Luther Burbank Corporation
Q2 2019 Earnings Call Transcript

Published: 3 Aug 2019

[Operator:]

Good morning, and welcome to the Luther Burbank Corporation Second Quarter 2019 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 2018 fiscal year, its quarterly reports on Form 10-Q and current report 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 for the company or online on 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 continued growth and performance are good, it is the company's policy not to establish with the market -- with the markets any earnings, margin or balance sheet guidance.I would now like to turn the conference over to Simone Lagomarsino, President and CEO. Please go ahead.

[Simone Lagomarsino:]

Good morning, and welcome to the Luther Burbank Corporation 2019 Second Quarter Conference Call. This is Simone Lagomarsino, President and CEO. And with me is Laura Tarantino, our Chief Financial Officer; and Brad Satenberg, Senior Vice President, Investor Relations, and CFO of our bank.Let's address our latest quarterly results, and I'll start first with earnings. Net income for the quarter was $11.7 million or $0.21 per diluted common share compared to $12 million or $0.21 per diluted common share in the prior quarter. The second quarter earnings included two nonrecurring items comprised of the $384,000 pre-tax recovery on equipment, previously written down, and a $197,000 pre-tax gain on the sale of loans sold net of a lower of cost or market adjustment on loan held for sale of $10.6 million.Earnings from the prior quarter similarly contained a nonrecurring $333,000 pre-tax gain on the sale of loans sold during the first quarter of 2019. I'll add some additional color about our 2019 loan sale activity in a few minutes. Excluding these onetime items, the adjusted second quarter 2019 earnings would have been $11.2 million and our EPS would have been $0.20 per share as compared to our linked quarter adjusted earnings of $11.8 million or $0.21 per share.The $525,000 decline in adjusted earnings compared to the prior quarter was primarily due to the following

[Laura Tarantino:]

Thank you, Simone. As discussed, our margin in the second quarter compressed at a greater pace than previously anticipated, primarily as a result of market rate changes and the greater inversion in the yield curve.In response to those changes, the coupon on our loan originations decreased to 4.44% in the current quarter from 4.62% in the linked quarter. While at the same time, the rate on loan payoffs and curtailments increased to 4.33% in the current quarter from 4.19% in the prior quarter. As a result of the spread between loan originations and payoffs decreased to 11 basis points in the current quarter as compared to 43 basis points in the linked quarter. The compression in these rates has translated to a smaller monthly increase in the overall portfolio rate.In coupon, our loan portfolio was 4.18% at the end of June '19 as compared to 4.15% at the end of March 2019, an increase of 2.4 basis points or less than 1 basis point per month. Additionally, given the decline in long-term rates, loan prepayments continue to accelerate, particularly in the single-family portfolio, which had exhibited a 32% CPR in the current quarter as compared to a 26% CPR in the linked quarter, causing further compression in loan yields. As a result, although, our average earning assets increased by 1.1%, interest income only grew by $277,000 or 0.4% improvement. And our total yield on earning assets declined by 3 basis points compared to the linked quarter.On the deposit side, although the change in retail deposits reversed course and grew by $103 million in the current quarter as compared to declining by $63 million during the linked quarter, the overall cost of deposits continued to advance increasing 11 basis points quarter-over-quarter and ended the quarter with a 2.10% deposit portfolio rate.This increase was in part offset by a decrease in wholesale FHLB funding rates. Average cost improved by 9 basis points quarter-over-quarter as we took advantage of the inverted yield curve and extended the duration of some of our FHLB advances.As a result, our cost of interest-bearing liabilities increased by 6 basis points compared to the linked quarter, which is an improvement from the 11 basis point increase experienced between the first quarter of 2019 and the fourth quarter of 2018.Our time deposits continue to represent 69% of our deposits composition. Looking forward, approximately $1 billion or 3% of the time deposit portfolio is subject to renewal during the next three months. $611 million of this balance is represented by wholesale deposits with the weighted average interest rate of 2.43% and recurring pricing is in the 2.20% range. Remaining $455 million of this balance comprised a retail term deposit with a weighted average interest rate of 2.14%. Interest in average rate on new and renewed retail CDs of 2.38% during June of 2019.As Simone noted, we would expect to begin fee reduction in the cost of our retail deposits as the Federal Reserve advised to cut rates tomorrow. I've already begun to see a decrease in wholesale funding cost, and both of these should allow our net interest margin to begin to stable -- stabilize, particularly if the longer end of the yield curve steepens and/or loan prepayment rates begin to decline. Although, significant decreases in long-term interest rates have tempered loan yield, those rate decreases along with the sale of 30-year fixed-rate loan additional expenses in our FHLB advances and other hedging activity to have greatly improved our level of interest rate risk.Declines in net interest income and the economic value of equity as a result of a 200 basis point parallel rate increase has improved to decrease of the 7.4% and 13.5%, respectively, at the end of the current quarter from decreases of 11.4% and 21.3%, respectively, at the end of the linked quarter. I'll conclude with a few other brief points. We expect that future loan loss provisions will be made to tempering that loan growth and that our ALLL coverage ratio will remain at or near its current level.No significant changes are anticipated to noninterest income as adjusted for nonrecurring items. And our quarterly run rate for noninterest expense is expected to range between $15 million and $16 million. And although, our effective tax rate in the current quarter approximated 31%, our current quarterly provision includes the tax impacts related to stock vesting and our effective tax rate should range between 29% and 30% moving forward.With that, we will ask the operator to open the line for questions.

