HomeStreet Inc (HMST) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the HomeStreet's Second Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to HomeStreet's CEO, Mark Mason. Please go ahead.

Hello and thank you for joining us today for our second quarter 2013 earnings call. Before we begin, I'd like to remind you that our second quarter 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, the recording will be available at the same address approximately one hour after this call.

On this 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 different from expectations or that may cause us to deviate from our current plans are detailed in our SEC filings, including our quarterly report on Form 10-Q for the first quarter and our Annual Report on Form 10-K for 2012 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.

Our second quarter earnings improved from the first quarter of this year despite the negative impact of sharply rising interest rates on our mortgage banking business. HomeStreet reported net income of $12.1 million or $0.82 per diluted share for the quarter. Our pretax income was $17.9 million or a 9% increase over the prior quarter. Our return on average common shareholders' equity was 17.2% and return on average assets as 1.86% for the quarter. In the quarter we made solid progress toward our goal of diversifying our business. Our commercial and consumer banking segment achieved profitability in the quarter for the first time since 2008. And we recognized segment net income of $1.3 million.

To accelerate our diversification and growth, we recently agreed to acquire Fortune Bank, the Yakima National Bank and two retail deposit branches from AmericanWest Bank. These acquisitions will add approximately $220 million in loans and approximately $280 million in deposits. Beyond the customer relationships and new markets, the acquisitions of Fortune Bank and the Yakima National Bank bring two teams of seasoned community bankers and two talented executives, David Straus, current CEO of Fortune Bank, and Jeff Newgard, current CEO of Yakima National Bank. These talented executives have agreed to stay and help us build our franchise in Puget Sound and expand our business in Central and Eastern Washington. We anticipate that these acquisitions will close in the fourth quarter, subject to regulatory approval and the approval of the shareholders of each of these banks. David Straus and Jeff Newgard are both here with me this morning on the call and I'll ask them to say a few words later about these transactions.

HomeStreet also grew organically in the quarter, opening two mortgage-lending centers in Oregon and Hawaii and one new retail deposit branch in Seattle with another new deposit branch scheduled to open in the fall. In addition, I'm also pleased to announce that we are opening our first mortgage-lending center in the Bay area of Northern California. On July 25, our Board of Directors approved a cash dividend of $0.11 per common share payable on August 15 to the shareholders of record as of the close of business on August 5, 2013.

Net interest income was $17.4 million for the quarter, up $2.2 million or 14% from the first quarter. Our net interest margin on a tax equivalent basis increased to 3.10% from 2.81% in the first quarter of this year. The Company's net interest margin for the first quarter, excluding the impact of a $1.4 million prior-period interest expense correction, was actually 3.06%. The improvement from first quarter was primarily due to a decrease in cost of funds, partially offset by a decline in our yield on interest earning assets. Total average interest-earning assets increased to $2.32 billion at the end of the second quarter, up from $2.24 billion at the end of the prior quarter, primarily as a result of higher average balance of portfolio loans and loans held for sale.

Noninterest income was $58 million for the quarter, down $1.4 million or 2% from the prior quarter. This decrease was primarily due to lower mortgage origination and sale revenue and lower mortgage servicing income. Noninterest expense was $56.7 million, an increase of $913,000 from the first quarter. This is the result of increased mortgage loan production commissions and incentives related to higher closed loan production in the quarter as well as higher marketing and other general and administrative expenses related to the growth in retail deposit branches and increased mortgage and commercial loan production personnel, partially offset by a decrease and other real estate owned expenses.

The Company's income tax expense was $5.8 million for the quarter. Our effective income tax rate was 32.4% in the quarter compared to 20.8% for 2012. The prior-year rate reflects the benefit of the full reversal of deferred tax valuation allowances in the prior year. And in the second quarter, regulatory capital ratios for the bank increased to a Tier 1 leverage ratio of 11.89%, and a total risk-based capital ratio of 19.15%.

Now a little bit about the segments, in the second quarter we restructured our business segment reporting. We now report separately mortgage banking as a business segment and commercial and consumer banking as a business segment.

