HomeStreet Inc (HMST) Q2 2019 Earnings Call Transcript

HMST earnings call for the period ending June 30, 2019.

Motley Fool Transcribers
Motley Fool Transcribers
Jul 23, 2019 at 5:23PM
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HomeStreet Inc (NASDAQ:HMST)
Q2 2019 Earnings Call
Jul 23, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the HomeStreet Inc., Second Quarter 2019's Earnings Call. [Operator Instructions]. After today's presentation their will be an opportunity to ask questions. [Operator Instructions]

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

Mark K. Mason -- Chairman, Chief Executive Officer and President

Hello, and thank you for joining us for our second quarter 2019 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 and Events Link.

In addition, a recording and a transcript will be available at the same address following our call. 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 it 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 our financial performance. The actions, findings or requirements of our regulators, our ability to meet cost savings expectations or to realize those cost savings at the pace we expect, 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 the 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 a moment, Mark will briefly discuss our financial results. But first, I'd like to give a summary update on our results of operations and review our progress in executing our business strategy.

The second quarter of 2019 marked a significant milestone in achieving our long term strategic goals. We completed the sale of substantially all of our stand-alone home loan centers and transferred most of our related personnel to Homebridge Financial Services.

The remaining offices that were not sold were closed during the quarter. As a result, our employee count decreased from 1,937 at the end of the first quarter to 1,221 at the end of the second quarter. Much of this activity took place in June, so our consolidated results of operations included an -- almost entire quarter of historical mortgage banking activities.

As part of our decision to reduce our exposure to mortgage banking. In July, we entered into a non-binding, letter of interest to sell our ownership interest in WMS Series, LLC. The successful completion of this

transaction will further reduce the single family mortgage loan volume we generate going forward. For perspective, during the second quarter we originated $166 million of held for sale loan volume and $5.3 million of held for investment loan volume from WMS.

At the beginning of the second quarter, we announced our Board had authorized a $75 million share repurchase program. As of the end of the quarter, we repurchased 963,600 shares in the open market at an average price per share of $29.40.

Subsequent to quarter end, upon receiving Federal Reserve Bank non-objection, we purchased Blue Lion Capital's 1.7 million shares representing 100% of Blue Lion Capital and its affiliates ownership position at a price per share of $31.16 which price represented the five day volume weighted average price prior to the date of our 2019 annual meeting.

We are pleased to reach this amicable resolution with Blue Lion Capital, which will allow us to focus completely on the business going forward. Asset quality remains strong and improved during the quarter, with non-performing assets declining to 16 basis points of total assets at the end of the second quarter from 23 basis points at the end of the first quarter. Our markets remain some of the strongest in the country with the large diverse economies. However, we are keeping a careful eye on fundamentals and remain focused on controlling credit risk.

Total deposits on our continuing operations increased 8% during the quarter, and deposits in our de novo branches, those opened within the last five years increased 25% during the same period. During the quarter, we announced the consolidation of our Lake Oswego, Oregon, retail deposit branch into our Lake Grove, Oregon branch, which will take place in September of this year, and we are dedicated to making this a seamless transition for our customers.

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

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Thank you, Mark. Good morning, everyone, and thank you again for joining us. In the first quarter, we announced that we would sell our home loan center based mortgage banking business and retain our substantially smaller bank location based mortgage banking business. As a result, the historical results of our mortgage banking segment were reclassified as discontinued operations.

Beginning in April 2019 and going forward, the assets, liabilities, revenues and expenses of the retained bank location-based mortgage banking business are included in continuing operations.

I'll be highlighting the impact from these changes in the presentation of our financial results during the quarter. And now regarding our second quarter financial results.

Our consolidated net loss, which includes the results of both continuing and discontinued operations for the second quarter of '19, was $5.6 million or $0.22 per diluted share, compared to a net loss of $1.7 million or $0.06 per diluted share for the first quarter of '19. The share repurchase from Blue Lion Capital, an affiliate on July 11th caused us to reclassify $52.7 million of our equity to temporary equity as of quarter-end.

This reclassification caused us to hold temporary equity for the last 10 days of the second quarter, resulting in a slightly dilutive effect to both income from continuing operations and loss per common share of approximately $0.01.

One time items included in net income for the second quarter of '19 were comprised of $9.6 million of restructuring charges from the exit or disposal of our home loan centers based mortgage banking business and $33,000 of acquisition related recoveries net of tax.

