Impac Mortgage Holdings, Inc. (NYSEMKT:IMH)
Q1 2016 Earnings Conference Call
April 29, 2016 12:00 ET
Justin Moisio - VP, IR
Joseph Tomkinson - Chairman & CEO
William Ashmore - President
Todd Taylor - CFO
Trevor Cranston - JMP Securities
Brock Vandervliet - Nomura Securities
Chase Basta - AWH Capital
Good day, ladies and gentlemen. Welcome to the Impac Mortgage Holdings First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Justin Moisio, Vice President of Investor Relations. Sir, you may begin.
Thank you. Good morning everyone. Thank you for joining us on our first quarter 2016 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.
Thank you, Justin. Good morning, and welcome, thank you for joining Impac's first quarter 2016 earnings call.
On the line with me, Joe Tomkinson, our Chairman and CEO, Todd Taylor, our Chief Financial Officer, and then I will begin with a brief review of the results for the first quarter of 2016. Management believes it is more useful to discuss operating income excluding changes in the contingent consideration, to get a better understanding of the operating results of the company.
In the first quarter of 2016, operating income, excluding contingent consideration changes, increased to $7 million, as compared to a net loss of $593,000 in the fourth quarter of 2015. GAAP net earnings in the first quarter of 2016 were $981,000, as compared to net earnings of $10.7 million in the fourth quarter of 2015. In the first quarter of 2016, origination volume increased 21% to $2.3 billion, as compared to $1.9 billion in the fourth quarter of 2015.
During the first quarter, retail originations through the CashCall Mortgage channel continued to be the main driver of total originations, representing approximately 70%, or $1.65 billion of the total originations. The increased originations in the first quarter put the company ahead of its business projections for 2016, and should keep us in the Top 20 residential mortgage originators in the country. Gain on sale margins increased by 43 basis points to 230 basis points in the first quarter of 2016, as compared to the fourth quarter of 2015.
The company successfully reduced the longer turn times in closing loans it experienced during the fourth quarter in its wholesale and correspondent channels, as a result of the closing demands from the TRID regulatory requirements implemented last October in 2015. These turn times reduced through automation and training on the TRID process, not only for our employees but also for our customers to expedite the total fundings. The company is and will be making a commitment to enhance its technology platform to not only increase customer satisfaction, but also enhance our efficiencies to reduce overall costs and time to close and fund loans. Further during 2016, the company is focusing on leveraging technology to automate systems, roll out business intelligence software that will allow continued improvement in efficiencies, user experience, and data accuracy.
Consistent with the increase in originations in the quarter, personnel expenses and business promotion increased by 14% in the first quarter of 2016, as compared to the fourth quarter of 2015. This was primarily a result of an increase in business promotion, in an effort to capture an increased amount of refinance volume during the first quarter of 2016. In line with our retail business model, the increase in business promotion was across all possible lead generation sources, which includes internet SEO, SEO search engine optimization, outbound mail campaigns, mortgage credit triggers, traditional radio and cable advertising, referrals, and also inquiries from our current portfolio.
In January, 2016, the company decided to exercise the option to convert $20 million of debt to common stock increasing book value by $20 million, and saving the company $375,000 in quarterly interest payments, or an annualized interest expense savings of $1.5 million. The conversion of the convertible stock was consistent with our push to reduce expenses, but also improve the balance sheet to increase book value.
During the first quarter of 2016, we have consolidated certain management and operational functions in our wholesale and correspondent channels, which have already improved efficiencies by reducing personnel, flattening the organizational structure, and merging certain operational functions. By eliminating redundancies that existed between the two channels, and creating a more simplified organizational structure, we expect to not only see increased production from our wholesale and correspondent channels, but further increases in efficiencies, which should help to improve margins and improve pricing for our customers.
In addition to the management and operational changes, we plan to improve our manufacturing process through technology. This includes automating certain functions, and soon-to-be rolled out document recognition technology, that will greatly increase efficiencies and scalability in our business-by-business channels. As of March 31, 2016, the company's mortgage servicing portfolio increased to $5.2 billion, a 45% increase from December 31, 2015 which increased retained MSRs to $44.3 million as of March 31, 2016 as compared to $36.4 million at December 31, 2015.
