Q4 2021 Impac Mortgage Holdings Inc Earnings Call
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Good day, and thank you for standing by and welcome to the Impac mortgage Holdings incorporated fourth 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 to ask a question during the session you'll need to press star one on your telephone please 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 Joe Joe Shockley Young General Counsel. Please go ahead Sir.
Good morning, everyone and thank you for joining Impac mortgage holdings year end 2021 earnings conference call.
During this call we will make projections and other forward looking statements in regards to but not limited to GAAP and tax.
Earnings cash flows interest rate 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 Form 10-Q s filed on the Securities and Exchange Act of $19 30 for 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 firstly disclaim any duty to update the information herein.
I would like to get started by introducing George Mangiaracina, Chairman and CEO of Impac mortgage Holdings Jordan.
Thank you Joe Tiffany has to figure out our CLO Johns Lochner, our treasurer.
Corey our CIO.
Will join me for the prepared remarks, and just mosey RCI will be available for the <unk>.
Question and answer segment of today's call.
For the fourth quarter of 2021, the company reported GAAP net income of $3 $6 million or 15 cents per diluted common share and a core loss of approximately $5 million or 23 cents per diluted common share.
For the year ended December 31, 2021, the company reported a GAAP net loss of $3 9 million or 22 cents per diluted common share and a core loss of approximately $12 4 million.
Or 5.8 cents per diluted common share the delta between GAAP and core results is primarily attributable to the increase in the fair value of our residual portfolio, which Jon block Mel will discuss in his prepared remarks later in this call.
As we've outlined in prior earnings calls the company broadly classifies its origination activities irrespective of channel as either rate or credit.
All right business is centered around our GSE products, while our credit business is focus on our non QM product.
In the fourth quarter of 2021 with respect to our rates business. The company was not immune from the reduced origination volumes and margin compression typically experienced by the industry at the latest state stages of refinance waves that were driven by low rates on the continent accommodative monetary policy.
As reflected in our GSE origination volumes in the fourth quarter.
We anticipate that market conditions will continue to be challenging for the foreseeable future and our rates business and have adjusted our capacity models marketing spend and headcount accordingly.
With respect to our credit business.
Quarter of 2021 further evidenced the resilience of our non QM franchise, non QM originations totaled close to $400 million in the fourth quarter of 2021 double that of the third quarter and position the company for an annualized run rate of approximately 1.5 billion.
So our full year 2021, the company posted close to $700 million in non QM too.
Two and a half times out of 2020.
Further context, the company originated less than $15 million in non QM and the four quarters post COVID-19 the second quarter of 2020 for the first quarter of 2021.
The non QM segment of the mortgage market experienced significant market pressure beginning in the fourth quarter of 2021 with conditions further deteriorating into the first quarter of 2022.
Expectations related to rising short term interest rates as expressed in the two and three year swap rates have resulted in concerns over extension risk and more expensive structured fancy terms. In addition to a disciplined approach to hedging activities not QM note rates were required to be recalibrated.
The consumer from a low 4% range prevalent in 2021.
So with target in the mid fives to 6% level.
Levels, not coincidentally presence in the market prior to the Covid induced emergent serious emergency monetary policy measures of March.
20.
The average note rate of the company's current lock pipeline.
Flex this arduous climb up the right ladder.
<unk> continues to believe that the addressable market for non QM will expand once markets normalize.
The first quarter of 2020 introduced increased market volatility and heightened market awareness of non transitory inflation and credit and liquidity risk brought on by geopolitical events.
Some of US were cutting our teeth in the business back in October of 1998 at the advent of the Russian debt crisis, which triggered a flight to safety rally in U S treasuries and a concurrent selloff and credit based assets, especially finance companies at that time experience losses and liquidity calls.
On their treasury short hedge positions and also faced warehouse margin calls and market value declines in the subprime and Alt a mortgage loan portfolios.
Layered risks are difficult to effectively hedge in times of acute market dislocation.
Company has deployed a wide wings capital markets had strategies and delivery mechanisms over the last several years with increased utilization over the last six months on futures on Treasury swaps.
