Q3 2022 Luther Burbank Corp Earnings Call

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As Johan during Q&A, you can dial star one one.

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Yeah.

Good morning, and welcome to the Luther Burbank Corporation third quarter 2022 earnings Conference call.

All participants will be in listen only mode.

After todays presentation, there will be an opportunity for the analyst covering Luther Burbank Corporation to ask questions.

To ask a question you will need to press star one one on your telephone.

Before we begin the company would like to remind you that discussions during this call contain forward looking statements that do not relate strictly to historical or current facts.

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 materially from those described in forward looking statements.

For more information on those factors. Please see the company's periodic reports accessible at the Luther Burbank Corporation website and filed with the SEC.

The presentation today contains certain non-GAAP financial measures that we believe provide useful information about our operational efficiency and performance relative to earlier periods and relative to other companies.

For more details on these non-GAAP financial measures and their limitations, including presentation with and reconciliation to the most directly comparable GAAP financials. Please refer to yesterday's earnings release.

And the related Investor presentation, which is available on our website at www Dot Luther Burbank savings dotcom.

I would now like to turn the conference over to Simone Lagomarsino President.

Please go ahead.

Thank you very much good morning, everyone and welcome to the Luther Burbank Corporation Quarterly earnings Conference call. This is Simone Lagomarsino, President and CEO and with me today is Laura Tarantino our CFO .

Today, We'll review our third quarter financial performance share our observations on recent trends and then open the lines for our analysts questions.

Our net income for the third quarter was $21 million or <unk> 41 per diluted share as compared to $22 $6 million or <unk> 44 cents per diluted share in the linked quarter.

The decline in net earnings of $1 $6 million was primarily attributed to the rise in market interest rates.

Three key financial components summarized the changes in net income as compared to the second quarter.

Our net interest income decreased by $2 million and our noninterest expense increased by $2 $1 million, while our provision for loan losses declined by $2 million, Let me address each of these in more detail.

First our interest income on earning assets increased as a result of loan growth slower loan prepayments greater earnings on interest rate swaps and higher loan coupons on new loan originations.

Our yield on interest, earning assets during the third quarter increased by 25 basis points compared to the second quarter.

However, higher interest rates on funding costs resulted in interest expense on deposits and borrowings to increase more rapidly given our liability sensitive balance sheet, where the cost of our interest bearing liabilities for the third quarter increased by 49 basis points compared to the linked quarter.

Net interest margin for the third quarter measured 2.42% a decline of 20 basis points from the linked quarter and in line with the guidance that we provided during our last quarter's call.

Our real estate loans grew by $217 million or 3% from the prior quarter and year to date, our annualized loan growth was 11, 8%.

Although the loan production fell by $203 million during the quarter, both single family and income property residential bond prepayment speeds, notably declined due to higher market rates, which yielded net loan growth for the quarter that was on a percentage basis similar to the linked quarter.

The weighted average coupon on new loan originations for the quarter was $4 six 5% or an increase of 110 basis points as compared to the prior quarter and average coupons for the loans that we're originating during the fourth quarter continued to rise.

At quarter end, the weighted average coupon on loans within our single family and income property loan pipelines were 559% and $4 nine 1% respectively.

Yeah.

And our loan portfolio for the quarter was funded primarily by wholesale sources, including <unk> advances and brokered deposits, which grew by $247 million and $217 million, respectively from the linked quarter.

Like several other financial institutions are retail deposit balances declined.

During the third quarter, our retail deposits decreased by $92 million as some customers opted for other investment choices, including U S treasuries.

Because wholesale funding can be more expensive than retail deposits. The use of wholesale funding to support our growth had a negative impact on our net interest margin.

As a comparison during the third quarter, our cost of interest bearing retail deposits rose 48 basis points from the second quarter as compared to 112 basis point increase in the cost of wholesale deposits for the same period.

Next I mentioned earlier that our noninterest expense increased by $2 $1 million from the linked quarter.

This increase was primarily due to an increase in compensation expense of $1 6 million as compared to the linked quarter, which related to a lower amount of capitalized loan origination costs due to a 28% decline in loan origination volume, which I previously mentioned.

Noninterest expense was also impacted by higher advertising cost associated with retail deposit generation.

Finally, net income for the quarter benefited from a $2 million reduction in loan loss provisions as compared to the prior quarter.

We recorded a $500000 loan loss provision primarily for net loan growth.

Classified assets declined by $1 8 million during the quarter and remain at a low level of 30 basis points of the total loan portfolio.

The quarter ended September 30, we had only two delinquent loans of the more than 5000 miles and our loan portfolio.

Our nonperforming assets to total asset ratio remains very strong and measured only five basis points at quarter end.

72% of our non accrual loans by balance are paid current.

I continue to be extremely proud of our credit quality and expect our loan portfolio to perform well to any potential economic downturn.

Now turning to our balance sheet total assets grew by 5% from the prior quarter and 10% on a year to date basis and total seven 9 billion at September 30th driven primarily by our net loan growth and funded by wholesale deposits and <unk> advances as we previously discussed.

