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Edited Transcript of HMST earnings conference call or presentation 23-Oct-18 5:00pm GMT

Q3 2018 HomeStreet Inc Earnings Call

Seattle Oct 24, 2018 (Thomson StreetEvents) -- Edited Transcript of HomeStreet Inc earnings conference call or presentation Tuesday, October 23, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark K. Mason

HomeStreet, Inc. - Chairman, President & CEO

* Mark R. Ruh

HomeStreet, Inc. - Executive VP & CFO

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Conference Call Participants

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* Brian Rohman

Boston Partners Global Investors, Inc. - MD, Research Analyst, and Portfolio Manager

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Timothy Norton Coffey

FIG Partners, LLC, Research Division - VP & Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the HomeStreet Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mark Mason, CEO. Please go ahead, sir.

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [2]

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Hello, and thank you for joining us for our third quarter 2018 earnings call. Before we begin, I'd 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 & Events link. In addition, a recording, and a transcript will be available at the same address following the call.

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 and housing supply that affect the demand for our mortgages and that impact on net interest margin and other aspects of our financial performance; the actions, findings or requirements of our regulators; 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 in our detailed 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 website. Please refer to our detailed earnings release for more discussion of our financial condition and results of operations.

Joining me today is our Chief Financial Officer, Mark Ruh. In a moment, Mark will present our financial results. But first, I'd like to give an update on our results of operations and review our progress in executing our business strategy.

During the third quarter of this year, we made significant progress on our long-term strategy to build a better HomeStreet. Our cost-savings initiatives in 2018 and 2017 have materially reduced our noninterest expenses due to lower headcount and fewer office locations. These actions, while important to improving our long-term results, negatively impacted our third quarter results. In addition to some additional restructuring charges, the wind-down of closed lending offices adversely affected our results of operations during the third quarter by creating a larger imbalance of closed loan volume relative to interest rate lock volume.

Our Commercial and Consumer Banking segment achieved record net income for the quarter, driven by growth -- loan growth of 3%. We were particularly pleased with 2% growth in commercial and industrial lending.

During the quarter, we originated $71.9 million of new commitments and $54.5 million of new commercial and industrial loan balances. The year-over-year growth in commercial and industrial loan balances was a strong 27%, reflecting the substantial investments we have made in this line of business.

Overall, loan growth drove an increase in our net interest income during the quarter, despite a decline in our net interest margin. The flat yield curve and increasing competition for deposits is putting pressure on our net interest margin. After several quarters of interest rate increases by the Federal Reserve, we are seeing upward pressure on deposit rates, which resulted in our cost of funds increasing at a faster rate than our yield on assets in the quarter.

Additionally, we experienced seasonal outflows of deposits by some of our larger commercial clients, which we replaced with higher costing wholesale deposits. Notwithstanding the seasonal and industry-wide competitive pressure, our de novo branches, those opened 5 years or less, grew deposit balances by 4.5% during the quarter. Asset quality remains strong during the quarter, with our nonperforming asset ratio ending at 15 basis points of total assets. Our early warning credit indicators continue to reflect strong fundamentals in all of our markets, which is not surprising, given we do business in some of the strongest markets in the United States today.

Job creation, unemployment, commercial and residential development activity and absorption, vacancies, cap rates and all other leading indicators of economic activity reflect strong economies in our primary markets.

Given the persistent shortage of new and resale housing and increased interest rates reducing demand for both purchase and refinanced mortgages, along with a decrease in composite profit margins, we took steps in the second quarter to streamline our Mortgage Banking operations by closing, consolidating or reducing space in 21 single-family lending offices. These steps also included a substantial reduction in headcount. These actions were completed this quarter and as a result, we realized an expected decrease in interest rate lock commitments compared to the second quarter of this year. However, we did not realize a corresponding decrease in single-family closed loan volume during the quarter as we closed the pipeline originated by the production personnel who are no longer with us. This resulted in an approximately $947,000 of additional pretax net costs to close this pipeline of loans.

