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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

☐ 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.

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		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Statements of Financial Condition - June 30, 2018 (unaudited) and December 31, 2017	3
	Unaudited Consolidated Statements of Income	4
	Unaudited Consolidated Statements of Comprehensive Income	5
	Unaudited Consolidated Statements of Changes in Stockholders' Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	61
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	63
	Signatures	64

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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.

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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

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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

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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

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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			Retained Earnings			Available for Sale Securities			Cash Flow Hedge
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

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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

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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.

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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,
(Dollars in thousands, except per share amounts)	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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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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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