UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 2012
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 000-52611
IMH FinanciaL corporation
(Exact name of registrant as specified in its charter)
Delaware | 27-1537126 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
7001 N. Scottsdale Rd #2050
Scottsdale, Arizona 85253
(Address of principal executive offices and zip code)
(480) 840-8400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company þ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The registrant had 50,000 shares of Common Stock, 3,811,342 shares of Class B-1 Common Stock, 3,811,342 shares of Class B-2 Common Stock, 7,735,169 shares of Class B-3 Common Stock, 627,579 shares of Class B-4 Common Stock and 838,448 shares of Class C Common Stock, which were collectively convertible into 16,873,880 outstanding common shares as of November 14, 2012.
IMH FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements. | ||
Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011 | 3 | ||
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 | 4 | ||
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2012 | 5 | ||
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 | 6 | ||
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 29 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 49 | |
Item 4. | Controls and Procedures. | 51 | |
PART II – OTHER INFORMATION | |||
Item 1. | Legal Proceedings. | 51 | |
Item 1A. | Risk Factors. | 51 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 51 | |
Item 3. | Defaults Upon Senior Securities. | 51 | |
Item 4. | Mine Safety Disclosures. | 52 | |
Item 5. | Other Information. | 52 | |
Item 6. | Exhibits. | 52 | |
Signatures | 53 | ||
Index to Exhibits | 54 |
2 |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
IMH FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, | December 31, | |||||||
2012 | 2011 (1) | |||||||
(Unaudited) | (Restated) | |||||||
ASSETS | ||||||||
Cash and Cash Equivalents | $ | 19,779 | $ | 21,322 | ||||
Mortgage Loans Held for Sale, Net | 78,436 | 108,186 | ||||||
Real Estate Acquired through Foreclosure Held for Sale | 53,998 | 34,644 | ||||||
Real Estate Acquired through Foreclosure Held for Development | 42,811 | 47,252 | ||||||
Operating Properties Acquired through Foreclosure | 22,151 | 19,611 | ||||||
Deferred Financing Costs, Net | 5,230 | 6,004 | ||||||
Other Receivables | 1,739 | 5,423 | ||||||
Other Assets | 4,104 | 2,903 | ||||||
Property and Equipment, Net | 686 | 1,013 | ||||||
Total Assets | $ | 228,934 | $ | 246,358 | ||||
LIABILITIES | ||||||||
Accounts Payable and Accrued Expenses | $ | 4,771 | $ | 7,183 | ||||
Accrued Property Taxes | 6,903 | 5,308 | ||||||
Dividends Payable | 400 | 506 | ||||||
Notes Payable, Net of Discount | 6,004 | 4,712 | ||||||
Special Assessment Obligations | 6,031 | 6,031 | ||||||
Accrued Interest Payable | 2,029 | 425 | ||||||
Liabilities of Assets Held for Sale | 832 | 591 | ||||||
Tenant Deposits and Funds Held for Others | 479 | 744 | ||||||
Convertible Notes Payable and Deferred Interest, Net of Discount | 48,737 | 45,155 | ||||||
Exit Fee Payable | 10,448 | 10,448 | ||||||
Total Liabilities | 86,634 | 81,103 | ||||||
Commitments and Contingent Liabilities | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $.01 par value; 200,000,000 shares authorized; 16,873,880 shares outstanding at September 30, 2012 and December 31, 2011 | 170 | 170 | ||||||
Preferred stock, $.01 par value; 100,000,000 shares authorized; none outstanding | - | - | ||||||
Paid-in Capital | 725,105 | 725,835 | ||||||
Accumulated Deficit | (582,975 | ) | (560,750 | ) | ||||
Total Stockholders' Equity | 142,300 | 165,255 | ||||||
Total Liabilities and Stockholders' Equity | $ | 228,934 | $ | 246,358 |
The condensed consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated financial statements included in the Company's annual report on Form 10-K, subject to the restatements described in note 2 herein.
The accompanying notes are an integral part of these statements
3 |
IMH FINANCIAL CORPORATION
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
REVENUE: | ||||||||||||||||
Mortgage Loan Income, Net | 251 | 322 | 849 | 988 | ||||||||||||
Rental Income | 363 | 442 | 1,170 | 1,381 | ||||||||||||
Investment and Other Income | 442 | 184 | 1,609 | 483 | ||||||||||||
Total Revenue | 1,056 | 948 | 3,628 | 2,852 | ||||||||||||
COSTS AND EXPENSES: | ||||||||||||||||
Property Taxes for Real Estate Owned | 792 | 749 | 2,011 | 2,323 | ||||||||||||
Other Operating Expenses for Real Estate Owned | 1,742 | 725 | 3,839 | 1,913 | ||||||||||||
Professional Fees | 1,636 | 2,106 | 3,430 | 5,241 | ||||||||||||
Default and Enforcement Related Expenses | 243 | 345 | 821 | 863 | ||||||||||||
General and Administrative Expenses | 1,406 | 1,846 | 4,403 | 7,681 | ||||||||||||
Organizational and Offering Costs | - | - | - | 509 | ||||||||||||
Interest Expense | 3,480 | 3,436 | 10,327 | 5,704 | ||||||||||||
Depreciation and Amortization Expense | 490 | 450 | 2,076 | 1,359 | ||||||||||||
Loss (Gain) on Disposal of Assets | (368 | ) | 58 | (591 | ) | (221 | ) | |||||||||
Settlement and Related Costs | 849 | 191 | 1,466 | 191 | ||||||||||||
Total Operating Expenses | 10,270 | 9,906 | 27,782 | 25,563 | ||||||||||||
Provision for (Recovery of) Credit Losses | (1,030 | ) | 4,000 | (1,929 | ) | 1,000 | ||||||||||
Impairment of Real Estate Owned | - | - | - | 1,529 | ||||||||||||
Total Provision and Impairment Charges | (1,030 | ) | 4,000 | (1,929 | ) | 2,529 | ||||||||||
Total Costs and Expenses | 9,240 | 13,906 | 25,853 | 28,092 | ||||||||||||
Loss before income taxes | (8,184 | ) | (12,958 | ) | (22,225 | ) | (25,240 | ) | ||||||||
Provision for Income Taxes | - | - | - | - | ||||||||||||
NET LOSS | (8,184 | ) | (12,958 | ) | (22,225 | ) | (25,240 | ) | ||||||||
Basic and diluted loss per common share | ||||||||||||||||
Net Loss per Share | $ | (0.49 | ) | $ | (0.77 | ) | $ | (1.32 | ) | $ | (1.50 | ) | ||||
Weighted Average Common Shares Outstanding | 16,873,880 | 16,873,880 | 16,873,880 | 16,842,626 |
The accompanying notes are an integral part of these statements
4 |
IMH FINANCIAL CORPORATION
Unaudited Condensed Consolidated Statement of Stockholders’ Equity
Nine Months Ended September 30, 2012
(Dollars in thousands)
Total | ||||||||||||||||||||
Common Stock | Accumulated | Stockholders' | ||||||||||||||||||
Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||
Balances at December 31, 2011 | 16,873,880 | $ | 170 | $ | 725,835 | $ | (560,750 | ) | $ | 165,255 | ||||||||||
Net Loss - Nine Months Ended September 30, 2012 | - | - | - | (22,225 | ) | (22,225 | ) | |||||||||||||
Dividends Declared | - | - | (1,200 | ) | - | (1,200 | ) | |||||||||||||
Stock-Based Compensation | - | - | 470 | - | 470 | |||||||||||||||
Balances at September 30, 2012 (unaudited) | 16,873,880 | $ | 170 | $ | 725,105 | $ | (582,975 | ) | $ | 142,300 |
The accompanying notes are an integral part of these statements
5 |
IMH FINANCIAL CORPORATION
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
CASH FLOWS - OPERATING ACTIVITIES | ||||||||
Net Loss | $ | (22,225 | ) | $ | (25,240 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Provision for (Recovery of) Credit Losses | (275 | ) | 1,000 | |||||
Impairment of Real Estate Owned | - | 1,529 | ||||||
Stock-Based Compensation and Option Amortization | 470 | 1,396 | ||||||
Gain on Disposal of Assets | (591 | ) | (221 | ) | ||||
Amortization of Deferred Financing Costs | 933 | 1,061 | ||||||
Depreciation and Amortization Expense | 2,076 | 1,359 | ||||||
Accretion of Discount on Note Payable | 1,893 | 392 | ||||||
Increase (decrease) in cash resulting from changes in: | ||||||||
Accrued Interest Receivable | (74 | ) | (1,475 | ) | ||||
Other Receivables | 3,614 | 52 | ||||||
Other Assets | (1,501 | ) | (1,701 | ) | ||||
Accrued Property Taxes | (535 | ) | (174 | ) | ||||
Accounts Payable and Accrued Expenses | (2,381 | ) | (1,136 | ) | ||||
Accrued Interest Payable | 3,735 | 3,185 | ||||||
Liabilities of Assets Held for Sale | (736 | ) | 1,045 | |||||
Tenant Deposits and Funds Held for Others | (513 | ) | 520 | |||||
Total adjustments, net | 6,115 | 6,832 | ||||||
Net cash used in operating activities | (16,110 | ) | (18,408 | ) | ||||
CASH FLOWS - INVESTING ACTIVITIES | ||||||||
Proceeds from Sale/Recovery of Real Estate Owned | 11,544 | 6,803 | ||||||
Proceeds from Sale of Loans | - | 5,039 | ||||||
Purchases of Property and Equipment | (329 | ) | (7 | ) | ||||
Mortgage Loan Fundings and Protective Advances | (1,622 | ) | (3,340 | ) | ||||
Mortgage Loan Repayments | 7,283 | 5,801 | ||||||
Investment in Real Estate Owned | (844 | ) | (629 | ) | ||||
Net cash provided by investing activities | 16,032 | 13,667 | ||||||
CASH FLOWS - FINANCING ACTIVITIES | ||||||||
Proceeds from Notes Payable | - | 1,500 | ||||||
Proceeds from Convertible Notes Payable | - | 50,000 | ||||||
Debt Issuance Costs | (159 | ) | (7,774 | ) | ||||
Repayments of Notes Payable | - | (11,640 | ) | |||||
Dividends Paid | (1,306 | ) | (506 | ) | ||||
Net cash (used in) provided by financing activities | (1,465 | ) | 31,580 | |||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,543 | ) | 26,839 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 21,322 | 831 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 19,779 | $ | 27,670 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Interest paid | $ | 3,764 | $ | 1,028 | ||||
Real Estate Acquired Through Foreclosure | $ | 33,264 | $ | 12,064 | ||||
Deferred Interest added to Notes Payable Principal | $ | 2,131 | $ | 2,732 | ||||
Seller Financing provided for Asset Sales | $ | 5,500 | $ | 7,953 | ||||
Note Payable Financing for Land Purchase | $ | 850 | $ | - |
The accompanying notes are an integral part of these statements
6 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY
Business
IMH Financial Corporation (the “Company”) is a real estate investor and finance company based in the southwest United States with over a decade of experience in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, documentation, servicing, construction, enforcement, development, leasing, operations, marketing, and disposition. The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments, and to perform all functions reasonably related thereto, including developing, stabilizing, managing and either holding for investment or disposing of real property acquired through foreclosure or other means. The Company also seeks to capitalize on opportunities to invest in selected real estate platforms under the direction of seasoned professionals in those areas. We were formed as a result of a series of transactions that were executed on June 18, 2010 that we refer to as the Conversion Transactions, which included (i) the conversion of our predecessor entity, IMH Secured Loan Fund (the “Fund”), from a Delaware limited liability company into a newly-formed Delaware corporation named IMH Financial Corporation, and (ii) internalization of the Fund manager, Investor’s Mortgage Holdings, Inc. (the “Manager”), through an acquisition by the Company of all of the outstanding shares of the Manager, and all of the outstanding membership interests of IMH Holdings, LLC.
Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results for the periods presented have been made. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2011.
The accompanying unaudited condensed consolidated financial statements include the accounts of IMH Financial Corporation and the following wholly-owned operating subsidiaries: Investor’s Mortgage Holdings, Inc., an Arizona corporation, Investors Mortgage Holdings California, Inc., a California corporation, IMH Holdings, LLC, a Delaware limited liability company (“Holdings”), and various other wholly owned subsidiaries established in connection with the acquisition of real estate either through foreclosure or purchase. Holdings is a holding company for two wholly-owned subsidiaries: IMH Management Services, LLC, an Arizona limited liability company, and SWI Management, LLC, an Arizona limited liability company. IMH Management Services, LLC provides us and our affiliates with human resources and administrative services, including the supply of employees, and SWI Management, LLC, or “SWIM”, acts as the manager for the Strategic Wealth & Income Company, LLC, or the SWI Fund. In addition, during the year ended December 31, 2011, we formed a new wholly-owned subsidiary, INFINET Financial Group, LLC (“Infinet”), to undertake an exploratory business venture to capitalize on our extensive network of broker-dealer relationships. Effective December 31, 2011, management elected to abandon the exploratory business venture. All significant intercompany accounts and transactions have been eliminated in consolidation.
7 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 1- BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY - (continued)
Liquidity
As of September 30, 2012, our accumulated deficit aggregated $583.0 million primarily as a result of previous provisions for credit losses recorded relating to the decrease in the fair value of the collateral securing our loan portfolio and impairment charges relating to the value of real estate owned assets acquired primarily through foreclosure, as well as on-going net operating losses in recent periods resulting from the lack of income-producing assets. As a result of the erosion of the U.S. and global real estate and credit markets, we continue to experience loan defaults and foreclosures on our mortgage loans. In addition, we have found it necessary to modify certain loans, which have resulted in extended maturities of two years or longer and we believe may need to modify additional loans in an effort to, among other things, protect our collateral.
In June 2011, we entered into and closed funding of a $50.0 million senior secured convertible loan with NWRA Ventures I, LLC (“NW Capital”), which has provided us with working capital and funding for our general business needs. To supplement this financing and in order to implement our business strategy, our liquidity plan includes selling whole loans or participating interests in loans and selling certain of our real estate owned assets. As of September 30, 2012, our entire loan portfolio with an aggregate carrying value of $78.4 million is held for sale. In addition, as of September 30, 2012, real estate owned (“REO”) projects with a carrying value totaling $54.0 million were being actively marketed for sale. During the nine months ended September 30, 2012, we sold certain loans and REO assets and collected other recoveries generating approximately $11.5 million in cash, net of the amounts financed by us. We also received $7.3 million in mortgage loan paydowns during the nine months ended September 30, 2012. At September 30, 2012, we had cash and cash equivalents of $19.8 million.
While we were successful in securing $50.0 million from the NW Capital loan to provide adequate funding for working capital purposes, there is no assurance that we will be successful in selling existing real estate assets in a timely manner or in obtaining additional financing, if needed, to sufficiently fund future operations or to implement our investment strategy. Further, each sale of real estate or loan assets by us requires the approval of NW Capital. Our failure to generate sustainable earning assets and successfully liquidate a sufficient number of our loans and real estate assets, including receiving approval from our lender of such liquidations, may have a further material adverse effect on our business, results of operations and financial position.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include revenue recognition, valuation and classification of loans and REO assets, contingencies, accretion of income for loans purchased at discount, income taxes and stock-based compensation. Actual results could materially differ from those estimates.
Our significant accounting policies are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2011. During the nine months ended September 30, 2012, there were no material changes in our significant accounting policies, except as described below.
8 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Restatement of Previously Issued Consolidated Financial Statements
The Company identified two REO projects located in Buckeye, AZ and Apple Valley, MN, which have community facilities district (CFD) special revenue bonds and special assessments, respectively. The Company acquired these two projects as a result of foreclosure of the underlying collateral on the loans in 2010 and 2009, respectively. Because these CFD and special assessment obligations are fixed in amount and for a fixed period of time, they are deemed to be obligations of the Company. The obligations assumed for the Company’s allocated share of CFD special revenue bonds and special assessments were not recorded when the real estate was acquired, but rather the assessments were recorded as property taxes as amounts were billed by the respective taxing authority. The Company prospectively corrected the identified misstatement by recording the CFD special revenue bonds and special assessments obligations totaling $6.0 million as a liability with an equal increase in the carrying value of the related real estate assets on the June 30, 2012 consolidated balance sheet. The REO assets held for sale are reported at the lower of carrying amount or fair value, less estimated costs to sell the property and the REO assets held for development are reported at lower of cost or estimated realizable value, as applicable.
The Company identified a misstatement in the manner in which it presented accrued mortgage loan interest in its consolidated balance sheet as of December 31, 2011 and for its prior period end reporting periods. Specifically, the accrued interest should have been reflected as a component of mortgage loans held for sale, where the offsetting valuation allowance was reflected. The balance of the accrued interest receivable at December 31, 2011 totaled $4.7 million and the related valuation allowance reflected in mortgage loans held for sale totaled $4.5 million at such date.
These corrections had no impact on stockholders’ equity as of December 31, 2011 or on net loss or basic and diluted loss per share for the year then ended. The Company has assessed these misstatements in financial statement presentation and has determined that, on both a qualitative and quantitative basis, the adjustments are immaterial, both individually and in the aggregate, to the consolidated financial statements, and thus the Company will not amend any of its prior quarterly and annual reports on Form 10-Q and 10-K, and that it will adjust its presentation on a prospective basis. In order to provide consistency in the Company’s financial reporting, the December 31, 2011 consolidated balance sheet presented herein has been adjusted to appropriately reflect the corrections described above. The following table summarizes the effect of these corrections on the previously filed balance sheet as of December 31, 2011, which were adjusted for comparative purposes only (in thousands):
December 31, 2011 Balances | ||||||||||||
As Previously | As | |||||||||||
Reported | Adjustment | Restated | ||||||||||
ASSETS | ||||||||||||
Mortgage Loans Held for Sale, Net | $ | 103,503 | $ | 4,683 | $ | 108,186 | ||||||
Accrued Interest Receivable | 4,683 | (4,683 | ) | - | ||||||||
Real Estate Acquired through Foreclosure Held for Sale | 30,945 | 3,699 | 34,644 | |||||||||
Real Estate Acquired through Foreclosure Held for Development | 44,920 | 2,332 | 47,252 | |||||||||
Total Assets | 240,327 | 6,031 | 246,358 | |||||||||
LIABILITIES | ||||||||||||
Special Assessment Obligations | - | 6,031 | 6,031 | |||||||||
Total Liabilities | 75,072 | 6,031 | 81,103 |
9 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Segment Reporting
Our operations are organized and managed according to a number of factors, including product categories and geographic locations. As our business has evolved from that of a lender to an owner and operator of various types of real properties, our reportable segments have also changed in order to more effectively manage and assess operating performance. As permitted under Accounting Standards Codification (“ASC”) Topic 280 (“ASC 280”), “Segment Reporting,” certain operations have been aggregated into operating segments having similar economic characteristics and products. Accordingly, in the first quarter of 2012, we changed the composition of the Company’s reportable segments based on the products and services offered and management’s intent for such assets to include the following: Mortgage and REO-Legacy Portfolio and Other Operations, Commercial Real Estate Leasing Operations, Hospitality and Entertainment Operations, and Corporate and Other, as described in Note 9 of these consolidated financial statements.
Reclassifications
Certain 2011 amounts have been reclassified to conform to the 2012 financial statement presentation. Such reclassifications include, but are not limited to, a reclassification of certain legal, accounting and other professional fees and related costs incurred in connection with the shareholder class action litigation described in Note 11, which were previously reported under professional fees in the accompanying consolidated statements of operations.
