10-Q 1 imh-20180630x10q.htm 10-Q imh_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

or

 

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

 

For the transition period from               to               

 

Commission File Number: 1-14100

 

IMPAC MORTGAGE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

33-0675505

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

19500 Jamboree Road, Irvine, California 92612

(Address of principal executive offices)

 

(949) 475-3600

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

                             Non-accelerated filer ☐(Do not check if a smaller reporting company)

 

 

Smaller reporting company ☐

                                Emerging growth company ☐    

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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

 

There were 21,047,589 shares of common stock outstanding as of August 3, 2018.

 

 

 

 


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

ITEM 1. 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017

3

 

Consolidated Statements of Operations and Comprehensive (Loss) Earnings for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

4

 

Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

ITEM 2. 

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

34

 

 

 

 

Forward-Looking Statements

34

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

34

 

Selected Financial Results

35

 

Status of Operations

35

 

Liquidity and Capital Resources

39

 

Critical Accounting Policies

41

 

Financial Condition and Results of Operations

41

 

 

 

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

63

 

 

 

ITEM 4. 

CONTROLS AND PROCEDURES

65

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

ITEM 1. 

LEGAL PROCEEDINGS

66

 

 

 

ITEM 1A. 

RISK FACTORS

66

 

 

 

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

66

 

 

 

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

66

 

 

 

ITEM 4. 

MINE SAFETY DISCLOSURES

66

 

 

 

ITEM 5. 

OTHER INFORMATION

66

 

 

 

ITEM 6. 

EXHIBITS

67

 

 

 

 

SIGNATURES

67

 

 

 

 

CERTIFICATIONS

 

 

2


 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2018

 

2017

 

ASSETS

 

(Unaudited)

 

 

 

 

Cash and cash equivalents

 

$

32,960

 

$

33,223

 

Restricted cash

 

 

4,606

 

 

5,876

 

Mortgage loans held-for-sale

 

 

481,291

 

 

568,781

 

Finance receivables

 

 

37,215

 

 

41,777

 

Mortgage servicing rights

 

 

180,733

 

 

154,405

 

Securitized mortgage trust assets

 

 

3,409,477

 

 

3,670,550

 

Goodwill

 

 

29,925

 

 

104,587

 

Intangible assets, net

 

 

6,033

 

 

21,582

 

Loans eligible for repurchase from Ginnie Mae

 

 

60,488

 

 

47,697

 

Other assets

 

 

23,494

 

 

33,222

 

Total assets

 

$

4,266,222

 

$

4,681,700

 

LIABILITIES

 

 

 

 

 

 

 

Warehouse borrowings

 

$

482,546

 

$

575,363

 

MSR financings

 

 

62,000

 

 

35,133

 

Convertible notes, net

 

 

24,979

 

 

24,974

 

Long-term debt

 

 

45,787

 

 

44,982

 

Securitized mortgage trust liabilities

 

 

3,393,721

 

 

3,653,265

 

Liability for loans eligible for repurchase from Ginnie Mae

 

 

60,488

 

 

47,697

 

Contingent consideration

 

 

 —

 

 

554

 

Other liabilities

 

 

33,952

 

 

34,585

 

Total liabilities

 

 

4,103,473

 

 

4,416,553

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $30,290; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of June 30, 2018 and December 31, 2017 (See Note 12)

 

 

 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 June 30, 2018 and December 31, 2017

 

 

14

 

 

14

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 21,026,392 and 20,949,679 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

210

 

 

209

 

Additional paid-in capital

 

 

1,234,622

 

 

1,233,704

 

Accumulated other comprehensive earnings, net of tax

 

 

25,053

 

 

 —

 

Net accumulated deficit:

 

 

 

 

 

 

 

Cumulative dividends declared

 

 

(822,520)

 

 

(822,520)

 

Retained deficit

 

 

(274,637)

 

 

(146,267)

 

Net accumulated deficit

 

 

(1,097,157)

 

 

(968,787)

 

Total stockholders’ equity

 

 

162,749

 

 

265,147

 

Total liabilities and stockholders’ equity

 

$

4,266,222

 

$

4,681,700

 

 

See accompanying notes to unaudited consolidated financial statements

3


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) EARNINGS

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Gain on sale of loans, net

 

$

18,741

 

$

36,806

 

$

40,223

 

$

74,126

 

Servicing fees, net

 

 

9,861

 

 

7,764

 

 

19,324

 

 

15,083

 

Gain (loss) on mortgage servicing rights, net

 

 

167

 

 

(6,669)

 

 

7,872

 

 

(7,646)

 

Real estate services fees, net

 

 

1,038

 

