Q1 2020 Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for patients.
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Good morning, and welcome to the looks to Burbank Corporation first quarter 2020, <unk> earnings Conference call. All participants will be in listen only mode should you need assistance. Please press star zero. After today's presentation, there will be an opportunity for the for analysts covering the lucid Burbank Corporation ask questions asked the question.
You'll need to press star one before we begin I'd like to remind everyone that some of the comments made during this call maybe considered forward looking statements. The company's form 10-K for the 29 fiscal year. Its quarterly reports on form 10-Q and report.
On form 8-K identifies certain factors that could cause the company's actual results could differ materially from those projected in any forward looking statements made this morning.
Company does not undertake to update any forward looking statements as a result, I'm, new information or future events or developments. The company's periodic reports are available for the company or to online company's website or the Fccs website.
Let's remind you that while the company's management thinks the company's prospects for formats are good. It is a company policy not to established with the markets any earnings margin or balance sheet guidance.
Now, let's turn the conference over to your Speaker today, Simone Lagomarsino, President and CEO. Please go ahead.
Thank you very much good morning, and welcome to the Luther Burbank Corporation, 2021st quarter Conference call.
This is Simone lagomarsino, President and CEO and with me today, our Lord parents, you know, our Chief Financial Officer, and John Hart, Among our Chief Credit Officer.
We're in the Mets have an unprecedented and challenging economic environment, which is the result of the carpet 19 pandemic.
Our primary focus over the past two months has been the health and wellbeing of our employees our customers and our communities. While also ensuring that we maintain a safety and soundness of our operations.
We believe that our strong liquidity in capital levels as one of our historical approach to credit quality, leading into this crisis positioned the company well to navigate our path forward during these uncertain times.
I will focus first today on our risk profile.
Over the past 36 years, we've been profitable every quarter, except the very first quarter of operations.
This consistent profitability throughout all economic cycles with achieved because we have secured maintaining a strong risk profile and credit standards.
These standards are reflected in the overall quality of our asset base.
At the end of the first quarter cash investments in real estate loans represented over 98% of our assets.
Our securities portfolio is almost entirely comprised of high quality liquid investments with little to no risk for impairment.
Our loan portfolio is 100% Realestate secured with an overall weighted average loan to value ratio of 59%.
Multifamily and single family residential real estate loans represent over 96% of our total loan portfolio.
Less than 4% of our loan pool bond portfolio is secured by nonresidential commercial real estate and we had minimal exposure to the market segments, most acutely impacted by the pandemic, including hospitality and retail and no exposure to energy or travel.
Additionally, and most significantly we have no exposure to see an island.
Granular breakdown of our nonresidential commercial real estate portfolio is available on page six of our presentation deck.
We believe that the residential real estate concentration in our loan portfolio and the lack of exposure to see an eye lending credit cards and auto loans provides a strong risk profile for the current circumstances and sets us apart from many of our peers in the industry.
The full economic impact of the carbon 19 pandemic. It's currently unknown. However, we think it is important to recognize that regardless of what lies ahead people will still need a place to live.
Additionally, the supply of how thing in our primary markets was not sufficient to support the demand leading into the pandemic and we do not anticipate that this dynamic will change as a result of a pandemic.
In early March in response to the Cabot 19 pandemic or incidence response plan was implemented.
We immediately began taking precautionary steps to protect our workforce and preserve our ability to serve our customers, including prohibiting employee travel enhancing routine sanitization of our branches.
And our corporate offices, and enforcing social distancing and other safety protocols.
We're pleased to report as a result of these actions that none of our employees has tepid tested positive for the virus today.
Our existing technology infrastructure with a few minor enhancements effectively accommodated and continues to accommodate approximately two thirds of our staff who are working remotely.
We implemented flexible employee schedules and reduced branch hours to ensure that our employees could be responsive to our customers work safely and balance their family needs and responsibilities.
We elevated and enhanced customer communications team via mailings and website posting to remind our customers about telephonics online and mobile options for transacting business.
We also encouraged our clients to exercise heightened awareness around cyber fraud, and particularly in relation to cope with 19 schemes.