This compared to one time items in the first quarter of $9.6 million of similar restructuring expenses, net of tax and $290,00 of acquisition-related expenses net of tax.

Net income was adversely impacted during the quarter by the timing of the sale of our home loan center based mortgage business. We recognize a full quarter of expenses and close loan volume. But only a partial quarter of revenue on interest rate lock volume. When single family interest rate lock volume is lower than closed loan volume in a given quarter, net income is reduced because the majority of mortgage revenue is recognized as interest rate lock, while most of the origination costs, including commissions, are recognized upon closing. This imbalance reduced net income during the quarter by approximately $3 million.

This adverse effect will continue during the third quarter of '19. We expect to recognize that limited revenue and interest rate locking for a commitment volume, but we'll continue to close the remaining loans from the pipeline that was sold.

Net income from continuing operations for the second quarter of '19 was $8.9 million compared to net income from continuing operations for the first quarter of '19 of $5.1 million. Of this increase, $3.2 million is due to the inclusion beginning in April of the revenues and expenses from the retained bank location based mortgage banking business previously included in discontinued operations.

Excluding this impact, the increase was primarily due to a decrease in the provision for credit losses and an increase in non-interest income from increases in gain on sales from securities and prepayment fees received on the pay up of commercial loans.

Net interest income increased by $1.16 [Phonetic] to $49.2 million in the second quarter of '19, from $47.6 million in the first quarter. Of the increase, $1.2 million was due to the inclusion beginning in April of net interest income from the retained bank location based mortgage banking business previously included in discontinued operations.

The remainder was due to higher average balances in loans held for investment during the quarter. Our net interest margin on a tax equivalent basis remained at 311 basis points in the second quarter compared to the prior quarter. Compared to the first quarter of '19, the benefit of growth in non-interest bearing deposit was offset by higher interest bearing deposit costs.

Loans held for investment decreased $59 million or 1% to $5.3 billion at the end of the second quarter from $5.4 billion at end of the first quarter. Sales of commercial real estate and single family mortgage loans during the quarter offset net increases in the portfolio from new lending.

Non-performing assets decreased to $11.7 million or 16 basis points of total assets at June 30, compared to $16.7 million or 23 basis points of assets at March 31. The decrease from March 31st, was primarily due

to the pay-off of a $4.7 million SBA 504 construction loan that had previously downgraded to non-accrual during the first quarter.

We recorded no provision for credit losses in the second quarter compared to a $1.5 million provision in the first quarter. This decreased in provision versus the prior quarter was primarily due to the reduction in loan balances and a slight recovery on loan losses during the quarter.

Deposit balances excluding those related to discontinued operations, were $5.6 billion at June 30th, an increase of 8% from March 31st. The increase in deposits was primarily driven by an increase in consumer, we raised generally less than nine-months CD deposit in anticipation of a decrease in servicing related deposits associated with the final transfers of mortgage servicing rights this month and in August.

Subsequently, we reduced our rates on these deposit products. We also had strong growth in non-interest bearing business deposits. Our trailing 12-month deposit data for the second quarter was 38%, up slightly from the first quarter's deposit data of 31%.

Our second quarter 12-month held for investment loan beta was 31%. Non-interest income increased $11.7 million from $8.1 million in the first quarter of '19, to $19.8 million in the second quarter of '19. $10.4 million of this increase was due to the inclusion beginning in April of non-interest income from the retained bank location mortgage banking business, previously included in discontinued operations.

The remainder was due to an increase on the gain on sale of investment securities during the quarter and an increase in prepayment penalties received on the pay-off of commercial loans. Non-interest expense increased $11 million to $58.8 million in the second quarter of '19 from $47.8 million in the first quarter. $7.6 million of this increase was due to the inclusion beginning in April of expenses from the retained bank location based mortgage banking business previously included in discontinued operations.

The remainder of the increase during the quarter was due primarily to proxy solicitation and other annual meeting costs, offset by $672,000 of legal expense reimbursements recognized in the first quarter of '19.

Our effective income tax rate, 14% for the second quarter of 2019 differs from our combined federal and blended state statutory tax rate of 23.6%, primarily due to the benefit we receive from tax exempt interest income and its proportion to total net income.

