Q3 2020 HomeStreet Inc Earnings Call
[music].
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to Mark Mason, Chairman, President and Chief <unk> Oh. Please go ahead Sir.
Well, thank you for joining us for our third quarter earnings call before we begin I'd like to remind you that our detailed earnings release and an accompanying investor presentation were filed with the FCC on form 8-K are available on our website at IR Dot Homestreet dot com under the news and events.
Right.
In addition, a recording of a transcript of this call will be available at the same address following our call.
Please note that during our call today, we may make certain predictive statements that reflect our current views and expectations about the company's performance and financial results.
They're likely forward looking statements that are made subject to the safe Harbor statement included in yesterday's earnings release, Investor deck, and the risk factors disclosed in our other public filings.
Additionally, reconciliations to non-GAAP measures referred to on our call today can be found in our earnings release available on our website.
Joining me today is our Chief Financial Officer, John Mitchell, John will briefly discuss our financial results and then I'd like to give an update on our results of operations credit performance and outlook going forward John.
Thank you Mark good morning, everyone and thank you for joining us.
In the third quarter, our net income was $26 million or $1.15 per share with core income of $20 million or $1.23 per share and pre provision core income before income taxes of $36 million.
This compares to net income core income and pre provision core income before taxes of 18.9, 20 to 20.2 million and 32 million respectively in the second quarter.
Net interest income was higher in the third quarter when compared to the second quarter due to an increase in interest, earning assets and an increase in our net interest margin of 3.20%.
This increase in <unk> net interest margin was due to decreased funding costs, which was only partially offset by decreases in our yields on interest earning assets.
At the end of the third quarter, our cost of deposits was 36 basis points.
As a result of the favorable formats of our loan portfolio, including decreases of loans in forbearance and they stable low level of non performing assets no provision for credit losses recorded in the third quarter compared to $6.5 million in the second quarter.
Our ratio of nonperforming assets to total assets remained low at 30 basis points well our ratio of total loans delinquent over 30 days to total loans decreased by 76 basis points at September Thirtyth from 94 basis points at June Thirtyth.
In the third quarter 25 commercial in theory loans were $66 million or a balance were granted the second forbearance. These.
The second forbearance is word to borrowers whose businesses continued to be impacted by the effects of the pandemic.
One relationship accounted for 18 of the loans and $52 million of the balances.
As of September Thirtyth 2020, excluding the loans approved for a second forbearance.
97% of the commercial and industrial loans granted forbearance prior to the third quarter have completed their forbearance period and have resumed payments.
As such the remaining balance of commercial and CRT Forbearances outstanding at the quarter in relate primarily to new and second forbearance was granted in the quarter.
During the third quarter non core items included $2.4 million of impairments related to ongoing restructuring restructuring of our facilities and operations, including the closing of an office in northern California.
The decrease in non interest income for the third quarter was due to a $4 million decrease in loan servicing income, which was partially offset by a 3 million dollar increase in gain on sales of loans.
The decrease in loan servicing income was due primarily to unfavorable risk management results on mortgage servicing rights, resulting from valuation reductions related to market expectations over an extended period of higher prepayments.
As origination volumes and profitability of single family loans sales were consistent with the prior quarter. The increase in gain on loan sales was due to a higher volume of commercial real estate loans sold in the third quarter.
The increase in non interest expense in the third quarter was due to higher occupancy costs related to our previously mentioned restructuring charges.
I will now turn the call over to Mark.
Thank you John.
Homestreet again delivered solid results. Despite the continuing challenges of the pandemic nationally and then our markets. Our net interest margin increased as a result of decreasing funding costs and we benefited from continuing high loan volume and profitability and our single family mortgage banking business.
In addition, due to our cost control efforts and increasing revenues, we are realizing meaningful improvement in our efficiency ratio.
With the Federal Reserve indicated an interest rates will remain low for the foreseeable future.
Net interest margin should continue to expand as deposits reprice down, though we do not expect it to continue at the rate we experienced earlier this year.