 

1,504

 

 

2,423

 

 

3,137

 

Other

 

 

116

 

 

228

 

 

207

 

 

275

 

Total revenues

 

 

29,923

 

 

39,633

 

 

70,049

 

 

84,975

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

 

16,678

 

 

21,373

 

 

34,421

 

 

46,291

 

Business promotion

 

 

9,000

 

 

10,110

 

 

18,730

 

 

20,341

 

General, administrative and other

 

 

10,846

 

 

8,324

 

 

19,122

 

 

16,348

 

Intangible asset impairment

 

 

13,450

 

 

 —

 

 

13,450

 

 

 —

 

Goodwill impairment

 

 

74,662

 

 

 —

 

 

74,662

 

 

 —

 

Accretion of contingent consideration

 

 

 —

 

 

707

 

 

 —

 

 

1,552

 

Change in fair value of contingent consideration

 

 

 —

 

 

(6,793)

 

 

 —

 

 

(6,254)

 

Total expenses

 

 

124,636

 

 

33,721

 

 

160,385

 

 

78,278

 

Operating (loss) income

 

 

(94,713)

 

 

5,912

 

 

(90,336)

 

 

6,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

49,064

 

 

60,573

 

 

99,215

 

 

122,157

 

Interest expense

 

 

(48,518)

 

 

(59,475)

 

 

(97,648)

 

 

(120,614)

 

Loss on extinguishment of debt

 

 

 —

 

 

(1,265)

 

 

 —

 

 

(1,265)

 

Change in fair value of long-term debt

 

 

258

 

 

(265)

 

 

1,481

 

 

(2,761)

 

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

 

 

217

 

 

2,005

 

 

(1,921)

 

 

8,324

 

Total other income, net

 

 

1,021

 

 

1,573

 

 

1,127

 

 

5,841

 

(Loss) earnings before income taxes

 

 

(93,692)

 

 

7,485

 

 

(89,209)

 

 

12,538

 

Income tax expense

 

 

3,706

 

 

1,045

 

 

4,316

 

 

1,471

 

Net (loss) earnings

 

$

(97,398)

 

$

6,440

 

$

(93,525)

 

$

11,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of instrument specific credit risk

 

$

(526)

 

$

 —

 

$

(1,965)

 

$

 —

 

Total comprehensive (loss) earnings

 

$

(97,924)

 

$

6,440

 

$

(95,490)

 

$

11,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(4.65)

 

$

0.33

 

$

(4.46)

 

$

0.62

 

Diluted

 

 

(4.65)

 

 

0.32

 

 

(4.46)

 

 

0.62

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

4


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Preferred

    

 

 

    

Common

    

 

 

    

Additional

    

Cumulative

    

 

 

 

Accumulated Other

    

Total

 

 

 

Shares

 

Preferred

 

Shares

 

Common

 

Paid-In

 

Dividends

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Outstanding

 

Stock

 

Outstanding

 

Stock

 

Capital

 

Declared

 

Deficit

 

Earnings

 

Equity

 

Balance, December 31, 2017

 

2,070,678

 

$

21

 

20,949,679

 

$

209

 

$

1,233,704

 

$

(822,520)

 

$

(146,267)

 

$

 —

 

$

265,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds and tax benefit from exercise of stock options

 

 —

 

 

 —

 

76,713

 

 

 1

 

 

319

 

 

 —

 

 

 —

 

 

 —

 

 

320

 

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

599

 

 

 —

 

 

 —

 

 

 —

 

 

599

 

Reclassification related to adoption of ASU 2016-01

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(27,018)

 

 

27,018

 

 

 —

 

Adjustment related to adoption of ASU 2016-16

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,827)

 

 

 —

 

 

(7,827)

 

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,965)

 

 

(1,965)

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(93,525)

 

 

 —

 

 

(93,525)

 

Balance, June 30, 2018

 

2,070,678

 

$

21

 

21,026,392

 

$

210

 

$

1,234,622

 

$

(822,520)

 

$

(274,637)

 

$

25,053

 

$

162,749

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

5


 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

June 30, 

 

 

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

    

    

 

    

 

Net (loss) earnings

 

$

(93,525)

 

$

11,067

 

Loss on sale of mortgage servicing rights

 

 

 —

 

 

82

 

Change in fair value of mortgage servicing rights

 

 

(9,572)

 

 

8,861

 

Loss on extinguishment of debt

 

 

 —

 

 

1,265

 

Gain on sale of mortgage loans

 

 

(47,766)

 

 

(62,202)

 

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

 

 

5,282

 

 

(9,598)

 

Change in fair value of derivatives lending, net

 