During the first quarter of 2016, we decided not to sell our MSRs as we have in prior quarters, the increase in the servicing portfolio resulting in higher than expected mark-to-market losses. Instead of selling our MSRs at a lower price due to lower interest rates, we focused on recapturing our run-off. During the first quarter into April, we experienced monthly retention percentages as high at 84%. This is an absolutely amazing retention rate, that we believe that can be sustained on our retained MSR portfolio.
Going forward, we will selectively sell certain portions of our retained MSR portfolio, as we manage our cash positions. Even though we experienced a large MSR valuation write-down during the first quarter, we have seen the flip side of this in April, as higher interest rates through today have seen our portfolio valuation increase upwards of $2 million.
The company's cash position decreased to $18.5 million as of March 31, 2016 as compared to $32.4 million at December 31, 2015, primarily, as a result of increase in mortgage servicing portfolio. As mentioned earlier, we will continue to monitor our cash position, and selectively sell MSRs to maintain solid liquidity levels. In December 2015, the company entered into equity distribution agreements to sell common stock through an after-market transaction or ATM. During the three months ended March 31, 2016, the company sold a total of 155,420 shares, at a weighted average price of $13.85 per share. Providing proceeds to the company of approximately $2.1 million, net of sales commissions. The net proceeds were used to retain more MSRs.
The ATM gives the company another tool which it can raise capital incrementally, without putting downward pressure on the stock price. As an update to our last conference call regarding our efforts to start a consumer loan division, the company decided to put this endeavor on hold. During the first quarter, companies offering consumer loans experienced a decrease in investor appetite from purchasing these loans. As a result of oversaturation in the consumer lending space, which in turn depressed prices. Currently, the resulting economics are not compelling enough to enter into this lending space at this time. However, we will monitor the sector, and may revisit it in the future, if the economics makes sense for the company.
Now let's move on to discussing Impac's level in the non-QM lending space. The non-QM market is expected to be a sizable segment of the overall mortgage production in the coming years, and as such we are committed to growing this portion of our originations. In our continuing effort to improve non-QM products, we made further enhancements to our guidelines during the first quarter of 2016. These changes will further provide flexibility to help qualify creditworthy borrowers that are unable to get financing from current traditional mortgage programs. To provide an idea of what these originations look like, here are some specific data points.
The weighted average FICO is 740, the average loan amount is around $420,000. The rate average loan to value ratio is 63%, and our current twelve month prepay speeds for the portfolio originated since June 2016 are less than 5%. Therefore we believe that this product is not a niche product, but rather part of our full spectrum of lending, and that the loans that we are originating, are all high credit quality coupled with low prepay speeds. Further to better represent the essence of this program, Impac is set to relaunch our non-QM loan programs as i-QM, the intelligent non-QM mortgage engineered with common sense. This will be done at the national MBA in the middle of May. Consistent with our strategy to increase non-QM originations, the company will continue to enhance our proprietary technology called iDASL, Impact direct access system for lending. Launched in 2015 as a non-QM pre-qualification engine in 2016 we expect to use iDASL to provide a full automated approval process for our non-QM loan products.
With regard to overall loan originations have seen our locked pipeline increase in the end of the first quarter, and into the second quarter. At February 29, 2016, our locked pipeline was $762 million. As March 31, 2016 our locked pipeline had increased to $790 million, and currently our locked pipeline has grown to $940 million. This pipeline growth has translated into increased mortgage origination volume in the subsequent months. In February, origination volume increased to nearly $800 million. In March, origination volume grew to $1 billion, and based on our locked pipeline the month of April is expected to also to be near that $1 billion in total originations.
In closing, I would like to comment that first quarter origination volumes and operating income sets the company up with a great start to 2016. We are especially pleased with our performance in the MSR retention, hitting an amazing 84% recapture rate last month. Indications are that we should be able to actually improve on this percentage going forward.
With the operational income improvement in this first quarter of 2016, we are moving closer to the levels we experienced in the first half of 2015. Additionally, the company is encouraged to have such a well-respected research team initiate analyst coverage on Impac earlier this month. This is yet another sign of the company's transformation since surviving the mortgage crisis in 2007.
