HomeStreet's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.29.13 | About: HomeStreet, Inc. (HMST)

HomeStreet Inc. (NASDAQ:HMST)

Q1 2013 Earnings Conference Call

April 28, 2013; 01:00 p.m. ET

Executives

Mark Mason - President & Chief Executive Officer

Cory Stewart - Chief Accounting Officer

Darrell van Amen - Treasurer & Chief Investment Officer

Jay Iseman - Chief Credit Officer

Analysts

Paul Miller - FBR

Jim Fowler - Harvest Capital

Tim Coffey - FIG Partners

Arthur Mackey - Private Investor

Unidentified Participant

Kevin Ross - Akon (ph)

Ren Vaughan - Salomon Whitney

Operator

Good afternoon and welcome to the HomeStreet, Q1 2013 earnings conference call.

All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

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

Mark Mason

Thank you. Hello and thank you for joining us today for our first quarter 2013 earnings call. I’ll begin with a few highlights from the quarter, followed by a more detailed discussion of our results, after which we’d be happy to take your questions.

Before we begin I’d like to remind you that our first quarter earnings release has been furnished this morning with the SEC on Form 8-K and is available on our website at ir.homestreet.com. In addition, the recording will be available at the same address approximately one hour after this call.

In our call this morning we will make some forward-looking statements. And these statements that is in a description of historical fact is arguably forward-looking and these statements are subject to many risks and uncertainties. Actual performance may differ and there is assurance that the company’s performance will occur in the manner we project.

Factors that may cause actual results to different materially from expectations are detailed in our SEC filings, including our 2012 Annual Report on Form 10-K and our various Quarterly Reports on Form 10-Q and our 8-K filings.

Additionally information on any non-GAAP financial measures referenced in today’s call, including a reconciliation of those measures to GAAP measures also may be found in our SEC filings and in the earnings release available on our website. I’d now like to begin by highlighting a few metrics and recent events from the quarter.

HomeStreet reported net income of $10.9 million or $0.74 per diluted share. Our pretax income was $16.4 million. Return on average common shareholders equity was 16% and return on average assets was 1.75% for the quarter.

Single family mortgage closed loan production designated for sale was $1.2 billion in the quarter, a decrease of 21.5% for the fourth quarter of last year and an increase of more than 67% over the first quarter of last year. Net gain on mortgage origination and sales activities was $54 million, 21.6% below the fourth quarter of last year and 83% above the first quarter of last year.

Loans held for investment grew 4% in the quarter to $1.36 billon, with $114.8 million in new originations and commitments in all of our lending product lines, commercial lending, commercial real estate, residential constriction and single-family mortgage. This was a third consecutive quarter of growth in our held for investment portfolio.

We added 119 new employees in the quarter, 32 of which were single-family mortgage production personnel and 56 of which were mortgage operations and performance personnel.

Additionally we opened three new stand-alone mortgage-lending centers, including our first in Californian located in the city of Pasadena. We also opened our third commercial lending office in New Seattle metropolitan market. And we continue to grow our mortgage origination branch network, opening a new mortgage-lending center last week in Pearl City, Hawaii. In May we plan to open another resale deposit bank branch in Seattle.

We are very pleased to achieve several major milestones in the first quarter. In March the company paid all differed and current interest due on its outstanding trust preferred securities.

Also in March the company Reserve Board of Governors terminated our regulatory order, which have been outstanding since May of 2009. On April 22, the company paid a cash dividend of $0.11 per common share. This was the first dividend paid by the company since becoming a public company. We are very happy to begin returning capital to our shareholders.

And on April 24 we formally agreed to make HomeStreet Bank the exclusive banking sponsor of the Seattle Seahawks and the Seattle Sounders FC. We believe this marketing and business partnership will significantly accelerate our goal of building regional brand recognition and of course generating new business.

Now I’d like to discuss or results for the quarter in more detail, beginning with mortgage banking activates. National mortgage origination volumes or forecasts have fallen only slightly in the first quarter. Regionally in the markets in which we operate, origination volumes fell more significantly.

