UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-38317
Luther Burbank Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | |
California (State or other jurisdiction of incorporation or organization) | | 68-0270948 (I.R.S. employer identification number) |
| | | |
520 Third St, Fourth Floor, Santa Rosa, California (Address of principal executive offices) | | 95401 (Zip Code) |
Registrant's telephone number, including area code: (844) 446-8201
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| Securities Registered Pursuant to Section 12(b) of the Act |
| Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
| Common stock, no par value | | LBC | | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | o | | Accelerated filer | ☒ |
| Non-accelerated filer | o | | Smaller Reporting Company | ☒ |
| | | Emerging Growth Company | ☒☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No x
As of October 31, 2022,May 1, 2023, there were 51,074,60551,027,878 shares of the registrant’s common stock, no par value, outstanding.
Table of Contents
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| PART I - FINANCIAL INFORMATION | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II - OTHER INFORMATION | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
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| Item 5. | | |
| Item 6. | | |
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Cautionary Statements Regarding Forward-Looking Information
All references to ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ ‘‘Luther Burbank Corporation’’ or ‘‘the Company’’ refers to Luther Burbank Corporation, a California corporation, and our consolidated subsidiaries, including Luther Burbank Savings, a California banking corporation, unless the context indicates that we refer only to the parent company, Luther Burbank Corporation. ‘‘Bank’’ or ‘‘LBS’’ refers to Luther Burbank Savings, our banking subsidiary.
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including our current views with respect to, among other things, future events and our results of operations, financial condition, financial performance, plans and/or strategies. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and may be identified by use of words such as "anticipate," "believe," “continue,” "could," "estimate," "expect," “impact,” "intend," "seek," "may," "outlook," "plan," "potential," "predict," "project," "should," "will," "would" and similar terms and phrases, including references to assumptions. These forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control and involve a number of risks and uncertainties. Accordingly, we caution you that any such forward-looking statement is not a guarantee of future performance and that actual results may prove to be materially different from the results expressed or implied by the forward-looking statements due to a number of factors, including without limitation:
•business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic markets, including the tight labor market, supply chain disruptions, or turbulence in domestic or foreign financial markets;
•interest rate, liquidity, economic, market, credit, operational liquidity, credit,and inflation and interest rate risks associated with our business or industry, including the speed and predictability of changes in these risks;
•the occurrence of significant natural or man-made disasters, including fires, earthquakes and terrorist acts, as well as public health issues and other adverse external events that could harm our business;
•climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;
•our management of risks inherent in our real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;
•our ability to retain deposits and attract new deposits and loans and the composition and terms of such deposits and loans;
•our access to adequate sources of liquidity;
•business and economic conditions generally and in the fiscal positionfinancial services industry, nationally and within our current and future geographic markets, including the tight labor market, ineffective management of the U.S. andFederal budget, debt or debt ceiling, bank failures, or turbulence or uncertainty in domestic or foreign financial markets;
•any failure to adequately manage the soundness of other financial institutions;transition from LIBOR as a reference rate;
•changes in consumer spendingthe level of our nonperforming assets and savings habits;charge-offs;
•the adequacy of our allowance for credit losses;
•our management of risks inherent in our real estate loan portfolio, including the seasoning of the portfolio, the level of non-conforming loans, the number of large borrowers, and the risk of a prolonged downturn in the real estate market;
•significant market concentrations in California and Washington;
•the occurrence of significant natural or man-made disasters (including fires, earthquakes and terrorist acts), severe weather events, health crises and other catastrophic events;
•climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;
•political instability or the effects of war or other conflicts, including, but not limited to, the current conflict between Russia and Ukraine, as well as the civil unrest in Sudan;
•the announced merger with Washington Federal, Inc., including delays in the consummation of the merger or litigation or other conditions that may cause the parties to abandon the merger or make the merger more expensive or less beneficial;
•the impact that the announced merger may have on our ability to attract and retain customers and key personnel, the value of our shares, our expenses, and/or our ability to conduct our business in the ordinary course and execute on our strategies;
•the performance of our third-party vendors;
•fraud, financial crimes and fund transfer errors;
•failures, interruptions, cybersecurity incidents and data breaches involving our data, technology and systems and those of our customers and third-party providers;
•rapid technological changes;changes in the financial services industry;
•any inadequacy in our risk management framework or use of data and/or models;
•the laws and regulations applicable to our business, and the impact of recent and future legislative and regulatory changes;
•changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
•increased competition in the financial services industry;
•changes in the level of our nonperforming assets and charge-offs;
•our involvement from time to time in legal proceedings and examinations and remedial actions by regulators;
•increased competition in the composition of our management teamfinancial services industry; and our ability to attract and retain key personnel;
•material weaknesseschanges in our internal control over financial reporting;
•systems failures or interruptions involving our information technology and telecommunications systems;
•potential exposure to fraud, negligence, data breaches, computer theft and cyber-crime;
•failure to adequately manage the transition from LIBOR as a reference rate;
•the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission ("SEC"), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB") or other accounting standards setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the Current Expected Credit Loss (“CECL”) model, which will change how we estimate credit losses and may increase the required level of our allowance for credit losses after adoption on January 1, 2023;
•political instability or the effects of war or other conflicts, including, but not limited to, the current conflict between Russia and Ukraine; and
•public health crises and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including on our credit quality and business operations, as well as the impact on general economic and financial market conditions.reputation.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in our annual report on Form 10-K for the year ended December 31, 2021,2022, including under the caption “Risk Factors” in Item 1A of Part I, subsequent Quarterly Reports on Form 10-Q, and other reports we fileor filings with the SEC.Securities and Exchange Commission ("SEC"). You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
PART I.
Item 1. Financial Statements
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
| | | September 30,
2022 (unaudited) | | December 31,
2021 | | March 31,
2023 (unaudited) | | December 31,
2022 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 256,658 | | | $ | 138,413 | | Cash and cash equivalents | $ | 516,913 | | | $ | 185,895 | |
| | Available for sale debt securities, at fair value | Available for sale debt securities, at fair value | 640,473 | | | 647,317 | | Available for sale debt securities, at fair value | 593,427 | | | 607,348 | |
| Held to maturity debt securities, at amortized cost (fair value of $2,845 and $4,018 at September 30, 2022 and December 31, 2021, respectively) | 3,135 | | | 3,829 | | |
| Held to maturity debt securities, at amortized cost (fair value of $2,891 and $2,874 at March 31, 2023 and December 31, 2022, respectively) | | Held to maturity debt securities, at amortized cost (fair value of $2,891 and $2,874 at March 31, 2023 and December 31, 2022, respectively) | 3,080 | | | 3,108 | |
| Equity securities, at fair value | Equity securities, at fair value | 10,317 | | | 11,693 | | Equity securities, at fair value | 10,506 | | | 10,340 | |
| | Loans receivable, net of allowance for loan losses of $36,035 and $35,535 at September 30, 2022 and December 31, 2021, respectively | 6,818,420 | | | 6,261,885 | | |
| Loans receivable, net of allowance for credit losses ("ACL") on loans of $35,914 and $36,685 at March 31, 2023 and December 31, 2022, respectively | | Loans receivable, net of allowance for credit losses ("ACL") on loans of $35,914 and $36,685 at March 31, 2023 and December 31, 2022, respectively | 6,987,565 | | | 6,973,760 | |
| Accrued interest receivable | Accrued interest receivable | 21,011 | | | 17,761 | | Accrued interest receivable | 23,873 | | | 24,306 | |
| Federal Home Loan Bank ("FHLB") stock, at cost | Federal Home Loan Bank ("FHLB") stock, at cost | 32,694 | | | 23,411 | | Federal Home Loan Bank ("FHLB") stock, at cost | 46,007 | | | 32,694 | |
| Premises and equipment, net | Premises and equipment, net | 14,260 | | | 16,090 | | Premises and equipment, net | 13,333 | | | 13,661 | |
| Goodwill | Goodwill | 3,297 | | | 3,297 | | Goodwill | 3,297 | | | 3,297 | |
| Prepaid expenses and other assets | Prepaid expenses and other assets | 121,319 | | | 56,261 | | Prepaid expenses and other assets | 104,456 | | | 120,223 | |
| Total assets | Total assets | $ | 7,921,584 | | | $ | 7,179,957 | | Total assets | $ | 8,302,457 | | | $ | 7,974,632 | |
| | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | LIABILITIES AND STOCKHOLDERS' EQUITY | |
| Liabilities: | Liabilities: | | Liabilities: | |
| Deposits | Deposits | $ | 5,794,380 | | | $ | 5,538,243 | | Deposits | $ | 5,649,494 | | | $ | 5,839,340 | |
| FHLB advances | FHLB advances | 1,201,647 | | | 751,647 | | FHLB advances | 1,701,647 | | | 1,208,147 | |
| Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures | 61,857 | | | 61,857 | | Junior subordinated deferrable interest debentures | 61,857 | | | 61,857 | |
| Senior debt | Senior debt | | Senior debt | |
| $95,000 face amount, 6.5% interest rate, due September 30, 2024 (less debt issuance costs of $246 and $338 at September 30, 2022 and December 31, 2021, respectively) | 94,754 | | | 94,662 | | |
| $95,000 face amount, 6.5% interest rate, due September 30, 2024 (less debt issuance costs of $184 and $215 at March 31, 2023 and December 31, 2022, respectively) | | $95,000 face amount, 6.5% interest rate, due September 30, 2024 (less debt issuance costs of $184 and $215 at March 31, 2023 and December 31, 2022, respectively) | 94,816 | | | 94,785 | |
| Accrued interest payable | Accrued interest payable | 950 | | | 118 | | Accrued interest payable | 7,430 | | | 3,964 | |
| Other liabilities and accrued expenses | Other liabilities and accrued expenses | 91,327 | | | 64,297 | | Other liabilities and accrued expenses | 91,052 | | | 84,003 | |
| Total liabilities | Total liabilities | 7,244,915 | | | 6,510,824 | | Total liabilities | 7,606,296 | | | 7,292,096 | |
| | Commitments and contingencies (Note 16) | | |
| Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | |
| | Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
| Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at September 30, 2022 and December 31, 2021, respectively | — | | | — | | |
| Common stock, no par value; 100,000,000 shares authorized; 51,074,605 and 51,682,398 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 398,325 | | | 406,904 | | |
| Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022, respectively | — | | | — | |
| Common stock, no par value; 100,000,000 shares authorized; 51,030,877 and 51,073,272 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | Common stock, no par value; 100,000,000 shares authorized; 51,030,877 and 51,073,272 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 398,363 | | | 398,988 | |
| Retained earnings | Retained earnings | 310,160 | | | 262,141 | | Retained earnings | 331,069 | | | 317,711 | |
| Accumulated other comprehensive (loss) income, net of taxes | (31,816) | | | 88 | | |
| Accumulated other comprehensive loss, net of taxes | | Accumulated other comprehensive loss, net of taxes | (33,271) | | | (34,163) | |
| Total stockholders' equity | Total stockholders' equity | 676,669 | | | 669,133 | | Total stockholders' equity | 696,161 | | | 682,536 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 7,921,584 | | | $ | 7,179,957 | | Total liabilities and stockholders' equity | $ | 8,302,457 | | | $ | 7,974,632 | |
See accompanying notes to unaudited consolidated financial statements
4
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Interest and fee income: | Interest and fee income: | | | | | | | | | Interest and fee income: | | | | | |
| Loans | Loans | | $ | 62,366 | | | $ | 55,757 | | | $ | 172,911 | | | $ | 164,006 | | Loans | | $ | 74,604 | | | $ | 53,633 | | |
| Investment securities | Investment securities | | 4,127 | | | 2,213 | | | 9,290 | | | 6,287 | | Investment securities | | 5,488 | | | 2,301 | | |
| Cash, cash equivalents and restricted cash | | 547 | | | 78 | | | 812 | | | 162 | | |
| Cash and cash equivalents | | Cash and cash equivalents | | 3,303 | | | 66 | | |
| Total interest and fee income | Total interest and fee income | | 67,040 | | | 58,048 | | | 183,013 | | | 170,455 | | Total interest and fee income | | 83,395 | | | 56,000 | | |
| Interest expense: | Interest expense: | | | | | | | | | Interest expense: | | | | | |
| Deposits | Deposits | | 14,085 | | | 7,535 | | | 27,018 | | | 28,890 | | Deposits | | 37,607 | | | 6,020 | | |
| FHLB advances | FHLB advances | | 5,346 | | | 3,573 | | | 12,071 | | | 11,345 | | FHLB advances | | 9,262 | | | 3,097 | | |
| Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures | | 560 | | | 250 | | | 1,220 | | | 763 | | Junior subordinated deferrable interest debentures | | 966 | | | 275 | | |
| Senior debt | Senior debt | | 1,575 | | | 1,574 | | | 4,724 | | | 4,723 | | Senior debt | | 1,574 | | | 1,574 | | |
| Total interest expense | Total interest expense | | 21,566 | | | 12,932 | | | 45,033 | | | 45,721 | | Total interest expense | | 49,409 | | | 10,966 | | |
| Net interest income before provision for loan losses | | 45,474 | | | 45,116 | | | 137,980 | | | 124,734 | | |
| Provision for (reversal of) loan losses | | 500 | | | (4,000) | | | 500 | | | (9,000) | | |
| Net interest income after provision for loan losses | | 44,974 | | | 49,116 | | | 137,480 | | | 133,734 | | |
| Net interest income before provision for credit losses | | Net interest income before provision for credit losses | | 33,986 | | | 45,034 | | |
| Reversal of provision for credit losses | | Reversal of provision for credit losses | | (795) | | | (2,500) | | |
| Net interest income after provision for credit losses | | Net interest income after provision for credit losses | | 34,781 | | | 47,534 | | |
| Noninterest income: | Noninterest income: | | | | | | | | | Noninterest income: | | | | | |
| | FHLB dividends | FHLB dividends | | 363 | | | 407 | | | 1,059 | | | 1,145 | | FHLB dividends | | 577 | | | 354 | | |
| Other income | Other income | | (94) | | | 24 | | | (370) | | | 105 | | Other income | | 658 | | | (296) | | |
| Total noninterest income | Total noninterest income | | 269 | | | 431 | | | 689 | | | 1,250 | | Total noninterest income | | 1,235 | | | 58 | | |
| Noninterest expense: | Noninterest expense: | | | | | | | | | Noninterest expense: | | | | | |
| Compensation and related benefits | Compensation and related benefits | | 8,857 | | | 9,596 | | | 26,146 | | | 28,617 | | Compensation and related benefits | | 10,671 | | | 10,219 | | |
| Deposit insurance premium | Deposit insurance premium | | 508 | | | 492 | | | 1,468 | | | 1,431 | | Deposit insurance premium | | 884 | | | 481 | | |
| Professional and regulatory fees | Professional and regulatory fees | | 639 | | | 445 | | | 1,812 | | | 1,543 | | Professional and regulatory fees | | 436 | | | 539 | | |
| Occupancy | Occupancy | | 1,199 | | | 1,263 | | | 3,590 | | | 3,735 | | Occupancy | | 1,184 | | | 1,194 | | |
| Depreciation and amortization | Depreciation and amortization | | 806 | | | 625 | | | 2,155 | | | 1,958 | | Depreciation and amortization | | 649 | | | 603 | | |
| Data processing | Data processing | | 1,044 | | | 883 | | | 3,039 | | | 2,729 | | Data processing | | 862 | | | 988 | | |
| Marketing | Marketing | | 1,211 | | | 380 | | | 2,194 | | | 907 | | Marketing | | 739 | | | 458 | | |
| Other expenses | Other expenses | | 1,112 | | | 951 | | | 3,809 | | | 2,999 | | Other expenses | | 1,509 | | | 1,030 | | |
| Total noninterest expense | Total noninterest expense | | 15,376 | | | 14,635 | | | 44,213 | | | 43,919 | | Total noninterest expense | | 16,934 | | | 15,512 | | |
| Income before provision for income taxes | Income before provision for income taxes | | 29,867 | | | 34,912 | | | 93,956 | | | 91,065 | | Income before provision for income taxes | | 19,082 | | | 32,080 | | |
| Provision for income taxes | Provision for income taxes | | 8,865 | | | 10,169 | | | 27,447 | | | 26,695 | | Provision for income taxes | | 5,640 | | | 9,140 | | |
| Net income | Net income | | $ | 21,002 | | | $ | 24,743 | | | $ | 66,509 | | | $ | 64,370 | | Net income | | $ | 13,442 | | | $ | 22,940 | | |
| | Basic earnings per common share | Basic earnings per common share | | $ | 0.41 | | | $ | 0.48 | | | $ | 1.31 | | | $ | 1.25 | | Basic earnings per common share | | $ | 0.26 | | | $ | 0.45 | | |
| Diluted earnings per common share | Diluted earnings per common share | | $ | 0.41 | | | $ | 0.48 | | | $ | 1.30 | | | $ | 1.24 | | Diluted earnings per common share | | $ | 0.26 | | | $ | 0.45 | | |
| Dividends per common share | Dividends per common share | | $ | 0.12 | | | $ | 0.12 | | | $ | 0.36 | | | $ | 0.24 | | Dividends per common share | | $ | — | | | $ | 0.12 | | |
|
See accompanying notes to unaudited consolidated financial statements
5
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 21,002 | | | $ | 24,743 | | | $ | 66,509 | | | $ | 64,370 | |
| Other comprehensive loss: | | | | | | | |
| Unrealized loss on available for sale debt securities: | | |
| Unrealized holding loss arising during the period | (14,855) | | | (2,482) | | | (44,970) | | | (5,785) | |
| | | | | | | |
| Tax effect | 4,334 | | | 722 | | | 13,066 | | | 1,681 | |
| Total other comprehensive loss, net of tax | (10,521) | | | (1,760) | | | (31,904) | | | (4,104) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Comprehensive income | $ | 10,481 | | | $ | 22,983 | | | $ | 34,605 | | | $ | 60,266 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Net income | $ | 13,442 | | | $ | 22,940 | | | | | |
| Other comprehensive income (loss): | | | | | | | |
| Unrealized gain (loss) on available for sale debt securities: | | |
| Unrealized holding gain (loss) arising during the period | 1,257 | | | (16,965) | | | | | |
| | | | | | | |
| Tax effect | (365) | | | 4,919 | | | | | |
| Total other comprehensive income (loss), net of tax | 892 | | | (12,046) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Comprehensive income | $ | 14,334 | | | $ | 10,894 | | | | | |
See accompanying notes to unaudited consolidated financial statements
6
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2023 AND 2022 AND 2021 (UNAUDITED)
(Dollar amounts in thousands, except per share data)
| | | | | | Accumulated Other Comprehensive Income (Loss) (Net of Taxes) | | Total Stockholders' Equity | | | | Accumulated Other Comprehensive Income (Loss) (Net of Taxes) | | Total Stockholders' Equity |
| | Common Stock | | Retained Earnings | | Available for Sale Securities | | | | Common Stock | | Retained Earnings | | Available for Sale Securities | | Total Stockholders' Equity | |
| | Shares | | Amount | | | | Shares | | Amount | | Retained Earnings | Available for Sale Securities | |
| Balance, June 30, 2021 | 51,861,704 | | | $ | 407,860 | | | $ | 226,446 | | | $ | 4,393 | | | | $ | 638,699 | | |
| Balance, December 31, 2021 | | Balance, December 31, 2021 | 51,682,398 | | | $ | 406,904 | | | $ | 262,141 | | | $ | 88 | | | | $ | 669,133 | |
| | Net income | Net income | — | | | — | | | 24,743 | | | — | | | | 24,743 | | Net income | — | | | — | | | 22,940 | | | — | | | | 22,940 | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | (1,760) | | | | (1,760) | | Other comprehensive loss | — | | | — | | | — | | | (12,046) | | | | (12,046) | |
| | Restricted stock award grants | | Restricted stock award grants | 206,675 | | | — | | | — | | | — | | | | — | |
| Settled restricted stock units | | Settled restricted stock units | 6,759 | | | — | | | — | | | — | | | | — | |
| Shares withheld to pay taxes on stock based compensation | | Shares withheld to pay taxes on stock based compensation | (62,422) | | | (875) | | | — | | | — | | | | (875) | |
| Restricted stock forfeitures | Restricted stock forfeitures | (1,332) | | | (5) | | | — | | | — | | | | (5) | | Restricted stock forfeitures | (4,100) | | | (4) | | | 2 | | | — | | | | (2) | |
| Stock based compensation expense | Stock based compensation expense | — | | | 650 | | | — | | | — | | | | 650 | | Stock based compensation expense | — | | | 714 | | | — | | | — | | | | 714 | |
| Shares repurchased | Shares repurchased | (177,768) | | | (2,174) | | | — | | | — | | | | (2,174) | | Shares repurchased | (425,396) | | | (5,637) | | | — | | | — | | | | (5,637) | |
| Cash dividends ($0.12 per share) | Cash dividends ($0.12 per share) | — | | | — | | | (6,217) | | | — | | | | (6,217) | | Cash dividends ($0.12 per share) | — | | | — | | | (6,227) | | | — | | | | (6,227) | |
| Balance, September 30, 2021 | 51,682,604 | | | $ | 406,331 | | | $ | 244,972 | | | $ | 2,633 | | | | $ | 653,936 | | |
| Balance, March 31, 2022 | | Balance, March 31, 2022 | 51,403,914 | | | $ | 401,102 | | | $ | 278,856 | | | $ | (11,958) | | | | $ | 668,000 | |
| | Balance, June 30, 2022 | 51,063,498 | | | $ | 397,620 | | | $ | 295,297 | | | $ | (21,295) | | | | $ | 671,622 | | |
| | Balance, December 31, 2022 | | Balance, December 31, 2022 | 51,073,272 | | | $ | 398,988 | | | $ | 317,711 | | | $ | (34,163) | | | | $ | 682,536 | |
Cumulative effect of change in accounting principal (1) | | Cumulative effect of change in accounting principal (1) | — | | | — | | | (84) | | | — | | | | (84) | |
| Net income | Net income | — | | | — | | | 21,002 | | | — | | | | 21,002 | | Net income | — | | | — | | | 13,442 | | | — | | | | 13,442 | |
| Other comprehensive loss | — | | | — | | | — | | | (10,521) | | | | (10,521) | | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | 892 | | | | 892 | |
| Restricted stock award grants | Restricted stock award grants | 11,373 | | | — | | | — | | | — | | | | — | | Restricted stock award grants | 42,034 | | | — | | | — | | | — | | | | — | |
| Settled restricted stock units | Settled restricted stock units | 3,502 | | | — | | | — | | | — | | | | — | | Settled restricted stock units | 15,426 | | | — | | | — | | | — | | | | — | |
| Shares withheld to pay taxes on stock based compensation | Shares withheld to pay taxes on stock based compensation | (3,768) | | | (51) | | | — | | | — | | | | (51) | | Shares withheld to pay taxes on stock based compensation | (99,855) | | | (1,098) | | | — | | | — | | | | (1,098) | |
| | Stock based compensation expense | Stock based compensation expense | — | | | 756 | | | — | | | — | | | | 756 | | Stock based compensation expense | — | | | 473 | | | — | | | — | | | | 473 | |
| | Cash dividends ($0.12 per share) | — | | | — | | | (6,139) | | | — | | | | (6,139) | | |
| Balance, September 30, 2022 | 51,074,605 | | | $ | 398,325 | | | $ | 310,160 | | | $ | (31,816) | | | | $ | 676,669 | | |
| | Balance, March 31, 2023 | | Balance, March 31, 2023 | 51,030,877 | | | $ | 398,363 | | | $ | 331,069 | | | $ | (33,271) | | | | $ | 696,161 | |
| (1) Represents the impact of the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, and the related amendments which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. | | (1) Represents the impact of the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, and the related amendments which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. |
See accompanying notes to unaudited consolidated financial statements
7
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
(Dollar amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Accumulated Other Comprehensive Income (Loss) (Net of Taxes) | | Total Stockholders' Equity |
| Common Stock | | Retained Earnings | | Available for Sale Securities | | | |
| Shares | | Amount | | | | |
| Balance, December 31, 2020 | 52,220,266 | | | $ | 414,120 | | | $ | 192,834 | | | $ | 6,737 | | | | | $ | 613,691 | |
| | | | | | | | | | | |
| Net income | — | | | — | | | 64,370 | | | — | | | | | 64,370 | |
| Other comprehensive loss | — | | | — | | | — | | | (4,104) | | | | | (4,104) | |
| | | | | | | | | | | |
| Restricted stock award grants | 289,473 | | | — | | | — | | | — | | | | | — | |
| Settled restricted stock units | 68,873 | | | — | | | — | | | — | | | | | — | |
| Shares withheld to pay taxes on stock based compensation | (85,825) | | | (901) | | | — | | | — | | | | | (901) | |
| Restricted stock forfeitures | (54,130) | | | (72) | | | 14 | | | — | | | | | (58) | |
| Stock based compensation expense | — | | | 1,952 | | | — | | | — | | | | | 1,952 | |
| Shares repurchased | (756,053) | | | (8,768) | | | — | | | — | | | | | (8,768) | |
| Cash dividends ($0.24 per share) | — | | | — | | | (12,246) | | | — | | | | | (12,246) | |
| Balance, September 30, 2021 | 51,682,604 | | | $ | 406,331 | | | $ | 244,972 | | | $ | 2,633 | | | | | $ | 653,936 | |
| | | | | | | | | | | |
| Balance, December 31, 2021 | 51,682,398 | | | $ | 406,904 | | | $ | 262,141 | | | $ | 88 | | | | | $ | 669,133 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | — | | | — | | | 66,509 | | | — | | | | | 66,509 | |
| Other comprehensive loss | — | | | — | | | — | | | (31,904) | | | | | (31,904) | |
| Restricted stock award grants | 218,048 | | | — | | | — | | | — | | | | | — | |
| Settled restricted stock units | 10,261 | | | — | | | — | | | — | | | | | — | |
| Shares withheld to pay taxes on stock based compensation | (66,190) | | | (926) | | | — | | | — | | | | | (926) | |
| Restricted stock forfeitures | (37,839) | | | (71) | | | 14 | | — | | | | | (57) | |
| Stock based compensation expense | — | | | 2,152 | | | — | | | — | | | | | 2,152 | |
| Shares repurchased | (732,073) | | | (9,734) | | | — | | | — | | | | | (9,734) | |
| Cash dividends ($0.36 per share) | — | | | — | | | (18,504) | | | — | | | | | (18,504) | |
| Balance, September 30, 2022 | 51,074,605 | | | $ | 398,325 | | | $ | 310,160 | | | $ | (31,816) | | | | | $ | 676,669 | |
| | | | | | | | | | | |
|
See accompanying notes to unaudited consolidated financial statements
87
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
| Net income | Net income | $ | 66,509 | | | $ | 64,370 | | Net income | $ | 13,442 | | | $ | 22,940 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 2,155 | | | 1,958 | | Depreciation and amortization | 649 | | | 603 | |
| Provision for (reversal of) loan losses | 500 | | | (9,000) | | |
| Reversal of provision for credit losses | | Reversal of provision for credit losses | (795) | | | (2,500) | |
| Amortization of deferred loan costs, net | Amortization of deferred loan costs, net | 11,173 | | | 15,035 | | Amortization of deferred loan costs, net | 1,373 | | | 4,792 | |
| Amortization of premiums on investment securities, net | Amortization of premiums on investment securities, net | 552 | | | 1,698 | | Amortization of premiums on investment securities, net | 1 | | | 337 | |
| | Stock based compensation expense, net of forfeitures | Stock based compensation expense, net of forfeitures | 2,081 | | | 1,880 | | Stock based compensation expense, net of forfeitures | 473 | | | 710 | |
| | Change in fair value of mortgage servicing rights | Change in fair value of mortgage servicing rights | 190 | | | 639 | | Change in fair value of mortgage servicing rights | 19 | | | 104 | |
| Change in fair value of equity securities | Change in fair value of equity securities | 1,376 | | | 233 | | Change in fair value of equity securities | (166) | | | 577 | |
| | Other items, net | Other items, net | 217 | | | 125 | | Other items, net | (31) | | | 44 | |
| Effect of changes in: | Effect of changes in: | | Effect of changes in: | |
| Accrued interest receivable | Accrued interest receivable | (3,250) | | | (94) | | Accrued interest receivable | 433 | | | (253) | |
| Accrued interest payable | Accrued interest payable | 832 | | | (1,211) | | Accrued interest payable | 3,466 | | | 35 | |
| Prepaid expenses and other assets | Prepaid expenses and other assets | (12,653) | | | (1,920) | | Prepaid expenses and other assets | 5,652 | | | 4,293 | |
| Other liabilities and accrued expenses | Other liabilities and accrued expenses | 11,483 | | | 11,804 | | Other liabilities and accrued expenses | (8,757) | | | 3,140 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 81,165 | | | 85,517 | | Net cash provided by operating activities | 15,759 | | | 34,822 | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
| Proceeds from maturities, paydowns and calls of available for sale debt securities | Proceeds from maturities, paydowns and calls of available for sale debt securities | 108,908 | | | 109,718 | | 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 | Proceeds from maturities and paydowns of held to maturity debt securities | 684 | | | 3,234 | | Proceeds from maturities and paydowns of held to maturity debt securities | 27 | | | 29 | |
| | Purchases of available for sale debt securities | Purchases of available for sale debt securities | (147,578) | | | (176,200) | | Purchases of available for sale debt securities | — | | | (33,140) | |
| | Net increase in loans receivable | (592,313) | | | (31,251) | | |
| Proceeds from sale of loans | — | | | 1,731 | | |
| Purchase of loans, including discounts/premiums | — | | | (286,917) | | |
| Net decrease (increase) in loans receivable | | Net decrease (increase) in loans receivable | 11,132 | | | (81,469) | |
| | (Purchase) redemption of FHLB stock, net | (Purchase) redemption of FHLB stock, net | (9,283) | | | 1,711 | | (Purchase) redemption of FHLB stock, net | (13,313) | | | 848 | |
| Purchase of premises and equipment | Purchase of premises and equipment | (325) | | | (191) | | Purchase of premises and equipment | (321) | | | (103) | |
| | Net cash used in investing activities | (639,907) | | | (378,165) | | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 12,703 | | | (75,539) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
| Net increase in deposits | 256,137 | | | 322,827 | | |
| Net (decrease) increase in deposits | | Net (decrease) increase in deposits | (189,846) | | | 63,004 | |
| Proceeds from long-term FHLB advances | Proceeds from long-term FHLB advances | 350,000 | | | 350,000 | | Proceeds from long-term FHLB advances | 450,000 | | | 100,000 | |
| Repayment of long-term FHLB advances | Repayment of long-term FHLB advances | (100,000) | | | (405,100) | | Repayment of long-term FHLB advances | (50,000) | | | (100,000) | |
| Net change in short-term FHLB advances | Net change in short-term FHLB advances | 200,000 | | | — | | Net change in short-term FHLB advances | 93,500 | | | — | |
| Shares withheld for taxes on vested restricted stock | Shares withheld for taxes on vested restricted stock | (926) | | | (901) | | Shares withheld for taxes on vested restricted stock | (1,098) | | | (875) | |
| Shares repurchased | Shares repurchased | (9,734) | | | (8,768) | | Shares repurchased | — | | | (5,637) | |
| Cash paid for dividends | Cash paid for dividends | (18,490) | | | (12,232) | | Cash paid for dividends | — | | | (6,225) | |
| Net cash provided by financing activities | Net cash provided by financing activities | 676,987 | | | 245,826 | | Net cash provided by financing activities | 302,556 | | | 50,267 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 118,245 | | | (46,822) | | |
| Cash, cash equivalents and restricted cash, beginning of period | 138,413 | | | 178,861 | | |
| Cash, cash equivalents and restricted cash, end of period | $ | 256,658 | | | $ | 132,039 | | |
| Increase in cash and cash equivalents | | Increase in cash and cash equivalents | 331,018 | | | 9,550 | |
| Cash and cash equivalents, beginning of period | | Cash and cash equivalents, beginning of period | 185,895 | | | 138,413 | |
| Cash and cash equivalents, end of period | | Cash and cash equivalents, end of period | $ | 516,913 | | | $ | 147,963 | |
| Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | | | |
| Cash paid during the period for: | Cash paid during the period for: | | Cash paid during the period for: | |
| Interest | Interest | $ | 44,201 | | | $ | 46,932 | | Interest | $ | 45,943 | | | $ | 10,931 | |
| Income taxes | Income taxes | $ | 21,987 | | | $ | 25,901 | | Income taxes | $ | 11 | | | $ | 6 | |
| Supplemental non-cash disclosures: | Supplemental non-cash disclosures: | | Supplemental non-cash disclosures: | |
| Lease liabilities arising from obtaining right-of-use assets | Lease liabilities arising from obtaining right-of-use assets | $ | 15,707 | | | $ | — | | Lease liabilities arising from obtaining right-of-use assets | $ | — | | | $ | 16,255 | |
| Non-cash investing activity: | | |
| | Loans transferred to held for sale | $ | — | | | $ | 1,706 | | |
| |
See accompanying notes to unaudited consolidated financial statements
98
LUTHER BURBANK CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.NATURE OF OPERATIONS
Organization
Luther Burbank Corporation (the ‘‘Company’’), a California corporation headquartered in Santa Rosa, is the bank holding company for its wholly-owned subsidiary, Luther Burbank Savings (the "Bank"), and the Bank's wholly-owned subsidiary, Burbank Investor Services. 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,California.
