Q3 2020 Luther Burbank Corp Earnings Call
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Good morning, and welcome to the limits of Berkley Corporation third quarter 2020 earnings Conference call.
All participants will be in listen only mode teaching.
Should you need assistance. Please press Star then two rooms.
After todays presentation, there will be opportunity for the three analysts covering Luther Burbank corporations to ask questions.
Asked a question. Please press Star then one.
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 2019 fiscal year its quarterly reports on form 10-Q, and current reports on form 8-K identify certain factors that could cause the companys 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 Companys periodic reports are available from the company or online on the company's web site or the Fccs website.
I would like to remind you that while the company's management thinks the companys prospects for performance are good. It is the company's policy not to establish with the markets any earnings margin or balance sheet guidance.
I would now like to turn the conference over to small Sancho Marci, you know president and CEO you may begin.
Thank you Towanda good morning, and welcome to the Luther Burbank Corporation third quarter 2020 earnings Conference call.
Simone Lagomarsino, President and CEO and with me today are Laura Guerrant, Tino, our Chief Financial Officer, and John Cart alone, our Chief Credit Officer.
The past nine months have been challenging for our country, our customers and our employees.
As the economy continues its recovery I'm pleased to see the resiliency of each of these constituencies, particularly during this last quarter.
This resiliency had a positive influence on our third quarter 2020 financial results, which I will share with you now.
Our net income for the third quarter was $14.3 million or 27 cents per diluted common share an improvement as compared to the linked quarter net earnings of $9.3 million or 18 cents per diluted common share.
The $5 million increase in net earnings was primarily a result of a reduction in loan loss provisions of $5.3 million recorded in the comparative period to set aside reserves for potential pandemic related losses in our real estate loan portfolio.
Additionally, as compared to the linked quarter net interest income improved by $3 million due to expansion in our net interest margin.
These benefits were partially offset by a 1 million dollar increase in non interest expense as well as a $2.1 million increase in the provision for income taxes as a result of greater pre tax income of $7.1 million compared to the prior quarter.
So let me now expand on each of these points.
During the third quarter, our net interest margin grew to 2.03% an increase of 15 basis points from the prior quarter level of 1.8%.
The improvement in our net margin and Relatedly net interest income was primarily due to continued reductions in the cost of our interest bearing deposits, which declined 33 basis points as compared to the linked quarter.
Similar to the prior quarter, even with declining deposit offer rates. The bank continued to attract new deposits with the average balance of interest bearing retail deposits, increasing by 256 million during the quarter current quarter.
The 4.1 million dollar improvement in net interest expense on deposits during the third quarter was somewhat offset by a $1.4 million decline in interest income on loans as our yield on loans during the third quarter decreased seven basis points as compared to the linked quarter.
Our loan yield has continued to decline for two reasons. The first is that the rates on new loan originations continue to decrease and the second reason is that we continue to experience an elevated level of loan prepayments.
Our net interest margin expanded during the third quarter to 2.03% and this is the first calendar quarter, where our net interest margin exceeded a 2% level since March of 2018.
In early 2019 based on the shape of the yield curve and the market conditions at the time the bank made a deliberate pivot and determined that the most prudent strategic objective to benefit our shareholders would be to focus on the quality of earnings rather than continuing to leverage capital and grow assets at very near.
Aero margins.
That growth go that goal remains unchanged today.
Next I'll speak to provisioning for loan losses, and our asset quality.
The COVID-19 pandemic was obviously unexpected.
At the outset of pandemic, we established two goals. The first was to ensure that our bank was well positioned to assist our customers with all of their banking needs, while keeping our customers and employees safe and healthy.
This included moving quickly to support a significant increase in telephone calls and transactions.
And the development programs for our borrowers who are experiencing temporary hardships the.
The second goal was to ensure that we maintain the sound quality of our loan portfolio.
Despite the need to move quickly.
Since the inception of the pandemic recurrent granted more than 280 loan modifications, allowing short term payment deferrals with sensible repayment structures that permit borrowers to resume loan repayments without undue hardship.
I am encouraged that more than 80% of loans that we modified have returned to payment status, which reflects the strong credit quality of our loan portfolio.