Recent Accounting Pronouncements
Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets for impairment. The amendments will allow an entity first to assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. An entity will no longer be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative test unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect that the adoption of this standard will have a material effect on its consolidated financial statements.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013. The Company does not believe that this will have a material impact on its consolidated financial statements.
10 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES – continued
Comprehensive Income
In June 2011, the FASB updated the accounting standards related to the presentation of comprehensive income. The standard requires entities to present all non-owner changes in stockholders’ equity either in a single continuous statement of comprehensive income or in two separate but consecutive statements. A subsequent ASU modified the effective date of certain provisions concerning whether it is necessary to require entities to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements, reverting to earlier guidance until the board completes its deliberations on the requested changes. The ASU, as modified, became effective for fiscal periods beginning after December 15, 2011. The standard is to be applied retrospectively. The adoption of the standard did not impact the Company’s consolidated financial condition and results of operations since to date we do not have any items giving rise to other comprehensive income (loss).
Fair Value
In May 2011, the FASB updated the accounting standards related to fair value measurement and disclosure requirements. The standard requires entities, for assets and liabilities measured at fair value in the statement of financial position which are Level 3 fair value measurements, to disclose quantitative information about unobservable inputs and assumptions used in the measurements, a description of the valuation processes in place, and a qualitative discussion about the sensitivity of the measurements to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. In addition, the standard requires disclosure of fair value by level within the fair value hierarchy for each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The standard is effective for interim and annual periods beginning on or after December 15, 2011. The adoption of the standard did not have a material impact on the Company’s fair value disclosures.
Multiemployer Plan Benefits
In September 2011, the FASB issued ASU No. 2011-9, "Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan," which provides new requirements for the disclosures that an employer should provide related to its participation in multiemployer pension plans. Plans of this type are commonly used by employers to provide benefits to union employees that may work for multiple employers during their working life and thereby accrue benefits in one plan for their retirement. The revised disclosures will provide users of financial statements with additional information about the plans in which an employer participates, the level of an employer's participation in the plans, and financial health of significant plans. The amendments in this update are effective for annual financial statements for the year ending September 30, 2012. The adoption of this update is not expected to have a material effect on our financial position, results of operations or cash flows.
NOTE 3 – MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES
Lien Priority
Except in limited circumstances, our mortgage loans are collateralized by first deeds of trust (mortgages) on real property and generally include a personal guarantee by the principals of the borrower and, often times, the loans are secured by additional collateral. However, as of September 30, 2012, there was an outstanding third-party loan totaling $17.8 million secured by a portion of our collateral that was superior to our lien position on one of our loans with an outstanding principal and accrued interest balance of $51.9 million. As of December 31, 2011, we had subordinated two first lien mortgages to third-party lenders in the amount of $20.4 million.
Lending Activities
Given the non-performing status of the majority of the loan portfolio, there has been limited loan activity during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, we originated two loans in the amount of $5.5 million relating to the financing of a portion of the sale of certain REO assets. At September 30, 2012, the average principal balance for our 12 loans was $10.8 million, as compared to $11.7 million for our 21 loans at December 31, 2011. A roll-forward of loan activity during the nine months ended September 30, 2012 is as follows (in thousands):
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 3 – MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES – (continued)
Principal | Interest | Valuation | Carrying | |||||||||||||
Outstanding | Receivable | Allowance | Value | |||||||||||||
Balances at December 31, 2011, as previously reported | $ | 245,190 | $ | - | $ | (141,687 | ) | $ | 103,503 | |||||||
Adjustment for Accrued Interest Receivable (note 2) | - | 4,683 | - | 4,683 | ||||||||||||
Balances at December 31, 2011 as restated | 245,190 | 4,683 | (141,687 | ) | 108,186 | |||||||||||
Additions: | ||||||||||||||||
Principal fundings - cash | 1,622 | 690 | - | 2,312 | ||||||||||||
Principal fundings - asset sale financing | 5,500 | - | - | 5,500 | ||||||||||||
Reductions: | ||||||||||||||||
Principal repayments | (7,283 | ) | (616 | ) | - | (7,899 | ) | |||||||||
Recovery of allowance for credit losses | - | - | 275 | 275 | ||||||||||||
Valuation adjustment | - | - | (23 | ) | (23 | ) | ||||||||||
Foreclosures/transfers to Real Estate Owned | (115,319 | ) | (3,226 | ) | 88,630 | (29,915 | ) | |||||||||
Balances at September 30, 2012 | $ | 129,710 | $ | 1,531 | $ | (52,805 | ) | $ | 78,436 |
As of September 30, 2012, we had three performing loans with an average outstanding principal balance of $2.3 million and a weighted average interest rate of 12.5%. As of September 30, 2012 and December 31, 2011, the valuation allowance represented 40.2% and 56.7%, respectively, of the total outstanding loan principal and interest balances.
Loan Maturities
The outstanding principal and interest receivable balances of our mortgage loans, net of the valuation allowance, as of September 30, 2012, have scheduled maturity dates within the next several quarters, as follows (dollars in thousands) :
September 30, 2012 | ||||||||||||
Quarter | # | Principal and Interest Amount | Percent | |||||||||
Matured | 9 | $ | 123,752 | 94.3 | % | |||||||
Q1 2013 | 1 | 539 | 0.4 | % | ||||||||
Q2 2013 | 1 | 2,020 | 1.5 | % | ||||||||
Q3 2013 | 1 | 4,930 | 3.8 | % | ||||||||
Total | 12 | 131,241 | 100.0 | % | ||||||||
Less: Valuation Allowance | (52,805 | ) | ||||||||||
Net Carrying Value | $ | 78,436 |
Given the non-performing status of the majority of the loan portfolio, the sustained depression of real estate values and lack of available takeout financing, we do not expect the payoffs to materialize in the respective quarters. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect our collateral, maximize our return or generate additional liquidity. During the nine months ended September 30, 2012, we extended the maturity date for one loan by twelve months. The modification did not result in forgiveness of interest or principal, but the interest rate on that loan was increased from 11% to 14%.
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 3 – MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES – (continued)
Loans in Default
We continue to experience loan defaults as a result of depressed real estate market conditions and lack of takeout financing in the marketplace. A summary and roll-forward of activity of loans in default through September 30, 2012 is as follows (dollars in thousands):
Accrued | Net | |||||||||||||||||||
Principal | Interest | Valuation | Carrying | # of | ||||||||||||||||
Outstanding | Receivable | Allowance | Value | Loans | ||||||||||||||||
Balances at December 31, 2011 | $ | 237,971 | $ | 4,467 | $ | (141,687 | ) | $ | 100,751 | 18 | ||||||||||
Additions: | ||||||||||||||||||||
Additional loan fundings | 1,622 | (15 | ) | - | 1,607 | - | ||||||||||||||
Allowance adjustment | - | - | (23 | ) | (23 | ) | - | |||||||||||||
Reductions : | ||||||||||||||||||||
Loans removed from default - due to sale | (1,598 | ) | (151 | ) | - | (1,749 | ) | - | ||||||||||||
Recovery of allowance for credit losses | - | - | 275 | 275 | - | |||||||||||||||
Loans removed from default - foreclosure | (115,319 | ) | (3,226 | ) | 88,630 | (29,915 | ) | (9 | ) | |||||||||||
Balances at September 30, 2012 | $ | 122,676 | $ | 1,075 | $ | (52,805 | ) | $ | 70,946 | 9 |
Of the 18 loans that were in default at December 31, 2011, nine of these loans remained in default status as of September 30, 2012, and nine such loans with a net carrying value of $29.9 million were foreclosed upon during the nine months ended September 30, 2012. The valuation allowance transferred to real estate owned is treated as a charge-off at the time of foreclosure.
We are currently exercising enforcement action which we believe could lead to foreclosure upon eight of the nine loans in default at September 30, 2012. We are continuing to work with the borrower with respect to the remaining one loan in default in order to seek to maintain the entitlements on the related project and, thus, the value of our existing collateral. With respect to the loans upon which we are exercising enforcement action, while we expect to complete the foreclosure process on the majority of such loans over the next six to nine months, the timing of foreclosure on these loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, our ability to negotiate a deed-in-lieu of foreclosure and other factors.
At September 30, 2012, all loans in default were also in non-accrual status. In addition, as of September 30, 2012 and December 31, 2011, interest receivable recorded on such loans prior to being placed in non-accrual status totaled $1.1 million and $4.8 million, respectively, and is included in mortgage loans held for sale on the accompanying condensed consolidated balance sheet.
No interest income was recognized on non-accrual loans on a cash or accrual basis during the three or nine months ended September 30, 2012 or 2011. In addition, borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2011 and any such changes are primarily a result of foreclosures.
NOTE 4 – OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Operating properties and real estate owned (REO) assets consist primarily of properties acquired as a result of foreclosure and are reported as operating properties, held for development, or held for sale, depending on whether we plan to hold and operate such properties, develop such assets prior to selling them or instead sell them as soon as possible. Operating properties and REO assets held for sale are reported at the lower of carrying amount or fair value, less estimated costs to sell the property. REO assets held for development are reported at lower of cost or estimated realizable value.
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 4 – OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE - continued
As described in note 2, we restated the December 31, 2011 real estate held for development and for sale to reflect the additional property basis for certain obligations assumed for the allocated share of CFD special revenue bonds and special assessments secured by certain real estate acquired through foreclosure in prior years in the amount of $6.0 million.
At September 30, 2012, we held total operating properties and REO assets of $119.0 million, of which $42.8 million was held for development, $54.0 million was held for sale, and $22.2 million was held as operating properties. A roll-forward of REO from December 31, 2011 to September 30, 2012 is as follows (dollars in thousands):
Operating Properties | # of Projects | Held for Development | # of Projects | Held for Sale | # of Projects | Total Net Carrying Value | ||||||||||||||||||||||
Balances at December 31, 2011, as previously reported | $ | 19,611 | 1 | $ | 44,920 | 16 | $ | 30,945 | 24 | $ | 95,476 | |||||||||||||||||
Adjustment for Special Assessment Obligations (note 2) | - | - | 2,332 | - | 3,699 | - | 6,031 | |||||||||||||||||||||
Balances at December 31, 2011 as restated | 19,611 | 1 | 47,252 | 16 | 34,644 | 24 | 101,507 | |||||||||||||||||||||
Additions: | ||||||||||||||||||||||||||||
Net principal carrying value of loans foreclosed | 1,792 | 1 | 3,028 | 1 | 25,095 | 6 | 29,915 | |||||||||||||||||||||
Other receivables transferred | 93 | - | 50 | - | 112 | - | 255 | |||||||||||||||||||||
Property taxes assumed on loans foreclosed | 660 | - | 1,456 | - | 978 | - | 3,094 | |||||||||||||||||||||
Capital costs additions | 1,325 | - | 369 | - | - | - | 1,694 | |||||||||||||||||||||
Reductions : | ||||||||||||||||||||||||||||
Cost of Properties Sold | - | - | - | - | (16,095 | ) | (7 | ) | (16,095 | ) | ||||||||||||||||||
Recoveries | (93 | ) | - | (14 | ) | - | (66 | ) | - | (173 | ) | |||||||||||||||||
Depreciation | (1,237 | ) | - | - | - | - | - | (1,237 | ) | |||||||||||||||||||
Transfers, net | - | - | (9,330 | ) | - | 9,330 | - | - | ||||||||||||||||||||
Balances at September 30, 2012 | $ | 22,151 | 2 | $ | 42,811 | 17 | $ | 53,998 | 23 | $ | 118,960 |
During the nine months ended September 30, 2012, we foreclosed on nine loans (resulting in eight property additions) and took title to the underlying collateral with net carrying values totaling $29.9 million as of September 30, 2012. The number of REO property additions does not necessarily correspond directly to the number of loan foreclosures as some loans have multiple collateral pieces that are viewed as distinct REO projects or, alternatively, we may have foreclosed on multiple loans to one borrower relating to the same REO project.
During the nine months ended September 30, 2012, we sold seven REO assets for $17.0 million (net of selling costs), of which we financed $5.5 million, for a gain of $0.6 million. During the nine months ended September 30, 2011, we sold eight REO assets for $6.1 million (net of selling costs) for a gain of $0.3 million. All REO asset sales for the nine months ended September 30, 2012 qualified for full accrual recognition except for one asset sale. Because the buyer did not provide the minimum required initial investment, full gain recognition was not allowed under GAAP so we applied the installment method of accounting for this transaction. This resulted in recognized gain of $0.1 million and a deferred gain of $0.2 million as of September 30, 2012, which is included in tenant deposits and funds held for others in the accompanying condensed consolidated balance sheet. The nature and extent of future capitalized costs for REO held for development depends on the level of development undertaken, the number of additional foreclosures and other factors. While our assets are generally available for sale, we continue to evaluate various alternatives for the ultimate disposition of these investments, including partial or complete development of the properties prior to sale or disposal of the properties on an as-is basis.
During the nine months ended September 30, 2012, we evaluated the disposition strategy for various assets which resulted in the reclassification of certain REO assets from held for development to held for sale and vice versa, based on planned investment and development activities. While the number of assets transferred between categories was the same (three), the net carrying value of assets transferred from held for development to held for sale was $9.3 million.
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 4 – OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE - continued
As discussed in more detail in note 6, we defaulted on the terms of an agreement related to a $5.2 million note payable. This default could result in cross-acceleration of the maturity of such debt or foreclosure on the related assets. These related assets, which are included as a component of Real Estate Acquired through Foreclosure Held for Development, totaled approximately $4.9 million at September 30, 2012.
Development Services Agreement
During the quarter ended September 30, 2012, we entered into a development services agreement with a third party developer to manage the development of certain existing real estate we own with a carrying value of $5.9 million at September 30, 2012. When completed, the project is expected to consist of a 332-unit multi-family residential housing complex and a retail component. The estimated project development costs are expected to total approximately $51 million, for which we are seeking $45 million in third party financing. Under the agreement, the developer is entitled a predevelopment services fee not to exceed $150,000, a development services fee equal to 3.0% of the total project cost less $3.3 million, as well a post-development services fee. The post-development services fee will consist of a profit participation upon sale of the project ranging from 7% to 10% of the profit, depending the amount and timing of project completion and sale. Alternatively, if the project is not sold, the post-development services fee will based on the fair market value of the project as of the date not earlier than 15 months following the achievement of 90% occupancy for the project. The agreement is in effect until the fifth anniversary of the substantial completion of the project, as defined. If we elect not to proceed with the project prior to our acceptance of the development authorization notice, the agreement is cancelable by us with 30 day notice by us, subject to full payment of the predevelopment services fee and any budgeted and approved costs incurred. We are currently awaiting final approval by the local government authorities to proceed with the development.
NOTE 5 – FAIR VALUE
Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale
Our valuation analysis processes and procedures are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We perform a valuation analysis of our loans not less frequently than on a quarterly basis. We complete an analysis of our loans as a whole to assess our exposure for loans made in various reporting periods and in terms of geographic diversity. We consider all relevant circumstances to determine if, and the extent to which, a valuation allowance is required.
Impairment for our collateral dependent loans is measured at the balance sheet date based on the then fair value of the collateral in relation to contractual amounts due under the terms of the applicable loan if foreclosure is probable. Substantially all of our loans are deemed to be collateral dependent.
Similarly, REO assets that are classified as held for sale are measured at the lower of carrying amount or fair value, less cost to sell. REO assets that are classified as operating properties or as held for development are considered “held and used” and are evaluated for impairment when circumstances indicate that the carrying amount exceeds the sum of the undiscounted net cash flows expected to result from the operation or development and eventual disposition of the asset. If an asset is considered impaired, an impairment loss is recognized for the difference between the asset’s carrying amount and its fair value. If we elect to change the disposition strategy for our real estate held for development, and such assets were deemed to be held for sale, we would likely record additional impairment charges, and the amounts could be significant. See our consolidated audited financial statements in our previously filed Annual Report on Form 10-K for the year ended December 31, 2011 for a detailed description of the summary of the procedures performed and assumptions utilized in connection with our impairment analysis of real estate owned assets as of and for the year ended December 31, 2011.
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 5 – FAIR VALUE – (continued)
We periodically engage independent third-party valuation firms and other consultants to assist with our analysis of fair value of the collateral supporting our loans and REO. These independent third-party valuation firms provide periodic complete valuation reports for the majority of our loans and REO. In subsequent periods, we often obtain a letter from the third-party valuation firms to determine whether there is a material diminution in the fair value indications from the previously reported values. In the absence of updated third party valuations, we review and update valuation assumptions and perform other in-house analysis using available market participant data to determine fair value at the reporting date.
During the period ended September 30, 2012, we performed both a macro analysis of market trends and economic estimates, as well as a detailed analysis on selected significant loan and REO assets. As described more fully below, while market confidence appears to be improving in numerous markets in which our assets are located as evidenced by some improvement in sales activity and pricing, there remains continuing uncertainty concerning the general economy and, accordingly, we consider these increases in pricing trends to be fragile. The updated information and our analysis indicate moderately improving real estate market conditions, increased consumer spending, shrinking residential inventory, modestly improved levels of unemployment, limited job growth and improving real estate values, a positive but albeit moderate improvement from such indications provided as of December 31, 2011. On a national level, new home sales reached their highest level in two years during the third quarter of 2012, while housing starts reached a four year high during the quarter. In addition, foreclosures have also declined significantly in several large markets. All said, sustainability of such trends remain a national concern.
To support continued progress toward maximum employment and price stability, the Federal Reserve has indicated that it expects to continue its highly accommodative monetary policy stance for a considerable time after the economic recovery strengthens. The optimism in real estate markets is tempered by the unknown outcome of the US presidential election and the concerns about the failure of U.S. policy makers to agree so far on a fiscal plan. As such, we expect housing demand and real estate in general to improve slightly over the short-term and do not expect that it will likely improve markedly until the general economy strengthens, the housing market shows a longer trend of ongoing recovery, and a clear fiscal policy is defined by the incoming administration following the presidential election.
The following is a summary of the procedures performed in connection with our fair value analysis of loans and REO assets as of and for the three months ended September 30, 2012:
1. | We reviewed the status of each of our loans to ascertain the likelihood that we will collect all amounts due under the terms of the loans at maturity based on current real estate and credit market conditions. |
2. | We reviewed the status and disposition strategy of each of our REO assets to determine whether such assets continue to be properly classified as held for sale or held as operating properties or development as of the reporting date. |
3. | For the period ended September 30, 2012, given the lack of significant change in overall general market conditions since December 31, 2011, we performed an analysis to determine whether there were any indications of a material increase or decrease in the value of the underlying collateral and REO assets since the last complete valuation for such assets. This analysis included a review and update of current market participant activity, overall market conditions, our direct knowledge of local market activity affecting the project, as well as other market indicators obtained through our asset management group and various third parties. Our asset-specific analysis focused on the higher valued assets representing approximately 90% of our total loan collateral and REO portfolio. We considered the results of our analysis and the potential valuation implication to the balance of the portfolio based on similar asset types and geographic location. |
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 5 – FAIR VALUE – (continued)
4. | In addition, for projects for which we have received a bona fide written third-party offer to buy our loan or REO asset, or the borrower has received a bona fide written third-party offer to buy the related project, we generally utilized the offer amount in cases where we have had earnest negotiations to sell such assets at the price point utilized (whether or not the offer was above or below the low end of the valuation range provided). Such offers are only considered if we deem the offer to be valid, reasonable and negotiable, and we believe the offeror has the financial wherewithal to execute the transaction. |
Based on our analysis, generally the valuation approach taken and assumptions utilized with respect to each asset at December 31, 2011 remained applicable at September 30, 2012, except for those assets subject to a recent bona fide written third-party offer to buy our loan or REO asset. See our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for a summary of the key assumptions and valuation methodologies utilized to derive fair value.
