Mechanics Bank (MCHB) Q2 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the HomeStreet, Inc., Second Quarter 2017 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please do note that the event is being recorded. I would now like to turn the conference over to Mark Mason, Chairman and CEO. Please go ahead.

Hello and thank you for joining us for our second quarter 2017 earnings call. Before we begin, I would like to remind you that our detailed earnings release was furnished yesterday to the SEC on Form 8-K and is available on our website at ir.homestreet.com under the news and market data link. In addition, a recording of this call will be available later today at the same address. On today's call, we will make some forward-looking statements. Any statement that isn't a description of historical fact is probably forward-looking and is subject to many risks and uncertainties. Our actual performance may fall short of our expectations or we may take actions different from those we currently anticipate. Those factors include conditions affecting the mortgage markets such as changes in interest rates that affect the demand for our mortgages, and that impact on our net interest margin and other aspects of our financial performance, the actions, findings or requirements of our regulators, which could impact our growth plans, our ability to meet our internal operating targets and forecasts, and economic conditions that affect our net interest margins. Our mortgage origination, the value of mortgage servicing rights. Other factors that may cause actual results to differ from our expectations or that may cause us to deviate from our current plans are identified in our earnings release and are detailed in SEC filings, including our most recent Quarterly Report and Form 10-Q as well as our various other SEC filings. Additionally, information on any non-GAAP financial measures referenced in today's call, including a reconciliation of those measures to GAAP measures, may be found in our SEC filings and in the earnings release available on our website. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations. Joining me today is our Interim Chief Financial Officer, Mark Ruh. In just a moment Mark will present our financial results, but first I would like to give an update on the results of operations and review our progress in executing our business strategy. Results of the second quarter demonstrated the benefit of our investment in growth and diversification. We have continued to make steady progress on organic growth and integration and growth of our various bank and branch acquisitions toward our strategy of becoming a leading West Coast regional bank. In that regard, loans held for investment increased 5% during the quarter, a new portfolio loan commitments during the quarter totaled $808 million, a record for the Company. All of our lending businesses contributed to this growth, consumer, commercial real estate, construction, and commercial business balances all increased during the quarter. Ratio of non-performing assets to total assets ended June is just 30 basis points, down from the first quarter's level of 38 basis points, representing our lowest absolute and relative levels of problem assets since 2006. Our early warning credit indicators continue to reflect strong fundamentals in all of our markets, which is not a surprise given we do business in the strongest markets in the United States today, job creation and unemployment, commercial and residential development activity and absorption, vacancies, cap rates and all other leading indicators of economic activity almost without exception reflect strong growing economies. And in the small number of submarkets, where we see indications of overbuilding, this is generally due to recent deliveries of new multifamily projects in Lisa, while we noted these conditions will not continued forever. Today, we do not see indications of change. End of the quarter, we opened de novo retail deposit branches in Baldwin Park, California and Redmond, Washington contributing to a 3% increase in total deposits during the quarter. Of particular note, business deposits increased 6% during the quarter and deposits on our de novo branches, specifically those open since the beginning of 2012 grew deposits by 10% in the quarter. In the quarter, we also announced an agreement to purchase one retail deposit branch and related deposit in El Cajon, California, a fast growing suburb in Eastern San Diego County. Our Mortgage Banking segment however, has been significantly impacted by the historically low supply of available housing in our primary markets. This is negatively impacted our second quarter results and our outlook for mortgage originations, until market conditions improve. During the fourth quarter 2016 earnings call, we provided full-year 2017 guidance for mortgage loan lock and forward sale commitments of $9.3 billion and mortgage loan held for sale closing volume of $9.4 billion. Today, we are revising our full-year 2017 mortgage loan market for the sale commitments guidance, down by 21% to $7.3 billion and our mortgage loan held for sale close loan volume down by 20% to $7.5 billion. These significant changes reflect both lower volumes in the second quarter and our revised view of market conditions going forward. We would like to