HomeStreet's (HMST) CEO Mark Mason on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: HomeStreet, Inc. (HMST)

HomeStreet, Inc. (NASDAQ:HMST)

Q2 2014 Results Earnings Conference Call

July 30, 2014 01:00 PM ET

Executives

Mark Mason - President and CEO

Analysts

Paul Miller - FBR Capital

Tim Coffey - FIG Partners

Operator

Good day and welcome to the HomeStreet Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

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

Mark Mason

Hello and thank you for joining us for our second quarter earnings call. Before we begin, I’d like to remind you that our earnings release was furnished this morning with the SEC on Form 8-K and is available on our website at ir.homestreet.com. In addition, a recording of this call will be available today at the same address.

On today’s call, we will make some forward-looking statements. Any statement that isn’t a description of historical fact is probably forward-looking and these statements are subject to many risks and uncertainties. Our actual performance may fall short of our expectations or we may take actions different than those we currently anticipate. Factors that may cause actual results to differ from expectations or that may cause us to deviate from our current plans are detailed in our SEC filings, including our quarterly reports on Form 10-Q and our annual report on Form 10-K for 2013 as well as our various other SEC reports.

Additionally information on any non-GAAP financial measures referenced in today’s call, including a reconciliation of those measures to GAAP measures may be found in our SEC filings and in the earnings release available on our website.

Today, I’d like to update you on recent events, talk about our progress and executing strategy and highlight key financial results. I'll also share a few thoughts about current market conditions. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations.

In the quarter, we successfully executed three important transactions. First we sold approximately $211 million of single family mortgages as part of our efforts to reduce mortgage concentration of our loan, recognizing a $3.9 million of pretax net gain. We have included this gain in our commercial and consumer banking segment, as the loans were previously in our held for investment consumer loan portfolio.

We also completed the sales of two pools of non-confirming jumbo mortgage loans totaling $84 million, these sales marked the first executions from our non-confirming HomeStreet Select mortgage loan program.

Today, the non-confirming jumbo loans space is the most competitive part of the mortgage market. With large balance sheet lenders offering the lowest rates and fees in the market. Over last year, we took the necessary steps to become a rated originator and servicer to enable us to sell our loans to securitization aggregators.

For example, our loans comprise over 20% of Redwood Trust most recent non-agency jumbo loan securitization. And finally, as part of our capital management measures in preparation of Basel III, we sold the right to service approximately $3 billion of single-family mortgage loans at a very attractive price, resulting in a net pre-tax gain of $4.7 million. This gain is included in mortgage servicing income for the quarter.

The strong interest in the secondary market for our loans and our mortgage servicing rights is gratifying and reflects the quality of our lending and the superior value of our servicing assets. We also continue to improve our team.

Last week, we announced that we appointed Financial Services Veteran Tim Chrisman to the Board of Directors of our company and our bank. Many of you know Tim from this 40 plus years in the industry. Tim’s depth of experience and perspective is great addition to our company.

And in June, HomeStreet received a superior rating for service in the consumer reports checkbook, placing second overall among 16 banks in savings and loans. Our focus continues to be on business diversification, building mortgage market share in existing and new markets and growing our commercial and consumer banking business, both in our core region and markets where we’re expanding our mortgage presence.

This quarter our mortgage banking business returned to profitability, benefiting from significant increases in closed loans and interest rate lock commitments. Our strategy of continuing to grow our retail mortgage banking franchise and mitigating the effects of the constrained markets through this growth helped us increase our closed loan production at two to three times the rate of the industry as a whole in the second quarter.

We continue to believe that this is the right strategy for our company. Many consider this to be the slowest recovery since post World War II. So, you wouldn’t necessarily know that in our core market area of Greater Seattle, building cranes are everywhere you look. In June, downtown Seattle had 100 projects actively under construction permitted or recently completed. Of those, 64 residential projects reflect the strong employment and population growth in this area.

