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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ________.
Commission File Number: 1-14100
IMPAC MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street, Newport Beach, California 92660
(Address of principal executive offices)
(949) 475-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $0.01 par value American Stock Exchange
Preferred Share Purchase Rights American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] 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, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $365.4 million, based on the
closing sales price of 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. There were
39,409,663 shares of Common Stock outstanding as of March 27, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in
connection with the 2002 Annual Meeting of Stockholders of the Registrant are
incorporated by reference into Part III.
IMPAC MORTGAGE HOLDINGS, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................ 1
ITEM 2. PROPERTIES.......................................................... 32
ITEM 3. LEGAL PROCEEDINGS................................................... 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................. 34
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................ 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 70
ITME 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................ 70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 71
ITEM 11. EXECUTIVE COMPENSATION.............................................. 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 72
SIGNATURES................................................................... 75
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PART I
Forward-Looking Information
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, some of which are
based on various assumptions and events that are beyond our control, may be
identified by reference to a future period or periods or by the use of
forward-looking terminology, such as "'may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, adverse economic conditions, changes in interest rates, changes
in the difference between short-term and long-term interest rates, changes in
prepayment rates, changes in assumptions regarding estimated fair value amounts,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties that could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in this Annual Report. We do not undertake, and
specifically disclaim any obligation, to publicly release the results of any
revisions that may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
ITEM 1. BUSINESS
Unless the context otherwise requires, the terms "Company," "we," "us,"
and "our" refer to Impac Mortgage Holdings, Inc., a Maryland corporation
incorporated in August 1995, and its subsidiaries, IMH Assets Corp., or "IMH
Assets," Impac Warehouse Lending Group, Inc., or "IWLG," and its affiliate Impac
Funding Corporation, or "IFC," together with its wholly-owned subsidiaries Impac
Secured Assets Corp. and Novelle Financial Services, Inc. References to Impac
Mortgage Holdings, Inc., or "IMH," are made to differentiate IMH, the publicly
traded company, as a separate entity from IMH Assets, IWLG and IFC.
General
We are a mortgage real estate investment trust, or "REIT." Together with
our subsidiaries and affiliate, IFC, we are a nationwide acquirer and originator
of non-conforming Alt-A mortgage loans. "Alt-A" mortgage loans consist primarily
of mortgage loans that are first lien mortgage loans made to borrowers whose
credit is generally within typical Federal National Mortgage Association, or
"Fannie Mae," and the Federal Home Loan Mortgage Corporation, or "Freddie Mac,"
guidelines, but that have loan characteristics that make them non-conforming
under those guidelines. For instance, the loans may have higher loan-to-value,
or "LTV," ratios than allowable or may have excluded certain documentation or
verifications. Therefore, in making our credit decisions, we are more reliant
upon the borrower's "credit score" and the adequacy of the underlying
collateral. We believe that non-conforming Alt-A mortgage loans provide an
attractive net earnings profile by producing higher yields without
commensurately higher credit losses than other types of mortgage loans. Since
1999, we have acquired and originated primarily non-conforming Alt-A mortgage
loans. We also provide warehouse and repurchase financing to originators of
mortgage loans. Our goal is to generate consistent reliable income for
distribution to our stockholders primarily from the earnings of our core
businesses.
We operate three core businesses:
. long-term investment operations;
. mortgage operations; and
. warehouse lending operations.
Our long-term investment operations invest primarily in non-conforming
Alt-A mortgages. This business primarily generates net interest income on its
mortgage loan and investment securities portfolios. Our investment in non-
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conforming Alt-A mortgage loans is financed with collateralized mortgage
obligations, or "CMO," financing, warehouse facilities and proceeds from the
sale of capital stock.
Our mortgage operations acquire, originate, sell and securitize primarily
non-conforming Alt-A mortgage loans. Our mortgage operations generate income by
securitizing and selling loans to permanent investors, including our long-term
investment operations. This business also earns revenues from fees associated
with mortgage servicing rights, master servicing agreements and interest income
earned on loans held for sale. Our mortgage operations primarily use warehouse
lines of credit to finance the acquisition and origination of mortgage loans.
Our warehouse lending operations provide short-term financing to mortgage
loan originators by funding mortgage loans from their closing date until they
are sold to pre-approved investors, including our long-term investment
operations. Our warehouse lending operations earn fees, as well as a spread,
from the difference between its cost of borrowings and the interest earned on
advances.
Generally, we seek to acquire non-conforming Alt-A mortgage loans funded
with facilities provided by our warehouse lending operations, which provides
synergies with our long-term investment operations and mortgage operations.
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 CMO
borrowings, invests primarily in non-conforming Alt-A mortgage loans and
mortgage-backed securities secured by or representing interests in mortgage
loans. Non-conforming Alt-A mortgage loans are residential mortgages that
generally do not qualify for purchase by government-sponsored agencies such as
Fannie Mae and Freddie Mac. Some of the principal differences between conforming
loans and non-conforming Alt-A mortgage loans are as follows:
. credit and income histories of the mortgagor;
. documentation required for approval of the mortgagor; and
. applicable loan-to-value ratios.
Income is primarily earned from net interest income received by the
long-term investment operations on mortgage loans and mortgage-backed acquired
and held in its investment portfolio. Mortgage loans and mortgage-backed
securities are financed with borrowings provided from CMOs, warehouse
facilities, which are referred to as reverse repurchase agreements, borrowings
secured by mortgage-backed securities and capital. The mortgage operations
supports the investment objectives of the long-term investment operations by
supplying mortgage loans at prices that are comparable to those available
through investment bankers and other third parties. We believe that purchasing
our loans acquired and originated by our mortgage operations affords us a
competitive advantage because of our historical understanding of the underlying
credit of these loans and the extensive information on the performance and
prepayment patterns of these types of loans.
Mortgage Loan Investment Portfolio
The long-term investment operations primarily invest in non-conforming
Alt-A mortgage loans that are acquired from our mortgage operations. We believe
that non-conforming Alt-A mortgage loans provide an attractive net earnings
profile by producing higher yields without commensurately higher credit risks
than other types of mortgage loans. We primarily acquire and originate
non-conforming "A" or "A-" credit quality loans, collectively, Alt-A loans. As
defined by us, A credit quality mortgage loans generally have a credit score of
640 or better and A- credit quality mortgage loans generally have a credit score
of between 600 and 639. We believe that by improving the overall credit quality
of our mortgage loan investment portfolio we can more consistently generate a
higher level of future cash flow and earnings. To a lesser extent, the long-term
investment operations acquire "B" and "C" credit quality mortgage loans,
collectively, "B/C loans." B/C loans generally have a credit score of 599 and
below.
Non-conforming Alt-A mortgages that we acquire for long-term investment
are primarily adjustable-rate mortgage loans, or "ARMs," and hybrid
adjustable-rate mortgage loans, or "hybrid ARMs." ARMs are generally fully
amortizing
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mortgage loans with maturity periods ranging from 15 to 30 years. The interest
rate on ARMs are typically tied to an index, such as six-month London Interbank
Offered Rate, or "LIBOR," plus a spread and adjust periodically. ARMs are
typically subject to lifetime interest rate caps and periodic interest rate and
payment caps. The interest rates on ARMs are typically lower than the average
comparable fixed-rate mortgage loan, or "FRM," initially, but may be higher than
average comparable FRMs over the life of the loan. Hybrid ARMs are generally
fully amortizing loans with maturity periods also ranging from 15 to 30 years.
Hybrid ARMs have an initial fixed-rate period, generally ranging from two to
five years, which subsequently adjust to ARMs.
Investments in Mortgage-Backed Securities
Since 1998, our investment strategy has been to only acquire or invest in
mortgage-backed securities that are secured by non-conforming Alt-A mortgage
loans underwritten and acquired and originated by our mortgage operations due to
our understanding of the underlying credit of these loans and their historical
performance. However, since 1999, we have acquired no mortgage-backed securities
from the mortgage operations and pursuant to our current investment policy, we
no longer acquire or invest in interest-only, principal-only or subordinate
mortgage-backed securities. Prior to 1998 and in connection with the issuance of
mortgage-backed securities by the mortgage operations in the form of real estate
mortgage investment conduits, or "REMICs," the long-term investment operations
acquired senior or subordinated securities as regular interests on a short-term
or long-term basis. Also, prior to 1998, the long-term investment operations
acquired subordinated mortgage-backed securities issued by third parties. These
securities or investments may subject us to credit, interest rate and 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
our yield on these securities and could result in failure to recoup our initial
investment.
Financing
We primarily finance our long-term investment portfolio as follows:
. issuance of CMOs;
. short-term borrowings under reverse repurchase agreements;
. borrowings secured by mortgage-backed securities; and
. proceeds from the sale of capital stock.
Collateralized Mortgage Obligations. As we accumulate mortgage loans in
our long-term investment portfolio, we may issue CMOs secured by the loans as a
means of financing our long-term investment operations. The decision to issue
CMOs is based on our 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, and the CMOs are treated as
debt, when for accounting purposes the CMO qualifies as a financing arrangement.
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 loan collateral. The long-term
investment operations earn net interest spread between interest income on
mortgage loans securing CMOs and interest and other expenses associated with CMO
financing. Net interest spreads may be directly impacted by levels of early
prepayment of 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 we issue CMOs for financing purposes, we seek an investment grade
rating for our 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 our capacity to raise
additional funds through short-term secured borrowings or additional CMOs, and
diminishes the potential expansion of our investment portfolio. As a result, our
objective is to pledge additional collateral for CMOs only in the
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amount required to obtain an investment grade rating for our CMOs by a
nationally recognized rating agency. Our total loss exposure is limited to the
equity invested in the CMOs at any point in time.
We believe that under prevailing market conditions the issuance of CMOs
that do not receive an investment grade rating would require payment of an
excessive yield to attract investors. Our CMOs typically are structured as
adjustable rate securities that are indexed to one-month LIBOR and fixed rate
securities with interest payable monthly. Interest rates on adjustable rate CMOs
can range from a low of 0.26% over one-month LIBOR on "AAA" credit rated bonds
to a high of 3.60% over one-month LIBOR on "BBB" credit rated bonds. As of
December 31, 2001, interest rates on adjustable rate CMOs ranged from 0.26% to
2.40% over one-month LIBOR, or 2.19% to 4.33%. Interest rates on fixed rate CMOs
range from 6.65% to 7.25% depending on the class of CMOs issued. Certain CMOs
are guaranteed to certificate holders by a mortgage loan insurer, which give the
CMOs the highest rating established by a nationally recognized rating agency.
Reverse Repurchase Agreements. Prior to the issuance of CMOs, we use
reverse repurchase agreements as short-term financing as we accumulate loans at
interest rates that are consistent with the our investment objectives. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing vehicle under which we effectively pledge our 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, we are required to repay the loan and
correspondingly we receive our collateral. Under reverse repurchase agreements,
we retain the beneficial ownership, including the right to distributions on the
collateral and the right to vote on matters as to which certificate holders
vote. Upon payment default, the lending party may liquidate the collateral. Our
borrowing agreements require us to pledge cash, additional mortgage loans or
additional securities backed by mortgage loans in the event the market value of
existing collateral declines. We may be required to sell assets to reduce our
borrowings to the extent that cash reserves are insufficient to cover such
deficiencies in collateral.
Borrowings Secured by Mortgage-Backed Securities. During 1999, we financed
a portion of our mortgage-backed securities portfolio with principal-only notes,
which had previously been financed with reverse repurchase agreements. The
principal-only notes represent senior or subordinated interests in trust funds
primarily consisting of a pool of mortgage loans. The principal-only notes
represent non-recourse obligations. As of December 31, 2001, the outstanding
balance of the principal-only notes was $17.1 million.
Hedging Activities
We follow a hedging program intended to limit our exposure to changes in
interest rates primarily associated with our CMO borrowings. Our primary
objective is to hedge our exposure to the variability in future cash flows
attributable to the variability of one-month LIBOR, which is the underlying
index of our CMO borrowings. We also monitor on an ongoing basis the prepayment
risks that arise in fluctuating interest rate environments. Our hedging program
is formulated with the intent to offset the potential adverse effects of
changing interest rates on CMO borrowings resulting from the following:
. interest rate adjustment limitations on mortgage loans due to
periodic and lifetime interest rate cap features; and
. mismatched interest rate adjustment periods of mortgage loans and
CMO borrowings.
We primarily acquire for long-term investment six-month LIBOR ARMs and
hybrid ARMs. Six-month LIBOR ARMs are generally subject to periodic and lifetime
interest rate caps. This means that the interest rate of each ARM is limited to
upwards or downwards movements on its periodic interest rate adjustment date,
generally six months, or over the life of the mortgage loan. Periodic caps limit
the maximum interest rate change, which can occur on any interest rate change
date to generally a maximum of 1% per semiannual adjustment. Also, each ARM has
a maximum lifetime interest rate cap. Generally, our borrowings are not subject
to the same periodic or lifetime interest rate limitations. During a period of
rapidly increasing or decreasing interest rates, our financing costs would
increase or decrease at a faster rate than the periodic interest rate
adjustments on our mortgage loans would allow, which could effect net interest
income. In addition, if market rates were to exceed the maximum interest rates
of our ARMs, our borrowing costs would increase while interest rates on ARMs
would remain constant.
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Our mortgage loan portfolio is also subject to basis risk as the basis, or
interest rate index, of our mortgage loans and our borrowings are tied to
different interest indices. For instance, six-month LIBOR ARMs are indexed to
six-month LIBOR while our CMO and reverse repurchase borrowings are indexed to
one-month LIBOR. Therefore, we receive interest income based on six-month LIBOR
plus a spread but pay interest expense based on one-month LIBOR plus a spread.
These indices typically move in unison but may vary in unequal amounts.
Our mortgage loan portfolio is subject to risk from the mismatched nature
of interest rate adjustment periods on our mortgage loans and interest rates on
the related borrowings. Our six-month LIBOR mortgage loans can adjust upwards or
downwards every six months, subject to periodic cap limitations, while
adjustable rate CMO borrowings adjust every month. Additionally, we have hybrid
ARMs which have an initial fixed interest rate period generally ranging from two
to three years, and to a lesser extent five years, which subsequently convert to
six-month LIBOR ARMs. Again, during a rapidly increasing or decreasing interest
rate environment, our financing costs would increase or decrease more rapidly
than would interest rates on our mortgage loans, which would remain fixed until
their next interest rate adjustment date.
To mitigate our exposure to the effect of changing interest rates on our
CMO borrowings, we acquire derivative instruments in the form of interest rate
cap agreements, or "caps," interest rate floor agreements, or "floors," and
interest rate swap agreements, or "swaps." We also simultaneously acquire caps
and floors, which are referred to as "collars." These derivative instruments are
referred to collectively as interest rate hedges, or "hedges." An interest rate
cap or floor is a contractual agreement for which we pay a fee. If prevailing
interest rates reach levels specified in the cap or floor agreement, we may
either receive or pay cash. An interest rate swap is generally a contractual
agreement that obligates one party to receive or make cash payments based on an
adjustable rate index and the other party to receive or make cash payments based
on a fixed rate. Swap agreements have the effect of fixing our borrowing costs
on a similar amount of swaps and, as a result, we can reduce the interest rate
variability of our borrowings. Our objective is to lock in a reliable stream of
cash flows when interest rates fall below or rise above certain levels. For
instance, when interest rates rise, our borrowing costs increase at greater
speeds than the underlying collateral supporting the borrowings. These
derivative instruments hedge the variability of forecasted cash flows
attributable to CMO borrowings and protect net interest income by providing cash
flows at certain triggers during changing interest rate environments. In all of
our hedging transactions, counterparties must have a AAA credit rating as
determined by various credit rating agencies.
On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, or "SFAS 133," "Accounting for Derivative Instruments and Hedging
Activities" accounting guidelines as established by the Financial Accounting
Standards Board, or "FASB." The purpose of SFAS 133 was to establish accounting
guidelines for financial assets that, prior to SFAS 133, did not appear on our
financial statements. With the implementation of SFAS 133, the fair market value
of hedges are reflected on our financial statements. On August 10, 2001, the
Derivatives Implementation Group, or "DIG," of FASB published DIG G20, which
further interpreted SFAS 133. On October 1, 2001, we adopted the provisions of
DIG G20.
Caps qualify as derivative instruments under provisions of SFAS 133. The
hedging instrument is the specific LIBOR cap that is hedging the LIBOR based CMO
borrowings. The nature of the risk being hedged is the variability of the cash
flows associated with the LIBOR borrowings. Prior to adoption of DIG G20, caps
were not effective hedges under SFAS 133 and, therefore, caps were marked to
market each reporting period with the entire change in market value being
recognized in non-interest expense on the statement of operations. However, upon
adoption of DIG G20, net income and accumulated other comprehensive income were
adjusted by the amount needed to reflect the cumulative impact of adopting the
provisions of DIG G20. Subsequent to the adoption of DIG G20, caps are
considered effective hedges and are marked to market each reporting period with
the entire change in market value being recognized in other comprehensive income
on the balance sheet.
Floors, swaps and collars qualify as cash flow hedges under the provisions
of SFAS 133. The hedging instrument is the specific LIBOR floor, swap or collar
that is hedging the LIBOR based CMO borrowings. The nature of the risk being
hedged is the variability of the cash flows associated with the LIBOR
borrowings. Prior to DIG G20, these derivatives were marked to market with the
entire change in the market value of the intrinsic component recognized in other
comprehensive income on the balance sheet each reporting period. The time value
component of these agreements were marked to market and recognized in
non-interest expense on the statement of operations. Subsequent to the adoption
of DIG G20, there derivatives are marked to market with the entire change in the
market value recognized in other comprehensive income on the balance sheet.
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Effectiveness of the hedges is measured by the fact that both the hedged
item, CMO borrowings, and the hedging instrument is based on one-month LIBOR. As
both instruments are tied to the same index, the hedge is expected to be highly
effective both at inception and on an ongoing basis. We assess the effectiveness
of the hedging instruments at the inception of the hedge and at each reporting
period. Based on the fact that, at inception, the critical terms of the hedges
and forecasted CMO borrowings are the same, we have concluded that the changes
in cash flows attributable to the risk being hedged are expected to be
completely offset by the hedging derivatives, subject to subsequent assessments
that the critical terms have not changed.
Mortgage Operations
The mortgage operations, conducted by IFC, Impac Lending Group, or "ILG," a
division of IFC, and Novelle Financial Services, Inc., or "NFS," a subsidiary of
IFC, primarily acquire and originate non-conforming Alt-A mortgage loans and B/C
loans from correspondents, mortgage brokers and retail customers. IFC is the
mortgage operations and includes correspondent business along with wholesale and
retail business from ILG. After acquiring and originating loans through its
production channels, the mortgage operations subsequently securitizes and sells
loans to permanent investors, including the long-term investment operations. All
mortgage loans acquired and originated by the mortgage operations are made
available for sale to the long-term investment operations at prices that are
substantially comparable to those available through third parties at the date of
their sale and subsequent transfer.
ILG began operations in January of 1999 and markets, underwrites,
processes and funds mortgage loans for both wholesale and retail customers. ILG
works directly with mortgage brokers to originate, underwrite and fund their
mortgage loans. Many of ILG's wholesale customers cannot conduct business with
the mortgage operations as correspondents because they do not meet the higher
net worth requirements. Through the retail division, ILG markets mortgage loans
directly to the public. ILG offers all of the same loan programs to its mortgage
brokers and retail customers, including Progressive Series and Progressive
Express, which are offered by IFC. NFS began operations in September of 2001 and
primarily originates B/C loans and subsequently sells its loans to third party
investors for cash gains.
We can compete effectively with other non-conforming Alt-A mortgage loan
conduits through our efficient loan purchasing process, flexible purchase
commitment options and competitive pricing and by designing non-conforming Alt-A
mortgage loans to suit the needs of our correspondents and mortgage brokers and
their borrowers, which is intended to provide sufficient credit quality to our
investors. As a non-conforming Alt-A mortgage conduit, the mortgage operations
acts as an intermediary between the originators of mortgage loans that do not
currently meet the guidelines for purchase by government-sponsored entities,
such as, Fannie Mae and Freddie Mac, that guarantee mortgage-backed securities
and permanent investors in mortgage-backed securities secured by or representing
an ownership interest in mortgage loans. The mortgage operations also acts as a
bulk purchaser of primarily non-conforming Alt-A mortgage loans.
We believe that non-conforming Alt-A mortgages provide an attractive net
earnings profile by producing higher yields without commensurately higher credit
risks when compared to other types of mortgage loans. In addition, based on our
experience in the mortgage banking industry and in the mortgage conduit
business, we believe we provide mortgage loan correspondents and mortgage
brokers with an expanded and competitively priced array of non-conforming Alt-A
mortgages, timely purchasing of loans, mandatory, best efforts and optional
rate-lock commitments, and flexible master commitments.
Marketing and Production
Marketing Strategy. Our principle strategy is to expand our market
position as a low-cost nationwide acquirer and originator of non-conforming
Alt-A mortgage loans, while continuing to emphasize an efficient centralized
operating structure. To help accomplish this, we have developed a web-based
automated underwriting system called Impac Direct Access System for Lending, or
"IDASL." IDASL substantially increases efficiencies for our customers and our
mortgage operations by significantly decreasing the processing time for a
mortgage loan, while improving employee productivity and maintaining superior
customer service. We seek to increase our mortgage loan acquisitions and
originations by providing innovative products, competitive pricing and superior
customer service. We also focus on expansion opportunities to attract
correspondent originators and mortgage brokers to our nationwide network in
order to increase mortgage loan acquisitions and originations in a controlled
manner. This allows us to shift the high fixed costs
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of interfacing with the homeowner to our correspondents and mortgage brokers.
This marketing strategy is designed to accomplish three objectives, which are as
follows:
. attract a geographically diverse group of both large and small
correspondent originators and mortgage brokers;
. establish relationships with correspondents and mortgage brokers
that facilitate their ability to offer a variety of loan products
designed by the mortgage operations; and
. purchase loans and securitize and sell them in the secondary market
or to the long-term investment operations.
As of March 13, 2002, we maintained relationships with 205 correspondent
sellers and 1,695 mortgage brokers. Correspondents originate and close mortgage
loans under our mortgage loan programs. Correspondents include mortgage bankers,
savings and loan associations and commercial banks.
In order to accomplish our production objectives, we design and offer loan
products that are attractive to potential non-conforming Alt-A borrowers and to
end-investors in non-conforming Alt-A loans and mortgage-backed securities. We
have historically emphasized and continue to emphasize flexibility in our
mortgage loan product mix as part of our strategy to attract and establish
long-term relationships with our correspondents and mortgage brokers. We also
maintain relationships with numerous end-investors so that we may develop
products that may be of interest to them as market conditions change, which in
turn may be offered through our correspondent network.
In response to the needs of our correspondents, and as part of our
strategy to facilitate the sale of our mortgage loans through the mortgage
operations, our marketing strategy offers efficient response time in the
purchase process, direct and frequent contact with our correspondents and
mortgage brokers through a trained sales force and flexible commitment programs.
Finally, due to the price sensitivity of most homebuyers, we are competitive in
pricing our products in order to attract sufficient numbers of mortgage loans.
Impac Direct Access System for Lending ("IDASL"). IDASL is not a lead
generator for mortgage brokers, but is an interactive internet system that
allows our customers to automatically underwrite loans, enabling our customers
to pre-qualify borrowers for various loan programs and receive automated loan
approval decisions. 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. IDASL improves employee production and
maintains superior customer service, which together leads to higher closing
ratios, improved profit margins and increased profitability at all levels of our
business operations. Most importantly, IDASL allows us to move closer to our
correspondents and mortgage brokers with minimal future capital investment while
maintaining centralization, a key factor in the success of our operating
strategy.
During 2001, average monthly volume of loans submitted through IDASL
increased by 127% over loan submissions during 2000. Loan submissions during
2001 averaged $794.9 million per month in total loan volume as compared to
$350.1 million per month during 2000. All of our correspondents submit loans
through the use of IDASL and all wholesale loans delivered by mortgage brokers
are directly underwritten through IDASL.
The Progressive Series Loan Program. The underwriting guidelines utilized
in the Progressive Series Loan Program, or "Progressive Series," as developed by
the mortgage operations, 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 LTV restrictions. Series I is
designed with credit history and income requirements typical of A credit quality
borrowers. In the event a borrower does not fit the series I criteria, the
borrower's mortgage loan may be placed into either series II, III, IV, V or VI,
depending on which series' mortgage loan parameters meets the borrower's unique
credit profile. Series II, 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, 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 underwritten with emphasis placed on the overall quality of the mortgage
loan. All Progressive Series borrowers are required to have debt service-to-
7
income ratios not to exceed 45% to 60% depending on the mortgage loan program,
which is calculated on the basis of monthly income, depending on the LTV of the
mortgage loan.
The Progressive Express Loan Program. We also developed an additional
program to the Progressive Series, called the Progressive Express Loan Program,
or "Progressive Express." The concept of Progressive Express is to underwrite
loans focusing on the borrower's credit score, 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 credit score that must be met by the borrower's primary wage earner and
does not allow for exceptions to the credit score requirement. The credit score
requirement is as follows:
. Progressive Express I - above 680;
. Progressive Express II - 620-679;
. Progressive Express III - 601-619;
. Progressive Express IV - 581-600;
. Progressive Express V - 551-580; and
. Progressive VI - 500-550.
Each Progressive Express program has different credit score requirements,
credit criteria, reserve requirements, and LTV restrictions. Progressive Express
I is designed for credit history and income requirements typical of A credit
quality borrowers. In the event a borrower does not fit the Progressive Express
I criteria, the borrower's mortgage loan may be 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 acquired and
originated by the mortgage operations are non-conforming Alt-A mortgage loans.
Currently, the maximum principal balance for a conforming loan is $300,700.
Loans that exceed such maximum principal balance are referred to as "jumbo
loans." Non-conforming Alt-A mortgage loans generally consist of jumbo loans or
other loans that are acquired and originated in accordance with underwriting or
product guidelines that differ from those applied by Fannie Mae and Freddie Mac.
Non-conforming Alt-A mortgage loans may involve greater risk as a result of
different underwriting and product guidelines. A portion of mortgage loans
purchased through the mortgage operations are B/C loans, which may entail
greater credit risks than non-conforming Alt-A mortgage loans. We generally do
not acquire or originate mortgage loans with principal balances above $750,000
for Alt-A credit quality loans and $500,000 for B/C loans.
Non-conforming Alt-A mortgage loans acquired and originated by the
mortgage operations pursuant to our underwriting programs typically differ from
those purchased pursuant to the guidelines established by Fannie Mae and Freddie
Mac. These differences are primarily with respect to documentation required for
approval of the borrower, credit and income histories of the borrower and
applicable loan-to-value ratios. 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 credit
losses.
Mortgage loans acquired by the mortgage operations are generally secured
by first liens and, to a lesser extent, second liens on single family
residential properties with either fixed or adjustable interest rates. FRMs have
a constant interest rate over the life of the loan, which is generally 15 or 30
years. The interest rate on ARMs are typically tied to an index, such as
six-month LIBOR plus a spread and adjust periodically. ARMs are typically
subject to lifetime interest rate caps and periodic interest rate and payment
caps. The interest rates on ARMs are typically lower than the average comparable
FRM initially, but may be higher than average comparable FRMs over the life of
the loan. Currently, we acquire or originate loans with the following most
common loan characteristics:
. FRMs that have original terms to maturity ranging from 15 to 30
years with two- to five-year prepayment penalty periods;
8
. ARMs that adjust based on six-month LIBOR with terms to maturity
ranging from 15 to 30 years with one- to five-year prepayment
penalty periods; and
. two- and three-year FRMs with terms to maturity ranging from 15 to
30 years that subsequently adjust to six-month LIBOR ARMs with one-
to five-year prepayment penalty periods.
Substantially all mortgage loans purchased by the mortgage operations
fully amortize over their remaining terms, however, we may purchase mortgage
loans with other interest rate and maturity characteristics.
The credit quality of loans acquired and originated by the mortgage
operations varies depending upon the specific program which loans are purchased.
For example, a principal credit risk inherent in ARMs is the potential "payment
shock" experienced by the borrower as rates rise, which could result in
increased delinquencies and credit losses. 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
borrower credit quality in order to compensate for the reduced level of lender
review with respect to the borrower's earnings history and capacity.
In general, B/C loans are residential mortgage loans made to borrowers
with lower credit ratings than borrowers of higher quality, Alt-A mortgage loans
and are normally subject to higher rates of loss and delinquency than other
non-conforming Alt-A mortgage loans acquired and originated by the mortgage
operations. As a result, B/C loans normally bear a higher rate of interest and
are typically subject to higher fees, including greater prepayment fees, than
non-conforming Alt-A mortgage 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 Alt-A mortgage loans. In addition, B/C loans are
generally subject to lower LTV ratios than Alt-A mortgage loans. Under the
mortgage operations' B/C loan programs, underwriting authority is delegated only
to correspondents who meet strict underwriting guidelines established by the
mortgage operations.
Our loan purchase activities are expected to continue to focus on those
regions of the country where higher volumes of non-conforming Alt-A mortgage
loans are originated, including California, Florida, Georgia, Texas, Illinois,
Colorado, Washington, New Jersey, New York, and Virginia. The highest
concentration of non-conforming Alt-A mortgage loans acquired and originated by
the mortgage operations relates to properties located in California and Florida
because of generally higher property values and mortgage loan balances. During
the years ended December 31, 2001 and 2000, mortgage loans secured by California
and Florida properties accounted for approximately 56% and 10%, respectively,
and 40% and 13%, respectively, of mortgage loan acquisitions and originations.
Of the $3.2 billion in mortgage loans acquired and originated during the
year ended December 31, 2001, $1.3 billion, or 41%, were acquired from our top
ten correspondents. During the year ended December 31, 2001, Express Lending
accounted for $530.8 million, or 17%, of mortgage loans acquired and originated
by the mortgage operations. No other sellers accounted for more than 10% of the
total mortgage loans acquired and originated by the mortgage operations during
the year ended December 31, 2001.
The following table presents our loan acquisitions and originations by
loan characteristic, excluding net premiums paid, for the periods shown (dollars
in thousands):
9
For the Year Ended, December 31,
--------------------------------------------
2001 2000
------------------- -------------------
Principle Principle
Balance % Balance %
---------- --- ---------- ---
By Loan Type:
Fixed rate ......................... $1,570,225 50 $1,539,741 74
Adjustable rate .................... 1,541,368 49 487,346 23
Second trust deed .................. 43,074 1 51,737 3
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
By Program:
Progressive Express ................ $2,256,523 72 $1,668,802 80
Progressive Series ................. 758,565 24 286,422 14
Other .............................. 139,579 4 123,600 6
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
By Production Channel:
Correspondent acquisitions ......... $2,383,018 75 $1,731,351 83
Wholesale and retail originations .. 683,059 22 276,190 13
Novelle Financial Services ......... 88,590 3 -- 0
Bulk acquisitions .................. -- 0 71,283 4
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
By Credit Quality:
Alt-A loans ........................ $3,046,298 97 $1,999,246 96
B/C loans .......................... 108,369 3 79,578 4
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
By Purpose:
Purchase ........................... $1,938,715 61 $1,675,893 81
Refinance .......................... 1,215,952 39 402,931 19
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
By Prepayment Penalty:
With prepayment penalty ............ $2,058,785 65 $1,104,154 53
Without prepayment penalty ......... 1,095,882 35 974,670 47
---------- --- ---------- ---
Total volume ........................... $3,154,667 100 $2,078,824 100
========== === ========== ===
High Loan-to-Value Loans. High loan-to-value loans, or "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 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. Since December 31, 1997, we did not
acquire or originate any 125 loans.
Purchase Commitment Process and Pricing
Master Commitments. As part of our marketing strategy, we have established
mortgage loan purchase commitments, or "Master Commitments," with sellers that,
subject to certain conditions, entitle the seller to sell and obligate us to
purchase a specified dollar amount of 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 us on a mandatory, best efforts or optional
rate-lock basis. Master Commitments do not generally obligate us to purchase
loans at a specific
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price, but rather provide the seller with a future outlet for the sale of its
originated loans based on our quoted prices at the time of purchase. Master
Commitments specify the types of mortgage loans the seller is entitled to sell
to us and generally range from $2 million to $250 million in aggregate committed
principal amount. The provisions of our 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. As of December 31, 2001, we had outstanding Master Commitments with 156
sellers to purchase mortgage loans in the aggregate principal amount of $2.5
billion over periods ranging from six months to one year, of which $1.3 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 us by executing individual, bulk or other rate-locks, or "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 obtain a Master Commitment on a mandatory delivery basis is often refunded
pro rata as the seller delivers loans pursuant to rate-locks. We retain any
remaining fee after the Master Commitment expires.
Bulk and Other Rate-Locks. We also acquire 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 the mortgage operations to purchase a specific group of loans,
generally ranging from $500,000 to $125 million in aggregate committed principal
amount, at set prices on specific dates. Bulk rate-locks enable us 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 our 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 our seller/servicer guide and
standard pricing provisions.
Mandatory, Best-Efforts and Optional Rate-Locks. Mandatory rate-locks
require the seller to deliver a specified quantity of loans to the mortgage
operations 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. We are 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 us 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 us a penalty. In contrast, mortgage loans
sold on a best-efforts basis must be delivered to us 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 us at a fixed price on a future date and require the
payment of up-front fees. We retain any up-front fees paid in connection with
optional rate-locks if the loans are not delivered.
Pricing. We set purchase prices at least once every business day for
mortgage loans we acquire based on prevailing market conditions. Different
prices are established for the various types of loans, rate-lock periods and
types of rate-locks, either mandatory or best-efforts. Our standard pricing is
based on the anticipated price we receive upon sale or securitization of 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 sale or securitization. The credit
enhancement cost component of pricing is established for individual mortgage
loans or pools of mortgage loans based upon the characteristics of 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. We periodically review the adjustments to reflect changes in the
costs of credit enhancement. Adjustments standard pricing may also be negotiated
on an individual basis under Master Commitments or bulk or individual rate-locks
with sellers.
