Q4 2020 Luther Burbank Corp Earnings Call
Good morning.
Burbank Corporation fourth quarter, 2000, and 'twenty earnings conference call on.
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Before we begin I would like to remind everyone that some other 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 identify certain factors that could cause the company's actual results to differ materially from those projected and 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 and the company's periodic reports are available from the company on line on the Companys website or the SEC's website.
Like to remind you that while the company and the company's management thinks the company's prospects for performance are good and if the company's policy not to establish with the markets any earnings margin or balance sheet guidance and.
And now I'll turn the conference over to Simone Lagomarsino, President and CEO. Please go ahead.
Thank you very much good morning, and welcome to Luther Burbank Corporation fourth quarter and full year 2020 earnings conference call. This.
This is Simone Lagomarsino, President and Chief Executive Officer, and with me today is Laura Tarantino, our Chief Financial Officer.
The conclusion of the calendar year 2020 marks our 37th consecutive year of recording consistent quarterly profitability.
After the unexpected events of last year I take comfort knowing that our company has remained a reliable financial partner to our loan and deposit customers and at the same time, a steady performer for our shareholders.
Today I'll begin with our fourth quarter results summarize our year end performance and then conclude with highlights of our 2021 outlook.
As a reminder, our fourth quarter Investor presentation is available for download on this webcast and will also be available on our website. Following this presentation.
Our net income for the fourth quarter was $8 $7 million or <unk> 17 cents per diluted common share and.
A decline as compared to the linked quarter net earnings of $14 $3 million or 27 cents per diluted common share.
Fourth quarter earnings were negatively impacted by our decision to reduce excess cash holdings and incurred $10 $4 million and pre tax penalties to prepay $150 million of long term fixed rate federal home loan bank advances.
Had we not made the decision to prepay these borrowings and excluding the impact of the nonrecurring prepayment charges, our pro forma fourth quarter net income would've been $16 1 million or <unk> 31 cents per diluted common share and increase of $1 $7 million as compared to the linked quarter.
This improvement was primarily due to growth and net interest income and stronger loan production.
As a result of elevated loan prepayments attributed to the low interest rate environment as well as solid retail deposit growth low yielding cash balances continued to grow throughout the year.
Rather than deploy this cash into our investment portfolio, where yields are equally low management believed it was and the best interest of the company to deleverage our balance sheet and instead advance the pace of net interest margin improvement and the company's future earnings potential.
Our net interest margin for the fourth quarter was $2, one 3% or a 10 basis point improvement from the linked quarter as the cost of our interest bearing liabilities declined to a greater extent and the yield reduction on our interest bearing assets.
This resulted in $1 $1 million of greater net interest income.
Additionally, compensation costs were $1 $2 million less and the linked quarter as capitalized loan origination origination cost reflected the 64% increase in new loan volume quarter over quarter.
Similar to the prior quarter, our fourth quarter results did not include any provision for loan losses as trends and the performance of our loan portfolio improved.
I will discuss that progress in more detail later in this presentation.
Annual net income for 2020 was $39 9 million or <unk> 75 per share as compared to fiscal year 2019, net income of $48 $9 million or 87 per share.
Again, excluding the impact of the prepayment penalties previously discussed pro forma net income for 2020 would've been $47 $3 million or <unk> 89 per diluted common share.
As compared to our prior fiscal year. The company's 2020 net interest income improved by $10 $2 million chiefly as a result of the expansion and our net interest margin from 184% for the year to 197% for the other year respectively.
The increase and net interest income, however was substantially offset by $9 $3 million and higher provisions made for possible loan losses during 2020 as compared to the prior year.
The company satisfied greater reserves for potential loan losses. During the first half of 2020, primarily due to the uncertainty related to the COVID-19 pandemic.
Additionally, noninterest income for 2020 declined by $2 $2 million due to decreases in loan servicing income and the fair value of mortgage servicing rights related to high loan prepayment speeds as well as the absence of gains attributed to loan sales executed during 2019 and.
And also a reduction and federal home loan bank cash dividends as compared to the prior year.
Now as promised I'll return to credit trends and our loan portfolio.
As reported earlier doing during 2020, our company was proud to partner with our borrowers by offering temporary loan payment deferral programs for those financially impacted by COVID-19.
And this regard we received 501 applications for payment assistance we.
And we granted modifications for approximately one half of those applications or 250 for loans in our portfolio as of year end 2020.
This represented six 3% of the portfolio outstanding balance as of the same day.
As the year progressed, our borrowers demonstrated remarkable resiliency and I am pleased to report that as of year and over 99% of loans had returned to payment status and more specifically 250 of the 250 for modified loans have returned and making monthly payments and two loans had indicated they plan to.
A return to making payments at the end of their deferral period, which is the end of this month.
