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Luther Burbank Corporation  (NASDAQ:LBC)
Q1 2019 Earnings Call
April 30, 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 First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (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 may be considered forward-looking statements. The Company's Form 10-K for the 2018 fiscal year, its quarterly reports on Form 10-Q and current report on Form 8-K identify certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. 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 risk prospects for continued growth and performance are good, it is the Company's policy not to establish with the markets 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

Thank you very much and good morning everyone. Welcome to the Luther Burbank Corporation 2019 first quarter conference call. This is Simone Lagomarsino, President and CEO, speaking and with me are Laura Tarantino, our Chief Financial Officer; John Cardamone, our Chief Credit Officer, and Robert Armstrong, our Chief Banking Officer.

We'll go ahead and get started with earnings. Our net income for the quarter was $12 million or $0.21 per diluted common share compared to $10.6 million or $0.19 per diluted common share in the prior quarter and $11.1 million or $0.20 per share a year earlier. The first quarter earnings compare favorably to the linked quarter even after excluding the $2,36,000 and $8,32,000 net after tax impact of the onetime items that occurred during the first quarter and fourth quarter, respectively.

Excluding these onetime items, the adjusted first quarter 2019 earnings would have been $11.8 million and the EPS would have remained at $0.21, and the adjusted fourth quarter 2018 net after tax earnings would have been $11.4 million or $0.20 per share. The onetime item during the first quarter was a pre-tax gain on the sale of some loans of $333,000 and we'll discuss that in more detail in a few minutes. The onetime items during the fourth quarter of 2018 were primarily comprised of charges relating to the CEO transition, net of the special FHLB dividend.

Our loan pipeline at December 31, 2018 was approximately 60% of what it had averaged last year, which is why we noted on our earnings call in January that we anticipated somewhat slower growth during 2019 than we experienced in 2018. At that time we indicated that we expected growth for 2019 in the low double-digits compared to the 22% growth that we experienced in 2018.

Since our call in January the yield curve has inverted between the three-month and five-year treasuries and we've experienced a continued level of accelerated payoff and slower growth than we previously anticipated, particularly in our single family portfolio. Our annualized long growth during the first quarter was less than 1% and if we exclude the loans that we sold, the annualized loan growth would have been 4.4%.

Our long pipeline has expanded from $209 million at the end of 2018 to $281 million as of March 31, 2019, which represents approximately 85% of what our pipeline averaged last year. However, as a result of the inverted yield curve and anticipated higher levels of loan prepayments, we're now projecting loan growth in the 5% to 7% range for the year. With the slower loan growth during the first quarter, we took the opportunity to focus on the liability side of the balance sheet, working to be more disciplined in our deposit pricing. This approach paid off to some extent during the quarter and we think this approach will prove to be beneficial in the future.

We continued to experience pressure on our net interest margin due to the current rate environment. The net interest margin for the quarter was 1.86%, down two basis points from 1.88% in the prior quarter. This two basis-point decline is better than the six basis-point decline that we had experienced the prior quarter. The margin compression in the first quarter is mostly driven from the increase in our cost of interest-bearing deposits of 11 basis points from 1.83% in the prior quarter to 1.94% in the first quarter. The cost of borrowings decreased by 5 basis points during the quarter. The yield on earning assets increased 9 basis points.

If we continue to operate in the current flat yield curve environment, we anticipate continued compression on our net interest margin of up to as much as 9 basis points per quarter through the end of the year and then we anticipate that the margin will stabilize. Certainly, when the yield curve normalizes, our margin should begin to expand. In the near term we will continue our focus and discipline around our deposit pricing to lessen the margin compression as much as possible.

Non-interest income was $1.4 million for the first quarter of 2019 compared to $1.2 million during the linked quarter. The $134,000 increase in non-interest income was primarily attributable to the $333,000 gain on sale of loans sold during the quarter and the increase in loan fee income of $170,000, which was partially offset by a special FHLB dividend of $484,000 in the fourth quarter.

