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Edited Transcript of HMST earnings conference call or presentation 22-Oct-19 5:00pm GMT

Q3 2019 HomeStreet Inc Earnings Call

Seattle Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of HomeStreet Inc earnings conference call or presentation Tuesday, October 22, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark K. Mason

HomeStreet, Inc. - Executive Chairman, President & CEO

* Mark R. Ruh

HomeStreet, Inc. - Executive VP & CFO

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Conference Call Participants

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* 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

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* Timothy O'Brien

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

* Timothy Norton Coffey

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

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Presentation

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Operator [1]

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Good day, and welcome to the HomeStreet, Inc. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mark Mason, Chief Executive Officer. Please go ahead.

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

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Hello, and thank you for joining us for our third quarter 2019 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 our 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 our financial performance; the actions, findings or requirements of our regulators; our ability to meet cost savings expectations or to realize those cost savings at the pace we expect and general economic conditions such as a decline in interest rate environment and flat or inverted yield curve that affect our net interest margin, 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 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 conditions and results of operations. Joining me today is our Chief Financial Officer, Mark Ruh. In a moment, Mark will briefly discuss our financial results. But first I'd like to give you a summary update on our results of operations and review our progress in executing our business strategy.

HomeStreet's third quarter result reflect the early success of our strategic achievement. Total assets declined in the quarter, primarily due to the closing of sale of the pipeline of loans remaining from home loan center sale and an increase in loan prepayments as a result of lower interest rates. The decline in total assets in conjunction with increasing deposits drove a meaningful decrease in wholesale funding, which helped to offset margin pressure in the quart.

Our retail branch network continued to perform well, with total deposits of continuing operations increasing 4% during the quarter and deposits in our de novo branches, those opened within the past 5 years, increasing 12% during the quarter. In addition to closing the pipeline of loans from our second quarter home loan center sale, we also completed the final transfer servicing deposits related to our first quarter mortgage servicing sales. We now have substantially completed these very complex transactions.

As a result of our strategic changes and our focus on efficiency and profitability, our noninterest expense decreased meaningfully during the quarter. This decrease was driven in part by a decrease in full-time equivalent employees of 7.3% during the quarter, and we expect further reductions as we execute on the suggested changes in our operations being made by our efficiency consultants.

Additionally, in the quarter, we consolidated our Lake Oswego, Oregon retail deposit branch into our nearby Lake Grove branch, and we continue to analyze additional opportunities to reduce our occupancy costs across the organization.

We also made progress toward our longer-term goal of improving the efficiency and profitability of the company, as we implemented the initial phases of the efficiency plan, we continue to develop with our consultants. Based on the work completed to date, we continue to believe we can achieve the cost reduction goals that we established last quarter. However, like our peers, we're experiencing the impact on our net interest margin of lower interest rates, higher deposit costs and changes in the yield curve. These changes negatively impacted our net interest margin in the quarter. And while deposit costs are already declining, the interest rate environment may continue to impact future results.

Notwithstanding the impact of the changing interest rate environment, we're pleased with our third quarter results, and we're committed subject to the challenges presented by the current environment to achieving the profitability and efficiency goals we established last quarter.

In recognition of our progress and our strong capital position, our Board of Directors has authorized a new common stock repurchase plan for up to an additional $25 million in stock repurchases. The commencement of which is contingent on the receipt of approval or nonobjection from our regulators, which we expect to receive in the near term, as our quality remains strong in the quarter, with nonperforming assets increasing slightly to 21 basis points of total assets of at the end of third quarter from 16 basis points at the end of second quarter.

Our markets remain some of the strongest in the country with large diverse economies, however, we're keeping a careful eye on fundamentals and remain focused on controlling credit risk.

