<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 June 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 August 11, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $111.3 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 August 12, 1999 was
22,730,206.
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 June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Earnings,
For the Three- and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows,
For the Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 31
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 31
Item 3. DEFAULTS UPON SENIOR SECURITIES 31
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 31
Item 5. OTHER INFORMATION 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 31
SIGNATURES 32
</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>
June 30, 1999 December 31, 1998
---------------- -------------------
ASSETS
Cash and cash equivalents........................................................ $ 12,435 $ 33,876
Investment securities available-for-sale......................................... 92,253 93,486
Loan Receivables:
CMO collateral................................................................ 1,183,306 1,161,220
Finance receivables........................................................... 212,072 311,571
Mortgage loans held-for-investment............................................ 14,666 20,627
Allowance for loan losses..................................................... (3,937) (6,959)
---------------- -------------------
Net loan receivables..................................................... 1,406,107 1,486,459
Due from affiliates.............................................................. 20,347 17,904
Investment in Impac Funding Corporation.......................................... 15,746 13,246
Accrued interest receivable...................................................... 11,568 10,039
Other real estate owned.......................................................... 9,922 8,456
Other assets..................................................................... 2,265 2,038
---------------- -------------------
Total assets................................................................ $ 1,570,643 $ 1,665,504
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings................................................................... $ 1,078,971 $ 1,072,316
Reverse repurchase agreements.................................................... 234,116 323,625
Senior subordinated debentures................................................... 6,609 --
Accrued dividends payable........................................................ 3,515 12,129
Due to affiliates................................................................ 15 2,670
Other liabilities................................................................ 1,639 3,158
---------------- -------------------
Total liabilities........................................................... 1,324,865 1,413,898
---------------- -------------------
Stockholders' Equity:
Preferred stock; $.01 par value; 6,300,000 shares authorized; none issued or
outstanding at June 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 June 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 June 30, 1999 and December 31, 1998, respectively.......... 12 12
Common stock; $.01 par value; 50,000,000 shares authorized; 22,727,045 and
24,557,657 shares issued and outstanding at June 30, 1999 and December
31, 1998, respectively........................................................ 227 246
Additional paid-in capital....................................................... 333,619 342,945
Accumulated other comprehensive loss............................................. (3,703) (1,736)
Notes receivable from common stock sales......................................... (907) (918)
Accumulated deficit:
Cumulative dividends declared................................................. (85,851) (79,176)
Retained earnings (accumulated deficit)....................................... 2,381 (9,767)
---------------- -------------------
Net accumulated deficit.................................................... (83,470) (88,943)
---------------- -------------------
Total stockholders' equity............................................... 245,778 251,606
---------------- -------------------
Total liabilities and stockholders'equity................................ $ 1,570,643 $ 1,665,504
================ ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS
(in thousands, except per share data)
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
INTEREST INCOME:
Mortgage Assets............................................. $ 29,900 $ 42,378 $ 59,586 $ 80,238
Other interest income....................................... 433 728 1,146 1,437
------------- ------------- ------------ -------------
Total interest income....... 30,333 43,106 60,732 81,675
------------- ------------- ------------ -------------
INTEREST EXPENSE:
CMO borrowings.............................................. 16,377 20,658 33,458 36,688
Reverse repurchase agreements............................... 5,363 9,826 10,190 21,870
Senior subordinated debentures.............................. 271 -- 278 --
Other borrowings............................................ 159 1,105 397 1,834
------------- ------------- ------------ -------------
Total interest expense.................................... 22,170 31,589 44,323 60,392
------------- ------------- ------------ -------------
Net interest income......................................... 8,163 11,517 16,409 21,283
Provision for loan losses................................. 1,490 487 2,989 2,391
------------- ------------- ------------ -------------
Net interest income after provision for loan losses......... 6,673 11,030 13,420 18,892
------------- ------------- ------------ -------------
NON-INTEREST INCOME:
Equity in net earnings of Impac Funding Corporation......... 1,409 1,793 2,499 3,949
Equity in net earnings of Impac Commercial Holdings, Inc.... -- 463 -- 841
Servicing fees.............................................. 387 535 854 849
Other income................................................ 223 496 376 1,010
------------- ------------- ------------ -------------
Total non-interest income................................. 2,019 3,287 3,729 6,649
NON-INTEREST EXPENSE:
Write-down on investment securities available-for-sale...... 1,256 1,241 1,678 1,241
Professional services....................................... 559 513 1,370 856
(Gain) loss on sale of other real estate owned.............. 559 201 1,110 (491)
General and administrative and other expense................ 271 559 630 919
Personnel expense........................................... 93 125 212 234
------------- ------------- ------------ -------------
Total non-interest expense................................ 2,738 2,639 5,000 2,759
Total non-interest income......................................
------------- ------------- ------------ -------------
Net earnings................................................ 5,954 11,678 12,149 22,782
Less: Cash dividends on Series B 10.5%
cumulative convertible preferred stock................. (788) -- (1,676) --
------------- ------------- ------------ -------------
Net earnings available to common stockholders............... 5,166 11,678 10,473 22,782
Other comprehensive earnings :
Unrealized losses on securities:
Unrealized holding losses arising during period........... (3,767) (1,856) (1,662) (1,871)
Less reclassification of
realized losses included in earnings 866 -- 305 --
------------- ------------- ------------ -------------
Net unrealized losses arising during period............ (4,633) (1,856) (1,967) (1,871)
------------- ------------- ------------ -------------
Comprehensive earnings...................................... $ 533 $ 9,822 $ 8,506 $ 20,911
============= ============= ============ =============
Net earnings per share--basic................................$ 0.23 $ 0.49 $ 0.44 $ 0.97
============= ============= ============ =============
Net earnings per share--diluted..............................$ 0.21 $ 0.49 $ 0.41 $ 0.97
============= ============= ============ =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<S> <C> <C>
For the Six Months
Ended June 30,
-------------------------------
1999 1998
--------------- --------------
Cash flows from operating activities:
Net earnings.......................................................................... $ 12,149 $ 22,782
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in net earnings of Impac Funding Corporation................................ (2,499) (3,949)
Equity in net earnings of Impac Commercial Holdings, Inc........................... -- (841)
Provision for loan losses.......................................................... 2,989 2,391
Depreciation and amortization...................................................... -- 212
(Gain) loss on sale of other real estate owned..................................... 1,110 (491)
Write-down of investment securities available-for-sale............................. 1,678 1,241
Net change in accrued interest receivable.......................................... (1,529) 2,936
Net change in other assets and liabilities......................................... (6,636) 8,857
--------------- --------------
Net cash provided by operating activities........................................ 7,262 33,138
--------------- --------------
Cash flows from investing activities:
Net change in CMO collateral.......................................................... (30,003) (632,505)
Net change in finance receivables..................................................... 99,212 84,606
Net change in mortgage loans held-for-investment...................................... (358) 204,017
Proceeds from sale of other real estate owned, net.................................... 5,936 5,460
Purchase of investment securities available-for-sale.................................. (9,084) (47,661)
Sale of investment securities available for sale...................................... 3,803 5,303
Net principal reductions on investment securities available-for-sale.................. 2,869 4,795
Dividends from Impac Commercial Holdings, Inc......................................... -- 557
Purchase of premises and equipment.................................................... -- (217)
--------------- --------------
Net cash provided by (used in) investing activities.............................. 72,375 (375,645)
--------------- --------------
Cash flows from financing activities:
Net change in reverse repurchase agreements........................................... (89,509) (254,497)
Proceeds from CMO borrowings.......................................................... 298,076 768,012
Repayments of CMO borrowings.......................................................... (291,421) (182,220)
Dividends paid........................................................................ (15,289) (21,702)
Proceeds from exercise of stock options............................................... -- 109
Net proceeds from stock issued through structured equity shelf........................ -- 106
Repurchase of common stock............................................................ (3,874) --
Proceeds from dividend reinvestment and stock purchase plan.......................... 928 23,506
Advances to purchase common stock, net of principal reductions........................ 11 357
--------------- --------------
Net cash provided by (used in) financing activities.............................. (101,078) 333,671
--------------- --------------
Net change in cash and cash equivalents................................................. (21,441) (8,836)
Cash and cash equivalents at beginning of period........................................ 33,876 16,214
=============== ==============
Cash and cash equivalents at end of period.............................................. $ 12,435 $ 7,378
=============== ==============
Supplementary information:
Interest paid......................................................................... $ 45,820 $ 60,231
Non-cash transactions:
Exchange of common stock for 11% senior subordinated debentures....................... $ 6,448 $ --
Dividends declared and unpaid......................................................... 3,515 11,789
Increase in accumulated other comprehensive loss...................................... 1,967 1,871
Loans transferred to other real estate owned.......................................... 8,512 5,258
</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 six-month period
ended June 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 six months ended June 30, 1999 and 1998 and
include the financial results of IMH's equity interest in net earnings of
IFC, IMH's equity interest in net earnings of Impac Commercial Holdings,
Inc. (ICH) and results of operations of IMH, IMH Assets, IWLG and Dove as
stand-alone entities. Equity interest in net earnings of Impac Commercial
Holdings, Inc. and financial results of Dove are included in three- and
six months ended June 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 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 earnings of Impac
Commercial Holdings, Inc."
