Q3 2019 Earnings Call
Good morning, and welcome to the Luther Burbank Corporation third quarter 2019 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please press star zero on your telephone.
After todays presentation, there will be an opportunity for the for analysts covering Luther Bank looser Burbank Corporation to ask questions to ask a question you will need to press star one on your telephone.
Before we begin I would like to remind everyone that some of the comments made during this call may be considered forward looking statements. The company's Form 10-K for the 2018 fiscal year. Its quarterly reports on Form 10-Q , and current reports on form 8-K identifies certain factors that could cause the company's actual results to differ materially.
From those projected in any forward looking statements made this morning.
The company does not undertake to update any forward looking statements as a result of new information or future events or developments.
The company's periodic reports are available for the company or online on the company's website or the Fccs website I.
I would like to remind you that while the company's management thinks the company's prospects for continued growth and performance are good. It is the company's policy not to establish with the markets any earnings margin or balance sheet guidance.
I'd now like to turn the conference over to Simone Lagomarsino, President and CEO . Please go ahead.
Thank you Andrew Good morning, everyone and welcome to the Luca Burbank Corporation 2019 third quarter Conference call. This is Simone Lagomarsino, President and CEO and with me are Lorex guarantee you know, our Chief Financial Officer, and John current among our Chief Credit Officer.
Today, well discuss last quarter's financial results and I'll begin with a high level overview of the quarter.
Several market dynamics occurred during the quarter and provided us the opportunity to better position the bank.
These include.
For the inverted yield curve allowed us to enter into to pay fixed swap transactions that provided positive carry for the quarter.
Second the two rate reductions by the federal reserve provided the opportunity to lower our cost of deposits toward the end of the corner the impact of which will be reflected in future resolved.
Third the lease rates for retail space in office space have dropped and some of our markets due to increases in online purchasing which resulted in excess inventory due to the shake up some of the large box retailers. This provided us the opportunity to enter into two new leases at substantial future savings.
Fourth at the result of continued equity market volatility driven by uncertainty caused by the threat of trade wars, Brexit and the potential for an economic downturn, we were able to repurchase additional shares under our share repurchase plan at a discount to our book value, bringing total repurchases since inception of the plan to more than 1 million shares.
I will discuss each of these items and their impact will result in more detail below.
Let me start now with an overview of our earnings.
Net income for the quarter with 12.7 million or 23 cents per diluted common share compared to 11.7 million or 21 cents per diluted common share in the prior quarter.
Our third quarter earnings contained three nonrecurring items, the first and most significant item with a $1.1 million write off and amortize tenant improvements for two leased facilities.
The two other adjustments were 480000 dollar FDIC deposit insurance credit and its 78000 dollar gain on sale of loans.
Due to the sale of loans.
I will discuss each of these items in more detail in a few minutes.
Excluding these three nonrecurring items the adjusted third quarter 2019 earnings would have been at $13.1 million with an EPS of 23 cents per share as compared to our linked quarter adjusted earnings of 11.2 million or 20 cents per share.
The $1.9 million or 17% increase in adjusted net earnings compared to the linked quarter was primarily due to a 2 million dollar improvement in net interest income further supported by $950000 and reduction in our provision for loan losses, and partially offset by higher noninterest expense.
The 2 million dollar improvement in net interest income in the third quarter as compared to the linked quarter with largely attributed to the $1.4 million in interest income from our two more recently executed pay fixed interest rate swaps and secondarily, a 560009 dollar interest.
In loan prepayment fees.
The swap transactions offset a portion of the interest rate risk in our loan portfolio as well as took advantage of the inverted yield curve I immediately yielding positive interest carry.
The increase in loan prepayment fees was due to accelerated prepayments speeds in our multifamily loan portfolio, which increased to a speed of 13.9% in the third quarter from a rate of 10.3% in the second quarter.
Similarly prepayment speeds in our single family loan portfolio accelerated during the third quarter two rate of 35.6 person from a level of 31.9%.
However, due to federal regulations prepayment fees are generally not assessed on our single family residential loans.
[noise], primarily as a result at the aforementioned items our yield on interest, earning assets increased 11 basis points to 3.88% for the third quarter as compared to 3.77% during the prior quarter.
