Impac Mortgage Holdings' (IMH) CEO Joe Tomkinson on Q4 2016 Results - Earnings Call Transcript

| About: Impac Mortgage (IMH)
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Impac Mortgage Holdings, Inc (NYSEMKT:IMH) Q4 2016 Earnings Conference Call February 24, 2017 12:00 PM ET

Executives

Justin Moisio - VP, IR

Joe Tomkinson - Chairman and CEO

Bill Ashmore - President and COO

Todd Taylor - CFO

Ron Morrison - General Counsel

Analysts

Trevor Cranston - JMP Securities

Brock Vandervliet - Nomura Securities

Dwight Carlton - UBS

Chase Basta - AWH Capital

Operator

Good day, ladies and gentlemen, and welcome to the Impac Mortgage Holdings’ Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time [Operator Instructions]. As a reminder this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Justin Moisio, Vice President, Investor Relations. You may begin.

Justin Moisio

Thank you. Good morning, everyone. Thank you for joining Impac Mortgage Holdings’ year-end 2016 earnings 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, mortgage production and general market conditions.

We 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 outlook and any 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 of Impac Mortgage Holdings.

Joe Tomkinson

Good morning, everyone. Again, thank you for joining us this morning. With me in the office here is Bill Ashmore, our President and Chief Operating Officer; Todd Taylor, our Chief Financial Officer; and Ron Morrison, General Counsel for the Company. I’ll begin with a brief review of the results for last year.

Consistent with our previous earnings releases, in order to get a better understanding of the Company's operating results we believe it's more useful to discuss the adjusted operating income opposed to GAAP net earnings. Adjusted operating income is operating income, excluding the changes in the contingent considerations. Go ahead and take a look at Company's earnings release for reconciliation between GAAP and the net earnings and adjusted operating income.

For 2016, adjusted operating income increased to $96.9 million or $6.52 per common share as compared to $33.5 million or $2.56 per diluted share for 2015. In the fourth quarter of last year, the adjusted operating income increased by $24 million to $23.9 million or $0.37 per diluted common share as compared to a loss of $593,000 or $0.04 per diluted common share in the fourth quarter of 2015. In 2016, the total origination volume increased 40% to $12.9 billion as compared to $9.2 billion for 2015.

Now, the primary reason for the increase in the originations volume in 2016 was a result of our retail originations through our CashCall Mortgage division. Retail originations represented approximately 75% of the total originations for 2016. The brand recognition of CashCall Mortgage as a consumer direct best price option, which closes loans on an average in 15-days, allowed us capitalize on the surge in the refinancing activity that took place during 2016. And as we expect and as is normal for this time of the year, the fourth quarter originations volumes decreased from $4.2 billion in the third quarter to approximately $3.1 billion in the fourth quarter. This decrease was caused by an expected increase in inventories, as well as the seasonality which occurs during this time period.

In 2016, we increased our margins by 50 basis points to 241 basis points as compared to 183 basis points through 2015. This was a result of lower interest rate environment, which allowed us to increase our loan origination volumes and their pipelines. In the fourth quarter of 2016, with the rising interest rate the opposite occurred, as our margins were declined to 210 basis points as compared to 268 basis points in the third quarter of 2016. Again, I want to emphasize that this was anticipated by the Company.

At the yearend, we had increased the servicing portfolio by 31% from the third quarter of 2016, bringing our servicing portfolio to $12.4 billion. As a result of management's strategic decision to retain its mortgage servicing rights during the low interest rate environment in 2016, our retained mortgage servicing rates increased to $131.5 million at the year-end as compared to $87.4 million at the end of the third quarter, a $44 million pick-up quarter-over-quarter. The increase in the size of our servicing portfolio also resulted in 33% increase in the servicing income in the fourth quarter over the third quarter, while the portfolio delinquencies continued to remain very low.

Through a very strong retention capability, we were able to take advantage of low interest rate environment and generate stronger origination volumes. As a result, we created a very low weighted average coupon portfolio, which as previously mentioned, increased in value during the recent rise in interest rates.