 

419

 

 

(669)

 

Provision (recovery) for repurchases

 

 

1,594

 

 

(1,574)

 

Origination of mortgage loans held-for-sale

 

 

(2,354,373)

 

 

(3,373,606)

 

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

 

 

2,467,591

 

 

3,217,330

 

Gains from REO

 

 

(603)

 

 

(5,751)

 

Change in fair value of net trust assets, excluding REO

 

 

2,524

 

 

(2,573)

 

Change in fair value of long-term debt

 

 

(1,481)

 

 

2,761

 

Accretion of interest income and expense

 

 

20,544

 

 

48,114

 

Amortization of intangible and other assets

 

 

2,385

 

 

2,384

 

Accretion of contingent consideration

 

 

 —

 

 

1,552

 

Change in fair value of contingent consideration

 

 

 —

 

 

(6,254)

 

Amortization of debt issuance costs and discount on note payable

 

 

41

 

 

124

 

Stock-based compensation

 

 

599

 

 

979

 

Impairment of deferred charge

 

 

 —

 

 

520

 

Impairment of goodwill

 

 

74,662

 

 

 —

 

Impairment of intangible assets

 

 

13,450

 

 

 —

 

Excess tax benefit from share based compensation

 

 

 —

 

 

12

 

Change in deferred tax assets, net

 

 

4,315

 

 

 —

 

Net change in other assets

 

 

(1,743)

 

 

(2,170)

 

Net change in other liabilities

 

 

(2,890)

 

 

(11,966)

 

Net cash provided by (used in) operating activities

 

 

81,453

 

 

(181,312)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Net change in securitized mortgage collateral

 

 

247,374

 

 

366,469

 

Proceeds from the sale of mortgage servicing rights

 

 

 —

 

 

813

 

Purchase of mortgage servicing rights

 

 

 —

 

 

(5,619)

 

Finance receivable advances to customers

 

 

(350,264)

 

 

(434,567)

 

Repayments of finance receivables

 

 

354,826

 

 

438,788

 

Net change in mortgages held-for-investment

 

 

 —

 

 

 1

 

Purchase of premises and equipment

 

 

(530)

 

 

(399)

 

Proceeds from the sale of REO

 

 

11,207

 

 

15,924

 

Net cash provided by investing activities

 

 

262,613

 

 

381,410

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

 

 —

 

 

55,454

 

Repayment of MSR financing

 

 

(40,133)

 

 

(25,000)

 

Borrowings under MSR financing

 

 

67,000

 

 

35,133

 

Repayment of warehouse borrowings

 

 

(2,355,268)

 

 

(3,073,584)

 

Borrowings under warehouse agreements

 

 

2,262,451

 

 

3,265,581

 

Repayment of term financing

 

 

 —

 

 

(30,000)

 

Payment of acquisition related contingent consideration

 

 

(554)

 

 

(11,444)

 

Repayment of securitized mortgage borrowings

 

 

(279,196)

 

 

(425,930)

 

Principal payments on capital lease

 

 

(106)

 

 

(174)

 

Debt issuance costs

 

 

 —

 

 

(100)

 

Tax payments on stock based compensation awards

 

 

(113)

 

 

(103)

 

Proceeds from exercise of stock options

 

 

320

 

 

296

 

Net cash used in financing activities

 

 

(345,599)

 

 

(209,871)

 

Net change in cash, cash equivalents and restricted cash

 

 

(1,533)

 

 

(9,773)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

39,099

 

 

46,067

 

Cash, cash equivalents and restricted cash at end of period

 

$

37,566

 

$

36,294

 

 

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

 

 

Transfer of securitized mortgage collateral to real estate owned

 

$

10,502

 

$

10,042

 

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

 

 

16,756

 

 

24,873

 

 

See accompanying notes to unaudited consolidated financial statements

6


 

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 direct and indirect wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets) and Impac Funding Corporation (IFC).

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.  IMC’s mortgage lending operations include the activities of CashCall Mortgage (CCM).

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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017, filed with the United States Securities and Exchange Commission (SEC).

All significant intercompany 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.  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, goodwill and intangible asset valuation and impairment, mortgage loans held-for-sale and derivative instruments, including interest rate lock commitments (IRLC). Actual results could differ from those estimates and assumptions.

