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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-19861
IMPAC MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 33-0675505
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
20371 IRVINE AVENUE 92707
SANTA ANA HEIGHTS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 556-0122
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -----------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
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. [_]
AT MARCH 24, 1998, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $364.4 MILLION, BASED ON
THE CLOSING SALES PRICE OF THE COMMON STOCK ON THE AMERICAN STOCK EXCHANGE.
FOR PURPOSES OF THE CALCULATION ONLY, IN ADDITION TO AFFILIATED COMPANIES, ALL
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT HAVE BEEN DEEMED
AFFILIATES. THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 24,
1998 WAS 23,257,036.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
IMPAC MORTGAGE HOLDINGS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 26
Item 3. Legal Proceedings..................................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................................... 27
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters................. 28
Item 6. Selected Consolidated Financial Data.................................................. 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 32
Item 8. Financial Statements and Supplementary Data........................................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 91
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 92
Item 11. Executive Compensation................................................................ 95
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 101
Item 13. Certain Relationships and Related Transactions........................................ 101
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 111
2
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Mortgage Holdings, Inc. ("IMH"), and its subsidiaries, IMH
Assets Corporation ("IMH Assets"), Impac Warehouse Lending Group, Inc.
("IWLG"), IMH/ICH Dove St., LLC ("Dove"), and Impac Funding Corporation
(together with its wholly-owned subsidiary, Impac Secured Assets Corp.,
"IFC"), collectively. References to IMH refer to Impac Mortgage Holdings, Inc.
as a separate entity from IMH Assets, IWLG, Dove and IFC. The Company is a
Maryland corporation formed on August 28, 1995.
GENERAL
Impac 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. 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 Related Transactions--Relationships with ICII--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 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
IFC supports the investment objectives of the Long-Term Investment
Operations by supplying all of the mortgage loans and a portion of the
mortgage-backed securities held by IMH. 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 from Collateralized Mortgage Obligations ("CMO")
borrowings and reverse repurchase agreements. At December 31, 1997, the
Company's mortgage loan and securities investment portfolio consisted of
$794.9 million of mortgage loans held in trust as collateral for CMOs, $257.7
million of mortgage loans held for investment, and $67.0 million of mortgage-
backed or other collateralized securities. For the year ended December 31,
1997, the Long-Term Investment Operations acquired $877.1 million of mortgage
loans from IFC as well as $12.6 million of securities created by IFC through
the issuance of Real Estate Mortgage Investment Conduits ("REMICs"). Also,
IMH, through trusts in which IMH Assets (a wholly-owned, specialty purpose
entity through which IMH conducts its CMO borrowings) holds residual
interests, issued $521.7 million in CMOs.
3
The following table summarizes average earning assets, average borrowings
and weighted average yield of the Long-Term Investment Operations and
Warehouse Lending Operations for the periods shown:
FOR THE YEAR ENDED DECEMBER 31, 1997 FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------- --------------------------------------
AVERAGE WEIGHTED PERCENTAGE AVERAGE WEIGHTED PERCENTAGE
BALANCE AVG YIELD OF PORTFOLIO BALANCE AVG YIELD OF PORTFOLIO
----------- ---------- ------------- ---------- ----------- --------------
(DOLLARS IN THOUSANDS)
ASSET TYPE
Money market and
passbook account....... $ 10,058 5.42% 0.76% $ 12,820 4.98% 1.66%
Investment securities
available-for-sale..... 64,936 13.16 4.93 39,725 12.88 5.15
Mortgage loans held for
investment and CMO
collateral............. 809,046 7.73 61.39 307,894 7.23 39.93
Finance receivables..... 433,894 8.59 32.92 410,657 8.67 53.26
----------- ------------- ---------- --------------
Total Interest Bearing
Assets............... $ 1,317,934 8.31% 100.00% $ 771,096 8.25% 100.00%
=========== ============= ========== ==============
BORROWING TYPE
CMO borrowings.......... $ 586,463 6.25% 49.06% $ 270,827 6.13% 38.42%
Reverse repurchase
agreements............. 609,017 6.52 50.94 434,087 6.34 61.58
----------- ------------- ---------- --------------
Total Interest Bearing
Liabilities.......... $ 1,195,480 6.41% 100.00% $ 704,914 6.26% 100.00%
=========== ============= ========== ==============
Net Interest Spread. 1.90% 1.99%
Mortgage Loans Held in the Portfolio
The Company originates loans through its network of conduit sellers 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 "A-," "B," "C," and "D" grade mortgage loans,
collectively ("B/C 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 IFC in the form of REMICs, IMH has in the past
and may in the future retain senior or subordinated securities as regular
interests on a short-term or long-term basis. In connection with IFC's REMIC
securitizations of $878.0 million during the year ended December 31, 1997, IMH
purchased
4
$12.6 million of securities as regular interests. At December 31, 1997, such
regular interests included $431,000 of "principal-only" and $8.1 million of
"interest-only" securities. Such securities or investments may subject the
Company to credit, interest rate and/or prepayment risks.
At December 31, 1997, the Company's investment securities available-for-sale
included $47.4 million of subordinated securities collateralized by mortgages
and $4.8 million of subordinated securities collateralized by other loans. 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, on December 31, 1996,
the Company purchased eight residual interests in securitizations from ICII
for $46.9 million. In March 1997, the Company sold one of the residual
interests in securitizations to Impac Commercial Holdings, Inc. ("ICH"), an
affiliate of the Company, for $10.1 million. In December 1997, the Company
sold the remaining seven residual interests in securitizations to ICII as part
of the Company's termination of its Management Agreement. See "Item 13.
Certain Relationships and Related Transactions--Relationships with the
Manager."
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 CMOs
issued by the Company, CMOs outstanding as of December 31, 1997, and certain
interest rate information:
INTEREST
INTEREST INTEREST RATE
RATE RATE MARGIN
MARGIN OVER MARGIN AFTER
ISSUE ISSUANCE CMOS ONE-MONTH ADJUSTMENT ADJUSTMENT
DATE ISSUANCE NAME AMOUNT OUTSTANDING LIBOR DATE DATE
- ----- ------------- ------------- ------------- ----------- ---------- ----------
(IN MILLIONS) (IN MILLIONS)
4/22/96 Fund America
Investors Trust V... $ 296.3 $151.9 0.50% 6/2003 1.00%
8/27/96 Imperial CMB
Trust Series 1996-1. 259.8 128.0 0.32% 10/2003 1.32%
-------- ------
556.1 279.9
-------- ------
5/22/97 Imperial CMB
Trust Series 1997-1. 348.0 288.2 0.22% 7/2004 0.44%
12/10/97 Imperial CMB
Trust Series 1997-2. 173.7 173.0 0.26-1.30% 1/2005 0.52-2.60%
-------- ------
521.7 461.2
-------- ------
Accrued Interest.... -- 0.8
-------- ------
$1,077.8 $741.9
======== ======
The Company issues CMOs secured by mortgage loans as a means of financing a
portion of its Long-Term Investment Operations. The decision to issue CMOs is
based on the Company's current and future investment needs, market conditions
and other factors. For accounting and tax purposes, the mortgage loans
financed through the issuance of CMOs are treated as assets of the Company,
and the CMOs are treated as debt of the Company, when for accounting purposes
the CMO qualifies as a financing arrangement under Statement of Financial
5
Accounting Standards No. 125 ("FAS 125"). 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 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. The CMOs
typically are structured as one month London interbank offered rate ("LIBOR")
"floaters" with interest payable monthly. However, in January 1998, the
Company issued its first fixed-rate CMO. Interest rates on the CMO range from
6.65% to 7.25% depending on the class of the CMOs with interest payable
monthly. 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, 1997, the underlying principal
balance of mortgages supporting CMO borrowings of $741.9 million represented
approximately $732.0 million of six-month and 2-year LIBOR adjustable rate
mortgage loans with varying grade quality and approximately $30.9 million of
second mortgage loans. Such mortgage balances are exclusive of net premiums.
Reverse Repurchase Agreements. The Company has uncommitted financing
facilities, which may be withdrawn at any time, with two investment banks at
interest rates that are consistent with its financing objectives, as described
herein. For a discussion of the terms of the Company's reverse repurchase
facilities, see "Item 7. Management's Discussion 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 instruments of
beneficial ownership, including the right to distributions on the collateral
and the right to vote on matters as to which certificate holders vote. Upon a
payment default under such agreements, the lending party may liquidate the
collateral. The Company's borrowing agreements require the Company to pledge
cash, additional mortgage loans or additional securities backed by mortgage
loans in the event the market value of existing collateral declines. 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,
6
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 enters into such agreements with several different
parties and follows its own credit exposure procedures. The Company monitors
the financial condition of its reverse repurchase agreement lenders on a
regular basis, including the percentage of mortgage loans that are the subject
of reverse repurchase agreements with a single lender. 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 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
The Conduit Operations, conducted by IFC, purchases primarily non-conforming
mortgage loans and, to a lesser extent, second mortgage loans, from its
network of third party correspondents and subsequently securitizes or sells
such loans to permanent investors, including the Long-Term Investment
Operations. Prior to the Contribution Transaction, IFC was a division or
subsidiary of ICII since 1990. IMH owns 99% of the economic interest in IFC,
while Joseph R. Tomkinson, Chief Executive Officer of IMH and IFC, William S.
Ashmore, President of IMH and IFC, and Richard J. Johnson, Chief Financial
Officer of IMH and IFC, are the holders of all the outstanding voting stock
of, and 1% of the economic interest in, IFC.
IFC'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
7
effectively with other non-conforming mortgage loan conduits. In addition to
earnings generated from ongoing securitizations and sales to third-party
investors, IFC 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, 1997, IFC acquired $2.6 billion of
mortgage loans and sold or securitized $2.2 billion of mortgage loans.
As a non-conforming mortgage loan conduit, IFC acts as an intermediary
between the originators of mortgage loans that do not currently meet the
guidelines for purchase by government-sponsored entities (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. IFC also acts as a bulk purchaser of primarily non-
conforming mortgage loans. The Company believes that non-conforming mortgage
loans provide an attractive net earnings profile, producing higher yields
without commensurately higher credit risks when compared to mortgage loans
that qualify for purchase by 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/C Loan
products, timely purchasing of loans, mandatory, best efforts and optional
rate-lock commitments, and flexible master commitments. See "--Purchase
Commitment Process and Pricing."
As of December 31, 1997, IFC maintained relationships with 135
correspondents. Correspondents originate and close mortgage loans under IFC's
mortgage loan programs on a flow (loan-by-loan) basis or through bulk sale
commitments. Correspondents include savings and loan associations, commercial
banks, mortgage bankers and mortgage brokers. During the years ended December
31, 1997 and 1996, the period from November 20, 1995 through December 31, 1995
(the "Interim Period"), and the years ended December 31, 1995 and 1994, IFC
acquired from its correspondents, including ICII after the Contribution
Transaction, $2.6 billion, $1.5 billion, $547.2 million, $1.1 billion and $1.7
billion, respectively, of mortgage loans. All non-conforming loans purchased
by IFC are made available for sale to IMH at fair market value at the date of
sale and subsequent transfer to IMH.
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 IFC,
and (3) purchase the loans and securitize or sell them in the secondary market
or to IMH. In order to accomplish these objectives, IFC 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.
IFC 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. IFC also maintains relationships
with numerous end-investors so that it may develop products that they may be
interested in as market conditions change, which in turn may be offered
through the correspondent network. As a consequence, IFC is less dependent on
acquiring conforming mortgage loans 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, IFC developed an additional series to the Progressive
ExpressTM Program (the "Progressive Express Program"). The concept of the
Progressive Express Program is to underwrite the loan focusing on the
borrowers Fair Issac Credit Score ("FICO"), 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
8
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's
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, IFC'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, IFC is competitive in pricing
its products in order to attract sufficient numbers of borrowers.
Mortgage Loans Acquired. A majority of mortgage loans purchased through the
Conduit Operations are non-conforming mortgage loans. Currently, the maximum
principal balance for a conforming loan is $227,400. 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
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/C Loans, as described below, which may entail greater credit
risks than other non-conforming loans. For the year ended December 31, 1997,
B/C Loans, as defined by the Company, accounted for 28.1% of IFC's total loan
acquisitions. In addition, during that period, IFC's acquisitions included
0.1% of "D" quality loans, as defined by the Company. IFC generally does not
acquire mortgage loans with principal balances above $750,000 for "A" quality
loans, and $500,000 for B/C Loans.
Non-conforming loans purchased by IFC pursuant to its underwriting programs
typically differ from those purchased pursuant to the guidelines established
by 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 IFC produce higher yields without commensurately
higher credit risk when compared to conforming mortgage loans.
IFC'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 the 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 IFC are generally secured by first liens and, to
a lesser extent, second liens on single (one-to-four) family residential
properties with either fixed or adjustable interest rates. During the year
ended December 31, 1997, fixed-rate mortgage loans and adjustable-rate
mortgage loans ("ARMs") accounted for 74.4% and 25.6%, respectively, of
mortgage loans acquired by IFC. Fixed-rate mortgage loans have a
9
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 one year constant maturity Treasury index ("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 IFC will fully amortize over their remaining
terms. Currently, IFC 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 fixed-
rate mortgage loans that adjust to six-month ARMs approximately two to three
years following origination at an interest rate based upon a defined index
plus a spread. IFC may from time to time purchase mortgage loans with other
interest rate and maturity characteristics.
Purchase of 125% LTV Mortgage Loans from Preferred Credit Corporation. In
July 1997, IFC began purchasing loans on a bulk basis from Preferred Credit
Corporation ("Preferred") pursuant to a mortgage loan purchase agreement (the
"Preferred Purchase Agreement"). During 1997, IFC purchased $576.1 million of
mortgage loans from Preferred. These loans consist of second mortgage loans to
qualified borrowers who satisfy Preferred's underwriting criteria based on
income, credit scores and other factors, but also who have limited access to
traditional mortgage-related financing generally because of a lack of equity
in their homes. The loans are typically closed-end (usually 15 years), fixed
rate, fully amortizing loans secured by a first or second lien on the
borrower's primary residence, and are typically used by consumers to pay-off
credit card and other unsecured indebtedness. Although Preferred seeks to lend
to borrowers with high credit worthiness, almost all of Preferred's loans are
made in excess of the value of the underlying collateral available to secure
such loan. IFC reviews all loans purchased from Preferred under IFC prepared
guidelines, including a regulatory compliance audit, and may reject any loans
that do not meet IFC's guidelines. IFC intends to sell or securitize all loans
purchased from Preferred, although there can be no assurance of its ability to
do so.
In January 1997, the California Department of Real Estate suspended the
license of Preferred and its top executive officers for 60 days for
mishandling trust funds, failing to supervise employees and other offenses
which occurred in 1995. These suspensions were stayed upon payment of a $3,000
fine. In July 1997, the California Department of Corporations (the "DOC")
filed a lawsuit against Preferred and its top two executive officers alleging,
among other things, that (1) Preferred was delaying loan closings in violation
of California's licensing laws; (2) as a result of the delayed loan closings,
Preferred was accruing interest on loans prior to the borrower's receipt of
the loan funds; and (3) Preferred had changed dates on the refund checks and
on internal loan reports to create an appearance that refund checks had been
mailed prior to the actual mailing date. Preferred reached a settlement with
the DOC on July 3, 1997, without admitting any liability or wrongdoing. The
settlement generally provides for the following: (1) Preferred is obligated to
complete any refunds not already made to borrowers and agreed to the
appointment of a third party to verify the accuracy of the refunds (prior to
completion of the settlement, Preferred had made refunds of approximately $1.4
million); (2) Preferred is forming an internal audit department and
implementing new operating procedures to prevent the reoccurrence of any
funding delays in the future; (3) Preferred's President/Chief Operating
Officer, Walter Villaume, resigned and agreed to be barred from employment,
management or control of any California residential mortgage lender; and (4)
Preferred agreed to pay a fine of $1.0 million. Pursuant to the Preferred
Purchase Agreement, Preferred has made certain representations and warranties
concerning such loans to IFC, agreed to repurchase any loan materially and
adversely affected by a breach thereof and agreed to further hold the Company
harmless in connection therewith.
As of December 31, 1997, $218.9 million in principal balance of mortgage
loans purchased from Preferred have been sold by the Company. IFC currently
intends to securitize the remaining mortgage loans purchased from Preferred.
In connection with the issuance of mortgage-backed securities by IFC, such
securities have been, and are expected, to be non-recourse to IFC, except in
the case of a breach of standard representations and warranties made by IFC
when the mortgage loans are securitized. See "--Securitization and Sale
Process."
10
A summary of IFC's mortgage loan acquisitions by type of loan, excluding net
premiums, is shown below:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(DOLLARS IN MILLIONS,
EXCEPT FOR AVERAGE LOAN SIZE)
Non-conforming Loans:
Volume of loans........................... $ 2,495.9 $1,424.4
Percentage of total volume................ 99.8% 94.6%
Conforming Loans:
Volume of loans........................... $ 4.1 $ 82.0
Percentage of total volume................ 0.2% 5.4%
--------- --------
$ 2,500.0 $1,506.4
========= ========
Fixed Rate Loans:
Volume of loans........................... $ 1,860.3 $ 484.2
Percentage of total volume................ 74.4% 32.1%
Adjustable Rate Loans:
Volume of loans........................... $ 639.7 $1,022.2
Percentage of total volume................ 25.6% 67.9%
--------- --------
$ 2,500.0 $1,506.4
========= ========
Average Loan Size........................... $ 85,625 $128,239
The credit quality of the loans purchased by IFC varies depending upon the
specific program under which such loans are purchased. For example, a
principal credit risk inherent in adjustable-rate mortgage loans is the
potential "payment shock" experienced by the borrower as rates rise, which
could result in increased delinquencies and credit losses. In the case of
negative amortization mortgage loans, a portion of the interest due accrues to
the underlying principal balance of the loan, thereby increasing the 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.
IFC'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 IFC relates to properties located in
California because of generally higher property values and mortgage loan
balances. In addition, of the $2.6 billion in loans acquired during the year
ended December 31, 1997, $1.6 billion (or 62.5%) were acquired from IFC's top
ten sellers. During the year ended December 31, 1997, Preferred and
Weyerhauser Mortgage Corporation accounted for 22.4%, or $576.1 million, and
11.9%, or $304.7 million, respectively, of the mortgage loans acquired by IFC.
No other sellers accounted for more than 10% of the total mortgage loans
acquired by IFC during the year ended December 31, 1997. No seller other than
Walsh Securities, Inc. ("WSI") and ICII are affiliates of the Company, see
"Item 13. Certain Relationships and Related Transactions."
11
The following table sets forth the geographic distribution of IFC's mortgage
loan acquisitions, excluding net premiums:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
DOLLAR PERCENTAGE DOLLAR PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
California.............................. $ 803.7 32.1% $ 699.4 46.4%
Florida................................. 266.5 10.7 157.7 10.5
New Jersey.............................. 157.9 6.3 123.3 8.2
New York................................ 129.6 5.2 59.6 4.0
Washington.............................. 80.8 3.2 46.7 3.1
Nevada.................................. 60.2 2.4 28.9 1.9
Texas................................... 57.4 2.3 21.5 1.4
Georgia................................. 56.5 2.3 19.3 1.3
Maryland................................ 54.2 2.2 23.0 1.5
Illinois................................ 50.9 2.0 32.1 2.1
Arizona................................. 47.6 1.9 18.7 1.2
Michigan................................ 46.8 1.9 4.2 .3
Colorado................................ 45.3 1.8 26.8 1.8
Connecticut............................. 43.2 1.7 10.1 .7
Virginia................................ 39.9 1.6 19.2 1.3
North Carolina.......................... 39.7 1.6 20.9 1.4
Ohio.................................... 38.3 1.5 10.0 .7
Massachusetts........................... 36.5 1.5 28.2 1.9
Oregon.................................. 33.9 1.4 29.8 2.0
Minnesota............................... 33.2 1.3 3.1 .2
Utah.................................... 32.7 1.3 28.7 1.9
Indiana................................. 30.9 1.2 5.2 .4
Oklahoma................................ 28.4 1.1 1.1 .1
Missouri................................ 25.2 1.0 2.7 .2
Other................................... 260.7 10.5 86.2 5.5
-------- ----- -------- -----
$2,500.0 100.0% $1,506.4 100.0%
======== ===== ======== =====
To date, a portion of the loans purchased by IFC comprise B/C Loans, as
defined by the Company. For the year ended December 31, 1997, such loans
accounted for 28.1% of IFC's total loan acquisitions. In general, B/C 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 other non-
conforming loans purchased by IFC. As a result, B/C Loans normally bear a
higher rate of interest, and are typically subject to higher fees (including
greater prepayment fees and late payment penalties), than non-conforming 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/C Loans than in
underwriting "A" grade loans. In addition, B/C Loans are generally subject to
lower loan-to-value ratios than "A" grade loans. Under IFC's B/C Loan program,
underwriting authority is delegated only to correspondents who meet those
strict underwriting guidelines established by IFC, see "--Underwriting and
Quality Control."
IFC generally purchases its loans on a "servicing-released" basis,
particularly in the case of Sub-Prime 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
IFC finances the acquisition of such loans with its warehouse line with IWLG,
IFC pledges such loans and the related servicing rights to IWLG as collateral.
As a result, IWLG has an absolute right to control the servicing of such loans
(including the right to
12
collect payments on the underlying mortgage loans) and to foreclose upon the
underlying real property in the case of default. Typically, IWLG delegates its
right to service the mortgage loans securing the warehouse line to IFC. In
connection therewith, IFC has contracted with third-party sub-servicers to
perform the function of servicing for IFC. IFC believes that the selection of
third-party sub-servicers is more effective than establishing a servicing
department within the Company. However, part of IFC's responsibility is to
continually monitor the performance of the sub-servicers through monthly
performance reviews and regular 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/C 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/C 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 IFC before they are eligible to participate in its
mortgage loan purchase program, and must submit to periodic reviews by IFC to
ensure continued compliance with these requirements. IFC's current criteria
for seller participation generally includes a minimum tangible net worth
requirement of $300,000 in its non-delegated program, $500,000 when
restricting loan amounts to $300,000 conforming limits, $1.5 million in its
fully delegated program, as described below, approval as a FNMA or FHLMC
Seller/Servicer in good standing, 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 IFC against
the seller in the event of a breach of representations or warranties made by
the seller with respect to mortgage loans sold to IFC, any fraud or
misrepresentation during the mortgage loan origination process, and upon early
payment default on such loans. As of December 31, 1997, 93 sellers had been
approved by IFC as being eligible to participate in the Conduit Operations.
Purchase Commitment Process and Pricing
Master Commitments. As part of its marketing strategy, IFC has established
mortgage loan purchase commitments ("Master Commitments") with sellers that,
subject to certain conditions, entitle the seller to sell and obligate IFC to
purchase a specified dollar amount of non-conforming mortgage loans over a
period generally ranging from six months to one year. The terms of each Master
Commitment specify whether a seller may sell loans to IFC on a mandatory, best
efforts or optional rate-lock basis, or a combination thereof. Master
Commitments do not generally obligate IFC to purchase loans at a specific
price, but rather provide the seller with a future outlet for the sale of its
originated loans based on IFC's quoted prices at the time of purchase. Master
Commitments specify the types of mortgage loans the seller is entitled to sell
to IFC and generally range from $2 million to $50 million in aggregate
committed principal amount. The provisions of IFC's Seller/Servicer Guide are
incorporated in each of the 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, 1997,
IFC had outstanding Master Commitments with 77 sellers to purchase mortgage
loans in the aggregate principal amount of $1.3 billion over periods generally
ranging from six months to one year, of which $714.6 million had been
purchased or committed to be purchased pursuant to rate-locks (as defined
below).
13
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 IFC to obtain
a Master Commitment on a mandatory delivery basis is often refunded pro rata
as the seller delivers loans pursuant to rate-locks. Any remaining fee after
the Master Commitment expires is retained by the Conduit Operations.
Following the issuance of a specific rate-lock, IFC is subject to the risk
of interest rate fluctuations and enters into hedging transactions to diminish
such risk. Hedging transactions may include mandatory or optional forward
sales of mortgage loans or mortgage-backed securities, interest rate caps,
floors and swaps, mandatory forward sales, mandatory or optional sales of
futures, and other financial futures transactions. The nature and quantity of
hedging transactions are determined by the management of IFC based on various
factors, including market conditions and the expected volume of mortgage loan
purchases.
Deferred hedging gains and losses are presented on IFC's balance sheet in
other assets. These deferred amounts are recognized upon the sale or
securitization of the related mortgage loans. As of December 31, 1997 IFC had
$5.1 million of deferred hedging losses included in other assets.
Bulk and Other Rate-Locks. IFC also acquires mortgage loans from sellers
that are not purchased pursuant to Master Commitments. These purchases may be
made on a bulk or individual rate-lock basis. Bulk rate-locks obligate the
seller to sell and IFC to purchase a specific group of loans, generally
ranging from $1 million to $125 million in aggregate committed principal
amount, at set prices on specific dates. Bulk rate-locks enable IFC to acquire
substantial quantities of loans on a more immediate basis. The specific
pricing, delivery and program requirements of these purchases are determined
by negotiation between the parties but are generally in accordance with the
provisions of IFC's Seller/Servicer Guide. Due to the active presence of
investment banks and other substantial investors in this area, bulk pricing is
extremely competitive. Loans are also purchased from individual sellers
(typically smaller originators of mortgage loans) who do not wish to sell
pursuant to either a Master Commitment or bulk rate-lock. The terms of these
individual purchases are based primarily on IFC's Seller/Servicer Guide and
standard pricing provisions, and are offered on a mandatory basis.
Mandatory, Best-Efforts and Optional Rate-Locks. Mandatory rate-locks
require the seller to deliver a specified quantity of loans to IFC over a
specified period of time regardless of whether the loans are actually
originated by the seller or whether circumstances beyond the seller's control
prevent delivery. IFC is required to purchase all loans covered by the rate-
lock at prices established at the time of rate-lock. If the seller is unable
to deliver the specified loans, it may instead deliver comparable loans
approved by IFC within the specified delivery time. Failure to deliver the
specified mortgage loans or acceptable substitute loans under a mandatory
rate-lock obligates the seller to pay IFC a penalty, and, if IFC's mortgage
loan yield requirements have declined, the present value of the difference in
yield IFC would have obtained on the mortgage loans that the seller agreed to
deliver and the yield available on similar mortgage loans subject to mandatory
rate-lock issued at the time of such failure to deliver. In contrast, mortgage
loans sold on a best-efforts basis must be delivered to IFC only if they are
actually originated by the seller. The best-efforts rate-lock provides sellers
with an effective way to sell loans during the origination process without any
penalty for failure to deliver. Optional rate-locks give the seller the option
to deliver mortgage loans to IFC at a fixed price on a future date and
requires the payment of up-front fees to IFC. Any up-front fees paid in
connection with best efforts and optional rate-locks are retained by IFC
whether or not the loans are delivered.
Pricing. IFC 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). IFC's standard pricing is based on the anticipated price it
receives upon sale or securitization of the loans, the anticipated interest
spread realized during the accumulation period, the targeted profit margin and
the anticipated issuance, credit enhancement, and ongoing administrative costs
associated with such sale or securitization. The credit
14
enhancement cost component of IFC's pricing is established for individual
mortgage loans or pools of mortgage loans based upon the characteristics of
such loans or loan pools. As the characteristics of the loans or loan pools
vary, this cost component is correspondingly adjusted upward or downward to
reflect the variation. IFC's adjustments are reviewed periodically by
management to reflect changes in the costs of credit enhancement. Adjustments
to IFC's standard pricing may also be negotiated on an individual basis under
Master Commitments or bulk or individual rate-locks with sellers. See "--
Securitization and Sale Process."
Underwriting and Quality Control
Purchase Guidelines. IFC 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 IFC'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 ratio, source of
funds, appraisal, and loan documentation. IFC also performs a legal
documentation review prior to the purchase of any mortgage loan. IFC 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), IFC 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. IFC 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 IFC's underwriting guidelines as set forth
in IFC'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 IFC. In connection
with its approval, the seller must represent and warrant to IFC that all
mortgage loans sold to IFC will comply with IFC's underwriting guidelines. The
current financial, historical loan quality and other criteria for seller
participation in this program generally include a minimum net worth
requirement and verification of the seller's good standing with FNMA and
FHLMC. As of December 31, 1997, 93 sellers had qualified by IFC for
participation in the delegated underwriting program.
The underwriting program consists of three separate subprograms. IFC's
principal delegated underwriting subprogram is a fully delegated program
designed for loan sellers that meet higher financial and performance criteria
than those applicable to sellers generally. Generally, qualifying sellers have
tangible net worth of at least $1.5 million and are granted delegated
underwriting authority to a maximum loan amount of $500,000 for all mortgage
products under this subprogram. The second subprogram is a delegated program
pursuant to which sellers have tangible net worth of $500,000 to $1.5 million
and are granted delegated underwriting authority to a maximum loan amount of
$300,000. The third program is for sellers with tangible net worth of $300,000
to $500,000 in which sellers are under IFC's non-delegated underwriting
program.
