Impac Mortgage Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Impac Mortgage Holdings First Quarter 2017 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Justin Moisio, VP, Investor Relations for Impac. Sir, you may begin.

[Justin Moisio:]

Thank you. Good morning, everyone. Thank you for joining Impac Mortgage Holdings first quarter 2017 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. I would like to refer you to the business risk factors in our most recently filed Form 10-K under the Securities and 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 outlook and any 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 Bill Ashmore, President of Impac Mortgage Holdings.

[Bill Ashmore:]

Thanks, Justin. Good morning, everyone. Welcome and thank you for joining Impac’s first quarter 2017 earnings call. I have on the line with me Joe Tomkinson, our CEO; Todd Taylor, our Chief Financial Officer; and Ron Morrison, our General Counsel. I will begin with a brief review of the results for the first quarter of 2017. Consistent with our previous earnings releases and in order to get a better understanding of the company’s operating results, management believes it is more useful to discuss adjusted operating income as opposed to GAAP net earnings. Adjusted operating income is operating income excluding changes in the contingent consideration. Please see the company’s earnings release for reconciliation between GAAP net earnings and adjusted operating income. For the first quarter of 2017, adjusted operating income decreased to $2.2 million or – excuse me, $0.12 per diluted common share for the first quarter of 2017 as compared to $7 million or $0.60 per diluted common share in the first quarter of 2016. The main drivers of the drop in operating income were higher interest rates subsequent to the November Presidential election and the usual seasonal slowdown, which caused lower refinance origination volumes during the first quarter 2017. During the first quarter of 2017, total originations decreased 33% to $1.6 billion as compared to $2.3 billion in the first quarter of 2016. However, as a result of higher volume of non-agency also known as non-QM and government loans, gain on sale margins increased by 7 basis points to 236 basis points in the first quarter of 2017 as compared to the first quarter of 2016. This is a good trend in light of the fact that in the declining origination market margins typically will compress. Despite the decline in total origination volume, our non-agency originations have dramatically increased along with substantial inquiries from our business-to-business customers to start originating these loans. Typically, these loans, along with government loans take longer to move through the origination process. Plus there is more training involved because the loan programs are more complex. As a result, the time to ramp up production on non-agency loans takes longer. Therefore, we expect to see greater volumes on these products as our clients and our call center loan officers become more familiar in originating these types of loans. In the first quarter of 2017, non-agency and government originations now represent almost 40% of total originations as compared to just 20% total originations in the first quarter of 2016. During the first quarter of 2017, origination volume of non-agency loans increased to $184.3 million as compared to just $289.6 million of non-agency production for all of 2016 and $86 million in the fourth quarter of 2017. We saw an increase in non-agency origination volume across all channels in the first quarter of 2017 and it should be noted that this increase in volume has been more evenly distributed across all channels. In the first quarter, 40% of the volume was originated from our retail channel and 60% from wholesale and correspondent channels. As compared to the fourth quarter of 2016 in which the retail channel only accounted for 12% of non-agency production, while wholesale correspondent originations accounted for nearly 88% of the non-agency production. We believe it is very positive sign that our retail channel has successfully pivoted its origination strategy to meet the growing consumer demand for non-agency products. Additionally, in the first quarter of 2017, the company’s government loan production increased to $428.4 million as opposed to $394 million in the first quarter of 2016. As we continue to increase existing non-agency production, the company is planning on releasing a new prime non-agency home equity product during the second quarter, which has been in the works for quite a while. We believe this will create additional non-agency production by tapping into many additional underserved high credit quality borrowers. Now, I would like to discuss our strategy in retaining MSRs is progressing. As a result of management’s strategic decision to retain its mortgage servicing rights beginning in the fourth quarter of 2015, our retained mortgage servicing rights increased in value to $141.6 million at the end of the first quarter as compared to $131.5 million at the end of the year, a $10 million pickup. As of March 31, 2017, we had increased the size of our servicing portfolio by 7% from year end bringing our total servicing portfolio up to $13.2 billion. The increase in the size of our servicing portfolio also resulted in a 45% increase in servicing income during the first quarter of 2017 as compared to the fourth quarter of 2016, while the portfolios delinquencies remain very low. Through strong retention capabilities, we were able to take advantage of low interest rate environment throughout 2016 and generate stronger origination volume while mitigating higher prepayments. As a result, we created a low weighted average coupon portfolio, which as previously mentioned, increasing value during the recent rising interest rate environment. As of March 31, 2017, this high-credit quality servicing portfolio had a weighted average coupon of just 3.73%, a weighted average LTV of 66% and a weighted average FICO of almost 740. Once again, the company wants to highlight that the decision to retain MSRs in late 2015 was the right decision as the numbers in the performance bears out. To further maximize the return on MSR portfolio. In February, the company paid off its $30 million working line of credit and replaced it with a mortgage servicing rights financing facility, which on an annualized basis provided $1.35 million in interest expense savings. It also gives us the flexibility to increase or decrease the financing as we see fit. In addition, another significant trend continued in the first quarter of 2017. The company was able to further increase its book value per common share in the first quarter. Since the beginning of 2016, the company has increased its book value per share by 33% from $11.09 per share to $14.74 per share at March 31, 2017 creating tremendous shareholder value. Also given our significant tax loss carry-forwards, we continue to be very tax efficient allowing us to retain more of our net earnings, which ultimately helps in increasing book value. Additionally, this week, we successfully exchanged 8.5 million shares of trust preferred debt at a discount to par by issuing 412,264 shares of common stock with an annualized savings of interest expense of approximately $400,000. Now, let’s focus on what is happening currently at Impac. In the first quarter, our total pipeline was $553 million, which remained relatively flat in comparison to year end. However, as of March 31, 2017, our non-agency pipeline had increased to approximately $202 million as compared to $148 million at December 31, 2016, a 36% increase. Additionally, as of yesterday, the non-agency pipeline has now increased to $232 million, a 15% increase since the end of the first quarter. As mentioned earlier, historically, the non-agency originations take longer to process through the pipeline. Therefore, the company has been diligently working on a proprietary technology solution that will reduce the time to originate non-agency and government loans along with greater data accuracy. In fact, in the quarter, we have increased our underwriter daily work output by over 50% and have had significant improvement in our data accuracy along with reducing turn times from process to close on non-agency loans in our business-to-business channels by over 25%. In addition, we believe we can continue to improve our efficiencies even more as our training, process improvements and proprietary technologies advance. Lastly, in April, the company completed a successful $56 million common stock registered direct offering. The net proceeds for the company from the sale of the shares of common stock in the registered direct offering were approximately $55.4 million. This offering is yet another positive sign that the company is headed in the right direction even as the overall residential mortgage markets saw its volumes decline in the first quarter of 2017. We intend to use the net proceeds to continue to expand our servicing portfolio and assist with our anticipated return to the securitization market with our rapidly growing non-agency production. Additionally, the net proceeds give us the ability to continue to expand into diversified income platforms and take advantage of strategic opportunities as they arise. At this point, we are well capitalized with cash position and we will be more responsive to take advantage of opportunities as they arise. Now I will close my prepared remarks and open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Trevor Cranston with JMP Securities. Sir, your question please.

