Mechanics Bancorp (MCHB) 2017 Q4 法說會逐字稿

Good day, and welcome to the HomeStreet, Inc. Year-end 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mark Mason, Chairman and Chief Executive Officer. Please go ahead.

Hello, and thank you for joining us for our Year-end and Fourth Quarter 2017 Earnings Call. Before we begin, I'd like to remind you that our detailed earnings release was furnished yesterday to the SEC on Form 8-K and is available on our website at ir.homestreet.com under the News & Market Data link. In addition, a recording and a transcript of this call will be available at the same address.

On today's call, we will make some forward-looking statements. Any statement that isn't a description of historical fact is probably forward-looking and is subject to many risks and uncertainties. Our actual performance may fall short of our expectations or we may take actions different from those we currently anticipate. Those factors include conditions affecting the mortgage markets, such as changes in interest rates and housing supply that affect the demand for our mortgages and the impact on 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, may be 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 just a moment, Mark will present our financial results. But first, I'd like to give an update on results of operations and review our progress in executing our business strategy.

In 2017, we continued executing our growth and diversification strategy toward our goal of building a regional bank with representation in major coastal markets in the Western United States. And I'm very proud of the progress our dedicated HomeStreet management and employees have made in such a short period of time. I'm happy to report net income for the fourth quarter of $34.9 million or $1.29 per diluted share, which included a $23.3 million benefit from lower corporate tax rates as a result of the signing of the Tax Cuts and Jobs Act in December. Excluding the impact of tax reform, core net income for the fourth quarter was $11.5 million or $0.42 per diluted share.

Highlighting our progress last year, our Commercial and Consumer Banking segment achieved record net income, increasing by 32% from $35.4 million in 2016 to $46.6 million in 2017, excluding the impact of tax reform and acquisition-related expenses. We accomplished this growth organically without the benefit of a whole bank acquisition during 2017. Our acquisitions of the Yakima National Bank and Fortune Bank in 2013, Simplicity Bank in 2015 and Orange County Business Bank and the Bank of Oswego in 2016 contributed to these accomplishments. These acquisitions provided us with new markets, customers, product lines and employees that made our success in 2017 possible. The Commercial and Consumer Banking segment finished the second half of 2017 with an efficiency ratio of 65% compared to the first half's 72%. We expect this trend of decrease in the efficiency ratio to continue in 2018 and beyond.

To support our growth in 2017, we opened 3 de novo retail deposit branches in California and Washington. We also acquired one retail deposit branch in California. Despite our significant growth since our IPO, we have conservatively managed the amount of credit risk we assumed. This approach, while resulting in somewhat lower asset yields and others, has allowed us to produce superior asset quality metrics as we have shown to date. We finished the year with a ratio of nonperforming assets to total assets of just 23 basis points, down from the third quarter's level of 28 basis points, representing our lowest absolute and relative levels of problem assets since 2006.

Our early warning credit indicators continue to reflect strong fundamentals in all of our markets, which is not a surprise, given we do business in some of the strongest markets in the United States today. Job creation, unemployment, commercial and residential development activity and inflation, vacancies, cap rates and all of the leading indicators of economic activity reflect strong growing economies in our primary markets. Additionally, we recorded $3.1 million of net credit recoveries during 2017, reflecting the strength of our markets and the solid problem asset mitigation strategies we employed during the recession. We don't anticipate these recovery levels are sustainable. And while we anticipate potential future recoveries, we expect loan loss provisions to normalize going forward.

Given the increased price expectations of bank sellers over the past year, we were not able to complete any whole bank acquisitions last year. And while we are open to future acquisitions, we're focused on optimizing our investments in current markets and products emphasizing the profitable growth and diversification of our business. We are planning to open 3 additional retail deposit branches in early 2018.

For some time now, we have discussed the low levels of new and retail loan inventory in many of our major markets and the negative impact of this supply-demand imbalance on our mortgage originations. The strong west coast economies, the major markets in which we operate, are continuing to produce above-average job and population growth, which, in turn, is causing a shortage of new and resale housing and, in turn, lower purchase mortgage originations. These conditions, along with the seasonal slowdown in home-buying activity and lower demand for refinanced mortgages in the current rate environment, have continued to adversely impact the profitability of our Mortgage Banking segment. We still do not see any near-term catalyst that would result in meaningful improvement in new or resale home inventories.

