IMPAC Mortgage Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.10.13 | About: Impac Mortgage (IMH)

IMPAC Mortgage Holdings, Inc. (NYSEMKT:IMH)

Q1 2013 Earnings Conference Call

May 9, 2013 12:00 PM ET

Executives

Justin Moisio - Director, IR

Joseph R. Tomkinson - Chairman and CEO

William S. Ashmore - President and Director

Todd R. Taylor - EVP and CFO

Analysts

Dan Mazur - Harvest Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IMPAC Mortgage Holdings First Quarter 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, May 9.

I would now like to turn the conference over to Justin Moisio, Director of Investor Relations. Please go ahead sir.

Justin Moisio

Good morning everyone, and thank you for joining Impac Mortgage Holdings first quarter 2013 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 and market risk exposure and general market conditions.

We 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 any outlook, 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 Joe Tomkinson, Chairman and CEO of Impac Mortgage Holdings.

Joseph R. Tomkinson

Good morning. Welcome and thank you for joining Impac's first quarter 2013 earnings call. With me on the line, is Bill Ashmore, our President and Chief Operating Officer; Todd Taylor, our Chief Financial Officer; and Ron Morrison, our General Counsel.

I'd like to begin my prepared remarks by discussing the completion, of what I believe (inaudible) the company's most significant transaction since the meltdown of 2007. The previously announced issuance of the $20 million convertible debt. The convertible debt has a coupon of 7.5%, requires quarterly interest only payments is convertible into common stock at a strike price of $10.875 (sic), and is due by 2018.

We are very pleased that we are able to complete this transaction in an expedited manner, with minimal costs, [which saved] our shareholders approximately $900,000 in offering costs, and as a result, the net proceeds were in excess of $19.5 million.

We expect to use those proceeds to increase the servicing portfolio, by both retaining a greater portion of MSRs, generated through our originations plus purchasing mortgage servicing, grow the mortgage lending platform to increase our lending volumes and optimize our secondary marking strategy and pursue other opportunities in the mortgage and lending markets.

As we've previously discussed, we believe there are a number of opportunities that exist in today’s mortgage and lending markets, which include the purchase of mortgage servicing rights, originating small balance multifamily loans, originating, pooling and privately securitizing jumbo mortgage loans and offering warehouse lines to small banks, credit unions and mortgage banking firms. With a portion of these proceeds, we expect to pursue some of these opportunities in a manner, and through structures, which we believe deliver accretive value to our shareholders.

When reflecting what has occurred over the past five years, we believe it is a major accomplishment for the company to be able to raise capital. Further, we believe this, as a tremendous vote of confidence to raise capital at such favorable rates and terms. The additional capital will also allow us much greater flexibility, in the overall execution of our business plan.

Now, I'll continue with a brief review of our results from the first quarter of 2013. Yesterday, the company announced results from our first quarter of 2013, including an 85% increase in our lending and originations, to $673 million from $365 million in the first quarter of 2012; and an increase in mortgage lending segment pre-tax profits to $671,000 in the first quarter of 2013, from $227,000 in the first quarter of 2012.

The continuing operations comprised of mortgage lending real estate services in long term mortgage portfolio segments, had net earnings after taxes of $138,000 in the first quarter of 2013, a $3.7 million improvement over the loss of $3.5 million in the first quarter of 2012, resulting in a $4 million in the consolidated net earnings in the first quarter 2013, as compared with the first quarter of 2012.

In the first quarter of 2013, mortgages lending net earnings before taxes improved slightly over the same period in the prior year. However, net earnings before taxes declined, as compared to the fourth quarter 2012. The decline in the first quarter 2013, as compared to the fourth quarter of 2012 was primarily due to what we call margin compression. An increase in lending operation, personnel costs, and a non-operational, non-recurring onetime cost of $700,000 recorded in the first quarter of 2013, to settle a claim for unpaid licensing fees from a former technology vendor, and associated with a system that was not installed, that was a mouthful.