Mortgage volumes should remain robust for the foreseeable future as the low interest rate environment has not completely been priced in the mortgage interest rates due to the industry's inability to absorb the massive amount of volume spurred by these historically low interest rates.
As capacity normalizes in the industry mortgage interest rates should decrease in line with this historical spread over long term treasury rates. We expect that this transition will reduce the very strong gain on sale margins. We're currently enjoying but maintain strong volumes for an extended period of time.
The transition will reduce the very strong gain on sale margins.
But it's important to note that in the third quarter, our mortgage servicing income declined $4 million from the prior quarter due to the impact of higher prepayment speed assumptions on new servicing values. This phenomena is not expected to continue and we anticipate these valuation changes to recover over time just to.
Klein and servicing income offset somewhat the cyclical impact of higher mortgage origination revenue on our results this quarter.
Despite the higher than expected mortgage loan volume, we've continued to maintain discipline on the expense side.
To aid in processing the surge in volume were instituting more scalable technology solutions, which we believe will result in greater efficiencies when volumes return to more normalized levels.
Our results for the third quarter, our testament to our consistent and our view conservative approach to credit risk management.
We experienced significant decreases in our commercial and commercial real estate loans in forbearance and our nonperforming asset levels remained low.
We continue to work with our borrowers who are more significantly negatively impacted by the pandemic.
As a result in the quarter, we granted additional forbearances to a few relationships.
As John mentioned earlier, one of these relationships accounts for 18 of the loans and $52 million of the balances of additional forbearance. This company operates restaurants hotels and event centers in the Pacific Northwest.
We have provided the company forbearances and additional credit availability and the owners have raised capital and provided additional real estate collateral.
We're optimistic this company will weather the pandemic given the success to date of their Reopenings strategy maybe.
Many of their locations are exceeding 80% of pre pandemic revenues.
As mentioned in our earnings release, almost all of our commercial customers for whom we have provided forbearances have reopened their business and they have responded to us that they do not currently foresee the need for additional forbearance.
We are confident in the credit quality of our loan portfolio as it is primarily secured by high quality real estate and some of the strongest and previously fastest growing economies in the nation.
These loans were underwritten distress levels generally more severe than the current conditions in our markets.
As a result, our loan portfolio is performing well despite the challenges of the pandemic.
Well the cares act relief payments on SP, a loans has ended our delinquency and forbearance experience with SP a loans has been excellent.
Also the Unguaranteed portion of SPD loans in our portfolio is less than $20 million at September thirtyth.
Of course, there's still exists significant uncertainty as to the ultimate ultimate impact of the pandemic on our loan portfolio. However, given our strong credit performance to date in the pandemic and unless things materially take a turn for the worse, we do not currently foresee a need to make additional provisions for loan losses at.
This time.
Our investor deck filed with the SEC contains data on our underwriting standards and portfolio composition.
We have again included a fills a few slides further dis aggregating information and providing additional detail on the parts of our portfolio most at risk today.
As a follow up to prior discussions reduced costs from revised technology contracts in 2021 are expected to allow us to reduce our information technology costs by somewhere between three and 5%.
And due to our strong results, we were able to complete our previously announced $25 million repurchase authorization during the third quarter and early October buying stock at an attractive average price of $27.05 per share.
In all we have repurchased 20% of our outstanding shares.
So given the second quarter of last year, Yes, you heard that right to zero, 20% in just six quarters.
Going forward, we plan to consider additional stock repurchases early next year subject to our financial condition and future outlook at the time and corporate governance and regulatory requirements.
Beginning in October the first we reorganized our Fannie Mae the U.S. business to move the origination sale and servicing of mortgages on multifamily properties to the back from a separate subsidiary of Homestreet.
That's separate subsidiary will continue to service the existing portfolio view us loan.
Until such time as that portfolio runs off or we are able to contribute the subsidiary to the bag subject to and in compliance with regulatory requirements.
By using the bank's capital, we will be able to offer larger loans to our clients with higher profitability to us.
