LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 13,442 | | | $ | 22,940 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 649 | | | 603 | |
Reversal of provision for credit losses | (795) | | | (2,500) | |
Amortization of deferred loan costs, net | 1,373 | | | 4,792 | |
Amortization of premiums on investment securities, net | 1 | | | 337 | |
| | | |
| | | |
| | | |
Stock based compensation expense, net of forfeitures | 473 | | | 710 | |
| | | |
Change in fair value of mortgage servicing rights | 19 | | | 104 | |
Change in fair value of equity securities | (166) | | | 577 | |
| | | |
| | | |
Other items, net | (31) | | | 44 | |
Effect of changes in: | | | |
Accrued interest receivable | 433 | | | (253) | |
Accrued interest payable | 3,466 | | | 35 | |
Prepaid expenses and other assets | 5,652 | | | 4,293 | |
Other liabilities and accrued expenses | (8,757) | | | 3,140 | |
Net cash provided by operating activities | 15,759 | | | 34,822 | |
Cash flows from investing activities: | | | |
Proceeds from maturities, paydowns and calls of available for sale debt securities | 15,178 | | | 38,296 | |
Proceeds from maturities and paydowns of held to maturity debt securities | 27 | | | 29 | |
| | | |
Purchases of available for sale debt securities | — | | | (33,140) | |
| | | |
Net decrease (increase) in loans receivable | 11,132 | | | (81,469) | |
| | | |
| | | |
(Purchase) redemption of FHLB stock, net | (13,313) | | | 848 | |
Purchase of premises and equipment | (321) | | | (103) | |
| | | |
Net cash provided by (used in) investing activities | 12,703 | | | (75,539) | |
Cash flows from financing activities: | | | |
Net (decrease) increase in deposits | (189,846) | | | 63,004 | |
Proceeds from long-term FHLB advances | 450,000 | | | 100,000 | |
Repayment of long-term FHLB advances | (50,000) | | | (100,000) | |
Net change in short-term FHLB advances | 93,500 | | | — | |
Shares withheld for taxes on vested restricted stock | (1,098) | | | (875) | |
Shares repurchased | — | | | (5,637) | |
Cash paid for dividends | — | | | (6,225) | |
Net cash provided by financing activities | 302,556 | | | 50,267 | |
Increase in cash and cash equivalents | 331,018 | | | 9,550 | |
Cash and cash equivalents, beginning of period | 185,895 | | | 138,413 | |
Cash and cash equivalents, end of period | $ | 516,913 | | | $ | 147,963 | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 45,943 | | | $ | 10,931 | |
Income taxes | $ | 11 | | | $ | 6 | |
Supplemental non-cash disclosures: | | | |
Lease liabilities arising from obtaining right-of-use assets | $ | — | | | $ | 16,255 | |
| | | |
| | | |
| | | |
| | | |
See accompanying notes to unaudited consolidated financial statements
8
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 11,102 |
| | $ | 12,295 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 714 |
| | 735 |
|
Provision for loan losses | 1,500 |
| | 309 |
|
Increase in deferred loan costs, net | (2,708 | ) | | (1,049 | ) |
Amortization of premiums on investment securities, net | 563 |
| | 231 |
|
Net loss on sale of loans | — |
| | 163 |
|
Originations of loans held for sale | — |
| | (17,986 | ) |
Proceeds from sale of loans held for sale | — |
| | 24,691 |
|
Stock based compensation expense, net of forfeitures | 1,013 |
| | — |
|
Net increase in cash surrender value of life insurance | (53 | ) | | (49 | ) |
Effect of changes in: | | | |
Accrued interest receivable | (1,236 | ) | | (1,033 | ) |
Accrued interest payable | 548 |
| | 96 |
|
Other assets | (43 | ) | | 527 |
|
Other liabilities | (6,727 | ) | | (7,522 | ) |
Net cash provided by operating activities | 4,673 |
| | 11,408 |
|
Cash flows from investing activities: | | | |
Proceeds from maturities or calls of available for sale investment securities | 20,965 |
| | 20,449 |
|
Proceeds from maturities or calls of held to maturity investment securities | 55 |
| | 289 |
|
Purchases of available for sale investment securities | (59,647 | ) | | (27,468 | ) |
Purchases of held to maturity investment securities | (5,375 | ) | | — |
|
Net increase in loans receivable | (281,986 | ) | | (307,966 | ) |
Purchase of FHLB stock, net | (5,290 | ) | | (2,500 | ) |
Purchase of premises and equipment | (123 | ) | | (168 | ) |
Net cash used in investing activities | (331,401 | ) | | (317,364 | ) |
Cash flows from financing activities: | | | |
Net increase in customer deposits | 162,788 |
| | 286,673 |
|
Proceeds from long term FHLB advances | 100,000 |
| | 100,000 |
|
Net change in short term FHLB advances | 68,893 |
| | (54,406 | ) |
Shares withheld for taxes on vested restricted stock | (49 | ) | | — |
|
Cash paid for dividends | (6,061 | ) | | (9,800 | ) |
Net cash provided by financing activities | 325,571 |
| | 322,467 |
|
(Decrease) increase in cash and cash equivalents | (1,157 | ) | | 16,511 |
|
Cash and cash equivalents, beginning of period | 75,578 |
| | 59,208 |
|
Cash and cash equivalents, end of period | $ | 74,421 |
| | $ | 75,719 |
|
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 18,268 |
| | $ | 13,451 |
|
Income taxes | $ | 158 |
| | $ | — |
|
LUTHER BURBANK CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.NATURE OF OPERATIONS
Organization
Luther Burbank Corporation (the ‘‘Company’’), a California corporation headquartered in Santa Rosa, is the bank holding company for its wholly-owned subsidiary, Luther Burbank Savings (the "Bank"), and itsthe Bank's wholly-owned subsidiary, Burbank Investor Services.
The Bank conducts its business from its headquarters in Manhattan Beach, California. It has nine full service branches located in Sonoma, Marin, Santa Clara, and Los Angeles Counties. Other California loan offices are located in Contra Costa, Los Angeles and Orange Counties. There are also loan offices in King County, Washington and Clackamas County, Oregon. The Company also owns Burbank Financial Inc., a real estate investment company that provides limited loan administrative support to the Bank, and all the common interests in Luther Burbank Statutory Trusts I and II, entities created to issue trust preferred securities.
The Bank conducts its business from its executive offices in Santa Rosa and Gardena, California, and an administrative office in Irvine, California. It has ten full service branches in California located in Sonoma, Marin, Santa Clara, and Los Angeles Counties and one full service branch in Washington located in King County. Additionally, there are several loan production offices located throughout California.
On April 27, 2017,November 13, 2022, the Company declared a 200-for-1 stock split, increasingentered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Washington Federal, Inc. (“WAFD”), pursuant to which the numberCompany will merge with and into WAFD (the “Corporate Merger”), with WAFD surviving the Corporate Merger. Promptly following the Corporate Merger, the Company’s wholly-owned bank subsidiary, Luther Burbank Savings, will be merged with and into Washington Federal Bank, dba WaFd Bank, the wholly-owned bank subsidiary of issued and authorized shares from 210,000 to 42,000,000 and 500,000 to 100,000,000, respectively. The Company also declared thatWAFD (“WAFD Bank”), with WAFD Bank as the stock has zero par value, whereas the stock had previously held a stated value of $8 per share (stated value not adjusted for split). Additional shares issued as a resultsurviving institution. Closing of the stock split were distributed immediatelytransaction, which is expected to occur in 2023, is contingent upon issuance to the stockholders. Shareshareholder approval and per share amounts included in the consolidated financial statements and accompanying notes reflect the effectreceipt of the split for all periods presented.
We terminated our status as a “Subchapter S” corporation as of December 1, 2017, in connection with our Initial Public Offering ("IPO") and became a taxable C Corporation. Prior to that date, as an S-Corporation, we had no U.S. federal income tax expense.
On December 12, 2017, the Company completed the IPO of its common stock. In connectionnecessary regulatory approvals, along with the Company’s IPO, the Company sold and issued 13,972,500 sharessatisfaction of common stock at $10.75 per share. After deducting underwriting discounts and offering expenses, the Company received total net proceeds of $138.3 million from the IPO.
other customary closing conditions.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2017,2022, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172022 filed with the SEC,Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and the Bank.its subsidiaries. All intercompany accounts and transactions have been eliminated.
The results of operations for the three months ended March 31, 20182023 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2018.2023.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ.
Earnings Per Share ("EPS")
Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year.period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of commonscommon shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method. The factors used in the earnings per share computation follow:
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except share amounts) | | Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Net income | | $ | 13,442 | | | $ | 22,940 | | | | | |
| | | | | | | | |
Weighted average basic common shares outstanding | | 50,871,173 | | | 51,337,488 | | | | | |
Add: Dilutive effects of assumed vesting of restricted stock | | 32,272 | | | 76,931 | | | | | |
Weighted average diluted common shares outstanding | | 50,903,445 | | | 51,414,419 | | | | | |
| | | | | | | | |
Income per common share: | | | | | | | | |
Basic EPS | | $ | 0.26 | | | $ | 0.45 | | | | | |
Diluted EPS | | $ | 0.26 | | | $ | 0.45 | | | | | |
Anti-dilutive shares not included in calculation of diluted earnings per share | | 19,913 | | | 20 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in thousands, except per share amounts) | | 2018 | | 2017 |
Net income | | $ | 11,102 |
| | $ | 12,295 |
|
| | | | |
Weighted average basic common shares outstanding | | 56,190,970 |
| | 42,000,000 |
|
Add: Dilutive effects of assumed vesting of restricted stock | | 564,184 |
| | — |
|
Weighted average diluted common shares outstanding | | 56,755,154 |
| | 42,000,000 |
|
| | | | |
Income per common share: | | | | |
Basic | | $ | 0.20 |
| | $ | 0.29 |
|
Diluted | | $ | 0.20 |
| | $ | 0.29 |
|
Anti-dilutive shares not included in calculation of diluted earnings per share | | — |
| | — |
|
Recently Adopted Financial Accounting Standard Adopted in 2018
Standards
FASB ASU 2018-022016-13
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity (“HTM”) debt securities and off-balance sheet exposures (loan commitments, financial guarantees, standby letters of credit and other similar instruments). In addition, CECL modifies the other-than-temporary impairment ("OTTI") model for available for sale (“AFS”) debt securities to require an allowance for credit losses instead of a direct write down, which allows for reversal of credit losses in future periods based on improvements in credit quality. As permitted under ASC 326, the Company elected to maintain the same loan segments that it previously identified prior to adoption of CECL.
The Company adopted CECL using the modified retrospective method for all financial assets measured at cost, including loans, HTM debt securities and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are reported under ASU 2016-13, while prior period results continue to be reported under the incurred loss model which was the previously applicable GAAP. The Company recorded an increase to its ACL of $119 thousand as a cumulative effect adjustment of adopting ASU 2016-13, with a corresponding decrease in retained earnings, net of $35 thousand in taxes, of $84 thousand. The transition adjustment reflects the results of our model in estimating lifetime expected credit losses on loans, unfunded commitments and other off-balance sheet credit exposures.
The following table illustrates the impact on the ACL due to the Company’s transition from the incurred loss methodology to the CECL methodology as of January 1, 2023:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Pre-CECL Adoption | | Impact of CECL Adoption | | As Reported Under CECL |
Assets: | | | | | |
ACL - Loans | | | | | |
Multifamily residential | $ | 26,417 | | | $ | 2,882 | | | $ | 29,299 | |
Single family residential | 8,564 | | | (2,472) | | | 6,092 | |
Commercial real estate | 1,539 | | | (784) | | | 755 | |
Construction and land | 165 | | | 282 | | | 447 | |
Total | $ | 36,685 | | | $ | (92) | | | $ | 36,593 | |
Liabilities: | | | | | |
ACL - Off-Balance Sheet Credit Exposures | $ | 563 | | | $ | 211 | | | $ | 774 | |
At adoption of CECL and continuing through March 31, 2023, the Company has not recorded an ACL on AFS or HTM investment securities as these investment portfolios consisted primarily of debt securities explicitly or implicitly backed by the U.S. government. Refer to Note 2, Investment Securities, for more information. The Company elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities.
The following accounting policies have been updated in connection with the adoption of the CECL methodology:
Allowance for Credit Losses on Loans
The ACL on loans represents the Company’s estimate of expected lifetime credit losses for its loans at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio as of the date of the consolidated statements of financial condition. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. The ACL on loans is increased by the provision for credit losses on loans, which is charged against current period operating results, and decreased by reversals of loan loss provisions as well as loan charge-offs, net of recoveries.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The Company’s ACL model utilizes an expected cash flow model to measure credit losses on an individual loan basis, which are then aggregated at the portfolio segment level and supplemented by a qualitative reserve that is applied to each portfolio segment level. Loans are segmented based on collateral type and consist of the following segments:
Multifamily residential and commercial real estate loans - These loans typically involve greater principal amounts than other types of loans, and repayment depends upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Multifamily residential and commercial real estate loans also expose a lender to significant credit risk because the collateral securing these loans typically cannot be sold as easily as single family residential real estate. In addition, some commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to comply with the terms of the loan agreement, which may increase the risk of default or non-payment.
Single family residential real estate loans - The degree of risk in single family residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate, and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of
loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Construction and land loans - This type of lending generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
The Company’s ACL model methodology incorporates assumptions for the probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the methodology, the ACL reflects the difference between the amortized cost basis and the net expected cash flows of a loan. In determining the PD, the model utilizes both macroeconomic and individual loan characteristics, such as loan-to-value, debt service coverage, seasoning, performance, collateral type, geography and credit score. For each period in a loan’s expected life, the model combines loan characteristics with forecasted economic conditions to determine the likely performance of a loan. With respect to LGD, the model estimates loss severity for secured loans primarily based on the loan type and value of collateral. Collateral values are estimated based on a third-party proprietary database that considers actual historical loan sales. The use of reasonable and supportable forecasts requires significant judgment. The ACL model leverages projections provided by reputable, well-recognized independent economic advisory companies and incorporates a forecast of macroeconomic factors which is updated quarterly. In addition, the ACL model incorporates two years of projected property type performance, such as property value growth and net operating income growth, also updated quarterly. For periods beyond the initial two years for property type performance, forecasts revert to a historical mean over the following three years and subsequently, to the U.S. historical average beyond that.
In February 2018,calculating its ACL, management considers whether qualitative adjustments to the FASB provided guidance forquantitative model, previously described, are needed. Qualitative adjustments may be related to and include, but are not limited to factors such as: differences in segment-specific risk characteristics, periods wherein current conditions and reasonable and supportable forecasts of economic conditions differ from the reclassificationconditions that existed at the time of the estimated loss calculation, model limitations identified through back-testing and management’s overall assessment of the adequacy of the ACL. Qualitative internal and external risk factors that are periodically evaluated by management include, but are not limited to, the following:
•Changes in the nature and volume of loans;
•Changes in economic conditions and forecasts;
•Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of criticized and classified loans;
•The existence and effect of remeasuring deferred tax balancesloan concentrations;
•Changes in lending policies and procedures;
•Changes in the experience, ability and depth of lending management and other relevant staff;
•Changes in the quality of our systematic loan review processes; and
•The effect of other external factors, such as legal and regulatory requirements on the level of estimated credit losses in the portfolio.
Generally, the measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that do not share similar risk characteristics are evaluated individually for credit loss and are not included in the evaluation process discussed above. Individually evaluated loans may consist of loans that are classified as collateral dependent, or of loans that management has determined to not share risk characteristics with collectively evaluated loans. Collateral dependent loans represent loans where management has determined that foreclosure is probable, or where a borrower is experiencing financial difficulty at the reporting date and loan repayment is expected to be provided generally through the operation or sale of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs, as appropriate.
Loans with terms that have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are evaluated for an ACL utilizing one of the methodologies above.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company makes commitments to extend credit to meet the financing needs of customers in the form of loans or lines of credit. The Company maintains an ACL on unfunded commitments and other off-balance sheet credit exposures in other liabilities and accrued expenses in the consolidated statements of financial condition. This ACL is estimated over a commitment's contractual period and is determined in a manner consistent with the ACL for loans, which includes consideration of the likelihood that funding will occur. Adjustments to the ACL for off-balance sheet credit exposures are included in the provision for credit losses in the unaudited consolidated statements of income.
Allowance for Credit Losses on Held to Maturity Securities
The Company measures expected credit losses on HTM investment securities on a collective basis by major security type. Accrued interest receivable on HTM investment securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Because substantially all of the Company’s HTM investment securities are either explicitly or implicitly guaranteed by U.S. Government entities or its agencies, the Company does not anticipate any credit related losses in this investment portfolio. Changes in the ACL on HTM securities, if any, are recorded in the provision for credit losses in the unaudited consolidated statements of income. Losses are charged against the ACL when management believes the uncollectibility of a HTM security is confirmed.
Allowance for Credit Losses on Available for Sale Securities
For AFS investment securities in an unrealized loss position, the Company initially assesses whether it intends to items within accumulatedsell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost is written down to fair value through income. For AFS investment securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, an allowance for credit loss is recorded to the extent that the fair value is less than the amortized cost basis. Because substantially all of the Company’s AFS investment securities are either explicitly or implicitly guaranteed by U.S. Government entities or its agencies, the Company does not anticipate any credit related losses in this investment portfolio. Any impairment that has not been recorded through an ACL on AFS securities is recognized in other comprehensive incomeincome. Changes in the ACL on AFS securities, if any, are recorded in the provision for credit losses in the unaudited consolidated statements of income. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to retained earnings resultingsell is met. Accrued interest receivable on AFS securities is excluded from the Tax Cuts and Jobs Actestimate of 2017. ASU 2018-02 is effective for all entities for fiscal years beginning after December 31, 2018, including interim periods therein, with early adoption permitted. As permitted, the Company early adopted ASU 2018-02 during the quarter ended March 31, 2018 and reclassified $1.8 million of stranded tax amounts within accumulated other comprehensive income to retained earnings.
Accounting Standards Pending Adoption
credit losses.
FASB ASU 2016-01
2022-02
In January 2016,March 2022, the FASB issued guidance to improve the usefulness of disclosures regarding certain loan refinancings, restructurings and write-offs under ASC 326. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL methodology and enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This Update contains several provisions, including but not limited to 1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and 4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the statement of financial condition or the accompanying notes to the financial statements. The Update also changes certain financial statement disclosure requirements including requiring disclosuresfor certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. In addition, the amendments require disclosure of the fair valuecurrent period gross write-offs for financing receivables and net investments in leases by year of financial instruments be made on the basis of exit price.origination. The Update is effective for public business entities ("PBEs") for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As an emerging growth company, the Company expects to adoptadopted this guidance on January 1, 2019, assuming2023, concurrent with its adoption of the Company remains an emerging growth company through such date.CECL standard. The adoption of this standard isdid not expected to have a material effect on the Company’s operating results or financial condition.
FASB ASU 2017-04
In January 2017, the FASB issued guidance related to the goodwill impairment test, which eliminates step 2 in the process. Under the amendments, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized, however, should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Update is effective for PBEs that are SEC filers for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption is permitted. As early adoption is permitted, the Company expects to adopt the guidance on December 31, 2018. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
| |
2. | 2. INVESTMENT SECURITIES |
Available for Sale
The following tables summarizetable summarizes the amortized cost and the estimated fair value of available for sale investmentdebt securities as of the dates indicated (dollars in thousands):indicated:
|
| | | | | | | | | | | | | | | |
| March 31, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Debt Securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 356,772 |
| | $ | 152 |
| | $ | (5,432 | ) | | $ | 351,492 |
|
Agency bonds | 120,405 |
| | 29 |
| | (3,919 | ) | | 116,515 |
|
Collateralized mortgage obligations | 44,707 |
| | 263 |
| | — |
| | 44,970 |
|
SBA securities | 13,125 |
| | — |
| | (137 | ) | | 12,988 |
|
U.S. Treasury 10 year note | 1,010 |
| | — |
| | (39 | ) | | 971 |
|
CRA Qualified Investment Fund (CRAIX) | 12,000 |
| | — |
| | (496 | ) | | 11,504 |
|
Total available for sale investment securities | $ | 548,019 |
| | $ | 444 |
| | $ | (10,023 | ) | | $ | 538,440 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Debt Securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 316,134 |
| | $ | 112 |
| | $ | (3,327 | ) | | $ | 312,919 |
|
Agency bonds | 120,405 |
| | 30 |
| | (3,213 | ) | | 117,222 |
|
Collateralized mortgage obligations | 46,920 |
| | 249 |
| | (1 | ) | | 47,168 |
|
SBA securities | 13,427 |
| | — |
| | (125 | ) | | 13,302 |
|
U.S. Treasury 10 year note | 1,010 |
| | — |
| | (26 | ) | | 984 |
|
CRA Qualified Investment Fund (CRAIX) | 12,000 |
| | — |
| | (307 | ) | | 11,693 |
|
Total available for sale investment securities | $ | 509,896 |
| | $ | 391 |
| | $ | (6,999 | ) | | $ | 503,288 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
At March 31, 2023: | | | | | | | |
Government and Government Sponsored Entities: | | | | | | |
Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | $ | 358,558 | | | $ | 217 | | | $ | (25,050) | | | $ | 333,725 | |
Residential MBS and CMOs | 216,656 | | | 12 | | | (21,125) | | | 195,543 | |
Agency bonds | 41,196 | | | 88 | | | (124) | | | 41,160 | |
Other asset backed securities ("ABS") | 23,916 | | | — | | | (917) | | | 22,999 | |
Total available for sale debt securities | $ | 640,326 | | | $ | 317 | | | $ | (47,216) | | | $ | 593,427 | |
At December 31, 2022: | | | | | | | |
Government and Government Sponsored Entities: | | | | | | |
Commercial MBS and CMOs | $ | 365,207 | | | $ | 265 | | | $ | (24,736) | | | $ | 340,736 | |
Residential MBS and CMOs | 221,994 | | | 22 | | | (22,632) | | | 199,384 | |
Agency bonds | 42,540 | | | 189 | | | (99) | | | 42,630 | |
Other ABS | 25,763 | | | — | | | (1,165) | | | 24,598 | |
Total available for sale debt securities | $ | 655,504 | | | $ | 476 | | | $ | (48,632) | | | $ | 607,348 | |
Net unrealized losses on available for sale investment securities are recorded as accumulated other comprehensive incomeloss within stockholders’ equity totaling $6.8and totaled $33.3 million and $6.2$34.2 million, net of $2.8$13.6 million and $394 thousand$14.0 million in tax assets, at March 31, 20182023 and December 31, 2017,2022, respectively. At December 31, 2017, $394 thousand of a total $1.9 million tax asset resides in accumulated other comprehensive income, while the remaining $1.5 million was included in the provision for income taxes on the consolidated statements of income related to the tax rate changes associated with the termination of S Corporation status and the change in tax law during the year ended December 31, 2017. The Company adopted ASU 2018-02 effective January 1, 2018 and reclassified the $1.5 million in stranded tax effects from the change in federal corporate tax rates on our available for sale investment securities from accumulated other comprehensive loss, net to retained earnings. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities forduring the three months ended March 31, 2018 and 2017.2023 or 2022.
The following tables summarize the gross unrealized losses and fair value of available for sale investmentdebt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):position:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Debt Securities: | | | | | | | | | | | |
Government Sponsored Entities: | | | | | | | | | | | |
Mortgage-backed securities | $ | 145,877 |
| | $ | (1,555 | ) | | $ | 177,062 |
| | $ | (3,878 | ) | | $ | 322,939 |
| | $ | (5,433 | ) |
Agency bonds | 9,755 |
| | (246 | ) | | 103,732 |
| | (3,673 | ) | | 113,487 |
| | (3,919 | ) |
SBA securities | — |
| | — |
| | 12,988 |
| | (137 | ) | | 12,988 |
| | (137 | ) |
U.S. Treasury 10 year note | — |
| | — |
| | 971 |
| | (39 | ) | | 971 |
| | (39 | ) |
CRA Qualified Investment Fund (CRAIX) | 4,869 |
| | (131 | ) | | 6,635 |
| | (364 | ) | | 11,504 |
| | (495 | ) |
Total available for sale investment securities | $ | 160,501 |
| | $ | (1,932 | ) | | $ | 301,388 |
| | $ | (8,091 | ) | | $ | 461,889 |
| | $ | (10,023 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Government and Government Sponsored Entities: | | | | | | | | |
Commercial MBS and CMOs | $ | 146,394 | | | $ | (2,205) | | | $ | 150,521 | | | $ | (22,845) | | | $ | 296,915 | | | $ | (25,050) | |
Residential MBS and CMOs | 69,012 | | | (2,781) | | | 121,213 | | | (18,344) | | | 190,225 | | | (21,125) | |
Agency bonds | 31,218 | | | (124) | | | — | | | — | | | 31,218 | | | (124) | |
Other ABS | — | | | — | | | 22,999 | | | (917) | | | 22,999 | | | (917) | |
Total available for sale debt securities | $ | 246,624 | | | $ | (5,110) | | | $ | 294,733 | | | $ | (42,106) | | | $ | 541,357 | | | $ | (47,216) | |
At March 31, 2018,2023, the Company held 92 mortgage-backed securities58 commercial MBS and CMOs of which 7251 were in a loss position and 4626 had been in a loss position for twelve months or more. The Company held 13 agency bonds89 residential MBS and CMOs of which 1286 were in a loss position and 11 had been for twelve months or more. The Company also held 15 collateralized mortgage obligations, none of which were in an unrealized loss position. Of the total 4 SBA securities held at March 31, 2018, 4 were in a loss position and had been in a loss position for greater than twelve months. Of the 3 total investments in CRA Qualified Investment Fund (CRAIX), all 3 were in a loss position and 2 had been for greater than 12 months. The Company held 1 U.S. Treasury note at March 31, 2018. This note was in a loss position and had been for greater than 12 months.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Debt Securities: | | | | | | | | | | | |
Government Sponsored Entities: | | | | | | | | | | | |
Mortgage-backed securities | $ | 93,403 |
| | $ | (805 | ) | | $ | 182,343 |
| | $ | (2,522 | ) | | $ | 275,746 |
| | $ | (3,327 | ) |
Agency bonds | 9,851 |
| | (148 | ) | | 104,340 |
| | (3,065 | ) | | 114,191 |
| | (3,213 | ) |
Collateralized mortgage obligations | 1,959 |
| | (1 | ) | | — |
| | — |
| | 1,959 |
| | (1 | ) |
SBA securities | — |
| | — |
| | 13,302 |
| | (125 | ) | | 13,302 |
| | (125 | ) |
U.S. Treasury 10 year note | — |
| | — |
| | 984 |
| | (26 | ) | | 984 |
| | (26 | ) |
CRA Qualified Investment Fund (CRAIX) | 4,948 |
| | (52 | ) | | 6,745 |
| | (255 | ) | | 11,693 |
| | (307 | ) |
Total available for sale investment securities | $ | 110,161 |
| | $ | (1,006 | ) | | $ | 307,714 |
| | $ | (5,993 | ) | | $ | 417,875 |
| | $ | (6,999 | ) |
At December 31, 2017, the Company held 87 mortgage-backed securities of which 68 were in a loss position and 3027 had been in a loss position for twelve months or more. The Company held 13six agency bonds of which 12three were in a loss position for less than twelve months. The Company held three other ABS of which all three were in a loss position for twelve months or more.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Government and Government Sponsored Entities: | | | | | | | | |
Commercial MBS and CMOs | $ | 188,155 | | | $ | (6,165) | | | $ | 109,255 | | | $ | (18,571) | | | $ | 297,410 | | | $ | (24,736) | |
Residential MBS and CMOs | 94,137 | | | (5,912) | | | 99,831 | | | (16,720) | | | 193,968 | | | (22,632) | |
Agency bonds | 14,345 | | | (99) | | | — | | | — | | | 14,345 | | | (99) | |
Other ABS | 10,804 | | | (580) | | | 13,794 | | | (585) | | | 24,598 | | | (1,165) | |
Total available for sale debt securities | $ | 307,441 | | | $ | (12,756) | | | $ | 222,880 | | | $ | (35,876) | | | $ | 530,321 | | | $ | (48,632) | |
At December 31, 2022, the Company held 58 commercial MBS and CMOs of which 50 were in a loss position and 1115 had been in a loss position for twelve months or more. The Company also held 15 collateralized mortgage obligations, 190 residential MBS and CMOs of which was in an unrealized loss position. Of the total 4 SBA securities held at year end, 486 were in a loss position and 14 had been in a loss position for greatertwelve months or more. The Company held six agency bonds of which one was in a loss position for less than twelve months. Of the 3 total investments in CRA Qualified Investment Fund (CRAIX), 3The Company held three other ABS of which three were in a loss position and 2two had been for greater than 12 months. The Company held 1 U.S. Treasury note at year end. This note was in a loss position and had been for greater than 12 months.twelve months or more.
