Q3 2021 Impac Mortgage Holdings Inc Earnings Call
Good day and thank you for standing by welcome to the APAC mortgage will reach 2021 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question and answer session to ask a question you need to press star one on your telephone cause anything between the countries you need to reach an operator.
Please press Star Zero, and now I would like to turn the corner soon.
General Counsel.
You may begin.
Good morning, everyone and thank you for joining Impac mortgage holdings third quarter 2021 earnings conference call. 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 in 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 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 means Youre, Athena chairman and CEO of Impac mortgage holdings.
Thank you Joe good morning.
Just a noisy or chief administrative officer, Jon block there.
Her and principal accounting officer will join us to prepared remarks, Obi Macquarie, our EVP of alternative credit products, and Tiffany Entsminger, Chief operating officer will be available.
Rene section of todays call.
Approximately three months ago during our Q2 2021 earnings call on August 12.
We discussed at the company and continue to grow its retail and PPL origination platforms, while continuing to focus on liquidity and risk management. Following the 2020 Covid crisis.
The Companys last business update expressed the view that market conditions in existence.
I continue to normalize with margins narrowing as a capacity to originate and process flows in the industry.
Caught up with consumer demand.
These trends within our rates business generally continued in the third quarter and are anticipated to remain in effect through the end of the year absent a material move in interest rates.
We also previously referenced the increasing investor demand expand.
Expansion of underwriting guidelines as well as improving margins for the company is not swim production a competency of the firm that we're currently investing in with capital market securitization talent.
Growing sales and operations to them.
Credit business exceeded expertise expectations for the third quarter measured by the increase from our non QM origination volume and fourth submission and lock pipelines.
The company reported net GAAP income of $2 1 million or eight cents per diluted common share.
Core earnings of approximately 800000 or four cents per diluted common share for the second quarter of 2021.
Core earnings are an alternative measure of results that senior management utilizes to gauge the company's performance core earnings isolates results from recurring business activities by adjusting for certain nonrecurring items, such as changes in the fair value of our long term debt and our trust assets gain or loss on mortgage servicing.
Held for sale and other nonrecurring legacy matters.
As it relates to production volume, we generated total originations of approximately $680 million in Q3 2021 versus $610 million in Q2, 2021 with non QM originations contributing 186 million in the third quarter.
Versus $100 million in the second quarter.
We do not typically provide forward looking guidance, but we will note that our locked pipeline was only $10 million at the end of 2020.
$80 million.
At the end of Q2 and approach 200 million as at the end of October 2021.
This marks a significant accomplishment for our non QM franchise, which we relaunched in earnest post COVID-19 market dislocation in the fourth quarter of 2021 and demonstrates the companys pivot towards non QM originations.
Across both our retail and our T P O channels.
We anticipate continued growth of non QM originations with attractive margins in both origination channels.
Knox when production ramp within our T. P O channel to celebrate accelerate as new account executive additions.
Acclimate their customers to our products competitive pricing and market, leading service levels, we believe and the market opportunity and demand for not QM and the company's ability to be an innovative market leader.
In this segment.
Since 2004, we have originated in excess of $4 5 billion of non QM steadily get responsibly increase.
<unk>, our production from $130 million in 2015 tool for one and a quarter of billion annually in two consecutive years, leading up to the Covid crisis, the company subject to capital markets and liquidity conditions projects to fund $1 5 billion in non QM in 2022 with an <unk>.
Increasingly the monthly run rate till the third and fourth quarters of next year.
As we noted in our Q&A session during our previous earnings call. The company has now established the season structured products capital markets team led by Bob Corey based in New York City.
Should enable the company to directly or synthetically access the securitization market and opportunistically routine economic interest in the subordinate tranches and asset management and servicing fees of our offerings.
Evidencing our confidence in the long term performance and risk weighted returns for the loans we originate.
Turning now to our longstanding preferred B litigation as disclosed in our 8-K filing on July 19, 2021, the Maryland Court of Appeals shouldn't in order, which affirmed the lower courts ruling specifically that the proposed 2009 amendment to the preferred b articles did not receive the required votes.
Therefore, the original preferred b articles remain in place.
I'm going to turn the call over now to our general counsel till Joe <unk> for a more detailed update on this matter Joe.
Thanks George.
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 stockholders, which amount was previously accrued by the company back in 2018.
Ease of the unpaid dividends will be determined once the circuit court determines the basis for an appropriate record date.
In addition, the court's order required a special meeting at preferred stockholders for the election of two additional directors of the company too.
