Q4 2021 Luther Burbank Corp Earnings Call
Good morning, and welcome to the Luther Burbank Corporation fourth 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.
After today's presentation there'll be opportunity different analyst covering Luther Burbank Corporation to ask the question to ask a question. Please press Star then one on you touched on the telephone.
Before we begin the company would like to remind you that discussions during this call contain forward looking statements made under the safe Harbor provision at the U S. Private Securities Litigation Reform Act of 995.
Burbank Corporation does not undertake any obligation to update any forward looking statements whether as a result of new information further events or otherwise numerous factors could cause our actual results to differ materially from those described in forward looking statements.
For more information on those factors. Please see the Companys periodic reports accessible and Luther Burbank Corporation website and filed with the SEC.
I will now turn the conference over there.
Lagomarsino, President and CEO . Please go ahead.
Thank you Valerie and good morning, everyone and thank you for joining our earnings call today.
As Simone Lagomarsino, President and CEO and with me is Laura Tarantino our CFO .
This morning, we will discuss Luther Burbank Corporation fourth quarter and full year 2021 results share some of our expectations for 2022 and update you on our strategic priorities before we take our analysts' questions.
It's coming up on the two year, mark or since the outset of the pandemic and I want to take a moment and acknowledge the outstanding work of our employees. Our branch employees have continued to serve our customers on the frontline each day, while the vast majority of our administrative employees quickly pivoted two years ago to a remote work environment.
And are currently continuing to work remotely.
We're extremely grateful and we truly appreciate the dedication and commitment of our employees over these past two years our team members have been remarkably resilient.
Now, let's turn to our financial performance.
Net income for the fourth quarter was $23 4 million or <unk> 45 per diluted share as compared to $24 7 million or 48 cents per diluted share in the linked quarter.
The one $4 million decrease in net income that we experienced during the quarter was primarily due to a reduction in recaptured loan loss provision provisions, which declined by $1 $6 million after tax in the fourth quarter as compared to the third quarter.
Although less impactful fourth quarter net income benefited from a $432000 after tax improvement in net interest income, which was directly related to a 10 basis point improvement in net interest margin.
However was largely offset by higher noninterest expense of $418000 after tax which was primarily due to higher compensation expense.
For the year ended 2021, our net income was $87 8 million or $1 70 per share.
Earnings were $47 $8 million greater than our prior fiscal year due to three key factors.
The first of which was the significant improvement in our net interest margin. The second was the continued strong performance of our loan portfolio and the third and to a lesser extent with lower noninterest expenses I will now expand on each of these three items.
First net interest margin grew by 43 basis points and net interest income increased by $31 8 million or $22 $5 million after tax for the year ended 2021.
These improvements were attributed to our ability to reduce the cost of our deposits.
This was facilitated by the drop in market interest rates in early 2020 as a result of the pandemic. However, during the past 18 months. We believe that we have also made improvements to the composition of our deposit portfolio.
We focused on growing our specialty in business deposits, which we expect will be generally less rate sensitive and as a result, less costly than our typical consumer deposits.
As a result, the ratio of specialty and business deposits to our total retail deposit portfolio has grown to 25% at year end 2021 from 21% at year end 2020.
Next our credit metrics remained very strong throughout 2021, the provisions that we made 2020 for the uncertainty of the impact that the pandemic might have had on our borrowers was Fortunately conservative.
As a result, and similar to many other banks loan loss reserves set aside for potential problem credits during 2020, we're substantially reversed during 2021.
Reversal of loan loss provisions in 2021 totaled $10 8 million, whereas in 2020, we recorded loan loss provisions of $10 6 million.
This adjustment in reserves resulted in a $21 $4 million pre tax or $15 $1 million after tax improvement in net earnings during 2021.
Lastly, net income for 2021 improved due to a $14 $8 million or $10 $5 million after tax reduction in noninterest expense.
This decrease was primarily due to a $10 $4 million nonrecurring prepayment penalty incurred in the prior year for the early payoff of FHA advances.
Additionally, compensation costs were $4 $5 million lower for fiscal year 2021, due to greater capitalized salary levels attributed to a 46% year over year growth in loan origination volume.
Our 2021 loan volume of $2 $1 billion was the second highest production year in our bank's history, and only $60 million less in the highest volume we recorded which was in 2017 and this leads me to an interesting segue pertaining to our balance sheet trends for 2021.
Yeah.
Our total assets for 2021 grew $274 million or 4% during the year and ended at $7 2 billion.
This growth was almost entirely attributed to 4% growth in our loan portfolio.
Although our lending teams logged a robust increase in production over the prior year elevated loan prepayments significantly muted those efforts.
