0001475348-23-000025 | 10-Q | XBRL Viewer

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Cover Page - shares	3 Months Ended
Cover Page - shares	Mar. 31, 2023	May 01, 2023
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2023
Document Transition Report	false
Entity File Number	001-38317
Entity Incorporation, State or Country Code	CA
Entity Tax Identification Number	68-0270948
Entity Address, Address Line One	520 Third St, Fourth Floor
Entity Address, City or Town	Santa Rosa
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	95401
City Area Code	844
Local Phone Number	446-8201
Title of 12(b) Security	Common stock, no par value
Trading Symbol	LBC
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock Shares Outstanding (in shares)		51,027,878
Amendment Flag	false
Entity Registrant Name	Luther Burbank Corp.
Entity Central Index Key	0001475348
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q1

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - USD ($) $ in Thousands	Mar. 31, 2023	Dec. 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, net	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:
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	0	0
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

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Parenthetical) - USD ($)	Mar. 31, 2023	Dec. 31, 2022
Statement of Financial Position [Abstract]
Fair value of held-to-maturity securities	$ 2,891,000	$ 2,874,000
Allowance for credit losses on loans	$ 35,914,000	$ 36,685,000
Debt Instrument [Line Items]
Preferred stock shares authorized (in shares)	5,000,000	5,000,000
Preferred stock shares issued (in shares)	0	0
Preferred stock shares outstanding (in shares)	0	0
Common stock shares authorized (in shares)	100,000,000	100,000,000
Common stock shares issued (in shares)	51,030,877	51,073,272
Common stock shares outstanding (in shares)	51,030,877	51,073,272
Senior Unsecured Term Notes, September 2014 \| Senior Unsecured Term Notes
Debt Instrument [Line Items]
Principal	$ 95,000,000	$ 95,000,000
Debt interest rate	6.50%
Unamortized debt issuance costs	$ 184,000	$ 215,000

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2023	Mar. 31, 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 (in usd per share)	$ 0.26	$ 0.45
Diluted earnings per common share (in usd per share)	0.26	0.45
Dividends per common share (in usd per share)	$ 0	$ 0.12

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Statement of Comprehensive Income [Abstract]
Net income	$ 13,442	$ 22,940
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

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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+ Details

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($)
$ in Thousands

Total

Cumulative Effect, Period of Adoption, Adjustment

^[1]

Common Stock

Retained Earnings

Cumulative Effect, Period of Adoption, Adjustment

^[1]

Accumulated Other Comprehensive (Loss) Income (Net of Taxes) Available for Sale Securities

Beginning balance (shares) at Dec. 31, 2021

51,682,398

Beginning balance at Dec. 31, 2021

$ 669,133

$ 406,904

$ 262,141

$ 88

Increase (Decrease) in Stockholders' Equity [Roll Forward]

Net income

22,940

Other comprehensive loss

(12,046)

Issuance of restricted stock awards (in shares)

206,675

Settled restricted stock units (in shares)

6,759

Shares withheld to pay taxes on stock based compensation (in shares)

(62,422)

Shares withheld to pay taxes on stock based compensation

(875)

$ (875)

Restricted stock forfeitures (in shares)

(4,100)

Restricted stock forfeitures

(2)

$ (4)

Stock based compensation expense

714

$ 714

Shares repurchased (in shares)

(425,396)

Shares repurchased

(5,637)

$ (5,637)

Cash dividends

(6,227)

Ending balance (shares) at Mar. 31, 2022

51,403,914

Ending balance at Mar. 31, 2022

668,000

$ 401,102

278,856

(11,958)

Beginning balance (shares) at Dec. 31, 2022

51,073,272

Beginning balance at Dec. 31, 2022

682,536

$ (84)

$ 398,988

317,711

$ (84)

(34,163)

Increase (Decrease) in Stockholders' Equity [Roll Forward]

Net income

13,442

Other comprehensive loss

892

Issuance of restricted stock awards (in shares)

42,034

Settled restricted stock units (in shares)

15,426

Shares withheld to pay taxes on stock based compensation (in shares)

(99,855)

Shares withheld to pay taxes on stock based compensation

(1,098)

