Q1 2021 Luther Burbank Corp Earnings Call
Good morning, and welcome to the Luther Burbank Corporation first quarter 2021 earnings Conference call. All participants will be in a 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 the verb.
<unk> Corp to ask questions to ask 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 'twenty 'twenty 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 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 for.
Each of events or developments the company's periodic reports are available from the company or online at the company's website or the SEC's website I would like to remind you that while the company's management thinks the company's prospectus for performance are good. It is the company's policy not to establish.
With the markets any earnings margin or balance sheets guidance.
I would now like to turn the conference call over to Simone Lagomarsino, President and CEO. Please go ahead.
Thank you very much good morning, and welcome to the Luther Burbank Corporation 2021 first quarter earnings Conference call. This.
This is Simone Lagomarsino, President and Chief Executive Officer, and with me today is Laura Tarantino, our Chief Financial Officer.
As I reflect on the first four months of this year I'm gratified to see signs of progress not only for our bank, but for our economy and our country.
The broad distribution of vaccines and the reopening of small businesses are welcome signs to a brighter future.
We are truly grateful for the dedication and resiliency of our customers and our employees. During this past year through this pandemic.
A few years ago, we laid out a multi year strategic goal to improve the quality of our earnings and this quarter's results demonstrate our progress towards achieving that go on.
For the first quarter, we recorded net income of $18 4 million or 35 cents per diluted share an improvement of $2 3 million or four cents per diluted share as compared to the prior quarter's adjusted earnings when excluding the nonrecurring nonrecurring charge for the prepayment of the FHL advance.
<unk> that we incurred in December of 2020.
Growth in net income.
Compared to the prior quarter was primarily attributed to a $1 $5 million increase in our net interest income and of $2 5 million recapture of loan loss provisions due to the improved credit quality within our loan portfolio.
Our net interest margin expanded for the fourth consecutive quarter to a level of two point to 3%, reflecting a 10 basis point improvement over the linked quarter.
This improvement resulted from a 15 basis point reduction in our cost of funds, which outpaced of six basis point decline in the yield of our interest earning assets.
Certainly the general level of market interest rates has contributed to our ability to reduce the cost of our deposits. However, our pricing has also benefited from our efforts to replace larger rate sensitive customers with more granular deposit relationships. This trend in part is attributed to an emphasis on customer calling campaigns.
Our branch employees have been calling our customers to check on their welfare. During this unique environment and then in many instances, we've been able to expand the existing customer relationships and gain referrals to new customers.
Our cost of funding also benefited from the strategic early payoff of high rate of <unk> advances last quarter.
Now, we'll turn to asset quality, our ability to recapture to $5 million. This quarter in loan loss reserves was the direct result of the significant improvement in our criticized loan balances, which declined 40% or $23 million from the prior quarter.
The vast majority of criticized loans that were upgraded during the quarter were related to borrowers who had initially been impacted by the pandemic received pandemic related payment deferral of relief and have now return to scheduled monthly payments.
Prior to upgrading the risk ratings on these loans the borrowers needed to demonstrate payment performance for three months or more of an exhibit the ability to service their obligations at.
March 31, we had only one single family loans remaining on a payment deferral plan and that borrower return to making payments this month.
At the outset of the pandemic, we designed our COVID-19 payment deferral of modification program. So that any deferred payments were added as additional monthly payments to the end of the loans and the loan was extended by an equal number of months. This ensured that our borrowers did not experience the impact of having to catch up on these payments.
All of that once at the conclusion of the deferral period.
We believe that the design of our modification program supported our borrowers who receive payment deferrals from our bank and it positions them to successfully manage their temporary pandemic related setbacks and return to full payment status.
Although we recaptured loan loss provisions during the first quarter, the qualitative or judgment based components of our allowance for loan losses continues to include approximately $8 7 million in reserves that we specifically set aside for potential incurred losses due to the heightened risk environment caused by.
The pandemic.
Our allowance per loan and lease losses coverage ratio was 70 basis points at the end of the first quarter as compared to a ratio of 58 basis points at December 31, 2019 prior to the declaration of the National emergency.
We intend to continue to monitor the economic environment on a quarterly basis to determine if or when it is reasonable to increase or reduce our allowance coverage.
Nonetheless, we believe that our credit outlook is very strong given our limited exposure to nonresidential commercial real estate the performance of our borrowers to date the strength of our real estate in our primary lending markets and the weighted average loan to value ratio of our loan portfolio of 58%.
