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Impac Mortgage Holdings, Inc. (NYSEMKT:IMH)

Q2 2013 Earnings Conference Call

August 07, 2013, 11:00 AM, ET


Justin Moisio - Investor Relations

William S. Ashmore - President and Director

Todd R. Taylor - Executive Vice President and Chief Financial Officer


Dan Mazur - Harvest Capital

Michael Salzhauer - Benjamin Partners


Ladies and gentlemen, thank you for standing by. Welcome to the Impac Mortgage Holdings Second 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, Wednesday, August 7.

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

Justin Moisio

Thank you. Good morning everyone, and thank you for joining Impac Mortgage Holdings second 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 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.

William S. Ashmore

Good morning. Welcome and thank you for joining Impac's second quarter 2013 earnings call. I have on line with me, Todd Taylor, our Chief Financial Officer; and Ron Morrison, our General Counsel. I’ll begin with the brief review of the results for the second quarter 2013.

Yesterday the company announced results from the second quarter of 2013, reporting net earnings of $1.2 million or $0.14 per diluted common share as compared to net earnings of $4.2 million in the second quarter of 2012 or $0.51 per diluted common share. For the first half of 2013 the company had net earnings of $480,000 or $0.08 per diluted common share as compared to a net loss of $578,000 or a loss of $0.07 per diluted common share for the first half of 2012.

The company’s long-term mortgage portfolio includes certain assets and liabilities subject to fair value accounting. Excluding the change in fair value of net trust securitization assets and long-term debt in such portfolio, the company’s consolidated net earnings would have shown a slight increase in the second quarter of 2013 as compared to the second quarter of 2012.

The company’s continuing operations, which include the mortgage lending, real estate services and long-term mortgage portfolio segments had net earnings of $2.2 million in the second quarter of 2013, as compared to net earnings of $138,000 in the first quarter of 2013 and $7.3 million in the second quarter of 2012.

I’ll continue with the discussion of the business segment results. First off, mortgage lending. In the second quarter of 2013, mortgage lending net earnings increased by $2.7 million to $3.4 million, as compared to the first quarter of 2013, and decreased slightly from the second quarter in the prior year. The increase in the second quarter of 2013 over the first quarter of 2013 was primarily due to a $106.3 million increase in mortgage originations.

In the second quarter of 2013, originations have increased to $780 million, a 16% increase over the first quarter of 2013, and a 46% increase over the second quarter of 2012. The company’s mortgage lending channels continue to experience a more balanced production mix. Our correspondent channel contributed 29% and our retail channel production also contributed 29% of originations, with the remaining 42% coming from the wholesale channel.

A more balanced mix of originations to wholesale and correspondent allows us to have better geographic dispersion in our portfolio while we continue to build our retail originations which are predominantly in the Western United States. Also the percentage of purchase money transactions, as compared to refinance transactions increased to almost 40% of overall originations, as compared to just over 25% in the first quarter of 2013.

The decrease in earnings from the second quarter of 2012 was due to an increase in personnel expense associated with an anticipated growth of our mortgage lending platform as we expected interest rates to remain low through year-end. For this reason the number of mortgage lending employees grew to approximately 540 at June 30, 2013 as compared to approximately 375 at June 30, 2012.

However with the abrupt and unprecedented increase of approximately 100 basis points in interest rate during the second quarter the industry has experienced a significant decrease in refinancing activities. As a result our personnel expenses were higher than normal relative to our production levels which have decreased recently. In response to the higher mortgage rates resulting in lower refinance volumes we have reduced staff levels in certain areas of our lending operations segment.

We will continue to monitor our pipeline and staffing levels to maximize efficiencies and maintain service levels based upon origination volumes. In further response to contracting refinance market, the company continues to focus on purchase money transactions by diversifying its loan products and adding extended rate lock options to help to capture more volume along with more expansive marketing efforts.

Today, the company offers a complete product menu including less interest rate sensitive loan programs such as Home Renovation 203(k) products, Home Affordable Refinance Programs or HARP and Reverse Mortgages. To capture a greater percentage of these loans our most recent marketing efforts include the launch of a televised ad campaign to increase our risk mortgage production and exclusive lead generation referrals for purchase money and 203(k) renovation loans.

Now let's review our growing long-term assets at mortgage servicing rights. With the servicing-retained sales in the second quarter and the recent rise in interest rates the estimated fair value of the mortgage servicing rights of the portfolio increased to $22.1 million at June 30, 2013, as compared to $15.6 million at March 31, 2013. Our mortgage servicing portfolio comprised of agency loans has increased to $2.1 billion in unpaid principle balance as of June 30, 2013, and $1.7 billion as of March 31, 2013.

About $2 billion of the portfolio was originated after 2010 and has a high credit quality with a weighted average FICO of 732 and a low weighted average coupon of 3.85%, substantially below today’s lending rates. We believe that these attributes make the originated portfolio an extremely valuable long-term asset to the company.

