Impac Mortgage Holdings, Inc.
Q3 2014 Earnings Call Transcript

Published: 9 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Impac Mortgage Holdings Third Quarter 2014 Earnings Call. [Operator Instructions] Thank you. Your speaker for today is Justin Moisio of Investor Relations. Please go ahead sir.

[Justin Moisio:]

Thank you. Good morning and thank you for joining Impac Mortgage Holdings Third Quarter 2014 Earnings Call. During this call we will make projections or other forward-looking statements in regards to but unlimited to GAAP and taxable earnings, cash-flows, interest rate risks and mortgage 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 defer materially from those contained in our projections or forward-looking statements. This presentation, including any outlook and any guidance is effective as of the date given and we expressly disclaim any duty to update the information herein. I would now like to get started by introducing JoeTomkinson, Chairman and CEO of Impac Mortgage Holdings.

[Joe Tomkinson:]

Good morning. And welcome and thank you for joining the third quarter earnings call. On the line with me is BillAshmore, our President and Chief Operating Officer. Todd Taylor will be calling in. He is our Chief Financial Officer and Ron Morrison, our General Counsel is here. I’ll begin with a brief review of the results from the third quarter. For the third quarter the company reported a loss of approximately $1.2 million or $0.13 a – per diluted common share as compared to the earnings of $82,000 or $0.01 per share for the second quarter of 2014. However, with the exception of last quarter’s significant fluctuation and market-to-market adjustment of the net trust assets we have continued to see a consistent, positive quarterly trend of improving consolidated net results over the last five quarters. Our total originations increase nearly 100 percent to $923.6 million from $465 million in the second quarter of 2014. The increase in lending volume was predominantly due to increase in our correspondent volume to $747 million in the third quarter which compares to $271 million in the second quarter of 2014. The increase was a result of the expansion of our bulk acquisitions in that quarter. With the large concentration of correspondent volumes gained on sale margins decreased in the third quarter of 2014 99 basis points because correspondent channel margins [aren’t] lower than the other channels. However, the correspondent lending expenses decreased proportionately as a result of the increased efficiencies in this channel and a much lower cost originate. Despite the decrease in margins, mortgage lending revenues increased by 30 percent in the third quarter of 2014 to $9.2 million and that compares to $6.5 million in the second quarter of 2014. Results for the third quarter of 2014 improved over the third quarter of 2013 primarily due to a decrease in the expenses. This can be attributed to the sale of a costly decentralized brick and mortar lending channel in December of last year as we have shifted our strategy to focus on more wholesale in correspondent lending channels in 2014. Overall, trends in mortgage lendings are very positive from second quarter to third quarter with the volume up almost 100 percent, revenues increasing by 30 percent and expenses down quarter over quarter. Also, mortgage lending net earnings increased by approximately $2.9 million since the last quarter. We believe there is a little bit more work to do to be done on operational efficiencies and overall expenses as we grow the originations through the year-end. During the third quarter, our correspondent channel contributed 81 percent of the originations. The wholesale channel contributed 17 percent and the remaining 2 percent coming from the retail channel and that compares to 58 percent, 39 percent and 3 percent, respectively for the second quarter of 2014. Although, we have been successful in increasing our correspondent volumes, wholesale volumes have decreased in the third quarter from the second quarter. With the transition to a new [LOS] system and the realignment of our processes in wholesale lending we have not yet seen a significant increase in our poll through rates during the third quarter as expected which delayed closing in the [instant press] funded volumes in the third quarter. In October, we made some significant changes in the wholesales, in operational groups that are expected to increase those volumes and improve the [poll] through during the fourth quarter and into the first quarter of 2015. Moreover, we are in the beginning stages of ramping up our non-qualified mortgage originations which currently are predominant through our wholesale channel and we expect these originations to continue to grow as we enhance our marketing and training efforts which will add to the overall mortgage origination volume. Over the last 45 days, we’ve seen an increase for our locks and locked pipeline to approximately $600 million. During the month of October, the company’s funded or acquired over $335 million of mortgage loans. Based on October originations and the continued increases in our pipeline, fourth quarter originations are expected [and seen] at third quarter productions. As part of our strategy, take advantage of attractive servicing pricing we’ve sold [$2.6 million] of mortgage servicing portfolio in the first nine months of the year. As a result, the mortgage servicing portfolio declined in the third quarter to $1.2 billion. And as a result of these servicing sales the company generated $20 million in cash. The company will continue to selectively sale servicing to maintain adequate liquidity and capital and will continue to grow and expand as mortgage lending in warehouse businesses. In the third quarter of 2014, mortgage servicing fees decreased to $400,000 decreased by 400 – excuse me, mortgage servicing fees decreased by $400,000 from the second quarter which here is a result of the [information] servicing sales. Our warehouse lending business has slowly