United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A
Amendment 1
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 2002.
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: 1-14100
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street
Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class Which registered
------------------------------- -----------------------
Common Stock $0.01 par value American Stock Exchange
Preferred Share Purchase Rights 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 13, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $418.1 million, based on the
closing sales price of the common stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of common stock outstanding as of May 13, 2002 was
39,422,163.
No documents are incorporated by reference to this Quarterly Report
1
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001............................... 3
Consolidated Statements of Operations and Comprehensive Earnings, For the Three Months Ended
March 31, 2002 and 2001.............................................................................. 4
Consolidated Statements of Cash Flows, For the Three Months Ended March 31, 2002 and 2001............ 6
Notes to Consolidated Financial Statements........................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................ 16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................................................................... 30
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................ 30
Item 3. DEFAULTS UPON SENIOR SECURITIES...................................................................... 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 30
Item 5. OTHER INFORMATION.................................................................................... 30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 30
SIGNATURE............................................................................................ 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
March 31, December 31,
2002 2001
----------- ------------
ASSETS
Cash and cash equivalents .................................................................. $ 52,827 $ 51,887
Investment securities available-for-sale ................................................... 28,640 32,989
Loan Receivables:
CMO collateral ........................................................................... 2,563,621 2,229,168
Finance receivables ...................................................................... 639,489 466,649
Mortgage loans held-for-investment ....................................................... 8,882 20,078
Allowance for loan losses ................................................................ (14,764) (11,692)
----------- -----------
Net loan receivables .................................................................. 3,197,228 2,704,203
Investment in Impac Funding Corporation .................................................... 20,377 19,126
Due from affiliates ........................................................................ 14,500 14,500
Accrued interest receivable ................................................................ 16,199 14,565
Derivative assets .......................................................................... 9,991 5,128
Other real estate owned .................................................................... 6,989 8,137
Other assets ............................................................................... 2,477 4,199
----------- -----------
Total assets .......................................................................... $ 3,349,228 $ 2,854,734
=========== ===========
LIABILITIES
CMO borrowings ............................................................................. $ 2,470,726 $ 2,151,400
Reverse repurchase agreements .............................................................. 576,094 469,491
Borrowings secured by investment securities available-for-sale ............................. 11,260 12,997
Accumulated dividends payable .............................................................. 15,766 14,081
Other liabilities .......................................................................... 5,242 3,400
----------- -----------
Total liabilities ..................................................................... 3,079,088 2,651,369
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value; 6,300,000 shares authorized; none issued or
outstanding at March 31, 2002 and December 31, 2001, respectively ........................ -- --
Series A junior participating preferred stock, $0.01 par value; 2,500,000 shares
authorized; none issued and outstanding at March 31, 2002 and December 31, 2001 .......... -- --
Series C 10.5% cumulative convertible preferred stock, $0.01 par value; 1,200,000
shares authorized; none outstanding at March 31, 2002 and December 31, 2001 .............. -- --
Common stock; $0.01 par value; 50,000,000 shares authorized; 39,422,163 and
32,001,997 shares issued and outstanding at March 31, 2002 and December 31,
2001, respectively ....................................................................... 394 320
Additional paid-in capital ................................................................. 416,224 359,279
Accumulated other comprehensive loss ....................................................... (10,904) (19,857)
Notes receivable from common stock sales ................................................... -- (920)
Net accumulated deficit:
Cumulative dividends declared ............................................................ (142,718) (126,952)
Retained earnings (accumulated deficit) .................................................. 7,144 (8,505)
----------- -----------
Net accumulated deficit ................................................................. (135,574) (135,457)
----------- -----------
Total stockholders' equity ............................................................ 270,140 203,365
----------- -----------
Total liabilities and stockholders' equity ............................................ $ 3,349,228 $ 2,854,734
=========== ===========
See accompanying notes to consolidated financial statements.
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS
(in thousands, except per share data)
For the Three Months
Ended March 31,
----------------------------
2002 2001
-------- --------
INTEREST INCOME:
Mortgage Assets ............................................................ $ 42,426 $ 38,793
Other interest income ...................................................... 642 606
-------- --------
Total interest income .................................................... 43,068 39,399
-------- --------
INTEREST EXPENSE:
CMO borrowings ............................................................. 22,406 20,592
Reverse repurchase agreements .............................................. 4,290 8,859
Borrowings secured by investment securities available-for-sale ............. 549 678
Senior subordinated debentures ............................................. -- 311
Other borrowings ........................................................... 176 66
-------- --------
Total interest expense ................................................... 27,421 30,506
-------- --------
Net interest income ........................................................ 15,647 8,893
Provision for loan losses ................................................ 3,707 4,038
-------- --------
Net interest income after provision for loan losses ................... 11,940 4,855
NON-INTEREST INCOME:
Equity in net earnings of Impac Funding Corporation ........................ 4,609 1,290
Loan servicing fees ........................................................ 66 292
Other income ............................................................... 977 543
-------- --------
Total non-interest income ............................................. 5,652 2,125
NON-INTEREST EXPENSE:
Write-down on investment securities available-for-sale ..................... 1,039 --
Professional services ...................................................... 860 619
Personnel expense .......................................................... 401 305
General, administrative and other expense .................................. 79 376
Mark-to-market loss - SFAS 133 ............................................. -- 864
Gain on disposition of other real estate owned ............................. (436) (639)
-------- --------
Total non-interest expense ............................................ 1,943 1,525
-------- --------
Earnings before cumulative effect of change in accounting principle ........... 15,649 5,455
Cumulative effect of change in accounting principle ........................ -- (4,313)
-------- --------
Net earnings .................................................................. 15,649 1,142
Less: Cash dividends on 10.5% cumulative convertible preferred stock ....... -- (788)
-------- --------
Net earnings available to common stockholders ................................. 15,649 354
Other comprehensive earnings:
Unrealized holding gains (losses) on securities arising during period ...... (1,230) 401
Unrealized holding gains on hedging instruments arising during period ...... 10,407 --
Reclassification of losses included in earnings ............................ (224) (72)
-------- --------
Net unrealized gains arising during period ............................... 8,953 329
-------- --------
Comprehensive earnings ..................................................... $ 24,602 $ 1,471
======== ========
See accompanying notes to consolidated financial statements.
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS
(in thousands, except per share data)
For the Three Months
Ended March 31,
--------------------------
2002 2001
--------- ---------
Earnings per share before cumulative effect of change in accounting principle:
Basic ........................................................................... $ 0.44 $ 0.23
========= =========
Diluted ......................................................................... $ 0.43 $ 0.20
========= =========
Net earnings per share:
Basic ........................................................................... $ 0.44 $ 0.02
========= =========
Diluted ......................................................................... $ 0.43 $ 0.04
========= =========
See accompanying notes to consolidated financial statements.
5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months
Ended March 31,
---------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net earnings ................................................................................ $ 15,649 $ 5,455
Adjustments to reconcile net earnings to net cash provided by operating activities:
Cumulative effect of change in accounting principle ....................................... -- (4,313)
Equity in net earnings of Impac Funding Corporation ....................................... (4,609) (1,290)
Provision for loan losses ................................................................. 3,707 4,038
Amortization of loan premiums and securitization costs .................................... 7,306 2,425
Gain on disposition of other real estate owned ............................................ 436 639
Write-down of investment securities available-for-sale .................................... 1,039 --
Net change in accrued interest receivable ................................................. (1,634) 627
Net change in other assets and liabilities ................................................ (1,299) 1,040
--------- ---------
Net cash provided by operating activities ............................................... 20,595 8,621
--------- ---------
Cash flows from investing activities:
Net change in CMO collateral ................................................................ (330,518) 117,922
Net change in finance receivables ........................................................... (172,840) (50,654)
Net change in mortgage loans held-for-investment ............................................ 10,126 (187,163)
Proceeds from sale of other real estate owned, net .......................................... 2,200 1,104
Dividend from Impac Funding Corporation ..................................................... 1,980 1,945
Net principal reductions on investment securities available-for-sale ........................ 1,347 997
--------- ---------
Net cash provided by operating activities ............................................... (487,705) (115,849)
--------- ---------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings ............................ 104,866 214,634
Proceeds from CMO borrowings ................................................................ 495,000 --
Repayments of CMO borrowings ................................................................ (175,674) (114,061)
Dividends paid .............................................................................. (14,081) (788)
Proceeds from sale of common stock .......................................................... 56,968 --
Proceeds from exercise of stock options ..................................................... 51 --
Advances and reductions on notes receivable-common stock .................................... 920 (18)
--------- ---------
Net cash provided by financing activities ............................................... 468,050 99,767
--------- ---------
Net change in cash and cash equivalents ..................................................... 940 (7,461)
Cash and cash equivalents at beginning of period ............................................ 51,887 17,944
--------- ---------
Cash and cash equivalents at end of period .................................................. $ 52,827 $ 10,483
========= =========
Supplementary information:
Interest paid ............................................................................... $ 27,534 $ 29,420
Non-cash transactions:
Dividends declared and unpaid ............................................................... $ 15,766 $ 788
Accumulated other comprehensive gain (loss) ................................................. 8,953 329
Loans transferred to other real estate owned ................................................ 1,488 3,358
See accompanying notes to consolidated financial statements.
6
IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements of Impac Mortgage
Holdings, Inc. (IMH) and subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America (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, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001.
IMH's results of operations have been presented in the consolidated
financial statements for the three-months ended March 31, 2002 and 2001 and
include the financial results of IMH's equity interest in net earnings of Impac
Funding Corporation (IFC). The results of operations of IFC, of which 100% of
IFC's preferred stock and 99% of its economic interest is owned by IMH, are
included in the results of operations as "Equity in net earnings of Impac
Funding Corporation." Additionally, IMH's results of operations include the
financial results of IMH Assets Corp. (IMH Assets) and Impac Warehouse Lending
Group (IWLG) as stand-alone entities.
