Impac Mortgage Holdings, Inc. Common Stock

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.

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.

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.