<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 1999
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-19861
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street
Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------- --------------------------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
On November 8, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $87.4 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 November 8, 1999 was
21,742,506.
Documents incorporated by reference: None
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC.
1999 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE HOLDINGS, INC. Page #
AND SUBSIDIARIES
Consolidated Balance Sheets,
As of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Earnings (Loss),
For the Three- and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows,
For the Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 33
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 33
Item 3. DEFAULTS UPON SENIOR SECURITIES 33
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
Item 5. OTHER INFORMATION 33
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 34
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<S> <C> <C>
September 30, December 31,
1999 1998
--------------- ---------------
ASSETS
Cash and cash equivalents........................................................ $ 16,447 $ 33,876
Investment securities available-for-sale......................................... 95,247 93,486
Loan Receivables:
CMO collateral................................................................ 1,053,463 1,161,220
Finance receivables........................................................... 209,426 311,571
Mortgage loans held-for-investment............................................ 10,451 20,627
Allowance for loan losses..................................................... (3,624) (6,959)
--------------- ---------------
Net loan receivables..................................................... 1,269,716 1,486,459
Investment in Impac Funding Corporation.......................................... 18,762 13,246
Due from affiliates.............................................................. 14,500 17,904
Other real estate owned.......................................................... 10,331 8,456
Accrued interest receivable...................................................... 10,262 10,039
Other assets..................................................................... 1,950 2,038
--------------- ---------------
Total assets................................................................ $ 1,437,215 $ 1,665,504
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings................................................................... $ 953,847 $ 1,072,316
Reverse repurchase agreements.................................................... 220,858 323,625
Senior subordinated debentures................................................... 6,615 --
Due to affiliates................................................................ 7,204 2,670
Accrued dividends payable........................................................ 3,659 12,129
Other liabilities................................................................ 1,645 3,158
--------------- ---------------
Total liabilities........................................................... 1,193,828 1,413,898
--------------- ---------------
Stockholders' Equity:
Preferred stock; $.01 par value; 6,300,000 shares authorized; none issued or
outstanding at September 30, 1999 and at December 31, 1998, respectively...... -- --
Series A junior participating preferred stock, $.01 par value; 2,500,000 shares
authorized; none issued and outstanding at September 30, 1999 and
December 31, 1998, respectively............................................... -- --
Series B 10.5% cumulative convertible preferred stock, $.01 par value;
$30,000 liquidation value; 1,200,000 shares authorized; 1,200,000 issued
and outstanding at September 30, 1999 and December 31, 1998, respectively..... 12 12
Common stock; $.01 par value; 50,000,000 shares authorized; 22,090,106 and
24,557,657 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively............................................... 221 246
Additional paid-in capital....................................................... 330,664 342,945
Accumulated other comprehensive loss............................................. (5,707) (1,736)
Notes receivable from common stock sales......................................... (906) (918)
Accumulated deficit:
Cumulative dividends declared................................................. (89,510) (79,176)
Retained earnings (accumulated deficit)....................................... 8,613 (9,767)
--------------- ---------------
Net accumulated deficit....................................................... (80,897) (88,943)
--------------- ---------------
Total stockholders' equity.................................................. 243,387 251,606
--------------- ---------------
Total liabilities and stockholders' equity.................................. $ 1,437,215 $ 1,665,504
=============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
INTEREST INCOME:
Mortgage Assets............................................. $ 26,745 $ 45,281 $ 86,332 $ 125,518
Other interest income....................................... 582 635 1,727 2,073
------------- ------------- ------------ -------------
Total interest income....... 27,327 45,916 88,059 127,591
------------- ------------- ------------ -------------
INTEREST EXPENSE:
CMO borrowings.............................................. 16,592 21,027 50,051 57,714
Reverse repurchase agreements............................... 4,497 12,488 14,688 34,358
Senior subordinated debentures.............................. 358 -- 636 --
Other borrowings............................................ 3 725 399 2,560
------------- ------------- ------------ -------------
Total interest expense.................................... 21,450 34,240 65,774 94,632
------------- ------------- ------------ -------------
Net interest income......................................... 5,877 11,676 22,285 32,959
Provision for loan losses................................. 1,367 (292) 4,356 2,099
------------- ------------- ------------ -------------
Net interest income after provision for loan losses......... 4,510 11,968 17,929 30,860
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation.. 3,017 (7,860) 5,516 (3,912)
Equity in net loss of Impac Commercial Holdings, Inc........ -- (1,840) -- (998)
Mark-to-market loss on loans held-for-sale.................. -- (1,200) -- (1,200)
Servicing fees.............................................. 247 613 1,101 1,462
Other income................................................ 519 753 896 1,763
------------- ------------- ------------ -------------
Total non-interest income................................. 3,783 (9,534) 7,513 (2,885)
NON-INTEREST EXPENSE:
Professional services....................................... 669 748 2,039 1,604
Loss on disposition of other real estate owned.............. 557 610 1,668 120
Write-down on investment securities available-for-sale...... 358 11,584 2,037 12,825
General and administrative and other expense................ 336 893 965 1,811
Personnel expense........................................... 141 139 353 373
Loss on equity investment................................... -- 9,076 -- 9,076
------------- ------------- ------------ -------------
Total non-interest expense................................ 2,061 23,050 7,062 25,809
------------- ------------- ------------ -------------
Net earnings (loss)......................................... 6,232 (20,616) 18,380 2,166
Less: Cash dividends on Series B 10.5%
cumulative convertible preferred stock................. (788) -- (2,463) --
------------- ------------- ------------ -------------
Net earnings (loss) available to common stockholders........ 5,444 (20,616) 15,917 2,166
Other comprehensive earnings (loss):
Unrealized losses on securities:
Unrealized holding (gain)/losses arising during period.... (1,965) (915) (3,666) 528
Less: Reclassification of realized (gain)/losses
included in earnings..................................... 39 (4,718) 305 (4,290)
------------- ------------- ------------ -------------
Net unrealized gain/(losses) arising during period..... (2,004) 5,633 (3,971) 3,762
------------- ------------- ------------ -------------
Comprehensive earnings (loss)............................... $ 3,440 $ (14,983) $ 11,946 $ 5,928
============= ============= ============ =============
Net earnings (loss) per share--basic........................ $ 0.24 $ (0.85) $ 0.69 $ 0.09
============= ============= ============ =============
Net earnings (loss) per share--diluted...................... $ 0.22 $ (0.85) $ 0.63 $ 0.09
============= ============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<S> <C> <C>
For the Nine Months
Ended September 30,
-------------------------------
1999 1998
--------------- --------------
Cash flows from operating activities:
Net earnings.......................................................................... $ 18,380 $ 2,166
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in net (earnings) loss of Impac Funding Corporation......................... (5,516) 3,912
Equity in net loss of Impac Commercial Holdings, Inc............................... -- 998
Loss on equity investment in Impac Commercial Holdings, Inc........................ -- 9,076
Mark-to-market loss on mortgage loans held-for-sale................................ -- 1,200
Provision for loan losses.......................................................... 4,356 2,099
Depreciation and amortization...................................................... -- 458
Loss on disposition of other real estate owned..................................... 1,668 120
Write-down of investment securities available-for-sale............................. 2,037 12,825
Net change in accrued interest receivable.......................................... (223) 3,742
Net change in other assets and liabilities......................................... 6,707 34,547
--------------- --------------
Net cash provided by operating activities........................................ 27,409 71,143
--------------- --------------
Cash flows from investing activities:
Net change in CMO collateral.......................................................... 95,592 (501,650)
Net change in finance receivables..................................................... 101,781 (29,570)
Net change in mortgage loans held-for-investment...................................... 1,749 225,410
Net change in mortgage loans held-for-sale............................................ -- (62,381)
Proceeds from sale of other real estate owned, net.................................... 9,722 8,626
Purchase of investment securities available-for-sale.................................. (18,295) (64,589)
Sale of investment securities available-for-sale...................................... 3,803 5,303
Net principal reductions on investment securities available-for-sale.................. 6,723 6,152
Dividends from Impac Commercial Holdings, Inc......................................... -- 1,184
Purchase of premises and equipment.................................................... -- (1,318)
--------------- --------------
Net cash provided by (used in) investing activities.............................. 201,075 (412,833)
--------------- --------------
Cash flows from financing activities:
Net change in reverse repurchase agreements........................................... (102,767) (126,606)
Proceeds from CMO borrowings.......................................................... 298,076 767,355
Repayments of CMO borrowings.......................................................... (416,545) (311,188)
Dividends paid........................................................................ (18,804) (33,491)
Proceeds from exercise of stock options............................................... -- 108
Net proceeds from stock issued through structured equity shelf........................ -- 3,289
Repurchase of common stock............................................................ (6,831) --
Proceeds from dividend reinvestment and stock purchase plan.......................... 946 27,837
Advances to purchase common stock, net of principal reductions........................ 12 376
--------------- --------------
Net cash provided by (used in) financing activities.............................. (245,913) 327,680
--------------- --------------
Net change in cash and cash equivalents................................................. (17,429) (14,010)
Cash and cash equivalents at beginning of period........................................ 33,876 16,214
=============== ==============
Cash and cash equivalents at end of period.............................................. $ 16,447 $ 2,204
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
<S> <C> <C>
Supplementary information:
Interest paid......................................................................... $ 67,894 $ 94,413
Non-cash transactions:
Transfer of mortgage loans from held-for investment to held-for-sale.................. $ -- $ 62,381
Exchange of common stock for 11% senior subordinated debentures....................... 6,448 --
Dividends declared and unpaid......................................................... 3,659 12,033
Accumulated other comprehensive gain/(loss)........................................... (3,971) 3,762
Loans transferred to other real estate owned.......................................... 13,265 8,541
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Unless the context otherwise requires, references herein to the
"Company"' refer to Impac Mortgage Holdings, Inc. (IMH) and its
subsidiaries, IMH Assets 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 Corporation, IFC), collectively. References to IMH refer to Impac
Mortgage Holdings, Inc. as a separate entity from IMH Assets, IWLG, Dove
and IFC.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three- and nine-month period
ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The operations of IMH have been presented in the consolidated financial
statements for the three- and nine months ended September 30, 1999 and
1998 and include the financial results of IMH's equity interest in net
earnings (loss) of IFC, IMH's equity interest in net loss of Impac
Commercial Holdings, Inc. (ICH) and results of operations of IMH, IMH
Assets, IWLG and Dove as stand-alone entities. The equity interest in net
loss of Impac Commercial Holdings, Inc. and the financial results of Dove
are included in three- and nine months ended September 30, 1998 only.
The results of operations of IFC, of which 99% of the economic interest
is owned by IMH, are included in the results of operations of the Company
as "Equity in net earnings (loss) of Impac Funding Corporation." The
results of operations of ICH, of which 9.8% of ICH's common stock was
owned by IMH prior to the sale of ICH common stock on October 21, 1998,
are included in the results of operations of IMH as "Equity in net loss of
Impac Commercial Holdings, Inc."
