HomeStreet, Inc.
Q4 2014 Earnings Call Transcript

Published: 28 Jan 2015

[Operator:]

Good day, and welcome to the HomeStreet fourth quarter and yearend conference call. [Operator Instructions] I would now like to turn the conference call over to Mr. Mark Mason, President and CEO. Mr. Mason, the floor is yours, sir.

[Mark Mason:]

Thank you. Hello and thank you for joining us on our fourth quarter and yearend 2014 earnings call. Before we begin, I would like to remind you that our earnings release was furnished this morning with the SEC on Form 8-K and is available on our website at ir.homestreet.com. In addition, a recording of this call will be available 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 these statements are 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. Factors that may cause actual results to differ from expectations or that may cause us to deviate from our current plans are detailed in our SEC filings, including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K for 2013, as well as our various other SEC reports. 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 Today, I'd like to update you on recent events, talk about our progress in executing our business strategy and highlight key financial results. I will also share a few thoughts about current market conditions. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations. During the last year we made substantial progress on our strategy to grow and diversify earnings. We expanded our commercial and consumer banking business and built mortgage banking market share in new and in existing markets. We opened three de novo retail deposit branches and grew our transaction and savings deposits by 12% in the 12-month period. Loan portfolio growth was strong with total loans held for investment increasing 12% over the prior year, despite our sale of $267 million in single family loans out of the portfolio in the first and second quarters of 2014. Net interest income increased 43% this year, as a result of a 34 basis point improvement in our net interest margin and almost 20% growth in average interest earning assets. This year we also negotiated our planned acquisition of Simplicity Bancorp. We have now received all regulatory approvals and on January 6 we filed the definitive joint proxy statement relating to the proposed merger of our two companies. The joint proxy seeks approval of the proposed, this merger, from Simplicity stockholders and approval by some HomeStreet stockholders for the issuance of the shares of HomeStreet stock to be exchanged in the merger. HomeStreet special shareholder meeting is scheduled for this Thursday, January 29, and Simplicity's meeting is scheduled for February 11. Proxy votes to date by both shareholder groups are favorable to these transactions. To efficiently register the shares to be exchanged in this merger, we have requested a fairness hearing from the California Department of Business Oversight. Assuming that the fairness panel determines at the proposed merger is fair, just and equitable to Simplicity's stockholders, we will receive a registration permit that will allow the shares to be issued to be exempt from registration with the Securities and Exchange Corporation. We anticipate that the hearing will be held on or about February 10, and a notice of the upcoming hearing will be sent to Simplicity stockholders prior to the hearing date. Assuming both HomeStreet and Simplicity receive approval for proposals from our respective shareholders, and assuming the California Department of Business Oversight timely grants the registration permit, we expect to complete the proposed merger at the end of February. We are excited about the potential this acquisition offers us for building a strong consumer and commercial banking franchise in Southern California, to complement our growing mortgage banking and other business in the region. I'd now like to share some key metrics from the quarter and full year. Fourth quarter net income was $5.6 million or $0.38 per diluted share compared to $5 million or $0.33 per diluted share for the third quarter. The increase in net income for the quarter was primarily due to $3.7 million in higher mortgage servicing income and $2.2 million in higher net interest income, which was primarily due to a 6.4% organic growth in average interest earning assets over the quarter. Full year net income was $22.3 million or $1.49 per share compared to $23.8 million or $1.61 per diluted share for 2013. Excluding pre-tax acquisition-related expenses of $889,000 in the fourth quarter and $3.1 million for the full year, net income was $6.2 million for the quarter or $0.41 per diluted share and $24.2 million for the year or $1.62 per