Good day, and welcome to HomeStreet's Third Quarter 2021 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I'd like to turn the call over to Mr.
Mark Mason, Chairman and CEO. Please go ahead. Hello, and
thank you for joining us for our Q3 2021 earnings call. Before we begin, I'd like to remind you that our detailed earnings release and an accompanying Investor presentation were filed with the SEC on Form 8 ks yesterday and are available on our website at ir.homestreet.com under the News and Events link. In addition, a recording and a transcript of this call will be available at the same address following our call. Please note that during our call today, we may make certain predictive statements that reflect our current views and about the company's performance and financial results. These are likely forward looking statements that are made subject to the Safe Harbor statements included in yesterday's earnings release, our investor deck and the risk factors disclosed in our other public filings.
Additionally, reconciliations to non GAAP measures referred to on our call today can be found in our earnings release and investor deck available on our website. Joining me today is our Chief Financial Officer, John Mitchell. John will briefly discuss our financial results, and then I'd like to give an update on our results of operations and our outlook going forward. John?
Thank you, Mark. Good morning, everyone, and thank you for joining us. In the Q3 of 2021, our net income was 27 dollars or $1.31 per share as compared to net income of $29,000,000 or $1.37 per share in the Q2 of 2021. Our annualized return on tangible common equity for the Q3 was 15.6%. Our annualized return on average assets was 1 point 4% 8% and our efficiency ratio was 62.8%.
Our net interest income in the 3rd quarter was slightly lower than the 2nd quarter due to a $1,700,000 decrease in interest income derived from PPP loans, which was partially offset by higher levels of non PPP loans. PPP loans caused our net interest margin to be higher by 11 basis points. Excluding the impact of PPP loans, Our net interest margin in the Q3 of 2021 was consistent with our net interest margin in the Q2 of 2021. As of September 30, 2021, outstanding PPP loans were $77,000,000 with deferred fees of $2,400,000 As a result of the continued favorable performance of our loan portfolio and the improving outlook of the impact of COVID-nineteen on our loan portfolio, We reported a $5,000,000 recovery of our allowance for credit losses in the Q3 of 2021. As we continue to have more clarity of the minimal impact COVID is having on our loan portfolio and with projected improvements in our economies, we expect to recover additional amounts of allowance for credit losses in future periods.
Our ratio of non performing assets to total assets improved to 26 basis points. Our ratio of ACL to total loans was 1.06%. The $3,800,000 decrease in net gain on loan origination and sales activities in the Q3 of 2021 as compared to the Q2 of 2021 was due primarily to a lower volume of single family mortgage rate locks and lower levels of CRE loans sold in the Q3. The $900,000 decrease in non interest expense in the 3rd quarter As compared to the Q2 was primarily due to lower compensation costs, which were partially offset by higher general, administrative and other expenses. The $3,200,000 decrease in compensation cost was primarily due to reduced commissions resulting from lower levels of loans Closed in our single family mortgage operations and lower benefit costs due to 3rd quarter seasonality.
General, administrative and other costs increased due to a $1,900,000 reimbursement of legal costs received from our insurance carrier in the Q2 2021 and higher marketing costs. During the Q3 of 2021, we repurchased 2% of our outstanding common stock at an average Since the beginning of 2021, we have repurchased 7% of our outstanding common stock. This is in addition to the 12% and 9% repurchased in 2019 2020, respectively. I will now turn the call over to Mark.
Thank you, John. HomeStreet's results for the Q3 continued our outstanding results for the year. Our results reflect our diversified business model, the benefits of our conservative credit culture and continuing focus on operating efficiency. Our loan origination levels remained strong with $804,000,000 of originations. And excluding the impact of PPP loans And despite continuing high levels of prepayments, our total loans grew at an annualized rate of 19% during the quarter and 9% year to date.
As expected, our single family mortgage loan volume and profit margins decreased from 2nd quarter levels and our revenue has now declined to near normal levels. The credit quality of our loan portfolio continued its strong performance. As John mentioned, greater clarity on the impact of COVID on our portfolio allowed us to recover $5,000,000 of our ACL. The 2nd consecutive quarter, Our mortgage banking revenue comprised only 17% of total revenue and less than 8% of our net income. We continue to anticipate a slight decrease in our origination and gain on sales activities over the next few quarters.
Due to increasing revenues from other operations, we expect the revenue contributions from our single family mortgage banking business to represent an even smaller share of total company revenue going forward. We expect our overall net interest margin to continue to benefit in the Q4 of 2021 from the forgiveness of PPP loans. Looking forward, with the Federal Reserve indicating that short term interest rates will remain low for the foreseeable future, we expect our net interest margin, excluding the impact of PPP loans, to remain level as the benefit of our deposits continuing to reprice downward is expected to offset any decline in the yields on our portfolio loans. As I have mentioned previously, We continue to increase our commercial real estate loan originations, primarily multifamily, both for sale and for our portfolio. The strong fundamentals and demand in our markets and our successful platform have supported this initiative.
