17MAY201317190678 2014 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:1) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 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 (State or other jurisdiction of incorporation or organization) 33-0675505 (I.R.S. Employer 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 Name of each exchange on which registered Common Stock, $0.01 par value Preferred Stock Purchase Rights NYSE MKT NYSE MKT Securities registered pursuant to Section 12(g) of the Act: none Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes (cid:2) No (cid:1) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:2) No (cid:1) 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 (cid:1) No (cid:2) 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:2) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. (cid:1) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer (cid:2) Accelerated filer (cid:2) Non-accelerated filer (cid:2) (Do not check if a smaller reporting company) Smaller reporting company (cid:1) Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes (cid:2) No (cid:1) As of June 30, 2014, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $33.4 million, based on the closing sales price of common stock on the NYSE MKT on June 30, 2014. For purposes of the calculation only, all directors and executive officers and beneficial holders of more than 10% of the stock of the registrant have been deemed affiliates. There were 9,606,338 shares of common stock outstanding as of March 18, 2015. IMPAC MORTGAGE HOLDINGS, INC. 2014 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I ITEM 1. BUSINESS ITEM 1A. RISK FACTORS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. MINE SAFETY DISCLOSURES PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. CONTROLS AND PROCEDURES ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV SIGNATURES 1 15 30 30 30 32 33 33 34 72 72 73 73 76 76 76 76 76 76 76 77 ITEM 1. BUSINESS PART I Impac Mortgage Holdings, Inc., sometimes referred to herein as the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us,’’ is a Maryland corporation incorporated in August 1995 and includes the following subsidiaries: Integrated Real Estate Service Corporation, or IRES, IMH Assets Corp. and Impac Funding Corporation. IRES subsidiary, Impac Mortgage Corp. (IMC), formerly known as Excel Mortgage Servicing, Inc., or Excel, conducts our mortgage lending and real estate services operations. Forward-Looking Statements This report on Form 10-K 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,’’ ‘‘seem to,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘assume,’’ or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: our ability to manage effectively our mortgage lending operations and facilities; volatility in the mortgage industry and unexpected interest rate fluctuations and margin compression; our ability to successfully manage operating expenses and reduce redundant activities; our ability to successfully expand volumes in the warehouse lending business; failure to successfully launch or continue to market new loan products, such as non-qualified mortgages and HELOC loans; ability of wholesale brokers and correspondent sellers to implement mortgage compliance programs and market and sell our loan products; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; inability to hire qualified loan officers, account executives or transact with qualified correspondents; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing and the terms of any financing that we do obtain; increase in loan repurchase requests and ability to adequately settle repurchase obligations; adequate performance by sub-servicers; the failure to create and maintain brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies and our compliance with applicable local, state and federal laws and regulations, including the new qualified mortgage rules, 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 this report. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. The information contained throughout this document is presented on a continuing basis, unless otherwise stated. Available Information Our internet website address is www.impaccompanies.com. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy 1 statements for our annual stockholders’ meetings, as well as any amendments to those reports, free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. You can learn more about us by reviewing our SEC filings on our website by clicking on ‘‘Investor Relations—Stockholder Relations’’ located on our home page and proceeding to ‘‘SEC Filings.’’ We also make available on our website, under ‘‘Corporate Governance,’’ charters for the audit, compensation, and governance and nominating committees of our board of directors, our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and other company information, including amendments to such documents and waivers, if any, to our Code of Business Conduct and Ethics. These documents will also be furnished, free of charge, upon written request to Impac Mortgage Holdings, Inc., Attention: Stockholder Relations, 19500 Jamboree Road, Irvine, California 92612. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including our Company. Our Company We are an established nationwide independent residential mortgage lender. We were founded in 1995 by members of our current management team, who have extensive experience and an established track record of operating our Company through multiple market cycles. We originate, sell and service residential mortgage loans. We primarily originate conventional mortgage loans eligible for sale to U.S. government-sponsored enterprises, or GSEs, including Fannie Mae, Freddie Mac, and government mortgage loans eligible for government securities issued through Ginnie Mae. We originate and acquire mortgage loans through our Correspondent, Wholesale and Retail origination channels. For the year ended December 31, 2014, we had $2.8 billion in origination volume, a slight increase over 2013. We primarily operate as a residential mortgage lender and are focused on expanding our mortgage lending platform providing conventional and government-insured mortgage loans as well as look to provide innovative products to meet the needs of borrowers in the dynamic mortgage compliance environment in which we operate. To a lesser extent, we provide real estate services and manage our long-term mortgage portfolio. The real estate service segment was created in 2008 to provide solutions to the distressed mortgage and real estate markets, including loan modifications, real estate disposition, monitoring and surveillance services and real estate brokerage. The long-term mortgage portfolio predominantly includes non-conforming mortgage loans originated between 2002 and 2007, and is decreasing in size from principal pay-downs and default liquidations. Since we are no longer adding new mortgage loans to the long-term mortgage portfolio, we expect that the real estate services and long-term mortgage portfolio segments will become less meaningful in the future, unless we are able to generate business from unrelated parties. Our warehouse lending group offers funding facilities to approved lenders focusing on smaller mortgage bankers and credit unions. These facilities allow our customers the ability to fund mortgage loans and sell closed loans to their investors. Our funding facilities are repaid when our customer sells the loans to the investor. Offering warehouse lending provides added value for our correspondent customers, which we believe will increase the capture rate from our currently approved customers and increase volumes in our correspondent channel. Our operating segments include Mortgage Lending, Real Estate Services and the Long-Term Mortgage Portfolio. A description of each operating segment is presented below with further details and discussions of each segments’ results of operations presented in Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.’’ Mortgage Lending—As a nationwide mortgage lender, we are approved to originate and service Fannie Mae, Freddie Mac and Ginnie Mae eligible loans. We primarily originate, sell and service 2 conventional, conforming agency and government insured residential mortgage loans originated or acquired through our three channels: Correspondent, Wholesale and Retail. Our mortgage lending operation generates origination and processing fees, net of origination costs, at the time of origination as well as gains or unexpected losses when the loans are sold to third party investors, including the GSEs and Ginnie Mae. We retain servicing rights from the mortgage originations and earn servicing fees, net of sub-servicer costs, from our mortgage servicing portfolio. From time to time we sell our servicing rights from our servicing portfolio. Real Estate Services—We provide loss mitigation and real estate services primarily on our own long-term mortgage portfolio, including default surveillance, loan modification services, short sale services (where a lender agrees to take less than the balance owed from the borrower), real estate owned (REO) surveillance and disposition services and monitoring, reconciling and reporting services for residential and multifamily mortgage portfolios. We provide services to investors, servicers and individual borrowers primarily focusing on loss mitigation and performance of our own long-term mortgage portfolio. These operations are conducted by IMC. Long-Term Mortgage Portfolio—We manage our long-term mortgage portfolio, which primarily consists of residual interests in the securitization trusts reflected as trust assets and liabilities in our consolidated balance sheets, to mitigate losses and maximize cash flows from our residual interests (net trust assets). We receive cash flows from our residual interests in securitizations to the extent excess cash remains in the trusts after required distributions to bondholders and maintaining required overcollateralization levels are met and other specified parameters within the trusts. Additionally, we have a corporate segment, which includes unallocated corporate and other administrative costs, that prior to 2013 was included with the Long-Term Mortgage Portfolio. We also have a discontinued operations segment that primarily includes legacy repurchase liability exposure, and expenses and liabilities associated with litigation matters that pertain to our discontinued operations. Recent Developments In January 2015, the Company, and its wholly-owned subsidiary, IMC, entered into an Asset Purchase Agreement with CashCall, Inc. (CashCall) pursuant to which IMC agreed to purchase certain assets and assume certain liabilities of CashCall’s residential mortgage operations. CashCall’s residential mortgage operation, which includes the complete origination platform, systems and personnel, will operate as a separate division of IMC under the name CashCall Mortgage (CCM). This division will operate as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents. With the addition of CCM we will have a scalable retail platform able to expand quickly and efficiently. By using its marketing to generate internal leads, we expect CCM to be able to compete with some of the largest internet lenders across the nation. In addition, we intend to leverage this same marketing platform to expand volumes of our new AltQM products and CCM will be able to leverage our state licenses to expand its national lending footprint. Prior to 2015, CashCall was a correspondent seller where we purchased closed loans on a bulk basis. As a result of the acquisition, we expect our correspondent volume to decline, but our retail volume should increase significantly. In 2013, CashCall’s mortgage division was ranked by the Mortgage Bankers Association as the 31st largest residential mortgage originator with approximately $6.5 billion in total originations. In the fourth quarter of 2014, CashCall’s mortgage division volume was approximately $800 million. As a centralized retail call center, loan applications are received and taken by loan agents directly from consumers and through the internet. As a result of the acquisition of CCM, we expect to significantly increase our retail direct origination volume since CashCall will no longer be a 3 correspondent seller as its mortgage operations will now be part of the Impac Mortgage Corp. platform beginning in 2015. During the third quarter of 2014, we rolled out and began originating non-qualified mortgage (non-QM) loans, marketed under our ‘AltQM’ label. The predominant amount of the originations has come through our wholesale lending channel. However, we expect the CCM division to increase originations through the retail call center as well as correspondent customers to begin delivering loans that meet our AltQM program guidelines. In conjunction with launching these new AltQM products, we established a strategic investor relationship with an institution that provides balance sheet capacity to fund these non-conforming loans. The mortgage lending industry is highly competitive, and may become more competitive as a result of legislative, regulatory, economic, and technological changes, as well as consolidation or expansion. Our competitors include money center banks, regional and community banks, thrifts, credit unions, real estate brokerage firms, mortgage brokers and mortgage banking companies. Continuing Operations Mortgage Lending Operations Our mortgage lending activities primarily consist of the origination, sale and servicing of conventional loans eligible for sale to Fannie Mae and Freddie Mac, and government-insured loans eligible for Ginnie Mae securities issuance. We currently originate and fund mortgages through our wholly-owned indirect subsidiary, IMC. In order to originate mortgage loans we must be able to finance them and hold them on our balance sheet until such loans are sold, generally within 10 to 20 days. In order to do this we must have lines of credit with banks (called warehouse lines) that allow us the short term funding required. The following table presents selected data from our mortgage lending operations for the year ended December 31, 2014 and 2013: (in millions) Originations Servicing Portfolio Mortgage servicing rights For the year ended December 31, 2013 % Change 2014 $ 2,848.8 $ 2,267.1 24.4 2,548.4 3,128.6 36.0 12% (cid:4)28% (cid:4)32% Our origination volumes increased 12% in 2014 to $2.8 billion as compared to $2.5 billion for the prior year. In 2014, our correspondent channel achieved the most significant growth as a percentage of total originations. As interest rates began to rise in May 2013, we saw the refinance volumes decline significantly. With the increase in rates, our lending volumes in the latter part of 2013 and early 2014 were lower than what we anticipated resulting in a net loss for the mortgage lending segment. In the second half of 2014 correspondent volumes increased primarily due to the acquisition of mortgages from CashCall. It was this relationship that led to the opportunity to acquire the residential mortgage operations of CashCall in the first quarter of 2015. Our mortgage servicing portfolio decreased in 2014 primarily due to the sale of servicing rights in excess of servicing-retained sales of conforming GSE-eligible loans and government-insured loans eligible for Ginnie Mae securities. In 2014, we sold $3.3 billion in UPB of servicing rights partially offset by servicing retained loan sales of $1.9 billion of conforming GSE-eligible loans and issued $790.0 million of government securities through Ginnie Mae on a servicing retained basis. 4 We have three origination channels to originate or acquire mortgage loans—wholesale, correspondent and retail. Each channel produces similar mortgage loan products and applies similar underwriting standards. At December 31, 2014, we had one operational fulfillment center located in Irvine, California. (in millions) Originations by Channel: Wholesale Correspondent Retail For the year ended December 31, 2014 % 2013 % $ 598.9 2,169.6 80.3 21% $ 76% 3% 971.2 867.8 709.4 38% 34% 28% Total originations $ 2,848.8 100% $ 2,548.4 100% Wholesale—In a wholesale transaction, our account executives work directly with mortgage brokers who originate and document loans for delivery to our operational center where we underwrite and fund the mortgage loan. Each loan is underwritten to our underwriting standards and if approved, the borrower is sent new disclosures under our name and the loan is funded in the name of Impac Mortgage. Prior to accepting loans from mortgage brokers, each mortgage broker is required to meet our guidelines for minimum experience, credit score and net worth. We also obtain a third-party due diligence report for each prospective broker that verifies licensing and provides information on any industry sanctions that might exist. In addition, each mortgage broker is required to sign our broker agreement that contains certain representations and warranties from the brokers. For the year ended December 31, 2014, we closed loans totaling $598.9 million in this origination channel, which equaled 21% of total originations, as compared to $971.2 million or 38% of total originations during 2013. Correspondent—Our correspondent channel represents mortgage loans acquired from our correspondent sellers. Our correspondent channel has historically targeted a market of small banks, credit unions and small mortgage banking firms. Prior to accepting loans from correspondent sellers, each seller is underwritten to determine if it meets financial and other guidelines. Our review of each prospective seller includes obtaining a third party due diligence report that verifies licensing, insurance coverage, quality of recent Federal Housing Administration (FHA) originations and provides information on any industry sanctions that might exist. In addition, each seller is required to sign our correspondent seller agreement that contains certain representations and warranties from the seller allowing us to require the seller to repurchase a loan sold to us for various reasons including (i) ineligibility for sale to GSEs, (ii) early payment default, (iii) early pay-off or (iv) if the loan is uninsurable by a government agency. In our correspondent channel, the correspondent seller originates and closes the loan. After the loan is originated, the correspondent seller provides the needed documentation and information to us to review and determine if it meets our underwriting guidelines. The loan is acquired by us only after we approve it for purchase. We focus on customer service for our clients by facilitating prompt review by our due diligence team, providing bid pricing on both newly originated and seasoned portfolios, enabling clients to deliver one loan at a time on a flow basis and providing clients with expedited funding timelines. We purchase conventional loans eligible for sale to the GSEs and government-insured loans eligible for Ginnie Mae securities. For the year ended December 31, 2014, we closed loans totaling $2.2 billion in the correspondent origination channel, which equaled 76% of total originations, compared to $867.8 million or 34% of total originations during 2013. 5 As a result of the acquisition of CashCall’s mortgage operations in the first quarter of 2015, we expect to see a decline in correspondent volume and an increase in retail volume. Retail—Beginning in January 2014, we originated retail loans using a centralized approach through our call center. When loans are originated on a retail basis, the origination documentation is completed inclusive of customer disclosures and other aspects of the lending process and funding of the transaction is completed internally. Our call center representatives contact borrowers through either inbound or outbound marketing campaigns sourced from purchase-money and refinance mortgage leads along with portfolio retention within our servicing portfolio. For the year ended December 31, 2014, we closed $80.3 million of loans in this origination channel, which equaled 3% of total originations, as compared to $709.4 million or 28% of total originations during 2013 prior to the sale of our retail branch offices. As stated above, in January 2015, we entered into an Asset Purchase Agreement to acquire CashCall’s residential mortgage operations. CashCall, a leading direct-to-consumer originator based in Orange, California, utilizes a high-volume, rapid turn time funding model with a focus on providing exceptional customer service. CashCall has proven expertise in multifaceted and other mass media marketing and we believe will further diversify IMC’s origination channels and capabilities. The acquisition of CashCall’s residential lending platform will add a centralized retail call center to IMC’s current business-to-business origination channels and provides additional capacity to process increased origination volumes of expanded products including the our AltQM loan programs and government insured Ginnie Mae programs, while profitably creating long-term servicing assets for IMC. Since 2011, we have provided loans to customers predominantly in the Western U.S. with California, Washington and Arizona comprising 70% of originations in 2014. Currently, we provide nationwide lending with our retail call center and our correspondent sellers and mortgage brokers. We have one primary loan origination fulfillment center in Irvine, California. Originations Our loan products primarily include conventional loans for Fannie Mae and Freddie Mac and loans insured by Federal Housing Administration (FHA), Veteran’s Administration (VA) and U.S. Department of Agriculture (USDA). We have also enhanced our product offering to include more loan products less sensitive to changing interest rates, including FHA 203(k), a home improvement loan that provides the borrower funds to make renovations, reverse mortgages, intermediate Adjustable Rate Mortgages and GSE and government-insured loan programs such as Home Affordable Refinance Program (HARP) loans which help timely paying borrowers to refinance into a loan with a lower interest rate despite the loan balance being greater than the estimated fair value of their home. We believe that these loan products will prepay at a slower rate as compared to other products. By retaining these loan products in our servicing portfolio, we expect to maintain a less volatile mortgage servicing portfolio. Additionally, as stated above, in the third quarter of 2014 we began originating non-qualified mortgage (non-QM) loans, marketed under our ‘AltQM’ label. We believe there is an underserved mortgage market for borrowers with good credit who may not meet the new QM guidelines set out by the Consumer Financial Protection Bureau (CFPB). In our opinion, as the demand by consumers for a non-QM product grows and the investor appetite increases, non-QM mortgages will be in more demand. We have established strict lending guidelines, including determining the prospective borrowers’ ability to repay the mortgage, which we believe will keep delinquencies and foreclosures at acceptable levels. 6 Originations by loan type for 2014 and 2013 are as follows. (in millions) Government (1) Conventional (2) Other (3) Total originations For the year ended December 31, 2013 % Change 2014 $ 817.8 $ 1,947.7 83.3 731.4 1,788.0 29.0 $ 2,848.8 $ 2,548.4 12% 9% 187% 12% (1) (2) (3) Includes government-insured loans including FHA, VA and USDA Includes loans eligible for sale to Fannie Mae and Freddie Mac Includes $7.0 million of AltQM mortgages originated during 2014 Loan Sales—Selling Loans to GSEs, Issuing Ginnie Mae Securities and Selling Loans on a Whole Loan Basis We sell our mortgage loans to the secondary market, including sales to the GSEs and issuing securities through Ginnie Mae. We primarily sell loans on a servicing-retained basis where the loan is sold to an investor such as Fannie Mae, and we retain the right to service that loan, called mortgage servicing rights, or MSRs. We also ‘‘sell’’ loans to Ginnie Mae by issuing Ginnie Mae securities through a process whereby a pool of loans is transferred to Ginnie Mae as collateral for a government mortgage- backed security. To a lesser extent, we sell our residential mortgage loans on a whole loan basis where the investor also acquires the servicing rights. The following table indicates the breakdown of our loan sales to GSEs, issuance of Ginnie Mae securities and loans sold to investors on a whole loan basis for the periods as indicated: (in millions) Fannie Mae Freddie Mac Ginnie Mae Total servicing retained sales Other (servicing released) Total loan sales Mortgage Servicing For the year ended December 31, 2014 2013 $ $ $ 892.4 $ 992.8 790.0 2,675.2 $ 70.8 1,497.3 227.9 638.8 2,364.0 102.6 2,746.0 $ 2,466.6 Upon our sale of loans to GSEs or the issuance of securities through Ginnie Mae, we generally retain the servicing rights with respect to the mortgage loans. We also sell loans on a servicing-released basis to secondary market investors where we do not retain the servicing rights. When we retain servicing rights, we are entitled to receive a servicing fee which is collected from interest payments made by the borrower and paid to us on a monthly basis equal to a specified percentage, typically between 0.25% and 0.44% per annum of the outstanding principal balance of the loans. We may also be entitled to receive additional servicing compensation, such as late payment fees and earn additional income through the use of non-interest bearing escrows. As a mortgage servicer, we are required to advance certain amounts to meet the contractual loan servicing requirements for certain investors. We may 7 advance principal, interest, property taxes and insurance for borrowers that have become delinquent, plus any other costs to preserve the property. Also, we will advance funds to maintain, repair and market foreclosed real estate properties. Such advances are typically repaid when the loan becomes current or repaid from the proceeds generated from the sale of the property subsequent to foreclosure. We have hired a nationally recognized residential servicer to sub-service the servicing portfolio. Although we use a sub-servicer to provide primary servicing and certain default servicing functions, our servicing surveillance team, which is experienced in loss mitigation and real estate recovery, monitors and surveys the performance of the loans and sub-servicer. We generally earn a servicing fee on each loan, but we also incur the cost of the sub-servicer as well as the internal servicing surveillance team. Servicing fees are collected from interest payments made by the borrower. Incurring the cost of both a sub-servicer and an internal surveillance team reduces the net revenues we earn from the mortgage servicing portfolio, however, we believe it reduces our risk by minimizing delinquencies and repurchase risk. During 2014, the mortgage servicing portfolio decreased to $2.3 billion as of December 31, 2014 from $3.1 billion at the end of 2013, generating gross servicing fees of $6.7 million, and $6.8 million in 2014 and 2013, respectively. We have been selling servicing rights to fund the expansion of origination volumes resulting in a decrease in our servicing portfolio. We may continue to monetize servicing rights as needed in the future. Furthermore, the value of mortgage servicing rights are effected by increases and decreases in mortgage interest rates. Therefore, volatility in mortgage rates generally causes volatility in the value of mortgage servicing rights. Risk Management Underwriting We primarily originate residential first mortgage loans for sale that conformed to the respective underwriting guidelines established by Fannie Mae, Freddie Mac, FHA, VA and USDA. Our mortgage loans are underwritten individually on a loan-by-loan basis. Each mortgage loan originated from our retail and wholesale channel are underwritten by one of our in-house loan underwriters or by a third party contract underwriter using our underwriting guidelines. Each mortgage loan originated from our correspondent channel is reviewed internally or by a third party underwriting company to determine if the borrower meets our underwriting guidelines. Our criteria for underwriting generally include, but are not limited to, full documentation of borrower’s income, assets, other relevant financial information, the specific agency’s eligible loan-to-value ratios, borrower’s debt-to-income ratio and full appraisals when required. Variances from any of these standards are permitted only to the extent allowable under the specific program requirements. Our underwriting procedures for all retail and wholesale loans require the use of a GSE automated underwriting systems (AUS). Our underwriting procedures for all correspondent loans that have been originated by a correspondent seller includes a third party file review including verification that the borrower’s credit and the collateral meets our applicable program guidelines and an appropriate AUS report has been completed. They also verify the loan is compliant with regulatory guidelines, including the ability to repay. In addition, the third-party performs pre-funding quality control procedures prior to our acquisition of the loan. Management reviews the reports prior to the acquisition of any correspondent loan. Quality Control Our mortgage brokers, within our wholesale channel and our correspondent sellers are reviewed and approved prior to the acquisition or origination of any loans. Each seller is required to sign our 8 correspondent seller agreement that contains certain representations and warranties from the seller requiring the seller to repurchase a loan sold to us for various reasons including loan ineligibility for sale to GSEs or if the loan is uninsurable by a government agency. Each broker is required to sign our broker agreement that contains certain representations and warranties from the broker requiring the broker to indemnify us for various reasons including early payment defaults or early pay-offs which may lead to repurchase requests and reimbursement of premiums to our investors. Prior to funding, retail and wholesale loans are reviewed internally by our quality control department to verify the loan conforms to our program guidelines and meets state and federal compliance guidelines. Prior to the acquisition of a correspondent loan, we perform pre-funding quality control procedures. Management reviews the reports prior to the acquisition of any correspondent loan. We also perform post origination quality controls procedures on at least 10% of all mortgage loans funded or acquired. Additionally, we closely monitor the servicing performance of loans retained in our mortgage servicing portfolio to identify any opportunities to improve our underwriting process or procedures and identify any issues with mortgage brokers or correspondent sellers. Findings are summarized monthly and the appropriate changes are implemented. Our risk management committee, comprised of senior management, meets weekly to identify, monitor, measure and mitigate key risks in the organization. The committee’s responsibilities, sometimes delegated to sub-committees, include monitoring the hedging positions and its effectiveness in mitigating interest rate risk, status of aged unsold loans, status of loans on the warehouse lines, the review of quality control reports, review of servicing portfolio and loan performance and the adequacy of the repurchase reserve and methodology. Hedging We are exposed to interest rate risks relating to our mortgage lending operations. Our strategy is to mitigate the market and interest rate risk from loan originations by either selling newly originated loans to GSEs or issuing Ginnie Mae mortgage-backed securities. We typically attempt to sell our mortgage loans within 10 to 15 days from acquisition or origination. We enter into interest rate lock commitments, or IRLCs, and commitments to sell mortgages to help mitigate some of the exposure to the effect of changing interest rates on our mortgage lending operation. We actively manage the IRLCs and uncommitted mortgage loans held for sale on a daily basis. To manage the risk, we utilize forward sold Fannie Mae and Ginnie Mae mortgage-backed securities to hedge the fair value changes associated with changes in interest rates. Data Security Sensitive borrower information, such as name, address and social security number is included in nearly all mortgage loan files. We seek to keep this information secure for every borrower. To do so, our policy requires all sensitive borrower data to be transmitted to us through our secure website portal which allows all our customers, correspondent sellers, mortgage brokers and individual borrowers to send data to us securely in an encrypted manner. 9 Real Estate Services We provide loss mitigation and recovery services primarily on our long-term mortgage portfolio. Our portfolio loss mitigation and real estate services operations include the following services: (cid:127) Default surveillance and loss recovery services for residential and multifamily mortgage portfolios (primarily our own long-term mortgage portfolio) for loan servicers and investors to assist them with overall portfolio performance and maximizing cash recovery; (cid:127) Loan modification solutions to individual borrowers. We interact with loan servicers and borrowers to assist them in lowering the monthly mortgage payments, which allows them to make their mortgage payments and possibly remain in their homes. We earn fees for these services once the modification is completed; (cid:127) Real Estate Owned (REO) surveillance and disposition services. We provide these services to portfolio managers and servicers to assist them with improving portfolio performance by maximizing liquidation proceeds from managing foreclosed real estate assets. We also provide short sale (where a lender agrees to take less than the balance owed from the borrower) services on pre-foreclosure properties for servicers, investors and institutions with distressed and delinquent residential and multifamily mortgage portfolios, these services also included real estate brokerage services; and (cid:127) Monitoring, reconciling and reporting services for residential and multifamily mortgage portfolios for investors and servicers. We intend to continue to provide these services predominantly for our long-term mortgage portfolio. We expect these revenues to gradually decline over time as our long-term mortgage portfolio declines. To the extent that opportunities arise, we may expand our loss mitigation and real estate services to third parties. Long-Term Mortgage Portfolio Our long-term mortgage portfolio consists of our residual interests in securitizations represented on our consolidated balance sheet as the difference between total trust assets and total trust liabilities. Our long-term mortgage portfolio includes adjustable rate and, to a lesser extent, fixed rate Alt-A single-family residential mortgages and commercial (primarily multifamily residential loans) mortgages that were acquired and originated primarily by our discontinued, non-conforming mortgage lending operations and retained in our long-term portfolio before 2008. Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit was generally within typical Fannie Mae and Freddie Mac guidelines but have loan characteristics that make them non-conforming under those guidelines. In previous years, we securitized mortgage loans by transferring originated residential single- family mortgage loans and multifamily commercial loans (the ‘‘transferred assets’’) into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing. A trustee and servicer, unrelated to us, was named for each securitization. Cash flows from the loans (the loan payments and liquidation of foreclosed real estate properties) collected by the loan servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). 10 The servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. Commercial mortgages in our long-term mortgage portfolio are primarily adjustable rate mortgages with initial fixed interest rate periods of two, three, five, seven and ten years that subsequently convert to adjustable rate mortgages (hybrid ARMs), and are primarily secured with multi- family residential real estate. Commercial mortgages have provided greater asset diversification on our balance sheet as borrowers of commercial mortgages typically have higher credit scores and commercial mortgages typically have lower LTVs. Historically, we securitized mortgages in the form of collateralized mortgage obligations, or CMOs, which were consolidated and accounted for as secured borrowings for financial statement purposes. Securitized mortgages in the form of real estate mortgage investment conduits, or REMICs, were either consolidated or unconsolidated depending on the design of the securitization structure. We consolidated the variable interest entity, or VIE, as the primary beneficiary of the sole residual interest in each securitization trust where we also performed the master servicing. Amounts consolidated were included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized mortgage borrowings and derivative liabilities in the accompanying consolidated balance sheets. At December 31, 2014, our residual interests in securitizations (represented by the difference between total trust assets and total trust liabilities) increased to $17.2 million, compared to $10.6 million at December 31, 2013. Since 2007, we have not added any mortgages to our long-term mortgage portfolio. For additional to Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition,’’ and Note 10. ‘‘Securitized Mortgage Trusts’’ in the notes to the consolidated financial statements. long-term mortgage portfolio information regarding refer the Master Servicing Until 2007, we were retaining master servicing rights on substantially all of our non-conforming single-family residential and commercial mortgage acquisitions and originations that were sold through securitizations. Since 2008, we have not retained any additional master servicing rights, but have continued to be the master servicer of previously retained master servicing rights. The function of a master servicer includes collecting loan payments from loan servicers and remitting loan payments, less master servicing fees receivable and other fees, to a trustee or other purchaser for each series of mortgage-backed securities or mortgages master serviced. In addition, as master servicer, we monitor compliance with the servicing guidelines and perform or contract with third parties to perform all functions not adequately performed by any loan servicer. The master servicer is also required to advance funds, or cause the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages, but only to the extent that it is determined that such advances are recoverable either from the borrower or from the liquidation of the property. Master servicing fees are generally 0.03% per annum on the unpaid principal balance of the mortgages serviced. As a master servicer, we also earn income or incur expense on principal and interest payments received from borrowers until those payments are remitted to the investors of those mortgages. Fees from the master servicing portfolio have declined significantly due to a decrease in principal balances since the end of 2008, which affects the amount we earn on balances held in custodial accounts. At December 31, 2014, we were the master servicer for approximately 29,000 mortgages with an unpaid principal balance of approximately $7.7 billion of which $1.7 billion of those loans were 60 or more days delinquent. At December 31, 2014, we were also the master servicer for unconsolidated securitizations (included in the total master servicing portfolio above) totaling approximately $944 million in unpaid principal balance of which $354 million of those loans were 60 or 11 more days delinquent. Fees earned from master servicing are separate from those earned from mortgage servicing which are generated from servicing rights from new originations since 2011. Corporate This segment includes all corporate services groups including information technology, human resources, legal, facilities, accounting, treasury and corporate administration. This corporate services group supports all operating segments. A portion of these costs are allocated to the operating segments based on certain allocation methods. These corporate services groups are centralized to be efficient and avoid any duplicate cost burdens. Specific costs associated with being a publicly traded company are not allocated and remain in this segment. At our corporate headquarters in Irvine, California, we occupy office space under our lease agreement. The leased office space includes office space we are attempting to sublet as well as space we are maintaining for future growth. The cost of unused space is recorded in the corporate segment since it is not attributed to mortgage lending or real estate services segments. The corporate segment also includes debt expense related to the Convertible Notes due in 2018 as well as capital leases. Debt service expense is not allocated to the mortgage lending, real estate services or long-term mortgage portfolio segments. We have taken advantage of very low financing rates and entered into capital lease arrangements to finance the purchase of equipment, mostly computer equipment, used in all three segments. The interest expense associated with the capital leases is not allocated and remains in this segment. Discontinued Operations Discontinued operations primarily include mitigating the remaining repurchase liability exposure, which arose as a result of our representations and warranties with respect to sold mortgages during 2007 and prior, and expenses and liabilities associated with litigation matters related to our discontinued, non-conforming mortgage operations. In previous years, when our discontinued, non-conforming mortgage operations sold loans to investors, we were required to make normal and customary representations and warranties about the loans sold. Whole loan sale agreements generally required us to repurchase loans if a representation or warranty given to the loan purchaser is breached. In addition, we could be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. We continue to attempt to settle outstanding repurchase requests from third-party investors of our discontinued, non-conforming mortgage operations. Regulation The U.S. mortgage industry is heavily regulated. Our mortgage lending operations, as well as our real estate services, are subject to federal, state and local laws that regulate and restrict the manner in which we operate in the residential mortgage industry. Plus, mortgage bankers and brokers in our wholesale production channel and correspondents from which we purchase loans are also subject to regulation, which may have an effect on our business and the mortgage loans we are able to fund or acquire. Compliance with regulations in the mortgage industry requires us to incur costs and expenses in our operations. To the extent we, or others with which we conduct business, do not comply with 12 applicable laws and regulations, we may be subject to fines, reimbursements and other penalties. The laws and regulations that we are subject to include the following: (cid:127) the Federal Truth-in-Lending Act (known as TILA) and Regulation Z promulgated there under, which require certain disclosures to the borrowers regarding the terms of the loans and require substantial changes in compensation that can be paid to brokers and loan originators; (cid:127) the Equal Credit Opportunity Act and Regulation B promulgated there under, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit; (cid:127) the Fair Housing Act, which prohibits discrimination in housing on the basis of race, color, national origin, religion, sex, familial status, or handicap, in housing-related transactions; (cid:127) the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower’s credit experience; (cid:127) the Fair and Accurate Credit Transaction Act, which regulates credit reporting and use of credit information in making unsolicited offers of credit; (cid:127) the Gramm-Leach-Bliley Act, which imposes requirements on all lenders with respect to their collection and use of nonpublic financial information and requires them to maintain the security of that information; (cid:127) the Real Estate Settlement Procedures Act (known as RESPA) and Regulation X, promulgated thereunder, which requires that consumers receive disclosures at various times and outlaws kickbacks that increase the cost of settlement services; (cid:127) the Home Mortgage Disclosure Act, which requires the reporting of public loan data; (cid:127) the Telephone Consumer Protection Act and the Can Spam Act, which regulate commercial solicitations via telephone, fax, and the Internet; (cid:127) the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state usury laws; (cid:127) the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws which regulate alternative mortgage transactions; (cid:127) the Fair Debt Collection Practices Act, which prohibits unfair debt collection practices; and (cid:127) the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which establishes national minimum standards for mortgage licensees. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act is a sweeping overhaul of the financial regulatory system. The Dodd- Frank Act has increased, and will continue to increase, regulation of the mortgage industry, including: generally prohibiting lenders from making residential mortgage loans unless a good faith determination is made of a borrower’s creditworthiness based on verified and documented information; requiring the Consumer Financial Protection Bureau (CFPB) to enact regulations, which were recently finalized, to help assure that consumers are provided with timely and understandable information about residential mortgage loans that protect them against unfair, deceptive and abusive practices; and requiring federal regulators to establish minimum national 13 underwriting guidelines for residential mortgages that lenders will be allowed to securitize without retaining any of the loans’ default risk. Our mortgage lending operations is an approved Housing and Urban Development (HUD) lender, a Ginnie Mae approved issuer and servicer and an approved seller/servicer of Fannie Mae and Freddie Mac. As such, we are required to submit annually to Fannie Mae, Freddie Mac, and HUD, as applicable, audited financial statements, or the equivalent, according to the financial reporting requirements of each regulatory entity for its sellers/servicers. The Company’s affairs are also subject to examination by Fannie Mae, Ginnie Mae, Freddie Mac, HUD and state regulatory agencies at any time to assure compliance with applicable regulations, policies and procedures. Also refer to ‘‘Regulatory Risks’’ under Item 1A. Risk Factors for a further discussion of regulations that may affect us. Competition We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory, economic, and technological changes, as well as continued consolidation or expansion. Our competitors include banks, thrifts, credit unions, real estate brokerage firms, mortgage brokers and mortgage banking companies. Competition is based on a number of factors including, among others, customer service, quality and range of products and services offered, price, reputation, interest rates, lending limits and customer convenience. To compete effectively, we must have a very high level of operational, technological, and managerial expertise, as well as access to capital at a competitive cost. Many of our competitors are larger than we are and have access to greater financial resources than we do, which can place us at a competitive disadvantage. In addition, many of our largest competitors are banks or affiliated with banking institutions, the advantages of which include, but are not limited to, the ability to hold new mortgage loan originations in an investment portfolio and having access to financing with more favorable terms than we do, including lower funding costs with bank deposits as a source of liquidity. Our real estate services segment competes with firms that provide similar services, including loan modification companies, real estate asset management and disposition companies and real estate brokerage firms. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide real estate services for others is more difficult than many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Risk factors, as outlined below, provide additional information related to risks associated with competition in the mortgage industry. Employees As of December 31, 2014 and 2013, we had a total of 298 and 312 employees, respectively. Management believes that relations with our employees are good. We are not a party to any collective bargaining agreements. 14 ITEM 1A. RISK FACTORS Some of the following risk factors relate to a discussion of our assets. For additional information on our asset categories refer to Item 7. ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ as well as the accompanying notes to the consolidated financial statements. Risks Related To Our Businesses Our long-term success is primarily dependent on our ability to increase our mortgage origination volumes and profits and to a lesser extent maintain our real estate services profits and realize cash flows from our long-term mortgage portfolio. We believe that a key driver of growth of our profitability will be increasing our mortgage origination volumes. Our success is dependent on many factors, some of which we can control and others we cannot, such as the documentation and data capture technology, increasing our loan origination operational capacities, incorporating CashCall mortgage operations into our systems, attracting qualified employees, ability to maintain our approvals with Fannie Mae, Freddie Mac, Ginnie Mae and other investors, ability to increase our mortgage servicing portfolio, the ability to obtain adequate warehouse borrowing capacity, the ability to adequately maintained loan quality and manage the risk of losses from repurchases, and the changing regulatory environment for mortgage lending and the ability to fund our originations. The ability to generate revenues in the real estate services segment is based on our ability to continue to provide services to the long-term mortgage portfolio, and seek opportunities to provide services to unrelated third parties. Realizing cash flows from our mortgage portfolio is dependent on the performance of the underlying mortgage loans and the performance of the servicers. At December 31, 2014, our debt obligations, consisting of our trust preferred securities, junior subordinated notes, bank loans, convertible notes and the short-term structured debt were an aggregate of approximately $100.8 million in outstanding net principal balance. If we are unable to generate net income from our mortgage lending operations and real estate services and cash flows from our mortgage portfolio, we may be unable to satisfy our future operating costs and liabilities, including repayment of our debt obligations. If we are unable to meet or maintain the necessary financial covenant requirements with lenders or satisfy, or obtain waivers from, the continuing covenants, this could have a material adverse effect on our financial condition and results of operations. Our warehouse facilities contain covenants, including requirements to maintain a certain minimum net worth, liquidity, litigation judgment thresholds, debt ratios, profitability levels and other customary debt covenants. A breach of the covenants can result in an event of default under these facilities and as such allows the lender to pursue certain remedies, which may constitute a cross default under other agreements. We may not be able to access financing sources on favorable terms, or at all, which could adversely affect our ability to implement and operate our business as planned. Future financing sources may include borrowings in the form of credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities, structured financing arrangements, public and private equity and debt issuances and derivative instruments, in addition to transactions or asset specific funding arrangements. Our access to sources of financing depends upon a number of factors some of which we have little or no control, including general market conditions, 15 resources and policies or lenders. Under current market conditions, many forms of structured financing arrangements are generally unavailable, which also in the past has limited our ability to borrow under short term warehouse and repurchase agreements that are intended to be refinanced by such financings. In addition, if regulatory capital requirements imposed on our private lenders change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity. Consequently, the expansion of our mortgage lending operations may be dictated by the cost and availability of financing, specifically warehouse facilities. Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity issuances, which may be dilutive to our shareholders, or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations and future business opportunities. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which could negatively affect our results of operations. If our access to such funds are restricted or are on terms that are materially changed, we may not be able to continue those operations which may affect our income and loan origination volumes. Mortgage market conditions have had and may continue to have a material adverse effect on our earnings and financial condition. Our results of operations are materially affected by conditions in the mortgage and real estate markets, the financial markets and the economy generally. Beginning in 2007, the mortgage industry and the single-family residential housing markets, and to a lesser extent multifamily residential housing markets, were adversely affected as home prices declined and delinquencies and defaults significantly increased. Borrowers found it difficult to refinance due to home price depreciation and lenders tightened their underwriting guidelines, which led to further increases in defaults and credit losses. During 2013 and into 2014, although housing prices rebounded in parts of the U.S., the Company continued to be negatively affected. As a result, non-conforming mortgage loans have not performed up to historical expectations, and the fair value of non-conforming mortgage loans deteriorated. This, in turn, previously resulted in declining revenues and increased expenses associated with the long-term mortgage portfolio, including increases in loan losses and impairment charges, losses sustained in the operation of real estate properties acquired in foreclosure proceedings and foreclosure related professional fees. These factors previously led to deterioration in the quality of the Company’s long-term mortgage portfolio, as evidenced by the delinquencies, foreclosures and credit losses. The adverse market conditions have affected our mortgage loan delinquencies and REO in the long-term mortgage portfolio. At December 31, 2014, the Company’s long-term mortgage portfolio had 20.3% or $1.4 billion of loans that were 60 days or more delinquent, included in continuing and discontinued operations, compared to 22.4% or $1.7 billion at December 31, 2013. REO decreased 1% to $18.8 million at December 31, 2014 as compared to $18.9 million at December 31, 2013. Losses from the sale of REO are within the nonrecourse securitization trusts but could result in reduced cash flows from the Company’s residual interests in respective securitizations. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future. The disruption in the capital markets and secondary mortgage markets has also reduced liquidity and investor demand for mortgage loans and mortgage backed securities, while yield requirements for these products have increased. Continuing concerns about the declining real estate market, as well as inflation, energy costs, geopolitical issues and the availability and cost of credit, have contributed to increased volatility and diminished expectations for the mortgage markets going forward. The mortgage market has been severely affected by changes in the lending landscape and there is no assurance that these conditions have stabilized or that they will not worsen. These unprecedented disruptions and 16 deterioration of the mortgage market have had, and may continue to have, an adverse effect on the Company’s results of operations and financial condition. As a result of tightening of credit guidelines in the overall mortgage market, a decline in financed real estate transactions, volatile interest rates, current economic conditions, the extremely difficult and complex mortgage and credit regulatory environment and other factors it is projected by some mortgage organizations that mortgage originations during 2014 may be at low volumes. As a result we may experience reduced volumes and thereby reduced income unless we are able to garner a greater market share of originations or sufficiently reduce costs. In addition, volatility in mortgage interest rates could cause volatility in the value of our mortgage servicing rights, resulting in volatile or adverse financial results. Representations and warranties made by us in our loan sales and securitizations may subject us to liability. In connection with our loan sales to third parties and our prior securitizations, we transferred mortgages acquired and originated by us to third parties or into a trust in exchange for cash and, in the case of a securitized mortgage, residual certificates issued by the trust. The trustee, purchaser, bondholder, guarantor or other entities involved in the issuance of the securities (which may include bond insurers) may have recourse to us with respect to the breach of the representations, and warranties made by us at the time such mortgages are transferred or when the securities are sold. Those representations and warranties may include, but are not limited to, issues such as the validity of the lien, the absence of liens or delinquent taxes, the validity of the appraisal obtained in conjunction with the loan, the truthfulness of information used in the loan approval process, the loans compliance with all local, state and federal laws, the delivery of all documents required to perfect title to the lien, the loan meeting all underwriting criteria and the selection process used to include the loans in any particular transaction. Also, we engage in bulk whole loan sales pursuant to agreements that generally provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties, any fraud or misrepresentation during the mortgage origination process, or upon early default on such mortgage. We attempt to limit the potential recourse from such purchasers by seeking remedies from correspondent sellers and wholesale brokers who originated the mortgages if we did not originate the loan. However, many of the entities we acquired loans from in the past are no longer in business. In some cases, we may not be able to seek remedies from others whom have sold mortgage loans to us. Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to sell the mortgage or we may have to sell the mortgage at a discount. Changes in the timing, processes and procedures of our primary investors review loans which they purchase from us may affect the number of loans that are rejected, the timing of our loan sales, or the frequency of repurchase demands issued to us. Also, similar changes by mortgage insurers agree to insure loans may also affect the frequency and timing of our loan sales. As a result, the effectiveness of our loan sales, our repurchase reserves and our profitability may be affected as we may have to sell loans at a discount. Competition in the residential mortgage industry and real estate services business is intense and may adversely affect our business operations and financial performance; the dominance of a limited number of companies may affect our ability to operate and compete effectively. Competition in the residential mortgage industry and real estate services business is intense. Plus, the mortgage business has experienced substantial consolidation. Our competitors include banks, thrifts, credit unions, real estate brokerage firms, mortgage brokers, asset management companies, and mortgage banking companies. Several of our competitors enjoy advantages, including greater financial resources and access to capital, a wider geographic presence, more accessible branch office locations, 17 more aggressive marketing campaigns, better brand recognition, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. To compete effectively, we must have a very high level of operational, technological, and managerial expertise, as well as access to capital at a competitive cost. As a result of reduced access to capital, general housing trends, rising delinquencies and defaults and other factors, many mortgage and real estate services firms have recently experienced severe financial difficulty, with some exiting the business or filing for bankruptcy protection, resulting in a consolidation of companies in such industries. The dominance of a limited number of companies have made it difficult to compete effectively, as such it may adversely affect our business operations and financial performance. New regulatory laws affecting our operations may affect our ability to expand our mortgage lending operations. Changes to the laws, regulations or regulatory policies can affect whether and to what extent we may be able to expand our mortgage lending activities. Many states and local governments and the Federal government have enacted, or may enact laws, or regulations that restrict or prohibit some provisions in some programs or businesses that we currently participate in or plan to participate in the future. As such, we cannot be sure that in the future we will be able to engage in activities that were similar to those we engaged or participated in the past thereby limiting our ability to commence new operations. As a result, we might be at a competitive disadvantage which would affect our operations and profitability. The regulatory changes in loan originator compensation, qualified mortgages requirements and other regulatory restrictions may put us at a competitive disadvantage to our competitors. Since some banks and financial institutions are not subject to the same regulatory changes as mortgage lenders, they could have an advantage over independent mortgage lenders. As a result of the nature of our operations, our capital, costs, source of funds and other similar factors may affect our ability to maintain and grow lending. For example, the Consumer Financial Protection Bureau recently finalized its rulemaking implementing strict residential mortgage loan underwriting standards enacted under the Dodd-Frank Act. The Act and that rulemaking impose significant liability for violation of those underwriting standards, and offer certain protection from that liability only for loans that comply with tight limitations on upfront fees and that do not contain certain alternative features (like balloon payments). Those requirements, which become effective in 2014, may affect our ability to originate residential mortgage loans or the profitability of those operations. We are subject to federal, state and local laws and regulations related to the mortgage industry that generally regulate interest rates and other charges, require certain disclosure, and require applicable licensing. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of our loans. Violations of certain provisions of these federal and state laws and regulations may limit our ability to collect all or part of the principal of or interest on the loans and in addition could subject us to damages, could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans, or could cause us to repurchase the loan and thereby suffer a loss on the transaction. In addition, such violations could cause us to be in default under our credit and repurchase lines and could result in the loss of licenses held by us. In addition to new rules and regulations involving areas such as loan officer compensation, servicing requirements, origination disclosures and various federal, state and local laws and regulations could pose substantial hardship on our ability to maintain our lending volumes and our compliance with 18 such requirements could expose us to fines, penalties or licensing restrictions that could affect our operations. Our hedging strategies implemented by our mortgage lending operations may not be successful in mitigating our risks associated with the market movement of interest rates. We use various derivative financial instruments to provide a level of protection against interest rate risks in our mortgage lending operations, but no hedging strategy can protect us completely. When rates change, we expect to record a gain or loss on derivatives which would be offset by an inverse change in the value of mortgage loans held for sale and interest rate lock commitments. We cannot assure you, however, that our use of derivatives will offset the risks related to changes in interest rates. There have been periods, and it is likely that there will be periods in the future, during which we will not have offsetting gains or losses in mortgage loan and interest rate lock commitment values after accounting for our derivative financial instruments. The derivative financial instruments we select may not have the effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and recorded transactions or inaccurate assumptions could actually increase our risk and losses. In addition, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. New mortgage products that we may offer may expose us to liability. We originate and acquire various types of residential mortgage products to consumers and our customers. During the third quarter of 2014, we began to offer non-Qualified Mortgage loan products being marketed as AltQM, which, unlike Qualified Mortgages, do not benefit from a presumption that the borrower has the ability to repay the loan. We understand that these types of products are new in today’s marketplace and while we have taken great steps to try and mitigate any exposure and insure that we have made a reasonable determination that the borrowers will have the ability to repay the loan, this type of product does have increased risk and exposure to litigation and claims of borrowers. If, however, we were to make a loan as to which we did not satisfy the regulatory standards for ascertaining the borrower’s ability to repay the loan, the consequences could include giving the borrower a defense to repayment of the loan, which may prevent us from collecting interest and principal on that loan. If we have sold the loan or the servicing of the loan, this may violate the representations and warranties we made in such a sale and impose upon us an obligation to repurchase the loan. Our performance may be adversely affected by the performance of parties who service or sub-service our mortgage loans. We contract with third parties for the servicing of our mortgage loans in our long-term mortgage portfolio, for which we are the master servicer, and the servicing portfolio in our mortgage lending operations, however we retain primary responsibility to insure the loans are serviced meeting contractual and regulatory requirements. Our operations, performance and liabilities are subject to risks associated with inadequate or untimely servicing. If a servicer defaults or fails to perform to certain standards then this can be deemed to be a default or failure by us to perform those duties or functions. If we, or our sub-servicers, commit a material breach of our obligations as a servicer or master servicer, we may be subject to damages or termination if the breach is not cured within a specified period of time following notice, causing us to lose servicing income. In addition, we may be required to indemnify the investor or securitization trustee against losses from any failure by us, as master servicer or on behalf of the sub-servicer, to perform the servicing obligations properly. If, as a result of a servicer or sub-servicer’s failure to perform adequately, we were terminated as servicer by an investor or master servicer of a 19 securitization, the value of any servicing or master servicing rights held by us could be adversely affected. Also, this could affect the cash flow generated by our servicing rights portfolio. Poor performance by a sub-servicer may result in greater than expected delinquencies and foreclosures and losses on our mortgage loans or, in the case of our long-term mortgage portfolio, in our resulting exposure to investors, bond holders, bond insurers or others to whom we are responsible for the performance of our loan sub-servicers. A substantial increase in our delinquency or foreclosure rate could adversely affect our ability to access the capital and secondary markets for our financing needs. With respect to our long-term mortgage portfolio, greater delinquencies would adversely affect the value of our cash flows and residual interests, if any, we hold in connection with that securitization. We believe one of our subservicers has experienced recent disputes or disagreements with a regulator and a securitization trustee regarding their servicing performance and documentation (although we are not aware whether this relates to our portfolio). If one of our subservicers experiences regulatory issues that affect its ability to service the loans in our long-term mortgage portfolio, or a securitization trustee demands that we change a subservicer based on a valid reason as enumerated in the securitization documents, we may be required to terminate the subservicer. If that were to occur, it may adversely affect the performance of the loans being serviced and we may be subject to fees, expenses, costs or damages as a result. Mortgage servicing rights are a material asset on our consolidated balance sheets. The value of these rights are dependent upon various factors, including, but not limited to, the adequate performance of the servicing function by our sub-servicer, the responsibilities imposed on us by the investors of our loans for which we hold the servicing rights, interest rates, the cost of our sub-servicers, loan prepayments and delinquencies. As these factors and others vary, the value of our mortgage servicing rights may fluctuate which may affect our ability to meet financial covenants, maintain credit facilities, expand our operations and generate income from our operations. Our ability to utilize our net operating losses and certain other tax attributes may be limited. At the end of our 2014 taxable year, we had net operating loss (NOL) carry-forwards of approximately $495.9 million for federal income tax purposes and approximately $427.3 million for state income tax purposes. Although, under existing tax rules, we are generally allowed to use those NOL carry-forwards to offset taxable income in subsequent taxable years, our ability to use those NOL carry- forwards to offset income may be severely limited to the extent that we experience an ownership change within the meaning of Section 382 of the Internal Revenue Code. These provisions could also limit our ability to deduct certain losses (built-in losses) we recognize after an ownership change with respect to assets we own at the time of the ownership change. In general, an ownership change, as defined by Section 382, results from transactions increasing ownership of certain stockholders or public groups in our stock by more than 50% over a three-year period. In addition, the generation of taxable income from cancellation of debt may further reduce the NOL. Any limitation on our NOL carry-forwards that could be used to offset taxable income would adversely affect our liquidity and cash flow, as and when we become profitable. We may not generate sufficient taxable income in future periods to be able to realize fully the tax benefits of our NOL carry-forwards. In 2013, the Company enacted a NOL rights plan, approved by stockholders, which is designed to mitigate the risk of losing net operating loss carry- forwards and certain other tax attributes from being limited in reducing future income taxes. An NOL rights plan does not prevent a change of control transaction but instead strongly discourages it. Our vendor relationships subject us to a variety of risks. We have significant vendors that, among other things, provide us with financial, technology and other services to support our mortgage loan servicing and origination businesses. With respect to 20 vendors engaged to perform activities required by servicing criteria, we have elected to take responsibility for assessing compliance with the applicable servicing criteria for the applicable vendor and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing criteria applicable to the vendor, including but not limited to, monitoring compliance with our predetermined policies and procedures and monitoring the status of payment processing operations. In the event that a vendor’s activities do not comply with the servicing criteria, it could negatively impact our servicing agreements. In addition, if our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies due to poor economic conditions, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations. Additionally, in April 2012 the CFPB issued CFPB Bulletin 2012-03 which states that supervised banks and non-banks could be held liable for actions of their service providers. As a result, we could be exposed to liability, CFPB enforcement actions or other administrative penalties if the vendors with whom we do business violate consumer protection laws. If we are forced to liquidate, we may have few unpledged assets for distribution to unsecured creditors or equity holders. In the event we are forced to liquidate, the majority of our assets is either collateral for specific borrowings or pledged as collateral for secured liabilities. We may have few remaining assets available for unsecured creditors and equity holders. Our loss of approvals with, or the potential limitation or wind-down of, the role Ginnie Mae, Fannie Mae and Freddie Mac play in the residential mortgage-backed security (MBS) market may adversely affect our business, operations and financial condition. We originate loans eligible for sale to Fannie Mae, Freddie Mac and government insured or guaranteed loans, such as FHA, VA and USDA loans, and loans eligible for Ginnie Mae securities issuance. We also service loans sold to the GSEs. We believe that having the ability to both sell loans directly to these agencies and issue Ginnie Mae securities gives us an advantage in the overall mortgage origination market. In 2008, the GSEs were placed in a conservatorship by the U.S. government. The government may eliminate over time the role of the GSEs in guaranteeing mortgages and purchasing mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a loan that the GSEs can purchase, phasing-in a minimum down payment requirement for borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process. There have been discussions concerning the ability or right of the GSEs to limit the amount of loans a company can sell to them based upon the company’s net worth. This could negatively impact our growth. We also service loans on behalf of Fannie Mae and Freddie Mac, as well as loans that have been delivered into securitization programs sponsored by Ginnie Mae in connection with the issuance of agency guaranteed mortgage-backed securities. These entities establish the base service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards. The extent and timing of any regulatory reform regarding the GSEs and the home mortgage market, as well as any effect on Impac’s business operations and financial results, are uncertain. We expect such proposals to be the subject of significant discussion and it is not yet possible to determine whether such proposals will be enacted and, if so, when, what form any final legislation or policies might take or how proposals, legislation or policies may impact the MBS market and our business, operations and financial condition. Our inability to make the necessary changes to respond to these changing 21 market conditions or loss of our approved seller/servicer status with the GSEs would have a material adverse effect on our mortgage lending operations and our financial condition, results of operations and cash flows. If those agencies cease to exist, wind down, or otherwise significantly change their business operations or if we lost approvals with those agencies, our ability to profitably sell the loans could be affected and our profitability, business, operations and financial condition may be adversely affected. Growth may place significant demands on our management and our infrastructure. For our operations to continue to grow in size, scope and complexity, we will need to improve and upgrade our systems and infrastructure to meet the demands and maintain efficiency of our business. Growth could strain our ability to maintain reliable service levels, develop and improve our operational, financial and management controls, enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business would be harmed. We may become, and in some cases are, a defendant in lawsuits, some of which may be class action matters, and we may not prevail in these matters. Individual and class action lawsuits and regulatory actions alleging improper marketing practices, abusive loan terms and fees, disclosure violations and other matters are risks faced by all mortgage originators. We are a defendant in purported class actions pending in different states and could be named in other matters. Some of the actions allege generally that the loan originator (whether or not Impac) improperly charged fees in violation of various state lending or consumer protection laws in connection with mortgages that we acquired while others allege that our lending or servicing practice was a statutory violation, an unlawful business practice, an unfair business practice or a breach of a contract. They generally seek unspecified compensatory damages, punitive damages, pre- and post-judgment interest, costs and expenses and rescission of the mortgages, as well as a return of any improperly collected fees. We are subject to a purported class action lawsuit relating to the tender of our preferred stock that is seeking cumulative dividends, unpaid dividends and the election of two directors by the preferred holders. We will incur defense costs and other expenses in connection with the lawsuits, and we cannot assure you that the ultimate outcome of these or other actions will not have a material adverse effect on our financial condition or results of operations. In addition to the expense and burden incurred in defending any of these actions and any damages that we may suffer, our management’s efforts and attention may be diverted from the ordinary business operations in order to address these claims. Plus, we may be deemed in default of our warehouse lines if a judgment for money that exceeds specified thresholds is rendered against us. If the final resolution of this litigation is unfavorable to us in any of these actions, our financial condition, results of operations and cash flows might be materially adversely affected. Litigation in the mortgage industry related to securitizations against issuers, sellers, servicers, originators, underwriters and others may adversely affect our business operations. As defaults, delinquencies, foreclosures, and losses in the real estate market continue, there have been lawsuits by various investors, insurers, underwriters and others against various participants in securitizations, such as sponsors, depositors, underwriters, servicers and loan sellers. Some lawsuits have alleged that the mortgage loans had origination defects, that there were misrepresentations made about the mortgage loans and the parties failed to properly disclose the quality of the mortgage loans or repurchase defective loans that servicing standards were not maintained or that there were other misrepresentations or representations. There have been claims related to our securitizations contending errors or misrepresentations in the securitization documents or process itself. Historically, we both 22 securitized and sold mortgage loans to third parties that may have been deposited or included in pools for securitizations. We have received notices of claims for indemnification relating to mortgage-backed security bond issues, originated or sold by the Company from Countrywide, UBS, Wilmington Trust, Deutsche Bank, Merrill Lynch, Bank of America and JP Morgan Chase Bank. The claims seek indemnification from claims asserted against them in various actions in which we are not parties. The notices each seek indemnification for all losses, liabilities, damages and legal fees and costs incurred in those actions. We also received demands to cover losses on the purchases of mortgage-backed securities. In connection with these potential claims, we may become subject to litigation related to the securitizations. As a result, we may incur significant legal and other expenses in defending against claims and litigation and we may be required to pay settlement costs, damages, penalties or other charges which could adversely affect our financial results. Violation of various federal, state and local laws may result in financial losses. We are subject to federal, state and local laws and regulations related to the mortgage industry that generally regulate interest rates and other charges, require certain disclosure, and require applicable licensing. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of our loans. Violations of certain provisions of these federal and state laws and regulations may limit our ability to collect all or part of the principal of or interest on the loans and in addition could subject us to damages, could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans, or could cause us to repurchase the loan and thereby suffer a loss on the transaction. In addition, such violations could cause us to be in default under our credit and repurchase lines and could result in the loss of licenses held by us. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains the Mortgage Reform and Anti-Predatory Lending Act (‘‘Mortgage Act’’), which imposes a number of additional requirements on lenders and servicers of residential mortgage loans, including Impac, by amending certain existing provisions and adding new sections to TILA, RESPA, and other federal laws. It also broadly prohibits unfair, deceptive or abusive acts or practices, and knowingly or recklessly providing substantial assistance to a covered person in violation of that prohibition. The penalties for noncompliance with these laws are also significantly increased by the Mortgage Act, which could lead to an increase in lawsuits against mortgage lenders and servicers. If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to report our financial results accurately or prevent fraud, which could cause current and potential stockholders to lose confidence in our financial reporting, adversely affect the trading price of our securities or harm our operating results. Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company. Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results, or cause us to fail to meet our reporting obligations. We cannot be certain that our efforts to improve or maintain our internal control over financial reporting and disclosure controls and procedures will be successful or that we will be able to maintain adequate controls over our financial processes and reporting in the future. Any failure to develop or maintain effective controls or difficulties encountered in their implementation or other effective improvement of our internal control over financial reporting and disclosure controls and procedures could harm our operating results, or cause us to fail to meet our reporting obligations. If we are unable to adequately establish or maintain our internal control over financial reporting, our external auditors will not be able to issue an unqualified opinion on the 23 effectiveness of our internal control over financial reporting. In the past, we have reported, and may discover in the future, material weaknesses in our internal control over financial reporting. Ineffective internal control over financial reporting and disclosure controls and procedures could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities or affect our ability to access the capital markets and could result in regulatory proceedings against us by, among others, the SEC. In addition, a material weakness in internal control over financial reporting, which may lead to deficiencies in the preparation of financial statements, could lead to litigation claims against us. The defense of any such claims may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation, even if resolved in our favor, could cause us to incur significant legal and other expenses or cause delays in our public reporting. Such events could harm our business, affect our ability to raise capital and adversely affect the trading price of our securities. Our share prices have been and may continue to be volatile and the trading of our shares may be limited. The market price of our securities has been volatile. We cannot guarantee that a consistently active trading market for our securities will continue. In addition, there can be no assurances that such markets will continue or that any shares which may be purchased may be sold without incurring a loss. Any such market price of our shares may not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for the shares in the future. The market price of our securities is likely to continue to be highly volatile and could be significantly affected by factors including: (cid:127) unanticipated fluctuations in our operating results; (cid:127) general market and mortgage industry conditions; (cid:127) mortgage and real estate fees; (cid:127) delinquencies and defaults on outstanding mortgages; (cid:127) loss severities on loans and REO; (cid:127) prepayments on mortgages; (cid:127) the regulatory environment and results of our mortgage originations; (cid:127) mark to market adjustments related to the fair value of loans held-for-sale, mortgage servicing rights, long-term debt and derivatives; (cid:127) interest rates; and (cid:127) litigation. During 2014, our common stock reached an intra-day high sales price of $7.40 on January 31st, and an intra-day low sales price of $4.75 on July 2nd. As of March 18, 2015, our stock price closed at $10.16 per share. In addition, significant price and volume fluctuations in the stock market have particularly affected the market prices for the securities of mortgage companies such as ours. Furthermore, general conditions in the mortgage industry may adversely affect the market price of our securities. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our securities. If our results of operations fail to meet the expectations of security analysts or investors in a future quarter, the market price of our securities could also be materially adversely affected and we may experience difficulty in raising capital. 24 Issuances of additional shares of our common stock may adversely affect its market price and significantly dilute stockholders. In order to support our business objectives, we may raise capital through the sale of equity or convertible securities. We may also issue shares of common stock to settle outstanding obligations and liabilities. The issuance or sale, or the proposed sale, of substantial amounts of our common stock in the public market could materially adversely affect the market price of our common stock or other outstanding securities. We do not know the actual or perceived effect of these issuances, the timing of any offerings or issuances of securities, the potential dilution of the book value or earnings per share of our securities then outstanding and the effect on the market price of our securities then outstanding. Our principal stockholders beneficially own a large portion of our stock, and accordingly, may have control over stockholder matters and sales may adversely affect the market price of our common stock. As of March 18, 2014, Todd M. Pickup and Richard H. Pickup and their respective affiliates beneficially owned approximately, in the aggregate, 34.1% of our outstanding common stock, which includes 898,851 shares and 524,138 shares of our Company’s common stock that Todd Pickup and Richard Pickup, respectively, has the right to acquire at any time by converting the outstanding principal balance of Convertible Notes Due 2018, at the initial conversion price of $10.875 per share. These stockholders together possess significant influence over our company. Such ownership may have the effect of control over substantially all matters requiring stockholder approval, including the election of directors. Furthermore, such ownership and control may have the effect of delaying or preventing a change in control of our Company, impeding a merger, consolidation, takeover or other business combination involving our Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company. We do not expect that these stockholders will vote together as a group. In addition, sales of significant amounts of shares held by these stockholders, or the prospect of these sales, could adversely affect the market price of our common stock. Increases in LIBOR rates could significantly reduce the future cash flows we receive from the retained interests in securitization trusts. The cash flows from residual interests in certain securitization trusts are contingent upon various factors including the interest income collected on the loans in the trusts in excess of the interest expense paid to respective bondholders. These cash flows are distributed to the residual interest holder after the required interest and principal payments are made to the bondholders. Interest rates on the bonds usually adjust monthly with changes primarily in one-month London Inter-bank Offering Rate (also known as LIBOR). Derivatives instruments (primarily interest rate swap agreements) inside the securitization trusts initially entered into were designed to offset the risk of movements in LIBOR that created the adverse effect of the interest income collected on the loans being less than interest expense paid to the respective bondholders. However, many of these derivatives agreements have maturities less than the maturities of the loans. Therefore, increases in LIBOR rates could significantly reduce the future cash flows we receive from the retained interests in these securitization trusts. The amount of the remaining derivatives instruments is not sufficient to fully protect the residual cash flows from increases in LIBOR. The Company does not have the ability to change the derivatives instruments inside the trusts and does not currently hedge this interest rate risk with derivatives instruments outside the securitization trusts. As a result of not fully hedging interest rate risks, the Company’s future residual cash flows could be significantly affected by rising LIBOR rates. 25 The geographic concentration of our mortgages increases our exposure to risks in those areas. We do not set limitations on the percentage of mortgages composed of properties located in any one area (whether by state, zip code or other geographic measure). Concentration in any one area increases our exposure to the economic and natural hazard risks associated with that area. A majority of our mortgage acquisitions and originations and mortgages held in our long-term mortgage portfolio are secured by properties in California and, to a lesser extent, Florida, Washington and Oregon. These states have experienced, and may experience in the future, an economic downturn and California and Florida have also suffered the effects of certain natural hazards. During past economic downturns, real estate values in California and Florida have decreased drastically, which could have a material adverse effect on our results of operations or financial condition. In addition, Florida is among several states with higher than average costs for investors in circumstances of mortgage default and foreclosure, since the foreclosure process takes significantly longer than average. Accordingly, to the extent the mortgages we originate or are held in our long-term mortgage portfolio experience defaults or foreclosures in that area, we may be exposed to higher losses. Furthermore, if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged. This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters. This would have a material adverse effect on our results of operations or financial condition. Loss of our current executive officers or other key management could significantly harm our business. We depend on the diligence, skill and experience of our senior executives, including our chief executive officer and president. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. We seek to compensate our executive officers, as well as other employees, through competitive salaries, bonuses and other incentive plans, but there can be no assurance that these programs will allow us to retain key management executives or hire new key employees. The loss of our chief executive officer, president, or other senior executive officers and key management could have a material adverse effect on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. Furthermore, in light of our present financial condition, no assurance can be given that we will retain these and other executive officers and key management personnel. To the extent that one or more of our top executives or other key management personnel are no longer employed by us, our operations and business prospects may be adversely affected. The loss of, and changes in, key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. Non-conforming mortgage loans may expose us to a higher risk of delinquencies, foreclosures and losses adversely affecting our earnings and financial condition. Our non QM production and our long-term mortgage portfolio include non-conforming single- family and multifamily mortgage loans. These are mortgages that generally did not qualify for purchase by government-sponsored agencies such as Fannie Mae and Freddie Mac. The performance of the long-term mortgage portfolio has been negatively affected by the losses from these mortgages. Credit risks associated with all these mortgages may be greater than those associated with conforming mortgages. Mortgages made to these borrowers generally entail a higher risk of delinquency and higher losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or recessions. The actual risk of 26 delinquencies, foreclosures and losses on mortgages made to these borrowers are higher under current economic conditions than those in the past. Additionally, the combination of different underwriting criteria and higher rates of interest leads to greater risk, including higher prepayment rates and higher delinquency rates and /or credit losses. These also include loans that are interest only. If there is a decline in real estate values, as previously seen, borrowers may default on these types of loans since they have not reduced their principal balances, which, therefore, could exceed the value of their property. In addition, a reduction in property values would also cause an increase in the loan-to-value (LTV) ratio for that loan which could have the effect of reducing the value of the property collateralized by that loan, reducing the borrowers’ equity in their homes to a level that would increase the risk of default. A material difference between the assumptions used in the determination of the estimated fair value of our residual interests in our long-term mortgage portfolio and our actual experience could cause us to write down the value of these securities and could harm our liquidity and financial condition. We receive cash flows from the residual interests in the securitization trusts within our long-term mortgage portfolio. Investments in residual interests and subordinated securities are much riskier than investments in senior mortgage-backed securities because these subordinated securities bear credit losses prior to the related senior securities. The risk associated with holding residual interests and subordinated securities is greater than holding the underlying mortgage loans directly due to the concentration of losses attributed to the subordinated securities. The value of residual interests represents the present value of future cash flows expected to be received by us from the excess cash flows created in the securitization transaction. In general, future cash flows are estimated by taking the coupon rate of the loans underlying the transaction less the interest rate paid to the bond holders, less contractually specified servicing and trustee fees, and after giving effect to estimated prepayments, credit losses and over-collateralization requirements. We estimate future cash flows from these securities and value them utilizing assumptions based in part on projected interest rates, delinquency, mortgage loan prepayment speeds and credit losses. It is extremely difficult to validate the assumptions we use in valuing our residual interests. Even if the general accuracy of the valuation model is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships which drive the results of the model. Such assumptions are complex as we must make judgments about the effect of matters that are inherently uncertain. If our actual experience differs from our assumptions, we could be required to reduce the value of these residual interests and securities. Furthermore, if our actual experience differs materially from these assumptions, our cash flow, financial condition, results of operations and liquidity may be harmed. A failure in or breach of our technology infrastructure, or the systems operated by our third-party service providers, to protect confidential information of borrowers could damage our reputation and substantially harm our business. We, or our third party service providers, maintain certain confidential information relating to our borrowers for mortgage loans. If the information is maintained electronically, we rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including personal information and credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. We may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to loss of critical data or the unauthorized disclosure of confidential borrower data. The possession and use of personal information in conducting our business subject us to legislative and regulatory burdens that may require notification to customers of a security breach, restrict our use of personal information and hinder our ability to operate our mortgage lending 27 business. A failure in or breach of the security of our information systems, or those of our service providers, could result in damage to our reputation and harm our business. Losses from defaulted loans may be higher than anticipated because we did not obtain mortgage insurance or if the mortgage insurance company is insolvent. Certain securitization trusts in the long term mortgage portfolio do not have credit enhancements such as mortgage pool insurance for all of the mortgages and mortgage investments. Generally, the Company required mortgage insurance on any first mortgage with an LTV ratio greater than 80%. During the time we hold mortgages for investment, we are subject to risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance. If a borrower defaults on a mortgage that we hold, we bear the risk of loss of principal to the extent there is any deficiency between the value of the related mortgaged property and the amount owing on the mortgage loan and any insurance proceeds available to us through the mortgage insurer. Also, to the extent we have mortgage insurance coverage, we may bear the risk of the insurance carriers rescinding such insurance under the terms of the policy, or not being able to make the required payments which will increase losses on foreclosures. We are subject to risks of operational failure that are beyond our control. Substantially all of our operations are located in Irvine, California. Our systems and operations are vulnerable to damage and interruption from fire, flood, telecommunications failure, break-ins, earthquake and similar events. Our operations may also be interrupted by power disruptions. Furthermore, our security mechanisms may be inadequate to prevent security breaches to our computer systems, including from computer viruses, electronic break-ins and similar disruptions. Such security breaches or operational failures could expose us to liability, impair our operations, result in losses, and harm our reputation. We do not expect to pay dividends in the foreseeable future and we may be restricted in paying dividends on our common stock. We do not anticipate paying any dividends on our common stock in the foreseeable future and we intend to retain any future earnings for funding growth. We may also be restricted in paying dividends on our common stock. For example, our existing and any future warehouse facilities may contain covenants prohibiting dividend payments upon an occurrence of a default or otherwise. Furthermore, if we receive an adverse judgment on the purposed class action relating to our preferred stock and the Company is required to pay dividends on the preferred stock, we will be prohibited from paying dividends on our common stock until such preferred stock dividends are paid. As a result, you should not rely on an investment in our stock if you require dividend income. Capital appreciation, if any, of our stock may be your sole source of gain for the foreseeable future. Our operations may be adversely affected if we are subject to the Investment Company Act. We intend to conduct our business at all times so as not to become regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. In order to qualify for this exemption we must maintain at least 55% of our assets directly in mortgages, qualifying pass-through certificates and certain other qualifying interests in real estate. Our ownership of certain mortgage assets may be limited by the provisions of the Investment Company Act, should we ever be subject to the Act. If the SEC adopts a contrary interpretation with respect to these 28 securities or otherwise believes we do not satisfy the above exception, we could be required to restructure our activities or sell certain of our assets. To insure that we continue to qualify for the exemption we may be required at times to adopt less efficient methods of financing certain of our mortgage assets and we may be precluded from acquiring certain types of higher-yielding mortgage assets. The net effect of these factors will be to lower our net interest income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described. Our business will be materially and adversely affected if we fail to qualify for this exemption. Provisions in our charter documents and Maryland law, as well as our NOL Rights Plan, impose limitations that may delay or prevent our acquisition by a third party. Our charter and bylaws contain provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions include, among other things, advance notice for raising business issues or making nominations at meetings and blank check preferred stock that allows our board of directors, without stockholder approval, to designate and issue additional series of preferred stock with rights and terms as our board of directors may determine, including rights to dividends and proceeds in a liquidation that are senior to our common stock. We are also subject to certain provisions of the Maryland General Corporation Law, which could delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the price for their common stock or may otherwise be in the best interests of our stockholders. This includes the ‘‘business combinations’’ statute that prohibits transactions between a Maryland corporation and ‘‘interested stockholders,’’ which is any person who beneficially owns 10% or more of the voting power of our then-outstanding voting stock for a period of five years unless the board of directors approved the transaction prior to the party’s becoming an interested stockholder. The five-year period runs from the most recent date on which the interested stockholder became an interested stockholder. The law also requires a super majority stockholder vote for such transactions after the end of the five-year period. Maryland law also provides that ‘‘control shares’’ of a Maryland corporation acquired in a ‘‘control share acquisition’’ have no voting rights except to the extent approved by a vote of two-thirds of the shares eligible to vote. The control share acquisition statute would not apply to shares acquired in a merger, consolidation or share exchange if we were a party to the transaction. The control share acquisition statute could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. We have also adopted a Tax Benefits Preservations Rights Agreement, also known as an NOL rights plan, pursuant to which each share of common stock also has a ‘‘right’’ attached to it. Although the NOL rights plan was adopted to help preserve the value of certain deferred tax benefits, including those generated by net operating losses, it also has the effect of deterring or delaying an acquisition of the Company by a third party. The rights are not exercisable except upon the occurrence of certain takeover-related events—most importantly, the acquisition by a third party (the ‘‘Acquiring Person’’) of more than 4.99% of our outstanding voting shares. Once triggered, the rights entitle the stockholders, other than the Acquiring Person, to certain ‘‘flip-in’’, ‘‘flip-over’’ and exchange rights. The effect of triggering the rights is to expose the Acquiring Person to severe dilution of its ownership interest, as the shares of common stock of our Company (or any surviving corporation) are offered to all of the stockholders other than the Acquiring Person at a steep discount to their market value. 29 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our primary executive and administrative offices are located at 19500 Jamboree Road, Irvine, California 92612 where we have a premises lease expiring in November 2016. We have two options to extend the term for five-year periods for each option. The premises consist of a seven-story building containing approximately 210,000 square feet with an initial annual rental rate of $31.80 per square foot, which amount increases every 30 months since commencement of the lease in October 2006. As of December 31, 2014, we have subleased approximately 112,000 square feet of our corporate headquarters. ITEM 3. LEGAL PROCEEDINGS Legal Proceedings The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any. In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any cases, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure. At December 31, 2014, the Company has a $130 thousand accrued liability recorded for such estimated loss exposure. Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period. The legal matters summarized below are ongoing and may have an effect on the Company’s business and future financial condition and results of operations: On or about April 20, 2011, an action was filed entitled Federal Home Loan Bank of Boston v. Ally Financial Inc., et al, naming IMH Assets Corp, IFC, the Company, and ISAC as defendants. The complaint alleges misrepresentations in the materials used to market mortgage-backed securities that the plaintiff purchased. The complaint seeks damages and attorney’s fees in an amount to be 30 established at time of trial. The case was removed to the United States District Court for the District of Massachusetts and on September 30, 2013, the Court granted the Company’s motion to dismiss claims against it arising under the Massachusetts Uniform Securities Act. The case remains pending as to other claims against the Company. On December 7, 2011, a purported class action was filed in the Circuit Court of Baltimore City entitled Timm, v. Impac Mortgage Holdings, Inc, et al. alleging on behalf of holders of the Company’s 9.375% Series B Cumulative Redeemable Preferred Stock (Preferred B) and 9.125% Series C Cumulative Redeemable Preferred Stock (Preferred C) who did not tender their stock in connection with the Company’s 2009 completion of its Offer to Purchase and Consent Solicitation that the Company failed to achieve the required consent of the Preferred B and C holders, the consents to amend the Preferred stock were not effective because they were given on unissued stock (after redemption), the Company tied the tender offer with a consent requirement that constituted an improper ‘‘vote buying’’ scheme, and that the tender offer was a breach of a fiduciary duty. The action seeks the payment of two quarterly dividends for the Preferred B and C holders, the unwinding of the consents and reinstatement of the cumulative dividend on the Preferred B and C stock, and the election of two directors by the Preferred B and C holders. The action also seeks punitive damages and legal expenses. The court, on January 28, 2013, dismissed all individual director and officer defendants from the case and further dismissed the Second, Third and Fifth causes of action. The remaining causes of action against the Company allege the Preferred B holders did not approve amendments to its Articles Supplementary and the holders thereof seek to recover two quarters of dividends and to elect two members to the Board of Directors of the Company. On November 27, 2013, the court denied the plaintiff’s motion to reconsider the court’s January 28, 2013 order. The Company and the Plaintiffs have filed a motion for summary judgment on the remaining claims and motions are currently pending. On April 30, 2012, a purported class action was filed entitled Marentes v. Impac Mortgage Holdings, Inc., alleging that certain loan modification activities of the Company constitute an unfair business practice, false advertising and marketing, and that the fees charged are improper. The complaint seeks unspecified damages, restitution, injunctive relief, attorney’s fees and prejudgment interest. On August 22, 2012, the plaintiff filed an amended complaint adding Impac Funding Corporation as a defendant and on October 2, 2012, the plaintiff dismissed Impac Mortgage Holdings, Inc., without prejudice. On December 27, 2012, the court granted IFC’s motion to dismiss and on May 23, 2014, the court of appeals reversed the dismissal. Discovery is currently proceeding in this matter. On December 14, 2013, a matter was filed in the US District Court, District of Minnesota, entitled Residential Funding Company, LLC v. Impac Funding Corp. alleging the defendant is responsible for unspecific debts of Pinnacle Direct Funding Corp., as its successor in interest. On April 3, 2014, the plaintiff filed a First Amended Complaint alleging the defendant is responsible for breaches of representations and warranties in connection with certain loan sales from Pinnacle to plaintiff. The plaintiff seeks declaratory relief and unspecified damages. On April 17, 2014, the Company filed a motion to dismiss the First Amended Complaint, which the court denied. The Company answered the First Amended Complaint on September 24, 2014, and filed a motion for summary judgment on January 6, 2015, which remains pending. On October 28, 2014, an action was filed in the Superior Court of the State of California in Orange County entitled Mallory Hill vs. Impac Mortgage Holdings, Inc., Impac Mortgage Corporation et al. In the action Mr. Hill seeks compensatory damages, general damages, treble damages, exemplary damages, an accounting, injunctive relief, attorney’s fees and costs for claims based upon a consulting agreement entered into with Mr. Hill, a purported employment relationship entered into with Mr. Hill and other purported claims. The matter was removed to the US District Court. The Company has filed a motion to dismiss that is pending. 31 In October 2011 and November 2012, the Company received letters from Countrywide Securities Corporation (Countrywide), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), and UBS Securities LLC (UBS) claiming indemnification relating to mortgage backed securities bonds issued, originated or sold by ISAC, IFC, IMH Assets Corp. and the Company. The claims seek indemnification from claims asserted against Countrywide, Merrill Lynch, and UBS in specified legal actions entitled American International Group Inc. v. Bank of America Corp., et al, in the United States District Court for the Southern District of New York and Federal Home Loan Bank of Boston v. Ally Financial, Inc., et al, in the United States District Court for the District of Massachusetts. The notices each seek indemnification for all losses, liabilities, damages and legal fees and costs incurred in those actions. Further related to these claims, the Company received a demand from American International Group (AIG) for claims it purports to have based upon 12 Residential Mortgage Backed Securities it purchased in which the Company was depositor, sponsor, seller and/or originator. AIG contends it has suffered almost $800 million in losses on the securities and contends there were misrepresentations and breaches of representations and warranties regarding the securities. In October 2012, January 2013, and December 2014, Deutsche Bank issued indemnification demands for claims asserted against them in the Superior Court of New York in cases entitled Royal Park Investments SA/NV v. Merrill Lynch, et. al and Dealink Funding Ltd. v. Deutsche Bank and in the Circuit Court for the City of Richmond, Virginia, in a case entitled Commonwealth of VA, et al. v. Barclays Capital Inc, et al. In February of 2013, the Company also received a notice of intent to seek indemnification on behalf of Deutsche Bank AG, Deutsche Bank Securities, Inc., DB Structured Products, Inc., ACE Securities Corp and Deutsche Alt-A Securities, Inc. The claim relates to an action filed against those entities in the Superior Court of New York. The Company is a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 32 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES Our common stock is currently listed on the NYSE MKT under the symbol ‘‘IMH’’. The following table summarizes the high and low sales prices for our common stock for the periods indicated: First Quarter Second Quarter Third Quarter Fourth Quarter High 2014 Low 7.40 6.14 6.88 6.50 5.71 4.80 4.75 4.81 Close High 5.99 4.80 6.32 6.20 15.39 11.95 10.90 9.70 2013 Low 9.55 9.67 9.48 4.66 Close 10.20 10.15 9.52 5.98 On March 18, 2015, the last quoted price of our common stock on the NYSE MKT was $10.16 per share. As of March 18, 2015, there were 156 holders of record, including holders who are nominees for an undetermined number of beneficial owners, of our common stock. The Board of Directors of the Company authorizes in its discretion the payment of cash dividends on its common stock, subject to an ongoing review of our profitability, liquidity and future operating cash requirements. We and some of our subsidiaries are subject to restrictions under our warehouse borrowings and long-term debt agreements on our ability to pay dividends if there is an event of default or otherwise. Plus, certain debt arrangements require the maintenance of ratios and contain restrictive financial covenants that could limit our ability, and the ability of our subsidiaries, to pay dividends. The Board of Directors did not declare cash dividends on our common stock during the years ended December 31, 2014 and 2013. We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA As a smaller reporting company, we are not required to provide the information required by this Item. 33 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis of financial condition and results of operations contain 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. Refer to Item 1. ‘‘Business—Forward-Looking Statements’’ for a complete description of forward-looking statements. Refer to Item 1. ‘‘Business’’ for information on our businesses and operating segments. Amounts are presented in thousands, except per share data or as otherwise indicated. Market Conditions The U.S. economy continued its recovery during 2014. Consumer sentiment rose to its highest level in eight years in December, lifted by healthy job growth, improved income expectations, and a decline in gasoline prices, which has also led to increased consumer spending. Labor market conditions, household and business spending continue their modest improvement. The U.S. economy has recovered all the jobs lost during the recession, adding almost 3.0 million jobs in 2014, while total unemployment fell to 5.6 percent in December 2014. Despite stronger economic data in various regions, wage growth, energy prices, credit market volatility, emerging market and geopolitical concerns continue to weigh on investor sentiment. These conditions in combination with fiscal policy and the impact of recent regulatory changes and the heightened regulatory and government scrutiny of financial institutions will continue to impact our results in 2015 and beyond. The residential mortgage banking market experienced a challenging year in 2014. Industry loan origination volumes declined by 39% from 2013 levels as refinance activity waned and loan sale margins remained under pressure as industry overcapacity adjusted to lower mortgage demand. Housing markets in the U.S. continue to recover with the strength of recovery varying by market. Housing inventories reached their highest levels in over a year during the second quarter of 2014, which had helped slow price gains in many regions during the third quarter of 2014. However, during the fourth quarter, housing inventories dropped 20% to a seasonally adjusted 4.6 month supply as compared to a 5.5 month supply in the third quarter of 2014, partially fueled by sub-4 percent interest rates. The backlog of properties in foreclosure will also continue to play a role in the housing recovery. In the U.S., both economic data and corporate earnings were mixed. The Federal Reserve Board announced further reductions in its bond buying stimulus program, which concluded in October. They will continue to evaluate progress toward their objectives of maximum employment and 2% inflation. Additionally, the Federal Reserve Board updated its guidance on short-term interest rates, indicated that it can be patient in beginning to tighten monetary policy. Mortgage and treasury rates were volatile throughout 2014, declined sharply in the fourth quarter, and through mid-February of 2015 were still lower than at the end of 2014. Recent Developments In January 2015, we entered into an agreement to acquire the mortgage operations of CashCall, Inc. (CashCall). The acquisition of CashCall’s residential mortgage operation includes the complete origination platform including systems and personnel and will operate as a separate division of IMC under the name CashCall Mortgage (CCM). This division will operate as a centralized call center that utilizes a marketing platform to generate customer leads through the internet and call center loan agents. With the addition of CCM we will have a scalable retail platform able to expand quickly and efficiently. By using its marketing to generate internal leads, we expect CCM to be able to compete with some of the largest internet lenders across the nation. In addition, we intend to leverage this same 34 marketing platform to expand volumes of our new AltQM products while CCM will be able to significantly expand the number of states approved to lend in by being part of IMC. In 2013, CashCall’s mortgage division was ranked by the Mortgage Bankers Association as the 31st largest residential mortgage originator with approximately $6.5 billion in total originations. In the fourth quarter of 2014, CashCall’s mortgage division volume was approximately $800 million. As a centralized retail call center, loan applications are received and taken by loan agents directly from consumers and through the internet. As a result of the acquisition of CCM, we expect to add significant retail direct origination volume since CashCall will no longer be a correspondent seller as its mortgage operations will now be part of the Impac Mortgage Corp. platform beginning in 2015. As a result of the acquisition, we expect to be considered a top ranked nationwide mortgage originator that offers a full spectrum of loan products including agency conventional, non-agency, prime jumbo and non-qualified mortgages. We believe that the call center operations, combined with its telephony, lead management and customized loan origination systems, makes the mortgage operations of CashCall a scalable retail origination platform that is able to close loans faster than competitors in a highly efficient manner. Impac Mortgage Corp. has been doing business with CashCall, Inc. on a correspondent basis since 2013, and CashCall, Inc’s. overall loan performance and delivery has reinforced Impac’s decision to complete the acquisition. We expect to leverage the CashCall Mortgage platform and proven multifaceted marketing strategies to increase origination volume of expanded products including the Company’s AltQM loan programs and government insured Ginnie Mae programs. 35 Selected Financial Results for 2014 and 2013 For the Three Months Ended For the Year Ended December 31, September 30, December 31, December 31, December 31, 2013 2014 2014 2013 2014 Revenues: Gain on sale of loans, net Real estate services fees, net Servicing income, net Mark-to-market mortgage servicing $ 9,060 $ 3,447 813 9,122 $ 3,243 913 7,908 $ 4,855 1,311 29,308 $ 14,729 4,586 rights Other Total revenues Expenses: Personnel expense General, administrative and other Total expenses Other income (expense): Net interest income (expense) Change in fair value of long-term debt Change in fair value of net trust assets Total other (expense) income Loss from continuing operations before income taxes Income tax (benefit) expense Net loss from continuing operations Loss from discontinued operations, net of tax Net loss Net earnings attributable to noncontrolling interest Net loss attributable to common stockholders Diluted loss per share Status of Operations (1,576) 20 11,764 9,557 4,300 13,857 797 (3,590) 3,222 429 (1,664) (100) (1,564) (673) (2,237) - (998) 195 12,475 9,062 4,410 13,472 747 - 92 839 (158) 307 (465) (736) (1,201) - 3,505 120 17,699 12,845 5,893 18,738 (121) (235) (1,301) (1,657) (2,696) 34 (2,730) (986) (3,716) - (5,116) 1,682 45,189 37,398 18,637 56,035 1,135 (4,014) 11,063 8,184 (2,662) 1,305 (3,967) (2,355) (6,322) - $ $ (2,237) $ (1,201) $ (3,716) $ (6,322) $ (0.23) $ (0.13) $ (0.42) $ (0.68) $ 57,188 19,370 4,240 6,567 1,004 88,369 64,769 25,191 89,960 (86) (687) (3,678) (4,451) (6,042) (1,031) (5,011) (3,037) (8,048) (136) (8,184) (0.94) For 2014, we recorded a loss of $6.3 million as compared to a loss of $8.2 million in 2013. The loss in 2014 was primarily associated with a mark-to-market (MTM) loss from mortgage servicing rights (MSRs), an increase in the estimated fair value of long-term debt recorded in the fourth quarter of 2014 and a loss from discontinued operations. A decline in mortgage interest rates during the year resulted in a $5.1 million MTM loss from MSRs. Additionally, due to the ongoing improvement of the Company’s financial condition, we updated the estimated fair value of long-term debt recording a $4.0 million expense in 2014. Additionally, with the recent resolution of our legacy repurchase requests from FNMA, we recorded additional provisions of $1.1 million in 2014 up to the expected liability of the settlement and a net $824,000 in previously disclosed legal settlements, net of recoveries. Gain on sale revenues and operating expenses both declined primarily due to a decrease in margins and the sale of our retail mortgage origination branches at the end of 2013. For the fourth quarter of 2014, we recorded a net loss of $2.2 million as compared to a loss of $1.2 million for the third quarter of 2014 and net loss of $3.7 million for the fourth quarter of 2013. With 36 the exception of the MTM adjustment of the long-term debt, we continued to see a positive quarterly trend of improving results. As a result of the continued improvements in the real estate markets and performance of the residual interests in our long-term mortgage portfolio, we updated the assumptions on the net trust assets (residuals) resulting in an increase in the fair value of $3.2 million. In the fourth quarter of 2014, we received cash flows of $2.3 million from our residual interests as compared to $2.0 million in the third quarter. In the fourth quarter, lending volume increased to $925.4 million as compared to $747.3 million in the third quarter of 2014 and $276.0 million in the fourth quarter of 2013. The increase was predominantly due to an increase in the correspondent lending channel. The increase was primarily due to the bulk purchases from one correspondent seller, CashCall, Inc. Mortgage lending margins declined associated with a higher concentration of bulk correspondent volume which earns a lower margin but which also has a much lower cost to generate. Additionally, gain on sale revenues increased slightly in the fourth quarter of 2014 as compared to the third quarter of 2014, while we recorded an increase in the MTM loss from MSR’s due to declining interest rates across the year. Furthermore, our product mix shifted to a higher concentration of conventional loans which has a slightly lower margin product than government loans. Furthermore, during the fourth quarter, real estate service revenues increased slightly from the third quarter, despite the anticipated runoff of our long-term mortgage portfolio. Summary Highlights (cid:127) Mortgage lending volumes increased in the fourth quarter of 2014 to $1.1 billion from $923.6 million in the third quarter of 2014 and $516.5 million in the fourth quarter of 2013, primarily due to the bulk purchases from CashCall Inc. (cid:127) Mortgage lending revenues remained relatively flat in the fourth quarter of 2014 at $9.2 million as compared to $9.1 million in the third quarter of 2014, but increased as compared to $7.9 million in the fourth quarter of 2013. (cid:127) Gain on sale margins decreased in the fourth quarter of 2014 to 83 bps, as compared to 99 bps in the third quarter of 2014, and 153 bps, in the fourth quarter of 2013 primarily associated with the higher concentration of correspondent volume, including bulk purchases of mortgage loans. (cid:127) Mortgage servicing income decreased in the fourth quarter of 2014 to $813 thousand from $913 thousand in the third quarter of 2014 and decreased compared to $1.3 million in the fourth quarter of 2013. The decline was due to the sale of servicing completed in the second and third quarters of 2014, which generated $23.0 million in cash. (cid:127) Mortgage servicing rights decreased to $24.2 million at December 31, 2014 as compared to $36.0 million at December 31, 2013. The decrease is due to bulk sales of servicing rights totaling $3.3 billion in unpaid principal balance (UPB). (cid:127) Real estate services revenue increased to $3.4 million in the fourth quarter of 2014 as compared to $3.2 million in the third quarter of 2014, but decreased as compared to $4.9 million in the fourth quarter of 2013. The decline in revenue is primarily due to the expected decline in the outstanding balance of the long-term mortgage portfolio. (cid:127) In our long-term mortgage portfolio, despite the decline in the outstanding balance of the portfolio, the residuals continue to generate better than expected cash flows of $2.3 million in 37 the fourth quarter of 2014 and $9.9 million in 2014, as compared to $2.0 million in the third quarter of 2014 and $6.8 million in 2013. Today, we have three operating segments: Mortgage Lending, Real Estate Services and Long-Term Mortgage Portfolio. Unallocated corporate and other administrative costs, including the cost associated with being a public company, are presented in the Corporate Segment. Mortgage Lending During 2014, as a result of bulk sales of servicing rights, the mortgage servicing portfolio decreased to $2.3 billion as of December 31, 2014, but produced net servicing fees of $4.6 million in 2014 as compared to $4.2 million in 2013. The estimated fair value of mortgage servicing rights decreased to $24.4 million at December 31, 2014, as compared to $36.0 million at December 31, 2013. (in millions) Originations Servicing Portfolio For the year ended December 31, 2013 2014 % Change $ 2,848.8 2,267.1 $ 2,548.4 3,128.6 12% (cid:4)28% During 2014, our warehouse borrowing capacity increased from $265.0 million to $415.0 million. At December 31, 2014, we had five warehouse lender relationships. Subsequent to December 31, 2014, our warehouse borrowing capacity increased to $615.0 million. Furthermore, we use a portion of our warehouse borrowing capacity to provide re-warehouse facilities to our customers, correspondent sellers and other small mortgage banking companies. During 2014, we increased our outstanding commitments to customers to $55.0 million. The average outstanding balance related to such commitments of the re-warehouse facilities increased 50% to $5.4 million in the fourth quarter of 2014 as compared to $3.6 million in the third quarter of 2014. By leveraging our re-warehousing division, we hope to increase the capture rate of our approved correspondent sellers business as well as expand our active customer base to include new customers seeking warehouse lines. Our loan products primarily include conventional loans for Fannie Mae and Freddie Mac and government loans insured by FHA, VA and USDA. Originations by Loan Type: (in millions) Government (1) Conventional (2) Other (3) Total originations Weighted Average FICO (4) Weighted Average LTV (5) Weighted Average Coupon Average Loan Size For the year ended December 31, 2013 2014 % Change $ $ 817.8 1,947.7 83.3 731.4 1,788.0 29.0 $ 2,848.8 $ 2,548.4 722 78.1% 4.29% 726 84.1% 4.04% $ 258,161 $ 220,526 12% 9% 187% 12% (1) (2) Includes government-insured loans including FHA, VA and USDA Includes loans eligible for sale to Fannie Mae and Freddie Mac 38 (3) (4) (5) Includes $7.0 million of AltQM mortgages originated during 2014 FICO—Fair Isaac Company credit score LTV—loan to value—measures ratio of loan balance to estimated property value based upon third party appraisal We expect to continue originating conventional and government-insured loans as we believe that having the ability to sell loans direct to GSEs and issue Ginnie Mae securities gives us a competitive advantage with regard to products, pricing, operational efficiencies and overall recruitment of high quality loan originators. We continue to attempt to improve the mix of purchase-money transactions as we believe it will create better opportunities to increase our origination market share in a decreasing refinance market. Despite the slight decrease in purchase-money transactions in 2014 we focused on aligning ourselves with customers that were purchase transaction centric in their lead generation strategies and ability to offer a better customer service experience through our sales and operations. Additionally, the decrease in interest rates in the second half of 2014 as well as the acquisition of mortgage loans from CashCall Inc. through our correspondent channel led to a larger increase in refinance volumes. (in millions) Originations by Purpose: Refinance Purchase Total originations For the year ended December 31, 2014 % 2013 % $ $ 1,894.3 954.5 2,848.8 66% $ 34% 1,510.3 1,038.1 100% $ 2,548.4 59% 41% 100% In 2014, our mortgage lending channel that experienced the largest percentage of growth was our correspondent channel primarily due to the acquisition of mortgages from CashCall Inc. in the second half of 2014. (in millions) Originations by Channel: Wholesale Correspondent Retail For the year ended December 31, 2014 % 2013 % $ 598.9 2,169.6 80.3 21% $ 76% 3% 971.2 867.8 709.4 Total originations $ 2,848.8 100% $ 2,548.4 38% 34% 28% 100% As previously discussed, in the fourth quarter of 2013, we sold the retail branches and consolidated the lending fulfillment centers in an effort to consolidate costs, streamline our operations and focus on expanding lending volumes in our wholesale, correspondent and centralized retail call center consumer direct channel. With the acquisition of the CashCall mortgage operations in 2015, we expect the retail volume and percentage of total originations to increase while the correspondent volume and percentage declines. As of December 31, 2014, we have approximately 713 approved wholesale relationships with mortgage brokerage companies and are approved to lend in 43 states. We have approximately 265 approved correspondent relationships with banks, credit unions and mortgage companies and are approved to lend in 48 states. 39 Mortgage Servicing During 2014, the mortgage servicing portfolio decreased to $2.3 billion as compared to $3.1 billion at the end of 2013. We earn servicing fees, net of sub-servicer costs from our mortgage servicing portfolio. The servicing portfolio generated gross servicing fees of $6.7 million, and $6.8 million in 2014 and 2013, respectively. The following table includes information about our mortgage servicing portfolio: (in millions) Fannie Mae Freddie Mac Ginnie Mae Other Total owned servicing portfolio Acquired Portfolio (1) Total servicing portfolio Number of loans W/A FICO W/A LTV Avg. Portfolio balance (in millions) Avg. Loan size (in thousands) At December 31, 2014 % 60+ days delinquent At December 31, 2013 % 60+ days delinquent $ $ $ $ 496.1 837.8 926.5 6.7 2,267.1 - 0.71% $ 0.16% 1.23% 0.00% 1,520.2 317.2 1,203.5 - 0.72% $ 3,040.9 0.00% 87.7 2,267.1 0.72% $ 3,128.6 0.17% 0.38% 1.28% 0.00% 0.63% 9.26% 0.87% 9,889 716 79.8% 2,253.9 243.5 16,040 728 84.9% 2,249.0 195.1 (1) Represents servicing portfolio acquired as part of the 2010 acquisition of AmeriHome, which was sold in 2014. We also believe that there are other opportunities that exist in today’s mortgage and lending markets. Depending on the amount of capital we have available, either internally generated or otherwise, we are considering pursuing opportunities to begin originating small balance multifamily loans, originating, pooling and securitizing jumbo mortgage loans and offering warehouse lines to small banks, credit unions and mortgage banking firms as we did in the past. In response to the lower origination volumes in the mortgage market and the current compliance landscape, we are exploring opportunities to provide mortgage products and services to meet the needs of our customers and borrowers. We believe there is an underserved mortgage market for a borrower with good credit who does not meet the new guidelines of a Qualified Mortgage (QM). In our opinion, as the demand for a non QM product grows and the investor appetite increases, the market for non QM mortgages will increase. In addition, the origination for home equity lines of credit (HELOC) loans is increasing creating another new product opportunity for lenders like us. We are currently in discussions with parties interested in funding and investing in these types of products and services that could create an opportunity for re-emergence of a liquid private securitization market. Furthermore, with the available warehouse capacity in today’s market, we are seeking ways to utilize our re-warehousing business to partner with wholesale brokers and correspondent sellers to expand volumes and better serve customers and the borrowers. 40 Real Estate Services We provide portfolio loss mitigation and real estate services including real estate owned (REO) surveillance and disposition services, default surveillance and loss recovery services, short sale and real estate brokerage services, portfolio monitoring and reporting services. The source of revenue for this segment is primarily from the long-term mortgage portfolio, along with a small number of third party clients as well. The real estate services segment continues to be profitable and posted net earnings of $8.7 million for the year ended December 31, 2014, as compared to $13.3 million for the same period in 2013. In a continuing effort to leverage our platform beyond mortgage lending, our real estate services segment has expanded by offering its loss mitigation services beyond our own legacy portfolio. We have recently established relationships with third-parties to perform mortgage insurance recovery services. In addition, we are in the final stages of solidifying an arrangement to provide title remediation for a third- party. Long-Term Mortgage Portfolio The long-term mortgage portfolio primarily includes the residual interests in securitizations, master servicing rights from the securitizations and long-term debt. Although we have seen some stabilization and improvement in defaults, the portfolio continues to suffer losses and may continue for the foreseeable future until we see a significant prolonged decline in the number of foreclosure properties in the market. At December 31, 2014, our residual interest in securitizations (represented by the difference between total trust assets and total trust liabilities) increased to $17.2 million, compared to $10.6 million at December 31, 2013. The increase in residual fair value in 2014 was primarily due to a decrease in losses and loss assumptions, decrease in investor yield assumptions as well as decreased discount rates on certain residual interest vintages. For additional information regarding the long-term mortgage portfolio refer to Financial Condition and Results of Operations below. Corporate The corporate segment includes all corporate services groups, public company costs, unused office space for future growth as well as debt expense related to the Convertible Notes and capital leases. This corporate services group supports all operating segments. A portion of the corporate services costs are allocated to the operating segments. The costs associated with being a public company, unused space for growth as well as the interest expense related to the Convertible Notes and capital leases is not allocated to our operating segments and remains in this segment. For additional information regarding the corporate segment refer to Results of Operations by Business Segment below. Critical Accounting Policies We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations. Our critical accounting policies require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the effect of changing market conditions and/or consumer behavior. In determining 41 which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations include the following: (cid:127) fair value of financial instruments; (cid:127) variable interest entities and transfers of financial assets and liabilities; (cid:127) net realizable value of REO; (cid:127) repurchase reserve; and (cid:127) interest income and interest expense. Fair Value of Financial Instruments Financial Accounting Standards Board—Accounting Standards Codification FASB ASC 820-10-35 defines fair value, establishes a framework for measuring fair value and outlines a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price). Fair value measurements are categorized into a three-level hierarchy based on the extent to which the measurement relies on observable market inputs in measuring fair value. Level 1, which is the highest priority in the fair value hierarchy, is based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 is based on observable market-based inputs, other than quoted prices, in active markets for similar assets or liabilities. Level 3, which is the lowest priority in the fair value hierarchy, is based on unobservable inputs. Assets and liabilities are classified within this hierarchy in their entirety based on the lowest level of any input that is significant to the fair value measurement. The use of fair value to measure our financial instruments is fundamental to our financial statements and is a critical accounting estimate because a substantial portion of our assets and liabilities are recorded at estimated fair value. Financial instruments classified as Level 3 are generally based on unobservable inputs, and the process to determine fair value is generally more subjective and involves a high degree of management judgment and assumptions. These assumptions may have a significant effect on our estimates of fair value, and the use of different assumptions, as well as changes in market conditions and interest rates, could have a material effect on our results of operations or financial condition. Mortgage loans held-for-sale—We elected to carry our mortgage loans held-for-sale originated or acquired from the mortgage lending operation at fair value. Fair value is based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. Mortgage servicing rights—We elected to carry all of our mortgage servicing rights arising from our mortgage lending operation at fair value. The fair value of mortgage servicing rights is based upon a discounted cash flow model. The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. 