Good afternoon. And welcome to the HomeStreet, Inc., Third Quarter 2017 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 Mark Mason, Chairman and CEO. Please go ahead.

Hello and thank you for joining us for our third 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 Web site at ir.homestreet.com under the news and market data link. In addition, a recording of the transcript 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 market, such as changes in interest rates and housing supply 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 implement our business strategy, and general economic conditions that affect our net interest margins, borrower credit performance, loan origination volumes and 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 detailed earnings release and our SEC filings, including our most recent Quarterly Report on 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 detailed earnings release available on our Web…

Thank you, Mark. Good morning, everyone and thank you again for joining us. I’ll first talk about our consolidated results and then provide detail on our two segments. Regarding our consolidated results. Net income for the third quarter was $13.8 million or $0.51 per diluted share compared to $11.2 million or $0.41 per diluted share for the second quarter of '17. The increase in net income from the prior quarter was primarily due to higher net interest income attributable to the growth in loans, both held for investments and held for sale, and due to higher SBA and commercial real estate net gain on sale revenue, both being partially offset by higher non-interest expense due to restructuring charges and mortgage banking segment. Total pretax restructuring charges in our mortgage banking segment were $3.9 million and acquisition related costs were $353,000. Excluding restructuring charges and acquisition related costs, core net income was $16.6 million or $0.61 per diluted share in the third quarter compared to $11.4 million or $0.42 per diluted share in the second quarter. The return on average tangible shareholders equity was 8.5% in the third quarter compared to 7% in the second quarter. Excluding the after tax impact of restructuring and acquisition related expenses, the core return on average tangible shareholders’ equity was 10.2% in the third quarter compared to 7.1% in the second quarter. Net interest income increased by $3.9 million to $50.8 million in the third quarter from $46.9 million in the second quarter. Our net interest margin of 3.40% increased 11 basis points from 3.29% in the second quarter. These increases are primarily due to the higher balances of both loans held for investment and loans held for sale, somewhat offset by higher rates on deposits and favorable home loan bank borrowing. Net interest income…

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 real estate construction, and real estate value appreciation than the remainder of the country. The major markets they’ll be focused 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. According to the most recent case show data, Seattle's home prices increased by 13.5% over the past 12 months, Portland increased by 7.6%, San Francisco by 6.7% and Los Angeles by 6.1% compared to the 20 city composite increase of 6.8%. Rental prices have continued the same trend. According to Zillow, annual rents for the year ended august 31st have increased 5.4% in the Seattle, 4.3% in Portland and 4.4% in Los Angeles compared to 1.9% nationally. San Francisco rents have actually decreased by 0.6% since last year, but are still the highest in the nation. Ironically, growth in these markets is one of the drivers of our decreased outlook for the home mortgage market and the catalyst for our restructuring. Population growth is outpacing the ability of the western housing markets to keep up the demand for homes. According to national association of home builders, total residential building permits increased 8% nationally and 12% in the west for the year ended August 31st. Permits increased 11% in the Seattle area…

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

Question, Mark Mason, on the -- maybe just to comment on the morale of the company and employees, given the restructuring efforts?

Well, it's clear any type of restructuring has a significant impact on various areas of the business right, particularly the people impacted of course. And we spent a lot of time before eliminating any position, right. We spent a fair amount of money and time recruiting these people. They are all high quality people, typically doing a very good job. And so, having to exit them is not a positive experience. It is a reality though of the mortgage banking business that from time-to-time the volume of operations personnel may have to decline. And that is sometimes driven by catalyst like rising interest rates obviously of lower refinancing volume. Sometimes it comes as a consequence of advances in technology and efficiency. In this case, part of our opportunity was driven in fact by increases in efficiency as a consequence of our new loan origination system. And so, while it is hard on morale to say good bye to people who have worked well and done a good job, for those remaining in the business, it is a positive statement regarding our commitment to the business. Our commitment to improving the efficiency and profitability of the business, which at the end of the day, secures jobs. And the people in that segment are very proud of their accomplishments. They are very proud of their growth and surprisingly, resilient in the face of changes, like we're discussing. So, I would say now that we're on the back end of the personnel changes and the decisions on branches that the folks in our business are very focused. And I think the morale is surprisingly good, but thank you for that question.

