Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               .

 

Commission File Number: 1-14100

 

IMPAC MORTGAGE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

33-0675505

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

19500 Jamboree Road, Irvine, California 92612

(Address of principal executive offices)

 

(949) 475-3600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)  Yes o No x

 

There were 10,322,602 shares of common stock outstanding as of  November 4, 2015.

 

 

 



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

2

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

3

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)

4

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

31

 

 

 

 

Forward-Looking Statements

31

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

31

 

Selected Financial Results

32

 

Status of Operations

32

 

Liquidity and Capital Resources

37

 

Critical Accounting Policies

38

 

Financial Condition and Results of Operations

40

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

60

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

60

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

61

 

 

 

ITEM 1A.

RISK FACTORS

61

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

61

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

61

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

62

 

 

 

ITEM 5.

OTHER INFORMATION

62

 

 

 

ITEM 6.

EXHIBITS

62

 

 

 

 

SIGNATURES

63

 

 

 

 

CERTIFICATIONS

 

 

1



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.                CONSOLIDATED FINANCIAL STATEMENTS

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

10,509

 

$

10,073

 

Restricted cash

 

5,829

 

2,420

 

Mortgage loans held-for-sale

 

460,808

 

239,391

 

Finance receivables

 

41,334

 

8,358

 

Mortgage servicing rights

 

63,281

 

24,418

 

Securitized mortgage trust assets

 

4,814,798

 

5,268,531

 

Goodwill

 

104,938

 

352

 

Intangible assets, net

 

31,024

 

 

Deferred tax asset, net

 

24,420

 

 

Other assets

 

37,942

 

25,029

 

Total assets

 

$

5,594,883

 

$

5,578,572

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Warehouse borrowings

 

$

477,673

 

$

226,718

 

Short-term debt

 

 

6,000

 

Term financing

 

30,000

 

 

Convertible notes

 

45,000

 

20,000

 

Contingent consideration

 

68,792

 

 

Long-term debt

 

31,663

 

22,122

 

Securitized mortgage trust liabilities

 

4,799,024

 

5,251,307

 

Other liabilities

 

39,816

 

27,469

 

Total liabilities

 

5,491,968

 

5,553,616

 

 

 

 

 

 

 

Commitments and contingencies (See Note 16)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Series A-1 junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued or outstanding

 

 

 

Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $16,640; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

7

 

7

 

Series C 9.125% redeemable preferred stock, $0.01 par value; liquidation value $35,127; 5,500,000 shares authorized; 1,405,086 noncumulative shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

14

 

14

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 10,291,653 and 9,588,532 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

 

103

 

96

 

Additional paid-in capital

 

1,097,436

 

1,089,574

 

Net accumulated deficit:

 

 

 

 

 

Cumulative dividends declared

 

(822,520

)

(822,520

)

Retained deficit

 

(172,125

)

(242,215

)

Net accumulated deficit

 

(994,645

)

(1,064,735

)

Total stockholders’ equity

 

102,915

 

24,956

 

Total liabilities and stockholders’ equity

 

$

5,594,883

 

$

5,578,572

 

 

See accompanying notes to unaudited consolidated financial statements

 

2



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

Gain on sale of loans, net

 

$

47,274

 

$

8,602

 

$

133,018

 

$

19,468

 

Real estate services fees, net

 

2,775

 

3,243

 

7,872

 

11,282

 

Servicing income, net

 

2,432

 

913

 

4,083

 

3,773

 

Loss on mortgage servicing rights

 

(4,818

)

(998

)

(14,176

)

(3,540

)

Other

 

(11

)

197

 

283

 

1,703

 

Total revenues

 

47,652

 

11,957

 

131,080

 

32,686

 

Expenses:

 

 

 

 

 

 

 

 

 

Personnel expense

 

21,315

 

9,062

 

56,883

 

27,841

 

Business promotion

 

10,735

 

252

 

19,628

 

1,020

 

General, administrative and other

 

7,100

 

4,376

 

20,479

 

14,260

 

Accretion of contingent consideration

 

2,424

 

 

5,471

 

 

Change in fair value of contingent consideration

 

(16,897

)

 

(28,223

)

 

Total expenses

 

24,677

 

13,690

 

74,238

 

43,121

 

Operating income (loss):

 

22,975

 

(1,733

)

56,842

 

(10,435

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

70,301

 

79,631

 

210,177

 

220,613

 

Interest expense

 

(70,182

)

(78,884

)

(208,042

)

(220,275

)

Change in fair value of long-term debt

 

 

 

(8,661

)

(424

)

Change in fair value of net trust assets, including trust REO (losses) gains

 

(3,004

)

92

 

(3,078

)

7,841

 

Total other income (expense)

 

(2,885

)

839

 

(9,604

)

7,755

 

Earnings (loss) before income taxes

 

20,090

 

(894

)

47,238

 

(2,680

)

Income tax expense (benefit)

 

781

 

307

 

(22,852

)

1,405

 

Net earnings (loss)

 

$

19,309

 

$

(1,201

)

$

70,090

 

$

(4,085

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share :

 

 

 

 

 

 

 

 

 

Basic

 

$

1.89

 

$

(0.13

)

$

7.00

 

$

(0.44

)

Diluted

 

$

1.48

 

$

(0.13

)

$

5.61

 

$

(0.44

)

 

See accompanying notes to unaudited consolidated financial statements

 

3



Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net earnings (loss)

 

$

70,090

 

$

(4,085

)

Loss (gain) on sale of mortgage servicing rights

 

6,193

 

(1,388

)

Change in fair value of mortgage servicing rights

 

7,983

 

4,928

 

Gain on sale of AmeriHome

 

 

(1,208

)

Gain on sale of mortgage loans

 

(115,578

)

(15,826

)

Change in fair value of mortgage loans held-for-sale

 

(9,030

)

(5,103

)

Change in fair value of derivatives lending, net

 

(8,755

)

(170

)

Provision for repurchases

 

340

 

1,602

 

Origination of mortgage loans held-for-sale

 

(7,319,723

)

(1,737,217

)

Sale and principal reduction on mortgage loans held-for-sale

 

7,146,796

 

1,635,569

 

Losses (gains) from REO

 

4,899

 

(8,977

)

Change in fair value of net trust assets, excluding REO

 

(4,977

)

(2,786

)

Change in fair value of long-term debt

 

8,661

 

424

 

Accretion of interest income and expense

 

111,400

 

137,087

 

Amortization of intangible and other assets

 

2,384

 

 

Accretion of contingent consideration

 

5,471

 

 

Change in fair value of contingent consideration

 

(28,223

)

 

Amortization of debt issuance costs and discount on note payable

 

248

 

31

 

Stock-based compensation

 

1,076

 

1,377

 

Impairment of deferred charge

 

1,054

 

 

Change in deferred tax assets

 

(24,420

)

 

Change in REO impairment reserve

 

1,655

 

6,243

 

Net change in restricted cash

 

(3,409

)

(396

)

Net change in other assets and liabilities

 

8,647

 

(5,601

)

Net cash (used in) provided by operating activities

 

(137,218

)

4,504

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Net change in securitized mortgage collateral

 

479,565

 

452,046

 

Proceeds from the sale of mortgage servicing rights

 

23,079

 

28,665

 

Finance receivable advances to customers

 

(523,005

)

(37,872

)

Repayments of finance receivables

 

490,029

 

33,538

 

Net change in mortgages held-for-investment

 

46

 

6

 

Purchase of premises and equipment

 

93

 

(18

)

Net principal change on investment securities available-for-sale

 

83

 

64

 

Acquisition of CashCall Mortgage

 

(5,000

)

 

Payment of acquisition related contingent consideration

 

(32,423

)

 

Proceeds from the sale of REO

 

24,210

 

27,666

 

Proceeds from the sale of AmeriHome

 

 

10,200

 

Net cash provided by investing activities

 

456,677

 

514,295

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Issuance of convertible notes

 

25,000

 

 

Issuance of term financing

 

30,000

 

 

Repayment of warehouse borrowings

 

(6,884,047

)

(1,560,956

)

Borrowings under warehouse agreement

 

7,135,002

 

1,662,692

 

Repayment of line of credit

 

(11,000

)

(23,250

)

Borrowings under line of credit

 

7,000

 

20,250

 

Repayment of short-term borrowing

 

(15,000

)

 

Short-term borrowing

 

15,000

 

 

Repayment of securitized mortgage borrowings

 

(614,505

)

(613,708

)

Principal payments on short-term debt

 

(6,000

)

 

Principal payments on capital lease

 

(616

)

(552

)

Capitalized debt issuance costs

 

(500

)

 

Proceeds from exercise of stock options

 

643

 

33

 

Net cash used in financing activities

 

(319,023

)

(515,491

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

436

 

3,308

 

Cash and cash equivalents at beginning of period

 

10,073

 

9,969

 

Cash and cash equivalents at end of period

 

$

10,509

 

$

13,277

 

 

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For the Nine Months

 

 

 

Ended September 30,

 

 

 

2015

 

2014

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Transfer of securitized mortgage collateral to real estate owned

 

$

30,307

 

$

23,510

 

Mortgage servicing rights retained from loan sales and issuance of mortgage backed securities

 

76,119

 

17,238

 

Acquisition related goodwill asset related to CashCall

 

104,586

 

 

Acquisition related intangible assets related to CashCall

 

33,122

 

 

Acquisition related contingent consideration liability related to CashCall

 

124,592

 

 

Common stock issued related to CashCall acquisition

 

6,150

 

 

Acquisition of equipment purchased through capital leases

 

413

 

573

 

Common stock issued upon legal settlement

 

 

3,449

 

 

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share data or as otherwise indicated)

 

Note 1.—Summary of Business and Financial Statement Presentation

 

Business Summary

 

Impac Mortgage Holdings, Inc. (the Company or IMH) is a Maryland corporation incorporated in August 1995 and has the following wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets) and Impac Funding Corporation (IFC).

 

In the first quarter of 2015, the Company settled its repurchase liability with Fannie Mae (FNMA) related to its legacy non-conforming mortgage operations.  As a result of this settlement and previous resolution of other legal matters pertaining to the legacy non-conforming mortgage operations, the Company determined the legacy non-conforming mortgage operations previously reported as discontinued operations is no longer significant for reporting purposes.

 

The Company’s operations include the mortgage lending operations and real estate services conducted by IRES and IMC and the long-term mortgage portfolio (residual interests in securitizations reflected as net trust assets and liabilities in the consolidated balance sheets) conducted by IMH.  Beginning in the first quarter of 2015, the mortgage lending operations include the activities of the CashCall Mortgage operations (CCM)( See Note 2. — Acquisition of CashCall Mortgage. )

 

Financial Statement Presentation

 

The accompanying unaudited consolidated financial statements of IMH and its subsidiaries (as defined above) have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These interim period condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the United States Securities and Exchange Commission (SEC).

 

All significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation.

 

Management has made a number of material estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with GAAP. Material estimates subject to change include the fair value estimates of assets acquired and liabilities assumed in the acquisition of CCM as discussed in Note 2. — Acquisition of CashCall Mortgage.  Additionally, other items affected by such estimates and assumptions include the valuation of trust assets and trust liabilities, contingencies, the estimated obligation of repurchase liabilities related to sold loans, the valuation of long-term debt, mortgage servicing rights, mortgage loans held-for-sale and interest rate lock commitments. Actual results could differ from those estimates and assumptions.

 

Recent Accounting Pronouncements

 

In January 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). ASU 2015-01 addresses the elimination from U.S. GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. This amended guidance will prohibit separate disclosure of extraordinary items in the income statement. This amendment is effective for years, and interim periods within those years, beginning after December 15, 2015. Entities may apply the amendment prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the year of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

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Table of Contents

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. For public business entities, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Entities should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, entities are required to comply with the applicable disclosures for a change in an accounting principle. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In May 2015, the FASB issued ASU 2015-08, “‘Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” ASU 2015-08 amends various SEC paragraphs included in the FASB’s Accounting Standards Codification to reflect the issuance of Staff Accounting Bulletin No. 115 (“SAB 115”). SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletins series and brings existing guidance into conformity with ASU 2014-17, “Business Combinations (Topic 805): Pushdown Accounting,” which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company has adopted the amendments in ASU 2015-08, effective immediately, as the amendments in the update are effective upon issuance. The adoption did not have an impact on the Consolidated Financial Statements.

 

In June 2015, the Financial Accounting Standards Board issued ASU 2015-10, “Technical Corrections and Improvements.” ASU 2015-10 amends various SEC paragraphs to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. This ASU is effective for fiscal years and interim periods beginning on or after December 15, 2015, with early adoption permitted. The Company does not expect the guidance in this ASU to have a material impact on our consolidated financial statements and related disclosures.

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805), which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, with earlier application permitted for financial statements that have not been issued.  The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

Note 2.—Acquisition of CashCall Mortgage

 

On January 6, 2015, the Company entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with CashCall, Inc. (CashCall), an unrelated entity, pursuant to which the Company agreed to purchase certain assets of CashCall’s residential mortgage operations. Upon closing, which occurred on March 31, 2015, CashCall’s mortgage operations began to operate as a separate division of IMC under the name CashCall Mortgage (CCM).

 

Pursuant to the Asset Purchase Agreement, and subject to the terms and conditions contained therein, the purchase price consists of a fixed component and a contingent component. The fixed component includes (i) the aggregate payment of $10 million in cash, payable in installments through January 2016 and (ii) 494,017 newly issued unregistered shares of the Company. The contingent component consists of a three year earn-out provision beginning on the effective date (January 2, 2015) of 100% of pre-tax net earnings of CCM for January and February of 2015, 65% of the pre-tax net earnings for the next 10 months of 2015, 55% of pre-tax net earnings for the second year and 45% of pre-tax net earnings for the third year.

 

If, during the four years following January 2, 2015, the Company sells all or substantially all of its assets or the assets of CCM, the division of IMC, or a person acquires 50% or more of the securities of the Company or IMC, then the Company will pay additional contingent consideration, subject to adjustment, to CashCall of 15% of the enterprise value (as defined in the Asset Purchase Agreement) in excess of $200 million plus an additional 5% of the enterprise value in excess of $500 million (Business Appreciation Rights).

 

During the nine months ended September 30, 2015, consideration paid to CashCall, Inc. included $5.0 million cash and 494,017 shares of common stock of the Company (issued April 1, 2015) valued at $6.2 million, pursuant to the fixed component of the Asset Purchase Agreement and $33.0 million pursuant to the earn-out provision.

 

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The table below presents the purchase price allocation of the estimated acquisition date fair values of assets acquired and the liabilities assumed as of March 31, 2015.

 

Consideration paid:

 

 

 

Cash

 

$

5,000

 

IMH common stock

 

6,150

 

Deferred payments

 

5,000

 

Contingent consideration (1)

 

124,592

 

 

 

$

140,742

 

 

 

 

 

Assets acquired:

 

 

 

Trademark

 

$

17,251

 

Customer list

 

10,170

 

Non-compete agreement

 

5,701

 

Fixed assets and software

 

3,034

 

Total assets acquired

 

36,156

 

 

 

 

 

Liabilities assumed:

 

 

 

Total liabilities assumed

 

 

 

 

 

 

Total assets

 

$

36,156

 

 

 

 

 

Goodwill

 

$

104,586

 

 


(1)         Included within the contingent consideration is $1.4 million of Business Appreciation Rights, as defined above.

 

The CCM acquisition was accounted for under the acquisition method of accounting pursuant to FASB Accounting Standards Codification (ASC) 805, Business Combinations.  The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date.  The Company made significant estimates and exercised significant judgment in estimating fair values of the acquired assets and assumed liabilities.  The application of the acquisition method of accounting resulted in tax deductible goodwill of $104.6 million.  The acquisition closed on March 31, 2015; however, the effective date of the transaction was January 2, 2015.  From the effective date to the date of the close, IMC was entitled to and recognized the net earnings of the loans originated by CCM.  Acquisition related costs of $0.3 million were expensed as incurred.  The expenses were comprised primarily of legal and professional fees.

 

Unaudited Pro Forma Results of Operations

 

The following table presents unaudited pro forma results of operations for the periods presented as if the CCM acquisition had been completed on January 1, 2014.  The unaudited pro forma results of operations include the historical accounts of the Company and CCM and pro forma adjustments, including the amortization of intangibles with definite lives, depreciation of fixed assets, accretion of discount on contingent consideration and elimination of commissions and loan due diligence costs of IMC.  The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of the future operating results or operating results that would have occurred had the CCM acquisition been completed at the beginning of 2014.  No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues

 

$

47,652

 

$

28,403

 

$

149,480

 

$

70,156

 

Other (expense) income

 

(2,885

)

1,121

 

(9,394

)

8,552

 

Expenses

 

(28,864

)

(34,887

)

(106,707

)

(102,643

)

Pretax net earnings (loss)

 

$

15,903

 

$

(5,363

)

$

33,379

 

$

(23,935

)

 

For the three and nine months ended September 30, 2015, revenues from CCM were $30.3 million and $109.9 million, respectively.  For the three and nine months ended September 30, 2015, expenses from operations were $22.4 million and $62.5 million, respectively.  During the first quarter of 2015 prior to the close of the acquisition, expenses related to CCM were included in gain on sale of loans, net in the consolidated statements of operations.

 

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Table of Contents

 

Note 3.—Mortgage Loans Held-for-Sale

 

A summary of the unpaid principal balance (UPB) of mortgage loans held-for-sale by type is presented below:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Government (1)

 

$

180,508

 

$

156,385

 

Conventional (2)

 

241,404

 

72,553

 

Other (3)

 

19,413

 

 

Fair value adjustment (4)

 

19,483

 

10,453

 

Total mortgage loans held-for-sale

 

$

460,808

 

$

239,391

 

 


(1)         Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).

(2)         Includes loans eligible for sale to Fannie Mae and Freddie Mac.

(3)         Includes ALT-QM and Jumbo loans.

(4)         Changes in fair value are included in the statements of operations.

 

Gain on mortgage loans held-for-sale (LHFS) is comprised of the following for the three and nine months ended September 30, 2015 and 2014:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Gain on sale of mortgage loans

 

$

59,753

 

$

29,593

 

$

179,894

 

$

62,420

 

Premium from servicing retained loan sales

 

23,384

 

8,913

 

76,119

 

17,237

 

Unrealized gains from derivative financial instruments

 

955

 

84

 

8,754

 

170

 

Realized losses from derivative financial instruments

 

(6,747

)

(2,436

)

(8,453

)

(8,579

)

Mark to market gain on LHFS

 

6,678

 

2,294

 

9,030

 

5,103

 

Direct origination expenses, net

 

(37,729

)

(28,989

)

(131,986

)

(55,281

)

Recovery (provision) for repurchases

 

980

 

(857

)

(340

)

(1,602

)

Total gain on sale of loans, net

 

$

47,274

 

$

8,602

 

$

133,018

 

$

19,468

 

 

Note 4.—Mortgage Servicing Rights

 

The Company retains mortgage servicing rights (MSRs) from its sales of certain mortgage loans. MSRs are reported at fair value based on the income derived from the net projected cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the UPB of the loans. The servicing fees are collected from the monthly payments made by the mortgagors or when the underlying real estate is foreclosed upon and liquidated. The Company may receive other remuneration from rights to various mortgagor-contracted fees such as late charges, collateral reconveyance charges, nonsufficient fund fees and the Company is generally entitled to retain the interest earned on funds held pending remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments.

 

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Table of Contents

 

The following table summarizes the activity of MSRs for the nine months ended September 30, 2015 and year ended December 31, 2014:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Balance at beginning of period

 

$

24,418

 

$

35,981

 

Additions from servicing retained loan sales

 

76,119

 

29,388

 

Reductions from bulk sales

 

(29,273

)

(27,276

)

Reduction from sale of AmeriHome

 

 

(7,446

)

Changes in fair value (1)

 

(7,983

)

(6,229

)

Fair value of MSRs at end of period

 

$

63,281

 

$

24,418

 

 


(1)         Changes in fair value are included within loss on mortgage servicing rights in the consolidated statements of operations.

 

At September 30, 2015 and December 31, 2014, the outstanding principal balance of the mortgage servicing portfolio was comprised of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Government insured

 

$

1,259,647

 

$

926,502

 

Conventional (1)

 

4,770,257

 

1,333,853

 

Alt-QM

 

58,134

 

6,731

 

Total loans serviced

 

$

6,088,038

 

$

2,267,086

 

 


(1)         Approximately $3.4 billion of FNMA servicing has been pledged as collateral as part of the Term Financing. ( See Note 7. — Term Financing. )

 

The table below illustrates hypothetical changes in fair values of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value.  See Note 12.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.

 

Mortgage Servicing Rights Sensitivity Analysis

 

September 30,
2015

 

 

 

 

 

Fair value of MSRs

 

$

63,281

 

 

 

 

 

Prepayment Speed:

 

 

 

Decrease in fair value from 100 basis point (bp) adverse change

 

(2,307

)

Decrease in fair value from 200 bp adverse change

 

(4,486

)

 

 

 

 

Discount Rate:

 

 

 

Decrease in fair value from 100 bp adverse change

 

(2,288

)

Decrease in fair value from 200 bp adverse change

 

(4,422

)

 

Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes in assumptions to changes in fair value may not be linear.  Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas a change in one factor may result in changes to another.  Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.  As a result, actual future changes in MSR values may differ significantly from those displayed above.

