UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2023
OR
Commission file number 001-38317
Luther Burbank Corporation
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | |||||||
(Address of principal executive offices) | (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 | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | ☒ | ||||||||||||
| Non-accelerated filer | o | 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 October 31, 2023, there were 51,016,948 shares of the registrant’s common stock, no par value, outstanding.
Table of Contents
| Page | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
Item 2. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
1
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 conflicts between Russia and Ukraine and in the Middle East, 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;
2
•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.
3
PART I.
Item 1. Financial Statements
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
| September 30, 2023 (unaudited) | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Available for sale debt securities, at fair value | |||||||||||
Held to maturity debt securities, at amortized cost (fair value of $ | |||||||||||
| Equity securities, at fair value | |||||||||||
Loans receivable, net of allowance for credit losses ("ACL") on loans of $ | |||||||||||
| Accrued interest receivable | |||||||||||
| Federal Home Loan Bank ("FHLB") stock, at cost | |||||||||||
| Premises and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Deposits | $ | $ | |||||||||
| FHLB advances | |||||||||||
| Junior subordinated deferrable interest debentures | |||||||||||
| Senior debt | |||||||||||
$ | |||||||||||
| Accrued interest payable | |||||||||||
| Other liabilities and accrued expenses | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 17) | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, no par value; | |||||||||||
Common stock, no par value; | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss, net of taxes | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying notes to unaudited consolidated financial statements
4
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Interest and fee income: | ||||||||||||||||||||||||||
| Loans | $ | $ | $ | $ | ||||||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||||||||
| Total interest and fee income | ||||||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||
| Deposits | ||||||||||||||||||||||||||
| FHLB advances | ||||||||||||||||||||||||||
| Junior subordinated deferrable interest debentures | ||||||||||||||||||||||||||
| Senior debt | ||||||||||||||||||||||||||
| Total interest expense | ||||||||||||||||||||||||||
| Net interest income before provision for credit losses | ||||||||||||||||||||||||||
| Provision for credit losses | ||||||||||||||||||||||||||
| Net interest income after provision for credit losses | ||||||||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||
| FHLB dividends | ||||||||||||||||||||||||||
| Other income | ( | ( | ||||||||||||||||||||||||
| Total noninterest income | ||||||||||||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||||||||
| Compensation and related benefits | ||||||||||||||||||||||||||
| Deposit insurance premium | ||||||||||||||||||||||||||
| Professional and regulatory fees | ||||||||||||||||||||||||||
| Occupancy | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Data processing | ||||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||
| Other expenses | ||||||||||||||||||||||||||
| Total noninterest expense | ||||||||||||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||||||||||||||
| Dividends per common share | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
5
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollar amounts in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Unrealized loss on available for sale debt securities: | |||||||||||||||||||||||
| Unrealized holding loss arising during the period | ( | ( | ( | ( | |||||||||||||||||||
| Tax effect | |||||||||||||||||||||||
| Total other comprehensive loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive (loss) income | $ | ( | $ | $ | $ | ||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
6
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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, June 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Restricted stock award grants | — | — | — | — | |||||||||||||||||||||||||
| Settled restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Shares withheld to pay taxes on stock based compensation | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | ( | ||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Restricted stock award grants | — | — | — | — | |||||||||||||||||||||||||
| Settled restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Shares withheld to pay taxes on stock based compensation | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Restricted stock forfeitures | ( | ( | — | ( | |||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Shares repurchased | ( | ( | — | — | ( | ||||||||||||||||||||||||
Cash dividends ($ | — | — | ( | — | ( | ||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Cumulative effect of change in accounting principal (1) | — | — | ( | — | ( | ||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Restricted stock award grants | — | — | — | — | |||||||||||||||||||||||||
| Settled restricted stock units | — | — | — | — | |||||||||||||||||||||||||
| Shares withheld to pay taxes on stock based compensation | ( | ( | — | — | ( | ||||||||||||||||||||||||
| Restricted stock forfeitures | ( | ( | — | ( | |||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | ||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| (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