Accordingly, to improve operational efficiency and overall profitability in the second and third quarters of 2017, we took meaningful steps to restructure the capacity, cost structure and management of our mortgage origination business. As a result, direct origination expenses are meaningfully lower in the fourth quarter, and the implementation of our new loan origination system during 2017 created opportunities for additional operating efficiencies going forward. We anticipate these actions and our focus on optimizing our Mortgage Banking capacity within our existing geographic footprint should result in continuing improvement in our Mortgage Banking results, subject to the cyclical and seasonal challenges of managing this line of business.

Our Mortgage Banking segment has been an important part of HomeStreet's success, and without it, we could not have produced the earnings and capital required to grow and diversify our business to this point. Mortgage Banking will continue to be an important contributor to our success going forward. Our retail focus, broad product mix and competitive pricing continue to attract some of the best retail originators in our markets, and reinforce our position as one of the leading mortgage lenders in the West.

Lastly, I'm sure you're aware of recent SEC filings made by Blue Lion Capital and its principal, Charles Griege, seeking representation on our Board of Directors and suggesting changes to our strategy on operations. After meeting with Mr. Griege and discussing his views on our business strategy and his qualifications as a director, the board unanimously decided to decline Mr. Griege's request to join our board. The board concluded the issues of greatest concern to Mr. Griege are best addressed with the company's current strategic plan, which has, thus far, produced extraordinary growth, diversification and shareholder value since our IPO in 2012 and transformed HomeStreet from a troubled thrift into a regional community bank with a diversified array of products and services doing business in the best markets in the nation.

As with other shareholders, we continue to offer to engage with Mr. Griege regarding his ideas for maximizing shareholder value. The board continues to welcome shareholder feedback, both from Blue Lion and from our broader shareholder base. However, in anticipation of a possible proxy contest, we're not going to comment further or take any questions on this matter on this call.

And now, I'll turn it over to Mark, who will share the details of our financial results.

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 2 operating segments.

Regarding our consolidated results, net income for the fourth quarter was $34.9 million or $1.29 per diluted share compared to $13.8 million or $0.51 per diluted share for the third quarter of '17. Included in net income for the fourth quarter was the previously disclosed $23.3 million tax benefit resulting from the lowering of the corporate tax rate to 21% with the signing of the Tax Cuts and Jobs Act in December '17. This $23.3 million tax benefit was the net result of a $4.2 million tax expense recognized in our Commercial and Consumer Banking segment, as this segment was in a net deferred tax asset position, and a $27.5 million tax benefit recognized in our Mortgage Banking segment, as this segment was in a net deferred tax liability position at year-end.

Excluding the impact of tax reform, restructuring charges and acquisition-related expenses, core net income for the fourth quarter was $11.5 million or $0.42 per diluted share compared to core net income of $16.6 million or $0.61 per diluted share for the third quarter of '17. The decrease in core net income from the prior quarter was primarily due to lower noninterest income, largely from lower net gain on lower origination and sale activities in our Mortgage Banking segment somewhat offset by higher net interest income in our Commercial and Consumer Banking segment and lower noninterest expenses.

Included in core net income for the quarter was a $399,000 net loss on the sale of investment securities. This net loss was primarily from the sale of securities acquired in previous mergers, the structure of which was not consistent with our current securities strategy, and we recognized the associated losses prior to the new tax rate taking effect.

Net interest income increased by $239,000 to $51.1 million in the fourth quarter from $50.8 million in the third quarter. This increase in net interest income is primarily due to the higher balances of loans held for investment in our Commercial and Consumer Banking segment.

Our fourth quarter net interest margin of 3.33% decreased 7 basis points from 3.40% in the third quarter. This decrease in net interest margin is primarily due to an increase in the cost of interest-bearing liabilities, specifically the cost of Federal Home Loan Bank advances, which rose ahead of the December fed funds rate increase by the Federal Reserve.

