Luther Burbank Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow

10-Q 1 lbc10q2020q1.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38317

Luther Burbank Corporation

(Exact name of registrant as specified in its charter)



California (State or other jurisdiction of incorporation or organization)		68-0270948 (I.R.S. employer identification number)

520 Third St, Fourth Floor, Santa Rosa, California (Address of principal executive offices)		95401 (Zip Code)

Registrant's telephone number, including area code: (844) 446-8201



Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common stock, no par value	LBC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller Reporting Company	x
		Emerging Growth Company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x

As of May 1, 2020, there were 52,951,276 shares of the registrant’s common stock, no par value, outstanding.

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		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition	3
	Unaudited Consolidated Statements of Income	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Changes in Stockholders' Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	56
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
	Signatures	63

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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q. With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information available to, management at the time such statements are first made. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict. Although the Company believes that management’s beliefs and assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition. Accordingly, investors should use caution in placing any reliance on forward-looking statements to anticipate future results or trends.

The coronavirus disease 2019 ("COVID-19") pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Some of the other risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the impact of changes in interest rates; political instability; changes in the monetary policies of the U.S. Government; a decline in economic conditions; deterioration in the value of West Coast real estate, both residential and commercial; an increase in the level of non-performing assets and charge-offs; further increased competition among financial institutions; the Company’s ability to continue to attract deposits and quality loan customers; further government regulation, including regulations regarding capital requirements, and the implementation and costs associated with the same; internal and external fraud and cyber-security threats including the loss of bank or customer funds, loss of system functionality or the theft or loss of data; management’s ability to successfully manage the Company’s operations; and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q and the Company’s 2019 Annual Report on Form 10-K.

Any forward-looking statements in this Quarterly Report on Form 10-Q and all subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after the date such forward-looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.

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PART I.

Item 1. Financial Statements

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands)



	March 31, 2020 (unaudited)		December 31, 2019
ASSETS
Cash, cash equivalents and restricted cash	$	123,248	$	91,325
Available for sale debt securities, at fair value	641,474		625,074
Held to maturity debt securities, at amortized cost (fair value of $10,132 and $10,349 at March 31, 2020 and December 31, 2019, respectively)	9,732		10,170
Equity securities, at fair value	11,970		11,782
Loans receivable, net of allowance for loan losses of $40,657 and $36,001 at March 31, 2020 and December 31, 2019, respectively	6,177,657		6,194,976
Accrued interest receivable	20,823		20,814
Federal Home Loan Bank ("FHLB") stock, at cost	29,612		30,342
Premises and equipment, net	19,792		19,504
Goodwill	3,297		3,297
Prepaid expenses and other assets	36,445		38,544
Total assets	$	7,074,050	$	7,045,828

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits	$	5,285,376	$	5,234,717
FHLB advances	953,694		978,702
Junior subordinated deferrable interest debentures	61,857		61,857
Senior debt
$95,000 face amount, 6.5% interest rate, due September 30, 2024 (less debt issuance costs of $553 and $584 at March 31, 2020 and December 31, 2019, respectively)	94,447		94,416
Accrued interest payable	2,635		2,901
Other liabilities and accrued expenses	72,701		58,771
Total liabilities	6,470,710		6,431,364

Commitments and contingencies (Note 16)

Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2020 and December 31, 2019	—		—
Common stock, no par value; 100,000,000 shares authorized; 54,286,465 and 55,999,754 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	431,578		447,784
Retained earnings	169,572		165,236
Accumulated other comprehensive income, net of taxes	2,190		1,444
Total stockholders' equity	603,340		614,464
Total liabilities and stockholders' equity	$	7,074,050	$	7,045,828

See accompanying notes to unaudited consolidated financial statements

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LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)



