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 September 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, California
 (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 November 5, 2018, there were 56,543,211 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)
 
September 30,
2018 (unaudited)
 
December 31,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
60,698

 
$
75,578

Available for sale investment securities, at fair value
614,576

 
503,288

Held to maturity investment securities, at amortized cost (fair value of $11,527 and $6,925 at September 30, 2018 and December 31, 2017, respectively)
11,935

 
6,921

Loans receivable, net of allowance for loan losses of $34,086 and $30,312 as of September 30, 2018 and December 31,2017, respectively
5,891,702

 
5,011,235

Accrued interest receivable
20,060

 
14,901

Federal Home Loan Bank ("FHLB") stock, at cost
27,235

 
27,733

Premises and equipment, net
21,571

 
22,452

Goodwill
3,297

 
3,297

Prepaid expenses and other assets
41,341

 
38,975

 
 
 
 
Total assets
$
6,692,415

 
$
5,704,380

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
4,943,944

 
$
3,951,238

FHLB advances
962,139

 
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 $738 and $839 at September 30, 2018 and December 31, 2017, respectively)
94,262

 
94,161

Accrued interest payable
4,974

 
1,781

Other liabilities and accrued expenses
53,840

 
56,338

 
 
 
 
Total liabilities
6,121,016

 
5,154,635

 
 
 
 
Commitments and contingencies (Note 15)

 

 
 
 
 
Stockholders' equity:
 
 
 
Common stock, no par value; 100,000,000 shares authorized; 56,543,771 and 56,422,662 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
457,428

 
454,287

Retained earnings
122,503

 
102,459

Accumulated other comprehensive loss, net of taxes
(8,532
)
 
(7,001
)
 
 
 
 
Total stockholders' equity
571,399

 
549,745

 
 
 
 
Total liabilities and stockholders' equity
$
6,692,415

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Interest and fee income:
 
 
 
 
 
 
 
 
Loans
 
$
55,644

 
$
44,180

 
$
153,550

 
$
124,096

Investment securities
 
3,266

 
1,683

 
8,638

 
4,857

Cash and cash equivalents
 
489

 
320

 
1,178

 
662

Total interest and fee income
 
59,399

 
46,183

 
163,366

 
129,615

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
19,650

 
10,156

 
46,141

 
27,527

FHLB advances
 
5,860

 
5,260

 
17,502

 
12,796

Junior subordinated deferrable interest debentures
 
600

 
430

 
1,655

 
1,218

Senior debt
 
1,577

 
1,577

 
4,733

 
4,732

Total interest expense
 
27,687

 
17,423

 
70,031

 
46,273

Net interest income before provision for (reversal of) loan losses
 
31,712

 
28,760

 
93,335

 
83,342

Provision for (reversal of) loan losses (Note 3)
 
650

 
1,550

 
3,450

 
(4,622
)
Net interest income after provision for (reversal of) loan losses
 
31,062

 
27,210

 
89,885

 
87,964

Noninterest income:
 
 
 
 
 
 
 
 
Loans held for sale
 
140

 
4,133

 
140

 
3,277

FHLB dividends
 
622

 
581

 
1,725

 
1,777

Other income
 
281

 
217

 
1,020

 
960

Total noninterest income
 
1,043

 
4,931

 
2,885

 
6,014

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and related benefits
 
9,018

 
8,664

 
27,836

 
28,384

Deposit insurance premium
 
483

 
580

 
1,382

 
1,408

Professional and regulatory fees
 
394

 
428

 
1,295

 
1,453

Occupancy
 
1,418

 
1,339

 
4,018

 
3,860

Depreciation and amortization
 
700

 
717

 
2,108

 
2,179

Data processing
 
895

 
791

 
2,490

 
2,378

Marketing
 
1,235

 
253

 
2,009

 
637

Other expenses
 
947

 
1,010

 
3,587

 
3,024

Total noninterest expense
 
15,090

 
13,782

 
44,725

 
43,323

Income before provision for income taxes
 
17,015

 
18,359

 
48,045

 
50,655

Provision for income taxes
 
4,886

 
612

 
13,588

 
1,691

Net income
 
$
12,129

 
$
17,747

 
$
34,457

 
$
48,964

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.22

 
$
0.42

 
$
0.61

 
$
1.17

Diluted earnings per common share
 
$
0.21

 
$
0.42

 
$
0.61

 
$
1.17

Dividends per common share
 
$
0.06

 
$
0.01

 
$
0.23

 
$
0.49



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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
12,129

 
$
17,747

 
$
34,457

 
$
48,964

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on available for sale investment securities:
 
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during the period
 
(1,196
)
 
(196
)
 