September 30, 2012 Selection of Single Best Estimate of Value
In determining the single best estimate of value for the September 30, 2012 valuation analysis, in our judgment, recent market participant information and other economic data points generally have improved since December 31, 2011. However, there are other offsetting factors that we have considered.
The valuation reports and other data points observed generally provide a range of values for the real estate valued rather than a single point estimate because of variances in the potential value indicated from the available sources of market participant information. The selection of a value from within a range of values depends upon specific market conditions for each property valued and its stage of entitlement or development. In selecting the single best estimate of value, we considered the information in the valuation reports, credible purchase offers received, as well as multiple observable and unobservable inputs as described below.
In addition to analyzing local market conditions in areas where our real estate assets are located, we also consider national and local market information, trends and other data to further support our asset values.
During the period ended September 30, 2012, we noted several improving trends in US real estate markets. According to various third-party sources, on a national level, new home sales reached their highest level in two years, while housing starts reached a four year high. Foreclosures have also declined significantly in the third quarter in nearly two-thirds of the nation’s largest metro areas, including San Francisco, Los Angeles and Phoenix. Some of largest homebuilders in the US reported strong third quarter profits and some have indicated that they expect to continue to do well because of high rental rates, record low general and mortgage interest rates and a decrease in overall home supply. The near record low rates for 30-year mortgages are expected to lure buyers to continue to the recovery. Nevertheless, lenders have continued to employ strict lending guidelines making it difficult for many consumers to qualify for mortgages to take advantage of the low rates.
The optimism in real estate markets is further tempered by the outcome of the US presidential election and the potential effects of reductions in federal spending resulting from required spending cuts. Collectively, the possible tax increases, sequestration and austerity provisions could have the effect of contracting the economy, resulting in job losses and a rise in unemployment, which would likely impede or negate the real estate market improvements noted. Additionally, while the economy appears to be growing modestly and improved consumer confidence has generated increased consumer spending, the nation continues to struggle because businesses are reluctant to invest, and slower global growth has cut demand for US exports. Internationally, monetary policy, fiscal consolidation and stressed financial systems have created a general feeling of uncertainty about the ability of European policy makers to control the Euro crisis.
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 5 – FAIR VALUE – (continued)
While certain external market information presents optimistic data points, it also cautions that continued improvement is expected to remain slow and is dependent on numerous economic factors. We believe the above observable inputs combined with other observable and unobservable inputs and management’s specific knowledge related to market activity surrounding the underlying real estate assets generally provide a reasonable basis for a selection within the valuation range provided. Accordingly, with the exception of specific assets, management generally considered the low end of the range to be most representative of fair value, less estimated costs to sell, based on current market conditions at September 30, 2012, consistent with prior reporting periods. Management continues to monitor both macro and micro-economic conditions through the date of filing of its quarterly financial statements to determine the impact of any significant changes that may have a material impact on the fair value of our real estate assets.
Valuation Conclusions
Based on the results of our evaluation and analysis, we recorded a recovery of credit losses of $0.3 million on our loan portfolio and no impairment charges in the value of REO for the three and nine months ended September 30, 2012, respectively. In addition, we recorded an additional recovery of credit losses of $0.7 and $1.6 million during the three and nine months ended September 30, 2012, respectively, relating to the collection of notes receivable from certain guarantors for which an allowance for credit loss had been previously recorded. For the three months and nine months ended September 30, 2011, we recorded a provision for credit losses, net of recoveries, of $4.0 million nine and $1.0 million, respectively.
As of September 30, 2012, the valuation allowance totaled $52.8 million, representing approximately 40.2% of the total outstanding loan principal and interest balances. As of December, 2011, the allowance for credit loss totaled $141.7 million, representing 56.7% of the total outstanding loan portfolio principal and interest balances. The reduction in the overall allowance is primarily attributed to the transfer of the allowance associated with loans on which we foreclosed during the period. With the existing valuation allowance recorded as of September 30, 2012, we believe that, as of that date, the fair value of the underlying collateral of our loans is adequate in relation to the net carrying value of loan principal and accrued interest and that no additional valuation allowance is considered necessary.
While the above results reflect management’s assessment of the fair value of our real estate assets as of September 30, 2012 and December 31, 2011 based on currently available data, we will continue to evaluate our loans and real estate assets in the remaining quarter of 2012 and beyond to determine the adequacy and appropriateness of the valuation allowance. Depending on market conditions, such updates may yield materially different values and potentially increase or decrease the valuation allowance for loans or impairment charges for REO assets.
Valuation Categories
Except for mortgage loans and REO held for sale, which are measured at fair value on a non-recurring basis for purposes of determining valuation with respect to our valuation allowance and/or impairment, none of our assets or liabilities is measured at fair value on a recurring or non-recurring basis. Additionally, there are no mortgage loans or REO held for sale that were measured at fair value using Level 1 inputs. The following table presents the categories for which net mortgage loans are measured at fair value based upon the lowest level of significant input to the valuation as of September 30, 2012 and December 31, 2011, respectively (in thousands):
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 5 – FAIR VALUE – (continued)
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Significant | Significant | |||||||||||||||||||||||
Other | Significant | Other | Significant | |||||||||||||||||||||
Observable | Unobservable | Observable | Unobservable | |||||||||||||||||||||
Inputs | Inputs | Inputs | Inputs | |||||||||||||||||||||
Description: | (Level 2) | (Level 3) | Total | (Level 2) | (Level 3) | Total | ||||||||||||||||||
Net Mortgage Loans: | ||||||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||||||
Held for Investment | $ | - | $ | 507 | $ | 507 | $ | - | $ | 1,838 | $ | 1,838 | ||||||||||||
Processing Entitlements | - | 4,930 | 4,930 | - | 21,800 | 21,800 | ||||||||||||||||||
- | 5,437 | 5,437 | - | 23,638 | 23,638 | |||||||||||||||||||
Entitled Land: | ||||||||||||||||||||||||
Held for Investment | - | (43 | ) | (43 | ) | 737 | 1,916 | 2,653 | ||||||||||||||||
Infrastructure under Construction | - | 7,135 | 7,135 | - | 10,050 | 10,050 | ||||||||||||||||||
Improved and Held for Vertical Construction | - | - | - | 3,848 | - | 3,848 | ||||||||||||||||||
- | 7,092 | 7,092 | 4,585 | 11,966 | 16,551 | |||||||||||||||||||
Construction & Existing Structures: | ||||||||||||||||||||||||
New Structure - Construction in-process | - | 8,876 | 8,876 | - | 11,118 | 11,118 | ||||||||||||||||||
Existing Structure Held for Investment | - | 2,020 | 2,020 | - | 2,010 | 2,010 | ||||||||||||||||||
Existing Structure - Improvements | 3,123 | 51,888 | 55,011 | 3,020 | 51,849 | 54,869 | ||||||||||||||||||
3,123 | 62,784 | 65,907 | 3,020 | 64,977 | 67,997 | |||||||||||||||||||
Total Mortgage Loans | $ | 3,123 | $ | 75,313 | $ | 78,436 | $ | 7,605 | $ | 100,581 | $ | 108,186 | ||||||||||||
Total Real Estate Held for Sale, as restated | $ | 16,253 | $ | 37,745 | $ | 53,998 | $ | 9,628 | $ | 25,016 | $ | 34,644 |
Generally, all of our mortgage loans and REO held for sale are valued using significant unobservable inputs (Level 3) obtained through third party appraisals or internal management analysis, except for such assets for which third party offers were used, which are considered Level 2 inputs. Changes in the use of Level 3 valuations are based solely on whether we utilized third party offers for valuation purposes. The table presented below summarizes the change in balance sheet carrying values associated with the mortgage loans measured using significant unobservable inputs (Level 3) during the nine months ended September 30, 2012 (in thousands):
Mortgage | Real Estate Held | |||||||
Loans, net | for Sale, net | |||||||
Balances, December 31, 2011, as restated | $ | 100,581 | $ | 25,016 | ||||
Mortgage Loan Fundings/Capital Additions, net | 7,709 | (7 | ) | |||||
Mortgage Loan Repayments | (7,647 | ) | - | |||||
Transfers to REO from Loans | (25,330 | ) | - | |||||
Asset sales/recoveries | - | (1,440 | ) | |||||
Transfers into (out of) Level 3 | - | 14,176 | ||||||
Balances, September 30, 2012 | $ | 75,313 | $ | 37,745 |
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IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 6 – DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS
A roll-forward of notes payable and related obligations from December 31, 2011 to September 30, 2012 is as follows, in thousands:
Balance at December 31, 2011, as previously reported | $ | 60,315 | ||
Adjustment for Special Assessment Obligations (note 2) | 6,031 | |||
Balance at December 31, 2011, as restated | 66,346 | |||
Additions: | ||||
Issuance of bank note | 850 | |||
Deferred interest on Convertible Notes Payable | 2,131 | |||
Accretion of discount | 1,893 | |||
Balance at September 30, 2012 | $ | 71,220 |
Interest expense for the three months ended September 30, 2012 and 2011 was $3.5 million and $3.4 million, respectively. Interest expense for the nine months ended September 30, 2012 and 2011 was $10.3 million and $5.7 million, respectively.
Convertible Notes Payable/Exit Fee Payable
As more fully described in our Form 10-K for the year ended December 31, 2011, on June 7, 2011, we entered into and closed funding of a $50.0 million senior secured convertible loan with NW Capital. The loan matures on June 6, 2016 and bears contractual interest at a rate of 17% per year. The lender elected to defer all interest due through December 7, 2011 and 5% of the interest accrued from December 8, 2011 to December 31, 2011. Thereafter, the lender, at its sole option, may make an annual election to defer a portion of interest due representing 5% of the total accrued interest amount, with the balance (12%) payable in cash. The lender made such an election for the year ending December 31, 2012. Deferred interest is capitalized and added to the outstanding loan balance on a quarterly basis. As of September 30, 2012, deferred interest added to the principal balance of the convertible note totaled $6.7 million, of which $2.1 million was added during the nine months ended September 30, 2012. Interest is payable quarterly in arrears beginning on January 1, 2012, and thereafter each April, July, October and January during the term of the loan.
In addition, we are required to pay an exit fee (“Exit Fee”) at maturity equal to 15% of the then outstanding principal, unpaid accrued and deferred interest and other amounts owed under the loan agreement. The Exit Fee is considered fully earned under the terms of the loan agreement and has been recorded as a liability with an offsetting amount reflected as a discount to the convertible note payable. The Exit Fee and corresponding discount to the convertible notes payable of $10.4 million was estimated assuming the lender elects its annual interest deferral option over the term of the loan. This discount amount is being amortized to interest expense over the term of the loan using the effective interest method. As of September 30, 2012, the unamortized discount totaled approximately $8.0 and the amortized discount added to the principal balance of the convertible note totaled approximately $2.5 million of which $1.5 million was added during the nine months ended September 30, 2012.
Debt issuance costs incurred in connection with the NW Capital closing are being amortized over the term of the loan using the effective interest method. With the contractual interest, and the amortization of the Exit Fee and related deferred financing costs, the effective interest rate under the NW Capital loan is approximately 23%. The loan is severally, but not jointly, guaranteed by substantially all of our existing and future subsidiaries, subject to certain exceptions and releases, and is secured by a security interest in substantially all of our assets. The loan may not be prepaid prior to December 7, 2014 and is subject to substantial prepayment fees and premiums in the event of payoff prior to maturity.
The loan agreement also contains certain restrictive covenants which require NW Capital’s consent as a condition to our taking certain actions. The restrictive covenants relate to our ability to sell or encumber our assets, issue additional indebtedness, restructure or modify our ownership structure, settle litigation over $10.5 million, enter into new material agreements and other operational matters.
20 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 6 – DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
Conversion Feature
As more fully described in our annual report on Form 10-K for the year ended December 31, 2011, the NW Capital loan is convertible into IMH Financial Corporation Series A preferred stock at any time prior to maturity at an initial conversion rate of 104.3 shares of our Series A preferred stock per $1,000 principal amount of the loan, subject to adjustment. Similar to the convertible note, dividends on the Series A preferred stock will accrue from the issue date at the rate of 17% of the issue price per year, compounded quarterly in arrears, a portion of which may, at the election of NW Capital, be payable in additional shares of stock.
If the NW Capital loan is converted into shares of Series A preferred stock, we are obligated to redeem all such preferred stock on the fifth anniversary of the loan date in cash, at a price equal to 115% of the original purchase price, plus all accrued and unpaid dividends (whether or not earned or declared), if any, to and including the date fixed for redemption, without interest. In addition, the Series A preferred stock has certain redemption features in the event of default or the occurrence of certain other events.
Other Notes Payable Activity
During the nine months ended September 30, 2012 and 2011, we amortized the discount applicable to certain non-interest bearing notes to interest expense totaling approximately $0.4 million for each period. The net principal balance of the notes payable at September 30, 2012, which have a maturity date of December 31, 2012, was $5.2 million. The remaining unamortized discount on the notes at September 30, 2012 and December 31, 2011 was approximately $0.2 million and $0.6 million, respectively. The notes are secured by certain REO assets that have a carrying value of approximately $4.9 million as of September 30, 2012. During the nine months ended September 30, 2012, we defaulted for strategic reasons on the terms of an agreement related to the loan, which resulted in an acceleration of the maturity date of such debt. The lender filed a notice of delinquency and a notice of trustee sale which was scheduled for June 12, 2012. The subsidiary that owns these assets was placed into bankruptcy which stayed the trustee sale. Management is currently working with the bankruptcy court and related creditors to evaluate available options. In addition, since this strategic default and bankruptcy constituted an event of default under the NW Capital loan, management obtained a waiver from NW Capital regarding this action.
During the three months ended September 30, 2012, we entered into a note payable with a bank in the amount of $850,000 in connection with the acquisition of certain land situated adjacent to another property owned by us. The note payable is secured by the land purchased, bears interest at the annual rate of 4% and matures in September 2015. We obtained approval from NW Capital for this new indebtedness. The note requires interest only payments through September 2013, with principal and interest payments commencing in October 2013 through maturity. The note payable has scheduled maturities as follows (in thousands):
Year | Amount | |||
2013 | $ | 10 | ||
2014 | 42 | |||
2015 | 798 | |||
Total | $ | 850 |
21 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 6 – DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS – continued
CFD and Special Assessment Obligations
As described in note 2, we restated the December 31, 2011 notes payable balance to reflect certain obligations assumed for the allocated share of CFD special revenue bonds and special assessments totaling approximately $6.0 million secured by certain real estate acquired through foreclosure in prior years. These obligations are described below.
One of the CFD obligations had an outstanding balance of approximately $3.7 million as of September 30, 2012 and December 31, 2011 and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. The CFD obligation is secured by certain real estate held for sale consisting of 171 acres of unentitled land located in Buckeye, Arizona which has a carrying value of approximately $5.2 million at September 30, 2012. During the nine months ended September 30, 2012, we recorded interest expense of $0.2 million related to this obligation. In addition, during the nine months ended September 30, 2012, we defaulted for strategic reasons on the obligation payment due and the taxing authority has since filed a notice of potential sale of the related real estate. Such real estate assets are owned by a wholly owned subsidiary of the Company. Management has engaged the appropriate advisors and is currently working towards a resolution of this issue. In addition, since this strategic default and bankruptcy constituted an event of default under the NW Capital loan, management obtained a waiver from NW Capital regarding this action.
The other CFD obligations are comprised of a series of special assessments that collectively had an outstanding balance of approximately $2.3 million as of September 30, 2012 and December 31, 2011. The CFD obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5%. During the nine months ended September 30, 2012, we recorded interest expense of $0.1 million related to this obligation. The CFD obligations are secured by certain real estate held for development consisting of 15 acres of unentitled land located in Dakota County, Minnesota which has a carrying value of approximately $5.9 million at September 30, 2012. Such real estate assets are owned by a wholly-owned subsidiary of the Company.
The CFD and special assessment obligations have scheduled maturities as follows (in thousands):
Year | Amount | |||
2012 | $ | 114 | ||
2013 | 369 | |||
2014 | 390 | |||
2015 | 411 | |||
2016 | 435 | |||
Thereafter | 4,312 | |||
Total | $ | 6,031 |
The responsibility for the repayment of these CFD and special assessment obligations rests with the owner of the property and, accordingly, will transfer to the buyer of the related real estate upon sale. Accordingly, management does not anticipate that these obligations will paid in their entirety by the Company. Nevertheless, these CFD obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.
NOTE 7 — SHARES, SHARE-BASED COMPENSATION AND EARNINGS PER SHARE
Shares of Common Stock, Class B Common Stock, Class C Common Stock and Class D Common Stock share proportionately in our earnings and losses. There are no shares of the Class D common stock outstanding as of September 30, 2012. There were no changes in the classes of stock or in the number of shares of authorized or outstanding shares during the period ended September 30, 2012.
22 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 7 — SHARES, SHARE-BASED COMPENSATION AND EARNINGS PER SHARE - continued
Share-Based Compensation
During the nine months ended September 30, 2011, in connection with resignation of Mr. Albers, our former CEO, we consented to the transfer of all of Mr. Albers’ holdings in the Company to an affiliate of NW Capital. As a result, the affiliate acquired 1,423 shares of Class B-1 common stock, 1,423 shares of Class B-2 common stock, 2,849 shares of Class B-3 common stock and 313,789 shares of Class B-4 common stock for $8.02 per share. Pursuant to the terms of the Separation Agreement with Mr. Albers, we deemed Mr. Albers’ resignation/separation to be “without cause”, and therefore the shares of Class B-4 common stock previously owned by Mr. Albers were no longer subject to the restrictions upon transfer applicable to Class B-4 common stock, but remain subject to all of the restrictions applicable to Class B-3 common stock as well as the additional dividend and liquidation subordination applicable to Class B-4 common stock. The amount by which the NW Capital affiliate paid in excess of the fair value of the common stock purchased resulted in our recording $1.2 million in compensation expense in 2011 in accordance with GAAP with the offsetting amount to be reported as a reduction in the associated debt’s interest expense over its corresponding term of five years using the effective interest method.
As of September 30, 2012, approximately 782,000 stock options were outstanding and there were 418,000 shares available for future grants under our 2010 Stock Option Plan. Approximately 262,000 options vested and none were exercised during the nine months ended September 30, 2012. Of the 262,000 vested options, approximately 52,000 were subject to accelerated vesting in connection with the termination of certain employees. Net stock-based compensation expense relating to these options was $0.5 million and $0.1 million for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, 5,000 options were granted to an employee in connection with his termination. We did not receive any cash from option exercises during the three or nine months ended September 30, 2012 or 2011.
As of September 30, 2012, there was approximately $1.1 million of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2010 Stock Option Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 3.0 years.
