HomeStreet, Inc.
Q1 2015 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Good day, and welcome to the HomeStreet first quarter 2015 conference call. [Operator Instructions] I would now like to turn the conference over to Mark Mason, President and CEO. Please go ahead, sir.

[Mark Mason:]

Hello and thank you for joining us for our first quarter 2015 earnings call. Before we begin, I would like to remind you that our earnings release was furnished this morning with the SEC on Form 8-K and is available on our website at ir.homestreet.com. In addition, a recording of this call will be available today at the same address. On today's call, we will make some forward-looking statements. Any statement that isn't a description of historical fact is probably forward-looking and is subject to many risks and uncertainties. Our actual performance may fall short of our expectations or we may take actions different from those we currently anticipate. Factors that may cause actual results to differ from expectations or that may cause us to deviate from our current plans are detailed in our SEC filings, including our quarterly reports on Form 10-Q and our Annual Report on Form 10-K for 2014, as well as our various other SEC reports. We expect to file our quarterly report on Form 10-Q for the quarter just completed. Additionally information on any non-GAAP financial measures referenced in today's call, including a reconciliation of those measures to GAAP measures, may be found in our SEC filings and in the earnings release available on our website. Today, I'll give a brief update on recent events, review our progress in executing our business strategy and highlight key financial results. Please refer to our earnings release for a more detailed discussion of our financial condition and results of operations. In the first quarter we made significant progress on our strategy to grow and diversify earnings. We expanded our commercial and consumer banking business organically and through acquisition, and build mortgage banking market share in new and existing markets, continuing to opportunistically hire teams of strong originators in western United States. On March 1 we completed our merger with Simplicity Bank, expanding our commercial and consumer banking business into Southern California. The transaction resulted in a bargain purchase gain of $6.6 million, which we have reported as non-interest income for the first quarter. Additionally, we realized pre-tax and merger-related expenses of $12.2 million in the quarter. We expect to recognize an additional $1.5 million in merger-related expenses in the second quarter. Given the merger date of March 1, only one month of combined results are reflected in the results of operations for the first quarter. We are excited about the potential this merger offers us for building a strong commercial and consumer banking franchise in Southern California to compliment our growing mortgage banking business in the region. I'd now like to share some key metrics from our consolidated results for the quarter. First quarter net income was $10.3 million or $0.59 per diluted share compared to $5.6 million or $0.38 per diluted share for the fourth quarter of 2014. The increase in net income for the quarter was primarily due to higher net gain on mortgage loan originations and sale activities and the bargain purchase gain from the merger with Simplicity, offset our merger integration-related expenses and higher salaries and related costs. Excluding first quarter after-tax merger-related expenses and the bargain purchase gain, net income for the quarter was $11.6 million or $0.67 per diluted share. Merger-related items decreased first quarter pre-tax and after-tax earnings by $5.5 million and $1.3 million, respectively. The after-tax impact on net income for the quarter was substantially less than the pre-tax impact, as the bargain purchase gain is not subject to taxation. And as such, the tax benefit from deductible merger-related expenses substantially offset the net pre-tax reduction in earnings. Tangible book value per share of $18.97 declined $0.42 from $19.39 in the fourth quarter of 2014, primarily due to the Simplicity merger. To complete the merger, HomeStreet issued 7,180,005 shares to Simplicity's shareholders in exchange for each share of Simplicity stock they held. Tangible book value per share declined, primarily as a result of greater growth in HomeStreet tangible book value per share, since the negotiation of the exchange ratio in the merger than the value of tangible net assets acquired in the merger, and as a consequence of equation of $7.4 million of core deposit in tangibles. At the date of the merger announcement, we anticipated initial tangible book value dilution of approximately 2.8%, excluding merger-related expenses. Actual initial tangible book value dilution was 4.7%. Net interest income increased $3.2 million or 12% in the first quarter compared to the prior period. This was a result of 10.6% growth in average interest earning assets, primarily due to higher average balances of loans held for investment. Our net interest margin was 3.6%, an increase of 7 basis points over the fourth quarter, due primarily to higher average asset yields from the addition of earning asset from Simplicity and to the ongoing changes in the composition of the loan portfolio through organic origination of commercial and consumer loans. Non-interest income increased $23.9 million or just over 46% from the fourth quarter, due primarily to higher net gain on loan origination and sale activities from increased single family mortgage interest rate locks and to the bargain purchase gain for the merger. Net gain on mortgage origination and sale activities increased $22.7 million from the prior quarter. Additionally, non-interest income included a $6.6 million bargain purchase gain from the Simplicity merger. Non-interest expense was $89.5 million compared with $68.8 million in the fourth quarter. Excluding merger-related expenses, non-interest expense was $77.3 million compared with $67.9 million for the