Q1 2022 Luther Burbank Corp Earnings Call
Good morning, and welcome to the Luther Burbank Corporation first quarter 2022 earnings Conference call all participants will be in a listen only mode.
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After today's presentation there'll be an opportunity for analysts covering Luther Burbank Corporation to ask questions to ask a question you will need to press star one as a reminder, this call is being recorded 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 the U S Private Securities Litigation Reform Act of 1995.
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 actual results to differ materially from those described in forward looking statements.
More information on those factors. Please see the Companys periodic reports accessible at Luther Burbank Corporation website and filed with the F. E. S E T.
I would now like to turn the conference over to Simone Lagomarsino, President and Chief Executive Officer. Please go ahead.
Thank you Norma.
Good morning, and welcome to the Luther Burbank Corporation first quarter earnings call. This is Simone Lagomarsino, President and CEO and with me is Laura Tarantino our CFO Mrs.
This morning, we'll focus on the highlights of our financial performance for our first quarter and then we'll open the line for analysts questions.
Our net income for the first quarter was $22 $9 million or <unk> 45 cents per diluted share as compared to $23 $4 million or <unk> 45 cents per diluted share in the linked quarter.
Our results reflected a 443000 dollar decline in net earnings compared to the prior quarter.
This modest decline in net earnings was primarily due to compression of our net interest margin and a mark to market adjustment for our equity securities.
These negative pressures on our net earnings were somewhat offset by a greater recapture of loan loss provisions as compared to the prior quarter.
Let me now take each of these three items individually and provide a little more information.
In our last conference call. We explained that we anticipated that our net interest margin would compress each quarter this year.
We explained that just compression would occur because our loan portfolio is projected to reprice lower in the near term due to loan origination volume carrying lower rates on both the rates on loan payoffs as well as the weighted average rate on the overall portfolio.
We also stated that we felt that the cost of our deposit portfolio had reached its floor.
Our net interest margin for the first quarter of this year declined by three basis points to 254%.
This was primarily due to a 10 basis point decrease in loan yields.
Net interest margin compression was partially abated, however by a three basis point decline in the cost of interest bearing deposits.
The net impact was a $494000 after tax reduction in net interest income.
We anticipate that the velocity of magnitude of further rate increases, which are generally forecasted this year will certainly place upward pressure for deposit or expectations and therefore on deposit rates.
Furthermore, relatively strong loan growth in the industry may deplete excess market liquidity earlier than we originally anticipated, which could also create an upper trending and more competitive deposit rate market.
On the other hand, we've recently increased offer rates on all of our loan products consistent with market competitive pricing, therefore, new loan volume in future quarters should carry interest rates at origination that are higher than our average loan portfolio rate, thereby helping to partially offset the negative impact to our margin potentially increasing funds.
<unk> costs.
It will of course take a couple of months for this higher loan pricing to be reflected in production results as we work through our existing pipeline much of which was locked in at lower interest rates.
All that being said consistent with our message earlier. This year, we continue to expect that our net interest margin will compress during 2022.
As I previously alluded our net income for the quarter was also negatively impacted by the significant increase in interest rates.
As our sole sole equity security holding representing an original 12 million dollar investment in a community development fund incurred a $413000 after tax mark to market loss. We have no current intention of liquidity liquid hating. This investment and it is not uncommon for us to record market adjustments that are typically inverse.
To the movement of market interest rates, although first quarter's impact was greater than we typically would have experienced.
The rising rate environment also affected the market value of our debt securities. The vast majority of which are held as available for sale, which as a result did not impact earnings and I'll speak to that the unrealized losses on that portfolio a bit later.
Yes.
Finally, the third factor that impacted our first quarter net earnings was the reversal of $2 $5 million and loan loss provisions. This amount was approximately $500000 greater on an after tax basis than the prior quarter's recapture.
With this reversal, we have eliminated all qualitative additions to the allowance that we had specifically set aside for the economic uncertainty related to the pandemic.
We remain pleased with and appreciative of the resilience of our borrowers and the continued strength of residential real estate and the markets that we serve.