The unrealized losses on the Company’s investments were caused by interest rate changes. In addition, the contractual cash flows of these investments are guaranteed by the U.S. government or agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for available for sale investment securities at March 31, 2023.
As of March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders' equity, other than the U.S. government and its agencies.
Held to Maturity
The following table summarizes the amortized cost and estimated fair value of held to maturity investment securities as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Estimated Fair Value |
As of March 31, 2023: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Residential MBS | $ | 3,022 | | | $ | — | | | $ | (189) | | | $ | 2,833 | |
Other investments | 58 | | | — | | | — | | | 58 | |
Total held to maturity investment securities | $ | 3,080 | | | $ | — | | | $ | (189) | | | $ | 2,891 | |
As of December 31, 2022: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Residential MBS | $ | 3,047 | | | $ | — | | | $ | (234) | | | $ | 2,813 | |
Other investments | 61 | | | — | | | — | | | 61 | |
Total held to maturity investment securities | $ | 3,108 | | | $ | — | | | $ | (234) | | | $ | 2,874 | |
The following table summarizes the gross unrecognized losses and fair value of held to maturity investment securities, aggregated by investment category and length of time that individual securities have
been in a continuous unrecognized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
As of March 31, 2023: | | | | | | | | |
Government Sponsored Entities: | | | | | | | | |
Residential MBS | $ | 1,652 | | | $ | (100) | | | $ | 1,181 | | | $ | (89) | | | $ | 2,833 | | | $ | (189) | |
As of December 31, 2022: | | | | | | | | |
Government Sponsored Entities: | | | | | | | | |
Residential MBS | $ | 2,813 | | | $ | (234) | | | $ | — | | | $ | — | | | $ | 2,813 | | | $ | (234) | |
At March 31, 2023, the Company had seven held to maturity residential MBS of which all seven were in a loss position and three had been in a loss position for twelve months or more. At December 31, 2022, the Company had seven held to maturity residential MBS of which all seven were in a loss position for less than twelve months.
The unrecognized losses on the Company’s held to maturity investments at March 31, 2023 were caused by interest rate changes. In addition, the contractual cash flows of these investments are guaranteed by agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investmentsthese securities to be other-than-temporarily impaired at March 31, 2018 and2023 or December 31, 2017.
As of March 31, 2018 and December 31, 2017, there were2022. Additionally, the Company had no holdings of securities of any one issuer in an amount greater than 10% of stockholders' equity, other than the U.S. government and its agencies.
Held to Maturity
The following tables summarize the amortized cost and estimated fair value ofACL recorded for held to maturity investment securities as of the dates indicated (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| March 31, 2018 |
| Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Estimated Fair Value |
Debt securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 11,956 |
| | $ | 33 |
| | $ | (257 | ) | | $ | 11,732 |
|
Other investments | 281 |
| | — |
| | — |
| | 281 |
|
Total held to maturity investment securities | $ | 12,237 |
| | $ | 33 |
| | $ | (257 | ) | | $ | 12,013 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Estimated Fair Value |
Debt securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 6,636 |
| | $ | 73 |
| | $ | (69 | ) | | $ | 6,640 |
|
Other investments | 285 |
| | — |
| | — |
| | 285 |
|
Total held to maturity investment securities | $ | 6,921 |
| | $ | 73 |
| | $ | (69 | ) | | $ | 6,925 |
|
The following tables summarize the gross unrecognized losses and fair value of held to maturity investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrecognized loss position (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
Debt securities: | | | | | | | | | | | |
Government Sponsored Entities: | | | | | | | | | | | |
Mortgage-backed securities | $ | 7,625 |
| | $ | (123 | ) | | $ | 2,943 |
| | $ | (134 | ) | | $ | 10,568 |
| | $ | (257 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
Debt securities: | | | | | | | | | | | |
Government Sponsored Entities: | | | | | | | | | | | |
Mortgage-backed securities | $ | 1,047 |
| | $ | (4 | ) | | $ | 3,029 |
| | $ | (65 | ) | | $ | 4,076 |
| | $ | (69 | ) |
The unrecognized losses on the Company’s investments were caused by interest rate changes. It is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rate and other market conditions. The issuers continue to make timely principal and interest payments on the investments. The fair value is expected to recover as the investments approach maturity.at March 31, 2023.
The following table summarizes the scheduled maturities of available-for-saleavailable for sale and held-to-maturityheld to maturity investment securities as of March 31, 2018 (dollars in thousands):2023:
|
| | | | | | | |
| March 31, 2018 |
| Amortized Cost | | Fair Value |
Available-for-sale investments securities | | | |
One to five years | $ | 120,296 |
| | $ | 116,341 |
|
Five to ten years | 1,329 |
| | 1,334 |
|
Beyond ten years | 414,394 |
| | 409,261 |
|
No maturity | 12,000 |
| | 11,504 |
|
Total available-for-sale investment securities | $ | 548,019 |
| | $ | 538,440 |
|
Held-to-maturity investment securities beyond ten years | $ | 12,237 |
| | $ | 12,013 |
|
Total held-to-maturity investment securities | $ | 12,237 |
| | $ | 12,013 |
|
| | | | | | | | | | | |
| March 31, 2023 |
(Dollars in thousands) | Amortized Cost | | Fair Value |
Available for sale debt securities | | | |
| | | |
| | | |
Five to ten years | $ | 37,479 | | | $ | 37,421 | |
Beyond ten years | 3,717 | | | 3,739 | |
MBS, CMOs and other ABS | 599,130 | | | 552,267 | |
Total available for sale debt securities | $ | 640,326 | | | $ | 593,427 | |
Held to maturity investments securities | | | |
Five to ten years | $ | 58 | | | $ | 58 | |
MBS | 3,022 | | | 2,833 | |
Total held to maturity debt securities | $ | 3,080 | | | $ | 2,891 | |
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities
may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. EquityAs such, mortgage backed securities, collateralized mortgage obligations and other asset backed securities are not included in the maturity categories above and instead are shown separately. As of March 31, 2023, securities with no maturity date are shown separately.an amortized cost totaling $612.3 million were pledged to the FHLB and Federal Reserve Bank of San Francisco ("FRB") to secure borrowing arrangements. See Note 9 for additional information. No securities were pledged as of December 31, 2022.
Equity Securities
Equity securities consist of investments in a qualified community reinvestment fund. At March 31, 20182023 and December 31, 2017.2022, the fair value of equity securities totaled $10.5 million and $10.3 million, respectively. Changes in fair value are recognized in other noninterest income and totaled $166 thousand and $(577) thousand during the three months ended March 31, 2023 and 2022, respectively. There were no sales of
equity securities during the three months ended March 31, 2023 or 2022. 3. LOANS
Loans receivable consist of the following (dollars in thousands):following:
| | | | | | | | | | | |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Mortgages on: | | | |
Multifamily residential | $ | 4,522,072 | | | $ | 4,532,312 | |
Single family residential | 2,308,485 | | | 2,283,628 | |
Commercial real estate | 168,049 | | | 172,258 | |
Construction and land | 24,873 | | | 22,247 | |
| | | |
Total | 7,023,479 | | | 7,010,445 | |
Allowance for credit losses on loans | (35,914) | | | (36,685) | |
Loans, net | $ | 6,987,565 | | | $ | 6,973,760 | |
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Permanent mortgages on: | | | |
Multifamily residential | $ | 3,076,356 |
| | $ | 2,887,438 |
|
Single family residential | 2,042,624 |
| | 1,957,546 |
|
Commercial real estate | 125,445 |
| | 112,492 |
|
Construction and land loans on: | | | |
Single family residential | 36,320 |
| | 41,165 |
|
Non-Mortgage (‘‘NM’’) loans: | 100 |
| | 50 |
|
Total | 5,280,845 |
| | 4,998,691 |
|
Deferred loan costs, net | 45,564 |
| | 42,856 |
|
Allowance for loan losses | (31,980 | ) | | (30,312 | ) |
Loans receivable held for investment, net | $ | 5,294,429 |
| | $ | 5,011,235 |
|
Certain loans have been pledged to secure borrowing arrangements (see Note 7)9).
Prior to the Company’s adoption of CECL on January 1, 2023, the Company maintained an allowance for loan losses ("ALLL") in accordance with the probable incurred loss model. The probable incurred loss model was reflective of estimates for loan losses incurred and inherent in the loan portfolio as of the balance sheet date, and did not reflect current estimates of future expected credit losses over the lives of the Company’s loans, as now required by CECL.
The following table summarizes activity in and the allocation of the allowance for credit losses by portfolio segment during the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Credit Losses |
(Dollars in thousands) | Beginning Balance | | Impact of CECL Adoption | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
Multifamily residential | $ | 26,417 | | | $ | 2,882 | | | $ | — | | | $ | — | | | $ | (2,007) | | | $ | 27,292 | |
Single family residential | 8,564 | | | (2,472) | | | — | | | — | | | 1,339 | | | 7,431 | |
Commercial real estate | 1,539 | | | (784) | | | — | | | — | | | 22 | | | 777 | |
Construction and land | 165 | | | 282 | | | — | | | — | | | (33) | | | 414 | |
Allowance for credit losses on loans | 36,685 | | | (92) | | | — | | | — | | | (679) | | | 35,914 | |
Allowance for credit losses on off-balance sheet credit exposures | 563 | | | 211 | | | — | | | — | | | (116) | | | 658 | |
Total | $ | 37,248 | | | $ | 119 | | | $ | — | | | $ | — | | | $ | (795) | | | $ | 36,572 | |
The following table summarizes activity in and the allocation of the allowance for loan losses by portfolio segment (dollars in thousands):during the three months ended March 31, 2022:
|
| | | | | | | | | | | | | | | | | | | |
| Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, NM, and Construction | | Total |
Three months ended March 31, 2018 |
Allowance for loan losses: | | | | | | | | | |
Beginning balance allocated to portfolio segments | $ | 18,588 |
| | $ | 9,044 |
| | $ | 1,734 |
| | $ | 946 |
| | $ | 30,312 |
|
Provision for loan losses | 1,245 |
| | 167 |
| | 63 |
| | 25 |
| | 1,500 |
|
Charge-offs | — |
| | — |
| | — |
| | — |
| | — |
|
Recoveries | — |
| | 3 |
| | 90 |
| | 75 |
| | 168 |
|
Ending balance allocated to portfolio segments | $ | 19,833 |
| | $ | 9,214 |
| | $ | 1,887 |
| | $ | 1,046 |
| | $ | 31,980 |
|
Three months ended March 31, 2017 |
Allowance for loan losses: | | | | | | | | | |
Beginning balance allocated to portfolio segments | $ | 18,478 |
| | $ | 11,559 |
| | $ | 1,823 |
| | $ | 1,438 |
| | $ | 33,298 |
|
Provision for loan losses | 1,395 |
| | (1,465 | ) | | 127 |
| | 252 |
| | 309 |
|
Charge-offs | — |
| | — |
| | — |
| | — |
| | — |
|
Recoveries | — |
| | 3 |
| | — |
| | 89 |
| | 92 |
|
Ending balance allocated to portfolio segments | $ | 19,873 |
| | $ | 10,097 |
| | $ | 1,950 |
| | $ | 1,779 |
| | $ | 33,699 |
|
The following tables summarize the allocation of the allowance for loan losses by impairment methodology (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, NM, and Construction | | Total |
Ending allowance balance allocated to: | | | | | | | | | |
Loans individually evaluated for impairment | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
|
Loans collectively evaluated for impairment | 19,833 |
| | 9,189 |
| | 1,887 |
| | 1,046 |
| | 31,955 |
|
Ending balance | $ | 19,833 |
| | $ | 9,214 |
| | $ | 1,887 |
| | $ | 1,046 |
| | $ | 31,980 |
|
Loans: | | | | | | | | | |
Ending balance: individually evaluated for impairment | $ | 1,564 |
| | $ | 10,211 |
| | $ | — |
| | $ | — |
| | $ | 11,775 |
|
Ending balance: collectively evaluated for impairment | 3,074,792 |
| | 2,032,413 |
| | 125,445 |
| | 36,420 |
| | 5,269,070 |
|
Ending balance | $ | 3,076,356 |
| | $ | 2,042,624 |
| | $ | 125,445 |
| | $ | 36,420 |
| | $ | 5,280,845 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, NM, and Construction | | Total |
Ending allowance balance allocated to: | | | | | | | | | |
Loans individually evaluated for impairment | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
|
Loans collectively evaluated for impairment | 18,588 |
| | 9,019 |
| | 1,734 |
| | 946 |
| | 30,287 |
|
Ending balance | $ | 18,588 |
| | $ | 9,044 |
| | $ | 1,734 |
| | $ | 946 |
| | $ | 30,312 |
|
Loans: | | | | | | | | | |
Ending balance: individually evaluated for impairment | $ | 2,246 |
| | $ | 8,991 |
| | $ | 656 |
| | $ | — |
| | $ | 11,893 |
|
Ending balance: collectively evaluated for impairment | 2,885,192 |
| | 1,948,555 |
| | 111,836 |
| | 41,215 |
| | 4,986,798 |
|
Ending balance | $ | 2,887,438 |
| | $ | 1,957,546 |
| | $ | 112,492 |
| | $ | 41,215 |
| | $ | 4,998,691 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for Loan Losses |
(Dollars in thousands) | Beginning Balance | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
|
Multifamily residential | $ | 26,043 | | | $ | — | | | $ | — | | | $ | (1,892) | | | $ | 24,151 | |
Single family residential | 7,224 | | | — | | | — | | | (427) | | | 6,797 | |
Commercial real estate | 2,094 | | | — | | | — | | | (212) | | | 1,882 | |
Construction and land | 174 | | | — | | | — | | | 31 | | | 205 | |
Allowance for loan losses | $ | 35,535 | | | $ | — | | | $ | — | | | $ | (2,500) | | | $ | 33,035 | |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans to identify credit risks and to assess the overall collectability of the portfolio. During these internal reviews,
management monitors and analyzes the financial condition of borrowers and guarantors, and trends inas well as the operationfinancial performance and/or other characteristics of theloan collateral. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into six major categories, defined as follows:
Pass assets are those which are performing according to contract and have no existing or known weaknesses deserving of management’s close attention. The basic underwriting criteria used to approve the loans are still valid, and all payments have essentially been made as planned.
Watch assets are expected to have an event occurring in the next 90 to 120 daysnear future that will lead to a change in risk rating with the change being either favorable or unfavorable. These assets require heightened monitoring of the event by management.
Special mention assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard assets are inadequately protected by the current net worth andand/or paying capacity of the obligor or by the collateral pledged. These assets have well-defined weaknesses: the primary source of repayment is gone or severely impaired (i.e., bankruptcy or loss of employment) and/or there has been
a deterioration in collateral value. In addition, there is the distinct possibility that the Company will sustain some loss, either directly or indirectly (i.e., the cost of monitoring), if the deficiencies are not corrected. A deterioration in collateral value alone does not mandate that an asset be adversely classified if such factor does not indicate that the primary source of repayment is in jeopardy.
Doubtful assets have the weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable based on current facts, conditions and values.
Loss assets are considered uncollectible and of such little value that their continuance as assets, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion thereof) even though partial recovery may be affected in the future.
The following tables summarizetable presents the internal risk ratings for total loans by portfolio segment of loan and origination year as of March 31, 2023, as well as gross charge-offs for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Loans by Origination Year | | |
2023 | 2022 | 2021 | 2020 | 2019 | Prior | | Total |
|
Multifamily residential |
Pass | $ | 23,568 | | $ | 1,183,333 | | $ | 1,216,122 | | $ | 720,962 | | $ | 429,745 | | $ | 887,435 | | | $ | 4,461,165 | |
Watch | — | | 691 | | 12,054 | | 4,833 | | 6,358 | | 18,619 | | | 42,555 | |
Special Mention | — | | — | | — | | — | | 1,731 | | — | | | 1,731 | |
Substandard | — | | — | | — | | 3,584 | | 3,875 | | 9,162 | | | 16,621 | |
Total | $ | 23,568 | | $ | 1,184,024 | | $ | 1,228,176 | | $ | 729,379 | | $ | 441,709 | | $ | 915,216 | | | $ | 4,522,072 | |
Year to date gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Single family residential |
Pass | $ | 65,714 | | $ | 835,490 | | $ | 732,585 | | $ | 167,821 | | $ | 142,040 | | $ | 350,157 | | | $ | 2,293,807 | |
Watch | — | | 1,418 | | 1,151 | | — | | 3,869 | | 6,510 | | | 12,948 | |
Special Mention | — | | — | | — | | — | | — | | — | | | — | |
Substandard | — | | — | | — | | — | | — | | 1,730 | | | 1,730 | |
Total | $ | 65,714 | | $ | 836,908 | | $ | 733,736 | | $ | 167,821 | | $ | 145,909 | | $ | 358,397 | | | $ | 2,308,485 | |
Year to date gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Commercial real estate |
Pass | $ | — | | $ | 24,186 | | $ | 1,942 | | $ | 11,607 | | $ | 24,216 | | $ | 104,546 | | | $ | 166,497 | |
Watch | — | | — | | — | | — | | — | | 604 | | | 604 | |
Special Mention | — | | — | | — | | — | | 948 | | — | | | 948 | |
Substandard | — | | — | | — | | — | | — | | — | | | — | |
Total | $ | — | | $ | 24,186 | | $ | 1,942 | | $ | 11,607 | | $ | 25,164 | | $ | 105,150 | | | $ | 168,049 | |
Year to date gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Construction and land |
Pass | $ | — | | $ | 6,528 | | $ | 18,345 | | $ | — | | $ | — | | $ | — | | | $ | 24,873 | |
Watch | — | | — | | — | | — | | — | | — | | | — | |
Special Mention | — | | — | | — | | — | | — | | — | | | — | |
Substandard | — | | — | | — | | — | | — | | — | | | — | |
Total | $ | — | | $ | 6,528 | | $ | 18,345 | | $ | — | | $ | — | | $ | — | | | $ | 24,873 | |
Year to date gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Total loans |
Pass | $ | 89,282 | | $ | 2,049,537 | | $ | 1,968,994 | | $ | 900,390 | | $ | 596,001 | | $ | 1,342,138 | | | $ | 6,946,342 | |
Watch | — | | 2,109 | | 13,205 | | 4,833 | | 10,227 | | 25,733 | | | 56,107 | |
Special Mention | — | | — | | — | | — | | 2,679 | | — | | | 2,679 | |
Substandard | — | | — | | — | | 3,584 | | 3,875 | | 10,892 | | | 18,351 | |
Total | $ | 89,282 | | $ | 2,051,646 | | $ | 1,982,199 | | $ | 908,807 | | $ | 612,782 | | $ | 1,378,763 | | | $ | 7,023,479 | |
Year to date gross charge-offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
The following table summarizes the loan portfolio allocated by management’s internal risk ratings at March 31, 2018 and December 31, 2017 (dollars in thousands):2022.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, NM and Construction | | Total |
Grade: | | | | | | | | | |
Pass | $ | 3,030,678 |
| | $ | 2,015,783 |
| | $ | 121,203 |
| | $ | 34,635 |
| | $ | 5,202,299 |
|
Watch | 32,854 |
| | 15,357 |
| | 3,267 |
| | — |
| | 51,478 |
|
Special mention | 5,755 |
| | 6,001 |
| | — |
| | 1,785 |
| | 13,541 |
|
Substandard | 7,069 |
| | 5,483 |
| | 975 |
| | — |
| | 13,527 |
|
Total | $ | 3,076,356 |
| | $ | 2,042,624 |
| | $ | 125,445 |
| | $ | 36,420 |
| | $ | 5,280,845 |
|
| (Dollars in thousands) | | (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Construction and Land | | Total |
| | | | December 31, 2017 | |
| Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, NM and Construction | | Total | |
Grade: | | | | | | | | | | Grade: | | | | | | | | | |
Pass | $ | 2,847,720 |
| | $ | 1,923,960 |
| | $ | 106,539 |
| | $ | 41,215 |
| | $ | 4,919,434 |
| Pass | $ | 4,469,443 | | | $ | 2,269,325 | | | $ | 169,711 | | | $ | 22,247 | | | $ | 6,930,726 | |
Watch | 25,354 |
| | 20,178 |
| | 4,315 |
| | — |
| | 49,847 |
| Watch | 44,436 | | | 11,341 | | | 1,594 | | | — | | | 57,371 | |
Special mention | 6,569 |
| | 9,025 |
| | — |
| | — |
| | 15,594 |
| Special mention | 2,460 | | | — | | | 953 | | | — | | | 3,413 | |
Substandard | 7,795 |
| | 4,383 |
| | 1,638 |
| | — |
| | 13,816 |
| Substandard | 15,973 | | | 2,962 | | | — | | | — | | | 18,935 | |
| Total | $ | 2,887,438 |
| | $ | 1,957,546 |
| | $ | 112,492 |
| | $ | 41,215 |
| | $ | 4,998,691 |
| Total | $ | 4,532,312 | | | $ | 2,283,628 | | | $ | 172,258 | | | $ | 22,247 | | | $ | 7,010,445 | |
The following tables summarizetable summarizes an aging analysis of the loan portfolio by the time past due as of the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | 30-59 Days | | 60-89 Days | | 90+ Days | | Total Past Due | | Current | | Total |
As of March 31, 2023: | | | | | | | | | | | |
Loans: | | | | | | | | | | | |
Multifamily residential | $ | 5,531 | | | $ | — | | | $ | 3,121 | | | $ | 8,652 | | | $ | 4,513,420 | | | $ | 4,522,072 | |
Single family residential | 1,665 | | | — | | | — | | | 1,665 | | | 2,306,820 | | | 2,308,485 | |
Commercial real estate | — | | | — | | | — | | | — | | | 168,049 | | | 168,049 | |
Construction and land | — | | | — | | | — | | | — | | | 24,873 | | | 24,873 | |
Total | $ | 7,196 | | | $ | — | | | $ | 3,121 | | | $ | 10,317 | | | $ | 7,013,162 | | | $ | 7,023,479 | |
As of December 31, 2022: | | | | | | | | | | | |
Loans: | | | | | | | | | | | |
Multifamily residential | $ | — | | | $ | — | | | $ | 3,023 | | | $ | 3,023 | | | $ | 4,529,289 | | | $ | 4,532,312 | |
Single family residential | — | | | — | | | 104 | | | 104 | | | 2,283,524 | | | 2,283,628 | |
Commercial real estate | — | | | — | | | — | | | — | | | 172,258 | | | 172,258 | |
Construction and land | — | | | — | | | — | | | — | | | 22,247 | | | 22,247 | |
Total | $ | — | | | $ | — | | | $ | 3,127 | | | $ | 3,127 | | | $ | 7,007,318 | | | $ | 7,010,445 | |
As of both March 31, 2023 and December 31, 2022, there were no loans that were past due over 89 days and still accruing interest.
Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes ofmeasuring the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded. The following table presents the amortized cost basis of collateral dependent loans by loan type at March 31, 2018 and December 31, 2017 (dollars in thousands):2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost by Collateral Type | | Allowance for Credit Losses |
(Dollars in thousands) | Residential | | Office | | Industrial | |
Multifamily residential | $ | 3,504 | | | $ | — | | | $ | — | | | $ | — | |
Single family residential | 1,466 | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
Total | $ | 4,970 | | | $ | — | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| 30 Days | | 60 Days | | 90+ Days | | Non-accrual | | Current | | Total |
Loans: | | | | | | | | | | | |
Multifamily residential | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,564 |
| | $ | 3,074,792 |
| | $ | 3,076,356 |
|
Single family residential | 2,841 |
| | — |
| | — |
| | 5,397 |
| | 2,034,386 |
| | 2,042,624 |
|
Commercial real estate | — |
| | 2,104 |
| | — |
| | — |
| | 123,341 |
| | 125,445 |
|
Land, NM, and construction | — |
| | — |
| | — |
| | — |
| | 36,420 |
| | 36,420 |
|
Total | $ | 2,841 |
| | $ | 2,104 |
| | $ | — |
| | $ | 6,961 |
| | $ | 5,268,939 |
| | $ | 5,280,845 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| 30 Days | | 60 Days | | 90+ Days | | Non-accrual | | Current | | Total |
Loans: | | | | | | | | | | | |
Multifamily residential | $ | 2,751 |
| | $ | — |
| | $ | — |
| | $ | 2,246 |
| | $ | 2,882,441 |
| | $ | 2,887,438 |
|
Single family residential | 4,870 |
| | 3,364 |
| | — |
| | 4,135 |
| | 1,945,177 |
| | 1,957,546 |
|
Commercial real estate | — |
| | — |
| | — |
| | 656 |
| | 111,836 |
| | 112,492 |
|
Land, NM, and construction | — |
| | — |
| | — |
| | — |
| | 41,215 |
| | 41,215 |
|
Total | $ | 7,621 |
| | $ | 3,364 |
| | $ | — |
| | $ | 7,037 |
| | $ | 4,980,669 |
| | $ | 4,998,691 |
|
The following table summarizes information related to impaired loans at March 31, 2018 and December 31, 2017 (dollars in thousands):2022:
| | (Dollars in thousands) | | (Dollars in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | With no related allowance recorded: | | | | | | |
Multifamily residential | | Multifamily residential | | $ | 485 | | | $ | 562 | | | $ | — | |
Single family residential | | Single family residential | | 5,580 | | | 5,779 | | | — | |
| | | As of March 31, 2018 | | As of December 31, 2017 | | | 6,065 | | | 6,341 | | | — | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | |
With no related allowance recorded: | | | | | | | | | | | | |
With an allowance recorded: | | With an allowance recorded: | | | | | | |
Multifamily residential | $ | 1,564 |
| | $ | 1,686 |
| | $ | — |
| | $ | 2,246 |
| | $ | 2,545 |
| | $ | — |
| Multifamily residential | | 3,024 | | | 3,002 | | | 600 | |
Single family residential | 9,257 |
| | 9,488 |
| | — |
| | 8,029 |
| | 8,237 |
| | — |
| Single family residential | | 801 | | | 798 | | | 25 | |
Commercial real estate | — |
| | — |
| | — |
| | 656 |
| | 798 |
| | — |
| |
| 10,821 |
| | 11,174 |
| | — |
| | 10,931 |
| | 11,580 |
| | — |
| |
With an allowance recorded: | | | | | | | | | | | | |
Single family residential | 954 |
| | 954 |
| | 25 |
| | 962 |
| | 962 |
| | 25 |
| |
| | 954 |
| | 954 |
| | 25 |
| | 962 |
| | 962 |
| | 25 |
| | | 3,825 | | | 3,800 | | | 625 | |
Total: | | | | | | | | | | | | Total: | | | | | | |
Multifamily residential | 1,564 |
| | 1,686 |
| | — |
| | 2,246 |
| | 2,545 |
| | — |
| Multifamily residential | | 3,509 | | | 3,564 | | | 600 | |
Single family residential | 10,211 |
| | 10,442 |
| | 25 |
| | 8,991 |
| | 9,199 |
| | 25 |
| Single family residential | | 6,381 | | | 6,577 | | | 25 | |
Commercial real estate | — |
| | — |
| | — |
| | 656 |
| | 798 |
| | — |
| |
| $ | 11,775 |
| | $ | 12,128 |
| | $ | 25 |
| | $ | 11,893 |
| | $ | 12,542 |
| | $ | 25 |
| |
| | | | | $ | 9,890 | | | $ | 10,141 | | | $ | 625 | |
The following table summarizes information related to impaired loans for the three months ended March 31, 2018 and 2017 (dollars2022:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | |
(Dollars in thousands) | | | | | | | Average Recorded Investment | | Interest Income | | Cash Basis Interest |
With no related allowance recorded: |
Multifamily residential | | | | | | | $ | 503 | | | $ | 8 | | | $ | 8 | |
Single family residential | | | | | | | 4,830 | | | 43 | | | 19 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | 5,333 | | | 51 | | | 27 | |
With an allowance recorded: | | | | | | | | | | | |
| | | | | | | | | | | |
Single family residential | | | | | | | 835 | | | 6 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | 835 | | | 6 | | | — | |
Total: | | | | | | | | | | | |
Multifamily residential | | | | | | | 503 | | | 8 | | | 8 | |
Single family residential | | | | | | | 5,665 | | | 49 | | | 19 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | $ | 6,168 | | | $ | 57 | | | $ | 27 | |
The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Construction and Land | | Total |
| | | | | | | | | |
| | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Ending allowance balance allocated to: | | | | | | | |
Loans individually evaluated for impairment | $ | 600 | | | $ | 25 | | | $ | — | | | $ | — | | | $ | 625 | |
Loans collectively evaluated for impairment | 25,817 | | | 8,539 | | | 1,539 | | | 165 | | | 36,060 | |
Ending balance | $ | 26,417 | | | $ | 8,564 | | | $ | 1,539 | | | $ | 165 | | | $ | 36,685 | |
Loans: | | | | | | | | | |
Ending balance: individually evaluated for impairment | $ | 3,509 | | | $ | 6,381 | | | $ | — | | | $ | — | | | $ | 9,890 | |
Ending balance: collectively evaluated for impairment | 4,528,803 | | | 2,277,247 | | | 172,258 | | | 22,247 | | | 7,000,555 | |
Ending balance | $ | 4,532,312 | | | $ | 2,283,628 | | | $ | 172,258 | | | $ | 22,247 | | | $ | 7,010,445 | |
The following table summarizes the population of loans with active payment modifications for borrowers experiencing financial difficulty as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Construction and Land | | Total |
| | |
Loan modifications | $ | — | | | $ | 1,200 | | | $ | — | | | $ | — | | | $ | 1,200 | |
% of loan modifications to total loan category | — | | | 0.05 | % | | — | | | — | | | 0.02 | % |
| | | | | | | | | |
Weighted average interest rate reductions | — | % | | 0.20 | % | | — | % | | — | % | | 0.20 | % |
Weighted average term extension | — | | | 6 months | | — | | | — | | | 6 months |
The Company had no modified loans with a subsequent payment default within the twelve months following their modification during the quarter ended March 31, 2023. A loan is considered to be in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
| Average Recorded Investment | | Interest Income | | Cash Basis Interest | | Average Recorded Investment | | Interest Income | | Cash Basis Interest |
With no related allowance recorded: | | | | | | | | | | | |
Multifamily residential | $ | 2,070 |
| | $ | — |
| | $ | — |
| | $ | 1,524 |
| | $ | — |
| | $ | — |
|
Single family residential | 8,165 |
| | 37 |
| | — |
| | 6,353 |
| | 48 |
| | — |
|
Commercial real estate | 487 |
| | — |
| | — |
| | 832 |
| | — |
| | — |
|
| 10,722 |
| | 37 |
| | — |
| | 8,709 |
| | 48 |
| | — |
|
With an allowance recorded: | | | | | | | | | | | |
Single family residential | 1,718 |
| | 17 |
| | — |
| | 989 |
| | 8 |
| | — |
|
| 1,718 |
| | 17 |
| | — |
| | 989 |
| | 8 |
| | — |
|
Total: | | | | | | | | | | | |
Multifamily residential | 2,070 |
| | — |
| | — |
| | 1,524 |
| | — |
| | — |
|
Single family residential | 9,883 |
| | 54 |
| | — |
| | 7,342 |
| | 56 |
| | — |
|
Commercial real estate | 487 |
| | — |
| | — |
| | 832 |
| | — |
| | — |
|
| $ | 12,440 |
| | $ | 54 |
| | $ | — |
| | $ | 9,698 |
| | $ | 56 |
| | $ | — |
|
default once it is 90 days contractually past due under the modified terms.The following table summarizes the recorded investment related to troubled debt restructurings ("TDRs") at March 31, 2018 and December 31, 2017 (dollars in thousands):2022:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Troubled Debt Restructurings: | | | |
Multifamily residential | $ | — |
| | $ | 667 |
|
Single family residential | 5,594 |
| | 5,653 |
|
Total recorded investment in troubled debt restructurings | $ | 5,594 |
| | $ | 6,320 |
|
| | | | | | | |
(Dollars in thousands) | | | |
Troubled debt restructurings: | | | |
| | | |
Single family residential | | | $ | 1,211 | |
| | | |
The Company hashad allocated $25 thousand of allowancesits allowance for loan losses for loans modified in troubled debt restructuringsTDRs at March 31, 2018 and December 31, 2017.2022. The Company does not have commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings. There were no troubled debt restructurings inTDRs.
During the three months ended March 31, 20182022, the Company modified the terms of one loan that qualified as a TDR. The following table provides details of this modification:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Troubled debt restructurings: | | | | | |
Single family residential | 1 | | $ | 405 | | | $ | 412 | |
Terms of the modification above included suspension of loan payments for six months and 2017.
a similar extension of the loan term. The TDR above resulted in no increase to the allowance for loan losses and no charge-offs primarily due to collateral support provided by the secondary source of repayment.
The Company had no troubled debt restructuringsTDRs with a subsequent payment default within the twelve months following thetheir modification during the three months ended March 31, 2018 and 2017.2022. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
The terms
4. NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans plus real estate owned (foreclosed property).owned. The Company’s nonperforming assets and trends relatedfollowing table presents the composition of non-accrual loans as of the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
(Dollars in thousands) | Non-Accrual Loans with No ACL | | Non-Accrual Loans | | Non-Accrual Loans with No ALLL | | Non-Accrual Loans |
Multifamily residential | $ | 3,504 | | | $ | 3,504 | | | $ | 3,509 | | | $ | 3,509 | |
Single family residential | 1,466 | | | 1,466 | | | 2,962 | | | 2,962 | |
Commercial real estate | — | | | — | | | — | | | — | |
Construction and land | — | | | — | | | — | | | — | |
Total | $ | 4,970 | | | $ | 4,970 | | | $ | 6,471 | | | $ | 6,471 | |
The allowance for non-accrual loans is based on the CECL cash flow methodology discussed in Note 1, “Summary of Significant Accounting Policies", unless the loan is considered collateral dependent. The allowance for collateral dependent loans is determined based on the estimated fair value of the underlying collateral.
Interest income on non-accrual loans is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loans are deemed to those assets atbe fully collectible. If there is doubt regarding the collectability of the loan, then any interest payments received are applied to principal. Interest income was recognized on a cash basis on non-accrual loans during the three months ended March 31, 20182023 and December2022 totaling $28 thousand and $27 thousand, respectively. Contractual interest not recorded on nonperforming loans during the three months ended March 31, 2017 are indicated below (dollars in thousands):2023 and 2022 totaled $118 thousand and $7 thousand, respectively.
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Non-accrual loans: | | | |
Multifamily residential | $ | 1,564 |
| | $ | 2,246 |
|
Single family residential | 5,397 |
| | 4,135 |
|
Commercial real estate | — |
| | 656 |
|
Total non-accrual loans | 6,961 |
| | 7,037 |
|
Real estate owned | — |
| | — |
|
Total nonperforming assets | $ | 6,961 |
| | $ | 7,037 |
|
Contractual interest not accrued during the quarter | $ | 12 |
| | $ | 10 |
|
There wasThe Company did not own any other real estate owned as of March 31, 20182023 and December 31, 2017.2022.
Generally, nonperforming loans are considered impaired, because the repayment of the loan will not be made in accordance with the original contractual agreement.5. MORTGAGE SERVICING RIGHTS
| |
5. | MORTGAGE SERVICING RIGHTS |
Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows (dollars in thousands):follows:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Mortgage loans serviced for: | | | |
FHLMC | $ | 609,254 |
| | $ | 625,545 |
|
Colorado Federal Savings | 40,049 |
| | 40,236 |
|
First National Bank of Alaska | 34,589 |
| | 36,050 |
|
Provident Bank | 20,390 |
| | 20,855 |
|
Pacific Coast Bankers Bank | 19,996 |
| | 20,112 |
|
American River Bank | 19,539 |
| | 20,718 |
|
Exchange Bank | 17,861 |
| | 20,165 |
|
Total mortgage loans serviced for others | $ | 761,678 |
| | $ | 783,681 |
|
| | | | | | | | | | | |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Mortgage loans serviced for: | | | |
Federal Home Loan Mortgage Corporation ("Freddie Mac") | $ | 78,312 | | | $ | 80,478 | |
Other financial institutions | 37,220 | | | 37,503 | |
Total mortgage loans serviced for others | $ | 115,532 | | | $ | 117,981 | |
Custodial account balances maintained in connection with serviced loans totaled $4.8$1.6 million and $5.2 million$234 thousand at March 31, 20182023 and December 31, 2017,2022, respectively.
ActivityThe Company measures servicing rights at fair value at each reporting date and reports changes in the fair value of servicing assets in earnings in the period in which the changes occur. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. Activities for mortgage servicing rights are as follows (dollars in thousands):follows:
| | | | | | | | | Three Months Ended March 31, | | |
| | Three Months Ended March 31, | |
| | 2018 | | 2017 | |
Beginning Balance | | $ | 4,255 |
| | $ | 1,099 |
| |
(Dollars in thousands) | | (Dollars in thousands) | 2023 | | 2022 | | |
Beginning balance | | Beginning balance | $ | 688 | | | $ | 915 | | | |
Additions | | — |
| | 83 |
| Additions | — | | | — | | | |
Disposals | | — |
| | — |
| Disposals | — | | | — | | | |
Change in fair value due to changes in assumptions | | — |
| | — |
| |
Changes in fair value due to changes in assumptions | | Changes in fair value due to changes in assumptions | — | | | — | | | |
Other changes in fair value | | (131 | ) | | (29 | ) | Other changes in fair value | (19) | | | (104) | | | |
Ending balance | | $ | 4,124 |
| | $ | 1,153 |
| Ending balance | $ | 669 | | | $ | 811 | | | |
Fair value as of March 31, 20182023 was determined using a discount rate of 10%, prepayment speeds ranging from 6.0%5.4% to 70.4%, depending on the stratification of the specific right,32.7% and a weighted average default rate of 5%. The weighted average prepayment speed at March 31, 2023 was 24.5%. Fair value as of December 31, 20172022 was determined using a discount rate of 10%, prepayment speeds ranging from 5.8%3.5% to 70.4%, depending on the stratification of the specific right,32.3% and a weighted average default rate of 5%. The weighted average prepayment speed at December 31, 2022 was 23.0%.
6. LEASES
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2023 and 2033, with certain leases containing five-year renewal options. The Company includes lease extension options in the lease term if it is reasonably certain the Company will exercise the option, when considering the economic incentive to do so. Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. All of the Company’s leases are classified as operating leases.
The Company records operating lease right-of-use assets and operating lease liabilities on the Company's consolidated statements of financial condition. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses its incremental borrowing rate at lease commencement to discount lease payments when the rate implicit in the lease is not readily determinable. The Company selected a FHLB advance rate at lease inception based on the lease term and other factors, as a reasonable incremental borrowing rate. In addition, the Company has elected to account for any non-lease components in its leases as part of the associated lease component. The Company also has elected to not recognize short-term leases with an original term of 12 months or less on the Company's consolidated statements of financial condition.
Supplemental lease information as of March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Operating lease right-of-use assets included in prepaid expenses and other assets | $ | 12,478 | | | $ | 13,244 | |
Operating lease liabilities included in other liabilities and accrued expenses | 12,478 | | | 13,316 | |
| | | | | |
| | | |
| | | | | |
Weighted average remaining lease term (years) of operating leases | 5.0 | | | 5.1 | |
Weighted average discount rate of operating leases | 2.73 | % | | 2.69 | % |
| | | |
Supplemental lease information for the three months ended March 31, 2023 and 2022 is as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(Dollars in thousands) | 2023 | | 2022 |
| | | |
| | | |
| | | |
| | | |
Operating lease costs included in occupancy expense | $ | 904 | | | $ | 929 | |
| | | |
| | | |
| | | |
Cash paid for amounts included in the measurement of operating lease liabilities | 976 | | | 1,033 | |
At March 31, 2023, future undiscounted lease payments with initial terms of one year or more are as follows:
| | | | | |
(Dollars in thousands) | |
April 1 - December 31, 2023 | $ | 2,537 | |
2024 | 2,803 | |
2025 | 2,388 | |
2026 | 2,203 | |
2027 | 1,964 | |
Thereafter | 1,640 | |
Total undiscounted lease payments | 13,535 | |
Less: Imputed interest | (1,057) | |
Net lease liabilities | $ | 12,478 | |
7. QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company is invested in qualified affordable housing projects that are expected to provide federal and state tax credits in the future. The investments are accounted for using the proportional amortization method. As of March 31, 2023 and December 31, 2022, the Company was committed to invest $18.0 million and $17.9 million, respectively, of which $5.2 million and $4.8 million, respectively, had been funded and was included in prepaid expenses and other assets in the consolidated statements of financial condition. The total unfunded commitments related to the investments totaled $12.8 million and $13.1 million at March 31, 2023 and December 31, 2022, respectively, and were included in other liabilities and accrued expenses in the consolidated statements of financial condition. During the three months ended March 31, 2023 and 2022, the Company recognized amortization expense of $364 thousand and $136 thousand, respectively, and tax benefits related to the investments of $119 thousand and $196 thousand, respectively. Amortization expense and tax benefits are included in the provision for income taxes in the unaudited consolidated statements of income.
8. DEPOSITS
A summary of deposits at March 31, 20182023 and December 31, 20172022 is as follows (dollars in thousands):follows:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Certificate accounts | $ | 2,398,698 |
| | $ | 2,242,682 |
|
Money market savings | 1,407,825 |
| | 1,389,425 |
|
NOW accounts | 196,767 |
| | 203,159 |
|
Money market checking | 81,893 |
| | 85,073 |
|
Commercial checking | 28,843 |
| | 30,899 |
|
| $ | 4,114,026 |
| | $ | 3,951,238 |
|
| | | | | | | | | | | |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 |
Time deposits | $ | 3,405,641 | | | $ | 3,134,373 | |
Money market savings | 1,271,147 | | | 1,718,008 | |
Money market checking | 754,080 | | | 728,231 | |
Interest-bearing demand | 143,870 | | | 158,068 | |
Noninterest-bearing demand | 74,756 | | | 100,660 | |
Total | $ | 5,649,494 | | | $ | 5,839,340 | |
The Company had certificates of deposit with a denomination of $100 thousandtime deposits that met or more totaling $2.1 billion and $1.9 billion at March 31, 2018 and December 31, 2017, respectively.
The Company had certificates of deposit that meet or exceedexceeded the FDICFederal Deposit Insurance Corporation ("FDIC") insurance limit of $250 thousand of $1.2$1.4 billion and $1.1$1.3 billion at March 31, 20182023 and December 31, 2017,2022, respectively.
The Company utilizes brokered deposits as an additional source of funding. The Company had brokered deposits of $295.9$543.4 million and $278.4$455.8 million at March 31, 20182023 and December 31, 2017,2022, respectively.
The increase in brokered deposits was utilized to partially offset retail deposit declines during the three months ended March 31, 2023.
Maturities of the Company’s certificate accountstime deposits at March 31, 20182023 are summarized as follows (dollarsfollows:
in thousands): | | | | | |
(Dollars in thousands) | |
April 1 - December 31, 2023 | $ | 2,462,856 | |
2024 | 919,568 | |
2025 | 7,357 | |
2026 | 10,450 | |
2027 | 4,537 | |
Thereafter | 873 | |
Total | $ | 3,405,641 | |
9. FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES
|
| | | |
April 1 - December 31, 2018 | $ | 1,467,831 |
|
Year ending December 31, 2019 | 560,064 |
|
Year ending December 31, 2020 | 278,666 |
|
Year ending December 31, 2021 | 51,750 |
|
Year ending December 31, 2022 | 35,530 |
|
Thereafter | 4,857 |
|
| $ | 2,398,698 |
|
| |
7. | FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES |
The Bank may borrow from the Federal Home Loan Bank ("FHLB"),FHLB, on either a short-term or long-term basis, up to 40% of its assets, provided that adequate collateral has been pledged. As of March 31, 2018 and December 31, 2017,2023, the Bank had pledged various mortgage loans and securities to secure these borrowing arrangements totaling approximately $2.3$4.3 billion and $2.4$258.3 million, respectively, compared to pledged mortgage loans totaling approximately $4.2 billion respectively, as well asof December 31, 2022. Additionally, the FHLB stock held by the Bank toas of both dates further secure these borrowing arrangements.
The Bank has access to the Loan and Discount Window of the Federal ReserveFRB and the FRB's new Bank of San FranciscoTerm Funding Program ("FRB"BTFP"). Advances under this windowthese programs are subject to the Bank providing qualifying collateral. Various mortgageMortgage loans totaling approximately $394.9 million$2.5 billion and $379.0$904.9 million as of March 31, 20182023 and December 31, 2017,2022, respectively, secure thisthe discount window borrowing arrangement. Securities with a current par value totaling $354.0 million secure the BFTP as of March 31, 2023. No securities were pledged to secure FRB borrowings as of December 31, 2022. There were no borrowings outstanding with the FRB as of March 31, 2018 and2023 or December 31, 2017.2022.
The following table discloses the Bank’s outstanding advances from the Federal Home Loan BankFHLB of San Francisco (dollarsFrancisco:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Balances | | As of March 31, 2023 |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 | | Minimum Interest Rate | | Maximum Interest Rate | | Weighted Average Rate | | Maturity Dates |
Fixed rate short-term | $ | 150,000 | | | $ | 56,500 | | | 5.27 | % | | 5.27 | % | | 5.27 | % | | June 2023 |
Fixed rate long-term(1) | 1,551,647 | | | 1,151,647 | | | 0.38 | % | | 7.33 | % | | 3.15 | % | | May 2023 to March 2030 |
| | | | | | | | | | | |
| $ | 1,701,647 | | | $ | 1,208,147 | | | | | | | | | |
(1) Included in thousands):
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
FHLB fixed rate short-term borrowings, interest rates from 1.78% to 1.94%, weighted average rate of 1.90%, and maturity dates of April and June 2018 as of March 31, 2018 | $ | 480,500 |
| | $ | 411,600 |
|
FHLB fixed rate long-term borrowings, interest rates from 1.55% to 7.69%, weighted average rate of 2.09%, maturity dates between July 2018 and August 2032 as of March 31, 2018 | 527,653 |
| | 427,660 |
|
FHLB variable rate long-term borrowings, interest rates from 1.68% to 1.89%, weighted average rate of 1.82%, and maturity dates between July 2018 and January 2020 as of March 31, 2018 | 150,000 |
| | 150,000 |
|
| $ | 1,158,153 |
| | $ | 989,260 |
|
total fixed rate long-term advances is a $200.0 million advance which matures in September 2025 and contains a FHLB quarterly call provision beginning in September 2023.The Bank's available borrowing capacity based on loans and securities pledged loans to the FRBFHLB and the FHLBFRB totaled $869.5$2.3 billion and $1.7 billion at March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, the Bank had aggregate loan balances of $17.8 million and $1.1 billion, atrespectively available to pledge to the FHLB and FRB to increase its borrowing capacity. As of March 31, 20182023 and December 31, 2017, respectively.2022, the Bank pledged as collateral a $62.6 million FHLB letter of credit to Freddie Mac related to our multifamily securitization reimbursement obligation.
Short-term borrowings are borrowings with original maturities of 1 year90 days or less. During the three months ended March 31, 20182023, there was a maximum amount of short termshort-term borrowings outstanding of $495.7$150.0 million, an average amount outstanding of $457.4$49.0 million, andwith a weighted average interest rate of 1.61%5.05%.
During the three months ended March 31, 2022, there was a maximum amount of short-term borrowings outstanding of $135.3 million, an average amount outstanding of $21.7 million, with a weighted average interest rate of 0.34%.
The following table summarizes scheduled principal payments on FHLB advances over the next five years as of March 31, 2018 (dollars in2023:
thousands): | | | | | |
(Dollars in thousands) | |
April 1 - December 31, 2023 | $ | 350,000 | |
2024 | 500,000 | |
2025 | 751,500 | |
2026 | 100,000 | |
2027 | — | |
Thereafter | 147 | |
| $ | 1,701,647 | |
10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
|
| | | |
April 1 - December 31, 2018 | $ | 531,000 |
|
Year ending December 31, 2019 | 275,000 |
|
Year ending December 31, 2020 | 150,000 |
|
Year ending December 31, 2021 | 150,600 |
|
Year ending December 31, 2022 | — |
|
Thereafter | 51,553 |
|
| $ | 1,158,153 |
|
| |
8. | JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES |
The Company formed wholly ownedtwo wholly-owned trust companies (the ‘‘Trusts’’) which issued guaranteed preferred beneficial interests (the "Trust Securities") in the Company’s junior subordinated deferrable interest debentures (‘‘the Trust Securities’’(the "Notes"). The Company is not considered the primary beneficiary of the Trusts and therefore, the Trusts are not consolidated in the Company’s financial statements, but rather the junior subordinated debentures are shown as a liability. The Company’s investment in the common securities of the Trusts, totaling $1.9 million, areis included in other assets onin the consolidated statementstatements of financial condition. The sole asset of the Trusts are junior subordinated deferrable interest debentures (the ‘‘Notes’’).the Notes that they hold.
At March 31, 2018 and December 31, 2017, the Company had two Trusts which have issued Trust Securities to the public. The Trusts have invested the proceeds of such Trust Securities in the Notes. Each of the Notes has an interest rate equal to the corresponding Trust Securities distribution rate. The Company has the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred, and the Company’s ability to pay dividends on its common stock will be restricted.
The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust
Securities; (ii) the redemption price with respect to any Trust Securities called for redemption by the Trusts; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trusts. The Trust Securities are mandatorily redeemable upon maturity of the Notes, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the Notes purchased by the Trusts, in whole or in part, on or after the redemption date. As specified in the indenture, if the Notes are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
The following table is a summary of the outstanding Trust Securities and Notes at March 31, 20182023 and December 31, 2017 (dollars in thousands):2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | Date | | Maturity | | Rate Index |
Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) |
(Dollars in thousands) |
Luther Burbank Statutory Trust I | | $ | 41,238 | | | 6.25 | % | | $ | 41,238 | | | 6.15 | % | | 3/1/2006 | | 6/15/2036 | | 3 month LIBOR + 1.38% |
Luther Burbank Statutory Trust II | | $ | 20,619 | | | 6.49 | % | | $ | 20,619 | | | 6.39 | % | | 3/1/2007 | | 6/15/2037 | | 3 month LIBOR + 1.62% |
|
| | | | | | | | | | | | | | |
Issuer | | Issuance Date | | Amount of Trust Securities | | Amount of Notes | | Redemption Date | | Maturity Date |
Luther Burbank Statutory Trust I | | March 2006 | | $ | 40,000 |
| | $ | 41,238 |
| | June 15, 2011 | | June 15, 2036 |
Quarterly adjustments - three month Libor plus 1.38% |
(3.505% and 2.968% at 3/31/2018 and 12/31/2017, respectively) |
Luther Burbank Statutory Trust II | | March 2007 | | $ | 20,000 |
| | $ | 20,619 |
| | June 15, 2012 | | June 15, 2037 |
Quarterly adjustments - three month Libor plus 1.62% |
(3.745% and 3.208% at 3/31/2018 and 12/31/2017, respectively) |
11. SENIOR DEBTIn September 2014, the Company issued $95 million in senior unsecured term notes to qualified institutional investors. The proceeds of this debt were used to retire senior unsecured term notes issued between 2009 and 2011 totaling $62.7 million, including a prepayment penalty of $243 thousand, and make an additional contribution to the Bank of $28 million in the form of paid-in capital. The balance of the proceeds, or approximately $2.7 million, was retained at the holding company to be used as cash reserves and for general corporate purposes. The following table summarizes information on these notes as of March 31, 20182023 and December 31, 2017 (dollars in thousands):2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | | | |
(Dollars in thousands) | | Principal | | Unamortized Debt Issuance Costs | | Principal | | Unamortized Debt Issuance Costs | | Maturity Date | | Fixed Interest Rate |
Senior Unsecured Term Notes | | $ | 95,000 | | | $ | 184 | | | $ | 95,000 | | | $ | 215 | | | 9/30/2024 | | 6.50 | % |
|
| | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Principal | | Unamortized debt issuance costs | | Principal | | Unamortized debt issuance costs |
Senior unsecured term notes, fixed interest rate 6.50%, does not amortize and matures on September 30, 2024 (discount is based on imputed interest rate of 6.70%) | $ | 95,000 |
| | $ | 805 |
| | $ | 95,000 |
| | $ | 839 |
|
12. DERIVATIVES AND HEDGING ACTIVITIESIn connection withFrom time to time, the initial public offering, the Company terminated its S Corporation status and became a taxable entity (“C Corporation”) on December 1, 2017. As such, any periods prior to December 1, 2017 will only reflect an effective state income tax rate.