Noninterest expense, excluding the impact of restructuring and acquisition-related expenses, decreased from $110.5 million in the third quarter of '17 to $107 million in the fourth quarter of '17. This decrease in noninterest expense was primarily from our Mortgage Banking segment due to a lower base salary expense run rate after the recent restructuring of this segment and from lower Mortgage Banking commissions.

I'll now discuss some key points regarding our Commercial and Consumer Banking segment results. Commercial and Consumer Banking segment core net income was $13.6 million in the fourth quarter compared to core net income of $14.2 million in the third quarter. Segment noninterest income increased quarter-to-quarter to $12.7 million from $12 million. This increase was primarily due to higher gains from commercial real estate loan sales, partially offset by lower commercial loan prepayment fees, lower gains from SBA loans, loan sales during the quarter and, as previously mentioned, net loss on the sale of securities. Segment core noninterest expense was $38.6 million, an increase of $1.8 million from the third quarter of '17. This increase was primarily due to a $497,000 charge related to the closure of a Southern California lending office.

The portfolio of loans held for investment increased 4% to 4.4 -- $4.5 billion in the fourth quarter. Net loan growth was $190.8 million in the fourth quarter compared to $155.8 million in the third quarter. Nonperforming assets declined to $15.7 million at December 31 compared to nonperforming assets of $18.8 million at September 30. This decrease was primarily a result of a $3 million reduction in other real estate owned. We recorded no provision for loan losses in the fourth quarter compared to $250,000 in the third quarter. This decrease in provision expense was primarily due to continued improvement in credit quality and lower expected loss rates, combined with $921,000 of net recoveries during the fourth quarter. Deposit balances were $4.8 billion at December 31, an increase of $90.5 million from September 30, driven primarily by increase in business money market accounts. Deposits in our de novo branches or those opened within the past 5 years increased 6% during the quarter.

I'll now share some key points from our Mortgage Banking segment results. The Mortgage Banking segment core net loss in the fourth quarter was $2.1 million compared with core net income of $2.4 million in the third quarter. This decrease in core earnings was due to lower gain on lower origination and sale activities, partially offset by lower salaries and related costs, both as a result of lower lending volume. The volume of interest rate lock and forward sale commitments was lower than closed loans designated for sale by 19% this quarter. Note that single-family interest rate locks being less than closing in a given quarter negatively affects segment earnings as the majority of mortgage revenue is recognized at interest rate lock while the majority of origination costs, including commitments, are recognized upon closing. The gain on mortgage loan origination sale deposit margin decreased to 329 basis points in the fourth quarter from 342 basis points in the third quarter. The decrease was primarily due to a slight shift in our origination mix to lowered margin products and generally lowered conforming conventional loan pricing among the agencies.

Mortgage Banking segment noninterest expense of $68.1 million decreased $9.4 million from the third quarter. This decrease was primarily due to a reduction in closed loan volume, but also due to the reduction in headcount and other capacity and cost-reduction changes implemented in the second and third quarters. Single-family mortgage servicing income was $8.4 million in the fourth quarter, an increase from $7.4 million in the third quarter. This increase was primarily due to increased net servicing income on a larger servicing portfolio and improved risk management results. Our portfolio of single-family loans serviced for others increased to $22.6 billion of unpaid principal balance at December 31 compared to $21.9 million at September 30. The value of our mortgage-servicing asset relative to the balance of loan serviced for others was 114 basis points at quarter end.

I will now turn it back over to Mark Mason to provide some additional insights on HomeStreet's general operating environment and our outlook for the future.

Thank you, Mark. In an effort to shorten our prepared comments this quarter, I will not be commenting on the health of the regional economies in which we do business, as we have in the past. If you would like current data, please contact Gerhard Erdelji, our Investment Relations Officer, who can provide you with an update.

Looking forward to the next 2 quarters in our Mortgage Banking segment, we currently anticipate single-family mortgage loan lock and forward sale commitment volume of $1.7 billion and $2.1 billion in the first and second quarters of this year, respectively. We anticipate mortgage held for sale closing volumes of $1.5 billion and $2.1 billion during the same periods. For the full year 2018, we anticipate single-family mortgage loan lock and forward sale commitments to total $7.2 billion and loan closing volumes to total $7.4 billion. Additionally, we expect our mortgage from positive profit margin to decline to a range of between 315 and 325 basis points during 2018.

