Q1 2022 Impac Mortgage Holdings Inc Earnings Call

May 13, 2022

Ladies and gentlemen, thank you for standing by and Bolcom to the Impac Mortgage Holdings, Inc. First quarter 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 your question. During the session you will need to press star one on your telephone.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Joe Geoffrion comp General Counsel. Please go ahead.

Good morning, everyone and thank you for joining Impac mortgage holdings first quarter 2022 earnings conference call.

Before we get to prepared remarks, we have a few disclosures to go through so bear with me.

Important additional information and where to find the company its directors and certain of its executive officers are deemed to be participants in the solicitation of proxies from the company's common shareholders in connection with the matters to be considered at the company's special meeting of shareholders relating to the proposed exchange offer and consent solicitation.

Information regarding the names of the company's directors and executive officers in the respective interest in the company by security holdings or otherwise can be found in the company's proxy statement for its 2022 annual meeting of shareholders filed with the U S Securities and Exchange Commission on April 29, 2022.

Proxy statement and all other documents filed with the SEC by the company are available free of charge at the SEC's website at Www Dot SEC Dot Gov.

The company intends to file a definitive proxy statement and proxy card with the SEC in connection with the solicitation of proxies from the company's shareholders in connection with the matters to be considered at the Companys exchange offer special meeting.

Additional information regarding the identity of participants and their direct or indirect interest by security holdings or otherwise will be set forth therein.

Investors and shareholders are strongly encouraged to read any proxy statement and the accompanying proxy card and other documents filed by the company with the SEC carefully and in their entirety when they become available as they will contain important information.

Shareholders will be able to obtain the proxy statement any amendments or supplements to the proxy statement and accompanying proxy card and other documents filed by the company with the SEC for no charge at the SEC's website at Www Dot SEC Dot Gov.

Copies will also be available at no charge at the Investor Relations section of the company's corporate website at www.

Companies Dot com or by writing the company's corporate Secretary at impact Holdings excuse me Impac Mortgage Holdings, Inc. 19, 500 Jamboree Road, Irvine, California nine to 612.

In connection with the exchange offer and consent solicitation a registration statement on form S. Four a tender offer statement unscheduled and.

And related documents and amendments thereto relating to the exchange offer and consent solicitation will be filed by the company with the SEC.

The series B preferred stock and series C preferred stock may not be exchanged or sold or may offers to exchange or by be accepted prior to the time. The registration statement becomes effective this earnings call shall not constitute an offer to exchange or sell or the solicitation of an offer to exchange or buy nor shall.

There'll be any exchange or sale of such securities in any state in which such offer exchange solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

<unk> as a preferred b.

The series B preferred stock and series C preferred stock are strongly advised to read the registration statements tender offer statement and other related documents and amendments thereto, one available because these documents will contain important information.

Such holders will be able to obtain copies of the exchange offer materials for free from the company as the aforementioned address or the SEC's website.

The company is not making any recommendation to holders of outstanding series B preferred stock or series C preferred stock as to whether they should tender their shares pursuant to the exchange offer and consent solicitation.

Also during this call, we will make projections or 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.

Hughes.

Under the series Securities Exchange Act of $19 34.

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 <unk>, Chairman and CEO of Impac mortgage holdings.

Thank you Joe just on La <unk>.

<unk> administrative officer, Jon Block principal accounting officer.

<unk>, our EVP Chief investment officer.

Here with me.

<unk> <unk> Chief operating officer will be available for the question and answer segment.

Today's call for the first quarter of 2022, the company reported a GAAP net loss of $1 2 million or seven.

Well below <unk> 77 per diluted common share and a core loss of approximately $13 million or <unk> 61 per diluted common share the delta between GAAP and core results is primarily attributable to the increase in the fair value of our net trust assets.

<unk> will discuss in his prepared remarks later on this call.

As we've outlined in prior earnings call. The company broadly classified its origination activities or cyclical channel either rate or credit a rate business is centered around our GSE and FHA VA product, while our credit businesses focused on the non QM product.

In the first quarter 2022.

Back to our REIT businesses.

Company was not immune from new storage and Asian volumes and margin compression typically experienced by the industry.

Later stages, the refinance wave is driven by low interest rates and accommodative monetary policy.

Primary 30 year fixed rate GSE mortgage rates are approximately 3.25% at the beginning of the year now stands at five 5% equating to increased payment for the average borrower of approximately $600 per month.

In excess of 7000 annually based on the convertible loans conventional loan size of $325000.

We anticipate that market conditions will continue to be challenging for the foreseeable future and our AIT business.