Mortgage banking results; the second quarter mortgage banking segment net income was $10.7 million, a 22% decrease from the first quarter of this year. For the first half of 2013, mortgage banking net income was $24.5 million, a 47% decrease from the first half of last year. During the quarter, interest rates increased significantly. At the end of the first quarter, the 10-year treasury yielded 1.85%. The 30-year mortgage rate was about 3.6%, and mortgage-backed securities yielded approximately 2.6%. As of the end of the second quarter, the 10-year treasury yield had risen to 2.49%, the 30-year mortgage rate was 4.5%, after having risen to as high as 4.6% during June, and mortgage-backed security yields were 3.32%. As rates rose during the quarter, regional mortgage application volume and refinance mortgage volume declined rapidly. Gain on sale margins also declined due to increased price competition for the remaining volume, in particular for purchase mortgages.

During this time, the purchase mortgage market became substantially more competitive as lenders tried to secure a reliable flow of purchase loan production. A sharp rise in rates put lenders, including HomeStreet, in a position where price competition and mortgage compression on purchase mortgages was being substantially offset by higher margins on refinancing and government mortgages. This margin mix imbalance has largely come back into balance in July with lenders increasing their profit margin substantially on purchase mortgages to fit the new market composition of volume.

In addition, as the consequence of recent changes to the FHA mortgage insurance program, many borrowers who had previously financed using FHA mortgages instead chose a conventional loan with private mortgage insurance. This resulted last quarter in a decline in FHA loan volume, further impacting the gain on sale margins in the quarter since FHA loans have historically had substantially higher profit margins on their origination and sale. This condition has also come back somewhat in the month of July to-date. We've long anticipated and discussed the eventual end of the most recent refinancing bubble and the related return of profit margins to more normalized levels. Our strategy to mitigate the negative impact of this transition involves continued expansion of our retail origination system and focus on the purchase mortgage market. We believe this strategy will allow us to remain profitable and provide an appropriate return at these lower industry volume and profit levels.

In the second quarter, purchase mortgages increased to 59% of closed loan volume, up from 37% in the first quarter. And I'm proud to report that HomeStreet is now the Number One ranking originator by volume of purchased mortgages in the Puget Sound region, our core market, based upon combined results for HomeStreet and loans we buy from our affiliate Windermere Mortgage Services. As a part of our purchase mortgage focus, we provide dedicated marketing support to new home-builders in our markets. These services include special pricing, long-term locks, and ongoing follow up with prospective buyers. 19% of our purchase mortgage closed loan volume in the second quarter on direct originations was from new home construction. Purchase mortgages made up 59% of total interest rates lock commitments for the quarter compared to 50% in the prior quarter. This trend was even more apparent in the latter part of the quarter with purchase mortgages representing 74% of total interest rates lock commitments in June. And for the month of July through last Friday, 80% of locks this month were for purchases.

Second quarter single family mortgage origination lock commitments, net of estimated fallout, totaled $1.42 billion, an increase of 37% from the prior quarter and 9% over the same period last year, reflecting both the industry increase in purchase mortgage origination activity and the continued expansion of our mortgage production personnel, which grew by 13 people or 3.5% this quarter. Single family closed loans designated for sale totaled $1.3 billion in the quarter, up nearly 10% from the first quarter and 22% over the same period last year. At June 30, the combined pipeline of interest rate lock commitments, net of estimated fallout and mortgage loans held for sale, was $1.13 billion compared to $910 million at the end of the first quarter. Government insured or guaranteed mortgages were 23% of closed loan volume for the second quarter compared to 25% in the first quarter.

Net gain on mortgage origination and sales activities was $52 million, in line with the first quarter of this year and 13% over this period last year. It should be noted that our net gain on mortgage loan origination and sale activities for the first quarter of this year included an increase of $4.3 million related to a change in the application of our methodology used to evaluate interest rate lock commitment. Composite margin for the second quarter was 380 basis points, down from 461 basis points in the first quarter. Given the decline in industry volume and ongoing competition for purchase volume, we anticipate our composite margin declining to 325 basis points to 350 basis points in the third quarter.