On November 13, 2022, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Washington Federal, Inc. (“WAFD”), pursuant to which the Company 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 WAFD (“WAFD Bank”), with WAFD Bank as well as a loan production officethe surviving institution. Closing of the transaction, which is expected to occur in Clackamas County, Oregon.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2021,2022, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
The results of operations for the three and nine months ended September 30, 2022March 31, 2023 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, 2022.2023.
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 period. In determining the weighted average number of shares outstanding, vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each share of common stock outstanding including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method.
| | (Dollars in thousands, except share amounts) | (Dollars in thousands, except share amounts) | | Three Months Ended September 30, | | Nine Months Ended September 30, | (Dollars in thousands, except share amounts) | | Three Months Ended March 31, | |
| 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | |
| Net income | Net income | | $ | 21,002 | | | $ | 24,743 | | | $ | 66,509 | | | $ | 64,370 | | Net income | | $ | 13,442 | | | $ | 22,940 | | |
| | Weighted average basic common shares outstanding | Weighted average basic common shares outstanding | | 50,738,479 | | | 51,333,283 | | | 50,956,972 | | | 51,680,782 | | Weighted average basic common shares outstanding | | 50,871,173 | | | 51,337,488 | | |
| Add: Dilutive effects of assumed vesting of restricted stock | Add: Dilutive effects of assumed vesting of restricted stock | | 155,079 | | | 211,630 | | | 114,774 | | | 153,980 | | Add: Dilutive effects of assumed vesting of restricted stock | | 32,272 | | | 76,931 | | |
| Weighted average diluted common shares outstanding | Weighted average diluted common shares outstanding | | 50,893,558 | | | 51,544,913 | | | 51,071,746 | | | 51,834,762 | | Weighted average diluted common shares outstanding | | 50,903,445 | | | 51,414,419 | | |
| | Income per common share: | Income per common share: | | Income per common share: | | |
| Basic EPS | Basic EPS | | $ | 0.41 | | | $ | 0.48 | | | $ | 1.31 | | | $ | 1.25 | | Basic EPS | | $ | 0.26 | | | $ | 0.45 | | |
| Diluted EPS | Diluted EPS | | $ | 0.41 | | | $ | 0.48 | | | $ | 1.30 | | | $ | 1.24 | | Diluted EPS | | $ | 0.26 | | | $ | 0.45 | | |
| Anti-dilutive shares not included in calculation of diluted earnings per share | Anti-dilutive shares not included in calculation of diluted earnings per share | | — | | | — | | | 2,493 | | | 6,291 | | Anti-dilutive shares not included in calculation of diluted earnings per share | | 19,913 | | | 20 | | |
Adoption of NewRecently Adopted Financial Accounting Standards
FASB ASU 2016-13
In June 2016,On January 1, 2023, the Company adopted ASU 2016-13, Financial Accounting Standards Board ("FASB") issued guidance to replaceInstruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss modelmethodology with an expected loss model, whichmethodology that is referred to as the currentCECL methodology. The measurement of expected credit loss ("CECL") model. Thelosses under the CECL modelmethodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables,loans, held to maturity (“HTM”) debt securities and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, financial guarantees, standby letters of credit financial guarantees, 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 investmentsof $35 thousand in leases recognized by a lessor.taxes, of $84 thousand. The transition will be appliedadjustment 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 follows:of January 1, 2023:
- For | | | | | | | | | | | | | | | | | |
| (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 other than temporary impairment ("OTTI"), the guidance will be applied prospectively.adoption of the CECL methodology:
- Existing purchased
Allowance for Credit Losses on Loans
The ACL on loans represents the Company’s estimate of expected lifetime credit impaired ("PCI") assets will be grandfatheredlosses for its loans at the time of origination or acquisition and classifiedis maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio as purchased credit deteriorated ("PCD") assets atof the date of adoption.the consolidated statements of financial condition. The assets willACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be grossed upcollected. 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 forbalance 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 for all PCD assetson an individual loan basis, which are then aggregated at the date of adoptionportfolio segment level and will continuesupplemented by a qualitative reserve that is applied to recognize the noncredit discount in interest incomeeach portfolio segment level. Loans are segmented based on the yield of such assets ascollateral type and consist of the adoption date. Subsequentfollowing 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 expectedthe economy or local market conditions. Multifamily residential and commercial real estate loans also expose a lender to significant credit losses willrisk because the collateral securing these loans typically cannot be recorded throughsold 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 allowance.
- For all other assets withinborrower to either sell or refinance the scope of CECL, a cumulative-effect adjustment will be recognizedunderlying property in retained earnings asorder to comply with the terms of the beginningloan agreement, which may increase the risk of the first reporting period in which the guidance is effective.default or non-payment.
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 amendments are effective for PBEs that are SEC filers for annual periods and interim periods within those annual periods beginning after December 15, 2019. As an emerging growth company, the Company expects to adopt this guidance on January 1, 2023. We expect to recognizeloans generally possess a one-time cumulative effect adjustment to the allowance for loan losses aslower inherent risk of the beginning of the first reporting period in which the new standard is effective.
Through September 30, 2022, CECL implementation activities haveloss 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 focusedpossess 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 capturing and validating loan data, segmenting the loan portfolio,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 calculating its ACL, management considers whether qualitative adjustments to the quantitative 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 conditions 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 loan 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 models, evaluating model resultsother off-balance sheet credit exposures in other liabilities and sensitivitiesaccrued expenses in the consolidated statements of financial condition. This ACL is estimated over a commitment's contractual period and completingis determined in a third party model validation. In determining anmanner 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 allowance under CECL,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 sell, 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 selectedresulted from credit losses or other factors. If a credit loss modelexists, an allowance for credit loss is recorded to the extent that utilizes an approach focused on a loan's probability of default and loss given default. As partthe fair value is less than the amortized cost basis. Because substantially all of the process to test and refine our CECL model,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 completed quarterly model runsnot been recorded through an ACL on AFS securities is recognized in other comprehensive income. Changes in the ACL on AFS securities, if any, are recorded in the provision for analysiscredit 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 sell is met. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses.
FASB ASU 2022-02
In March 2022, the FASB issued guidance to improve the usefulness of disclosures regarding certain loan refinancings, restructurings and backtesting purposes startingwrite-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 disclosure requirements for certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs for financing receivables and net investments in leases by year of origination. The Company adopted this guidance on January 1, 2023, concurrent with the third quarter of 2018. This process has been on-going and will continue until our adoption date. Continuing implementation activities include refining qualitative factor adjustments, finalizing policies and disclosures and evaluating, documenting and testing internal controls. We estimate that theits adoption of the CECL standard. The adoption of this standard woulddid not currently result inhave a material change in our allowance for credit losses, which, if necessary, will be recorded as a cumulative-effect adjustment to retained earnings, net of tax as of January 1, 2023. The ultimate impact will dependeffect on the portfolio and forecasts when the standard is adopted.Company’s operating results or financial condition.
2. INVESTMENT SECURITIES
Available for Sale
The following table summarizes the amortized cost and the estimated fair value of available for sale debt securities as of the dates indicated:
| | (Dollars in thousands) | (Dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | (Dollars in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| At September 30, 2022: | | | | | | | | |
| At March 31, 2023: | | At March 31, 2023: | | | | | | | |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | Government and Government Sponsored Entities: | |
| Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | $ | 404,141 | | | $ | 551 | | | $ | (23,840) | | | $ | 380,852 | | Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | $ | 358,558 | | | $ | 217 | | | $ | (25,050) | | | $ | 333,725 | |
| Residential MBS and CMOs | Residential MBS and CMOs | 214,557 | | | 44 | | | (21,060) | | | 193,541 | | Residential MBS and CMOs | 216,656 | | | 12 | | | (21,125) | | | 195,543 | |
| Agency bonds | Agency bonds | 39,963 | | | 210 | | | (84) | | | 40,089 | | Agency bonds | 41,196 | | | 88 | | | (124) | | | 41,160 | |
| Other asset backed securities ("ABS") | Other asset backed securities ("ABS") | 26,658 | | | — | | | (667) | | | 25,991 | | Other asset backed securities ("ABS") | 23,916 | | | — | | | (917) | | | 22,999 | |
| Total available for sale debt securities | Total available for sale debt securities | $ | 685,319 | | | $ | 805 | | | $ | (45,651) | | | $ | 640,473 | | Total available for sale debt securities | $ | 640,326 | | | $ | 317 | | | $ | (47,216) | | | $ | 593,427 | |
| At December 31, 2021: | | | | | | | | |
| At December 31, 2022: | | At December 31, 2022: | | | | | | | |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | Government and Government Sponsored Entities: | |
| Commercial MBS and CMOs | Commercial MBS and CMOs | $ | 407,111 | | | $ | 3,281 | | | $ | (2,646) | | | $ | 407,746 | | Commercial MBS and CMOs | $ | 365,207 | | | $ | 265 | | | $ | (24,736) | | | $ | 340,736 | |
| Residential MBS and CMOs | Residential MBS and CMOs | 200,775 | | | 1,225 | | | (1,867) | | | 200,133 | | Residential MBS and CMOs | 221,994 | | | 22 | | | (22,632) | | | 199,384 | |
| Agency bonds | Agency bonds | 10,587 | | | 244 | | | — | | | 10,831 | | Agency bonds | 42,540 | | | 189 | | | (99) | | | 42,630 | |
| Other ABS | Other ABS | 28,720 | | | 37 | | | (150) | | | 28,607 | | Other ABS | 25,763 | | | — | | | (1,165) | | | 24,598 | |
| Total available for sale debt securities | Total available for sale debt securities | $ | 647,193 | | | $ | 4,787 | | | $ | (4,663) | | | $ | 647,317 | | Total available for sale debt securities | $ | 655,504 | | | $ | 476 | | | $ | (48,632) | | | $ | 607,348 | |
Net unrealized gains (losses)losses on available for sale investment securities are recorded as accumulated other comprehensive income (loss)loss within stockholders’ equity and totaled $(31.8)$33.3 million and $88 thousand,$34.2 million, net of $13.0$13.6 million and $(36) thousand$14.0 million in tax assets, (liabilities), at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three or nine months ended September 30, 2022March 31, 2023 or 2021.2022.
The following tables summarize the gross unrealized losses and fair value of available for sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
| | | September 30, 2022 | | March 31, 2023 |
| | Less than 12 Months | | 12 Months or More | | Total | | Less than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | (Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (Dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | | | | | | | | Government and Government Sponsored Entities: | | | | | | | | |
| Commercial MBS and CMOs | Commercial MBS and CMOs | $ | 204,498 | | | $ | (7,168) | | | $ | 99,631 | | | $ | (16,672) | | | $ | 304,129 | | | $ | (23,840) | | Commercial MBS and CMOs | $ | 146,394 | | | $ | (2,205) | | | $ | 150,521 | | | $ | (22,845) | | | $ | 296,915 | | | $ | (25,050) | |
| Residential MBS and CMOs | Residential MBS and CMOs | 125,321 | | | (9,554) | | | 62,127 | | | (11,506) | | | 187,448 | | | (21,060) | | Residential MBS and CMOs | 69,012 | | | (2,781) | | | 121,213 | | | (18,344) | | | 190,225 | | | (21,125) | |
| Agency bonds | Agency bonds | 14,846 | | | (84) | | | — | | | — | | | 14,846 | | | (84) | | Agency bonds | 31,218 | | | (124) | | | — | | | — | | | 31,218 | | | (124) | |
| Other ABS | Other ABS | 16,251 | | | (378) | | | 9,739 | | | (289) | | | 25,990 | | | (667) | | Other ABS | — | | | — | | | 22,999 | | | (917) | | | 22,999 | | | (917) | |
| Total available for sale debt securities | Total available for sale debt securities | $ | 360,916 | | | $ | (17,184) | | | $ | 171,497 | | | $ | (28,467) | | | $ | 532,413 | | | $ | (45,651) | | Total available for sale debt securities | $ | 246,624 | | | $ | (5,110) | | | $ | 294,733 | | | $ | (42,106) | | | $ | 541,357 | | | $ | (47,216) | |
At September 30, 2022,March 31, 2023, the Company held 89 residential58 commercial MBS and CMOs of which 8251 were in a loss position and nine26 had been in a loss position for twelve months or more. The Company held 60 commercial89 residential MBS and CMOs of which 4686 were in a loss position and 1327 had been in a loss position for twelve months or more. The Company held fivesix agency bonds of which one was in a loss position and none had beenthree were in a loss position for less than twelve months or more.months. The Company held three other ABS of which all three were in a loss position and one had been in a loss position for twelve months or more.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 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 | $ | 157,031 | | | $ | (2,632) | | | $ | 10,608 | | | $ | (14) | | | $ | 167,639 | | | $ | (2,646) | |
| Residential MBS and CMOs | 118,803 | | | (1,864) | | | 247 | | | (3) | | | 119,050 | | | (1,867) | |
| | | | | | | | | | | |
| Other ABS | $ | 15,253 | | | $ | (150) | | | $ | — | | | $ | — | | | $ | 15,253 | | | $ | (150) | |
| Total available for sale debt securities | $ | 291,087 | | | $ | (4,646) | | | $ | 10,855 | | | $ | (17) | | | $ | 301,942 | | | $ | (4,663) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021,2022, the Company held 88 residential58 commercial MBS and CMOs of which 1450 were in a loss position and four15 had been in a loss position for twelve months or more. The Company held 54 commercial90 residential MBS and CMOs of which 2086 were in a loss position and two14 had been in a loss position for twelve months or more. The Company held six agency bonds of which one was in a loss position for less than twelve months. The Company held three other ABS of which twothree were in a loss position and nonetwo had been in a loss position for twelve months or more.
The unrealized losses on the Company’s investments were caused by interest rate changes. In addition, the contractual cash flows of these investments are guaranteed by the U.S. government or agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider these investmentssecurities to be other-than-temporarily impaired at September 30, 2022March 31, 2023 or December 31, 2021.2022. Additionally, the Company had no ACL recorded for available for sale investment securities at March 31, 2023.
As of September 30, 2022March 31, 2023 and December 31, 2021,2022, 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) | (Dollars in thousands) | Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Estimated Fair Value | (Dollars in thousands) | Amortized Cost | | Gross Unrecognized Gains | | Gross Unrecognized Losses | | Estimated Fair Value |
| As of September 30, 2022: | | | | | | | | |
| As of March 31, 2023: | | As of March 31, 2023: | | | | | | | |
| Government Sponsored Entities: | Government Sponsored Entities: | | Government Sponsored Entities: | |
| Residential MBS | Residential MBS | $ | 3,072 | | | $ | — | | | $ | (290) | | | $ | 2,782 | | Residential MBS | $ | 3,022 | | | $ | — | | | $ | (189) | | | $ | 2,833 | |
| Other investments | Other investments | 63 | | | — | | | — | | | 63 | | Other investments | 58 | | | — | | | — | | | 58 | |
| Total held to maturity investment securities | Total held to maturity investment securities | $ | 3,135 | | | $ | — | | | $ | (290) | | | $ | 2,845 | | Total held to maturity investment securities | $ | 3,080 | | | $ | — | | | $ | (189) | | | $ | 2,891 | |
| As of December 31, 2021: | | | | | | | | |
| As of December 31, 2022: | | As of December 31, 2022: | | | | | | | |
| Government Sponsored Entities: | Government Sponsored Entities: | | Government Sponsored Entities: | |
| Residential MBS | Residential MBS | $ | 3,761 | | | $ | 189 | | | $ | — | | | $ | 3,950 | | Residential MBS | $ | 3,047 | | | $ | — | | | $ | (234) | | | $ | 2,813 | |
| Other investments | Other investments | 68 | | | — | | | — | | | 68 | | Other investments | 61 | | | — | | | — | | | 61 | |
| Total held to maturity investment securities | Total held to maturity investment securities | $ | 3,829 | | | $ | 189 | | | $ | — | | | $ | 4,018 | | 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 | | Less than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | (Dollars in thousands) | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | (Dollars in thousands) | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses | | Fair Value | | Unrecognized Losses |
| As of September 30, 2022: | | | | | | | | | |
| As of March 31, 2023: | | As of March 31, 2023: | | | | | | | | |
| Government Sponsored Entities: | Government Sponsored Entities: | | Government Sponsored Entities: | |
| Residential MBS | Residential MBS | $ | 2,782 | | | $ | (290) | | | $ | — | | | $ | — | | | $ | 2,782 | | | $ | (290) | | Residential MBS | $ | 1,652 | | | $ | (100) | | | $ | 1,181 | | | $ | (89) | | | $ | 2,833 | | | $ | (189) | |
| | | As of December 31, 2022: | | As of December 31, 2022: | | | | | | | | |
| Government Sponsored Entities: | | Government Sponsored Entities: | |
| Residential MBS | | Residential MBS | $ | 2,813 | | | $ | (234) | | | $ | — | | | $ | — | | | $ | 2,813 | | | $ | (234) | |
At September 30,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 and none had been in a loss position for less than twelve months or more.months.
The unrecognized losses on the Company’s held to maturity investments at September 30, 2022March 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 maturity, the Company does not consider these investmentssecurities to be other-than-temporarily impaired at September 30,March 31, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for held to maturity investment securities at March 31, 2023.
The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of September 30, 2022:March 31, 2023:
| | | | | | | | | | | |
| September 30, 2022 |
| (Dollars in thousands) | Amortized Cost | | Fair Value |
| Available for sale debt securities | | | |
| | | |
| | | |
| Five to ten years | $ | 39,963 | | | $ | 40,089 | |
| | | |
| MBS, CMOs and other ABS | 645,356 | | | 600,384 | |
| Total available for sale debt securities | $ | 685,319 | | | $ | 640,473 | |
| Held to maturity investments securities | | | |
| Five to ten years | $ | 63 | | | $ | 63 | |
| MBS | 3,072 | | | 2,782 | |
| Total held to maturity debt securities | $ | 3,135 | | | $ | 2,845 | |
| | | | | | | | | | | |
| 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. As 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 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 September 30, 2022 or December 31, 2021.
Equity Securities
Equity securities consist of investments in a qualified community reinvestment fund. At September 30, 2022March 31, 2023 and December 31, 2021,2022, the fair value of equity securities totaled $10.3$10.5 million and $11.7$10.3 million, respectively. Changes in fair value are recognized in other noninterest income and totaled $(455)$166 thousand and $(1.4) million during the three and nine months ended September 30, 2022, respectively, compared to $(55) thousand and $(233)$(577) thousand during the three and nine months ended September 30, 2021,March 31, 2023 and 2022, respectively. There were no sales of
equity securities during the three or nine months ended September 30, 2022March 31, 2023 or 2021.2022.
3. LOANS
Loans consist of the following:
| | (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | December 31,
2021 | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 |
| Permanent mortgages on: | | | | |
| Mortgages on: | | Mortgages on: | | | |
| Multifamily residential | Multifamily residential | $ | 4,495,363 | | | $ | 4,210,735 | | Multifamily residential | $ | 4,522,072 | | | $ | 4,532,312 | |
| Single family residential | Single family residential | 2,159,384 | | | 1,881,676 | | Single family residential | 2,308,485 | | | 2,283,628 | |
| Commercial real estate | Commercial real estate | 181,971 | | | 187,097 | | Commercial real estate | 168,049 | | | 172,258 | |
| Land and construction loans | 17,737 | | | 17,912 | | |
| Construction and land | | Construction and land | 24,873 | | | 22,247 | |
| | Total | Total | 6,854,455 | | | 6,297,420 | | Total | 7,023,479 | | | 7,010,445 | |
| Allowance for loan losses | (36,035) | | | (35,535) | | |
| Loans held for investment, net | $ | 6,818,420 | | | $ | 6,261,885 | | |
| Allowance for credit losses on loans | | Allowance for credit losses on loans | (35,914) | | | (36,685) | |
| Loans, net | | Loans, net | $ | 6,987,565 | | | $ | 6,973,760 | |
Certain loans have been pledged to secure borrowing arrangements (see Note 8)9).
15Prior 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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:segment during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land and Construction | | Total |
| Three months ended September 30, 2022 |
| Allowance for loan losses: | | | | | | | | | |
| Beginning balance allocated to portfolio segments | $ | 26,007 | | | $ | 7,625 | | | $ | 1,673 | | | $ | 230 | | | $ | 35,535 | |
| Provision for (reversal of) loan losses | 197 | | | 532 | | | (130) | | | (99) | | | 500 | |
| Charge-offs | — | | | — | | | — | | | — | | | — | |
| Recoveries | — | | | — | | | — | | | — | | | — | |
| Ending balance allocated to portfolio segments | $ | 26,204 | | | $ | 8,157 | | | $ | 1,543 | | | $ | 131 | | | $ | 36,035 | |
| Three months ended September 30, 2021 |
| Allowance for loan losses: | | | | | | | | | |
| Beginning balance allocated to portfolio segments | $ | 30,114 | | | $ | 8,332 | | | $ | 2,705 | | | $ | 184 | | | $ | 41,335 | |
| Reversal of provision for loan losses | (2,933) | | | (747) | | | (283) | | | (37) | | | (4,000) | |
| Charge-offs | — | | | — | | | — | | | — | | | — | |
| Recoveries | — | | | — | | | — | | | — | | | — | |
| Ending balance allocated to portfolio segments | $ | 27,181 | | | $ | 7,585 | | | $ | 2,422 | | | $ | 147 | | | $ | 37,335 | |
| Nine months ended September 30, 2022 |
| Allowance for loan losses: | | | | | | | | | |
| Beginning balance allocated to portfolio segments | $ | 26,043 | | | $ | 7,224 | | | $ | 2,094 | | | $ | 174 | | | $ | 35,535 | |
| Provision for (reversal of) loan losses | 161 | | | 933 | | | (551) | | | (43) | | | 500 | |
| Charge-offs | — | | | — | | | — | | | — | | | — | |
| Recoveries | — | | | — | | | — | | | — | | | — | |
| Ending balance allocated to portfolio segments | $ | 26,204 | | | $ | 8,157 | | | $ | 1,543 | | | $ | 131 | | | $ | 36,035 | |
| Nine months ended September 30, 2021 |
| Allowance for loan losses: | | | | | | | | | |
| Beginning balance allocated to portfolio segments | $ | 33,259 | | | $ | 9,372 | | | $ | 3,347 | | | $ | 236 | | | $ | 46,214 | |
| Reversal of provision for loan losses | (6,078) | | | (1,851) | | | (925) | | | (146) | | | (9,000) | |
| Charge-offs | — | | | — | | | — | | | — | | | — | |
| Recoveries | — | | | 64 | | | — | | | 57 | | | 121 | |
| Ending balance allocated to portfolio segments | $ | 27,181 | | | $ | 7,585 | | | $ | 2,422 | | | $ | 147 | | | $ | 37,335 | |
The following table summarizes the allocation of the allowance for loan losses by impairment methodology:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land and Construction | | Total |
| As of September 30, 2022: | | | | | | | | | |
| Ending allowance balance allocated to: | | | | | | | |
| Loans individually evaluated for impairment | $ | — | | | $ | 25 | | | $ | — | | | $ | — | | | $ | 25 | |
| Loans collectively evaluated for impairment | 26,204 | | | 8,132 | | | 1,543 | | | 131 | | | 36,010 | |
| Ending balance | $ | 26,204 | | | $ | 8,157 | | | $ | 1,543 | | | $ | 131 | | | $ | 36,035 | |
| Loans: | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | 843 | | | $ | 6,434 | | | $ | — | | | $ | — | | | $ | 7,277 | |
| Ending balance: collectively evaluated for impairment | 4,494,520 | | | 2,152,950 | | | 181,971 | | | 17,737 | | | 6,847,178 | |
| Ending balance | $ | 4,495,363 | | | $ | 2,159,384 | | | $ | 181,971 | | | $ | 17,737 | | | $ | 6,854,455 | |
| As of December 31, 2021: | | | | | | | | | |
| Ending allowance balance allocated to: | | | | | | | |
| Loans individually evaluated for impairment | $ | — | | | $ | 25 | | | $ | — | | | $ | — | | | $ | 25 | |
| Loans collectively evaluated for impairment | 26,043 | | | 7,199 | | | 2,094 | | | 174 | | | 35,510 | |
| Ending balance | $ | 26,043 | | | $ | 7,224 | | | $ | 2,094 | | | $ | 174 | | | $ | 35,535 | |
| Loans: | | | | | | | | | |
| Ending balance: individually evaluated for impairment | $ | 505 | | | $ | 5,687 | | | $ | — | | | $ | — | | | $ | 6,192 | |
| Ending balance: collectively evaluated for impairment | 4,210,230 | | | 1,875,989 | | | 187,097 | | | 17,912 | | | 6,291,228 | |
| Ending balance | $ | 4,210,735 | | | $ | 1,881,676 | | | $ | 187,097 | | | $ | 17,912 | | | $ | 6,297,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
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The Company assigns a risk rating to all loans and periodically performs detailed reviews of all loans to identify credit risks and to assess the overall collectability of the portfolio. During these internal reviews,
management monitors and analyzes the financial condition of borrowers and guarantors, as well as the financial performance and/or other characteristics of loan collateral. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into six major categories, defined as follows:
Pass assets are those which are performing according to contract and have no existing or known weaknesses deserving of management’s close attention. The basic underwriting criteria used to approve the loans are still valid, and all payments have essentially been made as planned.
Watch assets are expected to have an event occurring in the near 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 and/or paying capacity of the obligor or by the collateral pledged. These assets have well-defined weaknesses: the primary source of repayment is gone or severely impaired (i.e., bankruptcy or loss of employment) and/or there has been a deterioration in collateral value. In addition, there is the distinct possibility that the Company will sustain some loss, either directly or indirectly (i.e., the cost of monitoring), if the deficiencies are not corrected. A deterioration in collateral value alone does not mandate that an asset be adversely classified if such factor does not indicate that the primary source of repayment is in jeopardy.
Doubtful assets have the weaknesses of those classified substandard with the added characteristic
that the weaknesses make collection or liquidation in full highly questionable and improbable based on current facts, conditions and values.
Loss assets are considered uncollectible and of such little value that their continuance as assets, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion thereof) even though partial recovery may be affected in the future.
