Q2 2021 Luther Burbank Corp Earnings Call
[music].
Good morning, and welcome to the Luther Burbank Corporation second quarter, 2021 earnings conference call.
All participants will be in a listen only mode.
Should you need assistance. Please press star zero on your telephone keypad.
After todays presentation, there will be an opportunity for 3 analysts covering Luther Burbank Corporation to ask question.
To ask a question. Please press Star then the number 1.
On your Touchtone phone.
If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Before we before we begin the company would like to remind you that discussions during this call contain forward looking statements made under the safe Harbor provisions of.
Of the U S Private Securities Litigation Reform Act 1995.
Luther Burbank Corporation does not undertake any obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
Numerous factors could cause our actual results to differ.
1 Lee from those described in forward looking statements.
More information on those factors. Please see the Companys periodic reports accessible at the Luther Burbank Corporation website and filed with the S. E C.
I would now like to turn the conference over to Simone Lagomarsino President.
Material CEO. Please go ahead.
Thank you Tamara good morning, and welcome to the Luther Burbank Corporation second quarter earnings Conference call.
This is Simone Lagomarsino, President and Chief Executive Officer, and with me today is Laura Tarantino, our Chief Financial Officer.
We appreciate.
And your joining us today.
We're pleased with our positive financial performance trends and that we're achieving the goals that we established in early 2019.
Primarily these goals included growing net interest margin to a level, which generates a return on average assets of at least 1% and simultaneous.
She actually produces a double digit return on average equity for our shareholders.
During the second quarter, we recorded net income of $21.2 million or <unk> 41 per diluted share an improvement of $2.8 million or 6 cents per diluted share as compared to the prior quarter earnings.
Growth in net income compared to the linked quarter was primarily attributed to a $2.2 million dollar increase in our net interest income and a $1.5 million reduction in noninterest expense, which was partially offset by a $1.1 million increase in income taxes.
Our returns on average assets and average.
Equity during the second quarter measured 1, 2% and 13, 3% respectively.
The earnings for the second quarter included a $2.5 million recapture of loan loss provisions and even if we exclude this reversal of loan loss provisions are adjusted net earnings would have produced.
Our return on average assets of $1.1 per cent and a return on average equity of 12, 2%.
Our net interest margin expanded to $2.3 1% during the second quarter, reflecting an 8 basis point improvement compared to the prior quarter.
While our yield on earning assets declined by 5 basis.
Points, largely due to prepayments of higher yielding loans as compared to rates on new loan volume. This trend was outpaced by a 15 basis point reduction in our cost of funds.
Our lending team generated record loan growth during the second quarter, we originated over $700 million in new.
Real estate loans in the period or an 85% increase as compared to the linked quarter. When we exclude the single family loan pool purchase we completed in the first quarter of this year.
The improvement in loan origination volume was directly correlated to the record high loan pipeline at the end of the first quarter.
We attribute.
The size of the pipeline and significant loan production during the quarter to reverting our loan underwriting policies to the pre pandemic requirements.
The interest rate associated with the new volume of $3.3 4% during the quarter was largely unchanged from the linked quarter coupons on new loan originations, which measured 3.
3.5% again, excluding the purchased loan pool.
Although $729 million in new loans were funded during the second quarter net loan growth totaled $172 million or 3.3% or 3% as the bank continued.
To experience accelerated levels of loan payoffs and Paydowns.
The conditional prepayment rate or CPR of our loan portfolio averaged approximately 28% this quarter and the interest rate on loans that paid off during the quarter averaged 4%.
Comparatively we had an average CPR of 20.
In the first quarter of 2020 before market interest rates rapidly decreased in response to the COVID-19 outbreak.
The yield on our loan portfolio declined by 8 basis points during the quarter, primarily due to the interest rate on loans paying off exceeding the rates on new loans as well as the lower coupon.
On the single family loan portfolio purchase that we completed last quarter, which was 231%.
However, as we previously noted the significant reduction in our cost of funding of 15 basis points during the second quarter outpaced the declining asset yields unless the primary contributor to our.
Percentage net interest margin.
Our cost of interest bearing deposits decreased 15 basis points for the period over the past 3 months, we had $1 billion of retail certificates of deposits that matured at an average rate of $1, 2.4% of which approximately 61% by balance renewed into.
Improved new term accounts at an average cost of 35 basis points or a rate reduction of almost 90 basis points.
Another 18% of maturing funds by balanced transferred to liquid deposit accounts.
We continue to forge deeper relationships with our deposit and loan customers, which.
Which was another goal that we established in early 2019.
