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 March 31, 2019
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

Securities registered under Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common stock, no par value
 
LBC
 
The Nasdaq Stock Market LLC
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ 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. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
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 May 3, 2019, there were 56,317,625 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

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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 West Coast 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 2018 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

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PART I.

Item 1. Financial Statements
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
 
March 31,
2019 (unaudited)
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
104,575

 
$
91,697

Available for sale debt securities, at fair value
638,795

 
608,528

Held to maturity debt securities, at amortized cost (fair value of $11,376 and $11,625 at March 31, 2019 and December 31, 2018, respectively)
11,450

 
11,860

Equity securities, at fair value
11,582

 
11,438

Loans receivable, net of allowance for loan losses of $34,692 and $34,314 as of March 31, 2019 and December 31, 2018, respectively
6,109,576

 
6,096,316

Accrued interest receivable
21,292

 
20,220

Federal Home Loan Bank ("FHLB") stock, at cost
32,047

 
31,823

Premises and equipment, net
20,473

 
20,981

Goodwill
3,297

 
3,297

Prepaid expenses and other assets
38,929

 
41,052

Total assets
$
6,992,016

 
$
6,937,212

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
5,081,831

 
$
5,001,040

FHLB advances
1,109,625

 
1,143,132

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 $676 and $707 at March 31, 2019 and December 31, 2018, respectively)
94,324

 
94,293

Accrued interest payable
5,476

 
4,307

Other liabilities and accrued expenses
50,605

 
51,438

Total liabilities
6,403,718

 
6,356,067

 
 
 
 
Commitments and contingencies (Note 14)

 

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2019 and December 31, 2018

 

Common stock, no par value; 100,000,000 shares authorized; 56,351,781 and 56,379,066 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
452,931

 
456,378

Retained earnings
138,123

 
129,806

Accumulated other comprehensive loss, net of taxes
(2,756
)
 
(5,039
)
Total stockholders' equity
588,298

 
581,145

Total liabilities and stockholders' equity
$
6,992,016

 
$
6,937,212


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 March 31,
 
 
2019
 
2018
Interest and fee income:
 
 
 
 
Loans
 
$
61,053

 
$
46,563

Investment securities
 
3,925

 
2,472

Cash and cash equivalents
 
400

 
246

Total interest and fee income
 
65,378

 
49,281

Interest expense:
 
 
 
 
Deposits
 
24,288

 
11,932

FHLB advances
 
6,772

 
4,820

Junior subordinated deferrable interest debentures
 
651

 
487

Senior debt
 
1,575

 
1,577

Total interest expense
 
33,286

 
18,816

Net interest income before provision for loan losses
 
32,092

 
30,465

Provision for loan losses
 
300

 
1,500

Net interest income after provision for loan losses
 
31,792

 
28,965

Noninterest income:
 
 
 
 
Gain on sale of loans
 
333

 

FHLB dividends
 
495

 
594

Other income
 
552

 
431

Total noninterest income
 
1,380

 
1,025

Noninterest expense:
 
 
 
 
Compensation and related benefits
 
10,052

 
9,619

Deposit insurance premium
 
498

 
432

Professional and regulatory fees
 
441

 
398

Occupancy
 
1,390

 
1,296

Depreciation and amortization
 
665

 
714

Data processing
 
919

 
788

Marketing
 
1,154

 
213

Other expenses
 
1,130

 
1,253

Total noninterest expense
 
16,249

 
14,713

Income before provision for income taxes
 
16,923

 
15,277

Provision for income taxes
 
4,913

 
4,175

Net income
 
$
12,010

 
$
11,102

 
 
 
 
 
Basic earnings per common share
 
$
0.21

 
$
0.20

Diluted earnings per common share
 
$
0.21

 
$
0.20

Dividends per common share
 
$
0.06

 
$
0.11



See accompanying notes to unaudited consolidated financial statements
4

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LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net income
 
$
12,010

 
$
11,102

Other comprehensive income (loss):
 
 
 
 
Unrealized gain (loss) on available for sale debt securities:
 
 
 
 
Unrealized holding gain (loss) arising during the period
 
2,504

 
(2,971
)
Tax effect
 
(724
)
 
843

Net of tax
 
1,780

 
(2,128
)
Unrealized gain on cash flow hedge:
 