Seasonality and the beginning of a transaction towards a purchase mortgage dominated market were factors in lower first quarter mortgage originations. However despite historical lower mortgage rates, rise in home prices and falling unemployment in our markets, which would generate a growing demand for purchases, resale and new home inventory remains at extremely low levels, which contribute to lower loan volumes in the quarter.

In our core market area of King County, Washington, inventory was down more than 42% in March compared to a year earlier, while the medium price of a home was up almost 19% for the same period. Today in King County, we have only about one month of available inventory. As a consequence of these drivers, Seattle ranks third in the nation for home price increases compared to a year ago.

Reflecting a strong demand for home purchases, total mortgage applications were up 14% in the first quarter, compared with the fourth quarter of last year and applications without properties, so called pre-qualifications were up 83% for the same period. Mortgage loan applications with property were down 11% for the quarter, for the proof of both seasonality and the low housing inventory condition.

Mortgage loans held for sale that closed during the quarter totaled $1.2 billon, down 21.5% from the fourth quarter and up more than 67% from the same period last year. In addition to the overall decline in market origination activity, this decrease is due in part to a relatively high ratio of loan closings to interest rate locks in the fourth quarter than in the first quarter of this year. This application and lock activity decline in these quarters, we took the opportunity to catch up and shorten our average closing time for refinancing loans.

Purchase mortgage volume accounted for 37% of closed loans in the quarter, compared with 32% in the fourth quarter. Our repurchase mortgages comprised 50% of interest rate lock commitments during the quarter, further evidence of the market transaction and our purchase mortgage focus here at the company.

We spoke last quarter about expanding our preferred builder program last year to leverage relationships with builders, and spread growth in purchase mortgage origination volume. In the first quarter we maintained our rank as the number two lender by volume for new construction and the four state region of Washington, Oregon, Idaho and Hawaii. In fact loans for new homes accounted for nearly 27% of our purchase volume in the first quarter, up from 20% in the fourth quarter of last year.

Single family interest rate lock commitments, net of estimated fall out were $1.04 billion in the first quarter, a decrease of 17.5% from the prior quarter and 13% above the same period last year.

Recently, beginning in March we experienced a significant increase in applications and interest rate locks. This increase is expected as we enter the strongest origination season of the year, which generally covers the second and third quarters.

In fact, in March rate locks were $3,382 million, an increase of 16% over February and as of April 28, interest rate lock commitments were $550 million for the month to date in April, with projected lock volume for the month of April of about $580 million. This would be the second highest monthly rate lock volume the company has had, only by in October of last year where we locked some $545 million.

We continue to expand mortgage production and origination capacity. Increase in our mortgage production personnel by 9.4% in the first quarter. It is our strategy to mitigate the anticipated overall decline in industry mortgage loan volume and profit margins, by continuing to opportunistically grow our ranks of high quality, high volume lenders, focused on the purchase of mortgage market.

As a result of our purchase mortgage focus and relationship with Windermere Mortgage Services, we have historically had a higher composition of purchase mortgages from the market as a whole. We expect our strategy to allow us to grow our full originations and market share as refinanced mortgage demand is ultimately met and the market as a whole declines.

Single family mortgage gain on sale margins while lower this quarter are still high and remains significantly above historical levels. Net gain on mortgage origination and sale activities was $54 million for the quarter, a 21.6% decrease from the fourth quarter and an increase of $24.4 million or 83% over the single quarter last year. First quarter results include a $4.3 million additional gain. The rates were changed in the application of our valuation approach for interest rate marked commitments.

As detailed in the mortgage banking activity table on our earnings release, our composite margin for the fourth quarter was 412 basis points, a decrease of 82 basis points or 16.6% from the prior quarter. While decrease in our profit margin was consistent with our peers, our margin was also negatively impacted by a reduction this quarter in government levels.

Our two refinancings this quarter accounted for only 4% of our total single-family loan production for the quarter compared to 19% last quarter. We expect our HARP loan production to improve over the remainder of this year as we refocus our pricing and lender incentives on increasing production in this very profitable area.