We will continue to adjust our capacity models marketing spend and headcount accordingly.

With respect to our credit business and not fluids segment of the mortgage market experienced significant market pressure youre getting in the fourth quarter of 2021 with conditions further deteriorating into the first quarter 2022, and only recently evidenced seeing signs of stabilizing expectations related to rising.

Rates and short end of the curve.

His expression and three year swap rates.

The cat market participants concern over extension risk and Thats more expensive structured financial terms.

Non QM note rates were required to be recalibrated with the consumer from a low 4% range prevalent in 2021 to target in the high six percents to low seven.

Range today's levels not seen in the market since prior to the Covid.

So monetary policymakers March 2020.

The average note rate of the company's current lock pipeline reflects this climb up the rate later in.

In the first quarter of 2022.

First quarter of 2022 also introduced increased market volatility and heightened market awareness of non transitory inflation in credit and liquidity risk brought on by geopolitical events.

Company deploys a wide range of capital markets hedge and delivery mechanisms with increased reliance over the last year of futures on Treasury swaps forward sale agreements and best efforts deliveries and move aggregating non QM to sell in bulk offerings.

While layered risks cannot be effectively hedged.

Times of acute market dislocation.

We will continue to remain disciplined in our origination and capital markets activities and credit markets have shown evidence of normalization in recent weeks with spreads on new issue non QM stabilizing.

Turning off the lights in the first quarter. The company continues to believe that the addressable market for non QM will expand to a benefit with respect to volume and margin.

<unk> will expand on the market update.

<unk> positioning.

Remarks later in the call turning now to provide additional commentary on previously filed eight Ks, which disclosed company developments from the first quarter and early second quarter.

On March 16, 2022, the company reported that we entered into an agreement to sell substantially all of its retain residual certificates issued in connection with all day and multifamily securitizations prior to the credit crisis of 2007 collectively the company's legacy securities for an amount of <unk>.

$37 5 million fair value gain of approximately $9 million.

The transaction was finalized in the company, we see bolus sale proceeds prior to the end of the first quarter.

Removes complexity from the Companys financial reporting by eliminating approximately $1 6 billion and securitized trust assets and liabilities and the related change in fair value net trust assets from the balance sheet and statement of operations. The legacy Securities unencumbered proceeds from the sale, we utilized and told to enhance the work.

Capital and liquidity position in the company as evidenced by an increase in the company's cash position.

$30 million at the end of 2021 to.

The $70 million at the end of the first quarter 2022.

On April 29, 2022, the company reported that it entered into voting agreements with certain holders of its preferred destock and its preferred E stock collectively the preferred securities as well as its common stockholders in connection with proposed amendments to the company's charter.

Those amendments will permit the closing of a proposed exchange offer and the redemption, which at the end of the day.

Would allow for the stock.

C stop to the exchange the <unk> for a combination of cash common stock.

In the case of the preferred stockholders long dated warrants.

The proposed amendments are subject to securing the required majority to each of the preferred security classes and a simple majority from the common shareholders as well as satisfying certain requirements of Maryland law simultaneously with the execution of these voting agreements the company entered into amendments.

Outstanding $20 million in convertible promissory notes that resulted in a $5 million payment being made may 19 2022.

Maybe $15 million due in $5 million annual installments connect since May 2020.

And without the above mentioned preferred exchange and launching does not occur prior to the end of October 2022 remaining $15 million due on the notes will become payable on November nine 2022.

As a reminder, with respect to the company's decade long preferred B litigation on July 19th 2021, Maryland, political Appeals issued an order, which affirmed the lower courts ruling specifically at the proposed 2009, an amendment to the preferred the articles did not receive the required votes and therefore, the original preferred the articles.

To remain in place as.

As a result of the court sort of a couple of required to one <unk>.

Approximately $1 2 million and on paying dividends to certain preferred stockholders, which amount was previously accrued by the company in 2018.

Two.

Consider the dividends and preferred stockholders to be effective affected chemo pivotal since 2009, an amount of approximately $20 million as of March 30, <unk> 2022.

And three to entitle the preferred stockholders to call a special meeting for the election placement of two additional directors to the company's board.

Proposed amendments and potential Finalization, we exchange offer redemption, our holistic and resolving on a go forward basis. The three material issues on the quarter. If the transaction closes approximately $70 million liquidation preference in cumulative dividends on the preferred securities would be eliminated continental.

And played a transaction be accretive to the book value of the common stock.

In addition should these contemplated transactions take effect the company will be better positioned to engaged capital raise and corporate finance activities absent the overhang of an intractable legacy capital structure.

We will have more comments on this later on in the call.

