Q2 2020 Impac Mortgage Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the second quarter Twentytwenty Impac mortgage Holdings Inc. earnings Conference call at this time, all participants on this and only.
Later, we will conduct a question and answer session and instructions will follow with that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call.
Well not be recorded I would now like to turn the conference over to your host just in those yeah.
Oh. Thank you good morning, everyone. Thank you for joining Impac mortgage holdings second quarter 2020 earnings conference call. During this call we will make projections. Other forward looking statements in regards to but not limited to gap in taxable earnings cash flows.
Rick interest rate risk and market risk exposure leverage production and general market conditions would like to refer you to the business risk factors that are most recently filed form 10-K under the Securities Exchange Act of 1934.
These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.
This presentation, including any outlook.
This is effective as of today.
We expressly disclaim any duty to update the information herein.
I would like to get started by introducing George my understanding chairman and CEO within that mortgage.
Good morning, and thank you for joining Impac mortgage holdings second quarter.
2020 earnings call. The company's executive team is with me. This morning whole like in our CFO Tiffany Atsinger, our Chief operating officer, just mostly O Chief administrative officer income Donald Trump Cartwright chief of staff.
In our first quarter earnings call on June 26, we discuss that the company had created substantial momentum across all lending channels in January and February with preliminary unaudited GAAP and core earnings of 5 million, a 14 million respectively.
And that we were poised for significant increase in originations and earnings before we experienced the adverse impact of Colbert 19.
The federal Reserve's emergency rate cut our March 15th and the resumption of its mortgage backed securities Qiwi program created unprecedented volatility in the interest rate and credit markets in which we operate materially affecting our GFC, a non QM businesses respectively.
In previous earnings calls, we discussed how the Companys GRC driven call center, and Nonqm, driven third party business function than a complimentary manner, the call center being scalable and providing high volume at reasonable margins in a refi environment.
Third party business offering inelastic volume at superior margins.
As result of significant market dislocation caused by cobot 19, the value assigned by investors and counter parties for credit sensitive nonqm assets declined substantially in the first quarter of 2020 and continued into the second quarter.
Which necessitated our efforts to protect franchise value by aggressively de leveraging our balance sheet in operating platform. These were difficult, but necessary decisions to make and precluded us from being able to immediately participate in the favorable interest rate environment for the GRC driven call Center.
Our de leveraging acts actions were completed by the end of April on a trade date basis.
And on a settlement date basis by May month, and preserving our liquidity and positioning the company's return to originating loans.
At June Thirtyth, we carried an unrestricted cash balance of approximately 43 million an unencumbered whole loans with the fair value of 30 million the company's debt to equity leverage ratio and its wholly owned license origination subsidiary AMC.
It was reduced to less than one half to one.
So the end of June.
The company's June 4th press release expressed the view that market conditions and external factors that sufficiently stabilized.
The company had elected to restart our retail lending activities. The industry is currently enjoying attractive margins and we're positioned to take advantage of the opportunity.
Primary to secondary market spreads are historically wide.
I have stretched the capacity levels in the industry extending locked fund times.
The company has always been recognized an industry leader in the region interest in origination turn times and can compete favorably on answer on service in this market.
In July our first full months since returning to originating we funded 67 million of retail loans a pipeline grew to 155 million by July month end.
We anticipate to continue to build a retail platform volume to run rate of approximately 250 million by September a current margins. This volume should produce positive core earnings the company believes that its existing borrowing capacity under us warehouse lines are sufficient to fund its near term origination activities.
The relaunch of the Tipo channel will take place in the first half of the third quarter with an expanded product set to include non QM BA Jumbo Ngs see origination we expect a similar ramp to that of our retail platform in terms of volume with loans funding in the latter part of September into October.
With respect to non QM.
We are prepared to participate in reemergence of this alternative market segment number participants have returned to nonqm space and created liquidity in the sector, which should all but evaporated in March.
Intensive work has that been done by the company on this product as it relates to revise credit policy guidelines and we are focused on continuing our conservative view relative to market as it relates to FICO LTV credit overlays and layered credit risk.
The company's product restart will be led by bank statement investor product offerings, we expect origination volumes in this product to be tempered by the fact that the industry is not yet created a standardized approach to address non QM loans have opt into forbearance plans will proceed cautiously while we work with Servicers investors and rating agencies on the service.
Moving topic.
Non QM has historically been a key differentiator for the company and aligns with our position as a leader in alternative credit markets, we intend to remain prudent and vigilant with respect to risk management.
With respect to MSR is the company sold 137 million of you PB of Ginnie Mae mortgage servicing rights on July 31st the initial instead. Its initial settlement proceeds were additive to the company's unrestricted cash balance.
The company was a participant in Ginnie Maes PA, Pete program, which provided financing on PPI advances. The facility was paid down full in July, but we are likely to utilize it again as Ginnie Mae originations and retention of MSR his resume.
