Impac Mortgage Holdings, Inc. (IMH) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the first quarter earnings conference call. Please be advised that today's conference is being recorded. With that, I would now like to hand the conference over to your speaker today, Justin Moisio. Chief Administrative Officer. Thank you, and please go ahead.
Justin Moisio: Thank you. Good morning, everyone. Thank you for joining Impac Mortgage Holdings First Quarter 2021 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 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.
George Mangiaracina: Thank you, Justin. Jon Gloeckner, our Principal Accounting Officer; and Tiffany Entsminger, our Chief Operating Officer, will join me for prepared remarks. Justin will be back along with Tom Donatacci, our Chief of Staff; and Joe Joffrion, our General Counsel, for the question-and-answer segment of today's call. On this call, we will discuss the overall state of the business and key accomplishments for the first quarter of 2021 including the continued momentum from the relaunch of the company's consumer direct and third-party origination or TPO channels in the second half of 2020. Approximately 8 weeks ago, in our 2020 year-end earnings call on March 11, we discussed the company had continued to grow our retail and TPO platforms and have recorded a second consecutive quarter of profitability, while continuing to maintain our focus on liquidity and risk management post the 2020 COVID crisis. The company's last business update expressed the view that market conditions in the GSE space have begun to normalize, with margins narrowing as the capacity to originate and process loans in the industry began to catch up with consumer demand. The company is not immune to the margin compression that presented itself in the fourth quarter of 2020 and that has continued into the second quarter of 2021. We also referenced the welcome shift of increasing investor demand, normalization of guidelines and improved valuations for our NonQM product and competency in the firm that we are currently investing in with product innovation, technology enhancements and sales and operations talent. Tiffany will discuss margins across products and channels in further detail later in the call. The company reported a net GAAP loss of $700,000 or $0.03 per diluted common share and a core loss of $300,000 or $0.01 per diluted common share in the first quarter of 2021. The company operates its origination activities through its licensed subsidiary Impac Mortgage Corp., IMC. IMC serves as the credit counterparty for the company's warehouse lending facilities, whole loan sales arrangements with GSEs, government and non-GSE aggregators. IMC produced GAAP and core earnings of $3.5 million for the second -- for the first quarter of 2021, the third consecutive quarter of positive results for our regulated licensed entity.
Jon Gloeckner: Thank you, George. For the first quarter, the company reported a GAAP loss of $683,000 as compared to a loss of $2.2 million in the fourth quarter, and loss of $65 million in the first quarter of 2020. In the first quarter, core earnings were a loss of $262,000 as compared to $3.3 million in the fourth quarter and a loss of $56 million in the first quarter of 2020. The first quarter of 2021 saw an interest rate environment that increased much earlier in the year than most had anticipated, causing margin compression in excess of expectations due to competitive pressures to retain market share. During the first quarter, we saw margin compression of approximately 28 basis points as compared to the previous quarter. As a result, gain on sale loans decreased by $1.3 million from the fourth quarter to the first quarter.
Tiffany Entsminger: Thank you, Jon. While 2020 was the year of the GSE loan, the shift in rates and margin compression around the product began sooner than anticipated during the first quarter of 2021. As we discussed last quarter, the guidelines and overlays impacting Fannie and Freddie eligible borrowers began to lift in the fourth quarter of 2020, leading to a more normalized underwrite. Alongside the shift in a more open credit box, competition among lenders contributed significantly to reduced margins across the board. Borrowers are able to shop and lenders find themselves competing aggressively on rates. Competitive margin reduction was compounded when competing in a higher rate environment. During the first quarter of 2021, despite record high margins and volume across the industry, these competitive end market-driven challenges resulted in a 60 to 80 basis point average margin compression across both retail and TPO when compared to the prior quarter. Looking back to the first quarter of 2020, margins have compressed significantly, on average, about 100 to 150 basis points for GSE products. Our retail consumer direct channel is the primary driver of GSE originations and was able to scale to a strategic $250 million run rate following its reinstatement of running in the second quarter of 2020.
