Luther Burbank Corporation
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Good morning, and welcome to the Luther Burbank Corporation Second Quarter 2021 Earnings Conference Call. . 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. 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 filed with the SEC. I would now like to turn the conference over to Simone Lagomarsino, President and CEO. Please go ahead.

[Simone Lagomarsino:]

Thank you, Detamara. Good morning, and welcome to the Luther Burbank Corporation's Second Quarter Earnings Conference Call. This is Simone Lagomarsino, President and Chief Executive Officer; and with me today is Laura Tarantino, our Chief Financial Officer. We appreciate that you're joining us today. We're pleased with our positive financial performance trends and that we're achieving the goals that we established in early 2019. Primarily, these goals included growing net interest margin to a level which generates a return on average assets of at least 1% and simultaneously produces a double-digit return on average equity for our shareholders. During the second quarter, we recorded net income of $21.2 million or $0.41 per diluted share, an improvement of $2.8 million or $0.06 per diluted share as compared to the prior quarter earnings. Growth in net income compared to the linked quarter was primarily attributed to a $2.2 million increase in our net interest income and a $1.5 million reduction in noninterest expense which was partially offset by a $1.1 million increase in income taxes. Our returns on average assets and average equity during the second quarter measured 1.2% and 13.3%, respectively. The earnings for the second quarter included a $2.5 million recapture of loan loss provisions. And even if we exclude this reversal of loan loss provisions, our adjusted net earnings would have produced a return on average assets of 1.1% and a return on average equity of 12.2%. Our net interest margin expanded to 2.31% during the second quarter, reflecting an 8 basis point improvement compared to the prior quarter. While our yield on earning assets declined by 5 basis points, largely due to prepayment of higher-yielding loans as compared to rates on new loan volume, this trend was outpaced by a 15 basis point reduction in our cost of funds. Our lending team generated record loan growth during the second quarter. We originated over $700 million in new real estate loans in the period or an 85% increase as compared to the linked quarter when we exclude the single-family loan pool purchase we completed in the first quarter of this year. The improvement in loan origination volume was directly correlated to the record high loan pipeline at the end of the first quarter. We attribute the size of the pipeline and significant loan productions during the quarter to reverting our loan underwriting policies to the pre-pandemic requirements. The interest rate associated with the new volume of 3.34% during the quarter was largely unchanged from the linked quarter coupon on new loan originations, which measured 3.35%, again, excluding the purchased loan pool.

[Laura Tarantino:]

Thank you, Simone. The more recent flattening of the yield curve, along with the reduction in the 10-year treasury by approximately 40 basis points since last quarter is not a change that we would have predicted and certainly not a banker's preferred shape of the yield curve.

[Operator:]

. Your first response is from Eleanor Hagan of KBW.

[Eleanor Hagan:]

Just starting out on expenses, I think you've kind of already touched on this in the prepared remarks, but how much of an impact did deferred compensation have on salary expense in 2Q '21, understanding that origination volume can be challenging to predict? Do you have a sense for what is an appropriate run rate going forward? Are we back to more of a pre-2020 level?

[Simone Lagomarsino:]

So I'll start and then turn it over to Laura to give more specifics, but I just want to clarify that when you talk about -- you use the term deferred compensation, the accounting would be considered the FASB 91 where we take the costs of generating a loan at the time of origination, and we book that and amortize that cost over the expected life of the loan. So it's -- we don't consider that a deferred compensation. We consider that just the FASB 91 loan origination costs that are booked over the life of the loan. We have -- we do have deferred compensation, which is separate, and I just wanted to clarify that for the conference call. And Laura, do you want to talk specifics -- I think you mentioned that in your comments about where we would expect that to be at the end of the third quarter. But do you want to clarify further?

[Laura Tarantino:]

Sure, Eleanor. I think I mentioned I would expect our noninterest expense next quarter or for the third quarter to approximate $15 million, which is about almost $1 million greater than the second quarter primarily because of lower originations.

[Eleanor Hagan:]

Okay. Great. And then kind of sticking with salary expense, how does your employee base compare to what you would consider full employment? And are you seeing or experiencing any inflationary pressures on salaries, given kind of the pressures that have been on hiring recently?

