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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19861
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 33-0675505
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 556-0122
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on March 20,
1997 on the American Stock Exchange was approximately $224.4 million.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 20, 1997:
9,400,000
DOCUMENTS INCORPORATED BY REFERENCE
DEFINITIVE PROXY STATEMENT
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 25
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters....................................................... 26
Item 6. Selected Consolidated Financial Data.......................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 30
Item 8. Financial Statements and Supplementary Data................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 86
PART III
Item 10. Directors and Executive Officers of the Registrant............ 87
Item 11. Executive Compensation........................................ 90
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 90
Item 13. Certain Relationships and Certain Transactions................ 90
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 100
PART I
ITEM 1. BUSINESS
GENERAL
Unless the context otherwise requires, references herein to the "Company"
refer to Imperial Credit Mortgage Holdings, Inc. ("IMH"), ICI Funding
Corporation ("ICIFC"), ICIFC Secured Assets Corp. ("ICIFC Assets"), IMH Assets
Corp. ("IMH Assets"), and Imperial Warehouse Lending Group, Inc. ("IWLG"),
collectively.
Imperial Credit Mortgage Holdings, Inc. is a specialty finance company
which, together with its subsidiaries and related companies, operates three
businesses: (1) the Long-Term Investment Operations, (2) the Conduit
Operations, and (3) the Warehouse Lending Operations. The Long-Term Investment
Operations invests primarily in non-conforming residential mortgage loans and
securities backed by such loans. The Conduit Operations purchases and sells or
securitizes primarily non-conforming mortgage loans, and the Warehouse Lending
Operations provides warehouse and repurchase financing to originators of
mortgage loans. These latter two businesses include certain ongoing operations
contributed to the Company in 1995 by Imperial Credit Industries, Inc.
("ICII"), a leading specialty finance company (the "Contribution
Transaction"). See "Item 13. Certain Relationships and Certain Transactions--
Other Transactions--The Contribution Transaction." IMH is organized as a real
estate investment trust ("REIT") for federal income tax purposes, which
generally allows it to pass through qualified income to stockholders without
federal income tax at the corporate level.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage
loans and mortgage-backed securities secured by or representing interests in
such loans and, to a lesser extent, in second mortgage loans. Non-conforming
residential mortgage loans are residential mortgages that do not qualify for
purchase by government-sponsored agencies such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). Such loans generally provide higher yields than conforming loans.
The principal differences between conforming loans and non-conforming loans
include the applicable loan-to-value ratios, the credit and income histories
of the mortgagors, the documentation required for approval of the mortgagors,
the type of properties securing the mortgage loans, the loan sizes, and the
mortgagors' occupancy status with respect to the mortgaged properties. Second
mortgage loans are higher yielding mortgage loans secured by a second lien on
the property and made to borrowers owning single-family homes for the purpose
of debt consolidation, home improvements, education and a variety of other
purposes. At December 31, 1996, the Company's mortgage loan and securities
investment portfolio consisted of $501.7 million of mortgage loans held in
trust as collateral for Collateralized Mortgage Obligations ("CMOs"), $63.5
million of mortgage-backed or other collateralized securities and $915,000 of
mortgage loans held for investment.
Conduit Operations. The Conduit Operations, conducted by ICIFC, purchases
primarily non-conforming mortgage loans and, to a lesser extent, second
mortgage loans from its network of third party correspondents and subsequently
securitizes or sells such loans to permanent investors, including the Long-
Term Investment Operations. ICIFC's ability to design non-conforming mortgage
loans which suit the needs of its correspondent loan originators and their
borrowers while providing sufficient credit quality to investors, as well as
its efficient loan purchasing process, flexible purchase commitment options
and competitive pricing, enable it to compete effectively with other non-
conforming mortgage loan conduits. In addition to earnings generated from
ongoing securitizations and sales to third party investors, ICIFC supports the
Long-Term Investment Operations of the Company by supplying IMH with non-
conforming mortgage loans and securities backed by such loans. For the year
ended December 31, 1996, ICIFC acquired $1.5 billion of mortgage loans and
sold or securitized $1.6 billion of mortgage loans. The Long-Term Investment
Operations acquired $591.6 million of such loans as well as $32.5 million of
securities created by ICIFC. Prior to the Contribution Transaction, ICIFC was
a division or subsidiary of ICII since 1990. IMH owns 99% of the economic
interest in ICIFC, while ICII is the holder of all the outstanding voting
stock of ICIFC, representing 1% of the economic interest in ICIFC. On March
31,
3
1997, ICII divested itself of its interest in ICIFC by contributing 100% of
ICIFC's common stock to certain officers and directors of the Company. At
December 31, 1996, ICIFC maintained relationships with 146 correspondents.
Warehouse Lending Operations. The Warehouse Lending Operations, conducted by
IWLG, provides warehouse and repurchase financing to ICIFC and to approved
mortgage banks, most of which are correspondents of ICIFC, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors. At December 31, 1996, the Warehouse
Lending Operations had $362.3 million in finance receivables outstanding, of
which $327.4 million was outstanding with ICIFC.
The following table sets forth the interest earning assets and interest
bearing liabilities of the Company on the dates indicated:
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------------------- -----------------------------------
CARRYING WEIGHTED PERCENTAGE CARRYING WEIGHTED PERCENTAGE
VALUE AVERAGE YIELD OF PORTFOLIO VALUE AVERAGE YIELD OF PORTFOLIO
-------- ------------- ------------ -------- ------------- ------------
(DOLLARS IN THOUSANDS)
ASSET TYPE
Money Market Account and
Passbook Account....... $ 22,289 6.12% 2.34% $ 750 5.73% 0.12%
Investment Securities
Available for Sale .... 63,505 12.31 6.68 17,378 11.23 2.85
Mortgage Loans Held for
Investment 915 9.17 0.10 -- -- --
CMO Collateral ......... 501,744 7.97 52.77 -- -- --
Finance Receivables..... 362,312 8.30 38.11 583,021 8.80 95.64
Lease Payment
Receivables
Held for Sale ......... -- -- -- 8,441 12.00 1.38
-------- ------ -------- ------
Total Interest Bearing
Assets............... $950,765 8.34% 100.00% $609,590 8.91% 100.00%
======== ====== ======== ======
BORROWING TYPE
CMO Borrowings (1)...... $474,045 5.94% 57.14% $ -- -- % -- %
Reverse Repurchase
Agreements (1)......... 355,508 6.20 42.86 566,652 6.67 100.00
-------- ------ -------- ------
Total Interest Bearing
Liabilities.......... $829,553 6.05 100.00% $566,652 6.67 100.00%
======== ====== ======== ======
Net Interest Spread... 2.29% 2.24%
- --------
(1) Excludes accrued interest payable on CMO borrowings and reverse repurchase
agreements of $467,000 and $2,208,000, respectively, at December 31, 1996
and none and $1,076,000, respectively, at December 31, 1995.
References to financial information of IMH for the year ended 1996, reflect
the financial operations of IMH, its subsidiaries (IWLG and IMH Assets) and
IMH's equity interest in ICIFC. References to financial information of IMH for
the year ended 1995, reflect the financial operations of IMH, its subsidiary
(IWLG) and IMH's equity interest in ICIFC. References to the "Interim Period"
refers to the period from November 20, 1995, the date of the Contribution
Transaction, to December 31, 1995.
LONG-TERM INVESTMENT OPERATIONS
GENERAL
IMH acquires mortgage loans and mortgage-backed securities, principally non-
conforming residential mortgage loans and securities backed by such loans, for
long-term investment. The Long-Term Investment Operations also invests, to a
lesser extent, in second mortgage loans. Currently, the Long-Term Investment
Operations include certain other assets which were purchased from ICII and its
affiliates. At December 31, 1996,
4
the carrying value of such assets totaled $15.4 million. See "Item 13. Certain
Relationships and Certain Transactions--Other Transactions--Purchase of Other
Investments." Income is earned principally from the net interest income
received by IMH on mortgage loans and mortgage-backed and other collateralized
securities acquired and held in its portfolio. Such acquisitions are financed
with a portion of the Company's capital, as well as borrowings provided
through CMO borrowings and reverse repurchase agreements. In April and August
1996, IMH, through trusts in which IMH Assets (a wholly-owned, specialty
purpose entity through which IMH conducts its CMO borrowings) holds residual
interests, completed $296.3 million and $259.8 million CMO borrowings,
respectively. ICIFC supports the investment objectives of IMH by supplying all
of the mortgage loans and mortgage-backed securities held by IMH.
MORTGAGE LOANS HELD IN THE PORTFOLIO
The Company originates, through its network of correspondents, and invests a
substantial portion of its portfolio in non-conforming mortgage loans and, to
a lesser extent, second mortgage loans. The Company also purchases such loans
from third parties for long-term investment and for resale. Management
believes that non-conforming mortgage loans provide an attractive net earnings
profile and produce higher yields without commensurately higher credit risks
when compared with conforming mortgage loans. A portion of the investment
portfolio of the Long-Term Investment Operations consists of "B" and "C" grade
mortgage loans. The Company believes that a structural change in the mortgage
banking industry has occurred which has increased demand for higher yielding
non-conforming mortgage loans. This change has been caused by a number of
factors, including: (1) investors' demand for higher yielding assets due to
historically low interest rates over the past few years; (2) increased
securitization of high-yielding non-conforming mortgage loans by the
investment banking industry; (3) quantification and development of
standardized credit criteria by credit rating agencies for securities backed
by non-conforming mortgage loans; (4) increased competition in the
securitization industry, which has reduced borrower interest rates and fees,
thereby making non-conforming mortgage loans more affordable; and (5) the end
of the refinance "boom" of 1992 and 1993, which has caused many mortgage
banks, attempting to sustain origination volume, to seek out non-conforming
mortgage loan borrowers.
INVESTMENTS IN MORTGAGE-BACKED AND OTHER COLLATERALIZED SECURITIES
The Company also acquires mortgage-backed securities and other
collateralized securities generated through its own securitization efforts as
well as those generated by third parties. In connection with the issuance of
mortgage-backed securities by ICIFC in the form of REMICs, IMH has in the past
and may in the future retain the senior or subordinated securities as regular
interests on a short-term or long-term basis. In connection with ICIFC's REMIC
securitizations of $835.2 million for the year ended December 31, 1996, IMH
has purchased $32.5 million of securities as regular interests. At December
31, 1996, such regular interests included $117,000 of "principal-only" and
$10.1 million of "interest-only" securities. Such securities or investments
may subject the Company to credit, interest rate and/or prepayment risks.
At December 31, 1996, the Company's investment securities available for sale
included $37.9 million of subordinated securities collateralized by mortgages
and $15.4 million of securities collateralized by other loans, of which $10.1
million is subordinated. The majority of such securities were rated "B" to
"BBB". In general, subordinated classes of a particular series of securities
bear all losses prior to the related senior classes. Losses in excess of
expected losses at the time such securities are purchased would adversely
affect the Company's yield on such securities and, in extreme circumstances,
could result in the failure of the Company to recoup its initial investment.
It is the Company's general policy not to acquire REMIC or CMO residuals
other than residual interests for which the Company owns all of the
outstanding interests in the REMIC or the CMO or which result from a
securitization transaction by the Conduit Operations. See "--Conduit
Operations--Securitization and Sale Process." However, in December 1996, ICIFC
purchased eight residuals from ICII for $46.9 million, all of which was
financed by an intercompany payable. See Note 1 to Notes to ICI Funding
Corporation Financial Statements.
5
FINANCING
The Long-Term Investment Operations are principally financed through the
issuance of CMOs and borrowings under reverse repurchase agreements.
Collateralized Mortgage Obligations. The following table sets forth the CMOs
issued by the Company and the outstanding principal balance of CMO collateral
for the year ended December 31, 1996:
DECEMBER 31,
ISSUANCE 1996
AMOUNT (IN
ISSUE DATE ISSUANCE NAME (IN MILLIONS) MILLIONS)
---------- ------------- ------------- ------------
April 25, 1996.. Fund America Investor Trust V $296.3 $238.0
August 28, 1996. Imperial CMB Trust Series 1996-1 $259.8 $248.4
The Company issues CMOs secured by mortgage loans as a means of financing a
portion of its Long-Term Investments Operations. The decision to issue CMOs is
based on the Company's current and future investment needs, market conditions
and other factors. For accounting and tax purposes, the mortgage loans
financed through the issuance of CMOs are treated as assets of the Company,
and the CMOs are treated as debt of the Company. Each issue of CMOs is fully
payable from the principal and interest payments on the underlying mortgage
loans collateralizing such debt, any cash or other collateral required to be
pledged as a condition to receiving the desired rating on the debt, and any
investment income on such collateral. The Long-Term Investment Operations
earns the net interest spread between the interest income on the mortgage
loans securing the CMOs and the interest and other expenses associated with
the CMO financing. The net interest spread may be directly impacted by the
levels of prepayment of the underlying mortgage loans and, to the extent each
CMO class has variable rates of interest, may be affected by changes in short-
term interest rates.
When the Company issues CMOs for financing purposes, it seeks an investment
grade rating for such CMOs by a nationally recognized rating agency. To secure
such a rating, it is often necessary to pledge collateral in excess of the
principal amount of the CMOs to be issued, or to obtain other forms of credit
enhancements such as additional mortgage loan insurance. The need for
additional collateral or other credit enhancements depends upon factors such
as the type of collateral provided and the interest rates paid thereon, the
geographic concentration of the mortgaged property securing the collateral and
other criteria established by the rating agency. The pledge of additional
collateral reduces the capacity of the Company to raise additional funds
through short-term secured borrowings or additional CMOs and diminishes the
potential expansion of its investment portfolio. As a result, the Company's
objective is to pledge additional collateral for CMOs only in the amount
required to obtain an investment grade rating for the CMOs by a nationally
recognized rating agency. Total credit loss exposure to the Company is limited
to the equity invested in the CMOs at any point in time.
The Company believes that under prevailing market conditions, an issuance of
CMOs receiving other than an investment grade rating would require payment of
an excessive yield to attract investors. No assurance can be given that the
Company will achieve the ratings it plans to seek for the CMOs. As of December
31, 1996, the Company had issued two CMOs in original balances totaling $556.1
million for the purpose of financing its Long-Term Investment Operations. The
CMOs were structured as one month LIBOR "floaters" with interest payable
monthly at LIBOR plus 0.32% to 0.50% currently, increasing to LIBOR plus 1.00%
to 1.32% after seven years. The CMOs are guaranteed for the holders thereof by
a mortgage loan insurer, giving the CMOs the highest rating established by a
nationally recognized rating agency. At December 31, 1996, the underlying
principal balance of mortgages supporting CMO borrowings of $486.4 million
represented approximately $447.5 million of six month and 2-year LIBOR
adjustable rate mortgage loans with varying grade quality and $38.9 million of
second mortgage loans. Such mortgages balances are exclusive of net premiums.
Reverse Repurchase Agreements. The Company has obtained financings with two
different third-party lenders, at interest rates that are consistent with its
financing objectives described herein, and has established $250.0 million and
$100 million committed financing facilities under which the lenders would be
required to enter into new reverse repurchase agreements as needed by the
Company during a specified period of time. For a discussion of the terms of
the Company's reverse repurchase facilities, see "Item 7. Management's
Discussion
6
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." A reverse repurchase agreement, although structured as a
sale and repurchase obligation, acts as a financing vehicle under which the
Company effectively pledges its mortgage loans and mortgage securities as
collateral to secure a short-term loan. Generally, the other party to the
agreement makes the loan in an amount equal to a percentage of the market
value of the pledged collateral. At the maturity of the reverse repurchase
agreement, the Company is required to repay the loan and correspondingly
receives back its collateral. Under reverse repurchase agreements, the Company
retains the incidents of beneficial ownership, including the right to
distributions on the collateral and the right to vote on matters as to which
certificate holders vote. Upon a payment default under such agreements, the
lending party may liquidate the collateral. The Company's borrowing agreements
require the Company to pledge cash, additional mortgage loans or additional
securities backed by mortgage loans in the event the market value of existing
collateral declines. To the extent that cash reserves are insufficient to
cover such deficiencies in collateral, the Company may be required to sell
assets to reduce its borrowings.
Reverse repurchase agreements take the form of a sale of securities to the
lender at a discounted price in return for the lender's agreement to resell
the same securities to the borrower at a future date (the maturity of the
borrowing) at an agreed price. In the event of the insolvency or bankruptcy of
the Company, certain reverse repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which is, among other
things, to allow the creditor under such agreements to avoid the automatic
stay provisions of the Bankruptcy Code and to foreclose on the collateral
agreements without delay. In the event of the insolvency or bankruptcy of a
lender during the term of a reverse repurchase agreement, the lender may be
permitted, under the Bankruptcy Code, to repudiate the contract, and the
Company's claim against the lender for damages therefrom may be treated simply
as one of the unsecured creditors. In addition, if the lender is a broker or
dealer subject to the Securities Investor Protection Act of 1970, the
Company's ability to exercise its rights to recover its securities under a
reverse repurchase agreement or to be compensated for any damages resulting
from the lender's insolvency may be further limited by such statute. If the
lender is an insured depository institution subject to the Federal Deposit
Insurance Act, the Company's ability to exercise its rights to recover its
securities under a reverse repurchase agreement or to be compensated for
damages resulting form the lender's insolvency may be limited by such statute
rather than the Bankruptcy Code. The effect of these various statutes is,
among other things, that a bankrupt lender, or its conservator or receiver,
may be permitted to repudiate or disaffirm its reverse repurchase agreements,
and the Company's claims against the bankrupt lender for damages resulting
therefrom may be treated simply as one of an unsecured creditor. Should this
occur, the Company's claims would be subject to significant delay and, if and
when received, may be substantially less than the damages actually suffered by
the Company.
To reduce its exposure to the credit risk of reverse repurchase agreement
lenders, the Company entered into such agreements with several different
parties and follows its own credit exposure procedures. The Company monitors
the financial condition of its reverse repurchase agreement lenders on a
regular basis, including the percentage of mortgage loans that are the subject
of reverse repurchase agreements with a single lender. Notwithstanding these
measures, no assurance can be given that the Company will be able to avoid
such third party risks.
Other Mortgage-Backed Securities. As an additional alternative for the
financing of its Long-Term Investment Operations, the Company may issue other
mortgage-backed securities, if, in the determination of the Company, the
issuance of such other securities is advantageous. In particular, mortgage
pass-through certificates representing an undivided interest in pools of
mortgage loans formed by the Company may prove to be an attractive vehicle for
raising funds.
The holders of mortgage pass-through certificates receive their pro rata
share of the principal payments made on a pool of mortgage loans and interest
at a pass-through interest rate that is fixed at the time of offering. The
Company may retain up to a 100% undivided interest in a significant number of
the pools of mortgage loans underlying such pass-through certificates. The
retained interest, if any, may also be subordinated so that, in the event of a
loss, payments to certificate holders will be made before the Company receives
its payments. Unlike the issuance of CMOs, the issuance of mortgage pass-
through certificates will not create an obligation of the
7
Company to security holders in the event of a borrower default. However, as in
the case of CMOs, the Company may be required to obtain various forms of
credit enhancements in order to obtain an investment grade rating for issues
of mortgage pass-through certificates by a nationally-recognized rating
agency.
CONDUIT OPERATIONS
GENERAL
ICIFC began its mortgage conduit operations as a division of ICII in 1990.
As of December 31, 1996, ICIFC maintained relationships with 146
correspondents. During the fourth quarter of 1996, ICIFC discontinued its
relationship with approximately 100 correspondents who were originating a
limited number of loans. Correspondents originate and close mortgage loans
under ICIFC's mortgage loan programs on a flow (loan-by-loan) basis or through
bulk sale commitments. Correspondents include savings and loan associations,
commercial banks, mortgage bankers and mortgage brokers. During the year ended
December 31, 1996, the Interim Period, and the years ended December 31, 1995
and 1994, ICIFC acquired from its correspondents, including ICII after the
Contribution Transaction, $1.5 billion, $547.2 million, $1.1 billion and $1.7
billion, respectively, of mortgage loans.
The Conduit Operations consists of the purchase and sale of mortgage loans
primarily secured by first liens and, to a lesser extent, second liens on
single (one-to-four) family residential properties that are originated in
accordance with ICIFC's underwriting guidelines. As a non-conforming mortgage
loan conduit, ICIFC acts as a intermediary between the originators of mortgage
loans that do not currently meet the guidelines for purchase by government-
sponsored entities (i.e., FNMA and FHLMC) that guarantee mortgage-backed
securities and permanent investors in mortgage-backed securities secured by or
representing an ownership interest in such mortgage loans. ICIFC also acts as
a bulk purchaser of primarily non-conforming mortgage loans. The Company
believes that non-conforming mortgage loans provide an attractive net earnings
profile, producing higher yields without commensurately higher credit risks
when compared to mortgage loans that qualify for purchase by FNMA or FHLMC. In
addition, based on the Company's experience in the mortgage banking industry
and in the mortgage conduit business, the Company believes it provides
mortgage loan sellers with an expanded and competitively priced array of non-
conforming and "B" and "C" grade mortgage loan products, timely purchasing of
loans, mandatory, best efforts and optional rate-lock commitments, and
flexible Master Commitments.
All non-conforming loans purchased by ICIFC are made available for sale to
IMH at fair market value at the date of sale and subsequent transfer to IMH.
In addition, ICII has granted ICIFC a right of first refusal to purchase all
non-conforming loans that ICII or any 25% entity originates or acquires and
subsequently offers for sale, and ICIFC has granted ICII, or any 25% entity
designated by ICII, a right of first refusal to purchase all conforming
mortgage loans that ICIFC acquires and subsequently offers for sale. See "Item
13. Certain Relationships and Certain Transactions--The Contribution
Transaction." As of December 31, 1996, no loans have been purchased under this
agreement.
MARKETING AND PRODUCTION
Marketing Strategy. The Company's competitive strategy is, in part, to be a
low cost national acquirer, through its national correspondent network, of
mortgage loans to be held for investment, sold in the secondary market as
whole loans or securitized as mortgage-backed securities. A key feature of
this approach is the use of a large national network of correspondent
originators, which enables the Company to shift the high fixed costs of
interfacing with the homeowner to the correspondents. The marketing strategy
for the Conduit Operations is designed to accomplish three objectives: (1)
attract a geographically diverse group of both large and small correspondent
loan originators, (2) establish relationships with such correspondents and
facilitate their ability to offer a variety of loan products designed by ICIFC
and (3) purchase the loans and securitize or sell them into the secondary
market or to IMH. In order to accomplish these objectives, ICIFC designs and
offers loan products that are attractive to potential non-conforming borrowers
as well as to end-investors in non-conforming mortgage loans and mortgage-
backed securities.
8
ICIFC has historically emphasized and continues to emphasize flexibility in
its mortgage loan product mix as part of its strategy to attract
correspondents and establish relationships. ICIFC also maintains relationships
with numerous end-investors so that it may develop products that they may be
interested in as market conditions change, which in turn may be offered
through the correspondent network. As a consequence, ICIFC is less dependent
on acquiring conforming mortgage loans than many mortgage bankers and has, in
the past, both as a division or subsidiary of ICII and as a subsidiary of IMH,
acquired significant volumes of non-conforming loans.
In July 1996, ICIFC developed an additional Series to the Progressive
Program, the "Progressive Express Program." The concept of the Progressive
Express Program is to underwrite the loan focusing on the borrowers Fair Issac
("FICO") credit score, ability and willingness to repay the mortgage loan
obligation, and assess the adequacy of the mortgage property as collateral for
the loan. The FICO Score was developed by Fair, Issac Co., Inc. of San Rafael,
California. It is an electronic evaluation of past and present credit accounts
on the borrower's credit bureau report. This includes all reported accounts as
well as public records and inquiries. The Progressive Express Program offers
six levels of mortgage loan programs. The Progressive Express Program has a
minimum FICO score that must be met by each of the borrowers and does not
allow for any exceptions to the FICO score requirement. The FICO Score
requirement is as follows: Progressive Express I 681 & above, Progressive
Express II 680-621, Progressive Express III 620-601, Progressive Express IV
600-581, Progressive Express V 580-551, and Progressive Express VI 550-500.
Each Progressive Express program has different FICO score requirements, credit
criteria, reserve requirements, and Loan-to-Value Ratio restrictions.
Progressive Express I is designed for credit history and income requirements
typical of "A+" credit borrowers. In the event a borrower does not fit the
Progressive Express I criteria, the borrower's mortgage loan is placed into
either Progressive Express II, III, IV, V, or VI, depending on which series'
mortgage loan parameters meets the borrower unique credit profile.
In response to the needs of its non-conforming mortgage loan correspondents
and as part of its strategy to facilitate the sale of its loans through the
Conduit Operations, ICIFC's marketing strategy offers efficient response time
in the purchase process, direct and frequent contact with its correspondents
through a trained sales force and flexible commitment programs. Finally, due
to the price sensitivity of most home buyers, ICIFC is competitive in pricing
its products in order to attract sufficient numbers of borrowers.
Mortgage Loans Acquired. A majority of the mortgage loans purchased through
the Conduit Operations are non-conforming mortgage loans. Currently, the
maximum principal balance for a conforming loan is $214,000. Loans that exceed
such maximum principal balance are referred to as "jumbo loans." Non-
conforming mortgage loans generally consist of jumbo loans or other loans that
are originated in accordance with underwriting or product guidelines that
differ from those applied by FNMA and FHLMC. Such non-conforming loans may
involve some greater risk as a result of such different underwriting and
product guidelines. A portion of the mortgage loans purchased through the
Conduit Operations are "B" and "C" grade loans, as described below, which may
entail greater credit risks than other non-conforming loans. For the year
ended December 31, 1996, "B" and "C" grade loans, as defined by the Company,
accounted for 12.1% of ICIFC's total loan acquisitions. In addition, during
that period, ICIFC's acquisitions included 0.6% of "D" grade loans, as defined
by the Company. ICIFC generally does not acquire mortgage loans with principal
balances above $750,000 for "A" quality loans, and $500,000 for "B" and "C"
grade loans.
Non-conforming loans purchased by ICIFC pursuant to its underwriting
programs typically differ from those purchased pursuant to the guidelines
established by FNMA and FHLMC primarily with respect to loan-to-value ratios,
borrower income or credit history, required documentation, interest rates,
borrower occupancy of the mortgaged property and/or property types. To the
extent that these programs reflect underwriting standards different from those
of FNMA and FHLMC, the performance of loans made thereunder may reflect higher
delinquency rates and/or credit losses. The Company believes that the non-
conforming mortgage loans acquired by ICIFC produce higher yields without
commensurately higher credit risk when compared to conforming mortgage loans.
9
ICIFC's focus on the acquisition of non-conforming mortgage loans may affect
the Company's financial performance. For example, the purchase market of non-
conforming loans has typically provided for higher interest rates in order to
compensate for the lower liquidity of such loans, thereby potentially
enhancing the interest income earned by the Company during the accumulation
phase for loans held for sale and during the holding period for loans held for
investment. In addition, due to the lower level of liquidity in non-conforming
loan market, the Company may realize higher returns upon securitization of
such loans than would be realized upon securitization of conforming loans. On
the other hand, such lower levels of liquidity may from time to time cause the
Company to hold such loans or other mortgage-related assets supported by such
loans. In addition, by retaining for investment either the loans or other
mortgage-related assets supported by such loans, the Company assumes the
potential risk of any increased delinquency rates and/or credit losses as well
as interest rate risk.
Mortgage loans acquired by ICIFC are generally secured by first liens and,
to a lesser extent, second liens on single (one-to-four) family residential
properties with either fixed or adjustable interest rates. During the year
ended December 31, 1996, fixed-rate mortgage loans and ARMs accounted for
approximately 67.9% and 32.1%, respectively, of the mortgage loans purchased
by ICIFC. Fixed-rate mortgage loans have a constant interest rate over the
life of the loan, which is generally 15 or 30 years. The interest rate on an
ARM is typically tied to an index (such as LIBOR or the CMT Index) and is
adjustable periodically at various intervals. Such mortgage loans are
typically subject to lifetime interest rate caps and periodic interest rate
and/or payment caps. The interest rates on ARMs are typically lower than the
average comparable fixed rate loan initially, but may be higher than average
comparable fixed rate loans over the life of the loan. Substantially all
mortgage loans purchased by ICIFC will fully amortize over their remaining
terms. Currently, ICIFC purchases (1) fixed rate mortgage loans that have
original terms to maturity ranging from 10 to 30 years, (2) ARM mortgage loans
that adjust based on LIBOR or the CMT Index, and (3) 2-year and 3-year
mortgage loans that adjust to six month adjustables approximately three years
following origination to an interest rate based upon a defined index plus a
spread. ICIFC may from time to time purchase mortgage loans with other
interest rate and maturity characteristics.
A summary of ICIFC's mortgage loan acquisitions by type of loan, excluding
net premiums, is shown below.
PERIOD FROM
NOVEMBER 20, 1995
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(DOLLARS IN MILLIONS,
EXCEPT FOR AVERAGE LOAN SIZE)
Non-conforming Loans:
Volume of loans........................... $1,424.4 $ 388.3
Percentage of total volume................ 94.6% 71.8%
Conforming Loans:
Volume of loans........................... $ 82.0 $ 152.3
Percentage of total volume................ 5.4% 28.2%
-------- --------
$1,506.4 $ 540.6
======== ========
Fixed Rate Loans:
Volume of loans........................... $1,022.2 $ 142.9
Percentage of total volume................ 67.9% 26.4%
Adjustable Rate Loans:
Volume of loans........................... $ 484.2 $ 397.7
Percentage of total volume................ 32.1% 73.6%
-------- --------
$1,506.4 $ 540.6
======== ========
Average Loan Size........................... $128,239 $143,017
10
The credit quality of the loans purchased by ICIFC varies depending upon the
specific program under which such loans are purchased. For example, a
principal credit risk inherent in adjustable-rate mortgage loans is the
potential "payment shock" experienced by the borrower as rates rise, which
could result in increased delinquencies and credit losses. In the case of
negative amortization mortgage loans, a portion of the interest due accrues to
the underlying principal balance of the loan, thereby increasing the loan-to-
value ratio of the mortgage loans. As a general rule, mortgage loans with
higher loan-to-value 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 lower loan-to-value
ratios and 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.
ICIFC's loan purchase activities have and are expected in the future to
continue to focus on those regions of the country where higher volumes of non-
conforming mortgage loans are originated. The highest concentration of non-
conforming mortgage loans purchased by ICIFC relates to properties located in
California because of the generally higher property values and mortgage loan
balances prevalent there. In addition, of the $1.5 billion in loans acquired
during the year ended December 31, 1996, $930.5 million (or 60.3%) were
acquired from ICIFC's top ten sellers, including ICII by volume of sales. ICII
accounted for more than 10% of the total mortgage loans acquired by ICIFC
during the year ended December 31, 1996. No seller other than ICII or Walsh
Securities, Inc. is an affiliate of the Company. See "Item 13. Certain
Relationships and Certain Transactions."
The following table sets forth the geographic distribution of ICIFC's
mortgage loan acquisitions, excluding net premiums.
PERIOD FROM
NOVEMBER 20, 1995
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -----------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- ------ ----------
(DOLLARS IN MILLIONS)
California................................ $ 699.4 46.4% $370.6 68.5%
Florida................................... 157.7 10.5 20.7 3.8
New Jersey................................ 123.3 8.2 22.1 4.1
New York.................................. 59.6 4.0 5.7 1.0
Washington................................ 46.7 3.1 23.3 4.3
Illinois.................................. 32.1 2.1 2.1 0.4
Oregon.................................... 29.8 2.0 18.9 3.5
Nevada.................................... 28.9 1.9 4.5 0.8
Utah...................................... 28.7 1.9 5.4 1.0
Massachusetts............................. 28.2 1.9 1.4 0.3
Hawaii.................................... 27.3 1.8 4.4 0.8
Colorado.................................. 26.8 1.8 23.6 4.4
Maryland.................................. 23.0 1.5 7.4 1.4
Texas..................................... 21.5 1.4 1.5 0.3
North Carolina............................ 20.9 1.4 2.4 0.4
Georgia................................... 19.3 1.3 2.1 0.4
Virginia.................................. 19.2 1.3 2.0 0.4
Arizona................................... 18.7 1.2 5.9 1.1
Pennsylvania.............................. 15.1 1.0 3.7 0.7
Other .................................... 80.2 5.3 12.9 2.4
-------- ----- ------ -----
$1,506.4 100.0% $540.6 100.0%
======== ===== ====== =====
11
To date, a portion of the loans purchased by ICIFC comprise "B" and "C"
grade residential mortgage loans, as defined by the Company. For the year
ended December 31, 1996, such loans accounted for 12.1% of ICIFC's total loan
acquisitions. In general, "B" and "C" grade loans are residential mortgage
loans made to borrowers with lower credit ratings than borrowers of higher
quality, or so called "A" grade mortgage loans, and are normally subject to
higher rates of loss and delinquency than the other non-conforming loans
purchased by ICIFC. As a result, "B" and "C" grade loans normally bear a
higher rate of interest, and are typically subject to higher fees (including
greater prepayment fees and late payment penalties), than non-conforming loans
of "A" quality. In general, greater emphasis is placed upon the value of the
mortgaged property and, consequently, the quality of appraisals thereof, and
less upon the credit history of the borrower in underwriting "B" and "C" grade
mortgage loans than in underwriting "A" grade loans. In addition, "B" and "C"
grade loans are generally subject to lower loan-to-value ratios than "A" grade
loans. Under ICIFC's "B" and "C" mortgage loan program, underwriting authority
is delegated only to correspondents who meet those strict underwriting
guidelines established by ICIFC. See "--Underwriting and Quality Control."