Non-interest expense was $16.2 million during the first quarter, down $1.7 million from the prior quarter. During the prior quarter there were onetime charges of $1.7 million related to the CEO transition. Excluding these onetime charges, the quarterly expenses would have been $16.3 million. Non-interest expense to average assets for the first quarter of 2019 was 0.93%, comparing favorably to the prior quarter adjusted level of 0.95%. We continue to operate very efficiently with our first quarter efficiency ratio of 48.55% comparing favorably to the fourth quarter adjusted efficiency ratio of 50.15%.

Turning now to the balance sheet, during the quarter we sold two pools of loans totaling $53 million and generating a gain on sale of $333,000. One pool was comprised of 30-year fixed rate single family loans with an average loan-to-value of 86% and with an average coupon of 4.53%. We understand that the buyer purchased them for CRA purposes. The other pool was $19 million and was comprised of multi-family loans with an average coupon of 4.10% and this sale was agreed to very early in the quarter. We do not anticipate having any additional loan sales this year.

As a result of the loan sales and slower originations and the prepayments on our single family portfolio, the loan portfolio remained relatively unchanged quarter over quarter at $6.1 billion. However, the composition of the loan portfolio changed slightly with multi-family representing 61% of the loan portfolio at March 31st compared to 59% at the end of the year and single family loans representing 35% of the portfolio at the end of March compared to 38% at the end of the year.

The inverted yield curve resulted in a national 30-year fixed rate loan for jumbo loans being near our five-year hybrid pricing. This negatively impacted our first quarter single family originations. As a result of payoffs and the loan sale outpacing the originations in our single family portfolio, the portfolio decreased by $91 million during the first quarter.

Credit quality remains very strong and non-performing loans totaling -- with non-performing loans totaling $1.5 million at March 31st, 2019 or 2 basis points of total loans. And this compares favorably to the linked quarter and prior year levels. John Cardamone will speak to credit quality in a few minutes.

During the first quarter our retail consumer deposits declined by $47 million while retail business deposits decreased by $39 million. These decreases were primarily driven by our more disciplined approach to pricing as well as a decrease in 1031 exchange which was related to the slowdown in the real estate market. Both the bank's and Company's capital ratios remained strong and are above the minimum levels required for bank regulatory capital purposes. And now with the slower growth we can again underscore, as we noted in our last call, that we do not anticipate the need to raise capital anytime soon and as we noted a few months ago, if growth does pick up we have multiple levers available to us to manage our capital levels, including as an example loan sales.

The Company's ROA and ROE during the quarter were 0.69% and 8.19% compared to 0.62% and 7.34% during the prior quarter. The improved ROA and ROE were primarily the result of non-recurring items discussed earlier. Excluding the impact of these items in both periods, our current period ROA and ROE would have been 0.68% and 8.03% compared to prior quarter amounts of 0.67% and 7.91%.

We are pleased to report that on April 29th, 2019, the Board of Directors declared a quarterly cash dividend of $0.0575 per share and the dividend is payable on May 20th, 2019 to shareholders of record as of May 9th, 2019. During the first quarter we repurchased an additional 393,000 shares as part of our share repurchase plan at an average price of $9.88 per share. Since the inception of the share repurchase plan in August of 2018, we repurchased 566,300 shares at an average price of $9.49 per share or 9% discount to our book value. We have approximately $9.6 million remaining of the $15 million that was set aside for share repurchases and we will continue to evaluate these future repurchases as appropriate.

And I will now turn the call over to Laura who's going to provide further detail regarding our first quarter results.

Laura Tarantino -- Executive Vice President and Chief Financial Officer

Thank you, Simone. As Simone did a comprehensive overview of our results, I'd just like to give you a little bit more detail with regards to volume, rates and repricing. As typical, my focus will be on our first quarter results as compared to the linked quarter. Although our margin did decline during the first quarter, our net interest income increased slightly quarter over quarter by $341,000 to $32 million or 1.1% increase over the linked quarter. Interest income grew by $2.7 million.

Interest on loans increased $2.8 million or 5% due to both the average balance of loans outstanding increasing by $159 million and the yield on those loans increasing by 8 basis points. These portfolio trends are very similar compared to the linked quarter where the volumes in the fourth quarter increased by $171 million and our yield increased by 9 basis points. However, new loan origination volumes decreased during the first quarter and consistent with the prior quarter and also as shown on slide 15 of our deck, the spreads between rates on new loan originations and current period payoffs and curtailments remained compressed. This change as compared to the first three quarters of 2018 where the spread grew in the fourth quarter of '18 and the first quarter of 2019 that spread declined.