fourth quarter, an increase of 14%. This increase was primarily due to higher salaries and related cost from increased headcounts and from higher commissions, as a result of 21% increase in company's mortgage volume. On the closing of the Simplicity merger on March 1, we implemented the first of a series of planned merger-related operating cost reductions impacting the combined company, as non-integration critical Simplicity employees began to depart. These reductions in personnel and other now duplicative operating expenses have resulted in achievement of approximately 15% of the planned 35% of pre-merger run rate operating expense savings in the first months of combined operations. Innovation efforts are expected to continue through the first half of the second quarter, with integration of all systems having been completed this month. We expect to achieve substantially all planned cost savings by the end of the second quarter. Additionally, we now estimate actual merger-related expenses will total $14.6 million versus our original estimate of $19.1 million. Of that amount, we expect to incur approximately $1.5 million of remaining merger-related expenses in the second quarter. At March 31, the bank's Tier 1 leverage ratio was 11.47% and total risk-based capital was 14.57%. These ratios reflect the implementation of Basel III requirements on January 1 and capital added through our merger with Simplicity. I'd now like to share some key points from our Commercial and Consumer Banking business segment results. Before our merger with Simplicity, HomeStreet gained seven retail deposit branches in Southern California, and added approximately $650 million in loans and $651 million in deposits to our balance sheet. Related to merger, we also entered into an agreement with Kaiser Permanente to continue providing a network of approximately 40 ATMs at certain of its California locations. Moving upon this growth, we recently launched HomeStreet Commercial Capital, a commercial real estate lending group, located in Orange County, California. They will originate permanent loans up to $10 million in size. The group includes personnel formerly with Simplicity and is led by its President, Bill Endresen, formerly with Impac Commercial Capital, a 40-year veteran of the commercial real estate industry. We also recently added a highly experienced nine-person SBA lending team, led by Joan Earhart. This group of lenders was most recently with Pacific Mercantile Bank, and was recently recognized by CVC small business finance, as the 2014 top community bank lender. The hiring of this group marks our first commercial lenders in the California market. The Commercial and Consumer Banking segment recognized a net loss of $14,000 for the first quarter compared to net income of $3.3 million in the prior quarter. Excluding merger-related expense of $12.2 million pre-tax and the $6.6 million bargain purchase gain, this segment recognized net income of $1.2 million for the quarter. Despite strong growth in net interest income from organic growth in earning assets and the addition of Simplicity, earnings fell quarter-over-quarter due to the combined impact of higher loan loss provisions and lower gains on the sales of securities and lower gains on the sale of Fannie Mae DUS loans. In the first quarter we recorded a $3 million loan loss provision compared to $500,000 in the fourth quarter, reflecting growth in our held for investment portfolio and an extension of our modeled loan loss emergence period for commercial loans. The extension of modeled loss emergence period added approximately $1.2 million to the provision this quarter. Absent a rise in balance of loans in our portfolio, this amount should not be repeated in the future. Additionally, in the fourth quarter of last year we realized $1.2 million of gains on sales of securities. We had no such security sales in the first quarter. Portfolio loans held for investment increased 34.7% to $2.83 billion from $2.1 billion at December 31, an increase of $729 million. This included approximately 4% organic growth and $650 million of loans added from the merger, primarily multifamily and single family loans. New commitments totaled $222 million compared to $308 million in the fourth quarter. We achieved this net growth in the loan portfolio despite continuing high portfolio run-off that were approximately 24% annualized during the quarter. Credit quality remained strong with non-performing assets of 0.71% of total assets at March 31 and non-accrual loans of 0.74% of total loans. Non-performing assets totaled $32.8 million at quarter end, including $7.4 million of non-accrual loans added from the Simplicity merger compared to non-performing assets of $25.5 million at December 31. Deposit balances increased $899 million to $3.34 billion from $2.45 billion or approximately 37% from yearend, which included approximately $651 million of deposits added from the merger. Organically, total deposit balances grew 10% in the quarter, transaction and savings deposits grew nearly 29% in the quarter, of which 4.4% is organic growth. Certificates of deposit balances increased 52% over December 31, primarily as a consequence of the merger. Segment non-interest expense was $35.7 million, an increase of $14.5 million from the fourth quarter. This included merger-related expenses as well as expenses from continued organic growth of our commercial real estate and commercial business lining activities and the expansion of our retail deposit network. I'd like to talk now about Mortgage Banking, as well as give some insight on the local economy. Most recent Mortgage Bankers Association monthly forecast projects total originations to increase 11% in 2015 over the past year, an upward revision from its earlier forecast of 7.2% increase. Mortgage rates continue near historic lows, and nationally purchases are expected to comprise 59% of volume this year. Housing starts were lower than expected nationally in February and March, but the pace is projected to pick up, rising within 7% of the long run average by the end of 