share. Tangible book value per share increased to $19.39 per share at yearend compared to $18.86 per share at September 30 and $17 per share at the end of 2013. This represents a 14.1% increase in tangible book value per share for the year. Our net interest margin was 3.53% for the quarter compared to 3.50% in the third quarter, and 3.51% for the full year compared to 3.17% for 2013. Non-interest income was $51.5 million, up $5.7 million or 12% from the third quarter and an increase of nearly 43% over the fourth quarter of the prior year. Non-interest expense was $68.8 million for the quarter compared to $64.2 million in the third quarter. The increase was related to higher technology costs, increased salaries tied to growth in headcount and higher commissions, as a result of higher single-family mortgage closed loan volume in the quarter. At December 31, the bank's Tier 1 leverage ratio was 9.36% and total risk-based capital ratio was 14%. I'd like to speak now about our commercial and consumer banking business segment results. Our commercial and consumer banking business continues to expand consistent with our strategic plan. We continue to target net growth in our loans held for investment portfolio of 5% or more per quarter, subject to liquidity and capital constraints. Segment net income was $3.3 million compared to $3.5 million in the third quarter. This decrease was primarily due to a higher effective income tax rate in the quarter. Pre-tax income increased $1.1 million from the prior quarter, as net interest income increased wit higher interest earning assets. Non-interest revenue and non-interest expenses both increased in the quarter and reflect growth in the business. Excluding acquisition-related expenses this quarter, income from commercial and consumer business represented 60% of total net income. Our portfolio of loans held for investment grew 6.8% in the quarter and 12% year-over-year to $2.1 billion. Excluding run-off, loans held for investment increased by $330 million or almost 17% in the quarter. New commitments totaled $308 million, and came all lending areas. The average yield of our portfolio increased by 16 basis points from last quarter. Construction lending has historically been a core business of HomeStreet and is a growing part of our business today. As part of our strong focus on risk management, we are very deliberate about diversifying both by product type and by geography. Residential construction has primarily been limited to shorter duration loans for detached vertical construction and consumer custom home construction in the Pacific Northwest, Utah and Southern California. Commercial real estate construction has primarily been in multifamily, with a focus on strong metropolitan markets in the Pacific Northwest and Southern California. Our relatively recent geographic expansion enables us to better manage concentration in this category. Our risk management focus is on lending to financially strong developers with successful track records. Credit quality continued to improve with non-performing assets decreasing to 0.72% of total assets at yearend, down from 0.87% at September 30. Classified assets ended the year at 0.75% of total assets, down from 1.09% of total assets at September 30. Non-accrual loans were down to 0.75% of total loans at December 31, down from about 1% at the end of the third quarter. We recorded a provision of $500,000, our first and only provision for loan losses this year. We have not needed to provision much this year due to continuing improvements in credit quality, and a very low level of charge-offs this year in relation to previously expected losses. Total deposits grew approximately 1% in the quarter with certificates of deposit increasing $127 million or near 35% from September 30. We elected this quarter to raise some longer duration time deposits to provide additional funding for lending and improve our interest rate risk profile. I'd like to talk now about our mortgage banking business segment results. Over the course of 2014, we expanded our home loan center network by 11 offices and mortgage production personnel grew by 18%. As a result of our continued hiring of strong loan producers, and despite a 39% decrease in industry loan volume, our single family closed loan volume designated for sale was approximately the same as in 2013. Additionally, closed loans per loan officer improved each quarter of the year, totaling 3.8 loans per loan officer in the fourth quarter this year, compared to 2.9 loans per loan officer in the fourth quarter of last year. The most recent Mortgage Bankers Association monthly forecast anticipates total originations, including purchases and refinances to increase 7.2% in 2015 over the prior