 

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Table of Contents

 

Loss on mortgage servicing rights is comprised of the following for the three and nine months ended September 30, 2015 and 2014:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

(Loss) gain on sale of mortgage servicing rights

 

$

(471

)

$

207

 

$

(6,193

)

$

1,388

 

Change in fair value of mortgage servicing rights

 

(4,347

)

(1,205

)

(7,983

)

(4,928

)

Loss on mortgage servicing rights

 

$

(4,818

)

$

(998

)

$

(14,176

)

$

(3,540

)

 

During the three months ended September 30, 2015, the Company recorded a $471 thousand loss on sale of mortgage servicing rights related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods.

 

The following is a summary of certain components of servicing income, net as reported in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Contractual servicing fees

 

$

3,014

 

$

1,228

 

$

5,702

 

$

4,885

 

Late and ancillary fees

 

33

 

28

 

91

 

107

 

 

Note 5.—Goodwill and Intangible assets

 

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired.  Other intangible assets with definite lives include trademarks, customer relationships, and non-compete agreements. In the first quarter of 2015, the Company acquired CCM and recorded $104.6 million of goodwill and intangible assets of $33.1 million, consisting of $17.3 million for trademark, $10.2 million for customer relationships and $5.7 million for a non-compete agreement with the former owner of CCM. The purchase price allocation was prepared with the assistance of a third party valuation firm.

 

Goodwill, trademarks and other intangible assets are tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. The carrying value of these intangible assets could be impaired if a significant adverse change in the use, life, or brand strategy of the asset is determined, or if a significant adverse change in the legal and regulatory environment, business or competitive climate occurs that would adversely impact the asset.

 

Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization but are instead tested for impairment no less than annually.  Impairment exists when the carrying value of goodwill exceeds its implied fair value.  An impairment loss, if any, is measured as the excess of carrying value of the goodwill over the implied fair value of the goodwill and would be recorded in other expense in the consolidated statements of operations.  Intangible assets with definite lives are amortized over their estimated lives using an amortization method that reflects the pattern in which the economic benefits of the asset are consumed.

 

For goodwill, the determination of fair value of a reporting unit involves, among other things, application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate. Goodwill is considered a Level 3 nonrecurring fair value measurement.

 

The methodology used to determine the fair value of trademarks includes assumptions with inherent uncertainty, including projected sales volumes and related projected revenues, long-term growth rates, royalty rates that a market participant might assume and judgments regarding the factors to develop an applied discount rate. The carrying value of intangible assets is at risk of impairment if future projected revenues or long-term growth rates are lower than those currently projected, or if factors used in the development of a discount rate result in the application of a higher discount rate.  The intangible assets are considered Level 3 nonrecurring fair value measurements.

 

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Table of Contents

 

The following table presents the changes in the carrying amount of goodwill for the period indicated:

 

Balance at December 31, 2014

 

$

352

 

Addition from CCM acquisition

 

104,586

 

Balance at September 30, 2015

 

$

104,938

 

 

As part of the acquisition of CCM, the purchase price of the intangible assets the Company acquired are listed below:

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

 

 

Amount

 

Amortization

 

Amount

 

Remaining Life

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trademark

 

$

17,251

 

$

(585

)

$

16,666

 

14.3

 

Customer relationships

 

10,170

 

(753

)

9,417

 

6.3

 

Non-compete agreement

 

5,701

 

(760

)

4,941

 

3.3

 

Total intangible assets acquired

 

$

33,122

 

$

(2,098

)

$

31,024

 

 

 

 

As part of the acquisition of CCM, the purchase price of other assets the Company acquired are listed below:

 

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

 

 

Amount

 

Amortization

 

Amount

 

Remaining Life

 

Other assets:

 

 

 

 

 

 

 

 

 

Developed software

 

$

2,719

 

$

(286

)

$

2,433

 

4.3

 

 

Note 6.—Warehouse Borrowings

 

The Company, through its subsidiaries, enters into Master Repurchase Agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund, and are secured by, residential mortgage loans that are held for sale. In accordance with the terms of the Master Repurchase Agreements, the Company is required to maintain cash balances with the lender as additional collateral for the borrowings which are included in restricted cash in the accompanying consolidated balance sheets.  In August and September 2015, the Company was not in compliance with certain financial covenants and received waivers.

 

The following table presents certain information on warehouse borrowings and related accrued interest for the periods indicated:

 

 

 

Maximum

 

Balance Outstanding At

 

 

 

Borrowing
Capacity

 

September 30,
2015

 

December 31,
2014

 

Short-term borrowings:

 

 

 

 

 

 

 

Repurchase agreement 1

 

$

150,000

 

$

64,534

 

$

64,907

 

Repurchase agreement 2

 

50,000

 

18,369

 

30,523

 

Repurchase agreement 3 (1)

 

 

 

24,012

 

Repurchase agreement 4 (2)

 

225,000

 

111,501

 

107,276

 

Repurchase agreement 5

 

150,000

 

139,266

 

 

Repurchase agreement 6 (3)

 

100,000

 

144,003

 

 

Total warehouse borrowings

 

$

675,000

 

$

477,673

 

$

226,718

 

 


(1)         This line expired in April, 2015 and the Company replaced it with a $100.0 million facility, Repurchase agreement 6.

(2)         As of September 30, 2015, $41.3 million is attributable to financing facility advances made to the Company’s warehouse customers.

(3)         In September 2015, the lender granted the Company a temporary increase in the maximum borrowing capacity to $150.0 million.

 

Note 7.—Term Financing

 

In June 2015, the Company and its subsidiaries, (IRES, IMC and Impac Warehouse Lending, Inc. (IWLI), collectively the (Borrowers)) entered into a Loan Agreement (Loan Agreement) with a lender (Lender) pursuant to which the Lender provided to the Borrowers a term loan in the aggregate principal amount of $30.0 million (Term Financing) due and payable on December 19, 2016, which may extend to December 18, 2017 at the Lender’s discretion.  In connection with the Term Financing, the Borrowers issued to the Lender a Term Note dated June 19, 2015.  The Lender may in its discretion make additional advances in an aggregate amount not to exceed $50.0 million (including amounts then outstanding).

 

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Table of Contents

 

The proceeds from the Term Financing were used to pay off the working capital line of credit with a national bank (approximately $4.0 million) and amounts under an existing master repurchase agreement with the Lender (approximately $3.2 million).   The Borrowers also paid the Lender an origination fee of $300 thousand.

 

Interest on the Term Financing is payable monthly and accrues at a rate of LIBOR plus 8.5% per annum.  Amounts under the Term Financing may be prepaid at any time without penalty or premium, provided, however, that any prepayments made within nine months of the closing date will be subject to, with certain exceptions, a prepayment premium equal to 50% of the then applicable interest rate multiplied by the amount of the prepayment.  The Borrowers are subject to mandatory prepayment on the Term Financing based on a borrowing base formula that includes amounts under outstanding warehouse facilities, market value of mortgage servicing rights and residual securities and certain mortgage loans.

 

The obligations of the Borrowers under the Loan Agreement are secured by assets and a pledge of all of the capital stock of the operating subsidiaries IRES, IMC and IWLI pursuant to a Security Agreement dated as of June 19, 2015 between the Borrowers and the Lender (Security Agreement).  As part of the Loan Agreement the Company received an acknowledgement agreement from FNMA to pledge the mortgage servicing rights associated with FNMA production as collateral.

 

The Term Financing is subject to customary affirmative and negative covenants of the Borrowers.    Upon an event of default, all outstanding amounts under the Term Financing may become immediately due and payable.  An event of default also occurs upon a change of control, which means acquisition of more than 25% of the common stock of the Company, more than 50% of the common stock of any other Borrower, or the ability to elect a majority of such Borrower’s directors or an event that triggers a violation of a change of control provision in any of the Borrowers’ warehouse facilities.

 

Note 8.—Convertible Notes

 

In April 2013, the Company entered into a Note Purchase Agreement with the purchasers named therein, whereby the Company issued $20.0 million in original aggregate principal amount of Convertible Promissory Notes Due 2018 (2013 Convertible Notes). Note holders may convert all or a portion of the outstanding principal amount of the Convertible Notes to shares of IMH common stock at a rate of $10.875 per share, subject to adjustment for stock splits and dividends.  The Company has the right to force a conversion if the stock price of IMH common stock reaches $16.31 for 20 trading days in a 30 day consecutive period. The 2013 Convertible Notes mature on or before April 30, 2018 and accrue interest at a rate of 7.5% per annum, to be paid quarterly.  Even though the Company is currently entitled to force a conversion of the note to common stock, if the Company forces conversion, it is required to prepay the interest due through April 2016.  Accordingly, the Company has elected not to force conversion at this time.

 

On May 8, 2015, the Company issued an additional $25.0 million Convertible Promissory Notes (2015 Convertible Notes). The 2015 Convertible Notes mature on or before May 9, 2020 and accrue interest at a rate of 7.5% per annum, to be paid quarterly.  Note holders may convert all or a portion of the outstanding principal amount of the 2015 Convertible Notes to shares of IMH common stock at a rate of $21.50 per share, subject to adjustment for stock splits and dividends.  The Company has the right to force a conversion if the stock price of IMH common stock reaches $30.10 for 20 trading days in a 30 day consecutive period.

 

Note 9.—Line of Credit Agreement

 

The Company had a $4.0 million working capital line of credit agreement with a national bank that had an  interest rate at a variable rate of one-month LIBOR plus 3.50%. The line of credit was unsecured. Under the terms of the agreement, the Company and its subsidiaries were required to maintain various financial and other covenants. As previously discussed, in June 2015, the Company used approximately $4.0 million of the proceeds from the Term Financing to fully satisfy the remaining amount due on the line of credit agreement and terminated the line.  At December 31, 2014, the outstanding balance under the line of credit was $4.0 million and was included in other liabilities on the consolidated balance sheets.

 

Note 10.—Short-Term Debt

 

Structured Debt

 

In December 2014, the Company entered into a $6.0 million short-term structured debt agreement using eight of the Company’s residual interests (net trust assets) as collateral. The Company received proceeds of $6.0 million and had transaction costs of approximately $60 thousand. The agreement had an interest rate of LIBOR plus 5.75% per annum, had a final repurchase date of June 29, 2015 and the Company had the right to repurchase the securities without penalty prior to the final repurchase date.  As previously discussed, in June 2015,  the Company used approximately $3.2 million of the proceeds from the Term Financing to satisfy fully the remaining amount due on the short-term structured debt agreement and the residuals held as collateral have been released to the Company.

 

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Table of Contents

 

Promissory Note

 

On April 27, 2015, the Company issued a $10.0 million short-term Promissory Note with an interest rate of 15% to the former owner of CCM. The balance was repaid in May 2015.

 

Note 11.—Securitized Mortgage Trusts

 

Trust Assets

 

Trust assets, which are recorded at fair value, are comprised of the following at September 30, 2015 and December 31, 2014:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Securitized mortgage collateral

 

$

4,796,405

 

$

5,249,639

 

Real estate owned

 

18,343

 

18,800

 

Investment securities available-for-sale

 

50

 

92

 

Total securitized mortgage trust assets

 

$

4,814,798

 

$

5,268,531

 

 

Trust Liabilities

 

Trust liabilities, which are recorded at fair value, are comprised of the following at September 30, 2015 and December 31, 2014:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Securitized mortgage borrowings

 

$

4,796,400

 

$

5,245,860

 

Derivative liabilities

 

2,624

 

5,447

 

Total securitized mortgage trust liabilities

 

$

4,799,024

 

$

5,251,307

 

 

Changes in fair value of net trust assets, including trust REO gains (losses) are comprised of the following for the three and nine months ended September 30, 2015 and 2014:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Change in fair value of net trust assets, excluding REO

 

$

(568

)

$

139

 

$

1,821

 

$

(1,136

)

(Losses) gains from REO

 

(2,436

)

(47

)

(4,899

)

8,977

 

Change in fair value of net trust assets, including trust REO (losses) gains

 

$

(3,004

)

$

92

 

$

(3,078

)

$

7,841

 

 

Note 12.—Fair Value of Financial Instruments

 

The use of fair value to measure the Company’s financial instruments is fundamental to its consolidated financial statements and is a critical accounting estimate because a substantial portion of its assets and liabilities are recorded at estimated fair value.

 

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Table of Contents

 

The following table presents the estimated fair value of financial instruments included in the consolidated financial statements as of the dates indicated:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Carrying

 

Estimated Fair Value

 

Carrying

 

Estimated Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,509

 

$

10,509

 

$

 

$

 

$

10,073

 

$

10,073

 

$

 

$

 

Restricted cash

 

5,829

 

5,829

 

 

 

2,420

 

2,420

 

 

 

Mortgage loans held-for-sale

 

460,808

 

 

460,808

 

 

239,391

 

 

239,391

 

 

Finance receivables

 

41,334

 

 

41,334

 

 

8,358

 

 

8,358

 

 

Mortgage servicing rights

 

63,281

 

 

 

63,281

 

24,418

 

 

 

24,418

 

Derivative assets, lending, net

 

13,019

 

 

 

13,019

 

2,884

 

 

 

2,884

 

Investment securities available-for-sale

 

50

 

 

 

50

 

92

 

 

 

92

 

Securitized mortgage collateral

 

4,796,405

 

 

 

4,796,405

 

5,249,639

 

 

 

5,249,639

 

Warrant

 

 

 

 

 

84

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse borrowings

 

$

477,673

 

$

 

$

477,673

 

$

 

$

226,718

 

$

 

$

226,718

 

$

 

Short-term structured debt

 

 

 

 

 

6,000

 

 

 

6,000

 

Line of credit

 

 

 

 

 

4,000

 

 

4,000

 

 

Term financing

 

30,000

 

 

 

30,000

 

 

 

 

 

Contingent consideration

 

68,792

 

 

 

68,792

 

 

 

 

 

Convertible notes

 

45,000

 

 

 

45,000

 

20,000

 

 

 

20,000

 

Long-term debt

 

31,663

 

 

 

31,663

 

22,122

 

 

 

22,122

 

Securitized mortgage borrowings

 

4,796,400

 

 

 

4,796,400

 

5,245,860

 

 

 

5,245,860

 

Derivative liabilities, securitized trusts

 

2,624

 

 

 

2,624

 

5,447

 

 

 

5,447

 

Derivative liabilities, lending, net

 

2,312

 

 

2,312

 

 

930

 

 

930

 

 

 

The fair value amounts above have been estimated by management using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

For securitized mortgage collateral and securitized mortgage borrowings, the underlying Alt-A (non-conforming) residential and commercial loans and mortgage-backed securities market have experienced significant declines in market activity, along with a lack of orderly transactions. The Company’s methodology to estimate fair value of these assets and liabilities include the use of internal pricing techniques such as the net present value of future expected cash flows (with observable market participant assumptions, where available) discounted at a rate of return based on the Company’s estimates of market participant requirements. The significant assumptions utilized in these internal pricing techniques, which are based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment speeds and appropriate discount rates.

 

Refer to Recurring Fair Value Measurements below for a description of the valuation methods used to determine the fair value of investment securities available-for-sale, warrant, securitized mortgage collateral and borrowings, derivative assets and liabilities, contingent consideration, long-term debt, mortgage servicing rights and mortgage loans held-for-sale.

 

The carrying amount of cash, cash equivalents and restricted cash approximates fair value.

 

Finance receivables carrying amounts approximate fair value due to the short-term nature of the assets and do not present unanticipated interest rate or credit concerns.

 

Warehouse borrowings carrying amounts approximate fair value due to the short-term nature of the liabilities and do not present unanticipated interest rate or credit concerns.

 

Convertible notes are recorded at amortized cost. The estimated fair value is determined using a discounted cash flow model using estimated market rates.

 

Term financing is recorded at amortized cost. The estimated fair value is determined using a discounted cash flow model using estimated market rates.

 

15



Table of Contents

 

Line of credit carrying amount approximates fair value due to the short-term nature of the liability and does not present unanticipated interest rate or credit concerns.

 

Fair Value Hierarchy

 

The application of fair value measurements may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value.

 

FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

·                  Level 1—Quoted prices (unadjusted) in active markets for identical instruments or liabilities that an entity has the ability to assess at measurement date.

 

·                  Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for an asset or liability, including interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, loss severities, credit risks and default rates; and market-corroborated inputs.

 

·                  Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers is unobservable.

 

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value.

 

As a result of the lack of observable market data resulting from inactive markets, the Company has classified its investment securities available-for-sale, securitized mortgage collateral and borrowings, net derivative liabilities, securitized trusts, long-term debt, interest rate lock commitments (IRLCs), mortgage servicing rights, warrant and contingent consideration as Level 3 fair value measurements. Level 3 assets and liabilities were 91% and 99% and 96% and 99%, respectively, of total assets and total liabilities measured at estimated fair value at September 30, 2015 and December 31, 2014.

 

Recurring Fair Value Measurements

 

The Company assesses the financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC Topic 810. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the beginning of the reporting period. There were no material transfers between our Level 1 and Level 2 classified instruments during the three and nine months ended September 30, 2015.

 

The following tables present the Company’s assets and liabilities that are measured at estimated fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option at September 30, 2015 and December 31, 2014, based on the fair value hierarchy:

 

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Table of Contents

 

 

 

Recurring Fair Value Measurements

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale

 

$

 

$

 

$

50

 

$

 

$

 

$

92

 

Mortgage loans held-for-sale

 

 

460,808

 

 

 

239,391

 

 

Derivative assets, lending, net (1)

 

 

 

13,019

 

 

 

2,884

 

Mortgage servicing rights

 

 

 

63,281

 

 

 

24,418

 

Warrant (2)

 

 

 

 

 

 

84

 

Securitized mortgage collateral

 

 

 

4,796,405

 

 

 

5,249,639

 

Total assets at fair value

 

$

 

$

460,808

 

$

4,872,755

 

$

 

$

239,391

 

$

5,277,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

 

$

 

$

4,796,400

 

$

 

$

 

$

5,245,860

 

Derivative liabilities, securitized trusts (3)

 

 

 

2,624

 

 

 

5,447

 

Long-term debt

 

 

 

31,663

 

 

 

22,122

 

Contingent consideration

 

 

 

68,792

 

 

 

 

Derivative liabilities, lending, net (4)

 

 

2,312

 

 

 

930

 

 

Total liabilities at fair value

 

$

 

$

2,312

 

$

4,899,479

 

$

 

$

930

 

$

5,273,429

 

 


(1)         At September 30, 2015, derivative assets, lending, net included $13.0 million in IRLCs associated with the Company’s mortgage lending operations, and is included in other assets in the accompanying consolidated balance sheets. At December 31, 2014, derivative assets, lending, net included $3.0 million in IRLCs associated with the Company’s mortgage lending operations, and is included in other assets in the accompanying consolidated balance sheets.

(2)         Included in other assets in the accompanying consolidated balance sheets.

(3)         At September 30, 2015 and December 31, 2014, derivative liabilities, securitized trusts, are included within trust liabilities in the accompanying consolidated balance sheets.

(4)         At September 30, 2015 and December 31, 2014, derivative liabilities, lending, net are included in other liabilities in the accompanying consolidated balance sheets.

 

The following tables present reconciliations for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2015 and 2014:

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the three months ended September 30, 2015

 

 

 

Investment
securities
available-for-sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing
rights

 

Interest rate lock
commitments,
net

 

Long-term
debt

 

Contingent
consideration

 

Warrant

 

Fair value, June 30, 2015

 

$

81

 

$

4,979,433

 

$

(4,977,150

)

$

(3,509

)

$

44,244

 

$

8,406

 

$

(31,438

)

$

(91,407

)

$

165

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

2

 

18,930

 

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(53,552

)

 

 

 

(225

)

 

 

Change in fair value

 

(7

)

(13,485

)

13,051

 

(127

)

(4,347

)

4,613

 

 

14,473

 

(165

)

Total (losses) gains included in earnings

 

(5

)

5,445

 

(40,501

)

(127

)

(4,347

)

4,613

 

(225

)

14,473

 

(165

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

23,384

 

 

 

 

 

Settlements

 

(26

)

(188,473

)

221,251

 

1,012

 

 

 

 

8,142

 

 

Fair value, September 30, 2015

 

$

50

 

$

4,796,405

 

$

(4,796,400

)

$

(2,624

)

$

63,281

 

$

13,019

 

$

(31,663

)

$

(68,792

)

$

 

 


(1)              Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $2.0 million for the three months ended September 30, 2015.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

 

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Table of Contents

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the three months ended September 30, 2014

 

 

 

Investment
securities
available-for-sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing
rights

 

Interest rate lock
commitments,
net

 

Long-term
debt

 

Warrant

 

Fair value, June 30, 2014

 

$

91

 

$

5,510,741

 

$

(5,507,629

)

$

(7,949

)

$

16,166

 

$

3,073

 

$

(17,555

)

$

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

6

 

21,312

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(64,502

)

 

 

 

(485

)

 

Change in fair value

 

11

 

(27,784

)

27,899

 

13

 

(1,205

)

(757

)

 

 

Total gains (losses) included in earnings

 

17

 

(6,472

)

(36,603

)

13

 

(1,205

)

(757

)

(485

)

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

8,913

 

 

 

164

 

Settlements

 

(18

)

(153,795

)

197,441

 

1,369

 

(10,306

)

 

 

 

Fair value, September 30, 2014

 

$

90

 

$

5,350,474

 

$

(5,346,791

)

$

(6,567

)

$

13,568

 

$

2,316

 

$

(18,040

)

$

164

 

 


(1)              Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $1.8 million for the three months ended September 30, 2014.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the nine months ended September 30, 2015

 

 

 

Investment
securities
available-for-sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing rights

 

Interest rate lock
commitments,
net

 

Long-term
debt

 

Contingent
consideration

 

Warrant

 

Fair value, December 31, 2014

 

$

92

 

$

5,249,639

 

$

(5,245,860

)

$

(5,447

)

$

24,418

 

$

2,884

 

$

(22,122

)

$

 

$

84

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

9

 

49,719

 

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(160,249

)

 

 

 

(880

)

 

 

Change in fair value

 

33

 

6,918

 

(4,647

)

(483

)

(7,984

)

10,135

 

(8,661

)

22,752

 

(84

)

Total gains (losses) included in earnings

 

42

 

56,637

 

(164,896

)

(483

)

(7,984

)

10,135

 

(9,541

)

22,752

 

(84

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

76,119

 

 

 

(124,592

)

 

Settlements

 

(84

)

(509,871

)

614,356

 

3,306

 

(29,272

)

 

 

33,048

 

 

Fair value, September 30, 2015

 

$

50

 

$

4,796,405

 

$

(4,796,400

)

$

(2,624

)

$

63,281

 

$

13,019

 

$

(31,663

)

$

(68,792

)

$

 

Unrealized gains (losses) still held (2)

 

$

50

 

$

(1,143,833

)

$

3,287,018

 

$

(2,390

)

$

63,281

 

$

13,019

 

$

39,100

 

$

(68,792

)

$

 

 


(1)              Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $6.3 million for the nine months ended September 30, 2015.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)              Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at September 30, 2015.

