_______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission File Number: 0-19861
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20371 Irvine Avenue 92707
Santa Ana Heights, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 556-0122
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $0.01par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on May 10,
1996 on the American Stock Exchange was approximately $65.9
The number of shares of Common Stock outstanding as of May 10 , 1996:
4,250,000
DOCUMENTS INCORPORATED BY REFERENCE
None
________________________________________________________________________________
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
1996 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE #
FINANCIAL INFORMATION - IMPERIAL CREDIT MORTGAGE HOLDINGS, INC
Consolidated Balance Sheets, March 31, 1996 and December 31, 1995......................................... 1
Consolidated Statements of Operations, Three Months Ended, March 31,
1996 and 1995............................................................................................ 2
Consolidated Statements of Changes in Stockholders' Equity................................................ 3
Consolidated Statements of Cash Flows, For the Three Months Ended, March 31,
1996 and 1995............................................................................................. 4
Selected Notes to Consolidated Financial Statements...................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 11
RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................ 16
ITEM 2- ITEM 5: NOT APPLICABLE........................................................................... 16
ITEM 6. EXHIBIT - STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE 17
SIGNATURES....................................................................................... 18
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
March 31, December 31,
1996 1995
--------------- ---------------
ASSETS
- - ------
Cash and cash equivalents $ 17,068 $ 2,284
Investment securities available-for-sale 33,243 17,378
Mortgage loans held for investment 311,461 -
Finance receivables, net 196,065 582,921
Lease payment receivables held for sale 7,806 8,441
Accrued interest receivable 5,611 1,645
Due from affiliates 1,390 113
Investment in ICI Funding Corporation 9,536 866
Other assets - 40
--------------- ---------------
$ 582,180 $ 613,688
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliates $ 6,040 $ -
Reverse-repurchase agreements 528,745 567,727
Other liabilities 779 725
--------------- ---------------
Total Liabilities 535,564 568,452
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; $10 million shares
authorized; none issued or outstanding at March
31, 1996 and at December 31, 1995 and 1994 - -
Common Stock; $.01 par value; 50 million shares
authorized; 4,250,000 shares issued and outstanding
at March 31, 1996 and at December 31, 1995 43 43
Additional paid-in capital 44,971 44,971
Investment securities valuation allowance (67) (93)
Retained earnings 1,669 315
--------------- ---------------
Total Stockholders' Equity 46,616 45,236
--------------- ---------------
$ 582,180 $ 613,688
=============== ===============
See accompanying notes to Consolidated financial statements.
1
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
For the Three Months Ended March 31,
1996 1995
---------------- ----------------
Revenues
Equity in net income of ICI Funding Corporation $ 542 $ 404
Interest income 13,010 86
Fee income 172 30
---------------- ----------------
13,724 520
---------------- ----------------
Expenses
Interest on borrowings from reverse repurchase agreements 9,009 -
Interest on borrowings from SPTL - 48
Provision for finance receivable losses 2,415 104
Personnel expense 44 18
Professional services 44 4
General and administrative expense 89 5
Advisory fee 426 -
Telephone and other communications 2 3
Occupancy expense 1 1
Data processing expense - 1
---------------- ----------------
12,030 184
---------------- ----------------
Income before income tax benefit 1,694 336
Income tax benefit - 28
---------------- ----------------
Net Income $ 1,694 $ 364
================ ================
Primary and fully diluted income per common share $ 0.39 N/A
================ ================
See accompanying notes to Consolidated financial statements.
2
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
(in thousands, except for number of shares)
Number of Additional Securities Total
Shares Common Paid-In Contributed Retained Valuation Stockholders'
Outstanding Stock Capital Capital Earnings Allowance Equity
-------------- --------- ---------- ----------- -------- ---------- -------------
Balance, December 31, 1994 - - - 358 6,496 - 6,854
Contribution Transaction 500,000 5 515 (358) (8,239) - (8,077)
Net proceeds, from intial
public offering 3,750,000 38 44,456 - - - 44,494
Net income, 1995 - - - - 2,058 - 2,058
Securities valuation
allowance - - - - - (93) (93)
-------------- --------- ---------- ----------- -------- ---------- -------------
Balance, December 31, 1995 4,250,000 43 44,971 - 315 (93) 45,236
Dividends paid
($.08 per share) - - - - (340) - (340)
Net income, three months
ended March 31, 1996 - - - - 1,694 - 1,694
Change in securities
valuation allowance - - - - - 26 26
-------------- --------- ---------- ----------- -------- ---------- -------------
Balance, March 31, 1996 4,250,000 43 44,971 - 1,669 (67) 46,616
============== ========= ========== =========== ======== ========== =============
See accompanying notes to Consolidated financial statements.
