HomeStreet, Inc.
Q4 2018 Earnings Call Transcript

Published: 22 Jan 2019

[Operator:]

Good day and welcome to the HomeStreet Inc., Year-end and Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Mason, Chief Executive Officer. Please go ahead.

[Mark Mason:]

Hello and thank you for joining us for our year-ended fourth quarter 2018 earnings call. Before we begin, I would like to remind you that our detailed earnings release was furnished this morning to the SEC on Form 8-K and is available on our website at ir.homestreet.com under the News and Events link. In addition, a recording and a transcript will be available at the same address following the call. On today's call, we will make some forward-looking statements. Any statement that isn't a description of historical facts 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 and housing supply that affect the demand for our mortgages and that impact our net interest margin and other aspects of our financial performance, the actions, findings, or requirements of our regulators and general economic conditions that affect our net interest margins, borrower credit performance, loan origination volumes and 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 detailed earnings release and in our SEC filings, including our most recent quarterly report on 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 maybe found in our SEC filings and in the detailed earnings release available on our website. Please refer to our detailed earnings release for more discussion of our financial condition and results of operations. Joining me today is our Chief Financial Officer, Mark Ruh. In a moment, Mark will present our financial results. But first I'd like to give an update on our results of operations and review our progress in executing our business strategy. Notwithstanding the impact of the challenging period in the mortgage banking cycle, I'm proud of what we accomplished in 2018. Our Commercial and Consumer Banking segment achieved record net income for the year, driven primarily by a 12% increase in loans held for investment, all of which was from organic growth. This growth was broad based in all of our primary commercial and consumer segment business lines. Of note commercial and industrial lending portfolio grew 16%, reflecting the substantial investments we have made in this line of business. Overall loan growth drove an increase in our net interest income during the year, despite a decline in our net interest margin. The yield curve ended the year flatter than previous quarters. December 2018 marked both the lowest spread between the two year treasury and the 10 year treasury and the first time the yield curve was inverted along parts of the term structure since 2007. During the fourth quarter our loan portfolio grew only 1%, which was less than our expectation of 2% to 4% growth. The lower growth was due to the sale of approximately $70 million of single family loans in the quarter. For the year loans held for investment grew 12%. This interest rate environment and increasing competition for deposits continues to pressure our net interest margin. After several quarters of short-term interest rate increases by the Federal Reserve, without a similar upwards movement in long-term rates, our cost of funds has increased at a faster rate than the yield on our assets. Additionally, we experienced outflows of demand deposits by some of our commercial clients associated with the mortgage industry as seasonal servicing deposit remittances, which we replaced with higher cost of wholesale deposits and borrowings. For the year deposits grew 6%, lower than our expectations going into the year, reflecting a more competitive deposit market. Notwithstanding the seasonally industry wide competitive pressure our de novo branches those opened five years or less grew deposit balances by 6.8% during the quarter, and 30% during the year. During the year, we opened three new retail deposit branches all in Washington. We also consolidated two smaller branches in Eastern Washington into nearby branches. Lastly, we announced our agreement to acquire a retail deposit branch, including approximately $123 million of both deposits and commercial loans and a commercial lending team in San Diego County. We expect that transaction to close in March of this year. After the quarter, we opened retail deposit branches in San Jose and Santa Clara, California. These are our first deposit branches in