Q1 2021 Impac Mortgage Holdings Inc Earnings Call
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Good day, and thank you for standing by.
Welcome to the first quarter earnings conference call.
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After the speaker's presentation, there will be a question and answer session.
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Sorry zero.
With that I would now like to hand, the conference over at your Speaker today share.
So with your Chief administrative officer. Thank you and please go ahead.
Thank you good morning, everyone. Thank you for joining Impac mortgage holdings first quarter 2021 earnings conference 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 flows interest rate risk and market risk exposure mortgage production and general market conditions I.
I would like to refer you to the business risk factors in our most recently filed form 10-K under the Securities Exchange Act of 1934.
These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements. This presentation, including outlook and any guidance is effective as of the day, given and we expressly disclaim any duty to update the information.
<unk> here and would like to get started by introducing George Mangiaracina, Chairman and CEO of Impac mortgage holdings.
Thank you Justin Jon Glockner, our principal accounting officer, and Tiffany Entsminger, our Chief operating Officer will join me for prepared remarks, just for moved back along with Tom's on the touchy.
<unk> staff and she'll job for you on our general counsel for the question and answer segment of today's call.
On this call we will discuss the overall state of the business and key accomplishments for the first quarter of 2021, including the continued momentum from the relaunch of the company's consumer direct and third party origination or P. P O channels in the second half of 2020.
Approximately eight weeks ago, and our 2020 year end earnings call on March 11th we discussed that the company had continued to grow our retail on P. P O platforms.
We recorded a second consecutive quarter of profitability, while continuing to maintain our focus on liquidity and risk management post the 2020 COVID-19 crisis.
The company's last business update expressed the view that market conditions in the GSE space had begun to normalize with margins narrowing that's the capacity originating process loans in the industry began to catch up with consumer demand. The company is not immune to the margin compression that presented itself in the fourth quarter of 2020.
And that has continued into the second quarter of 2021.
We also referenced the welcome shift of increasing investor demand normalization of guidelines and improved valuations for our non QM product.
And competency for the firm.
We are currently investing in with product innovation and technology enhancements and sales and operations talent.
And he will discuss margins across products and channels in further detail later in the call.
The company reported a net GAAP loss of 700000 or three cents per diluted common share.
And a core loss of 300000 or one cent per diluted common share.
The first quarter of 2021.
The company operates its origination activities for which license subsidiary Impac mortgage Corp.
M C.
I N C serves as the credit counterparty for the company's warehouse lending facilities and hold on sales arrangements with Gse's, the government and non GSE Aggregators IMC produced GAAP and core earnings of $3 5 million for the second for.
First quarter of 2021 third consecutive quarter of positive results for our regulated licensed entity.
Core earnings or loss or an alternative measure of results that senior management utilizes to gauge the company's performance.
Core earnings loss isolates results for recurring business activities by adjusting for certain nonrecurring items, such as changes in fair value of long term debt and trust assets gain or loss on mortgage servicing rights held for sale and other nonrecurring legacy matters.
As it relates to production volume, we generate originations of approximately $850 million in.
In Q1, 2021 versus $800 million in Q4 2020.
Companies locked pipeline at the end of the first quarter of 2021. It was approximately the same as at the end of 2020 $450 million.
However, our non QM locked pipeline was approximately $75 million at the end of the first quarter as compared to $10 million at the end of the year.
The shift evidence is more recent pivot to a P. P O channel sequence sequence day after having achieved the sustainable monthly run rate of $2 million to $300 million within our GSE centric consumer direct channel during the last two quarters of 2020.
Historically, while we've had success delivering non QM for consumer direct the Tpa channel has been the prime driver for non QM production, while we do not provide forward guidance. We will note that we originated approximately 35 million in non QM for T. P O in April versus at the minimus amount in March.
While non QM market has not returned to pre crisis levels. We are encouraged by growing borrower demand depths of investor interest and strong capital markets execution, approximating 500 basis points of gross margin for current originations. The current non QM market is characterized by moderately tighter lending standards across the industry.
We're in line with our firms long term view alternative credit.
Good and quality consistency performance and adherence to ability to repay our ATR ETR guidelines.
We continue to believe in the market opportunity and demand for non QM on the company's ability to be an innovative market leader in this segment.
Since the company's founding in 1995 Impac has been recognized as a leader in providing loan products.
