⇒ Standing Out ⇐
impac mortgage holdings, inc.
2006
annual report
Navigating the Market (p2)
Creating Tools for Performance (p6)
Preparing for Growth (p10)
ABOUT IMPAC: Impac Mortgage
Holdings, Inc. (“Impac” or “the
Company”) is a mortgage real
estate investment trust (“REIT”).
Impac (NYSE: IMH) manages a
long-term investment portfolio
with $21.1 billion in assets
nationwide. A public company
since 1995, Impac helped pioneer
the market for non-conforming
alternative-A (“Alt-A”) residential
mortgage loans. While Alt-A
mortgages remain our main focus,
we are building our portfolio
with a growing emphasis on
small-balance commercial loans
to enhance stockholder value.
As part of our diversified
strategy, Impac operates four
core businesses. Our Long-Term
Investment Operations invests
primarily in Alt-A residential
mortgage loans and to a lesser
extent in small-balance commercial
loans. Our Mortgage Operations,
Impac Funding Corporation
(“IFC”), acquires, originates, sells
and securitizes primarily Alt-A
loans. Our Warehouse Lending
Operations, Impac Warehouse
Lending Group (“IWLG”), provides
short-term repurchase facilities to
mortgage loan originators. Finally,
our Commercial Operations,
Impac Commercial Capital
Corporation (“ICCC”), originates
small-balance commercial and
multi-family loans for sale to the
Long-Term Investment Operations
or third parties.
⇒
Standing Out
⇐
In the highly cyclical mortgage industry, one thing is certain: maximizing
performance requires expertise, persistence and a disciplined approach
to managing risk. In this type of market, the best companies stand out by
emerging from each market cycle better and stronger. In 2006, Impac’s
experienced leadership proved its ability to make prudent choices to keep
the Company on course and protect stockholder value while pursuing
opportunities for longer-term growth and profitability.
impac mortgage holdings, inc.
2006
annual report
2
⇒ Navigating the Market ⇐
Navigating through the cycles of the mortgage industry requires
the ability to move quickly in shifting conditions. In 2006, Impac
adjusted its strategy to preserve liquidity while remaining focused on
long-term profitability. We adhered to our core philosophies despite
market pressures from competition and increased borrowing costs.
Early in 2006, we identified a downward trend in credit quality, as the
housing market cooled and home-price appreciation returned to more
normal levels. As a result, we made a conscious decision to reduce our
production volumes and invest more selectively.
We chose to build the balance sheet with longer duration, Alt-A
residential and small-balance commercial loans that have historically
demonstrated superior performance. Our foresight in a challenging
market allowed us to pay consistent dividends throughout the year
and reduce our exposure to less desirable mortgage assets.
sec 01 Navigating the Market
3
impac mortgage holdings, inc.
2006
annual report
4
The Capital Markets Group: In 2006, we established a Capital Markets group to broaden our ability to manage the balance sheet
and enhance our competitive advantage. Led by Impac’s new Chief Investment Officer, Andrew McCormick, and based just outside of
Washington, D.C., the group positions Impac to evaluate a wider array of investment opportunities. By diversifying our portfolio,
we believe we can minimize interest rate volatility and reduce credit risk.
from left to right: Norman Frey, Senior Vice President, Asset Liability, IFC; Andrew McCormick, Executive Vice President, Chief Investment Officer;
Nancy Pollard, Executive Vice President, Secondary Marketing, IFC; James Malloy, Senior Vice President, Secondary Marketing, IFC
sec 01 Navigating the Market
5
Impac remains well-capitalized, centralized and diversified among its business
segments in order to withstand extended market cycles. Most importantly, we
have the expertise to manage through the current lending environment. Our
executive team is willing to make tough choices to protect stockholder value. We
believe our Company is adequately prepared to weather the challenging market.
Focusing on credit quality: After years of minimal
credit losses, credit quality became a greater issue
industry-wide in 2006. While some of our peers
widened their underwriting guidelines to capture
more business, we did the opposite. Instead of growing
for growth’s sake, we decided to pursue reduced but
more profitable production, with a notable reduction
in volume in the first half of the year. This meant
tightening our underwriting guidelines and adjusting
pricing on loans that we acquired or originated.
At the same time, we maintained our credit
quality in the loans we held for investment. At the end of
2006, the long term investment portfolio had a weighted
average credit score of 698 with 99.8 percent of the
Alt-A residential mortgage loans defined as “A” credit
quality, which the Company defines as loans with credit
scores above 620. We also grew our high-performing
commercial investment portfolio to $1.7 billion at year
end, up 42 percent from the end of 2005.
Maximizing returns: Last year, our experience as a
seasoned issuer of structured transactions enabled us to
maximize our return on equity while preserving our
liquidity. To minimize risk and conserve our capital,
we sold more than half of our originations, primarily
Option Adjustable Rate Mortgages and second trust
deeds, or $6.3 billion in principal balance of mortgages
for gains. The whole-loan sales of these products to
third parties generally offer more attractive economic
results than including them in our mortgage-backed
security transactions.
