<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
1301 AVENUE OF THE AMERICAS, 42ND FLOOR
NEW YORK, NEW YORK 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 798-6100
Indicate by check mark whether the Registrant (1) has filed all documents and
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Common Stock ($0.01 par value) 6,317,177 as of November 10, 2000
================================================================================
<PAGE> 2
IMPAC COMMERCIAL HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999................................. 2
Consolidated Statements of Operations and Comprehensive Earnings (Loss) - Quarter and
Nine Months Ended September 30, 2000 and 1999....................................................... 3
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999.................. 4
Notes to Consolidated Financial Statements............................................................. 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................................... 10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 15
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................................... 15
SIGNATURES............................................................................................. 16
</TABLE>
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,013 $ 25,418
Commercial mortgage-backed securities ("CMBS") 132,013 35,589
Loan receivables:
Collateralized mortgage obligation ("CMO") collateral 302,718 312,152
Commercial mortgages held for investment 4,333 4,362
Allowance for loan losses (1,933) (1,427)
------------ ------------
Net loan receivables 305,118 315,087
Accrued interest receivable 2,475 2,355
Other assets 728 708
------------ ------------
$ 451,347 $ 379,157
============ ============
LIABILITIES
CMO borrowings $ 266,738 $ 274,529
Borrowings under repurchase arrangements 95,433 3,936
Other liabilities 1,530 3,898
------------ ------------
363,701 282,363
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock; $0.01 par value; 5,520 shares authorized; no shares
outstanding
Class A Convertible Preferred Stock; $0.01 par value; 3,000
shares authorized; no shares outstanding -- --
Series A Junior Participating Preferred Stock; $0.01 par value; 1,000 shares
authorized; no shares outstanding -- --
Series B 8.5% Cumulative Convertible Preferred Stock; $0.01 par value; 480 shares
authorized, issued and outstanding ($12,000 aggregate liquidation preference) 5 5
Class A Common Stock; $0.01 par value; 4,000 shares authorized;
no shares outstanding -- --
Common Stock; $0.01 par value; 46,000 shares authorized; 6,317 and 8,418 shares
issued and outstanding at September 30, 2000 and December 31, 1999, respectively 63 84
Additional paid-in-capital 125,330 137,522
Accumulated other comprehensive loss (7,031) (7,497)
Accumulated deficit (30,721) (33,320)
------------ ------------
87,646 96,794
------------ ------------
$ 451,347 $ 379,157
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 4
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Commercial mortgage assets $ 9,477 $ 6,878 $ 26,422 $ 23,480
Cash equivalents and due from affiliates 136 436 667 844
------------ ------------ ------------ ------------
Total interest income 9,613 7,314 27,089 24,324
------------ ------------ ------------ ------------
INTEREST EXPENSE:
CMO borrowings 4,909 5,202 15,078 15,742
Repurchase agreements and warehouse line agreements 1,739 102 3,772 1,261
Other borrowings -- 125 -- 410
------------ ------------ ------------ ------------
Total interest expense 6,648 5,429 18,850 17,413
------------ ------------ ------------ ------------
Net interest income 2,965 1,885 8,239 6,911
Provision for loan losses (301) -- (638) --
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,664 1,885 7,601 6,911
------------ ------------ ------------ ------------
OTHER REVENUE (EXPENSE):
Gain (loss) on sale of loans and real estate -- 432 (70) 679
Writedown of residual interest -- (5,043) -- (5,543)
Settlement of litigation -- -- (490) --
Rental and other income -- 447 44 1,163
General and administrative and other operating expense (492) (2,959) (1,645) (7,810)
Management advisory fees (234) -- (234) --
------------ ------------ ------------ ------------
TOTAL OTHER REVENUE (EXPENSE) (726) (7,123) (2,395) (11,511)
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 1,938 $ (5,238) $ 5,206 $ (4,600)
============ ============ ============ ============
NET EARNINGS (LOSS) AVAILABLE TO COMMON STOCKHOLDERS:
Net earnings (loss) $ 1,938 $ (5,238) $ 5,206 $ (4,600)
Less cash dividends on preferred stock (255) (255) (765) (414)
------------ ------------ ------------ ------------
Net earnings (loss) available to common stockholders $ 1,683 $ (5,493) $ 4,441 $ (5,014)
============ ============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.27 $ (0.65) $ 0.60 $ (0.59)
Diluted 0.24 (0.65) 0.57 (0.59)
OTHER COMPREHENSIVE EARNINGS (LOSS) :
Net earnings (loss) $ 1,938 $ (5,238) $ 5,206 $ (4,600)