In contrast to 2021 loan growth for 2017 with similar loan volumes and when excluding loan sale activity that year would have been 28%.
In the end we are pleased with our 2021 asset growth, which was in line with our expectations for the year, although required considerably more work by our team members than we had planned.
While still on the topic of loans the credit quality of our loan portfolio places us among the strongest in the industry, we experienced no loan charge offs during 2021 at.
At the end of the year, we had $2 $3 million in nonperforming loans or 0.03% of assets and over half of that amount is currently paying as agreed.
At the same date, we had only one delinquent loan which was not included within our nonperforming totals and that had a balance of $271000.
Our year end allowance coverage ratio was 56 basis points and continues to include approximately $3 $5 million in qualitative reserves that our pandemic related and which we felt were prudent to maintain until we have more information on the potential impacts of the omicron variant.
Our 2000 22021 asset growth was fully funded by increases in our retail deposit portfolio of $298 million or 6%.
Retail branch deposits grew over the prior year as previously noted most of the retail deposit growth occurred in our business and specialty deposit products.
The categories, reflecting the most growth where the 10 31 exchange and fiduciary verticals.
As a result of strong retail deposit growth, we were able to reduce wholesale funding such as federal home loan bank advances and broker deposits.
Before turning to our outlook for this year I mentioned that in 2021 due to our strong earnings and capital levels. The company returned $27 million to shareholders in the form of common stock dividends totaling $18 million and share repurchases of $9 million I am pleased to report that yesterday, our board of directors approved a first quarter.
<unk> 2022 cash dividend of <unk> 12 per common share and that will be paid on February 14th.
Looking forward I'd like to share our companys outlook for calendar year 2022.
Current loan offer rates for commercial real estate and single family mortgages remain below levels that commonly existed between 2015 and 2020.
Loans with these origination dates represent 61% of our loan portfolio at year end 2021.
Therefore, we expect that payoff rates will remain elevated.
With this in mind, our intention is to position ourselves to originate new loan volume for 2022 that is similar to our 2021 production levels.
Late last year, we added a loan officer dedicated to lending in our geographical expansion areas of Arizona, Colorado, and Utah, and we continue to source additional experienced lending staff in our existing west coast markets.
As a result of our plans, we anticipate asset growth of 3% to 5% for 2022.
We expect to fund asset growth with a combination of retail deposits and wholesale funding sources and have no plans to add to our branch footprint or to close any of our existing franchise.
Although the Federal Reserve Bank has not yet started its monetary tightening we believe that our net interest margin will likely have peaked in the fourth quarter of 2021.
We noted in prior quarters that lung competitors decreased offer rates during 2021, even when long term treasury rates began rising which we ascribe to the desire by many institutions to deploy the excess liquidity liquidity currently held within the financial services industry.
As a result, each month, new loan volume continues to be added at coupons less than our current portfolio rate.
While the rate on loan prepayments remains higher than the average portfolio rate, causing downward pressure on loan yields.
For the past several quarters this decline and the rate of earning assets. Excluding the positive impact of interest rate swap maturities that occurred during 2021 was mitigated by reductions in the cost of our deposit portfolio. However, fewer reductions in deposit costs are expected going forward.
Several increases in short term interest rates are expected throughout 2022, given the excess liquidity currently held in financial institutions were not expecting that initial federal reserve rate hikes will have an immediate impact on deposit rates.
As we are anticipating that it will take at least one year for excess liquidity to work itself out of the financial institution industry as such while we do not expect that we will see much reduction in the current cost of our retail deposits. We do believe that we will be able to hold deposit rates relatively flat throughout 2022.
Current deposit competition is primarily seen from credit unions in one bank competitor that continues to offer above market rates on money market accounts.
The resulting impact of our rate views to our projected financial performance is that we believe that our net interest margin will decline by approximately five basis points per quarter. During 2022 of course. This is largely dependent on a number of factors, including the speed and degree of the federal reserve rate hikes, and secondly, the impact that those rate increases.
Have on both loan and deposit competitive pricing.
We believe that real estate markets and our credit trends will remain strong in the markets in which we operate and that our allowance coverage ratio will remain relatively consistent with the current levels. We.
We expect 2022 loss provisioning to be exclusively related to loan portfolio growth.
Our banks still operates under the incurred loss methodology for the loan loss allowance and we expect to adopt seasonal in the first quarter of 2023.
Based on current results of our seasonal model test work, we believe that our implementation of <unk> will not result in any significant change to our allowance. However, the ultimate impact of adoption will be dependent on projected economic trends at the time of adoption.
