Impac Mortgage Holdings, Inc. Common Stock

Ladies and gentlemen, thank you for standing by, and welcome to the Impact 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 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Joe Joffrian. of General Counsel. Please go ahead.

Good morning, everyone, and thank you for joining Impact 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 on where to find it, 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 their respective interests 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. The proxy statement and all of the documents filed with the SEC by the company are available free of charge at the SEC's website at www.sec.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 company's exchange offer special meeting. Additional information regarding the identity of participants and their direct or indirect interests 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. 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.sec.gov. Copies will also be available at no charge at the investor relations section of the company's corporate website at www.companies.com or by writing to the company's corporate secretary at Impact Mortgage Holdings, Inc., 1900 Jamboree Road, Irvine, California, 92612. In connection with the exchange offer and consent solicitation, a registration statement on Form S-4, a tender offer statement on Schedule TO, 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, nor may offers to exchange or buy 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 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 Series B preferred stock and Series C preferred stock are strongly advised to read the registration statement, tender offer statement, and other related documents and amendments thereto when 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 at 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, gap in 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-Qs, filed under the Securities and Exchange Act of 1934. These documents contain or 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 Mangiarsina, Chairman and CEO of Impact Mortgage Holdings.

Thank you, Joe. Justin Moisio, our Chief Administrative Officer, John Glockner, our Principal Accounting Officer, Obi Wakori, our EVP Chief Investment Officer, are here with me for prepared remarks. Tiffany Etzinger, our Chief Operating Officer, will be available for the question and answer segment of today's call. For the first quarter of 2022, the company reported a gap net loss of $1.2 million, or seven cents, 007, seven cents per diluted common share, and a core loss of approximately 13 million or 61 cents per diluted common share. The delta between gap and core results is primarily attributable to the increase in the fair value of our net trust assets, which John Glockner will discuss in his prepared remarks later on in this call. As we've outlined in prior earnings calls, the company broadly classifies its origination activities, irrespective of channel, as either rate or credit. Our rate business is centered around our GSE and FHA VA product, while our credit business is focused on our non-QM product. In the first quarter of 2022, with respect to our rate businesses, the company was not immune from reduced origination volumes and margin compression, typically experienced by the industry at the latter stages of refinance waves driven by low interest rates and accommodative monetary policy. Primary 30-year fixed-rate GSC mortgage rates were approximately 3.25% at the beginning of the year, now stand at 5.5%, equating to increased payment for the average borrower of approximately $600 per month in excess of $7,000 annually based on a conventional loan size of $325,000. We anticipate that market conditions will continue to be challenging for the foreseeable future in our rate business and we will continue to adjust our capacity models, marketing spend, and headcount accordingly. With respect to our credit business, the non-QM segment of the market experience significant market pressure beginning in the fourth quarter of 2021 with conditions further deteriorating into the first quarter of 2022 and only recently evidencing signs of stabilizing. Expectations related to rising rates and short end of the curve as expressed in two and three-year swap rates, resulting in cap market participants' concern over extension risk and thus more expensive structured financing terms. Non-QM note rates were required to be recalibrated with the consumer from a low 4% range prevalent in 2021 to a target in the high 6% to low 7% range today, levels not seen in the market since prior to COVID-induced emergency monetary policy measures of March 2021. The average note rate of the company's current locked pipeline reflects this climb up the rate ladder. In the first quarter of 2022, first quarter of 2022 also introduced increased market volatility and heightened market awareness of non-transitory inflation and 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. futures on treasury swaps, forward sale agreements, and best efforts deliveries in lieu of aggregating non-QM to sell in bulk offerings. While layered risks cannot be effectively hedged in times of acute market dislocation, the company will continue to remain disciplined in our origination and capital markets activities. The credit markets have shown evidence of normalization in recent weeks with spreads on new issued non-QM stabilizing and tightening off the wides from the first quarter. The company continues to believe that the addressable market for non-cumulant will expand to our benefit with respect to volume and margin. OB will expand on the market update and the company's positioning during its prepared remarks later in the call. Turning now to provide additional commentary on previously filed 8Ks, which disclosed company developments in 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, for an amount of $37.5 million, a fair value gain of approximately $9 million. The transaction was finalized and the company received all the sale proceeds prior to the end of the first quarter. The sale removes complexity from the company's financial reporting by eliminating approximately $1.6 billion in securitized trust assets and liabilities and the 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 were utilized in full to enhance the working capital and liquidity position in the company, as evidenced by an increase in the company's cash position from $30 million at the end of 2021 to $70 million at the end of the first quarter of 2022. On April 29, 2022, the company reported that it entered into voting agreements with certain holders of its preferred B stock and its preferred C stock, collectively the preferred securities. as well as its common stockholders in connection with proposed amendments to the company's charter. Those amendments would permit the closing of a proposed exchange offer and a redemption, which at the end of the day would allow all preferred restock and preferred C stock to be exchanged or redeemed for a combination of cash, common stock, and in the case of the preferred C holders, long-dated warrants. The proposed amendments are subject to securing the required supermajority from 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 to its outstanding $20 million in convertible promissory notes that resulted in a $5 million payment being made May 9, 2022. the remaining $15 million due and $5 million annual installments commenced in May 2023. In the event the above-mentioned preferred exchange and redemption does not occur prior to the end of October 2022, the remaining $15 million due on the notes would become payable on November 9, 2022. As a reminder, with respect to the company's decade-long preferred relitigation, on July 19, 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 were to remain in place. As a result of the court's order, the company would be required to, one, pay approximately $1.2 million in unpaid dividends to certain preferred B stockholders, which amount was previously accrued by the company in 2018. Two, To consider the dividends of preferred stockholders to be in effect and cumulative since 2009, an amount of approximately $20 million as of March 30, 2022. 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. The proposed amendments and potential finalization of the exchange offer and redemption are holistic and resolving on a go-forward basis. the pre-material issues under the court order. If the transaction closes, approximately $70 million in liquidation preference and cumulative dividends on the preferred securities would be eliminated. The contemplated transaction would 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 engage in capital raise and corporate finance activities absent the overhang of an intractable legacy capital structure. We'll have more comments on this later on in the call during our prepared remarks. I turn the call back over to Joe.