10-Q 1 a06-22077_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

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, 2006 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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

19500 Jamboree Road, Irvine, CA 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 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 x Accelerated filer o Non-accelerated filer o

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 76,143,144 shares of common stock outstanding as of November 6, 2006.

 




IMPAC MORTGAGE HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

1

 

Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005

1

 

Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the Three and Nine Months Ended September 30, 2006 and 2005

2

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005

4

 

Notes to Consolidated Financial Statements

6

 

 

 

ITEM 2.

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

19

 

Forward-Looking Statements

19

 

General Overview

19

 

Critical Accounting Policies

21

 

Selected Financial Results for the Third Quarter of 2006

21

 

Selected Financial Results for the First Nine Months of 2006

22

 

Third Quarter and Year to Date 2006 Taxable Income

22

 

Financial Condition and Results of Operations

24

 

Liquidity and Capital Resources

43

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

47

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

50

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

50

 

 

 

ITEM 1A.

RISK FACTORS

50

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

51

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

52

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

52

 

 

 

ITEM 5.

OTHER INFORMATION

52

 

 

 

ITEM 6.

EXHIBITS

52

 

 

 

 

SIGNATURES

53

 

 

 

 

CERTIFICATIONS

 

 




 

PART I. FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

161,901

 

$

146,621

 

Restricted cash

 

498

 

698

 

Securitized mortgage collateral

 

20,232,463

 

24,494,290

 

Finance receivables

 

297,657

 

350,217

 

Mortgages held-for-investment

 

3,134

 

160,070

 

Allowance for loan losses

 

(65,715

)

(78,514

)

Mortgages held-for-sale

 

1,293,085

 

2,052,694

 

Accrued interest receivable

 

103,807

 

123,565

 

Derivatives

 

176,797

 

250,368

 

Other assets

 

286,757

 

220,370

 

Total assets

 

$

22,490,384

 

$

27,720,379

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Securitized mortgage borrowings

 

$

19,697,798

 

$

23,990,430

 

Reverse repurchase agreements

 

1,542,441

 

2,430,075

 

Trust preferred securities

 

97,448

 

96,750

 

Other liabilities

 

85,036

 

36,177

 

Total liabilities

 

21,422,723

 

26,553,432

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Series-A junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

 

 

 

Series-B 9.375% cumulative redeemable preferred stock, $0.01 par value; liquidation value $50,000; 2,000,000 shares authorized, 2,000,000 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

 

20

 

20

 

Series-C 9.125% cumulative redeemable preferred stock, $0.01 par value; liquidation value $109,280; 5,500,000 shares authorized; 4,383,900 shares and 4,371,200 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

 

44

 

44

 

 

 

 

 

 

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 76,083,865 and 76,112,963 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

 

761

 

761

 

Additional paid-in capital

 

1,168,729

 

1,167,059

 

Accumulated other comprehensive (loss) income

 

(567

)

1,305

 

Net accumulated deficit:

 

 

 

 

 

Cumulative dividends declared

 

(758,689

)

(675,373

)

Retained earnings

 

657,363

 

673,131

 

Net accumulated deficit

 

(101,326

)

(2,242

)

Total stockholders’ equity

 

1,067,661

 

1,166,947

 

Total liabilities and stockholders’ equity

 

$

22,490,384

 

$

27,720,379

 

 

See accompanying notes to consolidated financial statements.

1




 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)

(in thousands, except per share data)

(unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Mortgage assets

 

$

298,139

 

$

322,705

 

$

942,778

 

$

907,065

 

Other

 

2,127

 

1,345

 

6,451

 

4,149

 

Total interest income

 

300,266

 

324,050

 

949,229

 

911,214

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Securitized mortgage borrowings

 

289,925

 

243,945

 

888,144

 

639,667

 

Reverse repurchase agreements

 

32,552

 

35,448

 

81,881

 

78,192

 

Other borrowings

 

2,299

 

1,761

 

6,986

 

3,200

 

Total interest expense

 

324,776

 

281,154

 

977,011

 

721,059

 

 

 

 

 

 

 

 

 

 

 

Net interest (expense) income

 

(24,510

)

42,896

 

(27,782

)

190,155

 

Provision for loan losses

 

3,183

 

13,434

 

3,288

 

25,219

 

Net interest (expense) income after provision for loan losses

 

(27,693

)

29,462

 

(31,070

)

164,936

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Realized gain (loss) from derivative instruments

 

60,630

 

10,975

 

156,633

 

(4,209

)

Change in fair value of derivative instruments

 

(155,534

)

107,881

 

(92,602

)

141,521

 

Gain on sale of loans

 

4,906

 

12,118

 

35,647

 

44,063

 

Recovery of (provision for) repurchases

 

15,876

 

(3,242

)

(7,233

)

(8,606

)

Loss on lower of cost or market writedown

 

 

 

(15,284

)

 

Other income

 

8,724

 

1,280

 

27,128

 

8,664

 

Total non-interest (loss) income

 

(65,398

)

129,012

 

104,289

 

181,433

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Personnel expense

 

16,643

 

19,592

 

51,973

 

59,282

 

General and administrative and other expense

 

4,591

 

7,111

 

14,190

 

18,584

 

Amortization of deferred charge

 

4,861

 

6,908

 

15,872

 

19,503

 

Professional services

 

1,692

 

1,730

 

6,201

 

7,170

 

Equipment expense

 

1,543

 

1,414

 

4,862

 

3,797

 

Occupancy expense

 

1,248

 

1,284

 

3,860

 

3,599

 

Data processing expense

 

1,709

 

1,296

 

3,819

 

3,075

 

Amortization and impairment of mortgage servicing rights

 

380

 

551

 

1,112

 

1,577

 

Gain on sale of other real estate owned

 

(302

)

(432

)

(1,277

)

(1,261

)

Total non-interest expense

 

32,365

 

39,454

 

100,612

 

115,326

 

Net (loss) earnings before income taxes

 

(125,456

)

119,020

 

(27,393

)

231,043

 

Income tax expense (benefit)

 

2,234

 

(7,337

)

(11,625

)

(13,924

)

Net (loss) earnings

 

(127,690

)

126,357

 

(15,768

)

244,967

 

Cash dividends on cumulative redeemable preferred stock

 

(3,672

)

(3,624

)

(11,016

)

(10,872

)

Net (loss) earnings available to common stockholders

 

$

(131,362

)

$

122,733

 

$

(26,784

)

$

234,095

 

 

See accompanying notes to consolidated financial statements

2




 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net (loss) earnings

 

$

(127,690

)

$

126,357

 

$

(15,768

)

$

244,967

 

Net unrealized (losses) gains on securities:

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during period

 

(237

)

(803

)

(2,015

)

(363

)

Reclassification of gains included in net earnings

 

 

 

143

 

 

Net unrealized losses

 

(237

)

(803

)

(1,872

)

(363

)

Comprehensive (loss) earnings

 

$

(127,927

)

$

125,554

 

$

(17,640

)

$

244,604

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.73

)

$

1.62

 

$

(0.35

)

$

3.10

 

Diluted

 

$

(1.73

)

$

1.61

 

$

(0.35

)

$

3.07

 

Dividends declared per common share

 

$

0.25

 

$

0.45

 

$

0.75

 

$

1.95

 

 

See accompanying notes to consolidated financial statements

3




 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2006

 

2005

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net (loss) earnings

 

$

(15,768

)

$

244,967

 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

 

 

 

 

 

Provision for loan losses

 

3,288

 

25,219

 

Amortization of deferred charge

 

15,872

 

19,503

 

Amortization of premiums, securitization costs and debt issuance costs

 

181,769

 

216,284

 

Gain on sale of other real estate owned

 

(1,277

)

(1,261

)