Northern California and these branches will both open new markets for us, but also allow us to better serve existing commercial and consuming customers in Northern California. Asset quality remains strong during the quarter with our non-performing asset ratio ending at 17 basis points of total assets. Our early warning credit indicators continue to reflect strong fundamentals in all of our markets. We are keeping a careful eye on some of the secondary smaller markets in our footprint since these markets have historically exhibited greater price volatility compared to primary markets during the downturn. However job creation, unemployment, commercial and residential development activity and absorption, vacancies cap rates and all other leading indicators of economic activity continue to reflect strong fundamentals. While lower commission expenses on lower loan origination volume was the primary reason for the reduction in our non-interest expense during 2018. Our cost savings initiatives in 2017 and 2018 have also materially reduced these expenses. As a result of these thoughtful operational changes, base salaries, occupancy and G&A expenses are all meaningfully lower. We reduced total headcount 16% during the year and single family home loan centers including satellite locations decreased from 70 to 53. We believe that these cost saving initiatives will position the company for improved efficiency and profitability. Additionally, while we expect our mortgage banking business profitability to improve as the mortgage cycle improves, while we wait for this part of the cycle to end, we are considering additional operational and strategic changes to further improve the profitability of the mortgage business. During 2018 we sold $4.9 billion in unpaid principal balance of single-family mortgage servicing rights and modified our loss sharing agreement with Fannie Mae related to our DUS service. Both of these strategies improved our regulatory capital ratios. Also during the year, we continue to refresh our Board of Directors by appointing Mark Patterson and Sandra Cavanaugh to the Board, adding valuable skill sets and perspective to our Board. Since joining the Board they have both very valuable contributions toward improved governance in our strategic objectives. Don Voss, who joined the Board with our acquisition of Simplicity Bank was named the Lead Independent Director. Since last proxy season we have held productive discussions regarding corporate governance, business strategy and our results with most of our significant shareholders. These discussions has given the management and the Board meaningful insight on shareholder views on these subjects and positioned us well for the coming proxy season. Finally, a few comments on recent events and their effect on us, many of you may remember the devastating wildfires that impacted parts of California during the fourth quarter with thousands of homes lost. In the fire affected areas we have not seen any material impact of HomeStreet borrowers, as all have adequate insurance in place. For borrowers who were affected many have paid off their loans in full with insurance proceeds, while a few were taking out construction loans to rebuild. Additionally, HomeStreet has less than 30 borrowers that are experiencing some financial distress due to their places of employment being affected by the fires. We are not seeing any material uptick in single-family mortgage delinquencies and we will continue to work with affected borrowers, while monitoring the situation. Additionally, we are keeping a careful watch on the effects of the ongoing Federal Government shutdown on our business. We are receiving inquiries from furloughed federal workers about possible single family mortgage forbearance, but to-date only four borrowers have applied for this loss mitigation. The rest are using accumulated savings for the time being. We stand ready to provide assistance in the form of late fee waivers, loan modifications and short-term loans where warranted. The most acute impact however is on our SBA lending business. As part of the shutdown the SBA is not issuing loan numbers, so loans cannot be closed or funded. The secondary market for SBA loan guarantee sales are also closed, so loan sales will not recommence until after the government reopens. Other adverse effects may emerge as the shutdown persists. And now, I'll turn it over to Mark, who will share the details of our financial results.

