HomeStreet, Inc.

Good day, everyone, and welcome to the Home Street Incorporated year-end and fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please also note today's event is being recorded. I'd now like to turn the conference over to Mark Mason, Chief Executive Officer of HomeStreet. Please go ahead, sir.

Hello, and thank you for joining us for our fourth quarter 2020 earnings call. Before we begin, I'd like to remind you that our detailed earnings release and an accompanying investor presentation were filed with the SEC on Form 8K yesterday and are available on our website. at ir.homestreet.com under the news and events link. In addition, a recording and a transcript of this call will be available at the same address following our call. Please note that during our call today, we may make certain predictive statements that reflect our current views and expectations about the company's performance and financial results. These are likely forward-looking statements that are made subject to the safe harbor statements included in yesterday's earnings release, the investor deck, and the risk factors disclosed in our other public filings. Additionally, reconciliations to non-GAAP measures referred to on our call today can be found in our earnings release available on our website. Joining me today is our Chief Financial Officer, John Mitchell. John will briefly discuss our financial results, and then I'd like to give you an update on our results of operations, credit performance, and our outlook going forward. John?

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the fourth quarter, our net income was $28 million, or $1.25 per share, with core income of $32 million, or $1.47 per share, and pre-provisioned core income before income taxes of $41 million. This compares to net income, core income, and pre-provisioned core income before taxes of $26 million, $28 million, and $36 million, respectively, in the third quarter. Our results included unusual activities that occurred during the fourth quarter, including as part of restructuring and consolidation of our space at our corporate headquarters in Seattle, and to acknowledge the impact of the pandemic on the leasing office market, we recognized a $6.1 million charge related to the impairment of our lease and related fixed assets on space we have vacated. We estimate that this will result in occupancy expense savings of approximately $1.3 million per year through the next seven years. We paid off certain fixed rate FHLB advances and incurred a prepayment penalty of $1.5 million, with the benefits expected to be realized evenly within our net interest income over the next five years. We recognized a $1.8 million reduction in our self-insured medical benefit costs, which is due to lower usage of medical services by our employees in 2020. We are not anticipating similar savings in 2021 and future years. Continued decreases in our funding causes had the result of increasing our net interest margin to 3.26%. As a result of the continuing strong performance of our loan portfolio and a stable low level of non-performing assets, no provision for credit losses was recorded in the third or fourth quarters of 2020. Our ratio of non-performing assets to total assets remain low at 31 basis points, while our ratio of loans delinquent over 30 days to total loans decreased to 68 basis points at December 31st from 76 basis points at September 30th. Loans remaining in forbearances in our commercial and CRE portfolios were $41 million at December 31st, 2020, representing 1.2% of such loans' outstandings. and new forbearances granted in the fourth quarter for our commercial and CRE portfolio were less than $7 million. Single family and consumer loans remaining in forbearance, excluding those guaranteed by Ginnie Mae, were $76 million. In light of the recently passed Coronavirus Response and Relief Supplemental Appropriation Act, we anticipate that some single family loans may request an additional forbearance in 2021. Our single-family loan origination and sales volumes and profit margins remained strong in the fourth quarter, driven by the ongoing mortgage refinancing boom. The increase in non-interest income in the fourth quarter was due to higher sales of multifamily loans, including Fannie Mae DUS multifamily loans, and higher servicing income, which resulted from more favorable risk management results on mortgage servicing rights realized in the fourth quarter. The increase in non-interest expense in the fourth quarter over the third quarter was primarily due to the previously mentioned restructuring charges, higher lending commissions and management bonuses, and the prepayment fee on the FHLB advances, which were partially offset by reduced medical costs. I will now turn the call over to Mark.