At quarter end, approximately 65% of borrowers with loans originated in the first half of this year have at least 1 deposit account with the bank as compared to a level of 53% of customers with new loans funded in the full calendar year of 2020.
With continued outbound customer calling campaigns and in branch conversations. We're also seeing improved trends in our sales of fee income generating and non interest bearing service and deposit products.
Our cost of funding also benefited from a decline in the cost of our borrowings which measure to 8.3% for the period or.
Or a 31 basis point decline from the prior quarter.
This improvement was the result of the continued re pricing of our federal home loan bank advances as well as shorter overall duration.
We have historically and we will continue in the future using federal home loan bank advances as 1 of our tools to hedge the interest rate risk.
Risk associated with our hybrid arms and fixed rate loan products as we continue to grow our loan portfolio.
Now I'll move to asset quality.
As I noted earlier, our net income this quarter benefited from our ability to recapture of $2.5 million and loan loss reserve, which was primarily attributed to continued improvements in economic.
And the sustained strength of our residential real estate markets in the West coast.
I am pleased to announce that as of June 30, all of our borrowers who were granted temporary payment deferrals related to the pandemic have either returned to routine monthly payments or they've paid off their loans without concessions.
Condition as of the same day, we had 5 delinquent loans 2 of which have subsequently paid off in full.
Finally at quarter end, the bank had 3 non performing loans totaling $707000 with a weighted average loan to value ratio of 15%.
We did not have any real estate and as a result, our nonperforming assets to total assets ratio was just 1 basis point.
As you can probably tell I'm, particularly proud of the resiliency of our borrowers and the credit quality and performance of our loan portfolio.
During 2020, the bank added over 10.
Million dollars to our allowance for loan losses for the uncertainty related to the outbreak of COVID-19.
Year to date in 2021, we've recaptured $5 million of these loan loss provisions.
Our current allowance balance continues to have over $4 million in pandemic related qualitative reserves, which we may be able to recap.
Recapture in theater future quarters, if credit trends in the economy continued to remain strong.
Our allowance to total loans coverage ratio at quarter end was 64 basis points as compared to a ratio of 58 basis points at December 31, 2019 prior to the declaration of a national emergency.
Lastly in relation to the growth in our net earnings for the quarter, our reported that noninterest expense declined by $1.5 million from the linked quarter. The improvement was chiefly attributed to a $1.7 million reduction in compensation and related benefit expenses as a higher level of capitalized loan.
Creation costs outpaced increases in employee incentive payments related to this quarter's strong loan volume.
Additionally, payroll taxes were reduced in the second quarter compared to the linked quarter as payroll tax expense is typically elevated during the first calendar quarter, given the timing of annual bonus payments and the mechanics.
A tax ceilings.
Now I will turn to the balance sheet.
Our assets at the end of June totaled $7.3 billion, an increase of $351 million or 5% since year end.
The increase was primarily due to growth in loans and investments of $394 million 56.
Richard dollars, respectively, partially offset by a $109 million reduction in cash.
When we began this year, we indicated that we expected low single digit asset growth for 2021.
Our year to date growth has exceeded that projection primarily due to both the $288 million single.
$6 million loan portfolio that we purchased in the first quarter as well as internal loan production spar and by a large pipeline coming into the second quarter.
There are no additional loan purchases planned for this year and our loan pipeline has moderated to more typical levels. As a result, we would expect growth in the second half of the year.
<unk> to slow.
During the first half of this year growth in assets was primarily funded by $198 million in federal home loan bank advances and $138 million an increase deposits.
Retail deposits decreased by $14 million during the same period as the bank.
Supplemented retail deposit declines with wholesale deposits.
As a result of changes made by the FDIC towards broker deposit rules, which were effective on April 1 the bank intentionally exited a $120 million deposit relationship, which was previously categorized as retail funding, but after the.
The change on April 1st of the FDIC guidelines. It now became a broker deposits.
Additionally, we reclassified $37 million of funds from the retail to wholesale category based on this new definition of matchmaking by the FDIC.
We have examined the balance of our retail deposits.
Posit portfolio and do not believe that there will be any further significant impacts resulting from the FDIC fees updated rule.
The Companys capital position remains strong year to date through June 30, we have purchased 578000 shares of our common stock at an average price of $11.40 per share or 7.
<unk> discount to our June 30th tangible book value of $12.25.
We continue to have an active share repurchase plan with $12 million in remaining funds authorized for repurchases at quarter end.
And I'm very excited to announce that yesterday, the board of directors voted to increase our quarterly cash.
Percentage of <unk> 12 per common share.