We also issued $5.8 billion of mortgages as
consolidated Real Estate Mortgage Investment Conduit
(REMIC) transactions. In addition, we sold $834.0
million of mortgages as un-consolidated REMICs to
third parties, of which $29.8 million in residual interest
was retained by the Long-Term Investment Operations.
The REMIC strategy offers us attractive returns while
providing more liquidity than other kinds of mortgage-
backed securities.
Widening margins: We reached a turning point in
June 2006, when the Federal Reserve paused after
raising short-term interest rates 17 times during the
previous two years. With short-term interest rates
holding steady, our borrowing costs – which are tied
to the one-month London InterBank Offered Rate
(LIBOR) – stabilized. This enabled our adjusted net
interest margins to improve slightly as the coupons on
adjustable mortgages adjusted upwards over the last half
of the year.
In the third and fourth quarters, we took
advantage of the more favorable interest rate environ-
ment and reduced competition to increase both
production and investment. At the same time, we
continued to adhere to vigilant underwriting standards,
tools and processes to manage risk. We ended 2006
with a long-term investment portfolio of $21.1 billion,
down from a record high of $24.7 billion at the end
of 2005. While our portfolio was smaller, it consisted
primarily of Alt-A residential and small-balance
commercial loans that we believe offer superior credit
quality and loan duration.
impac mortgage holdings, inc.
2006
annual report
6
⇒ Creating Tools for Performance ⇐
Impac has long been a technology leader in the mortgage industry.
In 2006, we deployed more robust and sophisticated Enterprise Risk
Management tools to make more informed decisions. Leveraging
proprietary and third-party technology platforms, we enhanced
strategies, standards and processes to manage risk prudently.
Our data-driven strategy has helped us better define the credit risk
exposure in our existing portfolio. More importantly, we are targeting
precisely the loans we want to acquire and originate going forward.
We are concentrating on areas with the strongest home-price
appreciation and solid employment. With industry-leading analytical
capabilities, we are growing our business while building even stronger
relationships with our customers.
sec 02 Creating Tools for Performance
7
impac mortgage holdings, inc.
2006
annual report
8
The ERM Group: Since it was formed in 2005, the Enterprise Risk Management Group has brought a new level of innovation to Impac.
With industry-leading tools and technologies, we are better positioned to assess risk, adjust our underwriting guidelines and grow
our business. This group has impacted everything from product development to securitization strategies, enabling us to make the
best decision on each individual loan.
from left to right: James Dickinson, Vice President Business Reporting & Data Integrity; Lily Van, Senior Project Manager;
Ankush Chawla, Senior Vice President, Director of Enterprise Risk Management
sec 02 Creating Tools for Performance
9
Comprehensive data means more targeted marketing. Utilizing proprietary
analytics, we have identified the top performing markets for Alt-A residential
loan originations in terms of credit worthiness and loan duration. We have
expanded our sales and marketing efforts with a laser focus based on market
area performance.
Building our business: Today, we are using a risk-
based approach to acquire and originate higher credit
quality loans, while providing even greater value to our
customers. A key example is the Impac Market Analysis
Platform (iMAP), a proprietary tool we developed
exclusively for our correspondent and broker customers.
Launched in May 2006, iMAP gives our
customers macroeconomic data such as unemployment,
home price appreciation and loan delinquencies. iMAP
provides customers with a comprehensive credit risk
analysis of each metropolitan area. The Web-based
platform enables them to make better risk-adjusted
decisions that result in higher approval ratios and better
credit quality loans.
Our correspondents, who generated 68
percent of our loan production in 2006, are long-term
players who care about the quality of their loans. With
iMAP and third-party loan level assessment tools, we
are helping them deliver higher-credit quality, better
performing loans to Impac while building our business
at the same time.
Managing risk: Internally, we have deployed a
proprietary profitability ranking system that helps us
acquire and originate loans with higher credit quality.
Our comprehensive decision-support system covers
more than 320 metropolitan areas. We assess each loan’s
credit risk by evaluating macroeconomic data along
with individual characteristics such as the borrower’s
credit score, the loan-to-value ratio, the property’s
history and more.
In addition to developing our own proprietary
technology solutions, we partner with a number of
the industry’s top vendors to improve loan level risk.
In 2006, the Company implemented LoanSafe™,
a third-party tool from First American, CoreLogic™,
that analyzes the three main components of loan
transactions – the borrower, the collateral and the
mortgage broker. To screen out potentially fraudulent
loans, a key element of LoanSafe™ is the property
segment which measures the property-based risk score
based on home appreciation, foreclosure rates and f lip
activity. At year end 2006, we also began utilizing
IncomePro™, an income validation tool that is used
in conjunction with LoanSafe™ for the assessment of
stated income loans.
Optimizing our investments: We are integrating our
analytics and technology to optimize pricing and
selectively invest in loans. Using our technology
advantage, we can gain insight into areas with the
slowest prepayments and strongest job markets. By
working with our secondary marketing group, we are
in a position to identify a profitable exit strategy at the
point of loan origination.
Overall, we have implemented a robust
infrastructure designed to improve loan level
forecasting, portfolio analysis and overall profitability.
