Use these links to rapidly review the document
Table of Contents
INDEX TO FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on December 5, 2017

Registration No. 333-221455


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



PRE-EFFECTIVE AMENDMENT NO. 2
TO

FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933



Luther Burbank Corporation
(Exact name of registrant as specified in its charter)



California
(State or other jurisdiction of
incorporation or organization)

  6022
(Primary Standard Industrial
Classification Code Number)
  68-0270948
(I.R.S. Employer
Identification Number)

520 Third Street, Fourth Floor
Santa Rosa, California 95401
(844) 446-8201
(Address, including ZIP Code and Telephone Number, including Area Code, of Registrant's Principal Executive Offices)

John G. Biggs
President and Chief Executive Officer
Luther Burbank Corporation
520 Third Street, Fourth Floor
Santa Rosa, California 95401
(844) 446-8201
(Name, Address, including ZIP Code and Telephone Number, including Area Code, of Agent for Service)



    With copies to:    
Noel M. Gruber
Buckley Sandler LLP
1250 24th Street, NW, Suite 700
Washington, DC 20037
(202) 349-8000
  Liana Prieto
Executive Vice President, General Counsel
& Corporate Secretary
Luther Burbank Corporation
1500 Rosecrans Avenue, Suite 300
Manhattan Beach, CA 90266
(844) 446-8201
  Steven B. Stokdyk
Latham & Watkins LLP
355 South Grand Avenue, Suite 100
Los Angeles, California 90071
(213) 485-1234



Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated 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 12b2 of the Exchange Act. (Check one):

Large accelerated filer   o       Accelerated filer   o
Non-accelerated filer   ý   (Do not check if a smaller reporting company)   Smaller reporting company   o
            Emerging growth company   ý

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 7(a)(2)(B) of the Securities Act. o

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities or accept your offer to buy any of them until the registration statement filed with the Securities and Exchange Commission is declared effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 5, 2017

PRELIMINARY PROSPECTUS

LOGO

11,350,000 Shares

Common Stock

This is the initial public offering of shares of common stock of Luther Burbank Corporation, the bank holding company for Luther Burbank Savings, our principal subsidiary and a California chartered bank.

We are offering 11,350,000 shares of our common stock. Prior to this offering, there has been no public market for our common stock. We currently expect the initial public offering price per share of our common stock to be between $10.50 and $12.50. We have received approval to list the common stock on the NASDAQ Global Select Market under the symbol "LBC."

In connection with the termination of our status as an S Corporation, we intend to use a portion of the net proceeds to us from the offering to fund a cash distribution to our existing shareholders, immediately after the closing of this offering, in the amount of $40.0 million. The distribution is intended to be non-taxable to our existing shareholders and represents a substantial portion of our S Corporation earnings that have been, or will be, taxed to our existing shareholders, but not previously distributed to them. See "Use of Proceeds."

We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 and, as a result, are subject to reduced public company disclosure standards. See "Implications of Being an Emerging Growth Company."



The underwriters have an option to purchase up to an additional 1,702,500 shares of our common stock at the initial public offering price less the underwriting discount, within 30 days of the date of this prospectus. See "Underwriting."

Investing in our common stock involves risks. See "Risk Factors," beginning at page 27, to read about factors you should consider before investing in our common stock.

    Per Share     Total
 

Initial public offering price

  $     $    

Underwriting discounts and commissions

  $     $    

Proceeds before expenses

  $     $    



Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

These securities are not deposits, savings accounts or other obligations of any bank or savings association and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency and are subject to investment risks, including the possible loss of the entire amount you invest.



The underwriters expect to deliver the shares of our common stock to purchasers on or about                    , 2017, subject to customary closing conditions.

Joint Bookrunners

Keefe, Bruyette & Woods
A Stifel Company

 

 

 

 

Sandler O'Neill + Partners, L.P.

Lead Manager

Piper Jaffray

Co-Manager

D.A. Davidson & Co.

The date of this Prospectus is                    , 2017.


Table of Contents

GRAPHIC


Table of Contents


Table of Contents

ABOUT THIS PROSPECTUS

  i

S CORPORATION STATUS

  i

INDUSTRY AND MARKET DATA

  ii

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

  ii

PROSPECTUS SUMMARY

  1

THE OFFERING

  13

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

  17

UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS

  22

RISK FACTORS

  27

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

  55

USE OF PROCEEDS

  57

CAPITALIZATION

  58

DILUTION

  60

MARKET FOR COMMON STOCK AND DIVIDEND POLICY

  61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  64

BUSINESS

  114

SUPERVISION AND REGULATION

  126

MANAGEMENT

  137

EXECUTIVE COMPENSATION

  143

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

  153

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  154

DESCRIPTION OF OUR CAPITAL STOCK

  156

SHARES ELIGIBLE FOR FUTURE SALE

  160

UNDERWRITING

  162

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

  168

LEGAL MATTERS

  172

EXPERTS

  172

WHERE YOU CAN FIND MORE INFORMATION

  173

INDEX TO FINANCIAL STATEMENTS

  F-1

Table of Contents


ABOUT THIS PROSPECTUS

In this prospectus, "we," "our," "us," "Luther Burbank Corporation" or "the Company" refers to Luther Burbank Corporation, a California corporation, and our consolidated subsidiaries, including Luther Burbank Savings, a California banking corporation, unless the context indicates that we refer only to the parent company, Luther Burbank Corporation. In this prospectus, "Bank" or "LBS" refers to Luther Burbank Savings, our banking subsidiary.

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with different or additional information. Neither we nor the underwriters take responsibility for, or can provide any assurance as to the reliability of, any different or additional information that others may give you. If anyone provides you with different or inconsistent information, you should not rely on it.

We are offering to sell shares of our common stock, and intend to seek offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and growth prospects may have changed since that date. Information contained on, or accessible through, our website is not part of this prospectus.

Unless otherwise indicated or the context requires, all information in this prospectus (i) assumes the underwriters' option to purchase additional shares of our common stock to cover over-allotments is not exercised and (ii) reflects the 200-for-1 stock split that we effectuated in April 2017.

You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.

Our and our Bank's logos and other trademarks referred to and included in this prospectus belong to us. Solely for convenience, we refer to our trademarks in this prospectus without the "®", "SM" or the "™" symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this prospectus, if any, are the property of their respective owners, although for presentation convenience we may not use the "®", "SM" or the "™" symbols to identify such trademarks.


S CORPORATION STATUS

Since 2002, we have elected to be taxed for U.S. federal income tax purposes as an "S Corporation" under the provisions of Sections 1361 through 1379 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, our earnings have not been subject to, and we have not paid, U.S. federal income tax, and no provision or liability for U.S. federal income tax has been included in our consolidated financial statements. Instead, for U.S. federal income tax purposes our taxable income is "passed through" to our shareholders. Unless specifically noted otherwise, no amount of our consolidated net income or our earnings per share presented in this prospectus, including in our consolidated financial statements and the accompanying notes appearing in this prospectus, reflects any provision for or accrual of any expense for U.S. federal income tax liability for any period presented. In connection with this offering, our status as an S Corporation will terminate. Thereafter, our taxable earnings will be subject to U.S. federal income tax and we will bear the liability for those taxes.

i


Table of Contents


INDUSTRY AND MARKET DATA

This prospectus includes statistical and other industry and market data that we obtained from government reports and other third party sources. Our internal data, estimates and forecasts are based on information obtained from government reports, trade and business organizations and other contacts in the markets in which we operate and our management's understanding of industry conditions. Although we believe that this information (including the industry publications and third party research, surveys and studies) is accurate and reliable, we have not independently verified such information. In addition, estimates, forecasts and assumptions are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the "Risk Factors" section and elsewhere in this prospectus. Finally, forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.


IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of other significant requirements that are otherwise generally applicable to other public companies. Among other factors, as an emerging growth company:

We may take advantage of these provisions for up to five years unless we earlier cease to qualify as an emerging growth company. We will cease to qualify as an emerging growth company if we have more than $1.07 billion in annual gross revenues, as that amount may be periodically adjusted by the Securities and Exchange Commission, or SEC, we become a "large accelerated filer," including having more than $700.0 million in market value of our common stock held by non-affiliates, or we issue more than $1.0 billion of non-convertible debt in a three-year period. We have elected to adopt the reduced disclosure requirements described above regarding the number of periods for which we are providing audited financial statements and selected financial data, and our executive compensation arrangements for purposes of the registration statement of which this prospectus is a part. In addition, we expect to take advantage of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our shareholders.

ii


Table of Contents

Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

The JOBS Act exempts emerging growth companies from compliance with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act of 1933, or Securities Act, registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, or Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of this extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make our financial statements not comparable with those of a public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used. We cannot predict if investors will find our common stock less attractive as a result of our election to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

iii


Table of Contents

 


PROSPECTUS SUMMARY

This summary highlights selected information contained in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors," "Cautionary Note Regarding Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections, and our historical financial statements and the accompanying notes included in this prospectus.

Company Overview

We are Luther Burbank Corporation, a bank holding company headquartered in Santa Rosa, Sonoma County, California. We operate primarily through our wholly owned subsidiary, Luther Burbank Savings, a California banking corporation. Our mission is to improve your financial future – whether you are a customer, employee or shareholder. Our goal is to enhance our franchise and shareholder value by achieving significant growth in assets and profitability while maintaining strong asset quality and exemplary customer service.

We aim to:

    Continue to grow our premier financial institution by providing real estate loans to investors and owners of residential real estate and a wide range of deposit and cash management products to business and retail deposit customers;
    Continue our more than 34 year history of profitability and commitment to strong credit quality;
    Achieve deeper penetration of our lending and deposit gathering operations in our attractive West Coast markets; and
    Expand into contiguous markets on the West Coast to complete our Seattle to San Diego footprint.

We specialize in real estate secured lending in attractive metropolitan areas along the West Coast. We have developed special expertise in multifamily residential lending and in jumbo, nonconforming single family residential lending.

The Bank was chartered in 1983 in Santa Rosa, California as a California savings and loan association, and converted to a federal savings association charter in 1998. The Bank converted to a California commercial bank charter in 2016. The Company was formed as the holding company for the Bank in 1991. Our success is built upon our strategic development of strong relationships with depositors, who view the Bank as a sound, secure and trustworthy depository for their savings; and with commercial real estate investors, primarily in multifamily residential real estate, who recognize our expertise, understanding of the dynamics of the multifamily industry, and clear and comprehensive credit underwriting practices.

Our only equity raise prior to the current offering was our initial $2.0 million capital raise in connection with the organization of the Bank more than 34 years ago. The Bank has consecutively recorded profits since its second quarter of operations and, as of September 30, 2017, has total assets of approximately $5.3 billion, with over $433 million of stockholders' equity, of which approximately $431 million has been provided by retained earnings. We are raising additional capital in this offering to support our continued growth, to establish our ability to obtain additional capital in the future, and to provide liquidity to our existing shareholders.

We have invested heavily in personnel and infrastructure over the past four years, and are poised to continue to grow our deposit and lending operations in a cost efficient manner, with an effective risk

1


Table of Contents

management structure and conservative credit culture, and in compliance with applicable law and regulations.

Our industry expertise and reputation, personalized service, scalable model, operational efficiency, and strong risk management processes, combined with dynamic markets and continued strong demand for our product offerings, have enabled us to achieve asset growth at a compound annual growth rate of 12.9% from December 31, 2014 to December 31, 2016.

Our multifamily residential lending is predominantly focused on smaller, existing residential properties, averaging 15 units per property, with stabilized rent rolls, and catering predominantly to low and middle income renters who are unable to afford to purchase a single family residence or condominium unit in the high cost, high demand, low supply residential markets of the West Coast. At September 30, 2017, our average multifamily loan is approximately $1.4 million with a weighted average loan to value ratio of 56% and a weighted average debt service coverage ratio of 1.57. Our borrowers are typically professional investors with multiple properties, focused on investing in stabilized, cash-flowing assets as a means of building equity, current income and wealth. Our multifamily real estate loans are primarily originated by our bankers, although we also originate through brokers, depending on the needs and characteristics of the individual market. We also make other commercial real estate loans, focusing on industrial, office and retail facilities. We believe that our focus on stable, income producing properties and our existing customer profile will successfully translate into expanded lending on nonresidential income producing commercial real estate.

Our single family residential lending is focused on permanent financing on single family residential properties located in our market areas, both owner-occupied and investor owned. The majority of our originations are for purchase transactions and are sourced from third party mortgage brokers. At September 30, 2017, our single family loans had an average loan balance of $840 thousand, a weighted average loan to value of 65% and a weighted average credit score at origination/refreshed of 746. Our platform and niche lending offerings are designed to meet the needs of the high demand, low supply residential markets in high cost market areas, and we are focused on delivering consistent certainty of execution. We also offer innovative mortgage products, including a 30-year fixed rate first mortgage and a forgivable second mortgage, to low- and moderate-income borrowers designed to make home ownership possible and affordable even in our high cost markets.

GRAPHIC

2


Table of Contents

We expect that we will maintain a level of concentration in multifamily loans substantially in excess of the 300% of risk-based capital guideline established by the federal banking regulators, beyond which banks may be subject to greater regulatory scrutiny, enhanced risk management and higher capital expectations. We are comfortable with this concentration due to:

    the nature of well underwritten multifamily loans, which are classified as 50% risk-weighted assets by the regulators, reflecting the regulatory and industry perception that these loans are safer than loans secured by other commercial real estate;
    the excellent credit profile of our multifamily loans, in terms of loan to value and debt service coverage ratios;
    the stringent underwriting parameters of our loan policy;
    our focus on financing properties with experienced owners and stabilized rent rolls, rather than new development; and
    our rigorous credit review and monitoring practices.

Controlled Company.    Trusts established for the benefit of the Chairman of our board of directors, Victor S. Trione, our former director and Secretary, Mark Trione and his wife, and each of the adult children of Messrs. Trione, will control more than 50% of the outstanding shares of common stock following the offering. So long as the Trione family trusts continue to own a majority of our common stock, they will have the ability, if they vote in the same manner, to determine the outcome of all matters put to a shareholder vote, including the election of directors, the approval of mergers, material acquisitions and dispositions and other extraordinary transactions, and amendments to our articles of incorporation, bylaws and other corporate governance documents. In any of these matters, the interests of the Trione family trusts may differ from or conflict with the interests of our other shareholders. Moreover, this concentration of stock ownership may also adversely affect the trading price of our common stock, if investors perceive disadvantages in owning stock of a company with a controlling family.

Additionally, as a result of the greater than 50% ownership by the Trione family trusts, we will be a "controlled company" for purposes of the NASDAQ corporate governance standards. As a controlled company, we may elect not to comply with certain corporate governance requirements, including the requirement:

    that a majority of our board of directors consists of "independent directors," as defined under NASDAQ rules;
    that we have a nominating and corporate governance committee that is composed entirely of independent directors;
    that we have a compensation committee that is composed entirely of independent directors; and
    that we conduct annual performance evaluations of the nominating and corporate governance committee and compensation committee.

Although we currently intend to comply with these requirements, we may avail ourselves of certain of these exemptions for as long as we remain a "controlled company."

Our Markets

Our operations are currently concentrated in demographically desirable and fast growing major metropolitan areas on the West Coast. We currently operate in California, Washington and Oregon from our nine branches in Northern and Southern California and nine lending offices in California, Seattle, Washington, and, since November 1, 2017, Portland, Oregon. We are most active in the following metropolitan areas: Santa Rosa (Sonoma County), Los Angeles, San Francisco, San Jose, San Diego, and

3


Table of Contents

Seattle. We are seeking to more deeply penetrate these core markets and to increase our presence in contiguous metropolitan markets that share key demographic characteristics with our existing markets, solidifying our Seattle to San Diego footprint. Each of our markets have large and growing populations, strong employment, a robust small- and mid-sized business community, and a large number of high net worth individuals and entrepreneurs. As reflected in the following tables, these markets are characterized by strong historic and projected population and household income growth, as well as strong employment and economic statistics.