Recent Accounting Pronouncements

Accounting Standards Update (ASU) No. 2014-09, 2015-04, 2016-08, 2016-10, 2016-12, 2016-20, 2017-13 and 2017-14, collectively implemented as Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), “Revenue from Contracts with Customers (Topic 606)”, provides guidance for revenue recognition. This ASC’s core principle requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The standard also clarifies the principal versus agent considerations, providing the evaluation must focus on whether the entity has control of the goods or services before they are transferred to the customer. The new standard permits the use of either the modified retrospective or full retrospective transition method. The Company's revenue is primarily generated from loan originations, loan servicing and real estate services. Origination revenue is comprised of fee income earned at origination of a loan, interest income earned for the period the loans are held and gain on sale on loans upon disposition of the loan. Servicing revenue is comprised of servicing fees and other ancillary fees in connection with our servicing

7


 

activities. Real estate services revenue is comprised of income earned from various real estate services and support such as loss mitigation, loan modification, surveillance and disposition and monitoring services. The Company performed a review of the guidance as compared to current accounting policies and have evaluated all services rendered to customers as well as underlying contracts to determine the impact of this standard to the Company’s revenue recognition process. The majority of services rendered by the Company in connection with loan originations, loan servicing and the long-term mortgage portfolio are not within the scope of FASB ASC 606. However, the Company identified real estate services revenues that were within the scope of FASB ASC 606 and the impact upon adoption was not materially different from the previous revenue recognition processes. The Company adopted this guidance on January 1, 2018, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities."  The amendments in ASU 2016-01, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); requires separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.  The update is effective for interim and annual reporting periods beginning after December 15, 2017 on a modified retrospective basis, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year adopted. The Company adopted this guidance on January 1, 2018, which resulted in a $27.0 million reclass, net of tax, between opening retained earnings and other comprehensive earnings (loss) within stockholders’ equity. 

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The update amends the guidance in Accounting Standards Codification 230, Statement of Cash Flows, and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. In addition, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (ASU 2016-18). This ASU clarifies certain existing principles in FASB ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs were effective for the Company’s fiscal year beginning after December 15, 2017 and subsequent interim periods. The Company adopted this guidance retrospectively on January 1, 2018.  The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance on January 1, 2018, which resulted in a $7.8 million cumulative effect adjustment to opening retained earnings. 

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.  ASU 2017-04 amends Topic 350 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This update requires the performance of an annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those periods, with early adoption permitted. The Company early adopted this guidance prospectively on June 30, 2018.  See Note 4.—Goodwill and Intangible Assets for further discussion on goodwill impairment testing.

8


 

 

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.”  The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for annual reporting periods beginning after December 15, 2017.   The Company adopted this guidance on January 1, 2018, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive earnings (AOCE) to retained earnings for the stranded tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. The ASU is effective in years beginning after December 15, 2018, but permits early adoption in a period for which financial statements have not yet been issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In February 2018, the FASB ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  This amendment clarifies certain aspects of the new guidance (ASU 2016-01) on recognizing and measuring financial instruments and presentation requirements for certain fair value option liabilities. ASU 2018-03 is effective for interim periods beginning after June 15, 2018 and will be effective for our 2018 third quarter and annual reporting period. The standard requires entities to record a cumulative-effect adjustment to the statement of financial position at the beginning of the fiscal year in which the amendments are adopted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.”  This ASU codifies existing SEC guidance contained in SEC Staff Accounting Bulletin No. 118 (SAB 118), which expresses the view of the staff regarding application of existing guidance for the accounting for income taxes as it relates to the enactment of the Tax Cuts and Jobs Act (the TCJA) which was signed into law in the fourth quarter of 2017. In accordance with ASU 2018-05, the Company has recorded provisional estimates for the accounting impacts of the TCJA, deferred tax remeasurements, and other items, due to the uncertainty regarding how these provisions are to be implemented and additional anticipated forthcoming guidance. As management completes the analysis of the impacts of the TCJA, the Company may refine its current estimate and make adjustments, which will be recognized through income in the period such adjustments are identified, as required by ASU 2018-05.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. This ASU specifies that Topic 718 apply to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

 

9


 

Note 2.—Mortgage Loans Held-for-Sale

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

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

 

2017

 

Government (1)

    

$

209,133

    

$

263,512

 

Conventional (2)

 

 

98,172

 

 

193,055

 

Other (3)

 

 

160,066

 

 

93,012

 

Fair value adjustment (4)

 

 

13,920

 

 

19,202

 

Total mortgage loans held for sale

 

$

481,291

 

$

568,781

 


(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 Federal National Mortgage Association (Fannie Mae or FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC).

(3)

Includes non-qualified mortgages (NonQM) and jumbo loans.

(4)

Changes in fair value are included in gain on sale of loans, net in the accompanying consolidated statements of operations.

