<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 March 31, 2000
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 May 10, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $73.8 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 May 10, 2000 was
21,400,906.
Documents incorporated by reference: None
<PAGE>
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page #
------
<S> <C>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999............................... 3
Consolidated Statements of Operations and Comprehensive Earnings (Loss),
For the Three Months Ended March 31, 2000 and 1999................................................... 4
Consolidated Statements of Cash Flows, For the Three Months Ended March 31, 2000 and 1999............ 5
Notes to Consolidated Financial Statements........................................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................ 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 21
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................................................................... 22
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................ 22
Item 3. DEFAULTS UPON SENIOR SECURITIES...................................................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 22
Item 5. OTHER INFORMATION.................................................................................... 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 22
SIGNATURES 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 21,659 $ 20,152
Investment securities available-for-sale.............................................. 75,233 93,206
Loan Receivables:
CMO collateral..................................................................... 1,282,327 949,677
Finance receivables................................................................ 222,180 197,119
Mortgage loans held-for-investment................................................. 12,006 363,435
Allowance for loan losses.......................................................... (12,768) (4,029)
---------------- --------------
Net loan receivables.......................................................... 1,503,745 1,506,202
Investment in Impac Funding Corporation............................................... 17,887 17,372
Due from affiliates................................................................... 14,496 14,500
Accrued interest receivable........................................................... 10,866 11,209
Other real estate owned............................................................... 7,606 8,820
Other assets.......................................................................... 1,736 3,969
---------------- --------------
Total assets..................................................................... $ 1,653,228 $ 1,675,430
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings........................................................................ $ 1,179,184 $ 850,817
Reverse repurchase agreements......................................................... 222,426 539,687
Borrowings secured by investment securities available-for-sale........................ 28,487 31,333
Senior subordinated debentures........................................................ 6,765 6,691
Accrued dividends payable............................................................. 3,356 3,570
Due to affiliates..................................................................... -- 2,945
Other liabilities..................................................................... 1,360 1,543
---------------- --------------
Total liabilities................................................................ 1,441,578 1,436,586
---------------- --------------
Stockholders' Equity:
Preferred stock; $.01 par value; 5,100,000 shares authorized; none issued or
outstanding at March 31, 2000 and December 31, 1999, respectively.................. -- --
Series A junior participating preferred stock, $.01 par value; 2,500,000 shares
authorized; none issued and outstanding at March 31, 2000 and December 31, 1999.... -- --
Series B 10.5% cumulative convertible preferred stock, $.01 par value; $30,000
liquidation value; 1,200,000 shares authorized; none and 1,200,000 issued and
outstanding at March 31, 2000 and December 31, 1999, respectively.................. -- 12
Series C 10.5% cumulative convertible preferred stock, $.01 par value; $30,000
liquidation value; 1,200,000 shares authorized; 1,200,000 and none issued and
outstanding at March 31, 2000 and December 31, 1999, respectively.................. 12 --
Common stock; $.01 par value; 50,000,000 shares authorized; 21,400,906 shares
issued and outstanding at March 31, 2000 and December 31,1999, respectively........ 214 214
Additional paid-in capital............................................................ 327,632 327,632
Accumulated other comprehensive loss.................................................. (486) (7,579)
Notes receivable from common stock sales.............................................. (905) (905)
Accumulated deficit:
Cumulative dividends declared...................................................... (96,474) (93,080)
Retained earnings (accumulated deficit)............................................ (18,343) 12,550
---------------- --------------
Net accumulated deficit......................................................... (114,817) (80,530)
---------------- --------------
Total stockholders' equity.................................................... 211,650 238,844
---------------- --------------
Total liabilities and stockholders' equity.................................... $ 1,653,228 $ 1,675,430
================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
2000 1999
------------- ---------------
<S> <C> <C>
INTEREST INCOME:
Mortgage Assets................................................................... $ 33,591 $ 29,687
Other interest income............................................................. 549 712
------------- ---------------
Total interest income........................................................... 34,140 30,399
------------- ---------------
INTEREST EXPENSE:
CMO borrowings.................................................................... 19,131 17,081
Reverse repurchase agreements..................................................... 7,352 4,827
Borrowings secured by investment securities available-for-sale.................... 885 --
Senior subordinated debentures.................................................... 315 7
Other borrowings.................................................................. 42 238
------------- ---------------
Total interest expense.......................................................... 27,725 22,153
------------- ---------------
Net interest income.......................................................... 6,415 8,246
Provision for loan losses......................................................... 13,183 1,499
------------- ---------------
Net interest income (loss) after provision for loan losses................... (6,768) 6,747
NON-INTEREST INCOME:
Equity in net earnings of Impac Funding Corporation............................... 408 1,090
Servicing fees.................................................................... 162 466
Other income...................................................................... 791 154
------------- ---------------
Total non-interest income.................................................... 1,361 1,710
NON-INTEREST EXPENSE:
Write-down on investment securities available-for-sale............................ 23,979 422
Professional services............................................................. 660 811
Loss on disposition of other real estate owned.................................... 428 551
General and administrative and other expense...................................... 273 359
Personnel expense................................................................. 146 119
------------- ---------------
Total non-interest expense................................................... 25,486 2,262
------------- ---------------
Net earnings (loss)............................................................. (30,893) 6,195
Less: Cash dividends on Series C 10.5% cumulative convertible preferred stock..... (788) (888)
------------- ---------------
Net earnings (loss) available to common stockholders............................ (31,681) 5,307
Other comprehensive earnings (loss): Unrealized gains (losses) on securities:
Unrealized holding gains arising during period.................................. 11,262 2,715
Less: Reclassification of losses included in earnings (loss)................... (4,169) (49)
------------- ---------------
Net unrealized gains arising during period................................... 7,093 2,666
------------- ---------------
Comprehensive earnings (loss)................................................... $ (23,800) $ 8,861
============= ===============
Net earnings (loss) per share--basic............................................. $ (1.48) $ 0.22
============= ===============
Net earnings (loss) per share--diluted........................................... $ (1.48) $ 0.20
============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................................. $ (30,893) $ 6,195
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Equity in net earnings of Impac Funding Corporation.............................. (408) (1,090)
Provision for loan losses........................................................ 13,183 1,499
Amortization of loan premiums and securitization costs........................... 4,452 4,529
Loss on disposition of other real estate owned................................... 428 551