The following table 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 September 30, 2022 and December 31, 2021.2022.
| | (Dollars in thousands) | (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Land, Construction and NM | | Total | (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Construction and Land | | Total |
| As of September 30, 2022: | | | | | | | | | | |
| | Grade: | Grade: | | Grade: | | | | | | | | | |
| Pass | Pass | $ | 4,442,276 | | | $ | 2,141,123 | | | $ | 177,805 | | | $ | 17,737 | | | $ | 6,778,941 | | Pass | $ | 4,469,443 | | | $ | 2,269,325 | | | $ | 169,711 | | | $ | 22,247 | | | $ | 6,930,726 | |
| Watch | Watch | 32,912 | | | 15,274 | | | 3,208 | | | — | | | 51,394 | | Watch | 44,436 | | | 11,341 | | | 1,594 | | | — | | | 57,371 | |
| Special mention | Special mention | 2,473 | | | — | | | 958 | | | — | | | 3,431 | | Special mention | 2,460 | | | — | | | 953 | | | — | | | 3,413 | |
| Substandard | Substandard | 17,702 | | | 2,987 | | | — | | | — | | | 20,689 | | Substandard | 15,973 | | | 2,962 | | | — | | | — | | | 18,935 | |
| | Total | Total | $ | 4,495,363 | | | $ | 2,159,384 | | | $ | 181,971 | | | $ | 17,737 | | | $ | 6,854,455 | | Total | $ | 4,532,312 | | | $ | 2,283,628 | | | $ | 172,258 | | | $ | 22,247 | | | $ | 7,010,445 | |
| As of December 31, 2021: | | | | | | | | | | |
| Grade: | | |
| Pass | $ | 4,129,767 | | | $ | 1,856,942 | | | $ | 180,950 | | | $ | 17,523 | | | $ | 6,185,182 | | |
| Watch | 66,062 | | | 22,946 | | | 6,147 | | | 389 | | | 95,544 | | |
| Special mention | 4,586 | | | — | | | — | | | — | | | 4,586 | | |
| Substandard | 10,320 | | | 1,788 | | | — | | | — | | | 12,108 | | |
| | Total | $ | 4,210,735 | | | $ | 1,881,676 | | | $ | 187,097 | | | $ | 17,912 | | | $ | 6,297,420 | | |
The following table summarizes an aging analysis of the loan portfolio by the time past due at September 30, 2022as 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, 2021:2022, there were no loans that were past due over 89 days and still accruing interest.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | 30 Days | | 60 Days | | 90+ Days | | Non-accrual | | Current | | Total |
| As of September 30, 2022: | | | | | | | | | | | |
| Loans: | | | | | | | | | | | |
| Multifamily residential | $ | — | | | $ | — | | | $ | — | | | $ | 843 | | | $ | 4,494,520 | | | $ | 4,495,363 | |
| Single family residential | — | | | — | | | — | | | 2,987 | | | 2,156,397 | | | 2,159,384 | |
| Commercial real estate | — | | | — | | | — | | | — | | | 181,971 | | | 181,971 | |
| Land and construction | — | | | — | | | — | | | — | | | 17,737 | | | 17,737 | |
| Total | $ | — | | | $ | — | | | $ | — | | | $ | 3,830 | | | $ | 6,850,625 | | | $ | 6,854,455 | |
| As of December 31, 2021: | | | | | | | | | | | |
| Loans: | | | | | | | | | | | |
| Multifamily residential | $ | — | | | $ | — | | | $ | — | | | $ | 505 | | | $ | 4,210,230 | | | $ | 4,210,735 | |
| Single family residential | 271 | | | — | | | — | | | 1,788 | | | 1,879,617 | | | 1,881,676 | |
| Commercial real estate | — | | | — | | | — | | | — | | | 187,097 | | | 187,097 | |
| Land and construction | — | | | — | | | — | | | — | | | 17,912 | | | 17,912 | |
| Total | $ | 271 | | | $ | — | | | $ | — | | | $ | 2,293 | | | $ | 6,294,856 | | | $ | 6,297,420 | |
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| 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 | | | $ | — | | | $ | — | | | $ | — | |
The following table summarizes information related to impaired loans at September 30, 2022 and December 31, 2021:2022:
| | | As of September 30, 2022 | | As of December 31, 2021 | |
| (Dollars in thousands) | (Dollars in thousands) | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | (Dollars in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| With no related allowance recorded: | With no related allowance recorded: | | | | | | | | | With no related allowance recorded: | | | | | | |
| Multifamily residential | Multifamily residential | $ | 843 | | | $ | 919 | | | $ | — | | | $ | 505 | | | $ | 582 | | | $ | — | | Multifamily residential | | $ | 485 | | | $ | 562 | | | $ | — | |
| Single family residential | Single family residential | 5,623 | | | 5,818 | | | — | | | 4,847 | | | 5,033 | | | — | | Single family residential | | 5,580 | | | 5,779 | | | — | |
| | | 6,466 | | | 6,737 | | | — | | | 5,352 | | | 5,615 | | | — | | | | 6,065 | | | 6,341 | | | — | |
| With an allowance recorded: | With an allowance recorded: | | | | | | | | | | | | With an allowance recorded: | | | | | | |
| | Multifamily residential | | Multifamily residential | | 3,024 | | | 3,002 | | | 600 | |
| Single family residential | Single family residential | 811 | | | 808 | | | 25 | | | 840 | | | 836 | | | 25 | | Single family residential | | 801 | | | 798 | | | 25 | |
| | | 811 | | | 808 | | | 25 | | | 840 | | | 836 | | | 25 | | | | 3,825 | | | 3,800 | | | 625 | |
| Total: | Total: | | | | | | | | | | | | Total: | | | | | | |
| Multifamily residential | Multifamily residential | 843 | | | 919 | | | — | | | 505 | | | 582 | | | — | | Multifamily residential | | 3,509 | | | 3,564 | | | 600 | |
| Single family residential | Single family residential | 6,434 | | | 6,626 | | | 25 | | | 5,687 | | | 5,869 | | | 25 | | Single family residential | | 6,381 | | | 6,577 | | | 25 | |
| | | $ | 7,277 | | | $ | 7,545 | | | $ | 25 | | | $ | 6,192 | | | $ | 6,451 | | | $ | 25 | | | | $ | 9,890 | | | $ | 10,141 | | | $ | 625 | |
The following tables summarizetable summarizes information related to impaired loans for the three and nine months ended September 30, 2022 and 2021:March 31, 2022:
| | | Three Months Ended September 30, | |
| | 2022 | | 2021 | |
| (Dollars in thousands) | (Dollars in thousands) | Average Recorded Investment | | Interest Income | | Cash Basis Interest | | Average Recorded Investment | | Interest Income | | Cash Basis Interest | (Dollars in thousands) | | | Average Recorded Investment | | Interest Income | | Cash Basis Interest |
| With no related allowance recorded: | With no related allowance recorded: | With no related allowance recorded: |
| Multifamily residential | Multifamily residential | $ | 847 | | | $ | 13 | | | $ | 13 | | | $ | 664 | | | $ | 8 | | | $ | 8 | | Multifamily residential | | | $ | 503 | | | $ | 8 | | | $ | 8 | |
| Single family residential | Single family residential | 6,791 | | | 60 | | | 32 | | | 3,274 | | | 32 | | | — | | Single family residential | | | 4,830 | | | 43 | | | 19 | |
| | | 7,638 | | | 73 | | | 45 | | | 3,938 | | | 40 | | | 8 | | | | | 5,333 | | | 51 | | | 27 | |
| With an allowance recorded: | With an allowance recorded: | | | | | | | | | | | | With an allowance recorded: | | | | | | | |
| | Single family residential | Single family residential | 815 | | | 7 | | | — | | | 854 | | | 6 | | | — | | Single family residential | | | 835 | | | 6 | | | — | |
| | | 815 | | | 7 | | | — | | | 854 | | | 6 | | | — | | | | | 835 | | | 6 | | | — | |
| Total: | Total: | | | | | | | | | | | | Total: | | | | | | | |
| Multifamily residential | Multifamily residential | 847 | | | 13 | | | 13 | | | 664 | | | 8 | | | 8 | | Multifamily residential | | | 503 | | | 8 | | | 8 | |
| Single family residential | Single family residential | 7,606 | | | 67 | | | 32 | | | 4,128 | | | 38 | | | — | | Single family residential | | | 5,665 | | | 49 | | | 19 | |
| | | $ | 8,453 | | | $ | 80 | | | $ | 45 | | | $ | 4,792 | | | $ | 46 | | | $ | 8 | | | | | $ | 6,168 | | | $ | 57 | | | $ | 27 | |
The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2022:
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| (Dollars in thousands) | Multifamily Residential | | Single Family Residential | | Commercial Real Estate | | Construction and Land | | Total |
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| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| (Dollars in thousands) | Average Recorded Investment | | Interest Income | | Cash Basis Interest | | Average Recorded Investment | | Interest Income | | Cash Basis Interest |
| With no related allowance recorded: |
| Multifamily residential | $ | 712 | | | $ | 38 | | | $ | 38 | | | $ | 891 | | | $ | 22 | | | $ | 22 | |
| Single family residential | 5,935 | | | 140 | | | 61 | | | 4,781 | | | 143 | | | 85 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 6,647 | | | 178 | | | 99 | | | 5,672 | | | 165 | | | 107 | |
| With an allowance recorded: | | | | | | | | | | | |
| | | | | | | | | | | |
| Single family residential | 825 | | | 20 | | | — | | | 863 | | | 19 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 825 | | | 20 | | | — | | | 863 | | | 19 | | | — | |
| Total: | | | | | | | | | | | |
| Multifamily residential | 712 | | | 38 | | | 38 | | | 891 | | | 22 | | | 22 | |
| Single family residential | 6,760 | | | 160 | | | 61 | | | 5,644 | | | 162 | | | 85 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 7,472 | | | $ | 198 | | | $ | 99 | | | $ | 6,535 | | | $ | 184 | | | $ | 107 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 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 September 30, 2022 and December 31, 2021:2022:
| | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2022 | | December 31,
2021 |
| Troubled debt restructurings: | | | |
| | | |
| Single family residential | $ | 1,222 | | | $ | 1,204 | |
| | | |
| | | | | | | |
| (Dollars in thousands) | | | |
| Troubled debt restructurings: | | | |
| | | |
| Single family residential | | | $ | 1,211 | |
| | | |
The Company hashad allocated $25 thousand of its allowance for loan losses for loans modified in TDRs at both September 30, 2022 and December 31, 2021.2022. The Company does not have commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs.
During the ninethree months ended September 30,March 31, 2022, 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 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. There were no new TDRs during the three or nine months ended September 30, 2021.
The Company had no TDRs with a subsequent payment default within the twelve months following thetheir modification during the three or nine months ended September 30, 2022 and 2021.March 31, 2022. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
4. NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans plus real estate owned. The Company’s nonperforming assets at September 30, 2022 and December 31, 2021 arefollowing table presents the composition of non-accrual loans as of the dates indicated below:
| | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2022 | | December 31,
2021 |
| Non-accrual loans: | | | |
| Multifamily residential | $ | 843 | | | $ | 505 | |
| Single family residential | 2,987 | | | 1,788 | |
| | | |
| Total non-accrual loans | 3,830 | | | 2,293 | |
| Real estate owned | — | | | — | |
| Total nonperforming assets | $ | 3,830 | | | $ | 2,293 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 be 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 and nine months ended September 30,March 31, 2023 and 2022 totaling $45$28 thousand and $99$27 thousand, respectively, compared to $8 thousand and $107 thousand during the three and nine months ended September 30, 2021.respectively. Contractual interest not recorded on nonperforming loans during the three and nine months ended September 30,March 31, 2023 and 2022 totaled $6$118 thousand and $30$7 thousand, respectively, compared to $5 thousand and $21 thousand for the three and nine months ended September 30, 2021, respectively.
Generally, nonaccrual loans are considered impaired because the repaymentThe Company did not own any other real estate owned as of the loan will not be made in accordance with the original contractual agreement.March 31, 2023 and December 31, 2022.
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) | (Dollars in thousands) | September 30,
2022 | | December 31,
2021 | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 |
| Mortgage loans serviced for: | Mortgage loans serviced for: | | | | Mortgage loans serviced for: | | | |
| Federal Home Loan Mortgage Corporation ("Freddie Mac") | Federal Home Loan Mortgage Corporation ("Freddie Mac") | $ | 85,677 | | | $ | 127,431 | | Federal Home Loan Mortgage Corporation ("Freddie Mac") | $ | 78,312 | | | $ | 80,478 | |
| Other financial institutions | Other financial institutions | 42,770 | | | 58,298 | | Other financial institutions | 37,220 | | | 37,503 | |
| Total mortgage loans serviced for others | Total mortgage loans serviced for others | $ | 128,447 | | | $ | 185,729 | | Total mortgage loans serviced for others | $ | 115,532 | | | $ | 117,981 | |
Custodial account balances maintained in connection with serviced loans totaled $1.4$1.6 million and $5.0 million$234 thousand at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
The 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:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| (Dollars in thousands) | (Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 | (Dollars in thousands) | 2023 | | 2022 | | |
| Beginning balance | Beginning balance | $ | 779 | | | $ | 1,192 | | | $ | 915 | | | $ | 1,599 | | Beginning balance | $ | 688 | | | $ | 915 | | | |
| Additions | Additions | — | | | — | | | — | | | — | | Additions | — | | | — | | | |
| Disposals | Disposals | — | | | — | | | — | | | — | | Disposals | — | | | — | | | |
| Changes 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 | Other changes in fair value | (54) | | | (232) | | | (190) | | | (639) | | Other changes in fair value | (19) | | | (104) | | | |
| Ending balance | Ending balance | $ | 725 | | | $ | 960 | | | $ | 725 | | | $ | 960 | | Ending balance | $ | 669 | | | $ | 811 | | | |
Fair value as of September 30, 2022March 31, 2023 was determined using a discount rate of 10%, prepayment speeds ranging from 5.1%5.4% to 49.7%32.7% and a weighted average default rate of 5%. The weighted average prepayment speed at September 30, 2022March 31, 2023 was 29.9%24.5%. Fair value as of December 31, 20212022 was determined using a discount rate of 10%, prepayment speeds ranging from 7.6%3.5% to 48.8%32.3% and a weighted average default rate of 5%. The weighted average prepayment speed at December 31, 20212022 was 29.2%23.0%.
6. LEASES
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2023 and 2030,2033, with certain leases containing five yearfive-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 and prior to the adoption of ASU 2016-02 on January 1, 2022, were not recognized on the Company's consolidated statements of financial condition.leases.
Upon adoption of the new lease standard on January 1, 2022, theThe Company recordedrecords 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's incremental borrowing rate is based on theCompany selected a FHLB advance rate at lease inception based on the lease term and other factors.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 or for the threeMarch 31, 2023 and nine months ended September 30,December 31, 2022 is as follows:
| | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | |
Operating lease right-of-use assets included in prepaid expenses and other assets | $ | 12,803 | | | |
Operating lease liabilities included in other liabilities and accrued expenses | 12,984 | | | |
| | | | | |
| | | |
| | | | | |
Weighted average remaining lease term (years) of operating leases | 4.8 | | | | |
Weighted average discount rate of operating leases | 2.47 | % | | |
| | | |
| | | | | | | | | | | | | | | | | |
| (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 | % |
| | | |
| | | | | | | | | | | | | |
| (Dollars in thousands) | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | | | | |
| | | |
| | | |
| | | | | |
| Operating lease costs included in occupancy expense | $ | 911 | | | $ | 2,750 | |
| | | | | |
| | | | | |
| | | |
| Cash paid for amounts included in the measurement of operating lease liabilities | 1,019 | | | 3,071 | |
| | | | | | | | | | | |
| 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 September 30, 2022,March 31, 2023, future undiscounted lease payments with initial terms of one year or more are as follows:
| | (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| October 1 - December 31, 2022 | $ | 979 | | |
| 2023 | 3,357 | | |
| April 1 - December 31, 2023 | | April 1 - December 31, 2023 | $ | 2,537 | |
| 2024 | 2024 | 2,661 | | 2024 | 2,803 | |
| 2025 | 2025 | 2,238 | | 2025 | 2,388 | |
| 2026 | 2026 | 2,051 | | 2026 | 2,203 | |
| 2027 | | 2027 | 1,964 | |
| Thereafter | Thereafter | 2,572 | | Thereafter | 1,640 | |
| Total undiscounted lease payments | Total undiscounted lease payments | 13,858 | | Total undiscounted lease payments | 13,535 | |
| Less: Imputed interest | Less: Imputed interest | (874) | | Less: Imputed interest | (1,057) | |
| Net lease liabilities | Net lease liabilities | $ | 12,984 | | 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 September 30, 2022March 31, 2023 and December 31, 20212022 is as follows:
| | (Dollars in thousands) | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 | (Dollars in thousands) | March 31, 2023 | | December 31, 2022 |
| Time deposits | Time deposits | $ | 2,614,401 | | | $ | 2,335,141 | | Time deposits | $ | 3,405,641 | | | $ | 3,134,373 | |
| Money market savings | Money market savings | 2,156,210 | | | 2,294,367 | | Money market savings | 1,271,147 | | | 1,718,008 | |
| Money market checking | Money market checking | 706,092 | | | 580,325 | | Money market checking | 754,080 | | | 728,231 | |
| Interest-bearing demand | Interest-bearing demand | 169,019 | | | 176,126 | | Interest-bearing demand | 143,870 | | | 158,068 | |
| Noninterest-bearing demand | Noninterest-bearing demand | 148,658 | | | 152,284 | | Noninterest-bearing demand | 74,756 | | | 100,660 | |
| Total | Total | $ | 5,794,380 | | | $ | 5,538,243 | | Total | $ | 5,649,494 | | | $ | 5,839,340 | |
The Company had time deposits that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit of $250 thousand of $1.1$1.4 billion and $1.3 billion at both September 30, 2022March 31, 2023 and December 31, 2021.2022, respectively.
The Company utilizes brokered deposits as an additional source of funding. The Company had brokered deposits of $340.5$543.4 million and $25.8$455.8 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase in brokered deposits was utilized to fund loan growthpartially offset retail deposit declines during the ninethree months ended September 30, 2022.
Maturities of the Company’s time deposits at September 30, 2022March 31, 2023 are summarized as follows:
| | (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| October 1 - December 31, 2022 | $ | 591,162 | | |
| 2023 | 1,766,304 | | |
| April 1 - December 31, 2023 | | April 1 - December 31, 2023 | $ | 2,462,856 | |
| 2024 | 2024 | 215,150 | | 2024 | 919,568 | |
| 2025 | 2025 | 7,623 | | 2025 | 7,357 | |
| 2026 | 2026 | 26,674 | | 2026 | 10,450 | |
| 2027 | | 2027 | 4,537 | |
| Thereafter | Thereafter | 7,488 | | Thereafter | 873 | |
| Total | Total | $ | 2,614,401 | | Total | $ | 3,405,641 | |
8.9. FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES
The Bank may borrow from the 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 September 30, 2022 and DecemberMarch 31, 2021,2023, the Bank had pledged various mortgage loans and securities to secure these borrowing arrangements totaling approximately $3.1$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 $596.5 million$2.5 billion and $583.0$904.9 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 September 30, 2022March 31, 2023 or December 31, 2021.2022.
The following table discloses the Bank’s outstanding advances from the FHLB of San Francisco:
| | | Outstanding Balances | | As of September 30, 2022 | | Outstanding Balances | | As of March 31, 2023 |
| (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | December 31,
2021 | | Minimum Interest Rate | | Maximum Interest Rate | | Weighted Average Rate | | Maturity Dates | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | Minimum Interest Rate | | Maximum Interest Rate | | Weighted Average Rate | | Maturity Dates |
| Fixed rate short-term | Fixed rate short-term | $ | 200,000 | | | $ | — | | | 2.81 | % | | 3.16 | % | | 2.99 | % | | October 2022 to November 2022 | Fixed rate short-term | $ | 150,000 | | | $ | 56,500 | | | 5.27 | % | | 5.27 | % | | 5.27 | % | | June 2023 |
Fixed rate long-term(1) | Fixed rate long-term(1) | 1,001,647 | | | 751,647 | | | 0.38 | % | | 7.33 | % | | 2.21 | % | | March 2023 to March 2030 | Fixed rate long-term(1) | 1,551,647 | | | 1,151,647 | | | 0.38 | % | | 7.33 | % | | 3.15 | % | | May 2023 to March 2030 |
| | | $ | 1,201,647 | | | $ | 751,647 | | | | $ | 1,701,647 | | | $ | 1,208,147 | | |
(1) Included in total fixed rate long-term advances is a $200.0 million advance which matures in September 2025 and contains ana FHLB quarterly call provision beginning in September 2023.
The Bank's available borrowing capacity based on loans and securities pledged loans to the FHLB and the FRB totaled $973.1 million$2.3 billion and $1.2$1.7 billion at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Bank had aggregate loan balances of $2.1 billion$17.8 million and $2.5$1.1 billion, respectively available to pledge to the FHLB and FRB to increase its borrowing capacity. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 90 days or less. During the three and nine months ended September 30,March 31, 2023, there was a maximum amount of short-term borrowings outstanding of $150.0 million, an average amount outstanding of $49.0 million, with a weighted average interest rate of 5.05%. During the three months ended March 31, 2022, there was a maximum amount of short-term borrowings outstanding of $406.9$135.3 million, for both periods, an average amount outstanding of $265.3$21.7 million, and $128.2 million, respectively, with a weighted average interest rate of 2.52% and 2.04%, respectively. During the three and nine months September 30, 2021, there was a maximum amount of short-term borrowings outstanding of $306.2 million and $352.9 million, respectively, an average amount outstanding of $113.4 million and $148.2 million, respectively, with a weighted average interest rate of 0.15% and 0.14%, respectively.
The following table summarizes scheduled principal payments on FHLB advances over the next five years as of September 30, 2022:March 31, 2023:
| | (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| October 1 - December 31, 2022 | $ | 200,000 | | |
| 2023 | 250,000 | | |
| April 1 - December 31, 2023 | | April 1 - December 31, 2023 | $ | 350,000 | |
| 2024 | 2024 | 350,000 | | 2024 | 500,000 | |
| 2025 | 2025 | 301,500 | | 2025 | 751,500 | |
| 2026 | 2026 | 100,000 | | 2026 | 100,000 | |
| 2027 | | 2027 | — | |
| Thereafter | Thereafter | 147 | | Thereafter | 147 | |
| | $ | 1,201,647 | | | $ | 1,701,647 | |
9.10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Company formed two 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 "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, is included in other assets in the consolidated statements of financial condition. The sole asset of the Trusts are the Notes that they hold.
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 September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | September 30, 2022 | | December 31, 2021 | | Date | | Maturity | | Rate Index | | March 31, 2023 | | December 31, 2022 | | Date | | Maturity | | Rate Index |
| Issuer | Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) | Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) |
| (Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) |
| Luther Burbank Statutory Trust I | Luther Burbank Statutory Trust I | | $ | 41,238 | | | 4.67 | % | | $ | 41,238 | | | 1.58 | % | | 3/1/2006 | | 6/15/2036 | | 3 month LIBOR + 1.38% | 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 | Luther Burbank Statutory Trust II | | $ | 20,619 | | | 4.91 | % | | $ | 20,619 | | | 1.82 | % | | 3/1/2007 | | 6/15/2037 | | 3 month LIBOR + 1.62% | Luther Burbank Statutory Trust II | | $ | 20,619 | | | 6.49 | % | | $ | 20,619 | | | 6.39 | % | | 3/1/2007 | | 6/15/2037 | | 3 month LIBOR + 1.62% |
10.11. SENIOR DEBT
In September 2014, the Company issued $95 million in senior unsecured term notes to qualified institutional investors. The following table summarizes information on these notes as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | September 30, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 | |
| (Dollars in thousands) | (Dollars in thousands) | | Principal | | Unamortized Debt Issuance Costs | | Principal | | Unamortized Debt Issuance Costs | | Maturity Date | | Fixed Interest Rate | (Dollars in thousands) | | Principal | | Unamortized Debt Issuance Costs | | Principal | | Unamortized Debt Issuance Costs | | Maturity Date | | Fixed Interest Rate |
| Senior Unsecured Term Notes | Senior Unsecured Term Notes | | $ | 95,000 | | | $ | 246 | | | $ | 95,000 | | | $ | 338 | | | 9/30/2024 | | 6.50 | % | Senior Unsecured Term Notes | | $ | 95,000 | | | $ | 184 | | | $ | 95,000 | | | $ | 215 | | | 9/30/2024 | | 6.50 | % |
11.12. DERIVATIVES AND HEDGING ACTIVITIES
From time to time, the Company utilizes interest rate swaps and other derivative financial instruments as part of its asset liability management strategy to manage interest rate risk positions.
Fair Value Hedges of Interest Rate Risk
As of September 30, 2022,March 31, 2023, the Company held seven11 interest rate swaps with a total notional amount of $1.3 billion. During the nine months ended September 30, 2022, the Company entered into five new swap agreements$1.8 billion, two of which, with an aggregate notional amount of $600.0 million. The other two swaps were entered into$400 million, have effective dates in FebruaryApril and June 2021.2023. The swaps provide a hedge against the interest rate risk associated with both fixed rate loans and hybrid adjustable loans in their fixed rate period. Additionally, during the nine months ended September 30, 2021, the Company also held two separate, two-year interest rate swaps with a total notional amount of $1.0 billion. These swaps, which were in equal notional amounts of $500.0 million, matured in June and August 2021, and provided a hedge against the interest rate risk related to certain hybrid multifamily loans which were in their fixed rate period.
All outstanding swaps are designated as fair value hedges and involve the payment of a fixed rate amount to 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 hedged risk are recognized in interest income on loans.
The following table presents the effect of the Company’s interest rate swaps on the unaudited consolidated statements of income for the three and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, | |
| (Dollars in thousands) | (Dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 | (Dollars in thousands) | 2023 | | 2022 | |
| Derivative - interest rate swaps: | Derivative - interest rate swaps: | | | | | | | | Derivative - interest rate swaps: | | | | |
| Interest income (loss) | Interest income (loss) | $ | 2,971 | | | $ | (720) | | | $ | 3,404 | | | $ | (7,439) | | Interest income (loss) | $ | 8,164 | | | $ | (65) | | |
| Hedged items - loans: | Hedged items - loans: | | Hedged items - loans: | | |
| Interest loss | (77) | | | (1) | | | (125) | | | (30) | | |
| Interest income (loss) | | Interest income (loss) | 62 | | | (13) | | |
| Net increase (decrease) in interest income | Net increase (decrease) in interest income | $ | 2,894 | | | $ | (721) | | | $ | 3,279 | | | $ | (7,469) | | 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 September 30, 2022March 31, 2023 and December 31, 2021:2022:
| | | Fair Values of Derivative Instruments | | Fair Values of Derivative Instruments |
| | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| (Dollars in thousands) | (Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value | (Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value |
| Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | Derivatives designated as hedging instruments: | | | |
| As of September 30, 2022: | | |
| As of March 31, 2023: | | As of March 31, 2023: | |
| Interest Rate Swaps | Interest Rate Swaps | $ | 1,250,000 | | Prepaid Expenses and Other Assets | $ | 27,088 | | | Other Liabilities and Accrued Expenses | $ | — | | Interest Rate Swaps | $ | 1,800,000 | | Prepaid Expenses and Other Assets | $ | 11,763 | | | Other Liabilities and Accrued Expenses | $ | 18,053 | |
| As of December 31, 2021: | | |
| As of December 31, 2022: | | As of December 31, 2022: | |
| Interest Rate Swaps | Interest Rate Swaps | $ | 650,000 | | Prepaid Expenses and Other Assets | $ | 3,108 | | | Other Liabilities and Accrued Expenses | $ | — | | Interest Rate Swaps | $ | 1,850,000 | | Prepaid Expenses and Other Assets | $ | 21,323 | | | Other Liabilities and Accrued Expenses | $ | 2,136 | |
As of September 30, 2022March 31, 2023 and December 31, 2021,2022, 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) | 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 | 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) | (Dollars in thousands) | | | | | (Dollars in thousands) | | | | |
| As of September 30, 2022: | | |
| As of March 31, 2023: | | As of March 31, 2023: | |
| Loans receivable, net | Loans receivable, net | | $ | 1,222,785 | | | $ | (27,215) | | Loans receivable, net | | $ | 1,806,180 | | | $ | 6,180 | |
| As of December 31, 2021: | | |
| As of December 31, 2022: | | As of December 31, 2022: | |
| Loans receivable, net | Loans receivable, net | | $ | 646,890 | | | $ | (3,110) | | 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 items areitem is the last layer expectedstated amount of assets in the closed portfolios anticipated to be remaining atoutstanding for the end of the hedging relationship.designated hedge period. At September 30, 2022March 31, 2023 and December 31, 2021,2022, the amortized cost basis of the portfolio loans used in these hedging relationships were $2.5$4.5 billion and $1.0$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.
12.
13. STOCK BASED COMPENSATION
The Company’s stock based compensation consists of restricted stock awards ("RSAs") and restricted stock units ("RSUs") granted under the Luther Burbank Corporation Omnibus Equity and Incentive Compensation Plan ("Omnibus Plan"). In connection with its initial public offering ("IPO") in December 2017, the Company granted RSUs in exchange for unvested phantom stock awards related to a then discontinued employee benefit plan that awarded phantom stock to certain key executives and nonemployee directors. The RSUs were granted on a per share basis, with the same vesting schedule and deferral elections that existed for the original phantom stock awards. Post IPO, the Company typically grants RSAs to nonemployee directors and certain employees on an annual basis. RSA grants vest after one year for nonemployee directors and ratably over three to four years for employees.
All RSAs and RSUs are granted at the fair value of the common stock at the time of the award. 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 for the three and nine months ended September 30,March 31, 2023 and 2022 totaled $756$473 thousand and $2.1 million, respectively, compared with $645$710 thousand, and $1.9 million for the three and nine months ended September 30, 2021, respectively. The fair value of RSAs and/or RSUs that vested during the three and nine months ended September 30, 2022 totaled $90 thousand and $2.7 million, respectively, compared to $2.4 million for the nine months ended September 30, 2021. No RSAs or RSUs vested during the three months ended September 30, 2021.March 31, 2023 and 2022 totaled $2.7 million and $2.6 million, respectively.