As previously our large loan recourse and servicing revenue were reduced this relationship with Fannie Mae has existed at Homestreet since 1988, and we are one of only 23 authorized us lenders in the United States today.
Reflecting our very strong third quarter results. The board of directors declared a 15 cents per share common stock dividend to shareholders of record on November six 2020 and payable on November 20, Threerd 2020.
Given our strong performance the board of directors anticipates discussing an increase in our dividend in the first quarter of next year.
Of course, future declarations of the current or higher levels of dividends or subs.
This.
And future outlook at the time as well as corporate governance and regulatory requirements.
As we look forward, we anticipate completing the final pieces of our profitability and efficiency improvement initiative and transitioning our strategic focus to growth and maintaining capital to support growth and returning excess capital to our shareholders through repurchases and dividends.
We believe that notwithstanding our higher current sick sickle cyclical mortgage banking profitability, we have transitioned the company to a more consistent and durable level of core profitability and efficiency consistent with peers pre pandemic performance.
As I close my remarks today I admit it's difficult for me to overstate the progress we have made in improving our profitability and efficiency.
And the resulting substantial increase in the value of our company, especially over the course of the last two years since we made the decision to reorganize the company and in turn accelerate our development as a commercial bank.
The third quarter numbers speak volumes.
1.5% core return on average assets, 16.4% core return on average tangible common equity.
The efficiency ratio of 59.9%.
$1.23 said core earnings per share.
And tangible book value per share of $30.15 at September at September Thirtyth, which represents over 12% growth from a year ago, even as we have paid cumulative common dividends per share of 45 cents. This year and absorbed a 73 cents per share reduction.
As a as a result of Covidien related provisions.
And.
While the exceptional single family mortgage lending environment continues into this quarter, we know that it will normalize at some point in the future.
As industry capacity catches up with demand.
That's why we're so pleased to achieve to have achieved such remarkable remarkable results with many components of our strategic plan, including greater.
Greater cost containment and overall expense efficiency.
Prudent capital management with efficient return of excess capital to shareholders improved deposit funding composition in cost.
It is always a consistently strong credit culture.
For those shareholders listening today, who have remained committed to a homestreet investment over this process. We hope you are enjoying the fruits of our labor as much as we are today.
And for new and prospective shareholders. We welcome you aboard as we continue to believe our successful recent reorganization as well as our future earnings prospects are still yet to be adequately reflected in our current share price.
With that this concludes our prepared comments today. Thank you for your attention John and I would be happy to answer any questions you have at this time.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
And the first question will be from Jeff Rulis with D.A. Davidson. Please go ahead.
Thanks, Good morning.
Good morning. Good morning couple of question couple of questions on the expense side, and then kind of a near term long term.
Two part so.
For John just want to.
I understand that what you said at the core it.
Expense kind of baseline is if we back out some of those facility impairments.
Where do you where do you get comfort on what that level is understanding we got it.
Pretty high variable cost with the with the mortgage.
[noise], yeah from the perspective of looking at our expenses going forward. We think we reached is pretty stable environment other than the item you manage which is basically commissions on productions, especially single family loans.
You see the noncore items and as Mark mentioned, we expect some decreases in our information services costs going forward, but we have a pretty stable base expectation that expenses going forward, obviously with with normal expenses, such as raises next year and the volumes of the activities of our loan operation.
Yeah.
So Jeff I think if you consider we have.
Identified so my T. savings from contract renegotiation, we've converted several systems to lower cost systems over the last year, particularly in the Treasury area, we've reduced head count with a little more to go.
And yet offsetting that of course is inflation.
But I think the levels today of sort of of.
Normalized non extra mortgage expenses, when we look out past the the the inflated mortgage volume period.
Say year to two years from now that number is probably in the $53 million to $54 million a quarter range, giving effect to inflation to that point.
So if you discount that back a little that's probably around where it's at.
Subject to all that's really helpful.
Yes. Thank you.
I guess to.
To that end.