2. Organization
The Company is a mortgage loan finance company 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 real estate
investment trust (REIT) for federal income tax purposes, which generally
allows it to pass through qualified income to stockholders without federal
income tax at the corporate level, 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 six months ended June 30, 1998 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 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 common equivalent shares outstanding for the period. The following
tables represent the computation of basic and diluted earnings per share
for the three- and six months ended June 30, 1999 and 1998 (in thousands,
except per share data):
<TABLE>
<S> <C> <C>
For the Three Months
Ended June 30,
-----------------------------
1999 1998
-------------- --------------
Numerator:
Numerator for basic earnings per share--
Net earnings $ 5,954 $ 11,678
Less: Dividends paid to preferred stockholders (788) --
============== ==============
Net earnings available to common stockholders $ 5,166 $ 11,678
============== ==============
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during the period 22,726 23,784
Impact of assumed conversion of series B cumulative convertible preferred stock 6,061 --
Net effect of dilutive stock options 27 178
-------------- --------------
Weighted average common and common equivalent shares 28,814 23,962
============== ==============
Net earnings per share--basic $ 0.23 $ 0.49
============== ==============
Net earnings per share--diluted $ 0.21 $ 0.49
============== ==============
</TABLE>
<TABLE>
<S> <C> <C>
For the Six Months
Ended June 30,
-----------------------------
1999 1998
-------------- --------------
Numerator:
Numerator for basic earnings per share--
Net earnings $ 12,149 $ 22,782
Less: Dividends paid to preferred stockholders (1,676) --
============== ==============
Net earnings available to common stockholders $ 10,473 $ 22,782
============== ==============
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during the period 23,539 23,372
Impact of assumed conversion of series B cumulative convertible preferred stock 6,061 --
Net effect of dilutive stock options 27 187
-------------- --------------
Weighted average common and common equivalent shares 29,627 23,559
============== ==============
Net earnings per share--basic $ 0.44 $ 0.97
============== ==============
Net earnings per share--diluted $ 0.41 $ 0.97
============== ==============
</TABLE>
5. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance
receivables. At June 30, 1999 and December 31, 1998, Mortgage Assets
consisted of the following (in thousands):
<PAGE>
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
---------------- ----------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 90,494 $ 89,825
Subordinated securities collateralized by other loans 5,462 5,397
Net unrealized losses (3,703) (1,736)
---------------- ----------------
Carrying value 92,253 93,486
---------------- ----------------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance 1,133,206 1,109,577
Unamortized net premiums on loans 36,031 39,369
Securitization expenses 14,069 12,274
---------------- ----------------
Carrying value 1,183,306 1,161,220
Finance receivables--
Due from affiliates 149,306 198,104
Due from other mortgage banking companies 62,766 113,467
---------------- ----------------
Carrying value 212,072 311,571
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance 18,852 20,145
Unamortized net premiums (discounts) on loans (4,186) 482
---------------- ----------------
Carrying value 14,666 20,627
Carrying value of Gross Loan Receivables 1,410,044 1,493,418
Allowance for loan losses (3,937) (6,959)
---------------- ----------------
Carrying value of Net Loan Receivables 1,406,107 1,486,459
---------------- ----------------
Total carrying value of Mortgage Assets $ 1,498,360 $ 1,579,945
================ ================
</TABLE>
6. Segment Reporting
The Company's basis for segment reporting is to divide the entities
into (a) segments that derive income from long-term assets, (b) segments
that derive income by providing financing, and (c) segments that derive
income from the purchase and sale 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 table separates the Company's reporting segments,
as of, and for the six months ended June 30, 1999 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------ ---------- ---------------- ------------
Balance Sheet Items:
CMO collateral $ 1,183,306 $ -- $ -- $ -- $ 1,183,306
Total assets 1,418,232 258,596 15 (106,200) 1,570,643
Total stockholders' equity 290,103 43,972 -- (88,297) 245,778
Statement Of Operations Items:
Interest income $ 49,206 $ 15,038 $ 21 $ (3,533) $ 60,732
Interest expense 38,307 9,544 5 (3,533) 44,323
Equity in IFC (a) -- -- -- 2,499 2,499
Net earnings 3,165 5,227 41 3,716 12,149
</TABLE>
The following table separates the Company's reporting segments for the
three months ended June 30, 1999 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------ ---------- ---------------- ------------
Statement Of Operations Items:
Interest income $ 24,327 $ 8,695 $ 4 $ (2,693) $ 30,333
Interest expense 19,815 5,048 -- (2,693) 22,170
Equity in IFC (a) -- -- -- 1,409 1,409
Net earnings 1,059 3,486 (1) 1,410 5,954
</TABLE>
The following table separates the Company's reporting segments,
as of, and for the six months ended June 30, 1998 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------ ---------- ---------------- ------------
Balance Sheet Items:
CMO collateral $ 1,422,920 $ -- $ -- $ -- $ 1,422,920
Total assets 1,725,846 496,825 15,085 (133,015) 2,104,741
Total stockholders' equity 264,833 31,717 7,821 (53,472) 250,899
Statement Of Operations Items:
Interest income $ 62,533 $ 30,361 $ 207 $ (11,426) $ 81,675
Interest expense 49,479 22,095 244 (11,426) 60,392
Depreciation and amortization 11 -- 201 -- 212
Equity in IFC (a) -- -- -- 3,949 3,949
Net earnings 10,018 8,029 (57) 4,792 22,782
</TABLE>
The following table separates the Company's reporting segments for the
three months ended June 30, 1998 (in thousands):
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------ ---------- ---------------- ------------
Statement Of Operations Items:
Interest income $ 33,599 $ 13,638 $ 154 $ (4,285) $ 43,106
Interest expense 25,853 9,838 183 (4,285) 31,589
Depreciation and amortization 6 -- 152 -- 158
Equity in IFC (a) -- -- -- 1,793 1,793
Net earnings 5,821 3,644 (45) 2,258 11,678
</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 intercompany 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>
June 30, 1999 December 31, 1998
----------------- ------------------
ASSETS
Cash $ 17,216 $ 422
Investment securities available-for-sale 2,854 5,965
Investment securities available-for-trading -- 5,300
Mortgage loans held-for-sale 150,381 252,568
Mortgage servicing rights 13,056 14,062
Premises and equipment, net 2,386 1,978
Due from affiliates 750 9,152
Accrued interest receivable 582 1,896
Other assets 11,280 22,529
----------------- ------------------
Total assets $ 198,505 $ 313,872
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 145,168 $ 192,900
Other borrowings 233 67,058
Due to affiliates 20,320 24,382
Deferred revenue 10,881 10,605
Other liabilities 5,287 6,064
----------------- ------------------
Total liabilities 181,889 301,009