2. Organization
The Company is a mortgage real estate investment trust (Mortgage REIT)
which, together with its subsidiaries and related companies, primarily
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. IMH
is organized as a REIT for federal income tax purposes, which generally
allows it to pass through qualified income to stockholders without federal
income tax at the corporate level, provided that the Company distributes
95% of its taxable income to common stockholders.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH and IMH Assets, invests primarily in non-conforming
residential mortgage loans and mortgage-backed securities secured by or
representing interests in such loans and, to a lesser extent, in second
mortgage loans. Non-conforming residential mortgage loans are residential
mortgages that do not qualify for purchase by government-sponsored
agencies such as the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). The principal differences
between conforming loans and non-conforming loans include applicable
loan-to-value ratios, credit and income histories of the mortgagors,
documentation required for approval of the mortgagors, type of properties
securing the mortgage loans, loan sizes, and the mortgagors' occupancy
status with respect to the mortgaged properties. Second mortgage loans are
mortgage loans secured by a second lien on the property and made to
borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other
purposes.
<PAGE>
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 other
sellers. IFC subsequently securitizes or sells such loans to permanent
investors, including the Long-Term Investment Operations. IMH owns 99% of
the economic interest in IFC, while Joseph R. Tomkinson, Chairman and
Chief Executive Officer, William S. Ashmore, President and Chief Operating
Officer, and Richard J. Johnson, Executive Vice President and Chief
Financial Officer, are the holders of all the outstanding voting stock of,
and 1% of the economic interest in, IFC.
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.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis
of accounting in accordance with GAAP. The preparation of financial
statements in conformity with GAAP requires management to make significant
estimates and assumptions that affect the reported amounts of assets,
liabilities and contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ materially from those
estimates.
Reclassifications
Certain amounts in the consolidated financial statements as of and for
the three and nine months ended September 30, 1998 may have been
reclassified to conform to the 1999 presentation.
New Accounting Statements
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise" (SFAS 134).
SFAS 134 is an amendment to SFAS No. 65, which required that after the
securitization of a mortgage loan held-for-sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
security as a trading security. SFAS 134 further amends SFAS No. 65 and
requires that after the securitization of mortgage loans held-for-sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its
ability and intent to sell or to hold those investments. SFAS 134 conforms
the subsequent accounting for securities retained after the securitization
of mortgage loans by a mortgage banking enterprise with the subsequent
accounting for securities retained after the securitization of other types
of assets by non-mortgage banking enterprises. SFAS 134 is effective for
the first fiscal quarter beginning after December 15, 1998. The Company
adopted SFAS 134 and determined it did not have a material impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of
a recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 133 was amended by SFAS No. 137, which allows
deferral of SFAS 133 for all fiscal quarters of fiscal years beginning
after July 15, 2000. The Company believes that the adoption of SFAS 133
will not have a material impact on the Company's financial position or
results of operations.
<PAGE>
4. Net Earnings per Share
Basic earnings per share is computed on the basis of the weighted
average number of shares outstanding for the period. Diluted earnings per
share is computed on the basis of the weighted average number of shares and
dilutive common equivalent shares outstanding for the period. The following
tables represent the computation of basic and diluted earnings per share
for the three- and nine months ended September 30, 1999 and 1998 (in
thousands, except per share data):
<TABLE>
<S> <C> <C>
For the Three Months
Ended September 30,
-----------------------------
1999 1998
-------------- --------------
Numerator:
Numerator for basic earnings per share--
Net earnings (loss) $ 6,232 $ (20,616)
Less: Dividends paid to preferred stockholders (788) --
============== ==============
Net earnings (loss) available to common stockholders $ 5,444 $ (20,616)
============== ==============
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during the period 22,636 24,351
Impact of assumed conversion of series B cumulative
convertible preferred stock 6,061 --
Net effect of dilutive stock options 19 --
-------------- --------------
Weighted average common and common equivalent shares 28,716 24,351
============== ==============
Net earnings (loss) per share--basic $ 0.24 $ (0.85)
============== ==============
Net earnings (loss) per share--diluted $ 0.22 $ (0.85)
============== ==============
</TABLE>
<TABLE>
<S> <C> <C>
For the Nine Months
Ended September 30,
-----------------------------
1999 1998
-------------- --------------
Numerator:
Numerator for basic earnings per share--
Net earnings $ 18,380 $ 2,166
Less: Dividends paid to preferred stockholders (2,463) --
============== ==============
Net earnings available to common stockholders $ 15,917 $ 2,166
============== ==============
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during the period 23,233 23,699
Impact of assumed conversion of series B cumulative
convertible preferred stock 6,061 --
Net effect of dilutive stock options 24 172
-------------- --------------
Weighted average common and common equivalent shares 29,318 23,871
============== ==============
Net earnings (loss) per share--basic $ 0.69 $ 0.09
============== ==============
Net earnings (loss) per share--diluted $ 0.63 $ 0.09
============== ==============
</TABLE>
5. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance
receivables. At September 30, 1999 and December 31, 1998, Mortgage Assets
consisted of the following (in thousands):
<PAGE>
<TABLE>
<S> <C> <C>
September 30, December 31,
1999 1998
---------------- ----------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 95,401 $ 89,825
Subordinated securities collateralized by other loans 5,553 5,397
Net unrealized losses (5,707) (1,736)
---------------- ----------------
Carrying value 95,247 93,486
---------------- ----------------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance 1,008,212 1,109,577
Unamortized net premiums on loans 32,289 39,369
Securitization expenses 12,962 12,274
---------------- ----------------
Carrying value of CMO collateral 1,053,463 1,161,220
Finance receivables--
Due from affiliates 93,070 198,104
Due from other mortgage banking companies 116,356 113,467
---------------- ----------------
Carrying value of finance receivables 209,426 311,571
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance 14,271 20,145
Unamortized net premiums (discounts) on loans (3,820) 482
---------------- ----------------
Carrying value of mortgage loans held-for-investment 10,451 20,627
---------------- ----------------
Carrying value of Gross Loan Receivables 1,273,340 1,493,418
Allowance for loan losses (3,624) (6,959)
---------------- ----------------
Carrying value of Net Loan Receivables 1,269,716 1,486,459
---------------- ----------------
Total carrying value of Mortgage Assets $ 1,364,963 $ 1,579,945
================ ================
</TABLE>
6. Segment Reporting
The Company's basis for segment reporting is to separate its entities
into the following: segments that derive income from investment in
long-term Mortgage Assets, segments that derive income by providing
short-term financing, and segments that derive income from the purchase
and sale or securitization of mortgage loans.
The Company internally reviews and analyzes its entities as follows:
(1) the Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming residential mortgage loans and
mortgage-backed securities secured by or representing interests in such
loans and in second mortgage loans, (2) the Warehouse Lending Operations,
conducted by IWLG, provides warehouse and repurchase financing to
affiliated companies and to approved mortgage banks, most of which are
correspondents of IFC, to finance mortgage loans, and (3) the Conduit
Operations, conducted by IFC, purchases non-conforming mortgage loans and
second mortgage loans from its network of third party correspondents and
other sellers.
<PAGE>
The following tables shows the Company's reporting segments as of and
for the three and nine months ended September 30, 1999 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
For the three months ended Investment Lending Intercompany
September 30, 1999 Operations Operations Other (b) Elimination (c) Consolidated
------------------------------------- ---------------- ------------- ------------ ---------------- ---------------
Statement of Operations Items:
Interest income $ 21,932 $ 5,901 $ -- $ (506) $ 27,327
Interest expense 17,715 4,241 -- (506) 21,450
Equity interest in net earnings
of IFC (a) -- -- -- 3,017 3,017
Net earnings 1,710 1,505 -- 3,017 6,232
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
As of and for nine months Investment Lending Intercompany
ended September 30, 1999 Operations Operations Other (b) Elimination (c) Consolidated
------------------------------------- ---------------- ------------- ------------ ---------------- ---------------
Balance Sheet Items:
CMO collateral $ 1,053,463 $ -- $ -- $ -- $ 1,053,463
Total assets 1,275,559 253,802 7,204 (99,350) 1,437,215
Total stockholders' equity 283,190 45,477 -- (85,280) 243,387
Statement of Operations Items:
Interest income $ 71,139 $ 20,938 $ 21 $ (4,039) $ 88,059
Interest expense 56,023 13,785 5 (4,039) 65,774
Equity interest in net earnings
of IFC (a) -- -- -- 5,516 5,516
Net earnings 4,874 6,732 41 6,733 18,380
The following table shows the Company's reporting segments as of and
for the three and nine months ended September 30, 1998 (in thousands):
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
For the three months ended Investment Lending Intercompany
September 30, 1998 Operations Operations Other (b) Elimination (c) Consolidated
------------------------------------- ---------------- ------------- ------------ ---------------- ---------------
Statement of Operations Items:
Interest income $ 30,751 $ 17,147 $ 96 $ (2,078) $ 45,916
Interest expense 24,256 12,182 (120) (2,078) 34,240
Depreciation and amortization -- -- 106 -- 106
Equity interest in net loss
of IFC (a) -- -- -- (7,860) (7,860)
Net earnings (loss) (15,939) 4,732 581 (9,990) (20,616)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
As of and for nine months Investment Lending Intercompany
ended September 30, 1998 Operations Operations Other (b) Elimination (c) Consolidated
------------------------------------- ---------------- ------------- ------------ ---------------- ---------------
Balance Sheet Items:
CMO collateral $ 1,291,722 $ -- $ -- $ -- $ 1,291,722
Total assets 1,636,185 620,375 32,206 (173,018) 2,115,748
Total stockholders' equity 250,026 36,450 8,402 (63,463) 231,415
<PAGE>
Statement of Operations Items :
Interest income $ 93,284 $ 47,508 $ 303 $ (13,504) $ 127,591
Interest expense 73,735 34,278 123 (13,504) 94,632
Depreciation and amortization 11 -- 306 -- 317
Equity interest in net loss
of IFC (a) -- -- -- (3,912) (3,912)
Net earnings (loss) (5,922) 12,762 525 (5,199) 2,166
</TABLE>
(a) The Conduit Operations is accounted for using the equity method and
is an unconsolidated subsidiary of the Company.
(b) Primarily includes the operations of Dove, of which the Company
owned a 50% interest and account reclassifications.
(c) Elimination of intersegment balance sheet and income statement
items.
7. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through
its ownership of all of the non-voting preferred stock of IFC. As such,
the Company records its investment in IFC using the equity method. Under
this method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. Gain or loss on the sale of loans
or securities by IFC to IMH are deferred and amortized or accreted over
the estimated life of the loans or securities using the interest method.
