Impac Mortgage Holdings Inc. (NYSE:IMH) Q3 2022 Earnings Conference Call November 11, 2022 9:00 AM ET
Company Participants
Joe Joffrion – General Counsel
George Mangiaracina – Chairman & Chief Executive Officer
Jon Gloeckner – Principal Accounting Officer
Justin Moisio – Chief Administration Officer
Conference Call Participants
Operator
Hello. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Impac Mortgage Third Quarter Earnings Conference Call. [Operator Instructions]
I would now like to turn the call over to Mr. Joe Joffrion, General Counsel. Please go ahead.
Joe Joffrion
Good morning, everyone and thank you for joining Impac Mortgage Holdings third quarter 2022 earnings conference call.
During this call, we will make projections and 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’d like to get started by introducing George Mangiaracina, Chairman and CEO of Impac Mortgage Holdings. George?
George Mangiaracina
Thank you, Joe. Also with us this morning are Jon Gloeckner, our Principal Accounting Officer; Justin Moisio, our Chief Administrative Officer; Tiffany Entsminger, our Chief Operating Officer.
Interest rate and credit spread pressures with attendant market volatility and liquidity were unrelenting in the third quarter of 2022. The company adopted a defensive risk-off posture in the fourth quarter of 2021 and remains measured and disciplined in its origination and capital markets activities. Layered risks cannot be effectively hedged in times of acute market dislocation and we have no visibility as to when such dislocation will abate and return the industry to normalized volumes and margins. Jon Gloeckner will discuss our operating results later on in this call.
In October, the company announced the completion of the exchange offers and the redemption of its Series B and Series C preferred stock. These are significant achievements for the company. They align our equity stakeholder interests and simultaneously bring closure to the costly legal proceedings and distractions that have impeded the company since 2009. The company may now focus on exploring corporate finance and strategic opportunities absent an intractable legacy capital structure.
Joe Joffrion will now provide additional detail on our exchange offer and preferred litigation. Joe?
Joe Joffrion
Thanks, George. With respect to the exchange offers, as previously disclosed, the company completed the closing for all tendered Preferred B and Preferred C shares on October 26, 2022. The following day in accordance with the amended preferred article supplementary, the company issued its redemption notice to redeem all remaining shares of Preferred B and Preferred C stock that were not tendered and such closing is set to occur on November 15, 2022. In addition, in accordance with the order of the Circuit Court of Maryland and the Timm litigation matter, on October 28, 2022, the company deposited into escrow that required a number of common and preferred shares which are being held pursuant to an order until the court rules on certain matters remaining in the Timm litigation.
A hearing is scheduled for December 5, 2022 and such hearing primarily involves motions by the plaintiffs. And their counsel for fees, expenses and awards, any and all of which, would be paid from such escrowed shares and from cash previously aspired with the court pursuant to a separate court order. In the event there are any remaining shares of common or preferred in escrow following the court’s final ruling, then such remaining shares will be distributed to form of Preferred B shareholders, whose shares were either tendered or redeemed as previously described earlier on a pro rata basis.
Jon Gloeckner will now discuss the financial results for the third quarter of 2022. Jon?
Jon Gloeckner
Thank you, Joe. For the third quarter, the company reported a GAAP loss of $13 million as compared to a loss of $13.5 million in the second quarter and a gain of $2.1 million in the third quarter of 2021. Our third quarter adjusted loss was $12.6 million as compared to an adjusted loss of $15.4 million in the second quarter and a gain of $810,000 in the third quarter of 2021. The financial results for the quarter continue to reflect significant market pressure which continued to accelerate in the third quarter as a result of increasing interest rates, inflation, credit and liquidity risk.
Our results as well as many of our peers’ performance reflect 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.
Originations and margins have suffered as a result, with originations decreasing to $62 million with negative margins of 110 basis points during the third quarter as compared to originations of $128 million with margins of 14 basis points in the second quarter of 2022. Our risk-off posture, in conjunction with rate shock and increased fallout, resulted in continued origination and pipeline reductions which were the primary drivers for negative margins during the third quarter. Other income decreased to an expense of $1.8 million in the third quarter as compared to income of $720,000 in the second quarter, primarily due to a $2.4 million decrease in fair value adjustment on our long-term debt. It should be noted that changes in fair value of long-term debt are excluded from adjusted earnings.
Operating expenses decreased 24% or $3.6 million to $11.1 million in the third quarter as compared to $14.7 million in the second quarter, primarily due to a reduction in personnel costs which decreased $2.3 million from the prior quarter. The decrease in personnel costs during the third quarter was primarily the result of a decrease in variable compensation commensurate with reduced originations as well as a reduction in headcount to support reduced volume. Headcount has declined from approximately 330 at year-end 2021 to 162 at the end of the third quarter and sits at approximately 120 today.
Our business promotion expense decreased 59% or $774,000 as compared to the prior quarter. While we had previously pushed to target NonQM production in our retail channel, continued product expansion outside of California and maintained lead volume, as a result of the dislocation within the NonQM market due to a significant increase in interest rates, in the third quarter, we further reduced our marketing spend as we continue to pull back on origination volumes.
During the quarter, we continued to reduce our warehouse borrowing capacity with a combined borrowing capacity of $325 million at quarter end and anticipate lowering our borrowing capacities to less than $50 million in the fourth quarter as we continue to balance capacity needs to meet funding demands of our NonQM production. The anticipated reduction in capacity is due to the predominance of our current capacity geared more towards conventional and government insured originations which fell to less than $15 million in the third quarter.