3
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
March 31,
1996 1995
---------------- ----------------
Cash flows from operating activities:
Net income $ 1,693 $ 364
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of ICI Funding Corporation (542) (403)
Provision for finance receivable losses 2,415 104
Net change in accrued interest on loans (3,965) (3)
Net change in other assets and liabilities 4,856 -
---------------- ----------------
Net cash provided by operating activities 4,457 62
---------------- ----------------
Cash flows from investing activities:
Purchases of mortgage loans held for investment (313,751) -
Change in finance receivables 386,731 (3,180)
Purchase of investment securities available-for-sale (15,839) -
Net decrease in lease payment receivables 635 -
Contribution to IC Funding Corporation (8,128) -
---------------- ----------------
Net cash provided by (used in) investing activities 49,648 (3,180)
---------------- ----------------
Cash flows from financing activities:
Net change in borrowings from SPTL - 3,118
Net change in reverse-repurchase agreements (38,982) -
Dividends paid (340) -
---------------- ----------------
Net cash (used in) provided by financing activities (39,322) 3,118
Net change in cash and cash equivalents 14,783 -
Cash and cash equivalents at beginning of period 2,285 -
---------------- ----------------
Cash and cash equivalents at end of period $ 17,068 $
================ ================
Supplementary Information:
Interest paid $ 8,999 $ 48
Income taxes refunded - (33)
================ ================
See accompanying notes to Consolidated financial statements.
4
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context otherwise requires, references herein to the "Company"
means Imperial Credit
Mortgage Holdings, Inc. ("IMH"), ICI Funding Corporation ("ICIFC") and
Imperial Warehouse Lending Group, Inc. ("IWLG"), collectively. References to
IMH refer to Imperial Credit Mortgage Holdings, Inc. as a separate entity
from ICIFC and IWLG.
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principals and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by Generally
Accepted Accounting Principals 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, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995.
References to financial information of IMH for the three month
period ended March 31, 1995 reflect the pro forma financial
data of IMH's equity interest in ICII's mortgage conduit operations
and SPTL's warehouse lending operations, pre-Contribution Transaction.
References to financial information of IMH for the three month period
ended March 31, 1996 and as of December 31, 1995 reflect financial
results of IMH's equity interest in ICIFC and results of operations of
IWLG as stand-alone entities, post- Contribution Transaction.
The results of operations of ICIFC, of which 99% of the economic
interest is owned by IMH, are included in the results of operations for IMH
as "Equity in net income of ICI Funding Corporation." For the three month
period ended March 31, 1995, the financial statements included elsewhere
herein reflect management's estimate of the level of previous capital and the
amounts of interest charges and general and administrative expense and income
taxes that ICII's mortgage conduit operations would have incurred had it
operated as an entity separate from ICII.
2. ORGANIZATION
IMH is a recently-formed Maryland corporation which elected to be taxed as a
real estate investment trust ("REIT"). The Company operates three businesses,
two of which include certain ongoing operations that were contributed to the
Company on November 20, 1995 (the "Initial Public Offering") by Imperial
Credit Industries, Inc. ("ICII"), a leading diversified financial services
company and mortgage bank specialty finance company.
Long-Term Investment Operations. The Long-Term Investment Operations,
invests primarily in non-conforming residential mortgage loans and mortgage-
backed securities secured by or representing interests in such loans and, to
a lesser extent, in second mortgage loans. Non-conforming residential
5
mortgage loans are residential mortgages that do not qualify for purchase by
government-sponsored agencies such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). Such loans generally provide higher yields than conforming loans.
The principal differences between conforming loans and non-conforming loans
include the applicable loan-to-value ratios, the credit and income histories
of the mortgagors, the documentation required for approval of the mortgagors,
the type of properties securing the mortgage loans, the loan sizes, and the
mortgagors' occupancy status with respect to the mortgaged properties.
Second, non-conforming mortgage loans are higher yielding than conforming
mortgage loans for the purpose of debt consolidation, home improvements,
education and a variety of other purposes. At March 31, 1996, the Company's
loan investment portfolio consisted of $311.5 million of non-conforming
mortgage loans and $33.2 million of mortgage backed or other collateralized
securities.