[Mark Ruh:]

Thank you, Mark. Good morning everyone and thank you again for joining us. I'll first talk about our consolidated results and then provide detail on our two operating segments. Regarding our consolidated results, net income for the fourth quarter of 2018 was $15.2 million or $0.56 per diluted share compared to $1.8 million or $0.44 per diluted share for the third quarter. One-time items included in net income for the fourth quarter of 2018 were a non-core net recovery of $622,000 of restructuring and acquisition related items. Net of tax and a non-core $4.9 million income tax benefit from the reevaluation of our net deferred tax liability positions related to the Tax Cuts and Jobs Act legislation enacted in December of 2017 recognized in relation to the filing of our 2017 federal tax return. Excluding the impact of these charges core net income for the fourth quarter was $9.7 million or $0.36 per diluted share compared to core net income of $12.3 million or $0.45 per diluted share for the third quarter. The decrease in core net income from the prior quarter was primarily due to lower non-interest income, largely from seasonally lower net gain in loan origination and sale activities in our mortgage banking segment. Net interest income decreased by $272,000 to $51.4 million in the fourth quarter, from $51.6 million in the third quarter. This decrease in net interest income is primarily due to our slightly compressing net interest margin of 3.19%, which decreased one basis point in the third quarter’s net interest margin of 3.20%. While our retail deposit base have remained relatively low, our wholesale deposit and borrowing costs have continue to increase as the Federal Reserve continues to increase short-term interest rates. During the quarter this increase in funding costs was partially offset by higher yields on our interest earning assets. Non-interest expense excluding the net impact of acquisition and restructuring related items decreased to $85.4 million in the fourth quarter of 2018 from $94.1 million in the third quarter. This decrease in non-interest expense was primarily from the lower commission costs on lower closed single family mortgage loan volumes, but also due to expense reduction initiatives. Total non-interest expense declined by $49.1 million or 11.2% for the year-end December 31, 2018, compared to the year-end December 31, 2017. The primary driver for this reduction was lower incentives and commission expense due to lower mortgage loan volume. However, as a result of our 2017 and 2018 expense reduction initiative, we achieved on a core basis a $14 million or 8.8% [ph] decrease in base salaries for the year ended December 31, 2018, compared to the year ended December 31, 2017, due to the overall reduction in our headcount. Our expense reduction initiative also reduced general and administrative expenses on a core basis by $11.3 million or 17% during 2018. Finally, we reduced occupancy expense on a core basis by $2.6 million or 7.5% during 2018 due in part to reducing our total office count from 138 to 123 during the year. These expense reductions were partially offset by increases in information services expense as we continue to invest in upgrading our technology platform. Our effective income tax benefits rate of negative 2.5% for the fourth quarter of 2018 differs from our combine federal and blended state statutory tax rate of 23.6%, primarily due to a tax benefit of $3.7 million comprised of a non-core $4.9 million benefit from the revaluation of our net deferred tax liability position related to the Tax Cuts and Jobs Act. And a core expense of $1.2 million related to the filing of our 2017 federal tax return. I’ll now discuss some key points from our Commercial and Consumer Banking segment results. Commercial and Consumer Banking segment core net income was $14.3 million in the fourth quarter, a decrease of $2.3 million from core net income of $16.6 million in the third quarter. The decrease in core net income was primarily due to the previously mentioned tax benefit related to the filing of our 2017 federal tax return. Net interest income increased $1 million from the third quarter of 2018 to $48.9 million, primarily due to the growth in our loans held for investment. Our portfolio loans held for investment in this segment increased by $47.9 million or 1% during the fourth quarter. Growth occurred throughout the portfolio with the exception of a decline in the single-family mortgage portfolio from the previously mentioned sale of single-family mortgage loans during the quarter. Segment non-interest income decreases quarter-to-quarter to $10.4 million from $10.7 million, this decrease was primarily due to slightly lower profit margins from our sales of multi-family Fannie Mae DUS loans and small balance commercial real estate loans during the quarter. Segment core non-interest expense was $38.3 million, an increase of $518,000 from the third quarter of 2018. This increase was primarily due to higher salaries and related costs, as we added headcount ahead of the two Northern California retail deposit branches that were opened in early January of 2019. Non-performing assets increased to $12.1 million or 17 basis points of assets at December 31st compared to 15 basis points assets at September 30th. We recorded a $500,000 provision for credit losses in the fourth quarter, compared to $750,000 in the third quarter. The decrease in provision was really due to $559,000 of net recovery during the fourth quarter, compared to net recovery of $122,000 during the third quarter. Deposit balances were $5.1 billion at December 31st, a decrease of $103.6 million from September 30th. I'll now share some key points from our Mortgage Banking segment results. The Mortgage Banking segment’s core net loss in the fourth quarter was $4.5 million compared to core net loss of $4.3 million in the third quarter. Compared to last quarter, we had seasonally lower interest rate loss commitment that resulted in decrease in gain on loan origination and sale activity and lower mortgage banking servicing, offset some of the lower core non-interest expense. When single family interest rate locks are less than closings in a given quarter, earnings are negatively affected as the majority of mortgage revenue is recognized at interest rate locks, while majority of originating costs including commissions are recognized upon closing. Accordingly, the larger balance between interest rate lock volume and close loan volume during the third quarter normalized during the fourth quarter, resulting in lower differential between gain on loan origination sale revenue and salaries and commissions expense. Our gain on mortgage loan origination and sales composite margin was 323 basis points, a 12 basis point increase from the second quarter, primarily due to an increase in higher profit margin refinance, and FHA/VA transactions in our origination index. Mortgage Banking segment core non-interest expense of $47.1 million decreased $9.2 million from the third quarter of 2018, primarily due to the decrease in commissions paid as a result of lower closed mortgage loan volume. Single family mortgage servicing income was $5.4 million in the fourth quarter, a decrease from $6.9 million in the third quarter. This decrease was primarily due to lower risk management results, partially offset by higher servicing income. Lower risk management results were primarily driven by a more volatile interest rate environment, the continued flattening of the yield curve and increased negative convexity costs. The increase in servicing income is related to a higher average balance of loans serviced for others. Our portfolio of single family loan serviced for others increased to $20.2 million of unpaid principal balances at December 31st compared to $19.8 million at September 30th. The value of our mortgage servicing rights, relative to the balance of loans serviced for others was 125 basis points at quarter-end, a decrease of 8 basis points compared to prior quarter-end. Thanks for your attention and I'll turn it back over to Mark Mason.