Co plaintiff came back fund called for a special meeting of preferred B stockholders, which was convened on October 13, 2021, but in churn by vote. All shares present to November 23, 2021, due to a lack of corn sufficient for election of directors.
The company's hopefully corn will be achieved with the next special meeting date, and we will welcome the new directors once elected and look forward to their contributions, especially in line with company stockholders and stakeholders to create a sustainable capital structure and strategic vision for the future.
With respect to payment of future dividends on preferred stock such dividends are cumulative however, they are not payable unless declared by the board.
Preferred 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 stock, especially in light of the $82 million in short and long term debt has seniority in the company's capital structure.
Additional information on the company's capital structure, the court's order and the special meeting of preferred stockholders can be found in our 10-K's queues and 8-K filings.
John Walker will now discuss the operating results for the third quarter of 2021 John.
Thank you Joe.
For the third quarter, the company reported GAAP earnings of $2 1 million as compared to a loss of $8 9 million in the second quarter and earnings of $1 6 million in the third quarter of 2020.
For the third quarter core earnings were approximately 800000 as compared to a loss of $6 9 million in the second quarter and earnings of $4 4 million in the third quarter of 2020.
As mentioned in our previous earnings calls 2021 continues to be a transitional period for many mortgage originators, including ourselves as we have not been immune to the competitive pressures seen throughout the industry.
During the third quarter of 2021, our originations were $680 million with margins of 287 basis points as compared to originations of $610 million with margins of 175 basis points in the second quarter of 2021.
As we have indicated on previous calls in the first quarter of 2021, we shifted our production to focus on non QM as a result of the impending margin compression in conventional origination.
As a result, we were able to grow our non QM production to $186 million with 26% coming from our retail channel during the third quarter as compared to $100 million during the second quarter of 2021, with just 8% from our retail channel.
The shifted our production focus and subsequent increase in non fuel production through both our GPO and retail retail channel was a key component in our $8 $9 million increase in gain on sale of loans as compared to the second quarter.
During the third quarter of 2021, our income other income increased $3 1 million in Mark to market fair value gains on our net trust assets as a result of a decrease in residual discount rates.
Which was partially offset by $1 8 million in fair value losses on our long term debt due to an increase in fair value as a result of a decrease in engine.
A decrease in discount rates as well.
Changes in fair value of net trust assets and long term debt are excluded from core earnings.
Despite operating expenses being relatively flat at $19 7 million in the third quarter personnel costs increased to $12 7 million from $12 million in the second quarter.
The increase in personnel costs during the third quarter was primarily the result of an increase in variable compensation as a result of the increase in origination volume as well as the continued expansion of our non QM franchise as we continue to add new talent.
As we've stated on previous calls in addition to the aforementioned increases in personnel costs experienced during the quarter.
The competition for talent industry wide has also contributed to an increase in personnel costs as compared to previous quarters, which continued to remain elevated across the industry.
Our business promotion expense increased $2 2 million in the third quarter as compared to $1 8 million in the second quarter.
This was primarily the result of our efforts to target non QM production in our retail channel expand production outside of California, and maintain lead volume.
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 $575 million.
And expect to increase our borrowing capacity in the future to meet the growing funding demands of our non QM production goals.
We continue to carefully manage our liquidity and balance the demands of an aggregation model.
Our strong liquidity position gives us the flexibility to continue to invest in the growth of our non QM production.
I will now turn it over to Justin to discuss production activity during the quarter.
Thank you John.
As we discussed the last two quarters the landscape of the GSE lending space continues to present challenges to growth decreased loan applications industry wide is suggestive of the noticeable stagnation and GSE origination volume for many lenders competing for market share.
While margins were impacted favorably earlier in the year by the removal of the 50 basis point refi adjuster ongoing competitive pressure and rate movement has continued to constrict margins as well as the opportunity for growth around GSE products.
Our retail channel the primary driver of GSE originations maintained relatively flat GSE production as compared to the second quarter.
Impact will continue to originate in the GSE space, but we will remain diligent around market conditions with an eye towards protecting margin and credit quality.
During the last earnings call, 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.
We have successfully made this pivot much earlier than anticipated.
Our non term funding volume in the retail call center increased to $54 million in the third quarter, a substantial increase over the $8 million of non term funding volume in the second quarter of this year.
This momentum continues to carry into the fourth quarter as the retail call center funded $30 million of non QM volume in October alone.