2016. Nationally, originations are estimated to be split evenly between purchase and refinancing in the first quarter, which is consistent with our results for the period. The labor market continues to be very strong in the Pacific Northwest. In recent quarters job creation in Washington and Oregon exceeded 3% annualized. New residential construction is also stronger in this market, with permits within 6% of the long run average in Washington, and 5% above that average in Idaho compared to 19% below the long run average nationally. In Washington, multifamily permits accounted for a record 63% of total permits in the first quarter. Regional economy is blooming. Seattle is named the nation's fifth fastest-growing city by Forbes at the end of January. Median pay for college graduates is the third highest in the country, and job growth has been robust. Facebook just announced that it will lease new construction that can accommodate about 2,000 people. And Amazon plans to ultimately occupy 10 million square feet of office space in Seattle. Of that amount, approximately 3 million square feet are currently under construction in downtown Seattle. Now, a little about segment results. In the first quarter we added two locations to our home loan center network and grew mortgage production personnel by just over 4%. Closed loans per loan losses rose in the quarter to 4.3 loans compared to 3.8 loans in the fourth quarter. First quarter Mortgage Banking segment net income was $10.3 million compared to net income of $2.3 million in the fourth quarter. The increase was due to higher net gain on single family mortgage loan origination and sale activities tied to higher interest rate lock commitments, and offset in part for higher commission expense from increased closed loan volume. Interest rate lock commitments totaled $1.9 billion, an increase of 62% over the fourth quarter, due to lower mortgage interest rates and the continued growth of our production staff and network of home loan centers. In January, our company set a record of $715 million in interest rate lock commitments with refinancing comprising 67% of locks. Notably, March was not far behind, and volume was $615 million in rate lock commitments, although the percentages were reversed and purchase volume accounted for nearly two-thirds of locks in the month, consistent with the historical beginning of the home purchase season. Month-to-date, April activity continues to be strong, with month-to-date fallout adjusted locks of $600 million, 37% of which were refinances. Also our composite margin in April is consistent with the first quarter. Single family closed loan volume designated for sale is $1.6 billion in the first quarter, an increase of $276 million or nearly 21% from the prior period. The combined pipeline of locks and closed loans held for sale was $1.5 billion at quarter end compared to $891 million at the end of last year. The volume of interest rate lock commitments surpassed closed loans designated for sale by 18% this quarter, which positively affects accounting earnings as a majority of mortgage revenues recognized at interest rate lock loan mortgage, while a majority of origination costs, including commission, are recognized upon closing. If rate lock commitments during the first quarter would have equaled to closed loan volume, it would have resulted in approximately $8.7 million in lower gain on loan origination and sale revenue. Conversely, if closed loan volume had been the same as interest rate lock commitments, pre-tax income would be approximately $3.2 million lower, as a result of higher variable costs. Net gain on single family mortgage loan origination sale activities for the first quarter of 2015 was $60.7 million compared to $36.5 million in the fourth quarter of last year, reflecting the increase in interest lock commitments as well as a 16 basis point increase in our composite profit margin. We believe the increase in our composite margin was primarily due to higher refinance volume. In the first quarter, single family mortgage servicing income decreased $5.4 million or 58% from the fourth quarter of 2014, due to higher levels of decay in MSR values, driven by higher levels of actual prepayments in the quarter, and lower risk management results related to increasing long-term prepayments fees driving shorter loan lives. Single family mortgage servicing fees collected increased $640,000 or 8.5% from the fourth quarter, while the portfolio of single family loans serviced for others grew $11.9 billion at March 31, up from $11.2 billion at yearend. Segment non-interest expense was $53.8 million, an increase of 13% from the fourth quarter. This was primarily due to higher commissions and incentives related to the 21% increase in closed loans in the quarter. We've made substantial progress in improving production efficiency in the quarter, as a result our direct cost of originated loan decreased by 13 basis points. Over the past year, our direct cost to originated loan has decline by over a 100 basis points. I am particularly proud of the progress our mortgage operations group has made in improving their efficiency and growing our productive capacity. In the quarter, we increased our origination volume by over 60%, if measured by interest rate locks, and we only added approximately 4% mortgage origination personnel. Additionally, we did not experience any material extensions of underwriting of Basel processing or funding times. This performance suggests we can continue improving our production efficiency, as we continue to grow our franchise. In closing, I would like to once again express our enthusiasm and excitement about our company and its opportunities. We believe our business strategy is the right one for HomeStreet, given our strengths and challenges. And we remain focused on building a high quality regional, commercial and consumer bank, with a leading retail mortgage presence in the western United States and Hawaii. This concludes my prepared comments. Thank you for your attention today. I would be happy to answer any questions you have at this time.