year. And housing starts are expected to increase by 12% next year. Mortgage interest rates have fallen in recent weeks and lenders are currently seen a substantial increase in refinancing applications. The MBA expects 49% of originations in the first quarter to be refinances, up from an estimated 38% in the third quarter and 46% in the fourth quarter of last year. In the fourth quarter, our refinances were lower than the national average, due to our stronger purchase mortgage market share. Closed loans were 32% refinances versus 38% of interest rate locks for the same period as more homeowners began taking advantage of the lower mortgage interest rates. In January, we've seen a dramatic increase in refinancing, which comprises 67% of our rate locks month-to-date. Through January 23, we have produced a fallout adjusted $546 million in rate loss. At this pace, we expect to set a new monthly record for the company. Of course, it is unclear how long is refinancing activity will last. The FHA recently announced a 50 basis point reduction in mortgage insurance premiums for new originations. This reduction goes into effect at the end of this month and will enable more people including first-time homebuyers to qualify for loans and reduce their monthly payments. We anticipate this will spur some additional level of refinancing of FHA loans for borrowers who currently have higher interest rates and higher insurance premiums. All-in-all, this time of year is usually quite challenging in the mortgage business, particularly in the Pacific Northwest where seasonality is a more significant factor. But with a low interest rates and this positive change from the FHA, we anticipate a better quarter than previously forecasted internally. How much better will depend on how long rates remain at or below these levels? Now, little bit about the segment results. Mortgage banking segment net income for the fourth quarter was $2.3 million, compared to $1.4 million in the third quarter. This increase in the quarter was primarily due to higher mortgage servicing income. Closed loan volume designated for sale was $1.33 billion, an increase of nearly 3% from the prior quarter and 72% above the fourth quarter of 2013. The combined pipeline of locks and closed loans held for sale was $891 million at yearend, compared to $974 million at September 30. Interest rate lock commitments totaled $1.17 billion for the quarter, 0.3% over the third quarter and 77% over the last quarter of 2013. The volume of closed loans designated for sales surpassed interest rate lock commitments by 14% this quarter, which negatively affects accounting earnings as a majority of mortgage revenue is recognized as interest lock. All majority of origination costs including commissions are recognized upon closing. If interest rate lock commitments during the fourth quarter would have equal closed loan volume, it would have resulted in approximately $4 million higher gain on loan origination sale revenue. Conversely of closed loan volume had been the same as interest rate lock commitments, pretax income would have been approximately $1.7 million higher, as a result of lower variable costs. Net gain on single family mortgage loan origination sale activities was $36.5 million in the quarter, essentially flat from the prior quarter and $13.2 million or 56% above the fourth quarter of 2013. The composite margin was 310 basis points in the quarter, a decrease of 6 basis points from the prior quarter. The decrease was due primarily to pricing competition and lower profit margins specifically on non-conforming jumbo mortgage loans, which comprised over 13% of interest rate lock commitments adjusted for fallout during the quarter. Single family mortgage servicing income was $9.3 million for the quarter, a $4 million increase over the prior quarter, primarily due to increases in the fair value of single family mortgage servicing rights, resulting from slower than expected long-term prepayments fees. Single family mortgage servicing fees were down $524,000 from the third quarter, while the portfolio of single family loans serviced for others grew to $11.2 billion from $10.6 billion at September 30. Segment non-interest expense was $47.6 million, an increase of $2.4 million from the third quarter. This was primarily due to higher commissions related to higher close loan production. We continue to focus on improving production efficiency in the quarter, and as a result our direct cost originated loan decreased by an additional 12 basis points in the quarter. We are looking forward to a very exciting 2015. This concludes my prepared remarks this morning. We appreciate your attention today. I'd be happy to answer any questions you have at this time.

