Luther Burbank Corporation

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Good morning and welcome to the Luther Burbank Corporation second quarter 2022 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity for the analyst covering the Luther Burbank Corporation to ask questions. To ask a question, you will need to press star 1-1 on your telephone. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements that do not relate strictly to historical or current facts. 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. The presentation today contains certain non-GAAP financial measures that we believe provide useful information about our operational efficiency and performance relative to earlier periods and relative to other companies. For more details on these non-GAAP financial measures and their limitations, including presentation, with and reconciliation to the most directly comparable gap financials, please refer to yesterday's earnings release and the related investor presentation, which is available on our website at www.lutherburbanksavings.com. I would now like to turn the conference over to Ms. Simone Lagarmarsino, President and CEO. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to Luther Burbank Corporation's Earnings Conference Call. This is Simone Lagomarsino, President and CEO, and with me is Laura Tarantino, our CFO. Thank you for joining the call today to review our second quarter results. As is customary, we will focus on our actual financial performance, share our observations regarding recent trends, and then open the line for analysts' questions. We reported net income for the second quarter of $22.6 million, or $0.44 per diluted share, as compared to $22.9 million, or $0.45 per diluted share in the linked quarter. The decline in net earnings of $373,000 was primarily attributed to three key factors. While our net interest income increased by $2.4 million and our non-interest expense decreased by $2.2 million, These two positive trends were more than offset by a $5 million fluctuation in the provision for loan losses between the first and second quarters of the year. This is reflected in our pre-tax, pre-provision net earnings, which improved by $4.9 million in the second quarter compared to the first quarter. Although we had a large swing in our loan loss provisioning, our credit metrics remain strong, and I'll cover asset quality in detail a bit later in my presentation. First, let me address the two factors that led to our 16.7% improvement in pre-tax, pre-provision net earnings and our successful second quarter. As I mentioned, when compared to the first quarter, our second quarter net earnings benefited from a $2.4 million improvement in net interest income. Our net interest margin for the second quarter measured 2.62%, which was our best quarterly margin recorded since 2014. Interest income grew $4 million from the prior quarter, primarily as a result of increases in the average balance of the loan portfolio and rising interest rates, as well as improved earnings on certain of our interest rate swaps. Interest expense also rose during the second quarter, but to a lesser extent of $1.5 million as compared to the linked quarter, also chiefly attributed to rising market interest rates impacting the cost of deposits and borrowings. Our real estate loans grew by $272 million, or 4%, from the prior quarter, and year-to-date, our annualized loan growth was 10.8%. The increase in our loans was due to both strong loan production as well as slowing in single-family residential loan prepayment speeds. We entered the second quarter with a strong loan pipeline of $815 million as borrowers rushed to submit loan applications and lock in their low rates during the first quarter of this year, before market rates increased. Additionally, the rising interest rate environment benefited our single family lending business in two distinct ways. First, prepayment speed has slowed, which is a welcome change from the prepayment headwinds we experienced last year when our single family loan portfolio would have declined during calendar year 2021 had we not supplemented it with the purchase of a pool of single family loans. Furthermore, our hybrid Our loan product, which is our bread and butter of our single-family business, came back into consumer favor as interest rates on 30-year fixed-rate mortgages increased significantly in comparison to the last couple of years. Returning now to interest expense, I noted that this measure increased $1.5 million from the linked quarter, of which more than half was related to higher deposit costs, also attributed to rising market interest rates. At the beginning of the year, we anticipated that deposit pricing would be slow to adjust to short-term interest rate increases during 2022, given the excess liquidity that existed in the market at the beginning of this year. Although the federal funds rate increased by 150 basis points during the first half of this year, our average cost of interest-bearing deposits originally decreased by four basis points in the first quarter and then increased by five basis points during the second quarter, yielding a year-to-date increase of only two basis points. As I mentioned, the other significant element contributing to the improvement in our second quarter pre-tax, pre-provision net earnings was a $2.2 million reduction in non-interest expense as compared to the prior quarter. The key factors that contributed to this decline were related to strong loan production and rising market interest rates. Strong loan volume increased our level of capitalized salaries by $1.2 million as compared to the late quarter. while higher long-term interest rates reduced our post-retirement benefit liability by $1.4 million during the second quarter. Our first quarter net income resulted in a second quarter return