<unk> sale agreements and best effort deliveries in lieu of aggregating non QM for bulk sale.
We will continue to remain disciplined in our origination and capital markets activities and remain undeterred in our belief that the addressable market for non QM will expand to a benefit once markets normalize with respect to volume and margin.
Turning now to our longstanding preferred D 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 that the proposed 2009 amendment to the preferred b articles did not receive the required votes and that therefore, the original preferred the articles remains in place.
I will now turn the call over to our General Counsel, Joe drop beyond for a more detailed update on this matter Joe.
Thanks George.
As previously discussed 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, which amount was previously accrued by the company back in 2018.
The ease of the unpaid dividends will be determined once the circuit court determines the basis for an appropriate record date.
In addition, the court order required a special meeting of preferred stockholders for the election of two additional directors of the company.
<unk> meeting of the preferred B stockholders was originally convened October 13, 2021. However, it was a journey to November 23, 2021, due to the lack of corn sufficient for an election of directors.
Really on November 23, 2021, and the meeting was further adjourned until January six 2022 due to a lack of corn and finally also do a locker form at the January six 2022 meeting the special meeting was concluded without the election of any new directors.
The company was hopeful poor motive and achieved at one of the special meeting date as we're looking forward to welcome two new board members and their input, especially on aligning the company's stakeholders to create a sustainable capital structure and strategic vision for the future.
With respect to payment of the future dividends on preferred destock such dividends are cumulative however, theyre not payable unless declared by the board.
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 the $82 million in short and long term debt that has seniority in the capital company's capital structure.
Additional information on the Companys capital structure, the court's order and the special meeting of preferred stockholders can be found in our 10-K's 10-Q's and eight.
Carrie filings.
John Walker will now discuss the operating results for the fourth quarter of 2021.
Thank you Joe.
For the fourth quarter, the company reported GAAP earnings of $3 6 million as compared to $2 1 million for the third quarter and a loss of $2 2 million in the fourth quarter of 2020.
Our 2021 year to date GAAP net loss was $3 9 million as compared to a loss of $88 2 million in 2020.
For the fourth quarter core loss was $5 million as compared to earnings of 810000 in the third quarter and earnings of $3 3 million in the fourth quarter of 2020.
Our 2021 year to date core loss was $12 4 million as compared to a core loss of $58 7 million in 2020.
The financial results for the quarter reflected increased loan production net of the effect of market margin compression gain on gain on sale of loans decreased to $14 9 million during the fourth quarter as compared to $19 $6 million during the third quarter.
During the fourth quarter of 2021, our originations were 759 million with margins of 196 basis points as compared to originations of 683 million with margins of 287 basis points in the third quarter of 2021.
The increase in production quarter over quarter was due to our ability to grow our non QM production to $382 million, which increased 105% as compared to $186 million in production during the third quarter.
During the fourth quarter of $129 million or <unk>, 34% came from our retail channel as compared to $54 million or 29% during the third quarter of 2021.
The shift in our production focus and subsequent increase in non QM production through both our GPO and retail channels has helped to offset the declines in conventional originations. We all knew was coming with the fourth quarter conventional originations decreasing by 25% to $351 million as compared to $467 million.
In the third quarter.
During the fourth quarter of 2021, other income increased $7 3 million.
And mark to market fair value gains on our net trust assets as a result of a decrease in residual discount rates a decrease in loss assumptions on certain trust and an increase in prepayment assumptions.
As well as a $1 $5 million increase in fair value gains on our long term debt.
As George had previously indicated changes in fair value of the net trust assets and long term debt are excluded from core earnings.
Operating expenses increased to $20 5 million in the fourth quarter as compared to $19 8 million in the third quarter, primarily due to personnel costs, which increased to $13 2 million from $12 7 million in the third quarter.
The increase in personnel costs during the fourth quarter was primarily the result of an increase in variable compensation as a result of the increase in origination volume as well as personnel costs, which continue to remain elevated across the industry due to the competition for talent.