[Mark Mason:]

Thank you, Mark. During the past year, we've made substantial changes in our mortgage banking business to improve profitability in response to the current market conditions. As I stated earlier, we continue to consider both operational and strategic changes to improve further the profitability of this business. We are providing guidance today, assuming that we will continue with our current operations and strategy and that there are no material changes to the interest rate environment that existed in December 31, 2018. Current staffing levels mortgage production volume is forecast by the MBA or original outlook for mortgage production may impact these numbers. Actual results may vary from the guidance we are giving today, possibly in material ways if our actual strategy or future operations differ from these assumptions. We anticipate single family mortgage loan lock and forward sale commitment volume of $1.2 billion and $1.5 billion in the first and second quarters of this year respectively. We anticipate mortgage held for sale closing volumes of $1.1 billion and $1.6 billion for the same periods. For the full year of 2019, we anticipate single family mortgage loan lock in and forward sale commitments to total $5.2 billion and loan closing volume to total $5.3 billion. We expect our mortgage composite profit margins to remain in the range of between 310 and 320 basis points during the next two quarters as well as for the full year of 2019. In our Commercial and Consumer Banking segment, we expect our quarterly loan portfolio growth to average between 2% and 4% throughout this year. Reflecting the yield curve as of the end of the fourth quarter, and absent changes in market rates and loan prepayment speeds, we expect our consolidated net interest margin to decrease to the range of 300 basis points to 310 basis points over the next two quarters and remain within that range throughout this year. During the first and second quarters of this year, we expect our total core non-interest expense to increase approximately 6% to 8% given seasonally increasing closed single family mortgage loan expectations. For the full year of 2019, we expect our average quarterly net change in total core non-interest expenses to increase by approximately 3%, reflecting the growth of the business overall. Total core non-interest expenses will vary quarter-to-quarter, driven by seasonality and cyclicality in both our single family and commercial real estate closed mortgage loan volume. This concludes our prepared comments. Thank you for your attention today. Mark and I would be happy to answer any questions you have at this time.

[Operator:]

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

[Jeff Rulis:]

All right thanks. Good morning.

[Mark Mason:]

Good morning.

[Jeff Rulis:]

First question is more on the expense side, just wanted to see if the restructuring noise either expenses or recovers as we saw this quarter is that largely complete at this point. There's no tailwind into 2019 is that what you expect.

[Mark Mason:]

Yes, with respect to the expense restructurings in the mortgage business that were announced in the -- earlier in the year and this quarter we had a fair amount of revenue noise or contra expense noise related to income taxes. We don't expect to repeat any of that going forward.

[Jeff Rulis:]

Okay. And then the -- just on the MSR side any -- I guess any thoughts on additional sales? And then on a related just kind of the mortgage servicing line item from a revenue basis any expectations in 2019?

[Mark Mason:]

We do not have any planned sales of mortgage servicing at this time. I can't rule it out because we have since the company has been public on two occasions sold servicing primarily for capital planning purposes. But we don't have any plan at this time. Mortgage loan servicing revenue has been challenged over the last two years in particular as the yield curve flattened, And you can see that the companies risk management results have declined during that time. Historically the company has had very strong servicing revenue associated not just with the growth of the servicing portfolio, but with the results of risk management, which is really hedging. And typically the hedging income has been substantial. But as the yield curve has flattened the earnings on the swaps portion of that hedge, which is the lion share at times 75% of the hedge position those earnings have declined substantially. And so we expect that servicing income will be muted despite slow servicing speeds until we have little lift in the yield curve.