Write-down of investment securities available-for-sale........................... 23,979 422
Net change in accrued interest receivable........................................ 343 (482)
Net change in other assets and liabilities....................................... (891) 9,079
--------------- --------------
Net cash provided by operating activities...................................... 10,193 20,703
--------------- --------------
Cash flows from investing activities:
Net change in CMO collateral........................................................ (3,443) (60,906)
Net change in finance receivables................................................... (25,213) 111,219
Net change in mortgage loans held-for-investment.................................... 9,617 (38,632)
Proceeds from sale of other real estate owned, net.................................. 4,647 1,556
Purchase of investment securities available-for-sale................................ -- (9,084)
Net principal reductions on investment securities available-for-sale................ 980 441
--------------- --------------
Net cash provided by (used in) investing activities............................ (13,412) 4,594
--------------- --------------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings.................... (320,033) (68,578)
Proceeds from CMO borrowings........................................................ 451,950 186,140
Repayments of CMO borrowings........................................................ (123,583) (146,080)
Dividends paid...................................................................... (3,608) (12,129)
Repurchase of common stock.......................................................... -- (3,874)
Proceeds from dividend reinvestment and stock purchase plan......................... -- 909
Advances to purchase common stock, net of principal reductions...................... -- 13
--------------- --------------
Net cash provided by (used in) financing activities............................ 4,726 (43,599)
--------------- --------------
Net change in cash and cash equivalents............................................... 1,507 (18,302)
Cash and cash equivalents at beginning of period...................................... 20,152 33,876
--------------- --------------
Cash and cash equivalents at end of period............................................ $ 21,659 $ 15,574
=============== ==============
Supplementary information:
Interest paid....................................................................... $ 24,537 $ 22,787
Non-cash transactions:
Exchange of Series B preferred stock for Series C preferred stock................... $ -- $ --
Exchange of common stock for 11% senior subordinated debentures..................... -- 6,448
Transfer of mortgage loans held-for-investment to CMO collateral.................... 337,016 --
Dividends declared and unpaid....................................................... 3,356 3,156
Accumulated other comprehensive gain................................................ 7,093 2,666
Loans transferred to other real estate owned........................................ 3,861 4,210
</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-month period ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
The operations of IMH have been presented in the consolidated financial
statements for the three months ended March 31, 2000 and 1999 and include
the financial results of IMH's equity interest in net earnings of IFC and
IMH Assets, IWLG and Dove as stand-alone entities. The financial results
of Dove are only included in the three months ended March 31, 1999. 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."
2. Organization
The Company is a mortgage real estate investment trust (Mortgage REIT)
which, together with its subsidiaries and related companies, primarily
operates three businesses: (1) the Long-Term Investment Operations, (2)
the Conduit Operations, and (3) the Warehouse Lending Operations. The
Long-Term Investment Operations invests primarily in non-conforming
residential mortgage loans and securities backed by such loans. The
Conduit Operations purchases and sells or securitizes primarily
non-conforming mortgage loans. The Warehouse Lending Operations provides
warehouse and repurchase financing to originators of mortgage loans. IMH
is organized as a REIT for federal income tax purposes, which generally
allows it to pass through qualified income to stockholders without federal
income tax at the corporate level, provided that the Company distributes
95% of its taxable income to common stockholders.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH and IMH Assets, invests primarily in non-conforming
residential mortgage loans and mortgage-backed securities secured by or
representing interests in such loans and, to a lesser extent, in second
mortgage loans. Non-conforming residential mortgage loans are residential
mortgages that do not qualify for purchase by government-sponsored
agencies such as the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). The principal differences
between conforming loans and non-conforming loans include applicable
loan-to-value ratios, credit and income histories of the mortgagors,
documentation required for approval of the mortgagors, type of properties
securing the mortgage loans, loan sizes, and the mortgagors' occupancy
status with respect to the mortgaged properties. Second mortgage loans are
mortgage loans secured by a second lien on the property and made to
borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other
purposes.
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.
<PAGE>
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 generally accepted accounting
principles ("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 December
31, 1999 and for the three months ended March 31, 1999 may have been
reclassified to conform to the 2000 presentation.
New Accounting Statements
In June 1998, the Financial Accounting Standards Board (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
recognizes all derivatives as either assets or liabilities in the balance
sheets and measures those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 was amended by SFAS No. 137, which allows deferral of SFAS
133 for all fiscal quarters of fiscal years beginning after July 15, 2000.
Management is currently evaluating the impact of implementation of SFAS
133 on the Company's financial position and results of operations.
4. Net Earnings per Share
The following table represents the computation of basic and diluted net
earnings (loss) per share for the periods presented, as if all stock
options and cumulative convertible preferred stock ("Preferred Stock"), if
dilutive, were outstanding for these periods (in thousands, except
per share data):
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share
Net earnings (loss)............................................................ $ (30,893) $ 6,195
Less: Dividends paid to preferred stockholders................................ (788) (888)
-------------- --------------
Net earnings (loss) available to common stockholders........................ $ (31,681) $ 5,307
============== ==============
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during the period......... 21,401 24,366
Impact of assumed conversion of cumulative convertible preferred stock......... -- 6,061
Net effect of dilutive stock options........................................... -- 26
-------------- --------------
Weighted average common and common equivalent shares........................ 21,401 30,453
============== ==============
Net earnings (loss) per share--basic............................................ $ (1.48) $ 0.22
============== ==============
Net earnings (loss) per share--diluted.......................................... $ (1.48) $ 0.20
============== ==============
</TABLE>
5. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance
receivables. At March 31, 2000 and December 31, 1999, Mortgage Assets
consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 69,950 $ 94,985
Subordinated securities collateralized by other loans 5,710 5,633
Net unrealized losses (427) (7,412)
---------------- ----------------
Carrying value of investment securities available-for-sale 75,233 93,206
---------------- ----------------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance 1,237,539 908,987
Unamortized net premiums on loans 28,214 28,797
Securitization expenses 16,574 11,893
---------------- ----------------
Carrying value of CMO collateral 1,282,327 949,677
Finance receivables--
Due from affiliates 101,152 67,416
Due from other mortgage banking companies 121,028 129,703
---------------- ----------------
Carrying value of finance receivables 222,180 197,119
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance 15,124 361,394
Unamortized net premiums (discounts) on loans (3,118) 2,041
---------------- ----------------
Carrying value of mortgage loans held-for-investment 12,006 363,435
---------------- ----------------
Carrying value of Gross Loan Receivables 1,516,513 1,510,231
Allowance for loan losses (12,768) (4,029)
---------------- ----------------
Carrying value of Net Loan Receivables 1,503,745 1,506,202
---------------- ----------------
Total carrying value of Mortgage Assets $ 1,578,978 $ 1,599,408
================ ================
</TABLE>
<PAGE>
6. Segment Reporting
The basis for the Company's segments is to separate its entities as
follows: segments that derive income from investment in long-term Mortgage
Assets, segments that derive income by providing short-term financing and
segments that derive income from the purchase and sale or securitization
of mortgage loans.
