Q2 2020 HomeStreet Inc Earnings Call
Good afternoon, and welcome to the Homestreet second quarter 2020, <unk> earnings call Oh.
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Please note. This event is being recorded I would now like to turn the conference over to Mark Mason Chairman President and CEO. Please go ahead.
Well, thank you for joining us for a second quarter 2020 earnings call.
Before we begin I'd like to remind you that our detailed earnings release was furnished yesterday afternoon.
And then okay, and then accompanying Investor presentation was filed this morning to the FCC.
Form 8-K and are available on our website.
Our dog Homestreet dot com under the news and events like.
In addition to recording out transcript will be available at the same address following our call.
As noted in the course, where our call today, we may make certain predictive statements.
Reflect our current views and expectations about the company's performance and financial results. These are likely forward looking statements. There remains subject to the safe Harbor statements included in yesterday's earnings release, the investor deck and the risk factors are disclosed in our other public filings.
Additionally, reconciliations to non-GAAP measures refer to our call today can be found our earnings release available on our website.
Joining me today is our new Chief Financial Officer, John Mitchell on behalf of the entire organizationally would like to welcome John to the team you may have noticed the John has already making some changes to find out your reported.
Earnings release has a new look and format. We hope these changes will make it easier for investors to quickly understand the important things to know about our performance.
Of course, we're always open to feedback from investors on changes, we can make to advance that goal.
John will briefly discuss our financial results and then I'd like to give an update our response to the current coated 19 pandemic and related credit status. A few comments on our results of operations and our outlook going forward John.
Thank you Mark good morning, everyone and thank you again for joining us and it's great to be a member of the Homestreet team.
Before I comment on earnings I want to let everyone know we filed an amended press release. This morning to correct in there in the presentation related to the efficiency ratios on page four the actual efficiency ratios for the last five quarters or 62.6%, 68.5%, 74.8%. So.
35.9% and 82.4%.
In the second quarter of 2020, or net income was 18.9 million or 81 cents per share with core income of 20.2 million or 86 per share and pre provision core income before income taxes of $32 million.
This comparison net income core income a pre provision core income before taxes, or 7.1 million 8.1 million and 24.1 million respectively. In the first quarter of 2020.
Net interest income was higher in the second quarter of 2021 compared to the first quarter 2020.
Due to an increase in interest, earning assets and an increase our net interest margin to 3.12%.
This increase our net interest margin was due to decreased funding cost, which was only partially offset by decreases in our yields on interest earning assets.
We ended the second quarter or cost of deposits was 51 basis points.
Due to adverse economic conditions related to the covert 19 pandemic, we recorded additional provisions during the first six months or 2020 for credit losses, as an estimate of potential impact of these conditions our loan portfolio.
The provision for credit losses was 6.5 million for the second quarter 2020, as compared to 14.0 million in the first quarter 20 Twond.
As we have not experience any meaningful adverse changes in our non accrual are adversely classified loans our provision for credit losses for the second quarter was primarily related to commercial business owner occupied theory, and non owner occupied serially, she or he loans, which were granted forbearances during the first half of 2020.
In computing, our allowance for credit losses, we assumed that the probability default would be elevated for these types of loans granted forbearance, assuming probabilities of default Oh, 60% for commercial business loans, 35% for owner occupied theory loans and 50% for non owner occupied scenery logs.
As a result at June Thirtyth 2020, the allowance for credit losses was 4.04% for commercial business loans, one 2.23% for owner occupied theory loans and 84 basis points for non owner occupied theory logs.
During the second quarter of 2020 noncore items included $1.6 million of impairments related to vacant space, resulting from our restructuring activities.
0.7 million of income related to a contingent earn out from our 2019 sale of her home lending centers.
0.2 million charge off a pullbacks related to our sales of mortgage servicing rights in 2019, and 0.6 million of other restructuring costs.
The increase in noninterest income for the second quarter of 2020 was due to a 7.5 million increasing gains on loan sales, which was partially offset by 3.7 billion dollar decrease in loan servicing income.
The increase in gains on loan sales was due to an increase in profit margin and the decrease in loan servicing income was due primarily to favorable risk management results on our mortgage servicing rights and the first quarter.
