HomeStreet (HMST) Q2 2021 Earnings Call Transcript

HomeStreet (HMST -5.40%)
Q2 2021 Earnings Call
Jul 27, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Home Street second-quarter 2021 earnings conference call. [Operator instruction] Please note, this event is being recorded. I would now like to turn the conference over to Mark Mason, chief executive officer. Please go ahead.

Mark Mason -- Chief Executive Officer

Hello and thank you for joining us for our second-quarter earnings call. Before we begin, I'd like to remind you that our detailed earnings release had 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 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 expectations about the company's performance and financial results.

These are likely forward-looking statements that are made subject to safe harbor statements included in yesterday's earnings release, our investor deck, and the risk factors disclosed in our other public filing. Additionally, reconciliations to non-GAAP measures referred to in our call today can be found on 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 on our results of operations and our outlook going forward.

John?

John Michel -- Chief Financial Officer

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the second quarter of 2021, our net income was $29 million or $1.37 per share. This compares to net income of $30 million or $1.35 per share in the first quarter of 2021.

Our annualized return on tangible common equity for the second quarter was 17.2%. Our annualized return on average assets was 1.59% and our efficiency ratio was 63%. Our net interest income increased 6% in the second quarter due to a higher net interest margin and higher levels of interest-earning assets. Our net interest margin in the second quarter increased to 3.45% as a result of lower deposit rates as our total deposit costs decreased to 18 basis points in the second quarter and $200 million of payoffs of PPP loans.

The net interest income from our PPP loans caused our net interest margin to be higher by 15 basis points in the second quarter. As of June 30, 2021, the amount of remaining PPP loans was $204 million with deferred fees of $5.6 million. As a result of the continued favorable performance of our loan portfolio and improving economic conditions, we recorded a $4 million recovery of our allowance for credit losses in the second quarter of 2021. Our ratio of non-performing assets to total assets improved to 31 basis points.

Our ratio of ACL to total loans was 1.18%. The $12.2 million decrease in net gain on loan origination and sales activities in the second quarter of 2021 as compared to the first quarter of 2021 was primarily due to lower volume and lower profit margins on our single-family mortgage origination and sales. The $1.2 million increase in loan servicing income was due primarily to unfavorable risk management results realized in the first quarter of 2021 for single-family mortgage servicing rights. The $3.8 million decrease in non-interest expense in the second quarter as compared to the first quarter was primarily due to lower payroll taxes and a $1.9 million reimbursement of legal costs received from our insurance carrier.

During the second quarter of 2021, we repurchased 3% of our outstanding common stock and an average price of $44.22 per share and declared and paid a dividend of $0.25 per share. I will now turn the call over to Mark.

Mark Mason -- Chief Executive Officer

Thank you, John. Home Street's results for the second quarter continued our outstanding start to the year. Each of our lines of business performed well, continuing to meet or exceed our expectations and the credit quality of our loan portfolio continued its strong performance, allowing us to begin to recover pandemic-related allowances for credit losses. And given the positive outlook for the economies in our market, we may need to recover additional amounts of our allowance for credit losses going forward.

As expected, our single-family mortgage loan volume and profit margins decreased from the first quarter levels due to slower refinance activity. This decrease was offset by higher net interest income, a recovery of our allowance for credit losses, and lower non-interest expenses. And despite high levels of prepayments, we grew our loan portfolio in the quarter. Excluding the impact of the pay down in PPP loans, our loans held for investment increased $278 million, an annualized rate of 23%.

I am particularly pleased with the level and quality of our second-quarter operating results since many of the markets in which we do business have only recently lifted business restrictions related to the pandemic. Government stimulus and 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 continue to be well-positioned to make the most of this recovery. Based upon our strong financial results and positive outlook, we repurchased $25 million of our common stock during the quarter and paid a dividend, which today equates to a yield of over 2.5% on our common stock.

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. In that regard and subject to our board of directors review and approval, and the nominee objection of our regulators, we plan on repurchasing $15 million of our outstanding shares this quarter. We expect our net interest margin to continue to benefit through the remainder 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, excluding the impact of the paid out of PPP loans, we expect our net interest margin to remain level as the benefit of our deposits continuing to reprice downward is expected to offset any decline in the rates on our loans.

