of Correction for Series A
Junior Participating Preferred Stock of the Registrant (incorporated
by reference to exhibit 3.1(d) of the Registrant's 10-K for the year
ended December 31, 1998).
3.1(e) Articles Supplementary for Series B 10.5% Cumulative Convertible
Preferred Stock of the Registrant (incorporated by reference to
exhibit 3.1b of the Registrant's Current Report on Form 8-K, filed
December 23, 1998).
3.1(f) Articles Supplementary for Series C 10.5% Cumulative Convertible
Preferred Stock of the Registrant (incorporated by reference to the
corresponding exhibit number of the Registrant's Quarterly Report on
Form 10-Q for the period ending September 30, 2000).
3.1(g) Certificate of Correction for Series C Preferred Stock of the
Registrant (incorporated by reference to the corresponding exhibit
number of the Registrant's Quarterly Report on Form 10-Q for the
period ending September 30, 2000).
3.2 Bylaws of the Registrant, as amended and restated (incorporated by
reference to the corresponding exhibit number of the Registrant's
Quarterly Report on Form 10-Q for the period ending March 31, 1998).
4.1 Form of Stock Certificate of the Company (incorporated by reference to
the corresponding exhibit number to the Registrant's Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with
the Securities and Exchange Commission on September 7, 1995).
4.2 Rights Agreement between the Registrant and BankBoston, N.A.
(incorporated by reference to exhibit 4.2 of the Registrant's
Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on October 14, 1998).
4.2(a) Amendment No. 1 to Rights Agreement between the Registrant and
BankBoston, N.A. (incorporated by reference to exhibit 4.2(a) of the
Registrant's Registration Statement on Form 8-A/A as filed with the
Securities and Exchange Commission on December 23, 1998).
63
4.3 Form of Series B 10.5% Cumulative Convertible Preferred Stock
Certificate (incorporated by reference to exhibit 4.9 of the
Registrant's Current Report on Form 8-K, filed December 23, 1998).
4.4 Form of Series C 10.5% Cumulative Convertible Preferred Stock
Certificate.
4.5 Indenture between the Registrant and IBJ Whitehall Bank & Trust
Company, dated March 29, 1999 (incorporated by reference to exhibit
a(11) of the Registrant's Form 8-K filed on April 9, 1999).
4.6 First Supplemental Indenture to Indenture between the Registrant and
IBJ Whitehall Bank & Trust Company, dated March 29, 1999
(incorporated by reference to exhibit a(12) of the Registrant's Form
8-K filed on April 9, 1999).
10.1 1995 Stock Option, Deferred Stock and Restricted Stock Plan, as amended
and restated (incorporated by reference to exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ending
March 31, 1998).
10.2 Form of Indemnity Agreement between the Registrant and its Directors
and Officers (incorporated by reference to exhibit 10.4 to the
Registrant's Registration Statement on Form S-11, as amended (File
No. 33-96670), filed with the Securities and Exchange Commission on
September 7, 1995).
10.3 Form of Tax Agreement between the Registrant and Imperial Credit
Industries, Inc. (incorporated by reference to exhibit 10.5 to the
Registrant's Registration Statement on Form S-11, as amended (File
No. 33-96670), filed with the Securities and Exchange Commission on
September 7, 1995).
10.4(a) Sublease, dated February 12, 1997, between the Registrant and Imperial
Credit Industries, Inc. regarding Santa Ana Heights facility
(incorporated by reference to exhibit 10.5(a) of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.4(b) Sublease Amendment, dated July 24, 1997, between the Registrant and
Imperial Credit Industries, Inc. (incorporated by reference to
exhibit 10.5(b) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.4(c) Sublease Amendment, dated February 6, 1998, between the Registrant and
Imperial Credit Industries, Inc. (incorporated by reference to
exhibit 10.5(c) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997).
10.4(d) Amendment, dated October 1, 1999 to lease between The Realty Associates
V and the Registrant (incorporated by reference to exhibit 10.4(d) of
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000).
10.5 Form of Amended and Restated Employment Agreement with ICI Funding
Corporation (incorporated by reference to exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q, as amended, for the
quarter ended June 30, 1998).
10.5(a) List of Officers and terms relating to Form of Amended and Restated
Employment Agreement (incorporated by reference to exhibit 10.8(a) to
the Registrant's Quarterly Report on Form 10-Q, as amended, for the
quarter ended June 30, 1998).
10.5(b) Form of Amendment No. 1 to Amended and Restated Employment Agreement
with Impac Funding Corporation (incorporated by reference to exhibit
10.1(a) of the Registrant's Current Report on Form 8-K, filed June 2,
1998).
64
10.5(c) List of Officers and terms relating to Form of Amendment No. 1 to the
Amended and Restated Employment Agreement with Impac Funding
Corporation (incorporated by reference to exhibit 10.1(b) of the
Registrant's Current Report of Form 8-K, filed June 2, 1998). 10.6
Form of Loan Purchase and Administrative Services Agreement between
the Registrant and Impac Funding Corporation (incorporated by
reference to exhibit 10.9 to the Registrant's Registration Statement
on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).
10.7 Dividend Reinvestment and Stock Purchase Plan (incorporated by
reference to Exhibit 4 to, and the prospectus included in, the
Registrant's Registration Statement on Form S-3/A (File No. 333-
52335), as filed with the Securities and Exchange Commission on
September 4, 1998).
10.8 Servicing Agreement effective November 11, 1995 between the Registrant
and Impac Funding Corporation (incorporated by reference to exhibit
10.14 to the Registrant's Registration Statement on Form S-11, as
amended (File No. 333-04011), filed with the Securities and Exchange
Commission on May 17, 1996).
10.9 Impac Mortgage Holdings, Inc. 1996 Stock Option Loan Plan (incorporated
by reference to exhibit 10.15 to the Registrant's Form 10-K for the
year ended December 31, 1996).
10.10 Real Estate Purchase, Sale and Escrow Agreement by and between TW/BRP
Dove, LLC and IMH/ICH Dove Street, LLC, dated as of August 25, 1997
(incorporated by reference to exhibit 10.16 to the Registrant's
Quarterly Report on Form 10-Q, as amended, for the quarter ended June
30, 1997).
10.10(a) Contract of Sale between the Registrant and Impac Commercial Holdings,
Inc. (incorporated by reference to exhibit 10.11(a) of the
Registrant's 10-K for the year ended December 31, 1998).
10.11 Termination Agreement, effective December 19, 1997, between the
Registrant, Impac Funding Corporation, Imperial Credit Industries,
Inc. and Imperial Credit Advisors, Inc. and Joseph R. Tomkinson,
William S. Ashmore and Richard J. Johnson (incorporated by reference
to exhibit 10.18 to the Registrant's Current Report on Form 8-K, as
amended, dated December 19, 1997).
10.12 Services Agreement, dated December 29, 1997, between the Registrant,
Impac Funding Corporation and Imperial Credit Advisors, Inc.
(incorporated by reference to exhibit 10.19 to the Registrant's
Current Report on Form 8-K, as amended, dated December 19, 1997).
10.13 Registration Rights Agreement, dated December 29, 1997, between
Registrant and Imperial Credit Advisors, Inc. (incorporated by
reference to exhibit 10.20 to the Registrant's Current Report on Form
8-K, as amended, dated December 19, 1997).
10.14 Sales Agency Agreement between the Registrant and PaineWebber,
Incorporated, dated May 12, 1998 (incorporated by reference to
exhibit 1.1 of the Registrant's Current Report on Form 8-K, filed
June 2, 1998).
10.15 Lease dated June 1, 1998 regarding Dove Street facilities (incorporated
by reference to exhibit 10.17 of the Registrant's 10-K for the year
ended December 31, 1998).
10.16 Employment Letter between Impac Funding Corporation and Ronald Morrison
dated May 28, 1998 (incorporated by reference to exhibit 10.18 of the
Registrant's 10-K for the year ended December 31, 1998).
10.17 Note dated June 30, 1999 between the Registrant and Impac Funding
Corporation (incorporated by reference to exhibit 10.17 of the
Registrant's 10-K for the year ended December 31, 1999).
65
21.1 Subsidiaries of the Registrant (incorporated by reference to exhibit
21.1 of the Registrant's 10-K for the year ended December 31, 1998).
23.1 Consent of KPMG LLP regarding the Registrant.
23.2 Consent of KPMG LLP regarding Impac Funding Corporation.
24 Power of Attorney (included on signature page).
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Newport
Beach, State of California, on the 29 day of March, 2001.
IMPAC MORTGAGE HOLDINGS, INC.
by /s/ JOSEPH R. TOMKINSON
--------------------------------------
Joseph R. Tomkinson
Chairman of the Board
and Chief Executive Officer
We, the undersigned directors and officers of Impac Mortgage Holdings,
Inc., do hereby constitute and appoint Joseph R. Tomkinson and Richard J.
Johnson, or either of them, our true and lawful attorneys and agents, to do any
and all acts and things in our name and behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable said corporation to comply with
the Securities Exchange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission, in connections with this
report, including specifically, but without limitation, power and authority to
sign for us or any of us in our names and in the capacities indicated below, any
and all amendments to this report, and we do hereby ratify and confirm all that
the said attorneys and agents, or either of them, shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JOSEPH R. TOMKINSON Chairman of the Board,
- ----------------------------- Chief Executive Officer and Director March 29, 2001
Joseph R. Tomkinson
/s/ RICHARD J. JOHNSON Chief Financial Officer and
- ------------------------------ Executive Vice President March 29, 2001
Richard J. Johnson
/s/ WILLIAM S. ASHMORE President and Director March 29, 2001
- ------------------------------
William S. Ashmore
/s/ JAMES WALSH Director March 29, 2001
- ------------------------------
James Walsh
/s/ FRANK P. FILIPPS Director March 29, 2001
- ------------------------------
Frank P. Filipps
/s/ STEPHAN R. PEERS Director March 29, 2001
- ------------------------------
Stephan R. Peers
/s/ WILLIAM E. ROSE Director March 29, 2001
- ------------------------------
William E. Rose
67
INDEPENDENT AUDITORS' REPORT AND
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
----
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
----------------------------------------------
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets at December 31, 2000 and 1999................. F-3
Consolidated Statements of Operations and Comprehensive
Earnings (Loss) for the three years ended December 31, 2000, 1999 and
1998................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended December 31, 2000, 1999 and 1998............. F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000, 1999 and 1998................................. F-6
Notes to Consolidated Financial Statements................................ F-8
IMPAC FUNDING CORPORATION AND SUBSIDIARY
----------------------------------------
Independent Auditors' Report.............................................. F-33
Consolidated Balance Sheets at December 31, 2000 and 1999................. F-34
Consolidated Statements of Operations and Comprehensive Earnings (Loss)
for the three years ended December 31, 2000, 1999 and 1998............. F-35
Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2000, 1999 and 1998........................... F-36
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000, 1999 and 1998....................................... F-37
Notes to Consolidated Financial Statements................................ F-38
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Mortgage Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Impac
Mortgage Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive earnings
(loss), changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Impac Mortgage Holdings, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Orange County, California
February 2, 2001, except as to Note S
to the consolidated financial statements,
which is as of March 27, 2001.
F-2
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share data)
At December 31,
--------------------------
2000 1999
----------- -----------
ASSETS
------
Cash and cash equivalents ................................................................ $ 17,944 $ 20,152
Investment securities available-for-sale ................................................. 36,921 93,206
Loan Receivables:
CMO collateral ..................................................................... 1,372,996 949,677
Finance receivables ................................................................ 405,438 197,119
Mortgage loans held-for-investment ................................................. 16,720 363,435
Allowance for loan losses .......................................................... (5,090) (4,029)
----------- -----------
Net loan receivables ......................................................... 1,790,064 1,506,202
Investment in Impac Funding Corporation .................................................. 15,762 17,372
Due from Impac Funding Corporation ....................................................... 14,500 14,500
Accrued interest receivable .............................................................. 12,988 11,209
Other real estate owned .................................................................. 4,669 8,820
Other assets ............................................................................. 5,990 3,969
----------- -----------
Total assets ................................................................. $ 1,898,838 $ 1,675,430
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CMO borrowings ........................................................................... $ 1,291,284 $ 850,817
Reverse repurchase agreements ............................................................ 398,653 539,687
Borrowings secured by investment securities available-for-sale ........................... 21,124 31,333
11% senior subordinated debentures ....................................................... 6,979 6,691
Accrued dividends payable ................................................................ 788 3,570
Due to affiliates ........................................................................ -- 2,945
Other liabilities ........................................................................ 1,570 1,543
----------- -----------
Total liabilities ............................................................ 1,720,398 1,436,586
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 6,300,000 shares authorized; none issued and
outstanding at December 31, 2000 and 1999 .......................................... -- --
Series A junior participating preferred stock, $0.01 par value; 2,500,000 shares
authorized; none issued and outstanding at December 31, 2000 and 1999,
respectively -- --
Series B 10.5% cumulative convertible preferred stock,
$0.01 par value; liquidation value $30,000; 1,200,000 shares authorized;
and 1,200,000 issued and outstanding at December 31, 1999 .......................... -- 12
Series C 10.5% cumulative convertible preferred stock, $0.01 par value; liquidation
value $30,000; 1,200,000 shares authorized; and 1,200,000 issued and outstanding
at December 31, 2000 ............................................................... 12 --
Common stock, $0.01 par value; 50,000,000 shares authorized; 20,409,956 and
21,400,906 shares issued and outstanding at December 31, 2000 and 1999, respectively 204 214
Additional paid-in capital ............................................................ 325,350 327,632
Accumulated other comprehensive loss .................................................. (568) (7,579)
Notes receivable from common stock sales .............................................. (902) (905)
Net accumulated deficit:
Cumulative dividends declared ...................................................... (103,973) (93,080)
(Accumulated deficit)retained earnings ............................................. (41,683) 12,550
----------- -----------
Net accumulated deficit ......................................................... (145,656) (80,530)
----------- -----------
Total stockholders' equity ................................................... 178,440 238,844
----------- -----------
Total liabilities and stockholders' equity ................................... $ 1,898,838 $ 1,675,430
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
For the year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
INTEREST INCOME:
Mortgage Assets .......................................................... $ 144,735 $ 117,224 $ 160,720
Other interest income .................................................... 2,344 2,234 2,938
--------- --------- ---------
Total interest income ................................................. 147,079 119,458 163,658
INTEREST EXPENSE:
CMO borrowings ........................................................... 80,287 65,212 76,309
Reverse repurchase agreements ............................................ 42,433 23,229 42,139
Other borrowings ......................................................... 1,376 1,354 3,247
--------- --------- ---------
Total interest expense ................................................ 124,096 89,795 121,695
--------- --------- ---------
Net interest income ...................................................... 22,983 29,663 41,963
Provision for loan losses ............................................. 18,839 5,547 4,361
--------- --------- ---------
Net interest income after provision for loan losses ...................... 4,144 24,116 37,602
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation ............... (1,762) 4,292 (13,876)
Equity in net loss of Impac Commercial Holdings, Inc. .................... -- -- (998)
Loss on sale of loans .................................................... -- -- (3,111)
Servicing fees ........................................................... 690 1,370 1,929
Gain on sale of securities ............................................... -- 93 427
Other income ............................................................. 3,585 1,147 2,090
--------- --------- ---------
Total non-interest income ............................................. 2,513 6,902 (13,539)
NON-INTEREST EXPENSE:
Write-down on investment securities available-for-sale ................... 53,576 2,037 14,132
Professional services .................................................... 2,604 2,678 2,243
General and administrative and other expense ............................. 2,230 1,343 2,320
Loss on sale of other real estate owned .................................. 1,814 2,159 1,707
Personnel expense ........................................................ 666 484 518
Loss on equity investment of Impac Commercial Holdings, Inc. ............. -- -- 9,076
--------- --------- ---------
Total non-interest expense ............................................ 60,890 8,701 29,996
--------- --------- ---------
Net earnings (loss) ................................................... (54,233) 22,317 (5,933)
Less: Cash dividends on cumulative convertible preferred stock ........... (3,150) (3,290) --
--------- --------- ---------
Net earnings available to common stockholders ......................... (57,383) 19,027 (5,933)
--------- --------- ---------
Other comprehensive earnings (loss): Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during year ................. (795) (6,423) 7,395
Less: Reclassification of gains (losses) included in income ........... 7,806 580 (4,015)
--------- --------- ---------
Net unrealized gains (losses) arising during year .................. 7,011 (5,843) 3,380
--------- --------- ---------
Comprehensive earnings (loss) ......................................... $ (47,222) $ 16,474 $ (2,553)
========= ========= =========
Net earnings (loss) per share--basic .................................. $ (2.70) $ 0.83 $ (0.25)
========= ========= =========
Net earnings (loss) per share--diluted ................................ $ (2.70) $ 0.76 $ (0.25)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollar amounts in thousands, except share data)
Number of Number of Accumulated
Preferred Common Additional Other
Shares Preferred Shares Common Paid-In Comprehensive
Outstanding Stock Outstanding Stock Capital Earnings (Loss)
----------- ----------- ----------- ----------- ----------- ---------------
Balance, December 31, 1997 ............ -- $ -- 22,545,664 $ 225 $ 283,012 $ (5,116)
Dividends declared ($1.46 per share) .. -- -- -- -- --
Net proceeds from preferred stock