Recently the FHFA announced a two-year extension for HAPR 2 loans through 2015, which should allow our borrowers the full opportunity to refinance under the streamlined program. We continue to successfully market to and recapture our own refinances, with the recapture rate of 57% of our servicing portfolio prepayments in the first quarter.

Mortgage servicing encumbers just over $3 million for the quarter, compared to $651,000 in the fourth quarter. The increase quarter-to-quarter was primarily due to reductions in the fair value of mortgage servicing rights in the prior quarter and related to changes in the FHA’s streamlined refinance program, as well as the expected lies at home values, both of which generally lead to higher protected prepayments fees. In addition to that, actual prepayments fees in the first quarter were lower than we anticipated.

Our portfolio of loan service for others increased to $10.5 billion, compared with $9.7 billion at the end of 2012 and as of quarter end the value of our single family mortgage servicing rights represented 103 basis points and the outstanding principal balance of loan service for others, compared to 99 basis points in the fourth quarter.

Total delinquencies, included foreclosures remain low at 1.95% at the end of March, compared to 2.1% at the end of the prior quarter. Our non-mortgage lending lines of business may progress during the quarter as well. In 2012 we increased production and servicing personnel in commercial lending, commercial real estate lending and residential construction lending by some 60%, 36% and 15%. We are now beginning to get the anticipated benefits from these substantial investments in personnel and marketing.

In the first quarter we originated $48.7 million of new commercial loan commitments and $28.4 million in new balances. These new loan relationships were offset by $30.6 million in unanticipated loan prepayments and scheduled amortization. Our pipeline of new commercial loan opportunities continues to grow and we anticipate growing success over the remainder of this year.

We are also making substantial progress in building our commercial deposit base. In the first quarter commercial transaction and savings account deposits increased $50.8 million or 17.4% and our credit quality continues to stabilize and improve with strong allowance coverage, low levels of non-performing assets and decreasing charge offs.

Non-performing assets ended the quarter substantially unchanged at $54 million or 2.14% of total assets. Within that, total non-accrual loans increased slightly to $32 million from $30 million at the end of the prior quarter and other real estate owned ended at $21.7 million, decreasing $2.3 million from the fourth quarter, primarily as a result of valuation adjustments.

$2 million of the valuation adjustments last quarter related to the anticipated loss of sale of our largest remaining commercial property, a South Puget Sound Retail Center in which we held a participation interest. As of the end of the quarter our interest was valued at $5.1 million in this property and it was sold in early April with no additional loss.

Delinquent loans decreased to $92.6 million in the first quarter from $88.2 million at the end of 2012, primarily due to an increase in loans 90 days or more past due. It’s important to note that of the $54 million or 58% of the total, our mortgage loans ensured or guaranteed by the FHA or VA that are still cutting at quarter end. Excluding and sure to guarantee more, because total loan delinquencies were just under 3% of total loans at March 31, virtually unchanged from the prior quarter.

We recorded a loan loss provision of $2 million in the first quarter with net charge offs of just over $1 million, compared to a $4 million provision and nearly $4 million in charge offs recorded last quarter. The overall increase in the allowance for credit loss is a reflex to continued growth in our held for investment loan portfolio. The allowance represented 2.04% of loans held for investment and 88.4% of non-accrual loans at March 31.

Our funding and the quality of our net interest margin continue to improve. Net interest income, excluding the impact of the correction of a $1.4 million TruPS error was $16.6 million for the quarter consistent with the fourth quarter of last year and 30% above the first quarter of 2012.

Preparing to catch up the differed debt service or the trust preferred securities in the first quarter, we determine that our interest accrual in prior years had been understated by this error. While we recognize this interest expense in the first quarter, these amounts relate entirely to prior periods.

Our first quarter net interest margin, excluding the impact of the prior period area was 3.06%, consistent with the fourth quarter of last year and up from 2.51% from the first quarter of 2012.

