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HomeStreet Inc (HMST -5.40%)
Q3Â 2019 Earnings Call
Oct 22, 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. Third Quarter 2019 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Mark Mason, Chief Executive Officer. Please go ahead.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Hello, and thank you for joining us for our third 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 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, such as a decline in interest rate environment and flat or inverted yield curve that affect our net interest margin, 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 a moment, Mark will briefly discuss our financial results. But first, I'd like to give you a summary update on our results of operations and review our progress in executing our business strategy.
HomeStreet's third quarter results reflect the early success of our strategic changes. Total assets declined in the quarter, primarily those in and sale of the pipeline of loans was mainly from our home loan center sale and an increase in loan prepayments as a result of lower interest rates. The decline in total assets in conjunction with increasing deposits drove a meaningful decrease in wholesale funding, which helped offset margin pressure in the quarter.
Our retail branch network continued to perform well with total deposits of continuing operations increasing 4% during the quarter, and deposits in our de novo branches those opened within the past five years increasing 12% during the quarter. In addition to closing the pipeline of loans from our second quarter home loan center sale, we also completed the final transfer of servicing deposits related to our first quarter mortgage servicing sales. We now have substantially completed these very complex transactions.
As a result of our strategic changes and our focus on efficiency and profitability, our non-interest expense decreased meaningfully during the quarter. This decrease was driven in part by a decrease in full-time equivalent employees of 7.3% during the quarter, and we expect further reductions as we execute on the suggested changes in our operations being made by our efficiency consultants.
Additionally, in the quarter, we consolidated our Lake Oswego, Oregon retail deposit branch into our nearby Lake Grove branch, and we continue to analyze additional opportunities to reduce our occupancy costs across the organization. We also made progress toward our longer-term goal of improving the efficiency and profitability of the Company as we implemented the initial phases of the efficiency plan we continue to develop with our consultants.
Based on the work completed to date, we continue to believe we can achieve the cost reduction goals that we established last quarter. However, like our peers, we are experiencing the impact on our net interest margin of lower interest rates, higher deposit costs and changes in the yield curve. These changes negatively impacted our net interest margin in the quarter, and while deposit costs are already declining, the interest rate environment may continue to impact future results. Notwithstanding the impact of the change in interest rate environment, we are pleased with our third quarter results. And we're committed subject to the challenges presented by the current environment to achieving the profitability and efficiency goals we established last quarter.
In recognition of our progress and our strong capital position, our Board of Directors has authorized a new common stock repurchase plan for up to an additional $25 million in stock repurchases. The commencement of which is contingent on the receipt of approval or non-objection from our regulators, which we expect to receive in the near term.
Asset quality remains strong in the quarter with non-performing assets increasing slightly to 21 basis points of total assets at the end of the third quarter from 16 basis points at the end of the second quarter. Our markets remain some of the strongest in the country with large diverse economies. However, we are keeping a careful eye on fundamentals and remain focused on controlling credit risk.
As part of our work to prepare for the adoption of the current expected credit losses accounting standard, or CECL at the beginning of next year, we have been running parallel analysis to determine what the impact of adopting CECL would be on our loss reserve requirements and capital ratios. Based on our preliminary analysis and subject to final adoption of the standard, we currently estimate the impact of adoption to be approximately 5% to 10% increase of our allowance for loan losses and an immaterial impact to our capital ratios.
The ultimate effect of adopting CECL will depend on the size and composition of our loan portfolio at the time of adoption. The portfolio's credit quality and economic conditions at the time of adoption, as well as any refinements to our model methodology or key assumptions. Also, as the industry experiences credit cycles, we anticipate more volatility under a life of loan reserving approach versus the incurred loss approach currently used.
And now, I'll turn it over to Mark Ruh, 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. Our consolidated net income, which includes the results of both continuing and discontinued operations for the third quarter of '19 was $13.8 million or $0.55 per diluted share compared to a net loss of $5.6 million or $0.22 per diluted share for the second quarter of 2019.
Net income from continuing operations for the third quarter of '19 was $13.7 million or $0.54 per diluted share compared to net income from continuing operations for the second quarter of '19 of $8.9 million or $0.32 per diluted share. The increase was primarily due to an increase in our net gain on loan origination and sale activity driven by both improved volume and margin on commercial loan sales along with a decrease in non-interest expense.