Thank you, John. HomeStreet reported strong results in the fourth quarter, concluding the year in which Notwithstanding the challenges presented by the global pandemic, we benefited from our diversified business model, our conservatively underwritten loan portfolio, and the steadfast commitment of our employees. We'd like to take a moment to recognize and thank all of our frontline employees, as well as those working from home, for quickly adapting to the pandemic last year and serving our customers and communities, but also each other, and thereby helping the company to achieve these stellar results. During the just completed quarter, our net interest margin once again increased as a result of improvement in our funding costs. We continued to benefit from high loan volume and profitability in our single-family mortgage banking business, and we had record origination volumes of commercial real estate loans and higher volumes of commercial real estate loan sales. These increased revenues, along with the benefits of our efficiency and profitability improvement project initiated in 2019, resulted in meaningful improvement in our profitability and our efficiency. I'm very proud of what we achieved last year. For the full year 2020, our core results from continuing operations resulted in a return on average assets of 1.23%, a return on average tangible common equity of 13.4%, and our efficiency ratio of 61.4%. And for the fourth quarter, Our core results from continuing operations resulted in a return on average assets of 1.73%, a return on average tangible common equity of 19%, and an efficiency ratio of just 56.1%. These fourth quarter and full year results all meaningfully exceed the targets we established in 2019 for profitability and efficiency improvement following the restructuring of our single family mortgage business. And we accomplished these results despite the challenges of the pandemic and the significant additional loan loss provisions we recorded in the first half of the year. We also returned $73 million of excess capital to our shareholders during 2020 via dividends totaling 60 cents per share and the repurchase of 2.2 million shares or 9.2% of total shares outstanding at an average price per share of $26.31. substantially below our tangible book value at the time. Additionally, as a result of our repurchases and earnings for the year, our tangible book value per share increased 16% last year. We're quite pleased that the combination of our strong operating results and our active capital management during the course of the year resulted in our shares outperforming other regional banks by a meaningful margin. returning 1.4% compared to the negative 8.7% total shareholder return of the KBW Regional Bank Index. Looking forward, with the Federal Reserve indicating that interest rates will remain low for the foreseeable future, we expect our net interest margin to modestly expand as deposits continue to reprice downward and as we receive payoffs from the initial Paycheck Protection Program. Single family mortgage volumes should remain robust for the foreseeable future as the low interest rate environment has not completely been priced into mortgage interest rates due to the industry's inability to absorb the massive amount of volume spurred by these historically low interest rates. As capacity normalizes in the industry, mortgage interest rates should decrease in line with their historical spread over long-term treasury rates. We expect that this transition will reduce the very strong gain on sale margins we are currently enjoying, but maintain strong volumes for an extended period of time. The transfer of our Fannie Mae DUS multifamily lending business to Home Street Bank from a holding company subsidiary announced last quarter has already resulted in higher levels of loan origination volume and should result in higher sales volumes going forward. Despite the higher than expected mortgage loan volumes, we have continued to maintain discipline on the expense side, generally using overtime and temporary personnel to aid in processing the additional volume. We are also instituting more scalable technology solutions, which we believe will result in greater efficiencies when loan volumes return to more normalized levels. In the fourth quarter, we finalized and executed an amendment to our core systems contract, effective this month. As a result, we will begin to see the results of lower information systems expenses this quarter. Beginning last week, we have been granted access by the SBA to begin submitting customer applications for the next round of PPP loans. We are working with both first-time applicants and existing PPP customers that are applying for a second draw loan. For those commercial customers we granted forbearance during 2020, Nearly all have completed their forbearance period and resume making regular payments. Our remaining forbearances outstanding consist of a small amount of forbearances granted in the fourth quarter and customers granted a second forbearance. We are confident in the credit quality of our loan portfolio, as it is primarily secured by high-quality real estate in some of the strongest and previously fastest-growing economies in the nation. And these loans were underwritten distressed levels generally more severe than the current conditions in our markets. As a result, our loan portfolio is performing well despite the challenges of the pandemic. Of course, there still exists some degree of uncertainty as to the ultimate impact of the pandemic on our loan portfolio. However, given our strong credit performance to date and the pandemic, and unless things materially take a turn for the worst, we do not currently foresee a need to make additional provisions for loan losses at this time. Conversely, should our loan portfolio continue to perform well and the economy recover more rapidly or to a greater extent than currently expected, it is possible we may need to release some portion of the additions made last year relating to the pandemic to the allowance for credit losses. Our investor deck filed with the SEC yesterday contains detailed data on our underwriting standards and portfolio composition. We have again included a few slides further disaggregating the information and providing additional detail on the parts of our portfolio most at risk today. As we look forward into 2021 and beyond, we plan on maintaining and building on the cost efficiency gains we have achieved over the last two years. Our focus will be on profitable growth and maintaining our strong infrastructure and risk management. These activities will include an evaluation of our real estate space needs in a post-COVID operating environment with a more dispersed workforce and implementation of initiatives that will allow us to serve our customers better and work more efficiently. Most of our primary business units have rebuilt their pipelines and are reporting pre-pandemic levels or greater levels of business And our retail deposit branch network is located in large, densely populated markets that can support this growth with the growth in core deposits. This gives us great optimism for the future. Finally, we plan to continue to actively and prudently manage capital to support growth and return excess capital to our shareholders through dividends as well as potential share repurchases. As I close my remarks today, I admit it's difficult for me to overstate the achievements we have made in the midst of this unprecedented global pandemic. It gives us great pleasure to have guided the company to what appears to be a higher and more consistent level of profitability. This, of course, is the result of the hard work of many and of Strategic Action's initiative far before the start of 2020. As we contemplate our next steps, we anticipate that the successful implementation of our strategic, and efficiency improvement initiatives, our ongoing efforts to improve the composition and deposit costs, and our ongoing efficient capital management will have an enduring impact on our profitability and efficiency through the economic cycle. Specifically, we believe we have the opportunity to continue to grow earnings per share through the normalization of the single-family mortgage market. And finally, 2021 marks Home Street's centennial as a company. We were incorporated on August the 18th, 1921. At that time, incorporations were either delivered by horseback, steamwheeler, or train. Of the nearly 2,900 incorporations filed in Washington that year, only 33 exist today. Things have changed much during the past century, but Home Street has always served its communities with the highest standards and care surviving the Great Depression, wars, the thrift crisis, the Great Recession, and the current pandemic. We don't know what challenges will face us in the future, but with our culture, employees, and loyal customers, we feel confident we will continue to thrive despite the challenges. With that, that concludes our prepared comments today. We appreciate your attention. John and I would be happy to answer any questions you have at this time.