	Three Months Ended March 31,
	2020		2019
Interest and fee income:
Loans	$	60,705	$	61,053
Investment securities	3,303		3,925
Cash, cash equivalents and restricted cash	317		400
Total interest and fee income	64,325		65,378
Interest expense:
Deposits	24,581		24,288
FHLB advances	5,558		6,772
Junior subordinated deferrable interest debentures	493		651
Senior debt	1,578		1,575
Total interest expense	32,210		33,286
Net interest income before provision for loan losses	32,115		32,092
Provision for loan losses	5,300		300
Net interest income after provision for loan losses	26,815		31,792
Noninterest income:
Gain on sale of loans	—		333
FHLB dividends	535		495
Other income	263		552
Total noninterest income	798		1,380
Noninterest expense:
Compensation and related benefits	11,205		10,052
Deposit insurance premium	476		498
Professional and regulatory fees	431		441
Occupancy	1,140		1,390
Depreciation and amortization	669		665
Data processing	967		919
Marketing	875		1,154
Other expenses	1,096		1,130
Total noninterest expense	16,859		16,249
Income before provision for income taxes	10,754		16,923
Provision for income taxes	3,178		4,913
Net income	$	7,576	$	12,010

Basic earnings per common share	$	0.14	$	0.21
Diluted earnings per common share	$	0.14	$	0.21
Dividends per common share	$	0.06	$	0.06

See accompanying notes to unaudited consolidated financial statements

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LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)



	Three Months Ended March 31,
	2020			2019
Net income	$	7,576		$	12,010
Other comprehensive income:
Unrealized gain on available for sale debt securities:
Unrealized holding gain arising during the period	1,051			2,504
Tax effect	(305		)	(724		)
Net of tax	746			1,780
Unrealized gain on cash flow hedge:
Unrealized holding gain arising during the period	—			147
Tax effect	—			(43		)
Net of tax	—			104
Total other comprehensive income	746			1,884
Comprehensive income	$	8,322		$	13,894

See accompanying notes to unaudited consolidated financial statements

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LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

(Dollar amounts in thousands, except per share data)



									Accumulated Other Comprehensive (Loss) Income (Net of Taxes)						Total Stockholders' Equity
	Common Stock					Retained Earnings			Available for Sale Securities			Cash Flow Hedge
	Shares		Amount			Retained Earnings			Available for Sale Securities			Cash Flow Hedge
Balance, December 31, 2018	56,379,066		$	456,378		$	129,806		$	(4,935	)	$	(104	)	$	581,145
Cumulative effect of change in accounting principal (1)	—		—			(399		)	399			—			—
Comprehensive income:
Net income	—		—			12,010			—			—			12,010
Other comprehensive income	—		—			—			1,780			104			1,884
Issuance of restricted stock awards	297,663		—			—			—			—			—
Settled restricted stock units	112,302		—			—			—			—			—
Shares withheld to pay taxes on stock based compensation	(41,522	)	(404		)	—			—			—			(404		)
Restricted stock forfeitures	(2,728	)	(2		)	1			—			—			(1		)
Stock based compensation expense	—		840			—			—			—			840
Shares repurchased	(393,000	)	(3,881		)	—			—			—			(3,881		)
Cash dividends ($0.06 per share)	—		—			(3,295		)	—			—			(3,295		)
Balance, March 31, 2019	56,351,781		$	452,931		$	138,123		$	(2,756	)	$	—		$	588,298

Balance, December 31, 2019	55,999,754		$	447,784		$	165,236		$	1,444		$	—		$	614,464
Comprehensive income:
Net income	—		—			7,576			—			—			7,576
Other comprehensive income	—		—			—			746			—			746
Issuance of restricted stock awards	250,118		—			—			—			—			—
Settled restricted stock units	70,220		—			—			—			—			—
Shares withheld to pay taxes on stock based compensation	(53,824	)	(563		)	—			—			—			(563		)
Restricted stock forfeitures	(17,408	)	(8		)	6			—			—			(2		)
Stock based compensation expense	—		911			—			—			—			911
Shares repurchased	(1,962,395	)	(16,546		)	—			—			—			(16,546		)
Cash dividends ($0.06 per share)	—		—			(3,246		)	—			—			(3,246		)
Balance, March 31, 2020	54,286,465		$	431,578		$	169,572		$	2,190		$	—		$	603,340

(1) Represents the impact of adopting Accounting Standards Update ("ASU") 2016-01. See Note 3 to the unaudited consolidated financial statements for further information.