Excluding the $700,000 charge, mortgage lending net earnings before taxes were $1.4 million. Now this is a 500% improvement over the first quarter of 2012. The margin compression that began in the fourth quarter of 2012, continued in our first quarter, reducing our net margins by approximately 20 basis points. Although it now appears that the margins have somewhat stabilized in the latter part of the first quarter of 2013.

Our origination volumes were lower in the first quarter of 2013, as compared to $813 million in the fourth quarter of 2012. With the decline in originations across the industry, mortgage lenders reduced pricing to capture or maintain volumes. We did the same to stay competitive in maintaining volumes, resulting in reduced pricing and margin compressions on the lower volumes.

In addition, our operating costs were higher with the over-capacity in operations, expecting higher volumes than we experienced in the first quarter. Also, the implementation of our new loan origination system has been a bit more challenging than we anticipated. Upon implementation, we expect though this system will result in better operational efficiencies, to support a larger amount of production in the future.

THE Company has also hired a seasoned mortgage banking executive to manage the mortgage operations of the company, to complete the installation of our new systems, and will reduce operational costs and improve our turn time efficiencies.

During the first part of the second quarter of 2013, we have seen improved turn times with increased funding volumes. Further, we have seen a significant increase in our pipeline in April 2013, expected to result in higher origination volumes in the second quarter, as compared to what we experienced in the first quarter.

In the first quarter of 2013, the Company continued to see its mortgage lending channels have a more balanced production mix. This was a result of the continued growth in the retail channel, conducted by our branch offices, and a correspondent channel, which acquires closed loans from our correspondent sellers. For the first quarter of 2013, our retail channel production contributed 31% of originations, while our correspondent channel contributed 23%, with the remaining 46 % coming from the wholesale channels.

In the first quarter of 2013, the mix of purchase money transactions, as compared to refinance transactions, remain consistent with the first quarter of 2012 and the fourth quarter of 2012. We continue to devote efforts towards capturing additional purchase money transactions, as the real estate market continues to improve and the home refinance market continues to contract, as we view this prediction is more sustainable, than our reliance on the refinance activity. In fact, we have been able to increase the number of our relationships with the real estate professionals to 1,266 as compared with 1,173 as of December 31 (sic), 2012.

As of March 31, 2013, our servicing portfolio increased by $200 million to $1.7 billion, as compared to $1.5 billion as of December 31, 2012. The delinquencies in the newly originate portfolio remained under 1%, well below the national average. And as expected, net earnings before taxes from our real estate services segment decreased to $2.3 million in the first quarter of 2013, as compared with $2.7 million in the first quarter of 2012, and $3.1 million in the fourth quarter 2012. The real estate services segment continues to provide net operating margin, as revenue continues to gradually decline, which we have always reported. The decrease was primarily due to a continued and expected decline in the size of a long-term legacy mortgage portfolio, resulting from principal paydowns, and liquidation of defaulted loans.

The long-term mortgage portfolio had a net loss of $3.9 million for the first quarter of 2013, as compared to a net loss of $6.4 million in the first quarter of 2012, primarily due to the change in the estimated fair value of the portfolio. The estimated fair value of the net trust assets continues to decline in 2013, primarily as a result of the decline in the long term mortgage portfolio. With the estimated fair value of the net trust assets decreasing, we expect the future P&L volatility from the long term mortgage portfolio, to be greatly reduced.

In the first quarter of 2013, the company reported a consolidated net loss of $722,000 or $0.08 per diluted share, as compared to a net loss of $4.8 million in the first quarter of 2012 or $0.61 diluted per share; primarily due to a $2.5 million improvement in the long-term mortgage portfolio and a tax benefit of $1.1 million, due to the company increasing its AmeriHome ownership to 80%, which allows the company to include AmeriHome on its consolidated tax return, and to reduce income taxes, as AmeriHome will now be able to utilize IMH’s taxable net operating loss.

