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Luther Burbank Corporation  (NASDAQ:LBC)
Q4 2018 Earnings Conference Call
Jan. 29, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Luther Burbank Corporation Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) After today's presentation, there will be an opportunity for the four analysts covering Luther Burbank Corporation to ask questions. (Operator Instructions)

Before we begin, I would like to remind everyone that some of the comments made during this call will be -- may be considered forward-looking statements. The Company's Form 10-K for the 2017 fiscal year, its quarterly reports on Form 10-Q and current reports on Form 8-K identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The Company's periodic reports are available from the Company or online on the Company's website or the SEC's website.

I would like to remind you that while the Company's management thinks the Company's prospects for continued growth and performance are good, it is the Company's policy not to establish with the market any earnings, margin or balance sheet guidance.

I would now like to turn the conference over to Simone Lagomarsino, President and CEO. Please go ahead.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Good morning and welcome to the Luther Burbank 2018 Fourth Quarter Conference Call. This is Simone Lagomarsino, and I'm the new President and Chief Executive Officer of the Burbank, and I started on January 2nd after the retirement of John Biggs, who served our organization for more than 32 years. On behalf of Vic Trione, our Founder and Chairman, our Board and our entire team, we want to thank John for his 32 years of service, and we wish him well in his retirement.

With me this morning are Laura Tarantino, our Chief Financial Officer; John Cardamone, our Chief Credit Officer; and Robert Armstrong, our Chief Banking Officer.

Let's go ahead and start the call with a discussion about our earnings. Net income for the quarter was $10.6 million or $0.19 per diluted common share compared to $12.1 million or $0.21 per diluted common share in the prior quarter. Excluding the $832,000 net after-tax impact of the one-time items that occurred during the quarter, the quarterly net after-tax earnings would have been $11.4 million or $0.20 per share. The one-time items during the quarter were primarily comprised of charges related to the CEO transition, net of the special FHLB dividend.

The 2018 earnings were $45.1 million or $0.79 per share and $0.80 per share when adjusted for one-time items that occurred throughout the year. We continue to experience pressure on our net interest margin due to the current rate environment. The net interest margin in the quarter was 1.88%, down 6 basis points from 1.94% in the prior quarter. The margin compression in the fourth quarter is mostly driven from the increase in our cost of interest-bearing liabilities of 15 basis points from 185% in the prior quarter to 2% in the fourth quarter.

The cost of deposits increased 19 basis points and was the key driver of the increase in the cost of interest-bearing liabilities, while the cost of borrowings increased by 5 basis points. The yield on earning assets increased 8 basis points. We anticipate continued pressure on our net interest margin before we expect it to stabilize and Laura will discuss this in more details in a few minutes.

The net interest margin for 2018 was 1.98%, down 7 basis points from the net interest margin of 2.05% in 2017. Similar to the dynamics in the fourth quarter, the 2018 margin compression was driven primarily from the increase in the cost of interest-bearing liabilities of 48 basis points. The two factors that contributed to the increase in the cost of interest-bearing liabilities were the cost of borrowings, which increased 74 basis points and the cost of deposits, which increased 47 basis points. The yield on earning assets increased 35 basis points in 2018 to 3.57% compared to 3.22% in 2017.

The eighth sequential quarterly rate increases by the Federal Reserve since the beginning of 2017 coupled with the competitive deposit market drove the increase in short-term interest rates and as a result, the cost of our funding. Non-interest expense was $18 million during the fourth quarter, up $2.9 million from the prior quarter. During the quarter, there were one-time charges of $1.7 million related to the CEO transition. Excluding these one-time charges, the quarterly expenses would have been $16.3 million.

During 2018, non-interest expense was $62.7 million, non-interest expense to average assets for the fourth quarter of 2018 was 1.05%, however, it would have been 95 basis points when adjusted for the one-time items. During 2018, non-interest expense to average assets was 98 basis points, and that would have been 95 basis points when adjusted for the one-time items. This compares favorably when compared to the 1.03% in 2017.

The infrastructure at the Company is strong and other than opening one branch in 2019, we do not anticipate that we will require a significant increase in non-interest expense to support our existing business lines. Therefore, we're projecting our non-interest expense to be approximately $15.6 million to $16.4 million per quarter in 2019, with the first quarter impacted disproportionately due to payroll taxes.

We continue to operate very efficiently with our fourth quarter efficiency ratio of 54.44%. However, when adjusted for one-time items, it would have been 50.15%. During 2018, our efficiency ratio was 48.51%. However, again, when adjusted for all the one-time items previously discussed, it would have been 47.38%, which again compares favorably to the efficiency ratio of 47.76% in 2017.