See accompanying notes to unaudited consolidated financial statements

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LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net income	$	7,576		$	12,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	669			665
Provision for loan losses	5,300			300
Amortization of deferred loan costs, net	3,725			2,646
Amortization of premiums on investment securities, net	487			362
Gain on sale of loans	—			(333		)
Stock based compensation expense, net of forfeitures	903			838
Change in fair value of mortgage servicing rights	395			146
Change in fair value of equity securities	(188		)	(144		)
Other items, net	(40		)	—
Effect of changes in:
Accrued interest receivable	(9		)	(1,072		)
Accrued interest payable	(266		)	1,169
Prepaid expenses and other assets	(1,332		)	1,543
Other liabilities and accrued expenses	(1,423		)	(868		)
Net cash provided by operating activities	15,797			17,262
Cash flows from investing activities:
Proceeds from maturities, paydowns and calls of available for sale debt securities	92,128			16,263
Proceeds from maturities and paydowns of held to maturity debt securities	416			399
Purchases of available for sale debt securities	(107,942		)	(44,377		)
Net decrease (increase) in loans receivable	46,956			(69,765		)
Proceeds from loans held for sale previously classified as portfolio loans	—			53,772
Purchase of loans	(20,507		)	—
Redemption (purchase) of FHLB stock, net	730			(224		)
Purchase of premises and equipment	(957		)	(157		)
Net cash provided by (used in) investing activities	10,824			(44,089		)
Cash flows from financing activities:
Net increase in customer deposits	50,659			80,791
Proceeds from long-term FHLB advances	126,500			75,000
Repayment of long-term FHLB advances	(150,008		)	(7		)
Net change in short-term FHLB advances	(1,500		)	(108,500		)
Shares withheld for taxes on vested restricted stock	(563		)	(404		)
Shares repurchased	(16,546		)	(3,881		)
Cash paid for dividends	(3,240		)	(3,294		)
Net cash provided by financing activities	5,302			39,705
Increase in cash, cash equivalents and restricted cash	31,923			12,878
Cash, cash equivalents and restricted cash, beginning of period	91,325			91,697
Cash, cash equivalents and restricted cash, end of period	$	123,248		$	104,575
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	32,476		$	32,117
Income taxes	$	410		$	10
Non-cash investing activity:
Loans transferred to held for sale	$	—		$	53,559

See accompanying notes to unaudited consolidated financial statements

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LUTHER BURBANK CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	NATURE OF OPERATIONS

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 months ended March 31, 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 March 31, 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

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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 March 31,
(Dollars in thousands, except share amounts)	2020		2019
Net income	$	7,576	$	12,010

Weighted average basic common shares outstanding	55,611,827		56,519,809
Add: Dilutive effects of assumed vesting of restricted stock	113,271		202,887
Weighted average diluted common shares outstanding	55,725,098		56,722,696

Income per common share:
Basic EPS	$	0.14	$	0.21
Diluted EPS	$	0.14	$	0.21
Anti-dilutive shares not included in calculation of diluted earnings per share	17,313		13,981

New Financial Accounting Standards

FASB ASU 2019-12

In December 2019, the Financial Accounting Standards Board (“FASB”) issued "Simplifying the Accounting for Income Taxes (Topic 740)" (“ASU 2019-12”) removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740 and clarifying and amending existing guidance to provide for more consistent application. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.


2.	COVID-19

In late March 2020, the Company implemented a loan modification program that permits borrowers who have been financially impacted by the COVID-19 pandemic, and are unable to service their loans, to defer loan payments for a specified period of time. Because the loan modification program was established in late March 2020, borrower participation in the program and the receipt of modification applications were not generally experienced until April 2020. As of April 30, 2020, the Company had received completed applications from borrowers requesting modifications in connection with this program representing loan balances of $88.5 million, $111.9 million, $51.2 million and $1.1 million, or 2.2%, 5.9%, 24.4% and 5.4%, of our multifamily residential, single family residential, commercial real estate and construction and land loan portfolios, respectively. As of April 30, 2020, the Company has approved COVID-19 loan modifications with an aggregate principal loan balance of $84.7 million, representing 1.4% of the Company's loan portfolio. In conjunction with the passage of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), banks have been provided the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited time to account for the effects of COVID-19. As a result, the Company will not be recognizing eligible COVID-19 loan modifications as TDRs. Additionally, loans qualifying for these modifications will not be required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19 loan modification.

