Good day, and welcome to the HomeStreet fourth quarter and yearend conference call. [Operator Instructions] I would now like to turn the conference call over to Mr. Mark Mason, President and CEO. Mr. Mason, the floor is yours, sir.

Thank you. Hello and thank you for joining us on our fourth quarter and yearend 2014 earnings call. Before we begin, I would 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 from 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 in executing our business strategy and highlight key financial results. I will 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. During the last year we made substantial progress on our strategy to grow and diversify earnings. We expanded our commercial and consumer banking business and built mortgage banking market share in new and in existing markets. We opened three de novo retail deposit branches and…

[Operator Instructions] The first question we have comes from Jeff Rulis of D.A. Davidson.

I guess, if you anticipate closing of the Simplicity deal at the end of February, when would you guess the back office conversion would be the timing on that?

We are currently scheduled to integrate their back office systems during the month of April, generally. Some of the personnel will leave on legal day one. Obviously, personnel like the Board of Directors and certain members of management who won't be continuing. The rest of the back office staff who is running their base systems will be with us, of course through integration and a little past, somewhere on the average of two to three months.

And could you remind me of either the cost savings target on Simplicity alone or I guess the efficiency ratio goal for the combined company?

The cost savings were approximately 35%, I believe, an annual run rate of roughly $9 million, I think. Most of that cost savings is personnel-related. I believe almost $7 million of that is personnel. Beyond that systems and real estate expenses related to the headquarters were the next two largest categories. The efficiency ratio targets for the company are in the mid to low 60% range a few quarters out. I mean, in 2016, we hope to reach those numbers with a fairly steady improvement over the period of time from then to now.

And then separately, just interested in the pipelines on the commercial and consumer loan growth for perhaps the full year?

Our growth continues to be targeted at this sort of net portfolio growth of a little more than 5% a quarter. Each quarter we put out a pretty substantial deck of additional investor information that has typically included pipeline information as of the end of that period. If you bear with me, I've got a draft of it. Let me see if I can pull up the current pipelines as of yearend. So the total -- I'm sorry. I don't have that number yet. I just have the September numbers. I don't have the total pipeline yet. I mean, it's been running generally at about 130% of production for the quarter, if you look across all of the groups. We expect pretty consistent contributions. If you look at the full year production in commitments by each of our major lines of business, that's basically the contributions we're expecting to the portfolio next year. The only differences really lie in prepayment speeds. Our construction prepayment speeds have been very, very fast, particularly in residential construction, which isn't a surprise, given the lack of housing inventory at least in our markets. So turnover continues to be a problem. I think for the full year, portfolio runoff is going to be somewhere between 10 and 15%, probably closer to 15% for the year, which is quite high. I mean, it makes our interest in growing the portfolio more challenging, but we expect that to continue at this pace.

So from the production side, at least anecdotally, you enter '15 on equal standing as you entered '14? Or do you feel like you've put more boots on the ground and more optimistic in '15 versus '14.

I would say, we're in substantially better position in terms of pipeline and capacity. 2014, if you look at the improvement over the quarters, really showed a maturing of some of these lines of business that had to be restarted, and the integration of the acquisitions we did last year. If you remember, we did two smaller commercial bank acquisitions that close in November of 2013. That integration all took place in the first and second quarters of '14. And so that all got smoothed out during the year and our commercial real estate business picked up a lot of momentum during the year. So I think that what you saw is a maturing of all of the lines of business. And that allowed us to reduce the amount of single family mortgage volume we were putting into the portfolio, allowed us to accelerate the change in composition of the portfolio. I think at one point during the year, 60% of the portfolio was still single-family mortgage. Now, that's down to 40% currently and falling. And so we go into 2013 not only with a better diversification and composition of the portfolio, but with substantially greater velocity.

The next question we have comes from Russell Gunther of Macquarie.

I just want to follow-up on the loan commentary. I appreciate the color you guys gave with regard to your outlook for commercial and consumer loans, and additionally, the color on the construction book and growth this quarter. The other commercial buckets witnessed some runoff quarter-on-quarter. I wonder if you could just give us some color as to the performance there?

Make sure I understand your question. A little more color on the performance?

Sort of like the modest decline in commercial real estate multifamily C&I loans linked quarter.

Well, as I'm sure you know the competition for permanent lending in the multifamily spaces or at least in commercial real estate, the most competitive part of the market. And we have been less successful competitively in the last couple of quarters in the permanent loan area as we have been in the commercial area, though our success with respect to Fannie Mae lending has picked up during that period of time. So we're working on our pricing going forward to see if we can become a little more competitive. And that's caused some runoff in the multifamily area. And what was your question on construction? I didn't understand it.

