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, 1998 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: 0-13091
Impac Commercial Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0745075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20371 Irvine Avenue
Santa Ana Heights, California 92707
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 556-0122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange 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 11, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $98.4 million, based on the
closing sales price of the Common Stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of Common Stock and Class A Common Stock outstanding as of
May 11, 1998 was 7,344,789 and 674,211, respectively.
Documents incorporated by reference: None
<PAGE>
<TABLE>
IMPAC COMMERCIAL HOLDINGS, INC.
1998 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS - IMPAC COMMERCIAL
<S> <C>
Page #
------
HOLDINGS, INC.
Consolidated Balance Sheets, March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations, Three-Months Ended March 31, 1998 and
For the Period from January 15, 1997 (commencement of operations) through March 31, 1997 4
Consolidated Statements of Cash Flows, Three-Months Ended March 31,
1998 and For the period from January 15, 1997
(commencement of operations) through March 31, 1997 5
Selected Notes to Consolidated Financial Statements 6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 11
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II. OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS 15
Item 2-3 NOT APPLICABLE 15
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
Item 5 OTHER INFORMATION 15
Item 6 EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<CAPTION>
March 31, 1998 December 31, 1997
------------------ --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................... $ 22,962 $ 15,908
Investment securities available-for-sale................................................ 18,229 19,353
Residual interest in securitizations, held-for-trading.................................. 10,202 9,936
Loan receivables:
Finance receivables................................................................ 205,545 95,711
Commercial Mortgages held-for-investment........................................... 57,861 62,790
CMO collateral..................................................................... 4,018 4,255
Allowance for loan losses.......................................................... (612) (564)
------------------ --------------------
Net loan receivables.......................................................... 266,812 162,192
Due from affiliates..................................................................... 27,876 1,592
Premises and equipment, net............................................................. 3,876 3,857
Investment in Impac Commercial Capital Corporation...................................... 3,728 4,182
Accrued interest receivable............................................................. 1,667 1,361
Other assets............................................................................ 437 458
------------------ --------------------
$ 355,789 $ 218,839
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line agreements............................................................... $ 229,762 $ 90,374
Reverse repurchase agreements........................................................... 9,447 9,841
Due to affiliates....................................................................... 7,369 8,067
CMO borrowings.......................................................................... 3,946 4,176
Other liabilities....................................................................... 276 3,139
------------------ --------------------
Total liabilities............................................................. 250,800 115,597
------------------ --------------------
Stockholders' Equity:
Preferred Stock; $.01 par value; 6,000,000 shares authorized; no shares
issued and outstanding at March 31, 1998 (unaudited) and December 31, 1997 -- --
Convertible Class A Preferred Stock; $.01 par value; 4,000,000 shares
authorized; no shares issued and outstanding at March 31, 1998 (unaudited)
and December 31, 1997 -- --
Common Stock; $.01 par value; 46,000,000 shares authorized; 7,344,789 shares
issued and outstanding at March 31, 1998 (unaudited) and December 31, 1997 73 73
Class A Common Stock; $.01 par value; 4,000,000 shares authorized; 674,211
shares issued and outstanding at March 31, 1998 (unaudited) and December 31,
1997 7 7
Additional paid-in-capital.......................................................... 104,761 104,761
Investment securities valuation allowance........................................... (590) (160)
Cumulative dividends declared....................................................... (4,250) (4,250)
Retained earnings................................................................... 4,988 2,811
------------------ --------------------
Total stockholders' equity................................................... 104,989 103,242
------------------ --------------------
Subsequent events
$ 355,789 $ 218,839
================== ====================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
For the Three (commencement of
Months ended operations) through
March 31, 1998 March 31, 1997
---------------------- -----------------------
<S> <C> <C>
Revenues:
Interest income..............................................................$ 5,774 $ 366
Equity in net loss of Impac Commercial Capital Corp.......................... (454) --
Rental and other income...................................................... 109 --
------------------------ ----------------------
5,429 366
------------------------ ----------------------
Expenses:
Interest expense on warehouse line and reverse repurchase agreements......... 2,177 --
Interest expense on other borrowings......................................... 539 129
Interest expense on borrowings from Impac Warehouse Lending Group............ -- 150
General and administrative and other......................................... 190 3
