Good afternoon and welcome to the HomeStreet Incorporated Third Quarter 2015 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 Mr. Mark Mason, Chairman, President and Chief Executive Officer. Please go ahead.

Hello and thank you for joining us for our third quarter earnings call. Before we begin, I’d like to remind you that our earnings release was furnished this morning to 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. Those factors include conditions affecting the mortgage markets such as changes in interest rates that affect the demand for our mortgages, the actions of our regulators, our ability to meet our internal operating targets and forecasts, and economic conditions that affect our net interest margins. Other factors that may cause actual results to differ from our 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. Additionally, information of 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. First I’d like to introduce our new Chief Financial Officer, Melba Bartels. Melba came to HomeStreet from JPMorgan Chase where she was the Chief Financial Officer of the $60 billion Automobile Finance and Student Lending Division. Prior to that she managed Corporate Financial Planning and Analysis for Washington Mutual in Seattle. So she knows our business and our markets…

Thank you Mark and good morning everyone. Third quarter net income was 10 million or $0.45 per diluted share, compared with 12.4 million or $0.56 per diluted share for the second quarter of 2015 and 5 million or $0.33 per diluted share for the third quarter of 2014. The decrease in net income for the quarter was primarily due to lower net gain on mortgage origination and sale activities as Mark had noted. Excluding after tax merger related revenue and expenses, core net income for the third quarter was 9.4 million or $0.42 per diluted share compared to 14.5 million or $0.65 per diluted share in the second quarter. Net interest income was 39.6 million in the third quarter compared to 38.2 million in the second quarter of 2015. Our net interest margin was 3.67% an increase of 4 basis points over the second quarter, due primarily to ongoing changes in the composition of the loan portfolio through organic origination of commercial loans. Non-interest income decreased $5.5 million or 8% from the second quarter, due primarily to lower net gain on loan origination and sale activities. Net gain on mortgage loan origination and sale activities decreased $12.1 million from the prior quarter and increased 20.2 million from the third quarter of 2014. Non-interest expense was 92 million in the third quarter compared with 92.3 million in the second quarter. Excluding merger related expenses non-interest expense was 91.6 million compared with 89.1 million for the second quarter. The increase was primarily due to higher salaries and related costs from the increased headcount. At September 30th the bank's tier 1 leverage ratio was 9.69% and total risk based capital was 14.15%. These ratios reflect the implementation of Basel III requirements on January 1st. I'd now like to share some key points from…

I’d like to now discuss the national and regional economies as they influence our business. First I would like to remind everyone that we are fortunate to operate in some of the most attractive market areas in the United States today. We are focused on the major markets in the western United States, which today enjoy lower unemployment and substantially higher rates of population growth, job creation, commercial and residential construction and real estate value appreciation than the remainder of the country. The most recent Mortgage Bankers Association monthly forecast projects total loan originations to increase 15% this year over the prior year, a downward revision from its prior quarter forecast of 20%. Mortgage rates continue to near historic lows and nationally purchases are expected to comprise 57% of volume this year. Housing starts for 2015 are expected to be up 11% over 2014 levels. MD&A currently forecasts an additional 12% growth in housing starts next year. During the third quarter, purchases comprised 63% of originations nationally and 60% of originations in the Pacific Northwest. HomeStreet continues to perform at levels above the national and regional averages, with purchases accounting for 75% of our closed loans and 70% over interest rate lock commitments in the quarter. While our purchase composition is strong the overall home sales market remains well below historic levels due to low inventories of new and resell homes. Since the third quarter of last year, job creation in Washington, Oregon, and California has averaged 3% on an annualized basis a full percentage point faster growth than in the national economy. Since 2011, unemployment rates in the northwest states in California have been cut by over 40%. Housing permits though volatile due to multi-family swings have largely trended higher in Washington and California in recent quarters, but more…

Thank you, we will now begin the question and answer session. [Operator Instructions] And our first question comes from Paul Miller from FBR and Co, please go ahead.

