Impac Mortgage Holdings, Inc. Common Stock

Thank you for standing by, and welcome to Q4 2020 Impact Mortgage Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. After this speaker presentation, there will be a question and answer session. To ask a question, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Justin Marzo. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining Impact Mortgage Holdings' year-end 2020 earnings call. During this call, we will make projections or other forward-looking statements in regards to, but not limited to, gap in taxable earnings, cash flows, interest risk and market risk exposure, mortgage production, and general market conditions. I would like to refer you to the business risk factors that are most recently filed, Form 10-K, under the Securities 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. We'd like to get started by introducing George Mandracina, Chairman and CEO of Impact Mortgage Holding.

Thank you, Justin. Paul Eichen, our CFO, and Tiffany Etzminger, our COO, will join me for prepared remarks. Justin will be back along with Tom Donatacci, our Chief of Staff, and Joe Joffrey and our General Counsel for the question and answer segment. When we met about a year ago for the company's 2019 year-end earnings call, March 13, 2020 to be exact, We reported strong year-over-year operating results and discussed momentum we had anticipated would accelerate as we invested in technology, product design, industry talent, and geographic expansion. We also noted that any enthusiasm for future prospects needed to be properly balanced and tempered by potential supply and distribution constraints and attendant liquidity risks associated with the then-current macroeconomic conditions. In fact, 2020 presented the company with the Extraordinary challenges, the result of unprecedented credit and interest rate shocks and global market dislocations in the first and second quarters of the year. The difficult but necessary decisions the company executed on during the first half of 2020 have been well documented for our frequent business updates and prior quarterly earnings calls. These actions to de-risk the balance sheet and to consciously protect liquidity often at the expense of book value, positioned the company to normalize origination activity in the second half of 2020. Today, we are pleased to announce a second consecutive quarter of positive operating results, with 2020 fourth quarter earnings of 3.3 million, 16 cents a share, following 2020 third quarter earnings of 4.4 million, or 21 cents a share. Core earnings are an alternative measure of results that senior management utilizes to gauge the company's performance. They isolate results from recurring business activities by adjusting for certain non-recurring items, such as changes in the fair value of long-term debt and trust assets, gain or loss on mortgage servicing rights, and other non-recurring legacy matters. This concept was first introduced in the beginning of 2019. The table is provided with our earnings release to enable variation analysis between prior periods. Generating core earnings of approximately $8 million in the second half of 2020 versus core losses of approximately $66 million in the first half of 2020 was hard fought and a remarkable turnaround for the company. We would like to express our gratitude to our board of directors, our stakeholders, and our capital partners for their steadfast support under the most difficult of circumstances. And I personally I want to extend my thanks to our senior management team and our valued employees for their dedication and tireless focus on the company, often while managing stresses over health, family, and societal concerns brought on by COVID-19. Collectively, our stakeholders enabled the company to navigate through the unprecedented global market dislocation we experienced last year. On this call, we would like to highlight some of the key accomplishments for the second half of 2020. including the relaunch of our origination businesses, creating a profitable run rate in our consumer direct channel, restarting non-QM originations in our third-party or TPO channel, and enhancing the company's liquidity by extending our convertible promissory note. The company announced the relaunch of our lending activities in late second quarter within our consumer direct channel, focused initially on GSC, FHA, and VA product. In the latter half of the fourth quarter of 2020, we expanded those offerings to include non-agency jumbo and non-QM, and also relaunched our TPO channel. The company generated originations in excess of $800 million in Q4 2020 versus $400 million in Q3 of 2020 and just $2 million in Q2 of 2020. The increase reflects our success in ramping the call center to target originations of at least $250 million per month and the reintroduction of a broader product set across all channels. These origination activities were the prime driver of positive core earnings in the second half of the year. The company was not immune from margin compression experienced by the industry in the fourth quarter. This normalization was anticipated as industry capacity expanded to meet demand. Paul Lichen will address this in his prepared remarks. We entered 2020 with strong momentum. having repositioned the company over the years to expand our core competency related to alternative products. During the first quarter of 2020, prior to the disruption caused by COVID-19, we originated 260 million in non-QM loans and were on pace to exceed our fourth quarter 2019 non-QM origination volume. As financial markets became dislocated in March of 2020, Liquidity tightened and credit spreads widened substantially, with particular focus on non-QM payment delinquency and forbearance risk. To protect against market valuation declines, the company had a significant portion of our non-QM portfolio hedged via mandatory forward commitments with investors. Some of these hedges were not honored, causing the company to restructure the sale of these assets at market levels significantly below that which the company would have received under the terms of the mandatory forwards. We ceased originating non-QM loans in the beginning of April 2020. In the fourth quarter of 2020, market conditions and external factors, while not fully normalized, had sufficiently stabilized to the extent that the company elected to re-engage its lending activities within the non-QM market segment. The re-emergence of the non-QM market has been defined by products that originated to more restrictive credit underwriting guidelines than pre-COVID and consistent with the company's historical historic credit philosophy. We believe the quality of our loans have been demonstrated by their performance through the recent crisis. In 2020, our non-QM originations had a weighted average FICO of 730, weighted average LTV ratio of 68, compared to 731 and 70%, respectively, in 2019. Since the company has exceptionally historically been an innovator with respect to the design and origination of alternative credit products, Non-QM is a core competency differentiator for the company. We look forward to participating in the reemergence of this sector. As discussed on prior calls, improving and protecting the firm's liquidity was a primary objective for the firm in 2020. In line with these objectives, on October 28, 2020, we announced an extension of our convertible promissory note. This agreement extended the maturity date of the note by an additional 18 months from November 9, 2020 to May 9, 2022, and reduced the aggregate principal amount of the note to $20 million following a paydown of $5 million in principal. The company's cash and unencumbered whole-loan position was approximately $60 million at the end of the fourth quarter. As compared to $65 million at the end of the third quarter, we believe this liquidity position provides a margin of safety to address future market volatility. Finally, I would like to note that November 20th, 2020 marked the 25th anniversary of our initial public offering, a tribute to the company's resilience in navigating numerous economic and political events. We remain optimistic about the future. The company continues to originate through our consumer direct and third-party channels and is well-positioned to take advantage of opportunities as the agency and alternative credit markets evolve. I'll now hand the call over to Paul Lyken. Paul?