Turning now to the balance sheet. We continued our strong growth during the fourth quarter. Loans grew $205 million during the quarter, resulting in annual loan growth of $1.1 billion or 21.6% during 2018.

While we had strong growth during the year, our loan composition remained relatively stable throughout the year with the multi-family portfolio representing approximately 60% of total loans and the single-family residential portfolio representing approximately 37%, with other commercial real estate representing approximately 3% of total loans. Based on what we're experiencing so far this year, we expect our growth to slow to low double-digit growth during 2019.

Credit quality remained strong and non-performing loans totaled -- with non-performing loans totaling $2.2 million at December 31st or 4 basis points of total loans. This is similar to the levels at the linked quarter and compares favorably to a year earlier when the non-performing loans were $7 million or 14 basis points of total loans. And John Cardamone will speak to credit quality in a few minutes.

Deposit growth was also strong during the year. We ended the year at $5 billion in total deposits, which was $1 billion or 26.6% greater than a year earlier. Total retail and consumer deposits grew $462 million or approximately 13% in 2018 and in fact, our Bellevue, Washington branch, which we opened in June of 2018, had total deposit footings of $70 million at year end.

Our emphasis on growing the retail and online segment over the past year is clear if you look at Pages 16 and 17 of the investor presentation that we filed yesterday. This segment grew from $256 million at the end of 2017 to $658 million a year later, reflecting growth of 157%. The composition of these deposits shifted also during the year with 1031 exchange and HOA business lines expanding, while the concentration of fiduciary deposits contracted. We anticipate continuing to focus on building vertical deposit business lines, and Robert Armstrong will discuss this in more detail in a few minutes.

During 2019, with the anticipated slower growth, we also plan to deepen our relationships with our existing depositors and work to cross-sell them into other lower costing deposit products. This will work to lower our cost of deposits and enhance our net interest margin over time. We continue to use FHLB advances as part of our ongoing funding strategy to assist with and support our interest rate risk management. Laura Tarantino will discuss this in more detail in a few minutes.

The capital ratios remained strong and well above the minimum levels required for bank regulatory capital purposes with the Company's Tier 1 leverage ratio at 4 -- at 9.42% and total risk-based capital at 17.2%. Capital management will be an important part of our focus going forward. With the slower pace of growth that we are currently projecting, we do not see the need to raise capital anytime soon. And in fact, if there are -- there are numerous levers available to us to strengthen our capital ratios, which we will explore should it become necessary. These include, among other possibilities, reducing assets by selling individual loan pool or through another loan securitization and/or slowing growth further.

In August last year, we announced a $15 million stock repurchase program and in December, we further announced a 10b5-1 plan that went into place at that point. And during the fourth quarter, we purchased 173,300 shares at an average price of $8.62 per share or -- at 16% discount to our book value, and we will continue to evaluate future purchases as appropriate. We're also pleased to report that on January 28th, the Board of Directors declared a quarterly cash dividend of $0.0575 per common share and the dividend is payable on February 19th to shareholders of record on February 8th.

And with that, I'll turn it over to Laura to provide more detail on the financial results.

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Thank you. So Simone summarized our net earnings pretty well. I'm going to plan to focus most of my time talking about net interest income and net interest margins. Because it's year-end, I will make some full year comparisons with general explanations, but in keeping in line with prior quarters, most of my focus will be on the results for our fourth quarter as compared to the linked quarter of this year.

Net interest income for the year increased $14.2 million or 13% to $125.1 million over the prior fiscal year, primarily due to strong asset growth, which was great enough to offset declining margins. For the fourth quarter, we recorded net interest income of $31.7 million, which was relatively the same level as the linked quarter. Although both loan and deposit growth was healthy in the fourth quarter, again, the decline in margin was enough to offset the balance increases.

Our interest income in the fourth quarter grew by $3.3 million or 6% over the linked quarter. Interest on loans increased $2.7 million or 5%, given the average balance of loans increased $171 million in volume over the prior period and our yield increased 9 basis points. However, those trends were less favorable as compared to the prior quarter where our average volume increased $282 million and the yield increased by 12 basis points.

Although loan origination and prepayment volume were relatively consistent quarter-over-quarter, we did see a significant decline in the spread between our new loan origination rates and our rates on pay-downs and pay-offs. In the fourth quarter, we originated $470 million of new loans as compared to $463 million in the prior quarter. However, the rate on new lending of 4.73%, declined by 11 basis points from the prior quarter rate of 4.84%.

