Mechanics Bancorp (MCHB) 2015 Q1 法說會逐字稿

Good day, and welcome to the HomeStreet first quarter 2015 conference call. All participants will be in listen-only mode. (Operator Instructions). After today's preparation there will be an opportunity to ask questions. (Operator Instructions). I would now like to turn the conference over to Mark Mason, President and CEO. Please go ahead, sir.

Hello and thank you for joining us for the first quarter 2015 earnings call. Before we begin, I would like to remind you that our earnings release was furnished this morning with the SEC on Form 8-K, and is available on our website at IR.HomeStreet.com. An additional recording of this call will be available today at the same address. On today's call we will make some forward-looking statements. Any statement that isn't a description of historical fact is probably forward-looking, and is subject to many risks and uncertainties. Our actual performance may fall short of our expectations, or we may take actions different from those we currently anticipate. Factors that may cause actual results to differ from expectations or they may cause us to deviate from the current plans are detailed in our SEC filings, including our quarterly reports on Form 10-Q, and our Annual Report on Form 10-K 2014, as well as our various other SEC reports. We expect to file our quarterly report on Form 10-Q for the quarter just completed-- (break in audio). Operator?

Yes.

Operator, we just heard an announcement that said we were just joining the main conference. Did you hear that?

I did not, but you are still speaking into the main conference.

Can you check to make sure we are not interrupted again?

I will do so.

Thank you. All right. Continuing. Additionally information on any non-GAAP financial measures referenced in today's call, including a reconciliation of those measures to GAAP measures may be found in our SEC filings, and in the earnings release available on our website. Today I will give a brief update on recent events, review our progress in executing our business strategy, and highlight key financial results. Please refer to our earnings release for a more detailed discussion of our financial condition, and results of operations.

In the first quarter we made significant progress on our strategy to grow and diversify earnings. We expanded our commercial and consumer banking business, organically and through acquisition, and built mortgage banking market share in new and existing markets, continuing to opportunistically hire teams of strong originators in the western United States.

March 1st we completed our merger with Simplicity Bank, expanding our commercial and consumer banking business into southern California. The transaction resulted in a bargain purchase gain of $6.6 million, which we have reported as non-interest income for the first quarter. Additionally we realized pretax merger related expenses of $12.2 million in the quarter. We expect to recognize an additional $1.5 million in merger-related expenses in the second quarter. Given the merger date of March 1, only one month of combined results are reflected in the results of operations for the first quarter. We are excited about the potential this merger offers us for building a strong commercial and consumer banking franchise in southern California, to complement our growing mortgage banking business in the region. I would now like to share some key metrics from our consolidated results for the quarter.

First quarter net income was $10.3 million, or $0.59 per diluted share, compared to $5.6 million, or $0.38 per diluted share for the fourth quarter of 2014. The increase in net income for the quarter was primarily due to higher net gain on mortgage loan origination sale activities, and the bargain purchase gain from the merger with Simplicity, offset by merger integration-related expenses, and higher salaries and related costs. Excluding first quarter after-tax merger related expenses and the bargain purchase gain, net income for the quarter was $11.6 million, or $0.67 per diluted share. Merger related items decreased first quarter pretax and after tax earnings by $5.5 million and $1.3 million respectively. The after-tax impact on net income for the quarter was substantially less than the pretax impact, as the bargain purchase gain is not subject to taxation, and as such the tax benefit from deductible merger-related expenses substantially offsets the net pretax reduction in earnings.

Tangible book value per share of $18.97, declined $0.42 from $19.39 in the fourth quarter of 2014, primarily due to the Simplicity merger. To compete the merger HomeStreet issued 7,180,005 shares to Simplicity shareholders, in exchange for each share of Simplicity stock they held. Tangible book value per share declined primarily as a result of greater growth in HomeStreet tangible book value per share, since the negotiation of the exchange ration in the merger, than the value of tangible net assets acquired in the merger, and as a consequence of the creation of $7.4 million of core deposit intangibles. At the date of the merger announcement we anticipated initial tangible book value dilution of approximately 2.8%, excluding merger-related expenses. Actual initial tangible book value dilution was 4.7%.