Management advisory fees..................................................... 162 --
Professional services........................................................ 136 60
Provision for loan losses.................................................... 48 13
Stock compensation expense................................................... -- 2,697
------------------------ ----------------------
3,252 3,052
------------------------ ----------------------
Net earnings (loss).............................................................$ 2,177 $ (2,686)
======================== ======================
Net earnings per share--basic..................................................$ 0.27
========================
Net earnings per share--diluted................................................$ 0.27
========================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
For the Three (commencement of
Months ended operations) through
March 31, 1998 March 31, 1997
------------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................... $ 2,177 $ (2,686)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Equity in net loss of Impac Commercial Capital Corporation............. 454 --
Stock compensation expense............................................. -- 2,697
Provision for loan losses.............................................. 48 13
Depreciation........................................................... 49 --
Net change in accrued interest on receivables.......................... (306) (128)
Net change in other assets and liabilities............................. 205 109
Net change in due from affiliates and due to affiliates................ (26,982) --
------------------------- -----------------------
Net cash provided by (used in) operating activities.................. (24,355) 5
------------------------- -----------------------
Cash flows from investing activities:
Net change in Commercial Mortgages held-for-investment................. 4,929 (17,535)
Net change in finance receivables...................................... (109,834) --
Net change in CMO collateral........................................... 237 --
Principal reductions on investment securities available-for-sale....... 694 --
Purchase of residual interest in securitizations....................... -- (10,098)
Principal reductions on residual interest in securitizations........... (266) 73
Purchase of premises and equipment..................................... (68) --
------------------------- -----------------------
Net cash used in investing activities................................ (104,308) (27,560)
------------------------- -----------------------
Cash flows from financing activities:
Net change in warehouse line and reverse repurchase agreements......... 138,994 16,563
Net change in other affiliated borrowings.............................. -- 386
Net change in CMO borrowings........................................... (230) --
Issuance of Common Stock............................................... -- 6
Issuance of promissory notes........................................... -- 15,000
Dividends paid......................................................... (3,047) --
------------------------- -----------------------
Net cash provided by financing activities............................ 135,717 31,955
------------------------- -----------------------
Net change in cash and cash equivalents................................... 7,054 4,400
Cash and cash equivalents at beginning of period.......................... 15,908 --
------------------------- -----------------------
Cash and cash equivalents at end of period................................ $ 22,962 $ 4,400
========================= =======================
Supplementary information:
Interest paid.......................................................... $ 1,684 $ --
Non-cash transactions:
Increase in investment securities valuation allowance.................. $ 430 $ --
Conversion of promissory notes to ICH Preferred Stock.................. -- 15,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
Unless the context otherwise requires, references herein to the "Company"'
refer to Impac Commercial Holdings, Inc. (ICH), its subsidiary IMH/ICH Dove
Street, LLC (Dove), and Impac Commercial Capital Corporation (ICCC),
collectively. References to ICH refer to Impac Commercial Holdings, Inc. as
a separate entity from Dove or ICCC. ICH was incorporated in Maryland in
February 1997 under the name Imperial Credit Commercial Holdings, Inc. and
in June 1997 ICH changed its name to IMH Commercial Holdings, Inc. By a
vote of stockholders on January 28, 1998, a name change to Impac Commercial
Holdings, Inc. was approved.
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, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
The operations of ICH have been presented in the consolidated financial
statements for the three months ended March 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through March 31, 1997
and include the financial results of ICH as a stand-alone entity, the
financial results of ICH's equity interest in net loss in ICCC as a
stand-alone entity, subsequent to the contribution (the Contribution), and
the financial results of Dove.
The Company is entitled to 95% of the earnings or losses of ICCC through
its ownership of all of the non-voting preferred stock of ICCC. As such,
the Company records its investment in ICCC using the equity method. Under
this method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. The results of operations of ICCC
are included in the results of operations for ICH as "Equity in net loss of
ICCC." Gain or loss on the sale of loans or securities by ICCC to ICH are
deferred and amortized or accreted for gain or loss on sale over the
estimated life of the loans or securities using the interest method.
All significant intercompany balances and transactions with ICH's
consolidated subsidiary (Dove) have been eliminated in consolidation. Costs
and expenses of Impac Mortgage Holdings, Inc. (IMH) have been allocated to
ICH in proportion to services provided, plus a 15% service charge.