[Operator:]

[Operator Instructions] Our first question is going to be from Gary Tenner with D.A. Davidson. Your line is open.

[Gary Tenner:]

Thanks. Good morning. Just wanted to confirm that I heard you clearly on the margin. So if the Fed cuts tomorrow, you are able to immediately change from your deposit pricing. If the curve stays inverted as it is, so the file doesn't really move. Can you hold the line on margin at that point? Or is there further compression? And you need the steepening to really stabilize?

[Simone Lagomarsino:]

Laura, do you want to go ahead and answer that?

[Laura Tarantino:]

Sure. Gary, I do think that with short-term rates dropping a bit, we will begin to stabilize our margin. I'm hopeful that it will continue to decrease and, again, the loan side is if we were throwing a ball -- arranging to think that -- I think it will begin to stabilize and potentially, could be better, if the curve steepened and prepayments slowdown.

[Gary Tenner:]

Okay. Alright. It helps. And then on the loan searching portfolio, what was the fair value adjustment in the quarter on that in actual dollars? I think you had the sequential delta on servicing fees in your press release?

[Laura Tarantino:]

Don't remember the dollar level, I just remember there being a small adjustment -- it wasn't terribly material, I believe it was --- I feel like less than $300,000 in total.

[Gary Tenner:]

Okay. And just one last really quick one. On the income producing loan, was that a multifamily or a commercial real estate loan that went to nonaccrual?

[Laura Tarantino:]

I wasn't following, I wasn't sure I followed Gary's question.

[Gary Tenner:]

Of the loans that went on nonaccrual that one income producing loan, was that multifamily or some other sort of commercial?

[Laura Tarantino:]

Yes. As Simone said, it was a multifamily loan.

[Operator:]

Thank you. And our next question is from the line of Matthew Clark with Piper Jaffray. Your line is open.

[Matthew Clark:]

On the compensation expenses, the compensation expense this quarter, how much of it is related to FAS 91, just the deferral of origination costs relative to some other action you might have taken from a personal standpoint, if at all?

[Laura Tarantino:]

It was primarily related to the greater loan origination volume during the second quarter and capitalized salaries, there really wasn't any material changes in compensation.

[Matthew Clark:]

And then I didn't catch it, but the retail CD is the amount that's maturing here in the third quarter, the rate and kind of where they are expected to renew, can you just repeat that for me?

[Laura Tarantino:]

Retail CDs were $465 million over the next 3 months. They are maturing at a interest rate of 2.14% and our rates for new and renewed CDs during the month of June was 2.38%.

[Simone Lagomarsino:]

And just, Laura, to go back to the comments about there was an increase in the fair value on the equity securities of $311,000 in the current year and then a $185,000 decrease in servicing fee income. I think that was -- I guess that was the question Gary was asking.

[Operator:]

[Operator Instructions] I'm not showing any further questions.

[Simone Lagomarsino:]

Okay. Well, this then concludes our Second Quarter 2019 Luther Burbank Corporation Conference Call. Thank you all for joining us.

[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.