In our Commercial and Consumer Banking segment, we expect our average quarterly loan portfolio growth to range from 2% to 4% per quarter for the year of 2018. Reflecting the continued flagging of the yield curve and asset changes in market rates and loan prepayments speeds, we expect our consolidated net interest margin to decrease to a range of 3.25% to 3.35% for the first and second quarters of this year. As our loan portfolio continues to grow and reprice upwards, we expect the net interest margin to increase to a range of 3.35% to 3.45% in the third and fourth quarters of this year.

For the first quarter of this year, our noninterest expenses are expected to decrease, given the seasonality of lower single-family closed loans. For the remainder of 2018, we expect noninterest expenses to grow, on average, 1% per quarter, reflecting our focus on optimizing the profitable growth of HomeStreet. The growth rate of our total noninterest expenses will vary somewhat quarter-over-quarter, driven by seasonality and cyclicality in our single-family closed loan volume and in relation to the timing of further investments in growth. Additionally, as a result of federal tax reform, we expect our estimated effective tax rate to fall to between 21% and 22% for 2018.

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 Instructions) The first question today comes from Jessica Levi-Ribner with B. Riley FBR.

Can you talk a little bit about your expected loan growth going forward? Which areas in the Commercial platform you're looking at and maybe in the -- on the Mortgage side as well?

Sure. The composition of our lending has been relatively consistent. We are, of course, a very significant real estate lender, whether it be single-family mortgage, both for sale and for retention in the loan portfolio; commercial real estate, both permanent loans and construction lending; residential construction lending, which is mostly vertical construction; some integrated vertical land development; and commercial and industrial lending, which grew meaningfully last year, but still represents a smaller part of our total originations, and a growing, but still quite small, amount of consumer lending, general consumer lending, including term loans and secured and unsecured lending. And the proportionality of that is going to vary somewhat as our commercial and industrial lending grows over time and begins to occupy a larger place in the balance sheet.

Okay. And is there any type of loan types that you're shying away from? Just given the credit backdrop or anything like that?

We have not been a lender in, generally, entity value, C&I lending, leverage lending, some of the riskier C&I loan types. We've generally been staying at the middle of the Street with a view and a concern about consistent asset quality. We are watching the commercial real estate markets very carefully in which we do business, we're obviously, a significant commercial real estate lender, both multi-family and other commercial types, but in particular, a focus on multi-family, both for our balance sheet, for resale to other institutions and to Fannie Mae. And many of our markets have experienced significant construction and -- along with significant job growth and population growth, and we're watching very carefully to identify when that growth will slow and when it will be time to moderate that lending. To this point, I think consistent with my earlier comments, we still see very strong economic leading indicators and current ratios in these markets. Very, very recently, we've seen slowing in apartment rates in the Greater Seattle area. In fact, I believe in the month of December, we actually saw the first month-over-month decrease in rental rates in Greater Seattle. We're watching that closely whether that's as a consequence of larger deliveries of new buildings, which we consistently see a great deal of, or whether that may represent a turn in the supply-demand balance. And so we watch maybe a hundred of these indicators consistently for indications of softening markets or turning markets. But that will be an area not yet of concern to us, but a caution, I would say.

Okay. And then my other question, just to go back to the -- I know you spoke a little bit about the mortgage restructuring that you guys have gone through. Do you think that there is maybe a little bit more cost that you can get out of the business? Or some way that you can augment the business, given your thoughts around the origination opportunity or maybe a softer origination opportunity in your markets?