Looking ahead, we plan to use our Enterprise Risk
Management expertise to build business partnerships
with our customers by helping them to optimize
their sales strategies. At the same time, we are helping
our wholesale lending platforms originate better
performing loans. At Impac, it’s all part of creating
tools for performance.
impac mortgage holdings, inc.
2006
annual report
10
⇒ Preparing for Growth ⇐
Market corrections are often the point of differentiation for identifying
companies with experienced management, a solid business and a strong
balance sheet to manage through a decidedly challenging environment.
At Impac, we continue to believe that the fundamentals of this business
are sound and that we are positioned to successfully navigate through
this cycle.
To focus more on strategic initiatives and opportunities available to the
Company, we strengthened our executive management team. With this
expertise, we believe we are better positioned to evaluate a wider array
of investment opportunities. Further, we continue to evaluate strategic
acquisitions of well-established, profitable companies to complement
our thriving wholesale channels and leverage our liquidity.
sec 03
Preparing for Growth
11
impac mortgage holdings, inc.
2006
annual report
12
The Executive Management Team: In 2006, Impac strengthened its executive management team to pursue prospects for
targeted investment and growth. We repositioned long-time Impac executives and created a new position of Chief Investment Officer.
Our organizational changes reflect the extensive experience and contributions of our leadership team, while positioning
the Company for growth opportunities ahead.
back row from left to right: Ronald Morrison, Executive Vice President, General Counsel, Corporate Secretary;
Andrew McCormick, Executive Vice President, Chief Investment Officer; Gretchen Verdugo, Executive Vice President, Chief Financial Officer;
Richard Johnson, Executive Vice President, Chief Operating Officer; seated from left to right: William Ashmore, Director, President;
Joseph Tomkinson, Chairman & Chief Executive Officer
sec 04
Letter to Stockholders
13
Dear Fellow Stockholders: For Impac, 2006 was an important year of transition,
stabilization and innovation. Despite challenging market conditions, we
successfully preserved our liquidity, maintained our dividend and enhanced
our technological advantage to manage risk. We also expanded our already
significant management expertise to help prepare to take advantage of growth
opportunities ahead.
The year presented challenges for Impac and the mortgage industry as a
whole. Declining credit quality produced the least attractive vintage of
loans in recent years. Ahead of many of its peers, Impac saw the need to pull
back significantly on loan volume, cut costs and ride out the market cycle.
At the same time, we focused on growing higher-margin areas of our
diversified business, such as warehouse lending and our Alt-A and small-balance
commercial wholesale platforms.
We also faced a highly competitive mortgage industry and an unfavorable
yield curve, particularly in the first half of the year. In 2006, the Federal
Reserve increased short-term interest rates 100 basis points before pausing in
June for the remainder of the year – a welcome respite from the steady drumbeat
of rising interest rates over the previous two years. Compressed for most
of the year, our adjusted net interest margins began to widen in the fourth
quarter. Our margins improved as our borrowing costs stabilized and the
adjustable-rate mortgages in our securitized portfolio reset at higher rates.
Last year our leadership team effectively navigated through a difficult
environment. We ended the year well-capitalized, with a large long-term
investment portfolio that generates the majority of our taxable income. Once
market conditions become more favorable, we believe Impac will be well
positioned to achieve long-term, profitable growth.
A NEW OPPORTUNITY: In early
2007, we formed a partnership
with Arch Bay, L.L.C., a group
of mortgage industry leaders
who have significant
experience acquiring
non-performing loans at
deep discounts, and then
restructuring and remarketing
them. By combining our
partners’ expertise with
Impac’s infrastructure and
experience, we plan to
acquire, restructure and sell
these loans for attractive
returns. With the dramatic
increase in loan defaults in
recent months, the significant
number of variable-rate and
interest-only mortgages that
are resetting and pressure by
warehouse lenders on
their mortgage clients, we
believe this is a promising
opportunity for Impac.
impac mortgage holdings, inc.
2006
annual report
14
In 2006, credit quality in our investment portfolio remained high. At
year end, 99.8 percent of the Alt-A residential loans held as securitized
mortgage collateral were “A” credit quality mortgages, as defined by the
Company. To minimize risk, we continued to invest primarily in first-
lien residential mortgages for owner-occupied properties and purchase
transactions. At year end, the original credit score was 697 for residential
loans and 730 for commercial loans backing our portfolio.
2006 results: In 2006, the Company reported a net
loss of $75.3 million or $1.18 per diluted common
share, as compared to net earnings of $270.3 million or
$3.35 per diluted common share for 2005. Meanwhile,
our estimated taxable income, which we believe to
be an important indicator of the Company’s overall
performance, was $79.5 million or $1.05 per diluted
common share in 2006, as compared to taxable income
of $142.9 million or $1.87 per diluted common share
for 2005.
As a REIT, the Company is required to
distribute at least 90 percent of its taxable income in
the form of dividends. Our taxable income decreased
during the year for several reasons – one, we reduced
our loan production to better manage risk; two, our
long-term investment portfolio declined as we invested
more selectively and older loans seasoned and were paid
off; and three, higher borrowing costs narrowed our net
interest margins for much of the year. As a result, we
paid a common stock dividend of $0.95 per share in
2006, as compared to $1.95 per share in 2005.
