Q2 2020 Luther Burbank Corp Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Good morning, and welcome to the Luther Burbank Corporation second quarter 2020 earnings Financial Conference call.
All participants will be in listen only mode should you need assistance. Please press Star then zero.
After today's presentation, there will be an opportunity for the three analysts covering with her Burbank Corporation to ask questions to ask the question. Please press Star then one.
Before we begin I would like to remind everyone that someone the comments made during this call maybe considered forward looking statements.
The company's form 10-K for the 2019 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 on the company from the company or on the company's website, where the Fccs website.
I would like to remind you said, while the company's management thinks the company's prospects for performance are good it if the company's policy not to establish but the markets any earnings margin or balance sheet guidance.
I would now like to turn the conference over to Simone Lagomarsino, President and CEO. Please go ahead.
Thank you very much and good morning, everybody welcome to the Luther Burbank Corporation second quarter 2020 earnings Conference call. This is small market Marcelino I'm, the president and Chief Executive Officer, and with me today, Our Lora parents, you know, our Chief Financial Officer, and John card, among our Chief Credit Officer.
Before discussing our second quarter results I'd like to recognize the dedication of our bank employees as we continue to navigate through the ongoing cobot 19 pandemic.
Our employees have been working to keep each other in our customers safe and healthy while continuing to provide on interrupted outstanding service to our customers.
We pride ourselves and being a bank, where depositors completes their funds in a safe and reliable deposit account, earning competitive returns and were among customers understand that we are a trusted lender willing to facilitate temporary accommodations or expedite long fundings as needed based on their individual circumstances.
Our flexibility an outstanding service speak to the banks culture, especially during this time of crisis and I am proud to be associated with his team up remarkable employees.
Now, let's turn to our second quarter results or net income for the second quarter was $9.3 million or 18 cents per diluted common share an improvement as compared to the linked quarter net earnings of $7.6 million or 14 cents per diluted common share.
The 1.7 million dollar increase in net earnings was largely attributable to a 1 million dollar expansion in our net interest income as well as a 1.5 million dollar reduction in noninterest expense.
<unk> pre tax amounts were partially offset by a corresponding 725000 dollar increase in income tax expense.
During the second quarter, our net interest margin grew to 1.88% from a prior quarter level of 1.84%.
The improvement in our net interest margin in net interest income were primarily due to a significant reduction in the cost of interest bearing deposits, which declined 40 basis points as compared to the linked quarter.
Retail Cds that matured during the second quarter had a weighted average interest rate of 2.31%, while the rate on new and renewed Cds. This corner was slightly less than 1%, reflecting a decrease of over 130 basis points.
We're pleased that we've been able to significantly reduce the cost of our deposits during the quarter. While at the same time growing our retail deposits, which increased by $263 million four or 5.6% during the quarter.
Our 4.8 million dollar improvement in deposit cost this quarter was somewhat offset by a 3.8 million dollar decrease in interest income on cash and securities and loans.
The yield on interest, earning assets continued to decrease this quarter by 25 basis points as a result of lower market interest rates the impact of our swap positions and elevated prepayment speeds on mortgages and mortgage backed securities.
Outside of the increase in our net interest income I noted that non interest expense improved by $1.5 million. During the quarter. This is primarily due to a decline in compensation costs and related benefits of approximately $900000 as well as a cost savings of approximately five $550000 related to less marketing.
Around deposit gathering.
The decline in compensation cost was due to an increase in capitalized costs associated with the new loan volume net of related incentive compensation and a reduction in payroll taxes, which are proportionately elevated during the first quarter of a calendar year.
During the second quarter, we originated $488 million in new real estate loans as compared to a total volume of $333 million and the linked quarter, reflecting an increase of 46%.
Our net income during the second quarter as compared to the same period last year was negatively impacted by an elevated provision for loan losses.
At a level similar to our linked quarter, we recorded a 5.3 million dollar provision for possible loan losses. During this quarter, primarily to increase our allowance for loan losses in light of the carbon 19 pandemic.
Our credit quality by traditional measure measures remain strong we recorded no loan charge offs during the quarter and our nonperforming assets decreased slightly to 0.07% of assets from a level of 0.08% of assets in the linked quarter.
