Good morning and welcome to the HomeStreet, Inc. Fourth Quarter Earnings Update 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, Chief Executive Officer. Please go ahead.

Thank you. Hello and thank you for joining us for our year end and fourth quarter 2016 earnings call. Before we begin, I would like to remind you that our earnings release was furnished yesterday to the SEC on Form 8-K and is available on our website in full form at ir.homestreet.com. In addition, a recording of this call will be available later 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, and that impact our net interest margins and other aspects of our financial performance, the actions of our regulators, our ability to meet our internal operating targets and forecasts, and economic conditions that affect our net interest margins and businesses. Other factors that may cause actual results to differ from our expectations or that may cause us to deviate from our current plans are identified in our earnings release and detailed in our SEC filings, including quarterly reports on Form 10-Q and our Annual Report on Form 10-K for 2015, 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. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations. Joining me today is our Senior Executive Vice President…

Thank you Mark. Good morning, everyone. I'd like to first talk about our consolidated results and then provide detail on each of our segments. Net income for the fourth quarter was $2.3 million or $0.09 per diluted share, compared to $27.7 million, or $1.11 per diluted share for the third quarter. The decrease in net income from the prior quarter was primarily due to a $24.8 million decrease in gain on mortgage loan origination and sales and $14.5 million decrease in mortgage servicing income, partially offset by a $1.3 million increase in net interest income. Excluding after tax acquisition related items, core net income for the fourth quarter was $2.6 million or $0.10 per diluted share, compared to $28 million or $1.12 per diluted share in the prior quarter. Acquisition related expenses totaled $401,000 for the quarter primarily due to the expenses related to the two branches we acquired from Boston Private completed during the quarter. Net income for 2016 was $58.2 million or $2.34 per diluted share, compared to $41.3 million or $1.96 per diluted share for 2015. The increase year-over-year was primarily due to $70.9 million higher gain on mortgage loan origination sale activities, $31.7 million higher net interest income, and $111.5 million higher mortgage servicing income partially offset by $62.8 million in higher salaries and related expenses. Excluding after tax acquisition related items, core net income for 2016 was $62.8 million or $2.53 per diluted share, compared to $44.3 million or $2.11 per diluted share for 2015. Included in non-core items for 2016 was $7.1 million of acquisition related expenses compared to $16.6 million of acquisition related expenses and $7.7 million bargain purchase gain for the same period of 2015. Average loans held for investment grew by 29.4% from the year ago period from $2.8 billion to…

Thank you, Melba. I’d like to now discuss the national and regional economies as they influence our business today. First, notwithstanding the discipline was also the fourth quarter, we are extremely proud of our full year results and are excited about our prospects for achieving the growth and diversification goals of our strategic plan. We believe that our ability to achieve our goals are unaffected by the events of the fourth quarter and we are optimistic about 2017 and beyond. We are fortunate to operate in some of those attractive market areas in the United States today. These markets 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 major markets that we focus on are substantially larger then most of the other markets in the United States, which gives us the opportunity to grow meaningfully without the necessity of acquiring a significant market share. Together, Washington, Oregon, Idaho and California account for 15% of the United States economy measured by employment, yet these markets have contributed 23% of the increase in jobs through the third quarter of last year. Over the last five quarters, the year-over-year employment growth rates for these states have averaged 3.1% compared with 1.9% for the nations as a whole. The most recent mortgage bankers association monthly forecast projects total loan originations to decrease 17.3% this year over last year, by increased by 1.6% in 2018. The forecasted decline from 2016 to 2017 is driven by a 47% decline in expected refinancing volume. However, we do not expect the forecast to decline and refinance volume to impact our business to this degree, as our origination forecasts has always been on the purchase market. The mortgage bankers association…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jeff Rulis from D. A. Davidson.

Question on the single-family mortgages that are held in portfolio. It looks like those balances were down 10% in 2016. Any expectation for a similar drop in 2017?

Part of the drop in this year was a sale of single family and mortgages to approximately $70 million in the fourth quarter, so that has an impact on balances. I would expect by composition to continue to see that portion it would be held for investment portfolio, comprises single family mortgage to drop as a percentage of the portfolio, though continue to grow generally.

Got it. Did you have sales in Q2 and Q3 as you had a declining balance there as well?

No, I think that that’s the height of the prepayment double that we had during the year.

Got you. Okay. A couple of housekeeping items. Maybe from Melba. One, the tax rate expectation for 2017 and two, the SEC fine, that $500,000, was that in the general and administrative line item?