offering ........................... 1,200,000 12 -- -- 28,758 --
Proceeds from DRSPP ................... -- -- 1,758,493 18 27,822 --
Proceeds from SES Program ............. -- -- 245,700 3 3,245 --
Proceeds from exercise of stock options -- -- 7,800 -- 108 --
Payments on notes receivable from
common stock sales ................. -- -- -- -- -- --
Net loss, 1998 ........................ -- -- -- -- -- --
Other comprehensive earnings .......... -- -- -- -- -- 3,380
--------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 1998 ............ 1,200,000 12 24,557,657 246 342,945 (1,736)
Dividends declared ($0.48 per common
share) ............................. -- -- -- -- -- --
Dividends declared on preferred shares -- -- -- -- -- --
Proceeds from DRSPP ................... -- -- 216,156 -- 946 --
Repurchase of common stock ............ -- -- (2,013,400) (19) (9,841) --
Exchange of Common Stock for
senior subordinated debt ........... -- -- (1,359,507) (13) (6,418) --
Payments on notes receivable from
common stock sales ................. -- -- -- -- -- --
Net earnings, 1999 .................... -- -- -- -- -- --
Other comprehensive loss .............. -- -- -- -- -- (5,843)
--------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 1999 ............ 1,200,000 12 21,400,906 214 327,632 (7,579)
Dividends declared ($0.36 per common
share) ............................. -- -- -- -- -- --
Dividends declared on preferred shares -- -- -- -- -- --
Repurchase of common stock ............ -- -- (990,950) (10) (2,282) --
Payments on notes receivable from
common stock sales ................. -- -- -- -- -- --
Net loss, 2000 ........................ -- -- -- -- -- --
Other comprehensive earnings .......... -- -- -- -- -- 7,011
--------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 2000 ............ 1,200,000 $ 12 20,409,956 $ 204 $ 325,350 $ (568)
========= =========== ========== =========== =========== ===========
Notes
Receivable Retained
Common Cumulative Earnings Total
Stock Dividends (Accumulated Stockholders'
Sales Declared Deficit) Equity
------------ ------------ ------------ ------------
Balance, December 31, 1997 ............ $ (1,330) $ (43,927) $ (3,834) $ 229,030
Dividends declared ($1.46 per share) .. -- (35,249) (35,249)
Net proceeds from preferred stock
offering ........................... -- -- -- 28,770
Proceeds from DRSPP ................... -- -- -- 27,840
Proceeds from SES Program ............. -- -- -- 3,248
Proceeds from exercise of stock options -- -- -- 108
Payments on notes receivable from
common stock sales ................. 412 -- -- 412
Net loss, 1998 ........................ -- -- (5,933) (5,933)
Other comprehensive earnings .......... -- -- -- 3,380
----------- ----------- ----------- -----------
Balance, December 31, 1998 ............ (918) (79,176) (9,767) 251,606
Dividends declared ($0.48 per common
share) ............................. -- (10,614) -- (10,614)
Dividends declared on preferred shares -- (3,290) -- (3,290)
Proceeds from DRSPP ................... -- -- -- 946
Repurchase of common stock ............ -- -- -- (9,860)
Exchange of Common Stock for
senior subordinated debt ........... -- -- -- (6,431)
Payments on notes receivable from
common stock sales ................. 13 -- -- 13
Net earnings, 1999 .................... -- -- 22,317 22,317
Other comprehensive loss .............. -- -- -- (5,843)
----------- ----------- ----------- -----------
Balance, December 31, 1999 ............ (905) (93,080) 12,550 238,844
Dividends declared ($0.36 per common
share) ............................. -- (7,743) -- (7,743)
Dividends declared on preferred shares -- (3,150) -- (3,150)
Repurchase of common stock ............ -- -- -- (2,292)
Payments on notes receivable from
common stock sales ................. 3 -- -- 3
Net loss, 2000 ........................ -- -- (54,233) (54,233)
Other comprehensive earnings .......... -- -- -- 7,011
----------- ----------- ----------- -----------
Balance, December 31, 2000 ............ $ (902) $ (103,973) $ (41,683) $ 178,440
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ................................................ $ (54,233) $ 22,317 $ (5,933)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Equity in net (earnings) loss of Impac Funding Corporation ...... 1,762 (4,292) 13,876
Equity in net loss of Impac Commercial Holdings, Inc. ........... -- -- 998
Provision for loan losses ....................................... 18,839 5,547 4,361
Depreciation and amortization ................................... -- -- 355
Amortization of CMO premiums and deferred securitization costs .. 15,308 18,593 14,358
Loss on sale of ICH common stock ................................ -- -- 9,076
Net change in accrued interest receivable ....................... (1,779) (1,170) 4,973
Write-down of investment securities available-for-sale .......... 53,576 2,037 14,132
Loss on sale of REO ............................................. (1,814) (2,159) (1,707)
Gain on sale of investment securities available-for-sale ........ -- (93) (427)
Net change in other assets and liabilities ...................... (4,939) 15,059 3,105
--------- --------- ---------
Net cash provided by operating activities .................... 26,720 55,839 57,167
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in CMO collateral ....................................... 312,171 178,519 (385,568)
Net change in finance receivables .................................. (208,966) 113,969 221,100
Net change in mortgage loans held-for-investment ................... (433,340) (352,603) 225,301
Purchase of investment securities available-for-sale ............... -- (18,295) (66,329)
Sale of investment securities available-for-sale ................... 5,704 3,803 15,801
Issuance of note to IFC ............................................ -- (14,500) --
Principal reductions on investment securities available-for-sale ... 3,864 6,985 13,727
Proceeds from sale of other real estate owned ...................... 18,091 18,027 11,777
Purchase of premises and equipment ................................. -- -- (2,489)
Dividends from investment in Impac Commercial Holdings, Inc. ....... -- -- 1,812
--------- --------- ---------
Net cash provided by (used in) investing activities .......... (302,476) (64,095) 35,132
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in reverse repurchase agreements ........................ (150,955) 247,395 (431,934)
Proceeds from CMO borrowings ....................................... 943,558 298,076 768,012
Repayment of CMO borrowings ........................................ (503,091) (519,575) (437,602)
Proceeds from preferred stock ...................................... -- -- 28,770
Dividends paid ..................................................... (13,675) (22,463) (33,491)
Repurchase of common stock ......................................... (2,292) (9,860) --
Proceeds from sale of common stock issued through DRSPP and SES .... -- 946 31,088
Proceeds from exercise of stock options ............................ -- -- 108
Advances to purchase common stock .................................. 3 13 412
--------- --------- ---------
Net cash provided by (used in) financing activities .......... 273,548 (5,468) (74,637)
--------- --------- ---------
Net change in cash and cash equivalents ............................... (2,208) (13,724) 17,662
Cash and cash equivalents at beginning of year ........................ 20,152 33,876 16,214
--------- --------- ---------
Cash and cash equivalents at end of year .............................. $ 17,944 $ 20,152 $ 33,876
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(continued)
(in thousands)
SUPPLEMENTARY INFORMATION:
Interest paid .................................................. $125,391 $ 88,989 $122,904
NON-CASH TRANSACTIONS:
Exchange of Common Stock for senior subordinated debt .......... $ -- $ 6,431 $ --
Sale of Impac Commercial Holdings common stock ................. -- -- 6,099
Sale of Dove St. building and other assets in exchange for debt -- -- 6,000
Accumulated other comprehensive gain (loss) .................... 7,011 (5,843) 3,380
Transfer of loans held-for-investment to other real estate owned 3,179 1,318 7,924
Transfer of CMO collateral to other real estate owned .......... 8,300 14,431 4,883
Dividends declared and unpaid .................................. 788 3,570 12,129
See accompanying notes to consolidated financial statements.
F-7
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note A--Summary of Business and Significant Accounting Policies
1. Financial Statement Presentation
The operations of the Company have been presented in the consolidated
financial statements for the three-year period ended December 31, 2000 and
include the financial results of Impac Mortgage Holdings, Inc. (IMH), IMH Assets
Corporation (IMH Assets) and Impac Warehouse Lending Group (IWLG) as stand-alone
entities and the financial results of IMH's equity interest in net earnings
(loss) in Impac Funding Corporation (IFC) as a stand-alone entity.
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. Certain officers and directors of the Company own
all of the common stock of IFC and are entitled to 1% of the earnings or losses
of IFC. Gain on the sale of loans or securities by IFC to IMH are deferred and
accreted for gain on sale over the estimated life of the loans or securities
using the interest method.
All significant intercompany balances and transactions with IMH's
consolidated subsidiaries have been eliminated in consolidation. Interest income
on affiliated short-term advances, due from affiliates, has been earned at the
rate of 8.0% per annum. Interest expense on affiliated short-term borrowings,
due to affiliates, has been incurred at the rate of 8.0% per annum. Costs and
expenses of the Company and its affiliates have been charged to ICH in
proportion to services provided per the submanagement agreement between FIC
Management Inc. (FIC), an affiliate of Fortress Partners LP (Fortress), IMH and
IFC, not to exceed an annual fee of $250,000. The submanagement agreement
between FIC, IMH and IFC expired in December of 1999. Certain amounts in the
prior periods' consolidated financial statements have been reclassified to
conform to the current presentation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.
2. Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash and money market mutual funds. The Company
considers investments with maturities of three months or less at date of
acquisition to be cash equivalents.
3. Investment Securities Available-for-Sale
The Company classifies investment and mortgage-backed securities as
held-to-maturity, available-for-sale, and/or trading securities.
Held-to-maturity investment and mortgage-backed securities are reported at
amortized cost, available-for-sale securities are reported at fair value with
unrealized gains and losses as a separate component of stockholders' equity, and
trading securities are reported at fair value with unrealized gains and losses
reported in earnings. The Company's investment securities are held as
available-for-sale, reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. Gains and losses on
sale of investment securities available-for-sale are based on the specific
identification method. As the Company qualifies as a Real Estate Investment
Trust (REIT), and no income taxes are paid, the unrealized gains and losses are
reported gross in stockholders' equity. Premiums or discounts obtained on
investment securities are accreted or amortized to interest
F-8
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
income over the estimated life of the investment securities using the interest
method. Such investments may subject the Company to credit, interest rate and/or
prepayment risk.
The Company determines the decline in fair value to be other than
temporary if the present value of estimated future cash flows discounted at a
risk-free rate is less than the amortized cost basis of the security. In that
event, the cost basis of the security is written down to fair value as a new
cost basis and the amount of the write down is included in earnings.
From time to time, IMH purchases residuals created by IFC as a result of
the sale of mortgage loans through securitizations. IFC sells a portfolio of
mortgage loans to a special purpose entity that has been established for the
limited purpose of buying and reselling the mortgage loans. IFC then transfers
the same mortgage loans to a special purpose entity or owners trust (the Trust).
The Trust issues interest-bearing asset-backed securities generally in an amount
equal to the aggregate principal balance of the mortgage loans. IFC typically
sells these certificates at face value and without recourse. Representations and
warranties customary to the mortgage banking industry are provided by IFC. IMH
or other investors purchase these certificates from the Trust and the proceeds
from the sale of the certificates are used as consideration to purchase the
underlying mortgage loans from the Company. In addition, IFC may provide a
credit enhancement for the benefit of the investors in the form of additional
collateral held by the Trust. An over-collateralization account is required to
be maintained at specified levels.
4. CMO Collateral and Mortgage Loans Held-for-Investment
The Company purchases non-conforming mortgage loans to be held as
long-term investments or as Collateral Mortgage Obligations (CMOs) collateral.
Mortgage loans held-for-investment and CMO collateral are recorded at cost at
the date of purchase. Mortgage loans held-for-investment and CMO collateral
include various types of fixed and adjustable rate loans secured by mortgages on
single-family residential real estate properties and fixed rate loans secured by
second trust deeds on single-family residential real estate properties. Premiums
and discounts, which may result from the purchase or acquisition of mortgage
loans in excess of the outstanding principal balance, are amortized to interest
income over their estimated lives using the interest method as an adjustment to
the carrying amount of the loan. Prepaid securitization costs related to the
issuance of CMOs are amortized to interest expense over their estimated lives
using the interest method. Mortgage loans are continually evaluated for
collectibility and, if appropriate, the mortgage loans may be placed on
non-accrual status, generally when the mortgage is 90 days past due, and
previously accrued interest reversed from income. Other than temporary
impairment in the carrying value of mortgage loans held-for-investment, if any,
will be recognized as a reduction to current operations.
5. Finance Receivables
Finance receivables represent transactions with customers, including
affiliated companies, involving residential real estate lending. As a warehouse
lender, the Company is a secured creditor of the mortgage bankers and brokers to
which it extends credit and is subject to the risks inherent in that status
including, the risk of borrower default and bankruptcy. Any claim of the Company
as a secured lender in a bankruptcy proceeding may be subject to adjustment and
delay. The Company's finance receivables represent warehouse lines of credit
with mortgage banking companies collateralized by mortgage loans on single
family residences. Finance receivables are stated at the principal balance
outstanding. Interest income is recorded on the accrual basis in accordance with
the terms of the loans. Finance receivables are continually evaluated for
collectibility and, if appropriate, the receivable is placed on non-accrual
status, generally when 90 days past due. Future collections of interest income
are included in interest income or applied to the loan balance based on an
assessment of the likelihood that the loans will be repaid.
F-9
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
6. Allowance for Loan Losses
The Company maintains an allowance for losses on mortgage loans
held-for-investment, collateral for CMOs, and finance receivables at an amount
which it believes is sufficient to provide adequate protection against future
losses in the mortgage loans portfolio. The allowance for losses is determined
primarily on management's judgment of net loss potential including specific
allowances for known impaired loans, changes in the nature and volume of the
portfolio, value of the collateral and current economic conditions that may
affect the borrowers' ability to pay. A provision is recorded for loans deemed
to be uncollectible thereby increasing the allowance for loan losses. Subsequent
recoveries on mortgage loans previously charged off are credited back to the
allowance.
7. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
or amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (three
to twenty years).
8. CMO Borrowings
The Company issues CMOs, which are primarily secured by non-conforming
mortgage loans on single-family residential real property, as a means of
financing its Long-Term Investment Operations. CMOs are carried at their
outstanding principal balances including accrued interest on such obligations.
For accounting and tax purposes, mortgage loans financed through the issuance of
CMOs are treated as assets of the Company and the CMOs are treated as debt of
the Company. Each issue of CMOs is fully payable from the principal and interest
payments on the underlying mortgage loans collateralizing such debt and any
investment income on such collateral. The Company's CMOs typically are
structured as one-month London interbank offered rate (LIBOR) "floaters" and
fixed-rate securities with interest payable monthly. The maturity of each class
of CMO is directly affected by the rate of principal prepayments on the related
CMO collateral. Each CMO series is also subject to redemption according to
specific terms of the respective indentures. As a result, the actual maturity of
any class of a CMO series is likely to occur earlier than the stated maturities
of the underlying mortgage loans.
9. Income Taxes
IMH operates so as to qualify as a REIT under the requirements of the
Internal Revenue Code (the Code). Requirements for qualification as a REIT
include various restrictions on ownership of IMH's stock, requirements
concerning distribution of taxable income and certain restrictions on the nature
of assets and sources of income. A REIT must distribute at least 95% of its
taxable income to its stockholders, the distribution of which 85% must be
distributed within the taxable year in order to avoid the imposition of an
excise tax and the remaining balance may extend until timely filing of its tax
return in its subsequent taxable year. Qualifying distributions of its taxable
income are deductible by a REIT in computing its taxable income. If in any tax
year IMH should not qualify as a REIT, it would be taxed as a corporation and
distributions to the stockholders would not be deductible in computing taxable
income. If IMH were to fail to qualify as a REIT in any tax year, it would not
be permitted to qualify for that year and the succeeding four years.
10. Net Earnings (Loss) per Share
Basic net earnings (loss) per share are computed on the basis of the
weighted average number of shares outstanding for the year divided by net
earnings (loss) for the year. Diluted net earnings (loss) per share are computed
on the basis of the weighted average number of shares and dilutive common
equivalent shares outstanding for the year divided by net earnings for the year.
F-10
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
11. 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 No. 140 provides the accounting and
reporting guidance for transfers and servicing of financial assets and
extinguishments of liabilities. Statement No. 140 will be the authoritative
accounting literature for: (1) securitization transactions involving financial
assets; (2) sales of financial assets (including loan participations); (3)
factoring transactions, (4) wash sales; (5) servicing assets and liabilities;
(6) collateralized borrowing arrangements; (7) securities lending transactions;
(8) repurchase agreements; and (9) extinguishment of liabilities. The accounting
provisions are effective after March 31, 2001. The reclassification and
disclosure provisions are effective for fiscal years beginning after December
31, 2000. The Company adopted the disclosure required by SFAS No. 140 and has
included all appropriate and necessary disclosures required by SFAS No. 140 in
its financial statements and footnotes. 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 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 recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If specific conditions are
met, a derivative may be specifically designated as (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign-currency-denominated forecasted
transaction.