[Trevor Cranston:]

Hi, thanks. Good morning. Couple of questions to start on the growth in the non-agency originations. You mentioned the new product you are planning to rollout in the second quarter the prime home equity product. I think last quarter, you commented on a couple of key products that were sort of main ones in the non-agency space. One being a loan for self-employed borrowers and another for investors, can you comment on the – in terms of your first quarter originations, what the makeup of the different product types were that you were able to originate in the quarter? Thanks.

[Bill Ashmore:]

Sure, Trevor. Thanks. This is Bill. Yes, basically our self-employed program is using bank statements and/or assets to qualify the borrower. That is our largest origination product in the non-agency space. It’s representing currently about 40% originations and again, that is for the bank statement and/or asset depletion used for the deriving the ability to repay. The next one is the investor, which is viewed as the commercial loan. It is outside of Dodd-Frank. So, it is not a non-QM, but it has also been very, very successful, because there has been a lot of people venturing into owning non-owner properties and that represents about another 20%, 25%. And then the balance is in what we would call agency or Fannie Mae, Freddie Mac fallout, these would be traditionally documented loans that where there will be using W-2 and/or tax returns, but the loan might have an interest-only might have a higher debt to income ratio that the agencies allow. It might have multiple finance properties, which the agency do not allow. It might be non-warrantable condos. There is a number of other items that may cause it to not be available. In addition, it might be a larger loan balance. And so basically that’s the breakdown of our non-agency production in the first quarter.