Mortgage loans acquired under IFC's non-delegated underwriting program are
either fully underwritten by IFC's underwriting staff or involve the use of
contract underwriters. IFC has contracted with several national mortgage
insurance firms that conduct contract underwriting for mortgage loan
acquisitions by IFC. Under these contracts, IFC relies on the credit review
and analysis of the contract underwriter, as well as its own pre-purchase
eligibility review to ensure that the loan meets program acceptance, its own
follow-up quality control procedures, and the representations and warranties
of the contract underwriter.
Loans that are not acquired under either delegated or contract underwriter
methods are fully underwritten by IFC's underwriting staff. In such cases, IFC
performs a full credit review and analysis to ensure compliance with its loan
eligibility requirements. This review specifically includes, among other
things, an analysis of the underlying property and associated appraisal, and
an examination of the credit, employment and income history of the borrower.
Under all of these methods, loans are purchased only after completion of a
legal documentation and eligibility criteria review.
15
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 IFC's eligibility control prior to purchase, thereby
enhancing the financial support for the representations and warranties made by
such sellers. IFC 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 IFC'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 IFC 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 IFC 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 the 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. IFC 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 IFC. IFC 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, IFC
analyzes the underlying property 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 IFC's guidelines and to ensure compliance to state and federal
regulations.
Securitization and Sale Process
General. The Conduit Operations primarily utilizes warehouse lines of credit
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, IFC will securitize
them through the issuance of mortgage-backed securities in the form of REMICs
or resell them as bulk whole loan sales. The period between the time IFC
commits to purchase 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 IFC to issue REMICs or to sell the loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and can eliminate or minimize any long-term
residual investment in such loans. REMIC securities consist of one or more
classes of "regular interests" and a single class of "residual interest." The
regular interests are tailored to the needs of investors and may be issued in
multiple classes with varying maturities, average lives and interest rates.
These regular interests are predominantly senior securities but, in
conjunction with providing credit enhancement, may be subordinated to the
rights of other regular interests. The residual interest represents the
remainder of the cash
16
flows from the mortgage loans (including, in some instances, reinvestment
income) over the amounts required to be distributed to the regular interests.
In some cases, the regular interests may be structured so that there is no
significant residual cash flow, thereby allowing IFC to sell its entire
interest in the mortgage loans. As a result, in some cases, all of the capital
originally invested in the mortgage loans by the Company is redeployed in the
Conduit Operations.
As part of its operations, IFC may retain regular and residual interests on
a short-term or long-term basis. During the year ended December 31, 1997, IFC
issued $878.0 million in REMIC securities backed by $896.0 million in
principal balance of mortgage loans. The following table sets forth REMIC
securities issued by the Conduit Operations:
ISSUANCE
ISSUE DATE ISSUANCE NAME AMOUNT
---------- ------------- -------------
(IN MILLIONS)
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
--------
835.2
--------
March 21, 1997.................. ICIFC Secured Assets Corp. 1997-1 275.4
June 24, 1997................... ICIFC Secured Assets Corp. 1997-2 285.0
September 24, 1997.............. ICIFC Secured Assets Corp. 1997-3 317.6
--------
878.0
--------
$1,713.2
========
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 (pass-through certificates guaranteed by FNMA, FHLMC or
GNMA) 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 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 assurances of the sellers' abilities to honor their
respective obligations.
17
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 Warehouse Lending Operations, conducted by IWLG, provides warehouse and
repurchase financing to affiliated companies and to approved mortgage banks,
most of which are correspondents of IFC, to finance mortgage loans during the
time from the closing of the loans to their sale or other settlement with pre-
approved investors. Such operations primarily consist of warehouse lending to
affiliated companies, to approved mortgage banks acting as correspondents of
IFC and to other mortgage banks. Generally, the non-conforming mortgage loans
funded with such warehouse lines of credit are acquired by IFC. IWLG's
warehouse lines are non-recourse and IWLG 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 $1.1 billion warehouse line to IFC. IFC's outstanding
warehouse line balance on IWLG's balance sheet are structured to qualify under
REIT asset tests and to generate income qualifying under the 75% gross income
test. The terms of affiliated warehouse lines are based on Bank of America's
prime rate with advance rates between 90% and 98% of the fair value of the
mortgage loans outstanding. 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.
At December 31, 1997, IWLG had $1.2 billion of warehouse lines of credit
available to 21 borrowers, of which $533.1 million was outstanding thereunder,
including $454.8 million outstanding to IFC, $8.5 million to Impac Commercial
Capital Corporation ("ICCC"), ICH's conduit operations, and $11.0 million to
WSI. IWLG finances its Warehouse Lending Operations through reverse repurchase
agreements and equity. At December 31, 1997, IWLG had entered into uncommitted
reverse repurchase facilities with two investment banks to provide financing
as needed.
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 (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
18
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 interest of the Company, given the cost of such hedging transactions and
the need to maintain IMH's status as a REIT. Such periodic caps on the
Company's mortgage loans may also be hedged by the purchase of mortgage
derivative securities. Mortgage derivative securities can be effective hedging
instruments in certain situations as the value and yields of some of these
instruments tend to increase as interest rates rise and tend to decrease in
value and yields as interest rates decline, while the experience for others is
the converse. The Company intends to limit its purchases of mortgage
derivative securities to investments that qualify as Qualified REIT Assets or
Qualified Hedges so that income from such investments will constitute
qualifying income for purposes of the 95% and 75% gross income tests. To a
lesser extent, the Company, through its 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 is exempt from the registration
requirements of the Commodity Exchange Act or otherwise comply with the
provisions of that Act. The REIT provisions of the Internal Revenue Code of
1986, as amended (the "Code"), may restrict the Company's ability to purchase
certain instruments and may severely restrict the Company's ability to employ
other strategies. In all its hedging transactions, the Company intends to deal
only with counterparties that the Company believes are sound credit risks.
During the years ended December 31, 1997 and 1996, the Company had not
purchased any interest rate caps or interest rate swaps.
Conduit Operations. In conducting its Conduit Operations, IFC is subject to
the risk of rising mortgage interest rates between the time it commits to
purchase mortgage loans at a fixed price and the time it sells or securitizes
those mortgage loans. To mitigate this risk, IFC enters into transactions
designed to hedge interest rate risks, which may include mandatory and
optional forward selling of mortgage loans or mortgage-backed securities,
interest rate caps, floors and swaps, and buying and selling of futures and
options on futures. The nature and quantity of these hedging transactions are
determined by the management of IFC based on various factors, including market
conditions and the expected volume of mortgage loan purchases.
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 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
IFC currently acquires substantially all of its mortgage loans on a
"servicing-released" basis and thereby acquires the servicing rights. IFC
subcontracts all of its servicing obligations under such loans to independent
19
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
0.25% to 0.65% per annum on the declining principal balances of the loans
serviced.
The following table sets forth certain information regarding IFC's servicing
portfolio of loans for the periods shown:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(DOLLARS IN MILLIONS,
EXCEPT AVERAGE LOAN SIZE)
Beginning servicing portfolio.............. $1,550.1 $ 512.1
Loans added to the servicing portfolio..... 2,500.0 1,506.4
Loans sold servicing released and principal
paydowns (1).............................. (1,021.5) (468.4)
-------- --------
Ending servicing portfolio................. $3,028.6 $1,550.1
======== ========
Number of loans serviced................... 28,494 11,996
Average loan size.......................... $106,287 $129,220
- --------
(1) Includes normal principal amortization and prepayments.
In the future, IFC 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.
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.
20
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. 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, 1997 and 1996, 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 0.25% to 0.65% 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 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. IFC intends to hold the master servicing fees receivable for
investment. Currently the secondary market for master servicing fees
receivable is limited. Accordingly, if IFC had to sell these receivables, the
value received may or may not be at or above the values at which IFC carried
them on its balance sheet.
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
21
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, 1997 and 1996, IFC had $15.6 million and $8.8 million,
respectively, of MSRs.
IFC 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, IFC monitors compliance with
its servicing guidelines and is required to perform, or to contract with a
third party to perform, all obligations not adequately performed by any
servicer. A master servicer typically employs servicers to carry out servicing
functions. Servicers typically perform servicing functions for the master
servicer as independent contractors. As of December 31, 1997, IFC is the
master servicer for $1.5 billion of fixed-rate loans collateralizing REMIC
securities and $738.5 million of primarily adjustable-rate loans
collateralizing CMOs. In addition, IFC 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, IFC and IMH have
entered into a Servicing Agreement effective on November 20, 1995 having terms
substantially similar to those described above for servicing agreements.
The following table sets forth delinquency statistics for IFC's servicing
portfolio for the periods shown:
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
---------------- ----------------
NUMBER % OF NUMBER % OF
OF SERVICING OF SERVICING
LOANS PORTFOLIO LOANS PORTFOLIO
------ --------- ------ ---------
Loans delinquent for:
30-59 days.................................. 1,167 4.10% 587 4.89%
60-89 days.................................. 282 0.99 118 0.98
90 days..................................... 69 0.24 3 0.03
----- ---- --- ----
1,518 5.33 708 5.90
Foreclosures pending.......................... 378 1.33 180 1.50
Bankruptcies pending.......................... 140 0.49 55 0.46
----- ---- --- ----
Total delinquencies, foreclosures and
bankruptcies............................. 2,036 7.15% 943 7.86%
===== ==== === ====
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.
22
The following table sets forth certain information regarding the number of
and aggregate principal balance of mortgage loans, net of premium, serviced by
IFC, including both fixed and adjustable rate loans, at various mortgage
interest rates for the periods shown:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------------- --------------------------
WEIGHTED WEIGHTED
NUMBER AGGREGATE AVERAGE NUMBER AGGREGATE AVERAGE
OF PRINCIPAL INTEREST OF PRINCIPAL INTEREST
INTEREST RATES(%) LOANS BALANCE RATE LOANS BALANCE RATE
- ----------------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Less than 5.00%........... 1 $ 37 4.75% 1 $ 46 4.75%
5.00-5.49................. 2 171 5.22 3 338 5.17
5.50-5.99................. -- -- -- 1 114 5.63
6.00-6.49................. 15 3,567 6.14 9 818 6.33
6.50-6.99................. 70 15,758 6.72 34 4,922 6.81
7.00-7.49................. 139 29,112 7.23 64 10,636 7.29
7.50-7.99................. 470 90,843 7.74 240 38,807 7.78
8.00-8.49................. 1,581 280,398 8.24 1,052 179,095 8.28
8.50-8.99................. 5,815 894,029 8.73 3,254 516,333 8.71
9.00-9.49................. 4,760 677,394 9.17 2,251 330,306 9.18
9.50-9.99................. 2,517 337,780 9.66 1,565 200,881 9.67
10.00-10.49............... 849 97,963 10.18 610 69,175 10.19
10.50-10.99............... 778 86,733 10.70 598 65,628 10.71
11.00-11.49............... 457 48,104 11.20 316 29,345 11.21
11.50-11.99............... 987 67,482 11.78 327 29,718 11.70
12.00-12.49............... 418 28,454 12.23 163 11,498 12.19
12.50-12.99............... 1,862 80,349 12.79 256 13,728 12.76
13.00-13.49............... 704 29,618 13.22 170 8,366 13.21
13.50-13.99............... 3,084 118,848 13.83 413 15,047 13.67
14.00 and over............ 3,985 141,914 14.94 669 25,320 14.42
------ ---------- ------ ----------
28,494 $3,028,554 9.71% 11,996 $1,550,121 9.33%
====== ========== ====== ==========
23
The following table sets forth the geographic distribution of IFC's
servicing portfolio for the periods shown:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------------- ---------------------------
% OF % OF
NUMBER AGGREGATE AGGREGATE NUMBER AGGREGATE AGGREGATE
OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL
STATES LOANS BALANCE BALANCE LOANS BALANCE BALANCE
- ------ ------ ---------- --------- ------ ---------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
California.............. 8,628 $1,212,810 40.05% 4,967 $ 771,109 49.75%
Florida................. 3,780 355,036 11.72 1,444 153,446 9.90
New Jersey.............. 1,583 222,035 7.33 916 119,272 7.69
New York................ 1,182 171,998 5.68 427 58,391 3.77
Washington.............. 980 96,324 3.18 447 49,272 3.18
Nevada.................. 655 69,354 2.29 200 24,338 1.57
Texas................... 599 67,540 2.23 188 20,421 1.32
Maryland................ 435 55,469 1.83 197 23,393 1.51
Georgia................. 700 52,604 1.74 155 18,220 1.18
Colorado................ 573 48,395 1.60 279 30,550 1.97
Oregon.................. 503 47,610 1.57 348 35,320 2.28
Virginia................ 394 45,061 1.49 138 17,390 1.12
Massachusetts........... 323 44,375 1.47 188 23,356 1.51
North Carolina.......... 512 44,168 1.46 176 18,154 1.17
Illinois................ 440 42,236 1.39 276 27,340 1.76
Arizona................. 582 41,243 1.36 183 18,285 1.18
Utah.................... 360 40,838 1.35 270 25,928 1.67
Connecticut............. 442 38,687 1.28 73 8,317 0.54
Hawaii.................. 249 38,432 1.27 130 26,730 1.72
Others (1).............. 5,574 294,339 9.71 994 80,889 5.21
------ ---------- ------ ------ ---------- ------
28,494 $3,028,554 100.00% 11,996 $1,550,121 100.00%
====== ========== ====== ====== ========== ======
- --------
(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.
IFC is an approved FHLMC seller/servicer. The Conduit Operations is subject
to the rules and regulations of FHLMC with respect to acquiring, processing,
selling and servicing conforming mortgage loans. In addition, IFC is required
annually to submit to FHLMC audited financial statements, and each regulatory
entity has its own financial requirements for sellers/servicers. For any
conforming mortgage loan activities, IFC's affairs are also subject to
examination by 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. 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.
24
COMPETITION
In purchasing non-conforming mortgage loans and issuing securities backed by
such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and
loan associations, finance companies, mortgage bankers, insurance companies,
other lenders and other entities purchasing mortgage assets. 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 IFCs 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, Southern
Pacific Bank ("SPB"), formerly Southern Pacific Thrift and Loan Association,
may compete with the Company as may Southern Pacific Funding Corporation
("SPFC"), an affiliate of ICII, whose business is primarily to act as a
wholesale originator and a bulk purchaser of non-conforming mortgage loans.
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
"Item 13. Certain Relationships and Related Transactions--Relationships with
ICII--The Contribution Transaction."
EMPLOYEES
As of December 31, 1997, the Company had 165 employees, ten of which were
employed by IWLG. Employees and operating management of the Long-Term
Investment Operations and Conduit Operations are employed by IFC. As of
December 31, 1997, IFC had 155 employees. The Company believes that relations
with its employees are good. The Company is not a party to any collective
bargaining agreement.
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company can obtain a "Safe Harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results
to differ from those in the forward-looking statements. Accordingly, the
following information contains or may contain forward-looking statements: (1)
information included in this Annual Report on Form 10-K, including, without
limitation, statements made regarding investments in mortgage-backed
securities, hedging, servicing of mortgage loans, financing and statements in
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, (2) information included in future filings by the
Company with the Securities and Exchange Commission including, without
limitation, statements with respect to growth, projected revenues, earnings,
returns and yields on its portfolio of mortgage assets, the impact of interest
rates, costs, and business strategies and plans (including, without
limitation, plans to purchase additional mortgage-backed securities and other
mortgage assets and the servicing and purchase of mortgage loans), and (3)
information contained in written material, releases and oral statements issued
by or on behalf of, the Company, including, without limitation, statements
with respect to growth, projected revenues, net income, returns and yields on
its portfolio of mortgage assets, the impact of interest rates, costs and
business strategies and plans (including, without limitation, plans to
purchase additional mortgage-backed securities and other mortgage assets and
the servicing and purchase of mortgage loans). The Company's actual results
may differ materially from those contained in the forward-looking statements
identified above. Factors which may cause such a difference to occur include,
but are not limited to, (i) heightened competition, including specifically
increased competition for acceptable mortgage asset
25
purchase opportunities with investment banking firms, savings and loan
associations, banks, thrift and loan associations, finance companies, mortgage
bankers, insurance companies, other lenders and other entities purchasing
mortgage assets which have investment objectives similar to those of the
Company and some of which may have investment objectives similar to those of
the Company and some of which may have greater financial resources than the
Company, (ii) the availability of suitable opportunities for the acquisition,
ownership and disposition of mortgage assets, and yields available from time
to time on such mortgage assets, (which, in turn, depend to a large extent on
the type of mortgage asset involved, prevailing interest rates, the nature and
geographical location of the property, competition and other factors, none of
which can be predicted with certainty), (iii) regulatory and litigation
matters, (iv) interest rates, (v) imbalances in cash available for
distribution caused by an unanticipated level of defaults and/or prepayments
on the Company's portfolio of mortgage assets and (vi) trends in the economy
which affect confidence and demand for the Company's portfolio of mortgage
assets, particularly trends affecting the Company's assets.
ITEM 2. PROPERTIES
The primary executive offices and administrative offices of the Company are
located in Santa Ana Heights, California. The Company currently occupies, and
is fully utilizing, approximately 33,000 square feet of space under a premises
operating sublease with ICII pursuant to an agreement expiring in the year
1999. Management believes that the terms of the sublease are at least as
favorable as could have been obtained from an unaffiliated third party. See
"Item 13. Certain Relationships and Related Transactions--Relationships with
ICII--Arrangements and Transactions with ICII" and "--Relationships with
Affiliates--Related Party Cost Allocations."
In August 1997, IMH and ICH each purchased for cash a 50% interest in a
commercial office building located in Newport Beach, California. As of
December 31, 1997, IMH and ICH financed the commercial property with a $5.2
million loan from ICCC. See "Item 13. Certain Relationships and Related
Transactions--Relationships with Affiliates--Credit Arrangements." The Company
expects IWLG and IFC to begin relocating employees to the building in 1998
with relocation scheduled for completion in 1999. Management believes that
these facilities will adequately provide for the Company's growth needs for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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.
On March 5, 1997, plaintiffs Fortune Mortgage Corporation ("Fortune") 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 ICII 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
26
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. Pursuant to defendants' petition to compel
arbitration, the entire matter is now pending for arbitration. Defendants have
filed a cross-claim against Fortune for, among other things, breach of the
Agreement for Purchase and Sale of Assets and breach of another agreement
between IFC and Fortune's predecessor in interest. Three arbitrators have been
selected and a two week arbitration hearing has been set for July 1998.
Discovery is in its early stages.
The Company believes that the Fortune case is without merit and intends to
vigorously defend the action.
Other Matters. A financial institution has contended that it has a claim
against the Company in connection with certain communications between the
Company and the financial institution regarding a certain mortgage broker and
transactions involving that mortgage broker. No lawsuit has been filed and no
damages have been alleged. The Company believes that these contentions are
without merit, and if a lawsuit is ever filed, it will be vigorously defended.
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
No matters were submitted to the security holders to be voted on during the
fourth quarter of 1997.
27
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 high, low and closing
sales prices for IMH's Common Stock as reported by the American Stock Exchange
for the periods indicated:
1997(1) 1996(1)
-------------------- -------------------
HIGH LOW CLOSE HIGH LOW CLOSE
------ ------ ------ ------ ----- ------
First Quarter........................ $17.67 $14.58 $15.25 $10.25 $8.58 $10.17
Second Quarter....................... 18.67 13.25 18.08 11.42 9.83 10.67
Third Quarter........................ 19.17 16.25 18.42 14.25 10.00 13.75
Fourth Quarter....................... 18.58 14.69 17.88 16.25 13.58 15.83
- --------
(1) Adjusted to reflect 3-for-2 common stock split effective November 24,
1997.
On March 24, 1998, the last reported sale price of the Common Stock on the
AMEX was $17.3125 per share. As of March 24, 1998, there were 867 holders of
record (including holders who are nominees for an undetermined number of
beneficial owners) of the Company's Common Stock.
Pursuant to IMH's Dividend Reinvestment and Stock Purchase Plan (the
"Plan"), stockholders can acquire additional shares of IMH Common Stock by
reinvesting their cash dividends at 97% (subject to change) of the average
high and low market prices as reported on the AMEX on the Investment Date (as
described in the Plan) to the extent shares are issued by IMH. Stockholders
may also purchase additional shares of IMH Common Stock through the cash
investment option to purchase shares at 97% (subject to change) of the average
high and low market prices as reported on the AMEX during the three trading
days preceding the Investment Date (as described in the Plan).
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 generally
accepted accounting principles ("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
dividend payment date of the following taxable year. The dividend policy is
subject to revision at the discretion of the Board of Directors. All
distributions in excess of those required for IMH to maintain REIT status will
be made by IMH at the discretion of the Board of Directors and will depend on
the taxable earnings of IMH, the financial condition of IMH, and such other
factors as the Board of Directors deems relevant. The Board of Directors has
not established a minimum distribution level. The following table sets forth
the dividends paid or declared by IMH:
PER SHARE
STOCKHOLDER DIVIDEND
PERIOD COVERED RECORD DATE AMOUNT (1)
-------------- ------------------ ----------
Quarter ended March 31, 1996 April 24, 1996 $0.26
Quarter ended June 30, 1996 June 13, 1996 $0.30
Quarter ended September 30, 1996 September 30, 1996 $0.35
Special Dividend(2) November 15, 1996 $0.28
Quarter ended December 31, 1996 December 31, 1996 $0.37
Quarter ended March 31, 1997 April 1, 1997 $0.39
Quarter ended June 30, 1997 July 7, 1997 $0.40
Quarter ended September 30, 1997 September 15, 1997 $0.43
Quarter ended December 31, 1997(3) December 31, 1997 $0.46
- --------
(1) Adjusted to reflect 3-for-2 common stock split effective November 24,
1997.
(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 $0.46 per share cash dividend
paid on January 15, 1998 to stockholders of record on December 31, 1997.
28
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. Of the total dividends
paid during 1997, approximately $5.5 million represented a tax-free return of
capital. There was no return of capital paid to stockholders in 1996 and 1995.
IMH annually furnishes to each of its stockholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital.
In December 1997, in connection with the termination of the Management
Agreement and pursuant to a termination agreement (the "Termination
Agreement") among IMH, IFC, ICII, ICAI and Messrs. Tomkinson, Ashmore and
Johnson, IMH issued 2,009,310 shares of Common Stock to Imperial Credit
Advisors, Inc. ("ICAI" or the "Manager"), a subsidiary of ICII, representing a
value of approximately $35.0 million. The shares issued to ICAI were issued in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act. ICAI subsequently transferred the shares to ICII. See "Item
13. Certain Relationships and Related Transactions--Relationships with the
Manager--Termination of Management Agreement."
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, 1997, and the
consolidated balance sheet data as of December 31, 1997 and 1996 were derived
from the Company's and IFC's financial statements audited by KPMG Peat Marwick
LLP ("KPMG"), independent auditors, whose reports with respect thereto appear
elsewhere herein. The selected consolidated statements of operations data for
the year ended December 31, 1994, and the consolidated balance sheet data as
of December 31, 1995, were derived from the Company's and IFC's financial
statements audited by KPMG. The selected consolidated statement of operations
data for the year ended December 31, 1993 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 IFC, audited by KPMG. Such
selected financial data should be read in conjunction with those financial
statements and the notes thereto and with Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
References to financial information of the Company for the year ended
December 31, 1997 reflect financial results of IMH's equity interest in net
earnings of IFC, IMH's equity interest in net loss of ICH, IMH's equity
interest in net loss of ICCC, prior to ICH's initial public offering on August
8, 1997, and the results of operations of IMH, IMH Assets, IWLG and Dove as
stand-alone entities, subsequent to the Company's Initial Public Offering
("IPO") on November 20, 1995. References to financial information of the
Company for the year ended December 31, 1996 reflect financial results of
IMH's equity interest in net income of IFC and results of operations of IMH,
IMH Assets and IWLG as stand-alone entities, subsequent to the Company's IPO.
References to financial information of the Company for the year ended December
31, 1995 reflect the pro forma financial data of IMH's equity interest in
ICII's mortgage conduit operations and SPB's warehouse lending operations,
pre-Contribution Transaction, and financial results of IMH's equity interest
in net earnings of IFC and results of operations of IWLG, post-Contribution
Transaction.
The results of operations of IFC, of which 99% of the economic interest is
owned by IMH, are included in the results of operations of the Company as
"Equity in net income of Impac Funding Corporation." The results of operations
of ICH, of which 17.4% of the economic interest is owned by IMH, are included
in the results of operations of the Company as "Equity in net loss of Impac
Commercial Holdings, Inc."
29
IMPAC MORTGAGE HOLDINGS, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- ------ -------
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income................ $ 109,533 $ 63,673 $ 2,851 $ 292 $ 767
Equity in net income of Impac
Funding Corporation........... 8,316 903 1,489 532 4,192
Equity in net loss of Impac
Commercial Holdings, Inc...... (239) -- -- -- --
Other income................... 2,249 593 244 83 320
---------- -------- -------- ------ -------
119,859 65,169 4,584 907 5,279
---------- -------- -------- ------ -------
Expenses:
Interest on CMO borrowings and
reverse repurchase agreements. 76,577 44,144 1,116 -- --
Interest on borrowings from
SPB........................... -- -- 599 127 334
Provision for loan losses...... 6,843 4,350 488 95 --
Advisory fee................... 6,242 3,347 38 -- --
General and administrative ex-
pense......................... 1,851 1,449 209 225 197
Termination agreement expense.. 44,375 -- -- -- --
---------- -------- -------- ------ -------
135,888 53,290 2,450 447 531
---------- -------- -------- ------ -------
Income (loss) before income
taxes....................... (16,029) 11,879 2,134 460 4,748
Income taxes (benefit)......... -- -- 76 (30) 234
---------- -------- -------- ------ -------
Net income (loss)............ $ (16,029) $ 11,879 $ 2,058 $ 490 $ 4,514
========== ======== ======== ====== =======
Basic net income (loss) per
share....................... $ (0.99) $ 1.34 $ 0.05 -- --
========== ======== ======== ====== =======
Diluted net income (loss) per
share....................... $ (0.99) $ 1.32 $ 0.05 -- --
========== ======== ======== ====== =======
Dividends declared per share. $ 1.68 $ 1.61 -- -- --
========== ======== ======== ====== =======
Net income per share before
management termination
expense (1)................. $ 1.72 $ 1.32 $ 0.05 -- --
========== ======== ======== ====== =======
AT DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- ------ -------
BALANCE SHEET DATA:
Total assets................... $1,752,812 $972,355 $613,688 $9,365 $13,591
Mortgage loans held for
investment and CMO collateral. 1,052,610 502,658 -- -- --
Finance receivables............ 533,101 362,312 583,021 3,120 8,135
Investment in Impac Funding
Corporation................... 27,122 9,896 866 6,335 5,446
Borrowings from SPB............ -- -- -- 2,511 7,585
CMO borrowings................. 741,907 474,513 -- -- --
Reverse repurchase agreements.. 755,559 357,716 567,727 -- --
Total stockholders' equity..... 229,030 129,190 45,236 6,853 6,006
- --------
(1) Amounts are after the effect of an expense (the "Termination Agreement
Expense") for the termination of the Company's Management Agreement with
ICAI.