The dividend will be payable on August 16th to shareholders of record as of August 6 we believe our strengthened core profitability over the past several quarters supports this increased level of return to our stockholders and with that I'll now pass the presentation to Laura for a few added financial.
Dividend details pertaining to the second quarter and our near term outlook.
Thank you Simone.
In more recent flattening of the yield curve along with the reduction in the 10 year Treasury by approximately 40 basis points since last quarter.
A change that we would have predicted and certainly not a bankers preferred shape of the yield curve. Nonetheless.
Nonetheless, as we look at our contractual position, we would expect some additional growth in our net interest margin over the balance of this year.
At June 30 day rate on our loan portfolio was 3.7% to 8% per <unk>.
8 basis points less than last quarter end.
While our loan rate will likely continue to decline about 3 basis points per month.
Financially early from turnover within the portfolio the impact from the maturity of $2.500 million interest rate swap..1 this past June and 1 upcoming in August will offset most of the negative effect of loans turnover.
Based on current competition, our new loan origination rates should remain.
Our second quarter levels.
However, given recent yield curve changes as well as excess liquidity in the market continued elevated prepayment patterns and the resultant acceleration of deferred loan costs are expected to continue to challenge loan yield.
And it remains downside risk of market participants decreasing new lending.
<unk> net to stimulate growth.
On the other hand, we do expect additional pricing improvements in our deposit portfolio, albeit at a slightly slower rate than experienced in the prior quarter.
What rate on our retail deposit portfolio of measured 64 basis points at June 30th or a 19 basis point reduction compared to the end of the linked quarter.
Quarter.
During the third quarter of this year, we have $1.1 billion of retail certificate accounts that are scheduled to reprice.
Which level similar to the second quarter's maturing balances.
However, the current weighted average rate on these CD maturities measures, 1.08%, which is about 30% lower.
Then our Cds with re price during the second quarter.
Additionally, our current month Cds are opening and are renewing at a weighted average rate of 46 basis points.
Or approximately 13 basis points greater than the cost of those that were with new or renewed during the month of April.
As shown on pages.
24, and 25 of our Investor presentation, our interest rate risk.
As measured by the economic value of equity model increased during the second quarter.
The percentage decrease in our estimated equity at a 200 basis point parallel upward shock in rates.
Increased to 23% from a level.
<unk> of 18% as of the end of the prior quarter.
The increase in risk measure quarter over quarter was primarily due to a change in our modeling assumptions and secondarily due to strong loan growth during the second quarter.
In June we added 2 new hedge positions, including a 100 million 3 year FH, albeit.
<unk> costs were 38 basis points.
And a 300 million fed funds interest rate swaps with a fixed pay lag F 'twenty, 1 and a half basis points.
Our current negative carry of approximately 12 basis points.
The cost of hedging our liability sensitive balance sheet increased during this quarter due to changes.
And the shape of the yield curve.
Based on continued anticipated loan growth additional hedge positions in the form of derivatives and our long term message there'll be advances are expected during the third quarter.
Given current rate conditions, the counter but net beneficial day net beneficial dynamics of our loan and deposit portfolio.
Albeit this somewhat offset by the cost of active interest rate risk management, we would expect our net interest margin to improve to a range of $2.4 zero to 2.45% by year end.
Lastly, because compensation expenses highly correlated to loan volume and our quarter end.
Portfolio per quarter and loan pipeline of 31% less than levels at the end of the first quarter. We would expect our non interest expense to increase an approximate $15 million in the third quarter.
This concludes our prepared remarks and at this time lost the operator to open the line for questions.
Okay to ask a question.
Please press star 1 on your telephone keypad again, Thats star 1 to ask a question to withdraw your question press the pound key.
Your first response is from Illinois Hagan of K B W. Please go ahead.
Hi, good morning, Thank you for taking.
Okay.
Good morning.
Just starting out on expenses I think you've kind of already touched on this.
Card remarks, but how much of an impact did deferred compensation have on salary line.
In Q2, 'twenty, 1 I'm understanding that origination volume can be challenging to predict but do you have the sand.
Like what is an appropriate run rate going forward are we back to more about 320.20 level.
So I'll start and then turn it over to Laura to give more specifics, but I just wanted to clarify that.
When you talk about you used the term deferred compensation.
The accounting would be <unk>.
<unk>.
For what FASB 91, where we take the.
The.
Cost of generating alone.
At the time of origination and we book that and amortize that cost over the expected life of the loans. So if we don't consider that a deferred compensation we consider.
Mr. FASB 91 loan origination costs that are booked.