GRAPHIC

In addition to these traditional indicators of economic strength, there are a number of other factors, related to home affordability and the availability of housing, that make our markets attractive for a lender specializing in affordable rental housing and jumbo single family residential loans.

The following table reflects the changes in the S&P Case-Schiller Home Price Index in the major cities of our markets as compared to a national 20 city composite index. The S&P Case-Schiller Home Price Index is intended to capture changes in the price of existing single family homes over time.

4


Table of Contents

GRAPHIC

The following table reflects the makeup of the housing stock and vacancies in major cities in our markets.

GRAPHIC

5


Table of Contents

 

Competitive Strengths

    History of profitability. We opened in 1983, and have recorded consecutive quarterly profits since our second quarter of operations. We have not only survived but prospered through numerous economic cycles, demonstrating sustained profitability and growth. During the two years ended December 31, 2016, earnings increased at a compound annual growth rate of 22.7%. This history of earnings growth coincides with a trend of significant organic balance sheet growth during the entire period, with total assets increasing at a compound annual growth rate of 12.9% from December 31, 2014 to December 31, 2016.

    Well-positioned in strategic markets. We operate in markets with favorable demographics and strong economic growth. Our top markets are West Coast gateway cities in supply-constrained markets with strong job growth and limited affordable housing. The high cost of living and high barriers to entry make these markets attractive targets for affordable- and workforce-housing investments and nonconforming single family lending.

GRAPHIC

 

GRAPHIC

    Demonstrated organic growth. We have consistently grown by knowing our customers and developing personalized relationships with them. From December 31, 2014 to December 31, 2016, our loans increased at a compound average growth rate of 13.9%, and our deposits increased at a compound annual growth rate of 2.9%.

    In multifamily lending, our customers are professional real estate investors focused on investing in stabilized, cash-flowing assets as a means of building equity, current income and wealth. Since December 31, 2014, 63% of our multifamily production was generated by our retail loan officers. Multifamily loan originations have increased at a compound annual growth rate of 92.8% over the two years ended December 31, 2016.

    Our single family lending is a well-established operation serving customers throughout our markets. Our customers are typically financing the purchase of a primary residence, second home or vacation property or an investment property. Our single family residential loans are primarily sourced through wholesale brokers. Single family

6


Table of Contents

          loan originations have increased at a compound annual growth rate of 23.6% over the two years ended December 31, 2016.

          GRAPHIC

      Our branches provide us with a strong base of stable retail deposits, built on a high level of service, competitive rates and our reputation for strength and security. Our branch network is comprised of nine efficient branches, with large balances and market shares in key metropolitan locations in our markets. At September 30, 2017, our average deposit account balance exceeded $100 thousand. From December 31, 2014 through December 31, 2016, our rate of retention, by balance, on maturing certificates of deposit has averaged 83.4%.

GRAPHIC

    Strong management team and robust infrastructure to support growth. Our executive management team is led by John G. Biggs, our President and Chief Executive Officer, whose banking career spans over 30 years. Over the last several years, Mr. Biggs has enhanced the management team by recruiting financial services professionals who have

7


Table of Contents

      demonstrated their ability to drive organic growth, improve operating efficiencies, and establish a robust risk management framework. Our new executives, each of whom comes with many years of experience in our industry, complement the skills and capabilities of our tenured executives. Over the last four years, we have invested heavily in infrastructure, and are poised to continue to grow our deposit and lending operations in a cost efficient manner, with an effective risk management structure and conservative credit culture, and in compliance with applicable law and regulation.

      Our management team is supported by a dedicated board of directors comprised of individuals with significant experience in a broad range of disciplines related to the sound operation of the Bank, including banking, bank consulting, business, finance, accounting and corporate governance matters.

    Strong asset quality. Credit quality remains our most important focus. At September 30, 2017, our nonperforming assets (non-accrual loans, accruing loans 90 days or more past due and real estate owned, or REO) as a percentage of total assets was 0.11%. Our low level of nonperforming assets is a result of the extensive expertise among our lending and credit administration staff and management team, and our strict, quality oriented underwriting and credit monitoring processes. We are vigilant in promptly responding to adverse economic conditions and to specific problem credits, as well as working to minimize losses. We have only foreclosed on one property since January 1, 2015.

GRAPHIC

    Efficient operations. We have historically operated efficiently, including by maintaining a small network of high deposit balance branches. During recent years, we made significant infrastructure, technology and personnel investments, which have resulted in our efficiency ratio improving to 48.5% for the nine months ended September 30, 2017, as compared to 67.9% for the year ended December 31, 2015. We believe we are positioned to continue leveraging these investments and to further improve our efficiency ratio in the near term.

8


Table of Contents

GRAPHIC

Business Strategies

    Continued organic lending growth in our existing markets and in new strategically targeted markets. Our primary focus is to grow our client base within our strategic markets and to expand the penetration of our existing multifamily and single family lending activities into additional contiguous markets on the West Coast which have strong job growth, strong economic growth and limited affordable housing. As part of these efforts, we recently extended our multifamily and our single family residential lending operations to Portland, Oregon. We intend to incorporate all major metropolitan markets between our existing markets, resulting in a contiguous footprint from Seattle to San Diego. The high cost of living and high barriers to entry make these markets attractive targets for investments in affordable rental housing for low and middle income tenants. Robust job markets, strong single family residential demand, high average housing cost, and concentrations of professional, highly skilled and high income workers, entrepreneurs and other high net worth individuals make our markets ideal for our portfolio single family residential lending activities.

          We believe we have a competitive advantage over larger national financial institutions, which lack our level of personalized service, and over smaller community banks, which lack our product and market expertise. We intend to capture additional market share by deepening our relationships with current customers and supporting our bankers in their pursuit of new customers in our target markets. We believe that our stable, income producing property focus and our existing customer profile lends itself to expanded lending in our existing markets.

    Deepen client relationships and grow our deposit base. We provide a high level of customer service to our depositors. Our historical focus for our deposit production activities was exclusively on individual savings deposits from high net worth, primarily self-employed, individuals, entrepreneurs and professionals, and we did not emphasize

9


Table of Contents

      transactional accounts. This strategy has produced a stable customer base. At September 30, 2017, our average deposit account balance exceeded $100 thousand. From December 31, 2014 through December 31, 2016, our rate of retention, by balance, on maturing certificates of deposit has averaged 83.4%. We have recently expanded our focus, and invested in personnel, business and compliance processes and technology that enable us to acquire, and efficiently and effectively serve, a wide array of business deposit accounts, and increase outreach in high-density, small to medium sized business markets where the Bank already operates while continuing to provide the level of customer service for which we are known to our consumer depositors. We also provide comprehensive online and mobile banking products to our consumer depositors to complement our branch network.

      We believe that our current customer base contains significant, untapped cross-selling opportunities. We plan to continue to grow our non-brokered, consumer and business deposits by:

      cross-selling business deposit relationships to our existing consumer customers who are business owners;

      cross-selling business and consumer accounts to our multifamily and single family loan borrowers;

      developing limited trust and fiduciary services;

      obtaining new individual and business customers, including specialty deposit customers, such as escrow and title company depositors and 1031 exchange companies; and

      establishing new branches in San Diego, California and Seattle, Washington.

      We will also seek to cross-sell existing customers, and solicit new ones, for additional lending opportunities in our markets, and to develop niche verticals, where our credit underwriting expertise and efficient operations can yield an attractive risk-adjusted return. Our cross-selling efforts to existing customers will be strategically targeted, based on our in depth analyses of our customers' overall financial profile, cash flows, financial resources and banking requirements, to drive traffic to branches. Our cross-selling efforts are in their very early stages, and we believe there is a significant capacity to expand deposit and lending relationships on this basis.

    Disciplined credit quality and robust risk management. We are committed to being a high performing organization, and as we continue to grow our loan portfolio, we will do so in a disciplined manner. Risk management is a core competency of our business, demonstrated by the strong credit performance of our portfolio. We have implemented comprehensive policies and procedures for credit underwriting and monitoring our loan portfolio, internal risk management, managing our interest rate risk, compliance, reputation, legal risk and other risks inherent in our operations. The sound credit practices followed by our bankers allow credit decisions to be made efficiently and consistently. We attribute our success to a strong credit culture, the continuous evaluation of risk and return and the strict separation between business development and credit decision making, coupled with a robust risk management framework. Our focus on credit and risk management has enabled us to grow our balance sheet successfully while maintaining strong asset quality.

10


Table of Contents

    Disciplined cost management. We intend to continue to foster a culture of efficiency through hands-on management, prudent expense management, and a strategically small number of branches. We believe that we can support continued growth in assets, customers and our geographic footprint without significant additional investment in our infrastructure and technology, or significant expansion of our personnel. We believe that our existing network of branches and loan production offices, as well as nonbranch and online customer and deposit development activities, have significant potential to continue to grow loan and deposit balances. While we intend to continue to explore opportunities for establishing additional strategically located branches in markets which present significant opportunity for multifamily and commercial real estate lending, single family residential lending, and high net worth consumer and business banking relationships, including potential branches in San Diego, California and Seattle, Washington, we will continue to be highly selective in our branching decisions.

Agreement with Our Existing Shareholders

We have historically been treated as an S Corporation for U.S. federal income tax purposes, as a result of which, our existing shareholders have been taxed on our income directly. We have historically made tax distributions to our shareholders that were generally intended to equal the amount of tax our shareholders were required to pay with respect to our income. At September 30, 2017, the balance of our federal accumulated adjustments account for federal income tax purposes was $343.0 million, an amount substantially higher than the planned distributions of $40.0 million to our shareholders. In connection with this offering, we will enter into an S Corporation Termination and Tax Sharing Agreement with our existing shareholders. As a result, our S Corporation status will terminate on the earlier of the date on which consents to the revocation of our S Corporation election are filed by holders of more than one-half of the outstanding shares of common stock and the day on which we issue shares in the offering. We anticipate that consents to terminate the S Corporation election will be obtained in the fourth quarter of 2017 shortly before the consummation of this offering. It is our intention to cause the S Corporation election to be terminated, in a manner which will enable us to close the S Corporation books and commence C Corporation status effective as of the date of termination, which is expected to be December 1, 2017. Thereafter, we will be subject to federal income taxes, and increased state income taxes. The agreement also provides for the cash distributions to be made to our existing shareholders.

In the event of an adjustment to our reported taxable income for periods prior to termination of our S Corporation status, it is possible that our existing shareholders would be liable for additional income taxes for those prior periods. Pursuant to the tax sharing agreement, upon our filing any tax return (amended or otherwise), in the event of any restatement of our taxable income or pursuant to a determination by, or a settlement with, a taxing authority, for any period during which we were an S Corporation, we may be required to make a payment to our existing shareholders who execute the agreement in an amount equal to such shareholders' incremental tax liability, which amount may be material. In addition, we will indemnify such shareholders with respect to unpaid income tax liabilities to the extent that such unpaid income tax liabilities are attributable to an adjustment to our taxable income for any period after our S Corporation status terminates. In both cases the amount of the payment will be based on the maximum combined federal and state income tax rates for the relevant period for taxpayers who are married and filing jointly. We will also indemnify such shareholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. Our existing shareholders who execute the agreement will indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in the shareholder's taxable income for any for tax period and a corresponding increase in our taxable income for any period. For a discussion of risks related to the termination of our S Corporation election, see "Risk Factors."

11


Table of Contents

Recent Developments

Effects of the North Bay Fires

The North Bay Fires, which erupted on October 8, 2017, caused extensive damage in Sonoma County and neighboring counties. While the North Bay Fires were most active, we worked to ensure the safety of our employees and to provide our customers with access to needed financial services. As of December 4, 2017, we do not anticipate that the North Bay Fires will result in any significant losses to us.

The operational impact of the fires to our Santa Rosa headquarters and branch was minimal. We remained open throughout the disaster. Neither of our Santa Rosa locations suffered any fire-related damage. Our technology infrastructure was not impacted by the North Bay Fires, as all systems remained operational without interruption. Our business continuity plan worked as intended and will be enhanced based on what we learned as a result of this incident.

Since the first business day after the fires began we have been carefully monitoring the impact of the North Bay Fires on our customers and our operations. We have reached out to all borrowers with loans secured by property in the potentially impacted area to assess their situation. As of December 4, 2017, we have eight loans secured by properties within the fire zones with outstanding balances totaling approximately $6.6 million. We have confirmed that four of these properties have suffered no damage to the collateral, two of these properties suffered some damage, and two of these properties have suffered a total loss. Based on our records and communications with borrowers, we believe that all of these properties are fully insured and that we will not suffer any significant losses in connection with these loans. We also continue to monitor twenty loans secured by properties in the areas adjacent to the fire zones with outstanding balances of approximately $21.4 million. We have confirmed that eighteen of these properties suffered no damage and two suffered some damage. As with those properties located within the fire zones, we believe that all of these properties are fully insured and that we will not suffer any significant losses in connection with these loans.

We have not experienced unusual declines in deposits, although it is possible that we may experience elevated withdrawals of deposits as customers seek to repair or rebuild their properties in advance of receiving insurance proceeds. We do not anticipates any adverse issues with our ability to maintain adequate liquidity or to fund additional loans.

While we do not anticipate that the North Bay Fires will have significant long-term adverse effects on our business, financial condition or operations, the impact on the Sonoma County community as a whole will be large. It is estimated that the seven wildfires combined caused at least 40 deaths, destroyed over 8,500 structures, burned through nearly 400 square miles, and prompted the evacuation of approximately 100,000 residents. In order to fully participate in the rebuilding efforts within our community, we are establishing the Luther Burbank Corporation Foundation ("Foundation"), a not-for-profit private foundation. Our intention is that the Foundation will be a leader in the efforts to rebuild Sonoma County and participate in other community development and economic revitalization efforts in Sonoma County and our other markets.



Our principal executive office is located at 520 Third Street, 4th floor, Santa Rosa, CA 95401, and our telephone number is (844) 446-8201. Through the Bank, we maintain an Internet website at www.lutherburbanksavings.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.

12


Table of Contents

 


THE OFFERING

The following summary of the offering contains basic information about the offering and our common stock and is not intended to be complete. It does not contain all the information that may be important to you. For a more complete understanding of our common stock, please refer to "Description of Our Capital Stock."

Issuer   Luther Burbank Corporation

Common stock offered

 

11,350,000 shares of common stock

 

 

13,052,500 shares including the underwriters' over-allotment option

Shares outstanding after the offering (1)

 

53,350,000 shares

 

 

55,052,500 shares if the underwriters' over-allotment option is exercised in full

Price per share

 

We currently expect the initial public offering price per share of our common stock to be between $10.50 and $12.50.

Use of Proceeds

 

Assuming an initial public offering price of $11.50 per share (the midpoint of the range set forth on the cover page of this prospectus), we estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses, will be approximately $120.0 million, or approximately $138.3 million if the underwriters' over-allotment option is exercised in full. Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) our net proceeds, after deducting underwriting discounts and commissions and the estimated offering expenses, by $10.6 million (assuming no exercise of the underwriters' over-allotment option). Each increase (decrease) of 1.0 million in the number shares offered by us would increase (decrease) our total shareholders' equity and total capitalization by $10.8 million based on the midpoint of the price range set forth on the cover page of this prospectus. Each $1 million increase (decrease) in the amount of the dividend would decrease (increase) our net proceeds by a similar amount.