Conduit Operations. The Conduit Operations, ICIFC, primarily purchases non-
conforming mortgage loans and, to a lesser extent, second mortgage loans from
its network of third party correspondents and subsequently securitizes or
sells such loans to permanent investors including the Long-Term Investment
Operations. ICIFC's ability to design non-conforming mortgage loans, which
suit the needs of its correspondent loan originators and their borrowers,
while providing sufficient credit quality to investors, as well as its
efficient loan purchasing process, flexible purchase commitment options and
competitive pricing enables it to compete effectively with other non-
conforming mortgage loan conduits. ICIFC, in addition to its ongoing
securitizations and sales to third party investors, supports the Long-Term
Investment Operations of the Company by supplying IMH with non-conforming
mortgage loans and securities backed by non-conforming mortgage loans at
costs which are lower than would be available through third parties. For the
three months ended March 31, 1996, the Company acquired $280.5 million in
mortgage loans and sold $311.5 million of loans to the Long-Term Investment
Operations.
Warehouse Lending Operations. The Warehouse Lending Operations, IWLG,
provides short-term lines of credit to ICIFC and approved mortgage banks,
most of which are correspondents of ICIFC, to finance mortgage loans during
the time from the closing of the loans to their sale or other settlement with
pre-approved investors. At March 31, 1996, IWLG had $196.1 million in
outstanding finance receivables, of which $173.4 million was outstanding with
ICIFC.
3. THE CONTRIBUTION TRANSACTION
On November 20, 1995, ICII contributed to ICIFC certain of the operating
assets and certain customer lists of ICII's mortgage conduit operations,
including all of ICII's mortgage conduit operations' commitments to purchase
mortgage loans subject to rate locks from correspondents (having a principal
balance of $44.3 million on November 20, 1995) in exchange for shares
representing 100% of the common stock and 100% of the non-voting preferred
stock of ICIFC. Simultaneously, on November 20, 1995, in exchange for 500,000
shares of Common Stock, (1) ICII contributed to IMH all of the outstanding
non-voting preferred stock of ICIFC, which represents 99% of the economic
interest in ICIFC, (2) Southern Pacific Thrift and Loan Association ("SPTL")
contributed to IMH certain of the operating assets and certain customer lists
of SPTL's warehouse lending division, and (3) ICII and SPTL executed a Non-
Compete Agreement and a Right of First Refusal Agreement, each having a term
of two years from November 20, 1995. Of the 500,000 shares issued pursuant to
the Contribution Transaction, 450,000 shares were issued to ICII and 50,000
shares were issued to SPTL. All of the outstanding shares of common stock of
ICIFC were retained by ICII. Lastly, IMH
6
contributed to IWLG all of the aforementioned operating assets of SPTL's
warehouse lending operations contributed to it in exchange for shares
representing 100% of the common stock of IWLG thereby forming it as a wholly-
owned subsidiary. On November 20, 1995, the net tangible book value of the
assets contributed pursuant to the Contribution Transaction was $525,000.
ICII and SPTL retained all other assets and liabilities related to
contributed operations which at November 20, 1995 consisted mostly of $ 11.7
million of MSRs, $22.4 million of finance receivables, and $26.6 million in
advances made by ICII and SPTL to fund mortgage conduit loan acquisitions and
to fund finance receivables, respectively.
4. INVESTMENT IN ICIFC
Summarized financial information for ICIFC (unaudited) ( in thousands).
March 31, December 31,
1996 1995
----------------- ------------------
ASSETS
- - ------
Cash........................................................... $ - $ 2,184
Mortgage loans held for sale................................... 179,631 544,275
Accrued interest receivable.................................... 763 2,985
Due from affiliates............................................ 4,472 2,542
Mortgage servicing rights...................................... 2,657 -
Premises and equipment, net.................................... 490 516
Other assets................................................... 93 129
----------------- ------------------
$ 188,106 $ 552,631
----------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Borrowings from IWLG........................................... $ 173,408 $ 550,291
Accrued interest expense....................................... 2,894 1,348
Other liabilities.............................................. 1,828 118
Due to affiliate............................................... 344 -
----------------- ------------------
Total liabilities............................................ 178,474 551,757
----------------- ------------------
ShareholdersO equity:
Preferred stock............................................... 9,143 1,014
Common stock.................................................. 92 10
Retained earnings (accumulated deficit)....................... 397 (150)
----------------- ------------------
Total shareholdersO equity................................... 9,632 874
----------------- ------------------
$ 188,106 $ 552,631
================= ==================
7
For the Three Months Ended March 31,
(unaudited)
-------------------------------------------
1996 1995
----------------- ------------------
Revenues:
Gain on sale of loans......................................... $ 2,614 $ 730
Interest income............................................... 11,119 -
Loan servicing income......................................... 32 1,333
Gain on sale of servicing rights.............................. - 369
----------------- ------------------
13,765 2,432
----------------- ------------------
Expenses:
Amortization of mortgage servicing rights..................... 14 448
Personnel expense............................................. 835 518
General and administrative expense............................ 365 614
Interest on borrowings from IWLG.............................. 11,219 -
Interest on borrowings from ICII.............................. - 149
Provision for loan losses..................................... 400 -
----------------- ------------------
12,833 1,729
----------------- ------------------
Income before income taxes..................................... 932 703
Income taxes................................................... (384) (295)
----------------- ------------------
Net income................................................... $ 548 $ 408
----------------- ------------------
5. MORTGAGE LOANS HELD FOR INVESTMENT
The Company purchases certain non-corforming mortgage loans to be held as
long-term investments. Mortgage loans held for investment are recorded at
cost at the date of purchase. Mortgage loans held for investment include
various types of adjustable-rate loans secured by mortgages on single-family
residential real estate properties and fixed-rate loans secured by second
trust deeds on single-family residential real estate properties, accounting
for 89% and 11%, respectively, of the long-term investment portfolio at March
31, 1996. At December 31, 1995, the Company had no mortgage loans held for
investment.
