Q4 2020 Impac Mortgage Holdings Inc Earnings Call
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Coupons of 2020 EBITDA mortgage volume.
Earnings Conference call at this.
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The dispute of presentation, the question and answer session.
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Thank you good afternoon, everyone and thank you for joining the Impac mortgage holdings year end 2020 earnings call. During this call, we will make projections or other forward looking statements in regards to but not limited to GAAP and taxable earnings cash.
Cash flow interest risk and market risk exposure mortgage production and general market conditions.
I'd like to refer you to the business risk factors and the most recently filed form 10-K under the Securities Exchange Act of 1930 for these documents contain and identify important factors that could cause the actual results to differ materially. The most contained in our projections or forward looking statements this presentation, including outlook.
And any guidance is effective as of the day.
And we expressly disclaim any duty to update the information herein, we'd like to get started by introducing George <unk>, Chairman and CEO of Impac mortgage holdings.
Thank you Justin pull like and our CFO and Tiffany Entsminger, our CLO will join me for.
The prepared remarks, Justin will be back along the come down on Hitachi <unk> chief of staff and.
And Joe job for you on our general counsel for the question and answer segment.
When we met about a year ago for the company's 2019 year end earnings call on March 13th 2020 to be exact.
We reported strong year over year operating results and discuss the momentum we had anticipated would accelerate as we invested in technology product design industry talent and geographic expansion. We also noted that any enthusiasm for future prospects needed to be properly balanced and tempered by potential supply and <unk>.
<unk> constraints and attendant liquidity risks associated with the then current macroeconomic conditions. In fact 2020 presented the company with the extraordinary challenges. The result of unprecedented credit and interest rate shocks and global market dislocations in the first and second quarters of the year.
The difficult but necessary.
Decisions of the company executed on during the first half of 'twenty 'twenty has been well documented for our frequent business updates in prior quarterly earnings calls.
These actions to derisk, the balance sheet and to consciously protect liquidity on.
Often at the expense of book value positioning the company to normalized origination activity in the second half of <unk>.
2020 today, we are pleased to announce the second consecutive quarter of positive operating results.
With 2024th quarter earnings of $3 3 million.
16 cents a share.
Following 2023rd quarter earnings of $4 4 million of 21 cents per share.
Core earnings are on alternative measure of results that senior management utilizes to gauge the company's performance.
The isolate results from recurring business.
Activities by adjusting for certain nonrecurring items, such as changes in the fair value long term debt and trust assets gain or loss on mortgage servicing rights and the other non recurring legacy matters. This concept of this first introduced in the beginning of 2019, the tables provided with our earnings release to enable variation analysis between.
Prior periods.
Generating core earnings of approximately $8 million in the second half of 2020 versus core losses of approximately 66 million in the first half of 2020 was hard fought and a remarkable turnaround for the company.
We'd like to express our gratitude to our board of directors, our stakeholders and our capital partners for their steadfast support under the most difficult of circumstances and I personally want to extend my thanks to our senior management team.
And our valued employees for their dedication and tireless tireless focus on the company often while managing scratches all of a health family and societal concerns brought on by COVID-19, collectively our stakeholders name of the company to navigate through the unprecedented global market dislocation we experienced <unk>.
Last year on this call we'd like to highlight some of the key accomplishments for the second half of 2020, including the relaunch of our origination businesses.
Waiting of profitable profitable run rate on our consumer direct channel, we're starting non QM originations and of our third party or Tpa channel and enhancing the company's liquidity by expanding our convertible promissory note.
The company announced the relaunch of our lending activities in late second quarter within our consumer direct channel focused initially on GSE FHA and VA product in the latter half of the fourth quarter of <unk>.
2020, we expanded those offerings to include non agency jumbo and non QM.
And also we launched our PPO channel the company generated originations in excess of $800 million in Q4, 2020 versus $400 million in Q3 of 2020, and just $2 million in Q2 of 2020. The increase reflects our success in ramping the call center of the targeted originations of.
