Mechanics Bank (MCHB) Q1 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the HomeStreet First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Mark Mason, Chairman, President and CEO. Please go ahead, sir.

Hello and thank you for joining us for our first quarter 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-K yesterday and are available on our website at ir.homestreet.com under the News & Events link. In addition, a recording and the 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 expectations 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 Michel. John will briefly discuss our financial results and then I'd like to give an update our results of operations and our outlook going forward. John?

Thank you, Mark. Good morning, everyone and thank you for joining us. In the first quarter of 2021, our net income was $30 million or $1.35 per share. This compares to core net income of $32 million or $1.47 per share in the fourth quarter of 2020. Our annualized return on tangible common equity for the first quarter was 17.3%. Our annualized return on average assets was 1.65% -- excuse me. And our efficiency ratio was 60%. Our effective tax rate of 19.3% for the quarter benefited from tax advantage investments and excess tax benefits resulting from the exercise or vesting of stock awards in the quarter. For the remaining quarters of 2021, we are expecting to realize an effective tax rate of approximately 22%. While our net interest margin increased to 3.92% -- 3.29%, our net interest income in the first quarter of 2021 was lower than the fourth quarter of 2020 due to a lower level of interest-earning assets. Our net interest margin increased primarily due to the benefits of lower deposit rates. The lower balances of interest-earning assets was due primarily to the prepayments on loans in our portfolio and the sale of multifamily loans. Loan originations in the quarter totaled $769 million, which included $123 million of PPP loans. Due to the SBA's focus on originating round two of PPP loans, the actual level of PPP loan forgiveness in the first quarter of 2021 was minimal. Because of the increased balances and lower levels of forgiveness, the impact of PPP loans on our net interest margin was a decrease of approximately 2 basis points. As of March 31, 2021 the amount of remaining deferred fees was $9.4 million, $4.1 million from our first round of PPP loans and $5.3 million for our second round of PPP loans. As a result of the favorable performance of our loan portfolio and a stable low level of non-performing assets, no provision for credit losses was recorded in the first quarter of 2021 or the fourth quarter of 2020. Our ratio of non-performing assets to total assets remained low at 32 basis points. Outstanding loans in forbearance in our commercial and CRE portfolios decreased to 11 loans and $22 million as of March 31, 2021. Our ratio of ACL to total loans remained steady at 1.34%. The $3.4 million decrease in net gain on loan origination and sales activity in the first quarter of 2021 as compared to the fourth quarter of 2020 was due primarily to lower volumes of multifamily loans sold, including Fannie Mae DUS loans. A $1.8 million decrease in loan servicing income was due primarily to unfavorable risk management results in the first quarter of 2021 for single family mortgage servicing rights. The decrease in non-interest expense in the first quarter as compared to the fourth quarter of 2020 was primarily due to restructuring charges taken and prepayment fees incurred in the fourth quarter of 2020, lower occupancy costs due to reduction in rental space and lower information servicing costs related to renegotiating of our core system processing contract. During the first quarter of 2021, we repurchased 3% of our outstanding common stock at an average price of $44.56 per share and declared and paid a dividend of $0.25 per share. I will now turn the call over to Mark.