The Company internally reviews and analyzes its segments 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.
The following table shows the Company's reporting segments as of and
for the three months ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Items:
CMO collateral $ 1,282,327 $ -- $ -- $ -- $ 1,282,327
Total assets 1,514,899 274,599 -- (136,270) 1,653,228
Total stockholders' equity 283,210 52,069 -- (123,629) 211,650
Income Statement Items:
Interest income $ 26,079 $ 10,933 $ -- $ (2,872) $ 34,140
Interest expense 23,238 7,359 -- (2,872) 27,725
Equity interest in net earnings
of IFC (a) -- -- -- 408 408
Net earnings (loss) (34,687) 3,386 -- 408 (30,893)
</TABLE>
The following table shows the Company's reporting segments as of and
for the three months ended March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Long-Term Warehouse
Investment Lending Intercompany
Operations Operations Other (b) Elimination (c) Consolidated
---------------- ------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Items:
CMO collateral $ 1,217,289 $ -- $ -- $ -- $ 1,217,289
Total assets 1,487,795 273,699 5,442 (134,909) 1,632,027
Total stockholders' equity 291,567 40,486 658 (84,963) 247,748
Income Statement Items :
Interest income $ 24,879 $ 6,343 $ 17 $ (840) $ 30,399
Interest expense 18,493 4,496 4 (840) 22,153
Equity interest in net earnings
of IFC (a) -- -- -- 1,090 1,090
Net earnings 2,105 1,741 43 2,306 6,195
</TABLE>
(a) The Conduit Operations is accounted for using the equity method and is
an unconsolidated subsidiary of the Company.
(b) Primarily includes the operations of Dove, of which the Company
owned a 50% interest, and account reclassifications.
(c) Elimination of intersegment balance sheet and income statement items.
<PAGE>
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):
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- ----------------
<S> <C> <C>
ASSETS
Cash $ 12,863 $ 8,805
Investment securities available-for-sale 1,813 1,887
Investment securities available-for-trading 138 --
Mortgage loans held-for-sale 103,187 68,084
Mortgage servicing rights 15,499 15,621
Premises and equipment, net 4,172 3,575
Due from affiliates 1,220 4,307
Accrued interest receivable 333 48
Other assets 9,907 13,919
----------------- ----------------
Total assets $ 149,132 $ 116,246
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 101,150 $ 66,125
Other borrowings 82 181
Due to affiliates 14,500 14,500
Deferred revenue 6,307 7,635
Accrued interest expense 1,047 843
Other liabilities 7,978 9,414
----------------- ----------------
Total liabilities 131,064 98,698
----------------- ----------------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Accumulated deficit (107) (520)
Accumulated other comprehensive loss (60) (167)
----------------- ----------------
Total shareholders' equity 18,068 17,548
----------------- ----------------
Total liabilities and shareholders' equity $ 149,132 $ 116,246
================= ================
</TABLE>
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Interest income.................................................................. $ 4,945 $ 4,833
Interest expense................................................................. 5,660 4,746
--------------- ----------------
Net interest income (loss) (715) 87
Gain on sale of loans............................................................ 5,221 5,007
Loan servicing income............................................................ 1,536 2,141
Other non-interest income........................................................ 23 339
--------------- ----------------
Total non-interest income..................................................... 6,780 7,487
Personnel expense................................................................ 2,322 1,790
General and administrative and other expense..................................... 1,771 1,196
Amortization of mortgage servicing rights........................................ 1,192 1,427
Provision for repurchases........................................................ 64 20
Write-down on investment securities available-for-sale........................... -- 559
Loss on sale of mortgage servicing rights........................................ -- 567
--------------- ----------------
Total non-interest expense.................................................... 5,349 5,559
--------------- ----------------
Net earnings before income taxes.............................................. 716 2,015
Income taxes..................................................................... 304 914
--------------- ----------------
Net earnings.................................................................. $ 412 $ 1,101
=============== ================
</TABLE>
8. Stockholders' Equity
In February 2000, the Series B Preferred Stock was exchanged for Series
C Preferred Stock and the conversion rate was adjusted to $4.72 per share
convertible into 5.29661 shares of Common Stock or an aggregate of
6,355,932 shares of Common Stock.
On March 30, 2000, the Company declared a first quarter cash dividend
on common stock of $2.6 million, or $0.12 per share. This dividend was
paid on April 20, 2000 to common stockholders of record on April 10, 2000.
On March 30, 2000, the Company declared a first quarter cash dividend
of $788,000 or $0.65625 per share to series C preferred stockholders. This
dividend was paid on April 25, 2000.
<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 rate
of growth and expansion of the Company's new divisions, any delays with
respect to the acquisition of the thrift and loan, the availability of
suitable opportunities for the acquisition, ownership and disposition of
Mortgage Assets (which depend on the type of Mortgage Asset involved) and
yields available from time to time on such Mortgage Assets, interest
rates, changes in estimates of book basis and tax basis earnings,
fluctuations and increase in prepayment rates, the availability of
suitable financing and investments, trends in the economy which affect
confidence and demand on the Company's portfolio of Mortgage Assets and
other factors referenced in this report and other reports filed by the
Company with the SEC, including its Annual Report on Form 10-K.