Gain on sale of loans

 

(35,647

)

(44,063

)

Provision for repurchases

 

7,233

 

8,606

 

Lower of cost or market writedown

 

15,284

 

 

Change in fair value of derivative instruments

 

92,602

 

(141,521

)

Purchase of mortgages held-for-sale

 

(7,594,574

)

(16,300,056

)

Sale and principal reductions on mortgages held-for-sale

 

8,369,598

 

14,700,238

 

Net change in deferred taxes

 

83

 

(2,077

)

Share-based compensation

 

1,628

 

 

Depreciation and amortization

 

4,422

 

3,427

 

Amortization and impairment of mortgage servicing rights

 

1,112

 

1,577

 

Net change in accrued interest receivable

 

19,758

 

(18,712

)

Net change in restricted cash

 

200

 

252,964

 

Net change in other assets and liabilities

 

(16,890

)

(35,365

)

Net cash provided by (used in) operating activities

 

1,048,693

 

(1,070,270

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Net change in securitized mortgage collateral

 

3,974,163

 

(3,467,578

)

Net change in finance receivables

 

52,560

 

166,677

 

Purchase of premises and equipment

 

(8,162

)

(5,880

)

Net change in mortgages held-for-investment

 

154,130

 

388,105

 

Purchase (disposition) of investment securities available-for-sale

 

36,781

 

(36,413

)

Net change in mortgage servicing rights

 

(495

)

(736

)

Purchase of investments for deferred compensation plan

 

 

(3,201

)

Net principal reductions on investment securities available-for-sale

 

(29,035

)

1,501

 

Proceeds from the sale of other real estate owned

 

62,588

 

38,960

 

Net cash provided by (used in) investing activities

 

4,242,530

 

(2,918,565

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net change in reverse repurchase agreements

 

(887,634

)

1,026,328

 

Proceeds from securitized mortgage borrowings

 

2,973,399

 

10,564,127

 

Repayment of securitized mortgage borrowings

 

(7,297,487

)

(7,754,514

)

Issuance of trust preferred

 

 

76,202

 

Common stock dividends paid

 

(53,281

)

(113,194

)

Preferred stock dividends paid

 

(11,016

)

(10,872

)

Proceeds from sale of cumulative redeemable preferred stock

 

203

 

 

Purchases of common stock

 

(951

)

 

Proceeds from exercise of stock options

 

824

 

6,311

 

Net cash provided by (used in) financing activities

 

(5,275,943

)

3,794,388

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

15,280

 

(194,447

)

Cash and cash equivalents at beginning of period

 

146,621

 

324,351

 

Cash and cash equivalents at end of period

 

$

161,901

 

$

129,904

 

 

4




 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2006

 

2005

 

SUPPLEMENTARY INFORMATION:

 

 

 

 

 

Interest paid

 

$

862,033

 

$

656,422

 

Taxes paid

 

45

 

17,821

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Accumulated other comprehensive loss

 

$

(1,872

)

$

(363

)

Transfer of mortgages to other real estate owned

 

129,785

 

58,169

 

Dividends declared and accrued but unpaid

 

19,021

 

34,194

 

 

See accompanying notes to consolidated financial statements.

5




IMPAC MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data or as otherwise indicated)
(unaudited)

Note A—Summary of Business and Significant Accounting Policies

1.     Business Summary 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 subsidiaries, IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial Capital Corporation (ICCC).

The Company is a mortgage real estate investment trust, or “REIT,” that is a nationwide acquirer, originator, seller and investor of non-conforming Alt-A residential mortgages or “Alt-A mortgages” and to a lesser extent, small-balance commercial mortgages or “commercial mortgages.”  The Company also provides warehouse financing to originators of mortgages.

The Company operates four core businesses:

·      the Long-Term Investment Operations that is conducted by IMH and IMH Assets;

·      the Mortgage Operations that is conducted by IFC and ISAC;

·      the Warehouse Lending Operations that is conducted by IWLG; and

·      the Commercial Operations that is conducted by ICCC.

The REIT (IMH) is comprised of the long-term investment operations and the warehouse lending operations.  The Taxable REIT Subsidiaries (TRS) include the Mortgage Operations and Commercial Operations and are subsidiaries of the REIT.

The long-term investment operations generate earnings primarily from net interest income earned on mortgages held as securitized mortgage collateral and mortgages held-for-investment (long-term mortgage portfolio) and associated derivative cash flows.  The long-term mortgage portfolio as reported on our consolidated balance sheets consists of mortgages held as securitized mortgage collateral and mortgages held-for-investment.  Investments in Alt-A mortgages and commercial mortgages are initially financed with short-term borrowings under reverse repurchase agreements, which are subsequently converted to long-term financing in the form of securitized mortgage borrowings.  Cash flows from the long-term mortgage portfolio and proceeds from the sale of capital stock finance the acquisition of new Alt-A and commercial mortgages.

The mortgage operations acquire, originate, sell and securitize primarily Alt-A adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs) from correspondents, mortgage brokers and retail customers.  Correspondents originate and close mortgages under their mortgage programs and then sell the closed loans to the mortgage operations on a flow (loan-by-loan) basis or through bulk sale commitments. Correspondents include; savings and loan associations, commercial banks and mortgage bankers. The mortgage operations generate income by securitizing and selling mortgages to permanent investors, including the long-term investment operations. This business also earns revenue from fees associated with mortgage servicing rights, master servicing agreements and interest income earned on mortgages held-for-sale. The mortgage operations use facilities provided by the warehouse lending operations to finance the acquisition and origination of mortgages.

6




The warehouse lending operations provide repurchase financing to mortgage loan originators, including the mortgage and commercial operations, by funding mortgages from their closing date until sale to pre-approved investors. This business earns fees from each transaction as well as net interest income from the difference between its cost of borrowings and the interest earned on repurchase advances.

The commercial operations originate commercial mortgages, that are primarily adjustable rate mortgages with initial fixed interest rate periods of two-, three-, five-, seven- and ten-years that subsequently convert to adjustable rate mortgages, or “hybrid ARMs,” with balances that generally range from $500,000 to $5.0 million.  Commercial mortgages have interest rate floors, which is the initial start rate; in some circumstances have lock out periods, and prepayment penalty periods of three-, five-, seven- and ten-years.  These mortgages provide greater asset diversification on our balance sheet as commercial mortgage borrowers typically have higher credit scores and typically have lower loan-to-value ratios, or “LTV ratios,” and the mortgages have longer average lives than residential mortgages.

The Company securitizes mortgages in the form of collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs). The typical CMO securitization is designed so that the transferee (securitization trust) is not a qualifying special purpose entity (QSPE) and thus as the sole residual interest holder, the Company consolidates securitization.  Amounts consolidated are classified as securitized mortgage collateral and securitized mortgage borrowings in the consolidated balance sheets. In some cases, the REMIC securitization qualifies for sale accounting treatment and the securitization trust is a QSPE and thus not consolidated by the Company. Generally, a REMIC securitization trust does not meet sale accounting and QSPE criteria, and thus the securitization is treated as a secured borrowing and consolidation is assessed pursuant to FIN 46R, “Consolidation of Variable Interest Entities.”

In 2005 and 2006, the Company completed ISAC REMIC 2005-2, ISAC REMIC 2006-1, and ISAC REMIC 2006-3 securitizations which were treated as sales for tax purposes but treated as secured borrowings for generally accepted accounting principles (GAAP) and consolidated in the financial statements.  The associated collateral and borrowings are included in securitized mortgage collateral and borrowings, respectively, for reporting purposes. Hence, reference to “Securitized mortgage collateral” or “Securitized mortgage borrowings” includes the REMIC 2005-2, 2006-1, and 2006-3 securitized collateral and borrowings.