We have actively worked with our existing borrowers to facilitate short term loan payment deferrals in response to the pandemic as demonstrated on page seven of our investor deck Barware request for could.
Relief, we're most active in April and have fallen off considerably through the balance of last quarter and into this quarter.
We approved modifications for 58% of those who applied and as of June Thirtyth modified loans totaled 398 million or 6.4% of our loan portfolio.
We made the decision to accommodate our customers who appeared to demonstrate some need for relief even if their requests may have been made as an abundance of caution.
We felt that that's what's the right thing to do to sustain our goodwill with our valued customers.
Well the deferred interest payments for capitalized where borrowers loan balances the deferral have minimal risk of any detrimental impact to the bank.
As shown on page seven of our Investor deck loans that received a temporary payment deferral exhibit strong credit characteristics with leases. These laws, having a weighted average loan to value ratio of 64% in a weighted average debt service ratio or debt to income ratio of 139% or 39% as applicable.
As of July 21st 20.8% of those loans that were modified by balance have already been returned to routine monthly payment status with the greatest reversion demonstrated in the nonresidential commercial loan portfolio, which stands at 41.7% of loans modified was in that.
Folio, having now returned a payment status.
In relation to our allowance for loan losses, we downgraded the risk rating on loans granted the cobot 19 payment deferrals generally from a pass asset grade level to our watch list. These downgrades increased a quantitative component of our loan loss reserves.
We also increased a qualitative reserve for unknown economic impact due to the pandemic.
The result wasn't increase in our allowance coverage ratio of 12.3%, bringing the allowance to 73 basis points of the loan portfolio.
Although the total allowance for loan losses avail is available for any credit issue year to date $10.1 million of the increase in our loan loss allowance was recorded in light of the cobot 19 pandemic.
Gimmick, given the limited exposure our bank has to nonresidential commercial real estate and Moreover, the well secured and granular nature of our loan portfolio as detailed on page six of our investor deck, we feel comfortable with our level of reserves at June Thirtyth.
However, additional provisions maybe necessary in future quarters, as we monitor our portfolio the economy and specifically the resolution of those loans that received payment deferrals.
The payment deferral loan modifications will all generally expire before the end of this year.
Now turning to the balance sheet our assets at the end of June Thirtyth 2020 totaled $7.2 billion, an increase of $123 million since yearend 2019, or a 3.5% annualized growth rate year to date.
Our cash in our securities grew $89 million below our loan portfolio increased $50 million during the quarter.
As I previously noted, although we recorded strong loan volume during the current quarter non curtailments and pay offs continued.
At elevated levels for single family mortgage is an increase quarter over quarter in our multifamily portfolio.
The total loan portfolio CPR for the second quarter measure, 23% as compared to a level of 20% in the first quarter of this year.
Both single family borrowers and multifamily real estate investors are actively taking advantage of the continued decline in longer term interest rates.
As a result of high prepayments, we recorded annualized year to date long growth of 1.6%.
Additionally, our loan pipeline intake has slowed considerably over the last two months, both our single family in multifamily pipeline threat unusually low levels at June thirtyth totaling almost 133 million as compared to what we would typically consider a more normalized level of 300 million.
This is attributed to a general slowdown in real estate activity for Jumbo single family homes, and multifamily real estate transactions.
In addition to a tightening in our underwriting criteria, which we implemented as a result of the pandemic.
According to the June 2020 National Association of Realtors report existing single family home sales in the west for homes priced at a million dollars are more have declined 15.6% year over year. Moreover, the inventory of available homes at this price point in the West has declined 35.6% year over year.
This is consistent with the activity that we've been seeing during 2020 year to date, our single family loan volume is only 53% purchase activity where purchase transactions in 2019 in 2018 accounted for approximately 75% of our loan originations.
Conversely, 47% of our 2020 single family volume is refinance activity.
Additionally, we have successfully retained over $79 million in single family loans by offering rate modifications without a need for the bar where to go through a refinance.
[noise] as it pertains to income property lending the mortgage bankers Association is forecasting a 59% decline during 2020 in loans backed by income producing properties as compared to record volume levels in 2019. The MD Eightys also estimating a 42% decline for the same period specific.