Approximately 76% of the mortgage loans held for investment at March 31, 1996
were collateralized by properties located in California. Premiums and
discounts and the market valuation related to these loans are amortized over
their estimated lives using the interest method. Loans are continually
evaluated for collectibility and, if appropriate, the loan is placed on
nonaccrual status, generally 90 days past due and previously accrued interest
reversed from income. As of December 31, 1995 and March 31, 1996, there were
no loans and $164,000 of loans on nonaccrual status, respectively.
The Company maintains an allowance for losses on mortgage loans held for
investment at an amount which it believes is sufficient to provide adequate
protection against future losses in the loan portfolio. The allowance for
losses is determined primarily on the basis of managementOs judgment of net
loss potential, including specific allowances for known impaired loans and
other factors such as changes in the nature and volume of the portfolio,
value of the collateral, and current economic condition that may affect the
borrowers' ability to pay. A provision is recorded for all accounts or
portions thereof deemed to be uncollectible thereby increasing the allowance
for loan losses.
8
6. FINANCE RECEIVABLES
Finance receivables represent transactions with customers, including ICIFC,
involving predominantly residential real estate lending. As a warehouse
lender, the Company is a secured creditor of the mortgage bankers and brokers
to which it extends credit and is subject to the risks inherent in that
status, including the risk of borrower default and bankruptcy. Any claim of
the Company as a secured lender in a bankruptcy proceeding may be subject to
adjustment and delay.
The Company maintains an allowance for losses on financing receivables at an
amount which it believes is sufficient to provide adequate protection against
future losses in the portfolio. The allowance for losses is determined
primarily on the basis of management's judgment of net loss potential,
including specific allowances for known impaired loans. A provision is
recorded for all accounts or portions thereof deemed to be uncollectible
thereby increasing the allowance for loan losses for finance receivables.
Finance receivables are stated at the principal balance outstanding. Interest
income is recorded on the accrual basis in accordance with the terms of the
loans. Finance receivables are continually evaluated for collectibility and,
if appropriate, the receivable is placed on nonaccrual status, generally 90
days past due. Future collections of interest income are included in interest
income or applied to the loan balance based on an assessment of the
likelihood that the loans will be repaid.
The Company earns interest rates at prime on warehouse lines to ICIFC and
prime plus one-half to two percent on its warehouse lines to other mortgage
banking companies. These lines have maturities which range from on demand to
one year and are generally collateralized by mortgages on single family
residences.
7. INVESTMENT IN ICIFC
The Company records its investment in ICIFC on the equity method. ICII owns
all of the common stock of ICIFC and is entitled to 1% of the earnings or
losses of ICIFC. The Company is entitled to 99% of the earnings or losses of
ICIFC through it's ownership of all of the non-voting preferred stock in
ICIFC. ICIFC is a mortgage loan conduit organization which purchases mortgage
loans and subsequently securitizes or sells such loans to permanent investors
inluding IMH.
8. REVERSE-REPURCHASE AGREEMENTS
The Company enters into reverse-repurchase agreements with major brokerage
firms for its mortgage warehouse lending operations and to fund the purchase
of mortgage-backed securities. The maximum amount available under the
repurchase agreements as of December 31, 1995 and March 31, 1996 was $623
million.
9. STOCKHOLDERS' EQUITY
IMH intends to distribute 95% or more of its net taxable income (which does
not necessarily equal net income as calculated in accordance with GAAP) to
its common stockholder's each year so as to comply with the REIT provisions
of the Internal Revenue Code. Holders of the common
9
stock are entitled to such dividends as IMH's Board of Directors, in its
discretion, may declare out of funds available. In the event of liquidation
of IMH, holders of common stock are entitled to receive, pro rata, all of
the assets of IMH available for distribution. Holders of the common stock
have no conversion or preemptive or other subscription rights and there are
no redemption or sinking fund provisions applicable to the common stock.
10. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business. Such instruments include short-term
commitments to extend credit to borrowers under warehouse lines of credit
which involve elements of credit risk. In addition, the Company is exposed
to credit loss in the event of non-performance by the counterparties to the
various agreements associated with loan purchases. However, the Company does
not anticipate non-performance by such borrowers or counterparties. Unless
noted otherwise, the Company does not require collateral or other security
to support such commitments.
LOAN COMMITMENTS
The Company's warehouse lending program provides secured short-term
revolving financing to small- and medium-size mortgage originators and ICIFC
to finance mortgage loans from the closing of the loans until sold to
permanent investors. As of March 31, 1996, the Company had extended 10
committed lines of credit in the aggregate principal amount of $ $633.5
million, of which $194 million was outstanding.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROSPECTIVE SUMMARY
GENERAL
The Company's principal sources of net income are (1) net income from its REIT-
qualified, tax-exempt Long-Term Investment Operations, (2) dividends from the
Conduit Operations, at ICIFC, which is fully subject to federal and state income
taxes, and (3) net income IWLG, the REIT-qualified, tax-exempt Warehouse Lending
Operations. The principal source of income from its Long-Term Investment
Operations is net interest income, which is the net spread between interest
earned on mortgage loans and securities held for investment and interest costs
associated with the borrowings used to finance such loans and securities. The
principal sources of income from ICIFC are gains recognized on the sale of
mortgage loans and securities, net interest income earned on loans purchased by
ICIFC pending their securitization or resale, servicing fees, commitment fees
and processing fee income. The principal sources of income from IWLG are the
net spread between interest earned on warehoused loans and interest costs
associated with borrowings used to finance such loans and fee income received
from borrowers in connection with such loans.
References to the Pre-Contribution Transaction period refers to periods prior
to November 20, 1995, the Initial Public Offering. References to the Post-
Contribution Transaction period refers to periods subsequent to November 20,
1995. References to financial information of IMH for the year ended December 31,
1995 reflect the financial operations of IMH, its subsidiary IWLG and IMH's
equity interest in ICIFC Post-Contribution Transaction, and the pro forma
financial data of IMH's equity interest in ICII's mortgage conduit operations
and SPTL's warehouse lending operations Pre-Contribution Transaction.
References to financial information of ICIFC for the year ended December 31,
1995 reflect the financial data of ICIFC Post-Contribution Transaction and the
pro forma financial information of ICII's mortgage conduit operation Pre-
Contribution Transaction.
HISTORICAL TRENDS
ICIFC's mortgage loan acquisitions decreased 35% in 1995 to $1.1 billion,
which included $501.4 million of mortgage loans acquired from ICII and its
affiliates, from $1.7 billion in 1994 due to increased interest rates which
reduced mortgage loan originations throughout the mortgage industry (and ICIFC's
refocus on the non-conforming mortgage loan market and increased competition in
such non-conforming market). ICIFC was also adversely affected by the increase
in interest rates during 1994, resulting in a 20% decline in mortgage
acquisitions in 1994 to $1.7 billion from $2.1 billion originated in 1993. The
aforementioned decline in mortgage acquisitions resulted in higher operating
costs as a percentage of acquisitions despite ICIFC's efforts to reduce excess
production capacity through 1994 and 1995.
In an effort to increase profitability, ICIFC reduced operating expenses,
primarily through a reduction in personnel. At December 31, 1995, ICIFC had 36
employees, a 49% decrease from 71 employees at December 31, 1994. At December
31, 1994, the conduit operations of ICII employed 71 employees, a 57% decrease
from 167 employees at December 31, 1993. ICIFC continues to assess its work
force in order to properly match its loan acquisition capacity to current market
demands. In
11
addition in 1995, ICIFC emphasized the acquisition of higher margin non-
conforming mortgage loan products which provided a higher return than conforming
mortgage loans.