Currently, our servicing portfolio has increased to $13 billion. In September of last year, we set a target for our portfolio to reach $11 billion by the end of 2016 and $20 billion by June of 2017. We surpassed our year-end target by nearly $2 billion and we are on pace to reach our target for June of this year. At year-end, our $12.5 billion high credit quality servicing portfolio had a weighted average coupon of 3.7%, a weighted average LTV of 65% and a weighted average FICO score of 741.

One of the risks of growing a servicing portfolio is the inevitable run-off that will occur for any originator. However, even though we experienced run-off of $3 billion through our retention strategy, we successfully recaptured and refinanced 76% of these pre-payments, refinance them back into our servicing portfolio. We believe that this is the highest level of retention percentages of any reporting originator.

Our growing MSR portfolio, coupled with our successful retention program and the expansion of the non-agency loan volumes and a geographic diversity, should position the Company well in any interest rate environment. In 2016, the Company was successful in its objective to start restructuring its balance sheet. In January of last year, the Company exercises option to convert a portion of its debt to the common stock, increasing its book value by $20 million.

Additionally, during 2016, the Company raised approximately $5 million through an at-the-market transaction, or ATM, as an opportunistic and accretive way to raise capital. In September of last year, the Company completed a successful oversubscribed public offering, providing net proceed to the Company of approximately $42.6 million.

Lastly, and earlier this month, the Company paid-off its $30 million working line of credit and replaced it with the mortgage servicing rights financing facility, which on an annualized basis provides $1.3 million in interest expense savings. It also gives us the flexibility to increase or decrease financing as we see fit. In addition, the Company was able to increase its book value by over $1 a share to $14.42 in the fourth quarter as compared to the third quarter. As expected, as a result of the seasonality and rising interest rates, the locked pipeline in the fourth quarter decreased to $558 million, and that’s as of December 31, 2016.

However, during the first two months of this quarter, we have seen our locked pipeline grow to approximately $660 million, nearly a $100 million increase over the year-end. As the mix of products continues to shift to a higher percentage of non-agency and government loans, we expect the pipeline to continue to grow, going into the second and third quarter this year as our non-agency loan volumes continued to expand.

For the last two, two and half years, we've been saying that as interest rates rise non-agency originations would become a more significant portion of our originations. In a higher rate environment, the non-agency loan product becomes a more desirable product, because it caters to the purchase money market, and its guidelines allow for more qualified borrowers to be approved; thus, reducing the dependency on the refinance market. This product will also be advantageous towards expanding the volumes in our correspondent and in our wholesale channels.

We expect the hallmark of 2017 will be the growth of this product throughout the industry. For 2.5-years, the Company has been diligently working to redefine our guidelines and develop a secondary market for these products. Not only have we've been able to sell this product successfully, but we have been long recognized as leader in the non-agency loan space.

Through the first two months of 2017, we've already seen our non-agency loan pipeline increase over 15% from our year-end 2016 volume, contributing to the recent growth we have experienced in our overall pipeline.

In our business-to-business channels, we are marketing our non-agency loan products as IQM, the Intelligent Qualified Mortgage, and training our sales team on using the unique aspects of our IQM guidelines as sales tools. We are currently sponsoring training seminars with our customers, which reviews those unique guideline aspects, teaches how to present those guidelines to realtors and other referral partners, and guides them through the potential underwriting pitfalls to ensure a smooth and a timely close.

In February, alone, we’ve held 30 IQM training events in less than four weeks with over 950 attendees. We believe that these training events will be crucial to growing our non-agency volume in our business-to-business channel. As the landscape of the mortgage industry changes in 2017, we expect there to be consolidation throughout the mortgage industry, and as a result of decreased volumes and increased competition. Therefore, taking an advantage of possible M&A activity in creating further diversification of our product offering are very key components to our 2017 strategies.

Now, let's talk about the opportunities that exist on a go forward basis. We anticipate, during 2017, to supplement our mortgage originations to include acquisitions of existing purchase money mortgage operations, and expansion into the consumer financial asset origination channels that will be synergistic to our core businesses. Any acquisitions will be targeted to supplement our geographic in the non-agency loan originations in our mortgage lending business, while the consumer lending opportunities will expand our origination capabilities into other consumer asset classes.

With the aforementioned consolidation in the mortgage lending industry, we believe that there will be a number of key strategic acquisitions that we would be in a prime position to execute on in 2017. Any possible acquisition will be based on a target approach to better infill areas of our lending operations that could be further improved, such as geographic expansion and product offering. 2017 should be an exciting year for the Company, and we’re eager to increase shareholder value through our different strategic efforts.

That concludes my comments. And I would now like to open up the floor to any questions that folks may have. Thank you.

Question-and-Answer Session

Operator

Thank you [Operator Instruction]. And our first question comes from the line of Trevor Cranston from JMP Securities. Your line is open.

Trevor Cranston

First question, the retail refi business was obviously a very big contributor to your 2016 results. And I think most people have probably seen what the industry projections are for refi volumes going forward in 2017. Can you talk a little bit about your outlook or your targets in terms of total volumes that you think you can do in 2017, excluding the possibility of any potential acquisitions?

Joe Tomkinson

I am going to let Bill answer the volume question, and then I may have something anecdotally to answer to add to that. Bill?

Bill Ashmore

Rright now, and again we think these are very achievable. We’re going to be in the $9 billion to $10 billion range, but the mix of business is going to be different. We've already seen a significant uptick. And again, a wide margin product and a CashCall Mortgage, which was predominantly refinanced. They’re already seeing a significant increase in the FHA/VA business, which they did a very small portion of that last year, that's up around 20 plus percent of their current volume. They also are expanding the volumes in the non-QM area, which also provide continued wider margin products, albeit at lower volume levels. But we think we can grow on those.

If you’ve been listening to the Airwaves, we’ve been pretty aggressive in terms of offering mortgage and payment solutions for borrowers out there, and that's been a very good campaign so far. So we've got active call campaigns going-on on that. In addition to that, in our business-to-business, as Joe mentioned, we have a significant uptick in the interest in our B2B. And we've seen probably, in that particular portion of business, upwards of 40% increase in applications for where the run rate was at the end of last year and increasing every day.

Along with that, we will be incorporating a higher level of technology across all of origination channels which we believe key for this year, is going to increase the mortgage experience for both our mortgage partners in addition to the consumer direct area to be able to more efficiently be able to process those applications and those requests. So, hopefully that answers your question.

Trevor Cranston

Yes, that’s very helpful. To follow-up on the non-agency…

Joe Tomkinson

I want to emphasize something there's been pent-up demand for liquidity for an awful long time. The market in the past several years has forgotten about the self-employed, it's forgotten about the entrepreneur. When I say forgotten about it, it's been very difficult for those individuals to secure financing. And as we seen in the past and when you have a rising interest rates like we're beginning to see; although, the rise is de minims at best. You're also seeing an increase in the sales activity in certain real-estate markets.

And we've been predicting that 2.5 years, and that's why we don't emphasize refinanced business. We emphasize that the next growth sector is going to be in the non-QM space, or all-QM space, whatever you want to call it. And we think that we're perfectly suited, we’re perfectly aligned for that. And so, CashCall's business in the refinance has fallen off. But as Bill said, it is now targeting a different section of the marketplace, as is our B2B business. And now we're bringing a product that is very real-estate friendly to the marketplace. And we'll see an increase there. Given a idea of the volumes that are out there, although we don't see it right now. 10 years ago, we were doing, 10-11 years ago, we were doing $2 billion a month of a very high quality -- I think our average FICO score back then was 704. So it takes a while to stool it up, but we have been setting ourselves up to be in that marketplace, again. And it always takes a little bit of time. But it is certainly there.

And in the secondary market, we’re seeing more and more investors wanting to participate in the IQM space. We’re getting calls daily as to whether or not we will sell them our product. So, we think that we’re in a very, very good position on a go forward basis. And the volumes may stumble a little. I don’t know exactly what the volumes will be. But I think by year-end, we’ll be in pretty good shape. Does that help?

Trevor Cranston

Yes, that’s very helpful color. So, maybe as a follow-up to the opportunity on the non-QM or non-agency side, which obviously sounds like it's potential to be pretty significant. I think you guys have previously mentioned having a target for this year, doing something like $1 billion. Is that still what you’re working within that $9 billion to $10 billion total forecast?

Joe Tomkinson

Well, I don’t like to predict the numbers, Bill likes to predict numbers. I am not going to comment on that. If we hit $1 billion, it’d be great. If we hit $2 billion, that would be great. We’re certainly set to -- and we have the investors in place that we could do that. But it takes a while to build the demand, just like anything else.

Trevor Cranston

And then a question on the servicing portfolio, so you mentioned, obviously, that you had beat your target in terms of growth of the portfolio by year-end. And said you were on pace to meet your $20 billion target by June of this year. It seems like looking at the $20 billion number versus where the current portfolio is that you would need pretty large origination number to get there, if it was going to be through organic retention. Are you guys also looking at acquiring servicing from other originators that might be looking to sell, given the backup in rates?

Joe Tomkinson

Well, when I said that we’re on target right now, we are on target. But will we make it by June of this year? Not, quite sure about that. But we’re very opportunistic, and there has been opportunities that acquire portfolios. It's going to effect, that did on one that was -- what was that $14 billion. And we look at it and we put a number on it, and someone that was hungrier than us over-paid for it. So, when I say we’re on target, we’re moving in that direction. Let me put it that way. But we’re very opportunistic and we think that there is going to be a lot of good opportunity. In fact, there’s lot of opportunities, I’d say, right now. Does that help?

Operator

Thank you. And our next question comes from the line of Brock Vandervliet from Nomura Securities. Your line is open.

Brock Vandervliet

So, a number of companies are approaching non-QM, and just to distinguish your efforts. What does an average loan look like in terms of debt to income, LTV, FICO? Can you give us a sense of that?

Joe Tomkinson

Yes, I'm going to turn that over to Bill. Bill do you want to…

Bill Ashmore

So, a couple of things, number one. What we found is that this particular loan is, which first thing you want to do is you want afford a better experience to both the broker of the banker and the borrower. We're not having any problem necessarily getting, the loans being originated. But what's going to be the scalability portion of this, mean be able to do the volumes that Joe was talking about, is to deliver a much better experience to those borrowers, bankers, brokers, as you process that loan through the system.

So the first thing is that we have been working on is developing system to our technology and to our processes. And then with, as Joe mentioned, through this very enhanced business development unit that is reaching out to, on average now, it's going to be over 1,000 per month and those are all LOs that we're reaching out. We're going to expand that and that's going to be a very extensive training in terms of getting them so that they have higher levels of positive experiences for their borrowers and for their real-estate brokers.

Secondarily, to give you an idea of what we have been originating, it's about 7.40 FICO, about 67% LTV, and the debt to income would be in the, for the once that had that income ratio because we have a program that's an investor loan that doesn't require a debt to income ratio, is in the higher 30%, 38%, 39% DTI. Most of those loans being originated are under a bank statement program where we would receive bank statements. We do not receive tax returns or W2s or paycheck stubs. We look at the bank statement, as Joe said, targeting mostly self-employed individuals.

The second program that is a high amount of volume is the investor program. This is for people that are proven investors and non-owners, and we offer, what’s called the commercial program for them that's about 20% of the volume. And then the balance of the volumes coming into a agency near miss or a loan that's traditionally documented loan that is falling on a agency guidelines that might have an interest only component. It might have a debt to income over 43% DTI. It might have multiple finance properties. It might have unwarrantable condos, things of that nature, basically makes up the rest of the program.

We also have other programs that are in works that are targeted non-agency type originations that are going to fulfill the needs of what we're seeing the borrowers coming in. You got to remember, we're approaching $0.5 billion in originations of these loans over the last three years. We'll probably hit that in the next month or so. And we have a lot of history now of not only loans that we approve but also loans that we decline to better able to formulate refinement of existing programs and then the development of new programs.

Brock Vandervliet

And is the endgame ultimately to securitize, or do you plan to just continue to sell these on a full loan basis?

Joe Tomkinson

No, we've been servicing all of them, Brock.

Bill Ashmore

But I think we're going to be opportunistic on that Brock in terms of right now. Based on what the level of interest is from our partners who are purchasing these loans, it's more advantageous for us to sell the loans on a released RNA full loan basis. But based on the amount of securitizations that are going to be occurring throughout this year, we think that those opportunities will probably avail ourselves later on this year where there will be more involvement for impact in those securitizations. But right now, it's more advantageous for us to stick with selling the whole loans.

Brock Vandervliet

And just lastly, switching gears to overall personnel expense side of the equation. You had made some good progress taking out costs in Q4. I know the costs tend to lag revenue decel. What do you think is a reasonable run rate for that and/or do you expect expenses to…

Joe Tomkinson

Brock, you’re breaking up, we can barely hear you. Can you speak up?

Brock Vandervliet

Sure.

Joe Tomkinson

Did we lose him?

Operator

Yes, I am showing that he disconnected.

Joe Tomkinson

Okay, all right.

Operator

And our next question…

Joe Tomkinson

He’ll rejoin us hopefully.

Operator

And our next question comes from the line of Chase Basta from AWH Capital. Your line is open. And actually Chase's line has disconnected as well [Operator Instruction].

Joe Tomkinson

Operator, did you inadvertently disconnect these folks?

Operator

No, Sir.

Joe Tomkinson

Okay.

Operator

And our next question comes from the line of Dwight Carlton from UBS. Your line is open.

Dwight Carlton

This is actually a question from my father to Joe. But my father was -- I think you know Dave.

Joe Tomkinson

Sure.

Dwight Carlton

Looking at the originations, it shows the correspondent channel had the least reduction by percentage compared to the other two there. And he was wondering how IMH is going to go about increasing the number of correspondents that are working for you, since that seems to be the most stable spot right now. I mean, is that where you guys are generating the IQMs or whatever you call them now?

Joe Tomkinson

Well, Alt-QM, IQM, there is several names.

Dwight Carlton

Alt-QM, IQM.

Joe Tomkinson

IQM, Alt-QM, non-agency, but we’ll -- go ahead Bill. You want to jump in.

Dwight Carlton

Is that where the non-agency stuff is mostly coming from?

Bill Ashmore

Actually right now the majority that’s coming from the broker network and we are going to be -- the correspondent network is a little bit slower to ramp up. And then CashCall, which had not really concentrated on the non-agency up until recently, because they were -- had overcapacity in the refinance markets through year-end. As I mentioned earlier, we’ve got a mega campaign out there at CashCall to do a significant amount of this along with FHA. So, we’re going to see them becoming a much bigger component, but right now broker business is.

As you asked or answer to your, part of question, is that how we are planning to increase the overall business-to-business is that we are moving towards a hybrid platform on our TPO. So that our account executives which have been asking for the last couple of months, especially with the non-QM, they have correspondence in the correspondent areas that would rather sell broker. And they also have other brokers that the correspondent account executive knows that would like to do business. We have basically isolated those two accounts up until basically rolling out a new viewpoint relative to a hybrid.

So, we're going to be moving towards allowing our account executives in both correspondent and wholesale to be able to look to do business across the spectrum, which would be those emerging bankers where we can give them a warehouse line. There are broker that wants to move to a banker, also being able to do close loan correspondent business and also be able to do open broker business, which expands our footprint in terms of available amount of sales people pretty rapidly across all the channels. So, we're in the midst of finalizing the technology on that, and to be rolled out in the next 45 to 60 days. And we're going to be moving towards a bigger network of a sales organization to be able to cater to all the B2B customers.

Dwight Carlton

And you also mentioned some M&A activities, and trying to get a better footprint in certain regions. Can you comment on what type of things you are looking to acquire and where?

Joe Tomkinson

Well, without giving anything away that we can't give away, we're looking at an East Coast based purchase money originator. We’re in the, I guess you would say the final pros of the acquisition. But we're in the final throes of that and we think there's a huge opportunity in the consumer finance business, lot of -- and Bill and I and his group here, we've always been counter-investors when everybody is walking away from something or where we tend to open up our eyes and take closer look at it and say, where is the opportunity. We found a very, very good opportunity and we're in final negotiations of that one also. So, well I guess those rolled eyes again. So we feel very good, but even though the interest rate environment is somewhat negative right now for us, the way we position ourselves with the Alt-QM business we feel…

Bill Ashmore

And the servicing portfolio…

Joe Tomkinson

And a servicing portfolio, we feel very good about 2017. Everybody looks at volume as an indicator, and I've never ever looked at volume. Somebody asked me, I've been doing this, Bill and I and this group have been doing this together for near 30 years, and we've gone through every environment that you can think of. And it's not volume it's profitability, and it's managing your portfolio. And so, if you start putting too much emphasis on the volumes then you're emphasizing the wrong things.

The volumes, we said in the fourth quarter as I said in my prepared remarks, volumes are going to go down. Now, as long as I've been doing this, they've gone down every -- in the fourth of every year. So, there's no surprise. But for some reason, everybody is always surprised that the volumes go down and then when interest rates begin to tick-up, everyone is surprised that the volumes go down. Well, that's the nature of the business. And that's why I tell people I say we manage the business through different cycles. And if you take a look at volume there is three components of volume.

And it depends on what kind markets you are in, the one component precedent over the other. And it's product service and price. And right now with the rising interest rate environment, we have a product we have it priced properly. And as Bill mentioned, we have a system in place to better service the customers that need that product. So, we don’t look at volumes as a real indicator. So, I hope that helps you?

Dwight Carlton

It does. One other final question here, I seem to remember -- I've followed you guys and known you guys for a long time. In the past, I want to say about a year ago, one of these conference calls. I believe I remember you guys saying that you were kind of shying away from consumer lending. I don't know if I am correct on that. But you were looking at it and then changed your mind. And if that’s the case, what changed your mind?

Joe Tomkinson

First of all, the consumer, the whole idea of the consumer business is you got to have liquidity in the marketplace. And when the marketplace walked away from it, the liquidity dried up. But we felt that was, for us at that time, it wasn’t the right time to get involved in it, not because the loans were bad it's just because the liquidity that we saw earlier had somewhat dried up. But Bill and I have been talking to a number of investors that have the same outlook as us that the product, the consumer lending is a good product if it's done properly.

In the last couple of years, it hasn’t done properly. And so we couldn’t find a platform that we agreed with, and that was originating the loans properly. Now, we think we have found someone in a platform that does a good job and does it properly. In other words, you got to make good loans. And they have to be fair to the consumer and they have to be profitable for the secondary market. And so that’s, for the last year, what we’ve been working on. Does that help?

Dwight Carlton

That does. And then what type of consumer lending specifically are you talking about here, our financing…

Joe Tomkinson

Prime credit…

Dwight Carlton

Okay.

Joe Tomkinson

I am not talking about subprime at all.

Operator

Thank you. And our next question comes from the line of Chase Basta from AWH Capital. Your line is open.

Chase Basta

I'm not sure what happened earlier. I was still on the line, but anyway my question is on gain on sale margins. And I wanted to see if you guys could give some commentary on what your outlook is for first quarter in 2017 relative to 2016. Just based on what you’re seeing in primary, secondary spreads in the higher interest rate environment.

Joe Tomkinson

Well, I think you missed my whole diatribe on interest rates, when did you rejoined us?

Chase Basta

I was on the call the whole time.

Joe Tomkinson

Okay.

Chase Basta

So, I am just curious the gain on sale margins through the year, if you guys have any perspective on that. I mean, I heard your perspective on interest rates and that and margins…

Joe Tomkinson

I’ll give you just -- and Bill is going to have some comments. Let me just give you an idea. On the non-conforming loans, the non-agency, the Alt-QM, whatever you want to call it, the margins are significantly higher than you conform, and I'll give you thumbnail sketch. If we do one loan…

Bill Ashmore

This is business-to-business.

Joe Tomkinson

Yes, the business-to-business, it's three times as profitable as a conforming loan. Does that help you?

Chase Basta

Yes.

Joe Tomkinson

Bill, you’ve got some color?

Bill Ashmore

Yes, remember; one, if in terms of the marker we're moving into. So you've got -- you're going to have a different mix of business, so you'll have a -- instead of having a 25% business-to-business, 75% retail, you're going to get a higher percentage of business-to-business. But the business-to-business margins as we do more-and-more higher percentage of non-agency, you're going to see their margins expand. And because the CashCall margins are moving towards a higher percentage of FHA and a percentage of non-QM, those margins are fairly consistent with what they saw last year.

So, I think the margins for retail will, even though the volumes will be down, I think the margins will still be relatively intact. I think in terms of business-to-business, as we do higher percentages of the FHA and also the non-QM, you're going to see those margins increase. And then one of the reasons is that even though there's a limited premium available for the non-QM loans in the secondary market, the origination of that loan is not consistent with what has been done over the last year. It is not a no-cost to the borrower. The borrowers coming into that loan was somewhere between 1 to 1.5 points plus some costs for closing. Where what has happened over the last several years on agency and government loans is, is that because there are so much premium in those loans, you're able to do essentially a no-cost or a no-point loan.

So, the actual origination dynamics for what is going on moving into this non-agency market is going to be different than what we've seen over the last couple of years. So, hopefully that does answer the question.

Chase Basta

And you guys have talked about non-QM quite a bit being a growth driver in 2017. Can you remind us how much in non-QM originations you had in 2016?

Bill Ashmore

Not the top of my head. You know what, I don't remember.

Chase Basta

And then…

Joe Tomkinson

Chase, we can get it for you.

Chase Basta

Just one question, I guess, while we wait. Do you guys know yet what you expect to pay CashCall for their ear-nout payment based on Q4 performance?

Joe Tomkinson

No.

Bill Ashmore

It was about $300 million for non-QM for 2016. We're obviously on a run rate that's going to be significantly greater than that for '17.

Chase Basta

And then last question is, a few calls ago, you guys were talking about opportunity to expand CashCall into other states around the country. Can you just update us on your progress there and where all you are running ad campaigns?

Bill Ashmore

The ad campaigns are targeted from our Internet, from the mailings and then also from -- we do nationwide cable is, is that we try and stay within those states that offer higher loan balances and have lower cost title on escrow, other it's ancillary costs. And moving to other states, we want to be very selective. So the other states we're moving into are going to be more of the, sticking with the Western states and then also the Eastern Mid-Atlantic states; we probably will do some in Taxes, but trying to stick with those states. The middle of the U.S. becomes a little bit problematic, except for pockets, because the loan balances are so low. So, they try to concentrate on higher loan balances.

Operator

Thank you [Operator Instruction]. At this time, I am showing no further questions. I would like to turn the call back over to the Company for closing remarks.

Joe Tomkinson

Well, we have no more closing remarks, no other remarks. So, we appreciate everyone's participation in the call and look forward to the next earning's call. So, thank you everyone. Bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.

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