Thanks, John. HomeStreet's earnings during the first quarter of 2021 reflected strong underlying performance across all our lines of business, making our first quarter a great start to the year. During the first quarter, our net interest margin increased as a result of ongoing improvements in funding costs. We continue to benefit from high loan volume and profitability on loans sold and we helped our customers and communities most at risk during the pandemic by originating $123 million of PPP loans during the quarter. In particular, our single-family mortgage banking loan volume and profit margins continued at the high levels we have experienced since the second quarter of last year. Additionally, our non-interest expenses for the quarter reflected meaningful reductions in information services, occupancy and general and administrative and other expenses as a result of our ongoing focus on cost reduction and profitability improvement. And despite higher levels of prepayments, we grew our loan portfolio in the quarter. Our loan portfolio continues to perform well with low levels of problem assets and low levels of borrowers on forbearance. As John mentioned, we did not record any provision for loan losses in the current period. However, given the current low levels of problem loans and our positive outlook for the economies and our markets, we may need to release some of our allowance for credit losses going forward perhaps as early as next quarter. I am particularly pleased with the level and quality of our first quarter operating results, since many of the markets in which we do business have operated under sustained business restrictions since the beginning of the pandemic compared to many other parts of the country. The pace at which the members of our communities are becoming vaccinated bodes well for easing restrictions and return to normalized economic activity. Government stimulus and the normalization of economic activity should create a strong economic recovery in our markets and provide us with meaningful growth opportunities. Given our strong financial position, diversified lines of business, growth markets and disciplined risk management, I believe we are well positioned to benefit from the recovery. Based on our strong financial results and positive outlook, we repurchased $25 million of our common stock during the quarter and paid a cash dividend, which was 67% higher than the prior quarter. We plan to continue to manage our capital efficiently, retaining capital for growth while returning excess capital to our shareholders through dividends and share repurchases. Looking forward, with the Federal Reserve indicating that short-term interest rates will remain low for the foreseeable future and with long-term interest rates having moved somewhat higher, we expect our non-interest margin to modestly expand as deposits continue to reprice downward and we recognize deferred fees from the forgiveness of PPP loans. As we would expect, the increase in long-term interest rates which gained steam throughout the first quarter is beginning to affect our single-family mortgage banking business, reducing the robust levels of volume and profitability that we have enjoyed since early in 2020. Accordingly, we anticipate lower origination and gain on sales activities as well as lower commission-based compensation expense as we return to what might be considered a more normal single-family mortgage banking environment. The pace of this normalization however remains difficult to forecast. For example, the 10-year treasury yields have recently declined nearly 20 basis points off the interim high of 1.76% seen in late March. Where rates move from here is anyone's guess, but we have planned for the continued normalization of single-family mortgage banking volume and profitability over the remainder of this year. On our call with you last quarter, we discussed our investment in more scalable technology solutions. Some of these projects are commencing this quarter, so the benefit from lower compensation expenses will be offset somewhat by the cost of launching these projects, and the cost of returning to more normalized levels of marketing and other expenses as we emerge from the pandemic. While the expected decline in mortgage banking profitability and additional technology and marketing expenses is likely to result in upward pressure on our operating efficiency ratio in the near term. We anticipate total non-interest expenses to decline in the second half of this year resuming that low mortgage volume and related lower compensation expenses to levels, which we believe will result in an efficiency level in the low 60% range and falling in future years. Going forward, we plan on increasing our commercial real estate loan originations, both for sale and for our portfolio. We feel we can do this given the strong fundamentals and demand in our markets. Our CRA business is primarily permanent multifamily lending that, we originate most of the CRA property types. Over time, this increase in production should support net loan growth and higher net interest income, offsetting the expected decrease in non-interest income from lower mortgage banking income, which I just discussed. As such, subject to unforeseen changes in the economy and on our business, I will repeat my comments from last quarter. As our markets return to normal, the investments we have made and the improvements in our efficiency and profitability have provided us with the operating leverage that will allow us the opportunity to grow revenue and in turn earnings, without meaningful additions to personnel, or other operating expenses. And while quarter-to-quarter earnings may show some degree of volatility from a year-over-year standpoint, we believe we have the opportunity to continue to grow earnings per share next year, and going forward, past the normalization of the single family mortgage market. Additionally, as the result of the diversification of our business, and the improvements in operating efficiency and overall profitability over the last two years, and subject to unforeseen adverse changes in economic conditions, which may have a more significant impact on our business, we believe we can consistently produce annual returns on assets and tangible common equity at or above our peers going forward. As I close my prepared remarks on behalf of the Board of Directors and senior management, I want to thank our employees once again for their dedication and courage in serving our customers, communicate – communities and our company in the face of unprecedented challenges and delivering these outstanding operating results. With that, this concludes our prepared comments today. Thank you for your attention and John and I would be happy to answer any questions you have at this time.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Steve Moss of B. Riley FBR. Please go ahead.

Hi. Good morning.

Hey, Steve.

Good morning.

Just maybe start just on loan demand here. Mark, you hinted at the pipeline improving here just kind of curious, how you're thinking about loan growth in the aggregate going forward. And also, where is loan pricing?

The loan growth, I think, it's still consistent with our prior quarter comments. We're expecting total loan growth this year in the single-digit – high single-digit percentage overall. We've been signing a little recently by very high continuing levels of prepayments. That's starting to slow we hope. But that expectation is subject to prepayment expectations. We know loan demand is there, and not just for multifamily loans, but across all of our lines of business. But that loan demand is also related to prepayment activity. So it's a matter of effectively outrunning prepayments. John, do you want to speak to rates?

Sure. In terms of the commercial side both CRE and commercial, we're in the low-to-mid 3s in terms of rates on those. And then construction is still in the high 4s, and the single family portfolio is in the low 3s.