Net loss from discontinued operations was $14.5 million in the second quarter of '19 compared to a net loss of $6.8 million in the first quarter of '19. The increase in net loss from discontinued operations was due to the adverse impact of the imbalance between the volume of interest rate locks and the volume of closed loans that was previously discussed.

Thank you for your attention. I will now turn the call back over to Mark Mason.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Thank you, Mark. Now that we've completed most of the asset sale portion of our mortgage banking restructuring plan, we've turned our focus to improving our operating efficiency and reducing our cost structure to reflect our simplified business model and lowered growth expectations. In addition to the expense reductions to date and plan by management Dan Davis and CEC for profits are cost efficiency consultants and have identified a range of additional expense reduction opportunities, which involves substantial technology organization and personnel changes.

These include simplifying the organizational structure by reducing management levels and management redundancy. Consolidating similar functions currently residing in multiple organizations within the company. Renegotiating were possible major contracts, primarily technology, identifying and eliminating were possible, all redundant or unnecessary systems and services, and adjusting staffing to recognize the significant changes in work volumes in company direction.

Despite the challenges of the yield curve and assuming our strong credit culture maintains our low level of problem assets and assuming we realize the expense reductions currently planned by management and projected by our consultants. We expect to achieve an efficiency ratio in the low 60% range. Return on average assets exceeding 1.1% and return on average tangible equity exceeding 11% within the next four quarters, of additional improvement after that time.

The timing of these expense reductions will vary depending upon the nature of the expense, although a meaningful amount is expected to be realized in early 2020. These return targets are based only on expense savings without additional share repurchases or the possible establishment or regular quarterly dividend.

Additionally, revenue enhancements such as improvement in our cost of funds and fee income would improve these return targets. Going forward, as we implement the expense reductions identified by our consultants, we will be better able to forecast the timing of their expected impact on our financial results.

In future quarters, we will be providing detailed numbers on expense reductions to date and more specific timing of efficiency ratio, return on average assets and return on average tangible equity targets in the future.

As a consequence of the change in business strategy, we are also updating our growth expectations for the near term. For the remainder of this year and next year, we will be replacing run-off in our single family loan portfolio with growth in our commercial loan portfolios, resulting in no-net growth in loans held for investment over these terms. Additionally, assuming no change in the current yield curve, we expect the net interest margin consistent with our just concluded second quarter.

This concludes our prepared comments. We appreciate your attention today, and Mark and I would be happy to answer any questions you have at this time.


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Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Luke Bohlen [Phonetic] of KBW. Please go ahead.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

I just wanted to start off with just some questions on what you just touched upon, on the strategic initiatives and just kind of wanted to see in terms of some of the technology, renegotiations and systems consolidations that relate a lot, that are heavily to the kind of information services lines. And if you could just touch on that a little bit more further forward guidance?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Sure, it touches several categories of expenses. Of course, the technology line item, which comprised not just of inside IT personnel and costs, but more substantially the cost of software systems that provide the backbone of our operating systems. And we have a lot of systems here. We have some very specialized loan products and a fairly wide menu of products, and we have identified a certain amount of duplication of services among those products. We are analyzing those areas of potential duplication and consolidation in conjunction with the need to renegotiate many of our contracts as a result of substantially reduced volumes. Subsequent to the sale of the majority of our mortgage banking activities.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, that's helpful. Thanks. And then just switching over to -- well, you were just touching on the loan growth. You said that offsetting the commercial contraction that loan growth it can be relatively flat through the end of the year. Is that how I should interpret it?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Offsetting the runoff in the single family mortgage portion of our portfolio.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Right, -- understanding mortgage origination volume has -- I mean declined pretty dramatically. Those balances, particularly in this interest rate environment, are going to decline more quickly than in the past substantially. But we expect to offset that run off with greater levels or greater composition of various commercial loans.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, that's helpful. And then I'll just touch one more on the margin, just trying to get a sense of, if we do get a rate cut here in the next -- well, it looks like in the next couple days. But just through the end of the year, which -- how much of your commercial loan is floating to Prime or LIBOR? And given that cut, how do you see those yields trending?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

A meaningful amount of our portfolio is adjustable. In rough numbers, I believe about a third of it is monthly adjusting.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Right.