The 2.5 million dollar increase in non interest expense in the second quarter 2020 was due to non core charges and additional compensation costs related to the origination of loans.
I'll now turn the call back over to Mark.
Thank you John I'm very proud of what we accomplished at home Street during the second quarter.
Strong mortgage banking profitability significantly lower cost of deposits and the impact of our focus on cost efficiency contributed to solid financial performance I would like to thank all of our employees for their hard work delivering these exceptional result under very difficult circumstances.
There's pandemic illustrates the need for community banks, such as Homestreet consumers and small businesses have struggled to access and understand federal aid programs such as the Paycheck protection program.
These customers have been best served in the crisis by the level of customer service community banks provide.
Many of our larger competitors were unable to provide this needed support given the breadth of the crisis as a consequence, we welcome many new individual and small business customers to homestreet during this crisis.
Although the effects of the global pandemic continue and the long term impacts are yet to be fully realize we're encouraged by the performance of our loan portfolio to this point.
Our commercial business loan portfolio, which contains lines of credit and term loans has bydesign limited concentrations by industry in order to help limit our risk of exposure to any one part of the market.
Additionally, we have generally avoided lending to riskier industries like hospitality at leisure travel foodservice fitness energy and entertainment.
This conservatism has served us well in the pandemic the remainder of our loan portfolio is secured by conservatively underwritten high quality real estate and some of the strongest and previously fastest growing economies in the nation.
As a result, our loan portfolio is performing well relative to peers.
As of June Thirtyth, our commercial business loans granted forbearance.
88% of them have completed their forbearance period and have resumed regular payments and only 3% of these borrowers have requested a second forbearance period.
Commercial business in Syria owner occupied loans, and forbearance have declined by 91% and 77% to only $4.5 million in $21.3 million respectively.
As of June the 30.
Based on our survey of commercial business loan borrowers nearly all of them have reopen their businesses at some level at approximately 80% do not currently precede the potential need for additional forbearance.
Oh, the 137 commercial business in theory owner occupied real estate loans that have completed their forbearances only for our past due or on non accrual.
Before Barents careers for the majority of loans granted forbearance that were not completed as of June thirtyth are scheduled to be completed in the third quarter.
Our investor deck published this morning contains good data on our underwriting standards and portfolio composition.
We've also added a few slides further disaggregating, the information and providing additional detail on the parts of our portfolio most at risk today.
You will note that our non accrual loans increased slightly this quarter.
This increase is the result of downgrading of a few commercial business loans that were recently acquired that we're experiencing problems before the pandemic.
Unfortunately, these loans have underwriting deficiencies and irregularities that were not identified in our due diligence prior to our acquisition.
Fortunately at this time, we feel our potential loss exposure is adequately addressed in our allowance for credit losses.
It is clear to us today that our risk concentrations are well defined and we believe manageable with current reserves capital and earnings.
Given our current performance a customer outlook.
We believe we may not need any significant loan loss provisions.
Additional loan loss provisions to address credit risk rising from the pandemic.
Of course, there exists exists significant uncertainty as to the impact of the pandemic and its effect on the link the depth of the recession and the ultimate impact on our loan portfolio.
Adding to our confidence level is the fact that much of the team that initially came to Homestreet. The guide to back out of the credit challenges of the great recession, including me remain at the company today and key positions.
His experience and capability of Ben and will be invaluable as we continue to navigate the current crisis.
We are working hard to support our communities and our customers. While also protecting our employees, we like our peers have devoted to get significant time and resources to processing loans backed by the small business administration under the Paycheck protection program.
Again ticket applications for these loans on April the third and through June Thirtyth, We approved and registered 1700, 81 loans, which total net of fees.
Definitely $296 million.
As I mentioned earlier, we walk of many new customers to the back an increase core deposits result.
Our website has many testimonials from new and existing customers that speak highly of the quality of service the care. They received more wonderful employees during the crisis.
Today, we have a strong capital base with consolidated tier one at risk based capital ratios of 9.3% at 13.48% and bank level tier, one and risk based capital ratios of 9.79% and 14.08% respectively.
Beyond our strong capital base and increased to one or credit losses. Our current earnings provides meaningful additional capacity to absorb future credit losses.