Despite earnings from the mortgage lending segment staying relatively flat, when comparing the first quarter of 2013 with the first quarter 2012, we believe that the continued driver of growth in net earnings from continuing operations for 2013 will be the mortgage lending. Total originations volume fell in the first quarter of 2013, as compared to the fourth quarter of 2012; however, we continue to increase our production substantially on a year over year basis. The decrease in production from the fourth quarter 2012, combined with increased margin compressions, and higher personnel costs, limited the mortgage lending segment’s profitability in the first quarter of 2013.

Despite a challenging first quarter with margin compression, industry-wide originations volume down, and a slower than expected rollout of our new loan origination system, we are still on-track to grow our origination volume, in excess of $4 billion this year. Along with increasing origination volume across all origination channels, we remain focused on reducing our operating expenses, and creating more efficiencies.

With regards to the forecasted near term originations, April, recorded our largest amount of loan lots in recent years, with a total pipeline now in excess of $800 million. As on April 30, our new jumbo product had a pipeline of $25 million, with a rollout of the program in the wholesale correspondent expected during the second quarter. We expect the second quarter should greater close loan volume than the first quarter, with monthly funding volumes over $300 million by the end of the quarter, and more normalized margins, that should result in improved net operating earnings for the quarter.

Looking back to the first quarter, we knew our operating expenses were higher than we want to see, but will be more in line, by supporting the forecasted increase in volumes for this quarter, and through the rest of the year. As we stated, we feel very comfortable with our forecast to meet our full year projected originations, to be in excess of $4 billion, and we continue to work on improving our margins, both on the top and the bottom lines.

Further with the capital we have raised, we continue to grow our servicing portfolio, along with exploring other opportunities that we believe will enhance our overall ability to become not only more competitive, but be able to add additional products and services.

This concludes my prepared remarks, and I'd like to open it up for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of [Robert Bree], Private Investor. Please proceed with your question.

Unidentified Analyst

Good morning. I have two questions. You mentioned that in April, you had $800 million of loan locks, which is actually a very-very large number. What percentage of that do you think will close by the end of this quarter?

Joseph R. Tomkinson

Do you want to take that?

Todd R. Taylor

Yeah actually, that was $800 million, in pipeline, it was $400 million in loan locks, and when they plan to get into a loan lock stage, you are going to be closing majority of those loans, it's going to be over 80% depending upon the loan product in the channel, but it would be well over 80% of that $400 million that's going to close.

Unidentified Analyst

By the end of the quarter?

Todd R. Taylor

Well, probably -- yeah, by the end of the quarter. There could be something that [move] over, depending upon their purchase money transaction, that took an extended lock. But yeah you are right, most of it will (inaudible) within the quarter.

Unidentified Analyst

Okay. So I misread it when it said in your literature that there were $800 million worth of loan locks?

Todd R. Taylor

$800 million worth of pipeline, the total -- the origination pipeline, and half of that is [weight locked].

Unidentified Analyst

Second question is, servicing revenue, even though its decreasing because of your -- I guess, because of your old portfolio, which has some dead loans and refinancing. Seems to be a fairly large amount of money. What percentage, or how important do you consider that income, and what percentage of this $19.5 million are you going to allocate towards that part of your income?

Joseph R. Tomkinson

(inaudible).

Todd R. Taylor

Do you want me to take that?

Joseph R. Tomkinson

Yeah, I don't quite understand the question.

Todd R. Taylor

This is Todd Taylor. I am not sure if you are referring to our mortgage servicing portfolio, or the master servicing portfolio of the legacy.

Joseph R. Tomkinson

No he is referring to the legacy, the $2.3 million; what he saw was a decline, what he doesn't understand is we've always reported that we expect that income over time, to decline, as we improve the legacy portfolio or the portfolio as we sell it off (inaudible). I mean, that's what he was referring to.

Unidentified Analyst

In other words, I am not concerned about the legacy portfolio, which is going to be constantly decreasing, but are you developing a new portfolio of servicing?

Joseph R. Tomkinson

Yeah, the new portfolio of servicing currently stands at $1.7 billion, and we continue to grow that every quarter, and now that we have raised this capital, that servicing portfolio will grow even at a greater rate, because we are not forced to sell off parts of that debt reduction.

