SEC Filing | Investor Relations | Luther Burbank Corporation

View:

Download DOC

Download PDF

Download XLS

Download XBRL

lbc-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ 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

Accelerated filer

☒

Non-accelerated filer

Smaller Reporting Company

☒

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 1, 2023, there were 51,027,878 shares of the registrant’s common stock, no par value, outstanding.

Table of Contents


		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Consolidated Statements of Financial Condition	4
	Unaudited Consolidated Statements of Income	5
	Unaudited Consolidated Statements of Comprehensive Income	6
	Unaudited Consolidated Statements of Changes in Stockholders' Equity	7
	Unaudited Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	64
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	67
	Signatures	68

Table of Contents

Cautionary Statements Regarding Forward-Looking Information

All references to ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ ‘‘Luther Burbank Corporation’’ or ‘‘the Company’’ refers to Luther Burbank Corporation, a California corporation, and our consolidated subsidiaries, including Luther Burbank Savings, a California banking corporation, unless the context indicates that we refer only to the parent company, Luther Burbank Corporation. ‘‘Bank’’ or ‘‘LBS’’ refers to Luther Burbank Savings, our banking subsidiary.

This document contains 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, including our current views with respect to, among other things, future events and our results of operations, financial condition, financial performance, plans and/or strategies. These forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and may be identified by use of words such as "anticipate," "believe," “continue,” "could," "estimate," "expect," “impact,” "intend," "seek," "may," "outlook," "plan," "potential," "predict," "project," "should," "will," "would" and similar terms and phrases, including references to assumptions. These forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control and involve a number of risks and uncertainties. Accordingly, we caution you that any such forward-looking statement is not a guarantee of future performance and that actual results may prove to be materially different from the results expressed or implied by the forward-looking statements due to a number of factors, including without limitation:

•interest rate, liquidity, economic, market, credit, operational and inflation risks associated with our business or industry, including the speed and predictability of changes in these risks;

•our ability to retain deposits and attract new deposits and loans and the composition and terms of such deposits and loans;

•our access to adequate sources of liquidity;

•business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic markets, including the tight labor market, ineffective management of the U.S. Federal budget, debt or debt ceiling, bank failures, or turbulence or uncertainty in domestic or foreign financial markets;

•any failure to adequately manage the transition from LIBOR as a reference rate;

•changes in the level of our nonperforming assets and charge-offs;

•the adequacy of our allowance for credit losses;

•our management of risks inherent in our real estate loan portfolio, including the seasoning of the portfolio, the level of non-conforming loans, the number of large borrowers, and the risk of a prolonged downturn in the real estate market;

•significant market concentrations in California and Washington;

•the occurrence of significant natural or man-made disasters (including fires, earthquakes and terrorist acts), severe weather events, health crises and other catastrophic events;

•climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;

•political instability or the effects of war or other conflicts, including, but not limited to, the current conflict between Russia and Ukraine, as well as the civil unrest in Sudan;

•the announced merger with Washington Federal, Inc., including delays in the consummation of the merger or litigation or other conditions that may cause the parties to abandon the merger or make the merger more expensive or less beneficial;

•the impact that the announced merger may have on our ability to attract and retain customers and key personnel, the value of our shares, our expenses, and/or our ability to conduct our business in the ordinary course and execute on our strategies;

•the performance of our third-party vendors;

•fraud, financial crimes and fund transfer errors;

•failures, interruptions, cybersecurity incidents and data breaches involving our data, technology and systems and those of our customers and third-party providers;

•rapid technological changes in the financial services industry;

Table of Contents

•any inadequacy in our risk management framework or use of data and/or models;

•the laws and regulations applicable to our business, and the impact of recent and future legislative and regulatory changes;

•changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

•our involvement from time to time in legal proceedings and examinations and remedial actions by regulators;

•increased competition in the financial services industry; and

•changes in our reputation.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in our annual report on Form 10-K for the year ended December 31, 2022, including under the caption “Risk Factors” in Item 1A of Part I, subsequent Quarterly Reports on Form 10-Q, and other reports or filings with the Securities and Exchange Commission ("SEC"). You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Table of Contents

PART I.