$ (1,098)

Stock based compensation expense

473

$ 473

Ending balance (shares) at Mar. 31, 2023

51,030,877

Ending balance at Mar. 31, 2023

$ 696,161

$ 398,363

$ 331,069

$ (33,271)

[1]

(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.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (Parenthetical)	3 Months Ended
	Mar. 31, 2022 $ / shares
Statement of Stockholders' Equity [Abstract]
Cash dividends (in usd per share)	$ 0.12

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2023	Mar. 31, 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	0	(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	0
Shares withheld for taxes on vested restricted stock	(1,098)	(875)
Shares repurchased	0	(5,637)
Cash paid for dividends	0	(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
Non-cash investing activity:
Lease liabilities arising from obtaining right-of-use assets	$ 0	$ 16,255

NATURE OF OPERATIONS

3 Months Ended

Mar. 31, 2023

Accounting Policies [Abstract]

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

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.

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

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.

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.

INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2023

Investments, Debt and Equity Securities [Abstract]

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.


	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

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

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

LOANS

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

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		Impact of CECL Adoption		Charge-Offs		Recoveries		Provision		Ending Balance
Multifamily residential	$	26,417	$	2,882	$	—	$	—	$	(2,007)	$	27,292
Single family residential	8,564		(2,472)		—		—		1,339		7,431
Commercial real estate	1,539		(784)		—		—		22		777
Construction and land	165		282		—		—		(33)		414
Allowance for credit losses on loans	36,685		(92)		—		—		(679)		35,914
Allowance for credit losses on off-balance sheet credit exposures	563		211		—		—		(116)		658
Total	$	37,248	$	119	$	—	$	—	$	(795)	$	36,572

The following table summarizes activity in and the allocation of the allowance for loan losses by portfolio segment during the three months ended March 31, 2022:


	Allowance for Loan Losses
(Dollars in thousands)	Beginning Balance		Charge-Offs		Recoveries		Provision		Ending Balance

Multifamily residential	$	26,043	$	—	$	—	$	(1,892)	$	24,151
Single family residential	7,224		—		—		(427)		6,797
Commercial real estate	2,094		—		—		(212)		1,882
Construction and land	174		—		—		31		205
Allowance for loan losses	$	35,535	$	—	$	—	$	(2,500)	$	33,035

The Company assigns a risk rating to all loans and periodically performs detailed reviews of 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/or 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 near future 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 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 presents the internal risk ratings for total loans by portfolio segment of loan and origination year as of March 31, 2023, as well as gross charge-offs for the three months ended March 31, 2023:


(Dollars in thousands)	Loans by Origination Year
(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Total

Multifamily residential
Pass	$	23,568	$	1,183,333	$	1,216,122	$	720,962	$	429,745	$	887,435	$	4,461,165
Watch	—		691		12,054		4,833		6,358		18,619		42,555
Special Mention	—		—		—		—		1,731		—		1,731
Substandard	—		—		—		3,584		3,875		9,162		16,621
Total	$	23,568	$	1,184,024	$	1,228,176	$	729,379	$	441,709	$	915,216	$	4,522,072
Year to date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Single family residential
Pass	$	65,714	$	835,490	$	732,585	$	167,821	$	142,040	$	350,157	$	2,293,807
Watch	—		1,418		1,151		—		3,869		6,510		12,948
Special Mention	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		1,730		1,730
Total	$	65,714	$	836,908	$	733,736	$	167,821	$	145,909	$	358,397	$	2,308,485
Year to date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Pass	$	—	$	24,186	$	1,942	$	11,607	$	24,216	$	104,546	$	166,497
Watch	—		—		—		—		—		604		604
Special Mention	—		—		—		—		948		—		948
Substandard	—		—		—		—		—		—		—
Total	$	—	$	24,186	$	1,942	$	11,607	$	25,164	$	105,150	$	168,049
Year to date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land
Pass	$	—	$	6,528	$	18,345	$	—	$	—	$	—	$	24,873
Watch	—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—
Total	$	—	$	6,528	$	18,345	$	—	$	—	$	—	$	24,873
Year to date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total loans
Pass	$	89,282	$	2,049,537	$	1,968,994	$	900,390	$	596,001	$	1,342,138	$	6,946,342
Watch	—		2,109		13,205		4,833		10,227		25,733		56,107
Special Mention	—		—		—		—		2,679		—		2,679
Substandard	—		—		—		3,584		3,875		10,892		18,351
Total	$	89,282	$	2,051,646	$	1,982,199	$	908,807	$	612,782	$	1,378,763	$	7,023,479
Year to date gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—

The following table summarizes the loan portfolio allocated by management’s internal risk ratings at December 31, 2022.