Commenting further on asset quality more broadly we continue to see very strong credit metrics metrics credit metrics and our loan portfolio. Although we saw an increase in criticized and classified asset levels compared to the linked quarter. Our total classified assets to total assets measure of 0.19% and our total.
Nonperforming assets to total assets measure of 0.03% remained at historically low levels and our credit metrics continued to be among the strongest in the industry.
At March 31, our allowance coverage ratio was 52 basis points of the portfolio as.
As a reminder, our bank still operates under the incurred loss methodology for the loan loss allowance and we expect to adopt Cecil in the first quarter of 2023.
Based on ongoing results of our seasonal model test work, we believe that the implementation of <unk> will not result in a significant change to the level of our allowance. However, the ultimate impact of adoption will be dependent on the economic forecast at the time of adoption.
Now turning to the balance sheet, our total assets at quarter end grew by $81 million or four 5% on an annualized basis. This growth was primarily attributed to over 4% annualized growth in our loan portfolio.
Our first quarter loan origination volume of $569 million exceeded the linked quarter's volume of $70 million or 14% with both our income property in single family residential units recording strong production.
Based on the size of our loan pipeline at March 31st of $815 million, which is more than double the size of our pipeline level at the end of last year, we would expect our second quarter loan volume to reach or surpass our first quarter's production levels.
At this at this point, we appear on track to achieve our calendar 2022 asset growth goal of 3% to 5% that we announced at the beginning of this year.
Our asset growth in the first quarter was primarily funded with a combination of retail and wholesale deposits.
As I mentioned earlier, the average cost of our interest bearing liabilities declined during the first quarter.
We will note however that the cost of wholesale funding sources, whether it be brokered deposits or federal home loan bank advances have significantly increased over the last quarter and at some point the cost of our retail funding will begin to trend upward as well. However, we continue to strive to minimize the degree of net margin compression by placing greater emphasis on leveraging <unk>.
Technology to acquire customers.
<unk> and furthering our specialty deposit growth for funding, which we generally expect to be less expensive than our typical term deposits.
The Companys capital position remains strong however, total shareholders' equity declined $1 1 million at quarter end compared to the prior quarter.
The rising interest rate environment caused a fair value of our available for sale debt securities to decrease and lower our equity by $12 million after tax.
We remain in a strong position to support future growth in our tier one leverage ratio is at 10, 7% at quarter end.
Our investment portfolio, primarily serves as a contingent source of liquidity and as such we generally expect to hold these investments to term at March 31.
Our available for sale securities portfolio of $625 million had an estimated weighted average life of five five years and an average effective duration of three years.
As these securities prepay <unk> mature the unrealized losses, we recorded will reverse through capital.
As based on the current interest rate environment replacement security purchases are expected to carry higher yields resulting in better future returns.
Although total equity decreased during the first quarter importantly, our tangible book value per share increased by five to $12 93 per share as a result of a reduction in outstanding common shares during the first quarter, we returned $11 $9 million to shareholders in the form of common dividends and share repurchases.
Additionally, yesterday, our board of directors declared a <unk> 12 per common share dividend that will be paid on may 16th.
And with that I'll now turn the call over to Laura Tarantino for some additional brief brief comments.
No.
<unk> indicated with rising interest rates, we expect our net interest margin to decline further this year given interest rate volatility over the past quarter, let alone the past year and changing expectations about the frequency and magnitude of short term rate increases we are not providing any specific margin guidance.
I will give some greater efficiencies and greater granular detail for our loan and deposit portfolios.
As previously mentioned, we have increased our offer rates recently.
Current best pricing for any <unk>.
Hybrid arm single family or income property loan product just 4%.
This is an improvement over our first quarter loan origination rate, which averaged 314%.
It is also a level greater than our weighted average loan portfolio coupon of three 6% at March 31st.
Assuming competition in the interest rate environment remain unchanged loan growth. Later this year is expected to improve the trajectory of our loan yield.
As Simone previously stated there'll be a few months before current offer rates are reflected in our production numbers.
At quarter end $695 million or 85% of our pipeline carried rate limits with a weighted average coupon of 339%.
Moving to deposits at March 31 spot rate on our retail deposit portfolio was 43 basis points.