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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
As part of the Company's secondary marketing activities, it purchases caps
to hedge against adverse changes in interest rates. At December 31, 2000, the
carrying value of interest rate caps was $6.8 million. IMH does not recognize
unrealized gains and losses on these contracts in the balance sheet or statement
of income. In general, the caps are allocated to 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.
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 within stockholders'
equity. Amounts are reclassified from other comprehensive income to the income
statement in the period the hedged cash flow occurs. Derivative gains and losses
not considered effective in hedging the change in expected cash flows of the
hedged item are recognized immediately in the income statement. With the
implementation of SFAS 133, the Company recorded transition amounts associated
with establishing the fair values of the derivative instruments and hedged items
as of December 31, 2000 as an increase of $5.8 million to net loss.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
Accounting Principles Board Opinion No. 25" (APB 25). This Interpretation
clarifies the definition of an employee for purposes of applying APB 25,
"Accounting for Stock Issued to Employees", the criteria for determining whether
a plan qualifies as a noncompensatory plan, the accounting
F-11
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did
not have a material impact on the Company's consolidated financial position,
results of operations or liquidity.
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 because
of impairment. EITF 99-20 is effective for the Company after March 31, 2001. The
adoption of EITF 99-20 is not expected to have a material impact on the
Company's consolidated balance sheet or results of operations.
Note B--Investment Securities Available-for-Sale
During 2000, the Company, including IFC, wrote-off $52.6 million of
investment securities available-for-sale that were securities secured by high
loan-to-value second trust deeds and franchise mortgage receivables and certain
sub-prime subordinated securities all of which were acquired prior to 1998.
Subsequent to 1997, the Company has only acquired or invested in securities that
are secured by mortgage loans underwritten and purchased by the Company's
Mortgage Operations. The Company's remaining mortgage-backed securities
are primarily secured by conventional, one-to-four family mortgage loans. The
yield to maturity on each security depends on, among other things, the rate and
timing of principal payments, including prepayments, repurchases, defaults and
liquidations, the pass-through rate, and interest rate fluctuations. The
Company's interest in these securities is subordinated so that, in the event of
a loss, payments to senior certificate holders will be made before the Company
receives its payments. In connection with the issuance of REMICs by IFC during
the years ended December 31, 2000 and 1999 of $1.3 billion and $360.1 million,
respectively, IMH purchased none and $18.3 million, respectively, of securities
as regular interests. During 1999, the Company recorded $3.7 million in
discounts, at the time of purchase, in connection with the purchase of the
mortgage-backed securities. The Company sold one investment security during 2000
at its carrying value of $5.7 million.
The amortized cost and estimated fair value of mortgage-backed securities
available-for-sale and other collateralized securities available-for-sale are
summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
-------- -------- -------- ----------
(in thousands)
At December 31, 2000:
Mortgage-backed securities ...... $ 37,920 $ 2,245 $ 3,244 $ 36,921
======== ======== ======== ========
At December 31, 1999:
Mortgage-backed securities ...... $ 94,986 $ 1,235 $ 8,007 $ 88,214
Other collateralized securities . 5,633 -- 641 4,992
-------- -------- -------- --------
$100,619 $ 1,235 $ 8,648 $ 93,206
======== ======== ======== ========
To determine the fair value of investment securities, the Company must
estimate future rates of loan prepayments, prepayment penalties to be received
by the Company, delinquency rates, constant default rates and default loss
severity and their impact on estimated cash flows. At December 31, 2000, the
Company used a 0.50% to 9% constant default rate estimate with an 8% to 20% loss
severity resulting in loss estimates of 0.04% to 1.80%. These
F-12
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
estimates are based on historical loss data for comparable loans. The Company
estimates prepayments by evaluating historical prepayment performance of
comparable mortgage loans and trends in the industry. At December 31, 2000, the
Company used a constant prepayment assumption of 13% to 65% to estimate the
prepayment characteristics of the underlying collateral. The Company determines
the estimated fair value of the residuals by discounting the expected cash flows
using a discount rate, which it believes is commensurate with the risks
involved. At December 31, 2000, the Company used a weighted average discount
rate of approximately 13%.
Retained Interests in Securitizations
During 2000, IMH retained no interests in securitizations created through
the issuance of REMICs by IFC. However, prior to 2000, IMH retained interests in
mortgage-backed securities created through the issuance of REMICs by IFC. IMH
uses certain assumptions and estimates in determining the fair value allocated
to the retained interest at the time of initial sale and each subsequent sale in
accordance with SFAS 125. These assumptions and estimates include projections
for loan prepayment rates, constant default rates and loss severity commensurate
with the risks involved. These assumptions are reviewed periodically by
management. If these assumptions change, the related asset and income would be
affected. Key economic assumptions used in measuring the retained interests for
the indicated periods were as follows:
At time of At December 31,
securitization 2000
--------------- ---------------
Prepayment speed ................................... 16%-50% 15%-65%
Loss severity ...................................... 10%-100% 8%-18%
Constant default rate .............................. 0.01%-1% 0.50%-1%
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows on investment securities to immediate
10% and 20% adverse changes in those assumptions follow (dollars in thousands):
At December 31,
2000
--------
Carrying amount of investment securites ................... $ 22,120
Estimated fair value of investment securites .............. $ 20,503
Prepayment Speed Assumptions: ............................. 15%-65%
Decline in fair value of 10% adverse change ............... $ (2,488)
Decline in fair value of 20% adverse change ............... $ (3,319)
Loss Severity: ............................................ 8%-18%
Decline in fair value of 10% adverse change ............... $ (1,679)
Decline in fair value of 20% adverse change ............... $ (1,752)
Constant Default Rate: .................................... 0.50%-1%
Decline in fair value of 10% adverse change ............... $ (1,688)
Decline in fair value of 20% adverse change ............... $ (1,778)
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10% and 20% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in the assumption to the change in fair value may not be linear. Also,
the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption; in
F-13
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and increased
credit losses), which might magnify or counteract the sensitivities.
Quantitative information about delinquencies, credit losses and cash flows
related to retained interests during the periods shown were as follows (dollars
in thousands):
At December 31, At December 31,
2000 1999
------- -------
Delinquencies (60 days or more) ................ $13,553 $15,178
Net credit losses .............................. $ 936 $ 548
Actual losses to date .......................... 3.39% 3.08%
Projected losses over life ..................... 1.71% 1.92%
Cash flows received on retained interests ...... $ 5,078 $ 6,938
Note C--Mortgage Loans Held-for-Investment
Mortgage loans held-for-investment include various types of adjustable
rate loans secured by mortgages on single-family residential real estate
properties and fixed rate loans secured by second trust deeds on single-family
residential real estate properties. During the years ended December 31, 2000 and
1999, IMH purchased $454.0 million and $638.3 million, respectively, of mortgage
loans from IFC. At December 31, 2000 and 1999, approximately 27% and 64%,
respectively, of mortgage loans held-for-investment were collateralized by
properties located in California. Mortgage loans held-for-investment consisted
of the following:
At December 31,
----------------------
2000 1999
--------- ---------
(in thousands)
Adjustable rate loans secured by single-family
residential real estate ..................... $ 15,867 $ 335,609
Fixed rate loans secured by second trust deeds
on single-family residential real estate 1,061 25,785
Unamortized net premiums (discounts) on
mortgage loans .............................. (208) 2,041
--------- ---------
$ 16,720 $ 363,435
========= =========
At December 31, 2000, and 1999 there were $13.4 million and $8.3 million,
respectively, of mortgage loans held-for-investment which were not accruing
interest due to the delinquent nature of the mortgage loans. If interest on such
loans had been accrued for the years ended December 31, 2000, 1999 and 1998,
interest income would have increased by $1.0 million, $538,000 and $724,000,
respectively.
Note D--CMO Collateral
The Long-Term Investment Operations earns the net interest spread between
the interest income on the mortgage loans securing the CMOs and the interest and
other expenses associated with CMO financing. Interest income is reduced by the
amortization of loan premiums while interest expense includes the amortization
of securitization costs, which are incurred in obtaining CMO financing. The net
interest spread on CMOs may be directly impacted by prepayment levels of the
underlying mortgage loans, and, to the extent each CMO class has variable rates
of interest, may be affected by changes in short-term interest rates.
CMO collateral includes various types of fixed and adjustable rate loans
secured by mortgages on single-family residential real estate properties and
fixed rate loans secured by second trust deeds on single-family residential real
estate properties. During the years ended December 31, 2000 and 1999, $943.6
million and $298.1 million, respectively, of CMOs were issued and collateralized
by $952.8 million and $316.2 million, respectively, of mortgage loans. At
December 31, 2000 and 1999, approximately 53% and 43%, respectively, of CMO
collateral was collateralized by properties located in California. At December
31, 2000 and 1999, the underlying principal balance of
F-14
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
mortgages supporting CMO borrowings of $1.3 billion and $850.8 million,
respectively, represented approximately $1.3 billion and $827.3 million,
respectively, of adjustable and fixed rate mortgage loans with varying grade
quality and approximately $66.1 million and $81.7 million, respectively, of
second mortgage loans. Collateral for CMOs consisted of the following:
At December 31,
-----------------------
2000 1999
---------- ----------
(in thousands)
Adjustable and fixed rate loans secured by
single-family residential real estate .......... $1,269,977 $ 827,268
Fixed rate loans secured by second trust deeds on
single-family residential real estate........... 66,138 81,718
Unamortized net premiums on loans ............... 22,758 28,798
Securitization expenses ......................... 14,123 11,893
---------- ----------
$1,372,996 $ 949,677
========== ==========
Note E--Finance Receivables
The terms of IWLG's affiliated warehouse lines are based on Bank of
America's prime rate, which was 9.50% and 8.50% as of December 31, 2000 and
1999, respectively, with advance rates between 75% and 99% of the fair value of
the mortgage loans outstanding. The terms of IWLG's non-affiliated warehouse
lines, including the maximum warehouse line amount and interest rate, are
determined based upon the financial strength, historical performance and other
qualifications of the borrower. The warehouse lines have maturities that range
from on-demand to one year and are generally collateralized by mortgages on
single-family residential real estate.
At December 31, 2000 and 1999, the Company had $1.0 billion and $1.4
billion, respectively, of warehouse lines of credit available to 55 and 49
borrowers, respectively, of which $405.4 million and $197.1 million,
respectively, was outstanding. IWLG finances its Warehouse Lending Operations
through reverse repurchase agreements and equity. Finance receivables consisted
of the following:
At December 31,
----------------------
2000 1999
-------- --------
(in thousands)
Due from IFC ....................................... $219,102 $ 66,125
Due from Walsh Securities, Inc. .................... -- 48
Due from Impac Lending Group (ILG) ................ 47,931 1,243
Due from other mortgage banking companies .......... 138,405 129,703
-------- --------
$405,438 $197,119
======== ========
Note F--Allowance for loan losses
Activity for allowance for loan losses was as follows:
For the year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Balance, beginning of year .......... $ 4,029 $ 6,959 $ 5,129
Provision for loan losses ........... 18,839 5,547 4,361
Charge-offs, net of recoveries ...... (16,496) (7,152) (1,711)
Loss on sale of delinquent loans .... (1,282) (1,325) (820)
-------- -------- --------
Balance, end of year ................ $ 5,090 $ 4,029 $ 6,959
======== ======== ========
F-15
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note G--Reverse repurchase agreements
The Company enters into reverse repurchase agreements with major brokerage
firms to finance its Warehouse Lending Operations and to fund the purchase of
mortgage loans and mortgage-backed securities. Mortgage loans and
mortgage-backed securities underlying reverse repurchase agreements are
delivered to dealers that arrange the transactions. The Company's reverse
repurchase agreements are uncommitted lines, which may be withdrawn at any time
by the lender, with interest rates that range from one-month LIBOR plus 0.85% to
2.00% depending on the type of collateral provided.
Prior to October of 1999, the Company used reverse repurchase agreements
to fund the purchase of its mortgage-backed securities and to provide the
Company additional working capital. In October of 1999, the Company repaid its
borrowings of reverse repurchase agreements secured by mortgage-backed
securities with proceeds from the re-securitization of a portion of its
mortgage-backed securities portfolio (see Note I-Borrowings Secured by
Investment Securities Available-for-Sale). The Company's interest expense on
reverse repurchase agreements to fund the purchase of its mortgage loans for the
years ended December 31, 2000, 1999 and 1998 was $39.2 million, $22.5 million
and $42.1 million, respectively. The following tables set forth information
regarding the Company's reverse repurchase agreements as of December 31, 2000
and 1999 (dollars in thousands):
Reverse
Type of Repurchase Underlying Maturity
Collateral Committed Liability Collateral Date
-------------- ------------- ------------- -------------- ------------
Lender ........................... Mortgages No $398,653 $414,748 N/A
Reverse
Type of Repurchase Underlying Maturity
Collateral Committed Liability Collateral Date
-------------- ------------- ------------- -------------- ------------
Lender 1.......................... Mortgages No $536,112 $547,408 N/A
Lender 2.......................... Mortgages No 3,575 3,956 N/A
-------- --------
$539,687 $551,364
======== ========
At December 31, 2000 and December 31, 1999, reverse repurchase agreements
includes accrued interest payable of $2.1 million and $3.7 million,
respectively. The following table presents certain information on reverse
repurchase agreements, excluding accrued interest payable:
For the year ended
December 31,
----------------------
2000 1999
-------- --------
(dollars in thousands)
Maximum month-end outstanding balance........... $832,758 $569,862
Average balance outstanding..................... 513,987 346,556
Weighted average rate........................... 7.63% 6.51%
Note H--CMO Borrowings
The Company's CMOs are guaranteed for the holders by a mortgage loan
insurer giving the CMOs the highest rating established by a nationally
recognized rating agency. 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. Variable rate CMOs are typically structured as one-month LIBOR
"floaters." Interest on variable and fixed rate CMOs is payable to the
certificate holders monthly. For the years ended December 31, 2000, 1999 and
1998, interest expense
F-16
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
on CMO borrowings was $80.3 million, $65.2 million and $76.3 million,
respectively. The following table sets forth CMOs issued by the Company, CMOs
outstanding as of December 31, 2000 and 1999, and certain interest rate
information (dollars in millions):
CMOs Range of Interest Range of
Outstanding Range of Interest Rate Rate Interest Rate
as of Fixed Margins Over Margin Margins After
Issue Issuance ------------------------- Interest One-Month Adjustment Adjustment
Date Issuance Name Amount 12/31/00 12/31/99 Rates (%) LIBOR (%) Date Date (%)
- ------------------------------------------------------------------------------------------------------------------------------------
4/22/96 Fund America Investors
Trust V.................... $ 296.3 $ -- $ 41.7 N/A 0.50% 6/2003(1) 1.00%
8/27/96 Impac CMB
Trust Series 1996-1........ 259.8 -- 37.1 N/A 0.32 10/2003(1) 1.32
5/22/97 Impac CMB
Trust Series 1997-1........ 348.0 -- 68.5 N/A 0.22 7/2004(1) 0.44
12/10/97 Impac CMB
Trust Series 1997-2........ 173.7 -- 43.6 N/A 0.26-1.30 12/2004(1) 0.52-2.60
1/27/98 Impac CMB
Trust Series 1998-1........ 362.8 145.5 179.6 6.65-7.25 N/A N/A N/A
3/24/98 Impac CMB
Trust Series 1998-2........ 220.2 95.8 120.7 6.70-7.25 N/A N/A N/A
6/23/98 Impac CMB
Trust Series 1998-3........ 185.0 -- 94.8 N/A 0.18-1.24 7/2005(1) 0.36-2.48
2/23/99 Impac CMB
Trust Series 1999-1........ 183.1 102.1 154.4 N/A 0.40-0.63 3/2006(1) 0.80-1.26
6/24/99 Impac CMB
Trust Series 1999-2........ 115.0 89.7 108.3 N/A 0.37 7/2006(1) 0.74
1/25/00 Impac CMB
Trust Series 2000-1........ 452.0 371.3 -- N/A 0.32-2.40 2/2010(2) 0.64-3.60
11/21/00 Impac CMB
Trust Series 2000-2........ 491.6 484.5 -- N/A 0.26-1.90% 12/2010(2) 0.52-2.85%
-------- -------- -------
3,087.5 1,288.9 848.7
Accrued interest........... -- 2.4 2.1
-------- -------- -------
$3,087.5 $1,291.3 $850.8
======== ======== =======
- ----------
(1) Interest rate margin adjustment date is determined upon the earlier of
(a) the payment date on which the sum of the aggregate principal
balance of the bonds is less than or equal to 25% of the original bond
balance at cut-off date or (b) the date indicated.