We routinely evaluate new business opportunities that may generate increases in noninterest income and while fee income from our deposit activities is expected to continue to trend upwards existing lines of business are not yet a meaningful contributor to net earnings.
Okay.
Total non interest expense is expected to increase about 8% to 10% compared to 2021 levels.
Greater costs are expected for employee compensation as we backfill a higher than normal levels of turnover and add some specialists in the areas of fraud and data governance.
Other notable increases are expected in advertising and data processing as we look to improve our digital presence and customer experiences.
Lastly, higher than typical third party audit fees will likely be incurred for the first year implementation of Sox 400 will be for <unk> and related to the 2023 planned implementation of seasonal.
Our expected noninterest expense run rate is projected at approximately $16 $5 million per quarter, and our effective tax rate should approximate 29, 3%.
Lastly, before turning our presentation over to Laura for a more granular focus on our numbers I would like to give you a brief update on our strategic priorities first our commitment to credit quality remains steadfast.
Although we returned to our underwriting requirements to pre pandemic terms, we intend to maintain strong credit quality and that is included in our larger loan origination projections that I noted earlier.
We believe that we have made progress on improving the composition of our deposit portfolio, but we have more work to do and expect that it will take several years to meaningfully grow lower cost transaction and business accounts.
Each year, we prioritize the quality of earnings with a goal to maintain our return on average assets are greater than 1% and to provide a double digit return on equity for our shareholders. We believe we will achieve these measures for 2022.
While we remain heavily reliant on net interest income we will continue to strive to keep our efficiency ratio at levels that outperformed industry averages. As previously noted we continue to evaluate niche market opportunities to increase fee income <unk> create greater franchise value. However, it is important for us that any strategic opportunity be.
A good culture fit and provide long term benefits for our shareholders.
Finally, we have adopted an ESG framework, which includes our commitment to further diversity equity and inclusion within our employee base and vendor spend with a small number of branches that support our $7 billion balance sheet, along with our emphasis on residential real estate lending. We believe we have a small carbon footprint. We've also formalized our ESG accountability struck.
<unk> with the formation of a management level ESG Council that reports to our governance and nominating committee our.
Our attention to ESG considerations will be ongoing for years to come and with that I'll now pass the presentation to Laura for some additional brief comments.
Thank you and good morning, everyone.
<unk> indicated we expect our net interest margin to come under pressure. This year. So I'd like to provide some additional information to explain this expected trend.
Loan offer rates at a spread to treasuries have significantly compressed over the past year, essentially driven by fierce competition for loan volume to deploy excess liquidity in the industry and.
In December 2021, we funded over $200 million in new loan volume primarily comprised of five year hybrid arms, which carried an average interest rate of 315% or an approximate 2% spread to the five year treasury at the end of the year. Conversely, one year ago in December of 2020, our average loan offer rate of three.
Three 5% also comprised primarily of the five year fixed hybrid loans was priced at an approximate 3% spread to the five year treasury at that time.
This represents a 1% spread compression over the one year period.
The weighted average interest rate of our loan portfolio at December 31 was 367% and therefore, we're currently funding at rates approximately 50 basis points less than our average portfolio rates.
Last month, our loan portfolio payoffs and Paydowns of $192 million carried an existing interest rate of 389% of approximately 20 basis points higher than our average loan portfolio rate.
As we look at funding cost at year end 2021.
Walt rate on our retail deposit portfolio was 46 basis points during December our interest rate on new and renewed term accounts averaged 45 basis points, while new non maturity accounts had an average interest rate of 32 basis points.
During the first quarter of 2000 $20 million to $656 million of our term deposits with a current weighted average rate of 69 basis points will mature.
Thereafter monthly CD maturities during 2022.
Fair weighted average interest rates of 52 basis points or less and as a result, the ability to improve our retail deposit costs. Upon repricing is far more limited than existed in the previous fiscal year.
Given our liability sensitive balance sheet and the likelihood of several several rate increases this year, we expect to execute approximately $1 billion and new hedge instruments throughout 2022.
Actual results could be different at December 31, 2021, our interest rate risk that's modeled by the net interest income sensitivity model forecast is that a 100 basis point parallel yield curve increase would reduce our net interest income by approximately $2 million.
We typically use a combination of on balance sheet and it will be long term advances and off balance sheet interest rate swaps or cats to hedge our interest rate risk.
This concludes our prepared remarks and at this time, we will ask the operator to open the lines for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your touch tone telephone.
One moment for our first question.
Our first question comes from Woody lay of <unk>. Your line is open.
Hey, good morning.
Good morning Woody.
So elevated pay offs.