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Roughly and the remainder of the adjustable portion of portfolio is -- of the hybrid nature, right. Short term structure and then floating.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And then just given a cut, how do you -- see the yields on that? I mean, imagine. Do you have any kind of guidance for the impacts on them or is it kind of just to be assumed that through the end of the year, if there is a cut or two, it would be down modestly?

Mark K. Mason -- Chairman, Chief Executive Officer and President

You know, we're pretty balanced. And when we look at the potential for a cut of the short term of the curve, that's going have offsetting impact in our funding cost today. Get a level of loan advances and a falling deposit beta.

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That's helpful. I will step back. Thank you for your answers.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Good morning, Jeff.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Hi. A question on the income statement and trying to get into an OK approach to right sizing what things look like post Q2 -- is a good place to start. Maybe fair to back out the $10.4 million and $7 million, $6 million in fee income and expenses from the discontinued ops. Understand, -- going forward and then understanding efforts made to build that fee income and reduce cost is that a fair start point?

Mark K. Mason -- Chairman, Chief Executive Officer and President

No, actually, the reverse. The change in the quarter was reclassifying that portion of mortgage origination and servicing that will be continuing out of discontinued operations in the prior quarter into continued operations. And so, you should expect to going forward, to see those higher levels of revenue and expense.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay. And then on the stranded costs. I think you identified 8.3 previously. What of those have been captured as of the 2Q run rate. And I suppose what's left [Phonetic]?

Mark K. Mason -- Chairman, Chief Executive Officer and President

And apologize for not calling that out. But if you look on Page 25 of our earnings release under the non-GAAP financial measures at the end of the first page, it shows -- in the second last line on that page. The stranded cost numbers for the quarter's historical and most recent, in the $8.3 million has declined to $6.2 million in the second quarter and still falling, of course.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay. And are the exit and disposal cost is that complete i.e., no further charges anticipated in future quarters?

Mark K. Mason -- Chairman, Chief Executive Officer and President

In terms of restructuring type charges, that's substantially correct. We may have some miscellaneous items that come through. However, we will still have some operating loss in discontinued operations in the third quarter as we finish closing the pipeline of locked loans that existed when we transfer the offices in personnel. Those loans are being closed with the assistance of that personnel but we were transferred under the transition services agreement with Homebridge. And while the economics of that agreement we think are favorable to the company. We are not anticipating net income, probably some smaller net loss in discontinued operations.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay. An additional balance sheet adjustments post second quarter, you spoke about $133 million in deposits set to transfer to the mortgage buyer and then, you had an elevated loans held for sale. Could you talk about just structured deposits and loans that may -- that are planned to go away?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

So, right, including the expected reduction in deposits, loans held for sale should fall ultimately to less than $100 million. Two things driving that. One, of course, the completion of the, closing of the discontinued pipeline and that ultimate sale of those loans. But also the sale of our interest in Windermere Mortgage Services, which provides currently $70 million -- $75 million a month in originations to us, maybe larger last month. So all of those will create a decline ultimately in loans held for sale over the next six to nine months. The most -- the largest part of that being in the third quarter. The deposit number that we previously discussed. And of course, this temporary equity -- number that is existing temporarily at the end of this quarter.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Right. Okay. I will step back. Thanks.

Operator

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

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Good morning, guys.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Hi Steve.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

I want to start on the mortgage banking side, assuming the sale of WMS here? I guess it's kind of fair to think about originations on annual basis, probably in something like the $750 million to $1 billion range annually?

Mark K. Mason -- Chairman, Chief Executive Officer and President

That's fair. It's seasonal still. Right.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Right. Right. Okay. And then just in terms of, as you're thinking about expenses here, the only thing it would take to implement the bulk of the consultants and your own plans, recommendations. Should we think over the next six months or is it really longer over a 12-month plus period?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Well, I just stated in my comments that we're expecting to realize the lion share of this over the next four quarters.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Right.