Yes. It was, the second question I'll take first, the 500,000 was in G&A and in terms of our tax rate expectation for 2017, I don’t want to be too precise, but I would say around 34.5%. So somewhere between 34% and 35%.

Okay. And maybe one last one on overall credit quality. A good trend in the NPA number a little lighter net growth on the loan side. First on credit, some overall comments about trends you think you will see in 2017 and how you expect the provision for that?

Obviously, we like many of us we have been enjoying an excellent credit environment and we remain pretty cautious underwriters, trying to stay in the middle of the market and generally competing on price and not credit. So we are expecting going forward to continue to enjoy solid credit. Having said that, because of our expected growth in our loans held for investment portfolio, I would expect provisioning to follow that growth at approximately the same coverage levels that we run at today and I am talking about our coverage on non-purchased loans, which I believe is around 108 basis points roughly, we can give that number to you later Jeff. But if you look at portfolio of growth, organic growth expectations and consider we are going to have to provide upfront 100 basis points or so, that should generally reflect our provisioning going forward.

The not only thing that I would add to that is, as you can see from our results, for the full year we did enjoy a net recovery, over the course of the year I wouldn’t anticipate that we would have that same level going into this year.

Okay. Thank you.

Our next question will come from Jackie Boland with KBW.

Hi, good morning.

Hi, Jackie.

Melba just to clarify I mentioned that the settlement was in G&A. But was that captured in the commercial banking segment?

Yes, I would have been.

Okay, thank you. And then also to clarify Mark, with the no change to the outlook in terms of close and loss volumes versus what you had discussed on the third quarter's call, just so I understand it correctly. That is because as you look out and look forward, you are not forecasting a high level of refis, you are just looking to the purchase market?

That’s correct. And when we were forecasting last year, even before the run-up in rates, we were expecting a rate rise and an end to the refinancing volume we were experiencing at the time. So, our total number next year hasn't changed on either locks or closing. We changed somewhat the seasonality numbers, so I think we're a little lower in the first quarter, than our prior guidance about maybe $100 million. But we think we're going to make that up in the middle of the year.

Okay, that is helpful. And then sorry it went out of my head. I'm going to get back in the queue. Sorry about that.

Thanks, Jackie.

Our next question is from Paul Miller with FBR and Company.

Yes. On the M&A front, I know you've done a great job on building out the California franchise. And I'm just wondering given that the new, with Trump winning and better valuations are you seeing more people talking to you? And what geographies are you really focusing on? Are you continuing to focus on the California markets? And are you looking at picking up mortgage companies are just retail banks?

Thanks, Paul. It’s hard to say what the impact of higher valuations of public banks is going to do for total M&A activity. I think that you know, we've been at this for a while and as we get farther away from the recessions, those smaller institutions which have not been able to generate sizable returns, cover the cost of capital and or have ageing management teams continue to consider transactions and partnership. And I think that to the extent, you know, we're another year in, and there is the prospect and I'll say the prospect of better valuations, I think that we are going to – we already have and we're going to see more transactions this year, until they are contracted for and closed thoughts, they just remain possibilities.

And then the…

In terms of locations, we continue to focus on California currently. We are always interested in the Pacific Northwest and the markets that we are in. Puget Sound, Portland and the larger greater markets. We have also have considered transactions in Phoenix, Salt Lake City and in Colorado. And we – if we find the right transaction in any of those areas we would. With respect to commercial banking and mortgage because of our long-term goal of reducing the concentration in mortgage banking income, in the company's income, not only we back to more organic growth, but that's much slower to make an acquisitions, we do not expect to make any acquisitions in the mortgage banking area.

Okay. And then employment. I mean, you guys have been averaging roughly adding about 100 people a quarter. I think some of that is factored in with some of the acquisitions that you made, and some of that is organic. I believe some of that is on the commercial bank and some on the retail mortgage bank. Can you give us your philosophy on hiring people? And should that start to flatten out at this point or should we continue to expect greater employment?

We on the growth side, we tend to be opportunistic, right. So if you think about branch acquisitions, like we required two branches in the fourth quarter for Boston Private, opportunistic opportunity. In terms of mortgage banking production growth, also opportunistic, we find teams of high-quality originators in new markets, we hire them in mass as a team, but they come up sort of when they come up. Infill or expansion in existing markets in the mortgage business, we are continuous in the market for personnel, but we also have attrition, we'll offset that. So most of our growth comes from new teams on the mortgage banking side. We also are having to grow our infrastructure and as we grow towards the $10 billion asset level, absent a changes in DFAST requirements, we are building infrastructure and it’s a simple ratio of exercise in some of support departments, like in resources, IT and some of these other service departments, we have to simply grow personnel as we grow total personnel to support the growth. So you'll see lumpiness in that growth of personnel, but it's somewhat dependent on our opportunities for growth in the business segments.