The provision for income tax for the three months ended March 31, 2018 and 2017 differs from the statutory federal rate of 21% and 35%, respectively, due to the following:
|
| | | | | | | |
| Three months ended March 31, |
| 2018 | | 2017 |
Statutory U.S. Federal Income Tax | $ | 3,208 |
| | $ | 4,452 |
|
Increase (decrease) resulting from: | | | |
Benefit of S Corporation status | — |
| | (4,452 | ) |
State Taxes | 1,316 |
| | 425 |
|
Other | (349 | ) | | — |
|
Provision for income taxes | $ | 4,175 |
| | $ | 425 |
|
The Company’s effective tax rate differs from the statutory California tax rate of 3.5% prior to December 1, 2017 and the statutory federal and state tax rate of 29.56% for the three months ended March 31, 2018, primarily due to nontaxable earnings on life insurance and nondeductible meal and entertainment expense.
| |
11. | REGULATORY CAPITAL MATTERS |
The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (the “Basel III Capital Rules”) became effective for the Holding Company and Bank on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios as of January 1, 2015: a) 4.5% based upon common equity tier 1 capital ("CET1"); b) 6.0% based upon tier 1 capital; and c) 8.0% based upon total regulatory capital. A minimum leverage ratio (tier 1 capital as a percentage of average consolidated assets) of 4.0% is also required under the Basel III Capital Rules.
As of March 31, 2018 and December 31, 2017, the Company and the Bank met all capital adequacy requirements to which it is subject. Also, as of March 31, 2018 and December 31, 2017, the Bank satisfied all criteria necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. There have been no conditions or events since March 31, 2018 that management believes have changed the "well capitalized" categorization.
The Company’s and Bank’s actual capital amounts and regulatory capital ratios are presented as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Regulatory Requirement | | Minimum Capital Adequacy with Capital Buffer | | Minimum Regulatory Requirement for "Well- Capitalized" Institution under prompt corrective action provisions |
| Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
Luther Burbank Corporation | | | | | | | | | | | |
As of March 31, 2018 | | | | | | | | | | | |
Tier 1 Leverage Ratio | $ | 619,209 |
| 10.57 | % | | $ | 241,612 |
| 4.00 | % | | N/A |
| N/A |
| | N/A | N/A |
Common Equity Tier 1 Risk-Based Ratio | 557,352 |
| 15.55 | % | | 161,342 |
| 4.50 | % | | $ | 228,568 |
| 6.38 | % | | N/A | N/A |
Tier 1 Risk-Based Capital Ratio | 619,209 |
| 17.27 | % | | 215,123 |
| 6.00 | % | | 282,348 |
| 7.88 | % | | N/A | N/A |
Total Risk-Based Capital Ratio | 653,367 |
| 18.22 | % | | 286,830 |
| 8.00 | % | | 354,056 |
| 9.88 | % | | N/A | N/A |
As of December 31, 2017 | | | | | | | | | | | |
Tier 1 Leverage Ratio | $ | 615,010 |
| 11.26 | % | | $ | 218,499 |
| 4.00 | % | | N/A |
| N/A |
| | N/A | N/A |
Common Equity Tier 1 Risk-Based Ratio | 553,153 |
| 16.05 | % | | 155,107 |
| 4.50 | % | | $ | 198,192 |
| 5.75 | % | | N/A | N/A |
Tier 1 Risk-Based Capital Ratio | 615,010 |
| 17.84 | % | | 206,809 |
| 6.00 | % | | 249,894 |
| 7.25 | % | | N/A | N/A |
Total Risk-Based Capital Ratio | 647,421 |
| 18.78 | % | | 275,746 |
| 8.00 | % | | 318,831 |
| 9.25 | % | | N/A | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Regulatory Requirement | | Minimum Capital Adequacy with Capital Buffer | | Minimum Regulatory Requirement for "Well- Capitalized" Institution under prompt corrective action provisions |
| Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
Luther Burbank Savings | | | | | | | | | | | |
As of March 31, 2018 | | | | | | | | | | | |
Tier 1 Leverage Ratio | $ | 696,502 |
| 11.90 | % | | $ | 241,507 |
| 4.00 | % | | N/A |
| N/A |
| | $ | 301,884 |
| 5.00 | % |
Common Equity Tier 1 Risk-Based Ratio | 696,502 |
| 19.44 | % | | 161,225 |
| 4.50 | % | | $ | 228,402 |
| 6.38 | % | | 232,880 |
| 6.50 | % |
Tier 1 Risk-Based Capital Ratio | 696,502 |
| 19.44 | % | | 214,966 |
| 6.00 | % | | 282,143 |
| 7.88 | % | | 286,622 |
| 8.00 | % |
Total Risk-Based Capital Ratio | 730,660 |
| 20.39 | % | | 286,622 |
| 8.00 | % | | 353,799 |
| 9.88 | % | | 358,277 |
| 10.00 | % |
As of December 31, 2017 | | | | | | | | | | | |
Tier 1 Leverage Ratio | $ | 685,434 |
| 12.54 | % | | $ | 218,585 |
| 4.00 | % | | N/A |
| N/A |
| | $ | 273,232 |
| 5.00 | % |
Common Equity Tier 1 Risk-Based Ratio | 685,434 |
| 19.90 | % | | 154,980 |
| 4.50 | % | | $ | 198,030 |
| 5.75 | % | | 223,859 |
| 6.50 | % |
Tier 1 Risk-Based Capital Ratio | 685,434 |
| 19.90 | % | | 206,640 |
| 6.00 | % | | 249,689 |
| 7.25 | % | | 275,519 |
| 8.00 | % |
Total Risk-Based Capital Ratio | 717,845 |
| 20.84 | % | | 275,519 |
| 8.00 | % | | 318,569 |
| 9.25 | % | | 344,399 |
| 10.00 | % |
The Company utilizes interest rate capswaps and swap agreementsother derivative financial instruments as part of its asset liability management strategy to help manage its interest rate risk position. Thepositions.
Fair Value Hedges of Interest Rate Risk
As of March 31, 2023, the Company held 11 interest rate swaps with a total notional amount of $1.8 billion, two of which, with an aggregate notional amount of $400 million, have effective dates in April and June 2023. The swaps provide a hedge against the interest rate capsrisk associated with both fixed rate loans and hybrid adjustable loans in their fixed rate period.
All outstanding swaps do not represent amounts exchanged byare designated as fair value hedges and involve the parties. Thepayment of a fixed rate amount exchanged is determined by referenceto a counterparty in exchange for the Company receiving a variable rate payment over the life of the swaps without the exchange of the underlying notional amount. Any gain or loss on the derivatives, as well as any offsetting loss or gain on the hedged items attributable to the notional amount andhedged risk are recognized in interest income on loans.
The following table presents the other termseffect of the individualCompany’s interest rate cap or swap agreements.
Interest Rate Caps Designated as Cash Flow Hedges: Interest rate caps with a notional amount totaling $100 million as of both March 31, 2018 and December 31, 2017, were designated as cash flow hedges of certain Federal Home Loan Bank advances and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore,swaps on the aggregate fair value of the caps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the cap.
Summary information about the interest-rate caps designated as cash flow hedges as of year-end is as follows (dollars in thousands):
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Notional amounts | $ | 100,000 |
| | $ | 100,000 |
|
Weighted average rate on FHLB advances | 1.78 | % | | 1.42 | % |
Weighted average cap rate | 2.55 | % | | 2.55 | % |
Weighted average original maturity | 4.0 years |
| | 4.0 years |
|
Weighted average remaining maturity | 0.6 years |
| | 0.9 years |
|
Unrealized losses | $ | (614 | ) | | $ | (796 | ) |
The Company recognized $173 thousand and $77 thousand of cap premium amortization on cash flow hedges in the unaudited consolidated statements of income for the three months ended March 31, 20182023 and 2017,2022:
| | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | |
(Dollars in thousands) | 2023 | | 2022 | | | | |
Derivative - interest rate swaps: | | | | | | | |
Interest income (loss) | $ | 8,164 | | | $ | (65) | | | | | |
Hedged items - loans: | | | | | | | |
Interest income (loss) | 62 | | | (13) | | | | | |
Net increase (decrease) in interest income | $ | 8,226 | | | $ | (78) | | | | | |
The following table presents the fair value of the Company’s interest rate swaps, as well as their classification in the consolidated statements of financial condition as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Fair Values of Derivative Instruments |
| | Asset Derivatives | | Liability Derivatives |
(Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value |
Derivatives designated as hedging instruments: | | | | |
As of March 31, 2023: | | | | | |
Interest Rate Swaps | $ | 1,800,000 | | Prepaid Expenses and Other Assets | $ | 11,763 | | | Other Liabilities and Accrued Expenses | $ | 18,053 | |
As of December 31, 2022: | | | | | |
Interest Rate Swaps | $ | 1,850,000 | | Prepaid Expenses and Other Assets | $ | 21,323 | | | Other Liabilities and Accrued Expenses | $ | 2,136 | |
As of March 31, 2023 and December 31, 2022, the following amounts were recorded in the consolidated statements of financial condition related to cumulative basis adjustments for its fair value hedges:
| | | | | | | | | | | | | | |
Line Item in the Consolidated Statements of Financial Condition in Which the Hedged Items are Included (1) | | Carrying Amount of the Hedged Assets | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets |
(Dollars in thousands) | | | | |
As of March 31, 2023: | | | | |
Loans receivable, net | | $ | 1,806,180 | | | $ | 6,180 | |
As of December 31, 2022: | | | | |
Loans receivable, net | | $ | 1,430,641 | | | $ | (19,359) | |
(1) These amounts include the amortized cost basis of portfolio loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At March 31, 2023 and December 31, 2022, the amortized cost basis of the portfolio loans used in these hedging relationships were $4.5 billion and $3.9 billion, respectively.
As of March 31, 2023, the Company had $8.7 million in cash collateral posted in connection with its interest rate swaps. There was no cash collateral posted as of December 31, 2022.
| |
13. | STOCK BASED COMPENSATION |
13. STOCK BASED COMPENSATION
The Company’s stock based compensation consists of restricted stock awards (RSAs)("RSAs") and restricted stock units (RSUs)("RSUs") granted under its 2017the Luther Burbank Corporation Omnibus Equity and Incentive Compensation Plan ("Omnibus Plan"). In connection with its IPOinitial public offering ("IPO") in December 2017, the Company granted RSAs and RSUs to employees and nonemployee directors which all vest ratably over three years. At the same time, the Company granted RSUs in exchange for unvested phantom stock awards held by employees and all vested and unvestedrelated to a then discontinued employee benefit plan that awarded phantom stock awards held byto certain key executives and nonemployee directorsdirectors. The RSUs were granted on a per share basis. The RSUs were subjected tobasis, with the same vesting schedule and deferral elections that existed for the original phantom stock awards.
In recognition of prior and current service, additional Post IPO, the Company typically grants RSAs were granted during the first quarter of 2018. These awards to nonemployee directors and certain employees on an annual basis. RSA grants vest overafter one year while awards to employees vestfor nonemployee directors and ratably over three years. to four years for employees.
All RSAs and RSUs wereare granted at the fair value of the common stock at the time of the award. The RSAs and RSUs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period.
Non-cash stock compensation expense recognized for RSAs and RSUs for the quarterthree months ended on March 31, 20182023 and 2022 totaled $1.0 million. No$473 thousand and $710 thousand, respectively. The fair value of RSAs or RSUs had been granted prior to December 2017.that vested during the three months ended March 31, 2023 and 2022 totaled $2.7 million and $2.6 million, respectively.
As of both March 31, 2018,2023 and December 31, 2022, there was $7.9$2.4 million of unrecognized compensation expense related to 1,226,891232,459 and 414,004 unvested RSAs, and RSUs. This expense isrespectively, which amounts were expected to be recognizedexpensed over a weighted average period of 2.26 years.1.50 years and 1.74 years, respectively. As of March 31, 2018, 169,490
2023 and December 31, 2022, 65,799 and 81,225 shares, respectively, of RSUs were vested and remain unsettled per the original deferral elections. There were no unvested RSUs at March 31, 2023 or December 31, 2022.
The following table summarizes share information about restricted stock awardsRSAs and restricted stock units for the quarter ended March 31, 2018:RSUs:
| | | | Three Months Ended March 31, |
| | | | | | | 2023 | | 2022 |
| | Restricted Stock and Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | Weighted Average Grant Date Fair Value |
Beginning of the period balance | | 1,319,700 |
| | $ | 10.75 |
| Beginning of the period balance | 495,229 | | | $ | 11.89 | | | 581,189 | | | $ | 10.56 | |
Shares granted | | 131,140 |
| | 12.77 |
| Shares granted | 42,034 | | | 11.24 | | | 206,675 | | | 13.81 | |
Shares settled | | (53,059 | ) | | 10.75 |
| Shares settled | (239,005) | | | 11.81 | | | (253,706) | | | 10.45 | |
Shares forfeited | | (1,400 | ) | | 10.75 |
| Shares forfeited | — | | | — | | | (4,100) | | | 11.93 | |
End of the period balance | | 1,396,381 |
| | $ | 10.94 |
| End of the period balance | 298,258 | | | $ | 11.87 | | | 530,058 | | | $ | 11.87 | |
Under its Omnibus Plan, the Company reserved 3,360,000 shares of common stock for new awards. At March 31, 20182023 and December 31, 2017,2022, there were 2,559,9591,640,434 and 2,689,6991,682,468 shares, respectively, of common stock reserved and available for grant through restricted stock or other awards under the Omnibus Plan. RSU awards were initially issued to replace unvested phantom stock awards under the Luther Burbank Corporation Phantom Stock Plan and were excluded from the shares reserved and available for grant under the Omnibus Plan.
| |
14. | FAIR VALUE MEASUREMENTS
|
Fair Value Measurements14. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:
Level 1 - Quoted market prices for identical instruments traded in active exchange markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
Management monitors the availability of observable market data to assess the appropriate classification of assets and liabilities within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of
the transfer relative to total assets, total liabilities, or total earnings.
The following methods and assumptions were used to estimate the fair value of financial instruments:
For cash and cash equivalents, variable rate loans, accrued interest receivable and payable, demand deposits and short-term borrowings, the carrying amount iswas estimated to be fair value. The fair value of accrued interest receivable/payable balances arewere determined using inputs and fair value measurements commensurate with the asset or liability from which the accrued interest is generated.
Fair values for available for sale investmentand held to maturity debt securities, which include primarily debt securities issued by U.S. government sponsored agencies, arewere based on quoted market prices for similar securities.
Fair values for equity securities, which consist of investments in a qualified community reinvestment fund, were based on quoted market prices.
Loans were valued using the exit price notion. The fair value of mortgage banking loans held for sale recorded at level two is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
The fair value of other loans held for sale recorded at level three are determined by two methodologies. The first methodology is used for single family portfolio loans that have been designated as held for sale after having been retained on the balance sheet for at least twelve months of seasoning. To be announced ("TBA") prices for Fannie Mae mortgage backed securities are provided by a third party with prices varying depending upon the underlying loan’s weighted average coupon rate. These prices are then used to determine the fair value of the loan pool using each loan’s coupon rate. As compensating evidence, the loans are also run through a valuation model taking into consideration loan level adjustments such as loan to value ratios, property type, and an estimated servicing release premium. The second methodology is used for multifamily portfolio loans that have been designated as held for sale in relation to a planned securitization transaction. This analysis begins with a third party quoted price for a risk free government guaranteed security comprised of these same multifamily loans. This information is then input into an interest rate risk model to generate an option adjusted spread ("OAS"). This OAS is added to a credit risk spread, based primarily on the cost of the Freddie Mac guarantee fee, to generate a fair market value for the loan pool. Both of these methodologies are performed monthly and compared to the prior month analysis for reasonableness.
For loans, the fair value iswas estimated using market quotes for similar assets or the present value of future cash flows, discounted using the currenta market rate at whichfor similar loans would be made to borrowers with similar credit ratings and for the same maturitiesproducts and giving consideration to estimated prepayment risk and credit risk. The fair value of loans iswas determined utilizing estimates resulting in a Level 3 classification.
Impaired loans are measured for impairment based on the presentThe fair value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company may measure impairmentcollateral dependent loans were measured based on a loan’s observable market price, or the fair value of the collateral (net of estimated costs to sell) ifat the loan is collateral dependent.reporting date, adjusted for selling costs. The fair value of impairedcollateral dependent loans iswas determined utilizing estimates resulting in a Level 3 classification.
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Typical unobservable inputs used for computing theThe fair value of impaired loans include adjustments made by appraisersservicing rights was determined using a valuation model that utilizes interest rate, prepayment speed, and brokers for differences between comparable property sales,default rate assumptions that market participants would use in estimating future net operatingservicing income assumptions and capitalization rates. Other factors considered include geographic sales trends and the values of comparable surrounding properties as well as the condition of the subject property. In measuring the fair value of impaired collateral dependent loans, the Company assumes a 100% default rate. The valuation techniques used by third party appraisers is consistent among all loan classes held by the Company due to the similarities in the type of loan collateral. For loans measured at fair value on a non-recurring basis in the Company’s loan portfolio at March 31, 2018 and December 31, 2017, adjustments made by appraisers and brokers to comparable property sales generally ranged from (10)% to 20%. Additionally, all appraisals are reviewed in accordance with Uniform Standards of Professional Appraisal Practice, or USPAP, by in house licensed appraisers who review not only the appraisal but independently search for comparable properties to ensure selected comparable properties and corresponding adjustments are appropriate. When necessary appraisal staff will adjust or reject an appraised value. The Company estimates that selling costs approximate 6% of the collateral fair value.
Real estate owned fair values are categorized as Level 3 due to ongoing assumptions in fair value measurements related to real estatecan be validated against available market conditions which may require adjustments made by appraisers and brokers for differences between comparable property sales, net operating income assumptions, and capitalization rates.data.
The fair values of derivatives arewere based on valuation models using observable market data as of the measurement date.
Fair values for fixed-rate certificates of deposit aretime deposits were estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificatestime deposits with similar remaining maturities. For deposits with no contractual maturity, the fair value iswas assumed to equal the carrying value.
The fair value of FHLB advances iswas estimated based on discounting the future cash flows using the market rate currently offered.offered for similar terms.
The fair value of subordinated debentures iswas based on an indication of value provided by a third-party broker.
For senior debt, the fair value iswas based on an indication of value provided by a third-party broker.
Fair Value of Financial Instruments
The carrying and estimated fair values of the Company’s financial instruments arewere as follows (dollars in thousands):follows:
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| | | | | Fair Level Measurements Using |
| Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 74,421 |
| | $ | 74,421 |
| | $ | 74,421 |
| | $ | — |
| | $ | — |
|
Investment securities: | | | | | | | | | |
Available for sale | 538,440 |
| | 538,440 |
| | — |
| | 538,440 |
| | — |
|
Held to maturity | 12,237 |
| | 12,013 |
| | — |
| | 12,013 |
| | — |
|
Loans receivable, net | 5,294,429 |
| | 5,292,414 |
| | — |
| | — |
| | 5,292,414 |
|
Accrued interest receivable | 16,137 |
| | 16,137 |
| | 10 |
| | 1,309 |
| | 14,818 |
|
Federal Home Loan Bank stock | 33,023 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Interest Rate Cap Premium | 10 |
| | 10 |
| | — |
| | 10 |
| | — |
|
Financial liabilities: | | | | | | | | | |
Customer deposits | $ | 4,114,026 |
| | $ | 4,073,150 |
| | $ | 1,715,328 |
| | $ | 2,357,822 |
| | $ | — |
|
FHLB advances | 1,158,153 |
| | 1,158,556 |
| | — |
| | 1,158,556 |
| | — |
|
Junior subordinated deferrable interest debentures | 61,857 |
| | 58,085 |
| | — |
| | 58,085 |
| | — |
|
Senior debt | 94,195 |
| | 100,819 |
| | — |
| | 100,819 |
| | — |
|
Accrued interest payable | 2,329 |
| | 2,329 |
| | — |
| | 2,329 |
| | — |
|
| | | | | | | | | | | | | | Fair Level Measurements Using |
| December 31, 2017 | |
| | | | | Fair Level Measurements Using | |
| Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | |
(Dollars in thousands) | | (Dollars in thousands) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
As of March 31, 2023: | | As of March 31, 2023: | | | | | | | | |
Financial assets: | | | | | | | | | | Financial assets: | |
Cash and cash equivalents | $ | 75,578 |
| | $ | 75,578 |
| | $ | 75,578 |
| | $ | — |
| | $ | — |
| Cash and cash equivalents | $ | 516,913 | | | $ | 516,913 | | | $ | 516,913 | | | $ | — | | | $ | — | |
Investment securities: | | | | | | | | | | |
Debt securities: | | Debt securities: | |
Available for sale | 503,288 |
| | 503,288 |
| | — |
| | 503,288 |
| | — |
| Available for sale | 593,427 | | | 593,427 | | | — | | | 593,427 | | | — | |
Held to maturity | 6,921 |
| | 6,925 |
| | — |
| | 6,925 |
| | — |
| Held to maturity | 3,080 | | | 2,891 | | | — | | | 2,891 | | | — | |
Equity securities | | Equity securities | 10,506 | | | 10,506 | | | — | | | 10,506 | | | — | |
| Loans receivable, net | 5,011,235 |
| | 5,022,250 |
| | — |
| | — |
| | 5,022,250 |
| Loans receivable, net | 6,987,565 | | | 6,662,388 | | | — | | | — | | | 6,662,388 | |
Accrued interest receivable | 14,901 |
| | 14,901 |
| | 27 |
| | 1,320 |
| | 13,554 |
| Accrued interest receivable | 23,873 | | | 23,873 | | | 580 | | | 2,027 | | | 21,266 | |
Federal Home Loan Bank stock | 27,733 |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
Interest rate cap premium | 1 |
| | 1 |
| | — |
| | 1 |
| | — |
| |
FHLB stock | | FHLB stock | 46,007 | | | N/A | | N/A | | N/A | | N/A |
Interest rate swaps | | Interest rate swaps | 11,763 | | | 11,763 | | | — | | | 11,763 | | | — | |
Financial liabilities: | | | | | | | | | | Financial liabilities: | |
Customer deposits | $ | 3,951,238 |
| | $ | 3,917,999 |
| | $ | 1,708,556 |
| | $ | 2,209,443 |
| | $ | — |
| |
Deposits | | Deposits | $ | 5,649,494 | | | $ | 5,618,781 | | | $ | 2,013,853 | | | $ | 3,604,928 | | | $ | — | |
FHLB advances | 989,260 |
| | 989,833 |
| | — |
| | 989,833 |
| | — |
| FHLB advances | 1,701,647 | | | 1,670,831 | | | — | | | 1,670,831 | | | — | |
Junior subordinated deferrable interest debentures | 61,857 |
| | 58,624 |
| | — |
| | 58,624 |
| | — |
| Junior subordinated deferrable interest debentures | 61,857 | | | 57,653 | | | — | | | 57,653 | | | — | |
Senior debt | 94,161 |
| | 104,500 |
| | — |
| | 104,500 |
| | — |
| Senior debt | 94,816 | | | 93,128 | | | — | | | 93,128 | | | — | |
Accrued interest payable | 1,781 |
| | 1,781 |
| | — |
| | 1,781 |
| | — |
| Accrued interest payable | 7,430 | | | 7,430 | | | — | | | 7,430 | | | — | |
Interest rate swaps | | Interest rate swaps | 18,053 | | | 18,053 | | | — | | | 18,053 | | | — | |
As of December 31, 2022: | | As of December 31, 2022: | |
Financial assets: | | Financial assets: | |
Cash and cash equivalents | | Cash and cash equivalents | $ | 185,895 | | | $ | 185,895 | | | $ | 185,895 | | | $ | — | | | $ | — | |
Debt securities: | | Debt securities: | |
Available for sale | | Available for sale | 607,348 | | | 607,348 | | | — | | | 607,348 | | | — | |
Held to maturity | | Held to maturity | 3,108 | | | 2,874 | | | — | | | 2,874 | | | — | |
Equity securities | | Equity securities | 10,340 | | | 10,340 | | | — | | | 10,340 | | | — | |
Loans receivable, net | | Loans receivable, net | 6,973,760 | | | 6,743,783 | | | — | | | — | | | 6,743,783 | |
Accrued interest receivable | | Accrued interest receivable | 24,306 | | | 24,306 | | | 58 | | | 4,171 | | | 20,077 | |
FHLB stock | | FHLB stock | 32,694 | | | N/A | | N/A | | N/A | | N/A |
Interest rate swaps | | Interest rate swaps | 21,323 | | | 21,323 | | | — | | | 21,323 | | | — | |
Financial liabilities: | | Financial liabilities: | |
Deposits | | Deposits | $ | 5,839,340 | | | $ | 5,789,929 | | | $ | 2,449,966 | | | $ | 3,339,963 | | | $ | — | |
FHLB advances | | FHLB advances | 1,208,147 | | | 1,153,511 | | | — | | | 1,153,511 | | | — | |
Junior subordinated deferrable interest debentures | | Junior subordinated deferrable interest debentures | 61,857 | | | 56,967 | | | — | | | 56,967 | | | — | |
Senior debt | | Senior debt | 94,785 | | | 94,652 | | | — | | | 94,652 | | | — | |
Accrued interest payable | | Accrued interest payable | 3,964 | | | 3,964 | | | — | | | 3,964 | | | — | |
Interest rate swaps | | Interest rate swaps | 2,136 | | | 2,136 | | | — | | | 2,136 | | | — | |
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimatesestimates.
Assets and Liabilities Recorded at Fair Value
The following tables presenttable presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 20182023 and December 31, 2017.2022.
