Good day, everyone, and welcome to the HomeStreet, Inc., Second Quarter 2017 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please do note that the event is being recorded. I would now like to turn the conference over to Mark Mason, Chairman and CEO. Please go ahead.

Hello and thank you for joining us for our second quarter 2017 earnings call. Before we begin, I would like to remind you that our detailed earnings release was furnished yesterday to the SEC on Form 8-K and is available on our website at ir.homestreet.com under the news and market data link. 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 on our net interest margin and other aspects of our financial performance, the actions, findings or requirements of our regulators, which could impact our growth plans, our ability to meet our internal operating targets and forecasts, and economic conditions that affect our net interest margins. Our mortgage origination, the value of mortgage servicing rights. 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 are detailed in SEC filings, including our most recent Quarterly Report and Form 10-Q as well as our various other SEC filings. 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…

Thank you, Mark. Good morning, everyone and thank you again for joining us. I will first talk about our consolidated results and then provide detail on our two segments. Net income for the second quarter was $11.2 million or $0.41 per diluted share compared to $9 million or $0.33 per diluted share for the first quarter of 2017. The increase in net income from the prior quarter was primarily due to higher Mortgage Banking origination sale activities and high net interest income attributable to a change in our balance sheet mix from lower yielding investment securities to higher yielding loans held for investments. Acquisition related expenses were $177,000 for the second quarter, excluding after tax, acquisition related items, core net income was $11.3 million or $0.42 per diluted share in the second quarter compared to $9 million or $0.33 per diluted share in the first quarter. Net income was $46.9 million in the second quarter compared to $45.7 million in the first quarter. Our net interest margin up 3.29%, increased 6 basis points from the first quarter’s net interest margin up 3.23%. Both of these trends are primarily attributable to the previously mentioned change in our balance sheet asset mix from lower yielding investment securities to higher yielding loans held for investments. Non-interest income increased by $6.5 million to $81 million in the second quarter compared to $74.5 million in the first quarter, primarily due to an increase of $5.6 million in Mortgage Banking origination and sales activities. Non-interest expense was $111.2 million in the second quarter compared to $106.9 million in the first quarter. Excluding acquisition related expenses, non-interest expense was $111.3 million in the second quarter compared to $106.9 million in the first quarter. This increase in non-interest expense was primarily due to higher incentive costs attributable to…

Thank you, Mark. I’d like to now discuss the national and regional economies as they influence our business today. We remain fortunate to operate in some of the most 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 than 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, the most distinguishing feature of the Washington, Oregon, Idaho, and California economies continues to be their superior job growth compared to the national economy. Over the last five years, payrolls expanded 14% in Washington, Oregon and California compared to just 9% for the nation as a whole. Ironically, growth in these markets is one of the drivers of our decreased outlook for home mortgage volume. Population growth is up facing the ability of the Western housing markets to keep up with the demand for homes. Nevertheless, we believe these conditions improve the outlook of our consumer, commercial, real estate, construction and commercial lending and deposit businesses. On the commercial side, Seattle's office market remains one of the strongest nationwide as tenants flock the Puget Sound region and market is on pace for another year of 2 million square feet of positive absorption. There is approximately 5.6 million square feet of space currently under construction with new office space attracting significant preleasing. Of note, recently Amazon and F5 both pre-lease the entire footage of two Class A office buildings under construction in downtown Seattle, further challenging the significant demand for office space downtown. Portland absorbed over 52,000…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first questioner today is going to be Jeff Rulis with D. A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff.

Mark, just a little more color on the – I guess the personal cuts. I guess timing wise were those kind of early middle or late kind of throughout the quarter? And then the second question is I guess if you could breakout, is there a severance component to that that's near-term, I think you alluded to some higher costs, but then some efficiencies thereafter?

Sure. That reduction in force was accomplished in part through attrition in the middle of the quarter and in part through a single reduction in force in early June. There were some severance related expenses, but they were not that material…

It’s approximately $105,000.

Got it.

As we evaluate capacity requirements this quarter and through year-end, it's likely there will be some additional reductions. We hope those are generally accomplished through attrition, but we can't rule out other changes as we evaluate going forward the capacity we need at loan volumes we currently anticipate. And so we were going through a fairly extensive evaluation effort over the next several weeks that will result in those strategies. And there maybe some cost associate with some of those changes.

And we’ve target a lot about staff, but I mean is there discussions on the branch or facilities closures on that end possibly?

At this juncture we’re evaluating all of our options, obviously when we opened all of our branches, we felt strongly about the opportunities in those markets and the opportunities with the teams that led to the opening of those offices. And we did hire and have hired some excellent people in those markets and all that subject to evaluation.

Great. And just switching gears a little bit on to the commercial loan growth, it looks like some of them are balanced I guess segment wise than we've seen from the bank in a while. Could you provide any color to the regions that may have provided some of the strongest growth?

