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spk00: Good morning, and welcome to the Luther Burbank Corporation's first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please press star zero. After the day's presentation, there will be an opportunity for analysts covering Luther Burbank Corporation to ask questions. To ask a question, you'll need to press star one. As a reminder, this call is being recorded. Before we begin, the company would like to remind you The discussions during this call contained 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 the forward-looking statements. For more information on those factors, please see the company's periodic reports accessible at Luther Burbank Corporation website and filed with the SEC. I would now like to turn the conference over to Simone Lagomarsino, President and Chief Executive Officer. Please go ahead.
spk02: Thank you, Norma. Good morning and welcome to the Luther Burbank Corporation's first quarter earnings call. This is Simone Lagomarsino, President and CEO, and with me is Laura Tarantino, our CFO. This morning, we'll focus on the highlights of our financial performance for our first quarter, and then we'll open the line for analysts' questions. Our net income for the first quarter was $22.9 million, or 45 cents per diluted share, as compared to $23.4 million, or 45 cents per diluted share, in the linked quarter. Our results reflected a $443,000 decline in net earnings compared to the prior quarter. This modest decline in net earnings was primarily due to compression of our net interest margin and a mark-to-market adjustment for our equity securities. These negative pressures on our net earnings were somewhat offset by a greater recapture of loan loss provisions as compared to the prior quarter. Let me now take each of these three items individually and provide a little more information. In our last conference call, we explained that we anticipated that our net interest margin would compress each quarter this year. We explained that this compression would occur because our loan portfolio is projected to reprice lower in the near term due to loan origination volume carrying lower rates than both the rates on loan payoffs as well as the weighted average rate on the overall portfolio. We also stated that we felt that the cost of our deposit portfolio had reached its floor. Our net interest margin for the first quarter of this year declined by three basis points to 2.54%. This was primarily due to a 10 basis point decrease in loan yields. Net interest margin compression was partially abated, however, by a three basis point decline in the cost of interest-bearing deposits. The net impact was a $494,000 after-tax reduction in net interest income. We anticipate that the velocity and magnitude of further rate increases, which are generally forecasted this year, will certainly place upward pressure for depositor expectations and therefore on deposit rates. Furthermore, relatively strong loan growth in the industry may deplete excess market liquidity earlier than we originally anticipated, which could also create an upward trending and more competitive deposit rate market. On the other hand, we've recently increased offer rates on all of our loan products, consistent with market competitive pricing. Therefore, new loan volume in future quarters should carry interest rates at origination that are higher than our average loan portfolio rate, thereby helping to partially offset the negative impact to our margin of potentially increasing funding costs. It will, of course, take a couple of months for this higher loan pricing to be reflected in production results as we work through our existing pipeline, much of which was locked in at lower interest rates. All that being said, consistent with our message earlier this year, we continue to expect that our net interest margin will compress during 2022. As I previously alluded, our net income for the quarter was also negatively impacted by the significant increase in interest rates as our sole equity security holding representing an original $12 million investment in a community development fund incurred a $413,000 after-tax mark-to-market loss. We have no current intention of liquidating this investment and it's not uncommon for us to record market adjustments that are typically inverse to the movement of market interest rates, although first quarter's impact was greater than we typically would have experienced. The rising rate environment also affected the market value of our debt securities, the vast majority of which are held as available for sale, which as a result did not impact earnings. And I'll speak to the unrealized losses on that portfolio a bit later. Finally, the third factor that impacted our first quarter net earnings was the reversal of $2.5 million in loan loss provisions. This amount was approximately $500,000 greater on an after-tax basis than the prior quarter's recapture. With this reversal, we have eliminated all qualitative additions to the allowance that we had specifically set aside for the economic uncertainty related to the pandemic. We remain pleased with and appreciative of the resilience of our borrowers and the continued strength of residential real estate in the markets that we serve. Commenting further on asset quality more broadly, we continue to see very strong credit metrics in our loan portfolio. Although we saw an increase in criticized and classified asset levels compared to the linked quarter, our total classified assets to total assets measure of 0.19%, and our total non-performing assets to total assets measure of 0.03% remain at historically low levels, and our credit metrics continue to be among the strongest in the industry. At March 31st, our allowance coverage ratio was 52 basis points of the portfolio. As a reminder, our bank still operates under the incurred loss methodology for the loan loss allowance, and we expect to adopt CECL in the first quarter of 2023. Based on ongoing results of our CECL model test work, we believe that the implementation