Total deposits were $1.93 billion at the end of March, down from $1.98 billion at the end of the prior quarter. Total time deposits decreased $132 million in the quarter, while transaction and savings deposits increased $117 million. Transaction and savings deposits now comprise 60% of total deposits, up from 53% at year-end. As a result of these changes the average cost of deposits declined to 74 basis points from 75 basis points in the prior quarter.

As we have previously discussed, we have a large amount of longer-term time deposits maturing over the remainder of this year, a majority of which mature in the second quarter as a result of the roll off re-pricing or conversion of these deposits to lower cost products. We anticipate our cost of deposits will fall to below 60 basis points by the third quarter. Of course this assumes a stable interest rate environment until then.

Total average interest rate and assets ended the quarter at $2.24 billion, consistent with our prior quarter end, but up from $2.09 billion a year ago. The increase in our loans held for investment portfolio is offset by a decrease in our loans held for sale. Average yield on earning assets was 3.80% compared to 3.67% one year ago.

Non-interest income continues to drive our earnings. Non-interest income for the quarter was $58.9 million down $12.8 million or 18% from the prior quarter and an increase of 47% over the first quarter of 2012. The decrease from the fourth quarter was primarily due to lower mortgage banking activity in the first two months of the year, resulting in lower mortgage loan origination and sale revenue, offset in part by higher mortgage associate income for the quarter.

Non-interest expense was consistent with the prior quarter. Non-interest expense of $55.8 million included lower salaries and related cost as a result of lower incentives and mortgage commissions in the quarter. This decrease was offset by higher general and administrative expenses due to higher marketing, collection and loan expenses in the quarter.

One of our primary expense drivers is headcount. In the quarter our headcount grew 11% to 1,218 employees at quarter end. As I stated earlier, most of these additions were in our mortgage production and operations areas.

Our income taxes are substantially higher this year. The company’s income tax expense was $5.4 million for the quarter. Our effective annual income tax rate for the quarter was 33.2% compared to 20.8% for the full year last year. The lower prior year rate reflects the benefit of the full reversal of differed tax asset valuation allowances last year. Our regulatory capital ratios remain very strong. At quarter end our tier one leverage ratio was 11.97% and its sole risk based capital ratio was 20.47%.

I’d now like to say a few brief words about our local economy, after which we’ll be happy to take your questions.

Employment in Washington State increased in the first quarter more than expected, with strong growth in manufacturing and construction employment. The construction sector added 2,400 jobs between November and February, approximately 1,000 over the forecast from last November. Housing construction permits are off to a strong start with single family and multi family permits in January and February, each averaging 17,500 units, a level not seen since 2008.

The Seattle metropolitan market is experiencing a 20 year high for new units and more than 35,000 units on track to be delivered between 2012 and 2015. Oregon also is experiencing an upswing in construction employment and activity with single-family permits up 27% in 2012 and multifamily permits up 58% last year.

The Puget Sound Region, Homestreet’s primary market, job creation is strong. Unemployment of the Greater Seattle metropolitan market, the job center for the state is down to 5.9% and Forbes recently ranked Seattle No.5 for Best Cities For Good Jobs. Well fortunately they have several very strong employers in the area spanning a range of industries.

As we look ahead at drivers for revenue growth, we will continue to focus on diversifying through organic means and potentially through the acquisition of smaller end market and near market institutions. Organic growth will focus on both non-mortgage banking income for commercial lending, commercial real estate lending, core deposit acquisition cash management and insurance and investment product sales and I’m continuing to expand our retail mortgage lending operation, both in market share and equipment.

Thank you for your attention during our prepared remarks today. I have with me today Cory Stewart, our Chief Accounting Officer; Darrell van Amen, Treasurer and Chief Investment Officer and Jay Iseman, our Chief Credit Officer to help me with questions.

We’d now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is Paul Miller, FBR. Please go ahead sir.

Paul Miller - FBR

Thank you very much. I don’t know if you mentioned this as one of the things I missed at the very beginning. But can you talk a little bit about what your gain on sale is today relative to the first quarter so far since you pretty much finished up the month already?