30
IMPAC FUNDING CORPORATION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income................ $ 48,020 $ 32,799 $ 1,249 $ -- $ --
Gain on sale of loans.......... 19,414 7,747 4,135 2,291 5,859
Loan servicing income.......... 4,109 1,250 5,159 4,043 1,377
Gain on sale of servicing
rights........................ -- -- 370 4,188 5,332
Other income................... 643 -- -- -- --
-------- -------- -------- ------- -------
72,186 41,796 10,913 10,522 12,568
-------- -------- -------- ------- -------
Expenses:
Interest on borrowings......... 41,628 31,751 1,785 538 127
General and administrative and
other......................... 10,047 7,154 3,663 6,333 4,507
Provision for repurchases and
loan losses................... 3,148 687 -- 655 175
Amortization of mortgage ser-
vicing rights................. 2,827 613 2,892 2,070 459
-------- -------- -------- ------- -------
57,650 40,205 8,340 9,596 5,268
-------- -------- -------- ------- -------
Income before income taxes....... 14,536 1,591 2,573 926 7,300
Income taxes................... 6,136 679 1,069 389 3,066
-------- -------- -------- ------- -------
Net income....................... $ 8,400 $ 912 $ 1,504 $ 537 $ 4,234
======== ======== ======== ======= =======
Operating Data (in millions):
Mortgage loan acquisitions
(volume)...................... $ 2,571 $ 1,542 $ 1,133 $ 1,726 $ 2,149(1)
Servicing portfolio at period-
end........................... 3,029 1,550 512 1,868 950
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
BALANCE SHEET DATA:
Total assets................... $656,944 $399,171 $552,631 $12,097 $10,158
Mortgage loans held for sale... 620,549 334,104 544,275 -- --
Residual interests in
securitizations............... -- 46,949 -- -- --
Mortgage servicing rights...... 15,568 8,785 -- 11,453 9,551
Borrowings from IWLG........... 454,840 327,422 550,291 -- --
Other borrowings............... 148,307 -- -- -- --
Borrowings from affiliates..... 6,198 54,803 -- 5,698 4,657
Total shareholders' equity..... 27,396 9,996 874 6,399 5,501
- --------
(1) Represents principal amounts of mortgage loans purchased, excluding
premiums and discounts.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Impac Mortgage Holdings, Inc. is a Maryland corporation formed on August 28,
1995 under the name Imperial Credit Mortgage Holdings, Inc. The Company
operates three businesses: the Long-Term Investment Operations, the Warehouse
Lending Operations and the Conduit Operations. Prior to the Contribution
Transaction, see "--Contribution Transaction," IWLG, formerly Imperial
Warehouse Lending Group, Inc. and IFC, formerly ICI Funding Corporation, were
previously owned and operated by ICII a leading diversified financial services
company. IMH operates so as to qualify as a REIT under the requirements of the
Code.
The Long-Term Investment Operations conducted by IMH and IMH Assets, invests
primarily in non-conforming residential mortgage loans and mortgage-backed
securities secured by or representing interests in such loans. The Long-Term
Investment Operations also invests, to a lesser extent, in second mortgages.
The Conduit Operations, conducted by IFC, 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. IFC, 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 conducted by IWLG provides short-term lines of credit to affiliated
companies and other approved mortgage banks, most of which are correspondents
of IFC, to finance mortgage loans during the time from the closing of the
loans to their sale or other settlement with pre-approved investors.
References to "Pre-Contribution Transaction" refer to periods prior to
November 20, 1995, the date of IMH's IPO. References to "Post-Contribution
Transaction" refer to periods after November 20, 1995. References to financial
information of IMH Pre-Contribution Transaction reflect the pro forma
financial data of IMH's equity interest in SPB's, formerly Southern Pacific
Thrift and Loan Association, warehouse lending operations and ICII's mortgage
conduit operations prior to November 20, 1995. References to financial
information of IMH Post-Contribution Transaction reflect the financial
operations of IMH and its subsidiaries, IMH's equity interest in IFC, and
IMH's equity interest in ICH subsequent to ICH's initial public offering on
August 8, 1997. All references to earnings per share and number of shares
issued or outstanding give retroactive effect to IMH's 3-for-2 stock split
effective November 24, 1997.
Contribution Transaction
On November 20, 1995, ICII contributed to IFC 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 the non-voting preferred
stock of IFC. 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 IFC, which represents 99% of the economic
interest in IFC, (ii) SPB contributed to IMH certain of the operating assets
and certain customer lists of SPB's warehouse lending division, and (iii) ICII
and SPB executed a Non-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 SPB. Such shares have subsequently been sold by ICII and SPB. All of the
outstanding shares of common stock of IFC were retained by ICII. Lastly, IMH
contributed to IWLG all of the aforementioned operating assets of SPB'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 SPB 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
32
of finance receivables, and $26.6 million in advances made by ICII and SPB to
fund mortgage conduit loan acquisitions and to fund finance receivables,
respectively.
Significant Transactions
In February 1997, certain officers and directors of the Company, as a group,
and IMH purchased 300,000 and 299,000 shares of the Common Stock of ICH,
respectively. In addition, IMH purchased all of the non-voting preferred stock
of ICCC, which represents 95% of the economic interest in ICCC, for $500,000,
and certain of the Company's officers purchased all of the outstanding shares
of common stock of ICCC, which represents 5% of the economic interest in ICCC.
In addition, ICCC brokered ICH's purchase of $7.3 million and $10.2 million of
condominium conversion loans that were financed with $16.6 million in
borrowings under a warehouse lending facility provided by a subsidiary of IMH,
and $900,000 in borrowings from IMH.
In March 1997, IMH loaned ICH $15.0 million evidenced by a promissory note
convertible into shares of non-voting preferred stock of ICH ("ICH Preferred
Stock") at the rate of one share of ICH Preferred Stock for each $5.00
principal amount of said note. IMH converted the aforementioned $15.0 million
principal amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock. All shares of ICH Preferred Stock were automatically
converted upon the closing of ICH's initial public offering into shares of ICH
Common Stock determined by multiplying the number of shares of ICH Preferred
Stock to be converted by a fraction, the numerator of which was $5.00 and the
denominator of which was $15.00. Notwithstanding the foregoing, consistent
with IMH's classification as a REIT, IMH was not entitled to convert into ICH
Common Stock more than that number of shares of ICH Preferred Stock whereby
IMH would own, immediately after such conversion, greater than 9.8% of ICH's
outstanding Common Stock. Any shares of ICH Preferred Stock not converted into
ICH common stock upon the closing of the offering automatically converted into
shares of ICH non-voting Class A Common Stock ("ICH Class A Stock") at the
same rate as the ICH Preferred Stock converted into common stock of ICH.
Shares of ICH Class A Stock convert into shares of common stock of ICH on a
one-for-one basis and each such class of common stock of ICH is entitled to
cash dividends on a pro rata basis. Upon any subsequent issuances of common
stock by ICH or sale of ICH common stock held by IMH, shares of ICH Class A
Stock shall automatically convert into additional shares of the common stock
of ICH, subject to a 9.8% limitation. In addition, ICH purchased $10.1 million
in CMBS from IFC which was financed with a promissory note. The promissory
note was repaid to IFC with cash from IMH's above-referenced $15.0 million
investment. Concurrently, ICH repaid the $900,000 owed to IMH in connection
with its purchase of condominium conversion loans. Subsequently, ICH entered
into a borrowing agreement with ICII for $7.9 million secured by $10.1 million
CMBSs.
In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by
it for an equivalent number of shares of ICH Class A Stock.
Upon the closing of the ICH initial public offering in August 1997, IMH
contributed to ICH 100% of the outstanding shares of non-voting preferred
stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. As of
December 31, 1997, IMH owned 719,789 shares, or 9.8%, of ICH Common Stock in
addition to 674,211 shares, or 100%, of ICH Class A Stock.
In August 1997, Dove, a California limited liability company, of which each
of IMH and ICH own a 50% interest, purchased an office building located in
Newport Beach, California, for $7.8 million plus related closing costs. IMH
intends to relocate their headquarters to the building over the next two-year
period.
During 1997, IMH raised additional capital of $83.1 million, net of offering
expenses, as 4.8 million shares of Common Stock were issued through a public
stock offering and $24.7 million or 1.6 million shares were purchased under
the Company's Dividend Reinvestment and Stock Purchase Plan. Proceeds from the
sale of securities were used for general corporate purposes including, without
limitation, funding the Long-Term Investment Operations, the Conduit
Operations and the Warehouse Lending Operations, repayment of maturing
obligations, redemption of outstanding indebtedness, financing future
acquisitions, capital expenditures and working capital.
33
During 1997, IMH issued $521.7 million in CMOs, which were collateralized by
$533.9 million of mortgages, and IFC issued $878.0 million in REMIC securities
backed by $896.0 million in principal balance of mortgage loans.
Historical Trends
IFC'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 IFC's refocus from the conforming to the non-
conforming mortgage loan market and increased competition in such non-
conforming market. IFC 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 IFC's efforts to reduce excess production capacity
through 1994 and 1995. In an effort to increase profitability, IFC reduced
operating expenses in 1994 and 1995, primarily through a reduction in
personnel. At December 31, 1995, IFC 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. In 1995, IFC also emphasized the acquisition of higher margin non-
conforming mortgage loan products which provide a higher return than
conforming mortgage loans.
During the year ended December 31, 1996, IFC'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, IFC'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 during 1996 as
compared to 1995 was primarily the result of the Company's increased marketing
and sales efforts subsequent to the Contribution Transaction, 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 conjunction with the increase in
flow (loan-by-loan) acquisitions, as opposed to bulk loan acquisitions,
subsequent to the Contribution Transaction, the Company added personnel. At
December 31, 1996, IFC employed 104, an increase of 189%, from 36 employees at
December 31, 1995.
During the year ended December 31, 1997, IFC's mortgage loan acquisitions
increased 73% to $2.6 billion as compared to $1.5 billion for the same period
in 1996. IFC acquired $90.7 million of mortgages from affiliated parties
during 1997 as compared to $251.8 million during 1996. Excluding the
acquisition of mortgage loans from affiliated parties, IFC's mortgage loan
acquisitions increased 92% to $2.5 billion during 1997 as compared to $1.3
billion during 1996. The increase in mortgage loan acquisitions during 1997 as
compared to 1996 was primarily the result of acquiring $576.2 million in
second trust deed mortgages on a bulk basis and acquiring $773.7 million in
principal balance of Progressive Express(TM) loans on a flow basis as compared
to none and $22.0 million, respectively, of such loans acquired during 1996.
Progressive Express(TM) is a loan program with a one-page loan application
that includes less paperwork for the borrower, express credit approval and
attractive rates and terms. IFC securitized $896.0 million of fixed rate
mortgages in the form of REMICs and sold whole loans to third-party investors
totaling $501.7 million during 1997 as compared to $850.3 million and
$195.4 million, respectively, during 1996. Due to continued growth from the
Company's Long-Term Investment, Warehouse Lending, and Conduit Operations and
the organization of ICH as a public company in 1997, the Company added
personnel. At December 31, 1997, the Company employed 165, an increase of 59%,
from 104 employees at December 31, 1996.
34
RESULTS OF OPERATIONS; IMPAC MORTGAGE HOLDINGS, INC.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Income (loss)
Net loss for 1997 was $(16.0) million, or $(0.99) per diluted share, as
compared to net income of $11.9 million, or $1.32 per diluted share, for 1996.
The decrease in net income for 1997 is principally due to the effect of the
Termination Agreement Expense of $44.4 million related to the buyout of the
Company's Management Agreement with ICAI, a subsidiary of ICII, on December
22, 1997. Excluding the Termination Agreement Expense, net income for 1997
would have increased 139% to $28.3 million, or $1.72 per diluted share, as
compared to $11.9 million, or $1.32 per diluted share, for 1996.
The increase in net income for 1997, after excluding the effect of the
Termination Agreement Expense, was primarily the result of an increase in net
interest income and equity in net income of Impac Funding Corporation of
$13.4 million and $7.4 million, respectively, which was partially offset by an
increase in the provision for loan losses and advisory fees of $2.5 million
and $2.9 million, respectively.
Revenues
Revenues for the year ended December 31, 1997 increased to $119.9 million as
compared to $65.2 million for the same period in 1996, primarily as a result
of increased interest income from the Company's Long-Term Investment and
Warehouse Lending Operations and increased profitability from the Company's
Conduit Operations.
Interest income increased 72% to $109.5 million for 1997 as compared to
$63.7 million for 1996 as total average interest-earning assets increased 69%
to $1.3 billion (weighted average yield of 8.31%) as compared to $771.1
million (weighted average yield of 8.25%), respectively. The increase in
interest income was primarily from the Company's portfolio of mortgage loans
held for investment and CMO collateral and, to a lesser extent, from
investment securities available-for-sale and finance receivables.
Interest income on mortgage loans held for investment and CMO collateral
increased 180% to $62.5 million for 1997 as compared to $22.3 million for 1996
as average mortgage loans held for investment and CMO collateral increased
163% to $809.0 million as compared to $307.9 million, respectively. Mortgage
loans held for investment increased as IMH acquired $877.1 million of
mortgages from IFC during 1997 as compared to $591.6 million during 1996, of
which $533.8 million of mortgage acquisitions were used for CMO collateral
during 1997. The effective weighted average yield on mortgage loans held for
investment and CMO collateral for 1997 was 7.73% as compared to 7.23% for
1996. Interest income on mortgage loans held for investment and CMO collateral
includes the effect of amortization of net premiums paid in acquiring the
mortgage loans. As of December 31, 1997, net premiums on mortgage loans held
for investment and CMO collateral was $39.3 million.
Interest income on investment securities available-for-sale increased 67% to
$8.5 million for 1997 as compared to $5.1 million for 1996 as average
securities available-for-sale increased 63% to $64.9 million as compared to
$39.7 million, respectively. IMH retained $12.6 million of mortgage-backed
securities from IFC during 1997 that were created from IFC's issuance of
REMICs. The effective weighted average yield on investment securities
available-for-sale for 1997 was 13.16% as compared to 12.88% for 1996.
Interest income on finance receivables increased 5% to $37.3 million for
1997 as compared to $35.6 million for 1996 as average finance receivables
increased 6% to $433.9 million as compared to $410.7 million, respectively.
Interest income on finance receivables to affiliates represented a 7% increase
to $34.0 million for 1997 as compared to $31.8 million for 1996 as average
finance receivables to affiliates increased 4% to $399.8 million for 1997 as
compared to $383.2 million for 1996. The effective weighted average yield on
finance receivables for 1997 was 8.59% as compared to 8.67% for 1996.
35
Equity in net income of Impac Funding Corporation increased to $8.3 million
for 1997 as compared to $903,000 for 1996. IMH has a 99% economic interest in
IFC through its ownership of 100% of the preferred stock of IFC. For
additional information on the financial results of IFC, see "--Results of
Operations; Impac Funding Corporation."
Expenses
Expenses were $135.9 million for 1997 as compared to $53.3 million for 1996.
Excluding the Termination Agreement Expense of $44.4 million, expenses
increased 72% to $91.5 million for 1997 as compared to $53.3 million for 1996.
The increase in expense, excluding the Termination Agreement Expense, was
primarily the result of increased interest expense on reverse repurchase
borrowings by the Company's Long-Term Investment Operations and Warehouse
Lending Operations and, to a lesser extent, increases in provision for loan
losses and advisory fees.
Interest expense on reverse repurchase and CMO borrowings increased 73% to
$76.6 million for 1997 as compared to $44.1 million for 1996 as total average
interest-bearing liabilities increased 70% to $1.2 billion (weighted average
yield of 6.41%) as compared to $704.9 million (weighted average yield of
6.26%), respectively. The increase in interest expense was primarily the
result of increased interest expense on CMO borrowings and reverse repurchase
agreements used to finance the acquisition of mortgage loans and investment
securities available-for-sale and the financing of mortgage loans under
warehouse financing facilities.
Interest expense on CMO borrowings increased 121% to $36.8 million for 1997
as compared to $16.6 million for 1996 as average CMO borrowings increased 117%
to $586.5 million as compared to $270.8 million, respectively. The effective
weighted average yield on CMO borrowings for 1997 was 6.25% as compared to
6.13% for 1996.
Interest expense on reverse repurchase borrowings increased 44% to $39.8
million for 1997 as compared to $27.5 million for 1996 as average reverse
repurchase agreements increased 40% to $609.0 million as compared to $434.1
million, respectively. The effective weighted average yield on reverse
repurchase agreements for 1997 was 6.52% as compared to 6.34% for 1996.
Provision for loan losses increased 58% to $6.8 million for 1997 as compared
to $4.3 million for 1996 as a result of the combined increase in mortgage
loans held for investment, CMO collateral, and finance receivables ("Gross
Loan Receivables") outstanding at December 31, 1997 of $1.6 billion as
compared to Gross Loan Receivables outstanding at December 31, 1996 of $865.0
million. 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. The Company's total allowance for loan losses expressed as a
percentage of Gross Loan Receivables was 0.33% at December 31, 1997 as
compared to 0.50% at December 31, 1996. The allowance decreased as a
percentage of Gross Loan Receivables as the Company accelerated losses
totaling $1.4 million against the allowance for loan losses through the sale
of delinquent, foreclosure and bankruptcy loans during the year in order to
reduce its overall exposure to delinquent loans and future losses.
Advisory fees increased 88% to $6.2 million for 1997 as compared to $3.3
million for 1996. The increase in advisory fees during 1997 was the result of
an increase in incentive compensation paid to the Manager, ICAI. The increase
was directly attributable to the increase in the Company's earnings and assets
during 1997 over 1996. For more information on the calculation of the advisory
fee, see "Item 13. Certain Relationships and Related Transactions--
Relationships with the Manager--Management Fees."
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Income
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
diluted share for the year ended December 31, 1996 was $1.32.
36
Revenues
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 IFC subsequent to the Initial Public Offering. At December 31, 1996, IFC
accounted for 90% of the company's total gross finance receivables
outstanding. 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
IFC. Such loan sales were made to the Long-Term Investment Operations or to
other investors, and the proceeds reduced IFC's borrowings from IWLG.
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.
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. 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
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
an increase in borrowings associated with the financing of the Company's
finance receivables, CMO collateral and investment securities available for
sale, an increase in the provision for loan losses, and the payment of fees
associated with the Management Agreement.
Interest expense from reverse repurchase borrowings, CMO borrowings or
borrowings from SPB 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.
37
RESULTS OF OPERATIONS; IMPAC FUNDING CORPORATION
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net Income
Net income for 1997 increased to $8.4 million from $912,000 for the same
period in 1996. The increase in net income for 1997 as compared to 1996 was
primarily the result of an increase in net interest income of $5.3 million,
gain on sale of loans of $11.7 million, and loan servicing income of $2.9
million which was partially offset by increases in other operating expenses of
$7.6 million and income taxes of $5.5 million.
Revenues
Revenues increased 73% to $72.2 million for 1997 as compared to $41.8
million for 1996 primarily as a result of increases in interest income on
mortgage loans held for sale, gain on sale of loans, and loan servicing
income.
Interest income on mortgage loans held for sale increased 46% to $48.0
million for 1997 as compared to $32.8 million for 1996 primarily as the result
of increased interest income earned from the acquisition of loans during 1997
as compared to 1996. IFC acquired $2.5 billion in principal balance of
mortgages during 1997 as compared to $1.5 billion in principal balance of
mortgages acquired during 1996. Additionally, included in the $2.5 billion of
loans acquired during 1997, IFC acquired $576.2 million of second trust deed
loans purchased in bulk during 1997 as compared to none during 1996. Average
mortgage loans held for sale increased 19% to $455.3 million for 1997 as
compared to $383.8 million for 1996.
Gain on sale of loans increased 152% to $19.4 million for 1997 as compared
to $7.7 million for 1996. The increase in gain on sale of loans was primarily
due to the securitization of loans funded under the Progressive Express(TM)
program and whole loan cash sales to third-party investors. IFC acquired
$773.7 million of Progressive Express loans during 1997 as compared to $22.0
million of Progressive Express loans acquired during 1996. In addition, IFC
sold whole loans to third-party investors totaling $501.7 million during 1997
as compared to $195.4 million during 1996. The sale of mortgage loans during
1997 generated greater profits per loan than IFC earned on the sale of its
loans during 1996.
Loan servicing income increased 215% to $4.1 million for 1997 as compared to
$1.3 million for 1996 due to the continued increase in IFC's servicing
portfolio. IFC continues to build its loan servicing portfolio as IFC
generally retains loan servicing rights on mortgage loans acquired. Total
loans serviced at December 31, 1997 were 28,494, or $3.0 billion in principal
balance of mortgages, as compared to 11,996, or $1.6 billion in principal
balance of mortgages, at December 31, 1996.
Expenses
Expenses for 1997 were $57.7 million as compared to $40.2 million for 1996.
The increase in expense was primarily the result of increases in interest
expense on borrowings of $9.9 million, provision for loan losses and loan
repurchases of $2.5 million, amortization of MSR's of $2.2 million, personnel
expense of $1.7 million, and other operating expense of $1.2 million.
Interest expense on borrowings increased 31% to $41.6 million for 1997 as
compared to $31.8 million for 1996. The increase was primarily the result of
increased interest expense associated with greater reverse repurchase
borrowings used to finance the acquisition of $2.5 billion in principal
balance of mortgages during 1997 as compared to $1.5 billion in principal
balance of mortgages during 1996. Average borrowings increased 16% to $445.5
million for 1997 as compared to $383.2 million for 1996.
Provision for loan repurchases increased 351% to $3.1 million during 1997 as
compared to $687,000 during 1996 primarily as IFC securitized and sold more
loans during 1997 as compared to 1996. During 1997, IFC
38
securitized $896.0 million of fixed rate loans as REMIC securitizations and
sold $501.7 million of whole loans to third-party investors as compared to
$850.3 million and $195.4 million, respectively, during 1996.
Amortization of MSR's increased 357% to $2.8 million during 1997 as compared
to $613,000 during 1996 primarily as IFC amortized servicing rights on $19.0
million of MSR's added during 1997 and 1996 as compared to amortization of
servicing rights of $9.4 million of MSR's added during 1996. As IFC's
servicing portfolio and, correspondingly, MSR's continue to grow, amortization
of servicing rights will continue to increase.
Personnel expense increased 33% to $6.8 million for 1997 as compared to $5.1
million for 1996 primarily due to an increase in staffing during 1997. IFC
employed 155 at December 31, 1997 as compared to 104 at December 31, 1996,
which represents a 49% increase. Staff was added in 1997 primarily due to the
increase in loan acquisitions to $2.6 billion during 1997 as compared to $1.5
billion during 1996 and due to IFC's new submanagement agreement to provide
various services to ICH and ICCC.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Net Income
Net income for IFC for the year ended December 31, 1996 decreased 39% to
$912,000 from $1.5 million for the same period in 1995.
Revenues
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 IFC'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 IFC retaining mortgage loans held for sale
during the period. Prior to the Contribution Transaction, all of IFC'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 IFC 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 IFC 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, 1995. Total loans serviced at December 31, 1996
were $1.6 billion as compared to $512.1 million at December 31, 1995.
Expenses
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 IFC'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, IFC had no mortgage loans held for sale.
39
Subsequent to the Contribution Transaction, IFC entered into a warehouse
arrangement with IWLG to provide mortgage loan financing during the process of
IFC accumulating loans for sale and securitization. As a result of this
facility, IFC 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 IFC 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,
IFC 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from funding needs
arising from the acquisition of mortgage loans and mortgage-backed securities
by the Long-Term Investment, IMH, and Conduit Operations, IFC, and funding of
finance receivables made by the Warehouse Lending Operations, IWLG, under
warehouse line agreements. The Long-Term Investment Operations is primarily
funded through borrowings from reverse repurchase agreements, the issuance of
CMO's, and capital. The Warehouse Lending Operations is funded through
borrowings from reverse repurchase agreements and capital. The Conduit
Operations is funded through reverse repurchase borrowings from IWLG and
third-party lenders under warehouse line agreements and the sale of mortgage
loans and mortgage-backed securities.
The Warehouse Lending Operations finances the acquisition of mortgage loans
and mortgage-backed securities by the Long-Term Investment and Conduit
Operations primarily through borrowings on reverse repurchase agreements with
third-party lenders. IWLG has obtained two uncommitted repurchase facilities
from major investment banks to provide financing as needed. Terms of the
reverse repurchase agreements require that the mortgages be held by an
independent third party custodian, 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.
As of December 31, 1997, the Long-Term Investment Operations had $741.9
million of CMO borrowings used to finance $794.9 million of CMO collateral.
During 1997, the Long-Term Investment Operations issued $521.7 million in CMOs
to finance the acquisition of mortgage loans. The Long-Term Investment
Operations 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. The interest rates on the borrowings range from 22 basis
points to 130 basis points over one-month LIBOR. Equity in the CMOs is
established at the time of issuance and are issued at levels sufficient to
achieve desired credit ratings on the securities from the rating agencies.
During 1997, the Company raised additional capital of $107.8 million, net of
offering expenses, through a public common stock offering and from the
Company's Dividend Reinvestment and Stock Purchase Plan. Capital raised
through the issuance of common stock was used to fund the Long-Term
Investment, Warehouse Lending, and Conduit Operations.
40
The Conduit Operations has entered into warehouse line agreements to obtain
financing up to $1.1 billion from the Warehouse Lending Operations to provide
IFC mortgage loan financing during the period that IFC accumulates mortgage
loans and until the mortgage loans are securitized and sold. The margins on
the reverse repurchase agreements are based on the type of collateral used and
generally range from 95% to 100% of the fair market value of the collateral.
The interest rates on the borrowings are indexed to Bank of America's prime
lending rate, which was 8.50% at December 31, 1997.
The Conduit Operations has entered into a committed warehouse line agreement
to obtain financing up to $200.0 million from a major investment bank. The
margins on the reverse repurchase agreements are based on the type of
collateral used and generally range from 95% to 98% of the fair market value
of the collateral. The interest rates on the borrowings are indexed to LIBOR
plus a spread of 75 basis points to 125 basis points depending on the type of
collateral used.
The Conduit Operations has also entered into an uncommitted warehouse line
agreement to obtain financing as needed from a major investment bank. The
margins on the reverse repurchase agreements are based on the type of
collateral used and generally range from 95% to 98% of the fair market value
of the collateral. The interest rates on the borrowings are indexed to LIBOR
plus a spread of 75 basis points.
During 1997, the Conduit Operations securitized $896.0 million of mortgage
loans as REMIC securitizations and sold $1.3 billion of loans to the Long-Term
Investment Operations and third-party investors. By securitizing and selling
loans on a periodic and consistent basis, the warehouse financing facilities
were sufficient to handle IFC's liquidity needs during 1997.
Net cash provided by (used in) operating activities during the years ended
December 31, 1997, 1996 and 1995 was $9.2 million, $6.4 million, and
$(72,000), respectively. Net cash provided by operating activities increased
during 1997 as compared to 1996 primarily due to an increase in net income
after excluding the non-cash effect of the buyout of the Company's Management
Agreement with ICAI.
Net cash used in investing activities for the year ended December 31, 1997,
1996 and 1995 was $(765.6) million, $(330.2) million, and $(629.1) million,
respectively. Net cash flows from investing activities decreased during 1997
primarily due to increases in CMO collateral, finance receivables, and
mortgage loans held for investment as a result of mortgage loan acquisitions.
Net cash provided by financing activities for the year ended December 31,
1997, 1996 and 1995 was $750.1 million, $344.1 million, and $631.5 million,
respectively. Net cash flows from financing activities increased during 1997
primarily due to increases in reverse repurchase borrowings, CMO borrowings,
and proceeds from sale of common stock.
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.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................... 43
Consolidated Balance Sheets................................................ 44
Consolidated Statements of Operations...................................... 45
Consolidated Statements of Changes in Stockholders' Equity................. 46
Consolidated Statements of Cash Flows...................................... 47
Notes to Consolidated Financial Statements................................. 49
IMPAC FUNDING CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................... 72
Consolidated Balance Sheets................................................ 73
Consolidated Statements of Operations...................................... 74
Consolidated Statements of Changes in Stockholders' Equity................. 75
Consolidated Statements of Cash Flows...................................... 76
Notes to Consolidated Financial Statements................................. 77
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Mortgage Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Impac
Mortgage Holdings, Inc. and subsidiaries (formerly Imperial Credit Mortgage
Holdings, Inc. and subsidiaries) as of December 31, 1997 and 1996, 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, 1997. 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 Impac Mortgage Holdings, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
February 9, 1998
43
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
AT DECEMBER 31,
--------------------
1997 1996
---------- --------
ASSETS
Cash and cash equivalents................................ $ 16,214 $ 22,610
Investment securities available-for-sale................. 67,011 63,506
Loan Receivables:
CMO collateral......................................... 794,893 501,744
Finance receivables.................................... 533,101 362,312
Mortgage loans held for investment..................... 257,717 914
Allowance for loan losses.............................. (5,129) (4,384)
---------- --------
Net loan receivables................................. 1,580,582 860,586
Investment in Impac Funding Corporation.................. 27,122 9,896
Due from affiliates...................................... 16,679 7,709
Investment in Impac Commercial Holdings, Inc............. 17,985 --
Accrued interest receivable.............................. 15,012 7,263
Other real estate owned.................................. 5,662 332
Premises and equipment, net.............................. 3,866 --
Other assets............................................. 2,679 453
---------- --------
$1,752,812 $972,355
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings........................................... $ 741,907 $474,513
Reverse repurchase agreements............................ 755,559 357,716
Due to affiliates........................................ 12,421 27
Accrued dividends........................................ 10,371 5,170
Other liabilities........................................ 3,524 5,739
---------- --------
Total liabilities........................................ 1,523,782 843,165
---------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 10 million shares
authorized; none issued or outstanding at December 31,
1997 and 1996......................................... -- --
Common stock, $0.01 par value; 50 million shares
authorized; 22,545,664 and 9,400,000 shares issued and
outstanding at December 31, 1997 and 1996,
respectively.......................................... 225 94
Additional paid-in capital............................. 283,012 135,521
Investment securities valuation allowance.............. (5,116) (2,459)
Cumulative dividends declared.......................... (43,927) (15,441)
Notes receivable from common stock sales............... (1,330) (720)
Retained earnings (accumulated deficit)................ (3,834) 12,195
---------- --------
Total stockholders' equity............................... 229,030 129,190
---------- --------
Commitments and contingencies
Subsequent events
$1,752,812 $972,355
========== ========
See accompanying notes to consolidated financial statements.