For us, the focus is on optimizing individual offices, whether that be expenses or effectiveness of the teams. We closed or consolidated several offices in the third quarter. We continue to evaluate the performance of all of the branches and all the loan offices for that matter. And by the time, we are likely to identify an office that is not making the grade. And like all businesses, you always have a range of performance, and our job is to monitor that performance and either have a plan for improvement of performance or make the tough decisions about staying in that business or region, right? And so that's an ongoing process. The market will largely determine our decisions there based upon the performance, and so it's a constant part of what we do to evaluate month-to-month, not only the business as a whole, but the components of the business. And I think we have a number of opportunities for workflow efficiency improvement. Last year, we spent much of the year installing and integrating a new loan origination system, which has substantial opportunities for efficiency improvement, many of those we've already realized. We are just now closing the final loans in our prior loan origination system, so we will soon be getting rid of the duplicate costs, for example, of running 2 software systems and then moving on to realize the -- all the benefits of that integration. So I think we have lots of opportunities still.

The next question comes from Jeff Rulis with D.A. Davidson.

A question, the -- I guess the reduction in the full year guidance on margin for '18. Is that a product of the funding cost increases that you're seeing?

Well, yes. I mean, it's, in large part, yield curve-driven, right? Because the FHLB, in particular, surprised us by front-running the reserve increases, and they've shown a pattern of doing that recently, at least in our district. That will normalize, of course. But if the Fed continues to raise and the FH yield -- FHLB continues to front-run, we're likely to continue to experience some of that compression. Now over time, the loan portfolio catches up, right, and we have a fair amount of monthly adjusting loans and another significant amount of periodic adjustments, for which there's some delay in the impact of rising rates. And over time, that's going to catch up.

I guess another angle there is your success on growing interest-bearing deposits. And I looked in the average balances, they're down in Q4 seasonality. I guess talk about any programs to kind of build the core funding base.

Sure. There is seasonality. Several of the larger commercial customers draw down at the end of the year. You may look back at last year's fourth quarter comments. We had similar experiences with some of our larger customers. Our real funding opportunity, though, is continuing to grow the deposits and the de novo branches we've opened over the last 5 years and those that we expect to open in the coming years. And those activities have produced the greatest amount of deposit growth in our system, and we're very happy with our ability to identify strong markets to open those branches in. Our ability to grow deposits in those branches consistent with a deposit growth ramp that gets us to profitability in an expected period of time. And the lion's share, the far lion's share of our de novo branches that we've opened are meaningfully above that long-term slope. And so we expect that's going to continue to be one of the primary drivers of deposit growth. As our C&I business grows and other small business lending grows, that growth -- that's going to contribute to growth in commercial deposits as well.

Got you. And Mark, just one quick last one on the -- I missed the -- you talked about closed loan volume in 1Q and 2Q. Is that $2.1 billion and $1.5 billion, respectively?

No, $1.5 billion and $2.1 billion, so closing volume of $1.5 billion and $2.1 billion during the first and second quarter.

And the walk was in -- comparatively, what was that?

$1.7 billion and $2.1 billion, $1.7 billion first quarter, $2.1 second quarter for lock.

The next question comes from Tim Coffey with FIG Partners.

Mark Mason, as we kind of look at Page 25 of the press release, the Commercial and Consumer Banking segment 5 quarter loan roll-forward. The line of purchases and advances, do you -- can you provide any kind of breakdown between those 2?

Purchases and advances, you see, maybe this was not reported as well as it could be. Purchases would be single-family loans we acquire from, primarily, our joint venture, Windermere Mortgage Services. They're -- they are technically purchases from another entity. But the lion's share of that line item are advances on lines of credit previously originated. New loan originations would be up on the originations line. Sorry if that's a little complicated.

Yes. Yes, I was trying to get breakdown on that. And so what do you attribute -- obviously, the lion's shares of those are advances. What do you attribute that to? Is it coming from a specific market? I'm assuming you do different types of lines of credit. Is there a typical product that's it coming from right now?

Well, it's sort of all across-the-board. If you think about our lending, part of that comes from draws on construction loans, which are very large numbers. Part of that is draws on revolving lines of credit. And those 2 categories make that the lion's share. If you're interested in the breakdown, we could probably provide that later if you get with Gerhard.

Sure, okay. And then the line below that, the payoffs, paydowns and sales, I should be able to back into what the sales number is, right, off of other pages in the press release?

Yes.

Is there more to it than that?