Net interest income increased $3.2 million, or 12% in the first quarter compared to the prior period. This was as a result of 10.6% growth in average interest earning assets, primarily due to higher average balances of loans held for investment. Our net interest margin was 3.6%, an increase of 7 basis points over the fourth quarter, due primarily to higher average asset yields from the addition of earning assets from Simplicity, and to ongoing changes in the composition of the loan portfolio through organic origination of commercial and consumer loans.

Noninterest income increased $23.9 million, or just over 46% from the fourth quarter, due primarily to higher net gain on loan origination and sale activities from increased single family mortgage interest rate locks, and to the bargain purchase gain from the merger. Net gain on mortgage origination and sale activities increased $22.7 million from the prior quarter. Additionally noninterest income include the $6.6 million bargain purchase gain from the Simplicity merger.

Noninterest expense was $89.5 million compared with $68.8 million in the fourth quarter, excluding merger-related expenses, non-interest expense was $77.3 million, compared with $67.9 million for the fourth quarter, an increase of 14%. This increase was primarily due to higher salaries and related costs from increased head count, and from higher commissions as a result of the 21% increase in closed mortgage volume.

On the closing of the Simplicity merger on March 1 we implemented the first of a series of planned merger related operating cost reductions impacting the combined company, as non-integration critical Simplicity employees began to depart. These reductions in personnel and other now duplicative operating expenses have resulted in an achievement of approximately 15% of the planned 35% of pre-merger run rate operating expense savings in the first month of combined operations. The integration efforts are expected to continue through the first half of the second quarter, with the integration of all systems having been completed this month. We expect to achieve substantially all planned cost savings by the end of the second quarter. Additionally we now estimate actual merger-related expenses will total $14.6 million, versus our original estimate of $19.1 million. Of that amount we expect to incur approximately $1.5 million of remaining merger-related expenses in the second quarter. At March 31st, the bank's Tier 1 leverage ratio was 11.47%, and total risk based capital was 14.57%. These rations reflect the implementation of Basel 3 requirements on January 1, and capital added through our merger with Simplicity.

I would now like to share some key points from our commercial and consumer banking business segment results. Through our merger with Simplicity, HomeStreet gained seven retail deposit branches in southern California, and added approximately $650 million in loans, and $651 million in deposits to our balance sheet. Related to the merger, we also entered into an agreement with Kaiser Permanente, to continue providing a network of approximately 40 ATMs at certain of its California locations. Building upon this growth, we recently launched HomeStreet Commercial Capital, a commercial real estate lending group located in Orange County, California, that will originate permanent loans up to $10 million in size. The group includes personnel formerly with Simplicity, and is led by its President, Bill Henderson, formerly with Impac Commercial Capital, and a 40-year veteran of the commercial real estate industry.

We also recently added a highly experienced nine-person SBA lending team, led by Joan Earhart. This group of lenders was most recently with Pacific Mercantile Bank, and was recently recognized by CDC Small Business Finance, as the 2014 Top Community Bank Lender. The hiring of this group marks our first commercial lenders in the California market. The commercial and consumer banking segment recognized a net loss of $14,000 for the first quarter, compared to net income of $3.3 million in the prior quarter. Excluding merger-related expenses of $12.2 million pretax, and the $6.6 million bargain purchase gain, this segment recognized net income of $1.2 million for the quarter. Despite strong growth in net interest income from organic growth and earning assets and the addition of Simplicity, earnings fell quarter-over-quarter due to the combined impact of higher loan loss provisions, and lower gains on the sale of securities, and lower gains on the sale of Fannie Mae DUS loans.