2. Organization
IMH is a mortgage real estate investment trust (REIT). Together with its
subsidiaries and affiliate, IFC, the Company is a nationwide acquirer and
originator of non-conforming Alt-A mortgage loans (Alt-A). Alt-A mortgage loans
consist primarily of mortgage loans that are first lien mortgage loans made to
borrowers whose credit is generally within typical Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) guidelines, but that have loan characteristics that make them
non-conforming under those guidelines. For instance, the loans may have higher
loan-to-value (LTV) ratios than allowable or may have excluded certain
documentation or verifications. Therefore, in making credit decisions, the
Company is more reliant upon the borrower's credit score and the adequacy of the
underlying collateral. Management believes that Alt-A mortgage loans provide an
attractive net earnings profile by producing higher yields without
commensurately higher credit losses than other types of mortgage loans. Since
1999, the Company has acquired and originated primarily Alt-A mortgage loans.
The Company also provides warehouse and repurchase financing to originators of
mortgage loans. The Company's goal is to generate consistent and reliable income
for distribution to its stockholders primarily from the earnings of its core
businesses.
The Company primarily operates three core businesses: the long-term
investment operations, the mortgage operations, and the warehouse lending
operations. IMH is organized as a REIT for federal income tax purposes, which
generally allows it to pass through qualified income to stockholders without
federal income tax at the corporate level, provided that it distributes 90% of
its taxable income to common stockholders.
The Company's long-term investment operations, conducted by IMH and IMH
Assets, invest primarily in Alt-A mortgages loans. This business primarily
generates net interest income on its mortgage loan and investment securities
portfolios. The Company's investment in Alt-A mortgage loans is financed with
collateralized mortgage obligations (CMO) financing, warehouse facilities and
proceeds from the sale of capital stock. The mortgage operations acquire,
originate, sell and securitize primarily Alt-A mortgage loans. The mortgage
operations generate income by securitizing and selling loans to permanent
investors, including the long-term investment operations. This business also
earns revenues from fees associated with mortgage servicing rights, master
servicing agreements and interest income earned on loans held for sale. The
mortgage operations primarily use warehouse lines of credit to finance the
acquisition and origination of mortgage loans. The warehouse lending operations
provide short-term financing to mortgage loan originators by funding mortgage
loans from their closing date until they are sold to pre-approved investors,
including the long-term investment operations. The warehouse lending operations
earn fees, as well as a
7
spread, from the difference between its cost of borrowings and the interest
earned on advances. Generally, the Company seeks to acquire Alt-A mortgage loans
funded with facilities provided by the warehouse lending operations, which
provides synergies with the long-term investment operations and mortgage
operations.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make significant estimates and
assumptions that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ materially from those estimates. Significant estimates made by management
include "Accounting for Derivative Instruments and Hedging Activities" and
"Allowance for loan losses," which are presented in detail in footnotes 4 and 7,
respectively.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," (SFAS 142). SFAS 142 applies to all acquired intangible assets whether
acquired singularly, as part of a group, or in a business combination. SFAS 142
supersedes Accounting Principles Bulletin (APB) Opinion No. 17, "Intangible
Assets," and carries forward provisions in APB Opinion No. 17 related to
internally developed intangible assets. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Goodwill
should no longer be amortized, but instead tested for impairment at least
annually at the reporting unit level. The accounting provisions are effective
for fiscal years beginning after December 31, 2001. As of March 31, 2002, the
Company's intangible assets and goodwill are not significant. It is anticipated
that the financial impact of this statement will not have a material impact on
the Company's financial condition and results of operations.
4. Accounting for Derivatives Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No.
138, collectively, (SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including a number of derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If specific conditions are
met, a derivative may be specifically designated as (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign-currency-denominated forecasted
transaction.
On January 1, 2001, the Company adopted SFAS 133 and the fair market value
of derivative instruments are reflected on the Company's financial statements.
On August 10, 2001, the Derivatives Implementation Group (DIG) of the FASB
published DIG G20, which further interpreted SFAS 133. On October 1, 2001, the
Company adopted the provisions of DIG G20 and net income and accumulated other
comprehensive income were adjusted by the amount needed to reflect the
cumulative impact of adopting the provisions of DIG G20.
The Company follows a hedging program intended to limit its exposure to
changes in interest rates primarily associated with its CMO borrowings. The
Company's primary objective is to hedge its exposure to the variability in
future cash flows attributable to the variability of one-month London Interbank
Offered Rate (LIBOR), which is the underlying index of its CMO borrowings. The
Company also monitors on an ongoing basis the prepayment risks that arise in
fluctuating interest rate environments. The Company's hedging program is
formulated with the intent to offset
8
the potential adverse effects of changing interest rates on CMO borrowings
resulting from the following: interest rate adjustment limitations on mortgage
loans due to periodic and lifetime interest rate cap features and mismatched
interest rate adjustment periods of mortgage loans and CMO borrowings.
The Company primarily acquires for long-term investment six-month LIBOR
adjustable rate mortgages (ARMs) and hybrid ARMs. Six-month LIBOR ARMs are
generally subject to periodic and lifetime interest rate caps. This means that
the interest rate of each ARM is limited to upwards or downwards movements on
its periodic interest rate adjustment date, generally six months, or over the
life of the mortgage loan. Periodic caps limit the maximum interest rate change,
which can occur on any interest rate change date to generally a maximum of 1%
per semiannual adjustment. Also, each ARM has a maximum lifetime interest rate
cap. Generally, borrowings are not subject to the same periodic or lifetime
interest rate limitations. During a period of rapidly increasing or decreasing
interest rates, financing costs would increase or decrease at a faster rate than
the periodic interest rate adjustments on mortgage loans would allow, which
could effect net interest income. In addition, if market rates were to exceed
the maximum interest rates of our ARMs, borrowing costs would increase while
interest rates on ARMs would remain constant.
The Company's mortgage loan portfolio is also subject to risk from the
mismatched nature of interest rate adjustment periods on mortgage loans and
interest rates on the related borrowings. Six-month LIBOR mortgage loans can
adjust upwards or downwards every six months, subject to periodic cap
limitations, while adjustable rate CMO borrowings adjust every month.
Additionally, the Company has hybrid ARMs which have an initial fixed interest
rate period generally ranging from two to three years, and to a lesser extent
five years, which subsequently convert to six-month LIBOR ARMs. Again, during a
rapidly increasing or decreasing interest rate environment, financing costs
would increase or decrease more rapidly than would interest rates on mortgage
loans, which would remain fixed until their next interest rate adjustment date.
To mitigate exposure from the effect of changing interest rates on CMO
borrowings, the Company purchases and sells derivative instruments in the form
of interest rate cap agreements, or caps, interest rate floor agreements, or
floors, and interest rate swap agreements, or swaps. The Company also
simultaneously purchases or sells caps and floors, which are referred to as
collars. These derivative instruments are referred to collectively as
derivatives. An interest rate cap or floor is a contractual agreement. If
prevailing interest rates reach levels specified in the cap or floor agreement,
the Company may either receive or pay cash. An interest rate swap is generally a
contractual agreement that obligates one party to receive or make cash payments
based on an adjustable rate index and the other party to receive or make cash
payments based on a fixed rate. Swap agreements have the effect of fixing
borrowing costs on a similar amount of swaps and, as a result, the Company can
reduce the interest rate variability of borrowings. The Company's objective is
to lock in a reliable stream of cash flows when interest rates fall below or
rise above certain levels. For instance, when interest rates rise, borrowing
costs increase at greater speeds than the underlying collateral supporting the
borrowings. These derivative instruments hedge the variability of forecasted
cash flows attributable to CMO borrowings and protect net interest income by
providing cash flows at certain triggers during changing interest rate
environments. In all hedging transactions, counterparties must have a AAA credit
rating as determined by various credit rating agencies.
Caps qualify as derivative instruments under provisions of SFAS 133. The
hedging instrument is the specific LIBOR cap that is hedging the LIBOR based CMO
borrowings. The nature of the risk being hedged is the variability of the cash
flows associated with the LIBOR borrowings. Prior to the adoption of DIG G20,
the Company assessed the hedging effectiveness of its caps utilizing only the
intrinsic value of the caps. DIG G20 allows the Company to utilize the terminal
value of the caps to assess effectiveness. DIG G20 also allows the Company to
amortize the initial fair value of the caps over the life of the caps based on
the maturity date of the individual caplets. Upon adoption of DIG G20, net
income and accumulated other comprehensive income were adjusted by the amount
needed to reflect the cumulative impact of adopting the provisions of DIG G20.
Subsequent to the adoption of DIG G20, caps are considered effective hedges and
are marked to market each reporting period with the entire change in market
value being recognized in other comprehensive income on the balance sheet.
Floors, swaps and collars qualify as cash flow hedges under the provisions
of SFAS 133. The hedging instrument is the specific LIBOR floor, swap or collar
that is hedging the LIBOR based CMO borrowings. The nature of the risk being
hedged is the variability of the cash flows associated with the LIBOR
borrowings. Prior to DIG G20, these derivatives were marked to market with the
entire change in the market value of the intrinsic component recognized in other
comprehensive income on the balance sheet each reporting period. The time value
component of these agreements were marked to market and recognized in
non-interest expense on the statement of operations.
9
Subsequent to the adoption of DIG G20, these derivatives are marked to market
with the entire change in the market value recognized in other comprehensive
income on the balance sheet.
Effectiveness of derivatives is measured by the fact that both the hedged
item, CMO borrowings, and the hedging instrument is based on one-month LIBOR. As
both instruments are tied to the same index, the hedge is expected to be highly
effective both at inception and on an ongoing basis. The Company assesses the
effectiveness and ineffectiveness of the hedging instruments at the inception of
the hedge and at each reporting period. Based on the fact that, at inception,
the critical terms of the hedges and forecasted CMO borrowings are the same, the
Company has concluded that the changes in cash flows attributable to the risk
being hedged are expected to be completely offset by the hedging derivatives,
subject to subsequent assessments that the critical terms have not changed.
