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spk05: Good morning and welcome to the Luther Burbank Corporation third quarter 2022 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity for the analysts covering 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 width and reconciliation to the most directly comparable GAAP 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 Simone Lagomarsino, President and CEO. Please go ahead.
spk04: Thank you very much. Good morning, everyone, and welcome to the Luther Burbank Corporation's Quarterly Earnings Conference Call. This is Simone Lagomarsino, President and CEO, and with me today is Laura Tarantino, our CFO. Today we'll review our third quarter financial performance, share our observations on recent trends, and then open the lines for our analysts' questions. Our net income for the third quarter was $21 million, or 41 cents per diluted share, as compared to $22.6 million, or 44 cents per diluted share, in the linked quarter. The decline in net earnings of $1.6 million was primarily attributed to the rise in market interest rates. Three key financial components summarize the changes in net income as compared to the second quarter. Our net interest income decreased by $2 million, and our non-interest expense increased by $2.1 million, while our provision for loan losses declined by $2 million. Let me address each of these in more detail. First, our interest income on earning assets increased as a result of loan growth, slower loan prepayments, greater earnings on interest rate swaps, and higher loan coupons on new loan originations. Our yield on interest earning assets during the third quarter increased by 25 basis points compared to the second quarter. However, higher interest rates on funding costs resulted in interest expense on deposits and borrowings to increase more rapidly given our liability-sensitive balance sheet, where the cost of our interest-bearing liabilities for the third quarter increased by 49 basis points compared to the linked quarter. Our net interest margin for the third quarter measured 2.42%, a decline of 20 basis points from the linked quarter and in line with the guidance that we provided during our last quarter's earnings call. Our real estate loans grew by $217 million, or 3%, from the prior quarter and year-to-date. Our annualized loan growth was 11.8%. Although loan production fell by $203 million during the quarter, both single-family and income property residential loan prepayment speeds notably declined due to higher market rates, which yielded net loan growth for the quarter that was on a percentage basis similar to the linked quarter. The weighted average coupon on new loan originations for the quarter was 4.65%, or an increase of 110 basis points as compared to the prior quarter, and average coupons for the loans that we are originating during the fourth quarter continue to rise. At quarter end, the weighted average coupons on loans within our single-family and income property loan pipelines were 5.59% and 4.91%, respectively. Growth in our loan portfolio for the quarter was funded primarily by wholesale sources, including FHLB advances and broker deposits, which grew by $247 million and $217 million, respectively, from the linked quarter. Like several other financial institutions, our retail deposit balances declined. During the third quarter, our retail deposits decreased by $92 million as some customers opted for other investment choices, including U.S. Treasuries. Because wholesale funding can be more expensive than retail deposits, the use of wholesale funding to support our growth had a negative impact on our net interest margin. As a comparison, during the third quarter, our cost of interest-bearing retail deposits rose 48 basis points from the second quarter as compared to a 112 basis point increase in the cost of wholesale deposits for the same period. Next, I mentioned earlier that our non-interest expense increased by $2.1 million from the linked quarter. This increase was primarily due to an increase in compensation expense of $1.6 million as compared to the linked quarter which related to a lower amount of capitalized loan origination costs due to a 28% decline in loan origination volume, which I previously mentioned. Non-interest expense was also impacted by higher advertising costs associated with retail deposit generation. Finally, net income for the quarter benefited from a $2 million reduction in loan loss provisions as compared to the prior quarter. We recorded a $500,000 loan loss provision primarily for net loan growth. Our classified assets declined by $1.8 million during the quarter and remain at a low level of 30 basis points of the total loan portfolio. At quarter end September 30th, we had only two delinquent loans of the more than 5,000 loans in our loan portfolio. Our non-performing asset to total asset ratio remains very strong and measured only five basis points at quarter end. 72% of our non-accrual loans by balance are paid current. I continue to be extremely proud of our credit quality and expect our loan portfolio to perform well through any potential economic downturn. Now turning to our balance sheet. Total assets grew by 5% from the prior quarter and 10% on a year-to-date basis and total $7.9 billion at September 30th, driven primarily by our net loan growth and funded by wholesale deposits and FHLB advances as we previously discussed. Total stockholders' equity grew by $5 million during the prior quarter, since the prior quarter, sorry, grew by $5 million since the prior quarter. Our capital position during the third quarter benefited from our net earnings of $21 million, but was partially offset by $10.5 million of unrealized losses on our available for sale securities portfolio net of tax as a result of the rate environment. Our net unrealized loss position on our available for sale investment portfolio totaled $44.8 million as of September 30th. Also during the quarter, we returned $6.1 million to shareholders in the form of cash dividends and grew our tangible book value per share to $13.18 per share. Our tangible