In the first quarter we originated $312 million of new loans as compared to $470 million in the linked quarter. The rate on new lending was 4.62%, which declined by 11 basis points from the prior quarter rate of 4.73%. From December 31st to March 31st, we saw declines in both the 5- and 10-year treasury rates by approximately 28 basis points. Additionally, in March we saw the two-year and 10-year curve inversion and the current level of 5- and 10-year treasury rates are far from the 3% level that we experienced at the end of the third quarter of 2018.

As Simone inferred, with the flat yield curve 30-year fixed rate loans are a viable alternative for our single family borrowers and single family loan prepayments remain high. During the first quarter our (inaudible) pay downs totaled $247 million, just slightly less than the $256 million level in the prior quarter, and as prepayments had a weighted average coupon of 4.19%. The spread between loan originations and loan payoff was 43 basis points in the fourth quarter -- in the first quarter of '19 which is very similar to the linked quarter spread of 44 basis points.

As we experienced slower loan growth and compression between the rate on originations and payoffs, our overall loan portfolio reprices more slowly as would be expected. At March 31st, the coupon on loan portfolio was 4.15% or only 4 basis points greater than the prior quarter, which represents a change of approximately 1 basis point per month. This is a continued slowdown from the linked quarter where our rate on the loan portfolio increased slightly more than 2 basis points per month and definite slowdown from calendar 2018 where our loan portfolio coupon increased 35 basis points or approximately 3 basis points per month.

The growth in our interest income on loans was slightly offset by declines on interest income on cash and securities as the average balance of cash and investments decreased by 4% quarter over quarter, which was somewhat offset by the related increase in the yield on those same cash and investments which grew 5 basis points to 2.4% from 2.35% in the linked quarter.

Moving to interest expense. Interest expense increased $2.3 million over the linked quarter, driven both by an increase in interest expense on deposits of $1.3 million and an increase in the interest expense on FHLB advances of $990,000. Average deposits declined $11 million from the linked quarter while the rate on deposits increased 11 basis points. This also is a slowdown compared to the prior quarter where the average balance of deposits grew $230 million and the deposit rate increased 19 basis points from the third quarter of 2018, because we practice greater pricing discipline during the first quarter of this year. The average volume of FHLB advances increased $160 million -- $167 million quarter over quarter with only a 2 basis point increase in the rate of those advances.

During the quarter, as greater emphasis was placed on deposit pricing we supplemented our funding with wholesale sources of funds which offered a competitive price alternative. While total deposits increased quarter over quarter by $81 million, retail deposits actually declined by $86 million and wholesale deposits increased by $157 million. Thinking ahead about future repricing, at March 31st, the (inaudible) deposits was 1.97%, an increase of 13 basis points from the linked quarter rate of 1.84% or an increase of just over 4.3 basis points per month. This was a notable improvement as compared to the fourth quarter of 2018 where the deposit portfolio rate increased approximately 6.3 basis points per month and also an improvement from calendar 2018 where deposit rate increased by 68 basis points over the year or about 5.7 basis points per month for the calendar '18.

Looking forward to the next three months, 34% of the time deposit portfolio or $1.2 billion is subject to renewal. (inaudible) balance is represented by wholesale deposits with a weighted average interest rate of 2.39% and that rate remains consistent with current pricing. The other half of the renewal balance is represented by retail CDs with a weighted average interest rate of 1.98%. This rate represents a much more repricing spread as compared to the linked quarter wherein retail maturities had a weighted average interest rate of only 1.5%. And looking further forward in 2019, the rate on rolling term deposits averaged 2.10% and greater. As measured by a trailing 12-month figure, our beta as of 3/31 was 85% versus 79% in the linked quarter. As previously, noted, the repricing in our deposit portfolio slowed considerably during the first quarter with the average cost of deposits for the quarter slowing by approximately 40% from the linked quarter. However, it will take some time for that improvement to be reflected in a 12-month or longer trailing beta.