 

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Table of Contents

 

 

 

Level 3 Recurring Fair Value Measurements

 

 

 

For the nine months ended September 30, 2014

 

 

 

Investment
securities
available-for-
sale

 

Securitized
mortgage
collateral

 

Securitized
mortgage
borrowings

 

Derivative
liabilities, net,
securitized
trusts

 

Mortgage
servicing rights

 

Interest rate lock
commitments,
net

 

Long-term
debt

 

Warrant

 

Fair value, December 31, 2013

 

$

108

 

$

5,494,152

 

$

(5,492,371

)

$

(10,214

)

$

35,981

 

$

913

 

$

(15,871

)

$

 

Total gains (losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (1)

 

19

 

42,268

 

 

 

 

 

 

 

Interest expense (1)

 

 

 

(177,629

)

 

 

 

(1,745

)

 

Change in fair value

 

27

 

289,610

 

(290,360

)

(413

)

(4,928

)

1,414

 

(424

)

 

Total (losses) gains included in earnings

 

46

 

331,878

 

(467,989

)

(413

)

(4,928

)

1,414

 

(2,169

)

 

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

 

 

 

 

Issuances

 

 

 

 

 

17,238

 

 

 

164

 

Settlements

 

(64

)

(475,556

)

613,569

 

4,060

 

(34,723

)

(11

)

 

 

Fair value, September 30, 2014

 

$

90

 

$

5,350,474

 

$

(5,346,791

)

$

(6,567

)

$

13,568

 

$

2,316

 

$

(18,040

)

$

164

 

Unrealized gains (losses) still held (2)

 

$

84

 

$

(1,446,463

)

$

3,581,924

 

$

(6,132

)

$

13,568

 

$

2,316

 

$

52,723

 

$

164

 

 


(1)             Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. The net interest income, including cash received and paid, was $4.0 million for the nine months ended September 30, 2014.  The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings.

(2)             Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at September 30, 2014.

 

The following table presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and non-recurring basis at September 30, 2015:

 

Financial Instrument

 

Estimated Fair
Value

 

Valuation
Technique

 

Unobservable Input

 

Range of
Inputs

 

Weighted
Average

 

Assets and liabilities backed by real estate

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for-sale,

 

$

50

 

DCF

 

Discount rates

 

3.2 - 25.0%

 

5.1

%

Securitized mortgage collateral, and

 

4,796,405

 

 

 

Prepayment rates

 

2.1 - 28.1%

 

6.0

%

Securitized mortgage borrowings

 

(4,796,400

)

 

 

Default rates

 

0.6 - 15.5%

 

2.8

%

 

 

 

 

 

 

Loss severities

 

5.4 - 60.2%

 

37.8

%

Other assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

63,281

 

DCF

 

Discount rate

 

9.5 - 12.5%

 

9.9

%

 

 

 

 

 

 

Prepayment rates

 

3.3 - 28.7%

 

10.2

%

Derivative liabilities, net, securitized trusts

 

(2,624

)

DCF

 

1M forward LIBOR

 

0.2 - 2.8%

 

N/A

 

Derivative assets - IRLCs, net

 

13,019

 

Market pricing

 

Pull -through rate

 

38.0 - 99.0%

 

75.6

%

Long-term debt

 

(31,663

)

DCF

 

Discount rate

 

14.4%

 

14.4

%

Lease liability

 

(984

)

DCF

 

Discount rate

 

12.0%

 

12.0

%

Contingent consideration

 

(68,792

)

DCF

 

Discount rate

 

17.0%

 

17.0

%

 

 

 

 

 

 

Margins

 

1.6 - 3.7%

 

2.5

%

 

 

 

 

 

 

Probability of outcomes (1)

 

25.0 - 50.0%

 

32.1

%

 


DCF = Discounted Cash Flow

1M = 1 Month

(1)   Probability of outcomes is the probability of projected CCM earnings over the earn-out period based upon three scenarios (base, low and high).

 

For assets and liabilities backed by real estate, a significant increase in discount rates, default rates or loss severities would result in a significantly lower estimated fair value.  The effect of changes in prepayment speeds would have differing effects depending on the seniority or other characteristics of the instrument.  For other assets and liabilities, a significant increase in discount rates would result in a significantly lower estimated fair value.  A significant increase in one-month LIBOR would result in a significantly higher estimated fair value for derivative liabilities, net, securitized trusts.  The Company believes that the imprecision of an estimate could be significant.

 

19



Table of Contents

 

The following tables present the changes in recurring fair value measurements included in net earnings (loss) for the three and nine months ended September 30, 2015 and 2014:

 

 

 

Recurring Fair Value Measurements

 

 

 

Change in Fair Value Included in Net Earnings

 

 

 

For the three months ended September 30, 2015

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other Revenue and
Expense

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

2

 

$

 

$

(7

)

$

 

$

 

$

 

$

(5

)

Securitized mortgage collateral

 

18,930

 

 

(13,485

)

 

 

 

5,445

 

Securitized mortgage borrowings

 

 

(53,552

)

13,051

 

 

 

 

(40,501

)

Derivative liabilities, net, securitized trusts

 

 

 

(127

)(2)

 

 

 

(127

)

Long-term debt

 

 

(225

)

 

 

 

 

(225

)

Mortgage servicing rights (3)

 

 

 

 

 

(4,347

)

 

(4,347

)

Warrant

 

 

 

 

 

(165

)

 

(165

)

Contingent consideration

 

 

 

 

 

14,473

 

 

14,473

 

Mortgage loans held-for-sale

 

 

 

 

 

 

6,678

 

6,678

 

Derivative assets - IRLCs

 

 

 

 

 

 

4,613

 

4,613

 

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(3,658

)

(3,658

)

Total

 

$

18,932

 

$

(53,777

)

$

(568

)

$

 

$

9,961

 

$

7,633

 

$

(17,819

)

 


(1)   Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)   Included in this amount is $835 thousand in changes in the fair value of derivative instruments, offset by $963 thousand in cash payments from the securitization trusts for the three months ended September 30, 2015.

(3)   Included in loss on mortgage servicing rights in the consolidated statements of operations.

 

 

 

Recurring Fair Value Measurements

 

 

 

Change in Fair Value Included in Net Loss

 

 

 

For the three months ended September 30, 2014

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

6

 

$

 

$

11

 

$

 

$

 

$

 

$

17

 

Securitized mortgage collateral

 

21,312

 

 

(27,784

)

 

 

 

(6,472

)

Securitized mortgage borrowings

 

 

(64,502

)

27,899

 

 

 

 

(36,603

)

Derivative liabilities, net, securitized trusts

 

 

 

13

(2)

 

 

 

13

 

Long-term debt

 

 

(485

)

 

 

 

 

(485

)

Mortgage servicing rights (3)

 

 

 

 

 

(1,205

)

 

(1,205

)

Mortgage loans held-for-sale

 

 

 

 

 

 

2,294

 

2,294

 

Derivative assets - IRLCs

 

 

 

 

 

 

(757

)

(757

)

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

841

 

841

 

Total

 

$

21,318

 

$

(64,987

)

$

139

 

$

 

$

(1,205

)

$

2,378

 

$

(42,357

)

 


(1)   Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)   Included in this amount is $1.3 million in change in the fair value of derivative instruments, offset by $1.3 million in cash payments from the securitization trusts for the three months ended September 30, 2014.

(3)   Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations.

 

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Recurring Fair Value Measurements

 

 

 

Change in Fair Value Included in Net Earnings

 

 

 

For the nine months ended September 30, 2015

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other Revenue
and Expense

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

9

 

$

 

$

33

 

$

 

$

 

$

 

$

42

 

Securitized mortgage collateral

 

49,719

 

 

6,918

 

 

 

 

56,637

 

Securitized mortgage borrowings

 

 

(160,249

)

(4,647

)

 

 

 

(164,896

)

Derivative liabilities, net, securitized trusts

 

 

 

(483

)(2)

 

 

 

(483

)

Long-term debt

 

 

(880

)

 

(8,661

)

 

 

(9,541

)

Mortgage servicing rights (3)

 

 

 

 

 

(7,984

)

 

(7,984

)

Warrant

 

 

 

 

 

(84

)

 

(84

)

Contingent consideration

 

 

 

 

 

22,752

 

 

22,752

 

Mortgage loans held-for-sale

 

 

 

 

 

 

9,030

 

9,030

 

Derivative assets - IRLCs

 

 

 

 

 

 

10,135

 

10,135

 

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(1,381

)

(1,381

)

Total

 

$

49,728

 

$

(161,129

)

$

1,821

(4) 

$

(8,661

)

$

14,684

 

$

17,784

 

$

(85,773

)

 


(1)   Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)   Included in this amount is $2.7 million in changes in the fair value of derivative instruments, offset by $3.2 million in cash payments from the securitization trusts for the nine months ended September 30, 2015.

(3)   Included in loss on mortgage servicing rights in the consolidated statements of operations.

(4)   For the nine months ended September 30, 2015, change in the fair value of net trust assets, excluding REO was $1.8 million.  Excluded from the $5.0 million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $3.2 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

 

 

 

Recurring Fair Value Measurements

 

 

 

Changes in Fair Value Included in Net Loss

 

 

 

For the nine months ended September 30, 2014

 

 

 

 

 

 

 

Change in Fair Value of

 

 

 

 

 

Interest
Income (1)

 

Interest
Expense (1)

 

Net Trust
Assets

 

Long-term
Debt

 

Other Revenue

 

Gain on sale
of loans, net

 

Total

 

Investment securities available-for-sale

 

$

19

 

$

 

$

27

 

$

 

$

 

$

 

$

46

 

Securitized mortgage collateral

 

42,268

 

 

289,610

 

 

 

 

331,878

 

Securitized mortgage borrowings

 

 

(177,629

)

(290,360

)

 

 

 

(467,989

)

Derivative liabilities, net, securitized trusts

 

 

 

(413

)(2)

 

 

 

(413

)

Long-term debt

 

 

(1,745

)

 

(424

)

 

 

(2,169

)

Mortgage servicing rights (3)

 

 

 

 

 

(4,928

)

 

(4,928

)

Mortgage loans held-for-sale

 

 

 

 

 

 

5,103

 

5,103

 

Derivative assets - IRLCs

 

 

 

 

 

 

1,414

 

1,414

 

Derivative liabilities - Hedging Instruments

 

 

 

 

 

 

(1,244

)

(1,244

)

Total

 

$

42,287

 

$

(179,374

)

$

(1,136

)(4)

$

(424

)

$

(4,928

)

$

5,273

 

$

(138,302

)

 


(1)   Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities.

(2)   Included in this amount is $3.5 million in changes in the fair value of derivative instruments, offset by $3.9 million in cash payments from the securitization trusts for the nine months ended September 30, 2014.

(3)   Included in loss on mortgage servicing rights in the consolidated statements of operations.

(4)   For the nine months ended September 30, 2014, change in the fair value of net trust assets, excluding REO was $1.1 million.  Excluded from the $(2.8) million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $3.9 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities.

 

The following is a description of the measurement techniques for items recorded at estimated fair value on a recurring basis.

 

                Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value. The investment securities consist primarily of non-investment grade mortgage-backed securities. The fair value of the investment securities is measured based upon the Company’s expectation of inputs that other market participants would use. Such assumptions include judgments about the underlying collateral, prepayment speeds, future credit losses, forward interest rates and certain other factors.

 

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Given the lack of observable market data as of September 30, 2015 and December 31, 2014 relating to these securities, the estimated fair value of the investment securities available-for-sale was measured using significant internal expectations of market participants’ assumptions. Investment securities available-for-sale is considered a Level 3 measurement at September 30, 2015.

 

Mortgage servicing rights—The Company elected to carry its mortgage servicing rights arising from its mortgage loan origination operation at estimated fair value. The fair value of mortgage servicing rights is based upon market prices for similar instruments and a discounted cash flow model. The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Mortgage servicing rights are considered a Level 3 measurement at September 30, 2015.

 

Mortgage loans held-for-sale—The Company elected to carry its mortgage loans held-for-sale originated or acquired at estimated fair value. Fair value is based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. Given the meaningful level of secondary market activity for mortgage loans, active pricing is available for similar assets and accordingly, the Company classifies its mortgage loans held-for-sale as a Level 2 measurement at September 30, 2015.

 

Securitized mortgage collateral—The Company elected to carry its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements are based on the Company’s internal models used to compute the net present value of future expected cash flows with observable market participant assumptions, where available. The Company’s assumptions include its expectations of inputs that other market participants would use in pricing these assets. These assumptions include judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of September 30, 2015, securitized mortgage collateral had UPB of $5.9 billion, compared to an estimated fair value on the Company’s balance sheet of $4.8 billion. The aggregate UPB exceeds the fair value by $1.1 billion at September 30, 2015. As of September 30, 2015, the UPB of loans 90 days or more past due was $0.9 billion compared to an estimated fair value of $0.4 billion. The aggregate UPB of loans 90 days or more past due exceed the fair value by $0.5 billion at September 30, 2015. Securitized mortgage collateral is considered a Level 3 measurement at September 30, 2015.

 

Securitized mortgage borrowings—The Company elected to carry its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral and assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of September 30, 2015, securitized mortgage borrowings had an outstanding principal balance of $5.9 billion, net of $2.2 billion in bond losses, compared to an estimated fair value of $4.8 billion. The aggregate outstanding principal balance exceeds the fair value by $1.1 billion at September 30, 2015. Securitized mortgage borrowings are considered a Level 3 measurement at September 30, 2015.

 

Contingent consideration—Contingent consideration is applicable to the acquisition of CCM and is estimated and recorded at fair value at the acquisition date as part of purchase price consideration.  Additionally, each reporting period, the Company estimates the change in fair value of the contingent consideration and any change in fair value is recognized in the Company’s consolidated statements of operations if it is determined to not be a measurement period adjustment.  The estimate of the fair value of contingent consideration requires significant judgment and assumptions to be made about future operating results, discount rates and probabilities of various projected operating result scenarios. During the nine monthes ended September 30, 2015, the change in fair value of contingent consideration was related to the estimated reduction in future pre-tax earnings of CCM over the expected earn-out period, primarily due to margin compression.  Future revisions to these assumptions could materially change the estimated fair value of contingent consideration and materially affect the Company’s financial results. Contingent consideration is considered a Level 3 measurement at September 30, 2015.

 

Long-term debt—The Company elected to carry all of its long-term debt (consisting of trust preferred securities and junior subordinated notes) at fair value. These securities are measured based upon an analysis prepared by management, which considered the Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. As of September 30, 2015, long-term debt had UPB of $70.5 million compared to an estimated fair value of $31.7 million. The aggregate UPB exceeds the fair value by $38.8 million at September 30, 2015. The long-term debt is considered a Level 3 measurement at September 30, 2015.

 

Derivative assets and liabilities, Securitized trusts—For non-exchange traded contracts, fair value is based on the amounts that would be required to settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available. To the extent observable market inputs are not available, fair values measurements include the Company’s judgments about future cash flows, forward interest rates and certain other factors, including

 

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counterparty risk. Additionally, these values also take into account the Company’s own credit standing, to the extent applicable; thus, the valuation of the derivative instrument includes the estimated value of the net credit differential between the counterparties to the derivative contract. As of September 30, 2015, the notional balance of derivative assets and liabilities, securitized trusts was $74.0 million. These derivatives are included in the consolidated securitization trusts, which are nonrecourse to the Company, and thus the economic risk from these derivatives is limited to the Company’s residual interests in the securitization trusts. Derivative assets and liabilities, securitized trusts are considered a Level 3 measurement at September 30, 2015.

 

Derivative assets and liabilities, Lending—The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as free standing derivatives. IRLCs and hedging instruments can be either assets or liabilities depending on interest rate fluctuations subsequent to entering into the commitments.  IRLCs are entered into with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. Hedging instruments (typically TBA MBS) are used to hedge the fair value changes associated with changes in interest rates relating to its mortgage lending operations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date the loan is committed for sale. The estimated fair value of IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively quoted and easily validated through external sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate. The anticipated Pull-through Rate is an unobservable input based on historical experience, which results in classification of IRLCs as a Level 3 measurement at September 30, 2015.

 

The fair value of the hedging instruments is based on the actively quoted TBA MBS market using observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, the hedging instruments are classified as a Level 2 measurement at September 30, 2015.

 

The following table includes information for the derivative assets and liabilities, lending for the periods presented:

 

 

 

Notional Amount

 

Total Gains (Losses) (1)

 

 

 

September 30,

 

September 30,

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Derivative - IRLC’s

 

$

664,890

 

$

208,433

 

$

4,613

 

$

(757

)

$

10,135

 

$

1,414

 

Derivative - TBA MBS

 

550,210

 

285,797

 

(10,406

)

(1,595

)

(9,835

)

(9,823

)

 


(1)         Amounts included in gain on sale of loans, net within the accompanying consolidated statements of operations.

 

Warrant— Upon entering an arrangement to facilitate the Company’s ability to offer Non-QM mortgage products, a warrant to purchase up to 9.9% of Impac Mortgage Corp. was issued.  The warrant expired in August and was not exercised.  The estimated fair value of the warrant was based on a model incorporating various assumptions including expected future book value of Impac Mortgage Corp., the probability of the warrant being exercised, volatility, expected term and certain other factors.

 

Nonrecurring Fair Value Measurements

 

The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

 

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Table of Contents

 

The following tables present financial and non-financial assets and liabilities measured using nonrecurring fair value measurements at September 30, 2015 and 2014, respectively:

 

 

 

Nonrecurring Fair Value
Measurements

 

Total Gains (Losses) (1)

 

 

 

September 30, 2015

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2015

 

September 30, 2015

 

REO (2)

 

$

 

$

2,066

 

$

 

$

(2,436

)

$

(4,900

)

Lease liability (3)

 

 

 

(984

)

(14

)

(53

)

Deferred charge (4)

 

 

 

10,467

 

(421

)

(1,054

)

 


(1)         Total gains (losses) reflect gains and losses from all nonrecurring measurements during the period.

(2)         Balance represents REO at September 30, 2015 which has been impaired subsequent to foreclosure. For the three months ended September 30, 2015, the $2.4 million loss represents additional impairment write-downs attributable to higher expected loss severities on properties held during the period which resulted in a decrease to the net realizable value (NRV).  For the nine months ended September 30, 2015, the $4.9 million loss represents additional impairment write-downs attributable to higher expected loss severities on properties held during the period which resulted in a decrease to the net realizable value (NRV).

(3)         For the three and nine months ended September 30, 2015, the Company recorded $14 thousand and $53 thousand expense, resulting from changes in lease liabilities as a result of changes in our expected minimum future lease payments.

(4)         For the three and nine months ended September 30, 2015, the Company recorded $421 thousand and $1.1 million in income tax expense resulting from impairment write-downs of deferred charge based on changes in estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral.

 

 

 

Non-recurring Fair Value
Measurements

 

Total Gains (Losses) (1)

 

 

 

September 30, 2014

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

Level 1

 

Level 2

 

Level 3

 

September 30, 2014

 

September 30, 2014

 

REO (2)

 

$

 

$

1,686

 

$

 

$

(47

)

$

8,977

 

Lease liability (3)

 

 

 

(1,705

)

11

 

(617

)

 


(1)         Total gains (losses) reflect gains and losses from all nonrecurring measurements during the period.(1)

(2)         Balance represents REO at September 30, 2014 which has been impaired subsequent to foreclosure. Amounts are included in continuing operations.  For the three months ended September 30, 2014, the $47 thousand loss represents additional impairment write-downs attributable to higher expected loss severities on properties held during the period which resulted in a decrease to the net realizable value (NRV).  For the nine months ended September 30, 2014, $9.0 million gain represents recovery of the NRV attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV.(2)

(3)         For the three and nine months ended September 30, 2014, the Company recorded an $11 thousand recovery and $617 thousand in impairment, resulting from changes in lease liabilities as a result of changes in our expected minimum future lease payments.

 

Real estate owned—REO consists of residential real estate acquired in satisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fair value of the residential real estate less estimated selling and holding costs, offset by expected contractual mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. REO balance representing REOs which have been impaired subsequent to foreclosure are subject to nonrecurring fair value measurement and included in the nonrecurring fair value measurements tables. Fair values of REO are generally based on observable market inputs, and considered Level 2 measurements at September 30, 2015.