[Operator:]

[Operator Instructions] The first question we have comes from Jeff Rulis of D.A. Davidson.

[Jeff Rulis:]

I guess, if you anticipate closing of the Simplicity deal at the end of February, when would you guess the back office conversion would be the timing on that?

[Mark Mason:]

We are currently scheduled to integrate their back office systems during the month of April, generally. Some of the personnel will leave on legal day one. Obviously, personnel like the Board of Directors and certain members of management who won't be continuing. The rest of the back office staff who is running their base systems will be with us, of course through integration and a little past, somewhere on the average of two to three months.

[Jeff Rulis:]

And could you remind me of either the cost savings target on Simplicity alone or I guess the efficiency ratio goal for the combined company?

[Mark Mason:]

The cost savings were approximately 35%, I believe, an annual run rate of roughly $9 million, I think. Most of that cost savings is personnel-related. I believe almost $7 million of that is personnel. Beyond that systems and real estate expenses related to the headquarters were the next two largest categories. The efficiency ratio targets for the company are in the mid to low 60% range a few quarters out. I mean, in 2016, we hope to reach those numbers with a fairly steady improvement over the period of time from then to now.

[Jeff Rulis:]

And then separately, just interested in the pipelines on the commercial and consumer loan growth for perhaps the full year?

[Mark Mason:]

Our growth continues to be targeted at this sort of net portfolio growth of a little more than 5% a quarter. Each quarter we put out a pretty substantial deck of additional investor information that has typically included pipeline information as of the end of that period. If you bear with me, I've got a draft of it. Let me see if I can pull up the current pipelines as of yearend. So the total -- I'm sorry. I don't have that number yet. I just have the September numbers. I don't have the total pipeline yet. I mean, it's been running generally at about 130% of production for the quarter, if you look across all of the groups. We expect pretty consistent contributions. If you look at the full year production in commitments by each of our major lines of business, that's basically the contributions we're expecting to the portfolio next year. The only differences really lie in prepayment speeds. Our construction prepayment speeds have been very, very fast, particularly in residential construction, which isn't a surprise, given the lack of housing inventory at least in our markets. So turnover continues to be a problem. I think for the full year, portfolio runoff is going to be somewhere between 10 and 15%, probably closer to 15% for the year, which is quite high. I mean, it makes our interest in growing the portfolio more challenging, but we expect that to continue at this pace.

[Jeff Rulis:]

So from the production side, at least anecdotally, you enter '15 on equal standing as you entered '14? Or do you feel like you've put more boots on the ground and more optimistic in '15 versus '14.

[Mark Mason:]

I would say, we're in substantially better position in terms of pipeline and capacity. 2014, if you look at the improvement over the quarters, really showed a maturing of some of these lines of business that had to be restarted, and the integration of the acquisitions we did last year. If you remember, we did two smaller commercial bank acquisitions that close in November of 2013. That integration all took place in the first and second quarters of '14. And so that all got smoothed out during the year and our commercial real estate business picked up a lot of momentum during the year. So I think that what you saw is a maturing of all of the lines of business. And that allowed us to reduce the amount of single family mortgage volume we were putting into the portfolio, allowed us to accelerate the change in composition of the portfolio. I think at one point during the year, 60% of the portfolio was still single-family mortgage. Now, that's down to 40% currently and falling. And so we go into 2013 not only with a better diversification and composition of the portfolio, but with substantially greater velocity.

[Operator:]

The next question we have comes from Russell Gunther of Macquarie.

[Russell Gunther:]

I just want to follow-up on the loan commentary. I appreciate the color you guys gave with regard to your outlook for commercial and consumer loans, and additionally, the color on the construction book and growth this quarter. The other commercial buckets witnessed some runoff quarter-on-quarter. I wonder if you could just give us some color as to the performance there?

[Mark Mason:]

Make sure I understand your question. A little more color on the performance?

[Russell Gunther:]

Sort of like the modest decline in commercial real estate multifamily C&I loans linked quarter.

[Mark Mason:]

Well, as I'm sure you know the competition for permanent lending in the multifamily spaces or at least in commercial real estate, the most competitive part of the market. And we have been less successful competitively in the last couple of quarters in the permanent loan area as we have been in the commercial area, though our success with respect to Fannie Mae lending has picked up during that period of time. So we're working on our pricing going forward to see if we can become a little more competitive. And that's caused some runoff in the multifamily area. And what was your question on construction? I didn't understand it.

[Russell Gunther:]

No. I appreciate the color you offered on what was accounting for the growth in the quarter. I was just, as I look at the other commercial loan buckets; there was just some modest runoff linked quarter. I mean, I think I hear you loud and clear that the target's still on track for the 5% quarter-on-quarter commercial growth. I was just looking for some color on the migration in the quarter.