Mark Mason

Sure. Surprisingly our margins are slightly better than the quarter as a whole. With the recent decrease in long-term rates there’s been a widening of the primary, secondary spread and pricing in our markets has improved. Through April it looks like our composite margin is going to rise from what was about 412 basis points, excluding the impact of valuation adjustment to something closer to 450 basis points up to date.

Now we can’t assure you that this is going to continue through the rest of the quarter, but for the month we had a very good month, not only in application volume as I mentioned earlier with the locks, kind of the estimate will be about $580 million for the month, but with profit margins as well.

Paul Miller – FBR

And then on the headcount, the 119 people, can you talk about where you want – is this the bulk of your new hires for the year or is this the pace its going to continue for the next couple of quarters.

Mark Mason

Its probably the larger part of our non-mortgage hiring, though we still have some open positions as we have to continue to add to infrastructure as total volume in the business changes. But in the single family area, we expect continue hiring through the end of the year at about the same pace. There is a potential though that we may lose some personnel if refinancing volume falls at a greater pace than we expect. So we’ll have to see how the market plays out, but I would expect our mortgage related hiring to continue at the same pace for year-end and beyond.

Paul Miller – FBR

Of the 119, what was mortgage bank and what was the regular bank?

Mark Mason

Of the 119, the mortgage bank was about 88 personnel and the remainder were infrastructure and lending people on the commercial side.

Paul Miller – FBR

And then how many commercial lenders do have currently?

Mark Mason

In all three of groups the number in front of me, I think its about 22 to 25.

Paul Miller – FBR

Okay and is that headcount expected to go up or you are comfortable with that headcount right now?

Mark Mason

We are comfortable currently in residential construction. In commercial lending we are going to add about three more people to a new more reputed sales lending office we are going to be opening in the second quarter. And in the commercial real estate area we’ll probably add a couple more people in the remainder of this year, but mostly we’re set.

Paul Miller – FBR

Okay. Hey, thank a lot Mark.

Mark Mason

Thanks Paul.

Operator

Our next question is Jim Fowler, Harvest Capital. Please go ahead.

Jim Fowler - Harvest Capital

Hey Mark, thanks for taking my question. If I look at the mortgage source of income this quarter versus last quarter you made reference in the prepared remarks. I’m just wondering, between the two items, home cost appreciation, which from every data point that you mentioned seems like it might continue to be strong and go up versus the rally or the change in the interest rates that are subsequently rallied post quarter.

What’s been the individual drivers of that $3 million, $2.1 million gain versus last quarter. Are they more related to housing cost appreciation and therefore somewhat doable or was it a change in rates, where there might be some of that caught back in the first quarter, given where we see the ten year treasures.

Mark Mason

Well, first I’d refer you to the table on page 21 on of our earnings release. That details the components of mortgage servicing income. See that table that reconciles to the $3.1 million net revenue number. If you are looking at the lower part of that section, the risk management section, those are the two numbers, a $3.579 million gain in fair value to MSR and offsetting that $2.5 million loss on our hedges and Darrell van Amen, our Treasurer is with this morning.

Darrell could you speak to the drives of the increase in value, because the things that Jim’s talking about are actually decreasing and prepayments need increasing issues. But we had a net increase in value for the quarter.

Darrell van Amen

Correct. So during the fourth quarter we had experienced an acceleration and expected prepayments fees by those items, which you had just pointed out. But as we’ve done the modeling and brought those into the current quarter, we didn’t see a acceleration in prepayments based on an increase in housing prices.

What we did see is our rates had kicked up for the most part in the quarter and if you look at period-to-period, rates are a little bit elevated, especially the primary mortgage rage as compared to the fourth quarter. And if I can draw your attention to the line on that same page, changes in fair value of single family are going to start due to model of amortization. That resale, a little over $1 million from $6.2 million to $5.1 million, that is what we expect prepayments seem to be going forward. So the higher rates actually reduce expected or future prepayments going forward.