The following is financial information for IFC for the periods presented
(in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
1999 1998
----------------- ------------------
ASSETS
Cash $ 10,455 $ 422
Investment securities available-for-sale 2,219 5,965
Investment securities available-for-trading -- 5,300
Mortgage loans held-for-sale 98,983 252,568
Mortgage servicing rights 14,189 14,062
Due from affiliates 8,148 9,152
Premises and equipment, net 2,531 1,978
Accrued interest receivable 191 1,896
Other assets 8,247 22,529
----------------- ==================
Total assets $ 144,963 $ 313,872
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 92,924 $ 192,900
Other borrowings 182 67,058
Due to affiliates 14,648 24,382
Deferred revenue 8,878 10,605
Other liabilities 9,294 6,064
----------------- ------------------
Total liabilities 125,926 301,009
----------------- ------------------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings (accumulated deficit) 720 (4,852)
Accumulated other comprehensive earnings (loss) 82 (520)
----------------- ------------------
Total shareholders' equity 19,037 12,863
================= ==================
Total liabilities and shareholders' equity $ 144,963 $ 313,872
================= ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- --------------------------
1999 1998 1999 1998
------------- -------------- ------------ -------------
Interest income $ 4,491 $ 15,673 $ 13,986 $ 40,330
Interest expense 4,099 14,287 13,144 33,594
------------- -------------- ------------ -------------
Net interest income 392 1,386 842 6,736
Gain on sale of loans 8,296 10,061 22,787 18,932
Loan servicing income 1,758 1,815 5,452 4,521
Other non-interest income 373 63 856 374
------------- -------------- ------------ -------------
Total non-interest income 10,427 11,939 29,095 23,827
Personnel expense 2,048 2,582 5,399 7,363
General and administrative and other expense 1,936 1,658 5,384 3,943
Amortization of mortgage servicing rights 1,372 1,758 3,935 4,683
Provision for repurchases 188 26 366 366
Write-down on investment securities available-for-sale -- -- 4,223 --
Loss on sale of mortgage servicing rights -- -- 877 --
Mark to market loss on mortgage loans -- 21,041 -- 21,041
------------- -------------- ------------ -------------
Total non-interest expense 5,544 27,065 20,184 37,396
------------- -------------- ------------ -------------
Net earnings (loss) before income taxes 5,275 (13,740) 9,753 (6,833)
Income taxes 2,227 (5,800) 4,181 (2,885)
------------- -------------- ------------ -------------
Net earnings (loss) $ 3,048 $ (7,940) $ 5,572 $ (3,948)
============= ============== ============ =============
</TABLE>
8. Investment in Impac Commercial Holdings, Inc.
Subsequent to ICH's initial public offering on August 4, 1997, the
Company was entitled to 17.4% of the earnings or losses of ICH through its
ownership of 1,394,000 shares, or 9.8%, of the combined ICH voting common
stock and ICH non-voting Class A Common Stock. The Company recorded its
investment in ICH using the equity method. Under this method, original
investments were recorded at cost and adjusted by the Company's share of
earnings or losses. On October 21, 1998, ICH repurchased from IMH 937,084
shares of common stock and 456,916 shares of class A common stock at a
price of $4.375 per share for a total repurchase of $6.1 million,
representing a loss to IMH of $9.1 million. The Company had no investment
in ICH at September 30, 1999 or December 31, 1998.
On May 5, 1999, ICH executed a stock purchase agreement pursuant to
which it issued to Fortress Partners LP (Fortress) $12.0 million of series
B convertible preferred stock. In addition, FIC Management Inc. (FIC), an
affiliate of Fortress, entered into a definitive agreement with RAI
Advisors, LLC (RAI) for the assignment of RAI's rights and interests in
the management agreement with ICH. In connection with these transactions,
the sub-management agreement among RAI, IMH and IFC was terminated and a
new sub-management agreement was entered into among FIC, IMH and IFC and
the right of first refusal agreement among RAI, ICH, ICCC, IMH and IFC was
terminated. Under the new sub-management agreement, IMH and IFC provide
various services including accounting, data processing and secondary
marketing to ICH, as Fortress deems necessary, for an annual fee of
$250,000.
<PAGE>
9. Stockholders' Equity
During the nine months ended September 30, 1999, the Company raised
capital of $946,000 from the sale of 216,156 shares of common stock issued
through its Dividend Reinvestment and Stock Purchase Plan (DRSPP).
During the nine months ended September 30, 1999, the Company
repurchased 1,324,200 shares of common stock for $6.8 million pursuant to
the Board of Directors approval to repurchase up to $10.0 million of
common stock.
During the nine months ended September 30, 1999, the Company exchanged
1,359,507 shares of its common stock, at an average price of $5.70 per
share, for 11% senior subordinated debentures due to mature on February
15, 2004.
On September 22, 1999, the Company declared a third quarter cash
dividend of $788,000 or $0.66 per share to series B preferred stockholders.
This dividend was paid on October 26, 1999.
On September 22, 1999, the Company declared a third quarter cash
dividend on common stock of $2.9 million, or $0.13 per share. This
dividend was paid on October 15, 1999 to common stockholders of record on
September 30, 1999.
On June 22, 1999, the Company declared a second quarter cash
dividend of $788,000 or $0.66 per share to series B preferred stockholders.
This dividend was paid on July 27, 1999.
On June 22, 1999, the Company declared a second quarter cash
dividend on common stock of $2.7 million, or $0.12 per share. This dividend
was paid on July 15, 1999 to common stockholders of record on June 30,
1999.
On March 30, 1999, the Company declared a first quarter cash
dividend on common stock of $2.3 million, or $0.10 per share. This dividend
was paid on April 23, 1999 to common stockholders of record on April 9,
1999.
On March 23, 1999, the Company declared a first quarter cash
dividend of $888,000 or $0.74 per share to series B preferred stockholders.
This dividend was paid on April 27, 1999.
10. Subsequent Events
On October 21, 1999, the Company completed a re-securitization of its
investment securities available-for-sale, which raised additional cash
liquidity for the Company of approximately $23.3 million after repaying
reverse repurchase agreements collateralized by the investment securities
available-for-sale. The cash proceeds can be used to grow the Company's
balance sheet, repurchase common stock or for business expansion.
On December 22, 1998, the Company issued 1,200,000 shares of 10.5%
Cumulative Convertible Preferred Stock, having a liquidation preference of
$25 per share. The shares were originally convertible into Common Stock at
$4.95 per share, or an aggregate of 6,606,606 shares. The terms of the
acquisition provided for a downward adjustment of the conversion price if,
among other things certain earning levels were not attained by the Company
through June 30, 1999. Subsequent to September 30, 1999, the conversion
rate was adjusted, by an agreement in principle, to $4.72 per share or an
aggregate of 6,355,932 shares of common stock.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of
1934, as amended, which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "should,"
"anticipate," "estimate," or "believe" or the negatives thereof or other
variations thereon or comparable terminology. The Company's actual results
may differ materially from those contained in the forward-looking
statements. Factors which may cause a difference to occur include the
growth and expansion of the Company's new divisions, any delays with
respect to the acquisition of the thrift and loan, unanticipated
interruptions related to Year 2000 compliance, the availability of
suitable opportunities for the acquisition, ownership and disposition of
Mortgage Assets (which depend on the type of Mortgage Asset involved) and
yields available from time to time on such Mortgage Assets, interest
rates, changes in estimates of book basis and tax basis earnings,
fluctuations and increase in prepayment rates the availability of suitable
financing and investments, and trends in the economy which affect
confidence and demand on the Company's portfolio of Mortgage Assets and
other factors referenced in this report and other reports filed by the
Company with the SEC, including its Annual Report on Form 10-K.
SIGNIFICANT TRANSACTIONS
Exchange Offering
In March of 1999, the Company exchanged 1,359,507 shares of its common
stock, at an average price of $5.70 per share, for 11% senior subordinated
debentures due to mature on February 15, 2004. The debentures are
unsecured obligations of the Company subordinated to all indebtedness of
the Company's subsidiaries. The debentures bear interest at 11% per annum
from their date of issuance, payable quarterly, commencing May 15, 1999,
until the debentures are paid in full. The debentures mature on February
15, 2004, at which the date may be extended once by the Company to a date
not later than May 15, 2004, provided that the Company satisfies certain
conditions. Commencing on February 15, 2001, the debentures are
redeemable, at the Company's option, in whole at any time or in part from
time to time, at the principal amount to be redeemed plus accrued and
unpaid interest thereon to the redemption date.
Collateralized Mortgage Obligations ("CMOs")
The Company issued two CMOs during the first nine months of 1999. The
first CMO was issued in February of 1999 for $183.1 million and was
collateralized by $120.8 million of adjustable-rate mortgages and $77.8
million of residential loans secured by second trust deeds. The second CMO
was issued in June of 1999 for $115.0 million and was collateralized by
$117.6 million of primarily adjustable-rate mortgages. The issuance of
CMOs provides the Company with immediate liquidity, a locked-in net
interest rate spread and eliminates the Company's exposure to margin calls
on such loans.
Definitive Agreement to Acquire a California Thrift and Loan
During the first quarter of 1999, the Company completed a definitive
agreement to acquire a California Thrift and Loan ("Bank"). As provided
for in the agreement, the Company submitted its application in the second
quarter of 1999 for a change of control to the state and federal
regulatory agencies for their approval. During the process of reviewing
the application, the federal regulator raised certain issues. The Company
was not able to give the federal agency sufficient comfort with respect to
those issues without modifying the proposal. Also, the state regulatory
department requested significant additional information, which had the
effect of delaying the approval process. At this time, the Company has
decided to withdraw its state and federal applications for change of
control and intends on resubmitting a new application at a later date that
addresses the business concerns expressed by the regulators. However,
there are no assurances that a new application for change of control will
be received favorably by either of the state and federal regulators.
Therefore, the Company is continuing to expand its wholesale and retail
operations, which the Company intends to contribute to the Bank, within
IFC. In the event that the Company is unsuccessful in its efforts to
obtain the Bank charter, management believes that it will have no material
effect on the future profitability of the Company.
<PAGE>
Advance to Impac Funding Corporation
During the second quarter of 1999, IMH advanced $14.5 million in cash,
in exchange for an interest only note in anticipation of the initial
capitalization of the Bank.
BUSINESS OPERATIONS
Long-Term Investment Operations: During the first nine months of 1999,
the Long-Term Investment Operations, conducted by IMH and IMH Assets,
acquired $283.0 million of mortgages from IFC as compared to $841.6
million of mortgages acquired during the same period in 1998. Mortgages
purchased by the Long-Term Investment Operations during the first nine
months of 1999 consisted of $196.1 million of adjustable-rate mortgages
("ARMs") secured by first liens on residential property and $86.9 million
of fixed-rate mortgages ("FRMs") primarily secured by second trust deeds
on residential property. During the first nine months of 1999, IMH Assets
issued CMOs totaling $298.1 million as compared to CMOs totaling $768.0
million during the same period in 1998. As of September 30, 1999, the
Long-Term Investment Operations' portfolio of mortgage loans consisted of
$1.0 billion of mortgage loans held in trust as collateral for CMOs and
$10.5 million of mortgage loans held-for-investment, of which
approximately 43% were FRMs and 57% were ARMs. The weighted average coupon
of the Long-Term Investment Operations portfolio of mortgage loans was
9.41% at September 30, 1999 with a weighted average margin of 4.41%. The
portfolio of mortgage loans included 78% of "A" credit quality,
non-conforming mortgage loans and 22% of "B" and "C" credit quality,
non-conforming mortgage loans, as defined by the Company. During the first
nine months of 1999, the Long-Term Investment Operations acquired $18.3
million of securities from IFC as compared to $64.6 million during the
same period in 1998. These securities were generated primarily from the
periodic issuance of real estate mortgage investment conduits ("REMICs")
by IFC. As of September 30, 1999, the Long-Term Investment Operations had
$95.2 million of investment securities available-for-sale.
Conduit Operations: The Conduit Operations, conducted by IFC, continues
to support the Long-Term Investment Operations of the Company by supplying
IMH and IMH Assets with mortgages for IMH's long-term investment
portfolio. In acting as the mortgage conduit for the Company, IFC's
mortgage acquisitions decreased 42% to $1.1 billion during the first nine
months of 1999 as compared to $1.9 billion of mortgages acquired during
the same period in 1998. IFC sold whole loans to third party investors or
securitized $1.0 billion, which contributed to the gain on sale of loans
of $22.8 million, during the first nine months of 1999. This compares to
securitizations and whole loan sales to third party investors of $1.2
billion, resulting in gain on sale of loans of $18.9 million, during the
same period in 1998. Of the $1.0 billion of whole loan sales and
securitizations during the first nine months of 1999, IFC issued one REMIC
for $133.2 million. IFC had deferred income of $8.9 million at September
30, 1999 as compared to $10.6 million at December 31, 1998. Deferred
income results from the sale of mortgages to IMH which are deferred and
amortized or accreted over the estimated life of the loans. During the
first nine months of 1999, IFC sold $287.6 million in principal balance of
mortgages to IMH as compared to $817.9 million during the first nine
months of 1998. IFC's servicing portfolio decreased 35% to $2.2 billion at
September 30, 1999 as compared to $3.4 billion at September 30, 1998. The
loan delinquency rate of mortgages in IFC's servicing portfolio which were
60 or more days past due, inclusive of foreclosures and delinquent
bankruptcies, was 5.28% at September 30, 1999 as compared to 6.18%, 5.66%,
4.82%, and 5.21% for the last four quarter-end periods.