In the second quarter of 2006, the Company completed ISAC REMIC 2006-2 securitization in the amount of $834.0 million which was treated as a sale for both tax and GAAP purposes.  The residual interest, calculated as the present value of estimated future cash flows, was retained as a result of the ISAC REMIC 2006-2 securitization, and is recorded in other assets on the balance sheet as investment securities available-for-sale.  Investments in residual interest and subordinated securities represent higher risk than investments in senior mortgage-backed securities because these subordinated securities bear all credit losses prior to the related senior securities.  The risk associated with holding residual interests and subordinated securities is greater than holding the underlying mortgage loans directly due to the concentration of losses attributed to the subordinated securities.   The value of residual interests represents the present value of future cash flows expected to be received by us from excess cash flows created in the securitization transaction. In general, future cash flows are estimated by taking the coupon rate of the loans underlying the transaction less the interest rate paid to the investors, less contractually specified servicing and trustee fees, and after giving effect to estimated prepayments and credit losses.  The Company estimates future cash flows from these securities utilizing assumptions based in part on projected discount rates, delinquency rates, mortgage loan prepayment speeds and credit losses.

In January 2006, the Company combined our Alt-A wholesale and sub-prime residential mortgage product offerings under one platform. Our sub-prime residential mortgage products previously marketed under Novelle Financial Services, Inc., are now offered by our Alt-A wholesale operations, Impac Lending Group (ILG), a division of IFC.

On January 1, 2006, the Company elected to convert Impac Commercial Capital Corporation “ICCC” from a qualified REIT subsidiary to a taxable REIT subsidiary.  On June 30, 2006, the Company approved the transfer of ICCC to be a wholly-owned subsidiary of IFC effective January 1, 2006.

7




Financial Statement Presentation

The accompanying unaudited consolidated financial statements of the Company and our subsidiaries (as defined above) have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included.  Operating results for the three-month and nine-month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The Company’s consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of the Company and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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 estimates and assumptions relating to the reporting of assets and liabilities, including 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 financial statements in conformity with GAAP.  The items effected by management’s estimates and assumptions include allowance for loan losses, valuation of derivative financial instruments,  repurchase liabilities related to sold loans, the amortization of various loan premiums and discounts due to prepayment estimates, and lower of cost or market “LOCOM.”  Actual results could differ from those estimates.

Premiums, discounts and securitization costs associated with the securitized mortgage collateral and securitized mortgage borrowing are amortized or accreted into interest income/expense over the projected lives of the securitized mortgage collateral and securitized mortgage borrowings using the interest method.  The Company policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, market prepayment speeds, and current conditions.  If the estimate of prepayments is incorrect, the Company may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an effect on future income.

2.     Stock Options

The Company maintains a stock based incentive compensation plan the terms of which are governed by the Impac Mortgage Holdings, Inc. 2001 Stock Option, Deferred Stock and Restricted Stock Plan, as amended (the 2001 Stock Plan).  Officers, key employees, directors, consultants and advisors are eligible to receive awards pursuant to the 2001 Stock Plan.  The aggregate number of shares reserved under the 2001 Stock Plan is 10,222,765 shares  (including increases pursuant to the plan’s “evergreen provision”), and as of September 30, 2006 there were 2,225,699 shares available for grant as stock options, restricted stock and deferred stock awards.

Effective January 1, 2006, the Company adopted the Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective method, which requires recognition of compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS 123R.  As required, the pro forma effect from recognition of the estimated fair value of stock options granted to employees has been disclosed for previous periods.

As a result of adopting SFAS 123R on January 1, 2006, the Company’s net earnings before income taxes and net earnings for the nine months ended September 30, 2006 are $1.6 million and $1.3 million lower, respectively, than if it had continued to account for share-based compensation under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees, “(“APB 25”).  Basic and diluted earnings per share for the nine months ended September 30, 2006 are $0.02 and $0.02 lower, respectively, than if the Company had continued to account for share-based compensation under APB 25.

8




The fair value of each stock option granted under the Company’s stock based compensation plan is estimated on the date of grant using the Black-Scholes option-pricing model and the assumptions noted below. The expected volatility is based on both the implied and historical volatility of the Company’s stock. The expected option term of options granted represents the period of time that the options granted are expected to be outstanding and is based on historical experience giving consideration for the contractual terms, vesting periods and expectations of future employee behavior. The risk-free interest rate is based on the U.S. Treasury rate with a term equal to the expected term of the option grants on the date of grant.

SFAS 123R requires forfeitures to be estimated at the time of grant and prospectively revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures for the nine months ended September 30, 2006 such that expense was recorded only for those stock-based awards that were expected to vest. Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture.

On August 18, 2006, the Compensation Committee of the Board of Directors approved performance criteria for the 225,000 performance based options granted to each of the following, Messrs. Joseph R. Tomkinson, our Chairman and Chief Executive Officer, William S. Ashmore, our President, and Richard J. Johnson our Executive Vice President and Chief Operating Officer.  The awards vest in one-third increments if the Company meets specified estimated taxable income targets over each of the three 12-month periods ending June 30, 2009. The options expire four years from the date of grant. If a portion of an award does not vest, the failure of that portion to vest will not affect the vesting of earlier or subsequent portions.  These options were granted in the third quarter of 2006, and are included in the option grants below.  The fair value of each performance based option was measured on the date of grant using the same assumptions used to value the service based options, and assumed that performance goals would be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed.

The following table illustrates the effect as if the Company had elected to use the fair value approach to account for its employee stock-based compensation plan at September 30, 2005:

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30, 2005

 

Ended September 30, 2005

 

Net earnings available to common stockholders

 

$

122,733

 

$

234,095

 

Less: Total stock-based employee compensation expense using the fair value method

 

(686

)

(1,764

)

Pro forma net earnings

 

$

122,047

 

$

232,331

 

 

 

 

 

 

 

Net earnings per share as reported:

 

 

 

 

 

Basic

 

$

1.62

 

$

3.10

 

Diluted

 

$

1.61

 

$

3.07

 

 

 

 

 

 

 

Pro forma net earnings per share:

 

 

 

 

 

Basic

 

$

1.61

 

$

3.08

 

Diluted

 

$

1.59

 

$

3.01

 

 

The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:

9




 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2006

 

2005

 

Risk-free interest rate

 

3.90% to 4.26%

 

2.16% to 4.50%

 

Expected lives (in years)

 

3

 

3 - 4

 

Expected volatility (1)

 

34.75%

 

42.26%

 

Expected dividend yield

 

11.00%

 

10.00%

 

Grant date fair value of share options

 

$1.41

 

$3.71

 

 


(1)                      Expected volatilities are based on the historical volatility of the Company’s stock over the expected option life.

The following table summarizes activity, pricing and other information for the Company’s stock options for the nine-month period ended September 30, 2006:

 

 

 

 

Weighted-

 

Weighted-

 

Aggregate

 

 

 

 

 

Average

 

Average

 

Intrinsic

 

 

 

Number of

 

Exercise

 

Remaining Life

 

Value (1)

 

 

 

Shares

 

Price $ 

 

(Years)

 

(in thousands)

 

Options outstanding at beginning of year

 

5,266,544

 

$

14.55

 

 

 

 

 

Options granted

 

2,774,000

 

9.94

 

 

 

 

 

Options exercised

 

(75,202

)

10.95

 

 

 

 

 

Options forfeited / cancelled

 

(853,087

)

13.64

 

 

 

 

 

Options outstanding at end of period

 

7,112,255

 

$

12.90

 

3.00

 

$

3,753.9

 

Options exercisable at end of period

 

3,116,390

 

$

13.98

 

2.41

 

$

3,753.9

 

 


(1)                       The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $9.37 per share as of September 30, 2006, which would have been received by the option holders had all option holders exercised their options as of that date.  As of September 30, 2006, there was approximately $4.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plan.  That cost is expected to be recognized over a weighted average period of 1.19 years.