[Trevor Cranston:]

Got it. Okay, that’s helpful. And then you talked a little bit about the proprietary technology you guys are developing helping the efficiency in the process, particularly in the business-to-business channel and it sounds like hopefully that will kind of continue to improve things going forward. When you think about the growth strategy for non-agency lending, particularly on the retail side, is that strategy primarily focused on more of the ad campaigns, product availability and just having the employees in CashCall more and more used to originating the product or is there anything else like technology related that goes into the retail growth strategy for non-agency?

[Bill Ashmore:]

Specifically on retail, we have changed our strategy effective at the beginning of the year. We had teams originating in the call center and each team was specific to a product, so it might have been a conventional product for several teams depending upon what the volume is and then there was a government team for FHA VA and then there was a third team for non-QM. What we did at the first of the year was we had extensive training of our loan apps as we collapse our teams down to a lesser mind teams. And everyone on the team was getting all of the products that we offer. It was a little bit bumpy during the first month or so, but it’s been gaining traction ever since as they become more fluent and able to move quite quickly relative to as the borrow calls in. They may be eligible for an FHA loan. They maybe needing a refinance or cash out conventional loan or in fact, there maybe somebody that just rely on more of the non-agency, but strategy there has more been one of how we are taking the calls in. We are in the midst of changing some – on the front end of the point-of-sale, because we are noticing that because that we are advertising, we are getting a lot of people, even though we advertise a lot in radio and TV, we got a lot of people that will go directly to the website as opposed to, let’s say, call in. We subsequently will get in contact with them. So, we are attempting to do a significant update relative to our point-of-sale where the retail borrower would come in the front. But on the B2B and on the – and subsequently on the retail, we are one of the main portions of technology that were still in the stages of getting it refined is our – we call it, an IUS, and it’s Impac Intelligent Underwriting System. So that it’s a completely different viewpoint than we have had in prior years and we are having a very substantial positive reaction from our underwriters. Now, we have all the underwriters over at a B2B, they are on the system and we have noticed that their time to originate a loan has significantly diminished. In fact, the other day, one of the lead underwriters had e-mailed me said that she was completing an underwriting alone in 38 minutes, which is very quick, whether it’s non-QM or not, it’s very, very rapid underwriting. So, we think that as we refine and rollout specifically that automated system on a very complex loan program, is going to be a big lift not only B2B but also to the retail.

[Trevor Cranston:]

Got it. That’s great color. Thank you. And then to follow-up on the comment you made about the new capital you guys raised potentially partially being used to help your return to the securitization market. Can you just clarify that statement a little bit to – as to whether or not you are planning to start retaining loans for central securitization in the near term or if you are still kind of near-term seeing better execution through loan sales to the investors you have?

[Bill Ashmore:]

Ultimately, it’s going to be the total execution that we are looking at. We currently have couple of investors that we are selling the product away on several times per month and we will evaluate that and at a point where we see that it makes more sense to retain the loans for securitization, we will do that. However, we are in the midst of going through a rating agency evaluation as a originator and as a master servicer, we have engaged this as of a couple of weeks ago. That’s going to take a month or two. So we feel we are going to be prepared if and when we move ahead to go ahead and do that since we have a lot of expertise there, but for right now, over the near-term or more, we are going to be looking to sell loans away.

[Trevor Cranston:]

Okay, that makes sense. And then last thing for me, can you give just an update on where the total current pipeline is for the company currently, how’s it trended versus where it was a t March 31? Thanks.

[Bill Ashmore:]

So we are up slightly. The interesting thing is that with higher amounts of non-QM, you may have less numbers of loans but you will have higher balances on average, I’ll give you an example. In business-to-business, average balance over there is in the $400,000 plus, where if you look for more the agency and the government, it’s in the 200s, so you have 25% higher loan balance. And I guess good news, bad news is that we can have a bigger pipeline, but actually do it with lesser loans. It’s not quite as dramatic over in the retail but you are still seeing higher loan balances over there. In fact, we would be actually originating closer to $600,000 in average loan balances. However, we do originate loans from $100,000 to $200,000, so that kind of brings that average down so it might be a little bit misleading. This is consistent with what we saw prior to 2007 when looking at these non-agency products that they are, on average, they will be higher loan balances. I think back then it was similar in terms of size. It was 20% plus higher than the average originations that he think we are consistent that 20%, 25% is what we are seeing right now.

[Trevor Cranston:]

Okay, appreciate the comment. Thank you.

[Operator:]

Thank you. Our next question comes from Henry Coffey with Wedbush. Your question please.