Throughout this process, we have witnessed a significant change in branch foot traffic historically before them pandemic customers primarily conducted their transactions in person.
Now I think significant number of our transactions were handled over the phone.
I am proud to report that all of our branches remain open and as always when any deposit or long customer calls our bank during Christmas hours. They did not reach an automated system, but instead accompany representative answers the phone and it's ready to serve their needs.
To assist our borrowers who have been directly impacted by this health crisis, we've established a prudent customer friendly loan payment deferral programs.
Our program allow certain bar worth to the further monthly PMI obligations for three months or six month for borrowers in our first time Homebuyer program, where the scheduled maturity of the loan is equally extended and the deferred interest payments are capitalized to principal and repaid over the revised turn left alone.
As of April Thirtyth, we've received completed long payment deferral applications of 166 wells with principal balances totaling $253 million, representing approximately 4% of arc total loan portfolio balance through April Thirtyth, we completed modifications for 64 loans with.
The total principal balance of $85 million, representing 1.4% of our loan portfolio. Please refer to page eight of the presentation deck for more information regarding our kopec 19 payment deferral hardship program.
The forgone cash flows associated with the 166 loans that have provided completed applications is approximately $1.4 million per month and can be readily supplement it with our available liquidity resources totaling more than $1.9 billion at March 31st as shown on page five of our presentation.
Rick.
Based on the flexibility afforded by section four O. One three of the recently enacted Carrots Act the vast majority of lung customers, who receive cope with 19 modification well how their payments that is reflected as current and we'll be well continue to accrue interest monthly in our financial records.
What do you expected each loan that is approved for quite a bit 19 modification will be added to our internal watch list and will be subject increased monitoring.
It is not clear whether applications for credit relief will increase or subside over the coming months. The only only anecdotal evidence scatter today does that call volume inquiring about our payment deferral program has decreased over the past two weeks.
We believe that our desire and willingness to support our borrowers during this difficult time will reinforce our culture of providing superior customer service both in good times and in bad without materially impacting the credit supported these loans considering the generally well secured nature of the portfolio as evidenced by a relatively low loan to value ratios.
We elected not to participate in the Paycheck protection program, given the nature of our customer base, which includes only a minimal number of small business customers. However, our company remains committed to providing essential residential real estate lending services, although we have taken steps to temporarily tightened our credit underwriting standards.
Due to the potentially protracted period at the pandemic and the related unknown risks.
First we are no longer entertaining applications for investor on single family homes single family second homes, nonresidential commercial real estate loans or construction loans.
We have reduced loan to value ratios for owner occupied single family and multifamily loans. The only two loan categories for which we are currently continuing to accept applications.
Additionally that coverage ratios have been revised and bank control payment reserve of six to 12 months are now required on all new multifamily bonds.
Well higher credit scores are mandatory for single family borrowers.
We believe these actions will further support the strong credit quality of our loan portfolio.
Nonetheless, we will continue to monitor employment statistics, and realistic markets and implement additional protections and changes as necessary.
As an emerging growth company, we are not required to adopt Cecil until January 2023, and now the result, we did not autopsy sold this quarter.
We continue to develop our new model and how do we adopted c. So as of the ended the year prior to the Cobot 19 pandemic indicative loan loss reserve levels were not materially different when compared to our then current allowance, which was based on our existing incurred loss model.
Well this too it's too early to understand the potential impact that the pandemic on our seasonal modeling we will continue to analyze this as we learn more about the full economic impact the virus.
Now turning to our first quarter's results our net income for the first quarter of 2020 was $7.6 million or 14 cents per diluted common share compared to $12.5 million or 22 cents per diluted common share in the linked quarter.
The notable decrease in earnings was predominantly due to a 5.3 million dollar provision for loan losses, which was recorded entirely to address the uncertain economic consequences of the carpet 19 pandemic.
Other contributing factors to the decline in net earnings for the quarter included a $1 million decrease in net interest income and a $1.5 million increase in non interest expense with the foregoing expenses somewhat offset by a corresponding 2 million dollar reduction in income taxes.
Now I'll speak in greater detail to those components.
First our asset quality as defined by traditional measures.