In addition to the options granted, the Company has granted nonvested shares, which vest over a three year period.  The fair value of each nonvested share was measured on the date of grant using the grant date price of the Company’s stock.  A summary of the option activity of the Company’s nonvested shares during the nine month period ended September 30, 2006, is presented below:

 

 

 

Weighted-Average

 

 

 

 

 

Grant-Date

 

 

 

Shares

 

Fair Value

 

Nonvested outstanding at beginning of period

 

5,000

 

$

13.76

 

Shares Granted

 

42,577

 

9.94

 

Shares Vested

 

 

 

Shares Forfeited

 

 

 

Nonvested outstanding at end of period

 

47,577

 

$

10.34

 

10




As of September 30, 2006, there was approximately $450,000 of total unrecognized compensation cost related to nonvested stock compensation arrangements granted under the plan.  That cost is expected to be recognized over a weighted average period of 1.52 years.

Additional information regarding stock options outstanding as of September 30, 2006, is as follows:

 

Stock Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

Average

 

Weighted-

 

 

 

Weighted-

 

Exercise

 

 

 

Remaining

 

Average

 

 

 

Average

 

Price

 

Number

 

Contractual

 

Exercise

 

Number

 

Exercise

 

Range ($)

 

Outstanding

 

Life in Years

 

Price ($)

 

Exercisable

 

Price ($)

 

3.85 - 9.42

 

796,250

 

4.55

 

4.65

 

796,250

 

4.66

 

9.94

 

2,708,500

 

3.88

 

9.94

 

 

 

13.76 - 14.27

 

2,410,505

 

1.98

 

13.98

 

1,508,825

 

14.12

 

21.77 - 22.83

 

692,000

 

2.17

 

22.77

 

474,654

 

22.74

 

23.10

 

505,000

 

1.84

 

23.10

 

336,661

 

23.10

 

3.85 - 23.10

 

7,112,255

 

3.00

 

12.90

 

3,116,390

 

13.98

 

 

3.     Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, “an amendment of FASB Statements No. 133 and SFAS No. 140 (“SFAS 155”).  This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It also clarifies which interest-only strips and principal-only strips are not subject to FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).  The statement also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation. The statement also clarifies that concentration of credit risks in the form of subordination are not embedded derivatives, and it also amends SFAS 140 to eliminate the prohibition on a QSPE from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this statement by the Company will not have a significant effect on the consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140 (“SFAS 156”).  This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations; whenever a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. This statement requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. This statement permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. This statement at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. This statement also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt this statement as of the beginning of its first fiscal year that begins after September 15, 2006. The adoption of this statement by the Company is not expected to have a significant effect on the consolidated financial statements.

11




In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) which expands on the accounting guidance of FASB Statement No. 109, Accounting for Income Taxes.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The adoption of this interpretation by the Company is not expected to have a significant effect on the consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  SAB 108 was issued to address diversity in practice in quantifying financial statement misstatements.  SAB 108 requires that we quantify misstatements based on their effect on each of our financial statements and related disclosures.  SAB 108 is effective as of the end of the Company’s 2006 fiscal year.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company is currently assessing the effect, if any, from the adoption of SFAS No. 157 on the consolidated financial statements.

4.     Legal Proceedings

The Company’s Form 10-K for the year ended December 31, 2005 and Forms 10-Q for the periods ended March 31, 2006 and June 30, 2006, reported shareholder derivative actions filed against the Company and its senior officers and directors in the U.S. District Court, Central District of California and Orange County Superior Court.  On September 14, 2006, the Orange County Superior Court stayed the consolidated state shareholder derivative action pending resolution of the federal securities class actions and federal shareholder derivative actions.

Management believes that they have meritorious defenses to the above claims and intend to defend these claims vigorously. 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 consolidated financial statements.

Note B—Reconciliation of Earnings Per Share

The following table presents the computation of basic and diluted net earnings per common share including the dilutive effect of stock options outstanding for the periods indicated:

12




 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(127,690

)

$

126,357

 

$

(15,768

)

$

244,967

 

Less: Cash dividends on cumulative redeemable preferred stock

 

(3,672

)

(3,624

)

(11,016

)

(10,872

)

Net (loss) earnings available to common stockholders

 

$

(131,362

)

$

122,733

 

$

(26,784

)

$

234,095

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding during the period

 

76,132

 

75,720

 

76,119

 

75,440

 

Denominator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding during the period

 

76,132

 

75,720

 

76,119

 

75,440

 

Net effect of dilutive stock options

 

 

598

 

 

871

 

Diluted weighted average common shares

 

76,132

 

76,318

 

76,119

 

76,311

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.73

)

$

1.62

 

$

(0.35

)

$

3.10

 

Diluted

 

$

(1.73

)

$

1.61

 

$

(0.35

)

$

3.07

 

 

For the three and nine month periods ended September 30, 2006, stock options to purchase 7.1 million shares were outstanding but not included in the above weighted average calculations because they were anti-dilutive.  For the three and nine month periods ended September 30, 2005, stock options to purchase 1.4 million shares, were outstanding but not included in the above weighted average calculations because they were anti-dilutive.

Note C—Segment Reporting

The following tables present reporting segments as of and for the nine and three months ended September 30, 2006 and 2005:

13




 

 

 

Reporting Segments as of and for the Nine Months

 

 

 

Ended September 30, 2006

 

 

 

Long-Term

 

Warehouse

 

Mortgage

 

 

 

 

 

 

 

 

 

Investment

 

Lending

 

Operations

 

Commercial

 

Inter-

 

 

 

 

 

Operations

 

Operations

 

(IFC)

 

Operations

 

Company (1)

 

Consolidated

 

Balance Sheet Items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral and Mortgages held-for-investment

 

$

20,203,367

 

$

 

$

136,004

 

$

 

$

(103,774

)

$

20,235,597

 

Mortgages held-for-sale

 

 

 

932,419

 

360,666

 

 

1,293,085

 

Finance receivables

 

 

1,614,544

 

 

 

(1,316,887

)

297,657

 

Total assets

 

20,638,699

 

1,683,810

 

1,235,179

 

355,578

 

(1,422,882

)

22,490,384

 

Total stockholders’ equity (deficit)

 

873,154

 

239,887

 

91,540

 

(6,453

)

(130,467

)

1,067,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (expense) income

 

$

(91,393

)

$

24,229

 

$

(4,621

)

$

251

 

$

43,752

 

$

(27,782

)

Provision for (recovery of) loan losses

 

3,638

 

(350

)

 

 

 

3,288

 

Realized gain from derivatives

 

156,582

 

 

21

 

30

 

 

156,633

 

Change in fair value of derivatives

 

(95,186

)

 

4,877

 

(6,324

)

4,031

 

(92,602

)

Other non-interest (loss) income

 

(852

)

2,426

 

57,971

 

3,387

 

(22,674

)

40,258

 

Non-interest expense and income taxes

 

12,916

 

5,578

 

60,476

 

6,113

 

3,904

 

88,987

 

Net (loss) earnings

 

$

(47,403

)

$

21,427

 

$

(2,228

)

$

(8,769

)

$

21,205

 

$

(15,768

)

 

 

 

Reporting Segments as of and for the Three Months

 

 

 

Ended September 30, 2006

 

 

 

Long-Term

 

Warehouse

 

Mortgage

 

 

 

 

 

 

 

 

 

Investment

 

Lending

 

Operations

 

Commercial

 

Inter-

 

 

 

 

 

Operations

 

Operations

 

(IFC)

 

Operations

 

Company(1)

 

Consolidated

 

Income Statement Items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest (expense) income

 

$

(44,079

)

$

9,659

 

$

(3,234

)

$

61

 

$

13,083

 

$

(24,510

)

Provision for (recovery of) loan losses

 

3,533

 

(350

)

 

 

 

3,183

 

Realized gain from derivatives

 

60,595

 

 

18

 

17

 

 

60,630

 

Change in fair value of derivatives

 

(150,051

)

 

623

 

(6,106

)

 

(155,534

)

Other non-interest (loss) income

 

(70

)

878

 

40,092

 

286

 

(11,680

)

29,506

 

Non-interest expense and income taxes

 

5,198

 

2,077

 

25,896

 

1,008

 

420

 

34,599

 

Net (loss) earnings

 

$

(142,336

)

$

8,810

 

$

11,603

 

$

(6,750

)

$

983

 

$

(127,690

)

 


(1)                       Income statement items include inter-company loan sale transactions and the elimination of related gains.  Corporate overhead expenses are generally allocated to the segments based on percentage of time devoted to the segment.