As previously mentioned, the increase in long-term interest rates in the first quarter of 2021 affected our single-family mortgage banking business in the second quarter, reducing the robust levels of volume and profitability that we have enjoyed since early in 2020. This impact is reflected in the change in the composition of our single-family originations between refinancings and purchases as the percentage of refinancings decreased from 70% in the fourth quarter of 2020 to 45% in the second quarter of this year. We continue to anticipate a slight decrease in our origination and sales activities going forward 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.

Where rates move from here is anyone's guess but we've plans for the continued normalization of single-family mortgage banking volume and profitability over the remainder of this year. While the expected again slight decline in mortgage banking profitability is likely to result in upward pressure on our efficiency ratio in the near term, as I stated last quarter we anticipate total non-interest expenses to decline in the second half of the year assuming somewhat lower mortgage volume and related lower compensation expenses to levels which we believe will result in an efficiency ratio in the low 60% range and still falling in future years. We continue to increase our commercial real estate loan originations, primarily multifamily, for both sale and full portfolio. The strong fundamentals and demand in our markets and our successful platform support this initiative.

Over time, this increase in production should support net loan growth and higher net interest income, serving to offset any decrease in non-interest income from lower mortgage banking income, which I just discussed. As a result of the increasing levels of multifamily loan originations, we are contemplating utilizing securitizations to enable us to originate to our full potential, uncapped CRE concentration levels, and individual borrower lending limits and improve our capital efficiency. Additionally, securitization of our loans will enable us to retain the servicing of these loans as opposed to whole loan sales, which we've used historically to manage capacity limitations, and potentially provide improved execution metrics. While the final determination to proceed will be based upon various factors, including market spreads, we are anticipating completing our first securitization before the end of this year.

To minimize the impact of the costs of securitization, we anticipate two securitizations a year on a go-forward basis in place of our prior whole loan sales, which may produce some quarter-to-quarter earnings volatility. To reiterate my comments from last quarter, 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, excluding non-recurring items such as PPP loans and expense recoveries, and of course, subject to any unforeseen changes in the economy and our business, we believe we have the opportunity to continue to grow year-over-year earnings on a per-share basis both next year and going forward past the normalization of the single-family mortgage market. We would also expect our profitability metrics to continue to compare quite favorably to our peers going forward.

With that, this concludes our prepared comments today. Of course, we appreciate your attention and participation today. John and I would be happy to answer any questions you have at this time.

Questions & Answers:

Operator

[Operator instruction] The first question comes from Steve Moss with B. Riley Securities. Please go ahead.

Steve Moss -- B. Riley FBR Inc. -- Analyst

Hey, Good morning.

Mark Mason -- Chief Executive Officer

Hey, Steve.

John Michel -- Chief Financial Officer

Good morning, Steve.

Steve Moss -- B. Riley FBR Inc. -- Analyst

Maybe just starting with the loan production and loan growth, just given it sounds like a little bit of a change in strategy to support high origination levels, how do we think about this -- maybe translating into loan growth on normal basis going forward here? I think the first thing in high single digits, we'd be seeing type -- double-digit type loan growth.

Mark Mason -- Chief Executive Officer

It's possible. I mean, our expectation is high single digits. It could get into the low double digits depending upon how successful we are, the utilization of securitization, as I mentioned earlier, may support higher levels. The market is very, very strong still, particularly in the markets in which we do business, and our market share is still relatively small when you consider how large these markets are.

Even the multifamily market, which we focus on in the West Coast, of course, is very very large. So we think that our initiative to increase production obviously is working so far. We think we have a lot of room to grow and uncapping the balance sheet we think is the right thing to do at this time.

Steve Moss -- B. Riley FBR Inc. -- Analyst

Got it. And then maybe just in terms of the expansion in loan growth, so I guess -- maybe two parts. One, is the level of origination do you think sustainable at the current quarter level? And are you guys hiring additional people, just kind of curious as to how you think your expenses there too?

Mark Mason -- Chief Executive Officer

We will probably add a small number of producers but we are still realizing efficiencies from the restructuring work that we did. So we are still not expecting material additions to personnel for the foreseeable future.