In the first quarter, we recorded a $3 million loan loss provision, compared to $500,000 in the fourth quarter, reflecting growth in our held for investment portfolio and an extension our modeled loan loss emergence period for commercial loans. The extension of the modeled loss emergence period added approximately $1.2 million to the provision this quarter. Absent a rise in the balance of loans in our portfolio, this amount should not be repeated in the future. Additionally the fourth quarter of last year, we realized $1.2 million of gains on sales of securities, we had no such securities sales in the first quarter. Portfolio of loans held for investment increased 34.7% to $2.83 billion, from $2.1 billion at December 31st, an increase of $729 million. This included approximately 4% organic growth, and $650 million of loans added from the merger. Primarily multifamily and single family loans.

New commitments totaled $222 million, compared to $308 million in the fourth quarter. We achieved this net growth of the loan portfolio despite continuing high portfolio runoff of approximately 24% annualized during the quarter. Credit quality remains strong with nonperforming assets of 0.71% of total assets at March 31, and non-accrual loans of 0.74% of total loans. Nonperforming assets totaled $32.8 million at quarter end, including $7.4 million of non-accrual loans added from the Simplicity merger. Compared to non-performing assets of $25.5 million at December 31.

Deposit balances increased $899 million to $3.34 billion, from $2.45 billion or approximately 37% from year end, which included approximately $651 million of deposits added from the merger. Organically total deposit balances grew 10% in the quarter, transaction and savings deposits grew nearly 29% in the quarter, of which 4 .4% is organic growth. Certificates of deposit balances increased 52% over December 31st, primarily as a consequence of the merger. Segment non-interest expense was $35.7 million, an increase of $14.5 million from the fourth quarter. This included merger-related expenses, as well as expenses from continued organic growth of our commercial real estate and commercial business lending activities, and the expansion of our retail deposit network.

I would like to now talk more about mortgage banking, as well as give some insight from the local economy. The most recent Mortgage Bankers Association monthly forecast projects total originations to increase 11% in 2015 over the past year. An upward revision from its earlier forecast of a 7.2% increase. Mortgage rates continue near historic lows, and nationally purchases are expected to comprise 59% of volume this year. Housing starts were lower than expected nationally in February and March, though the pace is projected to pick up, rising to within 7% of the long run average by the end of 2016. Nationally originations are estimated to be split evenly between purchase and refinancing in the first quarter, which is consistent with our results for the period.

The labor market continues to be very strong in the Pacific Northwest. In recent quarters job creation in Washington and Oregon exceeded 3% annnualized. New residential construction is also stronger in this market, with permits within 6% of the long run average in Washington, and 5% above that average in Idaho, compared to 19% below the long run average nationally. In Washington, multifamily permits accounted for a record 63% of total permits in the first quarter. The regional economy is booming. Seattle was named the nation's fifth-fastest growing city by Forbes at the end of January. Median pay for college graduates is the third highest in the country, and job growth has been robust. Facebook just announced that it will lease new construction that can accommodate about 2,000 people, and Amazon plans to ultimately occupy 10 million square feet of office space in Seattle. Of that amount, approximately 3 million square feat are currently under construction in downtown Seattle. Now a little about segment results. In the first quarter we added two new locations to our home loan center network, and grew mortgage production personnel by just over 4%. Closed loans per loan officer rose in the quarter to 4.3, compared to 3.8 loans in the fourth quarter. First quarter mortgage banking segment net income was $10.3 million, compared to net income of $2.3 million in the fourth quarter. The increase was due to higher net gain on single family mortgage loan origination and sale activities, tied to higher interest rate lock commitments, offset in part by higher commission expense from increased closed loan volume. Interest rate lock commitments totaled $1.9 billion. An increase of 62% over the fourth quarter, due to lower mortgage interest rates and the continued growth of our production staff, and network of home loan centers.

In January our Company set a record of $715 million in interest rate lock commitments, with refinancing comprising 67% of locks. Notably March was not far behind in volume with $650 million in rate lock commitments, though the percentages were reversed and purchase volume accounted nearly two-thirds of locks in the month. Consistent with the historical beginning of the home purchase period season. Month-to-date April activity continues to be strong with month-to-date fallout adjusted locks of $600 million, 37% of which were refinances. Also our composite margin in April is consistent with the first quarter. Single family closed loan volume designated for sale was $1.6 billion in the first quarter, an increase of $276 million, or nearly 21% from the prior period. The combined pipeline of locks and closed loans held for sale $1.5 billion at quarter end, compared to $891 million at the end of last year.