44
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- ------
Revenues:
Interest income..................................... $109,533 $63,673 $2,851
Equity in net income of Impac Funding Corporation... 8,316 903 1,489
Equity in net loss of Impac Commercial Holdings,
Inc................................................ (239) -- --
Other income........................................ 2,249 593 244
-------- ------- ------
119,859 65,169 4,584
-------- ------- ------
Expenses:
Interest on CMO borrowings and reverse repurchase
agreements......................................... 76,577 44,144 1,116
Interest on borrowings from SPB..................... -- -- 599
Provision for loan losses........................... 6,843 4,350 488
Advisory fee........................................ 6,242 3,347 38
Professional services............................... 1,117 741 54
General and administrative expense.................. 403 398 64
Personnel expense................................... 331 310 91
Termination agreement expense....................... 44,375 -- --
-------- ------- ------
135,888 53,290 2,450
-------- ------- ------
Income (loss) before income taxes................... (16,029) 11,879 2,134
Income taxes.......................................... -- -- 76
Net income (loss)................................... $(16,029) $11,879 $2,058
======== ======= ======
Net income (loss) per share--basic.................. $ (0.99) $ 1.34 $ 0.05
======== ======= ======
Net income (loss) per share--diluted................ $ (0.99) $ 1.32 $ 0.05
======== ======= ======
See accompanying notes to consolidated financial statements.
45
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTES
RECEIVABLE
INVESTMENT FROM RETAINED
NUMBER OF ADDITIONAL SECURITIES CUMULATIVE COMMON EARNINGS TOTAL
SHARES COMMON PAID-IN CONTRIBUTED VALUATION DIVIDENDS STOCK (ACCUMULATED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL CAPITAL ALLOWANCE DECLARED SALES DEFICIT) EQUITY
----------- ------ ---------- ----------- ---------- ---------- ---------- ------------ -------------
Balance, December
31, 1994........ -- $ -- $ -- $ 356 $ -- $ -- $ -- $ 6,496 $ 6,852
Contributions
Transaction..... 500,000 5 515 (356) -- -- -- (8,239) (8,075)
Net proceeds,
from initial
public offering. 3,750,000 38 44,456 -- -- -- -- -- 44,494
Net income, 1995. -- -- -- -- -- -- -- 2,058 2,058
Securities
valuation
allowance, net.. -- -- -- -- (93) -- -- -- (93)
---------- ----- -------- ----- ------- -------- ------- -------- --------
Balance, December
31, 1995........ 4,250,000 43 44,971 -- (93) -- -- 315 45,236
Cumulative
dividends
declared ($1.61
per share)...... -- -- -- -- -- (15,441) -- -- (15,441)
Net proceeds from
public stock
offerings....... 5,000,000 50 87,888 -- -- -- -- -- 87,938
Sale of common
stock........... 105,000 1 2,078 -- -- -- -- -- 2,080
Exercise of stock
options ($8.67
per share)...... 45,000 -- 584 -- -- -- -- -- 584
Notes receivable
from common
stock sales..... -- -- -- -- -- -- (720) -- (720)
Net income, 1996. -- -- -- -- -- -- -- 11,879 11,879
Securities
valuation
allowance, net.. -- -- -- -- (2,366) -- -- -- (2,366)
---------- ----- -------- ----- ------- -------- ------- -------- --------
Balance, December
31, 1996........ 9,400,000 94 135,521 -- (2,459) (15,441) (720) 12,195 129,190
Cumulative
dividends
declared ($1.68
per share)...... -- -- -- -- -- (28,486) -- -- (28,486)
Net proceeds from
public stock
offerings....... 3,229,906 32 83,088 -- -- -- -- -- 83,120
Proceeds from
dividend
reinvestment and
stock purchase
plan............ 1,062,844 11 24,678 -- -- -- -- -- 24,689
Proceeds from
exercise of
stock options... 72,966 1 935 -- -- -- -- -- 936
Notes receivable
from common
stock sales..... -- -- -- -- -- -- (610) -- (610)
Stock issued for
termination of
Management
Agreement....... 2,009,310 20 35,017 -- -- -- -- -- 35,037
Gain on sale of
ICH preferred
stock........... -- -- 3,840 -- -- -- -- -- 3,840
3-for-2 stock
split........... 6,770,638 67 (67) -- -- -- -- -- --
Net income, 1997. -- -- -- -- -- -- -- (16,029) (16,029)
Securities
valuation
allowance, net.. -- -- -- -- (2,657) -- -- -- (2,657)
---------- ----- -------- ----- ------- -------- ------- -------- --------
Balance, December
31, 1997........ 22,545,664 $ 225 $283,012 $ -- $(5,116) $(43,927) $(1,330) $ (3,834) $229,030
========== ===== ======== ===== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
46
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER
31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................ $ (16,029) $ 11,879 $ 2,058
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Equity in net income of Impac Funding Cor-
poration.................................. (8,316) (903) (1,489)
Equity in net loss of Impac Commercial
Holdings, Inc. ........................... 239 -- --
Provision for loan losses.................. 6,843 4,350 488
Buyout of Management Agreement............. 44,375 -- --
Depreciation and amortization.............. 75 -- --
Net change in accrued interest receivables. (7,749) (5,618) (1,701)
Net change in other assets and liabilities. (10,274) (3,299) 572
--------- --------- ---------
Net cash provided by (used in) operating
activities.............................. 9,164 6,409 (72)
--------- --------- ---------
Cash flows from investing activities:
Net change in CMO collateral............... (299,600) (501,744) --
Net change in finance receivables.......... (161,533) 220,709 (602,737)
Net change in mortgage loans held for in-
vestment.................................. (269,681) (980) --
Purchases of investment securities avail-
able-for-sale............................. (12,555) (64,331) (17,471)
Sales of investment securities available-
for-sale.................................. 9,637 14,370 --
Principal reductions on securities avail-
able-for-sale............................. (3,244) 1,468 --
Proceeds from sale of other real estate
owned..................................... 7,902 -- --
Purchase of premises and equipment......... (3,941) -- --
Contributions to Impac Funding Corporation. (8,910) (8,128) (495)
Contributions to Impac Commercial Holdings,
Inc....................................... (15,123) -- --
Purchase of equity in residual interests in
securitizations from IFC.................. (9,338) -- --
Dividends from investment in Impac Commer-
cial Holdings, Inc. ...................... 739 -- --
Net decrease (increase) in lease payment
receivables............................... -- 8,441 (8,441)
--------- --------- ---------
Net cash used in investing activities.... (765,647) (330,195) (629,144)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from public stock offerings, net.. 83,120 87,938 44,493
Net change in borrowings from SPB.......... -- -- 19,280
Net change in reverse repurchase agree-
ments..................................... 397,843 (210,012) 567,727
Net change in CMO borrowings............... 267,394 474,513 --
Dividends paid............................. (23,285) (10,271) --
Proceeds from sale of additional common
stock..................................... 24,689 2,080 --
Proceeds from exercise of stock options.... 936 584 --
Advances to purchase common stock.......... (610) (720) --
--------- --------- ---------
Net cash provided by financing activi-
ties.................................... 750,087 344,112 631,500
--------- --------- ---------
Net change in cash and cash equivalents...... (6,396) 20,326 2,284
Cash and cash equivalents at beginning of
year........................................ 22,610 2,284 --
--------- --------- ---------
Cash and cash equivalents at end of year..... $ 16,214 $ 22,610 $ 2,284
========= ========= =========
See accompanying notes to consolidated financial statements.
47
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
Supplementary information:
Interest paid...................................... $73,053 $42,545 $ 715
Non-cash transactions:
Contribution Transaction on November 20, 1995 net
assets reverted to ICII and SPB:
Finance receivables................................ -- -- 22,353
Investment in IFC.................................. -- -- 7,973
Accrued interest receivable........................ -- -- 61
Borrowings from SPB................................ -- -- 21,791
Contributed capital................................ -- -- 358
Retained earnings.................................. -- -- 8,238
Contribution by ICII of 100% of the preferred stock
of Impac Funding Corporation (representing 99%
economic interest).................................. -- -- 520
Increase in Securities Valuation Allowance........... (2,657) (2,366) (93)
Gain on sale of subsidiary preferred stock........... 3,840 -- --
Issuance of stock to ICAI for termination of Manage-
ment Agreement...................................... 35,037 -- --
Transfer of loans held for investment to other real
estate owned........................................ 6,780 -- --
Transfer of CMO collateral to other real estate
owned............................................... 6,451 -- --
Accrued dividends.................................... 10,371 5,170 --
See accompanying notes to consolidated financial statements.
48
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. BUSINESS
Impac Mortgage Holdings, Inc. (IMH) and its wholly-owned subsidiaries, Impac
Warehouse Lending Group, Inc. (IWLG), IMH Assets Corporation (IMH Assets), and
IMH/ICH Dove St. LLC (Dove), is a Maryland corporation formed on August 28,
1995 that operates three businesses: the Long-Term Investment Operations, the
Warehouse Lending Operations and the Conduit Operations. Prior to the
Contribution Transaction, IWLG, formerly Imperial Warehouse Lending Group,
Inc. and Impac Funding Corporation (IFC), formerly ICI Funding Corporation,
were previously owned and operated by Imperial Credit Industries, Inc. (ICII)
a leading diversified financial services company. IMH intends to operate so as
to qualify as a real estate investment trust (REIT) under the requirements of
the Internal Revenue Code.
The Long-Term Investment Operations conducted by IMH and IMH Assets, invests
primarily in non-conforming residential mortgage loans and mortgage-backed
securities secured by or representing interests in such loans. The Long-Term
Investment Operations also invests, to a lesser extent, in second mortgages.
The Conduit Operations, conducted by IFC, 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. IFC, 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 conducted by IWLG provides short-term lines of credit to affiliated
companies and other approved mortgage banks, most of which are correspondents
of IFC, to finance mortgage loans during the time from the closing of the
loans to their sale or other settlement with pre-approved investors.
2. CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of IMH's initial public offering
(Initial Public Offering), ICII contributed to IFC 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 IFC. 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 IFC,
which represents 99% of the economic interest in IFC, (2) caused SPB, a wholly
owned subsidiary of ICII, to contribute to IMH certain operating assets and
certain customer lists of SPB'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 IFC were retained by ICII. Lastly,
IMH contributed all of the aforementioned operating assets of SPB's warehouse
lending operations, which was contributed to IMH by SPB, 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 SPB and ICII. ICII and SPB 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 SPB to fund mortgage conduit loan acquisitions and to fund
finance receivables.
3. 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" with the
accompanying consolidated financial statements and notes reflecting the
historical operations of IWLG for those periods presented. The historical
operations of IWLG have been
49
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
presented in the consolidated financial statements for the period January 1,
1995 to November 19, 1995 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 Company is entitled to 99% of the earnings or losses of IFC through its
ownership of all of the non-voting preferred stock of IFC. As such, the
Company records its investment in IFC using the equity method. Under this
method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. Gain or loss on the sale of loans or
securities by IFC to IMH are deferred and amortized or accreted for gain or
loss on sale over the estimated life of the loans or securities using the
interest method.
The Company is entitled to 17.4% of the earnings or losses of ICH through
its ownership of 719,789 shares of ICH Common Stock and 674,211 shares of ICH
Class A Common Stock. As such, the Company records its investment in ICH using
the equity method. Under this method, original investments are recorded at
cost and adjusted by the Company's share of earnings or losses.
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 significant intercompany balances and transactions with IMH's
consolidated subsidiaries (IWLG, IMH Assets and Dove) have been eliminated in
consolidation. Certain items in prior periods have been reclassified to
conform to the current presentation.
4. 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.
5. BORROWINGS FROM SPB
Historical operations of IWLG have been adjusted to reflect the funding of
net assets by SPB. 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 borrowing
balances of IWLG and SPB's average cost of funds, which were computed based on
a weighted average of SPB borrowings. The average borrowings and interest
rates used to determine the interest on IWLG borrowings are as follows:
JANUARY 1, 1995 THROUGH
NOVEMBER 19, 1995
-----------------------
(DOLLARS IN THOUSANDS)
Estimated average borrowings......................... $11,258
Interest rate........................................ 5.80%
Interest allocation.................................. $ 598
50
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. 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.
7. 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. 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.
Premiums or discounts obtained on investment securities are accreted or
amortized to interest income over the estimated life of the investment
securities using the interest method.
8. MORTGAGE LOANS HELD FOR INVESTMENT AND COLLATERAL FOR CMOS
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. 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 non-accrual status, generally when 90
days past due, and previously accrued interest reversed from income
9. FINANCE RECEIVABLES
Finance receivables represent transactions with customers, including
affiliated companies, involving residential real estate lending. As a
warehouse lender, the Company is a secured creditor of the mortgage bankers
and brokers to which it extends credit and is subject to the risks inherent in
that status including, the risk of borrower default and bankruptcy. Any claim
of the Company as a secured lender in a bankruptcy proceeding may be subject
to adjustment and delay. The Company's finance receivables represent warehouse
lines of credit with mortgage banking companies collateralized by mortgage
loans on single family residences. Finance receivables are stated at the
principal balance outstanding. Interest income is recorded on the accrual
basis in accordance with the terms of the loans. Finance receivables are
continually evaluated for collectibility and, if appropriate, the receivable
is placed on non-accrual status, generally when 90 days past due. Future
collections of interest income are included in interest income or applied to
the loan balance based on an assessment of the likelihood that the loans will
be repaid.
10. ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for losses on mortgage loans held for
investment, collateral for CMOs, and finance receivables at an amount which it
believes is sufficient to provide adequate protection against future losses in
the mortgage loans portfolio. The allowance for losses is determined primarily
on the basis of management's judgment of net loss potential including specific
allowances for known impaired loans, changes in the nature and volume of the
portfolio, value of the collateral and current economic conditions that may
affect the borrowers' ability to pay. A provision is recorded for all loans or
portions thereof deemed to be uncollectible thereby increasing the allowance
for loan losses. Subsequent recoveries on mortgage loans previously charged
off are credited back to the allowance.
51
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COLLATERALIZED MORTGAGE OBLIGATIONS
The Company issues CMOs, which are primarily secured by non-conforming
mortgage loans on single-family residential real property, as a means of
financing its Long-Term Investment Operations. For accounting and tax
purposes, mortgage loans financed through the issuance of CMOs are treated as
assets of the Company and the CMOs are treated as debt of the Company. Each
issue of CMOs are 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.
12. INCOME TAXES
IWLG did not record income taxes in its historical operations. The
accompanying consolidated financial statements reflect income taxes for IWLG
as if it had been a separate subsidiary of SPB for the period from January 1,
1995 through November 19, 1995. As a separate subsidiary of SPB, 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. IFC's taxable income is included in ICII's Federal and State
income tax returns. Post-Contribution, IFC 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 operates 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.
13. NET INCOME (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully
52
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any diluted
effects of stock options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts have been restated to conform to the SFAS No. 128 requirements.
Net income (loss) per share is computed on the basis of the weighted average
number of shares and common equivalent shares outstanding for the period.
Basic and dilutive earnings per share are approximately the same for all
periods presented. Of the dividends paid during 1997, approximately $5.5
million represented a tax-free return of capital. There was no return of
capital paid to stockholders during 1996 and 1995.
Net income per share, after giving effect to the 3-for-2 stock split
effective November 24, 1997, for December 31, 1997, 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 these periods is shown:
NOVEMBER 20, 1995
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
NUMERATOR:
Numerator for basic
earnings per share--
Net income (loss).... $(16,029,309) $11,879,438 $ 315,443
============ =========== ==========
DENOMINATOR:
Denominator for basic
earnings per share--
Weighted average
number of common
shares outstanding
during the period... 16,267,258 8,862,695 6,426,015
Net effect of
dilutive stock
options............. -- 149,689 12,522
------------ ----------- ----------
Denominator for diluted
earnings per share.... 16,267,258 9,012,384 6,438,537
============ =========== ==========
Net income (loss) per
share--basic.......... $ (0.99) $ 1.34 $ 0.05
============ =========== ==========
Net income (loss) per
share--diluted........ $ (0.99) $ 1.32 $ 0.05
============ =========== ==========
Antidilutive options outstanding as of December 31, 1997, 1996 and 1995 were
210,110, none and none, respectively.
Net income per share for the year ended December 31, 1995 is not presented
as the information is not meaningful.
14. 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 IFC.
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
53
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 125 was 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. The Company adopted SFAS 125 on January 1, 1997 with no significant
impact on the Company's financial position or results of operations.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" (SFAS No. 130) and "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
requirements is not expected to have a material impact on the Company's
consolidated financial position, results of operations or liquidity.
54
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company's mortgage-backed securities are primarily secured by
conventional, one-to-four family mortgage loans. The yield to maturity on each
security depends on, among other things, the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations), the
pass-through rate, and interest rate fluctuations. The Company's interest in
these securities is subordinated so that, in the event of a loss, payments to
senior certificate holders will be made before the Company receives its
payments. At December 31, 1997 and 1996, the Company's investment securities
available-for-sale included $47.4 million and $37.9 million, respectively, of
subordinated securities collateralized by mortgages and $4.8 million and
$15.4 million, respectively, of subordinated securities collateralized by
other loans. In connection with the issuance of REMICs by IFC for the year
ended December 31, 1997 and 1996, IMH purchased $12.6 million and $15.4
million, respectively, of securities as regular interests. At December 31,
1997 and 1996, such regular interests included $431,000 and $117,000,
respectively, of "principal-only" and $8.1 million 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
amortized cost and estimated fair value of mortgage-backed securities
available-for-sale and other collateralized securities available-for-sale are
summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
At December 31, 1997:
Mortgage-backed securities......... $66,811 $771 $5,384 $62,198
Other collateralized securities.... 5,316 -- 503 4,813
------- ---- ------ -------
$72,127 $771 $5,887 $67,011
======= ==== ====== =======
At December 31, 1996:
Mortgage-backed securities......... $51,221 $ 2 $3,084 $48,139
Other collateralized securities.... 14,744 623 -- 15,367
------- ---- ------ -------
$65,965 $625 $3,084 $63,506
======= ==== ====== =======
NOTE C--MORTGAGE LOANS HELD FOR INVESTMENT
Mortgage loans held for investment include various types of adjustable-rate
loans secured by mortgages on single-family residential real estate properties
and fixed-rate loans secured by second trust deeds on single-family
residential real estate properties. During the year ended December 31, 1997
and 1996, IMH purchased $877.1 million and $591.6 million, respectively, of
mortgage loans from IFC. Of the $877.1 million of mortgages IMH purchased
during 1997, IMH purchased $208.6 million of fixed-rate mortgage loans secured
by second liens on single family residential properties with loan-to-value
ratios of approximately 125% from Preferred Credit Corporation. As of December
31, 1997, the principal balance outstanding of 125 Loans was $197.6 million.
At December 31, 1997 and 1996, approximately 29% and 82% of mortgage loans
held for investment were collateralized by properties located in California.
Mortgage loans held for investment consisted of the following:
AT DECEMBER
31,
-------------
1997 1996
-------- ----
(IN
THOUSANDS)
Adjustable rate loans secured by single-family residential real
estate.......................................................... $ 49,392 $841
Fixed rate loans secured by second trust deeds on single-family
residential real estate......................................... 197,634 --
Unamortized net premiums on loans................................ 10,691 73
-------- ----
$257,717 $914
======== ====
55
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, there were $6.4 million of mortgage loans held for
investment which were not accruing interest due to the delinquent nature of
the mortgages. If interest on such loans had been accrued for the year ended
December 31, 1997, interest income would have increased by $298,721.
NOTE D--COLLATERAL FOR CMOS
Collateral for CMOs includes various types of adjustable-rate loans secured
by mortgages on single-family residential real estate properties and fixed-
rate loans secured by second trust deeds on single-family residential real
estate properties. During the year ended December 31, 1997 and 1996, $521.7
million and $556.1 million, respectively, of CMOs were issued and
collateralized by $533.9 million and $567.0 million, respectively, of mortgage
loans. At December 31, 1997 and 1996, approximately 53% and 56%, respectively,
of CMO collateral was collateralized by properties located in California.
Collateral for CMOs consisted of the following:
AT DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
Adjustable rate loans secured by single-family residential
real estate................................................. $732,033 $486,402
Fixed rate loans secured by second trust deeds on single-
family residential real estate.............................. 30,906 --
Unamortized net premiums on loans............................ 28,617 13,508
Securitization expenses...................................... 3,337 1,834
-------- --------
$794,893 $501,744
======== ========
NOTE E--FINANCE RECEIVABLES
The Company could suffer losses on its warehouse lines if a significant
decline in regional economic conditions or other regional catastrophe results
in mortgage banking companies being unable to sell their mortgage loans. These
factors could also result in fewer mortgage loans available for warehouse
lending by the Company and ultimately a decline in interest income and fee
income. Finance receivables consisted of the following:
AT DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
Due from IFC.............................................. $454,840 $327,422
Due from Impac Commercial Capital Corporation............. 8,508 --
Due from Walsh Securities, Inc. .......................... 10,969 --
Due from other mortgage banking companies................. 58,784 34,890
-------- --------
$533,101 $362,312
======== ========
The Company earns interest rates at prime, which was 8.50% and 8.25% as of
December 31, 1997 and 1996, respectively, on warehouse lines to affiliated
companies and prime to prime plus four percent on its warehouse lines to other
mortgage banking companies. The warehouse lines have maturities that range
from on-demand to one year and are generally collateralized by mortgages on
single-family residential real estate.
56
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following:
AT DECEMBER 31,
1997
---------------
(IN THOUSANDS)
Premises and equipment........................................ $3,941
Less accumulated depreciation................................. (75)
------
$3,866
======
The Company had no premises and equipment recorded at December 31, 1996.
NOTE G--ALLOWANCE FOR LOAN LOSSES
Activity for allowance for loan losses was as follows:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Balance, beginning of period............................. $ 4,384 $ 100
Provision for loan losses................................ 6,843 4,350
Charge-offs.............................................. (4,748) (146)
Loss on sale of delinquent loans......................... (1,350) --
Recoveries............................................... -- 80
--------- --------
Balance, end of period................................... $ 5,129 $ 4,384
========= ========
NOTE H--REVERSE REPURCHASE AGREEMENTS
The Company enters into reverse repurchase agreements with major brokerage
firms to finance its Warehouse Lending Operations and to fund the purchase of
mortgage loans and mortgage-backed securities. Mortgage loans underlying
reverse repurchase agreements are delivered to dealers that arrange the
transactions. The reverse repurchase agreements are uncommitted lines, which
may be withdrawn at any time, that provide financing as needed by the Company.
The following tables sets forth information regarding reverse repurchase
agreements:
AT DECEMBER 31, 1997
(IN THOUSANDS)
--------------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- -----------
Lender A...................... Mortgages $741,469 $759,819 Uncommitted
Lender B...................... Mortgages 4,986 5,182 Uncommitted
Lender C...................... Securities 9,104 12,091 1/2/1998
-------- --------
Total....................... $755,559 $777,092
======== ========
57
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AT DECEMBER 31, 1997
(IN THOUSANDS)
------------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- ---------
Lender A........................ Mortgages $244,960 $258,559 2/28/1997
Lender B........................ Mortgages 99,144 110,540 7/28/1997
Greenwich Capital............... Securities 9,692 10,710 1/7/1997
Bear Stearns.................... Securities 3,920 5,003 1/29/1997
-------- --------
Total......................... $357,716 $384,812
======== ========
At December 31, 1997 and December 31, 1996, reverse repurchase agreements
includes accrued interest payable of $5.4 million and $2.2 million,
respectively.
The maximum amount available under reverse repurchase agreements at December
31, 1997 and 1996 was $755.6 million and $750.0 million, respectively.
The following table presents certain information on reverse repurchase
agreements, excluding accrued interest payable:
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Maximum Month-End Outstanding Balance............... $ 924,638 $ 475,550
Average Balance Outstanding......................... 609,017 392,850
Weighted Average Rate............................... 6.52% 6.19%
NOTE I--CMO BORROWINGS
The following table sets forth CMOs issued by the Company, CMOs outstanding
as of December 31, 1997, and certain interest rate information:
INTEREST INTEREST
RATE INTEREST RATE
MARGIN RATE MARGIN
OVER MARGIN AFTER
ISSUE ISSUANCE CMOS ONE-MONTH ADJUSTMENT ADJUSTMENT
DATE ISSUANCE NAME AMOUNT OUTSTANDING LIBOR DATE DATE
-------- ------------------------ ------------ ------------ --------- ---------- ----------
(IN MILLIONS) (IN MILLIONS)
4/22/96 Fund America
Investor Trust V........ $ 296.3 $151.9 0.50% 6/2003 1.00%
8/27/96 Imperial CMB
Trust Series 1996-1..... 259.8 128.0 0.32% 10/2003 1.32%
-------- ------
556.1 279.9
-------- ------
5/22/97 Imperial CMB
Trust Series 1997-1..... 348.0 288.2 0.22% 7/2004 0.44%
12/10/97 Imperial CMB
Trust Series 1997-2..... 173.7 173.0 0.26-1.30% 1/2005 0.52-2.60%
-------- ------
521.7 461.2
-------- ------
Accrued Interest........ -- 0.8
-------- ------
$1,077.8 $741.9
======== ======
58
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--INCOME TAXES
The Company, as a qualified REIT for the year ended December 31, 1997 and
1996, and for the period from November 20, 1995 to December 31, 1995 is not
subject to income taxes. The Company's income taxes for the period prior to
its formation of IMH as a REIT are as follows:
JANUARY 1, 1995
THROUGH
NOVEMBER 19, 1995
-----------------
(IN THOUSANDS)
Current:
Federal.................................................. $37
State.................................................... 2
---
Total current.......................................... 39
---
Deferred:
Federal.................................................. 26
State.................................................... 11
---
Total deferred......................................... 37
---
Total income taxes......................................... $76
===
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 IFC. The Company had no deferred taxes at
December 31, 1997, 1996 and 1995.
NOTE K--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1997 and 1996 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, 1997 DECEMBER 31, 1996
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
ASSETS: (IN THOUSANDS)
Cash and cash equivalents.............. $ 16,214 $ 16,214 $ 22,610 $ 22,610
Investment securities available-for-
sale.................................. 67,011 67,011 63,506 63,506
CMO collateral......................... 794,893 802,044 501,744 503,962
Finance receivables.................... 533,101 533,101 362,312 362,312
Mortgage loans held for investment..... 257,717 257,717 914 914
LIABILITIES:
CMO Borrowings, net of accrued inter-
est................................... 741,092 741,092 474,045 474,045
Reverse-repurchase agreements, net of
accrued interest...................... 750,174 750,174 355,508 355,508
59
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value estimates as of December 31, 1997 and 1996 are based on
pertinent information available to management as of that date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
The following describes the methods and assumptions used by IMH in
estimating fair values.
Cash and Cash Equivalents
Fair value approximates carrying amounts as these instruments are demand
deposits and money market mutual funds and do not present unanticipated
interest rate or credit concerns.
Investment Securities Available-for-Sale
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage-backed securities.
Collateral for CMOs
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage loans.
Finance Receivables
Fair value approximates carrying amounts due to the short-term nature of the
assets and do not present unanticipated interest rate or credit concerns.
Mortgage Loans Held for Investment
Fair value is estimated based on estimates of proceeds the Company would
receive from the sale of the underlying collateral of each loan.
CMO Borrowings
Fair value approximates carrying amounts due to the variable interest rate
nature of the borrowings.
Reverse Repurchase Agreements
Fair value approximates carrying amounts due to the short-term nature of the
liabilities and do not present unanticipated interest rate or credit concerns.
NOTE L--EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
The Company does not have its own 401(K) or profit sharing plan. As such,
employees of the Company participate in ICII's 401(K) plan. Under ICII's
401(K) plan, employees of the Company may contribute up to 14% of their
salaries. The Company will match 50% of the first 4% of employee
contributions. Additional Company contributions may be made at the discretion
of the Company. The Company's matching and discretionary contributions were
not significant for any period presented.
60
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE M--RELATED PARTY TRANSACTIONS
Related Party Cost Allocations
Prior to the Contribution Transaction, IWLG was allocated various costs from
SPB 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
on a per employee basis, in most cases, which management believes was
reasonable. Total related party allocations and charges for period from
January 1, 1995 through November 19, 1995 were $46,865.