 

Lease liability—In connection with the discontinuation of our non-conforming lending and commercial operations in 2007, a significant amount of office space that was previously occupied is no longer being used by the Company. The Company has subleased a significant amount of this office space. Additionally, the Company has office space that is no longer occupied by the Company and we intend to sublease it.  The Company has recorded a liability representing the present value of the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space. This liability is based on present value techniques that incorporate the Company’s judgments about estimated sublet revenue and discount rates. Therefore, this liability is considered a Level 3 measurement at September 30, 2015.

 

Deferred charge— Deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. The Company evaluates the deferred charge for impairment quarterly using internal estimates of estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral. If the deferred charge is determined to be impaired, it is recognized as a component of income tax expense. For the three and nine months ended September 30, 2015, the Company recorded $421 thousand and $1.1 million in income tax expense resulting

 

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Table of Contents

 

from deferred charge impairment write-downs based on changes in estimated fair value of securitized mortgage collateral. There was no impairment of the deferred charge in the three and nine months ended September 30, 2014. Deferred charge is considered a Level 3 measurement at September 30, 2015.

 

Note 13.—Income Taxes

 

The Company calculates its quarterly tax provision pursuant to the guidelines in ASC 740 Income Taxes.  ASC 740 requires companies to estimate the annual effective tax rate for current year ordinary income. In calculating the effective tax rate, permanent differences between financial reporting and taxable income are factored into the calculation, but temporary differences are not. The estimated annual effective tax rate represents the best estimate of the tax provision in relation to the best estimate of pre-tax ordinary income or loss. The estimated annual effective tax rate is then applied to year-to-date ordinary income or loss to calculate the year-to-date interim tax provision.

 

The Company recorded income tax expense (benefit) of $781 thousand and ($22.9) million for the three and nine months ended September 30, 2015. For the three months ended September 30, 2015, the Company recorded amortization of the deferred charge and an increase in current income tax provision based upon an estimated increase in federal alternative minimum tax (AMT) and state income taxes.  For the nine months ended September 30, 2015, the Company recorded a benefit of $24.4 million primarily the result of a reversal of valuation allowance partially offset by federal alternative minimum tax (AMT), amortization of the deferred charge and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge is amortized and/or impaired, which does not result in any tax liability to be paid. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2014, the Company recorded expense of $307 thousand and $1.4 million, respectively, primarily related to federal and state AMT associated with taxable income generated from the sale of AmeriHome and mortgage servicing rights.

 

Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified.  As of each reporting date, the Company considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets.  Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences.  The Company’s evaluation is based on current tax laws as well as management’s expectation of future performance.

 

The Company’s deferred tax assets are primarily the result of net operating losses and other fair value write downs of financial assets and liabilities.  As of December 31, 2014, the Company had net deferred tax assets of approximately $163.2 million which the Company recorded a full valuation allowance against.  During the first quarter of 2015, with the aforementioned acquisition of CCM, the Company significantly expanded its mortgage lending operations and profitability.  As of March 31, 2015, in part because of the earnings of CCM during the first quarter of 2015, current year projected earnings, future projected earnings as well as the historical earnings of CCM, management determined that sufficient positive evidence exists to conclude that it is more likely than not that deferred taxes of $24.4 million are realizable in future years, and therefore, reduced the valuation allowance accordingly.  Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $24.4 million at September 30, 2015 is more likely than not based on future forecasted net earnings.

 

The Company has recorded a valuation allowance against its remaining net deferred tax assets at September 30, 2015 as it is more likely than not that not all of the deferred tax assets will be realized. The valuation allowance is based on the management’s assessment that it is more likely than not that certain deferred tax assets, primarily net operating loss carryforwards, may not be realized in the foreseeable future due to objective negative evidence that the Company would not generate sufficient taxable income to realize the deferred tax assets.

 

Note 14.—Reconciliation of Earnings Per Share

 

Basic net earnings per share is computed by dividing net earnings available to common stockholders (numerator) by the weighted average number of vested, common shares outstanding during the period (denominator). Diluted net earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the if-converted method. Dilutive potential common shares include shares issuable upon conversion of Convertible Notes, dilutive effect of outstanding stock options and deferred stock units (DSUs).

 

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Table of Contents

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator for basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

19,309

 

$

(1,201

)

$

70,090

 

$

(4,085

)

 

 

 

 

 

 

 

 

 

 

Numerator for diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

19,309

 

$

(1,201

)

$

70,090

 

$

(4,085

)

Interest expense attributable to convertible notes

 

844

 

 

1,875

 

 

Net earnings (loss) plus interest expense attributable to convertible notes

 

$

20,153

 

$

(1,201

)

$

71,965

 

$

(4,085

)

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share (1):

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding during the year

 

10,242

 

9,466

 

10,019

 

9,262

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings (loss) per share (1):

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding during the year

 

10,242

 

9,466

 

10,019

 

9,262

 

Net effect of dilutive convertible notes

 

3,002

 

 

2,461

 

 

Net effect of dilutive stock options and DSU’s

 

354

 

 

357

 

 

Diluted weighted average common shares

 

13,598

 

9,466

 

12,837

 

9,262

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.89

 

$

(0.13

)

$

7.00

 

$

(0.44

)

Diluted

 

$

1.48

 

$

(0.13

)

$

5.61

 

$

(0.44

)

 


(1)         Number of shares presented in thousands.

 

For the three and nine months ended September 30, 2015 there were 367 thousand anti-dilutive stock options outstanding.   The anti-dilutive stock options outstanding for the three and nine months ended September 30, 2014 were 2.9 million shares. Included in the anti-dilutive shares for the three and nine months ended September 30, 2014 was 1.8 million shares attributable to the 2013 Convertible Notes.

 

Note 15.—Segment Reporting

 

The Company has three primary reporting segments which include mortgage lending, real estate services and long-term mortgage portfolio. Unallocated corporate and other administrative costs, including the costs associated with being a public company, are presented in Corporate and other.

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

three months ended September 30, 2015:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

47,274

 

$

 

$

 

$

 

$

47,274

 

Real estate services fees, net

 

 

2,775

 

 

 

2,775

 

Servicing income, net

 

2,432

 

 

 

 

2,432

 

Loss on mortgage servicing rights

 

(4,818

)

 

 

 

(4,818

)

Other revenue

 

(145

)

 

79

 

55

 

(11

)

Other income (expense)

 

658

 

 

(1,936

)

(1,607

)

(2,885

)

Total expense (income)

 

(21,354

)

(1,447

)

(263

)

(1,613

)

(24,677

)

Net earnings before income taxes

 

$

24,047

 

$

1,328

 

$

(2,120

)

$

(3,165

)

20,090

 

Income tax expense

 

 

 

 

 

 

 

 

 

781

 

Net earnings

 

 

 

 

 

 

 

 

 

$

19,309

 

 

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Table of Contents

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

three months ended September 30, 2014:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

8,602

 

$

 

$

 

$

 

$

8,602

 

Real estate services fees, net

 

 

3,243

 

 

 

3,243

 

Servicing income, net

 

913

 

 

 

 

913

 

Loss on mortgage servicing rights

 

(998

)

 

 

 

(998

)

Other revenue

 

109

 

 

86

 

2

 

197

 

Other income (expense)

 

403

 

(6

)

847

 

(405

)

839

 

Total expenses

 

(8,746

)

(1,386

)

(214

)

(3,344

)

(13,690

)

Net earnings (loss) before income taxes

 

$

283

 

$

1,851

 

$

719

 

$

(3,747

)

(894

)

Income tax expense

 

 

 

 

 

 

 

 

 

307

 

Net loss

 

 

 

 

 

 

 

 

 

$

(1,201

)

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

nine months ended September 30, 2015:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

133,018

 

$

 

$

 

$

 

$

133,018

 

Real estate services fees, net

 

 

7,872

 

 

 

7,872

 

Servicing income, net

 

4,083

 

 

 

 

4,083

 

Loss on mortgage servicing rights

 

(14,176

)

 

 

 

(14,176

)

Other revenue

 

(25

)

 

203

 

105

 

283

 

Other income (expense)

 

1,673

 

 

(8,281

)

(2,996

)

(9,604

)

Total expense (income)

 

(63,347

)

(4,422

)

(611

)

(5,858

)

(74,238

)

Net earnings (loss) before income taxes

 

$

61,226

 

$

3,450

 

$

(8,689

)

$

(8,749

)

47,238

 

Income tax benefit

 

 

 

 

 

 

 

 

 

(22,852

)

Net earnings

 

 

 

 

 

 

 

 

 

$

70,090

 

 

Statement of Operations Items for the

 

Mortgage

 

Real Estate

 

Long-term

 

Corporate

 

 

 

nine months ended September 30, 2014:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Gain on sale of loans, net

 

$

19,468

 

$

 

$

 

$

 

$

19,468

 

Real estate services fees, net

 

 

11,282

 

 

 

11,282

 

Servicing income, net

 

3,773

 

 

 

 

3,773

 

Loss on mortgage servicing rights

 

(3,540

)

 

 

 

(3,540

)

Other revenue

 

1,366

 

 

296

 

41

 

1,703

 

Other income (expense)

 

774

 

(5

)

8,198

 

(1,212

)

7,755

 

Total expenses

 

(26,320

)

(4,443

)

(720

)

(11,638

)

(43,121

)

Net (loss) earnings before income taxes

 

$

(4,479

)

$

6,834

 

$

7,774

 

$

(12,809

)

(2,680

)

Income tax expense

 

 

 

 

 

 

 

 

 

1,405

 

Net loss

 

 

 

 

 

 

 

 

 

$

(4,085

)

 

 

 

Mortgage

 

Real Estate

 

Long-term
Mortgage

 

Corporate

 

 

 

Balance Sheet Items as of:

 

Lending

 

Services

 

Portfolio

 

and other

 

Consolidated

 

Total Assets at September 30, 2015 (1)

 

$

737,547

 

$

2,893

 

$

4,825,472

 

$

28,971

 

$

5,594,883

 

Total Assets at December 31, 2014 (1)

 

$

291,829

 

$

2,672

 

$

5,280,274

 

$

3,797

 

$

5,578,572

 

 


(1)         All segment asset balances exclude intercompany balances.

 

Note 16.—Commitments and Contingencies

 

Legal Proceedings

 

The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.

 

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In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any case, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.

 

Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

 

The Company is a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations.

 

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2014 and subsequent Form 10-Q filings for a description of litigation and claims.

 

Repurchase Reserve

 

When the Company sells mortgage loans, it makes customary representations and warranties to the purchasers about various characteristics of each loan such as the origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. The Company’s whole loan sale agreements generally require it to repurchase loans if the Company breached a representation or warranty given to the loan purchaser.

 

The following table summarizes the repurchase reserve activity related to previously sold loans for the nine months ended September 30, 2015 and year ended December 31, 2014:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Beginning balance

 

$

5,714

 

$

9,478

 

Provision for repurchases

 

340

 

2,252

 

Settlements

 

(1,286

)

(6,016

)

Total repurchase reserve

 

$

4,768

 

$

5,714

 

 

During the three months ended September 30, 2015, the general repurchase reserve was reduced by $980 thousand as a result of a review of the Company’s historical loss experience on originations since 2011.  In the first quarter of 2015, the Company settled its repurchase liability with FNMA related to its legacy non-conforming mortgage operations.  As part of the agreement, the Company paid FNMA $1.0 million during the first quarter with a final payment of $228 thousand paid in April 2015. Additionally, settlements for the year ended December, 31, 2014, were also primarily related to previous repurchase claims from the Company’s legacy non-conforming mortgage operations.

 

Short-Term Loan Commitments

 

The Company uses a portion of its warehouse borrowing capacity to provide secured short-term revolving financing to small and medium-size mortgage originators to finance mortgage loans from the closing of the mortgage loans until sold to investors (Finance Receivables). As of September 30, 2015, the warehouse lending operations had warehouse lines to non-affiliated customers totaling $116.5 million, of which there was an outstanding balance of $41.3 million in finance receivables compared to $8.4 million as of December 31, 2014. The finance receivables are generally secured by residential mortgage loans as well as personal guarantees.

 

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Table of Contents

 

Note 17.—Share Based Payments

 

The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant with the following weighted average assumptions:

 

 

 

September 30,

 

 

 

2015

 

Risk-free interest rate

 

1.54 - 1.76%

 

Expected lives (in years)

 

5.50 - 5.73

 

Expected volatility (1)

 

49.53 - 79.56%

 

Expected dividend yield

 

0.00%

 

Fair value per share

 

6.74 - 9.96

 

 


(1)         Expected volatilities are based on the volatility of the Company’s stock over the expected option term, adjusted for expected mean reversion.

 

The following table summarizes activity, pricing and other information for the Company’s stock options for the nine months ended September 30, 2015:

 

 

 

For the nine months ended
September 30,

 

 

 

2015

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Exercise

 

 

 

Shares

 

Price

 

Options outstanding at beginning of period

 

1,078,230

 

$

6.88

 

Options granted

 

405,800

 

19.59

 

Options exercised

 

(209,104

)

3.07

 

Options forfeited/cancelled

 

(102,946

)

9.08

 

Options outstanding at end of period

 

1,171,980

 

$

11.77

 

Options exercisable at end of period

 

495,701

 

$

8.13

 

 

As of September 30, 2015, there was approximately $3.9 million of total unrecognized compensation cost related to stock option compensation arrangements granted under the plan, net of estimated forfeitures. That cost is expected to be recognized over the remaining weighted average period of 2.4 years.

 

There were 405,800 and 409,250 options granted during the nine months ended September 30, 2015 and 2014, respectively.  For the nine months ended September 30, 2015 and 2014, the aggregate grant-date fair value of stock options granted was approximately $3.8 million and $1.4 million, respectively.

 

The following table summarizes activity, pricing and other information for the Company’s DSU’s, also referred to as deferred stock units as the issuance of the stock is deferred until termination of service, for the nine months ended September 30, 2015:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

DSU’s outstanding at beginning of period

 

75,750

 

$

8.63

 

DSU’s granted

 

5,000

 

20.50

 

DSU’s exercised

 

 

 

DSU’s forfeited/cancelled

 

 

 

DSU’s outstanding at end of period

 

80,750

 

$

9.36

 

 

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Table of Contents

 

As of September 30, 2015, there was approximately $169 thousand of total unrecognized compensation cost related to the DSU compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of 0.8 years.

 

Note 18.—Related Party Transactions

 

In January 2015, the Company entered into a $5.0 million short-term borrowing secured by Ginnie Mae servicing rights with an interest rate of 15%, transaction costs of $50 thousand, and was provided by a related party of the Company. The balance was repaid in March 2015.

 

Note 19.—Sale of AmeriHome

 

In March 2014, the Company sold AmeriHome for $10.2 million in cash, recording a gain of approximately $1.2 million, net of a deferred tax adjustment. In conjunction with the transaction, as required by Fannie Mae, the Company used $3.0 million of the proceeds to reduce the legacy repurchase liability with Fannie Mae.

 

Note 20.—Subsequent Events

 

In October 2015 the Company sold $3.5 billion of conventional mortgage servicing rights for approximately $34.0 million.  The transaction settled in October 2015.

 

In October 2015 the Company signed a term sheet to sell $1.0 billion of government insured mortgage servicing.  The transaction is expected to settle in November 2015.

 

Subsequent events have been evaluated through the date of this filing.

 

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Table of Contents

 

ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(dollars in thousands, except per share data or as otherwise indicated)

 

Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc. (the Company or IMH), a Maryland corporation incorporated in August 1995, and its subsidiaries, Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets), and Impac Funding Corporation (IFC).

 

Forward-Looking Statements

 

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “likely,” “should,” “could,” “seem to,” “anticipate,” “plan,” “intend,” “project,” “assume,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: failure to achieve the benefits expected from the acquisition of the CashCall Mortgage operations; costs and difficulties related to the integration of the business and operations with the Company’s operations, unexpected costs, liabilities, charges or expenses resulting from the transaction, successful development, marketing, sale and financing of new mortgage products, including the non-Qualified Mortgage and conventional and government loan programs; ability to increase our market share in the various residential mortgage businesses; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing, through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; and our compliance with applicable local, state and federal laws and regulations and other general market and economic conditions.

 

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2014, and other reports we file under the Securities Exchange Act of 1934. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

 

The mortgage industry is subject to current events that occur in the financial services industry including changes to regulations and compliance requirements that result in uncertainty surrounding the actions of states, municipalities and new government agencies, including the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA). These events can also include changes in economic indicators, interest rates, price competition, geographic shifts, disposable income, housing prices, market liquidity, market anticipation, and customer perception, as well as others. The factors that affect the industry change rapidly and can be unforeseeable making it difficult to predict and manage an operation in the financial services industry.

 

Current events can diminish the relevance of “quarter over quarter” and “year-to-date over year-to-date” comparisons of financial information. In such instances, the Company attempts to present financial information in its Management’s Discussion and Analysis of Financial Condition and Results of Operations that is the most relevant to its financial information.

 

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Table of Contents

 

Selected Financial Results

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,
2015

 

June 30, 2015

 

September 30,
2014

 

September 30,
2015

 

September 30,
2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of loans, net

 

$

47,274

 

$

48,346

 

$

8,602

 

$

133,018

 

$

19,468

 

Real estate services fees, net

 

2,775

 

2,355

 

3,243

 

7,872

 

11,282

 

Servicing income, net

 

2,432

 

1,017

 

913

 

4,083

 

3,773

 

Loss on mortgage servicing rights

 

(4,818

)

(2,790

)

(998

)

(14,176

)

(3,540

)

Other

 

(11

)

156

 

197

 

283

 

1,703

 

Total revenues

 

47,652

 

49,084

 

11,957

 

131,080

 

32,686

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

21,315

 

24,078

 

9,062

 

56,883

 

27,841

 

Business promotion

 

10,735

 

8,679

 

252

 

19,628

 

1,020

 

General, administrative and other

 

7,100

 

7,943

 

4,376

 

20,479

 

14,260

 

Accretion of contingent consideration

 

2,424

 

3,046

 

 

5,471

 

 

Change in fair value of contingent consideration

 

(16,897

)

(11,326

)

 

(28,223

)

 

Total expenses

 

24,677

 

32,420

 

13,690

 

74,238

 

43,121

 

Operating income (loss):

 

22,975

 

16,664

 

(1,733

)

56,842

 

(10,435

)

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

119

 

959

 

747

 

2,135

 

338

 

Change in fair value of long-term debt

 

 

(1,544

)

 

(8,661

)

(424

)

Change in fair value of net trust assets

 

(3,004

)

802

 

92

 

(3,078

)

7,841

 

Total other income (expense)

 

(2,885

)

217

 

839

 

(9,604

)

7,755

 

Net earnings (loss) before income taxes

 

20,090

 

16,881

 

(894

)

47,238

 

(2,680

)

Income tax expense (benefit)

 

781

 

71

 

307

 

(22,852

)

1,405

 

Net earnings (loss)

 

$

19,309

 

$

16,810

 

$

(1,201

)

$

70,090

 

$

(4,085

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

1.48

 

$

1.33

 

$

(0.13

)

$

5.61

 

$

(0.44

)

 

Status of Operations

 

Summary Highlights

 

·                  Mortgage lending volumes decreased slightly in the third quarter of 2015 to $2.3 billion from $2.6 billion in the second quarter of 2015 but increased from $923.6 million in the third quarter of 2014.

·                  Gain on sale of loans, net decreased in the third quarter of 2015 to $47.3 million from $48.3 million in the second quarter of 2015 but increased  from $8.6 million in the third quarter of 2014.

·                  Mortgage servicing portfolio increased to $6.1 billion at September 30, 2015 from $4.1 billion at June 30, 2015 and $2.3 billion at December 31, 2014.

·                  In October 2015, we sold $3.5 billion in mortgage servicing rights generating approximately $34.0 million.

 

In the third quarter of 2015, net earnings increased to $19.3 million or $1.48 per diluted common share, as compared to a net loss of $1.2 million or $0.13 per diluted common share for the third quarter of 2014 and net earnings of $16.8 million or $1.33 per diluted common share for the second quarter of 2015.  For the nine months ended September 30, 2015, net earnings increased to $70.1 million as compared to a loss of $4.1 million for the same period in 2014.

 

Net earnings (loss) includes certain fair value adjustments for changes in the (i) contingent consideration, (ii) long-term debt and (iii) net trust assets as well as accretion of the contingent consideration.  The change in fair value of the contingent consideration

and accretion is related to the CashCall Mortgage acquisition transaction, while the other fair value adjustments are related to our legacy portfolio.  These items, as discussed below, are non-cash items and are not related to current operating results.

 

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Operating income increased to $23.0 million in the third quarter of 2015 from $16.7 million in the second quarter of 2015 and an operating loss of $1.7 million in the third quarter of 2014.  The increase in the third quarter is primarily due to the change in fair value of the contingent consideration.  Although we are required by GAAP to record change in fair value of the contingent consideration and related accretion, management believes operating income excluding these items, as shown in the following table, is more useful to discuss our operations. Operating income excluding changes in contingent consideration is a non-GAAP financial measure and should be considered in addition to, but not as a substitute for the financial measure prepared in accordance with GAAP in this report.

