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.

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…

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.

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?

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

Yes.

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

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?

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.

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?

Or better.

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?

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.

Okay. Hey guys thank you very much.

Thanks Paul.

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

Hey, good morning Mark.

Good morning. How are you Tim?

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?

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.

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

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.

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?

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.

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

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.

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?

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.

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

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.

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

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.

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?

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.

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

Thanks Tim.

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

Good morning guys.

Good morning, Chuck.

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?

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...

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?

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…

(Inaudible)?

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.

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.

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.

I agree. Best of luck.

Thank you, sir.

(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.

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.

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