On the effective date of the IPO, 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, 1997 and 1996 and for
the Interim Period were $7,900, $54,981 and $4,462, respectively. In December
1996, IFC began providing data processing, professional services and
accounting functions to the Company while ICII continues to provide human
resource administration functions thereby reducing the Company's cost
allocations from ICII.
IMH and IWLG are allocated data processing, executive and operations
management, and accounting services that IFC incurs during the normal course
of business. IFC charges IMH and IWLG for these services based upon usage
which management believes was reasonable. Total cost allocations charged to
IMH and IWLG by IFC for the year ended December 31, 1997 were $384,767.
IMH has entered into a premises operating sublease agreement with ICII (see
Note N--Commitments and Contingencies) to rent approximately 33,000 square
feet of office space in Santa Ana Heights, Ca., for a two-year term expiring
in February 1999. IMH allocates monthly rental expense on the basis of square
footage occupied. The majority of occupancy charges incurred during 1997 were
allocated to IFC as most of the Company's employees are employed by the
Conduit Operations. Total lease charges for the years ended December 31, 1997
and 1996 and for the Interim Period were $395,672, $180,861, and $12,210, of
which $384,691, $179,049, and $12,210 was allocated to IFC.
Credit Arrangements
IWLG maintains a warehouse financing facility with IFC. Advances under such
warehouse facilities bear interest at rates indexed to prime. As of December
31, 1997, 1996 and 1995, finance receivables outstanding to IFC were $454.8
million, $327.4 million and $550.3 million, respectively. Interest income
recorded by IWLG related to finance receivables due from IFC for the years
ended December 31, 1997, 1996, and for the Interim Period was $33.4 million,
$31.8 million and $1.3 million, respectively.
IWLG maintains a warehouse financing facility with ICCC of which $8.5
million was outstanding on the warehouse line at December 31, 1997. Interest
income recorded by IWLG related to finance receivables due from ICCC for the
year ended December 31, 1997 was $430,373. During 1997, IWLG maintained a
warehouse financing facility with ICH until ICH obtained a warehouse financing
facility with a third-party lender. Interest income recorded by IWLG related
to finance receivables due from ICH for the year ended December 31, 1997 was
$164,111. As of December 31, 1997, ICH did not maintain a warehouse facility
with IWLG.
61
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1997, IMH entered into a revolving credit arrangement with ICH
whereby IMH would advance to ICH up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement are at an interest rate and
maturity to be determined at the time of each advance with interest and
principal paid monthly. As of December 31, 1997, the outstanding balance on
the line of credit was $9.1 million.
In February 1997, the Company financed ICH's purchase of $17.5 million of
commercial mortgage loans from IFC with $16.6 million in borrowings from IWLG
and $900,000 in other borrowings ("Due From Affiliates") from IMH. The Company
recorded interest income on the amounts borrowed from IWLG at 6.3% per annum,
which totaled $164,111. In March 1997, the ICH repaid the $900,000 in other
borrowings from IMH. Interest income recorded by IMH related to other
borrowings with ICH was $53,333 for the year ended December 31, 1997.
In June 1997, IMH canceled debt in the amount of $9.0 million owed to IMH by
IFC. Of the canceled amount $8.91 million was contributed to IFC as a
contribution to preferred stock and $90,000 was contributed on behalf of IFC's
common shareholders, Messrs. Tomkinson, Ashmore, and Johnson, so as to
maintain their 1% economic interest.
During the normal course of business, the Company may advance or borrow
funds on a short-term basis with affiliated companies. Advances to affiliates
are reflected as "Due From Affiliates" while borrowings are reflected as "Due
To Affiliates" on the Company's balance sheet. These short-term advances and
borrowings bear interest at a fixed rate of 8.00% per annum. Interest income
recorded by the Company related to short-term advances due from affiliates was
$219,416 for the year ended December 31, 1997. Interest expense recorded by
the Company related to short-term advances due to affiliates was $195,689 for
the year ended December 31, 1997.
As part of the Company's termination agreement of its Management Agreement
with ICAI, the Company purchased the equity in residual interests in
securitizations from IFC for $9.0 million and simultaneously retired IFC's
borrowings with the Company for the equity in residual interests in
securitizations for $9.0 million. No gain or loss on the sale of residual
interests in securitizations was recorded by the Company or IFC.
In March 1997, IWLG extended a $5.0 million line of credit (WSI Credit Line)
to Walsh Securities, Inc. (WSI), a firm affiliated with James Walsh, a
Director of the Company, which was increased to $7.5 million in November 1997.
Advances under the line of credit bear interest at a rate determined at the
time of each advance. As of December 31, 1997, WSI had an aggregate of $5.9
million outstanding under the WSI Credit Line.
In August 1997, IFC purchased $80.2 million of non-agency residential
mortgage loans from Greenwich Capital Financial Products, Inc. (Greenwich)
pursuant to a mortgage loan purchase agreement. Greenwich previously purchased
such loans from WSI. In December 1997, WSI repurchased $7.3 million of the
loans that IFC originally purchased from Greenwich at a loss to the Company of
$112,000. In connection with the repurchase, IWLG extended loans of
approximately $5.1 million to WSI at rates ranging from prime plus 2% per
annum to prime plus 4% per annum. Of the $5.1 million, 100% and 90% were
financed on approximately $2.8 million and $3.1 million, respectively, of
unpaid principal balance of mortgage loans repurchased by WSI. As of December
31, 1997, WSI had an aggregate of $5.1 million outstanding under the loans.
On December 31, 1997, the Company financed its 50% interest in a commercial
office building located in Newport Beach, California with a loan for $5.2
million from ICCC. Terms of the loan are for 25 years at an adjustable rate of
9.0% with current monthly principal and interest payments of $44,097. ICCC
received loan fees of $70,845 on the loan.
62
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash
Prior to the Contribution Transaction, IWLG had no cash accounts. All
operations were funded directly by SPB. Adjustments were made to IWLG's
financial statements to reflect these fundings as borrowings from SPB. 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 SPB.
Organizational Transactions with ICH and ICCC
In February 1997, certain officers and directors of the Company, as a group,
and IMH purchased 300,000 and 299,000 shares of the Common Stock of ICH,
respectively. In addition, IMH purchased all of the non-voting preferred stock
of ICCC, which represents 95% of the economic interest in ICCC, for $500,000,
and certain of the Company's officers purchased all of the outstanding shares
of common stock of ICCC, which represents 5% of the economic interest in ICCC.
In addition, ICCC brokered ICH's purchase of $7.3 million and $10.2 million of
condominium conversion loans which were financed with $16.6 million in
borrowings under a warehouse lending facility provided by a subsidiary of IMH,
and $900,000 in borrowings from IMH.
In March 1997, IMH loaned ICH $15.0 million evidenced by a promissory note
convertible into shares of non-voting preferred stock of ICH at the rate of
one share of ICH Preferred Stock for each $5.00 principal amount of said note.
IMH converted the aforementioned $15.0 million principal amount promissory
note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All shares
of ICH Preferred Stock were automatically converted upon the closing of ICH's
initial public offering into shares of ICH Common Stock determined by
multiplying the number of shares of ICH Preferred Stock to be converted by a
fraction, the numerator of which was $5.00 and the denominator of which was
$15.00. Notwithstanding the foregoing, consistent with IMH's classification as
a REIT, IMH was not entitled to convert into ICH Common Stock more than that
number of shares of ICH Preferred Stock whereby IMH would own, immediately
after such conversion, greater than 9.8% of ICH's outstanding Common Stock.
Any shares of ICH Preferred Stock not converted into ICH Common Stock upon the
closing of the Offering shall on such date automatically convert into shares
of ICH non-voting Class A Common Stock at the same rate as the ICH Preferred
Stock converted into Common Stock. Shares of ICH Class A Stock convert into
shares of Common Stock on a one-for-one basis and each such class of Common
Stock is entitled to cash dividends on a pro rata basis. Upon any subsequent
issuances of Common Stock by ICH or sale of ICH Common Stock held by IMH,
shares of ICH Class A Stock shall automatically convert into additional shares
of the Common Stock of ICH, subject to a 9.8% limitation. In addition, ICH
purchased $10.1 million in Commercial Mortgage-Backed Securities (CMBS) from
IFC which was financed with a promissory note. The promissory note was repaid
to IFC with cash from IMH's above-referenced $15.0 million investment.
Concurrently, ICH repaid the $900,000 owed to IMH in connection with its
purchase of condominium conversion loans. Subsequently, ICH entered into a
borrowing agreement with ICII for $7.9 million secured by $10.1 million CMBS.
In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by
it for an equivalent number of shares of ICH Class A Stock.
Upon the closing of the ICH initial public offering in August 1997, IMH
contributed to ICH 100% of the outstanding shares of non-voting preferred
stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. As of
December 31, 1997, IMH owns 719,789 shares, or 9.8%, of ICH Common Stock in
addition to 674,211 shares, or 100%, of ICH Class A Stock.
Purchase of Mortgage-Backed Securities
During the year ended December 31, 1997 and 1996, the Company purchased
$15.0 million and $32.5 million, respectively, of mortgage-backed securities
issued by IFC for $12.6 million and $26.8 million,
63
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively, net of discounts of $2.4 million and $5.7 million, respectively.
IFC issued mortgage-backed securities during 1997 and 1996 in connection with
its REMIC securitizations.
During 1997, the Company purchased Walsh Acceptance Corporation mortgage
pass-through certificates series 1997-1 and 1996-1, Class B, for $6.7 million
and $10.7 million, respectively, net of a discount of $916,000 and
$1.2 million, respectively, with a current yield of 8.9% and 10.8%,
respectively. James Walsh, a director of the Company, is an Executive Vice
President of Walsh Securities, Inc.
Purchase of Mortgage Loans
During the year ended December 31, 1997 and 1996, the Company purchased
adjustable rate first trust deed and fixed rate second trust deed residential
mortgages having a principal balance of $839.5 million and $576.4 million,
respectively, with premiums of $37.5 million and $15.2 million, respectively,
from IFC. Servicing rights on all adjustable rate mortgages were retained by
IFC while servicing rights on all second trust deed mortgages were not
originally acquired by IFC.
Redemption of Senior Notes
On January 24, 1997, IMH redeemed ICII senior note obligations for $5.2
million resulting in a gain of $648,000.
Sale of Franchise Loans Receivables
IMH sold the beneficial interest in the Class A Trust Certificate for the
Franchisee Loan Receivables Trust 1995-B ("Franchise Loans Receivables") and
the beneficial interest in the Class E Trust Certificate for the Franchisee
Loan Receivables Trust 1996-B to IFC at carrying value which approximated fair
value. No gain or loss was recorded on the sale and IMH was under no
obligation to sell the securities.
Sub-Servicing Agreements
IFC acts as a servicer of mortgage loans acquired on a "servicing-released"
basis by the Company in its Long-Term Investment Operations pursuant to the
terms of a Servicing Agreement which became effective on November 20, 1995.
For a general description of the terms of such a Servicing Agreement, see
"Item 1-- Business--Servicing and Master Servicing." IFC subcontracts all of
its servicing obligations under such loans to independent third parties
pursuant to sub-servicing agreements.
Termination of Management Agreement
Effective December 19, 1997, the Company terminated its Management Agreement
with ICAI. A termination fee in the aggregate of $44.0 million was paid with
2,009,310 shares of the Company's common stock representing a value of $35.0
million in addition to equity in IFC's residual interests in securitizations
representing $9.0 million. IMH purchased the equity in residual interests in
securitizations from IFC for $9.0 million and simultaneously retired IFC's
borrowings with IMH for the equity in residual interests in securitizations of
$9.0 million. No gain or loss on the sale of residual interests in
securitizations was recorded by IMH or IFC. For financial accounting purposes,
the termination fee was treated as a non-recurring, non-cash expense and
resulted in a charge of $44.4 million to the Company's fourth quarter income.
64
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Services Agreement
In connection with the Termination Agreement, the Company entered into a
services agreement with ICAI for a term of one year. ICAI agreed to provide
certain human resource and data and phone communication services based on an
arranged fee
Indebtedness of Management
In connection with the exercise of options during the years ended December
31, 1997 and 1996, the Company made loans secured by the related stock
totaling $939,000 and $720,000, respectively, 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. As of December 31, 1997 and 1996, total notes receivable from
common stock sales was $1.3 million and $720,000, respectively.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH
initial public offering, IMH will not acquire any commercial mortgages for a
period of the earlier of nine months from the closing of the ICH initial
public offering or the date upon which ICH and/or ICCC accumulates (for
investment or sale) $300.0 million of commercial mortgages or commercial
mortgage-backed securities.
Pursuant to the Right of First Refusal Agreement by and among IMH, IFC, ICH,
ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any Affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
NOTE N--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.
In the ordinary course of business, IFC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances, IFC
is required to repurchase mortgage loans if there had been a breach of
representations or warranties. IMH has guaranteed the performance obligation
of IFC under such representation and warranties related to loans included in
securitizations.
65
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Commitments
Minimum premises rental commitments under a non-cancelable premises
operating sublease signed with ICII for approximately 30,000 square feet of
office space in Santa Ana Heights, Ca., for a lease term of two years expiring
in February 1999 are as follows:
1998............................................................. $466,461
1999............................................................. 58,743
--------
Total.......................................................... $525,204
========
Minimum premises rental commitments reflect rates per the sublease
agreement.
Rent expense associated with the sublease is allocated between IMH, IWLG and
IFC based on square footage. The Company's portion of premises rental expense
for the years ended December 31, 1997, 1996 and 1995 was $10,981, $1,812 and
none, respectively.
Loan Commitments
The Company's warehouse lending program provides secured short-term non-
recourse revolving financing to small-and medium-size mortgage originators and
affiliated companies to finance mortgages from the closing of the loans until
sold to permanent investors. As of December 31, 1997 and 1996, the Company had
21 and 17 committed lines of credit, respectively, extended in the aggregate
principal amount of $1.2 billion and $657.6 million, respectively, of which
$469.3 million and $362.3 million, respectively, was outstanding with
affiliated companies. The Company's warehouse lines are non-recourse and the
Company can only look to the sale or liquidation of the mortgages as a source
of repayment.
NOTE O--MANAGEMENT CONTRACT
Effective December 19, 1997, the Company terminated its Management Agreement
with ICAI. The termination fee was paid with 2,009,310 shares of the Company's
common stock in addition to other assets. During the year ended December 31,
1997, the Company paid fees to ICAI, prior to the termination of the
Management Agreement, based upon terms of the original Management Agreement
and the revised Management Agreement executed on January 31, 1997 as outlined
below.
As manager of the Company, ICAI received 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 $4.0 million and $2.1 million was accrued for the
years ended December 31, 1997 and 1996, respectively.
As incentive compensation, ICAI 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 Company's incentive compensation calculation
was made quarterly in arrears before any income distributions are made to
stockholders for the corresponding period. Incentive compensation of $2.2
million and $1.3 million was accrued for the years ended December 31, 1997 and
1996, respectively. Pursuant to the Management Agreement, the Company reserved
up to 1/5 of the Company's 25% Incentive Payment for
66
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997 and 1996, the Company recorded $307,000 and $155,000,
respectively, 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 sub-management
agreement with ICII for ICII to perform such management services for the
Company as ICAI deems necessary.
NOTE P--STOCK OPTION PLAN
The Company adopted a Stock Option, Deferred Stock and Restricted Stock Plan
(the Stock Option Plan) which provides for the grant of qualified incentive
stock options (ISOs), options not qualified (NQSOs) and deferred stock,
restricted stock, stock appreciation, dividend equivalent rights and limited
stock appreciation rights awards (Awards). The Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the Administrator). ISOs may be granted to the officers and key employees of
the Company. NQSOs and Awards may be granted to the directors, officers and
key employees of the Company or any of its subsidiaries, to the directors,
officers and key employees of IFC.
The exercise price for any NQSO or ISO granted under the Stock Option Plan
may not be less than 100% (or 110% in the case of ISOs granted to an employee
who is deemed to own in excess of 10% of the outstanding Common Stock) of the
fair market value of the shares of Common Stock at the time the NQSO or ISO is
granted.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan after August 31, 2005.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Administrator. Awards will
be subject to the terms and restrictions of the award made by the
Administrator. The Administrator has discretionary authority to select
participants from among eligible persons and to determine at the time an
option or Award is granted and, in the case of options, whether it is intended
to be an ISO or a NQSO, and when and in what increments shares covered by the
option may be purchased.
As of December 31, 1997 1996 and 1995, options to purchase 25,550 shares,
none and none, respectively, were exercisable and 304,125 shares, 755,000
shares and 400,000 shares, respectively, were reserved for future grants under
the Stock Option Plan.
67
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option transactions for the periods shown are summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
------------------- ------------------ -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- ------- --------- ------- ---------
Options outstanding at
beginning of year...... 548,250 $ 9.47 465,000 $7.67 -- $ --
Option granted.......... 325,125 16.73 173,250 13.75 465,000 7.67
Options exercised....... (103,700) 8.77 (67,500) 8.67 -- --
Options
forfeited/cancelled.... (45,000) 13.75 (22,500) 7.50 -- --
-------- ------- -------
Options outstanding at
end of year............ 724,675 $12.56 548,250 $9.47 465,000 $7.67
======== ======= =======
In connection with the exercise of options during the years ended December
31, 1997 and 1996, the Company made loans secured by the related stock
totaling $939,000 and $720,000, respectively, 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. As of December 31, 1997 and 1996, total notes receivable from
common stock sales was $1.3 million and $720,000, respectively.
The following table sets forth information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- --------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES ($) AT PERIOD END CONTRACTUAL LIFE (MOS) EXERCISE PRICE ($) AT PERIOD END EXERCISE PRICE ($)
- ------------------- ------------- ---------------------- ------------------ ------------- ------------------
7.50 292,500 92 7.50 -- --
13.75 107,050 21 13.75 25,550 13.75
15.42 135,000 109 15.42 -- --
17.04 15,000 31 17.04 -- --
18.17 175,125 61 18.17 -- --
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 intrinsic 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.
68
IMPAC 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, after giving effect to the 3-for-2 stock split effective November
24, 1997, would have decreased to the pro forma amounts indicated below:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOVEMBER 20, 1995
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ -----------------
Net income (loss) as reported...... $(16,029) $11,879 $ 315
======== ======= =====
Pro forma net income (loss)........ $(16,581) $11,122 $ 44
======== ======= =====
Basic income (loss) per share as
reported.......................... $ (0.99) $ 1.34 $ .05
======== ======= =====
Dilutive income (loss) per share as
reported.......................... $ (0.99) $ 1.32 $ .05
======== ======= =====
Basic pro forma income (loss) per
share............................. $ (1.02) $ 1.25 $ .01
======== ======= =====
Dilutive pro forma income (loss)
per share......................... $ (1.02) $ 1.23 $ .01
======== ======= =====
The derived fair value of the options granted during 1997, 1996 and 1995 was
approximately $552,000, $1,814,000 and $589,000, respectively, using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.84%, expected lives of three, six and ten years, and
expected volatility of 28.5%.
NOTE Q--STOCKHOLDERS' EQUITY
During 1997, the Company raised additional capital of $107.8 million, net of
offering expenses, as 4.8 million shares of Common Stock were issued through a
public stock offering and 1.6 million shares of Common Stock were purchased
under the Company's Dividend Reinvestment and Stock Purchase Plan. Proceeds
from the sale of securities were used for general corporate purposes
including, without limitation, funding the Long-Term Investment Operations,
the Conduit Operations and the Warehouse Lending Operations, repayment of
maturing obligations, redemption of outstanding indebtedness, financing future
acquisitions, capital expenditures and working capital. In addition, directors
and officers of ICAI and employees of the Company exercised 103,700 shares of
Common Stock resulting in proceeds of $936,000. In conjunction with the
exercise of some of these shares, the Company approved loans totaling $939,000
to the directors and officers of ICAI and employees of the Company under the
terms and conditions of the Company's stock option loan program. As of
December 31, 1997, total notes receivable from common stock sales was $1.3
million.
During 1997, the Company declared cumulative dividends of $28.5 million or
$1.68 per share, after giving effect to the 3-for-2 stock split. 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, 1997, and 1996, 50
million shares of common stock were authorized and 22,545,664 and 9,400,000
shares were issued and outstanding, respectively.
The Board of Directors approved a 3-for-2 stock split paid on November 24,
1997 to stockholders of record on November 3, 1997.
69
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the ICH initial public offering in August 1997, the Company
recorded an adjustment to equity of $3.8 million from the sale of ICH common
stock.
The Company terminated its Management Agreement with ICAI. The termination
fee was paid with 2,009,310 shares of the Company's common stock with a market
value of $35.0 million at the date of termination.
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, 1997 and
1996, 10 million shares of preferred stock are authorized and no shares have
been issued or are outstanding.
NOTE R--SUBSEQUENT EVENTS
At a special meeting of stockholders on January 27, 1998, stockholders
approved the Company's name change from "Imperial Credit Mortgage Holdings,
Inc." to "Impac Mortgage Holdings, Inc."
On January 15, 1998, a $0.46 cash dividend, previously declared by the Board
of Directors on December 17, 1997, was paid to stockholders of record on
December 31, 1997.
In January 1998, IMH issued a CMO in the amount of $362.8 million which was
collateralized by $373.1 million of fixed-rate mortgage loans. The CMO is
structured as a fixed-rate instrument with interest rates ranging from 6.65%
to 7.25% depending on the class of the bonds. The weighted average interest
rate was 6.75%.
NOTE S--QUARTERLY FINANCIAL DATA UNAUDITED
Selected quarterly financial data for 1997 follows (dollar amounts in
thousands, except per share data):
FOR THE THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
Total revenues.................... $ 36,360 $32,767 $25,804 $24,928
Total expenses.................... 71,122 25,573 20,179 19,014
Net income (loss)................. (34,762) 7,194 5,625 5,914
Net income (loss) per share....... (1.70) 0.45 0.39 0.41
Dividends declared per share...... 0.46 0.43 0.40 0.39
Selected quarterly financial data for 1996 follows (dollar amounts in
thousands, except per share data):
FOR THE THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
Total revenues.................... $19,506 $17,737 $14,202 $13,724
Total expenses.................... 15,021 14,172 12,067 12,030
Net income (loss)................. 4,485 3,565 2,135 1,694
Net income (loss) per share....... 0.37 0.35 0.31 0.26
Dividends declared per share...... 0.37 0.35 0.30 0.26
70
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE T--IMPAC FUNDING CORPORATION
The following condensed financial information summarizes the financial
condition, results of operations and cash flows of Impac Funding Corporation
(dollar amounts in thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Cash.................................................. $ 359 $ 4,395
Mortgage loans held for sale.......................... 620,549 334,104
Mortgage servicing rights............................. 15,568 8,785
Investment securities................................. 6,083 46,949
Accrued interest receivable........................... 4,755 1,845
Due from affiliates................................... 969 --
Premises and equipment, net........................... 1,788 834
Other assets.......................................... 6,873 2,259
-------- --------
$656,944 $399,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG.................................. $454,840 $327,422
Other borrowings...................................... 148,307 --
Deferred revenue...................................... 7,048 1,393
Due to affiliate...................................... 6,198 54,803
Accrued interest expense.............................. 4,063 2,681
Other liabilities..................................... 9,092 2,876
-------- --------
Total liabilities.................................... 629,548 389,175
======== ========
Shareholders' equity:
Preferred stock...................................... 18,053 9,143
Common stock......................................... 182 92
Retained earnings.................................... 9,161 761
-------- --------
Total shareholders' equity.......................... 27,396 9,996
-------- --------
Commitments and contingencies
$656,944 $399,171
======== ========
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues:
Interest income.............................. $ 48,020 $ 32,799 $ 1,249
Gain on sale of loans........................ 19,414 7,747 4,135
Loan servicing income........................ 4,109 1,250 5,159
Other income................................. 643 -- 370
---------- ---------- ----------
72,186 41,796 10,913
---------- ---------- ----------
Expenses:
Interest on borrowings from IWLG............. 33,450 31,751 1,349
Other borrowings............................. 8,178 -- 437
General and administrative and other......... 10,047 7,154 3,662
Provision for repurchases.................... 3,148 687 --
Amortization of mortgage servicing rights.... 2,827 613 2,892
---------- ---------- ----------
57,650 40,205 8,340
---------- ---------- ----------
Income before income taxes................... 14,536 1,591 2,573
Income taxes................................... 6,136 679 1,069
---------- ---------- ----------
Net income................................... $ 8,400 $ 912 $ 1,504
========== ========== ==========
71
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Funding Corporation:
We have audited the accompanying consolidated balance sheets of Impac
Funding Corporation and subsidiaries (formerly ICI Funding Corporation and
subsidiary) as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 Impac Funding Corporation and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
February 9, 1998
72
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
AT DECEMBER 31,
-----------------
1997 1996
-------- --------
ASSETS
Cash......................................................... $ 359 $ 4,395
Securities available-for-sale................................ 6,083 --
Residual interests in securitizations........................ -- 46,949
Mortgage loans held for sale................................. 620,549 334,104
Mortgage servicing rights.................................... 15,568 8,785
Accrued interest receivable.................................. 4,755 1,845
Premises and equipment, net.................................. 1,788 834
Due from affiliates.......................................... 969 --
Other assets................................................. 6,873 2,259
-------- --------
$656,944 $399,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG......................................... $454,840 $327,422
Other borrowings............................................. 148,307 --
Deferred revenue............................................. 7,048 1,393
Due to affiliates............................................ 6,198 54,803
Accrued interest expense..................................... 4,063 2,681
Other liabilities............................................ 9,092 2,876
-------- --------
Total liabilities.......................................... 629,548 389,175
-------- --------
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized;
10,000 shares issued and outstanding at December 31, 1997
and 1996................................................. 18,053 9,143
Common stock, no par value; 10,000 shares authorized;
10,000 shares issued and outstanding at December 31, 1997
and 1996................................................. 182 92
Retained earnings.......................................... 9,161 761
-------- --------
Total shareholders' equity............................... 27,396 9,996
-------- --------
Commitments and contingencies
$656,944 $399,171
======== ========
See accompanying notes to consolidated financial statements.
73
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues:
Interest income.............................. $ 48,020 $ 32,799 $ 1,249
Gain on sale of loans........................ 19,414 7,747 4,135
Loan servicing income........................ 4,109 1,250 5,159
Other income................................. 643 -- 370
---------- ---------- ----------
72,186 41,796 10,913
---------- ---------- ----------
Expenses:
Interest on borrowings from IWLG............. 33,450 31,751 1,349
Interest on other affiliated borrowings...... 4,618 -- --
Interest on other borrowings................. 3,560 -- 437
Personnel expense............................ 6,760 5,093 1,592
Provision for repurchases and loan losses.... 3,148 687 --
Amortization of mortgage servicing rights.... 2,827 613 2,892
General and administrative and other......... 2,228 1,017 1,540
Data processing expense...................... 311 238 89
Occupancy expense............................ 408 195 150
Telephone and other communications........... 261 155 87
Professional services........................ 79 456 204
---------- ---------- ----------
57,650 40,205 8,340
---------- ---------- ----------
Income before income taxes................... 14,536 1,591 2,573
Income taxes................................... 6,136 679 1,069
---------- ---------- ----------
Net income................................... $ 8,400 $ 912 $ 1,504
========== ========== ==========
See accompanying notes to consolidated financial statements.
74
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
NUMBER OF NUMBER OF TOTAL
PREFERRED PREFERRED COMMON COMMON CONTRIBUTED RETAINED SHAREHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL EARNINGS EQUITY
--------- --------- --------- ------ ----------- -------- -------------
Balance, December 31,
1994................... -- $ -- -- $-- $ 361 $ 6,038 $ 6,399
Contribution
Transaction,
November 20, 1995...... 10,000 520 10,000 5 (361) (7,693) (7,529)
Capital contribution,
December 28, 1995...... -- 495 5 -- -- 500
Net income, 1995........ -- -- -- -- 1,504 1,504
------ ------- ------ ---- ----- -------- -------
Balance, December 31,
1995................... 10,000 1,015 10,000 10 (151) 874
Capital Contributions,
1996................... -- 8,128 82 -- -- 8,210
Net income, 1996........ -- -- 912 912
------ ------- ------ ---- ----- -------- -------
Balance, December 31,
1996................... 10,000 9,143 10,000 92 -- 761 9,996
Capital Contributions,
1997................... -- 8,910 90 -- -- 9,000
Net income, 1997........ -- -- -- -- 8,400 8,400
------ ------- ------ ---- ----- -------- -------
Balance, December 31,
1997................... 10,000 $18,053 10,000 $182 $ -- $ 9,161 $27,396
====== ======= ====== ==== ===== ======== =======
See accompanying notes to consolidated financial statements.