----------------- ------------------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Accumulated deficit (2,328) (4,852)
Accumulated other comprehensive earnings (loss) 709 (520)
----------------- ------------------
Total shareholders' equity 16,616 12,863
================= ==================
Total liabilities and shareholders' equity $ 198,505 $ 313,872
================= ==================
<PAGE>
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------ ---------------
Interest income $ 4,662 $ 9,857 $ 9,495 $ 24,656
Interest expense 4,299 8,524 9,045 19,307
-------------- ------------- ------------ ---------------
Net interest income 363 1,333 450 5,349
-------------- ------------- ------------ ---------------
Gain on sale of loans 9,483 5,153 14,490 8,872
Loan servicing income 1,553 1,705 3,694 2,706
Other non-interest income 145 115 484 311
-------------- ------------- ------------ ---------------
Total non-interest income 11,181 6,973 18,668 11,889
Write-down on securities available-for-sale 3,666 -- 4,225 --
General and administrative and other expense 2,249 1,242 3,445 2,285
Personnel expense 1,561 2,221 3,351 4,781
Amortization of mortgage servicing rights 1,137 1,533 2,564 2,925
Loss on sale of mortgage servicing rights 309 -- 876 --
Provision for repurchases 159 170 179 340
-------------- ------------- ------------ ---------------
Total non-interest expense 9,081 5,166 14,640 10,331
-------------- ------------- ------------ ---------------
Net earnings before income taxes 2,463 3,140 4,478 6,907
Income taxes 1,040 1,325 1,954 2,915
-------------- ------------- ------------ ---------------
Net earnings $ 1,423 $ 1,815 $ 2,524 $ 3,992
============== ============= ============ ===============
</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 June 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 of ICH. In addition, FIC Management Inc.
(FIC), an affiliate of Fortress, entered into a definitive agreement with
RAI Advisors, LLC (RAI) for the assignment of RAI's rights and interests
in the Management Agreement with ICH. In connection with these
transactions, the submanagement agreement among RAI, IMH and IFC was
terminated and a new submanagement agreement was entered into among FIC,
IMH and IFC and the right of first refusal agreement among RAI, ICH, ICCC,
IMH and IFC was terminated. Under the new submanagement agreement, IMH and
IFC provide various services including accounting, data processing and
secondary marketing to ICH, as Fortress deems necessary, for an annual fee
of $250,000.
9. Stockholders' Equity
During the six months ended June 30, 1999, the Company raised capital
of $928,000 from the sale of 212,995 shares of common stock issued through
its Dividend Reinvestment and Stock Purchase Plan (DRSPP).
During the six months ended June 30, 1999, the Company repurchased
684,100 shares of common stock for $3.9 million.
<PAGE>
During the six months ended June 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 June 22, 1999, the Company declared a second quarter dividend of
$788,000 to series B preferred stockholders. This dividend was paid on
July 27, 1999.
On June 22, 1999, the Company declared a second quarter dividend 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 dividend 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 dividend of
$888,000 to series B preferred stockholders. This dividend was paid on
April 27, 1999.
<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
success of the Company's new divisions, any delays with respect to the
acquisition of the thrift and loan, increased costs and delays 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, 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.
SIGNIFICANT TRANSACTIONS
Exchange Offering
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 six 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 Industrial Thrift and Loan ("Bank"). As
such, the Company has submitted its completed application to federal and
state regulatory agencies, the Federal Deposit Insurance Corporation
("FDIC") and the Department of Financial Institutions ("DFI") for their
approval, including the proposed relocation of the Bank's headquarters to
the Company's location in Newport Beach, California. During the second
quarter, the Company underwent an initial field review by the regulators
in connection with the application. The Company is not aware of any
outstanding issues that would impede its ability to obtain regulatory
approval by September 1, 1999. The acquisition of the Bank will facilitate
investment in high quality residential mortgage loans and provide access
to a relatively low cost of funds from a stable and diverse deposit base,
along with financing from the Federal Home Loan Bank. The Company is
planning to raise sufficient cash to reserve $25.0 million for the initial
capitalization of the Bank.
Advance to Impac Funding Corporation
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.
<PAGE>
BUSINESS OPERATIONS
Long-Term Investment Operations: During the first six 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 $794.0
million of mortgages acquired during the same period in 1998. Mortgages
purchased by the Long-Term Investment Operations during the first six
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 six 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 June 30, 1999, the Long-Term
Investment Operations portfolio of mortgage loans consisted of $1.2
billion of mortgage loans held in trust as collateral for CMOs and $14.7
million of mortgage loans held-for-investment, of which approximately 56%
were FRMs and 44% were ARMs. The weighted average coupon of the Long-Term
Investment Operations portfolio of mortgage loans was 9.35% at June 30,
1999 with a weighted average margin of 4.37%. The portfolio of mortgage
loans included 82% of "A" credit quality, non-conforming mortgage loans
and 18% of "B" and "C" credit quality, non-conforming mortgage loans, as
defined by the Company. The Long-Term Investment Operations also sold $8.1
million in principal balance of mortgages to IFC during the first six
months of 1999 as compared to $151.3 million during the same period in
1998. During the first six months of 1999, the Long-Term Investment
Operations acquired $9.1 million of securities from IFC as compared to
$47.7 million during the same period in 1998. During 1998, these
securities were generated primarily from the periodic issuance of real
estate mortgage investment conduits ("REMICs"). As of June 30, 1999, the
Long-Term Investment Operations had $92.3 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 51% to $631.6 million during the first six
months of 1999 as compared to $1.3 billion of mortgages acquired during
the same period in 1998. IFC sold whole loans to third party investors
totaling $439.8 million, which contributed to the gain on sale of loans of
$14.5 million, during the first six months of 1999. This compares to
securitizations and whole loan sales to third party investors of $784.3
million, resulting in gain on sale of loans of $8.9 million, during the
same period in 1998. IFC did not issue any REMICs during the first six
months of 1999. IFC had deferred income of $10.9 million at June 30, 1999
as compared to $10.6 million at December 31, 1998. The increase in
deferred income relates to the sale of $287.6 million in principal balance
of mortgages to IMH during the first six months of 1999, which are
deferred and amortized or accreted over the estimated life of the loans.