As of September 30, 2022both March 31, 2023 and December 31, 2021,2022, there was $3.0$2.4 million and $2.6 million, respectively, of unrecognized compensation expense related to 415,337232,459 and 489,703414,004 unvested RSAs, respectively,
which amounts were expected to be expensed over a weighted average period of 1.811.50 years and 1.691.74 years, respectively. As of September 30, 2022March 31,
2023 and December 31, 2021,2022, 65,799 and 81,225 and 91,486 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 RSAs and RSUs:
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Number of Shares | | 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 | Beginning of the period balance | 581,189 | | | $ | 10.56 | | | 605,916 | | | $ | 10.93 | | Beginning of the period balance | 495,229 | | | $ | 11.89 | | | 581,189 | | | $ | 10.56 | |
| Shares granted | Shares granted | 218,048 | | | 13.78 | | | 289,473 | | | 10.11 | | Shares granted | 42,034 | | | 11.24 | | | 206,675 | | | 13.81 | |
| Shares settled | Shares settled | (264,836) | | | 10.49 | | | (265,655) | | | 11.02 | | Shares settled | (239,005) | | | 11.81 | | | (253,706) | | | 10.45 | |
| Shares forfeited | Shares forfeited | (37,839) | | | 11.97 | | | (54,130) | | | 10.30 | | Shares forfeited | — | | | — | | | (4,100) | | | 11.93 | |
| End of the period balance | End of the period balance | 496,562 | | | $ | 11.90 | | | 575,604 | | | $ | 10.53 | | 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, there were 1,681,1351,640,434 and 1,861,3441,682,468 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. As of January 1, 2021, all RSUs were fully vested and no longer subject to forfeiture.
13.14. 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, and restricted cash, accrued interest receivable and payable, demand deposits and short-term borrowings, the carrying amount was estimated to be fair value. The fair value of accrued interest receivable/payable balances were 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 and held to maturity debt securities, which include primarily debt securities issued by U.S. government sponsored agencies, were 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 was estimated using market quotes for similar assets or the present value of future cash flows, discounted using a market rate for similar products and giving consideration to estimated prepayment risk and credit risk. The fair value of loans was determined utilizing estimates resulting in a Level 3 classification.
ImpairedThe fair value of collateral dependent loans were measured for impairment based on the present value of expected future cash flows discounted at the loans' effective interest rate, except that as a practical expedient, the Company may measure impairment 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 was 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.
The fair value of servicing rights was determined using a valuation model that utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.
The fair values of derivatives were based on valuation models using observable market data as of the measurement date.
Fair values for fixed-rate time deposits were estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for time deposits with similar remaining maturities. For deposits with no contractual maturity, the fair value was assumed to equal the carrying value.
The fair value of FHLB advances was estimated based on discounting the future cash flows using the market rate currently offered for similar terms.
The fair value of subordinated debentures was based on an indication of value provided by a third-party broker.
For senior debt, the fair value was 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 were as follows:
| | | Fair Level Measurements Using | | Fair Level Measurements Using |
| (Dollars in thousands) | (Dollars in thousands) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | (Dollars in thousands) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| As of September 30, 2022: | | | | | | | | | |
| As of March 31, 2023: | | As of March 31, 2023: | | | | | | | | |
| Financial assets: | Financial assets: | | Financial assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 256,658 | | | $ | 256,658 | | | $ | 256,658 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 516,913 | | | $ | 516,913 | | | $ | 516,913 | | | $ | — | | | $ | — | |
| Debt securities: | Debt securities: | | Debt securities: | |
| Available for sale | Available for sale | 640,473 | | | 640,473 | | | — | | | 640,473 | | | — | | Available for sale | 593,427 | | | 593,427 | | | — | | | 593,427 | | | — | |
| Held to maturity | Held to maturity | 3,135 | | | 2,845 | | | — | | | 2,845 | | | — | | Held to maturity | 3,080 | | | 2,891 | | | — | | | 2,891 | | | — | |
| Equity securities | Equity securities | 10,317 | | | 10,317 | | | — | | | 10,317 | | | — | | Equity securities | 10,506 | | | 10,506 | | | — | | | 10,506 | | | — | |
| | Loans receivable, net | Loans receivable, net | 6,818,420 | | | 6,597,158 | | | — | | | — | | | 6,597,158 | | Loans receivable, net | 6,987,565 | | | 6,662,388 | | | — | | | — | | | 6,662,388 | |
| Accrued interest receivable | Accrued interest receivable | 21,011 | | | 21,011 | | | 88 | | | 1,969 | | | 18,954 | | Accrued interest receivable | 23,873 | | | 23,873 | | | 580 | | | 2,027 | | | 21,266 | |
| FHLB stock | FHLB stock | 32,694 | | | N/A | | N/A | | N/A | | N/A | FHLB stock | 46,007 | | | N/A | | N/A | | N/A | | N/A |
| Interest rate swaps | Interest rate swaps | 27,088 | | | 27,088 | | | — | | | 27,088 | | | — | | Interest rate swaps | 11,763 | | | 11,763 | | | — | | | 11,763 | | | — | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
| Deposits | Deposits | $ | 5,794,380 | | | $ | 5,741,314 | | | $ | 2,919,979 | | | $ | 2,821,335 | | | $ | — | | Deposits | $ | 5,649,494 | | | $ | 5,618,781 | | | $ | 2,013,853 | | | $ | 3,604,928 | | | $ | — | |
| FHLB advances | FHLB advances | 1,201,647 | | | 1,157,828 | | | — | | | 1,157,828 | | | — | | FHLB advances | 1,701,647 | | | 1,670,831 | | | — | | | 1,670,831 | | | — | |
| Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures | 61,857 | | | 55,966 | | | — | | | 55,966 | | | — | | Junior subordinated deferrable interest debentures | 61,857 | | | 57,653 | | | — | | | 57,653 | | | — | |
| Senior debt | Senior debt | 94,754 | | | 93,486 | | | — | | | 93,486 | | | — | | Senior debt | 94,816 | | | 93,128 | | | — | | | 93,128 | | | — | |
| Accrued interest payable | Accrued interest payable | 950 | | | 950 | | | — | | | 950 | | | — | | Accrued interest payable | 7,430 | | | 7,430 | | | — | | | 7,430 | | | — | |
| | As of December 31, 2021: | | |
| 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: | | Financial assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 138,413 | | | $ | 138,413 | | | $ | 138,413 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 185,895 | | | $ | 185,895 | | | $ | 185,895 | | | $ | — | | | $ | — | |
| Debt securities: | Debt securities: | | Debt securities: | |
| Available for sale | Available for sale | 647,317 | | | 647,317 | | | — | | | 647,317 | | | — | | Available for sale | 607,348 | | | 607,348 | | | — | | | 607,348 | | | — | |
| Held to maturity | Held to maturity | 3,829 | | | 4,018 | | | — | | | 4,018 | | | — | | Held to maturity | 3,108 | | | 2,874 | | | — | | | 2,874 | | | — | |
| Equity securities | Equity securities | 11,693 | | | 11,693 | | | — | | | 11,693 | | | — | | Equity securities | 10,340 | | | 10,340 | | | — | | | 10,340 | | | — | |
| Loans receivable, net | Loans receivable, net | 6,261,885 | | | 6,297,548 | | | — | | | — | | | 6,297,548 | | Loans receivable, net | 6,973,760 | | | 6,743,783 | | | — | | | — | | | 6,743,783 | |
| Accrued interest receivable | Accrued interest receivable | 17,761 | | | 17,761 | | | 1 | | | 927 | | | 16,833 | | Accrued interest receivable | 24,306 | | | 24,306 | | | 58 | | | 4,171 | | | 20,077 | |
| FHLB stock | FHLB stock | 23,411 | | | N/A | | N/A | | N/A | | N/A | FHLB stock | 32,694 | | | N/A | | N/A | | N/A | | N/A |
| Interest rate swaps | Interest rate swaps | 3,108 | | | 3,108 | | | — | | | 3,108 | | | — | | Interest rate swaps | 21,323 | | | 21,323 | | | — | | | 21,323 | | | — | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
| Deposits | Deposits | $ | 5,538,243 | | | $ | 5,541,417 | | | $ | 2,918,102 | | | $ | 2,623,315 | | | $ | — | | Deposits | $ | 5,839,340 | | | $ | 5,789,929 | | | $ | 2,449,966 | | | $ | 3,339,963 | | | $ | — | |
| FHLB advances | FHLB advances | 751,647 | | | 755,981 | | | — | | | 755,981 | | | — | | FHLB advances | 1,208,147 | | | 1,153,511 | | | — | | | 1,153,511 | | | — | |
| Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures | 61,857 | | | 61,545 | | | — | | | 61,545 | | | — | | Junior subordinated deferrable interest debentures | 61,857 | | | 56,967 | | | — | | | 56,967 | | | — | |
| Senior debt | Senior debt | 94,662 | | | 103,361 | | | — | | | 103,361 | | | — | | Senior debt | 94,785 | | | 94,652 | | | — | | | 94,652 | | | — | |
| Accrued interest payable | Accrued interest payable | 118 | | | 118 | | | — | | | 118 | | | — | | 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 estimates.
Assets and Liabilities Recorded at Fair Value
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2022March 31, 2023 and December 31, 2021.
Recurring Basis
The Company is required or permitted to record the following assets and liabilities at fair value on a recurring basis:
| | (Dollars in thousands) | (Dollars in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 | (Dollars in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| As of September 30, 2022: | | | | | | | | |
| As of March 31, 2023: | | As of March 31, 2023: | | | | | | | |
| Financial Assets: | Financial Assets: | | Financial Assets: | |
| Available for sale debt securities: | Available for sale debt securities: | | Available for sale debt securities: | |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | Government and Government Sponsored Entities: | |
| Commercial MBS and CMOs | Commercial MBS and CMOs | $ | 380,852 | | | $ | — | | | $ | 380,852 | | | $ | — | | Commercial MBS and CMOs | $ | 333,725 | | | $ | — | | | $ | 333,725 | | | $ | — | |
| Residential MBS and CMOs | Residential MBS and CMOs | 193,541 | | | — | | | 193,541 | | | — | | Residential MBS and CMOs | 195,543 | | | — | | | 195,543 | | | — | |
| Agency bonds | Agency bonds | 40,089 | | | — | | | 40,089 | | | — | | Agency bonds | 41,160 | | | — | | | 41,160 | | | — | |
| Other ABS | Other ABS | 25,991 | | | — | | | 25,991 | | | — | | Other ABS | 22,999 | | | — | | | 22,999 | | | — | |
| Total available for sale debt securities | Total available for sale debt securities | $ | 640,473 | | | $ | — | | | $ | 640,473 | | | $ | — | | Total available for sale debt securities | $ | 593,427 | | | $ | — | | | $ | 593,427 | | | $ | — | |
| Equity securities | Equity securities | $ | 10,317 | | | $ | — | | | $ | 10,317 | | | $ | — | | Equity securities | $ | 10,506 | | | $ | — | | | $ | 10,506 | | | $ | — | |
| Mortgage servicing rights | Mortgage servicing rights | 725 | | | — | | | — | | | 725 | | Mortgage servicing rights | 669 | | | — | | | — | | | 669 | |
| Interest rate swaps | Interest rate swaps | 27,088 | | | — | | | 27,088 | | | — | | Interest rate swaps | 11,763 | | | — | | | 11,763 | | | — | |
| | As of December 31, 2021: | | |
| Financial Liabilities: | | Financial Liabilities: | |
| Interest rate swaps | | Interest rate swaps | $ | 18,053 | | | $ | — | | | $ | 18,053 | | | $ | — | |
| As of December 31, 2022: | | As of December 31, 2022: | |
| Financial Assets: | Financial Assets: | | Financial Assets: | |
| Available for sale debt securities: | Available for sale debt securities: | | Available for sale debt securities: | |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | Government and Government Sponsored Entities: | |
| Commercial MBS and CMOs | Commercial MBS and CMOs | $ | 407,746 | | | $ | — | | | $ | 407,746 | | | $ | — | | Commercial MBS and CMOs | $ | 340,736 | | | $ | — | | | $ | 340,736 | | | $ | — | |
| Residential MBS and CMOs | Residential MBS and CMOs | 200,133 | | | — | | | 200,133 | | | — | | Residential MBS and CMOs | 199,384 | | | — | | | 199,384 | | | — | |
| Agency bonds | Agency bonds | 10,831 | | | — | | | 10,831 | | | — | | Agency bonds | 42,630 | | | — | | | 42,630 | | | — | |
| Other ABS | Other ABS | 28,607 | | | — | | | 28,607 | | | — | | Other ABS | 24,598 | | | — | | | 24,598 | | | — | |
| Total available for sale debt securities | Total available for sale debt securities | $ | 647,317 | | | $ | — | | | $ | 647,317 | | | $ | — | | Total available for sale debt securities | $ | 607,348 | | | $ | — | | | $ | 607,348 | | | $ | — | |
| Equity securities | Equity securities | $ | 11,693 | | | $ | — | | | $ | 11,693 | | | $ | — | | Equity securities | $ | 10,340 | | | $ | — | | | $ | 10,340 | | | $ | — | |
| Mortgage servicing rights | Mortgage servicing rights | 915 | | | — | | | — | | | 915 | | Mortgage servicing rights | 688 | | | — | | | — | | | 688 | |
| Interest rate swaps | Interest rate swaps | 3,108 | | | — | | | 3,108 | | | — | | Interest rate swaps | 21,323 | | | — | | | 21,323 | | | — | |
| | Financial Liabilities: | | Financial Liabilities: | |
| Interest rate swaps | | Interest rate swaps | $ | 2,136 | | | $ | — | | | $ | 2,136 | | | $ | — | |
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2022March 31, 2023 or 2021.2022.
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.
At both September 30, 2022March 31, 2023 and December 31, 2021,2022, there were no assets or liabilities measured at fair value on a non-recurring basis and the Company held no other real estate owned.
14.
15. VARIABLE INTEREST ENTITIES ("VIE")
The Company is involved with VIEs through its loan securitization activities. The Company evaluated its 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. The assessment includes an evaluation of the Company's continuing involvement with the VIE and the nature and significance of its variable interests.
Multifamily loan securitization
With respect to the securitization transaction with Freddie Mac which settled September 27, 2017, the Company's variable interests reside with a reimbursement agreement entered into with Freddie Mac that obligates the Company to reimburse Freddie Mac for defaulted contractual principal and interest payments identified after the ultimate resolution of any 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 Company released all servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. As Master Servicer, Freddie Mac appointed the Company 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 Company and Freddie Mac. Freddie Mac, in its capacity as Master Servicer, can terminate the Company in its role as sub-servicer and direct such responsibilities accordingly. In evaluating the variable interests and continuing involvement in the VIE, the Company determined that it 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 Company 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. Hence, the Company determined that the VIE associated with the multifamily securitization should not be included in the consolidated financial statements of the Company.
The Company believes its maximum exposure to loss as a result of 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. The reserve for estimated losses with respect to the reimbursement obligation totaled $471$270 thousand and $727$439 thousand as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, based upon an analysis of quantitative and qualitative data of 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.
15.16. LOAN SALE AND SECURITIZATION ACTIVITIES
The Company periodically sells 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 $626.0 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 obligation.
As sub-servicer for Freddie Mac, the Bank is required to maintain a minimum net worth in accordance with GAAP of not less than $2.0 million. If 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 September 30, 2022,March 31, 2023, the Bank’s net worth was $820.4$838.6 million which equates to its Tier 1 capital of $848.9$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 $31.8$33.3 million.
General representations and warranties associated with loan sales and the securitization transaction require the Company 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 Company breaches its representations and warranties, the Company 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 Company 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 Company 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.
The following table provides cash flows associated with the Company's loan sale activities:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| (Dollars in thousands) | (Dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | (Dollars in thousands) | | 2023 | | 2022 | |
| Proceeds from loan sales | Proceeds from loan sales | | $ | — | | | $ | 1,731 | | | $ | — | | | $ | 1,731 | | Proceeds from loan sales | | $ | — | | | $ | — | | |
| Servicing fees | Servicing fees | | 75 | | | 128 | | | 261 | | | 445 | | Servicing fees | | 64 | | | 97 | | |
The following table provides information about the loans transferred through sales or securitization and not recorded in the consolidated statements of financial condition, for which the Company's continuing involvement includes sub-servicing or servicing responsibilities and/or reimbursement obligations:
| | (Dollars in thousands) | (Dollars in thousands) | Single Family Residential | | Multifamily Residential | (Dollars in thousands) | Single Family Residential | | Multifamily Residential |
| As of September 30, 2022: | | | | |
| As of March 31, 2023: | | As of March 31, 2023: | | | |
| Principal balance of loans | Principal balance of loans | $ | 11,091 | | | $ | 117,356 | | Principal balance of loans | $ | 10,907 | | | $ | 104,625 | |
| Loans 90+ days past due | Loans 90+ days past due | — | | | — | | Loans 90+ days past due | — | | | — | |
| Charge-offs, net | Charge-offs, net | — | | | — | | Charge-offs, net | — | | | — | |
| As of December 31, 2021: | | |
| As of December 31, 2022: | | As of December 31, 2022: | |
| Principal balance of loans | Principal balance of loans | $ | 12,243 | | | $ | 173,486 | | Principal balance of loans | $ | 11,000 | | | $ | 106,981 | |
| Loans 90+ days past due | Loans 90+ days past due | — | | | — | | Loans 90+ days past due | — | | | — | |
| Charge-offs, net | Charge-offs, net | — | | | — | | Charge-offs, net | — | | | — | |
16.17. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-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 loans in process, and involve, to varying degrees, credit risk and interest rate risk in excess of the amount recognized in the Company’s consolidated statements of financial condition. The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend 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 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 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had outstanding commitments of approximately $77.7$36.7 million and $132.8$37.7 million, respectively, for loans and lines of credit.loans. Unfunded commitment reserves totaled $113$389 thousand and $153$125 thousand at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The Company adopted 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 the CECL methodology as of January 1, 2023 and the incurred loss methodology as of December 31, 2022. 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 the CECL methodology.
Contingencies
At present, there are no pending or threatened proceedings against the Company which, if determined adversely, would have a material effect on the Company’s business, financial position, results of 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. Insured portions of these balances are limited to $250 thousand per institution based on FDIC insurance limits. At September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company had $24.7 million$854 thousand and $25.5$25.0 million, respectively, in uninsured available cash balances. Additionally, the 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 September 30, 2022March 31, 2023 and December 31, 20212022 and our results of operations for the three months ended September 30, 2022March 31, 2023 and June 30,December 31, 2022 and the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, 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, 20212022 that was filed with the Securities and Exchange Commission (the “SEC”)SEC on March 14, 2022February 22, 2023 (our “Annual Report”) and with the accompanying Notes to Unaudited Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022March 31, 2023 (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 with $7.9$8.3 billion in assets at September 30, 2022.March 31, 2023. Our principal business is providing high-value, relationship-based banking products and services to our customers, which include real estate investors, professionals, entrepreneurs, depositors 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 Federal 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 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 Report. The selected historical consolidated financial data as of and for the three months March 31, 2023 and nine months September 30, 2022 and 2021 are derived from our unaudited consolidated financial statements, which are included elsewhere in this Report. The selected historical consolidated financial data for the three months ended June 30,December 31, 2022 are derived from our unaudited consolidated financial statements which wereare included in our previously filed Form 10-Q8-K on August 5, 2022.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 per share data) | | As of or For the Three Months Ended | | | | As of or For the Nine Months Ended | |
| | As of or For the Three Months Ended |
| | (Dollars in thousands, except per share data) | (Dollars in thousands, except per share data) | | September 30,
2022 | | June 30,
2022 | | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands, except per share data) | | March 31,
2023 | | December 31,
2022 | | | March 31,
2022 |
| Statements of Income and Financial Condition Data | | | | | | | Statements of Income and Financial Condition Data | | | | |
| Net Income | Net Income | | $ | 21,002 | | | $ | 22,567 | | | | | $ | 66,509 | | | $ | 64,370 | | Net Income | | $ | 13,442 | | | $ | 13,689 | | | | $ | 22,940 | |
Pre-tax, pre-provision net earnings (1) | Pre-tax, pre-provision net earnings (1) | | $ | 30,367 | | | $ | 34,509 | | | | | $ | 94,456 | | | $ | 82,065 | | Pre-tax, pre-provision net earnings (1) | | $ | 18,287 | | | $ | 20,431 | | | | $ | 29,580 | |
| Total assets | Total assets | | $ | 7,921,584 | | | $ | 7,530,516 | | | | | $ | 7,921,584 | | | $ | 7,220,786 | | Total assets | | $ | 8,302,457 | | | $ | 7,974,632 | | | | $ | 7,260,826 | |
| Per Common Share | Per Common Share | | | | Per Common Share | | | |
| Diluted earnings per share | Diluted earnings per share | | $ | 0.41 | | | $ | 0.44 | | | | | $ | 1.30 | | | $ | 1.24 | | Diluted earnings per share | | $ | 0.26 | | | $ | 0.27 | | | | $ | 0.45 | |
| Book value per share | Book value per share | | $ | 13.25 | | | $ | 13.15 | | | | | $ | 13.25 | | | $ | 12.65 | | Book value per share | | $ | 13.64 | | | $ | 13.36 | | | | $ | 13.00 | |
Tangible book value per share (1) | Tangible book value per share (1) | | $ | 13.18 | | | $ | 13.09 | | | | | $ | 13.18 | | | $ | 12.59 | | Tangible book value per share (1) | | $ | 13.58 | | | $ | 13.30 | | | | $ | 12.93 | |
| | Selected Ratios | Selected Ratios | | | | Selected Ratios | | | |
| Return on average: | Return on average: | | | | Return on average: | | | |
| Assets | Assets | | 1.10 | % | | 1.23 | % | | | | 1.20 | % | | 1.20 | % | Assets | | 0.67 | % | | 0.69 | % | | | 1.28 | % |
| Stockholders' equity | Stockholders' equity | | 12.33 | % | | 13.41 | % | | | | 13.11 | % | | 13.48 | % | Stockholders' equity | | 7.78 | % | | 8.04 | % | | | 13.60 | % |
| Dividend payout ratio | Dividend payout ratio | | 29.23 | % | | 27.15 | % | | | | 27.80 | % | | 19.00 | % | Dividend payout ratio | | — | % | | 44.84 | % | | | 27.14 | % |
| Net interest margin | Net interest margin | | 2.42 | % | | 2.62 | % | | | | 2.52 | % | | 2.34 | % | Net interest margin | | 1.72 | % | | 2.01 | % | | | 2.54 | % |
Efficiency ratio (1) | Efficiency ratio (1) | | 33.61 | % | | 27.86 | % | | | | 31.88 | % | | 34.86 | % | Efficiency ratio (1) | | 48.08 | % | | 49.23 | % | | | 34.40 | % |
| Noninterest expense to average assets | Noninterest expense to average assets | | 0.80 | % | | 0.72 | % | | | | 0.80 | % | | 0.82 | % | Noninterest expense to average assets | | 0.84 | % | | 1.00 | % | | | 0.86 | % |
| Loan to deposit ratio | Loan to deposit ratio | | 118.29 | % | | 117.09 | % | | | | 118.29 | % | | 113.54 | % | Loan to deposit ratio | | 124.32 | % | | 120.06 | % | | | 113.66 | % |
| | Credit Quality Ratios | Credit Quality Ratios | | | | Credit Quality Ratios | | | |
| Allowance for loan losses to loans | | 0.53 | % | | 0.54 | % | | | | 0.53 | % | | 0.59 | % | |
| Allowance for loan losses to nonperforming loans | | 940.86 | % | | 706.46 | % | | | | 940.86 | % | | 5,806.38 | % | |
| Allowance for credit losses on loans to total loans | | Allowance for credit losses on loans to total loans | | 0.51 | % | | 0.52 | % | | | 0.52 | % |
| Allowance for credit losses on loans to nonperforming loans | | Allowance for credit losses on loans to nonperforming loans | | 722.62 | % | | 566.91 | % | | | 1,450.81 | % |
| Nonperforming assets to total assets | Nonperforming assets to total assets | | 0.05 | % | | 0.07 | % | | | | 0.05 | % | | 0.01 | % | Nonperforming assets to total assets | | 0.06 | % | | 0.08 | % | | | 0.03 | % |
| Net recoveries to average loans | | — | % | | — | % | | | | — | % | | (0.00) | % | |
| Net charge-offs to average loans | | Net charge-offs to average loans | | — | % | | — | % | | | — | % |
| Capital Ratios | Capital Ratios | | | | Capital Ratios | | | |
| Tier 1 leverage ratio | Tier 1 leverage ratio | | 9.99 | % | | 10.20 | % | | | | 9.99 | % | | 9.63 | % | Tier 1 leverage ratio | | 9.73 | % | | 9.72 | % | | | 10.27 | % |
| Total risk-based capital ratio | Total risk-based capital ratio | | 19.20 | % | | 19.12 | % | | | | 19.20 | % | | 18.98 | % | Total risk-based capital ratio | | 19.50 | % | | 19.14 | % | | | 19.37 | % |
| (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 loan 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. | |
(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. | | (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 (“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 statements for the year ended December 31, 2021,2022, included 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 toThe Company adopted the Jumpstart Our Business Startups Act (the "JOBS Act"current expected credit loss ("CECL"), 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 allowance methodology on January 1, 2023. The
elected not to opt outACL on loans represents the Company’s estimate 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. Our eligibility as an emerging growth company under the JOBS Act is expected to expire on December 31, 2022, which is the last day of the fiscal year following the five year anniversary from the date of our initial public offering.
Allowance for Loan Losses
The allowance for loan losses is provided for probable incurredlifetime 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 can be reduced by loan principal charge-offs, net of recoveries. The allowance can also be reduced by recapturing provisions when management determines that the allowanceprovide for loan losses is more than adequate to absorb the probable incurredexpected lifetime credit losses in the portfolio. The allowance is based on management’s assessment of various factors including, but not limited to, the natureportfolio 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 portfolio, previous loss experience, knownis confirmed. Recoveries will never exceed the aggregate of amounts previously charged-off.
While management estimates the ACL balance using relevant available information, from internal and inherent risks in the portfolio, the estimated value of underlying collateral, information that may affect a borrower’s abilityexternal sources, relating to repay,past events, current economic conditions and the results of our ongoing reviews of the portfolio. 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.
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. In addition, we utilize a number of economic variables in estimating the allowance, with the most significant drivers being unemployment levels and housing prices. Material changes in these economic variables may result in incremental changes in the estimated level of our allowance. 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. The Company currently utilizes the incurred loss methodology to determine its allowance for loan losses. The Company expects to adopt the current expected credit loss ("CECL") allowance methodology on January 1, 2023. We estimate that the adoption of the CECL standard would not currently result in a material change in our allowance for credit losses, which, if necessary, will be recorded as a cumulative-effect adjustment to retained earnings, net of tax as of January 1, 2023. The ultimate impact will depend on the portfolio and forecasts when the standard is adopted.
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. 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 debt securities available for sale are recorded in our consolidated statements of financial condition and comprehensive income (loss) while changes in the fair value of equity securities, loans held for sale and derivatives are recorded in the consolidated statements of financial condition and in the unaudited consolidated statements of 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, the portion of any unrealized
loss attributable to a decline in the credit quality of the issuer, 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationOperations contain financial measures that are not measures recognized under GAAP and therefore, are considered non‐GAAPnon-GAAP financial measures, including pre-tax, pre-provision net earnings, efficiency ratio, tangible assets, tangible stockholders' equity and tangible book value per share.
Our management uses these non‐GAAPnon-GAAP financial measures in their analysis of the Company’s performance, financial condition and the efficiency of its operations. We believe that these non‐GAAPnon-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods and other companies, as well as demonstrate the effects of significant changes in the current period. We also believe that investors find these non‐GAAPnon-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. You should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons.