Continued to offset really strong loan production it looks like prepayments at least on the CRE side peaked in November and took a small step down in December is there any optimism that we could see prepayment levels normalize in 2020 22.
Or do you want to.
Comment first.
Sure.
As someone tried to indicate during her presentation. When we look back at where origination rates, where particularly in 2018 when they were over four 5%. We still have quite a few loans in our portfolio that have a huge benefit of repricing them.
<unk> are coming up towards the end of their prepayment penalty terms. So as much as we would like to be optimistic that things will slow down we're preparing for similar payoff levels for 2022.
Got it.
And then.
I think in your prepared remarks, you said asset growth to be between three and 5% in 2022.
Would you look to grow your securities portfolio.
Loans continue to shrink or will you just keep that in cash and sort of wait for the payoff.
Environment to kind of normalize.
Typically we would.
Not to deploy much more into securities we tend to keep our securities very vanilla and conservative therefore low yielding.
If we got to a point, where I could not.
Reduce wholesale funding by the excess cash flow and the balance sheet, we might but.
But we tend to prefer to use our capital for loan growth.
Okay, and then last for me you disclosed you have about $2 5 million in quality qualitative reserves attributed to the pandemic remaining any timeline on when these reserves could be released or what you kind of hold onto them through this vehicle adoption.
Difficult to say I mean, we really just take each quarter at a time and it's not.
The $2 5 million has nothing to do with Stifel. It's all about how we feel about the pandemic environment.
Right Okay.
Okay. Thanks, guys. Thank.
Thank you.
Thank you.
Thank you. Our next question comes from Matthew Clark with Piper Sandler Your line is open.
Hey, good morning.
Good morning, Matthew.
Maybe just revisiting the the loan yield outlook.
The weighted average rate in the portfolio.
About $3 51.
And I thought I heard you say that new business was in and around there can you just revisit a couple of those numbers and.
I know that you have stuff, that's maturing thats coming off at a higher rate but.
Trying to get a sense for the incremental pressure on loan yields are.
Our coupon on the portfolio was 367% at year end.
And we're currently funding at about 315.
That's 50 basis points less than the portfolio rate and then on the opposite side got it prepayments 2020 basis points higher.
Yeah.
Okay.
Okay.
Yes.
And then on the.
The margin pressure.
Basis points a quarter whats your.
Underlying assumption on rate hikes in <unk>.
What's the.
Does it beta youre assuming.
Maybe over.
The first 100 basis points.
Our projections of rate hikes or potentially at least three hikes during the year.
Our general rate view is that we think we can hold deposit cost.
Relatively flat, meaning that we don't expect to see a lot of pressure at the moment also mentioned earlier it could change based on competitive pressures, but at this point given the excess liquidity in the market. We think that we can hold those costs relatively flat.
Okay.
Yes.
Yes, I did hear you say that.
Would you say that im sorry.
Okay and then.
On the.
Asset growth outlook should we assume that's consistent with your loan growth expectations or would you expect loan growth to lag that.
No, it's typically related to loan growth.
Okay.
Okay.
And then on the expense run rate.
16 of half a quarter a decent step up here.
Do you feel like you'd get to that run rate right right away or do we kind of grind to that.
By mid year and start to exceed it in the back half.
I think in general it's.
Pretty level over the year.
Our projections are always that we're starting hiring right away in the beginning of the year and that we're rolling out our technology products, sometimes those get delayed.
It started a little slower but in general in general we're thinking about <unk> 16.
16, and a half a quarter.
And generally for <unk>.
Employer taxes in the first quarter, we tend to have a higher expense there. So even if we don't hire everybody right away, we still have a little bit higher expense I think generally in the first quarter because of that.
Good point, and then of course, we do incentives or merit increases in the first quarter as well.
Okay, and then on the buyback, which kind of dried up a little bit this quarter.
Your thoughts on.
Buying back stock this year.
Our buyback is continues to be open and we continue to be monitoring and.
In.
Yes.
When we are able to we do.
Repurchase shares we've repurchased $9 million worth of shares last year and so the buyback is still open and we're continuing to monitor the market.
Okay. Thank you.
Thank you Matthew Thank you.
Our next question comes from Gary Tenner of D. A Davidson your line is open.
Thanks, Good morning, guys, Matt, Matt just answered or asked my remaining questions. Thanks.
Okay. Thanks, Gary.
Thank you I'm showing no further questions I'd like to turn the call back over to Mr. Lagomarsino for any closing remarks.
Terrific. Thank you Valerie and thank you all very much for joining US today. This concludes our call and we appreciate you joining our call today. Thank you.
Thank you that completes our call today, a recorded copy of the call will be available on the company's website. Thank you for joining.
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