No. You should though -- if this balance is loans held for investment, some of our sales go directly to loans held for sale. Of course, they would never enter that total. We do sell some loans out of the portfolio, so I -- there may be a reconciliation in total loan sales to that line item. Do you follow me?

Yes, I do. I do.

And in terms of payoffs, we have fairly high loan turnover in our portfolio. One is a consequence of construction lending, right? If you think about the very short duration of residential construction, today, those loans average about 200 days in duration, right? So there's a lot of churn in that portfolio. Additionally, loan types like single-family mortgages, in particular, jumbo nonperforming mortgages, have relatively high prepayments fees, surprisingly high. And we have been running, as a portfolio, in excess of 20% annual CPR for years now and sometimes as high as 25% or 26%.

Okay. I want to go back to the jumbo market, but -- yes, as we were talking about your loan growth expectations going forward, are we kind of talking about just originations? Are we talking of the entire thing with the advances and the payoffs and sales and everything?

Well, you kind of need to add those lines together. If you think about it, Tim, when we originate a line of credit, it may not get drawn on for several quarters, right, and current quarter may have draws of prior quarter originations, right? So when we're talking 2% to 4%, we're talking change in balances that is a consequence of commitment origination activity during the current quarter or the prior quarters. There's truly a change in balance we're talking about.

Sure. As I would have heard clarification on that. And I know it's early to be talking about this. But since the tax reform package has passed, are you seeing any changes in the jumbo mortgage market?

That -- I think it's a little early to tell. We saw a rush of activity in December, right? As people were looking at a possible decrease in deductibility, right, from $1 million to $750,000. But the reality is the market goes on. And for those people who can afford jumbo-sized mortgage -- jumbo mortgage-sized homes, it's not going to meaningfully change their affordability. Many of the jumbo mortgages that we would otherwise originate, we are able to structure into conforming balances within accompanying home equity line of credit. It's a great way for us to get someone a lower collective or composite rate, and it's great for us in building our home equity portfolio. So there's a number of things going on in the jumbo market. But I think the tax reform, at least in our large markets, where we have such a significant imbalance of available homes for sale to demand, we don't think tax reform is going to have a meaningful impact on that volume. Inventory is the biggest issue.

Okay. And given what's happened to rates year-to-date, is there any kind of color you can give us on how that's impacted your hedging activity?

Well, as a general matter, when rates rise quickly, that's bad for hedging. And when rates fall quickly, that's typically good for hedging because of what happens to basis, right? We always run some basis risk in our hedging activities, more so on our servicing hedging, much less so in our pipeline -- mortgage pipeline hedging. But in our servicing hedging, we hedge with a variety of instruments, swaps based upon LIBOR, and of course, right there, you have a pretty significant basis risk between LIBOR and mortgage rates. CDs, securities, which have close to the same basis as mortgages, but there are small differences. And eurodollar futures, which, of course, have basis differences. So if you look at the composition of the hedge, we have meaningful basis risk. And as long as basis differences stay within a reasonable range, our hedge works very, very good. When you have meaningful changes in rates, that can impact your hedges, obviously, positively or negatively. And historically, our hedge has not performed as well during periods of rising rates. That difference has not been that meaningful, right? We are still, we believe, the most effective hedger of servicing assets in the United States. We track the results of all of the public company reporters who report that activity. And again, last year, every quarter and for the full year last year, we were in -- the most effective, I guess that's the right way to say that, at hedging those assets. But it is true in periods of rising rate, our hedge historically has not performed quite as well.

Next question comes from Tim O'Brien with Sandler O'Neill.

So one question I have for you on the margin guidance you gave. That was down a little bit relative to the guidance that you gave on the last quarter call. Is there any rate move assumptions baked into that guidance for you guys?

No, there's not. We found we're not good at predicting the timing or magnitude of rate moves. So further rate moves could impact those results, but that depends on what also happens to the curve, right? So to the extent the curve steepens or flattens, that has a more significant impact on our net interest margin than, typically, a rate move.

Understood. And then the other question I have for you on that is sensitivity analysis and that modeling. Can you give us any updated color on that? You guys do that quarterly, don't you? Or is that an annual thing? I forgot.

We do it quarterly. And our position, our sensitivity...