Recurring Basis
The Company is required or permitted to record the following assets and liabilities at fair value on a recurring basis under other accounting pronouncements (dollars in thousands):basis:
|
| | | | | | | | | | | | | | | |
| March 31, 2018 |
Description | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | | | | | | | |
Available for sale investment securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 351,492 |
| | $ | — |
| | $ | 351,492 |
| | $ | — |
|
Agency bonds | 116,515 |
| | — |
| | 116,515 |
| | — |
|
Collateralized mortgage obligations | 44,970 |
| | — |
| | 44,970 |
| | — |
|
SBA securities | 12,988 |
| | — |
| | 12,988 |
| | — |
|
U.S. Treasury 10 year note | 971 |
| | — |
| | 971 |
| | — |
|
CRA Qualified Investment Fund (CRAIX) | 11,504 |
| | — |
| | 11,504 |
| | — |
|
Total investment securities available for sale | $ | 538,440 |
| | — |
| | $ | 538,440 |
| | — |
|
Interest rate cap premium | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
Description | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | | | | | | | |
Available for sale investment securities: | | | | | | | |
Government Sponsored Entities: | | | | | | | |
Mortgage-backed securities | $ | 312,919 |
| | $ | — |
| | $ | 312,919 |
| | $ | — |
|
Agency bonds | 117,222 |
| | — |
| | 117,222 |
| | — |
|
Collateralized mortgage obligations | 47,168 |
| | — |
| | 47,168 |
| | — |
|
SBA securities | 13,302 |
| | — |
| | 13,302 |
| | — |
|
U.S. Treasury 10 year note | 984 |
| | — |
| | 984 |
| | — |
|
CRA Qualified Investment Fund (CRAIX) | 11,693 |
| | — |
| | 11,693 |
| | — |
|
Total investment securities available for sale | $ | 503,288 |
| | $ | — |
| | $ | 503,288 |
| | $ | — |
|
Interest rate cap premium | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 |
As of March 31, 2023: | | | | | | | |
Financial Assets: | | | | | | | |
Available for sale debt securities: | | | | | | | |
Government and Government Sponsored Entities: | | | | |
Commercial MBS and CMOs | $ | 333,725 | | | $ | — | | | $ | 333,725 | | | $ | — | |
Residential MBS and CMOs | 195,543 | | | — | | | 195,543 | | | — | |
Agency bonds | 41,160 | | | — | | | 41,160 | | | — | |
Other ABS | 22,999 | | | — | | | 22,999 | | | — | |
Total available for sale debt securities | $ | 593,427 | | | $ | — | | | $ | 593,427 | | | $ | — | |
Equity securities | $ | 10,506 | | | $ | — | | | $ | 10,506 | | | $ | — | |
Mortgage servicing rights | 669 | | | — | | | — | | | 669 | |
Interest rate swaps | 11,763 | | | — | | | 11,763 | | | — | |
Financial Liabilities: | | | | | | | |
Interest rate swaps | $ | 18,053 | | | $ | — | | | $ | 18,053 | | | $ | — | |
As of December 31, 2022: | | | | | | | |
Financial Assets: | | | | | | | |
Available for sale debt securities: | | | | | | | |
Government and Government Sponsored Entities: | | | | |
Commercial MBS and CMOs | $ | 340,736 | | | $ | — | | | $ | 340,736 | | | $ | — | |
Residential MBS and CMOs | 199,384 | | | — | | | 199,384 | | | — | |
Agency bonds | 42,630 | | | — | | | 42,630 | | | — | |
Other ABS | 24,598 | | | — | | | 24,598 | | | — | |
Total available for sale debt securities | $ | 607,348 | | | $ | — | | | $ | 607,348 | | | $ | — | |
Equity securities | $ | 10,340 | | | $ | — | | | $ | 10,340 | | | $ | — | |
Mortgage servicing rights | 688 | | | — | | | — | | | 688 | |
Interest rate swaps | 21,323 | | | — | | | 21,323 | | | — | |
Financial Liabilities: | | | | | | | |
Interest rate swaps | $ | 2,136 | | | $ | — | | | $ | 2,136 | | | $ | — | |
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2018 and 2017.2023 or 2022.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date (dollars in thousands):date.
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
Description | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Total Gain (Loss) or (Valuation Allowance) |
Single family residential | $ | 191 |
| | $ | — |
| | $ | — |
| | $ | 191 |
| | $ | (5 | ) |
Total assets measured at fair value on a non-recurring basis | $ | 191 |
| | $ | — |
| | $ | — |
| | $ | 191 |
| | $ | (5 | ) |
Single family residential loansAt both March 31, 2023 and December 31, 2022, there were no assets or liabilities measured at fair value include loans held for sale and certain impaired loans. For the three months ended March 31, 2018, there were no charge offs on impaired loans. At December 31, 2017, an impaired loan of $196 thousand was adjusted to a fair value of $191 thousand by recording charge-offs of $5 thousand. The fair value of impaired, collateral dependent loans is estimated at the fair value of the underlying collateral, less estimated selling costs. These loans are categorized as Level 3 due to ongoing real estate market conditions which may require the use of unobservable inputs and assumptions in fair value measurements.
The company held no real estate owned at March 31, 2018 and December 31, 2017. Management periodically obtains updated valuations of properties after foreclosure.
Financial Instruments Recorded Using Fair Value Option
The Company has elected the fair value option for certain of its loans held for sale. These loans are intended for salenon-recurring basis and the Company believes that the fair value is the best indicatorheld no other real estate owned.
There was no interest income on loans held for sale for the three months ended March 31, 2018. For the three months ended March 31, 2017 interest income on loans held for sale totaled $32 thousand.15. VARIABLE INTEREST ENTITIES ("VIE")
| |
15. | VARIABLE INTEREST ENTITIES ("VIE") |
The Company is involved with VIEs through its loan securitization activities. WeThe Company evaluated ourits association with VIEs for consolidation purposes. Specifically, a VIE is to be consolidated by its primary beneficiary, the entity that has both the power to direct the activities that most significantly impact the VIE, and a variable interest that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest whose value fluctuates with the changes in the value of the VIE's assets and liabilities. OurThe assessment includes an evaluation of ourthe Company's continuing involvement with the VIE and the nature and significance of ourits variable interests.
Multifamily loan securitization
With respect to the securitization transaction with Freddie Mac which settled September 27, 2017, ourthe Company's variable interests reside with a reimbursement agreement entered into with Freddie Mac that obligates the BankCompany to reimburse Freddie Mac for any defaulted contractual principal and interest payments identified after the ultimate resolution of theany defaulted loans. Such reimbursement obligations are not to exceed 10% of the original principal amount of the loans comprising the securitization pool. As part of the securitization transaction, the BankCompany released all servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. As Master Servicer, Freddie Mac appointed the BankCompany with sub-servicing obligations, which include obligations to collect and remit payments of principal and interest, manage payments of taxes and insurance, and otherwise administer the underlying loans. The servicing of defaulted loans and foreclosed loans was assigned to a separate third party entity, independent of the BankCompany and Freddie Mac. Freddie Mac, in its capacity as Master Servicer, can terminate the BankCompany in its role as sub-servicer and direct such responsibilities accordingly. In evaluating ourthe variable interests and continuing involvement in the VIE, wethe Company determined that we doit does not have the power to make significant decisions or direct the activities that most significantly impact the economic performance of the VIE's assets and liabilities. As sub-servicer of the loans, the BankCompany does not have the authority to make significant decisions that influence the value of the VIE's net assets and therefore, is not the primary beneficiary of the VIE. Therefore, weHence, the Company determined that the VIE associated with the multifamily securitization should not be included in the consolidated financial statements of the Bank.Company.
We believe that ourThe Company believes its maximum exposure to loss as a result of our involvement with the VIE associated with the securitization under the reimbursement agreement executed with Freddie Mac is 10% of the original principal amount of the loans comprising the securitization pool, or $62.6 million. OurThe reserve for estimated losses with respect to the reimbursement obligation totaled $1.7 million$270 thousand and $439 thousand as of March 31, 20182023 and December 31, 2017,2022, respectively, based upon ouran analysis of quantitative and qualitative data overof the underlying loans included in the securitization pool. No disbursements have been made in connection with the reimbursement obligation. In connection with the adoption the CECL accounting standard on January 1, 2023, the Company decreased the allowance for the reimbursement obligation by $119 thousand, which represented the difference between the CECL methodology and the prior methodology utilized for estimating losses for its reimbursement obligation.
16. LOAN SALE AND SECURITIZATION ACTIVITIES | |
16. | LOAN SALE AND SECURITIZATION ACTIVITIES |
The Company periodically sells originated and acquired loans as part of its business operations and overall management of liquidity, assets and liabilities, and financial performance. The transfer of loans is executed in securitization or sale transactions. With respect to sale transactions, the Company's continuing involvement may or may not include ongoing servicing responsibilities and general representations and warranties. With respect to securitization sales, the Company executed its first and only transaction to date on September 27, 2017 with Freddie Mac. The transaction involved the sale of $626$626.0 million in originated multifamily loans through a Freddie Mac sponsored transaction. The Company's continuing involvement includes sub-servicing responsibilities, general representations and warranties, and a limited reimbursement obligations.obligation.
As sub-servicer for Freddie Mac, the Bank is required to maintain a minimum net worth in accordance with generally accepted accounting principlesGAAP of not less than $2.0 million. If Luther Burbank Savings’the Bank's capital were to fall below this threshold, Freddie Mac would have the authority to terminate and assume the Bank’s sub-servicing duties. At March 31, 2018,2023, the Bank’s actual net worth was $693$838.6 million which equates to its Tier 1 capital of $868.5 million plus goodwill of $3.3 million and accumulated other comprehensive loss related to net unrealized losses on available for sale securities of $33.3 million.
Servicing responsibilities on loan sales generally include obligations to collect and remit payments
General representations and warranties associated with loan sales and the securitization salestransaction require the BankCompany to uphold various assertions that pertain to the underlying loans at the time of the transaction, including, but not limited to, compliance with relevant laws and regulations, absence of fraud, enforcement of liens, no environmental damages, and maintenance of relevant environmental insurance. Such representations and warranties are limited to those that do not meet the quality represented at the transaction date and do not pertain to a decline in value or future payment defaults. In circumstances where the BankCompany breaches its
representations and warranties, the BankCompany would generally be required to cure such instances through a repurchase or substitution of the subject loan(s).
With respect to the securitization transaction, the BankCompany also has continuing involvement through a reimbursement agreement executed with Freddie Mac. To the extent the ultimate resolution of defaulted loans results in contractual principal and interest payments that are deficient, the BankCompany is obligated to reimburse Freddie Mac for such amounts, not to exceed 10% of the original principal amount of the loans comprising the securitization pool at the closing date of September 27, 2017. We recognized a liability of $1.7 million as of March 31, 2018 for our exposure to the reimbursement agreement with Freddie Mac.
The following table provides cash flows associated with the Company's loan sale activities:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(In thousands) | | 2018 | | 2017 |
Proceeds from loan sales | | $ | — |
| | $ | 24,691 |
|
Servicing fees | | 407 |
| | 108 |
|
During the three months ended March 31, 2018 there were no sales of originated loans. During the three months ended March 31, 2017 there were $24.7 million of sales of originated loans resulting in a net loss of of $163 thousand. | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(Dollars in thousands) | | 2023 | | 2022 | | | | |
Proceeds from loan sales | | $ | — | | | $ | — | | | | | |
Servicing fees | | 64 | | | 97 | | | | | |
The following table provides information about the loans transferred through sales or securitization and not recorded on our Consolidated Statementin the consolidated statements of Financial Condition,financial condition, for which the Company's continuing involvement includes sub-servicing or servicing responsibilities and/or reimbursement obligations (dollars in thousands):obligations:
| | | | | | | | | | | |
(Dollars in thousands) | Single Family Residential | | Multifamily Residential |
As of March 31, 2023: | | | |
Principal balance of loans | $ | 10,907 | | | $ | 104,625 | |
Loans 90+ days past due | — | | | — | |
Charge-offs, net | — | | | — | |
As of December 31, 2022: | | | |
Principal balance of loans | $ | 11,000 | | | $ | 106,981 | |
Loans 90+ days past due | — | | | — | |
Charge-offs, net | — | | | — | |
|
| | | | | | | |
| Single Family Residential | | Multifamily Residential |
March 31, 2018 | | | |
Principal balance of loans | $ | 28,830 |
| | $ | 732,848 |
|
Loans 90+ days past due | — |
| | — |
|
Charge-offs, net | — |
| | — |
|
December 31, 2017 | | | |
Principal balance of loans | 29,772 |
| | 753,909 |
|
Loans 90+ days past due | — |
| | — |
|
Charge-offs, net | — |
| | — |
|
17. COMMITMENTS AND CONTINGENCIES | |
17. | COMMITMENTS AND CONTINGENCIES |
Financial Instruments With Off-Balance-Sheetwith Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheetoff-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments represent commitments to originate fixed and variable rate loans and lines of credit and loans in process, and involve, to varying degrees, elements ofcredit risk and interest rate risk and credit risk in excess of the amount recognized in the Company’s consolidated statementstatements of financial condition. The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and lines of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance-sheeton-balance sheet instruments. As it relates to interest rate risk, the Company's exposure is generally limited to increases in interest rates that may result during the short period of time between the commitment and funding of fixed rate credit facilities and adjustable rate credit facilities with initial fixed rate periods. The limited timing risk associated with these credit facilities are considered within the Company's asset liability management process.
Commitments to fund loans and home equity lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have expiration dates or other termination clauses. In addition, external market forces may impact the probability of commitments
being exercised; therefore, total commitments outstanding do not necessarily represent future cash requirements.
At March 31, 20182023 and December 31, 2017,2022, the Company had outstanding commitments of approximately $114.8$36.7 million and $65.8$37.7 million, respectively, for real estate loans. Unfunded loan commitment reserves totaled $330$389 thousand and $197$125 thousand at March 31, 20182023 and December 31, 2017,2022, respectively.
Operating Leases
The Company leases various office premisesadopted the CECL accounting standard on January 1, 2023. Upon adoption, the Company increased the allowance for unfunded loan commitments by $330 thousand, which represented the difference between the allowance calculated under long-term operating lease agreements. These leases expire between 2018the CECL methodology as of January 1, 2023 and 2028, with certain leases containing either three, five or ten year renewal options. At Marchthe incurred loss methodology as of December 31, 2018, minimum2022. The $330 thousand increase in the allowance for unfunded loan commitments was primarily due to higher lifetime expected losses on unfunded commitments on construction loans under these non-cancellable leases with initial or remaining terms of one year or more are as follows (dollars in thousands):
|
| | | |
April 1 - December 31, 2018 | $ | 4,021 |
|
Year ending December 31, 2019 | 5,117 |
|
Year ending December 31, 2020 | 3,723 |
|
Year ending December 31, 2021 | 3,267 |
|
Year ending December 31, 2022 | 2,419 |
|
Thereafter | 1,864 |
|
| $ | 20,411 |
|
Rent expense under operating leases was $1.1 million and $1.1 million for the three months ended March 31, 2018 and 2017, respectively.
CECL methodology.
Contingencies
TheAt present, there are no pending or threatened proceedings against the Company is involved in legal proceedings arising in the normal course of business. In the opinion of management, the outcomes of such proceedings will notwhich, if determined adversely, would have a material adverse effect on the Company’s business, financial position, or results of operations.operations or cash flows. In the ordinary course of operations, as well as in connection with the pending merger with WAFD, the Company may be party to various legal proceedings.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. TheseInsured portions of these balances are insured by the FDIC uplimited to $250 thousand.thousand per institution based on FDIC insurance limits. At March 31, 20182023 and December 31, 2017,2022, the Company had $856$854 thousand and $845 thousand,$25.0 million, respectively, in uninsured available cash balances exceedingbalances. Additionally, the insured amounts.Company had $8.7 million in restricted cash as collateral for its interest rate swap agreements at a correspondent bank as of March 31, 2023, compared to none at December 31, 2022. The Company also has established federal funds lines of credit with correspondent banks totaling $50.0 million at both March 31, 2023 and December 31, 2022, none of which were advanced at those dates. The Company periodically monitors the financial condition and capital adequacy of these correspondent banks.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition at March 31, 20182023 and December 31, 20172022 and our results of operations for the three months ended March 31, 20182023 and December 31, 2022 and the three months ended March 31, 2017,2023 and 2022, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 20172022 that was filed with the Securities and Exchange Commission (the “SEC”)SEC on March 16, 2018February 22, 2023 (our “Annual Report”) and with the accompanying unaudited notesNotes to consolidated financial statementsUnaudited Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 20182023 (this “Report”). Because we conduct all of our material business operations through our bank subsidiary, Luther Burbank Savings (the "Bank"), the discussion and analysis relates to activities primarily conducted by the Bank.
Overview
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 $6.0$8.3 billion in assets at March 31, 2018.2023. 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 individualsdepositors 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 FHLBFederal Home Loan Bank ("FHLB") and brokered deposits. 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, consisting primarily of multifamily residential properties and purchase money mortgages on jumbo single family residential properties on the West Coast.
Selected Financial Data
The following table sets forth the Company’s selected historical consolidated financial data for the periods and as of the dates indicated. You should read this information together with the Company’s audited consolidated financial statements included in our Annual Report and the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.Report. The selected historical consolidated financial data as of and for the three months ended March 31, 20182023 and 20172022 are derived from our unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q.Report. The selected historical consolidated financial data as of and for the three months ended December 31, 2017 (except as otherwise noted below)2022 are derived from our auditedunaudited consolidated financial statements which are included in our Annual Reportpreviously filed Form 8-K on Form 10-K.January 24, 2023 as Exhibit 99.1. The Company’s historical results for any prior period are not necessarily indicative of future performance.
|
| | | | | | | | | | | | |
(Dollars in thousands, except share/per share data and percentages) | | As of or For the Three Months Ended |
| March 31, 2018 | | March 31, 2017 | | December 31, 2017 |
Per Common Share (1) | | | | | | |
Basic earnings per share | | $ | 0.20 |
| | $ | 0.29 |
| | $ | 0.45 |
|
Diluted earnings per share | | $ | 0.20 |
| | $ | 0.29 |
| | $ | 0.45 |
|
Book value per share | | $ | 9.79 |
| | $ | 9.70 |
| | $ | 9.74 |
|
Tangible book value per share (2) | | $ | 9.73 |
| | $ | 9.62 |
| | $ | 9.68 |
|
Common shares outstanding at end of period | | 56,561,055 |
| | 42,000,000 |
| | 56,422,662 |
|
Weighted average shares outstanding - basic | | 56,190,970 |
| | 42,000,000 |
| | 45,667,516 |
|
Weighted average shares outstanding - diluted | | 56,755,154 |
| | 42,000,000 |
| | 45,831,743 |
|
Pro Forma Statements of Income and Per Common Share Data (2) | | | | | | |
Pro forma provision for income tax | | $ | 4,175 |
| | $ | 5,342 |
| | $ | 6,122 |
|
Pro forma net income | | 11,102 |
| | 7,378 |
| | 8,455 |
|
Pro forma net income per common share—basic | | 0.20 |
| | 0.18 |
| | 0.19 |
|
Pro forma net income per common share—diluted | | 0.20 |
| | 0.18 |
| | 0.18 |
|
Selected Ratios | | | | | | |
Return on average: | | | | | | |
Assets | | 0.76 | % | | 0.95 | % | | 1.50 | % |
Stockholders' equity | | 7.98 | % | | 12.01 | % | | 17.97 | % |
Average stockholders' equity to average assets | | 9.52 | % | | 7.92 | % | | 8.32 | % |
Dividend payout ratio | | 54.59 | % | | 79.71 | % | | 230.64 | % |
Net interest margin | | 2.11 | % | | 2.10 | % | | 2.05 | % |
Efficiency ratio (2) | | 46.72 | % | | 53.02 | % | | 45.51 | % |
Loan to deposit ratio | | 129.47 | % | | 131.94 | % | | 127.59 | % |
Pro Forma Selected Ratios (2) | | | | | | |
Pro forma return on average assets | | 0.76 | % | | 0.57 | % | | 0.62 | % |
Pro forma return on average equity | | 7.98 | % | | 7.21 | % | | 7.44 | % |
Credit Quality Ratios | | | | | | |
Allowance for loan losses to loans | | 0.60 | % | | 0.71 | % | | 0.60 | % |
Allowance for loan losses to nonperforming loans | | 459.42 | % | | 780.97 | % | | 430.75 | % |
Nonperforming assets to total assets | | 0.12 | % | | 0.08 | % | | 0.12 | % |
Net recoveries to average loans | | 0.01 | % | | 0.01 | % | | 0.01 | % |
| | | | | | |
(1) 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. |
(2) Considered a non-GAAP financial measure. See Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations - ‘‘Non-GAAP Financial Measures’’ for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Net tangible book value is defined as total assets less goodwill and total liabilities. Efficiency ratio is defined as the ratio of noninterest expense to net interest income plus noninterest income. For periods prior to January 1, 2018, we calculate our pro forma net income, return on average assets and return on average equity by adding back our franchise S Corporation tax to net income, and using a combined C Corporation 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. Beginning January 1, 2018, our pro forma provision for tax expense is our actual C Corporation provision. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of or For the Three Months Ended |
| | | | | | | |
(Dollars in thousands, except per share data) | | March 31, 2023 | | December 31, 2022 | | | | | | March 31, 2022 |
Statements of Income and Financial Condition Data | | | | | | | | |
Net Income | | $ | 13,442 | | | $ | 13,689 | | | | | | | $ | 22,940 | |
Pre-tax, pre-provision net earnings (1) | | $ | 18,287 | | | $ | 20,431 | | | | | | | $ | 29,580 | |
Total assets | | $ | 8,302,457 | | | $ | 7,974,632 | | | | | | | $ | 7,260,826 | |
Per Common Share | | | | | | | | | | |
Diluted earnings per share | | $ | 0.26 | | | $ | 0.27 | | | | | | | $ | 0.45 | |
Book value per share | | $ | 13.64 | | | $ | 13.36 | | | | | | | $ | 13.00 | |
Tangible book value per share (1) | | $ | 13.58 | | | $ | 13.30 | | | | | | | $ | 12.93 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Selected Ratios | | | | | | | | | | |
Return on average: | | | | | | | | | | |
Assets | | 0.67 | % | | 0.69 | % | | | | | | 1.28 | % |
Stockholders' equity | | 7.78 | % | | 8.04 | % | | | | | | 13.60 | % |
Dividend payout ratio | | — | % | | 44.84 | % | | | | | | 27.14 | % |
Net interest margin | | 1.72 | % | | 2.01 | % | | | | | | 2.54 | % |
Efficiency ratio (1) | | 48.08 | % | | 49.23 | % | | | | | | 34.40 | % |
Noninterest expense to average assets | | 0.84 | % | | 1.00 | % | | | | | | 0.86 | % |
Loan to deposit ratio | | 124.32 | % | | 120.06 | % | | | | | | 113.66 | % |
| | | | | | | | | | |
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Credit Quality Ratios | | | | | | | | | | |
Allowance for credit losses on loans to total loans | | 0.51 | % | | 0.52 | % | | | | | | 0.52 | % |
Allowance for credit losses on loans to nonperforming loans | | 722.62 | % | | 566.91 | % | | | | | | 1,450.81 | % |
Nonperforming assets to total assets | | 0.06 | % | | 0.08 | % | | | | | | 0.03 | % |
Net charge-offs to average loans | | — | % | | — | % | | | | | | — | % |
Capital Ratios | | | | | | | | | | |
Tier 1 leverage ratio | | 9.73 | % | | 9.72 | % | | | | | | 10.27 | % |
Total risk-based capital ratio | | 19.50 | % | | 19.14 | % | | | | | | 19.37 | % |
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(1) Considered a non-GAAP financial measure. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ‘‘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 before taxes and provision for credit losses. Tangible book value per share is defined as total assets less goodwill and total liabilities divided by period end shares outstanding. Efficiency ratio is defined as the ratio of noninterest expense to net interest income plus noninterest income. |
Critical Accounting Policies and Estimates
Our unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States(“GAAP”) and with general practices within the financial services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Our most significant accounting policies are described in Note 1 to our audited Financial Statementsfinancial statements for the year ended December 31, 2017,2022, included on Form 10-K.in our Annual Report. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are reasonable and appropriate.
Pursuant to the JOBS Act, as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. 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 may adopt the standard for the private company.
We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company.
Allowance for LoanCredit Losses
("ACL") on Loans
The Company adopted the current expected credit loss ("CECL") allowance for loan losses is provided for probable incurredmethodology on January 1, 2023. The
ACL on loans represents the Company’s estimate of expected lifetime credit losses inherent in the loan portfoliofor its loans at the statementtime of financial condition date. The allowanceorigination or acquisition and is increasedmaintained at a level deemed appropriate by a provision chargedmanagement to expense and reduced by loan principal charge-offs, net of recoveries. Where management determines that the allowanceprovide for loan losses is more than adequate to absorb the probable incurredexpected lifetime credit losses in the portfolio as of the date of the consolidated statements of financial condition. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. Loans are charged-off against the allowance when management believes that the uncollectibility of a loan is reduced by recapturing provisionsconfirmed. Recoveries will never exceed the aggregate of amounts previously charged-off.
While management estimates the ACL balance using relevant available information, from internal and a credit is madeexternal sources, relating to the expense account. The allowance is based on management’s assessment of various factors including the nature of the loan portfolio, previous loss experience, known and inherent risks in the portfolio, the estimated value of underlying collateral, information that may affect a borrower’s ability to repay,past events, current economic conditions and the results of our ongoing reviews of the portfolio.
While we use available information, including independent appraisals for collateral, to estimate the extent of probable incurred loan losses within the loan portfolio,reasonable and supportable forecasts, inherent uncertainties in the estimation process make it reasonably possible that ultimate losses may vary significantly from our original estimates. Generally, loans are partially or fully charged off when it is determined that the unpaid principal balance exceeds the current fair value of the collateral with no other likely source of repayment.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at fair value. Loans originated and intended for sale only after a minimum 12 month period of seasoning, a practice generally utilized to allow for appropriate community reinvestment lending recognition, are classified as held for sale and are carried at the lower of aggregate cost or fair value. Loans transferred to the held-for-sale portfolio that were not originated with the intent to sell are carried at the lower of aggregate cost or fair value. Changes in the fair value of loans that are carried at fair value are recorded in noninterest income in the period incurred.
When determining whether to recognize sale accounting, we give consideration to the legal isolation of transferred assets including the right to pledge or exchange such assets and the surrender of control over transferred assets. Loan sale transactions that involve securitizations with variable interest entities are evaluated for consolidation with consideration given to the nature and extent of continuing involvement with the transferred assets. When the conditions for sale accounting and legal isolation are met, loans are derecognized from the balance sheet and any gains or losses are recorded to earnings through noninterest income.
Fair Value Measurement
We use estimates of fair value in applying various accounting standards for our unaudited consolidated financial statements. Fair value is defined as the exit price at which an asset may be sold or a liability may be transferred in an orderly transaction between willing and able market participants. When available, fair value is measured by looking at observable market prices for identical assets and liabilities in an active market. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, prepayment speeds and credit spreads. Methods used to estimate fair value do not necessarily represent an exit price. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
Changes in the fair value of investments available-for-sale and derivatives designated as effective cash flow hedgesdebt securities available for sale are recorded in our consolidated statementstatements of financial condition and other comprehensive income (loss) while changes in the fair value of equity securities, loans held for sale or otherand derivatives are recorded in the consolidated statementstatements of financial condition and in the statementunaudited consolidated statements of operations.income.
Investment Securities Impairment
We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a security in which we have an unrealized loss is impaired on an other-than-temporary basis. In any instance, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and, for debt securities, external credit ratings and recent downgrades. Securities with respect to which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value.
Non-GAAP Financial Measures
Some of the financial measures discussed in this Quarterly Report on Form 10-QItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations contain financial measures that are ‘‘not measures recognized under GAAP and therefore, are considered 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 ormeasures, 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, statements of financial condition or statements of cash flows.
Pre-tax,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. Prior to January 1, 2018, we calculate our pro forma net income, return on averageefficiency ratio, tangible assets, return on averagetangible stockholders' equity and per share amounts by adding back our franchise S Corporation tax to net income, and using a combined C Corporation 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. Beginning Janauary 1, 2018, our pro forma income tax expense is our actual C Corporation tax provision. Net tangible book value is defined as total assets less goodwillper share.