Thank you very much, hey Mark on the community end, on the consumer bank, you continue to show improvement in those earnings I believe it was like you showed a net segment analysis profit of $6.2 million. Is that a good run rate going forward or should that continue to grow, I know you've done a lot of hiring on that institution specially in the lending side.

As I mentioned in my earlier comments we are expecting from here forward for our results in that segment to grow not just in bottom line but in a efficiency in producing revenues. So we think that we've gotten past some of the scale challenges that we've had in the past in terms of the relative size of the loan portfolios and the operating expenses of the various lending units. The additions of Simplicity and soon Orange County Business Bank has already shown substantial improvement, provide a substantial improvement and we expect more going forward. So we feel like this quarter is a good baseline to revenue and expenses, understanding that revenues will grow as the portfolio grows and expenses will grow somewhat as we continue to open branches and we have personnel building out the platform.

And then can you talk a little bit about your M&A strategy right now, I mean the Simplicity mergers, that's probably the big one. But then you did OCBB and is that the new, are you just looking for a little fill-ins at this point or is there any major areas that you would love to get a foothold in?

Well yes theoretically we shop in all of the markets we'd ultimately like to be in. I think it's fair to say that we have tiers of interest, the top tier being of course in [indiscernible] where we have the most opportunity for consolidation and efficient mergers but obviously in Southern California we're focused on building out a full platform there and our operations currently don't reflect that. So we're very interested in both of those markets. The next tier would be other significant markets, the rest of California, and the bay area and the middle of the state, we're starting to see in the hi-fi corridor through Oregon and Washington and then some of the other centers of population in the rest of the western states. But given where we're trading particularly today relative to tangible book value it is hard for us to do some of the more expensive acquisitions in terms of premiums and tangible book value. That's not to say that we wouldn't entertain larger somewhat more expensive acquisitions if well placed and of a size that would accelerate substantially our diversification interest. Recently we've put more focused on transactions that more easily fit our acquisition criteria. And so I'd say you know for the time being we're still probably in this zone of properties. But if the right opportunity came along in a larger transaction that would accomplish all of our diversification objectives we would have to consider it.

Our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead.

Maybe a quick one for Melba on the margin -- was there -- could you break out any accretion benefit you saw on Q2 versus Q3?

Accretion relative to the recent merger?

I assume you mean accretion of the marks on [simplicity in the] prior mergers Jeff?

Correct. What it did add to the margin -- was that sort of flat quarter-to-quarter?

Okay. Jeff, I do not have at my fingertips, I’ll have to follow-up with you on that.

But I would say because the second quarter was a full quarter of operations -- for second and third quarters, were full quarters after the simplicity closing on March 1st, I would expect the impact to be relatively flat. Now what we are experiencing is some acceleration from prepayments, but I don't think it's a material change quarter-over-quarter.

Okay. And then Mark on your non-interest expense outlook kind of 2% growth in the quarter, would that include the acquisition coming on board in Q1, you are going to soak that in or would that be just legacy and then we add for that platform in Q1?

I think that's an ongoing expectation. I don't know that the closing of loans kind of business bank is going to materially change that number in the first quarter.

Now of course we would excluding in specific merger related expenses related to OCBB in that run rate, but Mark's correct it wouldn’t materially change the 2% guidance.

Okay. Got it, and then Mark could just those -- just jot down the lock and held for sale origination expectations for ‘16 was that 83 and 82 respectively?

That's correct, I think its 82 locks and 83 closing, I am checking my notes.

83 locks and 82 closing.

And I guess how does that compared to ‘15, if you kind of annualize Q4 or your expectations to close the year?

We -- so we are going to add, 15 and 16 locks and closings to our year-to-date numbers, which would give us about 71 in locks and 73 in closings for 2015.