We have ample on balance sheet liquidity and access to more from our contingent sources today, our total borrowing capacity from the federal reserve in the federal home loan bank, including existing lines. It's an additional unpledged collateral is $4 billion.
These conditions gave us the confidence in the second quarter to resume our previously suspended share repurchase program.
Since restarting the program through June Thirtyth, we've heard repurchased a total of 396795 shares.
Our common stock at an average price of $24.17.
Yesterday, we also announced that the board has approved an additional $25 million of stock repurchases.
Due to regulatory non objection.
Reflecting our very strong second quarter results, including the positive trends in our loan portfolio. The board of directors also declared a 15 cents per share common stock dividends to shareholders of record on August seven 2020 and payable on August 24th.
Finally on a governance note in June we welcome Jeffrey de Green to our board of directors.
Jeff is a former audit partner up Moss Adams in prior head of their banking practice group.
Jeff is a certified public accounting and has significant financial institutions and accounting experience and he will make a great addition to our board of directors.
Is actually already contributed to this release.
[noise] looking forward for the third and fourth quarters of this year, we expect our average loans held for investment to increased moderately as commercial real estate construction and commercial lending pipelines are rebuilt.
This growth will be offset somewhat by continuing high levels of prepayments the forgiveness of paycheck protection program loans, beginning in the fourth quarter.
We expect average deposits who also increased during this period increased in the increases in both consumer and business deposits from new customer relationships and consumers continue to increase the personal liquidity are expected to contribute to this growth.
Any growth will be offset somewhat by the outflow paycheck production program related funds as businesses use the loan proceeds for their intended purposes.
We expect our net interest margin to continue increasing assuming the current low level of market interest rates in shape of the yield curve.
Our cost of deposits continues to decline.
As of June Thirtyth, our cost of deposits to declined to 51 basis points.
And we expect.
Further declines as certificates of deposit mature and reprice.
Lower deposit costs are expected to be somewhat offset by lower interest, earning asset yields due to the ongoing repricing of variable rate loans and the region.
New loans at current market interest rates.
We expect the level of noninterest income to be stable to somewhat decreasing through the end of 2020.
Well I'm certain that the timing, we expect some decline in the volume and profit margin of single family mortgage loans from their cyclically high levels during the first and second quarters of this year.
While volume and profit margins of mortgages should at some point returned to historical levels when interest rates rise or the capacity of the mortgage industry to process. The surge in volume increases we have not yet seen any weakness.
We expect non interest expense levels to remain generally stable during this period.
Elevated Cologne Commission levels are expected to continue as long as loan volume is elevated.
In fact, we are currently adding a few mortgage originations personnel to assist with the high volume.
This will result in a slight increase the number of FTD.
We are carefully watching productivity and efficiency levels as we increase headcount.
Overall, we continue to benefit from our profitability in efficiency initiatives and we continue to work on further efficiencies.
For example, we now expect meaningful reductions in information technology contracts to began in January of next year.
The current environment has helped our expectation of the timing and value of real estate related cost efficiencies due to the pandemics impact on subleasing of commercial office space.
We'd like to take a moment and comment on our just completed second quarter results.
I'm very happy to report that we earn core pre provision pretax income of $32 million core return on average tangible equity of 12.2% core return on average assets of 112 basis points and an efficiency ratio 62.6%.
I would add that with these results, we exceeded each of our profitability and efficiency targets, which we set prior to in which we previously withdrew due to the pandemic.
We've not only attained our goals earlier than forecast, we've done so even while adding $6.5 million to our allows for credit losses during the quarter.
And remember that our targets were originally set without any expectation for loan loss provisions.
For those of you who are able to listen to our conference call last quarter, My following remarks and sounds familiar.
We must acknowledge that there are few factors to consider as we look to both sustain and build upon our current strong financial performance.
Chiefly our single family mortgage business is clearly benefiting from a very robust environment for both volume and margin.
Interest rate lock volume remained elevated during the second quarter compared to the first quarter.
And our composite profit margin increase substantially to 550 to 546 basis points during the quarter.
Well history tells us that such favorable environments for mortgage banking do not continue forever.