Mark K. Mason -- Chairman, Chief Executive Officer and President

With a meaningful amount in early 2020. Right now, it's a little hazy. Right. I mean, we are just investigating the potentials and beginning planning. And so it's a little hard to be more specific, but we we feel good enough to make, to provide this guidance. And unfortunately, right now, it's kind of as good as we can provide. But beyond, the first half of the first three quarters of next year, there are still -- there's still more to come. Right. Additionally, if you think about limiting loan growth, but continuing deposit growth, we are planning on improvement in our cost of funds as well. But that -- these numbers don't include any of that.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Right. And then I guess on the CD special, that you guys range, its kind of wondering, where was that and where are your CD rates today versus perhaps the current cost funds was [Indecipherable]?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Well, they're down substantially. We had a hole to fill, right. A very temporary one to plan for, with the transfer servicing deposits. And relative to advances and with liquidity considerations, we felt the right thing for us to do was to float a certain amount of short term CDs, and to raise that money quickly pass light premium.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

The rates on those products are down very substantially.

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

40 basis points.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Yeah, 40 basis points, right.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Okay, that's helpful. And then, I guess is the balance here is more or less stable. How should we think about -- you talked about commercial loan growth. How should we think about that underlying mix between C&I, CRE and construction?

Mark K. Mason -- Chairman, Chief Executive Officer and President

If you look at past volumes, I would expect consistent relationship generally, though our C&I lending has been increasing quarter-over-quarter, if you look at the trend over the last five quarters or so. Residential construction lending has declined somewhat consistent with a slowdown in that market. And so I think you'll see that construction volume declined somewhat. Commercial real estate, general commercial real estate lending, we expect to be very strong, perhaps grow slightly during this period.

We will not be holding all of that on our balance sheet, though, while originations have grown sales are growing as well and we effectively use that product type to balance our balance sheet needs these days. And we continue to work on growing our C&I business, as I previously stated.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Okay. And I guess more like a little more, I guess, housekeeping item, if you will. It looks like that you guys disclosed proxy expenses and some severance and looks like that came through continuing operations. I was wondering if you could quantify those items?

Mark K. Mason -- Chairman, Chief Executive Officer and President

We haven't specifically, but the delta between the items that we have described primarily, not exclusively relates to those items. We did have severance and continued operations because as we've been discussing, we've been paring down corporate services and personnel and in total those numbers continue -- [Speech Overlap] have been meaningful. Salaries and related costs for the quarter, about $1 million of that delta. If that helps.

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Okay, that's helpful. And I think that's everything for me at the moment. Thanks very much, guys.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Thanks Steve.

Operator

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

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

Thanks. First question, I have for you guys, can you talk a little bit about capital management plans and needs here going forward, obviously, with slower, long growth planned? That's a factor in this but and also where you see capital ratios, key capital ratios, kind of settling out with the share buyback spending [Phonetic] and stuff?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Sure. All of our current buyback activities have being concluded. Right. We first suspended and will soon terminate the $75 million board authorized repurchase plan, given we filled that and a little more with repurchase of the Blue Lion shares. We -- by strategy, quickly authorized after the end of the first quarter and the completion of our service and sales, our $75 million buyback with the intention of completing the home loans term sales and then after second quarter, assuming the completion of the sales, reevaluating our capital needs going forward.

And it is our expectation that the Board will authorize additional future share repurchases and ultimately a regular quarterly dividend. We're very early in the stabilization of the company. If you think about what we just went through in the first and second quarters, and what we will be going through for the next several quarters in efficiency improvement. I don't expect that we will wait too long before the board authorizes additional adjustments to our capital. But I don't want to front run their decision again. But I expect that will happen.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

And then sticking, my turn on the -- with another expense question. So on that page, it looked like about $6.2 million thereabouts on Page 25 for shared cost reduction. So $2 million reduction, if I'm reading it, right?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Yes.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

And then the work that Mr. Davis has done and the consultants and stuff are the cost savings that they have -- those opportunities been identified and quantified, and are they separate from these shared cost -- targeted share cost reductions?

Mark K. Mason -- Chairman, Chief Executive Officer and President

I wouldn't say they are necessarily separate in that the classes of potential savings across many aspects of the company, which would include corporate services.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

All right. And then I guess a different way to look at where you guys ended up finishing the second quarter from an expense standpoint and kind of on a go forward basis. Do you have a sense of ballpark range or where total non-interest expense might foot ex-one timers and extraneous cost and things like that. The core number here in the third quarter, is that going to be north -- south, $60 million, do you think?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Well, this last quarter's total expense was certainly [Speech Overlap] -- $58 million. So I don't expect it will be higher than that number. Right. If you think about the things that are going on at the company, including continuing reductions in personnel and the fact that the second quarter is really a peak quarter for mortgage loan originations. Even in our ongoing business that we would expect the number generally not to exceed that number.