At March 31, 2002, caps allocated to CMO borrowings had a remaining
notional balance of $1.5 billion. Pursuant to the terms of the caps, the Company
will receive cash payments if one-month LIBOR reaches certain strike prices,
ranging from 1.76% to 10.25%, with a weighted average strike price of 4.49% over
the life of the caps. At March 31, 2002, collars allocated to CMO borrowings had
a remaining notional balance of $913.3 million. Pursuant to the terms of the
collars, the Company will receive cash payments if one-month LIBOR reaches
strike prices ranging from 2.07% to 6.53% with a weighted average strike price
of 4.18% over the life of the collars. The Company will make cash payments if
one-month LIBOR reaches strike prices ranging from 1.32% to 5.88% with a
weighted average strike price of 3.50%. At March 31, 2002, swaps allocated to
CMO borrowings had a remaining notional balance of $68.7 million. Pursuant to
the terms of the swaps, the Company will receive cash payments based on
one-month LIBOR and make cash payments at fixed rates ranging from 4.83% to
5.18%, with a weighted average fixed rate of 4.94% over the life of the swaps.
The notional amounts of allocated caps, collars and swaps are amortized
according to projected prepayment rates on CMO borrowings. However, regarding
the floor component of the collar, the notional amount equals the actual
principal balance of the CMO borrowings. As of March 31, 2002, the fair market
value of the allocated caps, collars and swaps was $901,000. These derivatives
are marked to market each reporting period with the entire change in market
value being recognized in other comprehensive income on the balance sheet.
During 2001, the Company purchased a collar at strike prices tied to the
one-month LIBOR forward yield curve to protect cash flows on CMO borrowings,
which are secured by hybrid ARMs with remaining fixed terms and that did not
have derivative instruments allocated to the original CMO structures. As of
March 31, 2002, the collar had a notional amount of $718.6 million with a
one-month LIBOR cap strike price ranging from 4.29% to 5.42% and a weighted
average strike price of 4.90% over the life of the cap. The collar has a
one-month LIBOR floor strike price ranging from 4.21% to 4.98% and a weighted
average strike price of 4.51% over the life of the floor. The collar matures on
March 25, 2004. The notional amount of the collar is amortized according to
projected prepayment rates reflected in CMO borrowings. As of March 31, 2002,
the fair market value of the collar was $10.0 million. The collar is marked to
market each reporting period with the entire change in market value being
recognized in accumulated other comprehensive income on the balance sheet.
The following table presents certain information related to derivative
instruments and hedging activities as of March 31, 2002 (dollars in thousands):
Related
Original Fair Amount in Related Related
Notional Value Other Unamortized Amount in Amount
Face of Comprehensive Derivative Derivative in CMO
Amount Derivatives Index Income Instruments Asset Account Collateral
---------- ----------- ------ ------------- ----------- ------------- ----------
Caps and collars not
associated with 1 mo.
CMOs ............. $1,063,516 $ (6,185) LIBOR $ (8,626) $ 2,441 $ (6,185) $ --
Cash in margin
account .......... 16,176 16,176 N/A -- -- 16,176 --
Caps, collars and ..
swaps associated 1 mo.
with CMOs ........ 2,933,832 901 LIBOR (7,132) 8,033 -- 901
---------- -------- -------- ------- -------- ----
Totals ............. $4,013,524 $ 10,892 $(15,758) $10,474 $ 9,991 $901
========== ======== ======== ======= ======== ====
10
The following table presents certain information related to derivative
instruments and hedging activities as of December 31, 2001 (dollars in
thousands):
Related
Original Fair Amount in Related Related
Notional Value Other Unamortized Amount in Amount
Face of Comprehensive Derivative Derivative in CMO
Amount Derivatives Index Income Instruments Asset Account Collateral
----------- ----------- ----- -------------- ----------- ------------- ----------
Caps and collars not
associated with 1 mo.
CMOs ............. $1,860,790 $(13,659) LIBOR $(15,240) $1,581 $(13,659) $ --
Cash in margin
account .......... 18,787 18,787 N/A -- -- 18,787 --
Caps, collars and
swaps associated 1 mo.
with CMOs ........ 1,070,500 (4,372) LIBOR (12,722) 8,350 -- (4,372)
99% of OCI activity
at IFC ........... 36,000 (158) FNMA (90) -- -- --
---------- -------- -------- ------ -------- -------
Totals ............. $2,986,077 $ 598 $(28,052) $9,931 $ 5,128 $(4,372)
========== ======== ======== ====== ======== =======
5. Reconciliation of Net Earnings per Share
The following table presents the computation of basic and diluted net
earnings per share for the periods shown, as if all stock options and 10.5%
cumulative convertible preferred stock (Preferred Stock), if dilutive, were
outstanding for these periods (in thousands, except per share ):
For the Three Months
Ended March 31,
-------------------------
2002 2001
------- --------
Numerator for earnings per share:
Earnings before cumulative effect of change in accounting principle ................. $15,649 $ 5,455
Cumulative effect of change in accounting principle ................................ -- (4,313)
------- --------
Net earnings after cumulative effect of change in accounting principle ............. 15,649 1,142
Less: Dividends paid to preferred stockholders .................................... -- (788)
------- --------
Net earnings available to common stockholders ......................................... $15,649 $ 354
======= ========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period .......... 35,926 20,385
Impact of assumed conversion of Preferred Stock ....................................... -- 6,356
Net effect of dilutive stock options .................................................. 473 10
------- --------
Diluted weighted average common and common equivalent shares ....................... 36,399 26,751
======= ========
Earnings per share before cumulative effect of change in accounting principle:
Basic .............................................................................. $ 0.44 $ 0.23
======= ========
Diluted ............................................................................ $ 0.43 $ 0.20
======= ========
Net earnings per share:
Basic .............................................................................. $ 0.44 $ 0.02
======= ========
Diluted ............................................................................ $ 0.43 $ 0.04
======= ========
The Company had 1,500 and 187,036 stock options during the three months
ended March 31, 2002 and March 31, 2001, respectively, that were not considered
in the dilutive calculation of earnings per share as the exercise price was
higher than the market price for the period. In August 2001, 1,200,000 shares of
Preferred Stock were converted into 6,355,932 shares of common stock.
6. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance receivables. At
March 31, 2002 and December 31, 2001, Mortgage Assets consisted of the following
(in thousands):
11
March 31, December 31,
2002 2001
----------- ------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages ...................... $ 24,359 $ 26,661
Net unrealized gain (1) .................................................. 4,281 6,328
----------- -----------
Carrying value of investment securities available-for-sale ............. 28,640 32,989
----------- -----------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance ................................. 2,511,292 2,186,561
Unamortized net premiums on loans ........................................ 39,677 35,397
Securitization expenses .................................................. 11,751 11,582
Fair value of derivative instruments allocated to CMO collateral ......... 901 (4,372)
----------- -----------
Carrying value of CMO collateral ....................................... 2,563,621 2,229,168
Finance receivables (2)--
Due from affiliates, net of pledge accounts .............................. 375,546 166,078
Due from other mortgage banking companies ................................ 263,943 300,571
----------- -----------
Carrying value of finance receivables .................................. 639,489 466,649
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance ............. 8,936 20,086
Unamortized net discounts on loans ....................................... (54) (8)
----------- -----------
Carrying value of mortgage loans held-for-investment ................... 8,882 20,078
Carrying value of Gross Loan Receivables .................................... 3,211,992 2,715,895
Allowance for loan losses ................................................ (14,764) (11,692)
----------- -----------
Carrying value of Net Loan Receivables ................................. 3,197,228 2,704,203
----------- -----------
Total carrying value of Mortgage Assets
Carrying value of investment securities available-for-sale ............. $ 3,225,868 $ 2,737,192
=========== ===========
(1) Unrealized gains on investment securities available-for-sale is a
component of accumulated other comprehensive loss in stockholders equity.
(2) Outstanding advances on warehouse lines that the warehouse lending
operations makes to affiliates and external customers.
7. Allowance for Loan Losses
The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
The adequacy of the allowance for loan losses is evaluated on a monthly
basis by management to maintain the allowance at levels sufficient to provide
for inherent losses. The migration system analyzes historical migration of
mortgage loans from original current status to 30-, 60- and 90-day delinquency,
foreclosure, other real estate owned and paid. The principal balance of all
loans currently in the long-term investment portfolio are included in the
migration analysis until the principal balance of loans either become real
estate owned or are paid in full. The statistics generated by the migration
analysis are used to establish the general valuation for loan losses.
Activity for allowance for loan losses was as follows (in thousands):
For the Three Months Ended,
---------------------------
March 31, March 31,
2002 2001
---------- ----------
Balance, beginning of period ................ $ 11,692 $ 5,090
Provision for loan losses ................... 3,707 4,038
Charge-offs, net of recoveries .............. (635) (2,833)
-------- -------
Balance, end of period ...................... $ 14,764 $ 6,295
======== =======
12
8. Segment Reporting
The Company internally reviews and analyzes its operating segments as
follows:
o the long-term investment operations, conducted by IMH and IMH
Assets, invests primarily in non-conforming Alt-A residential
mortgage loans and mortgage-backed securities secured by or
representing interests in such loans and in second mortgage loans;
o the warehouse lending operations, conducted by IWLG, provides
warehouse and repurchase financing to affiliated companies and to
approved mortgage banks, most of which are correspondents of IFC, to
finance mortgage loans; and
o the mortgage operations, conducted by IFC, Impac Lending Group
(ILG), a division of IFC, and Novelle Financial Services (NFS), a
subsidiary of IFC, purchases and originates primarily non-conforming
Alt-A mortgage loans and second mortgage loans from its network of
third party correspondent sellers, mortgage brokers and retail
customers.
The following table shows the Company's reporting segments as of and for
the three months ended March 31, 2002 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
---------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $2,563,621 $ -- $ -- $2,563,621
Total assets 2,885,218 655,436 (191,426) 3,349,228
Total stockholders' equity 385,686 75,880 (191,426) 270,140
Income Statement Items
Interest income $ 35,455 $ 7,620 $ (7) $ 43,068
Interest expense 22,981 4,447 (7) 27,421
Equity interest in net earnings of IFC (b) -- -- 4,609 4,609
Net earnings 7,923 3,117 4,609 15,649
The following table shows the Company's reporting segments as of and for
the three months ended March 31, 2001 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
---------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $ 1,250,728 $ -- $ -- $1,250,728
Total assets 1,641,690 680,530 (322,562) 1,999,658
Total stockholders' equity 259,148 64,887 (144,982) 179,053
Income Statement Items
Interest income $ 29,399 $ 11,781 $ (1,781) $ 39,399
Interest expense 23,413 8,874 (1,781) 30,506
Equity interest in net earnings of IFC (b) -- -- 1,290 1,290
Net earnings (loss) (2,739) 2,591 1,290 1,142
(a) Elimination of inter-segment balance sheet and income statement items.