on average assets of 1.23% and a return on average equity of 13.41%, both measures which we consider strong. We do believe, however, that rapidly rising short-term interest rates will challenge our results over the next few quarters. So let me share with you more recent trends. We expect loan production to moderate in the third quarter of this year. Current loan offer rates exceed the weighted average coupon on our loan portfolio, as well as typical market offer rates that existed for the past two years, both of which will dampen refinancing activity. In comparison to the linked quarter, Our loan pipeline totaled $455 million at June 30th, a level which is much more typical of our bank. While production volume will flow, the ultimate size of our loan portfolio may benefit from additional flowing in loan prepayment speeds, particularly related to our income property prepayment rates, which remained elevated during the second quarter, in large part due to the volume of our in-house refinancing activity. In addition, increases in deposit costs began to accelerate at the end of the second quarter, And based on deposit rates advertised by several of our competitors, as well as interactions with our customers, we anticipate that the cost of our deposit portfolio will rise much faster in the second half of this year as compared to the first half of 2022. As a result, our projections are that increases in our funding costs will outpace improvements in our yields on our earning assets. And as a result, our net interest margin will decline beginning in the third quarter of this year, particularly in light of the expected pace of further short-term interest rate increases communicated by the Federal Reserve and anticipated by the market. Now turning to credit quality, during the second quarter, we recorded a loan loss provision of $2.5 million to account for both strong growth in our loan portfolio, as previously discussed, as well as a higher level of classified assets. Our classified assets increased by $8.7 million during the quarter, Three multifamily loans comprised the majority, or 73% of this increase. These loans were downgraded due to issues related to the borrower's ability to demonstrate debt service capacity. However, all three loans were paying as agreed at quarter end. The balance of the classified asset downgrade during the second quarter was comprised of three single-family loans, and each of these loans demonstrated some stage of delinquency. We believe that issues exhibited in these six recent classified credits a property or borrower-specific, rather than reflective of a general trend in rents occupancy and in the case of the single-family loans employment. Based on original appraisals and or updated values, these six loans have a weighted average loan-to-value ratio of 68%, and as such, we do not expect to incur any losses on them. Nonetheless, based on our model for our loans for loan loss reserves, methodology, approximately half of the $2.5 million loss provision recorded for the quarter was attributed to these downgrades, while the balance of the provision was primarily recorded for net loan growth. Our classified assets measured 34 basis points of the loan portfolio at June 30th. At the same date, we had seven delinquent loans totaling $7.1 million, or just 11 basis points of total loans, while non-accrual loans measured eight basis points of total loans. We believe that each of these measures compare favorably to the industry and exemplify our continued strong credit culture. At June 30th, our allowance coverage ratio was 54 basis points of the portfolio. And as a reminder, our bank still operates under the incurred loss methodology for the loan loss allowance. We expect to adopt CECL in the first quarter of 2023 And based on our 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. Of course, the ultimate impact of adoption will be dependent on our portfolio composition and the economic forecast at the time of adoption. Now we'll turn to the balance sheet. Our total assets at quarter end grew by $270 million, or 4%, and year-to-date we've grown almost 10% on an annualized basis. As I previously noted, this expansion was attributed to strong real estate loan originations as well as the flowing in our prepayment speeds. Our asset growth was supported by both FHLB advances, some of which also serve as hedging positions for interest rate risk, and deposits. Our loan-to-deposit ratio remains in a typical range for our business model and measured 117% at quarter end. Our total equity increased by $3.6 million since the prior quarter. Our capital position during the second quarter benefited from our net earnings of $22.6 million, but was partially offset by $9.3 million of unrealized losses on our available for sales security portfolio net of tax as a result of the interest rate environment. Our net unrealized loss position on our investment portfolio totaled $21.3 million as of June 30th, and we expect that this full amount will be recovered over time as we both have the intent and the ability to hold these securities until maturity. Importantly, during the quarter, we returned $6.1 million and $4.1 million to shareholders in the form of cash dividends and stock repurchases, respectively, and grew our tangible book value per share by 1.2% to $13.09 per share. Our capital ratios with a Tier 1 leverage ratio of 10.2% and a total risk-based capital ratio of 19.1% demonstrate a strong capital position in our conservative balance sheet. Our capital position will support future growth and provide some protection for our next eventual economic downturn. Finally, yesterday our board of directors declared a 12 cent per share dividend, 12 cent per common share dividend that will be paid on August 15th. And with that, I'll now turn the call over to Laura for some additional comments.