Net interest income decreased by $2.1 million or $47.1 million in the third quarter of '19 from $49.2 million in the second quarter, primarily due to an increase in interest expense on higher deposit balances. Late in the second quarter, we increased our CD balances, some with promotional interest rates to fund the transfer of servicing related deposits in connection with the final transfer of servicings related to our first quarter sale of mortgage servicing assets. Thus, in the third quarter, we experienced a full quarter of interest expense on those higher rates CD balances.
We also experienced a decrease in interest income from a lower rate and volume of loans held for sale as we closed out the pipeline of loans associated with the sale of our stand-alone home loan center-based mortgage business. The rate and volume of loans held for investment also decreased during the quarter as a result of higher prepayments in response to lower long-term interest rates during the quarter. These factors contributing to the decrease in interest income were partially offset by a continued growth of core deposits, which meaningfully reduced our volume of Federal Home Loan Bank advances during the quarter.
As a result of the foregoing changes, our net interest margin on a tax-equivalent basis decreased 296 basis points in the third quarter from 311 basis points in the second quarter. Loans held for investment decreased $147.8 million to $5.2 billion at the end of the third quarter from $5.3 billion at the end of the second quarter, primarily due to commercial loan sales of $233.2 million and higher levels of prepayments previously mentioned.
Non-performing assets increased to $14.2 million or 21 basis points of total assets at September 30, compared to $11.7 million or 16 basis points of assets at June 30. The increase was primarily due to a small increase in non-performing commercial loans. We recorded no provision for credit loss in the third quarter due to the reduction in loan balances during the quarter and continuing low levels of charge-offs fully offset by recoveries.
Deposit balances from continuing operations were $5.8 billion at September 30, an increase of 4% from June 30. The increase in deposits was primarily driven by our increase in CD balances previously described as well as increases in core consumer money market and non-interest checking accounts. Our trailing 12-month retail deposit beta for the third quarter was 61%, up from the second quarter's beta up 38%. Note that we expect our increase in deposit beta trends to reverse in the fourth quarter as we have been proactively lowering our deposit rates in September and October.
Our third quarter 12 months held for investment loan beta was 41%, also up from the second quarter's beta of 31%. Non-interest income increased $4.8 million from $19.8 million in the second quarter of '19 to $24.6 million in the third quarter of '19. The increase was primarily driven by an increase in volume and margin of commercial loan sales during the quarter.
Non-interest expense decreased $3.1 million to $55.7 million in the third quarter of '19 from $58.8 million in the second, primarily due to $1.7 million FDIC assessment credit, lower proxy solicitation and related costs, and lower salaries and occupancy costs related to our cost savings initiative. These decreases were partially offset by an increase in G&A expense due to seasonal marketing costs along with the temporary increase in IT costs resulting from transitioning servicing and origination systems as part of our long-term cost savings initiatives.
Our effective income tax rate of 14.6% for the third quarter of '19 differs from our combined federal and state blended statutory tax rate of 23.6%, primarily due to the benefit we received from tax-exempt interest income and its proportion to total net income. Net income from discontinued operations was $162,000 in the third quarter of '19 compared to a net loss of $14.5 million in the second quarter of '19, primarily due to the absence of additional restructuring charges in the quarter and recoveries of previously recorded estimated restructuring charges and compensation-related costs of $2.3 million net of tax.
Going forward, we expect some net loss from discontinued operations in the fourth quarter as we finalize the wind-down and transfer of discontinuing stand-alone home loan center-based mortgage banking business and related servicing.
Thank you for your attention. And I will now turn it back over to Mark Mason.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Thank you, Mark. Our second quarter call, we laid out a plan established by management and informed by our efficiency consultants to improve our operating efficiency and reduce our cost structure to reflect our simplified business model and lower growth expectations. The plan identified a range of expense reduction opportunities, many of which involve 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, renegotiating where possible, major contracts, primarily in technology, identifying and eliminating where possible redundant or unnecessary systems and services, and adjusting staffing to recognize the significant changes in work volumes and Company direction.