Single-family mortgage servicing income of $1.9 million in the second quarter of 2013 decreased $883,000 or 32% from the first quarter of this year and $4.9 million or 72% from the second quarter of last year. The decrease from the first quarter was primarily driven by higher decay rates in the quarter on the Company's single-family mortgage servicing rights, resulting from higher prepayments in the quarter and shorter anticipated remaining lives as well as changes in the FHA mortgage insurance program causing these borrowers to refinance into conventional mortgages. Single-family mortgage servicing fees collected in the second quarter of 2013 increased $421,000 or 6% from the first quarter of this year, resulting from growth in the portfolio single-family loan serviced for others, which increased to $10.4 billion at quarter end, compared to $9.7 billion at the end of the first quarter. At June 30, the value of our single-family mortgage servicing rights represented 123 basis points on the outstanding principal balance of single-family loan serviced for others compared to 103 basis points in the first quarter.

Commercial and consumer banking results. As I mentioned earlier, our commercial and consumer banking segment was profitable in the second quarter, with net income of $1.3 million compared to a net loss of $2.9 million in the prior quarter. For the first six months of this year, this segment had a net loss of $1.6 million compared to a net loss of $8 million for first half of last year. Net loans held for investment in the commercial and consumer banking segment were $1.4 billion at the end of the second quarter, an increase of $57 million or 4% from end of the prior-quarter and an increase of $107 million or 8% for the first half of last year. New loan commitments totaled $211 million for the second quarter, an increase of 84% over the first quarter. This increase was partially offset by a decrease in commercial real estate loans held for investment, as unscheduled pay-offs were greater than loan originations during the quarter.

Credit quality continues to improve. Classified assets declined to 2.7% of total assets at June 30, a decrease of $15 million or 17% from 3.6% of total assets at the end of the first quarter. Non-performing assets fell to 1.5% of total assets at the end of quarter, decreasing some $12 million or 22.6% from the end of the first quarter. Non-accrual loans were $30 million at the end of quarter, down $32 million from the end of first quarter. OREO balances were $12 million at June 30, declining almost $10 million in the quarter, primarily as a result of the sale of some commercial real estate properties.

Total delinquent loans decreased to $88 million in the second quarter from $93 million at the end of the first quarter. Excluding FHA insured and Department of Veterans' Affairs-guaranteed single family loans, delinquent loans declined to $34 million or 2.5% of the balance of total loans excluding these insured or guaranteed loans. The allowance for loan losses as a percent of loans held for investment declined to 1.92% of total loans at June 30 compared to 2.05% at March 31, this decline reflecting the improved credit quality of the our loan portfolio. We recorded a provision for credit losses of $400,000 for the second quarter with net charge-offs of just over $1 million, approximately $500,000 of which represented the charge-off of previously-established specific reserves.

Deposit balances were $1.96 billion at the end of the quarter as compared to $1.93 billion at the end of the first quarter. Certificates of deposit decreased $120 million or 23% from the prior quarter as a result of our continuing to manage down these higher-cost deposits. We've successfully replace them with transaction and savings deposits, which increased $167 million over the quarter and now comprise 68% of total deposits, up from 60% at March 31. As a result of the changes in composition, the average cost of deposits in the second quarter declined to 51 basis points from 74 basis points in the prior quarter and we anticipate the cost of deposits to fall to between 42 basis points and 45 basis points in the third quarter.

I'd like to spend a few minutes on the details of the two potential bank acquisitions we announced at the end of last week. On July 26th, we entered into separate merger agreements; one with Fortune Bank and the other YNB Financial, the holding company for Yakima National Bank.

Fortune Bank is a $141 million asset, Washington State chartered commercial bank, specializing in business banking and SBA lending with two branches in Seattle and Bellevue. The Yakima National Bank is a $125 million asset National Banking Association with four retail bank branches in the Central and Eastern Washington cities of Yakima, Selah, Sunnyside and Kennewick. Both of these institutions share the common qualities of strong leadership, exceptional customer service, and superior asset quality. We have provided investors with a detailed presentation on the business rationale, key transaction metrics, including valuation assumptions, information on the individual and combined loan and deposit portfolios and pro-forma combined capital ratios. This presentation was furnished under a Form 8-K last Friday to the SEC. It is available in the News and Market Data section of the Investor Information Section of our website at ir.homestreet.com. I encourage listeners on the call today to make reference to that presentation during this discussion.