7
LUTHER BURBANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Amortization of deferred loan costs, net | |||||||||||
| Amortization of premiums on investment securities, net | |||||||||||
| Stock based compensation expense, net of forfeitures | |||||||||||
| Change in fair value of mortgage servicing rights | |||||||||||
| Change in fair value of equity securities | |||||||||||
| Other items, net | |||||||||||
| Effect of changes in: | |||||||||||
| Accrued interest receivable | ( | ( | |||||||||
| Accrued interest payable | |||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Other liabilities and accrued expenses | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from maturities, paydowns and calls of available for sale debt securities | |||||||||||
| Proceeds from maturities and paydowns of held to maturity debt securities | |||||||||||
| Purchases of available for sale debt securities | ( | ||||||||||
| Net decrease (increase) in loans receivable | ( | ||||||||||
| Purchase of FHLB stock, net | ( | ( | |||||||||
| Purchase of premises and equipment | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Net (decrease) increase in deposits | ( | ||||||||||
| Proceeds from long-term FHLB advances | |||||||||||
| Repayment of long-term FHLB advances | ( | ( | |||||||||
| Net change in short-term FHLB advances | |||||||||||
| Shares withheld for taxes on vested restricted stock | ( | ( | |||||||||
| Shares repurchased | ( | ||||||||||
| Cash paid for dividends | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | $ | $ | |||||||||
| Supplemental non-cash disclosures: | |||||||||||
| Lease liabilities arising from obtaining right-of-use assets | $ | $ | |||||||||
See accompanying notes to unaudited consolidated financial statements
8
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. On May 4, 2023, the shareholders of the Company and WAFD approved the Corporate Merger at their respective special meetings and, on October 13, 2023, the Washington State Department of Financial Institutions granted conditional approval of the merger. Closing of the transaction, which is expected to occur in the fourth quarter of 2023, remains subject to the receipt of approvals from the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System, along with the satisfaction of other customary closing conditions.
Basis of Presentation
The results of operations for the three and nine months ended September 30, 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.
9
Use of Estimates
Reclassifications
Certain prior period balances have been reclassified to conform to current year presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.
Earnings Per Share ("EPS")
| (Dollars in thousands, except share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average basic common shares outstanding | ||||||||||||||||||||||||||
| Add: Dilutive effects of assumed vesting of restricted stock | ||||||||||||||||||||||||||
| Weighted average diluted common shares outstanding | ||||||||||||||||||||||||||
| Income per common share: | ||||||||||||||||||||||||||
| Basic EPS | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted EPS | $ | $ | $ | $ | ||||||||||||||||||||||
| Anti-dilutive shares not included in calculation of diluted earnings per share | ||||||||||||||||||||||||||
CECL
10
2. INVESTMENT SECURITIES
Available for Sale
The following table summarizes the amortized cost and the estimated fair value of available for sale debt securities as of the dates indicated:
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||
| At September 30, 2023: | |||||||||||||||||||||||
| Government and Government Sponsored Entities: | |||||||||||||||||||||||
| Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | $ | $ | $ | ( | $ | ||||||||||||||||||
| Residential MBS and CMOs | ( | ||||||||||||||||||||||
| Agency bonds | ( | ||||||||||||||||||||||
| Other asset backed securities ("ABS") | ( | ||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| At December 31, 2022: | |||||||||||||||||||||||
| Government and Government Sponsored Entities: | |||||||||||||||||||||||
| Commercial MBS and CMOs | $ | $ | $ | ( | $ | ||||||||||||||||||
| Residential MBS and CMOs | ( | ||||||||||||||||||||||
| Agency bonds | ( | ||||||||||||||||||||||
| Other ABS | ( | ||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | $ | ( | $ | ||||||||||||||||||
Net unrealized losses on available for sale investment securities are recorded as accumulated other comprehensive loss within stockholders’ equity and totaled $44.2 million and $34.2 million, net of $18.1 million and $14.0 million in tax assets, at September 30, 2023 and December 31, 2022, respectively. There were no sales or transfers of available for sale investment securities and no
The following tables summarize the gross unrealized losses and fair value of available for sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
| September 30, 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 | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| Residential MBS and CMOs | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Agency bonds | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Other ABS | ( | ( | |||||||||||||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
At September 30, 2023, the Company held 58 commercial MBS and CMOs of which 52 were in a loss position and 45 had been in a loss position for twelve months or more. The Company held 88 residential MBS and CMOs of which 86 were in a loss position and 81 had been in a loss position for twelve months or more. The Company held six agency bonds of which four were in a loss position and three had been in a loss position for twelve months or more. The Company held three other ABS of which all three were in a loss position for twelve months or more.