Steve Moss -- B. Riley FBR Inc. -- Analyst

OK. And is the kind of $900 million type level we saw for originations perhaps a sustainable or -- just curious on that.

Mark Mason -- Chief Executive Officer

We think so. We hope to approve on that number but yeah.

John Michel -- Chief Financial Officer

Yeah, and that's including the originations on loans held for sale. That's just for the health for investment. So we do have additional originations beyond that.

Steve Moss -- B. Riley FBR Inc. -- Analyst

OK. OK. That's helpful. And then just maybe on the schedule for a $50 million buyback and a step down here.

Just kind of curious, capital levels, call it, relatively steady. Is this just reflective of your expectations for higher growth or just kind of how do we think about this going forward?

Mark Mason -- Chief Executive Officer

We're leaving a little capital for growth, right? The -- if you think about what we're making per quarter, we are paying a dividend that's a little in excess of $5 million a quarter. This quarter it's a little higher because net income is a little higher because of the reversal of ACL. Right, so if you back that out with a $15 million repurchase plus $5 million of dividends, leaving a little capital for growth, it should kind of makes sense.

Steve Moss -- B. Riley FBR Inc. -- Analyst

OK. OK. That's helpful. And then just in terms of -- one last question for me just in terms of loan pricing, just kind of curious as to what you guys are seeing for rate these days?

Mark Mason -- Chief Executive Officer

It's not much different than the last quarter, frankly. The note rates on new production, construction is still in the mid to high 4% range, single family is in the low 3s, multi-family low 3s, C&I is 4 to 4.5. Those are major numbers under the rates.

Steve Moss -- B. Riley FBR Inc. -- Analyst

All right. Well, great. Thank you very much for the next quarter.

Mark Mason -- Chief Executive Officer

Appreciate it. Thanks, Steve.

John Michel -- Chief Financial Officer

Thanks, Steve.

Operator

The next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Good morning.

John Michel -- Chief Financial Officer

Good morning, Jeff.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Question on the -- I really want to circle back to the loan growth a little bit. I think you guys had kind of talked about targeting larger relationships and particularly in multifamily. I wanted to kind of follow up and say was that a factor in this quarter's growth? And part two of that is any purchase loans in what you characterize as growth in the quarter?

Mark Mason -- Chief Executive Officer

Second question first, no purchase loans. The closest we get to purchase loans are some indications or participations in the C&I book but it's quite small. This is all our originations. Large borrowers didn't really impact this quarter.

We did a few loans for larger borrowers but I wouldn't say it was beyond the average per quarter. The decision to consider securitizing going forward a portion of the loans has some benefit to larger borrowers. And I think I mentioned in my comments that we have borrowing relationships that we would very much like to do more with but we have house limits on loans to one borrower plus we have legal limits as well, right? And securitization is a way to go beyond those limits.

John Michel -- Chief Financial Officer

And one other thing, Jeff, is I think when you heard in the past is talking about the larger loans, we were specifically referring to the desk program because we changed our structures to we're allowed to do bigger loans but those are loans held for sale.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Yeah. OK. Fair enough. Thanks, John.

And I guess, John, while I have you, on the margin, I may have missed it at the beginning they're rattling through the PPP impact, do you have the key contribution to margin in the first quarter versus the second quarter? And/or if you just had a core margin with that stripped out [Inaudible]

John Michel -- Chief Financial Officer

Actually, if I strip out the PPP loans, their total impact both the balances and the revenues that we had in the first quarter it actually had a negative impact of about 2 basis points. In the second quarter had a positive impact of about 15 basis points. So when you look at the steady-state if you include PPP loans, we kind of are expecting a flat rate if you excluded their impact.

Mark Mason -- Chief Executive Officer

Flat margin.

John Michel -- Chief Financial Officer

Flat margin, excuse me. Sorry.

Jeff Rulis -- DA Davidson & Co. -- Analyst

OK. And, John, that 2 basis points and 15, respectively, that was to the margin not earning asset yields, correct?

John Michel -- Chief Financial Officer

Yeah, to the net interest margin. That's correct.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Got it.