Their remarks, I turn the call back over to Joe Joe.

Thanks George.

As we discussed and as mentioned by George the preferred B litigation remains outstanding at this time there was a hearing conducted by the circuit Court on February 18th 2022 at which time the court heard arguments by the parties regarding class certification, who will be designated as class representative in class Council and other related motions.

To date the court has not issued any final rulings.

With respect to the voting agreements and proposed amendments to the company's articles mentioned previously I would like to highlight the fact that there would be many conditions to closing such transaction as George mentioned amending the company's charter requires the approval of at least two thirds of the shares of each of the preferred stock classes of equity as well as approval.

By over 50% of our outstanding common stock. In addition to common stockholders was also approved the issuance of new common shares the SEC must approve our registration statement and there must be no material adverse developments in the company is reasonable judgment with respect to any action or proceeding concerning the company.

Although we have already received commitments via voting agreements from certain equity holders in each of the three classes of equity we have not yet received commitments that meet the required approval percentages and no guarantees can be made that such approvals will be obtained.

Additionally, Maryland state in which the company has incorporated has limitations on the payment of distributions to stockholders, including on redemption or repurchase of their shares unless the company meet certain financial test at the time the distributions are to be made.

Although we have a lot of it until the end of October 2022 to complete certain elements of the transaction without having the outstanding convertible note, becoming due and payable in full we can make no assurances that the company will meet the required Maryland financial tests by such time, even if we obtain the required approvals from shareholders.

John Walker will now discuss the operating results for the first quarter of 2022, John Thank.

Thank you Joe.

For the first quarter the company reported a GAAP loss of $1 2 million as compared to earnings of $3 6 million for the fourth quarter and a loss of 683000 in the first quarter of 2021.

Our first quarter core loss was $13 million as compared to a core loss of $5 million in the fourth quarter and loss of 262000 in the first quarter of 2021.

The financial results for the quarter reflect significant market pressure, which began in the fourth quarter of 2021 and accelerated through the end of the first quarter as a result of increasing interest rates inflation credit and liquidity risk.

Gain on sale of loans decreased to $6 million during the first quarter as compared to $14 9 million during the fourth quarter.

During the first quarter, our originations were 482 million with margins of 124 basis points as compared to originations of $759 million with margins of 196 basis points in the fourth quarter of 2021.

The decline in production quarter over quarter was due to both a reduction in our rates into the business due to the increase in interest rates as well as a reduction in our credit business as we made a decision to reduce risk and protect liquidity, which Justin will touch upon in his prepared remarks.

As George had indicated previously during the first quarter, we sold our legacy residual certificates and assign the related call rights and 34 consolidated Securitizations and three non consolidated securitization for $37 5 million.

Which had a book value of approximately $16 7 million at the end of 2020, and most recently $27 9 million at the end of 2021.

Upon the sale and transfer we were able to deconsolidation approximately $1 6 billion of trust assets and their corresponding liabilities, while recording an increase in fair value of $9 2 million net of transaction costs.

Additionally, we recorded a $1 6 million increase in fair value gains on our long term debt.

Which combined with the sale of the legacy portfolio accounted for $10 8 million of the $11 million in other income during the first quarter.

Changes in fair value of net trust assets and long term debt are excluded from core earnings which is the predominance of the delta between GAAP and core loss.

Operating operating expenses decreased to $19 4 million in the fourth and the first quarter as compared to $20 5 million in the fourth quarter, primarily due to a reduction in personnel costs, which decreased to $11 9 million from $13 2 million in the fourth quarter.

The decrease in personnel costs during the first quarter was primarily primarily the result of a decrease in variable compensation commensurate with reduced originations as well as a slight reduction in head count to support the reduced volume.

In addition to the reduction in head count during the first quarter, we have continued to adjust our capacity to support our volume levels.

Our business promotion expense was flat at $2 3 million quarter over quarter. This reflects our previous push to target non QM production in our retail channel continued product expansion outside of California, and maintain our lead volume.

While the company previously experienced a substantial amount of organic lead flow.

The recent competitiveness among other lenders for non QM production within the California market has driven up advertising costs.

We currently have warehouse lines with a combined borrowing capacity of $600 million and we'll continue to balance capacity needs to meet funding demands of our non QM production goals.

As previously indicated the sale of the legacy securitization portfolio enabled us to unlock value that had been trapped within the legacy securitizations on our balance sheet, improving our liquidity and unencumbered cash cash position to $70 million at the end of the first quarter as compared to $30 million at the end of the fourth quarter.

We continue to carefully manage our liquidity and balance the demands of an aggregation model.

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.