2. Summary of Business and Significant Accounting Policies
ICH is a recently formed specialty commercial property finance company
which has elected to be taxed at the corporate level as a real estate
investment trust (REIT) for federal income tax purposes, which generally
allows the Company to pass through income to stockholders without payment
of federal income tax at the corporate level. IMH capitalized ICH with
$15.0 million in cash in March 1997. As of March 31, 1998, IMH owned
719,789, or 9.8%, of ICH Common Stock and 674,211 shares, or 100%, of ICH
non-voting Class A Common Stock.
<PAGE>
Commercial mortgage assets include mortgage loans on
condominium-conversions and mortgage loans on commercial properties, such
as industrial and warehouse space, office buildings, retail space and
shopping malls, hotels and motels, nursing homes, hospitals, multifamily,
congregate care facilities and senior living centers (collectively,
Commercial Mortgages). The Company operates the Conduit Operations,
conducted by ICCC, which originates, purchases and sells or securitizes
Commercial Mortgages. The Company's Conduit Operations operates three
divisions: the ConduitExpress Division, CommercialExpress Division, and the
CondoSelect Division. The Company also operates the Long-Term Investment
Operations which invests in mortgage loans and mortgage-backed securities
(MBSs); to date, the Long-Term Investment Operations has invested primarily
in Commercial Mortgages and mortgage-backed securities on commercial
properties (CMBSs).
Long-Term Investment Operations
The Long-Term Investment Operations invests in mortgage loans for long-term
investment and mortgage backed securities. Income is earned principally
from the net interest income received by the Company on the mortgage loans,
mortgage-backed securities held in its portfolio and finance receivables.
Purchases of mortgage loans and mortgage-backed securities are financed
with a portion of the Company's capital, as well as long-term financing
through Collateralized Mortgage Obligations (CMOs) and borrowings under
warehouse line agreements and reverse repurchase agreements. To date, the
Long-Term Investment Operations have invested primarily in Commercial
Mortgages and CMBSs. ICCC supports the investment objectives of ICH by
selling Commercial Mortgages and CMBS to ICH at costs that are comparable
to those available through investment bankers and other third parties. At
March 31, 1998, the Company's mortgage loan and mortgage-backed securities
portfolio consisted of $205.5 million in finance receivables, $61.9 million
in Commercial Mortgages held-for-investment and CMO collateral, $18.2
million in CMBS, and $10.2 million in residual interest in securitization.
For the three months ended March 31, 1998 and for the period from January
15, 1997 to December 31, 1997 (the Commencement Period), the Long-Term
Investment Operations acquired $2.3 million and $58.5 million,
respectively, of adjustable rate Commercial Mortgages from ICCC.
Conduit Operations
The Company's Conduit Operations operates three divisions:
the ConduitExpress Division, the CommercialExpress Division, and the
CondoSelect Division.
ConduitExpress Division. The Company's ConduitExpress Division offers
Commercial Mortgages with a principal balance ranging from $1.5 million to
$10.0 million through specified correspondents such as savings and loan
associations, banks, mortgage bankers and other mortgage brokers. These
Commercial Mortgages are generally for projects more substantial than those
funded by the CommercialExpress Division. The ConduitExpress Division's
strategic focus is to be a low cost national originator through a network
of Commercial Mortgage correspondents which enables the Company to shift
the high fixed costs of interfacing with the property owner to such
correspondents. The marketing strategy for the ConduitExpress Division is
designed to accomplish three objectives: (1) attract a geographically
diverse group of correspondent loan originators, (2) establish
relationships with such correspondents and facilitate their ability to
offer a variety of Commercial Mortgage products designed by the
ConduitExpress Division and (3) purchase Commercial Mortgages and
securitize or sell such mortgages into the secondary market or to the
Long-Term Investment Operations. The ConduitExpress Division originated
$72.9 million and $159.2 million during the three months ended March 31,
1998 and the Commencement Period, respectively.
<PAGE>
CommercialExpress Division. The CommercialExpress Division markets
Commercial Mortgages directly to property owners who seek Commercial
Mortgages to purchase a building or refinance an existing mortgage. The
CommercialExpress Division offers smaller balance (ranging from $500,000 to
$1.5 million) adjustable and fixed rate Commercial Mortgages to project
owners or developers for smaller properties and projects than those offered
by the ConduitExpress Division. The division utilizes short-term prepayment
lock-outs and prepayment penalties with these Commercial Mortgages which
reduces the Company's exposure to interest rate changes and enhances the
profitability of these Commercial Mortgages. The Commercial Mortgages
offered by the CommercialExpress Division generally utilizes non-negotiable
loan documents and limited scope third party reports which provide more
efficient underwriting and closing. The CommercialExpress Division
originated $48.6 million and $50.7 million during the three months ended
March 31, 1998 and the Commencement Period, respectively.