At September Thirtyth, 47 loans, representing only 1.2% of our loan portfolio have either requested additional assistance or have not yet communicated their intent to resume payments.
During the first two quarters of this year, we added $10.2 million to our loan loss allowance pertaining to the credit uncertainty related to the pandemic environment.
We decided to add this amount to the allowance, even though the credit metrics related to the loans that receive payment deferrals exhibited strong prepayment pre pandemic debt coverage ratios debt to income ratios and collateral support as shown on pages seven and eight of the investor deck that we filed with our earnings release.
Additionally, little time had passed since the declaration of a national emergency to understand how the real estate markets supporting our collateral would be impacted.
Six months later, we are pleased to see that our lending specialty lines of business, namely the multifamily workforce housing and the jumbo single family housing real estate sectors on the West Coast remain sound.
According to the National Association of Realtors October 22nd publication existing home sales in the West Rose, 9.6% in September from one year ago, while sales of homes in the west of $1 million or more almost doubled over that same period.
Additionally, housing inventory is that historic lows, which should provide price support.
These trends are attributed to more individuals working remotely and low mortgage interest rates.
Also according to S&P core logic case, Shiller indices published on September 29th home prices in the major metropolitan areas located on the West Coast showed price appreciation approximating 5% in the one year period ending July 2020.
In the multifamily residential arena in its October 21st article the National Real estate Investor noted that the pandemic environment has driven urban core renters to the suburbs in search of more space and cheaper rents.
The same article net adds that class a vacancy rates have been higher than class C. Vacancies since 2016.
Further the article indicates that while effective rents across the us in class a apartments have declined 3% on average in August 2020, as compared to the year before Conversely average rents grew 3.8% in the lower cost classy apartments, which is the type of workforce housing that we find.
And.
As a result of the significant reduction of loans on payment deferrals and the general strength of the real estate markets in which we operate our traditional credit quality measures remain strong.
We recorded no loan charge offs during the current quarter and our nonperforming assets remained at 0.07% of assets at quarter end.
Furthermore, although California, Washington, and Oregon, We're all recently afflicted by several serious wildfires at this time, we are not aware of any property losses suffered by any of our borrowers.
Primarily as a result of these factors, we did not record any provision for loan losses for the current quarter as compared to a $5.3 million loan loss provision recognized during the linked quarter.
At September Thirtyth, our allowance for loan losses to total loans coverage ratio measured 75 basis points, an increase of two basis points since the end of the second quarter.
This increase was chiefly related to a decline in the balance of our total loan portfolio.
Although we feel comfortable with the current level of our reserves additional provisions maybe necessary in future quarters as we monitor the ongoing impact of the COVID-19 pandemic and other potential credit changes.
Returning to my quarter over quarter earnings comparison, the improvements in our pre tax earnings related to net interest margin expansion and reduced loan loss provisions were partially offset by a $1.1 million increase in compensation expense attributable to a reduction in capitalized salaries directly related to loan origination volume during the quarter.
In the third quarter, we funded 235 million of new loans compared to $488 million in the prior quarter or 52% decrease.
As we discussed last quarter with the onset of the pandemic, we temporarily tightened certain of our underwriting requirements.
These changes as expected led to a reduction of loan INTECH, However, consistent with our conservative credit culture. We felt it was important to pull back and assess the pandemics impact on the economy and on real estate values.
We recently adjusted our credit card lines, including very selective re entry into nonresidential commercial real estate and construction lending, although some credit parameters remain more limited than they were originally prior to the pandemic.
As a result, we have seen a healthy rebound in our income property loan pipeline, which improved to $191 million at September thirtyth from $88 million at the end of the prior quarter.
The single family residential pipeline also improved to $65 million at September Thirtyth from $40 million at June Thirtyth. However, we believe that single family loan volume will remain below traditional levels in.
In this historically low interest rate environment, given the ability of jumbo borrowers to obtain a 30 year fixed rate financing near a 3% level.
We do not offer 30 year fixed rate financing outside of special lending programs designed to assist low to moderate income borrowers.
Now, let's turn to the balance sheet.
Our assets at the end of September totaled $7.1 billion, an increase of $26 million since year end 2019 or growth of less than 1% year to date.
