Impac Mortgage Holdings, Inc. (NYSEMKT:IMH)
Q2 2014 Earnings Conference Call
August 7, 2014 12:00 p.m. ET
Justin Moisio - IR
Bill Ashmore - President
Todd Taylor - CFO
Ron Morrison - General Counsel
Jim Fowler - Harvest Capital
Ladies and gentlemen, thank you for standing by, and welcome to the Impac Mortgage Holdings, Inc. Second Quarter 2014 Earnings 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, August 7th.
I'd now like to turn the conference over to Justin Moisio, Investor Relations. Please go ahead, sir.
Thank you. Good morning, everyone. Thank you for joining Impac Mortgage Holdings second quarter 2014 earnings call. During this call, we'll 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'd 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 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'd expressly disclaim any duty to update the information herein.
I'd like to get started by introducing Bill Ashmore, President of Impac Mortgage Holdings.
Thank you, Justin. Good morning. Welcome and thank you for joining Impac's second quarter 2014 earnings call. I have in line with me, Todd Taylor, our Chief Financial Officer; and Ron Morrison, our General Counsel.
I'll begin with a brief review of the results from the second quarter of 2014. For the second quarter 2014, the company reported net earnings of $82,000 or $0.01 per diluted common share, an improvement over a net loss of $3 million or $0.33 per share for the first quarter of 2014.
Our total originations increased to 465 million from 353 million in the first quarter of 2014. Also, mortgage lending revenues and margins increased in the second quarter of 2014 to 6.5 million or 141 basis points as compared to 4.6 million or 130 basis points in the first quarter of 2014.
The increase in lending volume in the second quarter was predominantly due to an ongoing low interest rate environment, and an increase in our correspondent originations as compared to the first quarter of 2014.
Mortgage lending margins also improved over the first quarter due predominantly to a higher concentration of government loans, which have higher margins.
The company did see a decline in volumes from the second quarter of 2013, which was primarily due to the sale of our brick and mortar retail branches at the end of 2013, which operated in a monthly loss of approximately 700,000. Without this retail production we had a higher concentration of correspondent wholesale volume which operates with less operational overhead, expenses and compliance risk.
The company now has the ability to increase our focus on business-to-business originations, which provides the ability to be more scalable and flexible as mortgage volumes fluctuate. To this point, we've already seen significant increases in volume over correspondent division. A significant portion of this income is due to our new bulk delivery channel, which will also result in less operation cost and greater net profitability as well as create an expedited process for our customers.
During the second quarter, the company made several changes on the processing and prioritization of loans originated and delivered through its business to business channels, in addition to further rolling out of its new loan origination system.
As a result, we're seeing improved conversion ratios from submission to funding and acquisitions, improving conversion ratios are expected to achieve better efficiencies in our lending operations and improved customer service turn times.
Refinement of these processes in customer-specific prioritizations along with more automated workflow from our new origination system will continue into the third quarter and is expected to produce further operational efficiencies.
As a result of these efforts, total expenses decreased by approximately $1 million in the second quarter of 2014 as compared with the first quarter of 2014. This 6% reduction in expenses from first to second quarter also produced a 32% increase in originations from quarter-over-quarter.
As a percentage of overall originations, our purchase money transactions continued to increase in the second quarter of 2014 to 53% as compared to 42% in the first quarter of 2014.
During the second quarter, our correspondent channels contributed 58% of originations with the wholesale channel contributing 39% with the remaining 3% coming from retail as compared to 65%, 28% and 7% respectively in the first quarter of 2014. We expect the correspondent channel to continue to be the majority of originations through 2014.
Over the last 45 days, we've seen a 30% increase in our locks and lock pipeline to approximately 540 million. The increase in our lock pipeline has been predominantly a result of our correspondent channel. With increased pipeline, third quarter originations are expected to be significantly greater than the second quarter of 2014.
During the month of July, the company had funded or acquired over 270 million in mortgage loans, which should continue to result in what the company believes will be higher quarterly volumes for the remainder of 2014.
The mortgage servicing portfolio declined in the second quarter of 2014 to 1.6 billion at the end of the second quarter from 2.2 billion at March 31, 2014. This decline was due to servicing sales of $1 billion in the quarter, partially offset by the servicing retained loan loss in the quarter of 432.5 million.
