Earnings Transcript for LBC - Q4 Fiscal Year 2020

Operator: Good morning, and welcome to the Luther Burbank Corporation's Fourth Quarter 2020 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 fourth quarter and full-year 2020 earnings conference call. This is Simone Lagomarsino, President and Chief Executive Officer and with me today is Laura Tarantino, our Chief Financial Officer. The conclusion of the calendar year 2020 marks our 37th consecutive year of recording consistent quarterly profitability. After the unexpected events of last year, I take comfort knowing that our company has remained a reliable financial partner to our loan and deposit customers and at the same time, a steady performer for our shareholders. Today, I'll begin with our fourth quarter results, summarize our year-end performance and then conclude with highlights of our 2021 outlook. As a reminder, our fourth quarter Investor Presentation is available for download on this webcast and will also be available on our website following this presentation. Our net income for the fourth quarter was $8.7 million, or $0.17 per diluted common share, a decline as compared to the linked quarter net earnings of $14.3 million or $0.27 per diluted common share. Fourth quarter earnings were negatively impacted by our decision to reduce excess cash holdings and incur $10.4 million in pre-tax penalties to prepay $150 million of long-term fixed rate Federal Home Loan Bank advances. Had we not made the decision to prepay these borrowings and excluding the impact of the non-recurring prepayment charges, our pro forma fourth quarter net income would have been $16.1 million, or $0.31 per diluted common share, an increase of $1.7 million as compared to the linked quarter. This improvement was primarily due to growth in net interest income and stronger loan production. As a result of elevated loan prepayments attributed to the low interest rate environment as well as solid retail deposit growth, low yielding cash balances continued to grow throughout the year. Rather than deploy this cash into our investment portfolio where yields are equally low, management believed it was in the best interest of the company to deleverage our balance sheet and instead advance the pace of net interest margin improvement and the company's future earnings potential.

Laura Tarantino: Thank you. As Simone mentioned, our loan pipeline reflects healthy activity. Now then expected however, given continued low rates, the preponderance of activity were 73% for refinance transaction, and 18% are in-house refinances. The weighted average coupon on loans in our pipeline at year-end was 3.49% or approximately 50 basis points less than the coupon on our full loan portfolio at the end of 2020. Although year-to-date, we have seen an increase in five and 10-year treasury rates, this increase has not translated over into competitive pricing, likely due to the benign loan growth in the industry. During 2020, our loan portfolio coupon decreased by 18 basis points throughout the year. Based on the metrics I've provided, we would expect to see continued reduction in our pricing throughout the current year on this loan portfolio, but to a larger degree than in 2020 given the high levels turnover experienced during the past several months. On the other hand, we do expect to see additional cost savings in our deposit portfolio. The ending rate on our retail deposit portfolio measured 94 basis points at December 31 as compared to 1% at the end of the linked quarter. During the first quarter of 2021, $480 million of retail certificate accounts are scheduled to reprice. The current weighted average rate on these CD renewals measures 1.17% while in December, new and retained money was recorded at an average rate of 44 basis points, or approximately 73 basis points less. During 2020, our retail deposit spot rates decreased by 1% from the start of the year, to the end of the year, largely as a result of the Fed 150 basis point drop in the first quarter serving as a catalyst, as well as greater liquidity in the banking system. Retail deposit repricing improvements are expected to be more gradual this year with the potential to pick up a one to two basis point cost reduction per month. As Simone previously noted, our net interest margin is expected to show the most improvement during the last half of this year. We have $1 billion in interest rate swaps with a current negative carry of 135 basis points, with one half set to expire in both June and August of this year. This concludes our prepared remarks. And at this time, we'll ask the operator to open the line for questions.

Operator: . Our first question comes from Matthew Clark with Piper Sandler. Your line is open.

Matthew Clark: On the FHLB prepayment, I guess what part of the quarter did that occur, just trying to get a sense for whether or not it was late in the quarter or --?

Simone Lagomarsino: Mid-December, yes it was mid-December.

Matthew Clark: And I guess I would have thought there might be a little bit more relief on your borrowing costs. But remind us is that spread over the remaining life? Is that why in terms of the savings and it's not?

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

Laura Tarantino: That's correct. The improvement is probably going to be about 10 basis points, all else being equal for 2021. But because it was late in the year, you're not seeing that in 2020 results.

Matthew Clark: Okay. And what's your appetite to prepay additional FHLB advances?

Simone Lagomarsino: I would say it depends, but going to take and monitor trends throughout the year.

Matthew Clark: Okay. And then the uptick in the run rate of expenses. My guess is the swing from fourth to first is kind of FAS 91 related after that's a strong production in 4Q but anything else there? I mean, maybe advertising steps up more materially this year relative to this past year?