Item 1. Financial Statements

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands)


	March 31, 2023 (unaudited)		December 31, 2022
ASSETS
Cash and cash equivalents	$	516,913	$	185,895

Available for sale debt securities, at fair value	593,427		607,348
Held to maturity debt securities, at amortized cost (fair value of $2,891 and $2,874 at March 31, 2023 and December 31, 2022, respectively)	3,080		3,108
Equity securities, at fair value	10,506		10,340

Loans receivable, net of allowance for credit losses ("ACL") on loans of $35,914 and $36,685 at March 31, 2023 and December 31, 2022, respectively	6,987,565		6,973,760
Accrued interest receivable	23,873		24,306
Federal Home Loan Bank ("FHLB") stock, at cost	46,007		32,694
Premises and equipment, net	13,333		13,661
Goodwill	3,297		3,297
Prepaid expenses and other assets	104,456		120,223
Total assets	$	8,302,457	$	7,974,632

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits	$	5,649,494	$	5,839,340
FHLB advances	1,701,647		1,208,147
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 $184 and $215 at March 31, 2023 and December 31, 2022, respectively)	94,816		94,785
Accrued interest payable	7,430		3,964
Other liabilities and accrued expenses	91,052		84,003
Total liabilities	7,606,296		7,292,096

Commitments and contingencies (Note 17)

Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022, respectively	—		—
Common stock, no par value; 100,000,000 shares authorized; 51,030,877 and 51,073,272 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively	398,363		398,988
Retained earnings	331,069		317,711
Accumulated other comprehensive loss, net of taxes	(33,271)		(34,163)
Total stockholders' equity	696,161		682,536
Total liabilities and stockholders' equity	$	8,302,457	$	7,974,632

See accompanying notes to unaudited consolidated financial statements

Table of Contents

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollar amounts in thousands, except per share data)


	Three Months Ended March 31,
	2023		2022
Interest and fee income:
Loans	$	74,604	$	53,633
Investment securities	5,488		2,301
Cash and cash equivalents	3,303		66
Total interest and fee income	83,395		56,000
Interest expense:
Deposits	37,607		6,020
FHLB advances	9,262		3,097
Junior subordinated deferrable interest debentures	966		275
Senior debt	1,574		1,574
Total interest expense	49,409		10,966
Net interest income before provision for credit losses	33,986		45,034
Reversal of provision for credit losses	(795)		(2,500)
Net interest income after provision for credit losses	34,781		47,534
Noninterest income:

FHLB dividends	577		354
Other income	658		(296)
Total noninterest income	1,235		58
Noninterest expense:
Compensation and related benefits	10,671		10,219
Deposit insurance premium	884		481
Professional and regulatory fees	436		539
Occupancy	1,184		1,194
Depreciation and amortization	649		603
Data processing	862		988
Marketing	739		458
Other expenses	1,509		1,030
Total noninterest expense	16,934		15,512
Income before provision for income taxes	19,082		32,080
Provision for income taxes	5,640		9,140
Net income	$	13,442	$	22,940

Basic earnings per common share	$	0.26	$	0.45
Diluted earnings per common share	$	0.26	$	0.45
Dividends per common share	$	—	$	0.12

See accompanying notes to unaudited consolidated financial statements

Table of Contents

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollar amounts in thousands)


	Three Months Ended March 31,
	2023		2022
Net income	$	13,442	$	22,940
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale debt securities:
Unrealized holding gain (loss) arising during the period	1,257		(16,965)

Tax effect	(365)		4,919
Total other comprehensive income (loss), net of tax	892		(12,046)





Comprehensive income	$	14,334	$	10,894

See accompanying notes to unaudited consolidated financial statements

Table of Contents

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (UNAUDITED)

(Dollar amounts in thousands, except per share data)



						Accumulated Other Comprehensive Income (Loss) (Net of Taxes)		Total Stockholders' Equity
	Common Stock			Retained Earnings		Available for Sale Securities
	Shares	Amount
Balance, December 31, 2021	51,682,398	$	406,904	$	262,141	$	88		$	669,133