[Operator:]

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

[Paul Miller:]

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

[Mark Mason:]

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

[Paul Miller:]

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

[Mark Mason:]

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

[Operator:]

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

[Jeff Rulis:]

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

[Mark Mason:]

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

[Jeff Rulis:]

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

[Mark Mason:]

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

[Jeff Rulis:]

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

[Mark Mason:]

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

[Jeff Rulis:]

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

[Mark Mason:]

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

[Jeff Rulis:]

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

[Mark Mason:]

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

[Jeff Rulis:]

And then the provision?

[Mark Mason:]

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

[Operator:]

Our next question comes from Russell Gunther of Macquarie.

[Russell Gunther:]

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

[Mark Mason:]

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

[Russell Gunther:]

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

[Mark Mason:]

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

[Russell Gunther:]

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

[Mark Mason:]

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

[Russell Gunther:]

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

[Mark Mason:]

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

[Operator:]

Our next question comes from Tim Coffey of FIG Partners.

[Tim Coffey:]

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

[Mark Mason:]

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

[Tim Coffey:]

No, excluding single family?

[Mark Mason:]

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

[Tim Coffey:]

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

[Mark Mason:]

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

[Tim Coffey:]

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

[Mark Mason:]

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

[Operator:]

Our next question comes from Jackie Chimera of KBW.

[Jackie Chimera:]

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

[Mark Mason:]

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

[Jackie Chimera:]

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

[Mark Mason:]

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

[Jackie Chimera:]

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

[Mark Mason:]

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

[Jackie Chimera:]

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

[Mark Mason:]

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

[Jackie Chimera:]

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

[Mark Mason:]

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

[Operator:]

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

[Tim OBrien:]

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

[Mark Mason:]

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

[Tim OBrien:]

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

[Mark Mason:]

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

[Operator:]

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

[Mark Mason:]

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

[Operator:]

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