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Through the date of this filing, the Company has not experienced any loan charge-offs caused by the economic impact from COVID-19. Management has evaluated events related to COVID-19 that have occurred subsequent to March 31, 2020 and has concluded there are no matters that would require recognition in the accompanying unaudited consolidated financial statements.


3.	INVESTMENT SECURITIES

Available for Sale

The following table summarizes the amortized cost and the estimated fair value of available for sale debt securities as of the dates indicated:



(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
At March 31, 2020:
Government and Government Sponsored Entities:
Residential mortgage backed securities ('MBS") and collateralized mortgage obligations ("CMOs")	$	227,132	$	1,111	$	(1,829	)	$	226,414
Commercial MBS and CMOs	355,196		5,993		(2,246		)	358,943
Agency bonds	56,058		97		(38		)	56,117
Total available for sale debt securities	$	638,386	$	7,201	$	(4,113	)	$	641,474
At December 31, 2019:
Government and Government Sponsored Entities:
Residential MBS and CMOs	$	145,333	$	340	$	(481	)	$	145,192
Commercial MBS and CMOs	353,727		3,267		(825		)	356,169
Agency bonds	123,977		59		(323		)	123,713
Total available for sale debt securities	$	623,037	$	3,666	$	(1,629	)	$	625,074

Net unrealized gains on available for sale investment securities are recorded as accumulated other comprehensive income within stockholders’ equity and totaled $2.2 million and $1.4 million, net of $898 thousand and $593 thousand in tax liabilities, at March 31, 2020 and December 31, 2019, respectively. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three months ended March 31, 2020 and 2019.

The following tables summarize the gross unrealized losses and fair value of available for sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	March 31, 2020
	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Government and Government Sponsored Entities:
Residential MBS and CMOs	$	83,448	$	(1,038	)	$	40,964	$	(791	)	$	124,412	$	(1,829	)
Commercial MBS and CMOs	91,732		(1,199		)	59,746		(1,047		)	151,478		(2,246		)
Agency bonds	19,243		(38		)	—		—			19,243		(38		)
Total available for sale debt securities	$	194,423	$	(2,275	)	$	100,710	$	(1,838	)	$	295,133	$	(4,113	)

At March 31, 2020, the Company held 83 residential MBS and CMOs of which 65 were in a loss position and 27 had been in a loss position for twelve months or more. The Company held 43 commercial MBS and CMOs of which 19 were in a loss position and 9 had been in a loss position for twelve months or more. The Company held 14 agency bonds of which 2 were in a loss position and none had been in a loss position for twelve months or more.

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	December 31, 2019
	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Government and Government Sponsored Entities:
Residential MBS and CMOs	$	43,623	$	(181	)	$	54,870	$	(300	)	$	98,493	$	(481	)
Commercial MBS and CMOs	95,950		(339		)	57,219		(486		)	153,169		(825		)
Agency bonds	29,471		(86		)	87,405		(237		)	116,876		(323		)
Total available for sale debt securities	$	169,044	$	(606	)	$	199,494	$	(1,023	)	$	368,538	$	(1,629	)

At December 31, 2019, the Company held 76 residential MBS and CMOs of which 45 were in a loss position and 25 had been in a loss position for twelve months or more. The Company held 42 commercial MBS and CMOs of which 19 were in a loss position and 8 had been in a loss position for twelve months or more. The Company held 15 agency bonds of which 12 were in a loss position and 9 had been in a loss position for twelve months or more.

The unrealized losses on the Company’s investments were caused by interest rate changes. In addition, the contractual cash flows of these investments are guaranteed by the U.S. government or agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2020 and December 31, 2019.

As of March 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders' equity, other than the U.S. government and its agencies.

