Q3 2022 Impac Mortgage Holdings Inc Earnings Call
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Hello, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Impac mortgage third quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
The Speakers' remarks.
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If you should need any further assistance. Please press star zero and an operator will come on line to assist you I would now like to turn the call over to Mr. Joe Joppa Young General Counsel. Please go ahead.
Good morning, everyone and thank you for joining Impac mortgage holdings third quarter 2022 earnings conference call.
During this call we will make projections and other forward looking statements in regards to but not limited to GAAP and taxable earnings cash flows.
Interest rate and market risk exposure mortgage production and general market conditions are.
I would like to refer you to the business risk factors in our most recently filed Form 10-K and Form 10-Qs filed 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 any outlook and guidance is effective as of the date, given and we expressly disclaim any duty to update the information herein.
I'd like to get started by introducing George <unk>, Chairman and CEO of Impac mortgage holdings George. Thank you Joe also with US. This morning are John Glockner, Our principal accounting officer, Justin <unk>, our chief administrative officer, and Tiffany Entsminger, our Chief operating officer.
Interest rate and credit spread pressures with attendant market volatility and illiquidity will unrelenting in the third quarter of 2022.
The company adopted a defensive risk golf posture in the fourth quarter of 2021 and remains measured and disciplined in its origination capital markets activities late risks cannot be effectively hedged in times of acute market dislocation and we have no visibility as to when such dislocation will abate.
In return the industry to normalized volumes and margins John Glockner will discuss our operating results later on in this call.
In October the company announced the completion of the exchange offers and the redemption of its series B and series C preferred stock.
These are significant achievements for the company they align our equity stakeholder interests and simultaneously bring closure to the costly legal proceedings and distractions that have impeded the company. Since 2009. The company May now focus on exploring corporate finance and strategic opportunities absence and attract.
<unk> legacy capital structure, Joe John for you I will now provide additional detail on our exchange offer and preferred litigation, Jeff Thanks, George with.
With respect to the exchange offers as previously disclosed the company completed the closing for all tendered preferred B and preferred C shares on October 26 2022.
Following day in accordance with the amended preferred articles supplementary the company issued a redemption notice to redeem all remaining shares preferred b and preferred <unk> stock that were not tendered and such closing is set to occur on November 15th 2022.
In addition in accordance with the order of the Circuit Court in Maryland, and the Tim Litigation matter on October 28, 2022, the company deposited into escrow the required number of common and preferred shares which are being held pursuant to an order until the court rules on certain matters remaining and that's in litigation.
A hearing is scheduled for December five 2022, and such hearing primarily involves motions by the plaintiffs and their counsel for fees expenses and awards any and all of which would be paid from such escrowed shares and from cash previously asked crude with the court pursuant to a separate court order in the event there are any remaining shares.
A common or preferred in escrow following the court's final ruling then such remaining shares will be distributed to former preferred b shareholders, whose shares were either tenant or redeemed as previously described earlier on a pro rata basis.
John Walker went I'll discuss the financial results for the third quarter of 2022 John .
Thank you Jeff for the third quarter, the company reported a GAAP loss of $13 million as compared to a loss of $13 5 million in the second quarter.
And a gain of $2 1 million in the third quarter of 2021.
Our third quarter adjusted loss was $12 6 million as compared to an adjusted loss of $15 4 million in the second quarter and a gain of 810003rd quarter of 2021.
The financial results for the quarter continue to reflect significant market pressure, which continued to accelerate in the third quarter as a result of increasing interest rates inflation credit and liquidity risks.
Our results as well as many of our peers performance reflect the intense pressure on mortgage originations due to the dramatic collapse, the mortgage refinance market and the weakening mortgage purchase market, which was theft, which has suffered from a lack of housing inventory in significant increase in mortgage interest rates, resulting in affordability issues.
As we've discussed on previous calls this year beginning in the first quarter, we were deliberate in decisively more conservative in our lending approach adopting a risk off defensive posture sacrificing results for liquidity and stability, which we felt was the appropriate path heading into a steep rate headwinds.
Originations in margins has suffered as a result with originations decreasing to $62 million with negative margins of 110 basis points during the third quarter as compared to originations of 128 million with margins of 14 basis points in the second quarter of 2022.
Our risk off posture in conjunction with rate shock and increased fallout resulted in continued origination pipeline reductions, which are the primary drivers for negative margins during the third quarter.
Other income decreased to an expense of $1 8 million in the third quarter as compared to income of 720000 in the second quarter, primarily due to a $2 $4 million decrease in fair value adjustment of our long term debt. It should be noted that changes in fair value of long term debt are excluded from adjusted earnings.
Operating.
Expenses decreased 24% or $3 6 million to $11 1 million in the third quarter as compared to $14 7 million in the second quarter, primarily due to a reduction in personnel costs, which decreased $2 3 million from the prior quarter.
The decrease in personnel costs during the third quarter was primarily the result of a decrease in variable compensation commensurate with the reduced originations as well as a reduction in head count to support reduced volume.
Head Count has declined from approximately 330 at year end 2021 to 162 at the end of the third quarter and sits at approximately 120 today.
Our business promotion expense decreased 59% or 774000 as compared to the prior quarter well.
While we had previously pushed to target non QM production in our retail channel continued product expansion outside of California, and maintain lead volume as a result of the dislocation within the non QM market due to the significant increase in interest rates in the third quarter. We further reduced our marketing spend as we continue to pull back on origination volumes.
During the quarter, we continued to reduce our warehouse borrowing capacity with a combined borrowing capacity of $325 million a quarter end.
