IMPAC Mortgage Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.28.13 | About: Impac Mortgage (IMH)

IMPAC Mortgage Holdings, Inc. (NYSEMKT:IMH)

Q4 2012 Earnings Call

February 28, 2013 12:00 PM ET

Executives

Justin Moisio – IR

Joe Tomkinson – Chairman and CEO

Todd Taylor – CFO

Analysts

Daniel Barden

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Impac Mortgage Holdings 2012 Year End earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.

(Operator Instructions) As a reminder this conference is being recorded, Thursday February, 28.

I will now like to turn the call over to Mr. Justin Moisio, Investor Relations.

Justin Moisio

Good morning, everyone, and thank you for joining Impac Mortgage Holdings year end 2012 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 risk and market risk exposure and general market conditions.

I would like to refer you to the business risk factors in our most recently filed Form 10-K under the Securities and Exchange Act of 1934. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This presentation, including any outlook and guidance, is effective as of the date given and we expressly disclaim any duty to update the information herein.

I would like to get started by introducing Joe Tomkinson, Chairman and CEO at Mortgage Holdings.

Joe Tomkinson

Good morning, and thank you for joining our year end 2012 earnings call. With me here I have Bill Ashmore, our President and Chief Operating Officer; Todd Taylor, our Chief Financial Officer; and Ron Morrison, our General Counsel.

I’d like to begin my prepared remarks with a brief review and overview, some of the results of 2012. Yesterday, the company announces the 2012 results including an increase in origination volume to $2.4 billion for all of 2012. And this is an increase from $885 million that was originated in 2011. This continues to be a 93% increase in net earnings of continuing operations

Analysts

to $12.2 million in 2012 as compared to 6.3% or – excuse me, $6.3 million in 2011.

The continuing operations comprise of mortgage lending real estate services in our long-term portfolio, earned a $1.54 per diluted share in 2012 as compared to $0.76 per diluted share in 2011. This increase is primarily associated with the increase in our net earnings from our mortgage lending activities due to the growth in the originations and the retention of mortgage servicing rights, increasing our mortgage servicing portfolio to $2.2 billion.

The net earnings from the mortgage lending improved 242% to $16.6 million or $2.10 per diluted share in 2012 from a net loss of $11.6 million or $1.40 per diluted share due to the increase in mortgage originations and an increase in a retention of our mortgage servicing rights from service-retained sales and approximately $1.8 billion in 2012 an this compares to $420 million in 2011.

In the fourth quarter of 2012, net earnings from mortgage lending increased $4.3 million as compared to loss of $2.9 million in the fourth quarter of 2011; with the increase, mainly due to the increase in the originations to $813 million in the fourth quarter of 2012 compared to $345 million in the fourth quarter of 2011 and the increase in the service retained sales of $781 million in the fourth quarter of 2012 as compared to $289 million in the fourth quarter of 2011.

In comparison to the third quarter, mortgage originations and servicing retained loan sales increased by 15% and 24% respectively. However, net earnings and mortgage lendings were lower in the fourth quarter of 2012 as compared to the third quarter of 2012.

This was due to a larger decline in the mortgage origination pipeline in the quarter, primarily caused by an anticipated seasonal decline combined with the impact from the Federal Reserve’s QE3 program, were a brief rise in interest rates with the subsequent decrease for the end of September.

With the concern of rising interest rates from the fed’s actions, we saw substantial rate lock volumes from perspective borrowers which can secure these lower interest rates. This increased our mortgage origination pipeline as of September 30th, 2012 to its highest point during the year, resulting in our interest rate lock derivative increasing significantly.

Each quarter the accounting rules require the company to report interest rates lock derivative, representing the estimated, again, the estimated fair value of our mortgage origination pipeline.

With the normal and the expected seasonal decreases being much larger in the fourth quarter and some fourth quarter margin compression, the estimated fair value, the interest rate like derivative declined by $5.4 million, negatively impacting fourth quarter earnings.