ICIFC generally purchases its loans on a "servicing-released" basis,
particularly in the case of "B" and "C" grade loans due to its belief that
control over the servicing and collection functions with respect to such loans
is important to the realization of a satisfactory return thereon. To the
extent ICIFC finances the acquisition of such loans with the warehouse line
from IWLG, ICIFC pledges such loans and the related servicing rights to IWLG
as collateral. As a result, IWLG has an absolute right to control the
servicing of such loans (including the right to collect 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 ICIFC. In connection therewith,
ICIFC has contracted with third party sub-servicers to perform the function of
servicing for ICIFC. ICIFC believes that the selection of third party sub-
servicers was more effective than establishing a servicing department within
the Company. However, part of ICIFC's responsibility is to continually monitor
the performance of the sub-servicers through monthly performance reviews and
site visits. Depending on these sub-servicer reviews, the Company may in the
future form a separate collection group to assist the sub-servicer in the
servicing of these loans. See "--Servicing and Master Servicing."
In connection with the securitization of "B" and "C" grade loans, the levels
of subordination required as credit enhancement for the more senior classes of
securities issued in connection therewith are higher than those with respect
to its "A" grade non-conforming 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 in connection therewith are higher than those with respect
to its mortgage loans secured by first liens. Thus, to the extent that the
Company retains any of the subordinated securities created in connection with
such securitizations and losses with respect to such pools of "B" and "C"
grade loans or mortgage loans secured by second liens are higher than
expected, the Company's future earnings could be adversely affected.
Seller Eligibility Requirements. The mortgage loans acquired by the Conduit
Operations are originated by various sellers, including savings and loan
associations, banks, mortgage bankers and other mortgage brokers. Sellers are
required to meet certain regulatory, financial, insurance and performance
requirements established by ICIFC before they are eligible to participate in
its mortgage loan purchase program, and must submit to periodic reviews by
ICIFC to ensure continued compliance with these requirements. ICIFC's current
criteria for seller participation generally include a minimum tangible net
worth requirement ($300,000 in its non-delegated program, $500,000, when
restricting loan amounts to conforming limits, and $1.5 million in its
partially delegated program and at least $5 million in its fully delegated
program, as described below), approval as a FNMA or FHLMC Seller/Servicer in
good standing and a HUD-approved mortgagee in good standing or a financial
institution that is insured by the 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 ICIFC against the seller in
the event of a breach of representations or warranties made by the seller with
respect to mortgage loans sold to ICIFC, any fraud or misrepresentation during
the mortgage
12
loan origination process, and upon early payment default on such loans. As of
December 31, 1996, 146 sellers had been approved by ICIFC as being eligible to
participate in the Conduit Operations.
PURCHASE COMMITMENT PROCESS AND PRICING
Master Commitments. As part of its marketing strategy, ICIFC has established
mortgage loan purchase commitments ("Master Commitments") with sellers that,
subject to certain conditions, entitle the seller to sell and obligate ICIFC
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 ICIFC on a mandatory,
best efforts or optional basis, or a combination thereof. Master Commitments
do not generally obligate ICIFC 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 ICIFC's quoted prices at the time of purchase. Master
Commitments specify the types of mortgage loans the seller is entitled to sell
to ICIFC and generally range from $2 million to $50 million in aggregate
committed principal amount. The provisions of ICIFC's Seller/Servicer Guide
are incorporated in each of the Conduit Operations' Master Commitments and may
be modified by negotiations between the parties. In addition, there are
individualized Master Commitment options available to sellers, which include
alternative pricing structures or specialized loan products. In order to
obtain a Master Commitment, a seller may be asked to pay a non-refundable up
front or non-delivery fee, or both, to the Company. As of December 31, 1996,
ICIFC had outstanding Master Commitments with 68 sellers to purchase mortgage
loans in the aggregate principal amount of $826.5 million over periods
generally ranging from six months to one year, of which $304.9 million had
been purchased or committed to be purchased pursuant to rate-locks (as defined
below).
Sellers who have entered into the aforementioned Master Commitments may sell
mortgage loans to the Conduit Operations by executing individual, bulk or
other rate-locks (each, a "rate-lock"). Each rate-lock, in conjunction with
the related Master Commitment, specifies the terms of the related sale,
including the quantity and price of the mortgage loans or the formula by which
the price will be determined, the rate-lock type and the delivery
requirements. Historically, the up front fee paid by a seller to ICIFC to
obtain a Master Commitment on a mandatory delivery basis is often refunded pro
rata as the seller delivers loans pursuant to rate-locks. Any remaining fee
after the Master Commitment expires is retained by the Conduit Operations.
Following the issuance of a specific rate-lock, ICIFC 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 ICIFC based on
various factors, including market conditions and the expected volume of
mortgage loan purchases. Gains and losses on hedging transactions are recorded
as incurred.
Bulk and Other Rate-Locks. ICIFC also acquires mortgage loans from sellers
that are not purchased pursuant to Master Commitments. These purchases may be
made on a bulk or individual rate-lock basis. Bulk rate-locks obligate the
seller to sell and ICIFC to purchase a specific group of loans, generally
ranging from $1 million to $125 million in aggregate committed principal
amount, at set prices on specific dates. Bulk rate-locks enable ICIFC 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 ICIFC's Seller/Servicer Guide. Due to the active
presence of investment banks and other substantial investors in this area,
bulk pricing is extremely competitive. Loans are also purchased from
individual sellers (typically smaller originators of mortgage loans) who do
not wish to sell pursuant to either a Master Commitment or bulk rate-lock. The
terms of these individual purchases are based primarily on ICIFC's
Seller/Servicer Guide and standard pricing provisions, and are offered on a
mandatory basis.
13
Mandatory, Best Efforts and Optional Rate-Locks. Mandatory rate-locks
require the seller to deliver a specified quantity of loans to ICIFC 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. ICIFC is required to purchase all loans covered by the rate-
lock at prices established at the time of rate-lock. If the seller is unable
to deliver the specified loans, it may instead deliver comparable loans
approved by ICIFC 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 ICIFC a penalty, and, if ICIFC's
mortgage loan yield requirements have declined, the present value of the
difference in yield ICIFC would have obtained on the mortgage loans that the
seller agreed to deliver and the yield available on similar mortgage loans
subject to mandatory rate-lock issued at the time of such failure to deliver.
In contrast, mortgage loans sold on a best efforts basis must be delivered to
ICIFC 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 gives the seller the option to deliver mortgage loans to ICIFC at a
fixed price on a future date and requires the payment of up front fees to
ICIFC. Any up front fees paid in connection with best efforts and optional
rate-locks are retained by ICIFC whether or not the loans are delivered.
Pricing. ICIFC sets purchase prices at least once every business day for
mortgage loans it acquires for its Conduit Operations based on prevailing
market conditions. Different prices are established for the various types of
loans, rate-lock periods and types of rate-locks (mandatory, best efforts or
optional). ICIFC's standard pricing is based on the anticipated price it
receives upon sale or securitization of the loans, the anticipated interest
spread realized during the accumulation period, the targeted profit margin and
the anticipated issuance, credit enhancement and ongoing administrative costs
associated with such sale or securitization. The credit enhancement cost
component of ICIFC's pricing is established for individual mortgage loans or
pools of mortgage loans based upon the characteristics of such loan or loan
pool. As the characteristics of the loan or loan pool vary, this cost
component is correspondingly adjusted upward or downward to reflect the
variation. ICIFC's adjustments are reviewed periodically by management to
reflect changes in the costs of credit enhancement. Adjustments to ICIFC's
standard pricing may also be negotiated on an individual basis under Master
Commitments or bulk or individual rate-locks with sellers. See "--
Securitization and Sale Process."
UNDERWRITING AND QUALITY CONTROL
Purchase Guidelines. ICIFC has developed comprehensive purchase guidelines
for the acquisition of mortgage loans by the Conduit Operations. Subject to
certain exceptions, each loan purchased must conform to the loan eligibility
requirements specified in ICIFC's Seller/Servicer Guide with respect to, among
other things, loan amount, type of property, loan-to-value ratio, type and
amount of insurance, credit history of the borrower, income ratios, sources of
funds, appraisals and loan documentation. ICIFC also performs a legal
documentation review prior to the purchase of any mortgage loan. ICIFC either
delegates the underwriting function to its correspondents or performs the
function itself. Additionally, for mortgage loans that are underwritten by
contract underwriters (as explained below), ICIFC does not perform a full
underwriting review prior to purchase, but instead relies on the credit review
and analysis performed by the contract underwriter, as well as its own pre-
purchase eligibility process to ensure that the loan meets the program
acceptance guidelines and a post-purchase quality control review.
Underwriting Methods. ICIFC has established a delegated underwriting
program, which is similar in concept to the delegated underwriting programs
established by FNMA and FHLMC. Under this program, qualified sellers are
required to underwrite loans in compliance with ICIFC's underwriting
guidelines as set forth in ICIFC's Seller/Servicer Guide or an individual
Master Commitment. In order to determine a sellers eligibility to perform
under its delegated underwriting program, an internal loan committee review is
undertaken by ICIFC. In connection with its approval, the seller must
represent and warrant to ICIFC that all mortgage loans sold to ICIFC will
comply with ICIFC's underwriting guidelines. The current financial, historical
loan quality and other criteria for seller participation in this program
generally include a minimum net worth requirement and verification of the
seller's good standing with FNMA and FHLMC. As of December 31, 1996, 85
correspondents had qualified by ICIFC for participation in the delegated
underwriting program.
14
The delegated underwriting program consists of four separate subprograms.
ICIFC's principal delegated underwriting subprogram is a fully delegated
program designed for loan sellers that meet higher financial and performance
criteria than those applicable to sellers generally. Generally, qualifying
sellers have delegated underwriting authority for all mortgage products under
this subprogram, except for "B" and "C" grade loans. The second subprogram is
a partially delegated program pursuant to which sellers only have delegated
underwriting authority to a maximum loan amount of $500,000. The third
subprogram is also a partially delegated program with underwriting authority
to FNMA/FHLMC limits. The fourth subprogram is for sellers with tangible net
worth of $300,000 in which sellers are under ICIFC's non-delegated
underwriting program.
Mortgage loans acquired under ICIFC's non-delegated underwriting program are
either fully underwritten by ICIFC's underwriting staff or involve the use of
contract underwriters. ICIFC has contracted with several national mortgage
insurance firms that conduct contract underwriting for mortgage loan
acquisitions by ICIFC. Under these contracts, ICIFC relies on the credit
review and analysis of the contract underwriter, as well as its own pre-
purchase eligibility review to ensure that the loan meets program acceptance,
its own follow-up quality control procedures and the representations and
warranties of the contract underwriter.
Loans that are not acquired under either delegated or contract underwriter
methods are fully underwritten by ICIFC's underwriting staff. In such cases,
ICIFC performs a full credit review and analysis to ensure compliance with its
loan eligibility requirements. This review specifically includes, among other
things, an analysis of the underlying property and associated appraisal and an
examination of the credit, employment and income history of the borrower.
Under all of these methods, loans are purchased only after completion of a
legal documentation and eligibility criteria review.
Although the delegated underwriting program could be deemed to present
inherently greater risks due to the lower level of individual loan review, the
Company believes that this risk is mitigated by the higher net worth
requirements applicable to loan sellers eligible for the delegated
underwriting program and ICIFC's eligibility control prior to purchase,
thereby enhancing the financial support for the representations and warranties
made by such sellers. ICIFC also relies on such sellers' experience and
demonstrated performance with the government-sponsored entities referred to
above with respect to the delegated underwriting program.
Under all of ICIFC's underwriting methods, loan documentation requirements
for verifying the borrowers' income and assets vary according to loan-to-value
ratios and other factors. This variation is necessary to be competitive and
responsive to the needs of the non-conforming mortgage loan sellers.
Generally, as the standards for required documentation are lowered, borrowers'
down payment requirements are increased and the required loan-to-value ratios
are decreased. These types of loans with less documentation are reviewed on a
risk analysis underwriting basis, similar to the underwriting analysis
utilized by mortgage insurance companies. Reduced documentation loans require
the borrower to have a stronger credit history and larger cash reserves to
show a savings pattern history, and the appraisal of the property is validated
by either an enhanced desk or field review. Within the underwriting philosophy
of the ICIFC guidelines, the underwriters utilize a risk analysis approach to
determine the borrower's ability and willingness to repay the debt and to
determine if the property taken as security has sufficient value to recover
the debt in the event that the loan defaults. Each loan is reviewed for
compensating factors (i.e., credit reports, sufficient assets, appraisal, job
stability, savings pattern), and overall compensating factors are reviewed to
fully analyze the risk. Full documentation is requested if it is the judgment
of the underwriter that the compensating factors are insufficient for loan
approval.
Quality Control. Ongoing quality control reviews are conducted by ICIFC to
ensure that the mortgage loans purchased meet its quality standards. The type
and extent of the quality control review depend on the nature of seller and
the characteristics of the loans. Loans acquired under the delegated
underwriting program are reviewed in accordance with the quality control
procedures described above. ICIFC reviews on a post-purchase basis a portion
of all loans submitted with delegated underwriting to determine that the loans
were purchased in compliance with the guidelines set forth by ICIFC. ICIFC
reviews a higher portion of certain categories of mortgage loans, such as
loans with reduced documentation, loans with higher loan-to-value ratios
(above 80%) and cash out refinances. In performing a quality control review on
a loan, ICIFC analyzes the underlying property
15
appraisal and examines the credit and income history of the borrower. In
addition, all documents submitted in connection with the purchase of the
loans, including insurance policies, title policies, deeds of trust or
mortgages and promissory notes, are examined for compliance with ICIFC's
guidelines and to ensure compliance to state and federal regulations.
SECURITIZATION AND SALE PROCESS
General. The Conduit Operations primarily uses a warehouse line of credit
from IWLG and equity to finance the acquisition of mortgage loans from
correspondents. When a sufficient volume of mortgage loans with similar
characteristics has been accumulated, generally $100 million to $350 million,
ICIFC will securitize them through the issuance of mortgage-backed securities
in the form of a REMIC or resell them in bulk whole loan sales. The period
between the time ICIFC commits to purchase a mortgage loan and the time it
sells or securitizes such mortgage loan generally ranges from 10 to 90 days,
depending on certain factors, including the length of the purchase commitment
period, the loan volume by product type and the securitization process.
Any decision by ICIFC to form REMICs or to sell the loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and can eliminate or minimize any long-term
residual investment in such loans. REMIC securities consist of one or more
classes of "regular interests" and a single class of "residual interest." The
regular interests are tailored to the needs of investors and may be issued in
multiple classes with varying maturities, average lives and interest rates.
These regular interests are predominantly senior securities but, in
conjunction with providing credit enhancement, may be subordinated to the
rights of other regular interests. The residual interest represents the
remainder of the cash flows from the mortgage loans (including, in some
instances, reinvestment income) over the amounts required to be distributed to
the regular interests. In some cases, the regular interests may be structured
so that there is no significant residual cash flow, thereby allowing ICIFC to
sell its entire interest in the mortgage loans. As a result, in some cases,
all of the capital originally invested in the mortgage loans by the Company is
redeployed in the Conduit Operations.
As part of its operations, ICIFC may retain regular and residual interests
on a short-term or long-term basis. In the year ended December 31, 1996, ICIFC
issued $835.2 million in REMIC securities backed by $850.3 million of
principal balance mortgage loans. The following table sets forth the REMIC
securities issued by the Conduit Operations for the year ended December 31,
1996:
ISSUANCE
ISSUE DATE ISSUANCE NAME AMOUNT
---------- ------------- --------
February 28, 1996............................... Bear Stearns 1996-1 $171.9
June 28, 1996................................... Bear Stearns 1996-3 $213.0
September 30, 1996.............................. Bear Stearns 1996-4 $261.0
December 20, 1996............................... Bear Stearns 1996-9 $189.3
Credit Enhancement. REMICs created by the Conduit Operations are structured
so that one or more of the classes of such securities are rated investment
grade by at least one nationally recognized rating agency. In contrast to
Agency Certificates in which the principal and interest payments are
guaranteed by the U.S. government or an agency thereof, securities created by
the Conduit Operations do not benefit from any such guarantee. The ratings for
the Conduit Operations' REMICs are based upon the perceived credit risk by the
applicable rating agency of the underlying mortgage loans, the structure of
the securities, and the associated level of credit enhancement. Credit
enhancement is designed to provide protection to the security holders in the
event of borrower defaults and other losses including those associated with
fraud or reductions in the principal balances or interest rates on mortgage
loans as required by law or a bankruptcy court.
The Conduit Operations can utilize multiple forms of credit enhancement,
including special hazard insurance, private mortgage pool insurance reserve
funds, letters of credit, surety bonds, over-collateralization and
subordination or any combination thereof. In determining whether to provide
credit enhancement through
16
subordination or other credit enhancement methods, the Conduit Operations
takes into consideration the costs associated with each method.
Each series of mortgage-backed securities is typically fully payable from
the mortgage assets underlying such series, and the recourse of investors is
limited to such assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent the Company holds subordinated
securities, the Company generally bears all losses prior to the related senior
security holders. Generally, any losses in excess of the credit enhancement
obtained are borne by the security holders. Except in the case of a breach of
the standard representations and warranties made by the Company when mortgage
loans are securitized, such securities are non-recourse to the Company.
Typically, the Company has recourse to the sellers of loans for any such
breaches, but there are no assurance of the sellers' abilities to honor their
respective obligations.
Ratings of mortgage-backed securities are based primarily upon the
characteristics of the pool of underlying mortgage loans and associated credit
enhancement. A decline in the credit quality of such pools (including
delinquencies and/or credit losses above initial expectations), or of any
third party credit enhancer, or adverse developments in general economic
trends affecting real estate values or the mortgage industry, could result in
downgrades of such ratings.
WAREHOUSE LENDING OPERATIONS
The Company's third line of business is its Warehouse Lending Operations.
Such operations primarily consist of warehouse lending for approved mortgage
banks acting as correspondents of ICIFC and other mortgage banks. Generally,
the non-conforming mortgage loans funded with such warehouse lines of credit
are acquired by ICIFC. Warehouse lending facilities provide warehouse and
repurchase financing for mortgage loans from the time of closing the loan to
the time of its sale or other settlement with the pre-approved investor.
IWLG's warehouse lines are non-recourse and IWLG can only look to the sale or
liquidation of the mortgage loans as a source of repayment. Any claim of IWLG
as a secured lender in a bankruptcy proceeding may be subject to adjustment
and delay. Borrowings under the warehouse facilities are presented on the
Company's balance sheets as finance receivables.
IWLG provides a $600 million warehouse line to ICIFC. The ICIFC warehouse
line balance outstanding on IWLG's balance sheet is structured to qualify
under the REIT asset tests and to generate income qualifying under the 75%
gross income test. The terms of the warehouse line 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. The terms of IWLG's other warehouse lines
of credit, including the amount, are determined based upon the financial
strength, historical performance and other qualifications of the borrower. See
"--Long-Term Investment Operations--Financing--Reverse Repurchase Agreements."
At December 31, 1996, IWLG had $657.6 million of warehouse lines of credit
available to 17 borrowers, of which $362.3 million was outstanding thereunder,
including $327.4 million outstanding to ICIFC. IWLG finances its Warehouse
Lending Operations through reverse repurchase agreements and equity. At
December 31, 1996, IWLG had entered into repurchase facilities with two
investment banks.
HEDGING
The Company conducts certain hedging activities in connection with both its
Long-Term Investment Operations and its Conduit Operations.
Long-Term Investment Operations. To the extent consistent with IMH's
election to qualify as a REIT, the Company follows a hedging program intended
to protect against interest rate changes and to enable the Company to earn net
interest income in periods of generally rising, as well as declining or
static, interest rates. Specifically, the Company's hedging program is
formulated with the intent to offset the potential adverse effects resulting
from (1) interest rate adjustment limitations on its mortgage loans and
securities backed by mortgage loans and
17
(2) the differences between the interest rate adjustment indices and interest
rate adjustment periods of its adjustable rate mortgage loans and mortgage-
backed securities secured by such loans and related borrowings. As part of its
hedging program, the Company also monitors on an ongoing basis the prepayment
risks that arise in fluctuating interest rate environments.
The Company's hedging program encompasses a number of procedures. First, the
Company structures its commitments to purchase mortgage loans so that the
mortgage loans purchased will have interest rate adjustment indices and
adjustment periods that, on an aggregate basis, correspond as closely as
practicable to the interest rate adjustment indices and interest rate
adjustment periods of the anticipated financing source. In addition, the
Company structures its borrowing agreements to have a range of different
maturities (although substantially all have maturities of less than one year).
As a result, the Company adjusts the average maturity of its borrowings on an
ongoing basis by changing the mix of maturities as borrowings come due and are
renewed. In this way, the Company minimizes any differences between interest
rate adjustment periods of mortgage loans and related borrowings that may
occur due to prepayments of mortgage loans or other factors.
The Company may from time-to-time purchase interest rate caps to limit or
partially offset adverse changes in interest rates associated with its
borrowings. In a typical interest rate cap agreement, the cap purchaser makes
an initial lump sum cash payment to the cap seller in exchange for the
seller's promise to make cash payments to the purchaser on fixed dates during
the contract term if prevailing interest rates exceed the rate specified in
the contract. In this way, the Company generally hedges as much of the
interest rate risk arising from lifetime rate caps on its mortgage loans and
from periodic rate and/or payment caps as the Company determines is in the
best interests of the Company, given the cost of such hedging transactions and
the need to maintain IMH's status as a REIT. Such periodic caps on the
Company's mortgage loans may also be hedged by the purchase of mortgage
derivative securities. Mortgage derivative securities can be effective hedging
instruments in certain situations as the value and yields of some of these
instruments tend to increase as interest rates rise and tend to decrease in
value and yields as interest rates decline, while the experience for others is
the converse. The Company intends to limit its purchases of mortgage
derivative securities to investments that qualify as Qualified REIT Assets or
Qualified Hedges so that income from such investments will constitute
qualifying income for purposes of the 95% and 75% gross income tests. To a
lesser extent, the Company, through its Conduit Operations, may enter into
interest rate swap agreements, buy and sell financial futures contracts and
options on financial futures contracts and trade forward contracts as a hedge
against future interest rate changes; however, the Company will not invest in
these instruments unless the Company and the Manager are exempt from the
registration requirements of the Commodity Exchange Act or otherwise comply
with the provisions of that Act. The REIT provisions of the Code may restrict
the Company's ability to purchase certain instruments and may severely
restrict the Company's ability to employ other strategies. In all its hedging
transactions, the Company intends to deal only with counterparties that the
Company believes are sound credit risks. During the years ended December 31,
1996 and 1995, the Company had not purchased any interest rate caps, swaps or
other hedging instruments.
Conduit Operations. In conducting its Conduit Operations, ICIFC is subject
to the risk of rising mortgage interest rates between the time it commits to
purchase mortgage loans at a fixed price and the time it sells or securitizes
those mortgage loans. To mitigate this risk, ICIFC enters into transactions
designed to hedge interest rate risks, which may include mandatory and
optional forward selling of mortgage loans or mortgage-backed securities,
interest rate caps, floors and swaps, and buying and selling of futures and
options on futures. The nature and quantity of these hedging transactions are
determined by the management of ICIFC based on various factors, including
market conditions and the expected volume of mortgage loan purchases.
Costs and Limitations. The Company has implemented a hedging program
designed to provide a level of protection against interest rate risks.
However, an effective hedging strategy is complex, and no hedging strategy can
completely insulate the Company from interest rate risks. Moreover, as noted
above, certain of the federal income tax requirements that IMH must satisfy to
qualify as a REIT limit the Company's ability to fully hedge its interest rate
risks. The Company monitors carefully, and may have to limit, its hedging
strategies to assure that it does not realize excessive hedging income or hold
hedging assets having excess value in relation to total
18
assets, which would result in IMH's disqualification as a REIT or, in the case
of excess hedging income, the payment of a penalty tax for failure to satisfy
certain REIT income tests under the Code, provided such failure was for
reasonable cause.
In addition, hedging involves transaction and other costs, and such costs
increase dramatically as the period covered by the hedging protection
increases and also increase in periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging its
interest rate risks without significantly reducing the Company's return on
equity.
SERVICING AND MASTER SERVICING
ICIFC currently acquires substantially all of its mortgage loans on a
"servicing-released" basis and thereby acquires the servicing rights. ICIFC
subcontracts all of its servicing obligations under such loans to independent
third parties pursuant to sub-servicing agreements. Servicing includes
collecting and remitting loan payments, making required advances, accounting
for principal and interest, holding escrow or impound funds for payment of
taxes and insurance, if applicable, making required inspections of the
mortgaged property, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines. Servicing fees generally range from
0.250% to 0.500% per annum on the declining principal balances of the loans
serviced.
The following table sets forth certain information regarding ICIFC's
servicing portfolio of loans for the periods shown.
PERIOD FROM
NOVEMBER 20, 1995
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN MILLIONS)
Beginning servicing portfolio.............. $ 512.1 $ -- (1)
Loans added to the servicing portfolio..... 1,506.4 540.6
Loans sold servicing released and principal
paydowns (2).............................. (468.4) (28.5)
-------- --------
Ending servicing portfolio................. $1,550.1 $ 512.1
======== ========
Number of loans serviced................... 11,996 3,533
Average loan size.......................... $129,220 $144,955
- --------
(1) Pursuant to the Contribution Transaction, ICII retained ICIFC's servicing
portfolio at November 20, 1995.
(2)Includes normal principal amortization and prepayments.
In the future, ICIFC expects to offer its sellers of mortgage loans the
right to retain servicing. However, in connection with its warehouse line from
IWLG, any such servicers of the mortgage loans would have to be approved by
IWLG. In the case of servicing retained mortgage loans, the Company will enter
into agreements (the "Servicing Agreements") with the sellers of mortgage
loans to service the mortgage loans they sell to the Company. Each Servicing
Agreement will require the servicer to service the Company's mortgage loans in
a manner generally consistent with FNMA and FHLMC guidelines and procedures
and with any servicing guidelines promulgated by the Company. 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 so serviced. Each servicer will
also provide accounting and reporting services required by the Company for
such loans. The servicer will be required to follow such collection procedures
as are customary in the industry. The servicer may, at its discretion, arrange
with a defaulting borrower a schedule for the liquidation of delinquencies,
provided primary mortgage insurance coverage is not adversely affected. Each
Servicing Agreement will provide that the servicer may not assign any of its
obligations with respect to the mortgage loans serviced for the Company,
except with the Company's consent.
19
Each servicer will be required to pay all expenses related to the
performance of its duties under its Servicing Agreement. The servicer will be
required to make advances of principal and interest, taxes and required
insurance premiums that are not collected from borrowers with respect to any
mortgage loan, only if the servicer determines that such advances are
recoverable from the mortgagor, insurance proceeds or other sources with
respect to such mortgage loan. If such advances are made, the servicer
generally will be reimbursed prior to the Company receiving the remaining
proceeds. The servicer also will be entitled to reimbursement by the Company
for expenses incurred by it in connection with the liquidation of defaulted
mortgage loans and in connection with the restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company suffers a loss to the extent that
the proceeds from liquidation of the mortgaged property, after reimbursement
of the servicer's expenses in the sale, are less than the principal balance of
the related mortgage loan. The servicer will be responsible to the Company for
any loss suffered as a result of the servicer's failure to make and pursue
timely claims or as a result of actions taken or omissions made by the
servicer which cause the policies to be canceled by the insurer. Each servicer
will be required to represent and warrant that the mortgage loans it services
comply with any loan servicing guidelines promulgated by the Company and agree
to repurchase, at the request of the Company, any mortgage loan it services in
the event that the servicer fails to make such representations or warranties
or any such representation or warranty is untrue. The Company may terminate a
Servicing Agreement with any servicer upon the happening of one or more of the
events specified in the Servicing Agreement. Such events relate generally to
the servicer's proper and timely performance of its duties and obligations
under the Servicing Agreement and the servicer's financial stability. In
addition, the Company will have the right to terminate any Servicing Agreement
without cause upon 30 days' notice and upon payment of a termination fee that
is competitive with that which is obtainable generally in the industry. The
termination fee will be based on the aggregate outstanding principal amount of
the loans then serviced under the agreement. With respect to mortgage loans
that support CMOs or other mortgage-backed securities, the Company may not be
able to terminate a servicer without the approval of the trustee or bond
insurer for such securities.
As is customary in the mortgage loan servicing industry, servicers will be
entitled to retain any late payment charges, penalties and assumption fees
collected in connection with the mortgage loans. The servicers will receive
any benefit derived from interest earned on collected principal and interest
payments between the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance impound funds. The
servicer will generally be required to remit to the Company no later than the
18th day of each month all principal and interest due from borrowers on the
first day of such month.
The Company expects from time to time to retain master servicing fees
receivable. See"--Servicing and Master Servicing." Master servicing fees
receivable have characteristics similar to "interest-only" securities;
accordingly, they have many of the same risks inherent in "interest-only"
securities, including the risk that they will lose a substantial portion of
their value as a result of rapid prepayments occasioned by declining interest
rates. Master servicing fees receivable represent the present value of the
difference between the interest rate on mortgage loans purchased by the
Conduit Operations and the interest rate received by investors who purchase
the securities backed by such loans, in excess of the normal loan servicing
fees charged by either (1) the Conduit Operations on loans acquired "servicing
released" or (2) correspondents who sold loans to the Conduit Operations with
the "servicing retained" (the "Excess Servicing Fees"). At December 31, 1996
and 1995, the Company had no master servicing fees receivable.
To the extent that servicing fees on a mortgage loan exceed a "normal"
servicing fee (typically ranging from 0.250% to 0.500% per annum of the
mortgage loan principal amount), the Conduit Operations will generate master
servicing fees receivable as an asset that represents an estimated present
value of those excess fees assuming a certain prepayment rate on the mortgage
loan. In determining present value of future cash flows, the Conduit
Operations will use a market discount rate. Prepayment assumptions will be
based on recent evaluations of the actual prepayments of the Conduit
Operations' servicing portfolio or on market prepayment rates on new
portfolios on which the Conduit Operations has no experience and the interest
rate environment at the time the master servicing fees receivable are created.
There can be no assurance of the accuracy of management's
20
prepayment estimates. If actual prepayments with respect to sold mortgage
loans occur more quickly than was projected at the time such mortgage loans
were sold, the carrying value of the master servicing fees receivable may have
to be written down through a charge to earnings in the period of adjustment.
If actual prepayments with respect to sold mortgage loans occur more slowly
than estimated, the carrying value of master servicing fees receivable on the
Company's statement of financial condition would not increase, although total
income would exceed previously estimated amounts.
Management of the Company believes that, depending upon the level of
interest rates from time to time, investments in current coupon master
servicing fees receivable may be prudent, and if interest rates rise, these
investments will mitigate declines in income that may occur in the Conduit
Operations. ICIFC intends to hold the master servicing fees receivable for
investment. Currently the secondary market for master servicing fees
receivable is limited. Accordingly, if ICIFC had to sell these receivables,
the value received may or may not be at or above the values at which ICIFC
carried them on its balance sheet.
When the Conduit Operations purchases loans which include the associated
servicing rights, the allocated price paid for the servicing rights is
reflected on its financial statements as Mortgage Servicing Rights (MSRs).
MSRs differ from master servicing fees receivable primarily by the required
amount of servicing to be performed, the loss exposure to the owner of the
instrument and the financial liquidity of the instrument. In contrast to MSRs,
where the owner of the instrument acts as the servicer, master servicing fees
receivable do not require the owner of the instrument to service the
underlying mortgage loan. In addition, master servicing fees receivable
subject their owners to greater loss exposure from delinquencies or
foreclosure on the underlying mortgage loans than MSRs because a master
servicer stands behind the servicer (or sub-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. At December 31, 1996 and
1995, ICIFC had $8.8 million and none, respectively, of MSRs.