Unrealized gains (losses) (4) (8,918) 466 (8,260)
------------ ------------ ------------ ------------
Comprehensive earnings (loss) $ 1,934 $ (14,156) $ 5,672 $ (12,860)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 5
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 5,206 $ (4,600)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Decrease in minority interest in ICCC -- 788
Depreciation and amortization 772 (367)
Provision for loan losses 638 --
Writedown in residual interest -- 5,543
Loss on sale of REO 70 --
Net change in accrued interest on receivables 485 562
Net change in other assets and liabilities (3,020) 1,723
Net change in due from affiliates and due to affiliates -- 5,849
Net change in commercial mortgages held-for-sale -- 43,480
--------------- ---------------
Net cash provided by operating activities 4,151 52,978
--------------- ---------------
INVESTING ACTIVITIES:
Net change in commercial mortgages held-for-investment 19 18,188
Net change in CMO collateral 7,471 3,734
Purchases of CMBS (99,916) --
Proceeds from sale of REO 426 --
Principal reductions on CMBS, net of amortization 4,208 2,322
Purchase of premises and equipment -- (1,586)
Net cash acquired through the consolidation of ICCC -- 692
--------------- ---------------
Net cash provided by (used in) investing activities (87,792) 23,350
--------------- ---------------
FINANCING ACTIVITIES:
Net change in reverse repurchase agreements and other borrowings 91,497 (50,188)
Net change in CMO borrowings (7,441) (9,229)
Issuance of preferred shares -- 11,592
Repurchase of common shares (12,213) (1,072)
Dividends paid (2,607) (1,211)
--------------- ---------------
Net cash provided by (used in) financing activities 69,236 (50,108)
--------------- ---------------
296,831
Net change in cash and cash equivalents (14,405) 26,220
Cash and cash equivalents at beginning of period 25,418 14,161
--------------- ---------------
Cash and cash equivalents at end of period $ 11,013 $ 40,381
=============== ===============
SUPPLEMENTARY INFORMATION:
Interest paid $ 17,084 $ 17,580
NON-CASH TRANSACTIONS:
Transfer of loans to other real estate owned -- 1,325
Dividends declared and unpaid 255 1,307
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 6
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - BUSINESS AND PENDING MERGER
Impac Commercial Holdings, Inc. and subsidiaries ("Impac" or the "Company"), a
specialty commercial property finance company, earns income from investing in
commercial mortgage assets on a leveraged basis and other activities in the
commercial mortgage market. By mid-April 2000, Impac had substantially completed
modifying its business plan to focus primarily on CMBS investments.
On October 6, 2000 the Company announced it had signed a definitive merger
agreement providing for the acquisition by a wholly-owned subsidiary of Fortress
Investment Corp. ("Fortress") of all of the Company's outstanding common shares
not already owned by Fortress and its affiliates for $7.55 per share in cash.
Fortress is an affiliate of FIC Management Inc., the Company's external manager.
Fortress and its affiliates own common and preferred shares representing
approximately 31% of the voting power of the Company, on a fully diluted basis.
The all-cash transaction, which is structured as a $7.55 per share cash tender
offer followed by a second-step merger of the Company with a subsidiary of
Fortress, is valued at approximately $41.4 million excluding shares already
owned by affiliates of Fortress. The tender offer commenced October 13, 2000 and
is expected to conclude on November 17, 2000.
The tender offer and merger are subject to certain customary conditions;
however, the tender offer is not subject to a financing condition, nor a
condition that any minimum number of shares be tendered and the merger is not
subject to a "break-up" or "commitment" fee other than an expense reimbursement
of up to $400,000 payable in the event that an independent committee of the
Board of Directors receives a higher offer from a third party and accepts that
offer pursuant to the exercise of its fiduciary duties.
NOTE 2 - BASIS OF FINANCIAL STATEMENT PRESENTATION
Basis of Presentation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles 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 generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the quarter and nine
months ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the calendar year ending December 31, 2000. For further
information refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1999.
Reclassifications. Certain amounts in the consolidated financial statements as
of and for the quarter and nine months ended September 30, 1999 have been
reclassified to conform to the 2000 presentation.
NOTE 3 - SHARE REPURCHASES
On May 24, 2000 the Company repurchased 2,101,023 of its common shares at a
price of $5.81 per share (including transaction costs) pursuant to a tender
offer that was completed May 19, 2000.
