Impac Mortgage Holdings, Inc. (IMH) Q4 2022 Earnings Call Transcript

Impac Mortgage Holdings, Inc. (NYSE:IMH) Q4 2022 Results Conference Call March 16, 2023 5:00 PM ET

Company Participants

Joe Joffrion - General Counsel

George Mangiaracina - Chairman and CEO

Jon Gloeckner - Principal Accounting Officer

Justin Moisio - Chief Administrative Officer

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Impac Mortgage Holdings Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the conference over to Joe Joffrion, General Counsel. Please go ahead.

Joe Joffrion

Good afternoon, everyone, and thank you for joining Impac Mortgage Holdings Year-End 2022 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 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 and Form 10-Qs filed 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 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 George Mangiaracina, Chairman and CEO of Impac Mortgage Holdings. George?

George Mangiaracina

Thank you, Joe. With me this afternoon are Jon Gloeckner, our Principal Accounting Officer; and Justin Moisio, our Chief Administrative Officer.

On March 8 of last week, the company had issued a business update discussing it, how it has proactively adjusted its strategy to navigate market and industry conditions, including a pivot in its business model and an aggressive expense reduction initiative. Events of the recent week evidenced an accelerating deterioration of market conditions and operating environment.

The residential mortgage market has been challenged by adverse macroeconomic conditions ushered in by rate and credit dislocation that commenced in the fourth quarter of 2021. Non-transitory inflation and Fed tightening, coupled with widening credit spreads, has reduced the addressable market for our product offerings. Despite competitor consolidation and closures, excess industry origination capacity remains as evidenced by participants pricing to decrease net margins in pursuit of market share.

The company has no intention of engaging in systematic noneconomic activities. The company has no visibility as to when these dislocations will abate and return the industry to normalized volumes and margins. The proactive initiatives that the company undertook in 2022 and early '23 have aligned the stakeholders of the company's capital stack and reduced its overall operating expense load. These accomplishments continue the theme of eliminating complexity and reducing costs from the company's corporate and operating verticals, thus permitting the company to explore complementary strategic ventures, adjacent revenue opportunities and attendant capital raise and corporate finance activities.

Jon Gloeckner will now discuss the financial results for 2022. Jon?

Jon Gloeckner

Thank you, George, and good afternoon, everyone. For the fourth quarter, the company reported a GAAP loss of $11.8 million as compared to a loss of $13 million for the third quarter and a gain of $3.6 million in the fourth quarter of 2021. Our fourth quarter adjusted loss was $11 million as compared to an adjusted loss of $12.6 million in the third quarter and a loss of $5 million in the fourth quarter of 2021.

The financial results for the quarter and year reflect significant market pressure as a result of increasing interest rates, inflation, credit and liquidity risk. Our results as well as many of our peers' performance reflects the intense pressure on mortgage originations due to the dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market, which has suffered from a lack of housing inventory and significant increase in mortgage interest rates resulting in affordability issues.

As we have discussed on previous calls this year, beginning in the first quarter, we were deliberate and decisively more conservative in our lending approach, adopting a risk-off defensive posture, sacrificing results for liquidity and stability, which we felt was the appropriate path heading into steep rate headwinds.

Our originations and margins have suffered as a result, with originations declining to $21.5 million in the fourth quarter as compared to originations of $62 million in the third quarter of 2022. During 2022, total originations decreased to $639 million with margins of 91 basis points as compared to $2.9 billion in 2021 with margins of 225 basis points. Our risk-off posture in conjunction with the rate shock and increased fallout resulted in continued origination and pipeline reductions, which were the primary drivers of lower margins during the year.

Operating expenses were flat as compared to the third quarter at $11 million but decreased 46% or $9.5 million as compared to $20.5 million in the fourth quarter of 2021 primarily due to a reduction in personnel costs, which decreased $8.2 million from the same quarter in 2021. The decrease in personnel costs during the fourth quarter was primarily the result of a decrease in variable compensation commensurate with reduced originations as well as a reduction in head count to support reduced volume. Head count declined from approximately 330 at year-end 2021 to 80 full-time employees as of today.

Additionally, while our fourth quarter operating expenses were flat as compared to the third quarter, operating expenses included approximately $2 million of legal and professional fees related to our preferred exchange offers that were completed during the quarter.