Sure. As you would expect Puget Sound and greater Portland still comprises the bulk of our commercial origination activity, whether that might be commercial real estate or general commercial lending though our commercial real estate small balance business which is right out of Southern California is really a Western State's business, so you can assume a distributed across the major markets in the West for that business. And we are quickly growing general commercial leading business in California. We have teams in the Bay Area and in Orange County in San Diego now that we built over the last nine months. Those teams have strong pipelines and we're really encouraged about our opportunities there with some really fantastic personnel. So while those numbers are not significantly yet relative to Puget Sound, we expect that to be very significant going forward.

Okay. I’ll step back. Thanks.

Thank you, Jeff.

And our next questioner today is going to be Jessica Levi-Ribner with FBR. Please go ahead.

Hi, good afternoon. Thanks for taking my question.

Hi, Jessica.

How can we – just to kind of pegging back of the last question. How can we think about the absolute amount of expenses in the Mortgage segment as you reduced capacity? Can you guys – like a percentage…

Well, that’s a fair question. I would say we're not prepared to give a detailed answer on that today. We have to prepare our system for the expectation of balances and volume that maybe 20% to 25% lower than we expected. Now fortunately, our transition to our new loan origination system anticipated efficiencies that are going to enable or help enable that cost reduction effort. But I don't think compared to sort of give like a percentage or a pro low number today. I think at the end of this quarter, when we talk next quarter, we're going to be at a far better position to discuss that detail.

Okay. Fair enough. And then just wanted to clarify the 1.5% expense growth per quarter, did I hear that right?

1%.

1%, okay, so that’s down from your last quarter guidance and you had that have most to do with Mortgage Banking?

It does and the fact that some of the lumpiness of branch openings, which is already occurred into the 2% was an average with the expectation of some lumps of volatility in that number and so combination above.

Okay.

Plus as a consequence of decline in mortgage profit expectations were – being very careful in expenses across the board, while still making meaningful investments in growth, we are just being very, very careful with expenses.

Okay. And then looking forward to next quarter and beyond in kind of the commercial loan growth. Do you expect that to remain kind of various contributions across the platform? Are you seeing any particular areas of growth already in the third quarter?

While we expect general commercial lending to grow in composition as a portion of our lending. There is the prospect that we may retain more generally non-conforming mortgages as well. So we have seen greater runoff in that portfolio is a very stable high ROE asset today. And as a part of the strategies to attract more higher net worth private banking customers, we maybe originating more jumbo non-conforming in conjunction with those strategies.

Okay. That's all for me. Thanks so much.

Thank you.

And our next questioner today is Jackie Boland with KBW. Please go ahead.

Hi, good morning, everyone.

Hi, Jackie.

Mark, just in light of – everything is taken place on the mortgage market, how does this if it all impact the geographies that you're looking to in terms of expansion and I guess I guess both mortgage if that still on the table and then also the consumer commercial segment?

Well, I think consistent with our discussion last quarter. We have changed our growth strategy for that business and for the foreseeable future we will not be entering new markets. And growth in that business in terms of personnel and offices is going to be highly concentrated an existing markets within high to markets that we have or expect to in the near-term have full banking services. So that a business will be much more integrated and the synergy between the two sides of the house much greater and I would expect overall, growth in that business to be less than historic, part of that due to the market itself right from a volume standpoint. But our activity in opening new offices will be limited to really unusually good opportunities with the right loan mix, right. One of our greatest challenges today is home price appreciation and in proportion of our lending that is non-conforming or government mortgage. To the extent that housing prices have increased and we are having to originate more jumbo non-conforming loans, and those loans carries substantially lower profit margins. And so markets that are characterized by higher concentrations of those mortgages are not markets that we will be expanding it to.

Okay.

And so to the extent there is further expansion you'll see it Inland and in markets of generally lower housing prices.

Okay.

But we aren't concentrating today on efficiency, profitability and optimizing the system we have.

So is it fair to say then that this differs from prior cycles within the Mortgage segment, where you were able to advantageously pick up some teams when others were having challenges, but because it's the market itself and the lack of supply that's out there that differs this go around?

That's exactly right. I mean we are dealing with a vastly different market today that does not offer the same opportunity for origination that it did previously. Refinancing is down to 20% to 25% of our business and there is not the available inventory of homes to produce substantial levels of purchase growth that we expected. So we're really dealing with different fact set and we've had to come to terms with that in terms of our opportunity in this segment. So if you take that and understand little further, the composition of our earnings for the foreseeable future and probably permanently will be substantially lower in composition of Mortgage lendings.

So how would you looking to maybe 2018 in a little bit further out, and obviously this accelerates what we had talked about previously in terms of the breakdown between Mortgage and Commercial. How do you see that breakout playing out?

Well, I got to tell you that is a present subject that we are trying to wrestle down, right. I mean we have been expecting still meaningfully increases in loan volume in 2018 and 2019. We are currently carried back those expectations on a loan-to-loan officer basis and carried back our expectations on expense. And so as I see here today, I can tell you what I think the loan volumes going to be next year.

Okay. So probably more of an update in next quarter and then even more so – on the following quarter’s call I would guess right?

Yes. So consistent we are getting closer to year-end, by third quarter – next quarter I promise we will have – what we’ll probably call preliminary set of guidelines on 2018.