We attribute this decrease to declines in the five-year and 10-year treasury rates as well as pricing reductions made by our competition in the fourth quarter. In the fourth quarter, our pay-offs and pay-downs totaled $266 million, slightly less than $273 million level in the prior quarter. However, those prepayments had a weighted average coupon of 4.29%, which was 23 basis points greater than the prepayment coupon of the prior quarter of 4.06%. This is primarily due to faster prepayment rates. Consistent with prior quarter, we continue to see a high level of prepayments in the single-family segment of our loan portfolio with the fourth quarter CPR of approximately 26%. While the single-family segment only represents 30% -- excuse me, 37% of our loan portfolio, single-family products pay-downs and pay-offs over 2018 represented 62% of our paydowns.

We've noticed a couple of our niche programs and single-family had higher than expected prepayment rates, and we've made some adjustments to these programs in the fourth quarter to attempt to address those trends.

To summarize why earlier in the year we saw the spread between loan originations and prepayment rates increase, in the fourth quarter, we saw reversal of that trend and the rate differential dropped to 44 basis points in the fourth quarter from 78 basis points in the linked quarter.

This rate differential is meaningful as we think about our yield on the loan portfolio because 96% of our portfolio is in its initial fixed rate period and the loan portfolio has a weighted average term to repricing of 44 months. Most of our loan production is generated in a five-year fixed hybrid arm product. But I realize our call report disclosures can sometimes be confusing based on current FDIC instructions where much of our loan portfolio appears to be fixed over periods up to 30 years because a significant portion of our loans are at their floor rate.

Well, I thought it would be helpful to give you a little more information here. At year-end, 59% of our loan portfolio or $3.6 billion worth of its floor rate is primarily in the multi-family segment. Holding market rate static and based on the current level of indices, 98% of those loans have a fully indexed rate above their floors by approximately 1%. Therefore, these loans would reprice favorably without any additional market increases. But again, on average, given the predominance of our five-year product, we are 44 months away from repricing.

At 12/31, the coupon on our loan portfolio was 4.11%, 7 basis points greater than the prior quarter coupon and had moved a little more than 2 basis point per month over the quarter. This rate of change is the slowdown from prior quarters, whereas our coupon on the loan portfolio increased 35 basis points over the year or about 3 basis points per month.

Interest income also grew to a lesser extent by an increase on -- in income on cash and securities of $651,000 over the prior quarter due to the increase in the average balance of cash and investments of 6% over the quarter and a yield growth of 23 basis points over the linked quarter. This is primarily attributed to the purchase of new investments with higher yield. Typically, we grow our investment portfolio in line with general asset growth for liquidity risk mitigation purposes.

Moving to the other side of the balance sheet and interest expense. Our interest expense increased $3.3 million or 12% over the linked quarter, driven by interest expense on deposits, which also increased $3.3 million or 17% over the linked quarter, attributed both to increases in the balances of deposits and the rate on deposits. The average balance of our deposits grew by $230 million over the prior quarter and the rate on deposits increased 19 basis points. This is compared to prior quarter average balance growth of $573 million and deposit rate increase of 26 basis points in the linked quarter.

While our volume and deposit growth slowed in the fourth quarter, our growth for the year was very strong at $1 billion or 27% growth rate and $861 million of that growth or 82% was represented by retail, consumer and business deposits. Our deposit growth funded 96% of our net loan growth during the year and our loan to deposit ratio declined from -- to 123% from 128% at the beginning of the year.

With regard to repricing in the deposit portfolio, consistent with our prior quarter, 25% of our time deposit portfolio or $820 million is subject to renewal during the first quarter of 2019. Taking retail and brokered deposits together, those maturing deposits have a weighted average interest rate of 1.92%. During the last month of our fiscal year or December, our average rate on new and renewing CDs was approximately 2.44%, yielding a rate differential of 52 basis points. But in light of the quarterly consistent short-term rate increases over the year, I think it's helpful to give you a little more granularity between wholesale and retail.

Our brokered deposits represent $440 million of the $820 million repricing in the first quarter of 2019, and the weighted average interest rate on the brokered deposits is 2.27% with repricing spread of approximately 17 basis points. However, retail deposits of $380 million repricing during first quarter of 2019 have weighted interest rate of 1.5% and represent a repricing differential of 94 basis points. This large difference demonstrates how at times can be a very significant repricing lag in our deposit portfolio. On a positive note, however, all things being equal, our retailer repricing differential compresses quite a bit from the second quarter of 2019, where the weighted average interest rate on maturing CDs is approximately 1.96%.