IFC's servicing portfolio decreased 29% to $2.4 billion at June 30, 1999
as compared to $3.4 billion at June 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 6.18% at
June 30, 1999 as compared to 5.66%, 4.82%, 5.21%, and 4.29% for the last
four quarter-end periods.
Warehouse Lending Operations: At June 30, 1999, the Warehouse Lending
Operations, conducted by IWLG, had $1.4 billion of warehouse lines of
credit available to 40 borrowers, of which $230.0 million was outstanding
thereunder, including $145.2 million outstanding to IFC, $18.2 million
outstanding to the Long-Term Investment Operations, and $3.8 million
outstanding to Walsh Securities, Inc. ("WSI"). James Walsh, Executive Vice
President of WSI, is also a Director of IMH.
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS , INC.
For the Three Months Ended June 30, 1999 as compared to the Three Months
Ended June 30, 1998
Net Earnings
The Company recorded net earnings of $6.0 million, or $0.21 per diluted
common share, during the second quarter of 1999 as compared to net
earnings of $11.7 million, or $0.49 per diluted common share, during the
second quarter of 1998. The decrease in net earnings was primarily due to
the following: (1) a decrease of $3.4 million in net interest income as a
result of the Company deleveraging its balance sheet and increasing
liquidity by selling Mortgage Assets during the fourth quarter of 1998,
(2) a decrease in non-interest income of $1.3 million primarily due to
decreases in equity in net earnings of Impac Funding Corporation and Impac
Commercial Holdings, Inc. ("ICH"), and (3) an increase of $1.0 million in
provision for loan losses.
<PAGE>
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 decrease leverage and increase
liquidity to meet margin calls, the Company sold Mortgage Assets at
significant losses during the fourth quarter of 1998. As a result of the
sale of Mortgage Assets, total assets decreased 24% to $1.6 billion at
June 30, 1999 as compared to $2.1 billion at June 30, 1998 and total
average Mortgage Assets decreased 20% to $1.6 billion during the second
quarter of 1999 as compared to $2.0 billion during the second quarter of
1998. In addition, the Company's ratio of debt to equity decreased to
5.37:1 at June 30, 1999 as compared to 5.55:1 at December 31, 1998 and
7.29:1 at June 30, 1998. The combination of lower average Mortgage Assets
and decreased leverage was primarily responsible for the reduction of net
interest income during the second quarter of 1999 as compared to the
second quarter of 1998. However, as the mortgage sector stabilized during
the first six 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 second quarter of 1999.
The Company was also successful in increasing book value per common
share which increased to $9.49 per common share (calculated after
reduction of $30.0 million liquidation value of series B cumulative
convertible preferred stock ("Preferred Stock")) at June 30, 1999 as
compared to $9.02 per common share at December 31, 1998. The Company
expects that the retention of earnings in excess of dividend distributions
for the remainder of 1999 will continue to improve the Company's book
value per common share. The Company's current common stock dividend policy
is to base quarterly dividends per common share 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
Company's Board of Directors previously declared a second quarter dividend
of $0.12 per common share, paid on July 15, 1999 to stockholders of record
on June 30, 1999, a 20% increase over the dividend of $0.10 per common
share for the first quarter of 1999. The Company also declared a second
quarter Preferred Stock dividend of $788,000.
Net Interest Income
Net interest income decreased 29% to $8.2 million during the second
quarter of 1999 as compared to $11.5 million during the second quarter of
1998 primarily due to a decrease in average Mortgage Assets. 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. Average Mortgage Assets decreased 20% to $1.6
billion during the second quarter of 1999 as compared to $2.0 billion
during the second quarter 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 2.02% during
the second quarter of 1999 as compared to 2.36% during the second 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 0.50% during the first quarter of 1999 as compared to 1.28%
during the first quarter of 1998.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
second 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):
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months For the Three Months
Ended June 30, 1999 Ended June 30, 1998
------------------------------------- --------------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
------------ ---------- ----------- ----------- ------------- ------------
MORTGAGE ASSETS
Investment securities available-for-sale:
Sub-securities collateralized by mortgages $ 91,275 $ 3,213 14.08 % $ 91,269 $ 2,938 12.88 %
Sub-securities collateralized by other loans 10,779 213 7.90 5,369 149 11.10
------------- ----------- ---------- -------------
Total investment securities 102,054 3,426 13.43 96,638 3,087 12.78
available-for-sale ------------- ----------- ---------- -------------
Loan receivables:
CMO collateral 1,159,345 19,489 6.72 1,309,736 26,441 8.08
Mortgage loans held-for-investment 58,088 1,104 7.60 178,036 3,265 7.34
Finance receivables:
Affiliated 223,773 4,340 7.76 343,860 7,328 8.52
Non-affiliated 68,717 1,541 8.97 91,927 2,257 9.82
------------- ----------- ---------- -------------
Total finance receivables 292,490 5,881 8.04 435,787 9,585 8.80
------------- ----------- ---------- -------------
Total Loan Receivables 1,509,923 26,474 7.01 1,923,559 39,291 8.17
------------- ----------- ----------- -------------
Total Mortgage Assets $ 1,611,977 $ 29,900 7.42 % $ 2,020,197 $ 42,378 8.39 %
============= =========== =========== =============
BORROWINGS
CMO borrowings $ 1,053,205 $ 16,377 6.22 % $ 1,214,975 $ 20,658 6.80 %
Reverse repurchase agreements - mortgages 328,034 5,032 6.14 571,416 9,449 6.61
Reverse repurchase agreements - securities 20,727 331 6.39 23,551 377 6.40
------------ ------------ ----------- -------------
Total borrowings on
Mortgage Assets $ 1,401,966 $ 21,740 6.20 % $ 1,809,942 $ 30,484 6.74 %
============ ============ =========== =============
Net Interest Spread 1.22 % 1.65 %
Net Interest Margin 2.02 % 2.36 %
</TABLE>
Interest Income on Mortgage Assets: Interest income on CMO collateral
decreased 26% to $19.5 million during the second quarter of 1999 as
compared to $26.4 million during the second quarter of 1998 as average CMO
collateral decreased 8% to $1.2 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
second quarter of 1998, as compared to CMOs totaling $941.7 million, since
the end of the second quarter of 1997. In addition, total principal
prepayments on CMOs since the end of the second quarter of 1998 were
$595.7 million. Interest income on CMO collateral also decreased as the
weighted average yield decreased to 6.72% during the second quarter of
1999 as compared to 8.08% during the second quarter of 1998. The weighted
average yield on CMO collateral decreased due to a decrease in mortgage
interest rates, generally, and the London Interbank Offered Rate
("LIBOR"), specifically. During the second quarter of 1999, six-month
LIBOR, which is the primary interest rate index of adjustable-rate CMO
collateral, decreased to an average of 4.84% as compared to an average of
5.53% during the second quarter of 1998. As a result of the decrease in
mortgage interest rates and LIBOR, principal prepayment rates increased
along with a corresponding increase in amortization of loan premiums.