Excluding earnings from our interest rate swaps and the increase in multifamily prepayment fees collected the yield on our loan portfolio for the third quarter expanded by four basis points to an adjusted yield of 3.96% as compared to an adjusted yield of 3.92% during the second quarter of this year. This is generally due to the coupon on new loan originator.
And exceeding the rate on loan payoff. However in more recent months the interest rate differential between originations and pay offs has narrowed and the total coupon on the loan portfolio has remained relatively consistent.
And we'll provide more detail in her presentation later in this conference call.
Well our yield on real estate loans improved during the quarter the yield on our cash and securities portfolios, which represents 11% of our interest earning assets declined 14 basis points to 2.31% during the third quarter from 2.4 or 5% and the linked quarter and this is as a result of lower short term interest rates related.
To the Federal Reserve Board 50 basis point aggregate reduction in its target rate during the third quarter because the interest rates earned on our cash and securities portfolio or just a short term indices.
The short term interest rate declines provided some relief and the cost of our interest bearing liabilities, which increased only one basis 0.22, 0.2% during the third quarter as compared to a cost of two point, 19%, 2.19% during the linked quarter more specifically the cost of our interest bearing deposits increased two basis.
Thanks to 2.7%, but a third quarter from 2.05% during the second quarter. This is a significant improvement over prior quarters trends were in our cost of interest bearing deposits increased 11 basis points between both the first quarter of 2019, and the second quarter 2019 and from the fourth quarter 2008.
Team to the first quarter of this year.
During the third quarter, we began to reduce interest rates on our CD offerings as well as some of our non maturity deposits in response to the federal reserve lead.
For the third quarter, our net interest margin increased nine basis points to 1.84% from 1.75% during the linked quarter. We're very pleased with this performance as it marks the first increase in our net interest margin in more than one year.
The market fully anticipates that the federal reserve will reduce its target rate again on October thirtyth, well, we would expect to see incremental benefits and the cost of our deposit with future short term interest rate decreases the pace of the improvement in our cost of funds will lag at the federal reserve rate cuts, particularly where their target rate drops multiple time.
Within a short period of time.
Our ability to have our deposit repricing polar short term rate trends will be in part influenced by the timing of the maturities of our certificates of deposit as well as the actions of competitors.
Additionally, the benefit of short term interest rate decreases maybe offset by changes in the rate of our loan portfolio without reprieve in loan prepayments speeds and a steepening of the yield curve.
During the third quarter, we recaptured $500000 in loan loss provisions as compared to recording a charge for loan loss provisions in the prior quarter a 450000.
Or a 950000 dollar change quarter over quarter. The recapture was primarily due to the collection of a 200000 dollar loan loss recovery and a 2.8 million dollar reduction in our criticized loan balances and you end up the linked quarter.
Our eight triple to total loans coverage ratio of <unk>, 0.56% remains unchanged as of the ended the third quarter as compared to the prior quarter.
Non interest income was $993000 EUR $915000 when adjusted for a $78000 gain on sale of loans.
During the third quarter of 2019 compared to non interest income of $907000. During the linked quarter when similar dusted at four or $581000 of gains on sale of loans and equipment recovery during that period and the third quarter. We sold a 10.4 million dollar pool of single family 30 year fixed rate mortgages with a weighted.
Average loan to value ratio of 91%, although no further long sales are anticipated. This year remain we remain open to small transactions of this nature.
Noninterest expense was $16.1 million during the third quarter of 2019 and as previously mentioned included a one time at $1.1 million write off of capitalized tenant improvements related to our Manhattan Beach corporate office and our San Resell branch, although we had the option to renew both leases upon evaluating other available property.
He is the ability to reduce our annual occupancy is extension expenditures by more than 1.11.
By more than $1.1 million annually was a compelling reason to rig locate these facilities. Additionally, we believe that the new premises have better accommodations and are generally better situated for our customers and employees.
Noninterest expense for the third quarter also contained at 480000 dollar FDIC assessment credit.
As I'm sure you're aware the FDIC insurance fund reaches reached its required minimum reserve level to allow banks to begin using their small bank credit after recognizing the current quarters credit we have a remaining small bank credit balance of $914000, which we expect will be fully utilized by the first quarter of 2020.