John Michel -- Chief Financial Officer

So, if you pulled out the balances in the income. And the reason the first quarter was negative is because we put on a lot of balances that were earning 1%.

Mark Mason -- Chief Executive Officer

And checking around people too.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Yeah, yeah. Hey, Mark. Sorry, one more. On the -- so if we're talking about high single digit to low double digit loan growth, stable credit, at your comment that it may continue to have a reverse provision here.

Is there maybe just bigger picture kind of comfort -- maybe that's through the end of the year and then you stabilize on the reserves, if you could ballpark kind of where that base level is where that kind of settles in? Thanks.

Mark Mason -- Chief Executive Officer

Sure. It's hard to comment on what the actual pace will be. I mean we added $20.5 million to the ACL the first and second quarters of last year, specifically for the pandemic. We -- since that time our portfolio has continued to form well even better.

So there was going to be pressure on the ACL without the pandemic. If you look at our loan coverage from the ACL pre-pandemic, I think we were around 87 basis points, I believe. And given the improved performance and a greater composition of multi-family loans in the portfolio, our steady state ACL fully passed any pandemic recoveries likely to be 87 basis points or lower, if that helps. Now, how quickly we get there is a little unclear.

Though at this juncture, I would still expect to recover based upon all the trends more this year.

Jeff Rulis -- DA Davidson & Co. -- Analyst

OK. So pace of maybe drifting down is after some review but that falling at some point sub 1% of loans is not a figure that you can't get us out of the question.

Mark Mason -- Chief Executive Officer

No. And for lack of a better yardstick, it's hard enough. If you just recovered it evenly through the end of' 23 -- I'm sorry '22, that might not be a bad estimate but I can't assure that that's going to be the pace but I mean we have to plan somehow also. We have the same internal problem and for lack of a better yardstick that might be a good way to consider recovery here.

John Michel -- Chief Financial Officer

Yeah. Jeff, we're still as everybody else is, learning to see some modeling in the process the implications of it and how it works. And it's a very involved process and you don't have a ton of history with it. So as Mark said that's a reasonable assumption going forward.

But when it actually happens, it will kind of go through each quarter and have to evaluate whether it makes sense.

Mark Mason -- Chief Executive Officer

Right? I mean, we could recover faster than that potentially if there are any indications of an elongation of risk, it could be slower. We surely don't anticipate that today. So I don't know if that's helpful or not.

Jeff Rulis -- DA Davidson & Co. -- Analyst

That is -- I get the gymnastics of the process here. I just -- part of the question is your loan growth. And you talk about lowering reserves versus growing into it and if you keep its pace, it's you're kind of doing -- you hit from both sides. So, helpful otherwise.

I appreciate the comments. Thanks.

Mark Mason -- Chief Executive Officer

You bet.

Operator

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark -- Piper Sandler -- Analyst

Hey. Good morning, guys. Maybe just first on the share repurchase, another 15 million in the upcoming quarter here. What are your thoughts beyond 3Q in terms of share repurchase? Do you get to a point where given all you've bought back that the float starts to become a concern or an issue or do you feel like you can continue the buyback beyond this quarter?

Mark Mason -- Chief Executive Officer

I feel like that would be a high-class problem. Let me start with that, right? I mean, if we are so successful in managing our capital that we're able to return enough capital then that becomes a float issue, we would split the stock first and the shares. Because I would assume the stock price would be going out commensurately, right? We would probably split the stock. I would also assume our multiple would go up as well because that would mean an ever-improving return on equity in EPS.

I haven't really considered that potential problem yet. But I guess if we got there, that would be a good problem to deal with.

Matthew Clark -- Piper Sandler -- Analyst

OK. So it's fair to assume that buybacks will likely continue beyond this quarter?

Mark Mason -- Chief Executive Officer

Yeah, that's our working assumption. One perspective, and you'll understand it's biased, if the market is not going to appropriately value our shares, one of the best investments we can make is buying it back for the benefit of our remaining shareholders. And if we have enough capital that we're generating on top of that return of capital to shareholders to satisfy our growth needs, absolutely the best thing for us to do.