Okay. That's helpful. And then just in terms of on the funding cost side another good step down in terms of costs. Just kind of curious as to your expectations for funding costs going forward here? How much lower they could go?

Well, I think as I mentioned in my comments, funding costs, we are currently expected to continue to decline. We still have CD rollovers. We recently priced down again, our money market funds. That was not wholly reflected in the quarter. And borrowing rates continue at almost absurdly low level.

And our component of non-interest-bearing deposits continues to increase, which obviously, helps our overall cost also.

So in terms of numeric expectations, I think, still lower single-digit basis points, John, over the next couple of quarters.

Yes, a couple of quarters. Yes.

Okay. That's helpful. And then just in terms of capital here and the buyback. Capital going up even with the buyback here. Just kind of curious as to should we expect to see more of the same in terms of that $25 million per quarter repurchase?

To avoid front running my Board, I'll say, yes, that's our expectation. Our timing has gotten a little reset on making those decisions. We have gone back to announcing earnings about a week earlier than we had been, which I think most people appreciate. However, our earnings release date now precedes our Board meeting date at the end of each quarter. And so our Board will be main Thursday to consider the important questions of declaring dividend, of course, and further stock repurchases. So, as not to front run their decision I can simply say we'll be discussing it.

Okay. Great. Nice quarter. Thank you very much, Mark and John.

Thanks, Steve.

Thank you, Steve.

And our next question today from Jackie Bohlen with KBW. Please go ahead.

Hi. Good morning.

Good morning, Jackie.

Good morning, Jackie.

I wanted to start with liquidity deployment. And I understand there's a lot of moving pieces here with this. But just how you're thinking about deploying some of the funds you'll get from PPP loans as a forgiveness process hopefully accelerates this year?

Well, the first thing we do is pay down borrowings. But longer-term, we have lots of liquidity and lots of capital. Plenty to continue our program of efficient capital return to shareholders and still to fund the balance sheet growth that we're currently anticipating. So I think that our playbook really hasn't changed. Retain sufficient capital for appropriate levels of capital ratios, but not excess and to try to return excess through hopefully opportunities to grow dividends going forward and share repurchases.

Okay. And Mark, how are you thinking about -- sorry John, did I cut you off?

No. No. Not at all.

Mark, how are you thinking about potential acquisitions these days?

Well, that's a more timely question. We took a couple of years off of considering M&A though, I think, we did a small branch deal over the last couple of years in order to really focus on improving our efficiency and profitability. And we feel we've done that well. And we've recently began looking at M&A opportunities ranging from just acquisitions of deposits to whole bank or company acquisitions. Obviously, we haven't done anything yet. But we are -- we have started looking at things again. What we look at high on our list is always good deposit, franchises whether that be individual branches that might help create greater density. Some of our markets or create greater efficiency in consolidation or complementary smaller financial institutions those are at the top of our list.

And do you -- are there any parts of the footprint that you're more focused on than others? Or are you looking -- I know you have a broad geography to play with. I'm just wondering how you're thinking about that in terms of priorities if there are any?

Our focus is to create greater density in our primary markets. So Greater Puget Sound, obviously Greater Portland, the Hawaiian Islands or Southern California. That's where our focus is. We're not going to pioneer any new regions and we're unlikely to branch to other locations currently other than where we're currently branched.

Okay. Thank you. That's a really helpful update. And I just want to say thank you for the new slides in the deck. I think they were slides 12 and 13. They were really helpful for understanding the quarter. Thank you for those.

You can thank Gerhard for that. He pushed it.

Yeah. Exactly.

And our next question today comes from Matthew Clark with Piper Sandler [ph]. Please go ahead.

Hi, guys.

Hey, Matt.

Hey, Matt.

Maybe starting on gain on sale margins, up linked quarter which I think has gone against what most of the industry is seeing. How are you thinking about gain on sale margins for the year on a percentage basis year-over-year between SFR and CRE just order of magnitude?