[Jeff Rulis:]

Great. And maybe last one on the -- just on the NPA the modest lift in what consumer and commercial. Any color on those I assume not systemic issues wasn't large, but any additional detail on the increase?

[Mark Mason:]

There's nothing noteworthy there. There is probably a little volatility given how low the numbers are.

[Jeff Rulis:]

Fair enough. Okay, thank you.

[Mark Mason:]

Thanks, Jeff.

[Operator:]

The next question comes from Steve Moss of B. Riley FBR. Please go ahead.

[Steve Moss:]

Good morning.

[Mark Mason:]

Good morning.

[Steve Moss:]

Wondering just go on the locked volume guidance $5.2 billion for 2019, obviously a bit lower from what it was before. Just wondering what are the drivers behind that versus expectations before?

[Mark Mason:]

Well, recently we've seen anecdotally in our markets and specifically in most recent data home sales volume decline. And while this last quarter and currently as long rates declined a little bit we've seen some resurgence in refinancing, we can't expect that to continue either. And so based upon those changes, we have lowered our expectations a little bit.

[Steve Moss:]

Okay. And then on the margin guide here, going to 3 to 3.10 in the upcoming quarters, just wondering is it primarily expect -- driven by funding costs here?

[Mark Mason:]

Yes, or just the dividend speeds, right, funding costs rising faster than asset yield. Asset yields are still rising. And to the extent that we see moderation in deposit betas that would be better, but conservatively we thought that we needed to lower the expectation range.

[Steve Moss:]

Okay. And then I guess my third question, I'm not sure if I heard you correctly, Mark, but was at 2% to 4% loan growth per quarter or for the full year?

[Mark Ruh:]

That's still per quarter. Obviously we didn't make it last quarter, but that was in part due to a sale of single family loans, right. We would have made that range had we not elected to sell some single family mortgages on to the portfolio.

[Steve Moss:]

All right, thank you very much.

[Mark Mason:]

Thanks, Steve.

[Operator:]

The next question comes from Jackie Bohlen of KBW. Please go ahead.

[Jackie Bohlen:]

Hi. Good morning, everyone.

[Mark Mason:]

Good morning, Jackie.

[Jackie Bohlen:]

Wanted to touch based on expenses and looking primarily to headcount and any anticipated de novo branches plans you might have in the year and understanding of course that there are no announced plans for the Mortgage Banking segment but there possibility exist?

[Mark Mason:]

In terms of de novo branches, we opened two in January that had been delayed for some period of time. At this time, we are not planning any additional de novo branches for the foreseeable future. So headcount increases associated with the branch network system will define substantially from prior years, right. In terms of the mortgage business, we have had some attrition as a consequence of low volumes and as a performance related issue. We may have additional attrition, if volume continues to decline, as the market is suggesting right now. So that affects both of course reduction in positions, but also the operational positions depending upon total loan volume.

[Jackie Bohlen:]

And have you been replacing any of the attrition or just absorbing it with those that you have?

[Mark Mason:]

Well, we tried to replace attrition in production personnel with -- people with higher volume in today's market conditions. That's -- the day in, day out part of the business. We will attempt to replace attrition so that we keep seats filled in the offices that we have today. If there are empty seats, the office will not be operating as efficiently as it could or should. So we will be attempting to replace attrition of folks that are not been able to generate volume with those who do.

[Jackie Bohlen:]

Okay. So it sounds like then for the overall company headcount could come up a little bit in 2019 outside of any additional announcement?

[Mark Mason:]

Very slightly. We haven't -- we entered the year with some open positions at various places in the company. But our expectations are that the total headcount not increase materially this year.

[Jackie Bohlen:]

Okay. And then given all the tax noise in the quarter, would you mind just providing us with an updated guidance for an anticipated range going forward, in terms of the tax rate?

[Mark Ruh:]

Yes, sure. I would use our estimated to 20.5%. I believe at the prior quarter we provided 21%, but I would stick with 20.5% going forward.

[Jackie Bohlen:]

Okay. And the BNO should normalize next quarter.

[Mark Ruh:]

That was one-time event, you wouldn’t see that again. And so BNO will normalize, which does not run-through the tax line number that run through the G&A line.

