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Impac Mortgage Holdings, Inc. Announces Third Quarter 2018 Results

IRVINE, Calif., Nov. 07, 2018 (GLOBE NEWSWIRE) -- Impac Mortgage Holdings, Inc. (NYSE American: IMH) (the Company) announces the financial results for the quarter ended September 30, 2018.

For the third quarter of 2018, the Company reported a net (loss) of $(45.4) million, or $(2.16) per diluted common share, and adjusted operating (loss) of $(8.9) million, or $(0.42) per diluted common share, as compared to net earnings of $2.3 million, or $0.11 per diluted common share, and adjusted operating income of $114 thousand, or $0.01 per diluted common share, for the third quarter of 2017.

For the nine months ended September 30, 2018, the Company reported a net (loss) of $(139.0) million, or $(6.62) per diluted common share, and adjusted operating (loss) of $(11.1) million, or $(0.53) per diluted common share, as compared to net earnings of $13.4 million, or $0.71 per diluted common share, and adjusted operating income of $2.1 million or $0.10 per diluted common share, for the nine months ended September 30, 2017. Adjusted operating income (loss), excluding the changes in contingent consideration and impairment charges (adjusted operating income (loss)) is not considered an accounting principle generally accepted in the United States of America (non-GAAP) financial measurement; see the discussion and reconciliation on non-GAAP financial measures further below.

Results of Operations

For the Three Months Ended

For the Nine Months Ended

(in thousands, except share data)

September 30,

June 30,

September 30,

September 30,

September 30,

(unaudited)

2018

2018

2017

2018

2017

Revenues:

Gain on sale of loans, net

$

13,673

$

18,741

$

42,476

$

53,896

$

116,602

Servicing fees, net

10,124

9,861

8,492

29,445

23,575

(Loss) gain on mortgage servicing rights, net

(5,192

)

167

(10,513

)

2,682

(18,159

)

Real estate services fees, net

711

1,038

1,355

3,134

4,492

Other

71

116

266

278

541

Total revenues

19,387

29,923

42,076

89,435

127,051

Expenses:

Personnel expense

16,061

16,678

23,062

50,481

69,353

Business promotion

4,351

9,000

10,403

23,082

30,744

General, administrative and other

7,897

10,846

8,497

27,018

24,845

Intangible asset impairment

4,897

13,450

18,347

Goodwill impairment

29,925

74,662

104,587

Accretion of contingent consideration

396

1,948

Change in fair value of contingent consideration

(4,798

)

(11,052

)

Total expenses

63,131

124,636

37,560

223,515

115,838

Operating (loss) income :

(43,744

)

(94,713

)

4,516

(134,080

)

11,213

Other income (expense):

Net interest income

411

546

1,546

1,977

3,090

Loss on extinguishment of debt

(1,265

)

Change in fair value of long-term debt

(785

)

258

104

697

(2,657

)

Change in fair value of net trust assets

(1,315

)

217

(1,745

)

(3,236

)

6,578

Total other (expense) income

(1,689

)

1,021

(95

)

(562

)

5,746

Net (loss) earnings before income taxes

(45,433

)

(93,692

)

4,421

(134,642

)

16,959

Income tax expense

12

3,706

2,104

4,328

3,575

Net (loss) earnings

$

(45,445

)

$

(97,398

)

$

2,317

$

(138,970

)

$

13,384

Other comprehensive earnings (loss):

Change in fair value of instrument specific credit risk

25

(526

)

(1,940

)

Total comprehensive (loss) earnings

$

(45,420

)

$

(97,924

)

$

2,317

$

(140,910

)

$

13,384

Diluted weighted average common shares

21,071

20,964

21,195

20,996

20,381

Diluted (loss) earnings per share

$

(2.16

)

$

(4.65

)

$

0.11

$

(6.62

)

$

0.71

Net (loss) earnings as well as adjusted operating (loss) income for the third quarter of 2018 decreased due to a decline in revenue from gain on sale of loans, net as a result of a decrease in origination volumes as well as a reduction in margins. Gain on sale margins decreased by 44 basis point (bps) to 160 bps in the third quarter of 2018, as compared to 204 bps in the third quarter of 2017 reflecting margin compression.