Thank you, sir. We'll now begin the question and answer session. To ask a question, you may press star then one on your touchdown phone. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Today's first question comes from Steve Moss at B Riley Securities. Please go ahead.

Good morning, guys. Hey, Steve. Morning, Steve. Good quarter. Maybe start off with the margin here. Kind of curious as to you know, where you're seeing new money, loan origination yields, and, you know, what the impact on PPP was the margin for the quarter.

Why don't we start with the latter? John, what was the impact last quarter of PPP?

It was less than one basis point. It was about a half million dollars in terms of income. So we still have most of it to be recognized in 2021. Okay, that's helpful.

And... On loan yields and production? No.

New originations, Steve, are down about 16 basis points in yield in the fourth quarter. Not happy, but that's the reality. Fortunately, deposit costs are down more.

Right. So in terms of the business mix you guys are seeing coming up, I mean, obviously a good growth in multifamily, and that probably continues going forward. Just kind of curious, you know, How is commercial business doing relative to CRE, if you will?

Well, I mean, I'm sure this is true of everyone. Loan growth in the general C&I area is slow, right? I mean, people are generally focused on maintaining or reestablishing business volume and are generally not making new investments in their business. People are also generally not switching banks. Having said that, we had a reasonable origination quarter in our commercial business area. I think the reality for us though is for the foreseeable future, that line of business will continue to be smaller than our single family mortgage and commercial real estate businesses. The bulk of the balance sheet growth going forward at least in the next year or so is expected to be in multifamily loans. Multifamily originations we expect to grow or we hope to grow meaningfully this year and beyond. That is a focus for us. That is an asset class that has, through the economic cycle, performed extremely well and during the pandemic still extremely well. I think it's important to remember that where we land and where our borrowers' properties are located, pre-pandemic were the strongest markets in the country. And if you're looking at national numbers of multifamily performance, you might get the wrong idea about performance, particularly looking at areas like the Northeast, which is really struggling with delinquencies, remnant delinquencies that are often twice what you see in our markets. And some people might wrongly assume that some of the lower quality properties would perform worse. I mean, we do land on some B and C quality properties in some of the largest population areas. Their performance on delinquencies is often better than A or B quality properties or the better Bs. because these tenants are typically multi-income tenancies, often multi-generational families in the same unit, and they've been able to weather the storm from a rental delinquency standpoint, at least, much better.