That's a great question. And there's a lot that we don't know yet, right? I mean, in my comments I talked quite a bit about the normalization of the mortgage market, but the timing of that and what the trend will look like is pretty uncertain. I think my expectation is the single family profitability margins are going to be kind of volatile, right? I mean, we've seen that in the first quarter where margins declined somewhat in March and gave us the indication that okay we're starting to normalize. Those margins are up slightly in April. But of course, if you think about what's happened with long-term rates the 10-year in particular, it kind of follows what happens right? So our expectation is that single family margins will normalize this year. Something could always happen to change that. If the market begins believing that we're not going to experience the kind of inflation that many had begun expecting you may see long-term rates soften again which will help elongate that normalization trend. But right now we're currently planning for it to fully normalize by the end of the year. Commercial real estate margins have similarly been somewhat volatile quarter-over-quarter. They were down a little bit this quarter though that generally has to do with lower levels of Fannie Mae DUS originations and sales. Typically, the first quarter is the lowest seasonal quarter for Fannie Mae originations and sales. Also it was a pretty tough quarter competitively for Fannie Mae and Freddie Mac products, right? The agencies got new marching orders on their origination limits and they already had big pipelines they needed to close and so they were almost out of the market in the first quarter. We expect that to change over the remainder of the year and the Fannie Mae portion of our business to improve. Additionally, subject to my earlier comments, we are working to increase our multifamily perm loan originations and in turn that would mean sales as well and we -- so we hope that that will have a positive impact on the year. I'm not sure about margins though. I mean the margins are wholly dependent on the pace of rates, to the extent that we originate loans into falling rate markets that's great for margins. Of course, we're trying to be in a different trend right now. And so unclear, if we're going to see improvement or deterioration from here in CRE sales margins.

Okay. And then just on loans sold for this year, you're stepping up commercial and single family resi I guess will be what it will be. But you did $2.9 billion of loan sales last year 2.2 -- $2.16 billion in SFR$700 million in CRE. I guess how are you thinking about the amount of loans you might be able to sell this year in SFR and CRE?

We are generally thinking our single-family volume will be in total for the year similar to maybe slightly lower than last year. The – of course, that's subject to a lot of same comments on normalization, right? So I think maybe slightly lower, whether that's 5%, 10%, that could change easily in both directions. Commercial real estate, we're expecting a somewhat better year in Fannie Mae, DUS business. But obviously, that's going to happen over the next three quarters and it will probably be second half loaded. In general, CRE originations portfolio quality loans that we sell. Originations will be up. We may hold sales to similar levels of last year. We're not sure yet. We're trying to grow the balance sheet. Well that depends on prepayment speeds. And so we are still considering what amount of those loans we might sell. I think if you folks plan for sales similar to last year that might be a good number. We might exceed it or might be less depending upon our experience with prepayments.

Okay. And then just on the non-interest expense coming down potentially in the second half, as mortgage volume normalizes or slows and related on sale. The variable comp is going to come down, but having – not knowing what that variable component is, we have no idea I guess how to consider the order of magnitude in terms of release and expense. Is there anything you might be able to add there to help us think about a run rate in the second half of the year?

Historically, that number has ranged from 100 basis points to 115 to 120 basis points of variable component.

Yes. And one of the problems that we have, I'm just giving you a flat rate Matthew, here is that, as you look at it, we basically pay our loan officers kind of a base rate and then the commissions are paid on top of that. And if they have a lower level of commissions, you may have a higher level of fixed compensation to them. So it's not a straight...

Yes. And also the commission structure is a tiered structure based upon each loan officer's individual volume. And so you can have a decline in volume that creates a much greater decline in comp expense, right? So let's say you go from 90 basis points to 80 basis points on everything, big change because it's volume and rate, if you follow me?

Yes. Okay. Okay. And then just last couple housecleaning items. PPP contribution to net interest income this quarter and what the end-of-period PPP balance in the loan book?

Yes. So in terms of the numbers and we said that we have basically about $9 million of deferred fees. So from the perspective of PPP, we kind of anticipate recognizing that through the end of this year either through forgiveness or through the amortization. So we expect to benefit probably evenly throughout the next three quarters of that number, a couple of million dollars plus per quarter because of some of the normal amortization that you would have. But that's the – we figure that the first round is going to be forgiven in the first couple of quarters, second and third quarter. And then the second round will probably be forgiven in the fourth quarter.

Impact on margin this last quarter?

I think you're going to – last quarter it was down two basis points because of that, because we didn't get the forgiveness. We expect that to have a positive benefit over the next three quarters.

Okay. And then the end-of-period, PPP balance in the loan book?

I believe – and I don't have that number right in front of me but it's roughly I think about $250 million to $260 million.

Okay. Thank you.

And our next question today comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks. Good morning. I wanted to follow-up on the – just the expense. Mark, you covered kind of the variable pretty well. I just wanted to – the contract renegotiation and the occupancy decline. I guess, is there anything more structural that's kind of coming out of the expense line? We'll note the variable if that were to drift with mortgage slowing. But, have you largely captured some of the structural cost savings that have been identified for quarters to -- ago?