Hedging Activities
The mortgage operations hedges interest rate risk and price volatility on
its mortgage loan portfolio during the time it commits to acquire or originate
mortgage loans at a pre-determined rate and the time it sells or securitizes
mortgage loans. To mitigate interest rate and price volatility risks, the
mortgage operations enters into forward commitments and
11
futures transactions. The nature and quantity of hedging transactions are
determined based on various factors, including market conditions and the
expected volume of mortgage loan acquisitions and originations.
The mortgage operations enter into forward commitments and futures
transactions to mitigate changes in the value of its "locked pipeline." The
locked pipeline are mortgage loans that have not yet been acquired, however, the
mortgage operations has committed to acquire the mortgage loans in the future at
pre-determined rates through rate-lock commitments. The mortgage operations
records the value of its locked pipeline as it qualifies as a derivative
instrument under the provisions of SFAS 133, however, it does not qualify for
hedging treatment. Therefore, the locked pipeline and the related value of
forward and future contracts is marked to market each reporting period along
with a corresponding entry to non-interest income or expense.
The mortgage operations also enter into forward commitments and futures
transactions to lock in the forecasted sale profitability of fixed rate loans
held for sale. The mortgage operations generally sells call or buys put options
on U.S. Treasury bonds and mortgage-backed securities to hedge against adverse
movements of interest rates affecting the value of forecasted cash flow on the
sale of mortgage loans held for sale. The risk in writing a call option is that
the mortgage operations gives up the opportunity for profit if the market price
of the mortgage loans increases and the option is exercised. The mortgage
operations 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 we pay for the put option. These hedges are
treated as cash flow hedges under the provisions of SFAS 133 to hedge forecasted
transactions with the entire change in market value of the hedges recorded
through other comprehensive income.
Purchase Guidelines, Underwriting Methods, Seller Eligibility and Quality
Control
Purchase Guidelines. We have developed comprehensive purchase guidelines
for the acquisition and origination of mortgage loans. Each loan underwritten
assesses the borrower's credit score, 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 our 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. We also perform a full legal documentation review prior to the
purchase of all loans. All mortgage loans acquired or originated under our loan
programs are underwritten either by our employees or by contracted mortgage
insurance companies or delegated sellers.
Underwriting Methods. Under all of our 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 may be validated by an enhanced desk or field
review, depending on the loan program. 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, we underwrite one-to-four family
mortgage loans with LTV ratios at origination of up to 100% 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 the mortgage operations at origination,
however, the combined LTV ratio generally may not exceed 100% of the property's
appraised value. Progressive Express has a minimum credit score that must be met
by the borrower's primary wage earner and does not allow for exceptions to the
credit score requirement. Each Progressive Express program has different credit
score requirements, credit criteria, reserve requirements, and LTV ratio
restrictions. Under the Progressive Express program, IFC underwrites single
family dwellings with LTV ratios at origination of up to 100% 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, one 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.
We use program parameters as guidelines only. On a case-by-case basis, we
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 the following:
12
. the prospective mortgagor has demonstrated an ability to save and
devote a greater portion of income to basic housing needs;
. 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;
. the prospective mortgagor has demonstrated an ability to maintain a
debt free position;
. 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
. the prospective mortgagor's net worth is substantial enough to
suggest that repayment of the loan is within the prospective
mortgagor's ability.
We do not publish an approved appraiser list for our 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 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 mortgage bankers,
savings and loan associations and commercial banks. Sellers are required to meet
certain regulatory, financial, insurance and performance requirements
established by us before they are eligible to participate in our mortgage loan
purchase program. Sellers must also submit to periodic reviews to ensure
continued compliance with these requirements. Our 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, or "HUD," approved mortgagee in good
standing or a financial institution that is insured by the Federal Deposit
Insurance Corporation, or "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 us against the seller in the
event of a breach of representations or warranties made by the seller with
respect to mortgage loans sold to us, which includes but is not limited to any
fraud or misrepresentation during the mortgage loan origination process or upon
early payment default on loans.
The underwriting program consists of three separate subprograms. The
mortgage operations 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 participate in non-delegated underwriting
programs.
We have 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 our underwriting guidelines as set forth in our
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 our loan committee. In connection with its
approval, the seller must represent and warrant that all mortgage loans sold to
us will comply with our 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. We periodically review
sellers participating in our delegated underwriting program and will retain
those sellers that we believe are productive.
Mortgage loans acquired under our non-delegated underwriting program are
either fully underwritten by our underwriting staff or involve the use of
contract underwriters. We have contracted with several national mortgage
insurance firms that conduct contract underwriting for mortgage loan
acquisitions. Under these contracts, we rely on the credit review and analysis
of the contract underwriter, as well as their own pre-purchase eligibility
review to ensure
13
that the loan meets program acceptance, their 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 our underwriting staff. In such cases, we
perform a full credit review and analysis to ensure compliance with our 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. We perform a post-closing quality control review on a
minimum of 25% of the mortgage loans acquired or originated under the
Progressive Series and Progressive Express programs for complete re-verification
of employment, income and liquid assets used to qualify for mortgage loans.
Reviews also include procedures intended to detect evidence of fraudulent
documentation and/or imprudent activity during the processing, funding,
servicing or selling of mortgage loans. Verification of occupancy and applicable
information is made by regular mail.
Securitization and Sale Process
General. We primarily utilize warehouse lines of credit and equity to
finance the acquisition and origination of mortgage loans from our customers.
When a sufficient volume of mortgage loans with similar characteristics has been
accumulated, generally $200 million to $350 million, we 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 of time between when we commit
to purchase mortgage loans and the time we sell or securitize 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 to issue REMICs or to sell 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 us to sell our entire interest
in the mortgage loans. As a result, in some cases, all of the capital that we
originally invested in the mortgage loans is re-deployed into our operations.
Each series of mortgage-backed securities is typically fully payable from
the underlying mortgage assets and the recourse of investors is limited to such
assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent we hold subordinated securities
that are secured by mortgage loans created from our REMICs, we generally bear
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.
In the case of a breach of the standard representations and warranties made by
us when mortgage loans are securitized, such securities are non-recourse to us.
Typically, we have 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 us are structured so that one or
more of the classes of securities are rated investment grade by at least one
nationally recognized rating agency. In contrast to agency certificates, or
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 us do not benefit from any such guarantee.
The ratings for our 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.
We 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, we take into consideration
the costs associated with each method. Ratings of mortgage-backed
14
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 enhancement, 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 non-conforming Alt-A
mortgage 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 mortgage loans secured by first liens. Thus, to the extent
that we retain any of the subordinated securities created in connection with
securitizations and losses with respect to pools of B/C loans or mortgage loans
secured by second liens are higher than expected, our future earnings could be
adversely affected.
Master Servicing and Servicing
Master Servicing
General. We generally perform the function of master servicer with respect
to mortgage loans we securitize. Our function as master servicer includes
collecting loan payments from other loan servicers 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, we monitor compliance with our
servicing guidelines and are required to perform, or to contract with a third
party to perform, all obligations not adequately performed by any loan servicer.
A master servicer typically employs loan servicers to carry out primary
servicing functions. In addition, we act as the master servicer for all loans
acquired by the long-term investment operations. With respect to IFC's function
as a master servicer for loans owned by IMH, IFC and IMH have entered into
agreements with 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, 2001, IFC
owned master servicing rights on $5.6 billion in principal balance of
outstanding mortgage loans and $4.0 billion as of December 31, 2000.
We offer our correspondents the right to retain servicing. In the case of
servicing retained mortgage loans, we will enter into servicing agreements with
the sellers of mortgage loans to service the mortgage loans they sell to us.
Each servicing agreement will require the servicer to service our mortgage loans
as required under our 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 us
with required accounting and reporting services for loans serviced. The servicer
will be required to follow collection procedures as are customary in the
industry. The servicer may, at their 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 us, unless receiving our consent.
The following table presents the amount of delinquent loans in our master
servicing portfolio (dollars in millions):
At December 31, 2001 At December 31, 2000
------------------------------ ------------------------------
% of
Principal Master Principal % of Master
Balance of Servicing Balance of Servicing
Loans Portfolio Loans Portfolio
------------ ------------ ------------ ------------
Loans delinquent for:
60-89 days .............................................. $ 72.5 1.30% $ 65.8 1.63%
90 days and over ........................................ 72.5 1.30 26.0 0.64
------------ ------------ ------------ ------------
Total 60 days and over .............................. 145.0 2.60 91.8 2.27
Foreclosures pending .................................... 132.6 2.38 57.1 0.56
Bankruptcies pending .................................... 22.1 0.40 22.5 1.41
------------ ------------ ------------ ------------
Total delinquencies, foreclosures and bankruptcies .. $ 299.7 5.38% $ 171.4 4.24%
============ ============ ============ ============
15
Master Servicing Fees. We expect to retain master servicing fees on loans
sold. Master servicing fees receivable have characteristics similar to
"interest-only" securities. Accordingly, master servicing fees receivable 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 us 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 the mortgage operations on loans
acquired "servicing released" or correspondents who sold loans to the mortgage
operations with "servicing retained." We intend to hold the master servicing
fees receivable for investment. Accordingly, if we had to sell these
receivables, the value received may or may not be at or above the values at
which we carried them on our balance sheet. In determining present value of
future cash flows, we will use a market discount rate. Prepayment assumptions
will be based on recent evaluations of the actual prepayments of our servicing
portfolio or on market prepayment rates on new portfolios and the interest rate
environment at the time the master servicing fees receivable are created. We
believe 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.
Servicing
General. We subcontract all of our servicing obligations to independent
third parties pursuant to sub-servicing agreements. We believe that the
selection of third-party sub-servicers or the sale of servicing rights is more
effective than establishing a servicing department within our mortgage
operations. However, part of our responsibility is to continually monitor the
performance of the sub-servicers or servicers through monthly performance
reviews and regular site visits. Depending on sub-servicer reviews, we may in
the future rely on our internal collection group to take an ever more active
role to assist the sub-servicer in the servicing of 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 our
guidelines. Servicing fees range from 0.25% per annum for FRMs to 0.50% per
annum for B/C loans and 0.375% for ARMs on the declining principal balances of
loans serviced. Additionally, we earn interest, or "float," on principal and
interest payments we receive from our borrowers until those payments are
remitted to the investors in those loans. As of December 31, 2001, IFC owned
servicing rights on $1.8 billion in principal balance of outstanding mortgage
loans as compared to $2.4 billion as of December 31, 2000.
We generally acquire all of our loans on a servicing released basis. To
the extent IFC finances the acquisition of loans with its warehouse line with
IWLG, IFC pledges 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 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 presents information regarding our servicing portfolio
for the periods shown (dollars in millions, except average loan size):
Year ended Year ended
December 31, 2001 December 31, 2000
----------------- -----------------
Beginning servicing portfolio .... $ 2,428.9 $ 2,393.4
Add: Loan acquisitions ........... 3,154.7 2,078.8
Less: Servicing transferred ...... (2,866.1) (1,266.0)
Principal paydowns (1) ..... (963.1) (777.3)
------------- -------------
Ending servicing portfolio ....... $ 1,754.4 $ 2,428.9
============= =============
Number of loans serviced ......... 14,570 20,644
Average loan size ................ $ 120,000 $ 118,000
Weighted average coupon .......... 8.80% 9.88%
- -----------
(1) Includes normal principal runoff and principal prepayments.
16
Mortgage Servicing Rights. When we acquire and originate loans which
include the associated servicing rights, the allocated price paid for the
servicing rights is reflected on our financial statements as mortgage servicing
rights, or "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 our MSRs. Mortgage loans with higher interest rates are more
likely to result in prepayments.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provide reverse
repurchase financing to affiliated companies and to approved mortgage banks,
some of which are correspondents of the mortgage operations, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors. The warehouse lending operations relies
mainly on the sale or liquidation of the mortgage loans as a source of
repayment. Any claim of the warehouse lending operations as a secured lender in
a bankruptcy proceeding may be subject to adjustment and delay. Borrowings under
the warehouse facilities are presented on our balance sheets as finance
receivables. The mortgage operations outstanding warehouse line balances on the
warehouse lending operations 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 the
warehouse lending operations 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.
Regulation
Rules and regulations applicable to the mortgage operations prohibit
discrimination. We establish underwriting guidelines that include provisions for
inspections and appraisals, require credit reports on prospective borrowers and
determine maximum loan amounts. Mortgage loan acquisition and origination
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
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 and/or
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 applicable regulations,
policies and procedures. Additionally, there are various state and local laws
and regulations affecting the mortgage operations. The mortgage operations may
also be subject to applicable state usury statutes.
Competition
In purchasing and acquiring non-conforming Alt-A mortgage loans and
issuing securities backed by such loans, we compete 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. Consolidation in the mortgage banking industry may also reduce the
number of current sellers available to the mortgage operations, reducing our
potential customer base and resulting in the mortgage operations acquiring and
originating a larger percentage of mortgage loans from a smaller number of
sellers. Changes of this nature could negatively impact our businesses.
17
Mortgage-backed securities issued by the mortgage operations and the
long-term investment operations face competition from other investment
opportunities available to prospective investors. We face competition in our
mortgage operations and warehouse lending operations from other financial
institutions, including but not limited to banks and investment banks. Our
competitors include IndyMac Bancorp, Inc., Greenpoint Financial Corporation,
Residential Funding Corporation, Aurora Loan Services, Inc. and Credit Suisse
First Boston Corporation. Competition can take place on various levels,
including convenience in obtaining a mortgage loan, service, marketing,
origination channels and pricing. We depend primarily on correspondents and
independent mortgage brokers for the acquisition and origination of our mortgage
loans. These independent mortgage brokers deal with multiple lenders for each
prospective borrower. We compete with these lenders for the independent brokers'
business on the basis of price, service, loan fees, costs and other factors. Our
competitors also seek to establish relationships with such brokers, who are not
obligated by contract or otherwise to do business with us. Many of the
institutions with which we compete in our mortgage operations and warehouse
lending operations have significantly greater financial resources than we have.
However, we can compete effectively with other non-conforming Alt-A mortgage
loan conduits through our efficient loan purchasing process, flexible purchase
commitment options and competitive pricing and by designing non-conforming Alt-A
mortgage loans that suit the needs of our correspondents and their borrowers,
which is intended to provide sufficient credit quality to our investors.
Employees
As of December 31, 2001, we had 361 full- and part-time employees and
temporary and contract employees. The mortgage operations employed 339 full- and
part-time employees and temporary and contract employees, of which 80 were
employed by Novelle Financial Services, and the warehouse lending operations
employed 22 full- and part-time employees and temporary and contract employees.
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. Management believes that relations with its
employees are good. The Company is not a party to any collective bargaining
agreement.
Future Revisions in Policies and Strategies
Our board of directors has established our investment and operating
policies and strategies. Our core operations involve the acquisition and
origination of mortgage loans and their subsequent securitization and sale. We
also act as a warehouse lender providing financing facilities to mortgage loan
originators. These operations, their associated policies and strategies, are
further described herein. Our board of directors has delegated our
asset/liability management to the Asset/Liability Committee, or "ALCO," which
reports to the board of directors at least quarterly. See a further discussion
of ALCO in "Management's Discussion of Financial Condition and Results of
Operations." Any of our policies, strategies and activities may be modified or
waived by our board of directors without stockholder consent. Developments in
the market which affect the policies and strategies mentioned herein or which
change our assessment of the market may cause our board of directors to revise
our policies and financing strategies.
We have elected to qualify as a REIT for tax purposes. We have adopted
certain compliance guidelines, which include restrictions on the acquisition,
holding and sale of assets. Prior to the acquisition of any asset, we determine
whether the asset meets REIT requirements. Substantially all of the assets that
we have acquired and will acquire for investment are expected to qualify as REIT
assets. This requirement limits our investment strategies.
IMH primarily invests in non-conforming Alt-A mortgage loans that are
acquired from our mortgage operations. To a lesser extent, IMH acquires B/C
loans. Our mortgage operations generally do not acquire or originate mortgage
loans with principal balances above $750,000 for non-conforming Alt-A credit
quality loans and $500,000 for B/C loans. IMH does not have a limit on the
proportion of its assets that may be invested in each type of mortgage loan. Our
goal is that mortgage-backed securities do not consist more than 10% of our
total assets.
We closely monitor our acquisition and investment in mortgage assets and
the sources of our income, including income from our hedging strategies, to
ensure at all times that we maintain our qualifications as a REIT. We have
developed certain accounting systems and testing procedures to facilitate our
ongoing compliance with the REIT provisions of the Internal Revenue Code. No
changes in our investment policies and operating strategies, including credit
criteria for mortgage asset investments, may be made without the approval of our
board of directors.
We may at times and on terms that our board of directors deems
appropriate:
18
. Issue senior securities - In December 1999, we issued $30.0 million
of Series B 10.5% Convertible Preferred Stock. In February 2000, all
shares of Series B Convertible Preferred Stock were exchanged for
Series C 10.5% Cumulative Convertible 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. In August 2001, the shares of Series C Preferred
Stock were converted to common stock;
. Borrow money - We finance our operations in large part through the
issuance of CMOs, short-term borrowings under reverse repurchase
agreements and borrowings secured by mortgage-backed securities. In
addition, in March 1999, certain of our stockholders exchanged
1,359,507 shares of our common stock held by them, at an average
price of $5.70 per share, for our 11% senior subordinated debentures
due February 15, 2004. The debentures bore interest at 11% per annum
and mature on February 15, 2004. Commencing on February 15, 2001,
the debentures became redeemable at our option, and, in June 2001,
we redeemed all of the debentures at a price equal to the face
amount of the debentures plus accrued and unpaid interest;
. Make loans to other persons;
. Invest in securities of other issuers for the purpose of exercising
control;
. Engage in the purchase and sale of investments - In connection with
the issuance of mortgage-backed securities by our mortgage
operations in the form of REMICs, our long-term investment
operations may retain senior or subordinated securities on a
short-term or long-term basis;
. Offer securities in exchange for property - In March 1999, certain
of our stockholders exchanged 1,359,507 shares of their common stock
at an average price of $5.70 per share for 11% senior subordinated
debentures; and,
. 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. During 2000, we repurchased 991,000 shares for $2.3
million and did not repurchase any shares during 2001.
We may also underwrite the securities of other issuers, although we have
not done so in the past and have no present intention to do so. Historically, we
have and intend to continue to distribute annual reports to our stockholders,
including financial statements certified by independent auditors, describing our
current business and strategy.
RISK FACTORS
A prolonged economic downturn or recession would likely result in a reduction of
our mortgage origination activity which would adversely affect our financial
results
Although we have not operated during a period of prolonged general
economic downturn or a recession, these events have historically resulted in a
reduction in mortgage origination activity and an increase in the rate of
mortgage defaults. An economic downturn or a recession may have a significant
adverse impact on our operations and our financial condition. For example, a
reduction in new mortgages will adversely affect our ability to expand our
mortgage portfolio, our principal means of increasing our earnings. In addition,
a decline in new mortgage activity will likely result in reduced activity for
our warehouse lending operations and our long-term investment operations. In the
case of our mortgage operations, a decline in mortgage activity may result in
fewer loans that meet its criteria for purchase and securitization, thus
resulting in a reduction in interest income and fees and gain on sale of loans.
We may also experience larger than previously reported losses on our investment
portfolio due to a higher level of defaults on our mortgage loans.
If we are unable to generate sufficient liquidity we will be unable to conduct
our operations as planned
19
If we cannot generate sufficient liquidity, we will be unable to continue
to grow our operations, grow our asset base, maintain our current hedging policy
and pay dividends. We have traditionally derived our liquidity from four primary
sources:
. financing facilities provided to us by others to acquire or
originate mortgage assets;
. whole loan sales and securitizations of acquired or originated
mortgage loans;
. our issuance of equity and debt securities; and
. earnings from operations.
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. Our
ability to meet our long-term liquidity requirements is subject to the renewal
of our credit and repurchase facilities and/or obtaining other sources of
financing, including additional debt or equity from time to time. Any decision
by our lenders and/or investors to make additional funds available to us in the
future will depend upon a number of factors, such as our compliance with the
terms of our existing credit arrangements, our financial performance, industry
and market trends in our various businesses, the lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. If we cannot
raise cash by selling debt or 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 hence, our ability to pay dividends.
Any significant margin calls under our financing facilities would adversely
affect our liquidity and may adversely affect our financial results
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:
. the lack of financing to acquire these securitization interests;
. the widening of returns expected by institutional investors on
securitization interests over the prevailing Treasury rate; and
. market uncertainty.
As a result, many mortgage loan originators, including our company, were
unable to access the securitization market on favorable terms. This 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 short-term borrowings. However, the large
amount 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 were 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. Our current financing facilities continue to be
short-term borrowings and we expect this to continue. 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.
We incurred losses for fiscal years 1997, 1998 and 2000 and may incur losses in
the future
20
During the year ended December 31, 2000, we experienced a net loss of $54.2
million. The net loss incurred during 2000 included non-cash accounting charges
of $68.9 million. The non-cash accounting charges were the result of write-downs
of non-performing investment securities secured by mortgages and additional
increases in allowance for loan losses to provide for the deteriorating
performance of collateral supporting specific investment securities. During the
year ended December 31, 1998, we experienced a net loss of $5.9 million. During
the year ended December 31, 1997, we experienced a net loss of $16.0 million.
The net loss incurred during 1997 included a non-cash accounting charge of $44.4
million that was the result of expenses related to the termination and buyout of
our management agreement with Imperial Credit Advisors, Inc. We cannot be
certain that revenues will remain at current levels or improve or that we will
be profitable in the future, which could prevent us from effectuating our
business strategy.
If we are unable to complete securitizations, we would face a liquidity shortage
which would adversely affect our operating results
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, if available at all, may be on unfavorable terms. In addition,
delays in closing securitizations of our mortgage loans increase our risk by
exposing our company to credit and interest rate risks for this extended period
of time. Furthermore, gains on sales from our securitizations represent a
significant portion of our earnings. Several factors could affect our ability to
complete securitizations of our mortgages, including:
. conditions in the securities and secondary markets;
. credit quality of the mortgage loans acquired or originated through
our mortgage operations;
. volume of our mortgage loan acquisitions and originations;
. our ability to obtain credit enhancements; and
. lack of investors purchasing higher risk components of the
securities.
If we are unable to profitably securitize a significant number of our
mortgage loans in a particular financial reporting period, then we could
experience 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 substantial losses. We cannot assure you that we will
be able to continue to profitably securitize or sell our loans on a whole loan
basis, or at all.
The market for first loss risk securities, which are securities that take
the first loss when mortgages are not paid by the borrowers, is generally
limited. In connection with our REMIC securitizations, we endeavor to sell all
securities subjecting us to a first loss risk. If we cannot sell these
securities, we may be required to hold them for an extended period, subjecting
us to a first loss risk.
Our borrowings and use of substantial leverage may cause losses
Our use of collateralized mortgage obligations may expose our operations
to credit losses
To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans in the
form of CMOs. Historically, we have borrowed approximately 98% of the market
value of such investments. There are no limitations on the amount we may borrow,
other than the aggregate value of the underlying mortgage loans. We currently
use CMOs as financing vehicles to increase our leverage, since mortgage loans
held for CMO collateral are retained for investment rather than sold in a
secondary market transaction. Retaining mortgage loans as collateral for
collateralized mortgage obligations exposes our operations to greater credit
losses than does the use of other securitization techniques that are treated as
sales because as the equity holder in the security, we are allocated losses from
the liquidation of defaulted loans first prior to any other security holder.
Although our liability under a collateralized mortgage obligation is limited to
the collateral used to create the collateralized mortgage
21
obligation, we generally are required to make a cash equity investment to fund
collateral in excess of the amount of the securities issued in order to obtain
the appropriate credit ratings for the securities being sold, and therefore
obtain the lowest interest rate available, on the CMOs. If we experience greater
credit losses than expected on the pool of loans subject to the CMO, the value
of our equity investment will decrease and we would have to increase the
allowance for loan losses on our financial statements.
The cost of our borrowings may exceed the return on our 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, and we did not implement any applicable financial hedges.
If we default under our financing facilities, we may be forced to
liquidate the collateral at prices less than the amount borrowed
If we default under our financing facilities, our lenders could force us
to liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we could 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 or nothing
at all.
If we are forced to liquidate we may have few unpledged assets for
distribution to unsecured creditors
We have pledged a substantial portion of our assets to secure the
repayment of collateralized mortgage obligations issued in securitizations, our
financing facilities and our 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 was liquidated.
Interest rate fluctuations may adversely affect our operating results
Our operations, as a portfolio manager, a mortgage loan acquirer and
originator or a 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 or
originated by our mortgage operations and decrease the demand for warehouse
financing provided by our warehouse lending operations. 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 fixed and adjustable rate
mortgage loans at lower long-term fixed interest rates. Increased loan
prepayments could lead to a reduction in the number of loans in our investment
portfolio and reduce our net interest income.
We are subject to the risk of rising mortgage interest rates between the
time we commit to purchase mortgages at a fixed price through the issuance of
individual, bulk or other rate-locks 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 been sold or securitized or have not been properly hedged.
As a result, we may record a smaller gain, or even a loss, upon the sale or
securitization of those mortgage loans.
We may experience losses if our liabilities re-price at different rates than our
assets
Our principal source of revenue is net interest income or net interest
spread from our investment portfolio, 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
22
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.
Additionally, the rates paid on our borrowings and the rates received on
our assets may be based upon different indices, for instance, 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.
An increase in our adjustable interest rate borrowings may decrease the net
interest margin on our adjustable rate mortgages
As of December 31 2001, 67% of the mortgage loans held by our long-term
investment operations were hybrid ARMs. These are mortgages with fixed interest
rates for an initial period of time, which then become mortgages with variable
or adjustable interest rates or begin bearing interest based upon short-term
interest rate indices, or ARMs. We generally fund mortgages with variable
interest rate borrowings that are indexed to short-term interest rates and
adjust periodically at various intervals. To the extent that there is an
increase in the interest rate index used to determine our adjustable interest
rate borrowings and that increase is not offset by various interest rate hedges
that we have in place at any given time, our net interest margin will decrease
or become negative. As of December 31, 2001, hybrid ARMs in our long-term
investment portfolio had a weighted average months to interest rate adjustment
of 15 months.
We may suffer a net interest loss on our adjustable rate mortgages that
have interest rate caps if the interest rates on our related borrowings
increase
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. As a result, 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.
Increased levels of prepayments of our adjustable rate mortgage loans may
accelerate our expenses and decrease our net income
Mortgage prepayments generally increase on our adjustable rate mortgages
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, conditions in the
housing and financial markets and general economic conditions. Most of the
adjustable rate mortgages that we acquire are originated within three months of
the time we purchased the mortgages and generally bear initial interest rates
that 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 without payment
of any prepay penalty, we would not have received interest at the fully-indexed
rate during such period and we must expense the unamortized premium that was
paid for the loan at the time of the prepayment. 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.
Prepayments on fixed rate mortgages will also decrease our net interest income
when interest rates are declining. As of December 31, 2001, 54% of mortgage
loans held by our long-term investment operations had active prepayment penalty
features.
We generally 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 the
mortgage loans that we acquire at a premium prepay faster than originally
projected, generally accepted accounting principles require us to write down the
remaining capitalized premium amounts at a faster speed than was originally
projected, which would decrease our current net interest income.
The value of our portfolio of mortgage-backed securities may be adversely
affected by unforeseen events
Our prior investments in residual interest and subordinated debt
investments exposed us to greater risks as compared to senior
mortgage-backed securities
23
Prior to 1998, we invested in mortgage-backed securities known as
interest-only, principal-only, residual interest or other subordinated
securities. 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. 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 attributed to the subordinated securities.
If the projected value of our portfolio of residual interest and
subordinated debt instruments is incorrect we would have to write down the
value of these 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 any value
or that we could recoup our initial investment.
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 the mortgages in 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
mortgage-backed securities, which might then equate to a reduction of the value
of the security.
We undertake additional risks by acquiring and investing in mortgage loans
We may be subject to losses on mortgage loans for which we do not 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. Generally, we
require mortgage insurance on any loan with a loan-to-value ratio greater than
80%. 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. 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 and any insurance proceeds available to us
through the mortgage insurer. In addition, since defaulted mortgage loans, which
under our financing arrangements are mortgage loans that are generally 60 to 90
days delinquent in payments, may be considered ineligible collateral under our
borrowing arrangements, we could bear the risk of being required to own these
loans without the use of borrowed funds until they are ultimately liquidated or
possibly sold at a loss.
Non-conforming Alt-A mortgage loans expose us to greater credit risks
We are an acquirer and originator of non-conforming Alt-A residential
mortgage loans. These 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
Alt-A mortgage loans. Credit risks associated with non-conforming Alt-A mortgage
loans are greater than conforming mortgage loans. The interest rates we charge
on non-conforming Alt-A loans are often higher than those charged for conforming
loans in order to compensate for the higher risk and lower liquidity. Lower
levels of liquidity may cause us to hold loans or other mortgage-related assets
supported by these loans that we otherwise would not hold. 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.
Lending to non-conforming Alt-A borrowers may expose us to a higher risk
of delinquencies, foreclosures and losses
As a lender of non-conforming Alt-A mortgage loans, our market includes
borrowers who may be unable to obtain mortgage financing from conventional
mortgage sources. Loans made to such non-conforming Alt-A borrowers
24
generally entail a higher risk of delinquency and higher losses than loans made
to borrowers who utilize conventional mortgage sources. Delinquency,
foreclosures and losses generally increase during economic slowdowns or
recessions. The actual risk of delinquencies, foreclosures and losses on loans
made to non-conforming Alt-A borrowers could be higher under adverse economic
conditions than those currently experienced in the mortgage lending industry in
general. Further, any material decline in real estate values increases the
loan-to-value ratios of loans previously made by us, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Any sustained period of increased delinquencies, foreclosures
or losses after the loans are sold could adversely affect the pricing of our
future loan sales and our ability to sell or securitize our loans in the future.
In the past, certain of these factors have caused revenues and net income of
many participants in the mortgage industry, including us, to fluctuate from
quarter to quarter.
Our use of second mortgages exposes us to greater credit risks
Our security interest in the property securing second mortgages is
subordinated to the interest of the first mortgage holder and the second
mortgages have a higher cumulative loan-to-value ratio. 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, our second mortgage
loan will not be repaid. As of December 31, 2001, 1% of mortgage loans held by
our long-term investment operations were second mortgages.
The geographic concentration of our mortgage loans increases our exposure
to risks in those areas
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. For
instance, certain parts of California have experienced an economic downturn in
past years and California and Florida have suffered the effects of certain
natural hazards. During 2001, mortgage loans secured by California and Florida
properties accounted for approximately 56% and 10%, respectively, of mortgage
loan acquisitions and originations. As of December 31, 2001, 63% and 5% of
mortgage loans held by our long-term investment operations were secured by
properties located in California and Florida, respectively.
Representations and warranties made by us in our loan sales and securitizations
may subject us to liability
In connection with our securitizations, we transfer loans acquired or
originated by us into a trust in exchange for cash and, in the case of a CMO,
residual certificates issued by the trust. The trustee will have recourse to us
with respect to the breach of the standard representations and warranties made
by us at the time such loans are transferred. While we generally have recourse
to our customers for any such breaches, there can be no assurance of our
customers' abilities to honor their respective obligations. Also, we engage in
bulk whole loan sales pursuant to agreements that generally provide for recourse
by the purchaser against us in the event of a breach of one of our
representations or warranties, any fraud or misrepresentation during the
mortgage loan origination process, or upon early default on such mortgage loan.
We generally limit the potential remedies of such purchasers to the potential
remedies we receive from the people from whom we acquired or originated the
mortgage loans. However, in some cases, the remedies available to a purchaser of
mortgage loans from us may be broader than those available to us against the
sellers of the loans and should a purchaser enforce its remedies against us, we
may not always be able to enforce whatever remedies we have against our
customers.
In the ordinary course of our business, we are subject to claims made
against us by borrowers and trustees in our securitizations arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of our employees, officers and agents (including our appraisers),
incomplete documentation and our failure to comply with various laws and
regulations applicable to our business. Any claims asserted against us may
result in legal expenses or liabilities that could have a material adverse
effect on our results of operations or financial condition.
We face conflicts of interests based on the ownership of the voting stock of
Impac Funding Corporation by certain officers and directors of Impac Mortgage
Holdings, Inc.
We are subject to conflicts of interest arising from our relationship with
Impac Mortgage Holdings, Inc., our long-term investment operations, Impac
Funding Corporation, our mortgage operations, and their officers and directors.
Our
25
long-term investment operations acquires non-confirming Alt-A mortgage loans
from our mortgage operations. Impac Mortgage Holdings, Inc. owns all of the
preferred stock, and 99% of the economic interest in, Impac Funding Corporation.
Joseph R. Tomkinson, our Chairman and Chief Executive Officer, William S.
Ashmore, our Chief Operating Officer, President and a director, and Richard J.
Johnson, our Executive Vice President and Chief Financial Officer, are holders
of all of the outstanding voting stock of, and 1% of the economic interest in,
Impac Funding Corporation. They have the right to elect all directors of Impac
Funding Corporation and the ability to control the outcome of all matters for
which the consent of the holders of the common stock of Impac Funding
Corporation is required. Messer's Tomkinson, Ashmore and Johnson are also the
sole directors of Impac Funding Corporation. Decisions made by these officers at
one company may be at conflict with and have an adverse affect on the operations
of the other.
A substantial interruption in our use of IDASL may adversely affect our level of
mortgage loan acquisitions and originations
We utilize the Internet in our business principally for the implementation
of our automated loan origination program, IDASL, which stands for Impac Direct
Access System for Lending. IDASL is not a lead generator for mortgage brokers.