Payroll employment in Washington State returned to pre-recession levels in the first quarter with employment in Oregon and Idaho on track to attain the same in the near future. Average employment growth rates are expected to be 2.3% in Washington and 2.6% in Oregon and Idaho through 2015.

Construction, manufacturing and professional and business services sectors will leave the Northwest economies this year and next, accounting for a disproportionately high percent of job creation. However, even with our strong local and regional economic fundamentals and robust labor market housing activity still lags the long-term averages. According to the MBA mortgage applications are about 15% below last year. And both existing and new home sales have contracted compared to the same period. The MBA issued a new forecast recently for the remainder of this year, lowering its estimate of overall mortgage originations for 2014 to $1.02 trillion, down some 42% from 2013, the lowest annual total since 1997. Forecast for 2015 are better with purchase originations expected to increase about 25% and housing starts expected to mirror that increase. The MBA is estimated the second quarter mortgage originations increased 18% over first quarter. Inside mortgage finance estimates an increase of 25% over the same period. By contrast, our originations were significantly higher, increasing 63% over the prior quarter. Nationally purchases comprised 59% originations and 64% in the Pacific Northwest in the second quarter. HomeStreet continues to perform above the national and regional averages will purchases accounting for 80% of our close loans and 78% of our interest rate lock commitments in the quarter.

We continue to believe our company is on track to meet or exceed last year's origination volume, despite the significant contraction of the mortgage market. We are maintaining or growing market share in many of our regions including Puget Sound, (inaudible) Spokane market in Eastern Washington, Clark County in Southwest Washington and California which accounted for 20% of our close loan and interest rate lock volume in the second quarter.

Obviously new housing will play a critical role in the much needed recovery. It’s still very much of an upwind month down the next story at this point. Housing permit still lag the 25 year average in Washington and Oregon or they expected to hedge to closure to that average by the end of 2015. Idaho has another story were permits are expected to receive the long-term average by about 30% by the end of 2015.

I'd like to now share some key metrics from this quarter. Our second quarter net income was $9.4 million or $0.63 per diluted share compared to $2.3 million or $0.15 per diluted share for the first quarter. Tangible book value per share increased to $18.42 per share as of June 30th compared to $17.47 per share at March 31st year-to-date return on average tangible equity is 8.82%.

Excluding acquisition related expenses of $606,000 in the second quarter and $838,000 in the first quarter, net income for the quarter was $9.8 million or $0.65 per diluted share compared with net income of $2.8 million or $0.19 per diluted share in the prior quarter. Our net interest margin was 3.48% on a tax equivalent basis, compared to 3.51% in the first quarter. The change from first quarter was primarily the result of higher levels of interest received on non-accrual loans paying off during the first quarter versus the second quarter.

Net interest income was $23.1 million, an increase of approximately 2% from the prior quarter. Total average interest earning assets increased 2.6% to $2.72 billion, this strong growth in loan balances was partially offset by lower balances in our investment securities portfolio.

Non-interest income was $53.7 million, an increase of approximately $19 million or 55% from the first quarter, this was primarily due to a $16 million increase in net gain on mortgage origination sales activities from a significantly higher level of interest rate lock commitments as well as the increased mortgage servicing income which benefited from the gain we realized from our sale of mortgage servicing.

Additionally as I mentioned earlier, we recognized $3.9 million of pre-tax gain from the execution of portfolio loan sales closed in the second quarter.

Non-interest expense was $63 million for the quarter, compared to $56.1 million in the first quarter. This increase was primarily due to increased salaries and related costs, including commissions, from the increase in closed mortgage loans as well as other expenses related to acquisitions and organic growth.

During the quarter, we had net growth of 55 full time equivalent employees. These personnel increases were primarily the result of opening one new retail deposit branch in Seattle and four new home loan centers, two in the Puget Sound region and two in California.