As Simone noted, our net interest margin only declined by 2 basis points quarter-over-quarter. However, with the positive pricing continuing to outpace the rate of change in our loan portfolio, further NIM compression is anticipated and without any general improvement in market rate and some steepening in the yield curve, we continue to believe that a disciplined price approach to attracting increased deposit volume is best strategy to reduce the pace of NIM compression and achieve some stability. As always, margin prevent depends on several factors but in large part the improvement in NIM will require a more normalized yield curve.

Moving briefly to other income statement components, we recorded a $300,000 loan loss provisions in the first quarter as compared to $150,000 in the linked quarter. We maintain a (inaudible) coverage ratio of 56 basis points and our allowance coverage to the problem assets continues to be extremely strong with the coverage of 23 times non-performing assets in the first quarter, up from 15 times non-performing assets in the prior quarter.

We still expect our coverage ratio to remain relatively consistent and expect future quarterly provisions to provide for loan growth. Simone covered our increase in net interest -- non-interest income for the quarter. As she said it was primarily related to the gain on sale of loans. Just want to point out that the two loan sales were done for two very different purposes, a single family sale of $33 million was really an opportunity to reduce credit risk and interest rate risk as those loans for a 30 year fixed rate maturities or fixed rate loans with a combined loan-to-value is over 90%.

Conversely, we occasionally entertain smaller portfolio sales just to yield some feedback from capital markets as to the credit characteristics and pricing within our loan portfolio. And that was related to the $90 million in multi-family loans that we sold during the quarter. As a result of the single family sale and one new terms FHLB borrowing, our interest rate risk declined somewhat during the first quarter as compared to the linked quarter. Other changes in our non-interest income related to an increase in the market value of equity securities during 2018 or the first quarter, we did adopt ASU 2016-01 which means that we will see future changes and certain -- in the market by a certain equity securities running through the income statement as opposed to OCI. She also mentioned that our service fee income, net of amortization, was up $123,000 over the prior quarter and all of these increases were offset by that special FHLB dividend during the fourth quarter of 2018.

In the first quarter of 2019, our non-interest expense of $16.2 million was a $1.7 million decrease from the linked quarter, again, related to saving the CEO succession costs that we incurred during the fourth quarter of $1.7 million. Typical seasonal increases in the first quarter such as payroll taxes and an increase of $384 million was mostly offset by reduced marketing expenses of -- $334,000 payroll tax increase mostly offset by reduced marketing expenses of $334,000 related to deposit gathering during the first quarter. We do expect our run rate on non-interest expense to average about $60 million per quarter.

Simone mentioned our efficiency ratio at 48.6% which is similar or better to where it's been over the last five years which is I think especially notable given the margin compression that we've experienced. Our taxes remained an effective rate of -- for the quarter 29% as expected and we're not anticipating any change moving forward. Without the loan sales, we had annualized asset growth of 4.4% and ended our assets at about $7 billion. At quarter end our tangible book value was $10.38 per share or an annualized growth rate of 5.1% and we maintain the existing quarterly dividend, representing a yield of over 2% based on current pricing. We continue to have strong capital ratios with a tangible common equity ratio of 8.4%, leverage ratio of 9.3% and a total risk-based capital ratio of 17.3%.

With that, I'll pass it to John Cardamone to speak more about credit quality.

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

Good morning everyone and thank you Laura and I appreciate everybody joining us today. I'm delighted to continue to report to you that our credit quality remains exceptionally strong and I'd like to share a few numbers with you that back up that statement. Our non-performing assets to assets declined from 3 basis points to 2 basis points. NPAs to loans fell from 4 basis points to 2 basis points. Our A triple (inaudible) remained solid at 56 basis points. We have no REO on our books and had none at the end of the last quarter.

Our CRE portfolio LTVs remained steady at a dollar weighted level of 57%. Our debt coverage ratios declined a few basis points from 1.53 times at the end of the year to 1.49 at the end of the quarter.

On the single family side of the fence, FIFOs (ph) remained very strong at 751 both year end and at the end of the quarter and our LTVs on a dollar weighted basis dropped slightly from 65% to 64%. As reported in our package, the average loan size in our portfolio on the CRE side is slightly above $1.5 million. Year to date, we've been producing at slightly above $1.7 million. Single family loans at $908,000 in the portfolio, however, quarter to-date growth was $1,700,000.