Mark K. Mason -- Chairman, Chief Executive Officer and President

I will warn you, we could have non-recurring write-offs, restructuring severance and we will write related to some of these cost initiatives. I'm speaking to core numbers.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

In that second quarter number, the $59 million core number that did include retention of the mortgage business of those that personnel and stuff. Their compensation is reflected in that number in the second quarter. That $58 million -- $59 million. Correct?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

That is correct.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

And -- can you quantify what the savings are from that severance here going forward?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

In continued operation to patience [Phonetic], I think that I just mentioned that we had about $1 million of personnel --

Mark K. Mason -- Chairman, Chief Executive Officer and President

These is the restructuring charges was $1 million , $1 million [Speech Overlap]

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Right, but I don't think I can give guidance on forward similar numbers, yet.

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

All right. Turning off. I'll step back. Thank you.

Mark K. Mason -- Chairman, Chief Executive Officer and President

All right, Tim. Appreciate it.

Operator

The next question comes from Tim Coffey of Janney. Please go ahead.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Hi, good morning, gentlemen.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Good morning.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

As we look at kind of the forward run rate for the gain on sale line. With the composition, would you anticipate the composition will look a lot like it has the last two quarters where mortgage banking is a sizable portion of that component followed up by commercial real estate?

Mark K. Mason -- Chairman, Chief Executive Officer and President

I think that's going to be true in terms of the size of the numbers. The efficiency of those two operations is dramatically different. Right. If you think about the relationship between the revenues and expenses. Right, our efficiency ratio in commercial real estate is in the, mid-to-high 30% range. Right. But single family retail mortgage is running in probably mid-70 range. Right. So -- and remember there is seasonality still in mortgage revenue, second quarter being a relatively high point for the year. So the relationship or the composition of that non-interest income will change during the year, perhaps meaningfully.

Additionally, commercial real estate loan sales and in turn gain is historically higher in the second half of the year than the first half of the year in particular, Fannie Mae does loan sales are typically higher in the second half of the year. And so you can see a material change in the composition of that revenue line through the year.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay. What about the absolute dollar's falling through that line?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Not sure. I understand.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Well, we expect the gain on sell line item to come down.

Mark K. Mason -- Chairman, Chief Executive Officer and President

I would expect it to be seasonal with respect to each of the operations, and I think it's a little unclear at this point, how much will be offset versus decline.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay. All right. And then kind of flipping over to the mix of earning assets if the loans, the commentary on loan portfolio going forward. We will combine with the expectation to grow deposits. Would you anticipate that securities would become a bigger part of that earning asset mix, or do you think you can stay kind of in this low teens on an average basis?

Mark K. Mason -- Chairman, Chief Executive Officer and President

We carry a securities for liquidity and collateral purposes. And so they will vary generally around 15% of assets, roughly less if we can. Right. But you should generally see that balance is very in relation to the size of the balance sheet, around those numbers, say 13% to 15% roughly.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay. And then with the exit from a substantial portion of the mortgage business. Would it be correct to start thinking that your average borrowings would start to decline?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Yes, as the balance sheet stabilizes.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

If you do expect deposits to continue to grow. If you assume that our loan portfolio stabilizes around this number for the near term and deposits continue to grow, those will create a reduced need for home loan advances and other borrowings. And so you should see the composition of funding change.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay, great. Thank you. Those are my questions.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Thanks Tim.

Operator

[Operator Instructions] Our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Thanks. Just a couple of housekeeping follow-ups. Maybe from Mark Ruh -- the expected tax rate going forward. Do you have a estimate on that?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Yeah, I think like its going to be closer to what we report as a combined Federal and State of Statutory tax rate. So it was little bit low this quarter. But as we have larger income, basically -- the portion that we attribute to tax free securities will be less. So it's going to climb higher. I mean, typically you've seen in the past it's around 20% to 21%. I mean, when we start having a quarter is where we start earning again on a net basis, you're going see it. You're going to see it converge toward that, toward that combined Federal and State of -- Statutory Rate. But again, we've been -- typically, we were running 20, 21 is what you'll see. This was a non-quarter because net income was so low.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Right. Right. Okay. And then the any -- just to peg on the Q3 average diluted share count. Just some moving pieces there. We can do the math on what was coming out. But do you have a number. There's some averaging in there?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Don't yet. Don't have -- that really small effect that we talked about that happened in the second quarter. If there maybe a very, very immaterial effect due to that in the first 11 days of the third quarter, but it'll be tiny. I mean, you guys really won't even see it. I mean, I think as far as included share count, you could expect that the only shares we're going to be bring it on is due to shares that would be issued, due to employee grants, which is generally pretty small number. But you do have to remember that we're losing, the 1.7 million shares that were repurchased to the Blue Lion. So those will drop off after the first 11 days of July. And then so our diluted share count will change due to that. So just think about it.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