The those contract negotiations I I thought that was maybe some.
Towards the end of the year early next year is that is that correct you captured quite a bit of it but there's still a few upcoming.
Yes so.
As more significant piece that relates to our core services contract with that by us.
Should start in January of next year, and so you should see a step down.
That point, it's more meaningful yeah, and I also want to mention that those savings help offset obviously every word continue invest 90 resources and making sure that we're staying current from security perspective from a client service perspective. So these savings have allowed us not only to have a reduction but also to offset the costs that we are doing in terms of.
You need to invest in the company right Thats why that forward number that I cited is somewhat higher than it might have been.
A year or so ago two years ago.
Yes.
Okay.
That all that.
Got it though.
Maybe mark just on the on the buyback that you mentioned.
Maybe.
Taking it through the end of the year and then revisiting maybe the buyback is that in line with kind of your comments on the board looking at the dividend announcement. So you might pause here through Q4 to to look at those items is that is that what I'm hearing that you might buyback from here is probably quiet through the end of the year.
Yes.
And it's not that we don't think.
We have some excess capital today or that we are going to create some this quarter.
I think our paws really is is in respect of the regulatory environment.
And the current concerns about a spike in the pandemic potentially impacts.
We don't foresee the impacts, but I think environmentally.
Our regulators are cautious and while they've supported us to this point, even last quarter approving a further buyback I think we want to respect their caution.
And and revisit that subject in the first quarter, but our internal plan.
Suggests that.
The activity you saw this year.
Given all the caveats.
Could be repeated next year.
Great. Thanks.
Thanks Juan.
One quick last one just to the.
The loan runoff or net loan run off pull out the crystal ball, but just trying to think about when you think that begins to add or.
We we trough on the run off and where that May from up if we probably.
Probably rate driven but.
Your expectations for when we could see net growth resume.
Well I think.
Internally, we are expected to continue through next year.
In our major portfolios right think commercial real estate single family.
We were expecting particularly single family pretty significant CPR is somewhere in the.
25, 30% range roughly.
Probably a little less commercial real estate, but still high.
So a couple of factors going in that it actually looking at production, we're anticipating some a little bit higher level of.
Multifamily loan sales in the fourth quarter of this year, and then going forward and into next year, we have the pvp loans being forgiven. So it's kind of give me an offset from our growth perspective, which is a little less than $300 million. So we expect them to pretty much be gone by the end the year.
Other than that I think we can we.
We are anticipating some stabilization and growth near the end of next year and the loan balances.
Okay. Thank you.
The next question will be from Steve Motz with B. Riley FBR. Please go ahead.
Hi, good morning.
Good morning.
Yeah, that's great and just on a on loan yields and the margin just kind of curious what you're seeing or for new money yields These days.
You just start there.
Well, they're lower than we'd like Steve.
[laughter].
[laughter].
Obviously, it depends depends on loan types.
You know we're still seeing.
Construction lending in the high 4% range quite high 4% range.
Single family mortgage portfolio.
And.
And.
For sale mortgage rates are in the 3% to 325% range.
Multifamily Perm.
3.5% Cnine, a little closer to 4%.
Those are those are the significant rates on new activity.
Okay. That's.
That's helpful and then.
On the funding side, Mark I think you mentioned up front costs continue to come down but at a slow pace kind of curious you give us a flavor of where they were extremely abilities that core.
Quarter end.
And I think that we think lees comments and yet in the deposit comment we our cost of deposits were 36 basis points at the end of the quarter.
As compared to I think it was in the Fortys for the quarter itself.
So we expect to see that continue decrease because of that.
Our borrowing cost in terms of wholesale.
Funding broker Cds et cetera tends to be less than that also at the current time.
Okay. Thank you very much that was helpful.
The next question is from Jackie Bohlen with KBW. Please go ahead.
Hi, good morning, everyone.
I just.
Wanted to touch on balance sheet first then thinking about liquidity management, Yeah, obviously deposit balances have had really good growth over the last two quarters and just wanted to see number one if you've had any indication from your customers.