At least $250 million per month.
And the reintroduction of a broader product set across all channels.
These origination activities were the prime driver of positive core earnings for the second half of the year. The company was not immune for margin compression experienced by the industry in the fourth quarter. This normalization was anticipated as industry capacity expanded to meet demand pull like and we will address this in his prepared remarks.
We entered 2020 with strong momentum having repositioned the company over the years too.
Expand our core competency related to alternative products.
During the first quarter of 2020.
Prior to disruption caused by COVID-19, we originated $260 million of non QM.
Loans and we're on pace to exceed our fourth quarter 2000, and non 19, non QM origination volume as Forney financial markets became dislocated in March of 2020 liquidity tightened on credit spreads widen substantially with particular focus on non QM payment delinquency and forbearance risk.
The protect against the market valuation declines of the company had a significant portion of our non QM portfolio of hedged via mandatory full of commitments with investors. Some of these hedges were non honored.
Causing the company to restructure of the sale of these assets at market levels significantly below that which the company would have received under the terms of the mandatory forwards.
We ceased originating non QM loans in the beginning of April of 2020.
In the fourth quarter of 2020 market conditions and external factors will not fully normalized had sufficiently stabilized to the extent that the company elected to re engage its lending activities with the non QM market share segment. The reemergence of the non QM market has been defined by product set originated to more restrictive credit.
Underwriting guidelines than pre Covid and consistent with the company's historical historic credit philosophy.
We believe the quality of the loans have been demonstrated by their performance for the recent crisis in 2020 on non QM originations had a weighted average FICO of 730, <unk> weighted average LTV ratio of 68 compared to 731 and 70% respectively in 2019 since.
Since the company's exceptionally of historically been in the innovator with respect of design and origination of alternative credit products. Non QM is a core competency differentiator for the company and we look forward to participating the reemergence of the sector.
As discussed on prior calls improving and protecting the firm's liquidity.
The primary objective for the firm in 2020.
In line with these objectives on October 28, 2020, we announced an extension of our convertible promissory note.
This agreement extended the maturity date of of note by an additional 18 months from November 9th 2022 May nine 2022, and reduced the aggregate principal amount of notes of 20 million following the pay down of $5 million of principle the.
The company's cash and unencumbered hold on position was approximately $60 million at the end of the fourth quarter as compared to $65 million at the end of the third quarter. We believe this liquidity position provides a margin of safety to address future market volatility.
Finally, I would like to note that November 20th 2020 marked for.
The 25th anniversary of our initial public offering attribute to the company's resilience in navigating numerous economic and political events.
We remain optimistic about the future. The company continues to originate through our consumer direct and third party channels and is well positioned to take advantage of opportunities as the agency an alternative of credit markets evolve.
I'll now hand, the call over to Paul like in the pulse.
Thanks George.
In Q4, we continued to successfully ramp up production, we increased our funding volume from $418 million in Q3 to $810 million in Q4, representing a 94% quarter over quarter increase. In addition, we grew our locked pipeline by 26% from 300 of $59 million at the end of Q3 to 450.
The $1 million at the end of Q4.
As George mentioned earlier, we continue to carefully manage our liquidity as evidenced by our cash position of $54 million at the end of the year, while also extending our convertible notes due in November of 2020 to May of 2022 at the same funding costs are.
Our enhanced liquidity position gives the company the flexibility to continue to increase production and invest capital for continued growth.
The financial results of the quarter reflect increased loan production net of the effects of the market margin compression.
Excluding the effect of quarter and locked pipeline, we saw margin compression of approximately 73 bps in Q4 versus prior quarter. However.
However for some context, our Q4 2020 margins were around 80 basis points higher than our January and February 2020 margins pre COVID-19.
Gain on sale of loans increased from $19 3 million in Q3 to $21 5 million in Q4 as the result of increasing production volumes total operating expenses the increase from $16 1 million in Q3 to $19 9 million in Q4 led by an increase in personnel costs from $11 2 million in Q3 to $13 3 million.