So we do see an increase in value due to increased mortgage rates and we also see a slowing of prepayments fees based on the fees and accessibility of our current that became the serving book.

Mark Mason

So, Darrell this is Jim. In that general rates and passive yields on MBS decrease, doesn’t mean the mortgage rates followed. In fact mortgage rates are slightly up relative to that change, and so it had actually the offset on prepayments fees.

Jim Fowler - Harvest Capital

Yes, I mean that’s my questions. Your hedge performance was fairly constant December versus March, but your risk management picked up $1.1 million. My question is, during the quarter, from the fourth quarter to the first quarter, is that increase in risk management due to the impact at housing prices or due to more related to the change in interest rates.

I’m just wondering if there is any sort of claw back of that in the second quarter give that we’ve seen rates rally, which sounds like it going to be somewhat offset with continued housing prices, increases.

Mark Mason

I don’t think we expect it at this juncture, certainly not through April right. Through April our valuation versus hedge results are about flat.

Jim Fowler - Harvest Capital

Right. And then I wanted to just, I think you said this; I just wanted to clarity it. If I’m simply looking at the mortgage, the secondary mortgage gains as a percentage of locks, it was a take out to the 4.3 for the quarter. It looks like it was 223 basis points versus 313 last quarter. Is that 223, are you indicating that 223 has been fairly stable through the month of April. I’m just looking at locks versus secondary market execution.

Mark Mason

Right. In answering the question that Paul Miller just asked, I think what I suggest was that the total of the composite was slightly higher, maybe 450 basis points and within that number the secondary piece is the primary driver for that difference. I will say also that servicing is going up in value.

Jim Fowler - Harvest Capital

I was going to ask. So it’s not all capitalizing the increase in the capitalization factor. You’re also seeing it in cash execution.

Mark Mason

We are, right, and that difference is probably 75% in the secondary piece, about 25% in higher servicing value.

Jim Fowler - Harvest Capital

Right. I appreciate it. Thanks a lot.

Operator

(Operator Instructions). Our next question is Tim Coffey, FIG Partners. Please go ahead.

Tim Coffey - FIG Partners

Thank you. Good morning Mark.

Mark Mason

Hi Tim.

Tim Coffey - FIG Partners

As we look at kind of the overall non-interest expense trend for the rest of the year, would you anticipate that your levels in the first quarter were probably the lowest of the year?

Mark Mason

Good question. Yes, expect – I’d say generally yes. One, as a consequence of expected substantially higher mortgage volume in the middle of the year, in the second and third quarters, loan officer commissions will drive higher non-interest expense in total. By the time we hit the fourth quarter, we would expect somewhat higher expenses related to additional branches and personnel, even if all else were equal, so generally I would say yes.

Having said that, marketing expenses in the first quarter will be our highest level of the year by perhaps $1 million. We came out of the year with a very large part of our marketing budget dedicated to the first quarter and a change in logo and television commercials and a number of thing to really jumpstart our effort to improve our name recognition and keep it sound and less any declines over the range of the year.

So again, it’s a number that’s highly dependent on loan volume, mortgage loan volume with respect to commissions and then to a lesser extent the trend in personnel.

Tim Coffey - FIG Partners

Okay. What impact if any will the change in accounting on the interest rate market have going forward?

Mark Mason

On average it will follow us to an equal increase or gain. Not in total, just by timing, right, because there is still a range of valuation methodology in the marketplace. We moved our methodology closer to the majority of similar companies to recognize a substantial amount more of the gain created at lock date and so we essentially end up accelerating more gain into the day of lock as opposed to the date of closing.

So if you look at a year in total, and your locks equal to your closings, you would have no net effect between periods to the extent that locks are greater in closings, you will show higher composite margin.

Tim Coffey - FIG Partners

Okay. And if you look at kind of the commercial portfolio of the steps you are holding for investments, where are yields on new loans that are being added to the portfolio right now, in relation to your average loan yield for the quarter.