(2) Interest rate margin adjustment date is determined upon the earlier of
(a) the payment date on which the sum of the aggregate principal
balance of the bonds is less than or equal to 20% of the original bond
balance at cut-off date or (b) the date indicated.
The Company completed $943.6 million in CMOs during 2000, which included
$144.0 million of mortgage loan collateral from five previous CMOs. The Company
exercised the cleanup calls on the five previous CMOs and placed the mortgage
loan collateral into the new CMOs, which resulted in improved capital leverage,
lower borrowing costs and reduced amortization exposure on the $144.0 million of
previous CMO collateral. Additionally, approximately $32.6 million of capital
that was invested in the previous CMOs was released and reinvested in the
Company's Long-Term Investment Operations.
F-17
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note I--Borrowings Secured by Investment Securities Available-for-Sale
In October 1999, the Company completed a re-securitization of a portion of
its investment securities available-for-sale portfolio, which raised additional
cash liquidity for the Company of approximately $23.4 million, at the time of
execution, after repaying reverse repurchase agreements collateralized by the
investment securities available-for-sale. As of December 31, 2000 and 1999,
there was $21.1 million and $31.3 million, respectively, outstanding on the
borrowings, which were secured by $21.9 million and $49.6 million, respectively,
of investment securities available-for-sale. The outstanding borrowings are
principal only notes issued at a discount. The notes represent senior or
subordinated interests in trust funds primarily consisting of a pool of mortgage
loans and are non-recourse obligations of the Company. The terms of the notes
are dependent on the cash flows from the underlying certificates.
Note J--Senior Subordinated Debentures
In March 1999, certain stockholders of the Company exchanged 1,359,507
shares of their common stock, at an average price of $5.70 per share, for 11%
senior subordinated debentures due to mature on February 15, 2004. The
debentures were issued at a discount and amortized to interest expense over the
life of the debentures on a straight-line basis. The debentures are unsecured
obligations of the Company subordinated to all indebtedness of the Company's
subsidiaries. The debentures bear interest at 11% per annum from their date of
issuance, payable quarterly, commencing May 15, 1999, until the debentures are
paid in full. The debentures mature on February 15, 2004, at which time the date
may be extended once by the Company to a date not later than May 15, 2004,
provided that the Company satisfies certain conditions. Commencing on February
15, 2001, the debentures are redeemable, at the Company's option, in whole at
any time or in part from time to time, at the principal amount to be redeemed
plus accrued and unpaid interest thereon to the redemption date. Senior
subordinated debentures consisted of the following:
At December 31,
----------------------
2000 1999
------- -------
(in thousands)
11% senior subordinated debentures ........... $ 7,747 $ 7,747
Discount on senior subordinated debentures ... (768) (1,056)
------- -------
$ 6,979 $ 6,691
======= =======
Note K--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 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 and ILG, purchases and
originates non-conforming mortgage loans and second mortgage loans from
its network of third party correspondent sellers, wholesale brokers and
retail customers.
F-18
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table shows the Company's reporting segments as of and for
the year ended December 31, 2000 (in thousands):
Long-Term Warehouse
Investment Lending (b) (c)
Operations Operations Other Eliminations Consolidated
---------- ---------- ------- ------------ ------------
Balance Sheet Items:
- -------------------
CMO collateral ........... $1,372,996 $ -- $ -- $ -- $1,372,996
Total assets ............. 1,590,776 461,211 -- (153,149) 1,898,838
Total stockholders' equity 262,416 62,296 -- (146,272) 178,440
Income Statement Items:
- ----------------------
Interest income .......... 104,591 53,940 -- (11,452) 147,079
Interest expense ......... 96,325 39,223 -- (11,452) 124,096
Equity in IFC (a) ........ -- -- -- (1,762) (1,762)
Net earnings (loss) ...... (66,163) 13,612 -- (1,682) (54,233)
The following table shows the Company's reporting segments as of and for
the year ended December 31, 1999 (in thousands):
Long-Term Warehouse
Investment Lending (b) (c)
Operations Operations Other Eliminations Consolidated
---------- ---------- ------- ------------ ------------
Balance Sheet Items:
- -------------------
CMO collateral ........... $ 949,677 $ -- $ -- $ -- $ 949,677
Total assets ............. 1,545,283 588,448 2,945 (461,246) 1,675,430
Total stockholders' equity 294,852 48,684 -- (104,692) 238,844
Income Statement Items:
- ----------------------
Interest income .......... 91,965 31,998 21 (4,526) 119,458
Interest expense ......... 72,704 21,612 5 (4,526) 89,795
Equity in IFC (a) ........ 4,292 -- -- -- 4,292
Net earnings ............. 6,828 9,939 41 5,509 22,317
The following table shows the Company's reporting segments as of and for
the year ended December 31, 1998 (in thousands):
Long-Term Warehouse
Investment Lending (b) (c)
Operations Operations Other Eliminations Consolidated
------------ ------------ ------- -------------- ------------
Balance Sheet Items:
- -------------------
CMO collateral .............. $1,161,220 $ -- $ -- $ -- $1,161,220
Total assets ................ 1,410,019 338,365 3,418 (86,298) 1,665,504
Total stockholders' equity .. 277,868 38,745 615 (65,622) 251,606
Income Statement Items:
- ----------------------
Interest income ............. 121,271 57,500 358 (15,471) 163,658
Interest expense ............ 95,095 41,903 168 (15,471) 121,695
Depreciation and amortization 11 -- 344 -- 355
Equity in IFC (a) ........... (13,876) -- -- -- (13,876)
Net earnings (loss) ......... (6,369) 15,057 560 (15,181) (5,933)
F-19
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(a) The Mortgage Operations is accounted for using the equity method and is an
unconsolidated subsidiary of the Company.
(b) Primarily includes the operations of Dove, of which the Company owned a
50% interest, and account reclassifications.
(c) Elimination of intersegment balance sheet and income statement items.
Note L--Fair Value of Financial Instruments
The estimated fair value amounts have been determined by IMH using
available market information and appropriate valuation methodologies, however,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts IMH could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
December 31, 2000 December 31, 1999
----------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Assets (in thousands)
------
Cash and cash equivalents .................................... $ 17,944 $ 17,944 $ 20,152 $ 20,152
Investment securities available-for-sale ..................... 36,921 36,921 93,206 93,206
CMO collateral ............................................... 1,372,996 1,365,893 949,677 938,784
Finance receivables .......................................... 405,438 405,438 197,119 197,119
Mortgage loans held-for-investment ........................... 16,720 14,698 363,435 366,066
Due from affiliates .......................................... 14,500 14,500 14,500 14,500
Interest rate caps ........................................... 6,795 1,006 1,925 2,091
Liabilities
-----------
CMO borrowings, excluding accrued interest ................... 1,288,901 1,294,545 848,756 844,852
Reverse-repurchase agreements, excluding accrued interest .... 396,572 396,572 535,990 535,990
Borrowings secured by investment securities available-for-sale 21,124 17,744 31,333 34,393
Senior subordinated debentures ............................... 6,979 4,955 6,691 6,198
Due to affiliates ............................................ -- -- 2,945 2,945
Short-term commitments to extend credit ...................... -- -- -- --
The fair value estimates as of December 31, 2000 and 1999 are based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented.
The following describes the methods and assumptions used by IMH in
estimating fair values:
Cash and Cash Equivalents
Fair value approximates carrying amounts as these instruments are demand
deposits and money market mutual funds and do not present unanticipated interest
rate or credit concerns.
F-20
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Investment Securities Available-for-Sale
Fair value is estimated using a bond model, which incorporates certain
assumptions such as prepayment, yield and losses.
CMO Collateral
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage loans.
Finance Receivables
Fair value approximates carrying amounts due to the short-term nature of
the assets and do not present unanticipated interest rate or credit concerns.
Mortgage Loans Held-for-Investment
Fair value is estimated based on estimates of proceeds the Company would
receive from the sale of the underlying collateral of each loan.
Due From / To Affiliates
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and does not present unanticipated interest rate or credit
concerns.
CMO Borrowings
Fair value of fixed rate borrowings is estimated based on the use of a
bond model, which incorporates certain assumptions such as prepayment, yield and
losses.
Reverse Repurchase Agreements
Fair value approximates carrying amounts due to the short-term nature of
the liabilities and do not present unanticipated interest rate or credit
concerns.
Borrowings Secured by Investment Securities Available-for-Sale
Fair value is estimated based on quoted market prices from dealers or
brokers.
Senior Subordinated Debt
Fair value is estimated based on quoted market price from dealers or
brokers.
Interest Rate Caps
Fair value is estimated based on quoted market prices from dealers or
brokers.
F-21
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Short-term Commitments to Extend Credit
The Company does not collect fees associated with its warehouse lines of
credit. Accordingly, these commitments do not have an estimated fair value.
Note M--Employee Benefit Plans
Profit Sharing and 401(k) Plan
The Company does not have its own 401(K) or profit sharing plan. As such,
employees of the Company participate in Imperial Credit Industries, Inc's.
(ICII) 401(K) plan. Under ICII's 401(K) plan, employees of the Company may
contribute up to 14% of their salaries. The Company will match 50% of the first
4% of employee contributions. Additionally, contributions may be made at the
discretion of the Company. The Company's matching and discretionary
contributions were not material for any period presented.
Note N--Related Party Transactions
Related Party Cost Allocations
In 1995, IMH entered into a services agreement with ICII under which ICII
provided various services to the Company, including data processing, human
resource administration, general ledger accounts, check processing, remittance
processing and payment of accounts payable. ICII charged fees for each of the
services based upon usage. As part of the services provided, ICII provided the
Company with insurance coverage and self-insurance programs, including health
insurance. This services agreement was replaced with a new ICAI services
agreement in December 1997, in connection with termination of the Company's
management agreement with ICAI. Pursuant to the services agreement with ICAI,
ICAI provides the Company with certain human resource administration and data
and phone communication services. The charge to the Company for insurance
coverage is based upon a pro rata portion of the costs to ICII for its various
policies. Total charges to the Company for the years ended December 31, 2000,
1999 and 1998 were $15,000, $11,000, and $13,000, respectively.
During 1999 and 1998, IMH and IWLG were allocated data processing,
executive and operations management, and accounting services that IFC incurred
during the normal course of business per the Company's submanagement agreement
with RAI Advisors Inc. (RAI). IFC, through RAI, charged IMH and IWLG for
management and operating services based upon usage which management believes was
reasonable. In May 1999, the submanagement agreement with RAI was terminated and
IFC entered into a new submanagement agreement with FIC Management, Inc.,
pursuant to which IFC provides services to Impac Commercial Holdings, Inc.
(ICH). This agreement expired in December 1999. Prior to the submanagement
agreement with RAI and after RAI was terminated, IMH and IWLG were allocated
data processing, executive and operations management, and accounting services
that IFC incurred during the normal course of business. IFC charged IMH and IWLG
for management and operating services based upon usage which management believes
was reasonable. Total cost allocations charged by IFC to IMH and IWLG for the
years ended December 31, 2000, 1999 and 1998 were $1.5 million, $1.2 million and
$968,000, respectively.
Lease Agreement: IMH and IFC entered into a premises operating sublease
agreement to rent approximately 74,000 square feet of office space in Newport
Beach, California, for a ten-year term, which expires in May 2008 (see Note O -
Commitments and Contingencies). IMH and IFC pay monthly rental expenses and
allocate the cost to subsidiaries and affiliated companies on the basis of
square footage occupied. The majority of occupancy charges incurred were paid by
IFC as most of the Company's employees are employed by the Mortgage Operations.
Total rental expense paid by IFC for the years ended December 31, 2000, 1999 and
1998 were $1.6 million, $1.1 million and $1.3 million, of which $113,000,
$100,000, and $65,000, respectively, were charged to IWLG.
F-22
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Credit Arrangements - Current
IWLG maintains a warehouse financing facility with IFC. Advances under
such warehouse facilities bear interest at Bank of America's prime rate. As of
December 31, 2000 and 1999, finance receivables outstanding to IFC were $219.1
million and $66.1 million, respectively. Interest income recorded by IWLG
related to finance receivables due from IFC for the years ended December 31,
2000, 1999, and 1998, was $26.5 million, $18.4 million, and $32.7 million,
respectively.
IWLG maintains a warehouse financing facility with ILG, which was
established during 1999. At January 1, 2000, ILG became a division of IFC.
Advances under such warehouse facilities bear interest at prime. As of December
31, 2000 and 1999, finance receivables outstanding to ILG were $47.9 million and
$1.2 million, respectively. Interest income recorded by IWLG related to finance
receivables due from ILG for the years ended December 31, 2000 and 1999, was
$1.5 million and $293,000, respectively.
During the normal course of business, the Company may advance or borrow
funds on a short-term basis with affiliated companies. Advances to affiliates
are reflected as "Due from affiliates", while borrowings are reflected as "Due
to affiliates" on the Company's balance sheet. These short-term advances and
borrowings bear interest at a fixed rate of 8.0% per annum. As of December 31,
2000 and 1999, due from affiliates was none. Interest income recorded by the
Company related to short-term advances due from affiliates for the years ended
December 31, 2000 and 1999 was $90,000 and $835,000, respectively. As of
December 31, 2000 and 1999, due to affiliates was none and $2.9 million,
respectively. Interest expense recorded by the Company related to short-term
borrowings due to affiliates for the years ended December 31, 2000, 1999 and
1998 was $25,000, $399,000, and $2.7 million, respectively.
Indebtedness of Management. In connection with the exercise of stock
options by certain directors and employees of the Company, the Company made
loans secured by the related stock. The loans were made for a five-year term
with a current interest rate of 5.62%. Interest on the loans is payable
quarterly upon receipt of the dividend payment and the interest rate is set
annually by the compensation committee. At each dividend payment date, 50% of
excess quarterly stock dividends, after applying the dividend payment to
interest due, is required to reduce the principal balance outstanding on the
loans. The interest rate on these loans adjusts annually at the discretion of
the Board of Directors. As of December 31, 2000 and 1999, total notes receivable
from common stock sales was $902,000 and $905,000, respectively. Interest income
recorded by the Company related to the loans for the years ended December 31,
2000, 1999 and 1998 was $50,000, $41,000 and $60,000, respectively.
Credit Arrangements - Expired
IMH maintained an uncommitted warehouse line agreement with ICCC. The
margins on the warehouse line agreement were at 8% of the fair market value of
the collateral provided. Advances under such warehouse facilities bore interest
at Bank of America's prime rate. As of December 31, 1999 and 1998, finance
receivables outstanding to ICCC were none and $3.6 million, respectively.
Interest income recorded by IMH related to finance receivables due from ICCC for
the years ended December 31, 1999 and 1998 was $93,000 and $785,000,
respectively.
IMH entered into a revolving credit arrangement with a commercial bank,
which was an affiliate of ICII, whereby IMH could borrow up to maximum amount of
$10.0 million for general working capital needs. The revolving credit agreement
was converted to a reverse repurchase agreement in October 1998. Advances under
the reverse repurchase agreement were at an interest rate of LIBOR plus 2.00%,
with interest paid monthly. As of December 31, 1999 and 1998, IMH's outstanding
borrowings under the reverse repurchase arrangement were none and $10.0 million,
respectively. Interest expense recorded by IMH for the year ended December 31,
1999 and 1998 related to such advances was $348,000 and $202,000, respectively.
This agreement was terminated in 1999.
F-23
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Until March 31, 2000, IWLG maintained a warehouse financing facility with
Walsh Securities, Inc. (WSI), a firm affiliated with James Walsh, a Director of
the Company. Advances under the line of credit bore interest at a rate
determined at the time of each advance. As of December 31, 2000, 1999 and 1998,
finance receivables outstanding to WSI were none, $48,000 and $798,000,
respectively. Interest income recorded by IWLG related to finance receivables
due from WSI for the years ended December 31, 2000, 1999 and 1998 was $1,000,
$729,000 and $699,000, respectively.
Transactions with IFC
Purchase of Mortgage-Backed Securities: During the year ended December 31,
1999, the Company purchased $22.0 million of mortgage-backed securities issued
by IFC for $18.3 million net of discounts of $3.7 million. IFC issued
mortgage-backed securities during 2000 and 1999 in connection with its REMIC
securitizations, however, during 2000 the Company purchased no mortgage-backed
securities from IFC.
Purchase of Mortgage Loans: During the years ended December 31, 2000 and
1999, the Company purchased from IFC mortgage loans having a principal balance
of $450.7 million and $637.4 million, respectively. The loans were purchased
with premiums of $3.3 million and $877,000, respectively. Servicing rights on
all mortgages purchased by IMH were retained by IFC.
Sale of Mortgage Loans: During the year ended December 31, 2000 and 1999,
the Company sold to IFC mortgage loans having a principal balance of none and
$10.8 million, respectively, with premiums of none and $294,000, respectively.