 
 
 
Unrealized holding gain arising during the period
 
147

 
181

Tax effect
 
(43
)
 
(52
)
Net of tax
 
104

 
129

Total other comprehensive income (loss)
 
1,884

 
(1,999
)
Comprehensive income
 
$
13,894

 
$
9,103



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, 2017
56,422,662

 
$
454,287

 
$
102,459

 
$
(6,214
)
 
$
(787
)
 
$
549,745

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
11,102

 

 

 
11,102

Other comprehensive (loss) income

 

 

 
(2,128
)
 
129

 
(1,999
)
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
(1,400
)
 
(1
)
 

 

 

 
(1
)
Stock based compensation expense

 
1,014

 

 

 

 
1,014

Cash dividends ($0.11 per share)

 

 
(6,061
)
 

 

 
(6,061
)
Balance, March 31, 2018
56,561,055

 
$
455,251

 
$
105,750

 
$
(6,813
)
 
$
(437
)
 
$
553,751

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
56,379,066

 
$
456,378

 
$
129,806

 
$
(4,935
)
 
$
(104
)
 
$
581,145

Cumulative effect of change in accounting principal (1)

 

 
(399
)
 
399

 


 

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
12,010

 

 

 
12,010

Other comprehensive income

 

 

 
1,780

 
104

 
1,884

Issuance of restricted stock awards
297,663

 

 

 

 

 

Vested restricted stock units
112,302

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(41,522
)
 
(404
)
 

 

 

 
(404
)
Restricted stock forfeitures
(2,728
)
 
(2
)
 
1

 

 

 
(1
)
Stock based compensation expense

 
840

 

 

 

 
840

Shares repurchased
(393,000
)
 
(3,881
)
 

 

 

 
(3,881
)
Cash dividends ($0.06 per share)

 

 
(3,295
)
 

 

 
(3,295
)
Balance, March 31, 2019
56,351,781

 
$
452,931

 
$
138,123

 
$
(2,756
)
 
$

 
$
588,298

 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents the impact of adopting Accounting Standards Update ("ASU") 2016-01. See Note 1 to the unaudited consolidated financial statements for further information.

See accompanying notes to unaudited consolidated financial statements
6

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LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
12,010

 
$
11,102

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
665

 
714

Provision for loan losses
300

 
1,500

Amortization of deferred loan costs, net
2,646

 
2,334

Amortization of premiums on investment securities, net
362

 
563

Gain on sale of loans
(333
)
 

Stock based compensation expense, net of forfeitures
838

 
1,013

Change in fair value of mortgage servicing rights
146

 
131

Change in fair value of equity securities
(144
)
 

Other items, net

 
(37
)
Effect of changes in:
 
 
 
Accrued interest receivable
(1,072
)
 
(1,236
)
Accrued interest payable
1,169

 
548

Prepaid expenses and other assets
1,543

 
(156
)
Other liabilities and accrued expenses
(868
)
 
(6,761
)
Net cash provided by operating activities
17,262

 
9,715

Cash flows from investing activities:
 
 
 
Proceeds from maturities and paydowns of available for sale debt securities
16,263

 
20,965

Proceeds from maturities and paydowns of held to maturity debt securities
399

 
55

Purchases of available for sale debt securities
(44,377
)
 
(59,647
)
Purchases of held to maturity debt securities

 
(5,375
)
Net increase in loans receivable
(69,765
)
 
(287,028
)
Proceeds from loans held for sale previously classified as portfolio loans
53,772

 

Purchase of FHLB stock, net
(224
)
 
(5,290
)
Purchase of premises and equipment
(157
)
 
(123
)
Net cash used in investing activities
(44,089
)
 
(336,443
)
Cash flows from financing activities:
 
 
 
Net increase in customer deposits
80,791

 
162,788

Proceeds from long-term FHLB advances
75,000

 
100,000

Repayment of long-term FHLB advances
(7
)
 
(7
)
Net change in short-term FHLB advances
(108,500
)
 
68,900

Shares withheld for taxes on vested restricted stock
(404
)
 
(49
)
Shares repurchased
(3,881
)
 

Cash paid for dividends
(3,294
)
 
(6,061
)
Net cash provided by financing activities
39,705

 
325,571

Increase (decrease) in cash and cash equivalents
12,878

 
(1,157
)
Cash and cash equivalents, beginning of period
91,697

 
75,578

Cash and cash equivalents, end of period
$
104,575

 
$
74,421

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
32,117

 
$
18,268

Income taxes
$
10

 
$
158

Non-cash investing activity:
 
 
 
Loans transferred to held for sale
$
53,559

 
$


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 a loan production office in Clackamas County, Oregon.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2018, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 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 its subsidiaries. All intercompany accounts and transactions have been eliminated.
 