And for either of you just a more technical question on mapping this through the income statement, I just want to make sure I had the numbers correct. In Q3, the 3.9 could be -- the 3.3 is that in the occupancy line and then the 5.45 in salaries?

Yes, that is correct.

And then going forward, I guess, if it’s 13.2 for the year I’ll call it 3.3, I guess the 3 or 3.1 of that would be out of the salaries and then the balance out of occupancy?

Again, we talked about that. We have about again, Mark mentioned, in the spread given the pretax occupancy expense savings going forward will be about $1 million per year. And again that’s of course over the occupancy. And then course would be the savings on salaries and personnel again will be in the service related costs.

$9.4 million, right, pre tax.

Right, that’s close enough. Got you. May be one last one, I guess, M&A going forward in light of the restructuring effort does that augment the strategy in what you're looking for, particularly if additional more mortgage heavy operations were to come available?

So we’ve been very careful of one not to acquire banks with material mortgage origination activities. We have plenty and our goal is to reduce reliance on mortgage related income. So, I would not expect, absent some unusual opportunity, to acquire an institution with any material mortgage operations. Our strategy, with respect to growing the commercial consumer business, remains unchanged. We're committed to growing, primarily within our footprint, which means the large west coast markets, growing the commercial related lines of business, growing all types of deposits, consumer and commercial, and that strategy remains unchanged.

Our next question comes from Jessica Levi-Ribner with FBR. Please go ahead.

Thanks so much for taking my question. Just a couple of here from me, the first is can you quantify how much capital the capital simplification standards would free up for you? And how does that change the way you're thinking about the business and maybe asset mix?

I’ll take the first question. We have definitely done estimates, so it’s very exciting news as you can imagine when you had mortgage servicing assets size that we have, so we’re very excited about that. Our estimates we right now will free up approximately $70 million to $75 million in capital that we hold against the mortgage servicing assets. So it's a big deal, [Indiscernible] markets are going to [Indiscernible].

Obviously, it impacts our capital planning. And ultimately should impact the return on equity of the mortgage segment, because less capital will be committed to carry in that business, which already has in the normal course a very good ROE, that should go up. Most important in the short-term, it reduces our need to augment capital for growth. So what we may have planned in the next year to be necessary to continue growing in the prior growth rates was going to be mitigated by this change if indeed it gets finalized on the basis currently proposed.

It’s especially they’re like getting, for us getting we’ll call it a free capital raise. It’s amazing what it’s done for us, so we had very transformative and very positive for HomeStreet.

And could -- it certainly sounds like it. And could that capital be put towards the commercial bank, and would that increase your guidance from 2% to 4% quarterly asset growth there?

We may indeed grow more than that. I think that the management team felt it appropriate at the size we’re at to lower the guidance a little bit. Denominators are getting much larger than what we’ve [guided] [ph] 4% to 6% of quarter growth. And I think it's realistic to reduce expectations a little bit. Even though last quarter, we grown in the 4%, and we do have very powerful origination capability. But tempering that somewhat it is our ability to grow deposits as quickly in a market where deposit costs are growing, and need for deposits is likely to tighten with market liquidity or industry liquidity going down. And so we just thought better to lower expectations a little. It doesn’t mean that some quarters we may not exceed that guidance but there are other quarters we may not make the guidance. And so, that’s where we think the guidance should be. As a matter of capital planning, that’s a little bit of an opportunistic question. And last year, we took the opportunity in a very good market for most equities within particular bank equities at the end of the year to raise some capital. We’ll probably be filing another ATM prospectus in the next quarter or so. Not that we’re ready to raise capital, but being ready for another period of opportunistic valuation and that could allow us to grow faster. Because again, we are not limited by origination capability or infrastructure or markets by any means, we’re limited by our ability to fund and provide capital.