Assuming that there's no significant change any FDIC insurance fund levels.
Noninterest expense as adjusted for those two unusual items increased by $710000 in the third quarter as compared to the linked quarter predominantly due to a decrease of $740000 and capitalized compensation expense directly related to a 75.1 million dollar or 16% reduction in loan origination volume during.
<unk> as compared to the linked quarter.
Our noninterest expense to average assets ratio and efficiency ratio continue to compare very favorably to the industry and measured.
0.9% and 47.9% respectively for the third quarter 2019.
Now, let's turn to the balance sheet our assets at the end of September Thirtyth 2019 totaled $7.2 billion, an increase of $224 million or 3.2% year to date the.
The growth in assets was primarily attributed to 128.9 million dollar increase in real estate loans and a 76 million dollar increase in cash from the prior year end during the third quarter, our loan portfolio decreased by $7.2 million chiefly due to elevated loan prepayments.
During the current quarter, we originated $382 million as long as compared to volume of $457 million and $312 million and the second in first quarter of 2019, respectively. However, our annualized pre payment for all loans increased to 20.7% for the third quarter from 17.7% and third.
18.7% for the second first quarters, respectively.
Based upon feedback from our single family and income properties loan sales teams, we believe that the increasing trend in prepayment activity is attributed to the continued low long term interest rates as well as competition for loan growth in our markets.
Based on the loan repayment activity experienced year to date in the prolonged period with the flat and or imperative yield curve, we've revised our growth expectations since the prior quarter and now expect asset growth of 3% to 5% for the 2019 calendar year.
Our credit quality remains strong with nonperforming assets to total assets of 0.18%.
And nonperforming loans increased by 1.3 million in the third quarter compared to linked quarter.
The increase in nonaccrual loans, which represented by four small single family loans made to to borrowers based on original appraisals no losses are currently anticipated on these four loans.
Of our nonperforming loans totaling 12.9 million at September Thirtyth, 2019, 21%, 21% by balance are paying as agreed.
We routinely evaluate our delinquent loans for indications of potential negative credit trends at September Thirtyth, we had five accruing loans with a total principal balance of $2.6 million that were 30 days behind and no accruing loans that were 60 days delinquent.
Of these five loans three have already made their payment or paid off and are now correct.
During the third quarter, our retail deposits increased by $251.6 million, while our broker deposits declined by $124.1 million approximately 80% of the current quarter's growth in retail deposits was achieved in our business accounts, particularly within our tenthirty when exchange vertical while 20% or $49 million.
The growth was gathered by EUR 10, West coast branches.
Decline in our wholesale deposit balance was purposeful as we ran off some of the excess liquidity, resulting from strong retail deposit growth.
At September Thirtyth 2019, our loan to deposit ratio with 116.7% as compared to a level of 119.7% at the end of the linked quarter.
Both the banks and companies capital ratios remain strong and are well above the minimum levels required for bank regulatory capital purposes.
The company's ROI in our away during the current quarter were 0.71% and 8.4 or 5%, respectively compared to 0.66% and 7.83% during the prior quarter.
Excluding the impact of nonrecurring items discussed above our current period, ROI and our or we would have been 0.73% and 8.71% respectively compared to prior quarter adjusted amounts of 0.64% and 7.55% respectively were pleased to report than October 20, Threerd on October 20, Threerd 2000.
19, the board of directors declared a quarterly cash dividend dividend of 5.75 cents per common share. The dividend is payable on November 14, 2019 to shareholders of record as of November November 4th 2019.
Also on October 20, Threerd 2019, the board of Directors approved a one year extension for the term of our stock repurchase plan, which will allow the company to continue its share repurchase activity through December 30, Onest 2020, since the inception of a stock repurchase plan, which began in August of 2018, we have repurchased 1 million 40.
4000 shares at an average price of $9, an 85 cents per share, reflecting an 8% discount to our tangible book value.
We have approximately $4.7 million remaining of the $15 million that was originally set aside for share repurchases and we will continue to evaluate repurchase opportunities as appropriate.
Finally, given our banks specialty and multifamily lending I'd like to touch briefly briefly on the California State wide rent control ordinance that was passed in September 2019, the new law, which goes into effect January one 2020 for most multifamily housing built 15 years or more of a year ago makes it illegal for a landlord to increase attendance.