-5-
<PAGE> 7
NOTE 4 - NET EARNINGS (LOSS) PER COMMON SHARE
The following table represents the computation of basic and diluted earnings
(loss) per common share for the periods presented (in thousands, except per
share data):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for diluted computation--net earnings (loss) $ 1,938 $ (5,238) $ 5,206 $ (4,600)
Less preferred share dividends paid or accrued (255) (255) (765) (414)
------------ ------------ ------------ ------------
Net earnings (loss) available to common stockholders
and numerator for basic computation $ 1,683 $ (5,493) $ 4,441 $ (5,014)
============ ============ ============ ============
DENOMINATOR:
Denominator for basic computation--weighted
average common shares outstanding 6,317 8,418 7,429 8,476
Net effect of dilutive convertible preferred shares 1,684 -- 1,684 --
------------ ------------ ------------ ------------
Denominator for diluted computation 8,001 8,418 9,113 8,476
============ ============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ 0.27 $ (0.65) $ 0.60 $ (0.59)
Diluted 0.24 (0.65) 0.57 (0.59)
</TABLE>
NOTE 5 - CMBS
Investments in CMBS are secured by commercial real property. The yield to
maturity on each security depends on, among other things, the rate and timing of
principal payments (including prepayments, repurchases, defaults and
liquidations), the pass-through rate, and interest rate fluctuations. Average
effective interest rates (calculated for the quarter ended September 30, 2000
and the year ended December 31, 1999, excluding unrealized gains and losses)
along with amortized cost and estimated fair value information for investment
securities held available-for-sale is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
AVERAGE
AMORTIZED UNREALIZED UNREALIZED ESTIMATED EFFECTIVE
COST GAIN LOSS FAIR VALUE RATE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
AT SEPTEMBER 30, 2000:
Fixed-rate securities $ 6,729 $ -- $ (4,172) $ 2,557 12.01%
Adjustable-rate securities 122,719 651 (260) 123,110 9.78
Interest-only securities 5,894 34 (3,294) 2,634 11.65
Residual interest in securitization 3,702 10 -- 3,712 20.05
------------ ------------ ------------ ------------ ------------
$ 139,044 $ 695 $ (7,726) $ 132,013 10.25
============ ============ ============ ============ ============
AT DECEMBER 31, 1999:
Fixed-rate securities $ 6,635 $ -- $ (3,915) $ 2,720 11.88%
Adjustable-rate securities 24,396 22 (4) 24,414 8.24
Interest-only securities 7,955 16 (3,616) 4,355 12.44
Residual interest in securitization 4,100 -- -- 4,100 20.00
------------ ------------ ------------ ------------ ------------
$ 43,086 $ 38 $ (7,535) $ 35,589 10.70
============ ============ ============ ============ ============
</TABLE>
As of September 30, 2000 and December 31, 1999, the amortized cost of fixed-rate
and adjustable-rate securities included unamortized purchase discounts of $3.6
million and $1.7 million, respectively. Interest-only securities are entitled to
receive only coupon interest stripped from pools of commercial mortgage loans.
Consequently, the amortized cost of these securities represents unamortized
purchase premium. The residual interest in Southern Pacific Secured Assets Corp.
Mortgage Pass-Through Certificate 1995-2 (the "Residual") was previously
classified as held-for-trading and marked to market through earnings each
balance sheet date. On January 1, 2000 the Residual was reclassified as
available-for-sale. Under the terms of the securitization, the Residual is
required to build over-collateralization to specified levels using excess cash
flows after payments required to senior securities until set percentages of the
securitized portfolio are attained. This over-collateralization is held by the
real estate mortgage investment conduit ("REMIC") trust to provide credit
enhancement for senior security holders and is recorded as part of the Residual.
-6-
<PAGE> 8
NOTE 6 - LOAN RECEIVABLES
CMO COLLATERAL
CMO collateral includes various types of mortgages secured by commercial real
property and loans to developers secured by first liens on condominium
complexes. All CMO collateral is pledged to secure CMO borrowings. The
components of CMO collateral are summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Commercial mortgages held as CMO collateral $ 293,727 $ 301,198
Unamortized net premiums 2,581 3,338
Prepaid securitization costs 6,410 7,616
------------ ------------
$ 302,718 $ 312,152
============ ============
</TABLE>
The weighted average yield on CMO collateral was 7.55% and 7.65% during the
quarter and nine months ended September 30, 2000, respectively.
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 1,648 $ 1,427 $ 1,427 $ 2,110
Provision for loan losses 301 -- 638 --
Charge-offs (16) -- (132) (683)
------------ ------------ ------------ ------------
Balance, end of period $ 1,933 $ 1,427 $ 1,933 $ 1,427
============ ============ ============ ============
</TABLE>
NOTE 7 - CMO BORROWINGS
CMO borrowings are fully payable from the principal and interest payments on the
underlying mortgage loans collateralizing such debt and any investment income
earned on such payments held by the bond trustee. The maturity of each class of
CMO is directly affected by the rate of principal prepayments on the related CMO
collateral and is also subject to redemption according to specific terms of the
related indenture. As a result, the actual maturity of CMO borrowings is likely
to occur earlier than the stated maturities of the underlying mortgage loans.
The components of CMO borrowings, along with related other information, are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
CMO borrowings:
Fixed-rate $ 249,615 $ 253,230
Adjustable-rate 21,073 24,857
Accrued interest payable 1,488 1,530
------------ ------------
Total obligation 272,176 279,617
Unamortized discount (5,438) (5,088)
------------ ------------
$ 266,738 $ 274,529
============ ============
Range of fixed interest rates 6.06% to 7.58% 6.06% to 7.58%
Adjustable-rate margin over 1-month LIBOR 0.29% 0.28%
Number of series 1 2
</TABLE>
The weighted average effective rate on CMO borrowings was 7.31% and 7.46% during
the quarter and nine months ended September 30, 2000, respectively.