As John mentioned earlier, our business promotion expense attributed almost entirely to our retail channel increased in the third quarters compared to the second quarter, we increased business promotion to both maintain our GSE lead volume and the call center and augment targeted marketing to attract non QM focus consumers.
While we're pleased with how quickly we've been able to shift focus and increased non QM product and the call center. The results are unremarkable given the successful history of non QM originations in our consumer direct platform.
The three year span from 2017 to 2019, the consumer direct call center originated on average $300 million of non QM annualized production.
In total $1 billion of the $4 billion in non QM secured securitizations backed by impact collateral over the last six years was driven by retail originations by leveraging the sales and marketing expertise that were so successful in ramping up this product previously we've compressed.
The timeline significantly and shifting product composition within the retail channel.
With the aforementioned increase in business promotion related to non QM marketing in the consumer direct channel, we have seen a corresponding shift in pipeline composition.
Currently non QM originations represent approximately 35% of our locked consumer direct pipeline as compared to approximately 13% at the time of our last earnings call in August.
Additional marketing allocation, we 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.
The primary focal point and wrapping up our non QM production remains within our third party wholesale origination channel wholesaler has traditionally been a driving channel around non QM originations industry wide as well as the successful vehicle for increasing volume with an impact over the last several years.
Measuring from the first quarter of this year the momentum around non QM origination volume has steadily increased as George mentioned earlier on the call. The company originated over $185 million of non QM production third quarter as compared to $100 million in the second quarter of this year.
Roughly 70% of our monthly non QM production volume was generated through our PPO channel with the overall composition of the PPO pipeline sitting at approximately 95% non QM.
Through October our monthly non QM run rate across all channels and the organization is now over $100 million per month.
Progress in our PPO channels indicative on the unequivocal focus the business has on building a successful alternative credit platform.
Precision around credit guidelines pricing and service levels has promoted increased volume as well with non non QM submissions, increasing 25% month over month from September to October.
The increase in submission volume within the wholesale channel produced the third largest wholesale non QM funding amount in October as compared to historical volumes at impact since 2015, which is a remarkable accomplishment for our non QM team.
While the dramatic growth of our wholesale channel following its relaunch in the first quarter.
2020 has produced positive results I apologize 2021, the GPO channel has still not fully relaunched the correspondent division there.
There is additional opportunity to capture market share and drive volume through delegated and now non delegated correspondent business relationships in the future once that is launched.
In support of continued expansion and progress of our non QM lending channels, we remain committed to investing in resources to drive operational efficiency enhanced technology aimed at providing counter improved counterparty experience and attract talent to grow our teams across underrepresented regions of the country.
We have added talented sales personnel to our workforce over the last quarter, we will continue to build our non QM teams within both channels to offer alternative credit products in the same thoughtful and responsible manner, which we've done since 2015.
That.
Concludes our prepared remarks at this time.
So at this point, we'd like to open up the call for any questions.
As a reminder to ask a question you will need to press star one on your telephone to enjoy a question press the pound key again Thats Star then the number one on your telephone keypad assay Chris.
We are especially Cashcall and Trevor Cranston JMP Securities. Your line is open.
Hey, Thanks, good morning.
Couple of questions on the non QM side.
First I guess when you.
Look forward to 2022.
Thank you Gabe.
Commentary that you expect the non QM originations to be over $1 billion next year.
Can you talk about how you see the split between.
Wholesale and retail originations in that number.
Going forward and then the second question would be.
Can you talk about.
Sort of how you're thinking about the timing as to when you might be able to start returning some interests in non QM securitizations.
Alright, Hey, Trevor it's Justin So I'll take the first part of that I'll, let <unk> touch on kind of.
And George touch on anything around our thoughts around kind of retaining those pieces. So I would expect that going forward.
Youll see non QM volume continue to increase in both channels, we won't be able to maintain the same growth trajectory that we've had I mean, you are still going to be at probably about 70% of that coming from wholesale.
Which is about where we are right now compared to retail.
The number that George had put out there I think is a very attainable number because like we said where you're already at a $100 million of non QM a month across all channels.
Through October and that was about $88 million of that with it was.
Wholesale in about 70 of it.
Was retail so those splits could change slightly but predominantly it will come through.
Through the PPO channel Obi George.
Not sure if either of you a commentary on forward looking.
Around retaining any of that.
I, just I thought I heard Trevor.
Trevor.
We projected forward looking at $1 billion.
Already a $1 billion a year run rate given October volumes. So we're projecting a 1 billion and a half in 2022.
That's it's not aspirational.
<unk>.
Easily achievable.
And then that segways into I think it sets up nicely.
