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spk01: Good day and thank you for standing by. Welcome to the Impact Mortgage Holdings second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Justin Moizio, please go ahead.
spk04: Thank you. Good afternoon, everyone. Thank you for joining Impact Mortgage Holdings second quarter 2021 earnings conference 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 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 and 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 Mandracino, Chairman and CEO of Impact Mortgage Holdings.
spk02: Thank you, Justin. With me today for prepared remarks are John Glockner, our Treasurer and Principal Accounting Officer, Obi Wakori, our EVP and Head of Alternative Credit Products, They're with me for prepared remarks later for the Q&A session. Tiffany Etzminger, Joe Joffrion, and Tom Donatacci will join us. Approximately three months ago, during our Q1 2021 earnings call, we discussed that the company continued to grow its retail and TPO platforms in a recorded third consecutive quarter of growth while continuing to main focus on liquidity and risk management following the 2021 COVID crisis. The company's last business update expressed the view that market conditions in the GSE space had continued 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 affected the entire industry throughout the second quarter of 2021. We previously referenced the increasing investor demand expansion of and normalization of guidelines, as well as improved margins for our non-QM production, a competency of the firm that we are currently investing in with capital markets, securitization talent, product innovation, risk-based pricing enhancements, and a growing sales and operations team. Justin will expand on these initiatives and investments across products and channels in further detail a little bit later on in the call. The company reported net gap loss of approximately 9 million or 42 cents per diluted common share and a core loss of approximately 7 million or 32 cents per diluted common for the second quarter of 2021. Core earnings or loss are an alternative measure of results that senior management utilizes to gauge the company's performance. Core earnings or loss isolates 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 held for sale, and other non-recurring legacy matters. As it relates to production volume, we generated originations of approximately $600 million in Q2-21 versus $850 million in Q1-21. While typically we do not provide forward-looking guidance, we will note that our non-QM pipeline, as measured by submissions and locks fitted only $10 million at the end of 2020, a little bit over $80 million at the end of the second quarter, and currently stand at $90 million at the end of July. This product increase in the pipeline demonstrates the recent pivot towards non-QM originations, both in our retail channel and historically non-QM-focused TPO channel. The pipeline growth was sequenced after having achieved a sustainable monthly run rate of two to 300 million in GSD product during the past three quarters. Historically, we've had good success delivering non-QM through the retail channel as well as TPO. The significant decrease in GSD margins in addition to the shift in marketing resources for the retail channel fueled a rapid increase in non-QM activity. We anticipate continued growth in non-QM at healthy margins in all of our origination channels and for the non-QM product ramp and TPO to accelerate as our new account executive additions acclimate their customers to our products, competitive pricing, and market-leading service levels. The 10-year treasury rate has drifted down from 170 at the end of the first quarter of 21 to 150 at the end of the second quarter of 21 and recently dropped below 120 In recent weeks, the range that should support improved GSE origination levels had impact for the third quarter as the firm's non-QM investments continue to take hold. While the non-QM market has not fully returned to pre-crisis levels, it's close. We are encouraged by continued growth in borrower and investor demand, resulting in consistent and solid pricing, as well as strong capital markets execution for our current originations. The non-QM market is characterized by moderately tighter lending standards across the industry, which are in line with our firm's long-term view on alternative credit lending, anchored in quality, consistency, performance, and adherence to ability to repay, or ATR guidelines. We continue to believe in the market opportunity demand for non-QM and the company's ability to be an innovative market leader in the segment. The origination, securitization, and asset management of these products is a core competency of the company. Having originated over $90 billion of such loans from 1995 to 2007, post the subprime financial crisis, the company consciously maintained resources across these disciplines to manage legacy all-day portfolios. And in early 2014, extended that infrastructure as one of the first mortgage companies to anticipate and actively pursue the revival of non-QM mortgage market. Since 2014, we have originated an excess of $4 billion of non-QM steadily yet responsibly, increasing our production from $130 million in 2015 to over a billion and a quarter annually in the two consecutive years leading up to the COVID crisis. Companies not only maintained but added to both the number of warehouse relationships and availed credit and liquidity to comfortably support existing future growth targets for non-QM. We have also recently distributed non-QM loans to a wide range of investors on both a flow and bulk basis, including Wall Street firms, hedge funds, and alternative capital partners. We continue to receive market feedback that the production profile of our non-QM is considered at the top of the quality ranking available in the marketplace. Impacts non-QM collateral performance originator rankings, and adjustment factors with the rating agencies continue to result in efficient permanent capital structures for our investors. As we noted in the Q&A session during our previous earning call, the company has now established a seasoned structured products capital markets team led by Obi Wakori based in New York City. This enables the company to directly or synthetically access the securitization market and opportunistically retain economic interest in the subordinated tranches in asset management and servicing fees of our offerings, which evidence our confidence