-7-
<PAGE> 9
NOTE 8 - REVERSE REPURCHASE AGREEMENTS
The Company enters into reverse repurchase agreements whereby specific CMBS are
pledged as collateral to secure these loans. The interest rates on the loans are
based on 1-month LIBOR plus a margin depending on the type of collateral
provided by the Company and generally reset monthly. Interest is generally
payable to the lender on the monthly reset date. The following table sets forth
information regarding reverse repurchase agreements (dollars in thousands):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
------------------------------------ ------------------------------------
AMORTIZED AMORTIZED
REVERSE COST OF WEIGHTED REVERSE COST OF WEIGHTED
TYPE OF COLLATERAL AND REPURCHASE UNDERLYING AVERAGE REPURCHASE UNDERLYING AVERAGE
MATURITY OF RELATED LIABILITY LIABILITY COLLATERAL RATE LIABILITY COLLATERAL RATE
----------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CMBS (less than 31 days) $ 3,328 $ 10,507 7.60% $ 3,936 $ 5,408 7.28%
CMBS (31 to 90 days) 44,002 52,219 7.17 -- -- --
CMBS (91 to 180 days) 23,823 29,801 6.87 -- -- --
CMBS (over 181 days, to 270 days) 13,830 27,775 7.32 -- -- --
CMBS (over 1 year) 10,450 12,924 7.19 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
$ 95,433 $ 133,226 7.14 $ 3,936 $ 5,408 7.28
========== ========== ========== ========== ========== ==========
</TABLE>
The weighted average effective interest rate on borrowings under reverse
repurchase arrangements was 7.14% and 6.98% during the quarter and nine months
ended September 30, 2000, respectively.
NOTE 9 - ESTIMATED FAIR VALUE INFORMATION
The estimated fair values of the Company's assets and liabilities have been
determined using available market information and appropriate valuation
methodologies; however, considerable judgment is necessarily required to
interpret market data to develop these estimates. In addition, fair values
fluctuate on a daily basis. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, receivables/payables,
borrowings under reverse repurchase agreements and nonfinancial instruments
approximate fair value. The fair value of mortgage assets were estimated using
either (i) quoted market prices when available, including quotes made by lenders
in connection with designating collateral for borrowings, or (ii) offer prices
for similar assets or market positions. The fair value of fixed-rate CMO
borrowings was estimated based on the use of a bond model, which incorporates
certain assumptions such as yield, prepayments and losses. The fair value of
adjustable-rate CMO borrowings approximate carrying amount because of the
variable interest rate nature of these borrowings. The following table
summarizes fair value disclosures for financial instruments (in thousands):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000 AT DECEMBER 31, 1999
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 11,013 $ 11,013 $ 25,418 $ 25,418
CMBS 132,013 132,013 35,589 35,589
Loan receivables (principally CMO collateral) 305,118 270,082 315,087 272,646
Accrued interest receivable 2,475 2,475 2,355 2,355
Other assets 728 728 708 708
---------- ---------- ---------- ----------
$ 451,347 $ 416,311 $ 379,157 $ 336,716
========== ========== ========== ==========
LIABILITIES
CMO borrowings $ 266,738 $ 251,427 $ 274,529 $ 251,698
Reverse repurchase agreements 95,433 95,433 3,936 3,936
Other liabilities 1,530 1,530 3,898 3,898
---------- ---------- ---------- ----------
363,701 348,390 282,363 259,532
STOCKHOLDERS' EQUITY 87,646 67,921 96,794 77,184
---------- ---------- ---------- ----------
$ 451,347 $ 416,311 $ 379,157 $ 336,716
========== ========== ========== ==========
BOOK VALUE/NET ASSET VALUE PER
DILUTED COMMON SHARE $ 10.95 $ 8.49 $ 9.58 $ 7.64
</TABLE>
-8-
<PAGE> 10
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Commercial Mortgage Loan Sales Commitments. The Company has exposure to
liability under representations and warranties made to purchasers and insurers
of mortgage loans and the purchasers of servicing rights in the ordinary course
of the curtailed mortgage conduit operations. Under certain circumstances, Impac
may be required to repurchase mortgage loans if there has been a breach of
representations or warranties.
Litigation. During the second quarter of 2000, the Company settled a lawsuit
characterized as the Bresta Futura Action pertaining to an alleged breach of an
office lease agreement. As a result, year-to-date results include a $490,000
charge recorded in the second quarter, which together with previous accruals,
represents all costs incurred in connection with this matter. The Company is
currently not subject to any other material litigation.
-9-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
OVERVIEW
Impac Commercial Holdings, Inc. ("Impac" or the "Company") was incorporated in
the Commonwealth of Maryland on February 3, 1997 to seek and capitalize on
opportunities in the commercial mortgage market. Impac is a specialty commercial
property finance company that elects to be taxed at the corporate level as a
real estate investment trust ("REIT") for federal income tax purposes, which
generally allows Impac to pass through income to stockholders without payment of
federal income tax at the corporate level provided that Impac distributes at
least 95% of its taxable income to its stockholders (90% after January 1, 2001).