As part of our work to prepare for the adoption of the current expected credit losses accounting standard or CECL at the beginning of next year, we have been running parallel analysis to determine what the impact of adopting CECL would be on our loss reserve requirements and capital ratios. Based on our preliminary analysis and subject to final adoption of the standard, we currently estimate the impact of adoption to be approximately 5% to 10% increase of our allowance for loan losses and an immaterial impact to our capital ratios. The ultimate effect of the adopting CECL will depend on the size and composition of our loan portfolio at the time of adoption, the portfolio's credit quality and economic conditions at the time of adoption as well as any refinements to our model methodology or key assumptions. Also as the industry experiences credit cycles, we anticipate more volatility under a life-of-loan reserving approach versus the incurred loss approach currently used.

Now I'll turn it over to Mark Ruh, 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. Our consolidated net income, which includes the results of both continuing and discontinued operations for the third quarter of '19, was $13.8 million or $0.55 per diluted share compared to a net loss of $5.6 million or $0.22 per diluted share for the second quarter of '19.

Net income from continuing operations for the third quarter of '19 was $13.7 million or $0.54 per diluted share compared to net income from continuing operations for the second quarter of '19 of $8.9 million or $0.32 per diluted share. The increase was primarily due to an increase in our net gain on loan origination sale activity driven by both improved volume and margin on commercial loan sales along with the decrease in noninterest expense.

Net interest income decreased by $2.1 million to $47.1 million in the third quarter of '19 from $49.2 million in the second quarter primarily due to an increase in interest expense and higher deposit balances. Late in the second quarter, we increased our CD balances, some with promotional interest rates to fund the transfer of servicing-related deposits in connection with the final transfer of servicing related to our first quarter sale of mortgage servicing assets. Thus, in the third quarter, we experienced a full quarter of interest expense on those higher rate CD balances.

We also experienced a decrease in interest income from a lower rate and volume of loans up for sale as we closed out the pipeline of loans associated with the sale of our stand-alone home loan center based mortgage business. The rate and volume of loans held for investment also decreased during the quarter as a result of higher prepayments in response to lower long-term interest rates during the quarter. These factors contributing to the decrease in interest income were partially offset by our continued growth in core deposits, which meaningfully reduced our volume of Federal Home Loan Bank advances during the quarter.

As a result of the forgoing changes, our net interest margin on a tax equivalent basis decreased 296 basis points in the third quarter from 311 basis points in the second quarter. Loans held for investment decreased $147.8 million to $5.2 billion at the end of third quarter from $5.3 billion at the end of second quarter primarily due to commercial loan sales of $233.2 million and higher levels of prepayments previously mentioned.

Nonperforming assets increased to $14.2 million or 21 basis points of total assets at September 30 compared to $11.7 million or 16 basis points of assets at June 30. The increase was primarily due to a small increase in nonperforming commercial loans. We recorded no provision for credit loss in the third quarter due to the reduction in loan balances during the quarter and continuing low levels of charge-offs, fully offset by recoveries.

Deposit balances from continuing operations were $5.8 billion at September 30, an increase of 4% from June 30. The increase in deposits was primarily driven by our increasing CD balances previously described as well as increases in core consumer money market and noninterest checking accounts.

Our trailing 12-month retail deposit beta for the third quarter was 61%, up from the second quarter's beta of 38%. Note that we expect our increase in deposits beta trends to reverse in the fourth quarter as we've been proactively lowering our deposit rates in September and October. Our third quarter 12-month held-for-investment loan beta was 41%, also up from the second quarter's beta of 31%.

Noninterest income increased $4.8 million from $19.8 million in the second quarter of '19 to $24.6 million in the third quarter of '19. The increase was primarily driven by an increase in volume and margin of commercial loan sales during the quarter. Noninterest expense decreased $3.1 million to $55.6 million in the third quarter of '19 from $58.8 million in the second quarter primarily due to $1.7 million FDIC assessment credit, lower proxy’s solicitation and related costs and lower salaries and occupancy cost related to our cost-savings initiatives. These decreases were partially offset by an increase in G&A expense due to seasonal marketing cost along with the temporary increase in IT cost resulting from transitioning servicing and origination systems as part of our long-term cost savings initiative.