[Henry Coffey:]

Thank you for taking my question. What is it costing to get a customer to either pick up the phone or sign up on the website and what is your conversion rate on those inquiries?

[Bill Ashmore:]

I don’t have that. I can get back to you on the cost but the conversion rate – I will give you an idea in terms of how we handle the business over in our call center. When a borrower comes in that is pre-call on the phone, if he’s quick into the process, basically what we are attempting to do is to get him into position where he’s withdrawing documents within 5 days to 7 days because the traditional rate lock, even though it’s slightly longer for non-agency, is like 15 days. We have a slightly longer time for rate lock. So the idea here is you need to be very quickly bring the borrower in and qualify him and if he does in the process, we have an extremely high close ratio once you get to the process of 80% plus, but the amount of the front and that gets through under a prequalification, a loan officers also very, very high. But again, we want to get him in the door pre-qualified in process and how that borrower committing basically to close a loan within 5 days to 7 days.

[Henry Coffey:]

So once you get the application started, it’s an 80% close rate?

[Todd Taylor:]

Or better.

[Henry Coffey:]

And is that – how is this process working now that obviously, you are going to start touching more purchase money business?

[Bill Ashmore:]

It’s been a long date. So the cash flow last year was predominantly in the retail channel, predominantly refinance conventional. The average close was inside 20 days, like 15 days to 18 days. You are going to see that – those are expended out if it’s non-QM, more on QME and more, that will be expanding out in more of the 20- to 30-day range.

[Henry Coffey:]

So outside of your securitizations, who’s buying the loans on the other side? Is that regional banks, community banks, credit unions, investor funds? Who’s on the other side with the non-QM product and some of the other nonconventional products that you originate?

[Bill Ashmore:]

There are a handful of regional banks that are directly originated that, in some cases, might be our competition. That is a smaller portion of it. The actual investors on this, there are several out there – they are not that many, but there are several out there that would be more hedge fund oriented and/or have term commitments relative to financing that’s in there that they can hold for term as opposed to maybe a hedge fund type cycle but of shorter term. But there’s still is not that many. There’s a handful. So it’s not like there’s dozens and dozens out there that are pretty enabled. But I can tell you right now, if at the – we are at $100-plus-million and we will probably be substantially higher than that at the end of December on a monthly run rate. If I was originating 5x or maybe 10x more than that, there’s enough demand that that could be sold.

[Henry Coffey:]

Great, thank you very much.

[Operator:]

Thank you. Our next question comes from Doyle Clarity with the CQS. Your question please.

[Doyle Clarity:]

Hi. I was wondering if you could provide some clarity on gain-on-sale margins, in particular, have they breakdown between QM, non-QM, cross-channel, have they evolved over the past year and whether you check them going forward and after that, do you expect non-QM loans basically see originated in the retail channel?

[Bill Ashmore:]

Sure. Let me try and answer that. Margins for the non-QM in retail are relatively consistent with agency originations in terms of gain on sale. However, in the business-to-business TPO channels which exclude corresponding wholesale, the margins are significantly wider than agency originations come upwards of 2x to 3x greater on a revenue per loan. Remember, non-QM loans are usually significantly larger loan balances and the borrower is paying fees and, in some cases, points where agency originations in today over the last 10 or more years, agency originations were usually note points and sometimes note fees. So it’s a different strategy in terms of how you originate these loans since the borrowers are paying fees but you are coming to a similar instance relative to retail their consistent with agency, but it’s a combination of borrower paying it and getting it through a premium in the back in from a sale and the same thing goes on in the business-to-business channel. Almost everybody that I see is starting some sort of a fee, a point or so plus fees.

[Doyle Clarity:]

Okay. Could you put some firmer numbers on that? I – if agency originations have to handle on gain on sale, in B2B were roughly with the non-QM, would that be a 4-handle, 5-handle or 6-handle?

[Bill Ashmore:]

Yes. I think I try to answer to it as best as I could there without giving specifics on it. So I feel comfortable with my answer.

[Doyle Clarity:]

Okay.

[Operator:]

[Operator Instructions] I am not seeing any additional questions in the queue. I would now like to turn the call back over for closing remarks.

[Bill Ashmore:]

I have no further remarks. I appreciate everybody for being on the line and we will talk to you in the near term. Thank you.

[Operator:]

Thank you. Ladies and gentlemen that does conclude today’s conference. Thank you very much for your participation. You may now disconnect. Have a wonderful day.