Our cash balances have grown $123 million since year end, while our loan portfolio has decreased $82 million during the same period.
As I mentioned loan origination volume during the third quarter was about half of that of the previous quarter.
At the same time loan curtailments and pay offs remained at elevated levels.
The total loan portfolio CPR for the third quarter measured 20% as compared to a level of 23% in the second quarter of this year.
As a result, our total loan portfolio declined quarter over quarter.
At the same time, our retail deposit inflows remained strong with growth of $178 million during the third quarter and $363 million year to date.
In keeping with our overall path of improving net interest margin increased concentrating on the quality of earnings we've been decreasing our levels of wholesale deposits and utilizing excess liquidity to reduce low yielding cash on our balance sheets.
Our loan portfolio and deposit trends are not unlike the reports of other banks in the industry our ability to grow our loan portfolio. This year has been less than originally expected and less than desired. However, our objective is to have smart asset growth and credit quality remains our first priority. This is all to say that while I'm encouraged by that.
Rebound in our loan pipeline and the continued health of the West Coast Real estate markets. There are other factors that are creating headwinds in terms of asset growth.
Namely the ongoing pandemic, the social and political uncertainties surrounding the upcoming us presidential election, and the very low and relatively flat yield curve all of which will likely result in very limited growth and we anticipate that we will have balance sheet trends consistent with what we've experienced in the recent.
Quarter.
The company's cash capital ratios remained strong and as shown on page 10 of the Investor deck. We continue to remain maintains significant capital cushions above regulatory required minimums.
Although we do not have any active share repurchase plans currently in place we are routinely monitoring the market for our stock and we believe we are well positioned to lend support in the future under the right circumstances.
We are pleased to announce that yesterday the board of directors declared a quarterly cash dividend of 5.75 cents per common share payable on November 16 to shareholders of record as of November six.
At this time, we intend to maintain our quarterly dividends at the current level.
In conclusion, I am very proud of the strong earnings we recorded this quarter and the continued growth in our net interest margin I also take great comfort in the resiliency that our communities deposit customers borrowers and employees have demonstrated during the pandemic and fire season environments and with that I'll now pass the presentation to Laura for some brief.
Comments.
Thank you is now.
I'll spend just a few minutes per guidance update on recent trends in our loan and deposit portfolios since the end of the third quarter.
Based on current pipeline indications, we would expect fourth quarter loan volume to improve that carry an average rate of approximately 20 basis points less than the 3.66% achieved during the third quarter of this year.
Generally speaking competition pricing has trended down over the past several months.
And although we've seen some small recent evening in the five and 10 year treasuries over the past weaker sales related to the expectation of additional fiscal stimulus.
We expect competitors to wait.
This change is transitory in nature and the impact if any on the market as a result of election outcome, which may be protracted.
Consistent with the prior quarter, we have not yet seen a deceleration in loan prepayments and therefore, we would expect to see some continued downward pressure on loan yields.
Conversely, we do expect the additional cost savings in our deposit portfolio.
Not read on our retail and wholesale deposit portfolio measured 1% at the end of the third quarter compared to 1.3% at the end of the linked quarter.
Retail deposit repricing improvements are expected to be more gradual during the fourth quarter as.
It's only $370 million of retail, which indicate accounts are scheduled to reprice.
Compared to a level of $1.1 billion that were subject to repricing in the last quarter.
The current weighted average rate on this quarter CDN renewals measures 1.46%.
In September we opened new certificate enrolled existing certificates at an average rate of 43 basis points or.
Approximately 100 basis points last.
Given the excess liquidity position, that's known reference in her presentation, we would expect to continue to roll off wholesale deposit.
In summary, as result of our forecast at loan and deposit activity. We would expect to see continued improvement in our net interest margin.
Albeit at a lower pace than in the third quarter of this year.
I'll now turn it back over to Simone.
Thank you Laura.
Before we conclude our prepared comments I'd like to acknowledge John Carbone, who has been our chief credit officer for seven years.
Earlier this year, John announced his plans to retire at the end of the year. So this will be the last earnings call in which John will participate John.
John has done an excellent job during his tenure and he has helped us maintain a very high quality loan portfolio.