The results of operations for the three months ended March 31, 2019 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, 2019.

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

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including common stock that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury stock method.
(Dollars in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
 
$
12,010

 
$
11,102

 
 
 
 
 
Weighted average basic common shares outstanding
 
56,519,809

 
56,190,970

Add: Dilutive effects of assumed vesting of restricted stock
 
202,887

 
564,184

Weighted average diluted common shares outstanding
 
56,722,696

 
56,755,154

 
 
 
 
 
Income per common share:
 
 
 
 
Basic EPS
 
$
0.21

 
$
0.20

Diluted EPS
 
$
0.21

 
$
0.20

Anti-dilutive shares not included in calculation of diluted earnings per share
 
13,981

 

New Financial Accounting Standards

FASB ASU 2016-01

In January 2016, the FASB issued ASU 2016-01 which provided guidance to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This update contains several provisions, including but not limited to (1) requiring equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and (4) requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. The update also changes certain financial statement disclosure requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The update was effective for public business entities ("PBEs") for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As an emerging growth company, the Company was permitted to adopt this guidance on January 1, 2019 and, as a result, reclassified $399 thousand of unrealized losses on equity securities from other comprehensive income to retained earnings. Subsequent changes in the unrealized gain or loss on equity securities will be recorded through other noninterest income. Additionally, $11.4 million of equity securities were reclassified from available for sale securities to equity securities.


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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 debt securities as of the dates indicated:
(Dollars in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
At March 31, 2019:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Residential mortgage backed securities and collateralized mortgage obligations ("MBS and CMOs")
$
181,485

 
$
197

 
$
(1,878
)
 
$
179,804

Commercial MBS and CMOs
325,078

 
1,693

 
(1,997
)
 
324,774

Agency bonds
135,102

 
26

 
(1,897
)
 
133,231

U.S. Treasury
1,008

 

 
(22
)
 
986

Total available for sale debt securities
$
642,673

 
$
1,916

 
$
(5,794
)
 
$
638,795

At December 31, 2018:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Residential MBS and CMOs
$
194,297

 
$
339

 
$
(2,523
)
 
$
192,113

Commercial MBS and CMOs
294,276

 
979

 
(2,304
)
 
292,951

Agency bonds
125,329

 
7

 
(2,848
)
 
122,488

U.S. Treasury
1,008

 

 
(32
)
 
976

Total available for sale debt securities
$
614,910

 
$
1,325

 
$
(7,707
)
 
$
608,528

Net unrealized losses on available for sale investment securities are recorded as accumulated other comprehensive income within stockholders’ equity and totaled $2.8 million and $4.9 million, net of $1.1 million and $2.0 million in tax assets at March 31, 2019 and December 31, 2018, respectively. With the exception of the adoption of ASU 2016-01 as discussed in Note 1 to the unaudited consolidated financial statements, there were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three months ended March 31, 2019 and 2018.

The following tables summarize the gross unrealized losses and fair value of available for sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS and CMOs
$
43,757

 
$
(162
)
 
$
108,121

 
$
(1,716
)
 
$
151,878

 
$
(1,878
)
Commercial MBS and CMOs
35,400

 
(392
)
 
149,246

 
(1,605
)
 
184,646

 
(1,997
)
Agency bonds
14,607

 
(90
)
 
115,598

 
(1,807
)
 
130,205

 
(1,897
)
U.S. Treasury

 

 
986

 
(22
)
 
986

 
(22
)
Total available for sale debt securities
$
93,764

 
$
(644
)
 
$
373,951

 
$
(5,150
)
 