Our business promotion expense was relatively flat at $2 2 million quarter over quarter.
This reflects our previous push to target non QM production in our retail channel.
<unk> production outside of California, and maintain lead volume.
While the company previously experienced a substantial amount of organic lead flow the increase in competition is.
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 $600 million and we'll continue to balance capacity needs to meet funding demands of our non QM production goals.
We continue to carefully manage our liquidity and balance the demands of an aggregation model.
Our current cash position turn times and borrowing resources, we feel we have the liquidity necessary to meet our near term production goals.
Toby will corie will provide specific commentary around our non QM capital markets philosophy Obi.
Yeah.
Thank you John .
As has been mentioned the industry saw significant pressure on margins in the fourth quarter.
During the quarter, we saw flattening of the yield curve with two year and three year swap rates, increasing by over 50 basis points each.
Rising short term rates was driven by inflationary pressures in the economy and the markets expectation to the feds reaction to that pressure.
In addition to the selloff in rates, we saw widening of credit spreads across the capital stack with spreads on new issue non QM AAA rated tranches.
Moving from 65 basis points over interpolated swaps at the beginning of the quarter to 90 basis points by the end of the quarter.
Credit spreads have continued to widen and AAA non QM spreads economy around 160 basis points over benchmark wins.
Horizon credit spreads occurred as we saw increased volatility in the broader markets.
But this widening there was also a reflection of a supply demand imbalance in the non QM sector.
Supply outstripping demand during the fourth quarter.
Investors also began to focus on extension risk for lower coupon mortgages.
Originators were generally slow to react to these changes in investor appetite.
As a result of these pressures the company began to take steps during the quarter to protect its margins by raising rates across all non QM products.
We also began raising the minimum rates loud on our rate sheets from three one to five of the start of the quarter.
246 to five today.
The effect of these changes to the rate sheet is that the weighted average coupon on the illusion ended non QM loans has gone from the low 4%.
The fourth quarter to mid to high 5% today.
We also introduced some new tools as George previously mentioned, an expanded others to more closely manage the interest rate and credit exposure on our non QM mortgage pipeline.
We entered into interest rate swap futures to manage interest rate risk.
All forward loan sales to manage the pipeline with.
With that I'll now turn it over to Tiffany to discuss production activity during the quarter.
Thank you Avi.
As we discussed during the second half of 2021 landscape at the GSE lending space continued to present challenges to conventional lending growth.
Decreased loan application volume industry wide as suggested has been noticeable stagnation in GSE origination volume for many lenders competing for market share.
Raising rate environment combined with ongoing competitive pressure further constricted margins as well as the opportunities for growth around GSE production.
The primary driver of GSE originations as a retail consumer customer.
And while the volume in our retail channel remained relatively flat in the fourth quarter as compared to the third quarter. It did experience a decrease in GSE originations a 23%.
We will continue to originate in the GSE space to a retail channel with minimal marketing.
We will remain diligent around market conditions with an eye toward protecting margin.
Previously we discussed the important period within our consumer direct retail call center, allowing it to navigate shrinking GSE margins in offsetting reselling with non QM origination volume and revenue.
We are pleased with how quickly we've been able to shift focus and increased <unk> production and the cost.
By leveraging the sales and marketing expertise that was so successful in ramping up this product previously we've compressed timeline significantly in shifting product composition within the retail channel.
Our non QM lending volume in the retail call center increased to $129 million in the fourth quarter 2021 more than doubling the $54 million of non QM funding volume in the third quarter.
Well that non QM growth trajectory and the call center will level off we do expect our non same run rate to remain relatively flat into the first quarter of 2022.
As John touched on our business promotion expense attributed almost entirely to our retail channel increased slightly in the fourth quarter as compared to the third quarter.
We increased business promotion to both maintain our lead volume and the call center and augment targeted marketing to attract non QM focus.
With the aforementioned increase in business promotion related to non QM marketing in the consumer direct channel, we continue to see a corresponding shift in pipeline competition.