Since year end, we have seen an increase in the mortgage pipeline that we anticipate will continue to grow through the first quarter of 2013. To-date through February 2013, we have funded $425 million of mortgage loans, with expected total funded mortgages for the first quarter of 2013 is $650 million. This would be a 73% increase over the first quarter of 2012.

In 2012, our retail or correspondent channels experience a largest percentage of growth. Our retail channel increased average monthly production to approximately $60 million in 2012 from $23 million in 2011, and our correspondent channel increased monthly production significantly from just under $3 million in its first month, January 2012 to an excess of $50 million at the end of 2012.

The overall channel mix in 2012 was 28% in retail, 17% in correspondent and 55% wholesale. In the early part of 2013, the retail channel has remained consistent at about 28% and the correspondent channel has increased to 23% while the wholesale channel requiring to 49%,a much more balanced mix over the first quarter of 2012 of 38% retail, 7% correspondent and 55% in wholesale.

With the expectation of an increase in interest rates, we believe the refinanced market can shrink considerably in 2013. To mitigate this impact to our origination volumes in 2012, we have continued to build every storage capturing additional purchase money transaction as the real estate margin continues to improve.

With our proprietary web base technology, we have seen some big improvements in the capturing of more purchase money transactions. In 2012, although mix of purchase money transactions and refinanced loans has remained consistent across the year, the number of purchase money transactions has doubled from first quarter 2012 to the fourth quarter of 2012. Furthermore to also reduce the risk of origination volume volatility from rising interest rates we have been enhanced our product offering include more loan products that are less sensitive to change interest rates including FHA 203 K which is home improvement loan that provides the borrower funds to make renovations. A reverse mortgages for our growing senior population. Home affordable refinance program loans and intermediate adjustable rate mortgages.

With the increase in the service retain loan sales in 2012 our mortgage serving portfolio has increased to $2.2 billion as of December 31 of 2012. The loans in the portfolio originated after 2010 total – almost $2.1 billion in performing as expected with only a minimal number of delinquent loans. The remaining $114 million balance of the portfolio was originated by AmeriHome primarily prior to 2009 and was acquired and then purchase of AmeriHome in 2010 and continues to have high delinquencies since the acquisition due to principle balances.

One of our biggest challenges and expanded the mortgage lending path one is to procuring adequate warehouse capacity to fund their increasing mortgage origination volumes. We were able to make some very significant strides in 2012 not only increasing in our warehouse borrowing capacity to $217 million from $87.05 million at the end of 2011 that we are also able to obtain warehouse borrowing capacity from a major national financial institutions. Plus we have recently obtained approved from another well known national warehouse lending bank for new warehouse facilities and increases from our existing warehouse lenders for another $100 million in total warehouse capacity.

Which we believe will further provide us the ability to increase our mortgage originations. I’ll talk a little about the real estate services. The real estate services segment continues to earn profits recording net earnings of $12.6 million or $1.60 per diluted shares in 2012 declined from 2011.

In the past few years, we have been very successful in providing services to our securitization trust to maximize recoveries in a very depressed real estate market. Expectedly, there has been a decline in the services provided in 2012, resulting in a decline in net earnings from the segment. As this segment has declines, the mortgage lending segment has expanded.

As we expect to continue to focus on mortgage lending, we expect to see the real estate service segment continue to decline. Although portions of the master servicing portfolio maybe transferred to new services, giving us a potential opportunity to expand those real estate service activities and revenues. We currently expect a gradual decline in revenue and net earnings in the real estate services. And just as a side note, we have been saying this now for approximately four years that as we improve the portfolio through our loss mitigation efforts and we improve our lending efforts in the origination business, the lending origination income will c to grow and the portfolio service income will continue to decline, and this has always been part of our business plan.

