Q4 2022 Impac Mortgage Holdings Inc Earnings Call
Speaker 2: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Impact Mortgage Holdings' fourth quarter 2022 earnings conference call. The lines have been placed on mute to prevent any background noise.
Speaker 2: If you should need assistance during the call, press star then zero and an operator will come back on the line to assist you. I'd now like to turn the conference over to Jo Jo Freon, General Counsel. Please go ahead.
Speaker 3: Good afternoon, everyone, and thank you for joining Impact Mortgage Holdings' year-end 2022 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 and market risk exposure.
Speaker 3: mortgage production, and general market conditions.
Speaker 3: 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 under the Securities and Exchange Act of 1934. These documents contain and identify important factors that could cause the actual results to differ materially.
Speaker 3: from those contained in our projections or forward-looking statements.
Speaker 3: This presentation, including any outlook and guidance, is effective as the date given and we expressly disclaim any duty to update the information herein.
Speaker 3: I would like to get started by introducing George Manjursina, Chairman and CEO of Impact Mortgage Once again I'm George Manjursina leads I'm helping people walk through the field and
Speaker 4: Thank you, Joe. With me this afternoon are John Glockner, our Principal Accounting Officer, and Justin Mosio, our Chief Administrative Officer.
Speaker 4: On March 8th of last week, the company issued a business update discussing it, how it has proactively adjusted its strategy to navigate market and industry conditions, including a pivot in its business model and an aggressive expense reduction initiative. Events of the recent week evidenced an accelerating deterioration.
Speaker 4: of market conditions and operating environment.
Speaker 4: The residential mortgage market has been challenged by adverse macroeconomic conditions ushered in by rate and credit dislocation that commenced in the fourth quarter of 2021. Non-transitory inflation and Fed tightening, coupled with widening credit spreads, has reduced the addressable market for our product offerings.
Speaker 4: Despite competitor consolidation and closures, excess industry origination capacity remains, as evidenced by participants' pricing to decrease net margins in pursuit of market share.
Speaker 4: The company has no intention of engaging in systematic non-economic activities. The company has no visibility as to when these dislocations will abate and return the industry to normalized volumes and margins.
Speaker 4: The proactive initiatives that the company undertook in 2022 and early 2023 have aligned the stakeholders of the company's capital stack and reduced its overall operating expense load. These accomplishments continue the theme of eliminating complexity and reducing costs from the company's corporate and operating verticals.
Speaker 4: thus permitting the company to explore complementary strategic ventures, adjacent revenue opportunities, and attendant capital raise and corporate finance activities. John Glockner will now discuss the financial results for 2022. John ? Thank you George and good afternoon everyone.
Speaker 3: For the fourth quarter, the company reported a gap loss of 11.8 million as compared to a loss of 13 million for the third quarter and again of 3.6 million in the fourth quarter of 2021
Speaker 3: Our fourth quarter adjusted loss was 11 million as compared to an adjusted loss of 12.6 million in the third quarter and a loss of 5 million in the fourth quarter of 2021.
Speaker 3: The financial results for the quarter and year reflect significant market pressure as a result of increasing interest rates, inflation, credit and liquidity risk.
Speaker 3: Our results, as well as many of our peers' performance, reflect the intense pressure on mortgage origination due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in affordability issues.
Speaker 3: many of our peers' performance reflects the intense pressure on mortgage origination due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in affordability issues. Thank you.
Speaker 3: As we have discussed on previous calls this year, beginning in the first quarter, we were deliberate and decisively more conservative in our lending approach.
Speaker 3: Adopting a risk-off defensive posture.
Speaker 3: sacrificing results for liquidity and stability, which we felt was the appropriate path heading into steep rate headwinds.
Speaker 3: Originations and margins have suffered as a result. With originations declining to 21.5 million in the fourth quarter, as compared to originations of 62 million in the third quarter of 2022.
Speaker 3: During 2022, total originations decreased to $639 million with margins of 91 basis points as compared to $2.9 billion in 2021 with margins of 225 basis points. Our risk off posture in conjunction with rate shock and increased fallout.
Speaker 3: Resulting continued origination and pipeline reductions, which were the primary drivers of lower margins during the year.
Speaker 3: Operating expenses for a flat is converted to the third quarter at 11 million, but decreased 46% or 9.5 million is compared to 20.5 million in the fourth quarter of 2021. Primarily due to a reduction in personnel costs, which decreased 8.2 million from the same quarter in 2021.