As a result of the pandemic and keeping credit quality top of mind, we tightened some of our underwriting guidelines in early 2020, but we have returned our credit programs. So they are similar to pre pandemic requirements.
As the results.
Our first quarter loan originations of $391 million when annualized places us on track to exceed our 2020 volume and approximate our 2019 level.
Additionally, our $680 million pipeline is at a record level for our company.
Although we were pleased to see growing levels of loan activity loan repayments remain elevated through the first quarter due to the continued low rate environment.
Therefore in February we took the opportunity.
The purchase of single family fixed rate loan pool of $288 million to supplement our asset growth.
The purchased pool, having an average loan balance of $418000 was conservatively underwritten to agency standard standards with the weighted average debt to income ratio of 32% of <unk>.
Average FICO score of 777% and a weighted average loan to value ratio of 52%.
Although the fixed rate nature of this purchase pool and its weighted average coupon of two 3% was not typical of the loan from single family volume.
We normally originated from.
The loan portfolio. The transaction was an attractive use of liquidity when compared to yields on mortgage backed securities with similar characteristics.
Yeah.
At March 31, we had 11 delinquent loans on our loan portfolio totaling $7 $1 million.
Of which seven or $2 7 million, where single family loans from the loan purchase that we just discussed.
We attribute this statistic to a mid March transfer of servicing from the seller to us in each of these loans is actually now current.
Of the remaining four delinquencies two loans with 30 days late in two where chronic delinquencies that comprise a portion of our non accrual loan balance.
At quarter end, our nonperforming assets to total asset ratio remained at just nine basis points consistent with the prior quarter end.
Now I'll briefly turn to net income for the first quarter.
The improvement in our net interest margin and credit quality previously discussed along with our ability to reduce noninterest expense for the period to a level of less than the <unk>.
Prior year's quarterly adjusted average resulted in return on assets of 1.5% and return on equity of 11 eight 2%.
Had we not reversed the $2 $5 million and loan loss provisions a return on assets and return on equity would have been 95 basis points and $10 six 9% respectively for the first quarter of 2021, which is.
Significant improvement as compared to an adjusted return on assets and return on equity from fiscal year 2020.
67 basis points, and seven 7%, respectively again, the only adjustment made in 2020 was the federal home loan bank prepayment cost that totaled $10 4 million in the fourth quarter.
Now I will turn to the balance sheet our assets at the end of March totaled $7 1 billion, an increase of $173 million or 3% since year end the.
The increase was primarily due to growth in loans of $222 million in investment growth of $44 million, partially offset by a $97 million the reduction in cash.
Growth in assets was primarily funded by a $128 million increase in retail deposits.
Last quarter, we indicated that we expected low single digit growth in our assets for 2021 until we see a meaningful reduction in loan prepayments. We believe that this is still a reasonable estimate.
The Companys capital position remains strong during the quarter, we purchased an additional 202000 shares of our common stock at an average price of $10 42 per share or of 12% discount to our March 31 tangible book value of $11 88.
Additionally, we continue to have an active share repurchase plan on the 16th.
$5 million in remaining authorized funds.
We are pleased to announce that yesterday the board of directors declared a quarterly cash dividend of five and three quarter cents per common share payable on may 17th to shareholders of record as of May 7th and with that I'll now turn the presentation to Laura for a quick update on our loan and deposit trends.
Thank you Simone.
Like most bankers, we're pleased to see some steepening in the yield curve. This share at this point. However, it's not clear that this trend will translate into an increase in loan pricing likely due to the level of liquidity in the market and so on.
Benign loan growth for the industry.
During the first quarter the weighted average rate on our new loan volume, excluding the loans purchased Simone discussed was 335% or four basis point decline from the linked quarter.
Based on pipeline activity, we would expect our second quarter, the origination rates be similar to or even slightly less the three.
<unk>.
With our loan portfolio the spot rate of 386% at March 31, we continue to expect some downward pressure on loan yields as the rate on loan curtailments on payoff, which was four point of 3% during the first quarter exceeds both of the rate on new volume and the portfolio weighted average coupon.
Fortunately, we do expect to achieve additional pricing declines in our deposit portfolio.
The ending rate on our retail deposit portfolio of measured 82 basis points at March 31.
A 12 basis point reduction compared to the end of the linked quarter.
During the second quarter of this year, we have 1 billion of retail certificate on accounts that are scheduled to reprice the.