The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
| | | For the Three Months Ended | | | For the Nine Months Ended | | As of or For the Three Months Ended |
| (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | June 30,
2022 | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | | March 31,
2022 |
| Pre-tax, Pre-provision Net Earnings | Pre-tax, Pre-provision Net Earnings | | | | | | | | | Pre-tax, Pre-provision Net Earnings | | | | | | |
| Income before taxes | Income before taxes | $ | 29,867 | | | $ | 32,009 | | | | $ | 93,956 | | | $ | 91,065 | | Income before taxes | $ | 19,082 | | | $ | 19,781 | | | | $ | 32,080 | |
| Plus: Provision for (reversal of) loan losses | 500 | | | 2,500 | | | | 500 | | | (9,000) | | |
| Plus: (Reversal of) provision for credit losses | | Plus: (Reversal of) provision for credit losses | (795) | | | 650 | | | | (2,500) | |
| Pre-tax, pre-provision net earnings | Pre-tax, pre-provision net earnings | $ | 30,367 | | | $ | 34,509 | | | | $ | 94,456 | | | $ | 82,065 | | Pre-tax, pre-provision net earnings | $ | 18,287 | | | $ | 20,431 | | | | $ | 29,580 | |
| Efficiency Ratio | Efficiency Ratio | | | | | | | | | Efficiency Ratio | | | | | | |
| Noninterest expense (numerator) | Noninterest expense (numerator) | $ | 15,376 | | | $ | 13,325 | | | | $ | 44,213 | | | $ | 43,919 | | Noninterest expense (numerator) | $ | 16,934 | | | $ | 19,814 | | | | $ | 15,512 | |
| Net interest income | Net interest income | $ | 45,474 | | | $ | 47,472 | | | | 137,980 | | | 124,734 | | Net interest income | $ | 33,986 | | | $ | 39,274 | | | | 45,034 | |
| Noninterest income | Noninterest income | 269 | | | 362 | | | | 689 | | | 1,250 | | Noninterest income | 1,235 | | | 971 | | | | 58 | |
| Operating revenue (denominator) | Operating revenue (denominator) | $ | 45,743 | | | $ | 47,834 | | | | $ | 138,669 | | | $ | 125,984 | | Operating revenue (denominator) | $ | 35,221 | | | $ | 40,245 | | | | $ | 45,092 | |
| Efficiency ratio | Efficiency ratio | 33.61 | % | | 27.86 | % | | | 31.88 | % | | 34.86 | % | Efficiency ratio | 48.08 | % | | 49.23 | % | | | 34.40 | % |
| | Tangible Book Value Per Share | | Tangible Book Value Per Share | | | | | | |
| Total assets | | Total assets | $ | 8,302,457 | | | $ | 7,974,632 | | | | $ | 7,260,826 | |
| Less: Goodwill | | Less: Goodwill | (3,297) | | | (3,297) | | | | (3,297) | |
| Tangible assets | | Tangible assets | 8,299,160 | | | 7,971,335 | | | | 7,257,529 | |
| Less: Total liabilities | | Less: Total liabilities | (7,606,296) | | | (7,292,096) | | | | (6,592,826) | |
| Tangible stockholders' equity (numerator) | | Tangible stockholders' equity (numerator) | $ | 692,864 | | | $ | 679,239 | | | | $ | 664,703 | |
| Period end shares outstanding (denominator) | | Period end shares outstanding (denominator) | 51,030,877 | | | 51,073,272 | | | | 51,403,914 | |
| Tangible book value per share | | Tangible book value per share | $ | 13.58 | | | $ | 13.30 | | | | $ | 12.93 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| (Dollars in thousands, except per share data) | September 30,
2022 | | June 30,
2022 | | September 30,
2021 |
| Tangible Book Value Per Share | | | | | |
| Total assets | $ | 7,921,584 | | | $ | 7,530,516 | | | $ | 7,220,786 | |
| Less: Goodwill | (3,297) | | | (3,297) | | | (3,297) | |
| Tangible assets | 7,918,287 | | | 7,527,219 | | | 7,217,489 | |
| Less: Total liabilities | (7,244,915) | | | (6,858,894) | | | (6,566,850) | |
| Tangible stockholders' equity (numerator) | $ | 673,372 | | | $ | 668,325 | | | $ | 650,639 | |
| Period end shares outstanding (denominator) | 51,074,605 | | | 51,063,498 | | | 51,682,604 | |
| Tangible book value per share | $ | 13.18 | | | $ | 13.09 | | | $ | 12.59 | |
Results of Operations - Three Months Ended September 30, 2022March 31, 2023 and June 30,December 31, 2022
Overview
For the three months ended September 30, 2022,March 31, 2023, our net income was $21.0$13.4 million as compared to $22.6$13.7 million for the three months ended June 30,December 31, 2022. The decrease of $1.6 million,$247 thousand, or 6.9%1.8%, was attributable to an increase in
noninterest expense of $2.1 million and a decrease in net interest income of $2.0$5.3 million, partially offset by a decrease in noninterest expense of $2.9 million and a decrease in the provision for loancredit losses of $2.0$1.4 million. Pre-tax, pre-provision net earnings decreased by $4.1$2.1 million, or 12.0%10.5%, for the three months ended September 30, 2022March 31, 2023 as compared to the linked quarter.
Net Interest Income
Net interest income decreased by $2.0$5.3 million, or 4.2%13.5%, to $45.5$34.0 million for the three months ended September 30, 2022March 31, 2023 from $47.5$39.3 million for the prior quarter due to higher interest expense on our deposit portfolio and FHLB advances, partially offset by higher interest income on loans and investments.cash and cash equivalents.
Our net interest margin was 2.42%1.72% during the three months ended September 30, 2022March 31, 2023 compared to 2.62%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 during periods of rising interest rates. During the thirdfirst quarter, the cost of our interest bearing liabilities increased by 4962 basis points primarily due to an increase in the cost of our deposits and FHLB advances, while the yield on our interest earning assets increased by 2522 basis points primarily due to an increase in our loan and investment yields.yield. Our net interest spread in the thirdfirst quarter was 2.30%1.45%, decreasing by 2440 basis points as compared to the linked 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 September 30, 2022March 31, 2023 and June 30,December 31, 2022. The average balances are daily averages.
| | | For the Three Months Ended | | For the Three Months Ended |
| | September 30, 2022 | | June 30, 2022 | | March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Interest Inc/Exp | | Yield/Rate | | Average Balance | | Interest Inc/Exp | | Yield/Rate | (Dollars in thousands) | | Average Balance | | Interest Inc/Exp | | Yield/Rate | | Average Balance | | Interest Inc/Exp | | Yield/Rate |
| Interest-Earning Assets | Interest-Earning Assets | | | | | | | | | | | | | Interest-Earning Assets | | | | | | | | | | | | |
| Multifamily residential | Multifamily residential | | $ | 4,448,881 | | | $ | 41,267 | | | 3.71 | % | | $ | 4,318,879 | | | $ | 39,893 | | | 3.69 | % | Multifamily residential | | $ | 4,521,440 | | | $ | 48,961 | | | 4.33 | % | | $ | 4,518,952 | | | $ | 45,682 | | | 4.04 | % |
| Single family residential | Single family residential | | 2,097,312 | | | 18,660 | | | 3.56 | % | | 1,961,812 | | | 14,430 | | | 2.94 | % | Single family residential | | 2,283,753 | | | 22,991 | | | 4.03 | % | | 2,229,808 | | | 22,737 | | | 4.08 | % |
| Commercial real estate | Commercial real estate | | 185,017 | | | 2,137 | | | 4.62 | % | | 189,705 | | | 2,256 | | | 4.76 | % | Commercial real estate | | 169,268 | | | 2,147 | | | 5.07 | % | | 175,254 | | | 2,076 | | | 4.74 | % |
| Construction and land | Construction and land | | 19,761 | | | 302 | | | 6.06 | % | | 25,784 | | | 333 | | | 5.18 | % | Construction and land | | 23,665 | | | 505 | | | 8.65 | % | | 20,612 | | | 399 | | | 7.68 | % |
Total loans (1) | Total loans (1) | | 6,750,971 | | | 62,366 | | | 3.70 | % | | 6,496,180 | | | 56,912 | | | 3.50 | % | Total loans (1) | | 6,998,126 | | | 74,604 | | | 4.26 | % | | 6,944,626 | | | 70,894 | | | 4.08 | % |
| Investment securities | Investment securities | | 679,283 | | | 4,127 | | | 2.43 | % | | 650,514 | | | 2,863 | | | 1.76 | % | Investment securities | | 614,527 | | | 5,488 | | | 3.57 | % | | 639,137 | | | 5,082 | | | 3.18 | % |
| Cash and cash equivalents | Cash and cash equivalents | | 100,690 | | | 547 | | | 2.16 | % | | 101,873 | | | 198 | | | 0.78 | % | Cash and cash equivalents | | 291,706 | | | 3,303 | | | 4.59 | % | | 215,060 | | | 1,964 | | | 3.62 | % |
| Total interest-earning assets | Total interest-earning assets | | 7,530,944 | | | 67,040 | | | 3.56 | % | | 7,248,567 | | | 59,973 | | | 3.31 | % | Total interest-earning assets | | 7,904,359 | | | 83,395 | | | 4.22 | % | | 7,798,823 | | | 77,940 | | | 4.00 | % |
Noninterest-earning assets (2) | Noninterest-earning assets (2) | | 128,677 | | | 109,408 | | | Noninterest-earning assets (2) | | 149,670 | | | 154,605 | | |
| Total assets | Total assets | | $ | 7,659,621 | | | $ | 7,357,975 | | | Total assets | | $ | 8,054,029 | | | $ | 7,953,428 | | |
| Interest-Bearing Liabilities | Interest-Bearing Liabilities | | | | | | Interest-Bearing Liabilities | | | | | |
| Transaction accounts | Transaction accounts | | $ | 168,780 | | | 96 | | | 0.22 | % | | $ | 175,092 | | | 88 | | | 0.20 | % | Transaction accounts | | $ | 150,429 | | | 160 | | | 0.43 | % | | $ | 170,867 | | | 151 | | | 0.35 | % |
| Money market demand accounts | Money market demand accounts | | 3,005,468 | | | 7,416 | | | 0.97 | % | | 3,050,811 | | | 3,966 | | | 0.51 | % | Money market demand accounts | | 2,271,018 | | | 13,956 | | | 2.46 | % | | 2,622,015 | | | 12,271 | | | 1.83 | % |
| Time deposits | Time deposits | | 2,322,643 | | | 6,573 | | | 1.11 | % | | 2,196,455 | | | 2,859 | | | 0.51 | % | Time deposits | | 3,268,933 | | | 23,491 | | | 2.88 | % | | 2,973,058 | | | 17,043 | | | 2.25 | % |
| Total deposits | Total deposits | | 5,496,891 | | | 14,085 | | | 1.00 | % | | 5,422,358 | | | 6,913 | | | 0.50 | % | Total deposits | | 5,690,380 | | | 37,607 | | | 2.65 | % | | 5,765,940 | | | 29,465 | | | 2.00 | % |
| FHLB advances | FHLB advances | | 1,071,300 | | | 5,346 | | | 1.98 | % | | 863,685 | | | 3,628 | | | 1.68 | % | FHLB advances | | 1,327,863 | | | 9,262 | | | 2.83 | % | | 1,129,382 | | | 6,833 | | | 2.40 | % |
| Junior subordinated debentures | Junior subordinated debentures | | 61,857 | | | 560 | | | 3.59 | % | | 61,857 | | | 385 | | | 2.50 | % | Junior subordinated debentures | | 61,857 | | | 966 | | | 6.33 | % | | 61,857 | | | 794 | | | 5.09 | % |
| Senior debt | Senior debt | | 94,734 | | | 1,575 | | | 6.65 | % | | 94,703 | | | 1,575 | | | 6.65 | % | Senior debt | | 94,796 | | | 1,574 | | | 6.64 | % | | 94,765 | | | 1,574 | | | 6.64 | % |
| Total interest-bearing liabilities | Total interest-bearing liabilities | | 6,724,782 | | | 21,566 | | | 1.26 | % | | 6,442,603 | | | 12,501 | | | 0.77 | % | Total interest-bearing liabilities | | 7,174,896 | | | 49,409 | | | 2.77 | % | | 7,051,944 | | | 38,666 | | | 2.15 | % |
| Noninterest-bearing deposit accounts | Noninterest-bearing deposit accounts | | 164,988 | | | 165,799 | | | Noninterest-bearing deposit accounts | | 86,967 | | | 119,589 | | |
| Other noninterest-bearing liabilities | Other noninterest-bearing liabilities | | 88,323 | | | 76,412 | | | Other noninterest-bearing liabilities | | 100,627 | | | 101,234 | | |
| Total liabilities | Total liabilities | | 6,978,093 | | | 6,684,814 | | | Total liabilities | | 7,362,490 | | | 7,272,767 | | |
| Total stockholders' equity | Total stockholders' equity | | 681,528 | | | 673,161 | | | Total stockholders' equity | | 691,539 | | | 680,661 | | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | | $ | 7,659,621 | | | $ | 7,357,975 | | | Total liabilities and stockholders' equity | | $ | 8,054,029 | | | $ | 7,953,428 | | |
| Net interest spread (3) | Net interest spread (3) | | 2.30 | % | | 2.54 | % | Net interest spread (3) | | 1.45 | % | | 1.85 | % |
Net interest income/margin (4) | Net interest income/margin (4) | | $ | 45,474 | | | 2.42 | % | | $ | 47,472 | | | 2.62 | % | 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 $2.4$1.4 million and $4.0 million for both the three months ended September 30, 2022March 31, 2023 and June 30, 2022, respectively.December 31, 2022.
(2) Noninterest-earning assets includes the allowance for loan losses.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.
Interest rates and operating interest differential. Increases and decreases in interest income and interest expense result from changes 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 prior 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 September 30 vs June 30, 2022 | | Three Months Ended March 31, 2023 vs December 31, 2022 |
| | Variance Due To | | Variance Due To |
| (Dollars in thousands) | (Dollars in thousands) | Volume | | Yield/Rate | | Total | (Dollars in thousands) | Volume | | Yield/Rate | | Total |
| Interest-Earning Assets | Interest-Earning Assets | | | | | | Interest-Earning Assets | | | | | |
| Multifamily residential | Multifamily residential | $ | 1,164 | | | $ | 210 | | | $ | 1,374 | | Multifamily residential | $ | 25 | | | $ | 3,254 | | | $ | 3,279 | |
| Single family residential | Single family residential | 1,044 | | | 3,186 | | | 4,230 | | Single family residential | 539 | | | (285) | | | 254 | |
| Commercial real estate | Commercial real estate | (55) | | | (64) | | | (119) | | Commercial real estate | (72) | | | 143 | | | 71 | |
| Construction and land | Construction and land | (84) | | | 53 | | | (31) | | Construction and land | 57 | | | 49 | | | 106 | |
| Total loans | Total loans | 2,069 | | | 3,385 | | | 5,454 | | Total loans | 549 | | | 3,161 | | | 3,710 | |
| Investment securities | Investment securities | 132 | | | 1,132 | | | 1,264 | | Investment securities | (201) | | | 607 | | | 406 | |
| Cash and cash equivalents | Cash and cash equivalents | (2) | | | 351 | | | 349 | | Cash and cash equivalents | 764 | | | 575 | | | 1,339 | |
| Total interest-earning assets | Total interest-earning assets | 2,199 | | | 4,868 | | | 7,067 | | Total interest-earning assets | 1,112 | | | 4,343 | | | 5,455 | |
| Interest-Bearing Liabilities | Interest-Bearing Liabilities | | | | | | Interest-Bearing Liabilities | | | | | |
| Transaction accounts | Transaction accounts | (2) | | | 10 | | | 8 | | Transaction accounts | (20) | | | 29 | | | 9 | |
| Money market demand accounts | Money market demand accounts | (58) | | | 3,508 | | | 3,450 | | Money market demand accounts | (1,841) | | | 3,526 | | | 1,685 | |
| Time deposits | Time deposits | 175 | | | 3,539 | | | 3,714 | | Time deposits | 1,688 | | | 4,760 | | | 6,448 | |
| Total deposits | Total deposits | 115 | | | 7,057 | | | 7,172 | | Total deposits | (173) | | | 8,315 | | | 8,142 | |
| FHLB advances | FHLB advances | 986 | | | 732 | | | 1,718 | | FHLB advances | 1,203 | | | 1,226 | | | 2,429 | |
| Junior subordinated debentures | Junior subordinated debentures | — | | | 175 | | | 175 | | Junior subordinated debentures | — | | | 172 | | | 172 | |
| Senior debt | Senior debt | — | | | — | | | — | | Senior debt | — | | | — | | | — | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 1,101 | | | 7,964 | | | 9,065 | | Total interest-bearing liabilities | 1,030 | | | 9,713 | | | 10,743 | |
| | Net Interest Income | Net Interest Income | $ | 1,098 | | | $ | (3,096) | | | $ | (1,998) | | Net Interest Income | $ | 82 | | | $ | (5,370) | | | $ | (5,288) | |
Total interest income increased by $7.1$5.5 million, or 11.8%7.0%, for the three months ended September 30, 2022March 31, 2023 as compared to the prior quarter. This increase was primarily due to a $5.5$3.7 million improvement in interest income earned on loans resulting from a $254.8 million and 20an 18 basis point increase in the average balance and yield on our loans respectively. The increase in loan volumes resulted from strong loan originations and the slowing of loan prepayment speeds, while loan yield increases were primarily due to higher income earned on our interest rate swaps and the recent origination of loans at higher current rates relative to the existing coupon on our loan portfolio. Additionally,portfolio, as well as higher income earned on our interest rate swaps. Interest income on investments increased $1.3 million primarily duewas also positively impacted by an increase in the average balance and yield on investmentscash and cash equivalents of 67$76.6 million and 97 basis points, respectively, compared to the linked quarter. The increase in average balance was due to risingour purposeful plan to increase on-balance sheet liquidity, while the increase in average yield was due to the general rise in interest rates. At September 30, 2022, 43% of our investments were in their floating rate period and had a weighted average repricing frequency of 2.9 months.
The volume of new loan originations totaled $530.1$90.3 million and $733.0$281.4 million for the three months ended September 30,March 31, 2023 and December 31, 2022, respectively. Declining loan originations are primarily attributable to slowing demand resulting from the general rise in interest rates and June 30, 2022, respectively.our desire to achieve a risk adjusted return on new loan volume in light of the elevated cost of new funding. The weighted average rate on new loans for the three months ended September 30, 2022March 31, 2023 was 4.65%6.42% as compared to 3.55%5.68% for the linked quarter. The increase in the average coupon on originations was primarily due to the rising interest rate environment. Loan prepayment speeds were 15.4%4.2% and 24.0%5.7% during the three months ended September 30, 2022March 31, 2023 and June 30,December 31, 2022, respectively. The decrease incontinued lower prepayment speeds waswere due to rising market interest rates, which impactedcontinued to impact purchase and refinancing activity during the current quarter.activity. The weighted average rate on loan payoffs/curtailments during the three months ended September 30, 2022March 31, 2023 was 3.91%4.43% as compared to 3.86%4.19% for the prior quarter.
Total interest expense increased $9.1$10.7 million, or 72.5%27.8%, to $21.6$49.4 million, for the three months ended September 30, 2022March 31, 2023 from $12.5$38.7 million for the prior quarter. Interest expense on deposits increased $7.2$8.1 million, to $14.1$37.6 million, for the three months ended September 30, 2022March 31, 2023 from $6.9$29.5 million for the prior quarter. The increase was primarily due to a 5065 basis point increase in the cost of interest-bearing deposits predominantly due to rate increases in both retail and brokered deposits. Additionally, interest expense on FHLB advances increased $1.7$2.4 million compared to the prior quarter due to an increase in the average balance and cost of advances of $207.6$198.5 million and 3043 basis points, respectively. We generally use bothThe increase in FHLB advances was primarily utilized to offset declines in retail deposits and FHLB advances to fund net loan growth.supplement our liquidity during the quarter. We also use long-term FHLB advances as a hedge of interest rate risk, as we can strategically control the duration of those funds. A discussion of instruments used to mitigate interest rate risk can be found under Part II - Item 7A. ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’
Provision for LoanCredit Losses
During the three months ended September 30, 2022 and June 30, 2022,March 31, 2023, the Company recordedrecaptured loan loss provisions of $500$679 thousand, and $2.5 million, respectively.compared to recognizing loan loss provisions of $650 thousand during the linked quarter. The reversal during the current quarter was predominantly due to the elimination of a specific reserve previously established on a collateral dependent loan. The provision recorded during the linked quarter was primarily related to loan growthgrowth. The Company adopted the CECL methodology on January 1, 2023 resulting in a decrease in the ACL on loans of $92 thousand. The CECL methodology was adopted using the modified retrospective method and results for reporting periods beginning January 1, 2023 are reported under the CECL methodology, while the prior quarter provision was relatedperiod results continue to loan growth and an increase in classified loan balances.be reported under previously applicable GAAP. Our allowance for loan lossesACL on loans as a percentage of total loans was 0.53%0.51% at September 30, 2022March 31, 2023 compared to 0.54% and 0.56%0.52% at June 30, 2022 and December 31, 2021, respectively. The allowance for loan losses and the provisions for loan losses recognized were determined based on the incurred loss methodology. The Company expects to adopt the CECL allowance methodology on January 1, 2023.2022.
Nonperforming assets totaled $3.8$5.0 million, or 0.05%0.06% of total assets, at September 30, 2022March 31, 2023 compared to $2.3$6.5 million, or 0.03%0.08% of total assets, at December 31, 2021. Criticized2022. The decrease in nonperforming assets was primarily due to two single family residential loans which includes loans graded Special Mention and of greater risk, were $24.1 million at September 30, 2022 comparedreturning to $16.7 million at December 31, 2021.performing status during the quarter. Classified loans, which includes loans graded Substandard and of greater risk, totaled $20.7$18.4 million and $12.1$18.9 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The increase in criticizedCriticized loans, which includes loans graded Special Mention and classified loan balances was primarily attributed to isolated credit related downgrades of several loans, and are not thought to represent any particular declining credit trends in our loan portfolio. Aswere $21.0 million at March 31, 2023 compared to the linked quarter, classified loans decreased by $1.8$22.3 million declining as a result of the payoff of two adversely graded loans during the current quarter.at December 31, 2022. The Company's exposure to nonresidential commercial real estate remains limited, totaling $182.0$168.0 million, or 2.7%2.4% of our loan portfolio, at the end of the current quarter. See further detail of our nonresidential commercial real estate below in this item under "Loan Portfolio Composition - Commercial real estate loans".
Noninterest Income
Noninterest income decreasedincreased by $93$264 thousand, or 25.7%27.2%, to $269 thousand$1.2 million for the three months ended September 30, 2022March 31, 2023 from $362$971 thousand for the prior quarter. The following table presents the major components of our noninterest income:
| | | For the Three Months Ended | | For the Three Months Ended |
| (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | June 30,
2022 | | $ Increase (Decrease) | | % Increase (Decrease) | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Income | Noninterest Income | | | | | | | | Noninterest Income | | | | | | | |
| | FHLB dividends | FHLB dividends | $ | 363 | | | $ | 342 | | | $ | 21 | | | 6.1 | % | FHLB dividends | $ | 577 | | | $ | 529 | | | $ | 48 | | | 9.1 | % |
| Fee income | Fee income | 122 | | | 292 | | | (170) | | | (58.2) | % | Fee income | 138 | | | 110 | | | 28 | | | 25.5 | % |
| Other | Other | (216) | | | (272) | | | 56 | | | (20.6) | % | Other | 520 | | | 332 | | | 188 | | | 56.6 | % |
| Total noninterest income | Total noninterest income | $ | 269 | | | $ | 362 | | | $ | (93) | | | (25.7) | % | Total noninterest income | $ | 1,235 | | | $ | 971 | | | $ | 264 | | | 27.2 | % |
The decreaseincrease in noninterest income for the quarter ended September 30, 2022March 31, 2023 compared to the quarter ended June 30,December 31, 2022, was primarily attributable to declinesan increase in the fair value of equity securities and deposit related fee income, partially offset by an increaseduring the current quarter compared to the prior quarter. Changes in income earned on Community Reinvestment Act ("CRA") investments.fair value are primarily attributable to changes in market interest rates.
Noninterest Expense
Noninterest expense increased $2.1decreased $2.9 million, or 15.4%14.5%, to $15.4$16.9 million for the three months ended September 30, 2022March 31, 2023 from $13.3$19.8 million for the three months ended June 30,December 31, 2022. The following table presents the major components of our noninterest expense:
| | | For the Three Months Ended | | For the Three Months Ended |
| (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | June 30,
2022 | | $ Increase (Decrease) | | % Increase (Decrease) | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Expense | Noninterest Expense | | | | | | | | Noninterest Expense | | | | | | | |
| Compensation and related benefits | Compensation and related benefits | $ | 8,857 | | | $ | 7,070 | | | $ | 1,787 | | | 25.3 | % | Compensation and related benefits | $ | 10,671 | | | $ | 12,039 | | | $ | (1,368) | | | (11.4) | % |
| Deposit insurance premium | Deposit insurance premium | 508 | | | 479 | | | 29 | | | 6.1 | % | Deposit insurance premium | 884 | | | 551 | | | 333 | | | 60.4 | % |
| Professional and regulatory fees | Professional and regulatory fees | 639 | | | 634 | | | 5 | | | 0.8 | % | Professional and regulatory fees | 436 | | | 629 | | | (193) | | | (30.7) | % |
| Occupancy | Occupancy | 1,199 | | | 1,197 | | | 2 | | | 0.2 | % | Occupancy | 1,184 | | | 1,191 | | | (7) | | | (0.6) | % |
| Depreciation and amortization | Depreciation and amortization | 806 | | | 746 | | | 60 | | | 8.0 | % | Depreciation and amortization | 649 | | | 794 | | | (145) | | | (18.3) | % |
| Data processing | Data processing | 1,044 | | | 1,007 | | | 37 | | | 3.7 | % | Data processing | 862 | | | 1,050 | | | (188) | | | (17.9) | % |
| Marketing | Marketing | 1,211 | | | 525 | | | 686 | | | 130.7 | % | Marketing | 739 | | | 1,318 | | | (579) | | | (43.9) | % |
| Merger costs | | Merger costs | 553 | | | 1,090 | | | (537) | | | (49.3) | % |
| Other expenses | Other expenses | 1,112 | | | 1,667 | | | (555) | | | (33.3) | % | Other expenses | 956 | | | 1,152 | | | (196) | | | (17.0) | % |
| Total noninterest expense | Total noninterest expense | $ | 15,376 | | | $ | 13,325 | | | $ | 2,051 | | | 15.4 | % | Total noninterest expense | $ | 16,934 | | | $ | 19,814 | | | $ | (2,880) | | | (14.5) | % |
The increasedecrease in noninterest expense during the quarter ended September 30, 2022March 31, 2023 compared to the linked quarter was predominantly due to a $1.8$1.4 million increasedecrease in compensation costs primarily due to a $2.9 million decrease in salaries and related benefits related to a reduction in lending workforce at the end of 2022, partially offset by a $1.6 million decline in capitalized loan origination costs due to lower loan origination volume. Additionally,Noninterest expense was also positively impacted by a $579 thousand decrease in marketing expense increased $686 thousandsexpenses due to additionallower costs incurred related to our specialty deposit gathering efforts and a $537 thousand decline in costs incurred in connection with our deposit gathering efforts. These increases were partially offset by a decrease in other expenses primarily duepreviously announced merger with Washington Federal, Inc. ("WAFD") compared to a decline in down payment assistance costs associated with our program to support home ownership for low-to-moderate income borrowersthe prior quarter.
Income Tax Expense
For the three months ended September 30, 2022,March 31, 2023, we recorded income tax expense of $8.9$5.6 million as compared to $9.4$6.1 million for the prior quarter with effective tax rates of 29.7%29.6% and 29.5%30.8%, respectively.
Results of Operations - NineThree Months Ended September 30,March 31, 2023 and 2022 and 2021
Overview
For the ninethree months ended September 30, 2022,March 31, 2023, our net income was $66.5$13.4 million as compared to $64.4$22.9 million for the ninethree months ended September 30, 2021.March 31, 2022. The increasedecrease of $2.1$9.5 million, or 3.3%41.4%, was primarily attributable to an increasea decrease of $13.2$11.0 million in net interest income partially offset by an increase of $9.5 million in the provision for loan losses as compared to the same period last year. Pre-tax, pre-provision net earnings increaseddecreased by $12.4$11.3 million, or 15.1%38.2%, for the ninethree months ended September 30, 2022March 31, 2023 as compared to the same period last year.
Net Interest Income
Net interest income increaseddecreased by $13.2$11.0 million, or 10.6%24.5%, to $138.0$34.0 million for the ninethree months ended September 30, 2022March 31, 2023 from $124.7$45.0 million for the same period last year due to higher interest income on loans and investments and lower interest expense on deposits and FHLB advances, partially offset by higher interest expenseincome on FHLB advances.loans, investments and cash and cash equivalents.
Net interest margin for the ninethree months ended September 30, 2022March 31, 2023 was 2.52%1.72% compared to 2.34%2.54% for the same period last year. The increasedecrease in our margin was primarily related to a 16207 basis point increase in the cost of our interest-bearing liabilities, partially offset by a 106 basis point increase in the yield of our interest-earning assets.