SIGNIFICANT TRANSACTIONS
Exchange of Series B Cumulative Convertible Preferred Stock for Series C
Cumulative Convertible Preferred Stock
In February 2000, all shares of Series B 10.5% Cumulative Convertible
Preferred Stock ("Series B Preferred Stock") were exchanged for Series C
10.5% Cumulative Convertible Preferred Stock ("Series C Preferred Stock")
and the conversion rate was adjusted to $4.72 per share convertible into
5.29661 shares of Common Stock or an aggregate of 6,355,932 shares of
Common Stock. Other than the foregoing, the Series C Preferred Stock has
the same rights, preferences and privileges as the Series B Preferred
Stock.
Collateralized Mortgage Obligations ("CMOs")
The Company issued a CMO during the first three months of 2000 for
$452.0 million, which was collateralized by $428.1 million of
adjustable-rate mortgages and $27.6 million of fixed-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
The Company submitted a new application to state and federal regulatory
agencies in February 2000. The new application was modified from the prior
application in several key areas and to more clearly define the Bank as a
stand-alone operation that is not reliant upon the Company for its
success. The new Bank plan provides for the marketing of the Bank's unique
loan products, which will include mortgages, consumer equity loans and
loans on small commercial and multi-family properties. On May 8, 2000, the
FDIC notified the Company that they were extending to July 13, 2000, their
time to process the Company's application. In the event that the Company
is unsuccessful in its efforts to obtain the Bank charter, management
believes that it will have no adverse impact on the future profitability
of the Company.
BUSINESS OPERATIONS
Long-Term Investment Operations: During the first three months of 2000,
the Long-Term Investment Operations, conducted by IMH and IMH Assets,
acquired $40.3 million of mortgages from IFC as compared to $202.0 million
of mortgages acquired during the same period in 1999. Mortgages purchased
by the Long-Term Investment Operations during the first three months of
2000 consisted of $33.4 million of adjustable-rate mortgages ("ARMs")
secured by first liens on residential property and $20.9 million of
fixed-rate mortgages ("FRMs") primarily secured by second trust deeds on
<PAGE>
residential property. During the first three months of 2000, IMH Assets
issued CMOs totaling $452.0 million as compared to CMOs totaling $183.1
million during the same period in 1999. As of March 31, 2000, the
Long-Term Investment Operations' portfolio of mortgage loans consisted of
$1.3 billion of mortgage loans held in trust as collateral for CMOs and
$12.0 million of mortgage loans held-for-investment, of which
approximately 32% were FRMs and 68% were ARMs. The weighted average coupon
of the Long-Term Investment Operations portfolio of mortgage loans was
9.09% at March 31, 2000 with a weighted average margin of 4.21%. The
portfolio of mortgage loans included 79% of "A" credit quality,
non-conforming mortgage loans and 21% of "B" and "C" credit quality,
non-conforming mortgage loans, as defined by the Company. During the first
three months of 2000, the Long-Term Investment Operations acquired no
securities from IFC as compared to $9.1 million during the same period in
1999. These securities were generated primarily from the periodic issuance
of real estate mortgage investment conduits ("REMICs") by IFC. As of March
31, 2000, the Long-Term Investment Operations had $75.2 million of
investment securities available-for-sale.
Conduit Operations: The Conduit Operations, conducted by IFC, continues
to support the Long-Term Investment Operations of the Company by supplying
IMH and IMH Assets with mortgages for IMH's long-term investment
portfolio. In acting as the mortgage conduit for the Company, IFC's
mortgage acquisitions increased 81% to $458.8 million during the three
months of 2000 as compared to $253.8 million of mortgages acquired during
the same period in 1999. IFC sold whole loans to third party investors or
securitized $295.9 million, which contributed to the gain on sale of loans
of $5.2 million, during the first three months of 2000. This compares to
whole loan sales or securitizations to third party investors of $163.0
million, resulting in gain on sale of loans of $5.0 million, during the
same period in 1999. Of the $295.9 million of whole loan sales and
securitizations during the first three months of 2000, IFC issued one
REMIC for $271.7 million. IFC had deferred income of $6.3 million at March
31, 2000 as compared to $7.6 million at December 31, 1999. Deferred income
results from the sale of mortgages to IMH, which are deferred and
amortized or accreted over the estimated life of the loans. During the
first three months of 2000, IFC sold $40.2 million in principal balance of
mortgages to IMH as compared to $198.8 million during the first three
months of 1999. IFC's master servicing portfolio increased 4% to $2.9
billion at March 31, 2000 as compared to $2.8 billion at March 31, 1999.
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 4.33% at March 31, 2000 as compared to 4.37%, 5.28%,
6.18%, and 5.66% for the last four quarter-end periods.
Warehouse Lending Operations: At March 31, 2000, the Warehouse Lending
Operations, conducted by IWLG, had $1.5 billion of warehouse lines of
credit available to 55 borrowers, of which $222.4 million was outstanding
thereunder, after elimination of borrowings with the Long-Term Investment
Operations, including $101.2 million outstanding to IFC.
RESULTS OF OPERATIONS--
IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended March 31, 2000 as compared to the Three Months
Ended March 31, 1999
Results of Operations
The Company recorded a net loss of $(30.9) million, or $(1.48) per
diluted common share, during the first quarter of 2000 as compared to net
earnings of $6.2 million, or $0.20 per diluted common share, during the
first quarter of 1999. However, during the first quarter of 2000, the
Company recognized non-recurring and non-cash charges ("non-cash charges")
of (1) $11.9 million to substantially increase the allowance for loan
losses related to loans held-for-investment and CMO collateral to $12.8
million at March 31, 2000 and (2) $23.4 million on its investment
securities available-for-sale. The non-cash charges for the first quarter
of 2000 were primarily related to the write-off of an investment in high
loan-to-value ("HLTV") second trust deeds acquired in 1997 as a result of
higher than expected delinquencies and losses in the HLTV portfolio. After
1997, the Company did not acquire or invest in these HLTV mortgage assets.
However, because of the high incidence of bankruptcies and increasing
delinquencies, the Company determined that it was necessary to dramatically
increase its current allowance for loan losses and completely write-off an
investment security backed by such loans. Prior to the recognition of
non-cash charges, the Company's operating earnings were $4.4 million, or
$0.16 per diluted common share, as compared to net earnings of $6.2
million, or $0.20 per diluted common share, for the first quarter of 1999.