14




 

 

Reporting Segments as of and for the Nine Months

 

 

 

Ended September 30, 2005

 

 

 

Long-Term

 

Warehouse

 

Mortgage

 

 

 

 

 

 

 

Investment

 

Lending

 

Operations

 

Inter-

 

 

 

 

 

Operations (1)

 

Operations

 

(IFC)

 

Company (2)

 

Consolidated

 

Balance Sheet Items:

 

 

 

 

 

 

 

 

 

 

 

Securitized mortgage collateral and Mortgages held-for-investment

 

$

24,859,044

 

$

 

$

 

$

(129,355

)

$

24,729,689

 

Mortgages held-for-sale

 

 

 

2,214,215

 

 

2,214,215

 

Finance receivables

 

 

2,619,075

 

 

(2,313,932

)

305,143

 

Total assets

 

25,109,976

 

2,757,884

 

2,267,415

 

(2,246,326

)

27,888,949

 

Total stockholders’ equity

 

981,721

 

203,324

 

19,469

 

(67,810

)

1,136,704

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Items:

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

89,967

 

$

40,455

 

$

6,559

 

$

53,174

 

$

190,155

 

Provision for (recovery of) loan losses

 

25,484

 

(265

)

 

 

25,219

 

Realized loss from derivatives

 

(4,209

)

 

 

 

(4,209

)

Change in fair value of derivatives

 

146,913

 

 

(5,392

)

 

141,521

 

Other non-interest income (loss)

 

451

 

6,268

 

105,959

 

(68,557

)

44,121

 

Non-interest expense and income taxes

 

10,256

 

5,833

 

90,872

 

(5,559

)

101,402

 

Net earnings

 

$

197,382

 

$

41,155

 

$

16,254

 

$

(9,824

)

$

244,967

 

 

 

 

Reporting Segments as of and for the Three Months

 

 

 

Ended September 30, 2005

 

 

 

Long-Term

 

Warehouse

 

Mortgage

 

 

 

 

 

 

 

Investment

 

Lending

 

Operations

 

Inter-

 

 

 

 

 

Operations (1)

 

Operations

 

(IFC)

 

Company (2)

 

Consolidated

 

Income Statement Items:

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

8,941

 

$

15,475

 

$

(101

)

$

18,581

 

$

42,896

 

Provision for (recovery of) loan losses

 

13,699

 

(265

)

 

 

13,434

 

Realized gain from derivatives

 

10,975

 

 

 

 

10,975

 

Change in fair value of derivatives

 

108,905

 

 

(1,024

)

 

107,881

 

Other non-interest (loss) income

 

(530

)

2,011

 

31,559

 

(22,884

)

10,156

 

Non-interest expense and income taxes

 

3,257

 

1,978

 

29,604

 

(2,722

)

32,117

 

Net earnings

 

$

111,335

 

$

15,773

 

$

830

 

$

(1,581

)

$

126,357

 

 


(1)                       For the three and nine month periods ended September 30, 2005, the commercial operations were included in the Long Term Investment Operations.  On January 1, 2006, we elected to convert Impac Commercial Capital Corporation “ICCC” from a qualified REIT subsidiary to a taxable REIT subsidiary.  Therefore, there is no corresponding three or nine month comparison.

(2)                       Income statement items include inter-company loan sale transactions and the elimination of related gains.  Corporate overhead expenses are generally allocated to the segments based on percentage of time devoted to the segment.

Note D—Mortgages Held-for-Sale

Mortgages held-for-sale for the periods indicated consisted of the following:

15




 

 

At September 30,

 

At December 31,

 

 

 

2006

 

2005

 

Mortgages held-for-sale - residential

 

$

921,189

 

$

2,027,194

 

Mortgages held-for-sale - commercial

 

356,520

 

 

Change in fair value of mortgages held-for-sale

 

 

(4,465

)

Net premiums on mortgages held-for-sale - residential

 

13,241

 

29,965

 

Net premiums on mortgages held-for-sale - commercial

 

2,135

 

 

Total mortgages held-for-sale

 

$

1,293,085

 

$

2,052,694

 

 

Mortgages held-for-sale consist primarily of Alt-A mortgages, which are secured by residential and commercial properties, located throughout the United States. Mortgages held-for-sale are carried at the lower of cost net of purchase discounts or premiums and deferred fees, or market value. We determine the fair value of mortgages held-for-sale using current secondary market prices for loans with similar coupons, maturities and credit quality.

Note E— Securitized Mortgage Collateral

Securitized mortgage collateral consisted of the following:

 

At September 30,

 

At December 31,

 

 

 

2006

 

2005

 

Mortgages secured by single-family residential real estate

 

$

18,676,687

 

$

22,986,632

 

Mortgages secured by commercial real estate

 

1,347,646

 

1,195,541

 

Net unamortized premiums on mortgages - residential

 

195,845

 

301,709

 

Net unamortized premiums on mortgages - commercial

 

12,285

 

10,408

 

Total securitized mortgage collateral

 

$

20,232,463

 

$

24,494,290

 

 

Note F—Allowance for Loan Losses

The allowance for loan losses is comprised of the following:

 

At September 30,

 

At December 31,

 

 

 

2006

 

2005

 

Securitized mortgage collateral and mortgages held-for-investment

 

$

48,791

 

$

55,007

 

Specific reserve for finance receivables

 

10,334

 

10,683

 

Specific reserve for estimated hurricane losses

 

6,590

 

12,824

 

Total allowance for loan losses

 

$

65,715

 

$

78,514

 

 

Activity for allowance for loan losses for the periods indicated was as follows:

16




 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Beginning balance

 

$

68,072

 

$

69,826

 

$

78,514

 

$

63,955

 

Provision for loan losses

 

3,183

 

13,434

 

3,288

 

25,219

 

Charge-offs, net of recoveries

 

(5,540

)

(4,690

)

(16,087

)

(10,604

)

Total allowance for loan losses

 

$

65,715

 

$

78,570

 

$

65,715

 

$

78,570

 

 

Note G—Other Assets

Other assets consisted of the following:

 

At September 30,

 

At December 31,

 

 

 

2006

 

2005

 

Real estate owned

 

$

114,825

 

$

46,351

 

Cash collateral balances

 

47,828

 

16,567

 

Deferred charge

 

39,335

 

47,406

 

Investment securities available-for-sale

 

30,579

 

40,227

 

Prepaid and other assets

 

23,315

 

34,422

 

Premises and equipment, net

 

16,082

 

12,312

 

Deferred income taxes

 

12,077

 

12,160

 

Investment in Impac Capital Trusts

 

2,716

 

2,884

 

Investments for deferred compensation plan

 

 

8,041

 

Total other assets

 

$

286,757

 

$

220,370

 

 

Note H—Investment Securities Available-for-Sale

Investment securities are classified as available-for-sale and are included in other assets on our consolidated balance sheets. Available-for-sale securities are reported at fair value with unrealized gains and losses as other comprehensive earnings.  Securities available for sale include the residual interest from the ISAC REMIC 2006-2 securitization of approximately $27.5 million, calculated as the present value of estimated future cash flows.  Gains and losses realized on the sale of available-for-sale investment securities and declines in value judged to be other-than-temporary are based on the specific identification method and reported in current earnings.