Current weighted average rate on the CD maturities measures, 124%, while in March new and retained retail deposit money was recorded at the average rate of 38 basis points.
<unk> 86 basis points of that.
During the first quarter, we did execute a new $350 million interest rate swap contract.
Primarily to hedge the additional interest rate risk associated with the long term fixed rate nature of the single family loans pool that we purchased as compared to the risk inherent with our more typical five year hybrid fixed rate products.
The new two year swap has the pacing of cost of 11 basis points and the received variable federal funds average component.
Our current net carry of approximately five basis points.
Although we only anticipate a very modest margin improvement during this quarter.
We expect our net interest margin to show the most expansion during the last half of the share after other swaps totaling $1 billion with.
With the current negative carry of approximately 138 basis points.
Expire in June and August.
Consistent with our message last quarter, we're estimating our fourth quarter net interest margin to be in the range of $2 three five to $2 four per cent.
This concludes our prepared remarks and at this time was the operator to open the line for questions.
Certainly the ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line with Jackie Bohlen from <unk>. Your question. Please.
Hi, good morning.
Good morning, Jackie.
The C and if maybe you could provide an update on income property lenders I know during last quarter's call you discussed, adding some folks there just wanted to see how the progress has been on that.
Thank you, yes, Jackie so we are actually in the process of hiring an individual in the washing our Washington.
<unk>.
And also we are looking to do some expansion into some new markets.
And we're looking to hire in the individual for those markets and that includes.
The Denver market area of Phoenix and <unk>.
In Utah.
The Salt Lake City market, so that one individual will cover those three markets. So we are.
Very close to coming to a point of getting those individuals on board.
Okay.
And then you know as I think of the some of the new hires you're bringing on and you've got really strong pipeline of economies are starting to open up again on <unk>.
Prepayments of side, which I know are unpredictable and expected to continue given the rate environment.
How do you expect production this year to compare to 2019 it sounds like the first quarter indicates you're on pace for that just just wondering if you see that momentum gaining traction through the year.
Yes.
We absolutely do expect to see very strong production levels as I mentioned, we have of $680 million pipeline, which is as far back as we can determine the largest pipeline we've had.
So we do expect good strong loan originations.
And so we are looking at somewhere around on pace with 2019, which was about 1.5 billion.
Production.
And the Big question will be really what happens with the yield curve on what happens with prepayments, particularly for the single family portfolio, because that's where we've really continued to see the heavy prepayments.
Okay.
Okay, and then just one last one and then I'll step back.
Obviously.
Outside of prepayments loan originations going really well and you've made some good progress on deposits the remix thing and gaining balances there maybe just an update on your expectations for deposit growth through the year on some of the remarks, you think could happen.
Laura do you want to.
Don't want to take all the answers.
You want to take the first step and I'll follow on on that.
Sure.
Jackie.
Like you said, we have done a good job with the remix I would say part of that is customer desire because typically they don't want to lock into the C D and the low rate environment that there has been some.
The remixing that we've done ourselves I would expect our.
Future growth to be.
Similar to the first quarter and I only hesitate because we do have $1 billion coming off pretty high rates and.
And Cds and and so whether that market stays in the other that money stays on the banking industry are starting to look for other investments whether it be the stock market or real estate, it's hard to determine.
So right.
Feel like we'll see deposit growth, it's hard to say it'll be exactly the same as first quarter, but okay.
Yeah.
Yeah understood you've got a lot of moving parts there. So it sounds like there could be the remix out of some higher cost funding.
And maybe that absorbs some of the other liquidity and that plays into expectations for a similar level of growth that was discussed.
Last quarter, even though the current quarter outpaced that of a little bit is that a fair assessment.
Yes.
Okay great.
Great. Thanks for taking my questions.
Thank you Jackie.
Thank you. Our next question comes from the line of Bob Shone from Piper Sandler Your question. Please.
Good morning.
Bob I just I just wanted to go back to your comments on the margin of being 235 to four by four to 'twenty. One do you happen to have the.
Impact is as of right now of the <unk>.
Swaps upon their expiration of what thats going to the due to the margin.
Okay, I think we will get them.
At 10 to 15 basis point lift from that.
After the end of that and Thats included in the 235 to $2 four calculation.
Of this.
Okay.
And then maybe going to the back to the pipeline.
Can you maybe talk about some of the drivers on what.