Total stockholders' equity grew by $5 million during the prior quarter.

Since the prior quarter, sorry grew by $5 million since the prior quarter, our capital position during the third quarter benefited from our net earnings of $21 million, but was partially offset by $10 $5 million of unrealized losses on our available for sale securities portfolio net of tax as a result of the trade environment.

Net unrealized loss position on our available for sale investment portfolio totaled $44 $8 million as of September 30th.

Also during the quarter, we returned $6 $1 million to shareholders in the form of cash dividends and grew our tangible book value per share to $13 18 per share.

Our tangible capital and tier one capital ratios of eight 5% and 10% respectively remained strong finally yesterday, our board of directors declared a <unk> 12 cents per common share dividend that will be paid on November 14th.

Although the recent rate environment. This year continues to be volatile and challenging our net income for the third quarter yielded a return on average assets and return on average equity of one 1% and 12, 3% respectively.

We continue to believe however that rapidly rising short term interest rates will challenge our results looking forward.

Due to higher interest rates impacting refinancing activity and activity in the purchase market. We expect loan production to decline in the fourth quarter, the third quarter as evidenced by the size of our loan pipelines.

At September 30, our pipeline totaled $230 million or about 51% of its level at the end of the second quarter.

Well on production volume will slow we still may realize net loan growth.

Loan prepayment speeds and both our income property in single family portfolios declined by approximately a third as compared to the linked quarter.

We continue to expect deposit cost to increase during the fourth quarter as older turn accounts mature and reprice to current operates and based on our current clustering at the Federal Reserve Board of.

Our governors.

Since the U S banking.

It seems that you are thinking industry generally experienced deposit outflows over the past quarter, we expect strong deposit competition throughout the balance of 2022. Consequently, we anticipate continued deposit cost acceleration during the fourth quarter.

As a result, our projections are that our funding costs will outpace improvements in our yields on our interest earning assets and then our net interest margin will compress again in the fourth quarter and with that I'll now turn the call over to Laura for some additional comments.

You smell.

As usual I'll provide some brief but more granular information that we consider as we're analyzing our trends in our projections.

During the fourth quarter, we expect new volume three out of that coupons excuse me 5.25%.

Spot rate on our loan portfolio was $3 seven 1% at the end of the third quarter.

Although loan origination volume is expected to slow.

Portfolio repricing and slower prepayments should move our yields our loan yields in a positive direction.

Additionally, at quarter and 43% of our investment portfolio Securities are currently floating with a weighted average repricing frequency of $2 nine months. So we should also see investment yields improve as interest rates continue to rise.

Moving to deposits, although retail deposits declined during the third quarter, we generated approximately $200 million this quarter and new money from our advertising campaign of which 36% western customers new to the bank.

Digital advertising yielded $1 1 million impression.

With 23000 visitors to the bank's website of which 70% were first time visitors.

Year over year, our total households have grown about 18%.

During the fourth quarter of this year, we have 368 million of term deposits carrying a weighted average cost of 47 basis points scheduled to mature.

During the month of September the average cost of new and renewed term accounts with 2.59%.

At quarter end, our efforts you'll be advances totaled $1 2 billion and carried a weighted average cost of $2 three 4% and a weighted average term to maturity of one seven years.

Our third quarter results benefited from the existing interest rate swaps that we had on our books.

Net swap income totaled $2 9 million for the quarter.

Timber 30th the notional amount of our pay fixed swaps was $1 3 billion.

With a weighted average net positive carry to us of 154 basis points and a weighted average of $23 six months to maturity.

Our footprint continues to rise our earnings from these derivative positions will improve and we would expect to add new physicians to our balance sheet as we move forward.

Lastly, at the noninterest expense level of approximately $16 million for the fourth quarter as anticipated we.

We would expect higher compensation cost as a result of reduced loan volumes.

And the lower resulting amount of capitalized salaries.

As we work through our current annual budgeting process, we should have a better projection of noninterest expense for 2023 for you next quarter.

With those last comments, we'll now ask the operator to open the line for questions.

Okay.

As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.

SAR one one to ask a question.

Please standby, while we compile the Q&A roster.

Our first question comes from what do you like with VW. Your line is now open.

Hey, good morning, guys.

Good morning Woody.

I wanted to first look at the NIM.

I believe last quarter you got it.

Being down about eight.

Points a quarter.

Over the back half of 'twenty two each quarter.

Does that still feel like a good run rate.

Going forward or.

That's changed.

So you are correct last quarter, we did guide that we expected 20% to 30 basis point reduction in our NIM on a quarterly basis and at this point what do we have not.

<unk> projected our NIM and in our conference calls.

Because it is just too hard to project at this point I would think that that's probably.

In large part because of just the volatile market that we're seeing and and.

That we're looking at deposit cost that's really the big variable for us and we are.

As Laura went into great detail on using digital marketing to a greater extent and that's helping us to <unk>.

In deposits at.

Various different deposit rates.

Got it.