of CECL will not result in a significant change to the level of our allowance. However, the ultimate impact of adoption will be dependent on the economic forecast at the time of adoption. Now, turning to the balance sheet, our total assets at quarter end grew by $81 million, or 4.5% on an annualized basis. This growth was primarily attributed to over 4% annualized growth in our loan portfolios. Our first quarter loan origination volume of $569 million exceeded the linked quarters volume of $70 million, or 14%, with both our income property and single-family residential units recording strong production. Based on the size of our loan pipeline at March 31st of $815 million, which is more than double the size of our pipeline level at the end of last year, we would expect our second quarter loan volume to reach or surpass our first quarter's production levels. At this point, we appear on track to achieve our calendar 2022 asset growth goal of 3% to 5% that we announced at the beginning of this year. Our asset growth in the first quarter was primarily funded with a combination of retail and wholesale deposits. As I mentioned earlier, the average cost of our interest bearing liabilities declined during the first quarter. We will note, however, that the cost of wholesale funding sources, whether it be broker deposits or federal home loan bank advances, have significantly increased over the last quarter. And at some point, the cost of our retail funding will begin to trend upward as well. However, we continue to strive to minimize the degree of net margin compression by placing greater emphasis on leveraging technology to acquire customers' deposits and furthering our specialty deposit growth for funding. which we generally expect to be less expensive than our typical term deposits. The company's capital position remains strong. However, total shareholders' equity declined $1.1 million at quarter end compared to the prior quarter. The rising interest rate environment caused the fair value of our available-for-sale debt securities to decrease and lower our equity by $12 million after tax. We remain in a strong position to support future growth, and our Tier 1 leverage ratio is at 10.27% at quarter end. Our investment portfolio primarily serves as a contingent source of liquidity, and as such, we generally expect to hold these investments to term. At March 31st, our available for sale securities portfolio of $625 million had an estimated weighted average life of 5.5 years and an average effective duration of three years. As these securities prepay and or mature, the unrealized losses we've recorded will reverse through capital. As based on the current interest rate environment, replacement security purchases are expected to carry higher yields, resulting in better future returns. Although total equity decreased during the first quarter, importantly, our tangible book value per share increased by 5 cents to $12.93 per share as a result of a reduction in outstanding common shares. During the first quarter, we returned $11.9 million to shareholders in the form of common dividends and share repurchases. Additionally, yesterday, our board of directors declared a 12 cent per common share dividend that will be paid on May 16th. And with that, I'll now turn the call over to Laura Tarantino for some additional brief comments.
spk03: Laura Tarantino Thank you, Simone. As Simone indicated, with rising interest rates, we expect our net interest margin to decline further this year. Given interest rate volatility over the past quarter, let alone the past year, and changing expectations about the frequency and magnitude of short-term rate increases, we are not providing any specific margin guidance. However, I will give some greater granular detail for our loan and deposit portfolios. As previously mentioned, we have increased our offer rates recently. Our current best pricing for any hybrid arm, single family, or income property loan product is 4%. This is an improvement over our first quarter loan origination rate, which averaged 3.14%, and it is also a level greater than our weighted average loan portfolio coupon of 3.6% at March 31st. Assuming competition and the interest rate environment remain unchanged, loan growth later this year is expected to improve the trajectory of our loan yield. However, as Simone previously stated, it will be a few months before current offer rates are reflected in our production numbers. At quarter end, 695 million, or 85% of our pipeline, carried rate locks with a weighted average coupon of 3.39%. Moving to deposits, at March 31st, the spot rate on our retail deposit portfolio was 43 basis points. During the month of March, our interest rate on new and renewed term accounts averaged 41 basis points, while our new non-maturity accounts had an average interest rate of 37 basis points. During the second quarter of this year, 505 million of our term deposits with a current weighted average rate of 37 basis points will mature. At renewal, we would expect the cost of these deposits to increase. In late March, we executed one new derivative instrument, a two-year interest rate swap with a notional amount of $100 million to assist in hedging our interest rate risk position. Fixed pay swap carries a fixed pay leg of 2.24%. Finally, last quarter, I stated that I expected our non-interest expense to run at a rate of approximately $16.5 million per quarter. Our lower-than-anticipated G&A expenses for the first quarter of this year were primarily attributed to higher-than-planned capitalized loan costs related to strong loan volume during the quarter and a delay in staffing opened positions. Given the level of our loan pipeline, it is reasonable to expect non-interest expense to be closer to $16 million for the second quarter of this year since we will expect to have higher capitalized loan costs in the second quarter based on the size of our loan pipeline at the end of March 31st. This concludes our prepared remarks, and at this time we'll ask the operator to open the line for questions.