CondoSelect Division. The CondoSelect Division markets Commercial Mortgages
directly to developers and project owners who have completed a condominium
complex or are converting an apartment complex to a condominium complex.
This Division's products allow developers and project owners to structure
flexible financing on qualified condominium projects. Typical uses of the
program include financing the sale of individual units, replacing existing
matured loans or financing condominium acquisitions. Commercial Mortgages
offered by the CondoSelect Division are typically adjustable rate mortgages
with an initial balance between $3.0 million and $10.0 million. The
CondoSelect Division originated $3.4 million and $23.6 million during the
three months ended March 31, 1998 and the Commencement Period,
respectively.
Net Earnings per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). This
statement replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earning per share, basic earnings per share excludes any diluted
effects of stock options. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
Net earnings per share is computed on the basis of the weighted average
number of shares and common equivalent shares outstanding for the period.
Basic and dilutive earnings per share are approximately the same
for each period presented.
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three
Months ended
March 31, 1998
------------------------------
<S> <C>
Numerator:
Numerator for basic earnings per share--
Net earnings .................................................... $ 2,177
------------------------------
Denominator:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding
during the period................................................ 8,019
Net effect of dilutive stock options............................. 36
------------------------------
Denominator for diluted earnings per share............................ 8,055
==============================
Net earnings per share--basic........................................ $ 0.27
==============================
Net earnings per share--diluted....................................... $ 0.27
==============================
</TABLE>
3. Investment in Impac Commercial Capital Corporation
The Company records its investment in ICCC using the equity method. Certain
officers and directors of the Company and ICCC own all of the common stock
of ICCC and are entitled to 5% of the earnings or loss of ICCC. The Company
is entitled to 95% of the earnings or losses of ICCC through its ownership
of all of the non-voting preferred stock of ICCC. Summarized financial
information for ICCC follows:
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
(dollar amounts in thousands)
<S> <C> <C>
March 31, 1998 December 31, 1997
--------------------- ---------------------
ASSETS
Cash....................................................................... $ 2,700 $ 2,273
Commercial Mortgages held-for-sale......................................... 231,720 106,654
Due from affiliates........................................................ 837 1,538
Premises and equipment, net................................................ 408 381
Other assets............................................................... 2,228 1,789
--------------------- --------------------
$ 237,893 $ 112,635
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Warehouse line agreements.................................................. $ 223,815 $ 104,219
Due to affiliates.......................................................... 7,890 758
Other liabilities.......................................................... 2,263 3,255
--------------------- --------------------
Total liabilities..................................................... 233,968 108,232
--------------------- --------------------
Shareholders' Equity:
Preferred stock; no par value; 50,000 shares authorized; 9,500 shares
issued and outstanding at March 31, 1998 (unaudited) and December 31, 1997 2,875 2,875
Common stock; no par value; 50,000 shares authorized; 500 shares issued
and outstanding at March 31, 1998 (unaudited) and December 31, 1997....... 1 1
Contributed capital........................................................ 150 150
Retained earnings.......................................................... 899 1,377
--------------------- --------------------
Total shareholders' equity............................................ 3,925 4,403
--------------------- --------------------
$ 237,893 $ 112,635
===================== ====================
</TABLE>
STATEMENTS OF OPERATIONS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
For the Three (commencement of
Months ended operations) through
March 31, 1998 March 31, 1997
------------------------- ------------------------
<S> <C> <C>
Revenues:
Interest income...................................................... $ 2,846 $ 6
Loan servicing and other income...................................... 84 2
------------------------- -------------------------
2,930 8
------------------------- -------------------------
Expenses:
Interest on borrowings from ICH...................................... 2,526 --
Interest on other affiliated borrowings.............................. 393 5
General and administrative and other................................. 353 44
Personnel expense.................................................... 252 57
Professional services................................................ 233 63
Stock compensation expense........................................... -- 25
------------------------- -------------------------
3,757 194
------------------------- -------------------------
Net loss before tax benefit.......................................... (827) (186)
Income tax benefit........................................................ (349) --
------------------------- -------------------------
Net loss............................................................. $ (478) $ (186)
========================= =========================
</TABLE>
<PAGE>
4. Investment Securities Available-for-Sale
The Company classifies CMBSs as held-to-maturity, available-for-sale,
and/or trading securities. Held-to-maturity investment and mortgage-backed
securities are reported at amortized cost, available-for-sale securities
are reported at fair value with unrealized gains and losses, net of related
income taxes, as a separate component of stockholders' equity, and trading
securities are reported at fair value with unrealized gains and losses
reported in income. The Company's investment securities are held as
available-for-sale, reported at fair value with unrealized gains and losses
reported as a separate component of stockholders' equity. As the Company
qualifies as a REIT and no income taxes are paid, the unrealized gains and
losses are reported gross in stockholders' equity. Premiums or discounts
obtained on investment securities are accreted or amortized to interest
income over the estimated life of the investment securities using the
interest method. At March 31, 1998, the Company's investment securities
available-for-sale included $6.2 million of CMBSs and $12.0 million of
"interest only" securities collateralized by Commercial Mortgages. Such
investments may subject the Company to credit, interest rate and/or
prepayment risk.