<unk> multifamily lending.
The change in volume is primarily attributed to the cobot 19 fallout.
When we began the year, we were expecting mid single digit asset growth I'm at the onset of the pandemic, we've revised that projection downward at this time seeing no real abatement in the cobot 19 environment throughout the U.S.. We're in California, we continue to expect asset growth and a 2% to 3% range for the year.
Although loan growth has been somewhat muted deposits have grown by $149 million since year end or an annualized increase of 5.7%.
Retail deposits grew $185 million with most of that growth or 59% attributed to activity in our 11 branches.
And a balance was generated from our business units.
Our liquidity levels has described on page five of our investor deck are robust and a pandemic has not raised any concerns for us in this area.
The company's capital ratios also remained strong as shown on page nine of our investor deck, and we continue to maintain significant capital cushion above regulatory required minimum levels.
During the second quarter, we completed our stock repurchases under our stock repurchase plan that was authorized for $45 million throughout the program, we repurchased a total of 4.9 million shares at an average price of $9 in 19 cents per share or an 18.9% discount to our June thirtyth.
Tangible book value.
No additional shares share repurchases are planned at this time.
We're pleased to announce that onto I 28, 2020, the board of directors declared a quarterly cash dividend of 5.75 cents per common share payable on August 17th 2020 to shareholders of record as of August 7th 2020.
At this time, we intend to maintain our quarterly dividends at the current level. We will continue to monitor the cobot 19 pandemic and the impact that it may have on the economy in our region and.
Also monitor our financial position and capital levels and as a result, we may make changes to our dividend levels in the future. If we believe it is prudent to do so.
In conclusion like most banks, the very low and flat nature of the yield curve has created challenges relating to asset prices and it has caused a new wave of refinance activity.
Although we intend to continue growing our loan portfolio credit quality remains our first and top priority.
Additionally, it is not our objective to originate a large volume of loans with initial fixed rate periods of longer than seven years at ultra low rate deals at the current ultra low yield we believe that our opportunity to continue expand to expand our net interest margin in this current rate environment wise with continued focus on repricing within our deposit portfolio.
Which laurel will now speak to in greater detail Laura.
Thank you send them.
As usual I'll spend just a few minutes, providing an update on our recent trends and portfolios since the end of the second quarter.
No no for rates on decreased over the past month or so as most competitors have returned after blending and that's the five and 10 year treasury rates have declined.
In the second quarter, our weight on new loan originations averaged 3.78 persons.
And based on current pipeline indications, we would expect third quarter loan volume to carry an average rate of approximately 15 to 20 basis points less.
Also as we have not yet experienced a deceleration of loan prepayments, we would expect to see continued downward pressure on loan yield.
On the other hands, given our liability sensitive portfolio weeks I expect to see additional cost savings and our deposit portfolio.
The spot rate on our retail and wholesale deposit portfolio measured 1.3% that the ended the second quarter as compared to 1.65 person at the end of the linked quarter.
At the same day 1.1 billion, we <unk> point 1 billion of retail Cds were 35% of our retail time deposit portfolio with a weighted average rate of 2.04%.
Subject to renewal during this third quarter.
Based on current pricing, we would expect retain sun and or attracts new time deposits at a rate approximately 1%.
Deposit repricing opportunities in subsequent quarters still exists, although volume and read differentials declined dramatically.
For example in the fourth quarter. This year, approximately 376 million that's term accounts mature or roughly one third of the now that rolled.
During the third quarter.
The weighted average interest rate of this fund in fourth quarter. It's currently 1.44%.
Although a portion of our wholesale deposit portfolio subject to roll over during the third quarter, given excess cash levels and strong retail deposit growth, we would anticipate a decline in as wholesale portfolio.
In summary, as a result before constant loan and deposit activity. We would expect to see continued improvement in our net interest margin and particularly during the third quarter 2020.
This concludes our prepared remarks and at this time last the operator open the line for question.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.
Our first question comes from Jackie Bohlen with KBW. Your line is now open.
Hi, good morning.
Good morning Jan.
But it makes sure that I understood. The comments on modifications to known in your prepared remarks. So he keeps me that out of those that how to fly proved approximately 50% sent them.