Okay, that's very helpful. And then on capital here, I realize the board meeting's two days out, But just kind of curious, you know, you had very profitable this past quarter, probably carries over to this quarter for mortgage banking. Kind of curious as to how big, you know, the potential buyback could be and what you guys think about capital levels here.

Sure. I have to make sure I say I'm not going to front run the board or our appropriate corporate governance process, right? I mean, before the board will make this decision, we'll review with the board what completely the status of our loan portfolio and credit, our current forecast for results of operations, our recently completed annual capital stress test to aid them in making the decision. Having said that, I think that we have been fairly consistent in the size of the authorizations that we have proposed over the last year, and I think you can expect the same going forward.

All right, great. Thank you very much. Thanks, Steve.

And our next question today comes from Jeff Rulis with DA Davidson. Please go ahead. Good morning.

Hey, Jeff.

Good morning.

I wanted to ask about the – Mark, about the – just checking in on the expense front. I think – a lot of low-hanging fruit from the restructure kind of exiting the bulk of the mortgage business or shrinking that. And I think the technology or the systems conversion was one of the last, at least visibly to me, in terms of kind of pieces to go. And you kind of alluded, Mark, to the systems improvement when mortgages or that volume normalizes. Just trying to get a sense for what the expense line and just the general strategy, is it more kind of efficiency through growth at this point, or is there more costs to trim that are structural relative to what we've seen?

I think that we are coming to the end of, well, we have come to the end of significant structural changes. Having said that we have a few things we're trimming this quarter that aren't super material. I think going forward what you will see is operating leverage right. An expectation that revenues will grow but not interest expense will not grow at the same pace because we have established levels of productivity, and we believe that we have capacity to grow revenues without commensurate growth and non-interest expense. I think one of the things we mentioned is we continue to look at our occupancy costs and space needs in light of a changing landscape for space and there is the potential to further reduce those costs. I can't predict the magnitude of that yet, but there is that potential. But there's also the reality that some costs will increase, right? Basic inflation, we all fight. And there's a certain amount of technology spending that we will have to do going forward to stay current. on functionality for customers. Having said that, I think my first comments are still the most important. We are expecting operating leverage going forward, and that's where we hope to see the statistical efficiency gains primarily.

Okay, got it. And I guess more specifically, just to double back, the systems conversion, is that a more of the kind of operating leverage, or will we see another maybe structural expense savings following this conversion in the first quarter?

Yeah, Jeff, it's not a system conversion. It's a renegotiation of the base core systems contract, not a change in system.

Apologize. That renegotiation, the savings there, is that a meaningful number into one queue?

It is. It's about $2.5 million a year. But of course, there are some offsetting increases, right? Each of these other contracts have escalators, and we have some added functionality. So you won't see the entire... Yeah. Two and a half million is a straight reduction.

I think the prior guidance we've provided is roughly a savings of three to four percent compared to this year in terms of the IT costs. Overall, that contemplates all the items that Mark mentioned.

Right. Thanks, John. And then just a housekeeping. On the margin, did we capture the full impact of the FHOB prepayment and I guess secondarily, just sort of a margin outlook post that for the kind of the balance of the year.

The FHL repayment penalty was actually incurred at the end of the quarter. So it's not reflected in the quarter's margin at this time. So that will be a benefit going forward. And as I said, it was spread out over five years or so.

You can calculate the benefit.

Yeah, you can calculate the benefit in terms of going through that. And so I think that is a big answer.

Okay. But the core outlook, I guess, XPP benefit, you cited some of the puts and takes on new loan yields, but also deposit costs. Still, the outlook is... Flat to up.