(b) The mortgage operations are accounted for using the equity method and is
an unconsolidated qualified REIT subsidiary of the Company.
9. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through
its ownership of 100% of the non-voting preferred stock of IFC. As such, the
Company records its investment in IFC using the equity method. Under this
13
method, original investments are recorded at cost and adjusted by the Company's
share of earnings or losses. The following is financial information for IFC for
the periods presented (in thousands):
BALANCE SHEETS
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Cash $ 31,149 $ 28,612
Investment securities available-for-sale 173 3,394
Mortgage loans held-for-sale 386,373 174,172
Mortgage servicing rights 7,814 8,468
Premises and equipment, net 5,002 5,333
Accrued interest receivable 460 130
Other assets 19,883 19,693
--------- ---------
Total assets $ 450,854 $ 239,802
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 383,778 $ 174,136
Due to affiliates 14,500 14,500
Deferred revenue 3,858 4,479
Accrued interest expense (291) 453
Other liabilities 28,427 26,914
--------- ---------
Total liabilities 430,272 220,482
--------- ---------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings 13,378 8,722
Cumulative dividends declared (10,984) (8,984)
Accumulated other comprehensive gain (loss) (47) 1,347
--------- ---------
Total shareholders' equity 20,582 19,320
--------- ---------
Total liabilities and shareholders' equity $ 450,854 $ 239,802
========= =========
STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
---------------------------
2002 2001
-------- ---------
Interest income $ 6,646 $ 7,492
Interest expense 4,975 7,198
-------- ---------
Net interest income 1,671 294
-------- ---------
Gain on sale of loans 16,158 7,649
Loan servicing income (expense) (357) 1,032
Other non-interest income 1,735 46
-------- ---------
Total non-interest income 17,536 8,727
-------- ---------
Personnel expense 5,573 3,185
General, administrative and other expense 4,090 2,479
Amortization of mortgage servicing rights 1,499 1,053
Provision for repurchases 435 6
Mark-to-market gain - SFAS 133 (448) (17)
-------- ---------
Total non-interest expense 11,149 6,706
-------- ---------
Earnings before income taxes and cumulative effect of change in
change in accounting principle 8,058 2,315
Income taxes 3,403 1,000
-------- ---------
Earnings before cumulative effect of change in accounting principle 4,655 1,315
Cumulative effect of change in accounting principle -- 17
-------- ---------
Net earnings 4,655 1,298
Less: Cash dividends on preferred stock (1,980) (1,964)
-------- ---------
Net earnings (loss) available to common stockholders $ 2,675 $ (666)
======== =========
14
10. Stockholders' Equity
During the three months ended March 31, 2002, accumulated other
comprehensive loss decreased by $9.0 million due to a $1.4 million decrease in
unrealized gain on investment securities available-for-sale and a $10.4 million
decrease in unrealized loss on derivative assets.
On February 7, 2002, the Company issued 7.4 million shares of common stock
at a price of $8.25 per share and received net proceeds of $57.0 million.
On March 26, 2002, the Company declared a first quarter cash dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002 to
common stockholders of record on April 3, 2002.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, some of which are
based on various assumptions and events that are beyond our control, may be
identified by reference to a future period or periods or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, adverse economic conditions, the ability to generate sufficient
liquidity, including completing securitizations and earning interest on our
mortgage loans, different interest rate fluctuations on our assets and
liabilities, changes in the difference between short-term and long-term interest
rates, increase in prepayment rates on our mortgage assets, changes in
assumptions regarding estimated loan losses, the availability of financing and,
if available, the terms of any financing. For a discussion of the risks and
uncertainties that could cause actual results to differ from those contained in
the forward-looking statements, see "Risk Factors" in the Company's Annual
Report on Form 10-K. We do not undertake, and specifically disclaim any
obligation, to publicly release the results of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Unless the context otherwise requires, the terms "Company," "we," "us,"
and "our" refer to Impac Mortgage Holdings, Inc., a Maryland corporation
incorporated in August 1995, and its subsidiaries, IMH Assets Corp., or "IMH
Assets," Impac Warehouse Lending Group, Inc., or "IWLG," and its affiliate,
Impac Funding Corporation, or "IFC," together with its wholly-owned subsidiaries
Impac Secured Assets Corp. and Novelle Financial Services, Inc. References to
Impac Mortgage Holdings, Inc., or "IMH," are made to differentiate IMH, the
publicly traded company, as a separate entity from IMH Assets, IWLG and IFC.
SIGNIFICANT TRANSACTIONS
On February 7, 2002, the Company issued 7.4 million shares of common stock
at a price of $8.25 per share and received net proceeds of $57.0 million.
On March 26, 2002, the Company declared a first quarter cash dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002 to
common stockholders of record on April 3, 2002.
CORE BUSINESS OPERATIONS
Long-Term Investment Operations: During the first quarter of 2002, the
long-term investment operations acquired $500.3 million of primarily
non-conforming Alt-A adjustable-rate mortgages ("ARMs") secured by first liens
on residential property from IFC as compared to $182.1 million of mortgages
acquired during the same period of 2001. "Alt-A" credit quality loans generally
have a credit score of 600 or better while "A" credit quality loans generally
have a credit score of 640 or better. Alt-A mortgage loans primarily consist of
mortgage loans that are first lien mortgage loans made to borrowers whose credit
is generally within typical Federal National Mortgage Association ("Fannie Mae")
or Federal Home Loan Mortgage Corporation ("Freddie Mac") guidelines. However,
Alt-A mortgages have loan characteristics, such as lack of documentation or
verifications, that make them ineligible under Fannie Mae or Freddie Mac
guidelines. Of the mortgages acquired during the first quarter of 2002, 61% were
acquired with prepayment penalty features with a weighted average coupon of
6.54% and a weighted average credit score of 684. During the first quarter of
2002, IMH Assets issued CMOs for $495.0 million that were secured by $500.0
million of primarily Alt-A mortgage loans. As of March 31, 2002, the long-term
investment operations portfolio of mortgage loans consisted of $2.6 billion of
mortgage loans held in trust as collateral for collateralized mortgage
obligations ("CMOs") and $9.0 million of mortgage loans held-for-investment, of
which approximately 11% were fixed-rate mortgages ("FRMs") and 89% were ARMs.
The weighted average coupon of the mortgage loan investment portfolio was 7.57%
at March 31, 2002 with a weighted average margin of 3.29%. As of March 31, 2002,
95% of CMO collateral were Alt-A mortgage loans acquired or originated by the
mortgage operations, of which 57% had prepayment penalties and 60% were hybrid
ARMs with a weighted average credit score of 672. The delinquency rate of
mortgages in the mortgage loan investment portfolio which were 60 or more days
past due, inclusive of foreclosures and delinquent bankruptcies, was 3.85% at
March 31, 2002 as compared to 3.84% at December 31, 2001.
16
Mortgage Operations: Loan production by the mortgage operations increased
98% to $1.2 billion during the first quarter of 2002 as compared to $607.2
million during the same period in 2001. During the first quarter of 2002,
correspondent mortgage acquisitions, excluding premiums paid, were $877.7
million, or 74% of total production, wholesale loan originations were $235.4
million, or 20% of total production and Novelle Financial Services ("NFS") were
$71.2 million, or 6% of total production. During the first quarter of 2001,
correspondent mortgage acquisitions were $466.8 million, or 78% of total
production, and wholesale loan originations were $130.3 million, or 22% of total
production. Of mortgages acquired or originated during the first quarter of
2002, $817.3 million, or 69% of total production, had prepayment penalty
features as compared to $382.1 million, or 64% of total production, during the
same period in 2001. ARM production was $808.1 million, or 68% of total
production, during the first quarter of 2002 as compared to $155.3 million, or
26% of total production, during the same period in 2001. During the first
quarter of 2002, the mortgage operations issued real estate mortgage investment
conduits ("REMICs") totaling $444.7 million, sold $491.8 million of loans to IMH
and $84.2 million of loans to first party investors, which contributed to gain
on sale of loans of $16.2 million. During the first quarter of 2001, the
mortgage operations issued REMICs totaling $450.1 million, sold $179.2 million
of loans to IMH and $11.9 million of loans to first party investors, which
contributed to gain on sale of loans of $7.6 million. The master servicing
portfolio increased 11% to $6.2 billion at March 31, 2002 as compared to $5.6
billion at December 31, 2001. The loan delinquency rate of mortgages in the
master servicing portfolio which were 60 or more days past due, inclusive of
foreclosures and delinquent bankruptcies, was 5.13% at March 31, 2002 as
compared to 5.38% at December 31, 2001.
Warehouse Lending Operations: As of March 31, 2002, the warehouse lending
operations had $481.0 million of short-term warehouse lines of credit available
to 59 non-affiliated customers, of which $263.9 million was outstanding, as
compared to $447.0 million and 57, respectively, of which $300.6 million was
outstanding as of December 31, 2001.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended March 31, 2002 as compared to the Three Months Ended
March 31, 2001
Results of Operations
Net earnings for the first quarter of 2002 were $15.6 million, or $0.43
per diluted share, as compared to net earnings of $1.1 million, or $0.04 per
diluted share, for the first quarter of 2001. Net earnings rose as net interest
income increased by $6.8 million and equity in net earnings of IFC increased by
$3.3 million. Additionally, net earnings during the first quarter of 2002 were
unaffected by fair market adjustments on derivative instruments, in accordance
with Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," as compared to
mark-to-market losses of $5.2 million recorded during the first quarter of 2001.