Now I'll close my prepared remarks, and respond to questions received via email, and then open up the call for questions.
The first question we received, is regarding the deferred tax asset, we noticed that the company did not recognize a portion of this in the first quarter of 2016, and the last substantial amount of DTA came during the first quarter of 2015. Can you talk about the methodology for valuating this DTA, and whether some of the $266 million might be recognized through earnings any time soon? Todd?
Yes, I'll take that question, Justin. Hi, this is Todd Taylor. Each quarter we analyze the DTA and taxable income projections, to determine if the DTA is appropriate. In the first quarter of 2015, this analysis resulted in the recognizing a DTA of $24 million. Since then, our analysis has not resulted in a change of the DTA. To the extent expected future taxable income projections significantly increased in the future, we would expect to recognize more DTA at that time.
Thank you. Our next question, we received states, what is the market looking like for acquisitions? Also are you looking at any bolt-on acquisitions? Joe, would you like to speak to that?
Sure. We're always looking for opportunities. I recall a couple of years ago, I had mentioned that in one of the calls that I had a couple of tricks up my sleeve, and then we purchased CashCall, which was a very fortuitous purchase. So I'll just repeat it again. I have a couple of tricks up my sleeve, and I'm looking at some very good opportunities.
Great, thank you for that. Next question, what percentage of originations were non-QM, Bill, maybe you could speak to that?
Thanks, Justin. The non-QM portion of the business is growing, albeit a small portion of the overall originations. We have a pipeline that's approaching $125 million. We are looking to fund, as we mentioned or didn't mention, we funded about $75 million in the first quarter. We're looking to increase that in the second quarter and throughout the remainder of the year. We are seeing a number of new originators in addition to our own CashCall originations that are specifically coming in and signing up, that are going to be originating this non-QM product.
So the last 1.5 years has really been an R&D project, build in and out both processes, guidelines, et cetera. So we feel very, very comfortable. We do have that down, and we're getting a regular flow of business on a daily basis, and so we expect that to be a bigger portion, albeit still overall a small portion of overall percentage of the originations.
Great. And those are all of the questions we received ahead of the call. So we would like to open up the call now to our listeners for Q&A.
[Operator Instructions] Our first question comes from the line of Trevor Cranston with JMP Securities. Your line is now open.
Hi, good morning, thanks. One follow-up on the non-QM topic first. Can you just talk about what you're seeing in terms of investor interest, if there has been any kind of expansion in what you're seeing from kind of the number of investors who are interested in those loans, or are you guys still primarily working with the one investor partner? Thanks.
Currently we are still working closely with our investor partner, however we have significantly seen an increase in investor appetite, that are sourcing us out either through reverse inquiries or directly. But we haven't to date sold away from our existing investor partner. However, that's not going to preclude us going forward, that might in fact happen. But right now, we definitely have seen an increase in the investor demand for that product.
Okay, got it. And on the MSRs, I understand you said you kind of look to strategically sell some. Can you give us a sense of kind of what size you would be comfortable taking the MSR portfolio up to currently, especially given that it sounds like origination volumes are pretty healthy at the moment?
I think what we want to do is we want to keep it near kind of the levels where we are in the $5 billion to $7 billion range, if not a little bit lower, but we want to be opportunistic in terms of how we're going to be selling those MSRs. With such a high retention rate of 93% on the CashCall specific portfolio, and in the 40s of the non-CashCall, with a blended of, as I mentioned earlier, 84%, it really is a big plus for us to be able to hold on to the MSRs and be able to retention. So that will also play into what portions of the originations will be sold away. It is more advantageous let's say for us to sell Ginnie Mae MSRs, than maybe the conventional, so we're exploring, and we will be keeping it near that $5 billion to $7 billion range I believe throughout the rest of the year.
Got it. That's helpful. And last thing from me. The gain on sales margin for the quarter, can you say how much of the increase this quarter was attributable to the kind of shift in the mix towards more retail origination, or was there also a component that was margins within each channel expanding?