For borrowers in need for alternative to traditional Fannie Freddie or other government offerings, the origination securitization and asset management on these products as a core competency of the company having originated over $90 billion of such loans from 1995 for 2007.
Post the subprime financial crisis, the company consciously maintained our resources across these disciplines to manage our legacy Alt a portfolio and in early 2014 extended that infrastructure is where on the first mortgage companies to anticipate and actively pursue the revival on non QM mortgage market.
Since 2014, we've originated in excess of 4 billion of non QM steadily responsibly, increasing on non QM production for $130 million in 2015 to over 1 billion in the quarter annually for two consecutive years 2018, and 19, leading up to the COVID-19 crisis.
The company's maintain sufficient warehouse relationships and liquidity to comfortably to support existing and future growth targets for our non QM production.
And as recently distributed non QM loans to a wide range of investors, including Wall Street firms hedge funds hedge funds and alternative capital partners.
Throughout 2020 and during the first quarter of 2021 rated private label securitization, we issued backed by the company's non QM product.
<unk> non QM collateral performance originator, who originated rankings and adjustment factors with the rating agencies continue to result in efficient permanent capital structures for our investors.
In the near future, we intend to address and add resources to enable the company to directly ask at access the securitization market and Opportunistically retain economic interest in subordinate tranches of our offerings happening some of our confidence in the long term performance and risk weighted returns of the loans we originate.
The company is monitoring developments across a range for macroeconomic factors, including trends in inflation housing affordability.
Employment any interest rate environment.
Our risk management and product offerings will evolve with the marketplace to successfully navigate these challenges and seek opportunity where risk reward is properly balanced.
As stated earlier protecting firm's liquidity continues to be a primary objective for the firm in 2021, the firm's cash and unencumbered whole loan position was approximately $58 million for $2.70 per common share at the end of the first quarter. We believe this liquidity position as well as we are.
As well as our continued focus on strong risk management has prepared the firm to navigate future market volatility.
John Glockner will now discuss the operating results for the first quarter of 2021 John.
Thank you Jordan.
For the first quarter for the company reported a GAAP loss of 683000 as compared to a loss of $2 2 million in the fourth quarter and loss of $65 million in the first quarter of 2020.
In the first quarter core earnings were a loss of 262000 as compared to $3 3 million in the fourth quarter and a loss of $56 million in the first quarter of 2020.
The first quarter of 2021 saw on interest rate environment that increased much earlier in the year than most had anticipated, causing margin compression in excess of expectations due to competitive pressures to retain market share.
During the first quarter, we saw margin compression of approximately 28 basis points as compared to the previous quarter.
As a result gain on sale of loans decreased by $1 3 million from the fourth quarter to the first quarter.
Total operating expenses increased from 20 million in the fourth quarter to $21 3 million in the first quarter of 2021 due to a more competitive rate environment and continued rebuild of our non QM platform.
This was led by an increase in personnel costs from $13 3 million in Q4 to $14 9 million in Q1.
Escalating personnel cross costs across the industry due to competition for workforce talent has contributed to this increase in personnel costs.
Additionally, our personnel expenses associated with the rebuild of our non QM platform was higher as we are ramping production and the revenue associated with the upfront investment typically lags by several months given the business is a pipeline.
With the earlier than anticipated increase in mortgage interest rates and subsequent margin compression seen in conventional originations during the first quarter of 2021.
We've accelerated our pivot to non QM and our Tpa channel.
As George mentioned during March 2021, we saw a significant increase in non QM lock, which drove April non QM funding to be in excess of our first quarter 2021, non QM funding.
In the first quarter of 2021 are non human originations had a weighted average FICO score of 755, and a weighted average LTV of 60% for.
For the comparable period of 2020, our non QM origination had a weighted average FICO of 730, and a weighted average LTV of 68% Tiffany.
Stefanie will provide more color on our non QM production growth later on the call.
Our business promotion expense increased to $1 2 million in the first quarter as compared to 550000 in the fourth quarter. This was primarily the result of the aforementioned increase in competitive pressure during the first quarter.
While the company experienced a substantial amount of organic lead flow during the third and fourth quarters of 2020, the increase in rates during the first quarter, prompting an increase in marketing spend to maintain a consistent level of lead volume. However, despite the increase the company's business promotion spend was roughly one third of what was spent for the same period in 2000.