Additionally, the 4 billion on paid you PB of Freddie Mac MSR sale reported in our last earnings call closed on May 31st and transferred on July Onest.
Before turning the call over to pull like and I would like to commend our board of directors and senior management team again for this steadfast focus during these times I would also like to thank our dedicated employee base remaining loyal to our firm and to our culture and for returning to the mission of creating shareholder value with excitement and enthusiasm.
Paul turn it over to you know talk about operating results. Okay. Thank you George.
As we mentioned in our previous earnings call. The end of the first quarter and beginning in the second quarter was a difficult time due to the uncertainty and market volatility caused by the pandemic.
Two faced these headwinds the company went on the defensive and accomplished a number of objectives to protect and preserve liquidity, which included helping our lending operations selling most of our remaining loans held for sale portfolio retain all the balances on our warehouse lines selling a significant portion of our MSR asset repaying, our MSR borrowing facility full and extending the maturity of or $25 million of convert.
I will note. These activities allowed us to reduce the margin call exposure and provided to liquidity needed to accelerate our coverage in Q2 and beyond.
Although we although we restarted operations in late Q2, the financial results of the quarter are characterized by significantly lower lending activity due to the POZEN lending operations for most of the quarter gain on sale of loans in Q1 was 1.5 million versus a loss on sale of loans at 28 million in Q1.
In addition, as a result of pausing our lending operations, we reduced total expenses from 30.8 million in Q1 to 14.5 million in Q2 led by a reduction in personnel costs from 20.7 million in Q1 to 7.8 million Q2.
GAAP net loss before tax improved from 64.7 million in Q1 to a loss of 22.8 million in Q2, while core earnings also saw significant improvement from core loss of 56.1 million in Q1, two a core loss of 10.4 million in Q2 or 2020 year to date GAAP net loss before taxes was 87 point.
$5 million, while year to date core loss was 66.4 million compared to 2019 year to date GAAP net loss of 8.6 million in core earnings of 6.1 million.
Turning to liquidity as the end as of the end of Q2, we had 43 million in unrestricted cash and a little over 30 million, an unencumbered loans on our balance sheet of which little more than half are settled earlier. This week and the remainder are expected to be monetized and then Youve next few months and these proceeds will be additive to our unrestricted cash balance versus 80 million.
And in unrestricted cash and 3 million in unencumbered loans of the end of Q1 as mentioned previously in Q2, we used a portion of our cash pay off warehouse lines to deleverage and reduced margin call exposure, which led to the increase in an unencumbered assets. During the quarter. In addition, we currently have three warehouse lines with a combined borrowing capacity.
$575 million.
Based on our current cash position and borrowing resources, we feel we have the liquidity to not only meet our near term production goals, but also to other liquidity necessary, if we need to scale operations quicker than expected.
As we recently relaunched our lending operations at the end of Q2 and due to the nature of the mortgage industry Bina pipeline driven business. We don't expect you see the full operational financial impact of at lending operations until the end of Q3 or beginning of Q4.
However, as George previously mentioned, we are seeing substantial growth in our pipeline month over month as are locked pipeline continues to grow and Convertor loan held for sale portfolio. We expect to see revenues net income core earnings increase.
Based on current margins and market conditions, we expect to reach our income generating goal of $250 million a month funding volume in late Q3 early Q4, as we remain focused and committed on expanding and growing our lending operations and a responsible disciplined manner I.
I'll now turn it over to adjusting to discuss near term production mix and product focused thanks.
As discussed in our previous call. The targeted 250 million monthly production run rate in third quarter will be originated through our retail call Center.
Focused on segments of the market that have demonstrated adequate and stable capital markets distribution exits, which will initially be GST FHLB and be a lending.
Keeping in step with these other originators, we reevaluated the credit box within these product offerings, instituting, some overlays where necessary and remain competitive and responsible in our approach to serve in the market.
We continue to maximize the lead volume generated organically, our the call center with little to no marketing spend since the first quarter of this year currently our capacity model suggests we're tracking to originate and fund $250 million monthly by the end of third quarter.
We continue to add talent to the call center to promote efficiency and drive process improvements, while we ramp our volume.
This month the company will we launched its tipo channel the channel phase its approach to product launch starting with BA than its Alan evaluating conventional QM jumbo and non QM.
The company intends to participate in non terminal originations same thoughtful and brings focus weight has in the past.
Pack has a storied history around alternative credit.
Pioneer in both the old pay in non QM space, we continue to have strong appetite around non QM and continue to pay attention the changing for parents landscape borrower behavior and appropriate risk based pricing for these products and.
In addition to adding talent in the call Center, we're adding staff to the Tipo channel with experienced government jumbo non QM resources.
We anticipate competing competitively in rate product and service levels are optimizing margins and originating loans with sound credit risk.
At the ended the first quarter, we furloughed and reduce staff commensurate with our positive origination activity in March as we prioritized the protection of our liquidity.