Mortgage banking industry remains at a low point in its cycle. We will continue to analyze and make efficiency, process and strategic improvements to position our Mortgage Banking business to be a positive contributor in the near term and competitive in the long term.

During this low point of the mortgage industry cycle, we believe smaller, less efficient and less well-capitalized companies will exit the industry, thereby reducing capacity and improving profitability. Over the long term, as volumes and margins increase cyclically, we believe that our Mortgage Banking business will be well positioned to generate strong returns on equity, given our almost 100-year history of the mortgage business, our strong market share in some of the best markets in the United States.

It's important to remember that our Mortgage Banking business also produces and services mortgages and home equity lines of credit for our balance sheet, comprising 28% and 11%, respectively, of our loans held for investment. These loans are a meaningful source of earnings with balance sheet diversification for our Commercial and Consumer Banking segment.

As we execute on our strategy of converting a troubled thrift into a full-service regional community banking franchise, we will continue to consider new and alternative business strategies to improve efficiency and profitability in an effort to maximize shareholder value over the long run.

And now I'll turn it over to Mark, who will share the details of our financial results.

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [3]

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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 2 operating segments. Regarding our operating results, net income for the third quarter of '18 was $11.8 million or $0.44 per diluted share compared to $7.1 million or $0.26 per diluted share for the second quarter. Included in income for the third quarter of '18 was a total of $418,000 of restructuring and acquisition-related expenses net of tax. Excluding the impact of these charges, core net income for the third quarter was $12.3 million or $0.45 per diluted share compared to core net income of $12.5 million or $0.46 per diluted share for the second quarter.

The decrease in core net income from the prior quarter was primarily due to lower noninterest income, largely from lower net gain on loan origination and sale activity in our Mortgage Banking segment. This was primarily due to the impact of fewer loan origination personnel as a result of our second quarter '18 restructuring, as Mark previously discussed.

Net interest income increased by $641,000 to $51.6 million in the third quarter from $51 million in the second. This increase in net interest income is primarily due to the higher balances of loans held for investment.

Our third quarter net interest margin of 3.20% decreased from the second quarter's net interest margin of 3.25%. While our retail deposit betas have remained relatively low, our wholesale deposit and borrowing costs have continued to increase as the Federal Reserve continued to increase short-term interest rates. During the quarter, this increase in funding cost was partially offset by higher yields on our interest-earning assets.

Noninterest expense, excluding the impact of restructuring-related expenses, decreased to $94.1 million in the third quarter of '18 from $104.7 million in the second quarter. This decrease in noninterest expense was primarily from lower commissioning costs on lower closed single-family mortgage loan volume.

As a result of our 2017 and 2018 cost-savings initiatives, total core noninterest expense declined by $29.5 million or 9% for the 9 months ended September 30, 2018 compared to the 9 months ended September 30, 2017. The primary driver for this reduction was lower bonus and commission expense due to lower mortgage loan volume. However, we also achieved a $9.5 million or 7.9% net decrease in base salaries due to the overall reduction in our headcount from 2,552 full-time equivalent at December 31 of '16 to 2,053 full-time equivalent at September 30 of '18.

Additionally, general and administrative and occupancy expenses decreased $6.1 million and $1.2 million or 12% and 4.5%, respectively, during the same period, due in part to reducing our total office count from 139 to 123 during the same period. These expense reductions were partially offset by increases in information services expense as we continue to invest in upgrading our technology platforms to support our growth.

Our effective tax rate was 17.9% for the third quarter and differs from our estimated federal and state combined statutory rate of 23.5%, primarily due to the impact of higher tax-exempt interest income and adjustments to prior periods during the quarter.

I'll now discuss some key points from our Commercial and Consumer Banking segment results. Commercial and Consumer Banking segment's core net income was $16.6 million in the third quarter, increasing 39% over core net income of $11.9 million in the second quarter. Net interest income increased $116,000 in the second quarter of '18 to $47.9 million due to the growth in our loans held for investment and despite a 5 basis points decrease in our net interest margin.

