Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
o  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 x NO o

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller Reporting Company
x
 
 
 
Emerging Growth Company
x

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x

As of August 2, 2019, there were 56,146,949 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 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

Table of Contents

PART I.

Item 1. Financial Statements
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
 
June 30,
2019 (unaudited)
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
93,912

 
$
91,697

Available for sale debt securities, at fair value
638,245

 
608,528

Held to maturity debt securities, at amortized cost (fair value of $11,276 and $11,625 at June 30, 2019 and December 31, 2018, respectively)
11,203

 
11,860

Equity securities, at fair value
11,749

 
11,438

Loans held for sale
10,555

 

Loans receivable, net of allowance for loan losses of $35,221 and $34,314 as of June 30, 2019 and December 31, 2018, respectively
6,231,537

 
6,096,316

Accrued interest receivable
21,947

 
20,220

Federal Home Loan Bank ("FHLB") stock, at cost
32,668

 
31,823

Premises and equipment, net
20,051

 
20,981

Goodwill
3,297

 
3,297

Prepaid expenses and other assets
39,173

 
41,052

Total assets
$
7,114,337

 
$
6,937,212

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
5,234,490

 
$
5,001,040

FHLB advances
1,068,817

 
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 $645 and $707 at June 30, 2019 and December 31, 2018, respectively)
94,355

 
94,293

Accrued interest payable
5,002

 
4,307

Other liabilities and accrued expenses
52,349

 
51,438

Total liabilities
6,516,870

 
6,356,067

 
 
 
 
Commitments and contingencies (Note 15)

 

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at June 30, 2019 and December 31, 2018

 

Common stock, no par value; 100,000,000 shares authorized; 55,982,491 and 56,379,066 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
449,825

 
456,378

Retained earnings
146,514

 
129,806

Accumulated other comprehensive gain (loss), net of taxes
1,128

 
(5,039
)
Total stockholders' equity
597,467

 
581,145

Total liabilities and stockholders' equity
$
7,114,337

 
$
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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Interest and fee income:
 
 
 
 
 
 
 
 
Loans
 
$
61,015

 
$
51,343

 
$
122,068

 
$
97,906

Investment securities
 
4,118

 
2,901

 
8,043

 
5,372

Cash and cash equivalents
 
522

 
442

 
922

 
689

Total interest and fee income
 
65,655

 
54,686

 
131,033

 
103,967

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
26,471

 
14,560

 
50,759

 
26,492

FHLB advances
 
6,410

 
6,823

 
13,182

 
11,643

Junior subordinated deferrable interest debentures
 
632

 
567

 
1,283

 
1,054

Senior debt
 
1,574

 
1,577

 
3,149

 
3,154

Total interest expense
 
35,087

 
23,527

 
68,373

 
42,343

Net interest income before provision for loan losses
 
30,568

 
31,159

 
62,660

 
61,624

Provision for loan losses
 
450

 
1,300

 
750

 
2,800

Net interest income after provision for loan losses
 
30,118

 
29,859

 
61,910

 
58,824

Noninterest income:
 
 
 
 
 
 
 
 
Gain on sale of loans
 
197

 

 
530

 

FHLB dividends
 
552

 
509

 
1,047

 
1,103

Other income
 
739

 
308

 
1,291

 
739

Total noninterest income
 
1,488

 
817

 
2,868

 
1,842

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and related benefits
 
8,614

 
9,199

 
18,666

 
18,818

Deposit insurance premium
 
487

 
467

 
985

 
899

Professional and regulatory fees
 
457

 
503

 
898

 
901

Occupancy
 
1,399

 
1,304

 
2,789

 
2,600

Depreciation and amortization
 
664

 
694

 
1,329

 
1,408

Data processing
 
945

 
807

 
1,864

 
1,595

Marketing
 
1,071

 
561

 
2,225

 
774

Other expenses
 
1,072

 
1,387

 
2,202

 
2,640

Total noninterest expense
 
14,709

 
14,922

 
30,958

 
29,635

Income before provision for income taxes
 
16,897

 
15,754

 
33,820

 
31,031

Provision for income taxes
 
5,239

 
4,528

 
10,152

 
8,703

Net income
 
$
11,658

 
$
11,226

 
$
23,668

 
$
22,328

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.21

 
$
0.20

 
$
0.42

 
$
0.40

Diluted earnings per common share
 
$
0.21

 
$
0.20

 
$
0.42

 
$
0.39

Dividends per common share
 
$
0.06

 
$
0.06

 
$
0.12

 
$
0.17



See accompanying notes to unaudited consolidated financial statements
4

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
11,658

 
$
11,226

 
$
23,668

 
$
22,328

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available for sale debt securities:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period
5,469