reiterate that while demand is sufficiently strong to accomplish our prior expectations, it is clear to us now that new and retail home availability cannot meet this demand, and we do not see any catalyst for near-term meaningful change in this imbalance. Our challenge is not related to a loss of market share. It's highly ironic maybe cruel within the quarter and which we saw our market share in the Pacific Northwest increase – we are the number one mortgage lender of total purchase and refinancing loans that are loan volume with all meaningfully below our expectations. ,: New home construction in our markets is constrained by the geography of the West Coast and lingering effects of the last recession. Newly constructed single family home inventory remains extremely low as homebuilders struggle to find and develop enough buildable lots. This is caused by the lack of suitable land or remaining land within urban growth boundaries designed to prevent urban sprawl. Also increased land use regulations increase costs and limit the number of lots a parcel land can yield. In addition to these challenges, entitlement timelines continue to be challenged by inadequate staffing of municipal planning departments, whose budgets have not really grown since the recession. The industry continued development of raw land fallen the recession and with an average development timeline to finish lot succeeding five years, we anticipate the inventory will remain low for the foreseeable future. This has created a significant supply demand imbalance in most of our major markets. For example, the months of supply available – of available homes in the Seattle metro market has fallen to less than one month compared to the national average of just 2.5 months. Moreover, the median number of days on the market for a home in the Seattle metro areas fallen to only seven days compared to the national average of 36 days. There is lack of suppliers in the face of strong demand, the continued strong job growth and in migration in our markets is keeping the demand for housing high. While our year-to-date pipeline with single-family mortgage applications was down 10% from the year-ago period. Our application volume without property for those customers seeking prequalification to shop for a home is up 4% and increased 31% to 36% of our total pipeline compared to the same period last year. This partial underwriting creates expenses without the revenue associated with the closed mortgage loan, accrual outcome with a strong economy further challenging our Mortgage Banking results. Our gain on sale composite margin also declined during the quarter falling from 349 basis points in the first quarter to 331 basis points in the second. The composite margin fell within our previously announced guidance, but it has come under further pressure as our mix are shifted to lower margin products. We are originating the last FHA and VA, and refinance transactions all of which carry higher margins, with more purchase in jumbo non-conforming loans, which carry a meaningfully lower margins and conventional conforming and government loans. On a positive note, we have nearly completed the installation of our new loan origination system that already seeing the anticipated loan processing efficiencies and reduce closing times expected from this upgrade. All origination offices are now processing loans under the system and we are quickly closing or remaining pipeline of loans originated in the old system. As a result of these expected efficiencies and slightly lower mortgage – and significantly lower mortgage origination volume than anticipated, we are implementing cost reduction strategies. As a result of the quarter, we reduced overall mortgage origination personnel by 73 employees. Given the absence of the catalyst for meaningful change in housing inventories and the impact of this shortage on our lending volumes and expected profit margins for the foreseeable future, we are taking significant steps to reduce capacity, streamline operations and reduce costs. In the third quarter, we will continue to downsize our origination capacity and streamline operations if lending volumes do not support our current capacity or profit margins overall or in specific markets. We may incur additional cost of this effort and absent a meaningful change in loan volume or profit margins. Our Mortgage Banking segment results for the remainder of the year could mirror those of the year-to-date. Given the historical strength of the performance of our mortgage lending division, we are confident that we will be able to right size our business for these new market conditions and focus on optimizing our existing investments in our high portfolio markets. We are committed to being a leading mortgage originator in our markets. Our retail focus, broad product mix, and competitive pricing continue to attract the best retail originators in our markets. This aspect should allow us to successfully manage through today's market challenges and maintain our status as a market leading mortgage originator and servicer. Given these new realities in the mortgage business, we expect near-term earnings from the Commercial and Consumer Banking segment to comprise the majority of our earnings. And I will now turn it over to Mark Ruh, who will share details on our financial results.