Unidentified Analyst

Okay. But my question was of that $19.5 million, how much of that money do you feel is necessary to put towards the servicing?

Joseph R. Tomkinson

You mean, the capital that we raised?

Unidentified Analyst

Yes.

Joseph R. Tomkinson

Well, that's a difficult question to answer. Go ahead.

Todd R. Taylor

Well right now, we are taking a look at the utilization of that capital, for the -- that's for the company. There will be some of that, that will be applied towards the increase of the portfolio and the servicing portfolio, but there is also other activities that we are looking at, that will further enhance our abilities, as Joe mentioned in the conference call, both on a services and product standpoint for our customers. So we haven't finalized the exact rollout in terms of utilization of that capital, but there will be a portion of that we will use to, further increase the holding of those mortgage servicing rights.

Unidentified Analyst

I was just trying to get a feel for -- at the present moment, how much of a priority do you think that is, developing, servicing portfolio?

Joseph R. Tomkinson

Let me answer in a different way. We would like to double our servicing portfolio this year. That's what's in our business plan.

Unidentified Analyst

Okay. So that means to me that you have pretty high priority for that then?

Joseph R. Tomkinson

Increasing the servicing portfolio of these levels, is a pretty high priority. Yes.

Unidentified Analyst

Okay. That's what I wanted to know.

Joseph R. Tomkinson

Okay.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions]. Our next question comes from the line of Dan Mazur with Harvest Capital. Please proceed with your question.

Dan Mazur - Harvest Capital

Good morning guys. Thanks for taking my question. I was wondering if you could go through, before we get the Q, just components of the mortgage lending line item, sort of the mortgage lending gains and operating costs, if you could kind of walk us through, kind of roughly those numbers?

Todd R. Taylor

Do you want to take the production side? Or you want some specific numbers. That would be hard to have those. Is it in the release?

Dan Mazur - Harvest Capital

Or even just, you reference a 20 basis point decline in margin, maybe you could just walk even through the margins?

Todd R. Taylor

Okay. So you may do the component?

William S. Ashmore

Yeah.

Todd R. Taylor

Let me see the component for (inaudible) and Bill can walk through the compression. The revenue side of the lending segment is expected to record about $19.5 million and net gains in fees, and that's going to include servicing fees, and expense side is going to be $18 million thereabouts, and then another $700,000 associated with the charge that Joe referred to earlier in the call.

William S. Ashmore

So in reference to the 20 basis points, that basically is looking at the (inaudible) marketing gain on sale compression that occurred during that first quarter, and what compounded that, is the fact that we had operational capacity for a much bigger volumes that we -- as we mentioned in the press release, we will be seeing in the second quarter. Substantial expansion, as you can see through our pipeline, in both total pipeline and the lock pipeline, would be substantially increasing volumes with the personnel that were already on staff for that first quarter.

Dan Mazur - Harvest Capital

Okay. And just the 20 basis points, what is that a base of? I mean, is that just a 19.5 divided by the origination volume? Or is it other components like MSR or revaluation that goes into that 19.5?

William S. Ashmore

Trade gain on sale, that's a component of that 19.5

Todd R. Taylor

Yeah, we have (inaudible) 20 basis points.

William S. Ashmore

It's a gain on sale margin.

Todd R. Taylor

Just (inaudible) 20 basis points.

Dan Mazur - Harvest Capital

So, what was the base or how do you calculate -- like, what was the actual number?

Joseph R. Tomkinson

What you are asking us is --

Dan Mazur - Harvest Capital

240 to 220 or -- yeah?

Joseph R. Tomkinson

Yeah, what you are asking was, what was the previous bases of the previous quarters, and what was the decline over that base price. (inaudible).

Todd R. Taylor

I can answer that Joe. Last quarter, Q4, we had about $21 million in net gain on sale, on a production of $815 million, and in Q1, we had about $16 million net gain on sale, on a production of about 673. So if you take the basis points between those, last quarter was about 255 and Q1 is about 235, indicating the 20 bips difference or compression.