Speaker 3: The decrease in personnel costs during the fourth quarter was primarily the result of a decrease in variable compensation commensurate with reduced originations as well as a reduction in headcount to support reduced volume. Headcount declined from approximately 330 at year end 2021 to 80 full-time employees as of today.
Speaker 3: Additionally, while our fourth quarter operating expenses were flat as compared to the third quarter, operating expenses included approximately $2 million of legal and professional fees related to our preferred exchange offers that were completed during the quarter.
Speaker 3: With minimal active loans in the pipeline, the company had no outstanding warehouse or counterparty obligations associated with its wholesale activity.
Speaker 3: At December 31, 2022, we did not renew our $25 million warehouse facility, thereby further reducing warehouse capacity to $16 million with one counterparty.
Speaker 3: As mentioned in the company's business update last week, the pivot to a broker model
Speaker 3: With the pivot to a broker model, we will not be reliant upon warehouse borrowings to fund our origination.
Speaker 3: In December , the company negotiated a buyout of its legacy commercial lease for $3 million, reducing its office space footprint from 120,000 square feet to 19,000 square feet.
Speaker 3: The relocation was made possible by the company's ability to maintain and maintain a hybrid and remote workforce.
Speaker 3: Both during the following COVID crisis, thereby minimizing physical office space needs.
Speaker 3: The new lease terms, the lease terms of our new building run through July 31st, 2025 with the total expense of approximately $800,000 over the term of the lease as compared to $8.8 million that remained under the prior lease.
Speaker 3: The new lease terms of our new building run through July 31, 2025 with a total expense of approximately $800,000 over the term of the lease as compared to $8.8 million that remained under the prior lease, a total savings of nearly $5 million.
Speaker 3: Additionally, we continue to carefully manage our liquidity as evidenced by our restricted cash position of $26 million.
Speaker 3: and $9.4 million in unencumbered loans and balance sheets year-end.
Speaker 3: In the first quarter of 2023, as part of the CARES Act, the company filed for a $7.3 million of employee retention credit, which is expected to be received by the end of 2023.
Speaker 3: 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 recent developments within our origination platform. Justin? Thank you, John . Good afternoon, everyone. Our production volume in the fourth quarter.
Speaker 3: as with the third quarter, is reflective of the current challenges in the mortgage market impacting mortgage lenders both on the credit and rate side of the business.
Speaker 3: resulting in a reduction in purchased loans due to a decrease in home purchase affordability and also in refinance volume due to the number of loans that had previously refinanced during the preceding historically low interest rate environment.
Speaker 3: During the fourth quarter, our total originations decreased to 22 million as compared to 62 million in the third quarter.
Speaker 3: Non-QM originations decreased to 19 million as compared to 50 million for the third quarter.
Speaker 3: In line with the previously discussed expense reduction initiatives, the
Speaker 3: We recently repositioned our Retail Consumer Direct Call Center into a mortgage broker fulfillment model.
Speaker 3: The shift to a broker model allows the company to originate a variety of products that serve its national consumer base at a reduced cost per loan due to significant expense abatement relative to specialized staffing, operations, technology, and business promotion.
Speaker 3: The broker channel will support an expanded suite of loan products and programs offering enhanced flexibility with respect to credit, pricing, best-in-class technology, and product development and maintenance.
Speaker 3: We've partnered with established lenders to ensure our consumers continue to receive an optimized experience. We do expect non-QM originations to continue to be the dominant product in the Mortgage Rover Channel.
Speaker 3: This pivot to a broker model will also allow the call center to continue to leverage the brand recognition associated with the cash call mortgage name in the direct-to-consumer space. From an expense management perspective, we continue to adjust our marketing spend to calibrate to a reduced loan officer headcount, as well as the deterioration of lead quality of borrowers looking to transact.
Speaker 3: model origination capabilities while continuing to focus on expense management.
Speaker 3: As mentioned in our business update last week, the company's third-party origination channel, in line with industry cohorts, experienced significant volume and margin deterioration in 2022.
Speaker 3: These conditions have persisted into the first quarter of 2023 and as a result the company has decided to wind down its operations within the TPO channel. The company honored its pipeline and related obligations and commitments to its business to consumer and business to business partners.
Speaker 3: as we have done historically. The company remains in good standing with its warehouse lenders, whole loan takeout investors, vendors, and sub-servicing counterparties.