The bar of one loan representing $1 $1 million, just recently indicated their intent to return to routine debt service payments beginning February one.
Finally, one single family residential loans totaling $1 $7 million or less and one half of 1% of the portfolio, which made its first payment. After it's deferral period ended subsequently became delinquent by year and that loan which was experiencing payment issues. Prior to the pandemic was added to our impaired nonperforming loan balances.
Early in the fourth quarter, we have not received any applications for pandemic payment assistance since last August.
During the fourth quarter, our credit team initiated a proactive risk based approach to evaluate the repayment capacity of income property loans that either applied for or received payment assistance.
The approach includes reviewing all nonresidential real estate loans on our portfolio with a balance of $1 $5 million or greater to ensure that such credits were appropriately graded and adequately reserved for.
The majority of loans reviewed either retained their path or watch list status or were upgraded 10 performing loans that are paying as agreed were downgraded to special mention or sub standard status given property debt payment capacity and limited evidence of borrower liquidity on hand.
Primarily as a result of this evaluation process.
During the fourth quarter, our criticized assets increased by $9 million.
Criticized assets increased we are not anticipating any ultimate losses from these loans as they all appear to be well secured by collateral with a weighted average loan to value of 66% and no individual loan exhibiting a loan to value ratio of greater than 74% based on original appraisals.
As discussed last quarter collateral metrics on the west coast market for the type of B and C class and multifamily residential properties that we typically finance have held stable over the past year.
According to data recently published by Costar, one bedroom rents and Los Angeles suburban markets increased about 1% during 2020.
Additionally, on a national basis. According to graph published by you already matrix rent by necessity apartment rents have shown less volatility over the last year and class B and class a vacancy rates have remained relatively stable as compared to class a apartments.
While criticized loans grew during the fourth quarter, we recorded no loan loss provision for the period as the impact of higher criticized loan balances was entirely offset by a small reduction in qualitative reserves that were initially established in light of COVID-19, as well as a decline and our total loan portfolio balance as compared to the prior quarter.
The company recorded no loan charge offs and the fourth quarter.
For the year ended 2020, we recorded net charge offs of 337000 as compared to recording net recoveries of 437000 during 2019.
At year end 2020, both nonperforming loans and delinquent performing loans as a percentage of <unk>.
Total assets remain at historically low levels of 0.09%.
And 0.07% respectively.
At December 31, 2020, our allowance for loan loss coverage ratio was 76 basis points as compared to 58 basis points at the end of the prior year.
And the company has set aside quantitative and qualitative reserves totaling $12 4 million for the uncertainty of the pandemic impact on our loan portfolio.
Now, we will turn to the balance sheet.
Our assets at the end of December totaled $6 9 million, a decrease of $140 million or 2% since year end 2019.
The decrease was due to a decline and our single family real estate loan portfolio as a result of loan curtailments and pay offs exceeding loan origination volumes for the year.
Our single family loan portfolio declined by $297 million or 14, 7% since the beginning of the year.
The decline and the single family loan portfolio, which experienced a 36, 6% CPR. During 2020 is attributed to historically low interest rates for 30 year fixed rate mortgages are product generally not offered by our company.
Conversely, the decline and our single family loan portfolio was partially offset by growth and our primary lending products of multifamily residential loans, which portfolio represents 68% of our loan balances at December 31 2020.
Our multifamily loan portfolio increased by $115 million or two 9% year over year.
Although total assets declined during the year similar to others and the industry. Our retail deposit growth was strong retail deposits grew $396 million or eight 2% from the prior year, while the company utilized excess cash flow to exit wholesale funding positions.
Broker deposits and federal home loan bank advances decreased $366 million and $172 million or 88% and 17, 6% respectively. Since the beginning of the year.
The company's capital position remained strong during 2020 in light of the market price of our stock and a challenging environment for asset growth, we took the opportunity to invest over $36 million and our company through stock repurchase activity.
During the year, we repurchased 4 million shares of our common stock and an average price of $9 and <unk> or 23% discount to our December 31, tangible book value of $11 69.
While our capital ratios at year end 2020 remain consistent with or slightly improved from prior year and levels. Our tangible book value per share grew seven 1% over the same period.
Additionally, during the year, we paid cumulative dividends of 23 per share to our shareholders equating to a dividend yield of two 3% based on the closing price of our shares on December 31 2020.
As previously.
Previously announced in early November we continue to have and active share repurchase plan in place.
We're pleased to announce that yesterday the board of directors declared a quarterly cash dividend of five and three quarter cents per share.
Payable on February 16th to shareholders of record as of February 5th.
At this time, we intend to maintain our quarterly dividends at the current level.
Before I conclude I'd like to share our company's initial outlooks for the calendar year 2021.
Our primary goal continues to be smart asset growth.