We are acquiring these institutions for cash and as such we believe these transactions represent an efficient utilization of our capital. Today, these institutions have more cash on their balance sheets than the total consideration to be paid, which allows us to acquire these companies without issuing stock or increasing our borrowings. Each of these transactions contributes toward our strategy objectives of business diversification and growth of our commercial and consumer banking segment. These acquisitions allow us to expand our commercial banking market share in the Puget Sound region and expand our commercial and consumer banking market to Central and Eastern Washington. Specifically, these mergers will help diversify our loan portfolio, lower our funding costs, and increase our operating efficiency. We believe we'll bring substantial new opportunities to serve the customers of each of these institutions, not only can we provide substantially higher lending limits, but they will have the benefit of a broader menu of lending, deposit, investment and risk management products.

In the Fortune Bank transaction, we are paying total consideration of $27 million at $10.25 per share. This purchase price represents a multiple of 1.45 times their March 31, 2013 tangible book value. We anticipate this acquisition will provide us an internal rate of return well in excess of 15% and we estimate this merger to be 8.3% accretive to earnings per share next year, excluding a one-time transaction costs. We expect this transaction will be 2.8% dilutive to tangible book value per share and the earn-back period on this dilution is estimated at approximately three years on incremental earnings. We anticipate annual operating cost savings of approximately $3.4 million or 53% of Fortune Bank's estimated 2014 noninterest expense. This high level of expected cost savings is possible as a result of planned consolidation of both the Fortune Bank existing branches into existing HomeStreet Bank branches in downtown Seattle and Bellevue. We anticipate one-time transaction in restructuring charges of approximately $4.2 million to be incurred in the fourth quarter of this year and the first quarter of next year.

And in the Yakima National Bank transaction, we are paying total consideration of $10.3 million or $45 per share. This purchase price represents a multiple of 1.3 times March 31, 2013 tangible book value. We anticipate this acquisition will provide us an internal rate of return in excess of 15% and be 4% accretive to earnings per share in 2014, again excluding one-time transaction costs. We estimate that this transaction will be 1.2% dilutive to tangible book value per share and the earn-back period on this dilution is estimated at approximately 2.9 years on incremental earnings. We anticipate annual operating costs savings of approximately $1.6 million or 31% of the Yakima National Bank's estimate 2014 noninterest expense. The level of expected cost savings in this transaction is lower than that anticipated in the Fortune Bank transaction as we do not anticipate closing any of the Yakima National Bank branches. We anticipate one-time transaction and restructuring charges of $2.3 million to be incurred in the fourth quarter of this year and the first quarter of next year.

The consummation of these transactions is contingent among other things on regulatory and shareholder approvals. At this time, I would like to ask David Straus of Fortune Bank and then Jeff Newgard of Yakima National Bank to share their thoughts on these proposed mergers. David?

Thank you, Mark. Thank you. We're really excited about this merger. We'll have more products to sell to our customers and we can fully utilize our experienced people to develop deeper relationships. We can sell more products to the existing customers. All of our relationship officers have over 10 years of experience, most of them, many more than that. And they're used to dealing with larger deals and we'll be able to do that as soon as we close the merger. We've been -- so they've been a little limited and they feel like now they'll be able to do more.

Mark and I have been working on this deal for a little while and we've developed a great relationship. I think that together with Jeff Newgard here at Yakima National Bank, we can continue to build a great business banking group or commercial banking group at HomeStreet. When we founded Fortune Bank, it was the biggest Seattle-based bank for business. This accelerates our vision and will promise more opportunity for our people. HomeStreet's large enough to service most businesses and small enough to do it in a customized, friendly way. Well, back to you, Mark.

Thanks Dave. Maybe one question, many of your people have been with you for a long time through a number of institutions. Maybe you can make a couple of comments.

Yes, we have quite a few people that go back to the Pacific Northwest Bank. And then I have people that go back as far as First Interstate and Home National Bank and other places where I've worked. So, all of the people that we have are people I've known pretty well. There is a few that I've -- there's one or two I've picked up at Wells Fargo, when I was there for two and half years or so. It's a good group of people and very experienced on the commercial side and like I said, they're all excited that they can make bigger deals now and have more products to sell.

Thanks Dave. Jeff?