Early on, we saw that new originations were
not performing as well as other vintages and reduced
our residential production accordingly. As a result, we
acquired or originated approximately $11.6 billion of
primarily non-conforming Alt-A mortgages during
2006, as compared to $22.3 billion for 2005.
Meanwhile, we increased our production of
small-balance commercial and multi-family loans, which
have demonstrated superior performance. We acquired or
originated approximately $983.4 million of commercial
and multi-family loans during 2006, as compared to
$798.5 million in 2005.
During 2006, we securitized approximately
$6.9 billion of primarily Alt-A loans and retained
approximately $5.8 billion of those for investment, as
compared to securitizing $14.0 billion and retaining
approximately $13.4 billion in 2005. In 2006, we
securitized and retained $672.4 million of commercial
loans, as compared to $683.1 million in 2005.
At December 31, 2006, the Company’s
long-term investment portfolio totaled $21.1 billion,
down from its record high of $24.7 billion at December
31, 2005. Although the portfolio was smaller at year-end,
in many ways it was stronger, backed by loans that
have historically demonstrated higher credit quality
and longer duration.
Accomplishments: Despite these challenges, Impac
maintained its quarterly common stock dividend in 2006,
in fact raising its fourth quarter 2005 dividend from
$0.20 per share to $0.25 per share for 2006. Our adjusted
net interest margins began to show signs of rebounding
in the fourth quarter, as short-term interest rates and
prepayment speeds stabilized. We also benefited from
our hedging strategy, which helped to mitigate interest
margin volatility and provide significant cash f low.
At year end 2006, the Company held
approximately $179.8 million in cash and cash
equivalents. We carefully preserved our liquidity to
manage through the challenging environment as well
as to capture future long-term opportunities for the
Company. We sold nearly half of our loan production
during the year for gains, primarily utilizing whole-
loan sales. Like many in the industry, we experienced
increased repurchase activity during the year. Our
mortgage loan buybacks were up from recent historic
lows, primarily the result of record loan production levels
and whole loans sales principally related to the last half
of 2005 and the beginning of 2006.
sec 04
Letter to Stockholders
15
To minimize future repurchase liability,
based on a loan-level analysis during 2005 and 2006,
we aggressively tightened our underwriting criteria and
pricing guidelines. Although these changes significantly
decreased our loan production in 2006, they resulted
in a higher concentration of primarily longer duration
products, which have demonstrated better historical
performance. We believe our repurchase reserves, which
totaled $15.3 million as of December 31, 2006, remained
adequate at year end.
Meanwhile, during the year we selectively
added loans to the balance sheet, while remaining focused
on credit quality and performance. At year end, our long-
term portfolio was invested 70 percent in longer-duration
loans, defined as loans with fixed interest-rate periods of
three years or greater.
To further improve our return on equity while
preserving liquidity, we utilized REMIC securitizations.
REMICs offer benefits similar to CMOs; however,
their cash-f low structures offer more attractive returns
for commercial loans while at the same time the residual
created provides more readily available liquidity for
the organization.
Strategies for growth: In 2006, Impac implemented
strategies designed to grow our business and improve
stockholder value. Strengthening our executive
management team, we promoted Richard Johnson to
Executive Vice President and Chief Operating Officer
and Gretchen Verdugo to Executive Vice President and
Chief Financial Officer. William Ashmore continues
to lead the organization as President and Director of
the Company, leveraging his substantial expertise and
leadership to focus more on strategic initiatives and
opportunities available to the Company. We also
welcomed Andrew McCormick to the newly
created role of Executive Vice President and Chief
Investment Officer.
A 24-year veteran of the mortgage industry,
Mr. McCormick now oversees all balance-sheet
investment decisions for Impac. He also leads our Capital
Markets group based just outside of Washington, D.C.,
which is evaluating a wider array of prudent investment
opportunities. By diversifying our portfolio, we believe
we can reduce interest margin volatility and credit risk.
During 2006, our Enterprise Risk
Management group deployed innovative analytical tools
to acquire and originate loans with higher credit quality.
Leveraging our proprietary platforms, we adjusted our
sales strategy to more precisely account for credit and
market risk. We used third-party tools to minimize
potential fraudulent loans, while integrating analytical
technology to optimize pricing and selectively invest
in loans.
Also during 2006, our commercial operations
expanded its presence in the mountain and southwest
regions. We believe small-balance commercial mortgages
are an attractive investment because they typically offer
higher credit scores, lower loan-to-value ratios and longer
average-life-to-payoff than Alt-A mortgages.
Throughout the year, we continued to evaluate
potential acquisitions of profitable, well-established
companies to complement our existing wholesale Alt-A
and commercial lending platforms.
Positive outlook: In a challenging and changing market,
Impac will benefit from a large balance sheet that is
primarily invested in high credit quality mortgages.
With our strong liquidity, we believe that we are well
positioned to weather continuing consolidation in the
marketplace, as overall mortgage industry production is
expected to decline.
While home price appreciation has slowed,
the economy is still solid. Today, Impac is poised to
benefit from a steeper yield curve, increased wholesale
distribution through strategic acquisitions, or both.