Here I wanted to talk a little bit more about the long-term mortgage portfolio. The long-term mortgage portfolio had a net loss which are not unexpected, $17.1 million in 2012 compared to a net loss of $2 million in 2011. The $10.2 million in residual cash flows received in 2012 combined with the updated assumptions, expected acceleration of liquidation losses in the near future applied to certain securitization trusts, within the long-term mortgage portfolio and estimating the fair value of the portfolio, December 31st, 2012, resulted in a decline in the estimated fair value of the long-term mortgage portfolio in 2012.

So, these are all, again, these are all estimations, these are not, correct me if I’m wrong, these are not cash losses, their fair market value losses. And I think sometimes the market misunderstands that.

With the estimated fair value of the net trust assets decreasing to $15.8 million, we expect the future P&L volatility from this portfolio to be reviewed and this was another thing that was saying over and over again as we work through this portfolio.

In 2012 the company reported consolidated net loss of $ 3.4 million or $0.43 per share, as compared to net earnings of $3.2 million in 2011, with the decrease primarily due to the decline in the estimated fair value of the long-term mortgage portfolio. Now also adversely affecting the net earnings recorded in the third quarter settlement charge of 6.1 million that we recorded in the third quarter and we discussed in the September 30, 2012 10-Q and those associated losses entered the legal fees expense incurred in 2012 defending these matters.

We felt as we said in the third quarter it was most prudent to settle this and get pass them and that’s exactly what we did. Excluding the settlement charge in 2012 consolidated results would have been consistent with 2011. however the mix of the net earnings shifted to be primary drive from our mortgage operations in 2012.

In 2013 continued driver of the growth in consolidated earnings will be mortgage lending. The key to that growth is not only mortgage origination volume, but also loan quality and operational efficiencies. More specifically, we expect to see the most significant increases in the volume of loans originated through our retail and our correspondent channels. We believe that this will primarily be achieved by substantially increasing our active customer base in correspondent lending and of course hiring additional retail loan officers for our existing offices and call centers and our new retail offices currently planned to be opened during 2013.

Our wholesale lending channel will continue to be a key component of our origination platform, however, in 2013, we will focus on retail and correspondent channels in an effort to have originations more equally balanced across all of our channels.

We believe that each of our channels, retail, correspondent and wholesale, will benefit from our recently launched programs including the prime jumbo program, our FHA 203(k) program, and our newly approved reverse mortgages programs.

We also will have the increase in our operational capacities with the opening of new operation fulfillment centers. And the implementation of new loan origination system and the integration of new technology designed to capture index loan documentation in dated to more completely automate the origination process.

We expect the new loan origination system and documentation in data technology will also help us to ensure our loan quality and improve our operational efficiency. Lastly, in 2013 we will continue further the impact remain with increased consumer direct and business-to-business awareness through our social media, our public relations campaign in our industry wide marketing. Our efforts in impact brand awareness over the last year not only help their origination efforts, but it greatly enhances our recruiting average to top volume mortgage concessions.

Looking forward to 2-12 we expect the combination of our strategies and initiatives instituted over the last year will not only allow us to continue to grow but also solidify the foundation and delivering more consistent results.

This concludes my prepared remarks and I’d open it up to questions at this time.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions) The first question comes from line of Daniel Barden.

Daniel Barden

Hi. Good morning. I have a couple of questions. First of these residual interests you hold, I imagine there is a bunch of assumptions they go into calculating their value. And home prices that one of them and home prices according to what a headline I have been reading, has been moving up quite sharply over the past couple of months and I’m just curious if that might have a positive impact on the volume would be for us going forward?

Joe Tomkinson

Well I will turn that question over to Todd Taylor. Todd, do you want to answer that.

Todd Taylor

We actually quite seen as yet. The number of assumptions that go into the estimated value of these residuals. Home prices and the overall increase of real-estate valuation will be one component. The other component has to do with the number of defaults and for closures as they are been liquidated at the same time.