 
(941
)
 
7,973

 
(3,912
)
Tax effect
(1,585
)
 
272

 
(2,309
)
 
1,115

Net of tax
3,884

 
(669
)
 
5,664

 
(2,797
)
Unrealized gain on cash flow hedge:
 
 
 
 
 
 
 
Unrealized holding gain arising during the period

 
192

 
147

 
373

Tax effect

 
(55
)
 
(43
)
 
(107
)
Net of tax

 
137

 
104

 
266

Total other comprehensive income (loss)
3,884

 
(532
)
 
5,768

 
(2,531
)
Comprehensive income
$
15,542

 
$
10,694

 
$
29,436

 
$
19,797



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, March 31, 2018
56,561,055

 
$
455,251

 
$
105,750

 
$
(6,813
)
 
$
(437
)
 
$
553,751

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
11,226

 

 

 
11,226

Other comprehensive (loss) income

 

 

 
(669
)
 
137

 
(532
)
Restricted stock forfeitures
(1,400
)
 
(2
)
 

 

 

 
(2
)
Stock based compensation expense

 
1,040

 

 

 

 
1,040

Cash dividends ($0.06 per share)

 

 
(3,303
)
 

 

 
(3,303
)
Balance, June 30, 2018
56,559,655

 
$
456,289

 
$
113,673

 
$
(7,482
)
 
$
(300
)
 
$
562,180

 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
56,351,781

 
$
452,931

 
$
138,123

 
$
(2,756
)
 
$

 
$
588,298

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
11,658

 

 

 
11,658

Other comprehensive income

 

 

 
3,884

 

 
3,884

Issuance of restricted stock awards
24,121

 

 

 

 

 

Settled restricted stock units
9,677

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(3,119
)
 
(33
)
 

 

 

 
(33
)
Restricted stock forfeitures
(33,268
)
 
(129
)
 
9

 

 

 
(120
)
Stock based compensation expense

 
805

 

 

 

 
805

Shares repurchased
(366,701
)
 
(3,749
)
 

 

 

 
(3,749
)
Cash dividends ($0.06 per share)

 

 
(3,276
)
 

 

 
(3,276
)
Balance, June 30, 2019
55,982,491

 
$
449,825

 
$
146,514

 
$
1,128

 
$

 
$
597,467

 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to unaudited consolidated financial statements
6

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

 

 
22,328

 

 

 
22,328

Other comprehensive (loss) income

 

 

 
(2,797
)
 
266

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

 

 
(1,750
)
 
1,529

 
221

 

Issuance of restricted stock awards
131,140

 

 

 

 

 

Settled restricted stock units
12,710

 

 

 

 

 

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

 

 

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

 

 

 
(3
)
Stock based compensation expense

 
2,054

 

 

 

 
2,054

Cash dividends ($0.17 per share)

 

 
(9,364
)
 

 

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

 
$
456,289

 
$
113,673

 
$
(7,482
)
 
$
(300
)
 
$
562,180

 
 
 
 
 
 
 
 
 
 
 
 
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

 

 
23,668

 

 

 
23,668

Other comprehensive income

 

 

 
5,664

 
104

 
5,768

Issuance of restricted stock awards
321,784

 

 

 

 

 

Settled restricted stock units
121,979

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(44,641
)
 
(437
)
 

 

 

 
(437
)
Restricted stock forfeitures
(35,996
)
 
(131
)
 
10

 

 

 
(121
)
Stock based compensation expense

 
1,645

 

 

 

 
1,645

Shares repurchased
(759,701
)
 
(7,630
)
 

 

 

 
(7,630
)
Cash dividends ($0.12 per share)

 

 
(6,571
)
 

 

 
(6,571
)
Balance, June 30, 2019
55,982,491

 
$
449,825

 
$
146,514

 
$
1,128

 
$

 
$
597,467

 
 
 
 
 
 
 
 
 
 
 
 
(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
7

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
23,668

 
$
22,328

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,329

 
1,408

Provision for loan losses
750

 
2,800

Amortization of deferred loan costs, net
6,563

 
4,634

Amortization of premiums on investment securities, net
658

 
1,060

Gain on sale of loans
(530
)
 