75
IMPAC FUNDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
Cash flows from operating activities:
Net income.............................. $ 8,400 $ 912 $ 1,504
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for repurchases and loan
losses................................. 3,148 687 --
Depreciation and amortization........... 3,371 740 2,912
Gain on sale of servicing rights........ -- -- (370)
Purchase of mortgage loans held for
sale................................... (2,571,208) (1,542,273) (547,206)
Sales and principal reductions in
mortgage loans held for sale........... 2,284,763 1,752,444 2,931
Mortgage servicing rights............... (9,611) (9,398) (3,866)
Net change in borrowings from IWLG...... 127,418 (222,869) 550,291
Net change in other borrowings.......... 148,307 -- --
Net change in accrued interest
receivable............................. (2,910) 1,140 (2,985)
Net change in other assets and
liabilities............................ (51,119) (59) (2,553)
Net change in due to and due from
affiliates............................. -- 57,345 --
Net change in deferred revenue.......... 5,655 1,393 --
Net change in accrued interest expense.. 1,382 1,333 1,349
----------- ----------- ---------
Net cash provided by (used in) operat-
ing activities....................... (52,404) 41,395 2,007
----------- ----------- ---------
Cash flows from investing activities:
Purchase of residual interests in
securitizations........................ -- (46,949) --
Sale of residual interests in
securitizations........................ 47,925 -- --
Principal reductions on residual
interests in securitizations........... (976) -- --
Purchase of securities available-for-
sale................................... (28,646) -- --
Sale of securities available-for-sale... 22,953 -- --
Principal reductions on securities
available-for-sale..................... (390) -- --
Purchases of premises and equipment..... (1,498) (445) --
Proceeds from sale of servicing rights.. -- -- 1,250
----------- ----------- ---------
Net cash provided by (used in) invest-
ing activities....................... 39,368 (47,394) 1,250
----------- ----------- ---------
Cash flows from financing activities:
Net change in borrowings from ICII...... -- -- (1,573)
Capital contributions................... 9,000 8,210 500
----------- ----------- ---------
Net cash provided by (used in) financ-
ing activities....................... 9,000 8,210 (1,073)
----------- ----------- ---------
Net change in cash........................ (4,036) 2,211 2,184
Cash at beginning of year................. 4,395 2,184 --
----------- ----------- ---------
Cash at end of year....................... $ 359 $ 4,395 $ 2,184
=========== =========== =========
Supplementary information:
Interest paid........................... $ 40,246 $ 30,418 $ 1,785
Taxes paid.............................. 2,964 2 2
Non-cash transactions:
Contribution Transaction on November 20,
1995 net assets reverted to ICII:
Premises and equipment................ $ -- $ -- $ 498
Mortgage servicing rights............. -- -- 11,681
Borrowings from ICII.................. -- -- 4,126
Contributed capital................... -- -- 361
Retained earnings..................... -- -- 7,692
See accompanying notes to consolidated financial statements.
76
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. BUSINESS AND FINANCIAL STATEMENT PRESENTATION
Historically, Impac Funding Corporation (IFC) was a division or subsidiary
of ICII that began operations in 1990. On the date of IMH's IPO on November
20, 1995, IFC became the Conduit Operations for IMH as certain assets were
contributed to IFC by ICII in exchange for 100% of the common stock (1% of the
economic interest). On March 31, 1997, ownership of all of the common stock of
IFC was transferred from ICII to Joseph R. Tomkinson, Chief Executive Officer
of IMH and IFC, William S. Ashmore, President of IMH and IFC, and Richard J.
Johnson, Chief Financial Officer of IMH and IFC, who are entitled to 1% of the
earnings or losses of IFC. IFC is a mortgage loan conduit organization which
purchases primarily non-conforming 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 consolidated financial statements include the operations of IFC and its
wholly owned subsidiary, Impac Secured Asset Corp. (collectively the Company)
and have been prepared in conformity with generally accepted accounting
principles and prevailing practices within the mortgage banking 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 significant intercompany balances and transactions with IFCs
consolidated subsidiary have been eliminated in consolidation. Certain items
in prior periods have been reclassified to conform to the current
presentation.
2. CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of Impac Mortgage Holdings' (IMH)
initial public offering (IPO), ICII contributed to Impac Funding Corporation
(IFC) 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 IFC. Simultaneously, on the
effective date of the IPO, in exchange for 500,000 shares of IMH Common Stock,
ICII (1) contributed to IMH all of the outstanding non-voting preferred stock
of IFC, which represents 99% of the economic interest in IFC, (2) caused
Southern Pacific Bank (SPB), formerly Southern Pacific Thrift and Loan
Association, a wholly owned subsidiary of ICII, to contribute to IMH certain
operating assets and certain customer lists of SPB'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 IPO. This contribution is known as the Contribution Transaction. All of
the outstanding shares of common stock of IFC were retained by ICII. Lastly,
IMH contributed all of the aforementioned operating assets of SPB's warehouse
lending operations contributed to it by SPB to Imperial Warehouse Lending
Group, Inc. (IWLG) in exchange for shares representing 100% of the common
stock of IWLG. On the effective date of the IPO, 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
SPB and ICII which were also estimated to be their fair value. ICII and SPB
retained all other assets and
77
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 SPB to fund mortgage conduit
loan acquisitions and to fund finance receivables, respectively.
3. GAIN ON SALE OF LOANS
Prior to the Contribution Transaction, ICII entered into an agreement with
SPB, 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 SPB
and consistent with the Federal National Mortgage Association, Federal Home
Loan Mortgage Company or other investor guidelines. Final loan approval is
given by SPB prior to issuance of any commitments. ICII also, under the
agreement, may purchase mortgage loans at book value from SPB and sell them to
ICII investors. As a division of ICII, IFC historically, under this agreement,
provided these solicitation and origination services relating to its
correspondent customers, and purchased mortgage loans at book value from SPB
concurrent with sales to investors by IFC. IFC received as compensation all
origination fees and points received and recognized all gains or losses in
connection with the sale of loans. Gain (loss) on sale of loans included
amounts allocated to IFC from ICII's forward contracts and other loan hedging
activities. Gains and losses from these activities were allocated to IFC based
on the ratio of IFC's principal amount of loan sales to ICII's total principal
amount of loans sold. For the period from January 1, 1995 through November 19,
1995, total gains allocated were $2.6 million. ICII did not allocate
outstanding commitments to IFC at the end of any reporting period. After the
date of the Contribution Transaction, ICII discontinued these allocations for
IFC, and IFC hedges its own loans.
Subsequent to the Contribution Transaction, IFC recognizes gains or losses
on sale of loans when the sales transaction settles and the risks and rewards
of ownership are determined to have passed to the purchasing party. Gains or
losses on sale of loans or securities to IMH are deferred and amortized or
accreted over the estimated life of the loans or securities using the interest
method.
4. BORROWINGS FROM ICII
Historical operations of IFC, 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 IFC'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 IFC 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
NOVEMBER 20, 1995
----------------------
(DOLLARS IN THOUSANDS)
Estimated average borrowings........................ $4,785
Interest rate....................................... 10.28%
Interest allocation................................. $ 437
5. EQUITY
Prior to the effective date of the Offering, IFC had no contributed capital
or retained earnings recorded in its accounts. To properly reflect the
historical financial operations of IFC, retained earnings were recorded as a
result of net income or loss from operations on an adjusted historical basis.
78
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
IFC did not record income taxes in its historical operations. The
accompanying financial statements have been adjusted to reflect income taxes
for IFC as if it had been a separate company. As a subsidiary of ICII, IFC
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.
7. SECURITIES AVAILABLE-FOR-SALE
IFC classifies investment and mortgage-backed securities as held-to-
maturity, available-for-sale, and/or trading securities. Held-to-maturity
investment and mortgage-backed securities are reported at amortized cost,
available-for-sale securities are reported at fair value with unrealized gains
and losses, net of related income taxes, as a separate component of
shareholders' equity, and trading securities are reported at fair value with
unrealized gains and losses reported in income. IFC's investment securities
are held as available-for-sale, reported at fair value with unrealized gains
and losses reported as a separate component of shareholders' equity. Premiums
or discounts obtained on investment securities are accreted or amortized to
interest income over the estimated life of the investment securities using the
interest method.
IFC's securities available-for-sale include the beneficial interest in the
Class A Trust Certificate for the Franchisee Loan Receivables Trust 1995-B and
the beneficial interest in the Class E Trust Certificate for the Franchisee
Loan Receivables Trust 1996-B which were purchased from IMH in 1997. As of
December 31, 1997 and 1996, the carrying amount of securities available-for-
sale was $6.1 million and none, respectively. There were no significant
unrealized gain or loss on these securities at December 31, 1997.
8. RESIDUAL INTERESTS IN SECURITIZATIONS
The accompanying 1996 balance sheet included 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. ICII
transferred the residuals on December 31, 1996 to IFC at the carrying value
$46.9 million, all of which was financed by an intercompany payable and
guaranteed by ICII. In March 1997, IFC sold one residual interest in
securitization of $10.1 million to ICH at carrying value which approximated
fair value.
In 1997, IFC transferred the remaining residual interests in securitizations
in December, 1997 to IMH as part of the Company's Termination Agreement of its
Management Agreement with ICAI. IFC transferred all of its residual interests
in securitizations to IMH at carrying value which approximated fair market
value thereby recognizing no gain or loss on the transfer of the residual
interests in securitizations.
79
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of cost or market in
the aggregate as determined by outstanding commitments from investors or
current investor yield requirements. Interest is recognized as revenue when
earned according to the terms of the mortgage loans and when, in the opinion
of management, it is collectible. Nonrefundable fees and direct costs
associated with the origination or purchase of loans are deferred and
recognized when the loans are sold as gain or loss on sale of mortgage loans.
It is the policy of the Company to construct hedge positions which will
limit exposure to a rise or decline of 25 basis points in yield or
approximately a one point change in price of the benchmark instrument.
10. 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).
11. FUTURES
To remain competitive and control risk, IFC uses futures, and options on
futures. The use of these instruments provides for increased liquidity, lower
transaction costs and more effective short term coverage than cash and
mortgage-backed securities. However, IFC is vulnerable to the basis risk that
is inherent in cross-hedging. IFC uses the buying and selling of futures
contracts on T-Bonds and Treasury Notes when the market is vulnerable to day
to day corrections. Executing hedges with these instruments allows IFC to more
effectively hedge the risks of corrections or reverses in the market without
committing mandatory sales on mortgage-backed securities or cash. IFC utilizes
these instruments on a short-term basis to fine tune its overall hedge
position at a lower cost.
12. FORWARD CONTRACTS AND COMMITMENTS
In order to hedge against a change in market value of the loans it acquires,
IFC sells mortgage-backed securities through forward delivery contracts.
Income or loss on these contracts is recorded at the time of sale of the
related contracts or loans as a component of the gain or loss on sale of the
loans. If any party to the contracts fails to completely perform, IFC would be
exposed to additional interest rate risk. IFC's principal hedging activity
consists of optional and mandatory commitments to deliver closed mortgage
loans to institutional investors, which do not require any collateral
deposits.
13. OPTIONS
Written options are stated at market value.
14. SERVICING INCOME
Servicing income is reported as earned, principally on a cash basis when the
majority of the service process is completed.
15. MORTGAGE SERVICING RIGHTS
When IFC purchases loans that include the associated servicing rights,
purchase price is allocated to the loan and the servicing rights based on
relative fair values. MSRs are amortized in proportion to, and over the period
of expected net servicing income.
80
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 125 (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 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. The Company adopted SFAS 125 on January 1, 1997 with no significant
impact on the Company's financial position or results of operations.
SFAS No. 125 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 components of the loan. To determine the fair value of
the servicing rights created, IFC uses a valuation model that calculates the
present value of future net servicing revenues to determine the fair value of
the servicing rights. In using this valuation method, IFC incorporates
assumptions that it believes market participants would use in estimating
future net servicing, an inflation rate, ancillary income per loan, a
prepayment rate, a default rate and a discount rate commensurate with the risk
involved.
MSRs are 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 management's expectations of future
prepayment rates, which are based, in part, on the historical rate of
prepayment of IFC's loans, and other considerations. There can be no assurance
of the accuracy of the Company's prepayment 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 except for the impact of a reduction
in the valuation allowance.
16. SALES OF SERVICING RIGHTS
IFC 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.
81
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" (SFAS No. 130) and "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
requirements is not expected to have a material impact on the Company's
consolidated financial position, results of operations or liquidity.
NOTE B--MORTGAGE LOANS HELD FOR SALE
Mortgage loans purchased by IFC are fixed-rate or adjustable-rate non-
conforming mortgage loans secured by first and second liens on single-family
residential properties. During the years ended December 31, 1997 and 1996, IFC
acquired $2.6 billion and $1.5 billion, respectively, of mortgage loans and
sold $2.2 billion and $1.6 billion, respectively, of mortgage loans. Of the
$2.6 million of mortgage loans acquired by IFC during 1997, IFC acquired
$576.1 million of fixed-rate mortgage loans secured by second liens on single
family residential properties with loan-to-value ratios of approximately 125%
from Preferred Credit Corporation (Preferred) of which $138.9 million of
principal balance was outstanding at December 31, 1997. During the year ended
December 31, 1997, Preferred and Weyerhauser Mortgage Corporation accounted
for 22.4%, or $576.1 million, and 11.9%, or $304.7 million, respectively, of
the mortgage loans acquired by IFC. At December 31, 1997 and 1996,
approximately 35% and 47%, respectively, of mortgage loans held for sale were
collateralized by properties located in California. Mortgage loans held for
sale consisted of the following:
AT DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
Mortgage loans held for sale................................. $600,022 $323,816
Premium on loans............................................. 15,417 10,288
Deferred Hedging............................................. 5,110 --
-------- --------
$620,549 $334,104
======== ========
Included in other liabilities at December 31, 1997 and 1996 is an allowance
for repurchases and loan losses of $3.2 million and $686,661, respectively.
NOTE C--PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
AT DECEMBER 31,
-----------------
1997 1996
-------- -------
(IN THOUSANDS)
Premises and equipment....................................... $ 2,498 $ 970
Less accumulated depreciation................................ (710) (136)
-------- -------
$ 1,788 $ 834
======== =======
82
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--MORTGAGE SERVICING RIGHTS
Activity for mortgage servicing rights was as follows:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Beginning Balance.......................................... $ 8,785 $ --
Additions.................................................. 9,611 9,398
Amortization............................................... (2,828) (613)
--------- --------
Ending balance............................................. $ 15,568 $ 8,785
========= ========
At December 31, 1997 and 1996, approximately $2.4 million and $2.3 million,
respectively, of mortgage servicing rights relates to $473.3 million and
$576.4 million, respectively, of mortgage loans sold, servicing retained by
IFC, to IMH during the year ended December 31, 1997 and 1996.
NOTE E--OTHER BORROWINGS
IFC enters into reverse repurchase agreements with major brokerage firms to
fund the purchase of mortgage loans. Mortgage loans underlying reverse
repurchase agreements are delivered to dealers that arrange the transactions.
IFC has entered into a committed warehouse line agreement to obtain
financing up to $200.0 million from a major investment bank. The margins on
the reverse repurchase agreements are based on the type of collateral used and
generally range from 95% to 98% of the fair market value of the collateral.
The interest rates on the borrowings are indexed to LIBOR plus a spread of 75
basis points to 125 basis points depending on the type of collateral used.
IFC has entered into an uncommitted warehouse line agreement to obtain
financing as needed from a major investment bank. The margins on the reverse
repurchase agreements are based on the type of collateral used and generally
range from 95% to 98% of the fair market value of the collateral. The interest
rates on the borrowings are indexed to LIBOR plus a spread of 75 basis points.
The following tables sets forth information regarding reverse repurchase
agreements:
AT DECEMBER 31, 1997
--------------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- -----------
(IN THOUSANDS)
Lender A........................... Mortgages $ 76,209 $ 76,385 Uncommitted
Lender B........................... Mortgages 72,098 72,098 Uncommitted
-------- --------
Total............................ $148,307 $148,483
======== ========
83
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--INCOME TAXES
IFC's income taxes were as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1997 1996 1995
------ ---- ------
(IN THOUSANDS)
Current:
Federal................................................. $4,064 $ 82 $ 863
State................................................... 1,345 35 169
------ ---- ------
Total current............................................. 5,409 117 1,032
------ ---- ------
Deferred:
Federal................................................. 434 393 12
State................................................... 293 169 25
------ ---- ------
727 562 37
------ ---- ------
Total income taxes........................................ $6,136 $679 $1,069
====== ==== ======
The Company's effective income taxes differ from the amount determined by
applying the statutory Federal rate of 35%, 34% and 34% for the years ended
December 31, 1997, 1996 and 1995, respectively, is as follows:
1997 1996 1995
------ ---- ------
(IN THOUSANDS)
Income tax at Federal tax rate.......................... $5,088 $541 $ 875
California franchise tax, net of Federal income tax ben-
efit................................................... 1,065 135 128
Other................................................... (17) 3 66
------ ---- ------
$6,136 $679 $1,069
====== ==== ======
The tax effected cumulative temporary differences that give rise to deferred
tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996
------- -------
(IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue.......................................... $3,654 $1,383
Provision for repurchases................................. 1,442 311
Future state tax benefit.................................. 614 57
Loan market to market..................................... -- 1,536
Net operating loss........................................ -- 128
------- -------
$5,710 $ 3,415
Deferred Tax Liabilities--
Mortgage Servicing rights................................. 6,981 3,979
Other..................................................... 29 9
------- -------
Net deferred tax liability.............................. $1,300 $ 573
======= =======
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.
84
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In determining the possible future realization of deferred tax assets,
future taxable income from the following sources are taken into account: (a)
the reversal of taxable temporary differences, (b) future operations exclusive
of reversing temporary differences and (c) tax planning strategies that, if
necessary, would be implemented to accelerate taxable income into years in
which net operating losses might otherwise expire.
NOTE G--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The 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 IFC using available market
information and appropriate valuation methodologies, however, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts IFC could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
Assets:
Cash................................. $ 359 $ 359 $ 4,395 $ 4,395
Securities available-for-sale........ 6,083 6,083 -- --
Residual interests in
securitizations..................... -- -- 46,949 46,949
Mortgage loans held for sale......... 620,549 620,773 334,104 335,428
Liabilities:
Borrowings on warehouse lines........ 603,147 603,147 327,422 327,422
Other borrowings..................... 148,307 148,307 -- --
Due to affiliates.................... 6,198 6,198 54,803 54,803
Off balance-sheet loan commitments... -- 883 -- 866
The fair value estimates as of December 31, 1997 and 1996 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 IFC in
estimating fair values.
Cash
Fair value approximates carrying amounts as these instruments are demand
deposits and do not present unanticipated interest rate or credit concerns.
Securities Available-for-sale
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of securities.
85
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Residual Interests in Securitizations
Fair value approximates carrying amounts as fair value was estimated by
discounting future cash flows using rates that IFC 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.
Mortgage Loans Held for Sale
Fair value of mortgage loans held for sale is estimated based on quoted
market prices from dealers and brokers for similar types of mortgage loans.
Borrowings on Warehouse Lines
Fair value approximates carrying amounts because of the short-term maturity
of the liabilities.
Other Borrowings
Fair value approximates carrying amounts because of the short-term maturity
of the liabilities.
Due to Affiliates
Fair value approximates carrying amounts because of the short-term maturity
of the liabilities.
Off Balance Sheet Loan Commitments
Fair value of commitments, including hedging positions, is determined in the
aggregate based on current investor yield requirements.
NOTE H--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 IFC.
IFC does not have its own 401(k) or profit sharing plan. As such, employees
of IFC participate in ICII's 401(k) plan. The Company recorded approximately
$204,000 and $160,000 for matching and discretionary contributions in 1997 and
1996. There were no significant contributions made by IFC in 1995.
NOTE I--RELATED PARTY TRANSACTIONS
Related Party Cost Allocations
Prior to the Contribution Transaction, IFC was allocated various costs from
ICII. The costs of these services were not directly attributable to IFC 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 on a per
employee basis, on origination volume or an even allocation of total expense.
Management believes these methods of allocation are reasonable. Total
allocations of expenses for the period January 1, 1995 through November 19,
1995 were $222,361.
86
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On the effective date of the Company's IPO, IFC entered into a services
agreement with ICII under which ICII provides various services to IFC,
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. The
charge to IFC for coverage is based upon a pro rata portion of costs ICII
incurred for its various policies. Total allocation of expense for the years
ended December 31, 1997 and 1996 and for the Interim Period was $152,180,
$385,801 and $24,669, respectively. In December 1996, IFC began to provide
these services on its own thereby reducing cost allocations from ICII. ICII
continues to provide IFC with insurance coverage and self-insurance programs,
including health insurance.
In addition to IFC providing data processing, professional services and
accounting functions on its own, IFC provides these services to IMH and IWLG.
IFC allocates to IMH and IWLG certain direct expenses IFC incurs during the
normal course of business for various services including data processing,
professional services and accounting functions that directly benefit the
operations of IMH and IWLG. IFC charges IMH and IWLG for these services based
upon usage which management believes is reasonable. Total cost allocations IFC
charged to IMH and IWLG for the year ended December 31, 1997 were $384,767.
IMH entered into a premises operating sublease agreement with ICII (see Note
J--Commitments and Contingencies) to rent approximately 30,000 square feet of
office space in Santa Ana Heights, Ca., for a two-year term expiring in
February 1999. IFC is allocated monthly rental expense on the basis of square
footage occupied. The majority of occupancy charges incurred by IMH were
allocated to IFC as most of the Company's employees are employed by the
Conduit Operations. Total occupancy charges allocated to IFC by IMH for the
years ended December 31, 1997, 1996 and for the Interim Period were $384,691,
$179,049 and $12,210, respectively.
Credit Arrangements
IFC maintains a warehouse financing facility with IWLG. Advances under such
warehouse facilities bear interest at rates indexed to prime. As of December
31, 1997, 1996 and 1995, amounts outstanding on IFC's warehouse line with IWLG
were $454.8 million, $327.4 million and $550.3 million, respectively. Interest
expense recorded by IFC related to warehouse lines with IWLG for the years
ended December 31, 1997, 1996, and for the Interim Period was $33.4 million,
$31.8 million and $1.3 million, respectively.
In October 1997, IFC entered into a revolving credit arrangement with ICH
whereby ICH would advance to IFC up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement are at an interest rate and
maturity to be determined at the time of each advance with interest and
principal paid monthly. The revolving credit arrangement expired in December
1997 and as of December 31, 1997 there were no amounts outstanding.
During the normal course of business, IFC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on IFC's balance sheet. These short-term advances and borrowings
bear interest at a fixed rate of 8.00% per annum. Interest income recorded by
IFC related to short-term advances due from affiliates was $500,044 for the
year ended December 31, 1997. Interest expense recorded by IFC related to
short-term advances due to affiliates was $687,675 for the year ended December
31, 1997.
As part of IMH's termination agreement of its Management Agreement with
ICAI, IMH purchased the equity in residual interests in securitizations from
IFC for $9.0 million and simultaneously retired IFC's borrowings with IMH for
the equity in residual interests in securitizations for $9.0 million. No gain
or loss on the sale of residual interests in securitizations was recorded by
the Company or IFC.
87
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
IFC entered into a forward commitment with WSI to purchase or broker
approximately $500.0 million of certain mortgage loans until April 30, 1998.
The premium at which IFC purchases the loans depends on whether the loans are
resold or brokered by IFC. As of December 31, 1997, IFC has brokered
approximately $20.0 million of mortgage loans for WSI.
In September 1996, IFC issued a $1.25 million secured residential first
mortgage loan to the Chairman of IMH.
Sub-Servicing Agreements
Prior to July 1996, ICII provided sub-servicing to IFC 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 IFC and amounted to $335,188 and $1.1
million for the years ended December 31, 1996 and 1995, respectively.
IFC acts as a servicer of mortgage loans acquired on a "servicing-released"
basis by the Company in its Long-Term Investment Operations pursuant to the
terms of a Servicing Agreement which became effective on November 20, 1995.
For a general description of the terms of such a Servicing Agreement, see
"Item 1-- Business--Servicing and Master Servicing." IFC subcontracts all of
its servicing obligations under such loans to independent third parties
pursuant to sub-servicing agreements.
Cash
Prior to the Contribution Transaction IFC had no cash accounts. All
operations were funded directly by ICII. Adjustments were made to IFC's
financial statements to reflect these fundings as Borrowings from ICII. IFC
did not reflect any accounts receivable or payable on its balance sheets prior
to the Contribution Transaction because all transactions of IFC either
increased or decreased its borrowings from ICII.
Purchase of Franchise Loans Receivables
In January 1997, IFC purchased the beneficial interest in the Class A Trust
Certificate for the Franchisee Loan Receivables Trust 1995-B ("Franchise Loans
Receivables") and the beneficial interest in the Class E Trust Certificate for
the Franchisee Loan Receivables Trust 1996-B from IMH at carrying value which
approximated fair value. No gain or loss was recorded on the sale and IFC was
under no obligation to purchase the securities.
Purchase Mortgage Loans
In August 1997, IFC purchased $80.2 million of non-conforming residential
mortgage loans from Greenwich including premiums of $2.9 million pursuant to a
mortgage loan purchase agreement. Greenwich previously purchased such loans
from WSI.
Sale of Mortgage Loans
During the year ended December 31, 1997 and 1996, IFC sold adjustable rate
first trust deed and fixed rate second trust deed residential mortgages having
a principal balance of $839.5 million and $576.4 million, respectively, with
premiums of $37.5 million and $15.2 million, respectively, to IMH. Servicing
rights on all adjustable rate mortgages were retained by IFC while servicing
rights on all second trust deed mortgages were not originally acquired by IFC.
In February 1997, IFC sold $17.5 million in unpaid principal balance of
mortgage loans to ICH.
88
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sale of Mortgage-Backed Securities
During the year ended December 31, 1997 and 1996, IFC sold $15.0 million and
$32.5 million, respectively, of mortgage-backed securities to IMH for $12.6
million and $26.8 million, respectively, net of discounts of $2.4 million and
$5.7 million, respectively. IFC issued the mortgage-backed securities during
1997 and 1996 in connection with its REMIC securitizations.
Sale of Residual Interests in Securitizations
In March 1997, IFC sold a residual interest in securitization of $10.1
million to ICH at carrying value which approximated fair value.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which, IMH and IFC
provides various services to ICH as RAI deems necessary, including facilities
and costs associated therewith, technology, human resources, management
information systems, general ledger accounts, check processing and accounts
payable, plus a 15% service charge. IFC charges ICH and ICCC for these
services based upon usage which management believes is reasonable. Total cost
allocations IFC charged to ICH and ICCC for the year ended December 31, 1997
were $525,174 and $456,122, respectively.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH
initial public offering, IFC will not acquire any commercial mortgages for a
period of the earlier of nine months from the closing of the ICH initial
public offering or the date upon which ICH and/or ICCC accumulates (for
investment or sale) $300.0 million of commercial mortgages or commercial
mortgage-backed securities.
Pursuant to the Right of First Refusal Agreement by and among IFC, IMH, ICH,
ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any Affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
NOTE J--COMMITMENTS AND CONTINGENCIES
Loan Servicing
Properties securing mortgage loans in IFC's servicing portfolio are
primarily located in California. As of December 31, 1997 and 1996, IFC was
servicing loans totaling approximately $3.0 billion and $1.6 billion,
respectively, of which $2.2 and $1.3 billion, respectively, were serviced for
others. As of December 31, 1997 and 1996, IFC is the master servicer for $1.5
billion and $795.1 million, respectively of loans collateralizing fixed rate
REMIC securities and $738.5 million and $464.3 million, respectively of loans
collateralizing CMO's.
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 SPB.
Sales of Loans and Servicing Rights
In the ordinary course of business, IFC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances, IFC
is required to repurchase mortgage loans if there has been a breach of
representations or warranties. In the opinion of management, the potential
exposure related to these representations and warranties will not have a
material adverse effect.
89
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997 and 1996, included in other liabilities are $3.2
million and $686,661 in allowances related to possible off-balance sheet
recourse and repurchase agreement provisions.
Commitments
IFC establishes mortgage loan purchase commitments (master commitments) with
sellers that, subject to certain conditions, entitle the seller to sell and
obligate IFC to purchase a specified dollar amount of non-conforming mortgage
loans over a period generally ranging from six months to one year. The terms
of each master commitment specify whether a seller may sell loans to IFC on a
mandatory, best efforts or optional basis, or a combination thereof. Master
commitments generally do not obligate IFC to purchase loans at a specific
price, but rather provide the seller with a future outlet for the sale of its
originated loans based on IFC's quoted prices at the time of purchase.