Our effective income tax rate of 14.6% for the third quarter of '19 differs from our combined federal and state blended statutory tax rate of 23.6%, primarily due to the benefit we received from tax-exempt interest income and its proportion to total net income.

Net income from discontinued operations was $162,000 in the third quarter of '19 compared to a net loss of $14.5 million in the second quarter of '19, primarily due to the absence of additional restructuring charges in the quarter and recoveries of previously recorded estimated restructuring charges and compensation related cost of $2.3 million net of tax. Going forward, we expect some net loss from discontinued operations in the fourth quarter as we finalize the wind down in transfer of discontinued stand-alone home loan center based mortgage banking business and related servicing. Thank you for your attention.

And I will now turn it back over to Mark Mason.

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

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Thank you, Mark. Our second quarter call, we laid out a plan, established by management and informed by our efficiency consultants to improve our operating efficiency and reduce our cost structure to reflect our simplified business model and lower growth expectations.

The plan identified a range of expense reduction opportunities, many of which involves substantial technology, organization and personnel changes. These include: Simplifying the organizational structure by reducing management levels and management redundancy; consolidating similar functions currently residing in multiple organizations; renegotiating, where possible, major contracts, primarily in technology; identifying and eliminating, where possible, redundant or unnecessary systems and services; and adjusting staffing to recognize the significant changes in work volumes and company direction.

Our third quarter results include the implementation of the initial phases of our efficiency improvement plan. Assuming that we're able to realize the expense reductions currently planned by management and projected by our consultants and absent continuing negative impacts to our net interest margin beyond current expectations or as a result of changes in the interest rate environment or other changes in the business environment that would negatively impact our ability to accomplish our goals, we continue to expect to achieve an efficiency ratio in the low to mid-60% range, return on average assets exceeding 1.1% and return on average tangible equity exceeding 11% by the end of the third quarter of 2020.

The timing of future expense reductions will vary depending upon the nature of the expense, although a meaningful amount is expected to be realized in early 2020. We expect these expense savings to be primarily centered in continued decreases in salaries over the near term, potential decreases in occupancy over the middle term -- medium term and decreases in information services over the longer term as contracts expire or are replaced.

Our financial targets are based only on expense savings and without any additional share repurchases beyond the $25 million repurchase plan announced this week or the possible establishment of a regular quarterly dividend in the future.

For the remainder of this year and next year, we expect ongoing runoff in our single-family loan portfolio, offset by growth in our commercial loan portfolios, resulting in a flat to slightly increase in balance of loans held for investment over these periods.

Additionally, assuming the ongoing flatness in the yield curve, we expect our net interest margin to experience additional downward pressure as higher yielding loans are replaced by lower yield market rate loans. Mitigating this impact somewhat is lower cost of funds from the continued growth of our consumer and business deposit balances as de novo branches continue to mature and our commercial deposits continue to grow. This concludes our prepared comments.

We appreciate 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) The first question comes 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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I wanted to add a question about kind of mapping the $2.3 million in recovery of structuring comp expense. Is that just an offset to comp? Was it in the other line? Trying to figure out where that was embedded.

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

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It's in the discontinued operations line, and so it's offsetting other comp and costs that we've incurred in discontinued operations during the quarter.

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

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Okay. So the $162,000 income was in net that was in that line item? It's more like...

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

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Exactly.

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

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Okay. Fair enough. And Mark, you mentioned kind of the balance of the year, I don't know if that's on the loan side, if that kind of carries us into early next year. But anything further out in terms of net growth outlook for '20, by chance?

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

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Consistent with the comments I just made, we expect net growth over the period, consistent with what our current strategy is, the growth is not going to be significant, but there will be growth. We have guided a percentage at this juncture given we're not sure about prepayment speeds quite honestly, but we're expecting net growth.