Now I'd to go on to real estate services segment. The real estate services segment continues to provide positive net earnings through loss mitigation and real estate services, and has opportunities to perform mortgage insurance recovery services for institutions along with other loss mitigation activities offered to loan services. We are currently finalizing an engagement to provide mortgage insurance recovery services in addition to entering into loss mitigation service agreements that have already commenced activities.

With regard to recent developments, as a result of the strong relationships we have established with key financing partners that company is now in the process of entering the warehouse lending business which will allow the company to offer lines of credit to mortgage lenders including our correspondent sellers. We believe that offering warehouse financing to our existing and new customers is expected to be an important strategic move anticipated to help the continued expansion of our correspondent lending channel. The more products and services we offer to our customers will improve the strength of the overall business relationship and make it less reliant on pricing alone.

Due to the recent increases in interest rates, consistent with the rest of the industry we expect third quarter volumes to be lower than the second quarter volumes. However, we expect to see total 2013 mortgage originations exceeding our 2012 levels. In addition we expect our percentage of purchase money and less interest rate sensitive products will continue to grow as we originate through the rest of the year.

We see third quarter of 2013 being a transition period for mortgage lending industry as the overall market normalizes to predominantly purchase originations and a higher interest rate environment. Our lending business will experience a similar transition but the progress we have made in operations, marketing and our sales initiatives should ultimately help position our company, excuse me our mortgage lending segment to be successful as the overall mortgage market moves to more historical margins and a purchase money mortgage market driven.

Further in 2012, we successfully received agency approvals at Excel Mortgage Servicing DBA Impac Mortgage to sell and service Fannie Mae, Freddie Mac issue Ginnie Mae Securities. With Excel Mortgage Servicing completing the agency approval process the company is actively discussing a business strategy with potential investors involving AmeriHome Mortgage Corp., the company’s other agency approval lender. This will allow Excel Mortgage Servicing more opportunity in the future to expand its mortgage business. As these discussions proceed we’ll update our shareholders as to our progress.

Even though the industry has seen a dramatic move in interest rates and subsequent declining of refinance volumes the company believes there continues to be opportunities in the mortgage market. More specifically the company has made operational and personnel changes, released new products and services along with continued refinement of an expanded business relationship with AmeriHome Mortgage Corp., all of which should help to capitalize on the opportunities that exist in the market today.

This now concludes my prepared remarks and I’d like to open up for any callers on questions.

Question-and-Answer Session


Thank you. (Operator Instructions). Our first 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. Wanted to ask, real estate services had slightly better net this quarter than the last few, is that still a slow kind of steady march down in revenue and just better cost or what drove the better revenue -- I am sorry earnings in this quarter?

Todd R. Taylor

Hi, this is Todd Taylor, I’ll take that question. Mostly that's due to some timing of transactions that we did closed or some services that we did perform. So it’s not necessary indicative of a trend as much as we did some extra mortgage insurance recovery work in the quarter as well as timing relative to our multi-family modification and portfolio management work. So it’s probably more timing as the trend of a slow declining process services P&L as what we were expecting with the exception of the opportunities that we mentioned in the script that may enhance their P&L.

Dan Mazur - Harvest Capital

Okay, thank you. And maybe any color on gain on sale, revenue in the quarter and just maybe some of components like any fair value mark-ups of the MSR asset?

Todd R. Taylor

There is a mark-up of the fair value of the MSR with the drop in rates that occurred in the period. Of course the MSR as in the fair value those have increased, not to mention the service retained sales that we did in the quarter also that added to the portfolio. So in the quarter we did about a $1.5 million of MSR mark-up which has continued in that mortgage lending line item.

With regard to the gain on sales, the margins which were reduced substantially in the beginning of the year did normalize later on in the second quarter. There is still is pressure on margins as the overall market is contracting from a refinance standpoint. But we have seen some stabilization over the last couple of months relative to the overall gain on sale.

Dan Mazur - Harvest Capital

Okay, and I think your last call you pointed towards and I think it was greater than $4 billion origination. Is there a kind of a change now or the revised look, I mean is there any specific channel or is it just purely refi and just kind of what's changed and maybe just some color would be really helpful.

William S. Ashmore

Well, obviously refinance volumes were down and the one channel that had the highest refinance volumes was wholesale. So the wholesale channel currently is probably the biggest percentage drop and the biggest increase in terms of percentage is going to be retail, since retail was predominantly purchase money. So you are going to see the swing, as we saw and as we mentioned in the script 25% purchase money to close to 40% purchase money our current pipeline is approaching 50% and we believe that by sometime later on this quarter we would definitely be approaching close to 60% of purchase money.