Our third quarter results include the implementation of the initial phases of our efficiency improvement plan. Assuming that we are able to realize the expense reductions currently planned by management and projected by our consultants and absent continuing negative impacts to our net interest margin beyond current expectations or as a result of changes in the interest rate environment or other changes in the business environment that would negatively impact our ability to accomplish our goals. We continue to expect to achieve an efficiency ratio in the low to mid 60% range; return on average assets exceeding 1.1%, and return on average tangible equity exceeding 11% by the end of the third quarter of 2020.
The timing of future expense reductions will vary depending upon the nature of the expense. Although a meaningful amount, is expected to be realized in early 2020. We expect these expense savings to be primarily centered and continued decreases in salaries over the near-term, potential decreases in occupancy over the middle term -- medium term, and decreases in information services over the longer term as contracts expire or are replaced.
Our financial targets are based only on expense savings. And without any additional share repurchases, beyond the $25 million repurchase plan announced this week, or the possible establishment of a regular quarterly dividend in the future. For the remainder of this year and next year, we expect ongoing runoff in our single-family loan portfolio, offset by growth in our commercial loan portfolios, resulting in a flat to slightly increasing balance of loans held for investment over these periods.
Additionally, assuming the ongoing flatness in the yield curve, we expect our net interest margin to experience additional downward pressure, as higher-yielding loans are replaced by lower-yielding market-rate loans. Mitigating this impact somewhat is lower cost of funds from the continued growth of our consumer and business deposit balances as de novo branches continue to mature and our commercial deposits continue to grow.
This concludes our prepared comments. We appreciate your attention today. Mark and I will be happy to answer any questions you have at this time.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Rulis of D. A. Davidson. Please go ahead.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Thanks. Good morning.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Good morning, Jeff.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Wanted to -- I had a question about kind of mapping the $2.3 million in recovery of restructuring comp expenses. Is that just an offset to comp? Was it in the other line, trying to figure out where that was embedded?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
It's in the discontinued operations line. And so it's offsetting other comp and costs that were incurred in discontinued operations during the quarter.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Okay. So the $162 million income was a net -- it was in that line item more likely?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Exactly. Yes.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Okay, fair enough. And Mark, you mentioned kind of the balance of the year. I don't know if that on the loan side, if that kind of carries us into early next year. But anything further out in terms of net growth outlook for '20 by chance?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Consistent with the comments I just made, we expect net growth over the period. Consistent with what our current strategy is, the growth is not going to be significant, but there will be growth. We haven't guided a percentage at the juncture given we're not sure about prepayment speeds, quite honestly. But we're expecting that growth.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Okay. And then just circling back on the expenses, if you were to -- I appreciate the kind of the timeline of salaries, I guess then -- I guess, occupancy and then IT, I don't -- is there a way you could like a percentage or segment out what amount of cost saves would come from each area, if that makes sense? Excess salaries 50% reflected, yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Sure. The majority of the savings is going to come from personnel. I mean that -- this -- may be just looking at our cost structure, I think that the relationships in the cost structure are going to be consistent with the relationships in savings if that helps.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Okay, fair enough. And then one just last one for Mark Ruh, on the tax rate then expectations, a lot of moving pieces. But what would you say for 2020?
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
Yes. Let me give you -- I'll just -- for the fourth quarter, just to help you a little bit more. We're looking at probably about a 14% to 17% effective tax rate. And for 2020, I views in the 18% to 20% band for the year.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Great. Thank you.
Operator
The next question comes from Steve Moss of B. Riley FBR. Please go ahead.
Steve Moss -- B. Riley FBR -- Analyst
Hi. Good morning, guys.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Hi, Steve.
Steve Moss -- B. Riley FBR -- Analyst
Back on expenses, just want to see if you could quantify the trap cost you have this quarter? And when you're talking about the IT costs and and other things there, I'm not sure if you mentioned it but -- or if I missed it, but I wanted to start there.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
By trap cost, are you referring to the description we used a couple of quarters ago, stranded costs?
Steve Moss -- B. Riley FBR -- Analyst
Exactly, yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
We're not calculating that number these days. Because if -- once you have separated the groups and started to reduce expenses and consolidate departments and so on, it gets a little hard to track. I mean if you look at -- I think you should look at our expense level today versus that which will get us to our targets, and part of that's going to be efficiency improvement and part of that's going to be simply climbed back those what we previously called stranded costs.