<unk> will provide commentary around capital markets activity Obi.

Thank you John .

Previously mentioned the first quarter of 2022, so on the acceleration of the market volatility that began early in the fourth quarter of 2021.

The yield curve flattened dramatically as the short end of the curve the price in anticipation of the fed response to rising inflation.

During the quarter, two year and three year swap rates rose by 161 basis points on the 148 basis points respectively.

Spreads between two and 10 year treasuries went from 77 basis points at the beginning of the quarter to minus one basis point quarter on.

The widening in credit spreads also excellent during the quarter CTX high yield widened from 293 basis points to 306 basis points, while investment grade was widened by 17 basis points.

And mortgages AAA non QM brand.

150 basis points to roughly 200 basis points over interpolated yieldco.

Similarly, the basis between current coupon MBS and the 10 year chosen really widened from 56 basis points.

Third 15 basis points.

It's important to note George previously mentioned, while we continue to see widening of the broader credit market with CBS <unk> combing the HIFU hundreds long queue on spreads have stabilized.

Around 75 basis points over.

We sell off in rates, coupled with the widening of credit spreads led to rapid increase in mortgage rates offered to borrowers.

<unk> rates rose from the low point at the beginning of the quarter, so almost 5% by the end.

While the average rate per month ones from low fours to the low 6% range.

Trend upwards on rates of continued with current rates for 30 year fixed rate agency mortgages are on five 5%.

<unk>.

Non QM mortgages on the high sixes to low 7% range.

Home prices remained strong throughout the first quarter with national prices up in March by almost 21% year over year.

And three 3% for the month.

System supply demand imbalance, coupled with a low rate environment.

The increase in home prices.

However, as rates continue to rise.

The ability will become an increasing impediment to continued home price appreciation.

As a result of the challenging environment, we continue to take steps to mitigate and manage our exposure to both rates on credit we have employed a combination of quality loan agreements on best efforts execution to minimize our exposure to and spread volatility while using interest rate swaps to hedge our interest rate.

<unk>.

Yeah.

The company sold off its remaining GSE servicing book in the fourth quarter of 2020, and consequently, I would not expect.

Any of the MSR gains our MSR related hedge losses that we have seen from some other lenders.

I will now turn it over to Justin to discuss our origination activity during the quarter Justin.

Thanks Tobey.

As we've discussed over the last year the landscape of the GSE lending space continues to present challenges to conventional lending growth during.

During the first quarter of this year the sharp decline in conventional GSE origination volume was felt industry wide as outlined in industry publications and operating results for mortgage lenders across the industry.

While margin compression is typically a cyclical challenge to overcome in the mortgage industry and off cycles, the velocity in which interest rates began rising as well as the inflationary pressures felt across the market resulted in a sudden and dramatic impact on many lenders irrespective of the lender size or history in the <unk>.

History.

Not surprising the resulting decrease in loan application volume and overall origination growth growth was felt within our company as well.

Impacts primary driver of GSE originations is our retail consumer direct call center during the first quarter of 2022, our GSE originations in the retail channel decreased 55% as compared to the fourth quarter of 2021 and 80% from the same period in 2021.

This was as a result of the aforementioned economic and market pressures within the industry.

We will continue to originate in the GSE space through our retail channel with very limited minimal marketing spend but we will remain diligent around market conditions with an eye towards protecting margin and credit quality.

Previously we discussed the important pivot within our consumer direct retail call center, allowing it to navigate shrinking GSE margins and offsetting this volume with non QM origination volume and revenue.

We are pleased with how quickly we've been able to shift focus and increased non QM production and the call Center. However, it is worth noting that the non QM credit market is also subject to changing markets, including rate increases forced by changes in credit spreads among capital markets participants.

During our last call. We noted that the non QM growth trajectory in the retail call center, which stabilize but that we did expect our <unk> run rate to remain relatively flat in the first quarter of 2022.

Our non term funding volume in the retail call center during the first quarter was approximately $125 million, which was in line with our fourth quarter production.

During the month of April we did experience a decrease in non QM production through the call center as compared to the monthly production in the first quarter.

This was primarily due to the volatility that <unk> touched on in the non QM market, resulting in the rate shock for borrowers for pricing changes and a decrease in credit exceptions from non QM investors, leading to increased fallout within our pipeline the.

The same velocity and rate changes that impacted GSE consumers, which certainly felt in the non QM space as well.

As John touched on our business promotion expense attributed almost entirely to our retail channel was flat in the fourth first quarter as compared to the fourth quarter.

We continue to focus on maintaining our lead volume and the call center and augment targeted marketing to attract non QM focus consumers.