For the first six months of 2014, we sold $1.6 billion in servicing sales generating almost $19 million in cash flow. As a result of the monetization of some of the mortgage servicing rights through the April mentioned servicing sales, the value of our mortgage servicing rights decreased to 16.2 million at June 30, 2014 as compared to 36 million at March 31, 2014.
The company will continue to selectively sell servicing to maintain adequate liquidity and capital to grow and expand its mortgage lending and warehouse businesses.
In the second quarter of 2014, mortgage servicing fees decreased to 1.3 million from 1.6 million in the first quarter of 2014, which was a result of the servicing sales completed during the first quarter.
Further expanding our delivery and customer base, we'll be using a warehouse capacity to fund our newly launched emerging banker warehouse program. We believe that the initial response of the program is an indication that this will be a very successful sales tool in tracking new emerging mortgage bank customers in the future.
As a result, we currently have outstanding commitments of approximately $38 million and we expect that during the third quarter there will be a high utilization rate of these warehouse commitments that have been completed during the first half of the year.
For the second quarter of 2014, real estate service fees were 4.4 million, a $700,000 or increased over the first quarter of 2014. While this increase in fees is primarily related to seasonality, the company continues to generate consistent revenues from our real estate service fees business segment.
Also, our long-term mortgage portfolio has recently performed better than expected, generating cash flows from the residual interest of $5.7 million in the first six months of 2014. Based on continued improvement in the second quarter, the estimated fair value of these trust assets has increased. Further, the cash flows from the company's residual interest continue to be an important capital source as we expand and grow our businesses.
I'd like to turn to our recent developments. In the second half of 2014, we anticipate a continued increase in overall originations as well as our operational efficiencies. The company will work to increase originations predominantly through its business to business channels by further expanding our sales force, hiring experienced lending sales personnel for our wholesale and correspondent channels and increasing efficiencies and service to our customers.
In addition, we intend to leverage our re-warehousing division and target those customers to increase the capture rate for approved correspondent sellers' business as well as expand our active customer base to include new customers seeking warehouse lines.
We will continue to increase operational efficiencies and pull-through rates by completing the implementation of our new loan origination system across all three origination channels streamlining origination process and focusing on an analytics-based customer management methodology. Further, we attained our second quarter goal to have in excess of 40 sales personnel in place by the end of the quarter.
The trend to the first quarter continues through midyear with increase in active delivery customers with more brokers and bankers delivering multiple submissions within the month. These trends were important, because it has and will lead to higher pull-through rates that will continue to reduce operational expenses and help overall net margins.
Also hoping to increase originations through year end will be four additional east coast and mid western states including New York that in fact recently received licensing approvals to new business. These states are very important to our national footprint because it represent a large portion of nationwide mortgage production.
We have finalized development of our non qualified mortgage loan programs along with qualified mortgages not eligible for delivery to the GSEs and we are in the process of launching these products, these product offerings, and are expecting to begin loan funding and acquisitions during the third quarter. We believe there is an undisturbed market for these programs where certain borrowers are finding financing for purchase or refinances as either non-existent or available with stringent and classic parameters.
These undisturbed borrowers include, for national, self employed borrowers with good credit, borrowers who have a debt to income ratio over 43%, and borrowers that are slightly outside of the agency guidelines. We believe this is a market of significant size and are encouraged by the initial inquiries we have received from existing and new customers that intent to originate these loans after they have gone through our training webinars.
In fact during our first week of training a total of 450 individuals were trained representing over 200 approved customers. We have developed four initial loan programs which we are marketing as Alt-QM. In the development of these new loan programs we worked closely with outside council to ensure we are in strict compliance with the new Dodd-Frank legislation regarding how to document and qualify borrowers' ability to repay the loans.
In addition, the development of these programs includes significant credit analysis on the guidelines and the program parameters to ensure that the mortgage assets that are originated perform at the higher end of the credit spectrum. These programs' features include loan balances up to 3 million, interest only payment option, slightly higher debt to income ratios, alternative documentation for self-employed borrowers, so-called Fannie/Freddie near misses, foreign national borrowers and non-owner borrowers.
Along with the development of these non-agency loan programs we have launched Impac Direct Access System for Lending or IDASL; it's our automated eligibility engine that allows our customers to quickly and easily determine if the loan is eligible for one of our Alt-QM programs versus a conforming agency loan.