As we go into this quarter we have tightened our credit standards somewhat on both the CRE and the single family side, and we have enhanced our due diligence on early 30-day delinquencies. We saw a very minor tick up to about 5 basis points -- excuse me, yeah, 5 basis points at the end of the quarter. Most of those loans clear during the quarter, but we've enacted a much tighter monitoring on who is going 30 days delinquency if we're establishing any trends with those borrowers.

With that, I'll turn the microphone over to my colleague Robert Armstrong.

Robert Armstrong -- Executive Vice President, Chief Banking Officer

Thank you, John. As previously stated, with the pause in loan growth we were able to be more deliberate in our deposit strategy this quarter. We continued to see a net migration out of checking and money market indices early in the quarter. However, improved pricing discipline allowed us to reevaluate more expensive transactional business and start to develop lower cost products.

This led to a slightly lower CD retention rate of 79% by balance versus 87% Q4 for the period. Retail consumer deposits, as previously stated, were down for the quarter, roughly $47 million, but we were able to slow the rate of acceleration versus prior two quarters. Retail business deposits also decreased for the quarter, down $39 million primarily due to a market related decrease and 1031.

In aggregate, taking a more disciplined approach to pricing allowed us to slow rate of -- the rate escalation of 11 basis points versus 19 basis points prior quarter. Slower growth provided an opportunity to focus on a few key areas that are the cornerstones of our strategy going forward. We continue to build out and focus on less rate-sensitive products, greater emphasis was placed on capturing cross-sell opportunities. A good example of this is in our single family residence deposit rate buy down program, of which 98% of participating loans include active deposits and almost 50% are retaining even after payoff. Also last quarter we enhanced our income property loan officer compensation to incent greater cross-sell participation. This initiative should gain traction in future quarters.

The third part of this as we continue to pursue -- reduce large specialty and wholesale funds in favor of core business banking activity related primarily to our lending activity and niche business markets. An example of this was our expansion of trade union niche vertical with almost $50 million in the strategy now and just centered primarily in the north bay of Northern California. This represents a big opportunity going forward for us to expand in an area that we know well and have developed specific products for the vertical.

These initiatives continue to take time, are not linear, particularly with strong deposit competition in all of our markets. But we will continue our focus and discipline around improving our deposit cost of funds to lessen margin compression.

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

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

Thank you Robert. And at this time we'll go ahead and open the line for questions from our four analysts.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Gary Tenner with D.A. Davidson. Your line is open.

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

Thanks. Good morning.

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

Good morning.

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

I wanted to make sure Simone, I heard you correctly in your prepared comments on the margin pressure or potential margin pressure, was that as much as 9 basis points per quarter through the end of the year?

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

Yes. And Laura, maybe take a couple of minutes and just discuss some of what we're seeing currently even just in the month of April in terms of repricing, what's in our pipeline, our coupon on our loans, and kind of why we're saying it could be as much as 9 basis points.

Laura Tarantino -- Executive Vice President and Chief Financial Officer

Look, Gary, the trends we've seen over the fourth quarter of '18 and the first quarter of 2019 continue particularly with regards to the rate on new loan originations with the yield curve. Looking at our pipeline and I think we've noted this in our slide deck, the rate on loans in the pipeline or even less from the rate that we brought them on in the first quarter. Additionally, we held deposit costs rather contained in the first quarter but our growth in retail volume particularly wasn't very strong. So while we think that we can do a good job with pricing discipline on the deposit other side, moving forward we still have deposit rate increases outpacing loan rate increases in the portfolio.

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

On that topic, obviously with the projections for slower loan growth, it seems like you kind of have two options on the funding side, you could kind of take your foot off the gas a little bit and try to minimize the increase in upward pressure on those funding costs or given that you've got maybe a window of slower balance sheet growth overall, maybe try to grow deposits to work down the line deposit ratio in preparation for maybe a future kind of need for that liquidity. So how do you -- how are you thinking about managing that dynamic?