11
| 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 | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
| Residential MBS and CMOs | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Agency bonds | ( | ( | |||||||||||||||||||||||||||||||||
| Other ABS | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | ( | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||
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 September 30, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for available for sale investment securities at September 30, 2023.
As of September 30, 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 September 30, 2023: | |||||||||||||||||||||||
| Government Sponsored Entities: | |||||||||||||||||||||||
| Residential MBS | $ | $ | $ | ( | $ | ||||||||||||||||||
| Other investments | |||||||||||||||||||||||
| Total held to maturity investment securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||
| Government Sponsored Entities: | |||||||||||||||||||||||
| Residential MBS | $ | $ | $ | ( | $ | ||||||||||||||||||
| Other investments | |||||||||||||||||||||||
| Total held to maturity investment securities | $ | $ | $ | ( | $ | ||||||||||||||||||
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
12
been in a continuous unrecognized loss position:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | |||||||||||||||||||||||||||||
| As of September 30, 2023: | |||||||||||||||||||||||||||||||||||
| Government Sponsored Entities: | |||||||||||||||||||||||||||||||||||
| Residential MBS | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||||||||||||||
| Government Sponsored Entities: | |||||||||||||||||||||||||||||||||||
| Residential MBS | $ | $ | ( | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
At September 30, 2023, the Company had seven held to maturity residential MBS of which all seven 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 September 30, 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 September 30, 2023 or December 31, 2022. Additionally, the Company had no ACL recorded for held to maturity investment securities at September 30, 2023.
The following table summarizes the scheduled maturities of available for sale and held to maturity investment securities as of September 30, 2023:
| September 30, 2023 | |||||||||||
| (Dollars in thousands) | Amortized Cost | Fair Value | |||||||||
| Available for sale debt securities | |||||||||||
| One to five years | $ | $ | |||||||||
| Five to ten years | |||||||||||
| Beyond ten years | |||||||||||
| MBS, CMOs and other ABS | |||||||||||
| Total available for sale debt securities | $ | $ | |||||||||
| Held to maturity investments securities | |||||||||||
| Five to ten years | $ | $ | |||||||||
| MBS | |||||||||||
| Total held to maturity debt securities | $ | $ | |||||||||
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 September 30, 2023, securities with an amortized cost totaling $575.3 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 September 30, 2023 and December 31, 2022, the fair value of equity securities totaled $10.0 million and $10.3 million, respectively. Changes in fair value are recognized in other noninterest income and totaled $(322 455 ) thousand and
13
3. LOANS
Loans consist of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Mortgages on: | |||||||||||
| Multifamily residential | $ | $ | |||||||||
| Single family residential | |||||||||||
| Commercial real estate | |||||||||||
| Construction and land | |||||||||||
| Total | |||||||||||
| Allowance for credit losses on loans | ( | ( | |||||||||
| Loans, net | $ | $ | |||||||||
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 and nine months ended September 30, 2023:
| Allowance for Credit Losses | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Beginning Balance | Impact of CECL Adoption | Charge-Offs | Recoveries | Provision | Ending Balance | |||||||||||||||||||||||||||||
| Three months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | — | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Single family residential | — | ( | |||||||||||||||||||||||||||||||||
| Commercial real estate | — | ||||||||||||||||||||||||||||||||||
| Construction and land | — | ||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans | — | ( | |||||||||||||||||||||||||||||||||
| Allowance for credit losses on off-balance sheet credit exposures | — | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | — | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
| Nine months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Single family residential | ( | ( | |||||||||||||||||||||||||||||||||
| Commercial real estate | ( | ||||||||||||||||||||||||||||||||||
| Construction and land | ( | ||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans | ( | ( | |||||||||||||||||||||||||||||||||
| Allowance for credit losses on off-balance sheet credit exposures | ( | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
14
The following table summarizes activity in and the allocation of the allowance for loan losses by portfolio segment during the three and nine months ended September 30, 2022:
| Allowance for Loan Losses | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Beginning Balance | Charge-Offs | Recoveries | Provision | Ending Balance | ||||||||||||||||||||||||
| Three months ended September 30, 2022 | |||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||
| Commercial real estate | ( | ||||||||||||||||||||||||||||
| Construction and land | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||
| Commercial real estate | ( | ||||||||||||||||||||||||||||
| Construction and land | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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.