Yes. We are excited to become a part of the HomeStreet organization. I'm confident that our team will be a great fit with the HomeStreet team. The increased lending limits will be very beneficial. We grew loans 14% in 2012 and already 14% year-to-date and this is with the $1.5 million lending limit. I am excited by the prospect of what we can do with limits exceeding $20 million. My team is excited; they have more a vast and robust product offering. And as I look at the potential, I am personally excited by not only what my team can handle with organic growth, but the acquisition opportunities that exist on the East side of the state. I expect all of these activities to translate to increased earnings and accretive to earnings.

Thanks Jeff. Jeff is quite an accomplished young man. He currently serves as a Chairman of the Community Bankers of Washington, a trade association here and we're happy to have him.

In summary, we are as a company where we expected to be when we took the Company public early last year. We knew at the time that historically low interest rates and high profit margins in the mortgage origination business would not last forever and that we would have to work quickly to rebuild the historically strong profitability in our commercial and our consumer banking businesses. During this time, we've been opportunistic in utilizing a portion of our excess earnings to invest in new lending personnel, new branches and marketing. We've also grown the origination capacity in our mortgage banking business. The investment and growth in our mortgage banking business has already provided a substantial return. We're just now beginning to see the benefits of our investment in our commercial and consumer banking businesses. We're now in transition from a company whose earnings are dominated by mortgage banking earnings to a diversified company with significant contributions from mortgage banking and traditional commercial and consumer banking. This transition will take some time; however, transactions like the acquisitions recently announced will accelerate this process.

Given these conditions, we anticipate that the third quarter will be a transitional quarter for us and hopefully will be a low point for earnings based upon what we know today with lower mortgage gain on sale margins not yet offset by increases in commercial and consumer banking earnings. Going forward, we anticipate that over the coming quarters the growth of our commercial and consumer loan portfolio and seasoning of new deposit branches will produce the expected levels of bank earnings consistent with our peers in these businesses. The successful integration of acquisitions will accelerate this transition. Of course, achievement of these goals is highly dependent on our ability to execute our business plan, the direction of interest rates and the health of the overall economy among other important factors.

I'd now like to say a couple of words about the local economy and then we'd be happy to take your questions. In the Puget Sound region, HomeStreet's primary end-market, unemployment was 5.4% in May, with King County down to 4.3%. Job creation continues to be strong and is up over 2% from a year-ago, even with recent declines in certain sectors such as aerospace. Regional employment growth is expected to slow over the next two years due in part to announced Boeing layoffs and tightening in state jobs. Though at the same time, Amazon will be hiring, increasing demand for apartments and single-family dwellings. This region is fortunate to have several very strong employers in the area, spanning a range of industries. Median home prices continue to rise, 12% year-over-year in the Puget Sound region and over 10% in the Portland metropolitan market.

While active listings for single-family homes in our core market area of King, Snohomish and Pierce counties are down 14% year-over-year, new listings were up in June, nearly 25% over last June, which suggests that the shortage in inventory is beginning to turn. Closed sales are up in the three county area by 19% and in Portland by 12% year-over-year. Apartment investment in the Puget Sound region remained strong. According to Dupree and Scott, there were 145 sales in the first six months of 2013, up 20% over the same period last year and the average price per unit was $137,000 compared to $127,000 per unit in the same period last year. A shortage of condos regionally has created an opportunity for us as well. New condominium projects are under development, many at the upper end of market prices.

I'd like to thank you for your attention during these very long prepared remarks. We would now be happy to take your questions.

(Operator Instructions). Paul Miller, FBR.

Yes, thank you very much. Mark, on your asset quality, can you actually color, I mean your ratios or your, your total cost for the assets dropped 18%, your OREO dropped almost by 50%, was that one or two properties you were able to clear out? Is there any other big property that could be moved out over the next quarter?

The drop in classified assets is in part OREO, but in part seasoning modifications that we've been able to upgrade. That's a more substantial impact on classified assets. Non-performers, combination of things mostly getting foreclosures through the single family pipeline and into OREO and sold. Once we get (inaudible) of them today, they don't last very long. They average about 90 days in inventory, and we were able to sell a few of the remaining more significant commercial properties. Our last remaining properties and we only have three commercial properties left, two of which are under contract for sale this quarter. The third is a piece of commercial real estate that -- undeveloped commercial land that we have been processing some entitlement changes to. Those were just approved by the city that the land is in, and we have that property now on a marketing plan, not sure we can liquidate it this quarter, but in any event, we expect to move that by the end of this year. So, we expect to see the non-performing numbers fall well below 1% by year-end and classified assets perhaps to below 2%.