in the long-term performance and risk-weighted returns of the loans we originate. Obi is going to speak to these initiatives later during his prepared remarks. The company continues to monitor developments across a range of macroeconomic and pandemic-related factors, including trends in inflation, housing affordability, and the credit and interest rate environments. Our risk management and product offerings will evolve with the marketplace to successfully navigate these challenges and see opportunity where risk-reward is properly balanced. As stated earlier, protecting the firm's liquidity continues to be a primary objective for the firm. The firm's cash position was approximately $50 million or $2.34 per common share. at the end of the second quarter. We believe this liquidity position as well as a continued focus on strong risk management has prepared the firm to navigate any future market volatility. Turning now to our longstanding preferred B litigation. As we disclosed in our 8K filing on July 19th, 2021, the Maryland Court of Appeals issued an order which affirmed the lower court's ruling specifically that the proposed 2009 amendment to the preferred B articles did not receive the required votes and therefore the original preferred B articles remain in place. As a result of the court's order, the company will be required to pay approximately 1.2 million in unpaid dividends to certain preferred B stockholders. This amount was previously accrued by the company in 2018 And in addition, the preferred-be stockholders are now entitled to call a special meeting for the election of two additional directors to the company's board. Although disappointed in the court's order, it does bring closure to over a decade of litigation and adds certainty to the terms and rights of that portion of the company's capital structure. The company will welcome the new directors once elected and look forward to their contributions, especially in aligning the company's stakeholders to create an efficient and sustainable capital structure, and common strategic vision for the future. With respect to payment of future dividends on preferred B stock, such dividends are cumulative. They're not payable unless declared by the board. The preferred B stock is perpetual with respect to both its liquidation preference and payment of dividends. At this time, there is no intent to declare any dividends on the preferred B stock. especially in light of short and long-term debt that has seniority to the preferreds in the company's capital structure. Additional information on the company's capital structure and the court's ruling can be found in our 10-Ks, Qs, and 8-K filings. I will now hand the call over to John Glockner to discuss operating results from the first quarter. John? Thank you, George.
spk03: For the second quarter, the company reported a gap loss of $8.9 million as compared to a loss of $683,000 in the first quarter and a loss of $22.8 million in the second quarter of 2020. For the second quarter, core earnings were a loss of $6.9 million as compared to a loss of $262,000 in the first quarter and a loss of $10.4 million in the second quarter of 2020. The second quarter appeared to be a transitional quarter for many mortgage originators, including ourselves, as we were not immune from the margin compression seen throughout the industry. During the second quarter, our originations were $611 million with margins of 175 basis points, as compared to originations of $850 million with margins of 237 basis points in the first quarter. As we had indicated on the first quarter call, we shifted our focus to non-QM production as a result of the margin compression seen in conventional originations. Despite the decline in both origination volume and margin seen during the second quarter, we were able to grow our non-QM production to 100 million as compared to 15 million during the first quarter. The shift in our production mix during the first quarter and subsequent increase in non-QM production during the second quarter helped to offset the impending decline in conventional originations and margin many originators in the industry experienced during the second quarter, ourselves included. As a result, gain on sales loans decreased by 9.4 million from the first quarter to the second quarter. Operating expenses decreased from 21.3 million in the first quarter to 19.6 million in the second quarter. This was led by a decrease in personnel costs from 14.9 million in the first quarter to 12 million in the second quarter, which was primarily the result of a reduction in variable compensation as a result of the decrease in origination volume. Due to the continued competition for talent, despite the decline in personnel expense as compared to the first quarter, personnel costs continue to remain elevated across the industry. Additionally, our personnel expense associated with the rebuild of our non-QM platform has contributed to elevated personnel costs as we continue to add new talent to the team. Our business promotion expense increased to $1.8 million in the second quarter as compared to $1.2 million in the first quarter. This was primarily the result of the aforementioned increase in competitive pressures during the quarter. While the company previously experienced a substantial amount of organic lead flow, the increase in competition has prompted an increase in marketing spend to maintain a consistent level of lead volume. We currently have warehouse lines with a combined borrowing capacity of 550 million, with an additional 25 million in warehouse capacity coming online in the third quarter. Within the call center, our funding to settle turn times continue to be just under 20 days. However, this remains subject to the risk of increased turn times and capacity constraints inherent in an aggregation execution model. Our funding to settle turn times on non-QM are just under 40 days, with our goal to reduce the settlement turn time to 20 days or less by year's end. We continue to carefully manage our liquidity as evidenced by our unrestricted cash position of $50 million on the balance sheet at the end of the second quarter. Our strong liquidity position gives us the flexibility to continue to increase production and invest capital in our non-QM franchise for continued growth. Based on our current cash position, turn times, and borrowing resources, we feel we have the liquidity necessary to meet our near-term production goals. I will now turn it over to Justin to discuss production mix and product focus.