Net income	—	—		22,940		—			22,940
Other comprehensive loss	—	—		—		(12,046)			(12,046)

Restricted stock award grants	206,675	—		—		—			—
Settled restricted stock units	6,759	—		—		—			—
Shares withheld to pay taxes on stock based compensation	(62,422)	(875)		—		—			(875)
Restricted stock forfeitures	(4,100)	(4)		2		—			(2)
Stock based compensation expense	—	714		—		—			714
Shares repurchased	(425,396)	(5,637)		—		—			(5,637)
Cash dividends ($0.12 per share)	—	—		(6,227)		—			(6,227)
Balance, March 31, 2022	51,403,914	$	401,102	$	278,856	$	(11,958)		$	668,000

Balance, December 31, 2022	51,073,272	$	398,988	$	317,711	$	(34,163)		$	682,536
Cumulative effect of change in accounting principal (1)	—	—		(84)		—			(84)
Net income	—	—		13,442		—			13,442
Other comprehensive income	—	—		—		892			892
Restricted stock award grants	42,034	—		—		—			—
Settled restricted stock units	15,426	—		—		—			—
Shares withheld to pay taxes on stock based compensation	(99,855)	(1,098)		—		—			(1,098)

Stock based compensation expense	—	473		—		—			473


Balance, March 31, 2023	51,030,877	$	398,363	$	331,069	$	(33,271)		$	696,161

(1) Represents the impact of the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, and the related amendments which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology.

See accompanying notes to unaudited consolidated financial statements

Table of Contents

LUTHER BURBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollar amounts in thousands)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	13,442	$	22,940
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	649		603
Reversal of provision for credit losses	(795)		(2,500)
Amortization of deferred loan costs, net	1,373		4,792
Amortization of premiums on investment securities, net	1		337



Stock based compensation expense, net of forfeitures	473		710

Change in fair value of mortgage servicing rights	19		104
Change in fair value of equity securities	(166)		577


Other items, net	(31)		44
Effect of changes in:
Accrued interest receivable	433		(253)
Accrued interest payable	3,466		35
Prepaid expenses and other assets	5,652		4,293
Other liabilities and accrued expenses	(8,757)		3,140
Net cash provided by operating activities	15,759		34,822
Cash flows from investing activities:
Proceeds from maturities, paydowns and calls of available for sale debt securities	15,178		38,296
Proceeds from maturities and paydowns of held to maturity debt securities	27		29

Purchases of available for sale debt securities	—		(33,140)

Net decrease (increase) in loans receivable	11,132		(81,469)


(Purchase) redemption of FHLB stock, net	(13,313)		848
Purchase of premises and equipment	(321)		(103)

Net cash provided by (used in) investing activities	12,703		(75,539)
Cash flows from financing activities:
Net (decrease) increase in deposits	(189,846)		63,004
Proceeds from long-term FHLB advances	450,000		100,000
Repayment of long-term FHLB advances	(50,000)		(100,000)
Net change in short-term FHLB advances	93,500		—
Shares withheld for taxes on vested restricted stock	(1,098)		(875)
Shares repurchased	—		(5,637)
Cash paid for dividends	—		(6,225)
Net cash provided by financing activities	302,556		50,267
Increase in cash and cash equivalents	331,018		9,550
Cash and cash equivalents, beginning of period	185,895		138,413
Cash and cash equivalents, end of period	$	516,913	$	147,963
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	45,943	$	10,931
Income taxes	$	11	$	6
Supplemental non-cash disclosures:
Lease liabilities arising from obtaining right-of-use assets	$	—	$	16,255

See accompanying notes to unaudited consolidated financial statements

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 the Bank's wholly-owned subsidiary, Burbank Investor Services. The Company also owns Burbank Financial Inc., a real estate investment company that provides limited loan administrative support to the Bank, 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 executive offices in Santa Rosa and Gardena, California, and an administrative office in Irvine, California. It has ten 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 several loan production offices located throughout California.