capital and Tier 1 capital ratios of 8.5% and 10% respectively remain strong. Finally, yesterday, our Board of Directors declared a $0.12 per common share dividend that will be paid on November 14th. Although the recent rate environment this year continues to be volatile and challenging, our net income for the third quarter yielded a return on average assets and return on average equity of 1.1% and 12.3% respectively. We continue to believe, however, that rapidly rising short-term interest rates will challenge our results looking forward. Due to higher interest rates impacting refinancing activity and activity in the purchase market, we expect loan production to decline in the fourth quarter and the third quarter, as evidenced by the size of our loan pipelines. At September 30th, our pipeline totaled $230 million, or about 51% of its level at the end of the second quarter. While loan production volume was slow, we still may realize net loan growth as loan prepayment speeds in both our income property and single family portfolios declined by approximately a third as compared to the linked quarter. We continue to expect deposit costs to increase during the fourth quarter as older term accounts mature and reprice to current offer rates and based on the current posturing of the Federal Reserve Board of Governors. Additionally, since the U.S. banking and industry Since the U.S. banking industry generally experienced deposit outflows over the past quarter, we expect strong deposit competition throughout the balance of 2022. Consequently, we anticipate continued deposit cost acceleration during the fourth quarter. As a result, our projections are that our funding costs will outpace improvements in our yields on our interest-earning assets and that our net interest margin will compress again in the fourth quarter. And with that, I'll now turn the call over to Laura for some additional comments.
spk03: Thank you, Simone. As usual, I'll provide some brief but more granular information that we consider as we're analyzing our trends and our projections. During the fourth quarter, we expect new volume to be added at coupons exceeding 5.25%. The spot rate on our loan portfolio was 3.71% at the end of the third quarter. Although loan origination volume is expected to slow, new volume, portfolio repricing, and slower prepayments should move our loan yields in a positive direction. Additionally, at quarter end, 43% of our investment portfolio securities were currently floating with a weighted average repricing frequency of 2.9 months. So we should also see investment yields improve as interest rates continue to rise. Moving to deposits, although retail deposits declined during the third quarter, we generated approximately $200 million this quarter in new money from our advertising campaigns, of which 36% was from customers new to the bank. Digital advertising yielded 1.1 million impressions, with 23,000 visitors to the bank's website, of which 70% were first-time visitors. Year over year, our total households have grown about 18%. During the fourth quarter of this year, we have $368 million of term deposits carrying a weighted average cost of 47 basis points scheduled to mature. During the month of September, the average cost of new and renewed term accounts was 2.59%. At quarter end, our FHLB advances totaled $1.2 billion and carried a weighted average cost of 2.34% and a weighted average term to maturity of 1.7 years. Our third quarter results benefited from the existing interest rate swaps that we had on our books. Net swap income totaled $2.9 million for the quarter. At September 30th, the notional amount of our pay fixed swaps was $1.3 billion with a weighted average net positive carry to us of 154 basis points and a weighted average of 23.6 months to maturity. As Fed funds continues to rise, our earnings from these derivative positions will improve and we would expect to add new positions to our balance sheet as we move forward. Lastly, as to non-interest expense, a level of approximately $16 million for the fourth quarter is anticipated we would expect higher compensation costs as a result of reduced loan volumes and the lower resulting amount of capitalized salaries. As we work through our current annual budgeting process, we should have better projection of non-interest expense for 2023 for you next quarter. With those last comments, we'll now ask the operator to open the line for questions.
spk05: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone. That's star one one to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from Woody Lay with KBW. Your line is now open.
spk00: Hey, good morning, guys.
spk05: Good morning, Woody.
spk00: I wanted to first look at the NIM. I believe last quarter you guided the NIM being down about 20 basis points a quarter over the back half of 22 each quarter. Does that still feel like a good run rate going forward or have expectations changed?
spk04: So you're correct. Last quarter we did guide that we expected 20 to 30 basis point reduction in our NIM on a quarterly basis. And at this point, Woody, we have not projected our NIM in our conference calls because it is just too hard to project at this point. I would think that that's probably in large part because of just the volatile market that we're seeing. And as we're looking at deposit costs, that's really the big variable for us, and we are As Laura went into great detail on using digital marketing to a greater extent, and that's helping us to bring in deposits at various different deposit rates.
spk00: Got it. And then just, you know, to the extent we do see some growth, some loan growth in the coming quarters, how do you expect to fund that growth? I mean, do you think... increases in retail deposits could fund it or will you look to the wholesale market?
spk04: Probably all of the above. So we have been, as Laura said, successful and actually more recently for this quarter in growing retail deposits through some of the digital marketing efforts that we have rolled out. So we would expect some growth in retail and then also possibly some wholesale funding as well.