As I alluded to earlier, we see no disruption in the current strength in the cycle at this time.
Next the absolute lower level of interest rates, which has been a factor in our favorable mortgage banking performance has also been instrumental to our achieving lower funding costs and a higher net interest margin.
The current interest rate environment continues to be conducive towards further modest improvements in both measures into the third quarter.
Lastly.
One of the most obvious opportunities to improve our near term, but near term bottom line results is with our credit provision expense [noise].
I mentioned earlier that we believe that we may not need significant additional loan loss provisions to address credit risk arising from the pandemic.
To grass called meaningful this could be to our earnings one just needs to consider that the 6.5 billion dollar provision expense for the second quarter is taxed at 20% for simplicity would equate to 22 cents per share.
We'd like to close my prepared remarks today by bringing into your attention something we've always given a great deal of attention to here at home Street.
That being capital allocation and growth in tangible book value per share.
Fairly muted balance sheet growth at this time combined with strong capital generation from our operations has provided us the opportunity to return capital to shareholders in a very efficient manner.
We're pleased to have returned substantial excess capital to our shareholders over the past year.
In addition to a new regular quarterly common dividend, a 15 cents per share, which we initiated in the first quarter. This year, we have collectively repurchased over 3 million common shares during the prior 12 months representing over 12% of total common shares outstanding.
At $28.73 per share as of June Thirtyth, our tangible book value per share has grown by 7% since January the first of this year.
And the introduction of our common dividend.
As evidenced by our additional $25 million share repurchase authorization announced yesterday.
We are encouraged by our current operating performance and cautiously off.
Prior to our foreseeable future prospects.
With that this concludes our prepared comments. Thank you for your attention today, John and I would be happy to answer any questions you have at this time.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset pricing any key.
To withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
Our first question comes from Jefferies.
D.A. Davidson. Please go ahead.
Thanks, Good morning.
Good morning.
The margin position seems fairly favorable.
Amongst peers I wanted to.
Circle back market your expectations for margin to increases that exclusive of the PPP impact.
No. That's a that's inclusive of the PPP and okay. Okay. So on a core basis.
Pretty steady and then just hoping to.
Include a little benefit from PDP.
No I'm on a core basis improved.
The PPP impact.
We'll be declining right as forgiveness occurs right in those balances decline, obviously that has some impact but the effective margin on PPP loans for us I think is in the height to say at this time.
In our case, we have not sought to accelerate PPP fees.
We still have well over $9 million.
BP fees to be recognized out at the nine of the half million dollars a total fees.
Right I.
Hi, good.
Yes, yes, I'd, just say, we'd expect some benefit from the amortization of the loan forgiveness has but we don't expect that to happen until late fourth quarter, and then first and second quarter of next year over the next six months, we see our core earnings even though we have PPP doubt the downward empress because they're lower yielding loans, but we don't see the benefit.
The forgiveness of the loans until the second first second quarter next year. So also Jeff are.
Deposit costs are continuing to cost to decline at a meaningful level, even past the end of June.
At this point in July.
Our cost of deposits is approximately 45 basis points just for that perspective.
No I think I'd frame that up poorly I.
Anticipating that sort of TPP is that headwind today, and what sort of suggesting that towards the end of year, maybe early next becomes.
Tailwind.
Maybe John do you have the basis point impact of of PPP, what that was impacted margin in the quarter on a negative basis.
I I do not have that calculated by be glad to get it and get it back to you.
No problem. Thanks.
The non accrual.
Ads.
Mark Watson some commercial credits that were sort of non cobot related and and acquired what segments, where those and from a.
From a business standpoint.
They were dental practice loans.
Of the type that we referred to as.
Dental service organizations.
Where.
[noise] investors have.
Aggregated practices and centralized business management operations.
That is a growing trend in the.
The dental industry.
We had acquired a small portfolio those loans last year, and we've had a couple of problems.
Okay.
I would say the core dentists that youve underwritten and and I think some early deferrals the balance of those where we're pretty favorable or else has as we've opened up is that is that true that that group is done fairly well in the whole.
Really well and perhaps we should have highlighted that a little more but we went with the large numbers, which are so overwhelmingly positive as to.
Reopening.