20.
In April for the first time on over a year the call center began to reallocate a portion of its marketing spend towards non QM production.
This has already resulted in an increase in non QM submission, which we expect to continue to ramp up throughout the second quarter.
We intend to continue to source leads to digital campaign, which allow for a more cost effective approach increasing the ability to be more price and product competitive.
Within more specific target loan product and geographies.
During the first quarter, we maintained our production levels within the call center originating on a monthly run rate of approximately $250 million per month.
However, within our GPO channel, we have started to see growth around our production ramp as part of the channels relaunch.
This is evident in the 35% increase in CPO production in the first quarter as compared to the fourth quarter.
We continue to carefully manage our liquidity as evidenced by our balance sheet at the end of the first quarter. The company had an unrestricted cash position of 30 of $53 million and $5 million on unencumbered loans on our balance sheet.
Of which we expect to monetize and be accretive to our cash position.
Our strong liquidity position gives us the flexibility to continue to increase production and invest capital for continued growth.
In addition, we currently have warehouse lines of the combined borrowing capacity of $550 million.
During the quarter within the call Center, our fundings test that will turn times for just under 20 days. However, this remains subject to the risk of increased turn times and capacity constraints inherent in an aggregation execution model.
Based on our current cash position turn times and borrowing resources, while we may bring in additional warehouse capacity in the near future to diversify our financing capabilities. We feel we have the liquidity necessary to meet our near term production goals I will now turn it over to Tiffany to discuss production mix and product focus.
Thank you John.
2020 was the year for GSE loans, the shift in rates and market margin compression around the product began sooner than anticipated during the first quarter of 2021.
We discussed last quarter, the guidelines and overlays impacting Fanny and Freddy eligible borrowers begin to lift in the fourth quarter of 2020, leading to a more normalized vendor right alongside the shift and a more open credit box competition, among lenders contributed significantly to reduced margins across the board.
<unk>, they're able to shop and lenders find themselves competing aggressively on rate.
Competitive margin reduction.
Founded when competing at a higher rate environment.
During the first quarter of 2021, despite record high margins and volume across the industry. These competitive and market driven challenges resulted in a 60 to 80 basis point average margin compression across both retail and PPL when compared to the prior quarter.
Looking back to the first quarter of 2020 margins have compressed significantly on average about 100 to 150 basis points for GSE product.
Our retail consumer direct channel is the primary driver of GSE origination and was able to scale to strategic $250 million run rate following its reinstatement of lending in the second quarter of 2020.
While the market shift and impact on margin compression can be felt in the industry around GSE origination.
Remain committed to starting consumers in the GSE and government lending spaces, while also growing our non QM opportunities across all channel.
This is an important pivot for the company, allowing it to navigate shrinking GSE margin, while driving revenue on the non QM.
Non QM III emergence across the market was met with credit and pricing disadvantages that restricted the addressable market of consumers and investors.
During the first quarter of 2021 credit pricing and overall investor interest returned allowing impact too risky on one of its core competencies and product offerings.
Gross margin for non QM returned to healthy 400 to 500 basis point range by the end of the first quarter in 2021. Following 2020 margins that were significantly less in GSE product.
Yeah.
The retail consumer direct channel has also contributed to impact overall non QM origination since 2016 and as John noted additional marketing allocations have been deployed to leverage the expertise on the call center to drive this business once again.
<unk> compositions has started to shift slightly over the quarter and the addressable market for self employed and investor focus consumers are strong.
In addition to retail non QM originations the primary driver in physical plant and ramping up our non QM production remains within our third party origination or Tpa channel.
Tim around Relaunching, non QM product within TPS thats grown considerably over the quarter with overall loan volume doubling from the beginning to the end of the first quarter. This year.
The overall composition of the <unk> pipeline was over 90% non QM at quarter end.
We increased the sales and operations head count by about 10% quarter over quarter, which contributed to the ongoing growth of the GPO channel in line with the strategic expense allocated to growing non QM across the platform.
We took an iterative and risk focused approach to updating our credit box on guideline throughout the quarter to provide a competitive offering to the market, while maintaining high credit quality.
Impact will continue to your reasoning on the GSE space, but we will remain diligent around the market conditions impacting margin in competition Impac.