[Mark Mason:]

Sure. And I'm sorry it's just a price competition that we've been less successful in the multifamily area. We still feel strongly that we're going to get the level of composition of contribution in that area going forward. As an example, we're in the process of building a small balance commercial real estate group, which will run the small balance CRE portfolio that we're acquiring from Simplicity. A substantial amount of that production will be sold, but some of that will go into the portfolio as well. So we're coming into 2015 with one more mature existing business lines and a little more capacity from some new business.

[Russell Gunther:]

Just a question on the margin. The expansion in the quarter is unique in bank land today, and you mentioned locking in longer duration CDs, so I'm just wondering if you could comment, do you think this earning asset remix can continue to drive expansion, maybe even if we just looked to the first quarter of '15 and if there's maybe additional room to lower the cost of funds as well?

[Mark Mason:]

Well, we have shared that we believe our margin was going to expand 10 basis points to 15 basis points next year, which is counterintuitive to most of the industry today. That is going to largely be a consequence of improving asset yields as we continue to change the composition of the loan portfolio, our cost of funds, and that improvement is through the end of next year, potentially. Now that, of course, assumes no substantial change in interest rates from the current levels. Our cost of funds, we expect to increase slightly from here, but given that expected increase in margin, we expect our asset yields to improve substantially more. And again, that's really from remixing.

[Russell Gunther:]

And just so that I understand your margin guidance, you're saying 10 basis points to 15 basis points of expansion. Is that from 4Q '14's 3.53% through the end of 4Q '15 or how should I think about that?

[Mark Mason:]

That's correct.

[Russell Gunther:]

And then lastly, I have a couple of ticky-tack questions on the income statement. You guys mentioned some non-core items, both benefits and expenses on the tax in the quarter. Can you just give us some color, sort of size up? Was there a net non-core impact or did those wash out and what we should look at for a tax rate going forward?

[Mark Mason:]

It is one of the things that was disappointing to us in the quarter that we had some true-ups and a little higher allocation to higher state tax jurisdictions than we had previously planned. Plus, we had a little lower levels of nontaxable interest income from lower levels of municipal bonds in the securities portfolio and so all of that contributed to a much higher effective rate for the fourth quarter. Going forward, we will be having more taxable income in higher tax jurisdictions like California. So we think an effective rate next year of about 34%.

[Cory Stewart:]

34% to 35%.

[Mark Mason:]

34% to 35% is probably appropriate. Not as high as the fourth quarter, but higher than 2014 as a whole.

[Cory Stewart:]

And we also had a balance in Q4 that was sizeable related to acquisitions.

[Mark Mason:]

Cory reminded me of one other matter. One negative aspect to doing acquisitions is the non-deductibility of some of our merger-related expenses. So while we may recognize those as expenses in the income statement, they may not be deductible for tax purposes, but are capitalizable for income tax purposes. And during the quarter and the year this year, obviously we had some level of that activity and we will have next year as well. So that also contributed to the higher effective rate.

[Russell Gunther:]

Just minor question. Just on the other non-interest income line, it looked like there was a small loss in the quarter. Any color there, something one-time in nature?

[Mark Mason:]

Another unusual, and at this point, clearly non-recurring item, you may remember earlier in the quarter we announced that we had identified an internal control weakness related to a hedging program on a loan program that the company had done between 2006 and 2008. In addressing the issues related to that situation, we elected to terminate all the related swaps, amortize the remaining marks on the loans and those loss is related to those swap terminations.

[Russell Gunther:]

And just what was that in aggregate? Was that just the $9 million or did that wash out some other income there?

[Mark Mason:]

No, those numbers are all pretty small. I mean its in the small hundreds of thousands of dollars.

[Operator:]

Next, we have Tim Coffey, FIG Partners.

[Tim Coffey:]

Some of the CDs that you locked in this quarter, what was the cost on those?

[Mark Mason:]

Let me ask Darrell van Amen, our Treasurer is with us this morning. Darrell, what would you say the cost of the new CDs was?