spk04: Thank you, John. 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 amongst lenders contributed significantly to reduce margins across the board. borrowers are able to shop and lenders find themselves competing aggressively on rate. The result has been a significant decrease in GSE volume across the industry. During the second quarter, these competitive and market-driven challenges resulted in approximately 60 to 70 basis points of margin compression within our retail channel when compared to the first quarter. Our retail consumer direct channel, the primary driver of GSE originations, saw a decrease of approximately 33% in production from the second quarters compared to the first quarter. Impact will continue to originate in the GSE space, but will remain diligent around market conditions, impacting margin and competition. Business promotion expense attributed almost entirely to our retail call center increased by approximately 600,000 in the second quarter. During the second quarter, we increased our business promotion to maintain our lead volume in the call center and began targeting non-QM production in the retail call center. Although we continue to source leads through digital campaigns, which allows for a more cost-effective approach, the competitiveness within the California market has driven up our advertisement costs. Despite these challenges in the GSE space, we remain committed to serving consumers in the GSE and government lending spaces while also growing our non-QM opportunities across all channels. This is an important pivot for the company, allowing it to navigate shrinking GSE margins while driving revenue in the non-QM space. Non-QM's reemergence across the market was met with credit and pricing disadvantages that restricted the addressable market of consumers and investors. However, as mentioned on our last call, during the first quarter of this year, Credit, pricing, and overall investor interest returned, allowing impact to resume one of its core competencies and product offerings. Gross margins for non-QM returned to healthy 400 to 500 basis point range by the end of the first quarter, and they've stayed at those same levels to the start of the third quarter. With the aforementioned increase in business promotion related to non-QM marketing in the consumer direct channel, we've seen a corresponding shift in the pipeline composition. Currently, non-QM originations represent approximately 13% of our locked consumer direct pipeline. Historically, the retail consumer direct channel has contributed to impact's overall non-QM originations. Since 2016, our call center has originated approximately 1 billion of non-QM production. Additional marketing allocations have been deployed to leverage the expertise in the call center to drive this business once again. The primary driver and focal point in ramping up our non-QM production remains within our third-party origination channel. The momentum around relaunching non-QM products within TPO has grown considerably since we relaunched this program in the first quarter. The company originated 100 million of non-QM production in the second quarter, as John mentioned, compared to just 15 million in the first quarter. Over 90% of this non-QM production volume was generated through our TPO channel. Currently, the overall composition of the TPO pipeline was approximately 85% non-QM. With a $50 million current monthly run rate of non-QM production out of our TPO channel, we have demonstrated the ability to organically generate significant momentum around this product. Further, to build upon this momentum, we continue to invest in resources, opportunities, around operational improvement and technology aimed at increasing volume and counterparty experience, as well as some recent account executive hires that will continue to boost business in previously underserved regions of the country. We took an iterative and risk-based approach to updating our credit box, guidelines, and pricing during the second quarter to provide a competitive offering to the market while maintaining a high-quality credit standard. Obi Wakori will provide specific commentary around non-QM capital markets philosophy here at MPAC. Obi?
spk00: Thank you, Justin. Over the past two months, the teams in credit and capital markets have been focused on expanding our non-QM products and offering more aggressive pricing across the board. We rolled out the enhanced non-QM underwriting guidelines, which are a return to our pre-COVID product matrix and further our underwriting philosophy of providing quality loans to a broad section of non-QM borrowers. We also added to our range of investor property focused loan products by offering a no ratio product to tap into the large demand for single family rental investors with strong personal credit and low loan to value ratios. In addition to the enhanced underwriting guidelines, the team in Capital Markets has also rolled out more aggressive pricing across both our bank statement and property-focused products. We have developed analytical tools that enable us to better project repayment speeds and default probabilities on each loan, which will in turn allow us to use our rate sheets to target the optimal product mix. We have also developed tools that allow us to monitor our pricing and compare it in real time with other non-QM lenders and adjust our pricing accordingly. These actions have been very well received by our brokers and account executives. As has been mentioned previously, submissions, locks, and fundings are significantly higher since these changes were rolled out. We've also continued to explore structural options for an alternative investment vehicle. The goal for this vehicle will be to allow the company to participate in some of the economics associated with retaining an interest in securizations as either a standalone investor or as part of a joint venture. And that concludes the financial results and our prepared remarks. We will now open the call for questions.
spk01: As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star, then the number 1 on your telephone keypad. And I'm showing no questions at this time. Speakers, you may continue.
spk04: Okay. Well, thank you, everyone, for joining us today. We look forward to speaking with the market in early November and reporting our third quarter results. Thank you, everyone.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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