At June 30th, the Bank's tangible book value per share was $18.42, our tier 1 leverage ratio was 10.17% and the total risk based capital ratio was 14.84%.

Let's speak now about our commercial and consumer banking business results. Our commercial and consumer banking business continues to expand with strong loan productions and net loan portfolio growth of nearly 9% for the quarter. We continue to see growth in our loans held for investment portfolio at at least 5% or more per quarter subject to liquidity and capital constraints.

Segment net income was $3.8 million, compared to $4.1 million in the first quarter. These results included the $3.9 million net pretax gain on the sale of portfolio mortgage loans in the quarter.

Our first quarter results included a pretax $1.5 million reversal of loan loss reserves, primarily associated with the transfer of approximately $300 million in mortgage loans from our held for investment portfolio into our loans held for sales portfolio. Due to a significant decrease in classified loans and lower charge offs, we did not recorded loan loss provision in the second quarter. The total aggregate impact in net interest income of our portfolio mortgage loan sales most of which closed in the second quarter was $1.2 million pre-tax.

Going forward this impact will quickly be mitigated by new commercial lending and expected prepayments of those loans sold. Excluding acquisition related expenses segment net income was $4.1 million compared to $4.7 million for the first quarter. As I mentioned our loans held for investment portfolio grew 9% in the quarter to $1.81 billion with new loan commitments of 272 million for the greatest activity in single family residential construction and commercial real-estate.

Deposit balances grew 2% in the second quarter to $2.42 billion. Transaction in savings deposits rose 6% in the quarter now comprising 71% of total deposits. Non-interest bearing deposits increased over 7% in the quarter comprising 9.8% of total deposits at quarter end while (inaudible) of deposit balances fail by 14.4%.

In addition to the new retail deposit branch opened in the second quarter we also opened the second new deposit branch on July 17th and had two more openings in the second half of this year putting us on target to open four newer branches in Seattle in 2014.

Upon completion of these openings we will have substantially achieved our goal of branching to every community of deposit concentration in Seattle. We're happy to report the core deposit growth trajectory for these newer branches opening since the end of 2012 continues to exceed our expectations.

Classified assets ended the quarter at 1.24% of total assets, compared to 1.5% last quarter. And non-performing assets decreased to 1% of total assets from the 1.12% at March 31.

Now let’s talk about our Mortgage Banking results. Seasonality plays a role in loan volume in the mortgage market nationally and more significantly in the Pacific Northwest. As anticipated, interest rate lock commitments in [closed] loans both increased in the quarter. The addition in loan volume in conjunction with our efforts to improve production efficiency resulted in a substantial decrease in the cost to produce loans.

In the second quarter our mortgage banking segment recognized net income of $5.6 million compared to a net loss of $1.8 million in the prior quarter. Interest rate lock commitments totaled $1.2 billion, an increase of approximately 50% from the first quarter. Locks increased month by month throughout the second quarter but have slowed month-to-date in July to below June levels. Total applications increased 6% quarter-over-quarter for applications (inaudible) are now 44% of total applications down from 50% of total applications last quarter. Quarterly demand is much stronger than available housing start can support sale. Closed loan volume designated for sale was $1.1 billion an increase of 63% from the first quarter. The combined pipeline of locks and closed loans was $953 million at June 30th, 46% of that at March 31st of this year.

And our average loan amount has increased 9% to $292,500 in June compared to December of last year.

This growth and average loan size is attributable to a number of factors including the growth in jumbo non-conforming loans as a percent of our total, our growing franchise and market share in California and overall home price appreciation in all the markets that we serve. The gain on single family mortgage loan origination and sales activities was $37 million in the quarter, approximately 50% about that of the first quarter. We experienced some pressure on margins this quarter, due primarily to increased origination of non-conforming jumbo loans, which made up 20% of commitments in the quarter.

The composite profit margin was 321 basis points compared to 323 basis points in the first quarter. Given expectation that going forward the composition of our lending loan include a larger proportion of non-conforming jumbo loans, we are expecting our composite margin to decline slightly going forward.