ICIFC generally performs the function of master servicer with respect to
mortgage loans it sells or securitizes. The master servicer's function
includes collecting loan payments from servicers of loans and remitting loan
payments, less master servicing fees receivable and other fees, to a trustee
or other purchaser for each series of mortgage-backed securities or loans
master serviced. In addition, as master servicer, ICIFC monitors compliance
with its servicing guidelines and is required to perform, or to contract with
a third party to perform, all obligations not adequately performed by any
servicer. A master servicer typically employs servicers to carry out servicing
functions. Servicers typically perform servicing functions for the master
servicer as independent contractors. ICIFC is the master servicer for $850.3
million of loans collateralizing fixed rate REMIC securities and $567.0
million of loans collateralizing CMOs issued in 1996. In addition, ICIFC acts
as the servicer for all such loans and all other loans acquired by the Long-
Term Investment Operations. With respect to its function as a servicer for
loans owned by IMH, ICIFC and IMH have entered into a Servicing Agreement
effective on November 20, 1995 having terms substantially similar to those
described above for servicing agreements.
21
The following table shows ICIFC's delinquency statistics for its servicing
portfolio at the dates presented.
AT DECEMBER 31, AT DECEMBER 31,
1996 1995
------------------- -------------------
% OF % OF
NUMBER OF SERVICING NUMBER OF SERVICING
LOANS PORTFOLIO LOANS PORTFOLIO
--------- --------- --------- ---------
Loans delinquent for:
30-59 days............................ 587 4.89% 26 0.74%
60-89 days............................ 118 0.98 -- --
90 days+.............................. 3 0.03 -- --
--- ---- --- ----
708 5.90 26 0.74
Foreclosures pending.................... 180 1.50 -- --
Bankruptcies pending.................... 55 0.46 -- --
--- ---- --- ----
Total delinquencies, foreclosures
and bankruptcies................... 943 7.86% 26 0.74%
=== ==== === ====
As of December 31, 1995, mortgages acquired by the Company since the
Contribution Transaction were not outstanding for any periods commencing
earlier than November 20, 1995. Consequently, the Company's delinquencies at
December 31, 1995 were minimal. However, over the course of 1996, loans
acquired by the Company in 1995 and 1996 have subsequently been securitized
and sold with servicing rights retained. Therefore, the mortgage loans
currently in the servicing portfolio have been seasoned leading to increased
delinquencies.
During periods of declining interest rates, prepayments of mortgage loans
increase as homeowners look to refinance at lower rates, resulting in a
decrease in the value of the Company's mortgage servicing rights. Mortgage
loans with higher interest rates are more likely to result in prepayments. The
following table sets forth certain information regarding the number of and
aggregate principal balance of the mortgage loans, net of premium, serviced by
ICIFC, including both fixed and adjustable rate loans, at various mortgage
interest rates.
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------------------- --------------------------------
AGGREGATE WEIGHTED AGGREGATE WEIGHTED
NUMBER PRINCIPAL AVERAGE NUMBER PRINCIPAL AVERAGE
INTEREST RATES(%) OF LOANS BALANCE INTEREST RATE OF LOANS BALANCE INTEREST RATE
- ----------------- -------- ---------- ------------- -------- --------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Less than 5.00%........ 1 $ 46 4.75% -- $ -- -- %
5.00-5.49.............. 3 338 5.17 -- -- --
5.50-5.99.............. 1 114 5.63 6 976 5.74
6.00-6.49.............. 9 818 6.33 84 12,014 6.22
6.50-6.99.............. 34 4,922 6.81 85 13,693 6.68
7.00-7.49.............. 64 10,636 7.29 146 29,157 7.22
7.50-7.99.............. 240 38,807 7.78 505 96,681 7.71
8.00-8.49.............. 1,052 179,095 8.28 727 132,122 8.20
8.50-8.99.............. 3,254 516,333 8.71 797 133,324 8.70
9.00-9.49.............. 2,251 330,306 9.18 218 33,031 9.17
9.50-9.99.............. 1,565 200,881 9.67 108 16,939 9.68
10.00-10.49............ 610 69,175 10.19 49 6,240 10.14
10.50-10.99............ 598 65,628 10.71 55 6,832 10.66
11.00-11.49............ 316 29,345 11.21 11 1,481 11.11
11.50 and above........ 1,998 103,677 12.97 742 29,637 13.53
------ ---------- ----- --------
11,996 $1,550,121 9.33% 3,533 $512,127 8.58%
====== ========== ===== ========
22
The following table sets forth the geographic distribution of ICIFC's
servicing portfolio.
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------------- ----------------------------
% OF % OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
STATES OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
- ------ -------- ---------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
California......... 4,967 $ 771,109 49.75% 2,175 $356,931 69.70%
Florida............ 1,444 153,446 9.90 181 19,958 3.90
New Jersey......... 916 119,272 7.69 152 18,848 3.68
New York........... 427 58,391 3.77 39 5,663 1.11
Washington......... 447 49,272 3.18 186 21,522 4.20
Oregon............. 348 35,320 2.28 159 17,433 3.40
Colorado........... 279 30,550 1.97 155 20,634 4.03
Illinois........... 276 27,340 1.76 13 1,394 0.27
Hawaii............. 130 26,730 1.72 23 3,499 0.68
Utah............... 270 25,928 1.67 71 5,404 1.06
Nevada............. 200 24,338 1.57 41 4,458 0.87
Maryland........... 197 23,393 1.51 64 6,008 1.17
Massachusetts...... 188 23,356 1.51 8 1,377 0.27
Texas.............. 188 20,421 1.32 12 1,391 0.27
Arizona............ 183 18,285 1.18 60 5,648 1.10
Georgia............ 155 18,220 1.18 18 2,144 0.42
North Carolina..... 176 18,154 1.17 21 2,406 0.47
Virginia........... 138 17,390 1.12 17 1,488 0.29
Others (1)......... 1,067 89,206 5.75 138 15,921 3.11
------ ---------- ------ ----- -------- ------
11,996 $1,550,121 100.00% 3,533 $512,127 100.00%
====== ========== ====== ===== ======== ======
- --------
(1) No other state accounted for greater than 1% of the Company's mortgage
loan servicing portfolio.
REGULATION
The rules and regulations applicable to the Conduit Operations, among other
things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Mortgage loan acquisition
activities are subject to, among other laws, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and
the regulations promulgated thereunder that prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs.
ICIFC is an approved FNMA and FHLMC seller/servicer. The Conduit Operations
is subject to the rules and regulations of FNMA and FHLMC with respect to
acquiring, processing, selling and servicing conforming mortgage loans. In
addition, ICIFC is required annually to submit to FNMA and FHLMC audited
financial statements, and each regulatory entity has its own financial
requirements for sellers/servicers. For any conforming mortgage loan
activities, ICIFC's affairs are also subject to examination by FNMA and FHLMC
at any time to assure compliance with the applicable regulations, policies and
procedures.
Additionally, there are various state and local laws and regulations
affecting the Conduit Operations. ICIFC is licensed in those states requiring
such a license. Mortgage operations also may be subject to applicable state
usury statutes. The Company is presently in material compliance with all
material rules and regulations to which it is subject.
COMPETITION
In purchasing non-conforming mortgage loans and issuing securities backed by
such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and
loan associations, finance companies, mortgage bankers, insurance companies,
other lenders and
23
other entities purchasing mortgage assets. Continued consolidation in the
mortgage banking industry may also reduce the number of current sellers to the
Conduit Operations, thus reducing the Company's potential customer base,
resulting in ICIFCs purchasing a larger percentage of mortgage loans from a
smaller number of sellers. Such changes could negatively impact the Conduit
Operations. Mortgage-backed securities issued by the Conduit Operations and
the Long-Term Investment Operations face competition from other investment
opportunities available to prospective investors.
The Company faces competition in its Conduit Operations and Warehouse
Lending Operations from other financial institutions, including but not
limited to banks and investment banks. Many of the institutions with which the
Company competes in its Conduit Operations and Warehouse Lending Operations
have significantly greater financial resources than the Company.
The Company's operations may be affected by the activities of ICII and its
affiliates. As an end-investor in non-conforming mortgage loans, SPTL may
compete with the Company as this activity is not restricted by the Non-Compete
Agreement. Also, SPFC is a subsidiary of ICII whose business is primarily to
act as a wholesale originator and a bulk purchaser of non-conforming mortgage
loans. These activities are not restricted by the Non-Compete Agreement. In
addition, after the expiration of the Non-Compete Agreement in November, 1997,
ICII or any 25% entity may compete with the Company's Long-Term Investment
Operations, the Conduit Operations and the Warehouse Lending Operations. While
the Company believes such activities will not have a material adverse effect
on the Company's operations there can be no assurance of this. See "Certain
Relationships and Certain Transactions--Other Transactions--The Contribution
Transaction."
EMPLOYEES
As of December 31, 1996, ICIFC and IWLG employed 104 and four persons,
respectively. As part of the transition from a division or subsidiary of ICII
to ICIFC, some employees were shared by ICII and ICIFC. Expenses associated
with these employees were shared by both parties in relation to the time spent
working for each entity. ICII and ICIFC ended such sharing prior to December
31, 1996. The Company believes that relations with its employees are good. The
Company is not a party to any collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's executive offices and administrative facilities occupy
approximately 29,000 square feet of space in Santa Ana Heights, California.
The Company subleases its facilities from ICII pursuant to a sublease
agreement renegotiated in February 1997 and expiring in 1999 at an aggregate
monthly rental of $33,936. Management believes that the terms of the sublease
are at least favorable as could have been obtained from an unaffiliated third
party. Management believes that these facilities are adequate for the
Company's foreseeable needs and that alternate space at comparable rental
rates is available, if necessary.
ITEM 3. LEGAL PROCEEDINGS
ComUnity National Asset Corporation, a Maryland corporation v. Thomas O.
------------------------------------------------------------------------
Markel, Jr., an individual; Homemac Mortgage Bankers, a business association
- ------------
of unknown form; Homemac Corporation, a California corporation; Homemac
Finance Corporation; Homemac Institutional Mortgage Corporation, a California
corporation; Imperial Credit Mortgage Holdings, Inc., a Maryland corporation;
and DOES 1 through 100, inclusive, Orange County Superior Court Case No.
761786 (ComUnity case).
On March 13, 1997, a mediation was held between the plaintiff and all
defendants in the ComUnity case. The case was settled at the mediation for an
--------
immaterial amount to be paid by the defendants to the plaintiff. A written
settlement memorandum was executed by all parties which is binding and
enforceable. Accordingly, this case has been resolved.
24
Michele Perrin, an individual doing business as Perrin and Associates vs.
-------------------------------------------------------------------------
Thomas O. Markel, an individual; H. Wayne Snavely, an individual; Homemac
- ----------------
Mortgage Bankers, a business association of unknown form; Homemac Corporation,
a California corporation; Homemac Finance Corporation, a California
corporation; Homemac Institutional Mortgage Corporation, a California
corporation; Imperial Credit Mortgage Holdings, Inc., a Maryland corporation;
Imperial Credit Industries, Inc., a California corporation and DOES 1 through
100, Orange County Superior Court Case No. 768878.
The Company has received an indemnification from the principals of the
plaintiff in the above ComUnity case for any present or future claims brought
--------
by Perrin against the Company.
Fortune Mortgage, etc., et al. v. Imperial Credit Industries, Inc., Imperial
----------------------------------------------------------------------------
Credit Mortgage Holdings, Inc., ICI Funding Corp., Imperial Warehouse Lending
- -----------------------------------------------------------------------------
Group, Inc., William Ashmore, Edward Pollard, Wayne Snavely, and Joseph
- -----------------------------------------------------------------------
Tomkinson, Orange County Superior Court Case No. 776153 (Fortune case).
- ---------
On March 5, 1997, plaintiffs Fortune Mortgage Corporation and Thomas O.
Gephart filed a complaint against the above-named defendants for (1) Fraud;
(2) Negligent Misrepresentation; (3) Conspiracy to Commit Fraud; (4) Aiding
and Abetting Fraud; (5) Breach of Contract; (6) Breach of Implied Covenant of
Good Faith and Fair Dealing; (7) Rescission, Restitution and Damages; (8)
Contractual Indemnity and Reimbursement; (9) Money Had and Received; and (10)
Unjust Enrichment.
Plaintiffs' claims arise out of an Agreement for Purchase and Sale of
Assets, dated March 1, 1996, pursuant to which Imperial Credit Industries,
Inc. allegedly sold to Imperial First Mortgage, a group of loan production
offices located in California. In essence the plaintiffs' Complaint alleges
that that sale was induced by fraudulent misrepresentations and omissions,
including but not limited to an allegation that the loan production offices
were engaged in illegal kickback practices which were not disclosed to the
buyer, as well as misrepresentations concerning the volume and profitability
of the loan production offices.
The prayer seeks general damages, special and/or consequential damages,
reasonable attorney's fees and costs of suit on all of the causes of action.
In addition, the Prayer of the Complaint also seeks exemplary and punitive
damages on the first, third and fourth causes of actions described above.
Several of the causes of action allege specifically that plaintiffs have been
damaged in a sum in excess of $2.5 million by virtue of the defendants'
conduct, and the tenth cause of action for unjust enrichment alleges that the
defendants, and each of them, have been unjustly enriched in a sum in excess
of $10 million.
The Company believes that the Fortune case is without merit and intends to
vigorously defend the action.
Other than the foregoing, the Company is not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange under
the symbol IMH. The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock as reported by the American
Stock Exchange.
HIGH LOW
------ ------
1995
Fourth Quarter (from November 20, 1995)........................ $13.25 $12.00
1996
First Quarter.................................................. $15.38 $12.88
Second Quarter................................................. 17.13 14.75
Third Quarter.................................................. 21.50 15.00
Fourth Quarter................................................. 23.88 20.63
On March 20, 1997, the last reported sale price of the Common Stock on the
AMEX was $25.00 per share. As of March 20, 1997, there were approximately 204
holders of record (including holders who are nominees for an undetermined
number of beneficial owners) of the Company's Common Stock.
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which may
not necessarily equal net income as calculated in accordance with GAAP),
determined without regard to the deduction for dividends paid and excluding
any net capital gains. IMH declares regular quarterly dividend distributions.
Any taxable income remaining after the distribution of the regular quarterly
or other dividends will be distributed annually on or prior to the date of the
first regular quarterly dividends payment date of the following taxable year.
The dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions in excess of those required for IMH to maintain
REIT status will be made by IMH at the discretion of the Board of Directors
and will depend on the taxable earnings of IMH, the financial condition of IMH
and such other factors as the Board of Directors deems relevant. The Board of
Directors has not established a minimum distribution level. The following
table sets forth the dividends paid or declared by IMH during the year ended
December 31, 1996:
PER SHARE
STOCKHOLDER DIVIDEND
PERIOD COVERED RECORD DATE AMOUNT
-------------- ---------------- ---------
November 20, 1995 through December 31, 1995(1)................ January 26, 1996 $0.08
Quarter ended March 31, 1996.................................. April 24, 1996 $0.39
Quarter ended June 30, 1996................................... June 13, 1996 $0.45
Quarter ended September 30, 1996.............................. September 30, 1996 $0.52
Special Dividend(2)........................................... November 15, 1996 $0.42
Quarter ended December 31, 1996(3)............................ December 31, 1996 $0.55
- --------
(1) IMH commenced operations on November 20, 1995.
(2) The amount of the special dividend was calculated to distribute excess
taxable income not previously distributed by IMH as dividends, in order to
comply with REIT qualification requirements. The special dividend should
not be interpreted as a recurring dividend.
(3) The Board of Directors of IMH declared a $0.55 per share cash dividend
payable on January 15, 1997 to stockholders of record on December 31,
1996.
Distributions to stockholders will generally be taxable as ordinary income,
although a portion of such distributions may be designated by IMH as capital
gain or may constitute a tax-free return of capital. IMH will annually furnish
to each of its stockholders a statement setting forth distributions paid
during the preceding year and their characterization as ordinary income,
capital gains or return of capital.
26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for each of
the years in the three-year period ended December 31, 1996 and the
consolidated balance sheet data as of December 31, 1996 and 1995 were derived
from the Company's and ICIFC's financial statements audited by KPMG Peat
Marwick LLP ("KPMG"), independent auditors, whose reports with respect thereto
appear elsewhere herein. The selected consolidated statement of operations
data for the years ended December 31, 1993 and 1992 and the selected
consolidated balance sheet data as of December 31, 1994 and 1993 were derived
from the combined financial statements of the Company and ICIFC, audited by
KPMG. The selected consolidated balance sheet data as of December 31, 1992 was
derived from the unaudited financial statements of the Company and ICIFC. Such
selected financial data should be read in conjunction with those financial
statements and the notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
As discussed further in the notes to the Company's financial statements,
Pre-Contribution Transaction (as defined below), the Company's financial
statements were prepared based upon the historical operations of IWLG, as a
division of SPTL, and include the Company's equity interest in ICIFC, as a
division of ICII.
27
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994 1993 1992
------- ------ ---- ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income........................... $63,673 $2,851 $292 $ 767 $ 685
Equity in net income of ICI Funding
Corporation.............................. 903 1,489 532 4,192 1,254
Other income.............................. 593 244 83 320 205
------- ------ ---- ------ ------
65,169 4,584 907 5,279 2,144
------- ------ ---- ------ ------
Expenses:
Interest on borrowings from reverse-
repurchase agreements.................... 44,144 1,116 -- -- --
Interest on borrowings from SPTL.......... -- 599 127 334 377
Provision for loan losses................. 4,350 488 95 -- --
Advisory fee.............................. 3,347 38 -- -- --
General and administrative expense........ 1,449 209 225 197 103
------- ------ ---- ------ ------
53,290 2,450 447 531 480
------- ------ ---- ------ ------
Income before income taxes.................. 11,879 2,134 460 4,748 1,664
Income taxes (benefit)...................... -- 76 (30) 234 172
------- ------ ---- ------ ------
Net income.............................. $11,879 $2,058 $490 $4,514 $1,492
======= ====== ==== ====== ======
Net income per share.................... $ 1.98 $ 0.07 -- -- --
======= ====== ==== ====== ======
AT DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------ ------- -------
BALANCE SHEET DATA:
Total assets.......................... $972,355 $613,688 $9,365 $13,591 $10,287
Mortgage loans held for investment and
CMO collateral....................... 502,659 -- -- -- --
Finance receivables................... 362,312 583,021 3,120 8,135 9,022
Investment in ICI Funding Corporation. 9,896 866 6,335 5,446 1,254
Borrowings from SPTL.................. -- -- 2,511 7,585 8,785
CMO borrowings........................ 474,513 -- -- -- --
Borrowings on reverse-repurchase
agreements........................... 357,716 567,727 -- -- --
Total stockholders' equity............ 129,191 45,236 6,853 6,006 1,492
28
ICI FUNDING CORPORATION
(IN THOUSANDS, EXCEPT OPERATING DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
INCOME STATEMENT DATA:
Revenues:
Interest income................. $32,799 $ 1,249 $ -- $ -- $ --
Gain on sale of loans........... 7,747 4,135 2,291 5,859 1,155
Loan servicing income........... 1,250 5,159 4,043 1,377 1,131
Gain on sale of servicing
rights......................... -- 370 4,188 5,332 2,135
------- ------- ------- ------- ------
41,796 10,913 10,522 12,568 4,421
------- ------- ------- ------- ------
Expenses:
Interest on borrowings.......... 31,751 1,785 538 127 --
General and administrative
expense........................ 7,154 3,663 6,333 4,507 1,988
Provision for repurchases and
loan losses.................... 687 -- 655 175 249
Amortization of mortgage
servicing rights............... 613 2,892 2,070 459 --
------- ------- ------- ------- ------
40,205 8,340 9,596 5,268 2,237
------- ------- ------- ------- ------
Income before income taxes........ 1,591 2,573 926 7,300 2,184
Income taxes...................... 679 1,069 389 3,066 917
------- ------- ------- ------- ------
Net income.................... $ 912 $ 1,504 $ 537 $ 4,234 $1,267
======= ======= ======= ======= ======
OPERATING DATA (IN MILLIONS):
Mortgage loan acquisitions
(volume)......................... $ 1,542 $ 1,133 $ 1,726 $ 2,149(1) $ 929(1)
Servicing portfolio at period-end. 1,550 512 1,868 950 623
AT DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
BALANCE SHEET DATA:
Total assets........................ $399,171 $552,631 $12,097 $10,158 $ 137
Mortgage loans held for sale........ 334,104 544,275 -- -- --
Residual interests in
securitizations.................... 46,949 -- -- -- --
Mortgage servicing rights........... 8,785 -- 11,453 9,551 --
Borrowings (receivable) from
affiliates......................... 54,803 -- 5,698 4,657 (1,129)
Borrowings from IWLG................ 327,422 550,291 -- -- --
Total shareholders' equity.......... 9,996 875 6,399 5,501 1,267
- --------
(1) Represents principal amounts of mortgage loans purchased, excluding
premiums and discounts.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On November 20, 1995, ICII contributed to ICIFC certain of the operating
assets and certain customer lists of ICII's mortgage conduit operations,
including all of ICII's mortgage conduit operations' commitments to purchase
mortgage loans subject to rate locks from correspondents (having a principal
balance of $44.3 million on November 20, 1995), in exchange for shares
representing 100% of the common stock and 100% of thenon-voting preferred
stock of ICIFC. Simultaneously, on November 20, 1995, in exchange for 500,000
shares of Common Stock, (i) ICII contributed to IMH all of the outstanding
non-voting preferred stock of ICIFC, which represents 99% of the economic
interest in ICIFC, (ii) SPTL contributed to IMH certain of the operating
assets and certain customer lists of SPTL's warehouse lending division, and
(iii) ICII and SPTL executed aNon-Compete Agreement and a Right of First
Refusal Agreement, each having a term of two years from November 20, 1995. Of
the 500,000 shares of Common Stock issued by IMH pursuant to the Contribution
Transaction, 450,000 shares were issued to ICII and 50,000 shares were issued
to SPTL. All of the outstanding shares of common stock of ICIFC were retained
by ICII. Lastly, IMH contributed to IWLG all of the aforementioned operating
assets of SPTL's warehouse lending operations contributed to it in exchange
for shares representing 100% of the common stock of IWLG thereby forming it as
a wholly owned subsidiary. On November 20, 1995, the net tangible book value
of the assets contributed pursuant to the Contribution Transaction was
$525,000. ICII and SPTL retained all other assets and liabilities related to
contributed operations, which at November 20, 1995 consisted mostly of $11.7
million of MSRs, $22.4 million of finance receivables and $26.6 million in
advances made by ICII and SPTL to fund mortgage conduit loan acquisitions and
to fund finance receivables, respectively.
References to the Pre-Contribution Transaction period refer to the periods
prior to November 20, 1995. References to the Post-Contribution Transaction
period refer to periods after November 20, 1995. References to financial
information of IMH Post-Contribution Transaction reflect the financial
operations of IMH and its subsidiaries, IWLG and IMH Assets, and IMH's equity
interest in ICIFC. References to financial information of IMH Pre-Contribution
Transaction reflect the pro forma financial data of IMH's equity interest in
SPTL's warehouse lending operations and ICII's mortgage conduit operations
Pre-Contribution Transaction. References to financial information of ICIFC
reflect the financial data of ICIFC Post-Contribution Transaction and the pro
forma financial information of ICII's mortgage conduit operation Pre-
Contribution Transaction.
As discussed further in the Notes to ICIFC's financial statements, the
results of operations of ICIFC, of which 99% of the economic interest is owned
by IMH, are included in the results of operations for IMH as "Equity in net
income of ICI Funding Corporation." For Pre-Contribution Transaction, the
financial statements included elsewhere herein reflect management's estimate
of the level of previous capital and the amounts of interest charges and
general and administrative expense and taxes that ICII's mortgage conduit
operations would have incurred had it operated as an entity separate from
ICII.
HISTORICAL TRENDS
ICIFC's mortgage loan acquisitions decreased from $1.7 billion in 1994 to
$1.1 billion in 1995, which included $508.6 million in mortgage loans acquired
from ICII and its affiliates Post-Contribution Transaction. Management
attributes this decrease in mortgage loan acquisitions to the overall decrease
in mortgage loan originations throughout the mortgage industry as a result of
increased interest rates during 1995. In addition, the decrease in mortgage
loan acquisitions resulted from ICIFC's refocus from the conforming to the
non-conforming mortgage loan market and increased competition in such non-
conforming market. ICIFC was also adversely affected by the increase in
interest rates during 1994, resulting in a 20% decline in mortgage
acquisitions in 1994 to $1.7 billion from $2.1 billion acquired in 1993. The
aforementioned decline in mortgage acquisitions resulted in higher operating
costs as a percentage of acquisitions, despite ICIFC's efforts to reduce
excess production capacity through 1994 and 1995.
30
In an effort to increase profitability, ICIFC reduced operating expenses in
1994 and 1995, primarily through a reduction in personnel. At December 31,
1995, ICIFC had 60 employees, a 15% decrease from 71 employees at December 31,
1994. At December 31, 1994, the conduit operations of ICII employed 71
employees, a 57% decrease from 167 employees at December 31, 1993. ICIFC
continues to assess its work force in order to properly match its loan
acquisition capacity to current market demands. In 1995, ICIFC also emphasized
the acquisition of higher margin non-conforming mortgage loan products which
provided a higher return than conforming mortgage loans.
During the year ended December 31, 1996, ICIFC's mortgage loan acquisitions
increased 35% to $1.5 billion as compared to $1.1 billion for the same period
in 1995. Excluding the acquisition of mortgage loans from ICII or its
affiliated mortgage banking operations, ICIFC's mortgage loan acquisitions
increased 110% to $1.3 billion during 1996 as compared to $624.5 million
during 1995. The increase in mortgage loan acquisitions for 1996 as compared
to 1995 was primarily the result of the Company's increased marketing and
sales efforts subsequent to the Initial Public Offering, increased
concentration on identifying and servicing productive conduit sellers under
master commitment programs, and significantly increased sales activity from
two conduit sellers affiliated with ICII. In the second quarter of 1996, the
two conduit sellers were divested from ICII. ICIFC continues to acquire loans
from one of these mortgage banking entities. In conjunction with the increase
in flow (loan-by-loan) acquisitions, as opposed to bulk loan acquisitions,
subsequent to the Contribution Transaction, the Company has added additional
personnel. At December 31, 1996, ICIFC employed 104 employees, an increase of
189% from 36 employees at December 31, 1995.
SERVICING RIGHTS
When ICIFC purchases loans that include the associated servicing rights, the
allocated price paid for the servicing rights, net of amortization based on
assumed prepayment rates, is reflected on its financial statements as MSRs.
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No.
122, "Accounting for Mortgage Servicing Rights," an amendment to SFAS No. 65.
ICIFC elected to adopt this standard retroactive to January 1, 1995. SFAS No.
122 prohibits retroactive application to years prior to 1995.
SFAS No. 122 requires that a portion of the cost of acquiring a mortgage
loan be allocated to the mortgage loan servicing rights based on its fair
value relative to the loan as a whole. To determine the fair value of the
servicing rights created, ICIFC uses a valuation model that calculates the
present value of future net servicing revenues to determine the fair value of
the servicing rights. In using this valuation method, ICIFC incorporates
assumptions that it believes market participants would use in estimating
future net servicing income which include estimates of the cost of servicing,
an inflation rate, ancillary income per loan, a prepayment rate, a default
rate and a market discount rate.
ICIFC determines servicing value impairment by disaggregating its mortgage
conduit operations' servicing portfolio into its predominant risk
characteristics. ICIFC determines those risk characteristics to be loan
program type and interest rate. These segments of the portfolio are then
evaluated, using market prices under comparable
servicing sale contracts, when available, or alternatively using the same
model as was used to originally determine the fair value at acquisition, using
current assumptions at the end of the quarter. The calculated value is then
compared to the capitalized recorded value of each loan type and interest rate
segment to determine if a valuation allowance is required. At December 31,
1996, ICIFC had capitalized $8.8 million of MSRs.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time MSRs are recorded could result in a decline in the fair value of the MSRs
below their carrying value requiring a provision to increase the MSRs'
valuation allowance. The rate of prepayment of loans is affected by a variety
of economic and other factors, including prevailing interest rates and the
availability of alternative financing. The effect of those factors on loan
prepayment rates may vary depending on the particular type of loan. Estimates
of prepayment rates are made based on
31
management's expectations of future prepayment rates, which are based, in
part, on the historical rate of prepayment of ICIFC's loans, and other
considerations. There can be no assurance of the accuracy of management's
prepayments estimates. If actual prepayments with respect to loans serviced
occur more quickly than were projected at the time such loans were sold, the
carrying value of the MSRs may have to be reduced through a provision recorded
to increase the MSRs' valuation allowance in the period the fair value
declined below the MSRs' carrying value. If actual prepayments with respect to
loans occur more slowly than estimated, the carrying value of MSRs would not
increase, although total income would exceed previously estimated amounts and
the related valuation allowances, if any, could be unnecessary.
COMMITMENTS AND CONTINGENCIES
As part of its marketing strategy, ICIFC establishes mortgage loan purchase
commitments ("Master Commitments") with sellers that, subject to certain
conditions, entitle the seller to sell to ICIFC and obligate ICIFC to purchase
a specified dollar amount of mortgage loans over a period generally ranging
from six months to one year. As of December 31, 1996 and 1995, ICIFC had
outstanding short-term Master Commitments with 68 and 18 sellers,
respectively, to purchase mortgage loans in the aggregate principal amount of
$826.5 million and $241.0 million, respectively, over periods generally
ranging from six months to one year, of which $304.9 million and $37.3
million, respectively, had been purchased or committed to be purchased
pursuant to rate-locks (as defined below).
Sellers that enter into Master Commitments with ICIFC sell mortgage loans to
ICIFC by executing individual, bulk or other rate-locks (each, a "rate-lock").
Each rate-lock, in conjunction with the related Master Commitment, specifies
the terms of the related sale, including the quantity and price of the
mortgage loans or the formula by which the price is determined, the rate-lock
type and the delivery requirements. The up-front fee paid by a seller to ICIFC
to obtain a Master Commitment on a mandatory delivery basis is often refunded
pro rata as the seller delivers loans pursuant to rate-locks.
RESULTS OF OPERATIONS; IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income for the year ended December 31, 1996 increased to $11.9 million
as compared to $2.1 million for the same period in 1995. Net income per share
for the year ended December 31, 1996 was $1.98.
Revenues for the year ended December 31, 1996 increased to $65.2 million as
compared to $4.6 million for the same period in 1995, primarily as a result of
an increase in interest income from finance receivables and secondarily as a
result of interest income on the Company's mortgage loans held as CMO
collateral and investment securities available for sale. Average finance
receivables outstanding for the year ended December 31, 1996 increased to
$403.6 million as compared to $30.0 million for the same period in 1995,
primarily as a result of the Company providing warehouse facilities to ICIFC
subsequent to the Initial Public Offering. At December 31, 1996, ICIFC
accounted for 90% of the company's total gross finance receivables
outstanding. Average CMO collateral outstanding for the year ended December
31, 1996 increased to $282.7 million as compared to zero for the same period
in 1995, as a result of the Company financing $567.0 million of mortgage loans
held in its investment portfolio through two CMO structures created during
that period. Lastly, the Company invested in investment securities available
for sale with an average balance of $44.4 million and $1.8 million for the
years ended December 31, 1996 and 1995, respectively. At December 31, 1996,
finance receivables decreased to $362.3 million from $583.0 million at
December 31, 1995 due to a higher level of sales compared to acquisitions
during 1996 of mortgage loans held for sale by ICIFC. Such loan sales were
made to the Long-Term Investment Operations or to other investors, and the
proceeds reduced ICIFC's borrowings from IWLG. The Company had total
investment securities available for sale and cash and cash equivalents of
$86.1 million at December 31, 1996 as compared to $19.7 million at December
31, 1995.
Expenses for the year ended December 31, 1996 increased to $53.3 million as
compared to $2.4 million for the same period in 1995, primarily as a result of
(1) an increase in borrowings associated with the financing of
32
the Company's finance receivables, CMO collateral and investment securities
available for sale, (2) an increase in the provision for loan losses and (3)
the payment of fees associated with the Management Agreement. Interest expense
from reverse-repurchase borrowings, CMO borrowings or borrowings from SPTL
increased to $44.1 million for the year ended December 31, 1996 as compared to
$1.7 million for the same period in 1995. The increase in interest expense was
the result of increased borrowings to finance the growth in the Company's
interest earning assets as discussed above. The provision for loan losses
increased to $4.3 million for the year ended December 31, 1996 as compared to
$488,000 for the same period in 1995 as a result of establishing an allowance
for credit losses relating to the $501.7 million of CMO collateral and $362.3
million of finance receivables at December 31, 1996. A provision in 1995 in
the amount of $388,000 was the result of a write-off of a customer's
outstanding balance on a finance receivable. While the Company believes that
it has adequately provided for any future credit losses, the Company may have
to add to its loan loss allowance based upon actual loan loss experience or an
increase in the Company's investments. Management fees under the Management
Agreement were $3.3 million and $38,000 for the years ended December 31, 1996
and 1995, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net income, including the equity interest in the net income of ICIFC,
increased 320% to $2.1 million in 1995 from $490,000 in 1994. The increase in
net income was primarily the result of the increase in the equity interest in
the net income of ICIFC, the increase in IWLG's finance receivables
outstanding during 1995, and to a lesser extent, the purchase of an investment
portfolio, Post-Contribution Transaction. Excluding the equity interest in the
net income of ICIFC, net income in 1995 was $569,000 as compared to a loss of
$42,000 in 1994. Net income per share for 1995 Post-Contribution Transaction
was $0.07.