(5,108
)
 
595

Tax effect
 
352

 
7

 
1,467

 
(21
)
Net of tax
 
(844
)
 
(189
)
 
(3,641
)
 
574

Unrealized gain on cash flow hedge:
 
 
 
 
 
 
 
 
Unrealized holding gain arising during the period
 
133

 
120

 
506

 
256

Tax effect
 
(39
)
 
(4
)
 
(146
)
 
(9
)
Net of tax
 
94

 
116

 
360

 
247

Total other comprehensive (loss) income
 
(750
)
 
(73
)
 
(3,281
)
 
821

Comprehensive income
 
$
11,379

 
$
17,674

 
$
31,176

 
$
49,785



See accompanying notes to unaudited consolidated financial statements
5

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENT 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, 2017
56,422,662

 
$
454,287

 
$
102,459

 
$
(6,214
)
 
$
(787
)
 
$
549,745

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
34,457

 

 

 
34,457

Other comprehensive (loss) income

 

 

 
(3,641
)
 
360

 
(3,281
)
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
(18,684
)
 
(38
)
 
1

 

 

 
(37
)
Stock-based compensation expense

 
3,228

 

 

 

 
3,228

Cash dividends ($0.23 per share)

 

 
(12,664
)
 

 

 
(12,664
)
Balance, September 30, 2018
56,543,771

 
$
457,428

 
$
122,503

 
$
(8,326
)
 
$
(206
)
 
$
571,399



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)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
34,457

 
$
48,964

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,108

 
2,179

Provision for (reversal of) loan losses
3,450

 
(4,622
)
Amortization of deferred loan costs, net
7,421

 
6,745

Amortization of premiums on investment securities, net
1,559

 
2,166

Loans held for sale
(140
)
 
(3,277
)
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
3,190

 

Other items, net
(41
)
 
(17
)
Effect of changes in:
 
 
 
Accrued interest receivable
(5,159
)
 
(1,761
)
Accrued interest payable
3,193

 
810

Prepaid expenses and other assets
1,060

 
(6,521
)
Other liabilities and accrued expenses
(3,813
)
 
753

Net cash provided by operating activities
47,285

 
53,228

Cash flows from investing activities:
 
 
 
Proceeds from maturities or calls of available for sale investment securities
61,270

 
90,187

Proceeds from maturities or calls of held to maturity investment securities
344

 
584

Purchases of available for sale investment securities
(179,207
)
 
(104,022
)
Purchases of held to maturity investment securities
(5,375
)
 

Net increase in loans receivable
(910,941
)
 
(862,117
)
Proceeds from loans held for sale previously classified as portfolio loans
19,604

 
655,754

Redemption (purchase) of FHLB stock, net
498

 
(9,749
)
Purchase of premises and equipment
(1,231
)
 
(545
)
Net cash used in investing activities
(1,015,038
)
 
(229,908
)
Cash flows from financing activities:
 
 
 
Net increase in customer deposits
992,706

 
529,442

Proceeds from long term FHLB advances
350,000

 
330,000

Repayment of long term FHLB advances
(50,521
)
 
(400,000
)
Net change in short term FHLB advances
(326,600
)
 
(234,219
)
Shares withheld for taxes on vested restricted stock
(49
)
 

Cash paid for dividends
(12,663
)
 
(20,700
)
Net cash provided by financing activities
952,873

 
204,523

(Decrease) increase in cash and cash equivalents
(14,880
)
 
27,843

Cash and cash equivalents, beginning of period
75,578

 
59,208

Cash and cash equivalents, end of period
$
60,698

 
$
87,051

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
66,837

 
$
45,463

Income taxes
$
15,355

 
$
1,455

Non-cash investing activity:
 
 
 
Loans transferred to held for sale
$
19,603

 
$
630,103


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

Earnings Per Share ("EPS")

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the year. 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
 
$
12,129

 
$
17,747

 
$
34,457

 
$
48,964

 
 
 
 
 
 
 
 
 
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
 
673,130

 

 
622,140

 

Weighted average diluted common shares outstanding
 
56,864,100

 
42,000,000

 
56,813,110

 
42,000,000

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.22

 
$
0.42

 
$
0.61

 
$
1.17

Diluted
 
$
0.21

 
$
0.42

 
$
0.61

 
$
1.17

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

 

 

 

New Financial Accounting Standards

FASB ASU 2018-13

In August 2018, the Financial Accounting Standards Board issued guidance that eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average terms used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance also modifies certain disclosure requirements for nonpublic entities to make them less burdensome. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The adoption of this standard in not expected to have a material impact on the Company’s operating results or financial condition.