spk00: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone to withdraw your question. Please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Matthew Clark with Piper Sandler. Your line is open.
spk06: Good morning, Simone and Laura.
spk00: Good morning, Matthew.
spk06: Maybe first just on the change in the rate environment and whether or not you're seeing some change in behavior with customers maybe starting to prefer the hybrid product over the 30-year fixed-rate product? Are we at that point yet, or do you foresee that happening at some point this year? And if that does occur, do you feel like that would provide an upward bias to that 3% to 5% growth, or do you feel like the refi activity would decline so much that it would kind of mitigate the better prepay speeds?
spk02: So I'll take the first part, and then I'll have Laura take the second part. So the first part is, yes, we are definitely seeing, and I think there's some industry statistics that we've looked at that suggest that the five-year hybrid or other hybrid loans are much more coming into favor now because there is definitely some differential in, you know, now with mortgage, 30-year mortgage rates, you know, between four and in some cases over 5%. So four and a half, five, five, over five. And the hybrid arms as Laura mentioned are lower than that. So we have seen more interest and I think even like I said the industry statistics for example for single family mortgages suggest that the trend is changing from 30 year fixed to hybrids. And then with that Laura I'll have you answer the second part of Matthew's question.
spk03: Thank you. So I would add that we have seen prepayments slow a bit. I'm less concerned on the single-family side about the refi activity, primarily because we seem to specialize a little bit more in purchase activity, and I think the purchase market is still good, and typically spring and summer are strong purchase real estate markets. So I don't think that decline in refis will hurt us much.
spk06: Okay, great. Shifting to the deposit beta outlook, I know it's somewhat in flux, kind of just waiting on the Fed here the next few meetings, but what are you budgeting for, you know, maybe by the end of the year in terms of deposit costs or even through the end of next year? Just trying to get a sense for kind of your cumulative data assumption on deposits.
spk02: And again, I'm going to start and then I'll turn it over to Laura to actually answer your specific question. But I want to give a little bit of background of what we're looking at. I mean, I think everybody understands that we've seen a significant inflow of deposits over the pandemic from both fiscal and monetary policy that has taken place. And those deposits remain in the industry. And in fact, when we looked at so far what we're seeing in the first quarter is deposits in the industry are not starting to go down and in fact appear to continue to be growing. So I think that the big question in terms of pricing that will be different at this point in time from what the betas were historically is really just this significant amount of excess liquidity in the system today that we really haven't had historically. So for instance, when the Fed raised rates a quarter Previously, we did not see a lot of banks' competitors really aggressively raise rates to match that. And the deposit pricing market is just not as competitive today as we've seen it historically, again, because of just that excess liquidity. But with that kind of background, and we're kind of looking and monitoring because certainly when that dynamic changes and we – start to see an outflow of deposits, then we do expect there to be a more competitive deposit pricing market at that point, but we're just not exactly sure when that's going to be. But with that, I wanted to give that a little background, and then I'll turn it over to Laura to answer specifically the question that you asked, Matthew.
spk03: Thanks. And I think specifically I'm going to say that I tried to indicate that we weren't going to give any tight guidance, and I think there's just too many variables, Matt. I feel like this environment's different than environments that we've had in the past where rates were increasing. I feel like the Fed maybe is a little slower to raise rates this time, and now they're going to jump on it quickly. But again, going back to Simone's points, with deposits growing during the quarter at most banks, I don't think there's a real need for people to react right away. So I have no number to give you. We're just a little bit uncertain.
