Impac Mortgage Holdings, Inc. (NYSEMKT:IMH)
Q1 2014 Results Earnings Conference Call
May 08, 2014 12:00 AM ET
Justin Moisio - Investor Releations
Joe Tomkinson - Chairman and CEO
Bill Ashmore - President and COO
Todd Taylor - Chief Financial Officer
Ladies and gentlemen, thank you for standing by. Welcome to the Impac Mortgage Holdings, Inc First Quarter 2014 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 today, Thursday May 8, 2014, this conference is being recorded. I would now like to turn the conference over to Mr. Justin Moisio of Investor Relations. Please go ahead sir.
Thank you. Good morning everyone, and thank you for joining Impac Mortgage Holdings first quarter 2014 earnings conference 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 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 we 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.
Okay. Good morning and welcome and thank you again our first quarter 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. Before I get into the specific financial performance for the first quarter I would like to make a few remarks on the residential mortgage forecast in general for 2014 along with comments on impacts first quarter performance.
First, the 2014 residential mortgage originations are forecasted to be [$0.1 trillion] nationally the lowest overall annual total since 2000. As everyone is aware the majority of the reduction in the originations in 2014 were refinances however purchase money transactions in the market are also forecasted to be down due to a significant loss of first time home buyers and the enactment of new financial regulations on qualified and non-qualified mortgages that is making it more difficult for certain borrowers to qualify for a home mortgage.
However even though these projects are not showing any expanding market in 2014 we believe that Impac is off to a pretty good start for 2014 even though we show a loss in the first quarter which was entire expected. Our positive outlook is because we have built our active pipeline to almost $400 million as of today putting us back on track for higher volumes for the second quarter. We’re also pleased that there has been a significant increase in our lock pipelines, gain on sale of revenue per loan which we will be showing up in the second quarter fundings.
In addition we are also excited to rollout our new non-QM loan programs which we expect will be later in the second quarter and which we will expand our robust agency in jumbo loan products. These programs are designed to make loans available to those individuals that were locked out in the market due to the financial regulations enacted in January. And I'll speak more to these new programs later on in this call.
I'd like to move on to a quick review of the first quarter financial performance. For the first quarter of 2014, the company reported loss of $3 million or $0.33 of diluted share. This compares to loss of $738,000 or $0.08 per diluted share in the first quarter 2013, but an overall improvement over a net loss of $3.7 million or $0.42 per share for the fourth quarter of 2013.
The first quarter loss was attributed to a decline in mortgage lending volumes and margins which was expected. Originations declined to $353 million from $673 million in the first quarter of 2013 and from $516 million in the fourth quarter of 2013, while lending revenues declined quarterly from the first quarter and fourth quarter 2013.
Primarily, this primarily was due to the sale of our brick and mortar retail branches at the end of 2013, which operated an average monthly loss of approximately $700,000. Without this retail production we had a higher concentration correspondent and wholesale volume which generally earned lower margins in retail. We had a 20% increase in our servicing fees of $1.6 million in the first quarter of 2014 and this compares to $1.3 million in the fourth quarter and a 15% increase from $1 million in the first quarter of 2013.
We also had a $3.8 million decline in our expenses in the first quarter of 2014 as compared to the fourth quarter of 2014 and a $9.1 million or 38% decline as compared with the first quarter of 2013.
Although the total originations have decreased 47% from the first quarter of 2014, this decline was expected as more than half was due to the sale of our brick and mortar retail branches, which we completed in the fourth quarter of 2013. Excluding the production from our retail branches, the decline in our origination volumes from the first quarter of 2013 were less than the rest of the mortgage market, which saw decline of 57% versus Impac’s 27% decline.
Further, because the first quarter drop in originations was predominantly due to decreased refinance activity, our purchase money transactions as a percentage of overall originations have increased in the first quarter to 42% as compared to 28% in the first quarter of 2013, while there was a slight decline as compared to the fourth quarter of 2013.
In the first quarter, gain and sale margins continue to compress creating challenges for the entire mortgage banking industry. Mortgage and lending margins declined in the first quarter of 2014 to 131 basis points as compared to 155 basis points in the fourth quarter of 2013. With the higher concentration of business-to-business originations which operates with less operational overhead and expenses in retail brick and mortar lending, margins also declined. However, in last half of the first quarter, we have started to see and margin compression has received and we have seen an increase in the lending revenues in April. Further with mortgage interest rates tempering due to the first quarter over the last 45 days, we have seen a 25% increase in our locks and lock pipeline to little over $400 million, showing a projected increase in revenues per loan of 20% over the first quarter’s funding.
With the increased pipeline, second quarter total originations are expected to be in excess of $450 million. During the first quarter, our correspondent channel contributed 65% of the originations, the wholesale channel contributed 28% of the originations with the remaining 8% coming from the retail channel as compared to 23%, 46% and 31% respectively in the first quarter of 2013.
The mortgage servicing portfolio declined in the first quarter to $2.2 billion at March 31, 2014 from $3.1 billion at December 31, 2013. This decline was due to a servicing sale of $522 million as well as the sale of AmeriHome and its servicing portfolio of $702 million, partially offset by the serving retain retained loans sales in the quarter of $374 million.
As a result of monetizing some of our mortgage servicing rights, the mortgage servicing rights decreased to $25 million as of March 31, 2014 as compared to $36 million at December 31, 2013. In response to the reduced production volumes and revenues, we took steps to align the operating expenses with reduced lending volumes and revenues.