[Darrell van Amen:]

We actually had some pricing differential between the two different markets we were in, but primarily they were around 100 basis points, that we originated on mainland. So we had different pricing.

[Mark Mason:]

Those are the retail CDs. The institutional CDs --

[Darrell van Amen:]

And we didn't do much of those. They were very small. We cut those off in November and they were about 85 basis points

[Mark Mason:]

And the brokerage CDs?

[Darrell van Amen:]

But those aren't the duration stretching CDs. Those are about 35 basis points, but they were short-term.

[Mark Mason:]

But they are all in the CD bucket.

[Darrell van Amen:]

They are.

[Mark Mason:]

So what would you say the weighted average was?

[Darrell van Amen:]

The weighted average would have been something pretty close to about 65 basis points, because of the nature of the brokerage.

[Tim Coffey:]

And how long were those?

[Mark Mason:]

Well, there is a number of different durations. The retail CDs are all roughly in the one year to 15 month range.

[Darrell van Amen:]

15 month, yes.

[Mark Mason:]

The brokerage CDs are shorter.

[Darrell van Amen:]

Three months to six months.

[Mark Mason:]

Three months to six months.

[Tim Coffey:]

I mean do you feel like this is something you'll repeat again in forward quarters?

[Mark Mason:]

It's unclear. It really depends on our success in growing transaction accounts, obviously that's our preference. We took a look at the quarter and the year-to-date, coming into the year we had expected to raise substantially more CD money, but we were more successful with transaction accounts and core accounts than we expected. So it's going to depend on our success and raising core deposits. It's going to depend our success in growing the loan portfolio. And a great deal of it has to do with monitoring our non-core funding dependency. We try to keep our non-core or non-deposit funding to less than 30% of total funding and so we're constantly balancing all of those things.

[Tim Coffey:]

And then a question about the hedging activity. Do you feel that you're adequately hedged going into this first quarter given where the rates are and size of the of the MSR portfolio?

[Mark Mason:]

We always do. I mean, despite what some folks may think given the positive results that we fairly consistently show, we do not take a position on interest rates. We hedge both sides of the potential change equally. In fact, we hedge potential rate movements that we know of no other party who does. We hedge black swan-type spikes in rates that cost us money. We have just been quite good at dynamically managing that hedge and so our results have nearly always been positive. Remember, part of the reason for that though is we are long in these instruments, and so in a perfect world, we will still make money on the servicing hedge, because we're long in the instruments and these instruments have a carry or an earning rate. And so we kind of have a head start going into the quarter on the results.

[Operator:]

The next question we have comes from Paul Miller, FBR.

[Paul Miller:]

Can you talk a little bit about, we talked a little bit earlier this morning about this, but when do you think the bank can stand on its own two feet and start to really take over the earnings of the company? And what is your long-term goals with that also?

[Mark Mason:]

Well, upon the closing of the Simplicity acquisition, we believe that will change 2015 earnings to an expected more than 50% contribution from non-mortgage banking earnings, based upon on our internal numbers. And that also assumes a pretty significant mortgage banking earning year. So we think post Simplicity acquisition going forward, we should fairly consistently accept during maybe higher refinancing periods, have a majority of our earnings coming from non-mortgage banking or commercial consumer banking sources. I think the greater question is when will those standalone earnings provide a full basis for valuation of the company at levels at or above current valuation, when you think of typical bank earnings multiples? And I think we are approaching that point here in the next quarter or so, where beyond that if you're valuing the two segments separately, you should be able to get a reasonable commercial banking multiple out of the banking segment. And some much lower multiple on the mortgage banking earnings, understanding that those will always be valued at a lower multiple, because of their cyclicality. So I think that that point is coming soon, and the big change is going to be the Simplicity acquisition.

[Paul Miller:]

And then, what's the outlook for future M&A? Everybody knows that a lot of people want to sell two times the bank. You were able to find a descent deal at book. Those deals don't fall off the trees everyday. Are you going to continue to try to expand, now you got a foothold in California or you're just going to be looking up and down the West Coast?