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

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Okay. And then just circling back on the expenses. If you were to appreciate the kind of the time line of salaries, I guess, then, I guess the occupancy in IT, I don't -- is there a way you could -- like a percentage or segment out of what amount of cost saves would come from each area? If that makes sense? Excuse -- salaries 50% expected.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [9]

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Sure. The majority of the savings is going to come from personnel. If you just look at our cost structure, I think that the relationships in the cost structure are going to be consistent with the relationships in savings, if that helps.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

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Okay. And then one -- just last one for Mark Ruh on the tax rate, then expectations. Lot of moving pieces, but what would you say for 2020?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [11]

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Yes, let me give you, this year on, for the fourth quarter, just to help you a little bit more, we're looking probably about a 14% to 17% effective tax rate. And for 2020, I'd use in the 18% to 20% range for the year.

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Operator [12]

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The next question comes from Steve Moss of B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [13]

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Back on expenses, just want to see if you could quantify the trap costs you had this quarter? And when you're talking about the IT costs and other things there. I'm not sure if you mentioned, but -- or if I missed it, but I wanted to start there.

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

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By trap costs, are you referring to the description we used a couple of quarters ago stranded costs?

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [15]

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Exactly, yes.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [16]

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We're not calculating that number these days. Because once you have separated the groups and start to reduce expenses and consolidate departments and so on, it gets a little hard to track. I mean, if you look at -- I think you should look at our expense level today versus that, which will get us to our targets. And part of that's going to be efficiency improvement, part of that's going to be simply climb back those -- what we will previously called stranded costs.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [17]

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Okay. And then on the CD repricing and deposit repricing here in the fourth quarter, just kind of wondering how much do you expect to see over the next 2 quarters in basis points?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [18]

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In terms of total reduction in deposit cost?

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [19]

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Yes.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [20]

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That's a little hard to estimate given everything else going on. I mean we have relatively short duration deposits, but there is some duration in them. There is one lump of 9-month CDs, the promotional CDs that we raised a couple hundred million in the third quarter. That rolls in 9 months, for sure, that's a discrete piece that you could track. But our normal CD rollover, which you can get a view of in our 10-K, right? There's a duration table in there. If you think about that rollover rate and CD values and money market values coming down somewhat. I think you can estimate what will roll in the next couple of quarters.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [21]

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Okay. And then on the repurchase announcement here, just wondering about the timing of repurchases and your capital deployment plans. Any further additional color on capital deployment longer term?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [22]

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We're awaiting for approval or nonobjections from our regulators to commence the repurchase plan. I would expect it to commence in the next few weeks because obviously, we have application in. It will take some time to accomplish. You're all familiar with the restrictions on repurchase activity. You can really buy only about 20% for the daily activity on average. So we think about the amount of we're trading currently, that will take a few months to accomplish probably.

Second part of that question, future capital utilization. Obviously, we need less capital for growth than we used to, given our strategic position today. I would expect the Board after accomplishing this share repurchase to consider a new authorization. The Board is expected to also discuss the possibility of initiating a regular quarterly dividend next year sometime.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [23]

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Okay. That's helpful. And then one last thing, just on the leverage ratio restriction. Wondering if you have any updated thoughts there.

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

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Yes, that's a good question. I see that what you're referring to is our informal agreement with the FDIC to maintain 9% Tier 1 at the bank level. Is that right?

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [25]

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Yes.

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

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I think that that's an important conversation that we expect to have with our regulators probably early to mid-next year. We want to make sure that we have a solid view of recurring earnings and that we get our earnings into the range of our peers, so that we can have a productive conversation on that point.

