Luther Burbank Q3 2021 Earnings Call Transcript

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October 26, 2021

There are 4 speakers on the call.

Operator

Good morning, and welcome to the Luther Burbank Corporation Third Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity for the analysts covering Luther Burbank Corporation to ask questions. 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.

Operator

Private Securities Litigation Reform Act of 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 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 filled with the SEC. I would now like to turn the conference over to Simone Lago Marzino, President and CEO.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Jeff, and good morning, everyone. Welcome to Luther Burbank Corporation's 2021 Third Quarter Earnings Conference Call. This is Simone Lago Marcino, President and CEO and with me today is Laura Tarantino, our CFO. Yesterday, we reported quarterly net income of $24,700,000 or $0.48 per share, which to date represents the highest quarterly earnings that our company has recorded in its 38 year This performance is directly attributed to 3 key drivers: our improved net interest margin, our long term emphasis on credit quality and our continued commitment to efficient operations. Our earnings generated a 3rd quarter return on average assets of 1.34 percent and a return on average equity of 15.24 percent.

Speaker 1

Our net interest margin for the Q3 grew by 16 basis points to 2.47%, primarily due to a decline in our total cost of funding. Compared to the Q2 of 2021, our cost of interest bearing deposits dropped by 20 basis points, while our cost of Federal Home Loan Bank advances decreased by 7 basis The cost of our liabilities continues to benefit from the low interest rate environment and the change in our product mix as well as excess liquidity in the banking system in general. At the end of September, for the first time as a public company, The balances of our money market and checking products exceeded the balances of our time deposit accounts. This is in part due to customer preference and also in part related to our strategy to diversify single product customers and form deeper banking relationships. Our attention to credit quality has been the foundation of our lending business for many years.

Speaker 1

Similar to last quarter, our 3rd quarter results Included the reversal of loan loss provisions. During the Q3, we reversed $4,000,000 from our allowance for loan losses, which brings the year to date Total reversal to $9,000,000 If we normalize our financial results, our net income for the Q3 of 2021, Excluding the $4,000,000 that we reversed from our allowance for loan losses would have been $21,900,000 tax adjusted. Our adjusted return on average assets would have been 1.19% and our adjusted return on average equity would have been 13.5%. These metrics are well above the strategic goals we established 3 years ago. Our ability to continue to recapture reserves this past quarter is both a reflection of our conservative underwriting practices as well as the financial strength of our borrowers and their demonstrated ability to manage their debt obligations throughout this pandemic.

Speaker 1

Importantly, residential real estate values in our markets on the West Coast have appreciated over the past few years and we expect them to continue to increase given the low supply and strong demand for housing. Each quarter, I'm pleased to continue to report on the strong credit quality of our loan portfolio, which in the Q3 included a decrease in criticized assets by $16,900,000 or 43 percent since the end of June. At September 30, criticized loans were 0 point

Speaker 2

3% to 4 percent of total loans.

Speaker 1

Additionally, as of the same date, only 2 of our nearly 5,000 loans were non performing. The two loans had outstanding balances totaling $643,000 representing 0.01 percent of the loan portfolio. At quarter end, our allowance for loan losses had approximately $2,500,000 in qualitative reserves remaining that were initially established as a result of the COVID pandemic. We will continue to monitor the impact of the pandemic on the economy, residential real estate and our borrowers and make further adjustments to the qualitative reserves if appropriate. Our allowance to total loans coverage ratio at quarter end was 59 basis points as compared to a ratio of 58 basis points at December 31, 2019 prior to the declaration of the national emergency.

Speaker 1

Lastly, as I think about our 3rd quarter accomplishments, I'm reminded of one of our company's value statements, which is to improve performance through efficiency and accountability. Our 3rd quarter efficiency ratio of 32.1 percent speaks to our deliberate efforts to improve our operations and Our ratio is one of the best in the industry. As we look to the future, we recognize that enhancing our technology will be in our digital presence, online account opening and customer relationship management systems in the near future. Now we'll turn to the balance sheet. Our assets at the end of September totaled $7,200,000,000 an increase of $315,000,000 or 5% since year end 2020 and a decrease of $36,000,000 or 1% from June 30, 2021.

Speaker 1

In our last earnings call, we indicated that our pipeline had returned to more normalized levels after recording the highest quarterly level of loan originations in our company's 38 year history during the Q2. We also noted that we expected asset growth to slow in the second half of the year. The slight decline in our loan portfolio during the 3rd Quarter, however, was due to a combination of reduced loan originations and a higher level of loan prepayments compared to the linked quarter. The low interest rate environment compounded by excess liquidity in the system has kept competition for residential lending aggressive among market participants. And although long term rates have increased over the past quarter, we've noticed that many competitors continue to reduce loan offer rates.