Okay. And then on the acquisition front, the cash deal, is that -- when you do deals this size, I mean, could we -- is that going to be your primary form of paying for in cash?

Where we can, because we do still have pretty substantial capital cushions. Even assuming the Basel III standards, we have pretty substantial cushion still, even with a negative impact on those standards on our ratios. So, where possible, the best use of our capital is to reinvest in those things that we think will have a substantial return. We hope to continue paying a dividend and some day to increase it hopefully, but we think the capital is better used more efficiently by doing deals like this.

And you're not -- is it just for -- are you looking for banks or commercial -- you are looking for mainly commercial banks, you're not just looking for depositories or branches like -- you've seen some of the companies in your market go after just branches?

We've looked at some of the branch deals, and we've made offers on some of them. For us, if we can find a branch like the last two that we've -- these two that we're buying from AmericanWest Bank, that exist in markets that we're going to be opening de novo in any way, it's a great jump start because we miss that whole loss period of getting to breakeven. But it's also an opportunity -- there was a large branch sale recently near us that had we been able to participate in that, would have opened a new market. And so, if we have an opportunity to buy quality deposits in a market that we would ultimately like to have banking in where we already have a large mortgage presence, that's a potential for us to simply form our own banking operation. So, we would look at them definitely, but we would sure prefer getting assets other than cash at the same time.

And then on the mortgage bank, you talked about -- everybody knows rates are going up, refis are down, purchases are still not recovering as fast as we would like to see. Can you just add some color, I mean we are hearing that some people are qualified for a mortgage before the rate hike, don't qualify in the purchase market which has been somewhat disruptive?

That can happen. If they didn't lock their rate, right -- if they didn't apply or lock their rate, but I think we have to look at the absolute level of interest rates. Rates today are approximately where they were in the first half of 2011, and we were pretty happy with those rates. And we didn't think they could go lower. So when you look at the true affordability, it's much higher than it was prior to the recession. From a debt ratio standpoint, the problem is that the underwriting has, for many people, taken people with inconsistent incomes or non-W2 earners or people that for whom the underwriting has gotten substantially stricter, it's harder

to get a loan. For people who are marginal on the very lowest of the interest rates, of course, they won't qualify today. But that's not the largest part of the market.

Is there still a shortage -- I don't know if you mentioned it in the call and you usually do, is there still a shortage of homes, holding back to market?

They are, though the shortage is not quite as acute. Today in Greater Seattle, we have about two months of inventory. Normal equilibrium is about six months of inventory. And I think the last quarter we spoke about having only one month of inventory. So, while the relative inventory has doubled, it's only a third of what you might like to see in a normal liquid market, so it's still tight.

Okay, thanks a lot Mark.

Thanks Paul.

Ryan Zacharia, JAM.

Thanks Mark. Just a question on the $43 million of non-interest expense. Does the 92% of combined variable and semi-variable expenses still hold with that number?

It does, though I think that the semi-variable costs in the near-term are almost fixed and that we're growing, right. So, as we grow originations, we are still hiring, even in the semi-variable area, the fulfillment area. So, for months that we might have lower volume or higher volume, those semi-variable costs will have larger or lesser impact on margins. And so, this would be much more finite once the new growth is a smaller percentage of the total, and each period that we grow the total head count and total originations, our incremental efficiency becomes less.

Maybe that's a better way to think about it. Right now, we have a certain amount of inefficiency in those numbers as a consequence of going into new markets, both on the completely variable side when you are paying guarantees and commissions, right -- fixed costs for that four-month period and on the fulfillment side, when you are hiring -- opening new fulfillment offices and hiring new underwriters, (inaudible) funders, it takes some a couple months to get up to speed to full efficiency on our program or software or workflow and things like that. So, recently those numbers have been more fixed.

So, how much of the $43 million do you think was related to the guarantees?

We think it was about 4% or 5% of the total compensation in the quarter.

And how much of the $43 million is related to the servicing segment?

I don't have that number in front of me, but we can follow up on that with you.

Okay. And then just on the accretion numbers on the transactions. Are those relative to your internal estimates for 2014 or the Street estimates?