Net Loss Per Share
Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period before giving effect to stock options or convertible securities outstanding, which are considered to be dilutive common stock equivalents. Diluted net loss per common share is calculated based on the weighted average number of common and potentially dilutive shares outstanding during the period after giving effect to convertible preferred stock and stock options. Due to the losses for the three and nine months ended September 30, 2012 and 2011, basic and diluted loss per common share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. At September 30, 2012, the only potentially dilutive securities, not included in the diluted loss per share calculation, consist of vested stock options and the NW Capital convertible note payable which is convertible into 5,919,600 shares of Series A Preferred Stock (subject to increase upon NW Capital’s deferral of accrued interest), which are ultimately convertible into the same number of shares of our common stock. There were no other potentially dilutive securities at September 30, 2012.
23 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 8 – RELATED PARTY TRANSACTIONS
New World Realty Advisors, LLC
Effective March 2011, we entered into an agreement with New World Realty Advisors, LLC (“NWRA”) to provide certain consulting and advisory services in connection with the development and implementation of an interim recovery and workout plan and long-term strategic growth plan for us. The agreement remains in effect for four years and may be extended for an additional three years. NWRA is a related party of NW Capital, which is our lender, and an affiliate of which purchased certain shares from our former CEO, thereby holding an indirect ownership interest in the Company.
NWRA is entitled to various fees under this agreement include, among others, a non-contingent monthly fee of $125,000, plus out-of-pocket expenses, as well as a 10% legacy asset performance fee based on the gross sales proceeds from the sales of legacy assets over their related December 31, 2010 carrying value. During the nine months ended September 30, 2012 and 2011, NWRA earned base management fees of approximately $1.1 million and $0.9 million, respectively, which is included in professional fees in the accompanying condensed consolidated statement of operations, and $0.3 million and $0.1 million, respectively, in legacy asset performance fees which is included as an offset in gain on disposal of assets in the accompanying condensed consolidated statement of operations. During the three months ended September 30, 2012 and 2011, base management fees totaled $0.4 million in each period, respectively, and legacy asset performance fees totaled $0.1 million for each period, respectively.
NOTE 9 – SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision makers in deciding how to allocate resources and in assessing performance.
The Company has historically been engaged in the business of investing primarily in mortgage loans secured by a first lien on real estate in various stages of development, which was considered our sole reportable segment. As a result of the significant disruptions in the real estate and credit markets, we have foreclosed on numerous loans and have taken title to the underlying real estate, some of which consist of operating properties, land held for further development and land held for immediate sale. In the first quarter of 2012, we foreclosed on a golf course operation, which includes a spa and food and beverage operation. We also own and operate a commercial medical office building. Moreover, we anticipate that future foreclosures and investment activities may result in similar operations.
Accordingly, in the first quarter of 2012, we changed the composition of the Company’s reportable segments based on the products and services offered and management’s intent for such assets to include the following:
Mortgage and REO – Legacy Portfolio and Other Operations — Consists of the collection, workout and sale of legacy loans and REO assets, including financing of such asset sales. This also encompasses the carrying costs of such assets and other related expenses. This segment also reflects the carrying value of such assets and the related finance and operating obligations.
Commercial Real Estate Leasing Operations — Consists of rental revenue and tenant recoveries less direct property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses) and depreciation and amortization. This segment also reflects the carrying value of such assets and the related finance and operating obligations.
Hospitality and Entertainment Operations — Consists of revenues less direct operating expenses, depreciation and amortization relating to golf, spa, and food & beverage operations, and is expected to include similar operations resulting from future foreclosures or acquisitions. This segment also reflects the carrying value of such assets and the related finance and operating obligations.
24 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 9 – SEGMENT INFORMATION - continued
Corporate and Other — primarily consists of our centralized general and administrative and corporate treasury and deposit gathering activities, and interest expense associated with debt issuances. Corporate and Other also includes reclassifications and eliminations between the reportable operating segments, if any. This segment also reflects the carrying value of such assets and the related finance and operating obligations.
The information presented in our reportable segments tables that follow may be based in part on internal allocations, which involve management judgment. There is no intersegment activity.
Unaudited condensed consolidated financial information for our reportable operating segments is summarized as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | ||||||||||||||||
Income Statement Items | ||||||||||||||||
Total Revenue | ||||||||||||||||
Mortgage and REO - Legacy Portfolio and Other Operations | $ | 450 | $ | 322 | $ | 1,036 | $ | 988 | ||||||||
Commercial Real Estate Leasing Operations | 363 | 442 | 1,170 | 1,381 | ||||||||||||
Hospitality and Entertainment Operations | 320 | - | 1,309 | - | ||||||||||||
Corporate and Other | (77 | ) | 184 | 113 | 483 | |||||||||||
Consolidated | $ | 1,056 | $ | 948 | $ | 3,628 | $ | 2,852 | ||||||||
Net Income (Loss) | ||||||||||||||||
Mortgage and REO - Legacy Portfolio and Other Operations | $ | (2,688 | ) | $ | (7,852 | ) | $ | (6,175 | ) | $ | (11,851 | ) | ||||
Commercial Real Estate Leasing Operations | (22 | ) | 442 | 89 | 1,381 | |||||||||||
Hospitality and Entertainment Operations | (511 | ) | - | (769 | ) | - | ||||||||||
Corporate and Other | (4,963 | ) | (5,548 | ) | (15,370 | ) | (14,770 | ) | ||||||||
Consolidated | $ | (8,184 | ) | $ | (12,958 | ) | $ | (22,225 | ) | $ | (25,240 | ) | ||||
September 30, | December 31, | |||||||||||||||
2012 | 2011 | |||||||||||||||
(Unaudited) | (Restated) | |||||||||||||||
Balance Sheet Items | ||||||||||||||||
Total Assets | ||||||||||||||||
Mortgage and REO - Legacy Portfolio and Other Operations | $ | 176,984 | $ | 195,466 | ||||||||||||
Commercial Real Estate Leasing Operations | 19,938 | 19,611 | ||||||||||||||
Hospitality and Entertainment Operations | 2,573 | - | ||||||||||||||
Corporate and Other | 29,439 | 31,281 | ||||||||||||||
Consolidated | $ | 228,934 | $ | 246,358 | ||||||||||||
Notes Payable and Special Assessment Obligations | ||||||||||||||||
Mortgage and REO - Legacy Portfolio and Other Operations | $ | 12,035 | $ | 10,743 | ||||||||||||
Commercial Real Estate Leasing Operations | - | - | ||||||||||||||
Hospitality and Entertainment Operations | - | - | ||||||||||||||
Corporate and Other | 59,185 | 55,603 | ||||||||||||||
Consolidated | $ | 71,220 | $ | 66,346 | ||||||||||||
Operating Liabilities | ||||||||||||||||
Mortgage and REO - Legacy Portfolio and Other Operations | $ | 6,558 | $ | 6,315 | ||||||||||||
Commercial Real Estate Leasing Operations | 25 | 328 | ||||||||||||||
Hospitality and Entertainment Operations | 1,631 | - | ||||||||||||||
Corporate and Other | 7,200 | 8,114 | ||||||||||||||
Consolidated | $ | 15,414 | $ | 14,757 |
NOTE 10 – LEASES
In our ongoing effort to reduce overhead expenses, IMH Financial Corporation made a determination to lease appropriately sized and priced office space in Scottsdale under a lease commencing on May 1, 2012 and extending through October 30, 2017.
Prior to our acquisition of the Manager in the Conversion Transactions, the Manager was obligated under an office lease. The Manager determined that it would abandon that space effective May 1, 2012. Based on management’s analysis, we did not record a charge relating to the abandonment of the Manager’s office lease.
25 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Undisbursed Loans-In-Process
Undisbursed loans-in-process and interest reserves generally represent the unfunded portion of construction loans pending completion of additional construction, and interest reserves for all or part of the loans’ terms. There were no contractual undisbursed loans-in-process or interest reserves outstanding at September 30, 2012.
Strategic Actions Taken Relating to REO Assets
In connection with our foreclosure on loans and our related acquisition of the underlying real estate assets collateral, we often inherit the property subject to a variety of liens and encumbrances. These liens and encumbrances may include liens securing indebtedness senior to our lien, property tax liens, liens securing special assessment or community facilities revenue bonds, liens securing HOA or community recreation club or golf assessments and dues, as well as customary covenants, conditions, restrictions and utility and other easements. Oftentimes the real estate assets we acquire through foreclosure are in a distressed state and in those cases we actively work to stabilize the asset, resolve disputes among different lienholders and creditors and protect our interest in the asset as we determine the most advantageous strategy for the Company (i.e., sell, develop further or operate). As part of this process and with the intention of protecting or enhancing our interest in our commercial loan and REO assets, we may for strategic reasons take actions, or fail to take actions, that result in a default of obligations relating to the property, some of which obligations may have a security or collateral interest in the subject real estate property. In some cases, we may be directly liable for certain of these obligations. These actions (or inactions) are intended to protect or enhance our interest in the property and in many cases relate to obligations that were incurred prior to our acquisition of the property and often relate to disputes among the various stakeholders, including the Company, about the amount, timing or priority of the obligations and the appropriate resolution of the various the stakeholders’ claims, which in many cases will result in less than a full recovery for some or all stakeholders given the distressed state of many of our REO properties. In conjunction with this strategy, as discussed in note 6, we have placed one of our single asset subsidiaries into bankruptcy to address debt related matters associated with the subsidiary’s assets which have a carrying value of $4.9 million as of September 30, 2012. In addition, since these actions (or inactions) may constitute events of default under the NW Capital loan, we have obtained and will seek to obtain a waiver in the future from NW Capital, if necessary. The Company believes that it could, if it elected to do so, settle or cure these defaults and we do not believe the losses or costs relating to any such actions pending at September 30, 2012 will result in a material adverse effect on our financial position or results of operations.
Legal Matters
We may be a party to litigation as the plaintiff or defendant in the ordinary course of business in connection with loans that go into default, or for other reasons. While various asserted and unasserted claims exist, resolution of these matters cannot be predicted with certainty and, we believe, based upon currently available information, that the final outcome of such matters will not have a material adverse effect, if any, on our results of operations or financial condition.
As we have previously reported, various disputes arose relating to the consent solicitation/prospectus used in connection with seeking member approval of the Conversion Transactions, and we were named in various lawsuits containing allegations and claims that fiduciary duties owed to Fund members and to the Fund were breached because, among other things, the Conversion Transactions were unfair to Fund members, constituted self-dealing and because the information provided about the Conversion Transactions and related disclosures was false and misleading. The claims were consolidated into the putative class action lawsuit captioned In re IMH Secured Loan Fund Unitholders Litigation pending in the Court of Chancery in the State of Delaware against us, certain affiliated and predecessor entities, and certain former and current of our officers and directors (“Fund Litigation”).
26 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 11 – COMMITMENTS AND CONTINGENCIES - continued
As previously reported, on January 31, 2012, we reached a tentative settlement in principle to resolve all claims asserted by the plaintiffs in the Fund Litigation, other than the claims of one plaintiff which were separately settled. The tentative settlement in principle, memorialized in a Memorandum of Understanding (“MOU”) previously filed with our 8-K dated February 6, 2012, is subject to certain class certification conditions, confirmatory discovery and final court approval (including a fairness hearing). The MOU contemplates a full release and settlement of all claims, other than the claims of the one non-settling plaintiff (against whom we are litigating separately), against us and the other defendants in connection with the claims made in the Fund Litigation. The following are some of the key elements of the tentative settlement:
· | we will offer $20.0 million of 4% five-year subordinated notes to members of the Class in exchange for 2,493,765 shares of IMH common stock at an exchange rate of $8.02 per share (“Exchange Offering”); |
· | we will offer to Class members that are accredited investors $10.0 million of convertible notes with the same financial terms as the convertible notes previously issued to NW Capital (“Rights Offering”); |
· | we will deposit $1.57 million in cash into a settlement escrow account (less $0.23 million to be held in a reserve escrow account that is available for use by us to fund our defense costs for other unresolved litigation) which will be distributed (after payment of notice and administration costs and any amounts awarded by the Court for attorneys' fees and expense) to Class members in proportion to the number of our shares held by them as of June 23, 2010; |
· | we will enact certain agreed upon corporate governance enhancements, including the appointment of two independent directors to our board of directors upon satisfaction of certain conditions (but in no event prior to December 31, 2012) and the establishment of a five-person investor advisory committee (which may not be dissolved until such time as we have established a seven-member board of directors with at least a majority of independent directors); and |
· | provides additional restrictions on the future sale or redemption of our common stock held by certain of our executive officers. |
We have vigorously denied, and continue to vigorously deny, that we have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Fund Litigation, but we believe it is in our best interests and the interests of our stockholders to eliminate the burden and expense of further litigation and to put the claims that were or could have been asserted to rest. As of September 30, 2012 and December 31, 2011, we have accrued the payment required of $1.57 million, as well as the offsetting related anticipated insurance proceeds. In addition, due to the significance of the anticipated settlement and related costs, we have separately identified such costs in the accompanying consolidated statement of operations. Such amounts consist primarily of legal, accounting and other professional fees incurred in connection with the settlement proposal, including costs surrounding the proposed Rights Offering and Exchange Offering. During the three months ended September 30, 2012 and 2011, we recorded settlement related costs of $0.8 million and $0.2 million, respectively. During the nine months ended September 30, 2012 and 2011, we recorded settlement related costs of $1.5 million and $0.2 million, respectively. However, we have not included any other adjustments relating to the potential repurchase of stock in exchange for the issuance of convertible notes because the matter is still subject to the approval of the court (which is not assured) and because of the uncertainty of timing and of the GAAP based “fair value” determination of such securities as of the date of settlement. At the time that these amounts are estimable, we will record the appropriate amounts resulting from the resolution of this matter.
While we are working expeditiously to resolve this matter, there can be no assurance that the court will approve the tentative settlement in principle. Further, the judicial process to ultimately settle this action may take up to another nine months to finalize the transaction. If not approved, the tentative settlement as outlined in the MOU may be terminated and we will continue to vigorously defend this action.
27 |
IMH FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
NOTE 11 – COMMITMENTS AND CONTINGENCIES - continued
As previously reported, on December 29, 2010, an action was filed in the Superior Court of Arizona, Maricopa County, by purported Fund members David Kurtz, David L. Kurtz, P.C., Lee Holland, William Kurtz, and Suzanne Sullivan (collectively, the “Kurtz Plaintiffs”) against us and certain affiliated individuals and entities. The Kurtz Plaintiffs made numerous allegations against the defendants in that action, including allegations that fiduciary duties owed to Fund members and to the Fund were breached because the Conversion Transactions were unfair to Fund members, constituted self-dealing, and because information provided about the Conversion Transactions and related disclosures was false and misleading. In addition, the Kurtz Plaintiffs alleged that the Fund wrongfully rejected the defendants’ books and records requests, defamed David Kurtz, and wrongfully brought a civil action related to the Conversion Transactions. The Kurtz Plaintiffs seek the return of their original investments in the Fund, damages for defamation and invasion of privacy, punitive damages, and their attorneys’ fees and costs. Defendants filed a motion to stay this lawsuit in favor of the consolidated action pending in Delaware. As previously reported, the Court granted defendants’ motion and stayed this action pending the outcome of the above-referenced Fund Litigation.
Kurtz Plaintiffs’ motion for reconsideration of the Court’s denial of their motion to stay was denied by the Court on September 19, 2011, reaffirming the stay of this case pending the outcome of the Fund Litigation. We dispute the Kurtz Plaintiffs’ allegations and we intend to defend ourselves vigorously against these claims if this action is recommenced. The pending settlement in the Fund Litigation described above should dispose of some of the Kurtz claims, but various other claims will remain. The dismissed claims will streamline the litigation but will not necessarily reduce the amount of damages being claimed by the Kurtz Plaintiffs.
We are subject to oversight by various state and federal regulatory authorities, including, but not limited to, the Arizona Corporation Commission, or ACC, the Arizona Department of Revenue, the Arizona Department of Financial Institutions (Banking), the SEC and the IRS. Our income tax returns have not been examined by taxing authorities and all statutorily open years remain subject to examination.
We believe that we have always been, and currently are in compliance with all regulations that materially affect us and our operations, and that we have acted in accordance with our operating agreement prior to its termination as a result of the Conversion Transactions. However, there can be no guarantee that the above-described or other matters will be resolved favorably, or that we or our affiliates may not incur additional significant legal and other defense costs, damage or settlement payments, regulatory fines, or limitations or prohibitions relating to our or our affiliates’ business activities, any of which could harm our operations.
28 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and accompanying notes as of and for the year ended December 31, 2011 included in our previously filed Annual Report on Form 10-K (“Form 10-K”), and with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”). Undue reliance should not be placed upon historical financial statements since they are not indicative of expected results of operations or financial condition for any future periods.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “will,” “plan,” “potential,” “should” and “would” or the negative of these terms or other comparable terminology. Forward-looking statements in this quarterly report on Form 10-Q include: our business strategy and liquidity plan, including our intention to dispose of a significant portion of our mortgage loans and other real assets as quickly as possible, that future foreclosures may result in our ownership and development or operation of commercial, lodging and related food, beverage and amenity operations, and our goals and plans to invest in different real estate platforms, including consideration of opportunities to act as a sponsor and co-investor in real estate mortgages and other real estate-based vehicles, diversify our investments geographically and expand our investment capital base; the outcome of actions we may take, or fail to take, that result in defaults of obligations that have liens or collateral interest in our commercial mortgage loan and REO properties, including our ability to cure such defaults; our plans and the anticipated timing and results relating to our actions to foreclose on defaulted mortgage loans; trends and expectations relating to the real estate and lending markets we operate in; expected amortization period of unrecognized compensation costs; that future mortgage income will remain at minimal levels; that property taxes, costs and expenses relating to REO and other operating expenses will increase; that we may modify existing loans and/or subordinate our first lien position on our mortgage loans to protect our collateral and maximize our opportunity for recovery; that we expect to further diversify our investments geographically; that the concentration of our current loan portfolio will not materially change until we begin making new loans; our sources and the sufficiency of liquidity in the next twelve months; that our financial assets do not give rise to significant interest rate risk; that we may sell whole loans or participations in loans to increase our liquidity; that our failure to generate sustainable earning assets and liquidate our legacy assets may have an adverse effect on our business; the impact of new accounting standards; that we do not expect payoffs of many of our real estate mortgage loans in the near future; that changes in our disposition strategy and related changes in classifications of such assets under GAAP could result in material impairment charges; our future liability relating to CFD and special assessment obligations; that the fair value of the collateral underlying our mortgage loans is sufficient in relation to the current carrying value of the related loans; that we may increase our leverage; trends in costs relating to the Fund Litigation; and the outcome of pending litigation against us.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance. These beliefs, assumptions and expectations can change, and actual results and events may differ materially, as a result of many possible events or factors, not all of which are known to us or are within our control. These risk factors and uncertainties should be carefully considered by current and potential investors. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include:
· | that we may continue to record losses; |
· | increased operating expenses; |
· | that a significant portion of our loan portfolio is comprised of non-performing assets; |
· | that we will continue to foreclose on our remaining mortgage loan portfolio; |
· | concentration of credit risk to a particular borrower or borrower group; |
29 |
· | difficulties in analyzing potential investment opportunities as a result of the dislocations in the real estate market; |
· | supply of commercial mortgage loans and the resulting impact on our strategy; |
· | litigation; |
· | our obligation to fund unfunded contractual loan commitments; |
· | the availability of consultants and employees; |
· | the lack of secondary market for our loans that impairs our ability to diversify our portfolio; |
· | lack of access to public and capital markets; |
· | ability to control the administration of mortgage loans where we hold only a participation interest; |
· | the short-term nature of the loans we originate; |
· | risks of holding subordinated loans; |
· | lender due diligence risks; |
· | risks relating to hedging transactions; |
· | recent legislative initiatives; |
· | government regulation; |
· | failure to maintain our exemption from registration under the Investment Company Act; |
· | potential dilution resulting from the NW Capital loan and NW Capital’s approval rights over substantial portions of our operations; |
· | NW Capital loan covenants that restrict our operations and our ability to take certain actions; |
· | risks related to additional borrowings; |
· | risks relating to bank repurchase agreements; |
· | restrictive covenants that could be contained in future debt agreements; |
· | our inability to sell our current mortgage loan and REO assets and execute our business and liquidity strategy; |
· | our inability to resume our mortgage loan lending activities and grow our business; |
· | continuation of the economic and real estate market declines; |
· | the risks our borrowers are exposed to that could impair their ability to repay our loans; |
· | risks of owning real property obtained through foreclosure; |
· | inability of our commercial borrowers to generate sufficient income from their operating properties to repay our loans; |
· | declines in value of our real estate collateral relating to inaccurate estimates of value due to appraisal errors or subsequent events; |
· | failure of our underwriting standards; |
· | that the guarantors of our mortgage loans will have insufficient assets or resources to support their guarantees; |
· | our inexperience in managing and developing real estate acquired through foreclosure; |
· | a decline in the fair value of our assets; |
· | uncertainty relating to assets valued at fair value; |
· | reductions in income resulting from refinancing loans at lower rates; |
30 |
· | the adverse effects on our business of increasing interest rates; |
· | prepayment risk; |
· | risks relating to the balloon payment terms of many of our loans; |
· | competition; |
· | the inability of our borrowers to complete construction or development of the projects securing our loans; |
· | cost-overruns and non-completion of renovation of properties underlying rehabilitation loans we make; |
· | risks relating to non-Agency residential mortgage-backed securities, or subprime and Alt-A loans that we may acquire; |
· | our inability to manage through the current recession in the real estate industry; |
· | geographic concentration in our loan portfolio; |
· | protection of our rights as a secured lender; |
· | exposure to liability under lender liability laws; |
· | inadequate insurance coverage on the REO properties we acquire; |
· | hazardous substances on the REO properties we acquire; |
· | our inability to utilize our built-in net operating losses; |
· | continued decline in economic conditions; |
· | reliance on key personnel; |
· | conflicts of interest relating to existing contractual agreements; |
· | additional expense for compensation of broker-dealers to eliminate contingent claims; |
· | complex accounting rules; |
· | our failure to maintain adequate internal controls; |
· | our ability to change our business, leverage and financing strategies without stockholder consent; |
· | our inability to pay dividends; |
· | dilution resulting from future issuances of debt and equity securities; |
· | provisions in our certificate of incorporation, bylaws and Delaware law that could impede or delay an acquisition of the Company; and |
· | other factors listed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011. |
Investors should not place undue reliance on any such forward-looking statement, which speaks only as of the date on which it was made. The factors described within this Form 10-Q could affect the financial performance of IMH Financial Corporation and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.