Sub-Servicing Agreement: IFC acts as a servicer of mortgage loans acquired
on a "servicing-released" basis by the Company in its Long-Term Investment
Operations pursuant to the terms of a Servicing Agreement, which became
effective on November 20, 1995. IFC subcontracts all of its servicing
obligations under such loans to independent third parties pursuant to
sub-servicing agreements.
Advances: During 1999, IMH advanced $14.5 million in cash to IFC at an
interest rate of 9.50% per annum due June 30, 2004, in exchange for an interest
only to fund the operations of IFC and other strategic opportunities deemed
appropriate by IFC. At December 31, 2000 and 1999 the amount outstanding on this
note was $14.5 million and $14.5 million, respectively. Interest income recorded
by IMH related to this note at December 31, 2000 and December 31, 1999 was $1.4
million and $696,000 respectively.
Note O--Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
IMH is a party to financial instruments with off-balance sheet risk in the
normal course of business. Such instruments include short-term commitments to
extend credit to borrowers under warehouse lines of credit, which involve
elements of credit risk, lease commitments, interest rate cap agreements, and
exposure to credit loss in the event of nonperformance by the counterparties to
the various agreements associated with loan purchases. Unless noted otherwise,
IMH does not require collateral or other security to support such commitments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The contract or
notional amounts of interest rate cap agreements and forward contracts do not
represent exposure to credit loss. The Company controls the credit risk of its
interest rate cap agreements and forward contracts through credit approvals,
limits and monitoring procedures.
F-24
Short-Term Loan Commitments
IWLG's warehouse lending program provides secured short-term non-recourse
revolving financing to small-and medium-size mortgage originators and affiliated
companies to finance mortgages from the closing of the loans until sold to
permanent investors. As of December 31, 2000 and 1999, the Company had 55 and 49
committed lines of credit, respectively, extended in the aggregate principal
amount of $1.0 billion and $1.4 billion, respectively, of which $267.0 million
and $67.4 million, respectively, was outstanding with affiliated companies. The
Company's warehouse lines are non-recourse and IWLG can only look to the sale or
liquidation of the mortgages as a source of repayment.
Lease Commitments
The Company entered into a premises operating sublease agreement for
approximately 74,000 square feet of office space in Newport Beach, California
which expires in May 2008. Minimum premises rental commitments under
non-cancelable leases are as follows (in thousands):
Year 2001 .................................................. 1,856
Year 2002 .................................................. 1,901
Year 2003 .................................................. 1,946
Year 2004 .................................................. 1,990
Year 2005 .................................................. 2,035
Year 2006 and thereafter ................................... 5,097
-------
Total Lease Commitments .............................. $14,825
=======
Rent expense associated with the premises operating lease is allocated
between IMH, IWLG and IFC based on square footage. IMH and IWLG's combined
portion of premises rental expense for the years ended December 31, 2000, 1999,
and 1998 was $113,000, $100,000, and $65,000, respectively.
Interest Rate Cap Agreements
The Company purchases and sells, from time to time, interest rate
agreements in the form of interest rate caps, interest rate floors, and other
interest rate futures to attempt to mitigate interest and related risks. The
Company also may use such instruments to modify the characteristics of its CMO
issuance or to hedge the anticipated issuance of future liabilities or the
market value of certain assets. The Company intends generally to hedge as much
of the interest rate risk based on the cost of such hedging transaction and the
need to maintain the Company's status as a REIT. At December 31, 2000 and 1999,
the Company had $974.4 million and $422.0 million, in notional amount, of
interest rate caps, respectively, with a carrying value of $6.8 million and $1.9
million, respectively.
Loan Purchase Commitments
In the ordinary course of business, IFC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, IFC is
required to repurchase mortgage loans if there had been a breach of
representations or warranties. IMH has guaranteed the performance obligation of
IFC under such representation and warranties related to loans included in
securitizations. However, IMH does not anticipate nonperformance by such
borrowers or counterparties.
Note P--Stock Option Plan
The Company adopted a Stock Option, Deferred Stock and Restricted Stock
Plan (the Stock Option Plan) which provides for the grant of qualified incentive
stock options (ISOs), options not qualified (NQSOs) and deferred stock,
restricted stock, stock appreciation, dividend equivalent rights and limited
stock appreciation rights awards (Awards).
F-25
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The Stock Option Plan is administered by a committee of directors appointed by
the Board of Directors (the Administrator). ISOs may be granted to the officers
and key employees of the Company. NQSOs and Awards may be granted to the
directors, officers and key employees of the Company or any of its subsidiaries,
to the directors, officers and key employees of IFC. The exercise price for any
NQSO or ISO granted under the Stock Option Plan may not be less than 100% (or
110% in the case of ISOs granted to an employee who is deemed to own in excess
of 10% of the outstanding Common Stock) of the fair market value of the shares
of Common Stock at the time the NQSO or ISO is granted. Unless previously
terminated by the Board of Directors, no options or Awards may be granted under
the Stock Option Plan after August 31, 2005.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Administrator. Awards will be
subject to the terms and restrictions of the award made by the Administrator.
The Administrator has discretionary authority to select participants from among
eligible persons and to determine at the time an option or Award is granted and,
in the case of options, whether it is intended to be an ISO or a NQSO, and when
and in what increments shares covered by the option may be purchased. As of
December 31, 2000 and 1999, options to purchase 207,207 shares and 592,098
shares, respectively, were exercisable and 767,144 shares and 525,109 shares,
respectively, were reserved for future grants under the Stock Option Plan.
Option transactions for the years shown are summarized as follows:
For the year ended December 31,
--------------------------------------------------------------------
2000 1999 1998
---------------------- ------------------- ---------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise Of Exercise of Exercise
Shares Price Shares Price Shares Price
---------------------- ------------------- ---------------------
Options outstanding at beginning of year 674,891 $ 9.89 737,781 $10.06 724,675 $12.56
Options granted ........................ 112,500 3.56 35,500 4.92 195,781 5.68
Options exercised ...................... -- -- -- -- (7,800) 13.75
Options forfeited/cancelled ............ (533,535) 11.28 (98,390) 9.45 (174,875) 15.34
------- ------- -------
Options outstanding at end of year ..... 253,856 $ 4.15 674,891 $ 9.89 737,781 $10.06
======= ======= =======
As of December 31, 2000 and 1999, total notes receivable from Common Stock
sales were $902,000 and $905,000, respectively. Interest on all loans secured by
the Company's Common Stock is payable quarterly upon receipt of the Company's
dividend payment. At each dividend payment date, 50% of excess quarterly stock
dividends, after applying the dividend payment to interest due, is required to
reduce the principal balance outstanding on the loans. The interest rate on
these loans adjusts annually and is set at the discretion of the Board of
Directors.
During 1998, the Company made one loan totaling $30,000 to an employee of
the Company that is secured by the related Common Stock in connection with the
exercise of stock options under the Stock Option Plan. There were no loans made
in 2000 and 1999.
The following table sets forth information about fixed stock options
outstanding at December 31, 2000:
F-26
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Stock Options Outstanding Options Exercisable
------------------------------------------------------- ----------------------------------
Weighted-
Average Remaining Weighted- Weighted-
Exercise Number Contractual Life average Number Average
Prices Outstanding (mos.) exercise price ($) Exercisable exercise price ($)
----------- -------------- ----------------- ------------------ ------------- ------------------
$ 2.70 2,000 2.84 $2.70 -- $ --
3.50 79,000 0.43 3.50 79,000 3.50
3.88 15,000 2.07 3.88 -- --
4.44 139,023 3.02 4.44 117,043 4.44
4.56 2,500 1.72 4.56 166 4.56
4.69 8,333 3.65 4.69 8,333 4.69
5.75 5,500 1.15 5.75 1,832 5.75
5.81 2,500 1.57 5.81 833 5.81
---------- -------
253,856 2.11 4.15 207,207 4.11
========== =======
In November 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS 123
permits the Company to choose either a new fair value based method or the
current APB 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS 123 requires pro forma disclosures of net
earnings (loss) computed as if the fair value based method had been applied in
financial statements of companies that continue to follow current practice in
accounting for such arrangements under APB 25. SFAS 123 applies to all stock-
based employee compensation plans in which an employer grants shares of its
stock or other equity instruments to employees except for employee stock
ownership plans. SFAS 123 also applies to plans in which the employer incurs
liabilities to employees in amounts based on the price of the employer's stock,
i.e., stock option plans, stock purchase plans, restricted stock plans, and
stock appreciation rights. The statement also specifies the accounting for
transactions in which a company issues stock options or other equity instruments
for services provided by nonemployees or to acquire goods or services from
outside suppliers or vendors.
The Company elected to continue to apply APB 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements. If the Company determined its compensation cost
based on the fair value, at the grant date of the stock options exercisable
under SFAS 123, the Company's net earnings (loss) and net earnings (loss) per
share would have decreased to the pro forma amounts indicated below (dollars in
thousands, except per share data):
For the year ended December 31,
-------------------------------------
2000 1999 1998
----------- ---------- ---------
Net earnings (loss) as reported ............. $ (54,233) $ 22,317 $ (5,933)
=========== ========== =========
Pro forma net earnings (loss) ............... $ (54,306) $ 22,308 $ (6,038)
=========== ========== =========
Basic earnings (loss) per share as reported . $ (2.70) $ 0.83 $ (0.25)
=========== ========== =========
Diluted earnings (loss) per share as reported $ (2.70) $ 0.76 $ (0.25)
=========== ========== =========
Basic pro forma earnings (loss) per share ... $ (2.70) $ 0.83 $ (0.25)
=========== ========== =========
Diluted pro forma earnings (loss) per share . $ (2.70) $ 0.76 $ (0.25)
=========== ========== =========
The derived fair value of the options granted during 2000, 1999 and 1998
was approximately $0.75, $1.35 and $0.54, respectively. The fair value of
options granted, which is amortized to expenses over the option vesting period
in determining the pro forma impact, is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
F-27
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the year ended December 31,
------------------------------
2000 1999 1998
------- ------- -------
Risk-Free Interest Rate ............... 4.80% 4.98% 5.09%
Expected Lives (in years) ............. 1-3 3-5 3-10
Expected Volatility ................... 62.64% 60.17% 29.90%
Expected Dividend Yield ............... 11.20% 9.50% 11.50%
Note Q--Stockholders' Equity
Pursuant to IMH's Dividend Reinvestment and Stock Purchase Plan (DRSPP or
the Plan), stockholders can acquire additional shares of IMH Common Stock by
reinvesting their cash dividends at a 0% to 5% discount of the average high and
low market prices as reported on the AMEX on the Investment Date (as described
in the Plan) to the extent shares are issued by IMH. Stockholders may also
purchase additional shares of IMH Common Stock through the cash investment
option at a 0% to 5% discount of the average high and low market prices as
reported on the AMEX during the three trading days preceding the Investment
Date. In July of 1999, the Company suspended its DRSPP. During 1999 and 1998,
the Company raised capital of $946,000 and $27.8 million, respectively, as
216,156 and 1.8 million shares, respectively, of Common Stock were purchased
under the Company's DRSPP. Proceeds from the sale of securities were used for
working capital needs. In July 1999, the Company suspended its DRSPP.
During 2000, the Company's Board of Directors authorized the Company to
repurchase up to $3.0 million of the Company's Common Stock, $.01 par value, in
open market purchases from time to time at the discretion of the Company's
management; the timing and extent of the repurchases depend on market
conditions. For the year ended December 31, 2000, the Company repurchased
991,000 shares of its Common Stock for $2.3 million. The acquired shares were
canceled. In October 1998, the Board of Directors authorized the Company to
repurchase up to $5.0 million of the Company's Common Stock in the open market.
In 1999, the Board of Directors approved additional Common Stock repurchases up
to an additional $5.0 million, or a total of $10.0 million. During 1999, the
Company repurchased 2.0 million shares of Common Stock for $9.9 million.
During 1999, certain stockholders of the Company exchanged 1,359,507
shares of their Common Stock for 11% senior subordinated debentures due February
15, 2004. The Debentures are unsecured obligations of the Company subordinated
and subject in right of payment to all existing and future senior indebtedness
of the Company and effectively subordinated to all indebtedness of the Company's
subsidiaries. The Debentures bear interest at 11% per annum from their date of
issuance, payable quarterly, commencing May 15, 1999, until the debentures are
paid in full. The debentures mature on February 15, 2004, which date may be
extended once by the Company to a date not later than May 15, 2004, provided
that the Company satisfies certain conditions. Commencing on February 15, 2001,
the debentures are redeemable, at the Company's option, in whole at any time or
in part from time to time, at the principal amount to be redeemed plus accrued
and unpaid interest to the redemption date.
On December 22, 1998, the Company completed the sale of 1,200,000 shares
of Series B 10.5% Cumulative Convertible Preferred Stock (Series B Preferred
Stock) at $25.00 per share. The Series B Preferred Stock was convertible into
shares of the Company's Common Stock at a conversion price of $4.95 per share.
Accordingly, each share of Series B Preferred Stock was convertible into
5.050505 shares of the Company's Common Stock. The terms of the acquisition
provided for a downward adjustment of the conversion price if, among other
things, certain earnings levels were not attained by the Company through June
30, 1999. In February 2000, the Series B Preferred Stock was exchanged for
Series C 10.5% Cumulative Convertible Preferred Stock (Series C Preferred Stock)
and the conversion rate was adjusted to $4.72 per share convertible into 5.29661
shares of Common Stock or an aggregate of 6,355,932 shares of Common Stock.
Dividends on the Preferred Stock accumulate from the date of issuance and are
paid quarterly, in cash or the Company's Common Stock, starting April 27, 1999.
The dividend rate per share is the greater of $0.65625 or the quarterly cash
dividend declared on the number of shares of Common Stock into which a share of
Preferred Stock is convertible. The Company is authorized to issue shares of
Preferred Stock designated in one or more
F-28
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
classes or series. The Preferred Stock may be issued from time to time with such
designations, rights and preferences as shall be determined by the Board of
Directors. The Preferred Stock has a preference on dividend payments, takes
priority over dividend distributions to the common stockholders.
On October 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Preferred Stock Purchase Rights were distributed as a
dividend at the rate of one Right for each outstanding share of Common Stock.
The dividend distribution was made on October 19, 1998 payable to stockholders
of record on that date. The Rights are attached to the Company's Common Stock.
The Rights will be exercisable and trade separately only in the event that a
person or group acquires or announces the intent to acquire 10 percent or more
of the Company's Common Stock. Each Right will entitle stockholders to buy
one-hundredth of a share of a new series of junior participating Preferred Stock
at an exercise price of $30.00. If the Company is acquired in a merger or other
transaction after a person has acquired 10 percent or more of Company
outstanding Common Stock, each Right will entitle the stockholder to purchase,
at the Right's then-current exercise price, a number of the acquiring Company's
common shares having a market value of twice such price. In addition, if a
person or group acquires 10 percent or more of the Company's Common Stock, each
Right will entitle the stockholder (other than the acquiring person) to
purchase, at the Right's then-current exercise price, a number of shares of the
Company's Common Stock having a market value of twice such price. Following the
acquisition by a person of 10 percent or more of the Company's Common Stock and
before an acquisition of 50 percent or more of the Common Stock, the Board of
Directors may exchange the Rights (other than the Rights owned by such person)
at an exchange ratio of one share of Common Stock per Right. Before a person or
group acquires beneficial ownership of 10 percent or more of the Company's
Common Stock, the Rights are redeemable for $.0001 per right at the option of
the Board of Directors. The Rights will expire on October 19, 2008. The Rights
distribution is not taxable to stockholders. The Rights are intended to enable
all the Company stockholders to realize the long-term value of their investment
in the Company.
Note R--Reconciliation of Earnings Per Share
The following table represents the computation of basic and diluted net
earnings (loss) per share for the periods presented, as if all stock options,
cumulative convertible preferred stock (Preferred Stock), and ICII's ownership
interest in IMH were outstanding for these periods (in thousands, except per
share data):
For the year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Numerator:
Numerator for basic earnings per share--
Net earnings (loss) .......................................... $(54,233) $ 22,317 $ (5,933)
Less: Cash dividends on cumulative convertible preferred stock (3,150) (3,290) --
-------- -------- --------
Net earnings (loss) available to
common stockholders .................................... $(57,383) $ 19,027 $ (5,933)
======== ======== ========
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares
Outstanding during the period ............................. 21,270 22,824 23,914
Impact of assumed conversion of Preferred Stock .............. -- 6,356 --
Net effect of dilutive stock options ......................... -- 16 --
-------- -------- --------
Denominator for diluted earnings per share ................ 21,270 29,196 23,914
======== ======== ========
Net earnings (loss) per share--basic ............................ $ (2.70) $ 0.83 $ (0.25)
======== ======== ========
Net earnings (loss) per share--diluted .......................... $ (2.70) $ 0.76 $ (0.25)
======== ======== ========
F-29
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The antidilutive effects of stock options outstanding as of December 31,
2000, 1999 and 1998 was 669,391, none, and 137,105, respectively. The
antidilutive effects of outstanding Preferred Stock as of December 31, 2000,
1999 and 1998 was 6,355,932, none, and 6,060,606, respectively. Terms of the
Preferred Stock acquisition provided for a downward adjustment of the conversion
price if, among other things, certain earnings levels were not attained by the
Company through June 30, 1999. The change in the Preferred Stock conversion
price during 2000 from $4.95 to $4.72 per share resulted in 6,355,932 in Common
Stock equivalent shares outstanding at December 31, 2000 and 1999 as compared to
6,060,606 Common Stock equivalent shares outstanding at and 1998.