Net interest income increased to $15.6 million during the first quarter of
2002 as compared to $8.9 million during the first quarter of 2001 as average
Mortgage Assets increased and net interest margins widened. Total average
Mortgage Assets increased 58% to $3.0 billion during the first quarter of 2002
as compared to $1.9 billion during the first quarter of 2001 and net interest
margins widened to 2.02% from 1.82%, respectively, as short-term interest rate
reductions by the Federal Reserve Bank reduced CMO financing costs. Yields on
CMO borrowings decreased to 3.96% during the first quarter of 2002 as compared
to 6.60% during the first quarter of 2001 as one-month London Interbank Offered
Rate ("LIBOR") decreased. Interest rates on CMO borrowings are determined by
adding a contractual margin to the one-month LIBOR interest rate. Refer to "Net
Interest Income" below for more information on average Mortgage Assets and the
effect of interest rates on yields and net interest margins.
Equity in net earnings of IFC increased to $4.6 million during the first
quarter of 2002 as compared to $1.3 million during the first quarter of 2001 as
gain on sale of loans at IFC increased to $16.2 million from $7.6 million,
respectively. Gain on sale of loans increased as IFC sold a higher volume of
loans at more favorable prices during the first quarter of 2002 as compared to
the first quarter of 2001. During the first quarter of 2002, IFC also recorded a
gain of $1.7 million on the sale of 377,028 shares of IMH common stock that it
acquired during 2001. The sale of IMH common stock by IFC during the first
quarter of 2002 represented the remaining shares held by IFC. Refer to "Results
of Operations--Impac Funding Corporation" below for more information on the
operating results of IFC.
Total assets increased 14% to $3.3 billion as of March 31, 2002 as
compared to $2.9 billion as of December 31, 2001 as the long-term investment
operations acquired $491.8 million in unpaid principal balance of primarily
Alt-A
17
mortgage loans from the mortgage operations during the first quarter of
2002. The following table summarizes mortgage loan acquisitions for the periods
indicated (in thousands):
LOAN ACQUISITION SUMMARY
(excludes premiums paid)
For the Three Months
Ended March 31,
-----------------------------------
2002 2001
--------------- --------------
Balance % Balance %
-------- --- ------- ---
Volume by Type:
Adjustable rate $491,781 100 $179,168 100
Fixed rate -- 0 -- 0
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Product:
Six month LIBOR indexed ARMs $322,933 66 $ 3,096 2
Six month LIBOR indexed hybrids (1) 168,848 34 176,072 98
Second trust deeds -- 0 -- 0
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Credit Quality:
Alt-A loans $489,927 100 $176,767 99
B/C loans 1,854 0 2,401 1
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Purpose:
Purchase $290,019 59 $127,123 71
Refinance 201,762 41 52,045 29
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Prepayment Penalty:
With prepayment penalty $301,525 61 $110,637 62
Without prepayment penalty 190,256 39 68,531 38
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
(1) Mortgage loans are fixed rate for initial two to five year periods and
subsequently adjust to the indicated index plus a margin.
To finance the acquisition of mortgage loans during the first quarter of
2002, we issued $495.0 million of CMOs, which included $470.0 million of AAA
rated bonds and $25.0 million of BBB rated bonds that were priced on a weighted
average basis of one-month LIBOR plus 42 basis points and were secured by $500.0
million of primarily Alt-A mortgage loans. The high credit quality and favorable
credit loss history of our Alt-A mortgage loans allows us to borrow a higher
percentage against mortgage loans securing CMOs. In addition, we raised $57.0
million upon the issuance of 7.4 million shares of common stock, which reduced
our total leverage ratio to 12.40 to 1 as of March 31, 2002 as compared to 14.04
to 1 as of December 31, 2001. The issuance of additional shares of common stock
was accretive to diluted book value per share as it increased to $6.85 per share
as of March 31, 2002 as compared to $6.35 per share as of December 31, 2001.
During the first quarter of 2002, 66% of mortgage loans acquired by the
long-term investment operations from the mortgage operations were six-month
LIBOR indexed ARMs as compared to 2% during the first quarter of 2001. The shift
by borrowers from six-month LIBOR indexed hybrids, which have fixed interest
rate periods from two to five years, to six-month LIBOR indexed ARMs, which are
subject to interest rate adjustments every six months, reflects a widening gap
between short- and long-term interest rates and adjustable- and fixed-rate
mortgages. Over the last two calendar quarters, the long-term investment
operations has acquired $1.1 billion of primarily Alt-A ARMs, which represented
approximately 44% of our long-term mortgage loan portfolio as of March 31, 2002.
The acquisition for long-term investment of a higher than expected volume
of ARMs over the last two calendar quarters combined with an increase in
projected acquisitions over the remainder of 2002 has shifted projected earnings
from less reliance on gain on sale of loans as a source of revenue to net
interest income generated from the balance sheet. We anticipate that the balance
sheet will generate as much as, if not greater than, 80% of our total
18
earnings during 2002 as compared to 67% of total earnings during 2001 as we have
revised our 2002 projections of total assets to $4.2 billion from our original
year-end projections of $3.7 billion.
Higher outstanding advances on warehouse lines, or finance receivables,
that the warehouse lending operations makes to our affiliates and external
customers also contributed to the increase in total assets at quarter-end. The
warehouse lending operations had outstanding finance receivables of $639.5
million as of March 31, 2002 as compared to $466.6 million outstanding as of
December 31, 2001. The increase in finance receivables was primarily the result
of a 23% increase in loan production by IFC, the Company's taxable REIT
subsidiary. Loan production by IFC increased to $1.1 billion during the first
quarter of 2002 as compared to $977.1 million during the fourth quarter of 2001.
Additionally, the warehouse lending operations increased approved warehouse
lines available to non-affiliated customers to $481.0 million as of March 31,
2002 as compared to $447.0 million as of December 31, 2001.
Allowance for loan losses increased 27% to $14.8 million as of March 31,
2002 as compared to $11.7 million as of December 31, 2001. Allowance for loan
losses expressed as a percentage of loans receivable, which includes CMO
collateral, mortgage loans held-for-investment and finance receivables, was
0.46% at March 31, 2002 as compared to 0.43% at December 31, 2001. During the
first quarter of 2002, provision for loan losses was $3.7 million while actual
loan charge-offs, net of recoveries, were $635,000 as compared to $4.0 million
and $2.8 million, respectively, for the first quarter of 2001. The Company makes
a monthly provision for estimated loan losses on its long-term investment
portfolio as an increase to allowance for loan losses. As of March 31, 2002,
total non-performing assets were $80.4 million, or 2.40% of total assets, as
compared to $69.3 million, or 2.43% of total assets, as of December 31, 2001.
Mortgage loans that were 60 or more days delinquent, including foreclosures and
delinquent bankruptcies, was 3.85% of the long-term mortgage investment
portfolio as of March 31, 2002 as compared to 3.84% as of December 31, 2001.
Core Operating Earnings. Core operating earnings for the first quarter of
2002 increased to $16.7 million, or $0.46 per diluted share, as compared to core
operating earnings of $6.3 million, or $0.24 per diluted share, for the first
quarter of 2001. Core operating earnings reflect recurring earnings from
operations and exclude one-time, non-recurring income and expense items and the
effect of fair market accounting for derivative instruments and hedging
activities. Core operating earnings for the first quarter of 2002 were higher
than net earnings as core operating earnings exclude $1.0 million in write-down
of investment securities available-for-sale. Core operating earnings is a
concept not recognized by generally accepted accounting principles ("GAAP") and
may not be comparable to core operating earnings of other companies. The
following table summarizes the calculation of core operating earnings and a
reconciliation of core operating earnings to net earnings (in thousands, except
per share amounts):
For the Three Months
Ended March 31,
--------------------
2002 2001
------- ------
Net earnings .................................................. $15,649 $1,142
Adjustments to net earnings:
Mark-to-market loss - SFAS 133 ............................. -- 864
Write-down on investment securities available-for-sale ..... 1,039 --
Cumulative effect of change in accounting principle ........ -- 4,313
------- ------
Core operating earnings ....................................... $16,688 $6,319
======= ======
Core operating earnings per share ............................. $ 0.46 $ 0.24
======= ======
Estimated Taxable Earnings. Estimated taxable earnings for the first
quarter of 2002 were $17.0 million, or $0.47 per diluted share, as compared to
$8.6 million, or $0.32 per diluted share, during the first quarter of 2001.
Estimated taxable earnings during the first quarter were greater than net
earnings as the provision for loan losses of $3.7 million was in excess of
actual loan charge-offs, net of recoveries, of $635,000. Excess provision for
loan losses of $3.1 million cannot be deducted from taxable earnings. In
addition, estimated taxable earnings for the first quarter reflects a $2.0
million dividend from IFC on its after-tax net earnings of $4.7 million. The
board of directors previously declared a cash dividend of $0.40 per share during
the first quarter of 2002, which was paid on April 16, 2002 to stockholders of
record on April 3, 2002. The first quarter of 2002 dividend is not deducted from
estimated taxable earnings. The following table summarizes the calculation of
estimated taxable earnings and a reconciliation of estimated taxable earnings to
net earnings (in thousands, except per share amounts):
19
For the Three Months
Ended March 31,
--------------------
2002 2001
-------- -------
Net earnings .................................................... $ 15,649 $ 1,142
Adjustments to net earnings:
Mark-to-market loss - SFAS 133 ............................... -- 864
Write-down on investment securities available-for-sale ....... 1,039 --
Cumulative effect of change in accounting principle .......... -- 4,313
Loan loss provision .......................................... 3,707 4,038
Dividends from IFC ........................................... 1,980 1,944
Cash received from previously charged-off assets ............. 175 389
Tax deduction for actual loan losses ......................... (635) (2,833)
Equity in net earnings of IFC ................................ (4,609) (1,290)
Tax difference of amortization of derivative instruments ..... (316) --
-------- -------
Estimate taxable earnings (1) ................................... $ 16,990 $ 8,567
======== =======
Estimated taxable earnings per share (1) ........................ $ 0.47 $ 0.32
======== =======
(1) Reflects calculation of estimated taxable earnings generated by the
Company during periods shown. Excludes remaining $870,000 tax deduction
for 2002 and quarterly tax deduction of $2.7 million during 2001 for
amortization of the termination of the Company's management agreement in
1997, the deduction for dividends paid and the availability of a deduction
attributable to a net operating loss carryforward.