Booked over the life of the loan we have we do have deferred compensation, which is separate and I just wanted to clarify that.
For for the conference call and Laura do you want to talk specifics I think you mentioned that in your comments about where we would expect that to be at the end of.
The third quarter, but do you want to quantify further share LNR.
I think I mentioned I would expect our noninterest expense next quarter or for the third quarter to approximate $15 million, which is about almost $1 million greater than the second quarter, primarily because of lower origination.
Okay.
That's it thank you and then kind of sticking with.
Uh huh.
Salaries, but how does your employee base compared to.
What you would consider full employment and are you seeing are you or anything any inflationary pressures on salary.
Given kind of the pressures that have been on hiring recently.
Okay.
So we had about 285 employees at the end of the second quarter and that's we've been pretty consistent we have been fortunate to be able to fill open positions as they come up.
And we have not seen significant.
Okay, great pressure on salary cost at this point. However, we are obviously hearing about it in the market and expect that that may happen over time, but at the present time.
We have again been able to fill open positions and generally speaking I mean, maybe a few here or there that are more difficult to tell but generally we've been able to fill out some per.
Or anything more to add.
No.
Accurate.
Okay, great. Thank you.
Thank you.
Your final responses from Gary Tenner of D. A Davidson. Please go ahead.
Hi, there. This is clarke rate speaking on behalf of Gary Tenner. My question is preferred.
Especially to the single family real estate originations year to date.
Excluding the Q1 purchases you were nearly a prepayment of 2019 full year levels. Let alone 2020 can you provide any thoughts on where you think these originally origination levels are going to be heading in the second half of the year and if you could just provide any more commentary on the CRE originations.
Nation level projections as well.
So again I'll start this is Simona and then I'll, let Laura pick up.
I would say that.
We have had a very strong.
Our single family loan origination both from the loans that we purchased but also loans that we've originated.
Significant portion of the loans that we're originating are for purchase transactions, which I think is is very.
Very important and it really is the key.
Aspect of our loan originations that separate us a little bit so rather than refis, which we're seeing an uptick in refis are generally across the.
From what the mortgage bankers Association has reported.
We are still seeing a very strong loan purchase volume and if you look at our loan pipeline at the end of June for single family alone. It is.
Very similar to where we were at the end of March So we expect at least in the near term.
The board of strong loan originations in single family.
With the recent downturn in tenure.
Treasuries, we may see an uptick in.
Loans prepayments, though as more people, who have adjustable rate mortgages with us decided to refi into fixed rate longer.
Longer term 30 year mortgages, but that it's unknown, we've seen a little bit of a slowdown recently, but we may see an uptick just based on what's happened with recent rates and then in terms of CRE, we've seen a significant reduction in <unk>.
Our pipeline as we would've expected as we noted in our prepared comments we.
We had a big uptick in the pipeline at the end of the first quarter and we have moved that volume through our origination process and booked those loans, but we're now down to more of a what we would have said typically would have been the normalized level and so we would expect normalized levels of.
CRE loans for the last half of this year and Laura if you want to get more specific on any of that I welcome you to do that.
Thank you actually don't think I have anything else to add.
Awesome. Thanks, guys.
And then just my other question you had the.
Or do you really talked about the repricing activity that could be happening.
Are you expecting to see your cost of funds moving from here it looks like the cost of interest bearing deposits down.
Down to 74 basis points down.
50 basis points from Q1 levels do you see them moving any further below that or you think it can be stable.
The levels of it all right.
Okay.
Laura you want to take that share.
I do think it'll move down from the spot rate at June 30th, but just maybe half of what we achieved last quarter.
There was a prelaunch differential in the cost of.
C DS.
Turing and the prior quarter end and we are definitely I think since then a little bit of.
Price sensitivity on where people are willing to rollover their C. DS at what rate right and we've even seen some movement just in too.
Money market accounts given.
Thank.
We're continued low rate interest rate environment.
How long do you maybe want to mention also it would be.
Swaps that.
It expired at the end of June so close to the end of this last quarter and then now I'm coming up so that people can understand the impact that might have as well to the margin.
Sure.
I noticed when I was speaking.
We had $1.500 million swap mature in June another $500 million matures in August and that should pretty well offset the <unk>.
Monthly decline, we see in our loan yield just from the turnover of the ports.
Slowly so that's going to be the largest.
Impact I think for our net interest margin over Q3, and Q4, because they had pretty significant negative carry.
Okay. There are no further questions in the queue at this time I will turn the call back over to Simone Lagomarsino.
Thank you very much and we want to thank all of you for joining us today for our second quarter Conference call and this concludes our second quarter earnings call. Thank you very much.
