IMPAC MORTGAGE HOLDINGS INC - Quarter Report: 2015 September (Form 10-Q)

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)

 

 

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

 

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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

 

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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

 

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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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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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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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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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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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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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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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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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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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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.

 

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