Thank you, Mark. Good morning, everyone and thank you again for joining us. I will first talk about our consolidated results and then provide detail on our two segments. Net income for the second quarter was $11.2 million or $0.41 per diluted share compared to $9 million or $0.33 per diluted share for the first quarter of 2017. The increase in net income from the prior quarter was primarily due to higher Mortgage Banking origination sale activities and high net interest income attributable to a change in our balance sheet mix from lower yielding investment securities to higher yielding loans held for investments. Acquisition related expenses were $177,000 for the second quarter, excluding after tax, acquisition related items, core net income was $11.3 million or $0.42 per diluted share in the second quarter compared to $9 million or $0.33 per diluted share in the first quarter. Net income was $46.9 million in the second quarter compared to $45.7 million in the first quarter. Our net interest margin up 3.29%, increased 6 basis points from the first quarter’s net interest margin up 3.23%. Both of these trends are primarily attributable to the previously mentioned change in our balance sheet asset mix from lower yielding investment securities to higher yielding loans held for investments. Non-interest income increased by $6.5 million to $81 million in the second quarter compared to $74.5 million in the first quarter, primarily due to an increase of $5.6 million in Mortgage Banking origination and sales activities. Non-interest expense was $111.2 million in the second quarter compared to $106.9 million in the first quarter. Excluding acquisition related expenses, non-interest expense was $111.3 million in the second quarter compared to $106.9 million in the first quarter. This increase in non-interest expense was primarily due to higher incentive costs attributable to higher Mortgage Banking close loan volume. At June 30, the Bank's Tier 1 leverage ratio was 10.12%, while the total risk-based capital ratio was 13.87%. The consolidated Company Tier 1 leverage ratio was 9.55%, while the total risk-based capital ratio was 11.60%. Following are some key points regarding our Commercial and Consumer Banking segment results. Commercial and Consumer Banking segment net income was $9.4 million in the quarter compared to $9.3 million in the first quarter. Excluding after tax, net acquisition related items, the segment recognized core net income of $9.6 million in the second quarter compared to $9.3 million in the first quarter. Net interest income increased to $42.4 million in the second quarter from $40.9 million in the first quarter, primarily due to the growth of loans held for investments during the period. Segment non-interest income decreased from $9.4 million to $8.3 million during the quarter. This $1.1 million decrease was primarily due to the reduced gains from Fanny Mae, multifamily, DUS, loan origination and sale activities partially offset by securities gain taking during the quarter. Segment non-interest expense was $36.6 million, an increase of $162,000 from the first quarter. Excluding acquisition related expenses from both period, segment non-interest expenses were essentially flat between the second and first quarters of 2017. We recorded no provision for loan losses in the quarter of $500,000 compared to no provision in the first quarter. The provision taken was due to loan growth, partially offset by recoveries in the quarter combined with lower expected loss rate and continuing strong credit performance. Our net recoveries were $928,000 during the quarter compared to net recoveries of $778,000 in the first quarter. Gross charge-off during the second quarter totaled $205,000 primarily from consumer loans, but total recoveries totaled $1.1 million during the same period. The portfolio of loans held for investment increased 5% to $4.2 billion in the second quarter. As Mark previously stated, our new loans spend in the second quarter were $807.6 million is recorded level for the Company. Net loan growth was $196.9 million during the quarter. Credit quality remains strong with the non-performing assets to total asset ratio at 30 basis points at June 30 and the non-accrual loans to total loan ratio at 37 basis points at June 30. Non-performing assets were $20.1 million at June 30, compared to non-performing assets of $24.3 million at March 31. The decrease was a result of a decline in both non-performing loans and REO. These credit metrics represents the lowest absolute and relative levels of problem assets in HomeStreet since 2006. Deposit balances for the quarter were $4.7 billion at June 30, up from $4.6 billion on March 31. The most significant increase in deposits was an $80 million increase in time deposits. The deposit increase was also partly due to $44 million increase in other non-interest bearing accounts, primarily mortgage servicing related deposits. Note that servicing deposits fluctuate seasonally due to the timing of mortgage prepayment, insurance and property taxes. Also a significant note, our business deposit balances grew by over 6% during the quarter. Finally, our de novo branches. Those opened at the beginning of 2012, grew deposits by 10% during the quarter. I'll now share some key points from our Mortgage Banking business segment results. The Mortgage Banking segment net income was $1.8 million in the second quarter, compared to a net loss of $309,000 in the first quarter. The $2.1 million increase in income from the first quarter was primarily due to an increase in mortgage origination and sale activities, partially offset by an increase in compensation related expense, both driven by higher loan volumes. Gain on single family mortgage banking origination and sale activities in the second quarter was $64.2 million, compared to $56.3 million in the first quarter. Single family mortgage interest rate lock and forward sale equipments totaled $1.95 billion in the second quarter and increased to $327.8 million or 20% from $1.62 billion in the first quarter. Single family mortgage closed loans totaled $2.01 billion in the second quarter, an increase of $390 million or 24% from $1.62 billion in the first quarter. The near-complete installation of our new loan origination system is creating efficiencies that are allowing us to close loans faster with fewer manual processes. We expect these efficiency gains to continue as we fully complete the implementation and migrate our remaining mortgage loan pipeline off the old system during the third quarter. Unexpectedly, the volume of interest rate lock and forward sale commitments was lowerthan closed loansthat made it for sale by 3% this quarter, which negatively affect reported earnings as the majority of mortgage revenue has recognized net interest rates lock, while majority of origination costs including commission are recognized upon closing. The gain on mortgage loan origination sale from deposit margin decreased to 331 basis points in the second quarter from 349 basis points in the first quarter. As Mark previously mentioned, the decrease in composite margin is primarily due to mortgage mix changes, driven by relatively fewer refinancing and FHA and VA transactions, both with greater margins, offset by more jumbo non-conforming transactions with lower margin. Mortgage Banking segment non-interest expense of $74.6 million, increased $4.2 million from the first quarter. This increase was primarily due to higher commissions and incentives due to the increase in closed loan volume. Closed loans increased in the quarter to 4.4 loans per loan officer, compared to 3.6 loans per loan officer in the first quarter. Single family mortgage servicing income was $7.9 million in the second quarter as compared with $8.3 million in the first quarter, primarily due to an increase in amortization from increased prepayments. The quarter end results were comprised of $5.4 million of net servicing income and $2.5 million of risk management revenue. Our portfolio of single family loans, serviced for others was $21.1 billion at June 30, compared to $20.3 billion at March 31. The value of our mortgage servicing rights relative to the balance of loan serviced for others was 112 basis points of unpaid principal balance at quarter end. I’ll now turn it back over to Mark Mason to provide some additional insights on HomeStreet’s general operating environment and our outlook for the future.

