imh_Current folio_10Q

Table of Contents

 

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, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

IMH

NYSE American

Preferred Stock Purchase Rights

IMH

NYSE American

 

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 every Interactive Data File required to be submitted 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 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 ☐ 

 

 

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 21,181,357 shares of common stock outstanding as of August 5, 2019.

 

 

1

Table of Contents

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, 2019 (unaudited) and December 31, 2018

3

 

Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

4

 

Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

5

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

ITEM 2. 

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

32

 

 

 

 

Forward-Looking Statements

32

 

The Mortgage Industry and Discussion of Relevant Fiscal Periods

32

 

Selected Financial Results

33

 

Status of Operations

33

 

Liquidity and Capital Resources

37

 

Critical Accounting Policies

39

 

Financial Condition and Results of Operations

39

 

 

 

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

60

 

 

 

ITEM 4. 

CONTROLS AND PROCEDURES

60

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

ITEM 1. 

LEGAL PROCEEDINGS

62

 

 

 

ITEM 1A. 

RISK FACTORS

62

 

 

 

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

62

 

 

 

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

62

 

 

 

ITEM 4. 

MINE SAFETY DISCLOSURES

62

 

 

 

ITEM 5. 

OTHER INFORMATION

62

 

 

 

ITEM 6. 

EXHIBITS

63

 

 

 

 

SIGNATURES

63

 

 

 

 

CERTIFICATIONS

 

 

2

Table of Contents

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2019

 

2018

 

ASSETS

 

(Unaudited)

 

 

 

 

Cash and cash equivalents

 

$

25,794

 

$

23,200

 

Restricted cash

 

 

7,141

 

 

6,989

 

Mortgage loans held-for-sale

 

 

420,957

 

 

353,601

 

Mortgage servicing rights

 

 

50,346

 

 

64,728

 

Securitized mortgage trust assets

 

 

2,931,793

 

 

3,165,590

 

Other assets

 

 

63,939

 

 

33,835

 

Total assets

 

$

3,499,970

 

$

3,647,943

 

LIABILITIES

 

 

 

 

 

 

 

Warehouse borrowings

 

$

362,973

 

$

284,137

 

Convertible notes, net

 

 

24,990

 

 

24,985

 

Long-term debt

 

 

43,910

 

 

44,856

 

Securitized mortgage trust liabilities

 

 

2,915,156

 

 

3,148,215

 

Other liabilities

 

 

50,652

 

 

35,575

 

Total liabilities

 

 

3,397,681

 

 

3,537,768

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $31,850; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of June 30, 2019 and December 31, 2018 (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, 2019 and December 31, 2018 (See Note 12)

 

 

14

 

 

14

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 21,181,357 and 21,117,006 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

 

212

 

 

211

 

Additional paid-in capital

 

 

1,235,583

 

 

1,235,108

 

Accumulated other comprehensive earnings

 

 

24,254

 

 

23,877

 

Net accumulated deficit:

 

 

 

 

 

 

 

Cumulative dividends declared

 

 

(822,520)

 

 

(822,520)

 

Retained deficit

 

 

(335,261)

 

 

(326,522)

 

Net accumulated deficit

 

 

(1,157,781)

 

 

(1,149,042)

 

Total stockholders’ equity

 

 

102,289

 

 

110,175

 

Total liabilities and stockholders’ equity

 

$

3,499,970

 

$

3,647,943

 

 

See accompanying notes to unaudited consolidated financial statements

3

Table of Contents

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 Ended

 

For the Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenues:

 

 

    

 

 

    

 

 

    

 

 

    

 

Gain on sale of loans, net

 

$

29,472

 

$

18,741

 

$

41,686

 

$

40,223

 

Servicing fees, net

 

 

3,536

 

 

9,861

 

 

6,505

 

 

19,324

 

(Loss) gain on mortgage servicing rights, net

 

 

(9,887)

 

 

167

 

 

(15,510)

 

 

7,872

 

Real estate services fees, net

 

 

807

 

 