Any balance fluctuations you might expect going forward and number two how you're thinking about deploying any access.
Liquidity potentially as.
The PPP, let's start to run off.
[noise] Ah you know there is a general concern in the industry about.
Cash 14, and cash conservatism investment conservatism and how long this liquidity preference of customers will last.
Obviously, we don't have a crystal ball to know that.
And we don't we're not we're not really sure how much of our deposit increases could really be characterized as conservatism or cash hoarding.
So it kind of remains to be seen how long X.
Extra liquidity is going to last we intend to begin growing our loan portfolio again that is of course much tougher today given the high prepayment speeds that we just discussed so that is our investment goal.
To do that we're going to have to run harder than we have last year for this year.
To to outgrow those prepayment speeds, we think we can accomplish it though I think the pace of that growth.
We will be more significant in 22 as as hopefully prepayment speeds abate, but we're going to do our best to start growing our our loan portfolio again.
In terms of absolute.
Potential for cash run off.
We.
We don't know any specifics I mean, we don't see absolute lumpiness in certain accounts.
So it's it's hard to know what customers plans are at this point and our growth has been very granular and I really should touch on that it hasn't been the acquisition of the number of large accounts.
We.
We've done a great job of bringing on new customers like a lot of our peers have during this period of time.
Our loan portfolio next year, just make another point related growth is going to benefit one from lower sales of commercial real estate loans, but also.
Meaningfully increased origination.
Of multifamily loans, both Fannie Mae de less loans.
I discussed earlier on the call a change we made in the structure of that business and the on balance sheet portfolio as well.
So.
We're optimistic about the environment next year, but just for growth, we're pretty cautious about prepayment speeds.
I understand and I I know, there's a lot of moving parts there, but just as a follow up in terms of the restructuring that you've done with the U.S. product.
Outside of the potential to their ability to grow larger volume.
Is there any discernible change that we would see on our end from what you've done internally.
I think what you'll see is.
We're planning on meaningful increase in loan volume start there and we've hired some more people to support that growth.
Structurally you don't you, there's nothing to really see because it's inside the consolidation, but you'll see if you saw inside the consolidation, we'll see a servicing portfolio of Fannie Mae do U.S. loans being built at the bank level as opposed to a sister company that has operated today.
And the other two.
I'm sorry go ahead.
I was just going to ask if there's any update.
Expense efficiencies with that changed.
There's capital efficiency, we probably should touch on that.
Today, we have to carry.
Certain amount of liquidity and capital in Homestreet capital, which is a subsidiary of the holding company to satisfy the requirements of running the $1.6 billion servicing portfolio, we run today.
As that portfolio runs off that capital will be upstream to the holding company and available for dividends buybacks or investment in the bank for growth.
We are not we need no additional capital to grow our Fannie Mae DUS business. It is the biggest synergy here.
Increased capital.
Little bit of corporate governance and account at home.
Our Fannie Mae DUS business will essentially ride free from a capital standpoint.
On our existing bank capital.
Liquidity as well.
Okay.
I'm sorry, John you were going to add something to that part of my comments.
Yeah, I'd say the other the other advantage, we have but going into a more profitable larger loans.
In terms of originating the DUS loans, and so I think that will help us from our volume perspective, and our profitability perspective, yes, just to explain that a little further.
At our previous size.
That is to say that home Street capital subsidiary size, we were limited in the size of the loans, we could do it full profitability.
Given the capital in that subsidiary loans above a certain size in the low 20 million range.
We could do but Fannie would reduce our servicing fee and in turn reduce our recourse obligation.
Accordingly.
That would not be true in the bank and we have increased our maximum loan size and the bank fairly subs Bethany.
Anthony.
Ladies and.
Well I say.
Full profitability.
If your loan above.
Low twentys anymore.
May have had their profitability cut in half.
Obviously from it.
Good point.
Two the full profitability, so we're expecting that to have a noticeable.
The impact on.
On Fannie Mae DUS revenue next year.
