Luther Burbank Corp (LBC) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Luther Burbank Corporation First Quarter 2021 Earnings Conference Call. (Operator Instructions)

Before we begin, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. The company's Form 10-K for the 2020 fiscal year, its quarterly reports on Form 10-Q and current reports on Form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The company's periodic reports are available from the company or online at the company's website or the SEC's website.

I would like to remind you that while the company's management thinks the company's prospects for performance are good, it is the company's policy not to establish with the markets any earnings, margin or balance sheet guidance.

I would now like to turn the conference call over to Simone Lagomarsino, President and CEO. Please go ahead.

Thank you very much. Good morning, and welcome to the Luther Burbank Corporation's 2021 First Quarter Earnings Conference Call. This is Simone Lagomarsino, President and Chief Executive Officer; and with me today is Laura Tarantino, our Chief Financial Officer.

As I reflect on the first 4 months of this year, I'm gratified to see signs of progress, not only for our bank but for our economy and our country. The broad distribution of vaccines and the reopening of small businesses are welcome signs to a brighter future. We are truly grateful for the dedication and resiliency of our customers and our employees during this past year through this pandemic.

A few years ago, we laid out a multiyear strategic goal to improve the quality of our earnings, and this quarter's results demonstrate our progress toward achieving that goal. For the first quarter, we recorded net income of $18.4 million or $0.35 per diluted share, an improvement of $2.3 million or $0.04 per diluted share as compared to the prior quarter's adjusted earnings when excluding the nonrecurring charge for the prepayment of the FHLB advances that we incurred in December of 2020. Growth in net income compared to the prior quarter was primarily attributed to a $1.5 million increase in our net interest income and a $2.5 million recapture of loan loss provisions due to the improved credit quality within our loan portfolio.

Our net interest margin expanded for the fourth consecutive quarter to a level of 2.23%, reflecting a 10 basis point improvement over the linked quarter. This improvement resulted from a 15 basis point reduction in our cost of funds, which outpaced a 6 basis point decline in the yield of our interest-earning assets. Certainly, the general level of market interest rates has contributed to our ability to reduce the cost of our deposits. However, our pricing has also benefited from our efforts to replace larger rate-sensitive customers with more granular deposit relationships. This trend, in part is attributed to an emphasis on customer calling campaigns.

Our branch employees have been calling our customers to check on their welfare during this unique environment. And then in many instances, we've been able to expand the existing customer relationships and gain referrals to new customers. Our cost of funding also benefited from the strategic early payoff of high-rate FHLB advances last quarter.

Now we'll turn to asset quality. Our ability to recapture $2.5 million this quarter in loan loss reserves was a direct result of a significant improvement in our criticized loan balances, which declined 40% or $23 million from the prior quarter. The vast majority of criticized loans that were upgraded during the quarter were related to borrowers who had initially been impacted by the pandemic, received pandemic-related payment deferral release and have now returned to scheduled monthly payments. Prior to upgrading the risk ratings on these loans, the borrowers needed to demonstrate payment performance for 3 months or more and exhibit the ability to service their obligations. At March 31, we had only 1 single-family loan remaining on a payment deferral plan and that borrower returned to making payments this month.

At the outset of the pandemic, we designed our COVID-19 payment deferral modification program so that any deferred payments were added as additional monthly payments to the end of the loan, and the loan was extended by an equal number of months. This ensured that our borrowers did not experience the impact of having to catch up on these payments all at once at the conclusion of the deferral period. We believe that the design of our modification program supported our borrowers who received payment deferrals from our bank, and it positioned them to successfully manage their temporary pandemic-related setbacks and return to full payment status.

Although we recaptured loan loss provisions during the first quarter, the qualitative or judgment-based components of our allowance for loan losses continues to include approximately $8.7 million in reserves that we specifically set aside for potential incurred losses due to the heightened risk environment caused by the pandemic. Our allowance for loan and lease losses coverage ratio was 70 basis points at the end of the first quarter as compared to a ratio of 58 basis points at December 31, 2019, prior to the declaration of the national emergency.