grown over the last two quarters. We currently have outstanding commitments of approximately $43 million with an additional $55 million in re-warehousing requests of which $23 million is currently approved and in docks. As we acquire more warehouse capacity to offer lines to more customers, we expect this business to continue to grow. In the fourth quarter we expect to have an additional $30 million available in warehouse capacity to offer our new and existing customers. For the third quarter of 2014, real estate services fees were $3.2 million as compared to $4.4 million in the second quarter of 2014. While the company continues to generate real estate service fees, the decrease in fees was due to the anticipated [run-off] of a long-term mortgage portfolio. The reduced real estate fees from the second and third quarter of $1.2 million underscores the fact that mortgage lending net profitability will be the main driver of overall consolidated earning success. However, it is important to reiterate that our mortgage lending net results increased by approximately $2 million over the same quarterly periods. Management is very aware that with our real estate mortgage services revenues declining, we will continue to aggressively ramp up our mortgage division originations and revenues to obtain overall company consolidated profitability. While the company builds this mortgage origination volumes the residual income from its long-term mortgage portfolio have and will continue to be an important private company’s cash loans for the foreseeable future. In our long-term portfolio the residuals continue to generate better than expected cash flows of $2 million in the third quarters of 2014 and $7.6 million year-to-date through September 30th 2014. And that compares to $1.7 million in the third quarter of 2013 and $5 million year-to-date through September 30th 2013. During the third quarter of 2014 we saw a substantial increase in the total originations over $900 million. We believe this increase to quarterly volumes approaching $1 billion is an extremely important milestone because the negotiating strength gives the company, as we sell loans into the capital markets plus the overall effect on decreasing the cost to manufacture or acquire these loans. In the correspondent channel we continue to add customers in the third quarter and then receive submissions from more customers in the third quarter versus the second quarter. However, overall utilization rate remains flat. In wholesale, our percentage of customers delivering multiple loans per month, also remain flat but is expected to increase in the fourth quarter. These key initiatives are increasing multiple loan deliveries by [top gear] brokers in the wholesale channels along with a higher customer utilization rate in the correspondent operations will be driving our sales strategy in 2015. Both of these key metrics will not only increase volumes but decrease the overall expenses and expand the net margin in the mortgage lending operations. With this emphasis on increasing quarterly origination volume to a billion dollars plus level and reducing expenses on a per loan basis, we will continue to make further adjustments in the manufacturing process and focus on certain key customers where we can fund a higher percentage of their production. Looking forward, we believe that there will be improvement in total originations in top line revenues during the fourth quarter and not only the wholesale but our correspondent and retail channels. In addition, in the fourth quarter we anticipate exceeding third quarter production levels in generating production in excess of $950 for the fourth quarter. As a result of our initiative to obtain these higher funding volumes, we should exceed 2013 production with approximately $2.7 billion in originations for 2014. It should be noted that the volume increases for 2014 are back and loaded as compared to 2013 where the highest percentage of volume was in the first two quarters. Third quarter of 2014 origination volume was $100 million higher than the combined volumes in the first and second quarter of 2014. This is important because increase in volumes in the third and fourth quarter of 2014 will allow mortgage lending to sustain momentum into the first half of 2015. Consistent with this strategy to expand total originations, the company rolled out its non-QM loan programs in August. Marked as all QM and funded its first originations during the third quarter. As of October 31st, the company funded approximately $3.5 million dollars of all QM loans and expect to build on these fundings throughout the fourth quarter. Currently, the predominance of all QM originations is in our wholesale channel. But during the beginning of the fourth quarter the correspondent channel received commitments from several large retail originators to rule out our all QM loan products over the next several months. The company knows that in order to substantially grow the skill of our all QM loan production, it will require our correspondent customers’ originations of these programs. Additionally, these all QM programs coupled with their agency and government-backed programs in warehousing capabilities will strategically move Impac Mortgage into a full spectrum lender. Our full spectrum lending position will take advantage of Deutsche Bank projections of forecasted future non-agency origination market of up to $600 billion annually. Not only does this full spectrum lending proposition open up more origination [pause] at the least, but it also provides an increase competitive advantage when recruiting new sales in operational talent for Impac Mortgage and its customers. The largest growth in our overall origination Q15 2015 may not be the all QM loans but rather from where we can provide the biggest competitive advantage for our customers as we build our full spectrum lending strategy upon a customer-centered mortgage platform. Now this concludes my prepared remarks. And I’d like to now open us up to any questions you have.