During the second quarter of 1999, the prepayment rate on CMO collateral
was 41% as compared to 29% during the second quarter of 1998. However, IFC
continues to increase control over flow acquisitions through agreements
with certain correspondents providing first right of refusal on their loan
production. Additionally, IFC estimates that approximately 40% of new loan
production as of the end of the second quarter of 1999 included prepayment
penalties as compared to less than 5% at the same time last 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 mortgage loans held-for-investment decreased 67% to
$1.1 million during the second quarter of 1999 as compared to $3.3 million
during the second quarter of 1998 as average mortgage loans
held-for-investment decreased 67% to $58.1 million as compared to $178.0
million, respectively. Average mortgage loans held-for-investment
decreased due to decreased loan acquisitions by IMH, which were $81.0
million during the second quarter of 1999 as compared to $116.2 million
during the second quarter of 1998. The weighted average yield on mortgage
loans held-for-investment increased to 7.60% during the second quarter of
1999 as compared to 7.34% during the second quarter of 1998.
<PAGE>
Interest income on finance receivables decreased 39% to $5.9 million
during the second quarter of 1999 as compared to $9.6 million during the
second quarter of 1998 as average finance receivables decreased 33% to
$292.5 million as compared to $435.8 million, respectively. The decrease
in interest income on finance receivables was primarily the result of a
35% decrease in average finance receivables to affiliated companies,
primarily IFC. Average Finance receivable to affiliated companies
decreased to $223.8 million during the second quarter of 1999 as compared
to $343.9 million during the second quarter of 1998 as IFC's mortgage loan
acquisitions decreased to $379.9 million as compared to $665.4 million,
respectively. As such, interest income on finance receivables to
affiliates decreased 41% to $4.3 million during the second quarter of 1999
as compared to $7.3 million during the second quarter of 1998. The
weighted average yield on affiliated finance receivables decreased to
7.76% during the
second quarter of 1999 as compared to 8.52% during the second quarter of
1998. Interest income on finance receivables to non-affiliated mortgage
banking companies decreased 35% to $1.5 million during the second quarter
of 1999 as compared to $2.3 million during the second quarter of 1998 as
average finance receivables outstanding to non-affiliated mortgage banking
companies decreased 25% to $68.7 million as compared to $91.9 million,
respectively. The weighted average yield on non-affiliated finance
receivables decreased to 8.97% during the second quarter of 1999 as
compared to 9.82% during the second quarter of 1998. The overall weighted
average yield on finance receivables decreased to 8.04% during the second
quarter of 1999 as compared to 8.80% during the second quarter of 1998.
Yields on finance receivables decreased during the second quarter of 1999
as compared to the second quarter of 1998 due to a decrease in the average
prime rate ("Prime"), which is used as the index to determine interest
rates on finance receivables, to 7.75% from 8.50%, respectively.
Interest income on investment securities available-for-sale increased
10% to $3.4 million during the second quarter of 1999 as compared to $3.1
million during the second quarter of 1998 as average investment securities
available-for-sale, net of securities valuation allowance, increased 6% to
$102.1 million as compared to $96.6 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 $9.1 million during the second quarter of 1999. The weighted average
yield on investment securities available-for-sale increased to 13.43%
during the second quarter of 1999 as compared to 12.78% during the second
quarter of 1998.
Interest expense on borrowings: Interest expense on CMO borrowings
decreased 21% to $16.4 million during the second quarter of 1999 as
compared to $20.7 million during the second quarter of 1998 as average
borrowings on CMO collateral decreased 8% to $1.1 billion as compared to
$1.2 billion, respectively. Average CMO borrowings decreased as the
Long-Term Investment Operations issued CMOs totaling $298.1 million, since
the end of the second quarter of 1998, as compared to CMOs totaling $941.7
million during the same period in 1998. In addition, total principal
prepayments on CMOs since the end of the second quarter of 1998 were
$595.7 million. The weighted average yield of CMO borrowings decreased to
6.22% during the second quarter of 1999 as compared to 6.80% during the
second 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.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables decreased 47% to
$5.0 million during the second quarter of 1999 as compared to $9.4 million
during the second quarter of 1998 as average reverse repurchase agreements
decreased 43% to $328.0 million as compared to $571.4 million,
respectively. 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 second quarter of 1999 as compared to the second quarter of
1998. The weighted average yield on reverse repurchase agreements
decreased to 6.14% during the second quarter of 1999 as compared 6.61%
during the second quarter of 1998.
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 12% to $331,000 during the second quarter of 1999 as
compared to $377,000 during the second quarter of 1998. The average
balance on these reverse repurchase agreements decreased 12% to $20.7
million during the second quarter of 1999 as compared to $23.6 million
during the second quarter of 1998 primarily due to improved liquidity. The
weighted average yield of these reverse repurchase agreements decreased to
6.39% during the second quarter of 1999 as compared 6.40% during the
second quarter of 1998.
<PAGE>
Non-Interest Income
Non-interest income decreased 43% to $2.0 million during the second
quarter of 1999 as compared to $3.3 million during the second quarter of
1998. The decrease in non-interest income was primarily due to decreases
in equity in net earnings of IFC and ICH.
Equity in Net Earnings of IFC
During the second quarter of 1999, equity in net earnings of IFC
decreased to $1.4 million as compared to $1.8 million during the second
quarter of 1998 due to a decrease in IFC's net earnings. IFC's net
earnings decreased primarily due to a decrease of $1.0 million in net
interest income and an increase of $1.0 million in general and
administrative and other expense. These reductions to net earnings were
partially offset by a decrease of $660,000 in personnel expense.
IFC's net interest income decreased as average mortgage loans
held-for-sale decreased 47% to $211.2 million during the second quarter of
1999 as compared to $401.7 million during the second quarter of 1998.
Average mortgage loans held-for-sale decreased as mortgage loan
acquisitions decreased 40% to $379.9 million during the second quarter of
1999 as compared to mortgage loan acquisitions of $665.4 million during
the second quarter of 1998. Mortgage loan acquisitions decreased during
the second quarter of 1999 as compared to the second 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 six months of 1999, IFC continued to rebuild its mortgage
loan acquisitions to previous levels by offering its sellers competitive
and flexible mortgage products and the introduction of two new divisions.
The new divisions are focused on getting closer to the borrower through a
retail based portfolio retention program, along with interacting directly
with the mortgage broker community.
IFC's net earnings during the second quarter of 1999 were adversely
affected by an increase in general and administrative and other expense to
$2.2 million as compared to $1.2 million during the second quarter of
1998. This increase was primarily related to non-reimbursable expenses
from the retail and wholesale lending divisions that began operations in
early 1999.
