Q4 2019 Earnings Call
Should you need assistance. Please press Star then zero on your telephone after today's presentation, there will be an opportunity for them for analysts covering Luther bring Burbank Corporation to ask questions to ask a question you'll need to press star one on your telephone before we begin I would like to remind everyone that some of the car.
It's made during this call maybe 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 cost the companys actual results to differ materially.
From those projected in any forward looking statements made this morning.
But he does not undertake to see any forward looking statements as a result of new information for future events or developments.
Companies periodic reports are available from the company or online on the company's website or the Fccs website I would like to remind you that while the company's management thinks the company's prospects for performance are good. It is the company's policy not to establish with the markets.
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 very much good morning, and welcome to the Luther Burbank Corporation 2019 fourth quarter Conference call.
Among the Martino, President and Chief Executive Officer, and with me are Lord parents, you know, our Chief Financial Officer, and John card, among our Chief Credit Officer.
Begin with our earnings.
Net income for the quarter with $12.5 million or 22 cents per diluted common share compared to $12.7 million or 23 cents per diluted common share in the prior quarter.
Excluding a 643000 net after tax impact of especial FDIC assessment credit recognized during the fourth quarter adjusted fourth quarter 2019 earnings would have been $11.8 million with any P.S. of 21 cents per share as compared to our linked quarter adjusted earnings at $13.1 million or 20.
Three cents per share.
The 1.3 million dollar increase decrease in adjusted net earnings as compared to the linked quarter. Adjusted net earnings was primarily due to a 1.5 million dollar greater provision for loan losses, and 836000 of higher adjusted noninterest expenses, partially offset by 577000 improvement in net interest income.
I will address each of these items in more detail in a few minutes.
Annual net income for 2019 was $48.9 million or 87 cents per share representing 8.4% growth in net earnings as compared to fiscal year 2018, net income of $45.1 million or 79 cents per share.
The improvement in earnings from the prior fiscal year was primarily attributed to a 3.3 million dollar increase in net interest income principally from average, earning asset growth exceeding net interest margin compression and a 2.4 million dollar decrease in provisions made for loan losses.
Net interest margin compression that began in the second quarter of 2018 continued during the first half of 2019 other cost of interest bearing liabilities increased more quickly than our yield on earning assets primarily as a result of multiple short term rate increases during 2017 in 2018.
The higher level of loan loss provisioning. During 2018 was primarily due to 21.6% loan growth in the portfolio during 2018 as compared to 1.6% loan growth in the portfolio during 2019.
I'm pleased to report and improvement in our net interest margin for the second consecutive quarter. Our net interest margin for the fourth quarter 2019 increased by five basis points to 1.89% as compared to a margin of 1.84% during the linked quarter.
This increase is primarily the result of lower funding costs into a lesser extent decreases on the balances of our interest earning assets an interest bearing liabilities.
Expanding on the composition of our fourth quarter net interest margin. The 577000 dollar increase in net interest income as compared to the third quarter was primarily attributed to a decrease in the balance sheet decreased in the balance and cost of interest bearing liabilities and $78.7 million and nine basis points respectively.
Which was partially partially offset by a decline in the average balance in yield of our interest, earning assets $63.5 million and four basis points respectively.
Average interest, earning assets declined during the fourth quarter, mainly as a result of loan paydowns and payoffs exceeding no new loan origination volume, causing a 32.7 million dollar decrease in our average loan balances.
Although we added over $412 million of new real estate loans to our portfolio during the quarter or 7.9% increase in new production as compared to our linked quarter. The high prepayment rates, we experienced during the third quarter have not abated.
Our loan portfolio CPR was 23% in the fourth quarter as compared to a CPR of 21% for the third quarter 2019.
Hi, prepayment levels are predominantly a function of refinancing activity exacerbated by the steep decline in long term treasure rates during 2019, which decreased by roughly 80 to 90 basis points at the five year tenure.
During the fourth quarter of 2019, we established an express loan modification program for our existing loan customers to mitigate loan pay offs and today, we protected approximately $37 million in loans from early prepayment.