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Operator [27]

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The next question comes from Tim O'Brien of Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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First question that I have and tell me if you already answered this. Did you have -- I'm assuming there was no revenue from discontinued operations generated in the third quarter. Is that correct?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [29]

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There was some revenue, in that we were closing the pipeline of their loans. And there was some interest income in the -- because of the warehouse and loans held for sale, right? But...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [30]

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Mark Ruh, is there any chance you could kind of give me a ballpark of what that revenue number might have come in around?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [31]

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I'll answer that for Mark. We haven't disclosed the detail but will it be in the Q? Well, we don't disclose any of the details on discontinued operations at all.

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

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Even in the 10-Q.

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [33]

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But as we mentioned as a script, I mean, we essentially going to wind down discontinued operations center in the quarter. So there should be no revenue. I mean, no revenue.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [34]

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There should be no future revenue.

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [35]

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There will be no future revenue in the fourth quarter. Now there will be expense though, however, set as we wind it down, but there'll really be no material revenue.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [36]

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No material revenue going forward. I guess, there's -- going in a direction with my questions that's leading someplace else, and that was kind of incidental, but what I'm trying to get at is, ex any revenue that you had plus the $2.3 million recovery and then looking at what the net from discontinued operations was, that gives us a sense of what the cost were. And my question is what was that cost number from discontinued operations ex the recovery and any associated revenue? What was that ballpark number? Was it a few million bucks?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [37]

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Well, look, we'll say this. Look, we haven't disclosed the detail: One, because, we don't think it's material, right? It doesn't speak to future earnings, it's a cleanup operation. But revenue was not significant. Most of the activity was the expense offset by the recoveries.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [38]

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Great. Okay. That's helpful. And obviously, that cost number from discontinued operations is kind of most likely be lower in the fourth quarter than it was in the third quarter? Is that a good assumption too, correct?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [39]

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Generally correct. It should be lower, but it's not going to be nonexistent.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [40]

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Understood.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [41]

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And until we get the rest of the way through the quarter and see what the final cleanup of a couple of items are, we can't be sure. And that's why we're being a little vague, I'm sorry.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [42]

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No, that's okay, Mark. And then another question is on -- in the top line $32.8 million this quarter. Can you provide what piece of that was variable rate tied to gain on sale? Or kind of give me a ballpark of what that number was?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [43]

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If we were going to disclose all those numbers, we'd provide a schedule. So I don't think we should do it piecemeal.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [44]

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Yes, I'm just trying to get what kind of the fixed rate comp number was in the third quarter, kind of as a baseline? Core comp, fixed-rate comp here and to work off of that, ultimately, my intent and it's just...

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [45]

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I get it. Tim, I do get it. I understand your challenge and the forecasting the -- again, if we do it this quarter, then we feel an obligation to do it next quarter, and then we'll have to start creating schedules and that's kind of...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [46]

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So if I promise you I won't ask again?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [47]

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No. I'll just say no, but I appreciate your challenge.

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Operator [48]

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The next question comes from Jackie Bohlen of KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [49]

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Just wanted to see where you stand in terms of the identification of anticipated cost savings. Are you close to identifying most of everything? Or is there still more that the consultants are working on?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [50]

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That's a fascinating question. There's different levels of identification. Let me start with that, right? We have had an identification of the areas of cost savings, and the type of costs since the middle of the second quarter essentially, right? Now taking those areas of cost savings, translating them to plans which may involve consolidation of activities, consolidation of -- and elimination of multiple software systems things like that, value go down to a level of okay. Now we need an executable plan for that consolidation, and we need to identify individuals who will be staying versus leaving in terms of positions individual people.

So we have identified all of the areas. Some of the -- and we have a calendar on which we and our consultants are working each piece. And I would say we're about half way or more through the pieces in terms of plans and specific identification. All the pieces are not equal though. So as you would expect, we're attacking the largest opportunities first. And so I would say that we are -- hard to put a number on this, substantially more than halfway through the specific identification process. And that's why we continue -- but 100% through the process of identifying where the savings will come from. And I hope that doesn't sound too vague, but it's quite a process of organizational change, technology change and the like. And because of where we're at, we still feel comfortable, saying we believe we're going to achieve our targets. And the unfortunate part of that is most of the realization of that change is going to occur in future periods, right? We're going to see some more progress in the fourth quarter, mostly personnel reduction and then a substantial more in the first quarter, again, mostly personnel, but some technology and in occupancy. And then the remainder of the -- the remainder of the year next year.