Revenues in 1995 increased 405% to $4.6 million as compared to $907,000 in
1994. Of the $4.6 million in 1995 revenue, $1.6 million was attributable to
the Post-Contribution Transaction entity. Such revenues primarily consisted of
interest income earned on the finance receivables, investments available for
sale, equipment lease payments, processing fee income and the equity interest
in ICIFC. The increase in revenues was primarily due to three factors: (1)
increased interest income earned on investments available for sale and a
higher outstanding balance of IWLG's finance receivables, (2) increased
profitability in the Conduit Operations as a result of cost savings and a
focus on higher margin mortgage products and (3) increased fee income as a
result of an increased number of transactions with IWLG's warehouse borrowers.
Total interest income increased 874% to $2.9 million in 1995 as compared to
$293,000 in 1994. Interest income is primarily composed of interest earned on
IMH's investments and IWLG's outstanding finance receivables. The increase in
interest income was the result of the Company acquiring an investment
portfolio, Post-Contribution Transaction, and a substantial increase in the
average outstanding balance of IWLG's finance receivables. As a result of the
Initial Public Offering, the Company raised a net of $44.5 million of capital
to fund the Long-Term Investment Operations and to capitalize or fund the
Warehouse Lending Operations and Conduit Operations.
With the capital raised in the Initial Public Offering, the Company acquired
four mortgage-backed securities at a carrying value of $17.4 million with a
weighted average yield of 11.2% at December 31, 1995. The mortgage-backed
securities ratings from one or more rating agencies range from investment
grade ("BBB") to non-investment grade ("B") quality. The mortgage loans
underlying the mortgage-backed securities are adjustable rate loans indexed
either to LIBOR or to the 11th District Cost of Funds. The Company also
acquired from Imperial Business Credit, Inc. ("IBC"), a subsidiary of ICII, a
subordinated interest in an equipment-lease receivable securitization with a
carrying value of $8.4 million at December 31, 1995. On May 31, 1996, IMH sold
the security back to IBC at no gain or loss. See "Item 13. Certain
Relationships and Certain Transactions."
IWLG's average outstanding finance receivables increased 866% to $30.0
million for 1995 as compared to $3.1 million for 1994, which led to a
corresponding increase of 874% in interest income to $2.9 million in 1995 as
compared to $293,000 in 1994. IWLG's total finance receivable balances
outstanding at December 31, 1995 were $583.0 million, of which $550.3 million
represented balances outstanding from ICIFC. The increase in
33
ICIFC's balances were primarily the result of several bulk purchases from ICII
and SPTL, in the amount of $176.6 million and $332.0 million, respectively, of
mortgage loans. Pre-Contribution Transaction, ICIFC's mortgage loans held for
sale and the related income were retained on the books of ICII. Post-
Contribution Transaction, IWLG executed an agreement with ICIFC to provide
warehouse lines to fund the Conduit Operations. Lastly, equity in net income
of ICIFC increased 180% to $1.5 million in 1995 as compared to $532,000 in
1994. The increase was due to factors as set forth in "--Results of
Operations; ICI Funding Corporation--Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994."
Expenses increased to $2.4 million in 1995 as compared to $447,000 in 1994.
The increase in expenses was primarily the result of increased interest on
borrowings Post-Contribution Transaction and a provision for finance
receivables charged to operations Pre-Contribution Transaction in 1995. The
increased interest on borrowings was the result of an increase in borrowings
associated with the funding of IWLG's finance receivables and IMH's investment
portfolio. As discussed previously, IWLG's average outstanding finance
receivables increased primarily as a result of borrowings by ICIFC in December
1995. Although interest expense increased 1,255% to $1.7 million in 1995 from
$127,000 in 1994, the increase was mainly Post-Contribution Transaction. The
increase in provision for finance receivables was primarily the result of
management's decision in 1995 to write off the outstanding balance of a
delinquent warehouse line. Approximately $388,000 of the charge-offs
represents the net outstanding balance on that committed line. As part of the
Contribution Transaction, these assets were retained, net of the allowance, by
SPTL. The remaining provision represents a Post-Contribution Transaction
general provision for loan losses. Expenses, other than interest on borrowings
and provision for loan losses on finance receivables increased 9.8% to
$247,000 in 1995 as compared to $225,000 in 1994. Personnel expenses decreased
36.7% to $91,000 in 1995 as compared to $143,000 in 1994. Personnel expenses
declined in 1995 primarily as a result of staffing reductions made in late
1994 in the Warehouse Lending Operations. The advisory fee, which became
effective on November 20, 1995, was $38,000 in 1995. There was no advisory fee
in 1994.See "Item 13. Certain Relationships and Certain Transactions--Other
Transactions--Management and Sub-Servicing Agreements."
RESULTS OF OPERATIONS; ICI FUNDING CORPORATION
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income for ICIFC for the year ended December 31, 1996 decreased 39% to
$912,000 from $1.5 million for the same period in 1995.
Revenues for the year ended December 31, 1996 increased to $41.8 million as
compared to $10.9 million for the same period in 1995, as a result of an
increase in interest income from ICIFC's mortgage loans held for sale and, to
a lesser extent, an increase in gain on sale of loans, offset by a reduction
in loan servicing income. The increase in interest income for the year ended
December 31, 1996 was the result of ICIFC retaining mortgage loans held for
sale during the period. Prior to the Contribution Transaction, all of ICIFC's
mortgage loans held for sale were retained on the books of ICII, and all
income derived from these loans was retained by ICII.
Gain on sale of loans increased to $7.7 million for the year ended December
31, 1996 as compared to $4.1 million for the same period in 1995, as the
result of securitizations of $850.3 million of fixed rate mortgage loans and
sales of $195.4 million of mortgage loans to others. During the year ended
December 31, 1996, gain on sale of non-conforming mortgage loans generated
greater income per loan than ICIFC earned on the sale of its conforming loans
during 1995. Any gains or losses on the sale of loans to IMH are deferred and
amortized over the estimated life of the loans. Total deferred gains as a
result of the sale of mortgage loans and securities to IMH were $2.5 million
for the year ended December 31, 1996. Loan servicing income decreased to
$1.3 million for the year ended December 31, 1996 as compared to $5.2 million
for the same period in 1995 as a result of ICII retaining all mortgage
servicing rights on loans previously purchased by ICIFC which were in
existence at November 20, 1995 as part of the Contribution Transaction.
Servicing income for the year ended December 31, 1996 relates to loan
servicing rights generated only during the period subsequent to November 20,
34
1995. Total loans serviced at December 31, 1996 were $1.6 billion as compared
to $512.1 million at December 31, 1995.
Expenses for the year ended December 31, 1996 increased to $40.2 million as
compared to $8.3 million for the same period in 1995 primarily as a result of
an increase in borrowings associated with the financing of ICIFC's mortgage
loans held for sale and, to a lesser extent, increases in the provision for
repurchases and personnel expense, offset by a reduction in amortization of
mortgage servicing rights. As noted above, prior to the Contribution
Transaction, ICIFC had no mortgage loans held for sale. Subsequent to the
Contribution Transaction, ICIFC entered into a warehouse arrangement with IWLG
to provide mortgage loan financing during the process of ICIFC accumulating
loans for sale and securitization. As a result of this facility, ICIFC
incurred $31.8 million in interest expense to finance its mortgage loan
acquisitions during the year ended December 31, 1996. The increase in the
provision for repurchases to $687,000 for the year ended December 31, 1996,
compared with no such provision in 1995, was the result of management's
decision to establish an allowance for estimated losses related to the
potential repurchase of previously sold loans that could result from breaches
of standard representations and warranties. Personnel expenses increased to
$5.1 million for the year ended December 31, 1996 as compared to $1.6 million
for the same period in 1995 primarily as a result of ICIFC entering into
employment agreements with senior management that became effective on November
20, 1995 and the increase in personnel to process the increased mortgage
acquisitions during the year ended December 31, 1996 as compared to the same
period in 1995. Prior to the Contribution Transaction, ICIFC was allocated an
apportionment of these individual salaries by ICII. However, ICII retained a
substantial portion of the costs associated with the senior management of the
Company prior to the Contribution Transaction.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net income for the year ended December 31, 1995 increased 180% to $1.5
million as compared to $537,000 for the same period in 1994. The increase is
primarily due to increased profitability on the sale of mortgage loans and
reduced personnel and operating expenses. Overall, profitability was lower in
1994 as a result of lower profits on the sale of servicing-retained fixed rate
loans and a decrease in the principal amount of mortgage loans sold servicing-
released. Gain on sale of loans consists primarily of gains recorded upon the
sale of mortgage loans, net of associated expenses, and to a lesser extent,
fees received for commitments to fund mortgage loans. Prior to the
Contribution Transaction, financial information presented herein does not
reflect the net interest income from the mortgage loans held for sale during
accumulation and subsequent sale or securitization as this income was retained
by ICII, which provided the funding for such loans. Post-Contribution
Transaction for 1995, ICIFC earned interest income on mortgage loans held for
sale.
Revenues in 1995 increased 3.7% to $10.9 million as compared to $10.5
million in 1994. While total revenues did not materially change from year to
year, mortgage loan acquisitions declined 35% to $1.1 billion in 1995 as
compared to $1.7 billion in 1994. Total revenues remained consistent in 1995
as compared to 1994 due to increased profitability on the sale of loans,
interest earned on the loans while being held for sale or securitization and
loan servicing income, partially offset by a reduction in the amount of
servicing sold and the related gain on the sale of servicing rights.
Gain on sale of loans increased 80% to $4.1 million in 1995 as compared to
$2.3 million in 1994. The increased profitability on the sale of loans for the
year ended December 31, 1995 was due to several factors. As interest rates
stabilized, the calculated values of ICIFC's acquired servicing rights
increased, resulting in an increased amount of servicing value capitalized,
with a corresponding increase in the profitability of loan sales.
Additionally, the overall interest rate environment in 1995 was less volatile
than in 1994, which did not expose ICIFC to the same degree of losses as the
operations experienced in 1994.
ICIFC sold a larger percentage of its acquired loans into mortgage-backed
securities in 1995 as compared to 1994. During 1995, ICIFC, Pre-Contribution
Transaction, sold its LIBOR-based adjustable and fixed rate mortgage loans
into REMIC securities that generated gains in excess of what could have been
earned on whole loan sales. There were no such securitization gains in 1994.
The securitization and sale of ICIFC's LIBOR-based
35
adjustable and fixed rate loans in 1995 resulted in the creation of excess
servicing assets that were purchased, at fair value concurrent with the sale,
from ICIFC by ICII, thereby reducing intercompany borrowings from ICII and any
tax-related timing differences. The securitization gains resulted in part from
the allocation of amounts calculated using the present value of the expected
future revenue using prepayment assumptions, and estimated losses at a market
discount rate. The securitization gains created tax liabilities at the time of
sale based on taxable income (the tax liability is not necessarily equal to
the reported gain) equal to the present value gains calculated as discussed
above. This securitization method requires cash to finance the related tax
liability since the income is received over the life of the loans and the tax
is paid in the current year. ICIFC generated no gain on sale of loans acquired
during the Post-Contribution Transaction period through December 31, 1995.
Loan servicing income in 1995 increased 28% to $5.2 million as compared to
$4.0 million in 1994, primarily due to an increase in the average balance of
mortgage loans serviced during 1995, as compared to 1994. However, as part of
the Contribution Transaction, ICII retained all the assets of ICIFC except for
certain assets as described in the Contribution Agreement. ICII retained all
the MSRs; therefore, future loan servicing income will be substantially less
than in past periods until ICIFC builds its own loan servicing portfolio.
ICIFC generated no servicing income during the Post-Contribution Transaction
period through December 31, 1995.
Gain on sale of servicing rights decreased 91% to $370,000 in 1995 as
compared to $4.2 million in 1994. The total principal balance of loans
underlying servicing sold was $76.3 million for 1995 as compared to
$619.8 million for 1994. The decrease in profitability on the sale of
servicing rights was primarily the result of a higher percentage of the
mortgage loans serviced having capitalized MSRs for 1995 as compared to 1994.
Historically, the Company's incentive to sell mortgage servicing rights has
been based on cash flow and income purposes. Gain on the sale of servicing
rights consists of the total sales price of the bulk sale of servicing rights,
net of related MSRs. The decision to buy or sell servicing rights is based
upon management's assessment of the market for servicing rights and ICIFC's
current and future cash flow and income objectives. ICIFC generated no gain on
sale of servicing rights for the Post-Contribution Transaction through
December 31, 1995.
Total expenses decreased 13% in 1995 to $8.3 million as compared to $9.6
million in 1994. This decrease was primarily due to a decrease in personnel
and operational expenses. Expenses for 1995 decreased primarily as a result of
significant reductions in ICIFC's mortgage loan production and administrative
staff and related reductions in personnel and general and administrative
expenses, offset by $1.3 million of interest expenses on borrowings from IWLG.
Pre-Contribution Transaction, all net interest income was retained by ICII.
However, Post-Contribution Transaction, ICIFC financed its mortgage loan
acquisitions through IWLG and therefore earned and paid any interest income or
interest expense associated with these borrowings, respectively. Total
interest on borrowings from IWLG was $1.3 million or 16% of the total expenses
for 1995. Excluding this item, total expenses decreased 27% to $7.0 million in
1995 as compared to $9.6 million 1994. ICIFC reduced personnel expenses by 46%
to $1.6 million in 1995 as compared to $3.0 million in 1994. ICIFC attained
this reduction primarily by reducing staffing by 60% from December 31, 1994.
However, ICIFC continued to experience increased unit acquisition costs as a
result of lower loan acquisition volumes during the first half of 1995 until
staffing could be reduced to match current acquisitions. ICIFC expects that
personnel expenses should increase in 1996 as a percentage of revenue due to
amounts payable under the employment agreements that were in effect on the
date of the Initial Public Offering and the hiring of additional support
staff.
Amortization of MSRs increased to $2.9 million in 1995 as compared to $2.1
million in 1994. The increase was primarily due to an increase in the average
outstanding balance of the mortgage servicing portfolio.
Occupancy expense decreased 49% to $150,000 in 1995 as compared to $296,000
in 1994. The decrease in occupancy expense was primarily the result of the
reallocation of ICII's corporate personnel to occupy the unused space after
the downsizing of ICIFC's operations in 1994 and 1995. General and
administrative expenses, which include other general and administrative
expenses, professional services, telephone and other communications and data
processing, decreased 38% to $1.9 million in 1995 as compared to $3.1 million
in 1994. The decrease was the result of reduced loan acquisition volume and
reduced levels of ICIFC's personnel and related expenses. No provision for
repurchases was taken in 1995 compared to a $655,000 provision taken
36
in 1994. The provision in 1994 was the result of a default on an unsecured
loan by one of ICIFC's correspondents. Management does not intend to make
unsecured loans to its correspondents in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are the result of ICIFC's
acquisition of mortgage loans held for sale, mortgage loans and mortgage-
backed securities acquired by the Long-Term Investment Operations and the
funding of finance receivables by the Warehouse Lending Operations. Pre-
Contribution Transaction, ICIFC was funded by ICII through committed reverse
repurchase agreements and capital contributions. Historically, SPTL's
warehouse lending operations were funded by SPTL through deposits, other
borrowings and equity. However, post-Contribution Transaction, ICIFC, the
Long-Term Investment Operations and the Warehouse Lending Operations are
funded by reverse repurchase agreements, sale of mortgage securities, issuance
of CMO's and proceeds from the issuance of common stock.
During the year ended December 31, 1996, 1995 and 1994 net cash provided by
(used in) operating activities was $6.4 million, $(72,000) and $58,000,
respectively. Net cash provided by operating activities for the year ended
December 31, 1996 increased compared to 1995 due to an increase in net income
offset by an increase in accrued interest receivable as a result of increased
finance receivables and mortgage loans held for investment. IWLG's warehouse
lending activities affected net cash provided by operating activities more
significantly during the year ended December 31, 1996 than in prior periods,
as a result of significantly more warehouse lending to ICIFC subsequent to the
Contribution Transaction. The Company retained an investment portfolio of
mortgage loans only subsequent to the Initial Public Offering, and therefore
these activities only affected net cash provided by operating activities
during the year ended December 31, 1996.
Net cash provided by (used in) investing activities for the year ended
December 31, 1996, 1995 and 1994 was $(330.2) million and $5.0 million,
respectively. For the year ended December 31, 1996 and 1995, net cash flows
from investing activities increased due to the excess of repayment of finance
receivables compared with funding of such receivables, resulting in lower
finance receivables due from ICIFC. For the year December 31, 1996 and 1994,
net cash flows from investing activities increased due to higher repayments of
finance receivables than finance receivables funded. During the year ended
December 31, 1996, net cash flows from investing activities decreased due to
the Company's decision to create an investment portfolio of mortgage loans and
investment securities available for sale.
Net cash provided by (used in) financing activities for the year ended
December 31, 1996, 1995 and 1994 was $344.1 million, $631.5 million and $(5.1)
million, respectively. These net cash figures for the year ended December 31,
1996 and 1995 were affected by the Company's increased investment in CMO
collateral and finance receivables, thereby requiring it to raise additional
cash to finance such CMO collateral and finance receivables. Post-Contribution
Transaction, such borrowings consisted of reverse repurchase agreements and
CMO borrowings, while Pre-Contribution Transaction, such borrowings consisted
of borrowings from SPTL.
On the date of the Contribution Transaction, ICIFC entered into a $600
million reverse repurchase agreement with IMH's Warehouse Lending Operations
for the purpose of providing ICIFC mortgage loan financing during the period
that ICIFC accumulates mortgage loans and when the mortgage loans are
securitized and sold. The margins on the reverse repurchase agreements are
based on the type of collateral used and generally range from 95% to 100% of
the fair market value of the collateral. During 1996, ICIFC acquired
$1.5 billion in mortgages and sold $1.6 billion in mortgage loans to IMH's
Long-Term Investment Operations and others and as REMIC securitizations.
During 1996, average outstanding borrowings with IMH's Warehouse Lending
Operations were $383.3 million as, in most cases, mortgages acquired by ICIFC
are securitized or sold within 90 days. During 1996, ICIFC completed four
separate REMIC transactions totaling $850.3 million in principal balance of
mortgages and supplied mortgages to IMH's Long-Term Investment Operations for
two CMO issues totaling $567.0 in principal balance. By securitizing and
selling loans on a periodic and consistent basis, the reverse repurchase
facility was sufficient to handle liquidity needs during 1996. On December 31,
1996, ICIFC purchased residual interests in securitizations from ICII. The
residual interests total $46.9 million and are
37
financed by an intercompany payable with ICII. The borrowing requires monthly
payment of interest at a current interest rate of 12% and has no stated
maturity.
At December 31, 1996, the Company had $474.5 million of CMO borrowings used
to finance $501.7 million of CMO collateral held by the Long-Term Investment
Operations. The Company uses CMO borrowings to finance substantially all of
its mortgage loan investment portfolio as a means of eliminating certain risks
associated with reverse repurchase agreements (such as the potential need for
deposits of additional collateral) that are not present with CMO borrowings.
Terms of the CMO borrowings require that the mortgages be held by an
independent third party custodian, with the interest rate on the borrowings
ranging from 32 basis points to 50 basis points over one-month LIBOR. Equity
in the CMOs is established at the time the CMOs are issued at levels
sufficient to achieve desired credit ratings on the securities from the rating
agencies. Total credit loss exposure to the Company is limited to the equity
invested in the CMOs at any point in time.
At December 31, 1996, the Company had a $250 million committed financing
facility as well as additional uncommitted facilities to provide financing for
the Company's three businesses. Terms of the reverse repurchase agreements
require that the mortgages be held by an independent third party custodian,
which gives the Company the ability to borrow against the collateral as a
percentage of the outstanding principal balance. The borrowing rates quoted
vary from 65 basis points to 100 basis points over one-month LIBOR, depending
on the type of collateral provided by the Company. The margins on the reverse
repurchase agreements are based on the type of mortgage collateral used and
generally range from 90% to 98% of the fair market value of the collateral.
By December 31, 1996, the Company had utilized all of the net proceeds from
its Initial Public Offering and subsequent offerings to provide funding for
the Warehouse Lending Operations and to increase its Long-Term Investment
Operations and its Conduit Operations. Management believes that cash flow from
operations and the aforementioned potential financing arrangements is
sufficient to meet the current liquidity needs of the three businesses.
INFLATION
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased costs
of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company's operations are monetary in nature. As
a result, interest rates have a greater impact on the Company's operations'
performance than do the effects of general levels of inflation. Inflation
affects the Company's operations primarily through its effect on interest
rates, since interest rates normally increase during periods of high inflation
and decrease during periods of low inflation. During periods of increasing
interest rates, demand for mortgage loans and a borrower's ability to qualify
for mortgage financing in a purchase transaction may be adversely affected.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report............................................... 40
Consolidated Balance Sheets................................................ 41
Consolidated Statements of Operations...................................... 42
Consolidated Statements of Changes in Stockholders' Equity................. 43
Consolidated Statements of Cash Flows...................................... 44
Notes to Consolidated Financial Statements................................. 45
ICI FUNDING CORPORATION
Independent Auditors' Report............................................... 69
Balance Sheets............................................................. 70
Statements of Operations................................................... 71
Statements of Changes in Shareholders' Equity.............................. 72
Statements of Cash Flows................................................... 73
Notes to Financial Statements.............................................. 74
39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Mortgage Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Mortgage Holdings, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. 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 generally accepted auditing
standards. 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 Imperial Credit Mortgage Holdings, Inc. and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" for the year ended December 31,
1995.
KMPG Peat Marwick LLP
Orange County, California
March 3, 1997, except as to notes 11 and 15
to the consolidated financial statements which are as of March 31, 1997.
40
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
ASSETS
------
Cash and cash equivalents.. $ 22,609,583 $ 2,284,482
Investment securities
available-for-sale........ 63,505,551 17,378,238
Loan Receivables:
CMO collateral............ 501,743,986 --
Finance receivables....... 362,312,342 583,021,113
Mortgage loans held for
investment............... 914,541 --
Allowance for loan losses. (4,384,381) (100,000)
------------ ------------
Net loan receivables.... 860,586,488 582,921,113
Investment in ICI Funding
Corporation............... 9,896,383 865,839
Due from affiliates........ 7,708,654 113,089
Accrued interest receiv-
able...................... 7,263,351 1,645,414
Other assets............... 785,230 39,512
Lease payment receivables
held for sale............. -- 8,440,644
------------ ------------
$972,355,240 $613,688,331
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CMO borrowings............. $474,512,583 $ --
Reverse-repurchase agree-
ments..................... 357,715,550 567,727,361
Other liabilities.......... 5,739,350 725,146
Accrued dividends.......... 5,170,000 --
Due to affiliates.......... 27,169 --
------------ ------------
Total liabilities........ 843,164,652 568,452,507
------------ ------------
Stockholders' equity:
Preferred stock, $0.1 par
value;
10 million shares
authorized; none issued
or outstanding at
December 31, 1996 and
1995..................... -- --
Common stock, $.01 par
value;
50 million shares
authorized; 9,400,000
shares issued and
outstanding at December
31, 1996, and 4,250,000
shares issued and
outstanding at December
31, 1995 ................ 94,000 42,500
Additional paid-in capi-
tal...................... 135,521,413 44,970,544
Investment securities val-
uation allowance......... (2,458,614) (92,663)
Cumulative dividends de-
clared................... (15,441,450) --
Notes receivable from com-
mon stock sales.......... (719,642) --
Retained earnings......... 12,194,881 315,443
------------ ------------
Total stockholders' equi-
ty...................... 129,190,588 45,235,824
------------ ------------
Commitments and
contingencies
Subsequent events
$972,355,240 $613,688,331
============ ============
See accompanying notes to consolidated financial statements.
41
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
----------- ---------- --------
Revenues:
Interest income......................... $63,673,555 $2,851,216 $292,665
Equity in net income of ICI Funding
Corporation............................ 902,644 1,489,276 531,688
Other income............................ 592,978 243,155 82,742
----------- ---------- --------
65,169,177 4,583,647 907,095
----------- ---------- --------
Expenses:
Interest on CMO borrowings and reverse
repurchase agreements.................. 44,143,909 1,116,287 --
Interest on borrowings from SPTL........ -- 598,421 126,524
Provision for loan losses............... 4,349,969 487,505 95,374
Advisory fee............................ 3,346,531 37,888 --
Professional services................... 741,373 54,336 14,460
General and administrative expense...... 398,419 64,249 67,396
Personnel expense....................... 309,538 90,737 143,308
----------- ---------- --------
53,289,739 2,449,423 447,062
----------- ---------- --------
Income before income taxes................ 11,879,438 2,134,224 460,033
Income taxes (benefit).................... -- 75,849 (30,095)
----------- ---------- --------
Net income.............................. 11,879,438 $2,058,375 $490,128
=========== ========== ========
Net income per share.................... $ 1.98 $ .07 --
=========== ========== ========
See accompanying notes to consolidated financial statements.
42
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NOTES
RECEIVABLE
INVESTMENT FROM
NUMBER OF ADDITIONAL SECURITIES CUMULATIVE COMMON TOTAL
SHARES COMMON PAID-IN CONTRIBUTED VALUATION DIVIDENDS STOCK RETAINED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL CAPITAL ALLOWANCE DECLARED SALES EARNINGS EQUITY
----------- -------- ------------ ----------- ----------- ------------ ---------- ----------- -------------
Balance,
December 31,
1993........... -- $ -- $ -- $ -- $ -- $ -- $ -- $ 6,005,569 $ 6,005,569
Capital
contribution... -- -- -- 357,558 -- -- -- -- 357,558
Net income,
1994........... -- -- -- -- -- -- -- 490,128 490,128
--------- -------- ------------ --------- ----------- ------------ --------- ----------- ------------
Balance,
December 31,
1994........... -- -- -- 357,558 -- -- -- 6,495,697 6,853,255
Contribution
Transaction.... 500,000 5,000 514,750 (357,558) -- -- -- (8,238,629) (8,076,437)
Net proceeds,
from initial
public offering. 3,750,000 37,500 44,455,794 -- -- -- -- -- 44,493,294
Net income,
1995........... -- -- -- -- -- -- -- 2,058,375 2,058,375
Securities
valuation
allowance, net. -- -- -- -- (92,663) -- -- -- (92,663)
--------- -------- ------------ --------- ----------- ------------ --------- ----------- ------------
Balance,
December 31,
1995........... 4,250,000 42,500 44,970,544 -- (92,663) -- -- 315,443 45,235,824
Cumulative
dividends
declared ($2.41
per share)..... -- -- -- -- -- (15,441,450) -- -- (15,441,450)
Net proceeds
from public
stock offerings. 5,000,000 50,000 87,887,669 -- -- -- -- -- 87,937,669
Sale of common
stock.......... 105,000 1,050 2,078,650 -- -- -- -- -- 2,079,700
Exercise of
stock options
($13.00 per
share)......... 45,000 450 584,550 -- -- -- -- -- 585,000
Notes receivable
from common
stock sales.... -- -- -- -- -- -- (719,642) -- (719,642)
Net income,
1996........... -- -- -- -- -- -- -- 11,879,438 11,879,438
Securities
valuation
allowance, net. -- -- -- -- (2,365,951) -- -- -- (2,365,951)
--------- -------- ------------ --------- ----------- ------------ --------- ----------- ------------
Balance,
December 31,
1996 .......... 9,400,000 $ 94,000 $135,521,413 $ -- $(2,458,614) $(15,441,450) $(719,642) $12,194,881 $129,190,588
========= ======== ============ ========= =========== ============ ========= =========== ============
See accompanying notes to consolidated financial statements.
43
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -----------
Cash flows from operating activi-
ties:
Net income....................... $ 11,879,438 $ 2,058,375 $ 490,128
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Equity in net income of ICI
Funding Corporation............. (902,644) (1,489,276) (531,688)
Provision for loan losses........ 4,349,969 487,505 95,374
Net change in accrued interest on
loans and investments........... (5,617,937) (1,701,133) 4,565
Net change in other assets and
liabilities..................... (3,299,910) 572,545 --
------------- ------------- -----------
Net cash provided by (used in)
operating activities........... 6,408,916 (71,984) 58,379
------------- ------------- -----------
Cash flows from investing activi-
ties:
Net change in CMO collateral..... (501,743,986) -- --
Net change in finance
receivables..................... 220,708,771 (602,737,414) 5,015,658
Net change in mortgage loans held
for investment.................. (980,129) -- --
Purchases of investment
securities available-for-sale... (64,331,483) (17,470,901) --
Sales of investment securities
available-for-sale.............. 14,370,157 -- --
Principal reductions on
securities available-for-sale... 1,468,062 -- --
Net decrease (increase) in lease
payment receivables............. 8,440,644 (8,440,644) --
Contributions to ICIFC........... (8,127,900) (495,000) --
------------- ------------- -----------
Net cash provided by (used in)
investing activities........... (330,195,864) (629,143,959) 5,015,658
------------- ------------- -----------
Cash flows from financing activi-
ties:
Proceeds from public stock
offerings, net.................. 87,937,669 44,493,294 --
Net change in borrowings from
SPTL............................ -- 19,279,770 (5,074,037)
Net change in reverse-repurchase
agreements...................... (210,011,811) 567,727,361 --
Net change in CMO borrowings..... 474,512,583 -- --
Dividends paid................... (10,271,450) -- --
Proceeds from sale of additional
common stock.................... 2,079,700 -- --
Proceeds from exercise of stock
options......................... 585,000 -- --
Advances to purchase common
stock........................... (719,642) -- --
------------- ------------- -----------
Net cash provided by (used in)
financing activities........... 344,112,049 631,500,425 (5,074,037)
------------- ------------- -----------
Net change in cash and cash
equivalents...................... 20,325,101 2,284,482 --
Cash and cash equivalents at
beginning of year................ 2,284,482 -- --
------------- ------------- -----------
Cash and cash equivalents at end
of year.......................... $ 22,609,583 $ 2,284,482 $ --
============= ============= ===========
Supplementary information:
Interest paid.................... $ 42,544,542 $ 1,714,708 $ 126,524
Income taxes paid (refunded)..... -- -- (30,095)
============= ============= ===========
Non-cash transactions:
Contribution Transaction on
November 20, 1995:
Net assets reverted to ICII and
SPTL:
Finance receivables.............. $ -- $ 22,353,236 $ --
Investment in ICIFC.............. -- 7,973,245 --
Accrued interest receivable...... -- 60,855 --
Borrowings from SPTL............. -- 21,791,149 --
Contributed capital.............. -- 357,558 --
Retained earnings................ -- 8,238,629 --
Contribution by ICII of 100% of
the preferred stock
of ICI Funding Corporation
(representing
a 99% economic interest).......... -- 519,750 --
Unrealized losses on investment
securities available-for-sale.... (2,365,951) (92,663) --
Accrued dividends................. 5,170,000 -- --
See accompanying notes to consolidated financial statements.
44
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Imperial Credit Mortgage Holdings, Inc. and its wholly-owned subsidiaries,
Imperial Warehouse Lending Group (IWLG) and IMH Assets Corp. (IMH Assets),
(IMH or the Company) is a Maryland corporation formed on August 28, 1995 that
operates three businesses, two of which were formerly owned and operated by
Imperial Credit Industries, Inc. (ICII), a leading diversified financial
services company and mortgage bank. IMH intends to operate so as to qualify as
a real estate investment trust (REIT) under the requirements of the Internal
Revenue Code. The business objectives are discussed in the succeeding three
paragraphs.
The Long-Term Investment Operations, a newly created business, invests
primarily in non-conforming residential mortgage loans and mortgage-backed
securities secured by or representing interests in such loans. The Long-Term
Investment Operations also invest, to a lesser extent, in second mortgages.
The Conduit Operations, conducted in ICI Funding Corporation (ICIFC),
primarily purchases non-conforming mortgage loans and, to a lesser extent,
second mortgage loans from its network of third party correspondents and
subsequently securitizes or sells such loans to permanent investors. ICIFC, in
addition to its ongoing securitizations and sales to third party investors,
supports the Long-Term Investment Operations of the Company by supplying IMH
with non-conforming mortgage loans and securities backed by non-conforming
mortgage loans.
The Warehouse Lending Operations provides short-term lines of credit to
ICIFC and other approved mortgage banks, most of which are correspondents of
ICIFC, to finance mortgage loans during the time from the closing of the loans
to their sale or other settlement with pre-approved investors.
CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of IMH's initial public offering
(Initial Public Offering), ICII contributed to ICIFC certain operating assets
and certain customer lists of ICII's mortgage conduit operations, including
all of ICII's mortgage conduit operations' commitments to purchase mortgage
loans, subject to rate locks from correspondents, in exchange for shares
representing 100% of the common stock and 100% of the non-voting preferred
stock of ICIFC. Simultaneously, on the effective date of the Initial Public
Offering, in exchange for 500,000 shares of IMH Common Stock, ICII (1)
contributed to IMH all of the outstanding non-voting preferred stock of ICIFC,
which represents 99% of the economic interest in ICIFC, (2) caused Southern
Pacific Thrift and Loan Association (SPTL), a wholly owned subsidiary of ICII,
to contribute to IMH certain operating assets and certain customer lists of
SPTL's warehouse lending division, and (3) executed an agreement not to
compete and a right of first refusal agreement, each having a term of two
years from the effective date of the Initial Public Offering. This
contribution is known as the "Contribution Transaction." All of the
outstanding shares of common stock of ICIFC were retained by ICII. Lastly, IMH
contributed all of the aforementioned operating assets of SPTL's warehouse
lending operations contributed to it by SPTL to IWLG in exchange for shares
representing 100% of the common stock of IWLG thereby forming it as a wholly
owned subsidiary. On the effective date of the Initial Public Offering, the
net tangible book value of the assets contributed pursuant to the Contribution
Transaction was $525,000. The assets contributed were recorded by IMH at the
net book value of SPTL and ICII. ICII and SPTL retained all other assets and
liabilities related to the contributed operations which consist of mortgage
servicing rights (MSRs), finance receivables and advances made by ICII and
SPTL to fund mortgage conduit loan acquisitions and to fund finance
receivables.
45
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BASIS OF FINANCIAL STATEMENT PRESENTATION
Prior to the Contribution Transaction, the operations of IWLG are combined
with the Company in a manner similar to a "pooling-of-interests" and the
Company's investment in ICIFC is recorded using the equity method of
accounting, with the accompanying consolidated financial statements and notes
reflecting the historical operations of IWLG for those periods presented.
The historical operations of IWLG, formerly a division of SPTL, have been
presented in the consolidated financial statements for the period January 1,
1995 to November 19, 1995 and for the year ended December 31, 1994 as a stand-
alone company. Certain adjustments, as described below, were made to
historical operations in order to provide fair presentation of the financial
operations of IWLG.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and prevailing practices within the
financial services industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
All material intercompany balances and transactions with IMH's consolidated
subsidiaries (IWLG and IMH Assets) have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash and money market mutual funds. The Company
considers investments with maturities of three months or less at date of
acquisition to be cash equivalents.
BORROWINGS FROM SPTL
Historical operations of IWLG have been adjusted to reflect the funding of
net assets by SPTL. These borrowings were recorded at no more than 98% of
total finance receivables which is the maximum advance rate allowed under
current ICII warehouse lines of credit. Additionally, the historical
operations of IWLG have been adjusted to reflect the estimated interest
charges on these borrowings. In order to reflect all costs of doing business
in the financial statements, interest charges have been allocated to IWLG in
the accompanying consolidated statements of operations.
The interest charges allocated are based upon estimated average borrowings
balances of IWLG and SPTL's average cost of funds, which were computed based
on a weighted average of SPTL borrowings. The average borrowings and interest
rates used to determine the interest on IWLG borrowings are as follows:
JANUARY 1, FOR THE
1995 THROUGH YEAR ENDED
NOVEMBER 19, DECEMBER 31,
1995 1994
------------- ------------
Estimated average borrowings................... $11,258,467 $3,045,442
Interest rate.................................. 5.80% 4.15%
Interest allocation............................ $ 598,421 $ 126,524
46
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EQUITY
Prior to the effective date of the offering, IWLG had no capital or retained
earnings recorded in its accounts. To properly reflect the historical
financial operations of IWLG, retained earnings were recorded as a result of
net income or loss from operations on an adjusted historical basis.
INVESTMENT IN ICI FUNDING CORPORATION
The Company records its investment in ICIFC on the equity method. ICII owns
all of the common stock of ICIFC and is entitled to 1% of the earnings or loss
of ICIFC. The Company is entitled to 99% of the earnings or losses of ICIFC
through its ownership of all of the non-voting preferred stock in ICIFC. ICIFC
is a mortgage loan conduit organization, which purchases mortgage loans and
subsequently securitizes or sells such loans to permanent investors, including
IMH (see notes 15 and 16). Gain or loss on the sale of loans or securities by
ICIFC to IMH are deferred and amortized or accreted for gain or loss on sale
over the estimated life of the loans or securities using the interest method.
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, net of related income taxes, as a separate component of
stockholders' equity, and trading securities are reported at fair value with
unrealized gains and losses reported in income. Discounts obtained on
investment securities are amortized to interest income over the estimated life
of the investment securities using the interest method.
At December 31, 1996, the Company's investment securities available-for-sale
included $37.9 million of subordinated securities collateralized by mortgages
and $15.4 million of securities collateralized by other loans, of which $10.1
million is subordinated. In general, subordinated classes of a particular
series of securities bear all losses prior to the related senior classes. In
connection with ICIFC's REMIC securitizations of $835.2 million for the year
ended December 31, 1996, IMH has purchased $32.5 million of securities as
regular interests. At December 31, 1996, such regular interests included
$117,000 of "principal-only" and $10.1 million of "interest-only" securities.
Such retained securities or investments may subject the Company to credit,
interest rate and/or prepayment risks.
The Company's investment securities are held as available-for-sale, reported
at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. As the Company qualifies as a REIT and no
income taxes are paid, the unrealized gains and losses are reported gross in
stockholders' equity.
MORTGAGE LOANS HELD FOR INVESTMENT AND COLLATERALIZED MORTGAGE OBLIGATIONS
(CMO) COLLATERAL
The Company purchases certain non-conforming mortgage loans to be held as
long-term investments or as collateral for CMOs. Mortgage loans held for
investment and CMO collateral are recorded at cost at the date of purchase.
Mortgage loans held for investment and CMO collateral include various types of
adjustable-rate loans secured by mortgages on single-family residential real
estate properties and fixed-rate loans secured by second trust deeds on
single-family residential real estate properties, accounting for 92.0% and
8.0%, respectively, of the long-term investment portfolio and CMO collateral
at December 31, 1996. At December 31, 1995 the Company had no mortgage loans
held for investment. Approximately 56.2% of the mortgage loans held for
investment and CMO collateral at December 31, 1996 were collateralized by
properties located in California. Premiums and discounts related to these
loans are amortized over their estimated lives using the interest method.
Loans are continually evaluated for collectibility and, if appropriate, the
loan may be placed on nonaccrual status, generally 90 days past due, and
previously accrued interest reversed from income.
47
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company maintains an allowance for losses on mortgage loans held for
investment and CMO collateral at an amount which it believes is sufficient to
provide adequate protection against future losses in the mortgage loans
portfolio. The allowance for losses is determined primarily on the basis of
management's judgment of net loss potential, including specific allowances for
known impaired loans and other factors such as changes in the nature and
volume of the portfolio, value of the collateral and current economic
conditions that may affect the borrowers' ability to pay. A provision is
recorded for all loans or portions thereof deemed to be uncollectible thereby
increasing the allowance for loan losses.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Company issues CMOs secured primarily by non-conforming mortgage loans
as a means of financing its long-term investment operations. For accounting
and tax purposes, the mortgage loans financed through the issuance of CMOs are
treated as assets of the Company and the CMOs are treated as debt of the
Company. Each issue of CMOs is fully payable from the principal and interest
payments on the underlying mortgage loans collateralizing such debt and any
investment income on such collateral. The maturity of each class of CMO is
directly affected by the rate of principal prepayments on the related CMO
collateral. Each CMO series is also subject to redemption according to
specific terms of the respective indentures. As a result, the actual maturity
of any class of a CMO series is likely to occur earlier than the stated
maturities of the underlying mortgage loans. The weighted average maturity of
the CMO collateral ranges from 14 to 29 years. The CMOs are structured as one
month LIBOR "floaters" with interest payable monthly at LIBOR plus 0.32% to
0.50%, currently increasing to LIBOR plus 1.00% to 1.32% after seven years.
The long-term investment operations earns the net interest spread between
the interest income on the mortgage loans and the interest and other expenses
associated with the CMO debt. The net interest spread may be directly impacted
by the levels of prepayment of the underlying mortgage loans and, to the
extent CMO classes have variable rates of interest, may be affected by changes
in short-term interest rates. As of December 31, 1996, the Company had
outstanding CMO debt of $474.5 million and corresponding mortgage loans held
as collateral of $501.7 million.
The Company maintains an allowance for losses on loans held as collateral
for CMOs at an amount which it believes is sufficient to provide adequate
protection against losses in the portfolio. The allowance for losses is
determined primarily on the basis of management's judgment of net loss
potential, including specific allowances for known impaired loans. All
accounts or portions thereof deemed to be uncollectible are written-off to the
allowance for loan losses.
FINANCE RECEIVABLES
Finance receivables represent transactions with customers, including ICIFC,
involving predominantly residential real estate lending. As a warehouse
lender, the Company is a secured creditor of the mortgage bankers and brokers
to which it extends credit and is subject to the risks inherent in that
status, including the risk of borrower default and bankruptcy. Any claim of
the Company as a secured lender in a bankruptcy proceeding may be subject to
adjustment and delay.
The Company maintains an allowance for losses on financing receivables at an
amount which it believes is sufficient to provide adequate protection against
future losses in the portfolio. The allowance for losses is determined
primarily on the basis of management's judgment of net loss potential,
including specific allowances for known impaired loans. A provision is
recorded for all accounts or portions thereof deemed to be uncollectible.
Finance receivables are stated at the principal balance outstanding.
Interest income is recorded on the accrual basis in accordance with the terms
of the loans. Finance receivables are continually evaluated for
48
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
collectibility and, if appropriate, the receivable is placed on non accrual
status, generally 90 days past due. Future collections of interest income are
included in interest income or applied to the loan balance based on an
assessment of the likelihood that the loans will be repaid.
INCOME TAXES
IWLG did not record income taxes in its historical operations. The
accompanying consolidated financial statements reflect income taxes (benefit)
for IWLG as if it had been a separate subsidiary of SPTL for the period
January 1, 1995 through November 19, 1995 and the year ended December 31,
1994. As a separate subsidiary of SPTL, IWLG would file a consolidated Federal
income tax return and a combined California franchise tax return with ICII.
ICII's income tax allocation policy for financial statement purposes is to
allocate income tax provision or benefit based on income (loss) before income
taxes (benefit) of each entity within its consolidated group, adjusted for
nontaxable or nondeductible items of income and expense. ICIFC's taxable
income is included in ICII's Federal and State income tax returns. Post-
Contribution, ICIFC files its own tax return.
Prior to the Contribution Transaction, deferred tax assets and liabilities
were recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. 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.
IMH intends to operate so as to qualify as a real estate investment trust
(REIT) under the requirements of the Internal Revenue Code (the Code).
Requirements for qualification as a REIT include various restrictions on
ownership of IMH's stock, requirements concerning distribution of taxable
income and certain restrictions on the nature of assets and sources of income.
A REIT must distribute at least 95% of its taxable income to its stockholders,
the distribution of which 85% must be distributed within the taxable year in
order to avoid the imposition of an excise tax and the remaining balance may
extend until timely filing of its tax return in its subsequent taxable year.
Qualifying distributions of its taxable income are deductible by a REIT in
computing its taxable income. Although IMH did not make any distributions
during the calendar year of 1995, it retained its qualified REIT status and
eliminated its 1995 taxable income by making a qualified distribution after
the close of the 1995 taxable year in accordance with the provisions of
section 858 of the Code. IMH satisfied the requirements of section 858 of the
Code and elected to apply amounts out of its first distributions in calendar
year 1996 to effectively distribute 100% of its 1995 taxable income. The 1995
provision for income taxes for IMH in the consolidated financial statements
pertains to the period prior to the Contribution Transaction. 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.
ADVERTISING
The Company accounts for its advertising costs as non-direct response
advertising. Accordingly, advertising costs are expensed as incurred.
NET INCOME PER SHARE
Net income per share is computed on the basis of the weighted average number
of shares and common equivalent shares outstanding for the period. Primary and
fully diluted earnings per share are approximately the same for all periods
presented.
49
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net income per share for December 31, 1996 and for the period from November
20, 1995 through December 31, 1995, as if all stock options and ICII ownership
interest in IMH were outstanding for the year ended December 31, 1996 and
after the Offering for the period from November 20, 1995 through December 31,
1995 is:
YEAR ENDED NOVEMBER 20,
DECEMBER 1995 THROUGH
31, DECEMBER 31,
1996 1995
----------- ------------
Weighted average shares outstanding................. 6,008,256 4,284,015
=========== ==========
Net income.......................................... $11,879,438 $ 315,443
=========== ==========
Net income per share................................ $ 1.98 $ 0.07
=========== ==========
Net income per share for the years ended December 31, 1995 and 1994 is not
presented as the information is not meaningful.
RECLASSIFICATIONS
Certain items in prior periods have been reclassified to conform to the
current presentation.
MORTGAGE SERVICING RIGHTS
On May 12, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"), as an amendment to SFAS 65. The Company elected to adopt
this standard for the year ended December 31, 1995. The impact on the Company
from adoption of SFAS 122 is only to the extent mortgage servicing rights are
recognized by ICIFC.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
supersedes SFAS 122. SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of a
financial components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. SFAS 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 requires that liabilities and
derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practicable. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the
assets sold, if any, and retained interest, if any, based on their relative
fair values at the date of the transfers. SFAS 125 includes specific
provisions to deal with servicing assets or liabilities.
SFAS 125 will be effective for transactions occurring after December 31,
1996 except for certain transactions which according to Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB 125," will be effective if occurring after December 31,
1997. Management does not anticipate that the adoption of SFAS 125 will have a
material impact on the Company's financial condition or results of operations.
50
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company's mortgage-backed securities are 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.
The amortized cost and estimated fair value of mortgage-backed securities
available-for-sale are summarized as follows:
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
----------- ---------- ----------- -----------
Donaldson, Lufkin and Jenrette
Series:
1995-4, Class B-1........... $ 3,893,755 $ -- $ (424,678) $ 3,469,077
1995-4, Class B-2........... 1,703,236 -- (585,839) 1,117,397
----------- ------ ----------- -----------
5,596,991 -- (1,010,517) 4,586,474
Salomon Brothers Series:
1994-2, B1.................. 1,918,270 -- (30,239) 1,888,031
1994-2, B2.................. 1,442,744 -- (25,443) 1,417,301
1995-1, B................... 2,170,965 -- (31,299) 2,139,666
1995-A, B-2................. 5,293,699 -- (59,581) 5,234,118
1995-B, B1.................. 6,771,473 -- (97,449) 6,674,024
----------- ------ ----------- -----------
17,597,151 -- (244,011) 17,353,140
Bear Stearns Mortgage
Securities, Inc. Series:
1996-3, X................... 5,872,018 -- (787,928) 5,084,090
1996-4, X................... 5,730,333 -- (678,157) 5,052,176
1996-4, PO.................. 116,683 2,122 -- 118,805
1996-9, PO.................. 2,261 -- -- 2,261
1996-3, Class B-4........... 1,071,332 -- (13,707) 1,057,625
1996-3, Class B-5........... 586,167 -- (67,314) 518,853
1996-3, Class B-6........... 441,971 -- (91,262) 350,709
1996-4, Class B-4........... 1,233,447 -- (7,130) 1,226,317
1996-4, Class B-5........... 323,887 -- (32,969) 290,918
1996-4, Class B-6........... 423,123 -- (89,750) 333,373
1996-9, Class B-4........... 895,258 -- -- 895,258
1996-9, Class B-5........... 233,429 -- -- 233,429
1996-9, Class B-6........... 309,712 -- -- 309,712
----------- ------ ----------- -----------
17,239,621 2,122 (1,768,217) 15,473,526
----------- ------ ----------- -----------
Walsh Securities Series 1996-
1, Class B................... 10,786,806 -- (60,908) 10,725,898
----------- ------ ----------- -----------
$51,220,569 $2,122 $(3,083,653) $48,139,038
=========== ====== =========== ===========
51
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
----------- ---------- ---------- -----------
Donaldson, Lufkin and Jenrette
Series:
1995-Q6, Class B-1............. $ 6,585,440 -- $(36,496) $ 6,548,944
1995-4, Class B-1.............. 3,793,799 -- (7,962) 3,785,837
1995-4, Class B-2.............. 1,641,124 -- (4,321) 1,636,803
Salomon Brothers Series VII 95-A,
Class B-2....................... 5,450,538 -- (43,884) 5,406,654
----------- -------- -------- -----------
$17,470,901 -- $(92,663) $17,378,238
=========== ======== ======== ===========
The Company holds other securities available-for-sale with estimated fair
values as follows:
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
----------- ---------- ---------- -----------
Imperial Credit Industries, Inc.
9 3/4% Senior Notes............. $ 4,552,083 $622,917 $ -- $ 5,175,000
Franchise Loan Receivables Trust
1995-B.......................... 2,800,687 -- -- 2,800,687
Franchise Mortgage Acceptance
Corp. Series:
1996-B, Class D................ 5,104,125 -- -- 5,104,125
1996-B, Class E................ 2,286,701 -- -- 2,286,701
----------- -------- -------- -----------
7,390,826 -- -- 7,390,826
----------- -------- -------- -----------
$14,743,596 $622,917 $ -- $15,366,513
=========== ======== ======== ===========
There were no other securities available-for-sale at December 31, 1995.
3. CMO COLLATERAL
CMO collateral consists of the following:
AT DECEMBER 31,
1996
---------------
Loans secured primarily by single-family residential
real estate properties................................. $486,402,641
Premiums on loans....................................... 13,507,549
Securitization expenses related to issuance of CMOs..... 1,833,796
------------
$501,743,986
============
4. FINANCE RECEIVABLES
The Company's finance receivables represent warehouse lines of credit with
mortgage banking companies collateralized by mortgage loans on single family
residences. Because of the concentration of mortgage loans underlying the
Company's finance receivables located in California, which was approximately
47% and 63% at December 31, 1996 and 1995, respectively, a significant decline
in regional economic conditions, or some other regional catastrophe, could
result in mortgage banking companies being unable to sell mortgage loans and
the Company suffering losses on their warehouse lines or in fewer mortgage
loans available for warehouse lending by the Company and ultimately a decline
in interest income and fee income.
52
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Finance receivables consist of the following:
AT DECEMBER 31,
-------------------------
1996 1995
------------ ------------
Due from ICIFC.................................... $327,421,991 $550,290,862
Due from other mortgage banking companies......... 34,890,351 32,730,251
------------ ------------
$362,312,342 $583,021,113
============ ============
The Company earns interest rates at prime (8.5% at December 31, 1996) on
warehouse lines to ICIFC and prime to prime plus two percent on its warehouse
lines to other mortgage banking companies. These lines have maturities which
range from on demand to one year and are generally collateralized by mortgages
on single family residences.
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
Balance, beginning of period.............. $ 100,000 $ 95,374 $ --
Provision for loan losses................. 4,349,969 487,505 95,374
Charge-offs............................... (145,247) (482,879) --
Recoveries................................ 79,659 -- --
----------- ---------- --------
Balance, end of period.................... $ 4,384,381 $ 100,000 $ 95,374
=========== ========== ========
The charge-offs for 1995 reflected in the above table were recorded prior to
the effective date of the Initial Public Offering and are related to one
borrower.
6. REVERSE-REPURCHASE AGREEMENTS
IMH enters into reverse-repurchase agreements with major brokerage firms for
its mortgage warehouse lending operations and to fund the purchase of mortgage
loans and mortgage-backed securities. Mortgage loans underlying certain of the
agreements are delivered to the dealers that arrange the transactions. The
following tables present information regarding reverse-repurchase agreements:
AT DECEMBER 31, 1996
-------------------------------------------
REVERSE
REPURCHASE UNDERLYING
UNDERLYING COLLATERAL LIABILITY COLLATERAL MATURITY DATE
--------------------- ------------ ------------ -----------------
PaineWebber:
Mortgage loans................. $244,960,435 $258,559,264 February 28, 1997
Morgan Stanley:
Mortgage loans................. 99,143,988 110,539,568 July 28, 1997
Greenwich Capital:
MBS Walsh Securities 1996-1.... 9,691,717 10,710,248 January 7, 1997
Bear Stearns:
MBS Bear Stearns 1996-4 X...... 3,919,410 5,002,624 January 29, 1997
------------ ------------
Total...................... $357,715,550 $384,811,704
============ ============
53
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has not received a formal renewal of the reverse-repurchase
agreement with PaineWebber. However, PaineWebber continues to provide reverse-
repurchase financing under the same terms and conditions as existed under the
agreement which matured on February 28, 1997. Reverse-repurchase agreements
with Greenwich Capital and Bear Stearns have been renewed until April 28, 1997
and April 18, 1997, respectively.
AT DECEMBER 31, 1995
------------------------------------------
REVERSE UNDERLYING
UNDERLYING COLLATERAL REPURCHASE COLLATERAL MATURITY DATE
--------------------- ------------ ------------ ----------------
PaineWebber:
Mortgage loans.................. $239,628,464 $251,423,244 January 8, 1996
Merrill Lynch:
Mortgage loans.................. 323,180,005 332,660,022 January 25, 1996
Salomon Brothers:
MBS Salomon 1995-A.............. 4,918,892 5,406,654 January 5, 1996
------------ ------------
Total....................... $567,727,361 $589,489,920
============ ============
At December 31, 1996 and December 31, 1995, reverse-repurchase agreements
includes accrued interest payable of $2,207,677 and $1,075,511, respectively.
The following table presents certain information on reverse-repurchase
agreements, excluding accrued interest payable:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Maximum Month-End Outstanding Balance............ $475,549,629 $566,651,850
Average Balance Outstanding...................... 392,850,109 16,343,476
Weighted Average Rate............................ 6.19% 6.83%
The maximum amount available under the reverse-repurchase agreement at
December 31, 1996 and December 31, 1995 is $750 million and $623 million,
respectively.
7. INCOME TAXES
The Company, as a qualified REIT for the year ended December 31, 1996 and
for the period from November 20, 1995 to December 31, 1995 is not subject to
income taxes. The Company's income taxes (benefit) for the periods prior to
its formation of IMH as a REIT are as follows:
JANUARY 1,
1995 THROUGH
NOVEMBER 19,
1995 1994
------------ --------
Current:
Federal............................................ $36,951 $(10,775)
State.............................................. 2,054 2,555
------- --------
Total current.................................... 39,005 (8,220)
------- --------
Deferred:
Federal............................................ 26,257 (11,602)
State.............................................. 10,587 (10,273)
------- --------
Total deferred................................... 36,844 (21,875)
------- --------
Total income taxes (benefit)......................... $75,849 $(30,095)
======= ========
54
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provision prior to the formation of IMH as a REIT differs
from statutory Federal corporate income tax rate primarily due to state income
taxes and equity in earnings of ICIFC.
Deferred income taxes arise from differences in the bases of assets and
liabilities for tax and financial reporting purposes. The following table
shows the primary components of the IWLG's net deferred taxes at December 31,
1994:
Deferred tax assets:
Allowance for finance receivable losses........................ $40,057
Other.......................................................... 3,597
-------
Total........................................................ 43,654
Valuation allowance............................................ --
-------
Deferred tax assets, net of valuation allowance................ 43,654
Deferred tax liabilities:
State taxes.................................................... (2,701)
-------
Total........................................................ (2,701)
-------
Net deferred tax assets (included in borrowings from SPTL)....... $40,953
=======
The Company had no deferred taxes at December 31, 1996 and 1995.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks in making this
assessment. Based upon the schedule of reversals and available tax carrybacks,
management believes it is more likely than not the Company will realize the
benefits of the deferred tax assets. All deferred tax balances were
transferred to ICII on November 20, 1995 as part of the Contribution
Transaction.
55
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1996 and 1995 is made in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures About Fair Value of Financial Instruments, and SFAS No. 119,
Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by IMH
using available market information and appropriate valuation methodologies;
however, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein 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, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Cash and cash equivalents............ $ 22,610 $ 22,610 $ 2,284 $ 2,284
Investment securities available-for-
sale................................ 63,506 63,506 17,378 17,378
CMO collateral....................... 501,744 503,962 -- --
Finance receivables.................. 362,312 362,312 583,021 583,021
Mortgage loans held for investment... 915 915 -- --
Lease payment receivables held for
sale................................ -- -- 8,441 8,441
Liabilities:
CMO Borrowings, net of accrued
interest............................ 474,045 474,045 -- --
Reverse-repurchase agreements, net of
accrued interest.................... 355,508 355,508 566,652 566,652
Short-term commitments to extend
credit.............................. -- -- -- --
The fair value estimates as of December 31, 1996 and 1995 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 herein.
The following describes the methods and assumptions used by IMH in
estimating fair values.
CASH AND CASH EQUIVALENTS
The carrying amount for cash and cash equivalents approximates fair value
because 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
The fair value of investment securities is estimated based on quoted market
prices from dealers and brokers for similar types of mortgage-backed
securities.
CMO COLLATERAL
The fair value of CMO collateral is estimated based on quoted market prices
from dealers and brokers for similar types of mortgage loans.
56
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FINANCE RECEIVABLES
The fair value approximates the carrying amounts because of the short-term
nature of the assets and do not present unanticipated interest rate or credit
concerns.
MORTGAGE LOANS HELD FOR INVESTMENT
The fair value of mortgage loans held for investment is determined based
upon the Company's estimate of the proceeds from the ultimate sale of the
underlying collateral of each loan.
LEASE PAYMENT RECEIVABLES HELD FOR SALE
The fair value is estimated by discounting future cash flows using credit
and discount rates the Company believes reflect the estimated credit, interest
rate and prepayment risks associated with similar types of instruments.
CMO BORROWINGS
Fair values approximate the carrying amounts because of the variable
interest rate nature of the borrowings.
REVERSE-REPURCHASE AGREEMENTS
Fair values approximate the carrying amounts because of the short-term
maturity of the liabilities and do not present unanticipated interest rate or
credit concerns.
SHORT-TERM COMMITMENTS TO EXTEND CREDIT
There are no commitment fees associated with IMH's lines of credit extended
under the warehouse lending program. Accordingly, these commitments do not
have an estimated fair value.
9. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND 401(k) PLAN
Under ICII's 401(k) plan, employees of the Company may contribute up to 14%
of their salaries. The Company will match 50% of the first 4% of employee
contributions. An additional Company contribution may be made at the
discretion of the Company.
The Company does not have its own 401(K) or profit sharing plan. As such,
employees of the Company participate in ICII's 401(K) plan. The Company's
matching and discretionary contributions were not significant for any period
presented.
10. RELATED PARTY TRANSACTIONS
RELATED PARTY COST ALLOCATIONS AND CHARGES
Prior to the Contribution Transaction, IWLG was allocated various costs from
SPTL and charged for certain ICII services. The costs of these services were
not directly attributable to IWLG and primarily include general corporate
overhead such as human resources, data processing, professional services,
telephone and other communications, and general and administrative expense
including a fixed asset user charge. These expenses were allocated or charged
based typically on a per employee basis, which management believes is
reasonable.
57
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total related party allocations and charges for the period January 1, 1995
through November 19, 1995, and for the year ended December 31, 1994 were
$46,865 and $56,128, respectively.
Interest income recorded by the Company, related to finance receivables due
from ICIFC, was $31.8 million and $1.3 million for the years ended December
31, 1996 and 1995, respectively.
On the effective date of the Initial Public Offering, IMH entered into a
services agreement with ICII under which ICII provides various services to the
Company, including data processing, human resource administration, general
ledger accounts, check processing, remittance processing and payment of
accounts payable. ICII charges fees for each of the services based upon usage.
As part of the services provided, ICII provides IWLG with insurance coverage
and self insurance programs, including health insurance. The charge to IWLG
for coverage is based upon a pro rata portion of the costs to ICII for its
various policies. Total charges for the year ended December 31, 1996 and for
the period November 20, 1995 through December 31, 1995 were $54,981 and
$4,462, respectively.
CASH
Prior to the Contribution Transaction, IWLG had no cash accounts. All
operations were funded directly by SPTL. Adjustments were made to IWLG's
financial statements to reflect these fundings as borrowings from SPTL. IWLG
did not reflect any accounts receivable or payable on its balance sheet prior
to the Contribution Transaction because all transactions of IWLG either
increased or decreased its borrowings from SPTL.
PURCHASE OF MORTGAGE-BACKED AND OTHER COLLATERALIZED SECURITIES
On November 6, 1996, the Company purchased Walsh Acceptance Corporation
mortgage pass-through certificates series 1996-1, Class B issued September 30,
1996 for $10.7 million, net of a discount of $1.2 million to yield 9.3%. James
Walsh, a director of the Company, is an Executive Vice President of Walsh
Securities, Inc.
During the year ended December 31, 1996, IMH purchased $32.5 million of
subordinated mortgage-backed securities in connection with ICIFC's REMIC
securitizations for $26.8 million, resulting in discounts of $5.7 million.
On December 31, 1996, the Company purchased Franchise Mortgage Acceptance
Corporation Series 1996-B Class D and E securities. The securities are
collateralized by loans originated by Franchise Mortgage Acceptance Corp. LLC
("FMAC"), a subsidiary of ICII. The Company purchased the Class D and E
securities for $2.3 million and $5.1 million, respectively, net of a discount
of $1.9 million and $2.4 million, respectively.
PURCHASE OF BULK MORTGAGE LOANS
On March 29, 1996, IMH purchased from ICIFC bulk mortgage loan packages of
30-year fully amortizing six-month adjustable LIBOR and 15-year fixed rate
second trust deed mortgages having a principal balance of $276.3 million and
$34.7 million with premiums paid of $2.8 million and $1.2 million,
respectively. Servicing rights on all mortgage loans were retained by ICIFC.
On August 28, 1996, IMH purchased from ICIFC bulk mortgage loan packages of
30-year fully amortizing six-month and two-year adjustable LIBOR and 15-year
fixed rate second trust deed mortgages having a principal balance of $255.8
million and $9.6 million with premiums of $10.8 million and $408,000,
respectively. Servicing rights on all mortgage loans were retained by ICIFC.
58
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PURCHASE OF SUBORDINATED LEASE RECEIVABLES
On December 29, 1995, IMH purchased a subordinated interest in a lease
receivable securitization from Imperial Business Credit, Inc. (IBC) a wholly-
owned subsidiary of ICII. The lease receivables underlying the security were
originated by IBC. IMH purchased the subordinated lease receivable at the
present value of estimated cash flows based on a discount rate of 12%
amounting to a purchase price of $8.4 million. On May 31, 1996, IMH sold the
subordinated interest to IBC at no gain or loss.
PURCHASE AND SUBSEQUENT SALE OF FRANCHISE LOANS RECEIVABLES
On March 28, 1996, the Company purchased the beneficial interest in the
Class A Trust Certificate for the Franchisee Loan Receivables Trust 1995-B
("Franchise Loans Receivables"). The trust is securitized by loans originated
by FMAC LLC, a subsidiary of ICII. The purchase price was $2.8 million based
upon a discount rate of 16%. On January 30, 1997, the Company sold the
Franchise Loans Receivables to ICIFC at carrying value, which approximated
fair value. No gain or loss was recorded on the sale. The Company was under no
obligation to sell the securities.
PURCHASE AND SUBSEQUENT REDEMPTION OF ICII SENIOR NOTES
On March 8, 1996, the Company purchased from ICII $5.0 million of its Senior
Note obligations for $4.5 million plus accrued interest. On January 24, 1997,
the Company redeemed the Senior Notes for $5.2 million, resulting in a gain of
$648,000.
NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT
Pursuant to the Non-Compete Agreement, ICII and any entity of which ICII
owns more than 25% of the voting securities (a 25% entity) may not compete
with the Company's Warehouse Lending Operations and may not establish a
network of third party correspondent loan originators or another end-investor
in non-conforming mortgage loans. The agreement expires two years from the
effective date of the Initial Public Offering.
Pursuant to the Right of First Refusal Agreement, ICII granted ICIFC a right
of first refusal to purchase all non-conforming mortgage loans that ICII or
any 25% entity originates or acquires and subsequently offers for sale and
ICIFC granted ICII, or any 25% entity designated by ICII, a right of first
refusal to purchase all non-conforming mortgage loans that ICIFC acquires and
subsequently offers for sale. Additional related party transactions are
described elsewhere in the financial statement footnotes.
11. 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. In addition, IMH is exposed to credit loss in the
event of nonperformance by the counterparties to the various agreements
associated with loan purchases. However, IMH does not anticipate
nonperformance by such borrowers or counterparties. Unless noted otherwise,
IMH does not require collateral or other security to support such commitments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The
contract or notional amounts of forward contracts do not represent exposure to
credit loss. The Company controls the credit risk of its forward contracts
through credit approvals, limits and monitoring procedures.