Remains very strong and actually improved over the prior quarter.
Our criticized loan balances decreased by $10.5 million or 23% and our nonperforming loans to total loans dropped by nine basis points from already low level of 10 basis points as compared to the linked quarter.
As a result absent the onset of the pandemic. The company would have recorded a recapture of loan loss provisions.
Instead, we added more than $6.1 million as a qualitative adjustment to our loan loss reserves to specifically account for the uncertain economic impacts of the carpet 19 pandemic.
We increased our allowance coverage ratio by 12% from 58 basis points at the end of the prior quarter to our current coverage ratio of 65 basis points.
In determining the appropriateness of our total reserve level consideration was given to three key factors number one the fully secured real estate loan portfolio more than 96% of which is comprised of residential properties located in housing constrained West coast West Coast markets.
Number two the granularity of the loan portfolio with an average loan balance of $1.3 million.
And number three the strong credit metrics, including considerable collateral support as indicated by our overall portfolio loan to value ratio of 59%.
Multifamily and nonresidential commercial average debt coverage ratios of 1.5 times, and 1.57 times, respectively, and a single family portfolio average or original refreshed credit score of 750.
How the company not added the additional $6.1 million to with allowance for loan losses in connection with the Cobot 19 pandemic during the first quarter, our net income for the quarter would've been $11.9 million or 21 cents per diluted share.
While we feel comfortable with our level of reserves at March 31st additional provisions may become necessary in future quarters, and we believe that the passage of time will add some incremental clarity to the scope of the economic impact of the cobot my team kept them it.
Next our quarters net earnings decline due to lower net in.
Net interest income we recorded net interest income of $32.1 million for the first quarter or <unk> or a decline of $1 million from the linked quarter.
After two previously consecutive quarterly improvements in our net interest margin during the second half of 2019, our net interest margin declined five basis points from 1.89% in the fourth quarter of 2019% to 1.84% in the first quarter of 2020.
This reduction was chiefly caused by precipitous cats in the federal funds rate as a result of the cope with my team pandemic totaling 150 basis points during March.
Given our liability sensitive balance sheet declines in short term market rates are generally beneficial to our net interest margin. However, with our 70% composition of term deposits to total deposits additional improvements in our funding costs will lag the significant rate reductions made by the federal reserve.
The reduction in federal funds rate immediately however impacted the $1 billion of interest rate swaps placed on our books in June in August 2019, which reduced swap income by 922000 as compared to the previous quarter.
Our total cost of funding has declined by 17 basis points since we initiated the slops from a level of 2.2% for the quarter ending September 2019 sort of total cost of 2.03% for the current quarter.
Looking forward and assuming no change to the level or shape of the current yield curve. We would expect our net interest margin to improve for the balance of this year by approximately three to five basis points per quarter.
Finally, net income for the first quarter was negatively impacted by a higher than anticipated level of non interest expense.
We reported $16.9 million in noninterest expense as compared to $15.3 million in the prior quarter.
The $1.5 million or 9.9% increase in expense was person principally related to a 1.8 million dollar increase in compensation costs due to the front loaded nature of payroll taxes, and an increase in post retirement costs as well as a 916000 dollar increase in FDIC insured FDIC insurance premiums owing to the.
Finally utilization of the remaining small bank assessment credit during the prior quarter.
These increases were partially offset by a $736000 decline in marketing costs related to business deposits and a $306000 decrease in rent expense associated with the relocation of company facilities in the fourth quarter 2019.
The increase in post retirement benefit costs approximating $500000 was unexpected and occurred in direct relationship to the large decline in longer term interest rates during the first quarter.
Despite the increase in some costs. This period, our noninterest expense to average assets ratio and efficiency ratio continue to compare favorably to the industry Immeasured 96 basis points and 51% respectively for the first quarter.
We expect that are non interest expense will range between 16 million and $16.5 million per quarter for the remainder of the year.
Now, we'll turn to the balance sheet.
Our assets at the end of March 2020 totaled $7.1 billion.
Representing an increase of $28 million or 1.6% annualized growth rate.
The increase was primarily due to growth in cash in our securities portfolio.