On November 13, 2022, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Washington Federal, Inc. (“WAFD”), pursuant to which the Company will merge with and into WAFD (the “Corporate Merger”), with WAFD surviving the Corporate Merger. Promptly following the Corporate Merger, the Company’s wholly-owned bank subsidiary, Luther Burbank Savings, will be merged with and into Washington Federal Bank, dba WaFd Bank, the wholly-owned bank subsidiary of WAFD (“WAFD Bank”), with WAFD Bank as the surviving institution. Closing of the transaction, which is expected to occur in 2023, is contingent upon shareholder approval and receipt of all necessary regulatory approvals, along with the satisfaction of other customary closing conditions.

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, 2022, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”), under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

The results of operations for the three months ended March 31, 2023 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, 2023.

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

Table of Contents

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

Earnings Per Share ("EPS")

Basic earnings per common share represents the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average number of common shares outstanding during the period. 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 March 31,
	2023		2022
Net income	$	13,442	$	22,940

Weighted average basic common shares outstanding	50,871,173		51,337,488
Add: Dilutive effects of assumed vesting of restricted stock	32,272		76,931
Weighted average diluted common shares outstanding	50,903,445		51,414,419

Income per common share:
Basic EPS	$	0.26	$	0.45
Diluted EPS	$	0.26	$	0.45
Anti-dilutive shares not included in calculation of diluted earnings per share	19,913		20

Recently Adopted Financial Accounting Standards

FASB ASU 2016-13

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity (“HTM”) debt securities and off-balance sheet exposures (loan commitments, financial guarantees, standby letters of credit and other similar instruments). In addition, CECL modifies the other-than-temporary impairment ("OTTI") model for available for sale (“AFS”) debt securities to require an allowance for credit losses instead of a direct write down, which allows for reversal of credit losses in future periods based on improvements in credit quality. As permitted under ASC 326, the Company elected to maintain the same loan segments that it previously identified prior to adoption of CECL.

The Company adopted CECL using the modified retrospective method for all financial assets measured at cost, including loans, HTM debt securities and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2023 are reported under ASU 2016-13, while prior period results continue to be reported under the incurred loss model which was the previously applicable GAAP. The Company recorded an increase to its ACL of $119 thousand as a cumulative effect adjustment of adopting ASU 2016-13, with a corresponding decrease in retained earnings, net of $35 thousand in taxes, of $84 thousand. The transition adjustment reflects the results of our model in estimating lifetime expected credit losses on loans, unfunded commitments and other off-balance sheet credit exposures.

Table of Contents

The following table illustrates the impact on the ACL due to the Company’s transition from the incurred loss methodology to the CECL methodology as of January 1, 2023:


(Dollars in thousands)	Pre-CECL Adoption		Impact of CECL Adoption		As Reported Under CECL
Assets:
ACL - Loans
Multifamily residential	$	26,417	$	2,882	$	29,299
Single family residential	8,564		(2,472)		6,092
Commercial real estate	1,539		(784)		755
Construction and land	165		282		447
Total	$	36,685	$	(92)	$	36,593
Liabilities:
ACL - Off-Balance Sheet Credit Exposures	$	563	$	211	$	774

At adoption of CECL and continuing through March 31, 2023, the Company has not recorded an ACL on AFS or HTM investment securities as these investment portfolios consisted primarily of debt securities explicitly or implicitly backed by the U.S. government. Refer to Note 2, Investment Securities, for more information. The Company elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities.

The following accounting policies have been updated in connection with the adoption of the CECL methodology:

Allowance for Credit Losses on Loans

The ACL on loans represents the Company’s estimate of expected lifetime credit losses for its loans at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio as of the date of the consolidated statements of financial condition. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. The ACL on loans is increased by the provision for credit losses on loans, which is charged against current period operating results, and decreased by reversals of loan loss provisions as well as loan charge-offs, net of recoveries.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The Company’s ACL model utilizes an expected cash flow model to measure credit losses on an individual loan basis, which are then aggregated at the portfolio segment level and supplemented by a qualitative reserve that is applied to each portfolio segment level. Loans are segmented based on collateral type and consist of the following segments:

Multifamily residential and commercial real estate loans - These loans typically involve greater principal amounts than other types of loans, and repayment depends upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Multifamily residential and commercial real estate loans also expose a lender to significant credit risk because the collateral securing these loans typically cannot be sold as easily as single family residential real estate. In addition, some commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to comply with the terms of the loan agreement, which may increase the risk of default or non-payment.