15
The following table presents the internal risk ratings for total loans by portfolio segment of loan and origination year as of September 30, 2023, as well as gross charge-offs for the nine months ended September 30, 2023:
| (Dollars in thousands) | Loans by Origination Year | |||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||
| Multifamily residential | ||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | ||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Year to date gross charge-offs | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Single family residential | ||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | ||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Year to date gross charge-offs | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | ||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Year to date gross charge-offs | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | ||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Year to date gross charge-offs | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Total loans | ||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | ||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Year to date gross charge-offs | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
16
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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | |||||||||||||||||||||||||||||
| Special mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 September 30, 2023: | |||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||
| Construction and land | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||
| Construction and land | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
As of both September 30, 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 September 30, 2023.
| Amortized Cost by Collateral Type | Allowance for Credit Losses | ||||||||||||||||||||||
| (Dollars in thousands) | Residential | Office | Industrial | ||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | |||||||||||||||||||
| Single family residential | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
17
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 | $ | $ | $ | — | |||||||||||||
| Single family residential | — | ||||||||||||||||
| — | |||||||||||||||||
| With an allowance recorded: | |||||||||||||||||
| Multifamily residential | |||||||||||||||||
| Single family residential | |||||||||||||||||
| Total: | |||||||||||||||||
| Multifamily residential | |||||||||||||||||
| Single family residential | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
The following table summarizes information related to impaired loans for the three and nine months ended September 30, 2022:
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Recorded Investment | Interest Income | Cash Basis Interest | Average Recorded Investment | Interest Income | Cash Basis Interest | |||||||||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||||||||
| With an allowance recorded: | |||||||||||||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||||||||
| Total: | |||||||||||||||||||||||||||||||||||
| Multifamily residential | |||||||||||||||||||||||||||||||||||
| Single family residential | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans collectively evaluated for impairment | |||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | |||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
18
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 | $ | ||||
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 nine months ended September 30, 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 | $ | $ | |||||||||||||||
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
4. 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:
| September 30, 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 | $ | $ | $ | $ | |||||||||||||||||||
| Single family residential | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The allowance for non-accrual loans is based on the CECL cash flow methodology 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 is 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 and nine months ended September 30, 2023 totaling $23 thousand and $69 thousand, respectively, compared to $45 thousand and $99 thousand during the three and nine months ended September 30, 2022, respectively. Contractual interest not recorded on nonperforming loans during the three and nine months ended September 30, 2023 totaled $121 thousand and $362 thousand, respectively, compared to $6 thousand and $30 thousand during the three and nine months ended September 30, 2022, respectively.
19
5. MORTGAGE SERVICING RIGHTS
Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans are as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Mortgage loans serviced for: | |||||||||||
| Federal Home Loan Mortgage Corporation ("Freddie Mac") | $ | $ | |||||||||
| Other financial institutions | |||||||||||
| Total mortgage loans serviced for others | $ | $ | |||||||||
Custodial account balances maintained in connection with serviced loans totaled $360 thousand and $234 thousand at September 30, 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 value is based on a valuation model that calculates the present value of estimated future net servicing income. Activities for mortgage servicing rights are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | |||||||||||||||||||
| Additions | |||||||||||||||||||||||
| Disposals | |||||||||||||||||||||||
| Changes in fair value due to changes in assumptions | |||||||||||||||||||||||
| Other changes in fair value | ( | ( | ( | ( | |||||||||||||||||||
| Ending balance | $ | $ | $ | $ | |||||||||||||||||||
6. LEASES
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2024 and 2033, with certain leases containing five-year renewal options. The Company includes lease extension options in the lease term, if it is reasonably certain the Company will exercise the option, when considering the economic incentive to do so. Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. All of the Company’s leases are classified as operating leases.
20
Supplemental lease information as of September 30, 2023 and December 31, 2022 is as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||||||||
| Operating lease right-of-use assets included in prepaid expenses and other assets | $ | $ | |||||||||||||||
| Operating lease liabilities included in other liabilities and accrued expenses | |||||||||||||||||
| Weighted average remaining lease term (years) of operating leases | |||||||||||||||||
| Weighted average discount rate of operating leases | % | % | |||||||||||||||
Supplemental lease information for the three and nine months ended September 30, 2023 and 2022 is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Operating lease costs included in occupancy expense | $ | $ | $ | $ | |||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | |||||||||||||||||||||||
At September 30, 2023, future undiscounted lease payments with initial terms of one year or more are as follows:
| (Dollars in thousands) | |||||
| October 1 - December 31, 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total undiscounted lease payments | |||||
| Less: Imputed interest | ( | ||||
| Net lease liabilities | $ | ||||
7. QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
21
8. DEPOSITS
A summary of deposits at September 30, 2023 and December 31, 2022 is as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Time deposits | $ | $ | |||||||||
| Money market checking | |||||||||||
| Money market savings | |||||||||||
| Interest-bearing demand | |||||||||||
| Noninterest-bearing demand | |||||||||||
| Total | $ | $ | |||||||||
The Company had time deposits that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit of $250 thousand of $1.5 billion and $1.3 billion at September 30, 2023 and December 31, 2022, respectively.