During the three months ended March 31, 1996, ICIFC's mortgage loan
acquisitions increased 139% to $280.5 million as compared to $117.4 million for
the same period in 1995. Excluding the acquisition of mortgage loans from ICII
or its affiliated mortgage banking operations, ICIFC's mortgage loan
acquisitions declined 2% to $115.5 million in the first quarter of 1996 as
compared to $117.4 million for the same period in 1995. The increase in mortgage
loan acquisitions for the quarter ended in March 31, 1996 as compared to the
previous year was primarily the result of the Company's increased marketing and
sales effort subsequent to the Initial Public Offering and acquisitions from
ICII and its affiliated mortgage banking operations. As the affiliate mortgage
banking operations completely divest themselves from ICII, ICIFC expects to
continue to acquire loans from these newly formed mortgage banking entities. In
conjunction with the increase in loan acquisitions and ICIFC's divestiture from
ICII, the Company has added additional personnel to handle functions previously
performed by ICII. At March 31, 1996, ICIFC employed 60 employees, an increase
of 43% from 42 employees at March 31, 1995.
LOAN SERVICING
Mortgage loan servicing consists of collecting payments from borrowers and
remitting such funds to investors, accounting for loan principal and interest
payments, making advances when required, holding escrow funds for the payment of
taxes and insurance, contacting delinquent borrowers, foreclosing in the event
of unremedied defaults and performing other administrative duties. A servicer's
obligation to provide mortgage loan servicing and its right to collect fees are
set forth in a servicing contract. ICIFC's exclusive source of servicing rights
is from mortgage loans acquired and subsequently sold. ICIFC has historically
sub-contracted its servicing obligations to ICII. Management believes that the
terms are comparable to industry standards. In the first quarter of 1996, ICII
contracted to sell substantially all of its mortgage servicing portfolio and
eliminate a substantial portion of its mortgage servicing department. In
response to ICII's decision to exit the mortgage servicing business, ICIFC is in
the process of negotiating with another third party sub-servicer. ICIFC expects
that the transfer of servicing responsibilities will take place in June 1996.
However, there are no assurances that ICIFC will be able to complete the
transfer by this date.
ACCOUNTING FOR SERVICING RIGHTS
When ICIFC purchases loans that include the associated servicing rights, the
allocated price paid for the servicing rights, net of amortization based on
assumed prepayment rates, is reflected on its financial statements as Mortgage
Servicing Rights ("MSRs"). During 1995 and 1994, the conduit operations' MSRs
decreased by $11.5 million and increased by $1.9 million, respectively. As part
of the Contribution Transaction, ICII retained all of ICIFC's MSR's in the
amount of $11.7 million, leaving ICIFC with no MSRs at December 31, 1995.
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No.
122, ''Accounting for Mortgage Servicing Rights,'' an amendment to SFAS No. 65.
ICIFC elected to adopt this standard retroactive to January 1, 1995. SFAS No.
122 prohibits retroactive application to years prior to 1995.
SFAS No. 122 requires that a portion of the cost of acquiring a mortgage loan
be allocated to the mortgage loan servicing rights based on its fair value
relative to the loan as a whole. To
12
determine the fair value of the servicing rights created, ICIFC used the market
prices under comparable servicing sale contracts, when available, or
alternatively used a valuation model that calculates the present value of future
net servicing revenues to determine the fair value of the servicing rights. In
using this valuation method, ICIFC incorporated assumptions that they believe
market participants would use in estimating future net servicing income which
includes estimates of the cost of servicing, a discount rate, an inflation rate,
an ancillary income per loan, a prepayment rate, and a default rate.
Beginning January 1, 1995, ICIFC determined servicing value impairment by
disaggregating its mortgage conduit operations' servicing portfolio into its
predominant risk characteristics. ICIFC determined those risk characteristics
to be loan program type and interest rate. These segments of the portfolio were
then evaluated, using market prices under comparable servicing sale contracts,
when available, or alternatively using the same model as was used to originally
determine the fair value at acquisition, using current assumptions at the end of
the quarter. The calculated value was then compared to the capitalized recorded
value of each loan type and interest rate segments to determine if a valuation
allowance is required. At December 31, 1995, ICIFC had no MSRs since ICII
retained these assets as part of the Contribution Transaction. However, as ICIFC
continues to rebuild its mortgage loan servicing portfolio, ICIFC expects to
continue to use the same valuation and impairment criteria that was used Pre-
Contribution Transaction. At March 31, 1996, ICIFC had capitalized $2,656,626 of
mortgage servicing rights.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the time
MSRs are recorded result in accelerated amortization rates and increased future
amortization expense. The rate of prepayment of loans is affected by a variety
of economic and other factors, including prevailing interest rates and the
availability of alternative financing. The effect of those factors on loan
prepayment rates may vary depending on the particular type of loan. Estimates of
prepayment rates are made based on management's expectations of future
prepayment rates, which are based, in part, on the historical rate of prepayment
of ICIFC's loans, and other considerations such as interest rate and economic
conditions. There can be no assurance of the reasonableness of management's
prepayments estimates. If actual prepayment with respect to loans serviced occur
more quickly than were projected at the time such loans were sold, the carrying
value of the MSRs may have to be charged to earnings in the period of adjustment
through a valuation allowance. If actual prepayments with respect to loans occur
more slowly than estimated, the carrying value of MSRs would not increase,
although total income would exceed previously estimated amounts.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net income for the quarter ended March 31, 1996 increased to $1.7 million as
compared to $364,000 for the same period in 1995. Net income per share for the
quarter ended March 31, 1996 was $0.39. Net income per share for the quarter
ended March 31, 1995 is not presented since there were no shares outstanding
during the period.