Single family mortgage servicing income was $9.6 million in the quarter compared to $7.5 million in the first quarter. Mortgage servicing income for the quarter includes the pre-tax net gain of $4.7 million I referenced earlier related to the sale of a portion of our single family mortgage servicing rights.

Segment non-interest expense of $42.5 million increased $5.7 million or just over 15% from the first quarter. This was primarily due to higher commissions related to higher closed loan production. Notwithstanding the increase in overall expenses, our direct cost to originated loan decreased approximately 81 basis points from the first quarter.

In the quarter we added a net of 52 production and operations personnel in mortgage banking. This net number includes the reduction of both voluntarily and involuntary of 42 production and 30 operations personnel as part of our ongoing effort to upgrade production performance and improve operating efficiency.

We maintained our position as the top originator by volume of purchase mortgages in the Pacific Northwest. During the quarter we continued to expand our network of mortgage loan offices. Today we have 51 standalone home loan sellers opened in two new locations in Washington and three in California during the quarter.

Now, I would to make a few closing comments.

The second quarter marks the first quarter in which we made a profit in our mortgage banking operations since the second quarter of last year. The past year has been a challenging time for all companies in the mortgage business and these challenges continue. Although lenders continue to suffer the impact of regulatory and investor claims and settlements, HomeStreet fortunately has not incurred these types of claims due to our long history of ethical, compliant and credit worthy loan origination.

Our strategy of mortgage loan origination expansion during the downturn is showing results with loan originations growing two to three times the industry rate in the second quarter. We believe that industry origination volumes are at their lowest level subject to seasonality and that we will experience going forward growth that while a challenging market today reminds us that this is a business that is going to get better over the longer term.

In our traditional banking business, our loan originations continue to grow at a multiple of the growth levels achieved by peer institutions. And we are supporting that loan growth with strong deposit generation.

We remain optimistic of achieving a balanced contribution to our bottom line in a reasonable timeframe.

Overall, despite the headwinds of a slow mortgage market, lower interest rates and a weak economic recovery, we believe our strategy is the right one for HomeStreet at this time. We look forward to making more progress the remainder of this year. We appreciate your time and attention today and be happy to answer any questions you may have at this time.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Paul Miller of FBR Capital. Please go ahead sir.

Paul Miller - FBR Capital

One quick maintenance question, of the $900 million and so loans that you sold, did that include the legacy jumbo loans that were sold during the quarter?

Mark Mason

The loans sold during the quarter that are disclosed in the tables, in the back?

Paul Miller - FBR Capital

Yes.

Mark Mason

I don’t believe so. I think that those are the loans sold in the normal course in our mortgage banking activities.

Paul Miller - FBR Capital

Okay. And that’s why I just wanted double check with that. And the mortgage bank did well but as we always know that when -- your rate locks were up 60%. So, does this -- can you replicate your second quarter whether its’ rate locks or will it be tough because -- it’d be tough to increase your rate locks by 60%, like how much noise is created by these rate locks?

Mark Mason

Well it does help the quarter quite a bit I mean we have been suffering the opposite impact of declining locks and rising closings towards the end of last year. Because we have continued to hire and grow capacity, what we see is a leveling out of the difference between rate locks and closings.

We don’t expect to see that type of increase in volume between the second quarter and the third quarter, though we are expecting a meaningful impact of increased volume between second and third quarters. And we're also at this point expecting to see a flattening of volume from the third to the fourth quarter, which historically would have been unusual due to the seasonality of one production per producer. But given our growth in personnel and offices through year-end, we're expecting to mitigate somewhat that expected seasonality, it remains to be seen if that's actually going to occur, but that's our current expectation.

Paul Miller - FBR Capital

So, you think that given the new hires that you brought on, I just want to make sure I am clear is that you believe that production can remain relatively flat going into the third quarter?