Our management uses these non-GAAP financial measures in their analysis of the Company’s performance, financial condition and total liabilities. Efficiency ratio is defined as noninterest expenses divided by operating revenue, which is equal to net interest income plus noninterest income.the efficiency of its operations. We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, resultsa greater understanding of ongoing operations and cash flows computedenhance comparability of results with prior periods and other companies, as well as demonstrate the effects of significant changes in accordance with GAAP.the current period. We also believe that investors find these non-GAAP financial measures useful as they assist investors in understanding our underlying operating performance and the analysis of ongoing operating trends. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, youYou 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.
The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
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| As of or For the Three Months Ended |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 | | | | | | March 31, 2022 |
Pre-tax, Pre-provision Net Earnings | | | | | | | | | |
Income before taxes | $ | 19,082 | | | $ | 19,781 | | | | | | | $ | 32,080 | |
Plus: (Reversal of) provision for credit losses | (795) | | | 650 | | | | | | | (2,500) | |
Pre-tax, pre-provision net earnings | $ | 18,287 | | | $ | 20,431 | | | | | | | $ | 29,580 | |
Efficiency Ratio | | | | | | | | | |
Noninterest expense (numerator) | $ | 16,934 | | | $ | 19,814 | | | | | | | $ | 15,512 | |
Net interest income | $ | 33,986 | | | $ | 39,274 | | | | | | | 45,034 | |
Noninterest income | 1,235 | | | 971 | | | | | | | 58 | |
Operating revenue (denominator) | $ | 35,221 | | | $ | 40,245 | | | | | | | $ | 45,092 | |
Efficiency ratio | 48.08 | % | | 49.23 | % | | | | | | 34.40 | % |
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Tangible Book Value Per Share | | | | | | | | | |
Total assets | $ | 8,302,457 | | | $ | 7,974,632 | | | | | | | $ | 7,260,826 | |
Less: Goodwill | (3,297) | | | (3,297) | | | | | | | (3,297) | |
Tangible assets | 8,299,160 | | | 7,971,335 | | | | | | | 7,257,529 | |
Less: Total liabilities | (7,606,296) | | | (7,292,096) | | | | | | | (6,592,826) | |
Tangible stockholders' equity (numerator) | $ | 692,864 | | | $ | 679,239 | | | | | | | $ | 664,703 | |
Period end shares outstanding (denominator) | 51,030,877 | | | 51,073,272 | | | | | | | 51,403,914 | |
Tangible book value per share | $ | 13.58 | | | $ | 13.30 | | | | | | | $ | 12.93 | |
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| | As of or For the Three Months Ended |
(Dollars in thousands) | | March 31, 2018 | | March 31, 2017 | | December 31, 2017 |
Tangible book value | | | | | | |
Total assets | | $ | 6,033,888 |
| | $ | 5,391,540 |
| | $ | 5,704,380 |
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Less: Goodwill | | (3,297 | ) | | (3,297 | ) | | (3,297 | ) |
Less: Total liabilities | | (5,480,137 | ) | | (4,984,033 | ) | | (5,154,635 | ) |
Tangible book value | | $ | 550,454 |
| | $ | 404,210 |
| | $ | 546,448 |
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Pro forma provision for income tax | | | | | | |
Net income before income taxes | | $ | 15,277 |
| | $ | 12,720 |
| | $ | 14,577 |
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Total effective actual/ pro forma tax rate | | 27 | % | | 42 | % | | 42 | % |
Actual/ pro forma provision for income taxes | | $ | 4,175 |
| | $ | 5,342 |
| | $ | 6,122 |
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Pro forma net income | | | | | | |
Net income before income taxes | | $ | 15,277 |
| | $ | 12,720 |
| | $ | 14,577 |
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Actual/ pro forma provision for income taxes | | 4,175 |
| | 5,342 |
| | 6,122 |
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Actual/ pro forma net income | | $ | 11,102 |
| | $ | 7,378 |
| | $ | 8,455 |
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Pro forma ratios and per share data | | | | | | |
Annualized actual/ pro forma net income (numerator) | | $ | 44,408 |
| | $ | 29,510 |
| | $ | 33,819 |
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Average assets (denominator) | | 5,848,751 |
| | 5,172,186 |
| | 5,461,226 |
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Actual/ pro forma return on average assets | | 0.76 | % | | 0.57 | % | | 0.62 | % |
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Average stockholders' equity (denominator) | | 556,661 |
| | 409,451 |
| | 454,635 |
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Actual/ pro forma return on average stockholders' equity | | 7.98 | % | | 7.21 | % | | 7.44 | % |
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Actual/ pro forma net income (numerator) | | $ | 11,102 |
| | $ | 7,378 |
| | $ | 8,455 |
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Weighted average shares outstanding - basic (denominator) | | 56,190,970 |
| | 42,000,000 |
| | 45,667,516 |
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Actual/ pro forma net income per common share—basic | | $ | 0.20 |
| | $ | 0.18 |
| | $ | 0.19 |
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Weighted average shares outstanding - diluted (denominator) | | 56,755,154 |
| | 42,000,000 |
| | 45,831,743 |
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Actual/ pro forma net income per common share—diluted | | $ | 0.20 |
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| $ | 0.18 |
| | $ | 0.18 |
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Efficiency ratio | | | | | | |
Noninterest expense (numerator) | | $ | 14,713 |
| | $ | 14,703 |
| | $ | 13,221 |
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Net interest income | | $ | 30,465 |
| | $ | 26,850 |
| | $ | 27,554 |
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Noninterest income | | 1,025 |
| | 882 |
| | 1,494 |
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Operating revenue (denominator) | | $ | 31,490 |
| | $ | 27,732 |
| | $ | 29,048 |
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Efficiency ratio | | 46.72 | % | | 53.02 | % | | 45.51 | % |
Factors Affecting Comparability of Financial Results
S Corporation Status
We terminated our status as a “Subchapter S” corporation as of December 1, 2017, in connection with our IPO. Prior to this date, we elected to be taxed for U.S. federal income tax purposes as an S Corporation. As a result, our earnings were not subject to, and we did not pay, U.S. federal income tax, and we were not required to make any provision or
recognize any liability for U.S. federal income tax in our financial statements. While we were not subject to and did not pay U.S. federal income tax, we were subject to, and paid, California S Corporation income tax at a rate of 3.5%.
Upon the termination of our status as an S Corporation on December 1, 2017, we commenced paying U.S. federal income tax and a higher California income tax on our taxable earnings and our financial statements will reflect a provision for both U.S. federal income tax and California 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 Quarterly Report, 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 commenced being taxed as a C Corporation. As a C Corporation, our net income is calculated by including a provision for U.S. federal income tax and a higher California income tax rate, currently at 10.84%.
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. Subsequent to the termination of our S Corporation status on December 1, 2017, other than our obligations under the tax sharing agreement with prior S Corporation shareholders, no income will be ‘‘passed through’’ to any shareholders, but, as noted above, we have commenced 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 December 1, 2017. 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.
Deferred tax assets and liabilities are recognized for the 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.
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 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, $33.1 million of which remained on our books, and $7.3 million of which were subject to commitments for future disbursements, at March 31, 2018.
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.
Multifamily Securitization Transaction
During 2017, we entered into a trust sale memorandum of understanding with Freddie Mac, pursuant to which we 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.
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Loan Type | Number of Mortgage Loans | Principal Balance (1)(2) | Percentage of Mortgage Pool Balance | Weighted Average Mortgage Rate (2) | Loan to Value Ratio (2) | Debt Service Coverage Ratio (2) |
Post-Reset Hybrid Loans | 65 |
| $ | 91,552 |
| 14.6 | % | 3.66 | % | 53.2 | % | 1.88 |
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Pre-Reset Hybrid Loans (3) | 237 |
| 415,628 |
| 66.4 |
| 3.39 |
| 54.2 |
| 1.67 |
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Pre-Reset Hybrid Loans (4) | 70 |
| 118,880 |
| 19.0 |
| 3.51 |
| 46.5 |
| 1.70 |
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Total | 372 |
| $ | 626,060 |
| 100.0 | % | 3.45 | % | 52.6 | % | 1.71 |
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(2) | Represents balance, weighted average rate and ratios at the security cut-off date of September 1, 2017. |
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(3) | Loans have 1 to 40 months until their first rate reset. |
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(4) | Loans have 41 or more months until their first rate reset. | | | | |
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In connection with the securitization, we entered into a reimbursement agreement with Freddie Mac, pursuant to which we are obligated to reimburse Freddie Mac for the first losses in the underlying loan portfolio not to exceed 10% of the unpaid principal amount of the loans comprising the securitization pool at settlement, or approximately $62.6 million. Our reimbursement obligation is supported by a FHLB letter of credit. Our reimbursement obligation will terminate on the later of (i) the date on which Freddie Mac has no further liability (accrued or contingent) under its guarantee for these securities or (ii) the date on which the we shall pay to Freddie Mac our full reimbursement obligation.
As a result of our exit from retail mortgage banking and current securitization activities, gains on the sale of loans and other fee income shown as noninterest income in our consolidated statements of operations may not be directly comparable, and will likely vary, from period to period.
Public Company Costs
As a result of our initial public offering completed in December 2017, we expect to incur additional costs associated with operating as a public company. We expect that these costs will include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company.
The Sarbanes-Oxley Act, as well as rules adopted by the SEC and national securities exchanges, requires public companies to implement specified corporate governance practices that were inapplicable to us as a private company. These additional rules and regulations will increase our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly.
Results of operationsOperations - Three Months Ended March 31, 20182023 and 2017December 31, 2022
Overview
For the three months ended March 31, 20182023, our net income was $11.1$13.4 million as compared to $12.3$13.7 million for the three months ended December 31, 2022. The decrease of $247 thousand, or 1.8%, was attributable to a decrease in net interest income of $5.3 million, partially offset by a decrease in noninterest expense of $2.9 million and a decrease in the provision for credit losses of $1.4 million. Pre-tax, pre-provision net earnings decreased by $2.1 million, or 10.5%, for the three months ended March 31, 2023 as compared to the linked quarter.
Net Interest Income
Net interest income decreased by $5.3 million, or 13.5%, to $34.0 million for the three months ended March 31, 2017. The decrease of $1.22023 from $39.3 million or 9.7%, was attributed primarilyfor the prior quarter due to an increase of $3.6 million inhigher interest expense on our deposit portfolio and FHLB advances, partially offset by higher interest income on loans and cash and cash equivalents.
Our net interest income, a $1.2 million increase in the provision for loan losses and an increase of $3.8 million in the provision for income taxes, compared tomargin was 1.72% during the three months ended March 31, 2017. The2023 compared to 2.01% during the prior quarter. Our net interest margin reflects the net impact of an increase in the cost of interest bearing liabilities, partially offset by an increase in the yield on interest earning assets. Due to the liability sensitivity of our balance sheet, our interest-bearing liabilities generally reprice more quickly than our interest-earning assets, which will result in lower net interest income was credited to strong organic loan growth. Loan loss provisions recognized during periods of rising interest rates. During the first quarter, ended March 31, 2018 were directly attributable to loan growth. Despite higher loan growth during the quarter ended March 31, 2017, loan loss provisions were lowercost of our interest bearing liabilities increased by 62 basis points primarily due to improvementsan increase in the credit metricscost of our loan portfolio. Thedeposits and FHLB advances, while the yield on our interest earning assets increased by 22 basis points primarily due to an increase in provision for income taxesour loan yield. Our net interest spread in the first quarter was due to the increase in tax rates associated with the revocation of our S Corporation election in conjunction with our IPO in December 2017. Pre-tax, pre-provision net earnings increased1.45%, decreasing by $3.7 million, or 28.8%, for the three months ended March 31, 201840 basis points as compared to the three months ended March 31, 2017 largely due to the additional $3.6 million in net interest income.
Net Interest Income
Net interest income increased by $3.6 million, or 13.5%, to $30.5 million for three months ended March 31, 2018 from $26.9 million for three months ended March 31, 2017. Our net interest margin of 2.11% for the three months ended March 31, 2018 increased slightly from our net interest margin of 2.10% for the three months ended March 31, 2017, primarily due to the increased rates on new loan origination volume exceeding the rate on loans paid off and sold and secondarily, the recovery of $269 thousand of interest on two nonaccrual loans that paid off within thelinked quarter.
Average balance sheet, interest and yield/rate analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the three months ended March 31, 20182023 and 2017.December 31, 2022. The average balances are daily averagesaverages.
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| | | For the Three Months Ended |
| | | March 31, 2023 | | December 31, 2022 |
(Dollars in thousands) | | | Average Balance | | Interest Inc/Exp | | Yield/Rate | | Average Balance | | Interest Inc/Exp | | Yield/Rate |
Interest-Earning Assets | | | | | | | | | | | | | |
Multifamily residential | | | $ | 4,521,440 | | | $ | 48,961 | | | 4.33 | % | | $ | 4,518,952 | | | $ | 45,682 | | | 4.04 | % |
Single family residential | | | 2,283,753 | | | 22,991 | | | 4.03 | % | | 2,229,808 | | | 22,737 | | | 4.08 | % |
Commercial real estate | | | 169,268 | | | 2,147 | | | 5.07 | % | | 175,254 | | | 2,076 | | | 4.74 | % |
Construction and land | | | 23,665 | | | 505 | | | 8.65 | % | | 20,612 | | | 399 | | | 7.68 | % |
Total loans (1) | | | 6,998,126 | | | 74,604 | | | 4.26 | % | | 6,944,626 | | | 70,894 | | | 4.08 | % |
Investment securities | | | 614,527 | | | 5,488 | | | 3.57 | % | | 639,137 | | | 5,082 | | | 3.18 | % |
Cash and cash equivalents | | | 291,706 | | | 3,303 | | | 4.59 | % | | 215,060 | | | 1,964 | | | 3.62 | % |
Total interest-earning assets | | | 7,904,359 | | | 83,395 | | | 4.22 | % | | 7,798,823 | | | 77,940 | | | 4.00 | % |
Noninterest-earning assets (2) | | | 149,670 | | | | | | | 154,605 | | | | | |
Total assets | | | $ | 8,054,029 | | | | | | | $ | 7,953,428 | | | | | |
Interest-Bearing Liabilities | | | | | | | | | | | | | |
Transaction accounts | | | $ | 150,429 | | | 160 | | | 0.43 | % | | $ | 170,867 | | | 151 | | | 0.35 | % |
Money market demand accounts | | | 2,271,018 | | | 13,956 | | | 2.46 | % | | 2,622,015 | | | 12,271 | | | 1.83 | % |
Time deposits | | | 3,268,933 | | | 23,491 | | | 2.88 | % | | 2,973,058 | | | 17,043 | | | 2.25 | % |
Total deposits | | | 5,690,380 | | | 37,607 | | | 2.65 | % | | 5,765,940 | | | 29,465 | | | 2.00 | % |
FHLB advances | | | 1,327,863 | | | 9,262 | | | 2.83 | % | | 1,129,382 | | | 6,833 | | | 2.40 | % |
Junior subordinated debentures | | | 61,857 | | | 966 | | | 6.33 | % | | 61,857 | | | 794 | | | 5.09 | % |
Senior debt | | | 94,796 | | | 1,574 | | | 6.64 | % | | 94,765 | | | 1,574 | | | 6.64 | % |
Total interest-bearing liabilities | | | 7,174,896 | | | 49,409 | | | 2.77 | % | | 7,051,944 | | | 38,666 | | | 2.15 | % |
Noninterest-bearing deposit accounts | | | 86,967 | | | | | | | 119,589 | | | | | |
Other noninterest-bearing liabilities | | | 100,627 | | | | | | | 101,234 | | | | | |
Total liabilities | | | 7,362,490 | | | | | | | 7,272,767 | | | | | |
Total stockholders' equity | | | 691,539 | | | | | | | 680,661 | | | | | |
Total liabilities and stockholders' equity | | | $ | 8,054,029 | | | | | | | $ | 7,953,428 | | | | | |
| | | | | | | | | | | | | |
Net interest spread (3) | | | | | | | 1.45 | % | | | | | | 1.85 | % |
Net interest income/margin (4) | | | | | $ | 33,986 | | | 1.72 | % | | | | $ | 39,274 | | | 2.01 | % |
(1) Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred loan costs, net of deferred loan fees. Net deferred loan cost amortization totaled $1.4 million for both the three months ended March 31, 2023 and include both performing and nonperformingDecember 31, 2022.
(2) Noninterest-earning assets includes the allowance for credit losses on loans.
(3) Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities.
(4) Net interest margin is net interest income divided by total average interest-earning assets.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2018 | | 2017 |
(Dollars in thousands) | | | Average Balance | | Interest Inc / Exp | | Average Yield/Rate | | Average Balance | | Interest Inc / Exp | | Average Yield/Rate |
Interest-Earning Assets | | | | | | | | | | | | | |
Multifamily residential | | | $ | 3,000,059 |
| | $ | 27,930 |
| | 3.72 | % | | $ | 2,724,910 |
| | $ | 23,490 |
| | 3.45 | % |
Single family residential | | | 2,009,329 |
| | 16,806 |
| | 3.35 | % | | 1,755,119 |
| | 14,118 |
| | 3.22 | % |
Commercial | | | 117,559 |
| | 1,463 |
| | 4.98 | % | | 60,953 |
| | 784 |
| | 5.14 | % |
Construction, land and NM | | | 38,419 |
| | 364 |
| | 3.79 | % | | 37,390 |
| | 351 |
| | 3.76 | % |
Total Loans (1) | | | 5,165,366 |
| | 46,563 |
| | 3.61 | % | | 4,578,372 |
| | 38,743 |
| | 3.38 | % |
Securities available-for-sale | | | 524,119 |
| | 2,383 |
| | 1.82 | % | | 455,096 |
| | 1,465 |
| | 1.29 | % |
Securities held-to-maturity (2) | | | 10,544 |
| | 89 |
| | 3.38 | % | | 7,452 |
| | 59 |
| | 3.17 | % |
Cash and cash equivalents | | | 70,041 |
| | 246 |
| | 1.40 | % | | 70,983 |
| | 129 |
| | 0.73 | % |
Total interest-earning assets | | | 5,770,070 |
| | 49,281 |
| | 3.42 | % | | 5,111,903 |
| | 40,396 |
| | 3.16 | % |
Noninterest-earning assets (3) | | | 78,681 |
| | | | | | 60,283 |
| | | | |
Total assets | | | $ | 5,848,751 |
| | | | | | $ | 5,172,186 |
| | | | |
| | | | | | | | | | | | | |
Interest-Bearing Liabilities | | | | | | | | | | | | | |
Transaction accounts (4) | | | $ | 224,674 |
| | $ | 407 |
| | 0.72 | % | | $ | 205,712 |
| | $ | 350 |
| | 0.68 | % |
Money market demand accounts | | | 1,507,614 |
| | 3,314 |
| | 0.88 | % | | 1,545,433 |
| | 2,919 |
| | 0.76 | % |
Time deposits | | | 2,274,818 |
| | 8,211 |
| | 1.44 | % | | 1,716,304 |
| | 5,045 |
| | 1.18 | % |
Total deposits | | | 4,007,106 |
| | 11,932 |
| | 1.19 | % | | 3,467,449 |
| | 8,314 |
| | 0.96 | % |
FHLB advances | | | 1,070,087 |
| | 4,820 |
| | 1.80 | % | | 1,084,904 |
| | 3,275 |
| | 1.21 | % |
Senior debt | | | 94,173 |
| | 1,577 |
| | 6.70 | % | | 94,037 |
| | 1,577 |
| | 6.71 | % |
Junior subordinated debentures | | | 61,857 |
| | 487 |
| | 3.15 | % | | 61,857 |
| | 380 |
| | 2.46 | % |
Total interest-bearing liabilities | | | 5,233,223 |
| | 18,816 |
| | 1.44 | % | | 4,708,247 |
| | 13,546 |
| | 1.15 | % |
Noninterest-bearing liabilities | | | 58,867 |
| | | | | | 54,488 |
| | | | |
Total stockholders' equity | | | 556,661 |
| | | | | | 409,451 |
| | | | |
Total liabilities and stockholders' equity | | | $ | 5,848,751 |
| | | | | | $ | 5,172,186 |
| | | | |
| | | | | | | | | | | | | |
Net interest spread (5) | | | | | | | 1.98 | % | | | | | | 2.01 | % |
Net interest income/margin (6) | | | | | $ | 30,465 |
| | 2.11 | % | | | | $ | 26,850 |
| | 2.10 | % |
| |
(1) | Loan balance includes portfolio real estate loans, real estate loans held for sale and $100 thousand or less in non-mortgage loans. Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs. Net deferred loan cost amortization totaled $2.3 million and $2.2 million for the three months ended March 31, 2018 and 2017, respectively. |
| |
(2) | Securities held to maturity include obligations of states and political subdivisions of $281 thousand and $298 thousand as of March 31, 2018 and March 31, 2017, respectively. Yields are not calculated on a tax equivalent basis. |
| |
(3) | Noninterest earning assets includes the allowance for loan losses. |
| |
(4) | Transaction accounts include both interest and non-interest bearing deposits. |
| |
(5) | Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities. |
| |
(6) | Net interest margin is net interest income divided by total interest-earning assets. |
Interest rates and operating interest differential. Increases and decreases in interest income and interest expense result from changechanges in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities during the periods indicated. The effect of changes in volume is determined by multiplying the change in volume by the currentprior period’s average rate. The effect of rate changes is calculated by multiplying the change in average rate by the prior period’s volume. The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.
| | | Three Months Ended March 31, | |
| 2018 vs 2017 | | | | | | | | | | | | | | | |
| Variance Due To | | Three Months Ended March 31, 2023 vs December 31, 2022 |
| | | Yield/ | | | | Variance Due To |
(Dollars in thousands) | Volume | | Rate | | Total | (Dollars in thousands) | Volume | | Yield/Rate | | Total |
Interest-Earning Assets | | | | | | Interest-Earning Assets | | | | | |
Multifamily residential | $ | 2,478 |
| | $ | 1,962 |
| | $ | 4,440 |
| Multifamily residential | $ | 25 | | | $ | 3,254 | | | $ | 3,279 | |
Single family residential | 2,109 |
| | 579 |
| | 2,688 |
| Single family residential | 539 | | | (285) | | | 254 | |
Commercial | 705 |
| | (26 | ) | | 679 |
| |
Construction, land and NM | 10 |
| | 3 |
| | 13 |
| |
Total Loans | 5,302 |
| | 2,518 |
| | 7,820 |
| |
Securities available-for-sale | 247 |
| | 671 |
| | 918 |
| |
Securities held-to-maturity | 26 |
| | 4 |
| | 30 |
| |
Commercial real estate | | Commercial real estate | (72) | | | 143 | | | 71 | |
Construction and land | | Construction and land | 57 | | | 49 | | | 106 | |
Total loans | | Total loans | 549 | | | 3,161 | | | 3,710 | |
Investment securities | | Investment securities | (201) | | | 607 | | | 406 | |
Cash and cash equivalents | (2 | ) | | 119 |
| | 117 |
| Cash and cash equivalents | 764 | | | 575 | | | 1,339 | |
Total interest-earning assets | 5,573 |
| | 3,312 |
| | 8,885 |
| Total interest-earning assets | 1,112 | | | 4,343 | | | 5,455 | |
| | | | | | |
Interest-Bearing Liabilities | | | | | | Interest-Bearing Liabilities | | | | | |
Transaction accounts | 33 |
| | 24 |
| | 57 |
| Transaction accounts | (20) | | | 29 | | | 9 | |
Money market demand accounts | (73 | ) | | 468 |
| | 395 |
| Money market demand accounts | (1,841) | | | 3,526 | | | 1,685 | |
Time deposits | 1,862 |
| | 1,304 |
| | 3,166 |
| Time deposits | 1,688 | | | 4,760 | | | 6,448 | |
Total deposits | 1,822 |
| | 1,796 |
| | 3,618 |
| Total deposits | (173) | | | 8,315 | | | 8,142 | |
FHLB advances | (46 | ) | | 1,591 |
| | 1,545 |
| FHLB advances | 1,203 | | | 1,226 | | | 2,429 | |
Junior subordinated debentures | | Junior subordinated debentures | — | | | 172 | | | 172 | |
Senior debt | 2 |
| | (2 | ) | | — |
| Senior debt | — | | | — | | | — | |
Junior subordinated debentures | — |
| | 107 |
| | 107 |
| |
Total interest-bearing liabilities | 1,778 |
| | 3,492 |
| | 5,270 |
| Total interest-bearing liabilities | 1,030 | | | 9,713 | | | 10,743 | |
| | | | | | | | | | | |
Net Interest Income | | | | | | Net Interest Income | $ | 82 | | | $ | (5,370) | | | $ | (5,288) | |
Net Interest Income | $ | 3,795 |
| | $ | (180 | ) | | $ | 3,615 |
| |
strategically control the duration of those funds. A discussion of instruments used to mitigate interest rate risk can be found under Part III - Financial Information, Item 3.7A. ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’
Our loan portfolio is our largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which we attempt to mitigate with strong underwriting. As of both March 31, 20182023 and December 31, 20172022, our total loans amounted to $5.3 billion and $5.0 billion, respectively.$7.0 billion. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
We havehad a small portfolio of construction loans with commitments (funded and unfunded) totaling $44.5 million and $53.1$38.7 million at both March 31, 20182023 and December 31, 2017, respectively. These loans consist primarily2022. As of both March 31, 2023 and December 31, 2022, the average loan commitment for our single family owner-occupiedconstruction product, which includes small tract housing and condominium projects, and our multifamily residential construction loans that were accommodated as part of our retail mortgage banking operations. As a result of the recent northern California fires impacting our local community, we plan to expand ourwas $5.7 million and $3.4 million, respectively. Our construction lending to help rebuild homes in the affected areas.
typically focuses on non-owner occupied single family residential projects with completed per-unit values of $4.0 million or less and multifamily projects with loan commitments of $15.0 million or less. In late 2022, we stopped accepting any new construction loan applications.
