Document
 
 
 
 
 
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 June 30, 2018
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
 (Address of principal executive offices)
 
95401
(Zip Code)
 

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

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 ☒ NO ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES ☒ NO ☐

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 (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ 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 ☒

As of August 3, 2018, there were 56,548,614 shares of the registrant’s common stock, no par value, outstanding.



Table of Contents

Table of Contents
 
 
Page
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II - OTHER INFORMATION
 
Item 1.
Item 1A.
 

1

Table of Contents

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
 
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” and other similar expressions in this Quarterly Report on Form 10-Q. With respect to any such forward-looking statements, the Company claims the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. The Company cautions investors that any forward-looking statements presented in this Quarterly Report on Form 10-Q, or those that the Company may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information available to, management at the time such statements are first made. Actual outcomes will be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control or ability to predict.  Although the Company believes that management’s beliefs and assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, the Company’s actual future results can be expected to differ from management’s expectations, and those differences may be material and adverse to the Company’s business, results of operations and financial condition. Accordingly, investors should use caution in placing any reliance on forward-looking statements to anticipate future results or trends.
 
Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the risk that the impact of changes in interest rates; political instability; changes in the monetary policies of the U.S. Government; a decline in economic conditions; deterioration in the value of California real estate, both residential and commercial; an increase in the level of non-performing assets and charge-offs; further increased competition among financial institutions; the Company’s ability to continue to attract deposits and quality loan customers; further government regulation, including regulations regarding capital requirements, and the implementation and costs associated with the same; internal and external fraud and cyber-security threats including the loss of bank or customer funds, loss of system functionality or the theft or loss of data; management’s ability to successfully manage the Company’s operations; and the other risks set forth in the Company’s reports filed with the U.S. Securities and Exchange Commission. For further discussion of these and other factors, see “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q and the Company’s 2017 Annual Report on Form 10-K.
 
Any forward-looking statements in this Quarterly Report on Form 10-Q and all subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. The Company does not undertake any obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after the date such forward looking statements are made, and hereby specifically disclaims any intention to do so, unless required by law.


2

Table of Contents

PART I.

Item 1. Financial Statements
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
 
June 30,
2018 (unaudited)
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
76,018

 
$
75,578

Available for sale investment securities, at fair value
583,035

 
503,288

Held to maturity investment securities, at amortized cost (fair value of $11,725 and $6,925 at June 30, 2018 and December 31, 2017, respectively)
12,009

 
6,921

Loans held for sale
21,575

 

Loans receivable, net of allowance for loan losses of $33,358 and $30,312 as of June 30, 2018 and December 31,2017, respectively
5,701,559

 
5,011,235

Accrued interest receivable
18,310

 
14,901

Federal Home Loan Bank ("FHLB") stock, at cost
32,995

 
27,733

Premises and equipment, net
21,870

 
22,452

Goodwill
3,297

 
3,297

Prepaid expenses and other assets
39,565

 
38,975

 
 
 
 
Total assets
$
6,510,233

 
$
5,704,380

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
4,592,155

 
$
3,951,238

Federal Home Loan Bank advances
1,150,746

 
989,260

Junior subordinated deferrable interest debentures
61,857

 
61,857

Senior debt
 
 
 
$95,000 face amount, 6.5% interest rate, due September 30, 2024 (less debt issuance costs of $772 and $839 at June 30, 2018 and December 31, 2017, respectively)
94,228

 
94,161

Accrued interest payable
3,304

 
1,781

Other liabilities and accrued expenses
45,763

 
56,338

 
 
 
 
Total liabilities
5,948,053

 
5,154,635

 
 
 
 
Commitments and contingencies (Note 17)

 

 
 
 
 
Stockholders' equity:
 
 
 
Common stock, no par value; 100,000,000 shares authorized; 56,559,655 and 56,422,662 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
456,289

 
454,287

Retained earnings
113,673

 
102,459

Accumulated other comprehensive loss, net of taxes
(7,782
)
 
(7,001
)
 
 
 
 
Total stockholders' equity
562,180

 
549,745

 
 
 
 