Re growing revenues our dental practices are currently operating that between 70, an 80% of normalized revenue. According to our survey and the vast majority except for small handful.
Or.
Not anticipating any need for further forbearance, they're back making regular payments we have precious few delinquencies I'm. It's just a very very solid piece of the.
Landscape today.
In fact, if you look at.
The level of dental loans with outstanding Forbearances.
It's fallen to under $4 million and an eight borrowers at at the end of June and as we sit here today of course, I think that they're either gone or almost all gone.
Got it Okay last one on the on the reserves.
Framed up that methodology just is trying to.
Whether that's versus peers are that's fair not it seems more guided by kind of current credit Hello.
Rather than future potential risks I wanted to kind of get into that.
The reserve build methodology I guess the metrics that you see that are underlying that are more qualitative kind of what it was the inputs on that side that would suggest that you've got a pretty comfortable reserves.
So I appreciate that question, we tried to frame it and the comments and maybe you didn't do as good as we could have but but pretty simply you know we.
Well, we're cautiously optimistic about the portfolio and in particular, the commercial loans that we have granted forbearances on.
We.
We're fortunate that we can continue to provide comfortably in what I would really call in abundance of caution for uncertainty.
We feel quite good about the regular Cecil <unk> reserving process relative to single family mortgages and home equity lines of credit.
Those.
The probabilities of default and.
Loss given default those numbers came out of last recession.
Right and so those are sort of asset tested for 44 loss potential. However, the opposite has really been true with respect to commercial loans.
It's actually and see an eye loans owner occupied real estate loans and to a lesser extent.
Regular commercial real estate permanent loans and so we approached.
The question of.
Certainty.
By.
Judgmentally, increasing the probability of default really significantly.
For those loan types for which we provide for parents is whether or not they completed them. We're paying again, regardless for the total pool forbearances for commercial business loans owner occupied.
Real estate loans and those few number of.
Permanent commercial real estate loans that we provide forbearance too and roughly a John provided those.
Probabilities in his comments.
I'll find the numbers here, but it was.
Thank you see at 6% to 60% for the business loans, 35% for owner occupied and 50% for non owner occupied theory right. So we applied that expectation of default. We believe the loss given default numbers are severity and in our seasonal calculations.
Our still are reasonably appropriate.
We think at this point those numbers are extremely conservative Oh, just doing choose commercial business loans are pure lines of credit and term loans are we are reserved for 60% of them to default.
At a meaningful loss, given default, which I think is roughly 30% roughly 30% loss potential when today, we see.
The.
Almost all of them out of their forbearance period, and paying again, so we feel like our reserves relative.
To our pool of risk are really conservatively stated today subject to insert yes, and the other aspect I Wanna mention is that we do look at updated economic forecast from Moodys in terms of evaluating a qualitative factors and have included the most recent.
Valuations from Moody's in terms economic forecasts and that's contemplated in that calculation to our reserves at the most severe level, yes right.
So I hope that's great.
Yeah, no thanks to the color.
And Jeff I didn't get back it's roughly three to five basis points negative impact from the PPP loans in the second quarter.
Appreciate it thanks John.
Our next question comes from Steve Moss with B. Riley FBR. Please go ahead.
Good morning.
Good morning landscape.
Let me just starting on a you know the loan pipeline here, a little more optimistic than in some others with regard to lending opportunities just kind of curious as to you had mentioned types loans or what you're seeing for loan yields in kind of.
What.
Maybe extra underwriting standards. There are covenants you guys requiring these days.
Sure I'm book yields are low right I mean, given the absolute level of rates in the yield curve.
Yields.
Our still low competition for loans.
Maybe less in terms of active lenders, but those that are active are very competitive as as ray.
Our.
Commercial real estate for example, our commercial real estate.
Multifamily Perm loans are.
Averaging somewhere between I think it's 350 to three grew 43 70, I guess that right yeah.
We are our general commercial business loan pipeline of course, we suspended early on.
We reopened the pipeline.
On a limited basis, two industries and businesses that.
Have limited impact from the pandemic.
That is is not as competitive but of course everything is based upon much lower variable index levels right. So spreads are consistent to two larger but the absolute level of rates of course is lower.