Impac earns income from investing in credit-sensitive commercial mortgage assets
on a leveraged basis and other activities in the commercial mortgage market.
In May 1999, Fortress Partners, L.P. ("Fortress Partners") made a significant
preferred stock investment in Impac and, concurrently with that investment, FIC
Management Inc. (the "Manager") an affiliate of Fortress Partners, assumed
responsibility for the external management of Impac. Assuming conversion of the
preferred shares, and including subsequent open market purchases of 832,400
common shares by an affiliate, Fortress Partners' equity interest represents
approximately 31% of the voting power of the Company, on a fully diluted basis.
During 1999 Impac's current management formulated a new business plan for Impac
designed to produce high current returns, enhance liquidity and reduce reliance
on short-term financing. Under the new business plan, the Company is focusing
its investments in credit-sensitive commercial mortgage-backed securities
("CMBS"). To this end, since year-end the Company has acquired additional
adjustable-rate CMBS to increase mortgage investments by over $86 million to
approximately $437 million at September 30, 2000. By mid-April 2000, the Company
had substantially completed repositioning its investment portfolio.
PENDING MERGER
On October 6, 2000 the Company announced it had signed a definitive merger
agreement providing for the acquisition by a wholly-owned subsidiary of Fortress
Investment Corp., an affiliate of Fortress Partners and the Manager, of all of
the Company's outstanding common shares not already owned by Fortress Partners
and its affiliates for $7.55 per share in cash.
The all-cash transaction, which is structured as a $7.55 per share cash tender
offer followed by a second-step merger of the Company with a subsidiary of
Fortress Investment Corp., is valued at approximately $41.4 million excluding
shares already owned by Fortress Partners and its affiliates. The tender offer
commenced October 13, 2000 and is expected to conclude on November 17, 2000.
The tender offer and merger are subject to certain customary conditions;
however, the tender offer is not subject to a financing condition, nor a
condition that any minimum number of shares be tendered and the merger is not
subject to a "break-up" or "commitment" fee other than an expense reimbursement
of up to $400,000 payable in the event that an independent committee of the
Board of Directors receives a higher offer from a third party and accepts that
offer pursuant to the exercise of its fiduciary duties.
SHARE REPURCHASES
On May 24, 2000 the Company repurchased 2,101,023 of its common shares at a
price of $5.81 per share (including transaction costs) pursuant to a tender
offer that was completed May 19, 2000.
COMMERCIAL MORTGAGE INVESTMENTS
Impac invests primarily in credit-sensitive CMBS and commercial mortgage loans.
Acquisitions of mortgage assets are financed with capital, borrowings under
reverse repurchase agreements and long-term financing through collateralized
mortgage obligations ("CMOs"). Under its modified business plan the Company
anticipates future investments will be made primarily in CMBS. To this end, by
mid-April 2000 the Company acquired $99.9 million of adjustable-rate CMBS,
bringing the CMBS portfolio to $132 million as of September 30, 2000.
-10-
<PAGE> 12
Until August 1999, Impac originated commercial mortgage loans through its
conduit operations. Initially, these commercial mortgage loans were held as
long-term investments and were financed through short-term warehouse line
agreements and capital or used as collateral for the issuance of CMOs. From the
time CMOs were issued, the commercial mortgage loans pledged as collateral have
been reflected on Impac's balance sheet as CMO collateral with a corresponding
liability referred to as CMO borrowings. As of September 30, 2000, the Company's
CMO residual (defined as CMO collateral, net of CMO borrowings) totaled $36.0
million, compared to $37.6 million at December 31, 1999.
Although through August 1999 Impac originated commercial mortgage loans, future
loans may be purchased from third parties for long-term investment or for
resale. Impac also may acquire CMBS created through its own securitization
efforts in addition to the CMBS created by third parties. In connection with the
issuance of CMBS by Impac, Impac may retain the senior or subordinated
securities as regular interests in these securitizations on a short-term or
long-term basis. CMBS investments including any retained CMBS may include
"principal-only," "interest-only" or residual interest securities or other
credit, interest rate or prepayment sensitive securities. No such
securitizations were issued by the Company during 2000.
Investments in CMBS, commercial mortgage loans or any retained securities from
Impac-issued securitizations may subject Impac to credit, interest rate and/or
prepayment risks (see "Effects of Interest Rate Changes" and "Risks Associated
with Credit Sensitive Investments").
The executive officers of the Manager are empowered to make day-to-day
investment decisions, including the issuance of commitments on behalf of Impac
to purchase commercial mortgage loans and CMBS meeting the investment criteria
set from time to time by Impac's Board of Directors. Other than the observance
of statutory limitations which allow Impac to retain its classification as a
REIT, there are no current limitations set by the Board of Directors on the
percentage of assets which Impac may invest in any one type of investment or the
percentage of CMBS of any one issue which Impac may acquire. It is Impac's
policy to acquire assets primarily for income financed by reverse repurchase
agreements, the issuance of CMOs and CMBS, and proceeds from the issuance of
capital stock.