5. Residual Interest in Securitization
The accompanying balance sheets include one residual interest in
securitization (residual) of real estate mortgage investment conduits
(REMICs) which was recorded as a result of a 1995 securitization by
Imperial Credit Industries, Inc. (ICII) of commercial loans through a
special purpose trust vehicle. ICII has one director who also serves on the
Board of ICH. In March 1997, ICH purchased the residual from Impac Funding
Corporation (IFC) for $10.1 million. IFC and ICH have estimated future cash
flows from the residual utilizing assumptions that they believe are
commensurate with the risk inherent in the investment and consistent with
those that they believe would be utilized by an unaffiliated third-party
purchaser and discounted at a rate commensurate with the risk involved. The
Company has classified this residual as a held-for-trading security.
Unrealized gains and losses net of related income taxes will be recognized
as a reduction to current earnings. To the Company's knowledge, there is
currently no active market for the purchase or sale of this residual. As of
March 31, 1998, the carrying amount of the residual was $10.2 million.
6. Allowance for Loan Losses
The Company maintains an allowance for losses on Commercial Mortgages held
for investment, collateral for CMOs and finance receivables at an amount
which it believes is sufficient to provide adequate protection against
future losses in the mortgage loans portfolio. The allowance for losses is
determined primarily on the basis of management's judgment of net loss
potential, including specific allowances for known impaired loans and other
factors such as changes in the nature and volume of the portfolio, value of
the collateral and current economic conditions that may affect the
borrowers ability to pay. A provision is recorded for all loans or portions
thereof deemed to be uncollectible thereby increasing the allowance for
loan losses. Subsequent recoveries on mortgage loans previously charged off
are credited back to the allowance. During the three months ended March 31,
1998, the Company recorded $48,000 as provision for loan losses. As of
March 31, 1998, the Company's allowance for loan losses was $612,000.
7. Subsequent events
On April 1, 1998, the Board of Directors declared a $0.40 cash
dividend payable April 24, 1998 to stockholders of record on April 9, 1998.
<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, and Section 21e of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negatives thereof
or other variations thereon or comparable terminology.
General
ICH was incorporated in the state of Maryland on February 3, 1997. ICH was
formed to seek opportunities in the commercial mortgage market. Commercial
mortgage assets include mortgage loans on condominium-conversions and
mortgage loans on commercial properties, such as industrial and warehouse
space, office buildings, retail space and shopping malls, hotels and
motels, nursing homes, hospitals, multifamily, congregate care facilities
and senior living centers (collectively, Commercial Mortgages). The Company
operates the Long-Term Investment Operations which invests primarily in
mortgage loans and mortgage-backed securities and, subsequent to ICH's
initial public offering (IPO) in August 1997, engages in the Conduit
Operations, ICCC, which originates, purchases and sells or securitizes
Commercial Mortgages. ICCC operates three divisions: the ConduitExpress
Division, the CommercialExpress Division, and the CondoSelect Division.
RESULTS OF OPERATIONS; IMPAC COMMERCIAL HOLDINGS, INC.
