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 September 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 Pursuant to 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 November 5, 2019, there were 56,034,399 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)
 
September 30,
2019 (unaudited)
 
December 31,
2018
ASSETS
 
 
 
Cash and cash equivalents
$
168,282

 
$
91,697

Available for sale debt securities, at fair value
631,857

 
608,528

Held to maturity debt securities, at amortized cost (fair value of $10,731 and $11,625 at September 30, 2019 and December 31, 2018, respectively)
10,602

 
11,860

Equity securities, at fair value
11,837

 
11,438

Loans receivable, net of allowance for loan losses of $34,923 and $34,314 as of September 30, 2019 and December 31, 2018, respectively
6,224,597

 
6,096,316

Accrued interest receivable
21,558

 
20,220

Federal Home Loan Bank ("FHLB") stock, at cost
30,343

 
31,823

Premises and equipment, net
18,523

 
20,981

Goodwill
3,297

 
3,297

Prepaid expenses and other assets
40,523

 
41,052

Total assets
$
7,161,419

 
$
6,937,212

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
5,362,002

 
$
5,001,040

FHLB advances
977,210

 
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 $614 and $707 at September 30, 2019 and December 31, 2018, respectively)
94,386

 
94,293

Accrued interest payable
3,338

 
4,307

Other liabilities and accrued expenses
57,254

 
51,438

Total liabilities
6,556,047

 
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 September 30, 2019 and December 31, 2018

 

Common stock, no par value; 100,000,000 shares authorized; 56,034,771 and 56,379,066 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
447,389

 
456,378

Retained earnings
156,016

 
129,806

Accumulated other comprehensive income (loss), net of taxes
1,967

 
(5,039
)
Total stockholders' equity
605,372

 
581,145

Total liabilities and stockholders' equity
$
7,161,419

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest and fee income:
 
 
 
 
 
 
 
 
Loans
 
$
64,010

 
$
55,644

 
$
186,078

 
$
153,550

Investment securities
 
3,900

 
3,266

 
11,943

 
8,638

Cash and cash equivalents
 
766

 
489

 
1,688

 
1,178

Total interest and fee income
 
68,676

 
59,399

 
199,709

 
163,366

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
27,927

 
19,650

 
78,686

 
46,141

FHLB advances
 
5,983

 
5,860

 
19,165

 
17,502

Junior subordinated deferrable interest debentures
 
604

 
600

 
1,888

 
1,655

Senior debt
 
1,577

 
1,577

 
4,725

 
4,733

Total interest expense
 
36,091

 
27,687

 
104,464

 
70,031

Net interest income before (reversal of) provision for loan losses
 
32,585

 
31,712

 
95,245

 
93,335

(Reversal of) provision for loan losses
 
(500
)
 
650

 
250

 
3,450

Net interest income after (reversal of) provision for loan losses
 
33,085

 
31,062

 
94,995

 
89,885

Noninterest income:
 
 
 
 
 
 
 
 
Gain on sale of loans
 
77

 
140

 
607

 
140

FHLB dividends
 
557

 
622

 
1,604

 
1,725

Other income
 
359

 
281

 
1,650

 
1,020

Total noninterest income
 
993

 
1,043

 
3,861

 
2,885

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and related benefits
 
9,191

 
9,018

 
27,857

 
27,836

Deposit insurance premium
 

 
483

 
985

 
1,382

Professional and regulatory fees
 
521

 
394

 
1,419

 
1,295

Occupancy
 
1,425

 
1,418

 
4,214

 
4,018

Depreciation and amortization
 
672

 
700

 
2,001

 
2,108

Data processing
 
945

 
895

 
2,809

 
2,490

Marketing
 
1,217

 
1,235

 
3,442

 
2,009

Other expenses
 
2,098

 
947

 
4,300

 
3,587

Total noninterest expense
 
16,069

 
15,090

 
47,027

 
44,725

Income before provision for income taxes
 
18,009

 
17,015

 
51,829

 
48,045

Provision for income taxes
 
5,273

 
4,886

 
15,425

 
13,588

Net income
 
$
12,736

 
$
12,129

 
$
36,404

 
$
34,457

 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.23

 
$
0.22

 
$
0.65

 
$
0.61

Diluted earnings per common share
 
$
0.23

 
$
0.21

 
$
0.65

 
$
0.61

Dividends per common share
 
$
0.06

 
$
0.06

 
$
0.17

 
$
0.23



See accompanying notes to unaudited consolidated financial statements
4

Table of Contents

LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
12,736

 
$
12,129

 
$
36,404

 
$
34,457

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available for sale debt securities:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period
1,183