[Operator:]

You’re ready for questions? [Operator Instructions]

[Joe Tomkinson:]

Operator, are there any questions?

[Operator:]

Please hold for your first question.

[Joe Tomkinson:]

All right.

[Operator:]

Your first question comes from Daniel Baldini with Oberon.

[Daniel Baldini:]

Hi, good morning. Thanks for taking my call. So, you alluded to the profitability of the mortgage lending operation and I’m wondering if you have handy the numbers for the segment operating incomes for mortgage lending real estate services. The – these statistics that are disclosed in the 10-Q.

[Joe Tomkinson:]

Hold on a second.

[Bill Ashmore:]

[The count is] $803,000?

[Joe Tomkinson:]

So, what’s the question?

[Daniel Baldini:]

So, the – you published the 10-Q I – been in the next couple of days I suppose and there’ll be segment operating income numbers in there. I was just wondering if you have that handy now.

[Joe Tomkinson:]

Yes, sure. Yes, I’m looking at them right now.

[Daniel Baldini:]

Oh, okay. So, what was mortgage lending?

[Justin Moisio:]

So for the third quarter of 2014, mortgage lending has earnings of $803,000 which is a loss of approximately $2.1 million for the second quarter of 2014.

[Daniel Baldini:]

Yes?

[Justin Moisio:]

We’ll, say it’s services had earnings of about $1.9 million for the third quarter as compared to $2.8 for the second quarter.

[Daniel Baldini:]

Okay. And presumably the corporate expenses went down in the quarter.

[Joe Tomkinson:]

Yes.

[Daniel Baldini:]

Okay. Can I ask you these losses from discontinued operations seem to carry on and I’m curious when do you imagine that they’ll be eliminated?

[Joe Tomkinson:]

Well, that’s hard to say. You know, we continue to slowly reduce them and we continue to work on them. I – I’m uncomfortable in saying right now when do I think they’ll expire but I can tell you that we, in the last year and a half, we’ve reduced that overall expense close to $1 million dollars so, on a [monthly] basis.

[Daniel Baldini:]

And does it consist mostly of what put-backs in the securitized portfolios?

[Justin Moisio:]

No.

[Joe Tomkinson:]

No. it’s more – we had a lot of excess, as an example, we have excess space in our building and that’s causing us roughly somewhere between $250,000 and $300,000 a month that we’re stuck with above market rents. That rent we’re trying to renegotiate but if we had to look at it and say,”OK, how long is that going to continue?” The lease is up in October of 2016. So that’s what gives you an example.

[Daniel Baldini:]

Oh, okay. All right.Great. Thanks very much.

[Operator:]

[Operator Instructions] Your next question comes from Michael Salzhauer with Benjamin Partners.

[Michael Salzhauer:]

Hi, thanks for taking my question. So, on the new [all day] loans that you are originating, what happens to them when they’re originated? They’re – are they sitting on your balance sheet or are they sitting on – with the strategic partner?

[Joe Tomkinson:]

No, we fund them. And then our strategic partner on our request what we have on a certain level, we’ll put a request and then they come in and [sweep the line] then they hold it on their balance sheet.

[Michael Salzhauer:]

So they’re going to buy them from you?

[Joe Tomkinson:]

Yes.

