Earnings Transcript for LBC - Q1 Fiscal Year 2021

Operator: Good morning, and welcome to the Luther Burbank Corporation's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity for the three analysts covering Luther Burbank Corporation to ask questions. . 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 2019 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.

Simone Lagomarsino: Thank you very much. Good morning, and welcome to 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 four months of this year, I am 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 multi-year 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’ve recorded net income of $18.5 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 non-recurring 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 $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 at 2.23%, reflecting a 10-basis point improvement over the linked quarter. This improvement resulted from 15-basis point reduction in our cost of funds which outpaced a 6-basis point decline in the yield of our interest earning assets. Suddenly, the general level of market interest rates has contributed to our ability to reduce the cost of our deposit. However, our pricing has also benefitted 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.

Laura Tarantino : 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 way the average rate on our new loan volume, excluding the loan purchase Simone discussed, was 3.35% or 4-basis point declined 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 pay-offs, 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 rates on our retail deposit portfolio measured 82 basis points at March 31, or 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 last.

Operator: Certainly. Our first question comes from the line of Jackie Bohlen from KBW. Your question please?

Jackie Bohlen: Hi, good morning.

Simone Lagomarsino: Good morning, Jackie.

Jackie Bohlen: I was hoping to see, Simone, maybe if you could provide an update on income property lenders? I know during last quarter’s call, you discussed adding some folks there. Just wanted to see how the progress has been on that?

Simone Lagomarsino: Thank you. Yes, Jackie. So we are actually in the process of hiring an individual in the Washington -- 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 Utah, the Salt Lake City market. So that one individual will cover those three markets. So we are very close to coming to a point of getting those individuals onboard.

Jackie Bohlen: 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. Pre-payments 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?

Simone Lagomarsino: Yes, we absolutely do expect to see very strong production levels. As I mentioned, we have a $680 million pipeline, which is -- as Burbank 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.

Jackie Bohlen: Okay. And then just one last one, and then I'll step back. Now, obviously, outside of pre-payments loan originations going really well. And you've made some good progress on deposits with 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?

Simone Lagomarsino: 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 that?

Laura Tarantino : Sure. Hi, 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 look into the 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 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'll be exactly the same as first quarter. But yeah.

Jackie Bohlen: Yeah. I understand 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 absorb 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?

Laura Tarantino : Yeah.

Jackie Bohlen: Okay. Great. Thanks for taking my questions.

Simone Lagomarsino: Thank you, Jackie.

Operator: Thank you. Our next question comes from Bob Shone from Piper Sandler. Your question, please?

Bob Shone: Good morning.

Simone Lagomarsino: Good morning, Bob.

Bob Shone: I just wanted to go back to your comments on the margin of being 2.35 to 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?

Simone Lagomarsino: I think, we’ll get a 10 to 15-basis point lift from that, after the .

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

Simone Lagomarsino: It is.

Bob Shone: 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?

Simone Lagomarsino: 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 that 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 point to where we were pre-pandemic. I think, the one thing that we are still somewhat conservative on is non-residential, 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 pipelines and the demand in the market. When again, we focus primarily on multi-families that are in the suburbs. They are generally between 14 and 15 units per building. So they're not the big high rises and highly densely populated areas. They're more -- in general, many of them are, have more space and are -- where people are actually moving to 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. So I think all of that is driving our pipeline -- the demand in the market, and then our pipeline.

Bob Shone: Thanks, that's great color. And then maybe one more for me. Was there anything more non-recurring 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?

Simone Lagomarsino: Laura, do you want to take that one?

Laura Tarantino : There is nothing that I would consider non-recurring. I think a large part of our expense -- expenses have to do with the volume of loan originations. So the higher our donations, the more salaries that we are capitalizing. So that's probably the largest variable quarter-over-quarter, that I would think $16 million - $15.5 million is a pretty good quarterly run-rate.

Simone Lagomarsino: 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.

Bob Shone: Okay, thanks for that. I'll step back.

Operator: Thank you. Our next question comes from the line of Gary Tenner from D.A. Davidson. Your question, please?

Gary Tenner: Thanks. Good morning.

Simone Lagomarsino: Good morning, Gary.

Gary Tenner: 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 efforts 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 digital teams or anything or -- just what your broad thoughts are on that particular deposit vertical?

Simone Lagomarsino: 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 overtime, some of the deposit customers in the verticals that we're just all very focused on, right.

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

Simone Lagomarsino: Do you want to take that one, Laura?

Laura Tarantino : Yeah, thank you. 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 and 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.

Gary Tenner: Okay. Thank you.

Operator: Thank you. 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.

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

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

Simone Lagomarsino : Thank you, Johnson.

Operator: Thank you.