IDASL allows our customers to pre-qualify borrowers for various loan programs
based on criteria requested from the borrower and renders an automated
underwriting decision by issuing an approval of the mortgage loan or a referral
for further review or additional information. All of our correspondents submit
loans through IDASL and all wholesale loans delivered by mortgage brokers are
directly underwritten through IDASL. IDASL may be interrupted if the Internet
experiences periods of poor performance, if our computer systems or the systems
of our third-party service providers contain defects, or if customers are
reluctant to use or have inadequate connectivity to the Internet. Increased
government regulation of the Internet could also adversely affect our use of the
Internet in unanticipated ways and discourage our customers from using our
services. If our ability to use the Internet in providing our services is
impaired, our ability to originate or acquire loans on an automated basis could
be delayed or reduced. Any substantial delay and reduction in our mortgage loan
acquisitions and originations will reduce our net earnings for the applicable
period.
We are subject to risks of operational failure that are beyond our control
Substantially all of our operations are located in Newport Beach,
California. Our systems and operations are vulnerable to damage and interruption
from fire, flood, telecommunications failure, break-ins, earthquake and similar
events. Our operations may also be interrupted by power disruptions, including
rolling black-outs implemented in California due to the state's continuing acute
power shortage. We do not maintain alternative power sources. Furthermore, our
security mechanisms may be inadequate to prevent security breaches to our
computer systems, including from computer viruses, electronic break-ins and
similar disruptions. Such security breaches or operational failures could expose
us to liability, impair our operations, result in losses, and harm our
reputation.
Our reliance on third-party software for the implementation of IDASL exposes us
to risks
We have a licensing agreement with a third-party vendor for the use of
hardware and software for IDASL. All of our correspondents are submitting loans
through IDASL and all of our wholesale loans delivered by mortgage brokers are
directly underwritten through the use of IDASL. The termination or impairment of
this license could result in delays and reductions in the acquisition and
origination of mortgage loans until equivalent hardware and software could be
licensed and integrated, if at all possible, which may harm our business. In
addition, we would be harmed if the provider from whom we license software
ceases to deliver and support reliable products, enhance their current products
or respond to emerging industry standards. If the hardware or software provided
by our vendor fails for any reason, and the back-up hardware and software is not
implemented in a timely manner, it may also delay and reduce those mortgage loan
acquisitions and originations done through IDASL. The third-party hardware and
software also may not continue to be available to us on commercially reasonable
terms or at all. Any substantial delay and reduction in our mortgage loan
acquisitions and originations will reduce our net earnings for the applicable
period.
Competition for mortgage loans is intense and may adversely affect our
operations
We compete in acquiring and originating non-conforming Alt-A mortgage
loans and issuing mortgage-backed securities with:
26
. 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.
Some of our competitors are larger and have greater resources than we do.
Consolidation in the mortgage banking industry may adversely affect us by
reducing the number of current customers of 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 may
reduce our profit margins, or increase the cost to acquire these types of loans.
We are exposed to potential credit losses 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.
We may not pay dividends to stockholders
REIT provisions of the Internal Revenue Code generally require that we
distribute to our stockholders at least 90% of all of our taxable income. These
provisions restrict our ability to retain earnings and thereby renew capital for
our business activities. We may decide at a future date to terminate our REIT
status, which would cause us to be taxed at the corporate level, and cease
paying regular dividends.
In addition, for any year that we do not generate taxable income, we are
not required to declare and pay dividends to maintain our REIT status. For
instance, due to losses incurred in 2000, we did not declare any dividends from
September 2000 until September 2001.
To date, a portion of our taxable income and cash flow has been
attributable to our receipt of dividend distributions from Impac Funding
Corporation, our mortgage operations affiliate. Impac Funding Corporation is not
a REIT and is not, therefore, subject to the above-described REIT distribution
requirements. Because Impac Funding Corporation is seeking to retain earnings to
fund the future growth of our mortgage operations business, its board may decide
that Impac Funding Corporation should cease making dividend distributions in the
future. This would materially reduce the amount of our taxable income and in
turn, would reduce the amount we would be required to distribute as dividends.
If we fail to maintain our REIT status, we may be subject to taxation as a
regular corporation
27
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.
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 may 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. Failure to qualify as a
REIT could adversely affect the value of our common stock.
Delayed mortgage loan sales or securitization closings could have a material
adverse affect on our operations
A delay in closing a particular mortgage loan sale or securitization would
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.
Our share prices have been and may continue to be volatile
Historically, the market price of our common stock has been volatile.
During 2001, our stock reached a high of $9.35 per share on December 24th and a
low of $2.85 per share on January 2nd. The market price of our common stock is
likely to continue to be highly volatile and could be significantly affected by
factors including:
. the amount of dividends paid;
. availability of liquidity in the securitization market;
. loan sale pricing;
. calls by warehouse lenders or changes in warehouse lending rates;
. unanticipated fluctuations in our operating results;
. 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 stock 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 and we may experience difficulty in
raising capital.
If actual prepayments or defaults with respect to mortgage loans serviced occurs
more quickly than originally assumed, the value of our mortgage servicing rights
would be subject to downward adjustment
28
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 may be adversely 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. While we believe that we have properly hedging our interest rate
risk, the accounting for such hedging activities may not, and in some cases do
not, qualify for hedge accounting as established by FASB under the provisions of
SFAS 133. The effect of our hedging strategy may result in some volatility in
its quarterly earnings as interest rates go up or down. While we believe we
properly hedge interest rate risk, we cannot assure you that our hedging
transactions will offset the risk of adverse changes in net interest margins.
A reduction in the demand for residential mortgage loans and our non-conforming
Alt-A 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 Alt-A
mortgage loans, which is affected by:
. interest rates;
. national economic conditions;
. residential property values; and
. regulatory and tax developments.
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 Alt-A mortgage loans;
and
. an insufficient volume of loans to generate securitizations which
thereby causes 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
the loans in which we retain servicing rights, including those in our
securitizations. 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
29
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 or master 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 affected.
Potential characterization of distributions or gain on sale as unrelated
business taxable income to tax-exempt investors
If (1) all or a portion of our assets are subject to the rules relating to
taxable mortgage pools, (2) we are a "pension-held REIT," (3) a tax-exempt
stockholder has incurred debt to purchase or hold our common stock, or (4) the
residual REMIC interests we buy generate "excess inclusion income," then a
portion of the distributions to and, in the case of a stockholder described in
(3), gains 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 and the pool of mortgage loans or
mortgage backed securities to which such borrowings relate may be classified as
a taxable mortgage pool under the Internal Revenue Code. If any part of our
company were to be treated as a taxable mortgage pool, then our REIT status
would not be impaired, but a portion of the taxable income we recognize may,
under regulations to be issued by the Treasury Department, be characterized as
"excess inclusion" income and allocated among our stockholders to the extent of
and generally in proportion to the distributions we make to each stockholder.
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.
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
30
able to conduct our business as described. Our business will be materially and
adversely affected if we fail to qualify for this exemption.
If we conduct future offerings the market price of our securities may be
adversely affected
We may elect 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.
Sales of additional common stock may adversely affect its market price
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. Based on a Schedule 13G filed with
the SEC, as of February 15, 2002 HBK Master Fund L.P. beneficially owned
3,843,888 shares of our common stock, all of which are registered with the SEC
for sale to the public pursuant to an effective registration statement. The sale
of a large amount of shares by HBK Master Fund L.P., or the perception that such
sales may occur, could adversely affect the market price for our common stock or
other outstanding securities.
We are a defendant in purported class actions and may not prevail in these
matters
We are a defendant in seven purported class actions pending in six
different state courts; two cases in the United States District Court for the
Western District of Tennessee and one in the United States District Court for
the Northern District of Illinois. All, except for the Illinois matter, allege
generally that the loan originator improperly charged fees in violation of
various state lending or consumer protection laws in connection with mortgage
loans that we acquired. The Illinois matter alleges that we charged fees for
services that constitute the unauthorized practice of law and that were not
proper charges. Although the suits are not identical, they generally seek
unspecified compensatory damages, punitive damages, pre- and post-judgment
interest, costs and expenses and rescission of the loans, as well as a return of
any improperly collected fees. These actions are in the early stages of
litigation and, accordingly, it is difficult to predict the outcome of these
matters. We believe we have meritorious defenses to the actions and intend to
defend against them vigorously; however, an adverse judgment in any of these
matters could have a material adverse effect on us.
We may be subject to possible adverse consequences as a result of limits on
ownership of our shares
Our charter limits ownership of our capital stock by any single
stockholder to 9.5% of our outstanding shares unless waived by the board of
directors. Our board of directors may increase the 9.5% ownership limit. In
addition, to the extent consistent with the REIT provisions of the Internal
Revenue Code, our board of directors may, pursuant to our articles of
incorporation, waive the 9.5% ownership limit for a stockholder or purchaser of
our stock. In order to waive the 9.5% ownership limit our board of directors
must require the stockholder requesting the waiver to provide certain
representations to the Company to ensure compliance with the REIT provisions of
the Internal Revenue Code. 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 more than 50% (by value) 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;
31
. 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;
. may redeem the shares; and
. will consider the shares held in trust for the benefit of a
charitable beneficiary as designated by us.
The trustee shall sell the shares held in trust and the owner of the
excess shares will be entitled to the lesser of:
(a) the price paid by the owner;
(b) if the owner did not purchase for the excess shares, the closing
price for the shares on the national securities exchange on which
the company is listed; or
(c) the price received by the trustee from the sale of the shares.
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
Our primary executive and administrative offices are located in Newport
Beach, California. We have a 10-year lease expiring May 2008 to use
approximately 74,000 square feet of office space at a rate of $156,000 per
month. We believe that these facilities will adequately provide for our future
growth needs.
ITEM 3. LEGAL PROCEEDINGS
On September 1, 2000, a complaint captioned Michael P. and Shellie Gilmor
v. Preferred Credit Corporation and Impac Funding Corporation, et. al. was filed
in the United States District Court for the Western District of Missouri, Case
No. 4-00-00795-SOW, as a purported class action lawsuit alleging that the
defendants violated Missouri's Second Loans Act and Merchandising Practices Act.
In July 2001, the Missouri complaint was amended to include IMH and other
IMH-related entities. The plaintiffs in the Gilmor lawsuit are also alleging a
defendant class action. On July 26, 2001, a complaint captioned James and Jill
Baker, et al. v. Century Financial Group, Inc., et al., was filed in the Circuit
Court of Clay County, Missouri, Case No. CV100-4294CC as a purported class
action. This lawsuit alleges violations of Missouri's Second Loans Act and
Merchandising Practices Act. The plaintiffs in the Baker action also allege a
defendant class action. The Company has filed a Motion to Dismiss this action
and the Plaintiffs have agreed not to oppose the motion and to allow the matter
to be dismissed without prejudice. On August 2, 2001, a complaint captioned
Frazier, et al. v. Preferred Credit, et al., was filed in the Circuit Court of
Tennessee for the Thirtieth Judicial District at Memphis, Case No. CT004762-01.
This is also stated as a purported class action lawsuit alleging violations of
Tennessee's usury statute and Consumer Protection Act. On August 8, 2001, a
complaint captioned Mattie L. Street v. PSB Lending Corp., et al., was filed in
the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis,
Case No. CT004888-01. The Street action is also stated as a purported class
action lawsuit alleging violations of Tennessee's usury statute and Consumer
Protection Act. On October 2, 2001, a complaint captioned Deborah Searcy,
Shirley Walker, et. al. vs. Impac Funding Corporation, Impac Mortgage Holdings,
Inc. et. al. was filed in the Wayne County Circuit Court, State of Michigan, as
a purported class action lawsuit alleging that the defendants violated
Michigan's Secondary Mortgage Loan Act, Credit Reform Act and Consumer
Protection Act. Except for the Searcy
32
case in Michigan, all of the foregoing cases have been removed to federal court.
On October 10, 2001 a complaint captioned Hayes v Impac Funding Corporation, et
al was filed in the Circuit Court of Vanderburgh County, Indiana as Case No.
82C01-0110-CP580. This is stated as a purported class action lawsuit alleging a
violation of the Indiana Uniform Consumer Credit Code when the loans were
originated. On November 30, 2001 a complaint captioned Garry Lee Skinner and
Judy Cooper Skinner, et al. v. Preferred Credit, et al. was filed in the
Superior Court of Durham County, North Carolina as Case No. 1CV-05596. This is
stated as a purported class action alleging a violation of the North Carolina
Interest Statutes and Unfair and Deceptive Trade Practices Act when the
secondary mortgage loans were originated by the defendants.
All of the purported class action lawsuits are similar in nature in that
they allege that the mortgage loan originators violated the respective state's
statutes by charging excessive fees and costs when making second mortgage loans
on residential real estate. The complaints allege that IFC was a purchaser, and
is a holder, along with other IMH-related entities, of second mortgage loans
originated by other lenders. The plaintiffs in the lawsuits are seeking damages
that include disgorgement, restitution, rescission, actual damages, statutory
damages, exemplary damages, and punitive damages. Damages are unspecified in
each of the complaints.
Additionally, on November 26, 2001, a complaint captioned Sumner N. Doxie
v. Impac Funding Corp. was filed in the Circuit Court of Cook County, Illinois
as Case No. 01L015153, which was subsequently removed to the United States
District Court for the Northern District of Illinois, Eastern Division, as Case
No. 01C9835. This is stated as a purported class action alleging consumer fraud
in connection with the defendant's practice of charging appraisal review fees on
its mortgage loans, and alleging violations of the Illinois Consumer Fraud Act
for the unauthorized practice of law by performing document preparation services
for a fee in connection with its mortgage loans. The plaintiffs in the lawsuit
are seeking damages that include punitive damages, compensatory damages,
attorney's fees, and litigation costs.
The Company believes that it has meritorious defenses to the above claims
and intends to defend these claims vigorously. Nevertheless, litigation is
uncertain, and the Company may not prevail in the lawsuits and can express no
opinion as to its ultimate outcome.
The Company is a party to litigation and claims, which are normal in the
course of its operations. While the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a material adverse effect on the Company.
ITEM 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 2001.
33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange, or "AMEX,"
under the symbol IMH. The following table summarizes the high, low and closing
sales prices for our common stock as reported by the AMEX for the periods
indicated:
2001 2000
--------------------------- ---------------------------
High Low Close High Low Close
----- ----- ----- ----- ----- -----
First Quarter ....... $4.49 $2.85 $4.19 $4.25 $3.13 $3.50
Second Quarter ...... 7.25 3.89 7.15 4.38 3.06 4.31
Third Quarter ....... 8.15 5.76 7.44 4.19 2.38 2.70
Fourth Quarter ...... 9.35 6.85 8.50 3.20 1.83 2.95
On March 27, 2002, the last reported sale price of our common stock on the
AMEX was $9.40 per share. As of March 27, 2002, there were 579 holders of
record, including holders who are nominees for an undetermined number of
beneficial owners, of our common stock.
Dividend Reinvestment and Stock Purchase Plan. In July 1999, we suspended
our dividend reinvestment and stock purchase plan, or "DRSPP" or "Plan." Prior
to suspension of the Plan, stockholders could acquire additional shares of our
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 us.
Stockholders could also purchase additional shares of our 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. We are exploring the possibility of amending the existing
Plan or adopting a new plan.
Share Repurchase Program. During 2000, our board of directors authorized
us to repurchase up to $3.0 million of our common stock, $.01 par value, in open
market purchases from time to time at the discretion of management; the timing
and extent of the repurchases were dependent on market conditions. During 2001,
we did not repurchase any shares of our common stock. During 2000, we
repurchased 991,000 shares of our common stock for $2.3 million. The acquired
shares were canceled.
Stockholder Rights Plan. On October 7, 1998, our 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 our 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 our common stock (unless the offer to acquire the shares is approved by
a majority of the board of directors who are not affiliates of the acquirer).
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 we are acquired in a merger or other transaction after a person has acquired
10 percent or more our 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 our 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
our common stock having a market value of twice such price. Following the
acquisition by a person of 10 percent or more of our 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 our 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 of our
stockholders to realize the long-term value of their investment in our Company.
34
Distributions
To maintain our qualification as a REIT, we intend to make annual
distributions to stockholders equal to or greater than 90% of our taxable income
in accordance with the Internal Revenue Code, which may not necessarily equal
net earnings as calculated in accordance with generally accepted accounting
principles, or "GAAP." Our dividend policy is subject to revision at the
discretion of the board of directors. All distributions in excess of those
required to maintain our REIT status will be made at the discretion of the board
of directors and will depend on our taxable income, financial condition and
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 us as
capital gain or may constitute a tax-free return of capital. We annually furnish
to each of our stockholders a statement setting forth distributions paid during
the preceding year and their characterization as ordinary income, capital gain
or return of capital. Of the total dividends paid during 2001 and 2000, none and
approximately $13.7 million, respectively, represented a tax-free return of
capital.
The following table presents our dividends paid or declared for the
periods indicated:
Per Share
Stockholder Dividend
Period Covered Record Date Amount
- ------------------------------------------------------------------------- --------------------- ---------------
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
October 1, 2001 and
Quarter ended September 30, 2001........................................ November 1, 2001 (1) $0.25
Quarter ended December 31, 2001......................................... January 2, 2002 (2) $0.44
- -----------
(1) Impac Mortgage Holdings, Inc. declared a dividend of $0.25 per share for
the third quarter of 2001, payable in two installments: the first
installment of $0.13 was paid on October 15, 2001 to stockholders of
record on October 1, 2001, and the second installment of $0.12 per share
was paid on November 15, 2001 to stockholders of record on November 1,
2001.
(2) Consisted of a regular cash dividend of $0.37 per share and a special cash
dividend of $0.07 per share.
We did not declare a dividend for the quarters ended December 31, 2000,
March 31, 2001, and June 30, 2001.
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, 2001, and the
consolidated balance sheet data for the five-year period ended December 31, 2001
were derived from the consolidated financial statements of Impac Mortgage
Holdings, Inc. and Impac Funding Corporation and were audited by KPMG LLP, or
"KPMG," independent auditors, whose reports appear on pages F-2 and F-36,
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."
35
IMPAC MORTGAGE HOLDINGS, INC.
Statements of Operations
(dollar amounts in thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Net interest income:
Total interest income ............................... $ 156,615 $ 147,079 $ 119,458 $ 163,658 $ 109,533
Total interest expense .............................. 112,012 124,096 89,795 121,695 76,577
--------- --------- --------- --------- ---------
Net interest income ............................... 44,603 22,983 29,663 41,963 32,956
Provision for loan losses ...................... 16,813 18,839 5,547 4,361 6,843
--------- --------- --------- --------- ---------
Net interest income after loan loss provision ..... 27,790 4,144 24,116 37,602 26,113
Non-interest income:
Equity in net earnings (loss) of IFC ................ 10,912 (1,762) 4,292 (13,876) 8,316
Equity in net loss of ICH ........................... -- -- -- (998) (239)
Loss on sale of mortgage loans ...................... -- -- -- (3,111) --
Gain on sale of securities .......................... 312 -- 93 427 648
Other income ........................................ 6,155 4,275 2,517 4,019 1,601
--------- --------- --------- --------- ---------
Total non-interest income (loss) .................. 17,379 2,513 6,902 (13,539) 10,326
--------- --------- --------- --------- ---------
Non-interest expense:
Write-down on securities available-for-sale ......... 2,217 53,576 2,037 14,132 --
General and administrative and other expenses ....... 6,261 5,500 4,505 5,081 2,284
Mark-to-market loss - SFAS 133 ...................... 3,821 -- -- -- --
(Gain) loss on disposition of real estate owned ..... (1,931) 1,814 2,159 1,707 (433)
Loss on equity investment of ICH .................... -- -- -- 9,076 --
Advisory fees ....................................... -- -- -- -- 6,242
Termination agreement expense ....................... -- -- -- -- 44,375
--------- --------- --------- --------- ---------
Total non-interest expense ........................ 10,368 60,890 8,701 29,996 52,468
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting principle .. 34,801 (54,233) 22,317 (5,933) (16,029)
Extraordinary item .................................. (1,006) -- -- -- --
Cumulative effect of change in accounting
principle ......................................... (617) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) .................................... $ 33,178 $ (54,233) $ 22,317 $ (5,933) $ (16,029)
========= ========= ========= ========= =========
Earnings (loss) per share before extraordinary
item and cumulative effect of change in accounting
principle:
Basic ............................................... $ 1.41 $ (2.70) $ 0.83 $ (0.25) $ (0.99)
========= ========= ========= ========= =========
Diluted ............................................. $ 1.25 $ (2.70) $ 0.76 $ (0.25) $ (0.99)
========= ========= ========= ========= =========
Net earnings (loss) per share:
Basic ............................................... $ 1.34 $ (2.70) $ 0.83 $ (0.25) $ (0.99)
========= ========= ========= ========= =========
Diluted ............................................. $ 1.19 $ (2.70) $ 0.76 $ (0.25) $ (0.99)
========= ========= ========= ========= =========
Dividends declared per share ........................... $ 0.69 $ 0.36 $ 0.48 $ 1.46 $ 1.68
========= ========= ========= ========= =========
36
IMPAC MORTGAGE HOLDINGS, INC.
Selected Balance Sheet Data
(dollar amounts in thousands)
At December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Investment securities available-for-sale ............. $ 32,989 $ 36,921 $ 93,206 $ 93,486 $ 67,011
Mortgage loans held-for-investment and
CMO collateral .................................... 2,249,246 1,389,716 1,313,112 1,181,847 1,052,610
Finance receivables .................................. 466,649 405,438 197,119 311,571 533,101
Investment in Impac Funding Corporation .............. 19,126 15,762 17,372 13,246 27,122
Investment in Impac Commercial Holdings, Inc. ........ -- -- -- -- 17,985
Due from affiliates .................................. 14,500 14,500 14,500 17,904 16,679
Total assets ......................................... 2,854,734 1,898,838 1,675,430 1,665,504 1,752,812
CMO borrowings ....................................... 2,151,400 1,291,284 850,817 1,072,316 741,907
Reverse repurchase agreements ........................ 469,491 398,653 539,687 323,625 755,559
Total liabilities .................................... 2,651,369 1,720,398 1,436,586 1,413,898 1,523,782
Total stockholders' equity ........................... 203,365 178,440 238,844 251,606 229,030
37
IMPAC FUNDING CORPORATION
(dollar amounts in thousands, except Operating Data)
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Net interest income:
Total interest income ............................. $ 24,175 $ 28,649 $ 21,225 $ 48,510 $ 48,020
Total interest expense ............................ 20,865 30,056 20,953 40,743 41,628
------------ ------------ ------------ ------------ ------------
Net interest income (expense) ................... 3,310 (1,407) 272 7,767 6,392
Non-interest income:
Gain (loss) on sale of loans ...................... 46,949 19,727 27,098 (11,663) 19,414
Loan servicing income ............................. 2,140 6,286 5,221 7,071 4,109
Gain (loss) on sale of investment securities ...... 3,710 51 -- (706) 550
Mark-to-market loss on investment securities ...... -- -- -- (805) --
Other income ...................................... 1,295 1,054 979 420 93
------------ ------------ ------------ ------------ ------------
Total non-interest income (loss) ................ 54,094 27,118 33,298 (5,683) 24,166
------------ ------------ ------------ ------------ ------------
Non-interest expense:
General and administrative and other operating
expense ......................................... 28,911 19,634 14,965 14,385 10,047
Amortization of mortgage servicing rights ......... 4,519 5,179 5,331 6,361 2,827
Write-down of securities available-for-sale ....... -- 1,537 4,252 -- --
Provision for repurchases ......................... 3,498 371 385 367 3,148
Mark-to-market loss - SFAS 133 .................... 346 -- -- -- --
Impairment of mortgage servicing rights ........... 825 -- 1,078 3,722 --
------------ ------------ ------------ ------------ ------------
Total non-interest expense ...................... 38,099 26,721 26,011 24,835 16,022
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes .................. 19,305 (1,010) 7,559 (22,751) 14,536
Income taxes (benefit) ............................ 8,300 770 3,227 (8,738) 6,136
------------ ------------ ------------ ------------ ------------
Earnings (loss) before cumulative effect of change
in accounting principle ............................ 11,005 (1,780) 4,332 (14,013) 8,400
Cumulative effect of change in accounting
principle ......................................... 17 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) after cumulative effect of
change in accounting principle ..................... $ 11,022 $ (1,780) $ 4,332 $ (14,013) $ 8,400
============ ============ ============ ============ ============
At December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Mortgage loans held-for-sale ......................... $ 174,172 $ 275,570 $ 68,084 $ 252,568 $ 620,549
Mortgage servicing rights ............................ 8,468 10,938 15,621 14,062 15,568
Total assets ......................................... 239,802 317,163 116,246 313,872 656,944
Borrowings from IWLG ................................. 174,136 266,994 66,125 192,900 454,840
Other borrowings ..................................... -- -- 181 67,058 148,307
Due to affiliates .................................... 14,500 14,500 14,500 24,382 6,198
Total liabilities .................................... 220,482 301,242 98,698 301,009 629,548
Total shareholders' equity ........................... 19,320 15,921 17,548 12,863 27,396
Operating Data (in millions):
Mortgage loan acquisitions ........................... $ 3,204 $ 2,113 $ 1,672 $ 2,249 $ 2,571
Master servicing portfolio at period-end ............. 5,569 4,043 2,879 3,714 3,029
Servicing portfolio at period-end .................... 1,754 2,429 2,393 3,714 3,029
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Information
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, some of which are
based on various assumptions and events that are beyond our control, may be
identified by reference to a future period or periods or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, adverse economic conditions, changes in interest rates, changes
in the difference between short-term and long-term interest rates, changes in
prepayment rates, changes in assumptions regarding estimated fair value amounts,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties that could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
Factors" in this Annual Report. We do not undertake, and specifically disclaim
any obligation, to publicly release the results of any revisions that may be
made to any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
General
Together with our subsidiaries and related companies, we primarily operate
three core businesses:
. the long-term investment operations, which primarily invest in
non-conforming Alt-A residential mortgage loans, acquired and
originated by our mortgage operations, and mortgage-backed
securities;
. the mortgage operations, which acquire, originate, sell and
securitize primarily non-conforming Alt-A residential mortgage
loans; and
. the warehouse lending operations, which provide warehouse and
repurchase financing to originators of mortgage loans.
We elect to be taxed as a REIT for federal income tax purposes, which
generally allows us to pass through income to stockholders without payment of
federal income tax at the corporate level. IMH 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,
IMH records its investment in IFC using the equity method. Under this method,
original investments made to IFC are recorded at cost and adjusted by IMH's
share of earnings or losses.
Relationships with Impac Entities
Many of the officers and directors of IMH are officers, directors and
owners of IFC. 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 Chief Operating Officer, 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 IMH 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
unsecured obligations of IMH subordinated to all indebtedness of IMH's
subsidiaries. The debentures bore interest at 11% per annum from their date of
issuance, payable quarterly, commencing May 15, 1999, until the debentures were
paid in full. Commencing on February 15, 2001, the debentures were redeemable,
at IMH's option, in whole at any time
39
or in part from time to time, at the principal amount to be redeemed plus
accrued and unpaid interest. On June 20, 2001, IMH redeemed all of the senior
subordinated debentures.
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, or "Series B Preferred Stock," was exchanged for series C 10.5%
cumulative convertible preferred stock, or "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. In August 2001, all of the outstanding shares of Series C Preferred Stock
were converted into common stock.
Collateralized Mortgage Obligations
During 2001, the long-term investment operations, conducted by IMH and IMH
Assets, a wholly-owned specialty purpose entity through which IMH conducts its
CMO borrowings, issued CMOs totaling $1.5 billion. The following table presents
selected information on the issuance of CMOs during 2001 (dollars in millions):
Issue Issuance
Date Issuance Name Amount
- ---------------------------------------------------------------------------
05/23/01 Impac CMB Trust Series 2001-1...................... $ 357.8
08/27/01 Impac CMB Trust Series 2001-2...................... 400.5
10/25/01 Impac CMB Trust Series 2001-3...................... 397.0
12/17/01 Impac CMB Trust Series 2001-4...................... 345.6
Real Estate Mortgage Investment Conduits
During 2001, the mortgage operations issued REMICs totaling $1.7 billion. The
following table presents selected information on the issuance of REMICs during
2001 (dollars in millions):
Issue Issuance
Date Issuance Name Amount
- ---------------------------------------------------------------------------
01/25/01 Impac Secured Assets Trust 2001-1.................. $ 200.0
03/26/01 Impac Secured Assets Trust 2001-2.................. 250.1
04/23/01 Impac Secured Assets Trust 2001-3.................. 200.0
05/25/01 Impac Secured Assets Trust 2001-4.................. 202.3
07/25/01 Impac Secured Assets Trust 2001-5.................. 207.9
09/25/01 Impac Secured Assets Trust 2001-6.................. 200.0
10/25/01 Impac Secured Assets Trust 2001-7.................. 200.0
12/20/01 Impac Secured Assets Trust 2001-8.................. 196.7
Financial Condition
During the fourth quarter of 1998, the financial markets experienced a
liquidity crisis as a result of deterioration in the capital and mortgage-backed
securitization markets. We suffered margin calls on our warehouse and reverse
repurchase facilities. To meet margin calls, we sold mortgage loans and
mortgage-backed securities at prices that were less than their original purchase
prices and suffered substantial losses. In response to those events, we made a
number of strategic changes in our businesses that we believe have improved
operating performance and cash flows, increased the credit quality of our
long-term investment portfolio and reduced our exposure to interest rate risks.
These strategic changes include:
. expansion of our mortgage operations;
. introduction of prepayment penalties on our loan programs;
. increased frequency of securitization;
40
. stricter investment guidelines for our long-term investment
operations;
. improved hedging policies; and
. adjustment of pre-1998 investment securities available-for-sale.
As a result of the successful execution of these strategies, each quarter
over the last three-year period we have reported positive core operating
earnings, which excludes one-time non-recurring items and the effect of fair
market valuations of derivative instruments. Our business plan coupled with a
favorable interest rate environment produced positive asset growth and earnings
during 2001. During 2001, we accomplished the following:
. reported earnings of $33.2 million, or $1.19 per diluted common
share, and generated estimated taxable income of $46.4 million, or
$1.66 per diluted common share;
. increased total assets to $2.9 billion, or 53% over prior year;
. resumed the regular payment of common stock dividends six months
ahead of original expectations by declaring total dividends of $0.69
per common share;
. increased loan production to $3.2 billion, or 52% over prior year,
retained $1.5 billion of primarily non-conforming Alt-A ARMs for
long-term investment and completed non-conforming Alt-A
securitizations totaling $3.2 billion;
. increased average finance receivables by 53% over prior year;
. converted all of our outstanding 10.5% preferred stock to common
stock and retired all of our 11% senior subordinated debentures
almost three years before maturity; and
. sold 5.1 million newly issued shares of common stock.
As of December 31, 2001, our total assets were $2.9 billion as compared to
total assets of $1.9 billion as of December 31, 2000 and $1.7 billion as of
December 31, 1999. Our mortgage loan investment portfolio of $2.2 billion,
primarily included high credit quality, non-conforming Alt-A mortgage loans that
were acquired and originated by our mortgage operations since 1999. Another
$466.6 million of mortgage assets as of December 31, 2001 were outstanding
warehouse line advances, referred to as finance receivables, made to affiliates
and third party investors to provide short-term warehouse financing. This
compares to finance receivables of $405.4 million as of December 31, 2000 and
$197.1 million as of December 31, 1999. As of December 31, 2001, $33.0 million,
or 1% of total assets, consisted of mortgage-backed securities as compared to
$36.9 million, or 2% of total assets, as of December 31, 2000 and $93.2 million,
or 6% of total assets, as of December 31, 1999. During 2000, we wrote-off
investment securities that were secured by high loan-to-value second trust
deeds, securities that were secured by franchise receivables and certain
sub-prime subordinated securities that were acquired prior to 1998. We have
acquired no mortgage-backed securities for long-term investment since 1999.
Substantially all of our growth since 1998 was accomplished with liquidity
generated from our core operations. In December 2001, our CMO portfolio was
generating cash flows of $7.2 million per month as compared to cash flows of
$1.5 million per month in December 2000. Cash flow on our CMO portfolio improved
as net interest margins widened and the portfolio grew. With increased liquidity
generated from our core operating businesses, we were able to increase assets by
$1.0 billion through well-managed growth, retire $7.7 million of high cost
senior subordinated debentures and resume the payment of regular common stock
dividends. We believe that in order for us to continue to generate positive cash
flows and earnings we must successfully manage credit, prepayment and interest
rate risks. To accomplish these objectives, we acquire and originate and retain
for long-term investment high credit quality, non-conforming Alt-A mortgage
loans with prepayment penalty features and acquire hedges to mitigate adverse
changes in interest rates.
During 2001, we acquired and originated $3.2 billion of mortgage loans and
retained $1.5 billion of non-conforming Alt-A mortgage loans from our mortgage
operations for long-term investment. We are committed to
41
acquiring mortgages for long-term investment with favorable credit profiles and
with prepayment penalty features. Our non-conforming Alt-A mortgage products
have historically had favorable annualized loss rates while prepayment penalty
features have mitigated the effect of early payoffs. Because of the credit
profile, historical loss performance and prepayment characteristics of our
non-conforming Alt-A mortgages, we have been able to borrow a higher percentage
against mortgage loans securing CMOs, which we use as long-term financing for
our mortgage loan investment portfolio. As of December 31, 2001, total equity
invested in our CMO portfolio was $79.6 million, or 3.64% of CMO collateral, as
compared to total equity invested of $84.1 million, or 6.31% of CMO collateral,
as of December 31, 2000.
We employ a leveraging strategy to increase our assets by financing our
mortgage loan and investment securities portfolios and then using the proceeds
to acquire additional mortgage assets. We believe that by maintaining adequate
leverage we are protected from having to sell mortgage assets during periods
when the value of mortgage assets are declining, which may result in margin
calls by our lenders. We also securitize our loans more frequently so that we
reduce our exposure to margin calls on warehouse or reverse repurchase
facilities by obtaining long-term financing in the form of CMOs and reducing the
accumulation period that mortgage loans are outstanding on short-term warehouse
or reverse repurchase facilities. As of December 31, 2001, total assets to total
equity, or "leverage ratio," was 14.05 to 1 as compared to 10.64 to 1 as of
December 31, 2000. As we were able to borrow a higher percentage against
mortgage loans securing CMOs, the leverage ratio of the CMO portfolio increased
to 28.00 to 1 as of December 31, 2001 as compared to 16.33 to 1 as of December
31, 2000. This means that as a percentage of the total CMO portfolio, we have
less equity at risk and we are not subject to margin calls on mortgage loans
securing CMO borrowings. With this increased leverage, we have been able to grow
our balance sheet by efficiently using our currently available capital. We
continually monitor our leverage ratio and liquidity levels to insure that we
are adequately protected against adverse changes in market conditions.