Total liabilities and stockholders' equity
$
6,510,233

 
$
5,704,380


See accompanying notes to unaudited consolidated financial statements
3

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
51,343

 
$
41,173

 
$
97,906

 
$
79,916

Interest and dividends on investment securities
 
3,343

 
1,863

 
6,061

 
3,516

Total interest income
 
54,686

 
43,036

 
103,967

 
83,432

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits
 
14,560

 
9,058

 
26,492

 
17,371

Interest on FHLB advances
 
6,823

 
4,260

 
11,643

 
7,537

Interest on junior subordinated deferrable interest debentures
 
567

 
408

 
1,054

 
788

Interest on senior debt
 
1,577

 
1,577

 
3,154

 
3,154

Total interest expense
 
23,527

 
15,303

 
42,343

 
28,850

Net interest income before provision for (reversal of) loan losses
 
31,159

 
27,733

 
61,624

 
54,582

Provision for (reversal of) loan losses (Note 3)
 
1,300

 
(6,481
)
 
2,800

 
(6,172
)
Net interest income after provision for (reversal of) loan losses
 
29,859

 
34,214

 
58,824

 
60,754

Noninterest income:
 
 
 
 
 
 
 
 
Increase in cash surrender value of life insurance
 
48

 
47

 
101

 
95

Net loss on sale/fair value adjustments of loans
 

 
(693
)
 

 
(856
)
FHLB dividends
 
509

 
562

 
1,103

 
1,195

Other income
 
260

 
285

 
638

 
649

Total noninterest income
 
817

 
201

 
1,842

 
1,083

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and related benefits
 
9,199

 
9,523

 
18,818

 
19,720

Deposit insurance premium
 
467

 
431

 
899

 
829

Professional and regulatory fees
 
503

 
840

 
901

 
1,025

Occupancy
 
1,304

 
1,223

 
2,600

 
2,521

Depreciation and amortization
 
694

 
728

 
1,408

 
1,463

Data processing
 
807

 
797

 
1,595

 
1,587

Marketing
 
561

 
205

 
774

 
384

Other expenses
 
1,387

 
1,093

 
2,640

 
2,013

Total noninterest expense
 
14,922

 
14,840

 
29,635

 
29,542

Income before provision for income taxes
 
15,754

 
19,575

 
31,031

 
32,295

Provision for income taxes
 
4,528

 
654

 
8,703

 
1,079

Net income
 
$
11,226

 
$
18,921

 
$
22,328

 
$
31,216

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.20

 
$
0.45

 
$
0.40

 
$
0.74

Diluted earnings per common share
 
$
0.20

 
$
0.45

 
$
0.39

 
$
0.74

Weighted average common shares outstanding - basic
 
56,190,970

 
42,000,000

 
56,190,970

 
42,000,000

Weighted average common shares outstanding - diluted
 
56,820,076

 
42,000,000

 
56,787,615

 
42,000,000



See accompanying notes to unaudited consolidated financial statements
4

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
11,226

 
$
18,921

 
$
22,328

 
$
31,216

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on available for sale investment securities:
 
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during the period
 
(941
)
 
183

 
(3,912
)
 
791

Tax effect
 
272

 
(6
)
 
1,115

 
(27
)
Net of tax
 
(669
)
 
177

 
(2,797
)
 
764

Unrealized gain on cash flow hedge:
 
 
 
 
 
 
 
 
Unrealized holding gain arising during the period
 
192

 
85

 
373

 
135

Tax effect
 
(55
)
 
(3
)
 
(107
)
 
(4
)
Net of tax
 
137

 
82

 
266

 
131

Total other comprehensive (loss) income
 
(532
)
 
259

 
(2,531
)
 
895

Comprehensive income
 
$
10,694

 
$
19,180

 
$
19,797

 
$
32,111



See accompanying notes to unaudited consolidated financial statements
5

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollar amounts in thousands, except per share data)
 
 
 
 
 
Accumulated Other Comprehensive (Loss) Income (Net of Taxes)
 
Total Stockholders' Equity
 
Common Stock
 
Retained Earnings
 
Available for Sale Securities
 
Cash Flow Hedge
 
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2016
42,000,000

 
$
2,262

 
$
407,648

 
$
(4,374
)
 
$
(1,161
)
 
$
404,375

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
31,216

 

 

 
31,216

Other comprehensive income

 

 

 
764

 
131

 
895

Cash dividends ($0.48 per share)

 

 
(20,200
)
 

 

 
(20,200
)
Balance, June 30, 2017
42,000,000

 
$
2,262

 
$
418,664

 
$
(3,610
)
 