Three months ended March 31, 1998 compared to the period from January 15,
1997 (commencement of operations) through March 31, 1997
Net Earnings
Net earnings for the three months ended March 31, 1998 increased to
$2.2 million as compared to a net loss of $2.7 million for the period from
January 15, 1997 (commencement of operations) through March 31, 1997 (the
"March 31, 1997 Period"). The net loss for the March 31, 1997 Period was
primarily the result of the issuance by ICH of stock that resulted in a
one-time stock compensation expense of $2.7 million. Excluding the stock
compensation expense, ICH would have earned $11,000 for the March 31, 1997
Period. The increase in net earnings was primarily attributed to an
increase in net interest income earned on Commercial Mortgages, investment
and residual securities, and finance receivables partially offset by an
increase in management advisory fees and professional service expense. Net
earnings were adversely affected by the strategic decision of the Board of
Directors to boost long-term assets rather than realize current earnings
from a whole loan sale. The significant increase in the Company's net
earnings for the three months ended March 31, 1998 as compared to the
March 31, 1997 Period is the result the Company's growth over the past 12
months as the Company had only been in operation for approximately two
months as of March 31, 1997.
Revenues
Revenues for the three months ended March 31, 1998 increased to $5.4
million as compared to $366,000 for the March 31, 1997 Period. The increase
is primarily due to an increase in interest income earned on Commercial
Mortgages held-for-investment, investment securities available-for-sale,
residual interests in securitizations, and finance receivables
(collectively, "Commercial Mortgage Assets") partially offset by equity in
net loss of ICCC of $454,000.
<PAGE>
Interest income for the three months ended March 31, 1998 increased to
$5.8 million as compared to $366,000 for the March 31, 1997 Period. Such an
increase is attributed to an increase in average Commercial Mortgage Assets
to $213.2 million for the three months ended March 31, 1998 as compared to
$12.1 million for the March 31, 1997 Period.
The Company recorded equity in net loss of ICCC for the three months
ended March 31, 1998 of $454,000. The Company has a 95% economic interest
in ICCC through its ownership of 100% of the preferred stock of ICCC which
was acquired in August 1997. As the preferred stock of ICCC was contributed
to the Company in August 1997, the Company did not record any investment in
or equity in net earnings or loss for the March 31, 1997 Period. For
additional information on the financial results of ICCC, see "-- Results of
Operations; Impac Commercial Capital Corporation."
Expenses
Expenses for the three months ended March 31, 1998 increased 6.6% to
$3.3 million as compared to $3.1 million for the March 31, 1997 Period. The
increase is primarily due an increase in interest expense on borrowings,
management advisory fees and professional expenses offset by a decrease in
stock compensation expense. Interest expense for the three months ended
March 31, 1998 increased to $2.7 million as compared to $279,000 for the
March 31, 1997 Period as average borrowings, which include warehouse line
agreements, reverse repurchase agreements and CMO borrowings, increased to
$144.0 million for the three months ended March 31, 1998 as compared to
$9.6 million for the March 31, 1997 Period. Management advisory fees
increased to $162,000 for the three months ended March 31, 1998 as compared
to zero for the March 31, 1997 Period. The Company incurs management
advisory fee expense pursuant to the management agreement with RAI. The
Company did not record a management advisory fee for the March 31, 1997
Period as the Company's operations were in a formative stage, and thus, the
return on equity was less than the hurdle rate (average Ten year U.S.
Treasury rate plus 2%). Professional expenses increased 127% to $136,000
for the three months ended March 31, 1998 as compared to $60,000 for the
March 31, 1997 Period. The Company records professional expenses primarily
as a result of legal services and various services provided by IFC
including technology, management information and accounting services. Stock
compensation expense decreased as the Company incurred a one-time charge of
$2.7 million in the March 31, 1997 Period as a result of the Company
issuance of founder's stock.
RESULTS OF OPERATIONS; IMPAC COMMERCIAL CAPITAL CORPORATION
Three Months Ended March 31, 1998 Compared to the period from January 15,
1997 (commencement of operations) through March 31, 1997
Net Earnings
Net loss increased to $478,000 for the three months ended March 31,
1998 as compared to $186,000 for the March 31, 1997 Period. The net loss
for the three months ended March 31, 1998 was primarily due to net interest
expense from Commercial Mortgages held-for-sale as well as general and
administrative and other expense. The net loss for the March 31, 1997
Period was primarily due to general and administrative expenses incurred
during the Company's formative stage.