We continue to carefully manage our liquidity as evidenced by our unrestricted cash position of $44 million on the balance sheet at the end of the third quarter with those of an aggregation model. 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 origination activity during the quarter. Justin?
Justin Moisio
Thank you, Jon. Our production volume in the third quarter as with the second quarter is reflective of the current challenges in the mortgage market impacting mortgage lenders, both on the credit and rate side of the business.
Across the industry, the deterioration of the conventional GSE origination space continued during the third quarter. At the beginning of 2022, the consumer had access to a 30-year fixed mortgage rate between 2.5% to low 3.5% on average as compared to the same mortgage product being offered today at 7% or higher. Like many other originators reporting staggering reductions in overall loan volume, Impac was no exception as we saw a decrease of 97% of our overall GSE conventional volume in the third quarter of this year when compared to the third quarter of last year.
Impac’s primary driver of GSE originations is our retail consumer direct call center which has historically originated mostly refinanced transactions as the predominant loan purpose. During the third quarter, the consumer direct call center experienced a 94% decrease in total volume as compared to the third quarter of last year. This is in line with the roughly 83% decrease in refinance activity nationwide that was reported by the Mortgage Bankers Association at the end of September of 2022 which was then increased to 86% the following month. The pronounced drivers of this volume decline across the industry are attributable to higher rates, capital contraction and risk-based pricing adjustments relative to perceived credit risk across the market. In addition to the drop in overall volume, margin compression persisted as reported in prior quarters.
The rising rate environment has effectively eliminated the opportunity for rate and term refinance activity for the majority of American consumers. Investors have adjusted pricing to account for the perceived risk around HPI and credit risk, yielding considerably higher rates for consumers looking to access equity or consolidate debt through cash out refinance transactions. Moreover, the borrowers who are unable to take advantage of lower rates face considerable challenges in today’s market relative to their ability to credit quality.
Additionally, our purchase money transactions have increased as an overall percentage of our origination volume. This is solely due to the disappearance of the refinance activity. Total purchase money decreased 48% in the third quarter as compared to the previous quarter. The figures reported by the MBA reflect a 30% decline in purchase volume nationwide in addition to the steep drop in refinance activity. We continue to see weakening in purchase volume due to higher rates and affordability challenges as well as declining markets and valuation challenges. Borrowers appear to be canceling transactions at a much higher rate than what we have ever experienced before in the call center.
From an expense management perspective, as Jon touched on earlier, we continue to adjust our marketing spend downward to calibrate to a reduced loan officer headcount 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 $545,000 in the third quarter and was down $1.6 million or 75% from the third quarter of last year. We will continue to adjust this spend to support origination capabilities while focusing on margin and expense management.
In prior quarter’s earnings calls, we discussed the decline of NonQM volumes seen across the market following the first quarter of 2022 due to the dislocation in the market. Notably, rate shock pricing changes and increased fallout. Lower NonQM volume persisted throughout the third quarter for those same reasons. Overall, retail consumer direct NonQM production decreased to $21 million, a 57% decrease compared to $49 million in the second quarter.
The call center also experienced a decline in NonQM lead conversion, further reducing total originations. In part, this decline is due to higher market rates and shrinking credit boxes initiated by NonQM investors as well as overall credit quality challenges. Borrowers appear to be struggling with providing the requisite documentation to support ability to repay guideline eligibility criteria at a much — at this much higher rate.
As George mentioned earlier, during the fourth quarter of last year, the company took a defensive risk-off approach to managing our volumes across all channels, originating responsibly to support loans with strong credit quality, marketable rates and strong capital market exits.
During our last 2 earnings calls, we spent time discussing the sudden and dramatic increase in rates which triggered a significant increase in credit spreads and an oversupply of lower coupon loans in the market. With production in our TPO platform being nearly all NonQM, the need to manage market risk through credit and pricing remains critical in light of volatility and illiquidity in certain segments of the secondary markets.
Similar to the consumer direct channel, the drop in NonQM production we experienced in our TPO channel during April which was discussed on our previous call, persisted throughout the third quarter. Our TPO NonQM production decreased to $29 million in the third quarter as compared to $133 million in the third quarter of last year, a 78% decrease. Across both channels, the company originated $50 million in NonQM production during the third quarter this year as compared to $80 million in the second quarter of this year and $315 million in the first quarter.
Jon mentioned our operating expenses decreased 24% in the third quarter. We’ve continuously adjusted our headcount to align with capacity quarter-over-quarter. Despite these reductions to staff, we continue to face headwinds around market conditions, including high rates, diminished volume and margin compression, contributing significantly to a curtailment in revenue across all channels. In light of the challenging market ahead, the company remains steadfast in its commitment to managing risk within its core business. It’s important to note that this risk-off approach includes exploration of opportunities that may complement or supplement the services which we offer today and contribute to increased revenue and decreased expenses.
So at this point, that concludes our financial results and our prepared remarks. To this point, any questions that we’ve received from shareholders have been incorporated into these prepared remarks that had corresponding answers.
So we want to thank everyone for joining us this morning and we look forward to speaking with you next quarter. Thank you.
Question-and-Answer Session
End of Q&A
This concludes today’s conference. You may now disconnect.
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