13


Table of Contents

    We intend to use the net proceeds to us from this offering (i) to fund a cash distribution to our existing shareholders immediately after the closing of this offering in the amount of $40.0 million; and (ii) to use the remainder of the net proceeds, which we estimate to be approximately $80.0 million (after deducting underwriting discounts and the estimated offering expenses) if the underwriters' over-allotment option is not exercised, or $98.3 million (after deducting underwriting discounts and the estimated offering expenses) if the underwriters' over-allotment option is exercised in full, to increase the capital of the Bank in order to support our growth strategies, for working capital and for other general corporate purposes.

 

 

Our management will have broad discretion in the application of the net proceeds from this offering to us, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use at the Bank to fund loans or investment securities, we expect that we would use all or a portion of the net proceeds to pay off FHLB advances, which can be reborrowed, if necessary, to fund loan growth.

Distributions to Our Existing Shareholders

 

We intend to use a portion of the net proceeds to us from this offering to fund a cash distribution to our existing shareholders immediately after the closing of this offering in the amount of $40.0 million, which is intended to be non-taxable to our existing shareholders and represents a significant portion of our S Corporation earnings that have been taxed to our existing shareholders, but not distributed to them.

 

 

We also intend to make a distribution to our existing shareholders of $7.1 million prior to the completion of this offering to fund the payment of the estimated taxes that will be "passed through" to them by virtue of our status as an S Corporation.

 

 

Purchasers of our common stock in this offering will not be entitled to receive any portion of these distributions.

14


Table of Contents

Dividend Policy   The declaration of all future dividends, if any, will be at the discretion of our board of directors and will depend on many factors, including the financial condition, earnings and liquidity requirements applicable to us and the Bank, regulatory constraints, and any other factors that our board of directors deems relevant in making such a determination. Our ability to pay dividends is subject to restrictions under applicable banking laws and regulations. In addition, dividends from the Bank are the principal source of funds for the payment of dividends on our stock. The Bank is subject to certain restrictions under banking laws and regulations that may limit its ability to pay dividends to us. Therefore, there can be no assurance that we will pay any dividends to holders of our stock, or as to the amount of any such dividends.

 

 

Subject to the discretion of our board of directors and the considerations discussed under "Market for Common Stock and Dividend Policy," commencing in the second quarter of 2018, we expect to establish a regular quarterly cash dividend on our common stock of $0.0575 per share. We also expect to declare a dividend payable in the first quarter of 2018 to shareholders of record as of a date following the completion of this offering, in a prorated amount based on such amount and the portion of the fourth quarter of 2017 during which we are a public company.

Exchange Listing

 

We have received approval to list our common stock on the NASDAQ Global Select Market, or NASDAQ, under the symbol "LBC."

Directed Shares Program

 

The underwriters have reserved for sale at the initial public offering price up to 7% of the shares of our common stock being offered by this prospectus for sale to our employees, executive officers, directors, business associates and related persons who have expressed an interest in purchasing our common stock in this offering. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See "Underwriting."

Risk Factors

 

Investing in our common stock involves risks. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" for a discussion of factors that you should carefully consider before making an investment decision.
(1)
Unless otherwise noted, references in this prospectus to the number of shares of our common stock outstanding after this offering are based on 42,000,000 shares of our common stock issued and outstanding as of September 30, 2017. Unless otherwise noted, these references do not include:

3,360,000 shares of common stock reserved for issuance under our Omnibus Equity and Incentive Compensation Plan, including the anticipated award upon completion of the offering of 243,479 restricted stock units having a value of approximately $2.8 million, and 385,461 shares of restricted stock having a value of approximately $4.4 million, in each case based on

15


Table of Contents

    an assumed initial offering price of $11.50 per share (the midpoint of the range set forth on the cover page of this prospectus); and

735,543.609 shares of common stock issuable pursuant to restricted stock units issued upon conversion of shares of phantom stock issued under our Phantom Stock Plan.

Except as otherwise indicated, references in this prospectus to the number of shares of our common stock outstanding after this offering do not give effect to the exercise of the underwriters' option to purchase additional shares of our common stock from us.

16


Table of Contents


SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following tables set forth (i) selected historical financial data as of and for the nine months ended September 30, 2017 and 2016 and as of and for each of the years ended December 31, 2016, 2015 and 2014, (ii) selected pro forma financial data as of and for the nine months ended September 30, 2017 and for the year ended December 31, 2016, giving effect to the transactions described in "Unaudited Pro Forma Condensed Financial Information" and (iii) selected ratios as of and for the periods indicated. The summary historical financial data as of and for the years ended December 31, 2016, 2015 and 2014, except for selected ratios, have been derived from audited financial statements. The historical consolidated financial data as of and for the nine months ended September 30, 2017 and 2016 have been derived from our unaudited interim condensed consolidated financial statements. The unaudited pro forma financial data as of and for the nine months ended September 30, 2017 and year ended December 31, 2016 is presented for informational purposes only and are not necessarily indicative of future performance. The unaudited pro forma financial data was prepared using assumptions and information existing at the time of this prospectus, which is subject to change. The historical and pro forma consolidated financial information presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, and which have not been audited. See "Non-GAAP Financial Measures."

This table should be read together with, and are qualified by reference to, the historical consolidated financial information contained in our consolidated financial statements and related notes, our interim condensed consolidated financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Unaudited Pro Forma Condensed Financial Information" included in this prospectus. The results included here and elsewhere in this prospectus are not necessarily indicative of future performance.

      As of or for the nine
months ended September 30,
    As of or for the years ended December 31,
 
(Dollars in thousands, except per share data)     2017     2017     2016     2016     2016     2015     2014
 
 
  (pro forma)

  (actual)

   
  (pro forma)

  (actual)

   
   
 
Income Statement Data                                            
Total interest income   $ 112,825   $ 129,707   $ 106,860   $ 121,940   $ 144,164   $ 127,551   $ 131,289  
Total interest expense     39,217     46,273     36,377     41,460     49,524     42,633     37,290  

Net interest income

    73,608     83,434     70,483     80,480     94,640     84,918     93,999  
Provision for (recapture of) loan losses     (4,622 )   (4,622 )   (9,079 )   (17,152 )   (12,703 )   (7,141 )   -  
Total noninterest income     9,780     5,921     4,779     11,854     7,839     6,919     3,653  
Total noninterest expense     43,322     43,322     44,143     61,242     61,242     62,339     61,931  

Income before income taxes

    44,688     50,655     40,198     48,244     53,940     36,639     35,721  
Provision for income taxes     7,518     1,691     1,355     6,945     1,819     1,247     1,118  

Net income

  $ 37,170   $ 48,964   $ 38,843   $ 41,299   $ 52,121   $ 35,392   $ 34,603  
Pre-tax, pre-provision net earnings (1)     40,066     46,033     31,119     31,092   $ 41,237   $ 29,498   $ 35,721  

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash and cash equivalents   $ 87,051   $ 87,051   $ 68,304         $ 59,208   $ 65,562   $ 145,084  
Securities held-to-maturity     6,965     6,965     7,879           7,561     9,331     6,736  
Securities available-for-sale     475,938     475,938     418,384           459,662     378,169     312,867  
Loans held-for-sale     39,011     39,011     4,398           34,340     18,086     4,980  
Loans held-for-investment (2)     4,630,926     4,630,926     4,271,472           4,440,400     3,855,503     3,472,422  

17


Table of Contents

      As of or for the nine
months ended September 30,
    As of or for the years ended December 31,  
(Dollars in thousands, except per share data)     2017     2017     2016     2016     2016     2015     2014  
 
  (pro forma)

  (actual)

   
  (pro forma)

  (actual)

   
   
 
                                             
Allowance for loan losses     (28,984 )   (28,984 )   (36,924 )         (33,298 )   (45,509 )   (52,508 )
Real estate owned     -     -     -           -     -     -  
Goodwill     3,297     3,297     3,297           3,297     3,297     3,297  
Total assets     5,329,396     5,320,429     4,826,911           5,064,557     4,362,885     3,970,159  
Retail deposits     3,500,369     3,500,369     3,196,501           3,214,557     3,121,247     3,145,774  
Wholesale deposits     363,042     363,042     92,317           119,412     -     -  

Total deposits

    3,863,411     3,863,411     3,288,818           3,333,969     3,121,247     3,145,774  
FHLB advances     734,755     807,667     929,492           1,111,886     668,311     277,734  
Junior subordinated debentures     61,857     61,857     61,857           61,857     61,857     61,857  
Senior debt     95,000     95,000     95,000           95,000     95,000     95,000  
Total liabilities     4,814,057     4,886,969     4,427,432           4,660,182     3,991,586     3,620,651  
Total stockholders' equity (3)     515,339     433,460     399,479           404,375     371,299     349,508  
Net tangible book value (1)     507,964     426,085     395,603           399,979     368,002     346,211  

Selected Per Share Data (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Earnings per common share - basic & diluted – S Corp         $ 1.17   $ 0.92         $ 1.24   $ 0.84   $ 0.82  
Earnings per common share - basic & diluted – C Corp (5)   $ 0.70   $ 0.70   $ 0.56   $ 0.77   $ 0.74   $ 0.51   $ 0.49  
Book value per common share (3)   $ 9.66   $ 10.32   $ 9.51         $ 9.63   $ 8.84   $ 8.32  
Common shares outstanding at end of period     53,350,000     42,000,000     42,000,000     53,350,000     42,000,000     42,000,000     42,000,000  
Dividends per common share   $ 1.27   $ 0.49   $ 0.29   $ 1.20   $ 0.40   $ 0.28     0.36  

Selected Financial Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net income – C Corp (5)   $ 37,170   $ 29,380   $ 23,315   $ 41,299   $ 31,285   $ 21,251   $ 20,718  
Return on average:                                            

Assets – S Corp (6) (7)

          1.19%     1.13%           1.11%     0.88%     0.91%  

Assets – C Corp (5) (6) (7)

    0.90%     0.71%     0.68%           0.67%     0.53%     0.55%  

Stockholders' equity - S Corp (6) (7)

          15.70%     13.43%           13.35%     9.85%     10.08%  

Stockholders' equity - C Corp (5) (6) (7)

    11.91%     9.42%     8.06%           8.02%     5.91%     6.03%  
Average stockholders' equity to average assets (7)     7.57%     7.57%     8.39%           8.34%     8.89%     9.05%  
Dividend payout ratio     182.41%     42.28%     31.67%     154.73%     32.23%     33.34%     44.22%  
Efficiency ratio (1)     51.95%     48.48%     58.65%     66.33%     59.76%     67.88%     63.42%  
Noninterest expense to average assets (6) (7)     1.05%     1.05%     1.28%           1.31%     1.54%     1.63%  
Net interest margin (6) (8)     1.81%     2.05%     2.06%           2.04%     2.11%     2.49%  
Yield on interest-earning assets (6)     2.77%     3.19%     3.13%           3.11%     3.17%     3.48%  
Cost of interest-bearing liabilities (6)     1.04%     1.23%     1.17%           1.17%     1.17%     1.09%  
Net interest income to average assets (6) (7)     1.79%     2.02%     2.04%           2.02%     2.10%     2.48%  
Cost of total deposits     1.03%     1.03%     0.99%           0.97%     0.97%     0.91%  
Loan to deposit ratio     120.9%     120.9%     130.0%           134.2%     124.1%     110.5%  

Asset Quality Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Nonperforming loans to loans     0.13%     0.13%     0.06%           0.06%     0.17%     0.28%  

18


Table of Contents

      As of or for the nine
months ended September 30,
    As of or for the years ended December 31,  
(Dollars in thousands, except per share data)     2017     2017     2016     2016     2016     2015     2014  
 
  (pro forma)

  (actual)

   
  (pro forma)

  (actual)

   
   
 
                                             
Nonperforming assets to total assets     0.11%     0.11%     0.05%           0.05%     0.15%     0.25%  
Net (charge-offs) recoveries to average loans (6)     0.01%     0.01%     0.02%           0.01%     0.00%     (0.08% )
Allowance for loan losses to loans held-for-investment (2)     0.63%     0.63%     0.86%           0.75%     1.18%     1.51%  

Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Leverage capital ratio (9)     10.00%     8.58%     9.57%           9.47%     10.22%     10.27%  
Common equity tier 1 capital ratio     16.26%     13.68%     15.68%           15.10%     16.35%     N/A  
Tier 1 risk-based capital ratio     18.21%     15.63%     18.05%           17.33%     19.00%     19.18%  
Total risk-based capital ratio     19.20%     16.62%     19.30%           18.58%     20.26%     20.45%  
Loan Composition                                            
Multifamily residential   $ 2,628,691   $ 2,628,691   $ 2,458,395         $ 2,600,262   $ 2,295,697   $ 2,132,366  
Single family residential     1,857,042     1,857,042     1,689,975           1,746,148     1,467,945     1,215,005  
Commercial real estate     95,668     95,668     48,781           59,611     55,217     102,701  
Construction and land     48,004     48,004     40,222           29,465     21,421     46  
Non-mortgage     50     50     50           50     -     -  

Deposit Composition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Non-interest bearing transaction accounts   $ 27,166   $ 27,166   $ 9,802         $ 11,826   $ 7,943   $ 4,981  
Interest bearing transaction accounts     196,062     196,062     179,676           191,892     97,294     109,886  
Money market deposit accounts     1,430,201     1,430,201     1,478,874           1,500,976     1,267,121     588,401  
Time deposits     2,209,982     2,209,982     1,620,466           1,629,275     1,748,889     2,442,506  
(1)
Considered a non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Pre-tax, pre-provision net earnings is defined as net income plus income tax expense and provision for (recapture of) loan losses. Net tangible book value is defined as total assets less goodwill, mortgage servicing assets and total liabilities. Efficiency ratio is defined as the ratio of noninterest expense to net interest income plus noninterest income.
(2)
Loans held-for-investment include unamortized deferred fees/costs. All portfolio loans are collateralized by real estate with the exception of one $50 thousand non-mortgage loan.
(3)
If we gave effect to our planned cash distribution of $40.0 million to our existing shareholders while not giving effect to any other transaction, our pro forma stockholders' equity would be $393.5 million as of September 30, 2017. In addition, our pro forma book value per common share would be $9.37 as of the same date. Actual cash dividends for the 12 months ended September 30, 2017 together with the planned $40.0 million cash dividend immediately after the closing of this offering exceed net income for the 12 months ended September 30, 2017 by $3.0 million. Based on the estimated initial public offering price of $11.50, (the midpoint of the range on the cover page of this prospectus), after deducting underwriting discounts, 275,099 shares would be necessary to pay the $3.0 million balance.
(4)
Earnings per common share, basic and diluted, book value per common share and number of common shares outstanding have been adjusted retroactively to reflect a 200-for-1 stock split effective April 27, 2017.
(5)
We calculate our pro forma C corporation net income, return on average assets, return on average equity and earnings per common share by adding back our franchise S Corporation tax to net income, and using a combined effective tax rate for Federal and California income taxes of 42.0%. This calculation reflects only the change in our status as an S Corporation and does not give effect to any other transaction.
(6)
Interim periods annualized by dividing by the number of months in the period and multiplying by 12.
(7)
As a result of system conversions, we are unable to calculate daily average balances for 2014. For this period, average loans, assets and equity are calculated by averaging the ending balance of the prior month and the ending balance of the current

19


Table of Contents

    month and multiplying the average by the number of days in the current month. The twelve resulting products were then added together and the resulting sum is divided by the number of days in the year.

(8)
Net interest margin is defined as net interest income divided by average earning assets.
(9)
The 2014 leverage capital ratio was calculated prior to the implementation of Basel III.