58%, 15%, Okay, and what that just a function of bad.
People, we're applying it just really didnt need it.
Oh it was a number of things some actually withdrew their application. Some we actually denied of I think around 13%. We denied a and there was a small percentage that we approved that didn't except the the modification I think that was less than 10% maybe around five to sell.
1%, so but but.
58%, we're actually approved and modified.
Okay.
And was there any characteristics that were similar amongst the 13% that were denied.
John card them on our chief credit officers on the phone so I'm going to ask John to answer that I expect that thank yous ammonia to Jackie we look at each of these applications and the similar characteristics is they have the capacity to pay either they had cash flow from your property where their job.
Rob or they had significant liquid assets to carry them for over a year of older.
<unk>.
Okay.
Okay. Thank you that's helpful you work.
And then in the pipeline being down on I, just want to make sure I understand that as well is it more a function of tightening of underwriting standards or of inventory. That's in the market or is that you fairly evenly split between both those items.
Not always kind of to hard to tell exactly why but but I'll say that you know that's why we offered also the information from some mortgage bankers association and that the.
Real estate.
Yeah, I'm trying to look at them [laughter] reports there that I quoted on the National Association of Realtors. So both of those I think give some insight into the facts that I'm not only <unk>, yes, it expected and we've experienced that that volumes are down it as expected and projected for the rest of the year that volumes will be down a premier.
Really an income property for the multifamily, they're saying, we'll be down 42%. This year is a projection. So that is on the multifamily on the single family. What we're seeing is with a very very low long term interest rates.
Our arm products that we offer our getting repaid a and people are paying off off and moving to a longer term fixed rate at in many cases lower than what they're paying off on a five year arm. So I think those are the two pieces that are impacting the pay off the other side of that in terms of the the pipeline.
<unk> as well its just on the single family side. The inventory is just very low in terms of homes over a million dollars in our region better on the market for sale and new sales have been dropping sales of properties have been dropping so refinancing is picking up but it's not picking up for the types of bombs that that.
We make and that's impacting the pipeline.
And I'll, let more and John if either of you want to add to that please feel free to do so.
Yeah, I think you've covered it simona.
In the single family side inventories down in the 30 year fixed rate is incredibly attractive.
Transactions are down on the multifamily.
The things and as you May remember, we pulled out of CRT, London, which is we don't have very much there but.
You talked a little bit too.
Okay, Yeah, we either Hum stop, making CRB and SUS nonresidential theory and construction early in the pandemic interest so let's hold off for you know six months or so and let things settle and then we can reassess whether we want to move back into either of those two markets. So that's some of the underwriting changes and we made a few changes in our.
Uh-huh single family.
Side as well in terms of homes being purchased for investments are one of the products that were not.
Offering right now so if you want we can go into a little bit more detail on changes to underwriting, but I think that bigger impact really has more been from the changes in the market then Ah that I mentioned then.
Our underwriting changes.
Okay. No. That's that's all wonderful background, and I, I recalled, especially and I know I'm serious purchased for investment last quarter I'm. So.
Thank you for the refresher on that as well so it it sounds like bend the balance sheet growth that you're expecting could potentially be more a function of deposit generation on loan growth.
I think that's a very fair statement, we expect some small long growth, but not a significant amount of loan growth and yes, we do when it's a very good time for US right now in deposits I think you know as all things seem to be very flush with deposits, we are benefiting from that as well.
Yes.
Okay, great. Thank you for answering my questions.
Our next question comes from Matthew Clark with Piper Sandler Your line is now open.
Hi, good morning.
Good morning, Matthew.
Can you speak to what drove the increase in criticized loans.
The amount that type and the reasons.
John do you want to cancer that no.
That's a big increase we have had isn't or watch list.
Where we put all that work cold.
Modifications in terms of criticized loans those numbers still.
Non cobras remain.
Well.
So because I'm assuming.
During the during the third quarter that John we did have an increase in criticized loans and it was primarily related to death of sole borrowers Oh.
Well.
We will do well.
Got it.
Even if it has been relatively low loan to value [noise].
Yeah, and cash flow arguments on the problem till we get the documents.