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

Operating income (loss)
(in thousands)

 

September 30,
2015

 

June 30, 2015

 

September 30,
2014

 

September 30,
2015

 

September 30,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

$

22,975

 

$

16,664

 

$

(1,733

)

$

56,842

 

$

(10,435

)

Accretion of contingent consideration

 

2,424

 

3,046

 

 

5,471

 

 

Change in fair value of contingent consideration

 

(16,897

)

(11,326

)

 

(28,223

)

 

Operating income (loss) excluding changes in contingent consideration

 

$

8,502

 

$

8,384

 

$

(1,733

)

$

34,090

 

$

(10,435

)

 

Operating income, excluding the change in fair value of the contingent consideration and the related accretion, slightly increased to $8.5 million in the third quarter as compared to $8.4 million in the second quarter, and increased significantly from the operating loss of $1.7 million in the third quarter of 2014.

 

For the third quarter of 2015, gain on sale of loans was $47.3 million as compared to $8.6 million in the third quarter of 2014 and $48.3 million in the second quarter of 2015.  Gain on sale margin increased to 205 bps from 186 bps in the second quarter primarily as a result of interest rate declines in the quarter.

 

Total operating expenses, excluding the changes in the contingent consideration, declined in the third quarter of 2015 as compared to the second quarter of 2015 by approximately $1.6 million, although marketing expenses increased.  This decrease in expenses was primarily a result of the decrease in origination volume in the quarter.   The increase in marketing expenses, called business promotion on the consolidated statement of operations, is due to our efforts to expand our geographic marketing programs.

 

In the third quarter, similar to the second quarter, we continue to incorporate current market condition assumptions, including the overall margin compression at CCM in the estimated value of the contingent consideration.  The contingent consideration liability represents the estimated fair value of the expected future earn-out payments to be paid to the seller of the CashCall Mortgage operations which were acquired in the first quarter of 2015.

 

As a result of the change in market conditions, we recorded a change in the fair value of the contingent consideration in the third quarter reducing the contingent consideration liability by $16.9 million over the remaining earn-out period of 2 ¼ years.  Additionally, we recorded accretion of the contingent consideration liability, which increases the liability over the earn-out period.  The change in the contingent consideration is primarily due to lower expected future earn-out payments due to changes in market conditions.  Accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period.  Despite the decrease in the contingent consideration, our Cash Call Mortgage division (CCM) remains very profitable and the long term outlook continues to be very positive.

 

The CCM consumer direct channel’s marketing strategy is to offer attractive mortgage loan interest rates through television and radio advertising to create lead generation for the call center and internet portal.  In the third quarter of 2015, marketing expenses included in business promotion on the consolidated statement of operations continued to increase as part of our efforts to develop a national advertising campaign to leverage the “CashCall Mortgage” brand name better, as we continue to expand our geographic marketing programs.   In the third quarter, our geographic footprint expanded as we saw volume from an additional 19 states. We are also expanding lead generation through our web based internet marketing channel where we want to create more origination traffic through our consumer web portal.  Web based internet lead generation will be an important strategy in 2016 as we continue to diversify the CashCall Mortgage marketing initiative.

 

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For the three months ended September 30, 2015, we originated and sold $2.3 billion and $2.2 billion of loans, respectively, as compared to $923.6 million and $813.5 million of loans originated and sold, respectively, during the same period in 2014, and $2.6 billion and $2.7 billion of loans originated and sold, respectively, during the second quarter of 2015.

 

During the third quarter of 2015, and consistent with the rest of the market, total originations decreased to $2.3 billion, from $2.6 billion, in the second quarter of 2015. However, total originations increased approximately 150% from the third quarter of 2014.  The retail channel decreased 17% over the second quarter, while still representing approximately 56% or $1.3 billion of total originations.  The wholesale channel remained consistent with the second quarter, representing approximately 18% or $409.0 million of total originations.  The correspondent division decreased slightly from the second quarter, representing $608.5 million or 26% of total originations.   For the third quarter of 2015, purchase money transactions increased to 25% of total production, as compared to 18% of total production in the second quarter.

 

As of September 30, 2015, the Company’s mortgage servicing portfolio increased to $6.1 billion, a 50% increase from June 30, 2015, which correspondingly increased our retained mortgage servicing rights to $63.3 million at September 30, 2015 as compared to $44.2 million at June 30, 2015.   However, to manage the capital needs of the Company and to reduce the mortgage servicing rights asset concentration, in October 2015 the Company sold $3.5 billion of conventional mortgage servicing rights for approximately $34.0 million.

 

Originations

 

 

 

For the three months ended

 

(in millions)

 

September 30,
2015

 

June 30,
2015

 

%
Change

 

September 30,
2014

 

%
Change

 

Originations

 

$

2,303.2

 

$

2,604.3

 

-12

%

$

923.6

 

149

%

 

Origination volume decreased 12% in the third quarter of 2015 over the second quarter of 2015 to $2.3 billion as compared to $2.6 billion, respectively.  Of the $2.3 billion in total originations, approximately $1.3 billion, or 56%, was originated through the CCM retail channel.  In contrast, during the third quarter of 2014, our retail originations contributed only 2% to our total origination volume.  However, in 2014, the Company purchased mortgage loans from CashCall, Inc. (prior to the acquisition of their mortgage operations by the Company), as a correspondent customer.

 

Originations by Channel:

 

(in millions)

 

September 30,
2015

 

June 30,
2015

 

%
Change

 

September 30,
2014

 

%
Change

 

Wholesale

 

$

409.0

 

$

416.5

 

-2

%

$

159.1

 

157

%

Correspondent

 

608.5

 

640.2

 

-5

%

747.3

 

-19

%

Retail

 

1,285.7

 

1,547.6

 

-17

%

17.2

 

7375

%

Total originations

 

$

2,303.2

 

$

2,604.3

 

-12

%

$

923.6

 

149

%

 

During the third quarter of 2015, correspondent volume decreased 19% as compared to the third quarter of 2014 and 5% as compared to the second quarter of 2015.  The decline in correspondent volume from the prior year was due to the acquisition of CCM in the first quarter of 2015 as we purchased mortgage loans from CashCall, Inc. (prior to the acquisition of CCM by the Company), as a correspondent customer.

 

In the third quarter of 2015, wholesale originations increased 157% as compared to the third quarter of 2014 and decreased 2% as compared to the second quarter of 2015.   The volume in the wholesale channel declined as compared to the second quarter of 2015 as originations declined across the industry in the third quarter of 2015.

 

We believe the retail call center complements our wholesale and correspondent channels by lowering overall costs for mortgage lending.  We anticipate that these channels will continue to see growth month over month, as a result of the increased pipeline growth that both channels have recently enjoyed due to market share expansion.  The growth of CCM originations, which is more dependent on the refinance market, will be more reliant on geographic and product expansion.   We believe our expanded national lending footprint, combined with access to our Impac loan products, will unlock significant opportunities to greatly diversify CCM’s retail loan production and increase our mortgage lending divisions total production.

 

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Our loan products primarily include conventional loans eligible for sale to Fannie Mae and Freddie Mac, loans eligible for government insurance (government loans) by FHA, VA and USDA and also AltQM.

 

Originations by Loan Type:

 

 

 

For the three months ended September 30,

 

(in millions)

 

2015

 

2014

 

% Change

 

Government (1)

 

$

527.5

 

$

265.7

 

99

%

Conventional

 

1,713.4

 

636.8

 

169

%

Other (2)

 

62.3

 

21.1

 

195

%

Total originations

 

$

2,303.2

 

$

923.6

 

149

%

 


(1)         Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).

(2)         Includes $48.0 million of AltQM mortgages originated during the third quarter of 2015.

 

 

 

For the nine months ended September 30,

 

(in millions)

 

2015

 

2014

 

% Change

 

Government (1)

 

$

1,421.7

 

$

575.2

 

147

%

Conventional

 

5,772.9

 

1,118.6

 

416

%

Other (2)

 

125.7

 

48.1

 

161

%

Total originations

 

$

7,320.3

 

$

1,741.9

 

320

%

 


(1)         Includes all government-insured loans including Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA).

(2)         Includes $81.6 million of AltQM mortgages originated during the nine months ended September 30, 2015.

 

We believe there is an underserved mortgage market for borrowers with good credit who may not meet the new qualified mortgage (QM) guidelines set out by the CFPB.  In our opinion, as the demand by consumers for the non-QM product grows we expect the investor appetite will increase for the non-QM mortgages.  During 2014, we rolled out and began originating non-qualified mortgage (non-QM) loans, marketed under our ‘AltQM’ label.  The predominant amount of the early originations came through our wholesale lending channel.  Our correspondent customers began delivering loans that meet our AltQM program guidelines during the third quarter of 2015.  We have established strict lending guidelines, including determining the prospective borrowers’ ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels. In conjunction with launching these new AltQM products we established a strategic investor relationship which provides us with an exit strategy for these non-conforming loans.

 

During the third quarter of 2015, purchase money transactions increased $106.1 million or 23% as compared to the second quarter of 2015.  This was primarily the result of a continued increase in purchase money transactions in our business to business channels.

 

To mitigate against any reduced refinance volumes with the eventual expected increase in mortgage rates, we are focusing on opportunities that will create diversity in our revenue streams. Our efforts to expand our AltQM volumes as well as increase our geographic footprint of our originations are part of this strategy. We also believe that there is an opportunity to provide a third party servicing retention program using our CashCall Mortgage platform to create an additional source of revenue.  Furthermore, we expect to expand lead generation through our internet channel and monetizing our current mortgage leads to diversify our loan product offering.  We are moving forward on all of these initiatives in creating growing revenue streams.

 

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Table of Contents

 

Originations by Purpose:

 

 

 

For the three months ended September 30,

 

(in millions) 

 

2015

 

%

 

2014

 

%

 

Refinance

 

$

1,732.9

 

75

%

$

630.1

 

68

%

Purchase

 

570.3

 

25

%

293.5

 

32

%

Total originations

 

$

2,303.2

 

100

%

$

923.6

 

100

%

 

 

 

For the nine months ended September 30,

 

(in millions)

 

2015

 

%

 

2014

 

%

 

Refinance

 

$

6,000.9

 

82

%

$

1,054.5

 

61

%

Purchase

 

1,319.4

 

18

%

687.4

 

39

%

Total originations

 

$

7,320.3

 

100

%

$

1,741.9

 

100

%

 

Mortgage servicing portfolio

 

(in millions)

 

September 30,
2015

 

December 31,
2014

 

%
Change

 

September 30,
2014

 

%
Change

 

Mortgage servicing portfolio

 

$

6,088.0

 

$

2,267.1

 

169

%

$

1,247.7

 

388

%

 

The mortgage servicing portfolio increased to $6.1 billion at September 30, 2015 as compared to $2.3 billion at December 31, 2014. The increase was due to servicing retained loan sales of $7.0 billion, partially offset by bulk sales of servicing rights totaling $2.8 billion in unpaid principal balance (UPB).

 

To manage our liquidity, we have continued to sell mortgage servicing rights (MSRs) to generate cash needed to fund warehouse haircuts as well as other operating needs.  During the nine months ended September 30, 2015, we sold MSRs representing $2.8 billion in UPB of loans serviced, which has generated approximately $25.0 million in cash.

 

In October 2015, we sold $3.5 billion of conventional mortgage servicing rights for approximately $34.0 million.  Additionally, in October 2015, we signed a term sheet to sell $1.0 billion of government insured mortgage servicing rights.  The transaction is expected to settle in November 2015.

 

The following table includes information about our mortgage servicing portfolio:

 

 

 

At September 30,

 

% 60+ days

 

At December 31,

 

% 60+ days

 

(in millions)

 

2015

 

delinquent (1)

 

2014

 

delinquent (1)

 

Fannie Mae

 

$

3,433.8

 

0.15

%

$

496.1

 

0.71

%

Freddie Mac

 

1,336.4

 

0.09

%

837.8

 

0.16

%

Ginnie Mae

 

1,259.7

 

0.59

%

926.5

 

1.23

%

Other

 

58.1

 

0.00

%

6.7

 

0.00

%

Total servicing portfolio

 

$

6,088.0

 

0.24

%

$

2,267.1

 

0.72

%

 


(1)         Based on loan count.

 

Our warehouse lending division continues to grow and the outstanding balance of finance receivables, representing warehouse lending advances to our warehouse customers, decreased to $41.3 million at September 30, 2015 as compared to $54.3 million at June 30, 2015.  Funding’s from the warehouse lending division decreased to $185.5 million for the three months ended September 30, 2015 as compared to $213.3 for the three months ended June 30, 2015.   As of September 30, 2015, the warehouse lending operations had extended warehouse lines to non-affiliated customers totaling $116.5 million as compared to $112.0 million at June 30, 2015.

 

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Table of Contents

 

For the third quarter of 2015, real estate services fees were $2.8 million as compared to $2.4 million in the second quarter of 2015 and $3.2 million in the third quarter of 2014. Despite the real estate services fees increasing slightly during the third quarter of 2015, we expect these fees to decrease over time with the anticipated runoff of our long-term mortgage portfolio.

 

In our long-term mortgage portfolio, the residuals generated cash flows of $1.1 million in the third quarter of 2015 as compared to $1.6 million in the second quarter of 2015.  The estimated fair value of the residual interest decreased $2.1 million in the third quarter of 2015 to $15.8 million at September 30, 2015, as a result of residual cash flows received and increased loss and severity assumptions.

 

In the first quarter of 2015, we settled our repurchase liability with Fannie Mae related to our pre-2008 non-conforming mortgage operations.  As a result of this settlement and previous resolution of other legal matters pertaining to the legacy non-conforming mortgage operations, the discontinued segment is not expected to have any significant effect on our consolidated operations and financial results.  Therefore, we determined that we will no longer report the legacy non-conforming mortgage operations as discontinued operations.

 

For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below.

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2015, we funded our operations primarily from mortgage lending revenues and real estate services fees, net, which include gains on sale of loans, net, and other mortgage related income, portfolio loss mitigation and real estate services fees, net, primarily generated from our long-term mortgage portfolio, and cash flows from our residual interests in securitizations.  Additionally, we funded mortgage loan originations using warehouse facilities which are repaid once the loan is sold.  During the second quarter of 2015, we raised approximately $55.0 million of debt to provide the liquidity needed to fund warehouse facility haircuts, retain mortgage servicing rights and working capital to fund the growth of origination volumes.  Furthermore, we used the proceeds from the sale of mortgage servicing rights as an additional source of liquidity, as well as borrowings under the $4.0 million line of credit, $6.0 million short-term structured debt and $10.0 million short-term Promissory Note.  All of which have been repaid.  In order to support the continued growth of our mortgage lending platform, we intend to continue to manage our capital through the sale of mortgage servicing rights.  We may also seek to raise capital by issuing debt or equity.

 

The CCM acquisition contingent consideration payments for the first two earn-out periods were approximately $33.0 million and were paid in two parts during the second and third quarters of 2015.  These contingent consideration payments are based on the performance of the CCM division and over time  are expected to decline for the remaining earn-out periods since the earn-out percentage decreases to 55% beginning in 2016 and to 45% beginning in 2017.  Additionally, the quarterly contingent consideration payment due in November 2015 for the third earn-out period is expected to be approximately $5.6 million.

 

In October 2015, we sold $3.5 billion of conventional mortgage servicing rights for approximately $34.0 million.

 

In June 2015, the Company and its subsidiaries, (IRES, IMC and Impac Warehouse Lending, Inc. (IWLI), collectively, the (Borrowers)) entered into a Loan Agreement (Loan Agreement) with a lender (Lender) pursuant to which the Lender provided to the Borrowers a term loan in the aggregate principal amount of $30.0 million (Term Financing) due and payable on December 19, 2016, which may be extended up to December 18, 2017 at the Lender’s discretion.  In connection with the Term Financing, the Borrowers issued to the Lender a Term Note dated June 19, 2015.  The Lender may in its discretion make additional advances in an aggregate amount not to exceed $50.0 million (including amounts then outstanding).   The proceeds from the Term Financing were used to pay off the working capital line of credit with a national bank (approximately $4.0 million) and amounts under an existing master repurchase agreement with the Lender (approximately $3.2 million).   The Borrowers also paid the Lender an origination fee of $300 thousand.  The Term Financing is payable monthly and accrues interest at the rate per annum equal to LIBOR plus 8.5%.  Amounts under the Term Financing may be prepaid at any time without penalty or premium, provided, however, that any prepayments made within nine months of the closing date will be subject to, with certain exceptions, a prepayment premium equal to 50% of the then applicable interest rate multiplied by the amount of the prepayment that would be payable until the end of the nine months.  The Borrowers are subject to mandatory prepayment on the Term Financing based on a borrowing base formula that includes amounts under outstanding warehouse facilities, market value of mortgage servicing rights and residual securities and certain mortgage loans.

 

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Table of Contents

 

In May 2015, the Company issued $25.0 million in original aggregate principal amount of Convertible Promissory Notes (Convertible Notes). The Convertible Notes mature on or before May 9, 2020 and accrue interest at a rate of 7.5% per annum, to be paid quarterly.  Note holders may convert all or a portion of the outstanding principal amount of the Convertible Notes to shares of IMH common stock at a rate of $21.50 per share, subject to adjustment for stock splits and dividends.  The Company has the right to force a conversion if the stock price of IMH common stock reaches $30.10 for 20 trading days in a 30 day consecutive period.

 

In April 2015, the Company issued a $10.0 million short term Promissory Note with an interest rate of 15%. The balance was repaid in May 2015.

 

Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over economic recession, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing.

 

We believe that current cash balances, cash flows from our mortgage lending operations, the sale of mortgage servicing rights, real estate services fees generated from our long-term mortgage portfolio, and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating needs. We believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions and other finance companies which have offices in our market area as well as operations throughout the United States. We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers, brokers and sellers. Additionally, competition for loss mitigation servicing, loan modification services and other portfolio services has increased. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide mortgage and real estate services for others is more difficult than many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio.

 

While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending segment, real estate services segment and realizing cash flows from the long-term mortgage portfolio. Our future financial performance and profitability are dependent in large part upon the ability to expand our mortgage lending platform successfully.

 

Critical Accounting Policies

 

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include those issues included in Management’s Discussion and Analysis of Results of Operations in IMH’s report on Form 10-K for the year ended December 31, 2014.  Such policies have not materially changed during 2015 other than what is outlined below:

 

Income Taxes

 

Provision for income taxes is calculated using the asset and liability method, which requires the recognition of deferred income taxes. Deferred tax assets and liabilities are recognized and reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in the valuation allowance. Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. We provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets through carry back to prior periods; (3) anticipated taxable income resulting from the reversal of taxable temporary differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary differences.

 

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Table of Contents

 

Goodwill and Intangible Assets

 

We account for business combinations using the acquisition method, under which the total consideration transferred (including contingent consideration) is allocated to the fair value of the assets acquired (including identifiable intangible assets) and liabilities assumed. The excess of the consideration transferred over the fair value of the assets acquired and liabilities assumed results in goodwill.

 

We evaluate our reporting units on an annual or on as needed basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill and other intangible assets with an indefinite useful life are not subject to amortization but are reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. If we determine that it is more likely than not that the intangible assets are impaired, a quantitative impairment test is performed. For the quantitative impairment test, we estimate and compare the fair value of indefinite-lived intangible asset with its carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, the amount of the impairment is measured as the difference between the carrying amount of the asset and its fair value. Impairment is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.

 

Intangible assets with finite lives are amortized over their estimated lives using an amortization method that reflects the pattern in which the economic benefits of the asset are consumed. We review intangible assets for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable, in which case any impairment charge would be recorded to earnings.

 

Business Combinations

 

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations.” Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed which involve contingencies must also be recognized at their estimated fair value, provided such fair value can be determined during the measurement period. Acquisition-related costs, including severance, conversion and other restructuring charges, such as abandoned space accruals, are expensed. Results of operations of an acquired business are included in the statement of operations from the date of acquisition.

 

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Table of Contents

 

Financial Condition and Results of Operations

 

Financial Condition

 

As of September 30, 2015 compared to December 31, 2014

 

The following table shows the condensed consolidated balance sheets for the following periods:

 

 

 

September 30,

 

December 31,

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

 

 

(Unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

Cash

 

$

10,509

 

$

10,073

 

$

436

 

4

%

Restricted cash

 

5,829

 

2,420

 

3,409

 

141

 

Mortgage loans held-for-sale

 

460,808

 

239,391

 

221,417

 

92

 

Finance receivables

 

41,334

 

8,358

 

32,976

 

395

 

Mortgage servicing rights

 

63,281

 

24,418

 

38,863

 

159

 

Securitized mortgage trust assets

 

4,814,798

 

5,268,531

 

(453,733

)

(9

)

Goodwill

 

104,938

 

352

 

104,586

 

29,712

 

Intangibles

 

31,024

 

 

31,024

 

n/a

 

Deferred tax asset

 

24,420

 

 

24,420

 

n/a

 

Other assets

 

37,942

 

25,029

 

12,913

 

52

 

Total assets

 

$

5,594,883

 

$

5,578,572

 

$

16,311

 

0

%

 

 

 

 

 

 

 

 

 

 

LIABILITIES & EQUITY

 

 

 

 

 

 

 

 

 

Warehouse borrowings

 

$

477,673

 

$

226,718

 

$

250,955

 

111

%

Short-term debt

 

 

6,000

 

(6,000

)

(100

)

Term financing

 

30,000

 

 

30,000

 

n/a

 

Convertible notes

 

45,000

 

20,000

 

25,000

 

125

 

Long-term debt ($71,120 par)

 

31,663

 

22,122

 

9,541

 

43

 

Repurchase reserve

 

4,768

 

5,714

 

(946

)

(17

)

Securitized mortgage trust liabilities

 

4,799,024

 

5,251,307

 

(452,283

)

(9

)

Contingent consideration

 

68,792

 

 

68,792

 

n/a

 

Other liabilities

 

35,048

 

21,755

 

13,293

 

61

 

Total liabilities

 

5,491,968

 

5,553,616

 

(61,648

)

(1

)

Total equity

 

102,915

 

24,956

 

77,959

 

312

 

Total liabilities and stockholders’ equity

 

$

5,594,883

 

$

5,578,572

 

$

16,311

 

0

%

 

As a result of the net earnings in the nine months ended September 30, 2015, including $24.4 million from changes in the deferred tax asset valuation allowance and $22.8 million from changes in contingent consideration liability, book value per share increased 284% to $10.00 at September 30, 2015 as compared to $2.60 at December 31, 2014.