In closing, we would like to thank our
employees for their dedication and commitment, and
you, our stockholders, for your support. We believe our
Company will emerge from a difficult industry cycle
stronger and better. We look forward to updating you
as we work to build the balance sheet, diversify the
portfolio and strengthen the business in the year ahead.
Respectfully yours,
Joseph R. Tomkinson
Chairman of the Board and
Chief Executive Officer
William S. Ashmore
Director, President
impac mortgage holdings, inc.
2006
annual report
16
Statement of Operations Data
(amounts in thousands, except per share data)
For the year ended December 31,
2006
2005
restated
2004
restated
2003(1)
restated
2002
restated
Net interest income:
Interest income
Interest expense
Net interest income (expense)
Provision for loan losses
Net interest income (expense) after
provision for loan losses
Non-interest income:
Gain on sale of loans
Other income
Realized gain (loss) from derivative
$ 1,276,713
1,311,405
(34,692)
47,326
$ 1,251,960
1,047,209
204,751
30,563
$ 755,616
412,533
343,083
30,927
$ 385,716
209,009
176,707
24,853
$ 230,267
127,801
102,466
19,848
(82,018)
174,188
312,156
151,854
82,618
1,805
27,003
39,509
13,770
24,729
11,666
37,523
12,329
—
1,671
instruments
204,435
22,595
(91,881)
(47,847)
(28,361)
Change in fair value of derivative
instruments
Equity in net earnings of IFC
Total non-interest income (expense)
Non-interest expense:
Personnel expense
Other expense
General and administrative and
other expense
Total non-interest expense
(Loss) Earnings before income taxes
Income tax (benefit) expense
Net (loss) earnings
Net (loss) earnings per share:
Basic
Diluted
Dividends declared per share
Balance Sheet Data
As of December 31,
Securitized mortgage collateral and
mortgages held-for-investment
Finance receivables
Mortgages held-for-sale
Investments in and advances to IFC(1)
Total assets
Securitized mortgage borrowings
Reverse repurchase agreements
Total liabilities
Total stockholders’ equity
(113,017)
—
120,226
65,082
30,389
144,932
—
220,806
77,508
24,321
96,575
—
41,089
60,420
15,329
31,826
11,537
45,368
25,250
11,072
19,867
115,338
(77,130)
(1,857)
(75,273)
25,384
127,213
267,781
(2,477)
$ 270,258
17,097
92,846
260,399
2,762
$ 257,637
7,660
43,982
153,240
4,261
$ 148,979
(1.18)
(1.18)
0.95
$
$
$
3.38
3.35
1.95
$
$
$
3.79
3.72
2.90
$
$
$
2.94
2.88
2.05
$
$
$
$
(22,141)
11,299
(37,532)
1,856
1,898
985
4,739
40,347
—
$ 40,347
$
$
$
1.01
0.99
1.76
2006
2005
2004
2003(1)
2002
$ 21,052,709
306,294
1,561,919
—
23,598,955
20,526,369
1,880,395
22,589,425
1,009,530
$ 24,654,360 $ 21,895,592 $ 9,296,893
630,030
397,618
—
10,577,957
8,489,853
1,568,807
10,105,170
472,787
350,217
2,052,694
—
27,720,379
23,990,430
2,430,075
26,553,432
1,166,947
471,820
587,745
—
23,815,767
21,206,373
1,527,558
22,771,692
1,044,075
$ 5,215,731
664,021
—
531,032
6,540,339
5,019,934
1,168,029
6,256,814
283,525
(1) On July 1, 2003, IMH purchased 100 percent of the outstanding shares of common stock of IFC. The purchase of IFC’s common stock combined
with IMH’s ownership of 100 percent of IFC’s preferred stock resulted in the consolidation of IFC from July 1, 2003 through December 31, 2003.
Prior to July 1, 2003, IFC was a non-consolidated subsidiary of IMH and 99 percent of the net earnings of IFC were ref lected in IMH’s financial
statements as “Equity in net earnings of IFC.”
Operating Data
As of and for the year ended December 31,
Mortgage acquisitions and originations
for the year
Master servicing portfolio at year-end
Servicing portfolio at year-end
2006
2005
2004
2003
2002
$ 12,560,163
31,515,823
1,498,253
$ 22,310,603 $ 22,213,104 $ 9,525,121
13,919,694
28,404,008
28,448,507
1,402,100
1,690,800
2,208,433
$ 5,945,498
8,694,474
2,653,414
sec 04
Selected Data
17
Estimated Taxable Income available to IMH Common Stockholders
Estimated taxable income available to IMH common stockholders excludes net earnings from IFC and its subsidiaries and
the elimination of intercompany loan sale transactions. The following schedule reconciles net earnings to estimated taxable
income available to common stockholders of the REIT.