With our cost of deposits rising 19 basis points in the fourth quarter as compared to 26 basis points in the linked quarter, our deposit beta has slowed somewhat quarter-over-quarter. But our beta for the year, as measured in relation to average Fed fund was 79% for 2018 as compared to 29% for 2017. And then we attribute this to heightened deposit competition over the year. At 12/31/18, our ending rate on deposits was 1.84%, an increase of 19 basis points from the prior quarter as compared to our increase in deposit rates over the year at 68 basis points or about 5.7 basis points from loans.

Interest expense related to FHLB advances had a very small impact during the fourth quarter and declined by $78,000 due to a lower average volume of FHLB advances, offset somewhat by quarter-over-quarter increase of 4 basis points in the rate on FHLB advances. As Simone said, we do continue to use FHLB advances to hedge interest rate risks from repricing its matches and our asset liabilities portfolio.

In the fourth quarter, we executed a $100 million five-year fixed rate borrowing at 2.95%. The volume -- the type of hedging instruments used by us is dependent both on changes in the interest rate environment and our asset growth. When rates decline or we have slower growth, typically, we require less interest rate risk mitigation.

As Simone noted, our net interest margin declined 6 basis points over the fourth quarter. Looking forward one quarter out and giving consideration of the repricing metrics I've discussed earlier, I would expect to see a similar decline in the first quarter of 2019. And although further NIM compression is anticipated for the rest of the fiscal year, the level of that decrease further out depends, of course, on several factors, including what happens with market interest rates, our growth and also our success of the deposit strategies.

Moving briefly to some other income statement components, our loan loss provisions increased by $7 million year-over-year where as we recorded provisions primarily for loan growth during 2018. During 2017, we reversed provisions due to prolonged improvements in the credit metrics of our portfolio -- our loan portfolio.

For the fourth quarter 2018, we recorded $150,000 loan loss provision as compared to $650,000 provision in the linked quarter, again primarily attributed to strong, continued credit performance that John Cardamone will touch shortly. Our ALLL coverage ratio declined slightly to 56 basis points of the portfolio. We've completed four full calendar years without recording any net charge-off, and our ALLL coverage ratio as compared to problem assets remains very strong or about -- or more than 15 times non-performing assets.

During 2019, we'd expect our coverage ratio to remain relatively consistent, and I'd expect future quarterly provisions to provide for loan growth. Non-interest income decreased by $3.4 million year-over-year. In 2017, we recognized a gain on the securitization and sale of multi-family loan. For us during 2018, we had very limited loan sale activity. Non-interest income for the fourth quarter of 2018 increased $203,000 over the prior quarter to $1.2 million, primarily due to the $484,000 special dividend from the FHLB, which we consider a non-recurring item. For 2019, I would expect to see a decline in non-interest income asset loan sales and a run rate of approximately $700,000 to $800,000 per quarter.

Non-Interest expense increased $6.1 million year-over-year, primarily due to $2.3 million increase in compensation, primarily related to our CEO transition and to a lesser extent just general growth in staffing and a $2.6 million increase in marketing expenses related to deposit gathering activities. In the fourth quarter 2018, we recorded non-interest expense of $18 million or $2.9 million increase over the linked quarter. Compensation expense and professional services increased $2.3 million. $1.7 million of that amount would be considered non-recurring items to us related to the retirement or replacement of our CEO and to a lesser extent other compensation increases include loan officer incentive compensation in relation to achievement of performance goal and an annual true-up of 401(k) matching benefits for our employees.

Marketing expense in the fourth quarter increased by $254,000 over the linked quarter, primarily related to attracting business deposits, and other non-interest expense increased $252,000 over the prior quarter, primarily related to declines in our reserves for off-balance sheet commitments. Our efficiency ratio was elevated for the fourth quarter at 54%, but remained very strong at 48% for the full year. Non-interest expense to average assets for the year finished at 98 basis points, again an improvement from 1.03% for calendar 2017. And as Simone mentioned already, our non-interest expense quarterly run rate going forward will be in the range of the high $15 million to low $16 million per quarter.

Some quick balance sheet highlights, and not to be too repetitive with Simone, our assets growth, we finished over $6.9 billion in assets or growth rate of almost 22% for 2018. We had our third consecutive year of funding over $2 billion in new loan originations, and we continue to be one of the 20 -- largest 25th multi-family lenders in the country.