Looking at trying to model out the expense base. Especially the salaries and related costs, and I get it that you want to open up more retail branches in a purchase market and things like that. But should be looking at your expense base? I mean what kind of growth would you put on the expense base? Especially salaries and overall expenses as you open up new branches?

It depends on the branch, a retail deposit branch requires about 4.5 FTE each, mortgage production branches can vary from one or two people in a satellite office to as many as 20 or 25 or more originators and operations personnel in a large mortgage branch. Infrastructure people they sort move up ratio with our business and I don’t have a ratio for you there, but we can try to sort of develop ones as we think about it. The important part about expense growth is it should always be substantially less then revenue growth and we - our business plan on earnings growth on the mortgage side in our commercial and consumer business largely involves operating leverage continuing to improve our efficiency ratio through growth of revenues exceeding growth and expenses.

And I guess, your expenses came in right around $117 million. Should we be maintaining that throughout? Or what type of growth should we put on that number?

So for the quarter I think expense growth in total was – it’s about 2.7% and our forward guidance and again while, as Mark mentioned, it will be lumpy when you look at it as averaging around 2% per quarter.

Okay. That helps, guys. Thank you very much.

Thanks, Paul.

Yes.

Our next call is from Tim Coffey with FIG Partners. Please go ahead.

Morning, Mark. Morning, Melba.

Hey, Tim.

Good morning.

Mark I want to circle back on your expectations for the mortgage business in 2017. Relative to the guidance from last quarter, what gives you more confidence that we will see a more robust mortgage market in the second half of the year?

Well, in part, you have the annual home buying season and this is year end year out consistent that we have substantially higher levels of purchase volume in the second quarter and the third quarter, following in the fourth and first quarter. And we have no reason to believe that pattern is going to be different this year. The biggest challenge frankly in our markets it’s not demand, its inventory. Seattle in December was known the most impacted market in the United States in terms of demand versus supply, now fortunately we don’t really operate in Seattle. But there is so much economic activity, wage growth, home price appreciation in the west that home inventories are low. So my only caveat to our forecasts of volume is, it could be impacted by inventory levels. Having said that, we believe home turnover is poised to begin improving again. Post-recession we've been running about 5% a year, some quarter 7%, existing home resale versus the long-term average at 10% a year. Recovery in that number alone would support to improve our numbers. So I think we're confident that home buying season is going to come and go again this year, the question – the outstanding question is going to be inventory levels.

Okay. And did you change your expectations for producers at all since last quarter?

No, because remember our focus when hiring producers is to hire producers with a track record of focusing on the purchase market. So while we always have some attrition on producers that don’t continue their track record and trend before we hire them, the [indiscernible] focused and people we will be hiring this year will be similarly purchased focused and so we're confident they will do as well they are going to [indiscernible] role out.

Okay. Thank you those are my questions.

Thanks, Tim.

Next question is from Tim O’Brien with Sandler O'Neill and Partners. Please go ahead. Tim O’Brien: Good morning.

Hey, Tim.

Good morning. Tim O’Brien: Hey, Mark, you gave the updated MBA guidance down 17% for 2017, was that correct?

Let me check, I think that was…

In total.

In total. Tim O’Brien: So for the full country. Did you also give regional for Pac Northwest? Did they break that out or do you have any indication of overall production for the Pac Northwest for 2017?

You know, unfortunately, we have begged the MBA for that for several years and they do not provide a regional forecast. They will provide monthly regional actual closings, right, you can sort of track that during the year. but they don’t give a regional forecast. Now it is our expectation that regionally our markets will do better on the purchase side. Tim O’Brien: Yes…

10% [ph] my prior comments about inventory. Tim O’Brien: And then do you happen to also track new houses brought to market and do you have a ballpark number of number of new houses that were brought to market in 2016? And can you give us an estimate of the number of houses that are under construction, being built that should come to market in 2017? So in other words is production volume picking up in the Pac Northwest? Are people getting their entitlements in place and is the pipeline getting built for new product to come onto the market that will support your purchase business.