As part of the CCM acquisition in 2015, we recorded goodwill of $104.6 million, which is evaluated on a quarterly basis for impairment. As previously reported in the second quarter of 2018, an impairment charge of $74.7 million related to goodwill and $13.4 million related to intangible assets, was recorded as a significant reduction in the anticipated future cash flows and estimated fair value for this reporting unit had occurred. During the third quarter of 2018, CCM continued to experience a significant decline in origination volume and margin compression that exceeded our updated projections from the second quarter of 2018. As a result, during the three months ended September 30, 2018, we recorded an impairment charge of $29.9 million related to goodwill and $4.9 million related to intangible assets. Despite full impairment of goodwill, the consumer direct channel will remain an integral component of the Company’s distribution capabilities going forward.

Personnel expense decreased $7.0 million to $16.1 million for the three months ended September 30, 2018 as compared to the same period in 2017. The decrease is primarily related to a reduction in commission expense due to a decrease in loan origination volumes as well as staff reductions in the first three quarters of 2018. As a result of the reduction in loan origination volumes, we continue to reduce overhead to more closely align staffing levels to origination volumes in the current economic environment. As a result of the staff reductions in the third quarter of 2018, average headcount decreased 26% for the third quarter of 2018 as compared to the same period in 2017. Offsetting the decrease in personnel expense was $1.1 million in severance costs associated with the repositioning of the staff and executive management team.

Servicing Portfolio Data

(in millions)

As of
September 30, 2018

As of
June 30, 2018

%
Change

As of
September 30, 2017

%
Change

Mortgage Servicing Portfolio (UPB)

$16,789.5

$16,786.1

0%

$15,703.1

7%

Mortgage Servicing Rights

$181.0

$180.7

0%

$158.9

14%

Q3 2018

Q2 2018

%
Change

Q3 2017

%
Change

Servicing Fees, Net

$10.1

$9.9

3%

$8.5

19%

The mortgage servicing portfolio remained flat at $16.8 billion at September 30, 2018 as compared to June 30, 2018 but increased from $15.7 billion at September 30, 2017. During the three months ended September 30, 2018, the mortgage servicing portfolio increased due to servicing retained loans sales of $570.5 million in UPB, which were slightly offset by prepayments and principal amortization from the servicing portfolio. In October 2018, the Company sold $3.4 billion in unpaid principal balance (UPB) of GNMA mortgage servicing rights (MSRs) for approximately $35.9 million.

The servicing portfolio generated net servicing income of $10.1 million in the third quarter of 2018, a 19% increase over the net servicing fees of $8.5 million in the third quarter of 2017.

For the three months ended September 30, 2018, we recorded a $5.2 million loss from MSRs, net compared to a loss of $10.5 million in the comparable 2017 period. For the three months ended September 30, 2018, we recorded a $5.4 million loss from a change in fair value of MSRs primarily due to changes in fair value associated with voluntary and scheduled prepayments partially offset by changes in market rates, inputs and assumptions. Included in the $841 thousand gain from changes in valuation market rates, inputs or assumptions was a $2.3 million decrease in fair value associated with the execution price to sell $3.4 billion of our GNMA mortgage servicing portfolio during the three months ended September 30, 2018.

Delinquencies within the servicing portfolio have remained low at 0.98% for 60+ days delinquent as of September 30, 2018 as compared to 0.81% at December 31, 2017.