$
(1,030
)
 
$
416,286

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
56,422,662

 
$
454,287

 
$
102,459

 
$
(6,214
)
 
$
(787
)
 
$
549,745

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
22,328

 

 

 
22,328

Other comprehensive (loss) income

 

 

 
(2,797
)
 
266

 
(2,531
)
Reclassification of prior year tax benefit related to re-measuring deferred taxes on items recorded to other comprehensive income

 

 
(1,750
)
 
1,529

 
221

 

Issuance of restricted stock awards
131,140

 

 

 

 

 

Vested restricted stock units
12,710

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(4,057
)
 
(49
)
 

 

 

 
(49
)
Restricted stock forfeitures
(2,800
)
 
(3
)
 
0

 

 

 
(3
)
Stock-based compensation expense

 
2,054

 

 

 

 
2,054

Cash dividends ($0.17 per share)

 

 
(9,364
)
 

 

 
(9,364
)
Balance, June 30, 2018
56,559,655

 
$
456,289

 
$
113,673

 
$
(7,482
)
 
$
(300
)
 
$
562,180



See accompanying notes to unaudited consolidated financial statements
6

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
22,328

 
$
31,216

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,408

 
1,463

Provision for loan losses
2,800

 
(6,172
)
Amortization of deferred loan costs, net
4,634

 
4,642

Amortization of premiums on investment securities, net
1,060

 
695

Net loss on sale/fair value adjustment of loans

 
856

Originations of loans held for sale

 
(25,809
)
Proceeds from sale of loans held for sale

 
33,618

Stock based compensation expense, net of forfeitures
2,051

 

Other items, net
(34
)
 
(28
)
Effect of changes in:
 
 
 
Accrued interest receivable
(3,409
)
 
(2,420
)
Accrued interest payable
1,523

 
1,890

Prepaid expenses and other assets
891

 
(4,205
)
Other liabilities and accrued expenses
(10,575
)
 
(2,749
)
Net cash provided by operating activities
22,677

 
32,997

Cash flows from investing activities:
 
 
 
Proceeds from maturities or calls of available for sale investment securities
40,422

 
60,721

Proceeds from maturities or calls of held to maturity investment securities
273

 
331

Purchases of available for sale investment securities
(125,126
)
 
(85,301
)
Purchases of held to maturity investment securities
(5,375
)
 

Net increase in loans receivable
(719,333
)
 
(573,842
)
Proceeds from sale of portfolio loans

 
26,564

Purchase of FHLB stock, net
(5,262
)
 
(8,172
)
Purchase of premises and equipment
(826
)
 
(380
)
Net cash used in investing activities
(815,227
)
 
(580,079
)
Cash flows from financing activities:
 
 
 
Net increase in customer deposits
640,917

 
347,206

Proceeds from long term FHLB advances
425,000

 
100,000

Net change in short term FHLB advances
(263,514
)
 
147,687

Shares withheld for taxes on vested restricted stock
(49
)
 

Cash paid for dividends
(9,364
)
 
(20,200
)
Net cash provided by financing activities
792,990

 
574,693

Increase in cash and cash equivalents
440

 
27,611

Cash and cash equivalents, beginning of period
75,578

 
59,208

Cash and cash equivalents, end of period
$
76,018

 
$
86,819

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
40,820

 
$
26,960

Income taxes
$
10,994

 
$
1,590

Non-cash investing activity:
 
 
 
Loans transferred to held for sale
$
21,575

 
$
686,078


See accompanying notes to unaudited consolidated financial statements
7

Table of Contents


LUTHER BURBANK CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
NATURE OF OPERATIONS

Organization

Luther Burbank Corporation (the ‘‘Company’’), a California corporation headquartered in Santa Rosa, is the bank holding company for its wholly-owned subsidiary, Luther Burbank Savings (the "Bank"), and its wholly-owned subsidiary, Burbank Investor Services. The Company also owns Burbank Financial Inc., a real estate investment company, and all the common interests in Luther Burbank Statutory Trusts I and II, entities created to issue trust preferred securities.

The Bank conducts its business from its headquarters in Manhattan Beach, California. It has nine full service branches in California located in Sonoma, Marin, Santa Clara, and Los Angeles Counties and one full service branch in Washington located in King County. Additionally, there are seven loan production offices located throughout California, as well as loan production offices in King County, Washington and Clackamas County, Oregon.