The following table presents the activity in our loan portfolio for the periods shown:
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
(Dollars in thousands) | March 31, 2023 | | December 31, 2022 | | | | | | March 31, 2022 |
Loan increases: | | | | | | | | | |
Multifamily residential | $ | 23,380 | | | $ | 108,978 | | | | | | | $ | 297,128 | |
Single family residential | 66,927 | | | 166,694 | | | | | | | 251,964 | |
Commercial real estate | — | | | — | | | | | | | 14,420 | |
Construction and land | — | | | 5,707 | | | | | | | 5,400 | |
| | | | | | | | | |
| | | | | | | | | |
Total loans originated and purchased | 90,307 | | | 281,379 | | | | | | | 568,912 | |
| | | | | | | | | |
Loan decreases: | | | | | | | | | |
Loan principal reductions and payoffs | (105,288) | | | (134,361) | | | | | | | (495,715) | |
| | | | | | | | | |
| | | | | | | | | |
Other (1) | 28,015 | | | 8,972 | | | | | | | (4,299) | |
Total loan outflows | (77,273) | | | (125,389) | | | | | | | (500,014) | |
Net change in total loan portfolio | $ | 13,034 | | | $ | 155,990 | | | | | | | $ | 68,898 | |
| | | | | | | | | |
(1) Other changes in loan balances primarily represent the net change in disbursements on unfunded commitments, deferred loan costs, fair value adjustments and, to the extent applicable, may include foreclosures and charge-offs. Fair value adjustments totaled $25.5 million, $7.9 million and $(7.8) million for the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively. |
|
| | | | | | | |
| Three Months Ended March 31, |
(Dollars In thousands) | 2018 | | 2017 |
Loan Inflows: | | | |
Loans originated: | | | |
Multifamily residential | $ | 241,760 |
| | $ | 410,172 |
|
Single family residential | 215,248 |
| | 123,906 |
|
Commercial real estate | 20,795 |
| | 16,698 |
|
Construction and land | — |
| | 14,509 |
|
Non-mortgage | 50 |
| | — |
|
Mortgage banking originations | — |
| | 18,041 |
|
Total loans originated | 477,853 |
| | 583,326 |
|
| | | |
Loan Outflows: | | | |
Portfolio loan sales | — |
| | — |
|
Mortgage banking loan sales | — |
| | (24,692 | ) |
Loan principal reductions and payoffs | (200,117 | ) | | (254,155 | ) |
Other (1) | 7,126 |
| | (3,211 | ) |
Total loan outflows | (192,991 | ) | | (282,058 | ) |
| | | |
Net increase in total loan portfolio | $ | 284,862 |
| | $ | 301,268 |
|
| | | |
(1) Other changes in loan balances primarily represent the net change in disbursements on unfunded commitments and may include foreclosures, charge-offs and negative amortization. |
Total loan origination volume has increased significantly over the past few years as we have made investments in both experienced lending staff as well as front-end loan origination systems allowing us to be more competitive in our markets. MFR loan originations were higher during the first quarter of 2017 due to anticipated loan sales during 2017. The fluctuation in SFR originations was primarily attributable to an increase in customer demand experienced during the first quarter of 2018 compared to the same period last year. In September 2017, we closed a multifamily securitization transaction. The primary purpose of this 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.
Multifamily residential loans. We provide multifamily residential loans for the purchase or refinance of apartment buildings of five units or more, with the financed properties serving as collateral for the loan. Our multifamily lending is built around three core principles: market selection, deal selection and sponsor selection. We focus on markets with a high barrier to entry for new development, where there is a limited supply of new housing and where there is a high variance between the cost to rent and the cost to own. We typically lend on stabilized and seasoned assets and focus on older, smaller properties with rents at or below market levels, catering to low and middle income renters. Our customers are generally experienced real estate professionals who desire regular income/cash flow streams and are focused on building wealth steadily over time. We have instituted strong lending policies to mitigate credit and concentration risk. At March 31, 2018,2023, our multifamily real estate portfolio had an average loan balance of $1.5$1.6 million, an average unit count of 15.6 units, a weighted average loan to value of 56.7% and56.4%, a weighted average debt service coverage ratio of 1.58,1.6 times and supporting collateral averaging 13.7 housing units, as compared to an average loan balance of $1.5$1.7 million, an average unit count of 15.4 units, a weighted average loan to value of 56.6% and56.7%, a weighted average debt service coverage ratio of 1.541.5 times and supporting collateral averaging 13.7 housing units at December 31, 2017.2022.
Single family residential loans. We provide permanent financing on single family residential properties primarily located in our market areas, which are both owner-occupied and investor owned. We conduct this business primarily through a network of third party mortgage brokers with the intention of retaining these loans in our portfolio. The majority of our originations are for purchase transactions, but we also provide refinancings.loans to refinance single family properties. Our underwriting criteria focuses on debt
ratios, credit scores, liquidity of the borrower and the borrower’s cash reserves. At March 31, 2018,2023, our single family residential real estate portfolio had an average loan balance of $880$905 thousand, a weighted average loan to value of 64.9%64.1% and a weighted average borrower credit score at origination/refreshed of 749. Our759. At December 31, 2022, our single family residential real estate portfolio had an average loan balance of $865$907 thousand, a weighted average loan to value of 65.1%64.0% and a weighted average borrower credit score at origination/refreshed of 748 at December 31, 2017.759.
Commercial real estate loans. While not a large part of our portfolio during any period presented, we also lend on non-residential
nonresidential commercial real estate. Our nonresidential commercial real estate loans are generally used to finance the purchase or refinance of established multi-tenant industrial, office and retail sites. At March 31, 2018,2023, our commercial real estate portfolio had an average loan balance of $1.9$2.2 million, a weighted average loan to value of 59.3%53.8% and a weighted average debt service coverage ratio of 1.56,2.8 times, as compared to an average loan balance of $1.8$2.2 million, a weighted average loan to value of 59.0%53.9% and a weighted average debt service coverage ratio of 1.521.7 times at December 31, 2017.2022. Our business plan providesexposure to nonresidential commercial real estate is limited. Additional detail is provided within the table below as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Count | | Balance | | Weighted Average LTV | | % of Total Loans |
Multifamily Real Estate | | 2,741 | | $ | 4,522,072 | | 56.4% | | 64.4% |
Single Family Real Estate | | 2,547 | | 2,308,485 | | 64.1% | | 32.9% |
Commercial Real Estate Type: | | | | | | | | |
Mid Rise Office | | 7 | | 37,615 | | 62.3% | | 0.5% |
Strip Retail | | 13 | | 23,203 | | 50.3% | | 0.3% |
Medical Office | | 5 | | 18,466 | | 59.0% | | 0.3% |
Shopping Center | | 5 | | 17,925 | | 56.6% | | 0.3% |
Low Rise Office | | 10 | | 17,035 | | 50.9% | | 0.2% |
Unanchored Retail | | 8 | | 14,540 | | 44.3% | | 0.2% |
Anchored Retail | | 3 | | 11,479 | | 50.7% | | 0.2% |
More than 50% commercial | | 10 | | 10,867 | | 47.5% | | 0.2% |
Multi-Tenant Industrial | | 5 | | 6,961 | | 41.3% | | 0.1% |
Shadow Retail | | 3 | | 3,915 | | 61.4% | | 0.1% |
Flex Industrial | | 2 | | 2,367 | | 61.0% | | 0.0% |
Warehouse | | 3 | | 2,350 | | 44.1% | | 0.0% |
Restaurant | | 2 | | 1,253 | | 26.1% | | 0.0% |
Other | | 1 | | 73 | | 14.0% | | 0.0% |
Commercial Real Estate | | 77 | | 168,049 | | 53.8% | | 2.4% |
Construction (1) | | 8 | | 24,873 | | 57.7% | | 0.3% |
Total | | 5,373 | | $ | 7,023,479 | | 58.8% | | 100.0% |
(1) Construction LTV is calculated based on an "as-completed" property value.Undisbursed commitments for increased emphasis on this product through marketingconstruction loans totaled $13.6 million at March 31, 2023.
Construction and cross-selling efforts.
Other. land. Other categories of loans included in our portfolio includeconsist of construction loans and non-mortgageland loans. Construction loans currently consist primarily ofinclude a single family owner-occupiedconstruction product, which includes small tract housing and condominium projects, and multifamily construction projects. As of March 31, 2023 and December 31, 2022, the Company had no land loans outstanding.
The non-mortgagefollowing table sets forth the contractual maturity distribution of our loan portfolio:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Due in 1 year or less | Due after 1 year through 5 years | Due after 5 years through 15 years | Due after 15 years | Total |
As of March 31, 2023: | | | | | |
Loans | | | | | |
Real estate mortgage loans: | | | | | |
Multifamily residential | $ | 49 | | $ | 735 | | $ | 38,897 | | $ | 4,450,880 | | $ | 4,490,561 | |
Single family residential | 20 | | 418 | | 50,463 | | 2,227,757 | | 2,278,658 | |
Commercial real estate | 33 | | 55,941 | | 111,616 | | — | | 167,590 | |
Construction and land | 18,582 | | 6,585 | | — | | — | | 25,167 | |
Total loans | $ | 18,684 | | $ | 63,679 | | $ | 200,976 | | $ | 6,678,637 | | $ | 6,961,976 | |
| | | | | |
Fixed interest rates | $ | — | | $ | 196 | | $ | 44,191 | | $ | 273,178 | | $ | 317,565 | |
Floating or hybrid adjustable rates | 18,684 | | 63,483 | | 156,785 | | 6,405,459 | | 6,644,411 | |
Total loans | $ | 18,684 | | $ | 63,679 | | $ | 200,976 | | $ | 6,678,637 | | $ | 6,961,976 | |
As of December 31, 2022: | | | | | |
Loans | | | | | |
Real estate mortgage loans: | | | | | |
Multifamily residential | $ | 72 | | $ | 537 | | $ | 39,917 | | $ | 4,459,974 | | $ | 4,500,500 | |
Single family residential | 27 | | 468 | | 51,443 | | 2,202,049 | | 2,253,987 | |
Commercial real estate | — | | 41,505 | | 130,262 | | — | | 171,767 | |
Construction and land | 17,464 | | 5,069 | | — | | — | | 22,533 | |
Total loans | $ | 17,563 | | $ | 47,579 | | $ | 221,622 | | $ | 6,662,023 | | $ | 6,948,787 | |
| | | | | |
Fixed interest rates | $ | — | | $ | 197 | | $ | 45,045 | | $ | 270,285 | | $ | 315,527 | |
Floating or hybrid adjustable rates | 17,563 | | 47,382 | | 176,577 | | 6,391,738 | | 6,633,260 | |
Total loans | $ | 17,563 | | $ | 47,579 | | $ | 221,622 | | $ | 6,662,023 | | $ | 6,948,787 | |
Our fixed interest rate loans generally consist of 30 and 40-year loans that are primarily secured by single family residential properties, often in conjunction with our portfolioefforts to provide affordable housing financing to low-to-moderate income individuals. Our floating and adjustable rate loans are largely hybrid interest rate programs that provide an initial fixed term of three to ten years and then convert to quarterly or semi-annual repricing adjustments thereafter. As of March 31, 2023 and December 31, 2022, $4.4 billion and $4.6 billion, respectively, of our floating or hybrid adjustable rate loans were provided in supportat their floor rates. The weighted average minimum interest rate on loans at their floor rates was 3.65% and 3.66% at March 31, 2023 and December 31, 2022, respectively. Hybrid adjustable rate loans still within their initial fixed term totaled $5.6 billion and $5.7 billion at March 31, 2023 and December 31, 2022, respectively. These loans had a weighted average term to first repricing date of community investment efforts.
3.6 years and 3.7 years at March 31, 2023 and December 31, 2022, respectively.
Asset Quality
Our primary objective is to maintain a high level of asset quality in our loan portfolio. We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio. These policies are continually evaluated and updated as necessary. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction such as collateral type, collateral cash flow, collateral coverage and borrower strength. We believe that we have a comprehensive methodology to proactively monitor our credit quality after the origination process.origination. Particular emphasis is placed on our commercial portfolio where risk assessments are reevaluatedre-evaluated as a result of reviewing commercial property operating statements and borrower financials on at least an annual basis. Single family residential loans are subject to an annual regrading based upon a credit score refresh.refresh, among other factors. On an ongoing basis, we also monitor payment performance, delinquencies, and tax and property insurance compliance.compliance, as well as any other pertinent information that may be available to determine the collectability of a loan. We believe our practices
facilitate the early detection and remediation of problems within our loan portfolio. Assigned risk classifications are an integral part of management assessing the adequacy of our allowance for loan losses. We periodically employ the use of an outside independent consulting firm to evaluate our underwriting and risk assessment process.processes. Like other financial institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions.
Nonperforming assets. Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any. It is our policy to place a loan on non-accrual status in the event that the borrower is 90 days or more delinquent, unless the loan is well secured and in the process of collection, or earlier if the timely collection of contractual payments appears doubtful. Cash payments subsequently received on non-accrual loans are recognized as income only where the future collection of the remaining principal is considered by management to be probable. Loans are restored to accrual status only when the loan is less than 90 days delinquent and not in foreclosure, and the borrower has demonstrated the ability to make future payments of principal and interest.
Troubled debt restructures. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, or TDRs. Concessions could include reductions of interest rates, extension of the maturity date at a rate lower than current market rate for a new loan with similar risk, reduction of accrued interest, principal forgiveness, forbearance, or other material modifications. The assessment of whether a borrower is experiencing or will likely experience financial difficulty and whether a concession has been granted is highly subjective in nature, and management’s judgment is required when determining whether a modification is classified as a TDR.
The following table provides details of our nonperforming and restructured assets as of the dates presented and certain other related information:
| | | | March 31, | | December 31, | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2018 | | 2017 | (Dollars in thousands) | | March 31, 2023 | | December 31, 2022 |
Non-accrual loans | | | | | Non-accrual loans | | | | |
Multifamily residential portfolio | | $ | 1,564 |
| | $ | 2,246 |
| Multifamily residential portfolio | | $ | 3,504 | | | $ | 3,509 | |
Single family residential portfolio | | 5,397 |
| | 4,135 |
| Single family residential portfolio | | 1,466 | | | 2,962 | |
Commercial real estate | | — |
| | 656 |
| |
Construction and land | | — |
| | — |
| |
Non-mortgage | | — |
| | — |
| |
| Total non-accrual loans | | $ | 6,961 |
| | $ | 7,037 |
| Total non-accrual loans | | 4,970 | | | 6,471 | |
Real estate owned | | — |
| | — |
| Real estate owned | | — | | | — | |
Total nonperforming assets | | $ | 6,961 |
| | $ | 7,037 |
| Total nonperforming assets | | $ | 4,970 | | | $ | 6,471 | |
Troubled debt restructurings (performing - not included above) | | $ | 4,814 |
| | $ | 4,857 |
| |
Allowance for loan losses to period end nonperforming loans | | 459.42 | % | | 430.75 | % | |
| Allowance for credit losses on loans to period end nonperforming loans | | Allowance for credit losses on loans to period end nonperforming loans | | 722.62 | % | | 566.91 | % |
Nonperforming loans to period end loans | | 0.13 | % | | 0.14 | % | Nonperforming loans to period end loans | | 0.07 | % | | 0.09 | % |
Nonperforming assets to total assets | | 0.12 | % | | 0.12 | % | Nonperforming assets to total assets | | 0.06 | % | | 0.08 | % |
Nonperforming loans plus performing TDRs to total loans | | 0.22 | % | | 0.24 | % | |
|
When assessing whether a loan should be placed on non-accrual status because contractual payment appearspayments appear doubtful, consideration is given to the information we collect on an annual basis from commercial real estatethird parties and our borrowers to substantiate their future ability to repay principal and interest due on their loans as contractually agreed.
ForInterest income recognized on non-accrual loans subsequent to their classification as non-accrual totaled $28 thousand for the three months ended March 31, 20182023 compared to $55 thousand and 2017, no$27 thousand for the three months ended December 31, 2022 and March 31, 2022, respectively. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was recognized subsequent to a loan’s classification as nonaccrual. For$146 thousand for the three months ended March 31, 2018 and 2017, the Company recorded $542023 compared to $44 thousand and $56$27 thousand respectively, of interest income related to performing TDR loans.for the three months ended December 31, 2022 and March 31, 2022, respectively.
Allowance for loancredit losses. OurThe Company adopted the CECL allowance methodology on January 1, 2023. The ACL on loans represents the Company’s estimate of expected lifetime credit losses for loan lossesits loans at the time of origination or acquisition and is maintained at a level deemed appropriate by management believes is adequate to accountprovide for probable incurredexpected lifetime credit losses in the loan portfolio incurred as of the reporting date. We determinedate of the consolidated statements of financial condition. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The use of reasonable and supportable forecasts requires significant judgment. The ACL model leverages projections provided by reputable, well-recognized independent economic advisory companies and incorporates a forecast of macroeconomic factors which is updated quarterly. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.
The ACL on loans is a quarterly evaluationvaluation account that is deducted from the amortized cost basis of risk. That evaluation givesloans to present the net amount expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. Loans are charged-off against the allowance when management believes that the uncollectibility of a loan is confirmed. Recoveries will never exceed the aggregate of amounts previously charged-off. The Company also maintains an ACL on unfunded commitments and other off-balance sheet credit exposures in other liabilities and accrued expenses in the consolidated statements of financial condition. This ACL is estimated over a commitment's contractual period and is determined in a manner consistent with the ACL for loans, which includes consideration of the likelihood that funding will occur. Adjustments to the natureACL
for unfunded commitments are included in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower’s ability to repay, current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity.
Our allowance is established through charges to the provision for loan losses. Loans, or portion(or reversal of) credit losses on the unaudited consolidated statements of loans, deemed to be uncollectibleincome. All ACL balances are charged against the allowance. Recoveries of previously charged-off amounts are credited to our allowance for loan and lease losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is itare they an indicator of any future loss trends.
The following table providestables provide information on the activity within the allowance for loan losses as of and for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Beginning Balance | | Impact of CECL Adoption | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
Three months ended March 31, 2023 |
Multifamily residential | $ | 26,417 | | | $ | 2,882 | | | $ | — | | | $ | — | | | $ | (2,007) | | | $ | 27,292 | |
Single family residential | 8,564 | | | (2,472) | | | — | | | — | | | 1,339 | | | 7,431 | |
Commercial real estate | 1,539 | | | (784) | | | — | | | — | | | 22 | | | 777 | |
Construction and land | 165 | | | 282 | | | — | | | — | | | (33) | | | 414 | |
Allowance for credit losses on loans | 36,685 | | | (92) | | | — | | | — | | | (679) | | | 35,914 | |
Allowance for credit losses on off-balance sheet credit exposures | 563 | | | 211 | | | — | | | — | | | (116) | | | 658 | |
Total allowance for credit losses | $ | 37,248 | | | $ | 119 | | | $ | — | | | $ | — | | | $ | (795) | | | $ | 36,572 | |
Three months ended December 31, 2022 | | |
Multifamily residential | $ | 26,204 | | | $ | — | | | $ | — | | | $ | — | | | $ | 213 | | | $ | 26,417 | |
Single family residential | 8,157 | | | — | | | — | | | — | | | 407 | | | 8,564 | |
Commercial real estate | 1,543 | | | — | | | — | | | — | | | (4) | | | 1,539 | |
Construction and land | 131 | | | — | | | — | | | — | | | 34 | | | 165 | |
Allowance for loan losses | $ | 36,035 | | | $ | — | | | $ | — | | | $ | — | | | $ | 650 | | | $ | 36,685 | |
Three months ended March 31, 2022 | | |
Multifamily residential | $ | 26,043 | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,892) | | | $ | 24,151 | |
Single family residential | 7,224 | | | — | | | — | | | — | | | (427) | | | 6,797 | |
Commercial real estate | 2,094 | | | — | | | — | | | — | | | (212) | | | 1,882 | |
Construction and land | 174 | | | — | | | — | | | — | | | 31 | | | 205 | |
Allowance for loan losses | $ | 35,535 | | | $ | — | | | $ | — | | | $ | — | | | $ | (2,500) | | | $ | 33,035 | |
|
| | | | | | | | | |
| | | Three Months Ended March 31, |
(Dollars in thousands) | | | 2018 | | 2017 |
Loans held-for-investment | | | $ | 5,280,845 |
| | $ | 4,689,750 |
|
Allowance for loan losses at beginning of period | | | $ | 30,312 |
| | $ | 33,298 |
|
Charge-offs: | | | | | |
Multifamily residential | | | — |
| | — |
|
Single family residential | | | — |
| | — |
|
Commercial real estate | | | — |
| | — |
|
Construction and land | | | — |
| | — |
|
Non-mortgage | | | — |
| | — |
|
Total charge-offs | | | — |
| | — |
|
Recoveries: | | | | | |
Multifamily residential | | | — |
| | — |
|
Single family residential | | | 3 |
| | 3 |
|
Commercial real estate | | | 90 |
| | — |
|
Construction and land | | | 75 |
| | 89 |
|
Non-mortgage | | | — |
| | — |
|
Total recoveries | | | 168 |
| | 92 |
|
Net recoveries | | | 168 |
| | 92 |
|
Provision for loan losses | | | 1,500 |
| | 309 |
|
Allowance for loan losses at period end | | | $ | 31,980 |
| | $ | 33,699 |
|
Allowance for loan losses to period end loans held-for-investment | | | 0.60 | % | | 0.71 | % |
Annualized net recoveries to average loans | | | 0.01 | % | | 0.01 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
(Dollars in thousands) | | March 31, 2023 | | December 31, 2022 | | | | | | March 31, 2022 |
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| | | | | | | | | | |
Allowance for credit losses on loans to period end loans | | 0.51 | % | | 0.52 | % | | | | | | 0.52 | % |
Annualized net charge-offs to average loans: |
Multifamily residential | | — | % | | — | % | | | | | | — | % |
Single family residential | | — | % | | — | % | | | | | | — | % |
Commercial real estate | | — | % | | — | % | | | | | | — | % |
Construction and land | | — | % | | — | % | | | | | | — | % |
Annualized net charge-offs to average loans | | — | % | | — | % | | | | | | — | % |
Investment Portfolio
Our total securities held-for-investment and available-for-sale amounted to $550.7 million at March 31, 2018 and $510.2 million at December 31, 2017. Our investment portfolio is generally comprised of government agency securities which are high-quality liquid investments under Basel III.III, with over 97.9% classified as available for sale. The portfolio is primarily maintained to serve as a contingent, on-balance sheet source of liquidity and as such, is generally kept unencumbered. We manage our investment portfolio according to written investment policies approved by our board of directors. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk which is reflective in the yields obtained on those securities. Most of our securities are classified as available-for-sale,available for sale, although we occasionally purchase long-term fixed rate mortgage backed securities or municipal securities for community reinvestment purposes and classify those as held-to-maturity.held to maturity. In addition, we have equity securities which consist of investments in a qualified community reinvestment fund.
The following table presents the book value of our investment portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
(Dollars in thousands) | | Book Value | | % of Total | | Book Value | | % of Total |
Available for sale debt securities: | | | | | | | | |
Government and Government Sponsored Entities: | | | | |
Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | | $ | 333,725 | | | 54.98 | % | | $ | 340,736 | | | 54.89 | % |
Residential MBS and CMOs | | 195,543 | | | 32.21 | % | | 199,384 | | | 32.11 | % |
Agency bonds | | 41,160 | | | 6.78 | % | | 42,630 | | | 6.87 | % |
Other asset backed securities | | 22,999 | | | 3.79 | % | | 24,598 | | | 3.96 | % |
Total available for sale debt securities | | 593,427 | | | 97.76 | % | | 607,348 | | | 97.83 | % |
Held to maturity: | | | | | | | | |
Government Sponsored Entities: | | | | | | | | |
Residential MBS | | 3,022 | | | 0.50 | % | | 3,047 | | | 0.49 | % |
Other investments | | 58 | | | 0.01 | % | | 61 | | | 0.01 | % |
Total held to maturity debt securities | | 3,080 | | | 0.51 | % | | 3,108 | | | 0.50 | % |
Equity securities | | 10,506 | | | 1.73 | % | | 10,340 | | | 1.67 | % |
Total investment securities | | $ | 607,013 | | | 100.00 | % | | $ | 620,796 | | | 100.00 | % |
The unrealized losses in the Company's available for sale and held to maturity portfolios were $46.9 million and $189 thousand, respectively, and represented 7.73% and 0.03%, respectively, of our total investment portfolio as of the dates indicated:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | March 31, 2018 | | December 31, 2017 |
| | Book Value | % of Total | | Book Value | % of Total |
Available-for-sale: | | | | | | |
(At fair value) | | | | | | |
Government Sponsored Entities: | | | | | | |
Mortgage-backed securities | | $ | 351,492 |
| 63.82 | % | | $ | 312,919 |
| 61.33 | % |
Agency bonds | | 116,515 |
| 21.16 | % | | 117,222 |
| 22.98 | % |
Collateralized mortgage obligations | | 44,970 |
| 8.17 | % | | 47,168 |
| 9.24 | % |
SBA securities | | 12,988 |
| 2.36 | % | | 13,302 |
| 2.61 | % |
CRA Qualified Investment Fund (CRAIX) | | 11,504 |
| 2.09 | % | | 11,693 |
| 2.29 | % |
U.S. Treasury 10 year note | | 971 |
| 0.18 | % | | 984 |
| 0.19 | % |
Total available-for-sale | | 538,440 |
| 97.78 | % | | 503,288 |
| 98.64 | % |
| | | | | | |
Held-to-maturity: | | | | | | |
(At amortized cost) | | | | | | |
Government Sponsored Entities: | | | | | | |
Mortgage-backed securities | | 11,956 |
| 2.17 | % | | 6,636 |
| 1.30 | % |
Other investments | | 281 |
| 0.05 | % | | 285 |
| 0.06 | % |
Total held-to-maturity | | 12,237 |
| 2.22 | % | | 6,921 |
| 1.36 | % |
Total investment securities | | $ | 550,677 |
| 100.00 | % | | $ | 510,209 |
| 100.00 | % |
Atat March 31, 2018, there was no issuer, other than U.S. government agencies where the aggregate book value or market value of such issuer’s securities held by the Company exceed 10%2023. Over 63% of our stockholders’ equity.
Liabilities
Total liabilities asavailable for sale securities portfolio consisted of floating rate securities with an average repricing period of approximately 14 months. As of March 31, 20182023, securities with a book value totaling $573.5 million were $5.5 billionpledged to the FHLB and FRB to increase our borrowing capacity in response to the bank failures in that occurred in March 2023. There were no advances against these pledged securities during the current quarter. No securities were pledged as of December 31, 2022.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets totaled $104.5 million at March 31, 2023 compared to $5.2 billion$120.2 million at December 31, 2017, an increase2022, a decrease of $325.5$15.8 million, or 6.3%13.1%. The increaseThis decrease was chiefly driven by an increaseprimarily due to a $9.6 million decline in total depositsthe fair value of $162.8 million and an increase of $168.9 million in FHLB advances. The growth in deposits and FHLB advances period over period was instrumental in supporting our continued growth in real estate loans.swaps during the quarter.
Deposits
Representing 75.1%74.3% of our total liabilities as of March 31, 2018,2023, deposits are our primary source of funding for our business operations. We believe we will maintain and growDespite the recent volatility in the banking sector caused by bank closures during the current quarter, our deposit customer base inoutflows appear to have generally stabilized following an initial period of elevated withdrawals. We attribute the return to a rising ratemore normalized environment without the need to match increases in the federal funds target rate point for point, or to compete solely on the basisour competitive pricing of rate, and without materially increasing our cost of funds in the near term. This belief is based on our steady funding costs over the past three years coupled withdeposit products, as well as our strong customer relationships, our reputation as a safe, sound, secure and "well-capitalized" institution and our commitment to excellent customer service, evidenced in part by increased deposits over the same period of time, as well as our reputation as a safe, sound, secure, well-capitalized institution and our commitment to excellent customer service. We arerecent years. Further, we remain focused on growing our deposits by deepening our relationships with our existing loan and deposit customers and looking to expand our traditional product footprint with newnewer emphasis placed on specialty, specialty/business and online affiliations, and transactional deposits.affiliations. When competitively priced, or when there is market disruption, and/or for asset liability management purposes, we will supplement our deposits with wholesale deposits from deposit brokers.deposits.