Being able to handle.
<unk> Park part of part of Google.
Equipped to securitize, this and with the volume.
To tighten up the aggregation periods and so we thought we needed to get to something between 300 $400 million a quarter.
In order to introduce securitization is one of our capital markets exit so where they're at currently.
Maybe you want to take the follow on to that.
Okay.
Yes, Thanks, George So we begun to address.
Building blocks towards a securitization program as a new module and a lot of conversations with Counterparties banking's lawyers.
And agencies et cetera, so we've begun to address those.
With respect to actual timing, it's going to depend on how quickly we can get some of those pieces in place our intention our goals are to <unk>.
From a regular issuer.
<unk>.
Non QM securitizations and so whether that's end of first quarter or sometime in the second quarter.
We'll probably be in a better position to update Steve timing.
On the next call.
That is our goal to get something in place.
Sometime early 2022.
Okay got it that's helpful.
And then we.
You've seen a little bit of credit spread widening in the fourth quarter.
Seem to have impacted securitization executions and anecdotally we've heard a couple.
Non QM loan investors say that they are seeing modestly lower pricing on loans.
Can you comment on whether or not you guys are seeing that same sort of trends so far in <unk>.
If you would expect that to impact non QM gain on sale margins at all.
If you want to take that one too.
Yes, I'll take that Justin Thanks for the question. So yes, we.
Definitely we've seen softening in prices since the beginning of the fourth quarter.
We show up.
Two to three ports a month and so.
We show no.
Somewhere in the neighborhood of five <unk>.
Since then.
Definitely we've seen prices lower by between 75 to 100 basis points over that period.
Obviously, it's driven by a combination of factors selloff in rates flattening of the yield curve.
General widening.
But spreads due to strong supply and other seasonal factors.
And so we basically like I said seen soft and there one of the things that we're doing in other originators of doing is adjusting rate sheets and so we anticipate.
To begin to see those prices moderate.
Some time here shortly.
But definitely there has been there has been a softening prices and I think you know.
Originators are beginning to react to that.
Does that does that address your question.
Yeah, that's perfect.
Thanks for that.
And then I guess flipping to the.
Conventional side for a second.
Do you guys have the mix between.
The volume was in <unk> between purchase and refi.
And then looking forward into fourth quarter. It seems like most lenders have been guarding.
Lower volumes seasonally and some increased compression of gain on sale. Just curious if you guys could comment on what you guys are seeing on upside.
Yes Trevor.
I think maybe John and I.
Give me a moment here can take.
Can take this one so kind of.
Splits there I mean, obviously with the call center being heavy refi I mean, as an organization you're looking at probably 80% to 85% purchase in Q3, I'm sorry in refinancing in Q3, which is.
Down a bit.
Compared to Q2, because in Q2, we were about I would say, 90% to 92% refi so a little bit more purchase money is coming through in Q3, bringing that down to about 85%.
As far as just overall GSE volume.
Things of that nature for what we're expecting in Q4.
I can speak to a local market a bit we've seen it.
Decent amount of head count reduction to GSE platforms, and I know there is there is chatter ongoing that we will see more right sizing of those platforms in this area.
With competition margin that really being the main driver, but as always and we seem to talk about this every year at this time seasonality plays a major part in that.
So we would expect a slight dip in our GSE volume in the fourth quarter.
Compared to third quarter, however, with our pivot as we talked about at length on the call too to non QM focus through the call center ideally that reduction of whatever GSE volume falls off here in the fourth quarter is offset by that non film production as far as.
Gain on sale, John Germany, any thoughts there.
Yeah, Hey, Trevor this is John.
Yes, I would say not necessarily GSE specific.
But echoing what Justin and Ob have already touched upon.
Q3, it looks like the high watermark for us for gain on sale margins at about 287 basis points for the quarter.
We had a significant increase in non QM production with healthy margins.
Which made up for some of the GSE compression in both margin and volume.
Outside of any material changes in interest rates or credit or other macroeconomic events.
I would say our expectation would be that we will continue to see some compression in both GSE and non QM that is though we had mentioned.
And the margins, which is reflective of the typical seasonality seen during the fourth and first quarters.
Okay, Great I appreciate the comments thank you guys.
Yeah.
Sure.
Yes.
Any other questions online or.
There are no further question at this time I would now like to turn the conference back to Mr. Justin <unk>.
Okay, well. Thank you everyone for joining us early this morning.
We'll be back in the early part of 2020 to providing an update on <unk>.
Where we ended the year. So thank you all for joining us.