Except to the extent required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 10-Q and the documents incorporated by reference into this Form 10-Q.
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Overview of the Business
We are a real estate investor and finance company based in the southwest United States with over a decade of experience in various and diverse facets of the real estate lending and investment process, including origination, acquisition, underwriting, documentation, servicing, construction, enforcement, development, leasing, operations, marketing, and disposition.
The Company’s focus is to invest in, manage and dispose of commercial real estate mortgage investments, and to perform all functions reasonably related thereto, including developing, managing and either holding for investment or disposing of real property acquired through foreclosure or other means. The Company now also seeks to capitalize on opportunities to invest in selected real estate platforms under the direction of seasoned Company employees and advisors. The Company may also consider opportunities to act as a sponsor, providing investment opportunities as a proprietary source of, and/or co-investor in, real estate mortgages and other real estate-based investment vehicles. Through the purchase and sale of such investments, we hope to earn robust, risk-adjusted returns while being recognized as a nimble, creative and prudent lender/investor. Our strategy is designed to re-establish the Company’s access to significant investment capital. By increasing the level and quality of the assets in our portfolio specifically and under management in general, we believe that the Company can grow to ultimately provide its shareholders with favorable risk-adjusted returns on investments and enhanced opportunity for liquidity.
Through our traditional credit analysis coupled with property valuation techniques typically used by developers, we have acquired or originated real estate assets as of September 30, 2012 with an original investment basis of approximately $554.2 million and a current carrying value of $197.4 million, consisting of commercial real estate mortgage loans with a carrying value of $78.4 million and owned property with a carrying value of $119.0 million. The decline in the carrying (fair) value of our real estate assets is reflective of the deterioration of the commercial real estate lending market and the sustained decline in pricing of residential and commercial real estate in the last several years together with the ongoing downturn in the general economy and specifically the real estate markets.
Given the scale and composition of the remaining legacy portfolio, management has begun has begun to streamline and re-purpose the organization with a clear direction. The continued resolution and monetization of the legacy asset portfolio continues to be essential to the Company’s future success, as the value and liquidity created will be the building blocks for implementing the new strategy. Management continues to undertake significant efforts in this regard, including continued foreclosures, restructurings, development and stabilization activities, and asset dispositions. A number of key tactical initiatives have continued throughout 2012 with the near-term goal of further reducing expenses and enhancing systems, while seeking to mitigate legacy problems and maximize the value of legacy assets. Nevertheless, we continue to expend significant resources in resolving ongoing litigation and pursuing enforcement action against delinquent borrowers and guarantors.
Management continues to explore the possibility of sponsoring investment vehicles or other ventures with institutional investors in vertical market segments, re-position operating assets to produce a market-rate return as portfolio holdings or to dispose of these assets at favorable prices once they have been foreclosed upon and stabilized, and evaluate certain portfolio assets that we believe could yield significantly greater returns by developing the properties for future operation and sale. While focused on the foregoing, the Company remains nimble in its objectives and is poised to re-direct its efforts as economic circumstances evolve and unfold.
Operational Highlights
• | Total assets were $228.9 million as of September 30, 2012 compared to $246.4 million as of December 31, 2011. |
• | Net loss for the three months ended September 30, 2012 was $8.2 million compared to net loss of $13.0 million for the three months ended September 30, 2011. Net loss for the nine months ended September 30, 2012 was $22.2 million compared to net loss of $25.2 million for the same period during 2011. |
• | Basic and diluted loss per common share for the three months ended September 30, 2012 was $0.49 compared to $0.77 for the three months ended September 30, 2011. Basic and diluted loss per common share for the nine months ended September 30, 2012 was $1.32 compared to $1.50 for the same period during 2011. |
32 |
• | Top line revenue, the sum of mortgage, rental and investment and other income, increased approximately $0.1 million to $1.1 million for the three months ended September 30, 2012 from $0.9 million for the three months ended September 30, 2011. Top line revenue increased approximately $0.8 million to $3.6 million for the nine months ended September 30, 2012 from $2.9 million for the same period during 2011. |
• | We recorded a recovery of credit losses of $1.0 million and $1.9 million during the three nine months ended September 30, 2012, respectively, resulting from the combination of our fair value analysis and the collection of notes receivable from certain guarantors for which an allowance for credit loss had been previously recorded. During the three and nine months ended September 30, 2011, we recorded an additional provision for credit losses of $4.0 million and $1.0 million, respectively, net of recoveries, based on the results of our fair value analysis. |
• | We foreclosed on nine loans (resulting in eight property additions) during the nine months ended September 30, 2012 including a golf course operation. |
• | We sold seven REO assets during the nine months ended September 30, 2012 resulting in a net gain of $0.6 million, compared to the sale of twelve assets for a $0.2 million gain during the nine months ended September 30, 2011. |
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Selected Financial Data
The following table presents select financial and operating data for the periods indicated. The summary financial data was derived from our audited and unaudited financial statements and other financial records for the periods indicated. In order to provide consistency in the Company’s financial reporting, the amounts presented for the quarterly period ended September 30, 2011 and for the annual period ended December 31, 2011 have been restated to reflect the effect of the misstatements in those periods as described in Note 2 of the accompanying financial statements under the caption “Restatement of Previously Issued Consolidated Financial Statements.” All dollar amounts are expressed in thousands, except share and per unit data.
(Unaudited) | (Unaudited) | As of and for | ||||||||||||||||||
As of and for the Three | As of and for the Nine | Ended | ||||||||||||||||||
Months Ended September 30, | Months Ended September 30, | December 31, | ||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2011 | ||||||||||||||||
Summary balance sheet items | ||||||||||||||||||||
Cash and cash equivalents | $ | 19,779 | $ | 27,670 | $ | 19,779 | $ | 27,670 | $ | 21,322 | ||||||||||
Mortgage loan principal and accrued interest outstanding | 131,241 | 297,531 | 131,241 | 297,531 | 249,873 | |||||||||||||||
Valuation allowance | (52,805 | ) | (183,503 | ) | (52,805 | ) | (183,503 | ) | (141,687 | ) | ||||||||||
Mortgage loans held for sale, net | 78,436 | 114,028 | 78,436 | 114,028 | 108,186 | |||||||||||||||
Real estate held for development, net | 42,811 | 47,227 | 42,811 | 47,227 | 47,252 | |||||||||||||||
Real estate held for sale, net | 53,998 | 31,832 | 53,998 | 31,832 | 34,644 | |||||||||||||||
Operating Properties Acquired through Foreclosure, net | 22,151 | 19,945 | 22,151 | 19,945 | 19,611 | |||||||||||||||
Total assets | 228,934 | 255,547 | 228,934 | 255,547 | 246,358 | |||||||||||||||
Debt, notes payable and special assessment obligations | 71,220 | 63,300 | 71,220 | 63,300 | 66,346 | |||||||||||||||
Total liabilities | 86,634 | 80,073 | 86,634 | 80,073 | 81,103 | |||||||||||||||
Total stockholders' equity | 142,300 | 175,474 | 142,300 | 175,474 | 165,255 | |||||||||||||||
Summary income statement | ||||||||||||||||||||
Mortgage loan income | $ | 251 | $ | 322 | $ | 849 | $ | 988 | $ | 1,327 | ||||||||||
Total revenue | 1,056 | 948 | 3,628 | 2,852 | 3,733 | |||||||||||||||
Operating expenses (excluding interest expense) | 6,790 | 6,470 | 17,455 | 19,859 | 27,327 | |||||||||||||||
Provision for (recovery of) credit losses | (1,030 | ) | 4,000 | (1,929 | ) | 1,000 | 1,000 | |||||||||||||
Impairment of real estate owned | - | - | - | 1,529 | 1,529 | |||||||||||||||
Total costs and expenses | 9,240 | 13,906 | 25,853 | 28,092 | 38,928 | |||||||||||||||
Net loss | (8,184 | ) | (12,958 | ) | (22,225 | ) | (25,240 | ) | (35,195 | ) | ||||||||||
Earnings/Distributions per share data | ||||||||||||||||||||
Basic and diluted loss per share | $ | (0.49 | ) | $ | (0.77 | ) | $ | (1.32 | ) | $ | (1.50 | ) | $ | (2.09 | ) | |||||
Dividends declared per common share | 0.02 | 0.03 | 0.07 | 0.06 | 0.09 | |||||||||||||||
Loan related items | ||||||||||||||||||||
Note balances originated | $ | - | $ | 4,500 | $ | 5,500 | $ | 7,953 | $ | 7,953 | ||||||||||
Number of notes originated | - | 1 | 2 | 3 | 3 | |||||||||||||||
Average note balance originated | N/A | 4,500 | 2,750 | 2,651 | 2,651 | |||||||||||||||
Number of loans outstanding | 12 | 29 | 12 | 29 | 21 | |||||||||||||||
Average loan carrying value | 6,536 | 3,932 | 6,536 | 3,932 | 5,152 | |||||||||||||||
% of portfolio principal – fixed interest rate | 82.9 | % | 53.1 | % | 82.9 | % | 53.1 | % | 61.8 | % | ||||||||||
% of portfolio principal – variable interest rate | 17.1 | % | 46.9 | % | 17.1 | % | 46.9 | % | 38.2 | % | ||||||||||
Weighted average interest rate – all loans | 9.0 | % | 10.8 | % | 9.0 | % | 10.8 | % | 10.48 | % | ||||||||||
Principal balance % by state: | ||||||||||||||||||||
Arizona | 79.4 | % | 78.0 | % | 79.4 | % | 78.0 | % | 79.5 | % | ||||||||||
California | 11.5 | % | 13.0 | % | 11.5 | % | 13.0 | % | 13.0 | % | ||||||||||
Texas | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||
Idaho | 0.0 | % | 1.6 | % | 0.0 | % | 1.6 | % | 0.0 | % | ||||||||||
Other | 9.1 | % | 7.4 | % | 9.1 | % | 7.4 | % | 7.5 | % | ||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Credit Quality | ||||||||||||||||||||
Extension fees included in mortgage loan principal | $ | 4,726 | $ | 14,797 | $ | 4,726 | $ | 13,068 | $ | 7,664 | ||||||||||
Interest payments over 30 days delinquent | 1,219 | 4,460 | 1,219 | 4,460 | 3,491 | |||||||||||||||
Principal balance of loans past scheduled maturity, gross | 123,752 | 151,837 | 123,752 | 151,837 | 144,405 | |||||||||||||||
Principal balance of loans past scheduled maturity, net | 70,946 | 31,921 | 70,946 | 31,921 | 36,108 | |||||||||||||||
Carrying Value of loans in non accrual status | 70,946 | 103,668 | 70,946 | 103,668 | 96,284 | |||||||||||||||
Valuation allowance | (52,805 | ) | (183,503 | ) | (52,805 | ) | (183,503 | ) | (141,687 | ) | ||||||||||
Valuation allowance as % of outstanding loan principal and interest | 40.2 | % | 61.7 | % | 40.2 | % | 61.7 | % | 56.7 | % | ||||||||||
Net Charge-offs | 275 | 42,445 | 88,882 | 111,637 | 153,453 |
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September 30, | December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Average Balance Sheets* | ||||||||||||
Cash and cash equivalents | $ | 19,817 | $ | 16,637 | $ | 2,753 | ||||||
Mortgage loans, net | 93,435 | 119,965 | 180,604 | |||||||||
Real estate owned, net | 111,098 | 99,568 | 109,026 | |||||||||
Other assets | 13,351 | 12,569 | 8,484 | |||||||||
Total assets | $ | 237,701 | $ | 248,739 | $ | 300,867 | ||||||
Total liabilities | 83,857 | 63,365 | 26,932 | |||||||||
Total stockholders' equity | 153,844 | 185,374 | 273,935 | |||||||||
Total liabilities and owners' equity | $ | 237,701 | $ | 248,739 | $ | 300,867 |
* The average balance sheets were computed using the quarterly average balances during each period presented.