59
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the ordinary course of business, ICIFC 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,
ICIFC is required to repurchase mortgage loans if there had been a breach of
representations or warranties. IMH has guaranteed the performance obligation
of ICIFC under such representation and warranties related to loans included in
securitizations.
LEASE COMMITMENTS
Minimum rental commitments under a noncancelable premises operating sub-
lease with ICII were as follows:
1997............................................................. 386,900
1998............................................................. 407,200
1999............................................................. 51,000
--------
Total.......................................................... $845,100
========
The sublease agreement was renegotiated and signed with ICII in February
1997 for a lease term of two years expiring in February 1999. Minimum rental
commitments reflect rates per the new sublease agreement.
Rent expense for the years ended December 31, 1996, 1995, and 1994 was
$1,812, none, and $19,611, respectively. The greater portion of rent expense
associated with the sublease is allocated to ICIFC based on number of
employees.
LOAN COMMITMENTS
IWLG's warehouse lending program provides secured short-term non-recourse
revolving financing to small- and medium-size mortgage originators and ICIFC
to finance mortgage loans from the closing of the loans until sold to
permanent investors. As of December 31, 1996, the Company had extended 17
committed lines of credit in the aggregate principal amount of approximately
$657.6 million, of which $362.3 million was outstanding. IWLG's warehouse
lines are non-recourse and IWLG can only look to the sale or liquidation of
the mortgage loans as a source of repayment.
LEGAL PROCEEDINGS
ComUnity National Asset Corporation, a Maryland corporation v. Thomas O.
Markel, Jr., an individual; Homemac Mortgage Bankers, a business association
of unknown form; Homemac Corporation, a California corporation; Homemac
Finance Corporation; Homemac Institutional Mortgage Corporation, a California
corporation; Imperial Credit Mortgage Holdings, Inc., a Maryland corporation;
and DOES 1 through 100, inclusive, Orange County Superior Court Case No.
761786 (ComUnity case).
On March 13, 1997, a mediation was held between the plaintiff and all
defendants in the ComUnity case. The case was settled at the mediation for an
immaterial amount to be paid by the defendants to the plaintiff. A written
settlement memorandum was executed by all parties which is binding and
enforceable. Accordingly, this case has been resolved.
Michele Perrin, an individual doing business as Perrin and Associates vs.
Thomas O. Markel, an individual; H. Wayne Snavely, an individual; Homemac
Mortgage Bankers, a business association of unknown form; Homemac Corporation,
a California corporation; Homemac Finance Corporation, a California
corporation; Homemac Institutional Mortgage Corporation, a California
corporation; Imperial Credit Mortgage Holdings, Inc., a Maryland corporation;
Imperial Credit Industries, Inc., a California corporation and DOES 1 through
100, Orange County Superior Court Case No. 768878.
60
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has received an indemnification from the principals of the
plaintiff in the above ComUnity case for any present or future claims brought
by Perrin against the Company.
Fortune Mortgage, etc., et al. v. Imperial Credit Industries, Inc., Imperial
Credit Mortgage Holdings, Inc., ICI Funding Corp., Imperial Warehouse Lending
Group, Inc., William Ashmore, Edward Pollard, Wayne Snavely, and Joseph
Tomkinson, Orange County Superior Court Case No. 776153 (Fortune case).
On March 5, 1997, plaintiffs Fortune Mortgage Corporation and Thomas O.
Gephart filed a complaint against the above-named defendants for (1) Fraud;
(2) Negligent Misrepresentation; (3) Conspiracy to Commit Fraud; (4) Aiding
and Abetting Fraud; (5) Breach of Contract; (6) Breach of Implied Covenant of
Good Faith and Fair Dealing; (7) Rescission, Restitution and Damages; (8)
Contractual Indemnity and Reimbursement; (9) Money Had and Received; and (10)
Unjust Enrichment.
Plaintiffs' claims arise out of an Agreement for Purchase and Sale of
Assets, dated March 1, 1996, pursuant to which Imperial Credit Industries,
Inc. allegedly sold to Imperial First Mortgage, a group of loan production
offices located in California. In essence the plaintiffs' Complaint alleges
that that sale was induced by fraudulent misrepresentations and omissions,
including but not limited to an allegation that the loan production offices
were engaged in illegal kickback practices which were not disclosed to the
buyer, as well as misrepresentations concerning the volume and profitability
of the loan production offices.
The prayer seeks general damages, special and/or consequential damages,
reasonable attorney's fees and costs of suit on all of the causes of action.
In addition, the Prayer of the Complaint also seeks exemplary and punitive
damages on the first, third and fourth causes of action described above.
Several of the causes of action allege specifically that plaintiffs have been
damaged in a sum in excess of $2.5 million by virtue of the defendants'
conduct, and the tenth cause of action for unjust enrichment alleges that the
defendants, and each of them, have been unjustly enriched in a sum in excess
of $10 million.
The Company believes that the Fortune case is without merit and intends to
vigorously defend the action.
The Company is involved in additional litigation arising in the normal
course of business of which management believes, based in part upon the advice
of legal counsel, will not have a material effect on the Company.
12. MANAGEMENT CONTRACT
On the effective date of the Offering, the Company entered into an agreement
with Imperial Credit Advisors, Inc. (ICAI) for an initial term of one year, to
provide specified management services to the Company. These services include
the purchase, financing, servicing and administration of mortgage loans and
mortgage loan securities.
As manager of the Company, ICAI receives a per annum base management fee
payable monthly in arrears of an amount equal to (1) 3/8 of 1% of Gross
Mortgage Assets of IMH comprised of other than Agency Certificates, conforming
mortgage loans or mortgage-backed securities secured by or representing
interests in conforming mortgage loans, plus (2) 1/8 of 1% of the remainder of
Gross Mortgage Assets of IMH plus (3) 1/5 of 1% of the average daily asset
balance of the outstanding amounts under IWLG's warehouse lending facilities.
A base management fee of $2.1 million and $37,888 was accrued for the years
ended December 31, 1996 and 1995, respectively.
61
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As incentive compensation, ICAI is entitled to receive for each fiscal
quarter, an amount equal to 25% of the net income of the Company, before
deduction of such incentive compensation, in excess of the amount that would
produce an annualized Return on Equity equal to the daily average Ten Year
U.S. Treasury Rate plus 2%. The Company's incentive compensation calculation
will be made quarterly in arrears before any income distributions are made to
stockholders for the corresponding period. Incentive compensation of
$1,274,336 was accrued for the year ended December 31, 1996. No incentive
compensation was accrued for the period November 20, 1995 through December 31,
1995. Pursuant to the Management Agreement, the Company will reserve up to 1/5
of the Company's 25% Incentive Payment for distribution as bonuses to its
employees in amounts to be determined by the Company's Board of Directors.
Such payment is made in lieu of payment of a like amount to the Manager under
the Management Agreement. For the year ended December 31, 1996, the Company
recorded $154,751 pursuant to this provision of the Management Agreement.
The original Management Agreement described above expired on January 31,
1997 and a new 5 year agreement was executed with substantially the same terms
except as follows: (1) 75% of the per annum base management fee as calculated
above shall be paid to the Manager for services rendered under the agreement.
25% of the per annum base management fee as calculated above shall be reserved
by the Company for distribution to participants in its executive bonus pool in
amounts to be determined in the sole discretion of the Company's Chief
Executive Officer; (2) the Company will reserve up to 1/4 versus 1/5 of the
above incentive compensation for distribution as bonuses to participants in
its executive bonus pool in amounts to be determined in the sole discretion of
the Company's Chief Executive Officer; and (3) net income included in the
Return on Capital calculation was changed from net income in accordance with
GAAP to net taxable income.
Concurrent with the management agreement, ICAI entered into a submanagement
agreement with ICII for ICII to perform such management services for the
Company as ICAI deems necessary.
13. STOCK OPTION PLAN/EXECUTIVE COMPENSATION
In August, 1995 the Company adopted a Stock Option, Deferred Stock and
Restricted Stock Plan (the Stock Option Plan) which provides for the grant of
qualified incentive stock options (ISOs), options not qualified (NQSOs) and
deferred stock, restricted stock, stock appreciation, dividend equivalent
rights and limited stock appreciation rights awards (Awards). The Stock Option
Plan is administered by a committee of directors appointed by the Board of
Directors and is composed solely of "disinterested persons." ISOs may be
granted to the officers and key employees of the Company. NQSOs and Awards may
be granted to the directors, officers and key employees of the Company or any
of its subsidiaries, to the directors, officers and key employees of ICIFC. At
December 31, 1996, shares reserved for issuance pursuant to the Company's
Stock Option Plan were 755,000. The Company increased the Stock Option Plan's
shares available by 400,000 shares pursuant to a vote taken at the
stockholders meeting in July 1996.
The exercise price for any NQSO or ISO granted under the Stock Option Plan
may not be less than 100% (or 110% in the case of ISOs granted to an employee
who is deemed to own in excess of 10% of the outstanding Common Stock) of the
fair market value of the shares of Common Stock at the time the NQSO or ISO is
granted.
Under the Stock Option Plan, the Company may make loans available to stock
option holders in connection with the exercise of stock options granted under
the Stock Option Plan. If shares of Common Stock are pledged as collateral for
such indebtedness, the shares may be returned to the Company in satisfaction
of the indebtedness. If returned, the shares become available for issuance in
connection with future stock options and Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, the Stock Option
Plan will terminate in August of 2005. Options granted under the Stock Option
Plan will become exercisable as directed by a committee of the Board of
Directors at the time of grant.
62
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of stock options outstanding at December 31, 1996 and 1995
follows:
1996 1995
------------------ -----------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
Outstanding at beginning of year....... 310,000 11.50 -- --
Granted................................ 115,500 20.63 310,000 11.50
Exercised.............................. (45,000) 13.00 -- --
Forfeited/Cancelled.................... (15,000) 11.25 -- --
------- -------
Outstanding at end of year............. 365,500 14.21 310,000 11.50
======= =======
No shares were exercisable at December 31, 1996 or 1995.
Stock options granted in 1995 become exercisable three years from the date
of grant and expire seven years from the date they become exercisable.
However, a portion (45,000) of the stock options granted in 1995 became
exercisable in 1996 and were exercised.
Stock options granted in 1996 become exercisable at a rate of 1/3 per year
on the anniversary of the date of grant and expire three years from the date
they were granted.
In connection with the exercise of options in 1996, the Company made loans
secured by the related stock totaling $720,000 at a current interest rate of
5.63% for a five-year term. 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.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
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 Opinion 25 instrinsic value
based method of accounting for its stock-based compensation arrangements. SFAS
No. 123 requires pro forma disclosures of net income (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 Opinion 25. SFAS No. 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 No. 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.
63
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company elected to continue to apply the APB Opinion 25 in accounting
for its Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options exercisable under SFAS No. 123, the Company's net income and income
per share as of December 31, 1996 and after the Offering for the period from
November 20, 1995 through December 31, 1995 would have decreased to the pro
forma amounts indicated below:
NOVEMBER 20,
YEAR ENDED 1995 THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Net income as reported.......................... $11,879,438 $315,443
=========== ========
Pro forma net income............................ $11,121,506 $ 44,464
=========== ========
Income per share as reported.................... $ 1.98 $ .07
=========== ========
Pro forma income per share...................... $ 1.85 $ .01
=========== ========
The derived fair value of the options granted during 1996 and 1995 was
approximately $1,814,000 and $589,000, respectively, using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate
of 6.8%, expected lives of three and ten years, respectively, and expected
volatility of 22%.
14. STOCKHOLDERS' EQUITY
On November 20, 1995, the Company completed its initial public offering of
3,750,000 shares of common stock. The Company raised $44.5 million in the
initial public offering, net of $4.3 million in offering expenses. On June 18,
1996, the Company completed a stock offering of 2,500,000 shares of common
stock. The Company raised $36.7 million in this stock offering, net of $2.7
million in offering expenses. In July 1996, the Company issued 17,500 shares
of common stock raising $260,000 in connection with the over allotment
provision of the June offering. On November 18, 1996, the Company completed an
additional stock offering of 2,500,000 shares of common stock. The Company
raised $51.2 million in this stock offering, net of $3.8 million in offering
expenses. In December 1996, the Company issued 87,500 shares of common stock
raising $1.8 million in connection with the over allotment provision of the
November offering.
In December 1996, the outside directors of the Company exercised 45,000
shares of common stock at $13.00 per share or $585,000 in proceeds. In
conjunction with the exercise of shares, the Company approved loans totaling
$720,000 to the outside directors consistent with the Company's stock option
loan program.
During 1996, the Company declared cumulative dividends of $15.4 million or
$2.41 per share. The Company distributed 95% or more of its net taxable income
(which does not necessarily equal net income as calculated in accordance with
GAAP) to its common stockholders so as to comply with the REIT provisions of
the Internal Revenue Code. Holders of the common stock are entitled to such
dividends as the Company's Board of Directors, in its discretion, may declare
out of funds available. In the event of liquidation of the Company, holders of
common stock are entitled to receive, pro rata, all of the assets of the
Company available for distribution. Holders of the common stock have no
conversion or preemptive or other subscription rights and there are no
redemption or sinking fund provisions applicable to the common stock. At
December 31, 1996, and 1995, 50 million shares of common stock were authorized
and 9,400,000 and 4,250,000 shares were issued and outstanding, respectively.
64
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, if issued, may have a preference
on dividend payments which could affect the ability of the Company to make
dividend distributions to the common stockholders. As of December 31, 1996 and
1995, 10 million shares of preferred stock are authorized and no shares have
been issued or are outstanding.
15. SUBSEQUENT EVENTS
On January 15, 1997, a $0.55 cash dividend, previously declared by the Board
of Directors onDecember 19, 1996, was paid to stockholders of record on
December 31, 1996.
On January 24, 1997, Imperial Credit Industries, Inc. redeemed the senior
notes for $5.2 million, resulting in a gain of $648,000.
On January 30, 1997, the Company sold its equity interest in the Franchisee
Loan Receivables Trust 1995-B to ICIFC at carrying value, which approximated
fair value. No gain or loss was recorded on the sale.
On January 30, 1997, the Company sold the Franchise Mortgage Acceptance
Corp. 1996-B, Class E, securities to ICIFC at carrying value, which
approximated fair value. No gain or loss was recorded on the sale.
On February 25, 1997, the Company's Board of Directors approved a Dividend
Reinvestment and Stock Purchase Plan. The Company registered 1.7 million
shares that will be available from the Company for issuance pursuant to
dividend reinvestment and cash purchases.
On March 13, 1997, the Company settled its lawsuit with ComUnity National
Asset Corporation and received indemnification against all present and future
losses in the Michele Perrin lawsuit.
On March 31, 1997, ICII divested itself of its interest in ICIFC by
contributing 100% of ICIFC's common stock to certain officers and directors of
IMH.
65
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. ICI FUNDING CORPORATION
The following condensed financial information summarizes the financial
condition, results of operations and cash flows of ICI Funding Corporation:
CONDENSED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
Cash............................................. $ 4,395,252 $ 2,184,344
Residual interests in securitizations............ 46,949,383 --
Mortgage loans held for sale..................... 334,104,072 544,274,962
Accrued interest receivable...................... 1,844,577 2,984,867
Due from affiliates.............................. -- 2,541,743
Mortgage servicing rights........................ 8,784,509 --
Premises and equipment, net...................... 834,147 516,250
Other assets..................................... 2,258,582 129,205
------------ ------------
$399,170,522 $552,631,371
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG............................. $327,421,991 $550,290,862
Due to affiliate................................. 54,802,892 --
Other liabilities................................ 4,268,287 117,500
Accrued interest expense......................... 2,681,005 1,348,424
------------ ------------
Total liabilities................................ 389,174,175 551,756,786
------------ ------------
Shareholders' equity:
Preferred stock.................................. 9,142,650 1,014,750
Common stock..................................... 92,350 10,250
Retained earnings (accumulated deficit).......... 761,347 (150,415)
------------ ------------
Total shareholders' equity....................... 9,996,347 874,585
------------ ------------
Commitments and contingencies
$399,170,522 $552,631,371
============ ============
66
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Interest income....................... $32,799,171 $ 1,249,000 $ --
Gain on sale of loans................. 7,746,545 4,135,373 2,291,143
Loan servicing income................. 1,250,001 5,158,812 4,042,798
Gain on sale of servicing rights...... -- 369,703 4,188,282
----------- ----------- -----------
41,795,717 10,912,888 10,522,223
----------- ----------- -----------
Expenses:
Interest on borrowings from IWLG...... 31,750,751 1,348,424 --
Interest on borrowings from ICII...... -- 436,668 538,100
General and administrative and other.. 7,154,231 3,662,080 6,332,479
Provision for repurchases............. 686,661 -- 655,294
Amortization of mortgage servicing
rights............................... 613,491 2,892,341 2,070,387
----------- ----------- -----------
40,205,134 8,339,513 9,596,260
----------- ----------- -----------
Income before income taxes.............. 1,590,583 2,573,375 925,963
Income taxes............................ (678,821) (1,069,056) (388,904)
----------- ----------- -----------
Net income............................ $ 911,762 $ 1,504,319 $ 537,059
=========== =========== ===========
67
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------------- ------------- -----------
Cash flows from operating
activities:
Net income...................... $ 911,762 $ 1,504,319 $ 537,059
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Provision for repurchases and
loan losses .................. 686,661 -- 655,294
Depreciation and amortization.. 739,953 2,911,752 2,219,262
Gain on sale of servicing
rights........................ -- (369,703) (4,188,282)
Purchase of mortgage loans held
for sale....................... (1,542,273,392) (547,206,202) --
Sales and principal reductions
in mortgage loans held for
sale........................... 1,752,444,282 2,931,240 --
Mortgage servicing rights....... (9,398,000) (3,865,605) (8,781,244)
Net change in borrowings from
IWLG........................... (222,868,871) 550,290,862 --
Net change in accrued interest
receivable..................... 1,140,290 (2,984,867) --
Net change in other assets and
liabilities.................... (58,630) (2,553,448) --
Net change in due to and due
from affiliates................ 57,344,635 -- --
Net change in deferred revenue.. 1,393,379 -- --
Net change in accrued interest
expense........................ 1,332,581 1,348,424 --
--------------- ------------- -----------
Net cash provided by (used in)
operating activities........... 41,394,650 2,006,772 (9,557,911)
--------------- ------------- -----------
Cash flows from investing
activities:
Purchase of residual interests
in securitizations............. (46,949,383) -- --
Purchases of premises and
equipment...................... (444,359) -- (433,199)
Proceeds from sale of servicing
rights......................... -- 1,250,092 8,996,662
Advances on loans held for
investment..................... -- -- (408,054)
--------------- ------------- -----------
Net cash provided by (used in)
investing activities.......... (47,393,742) 1,250,092 8,155,409
--------------- ------------- -----------
Cash flows from financing
activities:
Net change in borrowings from
ICII........................... -- (1,572,520) 1,041,332
Capital contributions........... 8,210,000 500,000 361,170
--------------- ------------- -----------
Net cash provided by (used in)
financing activities.......... 8,210,000 (1,072,520) 1,402,502
--------------- ------------- -----------
Net change in cash................ 2,210,908 2,184,344 --
Cash at beginning of year......... 2,184,344 -- --
--------------- ------------- -----------
Cash at end of year............... $ 4,395,252 $ 2,184,344 $ --
=============== ============= ===========
Supplementary information:
Interest paid................... $ 30,418,170 $ 1,785,092 $ 538,100
Taxes paid...................... 678,821 1,069,056 388,904
=============== ============= ===========
Non-cash transactions:
Contribution Transaction on
November 20, 1995 net assets
reverted to ICII:
Premises and equipment......... $ -- $ 498,486 $ --
Mortgage servicing rights...... -- 11,680,939 --
Borrowings from ICII........... -- 4,125,642 --
Contributed capital............ -- 361,170 --
Retained earnings.............. -- 7,692,613 --
68
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ICI Funding Corporation:
We have audited the accompanying balance sheets of ICI Funding Corporation as
of December 31, 1996 and 1995, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of ICI Funding Corporation as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996
in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights" for the year ended December 31, 1995.
KPMG Peat Marwick LLP
Orange County, California
March 3, 1997, except as
to Note 10 to the
financial statements
which is as of March 31,
1997
69
ICI FUNDING CORPORATION
BALANCE SHEETS
DECEMBER 31,
-------------------------
1996 1995
------------ ------------
ASSETS
Cash................................................ $ 4,395,252 $ 2,184,344
Residual interests in securitizations............... 46,949,383 --
Mortgage loans held for sale........................ 334,104,072 544,274,962
Accrued interest receivable......................... 1,844,577 2,984,867
Due from affiliates................................. -- 2,541,743
Mortgage servicing rights........................... 8,784,509 --
Premises and equipment, net......................... 834,147 516,250
Other assets........................................ 2,258,582 129,205
------------ ------------
$399,170,522 $552,631,371
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG................................ $327,421,991 $550,290,862
Due to affiliates................................... 54,802,892 --
Accrued interest expense............................ 2,681,005 1,348,424
Other liabilities................................... 2,874,908 117,500
Deferred revenue.................................... 1,393,379 --
------------ ------------
Total liabilities................................. 389,174,175 551,756,786
------------ ------------
Shareholders' equity:
Preferred stock, no par value; 10,000 shares
authorized; 10,000 shares issued and outstanding
at December 31, 1996 and 1995 ................... 9,142,650 1,014,750
Common stock, no par value; 10,000 shares
authorized; 10,000 shares issued and outstanding
at December 31, 1996 and 1995 ................... 92,350 10,250
Retained earnings (accumulated deficit)........... 761,347 (150,415)
------------ ------------
Total shareholders' equity...................... 9,996,347 874,585
------------ ------------
Commitments and contingencies
Subsequent events
$399,170,522 $552,631,371
============ ============
See accompanying notes to financial statements.
70
ICI FUNDING CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Interest income....................... $32,799,171 $ 1,249,000 $ --
Gain on sale of loans................. 7,746,545 4,135,373 2,291,143
Loan servicing income................. 1,250,001 5,158,812 4,042,798
Gain on sale of servicing rights...... -- 369,703 4,188,282
----------- ----------- -----------
41,795,717 10,912,888 10,522,223
----------- ----------- -----------
Expenses:
Interest on borrowings from IWLG...... 31,750,751 1,348,424 --
Interest on borrowings from ICII...... -- 436,668 538,100
Personnel expense..................... 5,093,249 1,592,282 2,958,534
General and administrative and other.. 1,016,990 1,539,942 2,611,567
Provision for repurchases............. 686,661 -- 655,294
Amortization of mortgage servicing
rights............................... 613,491 2,892,341 2,070,387
Professional services................. 456,494 203,593 118,979
Data processing expense............... 237,592 89,223 154,621
Occupancy expense..................... 195,148 149,825 296,215
Telephone and other communications.... 154,758 87,215 192,563
----------- ----------- -----------
40,205,134 8,339,513 9,596,260
----------- ----------- -----------
Income before income taxes.............. 1,590,583 2,573,375 925,963
Income taxes............................ 678,821 1,069,056 388,904
----------- ----------- -----------
Net income.......................... $ 911,762 $ 1,504,319 $ 537,059
=========== =========== ===========
See accompanying notes to financial statements.
71
ICI FUNDING CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RETAINED
EARNINGS TOTAL
NUMBER OF PREFERRED NUMBER OF COMMON CONTRIBUTED (ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL DEFICIT) EQUITY
--------- ---------- --------- ------- ----------- ------------ -------------
Balance, December 31,
1993................... -- $ -- -- $ -- $ -- $ 5,500,820 $ 5,500,820
Capital contributions,
1994................... -- -- -- -- 361,170 -- 361,170
Net income, 1994........ -- -- -- -- -- 537,059 537,059
------ ---------- ------ ------- --------- ----------- -----------
Balance, December 31,
1994................... 361,170 6,037,879 6,399,049
Contribution
Transaction............ 10,000 519,750 10,000 5,250 (361,170) (7,692,613) (7,528,783)
Capital contribution,
December 28, 1995...... -- 495,000 -- 5,000 -- -- 500,000
Net income, 1995........ -- -- -- -- -- 1,504,319 1,504,319
------ ---------- ------ ------- --------- ----------- -----------
Balance, December 31,
1995................... 10,000 1,014,750 10,000 10,250 -- (150,415) 874,585
Capital Contributions,
1996................... -- 8,127,900 -- 82,100 -- -- 8,210,000
Net income, 1996........ -- -- -- -- -- 911,762 911,762
------ ---------- ------ ------- --------- ----------- -----------
Balance, December 31,
1996 .................. 10,000 $9,142,650 10,000 $92,350 $ -- $ 761,347 $ 9,996,347
====== ========== ====== ======= ========= =========== ===========
See accompanying notes to financial statements.
72
ICI FUNDING CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------------- ------------- -----------
Cash flows from operating
activities:
Net income...................... $ 911,762 $ 1,504,319 $ 537,059
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Provision for repurchases and
loan losses .................. 686,661 -- 655,294
Depreciation and amortization.. 739,953 2,911,752 2,219,262
Gain on sale of servicing
rights........................ -- (369,703) (4,188,282)
Purchase of mortgage loans held
for sale....................... (1,542,273,392) (547,206,202) --
Sales and principal reductions
in mortgage loans held for
sale........................... 1,752,444,282 2,931,240 --
Mortgage servicing rights....... (9,398,000) (3,865,605) (8,781,244)
Net change in borrowings from
IWLG........................... (222,868,871) 550,290,862 --
Net change in accrued interest
receivable..................... 1,140,290 (2,984,867) --
Net change in other assets and
liabilities.................... (58,630) (2,553,448) --
Net change in due to and due
from affiliates................ 57,344,635 -- --
Net change in deferred revenue.. 1,393,379 -- --
Net change in accrued interest
expense........................ 1,332,581 1,348,424 --
--------------- ------------- -----------
Net cash provided by (used in)
operating activities........... 41,394,650 2,006,772 (9,557,911)
--------------- ------------- -----------
Cash flows from investing
activities:
Purchase of residual interests
in securitizations............. (46,949,383) -- --
Purchases of premises and
equipment...................... (444,359) -- (433,199)
Proceeds from sale of servicing
rights......................... -- 1,250,092 8,996,662
Advances on loans held for
investment..................... -- -- (408,054)
--------------- ------------- -----------
Net cash provided by (used in)
investing activities.......... (47,393,742) 1,250,092 8,155,409
--------------- ------------- -----------
Cash flows from financing
activities:
Net change in borrowings from
ICII........................... -- (1,572,520) 1,041,332
Capital contributions........... 8,210,000 500,000 361,170
--------------- ------------- -----------
Net cash provided by (used in)
financing activities.......... 8,210,000 (1,072,520) 1,402,502
--------------- ------------- -----------
Net change in cash................ 2,210,908 2,184,344 --
Cash at beginning of year......... 2,184,344 -- --
--------------- ------------- -----------
Cash at end of year............... $ 4,395,252 $ 2,184,344 $ --
=============== ============= ===========
Supplementary information:
Interest paid................... $ 30,418,170 $ 1,785,092 $ 538,100
Taxes paid...................... 678,821 1,069,056 388,904
=============== ============= ===========
Non-cash transactions:
Contribution Transaction on
November 20, 1995 net assets
reverted to ICII:
Premises and equipment......... $ -- $ 498,486 $ --
Mortgage servicing rights...... -- 11,680,939 --
Borrowings from ICII........... -- 4,125,642 --
Contributed capital............ -- 361,170 --
Retained earnings.............. -- 7,692,613 --
See accompanying notes to financial statements.
73
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ICI Funding Corporation (ICIFC or the Company) is a wholly-owned subsidiary
of Imperial Credit Industries, Inc. (ICII). Historically, ICIFC was a division
or subsidiary of ICII that began operations in 1990. ICIFC is a mortgage loan
conduit organization which purchases mortgage loans from a network of third
party correspondent loan originators and subsequently securitizes or sells
such loans to permanent investors.
The mortgage banking business is highly competitive. The Company competes
with a number of national, local and regional mortgage banking companies with
operations similar to those of the Company. In addition, competitors or
potential competitors include other types of financial services companies,
such as commercial banks, savings and loan associations and finance companies
who possess substantially greater financial, marketing, technical, personnel
and other resources than the Company.
The financial statements have been prepared in conformity with generally
accepted accounting principles and prevailing practices within the mortgage
banking industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of Imperial Credit Mortgage
Holdings' (IMH) initial public offering (Offering), ICII contributed to ICI
Funding Corporation (ICIFC) certain operating assets and certain customer
lists of ICII's mortgage conduit operations, including all of ICII's mortgage
conduit operations' commitments to purchase mortgage loans subject to rate
locks from correspondents, in exchange for shares representing 100% of the
common stock and 100% of the non-voting preferred stock of ICIFC.
Simultaneously, on the effective date of the Offering, in exchange for 500,000
shares of IMH Common Stock, ICII (1) contributed to IMH all of the outstanding
non-voting preferred stock of ICIFC, which represents 99% of the economic
interest in ICIFC, (2) caused Southern Pacific Thrift and Loan Association
(SPTL), a wholly owned subsidiary of ICII, to contribute to IMH certain
operating assets and certain customer lists of SPTL's warehouse lending
division, and (3) executed an agreement not to compete and a right of first
refusal agreement, each having a term of two years from the effective date of
the Offering. This contribution is known as the Contribution Transaction. All
of the outstanding shares of common stock of ICIFC were retained by ICII.
Lastly, IMH contributed all of the aforementioned operating assets of SPTL's
warehouse lending operations contributed to it by SPTL to Imperial Warehouse
Lending Group (IWLG) in exchange for shares representing 100% of the common
stock of IWLG. On the effective date of the Offering, the net tangible book
value of the assets contributed pursuant to the Contribution Transaction was
$525,000. The assets contributed were recorded by IMH at the net book value of
SPTL and ICII which were also estimated to be their fair value. ICII and SPTL
retained all other assets and liabilities related to the contributed
operations which consist of $11.7 million mortgage servicing rights (MSRs),
$22.4 million finance receivables and $26.6 million in advances made by ICII
and SPTL to fund mortgage conduit loan acquisitions and to fund finance
receivables, respectively.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The operations of ICIFC as a division or subsidiary of ICII prior to the
Contribution Transaction are presented in the financial statements as a stand-
alone company. Certain adjustments, as described below, were made to
historical operations in order to provide fair presentation of the financial
operations of ICIFC.
74
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
GAIN ON SALE OF LOANS
ICIFC recognizes gain or loss on the sale of loans when the sales
transaction settles and the risks and rewards of ownership are determined to
have passed to the purchasing party.
Gain or loss on the sale of loans or securities to IMH are deferred and
amortized or accreted for gain or loss on sale over the estimated life of the
loans or securities using the interest method.
ICII entered into an agreement with SPTL, its wholly owned subsidiary, under
which ICII provides loan solicitation and origination services, including
credit review, asset appraisal and documentation, pursuant to specific
underwriting criteria established by SPTL and consistent with the Federal
National Mortgage Association, Federal Home Loan Mortgage Company or other
investor guidelines. Final loan approval is given by SPTL prior to issuance of
any commitments. ICII also, under the agreement, may purchase mortgage loans
at book value from SPTL and sell them to ICII investors.
Prior to the Contribution Transaction, as a division of ICII, ICIFC
historically, under this agreement, provided these solicitation and
origination services relating to its correspondent customers, and purchased
mortgage loans at book value from SPTL concurrent with sales to investors by
ICIFC. ICIFC received as compensation all origination fees and points
received, and recognized all gains or losses in connection with the sale of
loans.
Prior to the Contribution Transaction, gain (loss) on sale of loans included
amounts allocated to ICIFC from ICII's forward contracts and other loan
hedging activities. Gains and losses from these activities were allocated to
ICIFC based on the ratio of ICIFC's principal amount of loan sales to ICII's
total principal amount of loans sold. For the period January 1, 1995 through
November 19, 1995 and for the year ended December 31, 1994, the total gains or
(losses) allocated were $2.6 million and $3.8 million, respectively. ICII did
not allocate outstanding commitments to ICIFC at the end of any reporting
period. After the date of the Contribution Transaction, ICII discontinued
these allocations for ICIFC, and ICIFC hedges its own loans.
BORROWINGS FROM ICII
Historical operations of ICIFC, prior to the Contribution Transaction, have
been adjusted to reflect the funding of net assets by ICII. Because these
borrowings would have been secured primarily by ICIFC's mortgage servicing
rights, its most significant assets, no more than 50% of the mortgage
servicing rights was reflected in the borrowings from ICII (based on
management's assumption that a lender would not lend more than 50% of an asset
of this type). Additionally, the historical operations of ICIFC have been
adjusted to reflect the estimated interest charges on these borrowings, in the
accompanying statements of operations.