Steve Moss -- B. Riley FBR -- Analyst
Okay. And then on the CD repricing and deposit repricing here in the fourth quarter, just kind of wondering how much do you expect to see in the next -- over the next two quarters in basis points?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
In terms of the total reduction in deposit costs?
Steve Moss -- B. Riley FBR -- Analyst
Yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
That's a little hard to estimate, given everything else going on. I mean we have relatively short duration deposits, but there is some duration in them. There is one lump of nine month CDs -- promotional CDs that we've raised couple of $100 million in the third quarter that rolls in nine months, for sure that's a discrete piece that you could track. But our normal CD rollover, which you can get a view of in our 10-K, right there is a duration table in there. If you think about that rollover rate and CD values and money market values coming down somewhat, I think you can estimate what will roll in the next couple of quarters.
Steve Moss -- B. Riley FBR -- Analyst
Okay. And then on the repurchase announcement here, just wondering about the timing of repurchases and your capital deployment plans any further -- additional color on capital appointment longer term?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
We are waiting for approval or non-objection from our regulators to commence the repurchase plan. I would expect it to commence in the next few weeks because obviously we have application in. It will take some time to accomplish. You are familiar with the restrictions on repurchase activity, you can really buy only about 20% of the daily activity on average. So if you think about the amount we're trading currently, that will take a few months to accomplish, probably.
Second part of that question, future capital utilization. Obviously, we need less capital for growth that we used to given our strategic position today. I would expect the Board after accomplishing this share repurchase to consider a new authorization. The Board is expected to also discuss the possibility of initiating a regular quarterly dividend next year sometime.
Steve Moss -- B. Riley FBR -- Analyst
Okay, that's helpful. And then one last thing, just on the leverage ratio restriction, wondering if you have any updated thoughts there?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
That's a good question. Steve, I think what you're referring to is our informal agreement with the FDIC to maintain 9% Tier 1 at the bank level. Is that right?
Steve Moss -- B. Riley FBR -- Analyst
Yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
I think that that's an important conversation that we expect to have with our regulators probably early to mid next year. We want to make sure that we have a solid view of recurring earnings and that we get our earnings into the range of our peers, so that we can have a productive conversation on that point.
Steve Moss -- B. Riley FBR -- Analyst
All right. Thank you very much.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Thanks, Steve. Good questions.
Operator
The next question comes from Tim O'Brien of Sandler O'Neill and Partners. Please go ahead.
Tim O'Brien -- Sandler O'Neill -- Analyst
Good morning. Thanks guys for taking my questions. First question that I have and tell me if you've already answered this. Did you have -- I am assuming there was no revenue from discontinued operations generated in the third quarter. Is that correct?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
There was some revenue in that we were closing the pipeline of their loans and there was some interest income in the -- because of the warehouse of loans held for sale, right.
Tim O'Brien -- Sandler O'Neill -- Analyst
Is there any...
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
[Indecipherable] expenses.
Tim O'Brien -- Sandler O'Neill -- Analyst
Mark Ruh, is there any chance you could kind of give me a ballpark of what that revenue number might have come in around?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
I'll answer that for Mark. If -- we haven't disclosed the detail, but it will it be in the queue.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
Well, we don't disclose any of the detail in discontinued operations at all.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Even in the 10-Q.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
But as we mentioned in the script, I mean we're essentially going to wind down discontinued operation center in the quarter, so there should be no revenue. I mean no revenue.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes. There should be no future.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
There will be no future revenue in the fourth quarter. Now, there will be expense, however, certainly.
Tim O'Brien -- Sandler O'Neill -- Analyst
Right.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
As we wind it down, but there really be no material revenue.
Tim O'Brien -- Sandler O'Neill -- Analyst
No material revenue going forward. I guess there is a -- I'm going in a direction with my questions, that's leading someplace else, and that was kind of incidental. But what I'm trying to get at is, ex any revenue that you had, plus $2.3 million recovery. And then looking at what the net from discontinued operations, was that gives us a sense of what the costs were. And my question is, was -- what was that cost number from discontinued operations, ex the recovery and any associated revenue, what was that ballpark number? Was it a few million bucks?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Well, look, we'll say this. Look, we haven't disclosed the detail one because we don't think it's material, right. It doesn't speak to future earnings. It's a clean-up operation. The revenue was not significant. Most of the activity was expense offset by the recoveries if that helps.