 
(1,196
)
 
9,156

 
(5,108
)
Tax effect
(344
)
 
352

 
(2,653
)
 
1,467

Net of tax
839

 
(844
)
 
6,503

 
(3,641
)
Unrealized gain on cash flow hedge:
 
 
 
 
 
 
 
Unrealized holding gain arising during the period

 
133

 
147

 
506

Tax effect

 
(39
)
 
(43
)
 
(146
)
Net of tax

 
94

 
104

 
360

Total other comprehensive income (loss)
839

 
(750
)
 
6,607

 
(3,281
)
Comprehensive income
$
13,575

 
$
11,379

 
$
43,011

 
$
31,176



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, June 30, 2018
56,559,655

 
$
456,289

 
$
113,673

 
$
(7,482
)
 
$
(300
)
 
$
562,180

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
12,129

 

 

 
12,129

Other comprehensive (loss) income

 

 

 
(844
)
 
94

 
(750
)
Restricted stock forfeitures
(15,884
)
 
(35
)
 
1

 

 

 
(34
)
Stock based compensation expense

 
1,174

 

 

 

 
1,174

Cash dividends ($0.06 per share)

 

 
(3,300
)
 

 

 
(3,300
)
Balance, September 30, 2018
56,543,771

 
$
457,428

 
$
122,503

 
$
(8,326
)
 
$
(206
)
 
$
571,399

 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
55,982,491

 
$
449,825

 
$
146,514

 
$
1,128

 
$

 
$
597,467

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 
12,736

 

 

 
12,736

Other comprehensive income

 

 

 
839

 

 
839

Settled restricted stock units
377,728

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(178,403
)
 
(1,972
)
 

 

 

 
(1,972
)
Restricted stock forfeitures
(36,045
)
 
(89
)
 
8

 

 

 
(81
)
Stock based compensation expense

 
786

 

 

 

 
786

Shares repurchased
(111,000
)
 
(1,161
)
 

 

 

 
(1,161
)
Cash dividends ($0.06 per share)

 

 
(3,242
)
 

 

 
(3,242
)
Balance, September 30, 2019
56,034,771

 
$
447,389

 
$
156,016

 
$
1,967

 
$

 
$
605,372

 
 
 
 
 
 
 
 
 
 
 
 

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

 

 
34,457

 

 

 
34,457

Other comprehensive (loss) income

 

 

 
(3,641
)
 
360

 
(3,281
)
Reclassification of prior year tax benefit related to re-measuring deferred taxes on items recorded to other comprehensive income

 

 
(1,750
)
 
1,529

 
221

 

Issuance of restricted stock awards
131,140

 

 

 

 

 

Settled restricted stock units
12,710

 

 

 

 

 

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

 

 

 
(49
)
Restricted stock forfeitures
(18,684
)
 
(38
)
 
1

 

 

 
(37
)
Stock based compensation expense

 
3,228

 

 

 

 
3,228

Cash dividends ($0.23 per share)

 

 
(12,664
)
 

 

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

 
$
457,428

 
$
122,503

 
$
(8,326
)
 
$
(206
)
 
$
571,399

 
 
 
 
 
 
 
 
 
 
 
 
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

 

 
36,404

 

 

 
36,404

Other comprehensive income

 

 

 
6,503

 
104

 
6,607

Issuance of restricted stock awards
321,784

 

 

 

 

 

Settled restricted stock units
499,707

 

 

 

 

 

Shares withheld to pay taxes on stock based compensation
(223,044
)
 
(2,409
)
 

 

 

 
(2,409
)
Restricted stock forfeitures
(72,041
)
 