(Dollars in thousands)	Multifamily Residential		Single Family Residential		Commercial Real Estate		Construction and Land		Total









Grade:
Pass	$	4,469,443	$	2,269,325	$	169,711	$	22,247	$	6,930,726
Watch	44,436		11,341		1,594		—		57,371
Special mention	2,460		—		953		—		3,413
Substandard	15,973		2,962		—		—		18,935

Total	$	4,532,312	$	2,283,628	$	172,258	$	22,247	$	7,010,445

The following table summarizes an aging analysis of the loan portfolio by the time past due as of the dates indicated below:


(Dollars in thousands)	30-59 Days		60-89 Days		90+ Days		Total Past Due		Current		Total
As of March 31, 2023:
Loans:
Multifamily residential	$	5,531	$	—	$	3,121	$	8,652	$	4,513,420	$	4,522,072
Single family residential	1,665		—		—		1,665		2,306,820		2,308,485
Commercial real estate	—		—		—		—		168,049		168,049
Construction and land	—		—		—		—		24,873		24,873
Total	$	7,196	$	—	$	3,121	$	10,317	$	7,013,162	$	7,023,479
As of December 31, 2022:
Loans:
Multifamily residential	$	—	$	—	$	3,023	$	3,023	$	4,529,289	$	4,532,312
Single family residential	—		—		104		104		2,283,524		2,283,628
Commercial real estate	—		—		—		—		172,258		172,258
Construction and land	—		—		—		—		22,247		22,247
Total	$	—	$	—	$	3,127	$	3,127	$	7,007,318	$	7,010,445

As of both March 31, 2023 and December 31, 2022, there were no loans that were past due over 89 days and still accruing interest.

Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of measuring the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded. The following table presents the amortized cost basis of collateral dependent loans by loan type at March 31, 2023.


	Amortized Cost by Collateral Type						Allowance for Credit Losses
(Dollars in thousands)	Residential		Office		Industrial
Multifamily residential	$	3,504	$	—	$	—	$	—
Single family residential	1,466		—		—		—


Total	$	4,970	$	—	$	—	$	—

The following table summarizes information related to impaired loans at December 31, 2022:



(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Multifamily residential	$	485	$	562	$	—
Single family residential	5,580		5,779		—


	6,065		6,341		—
With an allowance recorded:
Multifamily residential	3,024		3,002		600
Single family residential	801		798		25


	3,825		3,800		625
Total:
Multifamily residential	3,509		3,564		600
Single family residential	6,381		6,577		25


	$	9,890	$	10,141	$	625

The following table summarizes information related to impaired loans for the three months ended March 31, 2022:




(Dollars in thousands)	Average Recorded Investment		Interest Income		Cash Basis Interest
With no related allowance recorded:
Multifamily residential	$	503	$	8	$	8
Single family residential	4,830		43		19


	5,333		51		27
With an allowance recorded:

Single family residential	835		6		—


	835		6		—
Total:
Multifamily residential	503		8		8
Single family residential	5,665		49		19


	$	6,168	$	57	$	27

The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2022:


(Dollars in thousands)	Multifamily Residential		Single Family Residential		Commercial Real Estate		Construction and Land		Total










Ending allowance balance allocated to:
Loans individually evaluated for impairment	$	600	$	25	$	—	$	—	$	625
Loans collectively evaluated for impairment	25,817		8,539		1,539		165		36,060
Ending balance	$	26,417	$	8,564	$	1,539	$	165	$	36,685
Loans:
Ending balance: individually evaluated for impairment	$	3,509	$	6,381	$	—	$	—	$	9,890
Ending balance: collectively evaluated for impairment	4,528,803		2,277,247		172,258		22,247		7,000,555
Ending balance	$	4,532,312	$	2,283,628	$	172,258	$	22,247	$	7,010,445