For the year ended December 31,
Net (loss) earnings
Adjustments to net (loss) earnings:(2)
Loan loss provision(3)
Tax deduction for actual loan losses(3)
GAAP earnings on REMICs(4)
Taxable income on REMICs(4)
Change in fair value of derivatives(5)
Dividends on preferred stock
Net loss (earnings) of taxable REIT subsidiaries(6)
Dividend from taxable REIT subsidiaries(7)
Elimination of inter-company loan sales transactions(8)
Net miscellaneous adjustments
Estimated taxable income available to common stockholders(9)
Estimated taxable income per diluted common share(9)
Diluted weighted average common shares outstanding
2006(1)
2005
2004
$ (75,273)
$ 270,258
$ 257,637
43,054
(27,157)
(16,822)
34,297
114,490
(14,698)
25,994
7,400
(11,913)
166
$ 79,538
$ 1.05
76,110
30,563
(16,004)
—
—
(155,695)
(14,530)
(14,968)
32,850
10,429
—
$ 142,903
$
1.87
76,277
30,927
(16,252)
—
—
(103,724)
(3,750)
(42,944)
37,000
44,048
—
$ 202,942
$
2.97
68,244
(1) Estimated taxable income includes estimates of book to tax adjustments which 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 percent of our
annual taxable income to our stockholders.
(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, ISAC REMIC 2006-3, ISAC REMIC 2006-4,
and ISAC REMIC 2006-5 securitizations, which were treated as secured borrowings for GAAP purposes and sales for tax purposes. The REMIC
GAAP income excludes the provision for loan losses recorded that may relate to the REMIC collateral included in securitized mortgage collateral.
The Company does not have any specific valuation allowances recorded as an offset to the REMIC collateral.
(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 (loss) earnings of IFC and ICCC, our taxable REIT subsidiaries (TRS), 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.
(7) Any dividends paid to IMH by the TRS in excess of their cumulative undistributed earnings and profits taxable income minus taxes paid would
be recognized as a return of capital by IMH to the extent of IMH’s capital investment in the TRS. Distributions from the TRS to IMH may not equal
the TRS net earnings, however, IMH can only recognize dividend distributions received from the TRS as taxable income to the extent that the TRS
distributions are from current or prior period undistributed earnings and profits taxable income minus taxes paid. Any distributions by the TRS in
excess of IMH’s capital investment in the TRS 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 cash dividends paid and the availability of a deduction attributable to net operating loss carry-forwards.
As of December 31, 2006, the Company has estimated federal net operating loss carry-forwards of $8.2 million that are expected to be utilized prior
to their expiration in the year 2020.
impac mortgage holdings, inc.
2006
annual report
18
Impac 2006 Annual Report Q&A
Q. What kind of mortgage lender is Impac?
A. Impac is an Alt-A lender. Substantially all of the mortgages we originate or acquire are Alt-A loans. We define Alt-A
loans as mortgages made to borrowers whose credit is generally within Fannie Mae and Freddie Mac guidelines, but have
loan characteristics that make them non-conforming under those guidelines. As of December 31, 2006, 99.8 percent
of the loans held in our portfolio had a credit grade of A or A-, which means that the credit rating exceeded 620, with
a weighted average loan-to-value ratio of 74 percent. As of December 31, 2006, the weighted average credit score of
the Alt-A loans in our portfolio (i.e. the long-term investment operations) was 697. The major credit rating agencies,
mortgage bond investors and our industry identify the Company as an Alt-A lender.
Q. Why does Impac invest in Alt-A residential mortgages?
A. 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. We believe Alt-A mortgages are normally subject to
lower rates of loss and delinquency than subprime mortgages.
Q. What are the key differences between Alt-A and subprime loans?
A. In general, Alt-A loans have stricter underwriting guidelines than subprime loans. For example, to qualify for an
Alt-A loan, a borrower must have established at least five trade lines of credit, which might include credit cards or a car
loan, and each trade line of credit must be consistent for a minimum of 24 months. Meanwhile, subprime borrowers in
general can have between zero and three trade lines depending on the loan-to-value ratio, and each trade line must be
consistent for a minimum of six months. In addition, Alt-A borrowers must not have a bankruptcy within 24 months
prior to loan approval, whereas there is no minimum elapsed time for subprime borrowers. To qualify for an Alt-A loan,
borrowers must have no rolling mortgage lates, whereas subprime loans allow rolling 30 days lates within the last 12
months, up to 90 days late.
Q. What is Impac’s exposure to subprime loans?
A. Virtually none. We generally do not acquire or retain subprime mortgages. As of December 31, 2006, subprime
mortgages represented 0.4 percent of acquisitions and 0.2 percent of the ending securitized mortgage collateral.
We define subprime mortgages made to borrowers with credit ratings less than 620, or other characteristics that increase
the credit risk.
Q. What are Impac’s key underwriting strategies?
A. Our strict underwriting strategies enable us to maintain a high-quality long-term investment portfolio. For a very
high percentage of loans, employment is provided and verified for at least two years. Most of our loans require either
full documentation or stated income and verified assets. In addition, any loans with a loan-to-value ratio of more than
80 percent have either borrower- or lender-paid mortgage insurance. We proactively adjust our underwriting guidelines
based on market conditions and actual loan performance.