Warehouse Lending Operations: At September 30, 1999, the Warehouse
Lending Operations, conducted by IWLG, had $1.4 billion of warehouse lines
of credit available to 52 borrowers, of which $223.5 million was
outstanding thereunder, including $92.9 million outstanding to IFC, $14.1
million outstanding to the Long-Term Investment Operations, and $146,000
outstanding to Walsh Securities, Inc. ("WSI"). James Walsh, Executive Vice
President of WSI, is also a Director of IMH.
<PAGE>
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS , INC.
For the Three Months Ended September 30, 1999 as compared to the Three
Months Ended September 30, 1998
Results of Operations
The Company recorded net earnings of $6.2 million, or $0.22 per diluted
common share, during the third quarter of 1999 as compared to net loss of
$(20.6) million, or $(0.85) per diluted common share, during the third
quarter of 1998. The increase in net earnings, during the third quarter of
1999 as compared to the third quarter of 1998, was primarily due to an
increase in non-interest income of $13.3 million and a decrease of $21.0
million in non-interest expense. These increases to net earnings were
partially offset by a decrease of $5.8 million in net interest income.
Due to the deterioration of the mortgage-backed securitization market
during the latter part of 1998, the Company sold Mortgage Assets during
the fourth quarter of 1998 to increase liquidity. As a result of the sale
of Mortgage Assets, total assets decreased 33% to $1.4 billion at
September 30, 1999 as compared to $2.1 billion at September 30, 1998 while
the Company's ratio of debt to equity ("Leverage Ratio") also decreased.
The combination of decreased average Mortgage Assets and decreased
leverage was primarily responsible for the reduction of net interest
income during the third quarter of 1999 as compared to the third quarter
of 1998. However, as the mortgage sector stabilized during the first nine
months of 1999 and recovered from the volatility that occurred during the
latter part of 1998, the Company returned to overall profitability and
profitability on the sale of its mortgage loans during the third quarter
of 1999.
The Company continued to maintain reduced leverage and strong liquidity
levels during the third quarter of 1999. The Company's Leverage Ratio
decreased to 4.85:1 at September 30, 1999 as compared to 5.55:1 at
December 31, 1998 and 7.90:1 at September 30, 1998. The Company's and
IFC's liquidity position at September 30, 1999 totaled $26.9 million of
cash and cash equivalents as compared to $34.3 million at December 31,
1998. The Company continued to reduce its reliance on reverse repurchase
agreements to finance its investment securities available-for-sale
portfolio. The Company's reverse repurchase agreements were $11.4 million
at September 30, 1999 as compared to $24.1 million at December 31, 1998.
The Company completed a re-securitization of its investment securities
available-for-sale on October 21, 1999, which raised additional cash
liquidity for the Company of approximately $23.3 million after repaying
reverse repurchase agreements collateralized by the investment securities
available-for-sale. The cash proceeds can be used to grow the Company's
balance sheet, repurchase common stock or for business expansion. The
following table summarizes the Company's liquidity position for the
periods presented (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
----------- ------------- ------------ ------------ ------------ ----------- ----------
Cash and marketable
securities (1) 47,454 49,421 58,416 76,468 49,173 47,698 35,960
Debt (2) 233,326 239,286 265,425 341,582 662,073 526,143 511,243
----------- ------------- ------------ ------------ ------------ ----------- ----------
Liquidity ratio 20.34% 20.65% 22.01% 22.39% 7.43% 9.07% 7.03%
----------- ------------- ------------ ------------ ------------ ----------- ----------
</TABLE>
(1) Calculated as cash and marketable securities rated AAA through BBB.
(2) Calculated as warehouse borrowings, reverse repurchase agreements,
dividends payable, and other short-term liabilities.
The Company was also successful in increasing book value per common
share, which increased to $9.66 per common share (calculated after
reduction of $30.0 million liquidation value of series B cumulative
convertible preferred stock) at September 30, 1999 as compared to $9.02
per common share at December 31, 1998. The increase in book value was
attributable to the retention of earnings, the exchange offer completed in
the second quarter of 1999 and the repurchase of the Company's common
stock in the open market during 1999. The Company anticipates that the
retention of earnings in excess of dividend distributions for the
remainder of 1999 and additional common stock repurchases will continue to
improve the Company's book value per common share and increase capital
levels.
<PAGE>
Net Interest Income
Net interest income decreased 50% to $5.9 million during the third
quarter of 1999 as compared to $11.7 million during the third quarter of
1998 primarily due to a decrease in average Mortgage Assets outstanding
and reduced leverage on Mortgage Assets outstanding. Interest income is
primarily interest earned on Mortgage Assets and includes interest earned
on cash and cash equivalents and due from affiliates. Interest expense is
primarily interest paid on borrowings on Mortgage Assets and includes
interest paid on due to affiliates and senior subordinated debentures. The
Company deleveraged its balance sheet and increased liquidity in response
to the global liquidity crisis, which occurred during the latter part of
1998 and resulted in a deterioration of the mortgage-backed securitization
market. In order to reduce leverage and increase liquidity to meet
potential margin calls, the Company sold Mortgage Assets at significant
losses during the fourth quarter of 1998. As a result, average Mortgage
Assets decreased 32% to $1.5 billion during the third quarter of 1999 as
compared to $2.2 billion during the third quarter of 1998. This decrease
was also related to a decrease in finance receivables made to IFC as IFC's
sold whole loans monthly to third parties instead of accumulating loans
for sale to IMH for issuance of CMO's. The combination of lower average
Mortgage Assets and decreased leverage was primarily responsible for the
reduction of net interest income during the third quarter of 1999 as
compared to the third quarter of 1998.
Net interest income also decreased as the net interest margin decreased
to 1.52% during the third quarter of 1999 as compared to 2.09% during the
third quarter of 1998. The net interest margin on Mortgage Assets
decreased primarily due to a decrease in the net interest spread on CMO
collateral, which decreased to (0.12)% during the third quarter of 1999 as
compared to 0.77% during the third quarter of 1998. The margin decreased
mainly due to increases in the one-month libor rate to which the
borrowings are indexed and contractual increases in the pass-thru rate on
certain of the bonds.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
third quarters of 1999 and 1998 and includes interest income on Mortgage
Assets and interest expense related to borrowings on Mortgage Assets only
(dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months For the Three Months
Ended September 30, 1999 Ended September 30, 1998
------------------------------------- ----------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
-------------- ---------- ----------- ------------ ---------- ----------
MORTGAGE ASSETS
Investment securities available-for-sale:
Securities collateralized by mortgages $ 79,435 $ 3,015 15.18 % $ 102,662 $ 3,234 12.60 %
Securities collateralized by other loans 5,495 193 14.05 5,379 153 11.38
-------------- ---------- ------------ ----------
Total investment securities available-for-sale 84,930 3,208 15.11 108,041 3,387 12.54
-------------- ---------- ------------ ----------
Loan receivables:
CMO collateral 1,131,926 17,907 6.33 1,374,131 25,256 7.35
Mortgage loans held-for-investment 13,849 253 7.31 62,294 1,372 8.81
Finance receivables:
Affiliated 183,856 3,597 7.83 610,378 13,041 8.55
Non-affiliated 77,743 1,780 9.16 93,581 2,225 9.51
-------------- ---------- ------------ ----------
Total finance receivables 261,599 5,377 8.22 703,959 15,266 8.67
-------------- ---------- ------------ ----------
Total Loan Receivables 1,407,374 23,537 6.69 2,140,384 41,894 7.83
-------------- ---------- ------------ ----------
Total Mortgage Assets $ 1,492,304 $ 26,745 7.17 % $ 2,248,425 $ 45,281 8.06 %
============== ========== ============ ==========
BORROWINGS
CMO borrowings $ 1,028,494 $ 16,592 6.45 % $ 1,277,826 $ 21,027 6.58 %
Reverse repurchase agreements - mortgages 261,900 4,238 6.47 716,216 11,849 6.62
Reverse repurchase agreements - securities 15,545 259 6.66 38,150 639 6.70
============== ========== ============ ==========
Total borrowings on Mortgage Assets $ 1,305,939 $ 21,089 6.46 % $ 2,032,192 $ 33,515 6.60 %
============== ========== ============ ==========
Net Interest Spread 0.71 % 1.46 %
Net Interest Margin 1.52 % 2.09 %
</TABLE>
<PAGE>
Interest Income on Mortgage Assets
Interest income on CMO collateral decreased 29% to $17.9 million during
the third quarter of 1999 as compared to $25.3 million during the third
quarter of 1998 as average CMO collateral decreased 21% to $1.1 billion as
compared to $1.4 billion, respectively. Average CMO borrowings decreased
as the Long-Term Investment Operations issued CMOs totaling $298.1 million
since the end of the third quarter of 1998 while total principal
prepayments on CMOs since the end of the third quarter of 1998 were $525.4
million. An increase in mortgage rates during the third quarter of 1999
and IFC's increased control over flow acquisitions through agreements with
certain correspondents providing right of first refusal on loan production
has contributed to greater stability in prepayments. Additionally,
approximately 40% of IFC's new loan production during the first nine
months of 1999 include prepayment penalties as compared to approximately
14% during the same period of the prior year. Therefore, due to IFC's
correspondent agreements and increased levels of prepayment penalties,
subsequent CMO collateral acquired by the Long-Term Investment Operations
from IFC should contribute to a reduction in prepayment rates and
stability of earnings. Interest income on CMO collateral also decreased as
the weighted average yield decreased to 6.33% during the third quarter of
1999 as compared to 7.35% during the third quarter of 1998. The weighted
average yield on CMO collateral decreased due to an increase in the
amortization of premiums and securitization costs due to prepayments.
Interest income on mortgage loans held-for-investment decreased 82% to
$253,000 during the third quarter of 1999 as compared to $1.4 million
during the third quarter of 1998 as average mortgage loans
held-for-investment decreased 78% to $13.8 million as compared to $62.3
million, respectively. Average mortgage loans held-for-investment
decreased primarily as mortgage loans acquired by the Long-Term Investment
Operations decreased to none during the third quarter of 1999 as compared
to $47.7 million during the third quarter of 1998. The weighted average
yield on mortgage loans held-for-investment decreased to 7.31% during the
third quarter of 1999 as compared to 8.81% during the third quarter of
1998. The decrease in the weighted average yield was primarily due to the
sale of high-yielding second trust deeds throughout 1998 and the
securitization of high yielding second trust deeds during the first
quarter of 1999.