Rent by more than 5% plus inflation or 10% whichever is lower on an annual basis.
We believe that this law allows for reasonable annual rental rate increases and unlike some rent control laws and other states does not place undue restraint on California multifamily property owners and we do not believe that this will negatively impact the values are cash flows of the collateral underlying the loans in our multifamily loan portfolios.
As it pertains to our loan portfolio.
As it pertains to our loan portfolio, our originations at origination we underwrite our income property loans to the lower of current actual rents or market as derived from the appraisal and now I'll turn it over to Laura will speak a little bit more specifically about some of the trends in our margin and other loan and deposit portfolio.
And I'll be relatively brief.
As previously noted the yield on our loan portfolio improved four basis points from the linked quarter, even when excluding the interest income from the swap transaction and greater level prepayments.
It was attributed to a growing coupon on our real estate loan portfolio, where the rate on.
The loan origination volume has generally outpaced that coupon on loans prepaying.
As reported in our last quarters earnings call due to the decline in the five year Treasury rate during 2019, which is correlate it to our real estate loan offer right.
Spread between loan originations and payoffs continues to impress.
The weighted average rate on new loan volume during the quarter was 4.26%, while the weighted average rate on them curtailments and pay off for the same period was four point in 22%, resulting in a spread of only four basis points.
Compares to a second quarter weighted average coupon on loan originations of 4.44% and a weighted average rates on payoffs and pay down.
4.33% and a corresponding spread of 11 basis points.
Consequently, the weighted average rate on our loan portfolio increased by only one basis point at the end of third quarter, two four point, 19% as compared to a weighted average rate of four point, 18% at the end of the prior quarter.
Because 89% of our loans in the portfolio Arts fixed term portion of their hybrid arm period.
And given that our new loan origination rates are approaching the overall loan portfolio rates.
Absent any steepening in the mid to long term treasury rates, our expectation is that the coupon our loan portfolio will remain relatively unchanged in the near term.
As we think about deposits recent reductions in short term market rates.
Have translated to improvements in the cost of our deposit.
The ending rate on our retail deposit portfolio decreased by 8.8 basis points to a level of 1.98% at September Thirtyth.
Versus a measure of 2.06% at June Thirtyth.
As with the expect it was short term brokered deposits the cost of our wholesale deposits declined more rapidly and fell by 31 basis points to a rate of two point, 10% at the end of the third quarter as compared to a rate of 2.41 person at the end of the second quarter.
Our time deposits represent 67% of our deposit competition composition looking forward one quarter.
1.04 billion or 29% at a time deposit portfolio is subject to renewable during the next three months.
527 million of this balances represented by wholesale deposits with a weighted average interest rate of two point, 11% and were current pricing is in the 1.9% to 2% range.
The remaining 560 million of this balance is comprised of retail term deposits with a weighted average interest rate of two point, 21%.
This compares to an average rate on new and renewed retail Cds of one point, 98% during September 2019.
Ethanol and already noted while additional short term interest rate cuts may benefit the cost of our funding it's anticipated that that our deposit beta will slow it's the federal reserve target rate decreases are rapid succession, giving the CD concentration in our deposit portfolio and the difficulty of adjusting customer rates to quickly wall.
Continuously growing deposit balances.
Additionally, all of our FHLB advances at September Thirtyth totally 977 million a fixed rate term borrowings with an average interest rate of 2.3% and a weighted average trumps maturity at 2.6 year.
As a result of both short term and long term decreases in market interest rates at the end just a third quarter as compared to the end of the prior quarter as well hedged instruments hedge instruments executed during that period, our interest rate risk has declined substantially.
Net interest income and economic values equity decline as a result of a 200 basis points parallel interest rate shock have them crews to decreases of 2.4% and 7.8% respectively. At the end of this current quarter from decreases of 7.4% and 13.5% respectively. At the end of the linked quarter.
While the net interest advantage of the pay fixed interest rate swaps on our books will lessen if and when short term interest rates continue to decline, we anticipate that our liability sensitive balance sheet will benefit from the same market change.
That concludes our prepared remarks and at this time last the operator open the line question.
Thank you.
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I don't know first question comes from the line of Matthew Clark with Piper Jaffray. Your line is now open.