That concludes.
Our call today, a recorded copy of the call will be available on the company's website. Thank you for joining US you may now disconnect.
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Good morning, and welcome to the Luther Burbank Corporation second quarter 'twenty.
Tier 1 earnings conference call.
All participants will be in a listen only mode.
Should you need assistance. Please press star zero on your telephone keypad.
After todays presentation, there will be an opportunity for 3 analysts covering Luther Burbank Corporation to ask question.
We do ask a question. Please press Star then the number 1 on your Touchtone phone.
If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Before we before we begin the company would like to remind you that discussions during this call contain forward looking.
That's made under the Safe Harbor provisions of the U S. Private Securities Litigation Reform Act 1995 Luther Burbank Corporation does not undertake any obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
Statements risk factors could cause our actual results to differ materially from those described in forward looking statements.
More information on those factors. Please see the company's periodic reports accessible at the Luther Burbank Corporation website and filed with SEC.
I would now like to turn the conference over to.
New home Lagomarsino, President and CEO. Please go ahead.
Thank you Tamara good morning, and welcome to the Luther Burbank Corporation second quarter earnings Conference call.
This is Simone Lagomarsino, President and Chief Executive Officer, and with me today is Laura Tarantino our.
Small financial officer.
We appreciate that you're joining us today.
We're pleased with our positive financial performance trends and that we're achieving the goals that we established in early 2019.
Primarily these goals included growing net interest margin to a level, which generates a return on average assets.
Assets of at least 1%.
And simultaneously produces a double digit return on average equity for our shareholders.
During the second quarter, we recorded net income of $21.2 million or <unk> 41 per diluted share an improvement of $2.8 million or <unk> <unk> per.
Archie share as compared to the prior quarter earnings.
Growth in net income compared to the linked quarter was primarily attributed to a $2.2 million dollar increase in our net interest income and a $1.5 million reduction in noninterest expense, which was partially offset by a $1.1 million increase in income.
Taxes.
Our returns on average assets and average equity during the second quarter measured 1, 2% and 13, 3% respectively.
The earnings for the second quarter included a $2.5 million recapture of loan loss provisions and even if we exclude this reversal.
Full of loan loss provisions are adjusted net earnings would have produced a return on average assets of 1.1% and our return on average equity of 12, 2%.
Our net interest margin expanded to 231% during the second quarter, reflecting an 8 basis point improvement compared to the prior quarter.
While our yield on earning assets declined by 5 basis points, largely due to prepayments of higher yielding loans as compared to rates on new loan volume. This trend was outpaced by a 15 basis point reduction in our cost of funds.
Our lending team generated record loan growth during the second quarter.
We originated over $700 million in new real estate loans in the period or an 85% increase as compared to the linked quarter. When we exclude the single family loan pool purchase we completed in the first quarter of this year.
The improvement in loan origination volume was directly correlated to the record high volume.
We attribute the size of the pipeline and significant loan production during the quarter to reverting our loan underwriting policies to the pre pandemic requirements.
The interest rate associated with the new volume of 334% during the quarter was largely unchanged from the.
Pipe order coupons on new loan originations, which measured 335% again, excluding the purchased loan pool.
Although $729 million in new loans were funded during the second quarter net loan growth totaled $172 million or 3 point.
A linked to <unk> percent or 3% as the bank continued to experience accelerated levels of loan payoffs and paydowns.
The conditional prepayment rate or CPR of our loan portfolio averaged approximately 28% this quarter and the interest rate on loans that paid off during the quarter averaged 4%.
Comparatively we had an average CPR of 20% in the first quarter of 2020 before market interest rates rapidly decreased in response to the COVID-19 outbreak.
The yield on our loan portfolio declined by 8 basis points during the quarter, primarily due to the interest rate on loans paying off exceeding.
Seeding the rates on new loans as well as the lower coupon on the single family loan portfolio purchase that we completed last quarter, which was 231%.
However, as we previously noted the significant reduction in our cost of funding of 15 basis points during the second quarter outpaced the.
Declining asset yields and was the primary contributor to our improved net interest margin.
Our cost of interest bearing deposits decreased 15 basis points for the period over the past 3 months, we had $1 billion of retail certificates of deposits that matured at an average rate of $1, 2.4% of which approximately.
61% by balance.
<unk> into new new term accounts at an average cost of 35 basis points or a rate reduction of almost 90 basis points.
Another 18% of maturing funds by balanced transferred to liquid deposit accounts.
We continue to forge.
<unk> relationships with our deposit and loan customers, which was another goal that we established in early 2019.