Okay. Thank you. I’ll get back now.

Thank you.

And our next questioner is going to be Tim Coffey with FIG Partners. Please go ahead with your question.

Thank you. Good morning, Mark.

Good morning.

I was kind of counting on talk about the Commercial banks for a little bit, the efficiency ratio has held pretty well in the low 70s last two quarters. Is that kind of where you think that level could be back half of this year or do you plan to make more investments in that?

Well, our view of our opportunities for growth in assets deposits and earnings and improvement and efficiency in our Commercial and Consumer segment has not changed. I mean we've been hitting our numbers pretty consistently on growth that growth should develop operating leverage and our efficiency ratio, we continue to expect to improve over the coming quarters such that in the back half of this year. We're expecting to be in the high 60s, and next year declining through the year to the mid-to-low 60% range. And that’s we've been very consistent of those expectations. And despite the challenges in the mortgage business, we have no reason to change those expectations currently.

And so does that imply that you mean you've got enough runway with the existing staffing and floatings that you have, I mean including El Cajon now already in that market?

It means we will have to continue to invest in infrastructure to support growth, but on the same terms we’ve discussed in terms of expense growth.

Okay. And then do you look to – will you be looking to sell any additional multifamily loans or commercial real estate loans to increase as they begin on sale activities and on that side of the business?

That’s little bit opportunistic. I will tell you that it’s bit of a schizophrenic market. In the first quarter of this year there was almost low demand, in the second quarter of this year demand rose really significantly and it’s still strong today. I hope that means we will be able to increase secondary market sales of those assets. It allows us to generally roll short-term profit. Hopefully, be able to retain servicing in some future date. We are currently reviewing our opportunities to securitize some of those assets, which would offer the leverage. And so we remain hopeful that those businesses even on the secondary market basis are going to continue to grow.

When you enter a beginning of the quarter, do you have a set target, the amount of loans you want to sell in other side of the business?

We do – in terms of the plan for the year, I will tell you that we’ve been way off above and below our expectations in various quarters, but to date, at least on our commercial real estate business, we are right on the plan or a little above plan in the Fannie Mae business and just sort of our plan I think is other secondary market sales.

Okay. And then just kind of follow-up on an answer you gave to an earlier question, talking about growth in the markets where you can capture the whole banking operations or the whole banking relationships with the market. Do you have any kind of rough parameter of what percentage of your branches where you don't have both commercial and multifamily – I’m sorry commercial and single family mortgage production in the same market?

Most of our branches do not have commercial lenders or mortgage lenders in branch. They’re really consumer retail branches and small business branches. Our commercial bankers are typically officed and centralized in regional offices. Our mortgage production personnel exist in about 20% of our branches maybe little less. We’ve historically had in branch mortgage loan officers, but the referrals from those branches go to regional mortgage-led offices, and so it’s a little bit of a mix.

Okay. Thank you very much. Those are my questions.

Thank you, Tim.

[Operator Instructions] And our next questioner today is going to be Tim O’Brien with Sandler O'Neill. Please go ahead. Timothy O’Brien: Good morning, guys.

Hi, Tim. Timothy O’Brien: Follow-up on some detail you gave last quarter hiring in the Commercial Banking business. You guys said you had plans for five – hiring five senior bankers or five season bankers. How's that – did you make any progress this quarter on that?

I believe we’ve hired two of the five and we have – I think we have one in the queue. Timothy O’Brien: Great.

I have to check with them. Timothy O’Brien: And then related to the new mortgage underwriting platform that you have. Do you have a sense – can you quantify cost saves that can come from that being fully operational versus not being operational at all – what's the annual – is there an annual savings number that you expect out of that?

We are waiting for it to stabilize. We are sure what that is going to be. Going into the project, savings are 10% to 15% on processing and funding were expected. I will tell you that our average closing time on those in the last month dropped from closer to 30 days to in the 17 or 18 day range. But I don’t want to attribute all of that the system efficiencies. Because what we’re also seeing is loan – is it loan application and closings in the same month wise, right. So that’s going to contribute to short purchase timelines, but we think the meaningful part of that is system efficiency. Timothy O’Brien: And then last question just on – to follow-up another one on mortgage. Have you guys seen any increase in new listings? Does that benefit you in the Seattle market in particular, possibly in the Bay Area? Have you seen that in say June versus April, those numbers? And is that something that could give you a little bit of support here in the second half potentially?

Seasonally, we expect increases in listings consistent with the home buying season. Nationally though, we’ve seen listings fall. And year-over-year at this time of year, I think I cited in my comments earlier listings are down like 30%. So the increase that we expected, to the extent it occurred, did not occur in the magnitude that would be typical for this time of the year. Timothy O’Brien: Thanks for answering my questions guys.

Thank you, Tim. End of Q&A

This will conclude our question-and-answer session. I would like to turn the conference back over to Mark Mason for his closing remarks.

Again, we appreciate your attention and patience today. We'll look forward to speaking with you next quarter. Have a great day.