In addition to increasing the credit quality of our mortgage loan
investment portfolio, as of December 31, 2001, 54% of mortgage loans held as CMO
collateral had prepayment penalty features as compared to 36% with prepayment
penalty features as of December 31, 2000. When actual prepayments exceed
expectations due to sustained increased prepayment activity, we have to amortize
our capitalized premium and securitization costs over a shorter period of time,
resulting in a reduced yield to maturity on our mortgage loan portfolio.
Conversely, if actual prepayment experience is less than expected prepayment
rates, the premium would be amortized over a longer period of time, resulting in
a higher yield to maturity. We monitor our prepayment experience on a monthly
basis in order to adjust the amortization of our costs. Constant prepayment
rates, or "CPR," on CMO collateral increased to 34% CPR during 2001 as compared
to 25% CPR during 2000. However, in light of the refinancing boom that occurred
during 2001, we believe that prepayment rates would have been much higher absent
the levels of prepayment protection in our mortgage loan investment portfolio.
Although constant prepayment rates were higher during 2001, net interest margins
were less affected by amortization of capitalized premium and securitization
costs as we reduced these costs as a percent of CMO collateral. As of December
31, 2001, capitalized premium and securitization costs were 215 basis points of
CMO collateral as compared to 277 basis points of CMO collateral as of December
31, 2000. This resulted in premium and securitization cost amortizations during
2001 of $15.0 million on average CMO collateral of $1.5 billion as compared to
$15.3 million on average CMO collateral of $1.2 billion during 2000.
The following table presents selected information about mortgage loans held
as CMO collateral for the periods shown (dollars in thousands):
As of December 31,
------------------------
2001 2000
---------- ----------
Unpaid principal balance ................................. $2,128,236 $1,293,791
Percent of Alt-A loans ................................... 95% 90%
Weighted average coupon .................................. 7.92% 9.33%
Weighted average margin .................................. 3.42% 4.15%
Weighted average original LTV ............................ 83% 85%
Weighted average original credit score ................... 678 675
Percent with prepayment penalty .......................... 54% 36%
Prior 3 month prepayment rate ............................ 28% 23%
Prior 12 month prepayment rate ........................... 34% 25%
Lifetime prepayment rate ................................. 34% 31%
Weighed average months until prepayment penalty expiration 22 27
42
Percent of ARMs........................................... 87% 65%
Percent of hybrid ARMs.................................... 68% 65%
Weighted average months until hybrid ARMs interest rate
adjustment.............................................. 15 16
Percent of mortgage loans in California................... 63% 53%
Percent of purchase transactions.......................... 70% 74%
Percent of owner occupied................................. 94% 96%
Percent of first lien..................................... 99% 95%
We follow a hedging program intended to limit our exposure to the effect
of changes in interest rates associated with the following:
. changes in one-month LIBOR which is the index used to re-price our
adjustable rate CMO borrowings on a monthly basis;
. mortgage loans that we have committed to acquire at pre-determined
rates through rate-lock commitments, or "locked pipeline;" and
. the value of proceeds from the sale of our fixed rate mortgage loans
held-for-sale.
Our primary objective is to hedge our exposure to the variability in
future cash flows attributable to the variability of one-month LIBOR, which is
the underlying index of our CMO borrowings. Our hedging program is formulated
with the intent to offset the potential adverse effects of changing interest
rates resulting from the following:
. interest rate adjustment limitations on mortgage loans due to
periodic and lifetime interest rate caps; and
. mismatched interest rate adjustment periods of mortgage loans and
related borrowings.
Our goal is to lock in a reliable stream of cash flows when interest rates
fall below or rise above certain levels. When interest rates rise or fall, our
borrowing costs increase or decrease at greater speeds than the underlying
collateral supporting the borrowings. Hedges are allocated to borrowings to
provide a hedge against a rise in interest rates. Cash flow derivative
instruments hedge the variability of forecasted cash flows attributable to
interest rate risk by providing cash flows at certain triggers during changing
interest rate environments.
As we acquire and originate mortgage loans, we purchase caps at interest
rate strike prices that are tied to a forward yield curve to hedge forecasted
borrowings. We purchase caps at strike prices over the one-month LIBOR forward
yield curve to correspond to our borrowing costs, which are indexed to one-month
LIBOR. A cap allows the yield on an ARM to rise in an increasing interest rate
environment just as the cost of related borrowings would rise as we receive cash
payments if one-month LIBOR were to reach the contractual strike price of the
cap. The cap would provide protection for (1) periodic and lifetime cap
limitations on the mortgage loan that are absent on the related borrowings, and
(2) mismatched interest rate adjustment periods. Simultaneously with the
purchase of caps, we may also sell floors, or "collars," at interest rate strike
prices that are below the one-month LIBOR forward yield curve. The sale of a
floor allows us to offset the cost that we pay for the cap. Our yield on ARMs
would decrease in a decreasing interest rate environment just as the cost of
related borrowings would decrease as we make cash payments if one-month LIBOR
were to reach the contractual strike price of the floor. We also purchase swaps
whereby we receive cash payments based on one-month LIBOR and make cash payments
at a fixed rate. Swaps have the effect of fixing our borrowing costs on a
similar amount of swaps and, as a result, we can reduce the interest rate
variability of our borrowings. The purchase of caps, collars and swaps allows us
to protect net interest income during periods of increasing interest rates while
maintaining a steady stream of cash flows if interest rates decline.
At December 31, 2001, caps allocated to CMO borrowings had a remaining
notional balance of $1.6 billion with a weighted average maturity of
approximately 28 months. Pursuant to the terms of the caps, we will receive cash
payments if one-month LIBOR reaches certain strike prices, ranging from 1.66% to
10.25%, with a weighted average strike price of 4.65% over the life of the caps.
At December 31, 2001, collars allocated to CMO borrowings had a remaining
notional balance of $758.9 million with a weighted average maturity of
approximately 25 months. Pursuant to the terms of the collars, we will receive
cash payments if one-month LIBOR reaches strike prices, ranging from 1.91% to
6.52%, with a weighted average strike price of 4.04% over the life of the
collars. We will make cash
43
payments if one-month LIBOR reaches strike prices, ranging from 1.16% to 5.88%,
with a weighted average strike price of 3.38%. At December 31, 2001, swaps
allocated to CMO borrowings had a remaining notional balance of $71.8 million
with a weighted average maturity of approximately 19 months. Pursuant to the
terms of the swaps, we will receive cash payments based on one-month LIBOR and
make cash payments at fixed rates ranging from 4.83% to 5.18%, with a weighted
average fixed rate of 4.93% over the life of the swaps. The notional amounts of
caps, collars and swaps are amortized according to projected prepayment rates on
the mortgage loans securing the CMO borrowings. However, regarding the floor
component of the collar, the notional amount equals the actual principal balance
of the CMO collateral. As of December 31, 2001, the fair market value of the
caps, collars and swaps was $(4.4) million. These hedges are marked to market
each reporting period with the entire change in market value being recognized in
other comprehensive income on the balance sheet.
During 2001, we purchased a collar at strike prices tied to the one-month
LIBOR forward yield curve to protect cash flows on CMO borrowings that are
secured by hybrid loans with remaining fixed terms, which did not have allocated
hedges. The balance sheet hedge protects cash flows on CMO borrowings with
hedges just as interest rate hedges would protect cash flows on CMO structures
with allocated hedges. As of December 31, 2001, the balance sheet hedge had a
notional amount of $815.6 million with a one-month LIBOR cap strike price of
4.38% and a weighted average strike price of 4.79% over the life of the cap. The
balance sheet hedge has a one-month LIBOR floor strike price of 3.98% and a
weighted average strike price of 4.42% over the life of the floor. The balance
sheet hedge matures on March 25, 2004. The notional amount of the balance sheet
hedge is amortized according to projected prepayment rates on CMO borrowings. As
of December 31, 2001, the fair market value of the balance sheet hedge was $5.1
million. The balance sheet hedge is marked to market each reporting period with
the entire change in market value being recognized in other comprehensive income
on the balance sheet.
We record monthly provisions for estimated loan losses on our long-term
mortgage investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in our long-term mortgage investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
mortgage investment portfolio. Provision for loan losses is also based on
management's judgment of net loss potential, including specific allowances for
known impaired loans, changes in the nature and volume of the portfolio, the
value of the collateral and current economic conditions that may affect the
borrowers' ability to pay.
We recorded loan loss provisions of $16.8 million during 2001 as compared
to $18.8 million during 2000. However, our allowance for loan losses increased
to $11.7 million as of December 31, 2001 as compared to $5.1 million as of
December 31, 2000 as actual loan losses declined. As of December 31, 2001,
allowance for loan losses was 43 basis points of total loan receivables, which
include our mortgage loan investment portfolio and finance receivables, as
compared to 28 basis points as of December 31, 2001. During 2001, actual loan
losses were $10.2 million as compared to $17.8 million during 2000. Actual loan
losses were higher during 2000 as we wrote-off high loan-to-value second trust
deeds, or "125 loans." In addition to lower actual losses during 2001, we
recorded gain on disposition of real estate owned of $1.9 million as compared to
a loss on disposition of real estate owned of $1.8 million during 2000. The
credit quality of our mortgage loan investment portfolio improved as 95% of CMO
collateral was non-conforming Alt-A mortgage loans that had a weighted average
original credit score of 678 as of December 31, 2001 as compared to 90% and 675,
respectively, as of December 31, 2000.
We continue to focus on successfully building our core operating
businesses. We believe that we have developed non-conforming Alt-A mortgage loan
products that meet the needs of originators of mortgage loans and borrowers, as
well as those of capital market investors. Total non-conforming Alt-A loan
production by our mortgage operations increased 52% to $3.2 billion during 2001
as compared to $2.1 billion during 2000. During 2001, the long-term investment
operations acquired $1.5 billion of primarily non-conforming Alt-A ARMs from the
mortgage operations for long-term investment as compared to $454.0 million
acquired during 2000. Our warehouse lending operations increased average
outstanding finance receivables to non-affiliated companies by 53% to $205.5
million during 2001 as compared to $134.7 million during 2000. As of December
31, 2001, the warehouse lending operations had warehouse advances outstanding to
non-affiliated companies of $300.6 million.
During 1999, we began to expand the scope of our mortgage operations to
include wholesale and retail lending. By expanding into these origination
channels we positioned ourselves closer to our customers, which increases the
quality of our mortgage loans and decreases the premiums that we pay for
acquiring and originating mortgage loans. During
44
2001, 22% of total loan production was originated through our wholesale and
retail channels at a premium of 157 basis points as compared to 13% of total
loan production at a premium of 163 basis points during 2000. The decrease in
premiums paid for acquiring and originating mortgage loans was more significant
considering that we acquired and originated 65% of mortgage loans with
prepayment penalty features during 2001 as compared to 53% during 2000. Mortgage
loans with prepayment penalty features are generally more costly to acquire and
originate than mortgage loans without prepayment penalties. We expanded our
correspondent, wholesale and retail origination channels while maintaining our
centralized operations, which we believe is a key factor in ensuring quality
control and being a low-cost acquirer and originator of mortgage loans. We also
believe that technology can provide operational efficiencies and allow us to
increase market share, expand our customer base, provide high levels of customer
service and reduce per loan operating costs. To accomplish this, we have
developed IDASL, an automated underwriting and loan approval system, and a
delivery tracking system for our warehouse lending operations.
The following table presents certain information about mortgage loan
acquisitions and originations by our mortgage operations and our long-term
investment operations for the periods shown, excluding net premiums paid
(dollars in thousands):
Mortgage Operations (1) Long-Term Operations (2)
-------------------------------------- --------------------------------------
2001 2000 1999 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
Total acquisitions ................. $3,066,077 $2,078,824 $1,647,718 $1,486,343 $ 450,712 $ 637,390
Percent of Alt-A loans ............. 99% 96% 90% 99% 93% 81%
Weighted average coupon ............ 8.05% 9.78% 8.87% 7.42% 9.41% 8.99%
Weighted average margin ............ 3.16% 4.10% 4.19% 3.20% 4.11% 4.15%
Weighted average original LTV ...... 81% 85% 87% 83% 87% 91%
Weighted avg orig credit score ..... 681 676 680 680 673 679
Percent with prepay penalty ........ 64% 53% 39% 59% 51% 35%
Percent of ARMs loans .............. 48% 23% 35% 99% 91% 78%
Percent of hybrid loans ............ 35% 23% 33% 74% 88% 71%
Percent of mortgages in Calif ...... 56% 40% 44% 70% 64% 64%
Percent of purchase transactions ... 62% 81% 77% 67% 82% 70%
Percent of owner occupied .......... 91% 96% 97% 93% 99% 98%
Percent of first lien .............. 99% 98% 100% 99% 98% 97%
- --------------
(1) Excludes loan production from Novelle Financial Services, Inc.
(2) All acquisitions were from our mortgage operations.
In order to minimize risks associated with the accumulation of our
mortgage loans, we seek to securitize our mortgage loans more frequently by
creating smaller securitizations of our loans, thereby reducing our exposure to
interest rate risk and price volatility during the accumulation period of our
loans. During 2001, we completed 12 FRM and ARM securitizations for $3.2 billion
as compared to total securitizations of $2.2 billion during 2000. In addition,
we currently have in place a forward commitment for the securitization of our
mortgage loans and the related mortgage servicing rights created from these
securities. This gives us the ability to securitize without substantial reliance
on the secondary markets and allows us to realize all cash gains on these sales
transactions.
All of our businesses actively work together to deliver comprehensive
mortgage investment and lending services to our correspondent sellers, mortgage
brokers, retail customers and capital market investors through a wide array of
mortgage loan programs, web-based technology and centralized operations so that
we can provide high levels of customer service at low per loan costs.
We believe the following are critical accounting policies that require the
most significant estimates and assumptions that are particularly susceptible to
significant change in the preparation of our financial statements:
. allowance for loan losses. For further information see discussion of
allowance for loan losses under Results of Operations--Impac Mortgage
Holdings, Inc. and Note A of the consolidated financial statements of
Impac Mortgage Holdings, Inc. and subsidiaries.
. mortgage servicing rights. We value our mortgage servicing rights
utilizing significant assumptions and estimates. For further
information see Note A and Note L of the consolidated financial
statements of Impac Funding Corporation and subsidiaries.
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS, INC.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Results of Operations
45
Our net earnings increased to $33.2 million, or $1.19 per diluted share,
for 2001 as compared to a loss of $54.2 million, or $(2.70) per diluted share,
for 2000. Our net earnings increased over prior year results as follows:
. net interest income, before provision for loan losses, increased
$21.6 million, or 94%, to $44.6 million during 2001 as compared to
net interest income of $23.0 million during 2000;
. equity in net earnings of IFC increased $12.7 million to $10.9
million during 2001 as compared to equity in net loss of IFC of $1.8
million; and
. non-interest expense decreased $50.5 million to $10.4 million during
2001 as compared to $60.9 million during 2000.
We also generated estimated taxable income of $46.4 million, or $1.66 per
diluted share, during 2001 compared to a taxable loss of $43.9 million, or
$(2.07) per diluted share, during 2000. As a REIT, we are required to distribute
a minimum of 90% of our estimated taxable income to our stockholders by the time
we file our applicable tax returns. As of December 31, 2001, we met all of our
dividend distribution requirements. When we file our annual tax returns there
are certain adjustments that we make to net earnings as reported based on GAAP.
For instance, for tax purposes we can only deduct loan loss provisions to the
extent that we incurred actual loan losses. Because we pay dividends based on
taxable income, dividends may be more or less than GAAP earnings.
Our board of directors declared regular cash dividends of $0.62 per share
and a special cash dividend of $0.07 per share during 2001. The special dividend
was the result of a non-recurring recovery of previously charged-off assets,
which we received during the fourth quarter of 2001, and increased our overall
taxable income. The regular cash dividend of $0.37 per share and the special
cash dividend of $0.07 per share that was declared in 2001, but paid in 2002,
represents a 2002 dividend distribution. The following table presents a
reconciliation of estimated taxable income to GAAP earnings (dollars in
thousands, except per share amounts):
For the Year Ended,
--------------------
December 31,
-------------------
2001 2000
-------- --------
Net earnings (loss) ......................................... $ 33,178 $(54,233)
Adjustments to earnings (loss):
Mark-to-market loss - SFAS 133 ............................ 3,821 --
Write-down of investment securities available-for-sale .... 2,217 18,866
Cumulative effect of change in accounting principle ....... 617 --
Alternative minimum tax ................................... 550 --
Loan loss provision ....................................... 16,813 18,839
Dividends from IFC ........................................ 8,894 --
Cash received from previously charged-off assets .......... 1,773 --
Tax deduction for actual loan losses ...................... (10,211) (17,778)
Gain on sale of investment securities available-for-sale .. (312) --
Equity in net (earnings) loss of IFC ...................... (10,912) 1,762
Other miscellaneous adjustments ........................... -- (520)
-------- --------
Estimated taxable earnings (1) .............................. $ 46,428 $(33,064)
======== ========
Estimated taxable earnings per diluted share (1) ............ $ 1.66 $ (1.20)
======== ========
- ----------
(1) Excludes annual tax deductions of approximately $10.9 million for
amortization of the termination of our management agreement in 1997, the
deduction for dividends paid and the availability of a deduction
attributable to net operating loss carryforwards. After 2001, we will have
completely deducted amortization of our management agreement from taxable
income.
We also report earnings on a core basis to reflect recurring earnings from
operations. Core operating earnings exclude one-time non-recurring revenue and
expense items and the effect of fair value accounting for derivative instruments
and hedging activities as required by SFAS 133. Depending on non-recurring and
fair value accounting adjustments, core operating earnings may at times be more
or less than GAAP earnings. Core operating earnings is a non-GAAP concept and
may not be comparable to other Company's core operating earnings. The following
table presents a reconciliation of core operating earnings to GAAP earnings
(dollars in thousands, except per share amounts):
46
For the Year Ended,
--------------------
December 31,
2001 2000
-------- --------
Net earnings (loss) ................................................................. $ 33,178 $(54,233)
Adjustments to earnings (loss):
Mark-to-market loss - SFAS 133 .................................................... 3,821 --
Write-down of investment securities available-for-sale ............................ 2,217 53,576
Cumulative effect of change in accounting principle ............................... 617 --
Alternative minimum tax ........................................................... 550 --
Write-off of discounts upon retirement of senior subordinated debentures .......... 1,006 --
Excess loan loss provisions to allow for write-down of non-performing loans ....... -- 14,499
Tax-effected write-down of investment securities available-for sale owned by IFC
and write-off of bank related start-up costs incurred by IFC ................... -- 1,836
Tax effected recovery of previously charged-off assets ............................ (2,813) --
-------- --------
Core operating earnings ............................................................. $ 38,576 $ 15,678
-------- --------
Core operating earnings per diluted share ........................................... $ 1.38 $ 0.57
======== ========
Net Interest Income
We earn interest income primarily on mortgage assets, and to a lesser
degree, 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. We also receive or make cash payments on our hedges as
an adjustment to the yield on mortgage assets depending on whether certain
specified interest rate levels are reached. Mortgage assets include CMO
collateral, mortgage loans held-for-investment, finance receivables and
investment securities available-for-sale. Borrowings on mortgage assets include
CMO borrowings, reverse repurchase agreements and borrowings on investment
securities available-for-sale.
Net interest income, before provision for loan losses, increased 94% to
$44.6 million during 2001 as compared to $23.0 million during 2000. The increase
in net interest income during 2001 was primarily due to short-term interest rate
reductions that occurred throughout 2001 and significantly reduced our CMO
borrowing costs. As interest rates rapidly declined, our adjustable rate CMO
borrowing costs declined at a faster rate than coupons on mortgage loans as our
CMO borrowings are not subject to the same periodic interest rate caps as our
mortgage loans. In addition, adjustable rate CMO borrowings are subject to
interest rate adjustments on a monthly basis as compared to mortgage loans which
may have fixed interest rates or are subject to interest rate adjustments every
six months. Net interest income was also higher as average mortgage assets
increased 22% to $2.2 billion during 2001 as compared to $1.8 billion during
2000. The combination of lower borrowing costs and a larger portfolio of
mortgage assets resulted in higher net interest income during 2001.
Net interest margins on mortgage assets increased 75 basis points to 1.98%
during 2001 as compared to 1.23% during 2000 as the yield on borrowings on
mortgage assets decreased 203 basis points to 5.45% from 7.48%, respectively,
while the yield on mortgage assets declined only 94 basis points to 7.11% from
8.05%, respectively. The primary reason for the widening of interest rate
margins was a 154 basis point increase in net interest margins on CMO
collateral. Net interest margins on CMO collateral increased to 2.01% during
2001 as compared to 0.47% during 2000 as rapidly decreasing short-term interest
rates reduced yields on CMO borrowings. CMO borrowing costs decreased 191 basis
points to 5.39% during 2001 from 7.30% during 2000. Average one-month LIBOR,
which is the primary index used to re-price CMO borrowings, averaged 3.88%
during 2001 as compared to 6.42% during 2000.
Additionally, our mortgage loan investment portfolio benefited from a
steeper yield curve during 2001. A steepening of the yield curve results when
there is a wider interest rate spread differential between short-term interest
rates and long-term interest rates. A steeper yield curve benefits our mortgage
loan investment portfolio as interest rates on mortgage loan acquisitions and
originations are determined by using the ten-year Treasury rate plus a margin as
compared to new CMO borrowings which are determined by using one-month LIBOR
plus a margin.
The impact of hedges reduced net interest income and net interest margins
during 2001. Net hedge cash payments and amortization of hedge costs were $5.2
million during 2001 as compared to $237,000 during 2000. Excluding the
47
effect of hedges, net interest margins on mortgage assets would have been
2.22% during 2001 as compared to actual net interest margins of 1.98%. During
2000, net interest margins would have been 1.21%, excluding hedges, as compared
to actual net interest margins of 1.23%. We believe that the Federal Reserve
Bank's policy of short-term interest rate reductions during 2001 to provide
relief to a faltering economy was exacerbated by the events of September 11,
2001 and precipitated further interest rate cuts by the Federal Reserve Bank. We
believe that our current hedging policy is sound and that as the economy
recovers from the current recession and when interest rates rise in the future
we will benefit from positive cash flows generated by our hedges.
The following table summarizes average balance, interest and weighted
average yield on mortgage assets and borrowings on mortgage assets for the years
ended December 31, 2001 and 2000 (dollars in thousands):
For the year ended December 31, 2001 For the year ended December 31, 2000
-------------------------------------------- ----------------------------------------------
Weighted Weighted
Average Avg. % of Average Avg. % of
Balance Interest Yield Portfolio Balance Interest Yield Portfolio
---------- -------- -------- --------- ---------- -------- -------- ---------
MORTGAGE ASSETS
Subordinated securities
collateralized by mortgages . $ 34,199 $ 3,517 10.28% 1.58% $ 57,651 $ 7,249 12.57% 3.21%
Subordinated securities
collateralized by other loans -- -- -- -- 2,871 273 9.51 0.16
---------- -------- ---------- --------
Total investment securities 34,199 3,517 10.28 1.58 60,522 7,522 12.43 3.37
---------- -------- ---------- --------
Loan receivables:
CMO collateral ................ 1,519,702 108,328 7.13 70.19 1,198,478 85,923 7.17 66.69
Mortgage loans
held-for-investment ......... 137,130 8,188 5.97 6.33 119,326 8,966 7.51 6.64
Finance receivables:
Affiliated .................. 268,718 18,362 6.83 12.41 284,070 28,044 9.87 15.80
---------- -------- ---------- --------
Non-affiliated .............. 205,474 15,556 7.57 9.49 134,741 14,280 10.60 7.50
---------- -------- ---------- --------
Total finance receivables .. 474,192 33,918 7.15 21.90 418,811 42,324 10.11 23.30
---------- -------- ---------- --------
Total loan receivables .... 2,131,024 150,434 7.06 98.42 1,736,615 137,213 7.90 96.63
---------- -------- ---------- --------
Total mortgage assets ......... $2,165,223 $153,951 7.11% 100.00% $1,797,137 $144,735 8.05% 100.00%
========== ======== ========== ========
BORROWINGS
CMO borrowings ................ $1,444,033 $ 77,813 5.39% 70.72% $1,100,151 $ 80,287 7.30% 67.06%
Reverse repurchase
agreements-mortgages ........ 580,605 30,804 5.31 28.44 513,987 39,216 7.63 31.33
Borrowings secured by
investment securities ....... 17,199 2,566 14.92 0.84 26,350 3,217 12.21 1.61
---------- -------- ---------- --------
Total borrowings on
mortgage assets ............ $2,041,837 $111,183 5.45% 100.00% $1,640,488 $122,720 7.48% 100.00%
========== ======== ========== ========
Net Interest Spread (1) ....... 1.66% 0.57%
Net Interest Margin (2) ....... 1.98% 1.23%
- ------------------
(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
CMO collateral. Interest income on CMO collateral increased 26% to $108.3
million during 2001 as compared to $85.9 million during 2000 as average CMO
collateral increased 25% to $1.5 billion as compared to $1.2 billion,
respectively. Average CMO collateral increased as the long-term investment
operations issued four CMOs during 2001 totaling $1.501 billion, which were
secured by $1.513 billion of mortgage loans. In comparison, the long-term
investment operations issued CMOs totaling $943.6 million, which were secured by
$952.8 million of mortgage loans, during 2000. The issuance of CMOs was
partially offset by CMO collateral prepayments of $581.4 million during 2001, a
12-month prepayment rate of 34% CPR. During 2000, CMO collateral prepayments
were $309.7 million, a 12-month prepayment rate of 25% CPR. CMO collateral
prepayment rates increased as interest rates declined during 2001,
48
however, we believe that absent prepayment penalties, early loan prepayments
would have been much higher. The long-term investment operations acquired
mortgage loans with prepayment penalty features of $876.8 million, or 59% of
mortgage loans acquired, during 2001 as compared to $231.0 million, or 51% of
mortgage loans acquired, with prepayment penalties during 2000. We believe that
a higher percentage of mortgages acquired for long-term investment with
prepayment penalties will to lead to less volatility in net interest income and
provide consistent income streams.
The weighted average yield on CMO collateral decreased 4 basis points to
7.13% during 2001 as compared to 7.17% during 2000 even though mortgage rates
declined to all-time lows during 2001. The primary reasons for the slight
decrease in yield on CMO collateral was as follows:
. $1.1 billion, or 74% of mortgage loan acquisitions, were hybrid
loans that were fixed throughout 2001;
. periodic interest rate adjustment cap limits on ARMs lagged market
interest rate declines; and
. the cost basis of capitalized premiums was lower during 2001 as
compared to 2000.
During 2001, average capitalized premiums were 164 basis points of average
CMO collateral as compared to 225 basis points of average CMO collateral during
2000. This resulted in premium amortization and a corresponding reduction to
interest income of $8.4 million during 2001 as compared to $10.6 million during
2000. Capitalized cost of premiums paid on loan acquisitions as of December 31,
2001 was $35.4 million as compared to capitalized premiums of $22.8 million as
of December 31, 2000.
On August 10, 2001, the Derivatives Implementation Group, or "DIG," of the
Financial Accounting Standards Board, or "FASB," published DIG G20, which
further interpreted SFAS 133. On October 1, 2001, we adopted the provisions of
DIG G20 and net income and accumulated other comprehensive income were adjusted
by the amount needed to reflect the cumulative impact of adopting the provisions
of DIG G20. As of October 1, 2001, we started amortizing the fair market value
of capitalized hedge costs as a reduction to interest income. However, for tax
purposes, we will amortize the historical cost of our hedges on our tax returns.
As of December 31, 2001, the capitalized carrying value of our hedges was $6.6
million, or 30 basis points of CMO collateral, as compared to $2.6 million, or
20 basis points of CMO collateral, as of December 31, 2000.
Mortgage loans held-for-investment. Interest income on mortgage loans
held-for-investment decreased 9% to $8.2 million during 2001 as compared to $9.0
million during 2000 as the weighted average yield decreased to 5.97% from 7.51%,
respectively. The yield decreased primarily as non-performing loans from a
collapsed CMO structure was reclassified on our balance sheet as mortgage loans
held-for-investment during 2001. CMO borrowings can be collapsed, or called,
when the current principal balance of CMO collateral securing a specific CMO
structure reaches a certain level, generally 20% to 25% of the original
principal balance of the pool of mortgage loans securing the CMO borrowings.
When we call a CMO structure we have to repay CMO borrowings. The CMO collateral
that secured the repaid CMO borrowings can be used in a new CMO structure if the
CMO collateral is not more than 30 days past due. When we collapsed the CMO
structure during 2001, we retained non-performing loans that could not be used
for CMO collateral and which was reclassified on our balance sheet as mortgage
loans held-for-investment. We did not accrue interest income on non-performing
mortgage loans, which results in a lower yield.
Finance receivables. Interest income on finance receivables decreased 20%
to $33.9 million during 2001 as compared to $42.3 million during 2000 as the
weighted average yield decreased to 7.15% as compared to 10.11%, respectively.
The yield on finance receivables decreased as average prime declined to 6.91%
during 2001 as compared to 9.23% during 2000. Prime is the index we use to
determine interest rates on finance receivables. The decrease in interest
income, which was caused by a decline in prime, was partially offset by higher
average finance receivable balances. Average finance receivables increased 13%
to $474.2 million during 2001 as compared to $418.8 million during 2000 as loan
production by our mortgage operations increased, as well as warehouse financing
activity by customers of our warehouse lending operations. Average finance
receivables to non-affiliated customers increased 53% to $205.5 million during
2001 as compared to $134.7 million during 2000.
Investment securities available-for-sale. Interest income on investment
securities available-for-sale decreased 53% to $3.5 million during 2001 as
compared to $7.5 million during 2000 as average investment securities decreased
43% to $34.2 million as compared to $60.5 million, respectively. Average
investment securities decreased as we wrote-off
49
$52.6 million of investment securities during the first six months of 2000. The
weighted average yield on investment securities decreased to 10.28% during 2001
as compared to 12.43% during 2000.
Interest Expense on Borrowings
CMO borrowings. Interest expense on CMO borrowings decreased 3% to $77.8
million during 2001 as compared to $80.3 million during 2001 as the weighted
average yield decreased to 5.39% as compared to 7.30%, respectively. The yield
on CMO borrowings decreased as short-term interest rates declined during 2001.
Average one-month LIBOR, which is the index used to determine interest rates on
adjustable rate CMO borrowings, was 3.88% during 2001 as compared to 6.42%
during 2000. Adjustable rate CMO borrowings adjust every month to an interest
rate that is equal to one-month LIBOR as of the pricing date of the previous
month, generally the 25th of each month, plus a spread. The decrease in interest
expense on CMO borrowings which was caused by interest rate reductions during
2001 was partially offset by higher average CMO borrowing balances. Average CMO
borrowings increased 27% to $1.4 billion during 2001 as compared to $1.1 billion
during 2000 as we issued CMOs totaling $1.5 billion during 2001.
Interest expense on CMO borrowings was adversely affected by an increase
of amortization of capitalized securitization costs. Securitization costs are
incurred when CMOs are issued and securitization costs are capitalized and
amortized over the life of the CMO borrowings as an adjustment to the yield.
During 2001, we amortized securitization costs of $6.5 million as compared to
$4.7 million during 2000. However, capitalized securitization costs were $11.6
million, or 53 basis points of CMO collateral, as of December 31, 2001 as
compared to $14.1 million, or 106 basis points of CMO collateral as of December
31, 2000.
Reverse repurchase agreements. Interest expense on reverse repurchase
agreements, which are used to fund the acquisition of mortgage loans and finance
receivables, decreased 21% to $30.8 million during 2001 as compared to $39.2
million during 2000 as the weighted average yield decreased to 5.31% as compared
to 7.63%, respectively. The yield on reverse repurchase agreements decreased
during 2001 as interest rates declined. The decrease in interest expense on
reverse repurchase agreements that was caused by interest rate reductions during
2001 was partially offset by higher average balances. Average reverse repurchase
agreements increased 13% to $580.6 million during 2001 as compared to $514.0
million during 2000 as more loans were acquired by our long-term investment
operations, our mortgage banking operations had higher loan production and our
warehouse lending operations had increased warehouse activity from its
customers.
Borrowings secured by investment securities. Interest expense on
borrowings secured by investment securities decreased 19% to $2.6 million during
2001 as compared to $3.2 million during 2000 as average borrowings decreased 35%
to $17.2 million as compared to $26.4 million, respectively. The weighted
average yield on borrowings secured by investment securities increased to 14.92%
during 2001 as compared to 12.21% during 2000.
Non-Interest Income
Non-interest income increased to $17.4 million during 2001 as compared to
$2.5 million during 2000 primarily due to an increase in equity in net earnings
(loss) of IFC. IMH records 99% of the earnings or losses from IFC, as IMH owns
100% of IFC's preferred stock, which represents 99% of the economic interest in
IFC. Equity in net earnings of IFC increased $12.7 million to $10.9 million
during 2001 as compared to equity in net loss of IFC of $(1.8) million during
2000. The increase in net earnings of IFC was primarily the result of increased
gain on sale of mortgage loans. Gain on sale of mortgage loans increased to
$46.9 million during 2001 as compared to $19.7 million during 2000 due to the
following:
. higher sales volume of mortgage loans;
. sale of mortgage loans at slightly higher prices; and
. sale of mortgage servicing rights on ARMs sold to the long-term
investment operations.