The interest charges allocated are based upon estimated average borrowing
balances and ICII's estimated cost of funds, computed based on a weighted
average of borrowings. Borrowing rates used were ICII's actual average cost of
funds. The average borrowings and interest rates used to determine the
interest on borrowings are as follows:
JANUARY 1,
1995 THROUGH FOR THE YEAR ENDED
NOVEMBER 20, DECEMBER 31,
1995 1994
------------ ------------------
Estimated average borrowings.................... $4,785,268 $5,234,439
Interest rate................................... 10.28% 10.28%
Interest allocation............................. $ 436,668 $ 538,100
75
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EQUITY
Prior to the effective date of the Offering, ICIFC had no contributed
capital or retained earnings recorded in its accounts. To properly reflect the
historical financial operations of ICIFC, retained earnings were recorded as a
result of net income or loss from operations on an adjusted historical basis.
INCOME TAXES
ICIFC did not record income taxes in its historical operations. The
accompanying financial statements have been adjusted to reflect income taxes
for ICIFC as if it had been a separate company. As a subsidiary of ICII, ICIFC
would file a consolidated Federal income tax return and a combined California
franchise tax return with ICII. ICII's tax allocation policy for financial
statement purposes is to allocate income tax provision or benefit based on
income (loss) before income taxes (benefit) of each entity within its
consolidated group, adjusted for nontaxable or nondeductible items of income
and expense.
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.
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.
RESIDUAL INTERESTS IN SECURITIZATIONS
The accompanying 1996 balance sheet includes eight residual interests in
securitizations (residuals) of real estate mortgage investment conduits
(REMICs) and one non-rated mortgage-backed security which were recorded as a
result of 1994 and 1995 securitizations by ICII of subprime mortgage and
commercial loans through various special purpose trust vehicles. ICIFC
purchased the residuals on December 31, 1996 from ICII for $46.9 million, all
of which was financed by an intercompany payable. ICIFC and ICII have
estimated future cash flows from these residuals and priced them utilizing
assumptions that they believe are commensurate with the risk inherent in these
investments and consistent with those that would be utilized by an
unaffiliated third-party purchaser and the Company has recorded these
residuals as available-for-sale securities at fair value in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Debt and Equity Securities." Unrealized gains and losses net of related income
taxes, will be included as a separate component of shareholders' equity. To
the Company's knowledge, there is currently no active market for the purchase
or sale of these residuals.
The fair value of the residuals is determined by computing the present value
of the excess of the weighted average coupon on the loans sold (ranging from
7.4% to 11.3%) over the sum of: (1) the coupon on the senior interests
(ranging from 5.8% to 7.3%), (2) a base servicing fee paid to servicer of the
loans (ranging from 0.40% to 0.96%) and other fees, (3) expected estimated
losses (ranging from .25% to 50% per annum) to be incurred on the portfolio of
loans sold over the estimated lives of the loans, and (4) estimated future
prepayment
76
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
assumption (ranging from 10% to 32%). Prepayment assumptions used in
estimating the cash flows are based on recent evaluations of the actual
prepayments of the related portfolios and on market prepayment rates on new
portfolios of similar loans, taking into consideration the current interest
rate environment and its expected impact on estimated future prepayment rates.
The estimated cash flows expected to be received by the Company are discounted
at an interest rate that the Company believes an unaffiliated third-party
purchaser would require as a rate of return on such a financial instrument.
The rates used to discount the cash flows range from 12% to 24%. To the extent
that actual future excess cash flows are different from estimated excess cash
flows, the fair value of the Company's residuals could decline.
Under the terms of the securitizations the residuals are required to build
overcollateralization to specified levels using the excess cash flows
described above until set percentages of the securitized portfolio are
attained. Future cash flows to the residual holder are all held by the REMIC
trust until a specific percentage of either the original or current
certificate balance is attained which percentage can be raised if certain
charge-offs and delinquency ratios are exceeded. The certificate holders'
recourse for credit losses is limited to the amount of overcollateralization
held by the residual interest in the REMIC trust. Upon maturity of the
certificates or upon exercise of an option (clean up call) to repurchase all
the remaining loans once the balance of the loans in the trust are reduced to
a specified balance of the original loans in the trust, any remaining amounts
in the trust are distributed. The current amount of any overcollateralization
balances held by the trust are recorded as part of its residuals.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets
(three to seven years).
FORWARD CONTRACTS AND COMMITMENTS
In order to hedge against a change in market value of the loans it acquires,
ICIFC sells mortgage-backed securities through forward delivery contracts.
Income or loss on these contracts is recorded at the time of sale of the
related contracts or loans as a component of the gain or loss on sale of the
loans.
If any party to the contracts noted above failed completely to perform,
ICIFC would be exposed to additional interest rate risk. The Company's
principal hedging activity consists of optional and mandatory commitments to
deliver closed mortgage loans to institutional investors, which do not require
any collateral deposits.
OPTIONS
Written options are stated at market value.
SERVICING INCOME
Servicing income is reported as earned, principally on a cash basis when the
majority of the service process is completed.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (MSRs) represent the allocated cost of acquiring
the rights to service mortgage loans. ICIFC amortizes MSRs in proportion to,
and over the period of, expected future net servicing income.
77
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No.
122, "Accounting for Mortgage Servicing Rights," an amendment to SFAS No. 65.
ICIFC elected to adopt this standard retroactive to January 1, 1995 which had
no impact on 1995 operations.
SFAS No. 122 requires that a portion of the mortgage loan's cost be
allocated to the mortgage loan servicing right based on its fair value
relative to the loan as a whole. To determine the fair value of the servicing
rights created, ICIFC uses a valuation model that calculates the present value
of future net servicing revenues to determine the fair value of the servicing
rights. In using this valuation method, ICIFC incorporates assumptions that
market participants would use in estimating future net servicing income which
includes estimates of the cost of servicing, a discount rate, an inflation
rate, ancillary income per loan, a prepayment rate, and a default rate.
ICIFC determines servicing value impairment by disaggregating ICIFC's
servicing portfolio into its predominant risk characteristics. ICIFC
determines those risk characteristics to be loan program type and interest
rate. Interest rates are stratified using 100 basis point increments. These
segments of the portfolio are then evaluated, using market prices under
comparable servicing sale contracts, when available, or alternatively using a
valuation model that calculates the present value of future net servicing
revenues using current market assumptions at the end of the quarter. The
calculated value is then compared to the capitalized recorded value of each
loan type and interest rate segment to determine if a valuation allowance is
required.
ICIFC continuously evaluates its MSRs to determine if fair value is below
the carrying values of its MSRs. If the undiscounted projected net future
servicing income is less than the carrying amount of any individual mortgage
servicing portfolio, the portfolio may have to be reduced through a provision
recorded to increase the MSR valuation allowance in the period the fair value
declined below the MSR's carrying value. In preparing its evaluation, ICIFC
uses constant prepayment rates (CPR's) relating to interest rates on each
portfolio, loan types, and maturity dates to determine the appropriate amount
of amortization of the MSRs.
SALES OF SERVICING RIGHTS
ICIFC recognizes gain or loss on the sale of servicing rights when the sales
contract has been executed and the risks and rewards of ownership are
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.
ADVERTISING
The Company accounts for its advertising costs as non-direct response
advertising. Accordingly, advertising costs are expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
supersedes SFAS 122. SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of a
financial components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. SFAS 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 requires that liabilities and
derivatives
78
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
incurred or obtained by transferors as part of a transfer of financial assets
be initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interest, if any, based on their relative fair values at
the date of the transfers. SFAS 125 includes specific provisions to deal with
servicing assets or liabilities. SFAS No. 125 will be effective for
transactions occurring after December 31, 1996 except for certain transactions
which according to Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB 125," will be
effective if occurring after December 31, 1997. Management does not anticipate
that the adoption of SFAS 125 will have a material impact on the Company's
financial position or results of operations.
RECLASSIFICATIONS
Certain items in prior periods have been reclassified to conform to the
current presentation.
2. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consisted of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Mortgage loans held for sale...................... $323,815,739 $536,356,411
Premium on loans.................................. 10,288,333 7,918,551
------------ ------------
$334,104,072 $544,274,962
============ ============
Included in other liabilities at December 31, 1996 is an allowance for
repurchases of $686,661.
Substantially all of the mortgage loans purchased by ICIFC are fixed-rate or
adjustable-rate non-conforming mortgage loans secured by first liens on
single-family residential properties. Because of the concentration of the
Company's mortgage loans located in California, which was approximately 47%
and 63% at December 31, 1996 and 1995, respectively, a significant decline in
regional economic conditions, or some other regional catastrophe, could result
in fewer mortgage loans available for lending by the Company and ultimately a
decline in interest income and fee income. Moreover, such an event or events
could affect the ability of borrowers to payoff their loan with the Company.
3. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Premises and equipment............................. $969,838 $733,431
Less accumulated depreciation...................... 135,691 217,181
-------- --------
$834,147 $516,250
======== ========
79
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE SERVICING RIGHTS
Changes in mortgage servicing rights were as follows:
DECEMBER 31,
------------------------
1996 1995
---------- ------------
Beginning Balance.................................. $ -- $ 11,453,240
Additions.......................................... 9,398,000 4,000,429
Sales of servicing rights.......................... -- (880,389)
Amortization....................................... (613,491) (2,892,341)
Transfer to ICII................................... -- (11,680,939)
---------- ------------
Ending balance..................................... $8,784,509 $ --
========== ============
At December 31, 1996, approximately $2.3 million of the mortgage servicing
rights relates to $576.4 million of mortgage loans sold, servicing retained by
ICIFC, to IMH during the year ended December 31, 1996.
5. RELATED PARTY TRANSACTIONS
RELATED PARTY COST ALLOCATIONS
ICIFC was allocated various costs from ICII. The costs of these services
were not directly attributable to ICIFC and primarily include general
corporate overhead such as human resources, data processing, telephone and
other communications and general and administrative expense (including loan
administration costs, accounting, legal and insurance). These expenses were
allocated by ICII to all divisions based typically either on a per employee
basis, based on origination volume or an even allocation of total expense.
Management believes these methods of allocation are reasonable. Total
allocations of expense for the period January 1, 1995 through November 19,
1995, and for the year ended December 31, 1994 were $222,361 and $460,638,
respectively.
On the effective date of the Initial Public Offering, ICIFC entered into a
services agreement with ICII under which ICII provides various services to
ICIFC, including data processing, human resource administration, general
ledger accounts, check processing, remittance processing and payment of
accounts payable. ICII charges fees for each of the services based upon usage.
As part of the services, ICII provides ICIFC with insurance coverage and self
insurance programs, including health insurance. The charge to ICIFC for
coverage is based upon a pro rata portion of the costs to ICII for its various
policies which amounted to $385,801 and $24,669 for the year ended December
31, 1996 and the period November 20, 1995 through December 31, 1995,
respectively.
SUB-SERVICING
Prior to July 1996, ICII provided sub-servicing to ICIFC for a sub-servicing
fee of approximately $7.50 per loan per month, which management believes to be
a market rate. The sub-servicing fee offsets "Loan Servicing Income" in the
accompanying statements of operations of ICIFC and amounted to $335,188,
$1,100,259, and $1,054,940 for the years ended December 31, 1996, 1995, and
1994, respectively.
CASH
Prior to the Contribution Transaction ICIFC had no cash accounts. All
operations were funded directly by ICII. Adjustments were made to ICIFC's
financial statements to reflect these fundings as Borrowings from ICII. ICIFC
did not reflect any accounts receivable or payable on its balance sheets prior
to the Contribution Transaction because all transactions of ICIFC either
increased or decreased its borrowings from ICII.
80
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
BORROWINGS
ICIFC has a $600 million warehouse borrowing agreement with IWLG of which
$327.4 million and $550.3 million was outstanding at December 31, 1996 and
1995, respectively. Interest expense recorded related to this borrowing was
$32.8 million and $1.3 million for the years ended December 31, 1996 and 1995,
respectively.
ICIFC's residual interests in securitizations is financed by an intercompany
payable with ICII and is included in the balance sheet as due to affiliate.
The $46.9 million of borrowings has a current interest rate of 12.0% with
interest payable monthly and no stated maturity.
PURCHASE OF RESIDUAL INTERESTS IN SECURITIZATIONS
On December 31, 1996, ICIFC purchased from ICII eight residual interests in
securitizations of primarily REMIC's for $46.9 million. ICIFC and ICII have
estimated future cash flows from these residuals and priced them utilizing
assumptions that they believe are consistent with those that would be utilized
by an unaffiliated third-party purchaser.
RELATED PARTY LOAN
On September 13, 1996, ICIFC issued a $1.25 million secured residential
first mortgage loan to the Chairman of IMH. Terms of the loan include monthly
interest only payments at 8% per annum with the balance due in full on October
1, 1997.
MORTGAGE LOAN PURCHASES
During the year ended December 31, 1996, ICIFC purchased from ICII mortgage
loans of 30-year fully amortizing six-month adjustable LIBOR and 30-and 15-
year fixed rate first and second trust deed mortgages having a principal
balance of $224.7 million with net premiums paid of $3.8 million. Servicing
rights on all mortgage loans were released to ICIFC.
During the year ended December 31, 1996, ICIFC purchased from Walsh
Securities, Inc. mortgage loans of 30-year fully amortizing six-month
adjustable LIBOR and 15-year fixed rate second trust deed mortgages having a
principal balance of $22.0 million with net premiums paid of $1.1 million.
Servicing rights on all mortgages were released to ICIFC. James Walsh, a
director of the Company, is an Executive Vice President of Walsh Securities,
Inc.
SALE OF MORTGAGE-BACKED SECURITIES
During the year ended December 31, 1996, in connection with ICIFC's REMIC
securitizations, ICIFC sold $32.5 million of subordinated mortgage-backed
securities to IMH for $26.8 million, resulting in discounts of $5.7 million.
MORTGAGE LOAN SALES
During the year ended December 31, 1996, ICIFC sold to IMH bulk mortgage
loans packages of 30-year fully amortized six-month adjustable LIBOR and 15-
year fixed rate second trust deed mortgages having a principal balance of
$576.4 million with net premiums paid of $15.2 million. In conjunction with
these sales, ICIFC recorded originated mortgage servicing rights of $2.5
million and a related deferred gain of $1.8 million, which will be amortized
over the estimated life of the loans.
81
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCCUPANCY
Subsequent to the Contribution Transaction, the Company is allocated rent
expense from IMH based on number of employees. Such allocation was $179,049
and $12,210 for the year ended December 31, 1996 and the period November 21,
1995 through December 31, 1995, respectively.
NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT
Pursuant to the Non-Compete Agreement, ICII and any entity of which ICII
owns more than 25% of the voting securities (a 25% entity) may not compete
with IWLG's Warehouse Lending Operations and may not establish a network of
third party correspondent loan originators or another end-investor in non-
conforming mortgage loans. The agreement expires in November 1997.
Pursuant to the Right of First Refusal Agreement, ICII granted ICIFC a right
of first refusal to purchase all non-conforming mortgage loans that ICII or
any 25% entity originates or acquires and subsequently offers for sale and
ICIFC granted ICII, or any 25% entity designated by ICII, a right of first
refusal to purchase all non-conforming mortgage loans that ICIFC acquires and
subsequently offers for sale.
Additional related party transactions are described elsewhere in the
financial statement footnotes.
6. INCOME TAXES
ICIFC's income taxes were as follows:
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1996 1995 1994
-------- ---------- ---------
Current:
Federal..................................... $ 81,817 $ 862,926 $(316,465)
State....................................... 35,183 169,241 (109,137)
-------- ---------- ---------
Total current................................. 117,000 1,032,167 (425,602)
-------- ---------- ---------
Deferred:
Federal..................................... 393,088 11,614 605,643
State....................................... 168,733 25,275 208,863
-------- ---------- ---------
561,821 36,889 814,506
-------- ---------- ---------
Total income taxes............................ $678,821 $1,069,056 $ 388,904
======== ========== =========
The Company's effective tax expense differs from the amount determined by
applying the statutory Federal rate of 34% for the years ended December 31,
1996 1995 and 1994 is as follows:
1996 1995 1994
-------- ---------- --------
Income tax at Federal tax rate................. $540,798 $ 874,948 $314,827
California franchise tax, net of
Federal income tax benefit................... 111,599 194,108 74,077
Other.......................................... 26,424 -- --
-------- ---------- --------
$678,821 $1,069,056 $388,904
======== ========== ========
82
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effected cumulative temporary differences that give rise to deferred
tax assets and liabilities as of December 31, 1996 and 1995, are as follows:
1996 1995
---------- -------
Deferred Tax Assets:
Deferred revenue....................................... $1,383,468 $ --
Loan market to market.................................. 1,536,449 --
Provision for repurchases.............................. 311,057 --
Net operating loss..................................... 127,843 --
Other.................................................. 47,778 --
---------- -------
3,406,595 --
Deferred Tax Liabilities--
Mortgage Servicing rights.............................. 3,979,383 --
Other.................................................. -- 10,967
---------- -------
Net deferred tax liability........................... $ 572,788 $10,967
========== =======
The Company believes that the deferred tax asset will more likely than not
be realized due to the reversal of the deferred tax liability and expected
future taxable income.
In determining the possible future realization of deferred tax assets,
future taxable income from the following sources are taken into account: (a)
the reversal of taxable temporary differences, (b) future operations exclusive
of reversing temporary differences and (c) tax planning strategies that, if
necessary, would be implemented to accelerate taxable income into years in
which net operating losses might otherwise expire.
7. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value
of Financial Instruments," and SFAS No. 119, "Disclosures About Derivative
Financial Instruments and Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by ICIFC 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 herein are not
necessarily indicative of the amounts ICIFC 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, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
Assets:
Cash.............................. $ 4,395 $ 4,395 $ 2,184 $ 2,184
Residual interests in
securitizations.................. 46,949 46,949 -- --
Mortgage loans held for sale...... 334,104 335,428 544,273 544,273
Liabilities:
Borrowings from IWLG.............. 327,422 327,422 550,291 550,291
Due to affiliates................. 54,803 54,803 -- --
Off balance-sheet loan
commitments...................... -- 866 -- 206
83
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value estimates as of December 31, 1996 and 1995 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 herein.
The following describes the methods and assumptions used by ICIFC in
estimating fair values.
CASH
The carrying amount for cash approximates fair value because these
instruments are demand deposits and do not present unanticipated interest rate
or credit concerns.
MORTGAGE LOANS HELD FOR SALE
The 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.
RESIDUAL INTERESTS IN SECURITIZATIONS
The carrying amounts for residual interests in securitizations approximates
fair value. The fair value was estimated by discounting future cash flows
using rates that the Company believes are commensurate with the risk inherent
in these investments and consistent with those that would be utilized by an
unaffiliated third party for financial instruments with similar terms and
remaining maturities.
BORROWINGS FROM IWLG
Fair values approximate the carrying amounts because of the short-term
maturity of the liabilities.
OFF BALANCE SHEET LOAN COMMITMENTS
The fair value of commitments, including hedging positions, is determined in
the aggregate based on current investor yield requirements.
8. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND 401(k) PLAN
Under ICII's 401(k) plan, employees of the Company may contribute up to 14%
of their salaries. The Company will match 50% of the first 4% of employee
contributions. An additional Company contribution may be made at the
discretion of ICIFC.
ICIFC does not have its own 401(k) or profit sharing plan. As such,
employees of ICIFC participate in ICII's 401(k) plan. The Company recorded
approximately $160,000 for matching and discretionary contributions in 1996.
There were no significant contributions for any other period presented.
9. COMMITMENTS AND CONTINGENCIES
LOAN SERVICING
Properties securing the mortgage loans in ICIFC's servicing portfolio are
primarily located in California. As of December 31, 1996 and 1995, ICIFC was
servicing loans totaling approximately $1.6 billion and
84
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$512.1 million, respectively, of which $1.3 billion and $0, respectively, were
serviced for others. As of December 31, 1996, ICIFC is the master servicer for
$795.1 million of loans collateralizing fixed rate REMIC securities and $464.3
million of loans collateralizing CMO's issued in 1996.
Related fiduciary funds are held in trust for investors in non-interest
bearing accounts. These funds are segregated in special bank accounts and are
held as deposits at SPTL.
SALES OF LOANS AND SERVICING RIGHTS
In the ordinary course of business, ICIFC 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,
ICIFC is required to repurchase mortgage loans if there has been a breach of
representations or warranties. In the opinion of management, the potential
exposure related to these representations and warranties will not have a
material adverse effect.
At December 31, 1996 and 1995, included in other liabilities are $686,661
and $0 in allowances related to possible off-balance sheet recourse and
repurchase agreement provisions.
COMMITMENTS
ICIFC establishes mortgage loan purchase commitments (master commitments)
with sellers that, subject to certain conditions, entitle the seller to sell
and obligate ICIFC 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
ICIFC on a mandatory, best efforts or optional basis, or a combination
thereof. Master commitments generally do not obligate ICIFC 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 ICIFC's quoted prices at the time of
purchase.
As of December 31, 1996 and December 31, 1995, ICIFC had outstanding short
term master commitments with 68 and 18 sellers to purchase mortgage loans in
the aggregate principal amount of $826.5 million and $241.0 million,
respectively, over periods ranging from six months to one year, of which
$304.9 million and $37.3 million, respectively, had been purchased or
committed to be purchased pursuant to rate locks. These rate-locks were made
pursuant to master commitments, bulk rate-locks and other negotiated rate-
locks. There is no exposure to credit loss in this type of commitment until
the loans are funded, and interest rate risk associated with the short-term
commitments is mitigated by the use of forward contracts to sell loans to
investors.
FORWARD CONTRACTS
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At December 31, 1996 and
1995, the Company had $141.0 million and $86.7 million, respectively, in
outstanding commitments to sell mortgage loans through mortgage-backed
securities. These commitments allow the Company to enter into mandatory
commitments when the Company notifies the investor of its intent to exercise a
portion of the forward delivery contracts. The Company was not obligated under
mandatory commitments to deliver loans to such investors at December 31, 1996
and 1995.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
85
ICI FUNDING CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OPTIONS
In order to protect against changes in the value of mortgage loans held for
sale, the Company may sell call or buy put options on U.S. Treasury bonds and
mortgage-backed securities. The Company generally sells call or buys put
options to hedge against adverse movements of interest rates affecting the
value of its mortgage loans held for sale.
The risk in writing a call option is that the Company gives up the
opportunity for profit if the market price of the mortgage loans increases and
the option is exercised. The Company 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 the Company
paid for the put option.
The Company had written option contracts with an outstanding principal
balance of $70.0 million and $16.0 million at December 31, 1996 and December
31, 1995, respectively. The Company received approximately $366,000 and
$100,000 in premiums on these options at December 31, 1996 and 1995,
respectively.
10. SUBSEQUENT EVENTS
On January 30, 1997, ICIFC purchased IMH's equity interest in Franchisee
Loan Receivables Trust 1995-B at carrying value which approximated fair value.
No gain or loss was recorded on the sale.
On January 30, 1997, ICIFC purchased the Franchise Mortgage Acceptance Corp.
1996-B, Class E, Security from IMH at carrying value, which approximated fair
value. No gain or loss was recorded on the sale.
On March 31, 1997, ICII divested itself of its interest in ICIFC by
contributing 100% of ICIFC's common stock to certain offices and directors of
IMH.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IMH was incorporated in the State of Maryland on August 28, 1995. The
following table sets forth certain information with respect to the directors
and executive officers of IMH, ICIFC and IWLG:
NAME AGE POSITION
---- --- --------
H. Wayne Snavely.................... 55 Chairman of the Board of IMH
Joseph R. Tomkinson................. 49 Vice Chairman of the Board and Chief
Executive Officer of IMH and Chairman
of the Board and Chief Executive
Officer of ICIFC and IWLG
William S. Ashmore.................. 47 President and Chief Operating Officer
of IMH, Executive Vice President and
Director of ICIFC
and President and Director of IWLG
Richard J. Johnson.................. 34 Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary of IMH, ICIFC and IWLG and
Director of ICIFC
Mary C. Glass....................... 43 Vice President of IMH and Senior Vice
President, Operations, of ICIFC and
IWLG
James Walsh+........................ 46 Director of IMH
Frank P. Filipps+................... 49 Director of IMH
Stephan R. Peers+................... 44 Director of IMH
- --------
+Unaffiliated Director
H. WAYNE SNAVELY has been Chairman of the Board of IMH since its formation.
He has been Chairman of the Board and Chief Executive Officer of ICII (NASDQ-
ICII) since December 1991. Mr. Snavely is also Chairman of the Board of
Southern Pacific Funding Corporation (NYSE-SFC), and of ICAI, the Manager. He
has been a Director of Imperial Bancorp and Imperial Bank since 1993, and was
a Director of Imperial Bank from 1975 to 1983. From 1983 to February 1991, Mr.
Snavely served as Executive Vice-President of Imperial Bancorp and Imperial
Bank. During the years 1983 through 1986, Mr. Snavely was employed as Chief
Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely is a
Certified Public Accountant.
JOSEPH R. TOMKINSON has been Vice Chairman of the Board and Chief Executive
Officer of IMH and Chairman of the Board and Chief Executive Officer of ICIFC
and IWLG since their formation. Mr. Tomkinson is also Vice Chairman of the
Board of ICAI, the Manager. Mr. Tomkinson served as President of ICII from
January 1992 to February 1996 and, from 1986 to January 1992, he was President
of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the companies
that combined to become ICII in 1992. Mr. Tomkinson has been a Director of
ICII since December 1991. From 1984 to 1986, he was employed as Executive Vice
President of Loan Production for American Mortgage Network, a privately owned
mortgage banker. Mr. Tomkinson brings 22 years of combined experience in real
estate, real estate financing and mortgage banking to the Company.
WILLIAM S. ASHMORE has been President and Chief Operating Officer of IMH and
Executive Vice President and a Director of ICIFC and IWLG since their
formation. From August 1993 to February 1996, he was Executive Vice President
and a Director of Secondary Marketing at ICII, having been its Senior Vice
President of Secondary Marketing since January 1988. From 1985 to 1987, he was
Chief Executive Officer and Vice Chairman of the Board of Century National
Mortgage Corporation, a wholesale mortgage banking company. From 1978 to 1985,
Mr. Ashmore was President and co-owner of Independent Homes Real Estate
Company, which evolved in 1980 into a mortgage banking firm that was sold to
Century National Bank in 1985. Mr. Ashmore has over 20 years of combined
experience in real estate, real estate financing and mortgage banking.
87
RICHARD J. JOHNSON has been Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of IMH, IWLG, and ICIFC since their formation. In
March of 1996, Mr. Johnson was appointed as a Director of ICIFC. From March
1995 to March 1996, Mr. Johnson was Chief Financial Officer of ICAI, the
Manager. From September 1992 to March 1995, Mr. Johnson was Senior Vice
President and Chief Financial Officer of ICII. From November 1989 to September
1992, Mr. Johnson was Vice President and Controller of ICII. From February
1988 to October 1989, he was Vice President and Chief Financial Officer of
Bayhill Service Corporation, a mortgage banking company, and Vice President of
Capital Savings and Loan, the parent of Bayhill Service Corporation. From
January 1987 to February 1988, Mr. Johnson was Vice President of Finance for
Merrill Lynch Huntoon Paige, Inc., a mortgage banking subsidiary of Merrill
Lynch Capital Markets. Mr. Johnson is a Certified Public Accountant.
MARY C. GLASS has been Vice President of IMH and Senior Vice President,
Structured Transactions, of ICIFC since their formation. Her primary
responsibilities include negotiation of structured transactions, bulk
acquisitions and forward commitments, the creation of new loan products and
overall management of operations and production. From April 1995 through
November 1996, Ms. Glass was the Senior Vice President and Managing Director
of Imperial Capital Markets Group, a division of ICII, and from February 1993
to April 1995, she was Senior Vice President of ICIFC, a division of ICII.
From 1991 through 1993, Ms. Glass acted as a mortgage banking consultant. From
1990 through 1991, she was an Executive Vice President at PriMerit Mortgage
Corporation. From 1988 to 1990, Ms. Glass was President of SCS Mortgage. From
September 1984 through September 1988, Ms. Glass was Senior Vice President of
Concor Financial Services.
JAMES WALSH has been a Director of the Company since August 1995. Mr. Walsh
is an Executive Vice President of Walsh Securities, Inc. where he directs
mortgage loan production, sales and securitization. Mr. Walsh was an executive
of Donaldson, Lufkin and Jenrette Securities Corporation from January 1989
through March 1996 where he oversaw residential mortgage securitization,
servicing brokerage and mortgage banking services. From February 1987 to
December 1988, Mr. Walsh was an executive in the mortgage banking department
at Bear Stearns & Company. From December 1985 to February 1987, Mr. Walsh was
a senior banking officer at Carteret Savings Bank.
FRANK P. FILIPPS has been a Director of the Company since August 1995. Mr.
Filipps was elected President of CMAC Investment Corporation and Chairman,
President and Chief Executive Officer of Commonwealth Mortgage Assurance
Company ("CMAC") in January 1995. In May 1995, Mr. Filipps was elected a
Director of CMAC Investment Corporation, and in January 1996, he was elected
Chief Executive Officer of CMAC Investment Corporation. Mr. Filipps joined
CMAC in 1992 as Senior Vice President and Chief Financial Officer, where he
was responsible for the company's financial, investment and data processing
operations, as well as the legal and human resources functions. In 1994, Mr.
Filipps was promoted to Executive Vice President and Chief Operating Officer
for both CMAC Investment Corporation and CMAC, where his additional
responsibilities included the company's sales, marketing, underwriting and
risk management. In 1975, Mr. Filipps joined American International Group and,
from 1989 to 1992, he was Vice President and Treasurer. Prior to that, he was
a Second Vice President for Chase Manhattan Bank, N.A., in New York.
STEPHAN R. PEERS has been a Director of the Company since October 1995.
Since April 1993, Mr. Peers has been an Executive Vice President of
International Strategic Finance Corporation, Ltd., where he performs corporate
finance services for overseas issuers. From April 1989 to April 1993, Mr.
Peers was a Vice President in corporate finance at Montgomery Securities where
he specialized in financial services institutions. From March 1987 to March
1989, Mr. Peers was a Vice President at The First Boston Corporation in
mortgage finance specializing in mortgage related products. Mr. Peers has
served as a Managing Director of Resource Bancshares Corporation since August
1995.
All directors are elected at each annual meeting of the Company's
stockholders until the next annual meeting of stockholders and until their
successors are elected and qualify. Replacements for vacancies occurring among
the Unaffiliated Directors will be elected by a majority vote of the remaining
Directors, including a majority of the Unaffiliated Directors. All officers
are elected and may be removed by the Board of Directors.
88
The Company pays an annual director's fee to each Unaffiliated Director equal
to $20,000 and reimburses such Directors' costs and expenses for attending
Board meetings.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland General Corporation Law, as amended from time to time ("MGCL")
permits a Maryland corporation to include in its charter a provision limiting
the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. The Charter of the Company contains such a
provision which eliminates such liability to the maximum extent permitted by
the MGCL.
The Charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from and against any claim or liability to
which such person may become subject or which such person may incur by reason
of his status as a present or former director or officer of the Company. The
Bylaws of the Company obligate it, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (a) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor
of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (1) was committed in bad faith or (2) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the
Bylaws and (b) a written undertaking by him or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the standard of conduct was not met. The Company has entered into
indemnification agreements with all of its officers and directors which
provide for the indemnification of such officers and directors to the fullest
extent permitted under Maryland law. Insofar as indemnification by the Company
for liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the Company pursuant to the
indemnity agreements referenced herein or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
89
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in the
Registrant's definitive proxy statement, which the Registrant intends to file
no later than 120 days after the end of fiscal year 1996, pursuant to Rule
12b-23.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 20,
1997 by (1) each person known to the Company to beneficially own more than
five percent of the Company's Common Stock, (2) each Director, (3) the
Company's executive officers, and (4) all Directors and executive officers as
a group. Unless otherwise indicated in the footnotes to the table, the
beneficial owners named have, to the knowledge of the Company, sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws where applicable.
NUMBER OF
SHARES PERCENTAGE OF
BENEFICIALLY SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
------------------------ ------------ -------------------
H. Wayne Snavely........................... -- --
Joseph R. Tomkinson........................ 27,613 *
William S. Ashmore......................... 10,087 *
Richard J. Johnson......................... 10,676 *
James Walsh................................ 15,000 *
Frank P. Fillips........................... 15,000 *
Stephan R. Peers........................... 15,000 *
All directors and executive officers as a
group (8 persons)......................... 93,376 *
- --------
* less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
RELATIONSHIPS WITH THE MANAGER
GENERAL
The Manager, ICAI, commenced operations as of January 23, 1995. Prior to
November 20, 1995, ICAI had no prior experience in managing or operating a
REIT. Each of the executive officers of the Manager has significant experience
in purchasing, financing, servicing and investing in mortgage loans and
mortgage securities; however, they have not previously managed a REIT. ICAI is
a wholly-owned subsidiary of ICII.