On April 27, 2017, the Company declared a 200-for-1 stock split, increasing the number of issued and authorized shares from 210,000 to 42,000,000 and 500,000 to 100,000,000, respectively. The Company also declared that the stock has zero par value, whereas the stock had previously held a stated value of $8 per share (stated value not adjusted for split). Additional shares issued as a result of the stock split were distributed immediately upon issuance to the stockholders. Share and per share amounts included in the unaudited consolidated financial statements and accompanying notes reflect the effect of the split for all periods presented.

We terminated our status as a “Subchapter S” corporation as of December 1, 2017, in connection with our Initial Public Offering ("IPO") and became a taxable C Corporation. Prior to that date, as an S-Corporation, we had no U.S. federal income tax expense.

On December 12, 2017, the Company completed the IPO of its common stock. In connection with the Company’s IPO, the Company sold and issued 13,972,500 shares of common stock at $10.75 per share. After deducting underwriting discounts and offering expenses, the Company received total net proceeds of $138.3 million from the IPO.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2017, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC, under the Securities and Exchange Act of 1934, (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and the Bank. All intercompany accounts and transactions have been eliminated.
 
The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2018.


8

Table of Contents

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ.

Earnings Per Share ("EPS")

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year. 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 commons shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method. The factors used in the earnings per share computation follow:
(Dollars in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
 
$
11,226

 
$
18,921

 
$
22,328

 
$
31,216

 
 
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
 
56,190,970

 
42,000,000

 
56,190,970

 
42,000,000

Add: Dilutive effects of assumed vesting of restricted stock
 
629,106

 

 
596,645

 

Weighted average diluted common shares outstanding
 
56,820,076

 
42,000,000

 
56,787,615

 
42,000,000

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.45

 
$
0.40

 
$
0.74

Diluted
 
$
0.20

 
$
0.45

 
$
0.39

 
$
0.74

Anti-dilutive shares not included in calculation of diluted earnings per share
 

 

 

 


2.
INVESTMENT SECURITIES

Available for Sale
The following tables summarize the amortized cost and the estimated fair value of available for sale investment securities as of the dates indicated (dollars in thousands):

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Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
At June 30, 2018:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
405,849

 
$
281

 
$
(6,180
)
 
$
399,950

Agency bonds
120,405

 
7

 
(4,113
)
 
116,299

Collateralized mortgage obligations
42,550

 
242

 
0

 
42,792

SBA securities
11,742

 

 
(129
)
 
11,613

U.S. Treasury
1,009

 

 
(44
)
 
965

CRA Qualified Investment Fund
12,000

 

 
(584
)
 
11,416

Total available for sale investment securities
$
593,555

 
$
530

 
$
(11,050
)
 
$
583,035

 
 
 
 
 
 
 
 
At December 31, 2017:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
316,134

 
$
112

 
$
(3,327
)
 
$
312,919

Agency bonds
120,405

 
30

 
(3,213
)
 
117,222

Collateralized mortgage obligations
46,920

 
249

 
(1
)
 
47,168

SBA securities
13,427

 

 
(125
)
 
13,302

U.S. Treasury
1,010

 

 
(26
)
 
984

CRA Qualified Investment Fund
12,000

 

 
(307
)
 
11,693

Total available for sale investment securities
$
509,896

 
$
391

 
$
(6,999
)
 
$
503,288

Net unrealized losses on available for sale investment securities are recorded as accumulated other comprehensive income within stockholders’ equity totaling $7.5 million and $6.2 million, net of $3.0 million and $394 thousand in tax assets at June 30, 2018 and December 31, 2017, respectively. At December 31, 2017, $394 thousand of a total $1.9 million tax asset resides in accumulated other comprehensive income, while the remaining $1.5 million was included in the provision for income taxes on the consolidated statements of income related to the tax rate changes associated with the termination of S Corporation status and the change in tax law during the year ended December 31, 2017. The Company adopted ASU 2018-02 effective January 1, 2018 and reclassified the $1.5 million in stranded tax effects from the change in federal corporate tax rates on our available for sale investment securities from accumulated other comprehensive loss, net to retained earnings. There were no sales or transfers of available for sale investment securities and no gains or losses on these securities during the three or six months ended June 30, 2018 and 2017.