The volume of interest rate lock commitments surpassed closed loans designated for sale by 18% this quarter, which positively affects the accounting and earnings, as a majority of mortgage revenue is recognized in interest rate lock, while the majority of origination costs including commissions are recognized upon closing. If rate lock commitments during the first quarter would have equaled close loan volume, it would have resulted in approximately $8.7 million in lower gain on loan origination sale revenue. Conversely if closed loan volume had been the same as interest rate lock commitments, pretax income approximately $3.2 million lower, as a result of higher variable costs. Net gain on single family mortgage loan origination sale activities for the first quarter of 2015 was $60.7 million, compared to $36.5 million in the fourth quarter of last year, reflecting the increase in interest rate lock commitments, as well as a 16 basis points increase in composite profit margin.

We believe the increase in our composite margin was primarily due to higher refinance volume. In the first quarter, single family mortgage servicing income decreased $5.4 million, or 58% from the fourth of 2014, due to higher levels of decay in MSR values, driven by higher levels of actual prepayments in the quarter, and lower risk management results related to increasing long-term prepayment speeds, driving shorter loan lines. Single family mortgage servicing fees collected increased $640,000, or 8.5% from the fourth quarter, while the portfolio of single family loans service for others grew to $11.9 billion at March 31st, up from $11.2 billion at year end. Segment non-interest expense was $53.8 million, an increase of 13% from the fourth quarter primarily due to higher commissions and incentives related to the 21% increase in closed loans in the quarter.

We made substantial progress in improving production efficiency in the quarter. As a result, our direct costs to originate a loan decreased by 13 basis points. Over the past year our direct costs to originate a loan has declined by over 100 basis points. I'm particularly proud of the progress our mortgage operations group has made in improving their efficiency, and growing our productive capacity. In the quarter we increased our origination volume by over 60% if measured by interest rate locks, and we only added approximately 4% more origination personnel. Additionally we did not experience any material extensions of underwriting, appraisal, processing, or funding times. This performance suggests we can continue improving our production efficiency, as we continue to grow our franchise.

In closing, I would like to once again express our enthusiasm and excitement about our Company and its opportunities. We believe our business strategy is the right one for HomeStreet, given our strengths and challenges, and we remain focused on building a high quality regional commercial and consumer bank, with a leading retail mortgage presence in the western United States and Hawaii. This concludes my prepared comments. Thank you for your attention today. I would be happy to answer any questions you have at this time.

(Operator Instructions). Our first question comes from Paul Miller of FBR Capital. Please go ahead.

How are you doing? Can you talk a little bit, Mark, about the sustainability, you might call it, of some of the mortgage revenues that are coming through, and also the sustainability of now that Simplicity has been closed, what that adds to the consistency of the model?

Sure. Thanks, Paul. The mortgage revenue was helped obviously in the first quarter in part by higher levels of refinancing than we would have expected going into the quarter, though by the time we reached March the composition of the locks was relatively close to what we would have expected going into the year, with the seasonal start of the home buying season. So while we are experiencing a slightly higher level than refinancing at this point, it is not as significant an impact as it was in January and February, and yet our origination activity is higher than we expected going into the year in total. And so given that recent activity, given the change in the national forecast, we are now expecting a somewhat better year for origination volume, than we had anticipated going into the year.

Going into the year we were expecting to originate $6.5 billion to $7 billion of held for sale single family mortgages. Reasonably that number will probably go up a little bit than from what we forecast. It remains to be seen, of course, how long these low levels of interest rates will continue. Should they rise obviously that would have a negative impact. With respect to the composite margin, it was stronger this quarter than the prior quarter of 326 basis points, I believe, up from 310 the prior quarter. We are seeing that sustained at least through April activity, and has been the history of the mortgage business, when volume rises lenders' capacity becomes constrained. Once that occurs, lenders tend to be less price aggressive, and we generally see price margins increase. We saw that happen slightly in the first quarter. And so we are seeing a sustained level of slightly higher profit margin so far. Should this continue we would expect to see continuing margins at about this level. Of course, higher rates and lower volume would negatively impact that number.