Okay, great. Thank you for all the additional color <unk>.
Thanks Jack.
Your next question is from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning, everyone, Hey, Matt good morning.
Maybe just on the expenses.
That 3% to 5%.
I'm on the tech side.
Is that just for the upcoming fourth quarter and are there additional savings that we should expect beyond.
<unk>.
First quarter next year.
You bet.
Going forward.
Okay, you broke up a little bit.
Okay, and then just on the overall expense outlook at 53 to 54 million I think you may have mentioned it but that that's net of.
Any additional savings and any additional reinvestment is that is that correct.
Yeah, that's not a lot of stuff going both directions right savings some additional digital investment inflow.
Inflation right.
Contract escalators and just like that.
Okay and returned to normal volume.
At a footnote and return to normalized volumes in the mortgage business.
Got it and then on the expense to average asset ratio, that's been kind of hovering around 3% you should we expect that ratio to decline as we get into next year and beyond as mortgage normalizes as well and now.
Absolutely right I mean, yeah balance sheet will grow.
Expenses should fall due to mortgage volume and some other improvements on.
[music].
But remember because we have we still have a mortgage business our absolute level of expenses to assets will be higher than some peers.
As a consequence of.
The mortgage origination business, which has.
Hum expense to revenue relationship with of course that business has a very very high return on equity relation.
Our relationship and.
But you have to live with the impact on efficiency ratios.
Yeah, Okay, and then just on the upcoming multi families sale in the fourth quarter, how much in loans do you plan to sell and can you update us on your strategy. There is that it is that.
Deliberate strategy to reduce that concentration over time or is this just kind of a onetime.
Decision.
If you look at.
The past several years, we have consistently sold.
A certain level of of our originations we did that early on to manage concentration that's becoming less important to us.
And so you'll see us.
Next year and going forward reduce somewhat.
The level of sales at least plan at this point.
We've done it impart to.
Establish liquidity alternative for the company.
It helps us manage our loan to deposit ratio gotten so we find it useful to do but as we go forward we.
We find it less attractive to sell loans given the relationship of premiums to.
The net interest spread these loans generally trade and so maybe going forward, you'll see somewhat lower levels of sales are sales to skirt should.
Should be consistent with the other similar quarters last year.
Okay, and then last one for me just on the provision expectations you have to be zero again.
Can you just give us a sense for the underlying assumptions there with the Moodys model is that you know are you assuming 100% baseline are you assuming some contribution from the adverse scenarios and ended up zero provision consider that Moodys model.
Incrementally deteriorating if we you know some part of the country.
It's locked up again.
We use the Moody's based forecast.
Scenario in our assumptions.
Again, we compare that to the <unk>.
More severe scenario and it doesn't change.
[music].
The outlook for us.
Obviously, we're getting to the point like all the other peers, where the analysis very cusp right, where the current period.
Impact is more severe than we think the following year impact right as we we get to this point of inflection from recession to recovery and I think that that's having a positive impact on everyone's Cecil based reserving and were no different.
Additionally, though are calculated expected losses continue to decline.
As we can do to have really fantastic experience with losses and you continue to add additional periods of good performance, obviously that dilutes your expected loss calculation.
We have continued to hold.
Additional reserves that we added in the second quarter of this year against the uncertainty of future performance of loans for which we have granted forbearances, we think that in an abundance of caution and given the murky outlook still.
On the link and impact of the pandemic on.
The economy in our business it is appropriate for us to continue to hold reserves against that uncertainty.
And I would expect to see us.
Do that for this foreseeable future until there is clarity.
It is possible that as the pandemic.
Continues to some ultimate end and as we grow our balance sheet hopefully.
Those reserves may be utilized to grow our business without the need for additional provisioning.
As we sit here today and if the performance of our portfolio continues at this extremely good level those reserves may not be needed in the future.
And we will either have to be a reverse or or utilized for growth. We obviously prefer the latter it's all very uncertain at this point and that's why we hold those reserves against that uncertainty.