Held to Maturity

The following table summarizes the amortized cost and estimated fair value of held to maturity investment securities as of the dates indicated:



(Dollars in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
As of March 31, 2020:
Government Sponsored Entities:
Residential MBS	$	9,651	$	400	$	—		$	10,051
Other investments	81		—		—			81
Total held to maturity investment securities	$	9,732	$	400	$	—		$	10,132
As of December 31, 2019:
Government Sponsored Entities:
Residential MBS	$	10,087	$	205	$	(26	)	$	10,266
Other investments	83		—		—			83
Total held to maturity investment securities	$	10,170	$	205	$	(26	)	$	10,349

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The following table summarizes the gross unrecognized losses and fair value of held to maturity investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrecognized loss position:



	Less than 12 Months				12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
As of December 31, 2019:
Government Sponsored Entities:
Residential MBS	$	—	$	—	$	2,253	$	(26	)	$	2,253	$	(26	)

At March 31, 2020, the Company had 7 held to maturity residential MBS and none were in a loss position. At December 31, 2019, the Company held 7 held to maturity residential MBS of which 2 had been in a loss position for twelve months or more.

The unrecognized losses on the Company’s held to maturity investments at December 31, 2019 were caused by interest rate changes. In addition, the contractual cash flows of these investments are guaranteed by agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2019.

The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of March 31, 2020:



	March 31, 2020
(Dollars in thousands)	Amortized Cost		Fair Value
Available for sale debt securities
Less than one year	$	10,000	$	10,018
One to five years	30,000		29,987
Five to ten years	3,777		3,781
Beyond ten years	12,281		12,331
MBS and CMOs	582,328		585,357
Total available for sale debt securities	$	638,386	$	641,474
Held to maturity investments securities
Beyond ten years	$	81	$	81
MBS	9,651		10,051
Total held to maturity debt securities	$	9,732	$	10,132

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and collateralized mortgage obligations are not included in the maturity categories above and instead are shown separately. No securities were pledged as of March 31, 2020 and December 31, 2019.

Equity Securities

Equity securities consist of investments in the CRA Qualified Investment Fund. At March 31, 2020 and December 31, 2019, the fair value of equity securities totaled $12.0 million and $11.8 million, respectively. Prior to January 1, 2019, equity securities were included with available for sale investment securities and stated at fair value with unrealized gains and losses reported in other comprehensive income. In conjunction with the adoption of ASU 2016-01, as of January 1, 2019, $399 thousand of unrealized losses on equity securities were reclassified from other comprehensive income to retained earnings. Subsequent changes in fair value are recognized in other noninterest income and totaled $188 thousand and $144 thousand during the three months ended March 31, 2020 and 2019. There were no sales of equity securities during the three

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months ended March 31, 2020 and 2019.


4.	LOANS

Loans consist of the following:



(Dollars in thousands)	March 31, 2020			December 31, 2019
Permanent mortgages on:
Multifamily residential	$	4,058,869		$	3,985,981
Single family residential	1,930,831			2,021,320
Commercial real estate	205,657			203,134
Construction and land loans	22,857			20,442
Non-Mortgage (‘‘NM’’) loans	100			100
Total	6,218,314			6,230,977
Allowance for loan losses	(40,657		)	(36,001		)
Loans held for investment, net	$	6,177,657		$	6,194,976

Certain loans have been pledged to secure borrowing arrangements (see Note 8).

The following table summarizes activity in and the allocation of the allowance for loan losses by portfolio segment:



(Dollars in thousands)	Multifamily Residential		Single Family Residential			Commercial Real Estate			Land, Construction and NM			Total
Three months ended March 31, 2020
Allowance for loan losses:
Beginning balance allocated to portfolio segments	$	23,372	$	10,076		$	2,341		$	212		$	36,001
Provision for (reversal of) loan losses	3,936		1,069			336			(41		)	5,300
Charge-offs	—		(722		)	—			—			(722		)
Recoveries	—		3			—			75			78
Ending balance allocated to portfolio segments	$	27,308	$	10,426		$	2,677		$	246		$	40,657
Three months ended March 31, 2019
Allowance for loan losses:
Beginning balance allocated to portfolio segments	$	21,326	$	10,125		$	2,441		$	422		$	34,314
Provision for (reversal of) loan losses	720		(239		)	(163		)	(18		)	300
Charge-offs	—		—			—			—			—
Recoveries	—		3			—			75			78
Ending balance allocated to portfolio segments	$	22,046	$	9,889		$	2,278		$	479		$	34,692

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The following table summarizes the allocation of the allowance for loan losses by impairment methodology:



(Dollars in thousands)	Multifamily Residential		Single Family Residential		Commercial Real Estate		Land, Construction and NM		Total
As of March 31, 2020:
Ending allowance balance allocated to:
Loans individually evaluated for impairment	$	—	$	25	$	—	$	—	$	25
Loans collectively evaluated for impairment	27,308		10,401		2,677		246		40,632
Ending balance	$	27,308	$	10,426	$	2,677	$	246	$	40,657
Loans:
Ending balance: individually evaluated for impairment	$	537	$	6,331	$	—	$	—	$	6,868
Ending balance: collectively evaluated for impairment	4,058,332		1,924,500		205,657		22,957		6,211,446
Ending balance	$	4,058,869	$	1,930,831	$	205,657	$	22,957	$	6,218,314
As of December 31, 2019:
Ending allowance balance allocated to:
Loans individually evaluated for impairment	$	—	$	815	$	—	$	—	$	815
Loans collectively evaluated for impairment	23,372		9,261		2,341		212		35,186
Ending balance	$	23,372	$	10,076	$	2,341	$	212	$	36,001
Loans:
Ending balance: individually evaluated for impairment	$	541	$	7,097	$	—	$	—	$	7,638
Ending balance: collectively evaluated for impairment	3,985,440		2,014,223		203,134		20,542		6,223,339
Ending balance	$	3,985,981	$	2,021,320	$	203,134	$	20,542	$	6,230,977

The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans to identify credit risks and to assess the overall collectability of the portfolio. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, as well as the financial performance and other characteristics of loan collateral. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into six major categories, defined as follows:

Pass assets are those which are performing according to contract and have no existing or known weaknesses deserving of management’s close attention. The basic underwriting criteria used to approve the loans are still valid, and all payments have essentially been made as planned.

Watch assets are expected to have an event occurring in the next 90 to 120 days that will lead to a change in risk rating with the change being either favorable or unfavorable. These assets require heightened monitoring of the event by management.

Special mention assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard assets are inadequately protected by the current net worth and/or paying capacity of the obligor or by the collateral pledged. These assets have well-defined weaknesses: the primary source of repayment is gone or severely impaired (i.e., bankruptcy or loss of employment) and/or there has been a deterioration in collateral value. In addition, there is the distinct possibility that the Company will sustain some loss, either directly or indirectly (i.e., the cost of monitoring), if the deficiencies are not corrected. A deterioration in collateral value alone does not mandate that an asset be adversely classified if such factor does not indicate that the primary source of repayment is in jeopardy.

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Doubtful assets have the weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable based on current facts, conditions and values.

Loss assets are considered uncollectible and of such little value that their continuance as assets, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion thereof) even though partial recovery may be affected in the future.

The following table summarizes the loan portfolio allocated by management’s internal risk ratings at March 31, 2020 and December 31, 2019:



(Dollars in thousands)	Multifamily Residential		Single Family Residential		Commercial Real Estate		Land, Construction and NM		Total
As of March 31, 2020:
Grade:
Pass	$	3,989,553	$	1,898,641	$	203,857	$	22,957	$	6,115,008
Watch	51,699		14,844		1,800		—		68,343
Special mention	16,692		10,108		—		—		26,800
Substandard	925		7,238		—		—		8,163
Doubtful	—		—		—		—		—
Total	$	4,058,869	$	1,930,831	$	205,657	$	22,957	$	6,218,314
As of December 31, 2019:
Grade:
Pass	$	3,917,264	$	1,980,845	$	200,371	$	20,542	$	6,119,022
Watch	47,309		16,432		2,763		—		66,504
Special mention	19,708		13,635		—		—		33,343
Substandard	1,700		8,808		—		—		10,508
Doubtful	—		1,600		—		—		1,600
Total	$	3,985,981	$	2,021,320	$	203,134	$	20,542	$	6,230,977

The following table summarizes an aging analysis of the loan portfolio by the time past due at March 31, 2020 and December 31, 2019:



(Dollars in thousands)	30 Days		60 Days		90+ Days		Non-accrual		Current		Total
As of March 31, 2020:
Loans:
Multifamily residential	$	—	$	897	$	—	$	537	$	4,057,435	$	4,058,869
Single family residential	1,066		1,720		—		5,036		1,923,009		1,930,831
Commercial real estate	—		—		—		—		205,657		205,657
Land, construction and NM	—		—		—		—		22,957		22,957
Total	$	1,066	$	2,617	$	—	$	5,573	$	6,209,058	$	6,218,314
As of December 31, 2019:
Loans:
Multifamily residential	$	1,411	$	—	$	—	$	541	$	3,984,029	$	3,985,981
Single family residential	4,037		690		—		5,792		2,010,801		2,021,320
Commercial real estate	—		—		—		—		203,134		203,134
Land, construction and NM	—		—		—		—		20,542		20,542
Total	$	5,448	$	690	$	—	$	6,333	$	6,218,506	$	6,230,977

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At March 31, 2020, there were 5 single family residential loans totaling $6.0 million and 1 multifamily residential loan totaling $595 thousand that would have been reported as 30 days delinquent loans if not for COVID-19 related requests. See Note 2 to the unaudited consolidated financial statements for additional information.

The following table summarizes information related to impaired loans at March 31, 2020 and December 31, 2019:



	As of March 31, 2020						As of December 31, 2019
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Multifamily residential	$	537	$	614	$	—	$	541	$	618	$	—
Single family residential	5,430		6,472		—		4,588		4,915		—
	5,967		7,086		—		5,129		5,533		—
With an allowance recorded:
Single family residential	901		898		25		2,509		2,484		815
	901		898		25		2,509		2,484		815
Total:
Multifamily residential	537		614		—		541		618		—
Single family residential	6,331		7,370		25		7,097		7,399		815
	$	6,868	$	7,984	$	25	$	7,638	$	8,017	$	815

The following tables summarize information related to impaired loans for the three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020						2019
(Dollars in thousands)	Average Recorded Investment		Interest Income		Cash Basis Interest		Average Recorded Investment		Interest Income		Cash Basis Interest
With no related allowance recorded:
Multifamily residential	$	539	$	8	$	8	$	560	$	3	$	3
Single family residential	4,790		19		14		4,148		36		—
Commercial real estate	—		—		—		—		—		—
	5,329		27		22		4,708		39		3
With an allowance recorded:
Single family residential	2,105		11		—		929		12		—
	2,105		11		—		929		12		—
Total:
Multifamily residential	539		8		8		560		3		3
Single family residential	6,895		30		14		5,077		48		—
Commercial real estate	—

Price	11.49	EPS	1
Shares	56	P/E	14
MCap	647	P/FCF	12
Net Debt	-168	EBIT	171
TEV	479	TEV/EBIT	3
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-03-11
10-Q	2019-09-30	Filed 2019-11-12
10-Q	2019-06-30	Filed 2019-08-09
10-Q	2019-03-31	Filed 2019-05-10
10-K	2018-12-31	Filed 2019-03-04
10-Q	2018-09-30	Filed 2018-11-09
10-Q	2018-06-30	Filed 2018-08-09
10-Q	2018-03-31	Filed 2018-05-10
10-K	2017-12-31	Filed 2018-03-16

8-K	2020-05-04
8-K	2020-04-28
8-K	2020-04-10
8-K	2020-03-11
8-K	2020-02-26
8-K	2020-01-28
8-K	2020-01-10
8-K	2019-10-23
8-K	2019-10-03
8-K	2019-07-29
8-K	2019-07-10
8-K	2019-04-29
8-K	2019-04-26
8-K	2019-04-24
8-K	2019-04-10
8-K	2019-01-31
8-K	2019-01-28
8-K	2019-01-10
8-K	2018-12-14
8-K	2018-11-30
8-K	2018-10-25
8-K	2018-10-10
8-K	2018-08-16
8-K	2018-07-26
8-K	2018-07-10
8-K	2018-06-07
8-K	2018-05-24
8-K	2018-04-27
8-K	2018-04-26
8-K	2018-04-05
8-K	2018-03-05
8-K	2018-01-25

EX-31.1	lbcex311_1q2020.htm
EX-31.2	lbcex312_1q2020.htm
EX-32.1	lbcex321_1q2020.htm
EX-32.2	lbcex322_1q2020.htm

LBC 10Q Quarterly Report

Luther Burbank Earnings 2020-03-31