BOOK VALUE AND NET ASSET VALUE
At December 31, 1999 the Company's book value was $9.58 per diluted common share
while management estimated net asset value at $7.64, the difference primarily
related to reflecting at fair value the Company's CMO residual. For financial
reporting purposes, CMO collateral and borrowings are reflected in the Company's
balance sheet at amortized cost. At September 30, 2000 book value increased to
$10.95 per diluted common share and net asset value increased to $8.49,
primarily as a result of the share repurchases mentioned above. See NOTE 9 to
the consolidated financial statements for more detailed fair value information
and a discussion regarding the difficulties of estimating fair values.
RESULTS OF OPERATIONS
Comparative net operating results by source (interest income, net of related
interest expense) were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CMBS $ 1,830 $ 401 $ 4,686 $ 2,149
Loan receivables (principally CMO collateral) 999 1,173 2,886 4,328
Other (principally short-term investments) 136 311 667 434
Provision for loan losses (301) -- (638) --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,664 1,885 7,601 6,911
Other revenue (expense):
Gain (loss) on asset sales or write downs -- (4,611) (70) (4,864)
Settlement of litigation -- -- (490) --
Rental and other income -- 447 44 1,163
General and administrative and other (726) (2,959) (1,879) (7,810)
------------ ------------ ------------ ------------
Net earnings (loss) $ 1,938 $ (5,238) $ 5,206 $ (4,600)
============ ============ ============ ============
Net earnings (loss) per share:
Basic $ 0.27 $ (0.65) $ 0.60 $ (0.59)
Diluted 0.24 (0.65) 0.57 (0.59)
</TABLE>
-11-
<PAGE> 13
Overview. Operating results for the quarter and nine months ended September 30,
2000 were substantially improved over the corresponding periods of the previous
year. Earnings were higher as a result of decisions made in 1999 to modify the
Company's business plan to focus primarily on investments in CMBS, to curtail
the mortgage conduit operations and to sell non-strategic assets. Earnings per
share also benefited from the repurchase of approximately 25% of the Company's
common shares pursuant to a tender offer that closed May 19, 2000.
Net Interest Income After Provision for Loan Losses. The CMBS portfolio
contributed more to net interest income for the quarter and nine months ended
September 30, 2000 than in the same periods in 1999 primarily because of the
growth of this portfolio in keeping with the Company's new business plan.
Average holdings, before fair value adjustments, of CMBS totaled $139.2 million
and $111.6 million during the quarter and nine months ended September 30, 2000
compared $24.6 million and $25.2 million during the same periods in 1999. The
CMBS portfolio yielded 10.25% and 10.05% during the quarter and nine months
ended September 30, 2000 compared to 7.67% and 12.52% during the same periods in
1999. CMBS portfolio yields for 1999 were negatively impacted by a reduction in
cash flow remittances on a residual interest in securitization that also was
written down by $5.0 million in the third quarter of 1999. In addition, yields
in 2000 reflect changes in portfolio mix with a greater emphasis on
lower-yielding adjustable-rate CMBS (adjustable-rate securities represented
$122.7 million or 88% of the CMBS portfolio at September 30, 2000 compared to
none at September 30, 1999). Borrowing costs were higher in 2000 due to greater
use of borrowings to support the larger portfolio and higher prevailing
short-term interest rates. The Company's borrowing rates on reverse repurchase
agreements were 7.14% and 6.98% during the quarter and nine months ended
September 30, 2000 compared to 6.44% and 6.28% during the same periods in 1999.
Loan receivables contributed less to net interest income for the quarter and
nine months ended September 30, 2000 than in the same periods in 1999 primarily
because of lower holdings of these assets with efforts made in 1999 to sell
unsecuritized loans and to completely curtail the mortgage conduit operations by
August of 1999. During 2000 loan receivables consisted primarily of CMO
collateral, secured by CMO borrowings. Average holdings of CMO collateral
totaled $306.6 million and $308.8 million during the quarter and nine months
ended September 30, 2000 compared $316.3 million and $320.8 million during same
periods in 1999. Yields on CMO collateral were 7.55% and 7.65% during the
quarter and nine months ended September 30, 2000 compared to 7.81% and 7.77%
during the same periods in 1999. The Company's CMO borrowing rates were 7.31%
and 7.46% during the quarter and nine months ended September 30, 2000 compared
to 7.55% and 7.10% during the same periods in 1999. Average holdings of
unsecuritized mortgage loans were less than $5 million in 2000 compared to $12.1
million and $39.6 million during the quarter and nine months ended September 30,
1999.
During the quarter and the nine months ended September 30, 2000 the Company
recorded $301,000 and $638,000, respectively, in provisions for loan losses
bringing the allowance for loan losses to $1.9 million at September 30, 2000.