Currently almost all of our paid marketing spend and the call centers non QM centric.

Additional marketing allocations will continue to be deployed as needed to leverage the expertise and the call center and educate consumers around the non QM product offering to further promote growth in the channel.

Since the end of the second quarter of 2021, the primary focal point and ramping up our non QM production has been within our third party wholesale origination channel.

Wholesale has traditionally been a driving channel around non QM originations industry wide as well as the successful vehicle for increasing volume over the last several years.

The company originated over $310 million of non term production in the first quarter of 2022 down from $380 million in the fourth quarter of 'twenty, one roughly 60% of our non QM production was generated through our Tpa channel with the overall composite composition of the <unk> pipeline.

Being almost entirely non QM product.

During the first quarter, our volume in the Tpa channel decreased by approximately 25% as compared to the fourth quarter.

In response to changing market conditions, we've taken steps to protect margin and manage credit risk by raising rates across all non QM products. This recalibration was implemented in kind by many non QM originators and investors and remains an ongoing balance between competitiveness and.

Risk management.

With the <unk> platform being all non QM the need to manage market risk through credit and pricing was top of mind in light of the volatility in illiquidity in certain segments of the secondary markets.

Adjusting pricing proactively allowed the company to navigate the uncertainty and execution and non QM margin compression, which resulted in reduced pipeline size and greater fallout as borrowers and brokers adjusted to new and notably higher rates across the industry.

The reduction of the company's non QM production during the course of the quarter is therefore, not surprising given the swing of 300 to 400 basis basis points on average in rate increases to consumers over a course of a 90 day period.

Overall.

Within our GPO channel originate originations downsize the $20 million in April as compared to the prior two quarters, which had us at a monthly run rate of about $75 million per month as locks at lower coupons funded out and pricing became less favorable with secondary market takeouts.

The replenishment of new submissions and locks was unfavorably impacted the forecast for April in subsequent quarters will likely reflect these market driven changes to overall origination volume however.

However, despite these challenges the company is committed to non QM and believes that access to alternative credit remains a core tenet of the business. We will continue to support and enhance our non QM offering while simultaneously looking for additional opportunities to drive efficiency reduce cost and remain agile.

As the market continues to evolve I'm, sorry, evolve around liquidity inflation and credit risk.

So at this point that concludes the financial results in our prepared remarks.

We received several questions from shareholders prior to the call.

Last night and this morning, and we've had corresponding answers incorporated into our prepared remarks and with no additional questions on the line that we see we will conclude our first quarter earnings call and we look forward to speaking with the market in the very near future. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Good day.

Yeah.

Okay.

Yes.

Sure.

Okay.

Thanks.

Okay.

[music].

Yes.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Impac Mortgage Holdings, Inc. First quarter earnings Conference call. At this time, all participants are in a listen Pitney Bowes.

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 one on your telephone if.

If you require any further assistance. Please press star Zero I would now like turn the conference over to Joe jump in off the top General Counsel. Please go ahead.

Good morning, everyone and thank you for joining Impac mortgage holdings first quarter 2022 earnings conference call.

Before we get to prepared remarks, we have a few disclosures to go through so bear with me.

Important additional information and where to find that the company its directors and certain of its executive officers are deemed to be participants in the solicitation of proxies from the company's common shareholders in connection with the matters to be considered at the company's special meeting of shareholders relating to the proposed exchange offer and consent solicitation.

Information regarding the names of the company's directors and executive officers and the respective interest in the company by security holdings or otherwise can be found in the company's proxy statement for its 2022 annual meeting of shareholders filed with the U S Securities and Exchange Commission on April 29, 2022.

Proxy statement and all other documents filed with the SEC by the company are available free of charge at the SEC's website at Www Dot SEC Dot Gov.

Additional information regarding the identity of participants and their direct or indirect interest by security holdings or otherwise will be set forth therein.

Investors and shareholders are strongly encouraged to read any such proxy statement and the accompanying proxy card and other documents filed by the company with the SEC carefully and in their entirety when they become available as they will contain important information.

Copies will also be available at no charge at the Investor Relations section of the company's corporate website at Www company.

Companies Dot com or by writing the company's corporate Secretary at impact Holdings excuse me Impac Mortgage Holdings, Inc. 19, 500 Jamboree Road, Irvine, California nine to 612.

In connection with the exchange offer and consent solicitation a registration statement on form S. Four a tender offer statement on schedule Tito Andrew.

And related documents and amendments there two relating to the exchange offer and consent solicitation will be filed by the company with big Scary.

With the SEC.

It would be any exchange or sale of such securities in any state in which such offer exchange solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

Holders of the preferred B C.