Mark Mason

That’s another great question. The yields are actually hanging in there pretty well. Some portion of those additions are single family mortgages. Those are substantially jumbos. Darrell do you have some actually numbers by loan type?

Darrell van Amen

Yes. If you look at single family as you pointed out, primary jumbos are fixed rates in the jumbo product. They are coming on and they’ve been pretty static for the first quarter. They are yielding about 425 and then of course our arm’s about 295.

If you look at the other component, say the commercial, the remaining loans held for investment, the commercial component, those yields are about 425 in terms of note rates coming on the books for the quarter. So (inaudible), they’ve held up pretty well for this quarter as well.

Tim Coffey - FIG Partners

Okay. If we talk about the jumbo market, it seems like it started to unlock a little bit in the secondary by-site. Does that have any impact for your operations going forward?

Mark Mason

I’m sorry Tim; I was looking at a piece of paper on yields. Could you give me the question again?

Tim Coffey - FIG Partners

Yes, the jumbo market seems to be unlocking a little bit. Does that have any impact on your operations going forward?

Mark Mason

It does and that we have been reluctant to put a substantial amount of fixed rate jumbo loans on our balance sheet because of the added interest rate risk. And while we have put some on during this period, we haven’t been as competitive in the market place as we would like to be.

Recently we have formed relationships with some folks in the secondary market, who have allowed us to substantially improve our pricing to the marketplace. Beyond that we are the in the process of becoming rated in order to participate in full securitizations of these jumbo loans and hopefully longer term, our volume will increase to the extent that we can do our own stand alone to securities.

Tim Coffey - FIG Partners

Okay, but this is more of a long-term strategy then.

Mark Mason

Yes, though more recently we are selling a lot more reserves into the secondary market at reasonable gains, but much better pricing to the customers.

Tim Coffey - FIG Partners

All right. I think that was all my questions. Thanks.

Operator

(Operator Instructions). We do have a question; Arthur Mackey, a Private Investor. Please go ahead.

Arthur Mackey - Private Investor

Yes, I was just wondering if you anticipate increasing the dividend in the future?

Mark Mason

Well, thanks. As a stockholder, I’m sure interested in that question. As you can tell when deciding on the size of the initial dividend, we were conservative and I know that shareholders would like to see a much higher payout ratio, given our level of capital.

Starting out initiating a dividend, at the same time that you’re coming off of a regulatory order, conservatism is the more important factor in your analysis and your proposal to the regulators. And so in initiating the dividend, we want to make sure that everyone, more specifically our regulators were comfortable that the dividend string that we were initiating would be sustainable.

And I would tell you that we are very interested in increasing the level of dividend. The timing of that is going to be subject to our Broad of Directors and our regulators comfort with an increasing level of dividend, and of course sustained and stable profitability and so it is our intention to do that. The timing of that I can’t be sure.

Arthur Mackey - Private Investor

All right. Thank you very much.

Mark Mason

Thank you.

Operator

Our next question is (Inaudible), JPP Consulting. Please go ahead.

Unidentified Participant

Yes. Just one; one of my questions was answered. But I just wanted to see, given your stages of on the expansion and maybe your marketing things to the California market or the latest one in Hawaii.

Mark Mason

Well, as I said earlier, it’s our intention to continue to expand our foot print. As good a market as Puget Sound is, we are already a substantial mortgage originator in Puget Sound and while that market share is going to increase over time, our opportunities as substantially broader than that in attracting really high performing great groups of people in other states.

And so we’ve started down California, we had a significant opportunity to bring on really high performing team. The leader of that team was Wells Fargo’s most prolific purchase mortgage originator and we are quite happy to bring them on. And so it means that we are going to ultimately build a larger presence in Southern California and hopefully Northern California as well.

The Hawaii market is one that we’ve been in for over 20 years, both as a bank, I’m sorry, 30 years, both as a bank and a mortgage originator and one that today we don’t have as great a market share as we have Puget Sound and we think we have a substantial opportunity to improve and so we are going to aggressively grow our personnel in that market.