There's also meaningful savings on the technology side that will occur after 2020. And that's unfortunate in that we'd like to get all the savings we can right away, but we have some longer-term technology contracts. A great example is our core system, right, with FIS which don't mature until 2022, which are very challenging to renegotiate when someone has contractual revenues already in their plan, right? So that's kind of the progression from here and we feel good about where we're at. And that's the feeling which you all will take away from this call. It's still a lot of work. And the economic environment provides some uncertainty still. Hope that helps.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [51]

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It does. So essentially you fully identified the areas you want to pull costs out. You're roughly about 50%, little more in terms of figuring out how you're going to execute some of those savings and what micro areas those might not come from? And then -- so you still need to continue to figure out where you're going to be able to pull those cost from? And then set up an execution schedule for that. Am I understanding correctly?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [52]

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I think that's right. I mean the fact that we may not have a fully detailed plan for certain areas. It doesn't mean we haven't looked at them and don't know where the savings are going to come from, we do. But getting down to execution dates, personnel things like that on some of the lesser areas, not done. And again, all the areas are not the same magnitude. That's the other important thing.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [53]

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Yes, I understood. And I guess you're executing on the easier items first and then the more challenging items, which have come over time?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [54]

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Not necessarily true. We want more significant magnitude first. If there's things that are easy to do today that are apparent today, we're asking the leaders in those areas to work on them and immediately, but they're not going to have help from senior management or consultants yet, right? So we're expecting our people to be doing whatever work they can independent of our process and that happened in one of the areas that is most easily identifiable is in attrition. And when we have attrition in areas and I'm talking substantially in nonrevenue areas. We're asking our managers to first ask themselves if the process where work being done by that position can be absorbed within the remaining group. And I'm still happy with the work that our folks are doing. They're really stretching and being creative to do that, right? To absorb into existing resources the work that some attrition position might create. Now that's not going to be true in every position. We will not starve our people for appropriate resources. We will not change our risk management profile, but our business is changing a lot. And in some areas, attrition can be turned into savings.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [55]

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Okay. And then just one more for me on a completely separate topic. You mentioned that the single-family portfolio will run down, and I know we've discussed this before. Do you have kind of a general target in mind for where that portfolio would trend down to as a percentage of total loans?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [56]

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That's a fair question. I think that, it's over...

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [57]

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I'm just trying to think about magnitude of decline of that loss.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [58]

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Yes. I can check this, but I would say, my sense is, the numbers we're looking at could be about a 20% decline in balances over the next, say, 18 months, and those are -- that's very rough. And I might have to [correct them], but I think that, that sort of magnitude could occur. And then Gerhard can follow up with you.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [59]

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Okay. And I mean I understand where we are going.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [60]

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Good, but it's just that we do not know if rates are going to continue to decline, right? I mean (inaudible) the environment is so uncertain.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [61]

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Yes. No, it's definitely understood that we're operating in a fluid environment.

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Operator [62]

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(Operator Instructions) The next question comes from Tim Coffey of Janney.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [63]

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What's the drop in rates? I kind of imagine there has been an increase in refi activity within your branches. I'm wondering, do you anticipate the volume of the refi activity to kind of lift your sold volume off $300 million that we saw in the third quarter?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [64]

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Third quarter volume, remember, is impacted by closing the pipeline of the home loan centers. But -- and it's elevated somewhat by actually refinancing. On a level state, we're expecting that business to originate about $1 billion a year and that's excluding the joint venture with WMS that we have, which (inaudible). So we're running probably 20% higher than a nonrefi period would suggest. But that extra refi volume, we expect to continue somewhat in the fourth quarter subject to seasonality and into the first part of next year, but again that any forecast is just subject to a lot of uncertainty with rates.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [65]