Good morning. This is Bob shown on from Matthew Clark, How you doing.
Hey, how are you doing method.
Oh, I'm just kind of wanted to talk about the margin.
Specifically around the swap income that we saw this quarter.
Could you guys give some more color too.
The swap that you put in place maybe the maturity of them and what we can expect.
Forward.
Yes, thanks for asking and so during the quarter I think actually started in late June and then added another one in August we.
The two separate swaps, both notional amount of 500 million.
They have a a weighted average pay fixed rate of 1.438%.
And they have a two year maturity from inception.
Awesome. Thank you and then shifting gears I'm talking and looking at share repurchases this quarter it looks like they slowed.
Hello.
<unk> a function on the stock price being higher and can you talk about appetite for share repurchases going forward. Thank you.
Ah, Yes, you're correct. It definitely was the result of higher stock prices.
And as noted in our presentation. The board recently extended our stock repurchase plan. So we continue to look forward utilizing the remain balance of our authorized share repurchase in upcoming quarters.
Okay. Thanks.
Thank you and as a reminder, ladies and gentlemen, if you have a question. Please press star one.
Our next question comes from the line of Little Cool with KBW. Your line is now.
Hi, good morning someone Laura thanks for taking my questions.
Morning.
Just wanted to talk about kind of the deposit mix during the quarter I'm, sorry, you guys were able to lower the the money market rates it looks but looks like you about by 4%, but you guys were still able to grow those balances just wanted to see kind of the outlook for for the non maturity growth and the deposit portfolio.
So kind of going forward.
Most of our non maturity deposits come and via our business line verticals.
And during the quarter, we saw most of our growth and Tenthirty on exchange accounts.
And as you know those come and go out a little bit that we continue to grow that portfolio period over period.
Does that refer to your question.
Yeah, no that's not that's that's perfect. Thanks, and then just kind of.
On the margin relative to that just you guys. It said that.
Let's say, it's going to be a little bit more lagged in terms of the the funding costs repricing and I just wanted to make sure I got that the numbers right for the.
You said 1.04 billion should be renewing and the next three months correct.
Correct.
And the weighted average rate on that was it was closer to the wholesale the to 11 versus the retail the to 21.
Right Okay.
Okay, Gotcha, and and I think you said that the new wholesales are coming on it.
2.1%, so there should be.
Major pick up in terms of.
Oh, no new wholesale it's closer to one nine frankly and dropping as we're getting closer to the snacks that meeting on raising that dropping.
Okay Gotcha.
And.
Just kind of pairing that with in terms of FHLB borrowings.
Would you be more inclined to take on less kind of structure and shorter duration. FHLB is then Paul will then kind of renew those time time deposits or how do we how should we look at that going forward just in terms of the mix shift on the balance sheet.
Considering it's more like two and we believe that retail deposits are far more valuable than FHLB wholesale borrowings right and there.
You'll see the utilized but if we can continue to grow our retail relationships, we would prefer to do that and I think with the higher level of prepayments that were seen we should be able to keep the growth in loans and deposits equally balanced.
Okay.
That's helpful. And then just lastly, just wanted to make sure that I got the numbers right. So with the them. The office relocation you guys are expecting 1.1 million annually or is that kind of amortized over the life of the new lease.
Yeah, I'll mention that so it is a little confusion, we took a 1.1 million dollar charge, which is a onetime charge to vacate the two offices that were vacating and we will achieve a 1.1 million dollar annual improvement in the expenses going forward.
The two numbers were saying, but it doesn't mean [laughter] kind of going forward.
And then just.
Just one more on credit you guys said you guys have.
It was the approximately 900 remaining credit for the with the FDIC such a cover couple more quarters I'm not mistaken.
Okay.
Then it should return kinda back to the normalized well expecting that the the insurance fund is.
It is not still fold up.
Yes, and it looks like based on the recent instructions at the FDIC release that will probably Rex nice two quarters in the fourth quarter. This year.
Okay.
Perfect I'll step back thank you.
Thank you book.
Thank you and as a reminder, if you have a question. Please press star one.
And I'm showing no further questions at this time, so with that that completes our call today over quite a copy of the coal will be available on the company's website. Thank you for joining us.