Our job, it's so successful drift.
Things, we just talked about.
Okay and.
And then how much did the swap.
Negatively impact the margin this quarter.
20 basis points.
Okay.
And then on.
Noninterest expense, the deferral of origination costs and the benefit there.
How much was that specifically and I guess relative to what it normally is and how are you thinking about the overall noninterest expense run rate that was no came in below expectation.
I don't have a specific number I'm, but I would say.
One of the primary differences besides the payroll taxes. It was the Fas 91, catlike salaries. So I would say, we're about 51 million this quarter.
Down in originations for third quarter will be around 16 million.
Okay.
And then on the buyback any plans to re upped it.
No not at the present time.
Okay.
And then just on the single family residential loan balance says bounces they were they've been declining pro.
Number of quarters, but.
I'm turned up this quarter.
You May have mentioned in your comments and I did I apologize but.
You just give a sense for what drove that increase in whether or not that's sustainable.
So but actually.
So we at the end of March saw a very significant increase in our pipeline a family attributed that in for a single family loans in particular in light of some of the mortgage bankers, who where I think.
Either not lending or some of the brokers were concerned about whether or not to be able to close alone. So we did see a very very big pickup we were able to move those through the.
Pipeline and and into our portfolio, we have seen additional pay offs and again as I mentioned, the because I think primarily our five year arms are.
Being paid off by 30 year fixed rate mortgages in many cases at lower rates. Then we're offering that we put a modification program in place to modify loans, a we've done about 79 million in loan modifications, where the borrower doesn't have to go through the whole process of a refinance we work with them to modify the alone on there exists or the rate on their existing long.
But but we are seeing an uptick it's still in in prepayments as a result of where long term retire and Laura were drawn if you want to add to that please feel free to do so.
I should say the uptick in rates as its alone. So a number of big acquisitions pulled out of the jumbo market Wells Fargo being the most notable one you're in the west coast and a lot of that move towards us in the credit quality.
[noise] was a theory so.
We had very good production bumps in April one thing I think it's about <unk>.
The trouble.
Payments.
Great.
[noise] [noise] okay.
Great and then when you just thinking about the modifications ever done and within multi family and single family resi at least for the ones that were.
Approved.
Can you give us a sense for what those reasons.
Were you know I assume it was uncertainty.
But I guess, what I'm getting that is you have very little in the way of kind of higher risk segments, but is there some portion of your multifamily.
Or single family residential portfolio that you know you're you're more focused on.
In this environment.
I would say that I think it's a good reflection that 20% of the loans modified have already been returned to payments I think to some extent that some of our borrowers.
We weren't sure of the future in and if we worked with them we want it to help assist them through the you know the uncertainty and so is there any segment that were most concerned about you know certainly I think we've highlighted our nonresidential, which is about 200 million and and even that that's.
Well, we had the largest percentage of deferrals like close to 24% of those loans were deferred we have had the largest amount of both of those loans modified returned back to payments. So I think you know well, we'll work with our borrowers a one by one I mean, I think there's some very positive trends to support.
On the types of lending that we do for instance, we are reading reports, where people are moving out of high rise buildings in you know very densely populated areas and moving more to suburban areas and that's really more the types of apartment loans that we make or in the suburbs. So you know I if there's so much on no [laughter].
And it's hard to know kind of what what segment to be more focused on but certainly I would say the other area that we are.
Looking out in the moratoriums on evictions and the impact that might have on our multifamily in particular, but so far I mean in having discussions like I said over 20% of already returned a lot to payment and and so that's what I think that's a very positive fine and then certainly more outwards honestly feel free to Uh huh.
Comment further.
I don't know that I'd point to any one single thing messy, we're taking these on a loan by loan basis, when evaluating each one and the reason to Barry for people.
<unk>.
Temporarily laid off to the same thing in our tendency towards really pragada, which tenant, but we're going to manage each loan.
It's really for the best potential outcomes.
That's great color. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back for any closing remarks.
[noise] well this concludes our second quarter earnings call. Thank you very much for joining us this morning and.
Just want everyone to stage safe and stay healthy so thank you.
That completes our call for today, a recorded copy of the call will be available on the company's website. Thank you for joining us.
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