For more information on the results of operations of IFC, refer to
"--Results of Operations--Impac Funding Corporation."
Non-Interest Expense
50
Non-interest expense decreased to $10.4 million during 2001 as compared to
$60.9 million during 2000 primarily due to $53.6 million of write-downs of
investment securities available-for-sale during 2000. Non-interest expense also
includes fair valuation adjustments on hedges of $3.8 million during 2001.
Excluding total write-downs of investment securities available-for-sale and the
effect of mark-to-market loss - SFAS 133, non-interest expense decreased 41% to
$4.3 million during 2001 as compared to $7.3 million during 2000. The primary
reason for the decrease in non-interest expense during 2001 was gain on
disposition of real estate owned of $1.9 million as compared to a loss on
disposition of real estate owned of $1.8 million during 2000.
Credit Exposures
Non-performing Assets
Non-performing assets consist of loans that are 90 days or more
delinquent, or "non-accrual loans," including loans in foreclosure and
delinquent bankruptcies, and real estate acquired in settlement of loans, or
other real estate owned. It is our 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, mortgage loans held-for-investment and CMO
collateral, or "mortgage loan portfolios." The outstanding unpaid principal
balance of non-performing assets totaled $75.7 million as of December 31, 2001
as compared to $49.9 million as of December 31, 2000. The increase in
non-performing assets was primarily due to an increase in the size of our
mortgage loan investment portfolios. As of December 31, 2001, non-performing
assets as a percentage of our mortgage loan portfolios was 2.54% as compared to
2.43% as of December 31, 2000. The carrying amount of other real estate owned,
after writing down the mortgage loan to the broker's price opinion or appraised
value, was $8.1 million and $4.7 million at December 31, 2001 and 2000,
respectively. We recorded gain on the disposition of other real estate owned of
$1.9 million during 2001 and a loss on disposition of real estate owned of $1.8
million during 2000.
We monitor our sub-servicers to make sure that they perform loss
mitigation, foreclosure and collection functions according to our servicing
guide. 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, sub-servicers are required to take timely and
aggressive action. The sub-servicer is required to determine payment collection
under various circumstances, which will result in maximum financial benefit.
This is accomplished by either working with the borrower to bring the loan
current or by foreclosing and liquidating the property. We perform ongoing
review of loans that display weaknesses and believe that we maintain adequate
loss allowance on the mortgage loans. The following table summarizes the unpaid
principal balance of non-performing assets included in our mortgage loan
portfolios for the periods shown (in thousands):
At December 31,
--------------------
2001 2000
------- -------
Mortgage Loans Held-for-Sale:
Non-accrual ....................................... $ 6,432 $ 3,680
Other real estate owned ........................... 330 148
------- -------
Total mortgage loans held-for-sale .............. 6,762 3,828
------- -------
Mortgage Loans Held-for-Investment:
Non-accrual ....................................... 9,922 10,197
In process foreclosures ........................... 2,002 3,168
------- -------
Total mortgage loans held-for-investment ........ 11,924 13,365
------- -------
CMO collateral:
Non-accrual ....................................... 51,214 28,798
Other real estate owned ........................... 5,805 3,883
------- -------
Total CMO collateral ............................ 57,019 32,681
------- -------
Total mortgage loan portfolios ............... $75,705 $49,874
======= =======
Delinquent Loans
When a borrower fails to make required payments on a loan and does not
cure the delinquency within 60 days, we generally record a notice of default and
commence 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, we generally acquire title to the
property. As of December 31, 2001, our mortgage loan portfolios included 3.84%
of
51
mortgage loans that were 60 days or more delinquent as compared to 4.89% as of
December 31, 2000. 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 mortgage
loans in our mortgage loan portfolios that were 60 or more days delinquent for
the periods shown (in thousands):
At December 31,
-------------------
2001 2000
-------- --------
Mortgage Loans Held-for-Sale:
60-89 days delinquent ................................. $ 494 $ 861
90 or more days delinquent (1) ........................ 6,432 3,680
-------- --------
Total mortgage loans held-for-sale .................. 6,926 4,541
-------- --------
Mortgage Loans Held-for-Investment:
60-89 days delinquent ................................. 916 115
90 or more days delinquent (1) ........................ 9,922 10,197
-------- --------
Total mortgage loans held-for-investment ............ 10,838 10,312
-------- --------
CMO collateral:
60-89 days delinquent ................................. 20,904 25,098
90 or more days delinquent (1) ........................ 51,214 28,798
-------- --------
Total CMO collateral ................................ 72,118 53,896
-------- --------
Total mortgage loan portfolios ................... $ 89,882 $ 68,749
======== ========
- -----------
(1) Includes loans in foreclosure and delinquent bankruptcies.
Provision for Loan Losses
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 0.43% as of December 31, 2001 as compared to 0.28% as
of December 31, 2000. We recorded net loan loss provisions of $16.8 million
during 2001 as compared to $18.8 million during 2000. The amount provided for
loan losses decreased during 2001 primarily due to loan loss provisions made
during 2000 for the anticipated loss on 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, 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 primarily the result
of non-cash accounting charges, or "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 our allowance for loan loss of
$14.5 million due to the continued deterioration in the performance of
collateral supporting specific investment securities.
We wrote-off substantially all remaining book value on specific investment
securities during 2000, which included all investment securities secured by high
loan-to-value 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, our 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. In addition, based on losses and delinquencies
in the high loan-to-value portfolio during 2000, we increased the loan loss
allowance to provide for losses inherent in the remaining high loan-to-value
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 of $1.0 million.
52
Excluding accounting charges, core operating earnings were $14.7 million,
or $0.54 per diluted common share, during 2000 as compared to core operating
earnings of $22.3 million, or $0.76 per diluted common share, during 1999. The
decrease in core 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.
Net Interest Income
Net interest income, before provision for loan losses, decreased 23% to
$23.0 million during 2000 as compared to $29.7 million during 1999. The decrease
in net interest income during 2000 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. The decrease in net interest margins was
partially offset as average mortgage assets increased 13% to $1.8 billion during
2000 as compared to $1.6 billion during 1999. 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:
. 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
. 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):
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
---------- -------- ---------- --------
53
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 .............. 0.57% 1.03%
Net Interest Margin .............. 1.23% 1.84%
Interest income on Mortgage Assets
CMO collateral: 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 $952.8 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 51%, of mortgages acquired
during 2000 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. We expect 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.
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, we 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, we have 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.
Mortgage loans held-for-investment. 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 1999 when our 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.
Finance receivables. 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
54
$317.5 million, respectively. Average finance receivables increased during 2000
as the mortgage operations 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 the warehouse lending operations 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 average prime rose during 2000. The prime
rate is the index the warehouse lending operations uses to determine interest
rates on finance receivables. Average prime during 2000 was 9.23% as compared to
8.00% during 1999.
Investment securities available-for-sale. 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 we 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 we
wrote-off higher yielding investment securities secured by high loan-to-value
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
CMO 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. This 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, we
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 securitization costs were $14.1 million as compared to
unamortized securitization costs of $11.9 million at December 31, 1999.
Reverse repurchase agreements. 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 the mortgage operations and
external customers of the warehouse lending operations.
The warehouse lending operations uses reverse repurchase agreements with
investment banks to fund its short-term loans to affiliates, primarily the
mortgage operations, 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 our lenders to determine interest rates on reverse repurchase
borrowings, increased during 2000 as compared to 1999.
Borrowings secured by investment securities. 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, we
issued notes collateralized by a portion of our 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 10.64% during 1999.
55
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 as follows:
. 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;
. servicing income decreased by $680,000 as income from the collection
of prepayment penalties decreased in conjunction with the decrease
in loan prepayments; and
. 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 the mortgage operations and external
customers of the warehouse lending operations.
Equity in Net Earnings (Loss) of IFC
Equity in net earnings (loss) of IFC decreased to a net loss of $1.8
million during 2000 as compared to net earnings of $4.3 million during 1999
primarily due to a decrease of $7.4 million in gain on sale of loans. 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 we substantially
wrote-off all remaining book value of investment securities secured by high
loan-to-value second trust deeds, investment securities secured by franchise
mortgage receivables and certain sub-prime subordinated securities, all of which
were acquired prior to 1998. 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 CMOs.
Credit Exposures
Non-performing Assets
The outstanding unpaid principal balance of non-performing assets totaled
$49.9 million as of December 31, 2000 as compared to $63.3 million as of
December 31, 1999. The decrease in non-performing assets was primarily due to
the sale of delinquent mortgage loans held-for-investment, which included 125
loans, and mortgage loans held-for-sale. 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 as of December 31, 2000
and 1999, respectively. We recorded losses on the disposition of other real
estate owned of $1.8 million and $2.2 million during 2000 and 1999,
respectively.
The following table summarizes the unpaid principal balance of our
non-performing assets included in our 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
------- -------
56
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.
As of December 31, 2000, mortgage loans included in our mortgage loan
portfolios that were delinquent 60 days or more were 4.89% as compared to 5.43%
as of December 31, 1999. 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 mortgage
loans in our mortgage loan portfolios that were 60 or more days delinquent for
the periods shown (in thousands):
At December 31,
-------------------
2000 1999
-------- --------
Mortgage Loans Held-for-Sale:
60-89 days delinquent ................................. 861 1,838
90 or more days delinquent ............................ 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 ............................ 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 ............................ 28,798 42,792
-------- --------
Total CMO collateral ................................ 53,896 55,190
-------- --------
Total mortgage loan portfolios ................... $ 68,749 $ 69,282
======== ========
Provision for Loan Losses
Total allowance for loan losses expressed as a percentage of gross loan
receivables increased to 0.28% as of December 31, 2000 as compared to 0.27% as
of December 31, 1999. We 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 anticipated loss on
disposition or write-off of 125 loans.
RESULTS OF OPERATIONS--
IMPAC FUNDING CORPORATION
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Results of Operations
Net earnings increased to $11.0 million during 2001 as compared to a net
loss of $1.8 million during 2000. Net earnings increased over prior year results
as follows:
. net interest income increased by $4.7 million to $3.3 million during
2001 as compared to net interest loss of $1.4 million during 2000;
. gain on sale of loans increased by $27.2 million to $46.9 million
during 2001 as compared to $19.7 million during 2000; and
57
. non-interest expense and income taxes increased by $18.9 million to
$46.4 million during 2001 as compared to $27.5 million during 2000.
Net earnings increased primarily as mortgage loan acquisitions and
originations increased 52% to $3.2 billion during 2001 as compared to $2.1
billion during 2000 and REMIC securitizations increased to $1.7 billion as
compared to $1.3 billion, respectively. In addition, the mortgage operations
sold servicing rights on $3.2 billion of non-conforming Alt-A ARM and FRM
securitizations during 2001 as compared to the sale of servicing rights on $1.3
billion of non-conforming Alt-A FRM securitizations during 2000.
Net Interest Income (Loss)
Net interest income increased to $3.3 million during 2001 as compared to
net interest loss of $1.4 million during 2000 as net interest margins increased
to 1.20% as compared to (0.37)%, respectively. Net interest margins improved
during 2001 as follows:
. the gap between short-term interest rates, which determine our
borrowing costs, and long-term interest rates, which determine
interest rates on our mortgage loans, widened during 2001;
. interest rates on warehouse financing with the warehouse lending
operations was reduced from prime to prime minus 0.50%; and
. short-term interest rates decreased throughout 2001.
The weighted average yield on interest bearing liabilities decreased 289
basis points to 6.96% during 2001 as compared to 9.85% during 2000 while the
weighted average yield on interest earning assets decreased 152 basis points to
7.88% as compared to 9.40%, respectively.
Average interest earning assets decreased 3% to $293.4 million during 2001
as compared to $302.0 million during 2000 as mortgage loans held-for-sale
decreased 6% to $277.3 million as compared to $294.6 million, respectively.
Mortgage loans held-for-sale decreased as the mortgage operations sold and
securitized loans more frequently during 2001 as compared to 2000. Even though
loan production increased 52% to $3.2 billion during 2001 as compared to $2.1
billion during 2000, the mortgage operations completed eight REMICs during 2001
as compared to five during 2000. In addition, the mortgage operations sold its
ARM production to the long-term investment operations on a monthly basis during
2001. The goal of the mortgage operations is to sell or securitize mortgage
loans more frequently to reduce interest rate risk and price volatility during
the mortgage loan accumulation period.
Non-Interest Income
Non-interest income increased to $54.1 million during 2001 as compared to
$27.1 million during 2000 as gain on sale of loans increased to $46.9 million as
compared to $19.7 million, respectively. Gain on sale of loans increased during
2001 as follows:
. higher sales volume of mortgage loans;
. sale of mortgage loans at slightly higher prices; and
. sale of mortgage servicing rights on ARMs sold to the long-term
investment operations.
During 2001, the mortgage operations securitized $1.7 billion of
non-conforming Alt-A FRMs, on a servicing released basis, in the form of REMICs
and sold $1.5 billion of primarily non-conforming Alt-A ARMs to the long-term
investment operations. During 2001, the mortgage operations sold and transferred
$2.9 billion mortgage servicing rights under a flow servicing sale agreement as
compared to $1.3 billion during 2000.
During 2001, the mortgage operations completed securitizations at net gains
of 149 basis points of total loan production, as compared to net gains of 95
basis points of total loan production, during 2000. In addition, the mortgage
operations received cash for the sale servicing rights upon the completion of
$1.5 billion of
58
CMOs by the long-term investment operations during 2001. Sale of servicing
rights upon the completion of CMOs allowed the mortgage banking operations to
record previously deferred income on sale of mortgage loans to the long-term
investment operations.
Non-Interest Expense
Non-interest expense and income taxes increased to $46.4 million during
2001 as compared to $27.5 million during 2000 as follows:
. personnel expense increased 70% to $16.6 million during 2001 as
compared to $9.8 million during 2000;
. provision for repurchases increased to $3.5 million during 2001 as
compared to $371,000 during 2000;
. income taxes increased to $8.3 million during 2001 as compared to
$770,000 during 2000; and
. other recurring operating expenses increased 25% to $12.4 million
during 2001 as compared to $9.9 million during 2000.
During 2001, personnel expense increased 70% to $16.6 million as compared
to $9.8 million during 2000 as total loan production increased 52% over prior
year. Personnel expense for 2001 includes $1.4 million in personnel expense
related to NFS. NFS became a subsidiary of the mortgage operations in September
2001. The increase in loan production led to a 55% increase in total staffing to
339 employees as of December 31, 2001, including 80 employees of NFS, as
compared to 219 employees as of December 31, 2000. Personnel expense during 2001
was 52 basis points of total loan production as compared to 47 basis points of
total loan production during 2000. However, excluding personnel expense and
total loan production from NFS, personnel expense was 49 basis points of total
loan production during 2001 as compared to 47 basis points during 2000.
Personnel expense also includes $3.8 million of bonus compensation paid to
employees during 2001 as compared to $630,000 during 2000. Bonus compensation
was 12 basis points of total loan production during 2001 as compared to 3 basis
points during 2000. The increase in bonus compensation was primarily due to the
attainment of return on equity targets that triggered the payment of bonus
compensation during 2001. Return on equity targets were not met during 2000.
Provision for repurchases increased to $3.5 million during 2001 as
compared to $371,000 during 2000. The increase was primarily the result of the
following: (1) provision for probable mortgage loan repurchases on $271.9
million of mortgage loans brokered by Impac Mortgage Acceptance Corporation, or
"IMAC," a division of the mortgage operations, and (2) fraud losses on loans
sold to third party investors which we subsequently repurchased.
Other recurring operating expenses increased 25% to $12.4 million during
2001 as compared to $9.9 million during 2000 as total loan production increased
52% over prior year. Other recurring operating expenses include general and
administrative and other expense, equipment expense, professional services,
occupancy expense and data processing expense.
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 2000 as
compared to net earnings of $4.3 million during 1999. The decrease in net
earnings was primarily due to the following:
. decrease of $7.4 million in gain on sale of loans;
. decrease of $1.7 million in net interest income (loss); and
. accrual of $1.6 million tax liability.
Net Interest Income (Loss)
59
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 interest rates
rose and interest margins compressed. Average mortgage loans held-for-sale
increased 23% to $294.6 million during 2000 as compared to $240.1 million during
1999 and further contributed to interest rate margin compression. Average
mortgage loans held-for-sale increased as total loan acquisitions and
originations increased by 24% to $2.1 billion during 2000 as compared to $1.7
billion during 1999.
The decrease in net interest income was due to the rapid increase in
short-term interest rates, which caused interest rates on borrowing to increase
at a faster rate than yields on mortgage loans could rise. 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. The 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 the mortgage operations 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 was positively affected as
follows:
. decrease of $2.7 million for write-down of investment securities;
. decrease of $1.1 million in impairment of MSRs;
. increase of $2.5 million in personnel expense; and
. 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.
LIQUIDITY AND CAPITAL RESOURCES
60
We recognize the need to have funds available for our operating businesses
and our customer's demands for obtaining short-term warehouse financing until
the settlement or sale of mortgage loans with us or with other investors. It is
our policy to have adequate liquidity at all times to cover normal cyclical
swings in funding availability and loan demand and to allow us to meet abnormal
and unexpected funding requirements. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds. Toward this goal, ALCO is responsible for monitoring our
liquidity position and funding needs. ALCO is comprised of the senior executives
of IMH. ALCO meets on a weekly basis to review current and projected sources and
uses of funds. ALCO monitors the composition of the balance sheet for changes in
the liquidity of our assets in adverse market conditions. Our liquidity consists
of cash and cash equivalents, short-term and marketable investment securities
rated AAA through BBB and maturing mortgage loans, or "liquid assets." Our
policy is to maintain a liquidity threshold of 5% of liquid assets to warehouse
borrowings, reverse repurchase agreements, dividends payable and other
short-term liabilities. During 2001, we were in compliance with this policy,
which ALCO reports to the board of directors at least quarterly. As of December
31, 2001, liquidity was 11%.
With increased liquidity generated from our CMO portfolio and core
operating businesses we were able to increase assets by $1.0 billion through
well-managed growth, retire $7.7 million of high cost senior subordinated
debentures and resume the payment of regular common stock dividends. We believe
that current liquidity levels, available financing facilities and liquidity
provided by operating activities will adequately provide for our 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 our ability to maintain adequate liquidity levels or may
subject us to future losses.
Sources of Liquidity
Our business operations are primarily funded as follows:
. monthly interest and principal payments from our mortgage loan and
investment securities portfolios;
. CMO and reverse repurchase agreements secured by mortgage loans and
mortgage-backed securities;
. proceeds from securitization and whole loan sale of mortgage loans;
and
. cash from the issuance of securities.
We use CMO borrowings and reverse repurchase agreements to fund
substantially all of our mortgage loan and mortgage-backed securities
portfolios. As we accumulate mortgage loans for long-term investment, we issue
CMOs secured by the mortgage loans as a means of providing long-term financing
and repaying short-term warehouse advances. The use of CMOs provides the
following benefits:
. allows us to lock in our financing cost over the life of the
mortgage loans securing the CMO borrowings; and
. eliminates margin calls on the borrowings that are converted from
reverse repurchase agreements to CMO financing.
Terms of CMO borrowings require that an independent third party custodian
hold mortgage loans as collateral. The maturity of each CMO bond class is
directly affected by the rate of early principal payments on the related
collateral. Interest rates on adjustable rate CMOs can range from a low of 0.26%
over one-month LIBOR on "AAA" credit rated bonds to a high of 3.60% over
one-month LIBOR on "BBB" credit rated bonds. As of December 31, 2001, interest
rates on adjustable rate CMOs ranged from 0.26% to 2.40% over one-month LIBOR,
or 2.19% to 4.33%. Interest rates on fixed rate CMOs range from 6.65% to 7.25%
depending on the class of CMOs issued. Equity in the CMOs is established at the
time CMOs are issued at levels sufficient to achieve desired credit ratings on
the securities from rating agencies. We also determine the amount of equity
invested in CMOs based upon the anticipated return on equity as compared to
estimated proceeds from additional debt issuance. Total credit loss exposure is
limited to the equity invested in the CMOs at any point in time.
During 2001, we completed $1.501 billion of CMOs to provide long-term
financing for $1.513 billion of mortgage loans securing CMOs. Because of the
credit profile, historical loss performance and prepayment characteristics of
our
61
non-conforming Alt-A mortgages, we have been able to borrow a higher percentage
against mortgage loans securing CMOs, which means that we have to provide less
capital. By decreasing the amount of capital we have to invest in our CMOs, we
have been able to grow with the liquidity generated from our business
operations.
During 2001, our CMO portfolio generated positive cash flows of $44.0
million, on average CMO equity of $77.6 million, as compared to cash flows of
$11.0 million, on average CMO equity of $100.0 million, during 2000. Cash flow
on our CMO portfolio improved as net interest margins widened and the portfolio
grew. Return on CMO equity was 39% during 2001 as compared to 6% during 2000. As
of December 31, 2001, total equity invested in our CMO portfolio was $79.6
million, or 3.64% of CMO collateral, as compared to total equity invested of
$84.1 million, or 6.31% of CMO collateral, as of December 31, 2000.
Before the issuance of CMOs, we finance the acquisition of mortgage loans
primarily through borrowings on reverse repurchase agreements with third party
lenders. When we have accumulated a sufficient amount of mortgage loans, we
issue CMOs and convert short-term advances under reverse repurchase agreements
to long-term CMO financing. Since 1995, we have had an uncommitted repurchase
facility with a major investment bank to finance the acquisition of mortgage
loans as needed. In order to give us more flexibility in our borrowing
arrangements and to reduce our reliance on one lender, we are currently in
negotiations with other investment banks to provide additional uncommitted
reverse repurchase facilities.
Terms of the reverse repurchase agreement require that mortgage loans be
held by an independent third party custodian, which gives us the ability to
borrow against a percentage of the outstanding principal balance of the mortgage
loans. The borrowing rates vary from 85 basis points to 200 basis points over
one-month LIBOR, depending on the type of collateral provided. The advance rates
on the reverse repurchase agreement is based on the type of mortgage collateral
provided, as well, and generally range from 70% to 98% of the fair market value
of the collateral. At December 31, 2001, we had $469.5 million outstanding on
the reverse repurchase facility, which included the funding of our mortgage
loans and those of our customers.
The mortgage operations currently has warehouse line agreements to obtain
financing of up to $600.0 million from the warehouse lending operations to
provide interim mortgage loan financing during the period that the mortgage
operations accumulates mortgage loans until the mortgage loans are securitized
or sold. The margins on reverse repurchase agreements are based on the type of
collateral provided by the mortgage operations 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 minus 0.50%, which was 4.75% at December 31,
2001. As of December 31, 2001, the mortgage operations had $174.1 million
outstanding under the warehouse line agreements.
We expect to continue to use short-term warehouse facilities to fund the
acquisition of mortgage loans. If we cannot renew or replace maturing
borrowings, we may have to sell, on a whole loan basis, the loans securing these
facilities which, depending upon market conditions, may result in substantial
losses. Additionally, if for any reason the market value of our mortgage loans
securing warehouse facilities decline, our lenders may require us to provide
them with additional equity or collateral to secure our borrowings, which may
require us to sell mortgage loans at substantial losses.
When the mortgage operations accumulates a sufficient amount of mortgage
loans, it sells or securitizes the mortgage loans. During 2001, the mortgage
operations securitized $1.7 billion of mortgage loans as REMICs and sold $1.5
billion, in unpaid principal balance, of mortgage loans to the long-term
investment operations. In addition, the mortgage operations sold $96.3 million,
in unpaid principal balance, of mortgage loans to other investors. The mortgage
operations sold mortgage servicing rights on all ARM and FRM securitizations
completed during 2001. This generated 100% cash gains on securitization and sale
of mortgage loans. Cash from the sale of mortgage servicing rights was deployed
in the mortgage operations and used to acquire and originate additional mortgage
loans.
In order to mitigate interest rate and market risk, we attempt to
securitize our mortgage loans more frequently. Although securitizing mortgage
loans more frequently adds operating and securitization costs, we believe the
added cost is offset as less capital is required and more liquidity is provided
with less interest rate and price volatility, as the accumulation and holding
period of mortgage loans is shortened. The mortgage operations currently has
agreements in place for the sale of mortgage loans and mortgage servicing rights
with an investment bank and large mortgage loan servicer, respectively. This
allows the mortgage operations to forward price its REMIC and CMO transactions
on a servicing released basis and achieve greater stability in the execution of
its securitizations.
62
Due to the success of our restructuring since the deterioration of the
mortgage-backed securitization market during the fourth quarter of 1998,
increased profitability, payment of regular common stock dividends and a
favorable capital market for mortgage-backed REITs, we were able to complete the
sale of 6.5 million shares of our common stock during 2001. The sale of common
stock provided net cash proceeds of $42.8 million which we used to grow our core
operating businesses in addition to being used for general corporate purposes.
On December 1, 2001, we filed a registration statement with the SEC, which
allows us to sell up to $300.0 million of securities, including common stock,
preferred stock, debt securities and warrants. This type of registration
statement is commonly referred to as a "shelf" registration process. In
conjunction with the filing of the shelf, we completed the sale of 7,402,000
shares of common stock, which provided net proceeds of approximately $57.4
million.
Uses of Liquidity
Our business operations primarily use funds as follows:
. acquisition and origination of mortgage loans;
. provide short-term warehouse financing; and
. pay common stock dividends.
During 2001, we acquired and originated $3.2 billion of mortgage loans of
which we retained $1.5 billion for long-term investment. The acquisition and
origination of mortgage loans by the mortgage operations during 2001 resulted in
premium costs of 1.55% of the outstanding principal balance of mortgage loans.
Our equity investment in mortgage loans is outstanding until we sell or
securitize our mortgage loans, which is one of the reasons we attempt to
securitize our mortgage loans frequently. When we complete CMOs our required
equity investment ranges from approximately 3% to 5% of the outstanding
principal balance of mortgage loans, depending on our premium costs,
securitization costs and the capital investment required. Since we rely
significantly upon securitizations to generate cash proceeds to repay borrowings
and to create credit availability, any disruption in our ability to complete
securitizations may require us to utilize other sources of financing, which, if
available at all, may be on unfavorable terms. In addition, delays in closing
securitizations of our mortgage loans increase our risk by exposing us to credit
and interest rate risks for this extended period of time. Furthermore, gains on
sales from our securitizations represent a significant portion of our earnings.
We utilize our uncommitted warehouse line with a major investment bank to
provide short-term warehouse financing to affiliates and external customers of
the warehouse lending operations. The mortgage operations has a $600.0 million
warehouse facility with the warehouse lending operations to fund the acquisition
and origination of mortgage loans until sale or securitization. The warehouse
lending operations provides financing to affiliates at prime minus 0.50%. As of
December 31, 2001, affiliates had $174.1 million outstanding on the warehouse
line with the warehouse lending operations. During January 2002, affiliates
deposited a total of $8.1 million in pledge accounts with the warehouse lending
operations that allows them to finance 100% of the fair market value of their
mortgage loans. The warehouse lending operations provides financing to
non-affiliates at prime plus a spread. Non-affiliates can generally finance
between 95% and 98% of the fair market value of the mortgage loans. As of
December 31, 2001, the warehouse lending operations had $447.0 million of
approved warehouse lines available to its customers of which $300.6 million was
outstanding. Our ability to meet liquidity requirements and the financing need
of our customers is subject to the renewal of our credit and repurchase
facilities or obtaining other sources of financing, if required, including
additional debt or equity from time to time. Any decision our lenders or
investors make to provide available financing to us in the future will depend
upon a number of factors, including:
. our compliance with the terms of our existing credit arrangements;
. our financial performance;
. industry and market trends in our various businesses;
. the general availability of and rates applicable to financing and
investments;
63
. our lenders or investors resources and policies concerning loans and
investments; and
. the relative attractiveness of alternative investment or lending
opportunities.
We made our first common stock dividend payments during 2001 since the
third quarter of 2000. The common stock dividend was $0.25 per common share, or
$6.7 million. In addition, we declared common stock dividends of $0.44 per
common share, or $14.1 million, which was paid in January 2002.
Cash Flows
Operating Activities - During 2001, net cash provided by operating
activities was $55.5 million. Net earnings of $33.2 million provided most of the
cash flows from operating activities.
Investing Activities - During 2001, net cash used in investing activities
was $961.0 million. Net cash flows of $923.3 million, including principal
repayments, was used in investing activities to acquire and originate mortgage
loans.
Financing Activities - During 2001, net cash provided by financing
activities was $939.5 million. Net cash flows of $860.1 million provided by CMO
financing was primarily provided by financing activities.
Inflation
The consolidated financial statements and corresponding notes to the
consolidated financial statements have been prepared in accordance with GAAP,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased costs of our operations. Unlike industrial companies,
nearly all of our assets and liabilities are monetary in nature. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Inflation affects our 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 our yield and
subsequently the value of our portfolio of mortgage assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
A significant portion of our revenues and earnings are derived from net
interest income. We strive to manage our interest-earning assets and
interest-bearing liabilities to generate what we believe to be an appropriate
contribution from net interest income. When interest rates fluctuate,
profitability can be adversely affected by changes in the fair market value of
our assets and liabilities and by the interest spread earned on interest-earning
assets and interest-bearing liabilities. We derive income from the differential
spread between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities. Any change in interest rates affects income
received and income paid from assets and liabilities in varying and typically in
unequal amounts. Changing interest rates may compress our interest rate margins
and adversely affect overall earnings.
Therefore, we seek to control the volatility of profitability due to
changes in interest rates through asset/liability management. We attempt to
achieve an appropriate relationship between interest rate sensitive assets and
interest rate sensitive liabilities. Although we manage other risks, such as
credit, operational and liquidity risk in the normal course of business, we
consider interest rate risk to be a significant market risk which could
potentially have the largest material effect on our financial condition and
results of operations. As we only invest or borrow in U.S. dollar denominated
financial instruments, we are not subject to foreign currency exchange risk.
64
As part of our asset/liability management process, we perform various
interest rate simulations that calculate the affect of potential changes in
interest rates on our 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 ALCO, which reports
to the board of director's on a quarterly basis. ALCO establishes policies that
monitor and coordinate sources, uses and pricing of 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 declining 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.
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 assets and
liabilities or the affects of hedges, on net interest income, see "--Changes in
Interest Rates."
We manage interest rate risk as follows:
. retaining adjustable rate mortgages to be held for long-term
investment;
. selling fixed rate mortgages on a whole-loan basis;
. securitizing both adjustable- and fixed rate mortgages through the
issuance of CMOs and REMICs; and
. purchasing interest rate hedges.
We retain 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. We also securitize both variable- and fixed rate mortgages as
CMOs to reduce 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, we purchase hedges to provide
some protection against any resulting basis risk shortfall on the related
liabilities. The hedges are based upon the principal balance that would result
under an assumed prepayment speed.
We do not currently maintain a securities trading portfolio. As a result,
we are not exposed to market risk as it relates to trading activities. Our
investment securities portfolio is available-for-sale, which requires us to
perform market valuations of the portfolio in order to properly record the
portfolio at the lower of cost or market. We continually monitor interest rates
of our investment securities portfolio as compared to prevalent interest rates
in the market.
The following table summarizes the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2001 (dollar amounts in
thousands), which are anticipated to re-price or mature in each of the future
time periods shown. The amount of assets and liabilities shown which re-price 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
65
for scheduled and unscheduled repayments. Unscheduled prepayment rates are
assumed on substantially all of our mortgage loan and mortgage-backed securities
investment 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
Years
2002 2003 2004 2005 2006 (4)
----------- --------- --------- --------- --------- ---------
Interest sensitive assets:
Cash equivalents $ 51,887 $ -- $ -- $ -- $ -- $ --
Average interest rate 4.69% --% --% --% --% --%
Investment securities (1) 3,468 3,619 4,548 5,039 5,876 10,439
Average interest rate 9.94% 10.02% 9.12% 8.69% 7.89% 5.81%
Finance receivables 466,649 -- -- -- -- --
Average interest rate 8.94% --% --% --% --% --%
CMO collateral (2) 907,316 929,466 146,737 56,383 38,904 150,362
Average interest rate 7.88% 8.17% 8.67% 9.03% 9.16% 7.75%
Loans held-for-investment (3) 12,677 256 65 51 40 6,989
Average interest rate 3.28% 10.46% 13.13% 13.71% 14.35% 16.77%
Due from affiliates 14,500 -- -- -- -- --
Average interest rate 9.50% --% --% --% --% --%
----------- --------- --------- --------- --------- ---------
Total interest-sensitive
assets $ 1,456,497 $ 933,341 $ 151,350 $ 61,473 $ 44,820 $ 167,790
----------- --------- --------- --------- --------- ---------
Average interest rate 9.80% 8.18% 8.68% 9.01% 9.00% 7.30%
Interest sensitive
liabilities:
CMO borrowings $ 2,021,043 $ 130,357 $ -- $ -- $ -- $ --
Average interest rate 3.25% 6.54% --% --% --% --%
Reverse repurchase
agreements 469,491 -- -- -- -- --
Average interest rate 4.02% --% --% --% --% --%
Borrowings secured by
securities
available-for-sale 4,185 3,376 2,722 2,194 520 --
Average interest rate 16.94% 16.95% 16.97% 16.99% 17.02% --%
----------- --------- --------- --------- --------- ---------
Total interest-sensitive
liabilities $ 2,494,719 $ 133,733 $ 2,722 $ 2,194 $ 520 $ --
----------- --------- --------- --------- --------- ---------
Average interest rate 3.42% 10.49% 259.32% 7.72% 7.37% --%
Interest rate sensitivity
gap (5) $ (1,038,222) $ 799,608 $ 148,628 $ 59,279 $ 44,301 $ 167,790
Cumulative interest rate
sensitivity gap $(1,038,222) $(238,614) $ (89,986) $ (30,707) $ 13,594 $ 181,384
Cumulative gap ratio% (36.88)% (8.48)% (3.20)% (1.09)% 0.48% 6.44%
Fair
Total Value
---------- ---------
Interest sensitive assets:
Cash equivalents $ 51,887 $ 51,887
Average interest rate 4.69%
Investment securities (1) 32,989 32,989
Average interest rate 8.04%
Finance receivables 466,649 466,649
Average interest rate 8.94%
CMO collateral (2) 2,229,168 2,339,558
Average interest rate 8.09%
Loans held-for-investment (3) 20,078 12,991
Average interest rate 3.76%
Due from affiliates 14,500 14,500
Average interest rate 9.50%
---------- ----------
Total interest-sensitive
assets $2,815,271 $2,918,574
---------- ----------
Average interest rate 8.00%
Interest sensitive
liabilities:
CMO borrowings 2,151,400 2,147,391
Average interest rate 3.45%
Reverse repurchase
agreements 469,491 469,491
Average interest rate 4.02%
Borrowings secured by
securities
available-for-sale 12,997 12,607
Average interest rate 17.11%
---------- ----------
Total interest-sensitive
liabilities $2,633,888 $2,629,489
---------- ----------
Average interest rate 4.07%
Interest rate sensitivity
gap (5) $ 181,384
Cumulative interest rate
sensitivity gap
Cumulative gap ratio %
- ------------------
(1) The over 5 year category includes "interest-only" securities of $4.9
million.