 

In the third quarter of 2015, cash balances decreased, primarily due to the increase in mortgage servicing rights as well as the earn-out payment to CashCall Inc. of approximately $8.0 million based upon CCM earnings for the second quarter of 2015.

 

At September 30, 2015, cash increased slightly to $10.5 million from $10.1 million at December 31, 2014. The primary sources of cash between periods were $30.0 million issuance of Term Financing, approximately $25.0 million from the sale of mortgage servicing rights, $25.0 million from the issuance of the Convertible Notes,  $39.5 million from the gain on sale of mortgage loans (net of non-cash premiums, mark-to-market adjustments, unrealized gains from derivatives instruments and provision for repurchases) and $4.6 million from residual interests in securitizations. Offsetting the sources of cash were operating expenses totaling $91.8 million (net of non-cash depreciation expense, amortization of intangible assets and stock compensation expense), $76.1 million of investment in mortgage servicing rights, $33.0 million in earn out payments to CashCall Inc., $6.0 million payoff of the short-term borrowings, $5.0 million payment as part of the consideration for the acquisition of CCM and $4.0 million payoff of the line of credit.

 

Mortgage loans held-for-sale increased $221.4 million to $460.8 million at September 30, 2015 as compared to $239.4 million at December 31, 2014. The increase was due to $7.3 billion in originations offset by $7.1 billion in loan sales related to growth in our mortgage lending division including the acquisition of CCM. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months.

 

Finance receivables increased $33.0 million to $41.3 million at September 30, 2015 as compared to $8.4 million at December 31, 2014. The increase was due to $523.0 million in fundings offset by $490.0 million in settlements.

 

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Table of Contents

 

MSRs increased $38.9 million to $63.3 million at September 30, 2015 as compared to $24.4 million at December 31, 2014. The increase was due to servicing retained loan sales of $7.0 billion. Partially offsetting the increase were bulk sales of MSRs totaling $2.8 billion in UPB and a mark-to-market reduction in fair value of $8.0 million.  At September 30, 2015, we serviced $6.1 billion in UPB for others as compared to $2.3 billion at December 31, 2014.

 

Warehouse borrowings increased $251.0 million to $477.7 million at September 30, 2015 as compared to $226.7 million at December 31, 2014. The increase was due to an increase in mortgage loans held-for-sale attributable to the increased loan volume from the growth in our mortgage lending division including the acquisition of CCM and increased finance receivables at September 30, 2015. During the nine months ended September 30, 2015, we increased our total borrowing capacity to $675.0 million as compared to $415.0 million at December 31, 2014.

 

In the fourth quarter of 2014, we entered into a $6.0 million short-term structured debt agreement collateralized by the residual interests in securitizations. The agreement had an interest rate of LIBOR plus 5.75% per annum and had a maturity date of June 29, 2015. The holder received monthly principal and interest payments which were equal to the distributions from the residual interest underlying collateral with a minimum payment of $500,000.  In June, we used approximately $3.2 million of the proceeds from the Term Financing to pay off the short-term structured debt.

 

Long-term debt increased $9.5 million to $31.7 million at September 30, 2015 as compared to $22.1 million at December 31, 2014.  The increase was primarily due to a mark-to-market adjustment of $8.7 million as a result of the increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate attributable to an improvement in our own credit risk profile, an improvement in our financial condition and results of operations as well as an increase in the forward LIBOR curve.

 

Repurchase reserve liability decreased to $4.8 million at September 30, 2015 as compared to $5.7 million at December 31, 2014. As previously reported, in the first quarter of 2015, we settled our repurchase liability with FNMA related to our legacy non-conforming mortgage operations.  As part of the agreement, the Company paid FNMA $1.0 million during the first quarter with a final payment of $228 thousand paid in April 2015.  We have received a minimal amount of repurchase requests by IMC’s mortgage lending operation for loans sold since early 2011.  During the third quarter of 2015, the general repurchase reserve was reduced by $1.2 million as a result of a review of the Company’s historical loss experience on originations since 2011.

 

The changes in total assets and liabilities, at fair market value, are primarily attributable to decreases in our trust assets and trust liabilities as summarized below.

 

 

 

September 30,

 

December 31,

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Securitized mortgage collateral

 

$

4,796,405

 

$

5,249,639

 

$

(453,234

)

(9

)%

Other trust assets

 

18,393

 

18,892

 

(499

)

(3

)

Total trust assets

 

4,814,798

 

5,268,531

 

(453,733

)

(9

)

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

4,796,400

 

$

5,245,860

 

$

(449,460

)

(9

)%

Other trust liabilities

 

2,624

 

5,447

 

(2,823

)

(52

)

Total trust liabilities

 

4,799,024

 

5,251,307

 

(452,283

)

(9

)

Residual interests in securitizations

 

$

15,774

 

$

17,224

 

$

(1,450

)

(8

)%

 

Since the consolidated and unconsolidated securitization trusts are nonrecourse to the Company, trust assets and liabilities have been netted to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was $15.8 million at September 30, 2015, compared to $17.2 million at December 31, 2014.

 

We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the nine months ended September 30, 2015, we decreased the investor yield requirements for certain securitized mortgage collateral and borrowings as estimated bond prices have continued to improve and corresponding yields have decreased. Additionally, during the second and third quarters of 2015 we lowered the discount rate on certain residual interest vintages.  The decrease in discount rates resulted in an increase in the value of these trust assets and liabilities resulting in an increase

 

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in the value of our residual interests during the the nine months ended September 30, 2015.  However, offsetting the increase was principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings.

 

·                  The estimated fair value of securitized mortgage collateral decreased $453.2 million during the nine months ended September 30, 2015, primarily due to reductions in principal from borrower payments and transfers of loans to REO for single-family and multi-family collateral. Additionally, other trust assets decreased $499 thousand during the nine months ended September 30, 2015, primarily due to liquidations of $24.2 million and a $4.9 million decrease in the net realizable value (NRV) of REO.  Partially offsetting the decrease was an increase of $28.7 million in REO from foreclosures.

 

·                  The estimated fair value of securitized mortgage borrowings decreased $449.5 million during the nine months ended September 30, 2015, primarily due to reductions in principal balances from principal payments during the period for single-family and multi-family collateral as well as a decrease in loss assumptions. The $2.8 million reduction in other trust liabilities during the nine months ended September 30, 2015, was primarily due to $3.3 million in derivative cash payments from the securitization trusts, and a $483 thousand increase in derivative fair value resulting from changes in forward LIBOR interest rates.

 

Prior to 2008, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the “transferred assets”) into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and sub-servicer, unrelated to us, was utilized for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. Our real estate services segment also performs mitigation activities for loans within the portfolio.

 

To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as “curves,” for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (i.e., third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees.

 

We use the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, derivative assets/liabilities, and the residual interests.

 

To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization (after taking into consideration any derivatives in the securitization).  As previously discussed, during the second and third quarters of 2015, we adjusted the acceptable range of expected yields and discount rates for some of our earlier vintage securitizations.  Based on improving bond prices and declining yields in our securitization trusts, we lowered certain residual discount rates during the second and third quarters of 2015.

 

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Table of Contents

 

The following table presents changes in the trust assets and trust liabilities for the nine months ended September 30, 2015:

 

 

 

TRUST ASSETS

 

TRUST LIABILITIES

 

 

 

 

 

Level 3 Recurring Fair Value

 

 

 

 

 

Level 3 Recurring Fair Value

 

 

 

 

 

Measurements

 

NRV (1)

 

 

 

Measurements

 

 

 

 

 

Investment
securities
available-for-
sale

 

Securitized
mortgage
collateral

 

Real estate
owned

 

Total trust
assets

 

Securitized
mortgage
borrowings

 

Derivative
liabilities

 

Total trust
liabilities

 

Net trust
assets

 

Recorded book value at December 31, 2014

 

$

92

 

$

5,249,639

 

$

18,800

 

$

5,268,531

 

$

(5,245,860

)

$

(5,447

)

$

(5,251,307

)

$

17,224

 

Total gains/(losses) included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

9

 

49,719

 

 

49,728

 

 

 

 

49,728

 

Interest expense

 

 

 

 

 

(160,249

)

 

(160,249

)

(160,249

)

Change in FV of net trust assets, excluding REO

 

33

 

6,918

 

 

6,951

(2)

(4,647

)

(483

)

(5,130

)(2)

1,821

 

Losses from REO - not at FV but at NRV

 

 

 

(4,899

)

(4,899

)(2)

 

 

 

(4,899

)

Total gains (losses) included in earnings

 

42

 

56,637

 

(4,899

)

51,780

 

(164,896

)

(483

)

(165,379

)

(113,599

)

Transfers in and/or out of level 3

 

 

 

 

 

 

 

 

 

Purchases, issuances and settlements

 

(84

)

(509,871

)

4,442

 

(505,513

)

614,356

 

3,306

 

617,662

 

112,149

 

Recorded book value at September 30, 2015

 

$

50

 

$

4,796,405

 

$

18,343

 

$

4,814,798

 

$

(4,796,400

)

$

(2,624

)

$

(4,799,024

)

$

15,774

 

 


(1)             Accounted for at net realizable value.

(2)             Represents change in fair value of net trust assets, including trust REO (losses) gains  in the consolidated statements of operations for the nine months ended September 30, 2015.

 

Inclusive of gains from REO, total trust assets above reflect a net gain of $2.1 million as a result of an increase in fair value of securitized mortgage collateral of $6.9 million, increases from other trust assets of $33 thousand offset by losses from REO of $4.9 million. Net losses on trust liabilities were $5.1 million as a result of $4.6 million in losses from the decrease in fair value of securitized mortgage borrowings and losses from derivative liabilities of $483 thousand. As a result, non-interest income—net trust assets totaled a loss of $3.1 million for the nine months ended September 30, 2015.

 

The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations):

 

 

 

September. 30,

 

December 31,

 

 

 

2015

 

2014

 

Net trust assets

 

$

15,774

 

$

17,224

 

Total trust assets

 

4,814,798

 

5,268,531

 

Net trust assets as a percentage of total trust assets

 

0.33

%

0.33

%

 

For the nine months ended September 30, 2015, the estimated fair value of the net trust assets remained the same as a percentage of total trust assets.

 

Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi-family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities.

 

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Table of Contents

 

The following tables present the estimated fair value of our residual interests, including investment securities available for sale, by securitization vintage year and other related assumptions used to derive these values at September 30, 2015 and December 31, 2014:

 

Origination

 

Estimated Fair Value of Residual
Interests by Vintage Year at
September 30, 2015

 

Estimated Fair Value of Residual
Interests by Vintage Year at December 31,
2014

 

Year

 

SF

 

MF

 

Total

 

SF

 

MF

 

Total

 

2002-2003

(1)

$

11,360

 

$

1,366

 

$

12,726

 

$

10,826

 

$

1,975

 

$

12,801

 

2004

 

1,022

 

900

 

1,922

 

1,846

 

1,506

 

3,352

 

2005

(2)

4

 

40

 

44

 

11

 

209

 

220

 

2006

(2)

 

1,082

 

1,082

 

 

851

 

851

 

2007

(2)

 

 

 

 

 

 

Total

 

$

12,386

 

$

3,388

 

$

15,774

 

$

12,683

 

$

4,541

 

$

17,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted avg. prepayment rate

 

5.0

%

11.8

%

5.5

%

4.3

%

12.4

%

4.9

%

Weighted avg. discount rate

 

15.8

%

14.6

%

15.6

%

19.0

%

16.2

%

18.3

%

 


(1)         2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period.

(2)         The estimated fair values of residual interests in vintage years 2005 through 2007 is reflective of higher estimated future losses and investor yield requirements compared to earlier vintage years.

 

We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use different investor yield (discount rate) assumptions for securitized mortgage collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions.  As previously discussed, during the second and third quarters of 2015, the single-family (SF) vintages were lowered to a range of 15% to 35% (15.8% weighted average) from 18% to 35% (19.0% weighted average) and the multi-family (MF) vintages were lowered to a range of 12% to 20% (14.6% weighted average) from 15% to 20% (16.2% weighted average).  The combined SF and MF weighted average discount rate for the quarter ended September 30, 2015 dropped to 15.6% from 18.3% at December 31, 2014.

 

The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at September 30, 2015:

 

 

 

Estimated Future Losses
(1)

 

Investor Yield Requirement
(2)

 

 

 

SF

 

MF

 

SF

 

MF

 

2002-2003

 

7

%

*

(3)

5

%

7

%

2004

 

10

%

*

(3)

5

%

5

%

2005

 

12

%

3

%

5

%

4

%

2006

 

20

%

5

%

6

%

5

%

2007

 

20

%

1

%

6

%

4

%

 


(1)         Estimated future losses derived by dividing future projected losses by UPB at September 30, 2015.

(2)         Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions.

(3)         Represents less than 1%.

 

Despite the increase in housing prices through September 30, 2015, housing prices in many parts of the country are still at levels which have significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2004 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods.

 

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Table of Contents

 

Long-Term Mortgage Portfolio Credit Quality

 

We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days delinquent or greater, foreclosures and delinquent bankruptcies were $1.2 billion or 19.1% of the long-term mortgage portfolio as of September 30, 2015.

 

The following table summarizes the gross UPB of loans in our mortgage portfolio, included in securitized mortgage collateral, that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated:

 

 

 

 

 

Total

 

 

 

Total

 

 

 

September 30,

 

Collateral

 

December 31,

 

Collateral

 

 

 

2015

 

%

 

2014

 

%

 

Securitized mortgage collateral

 

 

 

 

 

 

 

 

 

60 - 89 days delinquent

 

$

123,574

 

2.0

%

$

137,913

 

2.0

%

90 or more days delinquent

 

361,027

 

5.9

%

503,849

 

7.5

%

Foreclosures (1)

 

434,575

 

7.1

%

443,751

 

6.6

%

Delinquent bankruptcies (2)

 

247,817

 

4.1

%

281,936

 

4.2

%

Total 60 or more days delinquent

 

$

1,166,993

 

19.1

%

$

1,367,449

 

20.3

%

Total collateral

 

$

6,115,935

 

100

%

$

6,745,411

 

100

%

 


(1)       Represents properties in the process of foreclosure.

(2)       Represents bankruptcies that are 30 days or more delinquent.

 

The following table summarizes the gross securitized mortgage collateral and REO (at NRV), that were non-performing as of the dates indicated (excludes 60-89 days delinquent):

 

 

 

 

 

Total

 

 

 

Total

 

 

 

September 30,

 

Collateral

 

December 31,

 

Collateral

 

 

 

2015

 

%

 

2014

 

%

 

90 or more days delinquent, foreclosures and delinquent bankruptcies

 

$

1,043,419

 

17.1

%

$

1,229,536

 

18.2

%

Real estate owned

 

18,343

 

0.3

%

18,800

 

0.3

%

Total non-performing assets

 

$

1,061,762

 

17.4

%

$

1,248,336

 

18.5

%

 

Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is the Company’s policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of September 30, 2015, non-performing assets (UPB of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was 17.4%.  At December 31, 2014, non-performing assets to total collateral was 18.5%. Non-performing assets decreased by approximately $186.6 million at September 30, 2015 as compared to December 31, 2014. At September 30, 2015, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was $386.4 million or 6.9% of total assets. At December 31, 2014, the estimated fair value of non-performing assets was $410.3 million or 7.3% of total assets.

 

REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the consolidated statements of operations.

 

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Table of Contents

 

For the three and nine months ended September 30, 2015, we recorded a decrease in net realizable value of the REO in the amount of $2.4 million and $4.9 million, respectively, compared to a decrease of $47 thousand and  an increase of $9.0 million for the comparable 2014 period. The decrease in the net realizable value of the REO during the three and nine months ended September 30, 2015 is the resut of an increase in severities in certain states.  Increases and write-downs of the net realizable value reflect increases or declines in value of the REO subsequent to foreclosure date, but prior to the date of sale.

 

The following table presents the balances of REO:

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

REO

 

$

25,116

 

$

20,674

 

Impairment (1)

 

(6,773

)

(1,874

)

Ending balance

 

$

18,343

 

$

18,800

 

 

 

 

 

 

 

REO inside trusts

 

$

18,343

 

$

18,800

 

REO outside trusts

 

 

 

Total

 

$

18,343

 

$

18,800

 

 


(1)         Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure.

 

In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses.

 

Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses.

 

Results of Operations

 

For the Three and Nine Months Ended September 30, 2015 compared to the Three and Nine Months Ended September 30, 2014

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Revenues

 

$

47,652

 

$

11,957

 

$

35,695

 

299

%

Expenses (1)

 

(24,677

)

(13,690

)

(10,987

)

(80

)

Net interest income

 

119

 

747

 

(628

)

(84

)

Change in fair value of net trust assets, including trust REO gains

 

(3,004

)

92

 

(3,096

)

(3,365

)

Income tax expense

 

(781

)

(307

)

(474

)

(154

)

Net earnings (loss)

 

19,309

 

(1,201

)

20,510

 

1,708

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share available to common stockholders - basic

 

$

1.89

 

$

(0.13

)

$

2.01

 

1,546

%

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share available to common stockholders - diluted

 

$

1.48

 

$

(0.13

)

$

1.61

 

1,238

%

 


(1)         Offsetting and included are changes in contingent consideration liability of approximately $14.5 million for the three months ended September 30, 2015.

 

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For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Revenues

 

$

131,080

 

$

32,686

 

$

98,394

 

301

%

Expenses (1)

 

(74,238

)

(43,121

)

31,117

 

72

 

Net interest income

 

2,135

 

338

 

1,797

 

532

 

Change in fair value of long-term debt

 

(8,661

)

(424

)

(8,237

)

(1,943

)

Change in fair value of net trust assets, including trust REO (losses) gains

 

(3,078

)

7,841

 

(10,919

)

(139

)

Income tax benefit (expense)

 

22,852

 

(1,405

)

24,257

 

1,726

 

Net earnings (loss)

 

70,090

 

(4,085

)

74,175

 

1,816

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share available to common stockholders - basic

 

$

7.00

 

$

(0.44

)

$

7.44

 

1,689

%

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share available to common stockholders - diluted

 

$

5.61

 

$

(0.44

)

$

6.05

 

1,373

%

 


(1)         Offsetting and included are changes in contingent consideration liability of approximately $22.8 million for the nine months ended September 30, 2015.

 

Revenues

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

47,274

 

$

8,602

 

$

38,672

 

450

%

Real estate services fees, net

 

2,775

 

3,243

 

(468

)

(14

)

Servicing income, net

 

2,432

 

913

 

1,519

 

166

 

Loss on mortgage servicing rights

 

(4,818

)

(998

)

(3,820

)

(383

)

Other revenues

 

(11

)

197

 

(208

)

(106

)

Total revenues

 

$

47,652

 

$

11,957

 

$

35,695

 

299

%

 

Gain on sale of loans, net.  For the three months ended September 30, 2015, gain on sale of loans, net were $47.3 million compared to $8.6 million in the comparable 2014 period. The $38.7 million increase is primarily related to a $30.2 million increase in premiums received from the sale of mortgage loans, a $14.5 million increase in premiums from servicing retained loan sales, a $4.4 million increase in mark-to-market gains on loans held-for-sale (LHFS) and a $1.8 million increase in recovery for repurchases partially offset by an $8.7 million increase in net direct loan origination expenses and a $3.4 million increase in realized and unrealized net losses on derivative financial instruments.

 

The overall increase in gain on sale of loans, net was due to increased volumes and gain on sale margins predominantly due to the growth in our mortgage lending division including the first quarter acquisition of CCM.   For the three months ended September 30, 2015, we originated and sold $2.3 billion and $2.2 billion of loans, respectively, as compared to $923.6 million and $813.5 million of loans originated and sold, respectively, during the same period in 2014.  Margins increased to approximately 205 bps for the three months ended September 30, 2015 as compared to 93 bps for the same period in 2014 due to the higher concentration of retail loans which have higher margins.

 

Real estate services fees, net.  For the three months ended September 30, 2015, real estate services fees, net were $2.8 million compared to $3.2 million in the comparable 2014 period. The $468 thousand decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio as compared to the third quarter of 2014.

 

Servicing income, net.  For the three months ended September 30, 2015, servicing income, net was $2.4 million compared to $913 thousand in the comparable 2014 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 221% to an average balance of $5.4 billion for the three months ended September 30, 2015 as compared to an average balance of $1.7 billion for the three months ended September 30, 2014.   The increase in the average balance of the servicing portfolio is a result of servicing retained loan sales of $2.2 billion during the three months ended September 30, 2015 as compared to $793.1 million for the three months ended September 30, 2014.