Q. What is Impac’s leverage strategy?
A. We employ a leverage strategy to finance assets in our long-term mortgage portfolio primarily with securitized
mortgage borrowings and reverse repurchase agreements. We retain Adjustable Rate Mortgages (ARMs) and Fixed Rate
Mortgages (FRMs) that are acquired from the mortgage and commercial operations and finance the acquisition of these
mortgages, during the accumulation period with reverse repurchase agreements. After accumulating a pool of mortgages,
we securitize the mortgages in the form of Collateralized Mortgage Obligations (CMOs), or Real Estate Mortgage
Investment Conduits (REMICs), or we sell mortgages in whole loan sale transactions.
Q. What is a Collateralized Mortgage Obligation or CMO?
A. A CMO is a series of bonds (each called a “tranche”) with varying maturities and coupons. CMOs are a form of
collateralized borrowing where the cash flows from the assets supporting the debt are the repayment source. The
advantages of the CMO include: financing which allows the Company to secure permanent financing without the risk of
margin calls and a relatively small investment of capital.
sec 04
sec 04
Questions & Answers
Letter to Stockholders
19
Q. What is a Real Estate Mortgage Investment Conduit or REMIC?
A. REMIC securitizations, similar to a CMO, assemble mortgages into pools and issue multi-class bonds to the secondary
market. REMIC’s which offer the same advantages of CMOs can be structured as financing whereby the net interest
income is recognized over the life of the mortgage loans. REMICs can also be offered as a sale of assets to third parties
whereby the sale provides a contribution to income as a gain on sale and an ongoing return on any residual interest retained.
Q. Does Impac have suff icient f inancing under its reverse repurchase agreements?
A. Reverse repurchase agreements are entered into to finance the Company’s warehouse lending operations and to fund the
closing and purchase of mortgages by the mortgage and commercial operations. As of December 31, 2006, these facilities
amounted to $5.7 billion, of which $1.9 billion was outstanding.
Q. What is a repurchase liability?
A. 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. In 2006, we increased our repurchase reserve to $15.3 million, up 47 percent over 2005. To minimize future repurchase
liability, the Company aggressively tightened our underwriting criteria and changed pricing guidelines which has resulted
in improved credit and duration characteristics. As of December 31, 2006, the Company believes the repurchase reserve is
adequate.
Q. What is the effect of the Company’s restatements for 2004-2005?
A. Our restatements related to 2004-2005 have no effect on the Company’s net earnings, cash position, stockholders’
equity or taxable income. As previously described in our Form 8-K filed on February 23, 2007, we had discovered errors
in previously reported Consolidated Statements of Operations and Comprehensive Earnings. These errors related to the
presentation of deferred charge as a non-interest expense amount compared to the restated presentation as a component
of income tax expense. We also reported restated amounts in the Consolidated Statements of Cash Flows to eliminate
certain non-cash items related to inter-company transactions and the re-designation of loans from held-for-sale to held-for-
investment. We present these corrections in the 2006 consolidated financial statements included in our Annual Report on
Form 10-K.
Q. What is the primary indicator for common stock dividends?
A. Estimated taxable income is the primary indicator for common stock dividends. During 2006, the Company had estimated
taxable income of $79.5 million, or $1.05 per diluted common share. During 2006, we paid common stock dividends of
$72.3 million, or $0.95 per diluted common share.
Q. What and when is the ex-dividend date?
A. The ex-dividend date is important in determining whether a stockholder qualifies for the Company’s dividends. If
an investor buys the stock before the ex-dividend date, they will receive the declared dividend. The ex-dividend date is
two business days before the record date. The Company currently declares dividends on a quarterly basis and at that time
the Board of Directors will declare the amount, payment date and the record date, which sets the ex-dividend date. The
tentative dividend calendar is available on our website at www.impaccompanies.com, link to Financial Reports, Dividend
History. Please note that the Board of Directors has the right to change the dividend and schedule at any time, and without
prior notice.
impac mortgage holdings, inc.
2006
annual report
20
Glossary of Financial and Operational Terms
Accretion of Loan Discounts and Amortization of Premium Securitization Costs represent an adjustment to the yield
on our securitized mortgage collateral and borrowings.
Adjusted Net Interest Margin on mortgage assets is calculated by subtracting interest expense on total borrowings on
mortgage assets, accretion of loan discounts and net cash receipts (payments) on derivatives from interest income on
total mortgage assets and dividing by total mortgage assets. Adjusted net interest margin is a non-Generally Accepted
Accounting Principle (GAAP) financial measurement. We believe it is useful information to our investors as it
represents the economics of net interest margin on mortgage assets. For a reconciliation, please refer to the yield table
analysis of mortgage assets in the filing of our Annual Report on Form 10-K under item 7, Financial Condition and
Results of Operations.
Allowance for Loan Loss is a valuation allowance established to provide for credit losses inherent in the long term
investment portfolio as of the balance sheet date. The allowance for loan losses is evaluated by management on a
periodic basis and is determined by applying expected loss factors to loans outstanding such as loan aging, historical
default rates, loss percentages of comparable loans, market conditions and estimates of collateral value. This evaluation
is inherently subjective as it requires estimates that are susceptible to significant revisions as factors change or as more
information becomes available.