Operator: Our first question comes from the line of Trevor Cranston from JMP Securities.
Trevor Cranston: You guys talked some in the prepared remarks about the pressure in gain on sale margins, which occurred, obviously, during the first quarter. Can you maybe help us sort of contextualize and think about that in terms of kind of where you see margins, I guess, specifically on the agency business today versus even where they were in the first quarter?
Tiffany Entsminger: So specifically around the agency production, Q4 2020 to Q1 2021, it's about a 60 to 80 basis point reduction.
Jon Gloeckner: And so, Trevor, we're going to feel that in the call center, but we're not going to feel that -- the nice part is we're not going to feel that in our TPO channel. And due to the aggregator model, which, as everybody is aware that we're running currently, we're not in a position to simply just chase volume as some folks have to right now at the detriment of margin. We're trying to hold our margins pretty firm with where they are. And we're going to have to adjust the composition within the call center. As everyone mentioned on the call, you started to move some of that marketing spend around where it was predominantly that GSE refinance type marketing. It's now pivoting a bit towards NonQM, which will be helpful. And we've also brought in some folks to help originate that VA product. So we're not quite at the point where we were pre-COVID. We had separate teams for these products, but ideally, that's where we would be in the coming months. And those products, especially NonQM with where we've seen the margins come off the mat there considerably, we really think that a limited amount of NonQM production will offset the decrease in volume from a GSE perspective within the call center because that pipeline has shrunk a bit for the call center GSE production, which is fine. That's something that, as we said, we anticipated. So I hope that, that helps.
Trevor Cranston: Yes, that's very helpful. So on the NonQM business, as you sort of reemphasized that and shifted focus, can you maybe spend some time talking about the loans you guys are currently originating and products you're offering? How that looks today as you've reentered that business and it started to grow more meaningfully today versus what you were doing pre-COVID? And also maybe talk about the landscape of investor demand, if there's been any significant changes that you've seen in terms of what investors are looking for in loans and kind of the economics of the execution of selling loans to investors?
George Mangiaracina: Yes. Trevor, I'll take the second part of that question and hand it back to Justin and Tiffany for the product type that we're originating today. I'd say that since the market healed, I mean we were very encouraged in the second and third quarter of last year with the capital markets ability to absorb what had been overhang of NonQM product in the marketplace when the markets became dislocated in the first quarter. And it took a bit of time to clear that overhang. The overhang was mostly cleared with securitization. And then we've seen in the fourth quarter leading into the first quarter an acceleration of investor demand again, probably whole loan buyers that were reverse engineering into securitization exit. So our gross margins, Tiffany mentioned this earlier in prepared remarks, but our gross margins for NonQM were executing again at close to $1.05 price. And so out of our broker channel, our TPO channel, we've got close to 500 basis points of gross margin in the retail channel. When there's an opportunity to also charge points in fees, we'd have gross margins north of that. And so we're very encouraged by the back end execution. And we've sold -- the Wall Street firms have come back aggressively bidding for the product. Certainly, hedge funds and alternative investment vehicles -- I mean it's no surprise, right? There's a tremendous push for yield in this market as long as the Fed continues to buy $100 billion plus of treasury and mortgage product, pushing yields down as there is an incredible push for yield in marketplace and NonQM fills that void nicely. So -- and Justin, Tiffany, I don't know if you want to touch on how our product design might look a little different or maybe it's really just back to the future that the markets now creating product that looks very similar to what we've always been creating.
Tiffany Entsminger: Sure. Yes, this is Tiffany. I would say that the core offerings within NonQM have remained relatively unchanged with respect to a bank statement offering -- a 12- to 24-month bank statement offering, business purpose, DSCR loan, asset depletion and also a full dock product. So that's relatively unchanged. Certainly, the credit box around those products has migrated over the last year. We're starting to see more of a normalization of the guidelines that opens up that box a little bit more closely aligned with some of the pre-COVID credit offering.