Kind of more than double debt since year end.
Yeah.
Sure so.
We had.
Last year prior in the beginning of the pandemic as we started to move into the pandemic, we had tightened our underwriting criteria.
<unk> loan to values getting more conservative in terms of the requirements for debt.
Debt.
The coverage ratios.
And what we have done more recently is reverse and move back to the pre pandemic levels.
At the time at the beginning of the pandemic, we werent sure how long that would go.
The impact on the <unk>.
<unk> of real estate and <unk>.
We felt like it was important that we at least get some sense of that before going back to the pre pandemic.
Underwriting criteria, we have now.
I think we're now pretty close to on point to where we were pre pandemic I think.
The one thing that we are still somewhat conservative on is nonresidential commercial real estate lending, but other than that I think the rest of our criteria for both single family of multifamily. We're back on so that has really driven.
Never can increase and then just what's happening in the markets and.
Some some.
Focus from the.
Potential buyers of real estate looking at how strong the real estate has performed through this pandemic I think is driving as well the the.
Our pipeline from the demand in the market.
When again, we focus primarily on multifamily.
That are in the suburbs.
They are.
Generally between 14 and 15 units per building, so theyre not the big high rises in the highly densely populated areas theyre more.
In general of many of them are have more space in the end are.
Yeah.
Where people are actually moving to when they are leaving the highly densely populated areas. So we've actually seen real strength in the real estate in the markets that we lend to them.
So I think all of that is driving the art.
Our pipeline of the demand on the market and in our pipeline.
Great. Thanks, that's great color and then maybe one more from me was there anything more nonrecurring in the expense line on this quarter just trying to get a sense of this as kind of a good run rate to go forward over the next few quarters.
Laura you want to take that one.
There is nothing that I would consider nonrecurring I think of large part of our expense expenses has to do with the volume.
Volume of loan originations right. So the higher originations the Martin salaries that we're capitalizing.
So that's the probably the largest variable quarter over quarter.
Would think 2000.
$16 million $15 million is a pretty good quarterly run rate.
And if you look back on a year over year basis, we've been able really to reduce the marketing expenses in part because of.
The excess liquidity in the industry right now we haven't had to really market for deposits.
And so that's been a big reduction.
From prior years.
Okay. Thanks for that I'll step back.
So I think the bottom next question comes from the line of Gary Tenner from D. A Davidson your question. Please.
Thanks, Good morning.
Good morning, Greg.
I just want to talk a little bit about deposits.
Had some consistent traction in terms of the kind of business from specialty related deposits.
A little more again.
This quarter from year end I'm, just wondering as you look at that business and your continued effort to reduce deposit costs.
You know kind of kind of diversify the deposit portfolio.
What other <unk>.
Actions, you might be able to take in terms of adding folks focusing on on that more in terms of additional teams or anything or.
Just what are your broad thoughts are on that particular deposit of a hurdle.
So we have actually added several.
Individuals that focus specifically on different verticals within our specialty deposit base and verticals in particular that are less price sensitive than some of the verticals. We have had historically and that is a big part of our focus going forward.
So yes to your point, we are looking and have hired already some.
The team members that are specifically focused on certain.
Of those specialty deposit.
Verticals and we will continue to grow those.
But.
Moving out basically over time some of the deposit customers in the verticals that we're just all very focused on rate.
Thank you and then just.
In the earnings release on the deposit composition.
All of <unk>.
If this was mentioned, but I noticed the kind of shifts of what looks like a pretty sizable.
The sizeable chunk of interest bearing transaction accounts, maybe into the money markets anything to be aware of there was interest.
And of.
What you would expect in terms of migration.
You want to take that on Lora.
Thank you.
I don't think I said earlier, but I think in part some of that is not by your own designed by the customers and a lower rate interest rate environment tend to stay liquid in the hopes that they think interest rates are going to go up.
So they'll just convert to money markets, rather than Cds, and then again part of it is our remix of money and some of the efforts that we're trying to do.
Okay.
Thank you.
Thank you.
Does conclude the question and answer session of today's program I'd like to hand, the program back to Simone Lagomarsino for any further remarks.
So one of the thank all of you for joining US This morning, and this concludes our call today. Thank you all.
That completes our call today of recording copy of the call will be available on the company's website. Thank you for joining us.
Thank you Jonathan thank.
Thank you.
Okay.
Yes.
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Okay.
Hello.
Please go ahead.
Okay.