Currently non QM originations represent approximately 52% of our locked consumer direct pipeline as compared to approximately 31% at the time of our last earnings call in November .
Additionally, marketing allocations will continue to be depleted needed to leverage the expertise and the call center and educate consumers around the non QM product offering to further promote growth in the channel.
The primary focal point and ramping up our non QM production remains within our third party wholesale origination channels.
Wholesale and has traditionally been a driving channel around non QM originations industry wide as well as the successful vehicle for increasing volume over the last several years.
Measuring from the first quarter of this year the momentum around non similar origination volume has steadily increased.
As George mentioned the company originated over $380 million of non QM production in the fourth quarter 2021, as compared to $185 million in the third quarter doubling our non QM production from the third to fourth quarter.
Roughly 66% of our non QM production volume was generated through our Tpa channel, but the overall composition of the PPO pipeline almost entirely non QM product.
Over the course of the second half of 2021 and the progress we've made in our GPO channel is indicative of the clear focus the business has on rebuilding a successful alternative credit platform.
In December our wholesale channel funded $95 million in non QM production equaling the largest wholesale non QM funding months as compared to historical volume number since 2015, the very impressive milestone for non QM team.
While the dramatic growth of our wholesale channel following its relaunch in the third quarter of 2020.
Produced positive results. The GPO channel has still not fully relaunched the correspondent division there is additional opportunity to capture market share and drive volume through delegated and non delegated correspondent business relationships in the future.
As Obi mentioned, we've taken steps to protect margins by raising rates across all non QM products.
This has been an adjustment for a borrower and broker partners as they recalibrate to pricing changes in a rising rate environment.
Despite these changes our non QM run rate across all channels have remained at over $100 million per month during the first quarter.
We will continue to build our non QM teams with both channels to offer alternative kind of products and the same thoughtful and responsible way we have since 2015.
That concludes the financial results and our prepared remarks, and I'll now turn the call over to John for the question and answer session. Thanks.
Thanks Tiffany.
So we received a list of questions from Trevor Cranston.
So what I'll do right now is I'll go through those questions at the team answered them directly.
So the first item.
Trevor has mentioned was.
His understanding that the impact of the non QM valuation at the end of the fourth quarter had to do with spreads widening within non QM securitization. So with that said given what has happened in the first quarter.
Rate movement do we see margins tightening even further so ob maybe you can touch on that briefly.
Yes sure Justin.
So yeah I mean.
We've continued to see margin compression on to the first quarter of this year.
As mentioned in the prepared remarks took <unk> spreads ended the fourth quarter at roughly 90 basis points.
Those would be interpolated swaps.
Today with a few deals in the market, we're seeing those spreads.
We're at between 155 to 160 basis points over so.
Another call it 65 to 70 basis points.
Increased and credit spreads at the AAA level.
That obviously has continued to impact margins.
<unk> also seen rates I mentioned earlier that rates have increased.
50 basis points during the fourth quarter.
We've probably seen another 80 to 90 basis points.
Selloff in rates since that time, so again the combination of these two things have continued to put pressure on margins.
I do think that originators ourselves included.
Bonded and we began to see increase rates offering on the rate sheets.
And I think that.
Given where weighted average coupons program 150 basis points.
Higher than it was back then in all of this is Sam.
Two.
Some of that margin compression.
Okay. Thank you.
The next items is kind of a follow up there so.
Within the non QM space has the market specifically the brokers and our consumers adjusted to the increase in higher non QM rates and do we expect there to be a dip in volume that after that do we expect that to stabilize so I can just take that one.
So as we've touched on a couple of different places in the prepared remarks.
Oh political events combined with what was already a very volatile market.
Put significant pressure.
On us and the rest of the industry and obviously that was pushed forward to consumers and brokers.
And they had to recalibrate to.
<unk> significant pricing changes, which we outlined previously so for that reason within specifically just the unlocked pipeline. So those folks that had not yet locked.
They're loans, yet and that we did see some fallout there which was to be expected.
They felt that the rates that they were going to get we're going to be considerably lower and then there was that large move. So there was some fallout there so depending on how mark shakes out non.