The Company utilizes brokered deposits as an additional source of funding. The Company had brokered deposits of $441.7 million and $455.8 million at September 30, 2023 and December 31, 2022, respectively.
Maturities of the Company’s time deposits at September 30, 2023 are summarized as follows:
| (Dollars in thousands) | |||||
| October 1 - December 31, 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
9. FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES
The Bank may borrow from the FHLB, on either a short-term or long-term basis, up to 40 % of its assets, provided that adequate collateral has been pledged. As of September 30, 2023, the Bank had pledged various mortgage loans and securities to secure these borrowing arrangements totaling approximately $4.1 billion and $233.5 million, respectively, compared to pledged mortgage loans totaling approximately $4.2 billion as of December 31, 2022. Additionally, the FHLB stock held by the Bank as of both dates further secure these arrangements.
The Bank has access to the Loan and Discount Window of the FRB and the FRB's Bank Term Funding Program ("BTFP"). Advances under these programs are subject to the Bank providing qualifying collateral. Mortgage loans totaling approximately $2.6 billion and $904.9 million as of September 30, 2023 and December 31, 2022, respectively, secure the discount window borrowing arrangement. Securities with a current par value totaling $339.9 million secure the BTFP as of September 30, 2023. No securities were pledged to secure FRB borrowings as of December 31, 2022. There were no
22
The following table discloses the Bank’s outstanding advances from the FHLB of San Francisco:
| Outstanding Balances | As of September 30, 2023 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | Minimum Interest Rate | Maximum Interest Rate | Weighted Average Rate | Maturity Dates | |||||||||||||||||||||||||||||
| Fixed rate short-term | $ | $ | % | % | % | October 2023 | |||||||||||||||||||||||||||||
| Fixed rate long-term | % | % | % | December 2023 to March 2030 | |||||||||||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||||||||||||||
The Bank's available borrowing capacity based on loans and securities pledged to the FHLB and the FRB totaled $2.5 billion and $1.7 billion at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, the Bank had aggregate loan balances of $11.4 million and $1.1 billion, respectively, available to pledge to the FHLB and FRB to increase its borrowing capacity. As of September 30, 2023 and December 31, 2022, the Bank pledged as collateral a $62.6
Short-term borrowings are borrowings with original maturities of 90 days or less. During the three and nine months ended September 30, 2023, there was a maximum amount of short-term borrowings outstanding of $175.0 6.5 million and $59.5 million, respectively, with a weighted average interest rate of 5.60 % and 5.22 %, respectively. During the three and nine months ended September 30, 2022, there was a maximum amount of short-term borrowings outstanding of $406.9 265.3 million and $128.2 million, respectively, with a weighted average interest rate of 2.52 % and 2.04 %, respectively.
The following table summarizes scheduled principal payments on FHLB advances over the next five years as of September 30, 2023:
| (Dollars in thousands) | |||||
| October 1 - December 31, 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| $ | |||||
10. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
The Company formed two wholly-owned trust companies (the ‘‘Trusts’’) which issued guaranteed preferred beneficial interests (the "Trust Securities") in the Company’s junior subordinated deferrable interest debentures (the "Notes"). The Company is not considered the primary beneficiary of the Trusts and therefore, the Trusts are not consolidated in the Company’s financial statements, but rather the junior subordinated debentures are shown as a liability. The Company’s investment in the common securities of the Trusts, totaling $1.9 million, is included in other assets in the consolidated statements of financial condition. The sole asset of the Trusts are the Notes that they hold.
The Trusts have invested the proceeds of such Trust Securities in the Notes. Each of the Notes has an interest rate equal to the corresponding Trust Securities distribution rate. The Company has the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred, and the Company’s ability to pay dividends on its common stock will be restricted.