The other components in there are less interest rate sensitive products which includes reverse mortgages, HARP, 203(k) loans which make up another15% to 18%. So if you put in there relative to just take up the [strict] interest rate sensitive refinances we believe by sometime later on this year that will be a much smaller component of the overall originations as we gain a bigger market share and the purchase money in some of these other less interest rate sensitive areas.

Dan Mazur - Harvest Capital

Okay, and on the mortgage warehouse business, most banks who offer that have pretty extremely low cost of funds today and the one that disclosed it, I mean that most of it I believe the yield probably less than 4%. So is there -- and just you getting into that business, is it mostly strategic rationale or is there -- and is there spread to gain and becoming an earnings contributor?

William S. Ashmore

Well, in terms of -- definitely a strategic, history tells me when we were in this business before that relative to our customers there are more correspondent customers that will do business with us if we have these lines. And these are not captive lines so they can do business with anybody. But we historically find that anywhere from 25% to as much as 40% of that product that could be available to our correspondent lending channel. We have a bigger opportunity to capture that and we do it in a less price sensitive manner.

So we’re able to bring more best efforts and mandatory and less bulk purchase type activities when we have people that are bringing their loans. Also we give them an advantage in doing business with us to have lesser haircut, and we also are able to expedite the as appropriate purchase of those loans significantly from other lenders. So there is a big advantage in doing business with us.

This is not going to be a big P&L generator, it will make money but it’s not going to be anything that’s going to drive any big numbers to the bottom line except for the synergies that we developed by operating this. We’ve already have applications that we’ve already are on process of taking. The word is out, we’re attending conferences now and within the next 60 days where we will be very heavily promoting this particular program.

We think this is very important. As I said it takes somewhat a lot of pressure off of the pricing margins we have in correspondent. So we think that strategically it’s a big deal but not a real driver to the P&L bottom line.

Dan Mazur - Harvest Capital

Okay, great.


Our next question comes from the line of Michael Salzhauer with Benjamin Partners. Please proceed with your question.

Michael Salzhauer - Benjamin Partners

Hi, most of my questions have been answered but could you flesh out this idea a little bit about the synergies between Excel and AmeriHome?

William S. Ashmore

Just to clarify Excel Mortgage Servicing, Inc., as we mentioned has Fannie, Freddie and Ginnie Mae approvals to be seller of services and issue securities to these agencies. We also have AmeriHome which has a same approval. If you remember we acquired AmeriHome several years ago in attempt to get back into mortgage lending since it was a fully licensed platform. But simultaneously we are also obtaining approvals through Excel.

So once we obtain approvals through Excel which is predominantly where we are doing our business from a licensing and origination standpoint the thought was always that there would be something strategically we could do with AmeriHome all the way from selling the platform and this value there that we believe this is more than we are seeing on the balance sheet.

In addition to that there may be other things that we are currently as we mentioned in discussions with that we think would benefit overall with the negotiation with some investors where we would be able to use AmeriHome in a more efficient way relative to help Excel's doing business relatively growing that particular business. I can’t go into much more details other than the fact that we think there is an opportunity there that to use AmeriHome in such a way that would substantially benefit the overall execution of Excel.

Michael Salzhauer - Benjamin Partners

Got it, thank you.


(Operator Instructions). Our next question comes from the line of Daniel Bobveni with Albarino. Please proceed with your question.

Unidentified Analyst

Hi, good morning, thanks for taking my call. The question, during the annual meeting you’ve noted that you, in the first quarter you ranked 56th largest residential originator in that quarter and I’m just curious, what do you reckon your or how do you reckon your cost of originating a mortgage compared with the 75 or 100 other people that you compete with doing this?

William S. Ashmore

Well, you got to remember that the different lenders are going to have different costs depending upon what channel it is. So we are a little bit more complicated than some of the other lenders that are kind of showing that category since we are originating and currently about a 30% share of our originations is does through these channel currently.

So you are going to have a much lower cost structure but more price sensitive products, lower gross margins on correspondent all the way down to our widest gross margin in retail but also has the highest cost structure.

So overall as we monitor we see that from a gross revenue standpoint we are consistent with the rest of the market and depending upon who you are gauging yourself with we are competitive to slightly outside of that window from a cost structure depending upon who that lender is. For example in the case of retail we are -- have been growing and expanding retail, so our cost in retail are higher than what they normally would be when we get to a run rate as we continue to open branches and add new personnel, our cost, our margins on their get compressed because of the expansion.

When we find ourselves in the case when we come to a level where we have a quarter or two where we normalize with no additional adding or purchase more you are going see that the margins there are going to be much better than what they might be today.

Unidentified Analyst

Okay, thank you.


(Operator Instructions). There are no further questions at this time. Please continue with your presentation or closing remarks.

William S. Ashmore

No, no further remarks. I appreciate everybody on the phone call and look forward for the next call next quarter. Thank you very much.


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

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