[Jackie Bohlen:]

Yes.

[Mark Ruh:]

That threshold. Yes, right. Got it.

[Jackie Bohlen:]

Yes, definitely understood. Okay, great. Thanks guys.

[Mark Mason:]

Thanks, Jackie.

[Operator:]

The next question comes from Tim O'Brien of Sandler O'Neill and Partners. Please go ahead.

[Tim O'Brien:]

Good morning, guys.

[Mark Mason:]

Hey, Tim.

[Tim O'Brien:]

A quick question for Mark Ruh, do you happen to have the dollar amount of SBA gain on sale income for the quarter for 4Q?

[Mark Ruh:]

We provide the dollar amount, I'm looking at $484,000. It's in the table, that’s where I looking at. It's in page 12 for a table of Commercial and Consumer Banking segment.

[Tim O'Brien:]

Sorry I missed that, I looked, but I missed it. But thank you for that. And then another question I have for you, with the government shutdown, possibly extending, could that affect your single family mortgage business in any way, shape or form?

[Mark Mason:]

So far not materially; there's a couple of government related loan programs that have issues like...

[Tim O'Brien:]

DA program.

[Mark Ruh:]

There is USDA program and a Department of Homelands program that we do through FHA that have both been shut down for a moment, but they're not a material part of the originations.

[Tim O'Brien:]

Okay. And same thing on the multi side, right? Not expected the impact, the shutdown is not going to impact your multi sale business.

[Mark Mason:]

Fannie Mae continues to operate, right. So Fannie Mae does business should be unaffected, and the private business is not affected.

[Tim O'Brien:]

Great. And then you alluded to qualitatively some thoughts there might be some additional strategic changes that get looked at by the Board this year, Mark. Could you talk a little bit about kind of the list of what some of those changes that might be considered could be? Any of them?

[Mark Mason:]

We…

[Tim O'Brien:]

I put you on the spot there a little bit but…

[Mark Mason:]

I want to give you a quality answer. But the range of things that we look at is really why, right. I mean why as you might consider. And so, I don't want to overemphasize any particular option because that would suggest something that we are committed to doing and we're not yet. But we continue to analyze ways to improve profitability, the size of our business, the product lines within the business, expense components there is a very tough time. And while we have a deep and long history in the mortgage business status quo is not acceptable, it’s not acceptable to us, it’s not acceptable to our shareholders. And you should expect us to go after fully analyzing additional changes make some changes that make a meaningful difference in the business.

[Tim O'Brien:]

So I guess looking at that, the reverse of that. Are there any critical core parts of the business that you guys -- you can say right now that you remain committed to? There probably won't see any meaningful material strategic adjustments around?

[Mark Mason:]

That's kind of a tough question to answer because it's a very integrated business, right? And I think I'll just leave my comments where they are right now.

[Tim O'Brien:]

You're pretty open minded, Mark.

[Mark Mason:]

Well we have to be, right. I mean we have a responsibility here, we have a lot of capital tied up in this business, our shareholders' capital, my capital, everybody's capital. And we have been -- while we've been active in trying to seek improved profitability. We have been patient in believing that the cycle will turn and return superior profitability is taking a long time. And while it's probably easier for us to be patient because we've been through cycles there, it's less easy for people who aren't as familiar. And so, we're doing a lot of work on analyzing the business today. And that's all I am prepared to say.

[Tim O'Brien:]

Hey guys, thanks for the earnings call and for answering my questions. And good luck in the New Year.

[Mark Mason:]

Thanks, Tim.

[Operator:]

[Operator Instructions] The next question comes from Tim Coffey of FIG partners. Please go ahead.

[Tim Coffey:]

Thank you. Good morning, everybody.

[Mark Mason:]

Hey, Tim.

[Tim Coffey:]

Hey. Mark, I was wondering can you provide little more detail on the residential mortgage loans that you've sold out of the held for investment bucket.

[Mark Mason:]

We took the opportunity to strip out a portion of that portfolio with an eye to, one, reducing the size a little, but two, trying to sell some lower coupon loans, while the market rates were lower to improve the yields going forward.