Note I— Securitized Mortgage Borrowings

Selected information on securitized mortgage borrowings for the periods indicated consisted of the following (dollars in millions):

17




 

 

 

 

 

 

 

 

 

Range of Percentages:

 

 

 

 

 

 

 

 

 

 

 

Interest Rate

 

Interest Rate

 

 

 

Original

 

Securitized mortgage borrowings

 

 

 

Margins over

 

Margins after

 

 

 

Issuance

 

outstanding as of

 

Fixed Interest

 

One-Month

 

Adjustment

 

Year of Issuance

 

Amount

 

September 30, 2006

 

December 31, 2005

 

Rates

 

LIBOR (1)

 

Date (2)

 

2002

 

$

3,876.1

 

$

53.8

 

$

219.8

 

5.25 - 12.00

 

0.27 - 2.75

 

0.54 - 3.68

 

2003

 

5,966.1

 

1,063.9

 

1,723.0

 

4.34 - 12.75

 

0.27 - 3.00

 

0.54 - 4.50

 

2004

 

17,710.7

 

6,447.4

 

10,191.9

 

3.58 - 5.56

 

0.25 - 2.50

 

0.50 - 3.75

 

2005

 

13,387.7

 

9,345.5

 

11,902.9

 

 

0.24 - 2.90

 

0.48 - 4.35

 

2006

 

3,004.7

 

2,820.6

 

 

6.25

 

0.10 - 2.50

 

0.20 - 3.75

 

Subtotal securitized mortgage borrowings

 

 

 

19,731.2

 

24,037.6

 

 

 

 

 

 

 

Accrued interest expense

 

 

 

19.5

 

18.1

 

 

 

 

 

 

 

Unamortized securitization costs

 

 

 

(52.9

)

(65.3

)

 

 

 

 

 

 

Total securitized mortgage borrowings

 

 

 

$

19,697.8

 

$

23,990.4

 

 

 

 

 

 

 

 


(1)           One-month LIBOR was 5.32% as of September 30, 2006.

(2)                                  Interest rate margins over one-month LIBOR are generally adjusted when the unpaid principal balance is reduced to less than 10% to 20% of the original issuance amount, or if certain other triggers are met.

Note J—Reverse Repurchase Agreements

Reverse repurchase agreements are entered into to finance our warehouse lending operations and to fund the closing and purchase of mortgages by the mortgage and commercial operations.  These facilities consist of committed and uncommitted lines.  At September 30, 2006, the Company was in compliance with all of the financial covenants associated with the reverse repurchase agreements.  During the third quarter of 2006, these facilities amounted to $5.5 billion, of which $1.5 billion was outstanding at September 30, 2006.

Note K—Repurchase Reserve

The liability for mortgage repurchases is maintained for the purpose of purchasing previously sold mortgages for various reasons, including early payment defaults or breach of representations or warranties, which may be subsequently sold at a loss. Actual gains and losses on repurchases are recorded against the gain on sale of loans in the consolidated financial statements. In determining the adequacy of the liability for mortgage repurchases, management considers such factors as specific requests for repurchase, known problem loans, underlying collateral values, recent sales activity of similar loans and other appropriate information. During the third quarter of 2006 a recovery of repurchases of $15.9 million was recorded compared to a provision of $3.2 million for the same period in 2005.  The provision for repurchases decreased as a result of $114.4 million in outstanding requests which were rescinded by investors during the third quarter of 2006.

In the ordinary course of business, the Company sells whole pools of loans with standard representations and warranties including borrower defaults. When whole pools are sold, as opposed to securitized, the Company makes an estimate of the ultimate losses to be realized on the repurchased loans.  Because the loans are no longer on the Company’s balance sheet, the implied warranty component is considered a guarantee, under FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  During the nine months ended September 30, 2006, the Company sold $5.3 billion in whole loan sales.  The Company maintains a $15.2 million reserve related to these guarantees as of September 30, 2006 compared to $10.4 million at December 31, 2005, included in other liabilities.

Note L—Income Taxes

During the three and nine months ended September 30, 2006, income tax expense (benefit) was $2.2 million and ($11.6) million, respectively.  During the three and nine months ended September 30, 2005, income tax benefit was $7.3 million and $13.9 million, respectively.  The income tax provision for three months ended September 30, 2006 was primarily due to reduced net losses at the taxable REIT subsidiaries. The Company makes an estimate of the effective tax rate expected to be applicable for the fiscal year when providing for income tax expense (benefit).

18




 

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

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, IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and Impac Funding Corporation (IFC), together with its wholly-owned subsidiaries Impac Secured Assets Corp. (ISAC), and Impac Commercial Capital Corporation (ICCC).

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,” “anticipate,” or similar terms or variations on those terms or the negative of those terms.  The forward-looking statements are based on management expectations. Actual results may differ materially as a result of several factors, including, but not limited to, failure to achieve projected earnings levels; unexpected or greater than anticipated increases in credit and bond spreads; the ability to generate sufficient liquidity; the ability to access the equity markets; increased operating expenses and mortgage origination or purchase expenses that reduce current liquidity position more than anticipated; continued increase in price competition; risks of delays in raising, or the inability to raise on acceptable terms, additional capital, either through equity offerings, lines of credit or otherwise; the ability to generate taxable income and to pay dividends; interest rate fluctuations on our assets that unexpectedly differ from those on our liabilities; unanticipated interest rate fluctuations; changes in expectations of future interest rates; unexpected increase in prepayment rates on our mortgages; changes in assumptions regarding estimated loan losses or an increase in loan losses; continued ability to access the securitization markets or other funding sources, the availability of financing and, if available, the terms of any financing; changes in markets which the Company serves, such as mortgage refinancing activity and housing price appreciation; changes in laws that affect our products and our business; 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, 2005, and the other reports we file under the Securities and Exchange Act of 1934.  This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The Mortgage Banking Industry and Discussion of Relevant Fiscal Periods

The mortgage banking industry is continually subject to current events that occur in the financial services industry. Such events include changes in economic indicators, interest rates, price competition, housing prices, geographic shifts, disposable income, market anticipation and customer perception as well as others. The factors that affect the industry change rapidly.

In this environment, mortgage banking companies generally attempt to anticipate the future marketplace, engage in hedging activities and continuously reassess business plans and strategies to effectively position themselves in the marketplace.

As a result, 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 intends to present financial information in its Management Discussion and Analysis that is the most relevant to its financial information.

General Overview

We are a mortgage real estate investment trust, or “REIT,” that is a nationwide acquirer, originator, seller and investor of non-conforming Alt-A residential mortgages, or “Alt-A mortgages,” and to a lesser extent, small-balance, commercial mortgages, or “commercial mortgages.”  We also provide warehouse financing to originators of mortgages.

We operate four core businesses:

·      the Long-Term Investment Operations that is conducted by IMH and IMH Assets;

19




·      the Mortgage Operations that is conducted by IFC and ISAC;

·      the Warehouse Lending Operations that is conducted by IWLG; and

·      the Commercial Operations that is conducted by ICCC.