Laura Tarantino -- Executive Vice President and Chief Financial Officer

It's exactly what we've done in the first quarter. We've recognized that slower growth, recognized single family loans are probably going the 30-year course, causing some more recently originated 30-year loans with higher as to the hybrid loans with higher rates to pay off. And because we've had reduced pressure on the asset side, have been trying to grow our deposits slower and smarter.

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

Then other couple of new products that we developed during the first quarter that we're going to be rolling out now in the second quarter on the deposit side which again we'll be using to cross-sell our loan customers hopefully into these deposit products, including a little higher rate money market product as well as FDIC insured DDA account that's going to pay an interest rate on it as well. And Robert do you want to talk about that for a minute?

Robert Armstrong -- Executive Vice President, Chief Banking Officer

No, for competitive purposes, I don't want to go too far. But we have an advantage on these products right now particularly given our access to niche verticals that heading into more of a downturn might -- it might be more prudent as a fiduciary to be insured up to the full amount versus taking a risk on the bank's balance sheet.

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

Okay. Thank you.

Operator

Thank you. And our following question comes from the line of Matthew Clark with Piper Jaffray. Your line is open.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning. Just on the loan yield this quarter, I think they're up about 8 basis points. Was there anything unusual in that yield that created that expansion, just seems like it's a decent lift in but it doesn't sound like you're going to get that kind of lift going forward.

Laura Tarantino -- Executive Vice President and Chief Financial Officer

I would say there is nothing unusual. I think part of that's paying off from the growth that we put on during 2018. I would expect the lift to be less in future quarters primarily because our portfolio is just not turning over as quickly as it was with greater growth. And because again, the spread between what we were originating loans at earlier in 2018 to today are quite a bit different.

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

I would say there's no change in the credit characteristics of the portfolio this quarter.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then just on the CDs that are maturing this coming quarter, can you just quantify that bucket. I think you gave the overall including wholesale, but maybe just the CD bucket and maturing rates and renewal rate?

Laura Tarantino -- Executive Vice President and Chief Financial Officer

So, of the $1.2 billion, about half wholesale, half retail. The wholesale is basically priced where it would be currently. So I shouldn't see any pressure there. On the retail side, the renewing rate during the second quarter is 1.98%. Our new and renewed loan deposit growth during March came in about 2.29%, but I would point out that it didn't bring in a ton of growth. We replaced maturing CDs but in total our retail deposits declined.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then on the single family resi portfolio, I know you had some loan sales there this quarter, but if you adjust for that what's your outlook for growth in that portfolio? Do you think it'll continue to shrink from here or do you think you can actually show net growth?

Laura Tarantino -- Executive Vice President and Chief Financial Officer

April was a better month than the first quarter and I think it's a wait and see. Our payoff slowed a little bit in April and our loan volume was a little stronger in April. But I can't really comment further than what we're seeing in the first month of the second quarter.

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

And I would just add that I think we'll continue to see the growth in the 5% to 7% range for the total portfolio, most of which will be coming from income property rather than the single family.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And just expenses, $16 million on average. It sounds like for the rest of the year I think embedded in that was or maybe and I don't know if it's still embedded in that, advertising expense. I know it can move around quarterly, but is that still expected to be flat year over year?

Laura Tarantino -- Executive Vice President and Chief Financial Officer

Advertising expense is expected to be flat year-over-year, yes, at $16 million a quarter. So it's a good estimated run rate.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

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

Thank you.

Operator

Thank you. And our next question comes from Jackie Boland with KBW. Your line is open.

Jackie Boland -- KBW -- Analyst

Hi, good morning everyone.

Robert Armstrong -- Executive Vice President, Chief Banking Officer

Good morning, Jackie.

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

Good morning.

Jackie Boland -- KBW -- Analyst

I'm just looking for an updated outlook on capital plans now that the growth outlook is a little bit slower than what we talked about last quarter. I know that there's still quite a bit left in the buyback, if you think that pace in the first quarter is pretty indicative of how it will be going forward or if I'm -- just how you're thinking of it, I guess.

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

We continue to have about $9.6 million left in the approved repurchase -- share repurchase and we continue to look for opportunities and we're pleased that we've been able to buy as much as we have at a discount of 9% to our book. So, yes, if we continue to see where we're at, we can take the opportunity to repurchase, we intend to do so, particularly when it's at a discount to our book.