Thank you.
The next call. The next question will be from Tim Coffey with Janney. Please go ahead.
Thanks, My name's out on that appreciate your home this call.
Mark if we could circle back to the the D.U.S. a.
Question for a bit.
Given current capital how much production could you do.
Oh gosh, a lot I mean more than we'll likely to it.
It's well that's an interesting question right because it is it is a business.
That.
Is is somewhat capital light still.
The that servicing portfolio has to be included in risk weighted assets for our risk based capital ratios and still you have some some realistic limits as to how large our total risk assets, we would allow to get in that you know that plays into that answer.
But there's a fair amount of room, particularly when you consider that these assets are all 50% risk weighted.
Right and so <unk> I don't have the calculation for you other than to say.
It is not going to restrict our active.
Okay. So.
I mean, what kind of opportunity I would expect that maybe you'd see you know I guess.
Better loan growth going right out the gate.
I think you'll see that in.
The next quarter.
Okay. Okay.
And then just on the you mentioned, sometimes a digital investments are you thinking about making can you maybe provide more detail on what your plans are.
Sure I mean, you know these are.
Earthshaking additions right.
Digital mobile experiences of customers continue to improve and much of of these of this functionality is table Stakes today, if you have a meaningful consumer deposit.
Business, which we do.
So we have to continue to make incremental investments in adding functionality to stay at least reasonably close right to the large national banks and we have some of those improvements scheduled over the next couple of years.
Okay any of it related to client <unk> client onboarding either loans our deposits.
Yes, Bart absolutely part of that is.
On voter Onboarding Onboarding mobile functionality.
It has to do with Onboarding right mobile.
But also in the mortgage area that things I did refer to later as permanently increase in our efficiency I'm. We are headed very soon to 100% digital.
Application through fulfillment and today.
Our our disclosures.
I will well above 90% I believe are the disclosures.
And we're headed to the implementation in the near term of E. Fulfillment that is he signing and EAN Notre as Asian.
Which is ultimately the Holy Grail to a full digital for much of the mortgage.
Beyond that on the front end or we are building.
A.
A channel for our business to allow consumers.
To make applications directly and.
The digital experience, which is becoming a digital preference of mortgage customers given the success of.
I have a quick in rocket mortgage and others.
We're having to make investments there, but also there is infrastructure investments are more commercial real estate business sorely needs a friend in origination system is very manual at this point and when you are originating you know the levels of commercial real estate. We are we have to create some more efficiencies in that business.
Well, it's sort of across the board some of its internal infrastructure, which is getting cheaper amazingly, but also we need we have a significant need to be safe. So were invested in cyber security as well.
Okay in terms of the mortgage application process, how much of that is digital is it all of it.
To today.
Nearly all of it on a Friday and.
His digitally input to start and I couldn't have said that a year ago, but of course, the pandemic has accelerated that substantially.
Our business our mortgage business is still primarily a.
Our relationship based business you know are fantastic.
Mortgage originators.
Get their business from referrals from real estate agents closing.
Agents and the like.
But the experience from that point forward is becoming increasingly digital.
Okay.
Those are all my questions. Thanks.
Excellent.
Once again, if youd like to ask a question. Please press Star then one.
And our next question will be from David ship remain with Wedbush Securities. Please go ahead.
Hi, Thanks, a couple questions the first one.
On loan growth I want to make sure I get that the message right. So it sounds like originations looking out to next year will be strong, but pre pays when combined with PPP runoff could curtail that growth. So if we were to fast forward to the end of next year is the base case for stable loan balances versus.
Where we're at today.
No they will be up somewhat not nearly the amount.
We might have hoped with slower prepayments, but we're still expecting our loan portfolio to grow.
Several hundred million.
How many hundred million remained right [laughter].
They said Jeremy Thanks for that and then.
On mortgage banking. So clearly you know that the mortgage banking market is is booming as we look out.