Right. Flat to moderately up. Yeah.

Okay. I'll step back. Thank you. Thanks, Jeff.

And our next question today comes from Matthew Clark at Piper Sandler. Please go ahead.

Hey, good morning. Good morning, Matt. Maybe we can circle back on the non-interest expense run rate. I think coming into the quarter, the expectation longer term was $53 to $54 million with the normalization of mortgage and the reinvestments you need to make on the tech side and inflation. Is that still the thought or has there been a change there?

I think that that is... roughly true except for the impact of single family mortgage. When we were talking about those numbers, that's sort of the core expenses. If you remember the discussion, right, as a core run rate subject to higher levels of mortgage volumes, which we are expecting to extend through this year. And our view of that extension since that last discussion has elongated. So what does that mean for this year? We're expecting our non-interest expense including or inclusive of the impact of mortgage to be a little above that number.

With commensurate revenue increase?

And with commensurate revenue, of course.

Right. Okay. And then In terms of the gain on sale margins this quarter up in SFR and down in commercial, I guess, what are your thoughts on, it sounds like the single family resi will kind of continue to normalize a little bit lower based on kind of a bell curve throughout the year, but how should we think about that gain on sale margin for commercial? Was there something unusual that caused that to come down maybe a little bit more or is that kind of a good

You know, it's dependent upon several things. One of them being mix, right? What is the mix of Fannie Mae dust sales as opposed to portfolio quality loan sales? Fannie Mae dust sales are typically higher gain on sale margin, somewhere in the three and a half plus percent range. The portfolio Loan sales, the profit margin is typically?

101 and 102, in between those two, depending on what you have. And obviously, selling into a declining market will give you a little bit more juice. So as we go forward, we expect it to kind of get back to more normalized levels on the multifamily side.

Which would be in the?

Yeah, 101, 101.5 or something. Right. Yeah.

Right, meaning 1% to 1.5% profit. Right, yeah. Just to be clear. Yeah. So it's a mixed question, and the mix is going to jump around during the year, right? I'd love to give you a mixed number that you count on each quarter, but there is seasonality, particularly in the Fannie Mae dust business, somewhat in the portfolio quality business. The second half of the year tends to be more active for whatever reasons.

Okay, and then in terms of the volume of commercial loans sold this quarter, 407, how should we think about volume going forward, you know, more than double last quarter?

Right. I think we indicated at the end of the third quarter to expect the fourth quarter to be higher. It was higher than we expected, which was great. I would expect that volume to be lower this quarter. How much lower is a little foggy at this point but I think our volume will be at least half and might be meaningfully better than half of last quarter. John is that fair?

That sounds reasonable and obviously again driven more by the dust loans we did have a large non-dust sale in the fourth quarter that we expect not to be reoccurring in the future.

Not at that size.

At that size. Yeah.

Right. That's the biggest, one of the biggest components to the change.

Yeah.

Typically first quarter is one of the lowest quarters.

Yep. Okay. And then on the, um, the 130 reserve, um, How do you think about that ratio post-CECL? I think coming into the year, last year, when you adopted it, you know, you stepped it up from the 80s up to 115 or so. Should we think about, you know, if we assume the economy continues to improve modestly, how low would you be willing to let that ratio go?

That's a great question, Matt. With a lot of variables, right? Of course. One of the variables, post-pandemic normalization, is expected loss rate, which continues to fall. I mean, if you look at our credit numbers over the past seven, eight, nine years, we've had very, very few charge-offs, which is reflective of the post-Great Recession change in portfolio composition credit culture you know post turnaround of the company change in the business and so our expected loss component of that calculation continues to fall which means that the preponderance of our allowance is is post pandemic expected to be qualitative factors again like it was pre-pandemic. Pre-pandemic, I think at least two-thirds of the allowance, the CECL allowance, was qualitative reserves. And so we're expecting to go back to that kind of profile, but perhaps with a lower expected loss component. And with the changing composition of our portfolio being a little heavier on multifamily, which has a zero expected loss factor, our post-pandemic coverage, allowance coverage, could fall below the 87 or 89 basis points it was pre-pandemic. John, is that fair?