Our portfolio of loans held for investment increased by $142.2 million or 3% to $5.1 billion in the third quarter. Growth occurred throughout the portfolio in all of our major business lines.

Segment noninterest income increased quarter-to-quarter to $10.7 million from $8.4 million. This increase was primarily due to higher net gain from our sales of multifamily U.S. loans and small balance commercial real estate loans during the quarter.

Segment core noninterest expense was $37.8 million, a decrease of $1.5 million from the second quarter of '18. This decrease was primarily due to lower salaries and related costs from loan origination and fewer full-time equivalent employees in the corporate support functions.

Nonperforming assets remained relatively unchanged at $10.4 million or 15 basis points of assets at September 30 compared to 14 basis points of assets at June 30. We recorded a $750,000 provision for credit losses in the third quarter compared to $1 million in the second quarter. This decrease in provision expense was primarily due to $122,000 of net recoveries during the third quarter compared to net charge-offs of $464,000 during the second quarter.

Deposit balances were $5.2 billion at September 30, an increase of $34.8 million from June 30, driven primarily by an increase in broker deposit accounts as we wholesale deposits to replace seasonal drawdowns of large commercial customers.

During the quarter, we completed a consolidation of our Richland and Selah retail branches in Eastern Washington into nearby branches in Kennewick and Yakima, respectively, reducing our total retail branch count from 62 to 60 by the end of the third quarter.

Deposits in our de novo branches or those opened within the past 5 years increased approximately 5% during the quarter.

I'll now share some key points from Mortgage Banking segment results. Mortgage Banking segment's core net loss in the third quarter was $4.3 million compared to core net income of $630,000 in the second quarter. Compared to last year -- compared to last quarter, we had lower interest rate lock commitment and a lower composite margin that resulted in a decrease in core earnings from gain on loan origination and sale activities, offset somewhat by increased Mortgage Banking servicing income.

Competitive pressure on single-family mortgage pricing intensified during the third quarter, resulting in a reduction of our composite profit margin. Our gain on mortgage loan origination and sales composite margin was 311 basis points, a 15 basis point reduction from the second quarter. The decrease in interest rate lock commitments during the quarter was due to generally lower industry originations and the restructuring that included closing or consolidating 21 single-family lending offices, which was previously announced in the second quarter.

While the majority of loan officers affected by our reduction were no longer employed during the third quarter of '18, we still incurred the cost of closing their previously locked loan pipeline, including paying commission to those loan officers. This had the impact of significantly increasing closed loan volume relative to interest rate lock commitments. As previously mentioned, the net pretax impact of closing of loans originated by loan officers no longer with the company was $947,000, primarily in commission and fulfillment costs.

When single-family interest rate locks are less than closing in a given quarter, earnings are negatively affected as the majority of mortgage revenue is recognized in interest rate lock, while the majority of origination costs, including commissions, are recognized upon closing. To illustrate the impact of this imbalance, if rate lock volume had been equal to closed loan volume at our reported composite margin, the estimated net income for the segment would have been $1.1 million. If closed loan volume has been the same as rate lock volume during the quarter, the estimated net loss for the segment would have been $2.4 million.

Single-family mortgage servicing income was $6.9 million in the third quarter, an increase from $6.1 million in the second quarter. This increase was primarily due to higher risk management results, partially offset by lower servicing income. The higher risk management results were primarily driven by gains from a more stable interest rate environment and decreased negative convexity costs. The decline in servicing income is related to a lower average balance of loans serviced for others due to the sale of $4.9 billion in unpaid principal balance of mortgage servicing rights in the second quarter of this year.

Mortgage Banking segment core of noninterest expense of $56.3 million decreased $8.1 million from the second quarter of '18, primarily due to the decrease in commissions paid as a result of lower closed mortgage loan volume but also from lower base salaries due to lower headcount and lower G&A and occupancy expenses from operating fewer single-family lending office locations.