And Jessica just to make sure we answer your questions. The way I think about that capital is once we free it up from our mortgage banking segment, yes, we would internally -- we look the way manage capital between segments. Yes, we would deploying that over to the commercial and consumer banking segments.

Okay great. And then just to kind piggyback of your remark. In terms of deposits, do you have a deposit growth strategy that you're hunting deposits? Or is it just your normal core strategy of growing your deposit base and your outreach there?

So, our strategy continues to be the same. On the commercial side, its growth in commercial deposits consistent with the growth in the commercial customer base; and our investment in commercial lenders and growth in loan offices and so on. On the consumer side, it involves opening additional de novo branches, purchasing branches as we did this last quarter from other institutions; a limited use of promotional accounts, money market and CD accounts in selected markets, mostly associated with opening branches. And that strategy has served us well to this point if you look at the average annual organic growth rate in deposits it's been very close to our loan portfolio and growth rate. And so, we think that that strategy is going to be sufficient to fund our growth on the pace that we're projecting it.

And one last one for me is just kind of what kind of competition you've seen on both the mortgage side and also the commercial loan side? In terms of larger players coming into the market, or is competition stayed constant?

For us at our size, we compete with essentially everybody. We compete with the smallest community banks because we bank very small businesses. We compete with middle market banks across the board at all product types. And we compete with the National banks, substantially for consumers and at the lower end of their commercial banking businesses. We essentially compete with everywhere, which means the competition is unchanged. It's significant. It's broad. And we are in the markets of interest even for national banks who do not have deposit taking activities in our markets, they all have lending offices. So we compete not only with regionally headquarter located banks, but others nationally. And as a consequence in part because of competition, in part because of our fairly conservative credit closure, we compete on price. We seek to compete on price and on credit. And that positions us well to compete with all of those parties, because we can price with the national banks on any product. And of course those prices are substantially superior, generally to community banks and some of the regional banks. And so, we feel like we're well positioned structurally to compete, but the competition is fears.

And I think with respect to mortgage bank, we continue in the purchase market generally to be in Pacific Northwest, being Ohio, Oregon, Washington generally be number one. And aggregating with our aggregate purchase and refi, we generally are number two only behind Wells Fargo. So we have definitely maintained our position with respect to the other competitive landscape in the mortgage, single family mortgage side of our business…

Which means we have to be ultra-competitive in our pricing, but our structure set up to do that day-in-day-out, it’s one of the reasons we attract people. Not only do have the widest menu available products, including all of the important portfolio products like custom home construction loans and in general non-performing loans, but we have great pricing and great services. So we still feel like we’re well positioned to compete.

Our next question is from Jackie Boland with KBW. Please go ahead.

Just curious as to what kind of rate environments and potential fed fund increases you’re looking out for the 2018 NIM guidance?

Would you say what kind of…

Four year curve -- what are we expecting when we’re forecasting our guidance in terms of changes…

Well, actually right now, we generally I mean in the short-term, we generally when we model we run static is what we do. I think that’s generally what we’ve done here. We know that we are not great at forecasting the interest rates. So when we’re forecasting volumes and interest margins, we are forecasting based upon curve rates.

And on a theoretical basis, if we were to guide, assuming that the curve doesn’t flatten, if we were to get additional rate increases they maybe went in December and then one or two next year. How would you anticipate the net interest margin at the commercial bank level to perform?

The same or better typically. If yield curve doesn’t flatten -- our enemy is the flattening yield curve. In part because of our mortgage loans held for sale. If you think about it, these are loans that are yielding mortgage rents net of hedging costs. But they’re being funded with short-term money, like less than 30 day money. So every time that fed increase these and mortgage rates don’t increase commensurately, you get a squeeze in the net interest margin in that loans held for sale warehouse, which at times going to be billion dollars right. So that’s meaningful. If the curve rises parallel, mortgage rates will rise commensurate with short-term rate and will maintain or perhaps even grow if this curve steepens that portion of the net interest margin. A wild card is deposit cost. To-date deposit cost increases or the beta that most banks have been experiencing has been relatively low, our beta has been very low. So that continues to be a question that will be answered in the future somewhat, we don’t really know. So typically, as long as the curve rises in a parallel fashion or better, our margins should be same or better.