We intend to continue to monitor the economic environment on a quarterly basis to determine if or when it is reasonable to increase or reduce our allowance coverage. Nonetheless, we believe that our credit outlook is very strong, given our limited exposure to nonresidential commercial real estate, the performance of our borrowers to date, the strength of our real estate in our primary lending markets and the weighted average loan-to-value ratio of our loan portfolio of 58%.

As a result of the pandemic and keeping credit quality top of mind, we tightened some of our underwriting guidelines in early 2020, but we have returned our credit program, so they are similar to pre-pandemic requirements. As a result, our first quarter loan originations of $391 million, when annualized, places us on track to exceed the 2020 volume and approximate our 2019 level. Additionally, our $680 million pipeline is at a record level for our company.

Although we are pleased to see growing levels of loan activity, loan repayments remain elevated through the first quarter due to the continued low rate environment. Therefore, in February, we took the opportunity to purchase a single-family fixed rate loan pool of $288 million to supplement our asset growth. The purchased pool, having an average loan balance of $418,000 was conservatively underwritten to agency standards with a weighted average debt-to-income ratio of 32%, a weighted average FICO score of 777 and a weighted average loan-to-value ratio of 52%. Although the fixed rate nature of this purchase pool and its weighted average coupon of 2.3% was not typical of the loan -- single-family volume that we normally originate for our loan portfolio, the transaction was an attractive use of liquidity when compared to yields on mortgage-backed securities with similar characteristics.

At March 31, we had 11 delinquent loans in our loan portfolio totaling $7.1 million, of which 7 or $2.7 million were single-family loans from the loan purchase that we just discussed. We attribute this statistic to a mid-March transfer of servicing from the seller to us, and each of these loans is actually now current. Of the remaining 4 delinquencies, 2 loans were 30 days late and 2 were chronic delinquencies that comprise a portion of our nonaccrual loan balance. At quarter end, our nonperforming asset to total asset ratio remained at just 9 basis points, consistent with the prior quarter end.

Now I'll briefly turn to net income for the first quarter. The improvement in our net interest margin and credit quality previously discussed, along with our ability to reduce noninterest expense for the period to a level less than prior year's quarterly adjusted average resulted in return on assets of 1.05% and a return on equity of 11.82%. Had we not reversed the $2.5 million in loan loss provisions, our return on assets and return on equity would have been 95 basis points and 10.69%, respectively, for the first quarter of 2021, which is significant improvement as compared to an adjusted return on assets and return on equity for fiscal year 2020 of 67 basis points and 7.7%, respectively. Again, the only adjustment made in 2020 was the Federal Home Loan Bank prepayment cost that totaled $10.4 million in the fourth quarter.

Now we'll turn to the balance sheet. Our assets at the end of March totaled $7.1 billion, an increase of $173 million or 3% since year-end. The increase was primarily due to growth in loans of $222 million and investment growth of $44 million, partially offset by a $97 million reduction in cash. Growth in assets was primarily funded by a $128 million increase in retail deposits. Last quarter, we indicated that we expected low single-digit growth in our assets for 2021. Until we see a meaningful reduction in loan prepayments, we believe that this is still a reasonable estimate.

The company's capital position remains strong. During the quarter, we purchased an additional 202,000 shares of our common stock at an average price of $10.42 per share or a 12% discount to our March 31, tangible book value of $11.88. Additionally, we continue to have an active share repurchase plan of $16.5 million in remaining authorized funds.

We are pleased to announce that yesterday, the Board of Directors declared a quarterly cash dividend of $0.0575 per common share payable on May 17 to shareholders of record as of May 7. And with that, I'll now turn the presentation to Laura for a quick update on our loan and deposit trends.

Thank you, Simone. Like most bankers, we're pleased to see some steepening in the yield curve this year. At this point, however, it's not clear that this trend will translate into an increase in loan pricing, likely due to the level of liquidity in the market and somewhat benign loan growth for the industry.