(2) Includes unamortized net premiums and unamortized securitization costs of
$35.4 million and $11.6 million, respectively.
(3) Includes unamortized net discounts of $8,000.
(4) CMO collateral and loans held-for-investment include non-accrual loans of
$51.2 million and $9.9 million, respectively.
(5) Interest rate sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
Interest-earning assets and interest-bearing liabilities as of December
31, 2001 resulted in a negative estimated interest rate sensitivity gap for
2002. Under this scenario, net interest income could be positively affected by a
decrease in interest rates as more interest-bearing liabilities could reprice
downwards during 2002 than interest-bearing assets. Conversely, an increase in
interest rates could have a negative affect on net interest income during 2002
as more interest-bearing liabilities could reprice upwards than interest-bearing
assets, see "--Changes in Interest Rates." As of December 31, 2001, the
estimated cumulative negative gap of $1.0 billion during the first year compares
to an estimated cumulative negative gap of $396.4 million during the first year
as measured at December 31, 2000. The increase in the negative gap as measured
at December 31, 2001 was due to the acquisition of $1.1 billion of hybrid loans
during 2001 with fixed periods generally ranging from two to three years, which
are financed with adjustable rate CMO borrowings. However, in an increasing
interest rate environment the adverse effect to net interest income caused by
our negative gap would be offset by our interest rate hedges.
66
Since these estimates are based upon numerous assumptions, such as the
expected maturities of interest-earning assets and interest-bearing liabilities
and exclude the effect of hedges, 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, we
measure the sensitivity of our net interest income to changes in interest rates
affecting interest sensitive assets and liabilities using simulations. The
simulations consider the effect of interest rate changes on interest sensitive
assets and liabilities as well as hedges. Changes in interest rates are defined
as instantaneous and sustained movements in interest rates in 100 basis point
increments. We estimate our net interest income for the next twelve months
assuming no changes in interest rates from those at period end, which we refer
to as "base case." 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 our balance sheet structure as of December 31, 2001 and
2000. Since, these estimates are based upon numerous assumptions, such as
estimated prepayment rates, the shape of the yield curve and estimated business
volumes, actual sensitivity to interest rate changes could differ significantly
as compared to actual results.
2002 estimates using 2001 estimates using
balances at 12/31/01 balances at 12/31/00
----------------------- -----------------------
Changes in Interest Rates Change in Net Change in Net
(in basis points) Interest Income (1) Interest Income (1)
----------------------- -----------------------
($) (%) ($) (%)
+200...................................... (5.6) (7) (5.0) (19)
+100...................................... (2.4) (3) (4.1) (15)
-100...................................... (3.5) (5) 6.2 23
-200...................................... (5.3) (7) 12.7 48
- ------------------
(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.
We project that in all interest rate change scenarios we will maintain a
steady, consistent stream of cash flows compared to base case net interest
income. As a result of purchasing hedges during 2001, in an increasing interest
rate environment, net interest income, as a percentage change of base case net
interest income, will have a smaller impact on earnings during 2002 as compared
to 2001. As interest rates rise, interest rate hedges will have a positive
effect on earnings as we will receive cash payments when market interest rates
reach certain contractual levels based on our cap agreements. In a decreasing
interest rate environment, we project virtually the same effect on net interest
income as we will make cash payments when market rates reach certain contractual
levels base on our floor agreements
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 interest income and interest expense during
the periods indicated. Information is provided on mortgage assets and borrowings
on mortgage assets, only, with respect to the following:
. changes attributable to changes in volume (changes in volume
multiplied by prior rate);
. changes attributable to changes in rate (changes in rate multiplied
by prior volume);
67
. changes in interest due to both rate and volume; and
. the net change.
Year Ended December 31,
2001 over 2000
--------------------------------------------
Rate/ Net
Volume Rate Volume Change
-------- -------- -------- --------
(in thousands)
Increase/(decrease) in:
Subordinated securities collateralized by mortgages ............ $ (2,949) $ (1,320) $ 537 $ (3,732)
Subordinated securities collateralized by other loans .......... (273) (273) 273 (273)
-------- -------- ------- --------
Total investment securities ................................. (3,222) (1,593) 810 (4,005)
Loan receivables:
CMO collateral ................................................. 23,030 (493) (132) 22,405
Mortgage loans held-for-investment ............................. 1,338 (1,841) (275) (778)
Finance receivables:
Affiliated .................................................. (1,516) (8,633) 467 (9,682)
Non-affiliated .............................................. 7,496 (4,079) (2,141) 1,276
-------- -------- ------- --------
Total finance receivables ................................. 5,980 (12,712) (1,674) (8,406)
-------- -------- ------- --------
Total loan receivables ...................................... 30,348 (15,046) (2,081) 13,221
-------- -------- ------- --------
Change in interest income on mortgage assets .............. 27,126 (16,639) (1,271) 9,216
-------- -------- ------- --------
CMO borrowings ................................................. 25,096 (21,004) (6,565) (2,473)
Reverse repurchase agreements-mortgages ........................ 5,083 (11,946) (1,548) (8,411)
Borrowings secured by investment securities .................... (1,117) 714 (248) (651)
-------- -------- ------- --------
Change in interest expense on borrowings on mortgage assets 29,062 (32,236) (8,361) (11,535)
-------- -------- ------- --------
Change in net interest income ........................... $ (1,936) $ 15,597 $ 7,090 $ 20,751
======== ======== ======= ========
Year Ended December 31,
2000 over 1999
--------------------------------------------
Rate/ Net
Volume Rate Volume Change
-------- -------- -------- --------
(in thousands)
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)
======== ======== ======== ========
68
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 2001 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 2001 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 2001 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 2001 fiscal year.
69
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
Current Report on Form 8-K, dated October 1, 2001, reporting on Item 9,
relating to the posting of Registrant's unaudited monthly fact sheet.
Current Report on Form 8-K, dated October 22, 2001, reporting on Items 5
and 7, relating to the sale of the Registrant's common stock.
Current Report on Form 8-K, dated October 25, 2001, reporting on Items 5
and 7, relating to the issuance of a press release by the Registrant.
Current Report on Form 8-K, dated December 4, 2001, reporting on Item 9,
relating to the posting of Registrant's unaudited monthly fact sheet.
(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).
70
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).
4.3 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 Schedule 13E-4, as amended,
filed on April 9, 1999).
4.4 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
Schedule 13E-4, as amended, 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 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).
10.3(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).
10.3(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).
10.3(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).
10.4 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).
10.5 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).
71
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.9(a) Second Amendment to Lease dated October 1, 1999 between The
Realty Associates Fund V, L.P., the Registrant and Impac Funding
Corporation (incorporated by reference to exhibit number 10.4(d)
of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
10.10 Office Lease, First Amendment to Office Lease, and Assignment,
Assumption and Consent to Assignment of Lease with Property
California OB One Corporation and Assignment to Impac Funding
Corporation regarding San Diego facilities.
10.11 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).
10.12 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).
10.13 Underwriting Agreement dated October 22, 2001 among the
Registrant, Impac Funding Corporation and UBS Warburg LLC
(incorporated by reference to exhibit 1.1 of Registrant's
Current Report on Form 8-K dated October 22, 2001).
10.14 Underwriting Agreement dated February 7, 2002 among the
Registrant, HBK MasterFund L.P. and UBS Warburg LLC
(incorporated by reference to exhibit 1.1 of Registrant's
Current Report on Form 8-K dated February 8, 2002) .
10.15 Impac Mortgage Holdings, Inc. 2001 Stock Option Plan, Deferred
Stock and Restricted Stock Plan (incorporated by reference to
Appendix A of Registrant's Definitive Proxy Statement filed with
the SEC on April 30, 2001).
10.15(a) Amendment to Impac Mortgage Holdings, Inc. 2001 Stock Option
Plan, Deferred Stock and Restricted Stock Plan (incorporated by
reference to Exhibit 4.1(a) of the Registrants Form S-8 filed
with the SEC on March 1, 2002).
21.1 Subsidiaries of the Registrant.
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).
72
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 1st day of April, 2002.
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 April 1, 2002
- ------------------------------------ Executive Officer and Director
Joseph R. Tomkinson
/s/ RICHARD J. JOHNSON Chief Financial Officer and Executive April 1, 2002
- ------------------------------------ Vice President
Richard J. Johnson
/s/ WILLIAM S. ASHMORE President and Director April 1, 2002
- ------------------------------------
William S. Ashmore
/s/ JAMES WALSH Director April 1, 2002
- ------------------------------------
James Walsh
/s/ FRANK P. FILIPPS Director April 1, 2002
- ------------------------------------
Frank P. Filipps
/s/ STEPHAN R. PEERS Director April 1, 2002
- ------------------------------------
Stephan R. Peers
/s/ WILLIAM E. ROSE Director April 1, 2002
- ------------------------------------
William E. Rose
/s/ LEIGH J. ABRAMS Director April 1, 2002
- ------------------------------------
Leigh J. Abrams
INDEPENDENT AUDITORS' REPORT AND
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report ........................................... F-2
Consolidated Balance Sheets at December 31, 2001 and 2000 .............. F-3
Consolidated Statements of Operations and Comprehensive Earnings
(Loss) for the three years ended December 31, 2001, 2000 and 1999 ... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 2001, 2000 and 1999 .................. F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001, 2000 and 1999 .................................... F-7
Notes to Consolidated Financial Statements ............................. F-9
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
Independent Auditors' Report ........................................... F-36
Consolidated Balance Sheets at December 31, 2001 and 2000 .............. F-37
Consolidated Statements of Operations and Comprehensive Earnings
(Loss) for the three years ended December 31, 2001, 2000 and 1999 ... F-38
Consolidated Statements of Changes in Shareholders' Equity for
the three years ended December 31, 2001, 2000 and 1999 .............. F-39
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001, 2000 and 1999 .................................... F-40
Notes to Consolidated Financial Statements ............................. F-41
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.
KPMG LLP
Orange County, California
January 28, 2002, except as to Note T to
the consolidated financial statements,
which is as of March 8, 2002
F-2
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share data)
At December 31,
--------------------------
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents ............................................................... $ 51,887 $ 17,944
Investment securities available-for-sale ................................................ 32,989 36,921
Loan Receivables:
CMO collateral ....................................................................... 2,229,168 1,372,996
Finance receivables .................................................................. 466,649 405,438
Mortgage loans held-for-investment ................................................... 20,078 16,720
Allowance for loan losses ............................................................ (11,692) (5,090)
----------- -----------
Net loan receivables ............................................................... 2,704,203 1,790,064
Investment in Impac Funding Corporation ................................................. 19,126 15,762
Due from Impac Funding Corporation ...................................................... 14,500 14,500
Accrued interest receivable ............................................................. 14,565 12,988
Other real estate owned ................................................................. 8,137 4,669
Derivative assets ....................................................................... 5,128 --
Other assets ............................................................................ 4,199 5,990
----------- -----------
Total assets .................................................................. $ 2,854,734 $ 1,898,838
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings .......................................................................... $ 2,151,400 $ 1,291,284
Reverse repurchase agreements ........................................................... 469,491 398,653
Borrowings secured by investment securities available-for-sale .......................... 12,997 21,124
11% senior subordinated debentures ...................................................... -- 6,979
Accrued dividends payable ............................................................... 14,081 788
Other liabilities ....................................................................... 3,400 1,570
----------- -----------
Total liabilities ............................................................. 2,651,369 1,720,398
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 6,300,000 shares authorized; none issued and
outstanding at December 31, 2001 and 2000 .......................................... -- --
Series A junior participating preferred stock, $0.01 par value; 2,500,000 shares
authorized; none issued and outstanding at December 31, 2001 and 2000, respectively -- --
Series C 10.5% cumulative convertible preferred stock, $0.01 par value; liquidation
value $30,000; 1,200,000 shares authorized; none and 1,200,000 issued and
outstanding at December 31, 2001 and 2000, respectively ............................ -- 12
Common stock, $0.01 par value; 50,000,000 shares authorized; 32,001,997 and
20,409,956 shares issued and outstanding at December 31, 2001 and 2000, respectively 320 204
Additional paid-in capital ........................................................... 359,279 325,350
Accumulated other comprehensive loss ................................................. (19,857) (568)
Notes receivable from common stock sales ............................................. (920) (902)
Net accumulated deficit:
Cumulative dividends declared ...................................................... (126,952) (103,973)
Accumulated deficit ................................................................ (8,505) (41,683)
----------- -----------
Net accumulated deficit ......................................................... (135,456) (145,656)
----------- -----------
Total stockholders' equity .................................................... 203,365 178,440
----------- -----------
Total liabilities and stockholders' equity .................................... $ 2,854,734 $ 1,898,838
=========== ===========
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,
------------------------------------------
2001 2000 1999
---------- --------- ---------
INTEREST INCOME:
Mortgage Assets .......................................................... $ 153,951 $ 144,735 $ 117,224
Other interest income .................................................... 2,664 2,344 2,234
---------- --------- ---------
Total interest income .................................................. 156,615 147,079 119,458
INTEREST EXPENSE:
CMO borrowings ........................................................... 77,813 80,287 65,212
Reverse repurchase agreements ............................................ 33,370 42,433 23,229
Other borrowings ......................................................... 829 1,376 1,354
---------- --------- ---------
Total interest expense ................................................. 112,012 124,096 89,795
---------- --------- ---------
Net interest income ...................................................... 44,603 22,983 29,663
Provision for loan losses .............................................. 16,813 18,839 5,547
---------- --------- ---------
Net interest income after provision for loan losses ...................... 27,790 4,144 24,116
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation ............... 10,912 (1,762) 4,292
Servicing fees ........................................................... 751 690 1,370
Gain on sale of securities ............................................... 312 -- 93
Other income ............................................................. 5,404 3,585 1,147
---------- --------- ---------
Total non-interest income .............................................. 17,379 2,513 6,902
NON-INTEREST EXPENSE:
Mark-to-market loss - SFAS 133 ........................................... 3,821 -- --
Professional services .................................................... 2,747 2,604 2,678
General and administrative and other expense ............................. 2,303 2,230 1,343
Write-down on investment securities available-for-sale ................... 2,217 53,576 2,037
Personnel expense ........................................................ 1,211 666 484
(Gain) loss on sale of other real estate owned ........................... (1,931) 1,814 2,159
---------- --------- ---------
Total non-interest expense ............................................. 10,368 60,890 8,701
---------- --------- ---------
Earnings (loss) before extraordinary item and cumulative effect of change
in accounting principle ................................................... 34,801 (54,233) 22,317
Extraordinary item ....................................................... (1,006) -- --
Cumulative effect of change in accounting principle - SFAS 133 ........... (617) -- --
---------- --------- ---------
Net earnings (loss) ......................................................... 33,178 (54,233) 22,317
Less: Cash dividends on cumulative convertible preferred stock ........... (1,575) (3,150) (3,290)
---------- --------- ---------
Net earnings (loss) available to common stockholders ........................ 31,603 (57,383) 19,027
---------- --------- ---------
Other comprehensive earnings (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during year .................. (21,094) (795) (6,423)
Less: Reclassification of gains included in income ..................... 1,805 7,806 580
---------- --------- ---------
Net unrealized gains (losses) arising during year ................... (19,289) 7,011 (5,843)
---------- --------- ---------
Comprehensive earnings (loss) .......................................... $ 13,889 $ (47,222) $ 16,474
========== ========= =========
See accompanying notes to consolidated financial statements.
F-4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)--(continued)
Net earnings (loss) per share before extraordinary item and cumulative effect of
change in accounting principle:
Net earnings (loss) per share--basic ........................................ $ 1.41 $ (2.70) $ 0.83
========== ========== ========
Net earnings (loss) per share--diluted ...................................... $ 1.25 $ (2.70) $ 0.76
========== ========== ========
Net earnings (loss) per share:
Net earnings (loss) per share--basic ........................................ $ 1.34 $ (2.70) $ 0.83
========== ========== ========
Net earnings (loss) per share--diluted ...................................... $ 1.19 $ (2.70) $ 0.76
========== ========== ========
Dividends declared per common share ............................................ $ 0.69 $ 0.36 $ 0.48
========== ========== ========
See accompanying notes to consolidated financial statements.
F-5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollar amounts in thousands, except share data)
Accumulated Notes
Number of Number of Other Receivable
Preferred Common Additional Comprehensive Common
Shares Preferred Shares Common Paid-In Earnings Stock
Outstanding Stock Outstanding Stock Capital (Loss) Sales
----------------------------------------------------------------------------------
Balance, December 31, 1998............. 1,200,000 $ 12 24,557,657 $ 246 $ 342,945 $ (1,736) $ (918)
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.................. -- -- -- -- -- -- 13
Net earnings, 1999..................... -- -- -- -- -- -- --
Other comprehensive loss............... -- -- -- -- -- (5,843) --
----------------------------------------------------------------------------------
Balance, December 31, 1999............. 1,200,000 12 21,400,906 214 327,632 (7,579) (905)
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.................. -- -- -- -- -- -- 3
Net loss, 2000......................... -- -- -- -- -- -- --
Other comprehensive earnings........... -- -- -- -- -- 7,011 --
----------------------------------------------------------------------------------
Balance, December 31, 2000............. 1,200,000 12 20,409,956 204 325,350 (568) (902)
Dividends declared ($0.69 per common
share).............................. -- -- -- -- -- -- --
Dividends declared on preferred shares. -- -- -- -- -- -- --
Repurchase of common stock............. -- -- (25,000) -- (54) -- --
Common stock offering.................. -- -- 5,100,000 51 33,482 -- --
Proceeds from exercise of stock options -- -- 161,109 1 553 -- --
Conversion of preferred shares to
common shares....................... (1,200,000) (12) 6,355,932 64 (52) -- --
Advances on notes receivable from
common stock sales.................. -- -- -- -- -- -- (18)
Net earnings, 2001..................... -- -- -- -- -- -- --
Other comprehensive loss............... -- -- -- -- -- (19,289) --
----------------------------------------------------------------------------------
Balance, December 31, 2001............. -- $ -- 32,001,997 $ 320 $ 359,279 $ (19,857) $ (920)
==================================================================================
Retained
Cumulative Earnings Total
Dividends (Accumulated Stockholders'
Declared Deficit) Equity
---------------------------------------
Balance, December 31, 1998............. $(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
Net earnings, 1999..................... -- 22,317 22,317
Other comprehensive loss............... -- -- (5,843)
---------------------------------------
Balance, December 31, 1999............. (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
Net loss, 2000......................... -- (54,233) (54,233)
Other comprehensive earnings........... -- -- 7,011
---------------------------------------
Balance, December 31, 2000............. (103,973) (41,683) 178,440
Dividends declared ($0.69 per common
share).............................. (21,404) -- (21,404)
Dividends declared on preferred shares. (1,575) -- (1,575)
Repurchase of common stock............. -- -- (54)
Common stock offering.................. -- -- 33,533
Proceeds from exercise of stock options -- -- 554
Conversion of preferred shares to
common shares....................... -- -- --
Advances on notes receivable from
common stock sales.................. -- -- (18)
Net earnings, 2001..................... -- 33,178 33,178
Other comprehensive loss............... -- -- (19,289)
---------------------------------------
Balance, December 31, 2001............. $ (126,952) $ (8,505) $ 203,365
=======================================
See accompanying notes to consolidated financial statements.
F-6
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) before cumulative effect of change in accounting
principle ........................................................ $ 33,795 $ (54,233) $ 22,317
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle .............. (617) -- --
Equity in net (earnings) loss of Impac Funding Corporation ....... (10,912) 1,762 (4,292)
Provision for loan losses ........................................ 16,813 18,839 5,547
Amortization of CMO premiums and deferred securitization costs ... 14,973 15,308 18,593
Net change in accrued interest receivable ........................ (1,577) (1,779) (1,170)
Write-down of securitization costs ............................... 1,006 -- --
Write-down of investment securities available-for-sale ........... 2,217 53,576 2,037
Gain (loss) on sale of other real estate owned ................... 1,931 (1,814) (2,159)
Gain on sale of investment securities available-for-sale ......... (312) -- (93)
Net change in other assets and liabilities ....................... (1,858) (4,939) 15,059
------------ ------------ ------------
Net cash provided by operating activities ..................... 55,459 26,720 55,839
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in CMO collateral ....................................... (907,189) 312,171 178,519
Net change in finance receivables .................................. (61,817) (208,966) 113,969
Net change in mortgage loans held-for-investment ................... (16,091) (433,340) (352,603)
Purchase of investment securities available-for-sale ............... -- -- (18,295)
Sale of investment securities available-for-sale ................... 3,901 5,704 3,803
Dividend Impac Funding Corporation ................................. 8,894 -- --
Issuance of note to Impac Funding Corporation ...................... -- -- (14,500)
Principal reductions on investment securities available-for-sale ... 5,542 3,864 6,985
Proceeds from sale of other real estate owned ...................... 5,722 18,091 18,027
------------ ------------ ------------
Net cash used in investing activities ......................... (961,038) (302,476) (64,095)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in reverse repurchase agreements and other borrowings ... 62,824 (150,955) 247,395
Proceeds from CMO borrowings ....................................... 1,500,921 943,558 298,076
Repayment of CMO borrowings ........................................ (640,805) (503,091) (519,575)
Dividends paid ..................................................... (9,686) (13,675) (22,463)
Retirement of senior subordinated debentures ....................... (7,747) -- --
Proceeds from sale of common stock ................................. 33,533 -- 946
Repurchase of common stock ......................................... (54) (2,292) (9,860)
Proceeds from exercise of stock options ............................ 554 -- --
Advances to purchase common stock .................................. (18) 3 13
------------ ------------ ------------
Net cash provided by (used in) financing activities ........... 939,522 273,548 (5,468)
------------ ------------ ------------
Net change in cash and cash equivalents ............................... 33,943 (2,208) (13,724)
Cash and cash equivalents at beginning of year ........................ 17,944 20,152 33,876
------------ ------------ ------------
Cash and cash equivalents at end of year .............................. $ 51,887 $ 17,944 $ 20,152
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(continued)
(in thousands)
SUPPLEMENTARY INFORMATION:
Interest paid .................................................. $ 113,384 $125,391 $ 88,989
NON-CASH TRANSACTIONS:
Exchange of common stock for senior subordinated debt .......... $ -- $ -- $ 6,431
Accumulated other comprehensive gain (loss) .................... (19,289) 7,011 (5,843)
Transfer of loans held-for-investment to other real estate owned 2,522 3,179 1,318
Transfer of CMO collateral to other real estate owned .......... 7,993 8,300 14,431
Transfer of finance receivables to other real estate owned ..... 606 647 483
Dividends declared and unpaid .................................. 14,081 788 3,570
See accompanying notes to consolidated financial statements.
F-8
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Business and Significant Accounting Policies
1. Financial Statement Presentation
The financial condition and operations of the Company have been presented
in the consolidated financial statements for the three-year period ended
December 31, 2001 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 into 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 on December 31, 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 consist 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 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.
F-9
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Alt-A mortgage loans to be held as
long-term investment or as collateral for Collateralized Mortgage Obligations
(CMOs). Mortgage loans held-for-investment and CMO collateral are recorded at
cost as of 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.
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 loan investment 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
F-10
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
typically, three to twenty years.
8. CMO Borrowings
The Company issues CMOs, which are primarily secured by non-conforming
Alt-A 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 90% of its
taxable income to its stockholders 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. As of December 31, 2001, the
Company has federal net operating loss carryovers of $21.5 million which expire
in the year 2020 and state net operating loss carryovers of $21.5 million which
expire in the year 2010 that are available to offset future taxable income.
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 (loss) for
the year.
11. Stock Options
Stock options 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 Plans 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. Grants under their stock option plans are made and
administered by the board of directors.
12. Derivative Instruments and Hedging Activities
F-11
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
On January 1, 2001, the Company adopted SFAS 133 and the fair market value
of derivative instruments are reflected on the Company's financial statements.
On August 10, 2001, the Derivatives Implementation Group (DIG) of the FASB
published DIG G20, which further interpreted SFAS 133. On October 1, 2001, the
Company adopted the provisions of DIG G20 and net income and accumulated other
comprehensive income were adjusted by the amount needed to reflect the
cumulative impact of adopting the provisions of DIG G20.
The Company follows a hedging program intended to limit its exposure to
changes in interest rates primarily associated with its CMO borrowings. The
Company's primary objective is to hedge its exposure to the variability in
future cash flows attributable to the variability of one-month LIBOR, which is
the underlying index of its CMO borrowings. The Company also monitors on an
ongoing basis the prepayment risks that arise in fluctuating interest rate
environments. The Company's hedging program is formulated with the intent to
offset the potential adverse effects of changing interest rates on CMO
borrowings resulting from the following:
. interest rate adjustment limitations on mortgage loans due to
periodic and lifetime interest rate cap features; and
. mismatched interest rate adjustment periods of mortgage loans and
CMO borrowings.
The Company primarily acquires for long-term investment six-month LIBOR
ARMs and hybrid ARMs. Six-month LIBOR ARMs are generally subject to periodic and
lifetime interest rate caps. This means that the interest rate of each ARM is
limited to upwards or downwards movements on its periodic interest rate
adjustment date, generally six months, or over the life of the mortgage loan.
Periodic caps limit the maximum interest rate change, which can occur on any
interest rate change date to generally a maximum of 1% per semiannual
adjustment. Also, each ARM has a maximum lifetime interest rate cap. Generally,
borrowings are not subject to the same periodic or lifetime interest rate
limitations. During a period of rapidly increasing or decreasing interest rates,
financing costs would increase or decrease at a faster rate than the periodic
interest rate adjustments on mortgage loans would allow, which could effect net
interest income. In addition, if market rates were to exceed the maximum
interest rates of our ARMs, borrowing costs would increase while interest rates
on ARMs would remain constant.
The Company's mortgage loan portfolio is also subject to basis risk as the
basis, or interest rate index, of mortgage loans and borrowings are tied to
different interest indices. For instance, six-month LIBOR ARMs are indexed to
six-month LIBOR while CMO and reverse repurchase borrowings are indexed to
one-month LIBOR. Therefore, the Company receives interest income based on
six-month LIBOR plus a spread but pays interest expense based on one-month LIBOR
plus a spread. These indices typically move in unison but may vary in unequal
amounts.
The Company's mortgage loan portfolio is subject to risk from the
mismatched nature of interest rate adjustment periods on mortgage loans and
interest rates on the related borrowings. Six-month LIBOR mortgage loans can
adjust upwards or downwards every six months, subject to periodic cap
limitations, while adjustable rate CMO borrowings adjust every month.
Additionally, the Company has hybrid ARMs which have an initial fixed interest
rate period generally ranging from two to three years, and to a lesser extent
five years, which subsequently convert to six-month LIBOR ARMs. Again, during a
rapidly increasing or decreasing interest rate environment, financing costs
would
F-12
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
increase or decrease more rapidly than would interest rates on mortgage loans,
which would remain fixed until their next interest rate adjustment date.
To mitigate exposure to the effect of changing interest rates on CMO
borrowings, the Company purchases derivative instruments in the form of interest
rate cap agreements, or caps, interest rate floor agreements, or floors, and
interest rate swap agreements, or swaps. The Company also simultaneously
purchases caps and floors, which are referred to as collars. These derivative
instruments are referred to collectively as interest rate hedges, or hedges. An
interest rate cap or floor is a contractual agreement for which the Company pays
a fee. If prevailing interest rates reach levels specified in the cap or floor
agreement, the Company may either receive or pay cash. An interest rate swap is
generally a contractual agreement that obligates one party to receive or make
cash payments based on an adjustable rate index and the other party to receive
or make cash payments based on a fixed rate. Swap agreements have the effect of
fixing borrowing costs on a similar amount of swaps and, as a result, the
Company can reduce the interest rate variability of borrowings. The Company's
objective is to lock in a reliable stream of cash flows when interest rates fall
below or rise above certain levels. For instance, when interest rates rise,
borrowing costs increase at greater speeds than the underlying collateral
supporting the borrowings. These derivative instruments hedge the variability of
forecasted cash flows attributable to CMO borrowings and protect net interest
income by providing cash flows at certain triggers during changing interest rate
environments. In all hedging transactions, counterparties must have a AAA credit
rating as determined by various credit rating agencies.
Caps qualify as derivative instruments under provisions of SFAS 133. The
hedging instrument is the specific LIBOR cap that is hedging the LIBOR based CMO
borrowings. The nature of the risk being hedged is the variability of the cash
flows associated with the LIBOR borrowings. Prior to the adoption of DIG G20,
the Company assessed the hedging effectiveness of its caps utilizing only the
intrinsic value of the caps. DIG G20 allows the Company to utilize the terminal
value of the caps to assess effectiveness. DIG G20 also allows the Company to
amortize the initial fair value of the caps over the life of the caps based on
the maturity date of the individual caplets. Upon adoption of DIG G20, net
income and accumulated other comprehensive income were adjusted by the amount
needed to reflect the cumulative impact of adopting the provisions of DIG G20.
Subsequent to the adoption of DIG G20, caps are considered effective hedges and
are marked to market each reporting period with the entire change in market
value being recognized in other comprehensive income on the balance sheet.
Floors, swaps and collars qualify as cash flow hedges under the provisions
of SFAS 133. The hedging instrument is the specific LIBOR floor, swap or collar
that is hedging the LIBOR based CMO borrowings. The nature of the risk being
hedged is the variability of the cash flows associated with the LIBOR
borrowings. Prior to DIG G20, these derivatives were marked to market with the
entire change in the market value of the intrinsic component recognized in other
comprehensive income on the balance sheet each reporting period. The time value
component of these agreements were marked to market and recognized in
non-interest expense on the statement of operations. Subsequent to the adoption
of DIG G20, these derivatives are marked to market with the entire change in the
market value recognized in other comprehensive income on the balance sheet.
Effectiveness of the hedges is measured by the fact that both the hedged
item, CMO borrowings, and the hedging instrument is based on one-month LIBOR. As
both instruments are tied to the same index, the hedge is expected to be highly
effective both at inception and on an ongoing basis. The Company assesses the
effectiveness and ineffectiveness of the hedging instruments at the inception of
the hedge and at each reporting period. Based on the fact that, at inception,
the critical terms of the hedges and forecasted CMO borrowings are the same, the
Company has concluded that the changes in cash flows attributable to the risk
being hedged are expected to be completely offset by the hedging derivatives,
subject to subsequent assessments that the critical terms have not changed.
13. Recent Accounting Pronouncements
In September 2000, FASB issued SFAS No. 140 (SFAS 140) to replace SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 140 provides the accounting and reporting
guidance for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 140 will be the authoritative accounting literature for: (1)
securitization transactions involving financial assets; (2) sales of financial
F-13
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001. The Company
adopted the disclosure required by SFAS 140 and has included all appropriate and
necessary disclosures required by SFAS 140 in its financial statements and
footnotes. The adoption of the accounting provision did not have a material
impact on the Company's consolidated balance sheet or results of operations.
Note B--Investment Securities Available-for-Sale
The Company's 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. During 2000, the Company wrote-off $52.6 million of investment
securities available-for-sale that were investment securities secured by high
loan-to-value second trust deeds, 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. During the years ended December 31, 2001 and 2000, IMH did
not acquire any mortgage-backed securities. During the years ended December 31,
2001 and 2000, the Company sold investment securities with a carrying value of
$3.6 million and $5.7 million, respectively.
The amortized cost and estimated fair value of mortgage-backed securities
available-for-sale are presented as follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
------------ ------------- ------------ ------------
(in thousands)
At December 31, 2001:
Mortgage-backed securities................................. $ 26,661 $ 7,286 $ 958 $ 32,989
============ ============= ============ ============
At December 31, 2000:
Mortgage-backed securities................................. $ 37,920 $ 2,245 $ 3,244 $ 36,921
============ ============= ============ ============
To determine the fair value of investment securities, the Company must
estimate future rates of loan prepayments, prepayment penalties to be received,
delinquency rates, constant default rates and default loss severity and their
impact on estimated cash flows. At December 31, 2001, the Company used a 0.30%
to 6.2% constant default rate estimate with a 10% to 20% loss severity resulting
in loss estimates of 0.03% to 1.24%. These 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, 2001, the Company used a constant prepayment
assumption of 18% to 50% 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, 2001, the
Company used a weighted average discount rate of approximately 8.09%.
Retained Interests in Securitizations
From time to time, IMH retains 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 140.