During the recent quarter, our yield on loans declined by one basis point to 4.07% largely impacted by six basis point reduction in our single family loan portfolio to 3.51% from the prior quarter level of 3.57%.
Our yield on our multifamily loan portfolio remain unchanged during the fourth quarter of a level at a level of 4.31% despite being impacted by $874000 less of interest rate swap positive carry as compared to the prior quarter immoral will speak more to the fourth quarter impact to swap activity and a few months.
Yes.
At December 31st 2019 single family loans, and multifamily loans represented 32% and 64% respectively. Our total loan portfolio.
During the fourth quarter, we reduced excess liquidity on the balance sheet. The average balance of cash investments decreased by $30.8 million as compared to the linked quarter and the yield on cash and investments declined by 24 basis points to yield up 2.5% for the same period as a direct result of short term market interest rate. These.
Decreases.
Although average interest bearing liabilities decreased by $78.7 million during the fourth quarter. The decline was entirely due to less reliance on wholesale funding.
We utilize cash flow, resulting from elevated loan prepayments to reduce broker deposits and FHLB advances. The average balances these declined by 145.4 million and $32.1 million respectively.
During the fourth quarter as compared to the third quarter of 2019.
Conversely for the same period or average retail deposits increased by $98.2 million and we reduced the cost of interest bearing deposits by 10 basis points during the fourth quarter to a level of 1.98%.
This reflects the significant improvement as compared to the linked quarter result were in our cost of interest bearing deposits increased by two basis points.
During the fourth quarter of 2019, we recorded a loan loss provision of $1 million as compared to 500000 dollar recapture of loan loss provisions in the third quarter.
The 1.5 million dollar increase in loan loss provisions with attributed to a for 4.6 million dollar increase in criticized loans during the period as well as a specific provision made for one nonperforming single family residential loan.
The increase in criticized loans is due to the net movement of $12.9 million in loans to special mentioned status during the quarter, primarily related to issues with delinquent property taxes were collateral damage. At these loans are not considered impaired our general valuation allowance methodology calls for a higher loan loss allowance regardless.
So collateral support and or insurance coverage.
At the same time, the balance of our classified loans and our nonperforming loans decreased $8.4 million and $6.6 million, respectively. During the fourth quarter from the prior quarter.
These loans were cheaply identified as impaired prior to the fourth quarter without related loan loss allowance levels.
The current quarter decrease in classified assets was predominantly a couldn't attributed to the sale of one nonperforming $6.6 million multifamily loan at a price equal to the pull indebtedness due on the loan.
The individual single family loan Reserve previously mentioned was established as a result of our concerns regarding the potential for collateral devaluation. During what is expected to be a protected work out period due to an impending divorce and possible bankruptcy of the borrower.
We continue to closely monitor the credit quality of our entire loan portfolio and I'm not noted any significant deterioration in credit trends.
Our delinquent loans are leading indicator routinely evaluate.
At December 31st we had five accruing loans with a total principal balance of $5.4 million that were 30 days behind and one accruing loan with a balance of $690000 that was 60 days delinquent I've been six loans for have reinstated one is an escrow with an anticipated 45 day close and weather.
One with the remaining balance of $10000 is expected to pay off shortly.
Our allowance for loan and lease losses increased by $1.1 million over the linked quarter.
Yielding an allowance for loan and lease losses to total loans coverage ratio of 58 basis points or two basis point increase as compared to the linked quarter.
Finally, our third notable difference in adjusted earnings as compared to the prior quarter with an increase in adjusted noninterest expense.
As previously noted and similar to last quarter, our fourth quarter earnings reflected a nonrecurring item related to the FDIC small bank assessment credits made available to us this year.
During the recent quarter, we recognize the remaining balance of this credit or pre tax benefit of $914000. After excluding this credit our adjusted non interest expense was $836000 greater in the recent quarter as compared to the linked quarter, primarily due to an increase of $394000 in marketing expense.
Just related to deposit gathering efforts.
Competition for retail deposits continues to be very active during the fourth quarter and based on recent experience. It is our expectation that deposit competition will companies continue to be intense as we began 2020.