Our composition of multi-family group -- of our multi-family loans in our loan portfolio grew slightly over the year, primarily due to the elevated prepayment rates in the single-family portfolio. And as we look at our deposit competition, even though we grew our business accounts -- transaction accounts by over $400 million during the year, time deposits became a larger component of the deposit portfolio, as many of our consumer customers moved from money market transaction account to time deposits.

Our capital ratios are strong, as Simone mentioned and at 12/31, our tangible book value of $10.25 per share equates to a growth rate of 5.8% for year end -- from prior year end. And in addition, we've provided that consistent quarterly dividend of over 2% dividend yield for the entire year. With earnings over $45 million for 2018, we provided a return on average equity of 7.96% to our shareholders for our first full year as a public company, even within a challenging interest rate environment.

And with that, I'll turn it over to John Cardamone.

John A. Cardamone -- Executive Vice President, Chief Credit Officer

Thank you, Laura, and good morning, everyone, and thank you for joining us today. I'm delighted to report to you that our credit quality remains pristine. That's evidenced by very low delinquencies, which are really in the single digits and basis points. We have minimal non-performing assets, no real estate that we own, and our classified assets and our non-performing assets are either at or below five -- at or just above our five-year lows since I've been with the bank. I can also report to you that the devastating fires that took place in California, the last two years had very little impact on the bank's portfolio. We have less than a handful of collateral destroyed and most of those were adequately covered by insurance.

On Page 8, you can see many of the metrics of our portfolio, starting with the CRE side. While you see average loan balance in the portfolio was $1.6 million, our production in 2018 averaged almost $2 million per loan. LTVs at 57% of the portfolio were very similar to what we had last year. We were probably right around 60% debt coverage ratios in line. And interesting then we produced fewer loans this year just by a handful. But given the fact that we were able to do larger loans that was very much assisted our efficiency in our turn times in that nature.

On the single-family side, we averaged $1.1 million for loan this year at 67% LTV; FICO scores right around 750; and again, production was pretty much the same, couple of loans up. While we were generating this volume, we were able to achieve improved turn times in both our CRE and in our multi-CRE and our single-family portfolios, which we feel are market competitive with anybody that we deal with day-to-day.

That concludes my presentation, and I will turn things over to my colleague, Robert Armstrong.

Robert Armstrong -- Executive Vice President, Chief Banking Officer

Thank you, John. Despite the competitive headwinds, the bank was able to deliver strong year-over-year growth, as previously recorded. This organically funded much of our loan growth, lowering our loan to deposit ratio and reducing our dependence on brokered deposits. Growth was primarily fueled by new markets and new business verticals, but we remained largely dependent on a corpus of new and renewing CDs sensitive to the short-end of the curve. This negatively impacted our net interest margin for the quarter. Marketing costs associated with this deposit acquisition also rose, increasing our all-in cost of acquisition.

At the end of Q4, management began to refine its strategy and began to refocus away from more expensive transactional business. This is reflected in our slower Q4 growth of roughly 5% annualized and decelerating betas. With decelerating rate increases from November to December mainly, our new and renewed deposits, we see a shift in strategy that is more focused on return versus volume. We expect this theme of thoughtful growth focused on cost versus volume to carry over into 2019. This tactical shift is congruent with our 2018 strategy to diversify our deposit sourcing, developing new markets and business lines to reduce our exposure to higher priced consumer CDs.

Highlights from that strategy are our successful launch of the Bellevue branch in the Pacific Northwest, roughly $70 million in a little over six months of operation.

Acquisition costs for this branch were initially high, which should come down as we complement our lending activity. Our business banking initiatives continue to gain traction, now over 13%, as demonstrated on Page 17. We have established market leadership in several of these niche markets because of our commitment to service, technology and tailored products. This includes 1031, HOA, fiduciary, union and property management from our existing loan customers. We now have an except -- expanded footprint to sell-through from San Diego to Seattle. We have competitive cash management products and services that support our push for no cost or low-cost deposits.

Our online origination platform is established and able to take new deposits. This quarter positions us well for future growth despite our exposure to short-term rates, thoughtfully retaining and expanding our market share.

With that, I'll turn it back over to Simone.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Thank you. And that concludes our formal remarks. We're happy to take questions at this time from any of our four analysts.

Questions and Answers:

Operator

Thank you. And your first question comes from the line of Tim O'Brien with Sandler O'Neill. Your line is open.

Tim O'Brien -- Sandler O'Neill -- Analyst

Good morning.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Morning, Tim.