42 Derivative financial instruments—We utilize certain derivative instruments in the ordinary course of our business to manage our exposure to changes in interest rates. These derivative instruments include forward sales of MBS and forward loan sale commitments (Hedging Instruments). We also issue IRLCs to borrowers in connection with single family mortgage loan originations. We recognize all derivative instruments at fair value. The estimated fair value of IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively quoted and easily validated through external sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate. The fair value of the Hedging Instruments is based on the actively quoted TBA MBS market using observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date and are recorded in other liabilities in the consolidated balance sheet. The initial and subsequent changes in value of IRLCs and forward sale commitments are a component of gain on sale of loans, net in the consolidated statements of operations. Long-term debt—Long-term debt (consisting of trust preferred securities and junior subordinated notes) is reported at fair value within the long-term mortgage portfolio. These securities are measured based upon an analysis prepared by management, which considers the Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. Unrealized gains and losses are recognized in earnings in the accompanying consolidated statements of operations as change in fair value of long-term debt. Our estimate of the fair value of the long-term debt requires us to exercise significant judgment as to the timing and amount of the future obligation. Changes in assumptions resulting from changes in the Company’s own credit risk profile will affect the estimated fair value of the long-term debt and those changes are recorded as a component of net earnings. A change in assumptions associated with the improvement in the Company’s own credit risk profile could result in a significant increase in the estimated fair value of the long-term debt which would result in a significant charge to net earnings. Variable Interest Entities and Transfers of Financial Assets and Liabilities Historically, we securitized mortgages in the form of collateralized mortgage obligations (CMO), which were consolidated and accounted for as secured borrowings for financial statement purposes. We also securitized mortgages in the form of real estate mortgage investment conduits (REMICs), which were either consolidated or unconsolidated depending on the design of the securitization structure. CMO and certain REMIC securitizations contained structural terms that resulted in the transferee (securitization trust) to not be a qualifying special purpose entity (QSPE), and therefore we consolidated the variable interest entity (VIE) as it was the primary beneficiary of the sole residual interest in each securitization trust. Generally, this was achieved by including terms in the securitization agreements that gave us the ability to unilaterally cause the securitization trust to return specific mortgages, other than through a clean-up call. Amounts consolidated are included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized mortgage borrowings and derivative liabilities in the accompanying consolidated balance sheets. Our estimate of the fair value of our net retained residual interests in unconsolidated securitizations, which are included in investment securities available-for-sale in the consolidated balance sheets, requires us to exercise significant judgment as to the timing and amount of future cash flows from the residual interests. We are exposed to credit risk from the underlying mortgage loans in unconsolidated securitizations to the extent we retain subordinated interests. Changes in expected cash flows resulting from changes in expected net credit losses will impact the value of our subordinated 43 retained interests and those changes are recorded as a component of change in fair value of net trust assets. In contrast, for securitizations that are structured as secured borrowing, we recognize interest income over the life of the securitized mortgage collateral and interest expense incurred for the securitized mortgage borrowings. We refer to these transactions as consolidated securitizations. The mortgage loans collateralizing the debt securities for these financings are included in securitized mortgage collateral and the debt securities payable to investors in these securitizations are included in securitized mortgage borrowings in our consolidated balance sheet. Whether a securitization is consolidated or unconsolidated, investors in the securities issued by the securitization trust have no recourse to our non- securitized assets or to us and have no ability to require us to provide additional assets, but rather have recourse only to the assets transferred to the trust. Whereas the accounting differences are significant, the underlying economic impact to us, over time, will be the same regardless of whether the securitization trust is consolidated or unconsolidated. These securitizations are evaluated for consolidation based on the provisions of FASB ASC 810-10-25, which eliminated the concept of a QSPE and changed the approach to determine a securitization trust’s primary beneficiary. Amounts consolidated are included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized mortgage borrowings and derivative liabilities in the accompanying consolidated balance sheets. Net Realizable Value (NRV) of REO The Company considers the NRV of its REO properties in evaluating REO losses. When real estate is acquired in settlement of mortgage loans, or other real estate owned, the mortgage is written-down to a percentage of the property’s appraised value, broker’s price opinion or list price less estimated selling costs and including mortgage insurance proceeds expected to be received. Subsequent changes in the NRV of the REO is reflected as a write-down of REO and results in additional losses. Repurchase Reserve When we sell loans through whole loan sales we are required to make normal and customary representations and warranties about the loans to the purchaser. Our whole loan sale agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. Investors may request us to repurchase loans or to indemnify them against losses on certain loans which the investors believe either do not comply with applicable representations or warranties or defaulted shortly after its purchase. Upon completion of its own investigation regarding the investor claims, we repurchase or provide indemnification on certain loans, as appropriate. We maintain a liability reserve for expected losses on dispositions of loans expected to be repurchased or on which indemnification is expected to be provided. We regularly evaluate the adequacy of this repurchase liability reserve based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiations, and other relevant factors including economic conditions. We record a provision for losses relating to such representations and warranties as part of each loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. We 44 establish a liability at the time loans are sold and continually update our estimated repurchase liability. The level of the repurchase liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that may change over the lives of the underlying loans. Interest Income and Interest Expense Interest income on securitized mortgage collateral and interest expense on securitized mortgage borrowings are recorded using the effective interest method for the period based on the previous quarter-end’s estimated fair value. Interest expense on long-term debt is recorded using the effective interest method based on estimated future interest rates and cash flows. Financial Condition and Results of Operations Financial Condition As of December 31, 2014 compared to December 31, 2013 The following table shows the condensed consolidated balance sheets for the following periods: December 31, December 31, 2014 2013 Increase (Decrease) % Change Cash Restricted cash Mortgage loans held-for-sale Mortgage servicing rights Securitized mortgage trust assets Other assets (2) Total assets Warehouse borrowings Short-term structured debt Convertible notes Long-term debt ($71,120 par) Repurchase reserve (1) Securitized mortgage trust liabilities Other liabilities (2) Total liabilities Total equity Total liabilities and stockholders’ $ $ $ 10,073 $ 2,420 239,391 24,418 5,268,531 33,739 9,969 $ 1,467 129,191 35,981 5,513,166 28,551 5,578,572 $ 5,718,325 $ 226,718 $ 6,000 20,000 22,122 5,714 5,251,307 21,755 5,553,616 24,956 119,634 $ - 20,000 15,871 9,478 5,502,585 24,886 5,692,454 25,871 104 953 110,200 (11,563) (244,635) 5,188 (139,753) 107,084 6,000 - 6,251 (3,764) (251,278) (3,131) (138,838) (915) 1% 65 85 (32) (4) 18 (2)% 90% n/a - 39 (40) (5) (13) (2) (4) equity $ 5,578,572 $ 5,718,325 $ (139,753) (2)% (1) (2) $1.2 million and $5.5 million of the repurchase reserve is included within discontinued operations at December 31, 2014 and 2013, respectively. Included within other assets and liabilities are the assets and liabilities of the discontinued operations. 45 At December 31, 2014 and 2013, net trust assets and liabilities were as follows: Total trust assets Total trust liabilities Residual interests in securitizations December 31, December 31, 2014 2013 Increase (Decrease) % Change $ $ 5,268,531 $ 5,251,307 5,513,166 $ 5,502,585 (244,635) (251,278) 17,224 $ 10,581 $ 6,643 (4)% (5) 63% At December 31, 2014, cash increased to $10.1 million from $10.0 million at December 31, 2013. The primary sources of cash between periods were $28.4 million from the sale of mortgage servicing rights, $15.9 million in fees generated from the mortgage lending operations and real estate services (net of non-cash fair value adjustments), $10.2 million from the sale of AmeriHome and $9.9 million from residual interests in securitizations, $6.0 million from the short-term structured debt agreement and $1.0 million in borrowings on the line of credit. Offsetting the sources of cash were continuing operating expenses totaling $53.3 million (net of non-cash depreciation expense), $5.8 million in interest payments on the Convertible Notes and long-term debt and settlements of repurchase requests associated with loans sold by the discontinued non-conforming mortgage operations of approximately $5.3 million and an increase in restricted cash of $1.0 million. Mortgage loans held-for-sale increased $110.2 million to $239.4 million at December 31, 2014 as compared to $129.2 million at December 31, 2013. During 2014, we had $2.8 billion in originations and $2.7 billion in loan sales. As a normal course of our origination and sales cycle, loans held-for-sale at the end of any period are generally sold within one or two subsequent months. Mortgage servicing rights decreased $11.6 million to $24.4 million at December 31, 2014 as compared to $36.0 million at December 31, 2013. The decrease was due to bulk sales of servicing rights totaling $2.6 billion in UPB, the sale of AmeriHome, which had servicing rights totaling $702.1 million in UPB and a mark-to-market reduction in fair value of $6.2 million. Partially offsetting the decrease was servicing retained loan sales of $2.7 billion. At December 31, 2014, we serviced $2.3 billion in UPB for others as compared to $3.1 billion at December 31, 2013. Warehouse borrowings increased $107.1 million to $226.7 million at December 31, 2014 as compared to $119.6 million at December 31, 2013. The increase was due to an increase in mortgage loans held-for-sale and finance receivables at December 31, 2014. During 2014, we increased our total borrowing capacity to $415.0 million as compared to $265.0 million at December 31, 2013. In the fourth quarter of 2014, we entered into a $6.0 million short-term structured debt agreement collateralized by the residual interests in securitizations. The agreement bears interest at LIBOR + 5.75% per annum, has a maturity date of June 29, 2015 and we have the right to repay the debt without penalty prior to the maturity. The holder receives monthly principal and interest payments which are equal to the distributions from the residual interest underlying collateral with a minimum payment of $500,000. If the cash flows received from the collateralized residual interests are less than $500,000, we would be required to pay the difference to avoid the transfer of the residual interests and the rights to the associated future cash flows to the note holder. Repurchase reserve liability decreased to $5.7 million at December 31, 2014 as compared to $9.5 million at December 31, 2013. During 2014, we paid approximately $5.3 million to settle previous repurchase claims related to our discontinued operations. At December 31, 2014, the repurchase reserve within discontinued operations was $1.2 million as compared to $5.5 million at December 31, 2013. Additionally, we have approximately $4.5 million in repurchase reserves related to the loans sold by the continuing mortgage lending operation since early 2011. We have received a minimal amount of repurchase requests for loans sold by the continuing mortgage lending operation. 46 Book value per common share was $(2.04) as of December 31, 2014, as compared to $(2.88) as of December 31, 2013 (inclusive of the remaining $51.8 million of liquidation preference on our preferred stock). The changes in total assets and liabilities are primarily attributable to decreases in our trust assets and trust liabilities as summarized below. December 31, December 31, 2014 2013 Increase (Decrease) % Change Securitized mortgage collateral $ Other trust assets 5,249,639 $ 18,892 5,494,152 $ 19,014 5,268,531 5,513,166 (244,513) (122) (244,635) Total trust assets Securitized mortgage borrowings Other trust liabilities Total trust liabilities Residual interests in securitizations $ 5,245,860 $ 5,492,371 $ (246,511) 5,447 10,214 5,251,307 5,502,585 (4,767) (251,278) $ 17,224 $ 10,581 $ 6,643 (4)% (1) (4) (4)% (47) (5) 63% Since the consolidated and unconsolidated securitization trusts are nonrecourse to the Company, trust assets and liabilities have been netted in the table above to present our interest in these trusts more simply, which are considered the residual interests in securitizations. For unconsolidated securitizations the residual interests represent the fair value of investment securities available-for-sale. For consolidated securitizations, the residual interests are represented by the fair value of securitized mortgage collateral and real estate owned, offset by the fair value of securitized mortgage borrowings and net derivative liabilities. We receive cash flows from our residual interests in securitizations to the extent they are available after required distributions to bondholders and maintaining specified overcollateralization levels and other specified parameters (such as maximum delinquency and cumulative default) within the trusts. The estimated fair value of the residual interests, represented by the difference in the fair value of total trust assets and total trust liabilities, was $17.2 million at December 31, 2014, compared to $10.6 million at December 31, 2013. We update our collateral assumptions quarterly based on recent delinquency, default, prepayment and loss experience. Additionally, we update the forward interest rates and investor yield (discount rate) assumptions based on information derived from market participants. During the year ended December 31, 2014, we decreased the investor yield requirements for certain securitized mortgage borrowings as estimated bond prices have continued to improve and corresponding yields have decreased. Additionally, during 2014, we lowered the discount rate on certain residual interest vintages. The decrease in loss and loss assumptions, decrease in investor yield assumptions on securitized mortgage collateral and securitized mortgage borrowings as well as decreased discount rates resulted in an increase in the value of these trust assets and liabilities resulting in an increase in the value of our residual interests. However, offsetting the increase was principal payments and liquidations of securitized mortgage collateral and securitized mortgage borrowings. (cid:127) The estimated fair value of securitized mortgage collateral decreased $244.5 million during 2014, primarily due to reductions in principal from borrower payments and transfers of loans to REO for single-family and multi-family collateral, partially offset by an increase in fair value due to a reduction in investor yield requirements. Additionally, other trust assets decreased $122 thousand during 2014, primarily due to decreases in REO from liquidations of 47 $36.3 million. Partially offsetting the decrease was $33.4 million in REO foreclosures and a $7.6 million increase in the net realizable value (NRV) of REO. (cid:127) The estimated fair value of securitized mortgage borrowings decreased $246.5 million during 2014, primarily due to principal payments during the period, partially offset by an increase in fair value due to a reduction in investor yield requirements. The $4.8 million reduction in other trust liabilities during 2014 was primarily due to $5.2 million in derivative cash payments from the securitization trusts, and a $599 thousand increase in derivative fair value resulting from changes in forward LIBOR interest rates. In previous years, we securitized mortgage loans by transferring originated and acquired residential single-family mortgage loans and multi-family commercial loans (the ‘‘transferred assets’’) into non-recourse bankruptcy remote trusts which in turn issued tranches of bonds to investors supported only by the cash flows of the transferred assets. Because the assets and liabilities in the securitizations are nonrecourse to us, the bondholders cannot look to us for repayment of their bonds in the event of a shortfall. These securitizations were structured to include interest rate derivatives. We retained the residual interest in each trust, and in most cases would perform the master servicing function. A trustee and servicer, unrelated to us was named for each securitization. Cash flows from the loans (the loan payments as well as liquidation of foreclosed real estate properties) collected by the loan sub-servicer are remitted to us, the master servicer. The master servicer remits payments to the trustee who remits payments to the bondholders (investors). The sub-servicer collects loan payments and performs loss mitigation activities for defaulted loans. These activities include foreclosing on properties securing defaulted loans, which results in REO. In accordance with GAAP, we are required to consolidate all but one of these trusts (as we are not the master servicer on this one trust) on our statement of financial condition and results of operations. For the one trust we did not consolidate, the residual interest is reported as investment securities available-for-sale. For the trusts we do consolidate, the loans are included in the statement of financial condition as ‘‘securitized mortgage collateral’’, the foreclosed loans are included in the statement of financial condition as ‘‘real estate owned’’ and the various bond tranches owned by investors are included in the statement of financial condition as ‘‘securitized mortgage borrowings.’’ Any interest rate derivatives remaining in the trusts are included in our statement of financial condition as ‘‘derivative assets’’ or ‘‘derivative liabilities,’’ respectively. To the extent there is excess overcollateralization (as defined in the securitization agreements) in these securitization trusts, we receive cash flows from the excess interest collected monthly from the residual interest we own. Because (i) we elected the fair value option on the securitized mortgage collateral, securitized mortgage borrowings, (ii) derivative assets/ liabilities are carried at fair value as required by GAAP, and (iii) real estate owned is reflected at net realizable value (NRV), which closely approximates fair market value, the net of the trust assets and trust liabilities represents the estimated fair value of the residual interests we own. To estimate fair value of the assets and liabilities within the securitization trusts each reporting period, management uses an industry standard valuation and analytical model that is updated monthly with current collateral, real estate, derivative, bond and cost (servicer, trustee, etc.) information for each securitization trust. We employ an internal process to validate the accuracy of the model as well as the data within this model. Forecasted assumptions sometimes referred to as ‘‘curves,’’ for defaults, loss severity, interest rates (LIBOR) and prepayments are inputted into the valuation model for each securitization trust. We hire third-party market participants to provide forecasted curves for the aforementioned assumptions for each of the securitizations. Before inputting this information into the model, management employs a process to qualitatively and quantitatively review the assumption curves for reasonableness using other information gathered from the mortgage and real estate market (i.e., third party home price indices, published industry reports discussing regional mortgage and commercial loan performance and delinquency) as well as actual default and foreclosure information for each trust from the respective trustees. 48 We use the valuation model to generate the expected cash flows to be collected from the trust assets and the expected required bondholder distribution (trust liabilities). To the extent that the trusts are over collateralized, we may receive the excess interest as the holder of the residual interest. The information above provides us with the future expected cash flows for the securitized mortgage collateral, real estate owned, securitized mortgage borrowings, derivative assets/liabilities, and the residual interests. To determine the discount rates to apply to these cash flows, we gather information from the bond pricing services and other market participants regarding estimated investor required yields for each bond tranche. Based on that information and the collateral type and vintage, we determine an acceptable range of expected yields an investor would require including an appropriate risk premium for each bond tranche. We use the blended yield of the bond tranches together with the residual interests to determine an appropriate yield for the securitized mortgage collateral in each securitization (after taking into consideration any derivatives in the securitization). During 2014 and 2013, based on improving bond prices and declining yields in the Company’s securitization trusts and better than expected residual cash flows as well as conversations with market participants, the Company lowered certain residual discount rates. The following table presents changes in the trust assets and trust liabilities for the year ended December 31, 2014: TRUST ASSETS TRUST LIABILITIES Level 3 Recurring Fair Value Measurements Investment securities Securitized available-for- mortgage collateral sale NRV (1) Real estate owned Derivative assets Level 3 Recurring Fair Value Measurements Total trust assets Securitized mortgage borrowings Derivative liabilities Total trust liabilities Net trust assets $ 108 $ 5,494,152 $ - $ 18,906 $ 5,513,166 $ (5,492,371) $ (10,214) $ (5,502,585) $ 10,581 26 - 34 - 60 - 59,526 - 364,052 - 423,578 - (76) (668,091) - - - - - - - - - - 59,552 - - (237,793) - - - (237,793) 59,552 (237,793) 364,086(2) (360,005) (599) (360,604)(2) 7,581 7,581(2) - - - 3,482 7,581 7,581 431,219 (597,798) (599) (598,397) (167,178) - - - - - - (7,687) (675,854) 844,309 5,366 849,675 173,821 $ 92 $ 5,249,639 $ - $ 18,800 $ 5,268,531 $ (5,245,860) $ (5,447) $ (5,251,307) $ 17,224 Recorded book value at 12/31/2013 Total gains/(losses) included in earnings: Interest income Interest expense Change in FV of net trust assets, excluding REO Gains from REO – not at FV but at NRV Total gains (losses) included in earnings Transfers in and/or out of level 3 Purchases, issuances and settlements Recorded book value at 12/31/2014 (1) (2) Accounted for at net realizable value. Represents non-interest income-net trust assets in the consolidated statements of operations for the year ended December 31, 2014. Inclusive of gains from REO, total trust assets above reflect a net gain of $371.7 million as a result of an increase in fair value of securitized mortgage collateral of $364.1 million, gains from REO of $7.6 million and increases from other trust assets of $34 thousand. Net losses on trust liabilities were $360.6 million as a result of $360.0 million in losses from the increase in fair value of securitized mortgage borrowings and losses from derivative liabilities of $599 thousand. As a result, non-interest income—net trust assets totaled a gain of $11.1 million for the year ended December 31, 2014. 49 The table below reflects the net trust assets as a percentage of total trust assets (residual interests in securitizations): Net trust assets Total trust assets December 31, 2014 2013 $ 17,224 5,268,531 $ 10,581 5,513,166 Net trust assets as a percentage of total trust assets 0.33% 0.19% For the year ended December 31, 2014, the estimated fair value of the net trust assets increased as a percentage of total trust assets. The increase was primarily due to the reduction in loss assumptions as well as the decrease in discount rate assumptions for residual interests as discussed above. Since the consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. Therefore, in the following table we have netted trust assets and trust liabilities to present these residual interests more simply. Our residual interests in securitizations are segregated between our single-family (SF) residential and multi- family (MF) residential portfolios and are represented by the difference between trust assets and trust liabilities. The following tables present the estimated fair value of our residual interests, including investment securities available for sale, by securitization vintage year and other related assumptions used to derive these values at December 31, 2014 and December 31, 2013: Origination Year 2002-2003 (1) 2004 2005 (2) 2006 (2) 2007 (2) Estimated Fair Value of Residual Interests by Vintage Year at December 31, 2014 MF Total SF Estimated Fair Value of Residual Interests by Vintage Year at December 31, 2013 MF Total SF $ $ 10,826 1,846 11 - - 1,975 1,506 209 851 - $ 12,801 3,352 220 851 - $ $ 5,761 462 - - - $ 2,184 2,099 75 - - 7,945 2,561 75 - - Total $ 12,683 $ 4,541 $ 17,224 $ 6,223 $ 4,358 $ 10,581 Weighted avg. prepayment rate Weighted avg. discount rate 4.3% 19.0% 12.4% 16.2% 4.9% 18.3% 2.7% 25.4% 12.6% 20.2% 3.6% 23.2% (1) (2) 2002-2003 vintage year includes CMO 2007-A, since the majority of the mortgages collateralized in this securitization were originated during this period. The estimated fair values of residual interests in vintage years 2005 through 2007 is reflective of higher estimated future losses and investor yield requirements compared to earlier vintage years. We utilize a number of assumptions to value securitized mortgage collateral, securitized mortgage borrowings and residual interests. These assumptions include estimated collateral default rates and loss severities (credit losses), collateral prepayment rates, forward interest rates and investor yields (discount rates). We use the same collateral assumptions for securitized mortgage collateral and securitized mortgage borrowings as the collateral assumptions determine collateral cash flows which are used to pay interest and principal for securitized mortgage borrowings and excess spread, if any, to the residual interests. However, we use different investor yield (discount rate) assumptions for securitized mortgage 50 collateral and securitized mortgage borrowings and the discount rate used for residual interests based on underlying collateral characteristics, vintage year, assumed risk and market participant assumptions. The table below reflects the estimated future credit losses and investor yield requirements for trust assets by product (SF and MF) and securitization vintage at December 31, 2014: 2002-2003 2004 2005 2006 2007 Estimated Future Losses (1) SF MF Investor Yield Requirement (2) MF SF 7% 12% 15% 22% 26% * (3) * (3) 3% 5% 2% 5% 5% 5% 7% 7% 8% 4% 4% 5% 4% (1) (2) (3) Estimated future losses derived by dividing future projected losses by unpaid principal balances at December 31, 2014. Investor yield requirements represent our estimate of the yield third-party market participants would require to price our trust assets and liabilities given our prepayment, credit loss and forward interest rate assumptions. Represents less than 1%. Despite the increase in housing prices from December 2013 through December 2014, housing prices in many parts of the country are still at levels which has significantly reduced or eliminated equity for loans originated after 2003. Future loss estimates are significantly higher for mortgage loans included in securitization vintages after 2004 which reflect severe home price deterioration and defaults experienced with mortgages originated during these periods. Operational and Market Risks We are exposed to a variety of market risks which include interest rate risk, credit risk, real estate risk, prepayment risk and liquidity risk. Interest Rate Risk Interest Rate Risk—Mortgage Lending. We are exposed to interest rate risks relating to our ongoing mortgage lending operations. We use derivative instruments to manage some of our interest rate risk. However, we do not attempt to hedge interest rate risk completely. Interest rate lock commitments and mortgage loans held-for-sale expose us to interest rate risk. The mortgage lending operations currently utilizes forward sold Fannie Mae and Ginnie Mae mortgage- backed securities to help mitigate changes in interest rates relating to its interest rate lock commitments and mortgage loans held-for-sale, however we do not hedge the interest rate risk associated with the mortgage servicing portfolio. Interest Rate Risk—Securitized Trusts, Long-term Debt. Our earnings from the long-term mortgage portfolio depend largely on our interest rate spread, represented by the relationship between the yield on our interest-earning assets (primarily investment securities available-for-sale and securitized mortgage collateral) and the cost of our interest-bearing liabilities (primarily securitized mortgage borrowings and long-term debt). Our interest rate spread is impacted by several factors, including general economic factors, forward interest rates and the credit quality of mortgage loans in the long-term mortgage portfolio. 51 The residual interests in our long-term mortgage portfolio are sensitive to changes in interest rates on securitized mortgage collateral and the related securitized mortgage borrowings. Changes in interest rates can significantly affect the cash flows and fair values of the Company’s assets and liabilities, as well as our earnings and stockholders’ equity. We use derivative instruments to manage some of our interest rate risk in our long-term mortgage portfolio. However, we do not attempt to hedge interest rate risk completely. To help mitigate some of the exposure to the effect of changing interest rates on cash flows on securitized mortgage borrowings, we utilize derivative instruments primarily in the form of interest rate swap agreements (swaps) and, to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). These derivative instruments are recorded at fair value in the consolidated balance sheets. For non-exchange traded contracts, fair value is based on the amounts that would be required to settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available. To the extent observable market inputs are not available, fair value measurements include our judgment about future cash flows, forward interest rates and certain other factors, including counterparty risk. Additionally, these values also take into account our own credit standing, to the extent applicable; thus, the valuation of the derivative instrument includes the estimated value of the net credit differential between the counterparties to the derivative contract. At December 31, 2014, derivative liabilities were $5.4 million and reflect the securitization trust’s liability to pay third-party counterparties based on the estimated value to settle the derivative instruments. Cash payments on these derivative instruments are based on notional amounts that are decreasing over time. Excluding the effects of other factors such as portfolio delinquency and loss severities within the securitization trusts, as the notional amount of these derivative instruments decrease over time, payments to counterparties in the current interest rate environment are reduced, thereby potentially increasing cash flows on our residual interests in securitizations. Conversely, increases in interest rates from current levels could potentially reduce overall cash flows on our residual interests in securitizations. Since our consolidated and unconsolidated securitization trusts are nonrecourse to us, our economic risk is limited to our residual interests in these securitization trusts. We are also subject to interest rate risk on our long-term debt (consisting of trust preferred securities and junior subordinated notes). These interest bearing liabilities include adjustable rate periods based on three- month LIBOR (trust preferred securities and junior subordinated notes). We do not currently hedge our exposure to the effect of changing interest rates related to these interest-bearing liabilities. Significant fluctuations in interest rates could have a material adverse effect on our business, financial condition, results of operations or liquidity. Credit Risk We provide representations and warranties to purchasers and insurers of the loans sold that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us unless we have recourse to our correspondent seller. We maintain a reserve for losses on loans repurchased or indemnified as a result of breaches of representations and warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity payments, actual losses on repurchased loans, and recovery history, among other factors. Our assumptions are affected by factors both internal and external in nature. Internal factors include, among other things, level of loan sales, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to 52 recover any losses from third parties. External factors that may affect our estimate includes, among other things, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economy. Many of the factors are beyond our control and may lead to judgments that are susceptible to change. Counterparty Credit Risk. We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. We monitor the credit ratings of our counterparties and currently do not anticipate losses due to counterparty non-performance. Credit Risk-Securitized Trusts. We manage credit risk by actively managing delinquencies and defaults through our servicers. Starting with the second half of 2007 we have not retained any additional Alt-A mortgages in our long-term mortgage portfolio. Our securitized mortgage collateral primarily consists of Alt-A mortgages which when originated were generally within typical Fannie Mae and Freddie Mac guidelines but had loan characteristics, which may have included higher loan balances, higher loan- to-value ratios or lower documentation requirements (including stated-income loans), that made them non-conforming under those guidelines. Using historical losses, current portfolio statistics and market conditions and available market data, we have estimated future loan losses on the long- term mortgage portfolio, which are included in the fair value adjustment to our securitized mortgage collateral. While the credit performance for the loans has been clearly far worse than our initial expectations when the loans were originated, the ultimate level of realized losses will largely be influenced by events that will likely unfold over the next several years, including the recovery of the housing market and overall strength of the economy. If market conditions continue to deteriorate in excess of our expectations, we may need to recognize additional fair value reductions to our securitized mortgage collateral, which may also affect the value of the related securitized mortgage borrowings and residual interests. We monitor our servicers to attempt to ensure that they perform loss mitigation, foreclosure and collection functions according to their servicing practices and each securitization trust’s pooling and servicing agreement. We have met with the management of our servicers to assess our borrowers’ current ability to pay their mortgages and to make arrangements with selected delinquent borrowers which will result in the best interest of the trust and borrower, in an effort to minimize the number of mortgages which become seriously delinquent. When resolving delinquent mortgages, servicers are required to take timely action. The servicer is required to determine payment collection under various circumstances, which will result in the maximum financial benefit. This is accomplished by either working with the borrower to bring the mortgage current by modifying the loan with terms that will maximize the recovery or by foreclosing and liquidating the property. At a foreclosure sale, the trusts consolidated on our balance sheet generally acquire title to the property. Real Estate Risk Residential property values are subject to volatility and may be negatively affected by numerous factors, including, but not limited to, national, regional and local economic conditions such as unemployment and interest rate environment; local real estate conditions including housing inventory and foreclosures; and demographic factors. Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could cause us to suffer losses. Prepayment Risk We historically used prepayment penalties as a method of partially mitigating prepayment risk for those borrowers that have the ability to refinance. The recent economic downturn, lack of available 53 credit and declines in property values have limited borrowers’ ability to refinance. These factors have significantly reduced prepayment risk within our long-term mortgage portfolio. With the seasoning of the long-term mortgage portfolio, a significant portion of prepayment penalties terms have expired, thereby further reducing prepayment penalty income. Prepayment speed is a measurement of how quickly UPB is reduced. Items reducing UPB include normal monthly loan principal payments, loan refinancings, voluntary property sales and involuntary property sales such as foreclosures or short sales. Prepayment speed impacts future servicing fees, fair value of mortgage servicing rights and float income. When prepayment speed increases, our servicing fees decrease faster than projected due to the shortened life of a portfolio. Faster prepayment speeds will cause our mortgage servicing rights fair value to decrease. Liquidity Risk We are exposed to liquidity risks relating to our ongoing mortgage lending operations. We primarily fund our mortgage lending originations through warehouse facilities with third-party lenders. We primarily use facilities with national and regional banks. The warehouse facilities are secured by and used to fund single-family residential mortgage loans. In addition, the warehouse lenders require cash to be posted as additional collateral to secure the borrowings. In order to mitigate the liquidity risk associated with warehouse borrowings, we attempt to sell our mortgage loans within 10-15 days from acquisition or origination. Long-Term Portfolio Credit Quality We use the Mortgage Bankers Association (MBA) method to define delinquency as a contractually required payment being 30 or more days past due. We measure delinquencies from the date of the last payment due date in which a payment was received. Delinquencies for loans 60 days late or greater, foreclosures and delinquent bankruptcies were $1.4 billion or 20.3% of the long-term mortgage portfolio as of December 31, 2014, as compared to $1.7 billion or 22.4% as of December 31, 2013. The following table summarizes the unpaid principal balances of loans in our mortgage portfolio, included in securitized mortgage collateral, mortgage loans held-for-investment and mortgage loans 54 held-for-sale for continuing and discontinued operations combined, that were 60 or more days delinquent (utilizing the MBA method) as of the periods indicated: December 31, Collateral December 31, Collateral 2014 % 2013 % Total Total Mortgage loans held-for-sale and investment 60 - 89 days delinquent 90 or more days delinquent Foreclosures (1) Total 60+ days delinquent mortgage loans held-for-sale and investment (2) Securitized mortgage collateral 60 - 89 days delinquent 90 or more days delinquent Foreclosures (1) Delinquent bankruptcies (3) Total 60+ days delinquent long-term mortgage portfolio Total 60 or more days delinquent Total collateral $ $ $ $ - - - - 137,913 503,849 443,751 281,936 1,367,449 1,367,449 6,745,411 $ * * * * - - - - 2.0% $ 7.5% 6.5% 4.2% 180,002 580,318 605,201 340,102 20.3% 1,705,623 20.3% $ 1,705,623 100% $ 7,610,999 * * * * 2.4% 7.6% 8.0% 4.5% 22.4% 22.4% 100% * (1) (2) (3) Less than 0.1% Represents properties in the process of foreclosure. Represents legacy mortgage loans held-for-sale included in discontinued operations in the consolidated balance sheets. Represents bankruptcies that are 30 days or more delinquent. The following loans held-for-investment, mortgage loans held-for-sale and real estate owned, that were non-performing for continuing and discontinued operations combined as of the dates indicated (excludes 60-89 days delinquent): table summarizes securitized mortgage collateral, mortgage 90 or more days delinquent, foreclosures and delinquent bankruptcies Real estate owned Total non-performing assets December 31, Collateral December 31, Collateral 2014 % 2013 % Total Total $ $ 1,229,536 18,800 1,248,336 18.2% $ 0.4% 1,525,621 18,921 18.5% $ 1,544,542 20.0% 0.2% 20.3% Non-performing assets consist of non-performing loans (mortgages that are 90 or more days delinquent, including loans in foreclosure and delinquent bankruptcies) plus REO. It is the Company’s policy to place a mortgage on nonaccrual status when it becomes 90 days delinquent and to reverse from revenue any accrued interest, except for interest income on securitized mortgage collateral when the scheduled payment is received from the servicer. The servicers are required to advance principal and interest on loans within the securitization trusts to the extent the advances are considered recoverable. IFC, a subsidiary of IMH and master servicer, may be required to advance funds, or in most cases cause 55 the loan servicers to advance funds, to cover principal and interest payments not received from borrowers depending on the status of their mortgages. As of December 31, 2014, non-performing assets (unpaid principal balance of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) as a percentage of the total collateral was 18.5%. At December 31, 2013, non-performing assets to total collateral was 20.3%. Non-performing assets decreased by approximately $296.2 million at December 31, 2014 as compared to December 31, 2013. At December 31, 2014, the estimated fair value of non-performing assets (representing the fair value of loans 90 or more days delinquent, foreclosures and delinquent bankruptcies plus REO) was $410.3 million or 7.3% of total assets. At December 31, 2013, the estimated fair value of non-performing assets was $536.8 million or 9.4% of total assets. REO, which consists of residential real estate acquired in satisfaction of loans, is carried at the lower of cost or net realizable value less estimated selling costs. Adjustments to the loan carrying value required at the time of foreclosure are included in the change in the fair value of net trust assets. Changes in our estimates of net realizable value subsequent to the time of foreclosure and through the time of ultimate disposition are recorded as gains or losses from real estate owned in the consolidated statements of operations. For the year ended December 31, 2014, we recorded an increase in net realizable value of the REO in the amount of $7.6 million compared to an increase of $8.8 million for the comparable 2013 period. Increases and write-downs of the net realizable value reflect increases or declines in value of the REO subsequent to foreclosure date, but prior to the date of sale. The following table presents the balances of the REO for continuing operations: REO Impairment (1) Ending balance REO inside trusts REO outside trusts Total December 31, 2014 2013 $ $ $ $ 20,674 (1,874) 18,800 18,800 - 18,800 $ $ $ $ 23,601 (4,680) 18,921 18,906 15 18,921 (1) Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure. In calculating the cash flows to assess the fair value of the securitized mortgage collateral, we estimate the future losses embedded in our loan portfolio. In evaluating the adequacy of these losses, management takes many factors into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. The data is also broken down by collection status. Our estimate of losses for these loans is developed by estimating both the rate of default of the loans and the amount of loss severity in the event of default. The rate of default is assigned to the loans based on their attributes (e.g., original loan-to-value, borrower credit score, documentation type, geographic location, etc.) and collection status. The rate of default is based on analysis of migration of loans from each aging category. The loss severity is determined by estimating the net proceeds from the ultimate sale of the foreclosed property. The results of that analysis are then applied to the current mortgage portfolio and an estimate is created. We believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the future loan losses. 56 Management recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring losses in the loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors, employment and market conditions, competitor’s performance, market perception, historical losses, and industry statistics. The assessment for losses is based on delinquency trends and prior loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors affecting credit quality and inherent losses. Results of Operations For the year ended December 31, 2014 compared to the year ended December 31, 2013 Revenues Expenses Net interest income (expense) Change in fair value of long-term debt Change in fair value of net trust assets, including trust REO gains (losses) Income tax (expense) benefit from continuing operations Net loss from continuing operations Loss from discontinued operations, net Net loss Net earnings attributable to noncontrolling interest (1) Net loss attributable to IMH Loss per share available to common stockholders—basic and diluted Loss per share available to common stockholders—diluted $ $ $ $ For the year ended December 31, 2014 2013 (Decrease) Change Increase % 45,189 $ (56,035) 1,135 (4,014) 88,369 $ (89,960) (86) (687) (43,180) 33,925 1,221 (3,327) (49)% 38 1,420 (484) 11,063 (3,678) 14,741 401 (1,305) (3,967) (2,355) (6,322) 1,031 (5,011) (3,037) (8,048) - (136) (6,322) $ (8,184) $ (2,336) (227) 1,044 682 1,726 136 1,862 21 22 21 100 23% (0.68) $ (0.94) $ 0.26 28% (0.68) $ (0.94) $ 0.26 28% (1) For the year ended December 31, 2013, net earnings attributable to noncontrolling interest represents the portion of the earnings of AmeriHome Mortgage Corporation (a subsidiary of IMC) that we did not wholly-own, before we acquired 100% ownership of AmeriHome in 2013. 57 Revenues For the year ended December 31, 2014 2013 (Decrease) Change Increase % Gain on sale of loans, net Real estate services fees, net Servicing income, net (Loss) gain on mortgage servicing rights Other revenues Total revenues $ $ 29,308 $ 14,729 4,586 (5,116) 1,682 45,189 $ 57,188 $ 19,370 4,240 6,567 1,004 88,369 $ (27,880) (4,641) 346 (11,683) 678 (43,180) (49)% (24) 8 (178) 68 (49)% Gain on sale of loans, net. For the year ended December 31, 2014, gain on sale of loans, net was $29.3 million compared to $57.2 million in the comparable 2013 period. The $27.9 million decrease is primarily related to a $48.4 million increase in net direct loan origination expenses and a $28.2 million increase in realized and unrealized losses on derivative financial instruments, partially offset by a $30.8 million increase in premiums received from the sale of mortgage loans, a $9.8 million increase in mark-to-market gains and a $7.6 million increase in premiums from servicing retained loan sales. The overall decrease in gain on sale of loans, net was due to tighter lending spreads and gain on sale margins associated with $2.8 billion and $2.7 billion of loans originated and sold, respectively, during 2014, as compared to $2.5 billion and $2.5 billion of loans originated and sold, respectively, during 2013. Margins fell to 1.03% for during the year ended December 31, 2014 as compared to 2.24% for 2013. Real estate services fees, net. For the year ended December 31, 2014, real estate services fees, net were $14.7 million compared to $19.4 million in the comparable 2013 period. The $4.6 million decrease was primarily the result of a decrease in transactions related to the decline in loans and the balance of the long-term mortgage portfolio. Servicing income, net. For the year ended December 31, 2014, servicing income, net was $4.6 million compared to $4.2 million in the comparable 2013 period. The slight increase in servicing income, net was primarily the result of the servicing portfolio increasing to an average balance of $2.3 billion for the year ended December 31, 2014 as compared to an average balance of $2.2 billion for the same period in 2013. (Loss) gain on mortgage servicing rights. For the year ended December 31, 2014, loss on mortgage servicing rights was $5.1 million compared to gains of $6.6 million in the comparable 2013 period. The loss on mortgage servicing rights was primarily the result of a ($6.2) million change in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to $6.5 million for the same period in 2013. Partially offsetting the change in fair value was a $1.1 million gain on the sale of mortgage servicing rights during 2014, as compared to a $77 thousand gain during the same period in 2013. Other revenues. For the year ended December 31, 2014, other revenues were $1.7 million compared to $1.0 million in the comparable 2013 period. The increase in other revenue was due to the sale of AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain, partially offset by a $600 thousand reduction in investment income. Additionally, during 2014, there was an $84 thousand increase from the issuance of a warrant in our subsidiary Impac Mortgage Corp to facilitate our ability to offer Non-QM mortgage products. 