Although we have a few remaining credit parameters that have not returned to pre pandemic terms, we expect that our total origination volume increase and 2021 as compared to 2020.
Our loan pipeline at year end, 2020 was $331 million and approximately 18% higher than the prior year and level. Additionally, we intend to add income property loan officers to staff this year.
However, looking at the spot rate of our loan portfolio at December 31 of $3, 99%. We also expect that loan prepayment activity will remain brisk given the current.
And continued low interest rate environment as a result, we're looking for asset growth and the 1% to 2% range for this year.
Based on the continued repricing in our deposit portfolio, our actions to delever, the balance sheet using excess cash and the expiration of some hedge positions. We expect our net interest margin to continue to improve throughout 2021 with greater acceleration and a third and fourth quarters of the year on.
Preliminary expectation is that our net interest margin will improve by approximately three basis points per quarter. During the first half of 2021, and then once the hedge positions have expired potentially reach a range of 235 to 240 basis points during the second half of the year.
With vaccination programs moving forward and additional stimulus expected we remain cautiously optimistic that the current pandemic environment will improve during the current year.
However, given the number of unknowns, including the potential extension of eviction and or foreclosure moratoriums, we do not anticipate that we will release reserves set aside for COVID-19, and the near term and as always should credit conditions deteriorate additional loan loss provisions beyond the levels needed for loan growth may be required.
Well, we are not expected to adopt Cecil until the first quarter of 2023 current modeling under that methodology does not indicate any significant increase and our projected allowance levels.
We have no plans to close branches or downsize administrative offices during 2021.
Excluding the nonrecurring prepayment penalty incurred during the fourth quarter of 2020 that was on previously discussed we expect total noninterest expense within a tight range of $16 million to $16 $5 million per quarter or <unk>.
Wes and a 2% growth over 2020.
We plan to continue to invest and better technology to improve the digital experience for our deposit customers and improve our efficiency and originating real estate loans, our capital spend for new projects and 2021 approximate $1 million on.
Now pass the presentation to Laura for some brief details on loan and deposit trends.
Thank you and.
Non mentioned our loan pipeline reflects healthy activity not unexpected however, given continued low rates.
Ponder and some activity or 73% is free for refinance transactions.
And 18% our in house refinances.
The weighted average coupon on loans and our pipeline at year end was three point and four 9% or approximately 50 basis points less and the coupon on our full loan portfolio at the end of 2020.
Although year to date, we have seen an increase and five and 10 year treasury rate.
Kris has not translated over into competitive pricing likely due to the benign loan growth and the industry share.
During 2020, our loan portfolio coupon and decreased by 18 basis points throughout the year.
On the metrics I provided we would.
Checked to see continued reduction and our pricing throughout the current year on this loan portfolio, but to a larger degree than in 2020, given the high level of turnover experienced during the past several months.
On the other hand, we do expect to see additional cost savings and our deposit portfolio.
And the ending rate on our retail deposit portfolio measured and 94 basis points at December 31.
And that's compared to 1% at the end of the linked quarter.
During the first quarter of 2021 $480 million of retail certificate accounts are scheduled to reprice.
Current weighted average rate on these CD renewals measures 1.1 and 7%.
And December new and retained money was recorded at an average rate of 44 basis points for approximately 73 basis points less.
During 2020, our retail deposit spot rate decreased by 1% from the start of the year to the end of the year.
Largely as a result for the fed 150 basis point drop and the first quarter, serving on the catalyst as well as greater liquidity and the banking system.
Retail deposit repricing improvements are expected to be more gradual this year with the potential to pick up by one to two basis point and cost reduction per month.
And on previously noted our net interest margin is expected to show the most improvement during the last half of this year.
$1 billion and interest rate swaps with the current negative carry of 135 basis points with one set to expire and both June and August of this year.
This concludes our prepared remarks and at this time lost the operator to open the line for questions.
And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please stand by while we compile the Q&A roster.
Our first question comes from Matthew Clark with Piper Sandler Your line is open.
Hi, good morning.
Good morning.
On the <unk> B prepayment and I guess.
Good.
Part of the quarter did that occur just trying to get a sense for whether or not it was late in the quarter for.
Mid December.
Yes, It was mid December.
And I guess I would've thought there might be a little bit more relief.
On your borrowing costs, but remind us is that is that spread over the remaining life is that why in terms of the savings and it's not Laura do you want to take that one.
That's correct the improvement is probably going to be about 10 basis points, all else being equal for 2021, but because it was late in the year, you're not seeing that in 2020 results.
Okay.
And what's your appetite to prepay.
Additional <unk> advances.
I would say it depends for going to take care and monitor trends for a year.
Okay.
And then the.
Uptick in.
And the run rate of expenses Mike.
My guess is the swing.
And from fourth to first is kind of Fas 91 related.
After that the strong production and <unk>.