The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Securities; (ii) the redemption price with respect to any Trust Securities called for redemption by the Trusts;
23
and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trusts. The Trust Securities are mandatorily redeemable upon maturity of the Notes, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the Notes purchased by the Trusts, in whole or in part, on or after the redemption date. As specified in the indenture, if the Notes are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
The following table is a summary of the outstanding Trust Securities and Notes at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | Date | Maturity | Rate Index | ||||||||||||||||||||||||||||||||||||||||
| Issuer | Amount | Rate | Amount | Rate | Issued | Date | (Quarterly Reset) | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Luther Burbank Statutory Trust I | $ | % | $ | % | 3/1/2006 | 6/15/2036 | 3 month CME Term SOFR + Tenor Spread Adjustment (0.26%) + | |||||||||||||||||||||||||||||||||||||
| Luther Burbank Statutory Trust II | $ | % | $ | % | 3/1/2007 | 6/15/2037 | 3 month CME Term SOFR + Tenor Spread Adjustment (0.26%) + | |||||||||||||||||||||||||||||||||||||
11. SENIOR DEBT
In September 2014, the Company issued $95 million in senior unsecured term notes to qualified institutional investors. The following table summarizes information on these notes as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Principal | Unamortized Debt Issuance Costs | Principal | Unamortized Debt Issuance Costs | Maturity Date | Fixed Interest Rate | ||||||||||||||||||||||||||||||||
| Senior Unsecured Term Notes | $ | $ | $ | $ | 9/30/2024 | % | ||||||||||||||||||||||||||||||||
12. DERIVATIVES AND HEDGING ACTIVITIES
From time to time, the Company utilizes interest rate swaps and other derivative financial instruments as part of its asset liability management strategy to manage interest rate risk positions.
Fair Value Hedges of Interest Rate Risk
As of September 30, 2023, the Company held 11 interest rate swaps with a total notional amount of $1.8 billion. The swaps provide a hedge against the interest rate risk associated with both fixed rate loans and hybrid adjustable loans in their fixed rate period.
All outstanding swaps are designated as fair value hedges and involve the payment of a fixed rate amount to a counterparty in exchange for the Company receiving a variable rate payment over the life of the swaps without the exchange of the underlying notional amount. Any gain or loss on the derivatives, as well as any offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in interest income on loans.
The following table presents the effect of the Company’s interest rate swaps on the unaudited consolidated statements of income for the three and nine months ended September 30, 2023 and 2022:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Derivative - interest rate swaps: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Hedged items - loans: | |||||||||||||||||||||||
| Interest loss | ( | ( | ( | ( | |||||||||||||||||||
| Net increase in interest income | $ | $ | $ | $ | |||||||||||||||||||
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The following table presents the fair value of the Company’s interest rate swaps, as well as their classification in the consolidated statements of financial condition as of September 30, 2023 and December 31, 2022:
| Fair Values of Derivative Instruments | ||||||||||||||||||||
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||
| (Dollars in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||
| As of September 30, 2023: | ||||||||||||||||||||
| Interest Rate Swaps | $ | Prepaid Expenses and Other Assets | $ | Other Liabilities and Accrued Expenses | $ | |||||||||||||||
| As of December 31, 2022: | ||||||||||||||||||||
| Interest Rate Swaps | $ | Prepaid Expenses and Other Assets | $ | Other Liabilities and Accrued Expenses | $ | |||||||||||||||
As of September 30, 2023 and December 31, 2022, the following amounts were recorded in the consolidated statements of financial condition related to cumulative basis adjustments for its fair value hedges:
Line Item in the Consolidated Statements of Financial Condition in Which the Hedged Items are Included (1) | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| As of September 30, 2023: | ||||||||||||||
| Loans receivable, net | $ | $ | ( | |||||||||||
| As of December 31, 2022: | ||||||||||||||
| Loans receivable, net | $ | $ | ( | |||||||||||
13. STOCK BASED COMPENSATION
The Company’s stock based compensation consists of restricted stock awards ("RSAs") and restricted stock units ("RSUs") granted under the Luther Burbank Corporation Omnibus Equity and Incentive Compensation Plan ("Omnibus Plan"). In connection with its initial public offering ("IPO") in December 2017, the Company granted RSUs in exchange for unvested phantom stock awards related to a then discontinued employee benefit plan that awarded phantom stock to certain key executives and nonemployee directors. The RSUs were granted on a per share basis, with the same vesting schedule and deferral elections that existed for the original phantom stock awards. Post IPO, the Company typically grants RSAs to nonemployee directors and certain employees on an annual basis. RSA grants vest after one year for nonemployee directors and ratably over to four years for employees.