Nine Months Ended | ||||||||||||
September 30, | December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Analysis of Mortgage Loan Income by Loan Classification | ||||||||||||
Pre-entitled Land: | ||||||||||||
Processing Entitlements | $ | 461 | $ | 421 | $ | 86 | ||||||
Entitled Land: | ||||||||||||
Held for Investment | - | 98 | 173 | |||||||||
Infrastructure under Construction | - | 46 | 326 | |||||||||
Improved and Held for Vertical Construction | - | - | - | |||||||||
Construction and Existing Structures: | ||||||||||||
New Structure - Construction in process | 73 | 178 | 501 | |||||||||
Existing Structure Held for Investment | 315 | 423 | 38 | |||||||||
Existing Structure- Improvements | - | 161 | 330 | |||||||||
Total Mortgage Loan Income | $ | 849 | $ | 1,327 | $ | 1,454 |
September 30, | December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Mortgage Loan Principal Balances by Loan Classification | ||||||||||||
Pre-entitled Land: | ||||||||||||
Held for Investment | $ | 4,930 | $ | 6,484 | $ | 6,100 | ||||||
Processing Entitlements | 4,500 | 75,248 | 139,452 | |||||||||
Entitled Land: | ||||||||||||
Held for Investment | 12,312 | 15,735 | 73,462 | |||||||||
Infrastructure under Construction | 7,135 | 39,397 | 55,532 | |||||||||
Improved and Held for Vertical Construction | - | 5,870 | 26,096 | |||||||||
Construction and Existing Structures: | ||||||||||||
New Structure - Construction in process | 43,513 | 45,372 | 46,808 | |||||||||
Existing Structure Held for Investment | 2,000 | 2,000 | 12,775 | |||||||||
Existing Structure- Improvements | 55,320 | 55,084 | 57,115 | |||||||||
Total Mortgage Loan Balances | 129,710 | 245,190 | 417,340 | |||||||||
Add: Accrued Interest Receivable | 1,531 | 4,683 | 8,074 | |||||||||
Less: Valuation Allowance | (52,805 | ) | (141,687 | ) | (294,140 | ) | ||||||
Mortgage Loans Held for Sale, Net | $ | 78,436 | $ | 108,186 | $ | 131,274 |
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September 30, | December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Average Mortgage Loan Principal Balances by Loan Classification** | ||||||||||||
Pre-entitled Land: | ||||||||||||
Held for Investment | $ | 6,114 | $ | 6,177 | 12,773 | |||||||
Processing Entitlements | 39,874 | 102,900 | 175,364 | |||||||||
Entitled Land: | ||||||||||||
Held for Investment | 13,562 | 35,784 | 86,466 | |||||||||
Infrastructure under Construction | 15,215 | 52,605 | 64,437 | |||||||||
Improved and Held for Vertical Construction | 2,935 | 22,073 | 40,336 | |||||||||
Construction and Existing Structures: | ||||||||||||
New Structure - Construction in process | 44,023 | 45,780 | 46,496 | |||||||||
Existing Structure Held for Investment | 3,250 | 6,681 | 14,613 | |||||||||
Existing Structure- Improvements | 55,161 | 55,452 | 57,384 | |||||||||
Total Average Mortgage Loan Balances | 180,134 | 327,452 | 497,869 | |||||||||
Add: Average Accrued Interest Receivables | 3,139 | 6,826 | 8,922 | |||||||||
Less: Average Valuation Allowance | (89,838 | ) | (214,313 | ) | (326,187 | ) | ||||||
Average Mortgage Loans Held for Sale, Net | $ | 93,435 | $ | 119,965 | $ | 180,604 |
** Amounts were computed using the quarterly average balances for each of the periods presented
September 30, | December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Average Interest Rate by Loan Classification*** | ||||||||||||
Pre-entitled Land: | ||||||||||||
Held for Investment | 8.5 | % | 7.5 | % | 9.5 | % | ||||||
Processing Entitlements | 10.5 | % | 10.1 | % | 9.4 | % | ||||||
Entitled Land: | ||||||||||||
Held for Investment | 11.6 | % | 11.9 | % | 12.6 | % | ||||||
Infrastructure under Construction | 11.3 | % | 10.8 | % | 10.6 | % | ||||||
Improved and Held for Vertical Construction | 12.3 | % | 12.4 | % | 12.3 | % | ||||||
Construction and Existing Structures: | ||||||||||||
New Structure - Construction in process | 10.7 | % | 10.0 | % | 10.4 | % | ||||||
Existing Structure Held for Investment | 12.5 | % | 12.1 | % | 12.1 | % | ||||||
Existing Structure- Improvements | 10.9 | % | 13.0 | % | 12.5 | % | ||||||
Total Overall Average Interest Rate | 11.0 | % | 11.0 | % | 11.4 | % |
***Average Interest Rate by Loan Classification were computed by taking an average balance over the trailing 5 quarters
Average Yield**** | 2012 | 2011 | 2010 | |||||||||
Pre-entitled Land: | ||||||||||||
Held for Investment | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Processing Entitlements | 1.2 | % | 0.4 | % | 0.0 | % | ||||||
Entitled Land: | ||||||||||||
Held for Investment | 0.0 | % | 0.3 | % | 0.2 | % | ||||||
Infrastructure under Construction | 0.0 | % | 0.1 | % | 0.5 | % | ||||||
Improved and Held for Vertical Construction | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Construction and Existing Structures: | ||||||||||||
New Structure - Construction in process | 0.2 | % | 0.4 | % | 1.1 | % | ||||||
Existing Structure Held for Investment | 9.7 | % | 6.3 | % | 0.3 | % | ||||||
Existing Structure- Improvements | 0.0 | % | 0.3 | % | 0.6 | % | ||||||
Overall Average Yield | 1.4 | % | 1.0 | % | 0.3 | % |
**** | Average Yield is computed using Mortgage Loan Income by Loan Classification as a percent of Average Mortgage Loan Balances by Loan Classification |
Note: Overall Average Yields have decreased due to loans being placed in non-accrual status
Nine Months Ended | ||||||||||||
Ended September 30, | Year Ended December 31 | |||||||||||
Return on Equity and Assets Ratio | 2012 | 2011 | 2010 | |||||||||
Return on assets | (9.4 | )% | (14.1 | )% | (22.1 | )% | ||||||
Return on equity | (14.4 | )% | (19.0 | )% | (24.0 | )% | ||||||
Dividend payout ratio | (5.4 | )% | (4.3 | )% | 0.0 | % | ||||||
Equity to assets ratio | 64.7 | % | 74.6 | % | 91.1 | % |
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As of and Nine | ||||||||||||||||||||
Months Ended | As of and Year Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Allocation of Valuation Allowance by Loan Classification | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | (4,476 | ) | $ | (4,865 | ) | $ | (4,695 | ) | $ | (9,623 | ) | $ | (3,242 | ) | |||||
Processing Entitlements | - | (56,634 | ) | (123,090 | ) | (134,742 | ) | (122,266 | ) | |||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | (12,661 | ) | (13,418 | ) | (67,038 | ) | (80,750 | ) | (79,279 | ) | ||||||||||
Infrastructure Under Construction | - | (29,347 | ) | (43,920 | ) | (39,441 | ) | (24,863 | ) | |||||||||||
Improved and Held for Vertical Construction | - | (2,232 | ) | (20,547 | ) | (28,696 | ) | (38,522 | ) | |||||||||||
Construction & Existing Structures: | ||||||||||||||||||||
New Structure - Construction In-Process | (34,685 | ) | (34,302 | ) | (30,293 | ) | (30,106 | ) | (28,547 | ) | ||||||||||
Existing Structure Held for Investment | - | - | (4,557 | ) | (7,070 | ) | (2,954 | ) | ||||||||||||
Existing Structure - Improvements | (983 | ) | (889 | ) | - | - | (637 | ) | ||||||||||||
Allowance for Loan Loss/ Valuation Allowance | $ | (52,805 | ) | $ | (141,687 | ) | $ | (294,140 | ) | $ | (330,428 | ) | $ | (300,310 | ) | |||||
Rollforward of Valuation Allowance by Loan Classifications | ||||||||||||||||||||
Balance at the beginning of period | $ | (141,687 | ) | $ | (294,140 | ) | $ | (330,428 | ) | $ | (300,310 | ) | $ | (1,900 | ) | |||||
Additions to Valuation Allowance | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | - | $ | (170 | ) | $ | (2,096 | ) | $ | (6,381 | ) | $ | (3,242 | ) | ||||||
Processing Entitlements | - | 5,070 | (24,647 | ) | (24,851 | ) | (120,366 | ) | ||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | (73 | ) | (7,279 | ) | (9,851 | ) | (79,279 | ) | |||||||||||
Infrastructure Under Construction | - | (1,084 | ) | (3,185 | ) | (11,990 | ) | (24,863 | ) | |||||||||||
Improved and Held for Vertical Construction | - | (542 | ) | (629 | ) | 801 | (38,522 | ) | ||||||||||||
Construction & Existing Structures: | ||||||||||||||||||||
New Structure - Construction In-Process | - | (4,119 | ) | (7,736 | ) | (3,218 | ) | (26,137 | ) | |||||||||||
Existing Structure Held for Investment | - | 807 | (1,831 | ) | (4,116 | ) | (2,954 | ) | ||||||||||||
Existing Structure - Improvements | - | (889 | ) | (51 | ) | (19,693 | ) | (637 | ) | |||||||||||
Total provision for credit losses | $ | - | $ | (1,000 | ) | $ | (47,454 | ) | $ | (79,299 | ) | $ | (296,000 | ) | ||||||
Charge-Offs (including transfers to REO from foreclosures): | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | 137 | $ | - | $ | 7,024 | $ | - | $ | - | ||||||||||
Processing Entitlements | 56,632 | 61,386 | 36,300 | 12,375 | - | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | 758 | 53,692 | 20,992 | 8,380 | - | |||||||||||||||
Infrastructure Under Construction | 29,348 | 15,658 | (1,295 | ) | (2,588 | ) | - | |||||||||||||
Improved and Held for Vertical Construction | 2,232 | 18,857 | 8,778 | 9,025 | - | |||||||||||||||
Construction & Existing Structures: | ||||||||||||||||||||
New Structure - Construction In-Process | (383 | ) | 110 | 7,548 | 1,659 | - | ||||||||||||||
Existing Structure Held for Investment | - | 3,750 | 4,344 | - | - | |||||||||||||||
Existing Structure - Improvements | (94 | ) | - | 51 | 20,330 | - | ||||||||||||||
Total Charge-Offs | $ | 88,630 | $ | 153,453 | $ | 83,742 | $ | 49,181 | $ | - | ||||||||||
Net Change in Valuation Allowance | $ | 88,630 | $ | 152,453 | $ | 36,288 | $ | (30,118 | ) | $ | (296,000 | ) | ||||||||
Other changes to Valuation Allowance | 252 | - | - | - | (2,410 | ) | ||||||||||||||
Balance at end of period | $ | (52,805 | ) | $ | (141,687 | ) | $ | (294,140 | ) | $ | (330,428 | ) | $ | (300,310 | ) | |||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 49.3 | % | 50.5 | % | 17.5 | % | 8.4 | % | 0.0 | % |
37 |
September 30, | December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Scheduled Maturities - One year or less | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | 4,930 | $ | 6,484 | $ | 6,100 | $ | 13,834 | $ | 7,178 | ||||||||||
Processing Entitlements | 4,500 | 70,749 | 139,451 | 185,609 | 195,168 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | 12,312 | 15,735 | 73,462 | 101,942 | 89,786 | |||||||||||||||
Infrastructure under Construction | 7,135 | 39,397 | 55,532 | 27,953 | 57,908 | |||||||||||||||
Improved and Held for vertical Construction | - | 5,870 | 26,096 | 47,227 | 13,904 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | 43,513 | 45,371 | 5,330 | 12,653 | 43,814 | |||||||||||||||
Existing Structure Held for Investment | 2,000 | 2,000 | 10,391 | 23,641 | 37,482 | |||||||||||||||
Existing Structure- Improvements | 55,320 | 55,084 | 3,932 | - | 97,777 | |||||||||||||||
Total Scheduled Maturities - One year or less | 129,710 | 240,690 | 320,294 | 412,859 | 543,017 | |||||||||||||||
Scheduled Maturities - One to five years | - | |||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | - | |||||||||||||||
Processing Entitlements | - | 4,500 | - | - | 5,735 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | 24,520 | |||||||||||||||
Infrastructure under Construction | - | - | - | 41,886 | - | |||||||||||||||
Improved and Held for vertical Construction | - | - | - | - | 40,582 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | - | - | 41,478 | 33,670 | - | |||||||||||||||
Existing Structure Held for Investment | - | - | 2,384 | - | - | |||||||||||||||
Existing Structure- Improvements | - | - | 53,184 | 56,033 | - | |||||||||||||||
Total Scheduled Maturities - One to five years | - | 4,500 | 97,046 | 131,589 | 70,837 | |||||||||||||||
Total Loan Principal | 129,710 | 245,190 | 417,340 | 544,448 | 613,854 | |||||||||||||||
Add: Accrued Interest Receivables | 1,531 | 4,683 | 8,074 | 12,075 | 10,509 | |||||||||||||||
Less: Valuation Allowance | (52,805 | ) | (141,687 | ) | (294,140 | ) | (330,428 | ) | (300,310 | ) | ||||||||||
Mortgage Loans Held for Sale, Net | $ | 78,436 | $ | 108,186 | $ | 131,274 | $ | 226,095 | $ | 324,053 | ||||||||||
Scheduled Maturities - One to Five Years by Interest Type | ||||||||||||||||||||
Fixed Interest Rates | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Processing Entitlements | - | 4,500 | - | - | 1,929 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | 3,500 | |||||||||||||||
Infrastructure under Construction | - | - | - | 41,884 | - | |||||||||||||||
Improved and Held for vertical Construction | - | - | - | - | 10,461 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | - | - | 41,478 | 32,054 | - | |||||||||||||||
Existing Structure Held for Investment | - | - | 2,000 | - | - | |||||||||||||||
Existing Structure- Improvements | - | - | 53,183 | 56,033 | - | |||||||||||||||
Total Scheduled Maturities - Fixed interest rate | - | 4,500 | 96,661 | 129,971 | 15,890 | |||||||||||||||
Variable Interest Rates | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | - | |||||||||||||||
Processing Entitlements | - | - | - | - | 3,807 | |||||||||||||||
Entitled Land: | - | |||||||||||||||||||
Held for Investment | - | - | - | - | 21,020 | |||||||||||||||
Infrastructure under Construction | - | - | - | - | - | |||||||||||||||
Improved and Held for vertical Construction | - | - | - | - | 30,120 | |||||||||||||||
Construction and Existing Structures: | - | |||||||||||||||||||
New Structure - Construction in process | - | - | - | 1,618 | - | |||||||||||||||
Existing Structure Held for Investment | - | - | 385 | - | - | |||||||||||||||
Existing Structure- Improvements | - | - | - | - | - | |||||||||||||||
Total Scheduled Maturities - Variable interest rate | - | - | 385 | 1,618 | 54,947 | |||||||||||||||
Total Loan Principal due One to Five Years | $ | - | $ | 4,500 | $ | 97,046 | $ | 131,589 | $ | 70,837 |
38 |
September 30, | December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Performing Loans | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Processing Entitlements | 4,500 | 4,500 | - | - | 146,460 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | 1,201 | - | 37,146 | |||||||||||||||
Infrastructure Under Construction | - | - | - | 7,645 | 40,653 | |||||||||||||||
Improved and Held for Vertical Construction | - | - | - | - | 35,102 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in Process | 534 | 719 | 2,395 | 4,805 | 6,694 | |||||||||||||||
Existing Structure Held for Investment | 2,000 | 2,000 | 2,384 | - | 23,393 | |||||||||||||||
Existing Structure - Improvements | - | - | 3,932 | - | 97,777 | |||||||||||||||
Total Performing Loans | 7,034 | 7,219 | 9,912 | 12,450 | 387,225 | |||||||||||||||
Loans in Default - Non-Accrual | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | 4,930 | 6,484 | 6,100 | 13,834 | - | |||||||||||||||
Processing Entitlements | - | 70,748 | 139,451 | 185,608 | 46,636 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | 12,312 | 15,735 | 72,261 | 101,942 | 3,300 | |||||||||||||||
Infrastructure Under Construction | 7,135 | 39,397 | 55,532 | 62,194 | 17,255 | |||||||||||||||
Improved and Held for Vertical Construction | - | 5,870 | 26,096 | 40,051 | 14,632 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in Process | 42,979 | 44,653 | 44,414 | 39,102 | 13,800 | |||||||||||||||
Existing Structure Held for Investment | - | - | 10,391 | 23,640 | - | |||||||||||||||
Existing Structure - Improvements | 55,320 | 55,084 | 53,183 | 56,033 | - | |||||||||||||||
Total Loans in Default - Non-Accrual | 122,676 | 237,971 | 407,428 | 522,404 | 95,623 | |||||||||||||||
Loans in Default - Other | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | 7,178 | |||||||||||||||
Processing Entitlements | - | - | - | - | 7,806 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | - | 73,861 | |||||||||||||||
Infrastructure under Construction | - | - | - | - | - | |||||||||||||||
Improved and Held for vertical Construction | - | - | - | 7,176 | 4,752 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | - | - | - | 2,418 | 23,320 | |||||||||||||||
Existing Structure Held for Investment | - | - | - | - | 14,089 | |||||||||||||||
Existing Structure- Improvements | - | - | - | - | - | |||||||||||||||
Total Loans in Default - Other | - | - | - | 9,594 | 131,006 | |||||||||||||||
Total Loans in Default | 122,676 | 237,971 | 407,428 | 531,998 | 226,629 | |||||||||||||||
Total Loan Principal | 129,710 | 245,190 | 417,340 | 544,448 | 613,854 | |||||||||||||||
Add: Accrued Interest Receivables | 1,531 | 4,683 | 8,074 | 12,075 | 10,509 | |||||||||||||||
Less: Valuation Allowance | (52,805 | ) | (141,687 | ) | (294,140 | ) | (330,428 | ) | (300,310 | ) | ||||||||||
Mortgage Loans Held for Sale, Net | $ | 78,436 | $ | 108,186 | $ | 131,274 | $ | 226,095 | $ | 324,053 |
39 |
Loans in Default by Basis for Default | September 30, | December 31, | ||||||||||||||||||
Loans past maturity date, or other | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | 4,930 | $ | 6,484 | $ | 6,100 | $ | 13,834 | $ | 7,178 | ||||||||||
Processing Entitlements | - | 70,748 | 139,451 | 181,801 | 52,791 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | 12,312 | 15,735 | 72,261 | 80,922 | 73,714 | |||||||||||||||
Infrastructure under Construction | 7,135 | 39,397 | 24,762 | 20,308 | 17,255 | |||||||||||||||
Improved and Held for vertical Construction | - | 5,870 | 26,096 | 17,106 | 8,923 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | 42,979 | 44,653 | 1,261 | 9,522 | 36,246 | |||||||||||||||
Existing Structure Held for Investment | - | - | 10,391 | 23,641 | 14,089 | |||||||||||||||
Existing Structure- Improvements | 55,320 | 55,084 | - | - | - | |||||||||||||||
Total past maturity date | $ | 122,676 | $ | 237,971 | $ | 280,322 | $ | 347,134 | $ | 210,196 | ||||||||||
Loans past due on interest | ||||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||
Held for Investment | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Processing Entitlements | - | - | - | 3,807 | 1,650 | |||||||||||||||
Entitled Land: | ||||||||||||||||||||
Held for Investment | - | - | - | 21,020 | 3,447 | |||||||||||||||
Infrastructure under Construction | - | - | 30,770 | 41,886 | - | |||||||||||||||
Improved and Held for vertical Construction | - | - | - | 30,120 | 10,461 | |||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||
New Structure - Construction in process | - | - | 43,153 | 31,998 | 875 | |||||||||||||||
Existing Structure Held for Investment | - | - | - | - | - | |||||||||||||||
Existing Structure- Improvements | - | - | 53,183 | 56,033 | - | |||||||||||||||
Total past due on interest | - | - | 127,106 | 184,864 | 16,433 | |||||||||||||||
Total loans in default by basis of default | $ | 122,676 | $ | 237,971 | $ | 407,428 | $ | 531,998 | $ | 226,629 |
Analysis of Changes in Mortgage Loan Income | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 Compared to 2011 | 2011 Compared to 2010 | |||||||||||||||||||||||
Increase (Decrease) due to | Increase (Decrease) due to | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
Pre-entitled Land: | ||||||||||||||||||||||||
Held for Investment | $ | (207 | ) | $ | 207 | $ | - | (433 | ) | $ | 433 | $ | - | |||||||||||
Processing Entitlements | (8,049 | ) | 8,266 | 217 | (6,277 | ) | 6,451 | 174 | ||||||||||||||||
Entitled Land: | ||||||||||||||||||||||||
Held for Investment | (3,731 | ) | 3,633 | (98 | ) | (5,610 | ) | 5,681 | 71 | |||||||||||||||
Infrastructure under Construction | (3,689 | ) | 3,654 | (35 | ) | (1,205 | ) | 925 | (280 | ) | ||||||||||||||
Improved and Held for Vertical Construction | (2,522 | ) | 2,522 | - | (2,228 | ) | 2,228 | - | ||||||||||||||||
Construction and Existing Structures: | ||||||||||||||||||||||||
New Structure - Construction in process | (297 | ) | 213 | (84 | ) | 251 | (606 | ) | (355 | ) | ||||||||||||||
Existing Structure Held for Investment | (678 | ) | 700 | 22 | (966 | ) | 1,259 | 293 | ||||||||||||||||
Existing Structure- Improvements | (184 | ) | 23 | (161 | ) | (47 | ) | 20 | (27 | ) | ||||||||||||||
Total change in mortgage loan income | $ | (19,357 | ) | $ | 19,218 | $ | (139 | ) | $ | (16,515 | ) | $ | 16,391 | $ | (124 | ) |
Changes in mortgage loan interest income are attributed to either a change in average balance (volume change) or changes in average rate (rate change) for mortgage loans on which interest is earned. Volume change is calculated as change in volume times the previous rate, while rate change is change in average rates times the previous volume. The rate/volume change, change in rate times change in volume, is allocated between volume and rate change at the ratio each bears to the absolute value of their total.
40 |
Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
Revenues | 2012 | 2011 | $ Change | % Change | 2012 | 2011 | $ Change | % Change | ||||||||||||||||||||||||
Mortgage Loan Income | 251 | 322 | (71 | ) | (22.0 | )% | $ | 849 | $ | 988 | $ | (139 | ) | (14.1 | )% | |||||||||||||||||
Rental Income | 363 | 442 | (79 | ) | (17.9 | )% | 1,170 | 1,381 | (211 | ) | (15.3 | )% | ||||||||||||||||||||
Investment and Other Income | 442 | 184 | 258 | 140.2 | % | 1,609 | 483 | 1,126 | 233.1 | % | ||||||||||||||||||||||
Total Revenue | $ | 1,056 | $ | 948 | $ | 108 | 11.4 | % | $ | 3,628 | $ | 2,852 | $ | 776 | 27.2 | % |
Mortgage Loan Income.
During the three months ended September 30, 2012 and 2011, income from mortgage loans remained relatively consistent at $0.3 million. During the nine months ended September 30, 2012 and 2011, income from mortgage loans was $0.8 million and $1.0 million, respectively, a decrease of $0.1 million, or 14.1%. The year-over-year decrease in mortgage loan income for the period is attributable to the decrease in the income-earning portion of our loan portfolio. While the total loan portfolio outstanding principal was $129.7 million at September 30, 2012, the income-earning asset balance was $7.0 million with a weighted average interest rate of 12.5%, as compared to outstanding principal of $291.0 million at September 30, 2011, and an income-earning asset balance of $8.9 million with a weighted average interest rate of 10.1%. As of September 30, 2012, nine of our 12 loans were in default and non-accrual status, as compared to 23 out of our 29 loans at September 30, 2011. As such, in the absence of acquiring or originating new loans, we anticipate mortgage income to remain at minimal levels in future periods until such time that we are able to generate sufficient liquidity to re-commence lending activities at a meaningful level.