These continuing high levels of loan production are expected to result in 10% to 15% growth in our loan portfolio next year and beyond with a commensurate increase in net interest income. Our efficiency ratio in the 3rd quarter was consistent with the prior quarter at 62.8%. While the expected decline in mortgage banking profitability is likely to result in upward Pressure on our efficiency ratio through mid next year, we anticipate that as a result of loan portfolio growth and related increases in net interest income and our ability to leverage our existing operating infrastructure, We have the opportunity to improve our efficiency ratio to approximately 60% in the second half of next year and ultimately to the mid to high 50% range beyond that. Based upon our continuing strong financial results and positive outlook, we repurchased $15,000,000 of our common stock during the quarter and pay the $0.25 per share dividend, which today equates to a yield of approximately 2.3% on the market value of our common stock. We anticipate continuing to efficiently retain capital for growth, while returning excess capital to shareholders.
In that regard and subject to our Board of Directors review and approval and the non objection of our regulators, we plan on repurchasing $20,000,000 of our outstanding shares in the 4th quarter. Additionally, given our consistently strong performance, The Board of Directors anticipates discussing an increase in our dividend in the Q1 of next year. Of course, future declarations of the current or higher levels of dividends are subject to our financial condition and future outlook at that time, as well as corporate governance, legal and regulatory requirements. Last quarter, We disclosed that we were evaluating the use of securitizations as a tool to enable us to originate multifamily permanent loans to our full potential, To uncap individual borrower lending limits and to improve our capital efficiency and retain the servicing on these loans And then we planned on completing our first securitization this year. While we continue to evaluate the use of securitizations, We have instead agreed to execute a whole loan sale in the Q4 due to extremely favorable prices available in the secondary market today.
Looking forward to 2022, we expect lower levels of portfolio loan sales, either through whole loan sales or securitization, as we plan to retain loans in our portfolio to generate increasing levels of net interest income. Since going public in 2012, HomeStreet has been executing a strategy to convert from a legacy thrift to a full service commercial and consumer bank. This conversion focused on the development of commercial lending and deposit product lines, and more recently reducing the size of our single family mortgage banking business. S and P has recently recognized our successful conversion And HomeStreet's Global Industry Classification Standard Code will be changed from a thrift and mortgage finance institution to a regional bank effective as of November 1 this year. This change may qualify HomeStreet for inclusion in certain regional bank indexes that currently exclude us.
To reiterate my comments from last quarter, the investments that we have made And the improvements in our efficiency and profitability have provided us with the operating leverage that will enable us the opportunity to grow revenue and return earnings without commensurate additions to personnel or other operating expenses. And while quarter to quarter earnings may show some degree of volatility, Excluding recoveries of our allowance for credit losses and excluding non recurring items such as PPP loans and expense recoveries And of course, subject to any unforeseen changes in the economy in our business, we believe we have the opportunity to continue to grow year over year earnings per share over the next few years. Specifically, we believe that current estimates Understate our possible earnings per share over the next few years. Given our performance in relation to peers In the forward looking comments today, I believe our stock is significantly undervalued. Today, we trade at a meaningful discount to our peers on a price to earnings or tangible book value basis.
Specifically, based upon multiples of 2022 consensus earnings estimates. Today, the median of our peers trade at over 30% higher than HomeStreet. Historically, this discount was largely attributed to high levels of mortgage banking revenues and earnings and its associated volatility. Historically, this was accurate with mortgage banking revenues exceeding 50% of total revenues. However, even at the height of last year's mortgage refinancing, our mortgage banking revenues never exceeded 32% of total revenues, And the last two quarters of mortgage banking revenue represented only 17% of revenues and less than 8% of the bottom line.
Today, any meaningful discount associated with mortgage banking volatility is unwarranted, and I believe our shares represent a tremendous opportunity for investors. The best way for me to describe the current state of affairs at HomeStreet is that while we are pleased to have achieved strong operating results and nor is it the same home street of even 3 years ago. What we have been able to accomplish with our effective reorganization is to have brought the company to a place where we can expect to achieve lower earnings volatility, higher operational profitability and stronger earnings growth, all of which we believe should compare very favorably to our regional banking peers going forward. With that, this concludes our prepared comments today. We appreciate your attention.
And John and I would be happy to answer any questions you have at this time.
First question comes from Jeff O'Los, D. A. Davidson. Please go ahead.
Good morning. Hey, Jeff. Hey, Jeff. Question on the gain on sale projections in 'twenty two. You've got Sort of flattish fee income expectations, just trying to see what that line item year over year.