Yeah.
This concludes today's conference call thing of home training you may now disconnect.
Okay.
Sure.
Yes.
Yes.
Sure.
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Good day and thank you for standing by welcome to the Impac Mortgage Holdings 2021 third quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session to ask a question you need to press star one on your telephone cause anytime between the countries you need to reach an operator, we spread ours.
And now I would like to third and Colorado.
General Counsel Joe.
He begins.
Good morning, everyone and thank you for joining Impac mortgage holdings third quarter 2021 earnings conference call. 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 Qs filed under the 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 Mangiaracina, Chairman and CEO of Impac mortgage holdings.
Thank you Joe good morning.
Just a noisy our chief administrative officer John Brockner.
<unk>, our principal accounting officer will join us to prepared remarks, Obi Macquarie arguably.
Alternative credit products, and Tiffany <unk>, our chief operating officer will be available.
Q&A session of today's call.
Approximately three months ago during our Q2 2021 earnings call on August 12.
We discussed that the company will continue to grow its retail and PPL origination platforms, while continuing to focus on liquidity and risk management. Following the 2020 Covid crisis.
The Companys last business update expressed the view that market conditions in the <unk> base that continue to normalize with margins narrowing as capacity to originate and process flows in the industry.
Caught up with consumer demand.
These trends within our rates business generally continued in the third quarter and are anticipated to remain in effect through the end of the year absent a material move in interest rates.
We also previously referenced the increasing investor demand expanse.
Expansion of underwriting guidelines as well as improving margins for the company is not slim production a competency of the firm that we're currently investing in with capital market securitization talent.
Growing sales and operations team.
Credit business exceeded expectation expectations for the third quarter measured by the increase of our non QM origination volume and fourth submission and locked pipelines.
The company reported net GAAP income of $2 1 million or <unk> <unk> per diluted common share.
And core earnings of approximately 800000 or <unk>.
Diluted common share for the second quarter of 2021.
Core earnings are an alternative measure of results that senior management utilizes to gauge the company's performance core earnings isolates results from recurring business activities by adjusting for certain nonrecurring items, such as changes in the fair value of our long term debt and our trust assets gain or loss on mortgage servicing.
<unk> held for sale and other nonrecurring legacy matters.
As it relates to production volume, we generated total originations of approximately $680 million in Q3 2021 versus $610 million in Q2, 2021, with non QM originations contributing $186 million in the third quarter.
Versus a $100 million in the second quarter.
We do not typically provide forward looking guidance, but we will note that our locked pipeline was only $10 million at the end of 2020.
$80 million.
At the end of Q2 and approach 200 million as at the end of October 2021.
This marks a significant accomplishment for our non QM franchise, which we relaunched in earnest post COVID-19 market dislocation in the fourth quarter of 2021 and demonstrates the company's pivot towards non QM originations.
Across both our retail and our PPO channels.
We anticipate continued growth of non QM originations with attractive margins in both origination channels.
Not so when production ramp within our Tpa channel to celebrate accelerate as new account executive additions.
Acclimate their customers to our products competitive pricing and market, leading service levels, we believe and the market opportunity and demand for non QM and the company's ability to be an innovative market leader.
This segment.
Since 2004, we have originated in excess of $4 5 billion of non QM steadily get responsibly, increasing our production from $130 million in 2015 to over one and a quarter billion annually in two consecutive years, leading up to the Covid crisis the company subject to cap.
Markets and liquidity conditions.
To fund $1 5 billion in non QM in 2022 with.
With an increasingly monthly run rate over the third and fourth quarters of next year.
As we noted in our Q&A session during our previous earnings call. The company has now established the season structured products capital markets team led by Bob Corey based in New York City. This should enable the company to directly or synthetically access the securitization market and opportunistically routine economic interest and the support.
The tranches.
Asset management and servicing fees of our offerings.
Evidencing our confidence in the long term performance and risk weighted returns for the loans we originate.
Turning now to our longstanding preferred B litigation as disclosed in our 8-K filing 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 b articles did not receive the required votes.
And therefore, the original preferred b articles remain in place.
I'm going to turn the call over now to our general counsel till Joe <unk> for more detailed update on this matter Joe.
Thanks George.
The result of the court's order the company will be required to pay approximately $1 2 million in unpaid dividends to certain preferred stockholders, which amount was previously accrued by the company back in 2018.
The pace of the unpaid dividends will be determined once the circuit court determines the basis for an appropriate record date.