As well as the open market purchases you see -- the repurchases.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Those are -- you see those already. Those are done -- those are done. Those are in.

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

We finished.

Mark K. Mason -- Chairman, Chief Executive Officer and President

We finished that up in June. We are done with that.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

There was no tale of buyback in July.

Mark K. Mason -- Chairman, Chief Executive Officer and President

No.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

All done in June.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Got it. Right. And then maybe last one, Mark Mason. Just to confirm those financial numbers, you rolled out at 60% efficiency ratio or low range ROI 1%, ROTCE 11%. Your expectation is to get to those numbers by this time next year. So when reporting is that, am I reading that, right?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Yeah. It was actually in excess of 1.1% on assets in excess of 11% return on tangible common is to be specific. Our expectation is that we would be able to get to that run rate a year from now. Right. Meeting in the third quarter.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay, third quarter of 2020 is --

Mark K. Mason -- Chairman, Chief Executive Officer and President

Right.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

On those estimates, Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Right. So it's sort of a lag when you accomplish the cut or you take the action. Right.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

I didn't catch that last bit.

Mark K. Mason -- Chairman, Chief Executive Officer and President

There is a lag between taking the action right and getting the benefit in the P&L, right. So all these things happening to get this sort of annualized benefit of all those things. That is what we are currently targeting.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

All right, four quarters?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Throughout. Right, exactly.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Exactly.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay. Thanks.

Operator

Our next question comes from Jordan Hymowitz of Philadelphia Financial. Please go ahead.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Hey, guys. Thanks for taking my questions. If you're seeing your loan portfolio stabilizes here and securities were about 15%. Would you say your total assets are bottom around $6.5 billion, $6.7 billion is that a good number?

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

They're going to decline slightly, $6.5 billion, I believe is low. I think that, a higher number is more reasonable. We should be very, quite similar to where we are now.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

I want to say that you got $200 million of available for sale and a little less [Indecipherable]. Let's just say it's $6.7 billion, which you, maybe it's higher. And you said 1.1% on assets. That's $73 million without any additional buybacks. That's about 280 an EPS number. Is that math, right?

Mark K. Mason -- Chairman, Chief Executive Officer and President

The math is -- the math is the math, right?

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Okay. I mean is their a possibility for [Speech Overlap]

Mark K. Mason -- Chairman, Chief Executive Officer and President

Not to be snotty. I'm sorry, not to be snotty. That's just, you're right. That's the math. You think the share count --

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Well, there's a possibility for additional buybacks. A possibility, correct?

Mark K. Mason -- Chairman, Chief Executive Officer and President

Yes.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

And would you say it's a fair statement that now you've got rid of the mortgage business and you're probably in the hottest market in the country? You'd be more of a desirable candidate to sell or to be bought, rather.

Mark K. Mason -- Chairman, Chief Executive Officer and President

I would assume that's true.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Thank you very much. Have a great day.

Mark K. Mason -- Chairman, Chief Executive Officer and President

Thanks Jordan.

Operator

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

Mark K. Mason -- Chairman, Chief Executive Officer and President

We appreciate all the great questions and your patients on the call today. Look forward to talking to you at the end of next quarter. Thank you.

Operator

[Operator Closing Remarks].

Duration: 49 minutes

Call participants:

Mark K. Mason -- Chairman, Chief Executive Officer and President

Mark R. Ruh -- Executive Vice President, Chief Financial Officer

Luke Bohlen -- Keefe, Bruyette & Woods, Inc. -- Analyst

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Steve Moss -- B. Riley FBR, Inc. -- Analyst

Timothy O'Brien -- Sandler O'Neill and Partners -- Analyst

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Jordan Hymowitz -- Philadelphia Financial -- Analyst

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