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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):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
At September 30, 2018:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
452,567

 
$
255

 
$
(7,297
)
 
$
445,525

Agency bonds
120,405

 
7

 
(4,191
)
 
116,221

Collateralized mortgage obligations
40,311

 
231

 

 
40,542

U.S. Treasury
1,009

 

 
(48
)
 
961

CRA Qualified Investment Fund
12,000

 

 
(673
)
 
11,327

Total available for sale investment securities
$
626,292

 
$
493

 
$
(12,209
)
 
$
614,576

 
 
 
 
 
 
 
 
At December 31, 2017:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
329,561

 
$
112

 
$
(3,452
)
 
$
326,221

Agency bonds
120,405

 
30

 
(3,213
)
 
117,222

Collateralized mortgage obligations
46,920

 
249

 
(1
)
 
47,168

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 $8.3 million and $6.2 million, net of $3.4 million and $394 thousand in tax assets at September 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 loss, 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 available for sale investment securities from accumulated other comprehensive loss, net to retained earnings. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three or nine months ended September 30, 2018 and 2017.


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Table of Contents

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):
 
September 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
$
115,926

 
$
(1,020
)
 
$
286,121

 
$
(6,277
)
 
$
402,047

 
$
(7,297
)
Agency bonds

 

 
113,214

 
(4,191
)
 
113,214

 
(4,191
)
Collateralized mortgage obligations
30

 

 

 

 
30

 

U.S. Treasury

 

 
11,327

 
(673
)
 
11,327

 
(673
)
CRA Qualified Investment Fund

 

 
960

 
(48
)
 
960

 
(48
)
Total available for sale investment securities
$
115,956

 
$
(1,020
)
 
$
411,622

 
$
(11,189
)
 
$
527,578

 
$
(12,209
)
At September 30, 2018, the Company held 103 mortgage-backed securities of which 76 were in a loss position and 64 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 had been for twelve months or more. The Company also held 15 collateralized mortgage obligations, one of which was in an unrealized loss position. Of the 3 total investments in the CRA Qualified Investment Fund, all 3 were in a loss position and had been for greater than 12 months. The Company held 1 U.S. Treasury note at September 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
)
 
$
195,645

 
$
(2,647
)
 
$
289,048

 
$
(3,452
)
Agency bonds
9,851

 
(148
)
 
104,340

 
(3,065
)
 
114,191

 
(3,213
)
Collateralized mortgage obligations
1,959

 
(1
)
 

 

 
1,959

 
(1
)
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 91 mortgage-backed securities of which 72 were in a loss position and 34 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 3 total investments in the 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 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 September 30, 2018 and December 31, 2017.
As of September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer

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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 September 30, 2018:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Mortgage-backed securities
$
11,663

 
$
15

 
$
(423
)
 
$
11,255

Other investments
272

 

 

 
272

Total held to maturity investment securities
$
11,935

 
$
15

 
$
(423
)
 
$
11,527

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 September 30, 2018:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
10,123

 
$
(423
)
 
$

 
$

 
$
10,123

 
$
(423
)
As of December 31, 2017:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
1,047

 
$
(4
)
 
$
3,029

 
$
(65
)
 
$
4,076

 
$
(69
)
At September 30, 2018, the Company held 7 held to maturity mortgage-backed securities of which 6 were in a loss position and 3 had been in a loss position for twelve months or more. At December 31, 2017, the Company held 6 held to maturity mortgage-backed securities of which 3 were in a loss position and 2 had been in a loss position for twelve months or more.
The unrecognized losses on the Company’s held to maturity 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 Company has the ability and intent to hold those investments until maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018 and December 31, 2017.

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Table of Contents

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

 
$
114,175

Five to ten years

 

Beyond ten years
3,000

 
3,007

Equity securities
12,000

 
11,327

Mortgage-backed securities and collateralized mortgage obligations
492,878

 
486,067

Total available for sale investment securities
$
626,292

 
$
614,576

Held to maturity investments securities
 
 
 
Beyond ten years
$
272

 
$
272

Mortgage-backed securities
11,663

 
11,255

Total held to maturity investment securities
$
11,935

 
$
11,527

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 September 30, 2018 and December 31, 2017.