So, the reason you saw such a big drop where as the limitation of our expectation of increased for closure liquidations in the near future but that is going to be offset by what you mentioned is the increase in general home prices.

Daniel Barden

Okay. So – all right, we’ll just see what happens. My next question is with – to this discontinued operations I believe that – what constituted that loss of 2,147,000 million in the fourth quarter?

Joe Tomkinson

Hold on a second, we’re looking at –

Daniel Barden

I imagine most of it will be all right?

Joe Tomkinson

Part of it has to do with a valuation of legacy repurchase liability and so part of it has to do with it – part of it has to do with some literal expenses that we had incurred with – at this time.

Daniel Barden

And when do you imagine that these will take her off? Because these are cash expenses right that are – and it’s money at the door?

Joe Tomkinson

No, actually they are not cash expenses, this is our estimation of the exposure we have with some of the legacy repurchase request and so…

Daniel Barden

Let me interrupt you if you don’t mind but at some time you have – when the request has to be filed right, you have to pay that?

Joe Tomkinson

Yeah assuming that we are exactly correct then at some time in the future you would have to pay that that’s true. So, it’s possible that you turn in cash, but given that this is an estimated – certainly there will be exactly this amount.

Daniel Barden

Okay. Okay. But I’m sorry, I interrupted you, you were just commenting on what they might tampered off?

Joe Tomkinson

There is been a question that we receive the couple of times most likely it will probably be in the next year would be my estimate, but to extent that we continue to have activity from those, we have to account for them, as a discontinued operation. I know it does make a good financials a little bit confusion to me. We try to clarify this as much as possible in the footnotes, but we have to account for that way, but like I said I am hoping the next year so that it will tamper off be a much less of an impact to with that.

Todd Taylor

So in the overall especially legal side they are tampering and that was the reason for our settlement these losses, lot of this expenses and you are right, a sound in this region we had an opportunity to settle and by selling we got rid of this significant amount of monthly returning fees. And so now that’s from own home purposes that’s behind us. So I expect that over the next year its start, we’ll see just tamper off to giving away. Is that help you?

Todd Taylor

Yep. That does. Many thanks.

Joe Tomkinson

All right.

Operator

Your next question comes from the line of Dan (inaudible).

Unidentified Analyst

Good morning. Thanks for taking my question. I wanted to ask one in the press release that confuse a little bit, you mentioned you started decline in real states from the run off of the mortgage portfolio, and then you go on to say that you could recapture that you mentioned in your comments if the servicing book is moved to other services, maybe you can just help me out on what that means are you getting push back from the trustees and bond holders now and that might be moved and if its moved you might be able to recapture some service revenue?

Joe Tomkinson

No. You missed I think you can missed characterizing maybe it’s my fault the – what I was trying to convey, our business plan when we – we never think so hard certainly seven years ago, we looked around and what we’re going to do. And we saw a huge void left in the market place by the services. There was Bank of America that the GMAC and we get up on ourselves to begin modifying loans and starts selling the loans, et cetera. And in that being business and it became very, very successful. And as result, during the clarifying bit of money continues to earn a significant amount of money, but we also said that as the portfolio improves and you can’t necessarily see the percentages because the percentage will always to go up as the number loans are paid off in the portfolio and decline. So you always see that percentage, but the actual number of loans as a portfolio improves than the income derive from the loss litigation or we that call the portfolio services is going to decline.

And what we also said, so that’s okay, because, we wanted improve loans for the trust and in fact, we’ve done a very, very, very good job for the trust. And then, our second phase was always increase our business and we’re going to get back in the lending and of course we’ve done that, which the numbers clearly show that we’re growing our lending business.

Now with the transfer of servicing and I don’t know if you understand this but bank of America GMAC were sub services or servicing a lot of our loans in the – sold their portfolio or attempting to sell it and they’re moving to other services. And those are the services are taking look at the results that we have achieved and saying, or maybe what will do is higher impact to continue managed the portfolio or perhaps there’s a more business there to continue the loss mitigation services for other servicers, because quite frankly, necessity is some other invention, we became very good at loan modification short sales, loss protection, we became experts at it. And we are currently offer those services to others, so that’s what I mean to tell.