Note S--Subsequent Events
On February 20, 2001, IFC purchased $5.0 million of the Company's Series C
10.5% Cumulative Convertible Preferred Stock from LBP, Inc. (LBPI) at cost plus
accrued interest.
On March 27, 2001, IFC agreed in principle to purchase another $5.0
million of the Company's Series C 10.5% Cumulative Convertible Preferred Stock
from LBPI for $5.25 million plus accrued interest. In addition, the Company's
Board of Directors authorized management to call all or a portion of the
Company's 11% senior subordinated debentures. The actual timing and amount will
be completed at management's discretion.
Note T--Quarterly Financial Data (unaudited)
Selected quarterly financial data for 2000 follows (in thousands, except
per share data):
For the Three Months Ended,
-------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
Net interest income .................. $5,853 $5,377 $ 5,338 $ 6,415
Provision for loan losses ............ 1,104 1,248 3,304 13,183
Non-interest income (loss) ........... 1,314 886 (1,048) 1,361
Non-interest expense ................. 2,387 1,716 31,301 25,486
Net earnings (loss) .................. 3,676 3,299 (30,315) (30,893)
Net earnings (loss) per share -
diluted (1) ........................ 0.14 0.12 (1.45) (1.48)
Dividends declared per share ......... -- 0.12 0.12 0.12
Selected quarterly financial data for 1999 follows (in thousands, except
per share data):
For the Three Months Ended,
----------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
Net interest income ................. $ 7,378 $5,876 $8,163 $8,246
Provision for loan losses ........... 1,191 1,367 1,490 1,499
Non-interest income (loss) .......... (611) 3,784 2,019 1,710
Non-interest expense ................ 1,639 2,062 2,738 2,262
Net earnings ........................ 3,937 6,231 5,954 6,195
Net earnings per share - diluted (1) 0.14 0.22 0.21 0.20
Dividends declared per share ........ 0.13 0.13 0.12 0.10
- ----------
(1) Diluted earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share
may not equal the total for the year.
F-30
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note U--Impac Funding Corporation
The following condensed financial information summarizes the financial
condition and results of operations of Impac Funding Corporation:
Condensed Consolidated Balance Sheets
(in thousands)
At December 31,
-------------------------
2000 1999
--------- ---------
ASSETS
------
Cash and cash equivalents ............................................ 8,281 8,805
Securities available-for-sale ........................................ 266 1,887
Mortgage loans held-for-sale ......................................... 275,570 68,084
Mortgage servicing rights ............................................ 10,938 15,621
Due from affiliates .................................................. -- 4,307
Premises and equipment, net .......................................... 5,037 3,575
Accrued interest receivable .......................................... 1,040 48
Other assets ......................................................... 16,031 13,919
--------- ---------
$ 317,163 $ 116,246
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG ................................................. $ 266,994 $ 66,125
Other borrowings ..................................................... -- 181
Due to affiliates .................................................... 14,500 14,500
Deferred revenue ..................................................... 5,026 7,635
Accrued interest expense ............................................. 2,176 843
Other liabilities .................................................... 12,546 9,414
--------- ---------
Total liabilities .............................................. 301,242 98,698
--------- ---------
Shareholders' equity:
Preferred stock ................................................... 18,053 18,053
Common stock ...................................................... 182 182
Accumulated deficit ............................................... (2,300) (520)
Accumulated other comprehensive loss .............................. (14) (167)
--------- ---------
Total shareholders' equity ..................................... 15,921 17,548
--------- ---------
$ 317,163 $ 116,246
========= =========
F-31
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Condensed Consolidated Statements of Operations
(in thousands)
For the year ended December 31,
--------------------------------
2000 1999 1998
-------- ------- --------
Net interest income:
Total interest income ...................... $ 28,649 $21,225 $ 48,510
Total interest expense ..................... 30,056 20,953 40,743
-------- ------- --------
Net interest income (expense) ........... (1,407) 272 7,767
-------- ------- --------
Non-interest income:
Gain (loss) on sale of loans ............... 19,727 27,098 (11,663)
Loan servicing income ...................... 6,286 5,221 7,071
Other income ............................... 1,105 979 (1,091)
-------- ------- --------
Total non-interest income (loss) ........ 27,118 33,298 (5,683)
-------- ------- --------
Non-interest expense:
General and administrative and other expense 19,634 14,965 14,385
Amortization of mortgage servicing rights .. 5,179 5,331 6,361
Write-down of securities available-for-sale 1,537 4,252 --
Impairment of mortgage servicing rights .... -- 1,078 3,722
Provision for repurchases .................. 371 385 367
-------- ------- --------
Total non-interest expense .............. 26,721 26,011 24,835
-------- ------- --------
Earnings (loss) before income taxes ........ (1,010) 7,559 (22,751)
Income taxes (benefit) ........................ 770 3,227 (8,738)
-------- ------- --------
Net earnings (loss) ........................ $ (1,780) $ 4,332 $(14,013)
======== ======= ========
F-32
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Funding Corporation
We have audited the accompanying consolidated balance sheets of Impac
Funding Corporation and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of operations and comprehensive earnings (loss),
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Impac Funding Corporation and subsidiary as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Orange County, California
February 2, 2001, except as to Note L
to the consolidated financial statements,
which is as of March 27, 2001.
F-33
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
At December 31,
-----------------------
2000 1999
--------- ---------
ASSETS
------
Cash and cash equivalents .......................................................... $ 8,281 $ 8,805
Securities available-for-sale ...................................................... 266 1,887
Mortgage loans held-for-sale ....................................................... 275,570 68,084
Mortgage servicing rights .......................................................... 10,938 15,621
Due from affiliates ................................................................ -- 4,307
Premises and equipment, net ........................................................ 5,037 3,575
Accrued interest receivable ........................................................ 1,040 48
Other assets ....................................................................... 16,031 13,919
--------- ---------
Total assets .............................................................. $ 317,163 $ 116,246
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG ............................................................... $ 266,994 $ 66,125
Other borrowings ................................................................... -- 181
Due to affiliates .................................................................. 14,500 14,500
Deferred revenue ................................................................... 5,026 7,635
Accrued interest expense ........................................................... 2,176 843
Other liabilities .................................................................. 12,546 9,414
--------- ---------
Total liabilities ......................................................... 301,242 98,698
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; 10,000 shares issued and
outstanding at December 31, 2000 and 1999 .................................... 18,053 18,053
Common stock, no par value; 10,000 shares authorized; 10,000 shares issued and
outstanding at December 31, 2000 and 1999 .................................... 182 182
Accumulated deficit ............................................................. (2,300) (520)
Accumulated other comprehensive loss ............................................ (14) (167)
--------- ---------
Total shareholders' equity ................................................... 15,921 17,548
--------- ---------
Total liabilities and shareholders' equity ................................ $ 317,163 $ 116,246
========= =========
See accompanying notes to consolidated financial statements.
F-34
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(in thousands)
For the year ended December 31,
--------------------------------
2000 1999 1998
-------- ------- --------
INTEREST INCOME:
Mortgage loans held-for-sale ............................................. $ 28,009 $20,352 $ 45,070
Other interest income .................................................... 640 873 3,440
-------- ------- --------
Total interest income ................................................. 28,649 21,225 48,510
INTEREST EXPENSE:
Borrowings from IWLG ..................................................... 28,063 18,366 32,682
Other affiliated borrowings .............................................. 1,604 1,673 2,020
Other borrowings ......................................................... 389 914 6,041
-------- ------- --------
Total interest expense ................................................ 30,056 20,953 40,743
-------- ------- --------
Net interest income (expense) ......................................... (1,407) 272 7,767
NON-INTEREST INCOME:
Gain (loss) on sale of loans ............................................. 19,727 27,098 (11,663)
Loan servicing income .................................................... 6,286 5,221 7,071
Mark-to-market loss on investment securities ............................. -- -- (805)
Gain (loss) on sale of investment securities ............................. 51 -- (706)
Other income ............................................................. 1,054 979 420
-------- ------- --------
Total non-interest income (loss) ...................................... 27,118 33,298 (5,683)
NON-INTEREST EXPENSE:
Personnel expense ........................................................ 9,766 7,299 8,901
Amortization of mortgage servicing rights ................................ 5,179 5,331 6,361
General and administrative and other expense ............................. 4,448 3,417 2,516
Professional services .................................................... 2,535 2,524 978
Occupancy expense ........................................................ 1,626 1,095 1,391
Write-down of securities available-for-sale .............................. 1,537 4,252 --
Data processing expense .................................................. 657 337 387
Telephone and other communications ....................................... 602 293 212
Provision for repurchases ................................................ 371 385 367
Impairment of mortgage servicing rights .................................. -- 1,078 3,722
-------- ------- --------
Total non-interest expense ............................................ 26,721 26,011 24,835
-------- ------- --------
Earnings (loss) before income taxes ................................... (1,010) 7,559 (22,751)
Income taxes (benefit) ................................................... 770 3,227 (8,738)
-------- ------- --------
Net earnings (loss) ................................................... (1,780) 4,332 (14,013)
Other comprehensive earnings (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ............... (15) 329 (520)
Less: Reclassification of gains included in income .................... 168 24 --
-------- ------- --------
Net unrealized gains (losses) arising during period ................ 153 353 (520)
-------- ------- --------
Comprehensive earnings (loss) ......................................... $ (1,627) $ 4,685 $(14,533)
======== ======= ========
See accompanying notes to consolidated financial statements.
F-35
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
Retained Accumulated
Number of Number of Earnings Other Total
Preferred Preferred Common Common (Accumulated Comprehensive Shareholders'
Shares Stock Shares Stock Deficit) Loss Equity
--------- --------- --------- ------- ------------ ------------- -------------
Balance, December 31, 1997 10,000 $18,053 10,000 $182 $ 9,161 $ -- $ 27,396
Net loss, 1998 ........... -- -- -- -- (14,013) -- (14,013)
Other comprehensive loss . -- -- -- -- -- (520) (520)
-------- -------- -------- ---- -------- ----- --------
Balance, December 31, 1998 10,000 18,053 10,000 182 (4,852) (520) 12,863
Net earnings, 1999 ....... -- -- -- -- 4,332 -- 4,332
Other comprehensive income -- -- -- -- -- 353 353
-------- -------- -------- ---- -------- ----- --------
Balance, December 31, 1999 10,000 18,053 10,000 182 (520) (167) 17,548
Net loss, 2000 ........... -- -- -- -- (1,780) -- (1,780)
Other comprehensive income -- -- -- -- -- 153 153
-------- -------- -------- ---- -------- ----- --------
Balance, December 31, 2000 10,000 $18,053 10,000 $182 $ (2,300) $ (14) $ 15,921
======== ======== ======== ==== ======== ===== ========
See accompanying notes to consolidated financial statements.
F-36
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................................... $ (1,780) $ 4,332 $ (14,013)
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Provision for repurchases ...................................... 371 385 367
Gain (loss) on sale of loans ................................... 19,727 27,098 (11,663)
Depreciation and amortization .................................. 6,280 6,453 7,141
Amortization of deferred revenue ............................... (2,313) (12,751) (8,157)
Impairment of mortgage servicing rights ........................ -- 1,078 3,722
Net change in accrued interest receivable ...................... (992) 1,848 2,859
Net change in other assets and liabilities ..................... 6,007 (6,826) 1,806
Net change in deferred taxes ................................... (150) 568 (10,459)
Net change in deferred revenue ................................. (296) 9,781 11,714
Purchase of securities held-for-trading ........................ -- 5,300 (5,300)
Write-down of investment securities ............................ 1,537 4,252 805
Purchase of mortgage loans held-for-sale ....................... (2,112,724) (1,671,777) (2,248,586)
Sale of and principal reductions on mortgage loans held-for-sale 1,884,847 1,827,638 2,627,833
Net change in accrued interest expense ......................... 1,333 843 (5,673)
----------- ----------- -----------
Net cash provided by (used in) operating activities ......... (198,153) 198,222 352,396
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to mortgage servicing rights ............................ (496) (7,968) (8,577)
Issuance of note from IMH ......................................... -- 14,500 --
Purchase of securities available-for-sale ......................... -- (5,413) --
Sale of securities available-for-sale ............................. -- 5,413 --
Principal reductions on securities available-for-sale ............. -- -- 403
Purchase of premises and equipment ................................ (2,563) (2,719) (970)
----------- ----------- -----------
Net cash provided by (used in) investing activities ......... (3,059) 3,813 (9,144)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings from IWLG ................................ 200,869 (126,775) (261,940)
Net change in other borrowings .................................... (181) (66,877) (81,249)
----------- ----------- -----------
Net cash provided by (used in) financing activities ......... 200,688 (193,652) (343,189)
----------- ----------- -----------
Net change in cash and cash equivalents .............................. (524) 8,383 63
Cash and cash equivalents at beginning of year ....................... 8,805 422 359
----------- ----------- -----------
Cash and cash equivalents at end of year ............................. $ 8,281 $ 8,805 $ 422
=========== =========== ===========
SUPPLEMENTARY INFORMATION:
Interest paid ..................................................... $ 28,723 $ 20,109 $ 44,806
Taxes paid ........................................................ 24 385 5,205
See accompanying notes to consolidated financial statements.
F-37
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note A--Summary of Business and Significant Accounting Policies
1. Business and Financial Statement Presentation
IFC is a mortgage loan conduit organization, which purchases primarily
non-conforming mortgage loans from a network of third party correspondent
sellers and wholesale brokers and originates loans with retail customers. IFC
subsequently securitizes or sells such loans to permanent investors or IMH. On
March 31, 1997, ownership of all of the Common Stock of IFC was transferred from
Imperial Credit Industries, Inc. (ICII) to Joseph R. Tomkinson, Chief Executive
Officer of IMH and IFC, William S. Ashmore, President of IMH and IFC, and
Richard J. Johnson, Chief Financial Officer of IMH and IFC, who are entitled to
1% of the earnings or losses of IFC.
The consolidated financial statements include the operations of IFC and
its wholly-owned subsidiary, Impac Secured Asset Corporation (collectively, IFC)
and have been prepared in conformity with accounting principles generally
accepted in the United States of America and prevailing practices within the
mortgage banking industry.
All significant intercompany balances and transactions with IFC's
consolidated subsidiary have been eliminated in consolidation. Interest income
on affiliated short-term advances, due from affiliates, has been earned at the
rate of 8.0% per annum. Interest expense on affiliated short-term borrowings,
due to affiliates, has been incurred at the rate of 8.0% per annum. Costs and
expenses of IFC have been charged to Impac Commercial Holdings, Inc. (ICH) in
proportion to services provided per the submanagement agreement between FIC
Management Inc. (FIC), IMH and IFC, not to exceed an annual fee of $250,000. The
submanagement agreement between FIC, IMH and IFC expired in December of 1999.
Certain amounts in the prior year's consolidated financial statements have been
reclassified to conform to the current presentation.
Management of IFC has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period to prepare these
financial statements in conformity with accounting principles generally accepted
in the United States of America. Actual results could differ from those
estimates.
2. Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash and money market mutual funds. IFC considers
investments with maturities of three months or less at date of acquisition to be
cash equivalents.
3. Gain on Sale of Loans
IFC recognizes gains or losses on the sale of loans when the sales
transaction settles or upon the securitzation of the mortgage loans when the
risks of ownership have passed to the purchasing party. Gains and losses may be
increased or decreased by the amount of any servicing released premiums received
and costs associated with the acquisition or origination of mortgage loans. Gain
on sale of loans or securities to IMH are deferred and accreted over the
estimated life of the loans or securities using the interest method.
A transfer of financial assets in which control is surrendered is
accounted for as a sale to the extent that consideration other than a beneficial
interest in the transferred assets is received in the exchange. Liabilities and
derivatives incurred or obtained by the transfer of financial assets are
required to be measured at fair value, if practicable. Also, servicing assets
and other retained interests in the transferred assets must be measured by
allocating the previous carrying value between the asset sold and the interest
retained, if any, based on their relative fair values at the date of transfer.
To determine the value of the securities, IFC estimates future rates of
prepayments, prepayment
F-38
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
penalties to be received by IFC, delinquencies, defaults and default loss
severity and their impact on estimated cash flows.
4. Securities Available-for-Sale and Securities Held-for-Trading
IFC classifies investment and mortgage-backed securities as
held-to-maturity, available-for-sale, and/or trading securities.