And in Q4.
Under current production goals, we expect compensation expense to level off subject to market capacity constraints.
GAAP net loss before tax was $2 1 million in Q4 versus pretax income of $1 6 million in Q3.
Core earnings were $3 3 million for Q4 versus $4 4 million in Q3, our 2020 year to date GAAP net loss before tax was $88 million, while year to date core loss was $59 million compared to 2019 year to date GAAP net loss of $8 million and core earnings of $16 million.
Turning to liquidity as of the end of Q4, we had $54 million in unrestricted cash and $6 million in unencumbered loans on our balance sheet of which we expect to monetize and be additive to our cash balance.
Versus $55 million in unrestricted cash and $9 million in unencumbered loans. Other of the end of Q3. In addition, we currently have warehouse lines of the combined borrowing capacity of $550 million.
During the quarter, our funding to settle the turn times, where on the low 20 day range. However, this remains subject to the risks of increased turn times and capacity constraints inherent in an aggregation of execution model. However.
However, based on our current cash position turn times and borrowing resources, we feel we have the liquidity necessary to meet our near term production goals. It.
I will now turn it over to Tiffany to discuss production mix and product focus.
Thank you for in the fourth quarter, Mark the steady increase in origination volume, reaching over $800 million in funded volume for the quarter and exceeding our 250 million monthly funding targets.
We expanded our product offering to include QM jumbo and non QM in the third and fourth quarters and received favorable market reception among consumers and brokers in both of our retail in Tpa channel.
Our primary focus since the resumption of lending activity in the second quarter has been to originate GSE and government product margins have been historically high origination volume is undoubtedly higher and their diversified capital markets exit.
The risk based on really isn't posed by many lenders began to dissipate in the fourth quarter, allowing for a more normalized credit underwrite under GSE guideline.
Impac adjusted of the credit box in line with industry standard and accepted risk tolerances, which in turn contributed to increase originations during the fourth quarter.
Talent retention and acquisition remain a relevant topic throughout the quarter impact of focus not just on recruitment, but also on building a strong leadership infrastructure within its operating channels to support future growth and stability.
Our employee head count grew during the quarter to over 320 employees up from 250 at the end of the second quarter of 2020 with.
With the additional staff being added to retail and wholesale sales and operations of groups.
Ongoing wage inflation and increased personnel expense had an impact on our overall cost to originate however, the talent hired entertained with essential to growing the channels and exceeding the $250 million targeted monthly run rate.
Based on current models, we plan to maintain a run rate of at least $250 million through the first quarter of 2021.
As predicted we adjusted marketing throughout the quarter to support volume targets and drive new product offering organic lead volume, while the preferred required some supplemental spend into targeted lead sources.
Competition, among lenders remains on team and the resulting pressure to provide consumers with more favorable rates have started to drive the margin compression in the GSE space.
Increased business promotion spend and adversely impacted margins will likely persist as rates continue to increase.
A welcome shift in Q4 of 2020 was the reemergence of of renewed investor interest in non QM product the <unk>.
Appetite to buy these assets of gaining momentum while the origination volume of catching up the guideline normalization of credit risk overlays of been slowly adjusting to look more like a pre COVID-19 non QM product and the performance of the product. Despite COVID-19 related forbearance concerns of proven study.
Taking a focused approach to non QM origination by way of product innovation technology investment and origination efficiencies of top of mind in the first quarter of 2021 and beyond.
Investing in our wholesale channel and also the strategic step toward non QM growth and innovation.
We are committed to growing our core non QM product, while surveilling opportunities to serve consumers and more targeted offering such.
Such as purchase of second lien and other alternative credit vehicles remaining agile on the market around credit and product just as critical as doing so thoughtfully and responsibly.
That concludes the financial results in our prepared remarks, we'll now open the call for questions.
Okay.
Yeah.
Bear with us please.
The difficulties.