Thank you, Mark. I’d like to now discuss the national and regional economies as they influence our business today. We remain fortunate to operate in some of the most attractive market areas in the United States today. These markets enjoy lower unemployment and substantially higher rates of population growth, job creation, commercial and residential construction, and real estate value appreciation than the remainder of the country. The major markets that we focus on are substantially larger than most of the other markets in the United States, which gives us the opportunity to grow meaningfully without the necessity of acquiring a significant market share. Together, the most distinguishing feature of the Washington, Oregon, Idaho, and California economies continues to be their superior job growth compared to the national economy. Over the last five years, payrolls expanded 14% in Washington, Oregon and California compared to just 9% for the nation as a whole. Ironically, growth in these markets is one of the drivers of our decreased outlook for home mortgage volume. Population growth is up facing the ability of the Western housing markets to keep up with the demand for homes. Nevertheless, we believe these conditions improve the outlook of our consumer, commercial, real estate, construction and commercial lending and deposit businesses. On the commercial side, Seattle's office market remains one of the strongest nationwide as tenants flock the Puget Sound region and market is on pace for another year of 2 million square feet of positive absorption. There is approximately 5.6 million square feet of space currently under construction with new office space attracting significant preleasing. Of note, recently Amazon and F5 both pre-lease the entire footage of two Class A office buildings under construction in downtown Seattle, further challenging the significant demand for office space downtown. Portland absorbed over 52,000 square feet of office space and 855,000 square feet of industrial space in the second quarter. Amazon signed an agreement for 857,000 square feet of space in the second quarter in Portland and there is approximately 1.4 million square feet of office space currently under construction there. In Los Angeles, almost 410,000 square feet of positive net absorption in the first quarter marked 18th straight quarter of net occupancy gains for offices there. There is currently 1.8 million square feet of office space under construction with SNAP and Google alone slated to absorb over 600,000 square feet. Looking forward to the next two quarters in our Mortgage Banking segment, we currently anticipate single family mortgage loan lock and forward sale commitment volume of $1.9 billion and $1.8 billion in the third and fourth quarters respectively. We anticipate mortgage held for sale closing volumes of $2.1 billion and $1.8 billion during the same periods. For the full-year of 2017, we anticipate single family mortgage loan lock and forward sale commitments to total $7.3 billion and loan closing volumes to total $7.5 billion. These volumes will also be highly dependent upon inventory levels in the housing markets in which we do business, local economic conditions affecting unemployment growth and wages as well as prevailing interest rates. Additionally, we now expect our mortgage composite profit margin to decline to a range of between 310 and 320 basis points over the next two quarters. We continue to consider the Mortgage Banking business, a core part of our business and in integral part of our overall strategy going forward. We see growth whenever possible to convert our mortgage customers to full bank customers, while offering products and features that provide them with additional benefits. Our strategy of retaining servicing on most of the mortgage loans we sell allows us ongoing contact and this opportunity to cross sell these products and service. In our Commercial and Consumer Banking segment, we continue to expect average quarterly net loan portfolio growth to fall into the range of 4% to 6% in quarter for the remainder of the year. Reflecting the recent flattening of the yield curve and absent changes in market rates and loan prepayments speeds, we expect our consolidated net interest margin to increase from the 3.29% margin in the second quarter. As we finish the redeploying of the proceeds from our December 2016 common stock offerings from lower yielding securities into higher yielding loans, we expect the net interest margin to increase to between 3.35% and 3.45% by the end of this year. For the remainder of 2017, our non-interest expenses are expected to grow on an average by approximately 1% per quarter, reflecting in part the lower mortgage lending volume, the cost reduction efforts previously discussed, the seasonal slowdown in the mortgage market later in the year and the continued investment in growth in our infrastructure. The growth rate of our total non-interest expenses will vary somewhat quarter-over-quarter driven by seasonality and cyclicality in our single family close loan volume and in relation to the timing of future investments in growth. This concludes our prepared comments. Thank you for your attention and patience today. Mark and I'll be happy to answer any questions you have at this time. Operator, do you call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first questioner today is going to be Jeff Rulis with D. A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff.