Revenues for the three months ended March 31, 1996 increased to $13.7 million
as compared to $520,000 for the same period in 1995, primarily as a result of an
increase in interest income from IWLG's finance receivables and to a lesser
extent investment securities available-for-sale and cash
13
and cash equivalents. Total finance receivables increased to $196.1 million at
March 31, 1996 as compared to $6.1 million at March 31, 1995 as a result of IWLG
providing warehouse facilities to ICIFC subsequent to November 20, 1995. At
March 31, 1996, ICIFC accounted for 88% of IWLG's total gross finance
receivables outstanding. In addition, IMH invested a portion of the net proceeds
of the Company's initial public offering in investment securities available-for-
sale. At March 31, 1996, IMH had total investment securities available-for-sale
and cash and cash equivalents of $50.3 million as compared to none at March 31,
1995.
Expenses for the three months ended March 31, 1996 increased to $12.0 million
as compared to $184,000 for the same period in 1995 primarily as a result of an
increase in borrowings associated with the financing of IWLG's finance
receivables, an increase in the provision for loan losses and the payment of
fees associated with the management agreement with Imperial Credit Advisors Inc.
("ICAI"). Interest expense to finance IMH's operations from reverse repurchase
borrowings or borrowing from SPTL increased to $9.0 million for the quarter
ended March 31, 1996 as compared to $48,000 for the same period in 1995. The
increase in interest expense was the result of the growth in IMH's earning
assets as discussed above. The provision for loan losses increased to $2.4
million for the quarter ended March 31, 1996 as compared to $104,000 for the
same period in 1995 as a result of establishing a reserve for credit losses
related to $301.6 million of mortgage loans underlying a CMO offering which
closed in April 1996. The provision in 1995 was the result of a write-off of a
customer's outstanding balance on a finance receivable. While IMH believes that
it has adequately reserved for any future credit losses, the Company may have to
add to its loan loss reserve based upon actual loan loss experience or an
increase in the Company's investment portfolio.
Finance receivables decreased to $196.1 million at March 31, 1996 from $582.9
million at December 31, 1995 due to the sale of $311.5 million of mortgage loans
held for sale at ICIFC to IMH where such loans were held for investment. This
transaction reduced ICIFC's borrowings from IWLG which appeared as a finance
receivable on IMH's consolidated balance sheets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from the need to fund
the acquisition of mortgage loans held for sale by ICIFC, the long-term
investment in mortgage loans by IMH, and the short-term lendings by IWLG. Prior
to November 20, 1995, ICIFC was funded by ICII through committed reverse
repurchase agreements and capital contributions. Historically, SPTL's warehouse
lending operations were funded by SPTL through deposits, other borrowings and
equity. However, after November 20, 1995, the Long-Term Investment Operations,
the Conduit Operations and the Warehouse Lending Operations are funded by
reverse repurchase agreements, proceeds from the issuance of common or preferred
stock, sale of mortgage securities and issuance of CMOs.
During the three months ended March 31, 1996 and 1995, net cash provided by
operating activities was $4.5 million, and $62,000, respectively. Net cash
during the three months ended March 31, 1996 and 1995 was negatively affected by
the "Equity interest in net income of ICI Funding Corporation" which was
accounted for under the equity method. During the quarter ended March 31, 1996,
the Company was also affected by an increase in accrued interest on loans
associated with the increase in the Company's mortgage loan investment
portfolio, principally offset by a provision for finance receivable losses.
14
Net cash provided by (used in) investing activities for the three months ended
March 31, 1996 and 1995 was $49.6 million and $(3.2) million, respectively.
During the three months ended March 31, 1996, payoffs of finance receivables
exceeded additional borrowings of such receivables primarily due to the sale of
mortgage loans by ICIFC during the three months ended March 31, 1996 acquired in
December 1995. For the quarter ended March 31, 1996, net cash was negatively
affected by an increase in loans held for investment by the Company.
During the quarter ended March 31, 1996 and 1995, net cash provided by (used
in) financing activities was $(39.3) million and $3.1 million, respectively.