In addition, the court's order required a special meeting a preferred stockholders for the election of two additional directors of the company.
Co plaintiff came axon called for a special meeting of preferred B stockholders, which was convened on October 13, 2021, but in churn by a vote of all shares present to November 23, 2021, due to a lack of corn sufficient for election of directors.
The company is hopefully corn will be achieved with the next special meeting date, and we will welcome the new directors, one selected and look forward to their contributions, especially in aligning the company's stockholder stakeholders to create a sustainable capital structure and strategic vision for the future.
With respect to payment of future dividends on preferred stock such dividends are cumulative however, they are not payable unless declared by the board.
Preferred 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 the $82 million in short and long term debt has seniority in the company's capital structure.
Additional information on the company's capital structure, the court's order and the special meeting of preferred stockholders can be found in our 10-K's queues and 8-K filings.
John Walker will now discuss the operating results for the third quarter of 2021 John.
Thank you Joe.
For the third quarter, the company reported GAAP earnings of $2 1 million as compared to a loss of $8 9 million in the second quarter and earnings of $1 6 million in the third quarter of 2020.
For the third quarter core earnings were approximately 800000 as compared to a loss of $6 9 million in the second quarter and earnings of $4 4 million in the third quarter of 2020.
As mentioned in our previous earnings call 2021 continues to be a transitional period for many mortgage originators, including ourselves as we have not been immune to the competitive pressures seen throughout the industry.
During the third quarter of 2021, our originations were $680 million with margins of 287 basis points as compared to originations of $610 million with margins of 175 basis points in the second quarter of 2021.
As we have indicated on previous calls in the first quarter of 2021, we shifted our production to focus on non QM as a result of the impending margin compression in conventional origination.
As a result, we were able to grow our non QM production to $186 million with 26% coming from our retail channel during the third quarter as compared to $100 million during the second quarter of 2021, with just 8% from our retail channel.
The shifted our production focus and subsequent increase in non QM production through both our GPO and retail retail channel was a key component in our $8 $9 million increase in gain on sale of loans as compared to the second quarter.
During the third quarter of 2021, our income other income increased $3 1 million in Mark to market fair value gains on our net trust asset as a result of a decrease in residual discount rate.
Which was partially offset by $1 8 million in fair value losses on our long term debt due to an increase in fair value as a result of a decrease.
A decrease in discount rates as well.
Changes in fair value of net trust assets and long term debt are excluded from core earnings.
Despite operating expenses being relatively flat at $19 7 million in the third quarter personnel costs increased to $12 7 million from $12 million in the second quarter the.
The increase in personnel costs during the third quarter was primarily the result of an increase in variable compensation as a result of the increase in origination volume as well as the continued expansion of our non QM franchise as we continue to add new talent.
As we've stated on previous calls in addition to the aforementioned increases in personnel costs experienced during the quarter.
The competition for talent Industrywide has also contributed to an increase in personnel costs as compared to previous quarters, which continued to remain elevated across the industry.
Our business promotion expense increased to $2 2 million in the third quarter as compared to $1 8 million in the second quarter.
This was primarily the result of our efforts to target non QM production in our retail channel expand production outside of California, and maintain lead volume.
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 $575 million.
And expect to increase our borrowing capacity in the future to meet the growing funding demands of our non QM production goals.
We continue to carefully manage our liquidity and balance the demands of an aggregation model.
Our strong liquidity position gives us the flexibility to continue to invest in the growth of our non QM production.
I will now turn it over to Justin to discuss production activity during the quarter.
Thank you John.
As we discussed the last two quarters the landscape of the GSE lending space continues to present challenges to growth decreased loan applications industry wide is suggestive of the noticeable stagnation and GSE origination volume for many lenders competing for market share.
While margins were impacted favorably earlier in the year by the removal of a 50 basis point refi adjuster ongoing competitive pressure and rate movement has continued to constrict margins as well as the opportunity for growth around GSE products.
Our retail channel the primary driver of GSE originations maintained relatively flat GSE production as compared to the second quarter.
Impact will continue to originate in the GSE space, but we will remain diligent around market conditions with an eye towards protecting margin and credit quality.
During the last earnings call, 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.
We have successfully made this pivot much earlier than anticipated.
Non term funding volume and that retail call center increased to $54 million in the third quarter, a substantial increase over the $8 million of noncore funding volume in the second quarter of this year.
This momentum continues to carry into the fourth quarter as the retail call center funded $30 million of non QM volume in October alone.