Mark, just a little more color on the – I guess the personal cuts. I guess timing wise were those kind of early middle or late kind of throughout the quarter? And then the second question is I guess if you could breakout, is there a severance component to that that's near-term, I think you alluded to some higher costs, but then some efficiencies thereafter?

Sure. That reduction in force was accomplished in part through attrition in the middle of the quarter and in part through a single reduction in force in early June. There were some severance related expenses, but they were not that material…

It’s approximately $105,000.

Got it.

As we evaluate capacity requirements this quarter and through year-end, it's likely there will be some additional reductions. We hope those are generally accomplished through attrition, but we can't rule out other changes as we evaluate going forward the capacity we need at loan volumes we currently anticipate. And so we were going through a fairly extensive evaluation effort over the next several weeks that will result in those strategies. And there maybe some cost associate with some of those changes.

And we’ve target a lot about staff, but I mean is there discussions on the branch or facilities closures on that end possibly?

At this juncture we’re evaluating all of our options, obviously when we opened all of our branches, we felt strongly about the opportunities in those markets and the opportunities with the teams that led to the opening of those offices. And we did hire and have hired some excellent people in those markets and all that subject to evaluation.

Great. And just switching gears a little bit on to the commercial loan growth, it looks like some of them are balanced I guess segment wise than we've seen from the bank in a while. Could you provide any color to the regions that may have provided some of the strongest growth?

Sure. As you would expect Puget Sound and greater Portland still comprises the bulk of our commercial origination activity, whether that might be commercial real estate or general commercial lending though our commercial real estate small balance business which is right out of Southern California is really a Western State's business, so you can assume a distributed across the major markets in the West for that business. And we are quickly growing general commercial leading business in California. We have teams in the Bay Area and in Orange County in San Diego now that we built over the last nine months. Those teams have strong pipelines and we're really encouraged about our opportunities there with some really fantastic personnel. So while those numbers are not significantly yet relative to Puget Sound, we expect that to be very significant going forward.

Okay. I’ll step back. Thanks.

Thank you, Jeff.

And our next questioner today is going to be Jessica Levi-Ribner with FBR. Please go ahead.

Hi, good afternoon. Thanks for taking my question.

Hi, Jessica.

How can we – just to kind of pegging back of the last question. How can we think about the absolute amount of expenses in the Mortgage segment as you reduced capacity? Can you guys – like a percentage…

Well, that’s a fair question. I would say we're not prepared to give a detailed answer on that today. We have to prepare our system for the expectation of balances and volume that maybe 20% to 25% lower than we expected. Now fortunately, our transition to our new loan origination system anticipated efficiencies that are going to enable or help enable that cost reduction effort. But I don't think compared to sort of give like a percentage or a pro low number today. I think at the end of this quarter, when we talk next quarter, we're going to be at a far better position to discuss that detail.

Okay. Fair enough. And then just wanted to clarify the 1.5% expense growth per quarter, did I hear that right?

1%.

1%, okay, so that’s down from your last quarter guidance and you had that have most to do with Mortgage Banking?