spk06: Okay, that's fair. And then just on the reserve coverage, is this, you know, as low as you'd like to go, or do you feel like there's a little bit of room left kind of depending upon your qualitative factors? Obviously a more uncertain outlook these days, so I can't imagine it would go any lower, but just want to double-check there.
spk01: Lauren, you know, go ahead, if you want. No, I was going to say, Laura, why don't you go ahead and comment on that.
spk03: Thank you. You know, it's hard to say what the next quarter brings, and, of course, we will always react to what's happening. Assuming nothing changed from today, I would think that this level seems about right, and we're provisioning for loan growth. As we noted, we don't have any COVID-specific qualitative reserves remaining, and so most of the qualitative factors we have in our current allowance are ones that we feel are typically pretty stable. But again, what we do next quarter would just depend on what's happening in the economy and with our portfolio, but we don't see any really changing trends at this time.
spk06: Okay. Thank you.
spk00: Thank you. Our next question comes from Gary Tenner with DA Davidson. Your line is open.
spk05: Thanks. I did have a follow-up on that rate or, excuse me, the deposit beta question. Just asked it. Laura, I just wonder, as we look at the interest rate risk analysis on slide 24, can you give us a sense of what beta assumptions are embedded in your NII simulation model?
spk03: Yeah. On a weighted average portfolio, it's 79% beta. So the CDs are about 93, and money market accounts are about 78.
spk05: Okay, that's helpful. Thank you. And then just in terms of your prepared remarks, I just want to make sure I heard this correctly. Did you say that the increased loan offering rates, the lowest pricing that you're offering now is 4%?
spk03: That's correct. So if you were to maybe look at our three-year hybrid arm, the lowest would be 4%, whether it be single family or income property.
spk02: But Gary, I want to make sure this is, Simone, I want to make sure that we emphasize that there is 85% of our current pipeline is locked in and has been locked in, so we have to kind of work through at lower rates than the 4%. So we want to make sure we're clear that we're not going to see the benefit of that immediately, but it definitely, over time, we'll see the benefit of that, the current rate. Probably not till third.
spk05: Right. Yes, I appreciate that. Thank you.
spk00: Thank you. Our next question comes from Woody Lay with KBW. Your line is open.
spk04: Hey, good morning.
spk00: Good morning, Woody.
spk04: I wanted to hit on expenses. I think if I heard correct, you got it to an expense number of $16 million for the next quarter. Do you see that remaining relatively stable throughout the year? Are there some initiatives that could come in the back half of the year that could increase that up a little bit?
spk03: I think if it increases, it would be more dependent on loan volume slowing. So our initiatives are pretty spread throughout the year, and I don't think there's anything in particular that makes them spike in the third or fourth quarters. But if our volume goes down in quarter three or quarter four, that would have a direct impact.
spk04: Right. Okay, and then last for me on the buybacks, Rhonda, it was nice to see buybacks a little bit higher in the first quarter. What's sort of the plan with the buyback going forward, and could you just remind me how much remaining capacity you have in your current authorization?
spk02: So, Laura, I'll let Laura answer how much we have remaining, but I will mention that, you know, as an ongoing basis, we always look at, you know, our capital and how we manage our capital. And at this point, we're going to complete the current 20 million that we plan that we had set aside and then determine next steps. So with that, I'll just let Laura maybe answer the amount that was remaining at the end of the quarter.
spk03: At March 31st, there was 4.1 million remaining.
spk04: Got it. Thanks for taking my question.
spk00: Thank you, Woody. Thank you. And at this time, I am showing no further questions. I'd like to hand the conference back over to Simone Lagomarsino for closing comments.
spk02: Thank you, Norma. And we want to thank all of you for joining us this morning on our conference call. And this now concludes the first quarter 2022 conference call for Luther Burbank Corporation. Thank you.
spk00: Ladies and gentlemen, thank you. This concludes today's conference call. A recorded copy of the call will be available on the company's website. Thank you for joining us today. You may now disconnect. Everyone have a great day.
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