Interest income on finance receivables decreased 65% to $5.4 million
during the third quarter of 1999 as compared to $15.3 million during the
third quarter of 1998 as average finance receivables decreased 63% to
$261.6 million as compared to $704.0 million, respectively. The decrease
in interest income on finance receivables was primarily the result of a
70% decrease in average finance receivables to affiliated companies,
primarily IFC. Average finance receivables to affiliated companies
decreased to $183.9 million during the third quarter of 1999 as compared
to $610.4 million during the third quarter of 1998. IFC's mortgage loan
acquisitions decreased to $440.0 million during the third quarter of 1999
as compared to $604.7 million during the third quarter of 1998. As such,
interest income on finance receivables to affiliates decreased 72% to $3.6
million during the third quarter of 1999 as compared to $13.0 million
during the third quarter of 1998. The weighted average yield on affiliated
finance receivables decreased to 7.83% during the third quarter of 1999 as
compared to 8.55% during the third quarter of 1998 primarily due to a
decrease in the prime rate which is the index used to determine interest
rates on finance receivables.
Interest income on finance receivables to non-affiliated mortgage
banking companies decreased 18% to $1.8 million during the third quarter
of 1999 as compared to $2.2 million during the third quarter of 1998 as
average finance receivables outstanding to non-affiliated mortgage banking
companies decreased 17% to $77.7 million as compared to $93.6 million,
respectively. Average finance receivables decreased, during the third
quarter of 1999 as compared to the third quarter of 1998, primarily due to
an overall market decrease in mortgage loan originations. The weighted
average yield on non-affiliated finance receivables decreased to 9.16%
during the third quarter of 1999 as compared to 9.51% during the third
quarter of 1998 primarily due to a decrease in the prime rate from 8.50%
to 8.00%.
Interest income on investment securities available-for-sale decreased
6% to $3.2 million during the third quarter of 1999 as compared to $3.4
million during the third quarter of 1998 as average investment securities
available-for-sale, net of securities valuation allowance, decreased 21%
to $84.9 million as compared to $108.0 million, respectively. The decrease
in average securities available-for-sale was the result of the Long-Term
Investment Operations purchasing and retaining mortgage-backed securities
of $18.3 million during the first nine months of 1999 as compared to $64.6
million during the first nine months of 1998. The weighted average yield
on investment securities available-for-sale increased to 15.11% during the
third quarter of 1999 as compared to 12.54% during the third quarter of
1998.
<PAGE>
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 21% to $16.6 million
during the third quarter of 1999 as compared to $21.0 million during the
third quarter of 1998 as average borrowings on CMO collateral decreased
23% to $1.0 billion as compared to $1.3 billion, respectively. Average CMO
borrowings decreased as the Long-Term Investment Operations issued CMOs
totaling $298.1 million since the end of the third quarter of 1998 as
compared to CMOs totaling $768.0 million since the end of the third
quarter of 1997. In addition, total principal prepayments on CMO
collateral, which passes through to bondholders and reduces CMO
borrowings, was $525.4 million since the end of the third quarter of 1998.
The weighted average yield of CMO borrowings decreased to 6.45% during the
third quarter of 1999 as compared to 6.58% during the third quarter of
1998.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables decreased 64% to
$4.2 million during the third quarter of 1999 as compared to $11.8 million
during the third quarter of 1998 as average reverse repurchase agreements
decreased 63% to $261.9 million as compared to $716.2 million,
respectively. This decrease was primarily related to a decrease in finance
receivables made to IFC as IFC sold whole loans monthly to third parties
instead of accumulating loans for sale to IMH for issuance of CMO's. The
weighted average yield on reverse repurchase agreements decreased to 6.47%
during the third quarter of 1999 as compared 6.62% during the third
quarter of 1998. The decrease in the weighted average yield on reverse
repurchase agreements was due to the decrease in six-month LIBOR, which is
the primary interest rate index of these instruments.
The Company also uses mortgage-backed securities as collateral to
borrow under reverse repurchase agreements to fund the purchase of
mortgage-backed securities and to act as an additional source of liquidity
for the Company's operations. Interest expense on these reverse repurchase
agreements decreased 59% to $259,000 during the third quarter of 1999 as
compared to $639,000 during the third quarter of 1998. The average balance
on these reverse repurchase agreements decreased 59% to $15.5 million
during the third quarter of 1999 as compared to $38.2 million during the
third quarter of 1998 primarily due to improved liquidity. The weighted
average yield of these reverse repurchase agreements decreased to 6.66%
during the third quarter of 1999 as compared 6.70% during the third
quarter of 1998.
Provision for Loan Losses
The Company recorded loan loss provisions of $1.4 million during the
third quarter of 1999 as compared to $(292,000) during the third quarter
of 1998. The provision for loan losses is determined primarily on the
basis of management's judgment of net loss potential including specific
allowances for known impaired loans, changes in the nature and volume of
the portfolio, value of the collateral and current economic conditions
that may affect the borrowers' ability to pay.
The Company's total allowance for loan losses expressed as a percentage
of Gross Loan Receivables which includes loans held-for-investment, CMO
collateral and finance receivables was 0.28% at September 30, 1999 as
compared to 0.47% at December 31, 1998. The decrease in the allowance as a
percentage of Gross Loan Receivables was due to the sale of delinquent
loans and the reduction in delinquent loan balances in mortgage loans
held-for-investment and CMO collateral, as well as an improved cure rate
on delinquent loans.
Non-Interest Income
Non-interest income increased to $3.8 million during the third quarter
of 1999 as compared to $(9.5) million during the third quarter of 1998
primarily due to an increase in equity in net earnings of IFC, a reduction
in equity in net loss of ICH, and a reduction in mark-to-market loss on
loans held-for-sale.
<PAGE>
Equity in Net Earnings of IFC
Equity in net earnings of IFC increased to $3.0 million during the
third quarter of 1999 as compared to $(7.9) million during the third
quarter of 1998. IFC's net earnings increased during the third quarter of
1999 primarily due to a $21.0 million mark to market loss on mortgage
loans recorded during the third quarter of 1998 as a result of the
deterioration of the mortgage-backed securitization market during the
latter part of 1998. The Company records 99% of the earnings or losses
from IFC as the Company owns 100% of IFC's preferred stock, which
represents 99% of the economic interest in IFC.
IFC's net interest income decreased to $392,000 during the third
quarter of 1999 as compared to $1.4 million during the third quarter of
1998 as average mortgage loans held-for-sale decreased 70% to $198.5
million as compared to $655.6 million, respectively. Average mortgage
loans held-for-sale decreased as mortgage loan acquisitions decreased 27%
to $440.0 million during the third quarter of 1999 as compared to mortgage
loan acquisitions of $604.7 million during the third quarter of 1998 and
IFC sold whole loans monthly to third parties instead of accumulating
loans for sale to IMH for issuance of CMO's. Mortgage loan acquisitions
decreased during the third quarter of 1999 as compared to the third
quarter of 1998 due to the residual effects of the liquidity crisis, which
occurred during the latter half of 1998. In response to the liquidity
crisis, IFC raised interest rates on its loan programs and decreased the
amount of premiums paid on its loan acquisitions, which caused some of
IFC's correspondent sellers to use other sources for the funding of their
mortgage loans. During the first nine months of 1999, IFC continued to
rebuild its mortgage loan acquisitions to previous levels by offering its
sellers competitive and flexible mortgage products. Mortgage loan
acquisitions increased 16% to $440.0 million during the third quarter of
1999 as compared to $604.7 million during the third quarter of 1998.
IFC's gain on sale of loans decreased to $8.3 million during the third
quarter of 1999 as compared to $10.1 million during the third quarter of
1998. In line with the Company's overall strategy to improve liquidity,
IFC sold mortgage loans on a whole loan basis for cash, as opposed to
sales through asset-backed securitizations for non-cash gains. During the
third quarter of 1999, IFC sold mortgages totaling $380.6 million, on a
servicing released basis, to third party investors as compared to loan
sales of $459.3 million during the third quarter of 1998. The sale of
these loans on a servicing released basis reduced IFC's exposure to
prepayment risk. IFC also sold no mortgages to IMH during the third
quarter of 1999 as compared to $47.7 million during the third quarter of
1998.
During the third quarter of 1999, IFC's net earnings were positively
affected by a reduction in personnel expense to $2.0 million as compared
to $2.6 million during the third quarter of 1998 primarily due to a
reduction in staff. During the fourth quarter of 1998, IFC reduced staff
in anticipation of decreased loan acquisitions, due to the deterioration
of the mortgage-backed securitization market, and to increase liquidity
from operating activities. Net earnings were also positively affected by a
reduction in amortization of mortgage servicing rights during the third
quarter of 1999 as compared to the third quarter of 1998. Amortization of
mortgage servicing rights decreased to $1.4 million during the third
quarter of 1999 as compared to $1.8 million during the third quarter of
1998 as IFC sold mortgage servicing rights during the first nine months of
1999. These increases to net earnings, during the third quarter of 1999,
were partially offset by an increase in general and administrative and
other expense. General and administrative and other expense increased to
$1.9 million during the third quarter of 1999 as compared to $1.7 million
during the third quarter of 1998 primarily due to non-reimbursable
start-up costs and expenses from the retail and wholesale lending
divisions that began operations in early 1999.
Equity in Net Earnings of ICH
Equity in net earnings of ICH decreased to none during the third
quarter of 1999 as compared to equity in net loss of ICH of $1.8 million
during the third quarter of 1998, as the Company sold its investment in
ICH during the fourth quarter of 1998. As such, the Company no longer
records earnings or losses of ICH.
Non-Interest Expense
Non-interest expense decreased to $2.1 million during the third quarter
of 1999 as compared to $23.1 million during the third quarter of 1998.
Non-interest expense during the third quarter of 1998 consisted of
write-down of investment securities available-for-sale of $11.6 million
and loss on equity investment of $9.1 million, which were caused by the
deterioration of the mortgage-backed securitization market during the
latter part of 1998. Excluding the affect of write-down of investment
securities available-for-sale and loss on equity investment, non-interest
expense decreased 29% to $1.7 million during the third quarter of 1999 as
compared to $2.4 million during the third quarter of 1998.
<PAGE>
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS , INC.
For the Nine Months Ended September 30, 1999 as compared to the Nine
Months Ended September 30, 1998
Results of Operations
The Company recorded net earnings of $18.4 million, or $0.63 per
diluted common share, during the first nine months of 1999 as compared to
net earnings of $2.2 million, or $0.09 per diluted common share, during
the first nine months of 1998. The increase in net earnings, during the
first nine months of 1999 as compared to the first nine months of 1998,
was primarily due to an increase in non-interest income of $10.4 million
and a decrease of $18.7 million in non-interest expense. These increases
to net earnings were partially offset by a decrease of $10.7 million in
net interest income. As stated earlier, as the mortgage sector stabilized
during the first nine months of 1999 and recovered from the volatility
that occurred during the latter part of 1998, the Company returned to
overall profitability and profitability on the sale of its mortgage loans
during the first nine months of 1999.
The retention of earnings in excess of dividend distributions will
continue to improve the Company's book value per common share and increase
capital levels. During the first nine months of 1999, the Company recorded
net earnings of $0.69 per basic common share, which was $0.34 per basic
common share in excess of declared common stock dividends of $0.35 per
common share. The Company's current common stock dividend policy is to
partly base quarterly dividends upon the Company's best estimate of
taxable earnings for the year ending December 31, 1999. However, the Board
of Directors reserves the right to make adjustments to this policy as
actual results may differ from earnings projections. The most significant
adjustments to GAAP earnings for the first nine months of 1999 were as
follows: (1) amortization of the termination of the management agreement
with Imperial Credit Advisors, Inc. in December of 1997, which resulted in
a deduction of approximately $8.1 million, (2) exclusion of $5.5 million
of equity in net earnings of IFC, (3) actual loan charge-offs in excess of
loan loss provisions, which resulted in a deduction of approximately $3.3
million, and (4) deduction of Preferred Stock dividends of $2.5 million.