IFC's gain on sale of loans increased to $9.5 million during the second
quarter of 1999 as compared to $5.2 million during the second quarter of
1998. However, the increase in gain on sale of loans was due to a
reduction of mark-to-market allowances of $4.1 million. The reduction of
mark-to-market allowances during the second quarter of 1999 was partially
offset by write-down on investment securities of $3.7 million. Excluding
the reduction of mark-to-market allowances, IFC was profitable on the sale
of its mortgage loans during the second quarter of 1999 as compared to the
second quarter of 1998 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 second quarter of 1999, IFC
sold mortgages totaling $276.8 million to third party investors as
compared to loan sales of $185.9 million during the second quarter of
1998. Of the third party loan sales during the second quarter of 1999, IFC
sold $45.7 million of loans on a servicing released basis as compared to
no loans sold on a servicing released basis during the second quarter of
1998. The sale of these loans on a servicing released basis reduced IFC's
exposure to further prepayment risk. IFC also sold $88.8 million in
principal balance of mortgages to IMH during the second quarter of 1999 as
compared to $112.5 million during the second quarter of 1998. The sale of
loans to IMH during the second quarter of 1999 increased IFC's deferred
income to $10.9 million at June 30, 1999 as compared to $10.6 million at
December 31, 1998.
IFC's net earnings were positively affected by a decrease in personnel
expense to $1.6 million during the second quarter of 1999 as compared to
$2.2 million during the second quarter of 1998. Personnel expense
decreased primarily due to a decrease in bonus and incentive compensation
paid.
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.
<PAGE>
Equity in Net Earnings of ICH
During the second quarter of 1999, equity in net earnings of ICH
decreased to none as compared to $463,000 during the first six months of
1998. Equity in net earnings of ICH decreased during the second quarter of
1999 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.
Provision for Loan Losses
The Company recorded loan loss provisions of $1.5 million during the
second quarter of 1999 as compared to $487,000 during the second 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.
Credit Exposures
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 June 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.
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS , INC.
For the Six Months Ended June 30, 1999 as compared to the Six Months Ended
June 30, 1998
Net Earnings
The Company recorded net earnings of $12.1 million, or $0.41 per
diluted common share, during the first six months of 1999 as compared to
net earnings of $22.8 million, or $0.97 per diluted common share, during
the first six months of 1998. The decrease in net earnings was primarily
due to the following: (1) a decrease of $4.9 million in net interest
income as a result of the Company deleveraging its balance sheet and
increasing liquidity by selling Mortgage Assets during the fourth quarter
of 1998, (2) a decrease in non-interest income of $2.9 million primarily
due to decreases in equity in net earnings of IFC and ICH, and (3) an
increase of $2.2 million in non-interest expense primarily due to an
increase in loss on sale of other real estate owned ("REO").
Due to the aforementioned sale of Mortgage Assets during the fourth
quarter of 1998, net earnings during the first six months of 1999
decreased as compared to the first six months of 1998 as the Company
deleveraged its balance sheet and increased liquidity. As a result of the
sale of Mortgage Assets, total assets decreased 24% to $1.6 billion at
June 30, 1999 as compared to $2.1 billion at June 30, 1998 and total
average Mortgage Assets decreased 20% to $1.6 billion during the first six
months of 1999 as compared to $2.0 billion during the first six months of
1998. In addition, the Company's ratio of debt to equity decreased to
5.37:1 at June 30, 1999 as compared to 5.55:1 at December 31, 1998 and
7.29:1 at June 30, 1998. The combination of decreased average Mortgage
Assets and decreased leverage was primarily responsible for the reduction
of net interest income during the first six months of 1999 as compared to
the first six months of 1998. However, as the mortgage sector stabilized
during the first six 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 six months of 1999.
<PAGE>
As stated earlier, the Company was successful in increasing the
Company's book value per common share at June 30, 1999 as compared to
December 31, 1998. The Company expects that the retention of earnings in
excess of dividend distributions for the remainder of 1999 will continue
to improve the Company's book value per common share. The Company's
current common stock dividend policy is to 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 for the first six
months of 1999 were as follows: (1) the amortization of the termination of
the management agreement with Imperial Credit Advisors, Inc. in December
of 1997, which resulted in a deduction of approximately $5.4 million, (2)
the exclusion of $2.5 million of equity in net earnings of IFC, (3) actual
loan charge-offs which resulted in a deduction of approximately $4.4
million, and (4) the deduction of Preferred Stock dividends of $1.7
million. The Company's estimate of taxable loss for the first six months
of 1999 was approximately $(172,000). For the first six months of 1999,
the Company declared common stock dividends of $0.22 per common share, all
in excess of estimated taxable earnings, and Preferred Stock dividends of
$1.7 million.
Net Interest Income
Net interest income decreased 23% to $16.4 million during the first six
months of 1999 as compared to $21.3 million during the first six months of
1998 primarily due to a decrease in average Mortgage Assets. Average
Mortgage Assets decreased 20% to $1.6 billion during the first six months
of 1999 as compared to $2.0 billion during the first six 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 2.00% during the first six months of 1999 as compared
to 2.22% during the first six 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 0.48% during the first six
months of 1999 as compared to 0.79% during the first six months of 1998.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
six months ended June 30, 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 Six Months For the Six Months
Ended June 30, 1999 Ended June 30, 1998
------------------------------------- ---------------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
----------- ------------ ------------- ----------- ------------- -------------
MORTGAGE ASSETS
Investment securities available-for-sale:
Sub-securities collateralized by mortgages $ 90,392 $ 6,315 13.97 % $ 78,955 $ 4,752 12.04 %
Sub-securities collateralized by other loans 9,352 436 9.32 5,344 380 14.22
----------- ----------- ------------ ------------
Total investment securities 99,744 6,751 13.54 84,299 5,132 12.18
available-for-sale ----------- ----------- ------------ ------------
Loan receivables:
CMO collateral 1,168,051 39,497 6.76 1,180,143 44,190 7.49
Mortgage loans held-for-investment 55,745 1,906 6.84 252,762 11,717 9.27
Finance receivables:
Affiliated 204,296 8,323 8.15 361,701 15,480 8.56
Non-affiliated 69,103 3,109 9.00 77,905 3,719 9.55
----------- ----------- ------------ ------------
Total finance receivables 273,399 11,432 8.36 439,606 19,199 8.73
---------- ----------- ------------ ------------
Total Loan Receivables 1,497,195 52,835 7.06 1,872,511 75,106 8.02
---------- ----------- ------------ ------------
Total Mortgage Assets $ 1,596,939 $ 59,586 7.46 % $ 1,956,810 $ 80,238 8.20 %
=========== =========== ============ ============
BORROWINGS
CMO borrowings $ 1,065,930 $ 33,458 6.28 % $ 1,095,206 $ 36,688 6.70 %
Reverse repurchase agreements - mortgages 305,100 9,479 6.21 643,757 21,260 6.61
Reverse repurchase agreements - securities 21,853 711 6.51 19,352 610 6.30
----------- ----------- ------------ ------------
Total borrowings on
Mortgage Assets $ 1,392,883 $ 43,648 6.27 % $ 1,758,315 $ 58,558 6.66 %
=========== =========== ============ ============
Net Interest Spread 1.19 % 1.54 %
Net Interest Margin 2.00 % 2.22 %
<PAGE>
</TABLE>
Interest Income on Mortgage Assets: Interest income on CMO collateral
decreased 11% to $39.5 million during the first six months of 1999 as
compared to $44.2 million during the first six months of 1998 as the
weighted average yield decreased to 6.76% as compared to 7.49%,
respectively. The weighted average yield on CMO collateral decreased due
to a decrease in mortgage interest rates, generally, and the London
Interbank Offered Rate ("LIBOR"), specifically. During the first six
months of 1999, six-month LIBOR decreased to an average of 4.83% as
compared to an average of 5.52% during the second quarter of 1998. As a
result of the decrease in mortgage interest rates and LIBOR, principal
prepayment rates increased along with a corresponding increase in
amortization of loan premiums. During the first six months of 1999, the
prepayment rate on CMO collateral was 39% as compared to 28% during the
first six months of 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.