Single family residential real estate loans - The degree of risk in single family residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate, and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of

Table of Contents

loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Construction and land loans - This type of lending generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

The Company’s ACL model methodology incorporates assumptions for the probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the methodology, the ACL reflects the difference between the amortized cost basis and the net expected cash flows of a loan. In determining the PD, the model utilizes both macroeconomic and individual loan characteristics, such as loan-to-value, debt service coverage, seasoning, performance, collateral type, geography and credit score. For each period in a loan’s expected life, the model combines loan characteristics with forecasted economic conditions to determine the likely performance of a loan. With respect to LGD, the model estimates loss severity for secured loans primarily based on the loan type and value of collateral. Collateral values are estimated based on a third-party proprietary database that considers actual historical loan sales. The use of reasonable and supportable forecasts requires significant judgment. The ACL model leverages projections provided by reputable, well-recognized independent economic advisory companies and incorporates a forecast of macroeconomic factors which is updated quarterly. In addition, the ACL model incorporates two years of projected property type performance, such as property value growth and net operating income growth, also updated quarterly. For periods beyond the initial two years for property type performance, forecasts revert to a historical mean over the following three years and subsequently, to the U.S. historical average beyond that.

In calculating its ACL, management considers whether qualitative adjustments to the quantitative model, previously described, are needed. Qualitative adjustments may be related to and include, but are not limited to factors such as: differences in segment-specific risk characteristics, periods wherein current conditions and reasonable and supportable forecasts of economic conditions differ from the conditions that existed at the time of the estimated loss calculation, model limitations identified through back-testing and management’s overall assessment of the adequacy of the ACL. Qualitative internal and external risk factors that are periodically evaluated by management include, but are not limited to, the following:

•Changes in the nature and volume of loans;

•Changes in economic conditions and forecasts;

•Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of criticized and classified loans;

•The existence and effect of loan concentrations;

•Changes in lending policies and procedures;

•Changes in the experience, ability and depth of lending management and other relevant staff;

•Changes in the quality of our systematic loan review processes; and

•The effect of other external factors, such as legal and regulatory requirements on the level of estimated credit losses in the portfolio.

Generally, the measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that do not share similar risk characteristics are evaluated individually for credit loss and are not included in the evaluation process discussed above. Individually evaluated loans may consist of loans that are classified as collateral dependent, or of loans that management has determined to not share risk characteristics with collectively evaluated loans. Collateral dependent loans represent loans where management has determined that foreclosure is probable, or where a borrower is experiencing financial difficulty at the reporting date and loan repayment is expected to be provided generally through the operation or sale of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs, as appropriate.

Loans with terms that have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are evaluated for an ACL utilizing one of the methodologies above.

Table of Contents

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company makes commitments to extend credit to meet the financing needs of customers in the form of loans or lines of credit. The Company maintains an ACL on unfunded commitments and other off-balance sheet credit exposures in other liabilities and accrued expenses in the consolidated statements of financial condition. This ACL is estimated over a commitment's contractual period and is determined in a manner consistent with the ACL for loans, which includes consideration of the likelihood that funding will occur. Adjustments to the ACL for off-balance sheet credit exposures are included in the provision for credit losses in the unaudited consolidated statements of income.

Allowance for Credit Losses on Held to Maturity Securities

The Company measures expected credit losses on HTM investment securities on a collective basis by major security type. Accrued interest receivable on HTM investment securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Because substantially all of the Company’s HTM investment securities are either explicitly or implicitly guaranteed by U.S. Government entities or its agencies, the Company does not anticipate any credit related losses in this investment portfolio. Changes in the ACL on HTM securities, if any, are recorded in the provision for credit losses in the unaudited consolidated statements of income. Losses are charged against the ACL when management believes the uncollectibility of a HTM security is confirmed.