As such, the Company's best estimate of taxable earnings for the first
nine months of 1999 was $1.0 million, or $0.04 per basic common share.
Therefore, during the first nine months of 1999 the Company declared
common stock dividends of $0.35 per common share, of which approximately
$0.31 per basic common share is in excess of estimated taxable earnings.
Net Interest Income
Net interest income decreased 32% to $22.3 million during the first
nine months of 1999 as compared to $33.0 million during the first nine
months of 1998 primarily due to a decrease in average Mortgage Assets.
Average Mortgage Assets decreased 24% to $1.6 billion during the first
nine months of 1999 as compared to $2.1 billion during the first nine
months of 1998 due to the following: (1) sale of Mortgage Assets during
the fourth quarter of 1998, (2) reduction in mortgage loan production at
IFC, which decreased average outstanding finance receivables, and (3) the
Company's concentration on strengthening book value and conserving capital
by reducing leverage.
Net interest income also decreased as the net interest margin decreased
to 1.84% during the first nine months of 1999 as compared to 2.17% during
the first nine months of 1998. The net interest margin on Mortgage Assets
decreased primarily due to a decrease in the net interest spread on CMO
collateral, which decreased to 0.28% during the first nine months of 1999
as compared to 0.78% during the first nine months of 1998. The margin
decreased mainly due to increases in the one-month libor rate to which the
borrowings are indexed and contractual increases in the pass-thru rate on
certain of the bonds
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
nine months ended September 30, 1999 and 1998 and includes interest income
on Mortgage Assets and interest expense related to borrowings on Mortgage
Assets only (dollars in thousands):
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Nine Months For the Nine Months
Ended September 30, 1999 Ended September 30, 1998
----------------------------------- ----------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
------------ ---------- ----------- ------------ ---------- ----------
MORTGAGE ASSETS
Investment securities available-for-sale:
Securities collateralized by mortgages $ 86,700 $ 9,330 14.35 % $ 86,944 $ 7,986 12.25 %
Securities collateralized by other loans 8,052 629 10.42 5,356 533 13.27
------------ ---------- ------------ ----------
Total investment securities available-for-sale 94,752 9,959 14.01 92,300 8,519 12.31
------------ ---------- ------------ ----------
Loan receivables:
CMO collateral 1,155,877 57,404 6.62 1,245,516 69,446 7.43
Mortgage loans held-for-investment 41,626 2,160 6.92 188,799 13,089 9.24
Finance receivables:
Affiliated 197,408 11,920 8.05 445,504 28,520 8.54
Non-affiliated 72,015 4,889 9.05 83,188 5,944 9.53
------------ ---------- ------------ ----------
Total finance receivables 269,423 16,809 8.32 528,692 34,464 8.69
------------ ---------- ------------ ----------
Total Loan Receivables 1,466,926 76,373 6.94 1,963,007 116,999 7.95
------------ ---------- ------------ ----------
Total Mortgage Assets $ 1,561,678 $ 86,332 7.37 % $ 2,055,307 $ 125,518 8.14 %
============ ========== =========== ==========
BORROWINGS
CMO borrowings $ 1,053,314 $ 50,051 6.34 % $ 1,156,748 $ 57,714 6.65 %
Reverse repurchase agreements - mortgages 290,542 13,718 6.30 668,176 33,109 6.61
Reverse repurchase agreements - securities 19,727 970 6.56 25,687 1,249 6.48
============ ========== ============ ==========
Total borrowings on Mortgage Assets $ 1,363,583 $ 64,739 6.33 % $ 1,850,611 $ 92,072 6.63 %
============ ========== ============ ==========
Net Interest Spread 1.04 % 1.51 %
Net Interest Margin 1.84 % 2.17 %
</TABLE>
Interest Income on Mortgage Assets
Interest income on CMO collateral decreased 17% to $57.4 million during
the first nine months of 1999 as compared to $69.4 million during the
first nine months of 1998 as the weighted average yield decreased to 6.62%
as compared to 7.43%, respectively. The weighted average yield on CMO
collateral decreased due to increases in the amortization of premiums and
securitization costs due to high fluctuations in prepayments. Average CMO
collateral during the first nine months of 1999 decreased slightly to
$1.16 billion as compared to $1.25 billion during the first nine months of
1998. Constant prepayment rates on CMO collateral decreased to 38% during
the last twelve months ended September 30, 1999 as compared to 43% during
the same period ended September 30, 1998. As stated previously, the
Company expects that right of first refusal agreements with IFC's
correspondent sellers and increased prepayment penalties on IFC's loan
acquisitions should contribute to a reduction in prepayment rates and
stability of earnings on subsequent CMO collateral acquired by the
Long-Term Investment Operations from IFC.
Interest income on mortgage loans held-for-investment decreased 83% to
$2.2 million during the first nine months of 1999 as compared to $13.1
million during the first nine months of 1998 as average mortgage loans
held-for-investment decreased 78% to $41.6 million as compared to $188.8
million, respectively. Average mortgage loans held-for-investment
decreased due to reduced loan acquisitions by IMH, which were $283.0
million during the first nine months of 1999 as compared to $841.6 million
during the first nine months of 1998. The weighted average yield on
mortgage loans held-for-investment decreased to 6.92% during the first
nine months of 1999 as compared to 9.24% during the first nine months of
1998. The decrease in the weighted average yield was primarily due to the
sale of high-yielding second trust deeds throughout 1998 and the
securitization of high yielding second trust deeds during the first
quarter of 1999.
<PAGE>
Interest income on finance receivables decreased 51% to $16.8 million
during the first nine months of 1999 as compared to $34.5 million during
the first nine months of 1998 as average finance receivables decreased 49%
to $269.4 million as compared to $528.7 million, respectively. The
decrease in interest income on finance receivables was primarily the
result of a 56% decrease in average finance receivables to affiliated
companies, primarily IFC. Average finance receivable to affiliated
companies decreased to $197.4 million during the first nine months of 1999
as compared to $445.5 million during the first nine months of 1998. IFC's
mortgage loan acquisitions decreased to $1.1 billion during the first nine
months of 1999 as compared to $1.9 billion during the first nine months of
1998. As such, interest income on finance receivables to affiliates
decreased 58% to $11.9 million during the first nine months of 1999 as
compared to $28.5 million during the first nine months of 1998. The
weighted average yield on affiliated finance receivables decreased to
8.05% during the first nine months of 1999 as compared to 8.54% during the
first nine months of 1998 primarily due to a decrease in the prime rate
which is the index used to determine interest rates on finance
receivables.
Interest income on finance receivables to non-affiliated mortgage
banking companies decreased 17% to $4.9 million during the first nine
months of 1999 as compared to $5.9 million during the first nine months of
1998 as average finance receivables outstanding to non-affiliated mortgage
banking companies decreased 13% to $72.0 million as compared to $83.2
million, respectively. Average finance receivables decreased, during the
first nine months of 1999 as compared to the first nine months of 1998,
primarily due to an overall market decrease in mortgage loan originations.
The weighted average yield on non-affiliated finance receivables decreased
to 9.05% during the first nine months of 1999 as compared to 9.53% during
the first nine months of 1998 primarily due to a decrease in the prime
rate.
Interest income on investment securities available-for-sale increased
18% to $10.0 million during the first nine months of 1999 as compared to
$8.5 million during the first nine months of 1998 as average investment
securities available-for-sale, net of securities valuation allowance,
increased 3% to $94.8 million as compared to $92.3 million, respectively.
The increase in average securities available-for-sale was the result of
the Long-Term Investment Operations purchasing and retaining
mortgage-backed securities of $18.3 million, which were issued by IFC,
since the end of the third quarter of 1998. The weighted average yield on
investment securities available-for-sale increased to 14.01% during the
first nine months of 1999 as compared to 12.31% during the first nine
months of 1998.
Interest expense on Mortgage Assets
Interest expense on CMO borrowings decreased 13% to $50.1 million
during the first nine months of 1999 as compared to $57.7 million during
the first nine months of 1998 as the weighted average yield on CMO
borrowings decreased to 6.34% as compared to 6.65%, respectively. Average
CMO borrowings decreased to $1.1 billion during the first nine months of
1999 as compared to $1.2 billion during the first nine months of 1998.
Interest expense on reverse repurchase borrowings used to fund the
acquisition of mortgage loans and finance receivables decreased 59% to
$13.7 million during the first nine months of 1999 as compared to $33.1
million during the first nine months of 1998. The average balance of these
reverse repurchase agreements decreased 57% to $290.5 million during the
first nine months of 1999 as compared to $668.2 million during the first
nine months of 1998. This decrease was primarily related to a decrease in
finance receivables made to IFC as IFC's acquisition of mortgage loans
were lower during the first nine months of 1999 as compared the first nine
months of 1998. The weighted average yield of these reverse repurchase
agreements decreased to 6.30% during the first nine months of 1999 as
compared 6.61% during the first nine months of 1998. The decrease in the
weighted average yield on reverse repurchase agreements was due to the
decrease in six-month LIBOR, which is the primary interest rate index of
these instruments.
The Company also uses mortgage-backed securities as collateral to
borrow under reverse repurchase agreements to fund the purchase of
mortgage-backed securities and to act as an additional source of liquidity
for the Company's operations. Interest expense on these reverse repurchase
agreements decreased 17% to $1.0 million during the first nine months of
1999 as compared to $1.2 million during the first nine months of 1998. The
average balance on these reverse repurchase agreements decreased 23% to
$19.7 million during the first nine months of 1999 as compared to $25.7
million during the first nine months of 1998 primarily due to improved
liquidity. The weighted average yield of these reverse repurchase
agreements increased to 6.56% during the first nine months of 1999 as
compared 6.48% during the first nine months of 1998.
<PAGE>
Provision for Loan Losses
The Company recorded loan loss provisions of $4.4 million during the
first nine months of 1999 as compared to $2.1 million during the first
nine months of 1998. The provision for loan losses is determined primarily
on the basis of management's judgment of net loss potential including
specific allowances for known impaired loans, changes in the nature and
volume of the portfolio, value of the collateral and current economic
conditions that may affect the borrowers' ability to pay.
Non-Interest Income
Non-interest income increased to $7.5 million during the first nine
months of 1999 as compared to $(2.9) million during the first nine months
of 1998 primarily due to an increase in equity in net earnings of IFC, a
reduction in equity in net loss of ICH, and a reduction in mark-to-market
loss on loans held-for-sale.
Equity in Net Earnings of IFC
Equity in net earnings of IFC increased to $5.5 million during the
first nine months of 1999 as compared to $(3.9) million during the first
nine months of 1998. IFC's net earnings increased to $5.6 million during
the first nine months of 1999 as compared to $(3.9) million during the
first nine months of 1998 primarily due to a $21.0 million mark to market
loss on mortgage loans recorded during the third quarter of 1998 as a
result of the deterioration of the mortgage-backed securitization market
during the latter part of 1998. The Company records 99% of the earnings or
losses from IFC as the Company owns 100% of IFC's preferred stock, which
represents 99% of the economic interest in IFC.