(220
)
 
18

 

 

 
(202
)
Stock based compensation expense

 
2,431

 

 

 

 
2,431

Shares repurchased
(870,701
)
 
(8,791
)
 

 

 

 
(8,791
)
Cash dividends ($0.17 per share)

 

 
(9,813
)
 

 

 
(9,813
)
Balance, September 30, 2019
56,034,771

 
$
447,389

 
$
156,016

 
$
1,967

 
$

 
$
605,372

 
 
 
 
 
 
 
 
 
 
 
 
(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)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
36,404

 
$
34,457

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,001

 
2,108

Provision for loan losses
250

 
3,450

Amortization of deferred loan costs, net
10,386

 
7,421

Amortization of premiums on investment securities, net
1,039

 
1,559

Gain on sale of loans
(607
)
 
(140
)
Stock based compensation expense, net of forfeitures
2,211

 
3,190

Change in fair value of mortgage servicing rights
652

 
655

Change in fair value of equity securities
(399
)
 

Loss on disposition of leasehold improvements
1,120

 

Other items, net
(383
)
 
(41
)
Effect of changes in:
 
 
 
Accrued interest receivable
(1,338
)
 
(5,159
)
Accrued interest payable
(969
)
 
3,193

Prepaid expenses and other assets
(2,040
)
 
405

Other liabilities and accrued expenses
5,770

 
(3,813
)
Net cash provided by operating activities
54,097

 
47,285

Cash flows from investing activities:
 
 
 
Proceeds from maturities and paydowns of available for sale debt securities
55,523

 
61,270

Proceeds from maturities and paydowns of held to maturity debt securities
1,216

 
344

Proceeds from sales of available for sale debt securities
1,000

 

Purchases of available for sale debt securities
(71,694
)
 
(179,207
)
Purchases of held to maturity debt securities

 
(5,375
)
Net increase in loans receivable
(190,602
)
 
(910,941
)
Proceeds from loans held for sale previously classified as portfolio loans
62,235

 
19,604

Purchase of loan
(10,052
)
 

Redemption of FHLB stock, net
1,480

 
498

Purchase of premises and equipment
(663
)
 
(1,231
)
Net cash used in investing activities
(151,557
)
 
(1,015,038
)
Cash flows from financing activities:
 
 
 
Net increase in customer deposits
360,962

 
992,706

Proceeds from long-term FHLB advances
375,100

 
350,000

Repayment of long-term FHLB advances
(375,022
)
 
(50,521
)
Net change in short-term FHLB advances
(166,000
)
 
(326,600
)
Shares withheld for taxes on vested restricted stock
(2,409
)
 
(49
)
Shares repurchased
(8,791
)
 

Cash paid for dividends
(9,795
)
 
(12,663
)
Net cash provided by financing activities
174,045

 
952,873

Increase (decrease) in cash and cash equivalents
76,585

 
(14,880
)
Cash and cash equivalents, beginning of period
91,697

 
75,578

Cash and cash equivalents, end of period
$
168,282

 
$
60,698

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
105,433

 
$
66,837

Income taxes
$
14,125

 
$
15,355

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

 
$
19,603


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 nine months ended September 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 share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
 
$
12,736

 
$
12,129

 
$
36,404

 
$
34,457

 
 
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
 
55,654,429

 
56,190,970

 
56,094,285

 
56,190,970

Add: Dilutive effects of assumed vesting of restricted stock
 
273,104

 
673,130

 
219,587

 
622,140

Weighted average diluted common shares outstanding
 
55,927,533

 
56,864,100

 
56,313,872

 
56,813,110

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic EPS
 
$
0.23

 
$
0.22

 
$
0.65

 
$
0.61

Diluted EPS
 
$
0.23

 
$
0.21

 
$
0.65

 
$
0.61

Anti-dilutive shares not included in calculation of diluted earnings per share
 
4,398

 

 
4,381

 

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. No adjustments related to 2018 were recorded in the Company's unaudited consolidated statements of 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

10

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accounting, including: eliminating the requirement to separately measure and report hedge ineffectiveness; 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 table summarizes 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 September 30, 2019:
 