[Tim Coffey:]

Okay. And you have a outlook…

[Mark Mason:]

I'm sorry. And in part responding to people inquiring of us whether we'd be interested in selling a portion of the portfolio.

[Tim Coffey:]

Okay. Do you have other loans in the portfolio that kind of fit the characteristics of the loans that you sold.

[Mark Mason:]

Well, theoretically we always do it, right. I mean, if you think about originating continuously.

[Tim Coffey:]

Okay. And then on the kind of commercial real estate loans sold in the quarter last couple of quarters you've sold more than you've originated given what we're seeing in the SBA market and the trends that you've shown in that CRE non dust bucket. Could we see more loans being sold going forward than you originate. Of course the portfolio you have of CRE loans anyway is growing. Is that something we could see going forward?

[Mark Mason:]

Well, I think if you look at the full year last year was very seasonal. In the first part of the year we originated more than we sold; second part of the year we sold more than we originated. I can't tell you exactly what the pattern is. Typically it's in part demand based, right. And demand grows in the second half of the year historically. So that pattern great origination and sale of the first half greater the sale and origination in the second half is driven impart -- large part probably by purchasers. So I can't tell you exactly what the pattern will be, but it will not surprise me if it's the same this year.

[Tim Coffey:]

Okay, that's helpful. Thank you. And then earlier in the Q&A, you said that you're not expecting a resurgence in refi. I'm kind of wondering, what you would need to see from the market to give you that indication that refi is picking up?

[Mark Mason:]

Well, it's picked up a little bit, right. I mean, if you look at the composition of lending and if you saw the December numbers and to extend January today the percentage of the composition of refi versus purchase has increased. The dollar amount of that lending is still relatively weak, right, if you think about the lower levels seasonally. I think it's important to remember that during the recession and the years following the recession as rates fell the industry refinanced a substantial amount of the mortgages in the United States and the average interest rate in the servicing portfolios across the United States is approximately the current rate. And so the number of loans with a sufficient economic interest in refinancing is much smaller than in prior cycles at this time. And so that's why I based my comments on.

[Tim Coffey:]

Okay, that's helpful. Thank you. And then the deposit cost trends, I guess on total deposits we've seen right around say 10 basis points increase every quarter throughout 2018. Are you seeing that the trends are likely to be about the same or slowing?

[Mark Mason:]

Well, everybody's portfolio is different right and their needs are different. We -- I believe deposit costs are going to continue to increase at least our line of sight, right. And then if I can say was 10 too far, but that's our view here that the pace is not going to change in the near-term.

[Tim Coffey:]

Okay. And then just one final one, on the San Diego branch that you acquired I mean are going to close on in March, it's effectively kind of a small bank. Good loans, good deposits, but one of the seasoned banker that I know of, can you kind of talk about how that branch fits into the hierarchy of your Southern California footprint?

[Mark Mason:]

Sure. This was a particularly good deal for us, because we do not currently have the commercial lending team in San Diego. We currently have at four branches there, primarily consumer branches. Though we have some growing commercial business there, but it's being served, or serviced out of Orange County. And so being able to have an in-market team, a well-known track record bankers is real boost to our business. And we're looking forward to great things for that group after they join us.

[Tim Coffey:]

And your loan growth kind of guidance for next question that was organic, right? That didn't include this branch?

[Mark Mason:]

Loan growth for this year, that has historically -- has been inorganic forecast of ours. Yes.

[Tim Coffey:]

Okay. Yes, I was just double checking. All right, thank you very much. Those are my questions.

[Mark Mason:]

Thanks, Tim.

[Operator:]

And we have a follow up from Jeff Rulis of D.A. Davidson. Please go ahead.

[Jeff Rulis:]

Hey, Mark. I just forgot, I didn't quite get the numbers down on the guidance. I got the lock and closed for 2019 for the full year at 5.2 and 5.3. if you repeat the Q1 and Q2 lock and closed?

[Mark Mason:]

Sure. It's locks are $1.2 billion and $1.5 billion for Q1 and Q2. And closings $1.1 billion and $1.6 billion.

[Jeff Rulis:]

Great. Thank you.

[Operator:]

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

[Mark Mason:]

Well, thank you again for patience and attendance at the call this morning. We look forward to speaking with you after our first quarter results. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.