At quarter end, approximately 65% of borrowers with loans originated in the first half of this year have at least 1 deposit account with the bank as compared to a level of 53% of customers with new loans funded.
It's deeper in the full calendar year of 2020.
With continued outbound customer calling campaigns and in branch conversations. We're also seeing improved trends in our sales of fee income generating and non interest bearing service and deposit products.
Our cost of funding also benefited from a decline in the cost of our borrowings.
<unk>, which measures to 8.3% for the period or a 31 basis point decline from the prior quarter.
This improvement was the result of the continued re pricing of our federal home loan bank advances as well as shorter overall duration.
We have historically and we will continue in the future using federal home.
<unk> advances as 1 of our tools to hedge the interest rate risk associated with our hybrid arms and fixed rate loan products as we continue to grow our loan portfolio.
Now I'll move to asset quality.
As I noted earlier, our net income this quarter benefited from our ability to recapture of $2.5 million in loan loss reserves.
Loans, primarily attributed to continued improvements in economic conditions and the sustained strength of our residential real estate markets in the West coast.
I am pleased to announce that as of June 30, all of our borrowers who were granted temporary payment deferrals related to the pandemic have either returned to routine monthly payments.
Which was or they've paid off their loans without concessions.
As of the same day, we had 5 delinquent loans 2 of which have subsequently paid off in full.
Finally at quarter end, the bank had 3 nonperforming loans totaling $707000 with a weighted average.
Average loan to value ratio, Joe up 15%.
We did not have any real estate loans and as a result, our nonperforming assets to total assets ratio was just 1 basis point point could.
As you can probably tell I'm, particularly proud of the resiliency of our borrowers and the credit quality and performance of our loan portfolio.
During 2020, the bank added over $10 million to our allowance per loan losses for the uncertainty related to the outbreak of COVID-19.
Year to date in 2021, we've recaptured $5 million of these loan loss provisions.
Our current allowance balance continues to have over $4 million in pandemic related.
<unk> qualitative reserves, which we may be able to recapture in future quarters, if credit trends in the economy continued to remain strong.
Our allowance to total loans coverage ratio at quarter end was 64 basis points as compared to a ratio of 58 basis points at December 31, 2019 prior to the declaration.
Of a national emergency.
Yeah.
Lastly in relation to the growth in our net earnings for the quarter I reported that noninterest expense declined by $1.5 million from the linked quarter. The improvement was chiefly attributed to a $1.7 million reduction in compensation and related benefit expenses.
As a higher level of capitalized loan origination costs outpaced increases in employee incentive payments related to this quarter's strong loan volume.
Additionally, payroll taxes were reduced in the second quarter compared to the linked quarter as payroll tax expense is typically elevated during the first calendar.
The ratio given the timing of annual bonus payments and the mechanics of tax ceilings.
Now I will turn to the balance sheet.
Our assets at the end of June totaled $7.3 billion, an increase of $351 million or 5% since year end.
The increase was primarily due to growth in loans and investments.
A $394 million and $56 million respectively.
Really offset by a $109 million reduction in cash.
When we began this year, we indicated that we expected low single digit asset growth for 2021.
Our year to date growth has exceeded that projection primarily.
Due to both the $288 million single family loan portfolio that we purchased in the first quarter as well as internal loan production by.
By a large pipeline coming into the second quarter.
There are no additional loan purchases planned for this year and our loan pipeline has moderated to more typical levels as a.
Result, we would expect growth in the second half of the year to slow.
During the first half of this year growth in assets was primarily funded by $198 million in federal home loan bank advances and $138 million an increase deposits.
Retail deposits decreased by 14.
Million dollars during the same period as the bank.
Supplemented retail deposit declines with wholesale deposits.
As a result of changes made by the FDIC towards broker deposit rules, which were effective on April 1 day.
Bank intentionally exited a $120 million deposit relationship which was previously.
Categorized as retail funding, but after the change on April 1st of the FDIC guidelines. It now became a broker deposits.
Additionally, we reclassified $37 million of funds from the retail to wholesale category based on this new definition of matchmaking by the FDIC.
We have examined the balance of our retail deposit portfolio and do not believe that there will be any further significant impacts resulting from the fdic's updated rule.
The Companys capital position remains strong year to date through June 30, we have purchased 578000 shares of our common stock at an average price of $11.
<unk> 40 per share or a 7% discount to our June 30th tangible book value of $12.25.
We continue to have an active share repurchase plan with $12 million in remaining funds authorized for repurchases at quarter end.
And I'm very excited to announce that yesterday the board of directors voted.