And Jackie, just to follow up a little bit, I guess, I want to make sure, I may have misunderstood your question. I mean, again, right now in our current forecast again we’re using the September 30th yield curve and that’s really what our…

We might buy forwards…

And including buying forward, but again, we are not forecasting a rate increase. As Mark said, we’re not very predacious when that’s going to happen. So we just -- we assume that basically the yield curve now the yield curve that we’re going to be using going forward. That’s how we make them up. Thanks.

That’s very helpful, thank you. I too am not a great rate forecaster. And then Mark Mason, just to follow-up from your M&A comments, I understood that you‘re not interested in looking at acquisition targets that have a mortgage banking platform. Does that though process carryover to a bank that might have a large mortgage platform that's not for sale, where they portfolio those loans?

Let me answer it clearly. We would not exclude a bank that had a meaningful or material mortgage portfolio program, we have one, right. And that portfolio is one of the most consistent earners at the bank. It typically earns between 14% and 18% ROE quarter-to-quarter at very low losses and is a good contributor to bottom line. If there were an opportunity with a similar portfolio that would not necessarily be a negative. Though, in fairness, we are looking for commercial assets and liabilities, and its issues are concentrated in those assets and liabilities.

So your comments were more geared towards somebody who was originating margins just purely to the sales not for portfolio?

Correct because that's the business as we probably know that produces cyclicality and seasonality, and the volatility that we’re trying to dilute with diversification.

And we can certainly grow it at our own organically, should we chose that we would not be in the market or transaction.

And then just lastly, obviously, really strong sales volume in the CRE and SBA space in the quarter. Was that originally generated as held for sale, or did any of that come out as the held for investment portfolio. And I apologize if I missed any of that in your prepared remarks.

The SBA loans, because they’re essentially split, they get originated into held for investment classification. And then the ensured portion is split and sold. And so it never starts an held for sale position. The commercial real-estate loans are designated for sale post origination based upon the different interest or characteristics that buyers might be interested in, at the time. So those also have come out of the held for investment portfolio. The Fannie Mae DUS loans, the multifamily loans are originated in Fannie Mae those are held for sale loans.

So it wasn’t necessarily the small balance CRE group that drove all of the CRE sales that you placed in the quarter, there were some that came out of the portfolio?

Well, the small balance CRE group originates to the portfolio and then periodically we sell some of the loans.

And everything goes into held for investment and opportunistically what we have the right transaction, we move it from held for investment over to held for sale and then it exists out. And we’re going to view this portfolio generated as held, is held by the bank and held for sale and then we return to bank to the U.S. facility and get securitized to Fannie.

And so would you just categorize the strength this quarter as opportunistic in terms of what sales you were able to accomplish and perhaps not, we won't see the same level of strengths in the future, or is this the new ongoing run rate?

I wish you with the ongoing run rate. I think in fairness it’s a little seasonal. If you look at prior years with third and fourth quarters, has historically been the low significant for SBA lending and loans sales and Fannie Mae, the U.S. lending loan sales, which I think is going to remain true. With respect to the small balance CRE business, let me try to take the seasonal, it’s lumpy. It really -- the market volume rises and falls in these non-agency small balance CRE loans, based upon the appetite of the market, which means other banks, the insurance companies and credit unions. And it really works in inverse to those banks origination activities. And if they find that they are not meeting their growth targets, the origination targets, they will look to the market to supplement by buying loans. And starting in the second quarter and continuing through the third quarter. And today, there has been increased interest. So I don’t if you can call it seasonal or cyclical, or periodic. But it's lumpy. And so in total, I would say that the activity in the third quarters will be higher than the average quarter, and we shouldn’t forecast necessarily based upon this level. As we grow, the average loan quarter-to-quarter will also grow, but I think this quarter was a little outsized. Hopefully that makes sense.