Net Interest Income
Net interest income increased 75% to $15.6 million during the first
quarter of 2002 as compared to $8.9 million during the first quarter of 2001.
Net interest income increased as a result of decreased adjustable rate CMO
borrowing costs and wider net interest margins as the Federal Reserve Bank
decreased short-term interest rates during 2001. Total average Mortgage Assets
increased 58% to $3.0 billion during the first quarter of 2002 as compared to
$1.9 billion during the first quarter of 2001 as the long-term investment
operations continued to acquire primarily adjustable rate Alt-A mortgage loans
from the mortgage operations. Mortgage Assets include CMO collateral, mortgage
loans held-for-investment, finance receivables and investment securities. Net
interest margins on Mortgage Assets increased 20 basis points to 2.02% during
the first quarter of 2002 as compared to 1.82% during the first quarter of 2001.
Net interest margins on Mortgage Assets increased during the first quarter of
2002 primarily as a result of average CMO borrowing costs decreasing 264 basis
points to 3.96% as compared to 6.60% during the first quarter of 2001.
We expect a favorable interest rate environment for the remainder of 2002.
The Federal Reserve Bank did not raise short-term interest rates at its last
meeting as it indicated that the pace of the economic recovery remains
uncertain. Additionally, there appears to be no imminent plans by the Federal
Reserve Bank to increase short-term interest in the near term. We feel that
interest rate hedging instruments that are currently in place and a significant
volume of adjustable rate mortgages that were acquired during the first quarter
of 2002 and the fourth quarter of 2001 will help mitigate any possible adverse
effects that rising interest rates may have on future earnings. In addition, we
continue to acquire a significant portion of mortgage loans with prepayment
penalty features, which will help to mitigate any possible adverse effects that
refinance activity, which has been fueled by low mortgage rates, may have on
future earnings. As of March 31, 2002, 57% of CMO collateral had prepayment
penalties.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
quarters of 2002 and 2001 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
20
For the Three Months For the Three Months
Ended March 31, 2002 Ended March 31, 2001
------------------------------------ --------------------------------
Average Wtd. Avg Average Wtd Avg
Balance Interest Yield Balance Interest Yield
------------------------------------ --------------------------------
MORTGAGE ASSETS
Investment securities available-for-sale:
Securities collateralized by mortgages $ 32,364 $ 433 5.35% $ 36,419 $ 1,326 14.56%
Loan receivables:
CMO collateral 2,340,187 34,451 5.89 1,327,557 26,032 7.84
Mortgage loans held-for-investment (1) 14,979 (31) (0.83) 89,782 1,478 6.58
Finance receivables:
Affiliated 385,813 4,290 4.45 302,972 6,648 8.78
Non-affiliated 239,579 3,283 5.48 143,797 3,309 9.20
----------------------- ----------------------
Total finance receivables 625,392 7,573 4.84 446,769 9,957 8.91
----------------------- ----------------------
Total Loan receivables 2,980,558 41,993 5.64 1,864,108 37,467 8.04
----------------------- ----------------------
Total Mortgage Assets $3,012,922 $ 42,426 5.63% $1,900,527 $38,793 8.16%
======================= ======================
BORROWINGS
CMO borrowings (2) $2,261,902 $ 22,406 3.96% $1,247,222 $20,592 6.60%
Reverse repurchase agreements - mortgages 581,247 4,290 2.95 503,973 8,859 7.03
Borrowings secured by investment securities 12,345 549 17.79 20,329 678 13.34
----------------------- ----------------------
Total Borrowings on Mortgage Assets $2,855,494 $ 27,245 3.82% $1,771,524 $30,129 6.80%
======================= ======================
Net Interest Spread (3) 1.82% 1.36%
Net Interest Margin (4) 2.02% 1.82%
(1) Interest income includes amortization of acquisition costs and net cash
payments or receipts on derivatives pending allocation to specific CMO
borrowings.
(2) Interest expense includes amortization of acquisition costs and net cash
payments or receipts on derivatives not associated with CMO borrowings.
(3) Net interest spread is calculated by subtracting the weighted average
yield on total borrowings on Mortgage Assets from the weighted average
yield on total Mortgage Assets.
(4) Net interest margin is calculated by subtracting interest expense on total
borrowings on Mortgage Assets from interest income on total Mortgage
Assets and then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 33% to $34.5 million during
the first quarter of 2002 as compared to $26.0 million during the first quarter
of 2001 as average CMO collateral increased 77% to $2.3 billion as compared to
$1.3 billion, respectively. Average CMO collateral increased as the long-term
investment operations acquired $1.8 billion of primarily Alt-A mortgage loans
since the end of the first quarter of 2001. During the first quarter of 2002,
constant prepayment rates ("CPR") on CMO collateral decreased to 26% as compared
to 29% during the first quarter of 2001. CPR results from the unscheduled
principal pay down or payoff of mortgage loans prior to the contractual maturity
date or contractual payment schedule of the mortgage loan. The Company believes
that mortgage loans acquired from the mortgage operations with prepayment
penalties continues to mitigate increased CPR and corresponding premium
amortization from refinance activity. In addition, the Company reduced its
exposure to premium amortization as total capitalized premiums were 158 basis
points of outstanding CMO collateral as of March 31, 2002 as compared to 162
basis points of outstanding CMO collateral as of December 31, 2001. Loan
premiums paid for acquiring mortgage loans are amortized to interest income over
the estimated lives of the mortgage loans. The weighted average yield on CMO
collateral decreased 195 basis points to 5.89% during the first quarter of 2002
as compared to 7.84% during the first quarter of 2001 as mortgage rates
declined.
Interest income on mortgage loans held-for-investment decreased to
$(31,000) during the first quarter of 2002 as compared to $1.5 million during
the first quarter of 2001 as average mortgage loans held-for-investment
decreased 83% to $15.0 million as compared to $89.8 million, respectively.
Interest income on mortgage loans held-for-investment was reduced by $134,000
from the amortization of acquisition costs on derivatives prior to the
derivatives
21
being allocated to CMO structures. In addition, interest income was not accrued
on average non-performing loans held-for-investment of $8.2 million during the
first quarter of 2002. During the first quarter of 2002, average non-performing
loans held-for-investment represented 55% of total average loans
held-for-investment. However, the outstanding balance of non-performing loans
held-for-investment decreased 47% to $6.5 million as of March 31, 2002 from
$12.2 million as of March 31, 2001. As such, the weighted average yield on
mortgage loans held-for-investment decreased to (0.83)% during the first quarter
of 2002 as compared to 6.58% during the first quarter of 2001.
Interest income on total finance receivables decreased 24% to $7.6 million
during the first quarter of 2002 as compared to $10.0 million during the first
quarter of 2001 as the weighted average yield on total finance receivables
decreased to 4.84% as compared to 8.91%, respectively. The decrease in yield was
primarily due to a reduction in Bank of America's prime rate ("prime"), which is
the index used to determine interest rates on finance receivables. The decrease
in yield was partially offset by an increase in average finance receivables to
$625.4 million during the first quarter of 2002 as compared to $446.8 million
during the first quarter of 2001 as loan production by the mortgage operations
and warehouse activity from non-affiliates increased.
Interest income on finance receivables to affiliates decreased 35% to $4.3
million during the first quarter of 2002 as compared to $6.6 million during the
first quarter of 2001 as the weighted average yield on affiliated finance
receivables decreased to 4.45% as compared to 8.78%, respectively, as prime
decreased. The decrease in yield was partially offset as average finance
receivables to affiliated companies increased 27% to $385.8 million during the
first quarter of 2002 as compared to $303.0 million during the first quarter of
2001 as loan production by the mortgage operations increased.
Interest income on finance receivables to non-affiliated mortgage banking
companies was $3.3 million during the first quarter of 2002 and 2001. Although
the weighted average yield on non-affiliated finance receivables decreased to
5.48% during the first quarter of 2002 as compared to 9.20% during the first
quarter of 2001 due to a decrease in prime, it was offset as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
67% to $239.6 million as compared to $143.8 million, respectively. Average
finance receivables to non-affiliates increased as new customers were added and
usage of short-term warehouse lines of credit by existing customers increased.
Interest income on investment securities decreased 67% to $433,000 during
the first quarter of 2002 as compared to $1.3 million during the first quarter
of 2001 as the weighted average yield on investment securities decreased to
5.35% as compared to 14.56%, respectively, and average investment securities
decreased 11% to $32.3 million as compared to $36.4 million, respectively.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings increased 9% to $22.4 million during
the first quarter of 2002 as compared to $20.6 million during the first quarter
of 2001 as average borrowings on CMO collateral increased 92% to $2.3 billion as
compared to $1.2 billion, respectively. The large increase in average CMO
borrowings produced smaller incremental increases in interest expense on CMO
borrowings as short-term interest rate reductions during 2001 caused CMO
borrowing yields to decline 264 basis points to 3.96% during the first quarter
of 2002 as compared to 6.60% during the first quarter of 2001. Interest expense
and yields on CMO borrowings includes $4.5 million in net cash payments made on
derivatives not associated with specific CMO borrowings during the first quarter
of 2002 as compared to none during the first quarter of 2001. Although $2.0
billion of CMOs were issued since the end of the first quarter of 2001, the
Company reduced its exposure to securitization cost amortization as total
capitalized securitization costs were 47 basis points of outstanding CMO
collateral as of March 31, 2002 as compared to 53 basis points of outstanding
CMO collateral as of December 31, 2001. Securitization costs are incurred when
CMOs are issued and amortized to interest expense over the estimated lives of
the mortgage loans.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables decreased 52% to $4.3
million during the first quarter of 2002 as compared to $8.9 million during the
first quarter of 2001 as the weighted average yield on reverse repurchase
agreements decreased 408 basis points to 2.95% as compared to 7.03%,
respectively. Average reverse repurchase agreements increased 15% to $581.2
million during the first quarter of 2002 as compared to $504.0 million during
the first quarter of 2001 as loan production by the mortgage operations and
warehouse advances to non-affiliated customers increased.