 
 
 
 
 
 
Government and Government Sponsored Entities:
 
 
 
 
 
 
 
Residential mortgage backed securities and collateralized mortgage obligations ("MBS and CMOs")
$
156,939

 
$
292

 
$
(599
)
 
$
156,632

Commercial MBS and CMOs
337,882

 
4,104

 
(639
)
 
341,347

Agency bonds
134,262

 
46

 
(430
)
 
133,878

Total available for sale debt securities
$
629,083

 
$
4,442

 
$
(1,668
)
 
$
631,857

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 $2.0 million and $(4.9) million, net of $(807) thousand and $2.0 million in tax (liabilities) assets at September 30, 2019 and December 31, 2018, respectively. During the three and nine months ended September 30, 2019, the Company sold its U.S. Treasury security at its amortized cost. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three or nine months ended September 30, 2018.

11

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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:
 
September 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
$
37,276

 
$
(108
)
 
$
69,515

 
$
(491
)
 
$
106,791

 
$
(599
)
Commercial MBS and CMOs
60,614

 
(207
)
 
55,447

 
(432
)
 
116,061

 
(639
)
Agency bonds
19,923

 
(76
)
 
87,051

 
(354
)
 
106,974

 
(430
)
Total available for sale debt securities
$
117,813

 
$
(391
)
 
$
212,013

 
$
(1,277
)
 
$
329,826

 
$
(1,668
)
At September 30, 2019, the Company held 77 residential MBS and CMOs of which 49 were in a loss position and 31 had been in a loss position for twelve months or more. The Company held 40 commercial MBS and CMOs of which 16 were in a loss position and 7 had been in a loss position for twelve months or more. The Company held 15 agency bonds of which 11 were in a loss position and 9 had been for twelve months or more.
 
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 September 30, 2019 and December 31, 2018.
As of September 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 table summarizes the amortized cost and estimated fair value of held to maturity investment securities as of the dates indicated:
(Dollars in thousands)
Amortized Cost
 
Gross Unrecognized Gains
 
Gross Unrecognized Losses
 
Estimated Fair Value
As of September 30, 2019:
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
Residential MBS
$
10,517

 
$
165

 
$
(36
)
 
$
10,646

Other investments
85

 

 

 
85

Total held to maturity investment securities
$
10,602

 
$
165

 
$
(36
)
 
$
10,731

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 table summarizes 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 September 30, 2019:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$

 
$

 
$
2,260

 
$
(36
)
 
$
2,260

 
$
(36
)
As of December 31, 2018:
 
 
 
 
 
 
 
 
Government Sponsored Entities:
 
 
 
 
 
 
 
 
 
 
 
Residential MBS
$
6,481

 
$
(111
)
 
$
3,739

 
$
(151
)
 
$
10,220

 
$
(262
)
At September 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 September 30, 2019 and December 31, 2018.

13

Table of Contents

The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of September 30, 2019:
 
September 30, 2019
(Dollars in thousands)
Amortized Cost
 
Fair Value
Available for sale debt securities
 
 
 
Less than one year
$
30,000

 
$
29,923

One to five years
87,405

 
87,056

Five to ten years
4,202

 
4,212

Beyond ten years
12,655

 
12,687

MBS and CMOs
494,821

 
497,979

Total available for sale debt securities
$
629,083

 
$
631,857

Held to maturity investments securities
 
 
 
Beyond ten years
$
85

 
$
85

MBS
10,517

 
10,646

Total held to maturity debt securities
$
10,602

 
$
10,731

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

Equity Securities

Equity securities consist of investments in the CRA Qualified Investment Fund. At September 30, 2019 and December 31, 2018, the fair value of equity securities totaled $11.8 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 $89 thousand and $399 thousand during the three and nine months ended September 30, 2019, respectively. There were no sales of equity securities during the three and nine months ended September 30, 2019.