That’s an unusual market in that. The support for home values in that market is really an international support and their housing prices have rebounded just as quickly as our other markets and our generally more stable. And so we expect to expand our mortgage banking presence there, but ultimately our general banking presence as well.

We intend to also expand our mortgage business into the other contagious western states, Arizona, Uttar, Colorado and others over the next few years, as opportunities present themselves.

Unidentified Participant

Okay, and if I could just ask one more follow-on?

Mark Mason

Yes.

Unidentified Participant

As far as the California, Southern California and approximately Northern California. What did you see your timeline on that for the expansion.

Mark Mason

Well, I can’t say exactly, because we don’t open our offices on a schedule as to when we’d like to see them. We bring groups of originators on as we identify them. And there is a pretty significant pipeline of opportunities in that regard, but we try to let the market tell us where we should grow based upon the quality of the individuals we hire and not simply target markets.

And so I think as I said earlier, we expect to continue hiring in that business at the current pace, the most recent phase and so we grew sort 10% in production personnel in the first quarter and I would expect to see a similar number, but not a similar percent as sort of quarterly going forward.

Unidentified Participant

Okay. Thank you. That’s all my questions.

Operator

Our next question is Kevin Ross, Akon (ph). Please go ahead.

Kevin Ross - Akon (ph)

Hi Mark. How do you think about a share buyback program versus increasing a dividend as you look to return capital shareholders in the future?

Mark Mason

We don’t currently anticipate a buyback program. We would like to utilize our excess capital to grow the balance sheet and to acquire some smaller institutions, to accelerate our diversification efforts. If we are not successfully and we continue to accrete capital at the current rates; that’s a topic that we would revisit.

Kevin Ross - Akon (ph)

Okay, great, and then a follow on for what you were just talking about. Could you comment about the M&A activity in the northwest. What you are seeing and what’s your perception of pricing of deals that have been announced?

Mark Mason

I think activity is picking up; at least discussions are. I think pricing is increasing somewhat, which is probably what’s helping the discussions. Though we still see deals being done that are pretty dilutive and we are fairly disciplined about our evaluations. We have to return at least a 15% rate of return on investments like that and we hold ourselves to hopefully under a four-year delusion payback period from that _.

So some deals that recently have been, we were outside those parameters and so I guess that tells you people the way to spend more on deals. But we have been in discussions with a number of small institutions for some period of time. I can’t give any probabilities regarding actually competing the transaction, but those discussions have picked up in the last few months.

Kevin Ross - Akon (ph)

Great. One last one if I could Mark. Can you talk a bit about the multi-family market and are you getting more traction with your DUS license.

Mark Mason

We are and even more successful recently on the front end of that. We have had some significant success in the construction area of a range of sizes, of apartment construction projects with agreement on the backend to do Fannie Mae takeout loans. And so we are hoping that that leads to both, higher average on balance sheet balances, but also an increase in our Fannie Mae business as well.

Kevin Ross - Akon (ph)

Great. Thank you.

Operator

Our next question will be Ren Vaughan, Salomon Whitney. Please go ahead.

Ren Vaughan - Salomon Whitney

Mark, good morning on your end. How are you?

Mark Mason

Very good, Ren. How are you sir?

Ren Vaughan - Salomon Whitney

Good. Everybody else stole my thunder, the last three or four guys. I just wanted to say hello, no problem, thanks. Sorry.

Mark Mason

I have a hard time believing anyone could steel your thunder Ren.

Ren Vaughan - Salomon Whitney

I have a hard time too my friend. They must be some placed locked in my brain, steeling my question, no problem. How’s the weather out there today. Don’t answer, its raining, right?

Mark Mason

Its cloudy and rainy and periodically sunny like.

Ren Vaughan - Salomon Whitney

There you go. Say hello to Darrell for me. Enjoy your day.

Mark Mason

Thank you sir.

Operator

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mark Mason for any closing remarks.

Mark Mason

Thank you very much again for your patience and your questions today. Look forward to talking to you at the end of next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!