Having said that seeing I originally options.
Our fourth quarter to 5% as an absolute number.
Construction loans, obviously in the residential construction area, we're still actively lending those yields are still a prime plus one generally to one and a half.
And were generally getting a point in fees, so the effective yields over 5% typically.
And of course, the mortgage industry is what it is I mean.
You may see in the media 30 year mortgages at around 3%, but with low level price adjustment. The average is generally higher in the.
Three in a quarter to say 335 grade.
If that helps.
With a little absolute color on raised.
Absolutely that Doug Thank you for that and.
<unk> expenses here, Mark you mentioned I T X cents come down meaningfully in the.
Beginning next year I believe it's kind of curious as to maybe little more color on that and kind of.
How you're thinking about the efficiency ratio in 2021.
Well, we are we're just finishing a negotiating our largest core systems contract.
Renegotiating for an early renewal.
And our mortgage origination system contract.
I don't want to say too much about those until we have completed an executed the agreements.
But we are going to get.
Most of what we hoped for.
It is a reality when you request to renegotiate a contract early you will not get the full price benefit you would have of going to maturity and putting put it out for for proposal. However, we have a significant need to get benefit.
As soon as possible and we think that the present value the differences not that meeting right getting it early is important.
We we are getting.
[noise] meaningful double digit reductions.
In the cost of these contracts in fact, our.
Mortgage origination contract is going to go down by more than half.
Our.
Core systems contract.
Meaningful double digit reduction.
And just as important particularly in our core service agreement we are getting.
Significant improvements in our service level agreements.
And penalties.
And additional requirements that we'll have help us provide more consistent better service for customers right. So comprehensively, we feel very good about the work that we've done with our core service provider. They work productively with US more recently I know that I voiced some criticism earlier.
But more recently they have done a good job in working with US and we're we're happy with where were indeed.
That's helpful and then in terms of just the deferrals here.
You know good healthy declined on commercial side, just kind of curious what is I mean, sorry, I'm in there I didnt move much in the consumer portfolios any assuming that three more months to go just kind of curious as to what is within that number occupied bucket and how you feel about the remainder there's deferrals there.
Sure.
In the non owner occupied bucket we have.
16 loans I think.
I believe two of those are office buildings and the remainder are primarily retail some construction because they thought when oh plus the consumption. So if you construction loans I think seven atish, yes, and those are all multifamily and mixed use projects right.
And I believe all those are back constructing again, so they have to backfill that again, I mean remember that a prohibition in Washington state on construction for about a month and have to two months. So there are construction delays and of course, there we expect.
An extension of lease up period.
Given current conditions.
However, all of these projects, particularly the.
Construction projects are backed by a very deep pocketed.
Professional investors and developers.
Who have a lot of outside resources to bring to bear to complete these projects and sustain them through lease up and we feel very good.
Their prospects they just need a little help.
That's helpful and just in terms of single family and he liked what remains is that pretty much three more months together before we start seeing.
Getting hit on current performance there.
So you will see nearly all if not all of those forbearances.
Mature in the third quarter, well over half in the third quarter than the other half mostly in the fourth quarter and just from a number perspective and you can see in the he locks and the other consumer Theres a lot of consumer numbers that are in there that we extended from a period time, a really small balance loans in terms of got so that you can see the average size of those loans as much smaller.
There are the he likes tended to be more the six month timeframe.
Well actually happened, though mechanically with these forbearances at least on the single family closed inside they will be turned into permanent deferrals and those agreements.
We'll be modified.
And those payments are typically added on at the end.
Of the mortgages and simply extend their life in most cases and that has already started that process is hard to start with a number of borrowers. So when you see them with their forbearance period, they're not having to bring all those payments current they're just restarting normal payments, which from a credit standpoint as a much better answer.
Right.
All right. Thank you very much next quarter.
Thanks, Dave.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
Hey, good morning.
<unk>.
I appreciate the color on the rates by product.
But do you have a weighted average rate on.
New production in the quarter, excluding PPP or.
What you expect kind of weighted average rate to be based on what do you plan to originate in the back half.
When you say back half you're talking about second half of 2020, yes, yes, okay. So what we expect current and future rates to be but look we don't make ray predictions. So any future expectation, we would based on this quarter right.
Weighted average rate for all originations.
Let me ask my my guys here, we have that that that is probably number we don't know.
Again, the multifamily market and mentioned earlier is roughly at the current time threeforty for Threeseventy and kind of talked about the other rates. It depends on the volume we have a beach one.
<unk>.
In terms of note rates.
Okay. So it's going to be impacted by the PPP loans right. So it was an anomaly this quarter I mean I our average rate. This quarter is probably in the two and half percent range, but that's after having originated $300 million of 1%.
Coupon loans right.
Excluding that.
It's probably in the.
Hi, Thanks.
Hi, threes, yeah yeah.
Hi threes.
And we can work and we don't we're good at better Matthew as we get to the data so.
No worries I, just trying to I'm trying to I'm trying to get an incremental margin to give us some visibility knowing the spot rate on deposits and.
And I assume on the security side I guess.
With.
That's cash flows come in.
If you are buying.
Something what's kind of the we'd ever treat there.
Let me ask the treasures sitting there.
250 between 240 into 60 right now is where we're looking at the we're not with the with the growth in the what they declined in the balance sheet with the prepayments our liquidity is such that we're trying to deploy those into it.
So we're not purchasing much right now.
It was so as our securities portfolio going to shrink horizon right now we're going to hold it flat with everything cash flows, but we're not going to utilize any excess liquidity for the skids book.
Okay great.
And then maybe shifting gears to expenses can you quantify how much.
Of that 30 million in mortgage related revenue I guess how much.
Yes, it was offset by expenses mortgage expense.
Now you know, we don't breakout segments any longer.
[laughter] figured I'd.
Given a shot.
We've talked about this on the last call and <unk>.
[laughter] sneaky, there I'm sorry.
When we when we discontinue this segment simplify the company we made the decision to God essentially sub report that segment and I understand from an analyst standpoint, particularly when you have these substantial changes in volume profitability. It makes your modeling a little harder but.
So impressed with an intelligent you folks are I'm sure you'll get it right.
Great and then just on the.
Share repurchase.
I guess, what's your sense for the timing.
To receive non objection and how aggressive might you be and retiring that new 25 million Dot program.
I'm hopeful that the non objection will come promptly lets say within two weeks.
As you would expect I have pre discussed.
The possibility of us, making the request with our regulators and I believe that they are based on those discussions.
Favorably inclined.
But that's not an approval nor a non objection and we have a process to go through and they have their own considerations and so.
I'm hopeful that we receive that within a couple of weeks.
And then from a perspective of repurchasing we would be aggressively in the market, especially at the relative price compared to our book value tangible book value right and our current daily maximum.
Most recently was running at about 30000 30000 shares a day and it's very hard for us to get that many we've been averaging 17 18000 shares a day that helps yep.
Great. Thank you.
Got it.
Our next question comes from Jackie Bohlen with KBW. Please go ahead.
Hi, good morning.
Hi.
Like I wondered if you could give an update on just really theepan I'm. The Iraqi update has been great that I know that real estate is another area of focus for you in last quarter. You gave some great color on and she's that you're seeing in the market, which is trying to divest some of that so I wondered where that's good and also I just an update on if you take.
And how you think about your overall footprint just in terms of office space and branches in light of white warranted a pandemic.
[noise] move was lot of topics on that question.
So let me I'll try not to politicized my answer.
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We have excess space much of our excess space is here in Seattle at our corporate headquarters.
We have been trying to sublease approximately three floors of space here for some time, we have nibbled the way that.
We leased whole floor and portions of another floor. However, the current environment is not conducive to leasing class eight commercial office space right now.
And accordingly.
We reserved against our obligations this last quarter approximately $1.6 million.
I'm expecting lower sublease rates and higher.
Levels of tenant improvement allowances and longer timeframe at a longer time to before we get at least up so from a from a financial results standpoint, we've made our current position a little more conservative we hope that that is going to be enough to accomplish given that space absorbed.
Remains to be seen.
The.
Our view of our space requirements.
Obviously is subject to continue in reconsideration on a number of bases one if we end up.