Jackie Boland -- KBW -- Analyst

Okay. And then just one more from me. Are there any plans for de novo branches in the future? I know the Bellevue office has done really well.

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

Yes, we actually have one branch that is under way right now and should be opening sometime in the end of the third quarter, early fourth quarter and that's in the city of El Segundo and Southern California.

Jackie Boland -- KBW -- Analyst

Okay. And at the present moment is that the forward plans for de novo activity or is there anything else that could be in the pipeline?

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

That would be out at the present time.

Jackie Boland -- KBW -- Analyst

Okay. Thank you.

Matthew Clark -- Piper Jaffray -- Analyst

Thank you. Thanks, Jackie.

Operator

Thank you. And our following question comes from Tim O'Brien with Sandler O'Neill. Your line is open.

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

Good morning, thanks.

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

Good morning, Tim.

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

A question for John. John, you mentioned tightening credit standards and enhancing due diligence. That was a first quarter move?

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

We started in the first quarter and we'll continue to monitor the portfolio very, very closely. Obviously, performance has been really quite good so far and we want to keep it that way.

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

Can you I.D. the particulars that were tightened relative to what they were before, you know, like I don't know, was it LTVs, cash flows, what have you. Can you give a little color?

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

We're tightening the flexibility we have in niche products and the single family side is the biggest thing. We're going to be more focused on recourse lending than we were last year. We're going to require more tax returns and we --

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

The last two comments were relating to the income property.

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

Income property, yeah.

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

The first comment was single family.

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

Yeah, single family. Thank you, Simone.

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

We always require tax returns for the single family.

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

Yes, thank you.

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

Oh good.

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

So those are the big things, Tim.

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

Great. No change in LTV requirements or such?

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

No, they are remaining constant at the moment.

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

Okay. And then another question I have for you is just that the outflows of non-interest bearing deposits tied to 1031 exchange, can you give a little bit more color on what's going on in the 1031 exchange market, is that endemic and broad based. I know you -- I guess a different way to approach it is, can you talk a little bit about that niche and how much in deposits that accounts for -- has accounted for in the past and have they all flown out, and is it Southern California based or Bay Area based, little bit of color there?

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

Yeah. So Tim, it's not a big percentage when you look at it stacked against a $5 billion deposit portfolio.

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

Absolutely.

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

It's range anywhere from $100 million to $200 million. And you know we see it as I think it's only 29% of just the business vertical. So what we saw was the net outflow -- actually there is some -- even some seasonality Q1 what people are finding exchanges. As you know, with the 1031 exchange, you have 180 days to trade out and find a replacement property. So specific to our portfolio we saw a relatively minor outflow of, I believe it was $47 million. So it wasn't a big deal when you stack it against everything else that we've diversified into. But it was a decrease and we don't anticipate that bucket being a growth area for us. We will maintain what we have and look for strategic opportunities. Some of the pricing there became relatively expensive as people were striving to fund their loan needs and we did not pursue it beyond our comfort zone in terms of pricing. So (multiple speakers)

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

And honestly, I'm not really concerned about your situation kind of given the context of where you gather deposits and how big a piece that was a year deposit base. In the last cycle we saw and I'm sure a number of you all are familiar with this, outflows from 1031 exchange's been leading indicators of a slowdown in real estate markets and the way that I read the language in the press release suggests that was part of this. So I was just looking for a little bit more on that?

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

Fair enough. It's too early...

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

From a macro standpoint?

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

Yeah, from a macro standpoint, I think it's too early to tell. But it was off the front board.

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

All right. Thanks for answering my questions.

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

Thank you, Tim.

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

You're welcome, Tim.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to your speakers for closing remarks.

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

Thank you very much for participating in our first quarter conference call. This concludes the call. Thank you.

Duration: 42 minutes

Call participants:

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

Laura Tarantino -- Executive Vice President and Chief Financial Officer

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

Robert Armstrong -- Executive Vice President, Chief Banking Officer

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

Matthew Clark -- Piper Jaffray -- Analyst

Jackie Boland -- KBW -- Analyst

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

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