Got it, is this kind of backing into that your comments on [comfortability] with consensus you are looking for an increase in originations, I guess the MBA forecast for ‘16 is down 10% that basically balling that all up you intend to outperform the general demand on originations just from better execution or [boots] on the ground?

Two things, one as I mentioned earlier, we have a substantially higher purchase concentration than the nation as a whole, so the MD&A numbers reflect the national numbers, next year the MD&A is forecasting growth in purchase originations of -- I think it's around 12% roughly, so we should outperform the country without any growth in capacity simply on higher purchase composition, but in addition to that we expect the ongoing growth in origination capacity by hiring more teams in individual loan officers, next year as has been our strategy. So the combination of those two we think should result in growth from 71 to 82 billion in locks next year and similar in closings.

Then I guess just last one not to beat it up here, but with that composite margin of 315 to 325, I’m not -- wasn’t clear if that was for the full year or just for the next three quarters. But I guess the idea is that originations from your perspective were set to increase in ’16, but maybe a lighter composite margin. Is that directionally correct?

The 315 to 325 is we think good for the whole year. We think it's somewhat seasonal typically as volume drops, margins drop, as originators stretch to do more volume. So we would see the year, I think slightly higher margins in the second and third quarter, slightly lower in the first and fourth quarters, but averaging around that 315 to 325 range.

Our quarter comes from Jackie Chimera with KBW. Please go ahead.

So information services cost were up in the quarter. Is that related to the higher regulation and disclosure that you discussed or is that something different?

In part. So as we continue to improve our infrastructure here, sometimes as expenses are a little lumpy. So we have an ongoing series of implementation in the software systems in the various lending groups and I think this reflects somewhat lumpiness there and the [work on trade].

Okay. So some of it will be ongoing at last over the next couple of quarters, but others of it will just be quarterly fluctuations based on timing. Is that a good way to think about it?

Yes.

And then a question on the yield on securities in the quarter. The line item has been a little bit lumpy over the past couple of quarters. Has there been a change in premium amortization that might be impacting it or something else that I may not be thinking as?

Well to that idea is what’s impacting it. We have a fairly sizeable composition of mortgage backed securities in our securities portfolio with higher prepayment speeds or [predated] speeds that have been pretty volatile, I mean if you think at the first quarter very high, second quarter not so high, third quarter high again and under the prescribed accounting here which is a retrospective recalculation of [right to] date amortization, it provides unfortunately some pretty significant swings and yield on that portion of our portfolio and that’s what you see.

Can you [open up] the dollar amount of 2Q versus 3Q for your premium amount?

I do not have, but we can provide that later.

Okay, great. Then just one last one. So you had mentioned changing over to become a Washington State Bank. Would you at that point in time become a bank holding company as well?

That’s correct. I think they are called financial holding companies in the Federal Reserve vernacular.

Our next question comes from Russell Gunther from Macquarie. Please go ahead.

I just appreciate the guide on continued commercial growth expectations of 4% to 5%. You guys exceeded outperform the high end of that range in this quarter. Just want to get a sense for what you expect to be able to kind of drive continued 4% to 5% range and maybe why we shouldn’t expect continued outperformance given all the investment in the Southern California franchise?

Well in terms of lending, we have some pretty strong existing lending groups that we’ve been building for several years. But you may remember earlier in the year also we brought on two new groups in Southern California, a new SBA lending group and a small balance commercial mortgage group. Between the addition of those groups Orange County Business Bank and continued growth in the Pacific Northwest and our existing commercial lines, we feel pretty comfortable we are going to be able to maintain that kind of pace albeit on a larger base. I mean the denominator is growing. And because of that we're going to continue to be well diversified and predictably strong.

Great. Thanks for that Mark. I just wanted to kind of circle up on the commercial loans this quarter, saw that balance decline a little bit, others were strong. Is there any seasonality in that number that just coincidence that kind of trends down in the third quarter, could you just give a little color on the dynamics within the C&I line this quarter?