$
467,715

 
$
(5,794
)
At March 31, 2019, the Company held 80 residential MBS and CMOs of which 56 were in a loss position and 39 had been in a loss position for twelve months or more. The Company held 38 commercial MBS and CMOs of which 24 were in a loss position and 18 had been in a loss position for twelve months or more. The Company

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held 15 agency bonds of which 14 were in a loss position and had been for twelve months or more. The Company held 1 U.S. Treasury note at March 31, 2019. This note was in a loss position for greater than 12 months.
 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS and CMOs
$
31,728

 
$
(304
)
 
$
102,503

 
$
(2,219
)
 
$
134,231

 
$
(2,523
)
Commercial MBS and CMOs
58,725

 
(432
)
 
114,159

 
(1,872
)
 
172,884

 
(2,304
)
Agency bonds
4,906

 
(18
)
 
114,575

 
(2,830
)
 
119,481

 
(2,848
)
U.S. Treasury

 

 
976

 
(32
)
 
976

 
(32
)
Total available for sale debt securities
$
95,359

 
$
(754
)
 
$
332,213

 
$
(6,953
)
 
$
427,572

 
$
(7,707
)
At December 31, 2018, the Company held 82 residential MBS and CMOs of which 45 were in a loss position and 40 had been in a loss position for twelve months or more. The Company held 34 commercial MBS and CMOs of which 23 were in a loss position and 16 had been in a loss position for twelve months or more. The Company held 14 agency bonds of which 13 were in a loss position and 12 had been in a loss position for twelve months or more. The Company held 1 U.S. Treasury note at December 31, 2018. 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 the U.S. government or agencies sponsored by the U.S. government. Accordingly, it is expected that the securities will not be settled at a price less than amortized cost. Because the decline in market value is attributable to changes in interest rates but not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2019 and December 31, 2018.
As of March 31, 2019 and December 31, 2018, 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 March 31, 2019:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Residential MBS
$
11,187

 
$
40

 
$
(114
)
 
$
11,113

Other investments
263

 

 

 
263

Total held to maturity investment securities
$
11,450

 
$
40

 
$
(114
)
 
$
11,376

As of December 31, 2018:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Residential MBS
$
11,593

 
$
27

 
$
(262
)
 
$
11,358

Other investments
267

 

 

 
267

Total held to maturity investment securities
$
11,860

 
$
27

 
$
(262
)
 
$
11,625


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Table of Contents

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:
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair Value
 
Unrecognized Losses
 
Fair Value
 
Unrecognized Losses
 
Fair Value
 
Unrecognized Losses
As of March 31, 2019:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$

 
$

 
$
8,661

 
$
(114
)
 
$
8,661

 
$
(114
)
As of December 31, 2018:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$
6,481

 
$
(111
)
 
$
3,739

 
$
(151
)
 
$
10,220

 
$
(262
)
At March 31, 2019, the Company had 7 held to maturity residential MBS of which 4 were in a loss position and 4 had been in a loss position for twelve months or more. At December 31, 2018, the Company held 7 held to maturity residential MBS of which 6 were in a loss position and 3 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 March 31, 2019 and December 31, 2018.
The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of March 31, 2019:
 
March 31, 2019
(Dollars in thousands)
Amortized Cost
 
Fair Value
Available for sale debt securities
 
 
 
One to five years
$
118,413

 
$
116,584

Five to ten years
4,685

 
4,663

Beyond ten years
13,012

 
12,970

MBS and CMOs
506,563

 
504,578

Total available for sale debt securities
$
642,673

 
$
638,795

Held to maturity investments securities
 
 
 
Beyond ten years
$
263

 
$
263

MBS
11,187

 
11,113

Total held to maturity debt securities
$
11,450

 
$
11,376

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 March 31, 2019 and December 31, 2018.

Equity Securities

Equity securities consist of investments in the CRA Qualified Investment Fund. At March 31, 2019 and December 31, 2018, the fair value of equity securities totaled $11.6 million and $11.4 million, respectively. Prior to January 1, 2019, equity securities were included with available for sale investment securities and stated at fair value with unrealized gains and losses reported in other comprehensive income. As of January

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1, 2019, $399 thousand of unrealized losses on equity securities were reclassified from other comprehensive income to retained earnings. Subsequent changes in fair value are recognized in other noninterest income and totaled $144 thousand during the three months ended March 31, 2019. There were no sales of equity securities during the three months ended March 31, 2019.