During the first quarter, the weighted average rate on our new loan volume, excluding the loan purchase Simone discussed, was 3.35% or a 4 basis point decline from the linked quarter. Based on pipeline activity, we would expect our second quarter's origination rate to be similar to or even slightly less this rate. With our loan portfolio spot rate of 3.86% at March 31, we continue to expect some downward pressure on loan yields as the rate on loan curtailments and payoffs, which was 4.03% during the first quarter, exceeds both the rate on new volume and the portfolio weighted average coupon. Fortunately, we do expect to achieve additional pricing declines in our deposit portfolio. The ending rate on our retail deposit portfolio measured 82 basis points at March 31 or a 12 basis point reduction compared to the end of the linked quarter.

During the second quarter of this year, we have $1 billion of retail certificate accounts that are scheduled to reprice. The current weighted average rate on the CD maturities measures 1.24%, while in March, new and retained retail deposit money was recorded at an average rate of 38 basis points or approximately 86 basis points less. During the first quarter, we did execute a new $350 million interest rate swap contract primarily to hedge the additional interest rate risk associated with the long-term fixed rate nature of the single-family loans pool that we purchased as compared to the risk inherent with our multiple 5-year hybrid fixed rate products. The new 2-year swap has a pay fixed cost of 11 basis points and receive variable federal funds average component for a current net carry of approximately 5 basis points.

Although we only anticipate a very modest margin improvement during this quarter, we expect our net interest margin to show the most expansion during the last half of this year after our other swaps totaling $1 billion, with the current negative carry of approximately 138 basis points expire in June and August. Consistent with our message last quarter, we're estimating our fourth quarter net interest margin to be in the range of 2.35% to 2.4%.

This concludes our prepared remarks. And at this time, we'll ask the operator to open the line for questions.

(Operator Instructions) Our first question comes from the line of Jackie Bohlen from KBW.

Just want to see Simone, maybe you could provide an update on income property lenders. I know during last quarter's call, you discussed adding some folks there. I just wanted to see how the progress has been on that.

Thank you. Yes, Jackie. So we are actually in the process of hiring an individual in our Washington office. And also, we are looking to do some expansion into some new markets. And we're looking to hire an individual for those markets. And that includes the Denver market area, Phoenix and in Utah, the Salt Lake City market. So that one individual will cover those 3 markets. So we are very close to coming to a point of getting those individuals on board.

Okay. And then as I think of some of the new hires you're bringing on, and you've got really strong pipeline, economies are starting to open up again. Prepayments aside, which I know are unpredictable and expected to continue given the rate environment, how do you expect production this year to compare to 2019? It sounds like the first quarter indicates you're on pace for that. Just wondering if you see that momentum gaining traction through the year.

Yes. We absolutely do expect to see very strong production levels. As I mentioned, we have a $680 million pipeline, which is as far back as we can determine the largest pipeline we've had. So we do expect good strong loan originations. And so we are looking at somewhere around on pace with 2019, which was about $1.5 billion in production. And the big question will be really what happens with the yield curve and what happens with prepayments, particularly for the single-family portfolio because that's where we've really continued to see the heavy prepayments.

Okay. Okay. And then just one last one and then I'll step back. Obviously, outside of prepayments, loan origination is going really well, and you've made some good progress on deposits of remixing and gaining balances there. Maybe just an update on your expectations for deposit growth through the year and some of the remix you think could happen?

Laura, do you want to -- I don't want to pick all the answers, but you want to take the first step, and I'll follow-on on that.

Sure. Jackie, like you said, we have done a good job with the remix. I would say part of that is customer desire because typically they don't want to lock into a CD in the low rate environment, but there has been some remixing that we've done ourselves. I would expect our future growth to be similar to the first quarter, and I only hesitate because we do have $1 billion coming off pretty high rates in CDs. And so whether that market stays in the -- or that money stays in the banking industry or starts to look for other investments, whether it be the stock market or real estate, it's hard to determine. So I feel like we'll see deposit growth, it's hard to say it will be exactly the same as first quarter. But...

Okay. Yes, understood. You've got a lot of moving parts there. So it sounds like there could be some remix, added some higher cost funding and maybe that absorbs some of the other liquidity, and that plays into expectations for a similar level of growth that was discussed last quarter, even though the current quarter outpaced that a little bit. Is that a fair assessment?

Yes.

Yes.

Our next question comes from the line of Bob Shone from Piper Sandler.