Matthew Clark -- Piper Sandler -- Analyst

OK. Got it. And then just on expenses, I think you've talked in the past about a run rate, you've given some guidance for the next two to three quarters, which is obviously helpful. But you've also talked about the normalization of mortgage, again on sale with some offset.

So do you feel like that run rate of 54, 55 million can come down next year? Or do you feel like even with maybe a gain on sale revenue declining, you -- that run rate might be able to come down?

Mark Mason -- Chief Executive Officer

I think that's a good run rate. There could be some volatility within quarters, particularly because the seasonality of the normalized mortgage business. There -- when you get farther out let's say to late '22, '23, inflation will impact you somewhat, right? I mean, you -- just think about annual merit increases that for our industry have averaged about 3% a year. There will -- even with a steady-state FTE count, there is some inflation in expenses.

And so there might be some small increase in that number as you get out, let's say, to 2023.

John Michel -- Chief Financial Officer

But I think the important thing to remember here is just the operating leverage. So as we're going through this and keeping our expenses pretty relatively flat, we have the potential with our growth in our loan portfolio to really start getting increased revenues to get better-operating efficiencies.

Mark Mason -- Chief Executive Officer

Right. So, regardless of whatever inflation might do to expenses, we're expecting revenue increases of a multiple of whatever that is.

Matthew Clark -- Piper Sandler -- Analyst

Understood. OK. And then just on the for sale originations coming down a little bit from where they were this quarter, you feel like -- I think you did 2.16 billion of SFR loans sold last year and about 7 and 13 million on the CRE side. I guess, how do you feel about both of those buckets? You feel like you can come close to matching that type of for sale production on the SFR side and what are your thoughts on the commercial side as well?

Mark Mason -- Chief Executive Officer

We think in the single family for sale production bucket, if you will, that this year will be similar to last year. They just -- it's just going to come in different quarters. The Fannie Mae DUS business we think will be higher this year. Our multifamily loan sales -- if we do end up securitizing this year, whole loan sales, of course, will be down.

Sales through securitization will be up. The total may not be much different this year than last year. It depends on the volume of securitization. If we don't securitize, we will likely do whole loan sales sometime in the year.

It's just a little unclear right now.

Matthew Clark -- Piper Sandler -- Analyst

OK. Great. Thank you.

Mark Mason -- Chief Executive Officer

You bet.

Operator

The next question comes from Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen -- KBW -- Analyst

Hi. Good morning.

Mark Mason -- Chief Executive Officer

Good morning, J.

Jackie Bohlen -- KBW -- Analyst

I wanted to chat about deposits. Just really nice growth in the non-interest bearing accounts this quarter. I just wanted to see what some of the internal trends may have been there.

Mark Mason -- Chief Executive Officer

A lot of business deposit growth in the quarter and sort of across all markets, we are adding relationships and more deposit-only relationships. We have a specialty deposit group that we've been building over the last couple of years that's starting to get some traction. That's helped a great deal. The existing customers we're banking have retained some much more somewhat more kept cash as well if that's true across the industry right now.

We wish they're borrowing more but they are retaining more cash and I think that trend you see with our peers are also true here but we saw an acceleration this quarter. Very happy with it.

Jackie Bohlen -- KBW -- Analyst

OK. And then that -- I notice that you also had steady decline which those in combination obviously did great things for the mix in the quarter. Is that more a factor of repricing to intentionally run people out or you -- not run people out but reduce CDs or is it more people -- as their CDs are maturing, putting them into other accounts?

Mark Mason -- Chief Executive Officer

Well, I think it has more to do with the runoff of much, much higher priced money. And because we have reduced our rates farther than we would have historically, we're trying to retrain our customers somewhat. We were always not just a premium rate pair but at times we've let our markets when we were growing at 20% a year, and we needed to grow deposits at a much higher rate. Well, since we changed our growth expectations we have also lowered the -- our rates to be a lot closer to our peers.

And for some deposit -- CD deposit customers, who are only shopping absolute highest rates, there are better rates available whether it's online or otherwise. And so I think that that has helped us lower our CD balances in an effective way for what we really consider core customers.

John Michel -- Chief Financial Officer

And one other aspect, Jackie, is we do have some wholesale CD deposits that we utilize from time to time in the past. It's been a larger proportion of our balances. Some of the decrease has been in the wholesale side.