At the end of the first quarter of 2014, our personnel expenses had decreased to $9.2 million with a monthly average headcount of 301 employees compared to $12.5 million and 458 employees for the fourth quarter of 2013 and $17 million and 586 employees for the first quarter of 2013.
In December 2013, we began to aggressively expand our sales force, hiring experienced lending sales personnel for wholesale and correspondent channels. To-date the results of our sales force expansion and our business to business channels has increased our coverage to over 40 sales people which is on track to exceed our second quarter target. Secondly, we have also seen an increase in number of brokers and bankers delivering multiple submissions each month along with increases in our active delivering customers.
Further expanding our delivering customer base outside and increased sales presence, we will be using our warehouse capacity to fund our newly launched emerging banker warehouse program. We believe that the initial response to the program is an indication that this will be a very successful sales tool in attracting the new emerging mortgage banking customers.
As a result, we have increased outstanding commitments to $24 million at the end of the first quarter. And although average balances have been low in the first quarter. We anticipate adding customers would assume to be announced emerging banking program through our corresponded channel and many correspondent program through wholesale channels.
These programs are expected to not only bolster volumes, but also increase the net margin income. With the servicing sale that I previously mentioned in the first quarter of 2014, we generated $5.8 million in additional cash proceeds. In the first quarter with an approximately another $600,000 in additional proceeds which will be received at the time of the transfer during the second quarter.
In addition, we received most recently. A very competitive bid on another $1.2 billion of servicing, which we plan on selling, which we plan on selling in the second quarter and the majority of these proceeds will be received in the second quarter. Also our long-term mortgage portfolio has recently performed much better than expected generating cash flows from the residual interest of $3.1 million in the first quarter of 2014.
With the residual cash flows of service and sales proceeds and proceeds from the sale of Amerhome cash on the balance sheet increased to approximately $19 million at the end of the first quarter and this is a $9 million increase from the end of 2013.
In the first quarter 2014, we've been developing a non-qualified mortgage loan program along with qualified mortgages not eligible for delivery to the GSEs and we're expecting to begin originating these loans during the second quarter.
We have also been developing relationships with other institutions in an effort to forge an alliance with a strategic partner to provide financing sources and exit strategy alternatives. We are currently in discussions with parties interested in funding and investing in these types of products and services that could create an opportunity for the re-emergence of a liquid private securitization market. We believe there is an underserved market for these programs where certain borrowers are finding financing to purchase or refinancing is either non-exister or available with stringent and costly parameters.
These underserved borrowers include statutory borrowers with good credit, borrowers who have a debt to income ratio of over 43% and borrowers that are outside the agency guidelines. We believe this is a market of significant size and I’m encouraged by the initial inquiries we have received from existing and new customers to originate these loans.
When Impac went public in 1995, we recognize a similar need for these underserved borrowers. As a result we created loan programs to meet the needs of borrowers that fell outside of the agency guidelines. Today's market is very similar to the market then. We were very successful in doing a portfolio of non-agency loans. We expect to leverage that experience in today's market and becoming a leader within the high credit quality non-QM mortgage space.
This concludes my prepared remarks. And I'd like to open it up for questions if anyone has it.
Thank you. (Operator Instructions) Your first question comes from the line of Michael Salzhauer of Institutional.
I guess I have been institutionalized. Good morning. What’s the business thought behind selling servicing now?
Well, it’s a matter of price.
Okay. So obviously you think that the pricing that you are getting is good, but typically business like yours will also talk about either retaining or acquiring servicing as a natural hedge. Do you think you don’t need that or you think the hedge doesn’t work?
Well, this is Ashmore. Right now over the last year, the valuations in terms of selling servicing has gone up dramatically. And we several times a month will look at our assumptions and what the market place is offering out there especially in light of what’s going on over the last three to six months, we decided that it would be a better use of capital to go ahead and sell it, so specially the prices they were at and we were able to sell that rather retaining it. That may change in the future if those servicing bids fall back over the next several months. And you have to remember that we’ve sold this in the midst with a very strong MSR bid market in light of the fact that the market has rallied significantly over the last 45 days and would have resulted in probably a fair value change in the MSRs in the books based on the railing that we have seen. So we thought it would be very smart move for us to move that servicing at a levels that were attractive and have the cash available to look for other alternative investments and that very well maybe additional MSRs if in fact the servicing bids back up.
Mike we’ve also had a history being in and out of the market with the servicing. And you are right, it is a hedge against future increase in interest rates which you got to remember we’re also putting on somewhere around $150 million to $200 million of new servicing each month.
Okay. And can you give us a little bit more color on the change in the call it the residual portfolio? Why do you think that’s happened and how you are carrying it and what the prospects are for it?
I am going to let Todd Taylor answer that but probably some of the improvement is just our efforts in the servicing side.
Yes, loss mitigation efforts were very significant over the last year or so. We’ve also seen a slowdown in the prepays and the percentage, higher percentage of performing borrowers. And as a result, a number of those residuals having margin -- over finalization account to release a larger amount of cash than what we had originally forecasted earlier in the year.
Okay. And so these are carried on your books based upon cash flow expectations?
Yes, that's right, to start here. That's the right.
All right. Thank you.
(Operator Instructions). There appear to be no further questions. I would now like to turn the floor back over to Mr. Tomkinson for any closing or additional comments.
We have no other comments. But those who’ve joined us for the conference call; we appreciate your attendance, and look forward to the next quarterly call. Thank you.
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.