3.
LOANS
Loans consist of the following:
(Dollars in thousands)
September 30,
2019
 
December 31,
2018
Permanent mortgages on:
 
 
 
Multifamily residential
$
3,959,351

 
$
3,671,069

Single family residential
2,079,811

 
2,262,811

Commercial real estate
201,067

 
184,039

Construction and land loans
19,191

 
12,611

Non-Mortgage (‘‘NM’’) loans
100

 
100

Total
6,259,520

 
6,130,630

Allowance for loan losses
(34,923
)
 
(34,314
)
Loans held for investment, net
$
6,224,597

 
$
6,096,316


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


14

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 September 30, 2019
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance allocated to portfolio segments
$
22,745

 
$
9,439

 
$
2,412

 
$
625

 
$
35,221

Provision for (reversal of) loan losses
408

 
(415
)
 
115

 
(608
)
 
(500
)
Charge-offs

 

 

 

 

Recoveries

 
2

 

 
200

 
202

Ending balance allocated to portfolio segments
$
23,153

 
$
9,026

 
$
2,527

 
$
217

 
$
34,923

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

 
$
10,098

 
$
1,841

 
$
859

 
$
33,358

Provision for (reversal of) loan losses
604

 
396

 
157

 
(507
)
 
650

Charge-offs

 

 

 

 

Recoveries

 
3

 

 
75

 
78

Ending balance allocated to portfolio segments
$
21,164

 
$
10,497

 
$
1,998

 
$
427

 
$
34,086

Nine months ended September 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
1,827

 
(1,108
)
 
86

 
(555
)
 
250

Charge-offs

 

 

 

 

Recoveries

 
9

 

 
350

 
359

Ending balance allocated to portfolio segments
$
23,153

 
$
9,026

 
$
2,527

 
$
217

 
$
34,923

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

 
$
9,044

 
$
1,734

 
$
946

 
$
30,312

Provision for (reversal of) loan losses
2,576

 
1,444

 
174

 
(744
)
 
3,450

Charge-offs

 

 

 

 

Recoveries

 
9

 
90

 
225

 
324

Ending balance allocated to portfolio segments
$
21,164

 
$
10,497

 
$
1,998

 
$
427

 
$
34,086


15

Table of Contents

The following table summarizes 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 September 30, 2019:
 
 
 
 
 
 
 
 
 
Ending allowance balance allocated to:
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$

 
$
25

 
$

 
$

 
$
25

Loans collectively evaluated for impairment
23,153

 
9,001

 
2,527

 
217

 
34,898

Ending balance
$
23,153

 
$
9,026

 
$
2,527

 
$
217

 
$
34,923

Loans:
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
7,120

 
$
8,904

 
$

 
$

 
$
16,024

Ending balance: collectively evaluated for impairment
3,952,231

 
2,070,907

 
201,067

 
19,291

 
6,243,496

Ending balance
$
3,959,351

 
$
2,079,811

 
$
201,067

 
$
19,291

 
$
6,259,520

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 table summarizes the loan portfolio allocated by management’s internal risk ratings at September 30, 2019 and December 31, 2018:
(Dollars in thousands)
Multifamily Residential
 
Single Family Residential
 
Commercial Real Estate
 
Land, Construction and NM
 
Total
As of September 30, 2019:
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
$
3,880,672

 
$
2,055,025

 
$
183,894

 
$
19,291

 
$
6,138,882

Watch
53,314

 
9,266

 
17,173

 

 
79,753

Special mention
16,535

 
3,851

 

 

 
20,386

Substandard
8,830

 
11,669

 

 

 
20,499

Total
$
3,959,351

 
$
2,079,811

 
$
201,067

 
$
19,291

 
$
6,259,520

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 table summarizes an aging analysis of the loan portfolio by the time past due at September 30, 2019 and December 31, 2018:
(Dollars in thousands)
30 Days
 
60 Days
 
90+ Days
 
Non-accrual
 
Current
 
Total
As of September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Multifamily residential
$
716

 
$

 
$

 
$
7,120

 
$
3,951,515

 
$
3,959,351

Single family residential
1,891

 

 

 
5,820

 
2,072,100

 
2,079,811

Commercial real estate

 

 

 

 
201,067

 
201,067

Land, construction and NM

 

 

 

 
19,291

 
19,291

Total
$