22
The Company also uses mortgage-backed securities as collateral to borrow
and fund the purchase of mortgage assets and to act as an additional source of
liquidity. Interest expense on borrowings secured by investment securities
decreased 19% to $549,000 during the first quarter of 2002 as compared to
$678,000 during the first quarter of 2001 as the average balance on these
borrowings decreased 39% to $12.3 million as compared to $20.3 million,
respectively. The weighted average yield of these borrowings increased to 17.79%
during the first quarter of 2002 as compared 13.34% during the first quarter of
2001.
Provision for Loan Losses
During the first quarter of 2002, provision for loan losses was $3.7
million while actual loan charge-offs, net of recoveries, were $635,000 as
compared to $4.0 million and $2.8 million, respectively, for the first quarter
of 2001. The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
Non-Interest Income
During the first quarter of 2002, non-interest income was $5.7 million as
compared to $2.1 million during the first quarter of 2001. Non-interest income
includes equity in net earnings of IFC and other non-interest income, primarily
loan servicing fees and fees associated with the warehouse lending operations.
The increase in non-interest income was primarily due to an increase in equity
in net earnings of IFC to $4.6 million during the first quarter of 2002 as
compared to $1.3 million during the first quarter of 2001. IFC's net earnings
increased primarily as a result of an increase of $8.6 million in gain on sale
of loans and a $1.7 million gain on the sale of 377,028 shares of IMH common
stock that it acquired during 2001. The Company records 99% of the earnings or
losses from IFC as the Company owns 100% of IFC's preferred stock, which
represents 99% of the economic interest in IFC. Refer to "Results of
Operations--Impac Funding Corporation" for additional information regarding
operating results of IFC.
Non-Interest Expense
During the first quarter of 2002, non-interest expense increased to $1.9
million as compared to $1.5 million during the first quarter of 2001. Excluding
the write-down on investment securities and a mark-to-market loss as a result of
SFAS 133, non-interest expense increased to $904,000 during the first quarter of
2002 as compared to $661,000 during the first quarter of 2001 as gain on
disposition of other real estate owned decreased $203,000.
RESULTS OF OPERATIONS -- IMPAC FUNDING CORPORATION
For the Three Months Ended March 31, 2002 as compared to the Three Months
Ended March 31, 2001
Results of Operations
Net earnings increased to $4.7 million during the first quarter of 2002 as
compared to $1.3 million during the first quarter of 2001. The increase in net
earnings was primarily the result of an $8.6 million increase in gain on sale of
loans, a $1.7 million gain on sale of IMH stock and a $1.4 million increase in
net interest income.
Loan acquisitions and originations, excluding premiums paid, by the
mortgage operations increased 98% to $1.2 billion during the first quarter of
2002 as compared to $597.2 million during the first quarter of 2001. We believe
that loan production during the first quarter of 2002 was driven by low mortgage
rates, strong housing demand, our innovative loan programs and our automated
underwriting system, IDASL, which enhances the origination process. IDASL stands
for Impac Direct Access System for Lending and can be viewed on our website at
www.impaccompanies.com. The following table summarizes mortgage loan
acquisitions and originations for the periods indicated (in thousands):
23
LOAN PRODUCTION SUMMARY
(excludes premiums paid)
For the Three Months
Ended March 31,
------------------------------------
2002 2001
------------------ --------------
Balance % Balance %
------- --- ------- ---
Volume by Type:
Fixed rate $ 362,806 31 $431,868 72
Second trust deeds 13,496 1 9,954 2
Adjustable rate:
Six month LIBOR ARMs 523,731 3,044
Six month LIBOR hybrids 284,352 152,302
---------- --------
Total adjustable rate 808,083 68 155,346 26
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Channel:
Correspondent acquisitions $ 877,742 74 $466,820 78
Wholesale and retail originations 235,417 20 130,348 22
Novelle Financial Services 71,226 6 -- 0
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Credit Quality:
Alt-A loans $1,107,650 94 $591,384 99
B/C loans 76,735 6 5,784 1
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Purpose:
Purchase $ 648,230 55 $382,240 64
Refinance 536,155 45 214,928 36
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Prepayment Penalty:
With prepayment penalty $ 817,251 69 $382,142 64
Without prepayment penalty 367,134 31 215,026 36
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Net Interest Income
Net interest income increased to $1.7 million during the first quarter of
2002 as compared to net interest income of $294,000 during the first quarter of
2001. Net interest income rose as average loans held for sale increased to
$390.2 million during the first quarter of 2002 as compared to $311.1 million
during the first quarter of 2001 as a result of higher loan production levels
and widening of net interest margins. Net interest margins increased to 1.72%
during the first quarter of 2002 as compared to 0.53% during the first quarter
of 2001. Net interest margins increased as yields on average borrowing costs
decreased at a faster rate than weighted average coupons on mortgage loans.
Average prime, which is the index used to determine borrowing costs on warehouse
lines with the warehouse lending operations, decreased to 4.75% during the first
quarter of 2002 as compared to 8.62% during the first quarter of 2001.
Non-Interest Income
During the first quarter of 2002, non-interest income increased to $17.5
million as compared to $8.7 million during the first quarter of 2001 primarily
as a result of an increase in gain on sale of loans. Gain on sale of loans
increased to $16.2 million on loan sales of $1.0 billion during the first
quarter of 2002 as compared to $7.6 million and $641.2 million, respectively,
during the first quarter of 2001. Additionally, profit margins on mortgage loans
sold during the first quarter of 2002 were more favorable as compared to profit
margins on mortgage loans sold during the first quarter of 2001. During the
first quarter of 2002, IFC securitized $444.7 million of mortgages as REMICs as
compared to $450.1 million during the first quarter of 2001. IFC sold loans on a
servicing released basis during the first quarters of 2002 and 2001. The
mortgage operations anticipates that it will continue to sell related loan
servicing rights from the securitization of its loans and will continue to act
as master servicer on all its securitizations. IFC's goal is to securitize loans
more frequently as less capital is required, higher liquidity is maintained and
less interest rate and price volatility during the mortgage loan accumulation
period results. Additionally, during the first quarter of
24
2002 IFC recorded gains of $1.7 million on the sale of 377,028 shares of IMH
common stock it acquired during 2001. The sale of IMH common stock during the
first quarter of 2002 represented the remaining shares owned by IFC.
Non-Interest Expense
During the first quarter of 2002, non-interest expense increased to $11.1
million as compared to $6.7 million during the first quarter of 2001. Personnel
expense accounted for the primary increase in non-interest expense during the
first quarter of 2002 as it increased 75% to $5.6 million as compared to $3.2
million during the first quarter of 2001. The increase in personnel expense was
primarily the result of an increase in loan production and a corresponding
increase in staff. Staff in the conduit and wholesale lending operations rose to
282 employees at March 31, 2002 as compared to 232 employees at March 31, 2001
while total staff at Novelle Financial Services was 75 employees at March 31,
2002. Novelle Financial Services was acquired and became a subsidiary of IFC
after the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
We recognize the need to have funds available for our operating businesses
and our customer's demands for obtaining short-term warehouse financing until
the settlement or sale of mortgage loans with us or with other investors. It is
our policy to have adequate liquidity at all times to cover normal cyclical
swings in funding availability and loan demand and to allow us to meet abnormal
and unexpected funding requirements. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds. Toward this goal, the Company's asset and liability
committee ("ALCO") is responsible for monitoring our liquidity position and
funding needs. ALCO is comprised of the senior executives of IMH. ALCO meets on
a weekly basis to review current and projected sources and uses of funds. ALCO
monitors the composition of the balance sheet for changes in the liquidity of
our assets in adverse market conditions. Our liquidity consists of cash and cash
equivalents, short-term and marketable investment securities rated AAA through
BBB and maturing mortgage loans, or "liquid assets." Our policy is to maintain a
liquidity threshold of 5% of liquid assets to warehouse borrowings, reverse
repurchase agreements, dividends payable and other short-term liabilities.
During the first quarter of 2002, we were in compliance with this policy, which
ALCO reports to the board of directors at least quarterly. As of March 31, 2002,
overall liquidity was 12%.
Sources of Liquidity
Our business operations are primarily funded as follows:
o monthly interest and principal payments from our mortgage loan and
investment securities portfolios;
o CMO and reverse repurchase agreements secured by mortgage loans and
mortgage-backed securities;
o proceeds from securitization and whole loan sale of mortgage loans;
and
o cash from the issuance of securities.
We use CMO borrowings and reverse repurchase agreements to fund
substantially all of our mortgage loan and mortgage-backed securities
portfolios. As we accumulate mortgage loans for long-term investment, we issue
CMOs secured by the mortgage loans as a means of providing long-term financing
and repaying short-term warehouse advances. The use of CMOs provides the
following benefits:
o allows us to lock in our financing cost over the life of the
mortgage loans securing the CMO borrowings; and
o eliminates margin calls on the borrowings that are converted from
reverse repurchase agreements to CMO financing.
Terms of CMO borrowings require that an independent third party custodian
hold mortgage loans as collateral. The maturity of each CMO bond class is
directly affected by the rate of early principal payments on the related
collateral. Interest rates on adjustable rate CMOs can range from a low of 0.26%
over one-month LIBOR on "AAA" credit rated bonds to a high of 3.60% over
one-month LIBOR on "BBB" credit rated bonds. As of March 31, 2002, interest
rates on adjustable rate CMOs ranged from 0.26% to 2.40% over one-month LIBOR,
or 2.16% to 4.30%. Interest rates on fixed rate CMOs range from 6.65% to 7.25%
depending on the class of CMOs issued. Equity in the CMOs is established at the
time CMOs are issued at levels sufficient to achieve desired credit ratings on
the securities from rating agencies. We also determine the amount of equity
invested in CMOs based upon the anticipated return on
25
equity as compared to estimated proceeds from additional debt issuance. Total
credit loss exposure is limited to the equity invested in the CMOs at any point
in time.