The write-offs will significantly reduce the Company's exposure to HLTV
loans, as management believes the addition to the allowance for loan losses
is sufficient to absorb losses
<PAGE>
in the HLTV portfolio based on increased levels of loss and delinquency,
which occurred during the first quarter of 2000. 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, increased 211% to 0.84% at March 31, 2000 as compared
to 0.27% at December 31, 1999.
The Company's warehouse lending and mortgage operations continue to
operate profitably and generate positive cash flows. Total average
outstanding finance receivables increased 26% to $318.3 million during the
first quarter of 2000 as compared to $253.4 million during the first
quarter of 1999. The majority of the increase in average outstanding
finance receivables was with non-affiliated companies which increased 58%
to $109.6 million during the first quarter of 2000 as compared to $69.5
million during the first quarter of 1999. IWLG continued to provide a
consistent contribution to net earnings and earnings per share during the
first quarter of 2000. During the first quarter of 2000, IWLG's
contribution to earnings and earnings per diluted share was approximately
$2.5 million and $0.09, respectively, as compared to approximately $1.7
million and $0.06, respectively, during the first quarter of 1999. The
Company expects that IWLG will continue to add to its customer base,
increase its warehouse line commitments and increase average daily
outstanding balances throughout the remainder of the year. In addition,
total loan production at IFC remained strong as production increased 81%
to $458.8 million during the first quarter of 2000 as compared to $253.8
million during the first quarter of 1999. IFC exceeded production goals
for the first quarter of 2000 and, absent any significant market changes,
the Company expects that it will meet production goals for the remainder
of the year. The roll out of IFC's automated underwriting and loan
approval system, called Impac Direct Access System for Lending ("IDASL"),
to IFC's customers during 2000 is intended to further enhance IFC's
production capacity without increasing current staff levels.
Total assets were $1.7 billion at March 31, 2000 and at December 31,
1999. The Company's ratio of debt to equity ("Leverage Ratio") increased to
6.8:1 at March 31, 2000 as compared to 6.0:1 at December 31, 1999 as
stockholders' equity decreased to $211.7 million as compared to $238.8
million, respectively. Stockholders' equity decreased as the Company
recorded $35.3 million of non-cash charges during the first quarter of
2000. Excluding non-cash charges, diluted book value (calculated by
including preferred stock conversion rights of 6.4 million common shares)
increased 3% to $8.90 per common share at March 31, 2000 as compared to
$8.60 per common share at December 31, 1999. The recognition of non-cash
charges decreased diluted book value by 14% to $7.63 per common share at
March 31, 2000. The combined liquidity of the Company and IFC was $34.5
million at March 31, 2000 as compared to $29.0 million at December 31,
1999.
During the first quarter of 2000, the Company announced a common stock
dividend of $0.12 payable to its stockholders on April 20, 2000 for
stockholders of record on April 10, 2000. The payment of the common stock
dividend was greater than previously anticipated. The Company's Board of
Directors recognizes its commitment to stockholders to continue to pay a
common stock dividend while the Company's management team continues to
make every effort to increase common stock dividends in the future.
Net Interest Income
Net interest income decreased 22% to $6.4 million during the first
quarter of 2000 as compared to $8.2 million during the first quarter of
1999. The decrease in net interest income during the first quarter of 2000
was primarily the result of higher CMO borrowing costs due to an increase
in one-month London interbank offered rate ("LIBOR"), which is the index
used to reprice the Company's adjustable-rate CMO borrowings. One-month
LIBOR increased during the first quarter of 2000 as a result of the
Federal Reserve Bank increasing short-term interest rates. One-month LIBOR
averaged 5.92% during the first quarter of 2000 as compared to 4.95%
during the first quarter of 1999. In addition, January's borrowing costs
were higher than expected because of Year 2000 concerns. One-month LIBOR
on December 23, 1999, the contractual effective repricing date of CMO
borrowings for January 2000, was 6.48%. By December 30, 1999, one-month
LIBOR decreased 66 basis points to 5.82% and averaged 5.81% in January
2000. Total interest income earned on Mortgage Assets increased 13% to
$33.6 million during the first quarter of 2000 as compared to $29.7
million during the first quarter of 1999 as average Mortgage Assets
increased 10% to $1.737 billion as compared to $1.584 billion,
respectively. Mortgage Assets are comprised of mortgage loans
held-for-investment, CMO collateral, finance receivables and investment
securities available-for-sale. The increase in average Mortgage Assets
during the first quarter of 2000 was primarily the result of an increase
in average finance receivables and average CMO collateral of $64.9 million
and $28.0 million, respectively. Average finance receivables increased
during the first quarter of 2000 as the Warehouse Lending Operations,
IWLG, expanded its business. The increase in average CMO collateral was
<PAGE>
due to the completion of a $452.0 million CMO in January of 2000, which
was collateralized by $455.7 million of mortgage loans. The yield on
average Mortgage Assets during the first quarter of 2000 was 7.74% as
compared to 7.50% during the first quarter of 1999. Total interest expense
on borrowings on Mortgage Assets increased 25% to $27.4 million during the
first quarter of 2000 as compared to $21.9 million during the first
quarter of 1999. The increase in interest expense on borrowings on
Mortgage Assets was primarily due to the aforementioned increase in
short-term interest rates, which resulted in an increase in yield to 7.07%
during the first quarter of 2000 as compared to a yield of 6.34% during
the first quarter of 1999. Net interest margin decreased to 1.43% during
the first quarter of 2000 as compared to 1.96% during the first quarter of