Mortgage loan originations during the nine months ended September 30, 2012 have been limited to partial financings in connection with the sale of REO assets. During the nine months ended September 30, 2012, we financed two new loans with an aggregate principal balance of $5.5 million and interest rates ranging from 12.0 to 12.5%.
Rental Income.
During the three months ended September 30, 2012 and 2011, we recognized rental income of $0.4 million. During the nine months ended September 30, 2012, we recognized rental income of $1.2 million and $1.4 million in the corresponding period in 2011, a decrease of $0.2 million or 15.3%. The decrease in rental income is attributed to a settlement of a dispute with the anchor tenant of our medical office building which resulted in certain rental concessions being granted to the anchor tenant.
Investment and Other Income.
Investment and other income is comprised of interest earned on certain notes receivable from a tenant of one of our operating properties, fees earned from our management of the SWI Fund, and commencing in March 2012, golf, spa and food and beverage revenue from a golf course operation acquired through foreclosure. During the three months ended September 30, 2012, investment and other income was $0.4 million, an increase of $0.3 million from $0.2 million for the three months ended September 30, 2011. During the nine months ended September 30, 2012, investment and other income was $1.6 million, an increase of $1.1 million from $0.5 million for the nine months ended September 30, 2011. The increase is primarily attributable to the revenue derived from the golf course and food and beverage operation acquired through foreclosure in March 2012. These increases were offset by a decrease in interest income on a tenant note receivable resulting from principal paydowns since the prior year.
41 |
Expenses (dollars in thousands) | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
Expenses: | 2012 | 2011 | $ Change | % Change | 2012 | 2011 | $ Change | % Change | ||||||||||||||||||||||||
Property Taxes for REO | $ | 792 | $ | 749 | $ | 43 | 5.7 | % | $ | 2,011 | $ | 2,323 | $ | (312 | ) | (13.4 | )% | |||||||||||||||
Other Operating Expenses for REO | 1,742 | 725 | 1,017 | 140.3 | % | 3,839 | 1,913 | 1,926 | 100.7 | % | ||||||||||||||||||||||
Professional Fees | 1,636 | 2,106 | (470 | ) | (22.3 | )% | 3,430 | 5,241 | (1,811 | ) | (34.6 | )% | ||||||||||||||||||||
Default and Related Expenses | 243 | 345 | (102 | ) | (29.6 | )% | 821 | 863 | (42 | ) | (4.9 | )% | ||||||||||||||||||||
General and Administrative Expenses | 1,406 | 1,846 | (440 | ) | (23.8 | )% | 4,403 | 7,681 | (3,278 | ) | (42.7 | )% | ||||||||||||||||||||
Organizational and Offering Costs | - | - | - | - | - | 509 | (509 | ) | (100.0 | )% | ||||||||||||||||||||||
Interest Expense | 3,480 | 3,436 | 44 | 1.3 | % | 10,327 | 5,704 | 4,623 | 81.0 | % | ||||||||||||||||||||||
Depreciation and Amortization Expense | 490 | 450 | 40 | 8.9 | % | 2,076 | 1,359 | 717 | 52.8 | % | ||||||||||||||||||||||
Loss (Gain) on Disposal of Assets | (368 | ) | 58 | (426 | ) | (734.5 | )% | (591 | ) | (221 | ) | (370 | ) | 167.4 | % | |||||||||||||||||
Settlement and Relating Costs | 849 | 191 | 658 | 344.5 | % | 1,466 | 191 | 1,275 | 667.5 | % | ||||||||||||||||||||||
Provision for (Recovery of) Credit Losses | (1,030 | ) | 4,000 | (5,030 | ) | (125.8 | )% | (1,929 | ) | 1,000 | (2,929 | ) | (292.9 | )% | ||||||||||||||||||
Impairment of REO | - | - | - | - | - | 1,529 | (1,529 | ) | (100.0 | )% | ||||||||||||||||||||||
Total Costs and Expenses | $ | 9,240 | $ | 13,906 | $ | (4,666 | ) | (33.6 | )% | $ | 25,853 | $ | 28,092 | $ | (2,239 | ) | (8.0 | )% |
Property Taxes for REO.
During the three months ended September 30, 2012 and 2011, property tax expense was $0.8 million and $0.7 million, respectively, an increase of 5.7%. During the nine months ended September 30, 2012 and 2011, property tax expense was $2.0 million and $2.3 million, respectively, a decrease of $0.3 million or 13.4%. The year over year decrease for the nine month period is attributed to the foreclosure of nine loans in 2012, offset by the sale of certain REO properties and the payment of past due property taxes resulting in lower penalties. We expect such costs and expenses to increase as we continue to exercise remedies on loans in default and to decrease as we dispose of real estate owned.
Other Operating Expenses for REO.
Other operating expenses for REO include home owner association dues, utilities, repairs and maintenance, and other expenses attributable to such properties, as well as costs pertaining to operating properties. During the three months ended September 30, 2012 and 2011, other operating expenses for REO assets was $1.7 million and $0.7 million, respectively, an increase of $1.0 million or 140.3%. During the nine months ended September 30, 2012 and 2011, other operating expenses for REO assets was $3.8 million and $1.9 million, respectively, an increase of $1.9 million or 100.7%. The increase is primarily attributed to the foreclosure of new operating properties offset by a decrease in certain REO operating expenses resulting from asset sales. Specifically, $2.1 million was incurred by the golf course and food and beverage operation foreclosed in March 2012, as previously described. We expect such costs and expenses to increase as we continue to exercise remedies on loans in default and as activities of operating properties increase, and to decrease as we dispose of real estate owned.
Professional Fees.
During the three months ended September 30, 2012 and 2011, professional fees were $1.6 million and $2.1 million, respectively, a decrease of $0.5 million or 22.3%. During the nine months ended September 30, 2012 and 2011, professional fees were $3.4 million and $5.2 million, respectively, a decrease of $1.8 million or 34.6%. The overall decrease in professional fees for the nine month period is attributed to a settlement reached with a previous legal vendor that reduced the outstanding liability with the vendor. This was offset by increases in professional fees to ITH Partners and NWRA in accordance with the related consulting agreements which commenced late in first and second quarters of 2011.
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Default and Related Expenses.
During the three months ended September 30, 2012 and 2011, default and related expenses were $0.2 million and $0.3 million, respectively, a decrease of $0.1 million or 29.6%. During the nine months ended September 30, 2012 and 2011, default and related expenses were $0.8 million and $0.9 million, respectively, a decrease of 4.9%. The change in expense pertains directly to the number of defaults and foreclosures experienced by us in 2012 and 2011 during the respective periods, and our enforcement against related guarantors.
General and Administrative Expenses.
During the three months ended September 30, 2012 and 2011, general and administrative expenses totaled $1.4 million and $1.8 million, respectively, a decrease of $0.4 million or 23.8%. During the nine months ended September 30, 2012 and 2011, general and administrative expenses totaled $4.4 million and $7.7 million, respectively, a decrease of $3.3 million or 42.7%. The decrease in general and administrative costs is attributed to non-recurring expenses recorded during the nine months ended September 30, 2011 in connection with the separation of our former CEO, including costs totaling $1.2 million under the terms of his separation agreement, as well as a non-cash charge of $1.2 million for the excess of the amount paid by an affiliate of NW Capital for the purchase of the common shares owned by the former CEO over the deemed fair value of the stock as determined by an independent valuation firm which was recorded as compensation expense. In addition, we recorded $0.8 million in operating costs during the period ended September 30, 2011 relating to Infinet, which was abandoned effective December 31, 2011. Also, our rent expense decreased by approximately $0.2 million during the nine month period ended September 30, 2012 compared to the 2011 period as a result of our exit of a previous office lease in the second quarter of 2012.
Organizational and Offering Costs.
During the nine months ended September 30, 2011, we incurred organizational costs of $0.3 million relating to the start-up of Infinet, an exploratory business venture and our wholly-owned subsidiary. This venture was abandoned effective December 31, 2011. In addition, wrote-off offering costs incurred totaling $0.2 million during the nine months ended September 31, 2011 relating to our potential initial public offering. No such costs were incurred during the period ended September 30, 2012.
Interest Expense.
Interest expense includes interest incurred in connection with the NW Capital loan and borrowings from various other lenders. During the three months ended September 30, 2012, interest expense was $3.5 million as compared to $3.4 million for the same period in 2011, an increase of $44,000 or 1.3%. During the nine months ended September 30, 2012, interest expense was $10.3 million as compared to $5.7 million for the same period in 2011, an increase of $4.6 million or 81.0%. The increase in interest expense reflects interest incurred on the $50.0 million NW Capital loan which closed in June 2011, as well as the amortization of the related deferred financing costs. In addition, the increase is attributed in part to the additional CFD and special assessment obligations that are now recorded as our liabilities as of December 31, 2011.
Depreciation and Amortization Expense.
During the three months ended September 30, 2012 and 2011, depreciation and amortization expenses were $0.5 million for each period. During the nine months ended September 30, 2012 and 2011, depreciation and amortization expenses were $2.1 million and $1.4 million, respectively, an increase of $0.7 million or 52.8%. The increase is attributed to accelerated amortization on certain leasehold improvements abandoned in the second quarter of 2012, as well as depreciation recorded on operating property assets acquired through foreclosure in March 2012.
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Gain on Disposal of Assets.
During the three months ended September 30, 2012, gain on the disposal of assets totaled $0.4 million compared to a loss of $58,000 in the 2011 period, an improvement of $0.4 million. During the nine months ended September 30, 2012 and 2011, gain on the disposal of assets totaled $0.6 million and $0.2 million, respectively, an increase of $0.4 million. During the nine months ended September 30, 2012, we sold seven REO assets for $17.0 million (net of selling costs) resulting in a net gain of approximately $0.6 million. During the nine months ended September 30, 2011, we sold eight REO assets for $6.0 million (net of selling costs) resulting in a net gain of approximately $0.3 million which was offset by a $0.1 million loss on the sale of three loan assets.
Settlement and Related Costs.
As described in note 11 of the accompanying condensed consolidated financial statements, various disputes arose relating to the consent solicitation/prospectus used in connection with seeking member approval of the Conversion Transactions, and we were named in various lawsuits containing allegations and claims that fiduciary duties owed to Fund members and to the Fund were breached for various reasons. The claims were consolidated into the putative class action lawsuit captioned In re IMH Secured Loan Fund Unitholders Litigation pending in the Court of Chancery in the State of Delaware against us, certain affiliated and predecessor entities, and certain former and current of our officers and directors (“Fund Litigation”).
On January 31, 2012, we reached a tentative settlement in principle to resolve all claims asserted by the plaintiffs in the Fund Litigation, other than the claims of one plaintiff which were separately settled. The tentative settlement in principle, memorialized in a Memorandum of Understanding (“MOU”) previously filed with our 8-K dated February 6, 2012, is subject to certain class certification conditions, confirmatory discovery and final court approval (including a fairness hearing). The MOU contemplates a full release and settlement of all claims, other than the claims of the one non-settling plaintiff (against whom we are litigating separately), against us and the other defendants in connection with the claims made in the Fund Litigation. We have expended significant Company resources in our defense of the Fund Litigation in current and prior years. Due to the significance of the anticipated settlement and related costs, we have separately identified such costs in the accompanying consolidated statement of operations. Such amounts consist primarily of legal, accounting and other professional fees incurred in connection with the settlement proposal, including costs surrounding the proposed Rights Offering and Exchange Offering. During the three months ended September 30, 2012 and 2011, we recorded settlement related costs of $0.8 million and $0.2 million, respectively. During the nine months ended September 30, 2012 and 2011, we recorded settlement related costs of $1.5 million and $0.2 million, respectively. However, we have not included any other adjustments relating to the potential repurchase of stock in exchange for the issuance of convertible notes because the matter is still subject to the approval of the court (which is not assured) and because of the uncertainty of timing and of the GAAP based “fair value” determination of such securities as of the date of settlement. At the time that these amounts are estimable, we will record the appropriate amounts resulting from the resolution of this matter. We expect settlement and related costs to increase for additional professional fees and at the time that we are able to reasonably estimate the net settlement amount.
Provisions for Credit Losses and Impairment of REO.
Based on the valuation analysis performed on our loan and REO portfolio during the three and nine months ended September 30, 2012, we recorded for a recovery of credit losses of $0.3 million on our loan portfolio and no impairment in the valuation of REO. In addition, we recorded an additional recovery of credit losses of $0.7 million and $1.6 million during the three and nine months ended September 30, 2012, respectively, relating to the collection of notes receivable from certain guarantors for which an allowance for credit loss had been previously recorded. During the three and nine months ended September 30, 2011, we recorded a provision for credit losses of $4.0 million and $1.0 million, respectively, net of recoveries, as well as an REO impairment charge in the amount of $1.5 million.
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Loan Originations, Loan Types, Borrowers, the Underwriting Process and Loan Monitoring
Lending Activities
As of September 30, 2012, our loan portfolio consisted of 12 first lien mortgage loans with a carrying value of $78.4 million. In comparison, as of December 31, 2011, our loan portfolio consisted of 21 first mortgage loans with a carrying value of $108.2 million. Given the non-performing status of the majority of the loan portfolio and the suspension of significant lending activities, there continued to be limited loan activity during the nine months ended September 30, 2012. Except for the origination of two loans totaling $5.5 million relating to the financing of a portion of the sale of certain REO assets, no other new loans were originated during the nine months ended September 30, 2012. Similarly, we originated only three loans during the same period in 2011 totaling $8.0 million relating to the partial financing of the sale of certain REO and loan assets. As of September 30, 2012 and December 31, 2011, the valuation allowance represented 40.2% and 56.7%, respectively, of the total outstanding loan principal and interest balances.
Lien Priority
Historically, all mortgage loans have been collateralized by first deeds of trust (mortgages) on real property, and generally include a personal guarantee by the principals of the borrower. Often the loans are secured by additional collateral. However, as of September 30, 2012, there was an outstanding third-party loan totaling $17.8 million secured by a portion of our collateral that was superior to our lien position on one of our loans with an outstanding principal and accrued interest balance of $51.9 million. As of December 31, 2011, we had subordinated two first lien mortgages to third-party lenders in the amount of $20.4 million. While subordinations of our first lien positions are not expected to be a common occurrence in the future, we may find it necessary to do so in an effort to maximize the opportunity for recovery of our investment.
Changes in the Loan Portfolio Profile
Average Loan Size
At September 30, 2012, the average principal balance for our loans was $10.8 million, as compared to $11.7 million at December 31, 2011. The decrease in average note balance is a result of the foreclosure of certain higher balance loans during the nine months ended September 30, 2012.
Geographic Diversification
At September 30, 2012, our mortgage loans consist of loans where the primary collateral is located in Arizona, California and Utah. The concentration of our loan portfolio in Arizona and California, markets in which values have been severely impacted by the decline in the real estate market, totals 90.9% and 92.5% at September 30, 2012 and December 31, 2011, respectively. The change in the geographic diversification of our loans is primarily attributed to the foreclosure and transfer of such loans to REO assets. There has been no other material change in our geographical diversification or concentrations since December 31, 2011.
While our geographic concentration has been focused primarily in the southwestern United States, we expect to further diversify our investments geographically if attractive opportunities arise when we recommence lending activities.
See “Note 3 – Mortgage Investments, Loan Participations and Loan Sales” in the accompanying condensed consolidated financial statements and Item 2. - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Data" for additional information regarding the geographic diversification of our mortgage investment portfolio.
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Interest Rate Information
Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to the Prime rate with interest rate floors. At September 30, 2012 and December 31, 2011, respectively, the Prime rate was 3.25% per annum.
Despite these interest rates, the majority of our existing loans are in non-accrual status. As of September 30, 2012, we had three performing loans with an average outstanding principal balance of $2.3 million and a weighted average interest rate of 12.5%. At December 31, 2011, three of our 21 portfolio loans were performing and had an average principal balance of $2.4 million and a weighted average interest rate of 10.6%. For additional discussion regarding the impact of pro forma increases or decreases in the Prime rate, see “Quantitative and Qualitative Disclosures About Market Risk” located in our previously filed Form 10-K.
See “Note 3 – Mortgage Investments, Loan Participations and Loan Sales” in the accompanying condensed consolidated financial statements and Item 2. - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Data" for additional information regarding interest rates for our loan portfolio.
Loan and Borrower Attributes
Our existing borrowers generally consist of land developers, homebuilders, commercial property developers and real estate investors, while the collateral supporting our loans generally consists of fee simple real estate zoned for residential, commercial or industrial use. We also classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. With our suspension of the funding of new loans, the concentration of our current portfolio loans by development status and expected end-use of the underlying collateral has not changed materially, and is not expect to change materially, until we begin making new mortgage and other real estate investments.
As of September 30, 2012, the original projected end-use of the collateral under our loans was comprised of 55.2% residential, 3.8% mixed-use and 41.0% commercial. As of December 31, 2011, the original projected end-use of the collateral under our loans was comprised of 46.5% residential, 31.4% mixed-use, 21.7% commercial and the balance for industrial. Changes in classifications are primarily a result of foreclosures of certain loans, unless loans are modified and additional loan amounts advanced to allow a borrower’s project to progress to the next phase of the project’s development.
At September 30, 2012, the entire balance of the valuation allowance was attributable to residential-related projects. At December 31, 2011, approximately 60% of the valuation allowance was attributable to residential-related projects and 40% to mixed-use projects.
See “Note 3 – Mortgage Investments, Loan Participations and Loan Sales” in the accompanying condensed consolidated financial statements and Item 2. - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Data" for additional information regarding the classification of our loan portfolio.
Changes in the Portfolio Profile — Scheduled Maturities
The outstanding principal balance and accrued interest receivable of mortgage loans, net of the valuation allowance, as of September 30, 2012, have scheduled maturity dates within the next several quarters as follows (dollars in thousands):
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September 30, 2012 | ||||||||||||
Quarter | # | Principal and Interest Amount | Percent | |||||||||
Matured | 9 | $ | 123,752 | 94.3 | % | |||||||
Q1 2013 | 1 | 539 | 0.4 | % | ||||||||
Q2 2013 | 1 | 2,020 | 1.5 | % | ||||||||
Q3 2013 | 1 | 4,930 | 3.8 | % | ||||||||
Total | 12 | 131,241 | 100.0 | % | ||||||||
Less: Valuation Allowance | (52,805 | ) | ||||||||||
Net Carrying Value | $ | 78,436 |
Of the total of matured loans as of September 30, 2012, approximately 12.8% matured in the year ended December 31, 2008, 76.7% matured in the year ended December 31, 2009, 7.3% matured in the year ended December 31, 2010, 3.1% matured in the year ended December 31, 2011 and 0.1% matured during the nine months ended September 30, 2012.
From time to time, we may extend a mortgage loan’s maturity date in the normal course of business. In this regard, we have modified certain loans, extending maturity dates in some cases to two or more years, and we expect we will modify additional loans in the future in an effort to seek to preserve our collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, we classify and report the loan as matured.
Operating Properties and Real Estate Held for Development or Sale
A discussion and summary of Operating Properties and REO held for development or sale as of September 30, 2012 is presented in Note 4 of the accompanying financial statements under the heading entitled “Operating Properties and Real Estate Held for Development or Sale”.
