Luther Burbank Corporation
Q3 2019 Earnings Call Transcript

Published: 26 Oct 2019

[Operator:]

Good morning, and welcome to the Luther Burbank Corporation Third 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 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 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 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:]

Thank you, Andrew. Good morning, everyone and welcome to the Luther Burbank Corporation 2019 third quarter conference call. This is Simone Lagomarsino, President and CEO, and with me are Laura Tarantino, our Chief Financial Officer, and John Cardamone, our Chief Credit Officer. Today we'll discuss last quarter's financial results and I'll begin with a high-level overview of the quarter.Several market dynamics occurred during the quarter and provided us the opportunity to better position the bank. These include

[Laura Tarantino:]

Thank you, Simone, and I'll be relatively brief. As previously noted, the yield on our loan portfolio improved 4 basis points from the linked quarter, even when excluding the interest income from the swap transactions and the greater level of prepayment speeds, which was attributed to a growing coupon on our real estate loan portfolio where the rate on new loan origination volume has generally outpaced the coupon on loans prepaying.As reported in our last quarter's earnings call, due to the decline in the five-year treasury rate during 2019, which is correlated to our real estate loan operates the spread between loan originations and payoffs continues to compress.The weighted average rate on new loan volume during the quarter was 4.26%, while the weighted average rate on loan curtailments and pay off for the same period was 4.22% resulting in a spread of only 4 basis points. This compares to a second quarter weighted average coupon on loan originations of 4.44% and a weighted average rate on payoffs and paydowns of 4.33%, and a corresponding spread of 11 basis points.Consequently, the weighted average rate on our loan portfolio increased by only 1 basis point at the end of the third quarter to 4.19%, as compared to a weighted average rate of 4.18% at the end of the prior quarter. Because 89% of our loans in the portfolio are fixed-term portion of their hybrid on period and given that our new loan origination rates are approaching the overall loan portfolio rates, absent any steepening in the mid-to-long-term treasury rate, our expectation is that the coupon our loan portfolio will remain relatively unchanged in the near term.As we think about deposits recent reductions in short-term market rates have translated to improvements in the cost of our deposits. The ending rate on our retail deposit portfolio decreased by [8 basis points] to a level of 1.98% at September 30 versus a measure of 2.06% at June 30.As would be expected with short-term brokered deposits, the cost of our wholesale deposits declined more rapidly and fell by 31 basis points to a rate of 2.10% at the end of the third quarter, as compared to a rate of 2.41% at the end of the second quarter. Our time deposits represent 67% of our deposit composition.Looking forward on the quarter, 1.04 billion or 29% at the time deposit portfolio is subject to renewal during the next three months. 527 million of this balance is represented by wholesale deposits with a weighted average interest rate of 2.11% and were current pricing is in the 1.9% to 2% range. The remaining 516 million of this balance is comprised of retail term deposits with a weighted average interest rate of 2.21%. This compares to an average rate on new and renewed retail CDs of 1.98% during September 2019.As Simone already noted, while additional short-term interest rate cuts may benefit the cost of our funding, it's anticipated that our deposit beta will slow if the Federal Reserve's target rate decreases in rapid and succession giving the CD concentration in our deposit portfolio and the difficulty of adjusting customer rates too quickly, while simultaneously growing deposit balances.Additionally, all of our FHLB advances at September 30 totaling $977 million, our fixed rate term borrowing with an average interest rate of 2.3% and a weighted average term to maturity at 2.6 years. As a result of both short-term and long-term decreases in market interest rates at the end of the third quarter, as compared to the end of the prior quarter, as well as hedged instruments executed during that period, our interest rate risk has declined substantially.Net interest income and the economic value of equity decline as a result of a 200 basis-point parallel interest rate shock have improved to decreases of 2.4% and 7.8% respectively, at the end of the current quarter from decreases of 7.4% and 13.5% respectively, at the end of the linked quarter. While the net interest advantage of the pay fixed interest rate swaps on our books will lessen, if and when short-term interest rates continue to decline, we anticipate that our liability sensitive balance sheet will benefit from the same market change.That concludes our prepared remarks. And at this time, we'll ask the operator to open the line for questions.

[Operator:]

Thank you. [Operator instructions] And our first question comes from the line of Matthew Clark with Piper Jaffray. Your line is now open.

[Bob Shone:]

Good morning, this is Bob Shone on for Matthew Clark. How are you doing?

[Laura Tarantino:]

Great. How are you doing, Matthew? Oh! Bob?

[Bob Shone:]

So, I kind of wanted to talk about the margin and the outlook, specifically around the swap income that we saw this quarter. Could you guys give some more color to the swaps that you put in place maybe the majority of them and what we can expect going forward?

