NATURE OF OPERATIONS

9 Months Ended

Sep. 30, 2020

Organization

Luther Burbank Corporation (the ‘‘Company’’), a California corporation headquartered in Santa Rosa, is the bank holding company for its wholly-owned subsidiary, Luther Burbank Savings (the "Bank"), and its wholly-owned subsidiary, Burbank Investor Services. The Company also owns Burbank Financial Inc., a real estate investment company, and all the common interests in Luther Burbank Statutory Trusts I and II, entities created to issue trust preferred securities.

The Bank conducts its business from its headquarters in Gardena, California. It has ten full service branches in California located in Sonoma, Marin, Santa Clara, and Los Angeles Counties and one full service branch in Washington located in King County. Additionally, there are seven loan production offices located throughout California, as well as a loan production office in Clackamas County, Oregon.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2019, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2020.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.

Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The estimates utilized to determine the appropriate allowance for loan losses at September 30, 2020 may be materially different from actual results due to the COVID-19 pandemic. See Note 2 to the unaudited consolidated financial statements for additional information regarding the COVID-19 pandemic.

Reclassifications

Certain prior balances in the unaudited consolidated financial statements have been reclassified to

conform to current year presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.

Earnings Per Share ("EPS")

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method.


(Dollars in thousands, except share amounts)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	14,317	$	12,736	$	31,211	$	36,404

Weighted average basic common shares outstanding	52,001,097		55,654,429		53,359,460		56,094,285
Add: Dilutive effects of assumed vesting of restricted stock	156,106		273,104		118,309		219,587
Weighted average diluted common shares outstanding	52,157,203		55,927,533		53,477,769		56,313,872

Income per common share:
Basic EPS	$	0.28	$	0.23	$	0.58	$	0.65
Diluted EPS	$	0.27	$	0.23	$	0.58	$	0.65
Anti-dilutive shares not included in calculation of diluted earnings per share	26		4,398		17,623		4,381

Qualified Affordable Housing Project Investments

During the quarter ended September 30, 2020, the Company invested in a qualified affordable housing project that is expected to provide federal and California state tax credits in the future. This investment is accounted for using the proportional amortization method. During the quarter ended September 30, 2020, the Company committed to invest $4.8 million, of which $1.6 million has been funded at September 30, 2020, and was included in prepaid expenses and other assets in the unaudited consolidated statement of financial condition. The total unfunded commitment related to the investment totaled $3.3 million at September 30, 2020 and was included in other liabilities and accrued expenses in the unaudited consolidated statement of financial condition. Unfunded commitments are expected to be paid by the Company no later than 2023. During both the three and nine months ended September 30, 2020, the Company recognized amortization expense of $21 thousand and tax benefits related to the investment of $28 thousand. Amortization expense and tax benefits are included in the provision for income taxes in the unaudited consolidated statement of income.