Maybe you could just detail a little bit more what you see with the gain on sale item. Obviously, we expect gain on sales of single family mortgage loans to decline from this year, right? I mean, earlier this year, We still had much more meaningful levels of refinancing activity. So absent a meaningful decline in mortgage rates, We are expecting the revenues next year in the single family mortgage banking area to look a lot more like the second half of this year. So you can see there would be a noticeable decline in those revenues.
Additionally, Given my earlier statements that we are planning to sell less multifamily loans next year, either by Whole loan sale or securitization, those revenues are expected to decline also. We are expecting to continue to grow our multifamily Fannie Mae DUS business. And of course, those are all Loan sales securitizations, we're expecting those related revenues to rise. That mitigates those declines somewhat. But you could foresee these revenues declining, as you sort of mix up all of those comments, by 25% to say onethree of this year's gain on sale.
For this year, yes. So just to add, the 3rd quarter revenue numbers probably are pretty consistent from a single family perspective In terms of going forward and looking on a go forward basis, should not be substantially different either up or down from that. The other thing I want to point out is as we go through in this mortgage banking revenues, As our as the prepayment speeds decline, we would expect some uptick in our loan servicing revenue on the single family mortgage side.
I'll say some of that, yes. Right. It's countercyclical. I know, Jeff, you've looked at our results for a long time and seen that. Our servicing results have been pretty poor and they always are during falling rates, right?
High levels of prepayment speeds, which create high levels of decay For amortization of servicing rights. Also, when looking at these 3rd quarter results, we didn't have a multifamily loan sale, Right. So you really need to look at both 3rd and 4th quarters to get a realistic run rate going forward. And as we mentioned, we've agreed to have a whole loan sale of multifamily loans in the 4th quarter At premiums that were sufficient to keep us from securitizing. So, we're expecting that to be a strong loan sale.
Got you. And just a housekeeping item, maybe John, what were the PPP balances at quarter end?
They were at $77,000,000 and the deferred fees were about $2,500,000 Our expectations are that through the Q4, there'll be continued some forgiveness activity And then we don't expect anything material to be affecting next year's results on the PPP side, a small benefit.
Got you. So also just kind of beyond the revenue Question. We believe that revenue loss is going to be made up By other revenue increases, primarily greater net interest income. And all of these things together, We believe, along with continuing repurchases, that we are not going to see a diminution in earnings per share next year, despite The broad estimates that exist today. Yes.
If you look at our numbers, our expectations because of the declining balances this year due to PPP loans Is not only do we expect our year over year balances to increase by 10% to 15%, but we expect our average balance of loans to increase by a similar level Next year also.
And that 10% to 15% include the loans held for sale?
The 10% to 15%, the loans held for sale tend to it would not include that from the perspective of going forward. The loans held for sale We'll kind of be more fluctuating. And historically, we've been pretty consistent because we have the loan sale on a quarterly basis. In the future, that will be more fluctuating because we aren't going to necessarily do 1 on a quarterly going forward.
So right, the 10% to 15% is just loans held for investment. Okay. Got it. And the 19% annualized loan growth in the quarter, did you include the held for sale piece?
Yes, we did include the
held for because we did if you look at the held for sale between the Q2 and the Q3, there was a big jump because of reclassification. So to get that annualized number, we did include all the loans. That's why we also included the loans for the whole year and that run rate was 9%. That's why we want to make sure we're clarifying to everybody what the growth is. But We have strong growth when you pull back the PPP loans in terms of our overall portfolio.
Got you. Thanks for clarifying. I'll step back. Thank you. Thanks, Jeff.
Thanks, Jeff.
Next question is from Steve Moss, B. Riley Securities.
Maybe just following up on the loan pipeline being strong here. I hear you guys on multifamily originations, obviously, but kind of curious, You saw some growth here in the quarter in construction and even other spots. Just kind of how you think about the mix in terms of the growth going forward.
We have a very strong pipeline, particularly in commercial real estate area, the multifamily area. Obviously, in the single family mortgage area, we're coming into the seasonally Lower volume period and the Q4 tends to be a period seasonally where you're drawing down The pipeline? So we will exit the Q4 at least in the single family area with a smaller pipeline than we enter. That may not be true in the commercial area. It still remains to be seen.
Obviously, loan rates continue to be attractive. And In some areas like the Fannie Mae desk area, recent changes in the lending caps For Fannie Mae and Freddie Mac in the multifamily area have spurred greater originations there. The change in administration Has been good for the agencies with respect to multifamily lending caps. Those caps were increased about 10% from the 2021 cap and the agencies have become much more competitive since those announcements. So we're expecting much stronger agency lending through the end of the year and at least next year.
