Impac Mortgage Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Thank you for standing by and welcome to the Q4 2020 Impac Mortgage Holdings' Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session I would now like to hand the conference over to your speaker today Mr. Justin Moisio. Please go ahead.

[Justin Moisio:]

Thank you. Good afternoon, everyone. Thank you for joining Impac Mortgage Holdings' year-end 2020 earnings 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.

[George Mangiaracina:]

Thank you, Justin. Paul Licon, our CFO, and Tiffany Entsminger, our COO will join me for prepared remarks. Justin will be back, along with Tom Donatacci, our Chief of Staff, and Joe Joffrion, our General Counsel, for the question-and-answer segment. When we met about a year ago for the company's 2019 year-end earnings call -- on March 13, 2020, to be exact, we reported strong year-over-year operating results and discussed momentum we had anticipated would accelerate as we invested in technology, product design, industry talent and geographic expansion. We also noted that any enthusiasm for future prospects needed to be properly balanced and tempered by potential supply and distribution constraints and pendent liquidity risks associated with then current macroeconomic conditions. In fact, 2020 presented the company with extraordinary challenges, the result of unprecedented credit and interest rate shocks and global market dislocations in the first and second quarters of the year. The difficult but necessary decisions the company executed on during the first half of 2020 have been well-documented for our frequent business updates and prior quarterly earnings calls. These actions to de-risk the balance sheet and to consciously protect liquidity often at the expense of book value position the company to normalize origination activity in the second half of 2020. Today, we are pleased to announce a second consecutive quarter of positive operating results, with 2020 fourth quarter earnings of $3.3 million, $0.16 a share following 2020 third quarter earnings of $4.4 million or $0.21 a share. Core earnings are an alternative measure of results that senior management utilizes to gauge the company's performance. They isolate results from recurring business activities by adjusting for certain non-recurring items, such as changes in the fair value of long-term debt and trust assets on mortgage servicing rights and other non-recurring legacy matters. This concept was first introduced in the beginning of 2019. The tables provided with our earnings release to enable variation analysis between prior periods.

[Paul Licon:]

Yeah. Thanks, George. In Q4, we continue to successfully ramp up production. We increased our funding volume from 418 million in Q3 to 810 million in Q4, representing the 94% quarter-over-quarter increase. In addition, we grew our pipeline by 26% from $359 million at the end of Q3 to $451 million at the end of Q4.

[Tiffany Entsminger:]

Thank you, Paul. And the fourth quarter marked the steady increase in origination volume reaching over $800 million and funded volume for the quarter and exceeding our $250 million monthly funding targets. We've expanded our product offering to include QM jumbo and non-QM in the third and fourth quarters and received favorable market reception among consumers and brokers in both our retail and TPO channels.

[Operator:]

Excuse me everyone. Our first question is coming from the line of Trevor Cranston from JMP Securities. Your line is open.

[Trevor Cranston:]

Hi. Thanks. I guess, the first question, you guys touched on the margin compression and increased competition somewhat in the prepared remarks. Can you maybe provide some general color around the movement in mortgage rates we've seen so far in the first quarter? How -- what kind of magnitude of additional margin compression you think that will result in? And with that additional margin compression and your target funding levels, is -- does that still come out to a level where you think the company can comfortably remain at a comfortable level? Thanks.

[Paul Licon:]

Yeah. This is Paul. I can start by -- starting this and maybe someone else can jump in. Yeah. Right now, based on what we're seeing, we expect further marketing compression in Q1. We're estimating between 15 and 20 basis points of additional margin compression. Again, as Tiffany touched on, it's really just due to the increase in rates and competition. Of course, in the next couple of weeks that could change depending on what happens in the market, but that's sort of what we're anticipating now.

[Trevor Cranston:]

Okay. And is that -- so is that -- should I interpret that as a -- like 15 to 20 basis points lower margin kind of on a run rate going forward? Or is that sort of the average number you're expecting for 1Q versus where you were at in 4Q?

[George Mangiaracina:]

Yeah. Trevor, this is George. We don't give forward guidance. But with that amount of margin compression in the GSE product offset by what we believe would be a shift in production to non-QM and jumbo where the margins are healthier -- we're fairly confident that we'll be able to continue to run platform with a positive rate. So.

[Justin Moisio:]

Yeah. Trevor, this is Justin. You talked about the rate move. So kind of -- I mean, obviously, we're coming off of 2020 record lows in rates, historic refi volume, because of how much the borrowers could save on their monthly payments. So, over the last few weeks, as we've seen rates tick up slightly here, our borrowers have had some initial shock to those rates. However, there's still a very healthy appetite for refinances in the market right now, based on what we've seen for publications as early as recently as Monday indicating about half of the homeowners are currently in the money for refinances. So, there's still a lot of ground to cover there. And so, we do expect, there'll be more competition in the industry. Margins will tighten it a bit more, but as George mentioned, that really opens up opportunities for us, because with a product like non-QM and jumbo, where Impac historically, that's our DNA, that's what we've done very, very well that's where we can pivot nicely.

[Trevor Cranston:]

Okay. Got it. That is helpful. And in terms of personnel expense, I think you guys commented briefly on -- the fact that increased competition for employees in the market has had some impact on that. Given that 4Q, you kind of hit the funding targets and capacity you guys have at the moment. Is the personnel expense sort of at a good run rate level, or is that something that you expect to continue to tick up a little bit into the first quarter?

