Impac Mortgage Holdings, Inc. (NYSEMKT:IMH)
Q4 2013 Earnings Conference Call
March 20, 2014 12:00 PM ET
Justin Moisio - IR
Joe Tomkinson - Chairman and CEO
Ladies and gentlemen, thank you for standing by and welcome to the Impac Mortgage Holding year-end 2013 conference call. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded, Thursday March 20, 2014. I would now like to turn the call over to Justin Moisio. Please go ahead sir.
Thank you. Good morning everyone, and thank you for joining Impac Mortgage Holdings year-end 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 as well as general market conditions. I would like to refer you to the business risk factors and 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 and any guidance, is effective as of the date given and I would 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.
Good morning and thank you for joining our year-end 2014 earnings call. With me is Bill Ashmore our President and Chief Operating Officer; Todd Taylor our Chief Financial Officer; and Ron Morrison our General Counsel. I am going to begin with a brief review of the results for 2013. Yesterday we announced the results for 2013 reporting a net loss of $8.2 million or $0.94 per diluted common share in 2013 as compared to net loss of $3.4 million or $0.42 per share in 2012. The company’s continuing operations which include the mortgage lending, real-estate services and long-term mortgage portfolio, and corporate segments had a net loss before taxes of $6.2 million, as compared to net earnings before taxes of $13.4 million in 2012, primarily due to significant decline in mortgage lending earnings.
I will discuss the business segment results. Let’s start off with the mortgage lending. After a year of significant expansion of our lending platform in 2012, 2013 was a challenging year. We started the year with a business plan showing significant increases in originations from 2012 to 2013. However lending volumes only slightly increased in 2013 to $2.5 billion as compared to $2.4 billion in 2012.
Impac in along with the rest of the industry was derailed midway to 2013 when interest rates rose and lending volumes declined through the rest of the year, not did refinance activity decline, it also reflected origination of purchase transactions. In the mortgage lending industry when available originations are reduced, lenders competing for these originations reduced margins and quickly try to adapt to the new market along with downsizing the staff and shutting non-profit business units.
In addition Impac not unlike all the other originators, also had to deal with major lending compliance guidelines ruling out in January 2014, and this required a substantial investment in time, money, personnel and technology to comply with. A historically lower interest rate environment drove significant refinanced volumes in 2012 and in the first four months of 2013. However, as interest rates took a sharp and somewhat unexpected rise in May of 2013, we saw the refinance and purchase volumes decline significantly. And I think we all saw this straight across the board industry wide.
With the increase in rates, our lending volumes in the latter part of 2013 were lower than what we anticipated. The higher interest rates and the intense competition for lower level of originations caused profit margins to decrease significantly. It also took us some time to unwind the buildup in our staff and operations that were in place for the expected higher volumes in 2013. All of these factors helped to contribute to a loss of our mortgage lending segment in 2013.
In 2013 the mortgage lending segment had a loss of approximately $1.2 million. In 2013 gain on sale margins continued to compress creating challenges for the mortgage banking industry as a whole. Our lending margins including gain on sale in fees declined to 2.17% 2013 and this compares to 3.01% in 2012, resulting in decline in margin revenue of around $17.4 million. Offsetting hat decline though in margins was a $3 million increase in the servicing income and a $7.1 million increase in the mark-to-market of mortgage servicing rights. Given the margin compressions and the shift to predominantly business-to-business channels and lesser amounts of HARP originations, we expect to see decline in the margins in the first quarter.
However, this will ultimately be accompanied by lower origination cost. To-date, we are seeing first quarter margins decrease to 1.6% with mortgage interest rates tempering during the first quarter and margins [indiscernible] we have seen a substantial increase in our pipeline expecting to lead to increased originations going into the second quarter. Even though first quarter origination is expected to be in the excess of approximately $330 million, we expect origination to decrease in the second quarter significantly.
Our current mortgage pipeline is approximately $325 million which would result in fundings of approximately $225 million over the next 45 days. In the last 30 days, we have seen an increase in our locks and lock pipeline in excess of approximately 50%.
In the first half of 2013, we had maintained excess lending operating capacity for that anticipated increase in volumes. But with the unexpected increase in interest rates in May of 2013, lending volumes declined and we couldn’t cut expenses quickly enough. Combined with an increase in the compliance cost due to the new mortgage lending regulations, we experienced higher operational cost in 2013. Our monthly average lending operating cost increased to $5.6 million in 2013 from $4.4 million in 2012 primarily due to an increase in the average headcount to 456 individuals in 2013 from 343 in 2012.