Held-to-maturity investment and mortgage-backed securities are reported at
amortized cost, available-for-sale securities are reported at fair value with
unrealized gains and losses, net of related income taxes, as a separate
component of shareholders' equity, and trading securities are reported at fair
value with unrealized gains and losses reported in operations. IFC's investment
securities are held as available-for-sale, reported at fair value with
unrealized gains and losses net of related income taxes reported as a separate
component of shareholders' equity. Premiums or discounts obtained on investment
securities are accreted or amortized to interest income over the estimated life
of the investment securities using the interest method.
Residual interests in securitization of mortgage loans are recorded as a
result of the sale of mortgage loans through securitizations. IFC sells a
portfolio of mortgage loans to a special purpose entity that has been
established for the limited purpose of buying and reselling IFC's mortgage
loans. The special purpose entity then transfers the same mortgage loans to a
Real Estate Mortgage Investment Conduit or owners trust (the Trust). The Trust
issues interest-bearing asset-backed securities in an amount equal to the
aggregate principal balance of the mortgage loans. IFC typically sells these
certificates at face value and without recourse except that representations and
warranties customary to the mortgage banking industry are provided by IFC. IFC
may provide a credit enhancement for the benefit of the investors in the form of
additional collateral (over-collateralization) held by the Trust. The
over-collateralization account is required to be maintained at specified levels.
At the closing of each securitization, IFC removes from its consolidated
balance sheets the loans held-for-sale and adds to its consolidated balance
sheet the cash received, and the estimated fair value of the portion of the
mortgage loans retained from the securitizations (Residuals). The Residuals
consist of the over-collateralization account and the net interest receivables
which represent the estimated cash flows to be received by the Trust in the
future. The excess of the cash received and the assets retained by IFC over the
carrying value of the mortgage loans sold, less transaction costs, equals the
net gain on sale of mortgage loans recorded by IFC.
IFC allocates its basis in the mortgage loans between the portion of the
mortgage loans sold through the certificates and the portion retained based on
the relative fair values of those portions on the date of the sale. IFC may
recognize gains or losses attributable to the changes in the fair value of the
residuals, which are recorded at estimated fair value and accounted for as
held-for-trading securities at IFC. The market for the purchase or sale of
residuals is not considered liquid. IFC determines the estimated fair value of
the residuals by discounting the expected cash flows using a discount rate which
IFC believes is commensurate with the risks involved. Some of the residual
interests generated by IFC are sold to IMH and accounted for as
available-for-sale securities at IMH.
The Company receives periodic servicing fees for the servicing and
collection of the mortgage loans as master servicer of the securitized loans.
The Company is also entitled to the cash flows from the residual that represent
collections on the mortgage loans in excess of the amounts required to pay the
certificate principal and interest, the servicing fees and certain other fees
such as trustee and custodial fees. At the end of each collection period, cash
collected from the mortgage loans are allocated to the base servicing and other
fees for the period, then to the certificate holders for interest at the
pass-through rate on the certificates plus principal as defined in the servicing
agreements. If the amount of cash required for the above allocations exceeds the
amount collected during the collection period, the shortfall is drawn from the
over-collateralization account. If the cash collected during the period exceeds
the amount necessary for the above allocations, and there is no shortfall in the
related over-collateralization account, the excess is released to the Company.
If the over-collateralization account balance is not at the required credit
enhancement level, the excess cash collected is retained in the
over-collateralization account until the specified level is
F-39
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
achieved. The cash and collateral in the over-collateralization account is
restricted from use by the Company. Pursuant to certain servicing agreements,
cash held in the over-collateralization accounts may be used to make accelerated
principal paydowns on the certificates to create additional excess collateral in
the over-collateralization account.
5. Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are stated at the lower of cost or market in
the aggregate as determined by outstanding commitments from investors or current
investor yield requirements. Interest is recognized as revenue when earned
according to the terms of the mortgage loans and when, in the opinion of
management, it is collectible. Nonrefundable fees and direct costs associated
with the origination or purchase of loans are deferred and recognized when the
loans are sold as gain or loss on sale of mortgage loans. It is the policy of
the Company to construct hedge positions, which will limit exposure to a rise or
decline of 25 basis points in yield or approximately a one-point change in price
of the benchmark instrument.
6. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
or amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (three
to seven years).
7. Mortgage Servicing Rights
The Company allocates a portion of the cost of acquiring a mortgage loan
to the mortgage loan servicing rights based on its fair value relative to the
components of the loan. To determine the fair value of the servicing rights
created, IFC uses a valuation model that calculates the present value of future
net servicing revenues to determine the fair value of the servicing rights. In
using this valuation method, IFC incorporates assumptions that it believes
market participants would use in estimating future net servicing, an inflation
rate, ancillary income per loan, a prepayment rate, a default rate and a
discount rate commensurate with the risk involved. MSRs are amortized in
proportion to, and over the period of expected net servicing income. The
mortgage servicing rights are considered impaired when the fair value using a
discounted cash flow analysis is less than the carrying value. In that event, an
impairment loss is recognized in the respective period. The Company uses certain
assumptions and estimates in determining the fair value allocated to the
retained interest at the time of initial sale and each subsequent sale. As of
December 31, 2000, the Company used estimates for loan prepayment rates ranging
from 10% to 40% and a discount rate of 11%.
As of December 31, 2000 and 1999, IFC is the master servicer for $2.6
billion and $1.4 billion of loans collateralizing REMIC securities and $1.3
billion and $885.2 million of mortgage loans collateralizing CMOs, respectively.
IFC recognizes gain or loss on the sale of servicing rights when the sales
contract has been executed and ownership is determined to have passed to the
purchasing party. Gains and losses are computed by deducting the basis in the
servicing rights and any other costs associated with the sale from the purchase
price.
8. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
base. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-40
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
9. Futures
To control risk, IFC uses future contracts on Treasury Bonds and Treasury
notes to hedge against interest rate fluctuations and options on futures. The
use of these instruments provides for increased liquidity, lower transaction
costs and more effective short-term coverage than cash and mortgage-backed
securities. However, IFC is vulnerable to the basis risk that is inherent in
cross-hedging transactions. IFC uses the buying and selling of futures contracts
on Treasury bonds and Treasury notes when the market is vulnerable to day to day
corrections. Executing hedges with these instruments allows IFC to more
effectively hedge the risks of corrections or reverses in the market without
committing mandatory sales on mortgage-backed securities or cash. IFC utilizes
these instruments on a short-term basis to fine-tune its overall hedge position
at a lower cost. The Company's policy prior to the adoption of SFAS 133 as
discussed below has been to defer hedging gains or losses until the related
asset is sold. The hedge is then recognized and applied against the gain or loss
on the sale.
10. Forward Contracts and Options
In order to hedge against a change in market value of the loans it
acquires and originates, IFC sells mortgage-backed securities through forward
delivery contracts. Income or loss on these contracts is recorded at the time of
sale of the related contracts or loans as a component of the gain or loss on
sale of the loans. If any party to the contracts fails to completely perform,
IFC would be exposed to additional interest rate risk. IFC's principal hedging
activity consists of optional and mandatory commitments to deliver closed
mortgage loans to institutional investors, which do not require any collateral
deposits. Written options are stated at market value.
11. Servicing Income
Servicing income is reported as earned, principally on a cash basis when
the majority of the service process is completed.
12. 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 No. 140 provides the accounting and
reporting guidance for transfers and servicing of financial assets and
extinguishments of liabilities. Statement No. 140 will be the authoritative
accounting literature for: (1) securitization transactions involving financial
assets; (2) sales of financial assets (including loan participations); (3)
factoring transactions, (4) wash sales; (5) servicing assets and liabilities;
(6) collateralized borrowing arrangements; (7) securities lending transactions;
(8) repurchase agreements; and (9) extinguishment of liabilities. The accounting
provisions are effective for fiscal years beginning after March 31, 2001. The
reclassification and disclosure provisions are effective for fiscal years
beginning after December 31, 2000. The Company adopted the disclosure required
by SFAS No. 140 and has included all appropriate and necessary disclosures
required by SFAS No. 140 in its financial statements and footnotes. 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 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 recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If specific conditions are
met, a derivative may be specifically designated as (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) a hedge of the foreign currency exposure of
a net
F-41
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
As part of IFC's secondary marketing activities, IFC utilizes option and
futures contracts to hedge the value of loans originated for sale against
adverse changes in interest rates. At December 31, 2000, option contracts
amounted to approximately $10.0 million. IFC does not recognize unrealized gains
and losses on these contracts on the balance sheet or statement of operations.
Instead, when mortgage loans are securitized or sold, the deferred gains or
losses from these contracts are recognized in the income statement as a
component of net gains or losses on sales of loans. On January 1, 2001, IFC
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. 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 within
stockholders' equity, net of tax. Amounts are reclassified from other
comprehensive income to the income statement in the period the hedged cash flow
occurs. Derivative gains and losses not considered effective in hedging the
change in expected cash flows of the hedged item are recognized immediately in
the income statement. With the implementation of SFAS 133, IFC recorded pre-tax
transition amounts associated with establishing the fair values of the
derivative instruments and hedged items outstanding as of December 31, 2000. The
effect of pre-tax transition adjustments on the balance sheet and statement of
operations as of December 31, 2000 in compliance with SFAS 133 are as follows
(in thousands):
Balance Sheet Adjustments:
Other assets ............................................... $ 260
Other liabilities .......................................... 1,191
Other comprehensive earnings ............................... (914)
Statement of Operations Adjustment:
Net earnings ............................................... (17)
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 because
of impairment. EITF 99-20 is effective for the Company after March 31, 2001. The
adoption of EITF 99-20 is not expected to have a material impact on the
Company's consolidated balance sheet or results of operation.
Note B--Securities Available-for-Sale
During 2000, IFC wrote-off substantially all of its investment securities
available-for-sale which were securities secured by franchise mortgage
receivables.
Note C--Mortgage Loans Held-for-Sale
Mortgage loans purchased by IFC are fixed rate and adjustable rate
non-conforming mortgage loans secured by first and second liens on single-family
residential properties. During the years ended December 31, 2000 and 1999,
F-42
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IFC acquired $2.1 billion and $1.7 billion, respectively, of mortgage loans and
sold $1.9 billion of mortgage loans during 2000 and 1999. Of the mortgage loans
sold by IFC during 2000 and 1999, $454.0 million and $638.3 million,
respectively, were sold to IMH including premiums of $3.3 million and $877,000,
respectively. At December 31, 2000 and 1999, approximately 51% and 23%,
respectively, of mortgage loans held-for-sale were collateralized by properties
located in California.
Mortgage loans held-for-sale consisted of the following:
At December 31,
--------------------------
2000 1999
-------- --------
(in thousands)
Mortgage loans held-for-sale ........... $ 270,356 $66,041
Premium on loans ....................... 5,221 1,251
Deferred hedging gains (losses) ........ (7) 792
--------- -------
$ 275,570 $68,084
========= =======
Included in other liabilities at December 31, 2000 and 1999 is an
allowance for repurchases of $300,000 and $592,000, respectively.
Note D--Premises and Equipment
Premises and equipment consisted of the following:
At December 31,
--------------------------
2000 1999
-------- --------
(in thousands)
Premises and equipment ............ $ 8,774 $ 6,146
Less: Accumulated depreciation .... (3,737) (2,571)
------- -------
$ 5,037 $ 3,575
======= =======
Note E--Mortgage Servicing Rights
Activity for mortgage servicing rights was as follows:
For the year ended December 31,
-------------------------------
2000 1999
-------- --------
(in thousands)
Beginning Balance ...................... $15,621 $14,062
Net additions .......................... 496 7,968
Impairment of mortgage servicing rights -- (1,078)
Amortization ........................... (5,179) (5,331)
------- -------
$10,938 $15,621
======= =======
At December 31, 2000 and 1999, approximately $3.3 million and $6.2
million, respectively, of mortgage servicing rights relates to $1.4 billion and
$1.6 billion of mortgage loans sold to IMH during 2000 and 1999, respectively.
F-43
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Note F--Other Borrowings
IFC entered into reverse repurchase agreements with major brokerage firms
to fund the purchase of mortgage loans. IFC had an uncommitted warehouse line
agreement to obtain financing up to $200.0 million from a major investment bank.
The borrowings outstanding under this reverse repurchase agreement were paid off
by November 2000. The following tables sets forth information regarding reverse
repurchase agreements at December 31, 1999 (in thousands):
At December 31, 1999
-------------------------------------------------------
Reverse
Type of Repurchase Underlying Maturity
Collateral Liability Collateral Date
---------- --------- ---------- ----
Lender 1.............. Mortgages $181 $253 N/A
==== ====
Note G--Income Taxes
IFC's income taxes (benefit) are as follows:
For the year ended December 31,
--------------------------------
2000 1999 1998
------- ------ -------
(in thousands)
Current income taxes:
Federal ................................ $ 42 $ 248 $(3,673)
State .................................. 1,832 2 --
------- ------ -------
Total current income taxes .......... 1,874 250 (3,673)
------- ------ -------
Deferred income taxes:
Federal ................................ (960) 2,115 (3,533)
State .................................. (144) 862 (1,532)
------- ------ -------
Total deferred income taxes ......... (1,104) 2,977 (5,065)
------- ------ -------
Total income taxes (benefit) ..... $ 770 $3,227 $(8,738)
======= ====== =======
The Company's effective income taxes (benefit) differ from the amount
determined by applying the statutory Federal rate of 34% for the years ended
December 31, 2000, 1999, and 1998 is as follows:
2000 1999 1998
------- ------- -------
(in thousands)
Income taxes (benefit) at Federal tax rate ..... $ (343) $ 2,570 $(7,735)
State tax, net of Federal income tax (benefit).. (89) 570 (1,011)
California franchise tax accrual, net of
Federal income tax (benefit).................... 1,203 -- --
Other .......................................... (1) 87 8
------- ------- -------
$ 770 $3,227 $(8,738)
======= ====== =======
The tax effected cumulative temporary differences that give rise to
deferred tax assets and liabilities as of December 31, 2000 and 1999 are as
follows:
F-44
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2000 1999
------- -------
(in thousands)
Deferred tax assets:
- -------------------
Deferred revenue ................................... $ 2,041 $ 3,142
Forward commitments ................................ 8 14
Depreciation ....................................... 105 28
Salary accruals .................................... 328 169
Other accruals ..................................... 831 585
Loan mark-to-market ................................ 94 --
Non-accrual loans .................................. 100 91
Accrued interest ................................... 273 --
REMIC interest ..................................... 118 --
State franchise tax ................................ 620 --
Provision for repurchases .......................... 121 244
Contribution carryover ............................. 5 --
Minimum tax credit ................................. 233 292
Net operating loss ................................. 1,458 2,871
------- -------
Total gross deferred tax assets .............. 6,335 7,436
------- -------
Deferred tax liabilities:
- ------------------------
Mortgage servicing rights .......................... 4,269 6,168
Deferred gain ...................................... 174 449
Mark to market ..................................... -- 31
------- -------
Total gross deferred tax liabilities ......... 4,443 6,648
------- -------
Net deferred tax (asset) liability ........... $(1,892) $ (788)
======= =======
As of December 31, 2000, the Company has net operating loss carry-forwards
for federal and state income tax purposes of $3.4 million and $4.3 million,
which are available to offset future taxable income, if any, through 2018 and
2004, respectively. In addition, the Company has an alternative minimum tax
credit carry-forward of approximately $233,000 which is available to reduce
future federal regular income taxes, if any, over an indefinite period.
The Company believes that the deferred tax asset will more likely than not
be realized due to the reversal of the deferred tax liability and expected
future taxable income. In determining the possible future realization of
deferred tax assets, future taxable income from the following sources are taken
into account: (a) the reversal of taxable temporary differences, (b) future
operations exclusive of reversing temporary differences and (c) tax planning
strategies that, if necessary, would be implemented to accelerate taxable income
into years in which net operating losses might otherwise expire.
Note H--Disclosures About Fair Value of Financial Instruments
The estimated fair value amounts have been determined by IFC using
available market information and appropriate valuation methodologies, however,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts IFC could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-45
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
December 31, 2000 December 31, 1999
------------------------ ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ---------- -------- ----------
(in thousands)
Assets
------
Cash and cash equivalents ............. $ 8,281 $ 8,281 $ 8,805 $ 8,805
Securities available-for-sale ......... 266 266 1,887 1,887
Mortgage loans held-for-sale .......... 275,570 281,126 68,084 68,084
Due from affiliates ................... -- -- 4,307 4,307
Liabilities
-----------
Borrowings from IWLG .................. 266,994 266,994 66,125 66,125
Other borrowings ...................... -- -- 181 181
Due to affiliates ..................... 14,500 14,500 14,500 14,500
Loan commitments ...................... -- 20 -- 34
December 31, 2000
------------------------------------------
Notional Carrying Unrealized
Off-balance sheet items Amount Value Gain
----------------------- -------- -------- ----------
(in thousands)
Forward contracts ........... $29,000 $ -- $(44)
Futures contracts ........... -- -- --
Option contracts ............ 10,000 38 (89)
December 31, 1999
-----------------------------------------
Notional Carrying Unrealized
Off-balance sheet items Amount Value Gain
----------------------- -------- -------- ----------
(in thousands)
Forward contracts .............. $110,000 $-- $471
Futures contracts .............. 10,000 -- 54
Option contracts ............... 20,000 95 30
The fair value estimates as of December 31, 2000 and 1999 are based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented.