No. I appreciate the color you offered on what was accounting for the growth in the quarter. I was just, as I look at the other commercial loan buckets; there was just some modest runoff linked quarter. I mean, I think I hear you loud and clear that the target's still on track for the 5% quarter-on-quarter commercial growth. I was just looking for some color on the migration in the quarter.

Sure. And I'm sorry it's just a price competition that we've been less successful in the multifamily area. We still feel strongly that we're going to get the level of composition of contribution in that area going forward. As an example, we're in the process of building a small balance commercial real estate group, which will run the small balance CRE portfolio that we're acquiring from Simplicity. A substantial amount of that production will be sold, but some of that will go into the portfolio as well. So we're coming into 2015 with one more mature existing business lines and a little more capacity from some new business.

Just a question on the margin. The expansion in the quarter is unique in bank land today, and you mentioned locking in longer duration CDs, so I'm just wondering if you could comment, do you think this earning asset remix can continue to drive expansion, maybe even if we just looked to the first quarter of '15 and if there's maybe additional room to lower the cost of funds as well?

Well, we have shared that we believe our margin was going to expand 10 basis points to 15 basis points next year, which is counterintuitive to most of the industry today. That is going to largely be a consequence of improving asset yields as we continue to change the composition of the loan portfolio, our cost of funds, and that improvement is through the end of next year, potentially. Now that, of course, assumes no substantial change in interest rates from the current levels. Our cost of funds, we expect to increase slightly from here, but given that expected increase in margin, we expect our asset yields to improve substantially more. And again, that's really from remixing.

And just so that I understand your margin guidance, you're saying 10 basis points to 15 basis points of expansion. Is that from 4Q '14's 3.53% through the end of 4Q '15 or how should I think about that?

That's correct.

And then lastly, I have a couple of ticky-tack questions on the income statement. You guys mentioned some non-core items, both benefits and expenses on the tax in the quarter. Can you just give us some color, sort of size up? Was there a net non-core impact or did those wash out and what we should look at for a tax rate going forward?

It is one of the things that was disappointing to us in the quarter that we had some true-ups and a little higher allocation to higher state tax jurisdictions than we had previously planned. Plus, we had a little lower levels of nontaxable interest income from lower levels of municipal bonds in the securities portfolio and so all of that contributed to a much higher effective rate for the fourth quarter. Going forward, we will be having more taxable income in higher tax jurisdictions like California. So we think an effective rate next year of about 34%.

34% to 35%.

34% to 35% is probably appropriate. Not as high as the fourth quarter, but higher than 2014 as a whole.

And we also had a balance in Q4 that was sizeable related to acquisitions.

Cory reminded me of one other matter. One negative aspect to doing acquisitions is the non-deductibility of some of our merger-related expenses. So while we may recognize those as expenses in the income statement, they may not be deductible for tax purposes, but are capitalizable for income tax purposes. And during the quarter and the year this year, obviously we had some level of that activity and we will have next year as well. So that also contributed to the higher effective rate.

Just minor question. Just on the other non-interest income line, it looked like there was a small loss in the quarter. Any color there, something one-time in nature?

Another unusual, and at this point, clearly non-recurring item, you may remember earlier in the quarter we announced that we had identified an internal control weakness related to a hedging program on a loan program that the company had done between 2006 and 2008. In addressing the issues related to that situation, we elected to terminate all the related swaps, amortize the remaining marks on the loans and those loss is related to those swap terminations.

And just what was that in aggregate? Was that just the $9 million or did that wash out some other income there?

No, those numbers are all pretty small. I mean its in the small hundreds of thousands of dollars.

Next, we have Tim Coffey, FIG Partners.

Some of the CDs that you locked in this quarter, what was the cost on those?

Let me ask Darrell van Amen, our Treasurer is with us this morning. Darrell, what would you say the cost of the new CDs was?

We actually had some pricing differential between the two different markets we were in, but primarily they were around 100 basis points, that we originated on mainland. So we had different pricing.

Those are the retail CDs. The institutional CDs --

And we didn't do much of those. They were very small. We cut those off in November and they were about 85 basis points

And the brokerage CDs?

But those aren't the duration stretching CDs. Those are about 35 basis points, but they were short-term.

But they are all in the CD bucket.

They are.

So what would you say the weighted average was?

The weighted average would have been something pretty close to about 65 basis points, because of the nature of the brokerage.

And how long were those?

Well, there is a number of different durations. The retail CDs are all roughly in the one year to 15 month range.

15 month, yes.

The brokerage CDs are shorter.

Three months to six months.

Three months to six months.

I mean do you feel like this is something you'll repeat again in forward quarters?

It's unclear. It really depends on our success in growing transaction accounts, obviously that's our preference. We took a look at the quarter and the year-to-date, coming into the year we had expected to raise substantially more CD money, but we were more successful with transaction accounts and core accounts than we expected. So it's going to depend on our success and raising core deposits. It's going to depend our success in growing the loan portfolio. And a great deal of it has to do with monitoring our non-core funding dependency. We try to keep our non-core or non-deposit funding to less than 30% of total funding and so we're constantly balancing all of those things.

And then a question about the hedging activity. Do you feel that you're adequately hedged going into this first quarter given where the rates are and size of the of the MSR portfolio?

We always do. I mean, despite what some folks may think given the positive results that we fairly consistently show, we do not take a position on interest rates. We hedge both sides of the potential change equally. In fact, we hedge potential rate movements that we know of no other party who does. We hedge black swan-type spikes in rates that cost us money. We have just been quite good at dynamically managing that hedge and so our results have nearly always been positive. Remember, part of the reason for that though is we are long in these instruments, and so in a perfect world, we will still make money on the servicing hedge, because we're long in the instruments and these instruments have a carry or an earning rate. And so we kind of have a head start going into the quarter on the results.

The next question we have comes from Paul Miller, FBR.

Can you talk a little bit about, we talked a little bit earlier this morning about this, but when do you think the bank can stand on its own two feet and start to really take over the earnings of the company? And what is your long-term goals with that also?

Well, upon the closing of the Simplicity acquisition, we believe that will change 2015 earnings to an expected more than 50% contribution from non-mortgage banking earnings, based upon on our internal numbers. And that also assumes a pretty significant mortgage banking earning year. So we think post Simplicity acquisition going forward, we should fairly consistently accept during maybe higher refinancing periods, have a majority of our earnings coming from non-mortgage banking or commercial consumer banking sources. I think the greater question is when will those standalone earnings provide a full basis for valuation of the company at levels at or above current valuation, when you think of typical bank earnings multiples? And I think we are approaching that point here in the next quarter or so, where beyond that if you're valuing the two segments separately, you should be able to get a reasonable commercial banking multiple out of the banking segment. And some much lower multiple on the mortgage banking earnings, understanding that those will always be valued at a lower multiple, because of their cyclicality. So I think that that point is coming soon, and the big change is going to be the Simplicity acquisition.

And then, what's the outlook for future M&A? Everybody knows that a lot of people want to sell two times the bank. You were able to find a descent deal at book. Those deals don't fall off the trees everyday. Are you going to continue to try to expand, now you got a foothold in California or you're just going to be looking up and down the West Coast?

Theoretically, we're looking at every major western market that we have a meaningful mortgage market share end. So we look at deals in Southern California, Northern California, Oregon, Washington, Idaho, Hawaii, and soon we'll start looking in places like Phoenix and Salt Lake City. As you say, there are only so many deals that can be done today that would be feasible and not materially dilutive at our current stock price. So until that changes, we are not going to be in the market for the more expensive typical good quality commercial bank deals. Hopefully that changes in the future, but doing now and then though, we continue to look at deals that will trade closer to book value. And there are still some institutions out there, for various individual reasons, who would trade down near those levels. So it's still possible, we'll be able to do some other transactions in the interim.

The next question we have comes from Tim O'Brien Sandler of O'Neill & Partners.

So just couple of follow-ups. So did you book any in the non-interest expense line any deal-related cost this quarter? I might not have seen that.

We did. In fact, I think in the first paragraph of the earnings release, we try to early on describe the magnitude.

I was looking at the financial. So a question regarding first quarter with the deal potentially closing this quarter, with the lion's share of deal costs be recognized here at the end of this quarter and then a little clean up in the second quarter. Is that the way to look at it or is there going to be substantial related to conversion in the second quarter as well?

There will be material cost in this second quarter, because of the systems integration. If you looked at them, more than half will be in the first quarter, assuming a February closing, maybe two-thirds, my guys are saying here. But still a-third of those costs that are still pretty material. I mean, I believe its $18 million roughly of total deal cost. So $12 million of that likely is in the first quarter.

Now, will some of that be carried by Simplicity of the $18 million or is it all, that's your share?

You know some of that is going to be taken by Simplicity pre-deal, so that reduces the net assets we buy. I don't think it's really a big number. Most of that is going to be recognized through our operating statement.

And then that ratio that you mentioned that you monitor, which is non-core funding ratio below 30%?

Yes.

Where is that right now? It must be pretty low, I'd imagine?

It's going to get lower when we complete the acquisition. At the end of '14, there was, I'd tell you what it was, 28%, this is pretty high. And that's due in part to the level of mortgage loans held for sale. That number varies a lot, depending upon how active we are in the mortgage business, because most of that non-core number is borrowings from the federal home loan bank that are very short-term utilized to fund the warehouse of loans held for sale.

And then, as far as the question that Paul had about standalone earnings out of the non-mortgage bank, you said above 50% contribution to earnings. Is that something you thought was going to be realized in 2015? And is that a core number or is that more of 2016 idea?

No. That's 2015 based on our internal estimates and excluding acquisition-related expenses.

And then another question for you on, I mean, your credits performance is excellent. As far as the reserve ratio is concerned at 106 at the end of the quarter, reserve build going forward on that idea, what are you thinking there?

Clearly, we're going to be providing going forward. The biggest reason the reserve today in terms of a coverage level may look lower. There is some other institutions has to do at the level of single-family mortgage in the portfolio. So as that composition declines, you may see a change in the coverage ratio. But it's all going to relate to our experience, what we see other peer institutions doing and our expected losses.

But directionally you expect we're getting towards a bottom as far as kind of a baseline there? And it's more likely than not that given the credit cycle you're going to build from here that reserves.

Well, at lest we are going to be providing, right. And whether the coverage ratio goes up materially from here or not, it's kind of going to depend on credit performance and how the portfolio performs. Our internal expectations are that we will be providing each quarter going forward to the provision, probably an ever increasing number as the portfolio grows. To the extent, we don't experience charge-offs that could mitigate that, but it's very hard to grow the portfolio and not increase your allowance.

Next, we have a follow-up from Jeff Rulis, D.A. Davidson.

So I had one quick follow-up. Could you update us on the asset liability sensitivity pre and post Simplicity?

First, in summary and then I'll let Darrell speak to maybe some details. Our sensitivity has actually improved pretty substantially this year by a couple of things that we've done. So today, we're in a very balanced position. That will be a negative, if rates rise quickly. In the event they don't, we're very well-positioned. Of course, no one expected rates to fall here recently and that's not great if you're asset sensitive. But we're in a pretty balanced position. Darrell, would you add anything to that?

No. We've actually looked at the Simplicity interest rate risk and compared it to ours and we done some modeling in that context. They have a large proportion of indeterminate deposits, which have a longer duration, which matches there loans. So they are actually not unlike us in terms of being having a relatively matched book. They have a very small securities portfolio. The one thing they do have, that's a little bit different than ours, is their FHLB advance, although small, are very long in duration. So that helps our duration on our liability side.

So on balance, we don't expect it to materially change our position.

No, I think they actually -- in fact, we don't expect that at all

And in terms of management going forward, you'd like to stay that balanced position or move to more asset sensitivity?

Well, we would love to improve the liability side of the balance sheet. Our constant goal is to grow our non-term deposits, which of course is a great improvement in sensitivity. On the asset side today about a third of our book is fixed in the loan portfolio. But we do have, not a lot of it is monthly adjusting, some of it is, not a lot of it. So the improvement would probably come from more lines of credit, more monthly adjusting assets. And we are growing that, if you look construction assets are a good example of great asset sensitive instruments. I'm not sure, how much we can change it quickly though. I mean we improve the liability side somewhat, but that's a long-term challenge. In the asset side, we are looking for diversity and some of that comes with shorter-term sensitivity, some doesn't. And so I think we're going to be probably in a balanced position like we are now going forward.

Next we have a question from [ph] Joe Noel, Investor.

I believe you said your tangible book value now was $19.39. I was wondering what the book value is?

I'm sorry, what?

I believe you said, your tangible book value now were $19.39, so I was wondering what your book value is now?

The gross book value. Bear with me for a sec.

It seems like you're trading, the stock was trading quite a bit below, maybe you guys would like for a buyout?

Well, I hope not at these levels. So the gross book value per share is in the earnings release on the first page of statistics on Page 9, it is $20.34 per share.

Like you said earlier, you were looking for a companies trading near book value for a good buyout. Is there any chance, you guys might bought out yourself?

I think that would be a pretty poor price, given the forward outlook for this company. There are other companies, who have been less successful recently, who don't have asset growth or margin growth or businesses like the mortgage business that provide us additional non-interest income. We don't think at least at these levels with any reasonable premium that this will be a very good value for our shareholders.

Is there any chance that you're reconsidering the reinstatement dividend any time soon?

Boy, we sure hope too. So I think I've made this comment when we talked about the acquisition of Simplicity. After stabilizing that acquisition, we are planning to revisit the issue of a regular quarterly dividend with our board, so that would be some time later his year.

Well, at this time, we have no further questions. We'll go ahead and conclude the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks, gentlemen. End of Q&A

Thank you. Again, we appreciate your patience and attention today. Appreciate all the great questions. Look forward to talking to you next quarter.

And we thank you, sir, and to the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.