Call it up 100 basis point, Mark. What's -- do you have just that one number?

I don't have it at my fingertips, but let me ask my genius crew here.

Exactly. Gerhard?

If we can get back to you, Tim, [while the notes], obviously...

I'll follow up with the genius there. The other genius, one of them.

All right. I apologize. I know it's not...

No. That's okay, Mark. You can't have it all. Like -- I mean, there's a lot of details in your business. One other question. Can you give a little color on the C&I growth? You had nice C&I -- or excuse me, Commercial growth. I'm assuming that's -- those are lines of credit. Is that a fair assumption that went from $246 million to $265 million?

Yes. I mean, we had a much better year from a commitment standpoint, commitments growth. We've been investing a lot in pursuit of growing our C&I composition, and the originations were up -- commitment originations were up meaningfully from the prior year, maybe not 100%, but probably like 80%.

Would you happen to have those numbers? That's a good -- that's a really valuable piece of data for -- that validates your Commercial strategy and effort and investment, all ways, shapes or forms. That's a great milestone for us to have. Would you happen to have the total commitments created on Commercial for '17 versus '16, that progress?

Again, I don't have it at my fingertips, except through the third quarter because we published that in our investor deck, both changes in balances and changes in commitments by quarter. So we will be publishing that within the next week, and...

Okay. And that'll be through year-end?

That will be through year-end, correct.

Okay, great. I'll get it then. And then how about this, do you have utilization rate on commercial lines of credit? And this is kind of working off of Tim's question earlier, do you have that -- the C&I utilization rate, #4, at the end of the year relative to the last quarter-end, start of the year, call it -- start of the quarter, excuse me?

We're going to have to get back to you.

Sorry.

We have it in our detailed operation reports. We just don't have it all at our fingertips right now for the business units.

And so would you characterize the growth from the -- just under $20 million in Commercial business growth to be -- how much of that was new loans versus -- and new production in the quarter versus increased draws?

That's new production. Now some of that was draws on commitments in the second quarter, right, that were drawn in the third. But it's second half of the year activity.

And those lines are -- that business, again, the leader of that business is based out of San Jose, right? Or is that...

No, here in Seattle.

My bad. There's a California president too that's doing the same thing, but targeting California businesses, right?

Actually, the same person now. So you may have missed our press release a couple of months ago. The fellow, Ed Schultz, that we hired to build our California Commercial lending business has been promoted to lead all of our Commercial lending businesses and our retail franchise, both in the Pacific Northwest and California. Well, all franchises, including Hawaii. And so that's changed. The leadership was effective January 1. His name is Ed Schultz.

Okay, great. And then just shifting gears. You talked about office consolidations, closures. None of those were branches. I'm going to assume those were all loan production offices. Is that a fair assumption? Or is that a...

The office that we closed in the fourth quarter was an SBA lending office that we consolidated into our Orange County Business Bank office in Irvine.

And in the third quarter, those were predominantly -- no branches were closed last year, were there?

Well, we closed several mortgage production offices. And...

Mortgages, yes.

No branches, though?

Retail (inaudible)] branches, right?

No, no.

And then that leads into this other question. Do you guys have kind of a baseline number range of branches that you plan to open in '18? You might have mentioned it earlier, but just remind me.

I mentioned on the call we plan to open 3 retail deposit branches in early 2018.

And that's it for the full year. So that's it so far. That's the plan so far?

Correct.

The next question comes from Jackie Bohlen with KBW.

Just moving over to capital management. And just -- if you could provide an update, Mark, on how you're thinking about capital management, inclusive of potential dividends and everything, just in light of the bump to [TCE] from the [TTR] write-up and then also the lower tax rate going forward.