Speaker 3: In light of the challenging market ahead, the company remains steadfast in its commitment to managing risk within its core business.
Speaker 3: As mentioned during our previous earnings call, this risk-off approach includes exploration of opportunities that may complement or supplement the services we offer today and contribute to increasing top-line revenue and improving operating results.
Speaker 3: At this time, that concludes the financial results and our prepared remarks. Any questions received by shareholders prior to the call have had corresponding answers incorporated within our prepared remarks. I wanted to thank everyone for joining us this afternoon and we'll speak to you in the near future. Thank you.
Speaker 2: That will conclude today's meeting. You may now disconnect.
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Speaker 2: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Impact Mortgage Holdings' fourth quarter 2022 Earnings Conference call. All lines have been placed on mute to prevent any background noise.
Speaker 2: If you should need assistance during the call, press star then zero and an operator will come back on the line to assist you. I'd now like to turn the conference over to Jo Jo Freon, General Counsel. Please go ahead.
Speaker 5: Good afternoon, everyone, and thank you for joining Impact Mortgage Holdings' year-end 2022 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 and market risk exposure.
Speaker 5: 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 under the Securities and Exchange Act of 1934. These documents contain and identify important factors that could cause the actual results to differ materially.
Speaker 5: from those contained in our projections or forward-looking statements. This presentation, including any outlook and guidance, is effective as the date given, and we expressly disclaim any duty to update the information herein. I would like to get started by introducing George Mandrosina, Chairman and CEO of Impact Mortgage Holds. George.
Speaker 4: Thank you, Joe. With me this afternoon are John Glockner, our Principal Accounting Officer, and Justin Mosio, our Chief Administrative Officer.
Speaker 4: On March 8th of last week the company issued a business update discussing it how it has proactively adjusted its strategy to navigate market and industry conditions including a pivot in its business model and an aggressive expense reduction initiative. Events of the recent week evidenced an accelerating deterioration.
Speaker 4: market conditions and operating environment. The residential mortgage market has been challenged by adverse macroeconomic conditions ushered in by rate and credit dislocation that commenced in the fourth quarter of 2021. Non-transitory inflation and Fed tightening coupled with widening credit spreads.
Speaker 4: has reduced the addressable market for our product offerings. Despite competitor consolidation and closures, excess industry origination capacity remains.
Speaker 4: as evidenced by participants' pricing to decrease net margins in pursuit of market share. The company has no intention of engaging in systematic non-economic activities. The company has no visibility as to when these dislocations will abate and return the industry to normalized volumes and margins. The proactive initiatives that the company undertook
Speaker 4: in 2022 and early 23, how to line the stakeholders of the company's capital stack and reduce its overall operating expense load. These accomplishments continue the theme of eliminating complexity and reducing costs from the company's corporate and operating verticals, thus permitting the company to explore complementary strategic ventures, adjacent revenue opportunities.
Speaker 4: and attendant capital raise and corporate finance activities. John Glockner will now discuss the financial results for 2022. John ? Thank you George and good afternoon everyone.
Speaker 5: For the fourth quarter, the company reported a gap loss of $11.8 million as compared to a loss of $13 million for the third quarter and a gain of $3.6 million in the fourth quarter of 2021.
Speaker 5: Our fourth quarter adjusted loss was 11 million as compared to an adjusted loss of 12.6 million in the third quarter and a loss of 5 million in the fourth quarter of 2021.
Speaker 5: The financial results for the quarter and year reflect significant market pressure as a result of increasing interest rates, inflation, credit, and liquidity risks.
Speaker 5: Our results, as well as many of our peers' performance, reflect the intense pressure on mortgage origination due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in affordability issues.
Speaker 5: As we have discussed on previous calls this year, beginning in the first quarter, we were deliberate and decisively more conservative in our lending approach, adopting a risk-off defensive posture.
Speaker 5: sacrificing results for liquidity and stability, which we felt was the appropriate path heading into steep rate headwinds. Originations and margins have suffered as a result, with originations declining to $21.5 million in the fourth quarter as compared to originations of $62 million in the third quarter of 2022. frog crowd coast an eyeball all a lot of got work along
Speaker 5: During 2022, total originations decreased to $639 million with margins of 91 basis points as compared to $2.9 billion in 2021 with margins of 225 basis points. Our risk off posture in conjunction with rate shock and increased fallout.