1999 also primarily due to higher borrowing costs.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
first quarters of 2000 and 1999 and includes interest income on Mortgage
Assets and interest expense related to borrowings on Mortgage Assets only
(dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 2000 Ended March 31, 1999
------------------------------------ ------------------------------------
Average Weighted Average Weighted
Balance Interest Avg. Yield Balance Interest Avg. Yield
------------ ---------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE ASSETS
Investment securities available-for-sale:
Securities collateralized by mortgages $ 87,875 $ 2,879 13.10 % $ 92,576 $ 3,102 13.40 %
Securities collateralized by other loans 5,660 203 14.35 7,911 223 11.28
------------ ---------- ------------ ----------
Total investment securities available-for-sale 93,535 3,082 13.18 100,487 3,325 13.24
------------ ---------- ------------ ----------
Loan receivables:
CMO collateral 1,204,818 20,155 6.69 1,176,853 20,009 6.80
Mortgage loans held-for-investment 119,878 2,335 7.79 53,376 802 6.01
Finance receivables:
Affiliated 208,727 5,176 9.92 183,941 3,984 8.66
Non-affiliated 109,591 2,843 10.38 69,495 1,567 9.02
------------ ---------- ------------ ----------
Total finance receivables 318,318 8,019 10.08 253,436 5,551 8.76
------------ ---------- ------------ ----------
Total Loan Receivables 1,643,014 30,509 7.43 1,483,665 26,362 7.11
------------ ---------- ------------ ----------
Total Mortgage Assets $ 1,736,549 $ 33,591 7.74 % $ 1,584,152 $ 29,687 7.50 %
============ ========== ============ ==========
BORROWINGS
CMO borrowings $ 1,101,898 $ 19,131 6.94 % $ 1,078,797 $ 17,081 6.33 %
Reverse repurchase agreements - mortgages 415,798 7,352 7.07 281,471 4,447 6.32
Borrowings secured by investment securities
available-for-sale 30,271 885 11.69 22,992 380 6.61
------------ ---------- ------------ ----------
Total borrowings on Mortgage Assets $ 1,547,967 $ 27,368 7.07 % $ 1,383,260 $ 21,908 6.34 %
============ ========== ============ ==========
Net Interest Spread 0.67 % 1.16 %
Net Interest Margin 1.43 % 1.96 %
</TABLE>
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 1% to $20.2 million during
the first quarter of 2000 as compared to $20.0 million during the first
quarter of 1999 as average CMO collateral increased to $1.205 billion as
compared to $1.177 billion, respectively. The Long-Term Investment
Operations issued CMOs totaling $567.0 million since the end of the first
quarter of 2000 while total principal prepayments on CMOs since the end of
the first quarter of 1999 were $425.8 million. An increase in mortgage
rates during the first quarter of 2000 and an increase in IFC's loan
production with prepayment penalties has contributed to greater stability
in prepayments. During the first quarter of 2000, constant prepayment
rates ("CPR") on CMO collateral was 23% CPR as compared to 40% CPR during
the first quarter of 1999. 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. The weighted
average yield on CMO collateral decreased to 6.69% during the first
quarter of 2000 as compared to 6.80% during the first quarter of 1999
primarily due to increased delinquencies and losses related to HLTV loans
in the CMO portfolio. The Company significantly increased its allowance
for loan losses to provide for adequate levels of protection against
expected losses in the Company's CMO portfolio. Refer to "Provision for
Loan Losses" for additional detail.
<PAGE>
Interest income on mortgage loans held-for-investment increased to $2.3
million during the first quarter of 2000 as compared to $802,000 during
the first quarter of 1999 as average mortgage loans held-for-investment
increased to $119.9 million as compared to $53.4 million, respectively.
Average mortgage loans held-for-investment increased primarily as mortgage
loans acquired by the Long-Term Investment Operations increased to $355.2
million during the fourth quarter of 1999 in anticipation of the issuance
of a CMO in the first quarter of 2000. The weighted average yield on
mortgage loans held-for-investment increased to 7.79% during the first
quarter of 2000 as compared to 6.01% during the first quarter of 1999. The
increase in the weighted average yield was primarily due to the
acquisition of higher-yielding mortgage loans from IFC, which reflected an
increase in mortgage rates.
Interest income on finance receivables increased 43% to $8.0 million
during the first quarter of 2000 as compared to $5.6 million during the
first quarter of 1999 as average finance receivables increased 26% to
$318.3 million as compared to $253.4 million, respectively. Average
finance receivables to affiliated companies increased 13% to $208.7
million during the first quarter of 2000 as compared to $183.9 million
during the first quarter of 1999 as IFC's mortgage loan acquisitions
increased to $458.8 million as compared to $253.8 million, respectively.
As such, interest income on finance receivables to affiliates increased
30% to $5.2 million during the first quarter of 2000 as compared to $4.0
million during the first quarter of 1999. The weighted average yield on
affiliated finance receivables increased to 9.92% during the first quarter
of 2000 as compared to 8.66% during the first quarter of 1999 primarily
due to an increase in Bank of America's prime rate ("prime"), which is the
index used to determine interest rates on finance receivables. Interest
income on finance receivables to non-affiliated mortgage banking companies
increased 75% to $2.8 million during the first quarter of 2000 as compared
to $1.6 million during the first quarter of 1999 as average finance
receivables outstanding to non-affiliated mortgage banking companies
increased 58% to $109.6 million as compared to $69.5 million,
respectively. Average finance receivables to non-affiliates increased
during the first quarter of 2000 as compared to the first quarter of 1999
primarily due to IWLG's business expansion. The weighted average yield on
non-affiliated finance receivables increased to 10.38% during the first
quarter of 2000 as compared to 9.02% during the first quarter of 1999
primarily due to an increase in the prime rate. The average prime rate
increased to 8.83% during the first quarter of 2000 as compared to 7.75%
during the first quarter of 1999.