We don't really have that right here in front of us but we can get back to you, Trevor, on that.
Okay. Thanks, appreciate it.
And our next question comes from the line of Brock Vandervliet with Nomura Securities. Your line is now open.
Thanks for taking the question. I guess I missed the FICO average for your non-QM originations to date. What was that?
740, as a weighted average. Predominantly, it's in the low 700s to the mid-700s, but it a weighted average today of 740.
So is it fair to characterize these as basically very near prime that have some characteristic that just knocked them out of agency contention as opposed to going into deeper, sounds like you're not going into deeper credit profiles yet?
No, not now. We've looked into it but not -- we're basically originating really above 680 FICO. And you're exactly right, the two main products we have; one is a like an agency near miss where it might have an interest-only component, it might be off a DTI over 43, it might have multiple financed properties although those -- even though it is -- we have tax returns and paycheck stubs on those particular borrowers, those items will kick it out of a QM into the non-QM. And the other predominant program is an alternative documentation program, so instead of tax returns, we use bank statements. So those are the two main products that are driving the total production. We do have a smaller component of non-owner but that is qualifying the property as opposed to the borrower. So those make up the three main products; predominantly, the two that I mentioned earlier are the ones that are driving the total production.
Do you want to -- from a credit perspective, it would be looked upon as prime right now?
Yes, that's true.
And the delinquencies on this is -- I think it's zero, isn't it or one loan [ph]?
I think we have one loan that's like 50% LTV loan. There has been some diminishment in the guy's income, so -- but that's a loan, because of the loan-to-value that even if we have to foreclose on the borrower, we will not have a problem there in terms of any losses.
Yes. And you described the prior 18 months has been the experimental R&D phase. Now that this template is established, what do you think the major constraints are to really growing this volume? Is it internal issues with yourselves or is it just getting your partners to really focus on this new template that you have out there, and you expect the volume to grow from here?
Well, part of it is the fact when you got heightened origination volumes at low interest rates, the usual originators, and that includes CashCall Mortgage, really concentrate on the ability to originate in that low interest rate environment. However, the more that CashCall retail and our other business partners originate as brokers and bankers, originate into the program because we advertise in CashCall, specifically into these programs as opposed to using it as the follow-up for the agencies, you're going to see the volume start growing because you really need to originate into the program.
So as I said, the main driver that we've seen over the last year is just there has been heightened origination volume, but even the increased volumes in this first quarter, we still saw gains in the overall originations of non-QM.
Let me -- can I expand on that a little bit? Also as Bill said, so many originators are concentrating on the low hanging fruit on the refinance market. But as that market which we fully anticipate begins to slow down, then originators are going to be looking for a more viable long-term product. Which is going to satisfy the purchase money market. And that is the program that we have developed, so that currently the Realtor, he's showing property, and in the past maybe he can qualify one or two people under the Fannie Freddie Ginny guidelines with a 43% DTI. Now he can qualify for that same property, maybe ten people, because our DTIs with a higher FICO will go up to as much as 50%. It's more of a common sense make sense loan. And we've seen this in the past. The pattern is pretty clear.
So as the conforming market begins to slow down, the non-conforming market will pick up. And that's the advantage that we have over so many others. Not only do we have our own retail channel, but we also have the correspondent and the wholesale channel that will take advantage of this product. We have been seeing more and more customers signing up and understanding the program.
Got it. Okay, thank you. That's very exciting.
[Operator Instructions] And our next question comes from the line of Chase Basta with AWH Capital. Your line is now open.
Hi, good morning, guys. It looks like you guys ended up paying the sellers of CashCall around $42 million in earn out payments for 2015 performance. Just wondering if you can tell us what the amount will be for Q1?
Depends on the ultimate payout, and it depends on the servicing sales, and the valuation of the servicing. So no, we can't tell you it's been reduced to 55% for 2016.
Okay. So we can just look for that in the Q?
Okay. All right, thanks.
I'm showing no further questions at this time. I would now like to turn the call over to Mr. Ashmore.
I would like to thank everyone for participating, and we will talk to you at the end of the next quarter. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may now disconnect. Everyone have a great day.
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