I just wanted to go back to your comments on the margin of being 2.35 to 2.4 by 4Q '21. Do you happen to have the impact as of right now of the swaps upon their expiration of what that's going to do to the margin?

I think we'll get a 10 to 15 basis point lift from that after the...

And that's included in the 2.35 to 2.4 calculation?

It is.

Okay. And then maybe going to the -- back to the pipeline. Can you maybe talk about some of the drivers on what kind of more than doubled it since year end?

Sure. So we had last year prior -- in the beginning of the pandemic, as we started to move into the pandemic, we had tightened our underwriting criteria, lowering loan to values, getting more conservative in terms of the requirements for debt coverage ratios. And what we have done more recently is reverse and move back to the pre-pandemic levels. At the time -- at the beginning of the pandemic, we weren't sure how long it would go, the impact on the values of real estate. And we felt like it was important that we at least get some sense of that before going back to the pre-pandemic underwriting criteria. We have now -- I think we're now pretty close to on point to where we were pre-pandemic.

I think the one thing that we are still somewhat conservative on is nonresidential commercial real estate lending. But other than that, I think the rest of our criteria for both single-family and multifamily are back. And so that has really driven a significant increase, and then just what's happening in the markets. And I think some focus from the potential buyers of real estate looking at how strong the real estate has performed through this pandemic, I think, is driving as well the -- our pipeline and the demand in the market.

When -- again, we focus primarily on multifamilies that are in the suburbs. They are generally between 14 and 15 units per building. So they're not the big high rises in the highly densely populated areas. They're more -- in general, many of them are -- have more space and are -- where people are actually moving to it when they're leaving the highly densely populated areas. So we've actually seen real strength in the real estate in the markets that we lend in. I think all of that is driving our pipeline -- the demand in the market and in our pipeline.

That's great color. And then maybe one more for me. Was there anything more nonrecurring in the expense line this quarter? Just trying to get a sense if this is kind of a good run rate to go forward over the next few quarters.

Laura, you want to take that one?

There is nothing that I would consider nonrecurring. I think a large part of our expenses have to do with the volume of loan originations, right? So the higher our originations, the more salaries that we are capitalizing. So that's probably the largest variable quarter-over-quarter. But I would think $16 million, $15 million is a pretty good quarterly run rate.

And if you look back on a year-over-year basis, we've been able really to reduce the marketing expenses in part because of the excess liquidity in the industry right now. We haven't had to really market for deposits. And so that's been a big reduction from prior years.

Your next question comes from the line of Gary Tenner from D.A. Davidson.

I just want to talk a little bit about deposits. You've had some consistent traction in terms of the kind of business and specialty-related deposits a little more again this quarter from year-end. I'm just wondering, as you look at that business in your continued effort to reduce deposit costs and kind of diversify that deposit portfolio, what other actions you might be able to take in terms of adding folks focusing on that more in terms of additional teams or anything? Or just what your broad thoughts are on that particular deposit vertical?

So we have actually added several individuals that focus specifically on different verticals within our specialty deposit base and verticals, in particular, that are less price sensitive than some of the verticals we have had historically. And that is a big part of our focus going forward. So yes, to your point, we are looking and have hired already some team members that are specifically focused on certain of those specialty deposit verticals, and we'll continue to grow those. But moving out basically over time, some of the deposit customers in the verticals that we're just all very focused on rate.

And then just in the earnings release on the deposit composition, and I apologize if this was mentioned, but I noticed the kind of shift of what looks like a pretty sizable chunk of interest-bearing transaction accounts maybe into money market. Anything to just be aware of there? Or is it just kind of what you'd expect in terms of migration?

You want to take that one, Laura?

Yes. Thank you. I think -- I do think I said earlier, but I think, in part, some of that is not by our own design by but customers in a lower rate interest rate environment tend to stay liquid in the hopes that they think interest rates are going to go up. So they'll just convert to money markets rather than CDs. And then again, part of it is our remix of money and some of the efforts that we're trying to do.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Simone Lagomarsino for any further remarks.

So I want to thank all of you for joining us this morning, and this concludes our call today. Thank you all.

That completes our call today. A recording copy of the call will be available on the company's website. Thank you for joining us.

Thank you, Jonathan.

Thank you.