We will continue to improve this automation to be able to enhance underwriting, evaluate the collateral, and automating fraud review prior to the loan being submitted. We expect IDASL to normally be an important operational tool, but also deliver a better customer service experience when originating our Alt-QM loans.
In conjunction with launching these new Alt-QM products we are establishing a strategic relationship with a strong international based partner which will provide balance sheet capacity to fund these non-conforming loans, the loan impact to retain the servicing. Eventually it is the intention to securitize these loans and retain residual interest for long-term investment with our strategic partner.
As mentioned earlier, our efforts to bolster our sales coverage and customer base during the first half of 2014 has resulted in fundings for July of over $270 million with a pipeline at the beginning of August sufficient to project for projected fundings in the third quarter approaching 750 million. This does not take into consideration any incremental pick up for Alt-QM loan programs that are rolling out during the third quarter. This production enrichment in the third quarter should be positive for earnings since expenses are expected to remain relatively flat from the second quarter.
This concludes my prepared remarks, and I'd like to answer a question we received prior to the call, and then open up the call for other questions.
We received the following question; income tax expense for the quarter seemed high relative to net income. Could the tax expense be further explained? If the tax expense was primarily related to alternative minimum taxes associated with taxable income generated from the sale of the AmeriHome and mortgage servicing rights, how much longer will these tax expenses continue?
So now, I'd like to turn it over to Todd. Could you please respond to this question?
Yes. The sale of AmeriHome and mortgage servicing rights in the period generated taxable income. The alternative minimum tax rules only allowed 90% of taxable income to be applied against our NOL carry forward. The remaining 10% is tax at a Federal rate of 20%resulting in an effective tax rate of 2% on taxable income. So to the extent, we continue to generate taxable income, we will see a similar tax, which will be close to about 2% of our taxable income that we will record each period.
Okay. Thanks, Todd. Now, I'd like to open up the call to any additional questions to the audience.
Thank you. (Operator Instructions) You have a question from Jim Fowler with Harvest Capital.
Jim Fowler – Harvest Capital
Thanks for taking the question. I'm wondering if -- I know it's early, but I am wondering if you might talk a bit about the net economics of the new products, where they might be -- it seems like they will be priced at a premium because they will be one of the few lenders that will be out in the market with the products, but I'm wondering how much of that will accrue to your benefit in gains on sale of the product for how much of that will remain in the coupon that goes to the investor. Thanks a lot.
Yes. Obviously a lot of this is untested territory. We've been working very, very hard not only on the guidelines, but also on how we are going to price this. Basically the main products up there today are your prime, jumbo non-agency products for, let's say 5/1 ARM that are pricing in the 3% region on up to you've got more subprime non-QM products that's pricing upwards of the 9% to 11% region. Where we are going to see a predominance of products is going to be in a 5/1 ARM, we do apply 1/7, 1/10, but we think most of th eproducts are coming in the 5/1 ARM.
And we're based on the different programs that we have, we're going to see pricing that's going to be starting somewhere in the high 4s to low 5s on up to 7% to 8%. And then depending upon what attributes, the main attribute in adding to, let's say, we're going to carry it with the main effect on subordination levels would be LTV. So we're going to have the biggest additions to these basic coupons with LTV, DTI and FICO. So, once you come through with blended average of all things, you're going to be probably in the high 5s to 6% region as it grows coupon, which we'll retain servicing on that (inaudible), and the rest will be put on balance sheet until we accrue sufficient enough to test the securitization market.
We feel pretty confident we've got an idea where the subordination levels are, and we think that in terms of the economics, that in the beginning it's not going to give us the economics that we believe we'd enjoy later on, because this is similar to what we saw happened in the '96-'97 to '99-2000 on our other products we generated, which were (inaudible) back then [initially] (ph) coming up. You're not going to quite get the economics that you'd like, but I think it's going to be sufficient relative from a balance sheet standpoint to provide attractive returns.
I don't think you're necessarily going to out of the gate be getting double-digit returns, if that kind of answers your question.
And there are no further questions at this time.
Okay, no further questions. I appreciate everybody's participation here. Have a good day. Thank you very much for attending.
Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation and ask that you please disconnect your line.