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Sure, sure and I understand. Do you anticipate that additional volume to have any -- creating additional volatility within your expenses?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [66]

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Yes, sure, in commission revenue, of course. I mean commission, yes.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [67]

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Okay. Okay. And then the commercial loan sales in the quarter about $270 million. Is that a good run rate that you're looking at?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [68]

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It's okay. It can be a little seasonal. Fourth quarter is typically pretty strong. And we're expecting that again this year, if you look at last year's fourth quarter, the commercial loan sales were actually a little less than third quarter this year. So third quarter was surprisingly good. I would expect a reasonably strong fourth quarter. Will that be as large as the third quarter, kind of remains to be seen.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [69]

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Okay. And then was there anything in the margins on the gain on sale of either the loans, commercial or single-family residential that we should keep an eye on?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [70]

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The margins on the single-family loans will improve dramatically after we sell our interest in WMS because think about the correspondent margin on purchase loans being about half the margin on retail originated loans. Of course, the volumes will decline, but the margins will increase.

Also, the business we have today, the retail mortgage business, is substantially better controlled and if the margin were profitable than the very large business we had, we're much more stingy in price exceptions. And the absolute volume is not as important to us as profit margins and expense control as you would expect. And so the consistency of our margins going forward on the retained business should be substantially better than they have been. The pure margin -- the pure deposit margin this last quarter on our retail originated business, the continuing business, was well above 300 basis points, somewhere in the nature of 320, and it hasn't been that good for quite a while before that.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [71]

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And I know you entered into an agreement to sell your ownership interest in WMS. Do you have any idea when that's going to close?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [72]

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We hope this quarter. It should close this quarter.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [73]

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Okay. And just following up on the earlier question about CD maturity schedule. It doesn't sound you have anything material repricing in the next 2 quarters? Or was it just more of a kind of look at the schedule in the Qs and Ks to really get better answer.

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [74]

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Yes, I think it's the regular rollover. The one promotional piece that I mentioned is not going to roll for another couple of quarters, right? The 200 million that we -- promotional CDs we raised to fund the servicing transfer in the third quarter, that's going to take a while. But the regular rollover is going to continue.

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Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [75]

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Okay, okay. So you're calling out the 9-month promotional?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [76]

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Yes, that's what I called out, right?

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Operator [77]

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And we have a follow-up 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 [78]

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Just a couple others. On the -- in the credit side, it looked like you had some deterioration in the commercial nonperformers. Could you itemize was that by geography? Or just any color on the increase in the nonaccruals?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [79]

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There's is not much distinction there. There is a few smaller credits that went to nonaccrual. We don't expect any material losses. We have good collateral coverage and some of these hopefully will be upgraded sometime.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [80]

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Was there any geographic specifics to that?

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Mark K. Mason, HomeStreet, Inc. - Executive Chairman, President & CEO [81]

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Not really. I mean our concentrations are in Puget Sound and southern California. And there is a little of both.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [82]

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And then Mark, on -- you said earlier the efficiency goal is low to mid-60%. For the previous call, you had low 60%. Just curious as to the shift. Is that an updated revenue projection? Or is that less cost savings as you wrap your hands around the things you've got in?

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Mark R. Ruh, HomeStreet, Inc. - Executive VP & CFO [83]

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Well, the last time we mentioned it, it was probably low to mid, and we described it as low, right? If it's not 60%, right, it's somewhere between 60% and 65%, right? I think right now, we'll just provided a little uncertainty because of the interest rate environment impact on revenue.

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Operator [84]

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This concludes 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. - Executive Chairman, President & CEO [85]

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Thank you again for your participation and attention today. We look forward to speaking to you again next quarter.

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Operator [86]

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