 

Gain on mortgage loans held-for-sale (LHFS), included in gain on sale of loans, net in the consolidated statements of operations, is comprised of the following the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30, 

 

June 30, 

 

 

2018

 

2017

 

2018

 

2017

Gain on sale of mortgage loans

    

$

28,641

    

$

49,282

    

$

57,979

    

$

87,522

Premium from servicing retained loan sales

 

 

6,273

 

 

12,807

 

 

16,756

 

 

24,873

Unrealized gains (losses) from derivative financial instruments

 

 

1,435

 

 

1,896

 

 

(665)

 

 

751

Realized (losses) gains from derivative financial instruments

 

 

(227)

 

 

(6,167)

 

 

11,818

 

 

(5,042)

Mark to market (loss) gain on LHFS

 

 

(391)

 

 

4,394

 

 

(5,282)

 

 

9,598

Direct origination expenses, net

 

 

(15,773)

 

 

(25,314)

 

 

(38,789)

 

 

(45,150)

(Provision) recovery for repurchases

 

 

(1,217)

 

 

(92)

 

 

(1,594)

 

 

1,574

Total gain on sale of loans, net

 

$

18,741

 

$

36,806

 

$

40,223

 

$

74,126

 

 

 

 

 

 

 

 

Note 3.—Mortgage Servicing Rights

The Company retains mortgage servicing rights (MSRs) from its sales and securitization of certain mortgage loans or as a result of purchase transactions. 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 and 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 six months ended June 30, 2018 and year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

2018

 

2017

Balance at beginning of period

    

$

154,405

    

$

131,537

Additions from servicing retained loan sales

 

 

16,756

 

 

56,049

Addition from purchases

 

 

 —

 

 

5,618

Reductions from bulk sales (1)

 

 

 —

 

 

(895)

Changes in fair value (2)

 

 

9,572

 

 

(37,904)

Fair value of MSRs at end of period

 

$

180,733

 

$

154,405


(1)

In the first quarter of 2017, the Company sold substantially all of its NonQM MSRs.

(2)

Changes in fair value are included within gain (loss) on MSRs, net in the accompanying consolidated statements of operations.

 

At June 30, 2018 and December 31, 2017, the outstanding principal balance of the mortgage servicing portfolio was comprised of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

 

2017

 

Government insured

    

$

3,606,688

    

$

2,834,680

 

Conventional (1)

 

 

13,177,521

 

 

13,493,463

 

NonQM

 

 

1,937

 

 

1,957

 

Total loans serviced

 

$

16,786,146

 

$

16,330,100

 


(1)

At June 30, 2018 and December 31, 2017, $13.2 billion and $13.5 billion, respectively, of Fannie Mae and Freddie Mac servicing was pledged as collateral as part of the MSR Financing (See Note 5.—Debt– MSR Financings).  Pledged collateral was approximately 77% and 81% of the fair value of MSRs in the consolidated balance sheets at June 30, 2018 and December 31, 2017, respectively.

 

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 7.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

Mortgage Servicing Rights Sensitivity Analysis

 

2018

 

2017

Fair value of MSRs

    

$

180,733

 

$

154,405

Prepayment Speed:

 

 

 

 

 

 

Decrease in fair value from 10% adverse change

 

 

(3,464)

 

 

(5,643)

Decrease in fair value from 20% adverse change

 

 

(7,178)

 

 

(11,275)

Decrease in fair value from 30% adverse change

 

 

(11,101)

 

 

(16,807)

Discount Rate:

 

 

 

 

 

 

Decrease in fair value from 10% adverse change

 

 

(6,759)

 

 

(5,461)

Decrease in fair value from 20% adverse change

 

 

(13,046)

 

 

(10,555)

Decrease in fair value from 30% adverse change

 

 

(18,905)

 

 

(15,316)

 

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.

11


 

Gain (loss) on mortgage servicing rights, net is comprised of the following for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2018

    

2017

    

2018

    

2017

Change in fair value of mortgage servicing rights

 

$

393

 

$

(7,739)

 

$

9,572

 

$

(8,861)

Gain (loss) on sale of mortgage servicing rights

 

 

 —

 

 

331

 

 

 —

 

 

(82)

Realized and unrealized (losses) gains from hedging instruments

 

 

(226)

 

 

739

 

 

(1,700)

 

 

1,297

Gain (loss) on mortgage servicing rights, net

 

$

167

 

$

(6,669)

 

$

7,872

 

$

(7,646)

 

Servicing fees, net is comprised of the following for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2018

    

    

2017

    

2018

    

2017

Contractual servicing fees

 

$

11,326

 

$

9,011

 

$

22,864

 

$

17,377

Late and ancillary fees

 

 

167

 

 

73

 

 

318