These net cash figures were affected by factors similar to those affecting net
cash (used in) provided by investing activities described above. As a result of
such factors, borrowings to fund mortgage loan acquisitions fluctuated
accordingly. Subsequent to the Contribution Transaction, such borrowings
consisted of reverse repurchase agreements. Prior to the Contribution
Transaction, such borrowings consisted of borrowings from SPTL.
At March 31, 1996, the Company had reverse repurchase facilities to provide up
to $623.0 million of committed or non-committed reverse repurchase facilities to
finance the Company's three businesses. Terms of the reverse repurchase
agreements require that the mortgages be held by an independent third party
custodian, which gives the Company the ability to borrow against the collateral
as a percentage of the original principal balance. The borrowing rates quoted
vary from 65 basis points to 100 basis points over one-month LIBOR, depending on
the type of collateral provided by the Company. The margins on the reverse
repurchase agreements are based on the type of mortgage collateral used and
generally range from 90% to 98% of the fair market value of the collateral.
Management believes that cash flow from operations and the aforementioned
potential financing arrangements is sufficient to meet the current liquidity
needs of the three businesses.
INFLATION
The consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased costs of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Inflation affects the Company's
operations primarily through its effect on interest rates, since interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. During periods of increasing interest rates, demand for
mortgage loans and a borrower's ability to qualify for mortgage financing in a
purchase transaction may be adversely affected. However, as interest rates
increase, and loan prepayments decline, the value and earnings from the
servicing portfolio increases.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ComUnity National Asset Corporation, a Maryland corporation v. Thomas O.
-------------------------------------------------------------------------
Markel Jr., an individual, HOMEMAC MORTGAGE BANKERS, a business association of
- - -------------------------------------------------------------------------------
unknown form; HOMEMAC CORPORATION, a California corporation; HOMEMAC FINANCE
- - ----------------------------------------------------------------------------
CORPORATION, a California corporation; HOMEMAC INSTITUTIONAL MORTGAGE
- - ----------------------------------------------------------------------
CORPORATION, a California corporation; IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.,
- - -------------------------------------------------------------------------------
a Maryland corporation; and DOES 1 through 100, inclusive, Orange County
- - ----------------------------------------------------------
Superior Court Case No. 761786.
On April 1, 1996, plaintiff ComUnity National Asset Corporation filed a
lawsuit in Orange County Superior Court against Thomas O. Markel, Jr.
("Markel"), several Homemac entities and the Company. The complaint seeks
damages for statutory and common law misappropriation of trade secrets,
restitution for unfair competition, damages for negligence and conversion.
The plaintiff seeks damages in a unspecified amount, alleging that said amount
is in no event less than the amount spent and/or obligations incurred by
plaintiff in setting up its business and organizational plan to become a REIT
dealing primarily in sub-A mortgage loans and to take plaintiff public in an
initial public offering. Also plaintiff alleges that the Company wrongfully
received consideration in the form of, among other things, reduced expenses and
legal fees, salary, wages, stock options, and other forms of consideration
arising out of the commercial exploitation of plaintiff's confidential
information, and that the plaintiff is entitled to an order or restitution
compelling the Company to disgorge all such considerations over to plaintiff.
The Company believes that based in part on the advice of legal counsel, the
complaint is without merit and intends to vigorously defend the action.
Other than the foregoing, the Company is not a party to any material legal
proceedings.
ITEM 2- ITEM 5: NOT APPLICABLE
16
ITEM 6. EXHIBIT
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Quarter Ended
March 31, 1996
-----------------
Primary earnings per share:
Net income $ 1,693,639
=================
Avg. number of shares outstanding 4,250,000
Net effect of dilutive stock options-
Based on treasury stock method using
average market price 57,158
-----------------
Total average shares 4,307,158
=================
Primary earnings per share (a) $ 0.39
=================
(a) Fully diluted earnings per share
were not materially different
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By: /s/ Richard J. Johnson
--------------------------
Richard J. Johnson
Senior Vice President
and Chief Financial Officer
Date: May 14, 1996
18
5
3-MOS 3-MOS
DEC-31-1996 DEC-31-1995
JAN-01-1996 JAN-01-1995
MAR-31-1996 MAR-31-1995
17,068 0
33,243 0
0 0
2,515 200
0 0
50,311 0
0 0
0 0
582,180 12,847
0 0
0 0
0 0
0 0
43 0
46,573 7,218
582,180 12,847
0 0
13,724 520
0 0
0 0
606 32
2,415 104
9,009 48
1,694 336
0 (28)
0 0
0 0
0 0
0 0
1,694 364
.39 0
.39 0