Although we recorded new loans of $333.1 million, including a small $20.4 million multifamily loan purchase we loved curtailments and pay offs exceeded origination volume in our loan portfolio declined by $12.7 million.
Similar to patterns experienced in the past few quarters loan prepayments remained relatively high with a CPR of 20% for the entire portfolio for the first quarter of 2020.
Prepayment speeds were particularly faster in a single family residential one segment, where the first quarter CPR measured 36%, primarily as a result of declining long term interest rates and borrowers recent financing into longer term fixed rate loans.
In January of this year.
We expected annual asset growth during 2020 to be in a range of 3% to 5%. The covered my team had done I kept created a significant amount of uncertainty at March 31st 2020, our long pipeline was $527 million are almost double the 279 million dollar balance at the end of the prior quarter.
The strong pipeline was the result of a significant dislocation of the markets as a result at the cobot 19 pandemic.
Our pipeline is stronger than it has ever been over the last year. However, a prepayment speeds may remain high due to the further decline of approximately 130 basis points in longer term interest rates during the first quarter.
In addition, our growth maybe negatively impacted by our tightened credit criteria recently put in place as a result of the pandemic. Therefore, we believe that a realistic growth rate for the year, maybe in the 2% to 3% range.
During the first quarter total deposits grew $50.7 million or 1% to $5.3 billion consumer retail deposits increased by $13.8 million in wholesale deposits increased by $129 million, while retail businesses business balances declined by $92.1 million.
The reduction in business deposit balances with wholly attributed to a decrease in the Penthirty when exchange burden vertical which typically experiences seasonal outflows in the first quarter of each year. However, with the current market turmoil and its impact on the real estate purchase market. We would expect this line of business to refill more slowly than it has in the past.
The health of capital is at the forefront in the mines of our board of directors and executive management.
The company's capital ratios remain strong and as shown on page nine of the presentation deck, we maintain significant capital cushion above the regulatory required minimum levels.
We routinely manage our capital ratios to our board rift appetite and we periodically stress test our resilience to those levels under adverse economic scenarios to assist us in making prudent capital management decisions.
During the first quarter of 2020 in light of our strong capital position stock market volatility and slower than anticipated asset growth, we strategically invested in our own company by increasing the authorized level of repurchases under a stock repurchase plan.
Since inception, another plant in August 2018 through April Thirtyth 2020, we have repurchased 4.3 million shares at an average price of $9.12 per share. These share repurchases have resulted in a total cost through April thirtyth of $39.3 million and we have $5.7 million available for additional share repurchase.
This pursuant to our currently approved share repurchase plan.
We currently have no plans to freeze our share repurchase plan. Therefore, we anticipate we will complete the repurchases authorized under this existing current plan, we do not intend to replenish the plan unless or until we have a much better understanding of the full economic impact and the cobot 19 pandemic.
Additionally, on May 4th 2020, the board of directors declared a quarterly cash dividend of 5.75 cents per common share payable on may 26 to shareholders of record as of May 14th.
Based on what we currently no we intend to continue our currently dividend at the current level.
We will however continue to monitor the business economic in housing environment in impact that the cobot 19 pandemic may have on our capital levels and we will make changes accordingly, if appropriate.
Before I turn it over to learn to make a few comments I would just like the public we recognize an express my sincere appreciation to our awesome team of employees. They have been working tirelessly and their hard work dedication as much appreciated. It it's really it's an honor and privilege to be working with such a remarkable team and they truly.
Together to support each other so that we can provide outstanding service to our customer throughout this crisis.
Now I'd like to turn it over to Lora for a few additional remarks.
Thank you smell.
Because we provided a good amount a detail in our earnings release and presentation deck I'll spend just a few minutes, providing an update on recent trends in our portfolio since the end of the first quarter.
That's a non discussed we had strong loan pipeline and although we increased loan offerings at the end of March the majority of our pipeline loans are lost levels, reflecting interest rate declines experienced during the first quarter 2020.
As a result second quarter loan origination will likely carried coupon approximately 25 basis points less than the first quarter level of 3.98%.
Also the interest rate on loan pay offs continues to exceed loan origination right.