[Mark Mason:]

Theoretically, we're looking at every major western market that we have a meaningful mortgage market share end. So we look at deals in Southern California, Northern California, Oregon, Washington, Idaho, Hawaii, and soon we'll start looking in places like Phoenix and Salt Lake City. As you say, there are only so many deals that can be done today that would be feasible and not materially dilutive at our current stock price. So until that changes, we are not going to be in the market for the more expensive typical good quality commercial bank deals. Hopefully that changes in the future, but doing now and then though, we continue to look at deals that will trade closer to book value. And there are still some institutions out there, for various individual reasons, who would trade down near those levels. So it's still possible, we'll be able to do some other transactions in the interim.

[Operator:]

The next question we have comes from Tim O'Brien Sandler of O'Neill & Partners.

[Tim OBrien:]

So just couple of follow-ups. So did you book any in the non-interest expense line any deal-related cost this quarter? I might not have seen that.

[Mark Mason:]

We did. In fact, I think in the first paragraph of the earnings release, we try to early on describe the magnitude.

[Tim OBrien:]

I was looking at the financial. So a question regarding first quarter with the deal potentially closing this quarter, with the lion's share of deal costs be recognized here at the end of this quarter and then a little clean up in the second quarter. Is that the way to look at it or is there going to be substantial related to conversion in the second quarter as well?

[Mark Mason:]

There will be material cost in this second quarter, because of the systems integration. If you looked at them, more than half will be in the first quarter, assuming a February closing, maybe two-thirds, my guys are saying here. But still a-third of those costs that are still pretty material. I mean, I believe its $18 million roughly of total deal cost. So $12 million of that likely is in the first quarter.

[Tim OBrien:]

Now, will some of that be carried by Simplicity of the $18 million or is it all, that's your share?

[Mark Mason:]

You know some of that is going to be taken by Simplicity pre-deal, so that reduces the net assets we buy. I don't think it's really a big number. Most of that is going to be recognized through our operating statement.

[Tim OBrien:]

And then that ratio that you mentioned that you monitor, which is non-core funding ratio below 30%?

[Mark Mason:]

Yes.

[Tim OBrien:]

Where is that right now? It must be pretty low, I'd imagine?

[Mark Mason:]

It's going to get lower when we complete the acquisition. At the end of '14, there was, I'd tell you what it was, 28%, this is pretty high. And that's due in part to the level of mortgage loans held for sale. That number varies a lot, depending upon how active we are in the mortgage business, because most of that non-core number is borrowings from the federal home loan bank that are very short-term utilized to fund the warehouse of loans held for sale.

[Tim OBrien:]

And then, as far as the question that Paul had about standalone earnings out of the non-mortgage bank, you said above 50% contribution to earnings. Is that something you thought was going to be realized in 2015? And is that a core number or is that more of 2016 idea?

[Mark Mason:]

No. That's 2015 based on our internal estimates and excluding acquisition-related expenses.

[Tim OBrien:]

And then another question for you on, I mean, your credits performance is excellent. As far as the reserve ratio is concerned at 106 at the end of the quarter, reserve build going forward on that idea, what are you thinking there?

[Mark Mason:]

Clearly, we're going to be providing going forward. The biggest reason the reserve today in terms of a coverage level may look lower. There is some other institutions has to do at the level of single-family mortgage in the portfolio. So as that composition declines, you may see a change in the coverage ratio. But it's all going to relate to our experience, what we see other peer institutions doing and our expected losses.

[Tim OBrien:]

But directionally you expect we're getting towards a bottom as far as kind of a baseline there? And it's more likely than not that given the credit cycle you're going to build from here that reserves.

[Mark Mason:]

Well, at lest we are going to be providing, right. And whether the coverage ratio goes up materially from here or not, it's kind of going to depend on credit performance and how the portfolio performs. Our internal expectations are that we will be providing each quarter going forward to the provision, probably an ever increasing number as the portfolio grows. To the extent, we don't experience charge-offs that could mitigate that, but it's very hard to grow the portfolio and not increase your allowance.