Unidentified Analyst

Okay. Is that a big help for business today or is it most on your own portfolio?

Joe Tomkinson

We’re doing it for others right now. Obvious, those names are confidential.

Unidentified Analyst

Okay. Great. And the – that I hear you right, you said you expected some origination level in the first quarter, I think I missed it?

Joe Tomkinson

Yes. $650 million first quarter.

Unidentified Analyst

Okay. I think going back to your last call I think you did a roughly 290 in October and the first quarter run rates obviously a lot lower than that. Is that wholesales, is that slowing down, is that seasonal, why is that going to be down 23% quarter-to-quarter. I don’t think the margin was pretty down that much but maybe you can just help me understand?

Joe Tomkinson

I will answer the first part in January first quarter of every year and the end its always seasonal. And then as always have been in the business you have always seen a down turn in the first quarter. Bill you will get some....

Todd Taylor

Yeah. In terms of – from the overall market, if we got numerous warehouse lenders and in checking with them another originators pretty much its around anywhere from 12% to 15% too much as 20% down depending upon who the lenders are going into the in terms of their warehousing and then also overall volumes. It is directly relatable to back in QE3 came in. there was a big rush by lot of borrowers to refinance which increased the volumes and most lenders we had record volumes in that October late September, October and then flooding into November timeframe.

As Joe said, combined with that is the seasonality coming into the first part of the year. But as we mentioned, we are going to be essentially almost doubling the volume from quarter – first quarter of last year to first quarter of this year. And we are seeing the increase in our pipeline having into the till the end of February and heading into March which we continues to expect to occur into the first quarter.

Unidentified Analyst

Okay. That’s helpful. And this do you know the level that your capitalizing servicing at roughly?

Joe Tomkinson

We know that we are capitalizing that.

Unidentified Analyst

Means...

Joe Tomkinson

I mean you answer the question. Now I think you won’t know that we’re capitalizing that.

Unidentified Analyst

Yes.

Joe Tomkinson

Okay. You don’t know, who you’re dealing with here. So we’re pretty concerned on it.

Todd Taylor

Okay. Initially we capitalize servicing somewhere between 70 to 75 base at the end of the quarter though we do an valuation on the overall portfolio to market-to-market. But initially we’re capitalizing at debt levels.

Unidentified Analyst

Okay.

Joe Tomkinson

So 70 to 75 bps is pretty conservative.

Unidentified Analyst

Yeah, absolutely. I mean just one question is, I mean if you are capitalizing 70 to 75 bps that’s you apply probably $5.5 million of kind of non-cash gains there which I think is slightly above the earnings from the segment – I mean what implies that it’s kind of just a lease in that quarter, we had a little bit of a cash drag from the mortgage operation or lending, is that just because of the fair value markets? Or is that – I mean it is a capital intensive business and it is what it is?

Joe Tomkinson

It is what it is.

Unidentified Analyst

Okay.

Joe Tomkinson

I am not sure, I understand your question completely, but I think what you are getting to is the capital drain associated with routine...

Unidentified Analyst

And you said, we sell them I presume...

Joe Tomkinson

In previous quarter we’ve talked about our strategy to selectively sell off some servicing rates as we’re managing to our capital days. And we continue to do so in 2012 and in fact – in 2012 we sold a lot about 1.2 billion in servicing to do exactly that as far as generating some cash earnings for lending as you mentioned – capitalized service units in non-cash events.

So we’d like to continue to retain as much as the portfolio is possible, as it remains our capital needs, we are selectively telling sell-off.

Unidentified Analyst

Great. And last one, sorry I monopolized all the questions, but any color on just kind of current margins, the margins – I know it’s tough with (inaudible), but maybe relative to the past few quarters?