Mark Mason

Or better.

Paul Miller - FBR Capital

Or better. And then on the MSR sales, do you foresee any more sales like that or was that just an opportunity, a onetime opportunity to jump on or is it something you explored going forward to lessen the capital strange that it brings on relative to Basel?

Mark Mason

We intend that to be a one time sale. We obviously are doing other things to help mitigate the impact of the Basel III changes like the sale of portfolio mortgage loans. I guess I can never rule out another transaction if servicing values were to reach levels that we thought were abnormally high that would mitigate the very negative effects of selling servicing our system, and believe me they’re negative. Part of our business relies on the continued relationship between us and our customers.

Historically, we have an industry leading level of self-refinance loans and the best way to maintain that relationship is to continue to servicing relationship, beyond which we think that we are in a better position to service the loans we originate in our markets. So having said, that we don’t seek to execute anymore of these sales. I always hesitate to say never to anything because the world changes so quickly but that is not in our hands.

Paul Miller - FBR Capital

Okay. Hey guys thank you very much.

Mark Mason

Thanks Paul.

Operator

And our next question comes from Tim Coffey of FIG Partners. Please go ahead sir.

Tim Coffey - FIG Partners

Hey, good morning Mark.

Mark Mason

Good morning. How are you Tim?

Tim Coffey - FIG Partners

I am good. Thanks. The jumbo production you saw in the quarter and I apologize if I missed this in your comments. What was the geographical dispersion of that jumbo production?

Mark Mason

That’s a good question. Without checking the data my expectation is that by total dollar not the ponderance will still be in Puget Sound just given where the other levels of lending are, but on a per office or per originator basis you’ll see high level of jumbo production in some of this California and some of the closer in areas of Seattle.

Tim Coffey - FIG Partners

Okay. California specifically, was that your expectation that would be more of a jumbo market for you?

Mark Mason

Well we have become the terms with that when deciding to enter California. Now that we're there, we are as focused on non-jumbo markets, the interior markets which tend to have higher levels of government loan origination, government loans continue to have a highest profit margins and highest servicing value in the market today. So now that we're established in Northern and Southern California, we are more focused on areas with smaller levels of jumbo production.

Having said that, we're prepare to operate in any of those markets very competitively and that's why we went through all of these steps necessary to become a rated seller servicer to be able to pool and sell these loans to securitization aggregators. So our program is competitive today, but those loans by profit margin are the lowest in the market today.

Tim Coffey - FIG Partners

And turning to the commercial loan growth during the quarter. Obviously construction was really good and that's put too much pressure on it. But is that kind of performance repeatable?

Mark Mason

We think we're just getting started, honestly it was a strong quarter for construction but the pipeline is stronger. We’ve had a significant proportion of commercial construction activity in the first part of this year. The latter part of the year, we're going to be emphasizing permanent loans and funding loans more and increasing our required ROE's in construction, because we think we have a sufficient pipeline of commercial construction.

On the residential construction side, that pipeline is just beginning to grow to levels that we expect and I would expect to see those balances grow dramatically with commitments over the remainder of this year and you may remember that we hired two teams in the first quarter the one in Salt Lake City Utah and one in Southern California to expand a footprint of our rose energy construction business and those groups are doing well and I expect to see that business grow more significantly in the near-term.

Tim Coffey - FIG Partners

Okay. And so that’s where your growth would come from geographically speaking from Southern California Salt Lake City in the near term?

Mark Mason

It will though, we have been hampered in the Puget Sound area by a lack of buildable land and it’s not that the demand hasn’t been there where that our customer base the local regional builder isn’t ready to expand our business finding entitled land or getting new land entitled is today a four year process, so that is going to build slower locally, but the housing demand is currently there.

Tim Coffey - FIG Partners

Whether some of the characteristics on the financial side through these borrowers exhibit or in terms of construction, what does the financial position look like?