58 Expenses Personnel expense General, administrative and other Occupancy expense Legal and professional expense Total expenses For the year ended December 31, 2014 2013 (Decrease) Change Increase % $ $ 37,398 $ 10,505 5,562 2,570 56,035 $ 64,769 $ 14,805 6,432 3,954 89,960 $ (27,371) (4,300) (870) (1,384) (33,925) (42)% (29) (14) (35) (38)% Total expenses were $56.0 million for the year ended December 31, 2014, compared to $90.0 million for the comparable period of 2013. Personnel expenses decreased $27.4 million to $37.4 million during 2014 primarily due to a reduction in personnel related costs due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013 as well as a decrease in commission expense due to a shift to correspondent and wholesale lending. The average number of employees declined to 323 during 2014 as compared to 586 during the same period in 2013. General, administrative and other expenses decreased to $10.5 million for the year ended December 31, 2014, compared to $14.8 million for the same period in 2013. The $4.3 million decrease was primarily related to a decline in marketing, equipment and other expenses attributable to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013. Occupancy expense decreased to $5.6 million for the year ended December 31, 2014, compared to $6.4 million for the same period in 2013. Occupancy expense decreased due to a reduction in costs associated with the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013. Legal and professional expense decreased to $2.6 million for the year ended December 31, 2014, compared to $4.0 million for the same period in 2013. The $1.4 million decrease was primarily related to legal costs associated with a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013. Other Income (Expense) For the year ended December 31, 2014 2013 (Decrease) Change Increase % Interest income Interest expense Change in fair value of long-term debt Change in fair value of net trust assets, including trust REO gains (losses) Total other income (expense) $ $ 295,656 $ (294,521) (4,014) 310,391 $ (310,477) (687) 11,063 (3,678) 8,184 $ (4,451) $ (14,735) 15,956 (3,327) 14,741 12,635 (5)% 5 (484) 401 284% 59 Net Interest Income (Expense) We earn net interest income primarily from mortgage assets which include securitized mortgage collateral, mortgage loans held-for-sale and investment securities available-for-sale, or collectively, ‘‘mortgage assets,’’ and, to a lesser extent, interest income earned on cash and cash equivalents. Interest expense is primarily interest paid on borrowings secured by mortgage assets, which include securitized mortgage borrowings and warehouse borrowings and to a lesser extent, interest expense paid on long-term debt, Convertible Notes, notes payable and line of credit. Interest income and interest expense during the period primarily represents the effective yield, based on the fair value of the trust assets and liabilities. The following tables summarize average balance, interest and weighted average yield on interest- earning assets and interest-bearing liabilities, included within continuing operations, for the periods indicated. Cash receipts and payments on derivative instruments hedging interest rate risk related to our securitized mortgage borrowings are not included in the results below. These cash receipts and payments are included as a component of the change in fair value of net trust assets. For the year ended December 31, 2014 2013 Average Balance Interest Yield Average Balance Interest Yield ASSETS Securitized mortgage collateral Mortgage loans held-for-sale Other $ 5,413,104 $ 289,603 5,875 178 136,651 13,994 5.35% $ 5,640,115 $ 305,837 4,482 116,701 4.30% 72 13,751 1.27% 5.42% 3.84% 0.52% Total interest-earning assets $ 5,563,749 $ 295,656 5.31% $ 5,770,567 $ 310,391 5.38% LIABILITIES Securitized mortgage borrowings Warehouse borrowings Long-term debt Convertible notes Note payable Other Total interest-bearing liabilities Net Interest Spread (1) Net Interest Margin (2) 5.34% 5.25% $ 5,633,007 $ 300,524 $ 5,410,742 $ 283,951 4,472 111,335 4,616 4.02% 3.37% 4,050 28.40% 14,261 4,270 24.56% 7.73% 13,534 7.74% 1,548 1,046 303 34.20% 886 0.00% - 5.67% 1,446 3.90% 136 136,789 17,386 20,000 - 3,486 82 $ 5,588,403 $ 294,521 5.27% $ 5,774,469 $ 310,477 5.38% $ 1,135 0.04% 0.02% $ (86) 0.00% 0.00% (1) (2) Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets. Net interest margin is calculated by dividing net interest spread by total average interest-earning assets. Net interest income spread increased $1.2 million for the year ended December 31, 2014 primarily attributable to an increase in net interest spread on the long-term mortgage portfolio due to increases in yields between periods on securitized mortgage collateral and securitized mortgage borrowings as well as a decrease in the balance of the long-term mortgage portfolio and an increase in the net interest spread between loans held-for-sale and warehouse borrowings. Partially offsetting the increase in net 60 interest spread was the increase in interest expense associated with the long-term debt and issuance of the Convertible Notes during 2013. As a result, net interest margin increased to 0.02% for the year ended December 31, 2014 from 0.00% for the year ended December 31, 2013. During the year ended December 31, 2014, the yield on interest-earning assets decreased to 5.31% from 5.38% in the comparable 2013 period. The yield on interest-bearing liabilities decreased to 5.27% for the year ended December 31, 2014 from 5.38% for the comparable 2013 period. In connection with the fair value accounting for investment securities available-for- sale, securitized mortgage collateral and borrowings and long-term debt, interest income and interest expense is recognized using effective yields based on estimated fair values for these instruments. The decrease in yield for securitized mortgage collateral and securitized mortgage borrowings is primarily related to increased prices on mortgage-backed bonds which resulted in a decrease in yield. Bond prices received from pricing services and other market participants have increased over the past few quarters as investor’s demand for mortgage-backed securities has increased. This has resulted in an increase in fair value for both securitized mortgage collateral and securitized mortgage borrowings. These increases in fair value have decreased the effective yields used for purposes of recognizing interest income and interest expense on these instruments. Change in the fair value of long-term debt Change in the fair value of long-term debt was a loss of $4.0 million for the year ended December 31, 2014, compared to a loss of $687 thousand for the comparable 2013 period as a result of the increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a decrease in the discount rate due to a reduction in market yields on similar instruments and an improvement in our own credit risk profile as well as a decrease in forward LIBOR interest rates during 2014 as compared to 2013. Long-term debt (consisting of trust preferred securities and junior subordinated notes) is measured based upon an analysis prepared by the Company, which considers the Company’s own credit risk and discounted cash flow analyses. Improvements in financial results and financial condition of the Company in the future could result in additional increases in the estimated fair value of the long-term debt. Change in fair value of net trust assets, including trust REO gains (losses) Change in fair value of net trust assets, excluding REO Gains from REO Change in fair value of net trust assets, including trust REO gains (losses) For the year ended December 31, 2014 2013 $ 3,482 7,581 $ (12,494) 8,816 $ 11,063 $ (3,678) The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $11.1 million for the year ended December 31, 2014, compared to a loss of $3.7 million in the comparable 2013 period. The change in fair value of net trust assets, including REO was primarily due to a $7.6 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Additionally, the change in fair value of net trust assets, including REO was due to $3.5 million in gains from changes in fair value of investment securities securitized mortgage borrowings, securitized mortgage collateral and 61 available-for-sale primarily associated with updating assumptions of decreased severities in the future and lower interest rates. For the year ended December 31, 2013, the ($3.7) million change in fair value of net trust assets, including REO was due to $12.5 million in losses from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of increased collateral losses in the future and higher interest rates. Partially offsetting the loss was an $8.8 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Income Taxes In accordance with FASB ASC 810-10-45-8, we record a deferred charge representing income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge is amortized and/or impaired, which does not result in any tax liability to be paid. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statement of operations. The Company recorded a tax expense in 2014 in the amount of $453 thousand related to the deferred charge impairment, which did not result in any tax liability to be paid. We recorded income tax expense (benefit) of $1.3 million and $(1.0) million for the years ended December 31, 2014 and 2013, respectively. The income tax expense for 2014 is primarily the result of the federal alternative minimum tax (AMT), amortization of the deferred charge and state income taxes from states where the Company does not have net operating loss carryforwards or there are state minimum states, including AMT. The income tax benefit for 2013 is the result of the inclusion of AmeriHome in the IMH federal income tax return due to the Company’s increased ownership of AmeriHome during the first quarter of 2013. Additionally, federal alternative minimum tax was expensed during 2013. We are subject to federal income taxes as a regular (Subchapter C) corporation and file a consolidated U.S. federal income tax return for qualifying subsidiaries. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets through carry back to prior periods; (3) anticipated taxable income resulting from the reversal of taxable temporary differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary differences. We have significant NOL carry-forwards from prior years. At December 31, 2014 and 2013, we have recognized a full valuation allowance against these NOL carry- forwards in our consolidated balance sheets. However, as a result of the announced acquisition of the CashCall mortgage operations in the first quarter of 2015, we will reevaluate our ability to generate taxable income to determine our ability to recognize our deferred tax assets and the need for the full valuation allowance which could result in future tax benefits. 62 Results of Operations by Business Segment Mortgage Lending Condensed Statements of Operations Data Gain on sale of loans, net Servicing income, net (Loss) gain on mortgage servicing rights Other $ Total revenues Other income Personnel expense General, administrative and other For the year ended December 31, 2014 2013 (Decrease) Change Increase % 29,308 $ 4,586 (5,116) 1,311 30,089 1,353 (27,729) (7,582) 57,188 $ 4,240 6,567 191 68,186 (27,880) 346 (11,683) 1,120 (38,097) (49)% 8 (178) 586 (56) 4 1,349 33,725 (55,504) (13,787) 27,775 6,205 50 45 Net loss before income taxes $ (3,869) $ (1,101) $ (2,768) (251)% For the year ended December 31, 2014, gain on sale of loans, net were $29.3 million or 1.03% compared to $57.2 million or 2.24% in the comparable 2013 period. The $27.9 million decrease is primarily related to a $48.4 million increase in net direct loan origination expenses and a $28.2 million increase in realized and unrealized losses on derivative financial instruments, partially offset by a $30.8 million increase in premiums received from the sale of mortgage loans, a $9.8 million increase in mark-to-market gains on loans held for sale and a $7.6 million increase in premiums from servicing retained loan sales. The decrease in gain on sale of loans, net was due to tighter lending spreads and gain on sale margins associated with $2.8 billion and $2.7 billion of loans originated and sold, respectively, during the year ended December 31, 2014, as compared to $2.5 billion and $2.5 billion of loans originated and sold, respectively, during the same period in 2013. For the year ended December 31, 2014, servicing income, net was $4.6 million compared to $4.2 million in the comparable 2013 period. The increase in servicing income, net was primarily the result of the servicing portfolio slightly increasing to an average balance of $2.3 billion for the year ended December 31, 2014 as compared to an average balance of $2.2 billion for the same period in 2013. During 2014, we retained servicing rights on $2.7 billion in loan sales as well as sold $2.6 billion of UPB of servicing rights. Additionally, servicing income, net increased due to a reduction in loss mitigation costs primarily associated with the sale of AmeriHome in 2014. Servicing income, net includes certain loss mitigation costs associated with the acquired servicing portfolio from the 2010 acquisition of AmeriHome, which was sold in the first quarter of 2014. For the year ended December 31, 2014, loss on mortgage servicing rights was $5.1 million compared to a gain of $6.6 million in the comparable 2013 period. For the year ended December 31, 2014, (loss) gain on mortgage servicing rights was primarily the result of a $6.2 million reduction in fair value of mortgage servicing rights due to an increase in prepayment speed assumptions as a result of a decrease in interest rates during the period as compared to a $6.5 million increase for the same period in 2013. Partially offsetting the change in fair value was a $1.1 million gain on the sale of mortgage servicing rights during 2014, as compared to $77 thousand during the same period in 2013. For the year ended December 31, 2014, other revenues were $1.3 million compared to $191 thousand in the comparable 2013 period. The increase in other revenue was due to the sale of 63 AmeriHome during the first quarter of 2014 resulting in a $1.2 million gain. Additionally, other revenue includes a mark-to-market gain of $84 thousand during the year related to the issuance of a warrant, during the third quarter of 2014, in our subsidiary Impac Mortgage Corp to facilitate our ability to offer Non-QM mortgage products. For the year ended December 31, 2014 other income increased to $1.3 million as compared to $4 thousand for the comparable 2013 period. The $1.3 million increase in other income was primarily due to an increase in the net interest spread between loans held-for-sale and warehouse borrowings. As a result of the decrease in interest rates in 2014 as well as re-negotiated terms on our warehouse lines, the net spread between the interest earned on loans held-for-sale and the interest expense on the warehouse borrowings increased from $10 thousand in 2013 to $1.3 million in 2014. For the year ended December 31, 2014 personnel expense decreased to $27.7 million as compared to $55.5 million for the comparable 2013 period. The $27.8 million decrease in personnel expense was primarily due to the sale of our retail branch offices and consolidation of our lending fulfillment centers in the fourth quarter of 2013, reducing staffing to a level appropriate for our lending volumes. The average number of mortgage lending employees declined to 200 during 2014 as compared to 468 in 2013. Additionally, the decrease is also related to a reduction in commission expense due to a shift to correspondent and wholesale lending. For the year ended December 31, 2014, general, administrative and other expense decreased to $7.6 million from $13.8 million in the comparable 2013 period. The $6.2 million decrease in general, administrative and other expense is primarily related to reductions in occupancy, legal and professional fees and other marketing costs primarily attributable to the sale of our retail branches during the fourth quarter of 2013. The reduction in legal and professional fees is primarily due to a non-operational $700 thousand legal settlement expense recorded during the first quarter of 2013. Real Estate Services For the year ended December 31, 2014 2013 (Decrease) Change Increase % Real estate services fees, net $ 14,729 $ 19,370 $ (4,641) (24)% Other income (expense) Personnel expense General, administrative and other (5) (5,250) (802) 19 (5,317) (822) (24) 67 20 (126) 1 2 Net earnings before income taxes $ 8,672 $ 13,250 $ (4,578) (35)% For the year ended December 31, 2014, real estate services fees, net were $14.7 million compared to $19.4 million in the comparable 2013 period. The $4.6 million decrease in real estate services fees, net was the result of a $3.0 million decrease in real estate and recovery fees, $1.5 million decrease in loss mitigation fees and a $160 thousand decrease in real estate services. These reductions are primarily due to the expected decline in the outstanding balance of the long-term mortgage portfolio. For the year ended December 31, 2014, personnel expense and general, administrative and other expense remained relatively flat as compared to 2013. 64 Long-Term Mortgage Portfolio For the year ended December 31, 2014 2013 (Decrease) Change Increase % Other revenue $ 371 $ Personnel expense General, administrative and other Total expenses Net interest income Change in fair value of long-term debt Change in fair value of net trust assets, including trust REO losses Total other income (expense) (342) (582) (924) 1,407 (4,014) 11,063 8,456 833 (1,014) (699) (1,713) 994 (687) (3,678) (3,371) Net earnings (loss) before income taxes $ 7,903 $ (4,251) $ (462) (55)% 672 117 789 66 17 46 413 (3,327) 42 (484) 14,741 11,827 12,154 401 351 286% For the year ended December 31, 2014, other revenue totaled $371 thousand as compared to $833 thousand for the comparable 2013 period. The $462 thousand decrease is primarily due to a $558 thousand decrease in investment earnings partially offset by an $87 thousand increase in master servicing revenue earned on the long-term mortgage portfolio. For the year ended December 31, 2014, personnel expense was $342 thousand as compared to $1.0 million for the comparable 2013 period. The $672 thousand decrease in personnel expense was primarily due to a decrease in allocated personnel expenses associated with ongoing activities in the long-term mortgage portfolio associated with a decline in loans and balances of the long-term mortgage portfolio. For the year ended December 31, 2014, general, administrative and other expense decreased to $582 thousand as compared to $699 thousand for the comparable 2013 period. The $117 thousand decrease in general, administrative and other expense for the year ended December 31, 2014 is related to a decrease in legal and professional fees associated with the long-term mortgage portfolio. For the year ended December 31, 2014, net interest income totaled $1.4 million as compared to $994 thousand for the comparable 2013 period. The $413 thousand increase was primarily attributable to a $339 thousand increase in net interest spread on the long-term mortgage portfolio due to an improvement in net interest income and cash flows in the earlier vintage trusts which include our residual interests. Additionally, net interest income increased $303 thousand due to a decrease in interest expense on the note payable due to the repayment of the note in April 2013. Partially offsetting the increase in net interest income was an increase in interest expense on the long-term debt of $220 thousand. Change in the fair value of long-term debt was a loss of $4.0 million for the year ended December 31, 2014, compared to a loss of $687 thousand for the comparable 2013 period as a result of the increase in the estimated fair value of long-term debt. The increase in the estimated fair value of long-term debt was primarily the result of a reduction in market yields on similar instruments and an improvement in our own credit risk profile as well as a decrease in forward LIBOR interest rates during 2014 as compared to 2013. 65 The change in fair value related to our net trust assets (residual interests in securitizations) was a gain of $11.1 million for the year ended December 31, 2014, compared to a loss of $3.7 million in the comparable 2013 period. The change in fair value of net trust assets, including REO was due primarily to a $7.6 million increase in NRV of REO during the period attributed to lower expected loss severities on properties held in the long-term mortgage portfolio during the period. Additionally, the change in fair value of net trust assets, including REO was due to $3.5 million in gains from changes in fair value of securitized mortgage borrowings, securitized mortgage collateral and investment securities available-for-sale primarily associated with updating assumptions of decreased severities in the future and lower interest rates. Corporate Interest expense Other expenses Net loss before income taxes For the year ended December 31, 2014 2013 (Decrease) Change Increase % $ $ (1,620) $ (13,748) (1,104) (12,836) (516) (912) (47) (7) (15,368) $ (13,940) $ (1,428) (10)% For the year ended December 31, 2014, interest expense totaled $1.6 million as compared to $1.1 million for the comparable 2013 period. Interest expense increased $516 thousand for the year ended December 31, 2014 primarily attributable to a $502 thousand increase in interest expense on the $20.0 million Convertible Notes as they were issued in April 2013. Additionally, interest expense from the line of credit increased $14 thousand during 2014 as compared to 2013. For the year ended December 31, 2014, expenses increased to $13.7 million as compared to $12.8 million for the comparable 2013 period. The increase was primarily due to non-cash lease impairment charge and a net reduction in allocated corporate expenses. With the further consolidation of the mortgage lending and real estate services operations in the first quarter of 2014, the Company recorded a non-cash lease impairment charge of $548 thousand for the space that we no longer used and expect to sublease in the future. Additionally, the sale of the retail branch network and closure of the lending fulfillment center at the end of 2013 resulted in a reduced allocation of certain fixed corporate costs due to reduced headcount primarily in mortgage lending and the associated reductions in business operations. The combination of the two resulted in a net increase in expenses recorded in the corporate segment. Discontinued Operations For the year ended December 31, 2014 2013 (Decrease) Change Increase % Provision for repurchases General, administrative and other Net loss after income taxes $ $ (1,063) $ (1,292) (2,355) $ (1,312) $ (1,725) (3,037) $ 249 433 682 19% 25 22% Provision for repurchases decreased $249 thousand to a provision of $1.1 million for the year ended December 31, 2014, compared to a provision of $1.3 million for the same period in 2013. The decrease is the result of decreases in estimated repurchase losses during 2014 related to repurchase claims received from Fannie Mae as compared to the same period in 2013. During 2014, we paid 66 approximately $5.3 million to settle previous repurchase claims related to our previously discontinued operations and such amount was charged against the reserve. For the year ended December 31, 2014, general, administrative and other expense decreased to $1.3 million as compared to $1.7 million for the comparable 2013 period. During 2014, we incurred approximately $1.8 million in legal expenses and $448 thousand in occupancy expense for various matters pertaining to the discontinued non-conforming mortgage operations. Partially offsetting the legal expenses was a $950 thousand recovery from a settlement associated with previous litigation matters. Liquidity and Capital Resources Our results of operations and liquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, as well as the broader financial markets and the general economy. Concerns over economic recession, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and real estate market conditions contribute to increased volatility and diminished expectations for the economy and markets. Volatility and uncertainty in the marketplace may make it more difficult for us to obtain financing on favorable terms or at all. Our operations and profitability may be adversely affected if we are unable to obtain cost-effective financing. We believe that current cash balances, cash flows from our mortgage lending operations, the sale of mortgage servicing rights, real estate services fees generated from our long-term mortgage portfolio, and residual interest cash flows from our long-term mortgage portfolio are adequate for our current operating needs. However, we believe the mortgage and real estate services market is volatile, highly competitive and subject to increased regulation. Competition in mortgage lending comes primarily from mortgage bankers, commercial banks, credit unions and other finance companies which have offices in our market area as well as operations throughout the United States. We compete for loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality of services we provide to borrowers. Additionally, competition for loss mitigation servicing, loan modification services and other portfolio services has increased due to the difficult mortgage environment, credit tightening and an uncertain economy. Our competitors include mega mortgage servicers, established subprime loan servicers, and newer entrants to the specialty servicing and recovery collections business. Efforts to market our ability to provide mortgage and real estate services for others is more difficult than many of our competitors because we have not historically provided such services to unrelated third parties, and we are not a rated primary or special servicer of residential mortgage loans as designated by a rating agency. Additionally, performance of the long-term mortgage portfolio is subject to the current real estate market and economic conditions. Cash flows from our residual interests in securitizations are sensitive to delinquencies, defaults and credit losses associated with the securitized loans. Losses in excess of current estimates will reduce the residual interest cash receipts from our long-term mortgage portfolio. While we continue to pay our obligations as they become due, the ability to continue to meet our current and long-term obligations is dependent upon many factors, particularly our ability to successfully operate our mortgage lending segment, real estate services segment and realizing cash flows from the long-term mortgage portfolio. Our future financial performance and success are dependent in large part upon the ability to expand our mortgage lending platform and profitability. In order to support the continued growth of our mortgage lending platform, including the expected increase in volume due to the acquisition of CashCall mortgage operations, we will continue to consider sales of mortgage servicing rights, financing of unencumbered assets and opportunities to raise capital by issuing debt or equity. 67 Sources of Liquidity Cash flows from our mortgage lending operations. We receive loan fees from loan originations. Fee income consists of application and underwriting fees and fees on cancelled loans. These loan fees are offset by the related direct loan origination costs including broker fees related to our wholesale and correspondent channels. In addition, we generally recognize net interest income on loans held for sale from the date of origination through the date of disposition. We sell or securitize substantially all of the loans we originate in the secondary mortgage market, with servicing rights released or retained. Loans are sold on a whole loan basis by entering into sales transactions with third-party investors in which we receive a premium for the loan and related servicing rights, if applicable. The mortgage lending operations sold $2.7 billion of mortgages through whole loan sales and securitizations during 2014. Additionally, the mortgage lending operations enter into interest rate lock commitments (IRLCs) and utilize forward sold Fannie Mae and Ginnie Mae mortgage-backed securities (Hedging Instruments) to hedge interest rate risk. We may be subject to pair-off gains and losses associated with these hedging instruments. Since we rely significantly upon loan sales to generate cash proceeds to repay warehouse borrowings and to create credit availability, any disruption in our ability to complete sales may require us to utilize other sources of financing, which, if available at all, may be on less favorable terms. In addition, delays in the disposition of our mortgage loans increase our risk by exposing us to credit and interest rate risk for this extended period of time. We receive servicing income net of subservicing cost and other related servicing expenses from our mortgage servicing portfolio. Additionally, we strategically sell MSRs to generate liquidity, keep the amount of capital invested in MSRs at acceptable levels and provide capital needed for further growth. During 2014, our mortgage servicing portfolio declined to $2.3 billion at December 31, 2014, as compared to $3.1 billion at December 31, 2013. This decline was due to servicing sales of $2.6 billion in the first nine months of 2014. Despite the decline in our servicing portfolio during 2014, servicing income, net increased to $4.6 million as compared to $4.3 million in 2013 due to the increase in average balance of our servicing portfolio to $2.3 billion in 2014 compared to $2.2 billion in 2013. Fees from our mortgage and real estate service business activities. We earn fees from various mortgage and real estate business activities, including mortgage lending, loss mitigation, real estate disposition, monitoring and surveillance services and real estate brokerage. We provide services to investors, servicers and individual borrowers primarily by focusing on loss mitigation and performance of our long-term mortgage portfolio. Cash flows from our long-term mortgage portfolio (residual interests in securitizations). We receive residual cash flows on mortgages held as securitized mortgage collateral after distributions are made to investors on securitized mortgage borrowings to the extent required credit enhancements are maintained and performance covenants are complied with for credit ratings on the securitized mortgage borrowings. These cash flows represent the difference between principal and interest payments on the underlying mortgages, affected by the following: (cid:127) servicing and master servicing fees paid; (cid:127) premiums paid to mortgage insurers; (cid:127) cash payments / receipts on derivatives; (cid:127) interest paid on securitized mortgage borrowings; (cid:127) principal payments and prepayments paid on securitized mortgage borrowings; (cid:127) overcollateralization requirements; 68 (cid:127) actual losses, net of any gains incurred upon disposition of other real estate owned or acquired in settlement of defaulted mortgages; (cid:127) unpaid interest shortfall; (cid:127) basis risk shortfall; and (cid:127) bond write-downs reinstated. Prior to 2013, certain residuals were pledged as collateral for a note payable, which was repaid in April 2013. Residual cash flows were used to make principal and interest payments (See further details below under Structured Debt Agreement.) In December 2014, certain residuals were pledged again as collateral for short-term structured debt. Residual cash flows are being used to make principal and interest payments for such debt payments (See further details below under Financing Activities.) Additionally, we act as the master servicer for mortgages included in our CMO and REMIC securitizations. The master servicing fees we earn are generally 0.03% per annum (3 basis points) on the declining principal balances of these mortgages plus interest income on cash held in custodial accounts until remitted to investors, less any interest shortfall. However, due to the decline in interest rates, the interest income earned on cash held in custodial accounts has declined significantly. We are negotiating the terms for a new working capital facility to provide liquidity for warehouse haircuts and capitalization of MSRs associated with the growth expected from the acquisition of the mortgage operations of CashCall. Our goal is to complete the negotiation, execute the agreement and have the facility operational in April 2015. Uses of Liquidity Acquisition and origination of mortgage loans. During 2014, the mortgage lending operations originated or acquired $2.8 billion of mortgage loans. Capital invested in mortgages is outstanding until we sell the loans, which is one of the reasons we attempt to sell within 10-15 days of acquisition or origination. Initial capital invested in mortgage loans includes premiums paid when mortgages are acquired and originated and our capital investment, or ‘‘haircut,’’ required upon financing, which is generally determined by the type of collateral provided and the warehouse facility terms. The mortgage lending operations acquired and originated $2.8 billion of residential mortgages, which were financed with warehouse borrowings at a haircut generally between 2% to 10% of the outstanding principal balance of the mortgage loans. The haircuts are normally recovered from sales proceeds. With the expected future increase in origination volumes we will be required to use additional capital for haircuts and increase our restricted cash balances with our warehouse lenders. At December 31, 2014, we had $1.8 million in restricted cash posted as additional collateral as compared to $1.1 million at December 31, 2013. Investment in mortgage servicing rights. As part of our business plan, we invest in mortgage servicing rights through the sale of mortgage loans on a servicing retained basis. During 2014, we capitalized $29.4 million in mortgage servicing rights from selling $2.7 billion in loans with servicing retained. Partially offsetting this investment was the sale of $34.7 million in servicing rights ($3.3 billion of mortgage loans) from the servicing portfolio. Cash flows from financing facilities and other lending relationships. We primarily fund our mortgage originations through warehouse facilities with third-party lenders which are primarily with national and regional banks. During 2014, the warehouse facilities borrowing capacity amounted to $415.0 million, of which $226.7 million was outstanding at December 31, 2014. The warehouse facilities are secured by and used to fund single-family residential mortgage loans until such loans are sold. The 69 warehouse facilities agreements contain certain covenants which we are required to satisfy. In order to mitigate the liquidity risk associated with warehouse borrowings, we attempt to sell our mortgage loans within 10-15 days from acquisition or origination. In addition to the warehouse facilities, we have borrowing capacity up to $4.0 million on a Line of Credit. There was a $4.0 million outstanding balance on the Line of Credit at December 31, 2014. In December 2014, we entered into a $6.0 million short-term structured debt agreement to finance our residual interests. During 2013, we raised additional capital with the issuance of $20.0 million in Convertible Notes. Our ability to meet liquidity requirements and the financing needs of our customers is subject to the renewal of our warehouse facilities or obtaining other sources of financing, if required, including additional debt or equity from time to time. Any decision our lenders or investors make to provide available financing to us in the future will depend upon a number of factors, including: (cid:127) our compliance with the terms of existing warehouse lines and credit arrangements, including any financial covenants; (cid:127) the ability to obtain waivers upon any noncompliance; (cid:127) our financial performance; (cid:127) industry and market trends in our various businesses; (cid:127) the general availability of, and rates applicable to, financing and investments; (cid:127) our lenders or investors resources and policies concerning loans and investments; and (cid:127) the relative attractiveness of alternative investment or lending opportunities. Repurchase Reserve. When we sell loans through whole loan sales we are required to make normal and customary representations and warranties about the loans to the purchaser. Our whole loan sale agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. Investors have requested us to repurchase loans or to indemnify them against losses on certain loans which the investors believe either do not comply with applicable representations or warranties or defaulted shortly after its purchase. The Company records an estimated reserve for these losses at the time the loan is sold, and adjusts the reserve to reflect the estimated loss. During 2014, we paid approximately $5.3 million to settle previous repurchase claims related to our discontinued operations. Financing Activities Structured Debt Agreement (Note Payable). In February 2012, we refinanced the existing debt with the lender and entered into a new $7.5 million structured debt agreement (Note Payable) using eight of our residual interests (net trust assets) as collateral. We received proceeds of $7.0 million, net of the aforementioned payoff of $408 thousand and transaction costs of approximately $50 thousand. In April 2013, we fully satisfied the remaining scheduled payments on the Note Payable and hence, the residuals listed as collateral were released to us. Short-Term Structured Debt. In December 2014, we entered into a $6.0 million short-term structured debt agreement using eight of our residual interests (net trust assets) as collateral. We received proceeds of $6.0 million and had transaction costs of approximately $60 thousand. The agreement bears interest at LIBOR + 5.75% per annum, has a final repurchase date of June 29, 2015 and 70 we have the right to repurchase the securities without penalty prior to the final repurchase date. The holder receives monthly principal and interest payments which are equal to the distributions from the residual interest underlying collateral with a minimum payment of $500,000. If the cash flows received from the collateralized residual interests are less than $500,000, we would be required to pay the difference to avoid the transfer of the residual interests and the rights to the associated future cash flows to the note holder. Convertible Notes. In April 2013, we raised $20.0 million from the issuance of Convertible Notes. The Convertible Notes accrue interest at a rate of 7.5% per annum to be paid quarterly and mature in April 2018. Note holders may convert all or a portion of the outstanding principal amount of the Convertible Notes to shares of IMH common stock at a rate of $10.875 per share, subject to adjustment for stock splits and dividends. We have the right to force a conversion if the stock price of IMH common stock reaches $16.3125 for 20 trading days during any period of 30 consecutive trading days. Working Capital Line of Credit (Line of Credit). In June 2014, we amended the $4.0 million working capital line of credit agreement with a national bank at an interest rate of one-month LIBOR plus 3.50% extending the expiration to June 2015. We make monthly interest payments based on the unpaid balance of the Line of Credit. Under the terms of the agreement we are required to maintain various financial and other covenants. There was a $4.0 million outstanding balance on the working capital line of credit as of December 31, 2014. Long-term Debt (Trust Preferred Securities and Junior Subordinated Notes). Trust Preferred Securities had an outstanding principal balance of $8.5 million at December 31, 2014 with a stated maturity of July 30, 2035. The Trust Preferred Securities require quarterly distributions initially at a fixed rate of 2.00% per annum through December 2013 with increases of 1.00% per year through 2017. Starting in 2018, the interest rates become variable at 3-month LIBOR plus 3.75% per annum. At December 31, 2014, the interest rate was 3.0%. The Junior Subordinated Notes are redeemable at par at any time after July 30, 2010 and requires quarterly distributions at a variable rate of three-month LIBOR plus 3.75% per annum. At December 31, 2014, the interest rate was 3.99%. The Junior Subordinated Notes had an outstanding principal balance of $62.0 million at December 31, 2014 with a stated maturity of March 2034. We are current on all interest payments. At December 31, 2014, Long-term Debt had an estimated fair value of $22.1 million and is reflected on our consolidated balance sheets as long-term debt. Operating activities. Net cash provided by operating activities was $30.0 million for 2014 as compared to $174.5 million for 2013 primarily due to the timing of originations and sales of loans held-for-sale between 2014 and 2013. During 2014 and 2013, the primary sources of cash in operating activities were cash received from fees generated by our mortgage and real estate service business activities, cash received from mortgage lending and excess cash flows from our residual interests in securitizations offset by operating expenses. Investing activities. Net cash provided by investing activities was $701.3 million for 2014 as compared to $787.2 million for 2013. For 2014 and 2013, the primary source of cash from investing activities was provided by principal repayments on our securitized mortgage collateral, proceeds from the liquidation of REO, the sale of mortgage servicing rights and proceeds from the sale of AmeriHome. Financing activities. Net cash used in financing activities was $731.2 million for 2014 as compared to $964.5 million for 2013. For 2014 and 2013, net cash used in financing activities was primarily for principal repayments on securitized mortgage borrowings, partially offset by net borrowings under warehouse agreements, borrowings under the line of credit and issuance of the short-term structure debt. 71 Inflation. The consolidated financial statements and corresponding notes to the consolidated financial statements have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. For the years ended December 31, 2014 and 2013, inflation had no significant impact on our revenues or net income. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater effect on our performance than do the effects of general levels of inflation. Inflation affects our operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Off Balance Sheet Arrangements When we sell or broker loans through whole-loan sales, we are required to make normal and customary representations and warranties to the loan originators or purchasers, including guarantees against early payment defaults typically 90 days, and fraudulent misrepresentations by the borrowers. Our agreements generally require us to repurchase loans if we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its sale. Because the loans are no longer on our balance sheet, the representations and warranties are considered a guarantee. During 2014, we sold $2.7 billion and brokered $2.5 million of loans subject to representations and warranties compared to $2.5 billion and $55.9 million in 2013. At December 31, 2014, we had $4.5 million in repurchase reserve related to the loans sold since early 2011 by the continuing mortgage lending operation as compared to a reserve of $4.0 million as December 31, 2013. Additionally, the repurchase reserve within discontinued operations was $1.2 million at December 31, 2014, as compared to $5.5 million at December 31, 2013. During 2014, we paid $5.3 million to settle repurchase demands on loans previously sold to third parties as compared to $4.0 million to settle or repurchase loans during 2013. See disclosures in the notes to the consolidated financial statements under ‘‘Commitments and Contingencies’’ for other arrangements that qualify as off balance sheet arrangements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference to Impac Mortgage Holdings, Inc.’s Consolidated Financial Statements and Independent Auditors’ Report beginning at page F-1 of this Form 10-K. 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of its chief executive officer (CEO) and its chief financial officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. Based on that evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective at a reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Section 13a-15(f) of the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for reporting purposes in conformity with U.S. generally accepted accounting principles and include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. As of December 31, 2014, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO). Based on the criteria established by COSO, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014. Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the 73 design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by improper management override of the controls. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, there is a risk that material misstatements due to error or fraud may occur and will not be detected on a timely basis. Squar, Milner, Peterson, Miranda & Williamson, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting, a copy of which is included herein. Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2014, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 74 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Impac Mortgage Holdings, Inc. We have audited Impac Mortgage Holdings, Inc.’s (the Company) internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Impac Mortgage Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Impac Mortgage Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Impac Mortgage Holdings, Inc. and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and our report dated March 24, 2015 expressed an unqualified opinion on these financial statements. /s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP Newport Beach, California March 24, 2015 75 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item 10 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 including Equity Compensation Plan Information is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is hereby incorporated by reference to Impac Mortgage Holdings, Inc.’s definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of Impac Mortgage Holdings, Inc.’s fiscal year. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(3) Exhibits PART IV The exhibits listed on the accompanying Exhibit Index are incorporated by reference into this Item 15 of this Annual Report on Form 10-K. 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on the 24th day of March 2015. IMPAC MORTGAGE HOLDINGS, INC. by /s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) March 24, 2015 /s/ WILLIAM S. ASHMORE President and Director March 24, 2015 William S. Ashmore /s/ TODD R. TAYLOR Todd R. Taylor Chief Financial Officer (Principal Financial and Accounting Officer) March 24, 2015 /s/ JAMES WALSH Director James Walsh /s/ FRANK P. FILIPPS Director Frank P. Filipps /s/ STEPHAN R. PEERS Director Stephan R. Peers /s/ LEIGH J. ABRAMS Director Leigh J. Abrams March 24, 2015 March 24, 2015 March 24, 2015 March 24, 2015 77 Exhibit Number 2.1 3.1 3.1(a) 3.1(b) 3.1(c) 3.1(d) 3.1(e) 3.1(f) 3.1(g) 3.1(h) 3.1(i) Exhibit Index Description Equity Purchase Agreement dated December 3, 2013 among Aris Mortgage Holding Company, LLC, Excel Mortgage Servicing, Inc. and Integrated Real Estate Service Corporation. Charter of the Registrant (incorporated by reference to the corresponding exhibit number to the Registrant’s Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange Commission on November 8, 1995). Certificate of Correction of the Registrant (incorporated by reference to exhibit 3.1(a) of the Registrant’s 10-K for the year-ended December 31, 1998). Articles of Amendment of the Registrant (incorporated by reference to exhibit 3.1(b) of the Registrant’s 10-K for the year-ended December 31, 1998). Articles of Amendment for change of name to Charter of the Registrant (incorporated by reference to exhibit number 3.1(a) of the Registrant’s Current Report on Form 8-K/A Amendment No. 1, filed February 12, 1998). Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland on July 16, 2002, increasing authorized shares of Common Stock of the Registrant (incorporated by reference to exhibit 10 of the Registrant’s Form 8-A/A, Amendment No. 2, filed July 30, 2002). Articles of Amendment, filed with the State Department of Assessments and Taxation of Maryland on June 22, 2004, amending and restating Article VII of the Registrant’s Charter (incorporated by reference to exhibit 7 of the Registrant’s Form 8-A/A, Amendment No. 1, filed June 30, 2004). Articles Supplementary designating the Company’s 9.375 percent Series B Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the State Department of Assessments and Taxation of Maryland on May 26, 2004 (incorporated by reference to exhibit 3.8 of the Registrant’s Form 8-A/A, Amendment No. 1, filed June 30, 2004). Articles Supplementary designating the Company’s 9.125 percent Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, par value $0.01 per share, filed with the State Department of Assessments and Taxation of Maryland on November 18, 2004 (incorporated by reference to exhibit 3.10 of the Registrant’s Form 8-A filed November 19, 2004). Articles of Amendment of the Company, effective as of December 30, 2008, effecting 1-for-10 reverse stock split (incorporated by reference to exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2008). Articles of Amendment of the Company, effective as of December 30, 2008, amending par value (incorporated by reference to exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2008). 78 Exhibit Number 3.1(j) 3.1(k) 3.1(l) 3.2 3.2(a) 3.2(b) 3.2(c) 3.2(d) 3.2(e) 3.2(f) 4.1 4.2 4.2(a) Description Articles of Amendment of Series B Preferred Stock (incorporated by reference to exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2009). Articles of Amendment of Series C Preferred Stock (incorporated by reference to exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2009). Articles Supplementary of Series A-1 Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2013). Bylaws, as amended and restated (incorporated by reference to the corresponding exhibit number of the Registrant’s Quarterly Report on Form 10-Q for the period ending March 31, 1998). Amendment to Bylaws (incorporated by reference to exhibit 3.2(a) of the Registrant’s Registration Statement on Form S-3 (File No. 333-111517) filed with the Securities and Exchange Commission on December 23, 2003). Second Amendment to Bylaws (incorporated by reference to Exhibit 3.2(b) of the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on April 1, 2005). Third Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2(c) of the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on March 29, 2006). Fourth Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registrant’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on December 20, 2007). Fifth Amendment to Bylaws of the Company (incorporated by reference to Exhibit 3.2(e) of the Registrant’s Form 8-K, filed with the Securities and Exchange Commission on February 13, 2008). Amendment No. 6 to Bylaws of the Company (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2008). Form of Stock Certificate of the Company (incorporated by reference to the corresponding exhibit number to the Registrant’s Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange Commission on September 7, 1995). Indenture between Impac Mortgage Holdings, Inc. and Wilmington Trust Company, as trustee, dated October 18, 2005 (incorporated by reference to Exhibit 4.8 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005). First Supplemental Indenture dated as of July 14, 2009 between Wilmington Trust Company and Impac Mortgage Holdings, Inc. to Indenture dated October 18, 2005 (incorporated by reference to Exhibit 4.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009). 79 Exhibit Number 4.3 4.4 4.5 4.5(a) 10.1(a) 10.1(b) 10.2 10.3 10.4 10.5* Description Junior Subordinated Indenture dated May 8, 2009 between Impac Mortgage Holdings, Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, related to Junior Subordinated Note due 2034 in the principal amount of $30,244,000 (incorporated by reference to exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009). Junior Subordinated Indenture dated May 8, 2009 between Impac Mortgage Holdings, Inc. and The Bank of New York Mellon Trust Company, National Association, as trustee, related to Junior Subordinated Note due 2034 in the principal amount of $31,756,000 (incorporated by reference to exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009). Tax Benefits Preservation Rights Agreement, dated as of September 3, 2013, by and between Impac Mortgage Holdings, Inc. and American Stock Transfer & Trust Company, LLC, as rights agent (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2013). First Amendment to Tax Benefits Preservation Rights Agreement, dated as of September 24, 2013, by and between Impac Mortgage Holdings, Inc. and American Stock Transfer & Trust Company, LLC, as rights agent (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2013). Form of 2002 Indemnification Agreement between the Registrant and its Directors and Officers (incorporated by reference to exhibit 10.1(a) of the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004). Schedule of each officer and director that is a party to an Indemnification Agreement (incorporated by reference to exhibit 10.2(b) of the Registrant’s Annual Report on Form 10-K for the year-ended December 31, 2007). Form of Loan Purchase and Administrative Services Agreement between the Registrant and Impac Funding Corporation (incorporated by reference to exhibit 10.9 to the Registrant’s Registration Statement on Form S-11, as amended (File No. 33-96670), filed with the Securities and Exchange Commission on September 7,1995). Servicing Agreement effective November 11, 1995 between the Registrant and Impac Funding Corporation (incorporated by reference to exhibit 10.14 to the Registrant’s Registration Statement on Form S-11, as amended (File No. 333-04011), filed with the Securities and Exchange Commission on May 17, 1996). Lease dated March 4, 2005 regarding 19500 Jamboree Road, Newport Beach California (incorporated by reference to exhibit 10.8 of the Registrant’s Annual Report on Form 10-K for the year-ended December 31, 2004). Impac Mortgage Holdings, Inc. Omnibus Incentive Plan (as amended) (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2014). 10.5(a)* Form of Stock Option Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to exhibit 99.6 of the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on September 10, 2010). 80 Exhibit Number 10.5(b)* 10.5(c)* 10.6* 10.6(a)* 10.7* 10.7(a)* 10.8* 10.9* Description Form of Restricted Stock Agreement for 2010 Omnibus Incentive Plan (incorporated by reference to exhibit 99.7 of the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on September 10, 2010). Form of Stock Option Agreement for 2001 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004). Non-Employee Director Deferred Stock Unit Award Program (incorporated by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010). Form of Notice of Grant Under Non-Employee Director Deferred Stock Unit Award Program (incorporated by reference to Exhibit 10.6(a) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010). Employment Agreement effective as of January 1, 2013 between Impac Mortgage Holdings, Inc. and Joseph Tomkinson (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2013). First amendment to Employment Contract dated as of March 17, 2014 between Joseph Tomkinson and Impac Mortgage Holdings, Inc. (incorporated by reference to Exhibit 10.7(a) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013). Employment Agreement effective as of January 1, 2013 between Impac Mortgage Holdings, Inc. and William Ashmore (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 9, 2013). Employment Agreement effective as of January 1, 2014 between Impac Mortgage Holdings, Inc. and Todd Taylor (incorporated by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013). 10.9(a) Amendment dated November 10, 2104 to Employment Agreement with Todd Taylor. 10.10* Employment Agreement effective as of January 1, 2014 between Impac Mortgage Holdings, Inc and Ron Morrison (incorporated by reference to Exhibit 10.0 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013). 10.10(a) Amendment dated November 10, 2104 to Employment Agreement with Ron Morrison. 10.11 10.11(a) Amended and Restated Declaration of Trust among Impac Mortgage Holdings, Inc., Wilmington Trust Company, as Delaware and Institutional Trustee, and the Administrative Trustees named therein, dated October 18, 2005 (incorporated by reference to Exhibit 10.29 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005). Amendment No. 1 dated as of July 14, 2009 among Wilmington Trust Company, Impac Mortgage Holdings, Inc. and holders of Capital Securities to Amended and Restated Declaration of Trust dated October 18, 2005 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009). 81 Exhibit Number 10.12 10.13 10.14 Description Exchange Agreement dated May 8, 2009 between Impac Mortgage Holdings, Inc., Taberna Preferred Funding I, Ltd., and Taberna Preferred Funding II, Ltd. (incorporated by reference to exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2009). Credit Agreement executed May 13, 2014 and First Amendment with Promissory Note dated June 1, 2014 with Wells Fargo Bank (incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10 Q for the period ended June 30, 2014). Note Purchase Agreement dated as of April 29, 2013 by and among Impac Mortgage Holdings, Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30, 2013). 10.14(a) Form of Convertible Promissory Note Due 2018 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30, 2013). 10.15 21.1 23.1 31.1 31.2 32.1** 101 Registration Rights Agreement dated as of April 29, 2013 by and among Impac Mortgage Holdings, Inc. and the Purchasers (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30, 2013). Subsidiaries of the Registrant (incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013). Consent of Squar, Milner, Peterson, Miranda & Williamson, LLP. Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (1) the Condensed Consolidated Balance Sheets, (2) the Condensed Consolidated Statements of Operations, (3) the Condensed Consolidated Statements of Stockholders’ Equity, (4) the Condensed Consolidated Statements of Cash Flows, and (5) Notes to Consolidated Financial Statements, tagged as blocks of text. * ** Denotes a management or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K This exhibit shall not be deemed ‘‘filed’’ for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. NOTE: Filings on Form 10-K, 10-Q and 8-K are under SEC File No. 001-14100. 82 CONSOLIDATED FINANCIAL STATEMENTS INDEX Report of Independent Registered Public Accounting Firm .................................................. Consolidated Balance Sheets as of December 31, 2014 and 2013 ....................................... Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 ..... Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013 ...................................................................................... Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 .... Notes to Consolidated Financial Statements ..................................................................... F-2 F-3 F-4 F-5 F-6 F-8 F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Impac Mortgage Holdings, Inc. We have audited the accompanying consolidated balance sheets of Impac Mortgage Holdings, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Impac Mortgage Holdings, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 24, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP Newport Beach, California March 24, 2015 F-2 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS Cash and cash equivalents Restricted cash Mortgage loans held-for-sale Mortgage servicing rights Securitized mortgage trust assets Assets of discontinued operations Other assets Total assets LIABILITIES Warehouse borrowings Short-term structured debt Convertible notes Long-term debt Securitized mortgage trust liabilities Liabilities of discontinued operations Other liabilities Total liabilities Commitments and contingencies Series A-1 junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none issued or outstanding STOCKHOLDERS’ EQUITY Series B 9.375% redeemable preferred stock, $0.01 par value; liquidation value $16,640; 2,000,000 shares authorized, 665,592 noncumulative shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively 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 December 31, 2014 and December 31, 2013, respectively Common stock, $0.01 par value; 200,000,000 shares authorized; 9,588,532 and 8,988,910 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively Additional paid-in capital Net accumulated deficit: Cumulative dividends declared Retained deficit Net accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity December 31, December 31, 2014 2013 $ $ $ 10,073 $ 2,420 239,391 24,418 5,268,531 100 33,639 9,969 1,467 129,191 35,981 5,513,166 2,277 26,274 5,578,572 $ 5,718,325 226,718 $ 6,000 20,000 22,122 5,251,307 3,146 24,323 5,553,616 119,634 - 20,000 15,871 5,502,585 12,883 21,481 5,692,454 - 7 - 7 14 14 96 1,089,574 - (822,520) (242,215) 90 1,084,173 - (822,520) (235,893) (1,064,735) (1,058,413) 24,956 25,871 $ 5,578,572 $ 5,718,325 See accompanying notes to consolidated financial statements. F-3 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Revenues: Gain on sale of loans, net Real estate services fees, net Servicing income, net (Loss) gain on mortgage servicing rights Other Total revenues Expenses: Personnel expense General, administrative and other Occupancy expense Legal and professional expense Total expenses Other income (expense): Interest income Interest expense Change in fair value of long-term debt Change in fair value of net trust assets, including trust REO gains (losses) Total other income (expense) Loss from continuing operations before income taxes Income tax expense (benefit) from continuing operations Net loss from continuing operations Loss from discontinued operations, net of tax Net loss Net earnings attributable to noncontrolling interest Net loss attributable to common stockholders Loss per common share—basic and diluted: Loss from continuing operations attributable to IMH Loss from discontinued operations Net loss per share available to common stockholders For the year ended December 31, 2014 2013 $ 29,308 14,729 4,586 (5,116) 1,682 $ 57,188 19,370 4,240 6,567 1,004 45,189 88,369 37,398 10,505 5,562 2,570 56,035 64,769 14,805 6,432 3,954 89,960 295,656 (294,521) (4,014) 310,391 (310,477) (687) 11,063 8,184 (2,662) 1,305 (3,967) (2,355) (6,322) — (3,678) (4,451) (6,042) (1,031) (5,011) (3,037) (8,048) (136) $ $ $ (6,322) $ (8,184) (0.43) $ (0.25) (0.68) $ (0.59) (0.35) (0.94) See accompanying notes to consolidated financial statements F-4 $ 3 8 8 $ 0 6 9 , 8 2 $ ) 9 0 7 , 7 2 2 ( $ ) 0 2 5 , 2 2 8 ( $ , 3 8 0 9 7 0 1 , l ’ s r e d o h k c o t S g n i l l o r t n o c n o N l ’ s r e d o h k c o t S i d e n a t e R s d n e d v D i i y t i u q E s t s e r e t n I y t i u q E t i c i f e D d e r a c e D l n I - d a P i l a t i p a C l a t o T H M I l a t o T l e v i t a u m u C l a n o i t i d d A n o m m o C n o m m o C s e r a h S d e r r e f e r P d e r r e f e r P s e r a h S k c o t S i g n d n a t s t u O k c o t S i g n d n a t s t u O I I I S E R A D S B U S D N A . 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AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the year ended December 31, 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Gain on sale of MSRs Change in fair value of mortgage servicing rights Gain on sale of AmeriHome Impairment of deferred charge Gain on sale of loans Change in fair value of mortgage loans held-for-sale Change in fair value of derivatives lending, net Provision for repurchases Origination of mortgage loans held-for-sale Sale and principal reduction on mortgage loans held-for-sale Gains from REO Change in fair value of net trust assets, excluding REO Change in fair value of long-term debt Accretion of interest income and expense Change in REO impairment reserve Amortization of debt issuance costs and discount on note payable Stock-based compensation Net change in restricted cash Net cash used in operating activities of discontinued operations Net change in other assets and liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Net change in securitized mortgage collateral Proceeds from the sale of mortgage servicing rights Finance receivable advances to customers Repayments of finance receivables Net change in mortgages held-for-investment Purchase of equipment Net principal change on investment securities available-for-sale Acquisition of noncontrolling interest Proceeds from the sale of real estate owned Proceeds from the sale of AmeriHome Net cash provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of warehouse borrowings Borrowings under warehouse agreement Repayment of line of credit Borrowings under line of credit Repayment of securitized mortgage borrowings Issuance of Convertible Notes Issuance of short-term structured debt Principal payments on notes payable Principal payments on capital lease Capitalized debt issuance costs Proceeds from exercise of stock options Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period – continuing operations Cash and cash equivalents at end of period – discontinued operations $ $ (6,322) (1,112) 6,229 (1,208) 453 (23,668) (6,857) 27 1,190 (2,845,494) 2,736,431 (7,581) (8,658) 4,014 180,478 4,776 48 1,921 (953) (7,560) 3,827 29,981 634,714 28,388 (76,317) 67,959 7 (18) 76 — 36,288 10,200 701,297 (2,611,066) 2,718,150 (28,250) 29,250 (844,499) — 6,000 — (736) (60) 37 (731,174) 104 9,969 10,073 — Cash and cash equivalents at end of period $ 10,073 $ F-6 (8,048) (77) (6,490) — — (61,743) 2,895 1,797 1,750 (2,493,884) 2,520,551 (8,816) 6,250 687 215,653 4,906 30 1,971 1,763 (8,194) 3,468 174,469 739,154 3,065 — — (55) (362) 72 (350) 45,703 — 787,227 (2,364,679) 2,376,709 (13,500) 16,500 (995,200) 20,000 — (3,451) (769) (267) 175 (964,482) (2,786) 12,755 9,969 — 9,969 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued) (in thousands) SUPPLEMENTARY INFORMATION (Continuing and Discontinued Operations): Interest paid, net Taxes paid, net of refunds NON-CASH TRANSACTIONS (Continuing and Discontinued Operations): Transfer of securitized mortgage collateral to real estate owned Mortgage servicing rights retained from loan sales and issuance of mortgage backed securities Common stock issued upon legal settlement Acquisition of equipment purchased through capital leases Common stock issued for acquisition of noncontrolling interest Increase in ownership of AmeriHome For the year ended December 31, 2014 2013 $ $ 56,595 725 $ 65,525 209 33,377 $ 38,224 29,388 3,448 573 — — 21,776 2,760 1,171 1,100 911 See accompanying notes to consolidated financial statements F-7 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 1.—Summary of Business and Financial Statement Presentation including Significant Accounting Policies Business Summary Impac Mortgage Holdings, Inc. (the Company, IMH or Parent) is a Maryland corporation incorporated in August 1995 and has the following wholly-owned subsidiaries: Integrated Real Estate Service Corporation (IRES), Impac Mortgage Corp. (IMC), IMH Assets Corp. (IMH Assets) and Impac Funding Corporation (IFC). The Company’s continuing 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. The discontinued operations include the former non-conforming mortgage and retail operations conducted by IFC and subsidiaries. The information set forth in these notes is presented on a continuing operations basis, unless otherwise stated. Financial Statement Presentation Basis of Presentation The balance sheets, results of operations and cash flows have been presented in the accompanying consolidated financial statements as of December 31, 2014 and 2013 and for each of the years in the two-year period ended December 31, 2014 and include the financial results of IMH, IRES, IMC and IMH Assets within continuing operations and IFC within discontinued operations. All significant inter-company balances and transactions have been eliminated in consolidation. In addition, certain amounts in the prior periods’ consolidated financial statements have been reclassified to conform to the current year presentation. Principles of Consolidation The accompanying consolidated financial statements include accounts of IMH and other entities in which the Company has a controlling financial interest. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities (VIEs), through arrangements that do not involve voting interests. The VIE framework requires a variable interest holder (counterparty to a VIE) to consolidate the VIE if that party has the power to direct activities of the VIE that most significantly impact the entity’s economic performance, will absorb a majority of the expected losses of the VIE, receive a majority of the residual returns of the VIE, or both, and directs the significant activities of the entity. This party is considered the primary beneficiary of the entity. The determination of whether the Company meets the criteria to be considered the primary beneficiary of a VIE requires an evaluation of all transactions (such as investments, liquidity commitments, derivatives and fee arrangements) with the entity. F-8 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Noncontrolling Interests in Consolidated Subsidiaries The Company follows the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810-10-65-1, Noncontrolling Interests in Consolidated Financial Statements which requires a noncontrolling interest in a subsidiary to be reported as equity in the consolidated financial statements with sufficient disclosure provided to identify and distinguish between the interests of the parent and the interest of the noncontrolling owners. The Company previously reported the portion of AmeriHome Mortgage Corporation (AmeriHome) (a subsidiary of IRES) not owned by the Company as noncontrolling interests. During the third quarter of 2013, the Company and the noncontrolling interest holder entered into an agreement to transfer the remaining 20% ownership of AmeriHome to the Company. Effective July 1, 2013, the Company owned 100% of AmeriHome, which was subsequently sold in March 2014 (See Note 13—Acquisition/Disposition of Noncontrolling Interest). Use of Estimates and Assumptions The accompanying consolidated financial statements of IMH and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Management has made a number of 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 periods to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Significant Accounting Policies Fair Value Option The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. The Company has elected the fair value option on investment securities available-for-sale, securitized mortgage collateral, mortgage servicing rights, mortgage loans held-for-sale, securitized mortgage borrowings and long-term debt. Elections were made to mitigate income statement volatility caused by differences in the measurement basis of elected instruments (for example, securitized mortgage collateral was previously accounted for at cost adjusted for net deferred origination costs and allowance for loan losses for credit losses inherent in the portfolio, where securitized mortgage borrowings was previously accounted for at amortized cost net of deferred financing costs). Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less at the date of acquisition. The carrying amount of cash and cash equivalents approximates fair value. Cash balances that have restrictions as to the Company’s ability to withdraw funds are considered restricted cash. At December 31, 2014 and 2013, restricted cash totaled $2.4 million and $1.5 million, respectively. The restricted cash is the result of the terms of the Company’s warehouse borrowings. In accordance with the terms of the Master Repurchase Agreements related to the warehouse borrowings, F-9 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) the Company is required to maintain cash balances with the lender as additional collateral for the borrowings (See Note 5.—Warehouse Borrowings). Mortgage Loans Held-for-Sale During 2009, the Company established a residential mortgage lending operation after discontinuing its former residential and commercial lending operations in 2007 (see Note 21.— Discontinued Operations). Mortgage loans held-for-sale (LHFS) originated under the new lending operation are accounted for using the fair value option, with changes in fair value recorded in gain on sale of loans, net in the accompanying consolidated statements of operations. In accordance with FASB ASC 825, Financial Instruments, loan origination fees and expenses are recognized in earnings as incurred and not deferred. Revenue derived from the Company’s mortgage lending activities includes loan fees collected at the time of origination and gain or loss from the sale of LHFS. Loan fees consist of fee income earned on all loan originations, including loans closed and held for sale. Loan fees are recognized as earned and consist of amounts collected for application and underwriting fees, fees on cancelled loans and discount points. The related direct loan origination costs are recognized when incurred and consists of broker fees and commissions. Gain or loss from the sale and mark-to-market of LHFS includes both realized and unrealized gains and losses and are included in gain on sale of loans, net in the accompanying consolidated statements of operations. The valuation of LHFS approximates a whole-loan price, which includes the value of the related mortgage servicing rights. The Company principally sells its LHFS to government sponsored entities, and to a lesser extent, investors. The Company evaluates its loan sales for sales treatment. To the extent the transfer of loans qualifies as a sale, the Company derecognizes the loans and records a realized gain or loss on the sale date. In the event the Company determines that the transfer of loans does not qualify as a sale, the transfer would be treated as a secured borrowing. Interest on loans is recorded as income when earned and deemed collectible. LHFS are placed on nonaccrual status when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received from loans on nonaccrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. Mortgage Servicing Rights The Company accounts for mortgage loan sales in accordance with ASC 860, Transfers and Servicing. Upon sale of mortgage loans on a service-retained basis, the loans held for sale are removed from the balance sheet, mortgage servicing rights (MSRs) are recorded as an asset for servicing rights retained. The Company elected to measure MSRs at fair value as prescribed by FASB ASC 860-50-35, and as such, servicing assets or liabilities are valued using discounted cash flow modeling techniques using assumptions regarding future net servicing cash flow, including prepayment rates, discount rates, servicing cost and other factors. Changes in estimated fair value are reported in the accompanying consolidated statements of operations within (loss) gain on mortgage servicing rights. When the Company sells mortgage servicing rights, the Company records a gain or loss on such sale based on the selling price of the mortgage servicing rights less the carrying value and transaction F-10 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) costs. Gains and losses are reported in the accompanying consolidated statements of operations within (loss) gain on mortgage servicing rights. Finance Receivables Finance receivables represent transactions with the Company’s customers involved in residential real estate lending. As a warehouse lender, the Company’s warehouse lending operations are a secured creditor of the mortgage bankers and brokers to which the Company extends credit and is subject to the risks inherent in that status, including the risk of borrower fraud, default and bankruptcy. Any claim of the Company’s warehouse lending operations as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay. Finance receivables from customers represent repurchase facilities with mortgage bankers that are primarily collateralized by mortgages on single-family residential real estate. Terms of the repurchase facilities, including the maximum facility amount and interest rate, are determined based upon the financial strength, historical performance and other qualifications of the borrower. The warehouse facilities to customers have maturities that range from on-demand to one year. Finance receivables are stated at the principal balance outstanding and are included in other assets on the accompanying consolidated balance sheets. Interest income is recorded on the accrual basis. Investment Securities Available-for-Sale Investment securities classified as available-for-sale are reported at fair value within the long-term mortgage portfolio. Unrealized gains and losses are recognized in earnings as changes in fair value of net trust assets. Gains and losses realized on the sale of investment securities available-for-sale and declines in value considered to be other-than-temporary are based on the specific identification method and reported in current earnings. Interest income from investment securities available-for-sale is recognized based on current market yields. Investment securities available-for-sale may be subject to credit, interest rate and/or prepayment risk. Securitized Mortgage Collateral The Company’s long-term mortgage portfolio primarily includes adjustable rate and, to a lesser extent, fixed rate non-conforming mortgages and commercial mortgages that were acquired and originated by our mortgage and commercial operations prior to 2008. Non-conforming mortgages may not have certain documentation or verifications that are required by government sponsored entities and, therefore, in making our credit decisions, we were more reliant upon the borrower’s credit score and the adequacy of the underlying collateral. Historically, the Company securitized mortgages in the form of collateralized mortgage obligations (CMO) or real estate mortgage investment conduits (REMICs). These securitizations are evaluated for consolidation based on the provisions of FASB ASC 810-10-25. Amounts consolidated are included in trust assets and liabilities as securitized mortgage collateral, real estate owned, derivative assets, securitized mortgage borrowings and derivative liabilities in the accompanying consolidated balance sheets. F-11 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The Company accounts for securitized mortgage collateral at fair value, with changes in fair value during the period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s assumptions include its expectations of inputs that other market participants would use. These assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest rates and certain other factors. Interest income on securitized mortgage collateral is recorded quarterly using the effective yield for the period based on the previous quarter-end’s estimated fair value. Securitized mortgage collateral is generally not placed on nonaccrual status as the servicer advances the interest payments to the trust regardless of the delinquency status of the underlying mortgage loan, until it becomes apparent to the servicer that the advance is not collectible. Real Estate Owned Real estate owned (REO) on the balance sheet, are primarily assets within the securitized trusts but are recorded as a separate asset for accounting and reporting purposes and are within the long-term mortgage portfolio. REO, which consists of residential real estate acquired in satisfaction of loans, is carried at net realizable value, which includes the estimated fair value of the residential real estate less estimated selling and holding costs. Adjustments to the loan carrying value required at the time of foreclosure affect the carrying amount of REO. Subsequent write-downs in the net realizable value of REO are included in losses from REO in the consolidated statements of operations. Securitized Mortgage Borrowings The Company records securitized mortgage borrowings in the accompanying consolidated balance sheets for the consolidated CMO and REMIC securitized trusts within the long-term mortgage portfolio. The debt from each issuance of a securitized mortgage borrowing is payable from the principal and interest payments on the underlying mortgages collateralizing such debt, as well as the proceeds from liquidations of REO. If the principal and interest payments are insufficient to repay the debt, the shortfall is allocated first to the residual interest holders (generally owned by the Company) then, if necessary, to the certificate holders (e.g. third party investors in the securitized mortgage borrowings) in accordance with the specific terms of the various respective indentures. Securitized mortgage borrowings typically are structured as one- month LIBOR ‘‘floaters’’ and fixed rate securities with interest payable to certificate holders monthly. The maturity of each class of securitized mortgage borrowing is directly affected by the amount of net interest spread, overcollateralization and the rate of principal prepayments and defaults on the related securitized mortgage collateral. The actual maturity of any class of a securitized mortgage borrowing can occur later than the stated maturities of the underlying mortgages. When the Company issued securitized mortgage borrowings, the Company generally sought an investment grade rating for the Company’s securitized mortgages by nationally recognized rating agencies. To secure such ratings, it was often necessary to incorporate certain structural features that provide for credit enhancement. This generally included the pledge of collateral in excess of the principal amount of the securities to be issued, a bond guaranty insurance policy for some or all of the issued F-12 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) securities, or additional forms of mortgage insurance. The Company’s total loss exposure is limited to the Company’s initial net economic investment in each trust, which is referred to as a residual interest. The Company accounts for securitized mortgage borrowings at fair value, with changes in fair value during the period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s assumptions include its expectations of inputs that other market participants would use. These assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest rates and certain other factors. Interest expense on securitized mortgage borrowings are recorded quarterly using the effective yield for the period based on the previous quarter-end’s estimated fair value. Derivative Instruments In accordance with FASB ASC 815-10 Derivatives and Hedging—Overview, the Company records all derivative instruments at fair value. The Company has accounted for all its derivatives as non-designated hedge instruments or free-standing derivatives. Interest Rate Swaps, Caps and Floors The Company’s interest rate risk management objective was to limit the exposure to the variability in future cash flows attributable to the variability of one-month LIBOR, which is the underlying index of adjustable rate securitized mortgage borrowings. The Company’s interest rate risk management policies were formulated with the intent to offset the potential adverse effects of changing interest rates on securitized mortgage borrowings. To mitigate exposure to the effect of changing interest rates on cash flows on securitized mortgage borrowings, the Company purchased derivative instruments primarily in the form of interest rate swap agreements (swaps) and, to a lesser extent, interest rate cap agreements (caps) and interest rate floor agreements (floors). The Company has $5.4 million in derivative liabilities outstanding as of December 31, 2014, all of which are in the securitized trusts and included in trust liabilities in the consolidated balance sheets. The fair value of the Company’s swaps, caps, floors and other derivative instruments is generally based on market prices provided by dealers and market makers, or estimates of future cash flows from these financial instruments. Lending derivatives The mortgage lending operation enters into interest rate lock commitments (IRLCs) with consumers to originate mortgage loans at a specified interest rate. These IRLCs are accounted for as derivative instruments. The fair values of IRLCs utilize current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (Pull-through Rate). The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated Pull-through Rate. The Company reports IRLCs within other assets and other liabilities at fair value with changes in fair value being recorded in the accompanying statements of operations within gain on sale of loans, net. F-13 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The Company hedges the changes in fair value associated with changes in interest rates related to IRLCs and uncommitted mortgage loans held for sale by using forward sold commitments including Fannie Mae and Ginnie Mae mortgage-backed securities known as to-be-announced mortgage-backed securities (TBA MBS or Hedging Instruments). The Hedging Instruments are typically entered into at the time the IRLC is made and are accounted for as derivative instruments. The fair value of Hedging Instruments is subject to change primarily due to changes in interest rates. The Company reports Hedging Instruments within other assets and other liabilities at fair value with changes in fair value being recorded in the accompanying statements of operations within gain on sale of loans, net. The fair value of IRLCs and Hedging Instruments are represented as derivative assets, lending and derivative liabilities, lending in Note 14.—Fair Value of Financial Instruments. Long-term Debt Long-term debt (consisting of trust preferred securities and junior subordinated notes) is reported at fair value. These securities are measured based upon an analysis prepared by management, which considers the Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. Unrealized gains and losses are recognized in earnings in the accompanying consolidated statements of operations within change in fair value of long-term debt. The Company does not consolidate trust preferred entities (which are sometimes hereinafter referred to as capital trusts) since the Company does not have a significant variable interest in the trust. Instead, the Company records its investment in the trust preferred entities (included in other assets in the accompanying consolidated balance sheets) and accounts for such under the equity method of accounting and reflects a liability for the issuance of the notes to the trust preferred entities. Repurchase Reserve The Company sells mortgage loans to the secondary market, including U.S. government sponsored entities and issues mortgage-backed securities through Ginnie Mae and Fannie Mae. When the Company sells or issues securities, it makes customary representations and warranties to the purchasers about various characteristics of each loan such as the origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. In the event of a breach of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer for any loss. Also, the Company’s loss may be reduced by proceeds from the sale or liquidation of the repurchased loan. The Company’s loss may be reduced by any recourse it has to correspondent lenders that, in turn, had sold such mortgage loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent lender. The Company records a provision for losses relating to such representations and warranties as part of its loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults including any loss on sale or liquidation of the F-14 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) repurchased loan and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time loans are sold and continually updates its estimated repurchase liability. The level of the repurchase liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demands for loan repurchases and other external conditions that may change over the lives of the underlying loans. Revenue Recognition for Fees from Services The Company follows SAB No. 104 Revenue Recognition in Financial Statements, which provides guidance on the application of GAAP to selected revenue recognition issues. The Company’s real estate services segment provides various real estate related services and loss mitigation services including (i) managing distressed mortgage portfolios and foreclosed real estate assets, (ii) the disposition of such assets, (iii) surveillance services for residential and multifamily mortgage portfolios, (iv) loan modification services and (v) the master servicing on various residential mortgage and multifamily loan pools for loans in the long-term portfolio of IMH, and to a lesser extent, non-affiliated entities. The revenues from these services are recognized in income in the period when services are rendered and collectability is reasonably certain. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with FASB ASC 718 Compensation—Stock Compensation. Accordingly, the Company measures the cost of stock-based awards using the grant-date fair value of the award and recognizes that cost over the requisite service period. The fair value of each stock option granted under the Company’s stock-based compensation plan is estimated on the date of grant using the Black-Scholes- Merton option-pricing model and assumptions noted in Note 19.—Share Based Payments and Employee Benefit Plans. The risk-free interest rate is based on the U.S. Treasury rate with a term equal to the expected term of the option grants on the date of grant. FASB ASC 718 requires forfeitures to be estimated at the time of grant and prospectively revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures for the years ended December 31, 2014 and 2013, such that the expense was recorded only for those stock-based awards that were expected to vest during such periods. Refer to Note 19.—Share Based Payments and Employee Benefit Plans. Income Taxes In accordance with ASC 740, the Company records income tax expense as well as deferred tax assets and liabilities. Current income tax expense approximates taxes to be paid or refunded for the current period and includes income tax expense related to uncertain tax positions and amortization/ impairment of deferred charge, explained below. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and recognizes enacted changes in tax rates and laws in the period in which they occur. Deferred income tax expense F-15 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized subject to management’s judgment that realization is ‘‘more likely than not.’’ Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. The Company is subject to federal income taxes as a regular (Subchapter C) corporation and files a consolidated U.S. federal income tax return on qualifying subsidiaries. The Company files income tax returns in the U.S. for federal and various states. In prior periods when the Company was taxed as a real estate investment trust (REIT), it recorded a deferred charge to eliminate the expense recognition of income taxes paid on inter-Company profits that result from the sale of mortgage loans from the taxable REIT subsidiaries to IMH. The deferred charge is included in other assets in the consolidated balance sheets and is amortized and, or impaired as a component of income tax expense in the consolidated statements of operations over the estimated life of the mortgages retained in the securitized mortgage collateral. Earnings per Common Share Basic earnings per common share is computed on the basis of the weighted average number of shares outstanding for the year divided into earnings for the year. Diluted earnings per common share is computed on the basis of the weighted average number of shares and dilutive common equivalent shares outstanding for the year divided by earnings for the year, unless anti-dilutive. Refer to Note 15.— Reconciliation of Earnings Per Share. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The Company will be required to adopt this ASU beginning with the quarter ending March 31, 2015. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, (ASU 2014-12). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. ASU 2014-12 becomes effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. A collateralized financing entity (CFE) is a variable interest entity with nominal or no equity that holds F-16 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) financial assets and issues beneficial interests in those financial assets. The ASU is intended to address diversity in practice in accounting for the measurement difference between financial assets and financial liabilities of CFEs. The ASU is effective for annual periods and interim periods with those annual periods beginning after December 15, 2015. A reporting entity may apply the ASU using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure. This update requires creditors to reclassify loans that are within the scope of the ASU to ‘‘other receivables’’ upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. The ASU is effective for annual and interim reporting periods beginning January 1, 2017. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements. In November 2014, the FASB issued ASU No. 2014-17, Pushdown Accounting, which provides an acquired entity with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. ASU 2014-17 was effective for the Company beginning November 18, 2014 and did not have a material impact on the Company’s financial statements. Note 2.