Other Operating Revenue (Expense). Rental and other income and general and
administrative expenses have been significantly reduced by decisions made in
1999 to curtail the conduit operation, sell non-strategic assets including the
Company's office building and to eliminate certain office lease obligations.
During the second quarter of 2000, the Company settled a lawsuit pertaining to
an alleged breach of an office lease agreement. As a result, year-to-date
results include a $490,000 charge, which together with previous accruals,
represents all costs incurred in connection with this matter.
LIQUIDITY AND CAPITAL RESOURCES
Impac's business operations, including the acquisition of mortgage assets, are
primarily funded with monthly interest and principal payments from its CMBS and
loan receivable portfolios, borrowings under reverse repurchase agreements
secured by CMBS and CMO borrowings, proceeds from the sale of commercial
mortgages and other investments, and proceeds from stock issuances. Impac'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 Impac's lenders and/or investors to make additional funds available to Impac
in the future will depend upon a number of factors, such as Impac's compliance
with the terms of its existing credit arrangements, Impac's financial
performance, industry and market trends, 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 (see "Effects
of Interest Rate Changes" and "Risks Associated with Credit-sensitive
Investments").
-12-
<PAGE> 14
The Company has uncommitted repurchase facilities with investment banking firms
to finance CMBS, subject to certain conditions. Interest rates on borrowings
under these facilities are generally based on overnight to 30-day London
Interbank Offered Rate ("LIBOR") rates. The terms and conditions of these
agreements, including interest rates, are negotiated on a
transaction-by-transaction basis. Amounts available for borrowing under these
agreements are dependent upon the fair value of the securities pledged as
collateral, which may fluctuate with changes in interest rates and the credit
quality of these securities (see "Effects of Interest Rate Changes" and "Risks
Associated with Credit-Sensitive Investments").
As of September 30, 2000, $48.1 million of the Company's $95.4 million of
borrowings under repurchase agreements had maturities of greater than 90 days.
Borrowings under reverse repurchase agreements secured by more recent purchases
of adjustable-rate CMBS more closely match the interest rate adjustment features
of these investments such that the Company anticipates it can earn more
consistent net interest spreads on these investments (see "NOTE 8" to the
accompanying consolidated financial statements).
EFFECTS OF INTEREST RATE CHANGES
INTEREST RATE SENSITIVITY ON OPERATING RESULTS
The Company performs earnings sensitivity analysis using an income simulation
model to estimate the effects that specific interest rate changes will have on
future earnings. All mortgage assets and derivative financial instruments
("derivatives") held, if any, are included in this analysis. The model
incorporates management assumptions regarding the level of prepayments on
mortgage assets for a given level of market rate changes using industry
estimates of prepayment speeds for various coupon segments. These assumptions
are developed through a combination of historical analysis and future expected
pricing behavior. As of September 30, 2000 and December 31, 1999, the Company
had the following interest sensitivity profiles:
<TABLE>
<CAPTION>
IMMEDIATE CHANGE IN:
(RATES IN BASIS POINTS, DOLLARS IN THOUSANDS)
---------------------------------------------
<S> <C> <C>
30-day LIBOR rate Down 100 Up 100
10-year U.S. Treasury rate Down 100 Up 100
Projected 12-month earnings change:*
September 30, 2000 $(415) $415
December 31, 1999 (403) 404
</TABLE>
* Note that the impact of actual or planned acquisitions of
mortgage assets subsequent to quarter-end (beyond acquisitions
necessary to replace runoff) and any new business activities were
not factored into the simulation model for purposes of this
disclosure.
Income simulation modeling is a primary tool used to assess the direction and
magnitude of changes in net margins on mortgage assets resulting from changes in
interest rates. Key assumptions in the model include prepayment rates on
mortgage assets, changes in market conditions, and management's capital plans.
These assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net margins or precisely predict the impact of higher or
lower interest rates on net margins. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes and
other changes in market conditions, management strategies and other factors.
GENERAL DISCUSSION OF EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates may impact the Company's earnings in various ways. The
Company's earnings currently depend, in part, on the difference between the
interest received on CMBS investments, and the interest paid on related
short-term borrowings. The resulting spread may be reduced or even turn negative
in a rising short-term interest rate environment. For investments in
adjustable-rate CMBS, the risk of rising short-term interest rates is generally
offset to some extent by increases in the rates of interest earned on the
underlying adjustable-rate CMBS. The Company may invest in derivatives from time
to time as a hedge against rising interest rates on a portion of its short-term
borrowings. At September 30, 2000 the Company did not own any derivatives as a
hedge against rising interest rates.
-13-
<PAGE> 15
Another effect of changes in interest rates is that as long-term interest rates
decrease the rate of principal prepayments on loans underlying CMBS may
increase. To the extent the proceeds of prepayments on mortgage assets cannot be
reinvested at a rate of interest at least equal to the rate previously earned on
such investments, earnings may be adversely affected. In addition, the rates of
interest earned on adjustable-rate CMBS generally will decline during periods of
falling short-term interest rates.