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The following tables summarize the gross unrealized losses and fair value of available for sale investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (dollars in thousands):
 
June 30, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
167,838

 
$
(2,008
)
 
$
172,890

 
$
(4,172
)
 
$
340,728

 
$
(6,180
)
Agency bonds
9,713

 
(287
)
 
103,579

 
(3,826
)
 
113,292

 
(4,113
)
Collateralized mortgage obligations
96

 
0

 

 

 
96

 
0
SBA securities

 

 
11,613

 
(129
)
 
11,613

 
(129
)
U.S. Treasury

 

 
965

 
(44
)
 
965

 
(44
)
CRA Qualified Investment Fund
4,831

 
(169
)
 
6,585

 
(415
)
 
11,416

 
(584
)
Total available for sale investment securities
$
182,478

 
$
(2,464
)
 
$
295,632

 
$
(8,586
)
 
$
478,110

 
$
(11,050
)
At June 30, 2018, the Company held 96 mortgage-backed securities of which 69 were in a loss position and 48 had been in a loss position for twelve months or more. The Company held 13 agency bonds of which 12 were in a loss position and 11 had been for twelve months or more. The Company also held 15 collateralized mortgage obligations, one of which were in an unrealized loss position. Of the total 4 SBA securities held at June 30, 2018, all 4 were in a loss position for greater than twelve months. Of the 3 total investments in CRA Qualified Investment Fund, all 3 were in a loss position and 2 had been for greater than 12 months. The Company held 1 U.S. Treasury note at June 30, 2018. This note was in a loss position for greater than 12 months.
 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
93,403

 
$
(805
)
 
$
182,343

 
$
(2,522
)
 
$
275,746

 
$
(3,327
)
Agency bonds
9,851

 
(148
)
 
104,340

 
(3,065
)
 
114,191

 
(3,213
)
Collateralized mortgage obligations
1,959

 
(1
)
 

 

 
1,959

 
(1
)
SBA securities

 

 
13,302

 
(125
)
 
13,302

 
(125
)
U.S. Treasury

 

 
984

 
(26
)
 
984

 
(26
)
CRA Qualified Investment Fund
4,948

 
(52
)
 
6,745

 
(255
)
 
11,693

 
(307
)
Total available for sale investment securities
$
110,161

 
$
(1,006
)
 
$
307,714

 
$
(5,993
)
 
$
417,875

 
$
(6,999
)
At December 31, 2017, the Company held 87 mortgage-backed securities of which 68 were in a loss position and 30 had been in a loss position for twelve months or more. The Company held 13 agency bonds of which 12 were in a loss position and 11 had been for twelve months or more. The Company also held 15 collateralized mortgage obligations, 1 of which was in an unrealized loss position. Of the total 4 SBA securities held at year end, all 4 were in a loss position for greater than twelve months. Of the 3 total investments in CRA Qualified Investment Fund, all 3 were in a loss position and 2 had been for greater than 12 months. The Company held 1 U.S. Treasury note at year end. This note was in a loss position for greater than 12 months.
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 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

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Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2018 and December 31, 2017.
As of June 30, 2018 and December 31, 2017, 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 tables summarize the amortized cost and estimated fair value of held to maturity investment securities as of the dates indicated (dollars in thousands):
 
Amortized Cost
 
Gross Unrecognized Gains
 
Gross Unrecognized Losses
 
Estimated Fair Value
As of June 30, 2018:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
11,733

 
$
26

 
$
(310
)
 
$
11,449

Other investments
276

 

 

 
276

Total held to maturity investment securities
$
12,009

 
$
26

 
$
(310
)
 
$
11,725

As of December 31, 2017:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
6,636

 
$
73

 
$
(69
)
 
$
6,640

Other investments
285

 

 

 
285

Total held to maturity investment securities
$
6,921

 
$
73

 
$
(69
)
 
$
6,925

The following tables summarize the gross unrecognized losses and fair value of held to maturity investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrecognized loss position (dollars in thousands):
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrecognized Losses
 
Fair Value
 
Unrecognized Losses
 
Fair Value
 
Unrecognized Losses
As of June 30, 2018:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
10,299

 
$
(310
)
 
$

 
$

 
$
10,299

 
$
(310
)
As of December 31, 2017:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,047

 
$
(4
)
 
$
3,029

 
$
(65
)
 
$
4,076

 
$
(69
)
The unrecognized losses on the Company’s investments were caused by interest rate changes. It is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rate and other market conditions. The issuers continue to make timely principal and interest payments on the investments. The fair value is expected to recover as the investments approach maturity.