1,038

 

 

1,613

 

 

2,423

 

Other

 

 

187

 

 

116

 

 

187

 

 

207

 

Total revenues

 

 

24,115

 

 

29,923

 

 

34,481

 

 

70,049

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel expense

 

 

14,339

 

 

16,678

 

 

28,461

 

 

34,421

 

Business promotion

 

 

2,013

 

 

9,000

 

 

4,936

 

 

18,730

 

General, administrative and other

 

 

5,281

 

 

10,846

 

 

10,507

 

 

19,122

 

Intangible asset impairment

 

 

 —

 

 

13,450

 

 

 —

 

 

13,450

 

Goodwill impairment

 

 

 —

 

 

74,662

 

 

 —

 

 

74,662

 

Total expenses

 

 

21,633

 

 

124,636

 

 

43,904

 

 

160,385

 

Operating income (loss)

 

 

2,482

 

 

(94,713)

 

 

(9,423)

 

 

(90,336)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

43,061

 

 

49,064

 

 

88,316

 

 

99,215

 

Interest expense

 

 

(40,518)

 

 

(48,518)

 

 

(83,977)

 

 

(97,648)

 

Change in fair value of long-term debt

 

 

388

 

 

258

 

 

654

 

 

1,481

 

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

 

 

(1,459)

 

 

217

 

 

(4,142)

 

 

(1,921)

 

Total other income, net

 

 

1,472

 

 

1,021

 

 

851

 

 

1,127

 

Earnings (loss) before income taxes

 

 

3,954

 

 

(93,692)

 

 

(8,572)

 

 

(89,209)

 

Income tax expense

 

 

81

 

 

3,706

 

 

167

 

 

4,316

 

Net earnings (loss)

 

$

3,873

 

$

(97,398)

 

$

(8,739)

 

$

(93,525)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of mortgage-backed securities

 

 

(7)

 

 

 —

 

 

14

 

 

 —

 

Change in fair value of instrument specific credit risk of long-term debt

 

$

267

 

$

(526)

 

$

363

 

$

(1,965)

 

Total comprehensive earnings (loss)

 

$

4,133

 

$

(97,924)

 

$

(8,362)

 

$

(95,490)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

$

(4.65)

 

$

(0.41)

 

$

(4.46)

 

Diluted

 

 

0.18

 

 

(4.65)

 

 

(0.41)

 

 

(4.46)

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

4

Table of Contents

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 (Loss)

 

Equity

 

Balance, January 1, 2019

 

2,070,678

 

$

21

 

21,117,006

 

$

211

 

$

1,235,108

 

$

(822,520)

 

$

(326,522)

 

$

23,877

 

$

110,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds and tax benefit from exercise of stock options

 

 —

 

 

 —

 

64,351

 

 

 1

 

 

162

 

 

 —

 

 

 —

 

 

 —

 

 

163

 

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

107

 

 

 —

 

 

 —

 

 

 —

 

 

107

 

Other comprehensive earnings

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

117

 

 

117

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12,612)

 

 

 —

 

 

(12,612)

 

Balance, March 31, 2019

 

2,070,678

 

$

21

 

21,181,357

 

$

212

 

$

1,235,377

 

$

(822,520)

 

$

(339,134)

 

$

23,994

 

$

97,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

206

 

 

 —

 

 

 —

 

 

 —

 

 

206

 

Other comprehensive earnings

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

260

 

 

260

 

Net earnings

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,873

 

 

 —

 

 

3,873

 

Balance, June 30, 2019

 

2,070,678

 

$

21

 

21,181,357

 

$

212

 

$

1,235,583

 

$

(822,520)

 

$

(335,261)

 

$

24,254

 

$

102,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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 (Loss)

 

Equity

 

Balance, January 1, 2018

 

2,070,678

 

$

21

 

20,949,679

 

$

209

 

$

1,233,704

 

$

(822,520)

 

$

(146,267)

 

$

 —

 

$

265,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification related to adoption of ASU 2016-01