Anticipate lowering our borrowing capacity to less than $50 million in the fourth quarter as we continue to balance capacity needs to meet funding demands of our non QM production.
The anticipated reduction in capacity is due to the predominance of our current capacity geared more towards conventional and government insured originations, which fell to less than $15 million in the third quarter.
Yes.
We continue to carefully manage our liquidity as evidenced by our unrestricted cash position of $44 million on the balance sheet at the end of the third quarter with those of an aggregation model.
Based on our current cash position borrowing resources and defensive posture, we feel we have the liquidity necessary to meet our near term production needs.
I will now turn it over to Justin to discuss origination activity during the quarter Justin Thank you John .
Our production volume in the third quarter as with the second quarter is reflective of the current challenges in the mortgage market impacting mortgage lenders both on the credit and rate side of the business.
Across the industry the deterioration of the conventional GSE origination space continued during the third quarter.
At the beginning of 2022, the consumer had access to a 30 year fixed mortgage rate between two five to low three 5% on average as compared to the same mortgage product being offered today at 7% for higher like many other originators reporting staggering reductions in overall low.
Volume impact was no exception as we saw a decrease of 97% of our overall GSE conventional volume in the third quarter of this year when compared to the third quarter of last year.
Impacts primary driver of GSE originations is our retail consumer direct call center, which has historically originated mostly refinanced transactions as the predominant loan purpose during.
During the third quarter, the consumer direct call center experienced a 94% decrease in total volume as compared to the third quarter of last year.
This is in line with the roughly 83% decrease in refinance activity nationwide that was reported by the mortgage bankers Association at the end of September of 2022, which was then increased to 86% the following month.
The pronounced drivers of this volume decline pronounce drivers of this volume decline across the industry are attributable to higher rates capital contraction and risk based pricing adjustments relative to perceived credit risk across the market.
In addition to the drop in overall volume margin compression persisted as reported in prior quarters.
The rising rate environment has effectively eliminated the opportunity for rate and term refinance activity, but the majority of American consumers.
Investors have adjusted pricing to account for the perceived risk around <unk> and credit risk yielding considerably higher rates for consumers looking to access equity or consolidate debt through cash out refinance transactions.
Moreover, the borrowers who are unable to take advantage of lower rates face considerable challenges in today's market relative to their ability to credit quality.
Additionally, while purchase money transactions have increased as an overall percentage of our origination volume. This is solely due to the disappearance of the refinance activity.
Total purchase money decreased 48% in the third quarter as compared to the previous quarter. The figures reported by the MBA reflect a 30% decline in purchase volume nationwide. In addition to the steep drop in refinance activity.
We continue to see weakening in purchase volume due to higher rates and affordability challenges as well as declining markets and valuation challenges.
Borrowers appear to be cancelling transactions at a much higher rate than what we have ever experienced before in the call Center.
From an expense management perspective, as John touched on earlier, we continue to adjust our marketing spend downward to calibrate to a reduced loan officer head count as well as the deterioration of lead quality of borrowers looking to transact and the strengthening addressable market at these rate levels.
Our business promotion expense decreased to 545000 of third quarter.
And was down one 6 million or 75% from the third quarter of last year. We will continue to adjust this spend to support origination capabilities, while focusing on margin and expense management.
In prior quarters earnings calls, we discussed the decline of non QM volume seen across the market. Following the first quarter of <unk>.
2022, due to the dislocation in the market, notably rate shock pricing changes and increased fallout.
Lower non QM volume persisted throughout the third quarter for those same reasons.
Overall retail consumer direct non QM production decreased to $21 million, a 57% decrease compared to $49 million in the second quarter.
The call Center also experienced a decline in non QM lead conversion further reducing total originations in part and this decline is due to higher market rates and shrinking credit boxes initiated by <unk> investors as well as overall credit quality challenges borrower.
Borrowers appear to be struggling with providing the requisite documentation to support ability to repay guideline eligibility criteria at a much at this much higher rate as George mentioned earlier during the fourth quarter of last year. The company took a defensive risk off approach to managing our volumes across all channels.
Getting responsibly to support loans with strong credit quality marketable rates and strong capital market exits.
During our last two earnings calls, we spent time discussing the sudden and dramatic increase in rates, which triggered a significant increase in credit spreads and an oversupply of lower coupon loans in the market.
With production in our GPO platform being nearly all non QM the need to manage market risk through credit and pricing remains critical in light of volatility and illiquidity in certain segments of the secondary markets.
Similar to the consumer direct channel the drop in non QM production, we experienced in our GPO channel during April which was discussed on our previous call persisted throughout the third quarter, our GPO non QM production decreased to $29 million in the third quarter as compared to $133 million in the third quarter of last year.
78% decrease.
Across both channels. The company originated 50 million non QM production during the third quarter of this year as compared to $80 million in the second quarter of this year and $315 million in the first quarter.
John mentioned, our operating expenses decreased 24% in the third quarter, we've continuously adjusted our head count to align with capacity quarter over quarter.
Spite these reductions to staff.
We continue to face headwinds around market conditions, including high rates diminished volume and margin compression contributing significantly to a curtailment in revenue across all channels.
In light of the challenging market ahead, the company remains steadfast in its commitment to managing risk within its core business.
Important to note that this risk off approach includes exploration of opportunities that may complement or supplement the services, which we offer today and contribute to increased revenue and decreased expenses.
So at this point that concludes our financial results in our prepared remarks.
To this point any questions that we've received from shareholders have been incorporated into these prepared remarks, that's had corresponding answers. So we want to thank everyone for joining us. This morning, and we look forward to speaking with you next quarter. Thank you.
Concludes today's conference you may now disconnect.
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