Trevor Cranston: Great. Okay. That's helpful. And I guess on the expense side, you mentioned in the prepared comments that you're continuing to invest and hire for the rebuild of the NonQM channel. Can you talk about where -- kind of where you are, overall, in that process? How much more investment in hiring do you think you need to do? And maybe as the demand for agency refi strength, is there any sort of offset there in terms of the overall expense level? Or do you -- some of the -- some of the people who have been more focused on in the agency business and consumer direct, is that going to be kind of just shifted over to the NonQM focus going forward?
Justin Moisio: So Trevor, I can start with that, and Tiffany can weigh in and if George has anything to add, we can do that as well. So obviously, within the call center, we discussed kind of the way in which you'll see that GSE production volume start to come down because we're not going to give up that margin there with how tight it's already gotten. But some of the folks, most certainly, can pivot over from an operational standpoint over to that TPO world, specifically our underwriters and things of that nature can move over nicely. We'll repurpose some of our agents to be focused more on those alternative credit products. And that shift from an expense standpoint within business promotion, I don't anticipate for that to have any sort of material increase, at least for the next quarter, because we're just going to reallocate some of the money within that channel. Within -- now within TPO, we already have started to invest in that as evidenced, just from a pipeline makeup because I've seen a lot recently with some of the larger shops doing the broker business are really having to quickly pivot here. But just so you're aware, from a pipeline perspective, at the end of the year within our TPO channel, it was only about 19% was NonQM production opposed to today, which is roughly 90% of that production. So we've already made that shift so it won't be that noisy to hire into. But we are being very strategic in terms of additional specialized resources for the channel. So George, I don't know if you want to touch on that component for NonQM?
George Mangiaracina: Sure. I mean, Justin focused on some of the operations and the credit piece and the sales pieces. But I'd say that we -- one of the lessons that we took away from the COVID crisis of last year is that the need for us to have some more sophistication around capital markets in terms of how the loans that we originate model out for investment-grade levels for securitizations, and how we can then take that reverse engineering of securitizations and be more precise on how we price the themes of some of our offerings. And so we've -- we're very close to securing some additional resources within our capital markets teams that will permit us to do that. And that would give us another leg away from simply bidding comp exit for our NonQM offering or mandatory forwards, we hope before the end of the year, be able to access the securitization market like we had in years past. So I think you'll see that coming out of us in the next several months there'll be some announcements around those resources.
Trevor Cranston: Okay. Great. I guess the last question, you guys had been working with sort of target of hitting $250 million a month of originations, which, obviously, been successful at doing. As you look forward and the product mix shifts more to NonQM and the agency refi side comes down, is the $250 million a month of originations target still applicable to how you think about the business? Or has that shifted in light of, you think the product mix shifts going forward?
Tiffany Entsminger: Well, I think Justin spoke a little bit about that earlier with respect to the shift in pipeline composition. So I would expect that $250 million, while we would certainly like it to remain constant we have to adjust with the reaction to the GSE products in the market. So I would expect that to possibly reduce that GSE composition and then continue to supplement and grow NonQM and VA on top of that.
Justin Moisio: And it's on us, obviously, to execute at this point, Trevor, but just the NonQM, the margin there fills in the gap significantly compared to these tighter GSE margins from what you've seen across the industry. So to get back up to the combined run rate is a different number, and it's totally dependent upon how much NonQM the company can originate. But when we spoke to that $250 million number, probably third quarter was when we announced that target, that was we were originating just pure GSE production from the call center and TPO wasn't even up and running yet. So it will be a different make up at this point.
Operator: And there are no further questions, please continue.
Justin Moisio: Thank you. I was going to say at this point, it looks like there's no other questions. So we thank everyone for joining us today, and we'll be back speaking to the market in early August for our second quarter earnings release. Thank you all.
Operator: This concludes today's conference call. Thank you all for participating, and you may now disconnect. Have a great day.