Mark Mason

They are much stronger than they were pre-recession combination of factors contribute to that one. Although weaker builders didn’t really survive the recession so the builders that are in the market today are to be characterized by being substantially more liquid lower levered and I will repeat that much lower levered and subject to lending underwriting requirements in the industry not just with us that require real equity for the projects and we get between 10% and 20% cash equity on cost in our projects today, of course as you know that's much different than how this industry operate pre-recession, when there was not much real equity in most of the projects.

Our borrowers today are very strong and it's gratifying to see that who we're working with, because I would characterize that again as being liquid much less levered and much more concerned about the level of spec homes and lots they are carrying and there are net absorption duration. We are very concerned about that absorption duration. Today we will now allow absorption or building a spec homes larger than a six month duration by project.

And a lot of inventories of more than 18 to 24 months. So, the key for us in risk is duration, leverage and liquidity and we try to watch this very carefully today.

Tim Coffey - FIG Partners

Alright. How competitive is that market, we're going to see compression in loan yields?

Mark Mason

I think it's inevitable. Today the returns on these loans all of them exceed 30% ROE. That means we are giving prime plus 1.5%, 1% to 1.5% and fees of approximately 1.5% on these loans. Today that creates pretty substantial ROEs. Contributing to that number though is the short duration, which was in perspective of construction loans in the Puget Sound area or averaging lives of around 200 days. And even faster in today they are averaging about a 100 days of life.

So inventory, because of the scarce inventory condition is turning over quickly. And it’s sort of a good bad right, it makes sure ROE of these loans is spectacular but it makes it very hard to hold balances.

Tim Coffey - FIG Partners

I am sorry. I missed that last word, makes it very hard to what?

Mark Mason

To hold balances because they prepay the home sales so quickly since their bulk are gone, so holding balances at levels is hard. Historically these loans have carried about 60% utilization rate on the total commitment. They’ve been running in the low 40% range, for most of the time we’ve been back in the business since the recession.

Tim Coffey - FIG Partners

And then just a quick question about deposits. Your non-interest bearing deposits have been growing faster than the total deposit portfolio; given the renewed focus on commercial credits, do you expect that trend to continue?

Mark Mason

We sure hope so. Obviously, it’s the most competitive part of the marketplace and it is entirely relationship driven. We compete on the basis of service, to a lesser extent on the price of some service items. As an example, we have a very fine treasury and commercial cash management group that we’ve built here. But we sell those services at a lower price than most institutions. So we commonly save businesses who are net payers on analysis somewhere between 30% and 50% of what they're paying to other institutions for those services.

I can’t say that that doesn’t help competitively. At the end of the day though, it’s service and their relationship with you. And so as our commercial lending increases, I would expect to see balances come with that. But we’re also focused on non-borrowers people who have positive cash flow; they need investment services and cash management services. So we’re very focused on that. And it’s been gratifying to see the balance has come.

Tim Coffey - FIG Partners

Great. Okay, thanks. Those are all my questions.

Mark Mason

Thanks Tim.

Operator

(Operator Instructions). Our next question comes from [Chuck Grish from BlueLine Capital]. Please go ahead sir.

Unidentified Analyst

Good morning guys.

Mark Mason

Good morning, Chuck.

Unidentified Analyst

Just a couple questions here. So, got the mortgage bank back to profitability, you’re doing a very good job growing the commercial side of the business. How do you see the development and growth on the overall asset side of the book? Are you going to fund it with securities et cetera? That’s the first question. And if you were to look out 12 months to 18 months, how would you expect the balance sheet to grow relative to today? And then the second question is obviously trading -- you're actually trading at discount your tangible book value at present, what do you think any obstacles to get a fair valuation given the returns you’re generating, both on assets and on equity?