During the nine months ended September 30, 2012, we foreclosed on nine loans (resulting in eight property additions) with net carrying values totaling $29.9 million. In addition, during the nine months ended September 30, 2012, we sold seven REO assets for $17.0 million (net of selling costs), of which we financed $5.5 million, for a gain of $0.6 million.
Important Relationships Between Capital Resources and Results of Operations
Summary of Existing Loans in Default
At September 30, 2012, there were nine loans in default with a net carrying value of $70.9 million, as compared to 18 loans with a carrying value of $96.3 million at December 31, 2011. Of the 18 loans that were in default at December 31, 2011, nine of these loans remained in default status as of September 30, 2012, and nine such loans with a net carrying value of $29.9 million were foreclosed upon during the nine months ended September 30, 2012.
See “Note 3 – Mortgage Investments, Loan Participations and Loan Sales” in the accompanying condensed consolidated financial statements and Item 2. - "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Data" for additional information regarding the classification of our loan portfolio.
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Valuation Allowance and Fair Value Measurement of Loans and Real Estate Held for Sale
A discussion of our valuation allowance, fair value measurement, valuation categories and summaries of the procedures performed in connection with our fair value analysis as of September 30, 2012, is presented in Note 5 of the accompanying financial statements. Based on the results of our evaluation and analysis, we recorded a recovery of credit losses of $0.3 million for loans and no impairment charges for our REO assets during the nine months ended September 30, 2012. In addition, we recorded an additional recovery of credit losses of $0.7 million and $1.6 million during the three and nine months ended September 30, 2012, respectively, relating to the collection of notes receivable from certain guarantors for which an allowance for credit loss had been previously recorded. During the three and nine months ended September 30, 2011, we recorded a provision for credit losses of $4.0 million and $1.0 million, respectively, net of recoveries. In addition, we recorded an REO impairment charge in the amount of $1.5 million during the nine months ended September 30, 2011.
Leverage to Enhance Yields
During the three and nine months ended September 30, 2012, we entered into a note payable with a bank in the amount of $850,000 in connection with the acquisition of certain land situated adjacent to another property owned by us. The note payable is secured by the land purchased, bears interest at the annual rate of 4% and matures in September 2015. The note requires interest only payments through September 2013, with principal and interest payments commencing in October 2013 through maturity. We did not undertake any other borrowing activities during the nine months ended September 30, 2012. However, we may deem it beneficial, if not necessary, to employ additional leverage in the future. See “Note 6 – Debt and Notes Payable” in the accompanying condensed consolidated financial statements for additional information regarding our outstanding indebtedness.
Off-Balance Sheet Arrangements
Upon the initial funding of loans, we typically establish a reserve for future interest payments which is deposited into a controlled disbursement account in the name of the borrower for our benefit. These accounts, which are held in the name of the borrowers, are not included in our condensed consolidated balance sheets. However, as of September 30, 2012, there were no such amounts outstanding and we did not have any other off-balance sheet arrangements.
Liquidity and Capital Resources
We require liquidity and capital resources for various financial needs, including to acquire and originate our target assets, as well as for cost, expenses and general working capital needs, including, maintenance and development costs for REO assets, general and administrative operating costs, management fees and loan enforcement costs, interest expense on participations and loans, repayment of principal on borrowings, payment of outstanding property taxes and other liabilities and costs.
At September 30, 2012, we had cash and cash equivalents of $19.8 million, as well as loans held for sale totaling $78.4 million and REO held for sale of $54.0 million. These items comprise our primary sources of liquidity and we believe they are sufficient to cover our liquidity needs over the next twelve months. However, there is no assurance that we will be successful in selling existing real estate assets in a timely manner or in obtaining additional financing, if needed, to sufficiently fund future operations or to implement our investment strategy. Further, each sale requires the approval of the holders of our convertible notes payable. Our failure to generate sustainable earning assets and successfully liquidate a sufficient number of our loans and real estate assets, including receiving approval from our lender of such liquidations, may have a further material adverse effect on our business, results of operations and financial position.
Our requirements for and sources of liquidity and capital resources are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our requirements for liquidity from those described in our previously filed annual report on Form 10-K as of and for the nine months ended September 30, 2012.
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Cash Flows
Cash Used In Operating Activities
Cash used in operating activities was $16.1 million for the nine months ended September 30, 2012 as compared to $18.4 million for the nine months ended September 30, 2011. Cash flows from operating activities includes proceeds from the cash generated from interest and other mortgage income from our loan portfolio, offset by amounts paid for property taxes and other operating costs for REO assets, professional fees, general and administrative expenses and other expenses, as well as interest on our notes payable. The decrease in cash used in operating activities for the nine months ended September 30, 2012 compared to the 2011 period is attributable to the lower payments for various operating activities coupled with higher collections of receivables.
Cash Provided By Investing Activities
Net cash provided by investing activities was $16.0 million for the nine months ended September 30, 2012 compared to $13.7 million for the comparable 2011 period. Net cash provided by investing activities increased primarily due to higher proceeds from the sale and recoveries of REO assets and loans coupled with higher mortgage loan repayments and lower mortgage fundings.
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities was $1.5 million for the nine months ended September 30, 2012 as compared to net cash provided by financing activities of $31.6 million for the nine months ended September 30, 2011. The 2011 period reflects the net proceeds from NW Capital notes payable, net of related debt issuance costs.
Critical Accounting Policies
Our critical accounting policies are disclosed in our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2011. As of September 30, 2012, there has been no significant change in our critical accounting policies from December 31, 2011, except as disclosed in Note 2 of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements that are applicable to us, see Note 2 to our unaudited condensed consolidated financial statements included with this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our quantitative and qualitative disclosures about market risk are disclosed in our previously filed Annual Report on Form 10-K for the year ended December 31, 2011. As of September 30, 2012, there has been no significant changes in our market risks from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
Interest Rate Risk
Because over 94% of the principal balances of our loans are in non-accrual status as of September 30, 2012, changes in weighted average interest rates for our loan portfolio have little impact on interest income.
The following table contains information about our mortgage loan principal and accrued interest receivable balances as of September 30, 2012, presented separately for fixed and variable rates and the calendar quarters in which such mortgage investments mature (in thousands).
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Loan Rates: | Matured | Q1 2013 | Q2 2013 | Q3 2013 | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Variable | $ | 21,918 | $ | 539 | $ | - | $ | - | $ | 22,457 | ||||||||||
Fixed | 101,834 | - | 2,020 | 4,930 | 108,784 | |||||||||||||||
$ | 123,752 | $ | 539 | $ | 2,020 | $ | 4,930 | 131,241 | ||||||||||||
Less: Valuation Allowance | (52,805 | ) | ||||||||||||||||||
Net Carrying Value | $ | 78,436 |
As of September 30, 2012, we had cash and cash equivalents totaling $19.8 million (or 8.6% of total assets), all of which were held in bank accounts or highly liquid money market accounts or short-term certificates of deposit. We have historically targeted between 3% and 5% of our portfolio balances to be held as a working capital reserve. However, our actual deployment ratio of cash may vary in the future depending on a variety of factors, including the timing and amount of debt or capital raised, contractual restrictions and the timing and amount of investments made. We believe that these financial assets do not give rise to significant interest rate risk due to their short-term nature.
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Item 4. Controls and Procedures
Controls and Procedures
Our management has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-Q.
Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2012 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes to Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In designing and evaluating our disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in designing and evaluating the controls and procedures. We regularly review and document our disclosure controls and procedures, and we are in the process of refining our internal control over financial reporting, and may from time to time make appropriate changes aimed at enhancing their effectiveness and ensure that our systems evolve with our business.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The status of our legal proceedings is provided in Note 11 – “Commitments and Contingencies – Legal Matters” of the accompanying condensed consolidated financial statements and is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A, “Risk Factors,” in our previously filed Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or results of operations. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not applicable
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Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits
Exhibit
No. | Description | |
31.1 | Certification of Chief Executive Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer and the Chief Financial Officer of IMH Financial Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, 2012 | IMH FINANCIAL CORPORATION | |
By: | /s/ Steven Darak | |
Steven Darak | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer and | ||
Duly Authorized Officer) |
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INDEX TO EXHIBITS
No. | Description | |
31.1 | Certification of Chief Executive Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer of IMH Financial Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Chief Executive Officer and the Chief Financial Officer of IMH Financial Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Exhibit 31.1
CERTIFICATION
I, William Meris, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 of IMH Financial Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2012 | |
/s/ William Meris | |
William Meris | |
Chief Executive Officer, | |
IMH Financial Corporation |
EXHIBIT 31.2
CERTIFICATION
I, Steven Darak, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 of IMH Financial Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 14, 2012 | /s/ Steven Darak |
Steven Darak | |
Chief Financial Officer, | |
IMH Financial Corporation |
EXHIBIT 32.1
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 IMH Financial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned, each hereby certify, to the best of our knowledge, that:
(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. |
IMH Financial Corporation | |
By: | /s/ William Meris |
William Meris | |
Chief Executive Officer | |
By: | /s/ Steven Darak |
Steven Darak | |
Chief Financial Officer | |
Dated: | November 14, 2012 |
DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS (Details2) (USD $)
In Thousands, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Year | ||
Total | $ 71,220 | $ 66,346 |
Cfd Obligation [Member]
|
||
Year | ||
2012 | 114 | |
2013 | 369 | |
2014 | 390 | |
2015 | 411 | |
2016 | 435 | |
Thereafter | 4,312 | |
Total | $ 6,031 |
OPERATING PROPERTIES AND REAL ESTATE HELD FOR DEVELOPMENT OR SALE (Details Textual) (USD $)
|
9 Months Ended | |||||
---|---|---|---|---|---|---|
Sep. 30, 2012
Loans
|
Sep. 30, 2011
Loans
|
Dec. 31, 2011
|
||||
Real Estate Acquired Through Foreclosure | $ 118,960,000 | $ 101,507,000 | [1] | |||
Mortgage Loans On Real Estate Foreclosure Number Of Property Additions | 8 | |||||
Mortgage Loans On Real Estate Carrying Amount Of Collateral | 29,900,000 | |||||
Proceeds from Sale of Foreclosed Assets | 17,000,000 | 6,100,000 | ||||
Mortgage Loans on Real Estate, Face Amount of Mortgages | 5,500,000 | |||||
Gain Loss On Disposal Of Foreclosed Real Estate Owned | 200,000 | 300,000 | ||||
Notes Payable and Special Assessment Obligations | 71,220,000 | 66,346,000 | ||||
Tenant Deposits and Funds Held for Others | 479,000 | 744,000 | [1] | |||
Mortgage Loans On Real Estate Number Of Foreclosed Loans Sold | 6 | 5 | ||||
Real Estate Held for Development and Sale | 5,900,000 | |||||
Estimated Real Estate Development Cost | 51,000,000 | |||||
Loan Required For Real Estate Development | 45,000,000 | |||||
Pre-Development Services Fee | 150,000 | |||||
Development Services Fee Description | a development services fee equal to 3.0% of the total project cost less $3.3 million | |||||
Post Development Services Fee Description | The post-development services fee will consist of a profit participation upon sale of the project ranging from 7% to 10% of the profit, depending the amount and timing of project completion and sale. Alternatively, if the project is not sold, the post-development services fee will based on the fair market value of the project as of the date not earlier than 15 months following the achievement of 90% occupancy for the project. | |||||
Recognized Gain [Member]
|
||||||
Tenant Deposits and Funds Held for Others | 100,000 | |||||
Deferred Gain [Member]
|
||||||
Tenant Deposits and Funds Held for Others | 600,000 | |||||
Cfd Obligation [Member]
|
||||||
Real Estate Acquired Through Foreclosure | 6,000,000 | |||||
Notes Payable and Special Assessment Obligations | 6,031,000 | |||||
Defaulted Notes Payable [Member]
|
||||||
Notes Payable and Special Assessment Obligations | 5,200,000 | |||||
Held For Development [Member]
|
||||||
Real Estate Acquired Through Foreclosure | 42,811,000 | 47,252,000 | [1] | |||
Held For Development [Member] | Cross Acceleration Of Debt Default [Member]
|
||||||
Real Estate Acquired Through Foreclosure | 4,900,000 | |||||
Held For Sale [Member]
|
||||||
Real Estate Acquired Through Foreclosure | 53,998,000 | 34,644,000 | [1] | |||
Operating Properties [Member]
|
||||||
Real Estate Acquired Through Foreclosure | 22,151,000 | 19,611,000 | [1] | |||
Transfer From Held For Development To Held For Sale [Member]
|
||||||
Real Estate Acquired Through Foreclosure | $ 9,300,000 | |||||
|
BUSINESS, BASIS OF PRESENTATION AND LIQUIDITY (Details Textual) (USD $)
|
9 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Dec. 31, 2011
|
Dec. 31, 2010
|
Sep. 30, 2012
Held For Sale [Member]
|
Dec. 31, 2011
Held For Sale [Member]
|
Jun. 07, 2011
Convertible Senior Notes Payable [Member]
|
Jun. 07, 2011
Convertible Senior Notes Payable [Member]
Nwra Ventures I Llc [Member]
|
|||||
Accumulated Deficit | $ (582,975,000) | $ (560,750,000) | [1] | |||||||||
Real Estate Acquired Through Foreclosure | 118,960,000 | 101,507,000 | [1] | 53,998,000 | 34,644,000 | [1] | ||||||
Debt Instrument, Face Amount | 50,000,000 | 50,000,000 | ||||||||||
Loans Held-for-sale, Mortgages | 78,400,000 | |||||||||||
Proceeds from Collection of Other Loans Held-for-sale | 11,500,000 | |||||||||||
Proceeds from Collection of Mortgage Loans Held-for-sale | 7,283,000 | 5,801,000 | ||||||||||
Cash and Cash Equivalents | $ 19,779,000 | $ 27,670,000 | $ 21,322,000 | [1] | $ 831,000 | |||||||
|
RELATED PARTY TRANSACTIONS (Details Textual) (USD $)
|
3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 6 Months Ended | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
New World Realty Advisors Llc [Member]
|
Sep. 30, 2011
New World Realty Advisors Llc [Member]
|
Sep. 30, 2012
New World Realty Advisors Llc [Member]
|
Sep. 30, 2011
New World Realty Advisors Llc [Member]
|
Sep. 30, 2012
Cost Of Sales Legacy Fee [Member]
|
Sep. 30, 2011
Cost Of Sales Legacy Fee [Member]
|
Sep. 30, 2012
Cost Of Sales Legacy Fee [Member]
New World Realty Advisors Llc [Member]
|
|
Non Contingent Monthly Consulting Fee | $ 125,000 | ||||||||||
Percentage Of Legacy Assets Performance Fee (in percentage) | 10.00% | ||||||||||
Management Fee, Amount Paid | 0 | 0 | 0 | 0 | 400,000 | 400,000 | 1,100,000 | 900,000 | |||
Gains (Losses) On Sales Of Investment Real Estate | 368,000 | (58,000) | 591,000 | 221,000 | 300,000 | 100,000 | 100,000 | ||||
Legacy Assets Performance Fee | $ 100,000 | $ 100,000 |
DEBT, NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS (Details) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended | |||||
---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Dec. 31, 2011
Scenario, Previously Reported [Member]
|
Sep. 30, 2012
Cfd Obligation [Member]
|
Sep. 30, 2012
Cfd Obligation [Member]
Restatement Adjustment [Member]
|
Dec. 31, 2011
Cfd Obligation [Member]
Restatement Adjustment [Member]
|
|
Beginning balance | $ 66,346 | $ 60,315 | $ 6,031 | $ 6,000 | $ 6,031 | |
Additions: | ||||||
Issuance of bank note | 850 | |||||
Deferred Interest on Convertible Notes Payable | 2,131 | 0 | ||||
Accretion of discount | 1,893 | 392 | ||||
Ending balance | $ 71,220 | $ 60,315 | $ 6,031 | $ 6,000 | $ 6,031 |
MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
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Mortgage Loans On Real Estate [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage Loans on Real Estate, by Loan Disclosure [Text Block] | NOTE 3 – MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES
Lien Priority
Except in limited circumstances, our mortgage loans are collateralized by first deeds of trust (mortgages) on real property and generally include a personal guarantee by the principals of the borrower and, often times, the loans are secured by additional collateral. However, as of September 30, 2012, there was an outstanding third-party loan totaling $17.8 million secured by a portion of our collateral that was superior to our lien position on one of our loans with an outstanding principal and accrued interest balance of $51.9 million. As of December 31, 2011, we had subordinated two first lien mortgages to third-party lenders in the amount of $20.4 million.
Lending Activities
Given the non-performing status of the majority of the loan portfolio, there has been limited loan activity during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, we originated two loans in the amount of $5.5 million relating to the financing of a portion of the sale of certain REO assets. At September 30, 2012, the average principal balance for our 12 loans was $10.8 million, as compared to $11.7 million for our 21 loans at December 31, 2011. A roll-forward of loan activity during the nine months ended September 30, 2012 is as follows (in thousands):
As of September 30, 2012, we had three performing loans with an average outstanding principal balance of $2.3 million and a weighted average interest rate of 12.5%. As of September 30, 2012 and December 31, 2011, the valuation allowance represented 40.2% and 56.7%, respectively, of the total outstanding loan principal and interest balances.
Loan Maturities
The outstanding principal and interest receivable balances of our mortgage loans, net of the valuation allowance, as of September 30, 2012, have scheduled maturity dates within the next several quarters, as follows (dollars in thousands) :
Given the non-performing status of the majority of the loan portfolio, the sustained depression of real estate values and lack of available takeout financing, we do not expect the payoffs to materialize in the respective quarters. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect our collateral, maximize our return or generate additional liquidity. During the nine months ended September 30, 2012, we extended the maturity date for one loan by twelve months. The modification did not result in forgiveness of interest or principal, but the interest rate on that loan was increased from 11% to 14%.
Loans in Default
We continue to experience loan defaults as a result of depressed real estate market conditions and lack of takeout financing in the marketplace. A summary and roll-forward of activity of loans in default through September 30, 2012 is as follows (dollars in thousands):
Of the 18 loans that were in default at December 31, 2011, nine of these loans remained in default status as of September 30, 2012, and nine such loans with a net carrying value of $29.9 million were foreclosed upon during the nine months ended September 30, 2012. The valuation allowance transferred to real estate owned is treated as a charge-off at the time of foreclosure.
We are currently exercising enforcement action which we believe could lead to foreclosure upon eight of the nine loans in default at September 30, 2012. We are continuing to work with the borrower with respect to the remaining one loan in default in order to seek to maintain the entitlements on the related project and, thus, the value of our existing collateral. With respect to the loans upon which we are exercising enforcement action, while we expect to complete the foreclosure process on the majority of such loans over the next six to nine months, the timing of foreclosure on these loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, our ability to negotiate a deed-in-lieu of foreclosure and other factors.
At September 30, 2012, all loans in default were also in non-accrual status. In addition, as of September 30, 2012 and December 31, 2011, interest receivable recorded on such loans prior to being placed in non-accrual status totaled $1.1 million and $4.8 million, respectively, and is included in mortgage loans held for sale on the accompanying condensed consolidated balance sheet.
No interest income was recognized on non-accrual loans on a cash or accrual basis during the three or nine months ended September 30, 2012 or 2011. In addition, borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2011 and any such changes are primarily a result of foreclosures. |