The following describes the methods and assumptions used by IFC in
estimating fair values:
Cash and Cash Equivalents
Fair value approximates carrying amounts as these instruments are demand
deposits and do not present unanticipated interest rate or credit concerns.
F-46
IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Securities Available-for-Sale and Securities Held-for-Trading
To determine the value of the securities, the Company estimates future
rates of prepayments, prepayment penalties to be received by the Company,
delinquencies, defaults and default loss severity and their impact on estimated
cash flows.
Mortgage Loans Held-for-Sale
Fair value of mortgage loans held-for-sale is estimated based on quoted
market prices from dealers and brokers for similar types of mortgage loans.
Borrowings from IWLG
Fair value approximates carrying amounts because of the short-term
maturity of the liabilities.
Other Borrowings
Fair value approximates carrying amounts because of the short-term
maturity of the liabilities.
Due From / To Affiliates
Fair value approximates carrying amounts because of the short-term
maturity of the liabilities and does not present unanticipated interest rate or
credit concerns.
Off-Balance Sheet Items
Fair value of loan commitments, including hedging positions, is determined
in the aggregate based on current investor yield requirements. Fair value of
forward, futures and options contracts is based on broker quotes.
Note I--Employee Benefit Plans
Profit Sharing and 401(k) Plan
IFC does not have its own 401(k) or profit sharing plan. As such,
employees of IFC participate in ICII's 401(k) plan. Under ICII's 401(k) plan,
employees of the Company may contribute up to 14% of their salaries. The Company
will match 50% of the first 4% of employee contributions. Additional Company
contributions may be made at the discretion of IFC. The Company recorded
approximately $384,000, $135,000 and $340,000 for matching and discretionary
contributions during 2000, 1999 and 1998, respectively.
Note J--Related Party Transactions
Related Party Cost Allocations
During 2000, 1999 and 1998, IMH and IWLG were allocated data processing,
executive and operations management, and accounting services that IFC incurred
during the normal course of business per the Company's submanagement agreement
with RAI Advisors Inc. (RAI). IFC, through RAI, charged IMH and IWLG for
management and operating services based upon usage which management believes was
reasonable. In May 1999, the submanagement agreement with RAI was terminated and
IFC entered into a new submanagement agreement with FIC Management, Inc.,
pursuant to which IFC provides services to ICH. Prior to the submanagement
agreement with RAI and after RAI was terminated, IMH and IWLG were allocated
data processing, executive and operations management,
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IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
and accounting services that IFC incurred during the normal course of business.
IFC charged IMH and IWLG for management and operating services based upon usage
which management believes was reasonable. Total cost allocations charged by IFC
to IMH and IWLG for the year ended December 31, 2000, 1999 and 1998 were $1.5
million, $1.2 million and $968,000, respectively.
In December 1997, IFC entered into a services agreement with Imperial
Credit Advisors, Inc. (ICAI), a subsidiary of ICII, under which ICAI provides
various services to IFC, including data processing, human resource
administration, general ledger accounts, check processing, remittance processing
and payment of accounts payable. ICAI charges fees for each of the services
based upon usage. The charge to IFC for coverage is based upon a pro rata
portion of costs ICAI incurred for its various policies. Total allocation of
expense for the years ended December 31, 2000, 1999, and 1998 was $215,000,
$180,000, and $178,000, respectively.
Lease Agreement: IMH and IFC entered into a premises operating sublease
agreement to rent approximately 74,000 square feet of office space in Newport
Beach, California, for a ten-year term, which expires in May 2008. IMH and IFC
pay monthly rental expenses and allocate the cost to subsidiaries and affiliated
companies on the basis of square footage occupied. The majority of occupancy
charges incurred were paid by IFC as most of the Company's employees are
employed by the Mortgage Operations. Total rental expense for the years ended
December 31, 2000, 1999, and 1998 were $1.6 million, $1.1 million, and $1.3
million, respectively, of which $1.5 million, $1.0 million and $1.2 million,
respectively, was paid by IFC.
Credit Arrangements - Current
IFC maintains a warehouse financing facility with IWLG. Advances under the
warehouse facility bears interest at Bank of America's prime rate. As of
December 31, 2000 and 1999, amounts outstanding on IFC's warehouse line with
IWLG were $219.1 million and $66.1 million, respectively. Interest expense
recorded by IFC related to warehouse line with IWLG for the years ended December
31, 2000, 1999, and 1998, was $26.5 million, $18.4 million, and $32.7 million,
respectively.
In January 1999, ILG obtained a warehouse financing facility with IWLG. At
January 1, 2000, ILG became a division of IFC. Advances under the warehouse
facility bears interest at prime. As of December 31, 2000 and 1999, amounts
outstanding on ILG's warehouse line with IWLG were $47.9 million and $1.2
million, respectively. Interest expense recorded by ILG warehouse lines with
IWLG for the years ended December 31, 2000 and 1999, was $1.5 million and
$293,000, respectively.
During the normal course of business, IFC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are reflected
as "Due from affiliates", while borrowings are reflected as "Due to affiliates"
on IFC's balance sheet. These short-term advances and borrowings bear interest
at a fixed rate of 8.00% per annum. Interest income recorded by IFC related to
short-term advances due from affiliates for the years ended December 31, 2000,
1999 and 1998 was $161,000, $463,000 and $1.7 million, respectively. Interest
expense recorded by IFC related to short-term advances due to affiliates for the
years ended December 31, 2000, 1999 and 1998 was $226,000, $977,000 and $2.0
million, respectively.
Transactions with IMH and IWLG
Purchase of Mortgage Loans: During the year ended December 31, 1999, IFC
purchased from IMH mortgage loans having a principal balance of $10.8 million
including premiums of $294,000.
Advances: During 1999, IFC was advanced $14.5 million in cash from IMH at
an interest rate of 9.50% per annum in exchange for an interest only note due
June 30, 2004, in anticipation of the initial capitalization of the Bank
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IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
and to fund the operations of IFC and other strategic opportunities deemed
appropriate by IFC. Interest expense recorded by IFC related to this note was
$1.4 million and $696,000, respectively.
Sale of Mortgage Loans: During the years ended December 31, 2000 and 1999,
IFC sold to IMH mortgage loans having a principal balance of $450.7 million and
$637.4 million, respectively. The loans were sold with premiums of $3.3 million
and $877,000, respectively. Servicing rights on all mortgages purchased by IMH
were retained by IFC.
Purchases and Sales of Mortgage-Backed Securities: During the year ended
December 31, 1999, IFC sold $22.0 million of mortgage-backed securities to IMH
for $18.3 million net of discounts of $3.7 million. During the year ended
December 31, 1999, IFC purchased $7.5 million of mortgage-backed securities from
IMH for $3.8 million net of discounts of $3.7 million. None were purchased
during 2000.
Purchase of Mortgage Loans: During the year ended December 31, 1999, IFC
acquired $5.4 million of mortgage loans from WSI, an affiliate of the Company.
James Walsh, Executive Vice President of WSI, is a Director of the Company. None
were purchased during 2000.
Note K--Commitments and Contingencies
Master Servicing
Properties securing mortgage loans in IFC's master servicing portfolio are
primarily located in California. As of December 31, 2000 and 1999, approximately
39% and 40%, respectively, of mortgage loans in IFC's master servicing portfolio
were located in California. As of December 31, 2000 and 1999, IFC was master
servicing loans totaling approximately $4.0 billion and $2.9 billion,
respectively, of which $3.9 billion and $2.8 billion, respectively, were
serviced for others. As of December 31, 2000 and 1999, IFC is the master
servicer for $2.6 billion and $1.4 billion, respectively, of loans
collateralizing fixed rate REMIC securities and $1.3 billion and $885.2 million,
respectively, of loans collateralizing CMOs. Related fiduciary funds are held in
trust for investors in non-interest bearing accounts. These funds are segregated
in special bank accounts and are held as deposits at Southern Pacific Bank.
Master Commitments
IFC establishes mortgage loan purchase commitments (Master Commitments)
with sellers that, subject to certain conditions, entitle the seller to sell and
obligate IFC to purchase a specified dollar amount of non-conforming mortgage
loans over a period generally ranging from six months to one year. The terms of
each Master Commitment specify whether a seller may sell loans to IFC on a
mandatory, best efforts or optional basis. Master commitments generally do not
obligate IFC to purchase loans at a specific price, but rather provide the
seller with a future outlet for the sale of its originated loans based on IFC's
quoted prices at the time of purchase. As of December 31, 2000 and 1999, IFC had
outstanding short term Master Commitments with 135 and 88 sellers, respectively,
to purchase mortgage loans in the aggregate principal amount of $2.1 billion and
$1.9 billion, respectively, over periods ranging from six months to one year, of
which $1.2 billion and $747.5 million, respectively, had been purchased or
committed to be purchased pursuant to rate locks. These rate-locks were made
pursuant to Master Commitments, bulk rate-locks and other negotiated rate-locks.
There is no exposure to credit loss in this type of commitment until the loans
are funded, and interest rate risk associated with the short-term commitments is
mitigated by the use of forward contracts to sell loans to investors.
Following the issuance of a specific rate-lock, IFC is subject to the risk
of interest rate fluctuations and enters into hedging transactions to diminish
such risk. Hedging transactions may include mandatory or optional forward sales
of mortgage loans or mortgage-backed securities, interest rate caps, floors and
swaps, mandatory forward sales, mandatory or optional sales of futures, and
other financial futures transactions. The nature and quantity of hedging
transactions are determined by the management of IFC based on various factors,
including market conditions and the
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IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
expected volume of mortgage loan purchases. Deferred hedging gains and losses
are presented on IFC's balance sheet in other assets. These deferred amounts are
recognized upon the sale or securitization of the related mortgage loans.
Deferred hedging gains and losses are presented on IFC's balance sheet in
mortgage loans held-for-sale. As of December 31, 2000 and 1999, IFC had $(7,000)
and $792,000, respectively, of deferred hedging gains (losses) included in
mortgage loans held-for-sale.
Forward Contracts
IFC sells mortgage-backed securities through forward delivery contracts
with major dealers in such securities. At December 31, 2000 and 1999, IFC had
$29.0 million and $110.0 million, respectively, in outstanding commitments to
sell mortgage loans through mortgage-backed securities. These commitments allow
IFC to enter into mandatory commitments when IFC notifies the investor of its
intent to exercise a portion of the forward delivery contracts. IFC was not
obligated under mandatory commitments to deliver loans to such investors at
December 31, 2000 and 1999. The credit risk of forward contracts relates to the
counterparties' ability to perform under the contract. IFC evaluates
counterparties based on their ability to perform prior to entering into any
agreements.
Futures Contracts
IFC sells futures contracts against five and ten-year Treasury notes with
major dealers in such securities. At December 31, 2000 and 1999, IFC had none
and $10.0 million, respectively, in outstanding commitments to sell Treasury
notes which expire within 90 days.
Options
In order to protect against changes in the value of mortgage loans held
for sale, IFC may sell call or buy put options on U.S. Treasury bonds and
mortgage-backed securities. IFC generally sells call or buys put options to
hedge against adverse movements of interest rates affecting the value of its
mortgage loans held for sale. The risk in writing a call option is that IFC
gives up the opportunity for profit if the market price of the mortgage loans
increases and the option is exercised. IFC also has the additional risk of not
being able to enter into a closing transaction if a liquid secondary market does
not exist. The risk of buying a put option is limited to the premium IFC paid
for the put option. IFC had written option contracts with an outstanding
principal balance of $10.0 million and $20.0 million at December 31, 2000 and
1999, respectively. IFC received approximately $38,000 and $95,000 in premiums
on these options at December 31, 2000 and 1999, respectively.
Sales of Loans and Servicing Rights
In the ordinary course of business, IFC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage loans
and the purchasers of servicing rights. Under certain circumstances, IFC is
required to repurchase mortgage loans if there has been a breach of
representations or warranties. In the opinion of management, the potential
exposure related to these representations and warranties will not have a
material adverse effect. At December 31, 2000 and 1999, included in other
liabilities are $300,000 and $592,000, respectively, in allowances for
repurchases related to possible off-balance sheet recourse and repurchase
agreement provisions.
Legal Proceedings
On August 4, 2000, a complaint captioned Michael P. and Shellie Gilmor v.
Preferred Credit Corporation and Impac Funding Corporation, et. al. was filed in
the Circuit Court of Clay County, Missouri, Case No. CV100-6512CC (a later
duplicate action was filed under the same caption in the same court). The
plaintiffs are contending a purported class action lawsuit that the defendants
violated Missouri's Second Loans Act and Merchandising Practices Act by charging
certain unauthorized origination fees, finders' fees, mortgage broker or broker
fees, or closing fees and costs
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IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
on second mortgage loans, and thereby committed conversion from the illegal
charge of interest or such costs or fees. IFC was a purchaser of second mortgage
loans originated by Preferred Credit Corporation which the plaintiffs contend
are included in this lawsuit. The plaintiffs are seeking damages that include a
permanent injunction enjoining the defendants its successors and any and all
persons acting in concert from, directly or indirectly, engaging in the wrongful
acts described therein. It also seeks disgorgement or restitution of all
improperly collected charges and the imposition of an equitable constructive
trust over such amounts for the benefit of the plaintiffs, the right to rescind
the loan transactions, and a right to offset any finance charges, closing costs,
points or other loan fees paid against the principal amounts due on the loans,
actual damages, punitive damages, reasonable attorney's fees, pre- and post-
judgment interest and costs and expenses. In connection with their claim of
conversion, the plaintiffs are seeking $50 million in punitive damages. Damages
are unspecified and the punitive damages in connection with the other claims are
not specified. The Company believes that it has meritorious defenses to such
claims and intends to defend these claims vigorously. Nevertheless, litigation
is uncertain, and the Company may not prevail in this suit.
Note L--Retained Interests in Securitizations
During 2000, IFC sold $1.3 billion of mortgage loans through the issuance
of REMIC securitizations and recognized a pre-tax gain of $19.7 million, which
is included in non-interest income. In all the securitizations, IFC sold to
third party investors all mortgage-backed securities and MSRs created from
REMICs at the time of securitization. However, IFC retained master servicing
fees on all securitizations by virtue of its responsibilities as master
servicer. IFC generally earns 0.03% per annum on the declining principal balance
of loans master serviced. The retained interest in master servicing fees is
included in mortgage servicing rights on the balance sheet. The value of master
servicing fees in subject to prepayment and interest rate risks on the
transferred financial assets. The fair value assigned to the retained interest
in master servicing fees at the date of securitization was $1.2 million.
The Company uses certain assumptions and estimates in determining the fair value
allocated to the retained interest at the time of initial sale and each
subsequent sale in accordance with SFAS 125. These assumptions and estimates
include projections for loan prepayment rates and discount rates commensurate
with the risks involved. These assumptions are reviewed periodically by
management. If these assumptions change, the related asset and income would be
affected. At December 31, 2000, the carrying amount and estimated fair value of
MSRs was $10.9 million and $12.8 million, respectively. As of December 31, 2000,
IFC had $275.6 million of mortgage loans held-for-sale that were available for
securitization.
Note M--Subsequent Events
On February 20, 2001, IFC purchased $5.0 million of IMH's Series C 10.5%
Cumulative Convertible Preferred Stock from LBP, Inc. (LBPI) at cost plus
accrued interest.
On March 27, 2001, IFC agreed in principle to purchase another $5.0
million of IMH's Series C 10.5% Cumulative Convertible Preferred Stock
from LBPI for $5.25 million plus accrued interest.
IFC completed a REMIC securitization in January of 2001 for $200.0
million.
Note N--Quarterly Financial Data (unaudited)
Selected quarterly financial data for 2000 follows (in thousands):
For the Three Months Ended,
-------------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
Net interest income (expense) ............... $ (460) $ (325) $ 93 $ (715)
Non-interest income ......................... 8,502 6,291 5,545 6,780
Non-interest expense (including income taxes) 8,872 5,822 7,144 5,653
Net earnings (loss) ......................... (830) 144 (1,506) 412
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IMPAC FUNDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Selected quarterly financial data for 1999 follows (in thousands):
For the Three Months Ended,
------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
Net interest income (expense) ............... $ (571) $ 392 $ 363 $ 88
Non-interest income ......................... 4,204 10,427 11,181 7,486
Non-interest expense (including income taxes) 4,873 7,771 10,121 6,473
Net earnings (loss) ......................... (1,240) 3,048 1,423 1,101
F-52