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 ninethree months ended September 30, 2022March 31, 2023 and 2021.2022. The average balances are daily averages.
| | | For the Nine Months Ended September 30, | | For the Three Months Ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| (Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Interest Inc/Exp | | Yield/Rate | | Average Balance | | Interest Inc/Exp | | Yield/Rate | (Dollars in thousands) | | Average Balance | | Interest Inc/Exp | | Yield/Rate | | Average Balance | | Interest Inc/Exp | | Yield/Rate |
| Interest-Earning Assets | Interest-Earning Assets | | | | | | | | | | | | | Interest-Earning Assets | | | | | | | | | | | | |
| Multifamily residential | Multifamily residential | | $ | 4,327,355 | | | $ | 120,306 | | | 3.71 | % | | $ | 4,198,616 | | | $ | 115,542 | | | 3.67 | % | Multifamily residential | | $ | 4,521,440 | | | $ | 48,961 | | | 4.33 | % | | $ | 4,211,697 | | | $ | 39,146 | | | 3.72 | % |
| Single family residential | Single family residential | | 1,976,356 | | | 45,115 | | | 3.04 | % | | 1,903,550 | | | 40,787 | | | 2.86 | % | Single family residential | | 2,283,753 | | | 22,991 | | | 4.03 | % | | 1,867,416 | | | 12,025 | | | 2.58 | % |
| Commercial real estate | Commercial real estate | | 189,499 | | | 6,597 | | | 4.64 | % | | 198,073 | | | 6,750 | | | 4.54 | % | Commercial real estate | | 169,268 | | | 2,147 | | | 5.07 | % | | 193,871 | | | 2,204 | | | 4.55 | % |
| Construction and land | Construction and land | | 21,960 | | | 893 | | | 5.44 | % | | 19,730 | | | 927 | | | 6.28 | % | Construction and land | | 23,665 | | | 505 | | | 8.65 | % | | 20,341 | | | 258 | | | 5.14 | % |
| Total loans (1) | Total loans (1) | | 6,515,170 | | | 172,911 | | | 3.54 | % | | 6,319,969 | | | 164,006 | | | 3.46 | % | Total loans (1) | | 6,998,126 | | | 74,604 | | | 4.26 | % | | 6,293,325 | | | 53,633 | | | 3.41 | % |
| Investment securities | Investment securities | | 660,069 | | | 9,290 | | | 1.88 | % | | 645,343 | | | 6,287 | | | 1.30 | % | Investment securities | | 614,527 | | | 5,488 | | | 3.57 | % | | 650,091 | | | 2,301 | | | 1.42 | % |
| Cash and cash equivalents | Cash and cash equivalents | | 118,452 | | | 812 | | | 0.92 | % | | 148,630 | | | 162 | | | 0.15 | % | Cash and cash equivalents | | 291,706 | | | 3,303 | | | 4.59 | % | | 153,370 | | | 66 | | | 0.17 | % |
| Total interest-earning assets | Total interest-earning assets | | 7,293,691 | | | 183,013 | | | 3.35 | % | | 7,113,942 | | | 170,455 | | | 3.19 | % | Total interest-earning assets | | 7,904,359 | | | 83,395 | | | 4.22 | % | | 7,096,786 | | | 56,000 | | | 3.16 | % |
| Noninterest-earning assets (2) | Noninterest-earning assets (2) | | 110,459 | | | 64,614 | | | Noninterest-earning assets (2) | | 149,670 | | | 92,904 | | |
| Total assets | Total assets | | $ | 7,404,150 | | | $ | 7,178,556 | | | Total assets | | $ | 8,054,029 | | | $ | 7,189,690 | | |
| Interest-Bearing Liabilities | Interest-Bearing Liabilities | | | | | | Interest-Bearing Liabilities | | | | | |
| Transaction accounts | Transaction accounts | | $ | 171,148 | | | 279 | | | 0.21 | % | | $ | 155,568 | | | 263 | | | 0.22 | % | Transaction accounts | | $ | 150,429 | | | 160 | | | 0.43 | % | | $ | 169,580 | | | 95 | | | 0.22 | % |
| Money market demand accounts | Money market demand accounts | | 3,007,085 | | | 14,603 | | | 0.64 | % | | 2,301,417 | | | 8,711 | | | 0.50 | % | Money market demand accounts | | 2,271,018 | | | 13,956 | | | 2.46 | % | | 2,964,527 | | | 3,222 | | | 0.43 | % |
| Time deposits | Time deposits | | 2,250,523 | | | 12,136 | | | 0.71 | % | | 2,849,131 | | | 19,916 | | | 0.92 | % | Time deposits | | 3,268,933 | | | 23,491 | | | 2.88 | % | | 2,231,471 | | | 2,703 | | | 0.49 | % |
| Total deposits | Total deposits | | 5,428,756 | | | 27,018 | | | 0.66�� | % | | 5,306,116 | | | 28,890 | | | 0.72 | % | Total deposits | | 5,690,380 | | | 37,607 | | | 2.65 | % | | 5,365,578 | | | 6,020 | | | 0.45 | % |
| FHLB advances | FHLB advances | | 899,838 | | | 12,071 | | | 1.79 | % | | 907,998 | | | 11,345 | | | 1.67 | % | FHLB advances | | 1,327,863 | | | 9,262 | | | 2.83 | % | | 761,119 | | | 3,097 | | | 1.65 | % |
| Junior subordinated debentures | Junior subordinated debentures | | 61,857 | | | 1,220 | | | 2.64 | % | | 61,857 | | | 763 | | | 1.65 | % | Junior subordinated debentures | | 61,857 | | | 966 | | | 6.33 | % | | 61,857 | | | 275 | | | 1.80 | % |
| Senior debt | Senior debt | | 94,704 | | | 4,724 | | | 6.65 | % | | 94,581 | | | 4,723 | | | 6.66 | % | Senior debt | | 94,796 | | | 1,574 | | | 6.64 | % | | 94,673 | | | 1,574 | | | 6.65 | % |
| Total interest-bearing liabilities | Total interest-bearing liabilities | | 6,485,155 | | | 45,033 | | | 0.92 | % | | 6,370,552 | | | 45,721 | | | 0.95 | % | Total interest-bearing liabilities | | 7,174,896 | | | 49,409 | | | 2.77 | % | | 6,283,227 | | | 10,966 | | | 0.70 | % |
| Noninterest-bearing deposit accounts | Noninterest-bearing deposit accounts | | 159,504 | | | 107,789 | | | Noninterest-bearing deposit accounts | | 86,967 | | | 147,533 | | |
| Other noninterest-bearing liabilities | Other noninterest-bearing liabilities | | 82,935 | | | 63,745 | | | Other noninterest-bearing liabilities | | 100,627 | | | 84,022 | | |
| Total liabilities | Total liabilities | | 6,727,594 | | | 6,542,086 | | | Total liabilities | | 7,362,490 | | | 6,514,782 | | |
| Total stockholders' equity | Total stockholders' equity | | 676,556 | | | 636,470 | | | Total stockholders' equity | | 691,539 | | | 674,908 | | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | | $ | 7,404,150 | | | $ | 7,178,556 | | | Total liabilities and stockholders' equity | | $ | 8,054,029 | | | $ | 7,189,690 | | |
| | Net interest spread (3) | Net interest spread (3) | | 2.43 | % | | 2.24 | % | Net interest spread (3) | | 1.45 | % | | 2.46 | % |
| Net interest income/margin (4) | Net interest income/margin (4) | | $ | 137,980 | | | 2.52 | % | | $ | 124,734 | | | 2.34 | % | Net interest income/margin (4) | | $ | 33,986 | | | 1.72 | % | | $ | 45,034 | | | 2.54 | % |
|
(1) Non-accrual loans and loans held for sale 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 $11.2$1.4 million and $15.0$4.8 million for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively.
(2) Noninterest-earning assets includes the allowance for loancredit losses.
(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 interest-earning assets.
Interest rates and operating interest differential. The following table shows the effect that changes in volume and average interest rates had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities during the periods indicated.
| | | Nine Months Ended September 30, 2022 vs 2021 | | Three Months Ended March 31, 2023 vs 2022 |
| | Variance Due To | | Variance Due To |
| (Dollars in thousands) | (Dollars in thousands) | Volume | | Yield/Rate | | Total | (Dollars in thousands) | Volume | | Yield/Rate | | Total |
| Interest-Earning Assets | Interest-Earning Assets | | | | | | Interest-Earning Assets | | | | | |
| Multifamily residential | Multifamily residential | $ | 3,514 | | | $ | 1,250 | | | $ | 4,764 | | Multifamily residential | $ | 3,039 | | | $ | 6,776 | | | $ | 9,815 | |
| Single family residential | Single family residential | 1,636 | | | 2,692 | | | 4,328 | | Single family residential | 3,114 | | | 7,852 | | | 10,966 | |
| Commercial real estate | Commercial real estate | (299) | | | 146 | | | (153) | | Commercial real estate | (295) | | | 238 | | | (57) | |
| Construction and land | Construction and land | 98 | | | (132) | | | (34) | | Construction and land | 48 | | | 199 | | | 247 | |
| Total loans | Total loans | 4,949 | | | 3,956 | | | 8,905 | | Total loans | 5,906 | | | 15,065 | | | 20,971 | |
| Investment securities | Investment securities | 147 | | | 2,856 | | | 3,003 | | Investment securities | (132) | | | 3,319 | | | 3,187 | |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | (41) | | | 691 | | | 650 | | Cash, cash equivalents and restricted cash | 109 | | | 3,128 | | | 3,237 | |
| Total interest-earning assets | Total interest-earning assets | 5,055 | | | 7,503 | | | 12,558 | | Total interest-earning assets | 5,883 | | | 21,512 | | | 27,395 | |
| Interest-Bearing Liabilities | Interest-Bearing Liabilities | | | | | | Interest-Bearing Liabilities | | | | | |
| Transaction accounts | Transaction accounts | 27 | | | (11) | | | 16 | | Transaction accounts | (12) | | | 77 | | | 65 | |
| Money market demand accounts | Money market demand accounts | 3,080 | | | 2,812 | | | 5,892 | | Money market demand accounts | (914) | | | 11,648 | | | 10,734 | |
| Time deposits | Time deposits | (3,731) | | | (4,049) | | | (7,780) | | Time deposits | 1,808 | | | 18,980 | | | 20,788 | |
| Total deposits | Total deposits | (624) | | | (1,248) | | | (1,872) | | Total deposits | 882 | | | 30,705 | | | 31,587 | |
| FHLB advances | FHLB advances | (101) | | | 827 | | | 726 | | FHLB advances | 3,145 | | | 3,020 | | | 6,165 | |
| Junior subordinated debentures | Junior subordinated debentures | — | | | 457 | | | 457 | | Junior subordinated debentures | — | | | 691 | | | 691 | |
| Senior debt | Senior debt | 7 | | | (6) | | | 1 | | Senior debt | — | | | — | | | — | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | (718) | | | 30 | | | (688) | | Total interest-bearing liabilities | 4,027 | | | 34,416 | | | 38,443 | |
| | Net Interest Income | Net Interest Income | $ | 5,773 | | | $ | 7,473 | | | $ | 13,246 | | Net Interest Income | $ | 1,856 | | | $ | (12,904) | | | $ | (11,048) | |
Total interest income increased by $12.6$27.4 million, or 7.4%48.9%, for the ninethree months ended September 30, 2022March 31, 2023 as compared to the same period last year. The increase was primarily due to growthan 85 basis point increase in loan yields and a $704.8 million increase in the average balance of loans of $195.2loans. The increase in loan yields was attributable to an $8.3 million during the period,increase in interest income earned on our interest rate swaps as well as an 8 basis point increaseloans originated in loan yields.the past twelve months at increasing interest rates. The average balance of loans benefited fromincreased due to strong prior year loan origination volumesoriginations and a gradual slowing of prepayment speeds as compared to the same period last year, while loan yields improved as a result of a $10.7 million improvement in the earnings on our swaps, partially offset by the prepayment of higher yielding loans, which, prior to this quarter, were generally being replaced by loans at lower interest rates.speeds. Additionally, interest income on investments and cash and cash equivalents increased $3.0$3.1 million and $3.2 million, respectively, primarily due to a 58215 basis point and a 442 basis point, respectively, increase in yield compared to the same period last year due to rising market interest rates. As discussed above, at September 30, 2022, 43%At March 31, 2023, over 63% of our investments were in theiravailable for sale securities portfolio consisted of floating rate period and had a weightedsecurities with an average repricing frequencyperiod of 2.9approximately 14 months.
The volume of new loans originated totaled $1.8 billion$90.3 million and $1.6 billion$568.9 million for the ninethree months ended September 30,March 31, 2023 and 2022, respectively. The decline in loan originations was primarily attributable to slowing demand resulting from the general rise in interest rates and 2021, respectively.our desire to achieve a risk adjusted return on new loan volume in light of the elevated cost of new funding. The weighted average interest rate on new loans for the ninethree months ended September 30, 2022March 31, 2023 was 3.74%6.42% as compared to 3.34%3.14% for the same period last year. DuringThe increase in the nine months ended September 30, 2021, we purchased a pool of single family loans, whichaverage coupon on originations was a strategic responseprimarily due to continued elevated loan prepayments. This purchase is excluded from the total volume of new loans originated discussed above.rising interest rate environment. Loan prepayment speeds were 22.0%4.2% and 27.1%26.2% during the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. The decrease in prepayment speeds was due to rising market interest rates, which impactedslowed purchase and refinancing activity during the current year to dateyear-to-date period. The weighted average rate on loan payoffs/curtailments during the ninethree months ended September 30, 2022March 31, 2023 was 3.81%4.43% as compared to 3.95%3.70% for the same period last year.
Total interest expense decreased $688 thousand,increased $38.4 million, or 1.5%350.6%, to $45.0$49.4 million for the ninethree months ended September 30, 2022March 31, 2023 from $45.7$11.0 million for the same period last year. Interest expense on deposits decreased $1.9increased $31.6 million primarily due to the cost of interest-bearing deposits decreasing 6increasing 220 basis points. The decrease in our cost of interest-bearing deposits during the nine months ended September 30, 2022 compared to the same period last year was predominantlypoints due to the maturity of time deposits during the latter half of 2021 that repriced to lowergeneral rise in market interest rates at that time and, to a lesser extent, a $598.6 million decrease in the average balance of time deposits, which, prior to this quarter, were generally replaced with other lower cost deposit products.rates. Interest expense on advances from
the FHLB increased by $726 thousand$6.2 million during the ninethree months ended September 30, 2022March 31, 2023 compared to the same period last year, due to an increase in the average balance and cost of FHLB advances of 12$566.7 million and 118 basis points, respectively. The increase in FHLB advances has been utilized to fund loan growth, mitigate interest rate risk and, during the current quarter, increase liquidity. The increase in the
cost of FHLB advances is due to rising market interest rates. A discussion of instruments used to mitigate interest rate risk can be found under Part II - Item 7A. ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’
Provision for LoanCredit Losses
For the ninethree months ended September 30,March 31, 2023 and 2022, we recorded $500$679 thousand and $2.5 million, respectively, in reversals of provisions for loan loss provisions as compared to recording a reversal of loan loss provisions of $9.0 million for the same period last year.losses. During the ninethree months ended September 30, 2022, loan loss provisions recorded inMarch 31, 2023, the second and third quarters were primarilyreversal was predominantly due to the elimination of a specific reserve previously established on a collateral dependent loan growth and incremental changes in classified loan balances. These loan loss provisions were partially offset by awhile the prior year amount was related to the reversal of loan loss provisions recorded in the first quarter related to the remaining portion of qualitative reserves established for uncertain economic risks establisheduncertainty early in the pandemic that were deemed unnecessary. The loan loss provisions recaptured duringCOVID-19 pandemic. As discussed above, the nine months ended September 30, 2021 were predominantly due toCompany adopted the reversal of a portion of our pandemic related qualitative reserves, as well as an improvement in the level of our criticized loans during that period.CECL methodology on January 1, 2023.
Noninterest Income
Noninterest income decreased by $561 thousand, or 44.9%,increased to $689$1.2 million for the three months ended March 31, 2023 from $58 thousand for the ninesame period last year.
The following table presents the major components of our noninterest income:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| (Dollars in thousands) | 2023 | | 2022 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Income | | | | | | | |
| | | | | | | |
| FHLB dividends | $ | 577 | | | $ | 354 | | | $ | 223 | | | 63.0 | % |
| Fee income | 138 | | | 226 | | | (88) | | | (38.9) | % |
| Other | 520 | | | (522) | | | 1,042 | | | (199.6) | % |
| Total noninterest income | $ | 1,235 | | | $ | 58 | | | $ | 1,177 | | | 2,029.3 | % |
The increase in noninterest income for the three months ended September 30,March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to a $743 thousand net increase in the fair value of equity securities during the current period compared to the same period last year.
Noninterest Expense
Noninterest expense increased $1.4 million, or 9.2%, to $16.9 million for the three months ended March 31, 2023 from $1.3$15.5 million for the same period last year.
The following table presents the major components of our noninterest income:expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| (Dollars in thousands) | 2022 | | 2021 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Income | | | | | | | |
| | | | | | | |
| FHLB dividends | $ | 1,059 | | | $ | 1,145 | | | $ | (86) | | | (7.5) | % |
| Fee income | 640 | | | 149 | | | 491 | | | 329.5 | % |
| Other | (1,010) | | | (44) | | | (966) | | | 2195.5 | % |
| Total noninterest income | $ | 689 | | | $ | 1,250 | | | $ | (561) | | | (44.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, |
| (Dollars in thousands) | 2023 | | 2022 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Expense | | | | | | | |
| Compensation and related benefits | $ | 10,671 | | | $ | 10,219 | | | $ | 452 | | | 4.4 | % |
| Deposit insurance premium | 884 | | | 481 | | | 403 | | | 83.8 | % |
| Occupancy | 1,184 | | | 1,194 | | | (10) | | | (0.8) | % |
| Depreciation and amortization | 649 | | | 603 | | | 46 | | | 7.6 | % |
| Professional and regulatory fees | 436 | | | 539 | | | (103) | | | (19.1) | % |
| Data processing | 862 | | | 988 | | | (126) | | | (12.8) | % |
| Marketing | 739 | | | 458 | | | 281 | | | 61.4 | % |
| Merger costs | 553 | | | — | | | 553 | | | N/A |
| Other expenses | 956 | | | 1,030 | | | (74) | | | (7.2) | % |
| Total noninterest expense | $ | 16,934 | | | $ | 15,512 | | | $ | 1,422 | | | 9.2 | % |
The decreaseincrease in noninterest income forexpense during the ninethree months ended September 30, 2022March 31, 2023 as compared to the nine months ended September 30, 2021 was primarily due to a $1.1 million net decrease in the fair value of equity securities during the current period compared to the same period last year, partially offset by a $491 thousand increase in fee income primarily related to deposit accounts.
Noninterest Expense
Noninterest expense increased $294 thousand, or 0.7%, to $44.2 million for the nine months ended September 30, 2022 from $43.9 million for the same period last year.
The following table presents the major componentsperiod last year was primarily attributable to $553 thousand of costs incurred in connection with our noninterest expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| (Dollars in thousands) | 2022 | | 2021 | | $ Increase (Decrease) | | % Increase (Decrease) |
| Noninterest Expense | | | | | | | |
| Compensation and related benefits | $ | 26,146 | | | $ | 28,617 | | | $ | (2,471) | | | (8.6) | % |
| Deposit insurance premium | 1,468 | | | 1,431 | | | 37 | | | 2.6 | % |
| Occupancy | 3,590 | | | 3,735 | | | (145) | | | (3.9) | % |
| Depreciation and amortization | 2,155 | | | 1,958 | | | 197 | | | 10.1 | % |
| Professional and regulatory fees | 1,812 | | | 1,543 | | | 269 | | | 17.4 | % |
| Data processing | 3,039 | | | 2,729 | | | 310 | | | 11.4 | % |
| Marketing | 2,194 | | | 907 | | | 1,287 | | | 141.9 | % |
| Other expenses | 3,809 | | | 2,999 | | | 810 | | | 27.0 | % |
| Total noninterest expense | $ | 44,213 | | | $ | 43,919 | | | $ | 294 | | | 0.7 | % |
Thepreviously announced merger with WAFD and a $452 thousand increase in noninterestcompensation expense duringdue to a decline in capitalized salary costs due to lower loan origination volume, partially offset by a decrease in salaries and related benefits related to a reduction in our lending workforce at the nine months ended September 30, 2022 asend of 2022. Additionally, deposit insurance premiums increased $403 thousand compared to the same period last year was primarily attributable to a $1.3 million increase in marketing costs attributed to deposit gathering efforts and a $810 thousand increase in other expenses primarily relateddue to an increase in down payment assistance costs associated with our program to support home ownership for low-to-moderate income borrowers. These increased costs were partially offset by a $2.5 million decline in compensation costs primarily due to a decline inassessment rates effective at the required accrual for post-employment related retirement benefits resulting from an increase in interest rates and an increase in capitalized salaries related to increased loan production volumes, partially offset by increases in general compensation costs compared to the same period last year.beginning of 2023.
Income Tax Expense
For the ninethree months ended September 30, 2022,March 31, 2023, we recorded income tax expense of $27.4$5.6 million as compared to $26.7$9.1 million for the same period last year with effective tax rates of 29.2%29.6% and 29.3%28.5%, respectively.
Financial Condition - As of September 30, 2022March 31, 2023 and December 31, 20212022
Total assets at September 30, 2022March 31, 2023 were $7.9$8.3 billion, an increase of $741.6$327.8 million, or 10.3%4.1%, from December 31, 2021.2022. The increase was primarily due to a $557.0 million increase in loans and a $118.2$331.0 million increase in cash and cash equivalents as compared to December 31, 2021.prior year-end. Total liabilities were $7.2$7.6 billion at quarter end, an increase of $734.1$314.2 million, or 11.3%4.3%, from December 31, 2021.2022. The increase in total liabilities was primarily attributable to a $450.0$493.5 million increase in FHLB advances, and growth of $256.1partially offset by a $189.8 million decline in our deposits.
Loan Portfolio Composition
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 September 30, 2022both March 31, 2023 and December 31, 2021,2022, our total loans amounted to $6.9 billion and $6.3 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.
| | | As of September 30, 2022 | | As of December 31, 2021 | | As of March 31, 2023 | | As of December 31, 2022 |
| (Dollars in thousands) | (Dollars in thousands) | | Amount | | % of total | | Amount | | % of total | (Dollars in thousands) | | Amount | | % of total | | Amount | | % of total |
| Real estate loans | Real estate loans | | | | | | | | | Real estate loans | | | | | | | | |
| Multifamily residential | Multifamily residential | | $ | 4,463,812 | | | 65.6 | % | | $ | 4,183,194 | | | 66.9 | % | Multifamily residential | | $ | 4,490,561 | | | 64.5 | % | | $ | 4,500,500 | | | 64.8 | % |
| Single family residential | Single family residential | | 2,131,855 | | | 31.4 | % | | 1,859,524 | | | 29.8 | % | Single family residential | | 2,278,658 | | | 32.7 | % | | 2,253,987 | | | 32.4 | % |
| Commercial real estate | Commercial real estate | | 181,421 | | | 2.7 | % | | 186,531 | | | 3.0 | % | Commercial real estate | | 167,590 | | | 2.4 | % | | 171,767 | | | 2.5 | % |
| Construction and land | Construction and land | | 18,004 | | | 0.3 | % | | 18,094 | | | 0.3 | % | Construction and land | | 25,167 | | | 0.4 | % | | 22,533 | | | 0.3 | % |
| | Total loans before deferred items | Total loans before deferred items | | 6,795,092 | | | 100.0 | % | | 6,247,343 | | | 100.0 | % | Total loans before deferred items | | 6,961,976 | | | 100.0 | % | | 6,948,787 | | | 100.0 | % |
| Deferred loan costs, net | Deferred loan costs, net | | 59,363 | | | | | 50,077 | | | | Deferred loan costs, net | | 61,503 | | | | | 61,658 | | | |
| Total loans | Total loans | | $ | 6,854,455 | | | $ | 6,297,420 | | | Total loans | | $ | 7,023,479 | | | $ | 7,010,445 | | |
|
The relative composition of the loan portfolio has not changed significantly over the past several years. Our primary focus remains multifamily real estate lending, which constituted 66% and 67%65% of our portfolio at September 30, 2022both March 31, 2023 and December 31, 2021, respectively.2022. Single family residential lending is our secondary lending emphasis and represented 31%33% and 30%32% of our portfolio at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
We recognize that our multifamily and single family residential loan products represent concentrations within our balance sheet. Multifamily loan balances as a percentage of risk-based capital were 562%548% and 551%560% as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Our single family loans as a percentage of risk-based capital were 269%280% and 246%281% as of the same dates. Additionally, our loans are geographically concentrated with borrowers and collateral properties on the West Coast. At September 30, 2022,March 31, 2023, 61%, 27% and 9% of our real estate loans were collateralized by properties in southern California counties, northern California counties and Washington, respectively, compared to 63%61%, 26%27% and 9%, respectively, at December 31, 2021.2022.
Our lending strategy has been to focus on products and markets where we have significant expertise. Given our concentrations, we have established strong risk management practices including risk-based lending standards, self-established product and geographical limits, annual cash flow evaluations of income property loans and semi-annual stress testing.
We had a small portfolio of construction loans with commitments (funded and unfunded) totaling $32.9 million and $38.1$38.7 million at September 30, 2022both March 31, 2023 and December 31, 2021, respectively.2022. As of September 30,both March 31, 2023 and December 31, 2022, the average loan commitment for our single family construction product, which includes small tract housing and condominium projects, and our multifamily residential construction loans was $6.3$5.7 million and $3.9$3.4 million, respectively, compared to $5.1 million and $6.4 million, respectively, at December 31, 2021.respectively. Our construction lending 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 | | Nine Months Ended | | Three Months Ended |
| (Dollars in thousands) | (Dollars in thousands) | September 30,
2022 | | June 30,
2022 | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | | March 31,
2022 |
| Loan increases: | Loan increases: | | | | | | | | | Loan increases: | | | | | | |
| Multifamily residential | Multifamily residential | $ | 292,234 | | | $ | 495,594 | | | | $ | 1,084,956 | | | $ | 966,570 | | Multifamily residential | $ | 23,380 | | | $ | 108,978 | | | | $ | 297,128 | |
| Single family residential | Single family residential | 231,249 | | | 231,383 | | | | 714,596 | | | 592,627 | | Single family residential | 66,927 | | | 166,694 | | | | 251,964 | |
| Commercial real estate | Commercial real estate | 4,062 | | | 5,990 | | | | 24,471 | | | 2,000 | | Commercial real estate | — | | | — | | | | 14,420 | |
| Construction and land | Construction and land | 2,592 | | | — | | | | 7,992 | | | 20,657 | | Construction and land | — | | | 5,707 | | | | 5,400 | |
| | Purchases | — | | | — | | | | — | | | 287,751 | | |
| | Total loans originated and purchased | Total loans originated and purchased | 530,137 | | | 732,967 | | | | 1,832,015 | | | 1,869,605 | | Total loans originated and purchased | 90,307 | | | 281,379 | | | | 568,912 | |
| | Loan decreases: | Loan decreases: | | | | Loan decreases: | | | |
| Loan principal reductions and payoffs | Loan principal reductions and payoffs | (306,184) | | | (462,112) | | | | (1,264,011) | | | (1,557,667) | | Loan principal reductions and payoffs | (105,288) | | | (134,361) | | | | (495,715) | |
| Portfolio loan sales | — | | | — | | | | — | | | (1,706) | | |
| | Other (1) | Other (1) | (7,327) | | | 657 | | | | (10,969) | | | (16,187) | | Other (1) | 28,015 | | | 8,972 | | | | (4,299) | |
| Total loan outflows | Total loan outflows | (313,511) | | | (461,455) | | | | (1,274,980) | | | (1,575,560) | | Total loan outflows | (77,273) | | | (125,389) | | | | (500,014) | |
| Net change in total loan portfolio | Net change in total loan portfolio | $ | 216,626 | | | $ | 271,512 | | | | $ | 557,035 | | | $ | 294,045 | | 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. | |
(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. | | (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. |
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 September 30, 2022,March 31, 2023, our multifamily real estate portfolio had an average loan balance of $1.7$1.6 million, an average unit count of 13.7 units, a weighted average loan to value of 57.0%56.4%, a weighted average debt service coverage ratio of 1.6 times and supporting collateral averaging 13.7 housing units, as compared to an average loan balance of $1.7 million, a weighted average loan to value of 56.7%, a weighted average debt service coverage ratio of 1.5 times as compared to an average loan balance of $1.6 million, an average unit count of 14.0and supporting collateral averaging 13.7 housing units a weighted average loan to value of 56.9% and a weighted average debt service coverage ratio of 1.5 times at December 31, 2021.2022.
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 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 September 30,March 31, 2023, our single family residential real estate portfolio had an average loan balance of $905 thousand, a weighted average loan to value of 64.1% and a weighted average borrower credit score at origination/refreshed of 759. At December 31, 2022, our single family residential real estate portfolio had an average loan balance of $903$907 thousand, a weighted average loan to value of 63.8%64.0% and a weighted average credit score at origination/refreshed of 759. At December 31, 2021, our single family residential real estate portfolio had an average loan balance of $859 thousand, a weighted average loan to value of 62.5% and a weighted averageborrower credit score at origination/refreshed of 759.