Other contributing factors to the increase in noninterest expense during the quarter were $235000 a greater other operating cost primarily associated with repair and maintenance outlays due to the relocation of our San Resell branch and our Manhattan Beach administrative office during the quarter as well as higher compensation costs of 180000.
Others, reflecting on average an increase of five fulltime equivalent employees quarter over quarter and the impact of annual merit adjustments on our vacation accrual liability.
Our noninterest expense to average assets ratio and efficiency ratio continued to compare very favorably to the industry and measured 87 basis points in 45.2%, respectively for the fourth quarter of 2019, Immeasured 88 basis points and 46.9% respectively for the calendar year 2019.
Looking forward into the current year and based on our strategic initiatives. We would expect are noncash interest expense to have a quarterly run rate of between $16 million and $16.5 million.
Now what turned to the balance sheet.
Our assets at the end of December 31st 2019 totaled $7 billion, an increase of $109 million, reflecting 1.6% growth for the year, which was predominantly due to similar 1.6% increase in our loan portfolio.
Although annual loan growth excluding loan sales completed during the year would have been 2.8% the level of growth is more moderate than expected primarily due to higher than anticipated loan prepayments.
For the year ended 2019, we originated 1.6 billion in new loans compared to 2 billion during the prior year or 23.6% decrease comparatively but here into 2019 principal reductions and pay off totaled $1.4 billion as compared to 959 million during 2018 that were 44%.
Increase.
The decline in loan originations year over year is primarily due to two factors first we implemented more discipline loan pricing as compared to prior years based on our desire to widen margins on incremental asset growth. Additional additionally, incremental changes have been made to our loan products over the year to tighten credit standards, given what has now been the longest period backing.
Comic expansion.
New loan volume related to single family production has also been hampered by the 2019 market rate environment with a very flat yield curve that is made that 30 year fixed rate loan product an attractive attractive substitute for the five year arm products that we offer.
Additionally, we've seen a return of a healthy nonqm securitization market, creating greater competition for Nonqm jumbo loans.
As previously discussed the significant drop in interest rates in the flat yield curve has also been the predominant catalyst for the acceleration in loan prepayments and our single family portfolio.
Based on changes in the yield curve subsequent to December 31st wherein the curve is flattened further and the five year Treasury has declined another 25 basis points. We believe that loan prepayment activity will continue to be a challenge in the near term and we currently expect our asset growth to be in the range of 3% to 5% for 2020.
During 2019 or asset growth was entirely funded by retail deposit growth, which increased by $285 million or 6.3% since year end 2018.
Deposit balances primarily increased in our business product lines, which are tied to newer initiatives that we started over the past few years.
We continue to emphasize cross selling deposit products to our long customers and today, we have accumulated approximately $64 million in deposit balances with year end weighted average interest rate of 95 basis points from this channel.
Our loan to deposit ratio was 119% at December 31st 2019, as compared to 123% at yearend 2018.
Both the banks and companies capital ratios remained strong and are well above the minimum levels required for bank regulatory capital purposes.
The company's our away and our OE during the current quarter were 70 basis points, and 8.14%, respectively compared to 71 basis points, and 8.4 or 5% respectively. During the prior quarter, our our away and our we were 69 basis points and 8.1%, respectively for 2019 compared to 70 basis points.
7.96%, respectively for 2018.
We're pleased to report that on January 28, 2020, the board of directors declared a quarterly cash dividend of 5.75 cents per common share dividend is payable on February 18 to 2020 to shareholders of record as of February seven 2020.
Although our stock repurchase plan remains in place no shares were repurchased during the fourth quarter.
Since inception, other plan, which began in August of 2018, we have repurchased 1.044 million shares at an average price of $9, an 85 cents per share.
At the $15 million that was originally set aside for share repurchases. We have approximately 4.700 million remaining and we will continue to evaluate we purchase opportunities as appropriate and now I'll turn this over to Lora, who will speak a little bit more specifically the trends in our margin in our loans and deposits.
Uh huh.
That's not discuss the yield on our loan portfolio declined one basis point in the linked quarter. Jeremy three main factors contributing to this change first as reported in prior quarters earnings call and illustrated on page 15 of our slide deck. The coupon on new loan volume has generally decline since the fourth quarter of 2018 as.