NON-GAAP FINANCIAL MEASURES

Some of the financial measures discussed in our selected historical consolidated financial data are "non-GAAP financial measures." In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

Pre-tax, pre-provision net earnings is defined as income before taxes and provision for loan losses. We believe the most directly comparable GAAP financial measure is income before taxes. Disclosure of this measure enables you to compare our operations to those of other banking companies before consideration of taxes and provision expense, which some investors may consider to be a more appropriate comparison given our S Corporation status and recaptures from the allowance for loan losses. Net tangible book value is defined as total assets less goodwill, mortgage servicing assets and total liabilities. Efficiency ratio is defined as noninterest expenses divided by operating revenue, which is equal to net interest income plus noninterest income. We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons.

20


Table of Contents

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures.

(Dollars in thousands)     As of or for the nine months
ended September 30,
    As of or for the years ended
December 31,
 
      2017     2017     2016     2016     2016     2015     2014
 
 
  (pro forma)

  (actual)

   
  (pro forma)

  (actual)

   
   
 
Pre-tax, pre-provision net earnings                                            
Income before income taxes   $ 44,688   $ 50,655   $ 40,198   $ 48,244   $ 53,940   $ 36,639   $ 35,721  
Plus: Provision (recapture of provision) for loan losses     (4,622 )   (4,622 )   (9,079 )   (17,152 )   (12,703 )   (7,141 )   -  
Pre-tax, pre-provision net earnings   $ 40,066   $ 46,033   $ 31,119   $ 31,092   $ 41,237   $ 29,498   $ 35,721  

Net Tangible Book Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

5,329,396

 

$

5,320,429

 

$

4,826,911

 

 

 

 

$

5,064,557

 

$

4,362,885

 

$

3,970,159

 
Less: Goodwill     (3,297 )   (3,297 )   (3,297 )         (3,297 )   (3,297 )   (3,297 )
Less: Mortgage servicing asset     (4,078 )   (4,078 )   (578 )         (1,099 )   -     -  
Less: Total liabilities     (4,814,057 )   (4,886,969 )   (4,427,433 )         (4,660,182 )   (3,991,586 )   (3,620,651 )
Net tangible book value   $ 507,964   $ 426,085   $ 395,603         $ 399,979   $ 368,002   $ 346,211  

Efficiency Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Noninterest expense (numerator)   $ 43,322   $ 43,322   $ 44,143   $ 61,242   $ 61,242   $ 62,339   $ 61,931  

Net interest income

   
73,608
 
$

83,434
 
$

70,483
   
80,480
 
$

94,640
 
$

84,918
 
$

93,999
 

Noninterest income

    9,780     5,921     4,779     11,854     7,839     6,919     3,653  
Operating revenue (denominator)   $ 83,388   $ 89,355   $ 75,262   $ 92,334   $ 102,479   $ 91,837   $ 97,652  
Efficiency ratio     51.95     48.48%     58.65%     66.33%     59.76%     67.88%     63.42%  

21


Table of Contents

 

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following tables set forth unaudited pro forma condensed financial information for the nine months ended September 30, 2017 and the year ended December 31, 2016 and as of September 30, 2017, which has been derived from the historical consolidated financial information contained in our consolidated financial statements and related notes and our interim condensed consolidated financial statements included elsewhere in this prospectus and gives effect to the following transactions, or the Transactions:

    the offering and sale of 11,350,000 shares of our common stock at a price per share of $11.50, resulting in net proceeds to us of $120.0 million (if the underwriters' overallotment option is not exercised);
    a cash distribution of $40.0 million to our existing shareholders using a portion of the net proceeds of this offering;
    the distribution, on December 1, 2017, of $7.1 million to our existing shareholders, to fund the payment of estimated taxes that will be passed through to them by virtue of our S Corporation status;
    termination of our election to be taxed as an S Corporation; and
    in the pro forma income statements, each of the foregoing, and:
    the multifamily securitization transaction whereby we sold $626.1 million of multifamily loans to a real estate mortgage investment conduit that holds the loans in trust and issued securities that are fully guaranteed by Freddie Mac and privately offered and sold to investors; and
    the repayment of $634.4 million of FHLB advances having an average weighted interest rate of 1.14%.

The unaudited pro forma condensed income statement for the nine months ended September 30, 2017 and for the year ended December 31, 2016 gives effect to the Transactions as if they occurred on January 1, 2016. The unaudited pro forma condensed balance sheet as of September 30, 2017 gives effect to the Transactions as if they occurred on September 30, 2017.

The historical financial statements have been adjusted in the unaudited pro forma condensed financial information to give effect to pro forma events that are (i) directly attributable to the Transactions; (ii) factually supportable; and (iii) with respect to the unaudited pro forma condensed income statements, expected to have a continuing impact on the combined results.

The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the actual financial position and results of operations had the Transactions been effective at the dates indicated, or of future performance. The unaudited pro forma financial information was prepared using assumptions and information existing at the time of this prospectus, which is subject to change.

The unaudited pro forma condensed financial information should be read together with the historical consolidated financial information contained in our consolidated financial statements and related notes and our interim condensed consolidated financial statements included in this prospectus.

If we gave effect to our planned cash distribution of $40.0 million to our existing shareholders while not giving effect to any other transaction, our pro forma stockholders' equity would be $393.5 million as of September 30, 2017. In addition, our pro forma book value per common share would be $9.37 as of the same date. Actual cash dividends for the 12 months ended September 30, 2017 together with the planned $40.0 million cash dividend immediately after the closing of this offering exceed net income for the 12 months ended September 30, 2017 by $3.0 million. Based on the initial public offering price of $11.50, after deducting underwriting discounts, 275,099 shares would have to be sold to pay the $3.0 million balance.

22


Table of Contents



Luther Burbank Corporation and Subsidiaries
Unaudited Pro Forma Condensed Balance Sheet
As of September 30, 2017

    Historical     Adjustment for         Pro Forma
 

(Dollars in thousands)

    As of September 30, 2017     Transactions         As of September 30, 2017
 

ASSETS

                       

Cash and cash equivalents

  $ 87,051     120,012   (1)   $ 87,051  

          (47,100 ) (2)        

          (72,912 ) (3)        

Available for sale investment securities, at fair value

    475,938               475,938  

Held to maturity investment securities, at amortized cost

    6,965               6,965  

Loans held-for-sale

    39,011               39,011  

Loans held-for-investment, net of allowance of $28,984

    4,601,942               4,601,942  

Accrued interest receivable

    13,902               13,902  

Federal Home Loan Bank stock

    40,159               40,159  

Premises and equipment, net

    22,697               22,697  

Goodwill

    3,297               3,297  

Prepaid expenses and other assets

    29,467     8,967   (4)     38,434  

Total assets

  $ 5,320,429     8,967       $ 5,329,396  

LIABILITIES AND STOCKHOLDERS' EQUITY

                       

Liabilities:

                       

Retail deposits

  $ 3,500,369             $ 3,500,369  

Wholesale deposits

    363,042               363,042  

FHLB advances

    807,667     (72,912 ) (3)     734,755  

Junior subordinated deferrable interest debentures

    61,857               61,857  

Senior debt

    95,000               95,000  

Accrued interest payable

    2,112               2,112  

Other liabilities and accrued expenses

    56,922               56,922  

Total liabilities

    4,886,969     (72,912 )       4,814,057  

Stockholders' equity:

                       

Common stock, no par value; 100,000,000 shares authorized; 42,000,000 shares issued and outstanding historical, and 53,350,000 shares issued and outstanding pro forma

    2,262     120,012   (1)     122,274  

Additional paid in capital

        295,872   (5)     295,872  

Retained earnings

    435,912     (47,100 ) (2)     101,907  

          8,967   (4)        

          (295,872 ) (5)        

Accumulated other comprehensive loss, net of taxes

    (4,714 )             (4,714 )

Total stockholders' equity

    433,460     81,879         515,339  

Total liabilities and stockholders' equity

  $ 5,320,429     8,967       $ 5,329,396  

Notes to pro forma condensed balance sheet as of September 30, 2017

(1)
Reflects the sale of 11,350,000 shares of our common stock at an estimated price of $11.50 per share, which is the midpoint of the range on the cover of this prospectus, after underwriting discounts and commissions and estimated offering expenses.

(2)
Reflects payment of a $40.0 million distribution to our existing shareholders using the proceeds from the offering and sale of our common stock and payment of $7.1 million to our existing shareholders, to fund the payment of estimated taxes that will be passed through to them by virtue of our S Corporation status;

(3)
Reflects the repayment of FHLB advances from net proceeds of the sale of our common stock after the distribution to our existing shareholders.

(4)
Reflects the increase in our deferred tax asset and a corresponding increase in equity of $9.0 million at September 30, 2017 giving effect for the termination of our status as a S Corporation.

(5)
Reflects reclassification of undistributed S Corporation period earnings to additional paid in capital.

23


Table of Contents



Luther Burbank Corporation and Subsidiaries
Unaudited Pro Forma Condensed Statement of Income
For the Year Ended December 31, 2016

    Historical     Pro Forma
 

(Dollars in thousands, except per share data)

    For the Year Ended
December 31, 2016
    Adjustment for
Transactions
    For the Year Ended
December 31, 2016
 

Interest income:

                   

Interest and fees on loans

  $ 139,385     (22,224) (1)   117,161  

Interest and dividends on investment securities

    4,779           4,779  

Total interest income

    144,164     (22,224 )   121,940  

Interest expense:

                   

Interest on deposits

    31,801           31,801  

Interest on FHLB advances

    10,066     (8,064) (2)   2,002  

Interest on junior subordinated deferrable interest debentures

    1,348           1,348  

Interest on other borrowings

    6,309           6,309  

Total interest expense

    49,524     (8,064 )   41,460  

Net interest income before provision for loan losses

    94,640     (14,160 )   80,480  

Recapture of provision for loan losses

   
(12,703

)
 
(4,449)

(3)
 
(17,152

)

Net interest income after provision (recapture) for loan losses

    107,343     (9,711 )   97,632  

Noninterest income

    7,839     3,724 (4)   11,854  

          626 (5)      

          (335) (6)      

Noninterest expense

   
61,242
         
61,242
 

Income before provision for income taxes

    53,940     (5,696 )   48,244  

Provision for income taxes

   
1,819
   
(199)

(7)
 
6,945
 

          (13,317) (8)      

          18,642 (9)      

Net income

  $ 52,121     (10,822 )   41,299  

Basic and diluted earnings per common share

  $ 1.24           0.77  

Weighted average common shares outstanding - basic and diluted

    42,000,000     11,350,000 (10)   53,350,000  

Notes to pro forma statement of income for the year ended December 31, 2016

(1)
Reflects a one year reduction in interest income of $21.6 million on loans sold in the securitization with a weighted average interest rate of 3.45%, net of a reduction in deferred loan cost amortization of $232 thousand and net interest carry of $857 thousand on the interest swap derivative hedging the securitization transaction. The securitization transaction includes loans with a principal balance of $626.1 million and a book value of $630.1 million.

(2)
Reflects a one year reduction in interest expense due to repayment of $707.3 million of FHLB advances with an average interest rate of 1.14% as a result of net cash from the securitization and offering. The average interest rate of 1.14% represents the total rate on FHLB borrowings for the year ended December 31, 2016.

(3)
Reflects a recapture of loan loss provisions for the reduction in multifamily loans sold in the securitization transaction. Recapture is calculated as the product of the principal amount of loans sold and the multifamily ALLL coverage ratio in effect at December 31, 2016.

(4)
Reflects the gain on the sale of loans, including mortgage servicing rights, net of transaction costs of the securitization and net a provision for a reserve for our repurchase obligation to Freddie Mac in connection with the securitization transaction.

24


Table of Contents

(5)
Reflects estimated servicing fee income for one year from the securitization and sale of loans where sub-servicing will be retained with a servicing spread of 20 basis points annually.

(6)
Reflects the loss on the interest swap derivative which hedged the securitization transaction.

(7)
Reflects the S Corporation tax impact of above adjustments (1) through (6) related to the securitization and sale of common stock transactions at a rate of 3.5%.

(8)
Reflects the increase in our deferred tax asset and a corresponding decrease in tax expense of $13.3 million at January 1, 2016 giving effect for the termination of our status as a S Corporation and the tax deferred impacts of the pro forma securitization transaction.

(9)
Reflects tax provision giving effect for the termination of our status as a S Corporation. We calculate our pro forma tax provision by adding back our S Corporation franchise tax to net income, including adjustments for the securitization and common stock offering transactions, and using a combined effective tax rate for Federal and California income taxes of 42.0%

(10)
Reflects the offering and sale of 11,350,000 shares of our common stock at an estimated price of $11.50 per share, which is the midpoint of the range on the cover of this prospectus, after underwriting discounts and commissions and estimated offering expenses.

25


Table of Contents



Luther Burbank Corporation and Subsidiaries
Unaudited Pro Forma Condensed Statement of Income
For the Nine Months Ended September 30, 2017

    Historical               Pro Forma
 

(Dollars in thousands, except per share data)

    For the Nine Months
Ended September 30, 2017
    Adjustment for
Transactions
        For the Nine Months
Ended September 30, 2017
 

Interest income:

                       

Interest and fees on loans

  $ 124,096     (16,882 ) (1)     107,214  

Interest and dividends on investment securities                                       

    5,611               5,611  

Total interest income

    129,707     (16,882 )       112,825  

Interest expense:

                       

Interest on deposits

    27,826               27,826  

Interest on FHLB advances

    12,497     (7,056 ) (2)     5,441  

Interest on junior subordinated deferrable interest debentures

    1,218               1,218  

Interest on other borrowings                                       

    4,732               4,732  

Total interest expense

    46,273     (7,056 )       39,217  

Net interest income before provision for loan losses

    83,434     (9,826 )       73,608  

Recapture of provision for loan losses

    (4,622 )             (4,622 )

Net interest income after provision (recapture) for loan losses

    88,056     (9,826 )       78,230  

Noninterest income

    5,921     3,724   (3)     9,780  

          470   (4)        

          (335 ) (5)        

Noninterest expense

    43,322               43,322  

Income before provision for income taxes                                       

    50,655     (5,967 )       44,688  

Provision for income taxes

    1,691     (209 ) (6)     7,518  

          (11,251 ) (7)        

          17,287   (8)        

Net income

  $ 48,964     (11,794 )       37,170  

Basic and diluted earnings per common share                                                    

  $ 1.17               0.70  

Weighted average common shares outstanding -                                

                       

basic and diluted

    42,000,000     11,350,000   (9)     53,350,000  

Notes to pro forma statement of income for the nine months ended September 30, 2017

(1)
Reflects a nine month reduction in interest income of $16.2 million of loans sold in the securitization with a weighted average interest rate of 3.45%, net of a reduction in deferred loan cost amortization of $174 thousand and net interest carry of $857 thousand on the interest swap derivative hedging the securitization transaction. The securitization transaction includes loans with a principal balance of $626.1 million and a book value, including unrealized losses, of $630.1 million.

(2)
Reflects a nine month reduction in interest expense due to repayment of $707.3 million of FHLB advances with an average interest rate of 1.33% as a result of net cash from both the securitization and the offering. The average interest rate of 1.33% represents the total rate on FHLB borrowings for the nine months ended September 30, 2017.

(3)
Reflects the gain on the sale of loans, including mortgage servicing rights, net of transaction costs of the securitization and net a provision for a reserve for our reimbursement obligation to Freddie Mac in connection with the securitization transaction.

(4)
Reflects estimated servicing fee income for nine months from the securitization and sale of loans where sub-servicing will be retained with a servicing spread of 20 basis points annually.

(5)
Reflects the the loss on the interest swap derivative hedging the securitization transact¡on due at termination of the hedge.

(6)
Reflects the S Corporation tax impact of above adjustments (1) through (5) related to the securitization and offering and sale of common stock transactions at a rate of 3.5%.