Commercial real estate loans. While not a large part of our portfolio during any period presented, we also lend on
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 September 30, 2022,March 31, 2023, our commercial real estate portfolio had an average loan balance of $2.2 million, a weighted average loan to value of 53.3%53.8% and a weighted average debt service coverage ratio of 1.82.8 times, as compared to an average loan balance of $2.1$2.2 million, a weighted average loan to value of 54.2%53.9% and a weighted average debt service coverage ratio of 1.7 times at December 31, 2021.2022. Our exposure to nonresidential commercial real estate is limited. Additional detail is provided within the table below as of March 31, 2023:
49 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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% |
Construction LTV is calculated based on an "as-completed" property value.Undisbursed commitments for construction loans totaled $13.6 million at March 31, 2023. Construction and land. Other categories of loans included in our portfolio consist of construction and land loans. Construction loans include a single family construction 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 following table sets forth the contractual maturity distribution of our loan portfolio:
| | (Dollars in thousands) | (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 | (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 September 30, 2022: | | |
| As of March 31, 2023: | | As of March 31, 2023: | |
| Loans | Loans | | Loans | |
| Real estate mortgage loans: | Real estate mortgage loans: | | Real estate mortgage loans: | |
| Multifamily residential | Multifamily residential | $ | 40 | | $ | 698 | | $ | 38,598 | | $ | 4,424,476 | | $ | 4,463,812 | | Multifamily residential | $ | 49 | | $ | 735 | | $ | 38,897 | | $ | 4,450,880 | | $ | 4,490,561 | |
| Single family residential | Single family residential | 25 | | 531 | | 52,705 | | 2,078,594 | | 2,131,855 | | Single family residential | 20 | | 418 | | 50,463 | | 2,227,757 | | 2,278,658 | |
| Commercial real estate | Commercial real estate | — | | 22,082 | | 159,339 | | — | | 181,421 | | Commercial real estate | 33 | | 55,941 | | 111,616 | | — | | 167,590 | |
| Construction and land | Construction and land | 13,498 | | 4,506 | | — | | — | | 18,004 | | Construction and land | 18,582 | | 6,585 | | — | | — | | 25,167 | |
| Total loans | Total loans | $ | 13,563 | | $ | 27,817 | | $ | 250,642 | | $ | 6,503,070 | | $ | 6,795,092 | | Total loans | $ | 18,684 | | $ | 63,679 | | $ | 200,976 | | $ | 6,678,637 | | $ | 6,961,976 | |
| | Fixed interest rates | Fixed interest rates | $ | — | | $ | 198 | | $ | 45,925 | | $ | 267,515 | | $ | 313,638 | | Fixed interest rates | $ | — | | $ | 196 | | $ | 44,191 | | $ | 273,178 | | $ | 317,565 | |
| Floating or hybrid adjustable rates | Floating or hybrid adjustable rates | 13,563 | | 27,619 | | 204,717 | | 6,235,555 | | 6,481,454 | | Floating or hybrid adjustable rates | 18,684 | | 63,483 | | 156,785 | | 6,405,459 | | 6,644,411 | |
| Total loans | Total loans | $ | 13,563 | | $ | 27,817 | | $ | 250,642 | | $ | 6,503,070 | | $ | 6,795,092 | | Total loans | $ | 18,684 | | $ | 63,679 | | $ | 200,976 | | $ | 6,678,637 | | $ | 6,961,976 | |
| As of December 31, 2021: | | |
| As of December 31, 2022: | | As of December 31, 2022: | |
| Loans | Loans | | Loans | |
| Real estate mortgage loans: | Real estate mortgage loans: | | Real estate mortgage loans: | |
| Multifamily residential | Multifamily residential | $ | 30 | | $ | 2,225 | | $ | 37,730 | | $ | 4,143,209 | | $ | 4,183,194 | | Multifamily residential | $ | 72 | | $ | 537 | | $ | 39,917 | | $ | 4,459,974 | | $ | 4,500,500 | |
| Single family residential | Single family residential | 27 | | 631 | | 56,858 | | 1,802,008 | | 1,859,524 | | Single family residential | 27 | | 468 | | 51,443 | | 2,202,049 | | 2,253,987 | |
| Commercial real estate | Commercial real estate | — | | 11,403 | | 175,128 | | — | | 186,531 | | Commercial real estate | — | | 41,505 | | 130,262 | | — | | 171,767 | |
| Construction and land | Construction and land | 10,648 | | 7,446 | | — | | — | | 18,094 | | Construction and land | 17,464 | | 5,069 | | — | | — | | 22,533 | |
| Total loans | Total loans | $ | 10,705 | | $ | 21,705 | | $ | 269,716 | | $ | 5,945,217 | | $ | 6,247,343 | | Total loans | $ | 17,563 | | $ | 47,579 | | $ | 221,622 | | $ | 6,662,023 | | $ | 6,948,787 | |
| | Fixed interest rates | Fixed interest rates | $ | — | | $ | 201 | | $ | 49,385 | | $ | 240,337 | | $ | 289,923 | | Fixed interest rates | $ | — | | $ | 197 | | $ | 45,045 | | $ | 270,285 | | $ | 315,527 | |
| Floating or hybrid adjustable rates | Floating or hybrid adjustable rates | 10,705 | | 21,504 | | 220,331 | | 5,704,880 | | 5,957,420 | | Floating or hybrid adjustable rates | 17,563 | | 47,382 | | 176,577 | | 6,391,738 | | 6,633,260 | |
| Total loans | Total loans | $ | 10,705 | | $ | 21,705 | | $ | 269,716 | | $ | 5,945,217 | | $ | 6,247,343 | | 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 efforts 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 September 30, 2022March 31, 2023 and December 31, 2021, $4.92022, $4.4 billion and $4.8$4.6 billion, respectively, of our floating or hybrid adjustable rate loans were at their floor rates. The weighted average minimum interest rate on loans at their floor rates was 3.67%3.65% and 3.75%3.66% at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Hybrid adjustable rate loans still within their initial fixed term totaled $5.6 billion and $5.1$5.7 billion at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. These loans had a weighted average term to first repricing date of 3.83.6 years and 3.63.7 years at September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 origination. Particular emphasis is placed on our commercial portfolio where risk assessments are re-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, among other factors. On an ongoing basis, we also monitor payment performance, delinquencies, and tax and property insurance 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 ratings, as well as the evaluation of other credit metrics, 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 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 restructurings. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs. Concessions could include reductions of interest rates, extension of the maturity date at a rate lower than the 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:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | September 30,
2022 | | December 31,
2021 |
| Non-accrual loans | | | | | |
| Multifamily residential portfolio | | | $ | 843 | | | $ | 505 | |
| Single family residential portfolio | | | 2,987 | | | 1,788 | |
| | | | | |
| | | | | |
| Total non-accrual loans | | | 3,830 | | | 2,293 | |
| Real estate owned | | | — | | | — | |
| Total nonperforming assets | | | $ | 3,830 | | | $ | 2,293 | |
| Performing TDRs | | | $ | 811 | | | $ | 1,204 | |
| Allowance for loan losses to period end nonperforming loans | | | 940.86 | % | | 1,549.72 | % |
| Nonperforming loans to period end loans | | | 0.06 | % | | 0.04 | % |
| Nonperforming assets to total assets | | | 0.05 | % | | 0.03 | % |
| Nonperforming loans plus performing TDRs to total loans | | | 0.07 | % | | 0.06 | % |
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | March 31,
2023 | | December 31,
2022 |
| Non-accrual loans | | | | | |
| Multifamily residential portfolio | | | $ | 3,504 | | | $ | 3,509 | |
| Single family residential portfolio | | | 1,466 | | | 2,962 | |
| | | | | |
| | | | | |
| Total non-accrual loans | | | 4,970 | | | 6,471 | |
| Real estate owned | | | — | | | — | |
| Total nonperforming assets | | | $ | 4,970 | | | $ | 6,471 | |
| | | | | |
| Allowance for credit losses on loans to period end nonperforming loans | | | 722.62 | % | | 566.91 | % |
| Nonperforming loans to period end loans | | | 0.07 | % | | 0.09 | % |
| Nonperforming assets to total assets | | | 0.06 | % | | 0.08 | % |
| | | | | |
When assessing whether a loan should be placed on non-accrual status because contractual payments appear doubtful, consideration is given to information we collect from third parties and our borrowers to substantiate their future ability to repay principal and interest due on their loans as contractually agreed.
Interest income recognized on non-accrual loans subsequent to their classification as non-accrual totaled $45$28 thousand for the three months ended March 31, 2023 compared to $55 thousand and $27 thousand for the three months ended September 30,December 31, 2022 and June 30,March 31, 2022, respectively, and $99 thousand and $107 thousand for the nine months ended September 30, 2022 and 2021, respectively. The Company recorded interest income related to performing TDR loans of $10 thousand for both the three months ended September 30, 2022 and June 30, 2022, and $28 thousand and $77 thousand for the nine months ended September 30, 2022 and 2021, respectively. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $51 thousand and $44$146 thousand for the three months ended September 30, 2022 and June 30, 2022, respectively, and $122March 31, 2023 compared to $44 thousand and $21$27 thousand for the ninethree months ended September 30,December 31, 2022 and 2021,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 as of the reporting date. We determinedate of the consolidated statements of financial condition. Management estimates the allowance based on a quarterly evaluation of risk. That evaluation gives considerationbalance using relevant available information, from internal and external sources, relating to the nature of the loan portfolio, historical loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower’s ability to repay,past events, current economic and environmental conditions and risk assessments assigned to each loan asreasonable 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 resultforecast of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity.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.
OurThe 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 established through chargesconfirmed. 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 ACL
for unfunded commitments are included in the provision for loan losses. Loans, or portions(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 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:
| | | Three Months Ended | | Nine Months Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | (Dollars in thousands) | | September 30,
2022 | | June 30,
2022 | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands) | Beginning Balance | | Impact of CECL Adoption | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
| | Allowance for loan losses at beginning of period | | $ | 35,535 | | | $ | 33,035 | | | | $ | 35,535 | | | $ | 46,214 | | |
| Charge-offs: | | | | |
| Three months ended March 31, 2023 | | Three months ended March 31, 2023 |
| Multifamily residential | Multifamily residential | | — | | | — | | | | — | | | — | | Multifamily residential | $ | 26,417 | | | $ | 2,882 | | | $ | — | | | $ | — | | | $ | (2,007) | | | $ | 27,292 | |
| Single family residential | Single family residential | | — | | | — | | | | — | | | — | | Single family residential | 8,564 | | | (2,472) | | | — | | | — | | | 1,339 | | | 7,431 | |
| Commercial real estate | Commercial real estate | | — | | | — | | | | — | | | — | | Commercial real estate | 1,539 | | | (784) | | | — | | | — | | | 22 | | | 777 | |
| Construction and land | Construction and land | | — | | | — | | | | — | | | — | | Construction and land | 165 | | | 282 | | | — | | | — | | | (33) | | | 414 | |
| Total charge-offs | | — | | | — | | | | — | | | — | | |
| Recoveries: | | | | | | | | | | |
| | Single family residential | | — | | | — | | | | — | | | 64 | | |
| | Construction and land | | — | | | — | | | | — | | | 57 | | |
| Total recoveries | | — | | | — | | | | — | | | 121 | | |
| Net recoveries | | — | | | — | | | | — | | | 121 | | |
| Provision for (reversal of) loan losses | | 500 | | | 2,500 | | | | 500 | | | (9,000) | | |
| Allowance for loan losses at period end | | $ | 36,035 | | | $ | 35,535 | | | | $ | 36,035 | | | $ | 37,335 | | |
| Allowance for loan losses to period end loans held for investment | | 0.53 | % | | 0.54 | % | | | 0.53 | % | | 0.59 | % | |
| Annualized net recoveries to average loans: | |
| Allowance for credit losses on loans | | Allowance for credit losses on loans | 36,685 | | | (92) | | | — | | | — | | | (679) | | | 35,914 | |
| Allowance for credit losses on off-balance sheet credit exposures | | Allowance for credit losses on off-balance sheet credit exposures | 563 | | | 211 | | | — | | | — | | | (116) | | | 658 | |
| Total allowance for credit losses | | Total allowance for credit losses | $ | 37,248 | | | $ | 119 | | | $ | — | | | $ | — | | | $ | (795) | | | $ | 36,572 | |
| Three months ended December 31, 2022 | | Three months ended December 31, 2022 | | |
| Multifamily residential | Multifamily residential | | — | % | | — | % | | | — | % | | — | % | Multifamily residential | $ | 26,204 | | | $ | — | | | $ | — | | | $ | — | | | $ | 213 | | | $ | 26,417 | |
| Single family residential | Single family residential | | — | % | | — | % | | | — | % | | (0.00) | % | Single family residential | 8,157 | | | — | | | — | | | — | | | 407 | | | 8,564 | |
| Commercial real estate | Commercial real estate | | — | % | | — | % | | | — | % | | — | % | Commercial real estate | 1,543 | | | — | | | — | | | — | | | (4) | | | 1,539 | |
| Construction and land | Construction and land | | — | % | | — | % | | | — | % | | (0.39) | % | Construction and land | 131 | | | — | | | — | | | — | | | 34 | | | 165 | |
| Annualized net recoveries to average loans | | — | % | | — | % | | | — | % | | (0.00) | % | |
| Allowance for loan losses | | Allowance for loan losses | $ | 36,035 | | | $ | — | | | $ | — | | | $ | — | | | $ | 650 | | | $ | 36,685 | |
| Three months ended March 31, 2022 | | Three months ended March 31, 2022 | | |
| Multifamily residential | | Multifamily residential | $ | 26,043 | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,892) | | | $ | 24,151 | |
| Single family residential | | Single family residential | 7,224 | | | — | | | — | | | — | | | (427) | | | 6,797 | |
| Commercial real estate | | Commercial real estate | 2,094 | | | — | | | — | | | — | | | (212) | | | 1,882 | |
| Construction and land | | Construction and land | 174 | | | — | | | — | | | — | | | 31 | | | 205 | |
| Allowance for loan losses | | Allowance for loan losses | $ | 35,535 | | | $ | — | | | $ | — | | | $ | — | | | $ | (2,500) | | | $ | 33,035 | |
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| | Three Months Ended |
| (Dollars in thousands) | | March 31,
2023 | | December 31,
2022 | | | | | | March 31,
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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 | | — | % | | — | % | | | | | | — | % |
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| Annualized net charge-offs to average loans | | — | % | | — | % | | | | | | — | % |
Investment Portfolio
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, 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. 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:
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
| (Dollars in thousands) | (Dollars in thousands) | | Book Value | | % of Total | | Book Value | | % of Total | (Dollars in thousands) | | Book Value | | % of Total | | Book Value | | % of Total |
| Available for sale debt securities: | Available for sale debt securities: | | | | | | | | | Available for sale debt securities: | | | | | | | | |
| Government and Government Sponsored Entities: | Government and Government Sponsored Entities: | | Government and Government Sponsored Entities: | |
| Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | | $ | 380,852 | | | 58.24 | % | | $ | 407,746 | | | 61.52 | % | Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | | $ | 333,725 | | | 54.98 | % | | $ | 340,736 | | | 54.89 | % |
| Residential MBS and CMOs | Residential MBS and CMOs | | 193,541 | | | 29.60 | % | | 200,133 | | | 30.19 | % | Residential MBS and CMOs | | 195,543 | | | 32.21 | % | | 199,384 | | | 32.11 | % |
| Agency bonds | Agency bonds | | 40,089 | | | 6.13 | % | | 10,831 | | | 1.63 | % | Agency bonds | | 41,160 | | | 6.78 | % | | 42,630 | | | 6.87 | % |
| Other asset backed securities | Other asset backed securities | | 25,991 | | | 3.97 | % | | 28,607 | | | 4.32 | % | Other asset backed securities | | 22,999 | | | 3.79 | % | | 24,598 | | | 3.96 | % |
| Total available for sale debt securities | Total available for sale debt securities | | 640,473 | | | 97.94 | % | | 647,317 | | | 97.66 | % | Total available for sale debt securities | | 593,427 | | | 97.76 | % | | 607,348 | | | 97.83 | % |
| Held to maturity: | Held to maturity: | | Held to maturity: | |
| Government Sponsored Entities: | Government Sponsored Entities: | | Government Sponsored Entities: | |
| Residential MBS | Residential MBS | | 3,072 | | | 0.47 | % | | 3,761 | | | 0.57 | % | Residential MBS | | 3,022 | | | 0.50 | % | | 3,047 | | | 0.49 | % |
| Other investments | Other investments | | 63 | | | 0.01 | % | | 68 | | | 0.01 | % | Other investments | | 58 | | | 0.01 | % | | 61 | | | 0.01 | % |
| Total held to maturity debt securities | Total held to maturity debt securities | | 3,135 | | | 0.48 | % | | 3,829 | | | 0.58 | % | Total held to maturity debt securities | | 3,080 | | | 0.51 | % | | 3,108 | | | 0.50 | % |
| Equity securities | Equity securities | | 10,317 | | | 1.58 | % | | 11,693 | | | 1.76 | % | Equity securities | | 10,506 | | | 1.73 | % | | 10,340 | | | 1.67 | % |
| Total investment securities | Total investment securities | | $ | 653,925 | | | 100.00 | % | | $ | 662,839 | | | 100.00 | % | Total investment securities | | $ | 607,013 | | | 100.00 | % | | $ | 620,796 | | | 100.00 | % |
Prepaid Expenses and Other Assets
Prepaid expenses and other assets totaled $121.3$104.5 million at September 30, 2022March 31, 2023 compared to $56.3$120.2 million at December 31, 2021, an increase2022, a decrease of $65.1$15.8 million, or 115.6%13.1%. This increasedecrease was primarily due to a $24.3$9.6 million increasedecline in the fair value of our swaps due to rising interest rates, an additional $17.6 million investment in CRA qualified activities, a $13.0 million increase in deferred tax assets related toduring the decline in the fair value of available for sale investment securities and the recording of right-of-use assets related to the adoption of the new lease accounting standard on January 1, 2022, currently totaling $12.8 million. The new lease standard requires lessees to record a right-of-use asset and lease liability for all long-term lease obligations.quarter.
Deposits
Representing 80.0%74.3% of our total liabilities as of September 30, 2022,March 31, 2023, deposits are our primary source of funding for our business operations. We have historically maintained and grownDespite the recent volatility in the banking sector caused by bank closures during the current quarter, our deposit customer base in various rate environments based onoutflows appear to have generally stabilized following an initial period of elevated withdrawals. We attribute the return to a more normalized environment to our competitive pricing of deposit products, as well as our strong customer relationships, evidenced in part by increased deposits over recent years, as well as our reputation as a safe, sound, secure and "well-capitalized" institution and our commitment to excellent customer service. We areservice, evidenced in part by increased deposits over recent 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 newer emphasis placed on specialty/business affiliations and transaction accounts.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.
Total deposits increaseddecreased by $256.1$189.8 million, or 4.6%3.3%, to $5.8$5.6 billion at September 30, 2022March 31, 2023 from $5.5$5.8 billion at December 31, 2021. Brokered2022. Retail deposits declined $277.4 million, while brokered deposits increased $314.7 million, while retail deposits declined $58.6$87.6 million during the ninethree months ended September 30, 2022.March 31, 2023. The increasedecline in brokeredretail deposits was generally utilized to support loan growth. Duringduring the current quarter as a resultaccelerated after the bank failures on March 10th and 12th, 2023, with 62% of the rising interest rate environment, we saw a changeretail deposit outflows during the quarter occurring after these events. The deposit declines were primarily experienced in customer preferences related to termmoney market accounts, partially offset by increases in time deposits. Consequently, the proportion of non-maturity deposits within the portfolio decreased to 54.9% compared to 57.8%39.7% at December 31, 2021, while our portfolio of time deposits increased to 45.1% from 42.2% at December 31, 2021. Our cost of interest bearing deposits was 1.00% and 0.50% during the quarter ended September 30, 2022 and June 30, 2022, respectively, and 0.66% and 0.72% during the nine months ended September 30, 2022 and 2021, respectively. The increase in our cost of interest bearing
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 the same dates. The increase in brokered deposits was utilized to partially offset the decline in our retail deposits and further supplement our liquidity position. Our cost of interest bearing deposits was 2.65% during the quarter ended March 31, 2023, compared to 2.00% 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. The decrease during the nine months ended September 30, 2022 compared to the same period last year was predominantly due to the maturity of time deposits during the second half of 2021 that repriced to lower interest rates at that time and, to a lesser extent, a decrease in the average balance of time deposits, which were generally replaced with other lower cost deposit products.
Our loan to deposit ratio was 118%124% and 114%120% at September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 supplement loan growth and to strategically manage our interest rate risk, as well as our preference to maintain a large proportion of our assets in real estate loans which generally provide a better yield than high-quality liquid investments.
The following tables summarize our deposit composition by average deposits and average rates paid for the periods indicated:
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| Three Months Ended |
| September 30, 2022 | | June 30, 2022 | | |
| (Dollars in thousands) | Average amount | | Weighted average rate paid | | Percent of total deposits | | Average amount | | Weighted average rate paid | | Percent of total deposits | | | | | | |
| Noninterest-bearing deposit accounts | $ | 164,988 | | | — | % | | 2.9 | % | | $ | 165,799 | | | — | % | | 3.0 | % | | | | | | |
| Interest-bearing transaction accounts | 168,780 | | | 0.22 | % | | 3.0 | % | | 175,092 | | | 0.20 | % | | 3.1 | % | | | | | | |
| Money market demand accounts | 3,005,468 | | | 0.97 | % | | 53.1 | % | | 3,050,811 | | | 0.51 | % | | 54.6 | % | | | | | | |
| Time deposits | 2,322,643 | | | 1.11 | % | | 41.0 | % | | 2,196,455 | | | 0.51 | % | | 39.3 | % | | | | | | |
| Total | $ | 5,661,879 | | | 0.97 | % | | 100.0 | % | | $ | 5,588,157 | | | 0.49 | % | | 100.0 | % | | | | | | |
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| Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
| (Dollars in thousands) | Average amount | | Weighted average rate paid | | Percent of total deposits | | Average amount | | Weighted average rate paid | | Percent of total deposits |
| Noninterest-bearing deposit accounts | $ | 159,504 | | | — | % | | 2.9 | % | | $ | 107,789 | | | — | % | | 2.0 | % |
| Interest-bearing transaction accounts | 171,148 | | | 0.21 | % | | 3.1 | % | | 155,568 | | | 0.22 | % | | 2.9 | % |
| Money market demand accounts | 3,007,085 | | | 0.64 | % | | 53.8 | % | | 2,301,417 | | | 0.50 | % | | 42.5 | % |
| Time deposits | 2,250,523 | | | 0.71 | % | | 40.2 | % | | 2,849,131 | | | 0.92 | % | | 52.6 | % |
| Total | $ | 5,588,260 | | | 0.64 | % | | 100.0 | % | | $ | 5,413,905 | | | 0.70 | % | | 100.0 | % |
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| 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 | % |
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.
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| | 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 September 30, 2022:March 31, 2023:
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| (Dollars in thousands except for column headings) | | Insured | | Uninsured |
| Remaining maturity: | | | | |
| Three months or less | | $ | 309,932 | | | $ | 281,230 | |
| Over three through six months | | 300,975 | | | 88,281 | |
| Over six through twelve months | | 874,600 | | | 335,930 | |
| Over twelve months | | 333,837 | | | 89,616 | |
| Total | | $ | 1,819,344 | | | $ | 795,057 | |
| Percent of total deposits | | 31.40 | % | | 13.72 | % |
The Company estimated its balance of uninsured deposits at approximately $1.4 billion at both September 30, 2022 and December 31, 2021. At the same dates, the Company had $340.5 million and $25.8 million of wholesale deposits, respectively. The increase in brokered deposits was utilized to fund loan growth during the nine months ended September 30, 2022. | | | | | | | | | | | | | | |
| (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 | % |
FHLB Advances and Other Borrowings
In addition to deposits, we utilize collateralized FHLB borrowings to fund our asset growth.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 efforts to reduce the liability sensitive position of our balance sheet. Total FHLB advances totaled $1.7 billion and $1.2 billion and $751.6 million at September 30, 2022March 31, 2023 and December 31, 2021,2022, 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 FHLB letter of credit outstanding totaling $62.6 million. The increase in FHLB advances was primarily utilized to fund loan growth during the nine months ended September 30, 2022.
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 (the "Trusts") of which we own all the common securities, that have issued trust preferred securities, ("Trust Securities"), to investors in private placement transactions. The proceeds of the securities qualify as Tier 1 capital under the applicable regulations for community banks with total assets less than $15 billion. In accordance with GAAP, the Trusts are not consolidated in our consolidated statements of financial condition but rather, the common securities are included in our other assets and the junior subordinated debentures ("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 the dates indicated:
| | | September 30, 2022 | | December 31, 2021 | | Date | | Maturity | | Rate Index | | March 31, 2023 | | December 31, 2022 | | Date | | Maturity | | Rate Index |
| Issuer | Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) | Issuer | | Amount | | Rate | | Amount | | Rate | | Issued | | Date | | (Quarterly Reset) |
| (Dollars in thousands) | (Dollars in thousands) | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | |
| Luther Burbank Statutory Trust I | Luther Burbank Statutory Trust I | | $ | 41,238 | | | 4.67 | % | | $ | 41,238 | | | 1.58 | % | | 3/1/2006 | | 6/15/2036 | | 3 month LIBOR + 1.38% | 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 | Luther Burbank Statutory Trust II | | $ | 20,619 | | | 4.91 | % | | $ | 20,619 | | | 1.82 | % | | 3/1/2007 | | 6/15/2037 | | 3 month LIBOR + 1.62% | 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 or for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | As of or For the Three Months Ended |
| | As of or For the Three Months Ended | | As of or For the Nine Months Ended | |
| (Dollars in thousands) | (Dollars in thousands) | | September 30,
2022 | | June 30,
2022 | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands) | | March 31,
2023 | | December 31,
2022 | | | March 31,
2022 |
| FHLB advances | FHLB advances | | | | | | | | | | FHLB advances | | | | | | | |
| Average amount outstanding during the period | Average amount outstanding during the period | | $ | 1,071,300 | | | $ | 863,685 | | | | $ | 899,838 | | | $ | 907,998 | | Average amount outstanding during the period | | $ | 1,327,863 | | | $ | 1,129,382 | | | | $ | 761,119 | |
| Maximum amount outstanding at any month-end during the period | Maximum amount outstanding at any month-end during the period | | 1,201,647 | | | 954,947 | | | | 1,201,647 | | | 1,048,647 | | Maximum amount outstanding at any month-end during the period | | 1,704,647 | | | 1,208,147 | | | | 751,647 | |
| Balance outstanding at end of period | Balance outstanding at end of period | | 1,201,647 | | | 954,947 | | | | 1,201,647 | | | 751,647 | | Balance outstanding at end of period | | 1,701,647 | | | 1,208,147 | | | | 751,647 | |
| Weighted average maturity (in years) | Weighted average maturity (in years) | | 1.7 | | | 1.7 | | | | 1.7 | | | 2.5 | | Weighted average maturity (in years) | | 1.6 | | | 1.7 | | | | 2.3 | |
| Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 2.34 | % | | 1.79 | % | | | 2.34 | % | | 1.68 | % | Weighted average interest rate at end of period | | 3.34 | % | | 2.64 | % | | | 1.75 | % |
| Weighted average interest rate during the period | Weighted average interest rate during the period | | 1.98 | % | | 1.68 | % | | | 1.79 | % | | 1.67 | % | Weighted average interest rate during the period | | 2.83 | % | | 2.40 | % | | | 1.65 | % |
| | Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures | Junior subordinated deferrable interest debentures |
| Balance outstanding at end of period | Balance outstanding at end of period | | $ | 61,857 | | | $ | 61,857 | | | | $ | 61,857 | | | $ | 61,857 | | Balance outstanding at end of period | | $ | 61,857 | | | $ | 61,857 | | | | $ | 61,857 | |
| Weighted average maturity (in years) | Weighted average maturity (in years) | | 14.3 | | | 14.5 | | | | 14.3 | | | 15.3 | | Weighted average maturity (in years) | | 13.7 | | | 14.0 | | | | 14.8 | |
| Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 4.75 | % | | 3.29 | % | | | 4.75 | % | | 1.58 | % | Weighted average interest rate at end of period | | 6.33 | % | | 6.23 | % | | | 2.29 | % |
| Weighted average interest rate during the period | Weighted average interest rate during the period | | 3.59 | % | | 2.50 | % | | | 2.64 | % | | 1.65 | % | Weighted average interest rate during the period | | 6.33 | % | | 5.09 | % | | | 1.80 | % |
| | Senior unsecured term notes | Senior unsecured term notes | | | | Senior unsecured term notes | | | |
| Balance outstanding at end of period | Balance outstanding at end of period | | $ | 94,754 | | | $ | 94,724 | | | | $ | 94,754 | | | $ | 94,631 | | Balance outstanding at end of period | | $ | 94,816 | | | $ | 94,785 | | | | $ | 94,693 | |
| Weighted average maturity (in years) | Weighted average maturity (in years) | | 2.0 | | | 2.3 | | | | 2.0 | | | 3.0 | | Weighted average maturity (in years) | | 1.4 | | | 1.7 | | | | 2.4 | |
| Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 6.65 | % | | 6.65 | % | | | 6.65 | % | | 6.65 | % | Weighted average interest rate at end of period | | 6.64 | % | | 6.64 | % | | | 6.65 | % |
| Weighted average interest rate during the period | Weighted average interest rate during the period | | 6.65 | % | | 6.65 | % | | | 6.65 | % | | 6.66 | % | Weighted average interest rate during the period | | 6.64 | % | | 6.64 | % | | | 6.65 | % |
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 our 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | As of or For the Three Months Ended |
| | As of or For the Three Months Ended | | | As of or For the Nine Months Ended | |
| (Dollars in thousands) | (Dollars in thousands) | | September 30,
2022 | | June 30,
2022 | | | September 30,
2022 | | September 30,
2021 | (Dollars in thousands) | | March 31,
2023 | | December 31,
2022 | | | March 31,
2022 |
| Outstanding at period end | Outstanding at period end | | $ | 200,000 | | | $ | 153,300 | | | | $ | 200,000 | | | $ | — | | Outstanding at period end | | $ | 150,000 | | | $ | 56,500 | | | | $ | — | |
| Average amount outstanding | Average amount outstanding | | 265,305 | | | 95,003 | | | | 128,227 | | | 148,188 | | Average amount outstanding | | 48,993 | | | 75,561 | | | | 21,694 | |
| Maximum amount outstanding at any month end | Maximum amount outstanding at any month end | | 288,900 | | | 153,300 | | | | 288,900 | | | 346,900 | | Maximum amount outstanding at any month end | | 150,000 | | | 100,000 | | | | — | |
| Weighted average interest rate at end of period | Weighted average interest rate at end of period | | 2.99 | % | | 1.70 | % | | | 2.99 | % | | — | % | 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 | | 2.52 | % | | 1.05 | % | | | 2.04 | % | | 0.14 | % | Weighted average interest rate during the period | | 5.05 | % | | 3.19 | % | | | 0.34 | % |
Stockholders’ Equity
Stockholders’The Company's stockholders’ equity totaled $676.7$696.2 million at September 30, 2022,March 31, 2023, an increase of $7.5$13.6 million, or 1.1%2.0%, compared to December 31, 2021.2022. The increase in stockholders' equity was primarily due to net income of $66.5 million, partially offset by a decline in the fair value of available for sale investment securities, net of tax, of $31.9 million, dividends paid of $18.5 million and stock repurchases of $9.7 million during the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, the Company repurchased 732 thousand of its shares at an
average price of $13.30 per share and a total cost of $9.7 million in connection with a $20.0 million stock repurchase plan that was approved by the Board of Directors of the Company on October 30, 2020. The plan was completed during the second quarter of 2022. Throughout the term of the plan, the Company repurchased a total of 1.6 million shares at an average price of $12.17.$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 funds, 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 obligations. The following is a summary of our off-balance sheet arrangements outstanding as of the dates presented.
| | (Dollars in thousands) | (Dollars in thousands) | | September 30,
2022 | | December 31,
2021 | (Dollars in thousands) | | March 31,
2023 | | December 31,
2022 |
| Commitments to fund loans and lines of credit | | $ | 77,717 | | | $ | 132,769 | | |
| Commitments to fund loans | | Commitments to fund loans | | $ | 36,712 | | | $ | 37,741 | |
In connection with our Freddie Mac multifamily loan securitization, 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 $471$270 thousand and $727$439 thousand at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, which is included in other liabilities and accrued expenses in the consolidated statements of financial condition. In 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.