Joe Tomkinson

Any color, I am not sure.

Unidentified Analyst

I mean we’ve had rates back up a little bit, spreads compressed a little bit from like the absolute historic...

Joe Tomkinson

I can’t get into – speculated on future margins. You are right. We see compression and that’s our job to manage. This is – you know the sign of – did you ever the read the book Moneyball.

Unidentified Analyst

Yes.

Joe Tomkinson

You know I am not here trying to hit the homeruns every quarter. And I felt everybody – we’ve been doing this a long time. I am here hitting singles. And I believe that my job is to take each quarter and be profitable. And we’re very profitable for the year. Although we have to report the bad with the good and the bad is the old legacy. And I can’t help that the government steps in and makes changes and got to account the way they wanted to account. And then we got to come up these given unfair values. But the fact of the matter is every day we are hit in singles and we’re profitable. And we’re going to be profitable for the rest of this year.

So our portfolio is growing somewhere from – in retain servicing from year ago what was that I think I said it earlier $800 million to $2.2 billion which in the overall steamer things is not great. It’s not huge. But it’s an increase of over a 100% I would say that’s a good single where our mortgage originations hit almost triple. We’re going to see the same for I think for 2013. And so that’s what I am looking at. And I am here managing the company.

So when you ask me about margins. That’s our job to manage the margins. That’s why we talk about the technology. That’s why we talk about the efficiencies. That’s why we talk about the management team. And this isn’t our first rodeo. I mean, we’ve been through – I’ve been through the ups and downs since the markets in 1976. I saw on’76. I saw on the ‘81. I saw in ‘87, twice in ‘87. I saw on’91. I saw on ‘94. I saw on ‘98. I saw at in 2007 and here we are. So we’ve got a good management team. We know what we’re doing. And my model of this year is just to keep hitting singles every day. I love that movie the Money Ball.

Unidentified Analyst

Yeah. I mean that makes sense. And lost in any one report is shouldn’t be the hosted affected quite a amazing turnaround this year. Certain graphs on that?

Joe Tomkinson

Are you going to asking questions now.

Unidentified Analyst

Yes. I am.

Joe Tomkinson

Okay. Do we have any other questions?

Operator

Your next question comes from the line Eric Emory with (inaudible) Capital.

Unidentified Analyst

Hi, guys. Good morning. I wanted to ask just on the derivative I didn’t quite catch that explanation I was hoping you could just walk us through it – briefly just how exactly that works and why you guys use that instrument?

Joe Tomkinson

Go ahead.

Todd Taylor

This is Todd Taylor. Let me take that and try to explain. In earnings release I’m not sure – I captured as – after the readers to understand we’re trying to indicate on our mark to markets with due early quarter. But what we will require to do and we are adapting fair value for most all the financial instruments but for mortgage lending in particular we will require to both the estimated value of our pipeline, our inventory of loans and our outstanding hedges at the end of each period.

So, as we do so it can create some – and those are all non cash but theoretically will turn into cash in the future period. But in the period those are all non cash fair value estimates.

I spoke about the – in the release the interest rate lock derivative which is just simply our lost pipeline at the end of the period and the valuation and our estimate value we have to book according to our account GAAP rules.

I did not speak about some of the other components which include the mark-to-market of not only the inventory but then the hedges that we are using to hedge the pipeline. So when you take all those together each those mark-to-markets drop about $5 million in the period but again those are mark-to-markets between periods. So what you’re seeing is the change when we did 930 to 1231 and it creates an P&L volatility try to explain it so that you will understand the volatility from the mark-to-market as oppose to what the business is really doing from a cash or real earnings basis.

Those are not instrument –

Joe Tomkinson

Let me add here, they are not really instruments. Let me ask you a question as the pipeline goes way up what’s going to happen?

Todd Taylor

You have a natural pickup in a rate lock derivative fair value estimate.

Joe Tomkinson

So what we’re trying to – what we’re trying to explain is – when we saw pickup in interest rates are – fee of interest rates in the third quarter – end of the third quarter people rushed in and they locked in their loans. And then you see here is increase in the pipeline. Then it returns in the fourth quarter to a natural pipeline, I am just using syntax here. And so we have to record that difference. And so now if we see a large increase in the pipeline in the first quarter over the fourth quarter of last year you are going to see a pickup in that GAAP earnings. Is that makes sense?

Unidentified Analyst

Yeah. So I mean maybe I am taking step backward here just because I am asking couple of dumb questions so forgive me. But as I understand essentially as people are taking out loans on their homes and rates starts to go up. There is a bit of sense of urgency to lock in the rates they have and to accelerate the process. So it’s part of that acceleration you see your pipeline increased?

Joe Tomkinson

Right.

Unidentified Analyst

Okay. And you have also taken out hedges in the form of these derivates to protect yourself against interest rate changes, is that I understand it correctly?

Joe Tomkinson

We have – let me stop you right here because they locked itself is considered is financial instrument derivatives. Just the fact they are locked and we made a commitment to offer that rate on that loan to that borrower that is considered as derivative in the accounting standpoint.

Unidentified Analyst

Do you lock the rate for your customers but then you got to go lock the rate for yourself?

Joe Tomkinson

Instead of locking the rates we enter into offsetting hedges, the movement from that lock valuation, so there is a separate hedge instrument that we do actually enter.

Unidentified Analyst

Okay. And so as the pipeline fluctuates in size and you experience some gains and losses?

Joe Tomkinson

That’s my point just going, you are going to see natural P&L volatility as the pipeline goes up and down in volume. And so my point in energy lease was just swing at simply because of the drop in volume of the pipeline size in Q3 to Q4, actually in the Q3, in the Q4, we saw this P&L volatility creating a gap more is lending P&L of $4 million as oppose the previous quarter of $8 million.

Unidentified Analyst

And if this as you talked about the pipeline dropping at this number that we are seeing being guided towards in the first quarter of the – as compared to the fourth quarter I think, I in fact calculated that was something like 800 or 900. It’s backdrop that we are now going to witness in the first quarter that was reflecting that change in pipeline?

Joe Tomkinson

Yes. You’re talking the future period; the lock today is going in the future turn into a loan that we’re going to closing and yes.

Unidentified Analyst

Okay. I got you. So, and as you said, the market has began to or the pipeline has began to recover now or normalized, you then experiencing a reversal in that derivative that can turn from a loss back into a gain?

Joe Tomkinson

It’s quite possible, that’s quite possible. The one thing that I want to just mentioned to you though, along with the change in volume of locks from 9/30 or September 30 to December was a margin compression that we experienced.

Unidentified Analyst

Right.

Joe Tomkinson

Exactly this year that I disclosed as far as the change in interest, that interest rate loss derivative. So not trying to make it more contingently at present. You had margin compression going on to the same time from September to December. From December to the end of March, we just about we can speculate on margins. But as far as we can see from through today, margin has stabilized from the end of the year to today. Now looking at the end of March, I can’t speculate but they have stabilized.

Unidentified Analyst

Okay. Okay. Got you. And just the other question I had related to the portfolio segment, I know, you talked that links about that you’d also mentioned that you expected the volatility of the earnings from that segment to decrease going forward and it didn’t quite understand why?

Joe Tomkinson

Its hard I think for us. The accounting rules acquire to do a certain rate that makes it very difficult to explain to reader some times. And so what we’re trying to indicate there is, there’s a national run off of the portfolio that’s going on. We are is really what we can say, the residual – it’s a net residual, we call the net trust assets of loans that are varying all the times that they are in the portfolio securitization trusts. So what we are trying to say, in previous years and by the way valuation simply represents our expected cash flow is not residual in Q2 years and a discount rate applies to get to a net present value today, that’s what that number really represent. So it’s about 15 to 28 million as of the end of the year.

At the end of last year it was about 26 million. So, that nature run off of the portfolio has positive decline and that expected cash flows if you will from 27 to 15.8 which is about $10 million decline.

Unidentified Analyst

That will help a quite a bit in the fourth quarter as well, right. It was 20 at the end of third quarter?

Joe Tomkinson

It was 20 I think in the third quarter. Well, there was – and I was just going to get that there was an update in assumptions in the fourth quarter that actually was adverse as far as the evaluation or our expected future cash flows. So more information I indicated before, more information associated with what we believe foreclosure liquidation is going to do to the cash flows in the next few years in our change in – from previous quarters to Q4 with that assumption is what primarily drove the fourth quarter change of the valuation.

Unidentified Analyst

So on foreclosure is I am assuming that you’re assumption, is that there will be less foreclosure that you had originally thought?

Joe Tomkinson

Yeah. Actually, it’s probably counter intuitive and I understand why it’s kind of using because really there is more foreclosures have been very slow over the last couple of years. It’s been a lot of regulation as it is slow down. There’s been a lot of reasons for that.

Foreclosures are now have started to pick up and so I think as they pickup and people actually liquidate these properties and when the property is liquidate that creates a loss against those cash flows, the expected future cash flows. And so we expect that way action to go up slightly again in the next few years, because there has been a so the pent up foreclosures pipeline that’s starting to work its way through now more rapidly than it get over the last three or four years.

Unidentified Analyst

Okay. Got you. Now that makes more sense. Okay. I appreciated it. Thank you very much.

Joe Tomkinson

Sure.

Operator

Your next question comes from the line of George Renil, The (inaudible) Management Corp.

Unidentified Analyst

Hey, guys. How are you?

Joe Tomkinson

Good.

Unidentified Analyst

Good. I wondered only question in pretty descent stockholder and watching you guys at this company from where it was to where it had gone down to and bringing it back I can only congratulate you guys for doing a great job. Originally when I saw this things hope, hope things start to collapse I thought you guys wouldn’t be hold on but you have, but my only one question is do you guys down the road see Impac mortgage application of dividends later on?

Joe Tomkinson

We – you know what we don’t comment on that, being large shareholders myself I love to have dividends except to the Board of Directors. So but we never ever commented on that.

Unidentified Analyst

I was just curious was there any business plan, but I can understand you do not want to comment on this, but I just thought I’d ask him to do what he said. All right. Thank you guys.

Joe Tomkinson

You asked me that question all that the time and you always keep chirp me up.

Unidentified Analyst

Well, Joe, it’s the same thing I do on live business. I always look, always try and guess what tomorrow is going to – what kind of rate of return you’re going to get on investment and that’s a question for the rate or return incomes from both dividend and accommodation of appreciation, Infosys still in already IT, am I correct?

Joe Tomkinson

There is no need for us to jump through all the hoops to be a reap anymore because of the loss going forward. So...

Unidentified Analyst

I got it. Okay.

Joe Tomkinson

All right I appreciate it and I’m looking for myself to being able to pay dividend. So, if we can do it.

Unidentified Analyst

All right. Good luck. All right. Thank you very much. Have a good year.

Joe Tomkinson

All right. Thanks.

Operator

Your next question comes from the line of Michael (inaudible) Benjamin Partners.

Unidentified Analyst

Hey, all asked so many questions and off of that. Thank you very much.

Joe Tomkinson

Okay. Great. Thanks, Benjamin.

Operator

Okay. We have lot of time for question today. If you have any comments or remarks.

Justin Moisio

I don’t have any at this time, just my usual thanks for the participation and we look forward to the first quarter on reporting good earnings at the end of the quarter. Thanks.

Operator

Thank you for joining today’s conference call. You may now disconnect your lines.

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