Yes, I don't think it’s seasonality, I think we suffer similar to everyone else in that business in that there's not enough business to go around and with lower rates term lending has gotten refinanced at a much higher pace. Companies are not borrowing as much as they used to, so line utilization for all of us is down. I think you're just seeing some volatility there, we're expecting growth in that line item.

Okay, that's great, and then just on consumer loans, the single family continue to trend down a little bit, home equity balances have been kind of steadily increasing. Could you give us a sense for your thoughts around what you're going to continue to portfolio there?

Sure. On the single family front, we seek to portfolio certain classes of single family assets. Home equity loans as you mentioned in that, that business has been growing, for us it has always been a very fine business and even during the recession our [hillock] portfolio never got above 4% delinquent, so the company has a proven record of strong credit quality in that product, and it appears that product is great from an interest rate risk standpoint in that it's floating rate instrument. Additionally we portfolio custom home construction loans, these are loans that in a single close start as loans for individuals to build custom homes, they will into a permanent loan, because we're not interested in hedging them for those long periods of time and then reselling them we keep them in our portfolio. They do tend to have historically somewhat higher prepayment speed so that mitigates somewhat the rate risk in that category. And then beyond that other fixed junior liens and some non-conforming jumbos that we don't sell in pools and other non-jumbo loans that make sense. That makes up the remainder of that line item. We're expecting in the longer term to get our single family loan concentration down below a third of the portfolio. So we're a little above that now still but down substantially from when single family loans made up almost 60% of the portfolio. So we're looking for a little lower concentration going forward, but it's another one of those great product lines to have, you can really meet all your portfolio growth when you'd like with single family loans which continue to have better yields than commercial loans.

I appreciate that, and then just with regard to the forward guidance, you know particularly as it relates to expenses and maybe try and tie everything altogether, is there an efficiency ratio target you're thinking about for 2016 and if we can think about it maybe on an rising Fed fund scenario.

Sure. We are expecting our efficiency ratio to trend below 80% next year and in the best quarters hopefully approximating something close to 75% overall, but very different from a segment standpoint, the mortgage business should run between 75% and 85% efficiency, the commercial and consumer business we ultimately hope to get below 60%. That's not going to happen next year but we're going to make tremendous progress towards those numbers next year.

[Operator Instructions] Our next question comes from Tim Coffey of FIG Partners, please go ahead.

Thanks, morning Mark, morning Melba. Can you give us some color on the declines in the deposit portfolio over the last two quarters?

Sure. In the current quarter the primary reason for decline was a decline in term deposits. If you look at the quarter-over-quarter detail which is page 26 of our earnings release.

Okay, any specific reasons, I mean we just…

Well its mostly brokered deposits, brokered CDs that ran off that we didn’t need to replace.

Okay, would you expect more then forward quarters?

You know, it's going to depend on a lot of things, right lending volume, our success in gathering core deposits, to the extent that we can’t fulfill our funding needs in that manner or that we get to a level of FHLB borrowings we don't want to exceed, we may have to go back in to the time deposit market. I would expect ultimately that line item to grow consistent with the overall growth and maybe a little more depending upon funding needs.

Okay. And then on the construction lending that you’ve seen the strength in that is there any particular market where you find the most opportunities?

In our markets, there is so much construction going on, I wouldn’t cite anyone as being stronger than the others, of course most of our construction business is in the Pacific Northwest, on the commercial side, most of the construction is in primary or strong secondary markets surrounding Seattle and Portland. We do have a broader home building business with strength in Utah and the Salt Lake City area, which is a very strong home building market today, and in Southern California, which again from Central Southern California where there is available land, it's quite a strong market. So it's traditionally been the same for us, we have not really extended commercial construction yet, outside of the Pacific Northwest, though we expect to next year, sometime and these are all very, very strong markets with lots of opportunity, so we sort of picking our spots.