Yes. In my comments when you check the transcript, you'll see I cited that housing starts nationally are expected to be up 8.5% this year and I think its going to be higher. Housing starts in our various markets, bear with me and I'll give you a number, I have permits, which have been running in Washington state, in 2015 its about 38,000 permits a quarter level, in 2016 that was probably up to around 40,000 a quarter, peaking into the second quarter its 44,000. And in California permits were running - are running about a 100,000 a quarter with a low of about $97,000 in second quarter of last year. The forecast in Washington is that total housing permits will grow from 40,000 in total for the state to – in 2016 stable this year on starts growing 18 to 41,000 and [indiscernible] California. Tim O’Brien: Okay. That is per quarter you said 40,000 per quarter.

Yes, and I am sorry, do have the California forecast on housing permits… Tim O’Brien: Its okay, Mark. I don’t need the California, I am more curious about Pac Northwest. …

Okay. Tim O’Brien: Just because it’s kind of where the rubber meets the road. So I got Pac North. That is good color on that. But we will see flat to increased permits and it starts and such so that's a positive for you guys. And then one other question I have for you. Is the two hires that you announced in California these market presidents, can you give a little bit of color or background on the kind of commercial banking business that they did? Who they led? How big the portfolios of the groups were that they had? And just give some color on why these guys came aboard and what you think they can do here? I guess the timing and impact on C&I?

Sure. These gentlemen came from with backgrounds of institutions like, Comerica Union Bank they have led teams of – at the local level you know, 5 to 25 or more originators by office. Their focus is been in the middle market and in Northern California in part agricultural and technology as well. So they have experience not only in our middle market, business market, but in some of the area's of concentration, as an example in the Northern California market. And they have long track records of successfully building teams and portfolios. Tim O’Brien: Thanks for answering my questions.

Thanks, Tim.

Our next question is from Jackie Boland of KBW. Go ahead.

Hi. Sorry about that earlier. I just wanted to get a little bit of clarity on the ARM sale that occurred in the quarter. Was that captured in the commercial banking activity line item? Under origination and sales?

That sale is the fourth quarter was sort of a one-off sale. We were working with Freddie Mac on some interest they had in a certain type of loan and it helped us a little accelerate you know, the changing the changing composition of the portfolio and given the challenges of the quarter, it seemed a good time to execute on some people accomplish more on those objectives. But that’s not a day in day out goal for us to sell out of the portfolio.

And maybe just some added color on your expectations for small balance CRE sales and the Fannie Mae DUS product?

Sure. We've had a fantastic Fannie Mae DUS last year. Fortunately or unfortunately some of that carried over into the fourth quarter, I believe we closed about $375 million of Fannie Mae DUS originations. One of my people may correct me. I'm sorry, $325 million this year, which is high for the company. We were hoping for $400 million, but we carried over some of that to next year. We are hoping to do as well or better this next year, as you know Fannie Mae is multi family program, it’s a very good program, from time to time we're out in the market on pricing. And that’s more so on the larger loans, we are trying to concentrate on smaller loans in our markets and so we're hoping for a similar or better year next year. In terms of sales of small balanced commercial real estate loans, I believe we're hoping to originate and sell a little over $200 of that product this year, that can be subject to a lot of uncertainty in the secondary market. There as we try to understand buyers appetite for additional levels of commercial real estate in this environment.

And how does that $200 million compare to what was sold this year?

This year we sold…

I am sure of the exact [indiscernible] other sold this year is $157 million that is not all HBC.

All right, still over $100 million, but we'll have to get back to you on the exact number.

Okay. So basically normalized for the one off sale of the ARM portfolio. But then expect growth in the CRE sales depending on market conditions and then potentially as well or better in the Fannie Mae DUS is that a good way to characterize it?

Fair enough.

Yes. Jackie, I would just add, in terms of – you look at the non-interest income trend line for our commercial consumer banking segment, recall last quarter we had kind of high level or prepayment related to one loan in that quarter, that was about a [indiscernible], it benefited that quarter.

Pre-payment fees.

Pre-payment fees. And this quarter both the single family gain on sale that we discussed, as well as the AFS sale would be represented in that number. So it just seem for those two and then in anticipation of increased sales over the course of the – each quarter this year, I think you can start to see a trend.

Okay. That’s very helpful. Thank you.

Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mike Mason for any closing remarks.

Thank you, everyone how joined us on the call today. We appreciate your patience and taking the time to dial in and ask questions. Looking forward to talking to you next quarter.

This conference is now concluded. Thank you for attending today's presentation. You may disconnect.