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The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of June 30, 2018 (dollars in thousands):
 
June 30, 2018
 
Amortized Cost
 
Fair Value
Available for sale investments securities
 
 
 
One to five years
$
118,414

 
$
114,257

Five to ten years

 

Beyond ten years
3,000

 
3,007

Equity securities
12,000

 
11,416

Mortgage-backed securities and collateralized mortgage obligations
460,141

 
454,355

Total available for sale investment securities
$
593,555

 
$
583,035

Held to maturity investments securities
 
 
 
Beyond ten years
$
276

 
$
276

Mortgage-backed securities
11,733

 
11,449

Total held to maturity investment securities
$
12,009

 
$
11,725

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and collateralized mortgage obligations are not included in the maturity categories above and instead are shown separately. No securities were pledged as of June 30, 2018 and December 31, 2017.

3.
LOANS RECEIVABLE
Loans receivable consist of the following (dollars in thousands):

 
June 30,
2018
 
December 31,
2017
Permanent mortgages on:
 
 
 
Multifamily residential
$
3,335,958

 
$
2,887,438

Single family residential
2,167,341

 
1,957,546

Commercial real estate
151,610

 
112,492

Construction and land loans on single family residential
31,569

 
41,165

Non-Mortgage (‘‘NM’’) loans
100

 
50

Total
5,686,578

 
4,998,691

Deferred loan costs, net
48,339

 
42,856

Allowance for loan losses
(33,358
)
 
(30,312
)
Loans receivable held for investment, net
$
5,701,559

 
$
5,011,235


Certain loans have been pledged to secure borrowing arrangements (see Note 7).


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The following table summarizes activity in and the allocation of the allowance for loan losses by portfolio segment (dollars in thousands):
 
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, NM, and Construction
 
Total
Three months ended June 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
19,833

 
$
9,214

 
$
1,887

 
$
1,046

 
$
31,980

Provision for (reversal of) loan losses
727

 
881

 
(46
)
 
(262
)
 
1,300

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Three months ended June 30, 2017
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
19,873

 
$
10,097

 
$
1,950

 
$
1,779

 
$
33,699

Reversal of provision for loan losses
(4,300
)
 
(1,270
)
 
(38
)
 
(873
)
 
(6,481
)
Charge-offs

 
(5
)
 

 

 
(5
)
Recoveries

 
3

 

 
140

 
143

Ending balance allocated to portfolio segments
$
15,573

 
$
8,825

 
$
1,912

 
$
1,046

 
$
27,356

Six months ended June 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
18,588

 
$
9,044

 
$
1,734

 
$
946

 
$
30,312

Provision for (reversal of) loan losses
1,972

 
1,048

 
17

 
(237
)
 
2,800

Charge-offs

 

 

 

 

Recoveries

 
6

 
90

 
150

 
246

Ending balance allocated to portfolio segments
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Six months ended June 30, 2017
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
18,478

 
$
11,559

 
$
1,823

 
$
1,438

 
$
33,298

(Reversal of) provision for loan losses
(2,905
)
 
(2,735
)
 
89

 
(621
)
 
(6,172
)
Charge-offs

 
(5
)
 

 

 
(5
)
Recoveries

 
6

 

 
229

 
235

Ending balance allocated to portfolio segments
$
15,573

 
$
8,825

 
$
1,912

 
$
1,046

 
$
27,356


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The following tables summarize the allocation of the allowance for loan losses by impairment methodology (dollars in thousands):
 
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, NM, and Construction
 
Total
As of June 30, 2018:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
20,560

 
10,073

 
1,841

 
859

 
33,333

Ending balance
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
1,543

 
$
7,143

 
$
871

 
$

 
$
9,557

Ending balance: collectively evaluated for impairment
3,334,415

 
2,160,198

 
150,739

 
31,669

 
5,677,021

Ending balance
$
3,335,958

 
$
2,167,341

 
$
151,610

 
$
31,669

 
$
5,686,578

As of December 31, 2017:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
18,588

 
9,019

 
1,734

 
946

 
30,287

Ending balance
$
18,588

 
$
9,044

 
$
1,734

 
$
946

 
$
30,312

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
2,246

 
$
8,991

 
$
656

 
$

 
$
11,893

Ending balance: collectively evaluated for impairment
2,885,192

 
1,948,555

 
111,836

 
41,215

 
4,986,798

Ending balance
$
2,887,438

 
$
1,957,546

 
$
112,492

 
$
41,215

 
$
4,998,691


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

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

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

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

Substandard assets are inadequately protected by the current net worth and 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.