spk00: Okay. That's good color. Um, and then last for me, you know, credit, uh, just looking at the metrics remain very clean. Um, just as you talk to your borrowers, I mean, uh, is there anything that gives you pause on the credit front? Um, just given the macro uncertainty or is, uh, or are you y'all cautiously optimistic at this point?
spk04: Continue to be optimistic, uh, cautiously optimistic, but the, um, you know, you look at the average loan-to-value on our portfolio, both single-family and multi-family, and you look at the debt coverage in particular on, you know, the multi-family and the FICO scores on our single-family, I think, you know, we've got just a really solid loan portfolio. And as we said, we had two loans that were delinquent at the end of the quarter out of over 5,000 loans. So it is, I think, you know, I say it and it's may sound like cliche, but people need a place to live. Affordable housing is hard to find, and primarily what we provide in the multifamily is workforce affordable housing for people, and as we continue to see, vacancy rates are quite low in those markets, and rents have been strong, although we think they might have plateaued, but we still have a very strong debt cover and loan-to-value ratio in our portfolio. you know, fairly confident. And we look back through the great recession and the portfolio performed extremely well at that point as well.
spk00: All right. That's all great, Corey. That's all for me. Thank you all.
spk04: Thanks, Woody.
spk05: Thank you. Our next question comes from Adam Butler with Piper Sandler. Your line is now open.
spk01: Hi, everybody. Good morning. This is Adam calling in for Matthew Clark.
spk04: Good morning, Adam.
spk01: Deposit growth during the quarter was pretty successful from the advertising campaign that you recently mentioned. I was curious if you expect to see a similar level of deposit growth in 4Q, or what are your outlooks on that front?
spk04: So it's hard to say if it'll be a similar level, but we are quite successful in our digital marketing and in terms of new visitors to our website as a result of our digital marketing. And we are actually doing some regional pricing as well and different pricing on different products and kind of fine tuning the digital campaign as we see what's successful in different markets. So we do expect to see some growth through that campaign in our retail deposits. And as we mentioned a minute ago, a couple minutes ago, we expect probably to also augment that with some wholesale funding, whether both wholesale deposits and federal homeowner banks or one or the other, but possibly all of those.
spk01: Okay, great. Thanks for the cover there. And I was wondering if you guys have the spot rate on deposits as of the end of September?
spk04: Laura is looking for that. I apologize. I don't have that write-off. Okay. That's a problem I could turn over to another question.
spk01: Sure. Just going ahead and turning over to expenses, we saw a slight increase this quarter. And then going forward into 4Q, should we expect to see that run rate go a little bit lower based on lower levels of capitalized loan origination costs, or do you kind of expect that to be offset by increased advertising efforts or any color that would be great?
spk04: Yeah, so we do expect, and I think we both commented on, that our run rate will be about $16 million for the fourth quarter in terms of non-interest expense. And that's partly because we'll have lower levels of capitalized salaries because of our lower loan production levels. And that does include some additional marketing costs for the marketing that we've been doing.
spk01: Okay, great.
spk03: I'm sorry, Adam, I also have your spot rate at 930 for our retail deposit portfolio was 1.38%. Okay, awesome.
spk01: Those are all my questions. Thank you.
spk04: Thank you, Adam.
spk05: As a reminder, if you'd like to ask a question at this time, that's star 1-1. Our next question comes from the line of Gary Tenner with DA Davidson. Your line is now open.
spk02: Thanks. Good morning. My questions were largely asked, but just thought I'd ask about expectations around capital and share buyback. I know you've previously completed, you know, the second quarter, the repurchase authorization. I don't believe you've announced another one at this point, but given where the stock is below tangible bug value, We'd love to get your thoughts around that topic.
spk04: Thanks, Gary. Sure. Capital management is an ongoing role that we take very seriously, and we monitor and consider whether or not it makes sense. And at the present time, we are not considering a share repurchase, and that has something in part to do with the margin compression that we talked about earlier and more, I think, to do with just the rising interest rates, and as we've seen our mark-to-market on our securities portfolio has, while it doesn't impact us on a capital ratio perspective for regulatory capital, we are seeing the impact in our book value per share as well. So we just think at this point capital, we want to preserve capital, and we look at it on an ongoing basis, and that posture may change, but that's where we're at right now. particularly in the possibility of heading into a recession.
spk02: Thanks, Simone.
spk04: Thanks, Gary.
spk05: That concludes today's question and answer session. I'd like to turn the call back to Simone Lagomarsino for closing remarks.
spk04: Thank you very much. And this concludes our call this morning. We appreciate all of you sharing and joining with us. Thank you.
spk05: That completes our call today. A recorded copy of the call will be available on the company's website. Thank you for joining us.
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