Tim O'Brien -- Sandler O'Neill -- Analyst

First question for you, Simone. Could you talk a little bit about your background management skills and experiences, and which of those you see as being particularly valuable potentially to you in leading Luther Burbank here going forward?

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Sure. Thank you, Tim. First, let me say I'm thrilled to be joining this organization and we have a phenomenal team (ph). I'll talk about my background. It really kind of pales in comparison to the strength of the team as a whole. But I've been in banking since 1979. This is my 40th year actually in banking. I started as a teller at Wells Fargo, but then went to Community Banking, became a CFO in the mid-1980s and have been CFO of community banks and/or CEO for a number of banks from the 1980s forward and worked in commercial banks. In the year 2000, I was -- actually, it was 1999, I was made CEO of Hawthorne Savings, which was a $3 billion, 75-year-old savings institution literally right across the street from where our Luther Burbank Manhattan Beach office building is, so I know that market and at Hawthorne Savings, we had -- again, we were $3 billion. We did single-family lending very similar to what -- in fact, one of our employees that help start that program for us started at Luther Burbank here, transitioned after the sale of Hawthorne over to Luther and helped here. So very familiar with the product and the way that we do our single-family. At Hawthorne, we also did multi-family lending, very similar again with the granularity of the portfolio similar to what we have here. One of the other things that we've started, which we didn't talk a lot about yet on the call is our construction lending. We have just initiated that at Luther Burbank this last year, and again, that was something we did when I was at Hawthorne. So a lot of similarities to what we did at Hawthorne Savings. And again, after Hawthorne, which we sold very successfully in 2004, I've had the opportunity to work at a couple other institutions, including, most recently, Heritage Oaks Bank, which was very troubled when I went in and we were able to turn it around and do a merger and then sell it very successfully in 2017.

So had a -- have had a very wonderful career at banking and very much think a lot of that background will be beneficial here. But again, I want to just emphasize that we have an extraordinarily strong team, we have a very good Board, and my experience will just be one minor piece of addition to the great experience that everyone else brings to the table.

Tim O'Brien -- Sandler O'Neill -- Analyst

And then one follow-on question. In your assessment leading up to you joining the bank and in your initial work there and getting to know more deeply and understand the bank, what would you describe that you found, which is I guess the greatest strength of the bank outside of its people and its staff, what element to the bank do you think is most viable and is going to drive long-term shareholder value, create shareholder value over the long-term and serve shareholders the best over the long-term, what part of Luther Burbank?

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

I think the credit quality of the loan portfolio is extraordinarily strong as John Cardamone has mentioned. I mean, we're at five-year lows in terms of non-performing loans, delinquencies, you look at all those metrics. I think that's primarily driven by the types of loans we make, both residential and single-family. The metrics that he pointed to on Page 8, where it's a very granular portfolio, we aren't making a number of large ones, we're making very granular $1.6 million average multi-family loan. I mean, that's, I think, the strength of the portfolio here. And so I think that's very strong. I think the markets that we operate in are also a strength for the organization. We operate in some very strong market. And so in -- you qualified that I can't say the team, but I'm going to say the team again because I think we do have a really strong team.

Tim O'Brien -- Sandler O'Neill -- Analyst

Thanks a lot. I'll step back.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Thank you, Tim.

Operator

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

Jackie Bohlen -- KBW -- Analyst

Hi. Good morning, everyone.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Good morning, Jackie.

John A. Cardamone -- Executive Vice President, Chief Credit Officer

Good morning, Jackie.

Jackie Bohlen -- KBW -- Analyst

Probably, this one might be for Laura. I noticed in the slide deck that it looks like the niche yield on originated loans in the portfolio for the single-family portfolio was lower than the non-niche, and I just wondered what had caused that reversal of trends?

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Right. Jackie, thank you. We looked at our originations over the fourth quarter and it's just really a result of the composition of what was originated. During the fourth quarter, we had a higher level of non-owner occupied properties and second homes in our non-niche category, which carries a higher premium than the typical owner-occupied loans. Additionally, our niche product had a higher composition of purchase loans, which do get a discount to rate as opposed to refi. So it's a strange trend, nothing really changed in our program. It's just based on the makeup of what was actually originated during that quarter.

Jackie Bohlen -- KBW -- Analyst

Okay. So just unique circumstances assuming that those trends shift back to a normalized level, then those rates would kind of flip back to where they were before with the finished portfolio doing...

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Correct.