Stock based compensation expense, net of forfeitures
1,514

 
2,051

Change in fair value of mortgage servicing rights
463

 
387

Change in fair value of equity securities
(311
)
 

Other items, net
(370
)
 
(34
)
Effect of changes in:
 
 
 
Accrued interest receivable
(1,727
)
 
(3,409
)
Accrued interest payable
695

 
1,523

Prepaid expenses and other assets
(200
)
 
504

Other liabilities and accrued expenses
876

 
(10,575
)
Net cash provided by operating activities
33,378

 
22,677

Cash flows from investing activities:
 
 
 
Proceeds from maturities and paydowns of available for sale debt securities
32,322

 
40,422

Proceeds from maturities and paydowns of held to maturity debt securities
643

 
273

Purchases of available for sale debt securities
(54,712
)
 
(125,126
)
Purchases of held to maturity debt securities

 
(5,375
)
Net increase in loans receivable
(194,233
)
 
(719,333
)
Proceeds from loans held for sale previously classified as portfolio loans
51,606

 

Purchase of loan
(10,052
)
 

Purchase of FHLB stock, net
(845
)
 
(5,262
)
Purchase of premises and equipment
(399
)
 
(826
)
Net cash used in investing activities
(175,670
)
 
(815,227
)
Cash flows from financing activities:
 
 
 
Net increase in customer deposits
233,450

 
640,917

Proceeds from long-term FHLB advances
200,000

 
425,000

Repayment of long-term FHLB advances
(125,015
)
 
(14
)
Net change in short-term FHLB advances
(149,300
)
 
(263,500
)
Shares withheld for taxes on vested restricted stock
(437
)
 
(49
)
Shares repurchased
(7,630
)
 

Cash paid for dividends
(6,561
)
 
(9,364
)
Net cash provided by financing activities
144,507

 
792,990

Increase in cash and cash equivalents
2,215

 
440

Cash and cash equivalents, beginning of period
91,697

 
75,578

Cash and cash equivalents, end of period
$
93,912

 
$
76,018

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
67,678

 
$
40,820

Income taxes
$
10,916

 
$
10,994

Non-cash investing activity:
 
 
 
Loans transferred to held for sale
$
61,751

 
$
21,575


See accompanying notes to unaudited consolidated financial statements
8

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 and six months ended June 30, 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.

Reclassifications

Certain prior balances in the unaudited consolidated financial statements have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.


9

Table of Contents

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 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
 
$
11,658

 
$
11,226

 
$
23,668

 
$
22,328

 
 
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
 
56,108,618

 
56,190,970

 
56,314,213

 
56,190,970

Add: Dilutive effects of assumed vesting of restricted stock
 
182,770

 
629,106

 
192,829

 
596,645

Weighted average diluted common shares outstanding
 
56,291,388

 
56,820,076

 
56,507,042

 
56,787,615

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic EPS
 
$
0.21

 
$
0.20

 
$
0.42

 
$
0.40

Diluted EPS
 
$
0.21

 
$
0.20

 
$
0.42

 
$
0.39

Anti-dilutive shares not included in calculation of diluted earnings per share
 
5,762

 

 
6,701

 

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. Additionally, $11.4 million of equity securities were reclassified from available for sale securities to equity securities. Subsequent changes in the unrealized gain or loss on equity securities will be recorded through other noninterest income. See Note 2 to the unaudited consolidated financial statements for further discussion.

FASB ASU 2017-12

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”, which changes the recognition and presentation requirements of hedge accounting, including: eliminating the requirement to separately measure and report hedge ineffectiveness;

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and presenting all items that affect earnings in the same income statement line item as the hedged item. The ASU also provides new alternatives for applying hedge accounting to additional hedging strategies; measuring the hedged item in fair value hedges of interest rate risk; reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method; and reducing the risk of material error correction if a company applies the shortcut method inappropriately. ASU 2017-12 was effective for PBEs for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. As an emerging growth company, the Company had the option to adopt this guidance on December 31, 2020, but has elected to early adopt effective April 1, 2019. The guidance did not have a material impact on the Company’s operating results or financial condition on the date of adoption; however, during the quarter ended June 30, 2019, the Company entered into a fair value hedge to hedge certain fixed rate loans held for investment. The hedge is expected to be highly effective in offsetting changes in the fair value of the hedged loans. The related hedging relationship is designated as a fair value hedge under the “last-of-layer” method, a new approach provided by ASU 2017-12. Gains and losses on the derivative instrument designated as a fair value hedge, as well as changes in fair value on the hedged items, are recorded in interest income for loans, net in the unaudited consolidated statements of income. See Note 10 to the unaudited consolidated financial statements for further discussion.