These forces as well as the negative carry on our interest rate swaps.
Really out of the money by 139 basis points.
We'll continue to pressure our overall loan yield.
On a positive note. However, we should continue to experience additional cost savings in our deposit portfolio.
At March 30, Onest, the cost of our retail and wholesale deposits issued 1.71 person and 1.19%, respectively as compared to rates of 1.95 person and 1.8%.
Please.
End of the prior quarter.
I said the same day 1.2 billion of retail Cds or 38% of our retail time deposit portfolio with a weighted average range is 2.31%.
Subject to renewal during the second quarter 2020.
Based on current pricing, we would expect retain.
Attract new decide.
At a rate approximately.
Maybe 1.25%.
Additionally, 91% of our wholesale deposits or 495 million.
The weighted average rate of 1.22 for since March 31st is also subject to rollover during the second quarter.
Market pricing is currently sub 1%.
That concludes our prepared remarks and at this time, we will ask the operator to open the line for fresh.
And thank you.
As a reminder, asked the question you'll need to press star one on your telephone. So withdraw your question press the pound <unk>. Please standby will be compiles acuity Ross and once again that is star one if you like to ask the question and our first question is gonna come from Gary Tenner from D.A. Davidson. Your line is now open.
Thanks, Good morning.
One to make sure that I understand I kind of how the headwinds from the swap program will kind of show themselves during the second quarter, assuming that there's no change in rich, which I don't think everyone expects.
You said Oh, the money by 1.39% I think we're so.
Relative to the first quarter headwind seems like the had one would be wash then it wasn't the first quarters that.
Is that correct or shouldn't increase because of the full quarter in parts of the lower rates on the verticals.
I think it or you want it yeah go ahead, sorry, I think it'll increase geared to the fourth quarter impact Nonetheless will have offsetting benefits from the deposit portfolio that continues to retire.
Okay, and then just more broadly speaking what is the impact do you think the eviction moratorium on your multifamily portfolio. How you obviously, you're extending some although the request for above locations was more weighted towards your single family portfolio.
Yes, we are you seeing friend and multifamily bankers in terms of kind of rents coming in or is it a bit too early to tell.
So we have been asking our loan officers to touch base with their their clients and in doing that we have anecdotal information from them. A it's still appears that a significant number of tenants in many of the.
Properties.
We're paying and I think and John and Laura Correct me, if I pod focus, but I think when you understood and 70 to 80, some as high as 90% of the tenants are continuing to make payments now you know whether that continues into may how that continues to play out if it's fun known it before.
But we put the from a program in place to assist those multifamily borrowers who really are impacted negatively because they're tenants have been impacted but because of the way we underwrite our loans because of the reserves that we look too when we.
Make the loans initially and this non cash flows that we look to <unk>, we expect that many of our borrow borrowers on multifamily even if they have some tenant impacts will still be able to me.
And John or more if you want to add to that please do.
This is John I thought there was very comprehensive and yes, the numbers that some unquoted or whatever.
Loan officers are telling us and so.
We're pleased with that feedback so far.
Okay. Thanks, I met 70% to 90% from on that was the April ranch that you're referring to.
Correct.
Okay.
Thanks very much.
So and again I want to be careful to say that's anecdotal I mean, we haven't gotten rent rolls to confirm any about what's really important that I just underscore that.
Thank you and our next question comes from Matthew.
Clark from Piper Sandler.
Let's now open.
Hey, good morning.
[laughter].
On the noninterest expense run rate of 16, 16, a half a quarter can you.
Maybe talk through where are you expect to see savings it sounds like it's in the comp line and maybe on the marketing side of things are advertising, who just want to double check.
Where are you want to start on that women I'll follow up if one or <unk> I do think with the change in interest rates with the liquidity that's been brought into the bigger banks and particularly we're seeing a little less competition there for I think our advertising dollars.
We'll be comparatively less than originally planned.
Also we shouldn't have the payroll taxes headwind that we have in the first quarter or E change in our post retirement benefits from significant drop in interest rates.
This would be the three large it varies I would not expect to repeat the second quarter.
Okay.