Tim O'Brien -- Sandler O'Neill -- Analyst
Great, OK. That's helpful. And obviously that cost number from discontinued operations is going to most likely be lower in the fourth quarter than it was in the third quarter. That's a good assumption too. Correct?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Generally correct. It's -- it should be lower, but it's not going to be non-existent.
Tim O'Brien -- Sandler O'Neill -- Analyst
Understood.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
And until we get the rest the way through the quarter and see what the final clean up of a couple items, or we can't be sure, and that's why we're being a little vague, I'm sorry.
Tim O'Brien -- Sandler O'Neill -- Analyst
No, that's OK, Mark. And then another question is on the -- in the comp line $32.8 million this quarter. Can you provide what piece of that was variable rate tied to gain on sale, or kind of give me a ballpark of what that number was?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
If we're going to disclose all those numbers, we'll provide a schedule. So I don't think we should do it a piece nil.
Tim O'Brien -- Sandler O'Neill -- Analyst
Yes. I'm just trying to get at what kind of the fixed rate comp number was in the third quarter, kind of as a baseline core comp, fixed rate comp here, and to work off? So that's ultimately my intent and it's just.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
I get it. Tim, I do get it. I understand your challenge and the forecasting need. But again, if we do it this quarter, then we feel an obligation to do it next quarter, and then we have to start creating schedules and that's kind of where are.
Tim O'Brien -- Sandler O'Neill -- Analyst
So if I promise you, I won't ask again?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes. Keep talking, I'll just say no. But I appreciate your challenge.
Tim O'Brien -- Sandler O'Neill -- Analyst
It's OK. Yes. I thought I'd try. Yes. I'll step back now. Thank you.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Appreciate it.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
Thank you.
Operator
The next question comes from Jackie Bohlen of KBW. Please go ahead.
Jacquelynne Bohlen -- KBW -- Analyst
Hi, everyone, good morning.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Hi, Jackie.
Jacquelynne Bohlen -- KBW -- Analyst
Hi. Just wanted to see -- excuse me, hi, Mark, your stand in terms of the identification of anticipated cost savings. Are you close to identifying most of everything, or is there still more that consultants are working on?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
You know, that's a fascinating question. There is different levels of identification. Let me start with that, right. We have had an identification of the areas of cost savings, the type of costs since the middle of the second quarter, essentially, right. Now taking those areas of cost savings, translating them to plans, which may involve consolidation of activities, consolidation of -- and elimination of multiple software systems, things like that value go down to a level, OK, now we need an executable plan for that consolidation, and we need to identify individuals who will be staying versus leaving in terms of positions and individual people. So we have identified all of the areas.
Some of the -- and we have a calendar on which we and our consultants are working each piece, and I would say we are about halfway or more through the pieces in terms of plans and specific identification. All the pieces are not equal though. So as you would expect, we're attacking the largest opportunities first. And so I would say that we are hard to put a number on this. Substantially more than halfway through the specific identification process and that's why we continue. But 100% through the process of identifying where the savings will come from.
I hope that doesn't sound too vague, but it's quite a process of organizational change, technology change and the like. And because of where we're at, we still feel comfortable saying we believe we're going to achieve our targets. And the unfortunate part of that is most of the realization of that change is going to occur in future periods, right. We're going to see some more progress in the fourth quarter, mostly personnel reduction. And then a substantial more in the first quarter again mostly personnel, but some technology and occupancy, and then the remainder of the year, next year.
There is also meaningful savings on the technology side that will occur after 2020. And that's unfortunate in that we'd like to get all the savings we can right away, but we have some longer-term technology contracts, a great example is our core system, right, with that [Indecipherable] which don't mature until 2022, which are very challenging to renegotiate when someone has contractual revenues already in their plan, right. So that's kind of the progression from here. And we feel good about where we're at. I mean that's the feeling, I want you all to take away from this call. It's still a lot of work. And the economic environment provides some uncertainty still. Hope that helps.