During the month of March our interest rate on new and renewed determinate count averaged 41 basis points, while our new non maturity accounts had an average interest rate of 37 basis points.
During the second quarter of this year.
$505 million of our term deposits with a current weighted average rate of 37 basis points. This will mature.
At renewal, we would expect the cost of these deposits to increase.
In late March we executed one new derivative instrument at two year interest rate swaps with a notional amount of $100 million to assist in hedging our interest rate risk position.
Fed funds fixed pay swap carries a fixed pay lag of 2% to 4%.
Finally last quarter I stated that I expected, our noninterest expense to run at a rate of approximately $16 5 million per quarter.
Our lower than anticipated G&A expenses for the first quarter of this year were primarily attributed to higher than planned capitalized loan costs.
Strong loan volume during the quarter and a delay in staffing opens transition.
Given the level of our loan pipeline. It is reasonable to expect noninterest expense to be closer to $16 million for the second quarter of this year. Since we all expect to have higher capitalized loan costs in the second quarter based on the size of our loan pipeline at the end of March 31st.
This concludes our prepared remarks and at this time, we will ask the operator to open the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Matthew Clark with Piper Sandler Your line is open.
Hi, good morning, smaller him Laura how.
Good morning, Matthew.
Maybe first just on the.
The change in the rate environment.
Whether or not youre seeing.
Some change in behavior.
With customers, maybe starting to prefer the hybrid product over that 30 year fixed rate product.
Are we at that point, yet or do you foresee that happening at some point this year and if that does occur.
Do you feel like that would provide an upward bias to that 3% to 5% growth or do you feel like.
The refi activity would decline so much that it would kind of mitigate that.
The better prepay speeds.
Yeah.
So I'll take the first part and then I will have Laura take the second part. So the first part is yes, we are definitely seeing and I think there's some industry statistics that we've looked at it suggests that a.
Five year hybrid or other hybrid loans are much more coming into favor now because there is.
Definitely some differential in now with mortgage 30 year mortgage rates.
Between four and in some cases over 5%.
So 4555 overpriced.
And the hybrid arms as Laura mentioned are lower than that so.
We have seen more interest and I think even like I said.
Yes.
Industry Statistics for example for single family mortgages suggests that the trend is changing from 30 year fixed to hybrids.
And then with that Laura I'll have you answer the second part of Matthew's question.
Thank you.
I would add that we have seen pre.
Prepayments slow a bit I am less concerned on the single family side about.
Refi activity, primarily because we seem to specialize a little bit more in purchase activity and I think the purchase market is still good and typically spring and summer are strong purchase real estate market. So.
I don't think the decline in Refis will hurt us much.
Okay, Great and then shifts.
Shifting to the deposit beta outlook I know it's somewhat.
<unk> kind of just waiting on the fed here.
A few meetings, but.
What are you budgeting for maybe by the end of the year in terms of deposit costs or even through the end of next year, just trying to get a sense for kind of your cumulative beta assumption for the policy.
And again I'm going to start and then I'll turn it over to Laura to actually answer your specific question, but I want to give a little bit of background of what we're looking at I mean, I think everybody understands that we have seen a significant inflow of deposits over the pandemic for from both fiscal and monetary policy.
That has taken place.
Those deposits remain in the industry and in fact, when we looked at.
So far what we're seeing in the first quarter is.
Deposits in the industry are not starting to go down and in fact appear to continue to be growing. So I think the big question in terms of pricing that will be different.
At this point in time from what the betas were historically is really just a significant amount of excess liquidity in the system today that we really haven't had historically so for instance, when the fed raised rates a quarter.
Previously, we did not see a lot of banks competitors really aggressively raise rates to match that.
And the deposit pricing market is just modest competitive today as we've seen it historically again because of just that excess liquidity.
That kind of background and more kind of looking and monitoring because certainly when when that dynamic changes and we.
Starting to see an outflow of deposits than we do expect there to be a more competitive deposit pricing.
Market at that point, but we're just not exactly sure when that's going to.
But with that I wanted to give that a little background and then I'll turn it over to Laura to answer specific with the question that you asked.