Revenues
Revenues for the three months ended March 31, 1998 increased to $2.9
million as compared to $8,000 for the March 31, 1997 Period primarily
attributed to the increase in average Commercial Mortgages held-for-sale to
$137.3 million as compared to zero for the March 31, 1997 Period.
Expenses
Expenses for the three months ended March 31, 1998 increased to $3.8
million as compared to $194,000 for the March 31, 1997 Period. The increase
is primarily due to an increase in interest expense to $2.9 million for the
three months ended March 31, 1998 as compared to $5,000 for the March 31,
1997 Period. The increase was directly related to an increase in average
borrowings for the three months ended March 31, 1998 to $129.1 million as
compared to $86,000 for the March 31, 1997 Period and as a result of the
growth of ICCC's operations.
<PAGE>
Liquidity and Capital Resources
The Company's principal liquidity requirements result from funding
needs arising from the acquisition of mortgage loans and mortgage-backed
securities by the Long-Term Investment Operations, ICH, and the origination
or purchase of Commercial Mortgages held-for-sale by the Conduit
Operations, ICCC. 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.
Prior to the IPO, the Long-Term Investment Operations was funded by
$15.0 million in investments and $900,000 in borrowings from IMH and a
warehouse line agreement from a third party lender. ICCC was funded by
affiliated borrowings and by $500,000 from the issuance of preferred stock.
Subsequent to the IPO, the Long-Term Investment Operations and the Conduit
Operations were funded through borrowings from warehouse line agreements
and reverse repurchase agreements, borrowings from affiliated companies,
sales of Commercial Mortgages and proceeds from the issuance of capital
stock.
ICH, as a stand-alone entity, entered into committed warehouse line
agreements with two investment banks, one of which expires in May 1998 and
one of which expires in February 1999 (unless terminated earlier), which
provide up to an aggregate of $500.0 million to finance ICH's operations as
needed. Terms of the warehouse line agreements require that the Commercial
Mortgages be held by an independent third party custodian, which gives the
Company the ability to borrow against the collateral as a percentage of the
fair market value of the Commercial Mortgages. The borrowing rates are
expressed in basis points over one-month LIBOR, plus a certain margin
depending on the type of collateral provided by the Company. The margins on
the warehouse line agreements are based on the type of mortgage collateral
used and the loan amounts generally range from 85% to 92% of the fair
market value of the collateral. Management believes that the warehouse line
agreements will be sufficient to handle the Company's liquidity needs. As
of March 31, 1998, $229.8 million was outstanding on warehouse line
agreements.
ICH has entered into reverse repurchase agreements whereby ICH pledges
specific CMBSs as collateral to secure short-term loans. The interest rates
on the loans are based on one-month LIBOR plus a margin depending on the
type of collateral. As of March 31, 1998, amounts outstanding on the
reverse repurchase agreements were $9.4 million.
In August 1997, the Company raised net proceeds of $88.2 million (after
underwriting discounts and before offering expenses) from its IPO as
stockholders purchased 6,325,000 shares of common stock at a price of
$15.00 per share. Underwriting discount and commissions were $6.6 million
and the total expenses were approximately $1.2 million.
<PAGE>
In August 1997, ICH entered into a revolving credit arrangement with
IMH whereby ICH agreed to advance to IMH up to maximum amount of $15.0
million. The agreement expires on August 8, 1998. Advances under the
revolving credit arrangement are at an interest rate and maturity to be
determined at the time of each advance with interest and principal paid
monthly. As of March 31, 1998 and December 31, 1997, there were no amounts
outstanding under the credit arrangement. Interest income recorded by ICH
for the three months ended March 31, 1998 and the Commencement Period
related to such advances to IMH was approximately $55,000 and $68,000,
respectively.
In August 1997, ICH entered into a revolving credit arrangement with
IMH whereby IMH agreed to advance to ICH up to maximum amount of $15.0
million. The agreement expires on August 8, 1998. Advances under the
revolving credit arrangement are at an interest rate and maturity to be
determined at the time of each advance with interest and principal paid
monthly. As of March 31, 1998 and December 31, 1997, ICH's outstanding
borrowings under the credit arrangement was none and $9.1 million,
respectively. Interest expense recorded by ICH related to such borrowings
from IMH for the three months ended March 31, 1998 and the Commencement
Period was approximately $43,000 and $55,000, respectively.
