Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:

00

05 Good morning and welcome to the Luther Burbank Corporation Third Quarter twenty twenty one Earnings Conference Call. All participants will be in listen-only mode. [Operators Instructions]. After today's presentation, there will be an opportunity for the analysts covering Luther Burbank Corporation to ask questions. [Operators Instructions] 00

33 Before we begin, the company would like to remind you that discussion during this call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of nineteen ninety five. Luther Burbank Corporation does not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Numerous factors could cause our actual results to differ materially from those described in forward-looking statements. For more information on those factors, please see the company's periodic reports accessible at the Luther Burbank Corporation website and filed with the SEC. 01

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

01

31 Thank you, Jeff and good morning everyone. Welcome to Luther Burbank Corporation's twenty twenty one Third Quarter Earnings Conference Call. This is Simone Lagomarsino, President and CEO and with me today is Laura Tarantino, our CFO. 01

46 Yesterday, we reported quarterly net income of twenty four point seven million dollars or zero point four eight dollars per share, which to date represents the highest quarterly earnings that our company has recorded in its thirty eight year history. This performance is directly attributed to three key drivers

our improved net interest margin; our long-term emphasis on credit quality; and our continued commitment to efficient operation. 02

13 Our earnings generated a third quarter return on average assets of one point three four percent and a return on average equity of fifteen point two four percent. Our net interest margin for the third quarter grew by sixteen basis points to two point four seven percent primarily due to a decline in our total cost of funding. Compared to the second quarter of twenty twenty one, our cost of interest bearing deposits dropped by twenty basis points, while our cost of Federal Home Loan Bank advances decreased by seven basis points. 02

45 The cost of our liabilities continues to benefit from the low interest rate environment and the change in our product mix as well as excess liquidity in the banking system in general. At the end of September, for the first time as a public company, the balances of our money market and checking products exceeded the balances of our time deposit accounts. This is in part due to customer preference and also in part related to our strategy to diversify single product customers and form deeper banking relationships. 03

16 Our attention to credit quality has been the foundation of our lending business for many years. Similar to last quarter, our third quarter results included the reversal of loan loss provisions. During the third quarter, we reversed four million dollars from our allowance for loan losses, which brings the year-to-date total reversal to nine million dollars. 03

36 If we normalize our financial results, our net income for the third quarter of twenty twenty one, excluding the four million dollars that we reversed from our allowance for loan losses, would have been twenty one point nine million dollars tax adjusted. Our adjusted return on average assets would have been one point one nine percent and our adjusted return on average equity would have been thirteen point five percent. These metrics are well above the strategic goals we established three years ago. 04

04 Our ability to continue to recapture reserve this past quarter is both a reflection of our conservative underwriting practices as well as the financial strength of our borrowers and their demonstrated ability to manage their debt obligations throughout this pandemic. Importantly, residential real estate values in our markets on the West Coast have appreciated over the past few years and we expect them to continue to increase given the low supply and strong demand for housing. 04

33 Each quarter, I'm pleased to continue to report on the strong credit quality of our loan portfolio, which in the third quarter included a decrease in criticized assets by sixteen point nine million dollars or forty three percent since the end of June. At September thirty, criticized loans were zero point three four percent of total loans. Additionally, as of the same date, only two of our nearly five thousand loans were non-performing. The two loans had outstanding balances totaling six hundred and forty three thousand representing zero point zero one percent of the loan portfolio. 05

10 At quarter end, our allowance for loan losses had approximately two point five million dollars in qualitative reserves remaining that were initially established as a result of the COVID pandemic. We will continue to monitor the impact of the pandemic on the economy, residential real estate and our borrowers, and make further adjustments to the qualitative reserve if appropriate. 05

32 Our allowance to total loans coverage ratio at quarter end was fifty nine basis points as compared to a ratio of fifty eight basis points at December thirty first, twenty nineteen prior to the declaration of the national emergency. 05

46 Lastly, as I think about our third quarter accomplishments. I'm reminded of one of our company's value statements, which is to improve performance through efficiency and accountability. Our third quarter efficiency ratio of thirty two point one percent speaks to our deliberate efforts to improve our operations and our ratio is one of the best in the industry. 06

08 As we look to the future, we recognized that enhancing our technology will be extremely important in terms of maintaining our efficiency. We continue to evaluate new technology that will support our business model and we expect to make improvements in our digital presence, online account opening and customer relationship management systems in the near future. 06

28 Now, I will turn to the balance sheet. Our assets at the end of September totaled seven point two billion, an increase of three hundred and fifteen million dollars or five percent since year-end twenty twenty and a decrease of thirty six million dollars or one percent from June thirty, twenty twenty one. In our last earnings call, we indicated that our pipeline have returned to more normalized levels after recording the highest quarterly level of loan originations in our company's thirty eight year history during the second quarter. 06

56 We also noted that we expected asset growth to slow in the second half of the year. The slight decline in our loan portfolio during the third quarter, however, was due to a combination of reduced loan originations and a higher level of loan prepayments compared to the linked quarter. 07

13 The low interest rate environment compounded by excess liquidity in the system has kept competition for residential lending aggressive among market participants. And although long-term rates have increased over the past quarter, we've noticed that many competitors continue to reduce loan offer rates. 7

33 For the nine months ending September thirty, our lending teams have originated and underwritten one point nine billion dollars in new loans, which exceeds the production we recorded for the full calendar year of twenty twenty by four hundred and twenty eight million dollars and for twenty nineteen by three hundred and six million dollars. I expect that our fourth quarter loan volume will place our total year twenty twenty one originations, including our Q1 loan purchase, to be on par with or even exceed our prior greatest historical loan volume of two point one billion, which was achieved in twenty seventeen in the period when our loan portfolio was growing at double digits. 08