It does and the fact that some of the lumpiness of branch openings, which is already occurred into the 2% was an average with the expectation of some lumps of volatility in that number and so combination above.

Okay.

Plus as a consequence of decline in mortgage profit expectations were – being very careful in expenses across the board, while still making meaningful investments in growth, we are just being very, very careful with expenses.

Okay. And then looking forward to next quarter and beyond in kind of the commercial loan growth. Do you expect that to remain kind of various contributions across the platform? Are you seeing any particular areas of growth already in the third quarter?

While we expect general commercial lending to grow in composition as a portion of our lending. There is the prospect that we may retain more generally non-conforming mortgages as well. So we have seen greater runoff in that portfolio is a very stable high ROE asset today. And as a part of the strategies to attract more higher net worth private banking customers, we maybe originating more jumbo non-conforming in conjunction with those strategies.

Okay. That's all for me. Thanks so much.

Thank you.

And our next questioner today is Jackie Boland with KBW. Please go ahead.

Hi, good morning, everyone.

Hi, Jackie.

Mark, just in light of – everything is taken place on the mortgage market, how does this if it all impact the geographies that you're looking to in terms of expansion and I guess I guess both mortgage if that still on the table and then also the consumer commercial segment?

Well, I think consistent with our discussion last quarter. We have changed our growth strategy for that business and for the foreseeable future we will not be entering new markets. And growth in that business in terms of personnel and offices is going to be highly concentrated an existing markets within high to markets that we have or expect to in the near-term have full banking services. So that a business will be much more integrated and the synergy between the two sides of the house much greater and I would expect overall, growth in that business to be less than historic, part of that due to the market itself right from a volume standpoint. But our activity in opening new offices will be limited to really unusually good opportunities with the right loan mix, right. One of our greatest challenges today is home price appreciation and in proportion of our lending that is non-conforming or government mortgage. To the extent that housing prices have increased and we are having to originate more jumbo non-conforming loans, and those loans carries substantially lower profit margins. And so markets that are characterized by higher concentrations of those mortgages are not markets that we will be expanding it to.

Okay.

And so to the extent there is further expansion you'll see it Inland and in markets of generally lower housing prices.

Okay.

But we aren't concentrating today on efficiency, profitability and optimizing the system we have.

So is it fair to say then that this differs from prior cycles within the Mortgage segment, where you were able to advantageously pick up some teams when others were having challenges, but because it's the market itself and the lack of supply that's out there that differs this go around?

That's exactly right. I mean we are dealing with a vastly different market today that does not offer the same opportunity for origination that it did previously. Refinancing is down to 20% to 25% of our business and there is not the available inventory of homes to produce substantial levels of purchase growth that we expected. So we're really dealing with different fact set and we've had to come to terms with that in terms of our opportunity in this segment. So if you take that and understand little further, the composition of our earnings for the foreseeable future and probably permanently will be substantially lower in composition of Mortgage lendings.

So how would you looking to maybe 2018 in a little bit further out, and obviously this accelerates what we had talked about previously in terms of the breakdown between Mortgage and Commercial. How do you see that breakout playing out?

Well, I got to tell you that is a present subject that we are trying to wrestle down, right. I mean we have been expecting still meaningfully increases in loan volume in 2018 and 2019. We are currently carried back those expectations on a loan-to-loan officer basis and carried back our expectations on expense. And so as I see here today, I can tell you what I think the loan volumes going to be next year.

Okay. So probably more of an update in next quarter and then even more so – on the following quarter’s call I would guess right?

Yes. So consistent we are getting closer to year-end, by third quarter – next quarter I promise we will have – what we’ll probably call preliminary set of guidelines on 2018.

Okay. Thank you. I’ll get back now.

Thank you.

And our next questioner is going to be Tim Coffey with FIG Partners. Please go ahead with your question.

Thank you. Good morning, Mark.

Good morning.

I was kind of counting on talk about the Commercial banks for a little bit, the efficiency ratio has held pretty well in the low 70s last two quarters. Is that kind of where you think that level could be back half of this year or do you plan to make more investments in that?