Okay. As you expand commercial construction outside of the Pacific Northwest, would that entail hiring new lending teams or do you already have people in place for that?

We mostly have the people in place for that in Southern California, for example we hired a strong team of originators that today are focused on small balanced commercial permanent mortgage lending, but those folks also have construction bridge and other expertise, so our ability to extend that product down there, substantially exists with perhaps a few additions.

Okay. And with the potential for a higher rate environment, how is that going to change your hedging strategy on the mortgage service and portfolio?

It doesn’t change our strategy, we don't trade that hedge to position it for rising or falling rates, that would be speculative and we know that we are not great predictors of interest rate movements. The economists aren't either, so we keep that flat to either direction of potential movement, so we use the same instruments we’ve generally used before, and we will keep that profile flat on either end of the potential movement, so far it's been a good place to be.

Yes, of course so far. And then the estimates for your locks and closed loan production the next, at least the next quarter, how much of that is seasonal and how much of that is TRID related?

All seasonal, just because we as manufacturers of loans have a new disclosure standard, that doesn’t change market demand for mortgages, so our lock volume in the application volume will be what the season allows, it's our job to get it closed timely, in light of the new standards.

Our next question comes from Tim O'Brien from Sandler O'Neill & Partners. Please go ahead.

Couple of questions around credit, look like TDR balances came down this quarter nicely accruing TDR maybe that's not so nice. Can you give a little color there?

Sure, we have held a balance sheet of TDR since the recession that has been until recently a little more than $100 million. Most of that number $75 million or so has been in single family loans that were modified during the recession, they have performed very, very well and as you can see there is only a small amount of non-accruing single family loans. The biggest part of the change quarter-over-quarter came not in the single-family loan segment, but in commercial loan TDR portfolio and we had one large $15 million loan that had been performing and had been a permanent TDR as a consequence of modification during the recession that prepaid during the quarter. And so that accounts for the significant difference in commercial real estate accruing TDRs. If you look on page 24 there is a large detail of those amounts.

That’s great color, thanks. And on the credit performance, it’s been really solid. I notice just a slight uptick in 30 to 89-day past due loans sequentially. Can you talk a little bit about that, is that even a blip that registered on your radar screen?

It has though, we don’t think it’s meaningful or indicative of a new trend. Some of these delinquencies came from the portfolio that we acquired in the simplicity acquisition. And so they are centered generally in Southern California, but given our review of those delinquencies, we think that they will substantially cure and it represents a little volatility I would say at this juncture and we’re going to watch it.

And then last question it looked like another nice recovery of a previously charge-off. What’s the outlook for additional recoveries going forward?

I think we're still going to experience some out of the single-family portfolio. I don’t know if that’s a really material number, because we only have so much left to recover against. We do have some deficiency notes still outstanding from the clean-up of the construction portfolio. Again I don’t think there is going to be really material recoveries there. We have some, we’re going to see in the fourth quarter we think, I don’t think it’s a seven figure number, but until we realize them and put the money in the bank we’re not sure. So look I think the real issue in charge-offs is we don’t see credit deteriorating in the near-term based upon everything we see and while we’ll have some minor recoveries, what we're really expecting is relatively low charge-off experience in the near-term. In the longer term, we’ve been discussing this internally ourselves as we do strategic planning, it's really hard to predict a change in the credit environment even looking out two to three years, because we don’t have any precursors to really know. At some point, we will go through another credit cycle. As you know this recovery has been elongated, I think that’s going to be true of the credit cycle as well, everything we know today. And we are fortunate, we are in some of the strongest economic markets in the United States and that is going to be helpful with respect to credit as well.

It seems like every cycle has its own unique triggers.

Sure. And there will be a new one I’m sure.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mason for any closing remarks.

Well, thank you operator and thanks to everyone who joined us on the call today. Melba and I appreciate your patience during our prepared remarks and your great questions. Have a great day.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.