Net Cash Receipts (Payments) on Derivatives, also referred to as realized gain (loss) from derivative instruments,
are reported in the current period revenue or expense on our consolidated financial statements and are included in
the calculation of taxable income. During 2006, the Company primarily acquired swaps to synthetically convert its
floating rate borrowings into fixed rate borrowings. In an interest rate swap, we pay a fixed interest rate and receive a
floating rate indexed to one-month LIBOR which offsets changes in interest expense on our adjustable rate securitized
mortgage borrowings also indexed to one-month LIBOR.
Net Interest Margin on mortgage assets is calculated by subtracting interest expense on total borrowings on mortgage
assets from interest income on mortgage assets and then dividing by total mortgage assets.
Prepayments occur when borrowers pay all or part of their mortgage debt before it is due. Prepayments typically
increase in low interest rate and/or high home price appreciation environments where lower cost mortgage loans
and/or available equity encourage borrowers to refinance for better rates and/or terms.
Provision for Loan Losses is recorded to maintain an adequate allowance for loan loss. The Company evaluates loan
loss expectations and records a provision for loan losses.
Reconciliation of Net Earnings to Estimated Taxable Income includes certain adjustments made to net earnings in
order to calculate taxable income due to differences in the way revenues and expenses are recognized under the two
methods. For example, to calculate estimated taxable income, actual loan losses are deducted; however, the calculation
of net earnings under GAAP, requires a deduction for estimated losses inherent in our mortgage portfolio in the form
of a provision for loan losses. For a reconciliation, please refer to the table in our Annual Report on Form 10-K under
Item 7, Taxable Income.
Yield Curve is the relationship between the interest rate (cost of borrowing or yield) and the maturity of debt. A steep
yield curve occurs when the yield on longer duration debt is substantially higher than that of the yield of shorter duration
debt. A flat yield curve is apparent when all maturities have similar yields. An inverted yield curve is when long term yields
fall below short term yields.
Corporate Information
Annual Stockholders’ Meeting
The Fairmont Hotel
4500 MacArthur Blvd.
Newport Beach, CA 92660
June 5, 2007
9:00 am (Pacific Time)
Form 10-K
A copy of the Company’s annual report on Form
10-K as filed with the Securities and Exchange
Commission is available to stockholders without
charge by contacting the Company’s investor
relations department or by accessing our Website.
CERTIFICATIONS
After the fiscal 2006 Annual Meeting of
Stockholders, the Company intends to file with
the New York Stock Exchange (“NYSE”) the CEO
certification regarding its compliance with the
NYSE’s corporate governance listing standards
as required by NYSE Rule (303)A.12. Last year,
the Company filed this CEO certification with
the NYSE.
William E. Rose
Director,
Managing Director,
HBK Investments LP
James Walsh
Director,
Managing Director,
Sherwood Trading &
Consulting Corporation
CORPORATE INFORMATION
The Impac Companies
19500 Jamboree Rd.
Irvine, CA 92612
Telephone: 800.597.4101
Common Stock Listing
New York Stock Exchange
Symbol: IMH
Transfer Agent
American Stock Transfer Agent
59 Maiden Lane
New York, NY 10038
800.937.5449
Investor Relations
Tania Jernigan
Vice President, Investor Relations
tjernigan@impaccompanies.com
949.475.3722
Website
www.impaccompanies.com
CORPORATE OFFICERS & DIRECTORS
Joseph R. Tomkinson
Chairman of the Board,
Chief Executive Officer
William S. Ashmore
Director, President
Richard J. Johnson
Executive Vice President,
Chief Operating Officer
Ronald M. Morrison
Executive Vice President,
General Counsel and
Corporate Secretary
Gretchen D. Verdugo
Executive Vice President,
Chief Financial Officer
Andrew C. McCormick
Executive Vice President,
Chief Investment Officer
Leigh J. Abrams
Director,
Chief Executive Officer and President,
Drew Industries Inc.
Frank P. Filipps
Director,
Chairman and Chief Executive Officer,
Clayton Holdings Inc.
Stephan R. Peers
Director
FORWARD LOOKING STATEMENTS
This report 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 and taxable income levels; unexpected or greater than anticipated increases in credit and bond spreads; the ability to generate sufficient
liquidity; uncertainty in the secondary market and the inability to sell or securitize loans; unexpected decrease in value of loans underlying finance
facilities due to oversupply of mortgage loans or other market conditions; continued ability to access the securitization markets or other funding sources;
the availability of financing, including the renewal of finance facilities, and, if available, the terms of any financing; lenders’ unwillingness to provide
further financing based on general market conditions; failure to comply with our existing finance facilities; 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; the failure to sell non-performing loans in the secondary market due to economic or other
conditions; 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 our loan repurchase obligations; 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; the adoption of new laws that affect our business or the business of people with whom we
do business; 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 Item 1A “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the
Company’s Form 10-K for the year ended December 31, 2006. 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.
m
o
c
.
s
u
t
n
e
m
w
w
w
.
.
a
i
n
r
o
f
i
l
a
C
,
o
g
e
i
D
n
a
S
,
s
u
t
n
e
M
y
b
d
e
c
u
d
o
r
P
d
n
a
d
e
n
g
i
s
e
D
The Impac Companies
19500 Jamboree Road
Irvine, CA 92612