Speaker 5: resulted in continued origination and pipeline reductions, which were the primary drivers of lower margins during the year. Operating expenses were flat as compared to the third quarter at 11 million, but decreased 46% or 9.5 million as compared to 20.5 million in the fourth quarter of 2021, primarily due to a reduction in personnel costs.
Speaker 5: which decreased $8.2 million from the same quarter in 2021. The decrease in personnel costs during the fourth quarter was primarily the result of a decrease in variable compensation commensurate with reduced originations as well as a reduction in headcount to support reduced volume.
Speaker 5: Headcount declined from approximately 330 at year end 2021 to 80 full-time employees as of today.
Speaker 5: Additionally, while our fourth quarter operating expenses were flat as compared to the third quarter, operating expenses included approximately $2 million of legal and professional fees related to our preferred exchange offers that were completed during the quarter.
Speaker 5: With minimal active loans in the pipeline, the company had no outstanding warehouse or counterparty obligations associated with its wholesale activity.
Speaker 5: At December 31, 2022, we did not renew our $25 million warehouse facility, thereby further reducing warehouse capacity to $16 million with one counterparty.
Speaker 5: As mentioned in the company's business update last week, the pivot to a broker model
Speaker 5: With the pivot to a broker model, we will not be reliant upon warehouse borrowings to fund our originations. In December , the company negotiated a buyout of its legacy commercial lease for $3 million, reducing its office space footprint from 120,000 square feet to 19,000 square feet. In a month, the company began to coordinate 3 million finallyides from $ Stewart &
Speaker 5: The relocation was made possible by the company's ability to maintain a hybrid and remote workforce.
Speaker 5: both during and following the COVID crisis, thereby minimizing physical office space needs.
Speaker 5: The new lease terms, the lease terms of our new building run through July 31st, 2025 with the total expense of approximately $800,000 over the term of the lease as compared to $8.8 million that remained under the prior lease.
a total savings of nearly five million dollars. Additionally, we continue to carefully manage our liquidity as evidenced by our restricted cash position of $26 million.
and $9.4 million in unencumbered loans on balance sheet at year end. In the first quarter of 2023, as part of the CARES Act, the company filed for a $7.3 million of employee retention credit, which is expected to be received by the end of 2023.
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 recent developments within our origination platform. Justin. Thank you, John . Good afternoon, everyone. Our production volume in the fourth quarter, as with the third quarter, is reflective of the current challenges in the mortgage market impacting mortgage lenders, both on the credit and rate side of the business, resulting in a reduction in purchase loans due to a decrease in home-
Some originations decreased to 19 million as compared to 50 million for the third quarter.
In line with the previously discussed expense reduction initiatives, we recently repositioned our Retail Consumer Direct Call Center into a mortgage broker fulfillment model.
The shift to a broker model allows the company to originate a variety of products that serve its national consumer base at a reduced cost per loan due to significant expense abatement relative to specialized staffing, operations, technology, and business promotion.
The Broker Channel will support an expanded suite of loan products and programs, offering enhanced flexibility with respect to credit, pricing, best-in-class technology, and product development and maintenance. We have partnered with established lenders to ensure our consumers continue to receive an optimized experience.
We do expect non-QM originations to continue to be the dominant product in the mortgage broker channel. This pivot to a broker model will also allow the call center to continue to leverage the brand recognition associated with the cash call mortgage name in the direct-to-consumer space.
From an expense management perspective, we continue to adjust our marketing spend to calibrate to a reduced loan officer headcount, as well as the deterioration of lead quality of borrowers looking to transact and the shrinking addressable market at these rate levels. Our business promotion expense decreased to $261,000.
on expense management. As mentioned in our business update last week, the company's third-party origination channel, in line with industry cohorts, experienced significant volume and margin deterioration in 2022.
These conditions have persisted into the first quarter of 2023 and as a result the company has decided to wind down its operations within the TPO channel. The company honored its pipeline and related obligations and commitments to its business to consumer and business to business partners.
as we have done historically. The company remains in good standing with its warehouse lenders, whole loan takeout investors, vendors, and sub-servicing counterparties.
In light of the challenging market ahead, the company remains steadfast in its commitment to managing risk within its core business.
As mentioned during our previous earnings call, this risk-off approach includes exploration of opportunities that may complement or supplement the services we offer today and contribute to increasing top-line revenue and improving operating results. At this time, that concludes the financial results and our preparedness for today's
To conclude today's meeting, you may now disconnect.