In June of this year, we hired a deputy Chief Credit Officer, Mike Steadman, who joins us with more than 25 years of experience in real estate lending credit and risk management, Mike will transition into our chief credit officer role in January this.
This concludes our prepared remarks at this time, we'd like to ask the operator to open the lines for questions from our analysts.
Thank you.
As a reminder to ask the question you would need to press Star then one on your telephone.
Our first question comes from the line of Matt.
Andrew Clark with Piper Asylum your line is open.
Hi, good morning.
Good morning.
One of the stored on the balance sheet.
Shrinkage within SSG so far.
Yes, I understand prepayments are elevated and.
You know the the product is not in favor in terms of sort of your fixed relative to what you're willing to book, but is there anything else you can do to kind of stem.
The run offs, there, whether it's maybe it's getting more competitive on hybrids.
Just wondering if we can which is where you can help stabilize those those loan balances.
So Matthew Thank you for the question I will say that we have actually done a couple of things even before the pandemic. We put in place a loan modification program. We've modified and this is not not that modification to defer payments, but this was working with borrowers who.
But we're interested in staying with us, but looking to maybe lower their rates and so who maybe we'll refinance looking to refinance elsewhere and we worked with them to say, let's work with you to modify your rates and we've maintained that program throughout this again not people, who wanted to defer payments, but who wanted to just.
Work with us and we've modified over $100 million and loans through that program and we're continuing to do that they do need to qualify and we make sure that they're able to make their payments.
Once we do modify them, but so thats one program and we're continuing I will say part of.
The reduced level of new loan originations and SFR came because we did tighten our credit underwriting criteria and reduced.
For instance loan to values from 80% downward. So that we were able to have confidence that if there is a drop at some point in values that we still had a very strong credit quality and in light of that we have seen we've now made a few adjustments, but we have seen an increase in our pipeline.
As a result of some of the changes that we've made and with that ill maybe suggest that Laura add to that and if John wants to add to that as well. We can have both of them make additional comments along or you want to go first yes, I think I agree with what you said and just to Matthews point, we do monitor our offer rate weekly and it really.
He has been less about pricing and more about 20 to 30 year mortgages for jumbos.
Just ridiculous to compete at that price.
Great.
And John do you want to add anything to that or.
I would just say, yes, we did tighten our credit quality, which I think was a very prudent decision to take place in the March April timeframe, we have opened up a little bit we're not back to where we were prepared dynamic and we monitor data on ongoing basis, and we'll make adjustments.
Accordingly, as we see fit but I'm comfortable with the parameters that we have now and as we said many times throughout this presentation credit quality is obviously an important driver. Thanks.
Great.
Maybe shifting gears to deposits you still have like a fair amount of CD repricing to go less so this coming quarter than Threeq you, but.
I guess, what's your sense.
Which.
In deposits deposit costs can controlfour bottom I mean is there is there only we only go solo on Cds.
Where could you go lower obviously mix change would help too.
Well the answer, yes, and I would say that again with such a significant amount of our deposits in certificates of deposit we have 60% approximately.
Yeah. It takes time for those to mature for US to then repriced based on current market rates and we've benefited from the last two quarters of having relatively high amounts of maturities CD maturities and so we've been able to reprice. We expect the same that we will have the ability to reprice, the 300 plus million that mature.
Sure in the fourth quarter. So it's not the same as the billion dollar plus that we've had in the last two quarters.
However, we do expect as we continue going forward that the Cds will reprice at lower levels.
It will be over the next six months because the current rates on those are still higher than where we're currently pricing them and Laura if you want to provide actual more detail to that I'd encourage you to do that.
Well I think that the spot rate is at 1% and or special rate today for 12 months CD is 50 basis points. So there's definitely room.
Just to be a little slower based on the levels of repricing coming on.
And to follow up on your point, Matthew I mean the.
The abundance of liquidity in the banking industry right now is really allowing all banks to really work to reprice down, especially based on 150 basis point drop in rates that the fed moved in in March.
And so we're continuing to reprice and feel.
I feel like there's still more opportunity just not to the same extent we've had in the last two quarters at least not in this this quarter.
Okay.
And then just on share repurchase.
What do you what do you need to see to get.
To get active on that front, but given where your stock is trading in knowing deferrals or.