Such holders will be able to obtain copies and exchange offer materials for free from the <unk>.

Company is the aforementioned address or the SEC's website.

Hughes.

Under the series Securities and Exchange Act of $19 34.

I would like to get started by introducing George Mangiaracina, Chairman and CEO of Impac mortgage holdings.

Thank you Joe just the law.

<unk> administrative officer, John <unk>, our principal accounting officer.

<unk>, our EVP Chief investment officer.

Are here with me.

<unk> if any accident.

Operating officer will be available for the question and answer segment.

Today's call for the first quarter of 2022, the company reported a GAAP net loss of $1 2 million or seven.

<unk> 77 per diluted common share and a core loss of approximately $13 million or <unk> 61.

Per diluted common share the delta between GAAP and core results is primarily attributable to the increase in the fair value of our net trust assets.

Locklear will discuss in his prepared remarks later on in this call.

As we've outlined in prior earnings call the company broadly classified its origination activities irrespective of channel.

The rate of credit a rate business is centered around our GSC and <unk>.

VA product, while our credit businesses focused on a month to one product.

First quarter 2012 to request with respect to our rate businesses. The company was not strong new store generation volumes and margin compression typically experienced by the industry at the latter stages of refinance wave driven by low interest rates and accommodative monetary policy prior.

In excess of 7000 annually based on the convertible loans, our conventional loan size of $325000.

We anticipate that market conditions will continue to be challenging.

The foreseeable future in our <unk> business.

We will continue to adjust our capacity models marketing spend and headcount accordingly.

With respect to our credit business and not fluids segment item mortgage market experienced significant market pressure youre getting in the fourth quarter of 2021 with conditions further deteriorating into the first quarter 2022, and only recently evidencing signs of stabilizing expectations related to rising.

Rates and short end of the curve.

As expressed in EG and three year swap rates resulted in cat market participants concern rollover extension risk and thats more expensive structured financing terms.

Non QM note rates were required to be recalibrated with consumer from a low 4% range prevalent in 2021 to target in the high six percents to low sevens.

Range today's levels not seen in the market since prior to the Covid emergency monetary policymakers March 2020.

The average note rate of the company's current lock pipeline reflects this climb up the rate later in.

In the first quarter of 2022.

First quarter of 2022 also introduced increased market volatility and heightened market awareness of <unk>.

Transitory inflation in credit and liquidity risk brought on by geopolitical events. The company deploys a wide range of capital markets hedge and delivery mechanisms with increased reliance over the last year of futures on Treasury swaps forward sale agreements and best efforts deliveries and with aggregating non QM to sell in bulk offerings.

While layered risks cannot be effectively hedged.

So the acute market dislocation.

<unk> will continue to remain disciplined in our origination and capital markets activities and credit markets have shown evidence of normalization in recent weeks with spreads on new issue non QM stabilizing tightening off the lights in the first quarter. The company continues to believe that the addressable market for March alone will expand to a benefit with respect.

The volume and margin.

We will expand on the market update and the company's positioning with our prepared remarks later in the call turning now to provide additional commentary on previously filed eight Ks, which disclosed company developments from the first quarter and early second quarter.

On March 16, 2022, the company reported that it entered into an agreement to sell substantially all of its retained residual certificates issued in connection with all day and multifamily securitizations prior to the credit crisis of 2007 collectively the company's legacy Securities Florida.

Now from $37 5 million, a fair value gain of approximately $9 million. The transaction was finalized and the company received gold sale proceeds prior to the end of the first quarter.

The salary removes complexity from the Companys financial reporting by eliminating approximately $1 6 billion and securitized trust assets and liabilities and a related change in fair value of net trust assets from the balance sheet and statement of operations. The legacy Securities were unencumbered proceeds from the sale of utilized and told to enhance.

The working capital and liquidity position of the company as evidenced by an increase in the company's cash position and $30 million at the end of 2021.

The $70 million at the end of the first quarter 2022.

On April 29, 2022, the company reported that it entered into voting agreements with certain holders of its preferred destock and it's the protein stock collectively the preferred securities as well as its common stockholders in connection with proposed amendments to the company's charter those.

Those amendments will commit the closing of a proposed exchange offer and the redemption, which at the end of the day.

Would allow for the stock and preferred stock to the exchange the <unk> for a combination of cash common stock and in the case of the preferred holders long dated warrants.

The proposed amendments are subject to securing the required majority for each of the preferred security classes and a simple majority from the common shareholders as well as satisfying certain requirements of Maryland law.

Simultaneously with the execution of these voting agreements the company entered into amendments.