Average CMO collateral remained relatively unchanged at $1.17 billion
during the first six months of 1999 as compared to $1.18 during the first
six months of 1998.
Interest income on mortgage loans held-for-investment decreased 84% to
$1.9 million during the first six months of 1999 as compared to $11.7
million during the first six months of 1998 as average mortgage loans
held-for-investment decreased 78% to $55.7 million as compared to $252.8
million, respectively. Average mortgage loans held-for-investment
decreased due to decreased loan acquisitions by IMH, which were $283.0
million during the first six months of 1999 as compared to $794.0 million
during the first six months of 1998. The weighted average yield on
mortgage loans held-for-investment decreased to 6.84% during the first six
months of 1999 as compared to 9.27% during the first six 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.
Interest income on finance receivables decreased 41% to $11.4 million
during the first six months of 1999 as compared to $19.2 million during
the first six months of 1998 as average finance receivables decreased 38%
to $273.4 million as compared to $439.6 million, respectively. The
decrease in interest income on finance receivables was primarily the
result of a 44% decrease in average finance receivables to affiliated
companies, primarily IFC. Average finance receivables to affiliated
companies decreased to $204.3 million during the first six months of 1999
as compared to $361.7 million during the first six months of 1998 as IFC's
mortgage loan acquisitions decreased to $631.6 million as compared to $1.3
billion, respectively. As such, interest income on finance receivables to
affiliates decreased 46% to $8.3 million during the first six months of
1999 as compared to $15.5 million during the first six months of 1998. The
weighted average yield on affiliated finance receivables decreased to
8.15% during the first six months of 1999 as compared to 8.56% during the
first six months of 1998. Interest income on finance receivables to
non-affiliated mortgage banking companies decreased 16% to $3.1 million
during the first six months of 1999 as compared to $3.7 million during the
first six months of 1998 as average finance receivables outstanding to
non-affiliated mortgage banking companies decreased 11% to $69.1 million
as compared to $77.9 million, respectively. The weighted average yield on
non-affiliated finance receivables decreased to 9.00% during the first six
months of 1999 as compared to 9.55% during the first six months of 1998.
The overall weighted average yield on finance receivables decreased to
8.36% during the first six months of 1999 as compared to 8.73% during the
first six months of 1998. Yields on finance receivables decreased during
the first six months of 1999 as compared to the first six months of 1998
due to a decrease in average Prime, which is used as the index to
determine interest rates on finance receivables, to 7.75% from 8.50%,
respectively.
Interest income on investment securities available-for-sale increased
33% to $6.8 million during the first six months of 1999 as compared to
$5.1 million during the first six months of 1998 as average investment
securities available-for-sale, net of securities valuation allowance,
increased 18% to $99.7 million as compared to $84.3 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 $32.8 million, which were issued by IFC,
since the end of the second quarter of 1998. The weighted average yield on
investment securities available-for-sale increased to 13.54% during the
first six months of 1999 as compared to 12.18% during the first six months
of 1998.
Interest expense on borrowings: Interest expense on CMO borrowings
decreased 9% to $33.5 million during the first six months of 1999 as
compared to $36.7 million during the first six months of 1998 as the
weighted average yield on CMO borrowings decreased to 6.28% as compared to
6.70%, respectively. Average CMO borrowings remained relatively unchanged
at $1.07 billion during the first six months of 1999 as compared to $1.10
billion during the first six months of 1998.
<PAGE>
Interest expense on reverse repurchase borrowings used to fund the
acquisition of mortgage loans and finance receivables decreased 55% to
$9.5 million during the first six months of 1999 as compared to $21.3
million during the first six months of 1998. The average balance of these
reverse repurchase agreements decreased 53% to $305.1 million during the
first six months of 1999 as compared to $643.8 million during the first
six 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 six months of 1999 as compared the first six
months of 1998. The weighted average yield of these reverse repurchase
agreements decreased to 6.21% during the first six months of 1999 as
compared 6.61% during the first six 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 increased 17% to $711,000 during the first six months of 1999
as compared to $610,000 during the first six months of 1998. The average
balance on these reverse repurchase agreements increased 13% to $21.9
million during the first six months of 1999 as compared to $19.4 million
during the first six months of 1998. The weighted average yield of these
reverse repurchase agreements increased to 6.51% during the first six
months of 1999 as compared 6.30% during the first six months of 1998.
Non-Interest Income
Non-interest income decreased 44% to $3.7 million during the first six
months of 1999 as compared to $6.6 million during the first six months of
1998. The decrease in non-interest income was primarily due to decreases
in equity in net earnings of IFC and ICH.
Equity in Net Earnings of IFC
During the first six months of 1999 equity in net earnings of IFC
decreased to $2.5 million as compared to $3.9 million during the first six
months of 1998 due to a decrease in IFC's net earnings. IFC's net earnings
decreased primarily due to a decrease of $4.9 million in net interest
income. The decrease in net interest income was partially offset by a net
increase of $1.5 million in gain on sale of loans, after deducting the
reversal of mark-to-market allowances of $4.1 million during the second
quarter of 1999, and an increase of $1.2 million in loan servicing and
other non-interest income.
IFC's net interest income decreased as average mortgage loans
held-for-sale decreased 55% to $210.5 million during the first six months
of 1999 as compared to $464.4 million during the first six months of 1998.
Average mortgage loans held-for-sale decreased as mortgage loan
acquisitions decreased 48% to $631.6 million during the first six month of
1999 as compared to mortgage loan acquisitions of $1.3 billion during the
first six months of 1998. Mortgage loan acquisitions decreased during the
first six months of 1999 as compared to the first six 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 six months of 1999, IFC continued to rebuild its mortgage
loan acquisitions to previous levels by offering its sellers competitive
and flexible mortgage products and the introduction of two new divisions.
IFC's net interest income also decreased during the first six months of
1999 as the weighted average yield on mortgage loans held-for-sale
decreased to 8.50% as compared to a weighted average yield of 10.00%
during the first six months of 1998. IFC's yield on mortgage loans
held-for-sale during the first six 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.
<PAGE>
IFC's gain on sale of loans increased to $14.5 million during the first
six months of 1999 as compared to $8.9 million during the first six months
of 1998. However, the increase in gain on sale of loans was due to a
reduction of mark-to-market allowances of $4.1 million recorded during the
second quarter of 1999. In addition, the reduction of mark-to-market
allowances was partially offset by write-down on investment securities of
$3.7 million recorded during the second quarter of 1999. Excluding the
reduction of mark-to-market allowances, IFC was profitable on the sale of
its mortgage loans during the second quarter of 1999 as compared to the
second quarter of 1998 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 six months of 1999,
IFC sold mortgages totaling $439.8 million to third party investors as
compared to loan sales and securitizations of $784.3 million during the
first six months of 1998. Of the third party loan sales during the first
six months of 1999, IFC sold $158.3 million of loans on a servicing
released basis as compared to no loans sold on a servicing released basis
during the first six months of 1998. The sale of these loans on a
servicing released basis reduced IFC's exposure to further prepayment
risk. IFC also sold $287.6 million in principal balance of mortgages to
IMH during the first six months of 1999 as compared to $771.2 million
during the first six months of 1998. The sale of loans to IMH during the
first six months of 1999 increased IFC's deferred income to $10.9 million
at June 30, 1999 as compared to $10.6 million at December 31, 1998.