Jackie Bohlen -- KBW -- Analyst

Okay. Right. I just wanted to make sure I understood that. And thinking about the new strategy with lower growth, I have a two-fold question with the first part being, is it more strategy driven or more economically driven? And then the second part being what kind of an impact longer term you expect that to have just on profitability and the margin and everything under the assumption that obviously slower growth might turn the portfolio yields from both the loan and a deposit perspective more slowly?

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

So I'll start with that answer. This is Simone, and then I'll turn it over to Laura and then if John or Robert want to mention anything further, we can do that. Let me start by first pointing to Slide 12 of the deck that we had posted, the investor deck. If you look in quarter two, our loan originations were at $636 million and then they tapered back and were consistent in the third and fourth quarters at about $460 million, $470 million. And as we've been talking with our frontline folks, as we looked so far in January, we're seeing kind of even further declines in the pipeline and in loan fundings for the month of January so far. So that's where -- it's not -- I wouldn't say a shift in strategy that we're taking at this point, it's more really driven by what we're seeing in the markets, and there are two options we could take in looking at this right now. One is we could lower our pricing on our loans or we could stretch out for further risk. We're choosing not to do either, but to, at this point at least based on where rates are and where the market is, continue with a little slower growth. And with that, I'll turn it over to Laura

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Yes. To address how that might impact our results, even where our NIM was compressing over the past year, we were still able to grow net interest income quarter-over-quarter. With slower growth, I don't think we can count on that happening. However, I think we can, as Robert had precluded to earlier, have better success with some of our strategies. So that in the long term, our margin could improve.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

So the focus of flip to the deposit side where really growth won't be as strong, I mean, and still when you think about low double-digit growth, I mean, 10% plus growth for many organizations is actually quite strong. So we don't want to make it sound like we're going to stop growing. That's not the case at all, it will just be a slower growth than a 20% growth rate that we experienced last year. And in doing that, it will give us an opportunity to really focus on our deposit composition and the pricing on our deposits and see if we can lower the cost of deposits, which our goal would be to lower our cost of deposits over time and improve our net interest margins.

Jackie Bohlen -- KBW -- Analyst

Okay. Understood. And I mean, I agree, the growth is still very strong. And it sounds like just the little bit of excess capacity that your team might have can then be utilized in the deposit strategies. Is that the overarching theme?

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Yes. I think our focus will definitely be to focus on the deposit side. And our team as much as they can help, we will encourage them and request that they are.

Jackie Bohlen -- KBW -- Analyst

Okay. Thank you very much.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Thank you, Jackie.

Operator

Thank you. Your next question comes from Matthew Clark with Piper Jaffray. Your line is open.

Matthew Clark -- Piper Jaffray -- Analyst

Hi. Good morning.

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Morning.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Morning.

Matthew Clark -- Piper Jaffray -- Analyst

Laura, can you just update us on the pace of loan and deposit pricing on a monthly basis? I think it was 6 basis points and 3 basis points, respectively last quarter. I assume it's at similar pace still, but just wanted to double check.

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Right. On loan pricing, it's moved a little bit over 2 basis points, the loan yield over the fourth quarter, which is a little slower than it was moving over the 2018 and whole, was moving about 3 basis points per month. As I said, 2.7 basis points -- a little bit over 2 basis points per month (multiple speakers). On the deposit side, for the year, we were moving about a little over 5 basis points for the year, but it accelerated in the fourth quarter, and we've -- our cost of deposits increased a little bit over 6 basis points during the fourth quarter per month.

Matthew Clark -- Piper Jaffray -- Analyst

Yes. Okay. Okay, great. Yes, I can -- I just wasn't sure if that change coming out of the quarter or going into the first. But as it relates to the repricing of your CD portfolio coming in the first quarter, it sounds like a decent gap up in terms of repricing. But that differential, I think, as you mentioned, starts to narrow some. I guess, how do you think about the margin if the Fed stays on hold from here and the curve remains kind of in and around where it is today. I guess, when do you think that margin can stabilize? It doesn't sound like it's this year, but just thought I'd ask.

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Again, it has a lot to do with what happens with rates. As you said, assuming that the Fed stabilizes, is one piece of it, and the growth has lot to do with it too. Going back to my earlier comments on the turnover in the loan portfolio, if we're adding less loans at a higher rate and if our prepayments continue to peel off at a higher rate, that will have an impact too. The general impression is that NIM will continue to impress, and there'll be some time before it will stabilize.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then how does that differential look in terms of the repricing of the CD portfolio in the third and fourth quarter of this year, if you happen to have those numbers?