Origination Data

(in millions)

Q3 2018

Q2 2018

%
Change

Q3 2017

%
Change

Retail Originations

$432.7

$459.9

-6%

$1,426.2

-70%

Correspondent Originations

$200.6

$374.9

-46%

$376.4

-47%

Wholesale Originations

$219.9

$199.4

10%

$281.7

-22%

Total Originations

$853.2

$1,034.2

-18%

$2,084.3

-59%

During the third quarter of 2018, total originations decreased 18% to $0.9 billion as compared to $1 billion in the second quarter of 2018 and decreased 59% as compared to $2.1 billion in the third quarter of 2017. The decrease in originations from the second quarter of 2018 and third quarter of 2017 was primarily a result of higher interest rates. From January 2017 through the third quarter of 2018, interest rates have increased significantly from the historically low interest rate environment of previous years, causing a sharp drop in refinance volume, which has been the predominance of our retail originations. During the third quarter of 2018, the origination volume of NonQM loans increased to $349.2 million as compared to $306.1 million in the second quarter of 2018 and $239.4 million in the third quarter of 2017. In the third quarter of 2018, the retail channel accounted for 29% of NonQM originations while the wholesale and correspondent channels accounted for 71% of NonQM production. In the second quarter of 2018, the retail channel accounted for 25% of NonQM originations, while the wholesale and correspondent channels accounted for 75% of NonQM production. For the third quarter of 2018, our NonQM origination volume had an average FICO of 724 and a weighted average LTV of 68%.

Summary Balance Sheet

September 30,

December 31,

(in thousands, except per share data)

2018

2017

ASSETS

Cash

$

29,217

$

33,223

Mortgage loans held-for-sale

344,681

568,781

Finance receivables

731

41,777

Mortgage servicing rights

181,005

154,405

Securitized mortgage trust assets

3,311,785

3,670,550

Goodwill and intangibles

380

126,169

Loans eligible repurchase from Ginnie Mae

78,707

47,697

Other assets

31,196

39,098

Total assets

$

3,977,702

$

4,681,700

LIABILITIES & STOCKHOLDERS' EQUITY

Warehouse borrowings

$

315,152

$

575,363

Debt

133,720

105,089

Securitized mortgage trust liabilities

3,296,242

3,653,265

Loans eligible repurchase from Ginnie Mae

78,707

47,697

Contingent consideration

-

554

Other liabilities

36,227

34,585

Total liabilities

3,860,048

4,416,553

Total equity

117,654

265,147

Total liabilities and stockholders’ equity

$

3,977,702

$

4,681,700

Book value per share

$

5.57

$

12.66

Tangible Book value per share

$

5.56

$

6.43

Mr. George A. Mangiaracina, Chairman and CEO of Impac Mortgage Holdings, Inc., stated, “The Company has demonstrated the ability to make the difficult decisions to proactively eliminate cost and expense to right size the Company. We will continue to measure our origination capacity to demand and fine tune our resources to ensure we are appropriately calibrated to changing market conditions. Additionally, we are encouraged by the growth of our NonQM origination volume across our Direct to Consumer and TPO channels. We anticipate that the addressable market for alternative products will continue to expand, and that the Company is uniquely positioned to build upon our standing as a recognized leader in providing innovative and responsible products that match consumer needs to capital market investment objectives.”

Non-GAAP Financial Measures

Net earnings include certain fair value adjustments, which are non-cash items and are not related to current operating results. Adjusted operating (loss) income, which excludes changes in contingent consideration and impairment of goodwill and intangible assets), is considered a non-GAAP financial measurement. Although we are required by GAAP to record these fair value adjustments, management believes adjusted operating (loss) income is more useful to discuss the ongoing and future operations of the Company, shown in the table below:

Adjusted Operating Income (Loss)

For the Three Months Ended

For the Nine Months Ended

(in thousands, except share data)

September 30,

June 30,

September 30,

September 30,

September 30,

2018

2018

2017

2018

2017

Net (loss) earnings:

$

(45,445

)

$

(97,398

)

$

2,317

$

(138,970

)

$

13,384

Total other (income) expense

1,689

(1,021

)

95

562

(5,746

)

Income tax expense

12

3,706

2,104

4,328

3,575

Operating (loss) income:

$

(43,744

)

$

(94,713

)

$

4,516

$

(134,080

)

$

11,213

Intangible asset impairment

4,897

13,450

18,347

Goodwill impairment

29,925

74,662

104,587

Accretion of contingent consideration

396

1,948

Change in fair value of contingent consideration

(4,798

)

(11,052

)

Adjusted operating (loss) income

$

(8,922

)