Those are based upon our internal estimates.

And what are composite margins looking like through July?

Actually stronger than the numbers that I quoted for a range for the quarter. All of the originators, including us, got caught with a structure that didn't work when we refinances fell so quickly, and it's taken three or four weeks for everyone to readjust margins, put more profit margin back in the purchase mortgages so that the total revenue can make more sense. So, they are running above that 325 to 350 number by a little bit. But we think that at least from what we see today in this quarter, we expect to be in that 325, 350 composite range.

And just back to the acquisitions, what's the phasing on the cost savings, I am not sure if you provided that?

Over the first six months, the one-time costs are going to occur almost evenly between the two quarters, between the fourth quarter and the first quarter, and the cost savings should happen really in the first half of next year.

Okay, thanks a lot.

Thank you.

(Operator Instructions). Tim Coffey, FIG Partners.

Good morning, Mark.

Good morning, Tim.

Can you give an idea on what the trends you're seeing in fall-out rates and how that's impacting or might impact your production activities in the coming quarter?

We really haven't seen much variation in our fall-out rates. They are pretty consistent. I mean they are different between refinancing loans and purchase loans. Purchase loans with property have a relatively low fall-out rate, once we've qualified the borrowers, if they are committed to the transactions. Fall-out rates on refinancing loans are higher because periodically you have taken application and expect to close and a competitor will offer a better deal and you'll never close that loan or rates will rise and the loan doesn't lock and maybe have qualification problems. But I actually expect our fall-out rates to decline with an increase in purchase volume; that is to say, decline from lock date. Before the lock date when you have pre-qualifications and you have people shopping for properties, those closing rates are much lower because many times in today's market people can't find a property they like.

And then the there is a -- I'm sorry I missed this, is there a carryover from the drop in applications experience in the second quarter to the current quarter?

Carryover of application activity?

Lower application.

There is. I mean clearly for refinancing, that volume is substantially down. I think I quoted a month to date lock number of 18% for purchases so far this month. So, you can the volume of refinance activity is falling off very sharply.

And then I was wondering what went on with multi-family lending this quarter? Looks like there is a big drop there.

We had some pay-offs in the quarter unfortunately so that our origination activity didn't kick pace the pay-offs. You will see that activity grow materially in the third quarter. In the second quarter, we did enter into a number of commitments on the multi-family side on construction some real quality projects here in the Seattle metro area and of course, those loans, the draw pattern is much slower than a permit loan or refinancing loan. So, over the third and fourth quarters, we'll see those balances come back pretty strongly. There's a very active multi-family construction market here in Seattle, and while we worry a little bit about a potential bubble forming given the strength of employment here, things just look to be imbalanced at the current time.

Okay. Thanks for taking my questions.

Thank you Tim. Could you pull for questions one more time operator?

(Operator Instructions). We have a follow-up question from Paul Miller at FBR.

Hey Mark, the DUS license, I got a couple questions about that this morning. Where we would -- I know you did some revamping of the product. Are you still enthusiastic about that product adding value down the road?

We believe so. Of course, the uncertainty surrounding Fannie and Freddie and their franchises doesn't help the forward look. Hopefully, if those entities are restructured that will -- that business would be spun out privately, but we don't know yet. We still see that as a great product line. Unfortunately, on the smaller end, the small balance loans, many of the national banks have more competitive products in the five-year range. And in the 10-year level, the insurance companies have been really significant competition. So, the sweet spot for Fannie today is really around the seven-year range, maybe the 10-year as well.

We have been trying to add personnel that are specialists in that business for some time and we hope to be able to announce some of that going forward. But we haven't yet hit our stride there like we'd hope. The general commercial business is great and a lot of these construction, or bridge loans that we've committed to in the last couple of quarters, they will ultimately become Fannie Mae loans. These are borrowers who today are Fannie Mae borrowers and the projected disposition of those projects post-construction or post-repositioning is Fannie Mae. So, we are still looking forward to materially increasing this. We just haven't been able to produce it yet.

Okay, thank you very much.

Thank you, Paul.

We show no further questions at this time. Would you like to make any closing remarks?

I would. Thank you. I appreciate the patience for being on the call today and the great questions. We look forward to talking to you again next quarter. Thank you.

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