Jeff, we have -- I mean there's still the prospect of potentially further occupancy reductions, some of those coming from a change in where we allow people to work frankly. Not sure how many quarters that will take to figure out and recognize. And the sublease market, as I'm sure you know, is worse than it has been as a consequence of the pandemic. Having said that, we've caught up or in the process of catching up pretty quickly on our sublease inventory as a consequence of the charges that we took in the fourth quarter, and we reduced what we were asking for the space we're trying to sublease here in Seattle, and we've had a lot of great activity because of being a price leader, I guess, in sublease rates. But we have more to do. And so there's potentially future activity there. We continue to work on personnel efficiency. I mean, I don't know, you're ever really done with that. But as an example, we're in the process of consolidating our deposit operations groups here. We historically have had a separate commercial deposit operations group and a separate retail deposit operations group. And we're in the process of consolidating those activities, some of which are redundant and duplicative. And not sure what that's going to produce yet. There'll be a few FTE here or there. You may notice, if you've been tracking our FTE that we've actually decreased a little. We're going to be adding a couple more, right? So, you'll see a few FTE volatility, but we don't -- we think that we can grow our revenue without meaningfully adding to that FTE total. And that's really the best news for us. It's really an operating leverage story from here out.

Yes. So, it sounds like -- and you mentioned, the technology, some of that spend is there's some offset there. But I guess the general big picture efficiency comment is really that shift to the kind of more commercial-oriented business over time. That's kind of where your comments lie in terms of improvement from here, Mark. Is that safe to say?

That's fair. And typically, larger customers, less expensive disclosures and businesses that we already have, complete infrastructure in, right, easier to grow revenue.

Yes. Okay. And John, I took from your comments I didn't get an actual PPP balance, but you said forgiveness was minimal. Your -- does that mean your, I guess, activity in the round two PPP was pretty modest? Do you have a separate balances of what's remaining and -- go ahead.

Yes. In round two, we have -- at March 31 we had $123 million on loans. We're continuing to originate some, but it's not a very large amount under the PPP program through May. The deferred costs related to that, is about $5 million. That will be recognized both through amortization and then forgiveness, and going through and probably the forgiveness mostly in the fourth quarter of this year is the expectation--

For Round 2.

Yes, for Round 2. For Round 1 we still have the balances. I don't have right in front of you, but I believe it's about $130 million and we have about $4 million in deferred fees related to that. And so -- and those we expect to recognize over the next couple of quarters some of which will be amortized and some of which will be accelerated forgiveness.

That’s helpful. Thank you.

And our next question today comes from Tim Coffey at Janney. Please go ahead.

Thank you. Good morning gentlemen.

Hey Tim.

Hey Tim.

Hey. Mark so if we look at kind of gain on sale in the single family residential piece for next quarter, just kind of looking at where rate locks into the first quarter, is it possible we could see a gain on sale number lower in second quarter versus a year ago?

Year ago?

What exactly is year ago--

3 15?

No, he's talking -- so absolute. I don't think you'll see a percentage margin that's lower than -- 2Q.

Or 1Q?

Or 1Q.

2Q of last year, right? I think gain on sale was $28.3 million. I'm just looking at rate locks for the first quarter of this year were lower than they were than the first quarter of last year.

Right. Because of the impact on March because there was just -- rates dropped out. They just flew through the roof in that one month.

2Q last year the margin the profit margin was the highest we've had, right? I mean it was over 500 basis points almost 550 basis points. We are not going to see that again.

Yes, it's been expected.

What about next quarter?

For 2Q.

What about the dollar?

Volume of locks was a little over $500 million, right?

Which is what we had--

Which is about this quarter. That's an interesting question. I think it's possible. It may be down somewhere between I think at least 10% based upon what we're seeing now. It could be higher than that. We're only about quite a month in. And yes, that's kind of what we're thinking. It could be 10% or more. But we also are experiencing -- it's one of the reasons I'm kind of hedging my comments we're experiencing strange things in the buying season. Obviously, you've seen the home price numbers -- home price appreciation numbers. Seattle was one, two, or three, I think, the last three months in terms of leading the nation in home price appreciation. That's in part a consequence of extremely low levels of inventory. Part of that obviously is the pandemic and people's willingness or unwillingness to have people comping through their houses. We are seeing that starting to thaw inventories improving. So, we could see a greater surge in purchase transactions. But as we sit here not quite a third of the way in it's hard to make solid predictions on the quarter.