[Operator Instructions] Our next question comes from Tim O’Brien with Sandler O'Neill. Please go ahead. Tim O’Brien: First question I have for you, just to piggyback on what Jacky was talking about with regard to loan sales in commercial and consumers. So you guys sold $227 million in loans to the secondary market this quarter. So was any of that SBA in that -- how much of it was SBA? And now would be in the other bucket, right -- obviously, not multifamily DUS?

Yes, that would be in the other bucket. That is correct. Tim O’Brien: And then you alluded to the $67 million of that other bucket of the $125 million was single family, from the single family portfolio this quarter, right, in the foot note?

So you’re looking at foot note five correct, Tim? Tim O’Brien: Yes, so $67 million was single family?

Yes, that was second quarter. Tim O’Brien: Let's start with this. So the $125 million, 493 sold of other loans sold in the third quarter, that $125 million number?

Right, so this footnote five, if you read the full note as we mentioned the fourth quarter -- the fourth quarter 2016. So you see… Tim O’Brien: Yes. Can you give the breakdown of the parts that were attributed that contribute to that $125 million in total sales? How much was single family, how much was other multi, and how much was SBA? Just some along those lines just a sense of it. And even if you don’t, even if you can’t nail it directly, just what was the biggest piece maybe?

First, there was no single family loans in the number. It’s all in their SBA were small balance commercial real estate.

I know, I don’t have the appropriate number in front of me. I’d say the SBA is around 30-ish. I have to look it up, but that’s a approximate and doing this for memories, don’t have that scheduled in front of me? Tim O’Brien: I guess, the other question I have for you is. I mean, just looking at this. Is it fair to say that that portfolio of other loans held for sale was depleted a little bit as far as that channel that work-through this particular channel looking at the fourth quarter. Are you guys -- you also talk about kind of lumpiness or seasonality in this segment, extending through typically being the second half of a year. How is the fourth quarter look? I guess, again to reiterate what Jackie asked, kind of in light how much in loan sales you have this quarter and what kind production you had, and what’s left in the tank?

If I understand your question, Tim. First with respect to small balance commercial real estate loans, we are originating substantially more than we have sold. So there is no shortage of inventory. Those numbers depend really on buyer interest. And from quarter-to-quarter, it’s a little hard to gauge. It’s pretty strong right now. And the fourth quarter could have another $30 million to $50 million of those types of sales in the quarter. At this juncture, I’m not comfortable predicting with any reasonable amount of accuracy with that number might be. And we will have SBA loan sales in the quarter as well. I do not believe next quarter will be as high as this quarter. It will not be as low as the second quarter. If you look at the second quarter back, it was about $25 million. But I don’t think it is going to approach the third quarter levels. I know that’s a big range, so I apologize. Tim O’Brien: No, that’s okay. I mean you take your best shot. As far as pricing and what you guys booked on gains this quarter, I mean that was considerably stronger than the second quarter number. So obviously, that’s a reflection of again appetite demand. People were willing to pay up in the September quarter. That momentum rose into the fourth quarter at least at the start as well. So demand is there and pricing appetite willingness to pay up. Did that persists into October as well?

Well, the appetite does. The pricing on SBA loan sales continues to be spectacular. The last sale that we completed, the range of premiums was 10% to 14%. Now, we are going to keep all of that because anything over 10% get split 50-50 with the SBA, which is probably fair. So SBA loan sales gains -- pricing remains very good. Commercial real estate saw -- small balance commercial real estate, I think those gains will be a little softer as rates have risen and that has a direct impact on the premiums, you get for loans originated pre-rising rates, right. So those gains will probably be 50 basis points lower if they were averaging, let's say, 250 basis points in the third quarter, maybe 1.75 to 2 or little over 2, something like that in the fourth quarter. So we'll have to see how that goes.

The appetite may fix that or not… Tim O’Brien: And then last question, just to clean up the $7.7 billion, $7.8 billion rate lock in closed loan volume numbers for next year. That was for next year or 12 months next four quarters, including 4Q. Was that 2018?

That's 2018, yes.

And that's only origination in sale of mortgages held for sale.

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

Thank you all again for your patience. Thank you for the great questions by the analyst that cover the Company. We appreciate the coverage. Look forward to talking to you all next quarter. Thank you.

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