Resulted declines in the five year treasury rate and competitive pricing.
During 2019, the weighted average rate on new loan originations dropped 20 basis point to 4% to 4.35% that's compared to a weighted average coupon of 4.63% for 2018.
At the same time, the interest rate on principle repayments have trended upward and for the past five months.
Groupon on loan prepayments has exceeded the average rate on new loan production.
During 2019, the weighted average coupon on loan payoff increased 26 basis points.
The four point, 27% have compared to a weighted average rate of 4.1% for 2018.
Highlighting the most recent trends during the fourth quarter 2019, the weighted average rate on loan repayment for four point, 40%.
Or 25 basis points greater than the weighted average coupon on new loans at four point, 15% the same period.
The third factor contributing to a decrease in loan yields in the fourth quarter as compared to the prior quarter is $874000 decline and positive interest carry related to interest rate swap hedging our multifamily portfolio.
The decrease in swap income is due to reduction and the average federal funds rate during the fourth quarter, which decreased to one point, 55% at December 31.
From a level of 2.04% at September Thirtyth.
As a weighted average pay fixed rate of our one point I for $1 billion and interest rate swaps is one point 44%.
In terms of men's remain in the money and currently have a positive carry of approximately 11 basis points.
Given the impact of lower market rates in the very flat yield curve on the loan portfolio and without any steepening in the curve to a more normalized slow.
We would expect the yield on our loan portfolio to remain under pressure and be subject to small decreases over the upcoming fiscal year.
Moving to deposits.
Short term rate reductions in the second half of 2019 translates improvements and the cost of funding.
The ending rate on our retail deposit portfolio decreased by three basis points to a level one point, 95% at December 30, Onest versus a measure of one point 98%.
At September Thirtyth.
The cost of our wholesale deposits declined more rapidly and fell by 30 basis points to a rate of one point, 80% at the end of the fourth quarter as compared to a rate of two point, 10% at the end to the third quarter.
At December 31st 797 million of our retail Cds or.
Or 26% of the retail time deposit portfolio with a weighted average rate of 2.37% are subject to renewal during the first quarter 2020.
Based on current competitive pricing, we would expect to retain sun.
And or attracts new time deposits at a rate approximately.
Next me 2%.
Additionally, the entire balance of our wholesale deposits or 416 million at year end with a weighted average rate of one point, 80% are subject to renewal during the first quarter, where market pricing is currently one point 70%.
Given the nature of our deposit portfolio of which 67% is comprised of time deposits. We would expect to see some huge improvement in deposit funding costs over the upcoming year.
And combining our loan yield and deposit cost forecast and in light of the market rate movement and competitor activity that we have witnessed year to date.
I mean, no changes to today's yield curve, we would expect small improvements.
I have one to two basis points.
Third quarter, and our quarterly net interest margin.
Finally, a summary of our interest rate risk position can be found on slide 22, and 23 of our investor deck.
As a result at the flat yield curve watered asset growth and hedge position our interest rate risk remains at low levels and is comparable trust measures at the end of the prior quarter.
Net interest income and the economic value of equity decline as result of a 200 basis points parallel interest rate shock measure 4.3, and 7.9% respectively. At December 30, Onest 2019.
That concludes our prepared remarks and at this time, we'll ask the operator to open the line for questions.
[noise] certainly once again, ladies and gentlemen be question at this time. Please press Star then one on your Touchtone telephone. Our first question comes on the line of Jackie Bohlen from KBW. Your question. Please.
Hi, good morning.
Good morning, Jackie.
[laughter] just given the higher prepayments on that I know that you discussed that you expect to see some low pressure throughout the year on so that's understood, but just given the high prepayments and how quickly the loan portfolio is turning over does that move you closer to a point of stability Badness you know, it's a pretty much.
Payments were a little bit slower if we saw an uptick in rates.
[laughter] ticking.
If if the uptick in rates is in the five to 10 year.
Center of the yield curve that wouldn't [laughter], our overall loan yield.
If the uptick in rate for term.
That really has little effect.