Excuse me everyone of first the question comes from the line of strength of Hanson from JMP Securities. Your line is open.
Alright. Thanks.
I guess the first question.
Guys touched on the margin compression and increased competition.
Somewhat in the prepared remarks.
Can you maybe provide some general color around the movement in mortgage rates, we've seen so far in the first quarter.
You know how.
You know what kind of magnitude of of.
Additional margin compression you think debt.
<unk> will result in.
With that additional margin compression on your dinner target funding levels.
Does that still come out to a level, where you think the company.
And you can kind of comfortably remaining.
On a comfortable level.
Yes. This is Paul I can start by.
Starting this and maybe someone else can jump in.
Yeah, right now based on what we're seeing.
We expect.
Further market compression in Q1.
We're estimating between 15 and 20 basis points of additional margin compression.
Again.
Tiffany touched on it's really just due to.
The increase in rates and competition of course on the next couple of weeks that that could change depending on what happens on the market, but that's sort of what we're anticipating now.
Yeah.
Okay, and does that sort of is that.
Should I interpret that as the like 15 to 20 basis points lower margin kind of on a run rate going forward or is that sort of the average number of youre expecting for <unk> versus where you were at in the <unk>.
Yes, Trevor this is George we don't we don't give forward guidance, but.
With that with that amount of mortgage margin compression in the GSE product.
Offset by what we believe would be.
A shift in production for non QM, and jumbo where the margins of healthier.
We.
We're fairly confident that we'll be able to continue to run platform of the positive right. So yes. The Trevor. This is just on you talked about the rate move so kind of I mean, obviously, we're coming off of 2020 record lows in rates historically refi volume for us.
Much of the borrowers could save on their monthly payments. So over the last few weeks as we've seen rates tick up slightly here our borrowers have had some initial shock to those rates.
However, there is still a very healthy appetite.
For refinances in the market right now based on what we've seen for publications as early as recently as Monday, indicating about half of the homeowners are currently in the money for refinancing so theres still.
A lot of ground to cover there and so we do expect.
There will be more competition in the industry margins will tighten in a bit more but as George mentioned that really opens up opportunities for us.
Because with the product like non QM and jumbo were impact historically, that's our DNA. That's what we've done very very well, that's where we can pivot nicely too.
Okay got it that's helpful.
And in terms of the personnel expense I think of you guys.
The commented briefly on.
The fact that increased competition for.
Our employees in the market.
It has had some impact on that.
Given the <unk>.
You kind of hit the the funding targets and crowds for you guys have at the moment is.
As the personnel expense sort of out of good run rate level or.
Or is that something that.
You would expect to continue to tick up a little bit into the first quarter.
Hi, This is Tiffany I would expect it to be more normalized we certainly have.
The cash capacity with the assets that we have on board, but the the ramp up in the AD part of little bit more strength given the competition in the market right now, but now that we have the in the door and were producing wire on on will continue to build on our efficiency with the origination process and then also be able to stretch beyond the current head count that we have with the same folks.
Okay got it.
And then maybe just to touch on the <unk>.
Non QM and non agency products.
For a moment.
Can you provide some additional color around sort of how the restart of that business has gone.
In terms of.
Finding partners, who are actively originating the product.
And you know how much you think that that will change as a result of maybe some some refi business dropping off now that rates have moved higher.
And then as the second part of that I guess.
When you when we think back to where the non QM business was.
Pre COVID-19 of last year, and where margins were kind of how would you kind of compare how you expect the business to look as it as it ramps up over the course of this year versus versus where it was before the shutdown.
Sure Trevor this is Tom on autonomy.
We're already seeing origination growth in the non QM sector.
And anticipate to continue growing through two.
2021 into 2022 with S&P predicting we could see levels as high as 25 billion in originations levels not seen since 2019, while the hull to the market in early 2020 for both the originations and Securitizations was industry wide. The recovery began soon after and there has been a star.