—Mortgage Loans Held-for-Sale A summary of the unpaid principal balance of mortgage loans held-for- sale by type is presented below: Government (1) Conventional (2) Fair value adjustment Total mortgage loans held-for-sale December 31, 2014 2013 $ $ 156,385 72,553 10,453 81,292 44,303 3,596 $ 239,391 $ 129,191 (1) (2) Includes all government-insured loans including FHA, VA and USDA. Includes loans eligible for sale to Fannie Mae and Freddie Mac. The Company does not have any delinquent or nonaccrual mortgage loans held-for-sale as of December 31, 2014. F-17 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Gain on LHFS (included in gain on sale of loans, net in the consolidated statements of operations) is comprised of the following for the years ended December 31, 2014 and 2013: December 31, 2014 2013 Gain on sale of mortgage loans Premium from servicing retained loan sales Unrealized losses from derivative financial instruments Realized (losses) gains from derivative financial $ $ 100,219 29,388 (27) 69,422 21,776 (1,797) 14,589 (2,895) (42,157) (1,750) (15,397) 6,857 (90,542) (1,190) $ 29,308 $ 57,188 instruments Mark to market gain (loss) on LHFS Direct origination expenses, net Provision for repurchases Total gain on sale of loans, net Note 3.—Mortgage Servicing Rights The Company retains mortgage servicing rights (MSRs) from its sales of certain mortgage loans. MSRs are reported at fair value based on the income derived from the net positive cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the unpaid principal balances (UPB) of the loans. The servicing fees are collected from the monthly payments made by the mortgagors or when the underlying real estate is foreclosed upon and liquidated. The Company may receive other remuneration from rights to various mortgagor-contracted fees such as late charges, collateral reconveyance charges, nonsufficient fund fees and the Company is generally entitled to retain the interest earned on funds held pending remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments. Changes in the fair value of MSRs at December 31, 2014 and 2013 were as follows: Balance at beginning of period Additions from servicing retained loan sales Reductions from bulk sales Reduction from sale of AmeriHome Changes in fair value (1) Fair value of MSRs at end of period December 31, 2014 2013 $ $ 35,981 29,388 (27,276) (7,446) (6,229) 10,703 21,776 (2,988) — 6,490 $ 24,418 $ 35,981 (1) Changes in fair value are included within (loss) gain on mortgage servicing rights in the consolidated statements of operations. F-18 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) At December 31, 2014, the mortgage servicing portfolio is comprised of the following: Government insured Conventional 2010 Acquisition of AmeriHome (1) Total loans serviced Outstanding Principal Balance 2014 2013 $ 926,502 1,340,584 — $ 1,203,478 1,837,475 87,693 $ 2,267,086 $ 3,128,646 (1) Represents servicing portfolio acquired in the 2010 acquisition of AmeriHome and includes government and conventional loans originated by AmeriHome prior to the Company’s acquisition. The table below illustrates hypothetical changes in the fair value of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value. Mortgage Servicing Rights Sensitivity Analysis Fair value of MSRs Prepayment Speed: Decrease in fair value from 100 basis point (bp) adverse change Decrease in fair value from 200 bp adverse change Discount Rate: Decrease in fair value from 100 bp adverse change Decrease in fair value from 200 bp adverse change December 31, 2014 $ 24,418 (894) (2,393) (900) (1,738) 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. F-19 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 4.—Other Assets Other Assets Other assets consisted of the following: Deferred charge (See Note 14) Finance receivables Accounts receivable, net Derivatives assets – lending (See Note 11) Premises and equipment, net Prepaid expenses Servicing advances, net Other $ December 31, 2014 2013 $ 11,521 8,358 5,701 2,918 1,889 1,769 556 927 11,974 - 4,012 2,115 2,526 3,024 1,343 1,280 Total other assets $ 33,639 $ 26,274 Finance Receivables The Company uses a portion of the excess warehouse borrowing capacity to provide secured short-term revolving financing to small and medium-size mortgage originators to finance mortgage loans from the closing of the mortgage loans until sold to investors. As of December 31, 2014, the warehouse lending operations had warehouse lines to non-affiliated customers totaling $55 million and an outstanding balance of $8.4 million in finance receivables and none as of December 31, 2013. The finance receivables are secured by residential mortgage loans as well as personal guarantees. There are no delinquent balances as of December 31, 2014. Premises and Equipment, net Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets, typically three to twenty years. Premises and equipment and accumulated depreciation were as follows as of the dates indicated: Premises and equipment Less: Accumulated depreciation Total premises and equipment, net Servicing Advances December 31, 2014 2013 $ $ 15,101 (13,212) 1,889 $ $ 14,805 (12,279) 2,526 The Company is required to advance certain amounts to meet its contractual loan servicing requirements. The Company advances principal, interest, property taxes and insurance for borrowers F-20 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) that have insufficient escrow accounts, plus any other costs to preserve the property. Also, the Company will advance funds to maintain, repair and market foreclosed real estate properties. The Company is entitled to recover advances from the borrowers for reinstated and performing loans or from proceeds of liquidated properties. Servicer advances totaled $556 thousand and $1.3 million at December 31, 2014 and 2013, respectively. Note 5.—Warehouse Borrowings The Company, through its subsidiaries, enters into Master Repurchase Agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund, and are secured by, residential mortgage loans that are held for sale. In accordance with the terms of the Master Repurchase Agreements, the Company is required to maintain cash balances with the lender as additional collateral for the borrowings which are included in restricted cash in the accompanying consolidated balance sheets. The following table presents certain information on warehouse borrowings for the periods indicated: Maximum Borrowing Capacity Balance Outstanding at December 31, 2014 2013 Allowable Advance Rates (%) Rate Range (1) Maturity Date Short-term borrowings: Repurchase agreement 1 (2) Repurchase agreement 2 Repurchase agreement 3 (3) Repurchase agreement 4 (4) Repurchase agreement 5 (5) $ 100,000 40,000 50,000 125,000 100,000 $ 64,907 30,523 24,012 107,276 - $ 50,794 19,493 15,592 33,755 - Total short-term borrowings $ 415,000 $ 226,718 $ 119,634 90-98 1M L +3.4 - 6.5% 75-98 Prime + 0.0-5.50% 80-98 1M L +3.0 - 4.0% September 22, 2015 September 16, 2015 December 31, 2015 BR +2.5-4.0% L +2.9-5.4% June 19, 2015 May 28, 2015 95 99 (1) (2) (3) (4) (5) 1 ML represents One-month LIBOR. BR represents the lender defined base rate. In January 2015, the maximum borrowing capacity increased to $125 million. In January 2015, the maximum borrowing capacity increased to $75 million. As part of the agreement, the Company has a $40 million sublimit for re-warehousing with $8.4 million outstanding at December 31, 2014. In February 2015, the maximum borrowing capacity increased to $225 million. In February 2015, the maximum borrowing capacity increased to $150 million. The following table presents certain information on warehouse borrowings for the periods indicated: Maximum outstanding balance during the year Average balance outstanding for the year Underlying collateral (mortgage loans) Weighted average rate for period For the year ended December 31, 2014 2013 $ 226,718 136,789 237,340 $ 197,455 111,335 124,688 3.37% 4.02% F-21 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 6.—Convertible Notes In April 2013, the Company entered into a Note Purchase Agreement with the purchasers named therein (Noteholders), whereby the Company issued $20.0 million in original aggregate principal amount of Convertible Promissory Notes Due 2018 (Convertible Notes). The Convertible Notes mature on or before April 30, 2018 and accrue interest at a rate of 7.5% per annum, paid quarterly. Noteholders may convert all or a portion of the outstanding principal amount of the Convertible Notes into shares of the Company’s Common Stock (Conversion Shares) at a rate of $10.875 per share, subject to adjustment for stock splits and dividends (the Conversion Price). The Company has the right to convert the entire outstanding principal of the Convertible Notes into Conversion Shares at the Conversion Price if the market price per share of the Common Stock, as measured by the average volume-weighted closing stock price per share of the Common Stock on the NYSE MKT (or any other U.S. national securities exchange then serving as the principal such exchange on which the shares of Common Stock are listed), reaches the level of $16.31, for any twenty (20) trading days in any period of thirty (30) consecutive trading days after the Closing Date. Upon conversion of the Convertible Notes by the Company, the entire amount of accrued and unpaid interest (and all other amounts owing) under the Convertible Notes are immediately due and payable. Furthermore, if the conversion of the Convertible Notes by the Company occurs prior to the third anniversary of the Closing Date, then the entire amount of interest under the Convertible Notes through the third anniversary is immediately due and payable. To the extent the Company pays any cash dividends on its shares of common stock prior to conversion of the Convertible Notes, upon conversion of the Convertible Notes, the Noteholders will also receive such dividends on an as-converted basis of the Convertible Notes less the amount of interest paid by the Company prior to such dividend. Unless an event of default has occurred and is continuing, each purchaser of the Convertible Notes agrees, for the three years after the Closing Date, to vote all Conversion Shares for each of the Company’s nominees for election to the Company’s board of directors and not to nominate any other candidate for election to the board of directors at any time within such three year period. In conjunction with the issuance of the Convertible Notes, the Company incurred $0.3 million in debt issuance costs related to legal fees. The Company accounts for direct costs related to the issuance of debt in accordance with ASC Topic 470, Debt. The deferred debt issuance costs are amortized to interest expense over the term of the Note Purchase Agreement using the effective interest method. Note 7.—Short-Term Structured Debt In December 2014, the Company entered into a $6.0 million short-term structured debt agreement using eight of the Company’s residual interests (net trust assets) as collateral. The Company received proceeds of $6.0 million and had transaction costs of approximately $60 thousand. The agreement bears interest at LIBOR + 5.75% per annum, has a final repurchase date of June 29, 2015 and the Company has the right to repurchase the securities without penalty prior to the final repurchase date. The holder receives monthly principal and interest payments which are equal to the distributions from the residual interest underlying collateral with a minimum payment of $500,000. If the cash flows received from the collateralized residual interests are less than $500,000, the Company would be required to pay the difference to avoid the transfer of the residual interests and the rights to the associated future cash flows to the note holder. F-22 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 8.—Long-term Debt Trust Preferred Securities During 2005, the Company formed four wholly-owned trust subsidiaries (Trusts) for the purpose of issuing an aggregate of $99.2 million of trust preferred securities (the Trust Preferred Securities). All proceeds from the sale of the Trust Preferred Securities and the common securities issued by the Trusts were originally invested in $96.3 million of junior subordinated debentures (subordinated debentures), which became the sole assets of the Trusts. The Trusts pay dividends on the Trust Preferred Securities at the same rate as paid by the Company on the debentures held by the Trusts. During 2008 and 2009, the Company purchased and cancelled $36.5 million in outstanding Trust Preferred Securities for $5.5 million. Additionally, during 2009, the Company exchanged an aggregate of $51.3 million in outstanding Trust Preferred Securities for $62.0 million in Junior Subordinated Notes (Notes). As a result of these transactions, $8.5 million in Trust Preferred Securities remain outstanding. The Company carries its Trust Preferred Securities at estimated fair value as more fully described in Note 14.—Fair Value of Financial Instruments. The following table shows the remaining principal balance and fair value of Trust Preferred Securities issued as of December 31, 2014 and 2013: Trust preferred securities (1) Common securities Fair value adjustment Total December 31, 2014 2013 $ $ $ 8,500 263 (6,087) 2,676 $ 8,500 263 (6,459) 2,304 (1) Stated maturity of July 30, 2035 and redeemable at par at any time. The interest rate is a variable rate of three-month LIBOR plus 3.75% per annum. At December 31, 2014, the interest rate was 3.99%. If an event of default occurs (such as a payment default that is outstanding for 30 days, a default in performance, a breach of any covenant or representation, bankruptcy or insolvency of the Company or liquidation or dissolution of the Trust), either the trustee of the Notes or the holders of at least 25% of the aggregate principal amount of the outstanding Notes may declare the principal amount of, and all accrued interest on, all the Notes to be due and payable immediately, or if the holders of the Notes fail to make such declaration, the holders of at least 25% in aggregate liquidation amount of the Trust Preferred Securities outstanding shall have a right to make such declaration. F-23 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Junior Subordinated Notes The Company carries its Junior Subordinated Notes at estimated fair value as more fully described in Note 14.—Fair Value of Financial Instruments. The following table shows the remaining principal balance and fair value of junior subordinated notes issued as of December 31, 2014 and 2013: Junior subordinated notes (1) Fair value adjustment Total December 31, 2014 2013 $ $ 62,000 (42,554) 19,446 $ $ 62,000 (48,433) 13,567 (1) Stated maturity of March 2034; requires quarterly distributions initially at a fixed rate of 2.00% per annum through March 2014 with increases of 1.00% per year in 2014 through 2017. Starting in 2018, the interest rates become variable at 3-month LIBOR plus 3.75% per annum. At December 31, 2014, the interest rate was 3.0%. Note 9.—Line of Credit Agreement As of December 31, 2014 and 2013, the Company had a working capital line of credit agreement with a national bank that bears interest at a variable rate of one-month LIBOR plus 3.50%. The line of credit is unsecured and expires June 2015. Under the terms of the agreement the Company and its subsidiaries are required to maintain various financial and other covenants. The working capital line of credit is included in other liabilities in the accompanying consolidated balance sheets. At December 31, 2014, and 2013, the outstanding balance under the line of credit was $4.0 million and $3.0 million, respectively. At December 31, 2014, the Company was in compliance with all covenants. The following table presents certain information on the line of credit for the periods indicated: Maximum outstanding balance during the year Average balance outstanding for the year Weighted average rate for period For the year ended December 31, 2014 2013 $ 4,000 1,599 $ 3.88% 3,000 597 3.85% F-24 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 10.—Securitized Mortgage Trusts Securitized Mortgage Trust Assets Securitized mortgage trust assets, which are recorded at fair market value (FMV), are comprised of the following at December 31, 2014 and 2013: Investment securities available-for-sale Securitized mortgage collateral Real estate owned Total securitized mortgage trust assets Securitized Mortgage Collateral Securitized mortgage collateral consisted of the following: Mortgages secured by residential real estate Mortgages secured by commercial real estate Fair value adjustment Total securitized mortgage collateral December 31, 2014 2013 $ 92 5,249,639 18,800 $ 108 5,494,152 18,906 $ 5,268,531 $ 5,513,166 December 31, 2014 2013 $ 5,919,552 647,737 (1,317,650) $ 6,581,235 810,500 (1,897,583) $ 5,249,639 $ 5,494,152 As of December 31, 2014, the Company was also a master servicer of mortgages for others of approximately $1.0 billion that were primarily collateralizing REMIC securitizations, compared to $1.1 billion at December 31, 2013. Related fiduciary funds are held in trust for investors in non-interest bearing accounts and therefore not included in the Company’s consolidated balance sheets. The Company may also be required to advance funds or cause loan servicers to advance funds to cover principal and interest payments not received from borrowers depending on the status of their mortgages. F-25 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Real Estate Owned (REO) The Company’s REO consisted of the following: REO Impairment (1) Ending balance REO inside trusts REO outside trusts Total December 31, 2014 2013 $ $ $ $ 20,674 (1,874) 18,800 18,800 - 18,800 $ $ $ $ 23,601 (4,680) 18,921 18,906 15 18,921 (1) Impairment represents the cumulative write-downs of net realizable value subsequent to foreclosure. Securitized Mortgage Trust Liabilities Securitized mortgage trust liabilities, which are recorded at FMV, are comprised of the following at December 31, 2014 and 2013: Securitized mortgage borrowings Derivative liabilities Total securitized mortgage trust liabilities December 31, 2014 2013 $ 5,245,860 5,447 $ 5,492,371 10,214 $ 5,251,307 $ 5,502,585 F-26 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Securitized Mortgage Borrowings Selected information on securitized mortgage borrowings for the periods indicated consisted of the following (dollars in millions): Securitized mortgage borrowings outstanding as of December 31, 2014 2013 Range of Interest Rates (1) Interest Rate Interest Rate Fixed Interest Rates Margins over Margins after Contractual One-Month Call Date (3) LIBOR (2) $ 12.2 96.7 899.8 2,730.0 3,072.3 1,887.0 $ 14.5 116.8 1,035.1 2,999.4 3,321.2 2,055.4 5.25 - 12.00 4.34 - 12.75 3.58 - 5.56 - 6.25 - 0.27 - 2.75 0.27 - 3.00 0.25 - 2.50 0.24 - 2.90 0.10 - 2.75 0.06 - 2.00 0.54 - 3.68 0.54 - 4.50 0.50 - 3.75 0.48 - 4.35 0.20 - 4.13 0.12 - 3.00 Year of Issuance 2002 2003 2004 2005 2006 2007 Original Issuance Amount $ 3,876.1 5,966.1 17,710.7 13,387.7 5,971.4 3,860.5 Subtotal securitized mortgage borrowings (4) Fair value adjustment Total securitized mortgage 8,698.0 (3,452.1) 9,542.4 (4,050.0) borrowings $ 5,245.9 $5,492.4 (1) (2) (3) (4) Some rates have been modified subsequent to original issuance. One-month LIBOR was 0.15% as of December 31, 2014. Interest rate margins are generally adjusted when the unpaid principal balance is reduced to less than 10-20% of the original issuance amount, or if certain other triggers are met. Unpaid principal balance As of December 31, 2014, expected principal reductions of the securitized mortgage borrowings, which is based on contractual principal payments and expected prepayment and loss assumptions for securitized mortgage collateral, was as follows (dollars in millions): Payments Due by Period One to Three Years Less Than One Year Three to More Than Five Years Five Years Total Securitized mortgage borrowings (1) (1) Unpaid principal balance $ 8,698.0 $ 752.4 $ 1,188.0 $ 865.5 $ 5,892.1 F-27 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Derivative Liabilities As of December 31, 2014, the net derivative liability included in the securitization trusts was $5.4 million, as compared to $10.2 million at December 31, 2013. As of December 31, 2014, the notional balance of derivative assets and liabilities, securitized trusts was $96.4 million. The derivative values are based on the net present value of cash receipts or payments expected to be received or paid by the bankruptcy remote trusts. The fair value of the derivatives fluctuates with changes in the future expectation of cash receipts or payments based on notional balances and estimated LIBOR rates. On September 15, 2008, Lehman Brothers Holdings Inc. (LBHI) filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. As of that date, LBHI, through affiliated companies, was an interest rate swap counterparty to several of the Company’s CMO and REMIC securitizations. During the third quarter of 2013, the terminated LBHI swaps were settled with the bankruptcy court and the trustees for the securitization trusts. CMB 2004-4, CMB 2004-5 and CMB 2004-10 were settled and the corresponding fair values of the net derivative liabilities were removed from the consolidated balance sheet at September 30, 2013. At December 31, 2014 and 2013, there was no estimated fair value of derivatives with LBHI. As the related securitization trusts are non-recourse to the Company, the Company is not required to replace or otherwise settle any derivative positions affected by counterparty default within the consolidated trusts. Accordingly, the settlement of the net derivative liabilities did not result in any gain or loss for the Company. Change in fair value of net trust assets, including trust real estate owned (REO) gains (losses) Changes in fair value of net trust assets, including trust REO gains (losses) are comprised of the following for the years ended December 31, 2014 and 2013: Change in fair value of net trust assets, excluding REO Gains from REO Change in fair value of net trust assets, including trust REO gains (losses) Note 11.—Derivative Instruments Derivative Assets and Liabilities, Lending For the year ended December 31, 2014 2013 3,482 7,581 $ (12,494) 8,816 11,063 $ (3,678) $ $ The mortgage lending operation enters into IRLCs with prospective borrowers to originate mortgage loans at a specified interest rate and Hedging Instruments to hedge the fair value changes associated with changes in interest rates relating to its mortgage loan origination operations. The fair value of IRLCs and Hedging Instruments are included in other assets and other liabilities, respectively, in the consolidated balance sheets. As of December 31, 2014, the estimated fair value of IRLCs and Hedging Instruments associated with mortgage lending totaled $3.0 million and $930 thousand, respectively. F-28 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table includes information for the derivative assets and liabilities—lending for the periods presented: Notional Amount At December 31, Total Gains (Losses) (1) For the Year Ended December 31, 2014 2013 2014 2013 Derivative – IRLC’s Derivative – TBA MBS $ 299,507 397,373 $ 137,254 182,809 $ 1,982 (17,406) $ (3,057) 15,849 (1) Amounts included in gain on sale of loans, net within the accompanying consolidated statements of operations. Other Derivatives Upon entering an arrangement to facilitate the Company’s ability to offer Non-QM mortgage products, a warrant to purchase up to 9.9% of Impac Mortgage Corp. was issued in 2014. The warrant can only be exercised if the Company chooses not to continue with the agreement to facilitate Non-QM mortgage products and has a 60 day expiration window after the termination of the agreement. The exercise price of the warrant is an agreed upon multiple times the book value of the subsidiary Impac Mortgage Corp. at the time of exercise plus up to an additional 0.2 times the book value at the exercise date based off of the net income of Impac Mortgage Corp. for the following 12 months. Additionally, if upon exercise of the warrant, the Company does not receive regulatory approval for the sale of the 9.9% as a result of actions of the Company, the Company will have to pay the holder of the warrant a redemption price, equal to the value of the warrant, in cash within 30 days. The estimated fair value of the warrant was based on a model incorporating various assumptions including expected future book value of Impac Mortgage Corp., the probability of the warrant being exercised, volatility, expected term and certain other factors. As of December 31, 2014, the estimated fair value of the warrant was $84 thousand. As part of the acquisition of AmeriHome, the purchase agreement included a call and put option. The call option allowed the Company to purchase an additional 39% of AmeriHome anytime between January 1, 2011 and December 31, 2013. Insofar that the Company does not exercise the call option, the Company wrote a put option to the founder of AmeriHome that provided the founder with the right to require the Company to acquire the remaining 49% of AmeriHome. (See Note 13—Acquisition/ Disposition of Noncontrolling Interest). These options were considered derivative instruments and recorded at fair value using a multinomial option pricing model. The estimated fair value was based on a model incorporating various assumptions including expected future book value of AmeriHome, the probability of the option being exercised, volatility, expected term and certain other factors. The fair value of the options was included in other assets and other liabilities, in the consolidated balance sheets. As of December 31, 2014 and 2013, the estimated fair value of the call and put options were zero, in connection with the sale of AmeriHome in 2014. F-29 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 12.—Redeemable Preferred Stock At December 31, 2014, the Company has outstanding $51.8 million liquidation preference of Series B and Series C Preferred Stock. The holders of each series of Preferred Stock, which are non-voting and redeemable at the option of the Company, retain the right to a $25.00 per share liquidation preference in the event of a liquidation of the Company and the right to receive dividends on the Preferred Stock if any such dividends are declared. Note 13.—Acquisition/Disposition of Noncontrolling Interest In 2010, IMC formerly known as Excel Mortgage Servicing, Inc., a wholly-owned subsidiary of IRES, completed the acquisition of 51% of AmeriHome whereby the Company made a $1.1 million cash payment to AmeriHome and entered into a note payable for $720,000. As part of the transaction, the Company was granted an option to purchase an additional 39% of AmeriHome beginning January 1, 2011 for 1.5 times 39% of the lesser of $5 million or Issuer’s Book Value (IBV) of AmeriHome plus $550,000 in cash (see call/put option in Note 14.—Fair Value of Financial Instruments). This option had a three-year term. In addition, the founder of AmeriHome had a put option to sell his remaining 49% ownership beginning January 1, 2014 to the Company for the lesser of $5 million or IBV (see call/put option in Note 14.—Fair Value of Financial Instruments). In June 2012 and January 2013, the Company and the noncontrolling interest holder entered into an agreement to transfer an additional 27.5% and 1.5% ownership, respectively, of AmeriHome to the Company in exchange for the settlement of balances owed from the noncontrolling interest holder related to capital contributions made by the Company to AmeriHome and indemnification provisions included in the purchase agreement. In July 2013, the Company and the noncontrolling interest holder entered into an agreement to transfer the remaining 20% ownership of AmeriHome to the Company in exchange for $350 thousand in cash and $1.1 million in IMH common stock. Effective July 1, 2013, the Company owned 100% of AmeriHome. In March 2014, the Company sold AmeriHome for $10.2 million in cash, recording a gain of approximately $1.2 million, net of a deferred tax adjustment within other revenues in the consolidated statements of operations. In conjunction with the transaction, as required by Fannie Mae, the Company used $3.0 million of the proceeds to reduce the legacy repurchase liability with Fannie Mae. Note 14.—Fair Value of Financial Instruments The use of fair value to measure the Company’s financial instruments is fundamental to its consolidated financial statements and is a critical accounting estimate because a substantial portion of its assets and liabilities are recorded at estimated fair value. FASB ASC 825 requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. The following table presents F-30 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) the estimated fair value of financial instruments included in the consolidated financial statements as of the dates indicated: December 31, 2014 December 31, 2013 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 Assets Cash and cash equivalents Restricted cash Mortgage loans held-for-sale Finance receivables Mortgage servicing rights Derivative assets, lending, net Investment securities available-for-sale Securitized mortgage collateral Warrant Liabilities Warehouse borrowings Short-term structured debt Line of credit Convertible notes Long-term debt Securitized mortgage borrowings Derivative liabilities, securitized trusts Derivative liabilities, lending, net $ 10,073 $10,073 $ 2,420 239,391 8,358 24,418 2,884 92 5,249,639 84 2,420 - - - - - - - - $ - 239,391 8,358 - - - $ - - - 24,418 2,884 9,969 $9,969 $ 1,467 129,191 - 35,981 1,992 1,467 - - - - - $ - 129,191 - - 1,079 - - - - 35,981 913 - - - 92 5,249,639 84 108 5,494,152 - - - - - - - 108 5,494,152 - $ 226,718 $ 6,000 4,000 20,000 22,122 5,245,860 - $ 119,634 $ - $226,718 $ - - - - - - 4,000 - - - 6,000 - 20,000 22,122 5,245,860 - 3,000 20,000 15,871 5,492,371 - $119,634 $ - - - - - - 3,000 - - - - - - 20,000 15,871 5,492,371 5,447 930 - - - 930 5,447 - 10,214 - - - - - 10,214 - The fair value amounts above have been estimated by management using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. For securitized mortgage collateral and securitized mortgage borrowings, the underlying Alt-A residential and commercial loans and mortgage-backed securities market have experienced significant declines in market activity, along with a lack of orderly transactions. The Company’s methodology to estimate fair value of these assets and liabilities include the use of internal pricing techniques such as the net present value of future expected cash flows (with observable market participant assumptions, where available) discounted at a rate of return based on the Company’s estimates of market participant requirements. The significant assumptions utilized in these internal pricing techniques, which are based on the characteristics of the underlying collateral, include estimated credit losses, estimated prepayment speeds and appropriate discount rates. Refer to Recurring Fair Value Measurements below for a description of the valuation methods used to determine the fair value of investment securities available-for-sale, securitized mortgage collateral and borrowings, derivative assets and liabilities, long-term debt, mortgage servicing rights, loans held-for-sale, and call and put options. F-31 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The carrying amount of cash and cash equivalents and restricted cash approximates fair value. Warehouse borrowings carrying amounts approximates fair value due to the short-term nature of the liabilities and do not present unanticipated interest rate or credit concerns. Line of credit carrying amount approximates fair value due to the short-term nature of the liability and does not present unanticipated interest rate or credit concerns. Short-term structured debt has a maturity of less than one year. The short-term structured debt is recorded at amortized cost, net of any discounts. The carrying amount approximates fair value due to the short-term nature of the liability and does not present unanticipated interest rate or credit concerns. Convertible notes are recorded at amortized cost. The estimated fair value is determined using a discounted cash flow model using estimated market rates. Fair Value Hierarchy The application of fair value measurements may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value. FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy: (cid:127) Level 1—Quoted prices (unadjusted) in active markets for identical instruments or liabilities that an entity has the ability to assess at measurement date. (cid:127) Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable for an asset or liability, including interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, loss severities, credit risks and default rates; and market-corroborated inputs. (cid:127) Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value. As a result of the lack of observable market data resulting from inactive markets, the Company has classified its investment securities available-for-sale, mortgage servicing rights, call and put options, securitized mortgage collateral and borrowings, derivative assets and liabilities (trust and IRLCs), and long-term debt as Level 3 fair value measurements. Level 3 assets and liabilities were approximately 96% and 99% and 98% and 99%, respectively, of total assets and total liabilities measured at estimated fair value at December 31, 2014 and 2013. F-32 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Recurring Fair Value Measurements The Company assesses its financial instruments on a quarterly basis to determine the appropriate classification within the fair value hierarchy, as defined by ASC Topic 810. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial instruments among the levels occur at the beginning of the reporting period. There were no material transfers between Level 1 and Level 2 classified instruments during the year ended December 31, 2014. The following tables present the Company’s assets and liabilities that are measured at estimated fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option at December 31, 2014 and December 31, 2013, based on the fair value hierarchy: Recurring Fair Value Measurements December 31, 2014 Level 2 Level 1 Level 3 Level 1 December 31, 2013 Level 2 Level 3 Assets Investment securities available-for-sale Mortgage loans held-for-sale Derivative assets, lending, net (1) Mortgage servicing rights Warrant (2) Securitized mortgage collateral Total assets at fair value Liabilities Securitized mortgage borrowings Derivative liabilities, securitized trusts (3) Long-term debt Derivative liabilities, lending, net (4) Total liabilities at fair $ - $ - $ 92 $ - $ - $ 108 - - - - - 239,391 - - - - - 2,884 24,418 84 5,249,639 - - - - - 129,191 - 1,079 - - 913 35,981 - - 5,494,152 - $ 239,391 $ 5,277,117 $ - $ 130,270 $ 5,531,154 - $ - $ 5,245,860 $ - $ - $ 5,492,371 - - - - - 930 5,447 22,122 - - - - - - - 10,214 15,871 - $ $ value $ - $ 930 $ 5,273,429 $ - $ - $ 5,518,456 (1) (2) At December 31, 2014, derivative assets, lending, net included $3.0 million in IRLCs associated with the Company’s mortgage lending operations, and is included in other assets in the accompanying consolidated balance sheets. At December 31, 2013, derivative assets, lending, net included $913 thousand in IRLCs and $1.1 million in Hedging Instruments, respectively. Included in other assets in the accompanying consolidated balance sheets. F-33 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) (3) (4) At December 31, 2014 and 2013, derivative liabilities, net—securitized trusts, are included within trust liabilities in the accompanying consolidated balance sheets. At December 31, 2014, derivative liabilities, lending included $930 thousand in Hedging Instruments. The following tables present reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and December 31, 2013: Level 3 Recurring Fair Value Measurements For the year ended December 31, 2014 Investment securities Securitized Securitized liabilities, net, Mortgage available- mortgage mortgage borrowings collateral for-sale securitized trusts Derivative rights Interest rate lock net servicing commitments, Long- term debt Warrant Fair value, December 31, 2013 Total gains (losses) included in earnings: Interest income (1) Interest expense (1) Change in fair value Total gains (losses) included in earnings Transfers in and/or out of Level 3 Purchases, issuances and settlements Purchases Issuances Settlements Fair value, December 31, 2014 Unrealized gains (losses) still $108 $ 5,494,152 $(5,492,371) $(10,214) $35,981 $ 913 $(15,871) $ - 26 - 34 60 - - - (76) 59,526 - 364,052 - (237,793) (360,005) - - (599) - - (6,229) - - 1,982 - (2,237) (4,014) - - (80) 423,578 (597,798) (599) (6,229) 1,982 (6,251) (80) - - - - - - (668,091) - - 844,309 - - 5,366 - 29,388 (34,722) - - - (11) - - - - - - 164 - $ 92 $ 5,249,639 $(5,245,860) $ (5,447) $24,418 $2,884 $(22,122) $ 84 held (2) $ 91 $(1,317,650) $ 3,452,064 $ (5,063) $24,418 $2,884 $ 48,641 $ 84 (1) (2) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $5.7 million for the year ended December 31, 2014. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings. Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at December 31, 2014. F-34 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Level 3 Recurring Fair Value Measurements For the year ended December 31, 2013 Investment securities Securitized Securitized liabilities, net, Mortgage available- mortgage mortgage borrowings collateral for-sale securitized trusts Derivative rights Interest rate lock servicing commitments, Call Put net option option Long- term debt Fair value, December 31, 2012 $110 $ 5,787,884 $(5,777,456) $(17,163) $10,703 $ 3,970 $ 368 $(1) $(12,731) Total gains (losses) included in earnings: Interest income (1) Interest expense (1) Change in fair value Total (losses) gains included in earnings Transfers in and/or out of Level 3 Purchases, issuances and settlements Purchases Issuances Settlements Fair value, 34 - 36 70 - - - (72) 31,562 - 452,084 - (244,796) (465,189) 483,646 (709,985) - - - - 574 574 - - - 6,490 - - (3,057) 6,490 (3,057) - - - (777,378) - - 995,070 - - 6,375 - 21,776 (2,988) - - - December 31, 2013 $108 $ 5,494,152 $(5,492,371) $(10,214) $35,981 $ 913 Unrealized gains (losses) still held (2) $ 72 $(1,897,583) $ 4,050,051 $ (9,640) $35,981 $ 913 - - 111 111 - - - (479) $ $ - - - - 1 1 - - - - - (2,453) (687) (3,140) - - - - $ - $(15,871) $ - $ 54,892 (1) (2) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Net interest income, including cash received and paid, was $5.3 million for the year ended December 31, 2013. The difference between accretion of interest income and expense and the amounts of interest income and expense recognized in the consolidated statements of operations is primarily from contractual interest on the securitized mortgage collateral and borrowings. Represents the amount of unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held and reflected in the fair values at December 31, 2013. F-35 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and non-recurring basis at December 31, 2014. Financial Instrument Assets and liabilities backed by real estate Investment securities available-for-sale, Estimated Fair Value Valuation Technique Unobservable Input Range of Inputs Weighted Average $ 92 DCF Discount rates 3.4 - 25.0% 5.2% Securitized mortgage collateral, and Securitized mortgage borrowings 5,249,639 (5,245,860) Prepayment rates Default rates Loss severities 1.1 - 35.1% 5.5% 0.7 - 11.8% 2.9% 1.5 - 62.0% 39.0% Other assets and liabilities Mortgage servicing rights Derivative liabilities, net, securitized trusts Derivative assets – IRLCs, net Long-term debt Lease liability DCF = Discounted Cash Flow 1M = 1 Month $ 24,418 DCF (5,447) 2,884 Market pricing DCF (22,122) (1,578) DCF DCF Discount rate Prepayment rates 1M forward LIBOR Pull-through rate Discount rate Discount rate 10.5 - 11.5% 9.6% 2.3 - 50.8% 11.3% 0.2 - 3.5% N/A 46.0 - 99.0% 87.5% 19.2% 19.2% 12.0% 12.0% For assets and liabilities backed by real estate, a significant increase in discount rates, default rates or loss severities would result in a significantly lower estimated fair value. The effect of changes in prepayment speeds would have differing effects depending on the seniority or other characteristics of the instrument. For other assets and liabilities, a significant increase in discount rates would result in a significantly lower estimated fair value. A significant increase in one-month LIBOR would result in a significantly higher estimated fair value for derivative liabilities, net, securitized trusts. A significant increase or decrease in pull-through rate assumptions would result in a significant increase or decrease in the fair value of IRLCs. The Company believes that the imprecision of an estimate could be significant. F-36 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following tables present the changes in recurring fair value measurements included in net earnings for the years ended December 31, 2014 and 2013: Recurring Fair Value Measurements Changes in Fair Value Included in Net Loss For the ended December 31, 2014 Change in Fair Value of Interest Interest Income (1) Expense (1) Assets Net Trust Long-term Other Gain on sale Revenue of loans, net Debt Total Investment securities available-for-sale Securitized mortgage collateral Securitized mortgage borrowings Derivative liabilities, net, securitized trusts Long-term debt Mortgage servicing rights (3) Warrant Mortgage loans held-for-sale Derivative assets – IRLCs Derivative liabilities – Hedging Instruments Total $ 26 59,526 - $ - - (237,793) $ 34 364,052 (360,005) $ - - - $ - - - $ - - - $ 60 423,578 (597,798) - - - - - - - - (2,237) - - - - (599) (2) - - - - - - (4,014) - - - - - - (6,229) (80) - - - - - - 6,857 1,982 (599) (6,251) (6,229) (80) 6,857 1,982 - - - - (2,009) (2,009) $59,552 $(240,030) $ 3,482 (4) $(4,014) $(6,309) $ 6,830 $(180,489) (1) (2) (3) (4) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Included in this amount is $4.6 million in changes in the fair value of derivative instruments, offset by $5.2 million in cash payments from the securitization trusts for the year ended December 31, 2014. Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations. For the year ended December 31, 2014, change in the fair value of trust assets, excluding REO was $3.5 million. Excluded from the $(8.7) million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $5.2 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities. F-37 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Recurring Fair Value Measurements Changes in Fair Value Included in Net Loss For the ended December 31, 2013 Change in Fair Value of Interest Interest Income (1) Expense (1) Net Trust Assets Long-term Other Gain on sale Revenue of loans, net Debt Total Investment securities available-for-sale Securitized mortgage collateral Securitized mortgage borrowings Derivative liabilities, net, securitized trusts Long-term debt Mortgage servicing rights (3) Call option Put option Mortgage loans held-for-sale Derivative assets – IRLCs Derivative liabilities – Hedging Instruments Total $ 34 31,562 - $ - - (244,796) $ 36 452,084 (465,189) $ - - - $ - - - $ - - - $ 70 483,646 (709,985) - - - - - - - - - (2,453) - - - - - 574 (2) - - - - - - - - - (687) - - - - - - - - 6,490 111 1 - - - - - - - (2,895) (3,057) 574 (3,140) 6,490 111 1 (2,895) (3,057) - 1,260 1,260 $31,596 $(247,249) $ (12,495) (4) $(687) $6,602 $(4,692) $(226,925) (1) (2) (3) (4) Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust assets and trust liabilities. Included in this amount is $6.8 million in changes in the fair value of derivative instruments, offset by $6.2 million in cash payments from the securitization trusts for the year ended December 31, 2013. Included in (loss) gain on mortgage servicing rights in the consolidated statements of operations. For the year ended December 31, 2013, change in the fair value of trust assets, excluding REO was $12.5 million. Excluded from the $6.3 million change in fair value of net trust assets, excluding REO, in the accompanying consolidated statement of cash flows is $6.2 million in cash payments from the securitization trusts related to the Company’s net derivative liabilities. The following is a description of the measurement techniques for items recorded at estimated fair value on a recurring basis. Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value. The investment securities consist primarily of non-investment grade mortgage-backed securities. The fair value of the investment securities is measured based upon the Company’s expectation of inputs that other market participants would use. Such assumptions include judgments about the underlying collateral, prepayment speeds, future credit losses, forward interest rates and certain other factors. Given the lack of observable market data as of December 31, 2014 and 2013 relating to these securities, the estimated fair value of the investment securities available-for-sale was measured using significant internal expectations of market participants’ assumptions. Investment securities available-for-sale are classified as a Level 3 measurement at December 31, 2014. Mortgage servicing rights—The Company elected to carry its entire mortgage servicing rights arising from its mortgage loan origination operation at fair value. The fair value of mortgage servicing rights is based upon a discounted cash flow model. The valuation model incorporates assumptions that market participants would use in estimating the fair value of servicing. These assumptions include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual F-38 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) servicing fee income, prepayment and late fees, among other considerations. Mortgage servicing rights are considered a Level 3 measurement at December 31, 2014. Mortgage loans held-for-sale—The Company elected to carry its mortgage loans held-for-sale originated or acquired from its mortgage lending operation at fair value. Fair value is based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. Given the meaningful level of secondary market activity for mortgage loans, active pricing is available for similar assets and accordingly, the Company classifies its mortgage loans held-for-sale as a Level 2 measurement at December 31, 2014. Call/Put option—As part of the initial acquisition of AmeriHome, the purchase agreement included a call option to purchase an additional 39% of AmeriHome and a put option which allows the noncontrolling interest holder to sell his then remaining 49% of AmeriHome to the Company in the event the Company does not exercise the call option. In June 2012 and January 2013, the Company and the noncontrolling interest holder entered into agreements to transfer an additional 27.5% and 1.5% ownership, respectively, of AmeriHome to the Company in exchange for the settlement of balances owed from the noncontrolling interest holder related to the Company for capital contributions made by the Company to AmeriHome and indemnification provisions included in the purchase agreement. In July 2013, the Company acquired the remaining 20% ownership of AmeriHome from the noncontrolling interest holder for $350 thousand in cash and $1.1 million in IMH common stock. As of December 31, 2013, the Company owned 100% of AmeriHome. The estimated fair values of the call and put options were based on models incorporating various assumptions including expected future book value of AmeriHome, the probability of the option being exercised, volatility, expected term and certain other factors. AmeriHome was sold in March 2014. See Note 13.