3.
LOANS
Loans consist of the following:
(Dollars in thousands)
March 31,
2019
 
December 31,
2018
Permanent mortgages on:
 
 
 
Multifamily residential
$
3,747,716

 
$
3,650,967

Single family residential
2,141,989

 
2,231,802

Commercial real estate
190,082

 
183,559

Construction and land loans
13,188

 
12,656

Non-Mortgage (‘‘NM’’) loans
100

 
100

Total
6,093,075

 
6,079,084

Deferred loan costs, net
51,193

 
51,546

Allowance for loan losses
(34,692
)
 
(34,314
)
Loans held for investment, net
$
6,109,576

 
$
6,096,316


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

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, Construction and NM
 
Total
Three months ended March 31, 2019
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
21,326

 
$
10,125

 
$
2,441

 
$
422

 
$
34,314

Provision for (reversal of) loan losses
720

 
(239
)
 
(163
)
 
(18
)
 
300

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
22,046

 
$
9,889

 
$
2,278

 
$
479

 
$
34,692

Three months ended March 31, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
18,588

 
$
9,044

 
$
1,734

 
$
946

 
$
30,312

Provision for loan losses
1,245

 
167

 
63

 
25

 
1,500

Charge-offs

 

 

 

 

Recoveries

 
3

 
90

 
75

 
168

Ending balance allocated to portfolio segments
$
19,833

 
$
9,214

 
$
1,887

 
$
1,046

 
$
31,980


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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, Construction and NM
 
Total
As of March 31, 2019:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
22,046

 
9,864

 
2,278

 
479

 
34,667

Ending balance
$
22,046

 
$
9,889

 
$
2,278

 
$
479

 
$
34,692

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
557

 
$
4,461

 
$

 
$

 
$
5,018

Ending balance: collectively evaluated for impairment
3,747,159

 
2,137,528

 
190,082

 
13,288

 
6,088,057

Ending balance
$
3,747,716

 
$
2,141,989

 
$
190,082

 
$
13,288

 
$
6,093,075

As of December 31, 2018:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
21,326

 
10,100

 
2,441

 
422

 
34,289

Ending balance
$
21,326

 
$
10,125

 
$
2,441

 
$
422

 
$
34,314

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
566

 
$
6,008

 
$

 
$

 
$
6,574

Ending balance: collectively evaluated for impairment
3,650,401

 
2,225,794

 
183,559

 
12,756

 
6,072,510

Ending balance
$
3,650,967

 
$
2,231,802

 
$
183,559

 
$
12,756

 
$
6,079,084


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/or paying capacity of the obligor or by the collateral pledged. These assets have well-defined weaknesses: the primary source of repayment is gone or severely impaired (i.e., bankruptcy or loss of employment) and/or there has been a deterioration in collateral value. In addition, there is the distinct possibility that the Company will sustain some loss, either directly or indirectly (i.e., the cost of monitoring), if the deficiencies are not corrected. A deterioration in collateral value alone does not mandate that an asset be adversely classified if such

14

Table of Contents

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 March 31, 2019 and December 31, 2018:
(Dollars in thousands)
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, Construction and NM
 
Total
As of March 31, 2019:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,681,125

 
$
2,103,901

 
$
186,242

 
$
10,450

 
$
5,981,718

Watch
58,340

 
20,839

 
3,840

 

 
83,019

Special mention
5,962

 
10,486

 

 
2,838

 
19,286

Substandard
2,289

 
6,763

 

 

 
9,052

Total
$
3,747,716

 
$
2,141,989

 
$
190,082

 
$
13,288

 
$
6,093,075

As of December 31, 2018:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,581,468

 
$
2,205,528

 
$
180,190

 
$
10,232

 
$
5,977,418

Watch
64,958

 
20,288

 
1,887

 

 
87,133

Special mention
2,607

 
369

 
1,482

 
2,524

 
6,982

Substandard
1,934

 
5,617

 

 

 
7,551

Total
$
3,650,967

 
$
2,231,802

 
$
183,559

 
$
12,756

 
$
6,079,084

The following tables summarize an aging analysis of the loan portfolio by the time past due at March 31, 2019 and December 31, 2018:
(Dollars in thousands)
30 Days
 