And I think specifically I'm going to say that I tried to indicate that we weren't going to give any type of guidance and then I think there's just too many variables in that.
I feel like this environment is different than environments that we've had in the past where rates were increasing.
I feel like the fed maybe is a little slower to raise rates at this time and now theyre going to jump on it quickly, but again going back to his lungs points.
With deposits growing during the quarter at most banks.
I don't think Theres, a real need for people to react right away. So.
You have no number to give you.
Just a little bit of uncertainty.
Okay, that's fair.
And then just on the reserve coverage.
Is this low as you'd like to go or do you feel like there's a little bit of room left kind of depending upon your.
Your qualitative factors, obviously are more uncertain outlook. These days, so I can't I can't imagine would go any lower but just wanted to double check there.
Alright, great.
No I was going to say Laura why don't you go ahead and comment on.
It's hard to say what the next quarter brings and of course, we will always react to what's happening and assuming nothing changes from today I would think that this level seems about right and we're provisioning for loan growth. As we noted we don't have any COVID-19 specific qualitative reserves remaining and so most of that.
Qualitative factors that we have in our current allowance are ones that we feel are typically pretty stable.
But again, what we do next quarter or it just depends on what's happening in the economy and with our portfolio, but we don't see any really changing trends at this time.
Okay. Thank you.
Thank you. Our next question comes from Gary Tenner with D. A Davidson your line is open.
Thanks, I did have a follow up on that or do you think the deposit beta question just asked it.
I just wonder is it.
We look at this.
Interest rate risk analysis on slide 24 could you give us a sense of what beta assumptions are embedded in your NII simulation model.
Yeah, you bet on a weighted average portfolio with 79% beta so the Cds or about 93 and money market accounts are about 78.
Okay. That's helpful. Thank you.
And then.
Just in terms of.
Your prepared remarks, I just want make sure I heard this correctly did you say that the increase loan offer reached the lowest pricing that you're offering now is 4%.
That's correct. So if you were to maybe look at our three year hybrid arm.
The lowest it might be 4%, whether it be single family or income property.
Thanks, Darren I appreciate it.
Simona I want to make sure that we're that we emphasize that there is 85% of our.
Current pipeline is locked in and has been locked in so we have to kind of work through at the at lower rates.
The 4% so we want to make sure we're clear that we're not going to see the benefit of that immediately but it definitely over time, we'll see the benefit of that the current rate.
Yeah.
Right, Yes, I appreciate that thank you.
Thank you Thanks, Karen next.
Next question comes from Woody lay with <unk>. Your line is open.
Hey, good morning.
Good morning.
I wanted to hit on expenses I think if I heard correct you got it too.
Thanks Ben.
Expense number of $16 million for the next quarter do you see that remaining relatively stable throughout the year. There are some initiatives that could come in in the back half of the year that could increase that.
Up a little bit.
I think if it increases it would be more dependent on loan volume slowing.
So our initiatives are pretty spread throughout the year and.
And I don't think there's anything in particular that makes some spike it in.
In the third and fourth quarters.
But if our volume goes down in quarter, three or quarter, four that would have a direct impact.
Right.
And then last from me on the buyback front it was Mike with the buyback a little bit higher in the first quarter.
What sort of the plane with the buyback going forward and could you just remind me how much remaining capacity you have in your current authorization.
So Laura I'll, let Laura answer how much we have remaining but I will mention that as an ongoing basis, we always look at.
Our capital and how we manage our capital and at this point, we're going to complete the current.
$20 million that we plan that we had set aside and then determine next steps.
With that I will just let Laura maybe answer the amount that was remaining at the end of the quarter.
At March 31st there was $4 1 million remaining.
Got it thanks for taking my question.
Thank you Eddie.
Thank you.
And at this time I am showing no further questions I would like to hand, the conference back over to Simone.
Lagomarsino for closing comments.
Thank you Norma and we want to thank all of you for joining US. This morning on our conference call and this now concludes the first quarter 2022 conference call for Luther Burbank Corporation. Thank you.
Ladies and gentlemen. Thank you. This concludes today's conference call recorded copy of the call will be available on the company's website. Thank you for joining US today you may now disconnect everyone have a great day.
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