[Tiffany Entsminger:]

Hi. This is Tiffany. I'd expect it to be more normalized. We certainly have some stretched capacity with the folks that we have on board. But the ramp up in the ad required a little bit more sense given the competition in the market right now. But now that we have in the door and we're producing well, we'll continue to build on our efficiencies with the origination process and then also be able to stretch beyond the current headcount that we have with the same folks.

[Trevor Cranston:]

Okay. Got it. And then maybe just to touch on the non-QM and non-agency products for a moment. Can you provide some additional color around sort of how the restart of that business has gone in terms of finding partners who are actively originating the product? And how much you think that'll change as a result of maybe some refi business dropping off now that rates have moved higher? And then as the second part of that, I guess, when you -- when we think back to where the non-QM business was pre-COVID of last year and where margins were -- kind of how would you kind of compare how you expect that business to look as it ramps up over the course of this year versus where it was before the shutdown?

[Tom Donatacci:]

Sure. Trevor, this is Tom Donatacci. We're already seeing origination growth in the non-QM sector and anticipate to continue growing through 2021 into 2022 with S&P predicting we could see levels as high as $25 billion in originations, levels not seen since 2019. While the halt of the market in early 2020 for both originations and securitizations was industry-wide their recovery began soon after, and there has been a steady march towards pre-crisis market conditions and both guidelines and pricing with securitizations of both new originations and portfolios held since early 2020 being well-received by the market. A number of factors are supporting the stabilization and the return of the market and volume. One is extraordinary depth of demand from investors, created not just in appetite per volume, but also as an expanded list of buyers greater than what we had seen in 2019 is investors are able not only to buy -- dependent upon a securitization exit strategy, but many have entered with the ability to balance sheet the product, which creates additional stability in the market in the event of another market dislocation. The quality underwriting guidelines have improved market wide with most products being originated to more conservative -- a more conservative profile based on stronger borrowers. Those that had focused on the lower end of the credit box have had to move up the curve to take advantage of demand in the market. Impac has always focused on higher quality, non-QM originations. So, our criteria hasn't had to shift from the pre-crisis credit box nearly as much as many of the players in the marketplace. Past originations have continued to perform well, despite some of the economic conditions over the past year, resulting in fewer forbearance requests and of those requesting forbearance, many continuing to make their payments. As these requests expire or retire, the universe of potential borrowers continues to grow. Historically, – per Paul's comments on margins, historically low rates and wide margins over the last year have migrated many loan officers who have historically focused on non-QM to take advantage of the re-financeable market for GSE products. With rates rising and margins compressing, we're seeing return to these producers to the non-QM sector, which should boost the origination volumes going forward. Lastly, the MBA anticipates purchase demand to exceed refinance demand on a go-forward basis. This is also a positive indicator for non-QM market as business owners and real estate investors that rely on non-QM product offerings, like bank statement, and DSCR programs are typically strong drivers in the purchase market. For these reasons and our long history in the alternative credit space, we're bullish on the sector and our ability to participate competitively in non-QM going forward.

[Trevor Cranston:]

Okay. That's really helpful color. So, when you think about the overall funding capacity at the company as a whole, as the non-QM piece presumably grows over the course of this year. You guys have the capacity to kind of grow that alongside the business you're currently doing in the agency lending space, or would the anticipation be that you sort of shifts more the funding capacity into the non-QM, and it sort of replaces some of what you've been doing on the agency side?

[George Mangiaracina:]

Trevor, this is George. We have excess capacity to continue to grow the GSE portion of the business, which is primarily driven out of a call center. When I say capacity, I mean, both with respect to liquidity for warehouse lending, with the equity to support the warehousing and with personnel. Non-QM business, we have liquidity. Again, the hat cuts a bit deeper on non-QM, but we have the equity to support the non-QM growth concurrent with the existing run rate, or even a little bit higher run rate in GSE. We've got warehouse capacity for non-QM and we've got capacity in terms of -- human capacity in terms of operating plant around non-QM. And that last piece has been added in the fourth quarter to pipeline business. And so, we'll continue to build upon that in the first quarter. But we don't have any limitations on being able to continue to build on what we've created in the call center and at the same time concurrently build out the non-QM franchise.

[Justin Moisio:]

And Trevor, it’s Justin. So, while TPO, as George indicated, will remain -- laser focused on non-QM originations. If you remember from years past one thing that made us very successful within the call center for originating non-QM, albeit, $25 million to $50 million a month of that product was standing up an independent team that would originate that product. So, we would just adjust internally for that, but that was something that we unlike other lenders were able to do successfully, which was originate non-QM through the call center.

[Paul Licon:]

Yeah. We haven't yet begun to spend to drive any business promotion out of the call center to non-QM. Quite frankly, because the lead generation has been -- cost of customer acquisition has been de minimis around GSE production. But we will push some of our advertising spend into the non-QM effort. In the call center you'll see that at the end of the first quarter, it might take the call center in the second quarter and early third quarter of this year.

[Trevor Cranston:]

Great. Okay. That makes a lot of sense. Appreciate the comments. Thank you, guys.

[Paul Licon:]

You are welcome Trevor. Thank you.

[Justin Moisio:]

So, at this time, it doesn't look like we have any other questions in the queue. So, at this point, thank you everyone for joining us and we'll circle back in early May with our first quarter results. Thank you.

[Operator:]

This concludes today's conference call. Thank you all for participating. You may now disconnect.