As to Simplicity, we expect the run rate contributions to the earnings of Simplicity to be in the $15 million a year kind of range, after having achieved all of our cost reductions, and leveraging of the additional capital that we got in the merger. Obviously that will take several quarters to fully realize. The part that is under our control immediately, that is realizing the reductions in personnel and other operating costs, real estate and systems costs, we are very much on track, and now we expect those costs to be largely realized in the first part of the second quarter. So all that is left is realizing the revenue enhancements, and so we feel we are very are very much on track. We continue to leverage our capital relatively quickly. Though, of course, we have more capital than we had last quarter. That will take several quarters to fully utilize. Hopefully that answers your question.

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

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

Okay. Thank you very much.

Thanks, Paul.

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

Thanks, good morning.

Good morning, Jeff.

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

There are large pieces, I don't have detail by category in front of me, but I can provide that to you later. There are large amounts in G&A and consulting and in systems. So in IT and consulting, and to a lesser extent in salaries of temporary employees, plus we have severance and change of control-related costs. About $5 million in the quarter, that number we do know.

And that is it --

These are severance and change of control benefits. Got the line item. And then about, my guys are giving me some help here, about $5 million on the consulting line item. So that is about 10.5--

Consulting. But I guess on the severance on the release, I don't see it broken out, is that, would this be salaries and related costs is that baked into that number?

Yes, about $5.5 million on that line item. Call it $6 million, a little closer to $6 million, and about $5 million in consulting. About a $0.5 million in G&A. And now you are getting pretty close.

That is the bulk of it. Fair enough. So I guess if we would look forward and largely exclude that, you mentioned the $1.5 million expected in Q2, but excluding all of that noise, and a full quarter of Simplicity, any rough idea of non-interest expense base level that we should anticipate?Albeit production adjusted depending what happens in Q2?

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

Okay. Sort of angling into that maybe $75 million to $80 million quarterly run rate, it seems broadly speaking? I can back into it.

In total it will probably be slightly less and then because of merger-related expenses even less in the third quarter, into fourth quarter. And then part of that again is due to changes in mortgage volume. That is a big variable.

Sure.

So second quarter largely the same number, but for different reasons. Third quarter and fourth quarter each somewhat less, primarily because of lower mortgage volume in those quarters.

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

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

Okay. And then the provision?

So the provision I'm glad you asked the question, because it has a little noise in it this quarter. As I mentioned in my comments we continue to improve our loan loss estimation process. We have a fairly sophisticated classification migration model, to utilize, to calculate expected loses, and then of course we have qualitative loss factors on top of that. Our classification migration model had been based upon a one year loss emergence period. We believe that really should be extended now, particularly as we go through the cycle, we are really in the best part of the cycle right now, and will really be more accurate to look over the longer period, so we have increased on commercial loans, the loss emergence period to a total of eight quarters, or two years. That the cost of that, or the incremental reserves related to that model change were $1.2 million in the quarter.

All else being equal, we won't repeat that charge. Meaning absent any change in expected loss levels, or the size of the portfolio. Additionally we increased reserves this quarter for construction related loans. Again, on the qualitative side, out of a concern that we are in the best part of cycle, and while we see no indications of weakness, in fact our numbers all continue to improve, that we feel it prudent to carry a somewhat higher level of qualitative reserves related to construction loans. And so those changes, and that was I don't know, almost $1 million change I think this quarter as well, $900,000.

And the balance being related to growth in the portfolio. So for the remainder of the year, we are not expecting the same absolute level of provisioning, though we do expect to maintain coverage, reserve coverage pretty consistent with where we are now. So if you assume growth in the portfolio, we will be provisioning over the remainder of the year, and that those numbers by quarter could range from $2 million to $3 million depending on the quarter.