Jacquelynne Bohlen -- KBW -- Analyst
It does. So essentially you fully identify the areas you want to pull cost out of. You're roughly around 50%, a little more in terms of figuring out how you're going to execute some of those savings and what micro areas, those might come from. And then -- so you still need to continue to figure out where you're going to be able to pull those costs from and then set up an execution schedule for that. Am I understanding correctly?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
I think that's right. I mean the fact that we may not have a fully detailed plan for certain areas, doesn't mean we haven't looked at them and don't know where the savings are going to come from, we do. But getting down to execution dates, personnel and things like that on some of the lesser areas not done. And again all the areas are not the same magnitude. That's the other important thing.
Jacquelynne Bohlen -- KBW -- Analyst
Yes, understood. And I would guess you're executing on the easier items first and then the more challenging items will just come over time?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Not necessarily true.
Jacquelynne Bohlen -- KBW -- Analyst
Okay.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
We run most [Phonetic] significant magnitude first.
Jacquelynne Bohlen -- KBW -- Analyst
Okay.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes. If there's things that are easy to do and apparent today, we're asking the leaders in those areas to work on them immediately. But they're not going to have help from senior management or consultants yet, right. So we are expecting our people to be doing whatever work they can independent of our process and that's happening. And one of the areas that is most easily identifiable is in attrition. And when we have attrition in areas, and I'm talking substantially in non-revenue areas, we're asking our managers to first ask themselves if the process or work being done by that position can be absorbed within the remaining Group. And I'm so happy with the work that our folks are doing. They are really stretching and being creative to do that, right, to absorb into existing resources, the work with some attrition -- position might create. Now that's not going to be true in every position. We will not starve our people for appropriate resources. We will not change our risk management profile. But our business is changing a lot and in some areas, attrition can be turned into savings.
Jacquelynne Bohlen -- KBW -- Analyst
Okay. And then just one word for me on a completely separate topic. And you mentioned that the single-family portfolio will run down, and I know we've discussed this before. Do you have kind of a general target in mind for where that portfolio would trend down to as a percentage of total loans?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
That's a fair question. I think that -- it over the magnitude.
Jacquelynne Bohlen -- KBW -- Analyst
I'm just trying to think about the magnitude of decline.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes. I can check this, but I would say my sense of the numbers we're looking at, it could be about a 20% decline in balances over the next say 18 months. And those are -- that's very raw, and I might have to correct my point. But I think that order of magnitude could occur. And the Gerhard can follow up with you.
Jacquelynne Bohlen -- KBW -- Analyst
Okay. And -- I mean I understand what [Speech Overlap]
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
But -- so I don't know if rates are going to continue to decline, right. I mean the environment is so uncertain.
Jacquelynne Bohlen -- KBW -- Analyst
Yes. No, definitely understood that we're operating in a fluid environment. Okay, great. Thank you for taking my question.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Thanks, Jackie.
Operator
[Operator Instructions] The next question comes from Tim Coffey of Janney. Please go ahead.
Tim Coffey -- Janney -- Analyst
Thanks. Good morning, Mark.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Hi, Tim.
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
Hi.
Tim Coffey -- Janney -- Analyst
With the drop in rates, I've got to imagine, there has been an increase in refi activity within your branches. I'm wondering, do you anticipate the volume of the verify activity to kind of lift your sold volume of the $300 million that we saw in the third quarter?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Third quarter volume remember is impacted by closing the pipeline of the home loan centers. But -- and it's elevated somewhat by actual refinancing. On a level state, we're expecting that business to originate about $1 billion a year, and that's excluding the joint venture with WMS that we have, which would be up.
Tim Coffey -- Janney -- Analyst
Right.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
So we're running, probably 20% higher than a non-refi period would suggest. But that extra refi volume we expect to continue somewhat in the fourth quarter subject to seasonality. And -- and into the first part of next year, but again that any forecast is just subject to a lot of uncertainty with rates.
Tim Coffey -- Janney -- Analyst
Sure. No, I understand. Do you anticipate that additional volume to have any create any additional volatility within your expenses?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Sure. Got a commission revenue, of course, -- I mean commissions together.