That is fair.

How far down? It's a little tough to project right now, but As we think about post-pandemic coverage, being at least down to the 87, 89 basis point range is probably in order.

Again, I think our view is that we're probably not going to be reaching that level until late 2022 or 2023. We think the next year and a half is still going to be pretty uncertain.

We intend to hold reserves.

Okay, great. Can you just remind us how much you have in the way of net PPP fees left to be realized?

My guess is probably about $6 to $7 million on the old one, not counting the new stuff that's going out now.

Right. OK. And then maybe just a geography question. I think you mentioned the occupancy savings coming through net interest income. Is that what I heard, if I heard you correctly? No, it goes through non-interest.

No, it's non-interest expense. I'm sorry. The FHOB prepayment benefit would go through the net interest income. The savings on the occupancy would go through the occupancy line on a go-forward basis, about $1.3 million a year.

Okay, great. And then just that $9.5 million of G&A, is that where that does higher health care costs? I'm just trying to isolate that.

Yeah, yeah, I'm sorry, that was in the compensation and benefits line, the $1.8 million save. And that was what I tried to profess is that that happened in the fourth quarter, but that's not going to be our run rate going forward. Would you expect that not to be recurring? Okay, and then on the G&A side, that $9.5 million, anything unusual there or is that just? $9.5 you were talking about. Are you talking about the 6.1? I'm sorry. You had 9.5.

The 9.5. Yeah, no, no, no, the G&A line.

Oh, okay, okay, that's the G&A line. Yeah, that includes the $1.5 million prepayment fee, so that's probably the other thing. Other than that, I don't think there's any unusual items in there. Okay, thank you.

And our next question today comes from Jackie Bowen with KBW. Please go ahead.

Hi, good morning. Mark, I wondered if you could provide an update on your thoughts for the on-balance sheet single family portfolio, just in light of your expectations for volumes to remain high in terms of what you intend to sell. So, just wondering what your expectations are for balances in the portfolio.

I think they're going to stabilize.

So, you want me to be a forecaster?

No, I want some professional expertise.

I think that we're nearing stabilization, right? I mean, I think that's the big statement. John, what would you say in terms of timing of stabilization?

I think it's in the first half of this year as we expect that, because basically this is consistent with our volume estimates on the single-family side. is we see the prepayments starting to slow down in the second half of the year. So we think our portfolio would start growing because we'd have less levels of prepayments. I think our origination values have been pretty consistent in terms of the loans held for investment. But I think going forward, you know, we'll have, start to see that stabilize and start growing as prepayment levels start to decrease slightly.

Okay. Thank you. And then in terms of on slide 19, you referenced the anticipated increases in CRE, and I know you gave really great color on multifamily and what you're looking to do there. Does that encompass the CRE comment, or are there other CRE balances that you're also looking to grow this year?

No, that's the primary growth area. We do finance other property types, but on some property types we're just out of the market. We're not As a general matter, doing retail properties, office properties, we're watching closely and not lending actively on self-storage in many markets, as another example of maybe an overbuilt situation in some markets. And so there are certain CRE types that we are just not lending on today. But we obviously do a lot of owner-occupied C&I financing We continue to be active there. And we'll end up doing some amount of sort of each property type, but there's special situations. There are typically very deep net worth sponsors, large portfolios with portfolio cash flow, very low loan-to-values, and property types that have the extra risk.

Okay. Okay, now I understood. And then just lastly, you know, kind of rounding out the loan book, how has demand for construction loans been?

Surprisingly stronger than I would have expected. We are only financing multifamily construction today. Some of those projects have some mixed-use component of some small amount of retail typically, but Those are the only projects that we are actively considering today.

Outside the residential construction?

Yeah, I'm sorry. Outside of home building. Yeah, sorry. Thinking about commercial construction. We do obviously have a home building lending unit that had slightly lower volume last year, not because home building is not active. We all know it's incredibly active, but our builders started to run out of land to build on. And so our portfolio is going to go through a dip this year at the beginning of the year and then grow through the end of the year. That is a robust market and a very profitable market today, single-family residential construction.