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
F-14
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
would be affected. During 2001 and 2000, IMH retained no interests in
securitizations created through the issuance of REMICs by IFC. Key economic
assumptions used in measuring the retained interests are as follows:
At At
At time of December 31, December 31,
securitization 2001 2000
--------------- -------------- --------------
Prepayment speed............................................ 16 - 50% 18 - 50% 15 - 65%
Loss severity .............................................. 10 - 100% 10 - 130% 8 - 18%
Constant default rate....................................... 0.01 - 1% 0.30 - 6.2% 0.50 - 1.0%
The following table presents key economic assumptions and the sensitivity
of the current fair value of residual cash flows on investment securities
available-for-sale to immediate 10% and 20% adverse changes in those assumptions
(dollars in thousands):
At December 31,
----------------------------
2001 2000
---------------- -----------
Carrying amount of investment securities......................................... $ 22,297 $ 22,120
Estimated fair value of investment securities.................................... $ 22,297 $ 20,503
Prepayment Speed Assumptions: 15.2 - 60% 15 - 65%
Decline in fair value of 10% adverse change...................................... $ (812) $ (2,488)
Decline in fair value of 20% adverse change...................................... $ (1,494) $ (3,319)
Loss Severity Assumptions: 11 - 156% 8 - 18%
Decline in fair value of 10% adverse change...................................... $ (46) $ (1,679)
Decline in fair value of 20% adverse change...................................... $ (100) $ (1,752)
Constant Default Rate Assumptions: 0.33 -7.44% 0.50 - 1%
Decline in fair value of 10% adverse change...................................... $ (706) $ (1,688)
Decline in fair value of 20% adverse change...................................... $ (926) $ (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
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 are presented as follows (dollars in thousands):
At December 31,
-------------------------------
2001 2000
---------------- --------------
Net credit losses................................................................ $ 586 $ 936
Actual losses to date............................................................ 3.01% 3.39%
Projected losses over life....................................................... 1.14% 1.71%
Cash flows received on retained interests ....................................... $ 2,224 $ 5,078
Note C--Mortgage Loans Held-for-Investment
Mortgage loans held-for-investment include various types of adjustable
rate loans and fixed rate loans secured by mortgages on single-family
residential real estate properties. During the years ended December 31, 2001 and
2000, IMH purchased $1.5 billion and $454.0 million, respectively, of mortgage
loans from IFC. At December 31, 2001 and 2000,
F-15
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately 28% and 27%, 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,
-----------------------
2001 2000
-------- --------
(in thousands)
Fixed rate loans secured by second trust deeds on single-family residential real estate $ 20,211 $ 1,061
Adjustable rate loans secured by single-family residential real estate ................. 6,875 15,867
Unamortized net discounts on mortgage loans ............................................ (8) (208)
-------- --------
$ 20,078 $ 16,720
======== ========
At December 31, 2001, and 2000 there were $9.3 million and $13.4 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, 2001, 2000 and 1999,
interest income would have increased by $563,000, $1.0 million, and $538,000,
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, 2001 and 2000, $1.501
billion and $943.6 million, respectively, of CMOs were issued and collateralized
by $1.513 billion and $952.8 million, respectively, of mortgage loans. At
December 31, 2001 and 2000, approximately 63% and 53%, respectively, of CMO
collateral was collateralized by properties located in California. At December
31, 2001 and 2000, the underlying principal balance of mortgages supporting CMO
borrowings of $2.2 billion and $1.3 billion, respectively, which represented
approximately $2.2 billion and $1.3 billion, respectively, of adjustable and
fixed rate mortgage loans with varying grade quality and approximately $24.9
million and $66.1 million, respectively, of second mortgage loans. Collateral
for CMOs consisted of the following:
At December 31,
-----------------------------
2001 2000
-----------------------------
(in thousands)
Adjustable and fixed rate loans secured by single-family residential real estate ...... $ 2,161,645 $1,267,350
Fixed rate loans secured by second trust deeds on single-family residential real estate 24,916 66,138
Unamortized net premiums on loans ..................................................... 35,397 22,758
Capitalized securitization costs ...................................................... 11,582 14,123
Fair value of hedging instruments ..................................................... (4,372) 2,627
----------- ----------
$ 2,229,168 $1,372,996
=========== ==========
Note E--Finance Receivables
The terms of IWLG's affiliated warehouse lines are based on Bank of
America's prime rate, which was 4.75% and 9.50% as of December 31, 2001 and
2000, 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, 2001 and 2000, the
F-16
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had $1.7 billion and $1.0 billion, respectively, of warehouse lines of
credit available to 57 and 55 borrowers, respectively, of which $466.6 million
and $405.4 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,
------------------------
2001 2000
------------------------
(in thousands)
Due from other mortgage banking companies ...... $300,571 $138,405
Due from IFC ................................... 106,940 219,102
Due from Impac Lending Group (ILG) ............. 34,907 47,931
Due from Novelle Financial Services Inc.(NFS) .. 24,231 --
-------- --------
$466,649 $405,438
======== ========
Note F--Allowance for loan losses
Activity for allowance for loan losses was as follows:
For the year ended December 31,
---------------------------------
2001 2000 1999
-------- -------- -------
(in thousands)
Balance, beginning of year ............... $ 5,090 $ 4,029 $ 6,959
Provision for loan losses ................ 16,813 18,839 5,547
Charge-offs, net of recoveries ........... (9,339) (16,496) (7,152)
Loss on sale of delinquent loans ......... (872) (1,282) (1,325)
-------- -------- -------
Balance, end of year ..................... $ 11,692 $ 5,090 $ 4,029
======== ======== =======
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
short-term reverse repurchase agreements secured by mortgage-backed securities
with long-term financing on 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, 2001, 2000 and 1999 was $30.8 million, $39.2 million, and $22.5
million, respectively. The Company's interest expense on borrowings secured by
investment securities available-for-sale for the years ended December 31, 2001,
2000 and 1999 was $2.6 million, $3.2 million, and $686,000, respectively. The
following tables present information regarding the Company's reverse repurchase
agreements as of December 31, 2001 and 2000 (dollars in thousands):
Reverse
Type of Repurchase Underlying Maturity
Collateral Committed Liability Collateral Date
---------- --------- -------------- ---------- ----------
December 31, 2001............. Mortgages No $ 469,491 $ 489,113 N/A
============= ===========
December 31, 2000............. Mortgages No $ 398,653 $ 414,748 N/A
============= ===========
F-17
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001 and December 31, 2000, reverse repurchase agreements
includes accrued interest payable of $488,000 and $2.1 million, respectively.
The following table presents certain information on reverse repurchase
agreements, excluding accrued interest payable:
For the year ended
December 31,
-------------------------------
2001 2000
---------------- --------------
(dollars in thousands)
Maximum month-end outstanding balance............................................ $ 663,306 $ 832,758
Average balance outstanding...................................................... 580,605 513,987
Weighted average rate............................................................ 5.31% 7.63%
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. The Company completed $1.5 billion and 943.6
million in CMOs during the years ended December 31, 2001 and 2000, respectively.
For the years ended December 31, 2001, 2000 and 1999, interest expense on CMO
borrowings was $77.8 million, $80.3 million, and $65.2 million, respectively.
The following table presents CMOs issued, CMOs outstanding as of December 31,
2001 and 2000, and certain interest rate information (dollars in millions):
CMOs Range of Range of
Outstanding Range of Interest Rate Interest Rate
as of Fixed Margins Over Optional Margins After
Issue Issuance -------------------- Interest One-Month Redemption Adjustment
Date Issuance Name Amount 12/31/01 12/31/00 Rates (%) LIBOR (%) Date Date (%)
- ---------------------------------------------- -------------------------------- -------------------------------------------
01/27/98 Impac CMB
Trust Series 1998-1..... 362.8 91.7 145.5 6.65-7.25 N/A N/A N/A
03/24/98 Impac CMB
Trust Series 1998-2..... 220.2 62.2 95.8 6.70-7.25 N/A N/A N/A
02/23/99 Impac CMB
Trust Series 1999-1..... 183.1 -- 102.1 N/A 0.40-0.63 3/2006 (1) 0.80-1.26
06/24/99 Impac CMB
Trust Series 1999-2..... 115.0 36.1 89.7 N/A 0.37 7/2006 (1) 0.74
01/25/00 Impac CMB
Trust Series 2000-1..... 452.0 203.8 371.3 N/A 0.32-2.40 2/2010 (2) 0.64-3.60
11/21/00 Impac CMB
Trust Series 2000-2..... 491.6 303.2 484.5 N/A 0.26-1.90% 12/2010 (2) 0.52-2.85%
05/23/01 Impac CMB
Trust Series 2001-1..... 357.8 325.5 -- N/A 0.28-2.00% 6/2011 (2) 0.56-3.00%
08/27/01 Impac CMB
Trust Series 2001-2..... 400.5 386.6 -- N/A 0.28-1.90% 9/2011 (2) 0.56-2.85%
10/25/01 Impac CMB
Trust Series 2001-3..... 397.0 394.8 -- N/A 0.37-2.00% 11/2011 (2) 0.74-3.00%
12/17/01 Impac CMB
Trust Series 2001-4..... 345.6 345.6 -- N/A 0.42-2.30% 1/2012 (2) 0.84-3.45%
-------- -------- --------
3,325.6 2,149.5 1,288.9
Accrued interest........ -- 1.9 2.4
-------- -------- --------
$3,325.6 $2,151.4 $1,291.3
======== ======== ========
F-18
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The optional redemption 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) The optional redemption 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.
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, 2001 and 2000,
there was $13.0 million and $21.1 million, respectively, outstanding on the
borrowings, which were secured by $23.9 and $21.9 million, respectively, of
investment securities available-for-sale. The outstanding borrowings are
principal only notes with remaining discounts of $3.5 million and $5.7 million
as of December 31, 2001 and 2000, respectively. 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. On June 20, 2001, the Company
retired its senior subordinated debentures and wrote-off $1.0 million of
discounts and securitization costs related to the debentures. Senior
subordinated debentures consisted of the following:
At December 31,
-----------------------
2001 2000
-------- --------
(in thousands)
11% senior subordinated debentures .......... $ -- $ 7,747
Discount on senior subordinated debentures .. -- (768)
-------- --------
$ -- $ 6,979
======== ========
Note K--Segment Reporting
The Company internally reviews and analyzes its operating segments as
follows:
o the long-term investment operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming Alt-A residential mortgage loans and
mortgage-backed securities secured by or representing interests in such
loans and in second mortgage loans;
o the warehouse lending operations, conducted by IWLG, provides warehouse
and repurchase financing to affiliated companies and to approved mortgage
banks, most of which are correspondents of IFC, to finance mortgage loans;
and
o the mortgage operations, conducted by IFC, ILG and NFS, purchases and
originates non-conforming Alt-A mortgage loans and second mortgage loans
from its network of third party correspondent sellers, mortgage brokers
and retail customers.
The following table presents reporting segments as of and for the year
ended December 31, 2001 (in thousands):
F-19
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
------------- ------------ ----------------------------
Balance Sheet Items:
CMO collateral $ 2,229,168 $ -- $ -- $ 2,229,168
Total assets 2,490,564 543,536 (179,366) 2,854,734
Total stockholders' equity 309,794 72,763 (179,192) 203,365
Income Statement Items:
Interest income 122,502 42,463 (8,350) 156,615
Interest expense 89,485 30,877 (8,350) 112,012
Equity in net earnings of IFC (b) -- -- 10,912 10,912
Net earnings 11,799 10,467 10,912 33,178
The following table presents reporting segments as of and for the year
ended December 31, 2000 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations 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 net loss of IFC (b) -- -- (1,762) (1,762)
Net earnings (loss) (66,163) 13,612 (1,682) (54,233)
The following table presents reporting segments as of and for the year
ended December 31, 1999 (in thousands):
Long-Term Warehouse
Investment Lending (c) (a)
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 net earnings of IFC (b) -- -- -- 4,292 4,292
Net earnings 6,828 9,939 41 5,509 22,317
(a) Elimination of intersegment balance sheet and income statement items.
(b) The mortgage operations is accounted for using the equity method and is an
unconsolidated subsidiary of the Company
(c) Primarily includes the operations of Dove St. LLC, of which the Company
owned a 50% interest, and account reclassifications
Note L--Fair Value of Financial Instruments
F-20
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 December 31, 2000
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------
Assets (in thousands)
Cash and cash equivalents...................................... $ 51,887 $ 51,887 $ 17,944 $ 17,944
Investment securities available-for-sale....................... 32,989 32,989 36,921 36,921
CMO collateral, including allocated derivative assets.......... 2,229,168 2,339,558 1,372,996 1,365,893
Finance receivables............................................ 466,649 466,649 405,438 405,438
Mortgage loans held-for-investment............................. 20,078 12,991 16,720 14,698
Due from affiliates............................................ 14,500 14,500 14,500 14,500
Derivative assets.............................................. 5,128 5,128 6,795 1,006
Liabilities
CMO borrowings, excluding accrued interest..................... 2,149,545 2,147,391 1,288,901 1,294,545
Reverse-repurchase agreements, excluding accrued interest...... 469,003 469,003 396,572 396,572
Borrowings secured by investment securities available-for-sale. 12,997 12,607 21,124 17,744
Senior subordinated debentures................................. -- -- 6,979 4,955
The fair value estimates as of December 31, 2001 and 2000 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.
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.
F-21
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Derivative Assets and Liabilities
Fair value is estimated based on quoted market prices from dealers or
brokers.
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 IWLG participate in IFC's 401(k) plan. Under IFC's 401(k) plan,
employees may contribute up to 15% of their salaries. IWLG will match 50% of the
first 4% of employee contributions. Additional contributions may be made at the
discretion of IWLG. IWLG'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 Imperial Credit
Industries, Inc. (ICII) under which ICII provided various services to the
Company, including data processing, human resource administration, general
ledger
F-22
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting, check processing, remittance processing and payment of accounts
payable. ICII charged fees for each of the services based upon usage. 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 provided the Company with certain human resource administration
and data and phone communication services. On December 31, 2000, the Company did
not renew its services agreement with ICAI. The charge to the Company for
insurance coverage was based upon a pro rata portion of costs to ICII for its
various policies. Total charges to the Company for the years ended December 31,
2000 and 1999 were $15,000, and $11,000, respectively.
During 1999, IMH and IWLG were allocated data processing, executive and
operations management, and accounting services that IFC incurred during the
normal course of business per IFC's submanagement agreement with RAI Advisors
Inc. (RAI). IFC, through RAI, charged Impac Commercial Holdings, Inc. (ICH) 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 continue to provide services to ICH. This agreement
expired in December 1999. IMH and IWLG were allocated data processing, executive
and operations management, and accounting services that IFC incurred during the
normal course of business under the Submanagement Agreement with RAI. IFC
charged IMH and IWLG for these services based upon usage, which management
believes was reasonable. Total cost allocations charged to IMH and IWLG by IFC
for the year ended December 31, 1999 were $1.2 million.
IFC charges IMH and IWLG for management and operating services based upon
usage which management believes is reasonable. Total cost allocations charged by
IFC to IMH and IWLG for the years ended December 31, 2001 and 2000 were $1.7
million and $1.5 million, 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, 2001, 2000 and
1999 were $2.0 million, $1.6 million, and $1.1 million, of which $121,000,
$113,000, and $100,000, respectively, was charged to IWLG and IMH.
Credit Arrangements - Current
IFC maintains a $600.0 million uncommitted warehouse financing facility
with IWLG. Advances under the warehouse facility bears interest at Bank of
America's prime rate minus 0.50%. As of December 31, 2001 and 2000, amounts
outstanding on IFC's warehouse line with IWLG were $174.1 million and $267.0
million, respectively. Interest expense recorded by IFC related to the warehouse
line provided by IWLG for the years ended December 31, 2001, 2000, and 1999, was
$18.4 million, $28.1 million, and $18.4 million, 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,
2001 and 2000, due from affiliates was none. Interest income recorded by the
Company related to short-term advances with affiliates for the years ended
December 31, 2001, 2000, and 1999 was $122,000 $90,000, and $835,000,
respectively. As of December 31, 2001 and 2000, due to affiliates was none.
Interest expense recorded by the Company related to short-term borrowings with
affiliates for the years ended December 31, 2001, 2000 and 1999 was $250,000,
$25,000, and $399,000, respectively.
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 note to
fund the operations of IFC and other strategic opportunities deemed appropriate
by IFC. At December 31, 2001 and 2000, the amount outstanding on the note was
$14.5 million. Interest
F-23
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income recorded by IMH related to the note as of December 31, 2001, 2000, and
1999 was $1.4 million, $1.4 million and $696,000, 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 4.23%.
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, 2001
and 2000, total notes receivable from common stock sales was $920,000 and
$902,000, respectively. Interest income recorded by the Company related to the
loans for the years ended December 31, 2001, 2000 and 1999 was $39,000, $50,000,
and $41,000, respectively.
On December 10, 2001, IFC provided William B. Ashmore, President, Chief
Operating Officer and Director of the Company, with a $600,000 adjustable rate
loan to provide mortgage financing with an initial interest rate of 4.13%. In
the opinion of management, the loan was in the ordinary course of business,
substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated persons.
Credit Arrangements - Expired
In January 1999, ILG obtained a warehouse financing facility with IWLG.
Advances under the warehouse facility bore interest at prime. As of December 31,
1999, amounts outstanding on ILG's warehouse line with IWLG were $1.2 million.
Interest expense recorded by ILG related to its warehouse line provided by IWLG
for the year ended December 31, 1999 was $293,000. At January 1, 2000, ILG
became a division of IFC and borrowings from IWLG were consolidated with IFC's
borrowings.
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, there were no finance
receivables outstanding to ICCC. Interest income recorded by IMH related to
finance receivables due from ICCC for the year ended December 31, 1999 was
$93,000.
IMH entered into a revolving credit arrangement with a commercial bank,
which was an affiliate of ICII, whereby IMH could borrow up to a 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, IMH had
no outstanding borrowings under the reverse repurchase arrangement. Interest
expense recorded by IMH for the year ended December 31, 1999 related to such
advances was $348,000. This agreement was terminated in 1999.
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 and 1999,
finance receivables outstanding to WSI were none, and $48,000, respectively.
Interest income recorded by IWLG related to finance receivables due from WSI for
the years ended December 31, 2000 and 1999 was $1,000, and $729,000,
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. During 2001 and 2000,
the Company purchased no mortgage-backed securities from IFC.
F-24
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase of Mortgage Loans: During the years ended December 31, 2001 and
2000, the Company purchased mortgage loans from IFC having a principal balance
of $1.5 billion and $450.7 million, respectively. The loans were purchased with
premiums of $24.4 million and $3.3 million, respectively. Servicing rights on
all mortgages purchased by IMH were retained by IFC.
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.
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, 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.
Short-Term Loan Commitments
IWLG's warehouse lending program provides secured short-term 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, 2001 and 2000, the Company had 57 and 55 committed
lines of credit, respectively, extended in the aggregate principal amount of
$1.7 billion and $1.0 billion, respectively.
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 2002............................................................................. $ 1,901
Year 2003............................................................................. 1,946
Year 2004............................................................................. 1,990
Year 2005............................................................................. 2,035
Year 2006............................................................................. 2,080
Year 2007 and thereafter.............................................................. 3,017
-----------
Total lease commitments.......................................................... $ 12,969
===========
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, 2001, 2000,
and 1999 was $121,000, $113,000, and $100,000, respectively.
Loan Purchase Commitments
F-25
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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--Derivative Instruments and Hedging Activities
As the Company acquires and originates mortgage loans, it purchases caps at
interest rate strike prices that are tied to a forward yield curve to hedge
forecasted borrowings. The Company purchases caps at strike prices over the
one-month LIBOR forward yield curve to correspond to CMO borrowing costs, which
are indexed to one-month LIBOR. A cap allows the yield on an ARM to rise in an
increasing interest rate environment just as the cost of related borrowings
would rise as we receive cash payments if one-month LIBOR were to reach the
contractual strike price of the cap. The cap would provide protection for (1)
periodic and lifetime cap limitations on the mortgage loan that are absent on
the related borrowings, and (2) mismatched interest rate adjustment periods.
Simultaneously with the purchase of caps, the Company may also sell floors, or
collars, at interest rate strike prices that are below the one-month LIBOR
forward yield curve. The sale of a floor allows the Company to offset the cost
that the Company pays for the cap. The Company's yield on ARMs would decrease in
a decreasing interest rate environment just as the cost of related borrowings
would decrease as the Company makes cash payments if one-month LIBOR were to
reach the contractual strike price of the floor. The Company also purchases
swaps whereby it receives cash payments based on one-month LIBOR and makes cash
payments at a fixed rate. Swaps have the effect of fixing outstanding borrowing
on a similar notional amount of swaps and, as a result, can reduce the interest
rate variability of borrowings. The purchase of caps, collars and swaps allows
the Company to protect net interest income during periods of increasing interest
rates while maintaining a steady stream of cash flows if interest rates decline.
At December 31, 2001, caps allocated to CMO borrowings had a remaining
notional balance of $1.6 billion with a weighted average maturity of
approximately 28 months. Pursuant to the terms of the caps, the Company will
receive cash payments if one-month LIBOR reaches certain strike prices, ranging
from 1.66% to 10.25%, with a weighted average strike price of 4.65% over the
life of the caps. At December 31, 2001, collars allocated to CMO borrowings had
a remaining notional balance of $758.9 million with a weighted average maturity
of approximately 25 months. Pursuant to the terms of the collars, the Company
will receive cash payments if one-month LIBOR reaches strike prices, ranging
from 1.91% to 6.52%, with a weighted average strike price of 4.04% over the life
of the collars. The Company will make cash payments if one-month LIBOR reaches
strike prices, ranging from 1.16% to 5.88%, with a weighted average strike price
of 3.38%. At December 31, 2001, swaps allocated to CMO borrowings had a
remaining notional balance of $71.8 million with a weighted average maturity of
approximately 19 months. Pursuant to the terms of the swaps, the Company will
receive cash payments based on one-month LIBOR and make cash payments at fixed
rates ranging from 4.83% to 5.18%, with a weighted average fixed rate of 4.93%
over the life of the swaps. The notional amounts of caps, collars and swaps are
amortized according to projected prepayment rates on CMO borrowings. However,
regarding the floor component of the collar, the notional amount equals the
actual principal balance of the CMO borrowings. As of December 31, 2001, the
fair market value of the caps, collars and swaps was $(4.4) million. These
hedges are marked to market each reporting period with the entire change in
market value being recognized in other comprehensive income on the balance
sheet.
During 2001, we purchased a collar, or balance sheet hedge, at strike
prices tied to the one-month LIBOR forward yield curve to protect cash flows on
CMO borrowings that are secured by hybrid loans with remaining fixed terms,
which did not have allocated hedges. The balance sheet hedge protects cash flows
on CMO borrowings with unallocted hedges just as interest rate hedges would
protect cash flows on CMO structures with allocated hedges. As of December 31,
2001, the balance sheet hedge had a notional amount of $815.6 million with a
one-month LIBOR cap strike price of 4.38% and a weighted average strike price of
4.79% over the life of the cap. The balance sheet hedge has a one-month LIBOR
floor strike price of 3.98% and a weighted average strike price of 4.42% over
the life of the floor. The balance sheet hedge matures on March 25, 2004. The
notional amount of the balance sheet hedge is amortized according to projected
prepayment rates reflected in CMO borrowings. As of December 31, 2001, the fair
F-26
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market value of the balance sheet hedge was $5.1 million. The balance sheet
hedge is marked to market each reporting period with the entire change in market
value being recognized in other comprehensive income on the balance sheet.
The following table presents certain information related to derivative
instruments and hedging activities as of December 31, 2001 (dollars in
thousands):
Original Fair Related Related
Notional Value Related Unamortized Amount in Amount
Face of Amount Derivative Derivative in CMO
Amount Derivatives Index in OCI Instruments Asset Account Collateral
---------- ----------- ----------- ---------- ------------- ------------- ----------
Caps and collars not
Associated with
CMOs................ $1,860,790 $ (13,659) 1 mo. LIBOR $ (15,240) $ 1,581 $ (13,659) $ --
Cash in margin
Account............. 18,787 18,787 N/A -- -- 18,787 --
Caps, collars and
Swaps associated
With CMOs........... 1,070,500 (4,372) 1 mo. LIBOR (12,722) 8,350 -- (4,372)
99% of OCI activity
at IFC.............. 36,000 (158) FNMA (90) -- -- --
---------- ----------- ---------- ------------- ------------- ----------
Totals............. $2,986,077 $ 598 $ (28,052) $ 9,931 $ 5,128 $ (4,372)
========== =========== ========== ============= ============= ==========
Note Q--Stock Option Plan
The Company currently has a 1995 Stock Option, Deferred Stock and
Restricted Stock Plan (1995 Plan). During 2001, the board of directors and
stockholders approved a new Stock Option, Deferred Stock and Restricted Stock
Plan (2001 Plan), collectively (the Stock Option Plans). Each Stock Option Plan
provides for the grant of qualified incentive stock options (ISOs), options not
qualified (NQSOs), deferred stock, and restricted stock, and in the case of the
2001 Plan, dividend equivalent rights, and, in the case of the 1995 Plan, stock
appreciation rights and limited stock appreciation rights awards (Awards). The
Stock Option Plans are administered 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, and to the directors,
officers and key employees of IFC. The exercise price for any NQSO or ISO
granted under the Stock Option Plans 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.
The total number of shares initally reserved and available for issuance
under the 2001 Plan was 1.0 million shares. However, on the beginning of each
calendar year the maximum number of shares available for issuance may increase
by 3.5% of the total number of shares of stock outstanding or a lesser amount
determined by the board of directors. Pursuant to this provision, in January
2002, the 2001 Plan increased by an additional 1,120,069 shares available for
grant. Unless previously terminated by the board of directors, no options or
Awards may be granted under the 2001 Plan after March 27, 2011. The total number
of shares reserved and available for issuance under the 1995 Plan is 67,390.
Unless previously terminated by the board of directors, no options or Awards may
be granted under the 1995 Plan after August 31, 2005.
Options granted under the Stock Option Plans 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, 2001 and 2000, options to purchase 761,163 shares and 207,207
shares, respectively, were exercisable and 225,390 shares and 767,144 shares,
respectively, were reserved for future grants under the Stock Option Plans.
Option transactions for the years shown are summarized as follows:
For the year ended December 31,
---------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ ------------------------
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.. 253,856 $ 4.15 674,891 $ 9.89 737,781 $ 10.06
Options granted........................... 1,571,000 6.06 112,500 3.56 35,500 4.92
Options exercised......................... (161,109) 4.03 -- -- -- --
Options forfeited/cancelled............... (29,246) 4.34 (533,535) 11.28 (98,390) 9.45
---------- ---------- ----------
---------- ---------- ----------
Options outstanding at end of year........ 1,634,501 $ 5.99 253,856 $ 4.15 674,891 $ 9.89
========== ========== ==========
As of December 31, 2001 and 2000, total notes receivable from common stock
sales were $920,000 and $902,000, respectively. Interest on all loans secured by
the Company's common stock is payable quarterly upon receipt of the Company's
dividend payment. At each dividend payment date, 50% of excess quarterly stock
dividends, after applying the dividend payment to interest due, is required to
reduce the principal balance outstanding on the loans. The interest rate on
these loans adjusts annually and is set at the discretion of the board of
directors. There were no loans made in
F-27
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001, 2000, and 1999 in connection with the exercise of stock options under the
1995 Stock Plan. The following table presents information about fixed stock
options outstanding at December 31, 2001:
Stock Options Outstanding Options Exercisable
------------------------------------------------------------ -----------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Exercise Number Contractual Life average Number Average
Prices Outstanding (mos.) exercise price($) Exercisable exercise price($)
------------- -------------------- -------------------- ------------------ --------------- ------------------
$ 2.70 64,334 4.29 $ 3.82 5,498 $ 3.77
4.00 1,500 2.16 4.00 -- --
4.18 657,500 9.24 4.18 657,500 4.18
4.44 39,500 5.70 4.44 39,500 4.44
4.56 1,667 0.72 4.56 -- --
5.08 22,500 9.31 5.08 -- --
5.75 5,500 0.15 5.75 3,665 5.75
7.20 4,500 3.73 7.20 -- --
7.60 55,000 9.96 7.60 55,000 7.60
7.68 782,500 3.56 7.68 -- --
-------------------- ---------------
1,634,501 6.20 5.99 761,163 4.45
==================== ===============
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
Stock Option Plans 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,
----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net earnings (loss) before extraordinary item and cumulative effect
of change in accounting principle as reported ...................... $ 34,801 $ (54,233) $ 22,317
=========== =========== ===========
Pro forma net earnings (loss) ........................................ $ 34,493 $ (54,306) $ 22,308
=========== =========== ===========
Net earnings (loss) per share before extraordinary item and cumulative
effect of change in accounting principle as reported:
Basic ............................................................. $ 1.41 $ (2.70) $ 0.83
=========== =========== ===========
Diluted ........................................................... $ 1.25 $ (2.70) $ 0.76
=========== =========== ===========
Pro forma net earnings (loss) per share before extraordinary item and
cumulative effect of change in accounting principle:
F-28
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic ............................................................. $ 1.40 $ (2.70) $ 0.83
=========== =========== ===========
Diluted ........................................................... $ 1.23 $ (2.70) $ 0.76
=========== =========== ===========
Net earnings (loss) per share as reported:
Basic ............................................................. $ 1.34 $ (2.70) $ 0.83
=========== =========== ===========
Diluted ........................................................... $ 1.19 $ (2.70) $ 0.76
=========== =========== ===========
Pro forma net earnings (loss)
Basic ............................................................. $ 1.33 $ (2.70) $ 0.83
=========== =========== ===========
Diluted ........................................................... $ 1.18 $ (2.70) $ 0.76
=========== =========== ===========
The derived fair value of the options granted during 2001, 2000 and 1999
was approximately $1.18, $0.75, and $1.35, respectively. The fair value of
options granted, which is amortized to expense 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:
For the year ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------- -------------
Risk-Free Interest Rate............................................. 2.22% 4.80% 4.98%
Expected Lives (in years)........................................... 3-10 1-3 3-5
Expected Volatility................................................. 52.87% 62.64% 60.17%
Expected Dividend Yield............................................. 10.00% 11.20% 9.50%
Note R--Stockholders' Equity
During 2000, the Company's board of directors authorized the Company to
repurchase up to $3.0 million of the Company's common stock, $0.01 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, 2001 and 2000, the Company
repurchased none and 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 were 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 bore interest at 11% per annum from their date of
issuance, payable quarterly, commencing May 15, 1999, until the debentures were
paid in full on June 20, 2001.
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 were
paid quarterly, in cash or the Company's common stock, starting April 27, 1999.
The dividend rate per share was 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. In August 2001, the Series C Preferred Stock was
converted into 6,355,932 shares of
F-29
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock. The Company is authorized to issue shares of preferred stock
designated in one or more 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 (unless the offer to acquire the shares is
approved by a majority of the board of directors who are not affiliates of the
acquirer). 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 $0.0001 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 S--Reconciliation of Earnings (Loss) Per Share
The following table presents the computation of basic and diluted net
earnings (loss) per share, as if all stock options and cumulative convertible
preferred stock (Preferred Stock) was outstanding for the periods shown (in
thousands, except per share data):
For the year ended December 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Numerator for basic earnings per share:
Earnings (loss) before extraordinary item and cumulative effect of
change in accounting principle .................................. $ 34,801 $ (54,233) $ 22,317
Extraordinary item ............................................. (1,006) -- --
Cumulative effect of change in accounting principle ............ (617) -- --
------------ ------------ ------------
Earnings (loss) after extraordinary item and cumulative effect
change in accounting principle .................................. 33,178 (54,233) 22,317
Less: Cash dividends on cumulative convertible preferred stock . (1,575) (3,150) (3,290)
------------ ------------ ------------
Net earnings (loss) available to common stockholders .............. $ 31,603 $ (57,383) $ 19,027
============ ============ ============
Denominator for basic earnings per share:
Basic weighted average number of common shares outstanding
during the period ............................................... 23,510 21,270 22,824
============ ============ ============
Denominator for diluted earnings per share:
Diluted weighted average number of common shares
outstanding during the period ................................... 27,730 21,270 22,824
Impact of assumed conversion of Preferred Stock ................ -- -- 6,356
Net effect of dilutive stock options ........................... 222 -- 16
------------ ------------ ------------
F-30
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted weighted average common shares ............................ 27,952 21,270 29,196
============ ============ ============
Net earnings (loss) per share before extraordinary item and
cumulative effect of change in accounting principle:
Basic .......................................................... $ 1.41 $ (2.70) $ 0.83
============ ============ ============
Diluted ........................................................ $ 1.25 $ (2.70) $ 0.76
============ ============ ============
Net earnings (loss) per share:
Basic .......................................................... $ 1.34 $ (2.70) $ 0.83
============ ============ ============
Diluted ........................................................ $ 1.19 $ (2.70) $ 0.76
============ ============ ============
The antidilutive effects of stock options outstanding as of December 31,
2001, 2000 and 1999 was 348,475, 669,391, and none, respectively. The
antidilutive effects of outstanding Preferred Stock as of December 31, 2001,
2000 and 1999 was none, 6,355,932, and none, 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.
Note T--Subsequent Events
On February 13, 2002, the Company completed the issuance of 7,300,000
shares of common stock and received net proceeds of $56.6 million from the sale.
On March 8, 2002, the Company completed the issuance of an additional 102,000
shares of common stock and received net proceeds of $791,000 from the sale.