Okay. No, that's fair. That's fair. And then you've done a great job trimming the cost and being able to buy back stock. And as you kind of look forward to transforming the bank a little bit, do you have like a targeted ratio of where you'd like gain on sale revenues to be that say total revenues?

We -- I think that's a moving target, because we very intentionally, Tim as you'll remember reduced the size of the production of the single family mortgage business by 80%, right, when we sold our stand-alone network of home lending centers. Offsetting that was a completely unexpected increase in effectiveness of the group we retained. This business when we sized, it was supposed to originate $800 million to $1 billion in loans per normalized year, right? We now believe that business is going to normalize originate about $1.5 billion or more. So the composition of the business we sized it for is somewhat better. Now that's good news, bad news, because it's substantially more profitable normalized than we expected. But that's going to add a little more continuing gain on sale revenue to the mix that has to be outgrown by the growth in the remainder of the commercial businesses, right? So we look at it in terms of percent of production and that contribution should decline over time. But it's going to normalize in terms of production of like $1.5 billion. This year will be more, right? Based upon our comments I mean this year's…

We already did $500 million in the first quarter.

We already did $500 million. I mean, we're probably headed toward something well…

Roughly $2 billion.

Roughly $2 billion maybe plus or minus. Who knows right? So we're still going to have extra revenue this year. So I don't know, I'd have to work out the percentages on normalized margin and normalized volume. But what I do know is wherever that would normalize today that's going to decline over time by our expectation if we hold the size of that production and grow the remainder of the businesses. So I don't have that target percentage per se.

Yeah. No, no, I understand. I understand.

The one aspect to it in coming into this business and not having it before is it's really hard to turn away revenue just because it happens to be a really hot market. So from our perspective, we're benefiting and trying to leverage the extra capital we're creating, knowing that this is not going to continue to go on forever in terms of these high levels of activity.

Yeah. So it's been great, right? It's allowed us to buy back more stock, right? It's allowed us to increase our dividend and it's been fabulous, but it's going to return to normal here soon.

Okay. And then my last question is on the outlook for the allowance going forward. The decision to strongly suggest that there might -- the allowance -- dollar amount might come down, while at the same time you're growing commercial real estate loans. Is it just nothing simpler than looking at the reserve ratio saying it's been flat but yet your credit quality and your COVID related deferrals have just been improving throughout the last several months -- quarters?

It's probably a little more complicated but not much beyond that. If you think about normalized loss rates for different asset types, multifamily loans, permanent multifamily loans are among the lowest of any asset type in banking. And if you look at the ACL levels of companies that may have an even larger composition of multifamily originations, their ACLs tend to be meaningfully lower than that 130 basis points. And I think what you'll see from us going forward is that, our ACL will normalize, I know we use that word a lot today, to a level that will be at or probably below our pre-pandemic ACL levels, right? So if you look at the ACL as adopted January 1, 2020, that was about --

It was 80 basis points.

No, it was more like 90.

I think, it was 86.

86, 87. Yes.

Yes.

So that's where our expectations start, right? Because we don't believe any of our other asset types have increased risk needs, excluding the pandemic impacts. And we think that other than the construction line items, which generally carry a higher ACL, you're going to see ACL levels return to those levels and below, right? So think 87 basis points and lower. So today that's our sort of general expectation, as to post all of the pandemic impacts. And I'm not sure when I'm going to be able to say that. But some quarters out, right? Maybe years out, I don't know, absent changes in the composition of the portfolio, which if you listen to our comments means, should argue for lower ACL if we have higher per multifamily balances. That's where we're headed we believe.

Okay. Great. That was a super helpful answer. Thanks, Mark. That was it.

You bet.

[Operator Instructions] Our next question today is a follow-up from Matthew Clark with Piper Sandler. Please go --

Hey. You know what, I completely blanked on my question. I had it earlier. I’ll follow-up with you after. Sorry about that.

Okay.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Great. Thank you. I'd just like to close by reiterating something that I touched on at the end of my prepared comments. I want to make sure that the discussions we've had about the impact of the normalization of the mortgage market don't obscure what I've said about our expectations for performance. We believe that we will mitigate the impact on our earnings going forward by the loss of high cycle mortgage banking revenue, with improved margins, improved efficiency and growth, such that our earnings per share will not decline on an annualized basis and that we will consistently produce returns on assets and returns on tangible equity very competitive with our peers. And I don't want to, our discussion on changes that we may go through quarter-to-quarter or cyclically or seasonally, obscure my statement on our expectations. Anyway, we appreciate your attention, your attendance today. Look forward to talking to you next quarter.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.