Okay, great. Thank you for all the added details.

Thanks, Jackie.

Thanks. And as a reminder, if you have a question, please press stars and ones. Our next question today comes from David Ciaverini with Red Bull Securities. Please go ahead.

Hi, thanks. A couple questions for you. And since you don't give yourself enough credit for your forecasting ability, I'll ask another question along those lines. So mortgage volume, you mentioned about it staying elevated on the single family side. So in 2020, you guys did $2.1 billion of originations for mortgage banking. I'm assuming when you say, you know, stay elevated, that it will be somewhat lower than the kind of booming pace that we had in 2020. As we look out, and so if 2021 is still kind of in the elevated category, what would you expect if we look out even further to, say, 2022, what a kind of normalized sort of mortgage banking volume you would think is reasonable?

Well, thanks for that question, David. Had you asked me that question a year ago, I would have said about a billion dollars, a billion, a billion one, which is what the volume that we built or restructured our mortgage business to produce in a stable rate environment. However, what we've seen is that the unit we built is actually far better than that. And the loans for loan officer are greater. our efficiency in operations is better and we think that stabilized volume for that unit may actually be in the 1.5 or 1.6 billion dollar range, depending upon a lot of factors including competition. So that's a good answer for us. The one thing that we are doing in that unit is restricting the growth in personnel. So those numbers I'm giving you that are 50 to 60% higher than we expected are essentially with the same FTE or maybe a couple of operations people added, which means that the efficiency of that operation is 50 or 60% higher than we planned, which is a great thing. The person we have running that group, Eric Hand, has done an extremely good job at building efficiencies and quality into the group. And we're just really pleasantly surprised.

And picking up on that last point about efficiency, I have a question about expenses as well. So you mentioned a little bit higher this year for $53 to $54 million. So let's call it $54 or $55 million. But as we look out to 2022, Are there levers to pull to bring that pace kind of lower as the mortgage volumes kind of pull back so you won't have the commission expense? Could that be in the low 50s or even lower than the low 50s that you're already kind of pointing to for 2021 as we look out to 2022?

I don't think so. While we expect to realize some additional efficiencies, if you are paying attention to my answer to the question that Jeff Rulis asked, the greater improvements in efficiency we expect from operating leverage and growing revenues without the commensurate growth or material growth in operating expenses. And so we are planning to grow the balance sheet going forward, as an example, and grow originations, but not meaningfully grow operating expenses.

Yep. That makes sense. And we think we have a nature. And the nature of where I was going with that is, you know, you're in your prepared comments, you mentioned about, you know, that you should continue to grow EPS, even with, you know, uh, essentially a slowdown in mortgage banking decline. So it, it sounds as if it wouldn't be unreasonable to actually see an EPS decline in 2022 versus 2021, um, given. the dynamics and how, frankly, how profitable the mortgage banking operation is when volumes are high.

And I really understand your logic. That's sort of conventional wisdom logic. We just at this juncture believe that we have the opportunity to continue to grow earnings per share through those periods. Consequence of growth in our portfolio, reduction in our shares, and the greater efficiencies of growing revenue and not growing expenses at the same pace. So that's why I specifically made that comment in my prepared remarks. I really appreciate you pointed it out.

That's helpful. And then the last one for me is more housekeeping. You mentioned about PPP round two. How much are you expecting to come through? Would it be roughly half of what you did in round one?

The count is likely to be half or a little better. I mean, to date, we have some 85 million in the queue, 617 loans, and obviously we're just in the first week of taking applications. The average loan size is... obviously smaller, right? 85 million divided by 617 is about 130,000, which is a little lower than last time. But we are actually surprised at the level of demand. We were not expecting demand to be this high, and we'll see where it settles out.

Great. Thanks very much.

You're welcome. Thank you.

And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Mr. Mason and the management team for any final remarks.

We don't have anything further to say. We really appreciate your attention, particularly to our views on our future profitability. We believe that we have made a substantial change in our durable core profitability, and we're enjoying, obviously, a great period in mortgage loan refinancing, but we think the real story here is how we exit that period. We appreciate your time today. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.