Our portfolio of single-family loans serviced for others increased to $19.8 billion of unpaid principal balances at September 30 compared to $19.1 billion at June 30. The value of our mortgage servicing rights relative to the balance of loans serviced for others was 133 basis points at quarter end, an increase of 4 basis points compared to the prior quarter end.

I will now turn it back over to Mark Mason to provide some additional insights on HomeStreet's outlook for the future.

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [4]

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Thank you, Mark. Looking forward to the next 2 quarters in our Mortgage Banking segment, we currently anticipate single-family mortgage loan lock and forward sale commitment volume of $1.1 billion and $1.3 billion in the fourth quarter of this year and first quarter of next year, respectively. We anticipate mortgage loan held for sale closing volumes of $1.2 billion and $1.1 billion for the same periods.

For the full year of 2019, we anticipate single-family mortgage loan lock and forward sale commitments to total $5.7 billion and loan closing volumes to total $5.8 billion. These volumes will be highly dependent on inventory levels in the housing markets in which we do business, local economic conditions affecting employment growth wages as well as prevailing interest rates.

Reflecting the competitive pressures on gain of sale margins, we expect our mortgage composite profit margin to remain in the range of between 310 and 320 basis points during the next 2 quarters as well as for the full year of 2019.

In our Commercial and Consumer Banking segment, we expect our quarterly loan portfolio growth to average between 2% and 4% for the fourth quarter of this year and through 2019.

Reflecting the yield curve as of the end of the third quarter and asset changes in market rates and loan prepayment speeds, we expect our consolidated net interest margin to remain in the range of 310 to 320 basis points over the next 2 quarters and remaining within that range throughout 2019.

During the fourth quarter, we expect our total core noninterest expense to decrease between 3% and 5%, given seasonally lower closed single-family mortgage loan expectations and the ongoing impact of our streamlining. Following that decrease, we expect noninterest expenses to increase as seasonal lending volume increases during the middle of 2019.

For the full year of 2019, we expect total core noninterest expenses to decline by approximately 1% compared to 2018, reflecting the cost-savings initiatives we've implemented during 2017 and 2018, which were primarily concentrated on Mortgage Banking segment. These savings will be somewhat offset by increased noninterest expenses in our Commercial and Consumer Banking segment as we continue to invest in our growth.

Total core noninterest expenses will vary somewhat quarter-over-quarter, driven by seasonality and cyclicality in both our single-family and commercial real estate closed mortgage loan volume.

The FDIC's fall 2018 regulatory agenda released last week signaled that the final rule addressing the change to the capital treatment of mortgage servicing rights will be released this month. As a reminder, in September of 2017, the regulators proposed a rule easing the capital burden for smaller banks by raising the cap on the amount of net MSRs allowable in Tier 1 capital from 10% to 25% and increasing the risk-weighting exposure for the amount of MSR above the threshold from 100% to 250%. The pro forma impact on us if the rule will apply to our preliminary third quarter 2018 capital ratios will be to increase our consolidated Tier 1 ratio from 9.12% to approximately 10.1% and our total risk-based ratio from 12.6% to approximately 12.5%.

This concludes our prepared comments. Thank you for your attention today. Mark and I would be happy to answer any questions you have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Jeff Rulis of D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Question on the -- I guess, Mark Mason, the question on your assumptions on the noninterest expense, what is that? What are the assumption -- underlying assumptions on headcount in 2019?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [3]

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The headcount will increase slightly, not in the Mortgage Banking area, that headcount is expected to be flat currently, but in the Commercial and Consumer Banking area, we will be opening some additional branches and hiring some additional commercial lenders, and those activities will result in some slight increase in headcount in the Commercial and Consumer Banking.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. And then just relooking at, well, first question, restructuring costs, those are -- are those now complete at least for this -- the round that you've announced?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [5]

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Yes.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Okay. And then, is there something in your fiscal calendar or kind of a planning or budgeting period where additional restructuring would be analyzed if needed, or is that more of an ongoing process?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [7]