Well, our view of our opportunities for growth in assets deposits and earnings and improvement and efficiency in our Commercial and Consumer segment has not changed. I mean we've been hitting our numbers pretty consistently on growth that growth should develop operating leverage and our efficiency ratio, we continue to expect to improve over the coming quarters such that in the back half of this year. We're expecting to be in the high 60s, and next year declining through the year to the mid-to-low 60% range. And that’s we've been very consistent of those expectations. And despite the challenges in the mortgage business, we have no reason to change those expectations currently.

And so does that imply that you mean you've got enough runway with the existing staffing and floatings that you have, I mean including El Cajon now already in that market?

It means we will have to continue to invest in infrastructure to support growth, but on the same terms we’ve discussed in terms of expense growth.

Okay. And then do you look to – will you be looking to sell any additional multifamily loans or commercial real estate loans to increase as they begin on sale activities and on that side of the business?

That’s little bit opportunistic. I will tell you that it’s bit of a schizophrenic market. In the first quarter of this year there was almost low demand, in the second quarter of this year demand rose really significantly and it’s still strong today. I hope that means we will be able to increase secondary market sales of those assets. It allows us to generally roll short-term profit. Hopefully, be able to retain servicing in some future date. We are currently reviewing our opportunities to securitize some of those assets, which would offer the leverage. And so we remain hopeful that those businesses even on the secondary market basis are going to continue to grow.

When you enter a beginning of the quarter, do you have a set target, the amount of loans you want to sell in other side of the business?

We do – in terms of the plan for the year, I will tell you that we’ve been way off above and below our expectations in various quarters, but to date, at least on our commercial real estate business, we are right on the plan or a little above plan in the Fannie Mae business and just sort of our plan I think is other secondary market sales.

Okay. And then just kind of follow-up on an answer you gave to an earlier question, talking about growth in the markets where you can capture the whole banking operations or the whole banking relationships with the market. Do you have any kind of rough parameter of what percentage of your branches where you don't have both commercial and multifamily – I’m sorry commercial and single family mortgage production in the same market?

Most of our branches do not have commercial lenders or mortgage lenders in branch. They’re really consumer retail branches and small business branches. Our commercial bankers are typically officed and centralized in regional offices. Our mortgage production personnel exist in about 20% of our branches maybe little less. We’ve historically had in branch mortgage loan officers, but the referrals from those branches go to regional mortgage-led offices, and so it’s a little bit of a mix.

Okay. Thank you very much. Those are my questions.

Thank you, Tim.

[Operator Instructions] And our next questioner today is going to be Tim O’Brien with Sandler O'Neill. Please go ahead. Timothy O’Brien: Good morning, guys.

Hi, Tim. Timothy O’Brien: Follow-up on some detail you gave last quarter hiring in the Commercial Banking business. You guys said you had plans for five – hiring five senior bankers or five season bankers. How's that – did you make any progress this quarter on that?

I believe we’ve hired two of the five and we have – I think we have one in the queue. Timothy O’Brien: Great.

I have to check with them. Timothy O’Brien: And then related to the new mortgage underwriting platform that you have. Do you have a sense – can you quantify cost saves that can come from that being fully operational versus not being operational at all – what's the annual – is there an annual savings number that you expect out of that?

We are waiting for it to stabilize. We are sure what that is going to be. Going into the project, savings are 10% to 15% on processing and funding were expected. I will tell you that our average closing time on those in the last month dropped from closer to 30 days to in the 17 or 18 day range. But I don’t want to attribute all of that the system efficiencies. Because what we’re also seeing is loan – is it loan application and closings in the same month wise, right. So that’s going to contribute to short purchase timelines, but we think the meaningful part of that is system efficiency. Timothy O’Brien: And then last question just on – to follow-up another one on mortgage. Have you guys seen any increase in new listings? Does that benefit you in the Seattle market in particular, possibly in the Bay Area? Have you seen that in say June versus April, those numbers? And is that something that could give you a little bit of support here in the second half potentially?

Seasonally, we expect increases in listings consistent with the home buying season. Nationally though, we’ve seen listings fall. And year-over-year at this time of year, I think I cited in my comments earlier listings are down like 30%. So the increase that we expected, to the extent it occurred, did not occur in the magnitude that would be typical for this time of the year. Timothy O’Brien: Thanks for answering my questions guys.

Thank you, Tim. End of Q&A

This will conclude our question-and-answer session. I would like to turn the conference back over to Mark Mason for his closing remarks.

Again, we appreciate your attention and patience today. We'll look forward to speaking with you next quarter. Have a great day.