More permanently having some of our employees work from home, obviously that decreases space needs. If we move to in some functions more of a hotel in concept with partial time at home, obviously that would is well on the other hand, Oh, the pandemic has increased spacing require.
And of course that and that goes either way with increasing the amount of space craft to either you need to safely work in this this cobot environment.
So what's the net of that I don't know.
Those are all issues in front of us to sort out.
There was also the question of where do we need space.
It has been a popular question to me I do biweekly all employee calls with our employees.
And one of the more popular questions. During this period has been our we reconsidering moving our corporate headquarters out of Seattle.
I don't know have you been keeping track of what's going on here in Seattle I know that the National News is carried a lot of of video of demonstrations and protests and vandalism and political unrest here in the city.
What you may have not heard though our some of the.
Initiatives that the.
Current City Council has pursued during the pandemic.
Which include the imposition of a highly paid employee tax.
On employees, who make more than $150000 per year.
That tax is expected and not all the details are known but we currently estimated to be 250 to $300000 a year at this juncture.
Additionally, the city has recently.
Placing more towards him or a prohibition.
On enforcement of personal guarantees related to a commercial real estate leases through the end of the pandemic plus six months, so who knows what that's going to be.
And then the city is currently strongly considering a 50% that's a five zero percent reduction in the Seattle Police Department budget.
At a time when crime is spiraling.
Like in many major cities today those aren't great.
Those are not great things for the city and I expect ultimately the cooler heads are going to prevail and that we get compromises on those things that might more permanently.
Hurt our competitiveness, but does give us pause and we're fortunate that several years ago.
We meaningfully.
Expanded our business outside of Puget Sound Seattle.
So that we have today, a very diversified at least regionally business in the western United States, primarily the large coastal markets.
But it's challenging there's lot of real estate challenges today, when you walk around our offices, we've got lots of P.P.E., we required people to use tissues to hold that handles and doors [laughter] massive cores or mandatory less space in our people are very safe.
As you all know, it's a very challenging environment that we don't really know with long term repercussions.
Okay. So it sounds like hi, Dave become dependent on the environment and longer term potentially more meaning cost saves and changes to be determined maybe once.
When you reach whatever they do normalize going it looked like in your kind of figure out what the best long term plan has.
Fair enough that it.
Okay. Thank you and it's just one last one for me I'm John I, just wanted to clarify so in terms of the PPP lounge I'm, there's no amortization, taking place on a quarterly basis, a balances that remain on sheet and you plan to accelerate the full amount of that's the it pay off you I understand.
That correctly.
Oh no. They did the amortization is occurring over a two year timeframe in some of them are going to be five year, because a recent times where extended mostly over to your timeframe. So we're getting an effective yield on them roughly about 2% and then but we don't expect forgiveness, which would be accelerating a lot of those fees.
To start occurring till the fourth quarter and then the first two quarters next year. So so we did not see approach of some banks in calculated and effective yield anticipating.
Hey, forgiveness scenario right right, we took a little more conservative approach yeah.
Martin State amortization of the fees and then as you get to pay off you like celebrate whatever portion remains the back at that point in time.
Thats correct.
Great. Thank you.
Thanks Jackie.
Again, if you have a question. Please press Star then one.
Our next question comes from David.
Peter with Homestreet. Please go ahead.
Yes, Mark I don't have a comment however, right [laughter] question, but I do have a comment.
And that is so thank you to you and John.
And your entire team for truly a super corridor.
Thank you Dave for those of you on the line David at her as a recently retired chairman Emeritus of Homestreet Bank, who has served us well for very long time. Thank you Dave.
You bet.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Mark Mason for any closing or Mike.
Thank you all for your patience in listening to our prepared remarks, and asking us great questions. Obviously, we are.
[noise] very optimistic and optimistic and excited about our prospects at this juncture.
We understand there's a lot of uncertainty we think that we have been very cautious and conservative in our reserving toward that uncertainty.
Even understanding that none of us really no no how everything is going to play out right here, but we feel like we're just very fortunate that the way we have built our loan portfolio and run our business.
The conservatism with which Weve underwritten loans is finally really shine itself. Appreciate your time today. According to talk into next quarter.
The conference has now concluded. Thank you for attending todays presentation you may now disconnect.
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