The March towards price market conditions, and both guidelines and pricing with the Securitizations of both new originations and portfolios held since early 2020 being well received by the market.
The number of factors supporting the stabilization and the return of of the market in volume.
One is extraordinary depth of demand from investors created not just an appetite for volume, but also as an expanded list of buyers greater than what we had seen in 2019.
Investors are able not only to buy dependent upon the securitization exit strategy, but many of entered with the.
The ability of the balance sheet, the product, which creates additional stability in the market in the event of another market dislocation.
The quality underwriting guidelines have improved market wide with most product being originated to more conservative of more conservative profile based on stronger borrowers those that had focused on the lower end of the credit box of had to move up the curve take advantage of the demand in the market.
Impac has always focused on higher quality non QM originations. So our criteria is net the shift from pre credit from the pre crisis credit box nearly as much as many of the players in the marketplace.
Past originations have continued to perform well despite some of the economic conditions over the past year, resulting in fewer forbearance requests and of those requesting forbearance many continuing to make their payments as these requests expire or retire the universe of potential borrowers continues to grow.
Historically.
Per Paul's comments on margins.
Historically low rates and wide margins over the last year of migrated many loan officers, who have historically focused on non QM to take advantage of the refinance a bull market for GSE products with rates rising and margins compressing. We're seeing a return of these producers to the non QM sector, which should boost origination.
Items going forward.
<unk>.
Lastly, the MBA anticipates purchased demand to exceed refinance demand on a go forward basis.
Also of positive indicator for the non QM market as business owners and real estate investors that rely on non QM product offerings like bank statement and DST. Our programs are typically strong drivers on the purchase market for these reasons in our long history in the alternative credit space, we're bullish on the sector and our ability to participate competitively.
And non QM going forward.
Okay.
Really helpful color.
<unk>.
So when you think about the overall funding capacity of the company as a whole.
As the non QM.
Piece, presumably grows over the course of this year.
You guys have the capacity to kind of grow that alongside.
The business, you're currently doing in the agency lending space or with your anticipation would be that you sort of shifts shifts more of.
Plenty of capacity into the into the non QM on it sort of replaces some of what you've been doing on the agency side.
Trevor This is George.
We have excess capacity to continue to grow.
The GSC.
Yes.
Portion of the business with the business, which is primarily driven out of the call center when I say capacity I mean, both with respect to liquidity for warehouse lending with the equity to support the warehousing and with personnel.
Non QM business, we have.
Quiddity.
Again, the haircuts of bit deeper on non QM, but we have the equity the.
The support.
The non QM growth concurrent with.
The existing run rate or even a little bit higher run rate in GSC.
Got warehouse capacity for non QM.
And and we've got capacity in terms of human capacity in terms of operating plant.
Around non QM in that last piece has been added in the fourth quarter.
The pipeline business and so we'll continue to build upon that in the first quarter, but we don't we don't have any limitations on being able to continue to build.
On what we've created in the call center and at the same time concurrently build out the non QM franchise and Trevor it's Justin So while PPO as George indicated will remain.
Laser focused on non QM originations if you remember from years past one thing that made us very successful within the call center for originating non QM, albeit.
$25 million to $50 million of month of that product was standing up an independent team that would originate that product. So we would just the just internally for that but that was something that we unlike other lenders, we're able to do successfully which was originating non QM.
On the call Center, yes, we haven't yet begun to spend to drive any business promotion.
Out of the call center to non QM.
Quite frankly, because the lead generation has been.
Cost of customer acquisition has been.
De minimis around GSE production.
But we will will will will will push some of our advertising spend into the non QM effort in the call Center and Youll see that at the end of the first quarter it might take root in the call center in the second quarter and early third quarter of this year.
Alright, Okay that makes a lot of sense.
Great the condensate cargos.
Youre welcome Trevor Thank you.
So at this time it doesn't look like we have any other questions from the.
So at this point, thank you everyone for joining us and we'll circle back and in early May with.
With our first quarter results. Thank you.
Yes.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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