The impact of the advantage and cultivating a renewed non QM offering will remain a central focus of the company along with the continued growth of its wholesale and correspondent channel.
Driving process improvement and technology innovation to maximize the non human experience for our Counterparties will also be top of mind is this market share further toward alternative credit opportunities.
That concludes.
For the financial results in our prepared remarks.
We will now open the call for questions.
Yeah.
Thank you at this time I would like to take any questions for Mike here for us today and as a reminder to ask a question. Please press star one.
We have our first question comes from the line of Trevor Cranston from JMP Securities. Your line is open. Please go ahead.
Thanks, Good morning.
You guys you guys talked some on the prepared remarks about the.
Pressure and gain on sale margins, which occurred obviously during the first quarter.
Can you maybe help us sort of contextualize and think about that in terms of.
On kind of where you see margin.
Specifically on the agency business.
Today versus even where they where they were on the first quarter.
Thanks.
Sure.
Typically around the agency production.
Q4, 2020 to Q1 2021, that's about a 60% to 80 point basis point reduction.
And so so Trevor.
We're going to feel that in the call center, but we're not going to feel that the nice part is we're not going to fill that in our GPO channel.
And due to the aggregator model, which as everybody is aware that we're running currently.
We're not in a position to simply just chase volume.
Some folks have to right now.
At the detriment of margin.
We're trying to hold our margins pretty firm with where they are and we're going to have to adjust the composition within the call Center.
As everyone mentioned on the call you've started to move some of that marketing spend around.
Where it was predominantly that debt GSE refinance type marketing, it's now pivoting a bit.
Towards non QM, which will be helpful. And we've also brought on some folks.
Originate that VA product. So we're not quite at the point, where we were pre COVID-19. We had separate teams for these products, but ideally thats, where we would be in the coming months.
And those products, especially non QM with where we've seen margins come off the map there considerably.
We really think debt.
A limited amount of non QM production will offset.
The decrease in volume from a GSE perspective within the call Center.
Is that pipeline has shrunk a bit for the call Center GSE production, which is fine that's something that as we said we anticipated so I hope that that helps.
Yes, that's very helpful. Thanks for the interest.
So on on the non QM.
So as you.
Sort of reemphasize that and shifted focus.
Can you maybe spend some time talking about.
The loans you guys are currently originating and products you're offering.
How that looks today as you've re entered that business and it's starting to grow more meaningfully.
Today versus what you were doing pre COVID-19 and also maybe talk about the.
Landscape on the Investor demand, if theres been any significant changes that you've seen.
In terms of.
What investors are looking for it in loans.
And just kind of the economics of the execution of selling loans to investors.
Yes sure.
Trevor I'll take the second part of that question and hand, it back to Justin Tiffany for the <unk>.
Product type that we're originating today, let's say that.
Since since the market healed I mean, we were very encouraged in the second and third quarter of last year with the capital market's ability to absorb what had been overhang of non QM product in the marketplace from the markets.
Dislocated in the in the first quarter.
And it took a bit of a bit of time to clear that.
Overhang the overhang was mostly cleared for securitization.
And then we've seen in the fourth quarter, leading into the first quarter and acceleration of investor demand again.
Probably you know whole loan buyers that reverse engineering into securitization exit.
So our gross margins.
Tiffany mentioned this earlier in prepared remarks, but our gross margins for <unk>.
Non QM or executing again at close to a $105 price.
And so out of our broker channel or <unk> channel.
Got close to 500 basis points of gross margin in the retail channel.
When there's an opportunity to also.
<unk> points and fees, we would have gross margins north of that.
And so we're very encouraged by by the.
And the backend execution.
And we sold we sold the Wall Street firms have come back aggressively bidding for the product.
Certainly hedge funds and alternative investment vehicles as visit I mean, you know, it's no surprise right Theres a theres a tremendous.
Push for yield in this market as long as the fed continues to buy.
101 billion plus of Treasury and mortgage product.
Pushing yields down there's a there's an incredible.
Push for yield in a marketplace and non QM fills that for.
Fills that void nicely, so Justin Tiffany I don't know if you want to touch on how our product design might look a little different or maybe it's really just back to the future debt markets.
Now, creating product that looks very similar to what we've always been creating.
Sure. Yes. This is Stephanie I would say that the core offerings within non QM.
Have remained relatively unchanged with respect to our bank statement offering a 12 to 20 for them and think statement offering.
