Q2 2021 Impac Mortgage Holdings Inc Earnings Call
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Good day and thank you for standing by welcome to the Impac mortgage Holdings second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today just in Mooresville. Please go ahead.
Thank you good afternoon, everyone. Thank you for joining Impac mortgage holdings second 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 would like to refer you to the business risk factors in our most recently filed Form 10-K, and 10 Qs filed under.
The Securities and Exchange Act of $19.34.
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 any outlook and guidance is effective as of the date, given and we expressly disclaim any duty to update.
The information herein.
I would like to get started by introducing George <unk>, Chairman and CEO of Impac mortgage holdings.
Thank you Justin.
With me with me today for prepared remarks, John Glockner, our treasurer, and principal accounting officer, albeit Corey our EVP and.
In alternatives.
Alternative credit products.
Bear with me for prepared remarks later for the Q&A session Tiffany Entsminger.
Geoffrey.
And Tom kind of Hitachi will join us approximately three months ago during our.
Q1, 2021 earnings call. We discussed the company continue to grow its retail and <unk> platforms and are recorded its third consecutive quarter of growth.
While continuing to remain focus on liquidity and risk management. Following the 2020 Covid crisis. The Companys less business update expressed the view that market conditions in the GSE space had continued to normalize with margins narrowing has the capacity to originate and process loans in the industry began to catch up with.
<unk> demand the company is not immune to the margin compression that affected the entire industry throughout the second quarter of 2021, we previously referenced fee, increasing investor demand expansion of and normalization of guidelines as well as improved margins for our non QM production a competency of the firm that we are currently.
Investing in with capital market securitization talent product innovation risk based pricing enhancements and a growing sales and operations team Justin will expand on these initiatives and investments across products and channels in further detail a little bit later on in the call. The company reported net GAAP loss of approximately nine.
Millions of <unk> 42 per diluted common share and a core loss of approximately $7 million 32 per diluted common.
For the second quarter of 2021.
Core earnings or loss, an alternative measure of results that senior management utilizes to gauge the company's performance core earnings or loss isolates results from recurring business activities by adjusting for certain nonrecurring items such as changes in the 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 generated originations of approximately $600 million in Q2, 'twenty one versus $850 million in Q1, 'twenty one while typically we do not provide forward looking guidance. We will note that our non QM pipeline as measured by submissions and locks that only 10.
At the end of 2020.
A little bit over $80 million at the end of the second quarter.
And currently stand at $90 million at the end of July this product increasing pipeline demonstrates the recent pivot towards non QM originations both in our retail channel in the historically non QM focused GPO channel the.
Pipeline growth was sequenced after having achieved the sustainable monthly run rate of $2.2 million to $300 million in GSE product during the past three quarters. Historically, we've had good success delivering non QM through the retail channel as well as GPO the significant decrease in GSE.
Margins. In addition to the shift in marketing resources for the retail channel fueled a rapid increase in non QM activity we.
We anticipate continued growth in non QM at healthy margins and all of our origination channels.
And for non QM product ramp in <unk> to accelerate as our new account executive additions acclimate their customers to our products.
Competitive pricing and market leading service levels.
The 10 year Treasury rate has drifted down from $1.70 at the end of the first quarter of 'twenty one.
To 150 at the end of the second quarter of 'twenty one.
Recently dropped below 120 in recent weeks range that should support improved GSE origination levels at impact for the third quarter as the firm's non investment.
Non QM investments continue to take hold.
While the non <unk> non QM market has not fully returned to pre crisis levels. It's close we are encouraged by continued growth in borrower and investor demand, resulting in consistent and solid solid pricing as well as strong capital markets execution for our current originations.
The non QM market is characterized by moderately tighter lending standards across the industry, which are in line with our firms long term view on alternative credit lending anchored in quality consistency performance and adherence to ability to repay our ATR <unk>.
<unk>, we continue to believe in the market opportunity and demand for non QM and the company's ability to be an innovative market leader in the segment.
The origination securitization and asset management of these products as a core competency of the company.
Having originated over $90 billion of such loans from 995 to 2007 posted subprime financial crisis the company consciously maintained.
Resources across these disciplines to manage legacy Allstate portfolios and in early 2014 extended that infrastructure is one of the first mortgage companies to anticipate and that we pursue the revival of non QM mortgage market.
Since 2014, we originated in excess of $4 billion of non QM steadily yet responsibly, increasing our production from $130 million in 2015 to over $1 billion in quarter annually and the two consecutive years, leading up to the Covid crisis.
Company has not only maintained but added to both the number of warehouse relationships and available credit and liquidity to comfortably support existing future growth targets for non QM.
Have also recently distributed non QM loans to a wide range of investors on both flow and bulk basis.
Including Wall Street firms hedge funds and alternative capital partners, we continue to receive market feedback that the production profile of our non QM is considered at the top of the quality ranking available in the marketplace impacts not QM collateral performance originator rankings and adjustment factors with the rating agencies continue.