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(27,018)

 

 

27,018

 

 

 —

 

Adjustment related to adoption of ASU 2016-16

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,827)

 

 

 —

 

 

(7,827)

 

Proceeds and tax benefit from exercise of stock options

 

 —

 

 

 —

 

3,000

 

 

 1

 

 

15

 

 

 —

 

 

 —

 

 

 —

 

 

16

 

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

430

 

 

 —

 

 

 —

 

 

 —

 

 

430

 

Other comprehensive earnings

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,440)

 

 

(1,440)

 

Net earnings

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,873

 

 

 —

 

 

3,873

 

Balance, March 31, 2018

 

2,070,678

 

$

21

 

20,952,679

 

$

210

 

$

1,234,149

 

$

(822,520)

 

$

(177,239)

 

$

25,578

 

$

260,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds and tax benefit from exercise of stock options

 

 —

 

 

 —

 

73,713

 

 

 —

 

 

303

 

 

 —

 

 

 —

 

 

 —

 

 

303

 

Stock based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

170

 

 

 —

 

 

 —

 

 

 —

 

 

170

 

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(525)

 

 

(525)

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(97,398)

 

 

 —

 

 

(97,398)

 

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

Table of Contents

IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

June 30, 

 

 

 

2019

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

 

    

    

 

    

 

Net loss

 

$

(8,739)

 

$

(93,525)

 

Gain on sale of mortgage servicing rights

 

 

(864)

 

 

 —

 

Change in fair value of mortgage servicing rights

 

 

16,374

 

 

(9,572)

 

Gain on sale of mortgage loans

 

 

(31,946)

 

 

(47,766)

 

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

 

 

(8,334)

 

 

5,282

 

Change in fair value of derivatives lending, net

 

 

(4,566)

 

 

419

 

Provision for repurchases

 

 

3,160

 

 

1,594

 

Origination of mortgage loans held-for-sale

 

 

(1,402,859)

 

 

(2,354,373)

 

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

 

 

1,373,784

 

 

2,467,591

 

Loss (gain) from trust REO

 

 

1,099

 

 

(603)

 

Change in fair value of net trust assets, excluding trust REO

 

 

3,043

 

 

2,524

 

Change in fair value of long-term debt

 

 

(654)

 

 

(1,481)

 

Accretion of interest income and expense

 

 

13,768

 

 

20,544

 

Amortization of intangible and other assets

 

 

286

 

 

2,385

 

Amortization of debt issuance costs and discount on note payable

 

 

11

 

 

41

 

Stock-based compensation

 

 

313

 

 

599

 

Impairment of goodwill

 

 

 —

 

 

74,662

 

Impairment of intangible assets

 

 

 —

 

 

13,450

 

Change in deferred tax assets, net

 

 

 —

 

 

4,315

 

Net change in other assets

 

 

(771)

 

 

(1,743)

 

Net change in other liabilities

 

 

(8,737)

 

 

(2,890)

 

Net cash (used in) provided by operating activities

 

 

(55,632)

 

 

81,453

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Net change in securitized mortgage collateral

 

 

295,035

 

 

247,374

 

Proceeds from the sale of mortgage servicing rights

 

 

12

 

 

 —

 

Finance receivable advances to customers

 

 

 —

 

 

(350,264)

 

Repayments of finance receivables

 

 

 —

 

 

354,826

 

Purchase of premises and equipment

 

 

(335)

 

 

(530)

 

Purchase of mortgage-backed securities

 

 

(5,347)

 

 

 —

 

Proceeds from the sale of mortgage-backed securities

 

 

1,021

 

 

 —

 

Proceeds from the sale of trust REO

 

 

10,607

 

 

11,207

 

Net cash provided by investing activities

 

 

300,993

 

 

262,613

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repayment of MSR financing

 

 

 —

 

 

(40,133)

 

Borrowings under MSR financing

 

 

 —

 

 

67,000

 

Repayment of warehouse borrowings

 

 

(1,133,320)

 

 

(2,355,268)