As of December 31, 1997 and December 31, 1996, IFC had outstanding short
term master commitments with 77 and 68 sellers to purchase mortgage loans in
the aggregate principal amount of $1.3 billion and $826.5 million,
respectively, over periods ranging from six months to one year, of which
$714.6 million and $304.9 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
IFC sells mortgage-backed securities through forward delivery contracts with
major dealers in such securities. At December 31, 1997 and 1996, IFC had
$242.0 million and $141.0 million, respectively, in outstanding commitments to
sell mortgage loans through mortgage-backed securities. These commitments
allow IFC to enter into mandatory commitments when IFC notifies the investor
of its intent to exercise a portion of the forward delivery contracts. IFC was
not obligated under mandatory commitments to deliver loans to such investors
at December 31, 1997 and 1996.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. IFC evaluates counterparties based on their
ability to perform prior to entering into any agreements.
Future Contracts
IFC sells future contracts against five and ten year treasury notes with
major dealers in such securities. At December 31, 1997 and 1996, IFC had
$118.7 million and none, respectively, in outstanding commitments to sell
treasury notes which expire within 90 days.
Options
In order to protect against changes in the value of mortgage loans held for
sale, IFC may sell call or buy put options on U.S. Treasury bonds and
mortgage-backed securities. IFC generally sells call or buys put options to
hedge against adverse movements of interest rates affecting the value of its
mortgage loans held for sale.
The risk in writing a call option is that IFC gives up the opportunity for
profit if the market price of the mortgage loans increases and the option is
exercised. IFC also has the additional risk of not being able to enter into a
closing transaction if a liquid secondary market does not exist. The risk of
buying a put option is limited to the premium IFC paid for the put option.
IFC had written option contracts with an outstanding principal balance of
$20.0 million and $70.0 million at December 31, 1997 and 1996, respectively.
IFC received approximately $66,000 and $366,000 in premiums on these options
at December 31, 1997 and 1996, respectively.
90
IMPAC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K--QUARTERLY FINANCIAL DATA--UNAUDITED
Selected quarterly financial data for 1997 follows (dollar amounts in
thousands):
FOR THE THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
Revenues.......................... $22,283 $21,411 $14,148 $14,344
Total expenses.................... 20,076 18,958 11,975 12,777
Net income........................ 2,207 2,453 2,173 1,567
Selected quarterly financial data for 1996 follows (dollar amounts in
thousands):
FOR THE THREE MONTHS ENDED,
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
Revenues.......................... $9,069 $10,671 $8,291 $13,765
Total expenses.................... 8,883 10,569 8,215 13,217
Net income........................ 186 102 76 548
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
91
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, IFC and IWLG:
NAME AGE POSITION
---- --- --------
H. Wayne Snavely......... 56 Chairman of the Board of IMH
Joseph R. Tomkinson...... 50 Vice Chairman of the Board and Chief Executive Officer of IMH, and
Chairman of the Board and Chief Executive Officer of IFC and IWLG
William S. Ashmore....... 48 President, Chief Operating Officer and Director of IMH, President
and Director of IFC and IWLG
Richard J. Johnson....... 35 Executive Vice President, Chief Financial Officer, Treasurer and Secretary
of IMH, IFC and IWLG, and Director of IFC and IWLG
Mary C. Glass-Schannault. 44 Vice President of IMH and Senior Vice President, Operations, of IFC and
IWLG
James Walsh+............. 48 Director of IMH
Frank P. Filipps+........ 50 Director of IMH
Stephan R. Peers+........ 45 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 (Nasdaq-
ICII) since December 1991 and President since 1996. Mr. Snavely is also
Chairman of the Board of Southern Pacific Funding Corporation (NYSE-SFC),
Franchise Mortgage Acceptance Company (Nasdaq-FMAX), and Imperial Credit
Commercial Mortgage Investment, Inc. (Nasdaq-ICMI). Mr. Snavely served as a
Director of Imperial Bancorp (NYSE-IMP) from 1993-1998.
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 IFC
and IWLG since their formation. Mr. Tomkinson is also Chairman of the Board
and Chief Executive Officer of ICH (AMEX-ICH). In October 1997, Mr. Tomkinson
became a director of BNC Mortgage, Inc. (Nasdaq-BNCM), a specialty finance
company that originates and sells non-conforming residential mortgage loans.
Mr. Tomkinson served as President and Chief Operating Officer of ICII from
January 1992 to February 1996 and, from 1986 to January 1992, he was President
of Imperial Bank Mortgage, a division of Imperial Bank, one of the divisions
that later was 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
since its formation, President of IFC since March 1997 (after being promoted
from Executive Vice President) and a Director since its formation, and
President and a Director of IWLG since its formation. In July 1997, Mr.
Ashmore became a Director of IMH. 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.
RICHARD J. JOHNSON, recently promoted to Executive Vice President in January
1998, has been Senior Vice President, Chief Financial Officer, Treasurer and
Secretary of IMH, IWLG, and IFC since their formation.
92
In February 1996, Mr. Johnson was elected as a Director of IWLG and in March
1996, he was elected a Director of IFC. Mr. Johnson is also the Senior Vice
President, Chief Financial Officer, Treasurer and Secretary of ICH. 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-SCHANNAULT has been Vice President of IMH and Senior Vice
President, Structured Transactions, of IFC since their formation. Ms. Glass-
Schannault is also the Senior Vice President of ICH. 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-Schannault 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 IFC, a division
of ICII. From 1991 through 1993, Ms. Glass-Schannault 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-
Schannault was President of SCS Mortgage. From September 1984 through
September 1988, Ms. Glass-Schannault was Senior Vice President of Concor
Financial Services.
JAMES WALSH has been a Director of the Company since August 1995. Mr. Walsh
is also a director of ICH (AMEX-ICH). 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 is also a director of ICH (AMEX-ICH). 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
operations. 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. Mr.
Peers is also a director of ICH (AMEX-ICH). Since January 1998, Mr. Peers has
been an executive at Aames Financial Corporation, a mortgage loan company. Mr.
Peers served as a Managing Director of Resource Bancshares Corporation from
August 1995 to December 1997. From April 1993 to December 1997, Mr. Peers was
an Executive Vice President of International Strategic Finance Corporation,
Ltd., where he performed 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.
93
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. 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 or her 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, under the
MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on
the basis that personal benefit was improperly received, unless in either case
a court order indemnification and then only for expenses. In addition, the
MGCL requires the Company, as a condition to advancing expenses, to a director
or officer upon the corporation's receipt of (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
94
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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act of 1934, as amended, requires IMH's
Directors and executive officers, and persons who own more than ten percent of
a registered class of IMH's securities, to file with the Commission initial
reports of ownership and reports of changes in ownership of the Common Stock
and other equity securities of the Company. Officers, Directors and greater
than ten percent stockholders are required by the Commission's regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To IMH's knowledge, based solely on a review of the copies of such reports
furnished to IMH during the fiscal year ended December 31, 1997, all Section
16(a) filing requirements applicable to its officers, Directors and greater
than ten percent beneficial owners were satisfied by such persons.
ITEM 11. EXECUTIVE COMPENSATION
The following table contains information on the annual cash compensation
paid to executive officers of the Company for each of the years ended December
31, 1997 and 1996 for services rendered. During 1995, none of the executive
officers of the IMH earned more than $100,000 in total compensation
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- -----------------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS ALL OTHER
POSITION YEAR SALARY(1) BONUS(2)(3) COMPENSATION(5) AWARD(S) (#)(7) COMPENSATION(8)
------------------ ---- --------- ----------- --------------- ---------- ---------- ---------------
Joseph R. Tomkinson 1997 $200,000 $1,079,762(4) $16,000 $ -- 97,500 $960
Vice Chairman of the 1996 $250,000 $ 471,197(4) $24,648 -- -- $870
Board and Chief
Executive Officer of
IMH and Chairman of the
Board and CEO of IFC
and IWLG
William S. Ashmore 1997 $150,000 $ 769,676(4) $10,400 $ -- 60,000 $580
President and Chief 1996 $200,000 $ 237,878(4) $16,248 -- -- $839
Operating Officer of
IMH and President of
IFC and IWLG
Richard J. Johnson 1997 $ 75,000 $ 395,135 $10,400 $ -- 15,000 $176
Executive Vice 1996 $100,000 $ 68,250 $16,248 $15,090(6) -- $216
President, Chief
Financial Officer,
Treasurer, and
Secretary of IMH, IFC
and IWLG
Mary C. Glass-Schannault 1997 $ 61,740 $ 197,314 $ 8,075 -- 7,500 $238
Vice President of IMH 1996 $ 90,000 $ 99,148 $ 6,755 -- -- $357
and Senior Vice
President, Structured
Transactions, of IFC
and IWLG
- --------
(1) On November 20, 1995, each of the persons in the above table entered into
a five-year employment agreement at a base annual salary, subject to
adjustment for inflation, plus bonuses described in footnote (3) and in
the case of Messrs. Tomkinson and Ashmore, those additional bonuses
described in footnote (4). In August 1997 in connection with ICH's initial
public offering each officer's employment agreement was amended and
restated to allow him or her to become an officer of RAI Advisors, LLC
("RAI"), the
95
manager to ICH, and of ICH and ICCC. See "--Employment Agreements."
Salary, other annual compensation and all other compensation are allocated
to the Company at a rate of two-thirds and to ICH at a rate of one-third
for services performed by executive officers as part of the Company's
submanagement agreement with RAI. Total current base salaries pursuant to
the employment agreements are as follows: Joseph R. Tomkinson--$300,000;
William S. Ashmore--$225,000; Richard J. Johnson--$112,500 and Mary C.
Glass-Schannault--$92,930. See "Item 13. Certain Relationships and Related
Transactions--Arrangements with ICH."
(2) During 1996, pursuant to the Management Agreement, the Company reserved up
to 1/5 of the Company's 25% Incentive Payment (as defined therein) for
distribution as bonuses to its employees in amounts determined by the
Company's Board of Directors. Such payment was made in lieu of payment of
a like amount to ICAI under the Management Agreement. Pursuant to the
Amended and Restated Management Agreement, dated January 31, 1997, the
Company paid 1/4 of the Company's 25% Incentive Payment for distribution
as bonuses to participants in its executive bonus pool in amounts
determined in the sole discretion of the Company's Chief Executive Officer
and 25% of the per annum base management fee shall was paid to
participants in the Company's executive bonus pool in amounts determined
in the sole discretion of the Company's Chief Executive Officer. Such
payment was made in lieu of payment of a like amount to ICAI under the
Amended and Restated Management Agreement. The Amended and Restated
Management Agreement was terminated effective December 19, 1997. See "Item
13. Certain Relationships and Related Transactions--Relationships with the
Manager--Termination of Management Agreement."
(3) Includes a quarterly bonus equal to the aggregate dividend such person
would have received from the Company on all shares of Common Stock
underlying unexercised stock options held by such person which were
outstanding on the date of payment of said bonus; provided, however, that
(1) no such bonus was paid in calendar 1995, (2) quarterly bonuses were
paid for each of the first three quarters of calendar 1996 since the
dividend that would by payable by the Company on shares of its Common
Stock for the subject quarter after payment of all such quarterly bonuses
equaled or exceeded ten percent (10%) (on an annualized basis) of $8.67
(after giving effect to the stock split in November 1997), and (3)
quarterly bonuses were paid for the fourth quarter of 1996 and each of the
four quarters of 1997 since the dividend that would be payable by the
Company on shares of its Common Stock for the subject quarter after
payment of all such quarterly bonuses equaled or exceeded fifteen percent
(15%) (on annualized basis) of $8.67 (after giving effect to the stock
split in November 1997), and quarterly bonuses will be paid for each
calendar quarter thereafter, if the dividend that would be payable by the
Company on shares of its Common Stock for the subject quarter equals or
exceeds such level as determined by a majority of the Unaffiliated
Directors. Such persons will not be required to refund any portion of such
bonuses previously earned regardless of the level of dividends in
subsequent quarters.
(4) Messrs. Tomkinson and Ashmore are each entitled to performance and
profitability bonuses.
(5) Consists of a car allowance paid by the Company and contributions paid by
the Company under the 401(k) plan.
(6) Consists of 1,509 shares acquired on April 12, 1996 and based on a closing
price on that date of $10.00 per share as quoted on the American Stock
Exchange (after giving effect to the stock split in November 1997). As of
December 31, 1997, based on a closing price of $17.875 per share as quoted
on the American Stock Exchange, the value of the stock was $26,973.
(7) Consists of options granted under IMH's Stock Option Plan (as described
below). Options vest 100% one year from the date of grant. See "--Options
Granted in Fiscal Year Ended December 31, 1997."
(8) For each person, consists of payments on group term-life insurance.
96
EMPLOYMENT AGREEMENTS
On November 20, 1995, each of Messrs. Tomkinson, Ashmore and Johnson and Ms.
Glass-Schannault entered into a five-year employment agreement with IFC. In
August 1997, in connection with the public offering of ICH, each officer's
employment agreement was amended and restated to allow him or her to become an
officer of RAI (and of ICH and ICCC). See "--Executive Compensation--Summary
Compensation Table" for annual salary and bonus descriptions. RAI has agreed
to cause each of its officers to devote as much of his or her time to the
operations of ICH as is necessary. ICH will reimburse RAI, who will reimburse
IFC, on a dollar for dollar basis (including a service charge (see "Item 13.
Certain Transactions and Related Transactions--Arrangements with ICH")), for
the actual cost of providing the services of its officers to ICH based upon
the compensation payable to them by IFC, plus a 15% service charge.
Pursuant to the employment agreements, if the officer is terminated without
cause (as defined therein) then the officer will receive (i) his or her base
salary for a period of one year following the date of termination, (ii) any
bonus or incentive compensation prorated through the date of termination;
provided that if the bonus or incentive compensation is discretionary, then
the officer will receive a payment at least equal to the last previous payment
made to the officer, if any, for the previous year prorated to the date of
termination, and (iii) any expense reimbursements. Each officer agreed that he
or she will not compete with the Company if the agreement is voluntarily
terminated by the officer. The employment agreements will not be terminated
upon any merger or the transfer of all or substantially all of IFC's assets.
401(k) PLAN
On the effective date of the IPO, the Company commenced participation in the
ICII contributory retirement plan ("401(k) Plan") for all full time employees
with at least six months of service, which is designed to be tax deferred in
accordance with the provisions of Section 401(k) of the Code. The 401(k) Plan
provides that each participant may contribute from 2% to 14% of his or her
salary, and the Company will contribute to the participant's plan account at
the end of each plan year 50% of the first 4% of salary contributed by a
participant. Under the 401(k) Plan, employees may elect to enroll on the first
day of any month, provided that they have been employed for at least six
months.
Subject to the rules for maintaining the tax status of the 401(k) Plan, an
additional Company contribution may be made at the discretion of the Company,
as determined by the Unaffiliated Directors. Should a discretionary
contribution be made, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The matching contribution would
be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should
discretionary contribution funds remain following the allocation outlined
above, any remaining Company matching funds would be allocated as a 50% match
of employee contributions, on the first 4% of the employee's deferrals.
Company matching contributions will be made as of December 31st of each year.
SUMMARY OF THE PROVISIONS OF THE STOCK OPTION PLAN
The Company's 1995 Stock Option, Deferred Stock and Restricted Stock Plan
(the "Stock Option Plan") provides for the grant of qualified incentive stock
options ("ISOs") that meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), stock options not so qualified
("NQSOs") and deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights awards ("Awards"). The Stock Option Plan is
administered by the Board of Directors or a committee of the Directors (the
"Administrator"). ISOs may be granted to the officers and key employees of the
Company. NQSOs and Awards may be granted to the directors, officers and key
employees of the Company or any of its subsidiaries, to the directors,
officers and key employees of the Manager, or to the Manager itself, and to
the directors, officers and key employees of IFC. The exercise price for any
option 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 option is granted. The purpose of the Stock
Option Plan is to provide a means of performance-based compensation in
97
order to attract and retain qualified personnel and to provide an incentive to
those whose job performance affects the Company. The effective date of the
Stock Option Plan was August 31, 1995.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan currently authorizes the grant of
options to purchase, and Awards of, up to 1,200,000 shares and as of
December 31, 1997, 304,125 shares underlying options were available for grant.
If an option granted under the Stock Option Plan expires or terminates, or an
Award is forfeited, the shares subject to any unexercised portion of such
option or Award will again become available for the issuance of further
options or Awards under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to Board of Directors' approval, in connection with
the exercise of stock options granted under the Stock Option Plan. See "--
Stock Option Loan Plan". If shares of Common Stock are pledged as collateral
for such indebtedness, such shares may be returned to the Company in
satisfaction of such indebtedness. If so returned, such shares shall again be
available for issuance in connection with future stock options and Awards
under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the Stock Option Plan after August 31, 2005.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Administrator. Awards will
be subject to the terms and restrictions of the award made by the
Administrator. The Administrator has discretionary authority to select
participants from among eligible persons and to determine at the time an
option or Award is granted and, in the case of options, whether it is intended
to be an ISO or a NQSO, and when and in what increments shares covered by the
option may be purchased.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company. To ensure that the Company qualifies as
a REIT, the Stock Option Plan provides that no options may be granted under
the Stock Option Plan to any person who, assuming exercise of all options held
by such person, would own or be deemed to own more than 9.5% of the
outstanding shares of Common Stock of the Company.
Each option must terminate no more than 10 years from the date it is granted
(or 5 years in the case of ISOs granted to an employee who is deemed to own in
excess of 10% of the combined voting power of the Company's outstanding Common
Stock). Options may be granted on terms providing for exercise in whole or in
part at any time or times during their respective terms, or only in specified
percentages at stated time periods or intervals during the term of the option,
as determined by the Administrator.
The exercise price of any option granted under the Stock Option Plan is
payable in full (1) in cash, (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to
the option holder, (4) by a full recourse promissory note executed by the
option holder, or (5) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable United States Internal Revenue Service or Commission
regulations or other relevant pronouncements.
The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without his consent or may, without stockholder approval,
increase the number of shares subject to the Stock Option Plan or decrease the
exercise price of a stock option to less than 100% of fair market value on the
date of grant (with the exception of adjustments resulting from changes in
capitalization), materially modify the class of participants eligible to
receive options or Awards under the Stock Option Plan, materially increase the
benefits accruing to participants under the Stock Option Plan or extend the
maximum option term under the Stock Option Plan.
98
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1997
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES PERCENTAGE APPRECIATION FOR
UNDERLYING OF OPTIONS EXERCISE OPTION TERM(4)
OPTIONS GRANTED TO PRICE EXPIRATION ---------------------
NAME GRANTED(1) EMPLOYEES ($/SH)(2) DATE(3) 5%($) 10%($)
- ---- ---------- ---------- --------- ---------- --------- -----------
Joseph R. Tomkinson..... 75,000 23.1% 15.4167 1/28/07 727,159 1,842,765
22,500 6.9% 17.5833 10/21/07 134,550 305,249
William S. Ashmore...... 37,500 11.5% 15.4167 1/28/07 363,580 921,382
22,500 6.9% 17.5833 10/21/07 134,550 305,249
Richard J. Johnson...... 15,000 4.6% 15.4167 1/28/07 145,432 368,553
Mary C. Glass-
Schannault............. 7,500 2.3% 15.4167 1/28/07 72,716 184,276
- --------
(1) Such stock options vest 100% on the first anniversary of the date of
grant.
(2) The exercise price for all options equals the fair market value of such
shares at the date of grant as determined by the Administrator.
(3) Such stock options expire ten years from the date of grant or earlier upon
termination of employment.
(4) Amounts reflect assumed risks of appreciation set forth in the
Commission's executive compensation disclosure requirements. The actual
value, if any, an executive officer may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#)(1) UNEXERCISABLE ($)(2)
- ---- ----------- ------------ -------------------- --------------------
Joseph R. Tomkinson..... -- -- --/240,000 --/1,669,000
Willam S. Ashmore....... -- -- --/135,000 --/876,875
Richard J. Johnson...... -- -- --/52,500 --/425,937
Mary C. Glass-
Schannault............. -- -- --/45,000 --/407,500
- --------
(1) For a description of the terms of such options, see "--Stock Option Plan."
(2) Based on a price per share of $17.875, which was the price of a share of
Common Stock as quoted on the American Stock Exchange at the close of
business on December 31, 1997.
STOCK OPTION LOAN PLAN
In December 1996, the Board of Directors adopted the Impac Mortgage
Holdings, Inc. 1996 Stock Option Loan Plan (the "Loan Plan") under which loans
may be made to officers, directors and key employees of the Company, the
Manager and IFC in connection with the exercise of stock options granted under
the Stock Option Plan. Under the Loan Plan, the principal of any loan may not
exceed the sum of (x) the exercise price less the par value of the shares of
Common Stock covered by the stock option exercised by the holder and (y) any
Federal, state, or local income tax attributable to such exercise. Any loan
proceeds must be paid directly to the Company in connection with the exercise
of such options. Loans may be extended for a period of five years and can be
extended annually for up to two more years, but in no event may the term be
longer than seven years, including extensions. The interest rate on each loan
is approved by the Compensation Committee, with such interest rate to be at
all times at least sufficient to avoid imputed interest under the Code. The
loans under the Loan Plan are evidenced by a promissory note, they are full
recourse loans and are secured by pledges of the Common Stock purchased upon
the exercise of the stock options to which they relate. In the event of the
sale or
99
transfer of any of the shares of the Common Stock pledged as security, except
under certain limited conditions, the unpaid principal balance and accrued
interest shall become immediately due and payable to the extent of the
proceeds realized from such sale or transfer. The principal and interest on
the loans made under the Loan Plan are payable quarterly only upon the payment
of dividends by the Company to holders of its Common Stock. The loans may be
prepaid without penalty at any time.
The following table sets forth information as of December 31, 1997 relating
to loans made by IMH to certain directors of IMH and directors of ICAI under
the Loan Plan in connection with the exercise of stock options under the Stock
Option Plan.
BALANCE AT HIGHEST BALANCE INTEREST
NAME DECEMBER 31, 1997 DURING 1997 RATE
---- ----------------- --------------- --------
James Walsh..................... $ 213,747 $ 239,438 5.63%
Frank P. Fillips................ 213,743 239,438 5.63
Stephan R. Peers................ 213,747 239,438 5.63
H. Wayne Snavely................ 272,982 300,000 5.63
Stephen Sugerman................ 291,282 305,250 5.63
---------- ----------
Total......................... $1,205,501 $1,323,564
========== ==========
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee and Audit Committee each consist of
Messrs, Snavely, Walsh, Filipps and Peers. No member of the Compensation
Committee was, during the fiscal year, an officer or employee of IMH, nor was
any member of the Compensation Committee formerly an officer of IMH
H. Wayne Snavely, Chairman of the Board and a member of the Compensation
Committee of IMH, is also Chairman of the Board, Chief Executive Officer and
President of ICII. Joseph R. Tomkinson, Vice Chairman of the Board and Chief
Executive Officer of IMH, is also a Director of ICII. See "Item 13. Certain
Relationships and Related Transactions--Relationships with ICII." Mr.
Tomkinson is also Chairman of the Board and Chief Executive Officer of ICH,
and a member of ICH's Compensation Committee. William S. Ashmore, President,
Chief Operating Officer and a Director of IMH is also the President and Chief
Operating Officer of ICH. See "Item 13. Certain Relationships and Related
Transactions--Arrangements with ICH."
In March 1997, IWLG extended a $5.0 million line of credit to WSI, of which
James Walsh, a Director of the Company and a member of the Compensation
Committee, is an Executive Vice President. The line of credit was increased to
$7.5 million in November 1997 (the "WSI Credit Line"). Advances under the line
of credit bear interest at a rate determined at the time of each advance.
In August 1997, IFC purchased $80.2 million of non-conforming residential
mortgage loans from Greenwich Capital Financial Products, Inc. ("Greenwich")
pursuant to a mortgage loan purchase agreement. Greenwich previously purchased
such loans from WSI. In December 1997, WSI repurchased $7.3 million of the
loans that IFC originally purchased from Greenwich at a loss to the Company of
$112,000. In connection with the repurchase, IWLG extended loans of
approximately $5.1 million to WSI under the WSI Credit Line at rates ranging
from prime plus 2% per annum to prime plus 4% per annum. Of the $5.1 million,
100% and 90% were financed on approximately $2.3 million and $3.1 million,
respectively, of unpaid principal balance of mortgage loans repurchased by
WSI. As of December 31, 1997, WSI had an aggregate of $5.9 million outstanding
under the WSI Credit Line.
IFC entered into a forward commitment with WSI to purchase or broker
approximately $500.0 million of certain mortgage loans until April 30, 1998.
The premium at which IFC purchases the loans depends on whether the loans are
resold or brokered by IFC. As of December 31, 1997, IFC has brokered
approximately $20.0 million of mortgage loans for WSI.
The Company purchased Walsh Acceptance Corporation mortgage pass-through
certificates series 1997-1, Class B, for $6.7 million, net of a discount of
$916,000, with a current yield of 8.9%.
100
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 24,
1998 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 PERCENTAGE OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED
------------------------ ------------ -------------
Imperial Credit Industries, Inc. (1)................ 2,009,310 8.6%
Wellington Management Company, LLP (2).............. 1,498,750 6.4%
Joseph R. Tomkinson (3)............................. 42,372 *
H. Wayne Snavely (3)................................ 30,000 *
William S. Ashmore (3).............................. 29,147 *
James Walsh (3)..................................... 27,000 *
Richard J. Johnson (3).............................. 24,540 *
Frank P. Fillips (3)................................ 22,500 *
Stephan R. Peers (3)................................ 22,500 *
All directors and executive officers as a group (7
persons) (3)....................................... 198,059 *
- --------
* less than 1%
(1) ICII is located at 23550 Hawthorne Blvd., Building #1, Suite 110,
Torrance, CA 90505.
(2) Wellington Management Company, LLP ("Wellington") is located at 75 State
Street, Boston, Massachusetts 02109. Based on a Scheduled 13G, as amended,
filed February 10, 1998, Wellington has shared dispositive power as to
1,498,750 shares and shared voting power as to 1,131,900 shares.
(3) May be reached through the Company located at 20371 Irvine Avenue, Santa
Ana Heights, CA 92707.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS WITH THE MANAGER
The Company entered into the Management Agreement with ICAI, the Manager,
effective on November 20, 1995, for an initial term expiring on January 31,
1997 which the Company renewed for an additional five year term. See "--
Management Fees"). Effective December 19, 1997, the Company terminated its
Management Agreement with the Manager. The termination fee was paid with
2,009,310 shares of the Company's Common Stock representing a value of $35.0
million in addition to other assets comprising the balance. See "--Termination
of Management Agreement."
The Company is currently negotiating with the principals of RAI to provide
management services. The arrangement pursuant to which management services
will be provided to the Company will be on terms no less favorable to the
Company on a pro rata basis than the terms of the agreement with ICAI.
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 (as defined in the Management Agreement) of IMH
comprised of other than Agency Certificates (as defined in the Management
Agreement), 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 $4.0 million, $2.1 million,
$38,000 was accrued for the years ended December 31, 1997, 1996 and the
Interim Period, respectively.
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Prior to January 31, 1997, as incentive compensation (the "Incentive
Payment"), 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" was 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 was 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" was only for purposes of
calculating the incentive compensation payable, and was not related to the
actual distributions received by stockholders. The 25% Incentive Payment to
the Manager was calculated quarterly in arrears before any income
distributions were made to stockholders for the corresponding period. For the
years ended December 31, 1997, 1996 and the Interim Period, the Manager earned
$2.4 million, $1.3 million, and none, respectively, for the Manager's
Incentive Payment.
Pursuant to the Management Agreement, the Company provided up to 1/5 of the
Company's 25% Incentive Payment for distribution as bonuses to its employees
in amounts determined by the Company's Board of Directors. Such payment were
made in lieu of payment of a like amount to the Manager under the Management
Agreement. For the years ended December 31, 1997, 1996 and the Interim Period,
the Company recorded $307,000, $155,000 and none, pursuant to this provision
of the Management Agreement.
The Management Agreement described above expired on January 31, 1997 and a
new five year agreement was executed with similar terms except as follows: (1)
75% of the per annum base management fee as calculated above was paid to the
Manager for services rendered under the agreement; (2) 25% of the per annum
base management fee as calculated above was paid to participants in its
executive bonus pool in amounts determined in the sole discretion of the
Company's Chief Executive Officer; (3) the Company reserved 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 determined in the sole
discretion of the Company's Chief Executive Officer; and (4) net income
included in the Return on Capital calculation was changed from net income in
accordance with GAAP to net taxable income.
The Manager's base and incentive fees were calculated by the Manager within
60 days after the end of each calendar quarter, with the exception of the
fourth quarter for which compensation was computed within 30 days, and such
calculation was promptly delivered to the Company. The Company was 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 paid 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
included 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 years
ended December 31, 1997, 1996 and for the Interim Period, there were no monies
paid to the Manager as reimbursement of expenses.
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Termination of Management Agreement
Effective December 19, 1997, the Company terminated its Management Agreement
with ICAI. A termination fee in the aggregate of $44.0 million was paid with
2,009,310 shares of the Company's Common Stock representing a value of $35.0
million in addition to equity in IFC's residual interests in securitizations
originally purchased from ICII during 1996 representing $9.0 million. IMH
purchased the equity in residual interests in securitizations from IFC for
$9.0 million and simultaneously retired IFC's borrowings with IMH for the
equity in residual interests in securitizations of $9.0 million. No gain or
loss on the sale of residual interests in securitizations was recorded by IMH
or IFC. For financial accounting purposes, the termination fee was treated as
a non-recurring, non-cash expense and resulted in a charge of $44.4 million to
the Company's fourth quarter earnings.
RELATIONSHIPS WITH ICII
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, was the
Manager and provided advisory services to IMH in accordance with the terms of
the Management Agreement during 1997. At March 24, 1998, ICII owned 2,009,310
shares of IMH Common Stock that was acquired by ICAI in December 1997 in
connection with the termination of the Management Agreement. ICAI subsequently
transferred the shares of stock to ICII. In addition, a number of Directors
and officers of IMH and IFC also serve as Directors and/or officers of ICII.
See "Item 10. Directors and Executive Officers of the Registrant." IMH
currently utilizes ICAI as a resource for human resources services. See "--
Services Agreement with ICAI."
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 Contribution Transaction
On November 20, 1995, ICII contributed to IFC 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 IFC. 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 IFC, which represents 99% of the
economic interest in IFC, (2) caused SPB to contribute to IMH certain of the
operating assets and certain customer lists of SPB'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 SPB. Such shares
have subsequently been sold by ICII and SPB. All of the outstanding shares of
common stock of IFC were retained by ICII. Lastly, IMH contributed all of the
aforementioned operating assets of SPB's warehouse lending operations
contributed to it by SPB 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 SPB 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 SPB to
fund mortgage conduit loan acquisitions and to fund finance receivables,
respectively.
103
Pursuant to the Non-Compete Agreement, ICII and any entity of which ICII
owned 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. This agreement expired on November 20, 1997.
Pursuant to the Right of First Refusal Agreement, ICII granted IFC a right
of first refusal to purchase all non-conforming mortgage loans that ICII or
any 25% entity originated or acquired and subsequently offered for sale, and
IFC granted ICII, or any 25% entity designated by ICII, a right of first
refusal to purchase all conforming mortgage loans that IFC acquired and
subsequently offered for sale. This agreement expired on November 20, 1997.
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, 1997, 1996 and the Interim Period, $395,672, $180,861 and
$12,210, 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 Affiliates, must independently approve all transactions by and
between the Company and ICII.
Tax Agreement
IMH 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 IFC and
certain operational assets of SPB'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
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.
104
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 with ICII
Prior to November 20, 1995, the predecessors of IFC 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 were $269,226 for IFC and IWLG combined.
The Company and ICII 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 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, 1997, 1996 and for the Interim Period, total expenses
related to these services that were allocated to IFC and IWLG combined were
$160,080, $440,782 and $29,131, respectively.
Services Agreement with ICAI
In connection with the Termination Agreement, the Company entered into a
services agreement with ICAI for a term of one year. ICAI agreed to provide
certain human resource and data and phone communication services based on an
arranged fee.
ARRANGEMENTS WITH ICH
In February 1997, the Company incorporated ICH, a specialty commercial
property finance company which will elect to be taxed as a REIT. ICH
purchases, sells and securitizes commercial mortgage loans and invests in such
mortgage loans and securities backed by such loans. In connection with the
organization of ICH and its initial public offering in August 1997, the
Company capitalized ICH with $15.0 million and currently holds 719,789 shares
of ICH common stock representing 9.8% of the outstanding shares of common
stock from which it expects to receive dividend income, and 674,211 shares of
ICH's non-voting Class A Common Stock, which are convertible into an
equivalent amount of shares of common stock.
Many of the affiliates of IMH, RAI and IFC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, IMH's Vice Chairman
of the Board and Chief Executive Officer and IFC's Chief Executive Officer and
a Director, is the Chief Executive Officer and Chairman of the Board of ICH, a
one- third owner of RAI, an owner of one-third of the common stock of IFC, and
an owner of 25% of the common stock of ICCC. William S. Ashmore, IMH's
President, Chief Operating Officer, and a Director and IFC's President and a
Director, is the President and Chief Operating Officer of ICH, a one-third
owner of RAI, an owner of one-third of the common stock of IFC, and an owner
of 25% of the common stock of ICCC. Richard J. Johnson, IMH's and IFC's
Executive Vice President, Chief Financial Officer, Treasurer and Secretary,
and a Director of IFC, is Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of ICH, a one-third owner of RAI, an owner of one-
third of the common stock of IFC, and an owner of 25% of the common stock
105
of ICCC. Mary C. Glass-Schannault, IMH's and IFC's Senior Vice President, is a
Senior Vice President of ICH and ICCC. Each of James Walsh, Frank P. Filipps
and Stephan R. Peers, Directors of IMH, are Directors of ICH. Messrs.
Tomkinson, Ashmore, Johnson and Ms. Glass-Schannault and Messrs. Snaveley,
Walsh, Filipps and Peers hold 76,800, 76,800, 62,400 and 12,000 and 12,000
shares of the common stock of ICH. Messrs. Tomkinson, Ashmore and Johnson and
Ms. Glass-Schannault also hold options to purchase 10,000 shares of ICH common
stock with related dividend equivalent rights, and Messrs. Walsh, Filipps, and
Peers hold options to purchase 10,000 shares of common stock. In addition, as
owners of all of the outstanding shares of voting stock of IFC, Messrs.
Tomkinson, Ashmore, and Johnson, have the right to elect all directors of IFC
and the ability to control the outcome of all matters for which the consent of
the holders of the common stock of IFC is required. Ownership of 100% of the
common stock of IFC entitles the owners thereof to an aggregate of 1% of the
economic interest in IFC. Messrs. Tomkinson, Ashmore and Johnson received
their shares of IFC Common Stock from ICII.
The oversight of the day-to-day operations of ICH is conducted by RAI
pursuant to a Management Agreement ("the RAI Management Agreement"). The
officers of RAI, Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson
and Mary C. Glass-Schannault, are also officers of IMH and IFC. RAI is owned
one-third by Joseph R. Tomkinson, IMH's Vice Chairman of the Board and Chief
Executive Officer, ICH's Chairman of the Board and Chief Executive Officer,
one-third by William S. Ashmore, IMH's and ICH's President and Chief Operating
Officer and a Director of IMH, and one-third by Richard J. Johnson, IMH's and
ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary.
Each Messrs. Tomkinson, Ashmore and Johnson and Mrs. Glass-Schannault has
modified his or her employment agreement with IFC to allow him or her to
become an officer of RAI (and of ICH and ICCC). However, such officers are
expected to devote the majority of their time and effort towards the
management and operations of IMH and IFC. RAI has agreed to cause each of its
officers to devote as much of his or her time to the operations of ICH as is
necessary. ICH will reimburse RAI, who will reimburse ICIFC, on a dollar for
dollar basis (including the service charge referenced below), for the actual
cost of providing the services of its officers to ICH based upon the
compensation payable to them by IFC, plus a 15% service charge. See "Item 11.
Executive Compensation." ICH will reimburse RAI for expenses incurred by RAI,
plus a service charge of 15% on all expenses owed by RAI to IFC for costs and
services under any submanagement agreement between IFC, and RAI will pay all
such third parties on a dollar for dollar basis for the aforementioned amounts
received by it from ICH; no such 15% service charge will be paid to third
party service providers other than IFC. For the first three years of the RAI
Management Agreement, there will be a minimum amount of $500,000 (including
the 15% service charge) payable by ICH in connection with services provided
and expenses incurred by RAI and payable by RAI to IFC. After the third year,
ICH will only be responsible for reimbursing expenses and services provided,
with the 15% service charge for amounts due to IFC. However, such officers are
expected to devote the majority their time and effort towards the management
and operations of IMH and IFC. Should the operations of ICH and ICCC and those
of the Company require immediate attention or action by RAI or any of its
officers, there can be no assurance that the officers of RAI will be able to
properly allocate sufficient time to the operations of the Company. The
failure or inability of the Company's officers and directors to provide the
services required of them under their respective employment agreements or any
other agreements or arrangements with the Company would have a material
adverse effect on the Company's business.
Non-Competition Agreement
IFC and IMH entered into a non-compete agreement, (the "Non-Compete
Agreement") with ICH, effective as of August 8, 1997, under which neither IMH
nor IFC will originate or acquire any commercial mortgages or CMBSs for a
period of the earlier of nine months from August 1997 or the date upon which
ICH accumulates (for investment or sale) $300.0 million of commercial
mortgages and/or commercial mortgage-backed securities ("CMBSs"). However, the
Non-Compete Agreement does not preclude IMH (either directly or through IFC)
from purchasing any commercial mortgages or CMBSs as permitted under the Right
of First Refusal Agreement (as defined below). After the termination of the
Non-Compete Agreement, and subject to the Right of First Refusal Agreement,
IMH, as a mortgage REIT, and IFC, may compete with the operations of ICH.
106
Right of First Refusal Agreement
It is anticipated that RAI will act as the manager for other REITs, some of
which may have been or will be affiliated with the Company, ICH, or their
respective conduit operations (an "Affiliated REIT"). In such any event, any
Affiliated REIT utilizing RAI as its manager may be in competition with the
Company. RAI, ICH, ICCC, IMH and IFC have entered into a ten-year right of
first refusal agreement (the "Right of First Refusal Agreement"). It is
expected that any Affiliated REIT utilizing RAI as its manager will become a
party to the Right of First Refusal Agreement, but such event is outside the
control of the Company and there can be no assurance that any or all
Affiliated REITs will actually become parties to the Right of First Refusal
Agreement. Pursuant to this Agreement, RAI has agreed that any mortgage loan
or mortgage-backed security investment opportunity (an "Investment
Opportunity") which is offered to it on behalf of either the Company, ICH or
any Affiliated REIT will first be offered to that entity (the "Principal
Party") whose initial primary business as described in its initial public
offering documentation (the "Initial Primary Business") most closely aligns
with such Investment Opportunity. In addition, both IMH and IFC on the one
hand, and ICH and ICCC on the other, will agree that any Investment
Opportunity offered to either of them which falls outside the scope of its
Initial Primary Business should be offered to the Principal Party. Should the
Principal Party decline to take advantage of an Investment Opportunity offered
to RAI, RAI will make an independent evaluation of which REIT's business is
more greatly enhanced by such Investment Opportunity. Should all of said
REIT's decline to take advantage of an Investment Opportunity offered to a
REIT which is a party to the Right of First Refusal Agreement, said REIT shall
then be free to pursue the Investment Opportunity. In such an event there can
be no assurance that the Company will be able to take advantage of any such
Investment Opportunity or that any competitive activity of ICH or any
Affiliated REIT will not adversely affect the Company's operations. In
addition, the Company may become further prejudiced by the Right of First
Refusal Agreement to the extent that the Company desires to pursue or pursues
a business outside its Initial Primary Business.
After the termination of the Non-Compete Agreement, and subject to the Right
of First Refusal Agreement, IMH, as a mortgage REIT, and IFC may compete with
the operations of ICH.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which, IMH and IFC
provide various services to ICH as RAI deems necessary, including facilities
and costs associated therewith, technology, human resources, management
information systems, general ledger accounts, check processing and accounts
payable, plus a 15% service charge. IFC charges ICH and ICCC for these
services based upon usage which management believes is reasonable. Total cost
allocations IFC charged to ICH and ICCC for the year ended December 31, 1997
were $525,174 and $456,122, respectively.
Credit Arrangements
IWLG maintains a warehouse financing facility with ICCC of which $8.5
million was outstanding on the warehouse line at December 31, 1997. Interest
income recorded by IWLG related to finance receivables due from ICCC for the
year ended December 31, 1997 was $430,373. During 1997, IWLG maintained a
warehouse financing facility with ICH until ICH obtained a warehouse financing
facility with a third-party lender. Interest income recorded by IWLG related
to finance receivables due from ICH for the year ended December 31, 1997 was
$164,111. As of December 31, 1997, ICH did not maintain a warehouse facility
with IWLG.
In February 1997, the Company financed ICH's purchase of $17.5 million of
commercial mortgages from IFC with $16.6 million in borrowings from IWLG and
$900,000 in other borrowings from IMH. The Company recorded interest income on
the amounts borrowed from IWLG at 6.3% per annum, which totaled $164,111. In
March 1997, ICH repaid the $900,000 in other borrowings from IMH. Interest
income recorded by IMH related to other borrowings with ICH was $53,333 for
the year ended December 31, 1997.
In August 1997, IMH entered into a revolving credit arrangement with ICH
whereby ICH would advance to IMH up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement are evidenced
107
by an unsecured promissory note and at an interest rate and maturity to be
determined at the time of each advance with interest and principal paid
monthly. As of December 31, 1997, the outstanding balance on the line of
credit was $9.1 million.
In October 1997, IFC entered into a revolving credit arrangement with ICH
whereby ICH would advance to IFC up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement were evidenced by an unsecured
promissory note and at an interest rate and maturity determined at the time of
each advance with interest and principal paid monthly. The revolving credit
arrangement expired in December 1997 and as of December 31, 1997 there were no
amounts outstanding.
On December 31, 1997, the Company financed its 50% interest, through its
ownership in Dove, in a commercial office building located in Newport Beach,
California with a loan for $5.2 million from ICCC. Terms of the loan are at 25
year amortization maturing in 10 years, an adjustable rate of 9.0% with
current monthly principal and interest payments of $44,097. ICCC recorded loan
fees of $70,085 on the loan. See "Item 2. Properties."
Purchase of Mortgage Loans
In February 1997, IFC sold $17.5 million in unpaid principal balance of
mortgage loans to ICH.
Sale of Residual Interests in Securitizations
In March 1997, IFC sold a residual interest in securitization of $10.1
million to ICH at carrying value which approximated fair value.
RELATIONSHIPS WITH AFFILIATES
Related Party Cost Allocations
IMH and IWLG are allocated data processing, executive and operations
management, and accounting services that IFC incurs during the normal course
of business. IFC charges IMH and IWLG for these services based upon usage
which management believes was reasonable. Total cost allocations charged to
IMH and IWLG by IFC for the year ended December 31, 1997 were $384,767.
IMH has entered into a premises operating sublease agreement with ICII to
rent approximately 29,000 square feet of office space in Santa Ana Heights,
California, for a two-year term expiring in February 1999. IMH allocates
monthly rental expense on the basis of square footage occupied. The majority
of occupancy charges incurred during 1997 were allocated to IFC as most of the
Company's employees are employed by the Conduit Operations. Total lease
charges for the years ended December 31, 1997, 1996 and for the Interim Period
were $395,672, $180,861, and $12,210, of which $384,691, $179,049, and $12,210
was allocated to IFC (see "Item 2. Properties").
Sub-Servicing Agreements
IFC acts as a servicer of mortgage loans acquired on a "servicing-released"
basis by the Company in its Long-Term Investment Operations pursuant to the
terms of a Servicing Agreement which became effective on November 20, 1995.
For a general description of the terms of such a Servicing Agreement, see
"Item 1. Business--Servicing and Master Servicing." IFC subcontracts all of
its servicing obligations under such loans to independent third parties
pursuant to sub-servicing agreements.
Credit Arrangements
IWLG maintains a warehouse financing facility with IFC. Advances under such
warehouse facilities bear interest at rates indexed to prime. As of December
31, 1997, 1996 and 1995, finance receivables outstanding to IFC were $454.8
million, $327.4 million and $550.3 million, respectively. Interest income
recorded by IWLG
108
related to finance receivables due from IFC for the years ended December 31,
1997, 1996, and for the Interim Period was $33.4 million, $31.8 million and
$1.3 million, respectively.
In June 1997, IMH canceled debt in the amount of $9.0 million owed to IMH by
IFC. Of the canceled amount $8.91 million was contributed to IFC as a
contribution to preferred stock and $90,000 was contributed on behalf of IFC's
common shareholders, Messrs. Tomkinson, Ashmore, and Johnson, so as to
maintain their 1% economic interest.
As part of the Company's termination agreement of its Management Agreement
with ICAI, IMH purchased the equity in residual interests in securitizations
from IFC for $9.0 million and simultaneously retired IFC's borrowings with IMH
for the equity in residual interests in securitizations for $9.0 million. No
gain or loss on the sale of residual interests in securitizations was recorded
by IMH or IFC.
During the normal course of business, IMH may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on IMH's balance sheet. These short-term advances and borrowings
bear interest at a fixed rate of 8.00% per annum. Interest income recorded by
IMH related to short-term advances due from affiliates was $219,416 for the
year ended December 31, 1997. Interest expense recorded by IMH related to
short-term advances due to affiliates was $195,689 for the year ended December
31, 1997.
During the normal course of business, IFC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on IFC's balance sheet. These short-term advances and borrowings
bear interest at a fixed rate of 8.00% per annum. Interest income recorded by
IFC related to short-term advances due from affiliates was $500,044 for the
year ended December 31, 1997. Interest expense recorded by ICF related to
short-term advances due to affiliates was $687,675 for the year ended December
31, 1997.
In March 1997, IWLG extended a $5.0 million line of credit to WSI, a firm
affiliated with James Walsh, a Director of the Company, which was increased to
$7.5 million in November 1997. Advances under the line of credit bear interest
at a rate determined at the time of each advance. As of December 31, 1997, WSI
had an aggregate of $5.9 million outstanding under the WSI Credit Lines.
In September 1996, IFC issued a $1.25 million secured residential first
mortgage loan to the Chairman of IMH.
Purchase of Mortgage-Backed Securities
During the year ended December 31, 1997 and 1996, the Company purchased
$15.0 million and $32.5 million, respectively, of mortgage-backed securities
issued by IFC for $12.6 million and $26.8 million, respectively, net of
discounts of $2.4 million and $5.7 million, respectively. IFC issued the
mortgage-backed securities during 1997 and 1996 in connection with its REMIC
securitizations.
During 1997, the Company purchased Walsh Acceptance Corporation mortgage
pass-through certificates series 1997-1 and 1996-1, Class B, for $6.7 million
and $10.7 million, respectively, net of a discount of $916,000 and $1.2
million, respectively, with a current yield of 8.9% and 10.8%, respectively.
James Walsh, a director of the Company, is an Executive Vice President of
Walsh Securities, Inc.
Purchase of Mortgage Loans
During each of the years ended December 31, 1997 and 1996, the Company
purchased adjustable rate first trust deed and fixed rate second trust deed
residential mortgages having a principal balance of $839.5 million and
$576.4 million, respectively, with premiums of $37.5 million and $15.2
million, respectively, from IFC. Servicing rights on all adjustable rate
mortgages were retained by IFC while servicing rights on all second trust deed
mortgages were not originally acquired by IFC.
109
In August 1997, IFC purchased $80.2 million of non-conforming residential
mortgage loans from Greenwich pursuant to a mortgage loan purchase agreement.
Greenwich previously purchased such loans from WSI. In December 1997, WSI
repurchased $7.3 million of the loans that IFC originally purchased from
Greenwich at a loss to the Company of $112,000. In connection with the
repurchase, IWLG extended loans of approximately $5.1 million to WSI at rates
ranging from prime plus 2% per annum to prime plus 4% per annum. Of the
$5.1 million, 100% and 90% were financed on approximately $2.3 million and
$3.1 million, respectively, of unpaid principal balance of mortgage loans
repurchased by WSI. As of December 31, 1997, WSI had an aggregate of $5.1
million outstanding under the loans.
IFC entered into a forward commitment with WSI to purchase of broker
approximately $500.0 million of certain mortgage loans until April 30, 1998.
The premium at which IFC purchases the loans depends on whether the loans are
resold or brokered by IFC. As of December 31, 1997, IFC has brokered
approximately $20.0 million of mortgage loans for WSI.
Redemption of Senior Notes
On January 24, 1997, IMH redeemed ICII senior note obligations for $5.2
million resulting in a gain of $648,000.
Sale of Franchise Loans Receivables
In January 1997, IMH sold the beneficial interest in the Class A Trust
Certificate for the Franchisee Loan Receivables Trust 1995-B ("Franchise Loans
Receivables") and the beneficial interest in the Class E Trust Certificate for
the Franchisee Loan Receivables Trust 1996-B to IFC at carrying value which
approximated fair value. No gain or loss was recorded on the sale and the
Company was under no obligation to sell the securities.
Indebtedness of Management
In connection with the exercise of options during the years ended December
31, 1997 and 1996, the Company made loans secured by the related stock
totaling $939,000 and $720,000, respectively, 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. As of December 31, 1997 and 1996, total notes receivable from
common stock sales was $1.3 million and $720,000, respectively. See "Item 11.
Executive Compensation--Stock Option Loan Plan."
General
The Company may from time to time, enter into additional transactions in the
ordinary course on the business with institutions with which certain of the
affiliated directors are employed.
110
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements included in the Form 10-K are:
IMPAC MORTGAGE HOLDINGS, INC.
. Consolidated Balance Sheets at December 31, 1997 and 1996;
. Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995;
. Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995;
. Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995;
. Notes to Consolidated Financial Statements
IMPAC FUNDING CORPORATION
. Consolidated Balance Sheets at December 31, 1997 and 1996 (audited);
. Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 (audited);
. Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 (audited);
. Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 (audited);
. Notes to Consolidated 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) Reports on Form 8-K
A Current Report on Form 8-K dated August 8, 1998 was filed reporting Item 5
relating to recent transactions of the Registrant.
(c) Exhibits
EXHIBIT
NO.
-------
3.1 Charter of the Registrant (incorporated by reference to the
corresponding exhibit number to the Registrant's Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).
3.1(a) Articles of Amendment (Incorporated by reference to Current Report on
Form 8-K, as amended, dated January 28, 1998).
3.2 Bylaws of the Registrant (incorporated by reference to the
corresponding exhibit number to the Registrant's Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).
3.2(a) Amendment to Bylaws (Incorporated by reference to Current Report on
Form 8-K, as amended, dated January 28, 1998).
4.1 Form of Stock Certificate of the Company (incorporated by reference to
the corresponding exhibit number to the Registrant's Registration
Statement on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).
10.1 1998 Stock Option, Deferred Stock and Restricted Stock Plan
(incorporated by reference to exhibit 10.3 to the Registrant's
Registration Statement on Form S-11, as amended (File No. 33-96670),
filed with the Securities and Exchange Commission on September 7,
1995).
111
EXHIBIT
NO.
-------
10.2 Form of Indemnity Agreement between the Registrant and its Directors
and officers (incorporated by reference to exhibit 10.4 to the
Registrant's Registration Statement on Form S-11, as amended (File No.
33-96670), filed with the Securities and Exchange Commission on
September 7, 1995).
10.3 Form of Tax Agreement between the Registrant and Imperial Credit
Industries, Inc. (incorporated by reference to exhibit 10.5 to the
Registrant's Registration Statement on Form S-11, as amended (File No.
33-96670), filed with the Securities and Exchange Commission on
September 7, 1995).
10.4 Form of Services Agreement between the Registrant and Imperial Credit
Industries, Inc. (incorporated by reference to exhibit 10.6 to the
Registrant's Registration Statement on Form S-11, as amended (File No.
33-96670), filed with the Securities and Exchange Commission on
September 7, 1995).
10.5(a) Sublease, dated February 12, 1997, between the Registrant and Imperial
Credit Industries, Inc. regarding Santa Ana Heights facility.
10.5(b) Sublease Amendment, dated July 24, 1997, between the Registrant and
Imperial Credit Industries, Inc.
10.5(c) Sublease Amendment, dated February 6, 1998, between the Registrant and
Imperial Credit Industries, Inc.
10.6 Form of Amended and Restated Employment Agreement with ICI Funding
Corporation (incorporated by reference to exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q, as amended, for the
quarter ended June 30, 1997).
10.6(a) List of Officers and terms relating to Form of Amended and Restated
Employment Agreement (incorporated by reference to exhibit 10.8(a) to
the Registrant's Quarterly Report on Form 10-Q, as amended, for the
quarter ended June 30, 1997).
10.7 Form of Loan Purchase and Administrative Services Agreement between
the Registrant and Impac Funding Corporation (incorporated by
reference to exhibit 10.9 to the Registrant's Registration Statement
on Form S-11, as amended (File No. 33-96670), filed with the
Securities and Exchange Commission on September 7, 1995).
10.8 Form of Contribution Agreement between the Registrant, Imperial Credit
Industries, Inc., Southern Pacific Thrift & Loan Association, Impac
Funding Corporation and Imperial Warehouse Lending Group, Inc.
(incorporated by reference to exhibit 10.10 to the Registrant's
Registration Statement on Form S-11, as amended (File No. 33-96670),
filed with the Securities and Exchange Commission on September 7,
1995).
10.9 Dividend Reinvestment and Stock Purchase Plan (incorporated by
reference to Exhibit 4 to the Registrant's Registration Statement on
Form S-3 (File No. 333-38517)).
10.10 Servicing Agreement between the Registrant and Impac Funding
Corporation (incorporated by reference to exhibit 10.14 to the
Registrant's Registration Statement on Form S-11, as amended (File No.
333-04011), filed with the Securities and Exchange Commission on May
17, 1996).
10.11 Impac Mortgage Holdings, Inc. 1996 Stock Option Loan Plan
(incorporated by reference to exhibit 10.15 to the Registrant's Form
10-K for the year ended December 31, 1996).
10.12 Amended and Restated Management Agreement between the Registrant and
Imperial Credit Advisors, Inc. (incorporated by reference to exhibit
10.16 to the Registrant's Form 10-K for the year ended December 31,
1996).
10.13 Real Estate Purchase, Sale and Escrow Agreement by and between TW/BRP
Dove, LLC and IMH/ICH Dove Street, LLC, dated as of August 25, 1997
(incorporated by reference to exhibit 10.16 to the Registrant's
Quarterly Report on Form 10-Q, as amended, for the quarter ended June
30, 1997).
10.14 Revolving Credit and Term Loan Agreement, dated August 21, 1997,
between the Registrant and Impac Commercial Holdings, Inc.
(incorporated by reference to exhibit 10.17 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997).
112
EXHIBIT
NO.
-------
10.15 Termination Agreement, effective December 19, 1997, between the
Registrant, Impac Funding Corporation, Imperial Credit Industries,
Inc. and Imperial Credit Advisors, Inc. and Joseph R. Tomkinson,
William S. Ashmore and Richard J. Johnson (incorporated by reference
to exhibit 10.18 to the Registrant's Current Report on Form 8-K, as
amended, dated December 19, 1997).
10.16 Services Agreement, dated December 29, 1997, between the Registrant,
Impac Funding Corporation and Imperial Credit Advisors, Inc.
(incorporated by reference to exhibit 10.19 to the Registrant's
Current Report on Form 8-K, as amended, dated December 19, 1997).
10.17 Registration Rights Agreement, dated December 29, 1997, between
Registrant and Imperial Credit Advisors, Inc. (incorporated by
reference to exhibit 10.20 to the Registrant's Current Report on Form
8-K, as amended, dated December 19, 1997).
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP regarding the Registrant.
23.2 Consent of KPMG Peat Marwick LLP regarding Impac Funding Corporation.
24. Power of Attorney (included on signature page).
27. Financial Data Schedule.
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irvine, State of California, on the 27th day of March, 1998.
IMPAC MORTGAGE HOLDINGS, INC.
by /s/ Joseph R. Tomkinson
---------------------------
Joseph R. Tomkinson
Vice Chairman of the Board
and Chief Executive Officer
We, the undersigned directors and officers of Impac Mortgage Holdings, Inc.,
do hereby constitute and appoint Joseph R. Tomkinsom and Richard J. Johnson,
or either of them, our true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable said corporation to comply
with the Securities Exchange Act of 1934, as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission, in
connections with this report, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments to this report, and we do
hereby ratify and confirm all that the said attorneys and agents, or either of
them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph R. Tomkinson Vice Chairman of the Board and March 27, 1998
- ------------------------------------ Chief Executive Officer
(Principal Executive Officer)
Joseph R. Tomkinson
/s/ Richard J. Johnson Chief Financial Officer (Principal
- ------------------------------------ Financial and Accounting Officer) March 27, 1998
Richard J. Johnson
/s/ H. Wayne Snavely Chairman of the Board March 27, 1998
- ------------------------------------
H. Wayne Snavely
/s/ James Walsh Director March 27, 1998
- ------------------------------------
James Walsh
/s/ Frank P. Filipps Director March 27, 1998
- ------------------------------------
Frank P. Filipps
/s/ Stephan R. Peers Director March 27, 1998
- ------------------------------------
Stephan R. Peers
/s/ William S. Ashmore Director March 27, 1998
- ------------------------------------
William S. Ashmore
114