[Simone Lagomarsino:]

So we have about 285 employees at the end of the second quarter, and that's -- we've been pretty consistent. We have been fortunate to be able to fill open positions as they come up. And we have not seen significant pressure on salary costs at this point. However, we are obviously hearing about it in the market and expect that, that may happen over time. But at the present time, we have, again, been able to fill open positions. And generally speaking, I mean there may be a few here or there that are more difficult to fill. But generally, we've been able to fill our open positions. Laura, anything more to add?

[Laura Tarantino:]

No, that's accurate.

[Operator:]

Your final response is from Gary Tenner of D.A. Davidson.

[Clark Wright:]

This is Clark Wright, speaking on behalf of Gary Tenner. My question refers to the single-family real estate originations year-to-date. Excluding the Q1 purchases, you were nearly at pre-pandemic 2019 full year level let alone 2020. Can you provide any thoughts on where you think these origination levels are going to be heading in the second half of the year? And if you could just provide any more commentary on the CRE origination level projections as well?

[Simone Lagomarsino:]

So again, I'll start. This is Simone, and then I'll let Laura pick up. I would say that we have had a very strong single-family loan origination both from the loans that we purchased, but also loans that we've originated. A significant portion of the loans that we're originating are for purchase transactions, which I think is very important and it really is the key aspect of our loan originations that separate us a little bit. So rather than refis, which we're seeing an uptick in refis generally across the board from what the Mortgage Bankers Association has reported, we are still seeing a very strong loan purchase volume. And if you look at our loan pipeline at the end of June for single-family alone, it is very similar to where we were at the end of March. So we expect at least in the near term, to have strong loan originations in single family. With the recent downturn in 10-year treasuries, we may see an uptick in loan prepayments, though as more people who have adjustable rate mortgages with us decide to refi into fixed rate, longer-term 30-year mortgages. But that it's unknown. We've seen a little bit of a slowdown recently but we may see an uptick just based on what's happened with recent rates. And then in terms of CRE, we've seen a significant reduction in our pipeline as we would have expected, as we noted in our prepared comments, we had a big uptick in the pipeline at the end of the first quarter, and we have moved that volume through our origination process and booked those loans. But we're now down to more of a what we would have said typically would have been the normalized level, and so we would expect normalized levels of CRE loans for the last half of this year. And Laura, if you want to get more specific on any of that, I'd welcome you to do that.

[Laura Tarantino:]

Thank you. Actually, I don't think I have anything else to add.

[Clark Wright:]

Awesome. And then just my other question, you have already really talked about the repricing activity that would be happening. Where are you expecting to see your cost of funds moving from here? It looks like the cost of interest-bearing deposits is down to 74 basis points, down 50 basis points from Q1 levels. Do you see it moving any further below that? Or do you think it's going to be stable at levels they are at currently?

[Simone Lagomarsino:]

Laura, do you want to take that?

[Laura Tarantino:]

Sure. I do think it will move down from the spot rate at June 30, but just maybe half of what we achieved last quarter. Again, there was a pretty large differential in the cost of CDs that were maturing in the prior quarter. And we're definitely, I think, sensing a little bit of price sensitivity on where people are willing to roll over their CDs at what rates, right? And we have seen some movement just into money market accounts given the just the continued low interest rate environment.

[Simone Lagomarsino:]

And Laura, do you maybe want to mention also the swaps that expired at the end of June, so close to the end of this last quarter and then now coming up so that people can understand the impact that might have as well to the margin.

[Laura Tarantino:]

Sure. As I noted when I was speaking, we had one $500 million swap mature in June, another $500 million matures in August. And that should pretty well offset the monthly decline we see in our loan yield just from the turnover of the portfolio. So that's going to be the largest impact, I think, for our net interest margin over Q3 and Q4 because they had pretty significant negative carries.

[Operator:]

Okay. There are no further questions in the queue at this time. I will turn the call back over to Simone Lagomarsino.

[Simone Lagomarsino:]

Thank you very much. We want to thank all of you for joining us today for our second quarter conference call. And this concludes our second quarter earnings call. Thank you very much.

[Operator:]

That concludes our call today. A recorded copy of the call will be available on the company's website. Thank you for joining us. You may now disconnect.