Mark Mason -- Chief Executive Officer

Brokered CDs.

John Michel -- Chief Financial Officer

Yeah. Brokered CDs.

Mark Mason -- Chief Executive Officer

Yeah, that's true too.

Jackie Bohlen -- KBW -- Analyst

OK. So, setting aside -- sorry, go ahead.

Mark Mason -- Chief Executive Officer

Just adding on to that, since they are substantially borrowing, as our deposits grow we reduce the need for overall borrowings.

Jackie Bohlen -- KBW -- Analyst

OK. And setting aside kind of the unknown about customer liquidity behavior and how that's going to fluctuate in the coming quarters. Would you expect kind of the core trends of having great shoppers shift out of business customers and lower cost deposits shift in? Will that continue?

Mark Mason -- Chief Executive Officer

That's our plan. Everything we're doing is trying to grow the number of relationships, grow the proportion of the relationships that we have. Look, we have been working for -- I can say now many years to convert which once was a very traditional thrift to a full-service commercial bank. And this ongoing change in composition of deposits is a primary part of that ongoing initiative.

John Michel -- Chief Financial Officer

And also I think on the consumer side, I think we are developing a really strong core base customers that are less price sensitive than may have been historically in the past for this bank. So I think that's another positive benefit on the consumer side is more stable customers that won't believe in you for a couple basis points.

Jackie Bohlen -- KBW -- Analyst

OK. Great. That's very helpful. And then one last one for me, and I apologize if this is a moot question.

But I'm just wondering if you could provide an update on where you stand with any subleasing plans that you might have? I know there's obviously a number of factors that influence if you're still looking to do any of that activity, but just wanted to update there.

Mark Mason -- Chief Executive Officer

Well, thank you for asking that question. You may remember the fourth quarter of last year, we took a pretty substantial charge about $6 million to accelerate our subleasing efforts. We were still hung over from our downsizing of the mortgage business. That was very successful.

We have led the market -- I guess you can use that term as the lowest price Class A footage available in Seattle since that time. And I'm happy to report that we have substantially completed that subleasing effort. Having said that, we are in the process of restructuring expectations of how much time our people spend in the office versus working remotely and moving some number of people to nonpermanent workspace, hotel in workspace. And we are expecting that that process will ultimately create some more excess space that we'll have to sublease.

Please don't ask me the metrics of that yet. It's defined clear, but we may have a little more to do good for it.

Jackie Bohlen -- KBW -- Analyst

OK. OK. That's a good update. And I mean, I would assume that when you think about the run rate that we discussed earlier in the call that all of this was taken into consideration for that barring the unknowns as kind of future subleasing?

Mark Mason -- Chief Executive Officer

Correct.

Jackie Bohlen -- KBW -- Analyst

OK. Great. Thank you for taking my question.

Mark Mason -- Chief Executive Officer

Thanks, Jackie.

Operator

The next question comes from Tim Coffey with Janney. Please go ahead.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Thanks. Good morning, gentlemen.

Mark Mason -- Chief Executive Officer

Hey, Tim.

John Michel -- Chief Financial Officer

Good morning, Tim.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Yes, Mark if I could just give more color on this potential securitization. The one from before year end, what's the probability that happens?

Mark Mason -- Chief Executive Officer

Today, I would say it's very good but I am not a predictor of interest rates nor spreads and interest rate spreads can be volatile and they can change quickly. So, I'd say it looks good right now. Our folks are doing a lot of work on it. Of course, the first securitization takes a great deal more work in establishing structures, relationships, and all that.

But it remains to be seen. So, we are we are hoping to get this accomplished. We think that it's an important structural maturity in our business and gives us a lot more flexibility. At times, gain on sale, they might recognize in securitization is larger than the whole loan market.

At times, it's not, right? And so that's a that's a significant consideration.

John Michel -- Chief Financial Officer

But the retaining the servicing is a very, very positive aspect of the securitization.

Mark Mason -- Chief Executive Officer

It's very important. The ability to retain our customers, the ability to sort of uncapped CRE, concentration concerns, global and borrower concerns, to be able to do as much business as possible with the large borrowers that you feel most comfortable doing business with it's a great opportunity.