With minimal active loans in the pipeline, the company had no outstanding warehouse or counterparty obligations associated with its wholesale activity. At December 31, 2022, we did not renew our $25 million warehouse facility, thereby further reducing warehouse capacity to $16 million with one counterparty. As mentioned in the company's business update last week, the pivot to a broker model -- with the pivot to a broker model, we will not be relying upon warehouse borrowings to fund our originations.

In December, the company negotiated a buyout of its legacy commercial lease for $3 million, reducing its office space footprint from 120,000 square feet to 19,000 square feet. The relocation was made possible by the company's ability to maintain a hybrid and remote workforce both during and following the COVID crisis, thereby minimizing physical office space needs. The new lease terms -- the lease terms of our new building run through July 31, 2025, with a total expense of approximately $800,000 over the term of the lease as compared to $8.8 million that remained under the prior lease, a total savings of nearly $5 million.

Additionally, we continue to carefully manage our liquidity as evidenced by our restricted cash position of $26 million and $9.4 million in unencumbered loans on balance sheet at year-end.

In the first quarter of 2023, as part of the CARES Act, the company filed for $7.3 million of employee retention credit, which is expected to be received by the end of 2023.

Based on our current cash position, borrowing resources and defensive posture, we feel we have the liquidity necessary to meet our near-term production needs.

I will now turn it over to Justin to discuss recent developments within our origination platform. Justin?

Justin Moisio

Thank you, Jon. Good afternoon, everyone. Our production volume in the fourth quarter, as with the third quarter, is reflective of the current challenges in the mortgage market, impacting mortgage lenders both on the credit and rate side of the business, resulting in a reduction in purchased loans due to a decrease in home purchase affordability and also in refinance volume due to the number of loans that had previously refinanced during the preceding historically low interest rate environment.

During the fourth quarter, our total originations decreased to $22 million as compared to $62 million in the third quarter. NonQM originations decreased to $19 million as compared to $50 million for the third quarter.

In line with the previously discussed expense reduction initiatives, we recently repositioned our retail consumer-direct call center into a mortgage broker fulfillment model. The shift to a broker model allows the company to originate a variety of products that serve its national consumer base at a reduced cost per loan due to significant expense abatement relative to specialized staffing, operations, technology and business promotion.

The broker channel will support an expanded suite of loan products and programs, offering enhanced flexibility with respect to credit, pricing, best-in-class technology and product development and maintenance We've partnered with established lenders to ensure our consumers continue to receive an optimized experience. We do expect NonQM originations to continue to be the dominant product in the mortgage broker channel.

This pivot to a broker model will also allow the call center to continue to leverage the brand recognition associated with the CashCall Mortgage name in the direct-to-consumer space.

From an expense management perspective, we continue to adjust our marketing spend to calibrate to a reduced loan officer head count as well as the deterioration of lead quality of borrowers looking to transact and the shrinking addressable market at these rate levels.

Our business promotion expense decreased to $261,000 in the fourth quarter, a 52% decrease from the prior quarter and an 88% or $2 million decrease from the fourth quarter of last year. We will continue to adjust the spend to support our broker model origination capabilities while continuing to focus on expense management.

As mentioned in our business update last week, the company's third-party origination channel, in line with industry cohorts, experienced significant volume and margin deterioration in 2022. These conditions have persisted into the first quarter of 2023. And as a result, the company has decided to wind down its operations within the TPO channel.

The company honored its pipeline and related obligations and commitments to its business to consumer and business-to-business partners as we have done historically. The company remains in good standing with its warehouse lenders, whole loan takeout investors, vendors and subservicing counterparties.

In light of the challenging market ahead, the company remains steadfast in its commitment to managing risk within its core business. As mentioned during our previous earnings call, this risk-off approach includes exploration of opportunities that may complement or supplement the services we offer today and contribute to increasing top line revenue and improving operating results.

At this time, that concludes the financial results and our prepared remarks. Any questions received by shareholders prior to the call have had corresponding answers incorporated within our prepared remarks.

I wanted to thank everyone for joining us this afternoon, and we'll speak to you in the near future. Thank you.

Question-and-Answer Session

Operator