The result in efficient permanent capital structures for our investors.
As we noted in the Q&A session during our previous earnings call. The company has now established a seasoned structured products capital markets team led by <unk> with Corey based in New York City. This enables the company to directly or synthetically access the securitization market and opportunity Opportunistically retail.
<unk> economic interest in the subordinated tranche tranches in asset management, and servicing fees of our offerings, which evidenced our confidence in the long term performance and risk weighted returns of the loans, we originate over who is going to speak to these initiatives later during his prepared remarks.
The company continues to monitor developments across a range of macroeconomic and pandemic related factors, including trends in inflation housing affordability.
And the credit and interest rate environments, our risk management and product offerings will evolve with the marketplace to successfully navigate these challenges and see opportunity risk reward is properly balanced.
As stated earlier protecting the firm's liquidity continues to be a primary objective for the firm from its cash position was approximately $50 million or $2.34 per common share at the end of the second quarter. We believe this liquidity position as well as a continued focus on strong risk management is prepare the firm to.
Any future market volatility.
Turning now to our longstanding preferred B litigation.
As we disclosed in our 8-K filing on July 19.
2021, the Maryland Court of Appeals issued an order, which affirmed the lower courts ruling specifically.
Yep.
Proposed 2009 amendment to the preferred B articles did not receive the required votes and therefore, the original preferred b articles remain in place.
As a result of the court's order the company will be required to pay approximately $1.2 million in unpaid dividends to certain preferred stockholders.
This amount was previously accrued by the company in 2018.
And in addition, the preferred stockholders are now entitled to call a special meeting for the election of two additional directors to the company's board.
Although disappointed in the court's order it doesn't bring closure to over a decade of litigation and add certainty to the terms and rights of that portion of the company's capital structure.
The company will welcome the new directors once elected and look forward to their contributions, especially in aligning the company stakeholders to create an efficient and sustainable capital structure.
And common strategic vision for the future.
With respect to payment of future dividends on preferred stock such dividends are cumulative.
Theyre not payable unless declared by the board.
The preferred stock is perpetual with respect to both its liquidation preference and payment of dividends.
At this time there is no intent to declare any dividends on the preferred stock, especially in light of short and long term debt that has seniority to the preferreds in the company's capital structure.
Additional information on the company's capital structure and the courts ruling can be found in our 10 Ks Qs 8-K filings.
I will now hand, the call over to John Locke under discuss operating results from the first quarter.
Thank you George.
For the second quarter, the company reported a GAAP loss of $8.9 million as compared to a loss of 683000 in the first quarter and a loss of $22.8 million in the second quarter of 2020.
For the second quarter core earnings were a loss of $6.9 million as compared to a loss of 262000 in the first quarter and a loss of $10.4 million in the second quarter of 2020.
The second quarter appeared to be a transitional quarter for many mortgage originators, including ourselves as we were not immune from the margin compression theme throughout the industry.
During the second quarter, our originations were $611 million with margins of 175 basis points as compared to originations of $850 million with margins of 237 basis points in the first quarter.
As we had indicated on the first quarter call, we shifted our focus to non QM production as a result of the margin compression fenian conventional originations.
Despite the decline in both origination volume and margin gained during the second quarter.
We're able to grow our non QM production to $100 million as compared to $15 million during the first quarter.
The shift in our product on our production mix during the first quarter and subsequent increase in non QM production during the second quarter helped to offset the impending decline in conventional originations and margin many originators and the industry experienced during the second quarter ourselves included.
As a result gain on sale of loans decreased by $9.4 million from the first quarter to the second quarter.
Operating expenses decreased from $21.3 million in the first quarter to $19.6 million in the second quarter.
This was led by a decrease in personnel costs from $14.9 million in the first quarter to $12 million in the second quarter, which was primarily primarily the result of a reduction in variable compensation as a result of the decrease in origination volume.
Due to the continued competition for talent. Despite the decline in personnel expense as compared to the first quarter personnel costs continued to remain elevated across the industry.
Additionally, our personnel expense associated with the rebuild of our non QM platform has contributed to elevated personnel costs as we continued to add new talent to the team.
Our business promotion expense increased to $1.8 million in the second quarter as compared to $1.2 million in the first quarter.
This was primarily as a result of the aforementioned increase in competitive pressures during the quarter.
While the company previously experienced a substantial amount of organic lead flow. The increasing competition has prompted an increase in marketing spend to maintain a consistent level of lead volume.
We currently have warehouse lines with a combined borrowing capacity of $550 million with an additional $25 million of warehouse capacity coming online in the third quarter.
Within the call center or funding to settle turn times continue to be just under 20 days. However, this remains subject to the risk of increased turn times and capacity constraints inherent in an aggregation execution model.
Our funding this I will turn times on non QM or just under 40 days with our goal to reduce the settlement turn time to 20 days or less by year's end.