60 Days
 
90+ Days
 
Non-accrual
 
Current
 
Total
As of March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
1,440

 
$

 
$

 
$
557

 
$
3,745,719

 
$
3,747,716

Single family residential
9,397

 

 

 
949

 
2,131,643

 
2,141,989

Commercial real estate

 

 

 

 
190,082

 
190,082

Land, construction and NM

 

 

 

 
13,288

 
13,288

Total
$
10,837

 
$

 
$

 
$
1,506

 
$
6,080,732

 
$
6,093,075

As of December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$

 
$

 
$

 
$
566

 
$
3,650,401

 
$
3,650,967

Single family residential
357

 
2,205

 

 
1,598

 
2,227,642

 
2,231,802

Commercial real estate

 

 

 

 
183,559

 
183,559

Land, construction and NM

 

 

 

 
12,756

 
12,756

Total
$
357

 
$
2,205

 
$

 
$
2,164

 
$
6,074,358

 
$
6,079,084


15

Table of Contents

The following table summarizes information related to impaired loans at March 31, 2019 and December 31, 2018:
 
As of March 31, 2019
 
As of December 31, 2018
(Dollars in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
557

 
$
631

 
$

 
$
566

 
$
635

 
$

Single family residential
3,535

 
3,772

 

 
5,075

 
5,333

 

 
4,092

 
4,403

 

 
5,641

 
5,968

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single family residential
926

 
926

 
25

 
933

 
933

 
25

 
926

 
926

 
25

 
933

 
933

 
25

Total:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
557

 
631

 

 
566

 
635

 

Single family residential
4,461

 
4,698

 
25

 
6,008

 
6,266

 
25

 
$
5,018

 
$
5,329

 
$
25

 
$
6,574

 
$
6,901

 
$
25

The following table summarizes information related to impaired loans for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
(Dollars in thousands)
Average Recorded Investment
 
Interest Income
 
Cash Basis Interest
 
Average Recorded Investment
 
Interest Income
 
Cash Basis Interest
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
560

 
$
3

 
$
3

 
$
2,070

 
$

 
$

Single family residential
4,148

 
36

 

 
8,165

 
37

 

Commercial real estate

 

 

 
487

 

 

 
4,708

 
39

 
3

 
10,722

 
37

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Single family residential
929

 
12

 

 
1,718

 
17

 

 
929

 
12

 

 
1,718

 
17

 

Total:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
560

 
3

 
3

 
2,070

 

 

Single family residential
5,077

 
48

 

 
9,883

 
54

 

Commercial real estate

 

 

 
487

 

 

 
$
5,637

 
$
51

 
$
3

 
$
12,440

 
$
54

 
$

 
 
 
 
 
 
 
 
 
 
 
 
The following table summarizes the recorded investment related to troubled debt restructurings at March 31, 2019 and December 31, 2018:
(Dollars in thousands)
March 31,
2019
 
December 31,
2018
Troubled debt restructurings:
 
 
 
Single family residential
$
3,512

 
$
4,410

The Company has allocated $25 thousand of allowances for loans modified in troubled debt restructurings at both March 31, 2019 and December 31, 2018. The Company does not have commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings. There were no new troubled debt restructurings during the three months ended March 31, 2019 and 2018.

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Table of Contents


The Company had no troubled debt restructurings with a subsequent payment default within twelve months following the modification during the three months ended March 31, 2019 and 2018. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

4.
NONPERFORMING ASSETS
Nonperforming assets include nonperforming loans plus real estate owned. The Company’s nonperforming assets at March 31, 2019 and December 31, 2018 are indicated below:
(Dollars in thousands)
March 31,
2019
 
December 31,
2018
Non-accrual loans:
 
 
 
Multifamily residential
$
557

 
$
566

Single family residential
949

 
1,598

Total non-accrual loans
1,506

 
2,164

Real estate owned

 

Total nonperforming assets
$
1,506

 
$
2,164

Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of a non-accrual loan is deemed to be fully collectible. If there’s doubt regarding the collectability of the loan, then any interest payments received are applied to principal. Interest income was recognized on a cash basis on two non-accrual loans during the three months ended March 31, 2019 totaling $3 thousand. No interest income was recognized on non-accrual loans during the three months ended March 31, 2018. Contractual interest not accrued on nonperforming loans during the three months ended March 31, 2019 and 2018 totaled $22 thousand and $90 thousand, respectively.