As John mentioned earlier, our business promotion expense attributed almost entirely to our retail channel increased in the third quarter as compared to the second quarter, we increased business promotion to both maintain our GSE lead volume and the call center and augment targeted marketing to attract non QM focused consumers.
While we're pleased with how quickly we've been able to shift focus and increased non QM product and the call center. The results are unremarkable given the successful history of non QM originations in our consumer direct platform.
In the three year span from 2017 to 2019, the consumer direct call center originated on average $300 million of non QM annualized production.
In total $1 billion of the $4 billion in non QM secured securitizations backed by impact collateral over the last six years was driven by retail originations by leveraging the sales and marketing expertise that were so successful in ramping up this product previously we've compressed.
The timeline significantly and shifting product composition within the retail channel.
With the aforementioned increase in business promotion related to non through our marketing and the consumer direct channel we have seen a corresponding shift in pipeline composition.
Currently non QM originations represent approximately 35% of our locked consumer direct pipeline as compared to approximately 13% at the time of our last earnings call in August.
Additional marketing allocation, we 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.
The primary focal point and wrapping up our non QM production remains 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 with an impact over the last several years.
Measuring from the first quarter of this year the momentum around non QM origination volume has steadily increased as George mentioned earlier on the call. The company originated over $185 million of non QM production in the third quarter as compared to $100 million in the second quarter of this year roughly.
Roughly 70% of our monthly non QM production volume was generated through our Tpa channel with the overall composition of the PPO pipeline sitting at approximately 95% non QM.
Through October our monthly non QM run rate across all channels and the organization is now over $100 million per month.
The progress in our PPO channels indicative on the unequivocal focus the business has on building a successful alternative credit platform.
Precision around credit guidelines pricing and service levels has promoted increased volume as well with non non QM submissions, increasing 25% month over month from September to October the.
The increase in Signet submission volume within the wholesale channel produced the third largest wholesale non QM funding amount in October as compared to historical volumes at impacts since 2015, which is a remarkable accomplishment for our non QM.
While the dramatic growth of our wholesale channel following its relaunch in the first quarter.
2020 has produced positive results I apologize 2021, the Tpa channel is still not fully relaunched the correspondent division.
There is additional opportunity to capture market share and drive volume through delegated and knowledge non delegated correspondent business relationships in the future once that is launched and.
In support of continued expansion and progress of our non QM lending channels, we remain committed to investing in resources to drive operational efficiency enhanced technology aimed at providing counter improved counterparty experience and attract talent to grow our teams across underrepresented regions of the country.
We have added talented sales personnel to our workforce over the last quarter, we will continue to build our non sem teams within both channels to offer alternative credit products in the same thoughtful and responsible manner, which we've done since 2015.
That concludes our prepared remarks at this time.
So at this point, we'd like to open up the call for any questions.
As a reminder to ask a question you will need to press star one on your telephone to enjoy aggression breast that Pam again Thats Star then the number one on your telephone keypad assay Christian.
We are especially in class upon transfer fasten JMP Securities. Your line is open.
Hey, Thanks, good morning.
Couple of questions on the non QM side.
First I guess when you.
Look forward to 2022.
Thank you Gabe.
Commentary that you expect the non QM originations to be over $1 billion next year.
Can you talk about how.
You see the split between.
Wholesale and retail originations in that number.
Going forward and then the second question would be can you.
You talked about.
Sort of how youre thinking about the timing as to when you might be able to start returning some interest in.
Sure I'm Securitizations.
Hey, Trevor it's Justin So I'll take the first part of that I'll, let <unk> touch on kind of.
And George touch on anything around our thoughts around kind of retaining those pieces. So I would expect that going forward youll see non QM volume continue to increase in both channels, we won't be able to maintain the same growth trajectory that we've had I mean, you are still going to be at probably about <unk>.
70% of that coming from wholesale.
Which is about where we are right now compared to retail.
But the number that George had put out there I think is a very attainable number because like we said where you're already at a $100 million of non QM a month across all channels.
Through October and that was about $80 $80 million of that with it was wholesale.
Any of it.
It was retail so those splits could change slightly but predominantly it'll it'll come through.
Through the PPO channel.
George Im not sure if either of you have commentary on forward looking.
Around retaining any of that.
I just I heard.
Trevor.
We projected solid looking at $1 billion.
Already a $1 billion a year run rate given October volumes, so we're projecting $1 billion in half in 2022.
That's it's not aspirational.
Easily achievable.
And then that segways into I think it sets up nicely.
Being able to handle securitization part part of part of doing.
Equipped to securitize, this and with the volume.