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Yes. So in the second quarter, I think my weighted average rate on the retail was about 1.96%. When I looked out to the third quarter, and of course, that can change as we have new deposits for loan, we are over 2% for the remainder of the year. So much smaller gap in repricing, assuming prices don't change in the market.

Matthew Clark -- Piper Jaffray -- Analyst

Yes. Okay. And then the advertising expense, I think, this quarter was a little bit higher and sounded like it related to the deposit campaign or push. I guess, how should we think about the growth rate of that expense? Should -- I assume there's some seasonality in it maybe in the third quarter, but how should we think about that maybe year-over-year?

Laura Tarantino -- Executive Vice President, Chief Financial Officer

I think our goal is to and hopefully, we'll see less deposit competition in 2019. Our goal would be two-fold. All-in advertising expense relatively consistent year-over-year. Robert, I don't know, if you want to add to that?

Robert Armstrong -- Executive Vice President, Chief Banking Officer

No. That's spot on. In the effort to get to $1 billion, we spent -- there was outsized spending around marketing relative to our past efforts and some of that now is legacy, we'd have to carry it forward, but we're looking to lower that expense in subsequent quarters or at least hold it consistent.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just on the buyback, it sounds like you may remain active here, particularly I think if your stocks are under tangible book, I would think you would. I guess, can you remind us what your targeted capital theories and just give us a sense for how aggressive you could get?

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Well, the Board approved up to $15 million total stock repurchase and as of year-end, we had utilized $1.5 million of that amount.

Matthew Clark -- Piper Jaffray -- Analyst

In terms of your targeted capital ratios?

Laura Tarantino -- Executive Vice President, Chief Financial Officer

Our target is subject to change based on the risk factors that we see in our portfolio. In the past, we've said we feel relatively comfortable with a leverage ratio nearing 8%. We do feel like we have adequate room in our capital ratios to continue to grow.

Matthew Clark -- Piper Jaffray -- Analyst

Yes. Thank you.

Operator

Thank you. And your next question is from Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Good morning.

John A. Cardamone -- Executive Vice President, Chief Credit Officer

Good morning.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Simone, in your comments, you had mentioned the construction business and (inaudible) Luther enter that or grow it following the fires and your experience with that business in your previous companies. So I'm just curious that the year-over-year construction is down. And I'm curious just really how you're seeing that segment play out '19 and beyond, more focused just in the core markets or maybe expanding it throughout your footprint? Maybe could you talk about that a bit?

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

And I'll make a couple comments, and I'll have John Cardamone actually pick up after that. But I'll start with saying that we just hired somebody mid-year this year at Luther to help us develop the construction product and really move it forward. And so it is relatively new. I think we have about $12 million, and John will correct me with that, that we've booked so far, and we're looking at other projects. I think primarily we're going to look at that in our core market areas and not go outside of core market as from a risk standpoint, we have a better understanding of our core markets. And we are looking at multi-family and single-family construction, and we're again in the process of building that. Construction loans, as you can imagine, take some lead time, they're not something that -- that are very quick to book. So we're in the process of building that business. And with that, I'll turn it over to John.

John A. Cardamone -- Executive Vice President, Chief Credit Officer

I would reiterate that we are focused in our core markets and maybe tightly within our core markets in very dense areas. We focus with builders, not necessarily owner-occupied properties. And for example, we would be looking to do in the beach communities. In that way, we're doing a lot of scrape and builds on the single-family. We have had some opportunities in small balance apartment construction loans, maybe up to 30 units, but one above that. But larger that we're looking at and haven't closed at this point, but we've done two that are closed; one, a 20-unit property up here in the Santa Rosa area. So again, markets that we know, markets that we're very comfortable with, the people that we hired in that -- very experienced in those spaces. And I would also add, we've added two business development officers, one in Northern California, one in Southern California. So again, tight quarter focus really in California. We're not making an effort at this point in Washington or Oregon.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay. Thanks for the color.

Operator

Thank you. And that completes our call today. A recorded copy of the call will be available on the Company's website and thank you for joining us.

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Thank you.

Duration: 50 minutes

Call participants:

Simone Lagomarsino -- President & Chief Executive Officer, Board of Directors

Laura Tarantino -- Executive Vice President, Chief Financial Officer

John A. Cardamone -- Executive Vice President, Chief Credit Officer

Robert Armstrong -- Executive Vice President, Chief Banking Officer

Tim O'Brien -- Sandler O'Neill -- Analyst

Jackie Bohlen -- KBW -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Gary Tenner -- D.A. Davidson & Co. -- Analyst

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