<unk> 20 million in convertible promissory notes that resulted in a $5 million payment being made may 19, 2022, the remaining $15 million due in $5 million annual installments commencing in late 2020.

And without the above mentioned preferred exchange and redemptions not occur prior to the end of October 2022, the remaining $15 million due on the notes will become payable on November nine 2022.

As a reminder, with respect to the company's decade long preferred B litigation on July 19th 2021, the Maryland Court of Appeals issued an order, which affirmed the lower courts ruling specifically that the proposed 2009 amendment to the preferred the articles to not receive the required votes and therefore, the original preferred the Arctic.

To remain in place.

As a result of the court's order a couple of we acquired one pay approximately $1 2 million and on paying dividends to certain preferred stockholders, which amount was previously accrued by the company in 2018.

Two to.

Consider the dividends and preferred stockholders to be effective effect in chemo pivotal since 2009, an amount of approximately $20 million as of March 32022.

And three to entitle the preferred stockholders to call a special meeting for the election and placement of two additional directors to the company's board.

Proposed amendments and potential Finalization, we exchange offer and redemption of our holistic and resolving on a go forward basis. The three material issues under a court order if the transaction closes approximately $70 million and liquidation preference in cumulative dividends on the preferred securities would be eliminated comparable.

And played a transaction will be accretive to the book value of the common stock.

In addition should these contemplated transactions take effect the company will be better positioned to engaged capital raise and corporate finance activities, absolutely overhang of and trackable legacy capital structure.

We will have more comments on this later on in the call, but we're well prepared remarks, I'll turn the call back over to Joe Joe.

Thanks George.

As we discussed and as mentioned by George the preferred B litigation remains outstanding at this time there was a hearing conducted by the circuit Court on February 18, 2022 at which time the court heard arguments by the parties regarding class certification, who will be designated as class representative in class Council and other related motions.

To date the court has not issued any final rulings.

By over 50% of our outstanding common stock. In addition to common stockholders was also approved the issuance of new common shares the SEC must approve our registration statement and there must be no material adverse developments in the companys reasonable judgment with respect to any action or proceeding concerning the company.

John Walker will now discuss the operating results for the first quarter of 2022 John .

Thank you Joe.

For the first quarter the company reported a GAAP loss of $1 2 million as compared to earnings of $3 6 million for the fourth quarter and a loss of 683000 in the first quarter of 2021.

Our first quarter core loss was $13 million as compared to a core loss of $5 million in the fourth quarter and loss of 262000 in the first quarter of 2021.

The financial results for the quarter reflects significant market pressure, which began in the fourth quarter of 2021 and accelerated through the end of the first quarter as a result of increasing interest rates inflation credit and liquidity risk.

Gain on sale of loans decreased to $6 million during the first quarter as compared to $14 9 million during the fourth quarter.

Yes.

The decline in production quarter over quarter was due to both a reduction in our rate sensitive business due to the increase in interest rates as well as a reduction in our credit business as we made a decision to reduce risk and protect liquidity, which Justin will touch upon in his prepared remarks.

As George had indicated previously during the first quarter, we sold our legacy residual certificates and assign the related call rates and 34 consolidated Securitizations and three non consolidated securitizations for $37 5 million.

Which had a book value of approximately $16 7 million at the end of 2020, and most recently $27 9 million at the end of 2021.

Additionally, we recorded a $1 6 million increase in fair value gains on our long term debt.

Which combined with the sale of the legacy portfolio accounted for $10 8 million of the $11 million in other income during the first quarter.

Changes in fair value of net trust assets and long term debt are excluded from core earnings which is the predominance of the delta between GAAP and core loss.

In addition to the reduction in head count during the first quarter, we have continued to adjust our capacity to support our volume levels.

While the company previously experienced a substantial amount of organic lead flow the.

The recent competitiveness among other lenders for non QM production within the California market has driven up advertising costs.

We currently have warehouse lines with a combined borrowing capacity of $600 million and we will continue to balance capacity needs to meet funding demands of our non QM production goals.

We continue to carefully manage our liquidity and balance the demands of an aggregation model.

Our current cash position turn times and borrowing resources, we feel we have the liquidity necessary to meet our near term production goals.

<unk> will provide commentary around our capital markets activity.

Thank you John .

As previously mentioned the first quarter of 2022 saw an acceleration of the market volatility that began early in the fourth quarter of 2021.

The yield curve flattened dramatically as the short end of the curve, we priced in anticipation of the fed response to rising inflation.

During the quarter, two year and three year swap rates rose by 161 basis points on the 148 basis points respectively.