 

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Table of Contents

 

Loss on mortgage servicing rights.  For the three months ended September 30, 2015, loss on MSRs was $4.8 million compared to $998 thousand in the comparable 2014 period. For the three months ended September 30, 2015, loss on MSRs was primarily the result of a $4.3 million loss from a change in fair value of MSRs as well as a $471 thousand loss on sale of mortgage servicing rights.  The $4.3 million loss from change in fair value of mortgage servicing rights is primarily due to the reduction in interest rates since the end of the second quarter of 2015.    Additionaly, we recorded a $471 thousand loss on sale of MSRs related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods.  For the three months ended September 30, 2014, loss on MSRs was primarily the result of a $1.2 million loss from a change in fair value of MSRs partially offset by a $207 thousand gain on sale of servicing.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

133,018

 

$

19,468

 

$

113,550

 

583

%

Real estate services fees, net

 

7,872

 

11,282

 

(3,410

)

(30

)

Servicing income, net

 

4,083

 

3,773

 

310

 

8

 

Loss on mortgage servicing rights

 

(14,176

)

(3,540

)

(10,636

)

(300

)

Other revenues

 

283

 

1,703

 

(1,420

)

(83

)

Total revenues

 

$

131,080

 

$

32,686

 

$

98,394

 

301

%

 

Gain on sale of loans, net.  For the nine months ended September 30, 2015, gain on sale of loans, net were $133.0 million compared to $19.5 million in the comparable 2014 period. The $113.6 million increase is primarily related to a $117.5 million increase in premiums received from the sale of mortgage loans, a $58.9 million increase in premiums from servicing retained loan sales, an $8.7 million increase in realized and unrealized net gains on derivative financial instruments, a $3.9 million increase in mark-to-market gains on LHFS and a $1.3 million decrease in provision for repurchases, partially offset by $76.7 million increase in net direct loan origination expenses.

 

The overall increase in gain on sale of loans, net was due to increased volumes and gain on sale margins predominantly due to the growth in our mortgage lending division including the first quarter acquisition of CCM.   For the nine months ended September 30, 2015, we originated and sold $7.3 billion and $7.1billion of loans, respectively, as compared to $2.0 billion and $2.0 billion of loans originated and sold, respectively, during the same period in 2014.  Margins increased to approximately 182 bps for the nine months ended September 30, 2015 as compared to 112 bps for the same period in 2014 and a higher concentration of retail loans which have higher margins.  In the first quarter of 2015, gain on sale of loans, net included increased loan origination costs related to the acquisition of CCM.  Beginning in the second quarter of 2015, the operations of CCM were consolidated with our mortgage lending segment, therefore, the operating expenses of CCM were included in personnel and general, administrative, and other expense.

 

Real estate services fees, net.  For the nine months ended September 30, 2015, real estate services fees, net were $7.9 million compared to $11.3 million in the comparable 2014 period. The $3.4 million decrease was primarily the result of a decrease in transactions related to the decline in the number of loans and the UPB of the long-term mortgage portfolio.

 

Servicing income, net.  For the nine months ended September 30, 2015, servicing income, net was $4.1 million compared to $3.8 million in the comparable 2014 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 47% to an average balance of $3.6 billion for the nine months ended September 30, 2015 as compared to an average balance of $2.4 billion for the nine months ended September 30, 2014.   The increase in the average balance of the servicing portfolio is a result of servicing retained loan sales of $7.0 billion partially offset by $2.8 billion in mortgage servicing sales during the nine months ended September 30, 2015 as compared to $1.6 billion for the nine months ended September 30, 2014.

 

Loss on mortgage servicing rights.  For the nine months ended September 30, 2015, loss on MSRs was $14.2 million compared to $3.5 million in the comparable 2014 period. For the nine months ended September 30, 2015, loss on MSRs was primarily the result of a $6.2 million loss on sale of servicing primarily due to FHA dropping its required mortgage insurance premium by 0.50% in January 2015.  Additionally, we recorded an $8.0 million loss from change in fair value of MSRs related to a decrease in interest rates and prepayments experienced during the nine months ended September 30, 2015.  For the nine months ended September 30, 2014, (loss) gain MSRs was primarily the result of a ($4.9) million change in fair value of MSRs due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period, partially offset by a $1.4 million gain on the sale of MSRs.

 

Other revenues.  For the nine months ended September 30, 2015, other revenue was $283 thousand compared to $1.7 million for the comparable 2014 period.  The decrease in other revenue was primarily due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain.

 

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Table of Contents

 

Expenses

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Personnel expense

 

$

21,315

 

$

9,062

 

$

12,253

 

135

%

Business promotion

 

10,735

 

252

 

10,483

 

4160

 

General, administrative and other

 

7,100

 

4,376

 

2,724

 

62

 

Accretion of contingent consideration

 

2,424

 

 

2,424

 

n/a

 

Change in fair value of contingent consideration

 

(16,897

)

 

(16,897

)

n/a

 

Total expenses

 

$

24,677

 

$

13,690

 

$

10,987

 

80

%

 

Total expenses were $24.7 million for the three months ended September 30, 2015, compared to $13.7 million for the comparable period of 2014.  Personnel expense increased $12.3 million to $21.3 million for the three months ended September 30, 2015.  The increase is primarily due to the acquisition of CCM during the first quarter of 2015 which contributed an additional $10.3 million in personnel expense during the three months ended September 30, 2015 as well as the addition of new sales personnel in the wholesale and correspondent division as compared to the second quarter of 2014.

 

Business promotion was $10.7 million for the three months ended September 30, 2015, compared to $252 thousand for the comparable period of 2014.  The increase is due to the operations of CCM which were acquired during the first quarter of 2015.  This division operates as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents. Our centralized call center purchases leads and promotes its business through radio and television advertisements.  In addition to the ongoing advertising expense associated with CCM, the increase is part of our strategic goal to leverage the marketing platform to expand the national footprint of our retail call center volumes as well as offering new AltQM products.

 

General, administrative and other expenses increased to $7.1 million for the three months ended September 30, 2015, compared to $4.4 million for the same period in 2014. The increase was primarily related to a $1.2 million increase in amortization of intangible and other assets, a $664 thousand increase in legal and professional fees, a $177 thousand increase in data processing and information technology support and a $691 thousand increase in other general and administrative expenses related to the acquisition of CCM during the first quarter of 2015.

 

We recorded a contingent consideration liability related to the acquisition of CCM during the first quarter of 2015.  The contingent component consists of a three year earn-out provision beginning on the effective date January 2, 2015.  Each quarter we update our estimated fair value of contingent consideration by revising our forecast of CCM pre-tax earnings which include actual experience to date.  During the third quarters of 2015, we updated assumptions which included reductions in gains on sale margins based on current market conditions. Based on these changes, we recorded an $16.9 million change in fair value associated with a reduction in the contingent consideration liability at September 30, 2015.  The change in fair value of contingent consideration was related to the estimated reduction in future pre-tax earnings of CCM over the expected earn-out period, primarily due to margin compression.  The fair value of contingent consideration may change from quarter to quarter based upon updated assumptions used to forecast pre-tax earnings for CCM.

 

Beginning in the second quarter of 2015, as part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in 2017, wich increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period.  In the third quarter of 2015, accretion increased the contingent consideration liability by $2.4 million.

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Personnel expense

 

$

56,883

 

$

27,841

 

$

29,042

 

104

%

Business promotion

 

19,628

 

1,020

 

18,608

 

1824

 

General, administrative and other

 

20,479

 

14,260

 

6,219

 

44

 

Accretion of contingent consideration

 

5,471

 

 

5,471

 

n/a

 

Change in fair value of contingent consideration

 

(28,223

)

 

(28,223

)

n/a

 

Total expenses

 

$

74,238

 

$

43,121

 

$

31,117

 

72

%

 

Total expenses for the nine months ended September 30, 2015 include CCM expenses beginning April 1, 2015 as the transaction closed March 31, 2015.  As a result, total expenses for the nine months ended September 30, 2015 may not be representative of our expenses for the remainder of the year.

 

Total expenses were $74.2 million for the nine months ended September 30, 2015, compared to $43.1 million for the comparable period of 2014.  Personnel expense increased $29.0 million to $56.9 million for the nine months ended September 30, 2015.  The increase is primarily due to the acquisition and consolidation of CCM on March 31, 2015 which contributed an additional $22.0 million in personnel expense since the acquisition date as well as the addition of new sales personnel in the wholesale and correspondent division as compared to the nine months ended September 30, 2014.

 

Business promotion was $19.6 million for the nine months ended September 30, 2015, compared to $1.0 million for the same period of 2014.  The increase is due to the operations of CCM which were acquired during the first quarter of 2015.  This division operates as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents.  Our centralized call center purchases leads and promotes its business through radio and television advertisements. This increase is part of our strategic goal to leverage the marketing platform to expand the national footprint of our retail call center volumes as well as volumes of our new AltQM products.

 

General, administrative and other expenses increased to $20.5 million for the nine months ended September 30, 2015, compared to $14.3 million for the same period in 2014. The increase was primarily related to a $2.4 million increase in amortization of intangible and other assets, a $2.0 million increase in legal and professional fees, an $844 thousand increase in data processing and information technology support and a $1.0 million increase in other general and administrative expenses related to the acquisition of CCM during the first quarter of 2015.

 

During the third quarter of 2015, we updated assumptions which included reductions in gain on sale margins based on current market conditions. Based on these changes, we recorded a $28.2 million change in fair value associated with a reduction in the contingent consideration liability at September 30, 2015.  The change in fair value of contingent consideration was related to the estimated reduction in future pre-tax earnings of CCM over the expected earn-out period, primarily due to margin compression.  The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM.

 

Beginning in the second quarter of 2015, as part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in 2017, which increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period.  For the nine months ended September 30, 2015, accretion increased the contingent consideration liability by $5.5 million.  We did not record accretion in the first quarter of 2015 as the acquisition transaction did not close until March 31, 2015, however the accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period.

 

Net Interest Income (Expense)

 

We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, loans held-for-sale, finance receivables and investment securities available-for-sale, or collectively, “mortgage assets,” and, to a lesser extent, interest income earned on cash and cash equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized mortgage borrowings and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, short-term debt, Term Financing and line of credit. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities.

 

50



Table of Contents

 

The following tables summarize average balance, interest and weighted average yield on interest-earning assets and interest-bearing liabilities, for the periods indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets.

 

 

 

For the Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral

 

$

4,887,919

 

$

66,239

 

5.42

%

$

5,430,608

 

$

77,719

 

5.72

%

Mortgage loans held-for-sale

 

357,827

 

3,558

 

3.98

%

176,789

 

1,865

 

4.22

%

Finance receivables

 

42,025

 

495

 

4.71

%

3,590

 

42

 

4.68

%

Other

 

20,303

 

9

 

0.18

%

11,262

 

5

 

0.18

%

Total interest-earning assets

 

$

5,308,074

 

$

70,301

 

5.30

%

$

5,622,249

 

$

79,631

 

5.67

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

4,886,775

 

$

64,239

 

5.26

%

$

5,427,210

 

$

75,931

 

5.60

%

Warehouse borrowings (1)

 

396,019

 

3,397

 

3.43

%

171,458

 

1,491

 

3.48

%

Long-term debt

 

31,550

 

934

 

11.84

%

17,720

 

1,039

 

23.45

%

Convertible Notes

 

45,000

 

859

 

7.64

%

20,000

 

387

 

7.74

%

Short-term borrowing

 

30,000

 

737

 

9.83

%

 

 

0.00

%

Other

 

801

 

16

 

7.99

%

3,804

 

36

 

3.79

%

Total interest-bearing liabilities

 

$

5,390,145

 

$

70,182

 

5.21

%

$

5,640,192

 

$

78,884

 

5.59

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Spread (2)

 

 

 

$

119

 

0.09

%

 

 

$

747

 

0.08

%

Net Interest Margin (3)

 

 

 

 

 

0.01

%

 

 

 

 

0.05

%

 


(1)         Warehouse borrowings include the borrowings from mortgage loans held-for-sale and finance receivables.

(2)         Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(3)         Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

 

Net interest spread decreased $628 thousand for the quarter ended September 30, 2015 primarily attributable to an increase in interest expense from the issuance of the additional Convertible Note and the short-term borrowing.  Offsetting the decrease in net spread was an increase in the net interest spread on the securitized mortgage collateral and securitized mortgage borrowings, an increase in the net interest spread between loans held-for-sale and finance receivables and their related warehouse borrowings and a decrease in interest expense on the long-term debt.  As a result, net interest margin decreased to 0.01% for the three months ended September 30, 2015 from 0.05% for the three months ended September 30, 2014.

 

During the quarter ended September 30, 2015, the yield on interest-earning assets decreased to 5.30% from 5.67% in the comparable 2014 period. The yield on interest-bearing liabilities decreased to 5.21% for the quarter ended September 30, 2015 from 5.59% for the comparable 2014 period. In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield as compared to the previous period. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings.

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral

 

$

5,034,115

 

$

198,965

 

5.27

%

$

5,453,971

 

$

216,586

 

5.29

%

Mortgage loans held-for-sale

 

348,931

 

9,408

 

3.59

%

124,493

 

3,929

 

4.21

%

Finance receivables

 

59,851

 

1,773

 

3.95

%

2,070

 

70

 

4.51

%

Other

 

17,285

 

31

 

0.24

%

10,888

 

28

 

0.34

%

Total interest-earning assets

 

$

5,460,182

 

$

210,177

 

5.13

%

$

5,591,422

 

$

220,613

 

5.26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

$

5,032,136

 

$

192,689

 

5.11

%

$

5,451,962

 

$

212,601

 

5.20

%

Warehouse borrowings (1)

 

382,603

 

9,248

 

3.22

%

119,867

 

3,190

 

3.55

%

Long-term debt

 

28,717

 

2,827

 

13.13

%

17,097

 

3,224

 

25.14

%

Convertible notes

 

33,370

 

1,918

 

7.66

%

20,000

 

1,161

 

7.74

%

Short-term borrowing

 

13,315

 

1,062

 

10.63

%

 

 

0.00

%

Short-term debt

 

2,782

 

184

 

8.82

%

 

 

0.00

%

Other

 

3,197

 

114

 

4.75

%

3,495

 

99

 

3.78

%

Total interest-bearing liabilities

 

$

5,496,120

 

$

208,042

 

5.05

%

$

5,612,421

 

$

220,275

 

5.23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Spread (2)

 

 

 

$

2,135

 

0.08

%

 

 

$

338

 

0.03

%

Net Interest Margin (3)

 

 

 

 

 

0.05

%

 

 

 

 

0.01

%

 


(1)         Warehouse borrowings include the borrowings from mortgage loans held-for-sale and finance receivables.

(2)         Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.

(3)         Net interest margin is calculated by dividing net interest spread by total average interest-earning assets.

 

Net interest spread increased $1.8 million for the nine months ended September 30, 2015 primarily attributable to an increase in the net interest spread on securitized mortgage collateral and securitized mortgage borrowings, an increase in the net interest spread between loans held-for-sale and finance receivables and their related warehouse borrowings and a decrease in interest expense on the long-term debt.  Offsetting the increase in net spread was an increase in interest expense from the issuance of the additional Convertible Note, short-term structured debt and short-term borrowing. As a result, net interest margin increased to 0.05% for the nine months ended September 30, 2015 from 0.01% for the nine months ended September 30, 2014.

 

During the nine months ended September 30, 2015, the yield on interest-earning assets decreased to 5.13% from 5.26% in the comparable 2014 period. The yield on interest-bearing liabilities decreased to 5.05% for the nine months ended September 30, 2015 from 5.23% for the comparable 2014 period.  In connection with the fair value accounting for investment securities available-for-sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield as compared to the previous period. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings.

 

Change in the fair value of long-term debt.

 

Change in the fair value of long-term debt resulted in no change for both the three months ended September 30, 2015 as well as the comparable 2014 period.  Long-term debt (consisting of trust preferred securities and junior subordinated notes) is measured based upon an analysis prepared by the Company, which considers the Company’s own credit risk and discounted cash flow analyses. Improvements in financial results and financial condition of the Company in the future could result in additional increases in the estimated fair value of the long-term debt, while deterioration in financial results and financial condition could result in a decrease in the estimated fair value of the long-term debt.

 

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Change in the fair value of long-term debt resulted in a loss of $8.7 million for the nine months ended September 30, 2015, compared to a loss of $424 thousand for the comparable 2014 period as a result of the increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate attributable to an improvement in our own credit risk profile, improvement in our financial condition and results of operations from the mortgage lending segment including the acquisition of CCM during the first quarter of 2015 as well as an increase in forward LIBOR interest rates during 2015 as compared to 2014.

 

Change in fair value of net trust assets, including trust REO gains (losses)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Change in fair value of net trust assets, excluding REO

 

$

(568

)

$

139

 

$

1,821

 

$

(1,136

)

(Losses) gains from REO

 

(2,436

)

(47

)

(4,899

)

8,977

 

Change in fair value of net trust assets, including trust REO (losses) gains

 

$

(3,004

)

$

92

 

$

(3,078

)

$

7,841

 

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.0 million for the quarter ended September 30, 2015, compared to a gain of $92 thousand in the comparable 2014 period. The change in fair value of net trust assets, excluding REO was due to $568 thousand in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updated assumptions of increased severities and collateral losses. Additionally, the NRV of REO decreased $2.4 million during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $92 thousand for the quarter ended September 30, 2014. The change in fair value of net trust assets, including REO was due to $139 thousand in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased collateral losses in the future and lower interest rates. Partially offsetting the increase was a $47 thousand decrease in NRV of REO during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.1 million for the nine months ended September 30, 2015, compared to a gain of $7.8 million in the comparable 2014 period. The change in fair value of net trust assets, excluding REO was due to $1.8 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with lower interest rates during 2015 and updated assumptions of decreased collateral losses during the second quarter of 2015. Additionally, the NRV of REO decreased $4.9 million during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio primarily during the first and third quarters of 2015.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $7.8 million for the nine months ended September 30, 2014. The change in fair value of net trust assets, including REO was due to a $9.0 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Partially offsetting the gain was $1.1 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates.

 

Income Taxes

 

We recorded tax expense (benefit) of $781 thousand and ($22.9) million for the three and nine months ended September 30, 2015, respectively.  Income tax expense for the three months ended September 30, 2015 is primarily the result of amortization of the deferred charge and an increase in current income tax provision based upon an estimated increase in federal alternative minimum tax (AMT) and state income taxes.  Income tax benefit for the nine months ended September 30, 2015 is primarily the result of reversal of valuation allowance partially offset by federal alternative minimum tax (AMT), amortization of the deferred charge and state income taxes from states where we do not have net operating loss carryforwards or state minimum taxes, including AMT. For the three and nine months ended September 30, 2014, we recorded an expense of $307 thousand and $1.4 million primarily related to alternative minimum taxes associated with taxable income generated from the sale of AmeriHome and mortgage servicing rights.

 

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As of December 31, 2014, we had estimated federal and California net operating loss (NOL) carryforwards of approximately $496.3 million and $423.7 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2027 and 2018, respectively.

 

Based on pretax income of $47.2 million for the nine months ended September, 2015, the expected tax expense would be $18.9 million at an effective rate of 40%.  However, we utilized $18.4 million in available NOL’s by offsetting tax expense for the period with a reversal of the valuation allowance.  Additionally, based on the weight of available evidence at September 30, 2015, we determined that it was more likely than not that we would generate sufficient taxable income in future periods to utilize a portion of our net deferred tax asset.

 

As of December 31, 2014, we had deferred tax assets of $163.2 million which we recorded a full valuation allowance against.  During the first quarter of 2015, with the aforementioned acquisition of CCM, we significantly expanded our mortgage lending operations and profitability.  As of September 30, 2015, in part because of the earnings recognition during the first six months of 2015, current year projected earnings, future projected earnings as well as the historical earnings of CCM, management determined that sufficient positive evidence exists to conclude that it is more likely than not that deferred taxes of $24.4 million are realizable, and therefore, reduced the valuation allowance accordingly. Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset of $24.4 million at September 30, 2015 is more likely than not based on future forecasted net earnings.  The Company estimates that it would need to generate approximately $61.0 million of taxable income during the applicable carryforward periods to fully realize the federal and state deferred tax assets.  However, to the extent the Company is unable to generate sufficient taxable income, the ability to realize the deferred tax asset may become uncertain and an additional charge to increase the valuation allowance may be recorded.

 

Results of Operations by Business Segment

 

We have three primary operating segments: Mortgage Lending, Real Estate Services and Long-Term Mortgage Portfolio. Unallocated corporate and other administrative costs, including the cost associated with being a public company, are presented in Corporate. Segment operating results are as follows:

 

Mortgage Lending

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

47,274

 

$

8,602

 

$

38,672

 

450

%

Servicing income, net

 

2,432

 

913

 

1,519

 

166

 

Loss on mortgage servicing rights

 

(4,818

)

(998

)

(3,820

)

(383

)

Other

 

(145

)

109

 

(254

)

(233

)

Total revenues

 

44,743

 

8,626

 

36,117

 

419

 

 

 

 

 

 

 

 

 

 

 

Other income

 

658

 

403

 

255

 

63

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(20,631

)

(6,941

)

13,690

 

197

 

Business promotion

 

(10,702

)

(241

)

10,461

 

4,341

 

General, administrative and other

 

(4,494

)

(1,564

)

2,930

 

187

 

Accretion of contingent consideration

 

(2,424

)

 

2,424

 

n/a

 

Change in fair value of contingent consideration

 

16,897

 

 

(16,897

)

n/a

 

Net earnings before income taxes

 

$

24,047

 

$

283

 

$

23,764

 

8,397

%

 

For the quarter ended September 30, 2015, gain on sale of loans, net were $47.3 million or 205 bps compared to $8.6 million or 93 bps in the comparable 2014 period. The $38.7 million increase is primarily related to a $30.2 million increase in premiums received from the sale of mortgage loans, a $14.5 million increase in premiums from servicing retained loan sales, a $4.4 million increase in mark-to-market gains on LHFS and a $1.8 million increase in recovery for repurchases partially offset by an $8.7 million increase in net direct loan origination expenses and a $3.4 million increase in realized and unrealized net losses on derivative financial instruments.