Speaker 1

For the 9 months ending September 30, our lending teams have originated and underwritten $1,900,000,000 in new loans, which exceeds the production we recorded for the full calendar year of 2020 by $428,000,000 and for 2019 by $306,000,000 I expect that our 4th quarter loan volume will place our total year 2021 originations, including our Q1 loan purchase, To be on par with or even exceed our prior greatest historical loan volume of $2,100,000,000 which was achieved in 2017 in a period when our loan portfolio was growing at double digits. Despite our projections for strong loan originations, we're also that prepayment speeds will remain elevated and therefore we still expect flow single digit asset growth for this fiscal year. This is consistent with our earlier disclosures this year. Our year to date asset growth of 5% has been remains low at only 2% of our total deposits. Our total capital continues to grow and remains at strong levels.

Speaker 1

Our tangible Book value per share has increased by 7.7% since the beginning of the year. Our current $20,000,000 share repurchase plan remains active and to date under this plan through September 30, 2021, we've repurchased 905,000 shares of our common stock at an average price of $11.25 per share or an 11% discount to our September 30 tangible book value of $12.59 per share. As you may have seen in our press release yesterday, our Board of Directors approved a 4th quarter cash dividend of $0.12 per common share. The dividend will be payable on November 15 to shareholders of record as of November 5. Our 3rd quarter Record net earnings and strong financial performance have only been attainable with the dedication and hard work of our staff.

Speaker 1

I'd once again like to thank our employees And with that, I'll now pass the presentation to Laura for a few added financial details pertaining to the Q3 and our near term outlook.

Speaker 2

Thank you. As Simone indicated, our net interest margin grew by basis points during the Q3, predominantly due to the cost of our interest bearing deposits declining by 20 basis points to 54 basis points during the period. This reduction in the cost of our deposits is expected to slow significantly during the Q4 for two main reasons. First, only $424,000,000 of our term deposits With the current weighted average interest rate of 81 basis points, we'll mature during this period. This level of maturities is less than half of the level of $1,000,000,000 of term deposits that repriced during the Q3 of this year.

Speaker 2

Additionally, the term deposits that matured during the linked quarter carried a weighted average interest rate that was 27 basis points greater than that of the rate attached to our 4th quarter's maturing term deposits. Deposits that do renew before year end should yield a small benefit as during September, the weighted average rate on our new and renewing CDs at September 30. With regards to our loan book, the rate on the loan portfolio continues to decrease monthly As new loan volume is added at rates lower than the portfolio rate and the rate on loan payoff exceeds the portfolio rate. During the Q3, the weighted average rate of new loan originations was 3.32%, while the weighted average interest rate on loan payoffs was 3.88 At the end of the 3rd quarter, the spot rate on the loan portfolio was 3.73%. As Simone noted earlier, new loan rates continue to be under pressure and we expect that we will need to be more competitive in upcoming periods From the $500,000,000 of out of the money interest rate swaps that matured during August of this year, accelerated recognition that deferred loan costs Associated with high prepayment speeds will continue to depress returns.

Speaker 2

Given these various and opposing deposit and loan portfolio components, Our expectation is that our 4th quarter net interest margin will continue to improve, albeit to a much lesser extent than in prior quarters, at a measure of perhaps 3 to 4 basis points over the 3rd quarter. Lastly, I'll note that our total net non interest For the Q4, it's expected to range between $15,500,000 $16,500,000 Similar to the quarter ended September 30, Cost associated with loan origination volume is often the largest variable giving rise to comparable period increases or decreases. Given that our loan pipeline at the end of the 3rd quarter was $337,000,000 as compared to $472,000,000 at the end of the linked quarter, Capitalized salaries will likely decline, and I would expect our non interest expense to be somewhat higher in the Q4 than in the Q3 of this year. This concludes our prepared remarks. And at this time, we will ask Jeff to open the line for questions.

Operator

Your first question comes from the line of Gary Tenner from D. A. Davidson. Your line is open.

Speaker 3

Good morning.

Operator

Good morning, Dan. A couple

Speaker 3

of questions. First question I had, just in terms of the Benefit in the Q4 of the swaps, you mentioned Laura your expectations for the margin overall. What would be all else equal the kind of Full quarter benefit just from that August maturity that we should be thinking about for the quarter.

Speaker 2

Gary, I didn't look at that specifically, so I don't have a number to give to you.

Operator

Okay. Okay.

Speaker 3

And then secondly, you actually just wrapped up your comments with some thoughts on non interest As you're looking at 2022, all else equal in terms of the deferred comp Kind of volatility on production, any impact from upward pressure on wages, just generally everything, we're starting to hear more from banks In terms of pressure on labor and wages and maybe a larger than typical increase on that line item in 2022. So I'm just wondering what your Thoughts are on that topic?

Speaker 2

I do think like others in the industry that we will see some wage pressure. Our turnover is on average higher than in prior periods. But again, we are pretty good at managing Our overall cost, so we also look to spread our workload among our existing employees.

Speaker 1

And as I also mentioned in my comments, Gary, we are intending to continue to look at technology to help us continue Improving our efficiency as we go forward. And that's not meant to replace employees today. I mean, we have a great employee base and we are not looking at technology But it's to help us maybe not need to hire additional as many additional employees going forward.

Operator

There are

Speaker 1

no more

Operator

questions. Turning the call back to Ms. Simone Lagomarcino for closing remarks.

Speaker 1

Thank you, Jeff. This concludes our conference call. Thank you all very much for participating.

Operator

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

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