The following table summarizes the population of loans with active payment modifications for borrowers experiencing financial difficulty as of March 31, 2023:


(Dollars in thousands)	Multifamily Residential			Single Family Residential			Commercial Real Estate			Construction and Land			Total

Loan modifications	$	—		$	1,200		$	—		$	—		$	1,200
% of loan modifications to total loan category	—			0.05		%	—			—			0.02		%

Weighted average interest rate reductions	—		%	0.20		%	—		%	—		%	0.20		%
Weighted average term extension	—			6 months			—			—			6 months

The Company had no modified loans with a subsequent payment default within the twelve months following their modification during the quarter ended March 31, 2023. A loan is considered to be in default once it is 90 days contractually past due under the modified terms.

The following table summarizes the recorded investment related to troubled debt restructurings ("TDRs") at December 31, 2022:


(Dollars in thousands)
Troubled debt restructurings:

Single family residential	$	1,211

The Company had allocated $25 thousand of its allowance for loan losses for loans modified in TDRs at December 31, 2022. The Company does not have commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs.

During the three months ended March 31, 2022, the Company modified the terms of one loan that qualified as a TDR. The following table provides details of this modification:


(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Single family residential	1	$	405	$	412

Terms of the modification above included suspension of loan payments for six months and a similar extension of the loan term. The TDR above resulted in no increase to the allowance for loan losses and no charge-offs primarily due to collateral support provided by the secondary source of repayment.

The Company had no TDRs with a subsequent payment default within the twelve months following their modification during the three months ended March 31, 2022. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

NONPERFORMING ASSETS

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

NONPERFORMING ASSETS

Nonperforming assets include nonperforming loans plus real estate owned. The following table presents the composition of non-accrual loans as of the dates indicated below:


	March 31, 2023				December 31, 2022
(Dollars in thousands)	Non-Accrual Loans with No ACL		Non-Accrual Loans		Non-Accrual Loans with No ALLL		Non-Accrual Loans
Multifamily residential	$	3,504	$	3,504	$	3,509	$	3,509
Single family residential	1,466		1,466		2,962		2,962
Commercial real estate	—		—		—		—
Construction and land	—		—		—		—
Total	$	4,970	$	4,970	$	6,471	$	6,471

The allowance for non-accrual loans is based on the CECL cash flow methodology discussed in Note 1, “Summary of Significant Accounting Policies", unless the loan is considered collateral dependent. The allowance for collateral dependent loans is determined based on the estimated fair value of the underlying collateral.

Interest income on non-accrual loans is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loans are deemed to be fully collectible. If there is doubt regarding the collectability of the loan, then any interest payments received are applied to principal. Interest income was recognized on a cash basis on non-accrual loans during the three months ended March 31, 2023 and 2022 totaling $28 thousand and $27 thousand, respectively. Contractual interest not recorded on nonperforming loans during the three months ended March 31, 2023 and 2022 totaled $118 thousand and $7 thousand, respectively.

The Company did not own any other real estate owned as of March 31, 2023 and December 31, 2022.

MORTGAGE SERVICING RIGHTS

3 Months Ended

Mar. 31, 2023

Transfers and Servicing [Abstract]

MORTGAGE SERVICING RIGHTS

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:


(Dollars in thousands)	March 31, 2023		December 31, 2022
Mortgage loans serviced for:
Federal Home Loan Mortgage Corporation ("Freddie Mac")	$	78,312	$	80,478
Other financial institutions	37,220		37,503
Total mortgage loans serviced for others	$	115,532	$	117,981

Custodial account balances maintained in connection with serviced loans totaled $1.6 million and $234 thousand at March 31, 2023 and December 31, 2022, respectively.

The Company measures servicing rights at fair value at each reporting date and reports changes in the fair value of servicing assets in earnings in the period in which the changes occur. Fair va