Allowance for Credit Losses on Available for Sale Securities

For AFS investment securities in an unrealized loss position, the Company initially assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost is written down to fair value through income. For AFS investment securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. If a credit loss exists, an allowance for credit loss is recorded to the extent that the fair value is less than the amortized cost basis. Because substantially all of the Company’s AFS investment securities are either explicitly or implicitly guaranteed by U.S. Government entities or its agencies, the Company does not anticipate any credit related losses in this investment portfolio. Any impairment that has not been recorded through an ACL on AFS securities is recognized in other comprehensive income. Changes in the ACL on AFS securities, if any, are recorded in the provision for credit losses in the unaudited consolidated statements of income. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses.

FASB ASU 2022-02

In March 2022, the FASB issued guidance to improve the usefulness of disclosures regarding certain loan refinancings, restructurings and write-offs under ASC 326. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL methodology and enhance the disclosure requirements for certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs for financing receivables and net investments in leases by year of origination. The Company adopted this guidance on January 1, 2023, concurrent with its adoption of the CECL standard. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

Table of Contents

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 March 31, 2023:
Government and Government Sponsored Entities:
Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs")	$	358,558	$	217	$	(25,050)	$	333,725
Residential MBS and CMOs	216,656		12		(21,125)		195,543
Agency bonds	41,196		88		(124)		41,160
Other asset backed securities ("ABS")	23,916		—		(917)		22,999
Total available for sale debt securities	$	640,326	$	317	$	(47,216)	$	593,427
At December 31, 2022:
Government and Government Sponsored Entities:
Commercial MBS and CMOs	$	365,207	$	265	$	(24,736)	$	340,736
Residential MBS and CMOs	221,994		22		(22,632)		199,384
Agency bonds	42,540		189		(99)		42,630
Other ABS	25,763		—		(1,165)		24,598
Total available for sale debt securities	$	655,504	$	476	$	(48,632)	$	607,348

Net unrealized losses on available for sale investment securities are recorded as accumulated other comprehensive loss within stockholders’ equity and totaled $33.3 million and $34.2 million, net of $13.6 million and $14.0 million in tax assets, at March 31, 2023 and December 31, 2022, respectively. There were no sales or transfers of available for sale investment securities and no realized gains or losses on these securities during the three months ended March 31, 2023 or 2022.

The following tables summarize the gross unrealized losses and fair value of available for sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


	March 31, 2023
	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:
Commercial MBS and CMOs	$	146,394	$	(2,205)	$	150,521	$	(22,845)	$	296,915	$	(25,050)
Residential MBS and CMOs	69,012		(2,781)		121,213		(18,344)		190,225		(21,125)
Agency bonds	31,218		(124)		—		—		31,218		(124)
Other ABS	—		—		22,999		(917)		22,999		(917)
Total available for sale debt securities	$	246,624	$	(5,110)	$	294,733	$	(42,106)	$	541,357	$	(47,216)

At March 31, 2023, the Company held 58 commercial MBS and CMOs of which 51 were in a loss position and 26 had been in a loss position for twelve months or more. The Company held 89 residential MBS and CMOs of which 86 were in a loss position and 27 had been in a loss position for twelve months or more. The Company held six agency bonds of which three were in a loss position for less than twelve months. The Company held three other ABS of which all three were in a loss position for twelve months or more.

Table of Contents


	December 31, 2022
	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:
Commercial MBS and CMOs	$	188,155	$	(6,165)	$	109,255	$	(18,571)	$	297,410	$	(24,736)
Residential MBS and CMOs	94,137		(5,912)		99,831		(16,720)		193,968		(22,632)
Agency bonds	14,345		(99)		—		—		14,345		(99)
Other ABS	10,804		(580)		13,794		(585)		24,598		(1,165)
Total available for sale debt securities	$	307,441	$	(12,756)	$	222,880	$	(35,876)	$	530,321	$	(48,632)

At December 31, 2022, the Company held 58 commercial MBS and CMOs of which 50 were in a loss position and 15 had been in a loss position for twelve months or more. The Company held 90 residential MBS and CMOs of which 86 were in a loss position and 14 had been in a loss position for twelve months or more. The Company held six agency bonds of which one was in a loss position for less than twelve months. The Company held three other ABS of which three were in a loss position and two had been in a loss position for twelve months or more.