We continue to carefully manage our liquidity as evidenced by our unrestricted cash position of $50 million on the balance sheet at the end of the second quarter, our strong liquidity position gives us the flexibility to continue to increase production and invest capital in our non film franchise for continued growth.
Based on our current cash position turn time and borrowing resources, we feel we have the liquidity necessary to meet our near term production goals.
I will now turn it over to Justin to discuss production mix and product focus.
Thank you John.
As 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 underwrite alongside the shift in a more open credit box competition amongst lenders contributed significantly to reduce margins across the board borrowers are able to shop and lenders find themselves competing aggressively on rate.
The result has been a significant decrease in GSE volume across the industry. During the second quarter. These competitive and market driven challenges resulted in approximately 60 to 70 basis points of margin compression within our retail channel when compared to the first quarter.
Our retail consumer direct channel the primary driver of GSE originations. So a decrease of approximately 33% in production from the second quarter as compared to the first quarter.
Impact will continue to originate in the GSE space, but we'll remain diligent around market conditions impacting margin and competition.
Business promotion expense attributed almost entirely to our retail call center increased by approximately 600000 in the second quarter.
During the second quarter, we increased our business promotion to maintain our lead volume in the call Center and began targeting non QM production in the retail call Center.
Although we continue to source leads through digital campaigns, which allows for a more cost effective approach the competitiveness within the California market has driven up our advertisement costs. Despite these challenges in the GSE space, we remain committed to serving consumers in the GSE and government lending spaces, while also growing our.
Non QM opportunities across all channels.
This is an important pivot for the company, allowing it to navigate shrinking GSE margins, while driving revenue and the non QM space.
Non QM reemergence across the market was met with credit and pricing disadvantages that restricted the addressable market of consumers and investors. However, as mentioned on our last call. During the first quarter of this year credit pricing and overall investor interest returned allowing impact to resume one of its core.
Competencies and product offerings.
Gross margins for non QM returned to healthy 400 to 500 basis point range by the end of the first quarter NIM stayed at those same levels to start of the third quarter.
With the aforementioned increase in business promotion related to non QM marketing and the consumer direct channel, we've seen a corresponding shift and the pipeline composition currently non QM originations represent approximately 13% of our locked consumer direct pipeline historically, the retail consumer direct channel.
Contributed to impact overall non QM originations since 2016, our call Center has originated approximately 1 billion of non QM production additional marketing allocations have been deployed to leverage the expertise and the call center to drive this business once again.
The primary driver in focal point and ramping up our non QM production remains within our third party origination channel the momentum around re launching non QM products within <unk>.
<unk> has grown considerably since we re launched this program in the first quarter.
The company originated a $100 million of non QM production in the second quarter as John mentioned compared to just $15 million in the first quarter over 90% of this non QM production volume was generated through our Tpa channel currently the overall composition of the GPO pipeline was approximately 85% non QM.
With a $50 million current monthly run rate of non QM production out of our Tpa channel, we've demonstrated the ability to organically generate significant momentum around this product.
Further to build upon this momentum we continue to invest in resources.
Around operational improvements and technology aimed at increasing volume and counterparty experience as well as some recent account executive hires that will continue to boost business in previously underserved regions of the country.
We took an iterative and risk based based approach to updating our credit box guidelines and pricing during the second quarter to provide a competitive offering to the market, while maintaining a high quality credit standard.
<unk> will provide specific commentary around non QM capital markets philosophy here at impact Colby.
Thank you Justin.
Over the past two months the teams in credit and capital markets that we focused on expanding our non QM products and offering more aggressive pricing across the board.
No doubt the enhanced non QM underwriting guidelines, which are a return to a pre COVID-19 product matrix and <unk>.
Further our underwriting philosophy of providing quality loans to a broad section of non QM borrowers.
We also added to our range of Vesta property focused loan products by offering a low ratio product to tap into the large demand for single family rental investors with strong personal credit.
Low loan to value ratios.
In addition to the enhanced underwriting guidelines the team and capital markets was also rolled out more aggressive pricing across both our bank statement on property focused products.
We have developed analytical tools that enable us to better project prepayment speeds on default probabilities on each loan which will in turn allow us to use our rate sheets to target the optimal product mix.
We have also developed tools that allow us to monitor our pricing.
And compare it in real time with other non QM lenders and adjust our pricing accordingly.
These actions have been very well received by our brokers and account executives as as we mentioned previously submissions locks and fundings are significantly higher since this changes will rolled out.
We are also continuing to explore structural options for an alternative investment vehicle. The goal for this vehicle will be to allow the company to participate in some of the economics associated with retaining an interest and securitizations as either a standalone investor.
Our joint venture.
And that concludes the financial results on our prepared remarks, we will now open the call for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Again that is star then the number one on your telephone keypad.
And I am showing no questions at this time speakers you may continue.
Okay, well. Thank you everyone for joining us today, we look forward to speaking with the market in early November and reporting our third quarter results. Thank you everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
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