However, the company reinstated a significant number of its employees. In addition to retaining key personnel. We continue to hire in both operations and production to meet current origination targets.
The company currently has about 250 active employees with approximately 75% supporting production.
This compute compared to an active employee headcount of approximately 550 and of that about 65% supported production at the end of February.
We remained focused on adding talent to our team to support ongoing lending operations were adequately staffed to meet our targets as well some excess capacity as needed.
With that I'd like to turn the call back over to George.
In his remarks, you wanted just moved to QNX, yes, let's open the call question.
So with that we can open for questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the Q. Please press the pound.
Thanks, and actually I'll jump back in.
Because earlier, we received the list questions from Trevor Cranston JMP securities prior to the call. So I'll go through that read those to team first question as you ramp back up on lending volumes can you comment on how much lending capacity you have beyond 250 million per month could you handle volume and access.
Most of that if mortgage rates continued to decline and demand continues to grow so, particularly if you want to take that Sir.
The stream our platforms that were able to scale in contract very quickly and rebuild and stretch capacity to all of our capacity planning to account for rapid market changes.
As we leverage outsourcing both onshore and offshore is on technology tools to supplement the head count when needed.
With tens of significant growth.
Our staffing head count at the 250 million dollar Mark have the ability to take on additional volume and once we reset targets. If it's determined we want to further grow the platform, we would leverage our recruiting training and internal tool to target any origination volume.
Great. Thank you.
Next question from Trevor as third party lending comes back on line with two margins like in that business versus what you're producing cash call. So so Tom I think you can take that weren't sure.
Margins, excluding those for non QM are generally wide by historical norms and quite attractive right now and the retail platform, we're seeing conventional margins at approximately one and a half to two times what they were on the first half of 2019 was approximately a 50 basis point narrowing and margin for TPL.
If you may V.A. margins are strong today as well with the spread between the retail platform and tipo being approximately a 175 basis points.
Conversely, Tipo non QM margins are lower than pre crisis due to the fact that many investors are currently capping they're priced at one or two and a half to the seller great. Thank you.
Drivers third question, how much if any does business promotion expenses to increase to hit the 250 million monthly run rate what about for volume to grow beyond that so I can I'll take that one since we restarted origination activities, we've been able to leverage our key.
Current organic lead volume and we've had little spend.
This promotion since the first quarter actually.
We do anticipate that we will start spending into marketing dollars to supplement where needed but at a much lower rate than in January and February of this year.
On a go forward basis to reach that 250 million.
We run rate, we expect to spend probably between five and 10% of what our monthly average was.
Business from both during 2019.
Trevors next question I'll read it, but I think we sufficiently answered.
Earlier response can you say would type of gain on sale margins are baked into our forecast to return to profitability. So I think we touched on that with the margin discussion.
The next question.
As you look to restart non QM lending can you provide any color on how much investor demand there is for for lunch today versus pre merger.
Or some of your previous loan purchasers not back in the market, yet and how much warehouse capacity driven available for non QM loans given your other origination volumes are growing so Tom back to you on that one sure.
Investor demand is largely returned to pre March levels for non QM and substantially all the investors that existed pre March for impact are currently active again investor demand in the aggregate is strong but the product profile is changed as journal would become more conservative regarding higher ficos lower ltvs.
Impact is always originated high quality non QM with conservative loan characteristics. So this shift in the market has had little effect on our production profile. One area that is getting greater focus now than pre crisis is a forbearance SPD language in the purchase agreements.
Great.
Next question do you have a target for monthly non thrown volume later this year. So I guess you can tack on to the previous with that sure sure. We're we're starting off with a disciplined ramp for non QM with a target run rate of 15 to 20 million per month in 2020 rising to 75 million.
Monthly run rate by the middle of 2021, our current warehouse agreements allow for more than these project projections will require okay. Thanks.
And lastly.
Is the liquidity level youre carrying at June Thirtyth the level, we should expect for the foreseeable future for do you anticipate running with lower liquidity levels. In this market stabilize so Paul sure well I think for now one of our top priorities is going to be maintain our cash balances and keeping a strong liquidity profile.
And the reason for that is really twofold on the upside we want to be prepared for continued or higher than expected growth.
But to we also want to have a safety net during expected or even unexpected times of volatility like we've recently seen in the markets.
But it's really that last part the unknown that's difficult since it's impossible or even difficult to predict.
When these markets will actually stabilize.
However, as we grow we do expect to invest them or capital in our operations, but that being said, we do feel that our current cash position our warehouse line capacity and expected cash flows from operations do provide us the strong platform, we need for future growth, but also for us to be ready for the volatility that we may continue.
In these financial markets.
Great.
Thanks.
With that.
Those are all the questions. We received to date, so with that I'd like to close the call. We look forward to speaking background to the market.
In November for our third quarter earnings. Thank you all.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.
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