And then just.

To the extent, we do see some growth some loan growth in the coming quarters. How do you expect to fund that growth I mean do you think.

Increases in retail deposits can funded or will you look to the wholesale market.

Probably all of the above.

We have been successful and actually more recently in this so far this quarter in growing retail deposits through some of the digital marketing efforts that we have rolled out. So we would expect some growth in retail and then also possibly some wholesale funding as well.

Okay. That's good color.

And then last for me credit.

Just looking at the metrics remains very clean.

Just as you talk to your borrowers.

Is there anything that gives you pause on the credit front.

Just given the macro uncertainty here.

Or are you cautiously optimistic at this point.

Continue to be optimistic cautiously optimistic but.

You look at the average loan to value on our portfolio, both single family and multifamily and you look at the debt coverage in particular on the multifamily and the FICO scores on our single family I think we've got just a really solid loan portfolio and as we said we had two loans that were delinquent at the end of the quarter out of over five hopefully so.

It is.

I think.

Thank you.

Got it.

Sounds like cliche, but people need a place to live affordable housing was hard to find and primarily what we provide and the multifamily is workforce affordable housing.

Four four people and.

We continue to see vacancy rates are quite low in those markets and.

<unk> had been strong, although we think they might have plateaued, but we.

Still have a very strong debt cover and loan to value ratio on our portfolio and so we feel you know.

Fairly confident and we look back through the <unk>.

Great recession, and the portfolio performed extremely well at that point.

As well.

Alright, Thats all great color. That's all for me. Thank you all.

Woody.

Thank you.

Yeah.

Our next question comes from Adam Butler with Piper Sandler Your line is now open.

Hi, everybody. Good morning, this is Adam calling in for Matthew Clark.

Good morning, Adam.

Deposit growth during the quarter was.

Pretty successful from the advertising campaign.

Recently mentioned.

I was curious if you expect to see a similar level of deposit growth for Q.

Or what are your outlooks on that front.

So.

It's hard to say, but there'll be a similar level, but we are being we are quite successful in our digital marketing and in terms of new visitors to our website as a result of our digital marketing and.

We are actually doing some regional pricing as well and different pricing on different products and kind.

Kind of fine tuning.

The digital campaign as we see what's successful in different markets. So we do expect to see some growth through that campaign in our retail.

Deposits and as we mentioned.

A minute ago, a couple of minutes ago, we expect probably to also augment that with some wholesale funding whether both.

Wholesale deposits and federal home loan banks, or one or the other but possibly all of all of those.

Okay, great. Thanks for the color there.

I was wondering if you guys have the spot rate on deposits as of the end of September .

September .

Laura is looking for that I apologize.

Have that write off.

Okay.

Sure.

Thank you Tom.

One other question. Thank you another question.

Sure.

Just going ahead and turning over to expenses.

We saw that.

Slight increase this quarter.

And then going forward into <unk>.

Should we expect to see that run rate go a little bit lower based on lower levels of capitalized loan origination costs or do you expect that to be offset by increased.

Increased advertising efforts are for.

Any color there would be great.

Yes, so we do expect and Lora.

We both commented on that that our run rate will be about $16 million for the fourth quarter in terms of noninterest expense and that's partly because we will have lower levels of capitalized salaries.

Because of our lower loan production levels.

And that does include some additional marketing costs.

The marketing that we've been doing.

Okay great.

I'm sorry, Adam I also have your spot rate at 930 for our retail deposit portfolio was 138%.

Okay awesome.

All my questions. Thank you.

Thank you Adam.

Yeah.

As a reminder, if you'd like to ask a question at this time that star one what.

Our next question comes from the line of Gary Tenner with D. A Davidson your line is now open.

Thanks, Good morning.

My questions were largely.

But just thought I'd ask.

About.

Expectations of our capital on share buyback.

<unk>.

<unk> completed.

The second quarter the <unk>.

Repurchase authorization I don't believe you've announced another one at this point, but given where the stock is below tangible book value.

To get your thoughts around that topic.

Thanks, Terry share of capital management is an ongoing.

Well that we take very seriously and we monitor and consider whether or not it makes sense and at the present time, we are not considering a share repurchase and that has something some in part to deal with.

<unk>.

The margin compression that we talked about earlier and more I think to do with just.

The rising interest rates and as we've seen our mark to market on our securities portfolio has.

It doesn't impact us on a capital ratio perspective for regulatory capital you know we are seeing the impact in our book value per share as well. So we just think at this point capital we want to preserve capital.

And.

Well, we do that on a we look at it on an ongoing basis in that posture may change, but that's where we're at right now, particularly in the possibility of heading into a recession.

Thanks Shannon.

Thanks, Gary.

That concludes today's question and answer session I'd like to turn the call back to Simone Lagomarsino for closing remarks.

Thank you very much and this concludes our call. This morning, we appreciate all of your sharing and joining with US. Thank you.

That completes our call today.

A recorded copy of the call will be available on the Companys website. Thank.

Thank you for joining us.

Okay.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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