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We do not have any plans restructuring currently. We continue to analyze opportunities to improve efficiency in all aspects of our business, whether it be technology improvements, workflow improvements, real estate, occupancy and capacity improvements, and we expect to have some improvements in many of those areas next year. We also look at strategy and are there ways to improve our strategy which would improve our results, not only over the long term but the short term. And so no, I would never really say we're finished, and particularly, given the challenging part of the mortgage cycle, it's important that we continuously look to ways to improve those results.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Maybe one quick one for Mark Ruh, just on the tax rate. Any thoughts on -- that's kind of been bumping around in '18 but kind of what you expect for Q4 and then into '19?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [9]

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I expect for Q4 similar to what we have for Q3 based upon basically changes in our provisioning expenses. For 2019, I think I've discussed in the last call, which is approximately 21%, and I believe that, that's going to be accurate, or it's a good estimate for 2019. Again, 21% for 2019.

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Operator [10]

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The next question will come from Tim O'Brien of Sandler O'Neill.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [11]

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Just one question on efficiency in the Mortgage Banking segment. Obviously, that ratio is pretty elevated. Do you anticipate any improvement in that looking out into 2019? Is it possible that could come down below 100%? Or is it just reflective of the nature and challenges of the market right now, and it's going to take some market changes to improve that?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [12]

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We currently expect the Mortgage Banking segment to be profitable next year. We made a lot of changes in the past several quarters and this year in the cost structure. And absent another meaningful decline in industry, loan volume or a meaningful decline in our composite profit margin being the biggest factors, we expect the segment to be profitable. We don't expect it to return to higher levels of profitability that we've experienced in more recent years though, right? I mean, given the lower composite margin and lower volume, we expect that profitability to be not nearly as significant, but we do expect it to be profitable.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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Good. That's good to hear. That's, I guess, the product of all the work that you guys have gone through. Just shifting gears quickly to deposit betas. The margin kind of guidance that you gave for next year, does that include any assumptions of rate increases in a forward yield curve -- reflective in a forward yield curve?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [14]

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It does not. We're not sure what the yield curve's going to look like. And so making assumptions solely based upon Federal Reserve increases without a commensurate assumption of the yield curve is kind of like throwing dice. And so when we forecast, we're forecasting static changes or micro changes. And so obviously, depending upon which structure the yield curve changes, it could have a positive or negative impact on the margin.

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Operator [15]

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And next, we have a question from Jackie Bohlen of KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [16]

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I have just a couple of questions on deposits. Kind of digging into some of them more micro trends there. Are you seeing any variance in terms of repricing betas? I know you mentioned that they've been holding the line from the Retail segment but just across geographies?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [17]

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We're not really seeing a different experience. Our geographies are generally larger metropolitan areas along the West Coast, very competitive deposit markets accordingly. And I don't know that we're seeing differences in geographic regions, and that includes the Violin Islands, which is a strong savings region. It's just become more competitive. So our beta's moved up a little this year. Fortunately, it's still below our loan beta. And so we're able to, at least on the retail side, maintain our spread, where we've been hurt is wholesale borrowings.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [18]

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No, understood. And what about deposits from commercial customers?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [19]

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It's hard to generalize, right, when you think of all the different businesses. As we noted in the third quarter, some of our larger commercial clients and think about title companies and alike, drew down their deposits with declining real estate activity. Some of our other commercial clients have true seasonality in their cash flow patterns, and so we had a headwind there in the quarter. But I think that, basically, we see strong cash flow at our commercial customers, some of which they leave with us and some of which they invest, but they're not borrowing as actively as we might have hoped.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [20]

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Okay. And then just one last one. Obviously, credit remains very, very clean. Are there any categories, or any areas that you look at that perhaps you're starting to watch a little bit more closely as rates have risen?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [21]

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Yes, we are being substantially more careful about commercial construction, who we lend to, what types of projects, where they're located. In particular, multifamily construction, new lending has slowed, at least on our part, materially over the last couple of quarters as we sought to restrict that business to very, very strong sponsors who are end users and not merchant builders who have strong portfolio of cash flow and liquidity should cost overrun or time lines to build construction and absorption lease-up extend, and both of those are true, right? I mean, we've seen many projects this year have construction cost overruns and more elongated absorption periods. Fortunately, our underwriting and customer selection has been very strong. And those concerns which we knit into our underwriting have supported those initial time lines and costs. And so we're -- been even more selective, though not out of the market.