To tighten up the aggregation periods.
So we thought we needed to get to something between 300 $400 million a quarter.
In order to introduce securitization is one of our capital markets exit so where they're at currently.
Maybe you want to take the follow on to that.
Yes.
Yes, Thanks, George So we begun to address climate.
<unk> blocks towards <unk>.
Our securitization program in March.
A lot of.
<unk>.
Counterparties Banking's lawyers.
Rating agencies et cetera, So we've begun to address those I think with respect to actual time and it's going to depend on how quickly we can get some of those pieces in place our intention our goals are to.
Become a regular issuer.
Non QM securitizations and so whether that's end of first quarter or sometime in the second quarter.
We'll probably be in a better position to update us the timing.
On the next call.
But that is our goal to get something in place.
Sometime early 2022.
Okay got it that's helpful.
And then.
We've seen a little bit of credit spread widening in the fourth quarter.
It would seem to have impacted.
<unk> executions and anecdotally we've heard a couple.
Non QM loan investors say that they are seeing modestly lower pricing on loans.
Can you comment on whether or not you guys are seeing that same sort of trends so far in <unk>.
If you would expect that to impact non QM gain on sale margins at all.
Albeit if you want to take that one too.
I'll take that Justin Thanks for the question so yes.
We've definitely seen softening in Montana prices since the beginning of the fourth quarter.
We show up on average two to three ports a month and so.
Probably show now.
Somewhere in the neighborhood of five core since then.
Definitely seen prices lower by between 75 to 100 basis points over that period.
Obviously, it's driven by a combination of fast gains selloff in rates flattening of the yield curve.
And general widening.
Credit spreads due to strong supply and other seasonal factors.
And so we basically like I said <unk> seen a softening there.
The things that we're doing in other originators of doing is adjusting rate sheets and so we anticipate we will reach.
Expect to begin to see those prices moderate.
Some time here shortly but definitely there has been there has been a softening prices and I think.
Originators are beginning to react to that.
Does that does that address your question.
Yeah, that's perfect thanks for that.
And then I guess.
Moving to the <unk>.
Conventional side for a second.
Do you guys have the mix between what.
The volume was in <unk> between purchase and refi.
And then looking forward into fourth quarter. It seems like most lenders have been guiding for.
Lower volumes seasonally and some increased compression again on sales curious if you guys could comment.
We're seeing on that side.
Yes Trevor.
I think maybe John and I.
Give me a moment here can take.
Take this one so kind of.
Splits there I mean, obviously with the call center being heavy refi I mean, as an organization you're looking at probably 80% to 85% purchase in Q3, I'm sorry in refinancing in Q3, which is.
Down a bit.
Compared to Q2, because in Q2, we were about I would say, 90% to 92% refi so a little bit more purchase money is coming through in Q3, bringing that down to about 85%.
As far as just overall GSE volume.
Things of that nature for what we're expecting in Q4.
I can speak to a local market a bit we've seen it.
Diesel amount of head count reduction to GSE platforms, and I know there is there is chatter ongoing that we will see more right sizing of those platforms in this area.
With competition and margin that really being the main driver, but as always and we seem to talk about this every year at this time seasonality plays a major part in that.
So we would expect a slight dip in our GSE volume in the fourth quarter.
Compared to third quarter, however, with our pivot as we talked about at length on the call too to non QM focus through the call center ideally that reduction of whatever GSE volume falls off here in the fourth quarter is offset by that non film production as far as.
Gain on sale, John Germany, any thoughts there.
Yeah, Hey, Trevor this is John.
Yes, I'd say not necessarily GSE specific.
But echoing what Justin and Ob have already touched upon.
Q3, it looks like the high watermark for us for gain on sale margins at about 287 basis points for the quarter.
We had a significant increase in non QM production with healthy margins.
Which made up for some of the GSE compression in both margin and volume.
Outside of any material changes in interest rates or credit or other macroeconomic events.
I would say our expectation would be that we will continue to see some compression in both GSE and non QM as though we had mentioned.
And the margins, which is reflective of the typical seasonality seen during the fourth and first quarters.
Okay, Great I appreciate the comments thank you guys.
Sure.
Okay.
Yes.
Any other questions on liner.
There are no further question at this time I would now like to turn the conference back to Mr. Justin <unk>.
Okay, well. Thank you everyone for joining us early this morning.
We'll be back in the early part of 2020 to providing an update on where we ended the year. So thank you all for joining us.
Yeah.
This concludes today's conference call thing of home training you may now disconnect.