ICCC has entered into warehouse line agreements with ICH which provide
up to an aggregate of $900.0 million to finance ICCC's operations as
needed. Terms of the warehouse line agreements require that the Commercial
Mortgages be held by an independent third party custodian, which gives the
Company the ability to borrow against the collateral as a percentage of the
fair market value of the Commercial Mortgages. The borrowing rates on the
warehouse line agreements are at prime which was 8.50% at March 31, 1998.
The margins on the warehouse line agreements are up to 90% of the fair
market value of the collateral. Management believes that the warehouse line
agreements will be sufficient to handle the Company's liquidity needs. As
of March 31, 1998 and December 31,1997, amounts outstanding on ICCC's
warehouse line agreements with ICH were $205.5 million and $95.7 million,
respectively.
ICCC has entered into an uncommitted warehouse line agreement with IMH
to provide financing as needed. The margins on the warehouse line agreement
are at 8% of the fair market value of the collateral. The interest rates on
the borrowings are indexed to the prime rate. As of March 31, 1998 and
December 31,1997, outstanding amounts on the warehouse line agreement was
$18.3 million and $8.5 million, respectively.
During the three months ended March 31, 1998 and the period from
January 15, 1997 (commencement of operations) through December 31, 1997,
ICCC sold none and $73.4 million, respectively, to third party investors
and sold $2.3 million and $58.4 million, respectively, in principal balance
of Commercial Mortgages to ICH.
For the three months ended March 31, 1998 and the March 31, 1997
Period, net cash provided by (used in) operating activities was ($24.4)
million and $5,000, respectively. Net cash used in operating activities for
the three months ended March 31, 1998 was primarily the result of a net
increase in due from affiliates and due to affiliates balances of $27.0
million partially offset by a net change in other assets and liabilities of
$205,000. Net cash provided by operating activities for the March 31, 1997
Period was primarily affected by $2.7 million in stock compensation expense
related to the issuance of 300,000 shares of ICH Common Stock.
For the three months ended March 31, 1998 and the March 31, 1997
Period, net cash used in operating activities was $104.3 million and $27.6
million, respectively. Net cash used in investing activities for the three
months ended March 31, 1998 was primarily the result of a net increase in
finance receivables of $109.8 million. Net cash used in investing
activities for the March 31, 1997 Period was primarily affected by the
purchase of $17.5 million in Commercial Mortgages held-for-investment and
$10.1 million in residual interest in securitization.
For the three months ended March 31, 1998 and the March 31, 1997
Period, net cash provided by financing activities was $135.7 million and
$32.0 million, respectively. Net cash provided by financing activities for
the three months ended March 31, 1998 was primarily the result of an
increase in net borrowings on warehouse line and reverse repurchase
agreements of $139.0 million which was partially offset by dividends paid
of $3.0 million. Net cash provided by financing activities for the March
31, 1997 Period was primarily the result of an increase in net borrowings
on warehouse line and reverse repurchase agreements of $16.6 million and
the issuance of promissory notes of $15.0 million.
<PAGE>
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
period 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2- 3: NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 27,1998, the Company held a special meeting of stockholders. Of
the total number of shares eligible to vote (7,344,789), 6,839,899 votes
were returned, or 93%, formulating a quorum. At the stockholders meeting,
the following matters were submitted to stockholders for vote: Proposal I -
To approve an amendment to the Charter changing the corporate name from
"IMH Commercial Holdings, Inc." to "Impac Commercial Holdings, Inc."
The results of voting on these proposals were as follows:
Proposal I was approved with 6,754,498 shares voted for, 34,112 voted against,
and 51,289 abstained from voting thereby ratifying the change of corporate
name from "IMH Commercial Holdings, Inc." to "Impac Commercial Holdings, Inc."
ITEM 5: OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 27 Financial Data Schedule
(b) Reports on Form 8-K:
ICH filed a Current Report on Form 8-K, dated
January 28, 1998, on February 11, 1998 and an amendment to the Form 8-K on
February 12, 1998 reporting Item 5 with regards to ICH's name change and
Item 7 filing the amendment to ICH's charter.
<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 COMMERCIAL HOLDINGS, INC.
- -----------------------------------
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: May 13, 1998
<PAGE>
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