 

Borrowings under warehouse agreements

 

 

1,212,156

 

 

2,262,452

 

Payment of acquisition related contingent consideration

 

 

 —

 

 

(554)

 

Repayment of securitized mortgage borrowings

 

 

(321,494)

 

 

(279,196)

 

Principal payments on capital lease

 

 

(81)

 

 

(106)

 

Tax payments on stock based compensation awards

 

 

(39)

 

 

(113)

 

Proceeds from exercise of stock options

 

 

163

 

 

319

 

Net cash used in financing activities

 

 

(242,615)

 

 

(345,599)

 

Net change in cash, cash equivalents and restricted cash

 

 

2,746

 

 

(1,533)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

30,189

 

 

39,099

 

Cash, cash equivalents and restricted cash at end of period

 

$

32,935

 

$

37,566

 

 

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

 

 

Transfer of securitized mortgage collateral to trust REO

 

$

13,035

 

$

10,502

 

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

 

 

1,999

 

 

16,756

 

Initial recognition of operating lease right of use assets (net of $3.8 million of deferred rent)

 

 

19,694

 

 

 —

 

Initial recognition of operating lease liabilities

 

 

23,447

 

 

 —

 

 

See accompanying notes to unaudited consolidated financial statements

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IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1.—Summary of Business and Financial Statement Presentation

Business Summary

Impac Mortgage Holdings, Inc. (the Company or IMH) is a financial services company incorporated in Maryland with 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 its division, 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018, 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-backed securities, mortgage servicing rights, mortgage loans held-for-sale and derivative instruments, including interest rate lock commitments (IRLC). Actual results could differ from those estimates and assumptions.

 

Accounting Pronouncements Adopted in 2019

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”, and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.   The Company adopted ASU 2016-02 on January 1, 2019 and applied the practical expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to January 1, 2019 remained unchanged in accordance with Leases (Topic 840).  On January 1, 2019, the Company recognized right of use (ROU) assets of $19.7 million (net of the reversal of $3.8 million deferred rent liability) and lease liabilities of $23.4 

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million in the consolidated balance sheet.  There was no impact to retained earnings upon adoption of Topic 842.  For additional information related to the impact of the new guidance, see Note 4.—Leases.

 

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 Tax Act) which was signed into law in the fourth quarter of 2017. The ASU is effective in years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2019, and the adoption of this ASU had no impact on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Effective

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820).” The ASU eliminates disclosures such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40).” This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (ASU 2019-04), which provided certain improvements to ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) and ASU 2016-13. As the Company adopted ASU 2016-01 on January 1, 2018, the improvements in ASU 2019-04 are effective in the first quarter of 2020. Early adoption is permitted. The Company expects to adopt ASU 2016-13 in the first quarter of 2020, as described above, and the improvements in ASU 2019-04 will be adopted concurrently. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

 

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, 

 

 

 

2019

 

2018

 

Government (1)

    

$

39,924

    

$

39,522

 

Conventional (2)

 

 

154,066

 

 

53,148

 

Non-qualified mortgages (NonQM)

 

 

214,193

 

 

256,491

 

Fair value adjustment (3)

 

 

12,774

 

 

4,440

 

Total mortgage loans held-for-sale

 

$

420,957

 

$

353,601

 


(1)

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

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(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)

Changes in fair value are included in gain on sale of loans, net in the accompanying consolidated statements of operations and comprehensive earnings (loss).

 

At June 30, 2019 and December 31, 2018, the Company had $3.0 million and $2.3 million, respectively, in UPB of mortgage loans held-for-sale that were in nonaccrual status as the loans were 90 days or more delinquent.  The carrying value of these nonaccrual loans at June 30, 2019 and December 31, 2018 were $2.4 million and $1.8 million, respectively. 

Gain on mortgage loans held-for-sale (LHFS), included in gain on sale of loans, net in the consolidated statements of operations and comprehensive earnings (loss), is comprised of the following for the three and six months ended June 30, 2019 and 2018: