Good day, and welcome to the HomeStreet first quarter 2015 conference call. [Operator Instructions] 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 first quarter 2015 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 is subject to many risks and uncertainties. Our actual performance may fall short of our expectations or we may take actions different from those we currently anticipate. 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 2014, as well as our various other SEC reports. We expect to file our quarterly report on Form 10-Q for the quarter just completed. 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'll give a brief update on recent events, review our progress in executing our business strategy and highlight key financial results. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations. In the first quarter we made significant progress on our strategy to grow and diversify earnings. We expanded our commercial and consumer banking business organically and through acquisition, and build mortgage banking market share in new and existing markets, continuing to opportunistically hire teams of strong originators in…

[Operator Instructions] And our first question comes from Paul Miller of FBR Capital.

Can you talk a little bit, Mark, about the sustainability, I guess, you want to call it, of some of the mortgage revenues that are coming through? And then also the sustainability of, now that Simplicity is been closed, what that adds to the consistency of the model?

The mortgage revenue was helped obviously in the first quarter in part by higher levels of refinancing than we would expect it going into the quarter. Though, by the time we reached March, the composition of locks was relatively close to what we would have expected going into the year with the seasonal start of the home buying season. So while we are probably experiencing a slightly higher level than refinancing at this point, it is not as significant an impact as it was in January and February. And yet, our origination activity is higher than we expected going into the year in total. And so, given that recent activity, given the change in the national forecast, we are now expecting somewhat a better year for the origination volume than we had anticipated going into the year. Going into the year we were expecting to originate somewhere between $6.5 billion and $7 billion of held for sale single family mortgages. Reasonably that number will probably go up a little bit. What will be forecast, it remains to be seen, of course, how long these low levels of interest rates will continue. Should they rise, obviously that would have a negative impact. With respect to the composite margin, it was stronger this quarter than the prior quarter, 326 basis points, I believe, up from 310 basis points in the prior quarter. We are seeing that sustained at least through April activity. And as has been the history in the mortgage business when volume rises, lenders capacity becomes constrained. Once that occurs, lenders tend to be less price-aggressive, and we generally see price margins increase. We saw that happen slightly in the first quarter. And so we're seeing a sustained level of slightly higher profit margins so far. Should this continue, we would expect to see continuing margins at about this level. Of course, higher rates and lower volume would negatively impact that number. As to Simplicity, we expect the run rate contribution to the earnings of Simplicity to be in the $15 million a year kind of range, after having achieved all of our cost reductions and leveraging of the additional capital that we got in the merger. Well, obviously, that will take several quarters to fully realize. The part that's under our control immediately, that is realizing the reductions in personnel and other operating costs, real estate and systems cost, we are very much on track and now we expect those costs to be largely realized in the first part of the second quarter. So all that's left is realizing the revenue enhancements. And so we feel we're very much on track. We continue to leverage our capital relatively quickly. Though, of course, we have more capital than we had last quarter, and that will take several quarters to fully utilize. Hopefully that answers your question.

The other thing that we're getting a lot of positive feedback, and I don't know if it's regional or national is, that the purchase market is starting to show some life. I know we were all very disappointed in the purchase market in the spring buying season last year. I don't know if that was related to QM or just people didn't have the faith. But we're hearing that the purchase market that we're seeing some real, in some of these regions, some real growth there.

Well, we already know that one of the building industry is starting to catch up. I think in my comments earlier I discussed the level of new building permits. And while here in Seattle, we have way more multifamily construction than we have in the past, the homebuilding industry is catching up in other markets. And we think it's going to be a better year. At least at this juncture, it looks like it's going to be a better year than we've had for a long time. Some markets that we are in are already above their long-term averages. The Boise area in particular is very active, though that is not as larger market as some of them. Southern California is very active. So we agree, at least in the markets we're in, though it's kind of skewed. I mean, we are generally in the best markets in the western United States. So for us we're going to have a slightly more positive year than maybe others.

Our next question comes from Jeff Rulis of D.A. Davidson.

Could you itemize the $12.2 million in merger costs by line item detail or close to where that would break out in the expense categories?

There are large pieces, I don't have the detail by category in front of me, but I can provide that to you later. There are large amounts in G&A and consulting and in systems, so in IT and consulting, and to a lesser extent in salaries of temporary employees. Plus we have severance and change of control related costs, about $5 million in that quarter. That number we do know. But the others -- these are severance and change of control benefit by line item. And then about $5 million -- my guys have given me some help here. About $5 million on the consulting line item, so that's about $10.5 million.

But I guess, on the severance, on the release, I guess I do not see it broken out. Would that be salaries and related costs? Is that baked into that number?

So there is about $5.5 million on that line item, call it $6 million, a little closer to $6 million; and about $5 million in consulting; about $0.5 million in G&A, and now you're getting pretty close.

And I guess if we look forward and largely exclude that, you mention the $1.5 million expected in Q2. But excluding all that noise and a full quarter of Simplicity, any rough idea of non-interest expense base level that we should anticipate? Albeit production adjusted, depending on what happens in Q2?

For Q2, this is a big production quarter for us. I mean, seasonally this should be our largest of the year, so we expect some slightly higher locks and substantially higher closing this quarter, because of course it's rolling more into the plan. So you'll see higher commissions as an example on mortgage closings. Our quarter from a total non-interest expense standpoint will likely look very similar in total to this one, but for much different, right, higher, a full three months of Simplicity related operating expenses versus one month, offset by cost reductions and higher levels of mortgage-related compensation. So I think you'll see a total that's roughly the same as this one, but for different reasons.

So sort of angling into that maybe $75 million to $80 million quarterly run rate, it seems broadly speaking.

In total, it will probably be slightly less, and then because of the merger-related expenses even less in the third quarter and the fourth quarter. And part of that again is due to changes in mortgage volume, and that's a big variable. So second quarter, largely the same number, but for different reasons. Third quarter and fourth quarter, each somewhat less, primarily because of lower mortgage volume in those quarters.

The other one I guess is a bit maybe two-part. Looking at the portfolio loan growth, maybe just some color on that piece of kind of commercial side of what you see in the pipeline and what you'd expect on a growth outlook? And the second piece would be, if you could couple that with your provision expectations, that you mentioned, and I don't know if it was somewhat of a true-up with Simplicity, but also the growth. So I guess, to water that down, the loan growth outlook in the provision is tied to it?

Sure. The one wild card in loan growth for us is runoff. I mean, we had a pretty significant runoff experience in the first quarter annualized about 24%, which is pretty high. And we had somewhat lower commercial loan growth in the first quarter than we expected. We expect for our full year though to hit our targets. So we're expecting to catch up over the remainder of the year. The loan portfolio in total, we expect to finish the year above $3 billion; hopefully, somewhat above $3.2 billion. So net of runoff that reflects our expectation of some fairly strong and diversified origination across all the business units.

And then the provision?

So the provision, and I'm glad you asked the question, because it has a little noise in it this quarter. As I mentioned in my comments, we continue to improve our loan loss estimation process. We have a fairly sophisticated migration model, classification migration model utilized to calculate expected losses, and then of course we have qualitative loss factors on top of that. Our classification migration model had been based upon a one year loss emergence period. We believe that that really should be extended now, particularly as we grow through the cycle. That we're really in the best part of the cycle right now, and we will be more accurate to look over the longer period. So we've increased on commercial loans the loss emergence period to total of eight quarters or two years. The cost of that or the incremental reserves related to that model change were $1.2 million in the quarter. All else being equal, we won't repeat that charge, meaning absent any change in expected loss levels or the size of the portfolio. Additionally, we increased reserves this quarter for construction related loans. Again, on the qualitative side out of a concern that we're in the best part of cycle, and while we see no indications of weakness, in fact our numbers all continue to improve, that we feel it's prudent to carry a somewhat higher level of qualitative reserves related to construction loans. And so those changes -- and that was, I don't know, almost $1 million in change I think this quarter as well, $500,000, and the balance is being related to growth in the portfolio. So for the remainder of the year, we are not expecting the same absolute level of provisioning, though we do expect to maintain reserve coverage pretty consistent with where we are now in the portfolio. So if you assume growth in the portfolio, we will be provisioning over the remainder of the year. And that those numbers by quarter could range from $2 million to $3 million depending upon the quarter.

Our next question comes from Russell Gunther of Macquarie.

I just had a question on the margin. You guys have been very clear on your expectations for about 10 to 15 basis points year-over-year expansion, unique in bank land. The 3.6% this quarter was a little bit more than I expected. I wonder could you just update us on your expectations for the margin for the remainder of the year.

We are expecting the margin to continue to expand slightly. It was up more than 3.54% in the prior quarter to 3.53%, about 7 basis points. We expect about another 8, still toward 8 to 9 somewhat lower in there before the yearend. And then after that it's really a question of what happens to cost of funds and overall rates. So again, that total is 10 basis points to 15 basis points that we have been speaking about for sometime. Achieving that is dependent upon a whole bunch of stuff. It's largely out of our control. These changes we expect are composition related changes that we have to achieve through future loan origination and subject to runoff and all the stuff that is only partly within our control, that's what we're currently expecting.

So there's not really a rate expectation embedded in that?

No. We don't know what's going to happen to current rates. I mean, we forecast using the existing curve, and so no.

And then just lastly on the margin. I know that deal closed late in the quarter. Was there any impact to NII or the margin from purchase accounting accretion in the deal? And if not so much this quarter, what the expectation might be looking out?

Well, it's part of the increase next quarter, right. So in total we think the run rate impact is about 7 basis points. Obviously, we've got about a-third of that probably in the first quarter.

And then just my last question. I know, it's in the very early innings with the recent hires at the CRE team and the SBA lending team in Southern California, but could you just give us a sense of what your growth expectations are and maybe timing here?

I am not sure I can do that yet. We just got them settled. I will tell you that the SBA team that we hired has originated roughly $70 million to $75 million a year the last couple of years in their prior circumstance. We are a much larger bank with a larger footprint. I think that opportunity here for that group is better than that, quite a bit better than that. So we'll see. I mean, that's sort of our minimum expectation is an annual run rate. As for the CRE group in Southern California, that's a streamlined smaller balanced operation. There is a number of strong competitors in that group, not least of which is JPMorgan Chase. This group has in the past originated over $400 million a year of similar product. Now, do you expect them to get to that run rate any time soon? No. And we don't expect to hold all of that on our balance sheet either. When we do get to whatever run rate we will get to, we expect to sell or securitize some substantial amount of that business. And so it's going to grow probably slowly for the first couple of quarters, and then we'll have a better idea on what our longer-term expectations will be.

Our next question comes from Tim Coffey of FIG Partners.

I was wondering, if you can give me an idea of kind of the geographical dispersion of your loan growth this quarter.

I assume you're excluding single family or would you like to speak to single family also?

No, excluding single family?

Again most of that, the lion share of that is in Puget Sound and Portland. We have, of course, some activity in Central Washington, but the lion share of that is closed in Seattle or Puget Sound or the Greater Portland area.

And with your expectation for the tax rate, do you expect that to kick back up to the 40%, 42% range going forward?

No, I mean, that would be the rate that we will operate wholly within California. That's sort of their effective statutory rate, federal and state, net of federal benefit. Our tax rate for the remainder of this year we're estimating to be 35.8%, just under 36%. That's what our current estimate of business in higher tax jurisdictions in Washington. That will change. And it will end up being whatever it is, but I think right now that's our best estimate.

And how do you feel about your capital levels right now? Do you feel that you've got exciting growth from the balance sheet and do you think that there could be a resumption of kind of a special cash dividend?

We have previously said we're going to be discussing initiation of a regular quarterly dividend in the third and the fourth quarter. We, management and Board want to make sure that we integrated the Simplicity acquisition that we have a clear understanding that what our stable run rate non-mortgage related earnings are, before we make a decision about that.