IFC's net interest income decreased as average mortgage loans
held-for-sale decreased 61% to $206.5 million during the first nine months
of 1999 as compared to $528.8 million during the first nine months of
1998. Average mortgage loans held-for-sale decreased as mortgage loan
acquisitions decreased 42% to $1.1 billion during the first nine months of
1999 as compared to mortgage loan acquisitions of $1.9 billion during the
first nine months of 1998. Mortgage loan acquisitions decreased during the
first nine months of 1999 as compared to the first nine months of 1998 due
to the residual effects of the liquidity crisis, which occurred during the
latter half of 1998. In response to the liquidity crisis, IFC raised
interest rates on its loan programs and decreased the amount of premiums
paid on its loan acquisitions, which caused some of IFC's correspondent
sellers to use other sources for the funding of their mortgage loans.
During the first nine months of 1999, IFC continued to rebuild its
mortgage loan acquisitions to previous levels by offering its sellers
competitive and flexible mortgage products. IFC's net interest income also
decreased during the first nine months of 1999 as the weighted average
yield on mortgage loans held-for-sale decreased to 8.57% as compared to a
weighted average yield of 9.55% during the first nine months of 1998.
IFC's yield on mortgage loans held-for-sale during the first nine months
of 1998 included the acquisition of high-yielding second trust deeds,
which IFC acquired from Preferred Credit Corporation during the fourth
quarter of 1997. The majority of these second trust deeds were sold to
third party investors during 1998 or sold to the Long-Term Investment
Operations for CMO collateral during the first quarter of 1999.
IFC's gain on sale of loans increased to $22.8 million during the first
nine months of 1999 as compared to $18.9 million during the first nine
months of 1998. However, gain on sale of loans during the first nine
months of 1999 included a reduction of mark-to-market allowances of $4.1
million. Excluding the reduction of mark-to-market allowances, gain on
sale for the first nine months of 1999 was $18.7 million as compared to
$18.9 million during the first nine months of 1998, as IFC was profitable
on the sale of its mortgage loans as the mortgage-backed securitization
market recovered from the volatility that occurred during 1998. In line
with the Company's overall strategy to improve liquidity, IFC sold
mortgage loans on a whole loan basis for cash, as opposed to sales through
asset-backed securitizations for non-cash gains. During the first nine
months of 1999, IFC sold mortgages totaling $1.0 billion, on a servicing
released basis, to third party investors as compared to loan sales and
securitizations of $1.2 billion during the first nine months of 1998. The
sale of these loans on a servicing released basis reduced IFC's exposure
to prepayment risk. IFC also sold $287.6 million in principal balance of
mortgages to IMH during the first nine months of 1999 as compared to
$817.9 million during the first nine months of 1998.
<PAGE>
During the first nine months of 1999 IFC's net earnings were positively
affected by a reduction in personnel expense to $5.4 million as compared
to $7.4 million during the first nine months of 1998 primarily due to a
reduction in staff. During the fourth quarter of 1998, IFC reduced staff
in anticipation of decreased loan acquisitions, due to the deterioration
of the mortgage-backed securitization market, and to increase liquidity
from operating activities. Net earnings were also positively affected by a
reduction in amortization of mortgage servicing rights during the first
nine months of 1999 as compared to the first nine months of 1998.
Amortization of mortgage servicing rights decreased to $3.9 million during
the first nine months of 1999 as compared to $4.7 million during the first
nine months of 1998 as IFC sold mortgage servicing rights during the first
six months of 1999. These increases to net earnings, during the first nine
months of 1999, were partially offset by an increase in general and
administrative and other expense. General and administrative and other
expense increased to $5.4 million during the first nine months of 1999 as
compared to $3.9 million during the first nine months of 1998 primarily
due to non-reimbursable start-up costs and expenses from the retail and
wholesale lending divisions that began operations in early 1999.
Equity in Net Earnings of ICH
Equity in net earnings of ICH decreased to none during the first nine
months of 1999 as compared to equity in net loss of ICH of $(1.0) million
during the first nine months of 1998, as the Company sold its investment
in ICH during the fourth quarter of 1998. As such, the Company no longer
records earnings or losses of ICH.
Non-Interest Expense
Non-interest expense decreased to $7.1 million during the first nine
months of 1999 as compared to $25.8 million during the first nine months
of 1998. Non-interest expense during the first nine months of 1998
consisted of write-down of investment securities available-for-sale of
$12.8 million and loss on equity investment of $9.1 million, which was
caused by the deterioration of the mortgage-backed securitization market
during the latter part of 1998. Excluding the affect of write-down of
investment securities available-for-sale and loss on equity investment,
non-interest expense increased to $5.0 million during the first nine
months of 1999 as compared to $3.9 million during the first nine months of
1998. This increase was primarily due to a $1.5 million increase in loss
on disposition of other real estate owned.
LIQUIDITY AND CAPITAL RESOURCES
Overview. The Company's business operations are primarily funded from
monthly interest and principal payments from its mortgage loan and
investment securities portfolios, reverse repurchase agreements secured by
mortgage loans and mortgage-backed securities, adjustable- and fixed-rate
CMO financing, proceeds from the sale of mortgage loans and the issuance
of REMICs, and proceeds from the issuance of common stock through
secondary stock offerings, DRSSP, and its structured equity shelf. In July
of 1999, the Company decided to suspend its DRSSP. The acquisition of
mortgage loans and mortgage-backed securities by the Long-Term Investment
Operations are primarily funded from monthly principal and interest
payments, reverse repurchase agreements, CMO financing, and proceeds from
the sale of common stock. The acquisition of mortgage loans by the Conduit
Operations are primarily funded from reverse repurchase agreements, the
sale of mortgage loans and mortgage-backed securities, and the issuance of
REMICs. Short-term warehouse financing, or finance receivables, provided
by the Warehouse Lending Operations to affiliated companies and to IFC's
correspondent sellers are funded from reverse repurchase agreements and
proceeds from the sale of common stock.
The Company's ability to meet its long-term liquidity requirements is
subject to the renewal of its credit and repurchase facilities and/or
obtaining other sources of financing, including additional debt or equity
from time to time. Any decision by the Company's lenders and/or investors
to make additional funds available to the Company in the future will
depend upon a number of factors, such as the Company's compliance with the
terms of its existing credit arrangements, the Company's financial
performance, industry and market trends in the Company's various
businesses, the general availability of and rates applicable to financing
and investments, such lenders' and/or investors' own resources and
policies concerning loans and investments, and the relative attractiveness
of alternative investment or lending opportunities.
<PAGE>
During the latter half of 1998, a global liquidity crisis resulted in a
deterioration of the mortgage-backed securitization market and created
liquidity problems for the Company as the Company's lenders made margin
calls on their warehouse and reverse repurchase lines. Margin calls result
from the Company's lenders evaluating the market value of underlying
collateral securing the borrowings and requiring additional equity or
collateral. The Company sold Mortgage Assets at significant losses during
the fourth quarter of 1998 to meet potential margin calls. The sale of
Mortgage Assets and the issuance of Preferred Stock during the fourth
quarter of 1998 provided the Company with much needed liquidity at the
time. In addition, the Company decreased its Leverage Ratio at September
30, 1999 as compared to September 30, 1998 and, as a result, the Company
had no margin calls on its
reverse repurchase agreements during the first nine months of 1999.
Furthermore, the mortgage-backed securitization market stabilized during
the first nine months of 1999 and allowed the Company to complete two
CMOs. The issuance of CMOs provides the Company with immediate liquidity,
a locked-in interest rate spread and eliminates the Company's exposure to
margin calls on such loans. A decrease in loan acquisitions during the
first nine months of 1999 along with a return to profitability has
provided additional liquidity from operating activities. However, the
Company expects loan acquisitions and originations from its two new
divisions will increase on a go-forward basis, along with a corresponding
increase in staff, which will require additional cash.
The Company continues to explore alternatives for increasing liquidity
through additional asset sales and capital raising efforts. However, no
assurances can be given that such alternatives will be available, or if
available, under comparable rates and terms as currently exist. During the
first quarter of 1999, the Company completed a definitive agreement to
acquire a bank. As provided for in the agreement, the Company submitted
its application in the second quarter of 1999 for a change of control to
the state and federal regulatory agencies for their approval. During the
process of reviewing the application, the federal regulator raised certain
issues. The Company was not able to give the federal agency sufficient
comfort with respect to those issues without modifying our proposal. Also,
the state regulatory department requested significant additional
information which had the effect of delaying the approval process. At this
time, the Company has decided to withdraw its state and federal
applications for change of control and intends on resubmitting a new
application at a later date that addresses the business concerns expressed
by the regulators. However, there are no assurances that new applications
for change of control will be received favorably by either of the state
and federal regulators. Therefore, the Company is continuing to expand its
wholesale and retail operations, which was intended to be contributed to
the Bank, within IFC. In the event that the Company is unsuccessful in its
efforts to obtain the Bank charter, management believes that it will have
no effect on the future profitability of the Company.
Long-Term Investment Operations
Primary Source of Funds
The Long-Term Investment Operations uses CMO borrowings to finance
substantially its entire mortgage loan portfolio. Terms of the CMO
borrowings require that an independent third party custodian hold the
mortgages. The maturity of each class is directly affected by the rate of
principal prepayments on the related collateral. Equity in the CMOs is
established at the time the CMOs are issued at levels sufficient to
achieve desired credit ratings on the securities from rating agencies. The
amount of equity invested in CMOs by the Long-Term Investment Operations
is also determined by the Company based upon the anticipated return on
equity as compared to the estimated proceeds from additional debt
issuance. Total credit loss exposure is limited to the equity invested in
the CMOs at any point in time. For the first nine months of 1999, the
Company issued CMOs totaling $298.1 million that were collateralized by
$316.2 million of residential mortgages. At September 30, 1999, the
Long-Term Investment Operations had $1.0 billion of CMO borrowings used
to finance $1.1 billion of CMO collateral. During the first nine months
of 1999, total principal reductions on CMO collateral provided liquidity
of $378.6 million.
The Long-Term Investment Operations may pledge mortgage-backed
securities as collateral to borrow funds under reverse repurchase
agreements. The terms under these reverse repurchase agreements are
generally for 30 days with interest rates ranging from the one-month
London Interbank Offered Rate ("LIBOR") plus 56% to 200% depending on the
type of collateral provided. As of September 30, 1999, the Long-Term
Investment Operations had $11.4 million outstanding under these reverse
repurchase agreements which were secured by $29.2 million in fair market
value of mortgage-backed securities.
<PAGE>
During the first nine months of 1999, the Company raised capital of
$946,000 from the sale of 216,156 shares of common stock issued through its
DRSPP. The DRSPP was suspended in July 1999.
Primary Use of Funds
During the first nine months of 1999, IMH acquired $287.6 million in
principal balance of mortgage loans from IFC.
During the first nine months of 1999, IMH repurchased 1,324,200 shares
of Common Stock for $6.8 million and paid common and preferred stock
dividends of $18.8 million.
IMH has a reverse repurchase arrangement with a commercial bank. IMH
borrowed $10.0 million for general working capital needs. The reverse
repurchase arrangement expires on December 31, 1999. The interest rate on
the reverse repurchase arrangement is LIBOR plus 2.0%. Additional funds
cannot be advanced under the reverse repurchase arrangement with terms
that require monthly principal payments of $833,000 plus accrued interest.
As of September 30, 1999, IMH's outstanding borrowings under the reverse
repurchase arrangement was $4.2 million. This was subsequently paid in
full from the proceeds of the Company's re-securitization.