10 Despite our projections for strong loan originations, we're also anticipating that prepayment speeds will remain elevated and therefore, we still expect a low single digit asset growth for this fiscal year. This is consistent with our earlier disclosures this year. Our year-to-date asset growth of five percent has been primarily funded by retail deposits, which have also grown five percent or two hundred and thirty eight million dollars, while our dependence on wholesale deposits remains low at only two percent of our total deposits. 08

41 Our total capital continues to grow and remains at strong levels. Our tangible book value per share has increased by seven point seven percent since the beginning of the year. Our current twenty million dollars share repurchase plan remains active and to date under this plan through September thirty, twenty twenty one, we've repurchased nine hundred and five thousand shares of our common stock at an average price of eleven point two five dollars per share or an eleven percent discount to our September thirty tangible book value of twelve point five nine dollars per share. 09

17 As you may have seen in our press release yesterday, our Board of Directors approved a fourth quarter cash dividend of zero point one two per common share. The dividend will be payable on November fifteenth to shareholders of record as of November five. 09

30 Our third quarter record net earnings and strong financial performance have only been attainable with the dedication and hard work of our staff. I would once again like to thank our employees who have continually risen to the occasion in serving our customers well. 09

44 And with that, I will now pass the presentation to Laura for a few added financial details pertaining to the third quarter and our near-term outlook.

09

52 Thank you. As Simone indicated, our net interest margin grew by sixteen basis points during the third quarter, predominantly due to the cost of our interest bearing deposits declining by twenty basis points to fifty four basis points during the period. This reduction in the cost of our deposits is expected to slow significantly during the fourth quarter for two main reasons. 10

14 First, only four hundred and twenty four million dollars of our term deposits with a current weighted average interest rate of at thirty one basis points will mature during this period. This level of maturities is less than half of the level of one billion dollar of term deposits that repriced during the third quarter of this year. Additionally, the term deposits that matured during the linked quarter carried a weighted average interest rate that was twenty seven basis points greater than that of the rate attached to our fourth quarter's maturing term deposit. 10

46 Deposits I've given you before year end should yield a small benefit as during September, the weighted average rate on our new and renewing CDs was forty six basis points or thirty five basis points less than the rate on maturing accounts. The spot rate on our retail deposit portfolio with fifty basis points at September thirty. 11

07 With regards to our loan book, the rate on the loan portfolio continues to decrease monthly as new loan volume is added at rates lower than the portfolio rate and the rate on loan payoffs exceeds the portfolio rates. During the third quarter, the weighted average rate of new loan originations was three point three two percent while the weighted average interest rate on loan payoffs was three point eight eight percent. At the end of the third quarter, the spot rate on the loan portfolio was three point seven three percent. 11

37 As Simone noted earlier, new loan rates continue to be under pressure and we expect that we will need to be more competitive in the upcoming periods to attract sufficient volume to offset portfolio run off. Although loan yields during the fourth quarter will continue to benefit somewhat from the five hundred million dollars of other money interest rate swaps that matured during August of this year. 11

58 Accelerated recognition of deferred loan costs associated with high prepayment speeds will continue to depress return. Given these various and closing deposit and loan portfolio components, our expectation is that our fourth quarter net interest margin will continue to improve albeit to a much lesser extent than in prior quarter at a measure of perhaps three to four basis points over the third quarter. 12

24 Lastly, I'll note that our total net non-interest expense for the fourth quarter is expected to range between fifteen point five million dollars and sixteen point five million dollars. Similar to the quarter ended September thirty, cost associated with loan origination volume is often the largest variable giving rise to comparable period increases or decreases. 12

45 Given that our loan pipeline at the end of the third quarter was three hundred and thirty seven million dollars as compared to four hundred and seventy two million dollars at the end of the linked quarter, capitalized salaries will likely decline, and I would expect our non-interest expense to be somewhat higher in the fourth quarter than in the third quarter of this year. 13

04 This concludes our prepared remarks. And at this time, we will ask Jeff to open the lines for questions.

13

31 [Operators Instructions] Your first question comes from the line of Gary Tenner from DA Davidson. Your line is open.

13

36 Good morning.

13

38 Good morning, Gary.

13

41 A couple of questions -- first question I had is just in terms of the benefit in the fourth quarter of the swaps, you mentioned, Laura, your expectation for the margin overall, what would be all else equal the kind of full quarter benefit just from that August maturity that we should be thinking about for the quarter?

13

59 Gary, I didn't look at that specifically, so I don't have a number to give to you.

14

07 Okay. Okay. And then secondly, you actually described -- your comments with some thoughts on non-interest expenses for the fourth quarter. As you're looking at twenty twenty two, all else equal in terms of the deferred comp kind of volatility on production, any impact from upward pressure on wages, just generally everything -- we're certainly hear more from banks in terms of pressure on labor and wages and maybe a larger than typical increase on that line item in twenty twenty two. So I'm just wondering what your thoughts are on that topic.

14

43 I do think like others in the industry that we will see some wage pressure our turnover is on average, higher than in prior periods. But again, we are pretty good at managing our overall cost. So we also will look to spread our workload among our existing employees.

15

08 And as I also mentioned in my comments, Gary. We are intending to continue to look at technology to help us continue improving our efficiency as we go forward. And that's not meant to replace employees today I mean we have a great employee base and we are not looking at technology to replace them, but it's to help us maybe not need to hire additional as many additional employees going forward.

15

34 Yes. We might otherwise need to hire. Yes. Any other questions today.

15

47 There are no more questions. Turning the call back to Simone Lagomarsino for closing remarks.

15

53 Thank you, Jeff, this concludes our conference call. Thank you all very much for participating.

16

01 That completes, our call today. Recorded copy of the call will be available on the company's website. Thank you for joining us.