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 June 30, 2019:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Residential mortgage backed securities and collateralized mortgage obligations ("MBS and CMOs")
$
170,089

 
$
304

 
$
(819
)
 
$
169,574

Commercial MBS and CMOs
330,917

 
3,693

 
(1,045
)
 
333,565

Agency bonds
134,641

 
34

 
(570
)
 
134,105

U.S. Treasury
1,007

 

 
(6
)
 
1,001

Total available for sale debt securities
$
636,654

 
$
4,031

 
$
(2,440
)
 
$
638,245

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 gains (losses) on available for sale investment securities are recorded as accumulated other comprehensive income (loss) within stockholders’ equity and totaled $1.1 million and $(4.9) million, net of $(463) thousand and $2.0 million in tax (liabilities) assets at June 30, 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 or six months ended June 30, 2019 and 2018.


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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:
 
June 30, 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
$
25,920

 
$
(92
)
 
$
77,642

 
$
(727
)
 
$
103,562

 
$
(819
)
Commercial MBS and CMOs
31,754

 
(227
)
 
106,257

 
(818
)
 
138,011

 
(1,045
)
Agency bonds
9,822

 
(12
)
 
106,847

 
(558
)
 
116,669

 
(570
)
U.S. Treasury

 

 
1,001

 
(6
)
 
1,001

 
(6
)
Total available for sale debt securities
$
67,496

 
$
(331
)
 
$
291,747

 
$
(2,109
)
 
$
359,243

 
$
(2,440
)
At June 30, 2019, the Company held 77 residential MBS and CMOs of which 49 were in a loss position and 32 had been in a loss position for twelve months or more. The Company held 39 commercial MBS and CMOs of which 17 were in a loss position and 12 had been in a loss position for twelve months or more. The Company held 15 agency bonds of which 12 were in a loss position and had been for twelve months or more. The Company held 1 U.S. Treasury note at June 30, 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 June 30, 2019 and December 31, 2018.
As of June 30, 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.

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Table of Contents

Held to Maturity
The following tables summarize the amortized cost and estimated fair value of held to maturity investment securities as of the dates indicated:
(Dollars in thousands)
Amortized Cost
 
Gross Unrecognized Gains
 
Gross Unrecognized Losses
 
Estimated Fair Value
As of June 30, 2019:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Residential MBS
$
11,117

 
$
120

 
$
(47
)
 
$
11,190

Other investments
86

 

 

 
86

Total held to maturity investment securities
$
11,203

 
$
120

 
$
(47
)
 
$
11,276

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

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 June 30, 2019:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$

 
$

 
$
2,795

 
$
(47
)
 
$
2,795

 
$
(47
)
As of December 31, 2018:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$
6,481

 
$
(111
)
 
$
3,739

 
$
(151
)
 
$
10,220

 
$
(262
)
At June 30, 2019, the Company had 7 held to maturity residential MBS of which 2 were in a loss position and had been 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 June 30, 2019 and December 31, 2018.

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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 June 30, 2019:
 
June 30, 2019
(Dollars in thousands)
Amortized Cost
 
Fair Value
Available for sale debt securities
 
 
 
One to five years
$
118,412

 
$
117,851

Five to ten years
4,402

 
4,407

Beyond ten years
12,834

 
12,848

MBS and CMOs
501,006

 
503,139

Total available for sale debt securities
$
636,654

 
$
638,245

Held to maturity investments securities
 
 
 
Beyond ten years
$
86

 
$
86

MBS
11,117

 
11,190

Total held to maturity debt securities
$
11,203

 
$
11,276

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. As such, mortgage backed securities and collateralized mortgage obligations are not included in the maturity categories above and instead are shown separately. No securities were pledged as of June 30, 2019 and December 31, 2018.

Equity Securities

Equity securities consist of investments in the CRA Qualified Investment Fund. At June 30, 2019 and December 31, 2018, the fair value of equity securities totaled $11.7 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 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 $166 thousand and $311 thousand during the three and six months ended June 30, 2019, respectively. There were no sales of equity securities during the three and six months ended June 30, 2019.