Non QM for Q1 will most likely be down as compared to Q4, However, and Tiffany. It just mentioned this we're still remaining at a $100 million a month of non QM production.
And as the market gets comfortable with where rates are currently.
We do expect that to stabilize and then increase our locks and shops going forward.
The next question that Trevor had asked was do we ever expect non QM gain on sale margins to return to the levels that we we got to enjoying the third quarter or is there a more realistic target gross margin with these higher coupon levels.
That's a difficult one from a crystal ball perspective, but but Obi do you want to maybe give your thoughts on that.
Yes sure.
Yes, really really difficult question to answer given the volatility in the market.
Some of the changing dynamics, we're seeing but we do think that the market will normalize at some point.
And once it does.
The originators or find the right level of returns margins too.
It's not the same levels, we saw in Q3 of 'twenty one.
Close.
That allows us to run the business in a profitable manner number once and I would say, it's obviously a pipeline business with.
With a lag between one rates are locked by the borrower.
And when the loans are shown to investors approaches fund investors.
Some continued compression there, but I do think that at some point.
We stabilize here and.
Originators come too.
The rates that.
Allow us to get back to those.
54, 4% margin.
Okay. Thanks.
Next question.
Do we expect competition to remain as intense as it has been.
The last three or four months with the non QM space.
Do we believe that some new entrants could fall out due to all the volatility that has gone on so I mean that.
The question is around the staying power of some of our competitors. So I'll take that one as well so really late third quarter Theres been a lot of new faces step into the non QM space, which I think can be expected. We've seen this before to help offset the anticipated loss of <unk>.
Production, that's really outside of purchase money. The one pivot that a lot of folks will move to <unk>.
So while it's still too early to tell I would say some of these new entrants to the extent that they hadn't built out.
They are proper alternative credit non QM infrastructure similar to ourselves and some other the larger non QM lenders out there.
They could conceivably back away from the table at this point.
To the extent that the volatility which was too much for them to stomach.
However, we do believe that the larger names yourself included that have been tied to non QM since release inception.
Continue to aggressively compete on margin market share so from a big picture standpoint, I don't think that the competition.
In the space.
Will fall off at all.
You could see some of the newer entrants.
Back away from it.
And the last question that Trevor had focused on the.
Kind of a call center in the GSE space, So regarding GSE production.
The assumption is that our call center has.
Experienced the same pain or some other.
GSE shops.
And have we adjusted appropriately where do we see non throughout the call center and I'll just hold onto this one as well. So we've talked about this last couple of calls on this call a bit.
And George even mentioned it in his prepared remarks in terms of with respect to the right business. We are certainly not immune.
The reduced origination volumes and margin progression around GSE production.
So while our total volume in the retail call center remained relatively flat in the fourth quarter as compared to the third we did experience a decrease of about 23% in GSE originations.
Do expect that deep.
Decrease to continue going forward further.
Not a surprise there, especially when you take into account and John mentioned this in terms of marketing spend we're not chasing that production currently with increased marketing spend we've pivoted almost all of our business promotion within the call center to non QM and so the GSE thats coming in right now.
Purely organic.
We'll continue to capture as much of that that we can get that comes in but we're not going to chase that volume at these margin levels.
And Tiffany touched on it in her prepared remarks.
<unk> doubled our non QM production within the call center in the fourth quarter compared to the third so.
So clearly we've made data point of emphasis.
Having great success doing so.
And then.
A topic that continues to come up in terms of trade publications you read all the time is reduction of head count some of the larger institutions out there.
Not something that we're immune from either but the difference here is.
That our folks.
Know how to originate alternative credit and GSE products from years of being cross trained on that so that makes that much easier, but we will continue to staff thoughtfully respond appropriately as the market changes right sizing our capacity.
Market conditions as we always do.
So that concludes what we have in terms of questions today.
So with that.
Thank you all for joining us and we'll speak to the market in a few months here.
The results of the first quarter. Thank you.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect everyone have a wonderful day.
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