During the nine months ended September 30, 2022,As of March 31, 2023, the Company entered into three newheld eleven interest rate swap agreementsswaps with a total notional amount of $1.8 billion, two of which, with an aggregate notional amount of $300 million.$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. Asperiod and a pool of September 30, 2022, the Company held swaps with an aggregate notional amount of $1.3 billion.fixed rate single family loans. Our swaps involve the payment of a fixed rate amount to 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 amounts. As of September 30, 2022,March 31, 2023, these swaps carried a weighted average fixed payment rate payment of 1.54%2.74%, while receiving a federal funds weighted average rate of 3.08%4.83%. The net hedging impact associated with our swaps is reported in interest income on loans.
We guarantee 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 are material to investors.
Contractual Obligations
The following table presents, as of September 30, 2022,March 31, 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 16.17. ‘‘Commitments and Contingencies,’’ in the notes to our unaudited consolidated financial 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 | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | More than 5 Years | |
| (Dollars in thousands) | (Dollars in thousands) | Total | | (Dollars in thousands) | | Total |
| Contractual Cash Obligations | Contractual Cash Obligations | | | | | | | | | | Contractual Cash Obligations | | | | | | | | | | |
Time deposits (1) | Time deposits (1) | $ | 2,614,401 | | | $ | 2,190,948 | | | $ | 388,833 | | | $ | 34,620 | | | $ | — | | Time deposits (1) | | $ | 3,112,401 | | | $ | 277,476 | | | $ | 15,764 | | | $ | — | | | $ | 3,405,641 | |
FHLB advances (1)(2) | FHLB advances (1)(2) | 1,201,647 | | | 350,000 | | | 751,500 | | | 100,000 | | | 147 | | FHLB advances (1)(2) | | 450,000 | | | 1,151,500 | | | 100,000 | | | 147 | | | 1,701,647 | |
Senior debt (1) | Senior debt (1) | 95,000 | | | — | | | 95,000 | | | — | | | — | | Senior debt (1) | | — | | | 95,000 | | | — | | | — | | | 95,000 | |
Junior subordinated debentures (1) | Junior subordinated debentures (1) | 61,857 | | | — | | | — | | | — | | | 61,857 | | Junior subordinated debentures (1) | | — | | | — | | | — | | | 61,857 | | | 61,857 | |
| Operating leases | Operating leases | 13,858 | | | 3,510 | | | 5,221 | | | 4,008 | | | 1,119 | | Operating leases | | 3,282 | | | 4,994 | | | 3,941 | | | 1,318 | | | 13,535 | |
Significant contract (3) | Significant contract (3) | 6,119 | | | 1,696 | | | 3,393 | | | 1,030 | | | — | | Significant contract (3) | | 1,545 | | | 3,089 | | | 166 | | | — | | | 4,800 | |
| Total | Total | $ | 3,992,882 | | | $ | 2,546,154 | | | $ | 1,243,947 | | | $ | 139,658 | | | $ | 63,123 | | Total | | $ | 3,567,228 | | | $ | 1,532,059 | | | $ | 119,871 | | | $ | 63,322 | | | $ | 5,282,480 | |
| (1) Amounts exclude interest. | (1) Amounts exclude interest. | (1) Amounts exclude interest. |
(2) Included in total fixed rate long-term advances is a $200.0 million advance which matures in September 2025 and contains an 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 2022 average monthly expense extrapolated over the remaining life of the contract. | |
(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. |
We believe that we will be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.
Liquidity Management and Capital Adequacy
Liquidity Management
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 Company’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 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 Company’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 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
sources of funding include borrowings from the FRBFederal Reserve Bank ("FRB") discount window and the newly established FRB Bank Term Funding Program ("BTFP"), draws on established federal funds lines from unaffiliated commercial banks and the issuance of debt or equity securities. Our reliance on wholesale funding sources may fluctuate as economic conditions and customer preferences change.
We believeproactively and prudently manage liquidity, which became even more important during the first quarter of 2023 in light of the recent bank failures and other deposit dislocations resulting from the rapidly rising interest rate environment. During the quarter, we increased our on-balance sheet liquidity by $308.6 million through additional borrowings from the FHLB. Usage of our FHLB line to augment our liquidity is consistent with our past borrowing practices. In addition, we supplemented our borrowing capacity by pledging substantially all of our investment portfolio, as well as the majority of previously unpledged loans, to the FHLB and FRB. Although the Bank has established a $354 million line under the BTFP and expanded its discount window capacity, we have amplenot utilized either line during the current year. At the end of the quarter, our total liquidity, resourcesas shown below, represented 314% of our estimated uninsured deposit balances. As of March 31, 2023, we maintained the following liquidity position:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | As of March 31, 2023 | | % of Assets |
| Unrestricted cash & cash equivalents | | $ | 508,233 | | 6.12% |
| Unpledged liquid securities | | 33,505 | | 0.40% |
Unutilized brokered deposit capacity(1) | | 304,024 | | 3.66% |
Unutilized FHLB borrowing capacity(2)(3) | | 1,135,446 | | 13.68% |
Unutilized FRB borrowing capacity(2) | | 1,150,979 | | 13.86% |
| Commercial lines of credit | | 50,000 | | 0.60% |
| Total liquidity | | $ | 3,182,187 | | 38.33% |
(1)Capacity based on internal guidelines.
(2)Capacity based on pledged collateral specific to fund future growth and meet other cash needsthe FHLB or FRB, as necessary.applicable.
(3)Availability to borrow from the FHLB is permitted up to 40% of Luther Burbank Savings’ (the “Bank”) assets or $3.3 billion, subject to collateral capacity.
Our total deposits at September 30, 2022March 31, 2023 and December 31, 20212022 were $5.8$5.6 billion and $5.5$5.8 billion, respectively. Based on the values of loans and securities pledged as collateral, our $1.2$1.7 billion of FHLB advances outstanding and our $62.6 million FHLB letter of credit outstanding, we had $787.2 million$1.1 billion of additional borrowing capacity with the FHLB at September 30, 2022.March 31, 2023. Based on the values of other loans and securities pledged as collateral, we had $186.0 million$1.2 billion of borrowing capacity with the FRB at September 30, 2022.March 31, 2023. There were no outstanding advances with the FRB at September 30, 2022.March 31, 2023. In addition to the liquidity provided by the FHLB and FRB described above, we have established federal funds lines of credit with unaffiliated banks totaling $50.0 million at September 30, 2022,March 31, 2023, none of which were advanced at that date. In the ordinary course of business, we maintain correspondent bank accounts with unaffiliated banks which are used for normal business activity including ordering cash for our branch network, the purchase of investment securities and the receipt of principal and interest on those investments. Available cash balances at correspondent banks, including amounts at the FRB, totaled $256.7$508.2 million at September 30, 2022.March 31, 2023.
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.
Capital Adequacy
We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, we were in
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 September 30, 2022, the capital conservation buffer was 2.50%.
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. Risk-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 required risk-weighting percentage for these loans. Commercial real estate lending collateralized by real estate other than multifamily residential properties are generally risk weighted at 100%. Our leverage ratio is not impacted by the composition of our assets.
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:
| | | Minimum Required | | Minimum Required |
| | Actual | | For Capital Adequacy Purposes | | Plus Capital Conservation Buffer | | For Well- Capitalized Institution | | Actual | | For Capital Adequacy Purposes | | Plus Capital Conservation Buffer | | For Well- Capitalized Institution |
| (Dollars in thousands) | (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Luther Burbank Corporation | Luther Burbank Corporation | | | | | | | | Luther Burbank Corporation | | | | | | | |
| As of September 30, 2022 | | |
| As of March 31, 2023 | | As of March 31, 2023 | |
| Tier 1 Leverage Ratio | Tier 1 Leverage Ratio | $ | 767,045 | | 9.99 | % | | $ | 307,014 | | 4.00 | % | | N/A | | N/A | Tier 1 Leverage Ratio | $ | 787,992 | | 9.73 | % | | $ | 323,924 | | 4.00 | % | | N/A | | N/A |
| Common Equity Tier 1 Risk-Based Ratio | Common Equity Tier 1 Risk-Based Ratio | 705,188 | | 16.85 | % | | 188,348 | | 4.50 | % | | $ | 292,985 | | 7.00 | % | | N/A | Common Equity Tier 1 Risk-Based Ratio | 726,135 | | 17.18 | % | | 190,243 | | 4.50 | % | | $ | 295,933 | | 7.00 | % | | N/A |
| Tier 1 Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | 767,045 | | 18.33 | % | | 251,130 | | 6.00 | % | | 355,768 | | 8.50 | % | | N/A | Tier 1 Risk-Based Capital Ratio | 787,992 | | 18.64 | % | | 253,657 | | 6.00 | % | | 359,348 | | 8.50 | % | | N/A |
| Total Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | 803,685 | | 19.20 | % | | 334,840 | | 8.00 | % | | 439,478 | | 10.50 | % | | N/A | Total Risk-Based Capital Ratio | 824,586 | | 19.50 | % | | 338,210 | | 8.00 | % | | 443,900 | | 10.50 | % | | N/A |
| As of December 31, 2021 | | |
| As of December 31, 2022 | | As of December 31, 2022 | |
| Tier 1 Leverage Ratio | Tier 1 Leverage Ratio | $ | 727,606 | | 10.12 | % | | $ | 287,509 | | 4.00 | % | | N/A | | N/A | Tier 1 Leverage Ratio | $ | 775,259 | | 9.72 | % | | $ | 319,051 | | 4.00 | % | | N/A | | N/A |
| Common Equity Tier 1 Risk-Based Ratio | Common Equity Tier 1 Risk-Based Ratio | 665,749 | | 17.09 | % | | 175,296 | | 4.50 | % | | $ | 272,683 | | 7.00 | % | | N/A | Common Equity Tier 1 Risk-Based Ratio | 713,402 | | 16.80 | % | | 191,066 | | 4.50 | % | | $ | 297,214 | | 7.00 | % | | N/A |
| Tier 1 Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | 727,606 | | 18.68 | % | | 233,728 | | 6.00 | % | | 331,115 | | 8.50 | % | | N/A | Tier 1 Risk-Based Capital Ratio | 775,259 | | 18.26 | % | | 254,755 | | 6.00 | % | | 360,902 | | 8.50 | % | | N/A |
| Total Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | 764,048 | | 19.61 | % | | 311,638 | | 8.00 | % | | 409,025 | | 10.50 | % | | N/A | Total Risk-Based Capital Ratio | 812,529 | | 19.14 | % | | 339,673 | | 8.00 | % | | 445,820 | | 10.50 | % | | N/A |
| Luther Burbank Savings | Luther Burbank Savings | | Luther Burbank Savings | |
| As of September 30, 2022 | | |
| As of March 31, 2023 | | As of March 31, 2023 | |
| Tier 1 Leverage Ratio | Tier 1 Leverage Ratio | $ | 848,921 | | 11.06 | % | | $ | 306,932 | | 4.00 | % | | N/A | | $ | 383,664 | | 5.00 | % | Tier 1 Leverage Ratio | $ | 868,546 | | 10.73 | % | | $ | 323,836 | | 4.00 | % | | N/A | | $ | 404,796 | | 5.00 | % |
| Common Equity Tier 1 Risk-Based Ratio | Common Equity Tier 1 Risk-Based Ratio | 848,921 | | 20.29 | % | | 188,242 | | 4.50 | % | | $ | 292,821 | | 7.00 | % | | 271,905 | | 6.50 | % | Common Equity Tier 1 Risk-Based Ratio | 868,546 | | 20.56 | % | | 190,117 | | 4.50 | % | | $ | 295,737 | | 7.00 | % | | 274,613 | | 6.50 | % |
| Tier 1 Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | 848,921 | | 20.29 | % | | 250,989 | | 6.00 | % | | 355,568 | | 8.50 | % | | 334,653 | | 8.00 | % | Tier 1 Risk-Based Capital Ratio | 868,546 | | 20.56 | % | | 253,489 | | 6.00 | % | | 359,110 | | 8.50 | % | | 337,985 | | 8.00 | % |
| Total Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | 885,561 | | 21.17 | % | | 334,653 | | 8.00 | % | | 439,232 | | 10.50 | % | | 418,316 | | 10.00 | % | Total Risk-Based Capital Ratio | 905,140 | | 21.42 | % | | 337,985 | | 8.00 | % | | 443,606 | | 10.50 | % | | 422,482 | | 10.00 | % |
| As of December 31, 2021 | | |
| As of December 31, 2022 | | As of December 31, 2022 | |
| Tier 1 Leverage Ratio | Tier 1 Leverage Ratio | $ | 799,457 | | 11.13 | % | | $ | 287,407 | | 4.00 | % | | N/A | | $ | 359,259 | | 5.00 | % | Tier 1 Leverage Ratio | $ | 856,631 | | 10.74 | % | | $ | 318,970 | | 4.00 | % | | N/A | | $ | 398,712 | | 5.00 | % |
| Common Equity Tier 1 Risk-Based Ratio | Common Equity Tier 1 Risk-Based Ratio | 799,457 | | 20.54 | % | | 175,190 | | 4.50 | % | | $ | 272,518 | | 7.00 | % | | 253,052 | | 6.50 | % | Common Equity Tier 1 Risk-Based Ratio | 856,631 | | 20.19 | % | | 190,945 | | 4.50 | % | | $ | 297,026 | | 7.00 | % | | 275,809 | | 6.50 | % |
| Tier 1 Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | 799,457 | | 20.54 | % | | 233,587 | | 6.00 | % | | 330,915 | | 8.50 | % | | 311,449 | | 8.00 | % | Tier 1 Risk-Based Capital Ratio | 856,631 | | 20.19 | % | | 254,593 | | 6.00 | % | | 360,674 | | 8.50 | % | | 339,458 | | 8.00 | % |
| Total Risk-Based Capital Ratio | Total Risk-Based Capital Ratio | 835,899 | | 21.47 | % | | 311,449 | | 8.00 | % | | 408,777 | | 10.50 | % | | 389,311 | | 10.00 | % | Total Risk-Based Capital Ratio | 893,901 | | 21.07 | % | | 339,458 | | 8.00 | % | | 445,538 | | 10.50 | % | | 424,322 | | 10.00 | % |
Impact of Inflation and Changing Prices
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 (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay 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).
We manage market risk though our Asset Liability Council ("ALCO") which is comprised of senior management who are responsible for ensuring that board approved strategies, policy limits, and procedures for managing interest rate risk are appropriately executed within the designated lines of authority and responsibility. The ALCO meets monthly
to review, among other things, the composition of our assets and liabilities, the sensitivity of our assets and liabilities to interest rate changes, our actual and forecasted liquidity position, investment activity and our interest rate hedging transactions. The chairperson of the ALCO reports regularly to our board of directors. Our board reviews all policies impacting asset and liability management and establishes risk tolerance limits for business operations on at least an annual basis.
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 managing our risk exposure 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 ("NII at Risk") and the Economic Value of Equity ("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 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. Because of the lower level of market interest rates, we have not run these models with a yield curve shock beyond -100 basis points. As market interest rates increase, we anticipate running these models with the yield curve shock beyond -100 basis points in future quarters.
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 Company'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 Company. During weak economic times, our loan losses have been higher than normal, but the Federal Reserve will generally reduce short-term interest rates in an attempt to stimulate the economy and add liquidity. As a result, our interest rate spread will generally increase during those periods. During strong economic times, when the Federal Reserve raises short-term interest rates to dampen economic activity, the Company’s interest rate spread decreases. These periods have historically been indicative of inflation and real property value increases. As such, the decrease in net interest income is typically somewhat offset by declining 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 September 30, 2022.March 31, 2023. It models instantaneous parallel shifts in market interest rates, implied by the forward yield curve over the next one year period.
| | Interest Rate Risk to Earnings (NII) | Interest Rate Risk to Earnings (NII) | Interest Rate Risk to Earnings (NII) |
| September 30, 2022 | |
| March 31, 2023 | | March 31, 2023 |
| (Dollars in millions) | (Dollars in millions) | (Dollars in millions) |
| Change in Interest Rates (basis points) | Change in Interest Rates (basis points) | $ Change NII | % Change NII | Change in Interest Rates (basis points) | $ Change NII | % Change NII |
| +400 BP | +400 BP | $(28.2) | (19.9)% | +400 BP | $(10.0) | (23.7)% |
| +300 BP | +300 BP | (19.3) | (13.6)% | +300 BP | (6.1) | (14.3)% |
| +200 BP | +200 BP | (11.5) | (8.1)% | +200 BP | (3.3) | (7.7)% |
| +100 BP | +100 BP | (5.0) | (3.5)% | +100 BP | (1.1) | (2.6)% |
| -100 BP | -100 BP | 3.2 | 2.2% | -100 BP | (0.2) | (0.4)% |
| -200 BP | -200 BP | 4.0 | 2.8% | -200 BP | (0.2) | (0.5)% |
| -300 BP | | -300 BP | (0.8) | (2.0)% |
| -400 BP | | -400 BP | (1.5) | (3.5)% |
The NII at Risk reported at September 30, 2022March 31, 2023 reflects that our earnings were in a liability sensitive position in which an increase in interest rates is expected to generate lower net interest income. In addition, a decrease in short-term interest rates is expected to generate slightly lower net interest income because of our current hedge position. During the ninethree months ended September 30, 2022,March 31, 2023, our NII at Risk increaseddecreased in connection with upward interest rate shocks as compared to December 31, 20212022 primarily due to a decline in longer-term interest rates, a decrease in the months to repricing of our loan growthbalances and the steepening yield curve, partially offset by an increase in the level of our hedged positions.hedge positions, partially offset by slower loan prepayments and lower loan market values.
EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. The EVE results included in the table below reflect the analysis reviewed monthly by management. It models instantaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.
| | Interest Rate Risk to Capital (EVE) | Interest Rate Risk to Capital (EVE) | Interest Rate Risk to Capital (EVE) |
| September 30, 2022 | |
| March 31, 2023 | | March 31, 2023 |
| (Dollars in millions) | (Dollars in millions) | (Dollars in millions) |
| Change in Interest Rates (basis points) | Change in Interest Rates (basis points) | $ Change EVE | % Change EVE | Change in Interest Rates (basis points) | $ Change EVE | % Change EVE |
| +400 BP | +400 BP | $(388.1) | (54.8)% | +400 BP | $(279.4) | (60.6)% |
| +300 BP | +300 BP | (268.8) | (38.0)% | +300 BP | (184.0) | (39.9)% |
| +200 BP | +200 BP | (158.1) | (22.3)% | +200 BP | (105.5) | (22.9)% |
| +100 BP | +100 BP | (80.1) | (11.3)% | +100 BP | (43.6) | (9.5)% |
| -100 BP | -100 BP | 58.1 | 8.2% | -100 BP | 22.7 | 4.9% |
| -200 BP | -200 BP | 92.0 | 13.0% | -200 BP | 29.0 | 6.3% |
| -300 BP | | -300 BP | 25.6 | 5.6% |
| -400 BP | | -400 BP | 5.9 | 1.3% |
The EVE reported at September 30, 2022March 31, 2023 reflects that our market value of capital was in a liability sensitive position in which an increase in interest rates is expected to generate lower market values of capital. During the ninethree months ended September 30, 2022,March 31, 2023, our EVE at risk increased as compared to December 31, 20212022 primarily due to a decline in longer-term interest rates, a decrease in the months to repricing of our loan growthbalances and the steepening yield curve, partially offset by an increase in the level of our hedged positions.hedge positions, partially offset by slower loan prepayments and lower loan market values.
Certain shortcomings are inherent in the NII at Risk and EVE analyses presented above. Both the NII at Risk and
EVE simulations include assumptions regarding balances, asset prepayment speeds, deposit repricing and runoff and interest rate relationships among balances that we believe to be reasonable for the various interest rate environments. Differences in actual occurrences from these assumptions, as well as nonparallel changes in the yield curve, may change our market risk exposure. Simulated results are not intended to be used as a forecast of the actual effect of changes in market interest rates on our results, but rather as a means to better plan and execute appropriate interest rate risk strategies.
Hedge Positions
In managing our market risk, our board of directors has authorized the ALCO to utilize long-term borrowings and derivatives, including interest rate caps and swaps, to mitigate interest rate risk in accordance with regulations and our internal policy. We use or expect to use borrowings, interest rate caps and swaps as macro hedges against interest rate sensitivity in our loan portfolio, other interest-earning assets and our interest-bearing liabilities. Positions for hedging purposes are undertaken as mitigation to exposure primarily from mismatches between the repricing of assets and liabilities.
We are currently utilizing FHLB advances and interest rate swaps to hedge our liability sensitive interest rate risk position. As of September 30, 2022,March 31, 2023, the Company maintained seven11 interest rate swaps with an aggregate notional amount of $1.3$1.8 billion to primarily hedge the interest rate risk associated with both fixed rate loans and hybrid adjustable loans in their fixed rate period. All of our swaps are designated as fair value hedges and involve the payment of a fixed rate amount to 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. The gain or loss on derivatives, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk are recognized in interest income for loans in our unaudited consolidated statements of income. During the three and nine months ended September 30, 2022,March 31, 2023, the Company recognized an increase in interest income of $2.9$8.2 million and $3.3 million, respectively, in connection with interest rate swaps compared to a reduction of interest income of $721$78 thousand and $7.5 million, respectively, during the three and nine months ended September 30, 2021. The prior year reduction in interest income primarily related to two separate, two-year interest rate swaps with a total notional amount of $1.0 billion, which matured during the year ended DecemberMarch 31, 2021.2022.
The following table summarizes derivative instruments utilized by us as interest rate risk hedge positions as of September 30, 2022:March 31, 2023:
| | (Dollars in thousands) | (Dollars in thousands) | | | Fair Value | (Dollars in thousands) | | | Fair Value |
| Hedging Instrument | Hedging Instrument | Hedge Accounting Type | Months to Maturity | | Notional | | Other Assets | | Other Liabilities | Hedging Instrument | Hedge Accounting Type | Months to Maturity | | Notional | | Other Assets | | Other Liabilities |
| Interest rate swap | Interest rate swap | Fair value hedge | 5 | | | $ | 350,000 | | | $ | 5,188 | | | $ | — | | Interest rate swap | Fair value hedge | 3 | | | $ | 300,000 | | | $ | 3,168 | | | $ | — | |
| Interest rate swap | Interest rate swap | Fair value hedge | 9 | | | 300,000 | | | 8,511 | | | — | | Interest rate swap | Fair value hedge | 12 | | | 100,000 | | | 2,323 | | | — | |
| Interest rate swap | Interest rate swap | Fair value hedge | 18 | | | 100,000 | | | 2,933 | | | — | | Interest rate swap | Fair value hedge | 15 | | | 100,000 | | | 1,755 | | | — | |
| Interest rate swap | Interest rate swap | Fair value hedge | 21 | | | 100,000 | | | 2,051 | | | — | | Interest rate swap | Fair value hedge | 26 | | | 100,000 | | | 2,670 | | | — | |
| Interest rate swap | Interest rate swap | Fair value hedge | 32 | | | 100,000 | | | 3,617 | | | — | | Interest rate swap | Fair value hedge | 35 | | | 200,000 | | | — | | | 1,336 | |
| Interest rate swap | Interest rate swap | Fair value hedge | 60 | | | 100,000 | | | 3,941 | | | — | | Interest rate swap | Fair value hedge | 36 | | | 100,000 | | | — | | | 1,533 | |
Interest rate swap (1) | | Interest rate swap (1) | Fair value hedge | 39 | | | 200,000 | | | — | | | 4,209 | |
| Interest rate swap | Interest rate swap | Fair value hedge | 61 | | | 200,000 | | | 847 | | | — | | Interest rate swap | Fair value hedge | 53 | | | 100,000 | | | 1,847 | | | — | |
| Interest rate swap | | Interest rate swap | Fair value hedge | 54 | | | 200,000 | | | — | | | 2,828 | |
| Interest rate swap | | Interest rate swap | Fair value hedge | 55 | | | 200,000 | | | — | | | 4,055 | |
Interest rate swap (2) | | Interest rate swap (2) | Fair value hedge | 61 | | | 200,000 | | | — | | | 4,092 | |
| | $ | 1,250,000 | | | $ | 27,088 | | | $ | — | | | $ | 1,800,000 | | | $ | 11,763 | | | $ | 18,053 | |
(1) Effective date of June 24, 2023 | | (1) Effective date of June 24, 2023 |
(2) Effective date of April 27, 2023 | | (2) Effective date of April 27, 2023 |
Counterparty Credit Risk
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Our policies require that counterparties must be approved by our ALCO. Additionally, contracts are in place to ensure that minimum transfer amounts and collateral requirements are established.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of September 30, 2022,March 31, 2023, of the Company's disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022March 31, 2023 in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management of the Company as appropriate to allow timely decisions regarding required disclosures. Beginning with the filing of its Form 10-K for the year ending December 31, 2022, the Company will be subject to Section 404(b) of the Sarbanes-Oxley Act and will require the Company's registered public accounting firm to attest to, and report on, management's assessment of the effectiveness of its internal controls over financial reporting.
Changes in Internal Control over Financial Reporting
On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology (Allowance for Loan and Leases Losses or "ALLL") with an expected loss methodology that is referred to as the CECL methodology. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls around model assumptions and forecasted macroeconomic factors, as well as expanded controls over loan level data. There waswere no changeother changes in the Company'sCompany’s internal control over financial reporting that occurred during the Company's last fiscal quarterperiod covered by this report that hashave materially affected, or isare reasonably likely to materially affect, such controls.the Company’s internal control over financial reporting.
PART II.
Item 1. Legal Proceedings
FromOn March 24, 2023, Martin Siegel, a purported Luther Burbank Corporation shareholder, filed and served a putative class action on behalf of our shareholders in the Superior Court for the County of Sonoma, California captioned Siegel v. Lagomarsino, et al. (Case No. SCV-272922). The Siegel complaint alleges that our board of directors breached their fiduciary duty by failing to disclose certain internal projections and other information allegedly underlying the fairness opinion of our financial adviser, Piper Sandler & Co., in connection with our pending merger transaction with Washington Federal, Inc. Following the filing of our Current Report on Form 8-K on April 10, 2023 containing certain supplemental information regarding unaudited prospective financial estimates received and considered by Piper Sandler & Co., Mr. Siegel withdrew his request for a preliminary injunction to require us to disclose the internal projections and other information and to delay our May 4, 2023 shareholders meeting, but reserved the right to seek an award of attorney’s fees and expenses.
In addition, two other purported Luther Burbank Corporation shareholders have filed similar actions in the United States District Court for the Southern District of New York alleging violations of the Securities Exchange Act of 1934, as amended in matters captioned Wang v. Luther Burbank Corporation, et al. (Civil Action No. 23-cv-01949) and O’Dell v. Luther Burbank Corporation, et al. (Civil Action No. 23-cv-1912), and one other purported Luther Burbank Corporation shareholder has filed a similar action in the Superior Court for the County of Sonoma, California captioned Coffman v. Luther Burbank Corporation, et al. (Case No. SCV-273074). None of the plaintiffs have taken any action to serve these actions or otherwise prosecute their claims.
We believe the Siegel complaint and the other complaints are without merit.
In addition to the matters described above, from time to time, we are party to legal actions that are routine and incidental to our business. GivenIn addition, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, we, like all banking organizations, are subject to heightened regulatory compliance and legal risk. However, based on available information, management does not expect the ultimate disposition of any or a combination of these actions, including those described above, to have a material adverse effect on our business, financial condition or results of operation.operations.
Item 1A. Risk Factors
There have been no material changes from the risks disclosed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.2022, other than as described below.
Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system. The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank, among other recent events within the banking industry, and responses to them, have generated significant market volatility among publicly traded bank holding companies and, in particular, banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of certain banks. As a result, customers may choose, and some of our customers have chosen, to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in banks and the banking system more broadly. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our common stock and potentially our results of operations. Additional bank failures or other events that erode confidence in the banking industry, or in community banks, or our bank specifically, could quickly escalate and have consequences that we may not be able to adequately predict or mitigate and may also exacerbate the “Risk Factors” discussed in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases or unregistered sales of the Company’s stock during the quarter.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
| Exhibit Number | | Description | | Filed Herewith | | Form | | File No. | | Exhibit | | Filing Date |
| | | | | | | | | | | | |
| 3.1 | | | | | | S-1 | | 333-221455 | | 3.1 | | 11/9/2017 |
| 3.2 | | | | | | 8-K | | 001-38317 | | 3.1 | | 4/27/2018 |
| 4.1 | | | | | | S-1 | | 333-221455 | | 4.1 | | 11/9/2017 |
| | Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the SEC upon request. |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definitions Linkbase Document | | X | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | X | | | | | | | | |
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| | | | | | Incorporated by Reference |
| Exhibit Number | | Description | | Filed Herewith | | Form | | File No. | | Exhibit | | Filing Date |
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| 2.1 | | | | | | 8-K | | 001-38317 | | 2.1 | | 11/14/2022 |
| 3.1 | | | | | | S-1 | | 333-221455 | | 3.1 | | 11/9/2017 |
| 3.2 | | | | | | 8-K | | 001-38317 | | 3.1 | | 4/27/2018 |
| 4.1 | | | | | | S-1 | | 333-221455 | | 4.1 | | 11/9/2017 |
| | Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the SEC upon request. |
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| 31.1 | | | | X | | | | | | | | |
| 31.2 | | | | X | | | | | | | | |
| 32.1 | | | | X | | | | | | | | |
| 32.2 | | | | X | | | | | | | | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | X | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | X | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definitions Linkbase Document | | X | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | X | | | | | | | | |
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| *Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | LUTHER BURBANK CORPORATION |
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| DATED: | NOVEMBER 4, 2022MAY 5, 2023 | | By: /s/ Simone Lagomarsino |
| | | Simone Lagomarsino |
| | | President and Chief Executive Officer |
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| DATED: | NOVEMBER 4, 2022MAY 5, 2023 | | By: /s/ Laura Tarantino |
| | | Laura Tarantino |
| | | Executive Vice President and Chief Financial Officer |
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