 

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The overall increase in gain on sale of loans, net was due to increased volumes and gain on sale margins predominantly due to the growth in our mortgage lending division including the first quarter acquisition of CCM.   For the three months ended September 30, 2015, we originated and sold $2.3 billion and $2.2 billion of loans, respectively, as compared to $923.6 million and $813.5 million of loans originated and sold, respectively, during the same period in 2014.   Margins increased to approximately 205 bps for the three months ended September 30, 2015 as compared to 93 bps for the same period in 2014 due to the higher concentration of retail loans which have higher margins.

 

For the three months ended September 30, 2015, servicing income, net was $2.4 million compared to $913 thousand in the comparable 2014 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 221% to an average balance of $5.4 billion for the three months ended September 30, 2015 as compared to an average balance of $1.7 billion for the three months ended September 30, 2014.  The increase in the average balance of the servicing portfolio is a result of servicing retained loan sales of $2.2 billion during the three months ended September 30, 2015 as compared to $793.1 million for the three months ended September 30, 2014.

 

For the three months ended September 30, 2015, loss on MSRs was $4.8 million compared to $998 thousand in the comparable 2014 period. For the three months ended September 30, 2015, loss on MSRs was primarily the result of a $4.3 million loss from a change in fair value of MSRs as well as a $471 thousand loss on sale of mortgage servicing rights.  The $4.3 million loss from change in fair value of mortgage servicing rights is primarily due to the reduction in interest rates since the end of the second quarter of 2015.  Additionaly, we recorded a $471 thousand loss on sale of MSRs related to refunds of premiums to investors for loan payoffs associated with sales of servicing rights in previous periods.  For the three months ended September 30, 2014, loss on MSRs was primarily the result of a $1.2 million loss from a change in fair value of MSRs partially offset by a $207 thousand gain on sale of servicing.

 

Personnel expense increased $13.7 million to $20.6 million for the three months ended September 30, 2015.  The increase is primarily due to the acquisition of CCM during the first quarter of 2015 which contributed an additional $10.3 million in personnel expense during the three months ended September 30, 2015 as well as the addition of new sales personnel in the wholesale and correspondent division as compared to the third quarter of 2014.  Additionally, the growth of the mortgage lending division resulted in increased allocations of certain corporate costs.

 

Business promotion was $10.7 million for the three months ended September 30, 2015, compared to $241 thousand for the comparable period of 2014.  The increase is due to the operations of CCM which were acquired during the first quarter of 2015.  This division operates as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents. Our centralized call center purchases leads and promotes its business through radio and television advertisements.  In addition to the ongoing advertising expense associated with CCM, the increase is part of our strategic goal to leverage the marketing platform to expand the national footprint of our retail call center volumes as well as offering new AltQM products.

 

General, administrative and other expenses increased to $4.5 million for the three months ended September 30, 2015, compared to $1.6 million for the same period in 2014. The increase in general administrative and other expense was primarily related to the acquisition of CCM which contributed $2.7 million of the $2.9 million increase.  The $2.9 million increase was primarily related to a $1.2 million increase in amortization of intangible and other assets, a $411 thousand increase in general administrative expense related to the increase in mortgage loan origination volume, $277 thousand increase in legal and professional fees, a $303 thousand increase in data processing and information technology support and a $432 thousand increase in additional occupancy expense, of which $358 thousand was related to the acquisition of CCM during the first quarter of 2015.

 

We recorded a contingent consideration liability related to the acquisition of CCM during the first quarter of 2015.  The contingent component consists of a three year earn-out provision beginning on the effective date January 2, 2015.  Each quarter we update our estimated fair value of contingent consideration by revising our forecast of CCM pre-tax earnings which include actual experience to date.  During the third quarter of 2015, we updated assumptions which included reductions in gains on sale margins based on experience during the third quarter of 2015. Based on these changes, we recorded an $16.9 million change in fair value associated with a reduction in the contingent consideration liability at September 30, 2015.  The change in fair value of contingent consideration was related to the estimated reduction in future pre-tax earnings of CCM over the expected earn-out period, primarily due to margin compression.  The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM.

 

Beginning in the second quarter of 2015, as part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in 2017, wich increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period.  In the third quarter of 2015, accretion increased the contingent consideration liability by $2.4 million.

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Gain on sale of loans, net

 

$

133,018

 

$

19,468

 

$

113,550

 

583

%

Servicing income, net

 

4,083

 

3,773

 

310

 

8

 

Loss on mortgage servicing rights

 

(14,176

)

(3,540

)

(10,636

)

(300

)

Other

 

(25

)

1,366

 

(1,391

)

(102

)

Total revenues

 

122,900

 

21,067

 

101,833

 

483

 

 

 

 

 

 

 

 

 

 

 

Other income

 

1,673

 

774

 

899

 

116

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(55,252

)

(20,483

)

34,769

 

170

 

Business promotion

 

(19,496

)

(712

)

18,784

 

2,638

 

General, administrative and other

 

(11,351

)

(5,125

)

6,226

 

121

 

Accretion of contingent consideration

 

(5,471

)

 

5,471

 

n/a

 

Change in fair value of contingent consideration

 

28,223

 

 

(28,223

)

n/a

 

Net earnings (loss) before income taxes

 

$

61,226

 

$

(4,479

)

$

65,705

 

1,467

%

 

For the nine months ended September 30, 2015, gain on sale of loans, net were $133.0 million or 182 bps compared to $19.5 million or 112 bps in the comparable 2014 period. The $113.6 million increase is primarily related to a $117.5 million increase in premiums received from the sale of mortgage loans, a $58.9 million increase in premiums from servicing retained loan sales, an $8.7 million increase in realized and unrealized net gains on derivative financial instruments, a $3.9 million increase in mark-to-market gains on LHFS and a $1.3 million decrease in provision for repurchases, partially offset by $76.7 million increase in net direct loan origination expenses.

 

The overall increase in gain on sale of loans, net was due to increased volumes and gain on sale margins predominantly due to the first quarter acquisition of CCM.  For the nine months ended September 30, 2015, we originated and sold $7.3 billion and $7.1 billion of loans, respectively, as compared to $2.0 billion and $2.0 billion of loans originated and sold, respectively, during the same period in 2014.  Margins increased to approximately 182 bps for the nine months ended September 30, 2015 as compared to 112 bps for the same period in 2014 due to the higher concentration of retail loans which have higher margins.

 

For the nine months ended September 30, 2015, servicing income, net was $4.1 million compared to $3.8 million in the comparable 2014 period.  The increase in servicing income, net was the result of the servicing portfolio increasing 47% to an average balance of $3.6 billion for the nine months ended September 30, 2015 as compared to an average balance of $2.4 billion for the nine months ended September 30, 2014.  The increase in the average balance of the servicing portfolio is a result of servicing retained loan sales of $7.0 billion partially offset by $2.8 billion in mortgage servicing sales during the nine months ended September 30, 2015 as compared to $1.6 billion for the nine months ended September 30, 2014.

 

For the nine months ended September 30, 2015, loss on MSRs was $14.2 million compared to $3.5 million in the comparable 2014 period. For the nine months ended September 30, 2015, loss on MSRs was primarily the result of a $6.2 million loss on sale of servicing primarily due to FHA dropping its required mortgage insurance premium by 0.50% in January 2015.  Additionally, we recorded an $8.0 million loss from change in fair value of MSRs related to a decrease in interest rates and prepayments experienced during the nine months ended September 30, 2015.  For the nine months ended September 30, 2014, (loss) gain MSRs was primarily the result of a ($4.9) million change in fair value of MSRs due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period, partially offset by a $1.4 million gain on the sale of MSRs.

 

For the nine months ended September 30, 2015, other (expense) revenue was an expense of $25 thousand compared to revenue of $1.4 million for the comparable 2014 period.  The decrease in other revenue was primarily due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain.

 

Personnel expense increased $34.8 million to $55.3 million for the nine months ended September 30, 2015.  The increase is primarily due to the acquisition and consolidation of CCM on March 31, 2015 resulting in an additional $22.0 million in personnel expense since the acquisition date as well as the addition of new sales personnel in the wholesale and correspondent division as compared to the third quarter of 2014.  Additionally, the growth of the mortgage lending division resulted in increased allocations of certain corporate costs.  As previously described, beginning in the second quarter of 2015, personnel related costs from CCM were recorded within their respective expense line and as a result total expenses for the nine months ended September 30, 2015 might not be an accurate representation of our expenses for the remainder of the year.

 

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Table of Contents

 

Business promotion was $19.5 million for the nine months ended September 30, 2015, compared to $712 thousand for the comparable period of 2014.  The increase is due to the operations of CCM which were acquired during the first quarter of 2015.  This division operates as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents.  Our centralized call center purchases leads and promotes its business through radio and television advertisements. This increase is part of our strategic goal to leverage the marketing platform to expand the national footprint of our retail call center volumes as well as volumes of our new AltQM products.

 

General, administrative and other expenses increased to $11.4 million for the nine months ended September 30, 2015, compared to $5.1 million for the same period in 2014. The increase in general administrative and other expense was primarily related to the acquisition of CCM which contributed $5.4 million of the $6.2 million increase.  The $6.2 million increase was primarily related to a $2.4 million increase in amortization of intangible and other assets, a $1.0 million increase in general administrative expense related to the increase in mortgage loan origination volume, $822 thousand increase in legal and professional fees, an $835 thousand increase in data processing and information technology support and an $897 thousand increase in additional occupancy expense, of which $733 thousand was related to the acquisition of CCM.

 

During the third quarter of 2015, we updated assumptions which included reductions in gain on sale margins based on experience in the third quarter of 2015. Based on these changes, we recorded an $28.2 million change in fair value associated with a reduction in the contingent consideration liability at September 30, 2015.  The change in fair value of contingent consideration was related to the estimated reduction in future pre-tax earnings of CCM over the expected earn-out period, primarily due to margin compression.  The fair value of contingent consideration may change from quarter to quarter based upon actual experience and updated assumptions used to forecast pre-tax earnings for CCM.

 

Beginning in the second quarter of 2015, as part of the acquisition of CCM, we record accretion of the contingent consideration liability from the close of the transaction in March 2015 through the end of the earn-out period in 2017, wich increases the contingent consideration liability. The estimated contingent consideration liability is based on discounted cash flows which represent the time value of money of the liability during the earn-out period.  For the nine months ended September 30, 2015, accretion increased the contingent consideration liability by $5.5 million.  We were not required to record accretion in the first quarter of 2015 as the acquisition transaction did not close until March 31, 2015, however the accretion will continue to be a charge against earnings in future quarters until the end of the earn-out period.

 

Real Estate Services

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Real estate services fees, net

 

$

2,775

 

$

3,243

 

$

(468

)

(14

)%

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

(6

)

6

 

n/a

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(1,156

)

(1,225

)

69

 

6

 

General, administrative and other

 

(291

)

(161

)

(130

)

(81

)

Net earnings before income taxes

 

$

1,328

 

$

1,851

 

$

(523

)

(28

)%

 

For the three months ended September 30, 2015, real estate services fees, net were $2.8 million compared to $3.2 million in the comparable 2014 period. The $468 thousand decrease in real estate services fees, net was the result of a $269 thousand decrease in loss mitigation fees, a $224 thousand decrease in real estate and recovery fees slightly offset by a $25 thousand increase in real estate services.

 

For the three months ended September 30, 2015, general, administrative and other expense increased to $291 thousand as compared to $161 thousand for the comparable 2014 period. Despite the decline in real estate services fees, net due to a reduction in transactions, costs associated with the transactions increased during the period.

 

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Table of Contents

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Real estate services fees, net

 

$

7,872

 

$

11,282

 

$

(3,410

)

(30

)%

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

(5

)

5

 

n/a

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(3,787

)

(3,800

)

13

 

0

 

General, administrative and other

 

(635

)

(643

)

8

 

1

 

Net earnings before income taxes

 

$

3,450

 

$

6,834

 

$

(3,384

)

(50

)%

 

For the nine months ended September 30, 2015, real estate services fees, net were $7.9 million compared to $11.3 million in the comparable 2014 period. The $3.4 million decrease in real estate services fees, net was the result of a $1.5 million decrease in loss mitigation fees, a $1.4 million decrease in real estate and recovery fees and a $593 thousand decrease in real estate services.

 

For the nine months ended September 30, 2015, personal, general, administrative and other expenses were relatively flat only decreasing slightly from the prior year despite the reduction in transactions and the decline in loans and balance of the long-term mortgage portfolio.

 

Long-term Mortgage Portfolio

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Other revenue

 

$

79

 

$

86

 

(7

)

(8

)%

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(155

)

(111

)

44

 

40

 

General, administrative and other

 

(108

)

(103

)

5

 

5

 

Total expenses

 

(263

)

(214

)

(49

)

(23

)

 

 

 

 

 

 

 

 

 

 

Net interest income

 

1,068

 

755

 

313

 

41

 

Change in fair value of net trust assets, including trust REO (losses) gains

 

(3,004

)

92

 

(3,096

)

(3,365

)

Total other (expense) income

 

(1,936

)

847

 

(2,783

)

(329

)

Net (loss) earnings before income taxes

 

$

(2,120

)

$

719

 

$

(2,839

)

(395

)%

 

For the three months ended September 30, 2015, net interest income totaled $1.1 million as compared to $755 thousand for the comparable 2014 period. Net interest income increased $313 thousand for the quarter ended September 30, 2015 primarily attributable to a $208 thousand increase in net interest spread on the long-term mortgage portfolio due to an improvement in net interest income and cash flows in the earlier vintage trusts which include our residual interests. Additionally, net interest income increased $105 thousand due to a decrease in interest expense on the long-term debt.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.0 million for the quarter ended September 30, 2015, compared to a gain of $92 thousand in the comparable 2014 period. The change in fair value of net trust assets, excluding REO was due to $568 thousand in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updated assumptions of increased severities and collateral losses. Additionally, the NRV of REO decreased $2.4 million during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio during the period.

 

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For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Other revenue

 

$

203

 

$

296

 

(93

)

(31

)%

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

(235

)

(266

)

(31

)

(12

)

General, administrative and other

 

(376

)

(454

)

(78

)

(17

)

Total expenses

 

(611

)

(720

)

109

 

15

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

3,458

 

781

 

2,677

 

343

 

Change in fair value of long-term debt

 

(8,661

)

(424

)

(8,237

)

(1943

)

Change in fair value of net trust assets, including trust REO gains (losses)

 

(3,078

)

7,841

 

(10,919

)

(139

)

Total other (expense) income

 

(8,281

)

8,198

 

(16,479

)

(201

)

Net (loss) earnings before income taxes

 

$

(8,689

)

$

7,774

 

$

(16,463

)

(212

)%

 

For the nine months ended September 30, 2015, other revenue totaled $203 thousand as compared to $296 thousand for the comparable 2014 period. The $93 thousand decrease is primarily due to a $64 thousand decrease in master servicing revenue earned on the long-term mortgage portfolio.

 

For the nine months ended September 30, 2015, net interest income totaled $3.5 million as compared to $781 thousand for the comparable 2014 period.  Net interest income increased $2.7 million for the nine months ended September 30, 2015 primarily attributable to a $2.3 million increase in net interest spread on the long-term mortgage portfolio due to an improvement in net interest income and cash flows in the earlier vintage trusts which include our residual interests. Additionally, net interest income increased $397 thousand due to a decrease in interest expense on the long-term debt.

 

Change in the fair value of long-term debt resulted in a loss of $8.7 million for the nine months ended September 30, 2015, compared to a loss of $424 thousand for the comparable 2014 period as a result of the increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate attributable to an improvement in our own credit risk profile, improvement in our financial condition and results of operations from the mortgage lending segment including the acquisition of CCM during the first quarter of 2015 as well as an increase in forward LIBOR interest rates during 2015 as compared to 2014.

 

The change in fair value related to our net trust assets (residual interests in securitizations) was a loss of $3.1 million for the nine months ended September 30, 2015, compared to a gain of $7.8 million in the comparable 2014 period. The change in fair value of net trust assets, excluding REO was due to $1.8 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with lower interest rates during 2015 and updated assumptions of decreased collateral losses during the second quarter of 2015. Additionally, the NRV of REO decreased $4.9 million during the period attributed to higher expected loss severities on properties held in the long-term mortgage portfolio primarily during the first and third quarters of 2015.

 

Corporate

 

The corporate segment includes all compensation applicable to the corporate services groups, public company costs, unused office space as well as debt expense related to the Convertible Notes, Term Financing and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs is allocated to the operating segments. The costs associated with being a public company, unused space as well as the interest expense related to the Convertible Notes and capital leases are not allocated to our other segments and remain in this segment.

 

 

 

For the Three Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Interest expense

 

$

(1,607

)

$

(405

)

(1,202

)

(297

)%

Other expenses

 

(1,558

)

(3,342

)

1,784

 

53

 

Net loss before income taxes

 

$

(3,165

)

$

(3,747

)

$

582

 

16

%

 

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Table of Contents

 

For the three months ended September 30, 2015, interest expense increased to $1.6 million as compared to $405 thousand for the comparable 2014 period. The increase was primarily due to a $1.2 million increase in interest expense from the $30.0 million term financing entered into in June of 2015 as well as the issuance of an additional $25.0 million of Convertible Notes in May 2015.

 

For the three months ended September 30, 2015, other expenses decreased to $1.6 million as compared to $3.3 million for the comparable 2014 period. The decrease was primarily due to a $1.9 million increase in allocated corporate expenses as well as a $363 thousand decrease in occupany expense.   The growth of the mortgage lending division resulted in increased allocations of certain corporate costs due to increased headcount.   Partially offsetting the decrease was a $405 thousand increase in legal and professional fees.

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

 

 

 

Increase

 

%

 

 

 

2015

 

2014

 

(Decrease)

 

Change

 

Interest expense

 

$

(2,996

)

$

(1,212

)

(1,784

)

(147

)%

Other expenses

 

(5,753

)

(11,597

)

5,844

 

50

 

Net loss before income taxes

 

$

(8,749

)

$

(12,809

)

$

4,060

 

32

%

 

For the nine months ended September 30, 2015, interest expense increased to $3.0 million as compared to $1.2 million for the comparable 2014 period.  The increase was primarily due to a $1.8 million increase in interest expense from the $30.0 million term financing entered into in June of 2015, the issuance of an additional $25.0 million of Convertible Notes in May 2015, the $6.0 million short-term structured debt agreement entered into in December 2014 (which was repaid in June 2015) and $10.0 million short-term promissory note entered into in April 2015 and repaid in May 2015.

 

For the nine months ended September 30, 2015, other expenses decreased to $5.7 million as compared to $11.6 million for the comparable 2014 period. The decrease was primarily due to a $5.6 million increase in allocated corporate expenses as well as a $1.4 million decrease in occupany expense.   The growth of the mortgage lending division resulted in increased allocations of certain corporate costs due to increased headcount. Partially offsetting the decrease was a $1.3 million increase in legal and professional fees.

 

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, the Company is not required to provide the information required by this Item.

 

ITEM 4:  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our CEO and CFO, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting with the exception of the following:

 

·                  Beginning in the first quarter of 2015, the Company has incorporated the financial results of CCM into the Company’s consolidated financial statements.  The Company is in the process of documenting the control environment of the CCM division.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

ITEM 1:  LEGAL PROCEEDINGS

 

The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.

 

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any case, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.

 

Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

 

The Company is a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations.

 

Please refer to IMH’s report on Form 10-K for the year ended December 31, 2014 and subsequent Form 10-Q filings for a description of litigation and claims.

 

ITEM 1A:  RISK FACTORS

 

None.

 

ITEM 2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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Table of Contents

 

ITEM 4:  MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5:  OTHER INFORMATION

 

On November 5, 2015, Joseph R. Tomkinson, the Company’s Chief Executive Officer, and William S. Ashmore, the Company’s President, each entered into a First Amendment to their respective employment agreement, which is effective as of October 1, 2015.  The term of each employment agreement was extended until December 31, 2017, unless terminated earlier. Furthermore, for purposes of the annual bonus, the definition of “adjusted net earnings” was revised to also exclude any adjustment relating to (i) recognition or valuing of deferred tax assets, (ii) an earn-out accretion associated with the acquisition of CCM and (iii) the change in estimated fair value of the contingent consideration liability associated with the acquisition of CCM.

 

The information set forth above is included herewith for the purpose of providing the disclosure required under “Item 5.02(e) — Compensatory Arrangements of Certain Officers” of Form 8-K.

 

ITEM 6: EXHIBITS

 

(a)

 

Exhibits:

10.1

 

2010 Omnibus Incentive Plan, as amended (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 27, 2015).

10.2

 

First Amendment dated November 5, 2015 to Employment Agreement between Impac Mortgage Holdings, Inc. and Joseph R. Tomkinson.

10.3

 

First Amendment dated November 5, 2015 to Employment Agreement between Impac Mortgage Holdings, Inc.  and William S. Ashmore.

31.1

 

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

The following materials from Impac Mortgage Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Cash Flows, and (4) Notes to Consolidated Financial Statements, tagged as blocks of text.

 


*              This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

IMPAC MORTGAGE HOLDINGS, INC.

 

 

 

/s/ TODD R. TAYLOR

 

Todd R. Taylor

 

Chief Financial Officer

 

(authorized officer of registrant and principal financial officer)

 

 

 

November 9, 2015

 

 

63