The fact that we have been fortunate to realize an unexpected increase in capital as a consequence of the tax reform act because of the very significant deferred tax liability position that we have maintained as a consequence of having significant mortgage servicing rights. That was helpful. Ironically, as of year-end, it actually didn't have a beneficial impact on our risk-based capital ratios because we -- that very deferred tax liability is an offset to a carrying value of the mortgage servicing assets for determination of -- for capital purposes of how much is includable in capital. So we actually had to, in effect, write off more regulatory capital for risk-based capital purposes. However, that condition is expected to reverse as soon as the proposed changes in Basel III-based limitations on mortgage servicing assets in regulatory capital. That's a subject of a notice of proposed rulemaking change that was published last year. The comment period on that NPR ended on December 26. We're told that the agencies are reviewing the comments and considering the actions to be taken to make permanent those proposed rule changes. That rule change should provide us $70 million to $75 million of additional Tier 1 and risk-based capital, and so those ratios won't improve meaningfully, so a combination of those 2 things. We should realize -- and by that, I mean, the $23-some million in additional Tier 1 capital associated with the December benefit that we recorded due to tax reform and the anticipated or expected rulemaking change with respect to MSR capital, caps on MSR assets, it gives us a meaningful boost to regulatory capital relative to what we had previously expected to come in to the year with. In addition to strong earnings, obviously, primarily from our Commercial and Consumer Banking segment, we begin to be in a position where we can discuss with the board the potential for instituting a regular dividend. And the board has that on its agenda to discuss. We want to make sure that the rulemaking change is actually being permanent and that we understand the benefits of that change. But we have waited to institute regular dividend until we had built a sufficiently large, durable and consistent stream of earnings from our non-mortgage businesses. And we think it's time to have that discussion with the board, and we'll make the determination on that question, we'll of course share it with the public. As our capital planning relates to capital needs going forward, our growth rate is still likely to require capital. And in that regard, at some future point, potentially before the end of this year, we may return to the capital markets for either debt or equity to support that growth rate. But it's going to be dependent on growth. It's going to be dependent on earnings. And so the timing is a little uncertain as to the magnitude right now.

Okay. That's wonderful color on that. A quick follow-up on the NIM guidance that you provided. Does that include adjustments related to the tax-related equivalent yields and the impact of the new tax rate will have on those?

Yes.

Okay. And what -- how much, if you have it in basis points, would that impact lower the margin by?

That's a tougher analysis here. We have to think about that a little bit.

Okay, fair enough. And then just one last one. Other noninterest income was a little bit higher in the quarter. Was there anything unusual in that line item?

Not unusual, just greater volumes. If you look at...

Other...

The sales of...

What you're talking about, Jackie, is the $3.196 million other noninterest income, correct?

I don't have my model exactly in front of me, but it's just that last line item, the other, not with incumbents within any -- the multi-family sales or anything like that, the -- yes, the $3.196 million, yes.

Yes. So we had some amortization, or SBA amortization income get reclassified then added to that. Some other big items were again our usual FHLB dividend end up $449,000. We have some prepayments fees. That were fairly large in the quarter, $606,000. So I know that number doesn't fluctuate, but those are some of big item, again, $606,000 prepayment fees, Federal Home Loan Bank dividend of $449,000 and reclassification, $311 million.

And prepayment fees, historically, were included in interest income. So you're seeing a little higher other noninterest income, in part, by that change in geography.

Yes. And we also have our investment services unit in there, and that's been -- generally, it's pretty slow in the summer and into the fall, but it picked up in the fourth quarter, and that was $619,000 of that as well.

So given the change in the accounting treatment and some of the unique items that you had in the quarter, how should we think about normalized run rate heading into 1Q?

I think if you kind -- if you look at what we -- what you saw in the third quarter, I think it's generally what you're -- in that, quarterly, $1.7 million to $2.5 million band, I think, is more like it, but we just got to see. So going forward, into the first quarter, it's hard to predict. There are a lot of these other some unusual items in there that come and go. But I think sort of that $1.7 million to $2.5 million band would probably get you there pretty well.

In response to Tim's earlier question about 100 basis point move in rates, on our parallel shock curve analysis, that I'm sure everyone's familiar with, that creates about 1% to 1.25% positive change. Got it, at least one of those question.

All right. Thank you.

This concludes the question-and-answer session. I would now like to turn the conference back over to Mark Mason.

Thank you, all, for joining us today for our Fourth Quarter and Year-end Call. We appreciate your patience. We appreciate the analysts questions. Look forward to talking to you again next quarter.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.