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

 
September 30,
2018
 
December 31,
2017
Permanent mortgages on:
 
 
 
Multifamily residential
$
3,502,286

 
$
2,887,438

Single family residential
2,193,365

 
1,957,546

Commercial real estate
163,758

 
112,492

Construction and land loans
16,514

 
41,165

Non-Mortgage (‘‘NM’’) loans
100

 
50

Total
5,876,023

 
4,998,691

Deferred loan costs, net
49,765

 
42,856

Allowance for loan losses
(34,086
)
 
(30,312
)
Loans receivable held for investment, net
$
5,891,702

 
$
5,011,235


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


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Table of Contents

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 September 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Provision for (reversal of) loan losses
604

 
396

 
157

 
(507
)
 
650

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
21,164

 
$
10,497

 
$
1,998

 
$
427

 
$
34,086

Three months ended September 30, 2017
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
15,573

 
$
8,825

 
$
1,912

 
$
1,046

 
$
27,356

Provision for (reversal of) loan losses
1,666

 
68

 
(64
)
 
(120
)
 
1,550

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
17,239

 
$
8,896

 
$
1,848

 
$
1,001

 
$
28,984

Nine months ended September 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
2,576

 
1,444

 
174

 
(744
)
 
3,450

Charge-offs

 

 

 

 

Recoveries

 
9

 
90

 
225

 
324

Ending balance allocated to portfolio segments
$
21,164

 
$
10,497

 
$
1,998

 
$
427

 
$
34,086

Nine months ended September 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
(1,239
)
 
(2,667
)
 
25

 
(741
)
 
(4,622
)
Charge-offs

 
(5
)
 

 

 
(5
)
Recoveries

 
9

 

 
304

 
313

Ending balance allocated to portfolio segments
$
17,239

 
$
8,896

 
$
1,848

 
$
1,001

 
$
28,984


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Table of Contents

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 September 30, 2018:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
21,164

 
10,472

 
1,998

 
427

 
34,061

Ending balance
$
21,164

 
$
10,497

 
$
1,998

 
$
427

 
$
34,086

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
575

 
$
7,088

 
$

 
$

 
$
7,663

Ending balance: collectively evaluated for impairment
3,501,711

 
2,186,277

 
163,758

 
16,614

 
5,868,360

Ending balance
$
3,502,286

 
$
2,193,365

 
$
163,758

 
$
16,614

 
$
5,876,023

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 September 30, 2018 and December 31, 2017 (dollars in thousands):
 
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, NM and Construction
 
Total
As of September 30, 2018:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,422,215

 
$
2,169,733

 
$
161,294

 
$
14,461

 
$
5,767,703

Watch
76,313

 
14,649

 
2,464

 

 
93,426

Special mention
1,017

 
4,779

 

 
2,153

 
7,949

Substandard
2,741

 
4,204

 

 

 
6,945

Total
$
3,502,286

 
$
2,193,365

 
$
163,758

 
$
16,614

 
$
5,876,023

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 September 30, 2018 and December 31, 2017 (dollars in thousands):
 
30 Days
 
60 Days
 
90+ Days
 
Non-accrual
 
Current
 
Total
As of September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$

 
$

 
$

 
$
575

 
$
3,501,711

 
$
3,502,286

Single family residential
720

 

 
85

 
1,620

 
2,190,940

 
2,193,365

Commercial real estate

 

 

 

 
163,758

 
163,758

Land, NM, and construction

 

 

 

 
16,614

 
16,614

Total
$
720

 
$

 
$
85

 
$
2,195

 
$
5,873,023

 
$
5,876,023

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


16

Table of Contents

The following table summarizes information related to impaired loans at September 30, 2018 and December 31, 2017 (dollars in thousands):
 
As of September 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
$
575

 
$
638

 
$

 
$
2,246

 
$
2,545

 
$

Single family residential
6,148

 
6,393

 

 
8,029

 
8,237

 

Commercial real estate

 

 

 
656

 
798

 

 
6,723

 
7,031

 

 
10,931

 
11,580

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single family residential
940

 
940

 
25

 
962

 
962

 
25

 
940

 
940

 
25

 
962

 
962

 
25

Total:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
575

 
638

 

 
2,246

 
2,545

 

Single family residential
7,088

 
7,333

 
25

 
8,991

 
9,199

 
25

Commercial real estate

 

 

 
656

 
798

 

 
$
7,663

 
$
7,971

 
$
25

 
$
11,893

 
$
12,542

 
$
25

The following table summarizes information related to impaired loans for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
 
Three Months Ended September 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
$
953

 
$

 
$

 
$
2,518

 
$

 
$

Single family residential
6,171

 
28

 

 
7,203

 
37

 

Commercial real estate
436

 

 

 
686

 

 

 
7,560

 
28

 

 
10,407

 
37

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single family residential
943

 
7

 

 
976

 
8

 

 
943

 
7

 

 
976

 
8

 

Total:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
953

 

 

 
2,518

 

 

Single family residential
7,114

 
35

 

 
8,179

 
45

 

Commercial real estate
436

 

 

 
686

 

 

 
$