Given primarily the fact that our loan portfolio within their hybrid period, but certainly in the in the five year on longer if.
As a result mortgage rates go up 30 year mortgage rates go up we would expect a slowdown in the prepayments of our single family portfolio for sure.
Okay, and I I should have clarified I'm, sorry, I met longer term might not shorter term I'm just trying to get the the question pulled on loan yields and when you when we might see some more stabilization there just given where prepayments are out today.
And then.
In terms have been the marketing that deposit generation in the higher marketing cost that you have associated with that with that one time effort in the quarter or is that going to be just ongoing efforts to continue to improve says that there's posit strategy since you bought ongoing.
It'll be ongoing and our goal is to really continue to focus on our retail deposits and until at least in the near term within the next year, we would expect ongoing deposit.
Marketing expenses.
Okay and that those are they related to.
It campaigns that you have or is it just a larger efforts trout, yeah, just threw out your marketing.
They're they're really related to several separate campaigns one more in the business lines, one more for retail deposits in the branches.
So there are several paying several things going on.
Okay and are those campaigns rate driven or is there another incentives I think you're working with to gather deposits.
We have a marketing programs that will be doing throughout the year that will be bundling deposit products focusing on deposit products that are not just rate driven but ah that are.
Transaction products as well.
Okay. Okay.
Thank you that's helpful.
And then just one last one for me I'm in terms, if that's the 16 to 16 and a half million guide I'm, assuming that the FDIC expense normalized says I and the marketing expense remains near its current level, what kind of an uptick are you expecting in compensation in one can you just related payroll taxes.
And then <unk> any other factor that's in there.
There's always a bomb I can't give you a specific number but I would expect my Q1.
Non interest expense to be higher than Q2 for that purpose.
Okay, and the range, you're not saying he was hoping to the 16 five then the 16.
Okay.
Okay.
Great. Thank you I'll step back.
Exactly.
Thank you. Our next question comes on line, Gary Tenner from D.A. Davidson Your question. Please.
Hi, Good morning. This is actually just heard on for girls going.
Good morning.
Morning.
My first question. It gets regarding Cds is it possible you could walk you through a CD maturity and renewal rates by quarter for 24.
Little bit hard to hear you, but yeah, right. So I like where do you see a first quarter. It was about 2.377 and our second quarter of 2020 will be somewhat higher but I don't have a specific number for you.
Okay.
I really haven't higher priced Cds maturing in the first half of the year that we would anticipate that will be pricing down.
Okay. Okay.
Thank God for Greg.
My next question.
So.
As far as the planned all secure window branch what is the quarterly expense run rate you're planning on that.
So to and I apologize, we're having a little bit difficult time, I'm hearing you James but I think you asked for the El Segundo branch, what's the quarterly cost for that.
Yeah Court by saying, it's it's one of our newer branch models and it's we're its a very small footprint like.
I'm very like half of what are our other branches are at size wise and we did that really more to two do a a kind of worked down the track of a different model.
I will say and let me, let Laura respond more specifically, but it is we've included the cost of that in the $16 million to $16.5 million that we've.
Set out there as the range of our noninterest expenses for the year quarter by quarter 16, we could see by quarter by quarter in that range for the here and I don't know if you.
Yes, I was thinking about renter personnel will sell stuff it with three to four people at that branch. So overall personnel and that's a month had square footage is not very large rental expenses not terribly significant.
Okay, perfect and then.
Last question before I hop off here, so as far as you're good ones diesel in fact is there any color you could provide on that.
I can tell you that each quarter, we are running what we expect to be our Cecil model and for us of course, it's not [noise].
Limited until 2023, but as we look at the result.
It is within our current level of reserves or a total allowances that we have so we I think and.
I would say as expected for a real state lender, we're not seen any significant increases in a peaceful estimate.
Okay. Thank you for taking my question.
Thank you James.
Thank you I'm just asking to be question answer session of today's program I'd like band the program back diminishment for any further remarks.
Well. This concludes our fourth quarter earnings call. So thank you very much for joining us and good morning, everybody. Thank you.
That completes our call today are recorded copy over call will be available on the company's website. Thank you for joining us.