(7)
Reflects the increase in our deferred tax asset and a corresponding decrease in tax expense of $11.3 million at January 1, 2017 giving effect for the termination of our status as a S Corporation and tax deferred impacts of the pro forma securitization transaction.

(8)
Reflects tax provision giving effect for the term¡nation of our status as a S Corporation. We calculate our pro forma tax tax provision by adding back our S Corporation franchise tax to net income including adjustments for the securitization and common stock offering transactions, using a combined effective tax rate for Federal and California income taxes of 42.0%.

(9)
Reflects the offering and sale of 11,350,000 shares of our common stock at an estimated price of $11.50 per share, which is the midpoint of the range on the cover page of this prospectus, after underwriting discounts and commissions and estimated offering expenses.

26


Table of Contents


RISK FACTORS

An investment in our common stock involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before you decide to invest in our common stock, you should carefully read and consider the risk factors described below as well as the other information included in this prospectus. Any of these risks, if they are realized, could materially adversely affect our business, financial condition, and results of operations, and consequently, the value of our common stock. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also materially and adversely affect us. This prospectus also contains forward-looking statements that involve risks and uncertainties. If any of the matters included in the following information about risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially and adversely affected. In any such case, you could lose all or a portion of your original investment.

Risks Related to Our Business

Our business and operations may be materially adversely affected by weak economic conditions.

Our business and operations, which primarily consist of banking activities, including lending money to customers in the form of real estate secured loans and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the U.S. generally, and on the West Coast in particular. The economic conditions in our local markets may be different from the economic conditions in the U.S. as a whole. If economic conditions in the U.S. or any of our markets weaken, our growth and profitability from our operations could be constrained. In addition, foreign economic and political conditions could affect the stability of global financial markets, which could hinder economic growth. The current economic environment is characterized by interest rates near historically low levels, which impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.

Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates are concerns for businesses, consumers and investors in the U.S. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial conditions and results of operations.

We are subject to interest rate risk, which could adversely affect our profitability.

Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of

27


Table of Contents

Governors of the Federal Reserve System, or the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse impact on our business, financial condition and results of operations.

Our interest sensitivity profile was liability sensitive as of September 30, 2017. When short-term interest rates rise, the rate of interest we pay on our interest-bearing liabilities, such as deposits, may rise more quickly than the rate of interest that we receive on our interest-earning assets, such as loans, which may cause our net interest income to decrease. Additionally, a shrinking yield premium between short-term and long-term market interest rates, a pattern typically indicative of investors' waning expectations of future growth and inflation, commonly referred to as a flattening of the yield curve, typically reduces our profit margin as we borrow at shorter terms than the terms at which we lend and invest.

In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to credit risk, which could adversely affect our profitability.

Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions. If the overall economic climate in the U.S., generally, or in our market areas specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for loan losses. Additional factors related to the credit quality of multifamily residential and other commercial real estate loans include the quality of management of the business and tenant vacancy rates.

Our risk management practices, such as monitoring the concentration of our loans within specific markets and our credit approval, review and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. Many of our loans are made to small businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers. Consequently, we may have significant exposure if any of these borrowers becomes unable to pay their loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce, unemployment or death. A failure to effectively measure and limit the credit risk associated with our loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that we significantly increase our allowance for loan losses, each of which

28


Table of Contents

could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition and results of operations.

Our multifamily residential and commercial real estate loan portfolios generally carry greater credit risk than loans secured by our other mortgage loans.

Our loan portfolio consists primarily of multifamily residential and, to a lesser extent, other commercial real estate loans, which are secured by industrial, office and retail properties. As of September 30, 2017, our multifamily residential loans totaled $2.6 billion, or 56.8% of our loan portfolio, and our other commercial real estate loans totaled $95.7 million, or 2.1% of our loan portfolio. Nonperforming multifamily residential loans were $2.3 million and nonperforming other commercial real estate loans were $682 thousand at September 30, 2017. Multifamily residential and commercial real estate loans may carry more risk as compared to single family residential lending, because they typically involve larger loan balances concentrated with a single borrower or groups of related borrowers. In addition, these loans expose a lender to greater credit risk than those secured by residential real estate. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy. Investment in these properties by our customers is influenced by prices and return on investment, as well as changes to applicable laws regarding, among other things, rent control, personal and corporate tax reform, pass-through rules, immigration and fiscal and economic policy. The collateral securing these loans typically cannot be liquidated as easily as single family residential real estate, which may lead to longer holding periods as compared to single family residential properties.

If these properties become less attractive investments, demand for our loans would decrease. In addition, unexpected deterioration in the credit quality of our multifamily residential or commercial real estate loan portfolios could require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Our business and operations are concentrated in California and Washington, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.

Unlike many of our larger competitors that maintain significant operations located outside our market areas, substantially all of our customers are individuals and businesses located and doing business in the state of California. As of September 30, 2017, approximately 88% of the loans in our portfolio measured by dollar amount were secured by collateral located in California and 12% of the loans in our portfolio measured by dollar amount were secured by collateral located in Washington. In addition, 50.0% of our real estate loans measured by dollar amount, were secured by collateral located in Los Angeles County and Orange County. Therefore, our success will depend upon the general economic conditions in these areas, which we cannot predict with certainty. As a result, our operations and profitability may be more adversely affected by a local economic downturn than those of large, more geographically diverse competitors. A downturn in the local economy could make it more difficult for our borrowers to repay their loans and may lead to loan losses that are not offset by operations in other markets; it may also reduce the ability of depositors to make or maintain deposits with us. For these reasons, any regional or local economic downturn could have a material adverse effect on our business, financial condition and results of operations.

Our ability to conduct our business could be disrupted by natural or man-made disasters.

A significant number of our offices, and a significant portion of the real estate securing loans we make, and our borrowers' business operations in general, are located in California. California has had and will continue to have major earthquakes in areas where a significant portion of the collateral and assets of our

29


Table of Contents

borrowers are concentrated. California is also prone to fires, mudslides, floods and other natural disasters, such as the recent fires that impacted Napa, Sonoma and surrounding counties, including Santa Rosa, the location of our corporate headquarters and our main banking office. Additionally, acts of terrorism, war, civil unrest, violence, or other man-made disasters could also cause disruptions to our business or to the economy as a whole. The occurrence of natural or man-made disasters could destroy, or cause a decline in the value of, mortgaged properties or other assets that serve as our collateral and increase the risk of delinquencies, defaults, foreclosures and losses on our loans, damage our banking facilities and offices, negatively impact regional economic conditions, result in a decline in loan demand and loan originations, result in drawdowns of deposits by customers impacted by disasters and negatively impact the implementation of our growth strategy. We have implemented a disaster recovery and business continuity plan that allows us to move critical functions to a backup data center in the event of a catastrophe. Although this program has been tested, we cannot guarantee its effectiveness in any disaster scenarios. Regardless of the effectiveness of our disaster recovery and business continuity plan, the occurrence of any natural or man-made disaster could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers, which could adversely impact our profitability.

We have many competitors. Our principal competitors are commercial and community banks, credit unions, savings and loan associations, mortgage banking firms and online mortgage lenders, including large national financial institutions that operate in our market area. Many of these competitors are larger than us, have significantly more resources and greater brand recognition than we do, and may be able to attract customers more effectively than we can. We compete with these other financial institutions both in attracting deposits and making loans. We expect competition to continue to increase as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete with traditional and new financial services providers, some of which maintain a physical presence in our market areas and others of which maintain only a virtual presence. Increased competition could require us to increase the rates we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to retain or grow our core deposit base, which could adversely impact our funding costs.

Like many financial institutions, we rely on customer deposits as our primary source of funding for our lending activities, and we continue to seek customer deposits to maintain this funding base. Our future growth will largely depend on our ability to retain and grow our deposit base. As of September 30, 2017, we had $3.9 billion in deposits and a loan to deposit ratio of 120.9%, which is higher than the level maintained by many other banks. As of the same date, using deposit account related information such as tax identification numbers, account vesting and account size, we estimated that $830 million of our deposits exceeded the insurance limits established by the Federal Deposit Insurance Corporation, or FDIC. None of our deposits are governmental deposits secured by collateral. Although we have historically maintained a high deposit customer retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, or a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract

30


Table of Contents

additional deposits. Additionally, any such loss of funds could result in lower loan originations, which could have a material adverse effect on our business, financial condition and results of operations.

Proposed changes in tax laws could have an adverse affect on us, our industry, our customers, the value of collateral securing our loans and demand for our loans.

Changes in tax laws contained in proposed legislation under discussion contain a number of provisions which could have an impact on the banking industry, borrowers and the market for single family residential and multifamily residential real estate. Among the proposed changes are: lower limits on the deductibility of mortgage interest on single family residential mortgages; the elimination of deductibility of mortgage interest for second homes; limitations on deductibility of business interest expense; limitations on the deductibility of property taxes; and the elimination of the deductibility of state and local income taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, such changes may have an adverse affect on the market for and valuation of single family residential properties and multifamily residential properties, and on the demand for such loans in the future. If home ownership or multifamily residential property ownership become less attractive, demand for our loans would decrease. The value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of home ownership and multifamily residential ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations. Additionally, certain borrowers could become less able to service their debts if these changes become effective. These changes could adversely affect our business, financial condition and results of operations.

Our reputation is critical to our business, and damage to it could have a material adverse effect on us.

A key differentiating factor for our business is the strong reputation we are building in our markets. Maintaining a positive reputation is critical to attracting and retaining customers and employees. Adverse perceptions of us could make it more difficult for us to execute on our strategy. Harm to our reputation can arise from many sources, including actual or perceived employee misconduct, errors or misconduct by our third party vendors or other counterparties, litigation or regulatory actions, our failure to meet our high customer service and quality standards and compliance failures. Negative publicity about us, whether or not accurate, may damage our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

Our allowance for loan losses may be inadequate to absorb losses inherent in the loan portfolio, which could have a material adverse effect on our business, financial condition and results of operations.

Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some may only be partially repaid or may never be repaid at all. We may experience losses for reasons beyond our control, such as the impact of general economic conditions on customers and their businesses. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio considering historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, economic conditions and other pertinent information. The determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risk and future trends, all of which may change materially. Although we endeavor to maintain our allowance for loan losses at a level adequate to absorb any inherent losses in the loan portfolio, these estimates of loan losses are necessarily subjective and their accuracy depends on the outcome of future events. As of September 30, 2017, the allowance for loan losses was $29.0 million. Non-accruing loans totaled $5.8 million and loans 30-89 days past due were $5.0 million as of September 30, 2017.

31


Table of Contents

Over the last three years, we have enjoyed a relatively low level of nonperforming assets and net charge-offs, both in absolute dollars, and as a percentage of loans. As a result of this historical performance, we have experienced periodic recaptures of our prior provisions for loan losses (income), which positively impacted our earnings in 2015, 2016 and 2017. However, should a higher portion of our loans become delinquent, or if some of our loans are only partially repaid, we may experience losses for reasons beyond our control. Despite our underwriting criteria and historical experience, we may be particularly susceptible to losses due to: (i) the geographic concentration of our loans; (ii) the concentration of higher risk loans, such as commercial real estate loans; and (iii) the relative lack of seasoning of some of our loans. As a result, we may not be able to maintain our relatively low levels of nonperforming assets and charge-offs.

Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in our experiencing higher levels of nonperforming assets and charge-offs, and incurring loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.

Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. If we need to make significant and unanticipated increases in the loss allowance in the future, or to take additional charge-offs for which we have not established adequate reserves, our results of operations and financial condition could be materially adversely affected at that time.

We are dependent on our management team and key employees, and if we are not able to retain them, our business operations could be materially adversely affected.

Our success depends, in large part, on our management team and key employees. Our management team has significant industry experience, although a number of members of our senior management team have only been with us for a few years. In addition, our loan origination activities are conducted by a small number of individuals.

Our future success also depends on our continuing ability to attract, develop, motivate and retain key employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. The loss of any of our management team or our key employees could materially adversely affect our ability to execute our business strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able to retain the services of any members of our management team or other key employees. Though we have employment agreements in place with certain members of our management team they may still elect to leave at any time. Failure to attract and retain a qualified management team and qualified key employees could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to maintain consistent growth, earnings or profitability.

There can be no assurance that we will be able to continue to grow and to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent with our prior results of operations, or increase in the future. Our growth in recent years has been driven primarily by a strong multifamily housing market in our geographic footprint. A downturn in economic conditions in our markets, particularly in the real estate market, heightened competition from other financial services providers, an

32


Table of Contents

inability to retain or grow our core deposit base, regulatory and legislative considerations, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow assets, or increase profitability, as rapidly as we have in the past. Sustainable growth requires that we manage our risks by following prudent loan underwriting standards, balancing loan and deposit growth without materially increasing interest rate risk or compressing our net interest margin, maintaining more than adequate capital at all times, hiring and retaining qualified employees and successfully implementing our strategic initiatives. We have also recently entered, or expect to enter, new markets, including Portland, Oregon. We may not have, or may not be able to develop, the knowledge or relationships necessary to be successful in these new markets. Our failure to sustain our historical rate of growth, adequately manage the factors that have contributed to our growth or successfully enter new markets could have a material adverse effect on our earnings and profitability and, therefore on our business, financial condition and results of operations.

We may not be able to manage our growth effectively, which could adversely affect our business.

We may face a variety of risks and difficulties in pursuing our organic growth strategy and maintaining our growth, including:

To manage our growth and maintain adequate information and reporting systems within our organization, we must identify, hire and retain qualified employees, particularly in the accounting and operational areas of our business. We must also successfully implement improvements to, or integrate, our management information and control systems, procedures and processes in an efficient and timely manner and identify deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the infrastructure that comes with expanding operations, including new branches. Our growth strategy may divert management from our existing franchises and may require us to incur additional expenditures to expand our administrative and operational infrastructure. If we are unable to effectively manage and grow our banking franchise, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could materially and adversely affect our business, financial condition and results of operations.

Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.

The federal banking agencies have issued guidance for institutions that are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (i) total reported loans for construction, land development, and other land which represent 100% or more of an institution's total risk-based capital; or (ii) total commercial real estate loans representing 300% or

33


Table of Contents

more of the institution's total risk-based capital and the outstanding balance of the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. We have a concentration in commercial real estate loans, and multifamily residential real estate loans in particular, and we have experienced significant growth in our commercial real estate portfolio in recent years. From December 31, 2014 through December 31, 2016, our commercial real estate loan balances have increased by $454.2 million. As of September 30, 2017, commercial real estate loans represent 525% of the Company's total risk-based capital, of which multifamily residential real estate loans, the vast majority of which are 50% risk weighted for regulatory capital purposes, were 498% of the Company's total risk-based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, we could be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could limit our growth, require us to obtain additional capital, and have a material adverse effect on our business, financial condition and results of operations.

Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.

As a result of our organic growth over the past several years, as of September 30, 2017, approximately $3.9 billion, or 85%, of the loans in our loan portfolio were first originated since January 1, 2014. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as "seasoning." As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Although a significant portion of our multifamily portfolio are refinancings of prior loans on the same property, a large portion of our loan portfolio is relatively new, and therefore the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in the future. Our limited experience with these loans does not provide us with a significant history pattern with which to judge future collectability or performance. However, we believe that our stringent credit underwriting process, our ongoing credit review processes, and our history of successful management of our loan portfolio, mitigate these risks. Nevertheless, if delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition and results of operations.

Liquidity risk could impair our ability to fund operations and meet our obligations as they become due and failure to maintain sufficient liquidity could materially adversely affect our growth, business, profitability and financial condition.

Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost, in a timely manner and without adverse conditions or consequences. We require sufficient liquidity to fund asset growth, meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Liquidity risk can increase due to a number of factors, including an over-reliance on a particular source of funding or market-wide phenomena such as market dislocation and major disasters. Factors that could detrimentally impact access to liquidity sources include, but are not limited to, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, adverse regulatory actions against us, or changes in the liquidity needs of our depositors.

34


Table of Contents

Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Our inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial negative effect on our business, and could result in the closure of the Bank. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair our ability to fund operations and meet our obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations.

We rely on customer deposits, advances from the Federal Home Loan Bank of San Francisco, or FHLB, and brokered deposits to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, including throughout the recent recession, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions change. FHLB borrowings and other current sources of liquidity may not be available or, if available, sufficient to provide adequate funding for operations.

Limits on our ability to use brokered deposits as part of our funding strategy may adversely affect our ability to grow.

A "brokered deposit" is any deposit that is obtained from or through the mediation or assistance of a deposit broker. These deposit brokers attract deposits from individuals and companies throughout the country and internationally whose deposit decisions are based almost exclusively on obtaining the highest interest rates. We have used brokered deposits in the past, and we intend to continue to use brokered deposits as one of our funding sources to support future growth. As of September 30, 2017, brokered deposits represented approximately 9.4% of our total deposits and equaled $363 million. Currently, our brokered deposits have a comparable cost to our non-brokered, consumer and business deposits. There are risks associated with using brokered deposits. In order to continue to maintain our level of brokered deposits, we may be forced to pay higher interest rates than those contemplated by our asset-liability pricing strategy. In addition, banks that become less than "well-capitalized" under applicable regulatory capital requirements may be restricted in their ability to accept or renew, or prohibited from accepting or renewing, brokered deposits. If this funding source becomes more difficult to access, we will have to seek alternative funding sources in order to continue to fund our growth. This may include increasing our reliance on FHLB borrowing, attempting to attract additional non-brokered deposits, and selling loans. There can be no assurance that brokered deposits will be available, or if available, sufficient to support our continued growth. The unavailability of a sufficient volume of brokered deposits could have a material adverse effect on our business, financial condition and results of operations.

New lines of business, products, product enhancements or services may subject us to additional risk.

From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. We recently expanded our offerings of business and consumer deposit accounts and cash management services for businesses. There are substantial risks and uncertainties associated with these efforts. In developing, implementing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources. We may underestimate the appropriate level of resources or expertise necessary to make new lines of business or products successful or to realize their expected benefits. We may not achieve the milestones set in initial timetables for the development and introduction of new lines of business, products, product enhancements or services, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market

35


Table of Contents

preferences, may also impact the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. Any new line of business, product, product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. We may also decide to discontinue businesses or products, due to lack of customer acceptance or unprofitability. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition and results of operations.

We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon customers' representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants' reports, with respect to the business and financial condition of our customers. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

We depend on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely affect our operations and financial condition.

Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems. We outsource many of our major systems, such as data processing, deposit processing, loan origination, email and anti-money laundering monitoring systems. Of particular significance is our long term contract for core data processing services with Fiserv. The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations, and we could experience difficulty in implementing replacement solutions. In many cases our operations rely heavily on secured processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, failure of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties could disrupt our operations or adversely affect our reputation.

36


Table of Contents

We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.

Our business involves the storage and transmission of consumers' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. While we have incurred no material cyber-attacks or security breaches to date, a number of other financial services and other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers, or both. Although we devote significant resources to maintain, regularly update and backup our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us or our customers, our security measures may not be effective against all potential cyber-attacks or security breaches. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our internet-based product offerings and expand our internal usage of web-based products and applications. If an actual or perceived security breach occurs, customer perception of the effectiveness of our security measures could be harmed and could result in the loss of customers.

A successful penetration or circumvention of the security of our systems, including those of third party providers or other financial institutions, or the failure to meet regulatory requirements for security of our systems, could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers or counterparties, significant increases in compliance costs (such as repairing systems or adding new personnel or protection technologies), and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation and regulatory exposure, and harm to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

Failure to keep up with the rapid technological changes in the financial services industry could have a material adverse effect on our competitive position and profitability.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we have. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete effectively and could have a material adverse effect on our business, financial condition or results of operations. As these technologies are improved in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have a material adverse effect on our business, financial condition and results of operations.

37


Table of Contents

Our risk management framework may not be effective in mitigating risks and/or losses to us.

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances. Our risk management framework may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions. These losses could have a material adverse effect on our business, financial condition and results of operations.

The requirements of being a public company may strain our resources and divert management's attention.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and applicable securities rules and regulations. These laws and regulations increase the scope, complexity and cost of corporate governance, reporting and disclosure practices over those of non-public or non-reporting companies. Despite our conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we have experienced prior to becoming a public company. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. As a NASDAQ listed company, we will be required to prepare and file proxy materials which meet the requirements of the Exchange Act and the SEC's proxy rules. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an "emerging growth company" as defined in the JOBS Act. In order to maintain, appropriately document and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet the standards required by the Sarbanes-Oxley Act, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns, which could harm our business and operating results. Additionally, any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and cause our investors and potential investors to lose confidence in us, and restrict trading in, and reduce the market price of, our common stock, and potentially availability to access the capital markets.

We are dependent on the use of data and modeling in both our management's decision making generally and in meeting regulatory expectations in particular.

The use of statistical and quantitative models and other quantitatively-based analyses is endemic to bank decision making and regulatory compliance processes, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, allowance for loan loss measurement, portfolio stress testing and the identification of possible violations of

38


Table of Contents

anti-money laundering regulations are examples of areas in which we are dependent on models and the data that underlies them. We anticipate that model-derived insights will be used more widely in our decision making in the future. While these quantitative techniques and approaches improve our decision making, they also create the possibility that faulty data or flawed quantitative approaches could yield adverse outcomes or regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision making, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to design, implement and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, which could have a material adverse effect on us.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud.

We believe that a control system, no matter how well designed and managed, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control in the future, and our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, financial condition and results of operations.

We may need to raise additional capital in the future, and we may not be able to do so.

Access to sufficient capital is critical in order to enable us to implement our business plan, support our business, expand our operations, and meet applicable capital requirements. The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact our ability to support and to grow our operations. If we grow our operations faster than we generate capital internally, we will need to access the capital markets. We may not be able to raise additional capital in the form of additional debt or equity. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, our financial condition and our results of operations. Economic conditions and a loss of confidence in financial institutions may increase our cost of capital and limit access to some sources of capital. Such capital may not be available on acceptable terms, or at all. Any occurrence that may limit our access to the capital markets, or disruption in capital markets, may adversely affect our capital costs and our ability to raise capital. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on our business, financial condition and results of operations.

We could be subject to environmental risks and associated costs on our foreclosed real estate assets.

Our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. There is a risk that hazardous or toxic substances could be found on these properties and that we could be liable for remediation costs, as well as personal injury and

39


Table of Contents

property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property's value or limit our ability to sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations.

Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in various legal actions, arising in connection with our current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. Further we may in the future be subject to consent orders with our regulators. We may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our current and/or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, results of operations and results of operations.

The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property and other real estate owned may not accurately reflect the net value of the asset.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in value in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately reflect the net value of the collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of REO, that we acquire through foreclosure proceedings and to determine loan impairments. If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our REO, if any, and our allowance for loan losses may not reflect accurate loan impairments. Inaccurate valuation of REO or inaccurate provisioning for loan losses could have a material adverse effect on our business, financial condition and results of operations.

We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items and affect our profitability.

The nature of our business makes us sensitive to the large body of accounting rules in the U.S. From time to time, the governing bodies that oversee changes to accounting rules and reporting requirements may release new guidance for the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Changes which have been approved for future implementation, or which are currently proposed or expected to be proposed or adopted include requirements that we: (i) calculate the allowance

40


Table of Contents

for loan losses on the basis of the current expected loan losses over the lifetime of our loans, which is expected to be applicable to us beginning in 2021, and may result in increases in our allowance for loan losses and future provisions for loan losses; and (ii) record the value of and liabilities relating to operating leases on our balance sheet, which is expected to be applicable beginning in 2019. These changes could adversely affect our capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics. Any such changes could have a material adverse effect on our business, financial condition and results of operations.

The fair value of our investment securities can fluctuate due to factors outside of our control.

As of September 30, 2017, the fair value of our investment securities portfolio was approximately $483 million. As of the same date, 97% of our investments were U.S. government or U.S. government agency securities. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments, or OTTI, and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, financial condition or results of operations. The process for determining whether impairment of a security is OTTI usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security and our intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to correctly and timely assess any impairments or losses with respect to our securities could have a material adverse effect on our business, financial condition or results of operations.

Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

Regulators and law enforcement agencies in a number of countries are conducting civil and criminal investigations into whether the banks that contribute to the British Bankers' Association (the "BBA") in connection with the calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse affect on our results of operations.

41


Table of Contents

We may pursue strategic acquisitions in the future, and we may not be able to overcome risks associated with such transactions.

Although we plan to continue to grow our business organically, we may explore opportunities to invest in, or to acquire, other financial institutions and businesses that we believe would complement our existing business. Our investment or acquisition activities could be material to our business and involve a number of risks including the following:

We may not be successful in overcoming these risks or other problems encountered in connection with potential investments or acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition or results of operations. Additionally, if we record goodwill in connection with any acquisition, our financial condition and results of operation may be adversely affected if that goodwill is determined to be impaired, which would require us to take an impairment charge.

Risks Related to Our Industry

Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.

The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole or the FDIC Deposit Insurance Fund, not for the protection of our shareholders and creditors. We are subject to regulation and supervision by the Federal Reserve, and our Bank is subject to regulation and supervision by the FDIC and the California Department of Business Oversight Division of Financial Institutions, or DBO. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, which imposes significant regulatory and compliance changes on financial institutions, is an example of this type of federal regulation. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept and the rates we may pay on

42


Table of Contents

such deposits, maintenance of adequate capital and liquidity, changes in control of us and our Bank, transactions between us and our Bank, handling of nonpublic information, restrictions on dividends and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all. These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition and results of operations. Also, the burden imposed by those federal and state regulations may place banks in general, including our Bank in particular, at a competitive disadvantage compared to their non-bank competitors. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years, and may be subject to significant future changes. Future changes may have a material adverse effect on our business, financial condition and results of operations.

Federal and state regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations to us. Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations.

In addition, given the current economic and financial environment, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways, and could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad discretion in their interpretation of laws and regulations and their assessment of the quality of our loan portfolio, securities portfolio and other assets. If any regulatory agency's assessment of the quality of our assets, operations, lending practices, investment practices, capital structure or other aspects of our business differs from our assessment, we may be required to take additional charges or undertake, or refrain from taking, actions that could have a material adverse effect on our business, financial condition and results of operations.

Federal and state regulators periodically examine our business and may require us to remediate adverse examination findings or may take enforcement action against us.

The Federal Reserve, the FDIC and the DBO periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, the Federal Reserve, the FDIC, or the DBO were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to require us to remediate any such adverse examination findings.

In addition, these agencies have the power to take enforcement action against us to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation of

43


Table of Contents

law or regulation or unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our growth, to assess civil money penalties against us or our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is imminent risk of loss to depositors, to terminate our deposit insurance and place our Bank into receivership or conservatorship. Any regulatory enforcement action against us could have a material adverse effect on our business, financial condition and results of operations.

We may be required to act as a source of financial and managerial strength for our Bank in times of stress.

Under federal law and long-standing Federal Reserve policy, we, as a bank holding company, are required to act as a source of financial and managerial strength to our Bank and to commit resources to support our Bank if necessary. We may be required to commit additional resources to our Bank at times when we may not be in a financial position to provide such resources or when it may not be in our, or our shareholders' or creditors', best interests to do so. A requirement to provide such support is more likely during times of financial stress for us and our Bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise be. In addition, any capital loans we make to our Bank are subordinate in right of repayment to deposit liabilities of our Bank.

Regulatory initiatives regarding bank capital requirements may require heightened capital.

Regulatory capital rules, adopted in July 2013, implement higher minimum capital requirements for bank holding companies and banks. These rules, which implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, include a common equity Tier 1 capital requirement and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. These enhancements were intended to both improve the quality and increase the quantity of capital required to be held by banking organizations, and to better equip the U.S. banking system to deal with adverse economic conditions. The capital rules require bank holding companies and banks to maintain a common equity Tier 1 capital ratio of 4.5%, a minimum total Tier 1 risk based capital ratio of 6%, a minimum total risk based capital ratio of 8%, and a minimum leverage ratio of 4%. Bank holding companies and banks are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% (when fully phased in) to avoid limitations on capital distributions and discretionary executive compensation payments. At September 30, 2017, the capital conservation buffer was 1.25%. The revised capital rules will also require banks to maintain a common equity Tier 1 capital ratio of 6.5% or greater, a Tier 1 capital ratio of 8% or greater, a total capital ratio of 10% or greater and a leverage ratio of 5% or greater to be deemed "well-capitalized" for purposes of certain rules and prompt corrective action requirements.

The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing significant internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Our regulatory capital ratios currently are in excess of the levels established for "well-capitalized" institutions. Future regulatory change could impose higher capital standards.

Any new or revised standards adopted in the future may require us to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic liquidity requirements. We may not be able to raise additional capital at all, or on terms acceptable to us. Failure to maintain capital to meet current or future regulatory

44


Table of Contents

requirements could have a significant material adverse effect on our business, financial condition and results of operations.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act of 1970, the Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act or Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network, or FinCEN, and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny of compliance with the regulations issued and enforced by the Office of Foreign Assets Control, or OFAC. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

We are subject to numerous "fair and responsible banking" laws designed to protect consumers, and failure to comply with these laws could lead to a wide variety of sanctions.

The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Act and the Dodd-Frank Act prohibit unfair, deceptive, or abusive acts or practices by financial institutions. The U.S. Department of Justice, or DOJ, federal banking agencies, and other federal and state agencies are responsible for enforcing these fair and responsible banking laws and regulations. In 2012, our Bank, without admitting any wrongdoing, settled a lawsuit by the DOJ alleging violations of fair lending laws in connection with our single family mortgage lending program. The settlement required a number of remedial actions, with which we fully complied within the prescribed three year time frame. A challenge to an institution's compliance with fair and responsible banking laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our reputation, business, financial condition and results of operations.

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information, or PII, in various information systems that we maintain and in those maintained by third party service providers. We also maintain important internal company data such as PII about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees, and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act, or the GLB Act,

45


Table of Contents

which, among other things: (i) imposes certain limitations on our ability to share nonpublic PII about our customers with nonaffiliated third parties; (ii) requests that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that our collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure, or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations, financial condition and results of operations.

Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.

We regularly use third party vendors in our business and we rely on some of these vendors for critical functions including, but not limited to, our core processing function and mortgage broker relationships. Third party relationships are subject to increasingly demanding regulatory requirements and attention by bank regulators. We expect our regulators to hold us responsible for deficiencies in our oversight or control of our third party vendor relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or that such vendors have not performed adequately, we could be subject to administrative penalties or fines as well as requirements for consumer remediation, any of which could have a material adverse effect on our business, financial condition and results of operations. Additionally, our use of loan brokers to originate a portion of our multifamily residential loans and all of our single family residential loans, exposes us to risk of loss or liability in the event that such brokers misrepresent the borrower's financial condition or other information included in the loan package, or if the broker engages in violations of law in connection with the loan.

Rulemaking changes implemented by the Consumer Financial Protection Bureau will result in higher regulatory and compliance costs that may adversely affect our business.

The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau, or CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB also has examination and primary enforcement authority with respect to depository institutions with assets over $10.0 billion, their third party service providers and non-depository entities such as debt collectors and consumer reporting agencies. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and

46


Table of Contents

implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination. These changes could have a material adverse effect on our business, financial condition and results of operations, even if we remain under the threshold of over $10.0 billion for CFPB supervision.

Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect our ability to attract and retain our highest performing employees.

In April 2011 and May 2016, the Federal Reserve, other federal banking agencies and the SEC jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in consolidated assets, such as our Bank. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to successfully compete with financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees.

Our Bank's FDIC deposit insurance premiums and assessments may increase.

Our Bank's deposits are insured by the FDIC up to legal limits and, accordingly, our Bank is subject to insurance assessments based on our Bank's average consolidated total assets less its average tangible equity. Our Bank's regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Numerous bank failures during the financial crisis and increases in the statutory deposit insurance limits increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and the reserve ratios of the Deposit Insurance Fund required by statute and FDIC estimates of projected requirements, the FDIC has the power to increase deposit insurance assessment rates and impose special assessments on all FDIC-insured financial institutions. Any future increases or special assessments could reduce our profitability and could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to an Investment in Our Common Stock and the Offering

No prior public market exists for our common stock, and one may not develop.

Prior to this offering there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or may not be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock. The initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after the offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business through acquisitions, by using our common stock as consideration, should we elect to do so.

47


Table of Contents

Our stock price may be volatile, and you could lose part or all of your investment as a result.

Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact the timing of any sale. Our stock price may fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things:

The market price of our stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities.

After this offering, there will be 53,350,000 shares of our common stock outstanding (or 55,052,500 shares outstanding if the underwriters exercise their option to purchase additional shares in full). Of our issued and outstanding shares of common stock, all the shares sold in this offering will be freely transferable, except for any shares held by our "affiliates," as that term is defined in Rule 144 under the Securities Act, in respect of which the applicable holding period has not yet passed. Following completion of this offering, approximately 74.98% of our outstanding common stock (or 72.66% if the underwriters exercise their option to purchase additional shares in full) will be held by the Trione Family Trusts and can be resold into the public markets in the future in accordance with the requirements of Rule 144. An additional 3.75% of the shares of common stock outstanding after completion of the offering (3.63% if the underwriters exercise their option to purchase additional shares in full) held by other shareholders will be eligible for resale into the public markets in accordance with Rule 144.

48


Table of Contents

We, our executive officers and directors, and shareholders owning in excess of 95% of the currently outstanding shares of common stock have agreed with the underwriters that, subject to exceptions, we and they will not directly or indirectly sell or otherwise transfer their shares for a period of 180 days after the date of this prospectus.

The market price for our common stock may decline significantly when the restrictions on resale by our existing shareholders lapse. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price of our stock is substantially higher than the net tangible book value per share of our common stock immediately following the offering. Therefore, if you purchase shares in this offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. Based on the initial public offering price of $11.50 per share and our net tangible book value as of September 30, 2017, if you purchase our common stock in this offering, you will suffer immediate dilution of approximately $1.98 per share in net tangible book value. As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.

We are an "emerging growth company," as defined in the JOBS Act and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors and adversely affect the market price of our common stock.

We are an "emerging growth company," as defined in the JOBS Act. For as long as we continue to be an emerging growth company we may take advantage of certain exemptions from various requirements generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation, and exemption from requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an emerging growth company such as us to take advantage of an extended transition period to comply with the new or revised accounting standards applicable to public companies. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. The election not to opt out of the extended transition period may cause our financial condition and results of operations to be less comparable to those of other companies.

We may take advantage of these exemptions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the first fiscal year following the fifth anniversary of this offering; (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more; (iii) the date on which we have during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

We cannot predict whether investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may a less active trading market for our common stock, and our stock price may be more volatile or decline.

49


Table of Contents

Securities analysts may not initiate or continue coverage on our common stock, which could adversely affect the market for our common stock.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, the price or trading volume of our common stock could decline as a result.

We have broad discretion in allocating the net proceeds of the offering. Our failure to effectively utilize such net proceeds may have an adverse effect on our financial performance and the value of our common stock.

We intend to use the net proceeds of this offering after the distributions to our existing shareholders to increase the capital of the Bank in order to support our organic growth and implement our strategic initiatives, for working capital and for other general corporate purposes, and to strengthen our regulatory capital. We have not designated the amount of net proceeds that we will contribute to the Bank or that we will use for any particular purpose. Accordingly, our management will have broad discretion in the application of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. You will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

There are substantial regulatory limitations on changes of control of bank holding companies that may discourage investors from purchasing shares of our common stock.

With limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be "acting in concert" from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of the directors or otherwise direct the management or policies of our company without prior notice or application to, and the approval of, the Federal Reserve. Companies investing in banks and bank holding companies receive additional review and may be required to become bank holding companies, subject to regulatory supervision. Accordingly, prospective investors must be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. These provisions could discourage third parties from seeking to acquire significant interests in us or in attempting to acquire control of us, which, in turn, could adversely affect the market price of our common stock.

As a public company, we will incur significant legal, accounting, insurance, compliance and other expenses. Any deficiencies in our financial reporting or internal controls could materially and adversely affect our business and the market price of our common stock.

As a public company, we will incur significant legal, accounting, insurance and other expenses. These costs and compliance with the rules of the SEC and the rules of NASDAQ will increase our legal and financial compliance costs and make some activities more time consuming and costly. Beginning with our Annual Report on Form 10-K for our 2018 fiscal year, SEC rules will require that our Chief Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of our internal control over

50


Table of Contents

financial reporting. Beginning with the time we are no longer an "emerging growth company" as defined in the JOBS Act, but no later than December 31, 2022, we will be required to engage our independent registered public accounting firm to audit and opine on the design and operating effectiveness of our internal control over financial reporting. This process will require significant documentation of policies, procedures and systems, and review of that documentation and testing of our internal control over financial reporting by our internal auditing and accounting staff and our independent registered public accounting firm. This process will require considerable time and attention from management, which could prevent us from successfully implementing our business initiatives and improving our business, financial condition and results of operations, any strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter.

During the course of our testing we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal control over financial reporting. A material weakness is defined by the standards issued by the PCAOB as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a consequence, we would have to disclose in periodic reports we file with the SEC any material weakness in our internal control over financial reporting. The existence of a material weakness would preclude management from concluding that our internal control over financial reporting is effective and would preclude our independent auditors from expressing an unqualified opinion on the effectiveness of our internal control over financial reporting. In addition, disclosures of deficiencies of this type in our SEC reports could cause investors to lose confidence in our financial reporting, and may negatively affect the market price of our common stock, and could result in the delisting of our securities from the securities exchanges on which they trade. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting, it may materially and adversely affect us.

We may not pay dividends on our common stock in the future.

Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. Our board of directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, we are a bank holding company, and our ability to declare and pay dividends is dependent on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization's expected future needs, asset quality and financial condition.

We are controlled by trusts established for the benefit of members of the Trione family, whose interests in our business may be different from yours.

Trusts established for the benefit of the Chairman of our board of directors, Victor S. Trione, our former director and Secretary, Mark Trione and his wife, and each of the adult children of Messrs. Trione, collectively referred to as the Trione Family Trusts, currently control 95.2% of our common stock and if they vote in the same manner, are able to control our affairs in all circumstances. The Trione Family Trusts established for the benefit of the adult children hold an aggregate of 59.0% of the common stock outstanding before this offering, and each has the same third party trustees, one of whom is an employee of a company owned by Messrs. Trione. Following this offering, the Trione Family Trusts will continue to own approximately 74.97% of our common stock (or 72.66% if the underwriters exercise their option to purchase additional shares in full). As a result, the Trione Family Trusts will continue, if they vote in the

51


Table of Contents

same manner, to have the ability to determine the outcome of all matters put to a shareholder vote, including the election of directors, the approval of mergers, material acquisitions and dispositions and other extraordinary transactions, and amendments to our articles of incorporation, bylaws and other corporate governance documents. So long as the Trione Family Trusts continue to own a majority of our common stock, they will have the ability, if they vote in the same manner, to prevent any transaction that requires shareholder approval regardless of whether others believe the transaction is in our best interests. In any of these matters, the interests of the Trione Family Trusts may differ from or conflict with the interests of our other shareholders. Moreover, this concentration of stock ownership may also adversely affect the trading price of our common stock, if investors perceive disadvantages in owning stock of a company with a controlling family.

We are a "controlled company" within the meaning of the rules of NASDAQ and, as a result, qualify for, and may rely on, exemptions from certain corporate governance requirements. As a result, you will not have the same protections afforded to shareholders of companies that are subject to such requirements.

Following the consummation of this offering, The Trione Family Trusts will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a "controlled company" within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including the requirements that a majority of the board of directors consist of independent directors and to have board-level compensation and nominating and corporate governance committees consisting entirely of independent directors.

Following this offering, we do not intend to rely on these exemptions, but we may, in the future, take advantage of some of these exemptions for as long as we continue to qualify as a "controlled company." Accordingly, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

We may issue additional equity securities, or engage in other transactions, which could affect the priority of our common stock, which may adversely affect the market price of our common stock.

Our board of directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities. We are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be effected. Such offerings could be dilutive to common shareholders. We may also issue shares of preferred stock that will provide new investors with rights, preferences and privileges that are senior to, and that adversely affect, our then current common shareholders. Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

52


Table of Contents

We intend to enter into a tax sharing agreement with our existing shareholders and could become obligated to make payments to our existing shareholders for any additional federal, state or local income taxes assessed against them for tax periods prior to the completion of this offering.

We historically have been treated as an S Corporation for U.S. federal income tax purposes. Because we have been an S Corporation our existing shareholders have been taxed on our income as individuals. Therefore our existing shareholders have received distributions, referred to as tax distributions, from us that were generally intended to equal the amount of tax the existing shareholders were required to pay with respect to our income. In connection with this offering, our S Corporation status will terminate and we will thereafter be subject to federal and increased state income taxes. In the event of an adjustment to our reported taxable income for periods prior to the termination of our S Corporation status, it is possible that our existing shareholders would be liable for additional income taxes for those prior periods. Therefore, we intend to enter into an agreement with our existing shareholders prior to completion of this offering. Pursuant to this agreement, upon our filing of any tax return (amended or otherwise), in the event of any restatement of our taxable income pursuant to a determination by, or a settlement with, a taxing authority, for any period during which we were an S Corporation, depending on the nature of the adjustment we may be required to make a payment to our existing shareholders in an amount equal to our existing shareholders' incremental tax liability, which amount may be material. In addition, we will indemnify our existing shareholders with respect to unpaid income tax liabilities to the extent that such unpaid income tax liabilities are attributable to an adjustment to our taxable income for any period after our S Corporation status terminates. In both cases the amount of the payment will be based on the assumption that our existing shareholders are taxed at the highest rate application to married individuals filing jointly for the relevant periods. We will also indemnify our existing shareholders for any interest, penalties, losses, costs or expenses arising out of any claim under the agreement. However, our existing shareholders will indemnify us with respect to our unpaid tax liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in our existing shareholders' taxable income for any tax period and a corresponding increase in our taxable income for any period.

Prior to this offering, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could adversely affect us.

Upon consummation of this offering, our status as an S Corporation will terminate and we will be treated as a "C Corporation" under the provisions of Sections 301 through 385 of the Code, which treat the corporation as an entity that is subject to U.S. federal income tax. If the unaudited, open tax years in which we were an S Corporation are audited by the Internal Revenue Service, or IRS, and we are determined not to have qualified for, or to have violated any requirement for maintaining, our S Corporation status, we will be obligated to pay back taxes, interest and penalties. The amounts that we would be obligated to pay could include taxes on all our taxable income while we were an S Corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our business, financial condition or results of operations. For information regarding our pro forma tax liabilities if we had been taxed as a C Corporation, see "Selected Historical and Pro Forma Financial Data".

Future equity issuances could result in dilution, which could cause our common stock price to decline and future sales of our common stock could depress the market price of our common stock.

Following the completion of this offering, we will have 53,350,000 issued and outstanding shares of our common stock (55,052,500 shares if the underwriters elect to their option to purchase additional shares of common stock in full). Although we do not currently have any plans, arrangements or understandings to issue any shares of our common stock during the twelve month period following the date of this registration statement other than pursuant to the equity compensation arrangements described in this registration statement, actual or anticipated issuances or sales of substantial amounts of our common stock

53


Table of Contents

following this offering could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance. We may issue all of these shares without any action or approval by our shareholders, and these shares, once issued (including upon exercise of outstanding options), will be available-for-sale into the public market, subject to the restrictions described in this registration statement, if applicable, for affiliate holders.

Our corporate governance documents, and corporate and banking laws applicable to us, could make a takeover more difficult and adversely affect the market price of our common stock.

We intend to amend our articles of incorporation and bylaws prior to completion of the offering. Certain provisions of our articles of incorporation and bylaws, as we intend to amend them, and corporate and federal banking laws, could delay, defer, or prevent a third party from acquiring control of our organization or conducting a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions and regulations applicable to us:

These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our shareholders might otherwise receive a premium over the market price of our shares. In addition, immediately following the completion of this offering, the Trione Family Trusts will own shares sufficient for the majority vote over all matters requiring a stockholder vote, which may delay, deter or prevent acts that would be favored by our other shareholders.

An investment in our common stock is not an insured deposit.

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

54


Table of Contents


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as "may," "could," "should," "will," "would," "believe," "anticipate," "estimate," "expect," "aim," "intend," "plan," or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

55


Table of Contents

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this prospectus, including those discussed in the section entitled "Risk Factors." If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this prospectus. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

56


Table of Contents


USE OF PROCEEDS

Assuming an initial public offering price of $11.50 per share (the midpoint of the range set forth on the cover page of this prospectus), we estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses, will be approximately $120.0 million, or approximately $138.3 million if the underwriters' over-allotment option is exercised in full. Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) our net proceeds, after deducting underwriting discounts and commissions and the estimated offering expenses, by $10.6 million (assuming no exercise of the underwriters' over-allotment option). Each $1 million increase (decrease) in the amount of the dividend paid would decrease (increase) our net proceeds by a similar amount.

We intend to use the net proceeds to us from this offering (i) to fund a cash distribution to our existing shareholders immediately after the closing of this offering in the amount of $40.0 million — purchasers of our common stock in this offering will not be entitled to receive any portion of this distribution; and (ii) to use the remainder of the net proceeds, which we estimate to be approximately $80.0 million (after deducting underwriting discounts and the estimated offering expenses), or $98.3 million (after deducting underwriting discounts and the estimated offering expenses) if the underwriters' over-allotment option is exercised in full, to increase the capital of the Bank in order to support our growth strategies, for working capital and for other general corporate purposes, and to strengthen our regulatory capital.

Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use at the Bank to fund loans or investment securities, we expect that we would use all or a portion of the net proceeds to pay off FHLB borrowings, which can be reborrowed, if necessary, to fund loan growth.

57


Table of Contents


CAPITALIZATION

The following table sets forth our capitalization and regulatory capital ratios on a consolidated basis as of September 30, 2017:

Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) our net proceeds, after deducting underwriting discounts and commissions and the estimated offering expenses, by $10.6 million (assuming no exercise of the underwriters' over-allotment option). Each increase (decrease) of 1.0 million in the number shares offered by us would increase (decrease) our total shareholders' equity and total capitalization by $10.8 million based on the midpoint of the price range set forth on the cover page of this prospectus. Each $1 million increase (decrease) in the amount of the dividend paid would decrease (increase) our stockholders' equity by a similar amount. The as adjusted capitalization assumed that the underwriters' overallotment option is not exercised.

The following should be read together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Consolidated and Pro Forma Financial Data" and our consolidated financial statements and accompanying notes that are included elsewhere in this prospectus.