Note U--Quarterly Financial Data (unaudited)
Selected quarterly financial data for 2001 follows (in thousands, except
per share data):
For the Three Months Ended,
------------------------------------------------------
December 31, September 30, June 30, March 31,
-------------- --------------- ---------- ------------
Net interest income............................................. $ 13,772 $ 11,387 $ 10,551 $ 8,893
Provision for loan losses....................................... 6,255 2,615 3,905 4,038
Non-interest income............................................. 6,104 4,361 4,789 2,125
Non-interest expense............................................ (1,341) 4,842 2,652 5,838
Net earnings.................................................... 14,962 8,291 8,783 1,142
Net earnings per share - diluted (1)............................ 0.48 0.31 0.33 0.04
Dividends declared per share.................................... 0.44 0.25 -- --
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
- ---------------
(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-31
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note V--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,
-------------------------
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents .................................... $ 28,612 $ 8,281
Securities available-for-sale ................................ 3,394 266
Mortgage loans held-for-sale ................................. 174,172 275,570
Mortgage servicing rights .................................... 8,468 10,938
Premises and equipment, net .................................. 5,333 5,037
Accrued interest receivable .................................. 130 1,040
Other assets ................................................. 19,693 16,031
--------- ---------
$ 239,802 $ 317,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG ......................................... $ 174,136 $ 266,994
Due to affiliates ............................................ 14,500 14,500
Deferred revenue ............................................. 4,479 5,026
Accrued interest expense ..................................... 453 2,176
Other liabilities ............................................ 26,914 12,546
--------- ---------
Total liabilities ....................................... 220,482 301,242
--------- ---------
Shareholders' equity:
Preferred stock ........................................... 18,053 18,053
Common stock .............................................. 182 182
Retained earnings (accumulated deficit) ................... 8,722 (2,300)
Cumulative dividends declared ............................. (8,984) --
Accumulated other comprehensive income (loss) ............. 1,347 (14)
--------- ---------
Total shareholders' equity .............................. 19,320 15,921
--------- ---------
Total liabilities and shareholders' equity .......... $ 239,802 $ 317,163
========= =========
F-32
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
(in thousands)
For the year ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Net interest income:
Total interest income ............................. $ 24,175 $ 28,649 $ 21,225
Total interest expense ............................ 20,865 30,056 20,953
-------- -------- --------
Net interest income (expense) ................... 3,310 (1,407) 272
-------- -------- --------
Non-interest income:
Gain on sale of loans ............................. 46,949 19,727 27,098
Loan servicing income ............................. 2,140 6,286 5,221
Other income ...................................... 5,005 1,105 979
-------- -------- --------
Total non-interest income ....................... 54,094 27,118 33,298
-------- -------- --------
Non-interest expense:
General and administrative and other expense ...... 29,257 19,634 14,965
Amortization of mortgage servicing rights ......... 4,519 5,179 5,331
Write-down of securities available-for-sale ....... -- 1,537 4,252
Impairment of mortgage servicing rights ........... 825 -- 1,078
Provision for repurchases ......................... 3,498 371 385
-------- -------- --------
Total non-interest expense ...................... 38,099 26,721 26,011
-------- -------- --------
Earnings (loss) before income taxes .................. 19,305 (1,010) 7,559
Income taxes ...................................... 8,300 770 3,227
-------- -------- --------
Earnings (loss) before cumulative effect of change
in accounting principle ............................ 11,005 (1,780) 4,332
Cumulative effect of change in accounting principle 17 -- --
-------- -------- --------
Net earnings (loss) .................................. $ 11,022 $ (1,780) $ 4,332
======== ======== ========
F-33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Funding Corporation:
We have audited the accompanying consolidated balance sheets of Impac
Funding Corporation and subsidiaries as of December 31, 2001 and 2000, 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, 2001. 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 subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.
KPMG LLP
Orange County, California
January 28, 2002
F-35
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
At December 31,
--------------------------
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents .......................................................... $ 28,612 $ 8,281
Securities available-for-sale ...................................................... 3,394 266
Mortgage loans held-for-sale ....................................................... 174,172 275,570
Mortgage servicing rights .......................................................... 8,468 10,938
Premises and equipment, net ........................................................ 5,333 5,037
Accrued interest receivable ........................................................ 130 1,040
Other assets ....................................................................... 19,693 16,031
--------- ---------
Total assets ............................................................... $ 239,802 $ 317,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG ............................................................... $ 174,136 $ 266,994
Due to affiliates .................................................................. 14,500 14,500
Deferred revenue ................................................................... 4,479 5,026
Accrued interest expense ........................................................... 453 2,176
Other liabilities .................................................................. 26,914 12,546
--------- ---------
Total liabilities .......................................................... 220,482 301,242
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; 10,000 shares issued and
outstanding at December 31, 2001 and 2000 ..................................... 18,053 18,053
Common stock, no par value; 10,000 shares authorized; 10,000 shares issued and
outstanding at December 31, 2001 and 2000 ..................................... 182 182
Retained earnings (accumulated deficit) ......................................... 8,722 (2,300)
Cumulative dividends declared ................................................... (8,984) --
Accumulated other comprehensive income (loss) ................................... 1,347 (14)
--------- ---------
Total shareholders' equity .................................................... 19,320 15,921
--------- ---------
Total liabilities and shareholders' equity ................................. $ 239,802 $ 317,163
========= =========
See accompanying notes to consolidated financial statements.
F-36
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(in thousands)
For the year ended December 31,
-----------------------------------
2001 2000 1999
------- -------- -------
INTEREST INCOME:
Mortgage loans held-for-sale ................................... $23,044 $ 28,009 $20,352
Other interest income .......................................... 1,131 640 873
------- -------- -------
Total interest income ........................................ 24,175 28,649 21,225
INTEREST EXPENSE:
Borrowings from IWLG ........................................... 18,362 28,063 18,366
Other affiliated borrowings .................................... 2,010 1,604 1,673
Other non-affiliated borrowings ................................ 493 389 914
------- -------- -------
Total interest expense ....................................... 20,865 30,056 20,953
------- -------- -------
Net interest income (expense) ................................ 3,310 (1,407) 272
NON-INTEREST INCOME:
Gain on sale of loans .......................................... 46,949 19,727 27,098
Loan servicing income .......................................... 2,140 6,286 5,221
Gain on sale of investment securities .......................... 3,710 51 --
Other income ................................................... 1,295 1,054 979
------- -------- -------
Total non-interest income .................................... 54,094 27,118 33,298
NON-INTEREST EXPENSE:
Personnel expense .............................................. 16,559 9,766 7,299
Amortization of mortgage servicing rights ...................... 4,519 5,179 5,331
General and administrative and other expense ................... 3,757 3,636 2,492
Provision for repurchases ...................................... 3,498 371 385
Equipment expense .............................................. 2,583 1,414 1,218
Professional services .......................................... 2,286 2,535 2,524
Occupancy expense .............................................. 1,983 1,626 1,095
Data processing expense ........................................ 1,743 657 337
Impairment of mortgage servicing rights ........................ 825 -- 1,078
Mark-to-market gain - SFAS 133 ................................. 346 -- --
Write-down of investment securities available-for-sale ......... -- 1,537 4,252
------- -------- -------
Total non-interest expense ................................... 38,099 26,721 26,011
------- -------- -------
Earnings (loss) before income taxes and cumulative effect of change
in accounting principle ......................................... 19,305 (1,010) 7,559
Income taxes ................................................... 8,300 770 3,227
------- -------- -------
Earnings (loss) before cumulative effect of change in accounting
principle ....................................................... 11,005 (1,780) 4,332
Cumulative effect of change in accounting principle ............ 17 -- --
------- -------- -------
Net earnings (loss) ............................................... 11,022 (1,780) 4,332
Other comprehensive earnings:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period ...... 1,361 (15) 329
Less: Reclassification of gains included in income ........... -- 168 24
------- -------- -------
Net unrealized gains arising during period ................ 1,361 153 353
------- -------- -------
Comprehensive earnings (loss) ................................ $12,383 $ (1,627) $ 4,685
======= ======== =======
See accompanying notes to consolidated financial statements.
F-37
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
Retained Accumulated
Number of Number of Earnings Cumulative Other Total
Preferred Preferred Common Common (Accumulated Dividends Comprehensive Shareholders'
Shares Stock Shares Stock Deficit) Declared Gain(Loss) Equity
--------- --------- --------- -------- ----------- ---------- ------------- -------------
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
Net earnings, 2001 ............. -- -- -- -- 11,022 -- -- 11,022
Securities valuation allowance . -- -- -- -- -- -- 1,452 1,452
Other comprehensive income ..... -- -- -- -- -- -- (91) (91)
Dividends declared ............. -- -- -- -- -- (8,984) -- (8,984)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 2001 ..... 10,000 $ 18,053 10,000 $ 182 $ 8,722 $ (8,984) $ 1,347 $ 19,320
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-38
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .............................................. $ 11,022 $ (1,780) $ 4,332
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Provision for repurchases ...................................... 3,498 371 385
Gain on sale of loans .......................................... 46,949 19,727 27,098
Depreciation and amortization .................................. 7,011 6,280 6,453
Amortization of deferred revenue ............................... (1,914) (2,313) (12,751)
Impairment of mortgage servicing rights ........................ 825 -- 1,078
Net change in accrued interest receivable ...................... 910 (992) 1,848
Net change in other assets and liabilities ..................... 3,355 6,058 (6,826)
Net change in deferred taxes ................................... 5,547 (150) 568
Net change in deferred revenue ................................. 1,367 (296) 9,781
Purchase of securities held-for-trading ........................ -- -- 5,300
Write-down of investment securities available-for-sale ......... -- 1,537 4,252
Purchase of mortgage loans held-for-sale ....................... (3,203,559) (2,112,724) (1,671,777)
Sale of and principal reductions on mortgage loans held-for-sale 3,256,542 1,884,847 1,827,638
Net change in accrued interest expense ......................... (1,723) 1,333 843
----------- ----------- -----------
Net cash provided by (used in) operating activities ......... 129,830 (198,102) 198,222
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to mortgage servicing rights ........................... (2,874) (496) (7,968)
Issuance of note from Impac Mortgage Holdings, Inc. .............. -- -- 14,500
Purchase of securities available-for-sale ........................ (10,250) -- (5,413)
Gain on sale of investment securities ............................ (3,710) (51) --
Sale of securities available-for-sale ............................ 11,965 -- 5,413
Purchase of premises and equipment ............................... (2,788) (2,563) (2,719)
----------- ----------- -----------
Net cash provided by (used in) investing activities ......... (7,657) (3,110) 3,813
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings from Impac Warehouse Lending Group ...... (92,858) 200,869 (126,775)
Dividends paid ................................................... (8,984) -- --
Net change in other borrowings ................................... -- (181) (66,877)
----------- ----------- -----------
Net cash provided by (used in) financing activities ......... (101,842) 200,688 (193,652)
----------- ----------- -----------
Net change in cash and cash equivalents ............................. 20,331 (524) 8,383
Cash and cash equivalents at beginning of year ...................... 8,281 8,805 422
----------- ----------- -----------
Cash and cash equivalents at end of year ............................ $ 28,612 $ 8,281 $ 8,805
=========== =========== ===========
SUPPLEMENTARY INFORMATION:
Interest paid .................................................... $ 22,588 $ 28,723 $ 20,109
Taxes paid ....................................................... 7,010 24 385
Conversion of IMH preferred stock to common stock ................ 10,250 -- --
See accompanying notes to consolidated financial statements.
F-39
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Alt-A mortgage loans from a network of correspondent sellers and
mortgage brokers and originates loans with retail customers. IFC subsequently
securitizes or sells non-conforming Alt-A mortgage 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 subsidiaries, Impac Secured Asset Corporation and Novelle
Financial Services, 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 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 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 December 31, 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
F-40
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prepayments, prepayment penalties to be received, 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.
IFC receives periodic servicing fees for the servicing and collection of
the mortgage loans as master servicer of the securitized loans. IFC 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 IFC. 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 achieved. The cash and collateral in the
over-collateralization account is restricted from use by IFC. Pursuant to
certain
F-41
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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,
typically, three to seven years.
7. Mortgage Servicing Rights
IFC 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. IFC 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, 2001, IFC used estimates for loan prepayment rates ranging from 20%
to 129%.
As of December 31, 2001 and 2000, IFC is the master servicer for $3.1
billion and $2.6 billion of loans collateralizing REMIC securities and $2.1
billion and $1.3 billion 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.
9. Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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
F-42
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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)
On August 10, 2001, the Derivatives Implementation Group (DIG) of the FASB
published DIG G20, which further interpreted SFAS 133. On October 1, 2001, IFC
adopted the provisions of DIG G20 and net income and accumulated other
comprehensive income were adjusted by the amount needed to reflect the
cumulative impact of adopting the provisions of DIG G20.
IFC hedges interest rate risk and price volatility on its mortgage loan
portfolio during the time it commits to acquire or originate mortgage loans at a
pre-determined rate and the time it sells or securitizes mortgage loans. To
mitigate interest rate and price volatility risks, IFC enters into forward
commitments and futures transactions. The nature and quantity of hedging
transactions are determined based on various factors, including market
conditions and the expected volume of mortgage loan acquisitions and
originations.
IFC enters into forward commitments and futures transactions to mitigate
changes in the value of its "locked pipeline." The locked pipeline are mortgage
loans that have not yet been acquired, however, IFC has committed to acquire the
mortgage loans in the future at pre-determined rates through rate-lock
commitments. IFC records the value of its locked pipeline as it qualifies as a
derivative instrument under the provisions of SFAS 133, however, it does not
qualify for hedging treatment. Therefore, the locked pipeline and the related
value of forward and future contracts is marked to market each reporting period
along with a corresponding entry to non-interest income or expense.
IFC also enters into forward commitments and futures transactions to lock
in the forecasted sale profitability of fixed rate loans being held-for-sale.
IFC generally sells call or buys put options on U.S. Treasury bonds and
mortgage-backed securities 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 paid for the put option. These hedges are treated as cash
flow hedges under the provisions of SFAS 133 to hedge forecasted transactions
with the entire change in market value of the hedges recorded through other
comprehensive income.
10. Servicing Income
Servicing income is reported as earned, principally on a cash basis when
the majority of the service process is completed.
11. Recent Accounting Pronouncements
In September 2000, FASB issued SFAS No. 140 (SFAS 140) to replace SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 140 provides the
F-43
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. IFC
adopted the disclosure required by SFAS 140 and has included all appropriate and
necessary disclosures required by SFAS 140 in its financial statements and
footnotes. The adoption of the accounting provision did not have a material
impact on IFC's consolidated balance sheet or results of operations.
In November 2000, 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 was effective for IFC after March 31, 2001. The
adoption of EITF 99-20 did not have a material impact on IFC's consolidated
balance sheet or results of operation.
Note B--Securities Available-for-Sale
On February 20, 2001, IFC purchased $5.0 million of the IMH's Preferred
Stock from LBP, Inc. (LBPI) at cost plus accumulated dividends. On March 27,
2001, IFC purchased an additional $5.0 million of the IMH's Preferred Stock from
LBPI for $5.25 million plus accumulated dividends. The Preferred Stock was
converted into 2,118,644 shares of IMH common stock in August 2001.
Subsequently, IFC sold 1.7 million shares of IMH common stock for a gain of $3.5
million. As of December 31, 2001, IFC owned 377,028 shares of IMH common stock
with a carrying value of $3.2 million.
During 2000, IFC wrote-off substantially all of its investment securities
available-for-sale, which were secured by franchise loan receivables. As of
December 31, 2001, the carrying value of franchise loan receivables was
$189,000.
Note C--Mortgage Loans Held-for-Sale
Mortgage loans acquired and originated by IFC are fixed rate and
adjustable rate non-conforming Alt-A mortgage loans secured by first and second
liens on single-family residential properties. During the years ended December
31, 2001 and 2000, IFC acquired $3.2 billion and $2.1 billion, respectively, of
mortgage loans and sold $3.3 billion and $1.9 billion, respectively, of mortgage
loans. Of the mortgage loans sold by IFC during 2001 and 2000, $1.5 billion and
$454.0 million, respectively, were sold to IMH including premiums of $24.4
million and $3.3 million, respectively. At December 31, 2001 and 2000,
approximately 50% and 51%, 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,
-----------------------
2001 2000
--------- ---------
(in thousands)
Mortgage loans held-for-sale ............................... $ 172,204 $ 270,356
Premiums on mortgage loans held-for-sale ................... 2,126 5,221
Mark-to-market loss - SFAS 133 ............................. (158) --
--------- ---------
$ 174,172 $ 275,570
========= =========
F-44
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mark-to-market loss - SFAS 133 reflects the fair value of $36.0 million in
notional balance of derivative instruments hedging mortgage loans held-for-sale.
A $91,000 offset to mark-to-market loss -SFAS 133 is reflected in other
comprehensive income (loss), after applying a 42% tax rate, and $67,000
reflected in deferred taxes.
Included in other liabilities at December 31, 2001 and 2000 is an allowance
for repurchases of $2.3 million and $300,000, respectively.
Note D--Premises and Equipment
Premises and equipment consisted of the following:
At December 31,
-----------------------
2001 2000
--------- ---------
(in thousands)
Premises and equipment ..................................... $ 11,733 $ 8,774
Less: Accumulated depreciation ............................. (6,400) (3,737)
--------- ---------
$ 5,333 $ 5,037
========= =========
Note E--Mortgage Servicing Rights
Activity for mortgage servicing rights was as follows:
For the year ended December 31,
---------------------------------
2001 2000
-------------- -----------------
(in thousands)
Beginning Balance .............................. $ 10,938 $ 15,621
Net additions .................................. 2,874 496
Impairment of mortgage servicing rights ........ (825) --
Amortization ................................... (4,519) (5,179)
-------- --------
$ 8,468 $ 10,938
======== ========
Note F--Income Taxes
IFC's income taxes are as follows:
For the year ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Current income taxes:
Federal ............................... $ 7,260 $ 42 $ 248
State ................................. 2,167 1,832 2
-------- -------- --------
Total current income taxes .......... 9,427 1,874 250
-------- -------- --------
Deferred income taxes:
Federal ............................... (924) (960) 2,115
State ................................. (203) (144) 862
-------- -------- --------
Total deferred income taxes ......... (1,127) (1,104) 2,977
-------- -------- --------
Total income taxes ............... $ 8,300 $ 770 $ 3,227
======== ======== ========
IFC's effective income taxes differ from the amount determined by applying
the statutory Federal rate of 35%, 34%, and 34% for the years ended December 31,
2001, 2000, and 1999, respectively, as follows:
2001 2000 1999
-------- -------- --------
(in thousands)
Income taxes (benefit) at Federal tax rate .................... $ 6,763 $ (343) $ 2,570
State tax, net of Federal income tax (benefit) ................ 1,277 (89) 570
California franchise tax accrual, net of Federal income tax ... -- 1,203 --
Other ......................................................... 260 (1) 87
-------- -------- --------
Total income taxes ......................................... $ 8,300 $ 770 $ 3,227
======== ======== ========
F-45
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effected cumulative temporary differences that give rise to
deferred tax assets and liabilities as of December 31, 2001 and 2000 are as
follows:
2001 2000
-------- --------
(in thousands)
Deferred tax assets:
Deferred revenue ....................................... $ 1,867 $ 2,041
Forward commitments .................................... -- 8
Depreciation and amortization .......................... 505 105
Salary accruals ........................................ 1,086 328
Other accruals ......................................... 1,035 831
Loan mark-to-market .................................... 252 94
Non-accrual loans ...................................... 55 100
Accrued interest ....................................... 281 273
REMIC interest ......................................... -- 118
State franchise tax .................................... 759 620
Provision for repurchases .............................. 972 121
Contribution carryover ................................. -- 5
Minimum tax credit ..................................... -- 233
Net operating loss ..................................... -- 1,458
-------- --------
Total gross deferred tax assets ................... 6,812 6,335
-------- --------
Deferred tax liabilities:
Mortgage servicing rights .............................. 3,530 4,269
Deferred gain .......................................... 223 174
REMIC interest ......................................... 40 --
-------- --------
Total gross deferred tax liabilities .............. 3,793 4,443
-------- --------
Net deferred tax (asset) liability ................ $ (3,019) $ (1,892)
======== ========
As of December 31, 2001, IFC has no net operating loss carry-forwards for
federal and state income tax purposes, and no minimum tax carry-forward for
federal purposes.
IFC 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 G--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-46
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 December 31, 2000
---------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
Assets
------
Cash and cash equivalents ............................ $ 28,612 $ 28,612 $ 8,281 $ 8,281
Securities available-for-sale ........................ 3,394 3,394 266 266
Mortgage loans held-for-sale, including derivative
assets.............................................. 174,172 174,187 275,570 281,126
Liabilities
-----------
Borrowings from IWLG ................................. 174,136 174,136 266,994 266,994
Due to affiliates .................................... 14,500 14,500 14,500 14,500
Loan commitments ..................................... -- -- -- 20
The fair value estimates as of December 31, 2001 and 2000 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.
Securities Available-for-Sale
F-47
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To determine the value of the securities, IFC estimates future rates of
prepayments, prepayment penalties to be received, 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.
Loan Commitments
Fair value of loan commitments is determined in the aggregate based on
current investor yield requirements.
Note H--Employee Benefit Plans
Profit Sharing and 401(k) Plan
After meeting certain employment requirements, employees of IFC can
participate in the 401(k) plan. Under IFC's 401(k) plan, employees may
contribute up to 15% of their salaries. IFC will match 50% of the first 4% of
employee contributions. Additional contributions may be made at the discretion
of IFC. IFC recorded approximately $604,000, $384,000 and $135,000 for matching
and discretionary contributions during 2001, 2000 and 1999, respectively.
Note I--Related Party Transactions
Related Party Cost Allocations
IFC charges IMH and IWLG for management and operating services based upon
usage which management believes is reasonable. Total cost allocations charged by
IFC to IMH and IWLG for the years ended December 31, 2001, and 2000 were $1.7
million, and $1.5 million, respectively.
During 1999, IMH and IWLG were allocated data processing, executive and
operations management, and accounting services that IFC incurred during the
normal course of business per IFC's submanagement agreement with RAI Advisors
Inc. (RAI). IFC, through RAI, charged Impac Commercial Holdings, Inc. (ICH) 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 continue to provide services to ICH. This agreement
expired in December 1999. IMH and IWLG were allocated data processing, executive
and operations management, and accounting services that IFC incurred during the
normal course of business under the submanagement agreement
F-48
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with RAI. IFC charged IMH and IWLG for these services based upon usage, which
management believes was reasonable. Total cost allocations charged to IMH and
IWLG by IFC for the year ended December 31, 1999 were $1.2 million.
In December 1997, IFC entered into a services agreement with Imperial
Credit Advisors, Inc. (ICAI), a subsidiary of ICII, under which ICAI provided
various services to IFC, including data processing, human resource
administration, general ledger accounts, check processing, remittance processing
and payment of accounts payable. ICAI charged fees for each of the services
based upon usage. The charge to IFC for coverage was based upon a pro rata
portion of costs ICAI incurred for its various services. Total allocation of
expense for the years ended December 31, 2000, and 1999 was $215,000 and
$180,000, respectively. IFC began providing its own services in January 2001.
On December 10, 2001, IFC provided William B. Ashmore, President and Chief
Operating Officer of IFC, with a $600,000 adjustable rate mortgage loan to
provide financing with an initial rate of 4.13%. In the opinion of management,
the loan was in the ordinary course of business, substantially on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons.
On November 15, 2001, IFC provided Richard J. Johnson, Executive Vice
President and Chief Financial Officer of IFC, with a $140,000 fixed rate loan to
provide mortgage financing with an interest rate of 6.50%. In the opinion of
management, the loan was in the ordinary course of business, substantially on
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons.
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, 2001, 2000, and 1999 were $2.0 million, $1.6 million, and $1.1
million, respectively, of which $1.9 million, $1.5 million and $1.0 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 minus 0.50%.
As of December 31, 2001 and 2000, amounts outstanding on IFC's warehouse line
with IWLG were $174.1 million and $267.0 million, respectively. Interest expense
recorded by IFC related to warehouse line with IWLG for the years ended December
31, 2001, 2000, and 1999, was $18.4 million, $28.1 million, and $18.4 million,
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 with affiliates for the years ended December 31, 2001, 2000,
and 1999 was $758,000, $161,000 and $463,000, respectively. Interest expense
recorded by IFC related to short-term advances with affiliates for the years
ended December 31, 2001, 2000 and 1999 was $632,000, $226,000 and $977,000,
respectively.
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 a California Thrift
and Loan and to fund the operations of IFC and other strategic opportunities
deemed appropriate by IFC. Interest expense recorded by IFC for the years ended
December 31, 2001, 2000, and 1999 related to this note was $1.4 million $1.4
million, and $696,000, respectively.
Credit Arrangements - Expired
F-49
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1999, ILG obtained a warehouse financing facility with IWLG.
Advances under the warehouse facility bore interest at prime. As of December 31,
1999, amounts outstanding on ILG's warehouse line with IWLG were $1.2 million.
Interest expense recorded by ILG related to its warehouse line provided by IWLG
for the year ended December 31, 1999 was $293,000. At January 1, 2000, ILG
became a division of IFC and borrowings from IWLG were consolidated with IFC's
borrowings.
Transactions with IMH and IWLG
Sale of Mortgage Loans: During the years ended December 31, 2001 and 2000,
IFC sold to IMH mortgage loans having a principal balance of $1.5 billion and
$450.7 million, respectively, at premiums of $22.4 million and $3.3 million,
respectively. Servicing rights on all mortgages purchased by IMH were retained
by IFC.
Note J--Derivative Instruments and Hedging Activities
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of loans originated for sale against
adverse changes in interest rates. 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.
IFC hedges interest rate risk and price volatility on its mortgage loan
portfolio during the time it commits to acquire or originate mortgage loans at a
pre-determined rate and the time it sells or securitizes mortgage loans. To
mitigate interest rate and price volatility risks, IFC enters into forward
commitments and futures transactions. The nature and quantity of hedging
transactions are determined based on various factors, including market
conditions and the expected volume of mortgage loan acquisitions and
originations.
IFC enters into forward commitments and futures transactions to mitigate
changes in the value of its "locked pipeline." The locked pipeline are mortgage
loans that have not yet been acquired, however, IFC has committed to acquire the
mortgage loans in the future at pre-determined rates through rate-lock
commitments. IFC records the value of its locked pipeline as it qualifies as a
derivative instrument under the provisions of SFAS 133, however, it does not
qualify for hedging treatment. Therefore, the locked pipeline and the related
value of forward and future contracts is marked to market each reporting period
along with a corresponding entry to non-interest income or expense.
IFC also enters into forward commitments and futures transactions to lock
in the forecasted sale profitability of fixed rate loans being held-for-sale.
IFC generally sells call or buys put options on U.S. Treasury bonds and
mortgage-backed securities 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 paid for the put option. These hedges are treated as cash
flow hedges under the provisions of SFAS 133 to hedge forecasted transactions
with the entire change in market value of the hedges recorded through other
comprehensive income.
As of December 31, 2001 and 2000, IFC had $48.0 million and $29.0 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, 2001 and 2000.
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.
As of December 31, 2001 and 2002, IFC had written option contracts with an
outstanding principal balance of $5.0 million and $10.0 million, respectively.
IFC may sell call or buy put options on U.S. Treasury bonds and mortgage-backed
securities. 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.
The following table presents certain information related to derivative
instruments and hedging activities as of December 31, 2001 (dollars in
thousands):
Related Related
Original Fair Amount Amount
Notional Value Related Amount Amount in Loans in Other
Face of Amount In in Deferred Held- Assets/
Amount Derivatives in OCI Earnings Taxes for-Sale Liabilities
----------- ----------- --------- ----------- ------------- ------------- -----------
FNMA forward
commitments
hedging loans held-
for-sale............ $ 36,000 $ (158) $ (91) $ -- $ (67) $ (158) $ --
FNMA forward
commitments
hedging pipeline.... 12,000 -- -- (72) -- -- 72
Value of locked
pipeline............ 140,379 -- -- 401 -- -- (401)
Option on FNMA
forward............. 5,000 2 -- (2) -- -- 2
---------- ----------- --------- ----------- ------------ -------------- ----------
Totals............. $ 193,379 $ (156) $ (91) $ 327 $ (67) $ (158) $ (327)
========== =========== ========= =========== ============ ============== ==========
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, 2001 and 2000, approximately
46% and 39%, respectively, of mortgage loans in IFC's master servicing portfolio
were located in California. As of December 31, 2001 and 2000, IFC was master
servicing loans totaling approximately $5.6 billion and $4.0 billion,
respectively, of which $3.8 billion and $3.9 billion, respectively, were
serviced for others. As of December 31, 2001 and 2000, IFC is the master
servicer for $3.1 billion and $2.6 billion, respectively, of loans
collateralizing fixed rate REMIC securities and $2.1 billion and $1.3 billion,
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.
F-50
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, 2001 and 2000, IFC had
outstanding short term Master Commitments with 156 and 135 sellers,
respectively, to purchase mortgage loans in the aggregate principal amount of
$2.5 billion and $2.1 billion, respectively, over periods ranging from six
months to one year, of which $1.3 billion and $1.2 billion, 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 expected volume of mortgage loan purchases.
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 on IFC's financial condition and results of operations.
At December 31, 2001 and 2000, included in other liabilities are $2.3 million
and $300,000, respectively, in allowances for repurchases related to possible
off-balance sheet recourse and repurchase agreement provisions.
Lease Committments
IFC has entered in premise operating leases with minimum rental
commitments under non-cancelable leases of $1.1 million through 2004.
Legal Proceedings
On September 1, 2000, a complaint captioned Michael P. and Shellie Gilmor
v. Preferred Credit Corporation and Impac Funding Corporation, et. al. was filed
in the United States District Court for the Western District of Missouri, Case
No. 4-00-00795-SOW, as a purported class action lawsuit alleging that the
defendants violated Missouri's Second Loans Act and Merchandising Practices Act.
In July 2001, the Missouri complaint was amended to include IMH and other
IMH-related entities. The plaintiffs in the Gilmor lawsuit are also alleging a
defendant class action. On July 26, 2001, a complaint captioned James and Jill
Baker, et al. v. Century Financial Group, Inc., et al., was filed in the Circuit
Court of Clay County, Missouri, Case No. CV100-4294CC as a purported class
action. This lawsuit alleges violations of Missouri's Second Loans Act and
Merchandising Practices Act. The plaintiffs in the Baker action also allege a
defendant class action. The Company has filed a Motion to Dismiss this action
and the Plaintiffs have agreed not to oppose the motion and to allow the matter
to be dismissed without prejudice. On August 2, 2001, a complaint captioned
Frazier, et al. v. Preferred Credit, et al., was filed in the Circuit Court of
Tennessee for the Thirtieth Judicial District at Memphis, Case No. CT004762-01.
F-51
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This is also stated as a purported class action lawsuit alleging violations of
Tennessee's usury statute and Consumer Protection Act. On August 8, 2001, a
complaint captioned Mattie L. Street v. PSB Lending Corp., et al., was filed in
the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis,
Case No. CT004888-01. The Street action is also stated as a purported class
action lawsuit alleging violations of Tennessee's usury statute and Consumer
Protection Act. On October 2, 2001, a complaint captioned Deborah Searcy,
Shirley Walker, et. al. vs. Impac Funding Corporation, Impac Mortgage Holdings,
Inc. et. al. was filed in the Wayne County Circuit Court, State of Michigan, as
a purported class action lawsuit alleging that the defendants violated
Michigan's Secondary Mortgage Loan Act, Credit Reform Act and Consumer
Protection Act. Except for the Searcy case in Michigan, all of the foregoing
cases have been removed to federal court. On October 10, 2001 a complaint
captioned Hayes v Impac Funding Corporation, et al was filed in the Circuit
Court of Vanderburgh County, Indiana as Case No. 82C01-0110-CP580. This is
stated as a purported class action lawsuit alleging a violation of the Indiana
Uniform Consumer Credit Code when the loans were originated. On November 30,
2001 a complaint captioned Garry Lee Skinner and Judy Cooper Skinner, et al. v.
Preferred Credit, et al. was filed in the Superior Court of Durham County, North
Carolina as Case No. 1CV-05596. This is stated as a purported class action
alleging a violation of the North Carolina Interest Statutes and Unfair and
Deceptive Trade Practices Act when the secondary mortgage loans were originated
by the defendants.
All of the purported class action lawsuits are similar in nature in that
they allege that the mortgage loan originators violated the respective state's
statutes by charging excessive fees and costs when making second mortgage loans
on residential real estate. The complaints allege that IFC was a purchaser, and
is a holder, along with other IMH-related entities, of second mortgage loans
originated by other lenders. The plaintiffs in the lawsuits are seeking damages
that include disgorgement, restitution, rescission, actual damages, statutory
damages, exemplary damages, and punitive damages. Damages are unspecified in
each of the complaints.
Additionally, on November 26, 2001, a complaint captioned Sumner N. Doxie
v. Impac Funding Corp. was filed in the Circuit Court of Cook County, Illinois
as Case No. 01L015153, which was subsequently removed to the United States
District Court for the Northern District of Illinois, Eastern Division, as Case
No. 01C9835. This is stated as a purported class action alleging consumer fraud
in connection with the defendant's practice of charging appraisal review fees on
its mortgage loans, and alleging violations of the Illinois Consumer Fraud Act
for the unauthorized practice of law by performing document preparation services
for a fee in connection with its mortgage loans. The plaintiffs in the lawsuit
are seeking damages that include punitive damages, compensatory damages,
attorney's fees, and litigation costs.
The Company believes that it has meritorious defenses to the above claims
and intends to defend these claims vigorously. Nevertheless, litigation is
uncertain, and the Company may not prevail in the lawsuits and can express no
opinion as to its ultimate outcome.
The Company is a party to litigation and claims, which are normal in the
course of its operations. While the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a material adverse effect on the Company.
Note L--Retained Interests in Securitizations
During 2001, IFC sold $1.7 billion of mortgage loans through the issuance
of REMIC 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 value of master
servicing fees is subject to prepayment and interest rate risks on the
transferred financial assets. The retained interest in master servicing fees is
included in mortgage servicing rights on the balance sheet. During 2001, the
fair value assigned to the retained interest in master servicing fees at the
date of securitization was $2.9 million.
F-52
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IFC 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 140. 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, 2001 and 2000, the carrying amount and estimated fair
value of MSRs was $8.5 million and $10.9 million, respectively. As of December
31, 2001, IFC had $174.2 million of mortgage loans held-for-sale that were
available for securitization.
Note M--Quarterly Financial Data (unaudited)
Selected quarterly financial data for 2001 follows (in thousands):
For the Three Months Ended,
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------- ------------- ------------- -------------
Net interest income ........................... $ 1,597 $ 940 $ 479 $ 294
Non-interest income ........................... 18,518 13,140 13,709 8,727
Non-interest expense, including income taxes .. 17,029 10,991 10,639 7,723
Net earnings .................................. 3,086 3,089 3,549 1,298
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
F-53