All RSAs and RSUs are granted at the fair value of the common stock at the time of the award. RSAs and RSUs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the vesting and/or service period. Non-cash stock compensation expense recognized for RSAs for the three and nine months ended September 30, 2023 totaled $479 thousand and $1.4 million, respectively, compared to $756 thousand and $2.1 million for the three and nine months ended September 30, 2022. The fair value of RSAs that vested during the nine months ended September 30, 2023 totaled $2.7 million compared to $90 thousand and $2.7 million during the three and nine months ended September 30, 2022, respectively. No RSAs or RSUs vested during the three months ended September 30, 2023.
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As of September 30, 2023 and December 31, 2022, there was $1.4 million and $2.4 million, respectively, of unrecognized compensation expense related to 229,460 and 414,004 unvested RSAs, respectively, which amounts were expected to be expensed over a weighted average period of 1.17 years and 1.74 years, respectively. As of September 30, 2023 and December 31, 2022, 65,799 and 81,225 shares, respectively, of RSUs were vested and remain unsettled per the original deferral elections. There were no unvested RSUs at September 30, 2023 or December 31, 2022.
The following table summarizes share information about RSAs and RSUs:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Beginning of the period balance | $ | $ | |||||||||||||||||||||
| Shares granted | |||||||||||||||||||||||
| Shares settled | ( | ( | |||||||||||||||||||||
| Shares forfeited | ( | ( | |||||||||||||||||||||
| End of the period balance | $ | $ | |||||||||||||||||||||
14. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:
Level 1 - Quoted market prices for identical instruments traded in active exchange markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3 - Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
Management monitors the availability of observable market data to assess the appropriate classification of assets and liabilities within the fair value hierarchy. Changes in economic conditions or model-based
26
valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities, or total earnings.
The following methods and assumptions were used to estimate the fair value of financial instruments:
For cash and cash equivalents, accrued interest receivable and payable, demand deposits and short-term borrowings, the carrying amount was estimated to be fair value. The fair value of accrued interest receivable/payable balances were determined using inputs and fair value measurements commensurate with the asset or liability from which the accrued interest is generated.
Fair values for available for sale and held to maturity debt securities, which include primarily debt securities issued by U.S. government sponsored agencies, were based on quoted market prices for similar securities.
Fair values for equity securities, which consist of investments in a qualified community reinvestment fund, were based on quoted market prices.
Loans were valued using the exit price notion. The fair value was estimated using market quotes for similar assets or the present value of future cash flows, discounted using a market rate for similar products and giving consideration to estimated prepayment risk and credit risk. The fair value of loans was determined utilizing estimates resulting in a Level 3 classification.
The fair value of collateral dependent loans were measured based on the fair value of the collateral at the reporting date, adjusted for selling costs. The fair value of collateral dependent loans was determined utilizing estimates resulting in a Level 3 classification.
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
The fair value of servicing rights was determined using a valuation model that utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.
The fair values of derivatives were based on valuation models using observable market data as of the measurement date.
Fair values for fixed-rate time deposits were estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for time deposits with similar remaining maturities. For deposits with no contractual maturity, the fair value was assumed to equal the carrying value.
The fair value of FHLB advances was estimated based on discounting the future cash flows using the market rate currently offered for similar terms.
The fair value of subordinated debentures was based on an indication of value provided by a third-party broker.
For senior debt, the fair value was based on an indication of value provided by a third-party broker.
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Fair Value of Financial Instruments
The carrying and estimated fair values of the Company’s financial instruments were as follows:
| Fair Level Measurements Using | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| As of September 30, 2023: | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||||||||
| Held to maturity | |||||||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Loans receivable, net | |||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| FHLB stock | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| FHLB advances | |||||||||||||||||||||||||||||
| Junior subordinated deferrable interest debentures | |||||||||||||||||||||||||||||
| Senior debt | |||||||||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||||||||
| Available for sale | |||||||||||||||||||||||||||||
| Held to maturity | |||||||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Loans receivable, net | |||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| FHLB stock | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| FHLB advances | |||||||||||||||||||||||||||||
| Junior subordinated deferrable interest debentures | |||||||||||||||||||||||||||||
| Senior debt | |||||||||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||||||||
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
28
Assets and Liabilities Recorded at Fair Value
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2023 and December 31, 2022.