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Table of Contents

A deterioration in collateral value alone does not mandate that an asset be adversely classified if such factor does not indicate that the primary source of repayment is in jeopardy.

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

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

The following tables summarize the loan portfolio allocated by management’s internal risk ratings at June 30, 2018 and December 31, 2017 (dollars in thousands):
 
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, NM and Construction
 
Total
As of June 30, 2018:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,246,277

 
$
2,140,414

 
$
149,012

 
$
29,654

 
$
5,565,357

Watch
78,221

 
17,357

 
1,727

 

 
97,305

Special mention
4,941

 
5,675

 

 
2,015

 
12,631

Substandard
6,519

 
3,895

 
871

 

 
11,285

Total
$
3,335,958

 
$
2,167,341

 
$
151,610

 
$
31,669

 
$
5,686,578

As of December 31, 2017:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
2,847,720

 
$
1,923,960

 
$
106,539

 
$
41,215

 
$
4,919,434

Watch
25,354

 
20,178

 
4,315

 

 
49,847

Special mention
6,569

 
9,025

 

 

 
15,594

Substandard
7,795

 
4,383

 
1,638

 

 
13,816

Total
$
2,887,438

 
$
1,957,546

 
$
112,492

 
$
41,215

 
$
4,998,691

The following tables summarize an aging analysis of the loan portfolio by the time past due at June 30, 2018 and December 31, 2017 (dollars in thousands):
 
30 Days
 
60 Days
 
90+ Days
 
Non-accrual
 
Current
 
Total
As of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
660

 
$

 
$

 
$
1,543

 
$
3,333,755

 
$
3,335,958

Single family residential
1,711

 
2,230

 

 
2,372

 
2,161,028

 
2,167,341

Commercial real estate

 

 

 
871

 
150,739

 
151,610

Land, NM, and construction

 

 

 

 
31,669

 
31,669

Total
$
2,371

 
$
2,230

 
$

 
$
4,786

 
$
5,677,191

 
$
5,686,578

As of December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
2,751

 
$

 
$

 
$
2,246

 
$
2,882,441

 
$
2,887,438

Single family residential
4,870

 
3,364

 

 
4,135

 
1,945,177

 
1,957,546

Commercial real estate

 

 

 
656

 
111,836

 
112,492

Land, NM, and construction

 

 

 

 
41,215

 
41,215

Total
$
7,621

 
$
3,364

 
$

 
$
7,037

 
$
4,980,669

 
$
4,998,691


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Table of Contents

The following table summarizes information related to impaired loans at June 30, 2018 and December 31, 2017 (dollars in thousands):
 
As of June 30, 2018
 
As of December 31, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
1,543

 
$
1,680

 
$

 
$
2,246

 
$
2,545

 
$

Single family residential
6,196

 
6,443

 

 
8,029

 
8,237

 

Commercial real estate
871

 
871

 

 
656

 
798

 

 
8,610

 
8,994

 

 
10,931

 
11,580

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single family residential
947

 
947

 
25

 
962

 
962

 
25

 
947

 
947

 
25

 
962

 
962

 
25

Total:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
1,543

 
1,680

 

 
2,246

 
2,545

 

Single family residential
7,143

 
7,390

 
25

 
8,991

 
9,199

 
25

Commercial real estate
871

 
871

 

 
656

 
798

 

 
$
9,557

 
$
9,941

 
$
25

 
$
11,893

 
$
12,542

 
$
25


The following table summarizes information related to impaired loans for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
Three Months Ended June 30,
 
2018
 
2017
 
Average Recorded Investment
 
Interest Income
 
Cash Basis Interest
 
Average Recorded Investment
 
Interest Income
 
Cash Basis Interest
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
1,553

 
$

 
$

 
$
2,211