Interest income on investment securities available-for-sale decreased
6% to $3.1 million during the first quarter of 2000 as compared to $3.3
million during the first quarter of 1999 as average investment securities
available-for-sale, net of securities valuation allowance, decreased 7% to
$93.5 million as compared to $100.5 million, respectively. Average
securities available-for-sale decreased as the Long-Term Investment
Operations did not purchase and retain mortgage-backed securities during
the first three months of 2000 as compared to $9.1 million during the
first three months of 1999. The weighted average yield on investment
securities available-for-sale remained relatively constant at 13.18%
during the first quarter of 2000 as compared to 13.24% during the first
quarter of 1999.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings increased 12% to $19.1 million
during the first quarter of 2000 as compared to $17.1 million during the
first quarter of 1999 as average borrowings on CMO collateral increased 2%
to $1.102 billion as compared to $1.079 billion, respectively. Interest
expense increased during the first quarter of 2000 as compared to the
first quarter of 1999 due to higher CMO borrowing costs. One-month LIBOR,
which is the index used to reprice the Company's adjustable-rate CMO
borrowings, increased as a result of the Federal Reserve Bank increasing
short-term interest rates. One-month LIBOR on December 23, 1999, the
contractual effective repricing date of CMO borrowings for January 2000,
was 6.48%. By December 30, 1999, one-month LIBOR decreased 66 basis points
to 5.82% and averaged 5.81% in January 2000. The weighted average yield of
CMO borrowings increased to 6.94% during the first quarter of 2000 as
compared to 6.33% during the first quarter of 1999 as average one-month
LIBOR increased to 5.92% as compared to 4.95%, respectively.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables increased 68% to
$7.4 million during the first quarter of 2000 as compared to $4.4 million
during the first quarter of 1999 as average reverse repurchase agreements
increased 48% to $415.8 million as compared to $281.5 million,
respectively. These increases were primarily the result of an increase in
finance receivables made to non-affiliates due to the expansion of
business by the Warehouse Lending Operations. The weighted average yield
on reverse repurchase agreements increased to 7.07% during the first
quarter of 2000 as compared 6.32% during the first quarter of 1999 due to
an increase in one-month LIBOR, which is the interest rate index of these
instruments.
<PAGE>
The Company also uses mortgage-backed securities as collateral to
borrow and fund the purchase of mortgage-backed securities and to act as
an additional source of liquidity for the Company's operations. Interest
expense on borrowings secured by investment securities available-for-sale
increased 133% to $885,000 during the first quarter of 2000 as compared to
$380,000 during the first quarter of 1999 as the average balance on these
borrowings increased 32% to $30.3 million as compared to $23.0 million,
respectively. The weighted average yield of these borrowings increased to
11.69% during the first quarter of 2000 as compared 6.61% during the first
quarter of 1999 primarily as the Company re-securitized a portion of its
investment securities available-for-sale portfolio with long-term
financing, as opposed to short-term reverse repurchase financing which is
subject to margin calls. The Company did not have any short-term reverse
repurchase financing outstanding at March 31, 2000 and December 31, 1999.
Provision for Loan Losses
As a result of the performance of the Company's HLTV portfolio during
the first quarter of 2000, the Company significantly increased its
provision for loan losses. 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, increased
211% to 0.84% at March 31, 2000 as compared to 0.27% at December 31, 1999.
The Company recorded net loan loss provisions of $13.2 million during the
first quarter of 2000 as compared to $1.5 million during the first quarter
of 1999. Net loan loss provisions during the first quarter of 2000
includes an additional $11.9 million provision for loan losses to increase
the Company's allowance for loan losses and to provide for losses within
the HLTV portfolio, which is based on increased levels of loss and
delinquency which occurred during the first quarter of 2000, and to
provide for the bulk sale of delinquent loans.
Due to higher than anticipated losses in the HLTV portfolio during the
first quarter of 2000, the allowance for loan losses needed to be
increased to provide for adequate levels of protection against expected
losses in the Company's loan portfolios. The provision for loan losses is
determined primarily on the basis of management's judgment of net loss
potential including specific allowances for known impaired loans, changes
in the nature and volume of the portfolio, value of the collateral and
current economic conditions that may affect the borrowers' ability to pay.
Non-Interest Income
Non-interest income decreased to $1.4 million during the first quarter
of 2000 as compared to $1.7 million during the first quarter of 1999
primarily due to a decrease in equity in net earnings of IFC. 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.
Equity in Net Earnings of IFC
Equity in net earnings of IFC decreased to $408,000 during the first
quarter of 2000 as compared to $1.1 million during the first quarter of
1999 as IFC's net earnings decreased primarily due to a reduction of
$802,000 in net interest income (loss) and by $605,000 in loan servicing
income.
Net interest income (loss) at IFC. IFC's net interest income (loss)
decreased to a loss of $(715,000) during the first quarter of 2000 as
compared to income of $87,000 during the first quarter of 1999 primarily
as a result of an increase in borrowing costs due to an overall increase
in the prime rate and the spread charged by the warehouse lender. The
average prime rate increased to 8.83% during the first quarter of 2000 as
compared to 7.75% during the first quarter of 1999.
Non-interest income at IFC. IFC's non-interest income decreased to $6.8
million during the first quarter of 2000 as compared to $7.5 million
during the first quarter of 1999. The decrease in non-interest income was
primarily due to a 29% decrease in loan servicing income to $1.5 million
during the first quarter of 2000 as compared to $2.1 million during the
first quarter of 1999. The decrease in loan servicing income during the
first quarter of 2000 was primarily due to the smaller number of loans
whereby IFC owned mortgage servicing rights ("MSRs"), as (1) $1.5 billion
of mortgage loans were sold on a servicing released basis throughout 1999
and (2) $784.3 million of MSRs were sold in 1999. However, the decrease in
MSRs was partially offset by the completion of a REMIC transaction of
$271.7 million, which was sold on a servicing retained basis, during the
first quarter of 2000 and a decrease in CPR on the overall servicing
portfolio to 16% CPR during the first quarter of 2000 as compared to 34%
CPR during the first quarter of 1999.
<PAGE>
Non-Interest Expense
During the first quarter of 2000, non-interest expense decreased to
$5.3 million as compared to $5.6 million during the first quarter of 1999
primarily due to a $567,000 decrease in loss on sale of MSR's, a $559,000
decrease in write-down of investment securities and a decrease of $235,000
in amortization of MSRs. Excluding impairment and amortization of MSRs and
write-down of investment securities, non-interest expense increased 40% to
$4.2 million during the first quarter of 2000 as compared to $3.0 million
during the first quarter of 1999 primarily as a result of an increase in
personnel expense. During the first quarter of 2000, personnel expense
increased 30% as compared to the first quarter of 1999 as a result of a
23% increase in staff levels to 170 employees at March 31, 2000 as
compared to 138 employees at March 31, 1999 due to increased loan
production. Staff levels were higher during the first quarter of 2000 as
IFC reduced staff during the fourth quarter of 1998 in anticipation of
lower production volumes during the first quarter of 1999 as a result of
the deterioration of the mortgage-backed securitization market during the
latter half of 1998. IFC has increased staff levels since the second
quarter of 1999 as production volumes have steadily increased.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Historically, the Company's business operations are primarily funded
from monthly interest and principal payments from its mortgage loan and
investment securities portfolios, adjustable- and fixed-rate CMO financing,
reverse repurchase agreements secured by mortgage loans, borrowings secured
by mortgage-backed securities, proceeds from the sale of mortgage loans and
the issuance of REMICs and proceeds from the issuance of Common Stock
through secondary stock offerings, Dividend Reinvestment and Stock Purchase
Plan ("DRSPP"), and its structured equity shelf program ("SES Program").