Tim Coffey -- Janney -- Analyst
Right. Okay. And then the commercial loan sales in the quarter of about $270 million, is that a good run rate that you're looking at?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
So it can be a little seasonal. Fourth quarter is typically pretty strong and we are expecting that again this year. If you look at last year's fourth quarter, the commercial loan sales were actually little less than the third quarter this year. So the third quarter was surprisingly good. I would expect a reasonably strong fourth quarter. Will it be as large as the third quarter kind of remains to be seen.
Tim Coffey -- Janney -- Analyst
Okay. And then was there anything in the margins on the gain on sale of either the loans, commercial or single-family, residential that we should keep an eye on?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
The margins on the single-family loans will improve dramatically after we sell our interest in WMS because, think about the correspondent margin on purchase loans being about half the margin on retail originated loans. Of course the volume will decline, but the margins will increase.
Tim Coffey -- Janney -- Analyst
Yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Also the business we have today, the retail mortgage business is substantially better controlled and at the margin, more profitable than the very large business, we had. We are a much more stingy in price exceptions, and the absolute volume is not as important to us as profit margins, and expense control, as you would expect. And so the consistency of our margins going forward on the retained business should be substantially better than they have been.
Tim Coffey -- Janney -- Analyst
Okay.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
I mean -- so the pure margin -- the pure composite margin this last quarter on our retail originated business -- to the continuing business was well above 300 basis points, somewhere in the nature 320 basis points. And it hasn't been that good for quite a while before that.
Tim Coffey -- Janney -- Analyst
Okay. And I know you entered into an agreement to sell your ownership interest in WMS. Do you have any idea when that's going to close?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
We hope this quarter -- it should close this quarter.
Tim Coffey -- Janney -- Analyst
Okay. And just following up on the earlier question about CD maturities schedule. It doesn't sound like you have anything material repricing in the next two quarters? Or was it just more of a kind of -- look at the schedule in the Qs and Ks to really get a better answer?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes. I think it's the regular rollover.
Tim Coffey -- Janney -- Analyst
Yes.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
The one promotional piece that I mentioned is not going to rule for another couple of quarters, right, the $200 million that we -- promotional CDs we raised to fund the servicing transfer. In the third quarter, that's going to take a while, but the regular rollover is going to continue.
Tim Coffey -- Janney -- Analyst
Okay. So you're just calling out the -- a nine-month promotional?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Yes, that's all I call it out, right.
Tim Coffey -- Janney -- Analyst
Okay, all right. Those are all my questions. Thanks a lot.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Thanks. Tim.
Operator
And we have a follow up from Jeff Rulis of D. A. Davidson. Please go ahead.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Thanks. Just a couple of others. On the -- in the credit side, look like you had some deterioration in the commercial non-performers. Could you itemize either was that by geography or just any color on the increase in non-accruals? Thanks.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
You Know there's not much distinction there. There is a few smaller credits that went to non-accrual. We don't expect any material losses. We have good collateral coverage and some of these will hopefully be upgraded sometime soon.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Was there are any geographic specifics to that?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Not really. I mean our concentrations are in Puget Sound and Southern California. And there's a little of both.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
And then, Mark, on -- you said earlier, the efficiency goal is low to mid 60%; the previous call you had low 60%. Just curious as to the shift is that an updated revenue projection, or is that less cost savings as you wrap your hands around the things you've got in place?
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Well, the last time we mentioned it, it was probably low to mid, and we described it as low, right? If it's not 60%, right, it's somewhere between 60% and 65%, right. I think right now we just provide a little uncertainty because of the interest rate environment and the impact on revenue.
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Okay, all right. Thank you.
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Thank you, Jeff.
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 -- Director, Chairman, Chief Executive Officer and President
Thank you again for your participation and attention today. We look forward to speaking to you again next quarter.
Operator
[Operator Closing Remarks]
Duration: 46 minutes
Call participants:
Mark K. Mason -- Director, Chairman, Chief Executive Officer and President
Mark R. Ruh -- Executive Vice President, Chief Financial Officer
Jeff Rulis -- D. A. Davidson and Co. -- Analyst
Steve Moss -- B. Riley FBR -- Analyst
Tim O'Brien -- Sandler O'Neill -- Analyst
Jacquelynne Bohlen -- KBW -- Analyst
Tim Coffey -- Janney -- Analyst