Great. That is really good detail. Thanks Mark.

Our next question comes from Russell Gunther of Macquarie. Please go ahead.

Good afternoon, guys.

Good afternoon.

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

Sure. We are expecting the margin to continue to expand slightly. It was up from, was it 354 the prior quarter to 360?353, about 7 basis points. We expect about another 8 still toward 8 to 9, somewhere in there before year end, and then after that it is really a question of what happens to cost of funds and overall rates. So again, that total is the 10 to 15 basis point that we have been speaking about for some time. It is achieving, that is dependent upon a whole bunch of stuff that is largely out of our control. These changes we expect are composition related changes, that we have to achieve through future loan origination, and subject to runoff, and all of this stuff that is only partly within our control, that is what we are currently expecting.

That is helpful. There is not really a rate expectation embedded in that?

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

Okay. Around then just lastly on the margin, I know the deal closed late in the quarter. Any impact to NII, or the margin from purchase accounting accretion in the deal, and if not so much this quarter, what the expectation might be looking out?

That is part of the increase next quarter, right. So in total, we think the run rate impact is about 7 basis points. Obviously we got about one-third of that probably in the first quarter.

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

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

Great. Thanks, Mark, I really appreciate it.

Thank you.

Our next question comes from Tim Coffey of FIG Partners. Please go ahead.

Good morning Mark, how are you doing?

Good Tim, good morning.

Good morning. I was wondering if you could give me an idea of the geographical dispersion of the loan growth this quarter?

I assume you are excluding single family, or would you like to speak to single family also?

No, excluding single family.

Again, most of that, the lion's share of that is in Puget Sound and Portland. We have, of course, some activity in central Washington, but the lion's share of that is close in Seattle, or Puget Sound, or the greater Portland area.

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

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

Okay. And how do you feel about your capital levels right now? You have completed the deal, and expecting growth for the balance sheet. Do you think there could be the presumption of a special cash dividend?

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

Okay. Thanks a lot. Those are all my questions.

Thanks, Tim.

Our next question comes from Jacque Chimera of KBW. Please go ahead.

Good morning.

Hi, Jacque.

Wondering about the Simplicity deposits. Did you re-price those during the quarter when you brought them over?

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

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

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

Okay. So we are already seeing the impact from that even just from the one month?

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

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

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

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

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

Okay. Great. Thanks for the added color. I appreciate it.

Thank you.

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

Hi, Mark.

Hey, Tim.

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

Yes. And Portland. In greater Portland. Though we do have a home building group in Salt Lake City, and we have one in southern California, whose pipelines are starting to grow. So a minority of that business is in other places.

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

Yes on all counts. Each of those economic regions are constrained, severely constrained by inventory, and the homebuilders are trying to catch up to high demand. So we see a tremendous opportunity in each of these areas, and we are pursuing the business as we can in each of these areas. Construction, both residential and commercial, are lending businesses that we have done here for a long time, and were committed to doing as core businesses. They will never occupy the composition of the balance sheet they did at one time at this Company, but they are solid businesses that we expect to have higher concentrations of than many banks. And so today as an example, or just prior to the Simplicity merger, we exceeded the regulatory threshold for higher concentrations in construction slightly, which is 100% risk based capital. We were at 120%.

And with the Simplicity merger all of that got diluted, but we expect to grow back into that similar concentration over the next year, and you know, we are very happy with that business. The residential construction business has a very high return on equity, because it is a higher risk. We are very comfortable with the structure of the loans today. The credit quality and structuring, the controls on that lending much different than prior to the Recession, plus it is a great time to be in the commercial construction business, particularly multifamily though we are watching the markets we are in closely, to mark the date that we think we should pare back on that business, if it becomes overbuilt. I mean right now all of these markets are surprisingly short on multifamily rental units at most of the price points, and so we are going to continue to see strong multifamily construction for several years we think.

Thanks for answering my question.

Thanks, Tim.

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

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

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