But anything else there maybe advertising steps up more materially this year relative to this past year.
For Q1, we will definitely have higher employment taxes.
Just.
Because of the normal Q1.
Employer taxes increase.
And.
Laura do you want to comment on others, and Sharon and I would add debt and each year, we expect some increase.
Increase for merit changes for staff.
Great Okay.
And then just anything on the on the any update on the buyback I assume you guys will get.
A lot more active.
Assuming your stock kind of shakes out here.
Around where it is after the blackout period, but any updated thoughts on on on.
On the buyback.
Going forward.
But I think it's part of our capital management.
Focus is what's the best use of our capital and there is a balance between the unknown of Covid and and the <unk>.
Current levels of our share.
Share price so are we.
We focus on what's the best use of our capital and certainly having repurchased a significant number of shares last year and having the buyback in place will continue through this buyback of 'twenty with a total of $20 million that we set aside as of November of last year and at the conclusion of that we will see if there's if we are interested in and.
Having additional buybacks going forward.
Okay. Thank you.
Yes.
Thank you. Our next question comes from Jackie Bohlen with <unk>. Your line is open.
Hi, good morning.
Fair enough.
Thank you for all the wonderful color in terms of the margin and the pushes and pulls you see over the next yeah, and the coming quarters and months.
And that's start just with the pod that you've.
And you've had good fixed asset reshuffling that portfolio and just an update on from that.
Other things that you've already put in place and what you might look to further put in place just to keep that trajectory moving down even as you start to see CD repricing become less impactful.
Sure. So so we first of all in midyear in 2009, 2020 sort of midyear 2020.
Hired a new individual to run that division for US who has a very strong background in.
Community banking activities.
And he's really put our branch employees through a number of sales.
Sales programs and is very focused and helping us.
Be more focused on outreach both to cross sell existing customers and to bring in new customers, which is quite honestly a different approach from what we had done historically, which was to put advertising and the newspapers and basically attract customers through offering the higher rates. So I think.
It's two fold of why and how we've been successful is that.
And that new approach and addition to we bought <unk>.
Are creating some new products and services.
But probably obviously, just whats happening and the industry, where there's been an influx across the whole industry and deposit. So we've benefited from from the combination of both of those and we will continue.
To support the efforts of our.
For calling and additional products and services as we identify them to support deposit growth.
Wes rate driven and more focused on a more granular deposit base.
Okay.
I would guess that just kind of a.
Slow and Progressive continued chart and the portfolio and that should aid in deposit costs as we move forward as well and that's probably taken into consideration and your margin thoughts.
Correct.
Okay, and I certainly will.
I know I always ask for something and then I offer to Laura but I don't know if or if you have any more debt you'd like to and I certainly don't want to give you that opportunity.
No as you as you summarized I think and part it's really on culture change on the deposit side of our house.
It takes time to implement.
Okay. Thank you and then.
And I know in the past I apologize I can't remember if it was the second quarter as the third quarter. We had this discussion where I am.
<unk>.
I know you've tightened underwriting standards early and the pandemic and then you released some of that tightening just wanted to see where you stand today and.
In terms of the types of generation and Youre looking at versus where you were a year ago.
We have continued to make some changes to our underwriting criteria. We are not completely back to where we were prior to the pandemic, but where.
Each quarter.
We continue to move in that direction.
You can see what the performance of our portfolio we feel.
And our historical underwriting and and the.
Credit quality of our existing portfolio and we want to keep that kind of credit quality and the portfolio as we go forward.
And.
Again, we've slowly.
Over the course of last year.
[noise] back towards the direction of the pre pandemic and most likely within the next.
No.
And the first half of this year, we probably will be back to where we were pre prepay.
Pre pandemic assuming.
Everything plays out in terms of the vaccine and other.
Legislation and regulations don't change our mind on that.
Hi, Thank you I I think we all want to be back to where we were pre pandemic with and the next couple of months. So thank you very much.
Thank you Jackie.
Thank you. Our next question comes from Gary Tenner with D. A Davidson your line is open.
Thanks, Good morning.
Just wanted to.
For your comment about adding income property loan officers. This year is that in the multifamily space or is that and kind of non multifamily commercial real estate as youre looking out for a year.
And multifamily.
There is a multifamily okay.
On.
And then.
Just as it relates to.
Excuse me for ultra turn it off.
And the margin expansion that you are projecting for the year.
I apologize I actually had that question answered thanks.
That's okay. Thank you Gary.
Thank you and Oklahoma showing no further questions at this time I'd like to turn the call back over to Simone Lagomarsino for closing remarks.
Great well. Thanks. Thank you all for participating in our year end 2020 conference call. This concludes the conference call. Thank you.
That completes our call today and record a copy of the call will be available on the Companys website. Thank you for joining us.
Okay.
And finally.
Ladies and gentlemen.
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