The long-term investment operations primarily invest in adjustable rate and, to a lesser extent, fixed rate Alt-A mortgages and commercial mortgages that are acquired and originated by our mortgage and commercial operations. Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan characteristics that make them non-conforming under those guidelines. Some of the principal differences between mortgages purchased by Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:

·      credit and income histories of the mortgagor;

·      underwriting guidelines for debt and income ratios;

·      documentation required for approval of the mortgagor; and

·      loan balances in excess of maximum Fannie Mae and Freddie Mac lending limits.

For instance, Alt-A mortgages may not have certain documentation or verifications that are required by Fannie Mae and Freddie Mac and, therefore, in making our credit decisions, we are more reliant upon the borrower’s credit score and the adequacy of the underlying collateral. We believe that Alt-A mortgages provide an attractive net earnings profile by producing higher yields without commensurately higher credit losses than other types of mortgages.

The long-term investment operations also invest in commercial mortgages that are primarily adjustable rate mortgages with initial fixed interest rate periods of two-, three-, five-, seven- and ten-years that subsequently convert to adjustable rate mortgages, or “hybrid ARMs.”  Commercial mortgages have interest rate floors, which are the initial start rate, in some circumstances lock out periods and prepayment penalty periods of three-, five-, seven- and ten-years.  Commercial mortgages provide greater asset diversification on our balance sheet as borrowers of commercial mortgages typically have higher credit scores and commercial mortgages typically have lower loan-to-value ratios, or “LTV ratios,” and longer average life to payoff than Alt-A mortgages.

The long-term investment operations generate earnings primarily from net interest income earned on mortgages held for long-term investment, or (long-term mortgage portfolio).  The long-term mortgage portfolio as reported on our consolidated balance sheet consists of mortgages held as securitized mortgage collateral and mortgages held-for-investment. Investments in Alt-A mortgages and commercial mortgages are initially financed with short-term borrowings under reverse repurchase agreements that are subsequently converted to long-term financing in the form of securitized mortgage borrowings. Cash flows from the long-term mortgage portfolio, proceeds from the sale of capital stock and issuance of trust preferred securities also finance new Alt-A and commercial mortgages.

In 2005 and 2006, the Company completed ISAC REMIC 2005-2, ISAC REMIC 2006-1, and ISAC REMIC 2006-3 securitizations which were treated as sales for tax purposes but treated as secured borrowings for generally accepted accounting principles (GAAP) and consolidated in the financial statements.  The associated collateral and borrowings are included in securitized mortgage collateral and borrowings, respectively, for reporting purposes. Hence, reference to “Securitized mortgage collateral” or “Securitized mortgage borrowings” includes the REMIC 2005-2, 2006-1, and 2006-3 securitized collateral and borrowings.

In the second quarter of 2006, the Company completed ISAC REMIC 2006-2 securitization in the amount of $834.0 million which was treated as a sale for both tax and GAAP purposes.  The residual interest, calculated as present value of estimated future cash flows, was retained as a result of the ISAC REMIC 2006-2 securitization, and is recorded in other assets on the balance sheet as investment securities available for sale.  Investments in residual interest and subordinated securities represent higher risk than investments in senior mortgage-backed securities because these subordinated securities bear all credit losses prior to the related senior securities.  The risk associated with holding residual interest and subordinated securities is greater than holding the underlying mortgage loans directly due to the concentration of losses attributed to the subordinated securities.   The value of residual interests represents the present value of future cash flows expected to be received by us from excess cash flows created in the securitization transaction. In general, future cash flows are estimated by taking the coupon rate of the loans underlying the transaction less the interest rate paid to the investors, less contractually specified servicing and trustee fees,

20




and after giving effect to estimated prepayments and credit losses.  The Company estimates future cash flows from these securities utilizing assumptions based in part on projected discount rates, delinquency rates, mortgage loan prepayment speeds and credit losses.

The mortgage operations acquire, originate, sell and securitize primarily adjustable rate and fixed rate Alt-A mortgages and, to a lesser extent, sub-prime residential mortgages.  The mortgage operations generate income by securitizing and selling mortgages to permanent investors, including the long-term investment operations. This business also earns revenue from fees associated with mortgage servicing rights, master servicing agreements and interest income earned on mortgages held-for-sale. The mortgage operations use warehouse facilities provided by the warehouse lending operations to finance the acquisition and origination of mortgages.

The warehouse lending operations provide short-term financing to mortgage loan originators, including our mortgage operations, by funding mortgages from their closing date until sale to pre-approved investors. This business earns fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances.

The commercial operations originate commercial mortgages that are primarily adjustable rate mortgages with initial fixed interest rate periods of two-, three-, five-, seven- and ten-years that subsequently convert to adjustable rate mortgages, or “hybrid ARMs,” with balances that generally range from $500,000 to $5.0 million.  Commercial mortgages have interest rate floors, which is the initial start rate; in some circumstances have lockouts and prepayment penalty periods of three-, five-, seven- and ten-years.  These mortgages provide greater asset diversification on our balance sheet as commercial mortgage borrowers typically have higher credit scores and typically have lower loan-to-value ratios, or “LTV ratios,” and the mortgages have longer average lives than residential mortgages.

Critical Accounting Policies

We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations and may require estimates and assumptions based on our judgment of changing market conditions and the performance of our assets and liabilities at any given time. 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 allowance for loan losses, derivative financial instruments and securitization of financial assets as financing versus sale, amortization of loan premium and securitization costs, compliance with Regulation AB and taxable income.

Selected Financial Results for the Third Quarter of 2006

·                   Estimated taxable income per diluted share was $0.23 compared to $0.27 for the second quarter of 2006 and $0.36 for the first quarter of 2006;

·                   Cash dividends declared per common share was $0.25 compared to $0.25 for the second quarter of 2006 and $0.25 for the first quarter of 2006;

·                   Book value per common share was $11.94 as of September 30, 2006 compared to $13.24 as of December 31, 2005 and $12.93 as of September 30, 2005; the reduction in the net book value per common share from June 30, 2006 is primarily the result of a non-cash $155.5 million loss on the change in fair value of derivative instruments, as more fully described in the Results of Operations discussion;

·                   Total assets were $22.5 billion as of September 30, 2006 compared to $27.7 billion as of December 31, 2005 and $27.9 billion as of September 30, 2005;

·                   The mortgage operations acquired and originated $3.1 billion of primarily Alt-A mortgages compared to $2.2 billion for the second quarter of 2006 and $6.2 billion for the third quarter of 2005;

21




·                   The commercial mortgage operations originated $233.9 million of commercial mortgages compared to $277.9 million for the second quarter of 2006 and $211.9 million for the third quarter of 2005.

·                  The Company completed the $2.0 billion REMIC 2006-3 securitization which was treated as financing for GAAP purposes and consolidated onto the balance sheet as compared to the $834.0 million REMIC 2006-2 securitization during the second quarter of 2006 which was treated as a sale for GAAP purposes.  During the third quarter of 2005, the Company did not complete a REMIC securitization.

Selected Financial Results for the First Nine Months of 2006

·                   Estimated taxable income per diluted share decreased to $0.86 compared to $1.68 for the first nine months of 2005;

·                   Cash dividends declared per share decreased to $0.75 compared to $1.95 for the first nine months of 2005;

·                   The mortgage operations acquired and originated $7.4 billion of primarily Alt-A mortgages compared to $16.3 billion for the first nine months of 2005;

·                   The long-term investment operations, retained for investment $2.8 billion of primarily Alt-A mortgages compared to $9.7 billion for the first nine months of 2005; and

·                   The commercial mortgage operations originated $713.8 million of commercial mortgages compared to $591.8 million for the first nine months of 2005.