[Operator:]

Next, we have a follow-up from Jeff Rulis, D.A. Davidson.

[Jeff Rulis:]

So I had one quick follow-up. Could you update us on the asset liability sensitivity pre and post Simplicity?

[Mark Mason:]

First, in summary and then I'll let Darrell speak to maybe some details. Our sensitivity has actually improved pretty substantially this year by a couple of things that we've done. So today, we're in a very balanced position. That will be a negative, if rates rise quickly. In the event they don't, we're very well-positioned. Of course, no one expected rates to fall here recently and that's not great if you're asset sensitive. But we're in a pretty balanced position. Darrell, would you add anything to that?

[Darrell van Amen:]

No. We've actually looked at the Simplicity interest rate risk and compared it to ours and we done some modeling in that context. They have a large proportion of indeterminate deposits, which have a longer duration, which matches there loans. So they are actually not unlike us in terms of being having a relatively matched book. They have a very small securities portfolio. The one thing they do have, that's a little bit different than ours, is their FHLB advance, although small, are very long in duration. So that helps our duration on our liability side.

[Mark Mason:]

So on balance, we don't expect it to materially change our position.

[Darrell van Amen:]

No, I think they actually -- in fact, we don't expect that at all

[Jeff Rulis:]

And in terms of management going forward, you'd like to stay that balanced position or move to more asset sensitivity?

[Mark Mason:]

Well, we would love to improve the liability side of the balance sheet. Our constant goal is to grow our non-term deposits, which of course is a great improvement in sensitivity. On the asset side today about a third of our book is fixed in the loan portfolio. But we do have, not a lot of it is monthly adjusting, some of it is, not a lot of it. So the improvement would probably come from more lines of credit, more monthly adjusting assets. And we are growing that, if you look construction assets are a good example of great asset sensitive instruments. I'm not sure, how much we can change it quickly though. I mean we improve the liability side somewhat, but that's a long-term challenge. In the asset side, we are looking for diversity and some of that comes with shorter-term sensitivity, some doesn't. And so I think we're going to be probably in a balanced position like we are now going forward.

[Operator:]

Next we have a question from [ph] Joe Noel, Investor.

[Unidentified Analyst:]

I believe you said your tangible book value now was $19.39. I was wondering what the book value is?

[Mark Mason:]

I'm sorry, what?

[Unidentified Analyst:]

I believe you said, your tangible book value now were $19.39, so I was wondering what your book value is now?

[Mark Mason:]

The gross book value. Bear with me for a sec.

[Unidentified Analyst:]

It seems like you're trading, the stock was trading quite a bit below, maybe you guys would like for a buyout?

[Mark Mason:]

Well, I hope not at these levels. So the gross book value per share is in the earnings release on the first page of statistics on Page 9, it is $20.34 per share.

[Unidentified Analyst:]

Like you said earlier, you were looking for a companies trading near book value for a good buyout. Is there any chance, you guys might bought out yourself?

[Mark Mason:]

I think that would be a pretty poor price, given the forward outlook for this company. There are other companies, who have been less successful recently, who don't have asset growth or margin growth or businesses like the mortgage business that provide us additional non-interest income. We don't think at least at these levels with any reasonable premium that this will be a very good value for our shareholders.

[Unidentified Analyst:]

Is there any chance that you're reconsidering the reinstatement dividend any time soon?

[Mark Mason:]

Boy, we sure hope too. So I think I've made this comment when we talked about the acquisition of Simplicity. After stabilizing that acquisition, we are planning to revisit the issue of a regular quarterly dividend with our board, so that would be some time later his year.

[Operator:]

Well, at this time, we have no further questions. We'll go ahead and conclude the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks, gentlemen. End of Q&A

[Mark Mason:]

Thank you. Again, we appreciate your patience and attention today. Appreciate all the great questions. Look forward to talking to you next quarter.

[Operator:]

And we thank you, sir, and to the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.