3.
LOANS
Loans consist of the following:
(Dollars in thousands)
June 30,
2019
 
December 31,
2018
Permanent mortgages on:
 
 
 
Multifamily residential
$
3,919,621

 
$
3,671,069

Single family residential
2,127,733

 
2,262,811

Commercial real estate
199,125

 
184,039

Construction and land loans
20,179

 
12,611

Non-Mortgage (‘‘NM’’) loans
100

 
100

Total
6,266,758

 
6,130,630

Allowance for loan losses
(35,221
)
 
(34,314
)
Loans held for investment, net
$
6,231,537

 
$
6,096,316


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, Construction and NM
 
Total
Three months ended June 30, 2019
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
22,046

 
$
9,889

 
$
2,278

 
$
479

 
$
34,692

Provision for (reversal of) loan losses
699

 
(454
)
 
134

 
71

 
450

Charge-offs

 

 

 

 

Recoveries

 
4

 

 
75

 
79

Ending balance allocated to portfolio segments
$
22,745

 
$
9,439

 
$
2,412

 
$
625

 
$
35,221

Three months ended June 30, 2018
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
19,833

 
$
9,214

 
$
1,887

 
$
1,046

 
$
31,980

Provision for (reversal of) loan losses
727

 
881

 
(46
)
 
(262
)
 
1,300

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Six months ended June 30, 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
1,419

 
(693
)
 
(29
)
 
53

 
750

Charge-offs

 

 

 

 

Recoveries

 
7

 

 
150

 
157

Ending balance allocated to portfolio segments
$
22,745

 
$
9,439

 
$
2,412

 
$
625

 
$
35,221

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

 
$
9,044

 
$
1,734

 
$
946

 
$
30,312

Provision for (reversal of) loan losses
1,972

 
1,048

 
17

 
(237
)
 
2,800

Charge-offs

 

 

 

 

Recoveries

 
6

 
90

 
150

 
246

Ending balance allocated to portfolio segments
$
20,560

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358


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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 June 30, 2019:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
22,745

 
9,414

 
2,412

 
625

 
35,196

Ending balance
$
22,745

 
$
9,439

 
$
2,412

 
$
625

 
$
35,221

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
7,124

 
$
8,055

 
$

 
$

 
$
15,179

Ending balance: collectively evaluated for impairment
3,912,497

 
2,119,678

 
199,125

 
20,279

 
6,251,579

Ending balance
$
3,919,621

 
$
2,127,733

 
$
199,125

 
$
20,279

 
$
6,266,758

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
$
564

 
$
5,881

 
$

 
$

 
$
6,445

Ending balance: collectively evaluated for impairment
3,670,505

 
2,256,930

 
184,039

 
12,711

 
6,124,185

Ending balance
$
3,671,069

 
$
2,262,811

 
$
184,039

 
$
12,711

 
$
6,130,630


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

16

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 June 30, 2019 and December 31, 2018:
(Dollars in thousands)
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, Construction and NM
 
Total
As of June 30, 2019:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,827,703

 
$
2,098,295

 
$
191,761

 
$
17,266

 
$
6,135,025

Watch
68,019

 
12,702

 
7,364

 

 
88,085

Special mention
15,050

 
6,304

 

 
3,013

 
24,367

Substandard
8,849

 
10,432

 

 

 
19,281

Total
$
3,919,621

 
$
2,127,733

 
$
199,125

 
$
20,279

 
$
6,266,758

As of December 31, 2018:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,601,279

 
$
2,236,394

 
$
180,655

 
$
10,174

 
$
6,028,502

Watch
65,222

 
20,505

 
1,895

 

 
87,622

Special mention
2,631

 
380

 
1,489

 
2,537

 
7,037

Substandard
1,937

 
5,532

 

 

 
7,469

Total
$
3,671,069

 
$
2,262,811

 
$
184,039

 
$
12,711

 
$
6,130,630

The following tables summarize an aging analysis of the loan portfolio by the time past due at June 30, 2019 and December 31, 2018:
(Dollars in thousands)
30 Days
 
60 Days
 
90+ Days
 
Non-accrual
 
Current
 
Total
As of June 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
4,060

 
$

 
$

 
$
7,124

 
$
3,908,437

 
$
3,919,621

Single family residential
5,325

 

 

 
4,555

 
2,117,853

 
2,127,733

Commercial real estate