I think you gave us a couple of deposit rates at the end of March can you give us just the overall spot rate on deposits, whether its interest bearing or total.
I had been separate leaves or.
Retail was.
Got rid of 1.71.
March 31st principle fail a spot rate of 1.19.
Okay.
We can.
Well because that and then on me.
Prepay activity in single family Reggie book I think in your.
Release, you mentioned that the prepay speeds were down slightly linked quarter to 36.1% versus 36 seven.
Putting that chart on page 22, where the graph it looks like that single family residential Prepays.
Oh speed increased more significantly I just wanted to square the too.
Yeah I'm looking at.
Correct.
As of March.
I think it's because it's a 12 month rolling average.
Oh, yes that could be a.
Thank you.
Okay. Thank you to the footnote, though [noise].
And then just on the FHLB advances that you have a two in a quarter you just remind us of the home.
The schedule and so it's in those might reprice going forward must say over the next three or four quarters.
I would say, there's very little to reprice in the next three four quarters most of those were hedged.
Term borrowings.
A little too right.
Okay. Okay.
Okay, great. Thank you.
And thank you.
And our next question comes from Jackie Bohlen from KBW. Your line is now open.
Hi, good morning.
I just wanted to touch base on the the loan purchase and see if that's something you might look to going forward or if it was a one time item.
I would say, it's a onetime item at this point we.
Had started prior to the pandemic started the process and entered into agreements in and I think at this point with our very strong pipeline and and with so much on them based on the pandemic itself that we probably won't be doing another purchase from that in the near term.
Okay.
And then in terms of you know that the 2% to 3% growth [laughter] growth rate that you spoke of understanding to push and pull that's taking place there.
What's offsetting the strong pipeline volume that you have is that more a function of your assumptions on prepayments or is it more a function of what you anticipate the changes in underwriting will have on your ability to generate from the pipeline.
So there's a couple of factors again very strong pipeline today. Some there will be some impact from the change in our credit underwriting criteria the tightening of our credit box so to speak.
But also with pre with.
Long term rates dropping by 130 basis points, we expect that we will see continued high levels of prepayments what kind of unknown also is the level of real estate transactions that are gonna be completed.
Both on the single family and multifamily a in the current environment that we're operating in with people.
Staying at home so.
The other piece of it that were still you know it's still unknown.
Fewer transactions are being done so that will impact, but the growth as well.
Okay. So it sounds like it's more a factor of.
Prepayment expectations understanding that there could be volatile and there's a lot of factors there than it is a function of changes that you've made the underwriting.
Well in the in the lack of you know the reduced levels of drift people purchasing real estate right now from single family and multifamily.
No. It's in no definitely more <unk> more prepayments potentially but but it's also the tax that we don't expect a lot of new new purchases.
Liftgate until.
Further into and out coming out of this economic downturn.
Yeah, Yeah, no definitely understood that the environment debris and and then I just have one more related to deposit pricing I have you and I understand the schedule that you have a in terms of TD that everything the rate since you're currently offering right now and Cds are assuming it's a stagnant rate environment had those all.
When fully repriced to where you want them or is the path there the possibility that you couldn't books to lower those.
And from where they are right now without any further rate movement.
Does that make sense, what I'm asking.
Yes, and Laura you want to.
Got it does make sense.
I would say Jackie where our C.D. levels are are.
Probably appropriate at this time.
We sort of gauge it every week, depending on the inflows and outflows, but there definitely are some competitors out there in the market with rates as high as 150 for 12 months.
I'm not a lot and we've definitely seen the pressure come down.
So.
At this point I don't see as a ton of downward movement, although I think again it'll depend on how long the tandem it goes up the team to fee.
People green liquidity into that.
Okay. Okay. Thank you that's helpful.
Thank you.
And I'm showing no further questions I would now let's turn the conference over the Simone Lagomarsino, President and CEO for further remarks.
Thank you very much. So this does conclude our first quarter earnings call and we hope that all of you who are joining us today will stay safe and healthy and we look forward to eventual recovery of our economy in our country. Thank you very much for joining us today.
Thank you this completes our call today recorded a copy of the call will be available in the company's website. Thank you for joining US everyone have a great day.
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