Volumes it sounds like we'll we'll remain strong and gain on sale margins could be under a little bit of pressure. Just curious you know I am assuming that mortgage banking income will come down somewhat from this you know really excellent level, but curious as to what your views are on the mortgage banking line over the next.
Few quarters.
Oh, well, we expect volumes to continue to be unseasonably strong right I mean, typically entering the fourth quarter and first quarter of next year, our revenue would be down somewhat either to.
Climbing pipeline.
During the holidays.
Or rising pipeline in the first quarter, but still not up to the peak home buying season. However, given mortgage rates are at the levels. They are we expect mortgage refinancing to hold those levels.
Meaningfully higher than what they would otherwise be a what does that mean in real numbers.
I think that.
We will have.
Production.
Over the next couple of quarters that will fall somewhat in the fourth quarter, a little more so in the first quarter.
But were.
We're being pretty conservative honestly in our internal forecasts.
And we are internally forecasting.
A little bit of a decline in volume that may not be realized a same with mortgage profit margins.
That are obviously historically high right now I think it's inevitable that mortgage profit margins fall over the next year or so it's very hard to determined what the pace of that decline will be a there are scenarios, where volume and profit mom.
Argentina remain high.
As well as decline in world.
We're being conservative internally.
With our internal estimates of a forward results.
I think it has a lot to do.
With.
How quickly.
Originators like us can satisfy demand.
At this point and a refinancing period, it's all about manufacturing capacity.
And how.
Such.
Originators can handle relative to their demand as long as demand is outstripping capacity.
We'll have mortgage rates remain higher than the otherwise naturally would which translates to higher mortgage profit margins.
And steady volume.
Some point you start to two.
Experienced burn out.
And profit margins fall when they fall initially production levels are supported and.
Production will remain higher with profit margins fall, even then ultimately volume and profit margins fall to some normalized.
The.
The challenge is trying to understand when and how much and we're truly an unprecedented waters here.
We have never.
Had mortgage rates as low as they are today for an extended period of time.
And we have never had the.
I'll call it mathematical opportunity at substantially lower rates.
Because these conditions are what they are there is a certain amount of hysteria.
In the mortgage asset market today.
Were particularly buyers of servicing.
Our valuing servicing at annual prepayment rates or CPR ours.
Far in excess of what they think could be sustained over the period of expectation to put that in perspective, you'll notice that our servicing income was down meaningfully this year I'm, sorry, this quarter past quarter.
That is based upon having to reduce the value of newly originated servicing.
Stanley to valuation levels, which anticipate lifetime, CPR ours, a 30% to 40% and I want to repeat that.
Not next year lifetime, CPR as a newly originated mortgage servicing of 30% to 40%.
But then perspective typically that is a 10% to 11% number.
We think that that is practically impossible and that you have a.
An anxiety and valuation dislocation.
Dislocation between the demand from buyers of servicing to originators, but today that is the valuation.
And we think as I mentioned earlier in my comments, that's going to recover.
And when it recovers, we're likely to recover value, which means more revenue.
But until people begin to understand the Lincoln the depth of this refinancing period, you're going to have that overreaction.
In valuation.
I know that was a lot for an answer sorry about that.
Now that's all really helpful and since it sounds like servicing rights are being mis priced out. There you know have you considered purchasing some servicing rights to take advantage of dislocation.
[noise] well.
[laughter], if I treasure season here in the room with me clapping silently [laughter] no we have not though I would tell you economically the returns should be substantial.
Which makes you wonder about the depth of that market today, because if if you could truly if you truly can trade servicing at these levels and you can for some people who have to sell their services as opposed to us.
Theres, a huge opportunity mortgage servicing today.
The reality is when we have to price our servicing.
We have to price down to these kind of numbers and it's just not rational, but it's real which if you look at our numbers today means our quarter could have been $4 million to $5 million higher than it was.
I'll repeat that $4 million to $5 million higher.
Great. Thanks very much.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mark Mason for any closing remarks.
We appreciate everybody participating this morning, obviously, we're very excited about our business going forward. Thanks for listening today.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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