Very low.
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We're monitoring it daily and we're very focused on exactly what you just said so yes, what do we need to see I think we are continuing to monitor and agree with everything you said.
Okay. Thank you.
Thank you.
Our next question comes from the line of Jackie Bohlen with KBW. Your line is open.
Hi, Good morning, George.
Turning to following up on on Matthews question Real quick if you were to restart a buyback is that something where you would need to make a formal announcement about that or is it something where as part of the normal course of operation do would just begin repurchasing <unk> Oh, you I'm sorry mid thought here you don't have an outstanding authorization correct Lachlan was completed and a new one was not issued right.
Correct and so yes, we completed $45 million in share repurchases during the second quarter.
We did not renew the share repurchase plan and again, we are monitoring on an ongoing basis and recognized.
Finally, with the significant reduction in deferrals loans on deferrals.
And in the current share price levels, we monitor daily and agree with the comments made by Matthew.
Okay, I apologize I knew that you did not have anything outstanding that was a silly question.
Switching topics. So it sounds like then the balance sheet I, if I'm interpreting your comments correctly could be fairly flat on just based on what I'm fairly flat, maybe even declining based on remixing of deposits and then the prepayment offsetting any loan generation and I'm thinking about that properly.
I would say, let me actually go back to one comment that you made in your prior question, we would have to do a new announcement and just to be clear.
That would have to be when we're out of a blackout period as well. So so we would have to do in re announcement to do a share repurchase plan and put it in place because we do not have on existing today I just want to clarify that and then secondly to your point.
We do feel that we will see some strength in originations this quarter, particularly an income property in the multifamily side because of the strength of that.
Pipeline at September Thirtyth, it was over a $190 million.
This is a very low 88 million in the prior quarter and so we see that we'll have some strength in originations and we do expect to continue to see higher higher levels of prepayments, but we're hoping that we'll see.
At a minimum a flat balance sheet, hopefully not a reducing balance sheet and maybe slightly increasing in the loan side, but but we are continuing on the funding side to look at how can we continue to lower cost of funds and so we are working to replace wholesale fund.
Funding with a lower costing retail deposits, where we can and Laura I encourage you to fill in where I've left off.
I agree with all your comments and I would say that flat is a fair.
Dictation, particularly where we have excess liquidity that we probably will continue to run off Q4 satellite well assets for hopefully will grow low to me why we hope that loans will grow a bit we would expect a cash balances to come down.
Okay and at this point I have with some some wholesale balances remaining is that is your preferred use of any excess cash where do you think that wholesale balances rather than keeping it in cash or deploying into securities.
Correct.
Go ahead [laughter] no sorry.
When you look at the returns on Securities.
Really the best use of our money and improving margin is not hold on board.
Securities.
Opinion, either alone or reduced cash.
Okay, great. Thank you both very much.
Thank you Jackie.
Thank you.
Our next question comes from a lot of Gary Tenner with D.A. Davidson. Your line is open.
Thanks, Good morning.
Quick question on the outlook for loan growth I think as you talked about the third quarter in kind of the forward. Both it was a little more focused on single family.
Seems like multifamily overall commercial real estate wall. The yields came down very similarly, this quarter on originations the volumes sold in a bit better. So just wondering is multifamily were little more opportunity to run that potentially kind.
Got to stabilize and grow the loan portfolio.
Absolutely yes.
Or are they either [laughter] my very brief comment on that [laughter].
I agree.
So as you think of your underwriting now having tightened up your overall underwriting.
What are the kind of thresholds for Ltvs and debt service coverage, you're looking at for now in that portfolio.
John you want to take that.
Sure were 71 to one.
I mean, where do you get that portfolio and all of our key on your originations are in the ballpark.
Really not doing maybe.
Commercial real estate.
[noise] Okay. Thank you my other questions were answered.
Thank you Gary Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to smoke for closing remarks.
Okay.
Thank you Towanda and thank you to all of our shareholders and investors who have joined US here. Today. This concludes our call today. Thank you very much for joining us.
Ladies and.
Gentlemen that.
That concludes alcohol every quite a copy of the call will be available on the company's website. Thank you for joining us and have a wonderful day.
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Oh.
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