58


Table of Contents

 
  As of September 30, 2017
(Dollars in thousands)
  Actual
  Pro Forma

Borrowings (1):

           

Senior debt, due 2024

    $ 95,000       $ 95,000  

Junior subordinated notes, due 2036

      41,238         41,238  

Junior subordinated notes, due 2037

      20,619         20,619  

Total borrowings

    $ 156,857       $ 156,857  

Stockholders' equity

           

Common stock, no par value, shares authorized

      2,262         122,274  

100,000,000, shares issued and outstanding 42,000,000 actual and 53,350,000 as adjusted (2)

           

Retained earnings

      435,912         397,779  

Accumulated other comprehensive (loss) income

      (4,714)        (4,714) 

Total stockholders' equity (3)

    $ 433,460         515,339  

Total capitalization

    $ 590,317         672,196  

Capital Ratios

           

Leverage capital ratio

      8.58%        10.00%  

Common equity Tier 1 capital ratio

      13.69%        16.26%  

Tier 1 risk based capital ratio

      15.63%        18.21%  

Total risk based capital ratio

      16.62%        19.20%  
(1)
Excludes actual FHLB advances at the Bank of $807.7 million, $734.7 million pro forma, with a weighted average interest rate of 1.64%, at September 30, 2017. We intend to use the net cash proceeds from this transaction to reduce our level of FHLB advances by $80.0 million until we can redeploy such funds into higher yielding assets such as loans and investments.

(2)
Number of common shares outstanding have been adjusted retroactively to reflect a 200-for-1 stock split effective April 27, 2017.

(3)
The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C corporation will be recognized in income in the quarter in which such change takes place. The difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases would have been recorded as a net deferred tax asset of $9.8 million, or an increase of $9.0 million, and a corresponding increase of $9.0 million in stockholders' equity if it had been recorded on our balance sheet as of September 30, 2017.

59


Table of Contents


DILUTION

If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of common stock upon completion of this offering. Net tangible book value per common share represents the amount of our tangible assets less total liabilities, divided by the number of shares of common stock outstanding.

As of September 30, 2017, we had net tangible book value of approximately $426.1 million, or $10.14 per share. After giving effect to the sale of shares of our common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares), based upon an assumed offering price of $11.50 per share (the midpoint of the range set forth on the cover page of this prospectus), the use of proceeds, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2017 would have been approximately $508.0 million, or $9.52 per share. This represents an immediate decrease in net tangible book value of $0.62 per share to our existing shareholders and an immediate dilution of $1.98 per share to new investors purchasing common stock in this offering.

Each $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) our pro forma net tangible book value after this offering by approximately $10.6 million, or approximately $0.20 per share, and the dilution per share to new investors would decrease (increase) by approximately $0.20, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their option to purchase additional shares and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) our as adjusted net tangible book value after this offering by approximately $10.8 million, or approximately $0.02 per share, and the dilution per share to new investors would decrease (increase) by approximately $0.02, assuming the public offering price of $11.50 per share of common stock (the midpoint of the price range set forth on the cover page of this prospectus), remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table illustrates this dilution on a per share basis:

 
  Per Share

Initial public offering price per share of common stock

    $ 11.50  

Net tangible book value per share as of September 30, 2017

    $ 10.14  

Decrease in net tangible book value per share of our common stock

    $ 0.62  

Pro forma net tangible book value per share of common stock after this offering

    $ 9.52  

Dilution per share to new investors in this offering

    $ 1.98  

If the underwriters exercise in full their option to purchase additional shares in this offering, our pro forma net tangible book value per share would be $9.56 per share of common stock and the dilution to new investors in this offering would be $1.94 per share of common stock), based upon an assumed offering price of $11.50 per share (the midpoint of the range set forth on the cover page of this prospectus), the use of proceeds therefrom, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

60


Table of Contents


MARKET FOR COMMON STOCK AND DIVIDEND POLICY

Market for Common Stock

Prior to this offering, our common stock has not been traded on an established public trading market, and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. As of September 30, 2017, there were nine holders of record of our common stock.

We have received approval to list our common stock for trading on the NASDAQ Global Select Market. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See the section of this prospectus titled "Underwriting" for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

Dividend Policy

Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends.

S Corporation Dividends and Distributions.    Historically, we have been an S Corporation, and as such, we have paid distributions to our existing shareholders to assist them in paying the U.S. federal income taxes on our taxable income that is "passed through" to them, as well as additional amounts for returns on capital. Prior to consummation of this offering, our board of directors intends to declare a cash dividend to our existing shareholders in the amount of $40.0 million, which is intended to be non-taxable to them and represents a significant portion of our S Corporation earnings that have been, or will be, taxed to our shareholders, but not distributed to them. The distribution will be contingent upon, and payable to our existing shareholders immediately following, the closing of this offering. Purchasers of our common stock in this offering will not be entitled to receive any portion of this distribution. We also intend to make a distribution to our existing shareholders in the amount of $7.1 million prior to the completion of this offering to fund the payment of the estimated fourth quarter 2017 taxes that will be "passed through" to them by virtue of our status as an S Corporation.

The following table shows the dividends that have been declared on our common stock with respect to the periods indicated below. The per share amounts set forth in the following table have been adjusted to give

61


Table of Contents

effect to the 200-for-one stock split effective as of April 27, 2017. The per share amounts are presented to the nearest cent.

Quarterly Period    
  Amount
Per Share
  Total Cash
Dividend
($ in 000's)

First Quarter 2015

    $ 0.07       $ 3,100  

Second Quarter 2015

      0.10         4,000  

Third Quarter 2015

      0.05         2,200  

Fourth Quarter 2015

      0.06         2,500  

First Quarter 2016

   
  0.06  
   
  2,500  

Second Quarter 2016

      0.14         5,700  

Third Quarter 2016

      0.10         4,100  

Fourth Quarter 2016

      0.11         4,500  

First Quarter 2017

   
  0.23  
   
  9,800  

Second Quarter 2017

      0.25         10,400  

Third Quarter 2017

      0.01         500  

Fourth Quarter 2017

      0.17         7,100  

Future Dividend Policy.    Following this offering, our dividend policy and practice will change. Following the offering, we will be taxed as a C Corporation and, therefore, we will no longer pay distributions to provide our shareholders with funds to pay U.S. federal income tax on their pro rata portion of our taxable income.

Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, our ability to service debt obligations senior to our common stock, banking regulations, contractual, legal, tax and regulatory restrictions, and limitations on the payment of dividends by us to our shareholders or by the Bank to us, and such other factors as our board of directors may deem relevant. Because we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay any dividends on our common stock depends, in large part, upon our receipt of dividends from our Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies.

Subject to the discretion of our board of directors and the considerations discussed under "Market for Common Stock and Dividend Policy," commencing in the second quarter of 2018, we expect to establish a regular quarterly cash dividend on our common stock of $0.0575 per share. We also expect to declare a dividend payable in the first quarter of 2018 to shareholders of record as of a date following the completion of this offering, in a prorated amount based on such amount and the portion of the fourth quarter of 2017 during which we are a public company. Although we currently intend to pay dividends according to our dividend policy, there can be no assurance that we will pay any dividend to holders of our stock, or as to the amount of any such dividends. Our board of directors, in its sole discretion, can change the amount or frequency of this dividend or discontinue the payment of dividends entirely at any time.

Dividend Limitations.    California law places limits on the amount of dividends the Bank may pay to the Company without prior approval. Prior regulatory approval is required to pay dividends which exceed the lesser of the Bank's retained earnings or the Bank's retained net income for the prior three fiscal years. State and federal bank regulatory agencies also have authority to prohibit a bank from paying dividends if such payment is deemed to be an unsafe or unsound practice, and the Federal Reserve has the same

62


Table of Contents

authority over bank holding companies. We would not be able to pay a dividend in excess of our retained earnings, or where our liabilities would exceed our assets.

The Federal Reserve has established requirements with respect to the maintenance of appropriate levels of capital by registered bank holding companies. Compliance with such standards, as presently in effect, or as they may be amended from time to time, could possibly limit the amount of dividends that we may pay in the future. The Federal Reserve has issued guidance on the payment of cash dividends by bank holding companies. In the statement, the Federal Reserve expressed its view that a holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income, or which could only be funded in ways that weaken the holding company's financial health, such as by borrowing. Under Federal Reserve guidance, as a general matter, the board of directors of a holding company should inform the Federal Reserve and should eliminate, defer, or significantly reduce the dividends if: (i) the holding company's net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the holding company's prospective rate of earnings retention is not consistent with the capital needs and overall current and prospective financial condition; or (iii) the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. As a depository institution, the deposits of which are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due the FDIC. The Bank currently is not in default under any of its obligations to the FDIC.

63


Table of Contents


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information appearing elsewhere in this prospectus.

In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements, except to the extent required by law.

The following discussion presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through our bank subsidiary, Luther Burbank Savings, the discussion and analysis relates to activities primarily conducted by the Bank.

We are a bank holding company headquartered in Santa Rosa, California, and the parent company of Luther Burbank Savings, a California-chartered commercial bank headquartered in Manhattan Beach, California with $5.3 billion in assets at September 30, 2017. Our principal business is providing high-value, relationship-based banking products and services to our customers, which include real estate investors, professionals, entrepreneurs, high net worth individuals and commercial businesses. We generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is retail deposits and we place secondary reliance on wholesale funding, primarily borrowings from the FHLB. Our largest expenses are interest on deposits and borrowings along with salaries and related employee benefits. Our principal lending products are real estate secured loans, primarily on smaller, existing multifamily residential properties, with stabilized rent rolls, and catering predominantly to low and middle income renters who are unable to afford to purchase a single family residence or condominium unit in the high demand, low supply residential markets of the West Coast, and purchase money mortgages on higher end single family residential properties.


Factors Affecting Comparability of Financial Results

S Corporation Status

Since 2002, we have elected to be taxed for U.S. federal income tax purposes as an S Corporation. As a result, our earnings have not been subject to, and we have not paid, U.S. federal income tax, and we have not been required to make any provision or recognize any liability for U.S. federal income tax in our financial statements. While we are not subject to and have not paid U.S. federal income tax, we are subject to, and have paid, California S Corporation income tax at a current rate of 3.5%. The consummation of this offering will result in the termination of our status as an S Corporation and in the commencement of our taxation as a C Corporation for U.S. federal and California income tax purposes. Upon the termination of our status as an S Corporation, we will commence paying U.S. federal income tax and a higher California income tax on our taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminates), and our financial statements will reflect a provision for U.S. federal income tax. As a result of this change, the net income and earnings per share data presented in our historical financial statements and the other financial information set forth in this prospectus, which (unless otherwise specified) do not include any provision for U.S. federal income tax, will not be comparable with our future net income and earnings per share in periods after we commence to be taxed as a C Corporation. As a C Corporation, our net income will be calculated by including a provision for U.S. federal income tax and a higher California income tax rate, currently at 10.84%.

64


Table of Contents

The termination of our status as an S Corporation may also affect our financial condition and cash flows. Historically, we have made quarterly cash distributions to our shareholders in amounts estimated by us to be sufficient for them to pay estimated individual U.S. federal and California income tax liabilities resulting from our taxable income that was "passed through" to them. However, these distributions have not been consistent, as sometimes the distributions have been less than or in excess of the shareholder's estimated U.S. federal and California income tax liabilities resulting from their ownership of our stock. In addition, these estimates have been based on individual income tax rates, which may differ from the rates imposed on the income of C Corporations. Once our status as an S Corporation terminates, no income will be "passed through" to any shareholders, but, as noted above, we will commence paying U.S. federal income tax and a higher California income tax. The amounts that we have historically distributed to our shareholders may not be indicative of the amount of U.S. federal and California income tax that we will be required to pay after we commence to be taxed as a C Corporation. Depending on our effective tax rate and our future dividend rate, our future cash flows and financial condition could be positively or adversely affected compared to our historical cash flows and financial condition.

Furthermore, deferred tax assets and liabilities will be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation will be recognized in income in the quarter such change takes place. The difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases would have been recorded as a net deferred tax asset of $9.8 million, or an increase of $9.0 million, and a corresponding $9.0 million increase to stockholders' equity if it had been recorded on our balance sheet as of September 30, 2017.

Retail Mortgage Banking Activity and Other Loan Sales

We began retail mortgage banking operations in 2013, with the primary purpose of serving a wider customer base of consumers who desire 30-year fixed rate single family real estate financing. We offered a wide range of mortgage products including variable rate 3, 5, 7 and 10-year hybrid products and long-term fixed rate programs. While much of the variable rate loan production from this activity was held in our loan portfolio, the long-term fixed loan originations were sold to correspondents or to the Federal Home Loan Mortgage Corporation, or Freddie Mac. Since 2016, we have sold $31.3 million of single family residential loans to Freddie Mac, on a servicing retained basis. We also brokered loans to other financial institutions where those organizations had a desirable product for our customers. As part of our retail mortgage banking activity, we also made single family residential construction loans, $59.7 million of which remained on our books, and $15.7 million of which were subject to commitments for future disbursements, at September 30, 2017.

In December 2016, we decided to wind down this business activity during the first quarter of 2017, as we found that the highly competitive nature and expense of running this business was unprofitable, primarily due to the lack of sufficient loan volume needed to offset fixed costs. Revenue from this activity, including net gains on the sales of loans, broker fee income and servicing fee income can be found in noninterest income on our consolidated statements of operations while the related expenses are captured in noninterest expense on the consolidated statements of operations.

While we are still able to originate single family residential loans on a retail basis with our portfolio of hybrid products, we are not actively pursuing this business. Our single family residential loans are primarily sourced from brokers, with many of which we have long-term relationships. This activity has been a significant part of our lending business since 2006.

65


Table of Contents

Multifamily Securitization Transaction

During 2017, we entered into a trust sale memorandum of understanding with Freddie Mac, pursuant to which agreed to sell a portfolio of multifamily loans to a real estate mortgage investment conduit, or REMIC, that holds the loans in trust and issued securities that are fully guaranteed by Freddie Mac and privately offered and sold to investors. On September 27, 2017, we closed this securitization transaction. We did not purchase any of the securities for our portfolio.

The primary purpose of this multifamily securitization transaction was to enable us to redeploy capital and funding to support higher-yielding assets while also reducing our reliance on wholesale funding, improving liquidity measures and reducing our concentration of multifamily loans.

The size of the multifamily loan portfolio sold to the REMIC was $626.1 million, consisting of one class of post-reset, variable rate 3, 5, and 7-year hybrid loans in an aggregate principal amount of approximately $91.6 million, and two classes of pre-reset, variable rate 3, 5 and 7-year hybrid loans in an aggregate principal amount of approximately $534.5 million. 74.3% of the loan portfolio consisted of loans for multifamily properties located in California, while the remaining 25.7% of the loan portfolio consistent of loans for multifamily properties located in Washington. We retain sub-servicing obligations on the loan portfolio. The gross proceeds of this sale to us was approximately $637.6 million. We used the proceeds of this sale to pay down short-term FHLB borrowings. These borrowings had no prepayment penalties associated with them. The following table summarizes the loans that sold in this securitization.

Loan Type

    Number of
Mortgage
Loans
    Principal
Balance (1)
  Percentage
of
Mortgage
Pool Balance
  Weighted
Average
Mortgage
Rate (1)
  Loan to
Value
Ratio (1)
    Debt
Service
Coverage
Ratio (1)
 

Post-Reset Hybrid Loans

    65   $ 91,552   14.6%   3.66%   53.2%     1.88  

Pre-Reset Hybrid Loans (2)

    237     415,628   66.4      3.39      54.2        1.67  

Pre-Reset Hybrid Loans (3)

    70     118,880   19.0      3.51      46.5        1.70  

Total

    372   $ 626,060   100.0%   3.45%   52.6%     1.71