Changes in interest rates also affect earnings recognized from interest-only
CMBS. The amount of income that may be generated from interest-only CMBS is
dependent upon the rate of principal prepayments on the underlying mortgage
collateral. If mortgage interest rates fall significantly below interest rates
on the collateral, principal prepayments may increase, reducing or even turning
negative the overall return on these investments. Conversely, if mortgage
interest rates rise, interest-only CMBS tend to perform favorably because
underlying mortgage loans will generally prepay at slower rates, thereby
increasing overall returns.
Changes in interest rates affect CMO residuals in a similar fashion. If mortgage
interest rates fall, prepayments on the underlying mortgage loans generally will
be higher, thereby reducing or even turning negative the overall returns on
these investments. This is due primarily to the acceleration of the amortization
of bond discounts and prepaid securitization costs as bond classes are repaid
more rapidly than originally anticipated. Conversely, if mortgage interest rates
rise significantly above interest rates on the collateral, principal prepayments
will typically diminish, improving the overall return on an investment in a CMO
residual because of an increase in time over which the Company receives the
larger positive interest spread.
The Company may periodically sell mortgage assets, which may increase income
volatility because of the recognition of transactional gains or losses. Such
sales may become attractive as values of mortgage assets fluctuate with changes
in interest rates. At other times, it may become prudent to reposition the
mortgage asset portfolios to mitigate exposure to potential changes in interest
rates.
RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS
CMBS are generally viewed as exposing an investor to greater risk of loss than
residential mortgage-backed securities since such securities are typically
secured by larger loans to fewer obligors than residential mortgage-backed
securities. Commercial property values and net operating income are subject to
volatility, and net operating income may be sufficient or insufficient to cover
debt service on the related mortgage loan at any given time. The repayment of
loans secured by income-producing properties is typically dependent upon the
successful operation of the related real estate project and the ability of the
applicable property to produce net operating income rather than upon the
liquidation value of the underlying real estate. Even when the current net
operating income is sufficient to cover debt service, there can be no assurance
that this will continue to be the case in the future.
Additionally, commercial properties may not readily be convertible to
alternative uses if such properties were to become unprofitable due to
competition, age of improvements, decreased demand, regulatory changes or other
factors. The conversion of commercial properties to alternate uses generally
requires substantial capital expenditures, which may or may not be available.
The availability of credit for commercial mortgage loans will be significantly
dependent upon economic conditions in the markets where such properties are
located, as well as the willingness and ability of lenders to make such loans.
The availability of funds in the credit markets fluctuates and there can be no
assurance that the availability of such funds will increase above, or will not
contract below current levels. In addition, the availability of similar
commercial properties, and the competition for available credit, may affect the
ability of potential purchasers to obtain financing for the acquisition of
properties. This could effect the repayment of commercial mortgages pledged to
secure CMBS.
Through the process of securitizing commercial mortgages, credit risk can be
heightened or minimized. Senior classes in multi-class securitizations generally
have first priority over cash flows from a pool of mortgages and, as a result,
carry the least risk, highest investment ratings and the lowest yields.
Typically a securitization will also have mezzanine classes and subordinated
classes. Mezzanine classes will generally have somewhat lower credit ratings and
may have average lives that are longer than the senior classes. Subordinate
classes are junior in the right to receive cash flow from the underlying
mortgages, thus providing credit enhancement to the senior and mezzanine
classes. As a result, subordinated securities will have lower credit ratings
because of the elevated risk of credit loss inherent in these securities.
-14-
<PAGE> 16
The availability of capital from external sources to finance investments in
credit-sensitive CMBS that are not financed to maturity at acquisition may be
diminished during periods of mortgage finance market illiquidity, such as was
experienced in 1998. Additionally, if market conditions deteriorate resulting in
substantial declines in value of these securities, sufficient capital may not be
available to support the continued ownership of such investments, requiring
these securities to be sold at a loss.
OTHER
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. The Company's actual results and liquidity can differ
materially from those anticipated in these forward-looking statements because of
changes in the level and composition of the Company's investments and unforeseen
factors. These factors may include, but are not limited to, changes in general
economic conditions, the availability of suitable investments, fluctuations in
and market expectations for fluctuations in interest rates and levels of
mortgage prepayments, deterioration in credit quality and ratings, the
effectiveness of risk management strategies, the impact of leverage, liquidity
of secondary markets and credit markets, increases in costs and other general
competitive factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included above in "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PART II. -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: Exhibit 27 - Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-15-
<PAGE> 17
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.
Date: November 10, 2000 IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ Randal A. Nardone
---------------------------------------
Randal A. Nardone
Chief Operating Officer and Secretary
Date: November 10, 2000 IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ Gregory F. Hughes
---------------------------------------
Gregory F. Hughes
Chief Financial Officer (Principal
Financial and Accounting Officer)
-16-
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