The Company has selected an outside advisor and in particular an advisor
associated with ICII in order to efficiently and economically coordinate,
assist and manage the duties and responsibilities of the Company. The Company
believes that ICAI is more adequately suited than the Company to provide or
advise it with contract negotiation, market information, implementation of
cost controls, asset/liability modeling and management, servicing systems and
management information systems. In addition, the Company believes that ICAI is
better equipped than the Company to manage human resources and facilities
because ICAI and ICII, with which ICAI has entered into a submanagement
agreement to perform such administrative services for the Company as ICAI
deems necessary, has experienced teams in these areas. The Company believes
that ICAI, as an affiliate of ICII, is particularly appropriate to act as the
Company's advisor because ICAI provides continuity to those businesses
contributed pursuant to the Contribution Transaction and because of ICII's
familiarity with such businesses.
The address of the Manager is 20371 Irvine Avenue, Santa Ana Heights,
California 92707, telephone (714) 474-8500.
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DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Manager are as follows:
NAME POSITION
---- --------
H. Wayne Snavely* Chairman of the Board
Joseph R. Tomkinson* Vice Chairman of the Board
Thomas O. Markel, Jr. President and Director
Stephen Shugerman Executive Vice President
Glenn R. Wilson, Jr. Director
- --------
*Each of these persons also serve as directors or executive officers of the
Company.
For biographical information on Messrs. Snavely and Tomkinson, see "Imperial
Credit Mortgage Holdings, Inc.--Directors and Executive Officers."
THOMAS O. MARKEL, JR. has been President and a Director of ICAI since March
1995. He has been President and Chief Executive Officer of HomeMac Corporation
since August 1993. Prior to August 1993, he had been Executive Vice President,
Chief Operating Officer and a Director of HomeMac since 1990. Mr. Markel is
also Chairman of the Board, Chief Executive Officer and a Director of
Homeowners' Mortgage Acceptance Corporation, the parent of HomeMac
Corporation, which is currently inactive. Since 1990, Mr. Markel has primarily
been involved in activities related to the analysis, financing and acquisition
of mortgage banking entities and related assets. From March 1986 to March
1990, Mr. Markel was a Senior Vice President of Lepercq Capital Partners,
responsible for capital market activities in the Western United States. Mr.
Markel is a member of the Mortgage Bankers Association Educational and Loan
Administration and Legislative Committees.
STEPHEN SHUGERMAN has been Executive Vice President of ICAI since August
1995 and was a Director of ICAI from August 1995 through October 1995. Mr.
Shugerman has been a Director of ICII since December 1991 and has been
President of SPTL since June 1987. From June 1985 to May 1987, Mr. Shugerman
was President of ATI Thrift & Loan Association, a privately owned thrift and
loan association, and, from 1979 to 1985, he was Senior Vice President of
Imperial Thrift and Loan Association, a former subsidiary of Imperial Bank.
Mr. Shugerman has recently served as president of the California Association
of Thrift & Loan Companies.
GLENN R. WILSON, JR. has been a Director of ICAI since October 1995. He has
been Chairman since May 1995, and President and Chief Executive Officer of
Knutson Mortgage Corporation since June 1988. From February 1987 to June 1988,
Mr. Wilson served as President and Chief Executive Officer of FirsTier
Mortgage Company. From May 1985 through February 1987, Mr. Wilson served as
President of the Government National Mortgage Association. Mr. Wilson has
served on the Board of Governors of the Mortgage Bankers Association of
America since March 1993.
MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with the Manager
effective on November 20, 1995, for an initial term expiring on January 31,
1997. The Company renewed the Management Agreement for an additional five year
term (See "--Management Fees"). The Management Agreement may be terminated by
the Company or the Manager without cause at any time upon 60 days' written
notice. Any such termination or failure to extend by the Company without cause
shall result in the payment of a termination or non-renewal fee to the Manager
determined by an independent appraisal. In addition, the Company and the
Manager will have the right to terminate the Management Agreement upon the
occurrence of certain specified events, including a breach by the other party
of any provision contained in the Management Agreement which remains uncured
for 30 days. The Company may renew or terminate the Management Agreement by a
majority vote of its Unaffiliated Directors or by a vote of the holders of a
majority of the outstanding shares of Common Stock. The Manager may terminate
the Management Agreement by a majority vote of its Board of Directors.
91
The terms of the Management Agreement, including the management fees, were
determined by arms-length discussion based upon what management of both ICAI
and IMH believe are comparable with other advisory relationships and have been
approved by the Board of Directors of ICAI and the Unaffiliated Directors of
IMH. IMH's Bylaws provide that the Unaffiliated Directors shall determine at
least annually that the compensation paid to the Manager is reasonable in
relation to the nature and quality of the services performed by the Manager.
The Manager is at all times subject to the supervision of the Company's
Board of Directors and provides advisory services to the Company in accordance
with the terms of the Management Agreement. The Manager is involved in three
primary activities: (1) capital management--primarily the oversight of the
Company's structuring, analysis, capital raising and investor relations
activities; (2) asset management--primarily the analysis and oversight of the
acquisition, management and disposition of Company assets; and (3) operations
management--primarily the oversight of IMH's operating subsidiaries.
Specifically, the Manager performs such services and activities relating to
the assets and operations of the Company as may be appropriate, including:
(a) serve as the Company's consultant with respect to formulation of
investment criteria and interest rate risk management by the Board of
Directors;
(b) advise as to the insurance of commitments on behalf of the Company to
purchase Mortgage Loans or purchasing Mortgage Loans and Agency
Certificates meeting the investment criteria set from time to time by the
Board of Directors:
(c) advise the Company in connection with and assist in its long-term
investment operations.
(d) provide personnel and technical assistance to support securitization
activities of the Company by reviewing documents and assisting in the
determination and negotiation of the terms and features of securities
issued in connection therewith;
(e) furnish reports and statistical and economic research to the Company
regarding the Company's activities and the services performed for the
Company by the Manager;
(f) monitor and provide to the Board of Directors on an on-going basis
price information and other data, obtained from certain nationally-
recognized dealers who maintain markets in Mortgage Loans identified by the
Board of Directors from time to time, and provide data and advice to the
Board of Directors in connection with the selection and identification of
such dealers;
(g) provide the executive and administrative personnel, office space and
services required, including, without limitation, legal services and
contract review from in-house counsel, human resources payroll, and 401K or
benefits administration, in rendering services to the Company;
(h) monitor and provide a full time asset liability manager with the
proper computer hardware and software to perform research and analysis to
provide data about the Company's portfolio of Mortgage Loans and
recommended hedging strategies to the Board of Directors;
(i) provide Management Information Systems voice and data phone line and
equipment support;
(j) advise on the negotiation of agreements on behalf of the Company with
banking institutions and other lenders to provide for the short-term
borrowing of funds by the Company;
(k) communicate on behalf of the Company with the holders of the equity
and debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental bodies or agencies and maintain
effective relations with such holders of the Company's securities,
including hiring and retaining a public relations firm to market and
promote the Company.
(l) assist in the administration of any stock option plan of the Company
by providing personnel, administrative services, data processing and other
systems and controls;
(m) upon request by and in accordance with the direction of the Board of
Directors, invest or reinvest any money of the Company; and
92
(n) as approved and directed by the Board of Directors, perform such
other services as may be required for management and other activities
relating to the assets of the Company as the Manager shall deem appropriate
under the particular circumstances.
The Manager has entered into a submanagement agreement with ICII to perform
such administrative services for the Company as the Manager deems necessary.
The Manager may enter into additional contracts with other parties, including
ICII, to provide any such services for the Manager, which third party shall be
approved by the Company's Board of Directors.
As of December 31, 1996, ICAI had a total of seven officers and directors
who participate in the oversight of the Company's operations.
MANAGEMENT FEES
Prior to January 31, 1997, the Manager was entitled to a per annum base
management fee payable monthly in arrears of an amount equal to (1) 3/8 of 1%
of Gross Mortgage Assets of IMH comprised of other than Agency Certificates,
conforming mortgage loans or mortgage-backed securities secured by or
representing interests in conforming mortgage loans, plus (2) 1/8 of 1% of the
remainder of Gross Mortgage Assets of IMH plus (3) 1/5 of 1% of the average
daily asset balance of the outstanding amounts under IWLG's warehouse lending
facilities. A base management fee of $2.1 million and $37,888 was accrued for
the year ended December 31, 1996 and 1995, respectively.
As incentive compensation, the Manager was entitled to receive for each
fiscal quarter, an amount equal to 25% of the net income of the Company,
before deduction of such incentive compensation, in excess of the amount that
would produce an annualized Return on Equity equal to the daily average Ten
Year U.S. Treasury Rate plus 2%. The term "Return on Equity" is calculated for
any quarter by dividing the Company's Net Income for the quarter by its
Average Net Worth for the quarter. For such calculations, the "Net Income" of
the Company means the income of the Company determined in accordance with GAAP
before the Manager's incentive compensation, the deduction for dividends paid
and any net operating loss deductions arising from losses in prior periods. A
deduction for all of the Company's interest expenses for borrowed money is
also taken in calculating Net Income. "Average Net Worth" for any period means
the arithmetic average of the sum of the gross proceeds from any offering of
its equity securities by the Company, before deducting any underwriting
discounts and commissions and other expenses and costs relating to the
offering, plus the Company's retained earnings (without taking into account
any losses incurred in prior periods) computed by taking the daily average of
such values during such period. The definition "Return on Equity" is only for
purposes of calculating the incentive compensation payable, and is not related
to the actual distributions received by stockholders. The 25% Incentive
Payment to the Manager will be calculated quarterly in arrears before any
income distributions are made to stockholders for the corresponding period.
For the year ended December 31, 1996 and for the year ended December 31, 1995,
the Manager earned $1,274,336 and zero, respectively, for the Manager's
Incentive Payment. Pursuant to the Management Agreement, the Company provides
up to 1/5 of the Company's 25% Incentive Payment for distribution as bonuses
to its employees in amounts to be determined by the Company's Board of
Directors. Such payment is made in lieu of payment of a like amount to the
Manager under the Management Agreement. For the year ended December 31, 1996,
the Company recorded $154,751 pursuant to this provision of the Management
Agreement.
The management Agreement described above expired on January 31, 1997 and a
new 5 year agreement was executed with similar terms except as follows: (1)
75% of the per annum base management fee as calculated above shall be paid to
the Manager for services rendered under the agreement. 25% of the per annum
base management fee as calculated above shall be paid to participants in its
executive bonus pool in amounts to be determined in the sole discretion of the
Company's Chief Executive Officer; (2) the Company will reserve up to 1/4
versus 1/5 of the above incentive compensation for distribution as bonuses to
participants in its executive bonus pool in amounts to be determined in the
sole discretion of the Company's Chief Executive Officer; and (3) net income
included in the Return on Capital calculation was changed from net income in
accordance with GAAP to net taxable income.
93
The Manager's base and incentive fees are calculated by the Manager within
60 days after the end of each calendar quarter, with the exception of the
fourth quarter for which compensation will be computed within 30 days, and
such calculation shall be promptly delivered to the Company. The Company is
obligated to pay the base fee within 90 days after the end of each calendar
quarter.
EXPENSES
Pursuant to the Management Agreement, the Company also pays all operating
expenses except those specifically required to be borne by the Manager under
the Management Agreement. The operating expenses generally required to be
borne by the Manager include the compensation and other employment costs of
the Manager's officers in their capacities as such and the cost of office
space and out-of-pocket costs, equipment and other personnel required for
oversight of the Company's operations. The expenses paid by the Company
include issuance and transaction costs incident to the acquisition,
disposition and financing of investments, regular legal and auditing fees and
expenses of the Company, the fees and expenses of the Company's Directors,
premiums for directors' and officers' liability insurance, premiums for
fidelity and errors and omissions insurance, servicing and sub-servicing
expenses, the costs of printing and mailing proxies and reports to
stockholders, and the fees and expenses of the Company's custodian and
transfer agent, if any. Reimbursements of expenses incurred by the Manager
which are the responsibility of the Company are made monthly. For the year
ended December 31, 1996 and for the year ended December 31, 1995, there were
no monies paid to the Manager as reimbursement of expenses.
STOCK OPTION PLAN
The Company has adopted the Stock Option Plan and the Manager and the
directors, officers and employees of the Manager have been granted certain
options or rights under the Stock Option Plan, and may in the future be
granted additional options or rights under the Stock Option Plan. See "Item
11. Executive Compensation--Stock Options."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to render the services called for thereunder and is
not responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors, officers, shareholders and employees are not liable to the
Company, any mortgage security issuer, any subsidiary of the Company, the
Unaffiliated Directors, the Company's stockholders or any subsidiary's
shareholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager is a recently formed
company and does not have significant assets. Consequently, there can be no
assurance that the Company would be able to recover any damages for claims it
may have against the Manager. The Company has agreed to indemnify the Manager,
and its directors, officers, shareholders and employees with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising
from any acts or omissions of the Manager made in good faith in the
performance of its duties under the Management Agreement.
RELATIONSHIPS WITH AFFILIATES
GENERAL
ICII is a publicly traded company whose shares of common stock are listed on
the Nasdaq National Market. ICAI, a wholly-owned subsidiary of ICII, is the
Manager and provides advisory services to IMH in accordance with the terms of
the Management Agreement. As previously described, IMH utilizes the mortgage
banking experience, management expertise and resources of ICII and ICAI in
conducting its business. At March 20, 1997, ICII and SPTL, its wholly-owned
subsidiary, owned in the aggregate 424,538 shares of the Common Stock of
94
IMH. In addition, a number of Directors and officers of IMH and ICIFC also
serve as Directors and/or officers of ICII and ICAI. See "Item 10. Directors
and Officers of the Registrant" and "--Relationships with the Manager." IMH
currently utilizes ICII as a resource for technology, human resources services
and management information services. The amount of services provided by ICII
has decreased as IMH takes on certain of these responsibilities. As of
December 31, 1996, ICII owned all of the voting common stock, representing a
1% economic interest in ICIFC, and IMH owned all of the non-voting preferred
stock of ICIFC, representing 99% of the economic interest in ICIFC. ICII has
the power to elect all of the directors of ICIFC and the ability to control
the outcome of all matters for which the consent of the holders of the common
stock of ICIFC is required. On March 31, 1997, ICII divested itself of its
interest in ICIFC by contributing 100% of ICIFC's common stock to certain
officers and directors of the Company.
With a view toward protecting the interests of IMH's stockholders, the
Charter and the Bylaws of IMH provide that a majority of the Board of
Directors (and at least a majority of each committee of the Board of
Directors) must not be "Affiliates" of ICAI, as that term is defined in the
Bylaws, and that the investment policies of IMH must be reviewed annually by
the Unaffiliated Directors. Such policies and restrictions thereon may be
established from time to time by the Board of Directors, including a majority
of the Unaffiliated Directors. In addition, any transaction between IMH and
any Affiliated Person requires the affirmative vote of a majority of the
Unaffiliated Directors. Moreover, approval, renewal or termination of the
Management Agreement requires the affirmative vote of a majority of the
Unaffiliated Directors. The Management Agreement may be terminated by either
IMH or the Manager upon 60 days' notice. Any such termination or failure to
extend by IMH without cause shall result in the payment of a termination or
non-renewal fee to the Manager determined by an independent appraisal.
Certain activities of ICII and its affiliates may adversely affect IMH's
operations. For a further description of such activities and the possible
effects to IMH therefrom, including the terms and conditions of the Non-
Compete Agreement and the Right of First Refusal Agreement, see "--Other
Transactions."
OTHER TRANSACTIONS
The Contribution Transaction
On November 20, 1995, ICII contributed to ICIFC certain of the operating
assets and certain customer lists of ICII's mortgage conduit operations
including all of ICII's mortgage conduit operations' commitments to purchase
mortgage loans subject to rate locks from correspondents (having a principal
balance of $44.3 million at November 20, 1995), in exchange for shares
representing 100% of the common stock and 100% of the outstanding non-voting
preferred stock of ICIFC. Simultaneously, on November 20, 1995, in exchange
for 500,000 shares of Common Stock, ICII (1) contributed to IMH all of the
outstanding non-voting preferred stock of ICIFC, which represents 99% of the
economic interest in ICIFC, (2) caused SPTL to contribute to IMH certain of
the operating assets and certain customer lists of SPTL's warehouse lending
division, and (3) executed the Non-Compete Agreement and the Right of First
Refusal Agreement, each having a term of two years from November 20, 1995. Of
the 500,000 shares issued pursuant to the Contribution Transaction, 450,000
shares were issued to ICII and 50,000 shares were issued to SPTL. All of the
outstanding shares of common stock of ICIFC were retained by ICII. Lastly, IMH
contributed all of the aforementioned operating assets of SPTL's warehouse
lending operations contributed to it by SPTL to IWLG in exchange for shares
representing 100% of the common stock of IWLG thereby forming it as a wholly
owned subsidiary. At November 20, 1995, the net tangible book value of the
assets contributed pursuant to the Contribution Transaction was $525,000. ICII
and SPTL retained all other assets and liabilities related to the contributed
operations which at November 20, 1995 consisted mostly of $11.7 million of
MSRs, $22.4 million of finance receivables and $26.6 million in advances made
by ICII and SPTL to fund mortgage conduit loan acquisitions and to fund
finance receivables, respectively.
Pursuant to the Non-Compete Agreement, ICII, except as set forth below, and
any 25% entity may not compete with the Warehouse Lending Operations and may
not establish a network of third party correspondent loan originators or
another end-investor in non-conforming mortgage loans. ICII has also agreed
(1) that, in
95
addition to any other remedy that may be available to the Company, it will
sell all of the outstanding shares of common stock of ICIFC retained by ICII
pursuant to the Contribution Transaction to any third party reasonably
acceptable to the Company in the event that ICII or a 25% entity establishes a
network of third party correspondent loan originators during the term of the
Non-Compete Agreement and (2) that any sale by ICIFC of shares of its capital
stock or sale or transfer by ICII of any shares of the common stock of ICIFC
which ICII owns may only be made to a party reasonably acceptable to the
Company. Pursuant to the Non-Compete Agreement, SPTL may continue to act as an
end-investor in non-conforming mortgage loans and SPFC, a subsidiary of ICII,
may continue its business, which is primarily to act as a wholesale originator
and bulk purchaser of non-conforming mortgage loans. Pursuant to the Right of
First Refusal Agreement, ICII has granted ICIFC a right of first refusal to
purchase all non-conforming mortgage loans that ICII or any 25% entity
originates or acquires and subsequently offers for sale, and ICIFC has granted
ICII, or any 25% entity designated by ICII, a right of first refusal to
purchase all conforming mortgage loans that ICIFC acquires and subsequently
offers for sale.
ARRANGEMENTS AND TRANSACTIONS WITH ICII
The Company and ICII have entered into agreements for the purpose of
defining their ongoing relationships. These agreements were developed in the
context of a parent/subsidiary relationship and therefore were not the result
of arms length negotiations between independent parties. It is the intention
of the Company and ICII that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company as could have been
obtained from unaffiliated third parties.
The Company has entered into a sublease with ICII to lease a portion of its
facilities as the Company's executive offices and administrative facilities.
The Company believes that the terms of the sublease are at least as favorable
as could have been obtained from an unaffiliated third party. For the year
ended December 31, 1996 and for the Interim Period, $154,800 and $12,900,
respectively, were paid by the Company to ICII under the sublease. See "Item
2. Properties."
Additional or modified arrangements and transactions may be entered into by
the Company, ICII, and their respective subsidiaries, in the future. Any such
future arrangements and transactions will be determined through negotiation
between the Company and ICII, and it is possible that conflicts of interest
will be involved. The Unaffiliated Directors, consisting of directors
independent of the Company, any manager of the Company (including ICAI) and
ICII and its Affiliated Persons, must independently approve all transactions
by and between the Company and ICII.
TAX AGREEMENT
IMH has entered into an agreement (the "Tax Agreement") effective November
20, 1995 with ICII for the purposes of (1) providing for filing certain tax
returns, (2) allocating certain tax liability and (3) establishing procedures
for certain audits and contests of tax liability.
Under the Tax Agreement, ICII has agreed to indemnify and hold IMH harmless
from any tax liability attributable to periods ending on or before November
20, 1995, in excess of such taxes as IMH has already paid or provided for. For
periods ending after November 20, 1995, IMH will pay its tax liability
directly to the appropriate taxing authorities. To the extent (1) there are
audit adjustments that result in a tax detriment to IMH or (2) IMH incurs
losses that are carried back to an earlier year and any such adjustment
described in (1) or loss described in (2) results in a tax benefit to ICII or
its affiliates, then ICII will pay to IMH an amount equal to the tax benefit
as that benefit is realized. ICII will also agree to indemnify IMH for any
liability associated with the contribution of the preferred stock of ICIFC and
certain operational assets of SPTL's warehouse lending division or any
liability arising out of the filing of a federal consolidated return by ICII
or any return filed with any state or local counterpart liability. To the
extent there are audit adjustments that result in any tax detriment to ICII or
96
any of its affiliates with respect to any period ending on or before November
20, 1995, as a result thereof, IMH for any taxable period after November 20,
1995 realizes a tax benefit, then IMH shall pay to ICII the amount of such
benefit at such time or times as IMH actually realizes such benefit.
ICII generally controls audits and administrative and judicial proceedings
with respect to periods ending on or before November 20, 1995, although ICII
cannot compromise or settle any issue that increases IMH's liability without
first obtaining the consent of IMH. IMH generally controls all other audits
and administrative and judicial proceedings.
SERVICES AGREEMENT
Prior to November 20, 1995, the predecessors of ICIFC and IWLG were
historically allocated expenses of various administrative services provided by
ICII. The costs of such services were not directly attributable to a specific
division or subsidiary and primarily included general corporate overhead, such
as accounting and cash management services, human resources and other
administrative functions. These expenses were calculated as a pro rata share
of certain administrative costs based on relative assets and liabilities of
the division or subsidiary, which management believed was a reasonable method
of allocation. The allocations of expenses for the period January 1, 1995 to
November 19, 1995, and for the year ended December 31, 1994 were $269,000 and
$517,000, respectively, for ICIFC and IWLG combined.
The Company and ICII have entered into a services agreement effective as of
November 20, 1995 (the "Services Agreement") under which ICII provides various
services to the Company, including data processing, human resource
administration, general ledger accounts, check processing and payment of
accounts payable. ICII charges fees for each of the services which it provides
under the Services Agreement based upon usage. The Services Agreement has an
initial term that ends on December 31, 1996 and is renewable annually
thereafter. The Company may terminate the Services Agreement, in whole or in
part, upon one month's written notice. As part of the services to be provided
under the Services Agreement, ICII provides the Company with insurance
coverage and self-insurance programs, including health insurance. The charge
to the Company for coverage will be based upon a pro rata portion of the costs
to ICII for the various policies. Management believes that the terms of the
Services Agreement are as favorable to the Company as could be obtained from
independent third parties. For the year ended December 31, 1996 and for the
Interim Period, total expenses allocated to the Company related to these
services were $441,000 and $29,000, respectively.
MANAGEMENT AND SUB-SERVICING AGREEMENTS
ICAI, a wholly-owned subsidiary of ICII, oversees the day-to-day operations
of the Company, subject to the supervision of the Company's Board of
Directors, pursuant to the Management Agreement which became effective on
November 20, 1995. For a description of the terms of the Management Agreement,
see""--Relationships with the Manager--Management Agreement."
ICIFC 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. For a general description of the terms of such a Servicing Agreement,
see "Item 1-- Business--Servicing and Master Servicing." ICIFC subcontracts
all of its servicing obligations under such loans to independent third parties
pursuant to sub-servicing agreements.
MORTGAGE LOANS PURCHASES
During the year ended December 31, 1996, ICIFC purchased from ICII bulk
mortgage loans packages of 30-year fully amortizing six-month adjustable LIBOR
and 30- and 15-year fixed rate first and second trust deed mortgages having a
principal balance of $224.7 million with net premiums paid of $3.8 million.
Servicing rights on all mortgage loans were released to ICIFC.
97
During the year ended December 31, 1996, ICIFC purchased from Walsh
Securities mortgage loans of 30-year fully amortizing, six-month adjustable
LIBOR and 15-year fixed rate second trust deed mortgages having a principal
balance of $22.0 million with net premiums paid of $1.1 million. Servicing
rights on all mortgage loans were retained by ICIFC. James Walsh, a director
of the Company, is an Executive Vice President of Walsh Securities, Inc.
On March 29, 1996, IMH purchased from ICIFC bulk mortgage loan packages of
30-year fully amortizing six-month adjustable LIBOR and 15-year fixed rate
second trust deed mortgages having a principal balance of $276.3 million and
$34.7 million with premiums paid of $2.8 million and $1.2 million,
respectively. Servicing rights on all mortgage loans were retained by ICIFC.
On August 28, 1996, IMH purchased from ICIFC bulk mortgage loan packages of
30-year fully amortizing six-month and two-year adjustable LIBOR and 15-year
fixed rate second trust deed mortgages having a principal balance of $255.8
million and $9.6 million with premiums of $10.8 million and $408,000,
respectively. Servicing rights on all mortgage loans were retained by ICIFC.
PURCHASE OF SUBORDINATED LEASE RECEIVABLES
On December 29, 1995, IMH purchased a subordinated interest in a lease
receivable securitization from Imperial Business Credit, Inc. (IBC) a wholly-
owned subsidiary of ICII. The lease receivables underlying the security were
originated by IBC. IMH purchased the subordinated lease receivable at the
present value of estimated cash flows based on a discount rate of 12%
amounting to a purchase price of $8.4 million. On May 31, 1996, IMH sold the
subordinated interest to IBC at no gain or loss.
PURCHASE OF MORTGAGE-BACKED SECURITIES
On November 6, 1996, the Company purchased Walsh Acceptance Corporation
mortgage pass-through certificates series 1996-1, Class B issued September 30,
1996. The principal balance of the Class B Certificates was $10.7 million, net
of a discount of $1.2 million to yield 9.3%. James Walsh, a director of the
Company, is an Executive Vice President of Walsh Securities, Inc.
During the year ended December 31, 1996, IMH purchased $32.5 million of
subordinated mortgage-backed securities in connection with ICIFC's REMIC
securitizations for $26.8 million, resulting in discounts of $5.7 million.
PURCHASE OF OTHER INVESTMENTS
On March 8, 1996, the Company purchased from ICII $5.0 million of its Senior
Note obligations for $4.5 million plus accrued interest. On January 24, 1997,
the Company redeemed the Senior Notes for $5.2 million, resulting in a gain of
$648,000.
On March 28, 1996, the Company purchased from ICII the beneficial interest
in the Class A Trust Certificate for the Franchisee Loan Receivables Trust
1995-B. The trust is securitized by loans originated by Franchise Mortgage
Acceptance Corporation LLC, a subsidiary of ICII. The purchase price was $2.8
million based upon a discount rate of 16%. On January 30, 1997, the Company
sold its beneficial interest in the Franchisee Loan Receivables to ICIFC at
carrying value, which approximated fair value. No gain or loss was recorded on
the sale.
On December 31, 1996, the Company purchased FMAC Loan Receivables Trust
1996-B Class D and E securities. The securities are collateralized by loans
originated by Franchise Mortgage Acceptance Corporation LLC, a subsidiary of
ICII. The Company purchased the Class D and E securities for $2.3 million and
$5.1 million, respectively, a discount of $1.9 million and $2.4 million,
respectively.
98
BORROWINGS
ICIFC has a $600 million warehouse borrowing agreement with IWLG of which
$327.4 million and $550.3 million was outstanding at December 31, 1996 and
1995, respectively. Interest expense recorded related to this borrowing was
$32.8 million and $1.3 million for the years ended December 31, 1996 and 1995,
respectively.
ICIFC's residual interests in securitizations are financed by an
intercompany payable with ICII and is included in the balance sheet as due to
affiliate. The $46.9 million of borrowings has a current interest rate of
12.0% with interest payable monthly and no stated maturity.
PURCHASE OF RESIDUAL INTERESTS IN SECURITIZATIONS
On December 31, 1996, ICIFC purchased from ICII eight residual interests in
securitizations of primarily REMIC's for $46.9 million. ICIFC and ICII have
estimated future cash flows from these residuals and priced them utilizing
assumptions that they believe are consistent with those that would be utilized
by an unaffiliated third-party purchaser.
The Company may, from time to time, enter into additional transactions in
the ordinary course of business with institutions with which certain of the
Unaffiliated Directors are employed.
RELATED PARTY LOAN
In September 1996, ICIFC issued a $1.25 million secured residential first
mortgage loan to the Chairman of IMH. Terms of the loan include monthly
interest-only payments at 8% per annum, with the principal balance due in full
on October 1, 1997.
99
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements included in the Form 10-K are:
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
Consolidated Balance Sheets at December 31, 1996 and 1995;
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994;
Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994;
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994;
Notes to Consolidated Financial Statements
100
ICI FUNDING CORPORATION
Balance Sheets at December 31, 1996 and 1995 (audited);
Statements of Operations for the years ended December 31, 1996, 1995 and
1994 (audited);
Statement of Changes in Shareholders' Equity for the years ended December
31, 1996, 1995 and 1994 (audited);
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994 (audited);
Notes to Financial Statements
All schedules have been omitted because they are either not applicable, not
required or the information required has been disclosed in the financial
statements and related notes or otherwise in the Form 10-K.
(b) Exhibits
EXHIBIT
NO.
-------
3.1+ -- Charter of the Registrant.
3.2+ -- Bylaws of the Registrant.
4.1+ -- Form of Stock Certificate of the Company.
10.1+ -- Form of Management Agreement between the Registrant and Imperial
Credit Advisors, Inc.
10.2+ -- Form of Submanagement Agreement between Imperial Credit Advisors,
Inc. and Imperial Credit Industries, Inc.
10.3+ -- Stock Option Plan.
10.4+ -- Form of Indemnity Agreement between the Registrant and its
Directors and officers.
10.5+ -- Form of Tax Agreement between the Registrant and Imperial Credit
Industries, Inc.
10.6+ -- Form of Services Agreement between the Registrant and Imperial
Credit Industries, Inc.
10.7+ -- Form of Sublease between the Registrant and Imperial Credit
Industries, Inc. regarding Santa Ana Heights facility.
10.8+ -- Form of Employment Agreement.
10.9+ -- Form of Loan Purchase and Administrative Services Agreement
between the Registrant and ICI Funding Corporation.
10.10+ -- Form of Contribution Agreement between the Registrant, Imperial
Credit Industries, Inc., Southern Pacific Thrift & Loan
Association, ICI Funding Corporation and Imperial Warehouse
Lending Group, Inc.
10.11+ -- Form of Non-Competition Agreement between the Registrant and
Imperial Credit Industries, Inc.
10.12+ -- Form of Right of First Refusal Agreement between Imperial Credit
Industries, Inc. and ICI Funding Corporation.
10.14++ -- Servicing Agreement between the Registrant and ICI Funding
Corporation.
10.15 -- Imperial Credit Mortgage Holdings, Inc. 1996 Stock Option Loan
Plan.
11 -- Statement regarding computation of per share earnings.
21.1* -- Subsidiaries of the Registrant.
- --------
+ Incorporated by reference to, and all such exhibits have the corresponding
Exhibit Number filed as part of the Registration Statement on Form S-11
(File No. 33-96670) and Amendments No. 1, 2 and 3 filed with the Securities
and Exchange Commission on September 7, 1995, October 23, 1995, October 30,
1995 and November 8, 1995, respectively.
++ Incorporated by reference to, and all such exhibits have the corresponding
Exhibit Number filed as part of the Registration Statement on Form S-11
(File No. 333-04011) and Amendment No. 1 filed with the Securities and
Exchange Commission on May 17, 1996 and May 30, 1996, respectively.
* Incorporated by reference to, and all such exhibits have the corresponding
Exhibit Number filed as part of the Registration Statement on Form S-11
(File No. 333-14873) and Amendment No. 1 filed with the Securities and
Exchange Commission on October 25, 1996 and November 4, 1996, respectively.
101
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.
IMPERIAL CREDIT MORTGAGE HOLDINGS,
INC.
by /s/ JOSEPH R. TOMKINSON
-------------------------------------
Joseph R. Tomkinson
Vice Chairman of the Board
and Chief Executive Officer
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 Vice Chairman of the Board March 31, 1997
____________________________________ and Chief Executive Officer
Joseph R. Tomkinson (Principal Executive
Officer)
/s/ RICHARD J. JOHNSON Chief Financial Officer March 31, 1997
____________________________________ (Principal Financial and
Richard J. Johnson Accounting Officer)
/s/ H. WAYNE SNAVELY Chairman of the Board March 31, 1997
____________________________________
H. Wayne Snavely
/s/ JAMES WALSH Director March 31, 1997
____________________________________
James Walsh
/s/ FRANK P. FILIPPS Director March 31, 1997
____________________________________
Frank P. Filipps
/s/ STEPHAN R. PEERS Director March 31, 1997
____________________________________
Stephan R. Peers
102