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 securities to be other-than-temporarily impaired at March 31, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for available for sale investment securities at March 31, 2023.

As of March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders' equity, other than the U.S. government and its agencies.

Held to Maturity

The following 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 March 31, 2023:
Government Sponsored Entities:
Residential MBS	$	3,022	$	—	$	(189)	$	2,833
Other investments	58		—		—		58
Total held to maturity investment securities	$	3,080	$	—	$	(189)	$	2,891
As of December 31, 2022:
Government Sponsored Entities:
Residential MBS	$	3,047	$	—	$	(234)	$	2,813
Other investments	61		—		—		61
Total held to maturity investment securities	$	3,108	$	—	$	(234)	$	2,874

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

Table of Contents

been in a continuous unrecognized loss position:


	Less than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
As of March 31, 2023:
Government Sponsored Entities:
Residential MBS	$	1,652	$	(100)	$	1,181	$	(89)	$	2,833	$	(189)
As of December 31, 2022:
Government Sponsored Entities:
Residential MBS	$	2,813	$	(234)	$	—	$	—	$	2,813	$	(234)

At March 31, 2023, the Company had seven held to maturity residential MBS of which all seven were in a loss position and three had been in a loss position for twelve months or more. At December 31, 2022, the Company had seven held to maturity residential MBS of which all seven were in a loss position for less than twelve months.

The unrecognized losses on the Company’s held to maturity investments at March 31, 2023 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 these securities to be other-than-temporarily impaired at March 31, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for held to maturity investment securities at March 31, 2023.

The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of March 31, 2023:


	March 31, 2023
(Dollars in thousands)	Amortized Cost		Fair Value
Available for sale debt securities


Five to ten years	$	37,479	$	37,421
Beyond ten years	3,717		3,739
MBS, CMOs and other ABS	599,130		552,267
Total available for sale debt securities	$	640,326	$	593,427
Held to maturity investments securities
Five to ten years	$	58	$	58
MBS	3,022		2,833
Total held to maturity debt securities	$	3,080	$	2,891

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, collateralized mortgage obligations and other asset backed securities are not included in the maturity categories above and instead are shown separately. As of March 31, 2023, securities with an amortized cost totaling $612.3 million were pledged to the FHLB and Federal Reserve Bank of San Francisco ("FRB") to secure borrowing arrangements. See Note 9 for additional information. No securities were pledged as of December 31, 2022.

Equity Securities

Equity securities consist of investments in a qualified community reinvestment fund. At March 31, 2023 and December 31, 2022, the fair value of equity securities totaled $10.5 million and $10.3 million, respectively. Changes in fair value are recognized in other noninterest income and totaled $166 thousand and $(577) thousand during the three months ended March 31, 2023 and 2022, respectively. There were no sales of

Table of Contents

equity securities during the three months ended March 31, 2023 or 2022.

3. LOANS

Loans consist of the following:


(Dollars in thousands)	March 31, 2023		December 31, 2022
Mortgages on:
Multifamily residential	$	4,522,072	$	4,532,312
Single family residential	2,308,485		2,283,628
Commercial real estate	168,049		172,258
Construction and land	24,873		22,247

Total	7,023,479		7,010,445
Allowance for credit losses on loans	(35,914)		(36,685)
Loans, net	$	6,987,565	$	6,973,760

Certain loans have been pledged to secure borrowing arrangements (see Note 9).

Prior to the Company’s adoption of CECL on January 1, 2023, the Company maintained an allowance for loan losses ("ALLL") in accordance with the probable incurred loss model. The probable incurred loss model was reflective of estimates for loan losses incurred and inherent in the loan portfolio as of the balance sheet date, and did not reflect current estimates of future expected credit losses over the lives of the Company’s loans, as now required by CECL.

The following table summarizes activity in and the allocation of the allowance for credit losses by portfolio segment during the three months ended March 31, 2023:

Allowance for Credit Losses

(Dollars in thousands)

Beginning Balance