Business purpose the SDR loan.
Asset depletion and also on a full doc products for that is relatively unchanged.
The credit credit credit box around those products has migrated over the last year on what we're starting to see more of a normalization of the guidelines that that opens up that box a little bit more closely align with some of the pre COVID-19 credit offering.
Great. Okay. That's helpful.
And I guess on the expense side.
You mentioned in the prepared comments.
But you are continuing to invest on hire for the rebuild of the non QM channel.
Can you talk about where it kind of where you are overall on that process how much more investment in hiring you think you need to do.
And maybe as the demand for agency revised shrink is there any sort of offset there in terms of the overall expense level.
Or do some of the some of the people who have been more focused on the agency business and consumer direct is that couldn't be kind of interest.
Shifting over to the.
Non drilling focus going forward.
So Trevor I can start with that and <unk> can weigh in if George has anything to add.
Can do that as well.
So obviously within the call center, we discussed kind of the way in which you will see that GSE production volume start to come down because we're not going to give up that margin there with how tight and it's already gotten.
But some of the folks most certainly can pivot over from an operational standpoint over to that to that GPO world, specifically, our underwriters and things of that nature.
Can move over nicely.
Repurpose some of our our agents to be focused more on those alternative credit products.
And that shift from an expense standpoint within business promotion I don't anticipate for that to have any sort of material increase at least for the next quarter, because we're just going to reallocate some of the money within that channel.
Within now within GPO.
We already have started to invest in that as evidenced.
From a pipeline makeup because I've seen a lot recently with some of the larger shops.
Doing the broker business are really having to quickly pivot here, but just so you're aware from a pipeline perspective at the end of the year within our Tpa channel. It was only about 19% was non QM production opposed to today, which is roughly 90% of that production. So we've already made.
Net shift so lumpy that noisy to hire into but we are being very strategic in terms of additional specialized resources for the channel. So George I don't know if you want to touch on that component for.
For non QM.
Sure I mean, just as focused on some of the operations and the credit piece on the sales pieces, but I'd say that we one of the lessons that we took away from the COVID-19 crisis of last year is that the need for us to have some more sophistication around capital markets in terms of.
How the loans that we originate.
Model out for.
Investment.
For investment grade levels for securitization.
And how we can then take take that reverse engineering of securitization can be more precise on.
How we price the seams of some of our offerings.
And so we've we're very close to securing some additional resources within our capital markets teams that will permit us to do that and that would give us another <unk>.
Leg.
Right away from <unk>.
Simply bidding comp exit for our non QM offering for mandatory forwards.
We hope before the end of the year be able to access the securitization market like we had.
In years past, so I think you'll see that coming out of us in the next in the next.
Several months there'll be some announcements around those resources.
Okay great.
And I guess the last question.
You guys have had been working with the sort of target.
Target of hitting $250 million, a month of originations, which obviously you've been.
Successful at doing.
As you look forward and the product mix shifts more to non QM in the agency repo side comes down.
Is that is the $250 million a month of originations target.
Still applicable to how you think about the business or has that shifted that in light of what you think the.
The product mix shifts going forward. Thanks.
Well I think Justin for a little bit about that.
Earlier with respect for this system pipeline competition, so I would expect that $250 million.
Certainly like it to remain constant we have to adjust for.
The reaction to the GSE product in the market. So I would expect that to possibly reduce.
GSE composition, and then continue to supplement and grow non QM and VA on top of that and.
It's on US obviously to execute at this point Trevor but just.
Non QM.
The margin there fills in the GAAP significantly.
Compare to these tighter GSE margins from what you've seen across the industry so to.
To get back up to.
The combined run rate is.
Is a different number and it's totally dependent upon how much non QM the company.
Can originate but when we spoke to that $2 50 number probably third quarter was one we announced that target that was we were originating just pure GSE production from the call Center and <unk> wasn't even up and running yet so it'll be a different makeup at this point.
Okay that makes sense I appreciate all the comments thank you.
Alright, thank you.
So was there any day.
Your question. Please thank you.
<unk>.
Thank you I was going to say at this point it looks like Theres no. Other questions. So we thank everyone for joining us today and well be back speaking to the market in early August for our second quarter earnings release. Thank you all.
This concludes today's conference call. Thank you all for participating and you may now disconnect have a great day.
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