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Operator [22]

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The next question will come from Tim Coffey of FIG Partners.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [23]

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You just -- can you maybe provide a little bit more color on the seasonal outflows in deposits you saw this quarter? Maybe kind of provide a little more detail on what made those seasonal.

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [24]

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Sure. As I've just mentioned in my answer with Jackie, part of it was real estate-related. We do have several significant regional title companies who, consistent with lower mortgage volume, lower home sales volume, they have lower transactional volume, right? So those temporary funds, right, closing real estate transactions have declined and pretty significantly, I mean, in the tens of millions of dollars each. We have other large commercial customers who have seasonal cash flow, and that unfortunately happens every year. It's a little more acute this year.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [25]

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Okay. And if we look at your loan-to-deposit ratio using just loans held for investment, that's up near 100%. Is that a level you're comfortable with, given the current rate environment, or do you see that coming down?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [26]

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We've been running about 90% on that calculation for a long time. And I think our prior discussion about deposits has had an impact this quarter, right? We've had to supplement retail deposit growth or lack thereof this quarter with wholesale deposits, despite an increase in the loan portfolio of 3%, and that's what's really driving that, but we expect that to normalize back to around 90%.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [27]

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Okay. And then I don't know if it was in the text of the prepared remarks, but you discussed the expectation of an eventual shakeout within the mortgage lending business in the industry that you compete in, in the markets that you compete in rather. Are you seeing any signs of that starting to happen? Or are your competitors still competing on by cutting fees?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [28]

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To this point, it's anecdotal, right? And we hear of a lot of anecdotal stories of individual loan officers [leave] the industry, of course some of that are our own loan officers who are not performing that we are reducing headcount with, also smaller mortgage brokers and mortgage bankers. We think this quarter, you will see more substantial reductions in capacity in that regard and through next quarter. This is the low part of the season, right? And many who have been able to hang on through the summer and the fall will not be able to do so. And we expect to see more movement here over the next 6 months.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [29]

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Okay. And then with -- I think you're at, as Mark mentioned, now 60 retail branches. Is that the right number for you? Or could you see that number going down?

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [30]

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Of retail deposit branches?

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [31]

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Yes, I'm sorry, yes, retail deposit branches.

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [32]

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We see that number increasing over time as we consolidate a couple of smaller branches in Eastern Washington that we acquired or transitioned branches over the last couple of years. We have other branches that are de novo branches that both been opened in the last several years that are on their expected growth path. And so while they may not yet house the level of deposits we would like to see in a mature branch, they're still on their expected slope of growth. This has been our strategy for the last 6 years, and we expect that -- we expect to continue that. Supplementing that is higher C&I-related deposit growth. And so we think that our strategy has been a good one. It has resulted in an average deposit growth of 20% a year the last 6 years. Some of that has been through M&A transactions, but the preponderance of it has been organic growth. And it's resulted in lower deposit betas in the industry and consistent growth, and we think we're on the right track.

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Operator [33]

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And the next question comes from Brian Rohman of Boston Partners.

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Brian Rohman, Boston Partners Global Investors, Inc. - MD, Research Analyst, and Portfolio Manager [34]

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Well, I would have had a question, but they've already been asked. So I won't ask any. I'll say that it was a good, serviceable quarter, moving in the right direction, guys.

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Operator [35]

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(Operator Instructions) And this will conclude our question-and-answer session. I would like to turn the conference back over to Mark Mason for any closing remarks.

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Mark K. Mason, HomeStreet, Inc. - Chairman, President & CEO [36]

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Thank you all for your patience and attention and attendance today on our third quarter call. We look forward to speaking with you again next January.

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Operator [37]

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