Our next question comes from Jackie Chimera of KBW.

Just wondering about the Simplicity deposits. Did you reprice those during the quarter, when you brought them over?

We have not changed their pricing structure yet. We anticipate making some changes to their CD pricing going forward. We're going to ease into that.

And were there any, and this could just be a day count factor in my model that explains it, but were there any changes to the legacy HomeStreet pricing in the quarter on deposits?

No, but remember in purchase price accounting we essentially re-rate those liabilities when we mark them to fair value, and then amortize that difference over same expected life of that relationship. And so that tends to have a net benefit to the margin.

So we're already seeing the impact from that even just from the one month?

Exactly. Earlier you may think back to the discussion we just had on margin and the 7 basis point impact from the merger. A part of that is amortization of these marks on loans and deposits.

And then my next question. So if I look at -- looking a look at the MBA origination forecast and then taking a look at the linked quarter growth that you had and the rate lock commitments, your growth was hugely significant compared to what is in the forecast MBA growth? Is that just massive market share takeaway that you've been able to achieve through a lot of the growth you had?

Well, that's the only other answer right. I mean, if the market is growing a certain number and we're growing faster, we're taking share, and we expect to as a consequence of growing the ranks of our personnel and opening new mortgage lending production offices. Remember we have a -- it's not just the people we might have hired this quarter, but there is growth related to people we hired in the latter half of last year, who takes six months or so to build a run rate pipeline. And so we benefited in the first quarter from people we hired in the third and fourth quarter of last year. Plus the impact of lower interest rate on the entire system, which was larger than the prior years, and so it's all growth and capacity, and then when you have a period where you get the benefit of lower rates and higher refinancing activity, we get a greater share of that benefit.

So you are seeing the Arizona folks start to come onboard and starting to see some good production out of them?

Well, we are. They are a wonderful group of not just honorable high quality lenders, but they are prolific as well.

Our next question comes from Tim O'Brien of Sandler O'Neill.

Little bit on construction lending. Most of that business is in the Puget Sound area, is that correct?

Yes, in Portland, in Greater Portland. So we do have a home building group in Salt Lake City, and we have one in Southern California whose pipeline are starting to grow, a minority of that business is in other places.

And as far as your outlook for growth of that business, is it constrained by I guess by internal concentration limits? And then also do you see pretty good opportunities in SoCal to expand there quite a bit or in Salt Lake City or Boise or Hawaii?

Yes, within all accounts. I mean, each of those economic regions are severely constrained by inventory and the homebuilders are trying to catch up to high demand. So we see a tremendous opportunity in each of these areas, and we are pursuing the business as we can in each of these areas. Construction, both residential and commercial are mainly businesses that we've done here for long time and we're committed to doing as core businesses. We will never occupy the composition of the balance sheet they did at one-time at this company, but they are solid businesses, that we expect to have higher concentrations of than many banks. And so today, as an example, or just prior to the Simplicity merger, we exceeded the regulatory threshold for higher concentrations in construction slightly, which is a 100% risk-based capital, we were on a 120%. And with the Simplicity merger, of course all of that got diluted, but we expect to grow back into that similar concentration over the next year. And we're very happy with that business, the residential construction business. It has a very high return on equity, because it is of higher risk. We're very comfortable with the structure of the loans today, the credit quality and the structuring, the controls on that lending much different than prior the recession, plus it's a great time to be in the commercial construction business, particularly multifamily. Although we're watching the markets we're in closely to mark the date that we think we should pair back on that business, as it becomes overbuild. I mean, right now, all of these markets are surprisingly short on multifamily rental units at most of the price point. And so we're going to continue to see strong multifamily construction for several years we think.

This concludes our question-and-answer session. I would like to turn the conference back over to, Mark Mason, for any closing remarks. End of Q&A

Again, we appreciate your patience for listening through my long prepared remarks and your participation on the call today. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.