$

(6,601

)

$

114

$

(11,146

)

$

2,109

Diluted weighted average common shares

21,071

20,964

21,195

20,996

20,381

Diluted adjusted operating (loss) income per share

$

(0.42

)

$

(0.31

)

$

0.01

$

(0.53

)

$

0.10

This release contains operating (loss) income excluding changes in contingent consideration and impairment of goodwill and intangible assets and per share as performance measures, which are considered non-GAAP financial measures, to further aid our investors in understanding and analyzing our core operating results and comparing them among periods. Adjusted operating (loss) income and adjusted operating (loss) income per share exclude certain items that we do not consider part of our core operating results. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for net earnings before income taxes, net earnings or diluted earnings per share (EPS) prepared in accordance with GAAP. The table below shows operating income per share excluding these items:

For the Three Months Ended

For the Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

2018

2018

2017

2018

2017

Diluted (loss) earnings per share

$

(2.16

)

$

(4.65

)

$

0.11

$

(6.62

)

$

0.71

Adjustments:

Total other (income) expense (1)

0.08

(0.05

)

0.03

(0.35

)

Income tax expense

0.01

0.19

0.10

0.21

0.18

Intangible asset impairment

0.23

0.64

0.87

Goodwill impairment

1.42

3.56

4.98

Accretion of contingent consideration

0.02

0.10

Change in fair value of contingent consideration

(0.22

)

(0.54

)

Diluted adjusted operating (loss) income per share

$

(0.42

)

$

(0.31

)

$

0.01

$

(0.53

)

$

0.10

(1) Except for when anti-dilutive, convertible debt interest expense, net of tax is included for calculating diluted EPS and is excluded for purposes of reconciling GAAP diluted EPS to non-GAAP diluted adjusted operating (loss) income per share.

Conference Call

The Company will hold a conference call on November 8, 2018, at 6:00 a.m. Pacific Time (9:00 a.m. Eastern Time) to discuss the Company’s financial results and business outlook and to answer investor questions. After the Company’s prepared remarks, management will host a live Q&A session. To submit questions via email, please email your questions to Justin.Moisio@ImpacMail.com. Investors may participate in the conference call by dialing (844) 265-1560 conference ID number 9399676, or access the web cast via our web site at http://ir.impaccompanies.com. To participate in the conference call, dial in 15 minutes prior to the scheduled start time. The conference call will be archived on the Company's web site at http://ir.impaccompanies.com.

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward looking terminology, such as “may,” “capable,” “will,” “intends,” “believe,” “expect,” “likely,” “potentially” ”appear,” “should,” “could,” “seem to,” “anticipate,” “expectations,” “plan,” “ensure,” “desire,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: successful development, marketing, sale and financing of new and existing financial products, including continued increase in interest rates; expansion of NonQM loan originations and conventional and government-insured loan programs; ability to successfully diversify our loan products; decrease in our mortgage servicing portfolio; ability to continue to grow the servicing portfolio; ability to successfully sell loans to third-party investors; volatility in the mortgage industry; unexpected interest rate fluctuations and margin compression; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; ability to successfully create cost and product efficiencies through new technology; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome, including any settlements, of litigation or regulatory actions pending against us or other legal contingencies; our compliance with applicable local, state and federal laws and regulations; and other general market and economic conditions.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see the annual and quarterly reports we file with the Securities and Exchange Commission. This document speaks only as of its date and we do not undertake, and specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

About the Company

Impac Mortgage Holdings, Inc. (IMH or Impac) provides innovative mortgage lending and warehouse lending solutions, as well as real estate solutions that address the challenges of today’s economic environment. Impac’s operations include mortgage and warehouse lending, servicing, portfolio loss mitigation and real estate services as well as the management of the securitized long-term mortgage portfolio, which includes the residual interests in securitizations.

For additional information, questions or comments, please call Justin Moisio, SVP Business Development & Investor Relations at (949) 475-3988 or email Justin.Moisio@ImpacMail.com. Web site: http://ir.impaccompanies.com or www.impaccompanies.com