Dan Mazur - Harvest Capital

Okay. That's exactly what I was looking for, and the difference between the 19.5 million and the 16 million, is that just servicing fees, and then just maybe a small markup in the MSR?

Todd R. Taylor

Yeah, actually that's exactly right. There is loan fees and servicing fees in there, as well as a markup on the MSRs, that we did record of about $1.2 million in the quarter.

Dan Mazur - Harvest Capital

Okay great. Then you've referenced buying MSR, I mean, how do you look at the return of kind of buying MSR versus trading MSR and how do you think about that?

Joseph R. Tomkinson

We think right now we are better off creating our own MSRs as opposed to going out and buying. If we buy anything, we buy them under the correspondent channel, which has been very-very profitable for us. So we are not going to get into the bidding wars that others are getting into. It's much more efficient for us to create the MSRs.

Dan Mazur - Harvest Capital

Okay.

Joseph R. Tomkinson

Does that help you?

Dan Mazur - Harvest Capital

That does help me. Thank you.

Joseph R. Tomkinson

Let me add one other thing on the compression of margins and the -- we were -- the decline in the income was a result of basically two things, lower production, and lower profitability on the sale of the product. But, the lower production was expected. I mean, every January, we go through the same seasonality, and so, what we are trying to get across is that, we planned for this and we were expecting it in our business plan. But overall, as I tried to point out in the prepared remarks, our overall production are in line with our business plan for the year, and we expect that we will do a little over $4 billion in production, and we hope to increase our servicing portfolio, to somewhere around $4 billion. So, in our business plan, we are right on schedule here. Does that help?

Dan Mazur - Harvest Capital

Yeah. That's very helpful, I mean, given your retail wholesale correspondent mix, I mean, the kind of 230 range is pretty healthy. Do you see that holding in the market, and is that an okay thing to think about, just long term?

Joseph R. Tomkinson

I am going to have Bill answer that.

William S. Ashmore

Well what we have seen is a basic stabilization in the margins. I mean, this is pretty typical when -- when the volume goes down, you have people that are bringing their margins in, in order to try and maintain their overall volume level, so this is not without precedent, while it was a little bit more than what would be expected, because the unprecedented margins of last year, in terms of how wide they were.

So going forward, our business plan would anticipate that we would be around these margins. However, we would not think that couldn't come down a little bit, but right now for the last 45 to 60 days -- more like 45 days, we have obviously seen a stabilization of margins, and have been able to price in a little bit extra, over the last 30 days, with the rally in the market, and additional applications coming in. so that's a reasonably good proxy, again, depending upon overall (inaudible) to do over the next year, relative to increase of purchase money and a decrease in refinance.

Dan Mazur - Harvest Capital

And just last one, sorry to take so many questions. Maybe you should go back to the fourth quarter and adjust out the increase in guarantees for using, if we see that again this year, opportunity to just kind of push through to the customer, versus impacting rate versus impacting margin?

William S. Ashmore

This is Bill Ashmore again. I just got back from the New York (Inaudible) Marketing MVA Conference, and basically, there will be additional guarantee fee increases. Fannie Mae in our meeting, they have cleared us, that that was going to be the case. However, you see we are having a rolling out of our jumbo program, and that is going to be an area, where we are going to be able to pick up additional incremental volume, by doing greater amounts of jumbo programs, and ultimately, securitizing that product, to be able to garner additional market share in that particular area.

In terms of the guarantor fee, so far, we have seen a majority of the guarantor fee being pushed on to the consumer. Going forward, I still see that being viable, because the minimum margins that most of these lenders are going to have to maintain, in order to maintain profitability. So we will see some increase in the guarantor fee, and I believe that a large portion of it does get pushed on to the consumer.

Dan Mazur - Harvest Capital

Okay great. Thanks guys.

Operator

[Operator Instructions]. Mr. Moisio, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Justin Moisio

Well if there is no other questions, the management wants to take the opportunity to thank everybody for participating, and that's all we have. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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