[Simone Lagomarsino:]

Yes, thanks for asking. And so, during the quarter, I think actually started in late June and then we did another one in August, we – the two separate swaps, both notional amount of $500 million. They have a weighted average pay fixed rate of 1.438% and they have a two-year maturity from inception.

[Bob Shone:]

Awesome. Thank you. And then shifting gears talking – looking at share repurchases this quarter, it looked like they slowed, a little bit slow. Was this a function of the stock price being higher? And can you talk about appetite for share repurchases going forward? Thank you.

[Simone Lagomarsino:]

You're correct. It definitely was a result of higher stock prices. And as noted in our presentation, the Board recently extended our stock repurchase plan, so we continue to look forward to utilizing the remaining balance of our authorized share repurchase in upcoming quarters.

[Bob Shone:]

Okay. Thanks. I'll step back.

[Operator:]

Thank you. [Operator Instructions] Our next question comes the line of Luke Wooten with KBW. Your line is now open.

[Luke Wooten:]

Hi, good morning, Simone and Laura. Thank you for taking my questions.

[Laura Tarantino:]

Good morning.

[Simone Lagomarsino:]

Good morning, Luke.

[Luke Wooten:]

Just wanted to talk about kind of the deposit mix during the quarter. I saw you guys were able to lower the money market rates. It looked like about by 4%. But you guys are still able to grow those balances. I just wanted to see kind of the outlook for the non-maturity growth in the deposit portfolio kind of going forward?

[Simone Lagomarsino:]

Most of our non-maturity deposits come in via our business line verticals. And during the quarter, we saw most of our growth in 1031 exchange account. As you know, those come in and go out a little bit, but we continue to grow that portfolio period-over-period. Is that referring to your question?

[Luke Wooten:]

Yes, no, that's perfect. Thanks. And then just kind of – on the margin relative to that just you guys had said that looks like it's going to be a little bit more lagged in terms of the funding cost repricing. And I just want to make sure I got the numbers right for the – you said $1.04 billion should be renewing in the next three months. Correct?

[Simone Lagomarsino:]

That's correct.

[Luke Wooten:]

And the weighted average rate on that was, it was closer to the wholesale of the 2.11% versus the retail of the 2.21%?

[Simone Lagomarsino:]

That's correct.

[Luke Wooten:]

Okay. Got you. And I think you said that the new wholesales are coming on at 2.1%. So, there shouldn't be a major pickup in terms of.

[Simone Lagomarsino:]

No. New wholesale is closer to 1.9, frankly, and dropping. As we're getting closer to this next Fed meeting, we may see that dropping.

[Luke Wooten:]

Okay. Got you. And just kind of paring that with in terms of FHLB borrowings. Would you be more inclined to take on less kind of structure and shorter duration FHLBs then put – then kind of renew those time deposits or how do we, how should we look at that going forward just in terms of the mix shift on the balance sheet, considering it's a larger piece?

[Simone Lagomarsino:]

I think we like to – we believe that retail deposits are far more valuable than FHLB wholesale borrowings, right? They're – you can see the utilized, but if we can continue to grow our retail relationship, we would prefer to do that. And I think with the higher level of prepayments that we're seeing. We should be able to keep the growth in loans and deposits equally balanced.

[Luke Wooten:]

Okay. That's helpful. And then just lastly, just wanted to make sure that I got the numbers right. So, with the office relocation, you guys are expecting $1.1 million annually or is that kind of amortized over the life of the new lease?

[Laura Tarantino:]

Yes, I've mentioned that. So, it is a little confusing. We took a $1.1 million charge, which is a one-time charge to vacate the two offices that we’re vacating and we will achieve a $1.1 million annual improvement in the expenses going forward. The two numbers are the same, but it is annual [kind of thing] going forward.

[Luke Wooten:]

Got you. And then just one more on credit, you guys said you guys have, I think it was the approximately 900 remaining credit with the FDIC, so that you cover a couple more quarters if I'm not mistaken, and then we should kind of.

[Laura Tarantino:]

Yes.

[Luke Wooten:]

Okay. And then that should return kind of back to normalized – well, expecting that the insurance fund is not still fall at that point.

[Simone Lagomarsino:]

Yes, and it looks like based on the recent instructions at the FDIC release, that will probably recognize two quarters in the fourth quarter of this year.

[Luke Wooten:]

Okay. Perfect. I'll step back. Thank you.

[Simone Lagomarsino:]

Thank you, Luke.

[Operator:]

Thank you. [Operator Instructions] And I'm showing no further questions at this time. So, with that, that completes our call today. A recorded copy of the call will be available on the company's website. Thank you for joining us.