Now in response to the reduced production volumes and revenues, we took steps in the third and fourth quarter of 2013 to align the operating expenses with reduced lending volumes and revenues. Furthermore, we reduced our retail branch lending operations which were operating at a loss by shifting our focus to wholesale, correspondent and a centralized retail call center. With these steps we have taken in the first quarter of 2014, we decreased our lending headcount over 40% and decreased our monthly operating cost of approximately 45% from our 2013 average run rates. More specifically, as part of our business channel realignment at the end of the fourth quarter, we sold our retail branches and consolidated the lending fulfillment centers in an effort to consolidate those costs, streamline our operations and focus on expanding lending volumes in our wholesale, correspondent and retail call center and consumer direct channels.
We have also consolidated our lending operations to one primary fulfillment center in Irvine, California. We believe the shift to more business-to-business originations gives the company more control over its originations with a much lower overhead risk and personnel expense and lease obligations along with better control over new stricter compliance requirements. Also, we are streamlining our process to provide customer service levels necessary to capture more market share without competing on the price alone.
Through our wholesale and correspondent channels we are licensed now to lend nationwide in 42 states and submitted licensing in three additional states including receiving notice we are in the final stages to obtain New York State approval. Being licensed actually gives the company the flexibility to target originations in both product and pricing on a regional basis and to maximize the net revenue on a prolonged basis.
During 2013, our correspondent channel contributed 34% of originations; the retail channel contributed 28% of originations with the remaining 38% coming from the wholesale channel, as compared to 16%, 30%, and 54%, respectively in 2012. We believe that in 2014, the origination mix will move even more heavily to wholesale and correspondent volume. In 2013, we attempted to improve the mix of purchase money transaction as we believe it will create better opportunities to increase our origination market share in a decreasing refinance market. The percentage of purchase money transactions, as compared to refinanced transactions, increased to almost 41% of overall originations, as compared to just 31% in 2012. The primary reason for this increase in purchase money transactions in 2013 was us aligning ourselves with customers that were purchase transaction centric in their lead generation strategies and the ability to offer better customer service experience through our sales and operations.
In December of 2013 we began to aggressively expand our sales force, hiring experienced lending sales personnel for wholesale, correspondent and retail consumer direct channels. The results of the sales force expansion will more than double our 2013 sales force in wholesale and correspondent segments by the second quarter of 2014.
All new sales professionals are required to have the current book of business with proven connection capabilities including expansion into new geographic locations and experience in the selling all the company’s loan products. With these hires we expect to not only increase the number of delivery and brokers and correspondents but also the average number of monthly closed loans for each individual broker and correspondent.
In addition to expanding the sales force, the company announced the roll out of our re-warehousing product for new and existing correspondents along with the special finance capability for mortgage brokers become mortgage bankers in our emerging banker program. Providing warehouse lending will only help new originations and corresponding the wholesale channels, but will provide a net interest spread to the overall net revenues in the mortgage lending segments.
Currently we have a $40 million re-warehouse financing facility but believe we can expand that as we add new customers during the first half of 2014. Historically the company experienced 40-65% capture ratio on all of our re-warehouse slides from our customers’ originations. The company believes this is important product to offer our customers that will supplement the value proposition to do business with Impac.
Furthermore we have been successful in our goal of increasing the mortgage servicing portfolio by retaining greater portion of our own originations. During 2013 we increased the mortgage servicing portfolio to $3.1 billion as of December 31 and produced net servicing fees of $4.3 million in 2013 as compared to $1.2 million in 2012. The estimated fair value of mortgage servicing rights increased to $36 million at December 31, 2013 as compared to $10.7 million at December 31, 2012. As a result we have the ability to valuate opportunities to selectively sell servicing at the increased multiple valuations that we see today.
Depending on pricing and appetite of the market we are in a position to take advantage of opportunities as they rise. Thus we are in the process of selling $1.3 billion in servicing. We expect to complete the sales in the next 45 days at a record multiple for the company. The sales are forecasted to generate cash proceeds of approximately $10 million over the next 45 days and another 5 million by the end of the second quarter as the servicing transfers are completed. Going forward the company will continue to evaluate window hold selective mortgage servicing rights or sell depending on which provides better return to the company.
At the end of the first quarter with servicing sale proceeds and proceeds from the sale of Amerhome we expect ending the quarter with approximately $15 million in cash on the balance sheet which will improve our cash position by $5 million from the end of 2013.