The spread between two and 10 year treasuries went from 77 basis points at the beginning of the quarter to minus one basis point quarter on.

The widening in credit spreads also accelerated during the quarter CTX high yield widened from 293 basis points to 336 basis points, while investment grade was widened by 17 basis points.

And mortgages AAA non <unk> brands.

150 basis points to roughly 200 basis points over in total related yield curve.

Similarly, the basis between current coupon MBS and the 10 year chosen really widened from 56 basis points to one <unk>.

Hundred 15 basis points.

It is important to note George previously mentioned, while we continue to see widening of the broader credit market with <unk> yields combing the HIFU homegoods <unk> spreads have stabilized.

Around 175 basis points over.

The sell off in rates, coupled with the widening of credit spreads led to rapid increase and mortgage rates offered to borrowers.

Fee rates rose from below three at the beginning of the quarter to almost 5% by the end.

While the aggregate amount due on <unk> one.

So for us to the low 6% range.

Trend upwards in rates has continued with current rates for 30 year fixed rate agency mortgages are up five 5%.

<unk>.

Non QM mortgages on the high sixes to low 7% range.

Home prices remained strong throughout the first quarter with national prices up in March by almost 21% year over year.

Three 3% for the month.

Persistent supply demand imbalance, coupled with a low rate environment has led to the increase in home prices.

However, as rates continue to rise affordability will become an increasing impediment to continued home price appreciation.

As a result of the challenging environment, we continued to take steps to mitigate and manage our exposure to both rates on credit we have employed a combination of floods flow agreements on best efforts execution to minimize our exposure to and spread volatility.

We are using interest rate swaps to hedge our interest rate exposure.

The company sold off with three mainland GSE servicing book in the fourth quarter of 2020, and consequently, I would not experience any of the MSR gains are.

MSR related hedge losses that we have seen from some other lenders.

I will now turn it over to Justin to discuss our origination uptick this quarter adjusting.

Thanks Tobey.

As we've discussed over the last year the landscape of the GSE lending space continues to present challenges to conventional lending growth.

During the first quarter of this year the sharp decline in conventional GSE origination volume was felt industry wide.

As outlined in industry publications and operating results for mortgage lenders across the industry.

Industry.

Not surprising the resulting decrease in loan application volume and overall origination growth growth was felt within our company as well.

This is a result of the aforementioned economic and market pressures within the industry.

During our last call. We noted that the non QM growth trajectory in the retail call center, which stabilize but that we did expect our non QM run rate to remain relatively flat in the first quarter of 2022.

Our non term funding volume in the retail call center during the first quarter was approximately $125 million, which was in line with our fourth quarter production.

During the month of April we did experience a decrease in non QM production through the call center as compared to the monthly production in the first quarter.

This was primarily due to the volatility that <unk> touched on in the non QM market, resulting in the rate shock for borrowers from pricing changes and a decrease in credit exceptions from non QM investors, leading to increased fallout within our pipeline the same velocity and rate changes that impact.

Acted GSE consumers, which certainly felt in the non QM space as well.

As John touched on our business promotion expense attributed almost entirely to our retail channel was flat in the fourth first quarter as compared to the fourth quarter.

We continue to focus on maintaining our lead volume and the call center and augment targeted marketing to attract non QM focused consumers.

Currently almost all of our paid marketing spend and the call centers non QM centric.

Since the end of the second quarter of 2021, the primary focal point and ramping up our non QM production has been within our third party wholesale origination channel.

Wholesale has traditionally been a driving channel around non QM originations industry wide as well as the successful vehicle for increasing volume over the last several years.

The company originated over $310 million of non QM production in the first quarter of 2022 down from $380 million in the fourth quarter of 'twenty, one roughly 60% of our non QM production was generated through our Tpa channel with the overall composite composition of the <unk> pipeline.

Being almost entirely non QM product.

During the first quarter, our volume in the Tpa channel decreased by approximately 25% as compared to the fourth quarter and.

Risk management.

Overall GPO within our Tpa channel originate originations downsize the $20 million in April as compared to the prior two quarters, which had us at a monthly run rate of about $75 million per month as locks at lower coupons funded out and pricing became less favorable with secondary.

Market Takeouts, the replenishment of new submissions and locks was invariably impacted the forecast for April in subsequent quarters will likely reflect these market driven changes to overall origination volume.

<unk> is the market continues to evolve I'm, sorry, evolve around liquidity inflation and credit risk.

So at this point that concludes the financial results in our prepared remarks.

We received several questions from shareholders prior to the call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

A great day.

Q1 2022 Impac Mortgage Holdings Inc Earnings Call

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