Simone Lagomarsino: Well, Q1 will definitely have higher employment taxes just because of the normal Q1 employer taxes increase. And, Laura, do you want to comment on that?

Laura Tarantino: Sure. And I would add that at each year, we expect some increase for merit changes for staff.

Matthew Clark: Great, okay. Then, just anything on the -- any update on the buyback, I assume you guys will get lot more active, assuming your stock kind of shakes out here around where it is after the blackout period. But any updated thoughts on the buyback going forward?

Simone Lagomarsino: Right. I think as part of our capital management focus is what's the best use of our capital and there's a balance between the unknown of COVID and the current levels of our share price. So we focus on what's the best use of our capital and certainly having repurchased a significant number of shares last year and having the buyback in place will continue through this buyback of $20 million -- a total of $20 million that we set aside as of November of last year. And at the conclusion of that, we'll see if there's -- we're interested in having additional buybacks going forward.

Operator: Thank you. Our next question comes from Jackie Bohlen with KBW. Your line is open.

Jackie Bohlen: Thank you for all the wonderful color in terms of the margin and the pushes and pulls, you see over the next in the coming quarters and months. I want to start just with deposits. Here you've had good success at reshuffling that portfolio and just an update Simone on some of the things that you've already put in place and what you might look to further put in place to keep that trajectory moving down even as you start to see CD repricing become less impactful?

Simone Lagomarsino: Sure. So we first of all in mid-year in 2019 -- 2020, sorry mid-year 2020, we hired a new individual to run that division for us who has a very strong background in community banking activities. And he's really put our branch employees through a number of sales programs and is very focused in helping us be more focused on outreach, both to cross-sell existing customers and to bring in new customers, which is quite honestly a different approach from what we had done historically, which was to put advertising in the newspapers and basically attract customers through offering the higher rates. So I think it's twofold of why and how we've been successful is that new approach, in addition to we bought are creating some new products and services. But probably, obviously, just what's happening in the industry where there's been an influx across the whole industry in deposit. So we've benefited from the combination of both of those, and we will continue to support the efforts of calling and additional products and services as we identify them to support deposit growth that's less rate driven, and more focused on more granular deposit base.

Jackie Bohlen: Okay. So I would guess that just kind of a slow and progressive continued churn in the portfolio, and that should aid new deposit costs as we move forward, as well. And that's probably taken into consideration and your margin thoughts?

Simone Lagomarsino: Correct. And I certainly well, I know, I always answer something, and then I offer it to Laura, but I don't know, Laura, if you have any more that you'd like to add, I certainly want to give you that opportunity.

Laura Tarantino: No. As you summarized, I think in part, it's really a culture change on the deposit side of our house, it takes time to implement.

Jackie Bohlen: Okay, thank you. And then, I know in the past, I apologize, I can't remember if it was the second quarter or the third quarter, we had this discussion where I'm I know you've tightened underwriting standards early in the pandemic, and then you released some of that tightening, just wanted to see where you stand today in terms of the types of generation you're looking at versus where you were a year-ago?

Simone Lagomarsino: We have continued to make some changes to our underwriting criteria. We're not completely back to where we were prior to the pandemic, but we're -- each quarter, we continue to move in that direction. Certainly, you can see what the performance of our portfolio, we feel confident in our historical underwriting and the credit quality of our existing portfolio, and we want to keep that kind of credit quality in the portfolio as we go-forward. And again, we've slowly over the course of last year, moved back towards the direction of the pre-pandemic, and most likely within the next, within the first half of this year, we probably will be back to where we were pre-pandemic assuming everything plays out in terms of vaccine and other legislation and regulations don't change our mind on that.

Jackie Bohlen: Okay, thank you. I think we all want to be back to where we were pre-pandemic within the next couple of months. So, thank you very much.

Simone Lagomarsino: Thank you, Jackie.

Operator: Thank you. Our next question comes from Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner: Thanks. Good morning. I just wanted to clarify your comment about adding income property loan officers this year. Is that in the multifamily space, or is that in kind of non-multifamily commercial real estate as you're looking out for the year?

Simone Lagomarsino: In multifamily.

Gary Tenner: Those are multifamily, okay. And then just as it relates to excuse me lost the margin expansion that you're projecting for the year -- I apologize; I actually had that question answered. Thanks.

Simone Lagomarsino: That's okay. Thank you, Gary.

Operator: Thank you. And I currently show no further questions at this time. I'll turn the call back over to Simone Lagomarsino for closing remarks.

Simone Lagomarsino: Great. Well thank you all for participating in our year-end 2020 conference call. This concludes the conference call. Thank you.

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.