Total deposits increaseddecreased by $162.8$189.8 million, or 4.1%3.3%, to $4.1$5.6 billion at March 31, 20182023 from $4.0$5.8 billion at December 31, 2022. Retail deposits declined $277.4 million, while brokered deposits increased $87.6 million during the three months ended March 31, 2023. The decline in retail deposits during the quarter accelerated after the bank failures on March 10th and 12th, 2023, with 62% of the retail deposit outflows during the quarter occurring after these events. The deposit declines were primarily experienced in money market accounts, partially offset by increases in time deposits. Consequently, the proportion of non-maturity deposits within the portfolio decreased to 39.7% at
March 31, 2023 compared to 46.3% at December 31, 2022, while our portfolio of time deposits increased to 60.3% from 53.7% as of December 31, 2017. Deposit increases were attributedthe same dates. The increase in brokered deposits was utilized to both organic retail deposit growth from our existing nine branches coupled with growthpartially offset the decline in wholesale deposits. Given our consistently high retention rate at renewal, we consider all our retail deposits including timeand further supplement our liquidity position. Our cost of interest bearing deposits was 2.65% during the quarter ended March 31, 2023, compared to be core2.00% and 0.45% during the three months ended December 31, 2022 and March 30, 2022, respectively. As discussed above, the increase in our cost of interest bearing deposits compared to the prior quarter and prior year-to-date period was predominantly due to interest rate increases in both retail and brokered deposits. We expect to continue to maintain approximately half of our deposits balance in time deposits.
Our loan to deposit ratio was 129.47%124% and 127.59%120% at March 31, 20182023 and December 31, 2017,2022, respectively. It is common for us to operate with a loan to deposit ratio exceeding those commonly seen at other banks. Our higher than average ratio is attributed to our use of FHLB borrowings to fundsupplement loan growth and to strategically manage our interest rate risk, as well as our preference to maintain a large proportion of our assets being comprised ofin real estate loans which generally provide a better yield than the high-quality liquid investments that we typically hold for contingent liquidity purposes. We intendinvestments. The increase in this ratio during the current quarter was due to continue to operate our business with a loan tothe retail deposit ratio similar to these levels.
outflows discussed above.
The following table summarizestables summarize our deposit composition by average deposits and average rates paid for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
(Dollars in thousands) | Average amount | | Weighted average rate paid | | Percent of total deposits | | Average amount | | Weighted average rate paid | | Percent of total deposits | | Average amount | | Weighted average rate paid | | Percent of total deposits |
Noninterest-bearing deposit accounts | $ | 86,967 | | | — | % | | 1.5 | % | | $ | 119,589 | | | — | % | | 2.0 | % | | $ | 147,533 | | | — | % | | 2.7 | % |
Interest-bearing transaction accounts | 150,429 | | | 0.43 | % | | 2.6 | % | | 170,867 | | | 0.35 | % | | 2.9 | % | | 169,580 | | | 0.22 | % | | 3.1 | % |
Money market demand accounts | 2,271,018 | | | 2.46 | % | | 39.3 | % | | 2,622,015 | | | 1.83 | % | | 44.6 | % | | 2,964,527 | | | 0.43 | % | | 53.8 | % |
Time deposits | 3,268,933 | | | 2.88 | % | | 56.6 | % | | 2,973,058 | | | 2.25 | % | | 50.5 | % | | 2,231,471 | | | 0.49 | % | | 40.4 | % |
Total | $ | 5,777,347 | | | 2.60 | % | | 100.0 | % | | $ | 5,885,529 | | | 1.96 | % | | 100.0 | % | | $ | 5,513,111 | | | 0.44 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2018 | | March 31, 2017 |
(Dollars in thousands) | Average Amount | | Weighted average rate paid | | Percent of total deposits | | Average Amount | | Weighted average rate paid | | Percent of total deposits |
Transaction accounts (1) | $ | 224,674 |
| | 0.72 | % | | 5.6 | % | | $ | 205,712 |
| | 0.68 | % | | 5.9 | % |
Money market demand accounts | 1,507,614 |
| | 0.88 | % | | 37.6 | % | | 1,545,433 |
| | 0.76 | % | | 44.6 | % |
Time deposits | 2,274,818 |
| | 1.44 | % | | 56.8 | % | | 1,716,304 |
| | 1.18 | % | | 49.5 | % |
| $ | 4,007,106 |
| | 1.19 | % | | 100.0 | % | | $ | 3,467,449 |
| | 0.96 | % | | 100.0 | % |
(1) Transaction accounts include both interest bearing and non-interest bearing deposits. |
The Company estimated its balance of uninsured deposits at approximately $1.0 billion, or 17.9% or total deposits, and $1.3 billion, or 22.5% of total deposits, at March 31, 2023 and December 31, 2022, respectively. The following table summarizes our deposit composition by source and segregates balances between estimated insured and uninsured balances for each deposit category as of March 31, 2023 and December 31, 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
(Dollars in thousands) | | Insured | | Uninsured | | Insured | | Uninsured |
Consumer | | $ | 3,175,326 | | $ | 846,762 | | $ | 3,090,797 | | $ | 931,454 |
Business | | 917,867 | | 166,139 | | 981,692 | | 379,560 |
Brokered | | 543,400 | | — | | 455,837 | | — |
Total deposits | | $ | 4,636,593 | | $ | 1,012,901 | | $ | 4,528,326 | | $ | 1,311,014 |
The following table sets forth the maturity of time deposits and estimated insured and uninsured balances as of March 31, 2018:2023:
| | | | | | | | | | | | | | |
(Dollars in thousands except for column headings) | | Insured | | Uninsured |
Remaining maturity: | | | | |
Three months or less | | $ | 601,950 | | | $ | 109,572 | |
Over three through six months | | 796,443 | | | 185,759 | |
Over six through twelve months | | 1,170,083 | | | 248,594 | |
Over twelve months | | 241,240 | | | 52,000 | |
Total | | $ | 2,809,716 | | | $ | 595,925 | |
Percent of time deposits to total deposits | | 49.73 | % | | 10.55 | % |
|
| | | | | | | | |
(in thousands except for column headings and percentages) | | Under $100,000 | | $100,000 and greater |
Remaining maturity: | | | | |
Three months or less | | $ | 59,250 |
| | $ | 691,822 |
|
Over three through six months | | 54,643 |
| | 322,565 |
|
Over six through twelve months | | 109,132 |
| | 558,155 |
|
Over twelve months | | 106,456 |
| | 496,675 |
|
Total | | $ | 329,481 |
| | $ | 2,069,217 |
|
Percent of total deposits | | 8.01 | % | | 50.30 | % |
FHLB Advances and Other Borrowings
In addition to deposits, we utilize short and long-term collateralized FHLB borrowings to fund our loan growth.asset growth and, more recently, to add liquidity to our balance sheet. FHLB advances can, at times, have attractive rates and we have commonly used them to strategically extend the duration of our liabilities as part of our interest rate risk management. Totalmanagement efforts to reduce the liability sensitive position of our balance sheet. FHLB advances totaled $1.7 billion and $1.2 billion at March 31, 2018 were $1.2 billion compared to $989.3 million at2023 and December 31, 2017, an increase of $168.9 million, or 17.1%.2022, respectively. The increase in FHLB advances this quarter was primarily utilized to supplement our liquidity in response to the unexpected bank closures in March 2023 and offset the declines in retail deposits discussed above. As of the same dates, the Bank had a resultFHLB letter of borrowing to support our strong loan growth.credit outstanding totaling $62.6 million.
Historically, we have utilized other instruments such as trust preferred securities and senior debt at the bank holding company level as a source of capital for our Bank to support asset growth. We have established two trusts or Trusts,(the "Trusts") of which we own all the common securities, that have issued trust preferred securities, or ("Trust Securities,Securities"), to investors in private placement transactions. The proceeds of the securities qualify as Tier 1 capital under the final Dodd Frankapplicable regulations for community banks with total assets less than $15 billion. In accordance with GAAP, the Trusts are not consolidated in our balance sheetconsolidated statements of financial condition but rather, the common securities are included in our other assets and the junior subordinated debentures or Notes,("Notes") issued to the Trusts are shown as a liability. The following table is a summary of our outstanding Trust Securities and related Notes as of March 31, 2018 (dollars in thousands):the dates indicated:
|
| | | | | | | | | | | | | | |
Issuer | | Issuance Date | | Amount of Trust Securities | | Amount of Notes | | Redemption Date | | Maturity Date |
Luther Burbank Statutory Trust I | | March 2006 | | $ | 40,000 |
| | $ | 41,238 |
| | June 15, 2011 | | June 15, 2036 |
Quarterly adjustments - three month Libor plus 1.38% |
(3.505% at March 31, 2018) |
Luther Burbank Statutory Trust II | | March 2007 | | $ | 20,000 |
| | $ | 20,619 |
| | June 15, 2012 | | June 15, 2037 |
Quarterly adjustments - three month Libor plus 1.62% |
(3.745% at March 31, 2018) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | Date | | Maturity | | Rate Index |
Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) |
(Dollars in thousands) | | | | | | | | | | | | | | |
Luther Burbank Statutory Trust I | | $ | 41,238 | | | 6.25 | % | | $ | 41,238 | | | 6.15 | % | | 3/1/2006 | | 6/15/2036 | | 3 month LIBOR + 1.38% |
Luther Burbank Statutory Trust II | | $ | 20,619 | | | 6.49 | % | | $ | 20,619 | | | 6.39 | % | | 3/1/2007 | | 6/15/2037 | | 3 month LIBOR + 1.62% |
We have the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant Note. During any such extension period, distributions on the Trust Securities will also be deferred, and our ability to pay dividends on our common stock will be restricted.
We have entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Securities; (ii) the redemption price with respect to any Trust Securities called for redemption by the Trusts; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trusts. The Trust Securities are mandatorily redeemable upon maturity of the Notes, or upon earlier redemption as provided in the indenture. We have the right to redeem the Notes purchased by the Trusts, in whole or in part, on or after the redemption date. As specified in the indenture, if the Notes are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
In 2014, we issued senior debt totaling $95.0 million to qualified institutional investors. These senior notes are unsecured, carry a fixed interest coupon of 6.5%, pay interest only on a quarterly basis and mature on September 30, 2024. The senior debt is redeemable at any time prior to August 31, 2024, at a redemption price equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the calculated rate for a U. S. Treasury security having a comparable remaining maturity, plus 30 basis points, plus in each case, accrued and unpaid interest. On or after September 1, 2024, the senior debt may be redeemed at 100% of the principal amount plus accrued and unpaid interest.
The following table presents information regarding our FHLB advances and other borrowings as of andor for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of or For the Three Months Ended |
| | | | | |
(Dollars in thousands) | | March 31, 2023 | | December 31, 2022 | | | | | | March 31, 2022 |
FHLB advances | | | | | | | | | | |
Average amount outstanding during the period | | $ | 1,327,863 | | | $ | 1,129,382 | | | | | | | $ | 761,119 | |
Maximum amount outstanding at any month-end during the period | | 1,704,647 | | | 1,208,147 | | | | | | | 751,647 | |
Balance outstanding at end of period | | 1,701,647 | | | 1,208,147 | | | | | | | 751,647 | |
Weighted average maturity (in years) | | 1.6 | | | 1.7 | | | | | | | 2.3 | |
Weighted average interest rate at end of period | | 3.34 | % | | 2.64 | % | | | | | | 1.75 | % |
Weighted average interest rate during the period | | 2.83 | % | | 2.40 | % | | | | | | 1.65 | % |
| | | | | | | | | | |
Junior subordinated deferrable interest debentures |
Balance outstanding at end of period | | $ | 61,857 | | | $ | 61,857 | | | | | | | $ | 61,857 | |
Weighted average maturity (in years) | | 13.7 | | | 14.0 | | | | | | | 14.8 | |
Weighted average interest rate at end of period | | 6.33 | % | | 6.23 | % | | | | | | 2.29 | % |
Weighted average interest rate during the period | | 6.33 | % | | 5.09 | % | | | | | | 1.80 | % |
| | | | | | | | | | |
Senior unsecured term notes | | | | | | | | | | |
Balance outstanding at end of period | | $ | 94,816 | | | $ | 94,785 | | | | | | | $ | 94,693 | |
Weighted average maturity (in years) | | 1.4 | | | 1.7 | | | | | | | 2.4 | |
Weighted average interest rate at end of period | | 6.64 | % | | 6.64 | % | | | | | | 6.65 | % |
Weighted average interest rate during the period | | 6.64 | % | | 6.64 | % | | | | | | 6.65 | % |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in thousands) | | 2018 | | 2017 |
| | | | |
FHLB advances | | | | |
Average amount outstanding during the period | | $ | 1,070,087 |
| | $ | 1,084,904 |
|
Maximum amount outstanding at any month-end during the period | | 1,158,153 |
| | 1,157,480 |
|
Balance outstanding at end of period | | 1,158,153 |
| | 1,157,480 |
|
Weighted average maturity (in years) | | 1.2 |
| | 1.4 |
|
Weighted average interest rate at end of period | | 1.98 | % | | 1.22 | % |
Weighted average interest rate during the period | | 1.80 | % | | 1.21 | % |
| | | | |
Junior subordinated deferrable interest debentures | | | | |
Balance outstanding at end of period | | $ | 61,857 |
| | $ | 61,857 |
|
Weighted average maturity (in years) | | 18.8 |
| | 19.8 |
|
Weighted average interest rate at end of period | | 3.58 | % | | 2.52 | % |
Weighted average interest rate during the period | | 3.15 | % | | 2.46 | % |
| | | | |
Senior unsecured term notes | | | | |
Balance outstanding at end of period | | $ | 94,195 |
| | $ | 94,061 |
|
Weighted average maturity (in years) | | 6.6 |
| | 7.6 |
|
Weighted average interest rate at end of period | | 6.70 | % | | 6.71 | % |
Weighted average interest rate during the period | | 6.70 | % | | 6.71 | % |
Our level of FHLB advances can fluctuate on a daily basis depending on our funding needs and the availability of other sources of funds to satisfy those needs. Short-term advances allow us flexibility in funding particularly when planned transactions will yield an immediate large inflow of cash such as the closing of the securitization transaction in the third quarter of 2017, and the closing of the initial public offering. We intend to use the net cash proceeds from these transactions to reduce our level of short-term FHLB advances until we can redeploy such funds into higher yielding assets such as loans and investments.daily liquidity needs.
The following table sets forth the amount of short-term borrowings outstanding, comprised entirely of FHLB advances, as well as the weighted average interest rate thereon, as of or for the dates indicated.indicated:
| | | | | | | | As of or For the Three Months Ended |
| | Three Months Ended March 31, | |
(Dollars in thousands) | | 2018 | | 2017 | (Dollars in thousands) | | March 31, 2023 | | December 31, 2022 | | | March 31, 2022 |
Outstanding at period end | | $ | 480,500 |
| | $ | 579,800 |
| Outstanding at period end | | $ | 150,000 | | | $ | 56,500 | | | | $ | — | |
Average amount outstanding | | 457,425 |
| | 564,900 |
| Average amount outstanding | | 48,993 | | | 75,561 | | | | 21,694 | |
Maximum amount outstanding at any month end | | 495,700 |
| | 579,800 |
| Maximum amount outstanding at any month end | | 150,000 | | | 100,000 | | | | — | |
Weighted average interest rate: | | | | | |
During period | | 1.61 | % | | 0.66 | % | |
End of period | | 1.90 | % | | 0.72 | % | |
Weighted average interest rate at end of period | | Weighted average interest rate at end of period | | 5.27 | % | | 4.65 | % | | | — | % |
Weighted average interest rate during the period | | Weighted average interest rate during the period | | 5.05 | % | | 3.19 | % | | | 0.34 | % |
Stockholders’ Equity
Stockholders’The Company's stockholders’ equity totaled $553.8 million and $549.7$696.2 million at March 31, 2018 and2023, an increase of $13.6 million, or 2.0%, compared to December 31, 2017, respectively.
2022. The increase in stockholders' equity was primarily due to net income of $13.4 million.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions that are not included in our consolidated statements of financial condition in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business including commitments to fund new loans and undisbursed construction funds. While thesefunds, as well
as certain guarantees and derivative transactions.
Loan commitments represent contractual cash requirements to a borrower although, a portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts, shown below, do not necessarily represent future cash requirements. In conjunction with mortgage banking activities, we enter into forward sales contracts to hedge interest rate risk involved with interest rate lock commitments on loans. Given our exit from mortgage banking activities, the volume of both forward sales and written option contracts have decreased from prior periods.obligations. The following is a summary of our off-balance commitmentssheet arrangements outstanding as of the dates presented.
| | | | | | | | | | | | | | |
(Dollars in thousands) | | March 31, 2023 | | December 31, 2022 |
Commitments to fund loans | | $ | 36,712 | | | $ | 37,741 | |
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2018 | | December 31, 2017 |
Commitments to fund loans held-for-investment | | $ | 114,832 |
| | $ | 65,767 |
|
In connection with our Freddie Mac multifamily loan securitization, in 2017, we entered into a reimbursement agreement pursuant to which we may be required to reimburse Freddie Mac for the first losses in the underlying loan portfolio, not to exceed 10% of the unpaid principal amount at settlement, or approximately $62.6 million. A $62.6 million letter of credit with the FHLB is pledged as collateral in connection with this reimbursement agreement. We have recorded a reserve for estimated losses with respect to the reimbursement obligation of $1.7 million as of$270 thousand and $439 thousand at March 31, 2018,2023 and December 31, 2022, respectively, which is included in other liabilities and accrued expenses onin the consolidated statements of financial condition. Please referIn connection with the adoption of the CECL accounting standard on January 1, 2023, the Company decreased the allowance for the reimbursement obligation by $119 thousand, which represented the difference between the CECL methodology and the prior methodology utilized for estimating losses for its reimbursement obligation. The prior period allowance is reported in accordance with previous GAAP.
As of March 31, 2023, the Company held eleven interest rate swaps with a total notional amount of $1.8 billion, two of which, with an aggregate notional amount of $400 million, have effective dates in April and June 2023. The swaps provide a hedge against the interest rate risk associated with both hybrid adjustable loans in their fixed rate period and a pool of fixed rate single family loans. Our swaps involve the payment of a fixed rate amount to "Factors Affecting Comparabilitya counterparty in exchange for the Company receiving a variable rate payment over the life of Financial Results - Multifamily Securitization Transaction"the swaps without the exchange of the underlying notional amounts. As of March 31, 2023, these swaps carried a weighted average fixed payment rate of 2.74%, while receiving a federal funds weighted average rate of 4.83%. The net hedging impact associated with our swaps is reported in Part I, Item 2. "Management's Discussion and Analysis" for additional information regarding the securitization.interest income on loans.
We guarantee the distributions and payments for redemption or liquidation of the Trust Securities issued by the Trusts to the extent of funds held by the Trusts. Although this guarantee is not separately recorded, the obligation underlying the guarantee is fully reflected on our consolidated statements of financial condition as junior subordinated debentures held by the Trusts. The junior subordinated debentures currently qualify as Tier 1 capital under the Federal Reserve capital adequacy guidelines. With the exception of our obligations in connection with its Trust Securities and the other items detailed above, we have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that isare material to investors.
Contractual Obligations
The following table presents, as of March 31, 2018,2023, our significant contractual obligations to third parties on debt and lease agreements and service obligations. For more information about our contractual obligations, see Part I, Item 1, "Financial Statements and Supplementary Data", Note 17. ‘‘Commitments and Contingencies,’’ in the notes to our unaudited consolidated financial statements.statements in this Report.
| | | | | | | | | | | | | | Payments Due by Period |
| | | Payments Due by Period | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | |
As of March 31, 2018 | | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | |
(Dollars in thousands) | Total | | (Dollars in thousands) | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | | Total |
Contractual Cash Obligations | | | | | | | | | | Contractual Cash Obligations | | |
Time deposits (1) | $ | 2,398,698 |
| | $ | 1,776,864 |
| | $ | 598,297 |
| | $ | 23,537 |
| | $ | — |
| Time deposits (1) | | $ | 3,112,401 | | | $ | 277,476 | | | $ | 15,764 | | | $ | — | | | $ | 3,405,641 | |
FHLB advances (1) | 1,158,153 |
| | 531,000 |
| | 575,000 |
| | 50,600 |
| | 1,553 |
| |
FHLB advances (1)(2) | | FHLB advances (1)(2) | | 450,000 | | | 1,151,500 | | | 100,000 | | | 147 | | | 1,701,647 | |
Senior debt (1) | 95,000 |
| | — |
| | — |
| | — |
| | 95,000 |
| Senior debt (1) | | — | | | 95,000 | | | — | | | — | | | 95,000 | |
Junior subordinated debentures (1) | 61,857 |
| | — |
| | — |
| | — |
| | 61,857 |
| Junior subordinated debentures (1) | | — | | | — | | | — | | | 61,857 | | | 61,857 | |
Operating leases (net of sublease income) | 18,242 |
| | 4,665 |
| | 7,178 |
| | 5,013 |
| | 1,386 |
| |
Significant contract (2) | 4,207 |
| | 1,354 |
| | 2,707 |
| | 146 |
| | — |
| |
Operating leases | | Operating leases | | 3,282 | | | 4,994 | | | 3,941 | | | 1,318 | | | 13,535 | |
Significant contract (3) | | Significant contract (3) | | 1,545 | | | 3,089 | | | 166 | | | — | | | 4,800 | |
Total | $ | 3,736,157 |
| | $ | 2,313,883 |
| | $ | 1,183,182 |
| | $ | 79,296 |
| | $ | 159,796 |
| Total | | $ | 3,567,228 | | | $ | 1,532,059 | | | $ | 119,871 | | | $ | 63,322 | | | $ | 5,282,480 | |
(1) Amounts exclude interest | |
(2) We have one significant, long-term contract for core processing services which expires May 9, 2021. Actual obligation is unknown and dependent on certain factors including volume and activities. For purposes of this disclosure, future obligations are estimated using our March 31, 2018 year to date average monthly expense extrapolated over the remaining life of the contract. | |
| (1) Amounts exclude interest. | | (1) Amounts exclude interest. |
(2) Included in total FHLB advances is a $200.0 million advance which matures in September 2025 and contains a FHLB quarterly call provision beginning in September 2023. | | (2) Included in total FHLB advances is a $200.0 million advance which matures in September 2025 and contains a FHLB quarterly call provision beginning in September 2023. |
(3) We have one significant, long-term contract for core processing services which expires May 9, 2026. The actual obligation is unknown and dependent on certain factors including volume and activities. For purposes of this disclosure, future obligations are estimated using our year-to-date 2023 average monthly expense extrapolated over the remaining life of the contract. | | (3) We have one significant, long-term contract for core processing services which expires May 9, 2026. The actual obligation is unknown and dependent on certain factors including volume and activities. For purposes of this disclosure, future obligations are estimated using our year-to-date 2023 average monthly expense extrapolated over the remaining life of the contract. |
Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions, the banking industry, such as bank failures, or exposure to credit, market, operational, legal and reputational risks also could affect the bank’sCompany’s liquidity risk profile and are considered in the assessment of liquidity management.
We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank,Company, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems including stress tests that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’sCompany’s liquidity risk management process.
Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, unrestricted cash at third party banks, investments available-for-saleavailable for sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used
The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its senior notes and junior subordinated debentures. The Company’s main source of cash flow is dividends declared and paid to it by the Bank. There are statutory and regulatory limitations that affect the ability of our Bank to pay dividends to the Company. We believe that these limitations will not impact our ability to meet our ongoing short-term cash obligations. For contingency purposes, the Company typically maintains a minimum level of cash to fund one year’s projected operating cash flow needs.
compliance with all applicable regulatory capital requirements, including the capital conservation buffer, and the Bank qualified as ‘‘well-capitalized’’ for purposes of the FDIC’s prompt corrective action regulations. At March 31, 2018, the capital conservation buffer was 1.875%.
The vast majority of our multifamily residential loans and single family residential loans are currently eligible for 50% risk-weighting for purposes of calculating our regulatory capital levels. ToRisk-weighting requirements of multifamily residential loans and single family residential loans are contingent upon meeting specific criteria, which, if not adequately met, would increase the extent that we increase our levels of commercialrequired risk-weighting percentage for these loans. Commercial real estate lending collateralized by real estate other than multifamily residential properties which loans wouldare generally be 100% risk weighted we would expect that our risk-based capital ratios would decline.at 100%. Our leverage ratio is not impacted by the composition of our assets. See ‘‘Supervision and Regulation’’ for additional information regarding the regulatory capital requirements applicable to us.
The following table presents our regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by FDIC regulations to maintain ‘‘well-capitalized’’ status:
Our unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the exposure to unanticipated changes in net interest earnings or loss due to changes in the market value of assets and liabilities as a result of fluctuations in interest rates. As a financial institution, our primary
market risk is interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice(repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. In recognition of this, we actively manage our assets and liabilities to maximize our net interest income and return on equity, while limitingmanaging our exposure to board-established risk tolerancesexposure and maintaining adequate liquidity and capital positions.
Given the nature of our loan and deposit activities, we are liability sensitive to volatility in interest rates. A liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin. Conversely, an asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding net interest margin.
We use two primary modeling techniques to assess our exposure to interest rates that simulate the earnings and valuation effects of variations in interest rates: Net Interest Income at Risk or ("NII at Risk,Risk") and the Economic Value of Equity or EVE.("EVE"). These models require that we use numerous assumptions, including asset and liability pricing and repricing, future growth, prepayment rates, non-maturity deposit sensitivity and decay rates. These assumptions are inherently uncertain and, as a result, the models cannot precisely predict the fluctuations in market interest rates or precisely measure the impact of future changes in interest rates. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100-400 to 400+400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve.
Instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a
financial metric used to manage interest rate risk, implement hedging transactions if the metric rises above policy limits for interest rate risk, and track the movement of the bank’sCompany's interest rate risk position over a historical time frame for comparison purposes.
Our earnings are a function of collecting both a credit risk premium on our loans and an interest rate risk premium on our balance sheet position. The purpose of these premiums being to diversify our earnings position with both credit risk and interest rate risk, which generally tend to be negatively correlated historically for the bank.Company. During weak economic times, such as the financial crisis of 2007-2008, our loan losses werehave been higher than normal. However, due tonormal, but the decline inFederal Reserve will generally reduce short-term interest rates caused by the Federal Reserve attemptingin an attempt to stimulate the economy and add liquidity,liquidity. As a result, our interest rate spread increased sufficiently to offset the loan losses in our loan portfolio.will generally increase during those periods. During strong economic times, when the Federal Reserve raises short-term interest rates to dampen economic activity, the Bank’sCompany’s interest rate spread decreases. These periods are oftenhave historically been indicative of inflation and real property value increases. As such, the decrease in net interest income is typically somewhat offset by little to nodeclining loan losses in our loan portfolio. There is no guarantee, however, that the past countercyclical nature of our loan losses and our net interest spread declines will continue in
the future.
On a quarterly basis, we measure and report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The following table illustrates the results of our NII at Risk analysis to determine the extent to which our net interest income over the following 12 months would change if prevailing interest rates increased or decreased by the specified amounts at March 31, 2018.2023. It models instantaneous parallel shifts in market interest rates, implied by the forward yield curve over the next one year period.