During the first quarter of 2002, we issued $495.0 million of CMOs, which
included $470.0 million of AAA rated bonds and $25.0 million of BBB rated bonds
that were priced on a weighted average basis of one-month LIBOR plus 42 basis
points, to provide long-term financing for $500.0 million of mortgage loans
securing CMOs. In April of 2002, we issued a CMO for $496.3 million which
included $472.5 million of AAA rated bonds and $23.8 million of BBB rated bonds
that were priced on a weighted average basis of one-month LIBOR plus 37 basis
points. Because of the credit profile, historical loss performance and
prepayment characteristics of our non-conforming Alt-A mortgages, we have been
able to borrow a higher percentage against mortgage loans securing CMOs, which
means that we have to provide less capital. By decreasing the amount of capital
we have to invest in our CMOs, we have been able to grow with the liquidity
generated from our business operations.
Before the issuance of CMOs, we finance the acquisition of mortgage loans
primarily through borrowings on reverse repurchase agreements with third party
lenders. When we have accumulated a sufficient amount of mortgage loans, we
issue CMOs and convert short-term advances under reverse repurchase agreements
to long-term CMO financing. Since 1995, we have had an uncommitted repurchase
facility with a major investment bank to finance the acquisition of mortgage
loans as needed. In order to give us more flexibility in our borrowing
arrangements and to reduce our reliance on one lender, we are currently in
negotiations with other investment banks to provide additional uncommitted
reverse repurchase facilities.
Terms of the reverse repurchase agreement require that mortgage loans be
held by an independent third party custodian, which gives us the ability to
borrow against a percentage of the outstanding principal balance of the mortgage
loans. The borrowing rates vary from 85 basis points to 200 basis points over
one-month LIBOR, depending on the type of collateral provided. The advance rates
on the reverse repurchase agreement is based on the type of mortgage collateral
provided and generally range from 70% to 98% of the fair market value of the
collateral. As of March 31, 2002, we had $576.1 million outstanding on the
reverse repurchase facility, which included the funding of our mortgage loans
and those of our customers.
The mortgage operations currently have warehouse line agreements to obtain
financing of up to $600.0 million from the warehouse lending operations to
provide interim mortgage loan financing during the period that the mortgage
operations accumulates mortgage loans until the mortgage loans are securitized
or sold. The margins on reverse repurchase agreements are based on the type of
collateral provided by the mortgage operations and generally range from 95% to
99% of the fair market value of the collateral. The interest rates on the
borrowings are indexed to prime minus 0.50%, which was 4.75% at March 31, 2002.
As of March 31, 2002, the mortgage operations had $383.8 million outstanding
under the warehouse line agreements.
We expect to continue to use short-term warehouse facilities to fund the
acquisition of mortgage loans. If we cannot renew or replace maturing
borrowings, we may have to sell, on a whole loan basis, the loans securing these
facilities which, depending upon market conditions, may result in substantial
losses. Additionally, if for any reason the market value of our mortgage loans
securing warehouse facilities decline, our lenders may require us to provide
them with additional equity or collateral to secure our borrowings, which may
require us to sell mortgage loans at substantial losses.
When the mortgage operations accumulates a sufficient amount of mortgage
loans, it sells or securitizes the mortgage loans. During the first quarter of
2002, the mortgage operations securitized $444.7 million of mortgage loans as
REMICs and sold $491.8 billion, in unpaid principal balance, of mortgage loans
to the long-term investment operations. In addition, the mortgage operations
sold $84.2 million, in unpaid principal balance, of mortgage loans to other
investors. The mortgage operations sold mortgage servicing rights on all ARM and
FRM securitizations completed during the first quarter of 2002. This generated
100% cash gains on securitization and sale of mortgage loans. Cash from the sale
of mortgage servicing rights was deployed in the mortgage operations and used to
acquire and originate additional mortgage loans.
In order to mitigate interest rate and market risk, we attempt to
securitize our mortgage loans more frequently. Although securitizing mortgage
loans more frequently adds operating and securitization costs, we believe the
added cost is offset as less capital is required and more liquidity is provided
with less interest rate and price volatility, as the accumulation and holding
period of mortgage loans is shortened. The mortgage operations currently has
agreements in place for the sale of mortgage loans and mortgage servicing rights
with an investment bank and large mortgage loan
26
servicer, respectively. This allows the mortgage operations to forward price its
REMIC and CMO transactions on a servicing released basis and achieve greater
stability in the execution of its securitizations.
On December 1, 2001, we filed a registration statement with the SEC, which
allows us to sell up to $300.0 million of securities, including common stock,
preferred stock, debt securities and warrants. This type of registration
statement is commonly referred to as a "shelf" registration process. In
conjunction with the filing of the shelf, we completed the sale of 7,402,000
shares of common stock during the first quarter of 2002, which provided net
proceeds of approximately $57.0 million.
Uses of Liquidity
Our business operations primarily use funds as follows:
o acquisition and origination of mortgage loans;
o provide short-term warehouse financing; and
o pay common stock dividends.
During the first quarter of 2002, we acquired and originated $1.2 billion
of mortgage loans of which we retained $491.8 million for long-term investment.
The acquisition and origination of mortgage loans by the mortgage operations
during the first quarter of 2002 resulted in premium costs of 1.39% of the
outstanding principal balance of mortgage loans. Our equity investment in
mortgage loans is outstanding until we sell or securitize our mortgage loans,
which is one of the reasons we attempt to securitize our mortgage loans
frequently. When we complete CMOs our required equity investment ranges from
approximately 3% to 5% of the outstanding principal balance of mortgage loans,
depending on our premium costs, securitization costs and the capital investment
required. Since we rely significantly upon securitizations to generate cash
proceeds to repay borrowings and to create credit availability, any disruption
in our ability to complete securitizations may require us to utilize other
sources of financing, which, if available at all, may be on unfavorable terms.
In addition, delays in closing securitizations of our mortgage loans increase
our risk by exposing us to credit and interest rate risks for this extended
period of time. Furthermore, gains on sales from our securitizations represent a
significant portion of our earnings.
We utilize our uncommitted warehouse line with a major investment bank to
provide short-term warehouse financing to affiliates and external customers of
the warehouse lending operations. The mortgage operations has a $600.0 million
warehouse facility with the warehouse lending operations to fund the acquisition
and origination of mortgage loans until sale or securitization. The warehouse
lending operations provides financing to affiliates at prime minus 0.50%. As of
March 31, 2002, affiliates had $383.8 million outstanding on the warehouse line
with the warehouse lending operations. During January 2002, affiliates deposited
a total of $8.1 million in pledge accounts with the warehouse lending operations
that allows them to finance 100% of the fair market value of their mortgage
loans.
The warehouse lending operations provides financing to non-affiliates at
prime plus a spread. Non-affiliates can generally finance between 95% and 98% of
the fair market value of the mortgage loans. As of March 31, 2002, the warehouse
lending operations had $481.0 million of approved warehouse lines available to
its customers of which $263.9 million was outstanding. Our ability to meet
liquidity requirements and the financing need of our customers is subject to the
renewal of our credit and repurchase facilities or obtaining other sources of
financing, if required, including additional debt or equity from time to time.
Any decision our lenders or investors make to provide available financing to us
in the future will depend upon a number of factors, including:
o our compliance with the terms of our existing credit arrangements;
o our financial performance;
o industry and market trends in our various businesses;
o the general availability of and rates applicable to financing and
investments;
o our lenders or investors resources and policies concerning loans and
investments; and
o the relative attractiveness of alternative investment or lending
opportunities.
During the first quarter of 2002, we declared common stock dividends of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002.
27
Cash Flows
Operating Activities - During the first quarter of 2002, net cash provided by
operating activities was $20.6 million. Net earnings of $15.6 million provided
most of the cash flows from operating activities.
Investing Activities - During the first quarter of 2002, net cash used in
investing activities was $487.7 million. Net cash flows of $330.5 million,
including principal repayments, was used in investing activities to acquire and
originate mortgage loans and $172.8 million was used to provide short-term
advances warehouse advances to affiliates and external customers.
Financing Activities - During the first quarter of 2002, net cash provided by
financing activities was $468.1 million. Net cash flows of $319.3 million was
provided by CMO proceeds, $104.9 million was provided by advances on warehouse
lines, and $57.0 million was provided by the issuance of common stock.
Inflation
The consolidated financial statements and corresponding notes to the
consolidated financial statements 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 our operations. Unlike industrial companies,
nearly all of our assets and liabilities are monetary in nature. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Inflation affects our operations primarily through
its effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. During
periods of increasing interest rates, demand for mortgage loans and a borrower's
ability to qualify for mortgage financing in a purchase transaction may be
adversely affected. During periods of decreasing interest rates, borrowers may
prepay their mortgages, which in turn may adversely affect our yield and
subsequently the value of our portfolio of mortgage assets.
28
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization or sale of such loans, the Company is exposed to
interest rate risk. Most of the loans are securitized or sold within 45 to 90
days of origination of purchase. However, a portion of the loans are
held-for-sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold (the latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of the
Company's related gain or an increase in the Company's loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $3.6 million and $4.9 million outstanding at March 31,
2002 and December 31, 2001, respectively. These instruments are carried at
market value at March 31, 2002 and December 31, 2001. The Company values these
assets based on the present value of future cash flow streams net of expenses
using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
29
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is a party to litigation and claims, which are normal in the
course of its operations. While the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a material adverse effect on the Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
1. Form 8-K reporting Item 9 filed on January 4, 2002
2. Form 8-K reporting Items 5 and 7 filed on January 24, 2002
3. Form 8-K reporting Items 5 and 7 filed on February 8, 2002
4. Form 8-K reporting Item 9 filed on March 4, 2002
5. Form 8-K reporting Item 9 filed on March 28, 2002
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: August 22, 2002
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
/s/ Richard J. Johnson
by: Richard J. Johnson
Executive Vice President
and Chief Financial Officer
(authorized officer of registrant and principal financial officer)
Date: August 22, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Impac Mortgage Holdings, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joseph R. Tomkinson
Joseph R. Tomkinson
Chief Executive Officer
August 22, 2002
/s/ Richard J. Johnson
Richard J. Johnson
Chief Financial Officer
August 22, 2002
32