Now I want to move in to discuss the real estate services business segment. The real estate services segments continues to earn consistent profits and posted net earnings of $13.3 million for the year ended December 31, 2013 as compared to $12.6 million for the same period in 2012. In a continued effort to leverage our platform beyond mortgage lending and servicing capabilities, our real estate service segment has expanded by offering its loss mitigation services beyond their own legacy portfolio including mortgage insurance recovery services and title remediation services. We believe that the expansion on real estate services activities to third parties will continue to help our revenues in the latter part of 2014.
Now our long term mortgage portfolio. Regarding our long term mortgage portfolio segment as a principal balance of the loans in the portfolio continues to decline from principal payments from borrowers, payoffs of loans as well as the liquidations of defaulting loans, the net interest income from the loans declines. Because the loan balances and long term mortgage portfolio continue to decline the estimated fair value of the net trust asset has continued to decline in 2013. The cash received from the residual interest securitizations, net interest assets was $6.8 million in 2013 as compared to $10.3 million in 2012, and is expected to decline in the future with the decline in loan balances and the expected ongoing decline in the securitized mortgages. At December 31, 2013, our residual interest and securitization decreased to $10.6 million, compared to $15.9 million at December 31, 2012.
In March 2014, Excel, our wholly-owned subsidiary, changed its name to Impac Mortgage Corporation. We changed the name to further build on the historically positive brand name of Impac as well as restore brand continuity with the name of our other Impac companies. The name change will also help to provide clarity regards to state licensing. In March of 2014, we completed the previously announced sale of AmeriHome Mortgage Corporation, a duplicative operational mortgage platform for $10.2 million in cash, recording a gain of approximately $3.0 million. In conjunction with the transaction, we used $3.0 million of the proceeds and paid down our repurchase liability with Fannie Mae.
The sale of AmeriHome will not only improve near-term cash balances and profitability but it will also help the company to streamline its mortgage operations. We expect the deployment of our new LOS system in our wholesale lending operations to further reduce these operating costs. The new system will greatly enhance our loan manufacturing process. Today’s mortgage banking environment requires an effective sales force streamlined automated delivery and good customer service to realize profitability in a tight margin environment.
Furthermore, to differentiate ourselves from our competition our value proposition will include customized accelerated delivery options, pricing structures offered so customers can better control their risk profiles, new products to enhance businesses including the nonqualified mortgages and warehouse lending finance lines along with our personalized customer care initiative to just name a few.
As I just briefly mentioned, the company intends on offering nonqualified mortgages to our customers. We believe the enactment of the qualified mortgage regulation 2014 has created a tremendous opportunity in mortgage lending that has not been seen in many years.
Impac went public in 1995 as an innovator of mortgage loan products and wants to continue that tradition in the soon to be recognized nonqualified mortgage origination market. As of this date, the company has created the loan product guidelines, researched the price discovery and is in the process of negotiating its exit strategies with future partnerships along with the interim warehouse financing with which to originate these loans. Our nonqualified mortgage program from target borrowers, we have good credit and high likelihood of repayment. Likely borrowers will be the first time home buyers, self-employed or could be a near miss from qualifying with government agencies or could simply be a borrower who wants an interest only payment or has a slightly higher debt ratio than a qualified mortgage maximum of 43%.
The company believes that residential nonqualified mortgage products will marry well with our current product offerings with huge customers and borrower demand. We anticipate announcing the launch of our non-QM program very soon. As the company looks at other opportunities that exist in today’s mortgage and lending markets, we are currently exploring opportunity to rollout a small balance multifamily platform coupling our origination expertise with the capital partner. Our goal is to rollout a small balance multifamily loan product by midyear.
This concludes my prepared remarks. And now I would like to open it up to any questions that you have.
Thank you, ladies and gentlemen. (Operator Instructions) Your first question comes from the line of Daniel [indiscernible].
I have a question unrelated to anything you’ve talked about and it’s about the long-term debt. You have this long-term debt on your balance sheet which you carry at “fair value” and now I have no idea whether there is market prices out there, but if the market prices were anything close to the fair value, it would seem that repurchasing this debt would be just as good use of capital as originating mortgages and I am curious to know if this is something you’ve considered or if it's even possible?
That’s a good question. And we have attempted to repurchase and we have repurchased some, and we continue to try to repurchase. But it takes -- as any transaction, you need a willing buyer and a willing seller, and we haven’t gotten a lot of good response.
(Operator Instructions) Justin, you may resume your presentation.
As there is no all calls, I appreciate everyone that participated and we’ll go ahead and adjourn for now. Thank you very much.
Ladies and gentlemen, that does conclude the conference today. We thank you for your participation, and I ask that you please disconnect your lines.
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