Generally, nonperforming loans are considered impaired, because the repayment of the loan will not be made in accordance with the original contractual agreement.
 
5.
MORTGAGE SERVICING RIGHTS
Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:
(Dollars in thousands)
March 31,
2019
 
December 31,
2018
Mortgage loans serviced for:
 
 
 
Federal Home Loan Mortgage Corporation ("Freddie Mac")
$
490,744

 
$
497,950

Other financial institutions
185,896

 
139,558

Total mortgage loans serviced for others
$
676,640

 
$
637,508

Included in the table above are $33.4 million of single family loans that were sold during the quarter ended March 31, 2019.  In connection with the sale, the Company agreed to service this portfolio for a temporary period of 30 days.  Following this period, the Company will release the servicing rights to the purchaser of this portfolio.
Custodial account balances maintained in connection with serviced loans totaled $948 thousand and $10.1 million at March 31, 2019 and December 31, 2018, respectively.

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Table of Contents

Activity for mortgage servicing rights are as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
 
2018
Beginning balance
$
3,463

 
$
4,255

Additions
155

 

Disposals

 

Change in fair value due to changes in assumptions

 

Other changes in fair value
(146
)
 
(131
)
Ending balance
$
3,472

 
$
4,124

Fair value as of March 31, 2019 was determined using a discount rate of 10%, prepayment speeds ranging from 5.8% to 82.0%, depending on the stratification of the specific right, and a weighted average default rate of 5%. The weighted average prepayment speed at March 31, 2019 was 22.6%. Fair value as of December 31, 2018 was determined using a discount rate of 10%, prepayment speeds ranging from 6.0% to 70.4%, depending on the stratification of the specific right, and a weighted average default rate of 5%. The weighted average prepayment speed at December 31, 2018 was 23.3%.
 
6.
DEPOSITS
A summary of deposits at March 31, 2019 and December 31, 2018 is as follows:
(Dollars in thousands)
March 31,
2019
 
December 31,
2018
Certificates of deposit
$
3,523,187

 
$
3,297,433

Money market savings
1,174,786

 
1,335,246

Interest bearing demand
216,580

 
179,272

Money market checking
127,351

 
123,119

Non-interest bearing demand
39,927

 
65,970

Total
$
5,081,831

 
$
5,001,040

The Company had certificates of deposit with a denomination of $100 thousand or more totaling $2.5 billion and $2.4 billion at March 31, 2019 and December 31, 2018, respectively.

The Company had certificates of deposit that meet or exceed the FDIC Insurance limit of $250 thousand of $1.3 billion and $1.2 billion at March 31, 2019 and December 31, 2018, respectively.

The Company utilizes brokered deposits as an additional source of funding. The Company had brokered deposits of $611.2 million and $467.5 million at March 31, 2019 and December 31, 2018, respectively.

Maturities of the Company’s certificates of deposit at March 31, 2019 are summarized as follows (dollars
in thousands):
April 1 - December 31, 2019
$
1,966,800

Year ending December 31, 2020
1,222,219

Year ending December 31, 2021
278,890

Year ending December 31, 2022
50,184

Year ending December 31, 2023
5,094

Total
$
3,523,187

 
7.
FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES
The Bank may borrow from the FHLB, on either a short-term or long-term basis, up to 40% of its assets provided that adequate collateral has been pledged. As of March 31, 2019 and December 31, 2018, the Bank had pledged various mortgage loans totaling approximately $2.3 billion and $2.1 billion, respectively, as well as the FHLB stock held by the Bank to secure these borrowing arrangements.

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Table of Contents

The Bank has access to the Loan and Discount Window of the Federal Reserve Bank of San Francisco ("FRB"). Advances under this window are subject to the Bank providing qualifying collateral. Various mortgage loans totaling approximately $423.1 million and $406.6 million as of March 31, 2019 and December 31, 2018, respectively, secure this borrowing arrangement. There were no borrowings outstanding with the FRB as of March 31, 2019 and December 31, 2018.