Warehouse Lending Operations
Primary Source of Funds
The Warehouse Lending Operations finances the acquisition of mortgage
loans by the Long-Term Investment Operations and Conduit Operations
primarily through borrowings on reverse repurchase agreements with third
party lenders. IWLG has obtained reverse repurchase facilities from major
investment banks to provide financing as needed. Terms of the reverse
repurchase agreements require that the mortgages be held by an independent
third party custodian giving the Warehouse Lending Operations the ability
to borrow against the collateral as a percentage of the outstanding
principal balance. The borrowing rates vary from 85 basis points to 200
basis points over one-month LIBOR, depending on the type of collateral
provided. The advance rate on the reverse repurchase agreements are based
on the type of mortgage collateral used and generally range from 75% to
101% of the fair market value of the collateral.
The following table presents information on available reverse
repurchase agreements as of September 30, 1999 (dollars in thousands):
<TABLE>
<S> <C> <C>
Amount
Outstanding Interest rate
--------------- --------------------------
Lender A (1) $ 207,943 Libor + 0.85% to 2.00%
Lender B (1) 304 Libor + 1.00%
---------------
$ 208,247
===============
Total
</TABLE>
(1) Uncommitted reverse repurchase agreement.
Conduit Operations
Primary Source of Funds
The Conduit Operations has entered into reverse repurchase agreements
to obtain financing of 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 provided and generally range from 95% to
100% of the fair market value of the collateral. The interest rates on the
borrowings are indexed to Prime, which was 8.25% at September 30, 1999. At
September 30, 1999, the Conduit Operations had $92.9 million outstanding
under the reverse repurchase agreement.
<PAGE>
During the first nine months of 1999, the Conduit Operations sold $1.0
billion in principal balance of mortgage loans to third-party investors.
In addition, IFC sold $287.6 million in principal balance of mortgage
loans to the Long-Term Investment Operations during the first nine months
of 1999. By securitizing and selling loans on a periodic and consistent
basis the reverse repurchase agreements were sufficient to handle IFC's
liquidity needs during the first nine months of 1999.
Primary Use of Funds
During the first nine months of 1999, the Conduit Operations acquired
$1.1 billion of mortgage loans.
Cash Flows
Operating Activities - During the first nine months of 1999 net cash
provided by operating activities was $27.4 million. Cash provided by
operating activities was primarily due to net earnings of $18.4 million
and $6.7 million in net change in other assets and liabilities.
Investing Activities - During the first nine months of 1999 net cash
provided by investing activities was $201.1 million. Cash provided by
investing activities was primarily due to a decrease in finance
receivables of $101.8 million as loan acquisitions at IFC decreased during
the first nine months of 1999 and a decrease $95.6 million in CMO
collateral.
Financing Activities - During the first nine months of 1999 net cash
used in financing activities was $245.9 million. Cash used in financing
activities was primarily due to repayment of CMO borrowings of $416.5
million and reverse repurchase agreements of $102.8 million. This use of
funds was partially offset by proceeds from the issuance of CMOs of $298.1
million.
Inflation
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased costs of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company's operations are
monetary in nature. As a result, interest rates have a greater impact on
the Company's operations' performance than do the effects of general
levels of inflation. Inflation affects the Company's operations primarily
through its effect on interest rates, since interest rates normally
increase during periods of high inflation and decrease during periods of
low inflation. During periods of increasing interest rates, demand for
mortgage loans and a borrower's ability to qualify for mortgage financing
in a purchase transaction may be adversely affected. During periods of
decreasing interest rates, borrowers may prepay their mortgages, which in
turn may adversely affect the Company's yield and subsequently the value
of its portfolio of Mortgage Assets.
Year 2000 Compliance
Project Status
The Company's Year 2000 project was approximately 100% complete as of
September 30, 1999. The Company contracted with an outside vendor to
provide coordination, support, testing and implementation in regards to
Year 2000 compliance of hardware and software systems, both on an
information technology ("IT") and non-IT level.
The Company's in-house IT department took over the project from its
outside vendors during the second quarter of 1999. The Company's primary
IT systems include loan servicing, loan tracking, master servicing and
accounting and reporting. The Company has obtained information and the
published plan in regards of Year 2000 compliance from the loan servicing
systems' outside vendor. The Company's IT department will continue to
monitor our vendor's progress on Year 2000 compliance. The loan tracking
system is currently in compliance with Year 2000. The master servicing
system was tested and Year 2000 compliant. The accounting and reporting
system is currently Year 2000 compliant. The Company's non-IT systems
include its file servers, network systems, workstations and communication
systems are Year 2000 compliant. As of June 30, 1999, the upgrade of the
Company's communication systems was completed. Testing on all other
in-house hardware was completed as of June 30, 1999.
<PAGE>
The Year 2000 project is divided into two primary phases as follows:
(1) define scope of project and identify all IT and non-IT systems, and
(2) testing of existing systems and implementation of new systems, if
required. The outside contractor on the Year 2000 project submits monthly
status reports to the Company's IT manager and communicates with the IT
department on a daily basis. The Company's executive committee which
includes the CEO and Chairman, President, and Chief Financial Officer
reviews the progress of the Company's Year 2000 project through monthly
status reports and reviews with the Company's IT manager. In August 1999
the Vice President of Information Technology presented the Company's Y2K
compliance update to the board members.
Phase I - Define Scope of Project
This phase primarily included the inventorying of Year 2000 items,
contacting outside vendors, including reviewing contractual terms and
conditions, reviewing internal software for compliance and determining
costs to complete the project. As of the end of October 1998, Phase I of
the project had been completed. Phase I of the project also included the
testing and implementation or upgrade of non-IT systems.
Phase II - Testing of Systems
This phase of the Year 2000 project can be divided into four separate
processes as follows: (1) Compliance Questionnaires, (2) Hardware
Certification Information, (3) Software/Data Testing, and (4) Hardware
Testing.
Compliance Questionnaires and Hardware Certification Information.
As of July 31, 1999, these portions of Phase II were complete.
Software/Data Testing. The remaining tasks within this process included
analyzing a list of software being used, testing all software programs,
testing all data from incoming sources, and testing all outgoing data
processes and reporting. As of July 31, 1999, this portion of Phase II was
completed.
Hardware Testing. The Company has completed all testing and is
compliant with all internal Year 2000 hardware issues.
Costs
The total cost associated with required modifications or installations
to become Year 2000 compliant was not material to the Company's financial
condition. The cost to upgrade the Company's communications system was
$140,000. As of October 31, 1999, the Company had paid $273,000 to the
outside vendor for completed work on the project. The Company does not
anticipate any additional cost for the project. The majority of the
Company's estimated cost for the Year 2000 compliance was be spent on
software upgrades and writing new program code on existing proprietary
software. Since the Company's hardware had been purchased within the last
two years, the cost of replacing hardware was minimal.
Risks
The Company does not anticipate any material disruption of its
operations as a result of any failure by the Company to be compliant.
However, there can be no assurance that there will not be a delay in, or
increased costs associated with, the need to address the Year 2000 issue.
The Company also relies, directly and indirectly, on other businesses such
as third party service providers, creditors and financial organizations
and governmental entities. Even if the Company's computer systems are not
materially adversely affected by the Year 2000 issue, the Company's
business and operations could be materially adversely affected by
disruptions in the operations of the enterprises with which the Company
interacts.
<PAGE>
Contingency Plans
The Company believes its Year 2000 compliance process should enable it
to be successful in modifying its computer systems to be Year 2000
compliant. Acceptance testing and sign-off is 100% complete with respect
to the Company's in-house systems. In addition to Year 2000 compliance
system modification plans, the Company has also developed contingency
plans for all other systems classified as critical and high risk. These
contingency plans provide timetables to pursue various alternatives based
upon the failure of a system to be adequately modified and/or sufficiently
tested and validated to ensure Year 2000 compliance. The IT department
will be working on January 1st and 2nd, 2000 to test to ensure that all
systems are operational and functioning properly. However, there can be no
assurance that either the compliance process or contingency plans will
avoid partial or total system interruptions or the costs necessary to
update hardware and software would not have a material adverse effect upon
the Company's financial condition, results of operation, business or
business prospects.
Transactions with Related Parties
During the second quarter of 1999, IMH advanced $14.5 million in cash,
in the form of an interest-only note payable, to IFC as part of the
initial capitalization of the Bank. During the third quarter of 1999, the
Company received interest income of $344,000 on this note.
In January 1999, IWLG extended a $50.0 million warehouse line to WSI,
which James Walsh, a Director of the Company, is Executive Vice President.
Advances under the warehouse line bear interest at a rate of Prime +
0.50%. As of September 30, 1999, there was $146,000 outstanding under the
warehouse line agreement.
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales - Hedging Interest Rate Risk. The most
significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim
period between loan origination or purchase and securitization or sale of
such loans, the Company is exposed to interest rate risk. The majority of
loans are securitized or sold within 90 days of origination of purchase.
However, a portion of the loans are held-for-sale or securitization for as
long as 12 months (or longer, in very limited circumstances) prior to
securitization or sale. If interest rates rise during the period that the
mortgage loans are held, in the case of a securitization, the spread
between the weighted average interest rate on the loans to be securitized
and the pass-through interest rates on the securities to be sold (the
latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of
the Company's related gain or loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $35.8 million and $43.1 million outstanding at
September 30, 1999 and December 31, 1998, respectively. These instruments
are carried at market value at September 30, 1999 and December 31, 1998.
The Company values these assets based on the present value of future cash
flow streams net of expenses using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows
realized from these assets would be reduced should prepayments or losses
exceed assumptions used in the valuation. Conversely, cash flows realized
would be greater should prepayments or losses be below expectations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 27,1999, the Company held it's annual meeting of stockholders. Of
the total number of shares eligible to vote (22,725,770), 21,769,111 votes
were returned, or 96%, formulating a quorum. At the stockholders meeting,
the following matters were submitted to stockholders for vote: Proposal I
- Election of Directors, Proposal II - Ratify appointment of Company's
independent auditors, KPMG LLP.
The results of voting on these proposals are as follows:
Proposal I - Election of Directors
<TABLE>
<S> <C> <C> <C>
Director For Against Elected
Joseph R. Tomkinson 21,224,792 544,319 Yes
William S. Ashmore 21,237,541 531,570 Yes
James Walsh 21,226,612 542,499 Yes
Frank P. Filipps 21,248,237 520,874 Yes
Stephan R. Peers 21,248,187 520,924 Yes
</TABLE>
All directors are elected annually at the Company's annual stockholders
meeting.
Proposal II - Appointment of independent auditors
Proposal II was approved with 21,503,228 shares voted for, 146,909 voted
against, and 118,974 abstained from voting thereby ratifying the
appointment of KPMG LLP as the Company's independent auditors.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: November 11, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,447
<SECURITIES> 95,247
<RECEIVABLES> 1,273,340
<ALLOWANCES> (3,624)
<INVENTORY> 0
<CURRENT-ASSETS> 250,635
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,437,215
<CURRENT-LIABILITIES> 231,721
<BONDS> 0
0
12
<COMMON> 221
<OTHER-SE> 243,154
<TOTAL-LIABILITY-AND-EQUITY> 1,437,215
<SALES> 88,059
<TOTAL-REVENUES> 95,572
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,062
<LOSS-PROVISION> 4,356
<INTEREST-EXPENSE> 65,774
<INCOME-PRETAX> 18,380
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,380
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.63
</TABLE>