[Bill Ashmore:]

Yes, we just completed the first $3.5 million purchase, I believe if it doesn’t get done today it’ll be tomorrow.

[Michael Salzhauer:]

And what is the spread on that sale?

[Bill Ashmore:]

The spread on the sale?

[Joe Tomkinson:]

[Necessarily] you mean what is the profitability?

[Michael Salzhauer:]

Yes.

[Bill Ashmore:]

Wait on Joe we – that’s kind of a [trade Macquarie] on us. That’s …

[Joe Tomkinson:]

Yes, that’s something we don’t disclose right now.

[Bill Ashmore:]

But it is a very profitable product.

[Michael Salzhauer:]

I assume it’s more profitable than regular mortgage product.

[Bill Ashmore:]

Yes.

[Michael Salzhauer:]

And what is the competitive [loans] – and after you sell these loans to [Macquarie] you’re presumably servicing them but you don’t have any more participation in them, is that correct?

[Bill Ashmore:]

[That’s not right]. We are continuing to service with them and we are partaking in a split of the servicing with [Macquarie] after the net expenses in addition to – there is some residual interest that Impac owns relative to future spreads on those loans that are held in balance [inaudible] and eventually securitized.

[Michael Salzhauer:]

And what kind of liability do you have back to the – to Macquarie?

[Joe Tomkinson:]

Our liability is no more than the same liability that we have with Fannie and Freddie.

[Michael Salzhauer:]

So it’s like wrap some warranties kind of stuff?

[Joe Tomkinson:]

Yes.

[Bill Ashmore:]

Yes.

[Michael Salzhauer:]

And could you just talk a little bit about the competitive landscape for that re-emerging product and then I’ll get off. Thanks.

[Joe Tomkinson:]

Well there’s – I’ll speak first and then I’m sure [Bill] would want to add to it. There’s a lot of companies out there that have recognized the void in that space and there’s a lot of companies that have talked about getting in to the space. I think we’re really the only company to truly come out with guidelines and gone ahead and began accepting applications for correspondents and wholesale lenders. We’ve – I think our pipeline was somewhere around $50 million on this product.

[Bill Ashmore:]

Yes.

[Joe Tomkinson:]

Our pipeline is currently at $50 million and that’s from a dead start. But I think we’re the only company that is actually funding the product. Bill?

[Bill Ashmore:]

Well, Joe let me amplify that. There are a couple regional banks that have been originating some of this non-QM product, but most of it has been more of a prime jumbo type of product that maybe has an [IO] on it or maybe has higher than [a 43 back-in] ratio. There are a couple of hedge funds that have recently ventured in their partnering with some originators but we just got back from the Mortgage Bankers Association [event] in Las Vegas two weeks ago where a number of current or prospective customers were meeting with us and a couple other potential non-QM acquirer of loans and at the end of the – and into the conference we met with several large retail prospects or current clients that have in excess of two [a portion] of 600 plus loan officers and we did get commitments after they spoke to a number of what we’re – our competitors out there. We have commitments of several of these large retail originators that will be starting to [retake these loans] starting in as early as November and all the way to the beginning of next year. So we feel quite good that our positioning in terms of the guidelines, as Joe mentioned, and the pricing is quite competitive out there. In addition to us offering extensive training and not just a matrix type of a delivery of what the programs are and in fact we are starting our first seminars next week here in Irvine California. We have [upwards] of 100 brokers that are signed up. We are going to start the correspondent webinars at the beginning of December where we initially have several hundred that are – have shown initial interest to sign up [for this week]. So pretty good about where were positioned relative to our, you know all QM loans.

[Michael Salzhauer:]

Thanks. I think you guys are great entrepreneurs.

[Bill Ashmore:]

Thank you.

[Joe Tomkinson:]

Thank you, anything else?

[Michael Salzhauer:]

Not from me.

[Joe Tomkinson:]

OK. All right. Thanks.

[Operator:]

Ladies and gentlemen, as a reminder to register for a question press star then the number one. Mr. Tomkinson, there are no further questions at this time. I will turn the call back over to you. Please continue with your presentation or closing remark.

[Joe Tomkinson:]

I have no other closing remarks other than again, I want to just thank everyone who participated in the call. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and I [expect you] please disconnect your line.