-Acquisition/Disposition of Noncontrolling Interest. Securitized mortgage collateral—The Company elected to carry all of its securitized mortgage collateral at fair value. These assets consist primarily of non-conforming mortgage loans securitized between 2002 and 2007. Fair value measurements are based on the Company’s internal models used to compute the net present value of future expected cash flows, with observable market participant assumptions, where available. The Company’s assumptions include its expectations of inputs that other market participants would use in pricing these assets. These assumptions include judgments about the underlying collateral, prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of December 31, 2014, securitized mortgage collateral had an unpaid principal balance of $6.6 billion, compared to an estimated fair value on the Company’s balance sheet of $5.2 billion. The aggregate unpaid principal balance exceeds the fair value by $1.4 billion at December 31, 2014. As of December 31, 2014, the unpaid principal balance of loans 90 days or more past due was $1.1 billion compared to an estimated fair value of $0.4 billion. The aggregate unpaid principal balances of loans 90 days or more past due exceed the fair value by $0.7 billion at December 31, 2014. Securitized mortgage collateral is considered a Level 3 measurement at December 31, 2014. F-39 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Securitized mortgage borrowings—The Company elected to carry all of its securitized mortgage borrowings at fair value. These borrowings consist of individual tranches of bonds issued by securitization trusts and are primarily backed by non-conforming mortgage loans. Fair value measurements include the Company’s judgments about the underlying collateral and assumptions such as prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of December 31, 2014, securitized mortgage borrowings had an outstanding principal balance of $6.5 billion, net of $2.2 billion in bond losses, compared to an estimated fair value of $5.2 billion. The aggregate outstanding principal balance exceeds the fair value by $1.3 billion at December 31, 2014. Securitized mortgage borrowings are considered a Level 3 measurement at December 31, 2014. Long-term debt—The Company elected to carry all of its long-term debt (consisting of trust preferred securities and junior subordinated notes) at fair value. These securities are measured based upon an analysis prepared by management, which considered the Company’s own credit risk, including settlements with trust preferred debt holders and discounted cash flow analysis. As of December 31, 2014, long-term debt had an unpaid principal balance of $70.5 million compared to an estimated fair value of $22.1 million. The aggregate unpaid principal balance exceeds the fair value by $48.4 million at December 31, 2014. The long-term debt is considered a Level 3 measurement at December 31, 2014. Derivative assets and liabilities, Securitized trusts—For non-exchange traded contracts, fair value is based on the amounts that would be required to settle the positions with the related counterparties as of the valuation date. Valuations of derivative assets and liabilities are based on observable market inputs, if available. To the extent observable market inputs are not available, fair values measurements include the Company’s judgments about future cash flows, forward interest rates and certain other factors, including counterparty risk. Additionally, these values also take into account the Company’s own credit standing, to the extent applicable; thus, the valuation of the derivative instrument includes the estimated value of the net credit differential between the counterparties to the derivative contract. As of December 31, 2014, the notional balance of derivative assets and liabilities, securitized trusts was $96.4 million. These derivatives are included in the consolidated securitization trusts, which are nonrecourse to the Company, and thus the economic risk from these derivatives is limited to the Company’s residual interests in the securitization trusts. Derivative assets and liabilities, securitized trusts are considered a Level 3 measurement at December 31, 2014. Derivative assets and liabilities, Lending—The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as free standing derivatives. The derivatives include IRLCs with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. The derivatives also include hedging instruments (typically TBA MBS) used to hedge the fair value changes associated with changes in interest rates relating to its mortgage lending operations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date of the loan sale. The estimated fair value of IRLCs are based on underlying loan types with similar characteristics using the TBA MBS market, which is actively quoted and easily validated through external sources. The data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan, adjusted for current market conditions. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. For all IRLCs, the base value is then adjusted for the anticipated Pull-through Rate. F-40 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The anticipated Pull-through Rate is an unobservable input based on historical experience, which results in classification of IRLCs as a Level 3 measurement at December 31, 2014. The fair value of the Hedging Instruments is based on the actively quoted TBA MBS market using observable inputs related to characteristics of the underlying MBS stratified by product, coupon and settlement date. Therefore, the Hedging Instruments are classified as a Level 2 measurement at December 31, 2014. Warrant— Upon entering an arrangement to facilitate the Company’s ability to offer Non-QM mortgage products, a warrant to purchase up to 9.9% of Impac Mortgage Corp. was issued. The warrant can only be exercised if the Company chooses not to continue with the agreement to facilitate Non-QM mortgage products and has a 60 day expiration window after the termination of the agreement. The exercise price of the warrant is an agreed upon multiple times the book value of the subsidiary Impac Mortgage Corp. at the time of exercise plus up to an additional 0.2 times the book value at the exercise date based off of the net income of Impac Mortgage Corp. for the following 12 months. Additionally, if upon exercise of the warrant, the Company does not receive regulatory approval for the sale of the 9.9% as a result of actions of the Company, the Company will have to pay the holder of the warrant a redemption price, equal to the value of the warrant, in cash within 30 days. The estimated fair value of the warrant was based on a model incorporating various assumptions including expected future book value of Impac Mortgage Corp., the probability of the warrant being exercised, volatility, expected term and certain other factors. The warrant is considered a Level 3 measurement at December 31, 2014. Nonrecurring Fair Value Measurements The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These fair value measurements typically result from the application of specific accounting pronouncements under GAAP. The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10. The following tables present financial and non-financial assets and liabilities measured using nonrecurring fair value measurements at December 31, 2014 and 2013, respectively: Nonrecurring Fair Value Measurements December 31, 2014 Level 2 Level 1 Level 3 Total Gains (Losses) (3) For the Year Ended December 31, 2014 REO (1) Lease liability (2) Deferred charge (4) $ $ - - - $ 3,030 - - $ - (1,578) 11,521 7,581 (681) (453) (1) Balance represents REO at December 31, 2014 which has been impaired subsequent to foreclosure. Amounts are included in continuing operations. For the year ended December 31, 2014, the $7.6 million gain represents recovery of the net realizable value (NRV) attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV. F-41 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) For the year ended December 31, 2014, the Company recorded $681 thousand in losses resulting from changes in lease liabilities as a result of changes in the Company’s expected minimum future lease payments, net. Total losses reflect losses from all nonrecurring measurements during the period. Amounts are included in continuing operations. For the year ended December 31, 2014, the Company recorded $453 thousand in income tax expense resulting from impairment write-downs based on changes in estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral. Non-recurring Fair Value Measurements December 31, 2013 Level 2 Level 3 Level 1 Total Gains (Losses) (3) For the Year Ended December 31, 2013 REO (1) Lease liability (2) $ $ - - 3,109 - $ - (1,623) $ 8,760 (202) Balance represents REO at December 31, 2013 which has been impaired subsequent to foreclosure. Amounts are included in continuing operations. For the year ended December 31, 2013, the $8.8 million gain represents recovery of the net realizable value (NRV) attributable to an improvement in state specific loss severities on properties held during the period which resulted in an increase to NRV. For the year ended December 31, 2013, the Company recorded $202 thousand in losses resulting from changes in lease liabilities as a result of changes in the Company’s expected minimum future lease payments, net. Total losses reflect losses from all nonrecurring measurements during the period. (2) (3) (4) (1) (2) (3) Real estate owned—REO consists of residential real estate acquired in satisfaction of loans. Upon foreclosure, REO is adjusted to the estimated fair value of the residential real estate less estimated selling and holding costs, offset by expected contractual mortgage insurance proceeds to be received, if any. Subsequently, REO is recorded at the lower of carrying value or estimated fair value less costs to sell. REO balance representing REOs which have been impaired subsequent to foreclosure are subject to nonrecurring fair value measurement and included in the nonrecurring fair value measurements tables. Fair values of REO are generally based on observable market inputs, and considered Level 2 measurements at December 31, 2014. Lease liability—In connection with the discontinuation of our non-conforming mortgage, retail mortgage, warehouse lending and commercial operations, a significant amount of office space that was previously occupied is no longer being used by the Company. The Company has subleased a significant amount of this office space. The Company has recorded a liability representing the present value of the minimum lease payments over the remaining life of the lease, offset by the expected proceeds from sublet revenue related to this office space. This liability is based on present value techniques that incorporate the Company’s judgments about estimated sublet revenue and discount rates. Therefore, this liability is considered a Level 3 measurement at December 31, 2014. Deferred charge—Deferred charge represents the deferral of income tax expense on inter- company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH in prior years. F-42 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The Company evaluates the deferred charge for impairment quarterly using internal estimates of estimated cash flows and lives of the related mortgages retained in the securitized mortgage collateral. If the deferred charge is determined to be impaired, it is recognized as a component of income tax expense. For the year ended December 31, 2014, the Company recorded $453 thousand in income tax expense resulting from deferred charge impairment write-downs based on changes in estimated fair value of securitized mortgage collateral. There was no impairment of the deferred charge in 2013. Deferred charge is considered a Level 3 measurement at December 31, 2014. F-43 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 15.—Reconciliation of Earnings Per Share The following table presents the computation of basic and diluted earnings per common share, including the dilutive effect of stock options and cumulative redeemable preferred stock outstanding for the periods indicated: Numerator for basic loss per share: Loss from continuing operations Net earnings attributable to noncontrolling interest Loss from continuing operations attributable to IMH Loss from discontinued operations Net loss attributable to IMH common stockholders Numerator for diluted loss per share: Loss from continuing operations attributable to IMH Interest expense attributable to convertible notes Loss from continuing operations attributable to IMH plus interest expense attributable to convertible notes Loss from discontinued operations Net loss attributable to IMH common stockholders plus For the year ended December 31, 2014 2013 $ $ $ (3,967) $ - (3,967) (2,355) (5,011) (136) (5,147) (3,037) (6,322) $ (8,184) (3,967) $ - (5,147) - (3,967) (2,355) (5,147) (3,037) interest expense attributable to convertible notes $ (6,322) $ (8,184) Denominator for basic loss per share (1): Basic weighted average common shares outstanding during the year 9,344 8,749 Denominator for diluted loss per share (1): Basic weighted average common shares outstanding during the year Net effect of dilutive convertible notes Net effect of dilutive stock options and DSU’s Diluted weighted average common shares 9,344 - - 9,344 Loss per common share – basic and diluted: Loss from continuing operations attributable to IMH Loss from discontinued operations Net loss per share available to common stockholders $ $ $ (0.43) $ (0.25) (0.68) $ 8,749 - - 8,749 (0.59) (0.35) (0.94) (1) Share amounts presented in thousands. The anti-dilutive stock options outstanding for the years ending December 31, 2014 and 2013 were 2.9 million and 2.6 million shares, respectively. Included in the anti-dilutive shares for 2014 are 1.8 million shares attributable to the Convertible Notes. F-44 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 16.—Income Taxes The Company is subject to federal income taxes as a regular (Subchapter C) corporation and files a consolidated U.S. federal income tax return. Income taxes for the years ended December 31, 2014 and 2013 were as follows: For the year ended December 31, 2014 2013 Current income taxes: Federal State Total current income tax expense Deferred income taxes: Federal State Total deferred income tax benefit $ $ 940 365 1,305 - - - Total income tax expense (benefit) $ 1,305 $ 21 144 165 (1,038) (158) (1,196) (1,031) The Company recorded income tax expense (benefit) of $1.3 million and ($1.0) million for the years ended December 31, 2014 and 2013, respectively. The current income tax expense of $1.3 million for 2014 is primarily the result of the federal alternative minimum tax (AMT), amortization of the deferred charge and state income taxes from states where the Company does not have net operating loss carryforwards or state minimum taxes, including AMT. The deferred charge represents the deferral of income tax expense on inter-company profits that resulted from the sale of mortgages from taxable subsidiaries to IMH prior to 2008. The deferred charge is amortized and/or impaired, which does not result in any tax liability to be paid. The deferred charge is included in other assets in the accompanying consolidated balance sheets and is amortized as a component of income tax expense in the accompanying consolidated statement of operations. The income tax benefit for 2013 is the result of the inclusion of AmeriHome in the IMH federal income tax return due to the Company’s increased ownership of AmeriHome during the first quarter of 2013. Additionally, federal alternative minimum tax was expensed during 2013. F-45 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Deferred tax assets are comprised of the following temporary differences between the financial statement carrying value and the tax basis of assets: For the year ended December 31, 2014 2013 Deferred tax assets: Fair value (1) Federal and state net operating losses (2) Derivatives Real estate owned Depreciation and amortization Compensation and other accruals Repurchase reserve Total gross deferred tax assets (3) Deferred tax liabilities: REMIC transactions (4) Mortgage servicing rights Total gross deferred tax liabilities Valuation allowance $ $ 128,265 196,954 1,388 750 620 6,919 2,287 337,183 (164,170) (9,773) (173,943) (163,240) Total net deferred tax assets $ - $ 74,682 208,158 2,980 1,892 878 3,053 3,832 295,475 (123,650) (14,359) (138,009) (157,466) - (1) (2) (3) (4) Includes the change in fair value of net trust assets, long-term debt, LHFS, interest accretion and loan losses. Federal and state NOL’s related to the discontinued operations totaled $121.6 million and $119.5 million at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, discontinued operations had gross deferred tax assets of $121.8 million and $118.5 million, respectively, which had a full valuation allowance. Includes (i) REMIC transactions—tax versus book difference. The following is a reconciliation of income taxes to the expected statutory federal corporate income tax rates for the years ended December 31, 2014 and 2013: Expected income tax (benefit) expense State tax, net of federal benefit Change in valuation allowance Deferred charge Other Total income tax expense (benefit) For the year ended December 31, 2014 2013 $ $ (1,756) $ (248) 2,735 453 121 1,305 $ (3,177) (343) 2,441 - 48 (1,031) F-46 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) As of December 31, 2014, the Company had estimated federal and California net operating loss (NOL) carryforwards of approximately $495.9 million and $427.3 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2027 and 2018, respectively. The Company files numerous tax returns in various jurisdictions. While the Company is subject to examination by various taxing authorities, the Company believes there are no unresolved issues or claims likely to be material to its financial position. A subsidiary of the Company had been examined by the IRS for tax years 2006 and 2008. The Company classifies interest and penalties on taxes as provision for income taxes. As of December 31, 2014 and 2013, the Company has no material uncertain tax positions. The Company has federal AMT credits in the amount of $507 thousand as of December 31, 2014. The Company recognizes tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award. At December 31, 2014 and 2013, deferred tax assets do not include $3.8 million of excess tax benefits from stock-based compensation. Note 17.—Segment Reporting The Company has three primary reporting segments within continuing operations which include mortgage lending, real estate services and long-term mortgage portfolio. Unallocated corporate and other administrative costs, including the costs associated with being a public company, are presented in Corporate. F-47 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table presents selected balance sheet data by reporting segment as of the dates indicated: Balance Sheet Items as of December 31, 2014: Cash and cash equivalents Restricted cash Mortgage loans held-for-sale Mortgage servicing rights Trust assets Other assets (1) Total assets Total liabilities Balance Sheet Items as of December 31, 2013: Cash and cash equivalents Restricted cash Mortgage loans held-for-sale Mortgage servicing rights Trust assets Other assets (1) Total assets Total liabilities Mortgage Real Estate Long-term Corporate Discontinued Lending and other Portfolio Services Operations Consolidated $ 9,434 $ 2,420 239,391 24,418 - 16,166 291,829 253,278 400 $ - - - - 2,272 2,672 1,458 - $ - - - 5,268,531 11,743 5,280,274 5,273,815 239 $ - - - - 3,458 3,697 21,919 - - - - - 100 100 3,146 $ 10,073 2,420 239,391 24,418 5,268,531 33,739 5,578,572 5,553,616 Mortgage Real Estate Long-term Corporate Discontinued Lending and other Portfolio Services Operations Consolidated $ 9,451 $ 1,467 129,191 35,981 - (671) 175,419 141,857 (74) $ - - - - 8,122 8,048 1,305 - $ - - - 5,513,166 56 5,513,222 5,502,765 592 $ - - - - 18,767 19,359 33,644 - - - - - 2,277 2,277 12,883 $ 9,969 1,467 129,191 35,981 5,513,166 28,551 5,718,325 5,692,454 (1) Amounts represent reclassifications of balances within the discontinued operations segment to reflect balances within continuing operations as presented in the accompanying consolidated balance sheets. F-48 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table presents selected statement of operations information by reporting segment for the years ended December 31, 2014 and 2013: Statement of Operations Items for the year ended December 31, 2014: Gain on sale of loans, net Servicing income, net Real estate services fees, net (Loss) on mortgage servicing rights Other revenue Other income (expense) Total expense (Loss) earnings from continuing operations Mortgage Real Estate Long-term Corporate Lending Portfolio Services and other Consolidated $ 29,308 $ 4,586 - (5,116) 1,311 1,353 (35,311) - $ - 14,729 - - (5) (6,052) - $ - - - 371 8,456 (924) - $ - - - - (1,620) (13,748) 29,308 4,586 14,729 (5,116) 1,682 8,184 (56,035) before income taxes $ (3,869) $ 8,672 $ 7,903 $ (15,368) (2,662) Income tax benefit from continuing operations Loss from continuing operations Loss from discontinued operations, net of tax Net loss Net earnings attributable to noncontrolling interest Net loss attributable to common stockholders Statement of Operations Items for the year ended December 31, 2013: 1,305 (3,967) (2,355) (6,322) - $ (6,322) Mortgage Real Estate Long-term Corporate Lending Portfolio Services and other Consolidated Gain on sale of loans, net Servicing income, net Real estate services fees, net Gain on mortgage servicing rights Other revenue Other income (expense) Total expense $ 57,188 $ 4,240 - 6,567 191 4 (69,291) - $ - 19,370 - - 19 (6,139) - $ - - - 833 (3,371) (1,713) - $ - - - (20) (1,103) (12,817) 57,188 4,240 19,370 6,567 1,004 (4,451) (89,960) (Loss) earnings from continuing operations before income taxes $ (1,101) $ 13,250 $ (4,251) $ (13,940) (6,042) Income tax benefit from continuing operations Loss from continuing operations Loss from discontinued operations, net of tax Net loss Net earnings attributable to noncontrolling interest Net loss attributable to common stockholders (1,031) (5,011) (3,037) (8,048) (136) $ (8,184) F-49 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 18.—Commitments and Contingencies (Continuing and Discontinued Operations) Legal Proceedings The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any. In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In any cases, there may be an exposure to losses in excess of any such amounts whether accrued or not. Any estimated loss is subject to significant judgment and is based upon currently available information, a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure. At December 31, 2014, the Company has a $130 thousand accrued liability recorded for such estimated loss exposure. Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period. The legal matters summarized below are ongoing and may have an effect on the Company’s business and future financial condition and results of operations: On or about April 20, 2011, an action was filed entitled Federal Home Loan Bank of Boston v. Ally Financial Inc., et al, naming IMH Assets Corp, IFC, the Company, and ISAC as defendants. The complaint alleges misrepresentations in the materials used to market mortgage-backed securities that the plaintiff purchased. The complaint seeks damages and attorney’s fees in an amount to be established at time of trial. The case was removed to the United States District Court for the District of Massachusetts and on September 30, 2013, the Court granted the Company’s motion to dismiss claims against it arising under the Massachusetts Uniform Securities Act. The case remains pending as to other claims against the Company. On December 7, 2011, a purported class action was filed in the Circuit Court of Baltimore City entitled Timm, v. Impac Mortgage Holdings, Inc, et al. alleging on behalf of holders of the Company’s 9.375% Series B Cumulative Redeemable Preferred Stock (Preferred B) and 9.125% Series C Cumulative Redeemable Preferred Stock (Preferred C) who did not tender their stock in connection with the Company’s 2009 completion of its Offer to Purchase and Consent Solicitation that the Company F-50 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) failed to achieve the required consent of the Preferred B and C holders, the consents to amend the Preferred stock were not effective because they were given on unissued stock (after redemption), the Company tied the tender offer with a consent requirement that constituted an improper ‘‘vote buying’’ scheme, and that the tender offer was a breach of a fiduciary duty. The action seeks the payment of two quarterly dividends for the Preferred B and C holders, the unwinding of the consents and reinstatement of the cumulative dividend on the Preferred B and C stock, and the election of two directors by the Preferred B and C holders. The action also seeks punitive damages and legal expenses. The court, on January 28, 2013, dismissed all individual director and officer defendants from the case and further dismissed the Second, Third and Fifth causes of action. The remaining causes of action against the Company allege the Preferred B holders did not approve amendments to its Articles Supplementary and the holders thereof seek to recover two quarters of dividends and to elect two members to the Board of Directors of the Company. On November 27, 2013, the court denied the plaintiff’s motion to reconsider the court’s January 28, 2013 order. The Company and Plaintiffs have filed a motion for summary judgment on the remaining claims and motions are currently pending. On April 30, 2012, a purported class action was filed entitled Marentes v. Impac Mortgage Holdings, Inc., alleging that certain loan modification activities of the Company constitute an unfair business practice, false advertising and marketing, and that the fees charged are improper. The complaint seeks unspecified damages, restitution, injunctive relief, attorney’s fees and prejudgment interest. On August 22, 2012, the plaintiff filed an amended complaint adding Impac Funding Corporation as a defendant and on October 2, 2012, the plaintiff dismissed Impac Mortgage Holdings, Inc., without prejudice. On December 27, 2012, the court granted IFC’s motion to dismiss and on May 23, 2014, the court of appeals reversed the dismissal. Discovery is currently proceeding in this matter. On December 14, 2013, a matter was filed in the US District Court, District of Minnesota, entitled Residential Funding Company, LLC v. Impac Funding Corp. alleging the defendant is responsible for unspecific debts of Pinnacle Direct Funding Corp., as its successor in interest. On April 3, 2014, the plaintiff filed a First Amended Complaint alleging the defendant is responsible for breaches of representations and warranties in connection with certain loan sales from Pinnacle to plaintiff. The plaintiff seeks declaratory relief and unspecified damages. On April 17, 2014, the Company filed a motion to dismiss the First Amended Complaint, which the court denied. The Company answered the First Amended Complaint on September 24, 2014, and filed a motion for summary judgment on January 6, 2015, which remains pending. On October 28, 2014, an action was filed in the Superior Court of the State of California in Orange County entitled Mallory Hill vs. Impac Mortgage Holdings, Inc., Impac Mortgage Corporation et al. In the action Mr. Hill seeks compensatory damages, general damages, treble damages, exemplary damages, an accounting, injunctive relief, attorney’s fees and costs for claims based upon a consulting agreement entered into with Mr. Hill, a purported employment relationship entered into with Mr. Hill and other purported claims. The matter was removed to the US District Court. The Company has filed a motion to dismiss that is pending. In October 2011 and November 2012, the Company received letters from Countrywide Securities Corporation (Countrywide), Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), and UBS Securities LLC (UBS) claiming indemnification relating to mortgage backed securities bonds issued, originated or sold by ISAC, IFC, IMH Assets Corp. and the Company. The claims seek F-51 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) indemnification from claims asserted against Countrywide, Merrill Lynch, and UBS in specified legal actions entitled American International Group Inc. v. Bank of America Corp., et al, in the United States District Court for the Southern District of New York and Federal Home Loan Bank of Boston v. Ally Financial, Inc., et al, in the United States District Court for the District of Massachusetts. The notices each seek indemnification for all losses, liabilities, damages and legal fees and costs incurred in those actions. Further related to these claims, the Company received a demand from American International Group (AIG) for claims it purports to have based upon 12 Residential Mortgage Backed Securities it purchased in which the Company was depositor, sponsor, seller and/or originator. AIG contends it has suffered almost $800 million in losses on the securities and contends there were misrepresentations and breaches of representations and warranties regarding the securities. In October 2012, January 2013, and December 2014, Deutsche Bank issued indemnification demands for claims asserted against them in the Superior Court of New York in cases entitled Royal Park Investments SA/NV v. Merrill Lynch, et al. and Dealink Funding Ltd. v. Deutsche Bank and in the Circuit Court for the City of Richmond, Virginia, in a case entitled Commonwealth of VA, et al. v. Barclays Capital Inc, et al. In February of 2013 the Company also received a notice of intent to seek indemnification on behalf of Deutsche Bank AG, Deutsche Bank Securities, Inc., DB Structured Products, Inc., ACE Securities Corp and Deutsche Alt-A Securities, Inc. The claim relates to an action filed against those entities in the Superior Court of New York. The Company is a party to other litigation and claims which are normal in the course of our operations. While the results of such other litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on our financial condition or results of operations. The Company believes that it has meritorious defenses to the above claims and intends to defend these claims vigorously and as such the Company believes the final outcome of such matters will not have a material adverse effect on its financial condition or results of operations. Nevertheless, litigation is uncertain and the Company may not prevail in the lawsuits and can express no opinion as to their ultimate resolution. An adverse judgment in any of these matters could have a material adverse effect on the Company’s financial position and results of operations. Lease Commitments The Company leases office space and certain office equipment under long-term leases expiring at various dates through 2019. Future minimum commitments under non-cancelable leases are as follows: Year 2015 Year 2016 Year 2017 Year 2018 Year 2019 and thereafter Subtotal Sublet income Operating Leases Capital Leases Total 7,851 6,519 — — — 14,370 (5,407) $ 728 357 68 34 23 1,210 — 8,579 6,876 68 34 23 15,580 (5,407) Total lease commitments $ 8,963 $ 1,210 $ 10,173 Total rental expense for the years ended December 31, 2014 and 2013 was $5.0 million and $5.8 million, respectively. During 2014 and 2013, approximately $4.8 million and $5.7 million, F-52 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) respectively, were charged to continuing operations, and are included in occupancy expense in the consolidated statements of operations. Included in rent expense for 2014 and 2013, is an increase of $681 thousand and $202 thousand, respectively, related to changes in estimated lease liabilities as a result of changes in our expected minimum future lease payments. Interest expense on the capital leases was $72 thousand and $58 thousand for the years ended December 31, 2014 and 2013, respectively. Repurchase Reserve When the Company sells mortgage loans, it makes customary representations and warranties to the purchasers about various characteristics of each loan such as the origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. The Company’s whole loan sale agreements generally require it to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. The activity related to the continuing operations repurchase reserve for previously sold loans for the years ended December 31, 2014 and 2013 is as follows: December 31, December 31, 2014 2013 Beginning balance Provision for repurchases Settlements Total repurchase reserve $ $ $ 4,013 1,190 (701) 4,502 $ 2,392 1,750 (129) 4,013 The activity related to the discontinued operations repurchase reserve for previously sold loans for the years ended December 31, 2014 and 2013 is as follows: December 31, December 31, 2014 2013 Beginning balance Provision for repurchases Settlements Total repurchase reserve $ $ $ 5,465 1,062 (5,315) 1,212 $ 8,170 1,312 (4,017) 5,465 Concentration of Risk The aggregate unpaid principal balance of loans in the Company’s long-term mortgage portfolio secured by properties in California and Florida was $3.4 billion and $694.7 million, or 51% and 11%, respectively, at December 31, 2014. The Company does not have a significant concentration of risk to any individual client except for the U.S. government and its agencies relating to its concentration of loan sales. However, a geographic concentration arises because 62% of the Company originations were from California. F-53 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) Note 19.—Share Based Payments and Employee Benefit Plans The Company maintains a stock-based incentive compensation plan, the terms of which are governed by the 2010 Omnibus Incentive Plan (the 2010 Incentive Plan). The 2010 Incentive Plan provides for the grant of stock appreciation rights, restricted stock units, performance shares and other stock and cash-based incentive awards. Employees, directors, consultants or other persons providing services to the Company or its affiliates are eligible to receive awards pursuant to the 2010 Incentive Plan. In connection with the adoption of the 2010 Incentive Plan, the Company’s 2001 Stock Plan, which was scheduled to expire in March 2011, was frozen. Further, all outstanding awards under the 2001 Stock Plan, as well as the Company’s previous 1995 Stock Option, Deferred Stock and Restricted Stock Plan (together with the 2001 Stock Plan, the ‘‘Prior Plans’’), were assumed by the 2010 Incentive Plan. During the third quarter of 2014, the shareholders voted on and approved the amendment to the 2010 Omnibus Incentive Plan to increase the shares subject to the plan by 300,000 shares. As of December 31, 2014, the aggregate number of shares reserved under the 2010 Incentive Plan is 1,430,410 shares (including all outstanding awards assumed from Prior Plans), and there were 59,402 shares available for grant as stock options, restricted stock and deferred stock awards. The Company issues new shares of common stock to satisfy stock option exercises. There were 409,250 options granted for the year ended December 31, 2014. The fair value of options granted, which is amortized to expense over the option vesting period, is estimated on the date of grant with the following weighted average assumptions: Risk-free interest rate Expected lives (in years) Expected volatility (1) Expected dividend yield Fair value per share For the year ended December 31, 2014 1.08 - 1.79% 3.48 - 5.73 70.47 - 75.93% 0.00% $2.69 - $4.46 2013 1.46% 5.56 78.58% 0.00% $7.03 (1) Expected volatilities are based on both the implied and historical volatility of the Company’s stock over the expected option life. F-54 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table summarizes activity, pricing and other information for the Company’s stock options for the years presented below: For the year ended December 31, 2014 2013 Number of Shares Weighted- Average Exercise Price Number of Shares Weighted- Average Exercise Price 787,132 $ 409,250 (14,622) 9.07 5.41 2.58 796,795 $ 255,000 (121,576) (103,530) 18.30 (143,087) 1,078,230 $ 534,323 $ 6.88 6.72 787,132 $ 424,888 $ 7.89 10.65 1.45 11.76 9.07 6.72 Options outstanding at beginning of year Options granted Options exercised Options forfeited / cancelled Options outstanding at end of year Options exercisable at end of year The aggregate intrinsic value in the following table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $6.20 and $5.98 per common share as of December 31, 2014 and 2013, respectively. Aggregate intrinsic value represents the amount of proceeds the option holders would have received had all option holders exercised their options and sold the stock as of that date. As of December 31, 2014 2013 Weighted- Average Remaining Life (Years) Aggregate Intrinsic Value (in thousands) Weighted- Average Remaining Life (Years) Aggregate Intrinsic Value (in thousands) Options outstanding at end of year Options exercisable at end of year 7.89 $ 1,631 7.92 $ 1,325 6.50 $ 1,319 6.73 $ 1,325 As of December 31, 2014, there was approximately $1.9 million of total unrecognized compensation cost related to stock option compensation arrangements granted under the plan, net of estimated forfeitures. That cost is expected to be recognized over the remaining weighted average period of 1.9 years. For the years ended December 31, 2014 and 2013, the aggregate grant-date fair value of stock options granted was approximately $1.4 million and $1.8 million, respectively. F-55 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) For the years ended December 31, 2014 and 2013, total stock-based compensation expense was $1.9 million and $2.0 million, respectively. Additional information regarding stock options outstanding as of December 31, 2014 is as follows: Exercise Price Range $ 0 - 0.53 0.54 - 2.80 2.81 - 6.81 6.82 - 10.65 10.66 - 13.81 $ 0.53 - 13.81 Stock Options Outstanding Weighted- Average Remaining Contractual Outstanding Life in Years Number Weighted- Average Exercise Price Options Exercisable Number Exercisable Weighted- Average Exercise Price 130,410 168,070 390,250 190,000 199,500 1,078,230 4.44 5.87 9.56 8.56 7.91 7.89 0.53 2.75 5.41 10.65 13.81 6.88 130,410 $ 168,070 — 63,340 172,503 534,323 0.53 2.75 — 10.65 13.81 6.72 In addition to the options granted, the Company has granted deferred stock units (DSU’s), which vest between one and three year periods. The fair value of each DSU was measured on the date of grant using the grant date price of the Company’s stock. For the years ended December 31, 2014 and 2013, the aggregate grant-date fair value of DSU’s granted was approximately $20 thousand and $320 thousand, respectively. The following table summarizes activity, pricing and other information for the Company’s DSU’s for the years presented below: For the year ended December 31, 2013 2014 Number of Shares Weighted- Average Grant Date Fair Value Number of Shares Weighted- Average Grant Date Fair Value $ 72,000 3,750 — — 75,750 $ 8.80 5.39 — — 8.63 $ 42,000 30,000 — — 7.48 10.65 — — 72,000 $ 8.80 DSU’s outstanding at beginning of year DSU’s granted DSU’s exercised DSU’s forfeited/ cancelled DSU’s outstanding at end of period F-56 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) As of December 31, 2014, there was approximately $177 thousand of total unrecognized compensation cost related to the DSU compensation arrangements granted under the plan. This cost is expected to be recognized over a weighted average period of 1.5 years. 401(k) Plan After meeting certain employment requirements, employees can participate in the Company’s 401(k) plan. Under the 401(k) plan, employees may contribute up to 25% of their salaries, pursuant to certain restrictions. The Company matches 50% of the first 4% of employee contributions. Additional contributions may be made at the discretion of the board of directors. During the year ended December 31, 2014, the Company recorded approximately $289 thousand for basic matching contributions. During the year ended December 31, 2013, the Company recorded approximately $473 thousand for basic matching contributions. There were no discretionary matching contributions recorded during the years ended December 31, 2014 or 2013. Note 20.—Related Party Transactions Historically, mortgage loans have been extended to officers and directors of the Company. All such loans were made at the prevailing market rates and conditions existing at the time. During 2014 and 2013, no mortgage loans were extended to officers or directors. During 2013, the Company incurred an expense of $132,000 from a vendor partially owned by an officer. Services were at arms-length and performed at prevailing market rates. The Company earns mortgage lending gains and fees and real estate service fees by providing such services to its long-term mortgage portfolio. Note 21.—Discontinued Operations During 2007, the Company announced plans to exit substantially all of its non-conforming mortgage, commercial, retail, and warehouse lending operations. Consequently, the amounts related to these operations are presented as discontinued operations in the Company’s consolidated statements of operations and comprehensive loss and its consolidated statements of cash flows, and the asset groups exited are reported as assets and liabilities of discontinued operations in its consolidated balance sheets for the periods presented. F-57 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) The following table presents the discontinued operations’ condensed balance sheets as of December 31, 2014 and 2013: Cash and cash equivalents Other assets Total assets Repurchase reserve Legal settlements Other liabilities Total liabilities At December 31, 2013 2014 $ $ $ $ $ $ $ - 100 100 1,212 - 1,934 - 2,277 2,277 5,465 3,775 3,643 3,146 $ 12,883 The following table presents the discontinued operations’ condensed statements of operations for the years ended December 31, 2014 and 2013: Provision for repurchases Legal settlements Other income (expense) Net loss For the years ended December 31, 2014 2013 $ $ (1,063) $ - (1,292) (2,355) $ (1,312) (3,775) 2,050 (3,037) Note 22.—Tax Benefits Preservation Rights Plan In September 2013, the Company adopted a Tax Benefits Preservation Rights Agreement (Rights Plan) to help preserve the value of certain deferred tax benefits, including those generated by net operating losses (collectively, Tax Benefits). In general, the Company may ‘‘carry forward’’ net operating losses in certain circumstances to offset current and future taxable income, which will reduce federal and state income tax liability, subject to certain requirements and restrictions. The Company’s ability to use these Tax Benefits would be substantially limited and impaired if it were to experience an ‘‘ownership change’’ for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’) and the Treasury Regulations promulgated thereunder. Generally, the Company will experience an ‘‘ownership change’’ if the percentage of the shares of Common Stock owned by one or more ‘‘five-percent shareholders’’ increases by more than 50 percentage points over the lowest percentage of shares of Common Stock owned by such stockholder at any time during the prior three year on a rolling basis. As such, the Rights Plan has a 4.99% ‘‘trigger’’ threshold that is intended to act as a deterrent to any person or entity seeking to acquire 4.99% or more of the outstanding Common Stock without the prior approval of the Board. The Rights Plan also has certain ancillary anti-takeover effects. The rights accompany each share of common stock of the Company and are evidenced by ownership of common stock. The rights are not exercisable except upon the occurrence of certain change of control events. Once triggered, the rights would entitle the stockholders, other than a person qualifying as an ‘‘Acquiring Person’’ pursuant to the rights plan, to certain ‘‘flip-in’’, ‘‘flip-over’’ and exchange rights. The rights issued under the Rights Plan may be redeemed by the board of directors at a nominal redemption price F-58 IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data or as otherwise indicated) of $0.001 per right, and the board of directors may amend the rights in any respect until the rights are triggered. The Rights Plan expires September 2, 2016. Note 23.—Subsequent Events On January 6, 2015, the Company, and its wholly-owned subsidiary, IMC, entered into an Asset Purchase Agreement (the ‘‘Asset Purchase Agreement’’) with CashCall, Inc. (‘‘CashCall’’) pursuant to which IMC agreed to purchase substantially all the assets and assume certain liabilities of CashCall’s residential mortgage operations. Upon closing, CashCall’s mortgage operations will operate as a separate division of IMC under the name CashCall Mortgage. Pursuant to the Asset Purchase Agreement, and subject to the terms and conditions contained therein, the purchase price consists of a fixed component and a contingent component. The fixed component includes (i) the aggregate payment of $10 million in cash, payable in installments through January 2016 and (ii) approximately 500,000 newly issued unregistered shares of the Company. The contingent component consists of a three year earn-out provision based on a percentage of the pre-tax profits of the CashCall Mortgage division purchased, which is expected to be an average of approximately 55% during the three year earn-out period of the CashCall Mortgage division’s profitability. Warehouse Amendments In January 2015, repurchase agreement 1 was amended to increase the maximum borrowing capacity from $100.0 million to $125.0 million. In January 2015, repurchase agreement 3 was amended to increase the maximum borrowing capacity from $50.0 million to $75.0 million. In January 2015, repurchase agreement 4 was amended to increase the maximum borrowing capacity from $125.0 million to $175.0 million. In February 2015, repurchase agreement 4 was amended to increase the maximum borrowing capacity from $175.0 million to $225.0 million. In February 2015, repurchase agreement 5 was amended to increase the maximum borrowing capacity from $100.0 million to $150.0 million. Short-term borrowing In January 2015, the Company entered into a $5.0 million short-term borrowing secured by Ginnie Mae servicing with an interest rate of 15%. The balance was repaid in March 2015. F-59 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-169316, 333-185195 and 333-193489) of Impac Mortgage Holdings, Inc. (the ‘‘Company’’) of our reports dated March 24, 2015 with respect to the consolidated financial statements of the Company and the effectiveness of the Company’s internal control over financial reporting included in this Annual Report (Form 10-K) for the year ended December 31, 2014. /s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP Newport Beach, California March 24, 2015 Exhibit 31.1 I, Joseph R. Tomkinson, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this report on Form 10-K of Impac Mortgage Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. b. c. d. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. b. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson Chief Executive Officer March 24, 2015 Exhibit 31.2 I, Todd R. Taylor, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this report on Form 10-K of Impac Mortgage Holdings, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. b. c. d. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. b. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ TODD R. TAYLOR Todd R. Taylor Chief Financial Officer March 24, 2015 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Impac Mortgage Holdings, Inc. (the ‘‘Company’’) on Form 10-K for the period ending December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: (1) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOSEPH R. TOMKINSON Joseph R. Tomkinson Chief Executive Officer March 24, 2015 /s/ TODD R. TAYLOR Todd R. Taylor Chief Financial Officer March 24, 2015 Impac Mortgage Holdings, Inc. 19500 Jamboree Road Irvine, CA 92612 16MAY201312534122