Tim Coffey -- Janney Montgomery Scott -- Analyst

No, there's a ton of benefits to the program. You also mentioned potential earnings volatility in the course once the securitizations are completed. What's the magnitude of that volatility?

Mark Mason -- Chief Executive Officer

Well, you can think of it this way. If you look at last year's home loan sales we did them and each quarter, not exactly the same amount, but we did some in each quarter. If you took that total, let's say and only put it in the, let's say, second and fourth quarters, right, you would have volatility between the first, and third, and second, and fourth.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. And this how you're thinking about when you secure -- you do a securitization, would it be something like the, say, first and fourth quarters when a residential mortgage market is seasonally weak?

Mark Mason -- Chief Executive Officer

I think we're thinking more second and fourth quarters. But anything that may not turn out that way. If we, let's say, we were to close a securitization by the end of this quarter. It's more likely we would securitize in the first quarter of next year and then six months later.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. OK. Thanks. I was just trying to get a handle on the timing of that.

Mark Mason -- Chief Executive Officer

Yeah, to be more precise but [Inaudible]

Tim Coffey -- Janney Montgomery Scott -- Analyst

We'll figure it out as you start doing them. And then, John, just looking at the investment portfolio, it's been coming down average balances, period end balances for the last three quarters are at relative range where it's historically been, is there anything that you see in the investment market that you don't like that potentially you could see a buildup in cash or is it just really dependent on the normal things like increasing deposits and loan growth?

John Michel -- Chief Financial Officer

Yeah, I think it's more dependent on the latter in terms of our investment portfolio we utilize that almost exclusively as a liquidity portfolio to meet liquidity requirements. However, we have -- do a very good job of on a relative basis generating earnings out of it. But, I think going forward, you're going to see a relatively stable percentage of balance sheet in our investment portfolio. So as we grow, I would expect that to grow slightly consistent with the growth of mythology just to maintain our liquidity requirements and -- go ahead.

Mark Mason -- Chief Executive Officer

Just a footnote to that though. Inside of that portfolio is essentially a collateral portfolio, right? Because we do -- we have a fairly large derivatives book because of our level of hedging many of our agreements of course require collateral. And so inside of that book is a sub-portfolio, if you will, that is collateral qualifying under these various agreements. But in terms of total, John's right.

We were generally targeting 10% of assets. But sometimes we grow it a little. We've been lucky to grow it before -- while rates will higher, which has been nice but I don't think you're going to see us focus on growing that as a percent of assets.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK, great. Those are my questions. Thank you for the time.

Mark Mason -- Chief Executive Officer

Thanks, Tim.

Operator

And we have a follow up from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Just a housekeeping, PPP loans outstanding as of 6/30 and if you could, John, if you want to comment on the pace of forgiveness through year end.

John Michel -- Chief Financial Officer

Yeah. Well, I can tell you I just close a little bit. We have about $200 -- a little over $200 million worth of loans and about a little over $5 million worth of deferred fees. Our expectations, and we haven't always been right because we're not sure what the SBA does all the time.

Our expectation is that a majority of those will be forgiven by the end of the year. And so, that's our working model but that depends on two things the SBA processing, which seems to have picked up, and also our customers filing the forgiveness, which sometimes they tend to wait till the last second in going through that spot. So, our expectations is that most of that will be gone by the end of the year and that's --

Jeff Rulis -- DA Davidson & Co. -- Analyst

Thanks, John.

John Michel -- Chief Financial Officer

Was that the answer? I think that's the best answer we've got right now.

Jeff Rulis -- DA Davidson & Co. -- Analyst

Yeah, you got it. Thank you.

Operator

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 -- Chief Executive Officer

Thank you again for attending our call and for the great questions. We look forward to speaking to you next quarter.

Duration: 44 minutes

Call participants:

Mark Mason -- Chief Executive Officer

John Michel -- Chief Financial Officer

Steve Moss -- B. Riley FBR Inc. -- Analyst

Jeff Rulis -- DA Davidson & Co. -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Jackie Bohlen -- KBW -- Analyst

Tim Coffey -- Janney Montgomery Scott -- Analyst

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