<unk> to increase our quarterly cash dividend to <unk> 12 per common share the.
The dividend will be payable on August 16th to shareholders of record as of August 6 we believe our strengthened core profitability over the past several quarters supports this increased level of return to our stockholders and with that I'll now pass.
The presentation to Laura for a few added financial details pertaining to the second quarter and our near term outlook.
Thank you Simone.
In more recent flattening of the yield curve along with the reduction in the 10 year Treasury by approximately 40 basis points since last quarter.
A change that we would have predicted and certainly not a bankers preferred shape.
Yield curve Nonetheless.
Nonetheless, as we look at our contractual position, we would expect some additional growth in our net interest margin over the balance of this year.
At June 30 day rate on our loan portfolio was 378% growth.
8 basis points less than last quarter end.
While our loan rate will likely continue to.
Decline about 3 basis points per month nearly from turnover within the portfolio the impact from the maturity of $2.500 million interest rate swaps..1 this past June and 1 upcoming in August will offset most of the negative effect of loans turnover.
Based on current competition.
<unk>, our new loan origination rates should remain near our second quarter levels.
However, given the recent yield curve changes as well as excess liquidity in the market continued elevated prepayment patterns and the resultant acceleration of deferred loan costs are expected to continue to challenge loan yields.
And there remains downside risk of market.
Participants decreasing new lending rates to stimulate growth.
On the other hand, we do expect additional pricing improvements in our deposit portfolio, albeit at a slightly slower rate than experienced in the prior quarter.
Our spot rate on our retail deposit portfolio of measured 64 basis points at June 30th or 19 basis points.
The reduction compared to the end of the linked quarter.
During the third quarter of this year, we have $1.1 billion of retail certificate accounts that are scheduled to reprice, which level similar to the second quarter's maturing balances.
However, the current weighted average rate on these CD maturities measures 1.08%.
Which is about 13% lower than our Cds, which we price during the second quarter.
Additionally, our current months Cds are opening and are renewing at a weighted average rate of 46 basis points or approximately 13 basis points greater than the cost of those that were new or renewed during the month of April.
As shown on pages 24, and 25 of our Investor presentation, our interest rate risk as measured by the economic value of equity model increased during the second quarter.
The percentage decrease in our estimated equity at a 200 basis point parallel upward shock and rate increased to 23.
From a level of 18% as of the end of the prior quarter.
The increase in risk measure quarter over quarter was primarily due to a change in our modeling assumption and secondarily due to strong loan growth during the second quarter.
In June we added 2 new hedge positions, including a $100 million.
<unk> FHL advance at a cost of 38 basis points.
And a $300 million fed funds interest rate swap with a fixed pay lag of 'twenty, 1 and 5 basis points.
Our current negative carry of approximately 12 basis points.
The cost of hedging our liability sensitive balance sheet increased during this quarter.
Due to changes in the shape of the yield curve.
Based on continued anticipated loan growth additional hedge positions in the form of derivatives and our long term <unk> advances are expected during the third quarter.
Given current rate conditions, the counter but net beneficial day net.
Net beneficial dynamics of.
Of our loan and deposit portfolios somewhat offset by the cost of active interest rate risk management, we would expect our net interest margin to improve to a range of $2.4 zero to 2.45% by year end.
Lastly, because compensation expenses highly correlated to loan volume.
Per quarter at our quarter end loan pipeline is 31% less than levels at the end of the first quarter. We would expect our non interest expense to increase an approximate $15 million in the third quarter.
This concludes our prepared remarks and at this time I'll ask the operator to open the line for questions.
And.
Okay to ask a question.
Please press star 1 on your telephone keypad again that star 1 to ask a question to withdraw your question press the pound key.
Your first response is from Illinois Hagan of K B W. Please go ahead.
Hi.
Thank you for taking my question.
Morning.
Just starting out on the expenses I think you've kind of already touched on this in a paired remarks, but how much of an impact did deferred compensation have on salary line until 'twenty, 1 I'm understanding that origination volume can be challenging to.
Predict but do you have a sense for what is an appropriate run rate going forward are we back to more about 320.20 level.
So I'll start and then turn it over to Laura to give more specifics, but I just wanted to clarify that when.
When you talk about you used the term deferred compensation.
The accounting.
It would be.
Considered the FASB 91, where we take the cost of generating alone.
At the time of origination and we book that and amortize that cost over the expected life of the loans. So if we don't consider.
Figured out of deferred compensation, we consider that just the FASB 91 loan origination costs that are booked.
Booked over the life of loan we have we do have deferred compensation, which is separate and I just wanted to clarify that.