Equity in Net Earnings of ICH
During the first six months of 1999, equity in net earnings of ICH
decreased to none as compared to $841,000 during the first six months of
1998. Equity in net earnings of ICH decreased during the first six months
of 1999 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
During the first six months of 1999, net earnings were adversely
affected by a 79% increase in non-interest expense. Non-interest expense
increased to $5.0 million during the first six months of 1999 as compared
to $2.8 million during the first six months of 1998 primarily due to an
increase of $1.6 million in losses on sale of REO properties real estate
owned.
Provision for Loan Losses
The Company recorded loan loss provisions of $3.0 million during the
first six months of 1999 as compared to $2.4 million during the first six
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.
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.
<PAGE>
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.
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 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 ratio of debt to equity at June 30,
1999 as compared to June 30, 1998 and, as a result, the Company had no
margin calls on its reverse
repurchase agreements during the first six months of 1999. Furthermore,
the mortgage-backed securitization market stabilized during the first six
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 six 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
during last six months of 1999, along with a corresponding increase in
staff, which will require additional cash.
The Company does not believe its current operating cash flows are
sufficient to fund the growth of its mortgage loan and investment
securities portfolios, lending activities and payment of cash dividends
due to continued exposure to margin calls on its reverse repurchase
agreements. 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. As such, during the first quarter of 1999, the Company entered into
a definitive agreement to acquire a Bank. The Company has submitted its
completed application to federal and state regulatory agencies, the FDIC
and the DFI for their approval, including the proposed relocation of the
Bank's headquarters to the Company's location in Newport Beach,
California. The Company is not aware of any outstanding issues that would
impede its ability to obtain regulatory approval by September 1, 1999. The
acquisition of the Bank will provide access to a relatively low cost of
funds from a stable and diverse deposit base, along with financing from
the Federal Home Loan Bank. The Company is planning to raise sufficient
cash to reserve $25.0 million for the initial capitalization of the Bank.
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 six months of 1999, the
Company issued CMOs totaling $298.1 million that were collateralized by
$316.2 million of residential mortgages. At June 30, 1999, the Long-Term
Investment Operations had $1.1 billion of CMO borrowings used to finance
$1.2 billion of CMO collateral.
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 0.45% to 2.00% depending on
the type of collateral provided. As of June 30, 1999, the Long-Term
Investment Operations had $18.4 million outstanding under these reverse
repurchase agreements which were secured by $58.2 million in fair market
value of mortgage-backed securities.
<PAGE>
During the first six months of 1999, total principal reductions on CMO
collateral provided liquidity of $294.5 million.
During the first six months of 1999, the Company raised capital of
$928,000 from the sale of 212,995 shares of common stock issued through
its DRSPP.
Primary Use of Funds
During the first six months of 1999, IMH acquired $283.0 million in
principal balance of mortgage loans from IFC.
The Company repurchased 684,100 shares of Common Stock for $3.9
million and paid common and preferred stock dividends of
$15.3 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 June 30, 1999, IMH's outstanding borrowings under the reverse
repurchase arrangement was $5.0 million.
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 margins 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 June 30, 1999 (dollars in thousands):
<TABLE>
<S> <C> <C>
Amount
Outstanding Interest rate
--------------- --------------------------
Lender A (1) $ 209,748 Libor + 0.85% to 2.00%
Lender B (1) 4,811 Libor + 1.00%
---------------
$ 214,559
===============
Total
</TABLE>
(1) Uncommitted reverse repurchase agreement.
Conduit Operations
<PAGE>
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 7.75% at June 30, 1999. At June
30, 1999, the Conduit Operations had $145.2 million outstanding under the
reverse repurchase agreement.
During the first six months of 1999, the Conduit Operations sold $439.8
million 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 six 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 six months of 1999.
Primary Use of Funds
During the first six months of 1999, the Conduit Operations acquired
$631.6 million of mortgage loans.
Cash Flows
Operating Activities - During the first six months of 1999 net cash
provided by operating activities was $7.3 million. Cash provided by
operating activities was primarily due to net earnings of $12.1 million,
which was partially offset by a decrease in other assets and liabilities
of $6.6 million.
Investing Activities - During the first six months of 1999 net cash
provided by investing activities was $72.4 million. Cash provided by
investing activities was primarily due to a decrease in finance
receivables of $99.2 million as loan acquisitions at IFC decreased during
the first six months of 1999. The increase in cash from the reduction in
finance receivables was partially offset by an increase of $30.0 million
in CMO collateral.
Financing Activities - During the first six months of 1999 net cash
used in financing activities was $101.1 million. Cash used in financing
activities was primarily due to a decrease of $89.5 million in reverse
repurchase agreements and the payment of $15.3 million of common and
preferred stock dividends. This use of funds was partially offset by cash
proceeds from CMO borrowings, net of repayments, of $6.7 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 90% complete as of
July 31, 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.
<PAGE>
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 the Company believes that this system is 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
has been completed. Testing on all other in-house hardware has been
completed as of June 30, 1999.
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
review the progress of the Company's Year 2000 project through monthly
status reports and reviews with the Company's IT manager.
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 is not expected to be material to the
Company's financial condition. The estimated cost of the project is
expected to be approximately $500,000, of which approximately $108,000 of
the cost will be paid by ICH. The total estimate of the project includes
the cost to upgrade the Company's communications system, which was
$140,000. As of July 31, 1999, the Company had paid $273,000 to the
outside vendor for completed work on the project. The majority of the
Company's estimated cost for the Year 2000 compliance has been or will be
spent on software upgrades and writing new program code on existing
proprietary software. Since most of the Company's hardware has been
purchased within the last two years, the cost of replacing hardware will
be 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 90% 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. 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.
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 June 30, 1999, there was $3.8 million outstanding under the
warehouse line agreement.
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 $39.6 million and $43.1 million outstanding at
June 30, 1999 and December 31, 1998, respectively. These instruments are
carried at market value at June 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
No matters were submitted to a vote of security holders during the three
months ended June 30, 1999.
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: August 13, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,435
<SECURITIES> 92,253
<RECEIVABLES> 1,410,044
<ALLOWANCES> (3,937)
<INVENTORY> 0
<CURRENT-ASSETS> 256,422
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,570,643
<CURRENT-LIABILITIES> 237,646
<BONDS> 0
0
12
<COMMON> 227
<OTHER-SE> 245,539
<TOTAL-LIABILITY-AND-EQUITY> 1,570,643
<SALES> 60,732
<TOTAL-REVENUES> 64,461
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,000
<LOSS-PROVISION> 2,989
<INTEREST-EXPENSE> 44,323
<INCOME-PRETAX> 12,149
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,149
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.21
</TABLE>