Mark Mason

Thanks for the good questions, Chuck. Our asset growth, we expect to come primarily from growth in our loan portfolio. We do need to maintain a securities portfolio that’s somewhere between 13% and 15% of total assets. We need most of those securities as collateral for our hedging activities, so a little different than some commercial institutions which keep these portfolios exclusively for liquidity purposes. We have a dual challenge of sufficient on balance liquidity and having sufficient collateral with trading activity surrounding hedging.

So we expect that 13% to 15% asset composition in securities. And the remainder of straight portfolio growth, honestly we’ve been disappointed, we haven't been able to grow faster because our prepayment speeds in our portfolio have been a lot faster than we expected. We’ve been running about 5% per quarter in scheduled and unscheduled pay downs of loans, much faster than you would expect in the normal course. And so a little help we think will come simply from slowing prepayment speeds.

With respect to stock price, obviously we’re a little frustrated...

Unidentified Analyst

The second question was how would you expect your -- the balance sheet to look 12 months to 18 months from now and kind of the returns from the two different size of the house as a percentage of your net income, how much more balance might we see?

Mark Mason

Sure. So, we expect total assets to grow this year by maybe $400 million over the year, roughly and we’ve already done some of that. The next year, we hope to grow assets a little faster, maybe 600 million to 700 million or more. That is going to be regulated by our earnings and our ability to grow capital to support that number. The return…

Unidentified Analyst

(Inaudible)?

Unidentified Company Representative

Yes, because right now we're not quite fully levered, right, we're running 10% Tier 1; we're going to run that down to about 9% so combination of earnings growth, capital growth and a little more leverage on capital. It should allow us to grow if we are growing well and our stock price supports that we may even raise some capital next year. But that is subject to a lot of considerations including stock price.

Returns on those businesses as a contribution to the total. We don’t quite expect to be in a position where we have an equal contribution next year. The total income from the mortgage bank we expect to increase substantially next year that would be consistent with increasing volume, larger footprint, greater efficiency of our operations. The bottom line next year there will still be more than half mortgage banking. I don’t think that the absolute contribution should be as important as what is the dollar contribution of commercial banking, standard traditional banking and what does that imply to our valuation if you were to value these segments separately. We understand that the market is going to value mortgage gains at least historically at about half the multiple, traditional bank earnings and that’s due to a volatility, cyclicality, durability of those mortgage earnings. What we are hoping is that people are going to start paying attention to the absolute returns on the commercial segment, valuing those at a reasonable multiple or rate of operations and accordingly mortgage. And so we expect next year's earnings in the commercial and consumer segment to be substantially higher than this year as we build those portfolios at a much higher pace than operating expenses, getting our operating leverage we've been looking for.

Unidentified Analyst

I would concur wholeheartedly with that and given consensus earnings right now we are about 280. In extent you can get more coverage that will broaden your -- lead to a broader investor base. I think the valuation will be appropriately reflected in the stock.

Mark Mason

Well, we hope so. And it's very frustrating to be trading below tangible below book value. I believe it is an inappropriate valuation in light of peer institutions and in light of the historical and future profitability of this institution. But I don't make the market, all we can do is commute a business plan and try to execute it well. We have had some significant headwinds in the mortgage market and I think our stock price today reflects general concern about the mortgage market. The fact that our earnings today are still dependent on mortgage earnings for some significant amount of the earnings. And so until there is stabilization into the mortgage market and in our mortgage earnings, I guess I have to accept the markets concern as reflected in our stock price. I think over the next several quarters, that should be mitigated by our performance on the mortgage side.

Unidentified Analyst

I agree. Best of luck.

Mark Mason

Thank you, sir.

Operator

(Operator Instructions) It appears that we have no more questions. So this will conclude our question-and-answer session. And I would like to turn the conference back over to Mr. Mark Mason for any closing remarks.

Mark Mason

Again we appreciate your attendance in listening to our presentation today. All the great questions. We're looking forward to a great quarter this quarter. Thank you all.

Operator

The conference is now concluded thank you for attending today's presentation. You may now disconnect your lines.

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