For for the conference call and Laura do you want to talk specifics I think you mentioned that in your comments about you know where we would expect.
That to be at the end of the third quarter, but do you want to clarify further share Illinois.
I think I mentioned I would expect our noninterest expense next quarter or for the third quarter to approximate $15 million, which is about oh.
It's a million dollars greater than the second quarter, primarily because of lower origination.
Okay, great. Thank you and then kind of sticking with.
Salaries, how does your employee base compared to what you would consider full employment and are you seeing are you anything any inflationary pressures on salary.
Given kind of the pressures that have been on hiring recently.
Okay.
We had about 285 employees at the end of the second quarter and that's we've been pretty consistent we have been fortunate to be able to fill open fill open positions as they come up.
And.
We have.
<unk> seen significant pressure on salary cost at this point. However, we are obviously hearing about it in the market and expect that that may happen over time, but at the present time we.
We have again been able to fill open positions in and generally speaking I mean, maybe a few here or there that are more difficult to fill but generally we've been at.
But to fill our open positions.
Or anything more to add.
No.
Accurate.
Okay, great. Thank you.
Thank you your final responses from Gary Tenner of D. A Davidson. Please go ahead.
Hi, there. This is clarke rate speaking on behalf of Gary Tenner.
My question refers to the single family real estate originations year to date.
Excluding the Q1 purchases.
Pre pandemic 2019 full year levels, let alone 2020 can you provide any thoughts on where you think these originally origination levels are going to be heading in the second half of the year and if you could just provide any more commentary on.
On the CRE origination level protections as well.
So again I'll start this is Simona and then I'll, let Laura pick up I would say that we have had a very strong.
Single family loan origination both from the loans that we purchased but also loans that we've originated.
A significant portion of the loans that we're originating are for purchase transactions, which I think is is very.
Very important and it really is the key aspect of our loan originations that separate us a little bit so rather than refis, which we're seeing an uptick in refis.
<unk> generally across the board from what the mortgage Bankers Association has reported.
We are still seeing a very strong loan purchase volume and if you look at our loan pipeline at the end of June for single family alone. It is.
Very similar to what where we were at the end of March So we expect.
Just in the near term to have strong loan originations in single family with the recent downturn in tenure.
Treasuries, we may see an uptick in.
Loans prepayments, though as more people, who have adjustable rate mortgages with bass decided to refi into.
<unk> fixed rate longer term 30 year mortgages, but that.
We've seen a little bit of a slowdown recently, but we may see an uptick just based on what's happened with recent rates and then in terms of CRE, we've seen a significant reduction in.
Our pipeline as we would've expected as we noted.
Prepared comments, we had a big uptick in the pipeline at the end of the first quarter and we have moved that volume through our origination process and booked those loans, but we're now down to more of a what we would have said typically would have been the normalized level and so we would expect normalized levels of.
CRE loans for the last half of this year and Laura if you want to get more specific on any of that I welcome you to do that.
Thank you actually don't think I have anything out there.
Awesome. Thanks, guys.
And then just my other.
Question, you have or do you really got you talked about the repricing activity that could be happening.
Were you expecting to see your cost of funds moving from here it looks like the cost of interest bearing deposits.
Down to 74 basis points down.
Down 50 basis points from Q1 levels do you see them moving any further below that or do you think.
E D.
Okay.
Laura you want to take that share.
Do think it'll move down from the spot rate at June 30th.
Maybe half of what we achieved last quarter.
There was a pretty large differential in the cost of.
Cds that were maturing in the prior quarter end and we are definitely I think.
<unk> seen a little bit of.
Price sensitivity on where people are willing to rollover their C DS at what rate right.
We've even seen some movement just to money market accounts given.
Continued low rate interest rate environment.
How long do you maybe want to mention also it would be.
Swaps that.
It expired at the end of June so close to the end of this last quarter and then now coming up so that people can understand the impact that might have as well to the margin.
Sure.
Notice it when I was speaking.
We had $1.500 million swap mature in June another $500 million matures in August.
And that should pretty well offset the <unk>.
Monthly decline, we see in our loan yield just from the turnover of the Portugal.
So that's going to be the largest.
Impact I think for our net interest margin over Q3, and Q4, because they had pretty significant negative carry.
Okay. There are no further questions in the queue at this time I will turn the call back over to Simone Lagomarsino.
Thank you very much and we want to thank all of you for joining us today for our second quarter Conference call and this concludes our second quarter earnings call. Thank you very much.
That concludes.
Today, a recorded copy of the call will be available on the company's website. Thank you for joining US you may now disconnect.