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 issuance of CMO financing
provides the Long-Term Investment Operations with immediate liquidity, a
locked-in interest rate spread and eliminates the Company's exposure to
margin calls on such loans. The acquisition of mortgage loans by the
Conduit Operations are funded from reverse repurchase agreements, the sale
of mortgage loans and mortgage-backed securities and the issuance of
REMICs. Short-term warehouse financing, finance receivables, provided by
the Warehouse Lending Operations are primarily funded from reverse
repurchase agreements. During the first quarter of 2000, the Company issued
no new shares of Common Stock through stock offerings, through its SES
Program, or through its DRSPP.
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. The Company believes that current liquidity levels,
available financing facilities and additional liquidity provided by
operating activities will adequately provide for the Company's projected
funding needs, asset growth and the payment of dividends for the near term.
The Company is continuously exploring alternatives for increasing liquidity
and monitors current and future cash requirements through its
asset/liability committee ("ALCO"). However, no assurances can be given
that such alternatives will be available, or if available, under comparable
rates and terms as currently exist.
<PAGE>
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 three months of 2000, the
Company issued a CMO totaling $452.0 million that were collateralized by
$455.7 million of residential mortgages. At March 31, 2000, the Long-Term
Investment Operations had $1.2 billion of CMO borrowings used to finance
$1.3 billion of CMO collateral. During the first three months of 2000,
total principal reductions on CMO collateral provided liquidity of $70.8
million.
The Long-Term Investment Operations may pledge mortgage-backed
securities as collateral to borrow funds under reverse repurchase
agreements. The terms under these reverse repurchase agreements are
generally for 30 days with interest rates ranging from the one-month LIBOR
plus a spread depending on the type of collateral provided. As of March
31, 2000, the Long-Term Investment Operations had no amounts outstanding
under reverse repurchase agreements secured by investment securities
available-for-sale.
Primary Use of Funds
During the first three months of 2000, the Long-Term Investment
Operations acquired $40.2 million in principal balance of mortgage loans
from IFC.
During the first three months of 2000, the Company paid common and
preferred stock dividends of $3.6 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 advance rate on the reverse repurchase agreements are based
on the type of mortgage collateral used and generally range from 75% to
101% of the fair market value of the collateral. At March 31, 2000, the
Warehouse Lending Operations had $222.4 million outstanding on uncommitted
reverse repurchase agreements at a rate of one-month LIBOR plus 0.85% to
2.00%.
Primary Use of Funds
During the first three months of 2000, the Warehouse Lending Operations
increased outstanding finance receivables by $25.1 million.
<PAGE>
Conduit Operations
Primary Source of Funds
The Conduit Operations has entered into reverse repurchase agreements
to obtain financing of up to $1.1 billion from the Warehouse Lending
Operations to provide IFC mortgage loan financing during the period that
IFC accumulates mortgage loans and until the mortgage loans are
securitized and sold. The margins on the reverse repurchase agreements are
based on the type of collateral provided and generally range from 95% to
100% of the fair market value of the collateral. During the first quarter
of 2000, the interest rates on the borrowings were indexed to prime plus
1.00%, which was 9.00% at March 31, 2000. At March 31, 2000, the Conduit
Operations had $101.2 million outstanding under the reverse repurchase
agreements.
During the first three months of 2000, the Conduit Operations sold
$295.9 million in principal balance of mortgage loans to third party
investors. In addition, IFC sold $40.2 million in principal balance of
mortgage loans to the Long-Term Investment Operations during the first
three months of 2000. 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 three months of 2000.
Primary Use of Funds
During the first three months of 2000, the Conduit Operations acquired
$458.8 million of mortgage loans.
Cash Flows
Operating Activities - During the first three months of 2000, net cash
provided by operating activities was $10.2 million.
Investing Activities - During the first three months of 2000, net cash
used in investing activities was $13.4 million. Cash used in investing
activities was primarily due to an increase in finance receivables of
$25.2 million as the Warehouse Lending Operations expanded its business.
Financing Activities - During the first three months of 2000, net cash
provided by financing activities was $4.7 million. Cash provided by
financing activities was primarily due to proceeds from CMO borrowings of
$452.0 million, which was mainly offset by repayment of CMO borrowings and
reverse repurchase agreements of $443.6 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.
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales - Hedging Interest Rate Risk. The most
significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim
period between loan origination or purchase and securitization or sale of
such loans, the Company is exposed to interest rate risk. The majority of
loans are securitized or sold within 90 days of origination of purchase.
However, a portion of the loans are held-for-sale or securitization for as
long as 12 months (or longer, in very limited circumstances) prior to
securitization or sale. If interest rates rise during the period that the
mortgage loans are held, in the case of a securitization, the spread
between the weighted average interest rate on the loans to be securitized
and the pass-through interest rates on the securities to be sold (the
latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of
the Company's related gain or loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $14.9 million and $35.7 million outstanding at
March 31, 2000 and December 31, 1999, respectively. These instruments are
carried at the lower of amortized cost or market value at March 31, 2000
and December 31, 1999. 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
In February 2000, all shares of Series B 10.5% Cumulative Convertible
Preferred Stock ("Series B Preferred Stock") were exchanged for Series C
10.5% Cumulative Convertible Preferred Stock ("Series C Preferred Stock")
and the conversion rate was adjusted to $4.72 per share convertible into
5.29661 shares of Common Stock or an aggregate of 6,355,932 shares of
Common Stock. Other than the foregoing, the Series C Preferred Stock has
the same rights, preferences and privileges as the Series B Preferred
Stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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: May 12, 2000
<PAGE>
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