Third Quarter and Year to Date 2006 Taxable Income

Because dividend payments are based on estimated taxable income, dividends may be more or less than net earnings. As such, we believe that the disclosure of estimated taxable income available to common stockholders, which is a non-generally accepted accounting principle, or “non-GAAP,” financial measurement, is useful information for our investors.

The following table presents a reconciliation of net (loss) earnings (GAAP) to estimated taxable income available to common stockholders for the periods indicated (in thousands, except per share amounts):

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30, (1)

 

Ended September 30, (1)

 

 

 

2006

 

2005

 

2006

 

2005

 

Net (loss) earnings GAAP

 

$

(127,690

)

$

126,357

 

$

(15,768

)

$

244,967

 

Adjustments to net (loss) earnings: (2)

 

 

 

 

 

 

 

 

 

Loan loss provision (3)

 

3,183

 

13,434

 

3,288

 

25,219

 

REMIC income (4)

 

2,838

 

 

11,933

 

 

Tax deduction for actual loan losses (3)

 

(5,540

)

(4,690

)

(16,087

)

(10,604

)

Change in fair value of derivatives (5)

 

150,051

 

(108,905

)

95,186

 

(146,913

)

Dividends on preferred stock

 

(3,672

)

(3,624

)

(11,016

)

(10,872

)

Net (earnings) loss of taxable REIT subsidiaries (6)

 

(4,853

)

(830

)

10,997

 

(16,254

)

Dividend from taxable REIT subsidiaries (7)

 

3,900

 

7,000

 

7,400

 

32,850

 

Elimination of inter-company loan sales transactions (8)

 

(983

)

1,581

 

(21,205

)

9,824

 

Miscellaneous adjustments

 

96

 

 

335

 

 

Estimated taxable income available to common stockholders (9)

 

$

17,330

 

$

30,323

 

$

65,063

 

$

128,217

 

Estimated taxable income per diluted common share (9)

 

$

0.23

 

$

0.40

 

$

0.86

 

$

1.68

 

Diluted weighted average common shares outstanding

 

76,132

 

76,318

 

76,119

 

76,311

 

 


(1)                       Estimated taxable income includes estimates of book to tax adjustments and can differ from actual taxable income as calculated when we file our annual corporate tax return. Since estimated taxable income is a non-GAAP financial measurement, the reconciliation of estimated taxable income available to common stockholders to net (loss) earnings is intended to meet the requirements of Regulation G as promulgated by the SEC for the presentation of non-GAAP financial measurements. To maintain our REIT status, we are required to distribute a minimum of 90% of our annual taxable income to our stockholders.

22




(2)                       Certain adjustments are made to net (loss) earnings in order to calculate taxable income due to differences in the way revenues and expenses are recognized under the two methods.

(3)                       To calculate estimated taxable income, actual loan losses are deducted. For the calculation of net earnings, GAAP requires a deduction for estimated losses inherent in our mortgage portfolios in the form of a provision for loan losses, which are not deductible for tax purposes. Therefore, as the estimated losses provided for under GAAP are actually realized, the losses will negatively and may materially effect future taxable income.

(4)                       Includes GAAP to Tax Differences related to the ISAC REMIC 2005-2, ISAC REMIC 2006-1, and ISAC REMIC 2006-3 securitizations, which were treated as secured borrowings for GAAP purposes and sales for tax purposes.

(5)                       The mark-to-market change for the valuation of derivatives at IMH is income or expense for GAAP financial reporting purposes but is not included as an addition or deduction for taxable income calculations until realized.

(6)                       Represents net earnings of IFC and ICCC, our taxable REIT subsidiaries (TRSs), which may not necessarily equal taxable income.  Starting January 1, 2006, the Company elected to convert ICCC from a qualified REIT subsidiary to a TRS.  Therefore, the three and nine months ended September 30, 2005 does not include any net earnings or losses of ICCC.

(7)                       Any dividends paid to IMH by the TRSs in excess of their cumulative undistributed taxable income would be recognized as return of capital by IMH to the extent of IMH’s capital investment in the TRSs. Distributions from the TRSs to IMH may not equal the TRSs’ net earnings, however, IMH can only recognize dividend distributions received from the TRSs as taxable income to the extent that the TRSs’ distributions are from current or prior period undistributed taxable income. Any distributions by the TRSs in excess of IMH’s capital investment in the TRSs would be taxed as capital gains.

(8)                       Includes the effects to taxable income associated with the elimination of gains from inter-company loan sales and other inter-company transactions between IFC, ICCC, and IMH, net of tax and the related amortization of the deferred charge.

(9)                       Excludes the deduction for common stock dividends paid and the availability of a deduction attributable to net operating loss carry-forwards. As of December 31, 2005, the Company has estimated federal net operating loss carry-forwards of $18.1 million that are expected to be utilized prior to their expiration in the year 2020.

Third Quarter 2006 vs. Second Quarter 2006 Net GAAP Earnings

The results of operations for the third quarter of 2006 resulted in a net loss of $127.7 million or $1.73 per share as compared to net earnings $26.4 million or $0.30 per share, for the second quarter of 2006. The decrease is primarily due to the decrease in the fair value of the derivative instruments and a decrease in net interest income partially offset by an increase in realized gains from derivative instruments.

Included in net earnings was a primarily mark-to-market loss in the fair value of derivative instruments whereby the Company records a change in fair value of its derivative instruments as a gain or loss in the current period, which during the third quarter of 2006 decreased to a loss of $155.5 million as compared to a gain of $11.5 million during the second quarter 2006.  The change in the fair value of the derivative instruments was the result of a partial inversion in the forward yield curve as of September 30, 2006.  The third quarter of 2006 resulted in a net interest expense of $24.5 million as compared to a net interest expense of $14.7 million for the second quarter of 2006.  The increase in net interest expense of $9.8 million was primarily due to a decrease in interest income on mortgage assets of $13.1 million partially offset by a reduction in interest expense mortgage borrowings of $3.7 million.  Realized gains on derivative instruments increased to $60.6 million during the third quarter of 2006 as compared to $55.9 million during the second quarter of 2006.

Third Quarter 2006 vs. Second Quarter 2006 Estimated Taxable Income

Estimated taxable income decreased by $3.3 million to $17.3 million, or $0.23 per diluted common share during the third quarter of 2006, compared to $20.6 million or $0.27 per diluted common share for the second quarter 2006 primarily attributable to a decrease in adjusted net interest income at the REIT of $3.9 million, partially offset by a decrease in actual loan losses of $600,000, and a $400,000 increase in dividend income from the taxable REIT subsidiary, Impac Funding Corporation.

The decrease in adjusted net interest income at the REIT of $3.9 million was primarily the result of a decrease in interest income of $10.3 million, partially offset by a decrease in interest expense of $3.7 million and an increase in realized gain from derivative instruments of $2.7 million.  Although interest income and interest expense decreased primarily due to a decline in the average balances of the securitized mortgage collateral and the related securitized mortgage borrowings, the adjusted net interest margin as a percentage of total average mortgage assets improved to 39 basis points as compared to 38 basis points during the second quarter 2006.

23




 

Financial Condition and Results of Operations

Financial Condition

 

Condensed Balance Sheet Data

(dollars in thousands)

 

 

September 30,

 

December 31,

 

Increase

 

%

 

 

 

2006

 

2005

 

(Decrease)

 

Change

 

Cash and cash equivalents

 

$

161,901

 

$

146,621

 

$

15,280

 

10

%

Restricted Cash

 

498

 

698

 

(200

)

(29

)

Securitized mortgage collateral

 

20,232,463

 

24,494,290

 

(4,261,827

)

(17

)

Finance receivables

 

297,657

 

350,217

 

(52,560

)

(15

)

Mortgages held-for-investment

 

3,134

 

160,070

 

(156,936

)

(98

)

Allowance for loan losses

 

(65,715

)