And one other thing too is just our single family loans originated for portfolio have been strong this year and we continue to have Pretty strong results next year. Just the level of prepayments have been so high this last year and a half that it's been hard to keep pace with it. We expect with prepayments going down next year that we expect our single family portfolio to continue to actually just start growing next year.
And it's been running off since we've downsized the business. Right.
Right. Exactly. Okay. That's helpful. And then in terms of just loan pricing, kind of curious as to where rates are in terms of what's coming on the books these days versus what the rate of what is rolling off?
Well, I mean, that's still that condition hasn't changed, Right. I mean loans that are prepaying are prepaying for a reason, right? And so let me see if I can give you Some runoff note rates. In the aggregate, in the 3rd quarter, That's Right. I'm looking for the runoff.
The runoff is here.
We ran loans off. Actually, it appears balanced, but it's not really. In total, we ran off loans at about a 338 Spread replacement of 3.39, but that's not true by category, right? If you look at, For example, single family loans, the loans that prepaid were 3.93% And the loans we have are 3.36%, right? I mean, that puts in perspective what happens with one off.
The one thing that's affecting us too is the PPP loans are some of the runoff we have. And so those loan rates were low at 1%.
Yes. That's what makes the aggregate low.
Yes.
But in the ongoing portfolios, the multifamily perm portfolio plus the non residential CRE Perm portfolio, we ran off at 4.21 percent and we added at 3.22%, right? So These trends continue. This is the same experience all of our peers are having. Fortunately, our funding costs continue to fall. And in the aggregate, we believe we're able to maintain our core net interest margin.
Okay. That's helpful. And then in terms of Mark, you talked about capital deployment going up to $20,000,000 here likely on the buyback. Just kind of I take that to be you're signaling sustained profitability closer to this quarter's current level. Just kind of curious on how you guys are thinking about it, especially as we think about 2022.
That's a great question. We have been fairly aggressive with our buyback program, though we have been careful during the pandemic to structure our buyback program So that buybacks during the quarter have generally not exceeded what we've earned in the quarter in conjunction with dividends, So distributions, if you will. And we were sensitive to that relationship, as the pandemic has extended to return to return
to maintain
a somewhat higher level of capital than we would target in a normal course. And going forward, As the pandemic crossing my fingers on this one as the pandemic ends and doesn't extend, You may see us extend the buyback activity beyond current earnings in conjunction with dividends that would have the impact of Reducing our capital ratios somewhat, not significantly, but beyond the current levels, Which means that relative to capital earnings, our buyback program may be slightly elevated. Thank you, Steve.
Thanks, Steve.
This concludes our question and answer session.
I'd like to turn the call back over with the Mark Mason for final remarks. Please go ahead, sir.
We appreciate Well, before we leave, we're looking at the queue. Does Jeff Rulis have another question? Are we looking at the KeyRome? Operator, can you check?
One moment. Yes, I'll get him back in. Give me a moment, please. All right. Our next question will be from Jeff Rollins, a follow-up from D.
A. Davidson. Please go ahead.
Sorry, guys. Not to hold everyone up, but I just a quick question on the EPS being understated. I think a big piece of Expectations might be at least year over year 2021 versus 2022 is on the provision Year to date, a $9,000,000 recapture added. Are those are you excluding that in that conversation? Just wanted to And if you're including it, I guess any expectations you have on the provision line for 2022 are relevant.
Great. And thanks for asking that question. We are anticipating, again, absent changes in COVID related risk or other credit risk. We are anticipating further drawdowns in our ACL next year. If we realize what I would consider A normal a full normalization of that credit risk related to COVID next year, We would likely normalize our ACL levels or coverage levels, if you will, which would anticipate us recovering the remainder of provisions we established against pandemic related risk, offset by growth in the portfolio And whatever other adjustments we might feel are needed to adequately state our ACL in relation to, obviously, the new standards.
But if you consider that We've had a growing composition of multifamily loans in our held for investment portfolio And that potential impact on the ACL, our ACL could end up at or slightly lower Relatively to where we were pre pandemic. We have not had losses in multifamily loans as an institution, a simple statement. And our relative credit risk, when you consider Our high composition of real estate related lending and the hard collateral Conservatively underwritten, it comes with it. We have a lot of safety Yes, RACL coverage, and so our next year's comments do contain the assumption that we will recover all or substantially all of the pandemic related Provisions from 2020 offset by portfolio growth. Got it.
So if you're growing loans 10% to 15% in 'twenty two, We could see continued drawdown of reserves in 2022, so be it that the provision line is a net benefit. That makes sense. Yes.
Absolutely. That's correct.
Okay. Thank you, guys. You got it. Thank you. That will conclude our question and answer session.
We'll go Mr. Mark Mason now for closing remarks. Thank you.
Thank you, operator, and thank you to everyone who joined us today for your attendance and patience in our prepared comments and the great Q and A. We look forward to talking to you next quarter.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.