Recurring Basis
The Company is required or permitted to record the following assets and liabilities at fair value on a recurring basis:
| (Dollars in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| As of September 30, 2023: | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Government and Government Sponsored Entities: | |||||||||||||||||||||||
| Commercial MBS and CMOs | $ | $ | $ | $ | |||||||||||||||||||
| Residential MBS and CMOs | |||||||||||||||||||||||
| Agency bonds | |||||||||||||||||||||||
| Other ABS | |||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | $ | $ | |||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| As of December 31, 2022: | |||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Government and Government Sponsored Entities: | |||||||||||||||||||||||
| Commercial MBS and CMOs | $ | $ | $ | $ | |||||||||||||||||||
| Residential MBS and CMOs | |||||||||||||||||||||||
| Agency bonds | |||||||||||||||||||||||
| Other ABS | |||||||||||||||||||||||
| Total available for sale debt securities | $ | $ | $ | $ | |||||||||||||||||||
| Equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2023 or 2022.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date.
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15. VARIABLE INTEREST ENTITIES ("VIE")
The Company is involved with VIEs through its loan securitization activities. The Company evaluated its association with VIEs for consolidation purposes. Specifically, a VIE is to be consolidated by its primary beneficiary, the entity that has both the power to direct the activities that most significantly impact the VIE, and a variable interest that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest whose value fluctuates with the changes in the value of the VIE's assets and liabilities. The assessment includes an evaluation of the Company's continuing involvement with the VIE and the nature and significance of its variable interests.
Multifamily loan securitization
With respect to the securitization transaction with Freddie Mac which settled September 27, 2017, the Company's variable interests reside with a reimbursement agreement entered into with Freddie Mac that obligates the Company to reimburse Freddie Mac for defaulted contractual principal and interest payments identified after the ultimate resolution of any defaulted loans. Such reimbursement obligations are not to exceed 10 % of the original principal amount of the loans comprising the securitization pool. As part of the securitization transaction, the Company released all servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. As Master Servicer, Freddie Mac appointed the Company with sub-servicing obligations, which include obligations to collect and remit payments of principal and interest, manage payments of taxes and insurance, and otherwise administer the underlying loans. The servicing of defaulted loans and foreclosed loans was assigned to a separate third-party entity, independent of the Company and Freddie Mac. Freddie Mac, in its capacity as Master Servicer, can terminate the Company in its role as sub-servicer and direct such responsibilities accordingly. In evaluating the variable interests and continuing involvement in the VIE, the Company determined that it does not have the power to make significant decisions or direct the activities that most significantly impact the economic performance of the VIE's assets and liabilities. As sub-servicer of the loans, the Company does not have the authority to make significant decisions that influence the value of the VIE's net assets and therefore, is not the primary beneficiary of the VIE. Hence, the Company determined that the VIE associated with the multifamily securitization should not be included in the consolidated financial statements of the Company.
16. LOAN SALE AND SECURITIZATION ACTIVITIES
The Company periodically sells loans as part of its business operations and overall management of liquidity, assets and liabilities, and financial performance. The transfer of loans is executed in securitization or sale transactions. With respect to sale transactions, the Company's continuing involvement may or may not include ongoing servicing responsibilities and general representations and warranties. With respect to securitization sales, the Company executed its first and only transaction to date on September 27, 2017 with Freddie Mac. The transaction involved the sale of $626.0 million in originated multifamily loans through a Freddie Mac sponsored transaction. The Company's continuing involvement includes sub-servicing responsibilities, general representations and warranties, and a limited reimbursement obligation.
As sub-servicer for Freddie Mac, the Bank is required to maintain a minimum net worth in accordance with GAAP of not less than $2.0 million. If the Bank's capital were to fall below this threshold, Freddie Mac would have the authority to terminate and assume the Bank’s sub-servicing duties. At September 30, 2023, the Bank’s net worth was $834.5 million which equates to its Tier 1 capital of $875.4 million plus goodwill of $3.3 million less accumulated other comprehensive loss related to net unrealized losses on available for sale securities of $44.2 million.
30
General representations and warranties associated with loan sales and the securitization transaction require the Company to uphold various assertions that pertain to the underlying loans at the time of the transaction, including, but not limited to, compliance with relevant laws and regulations, absence of fraud, enforcement of liens, no environmental damages, and maintenance of relevant environmental insurance. Such representations and warranties are limited to those that do not meet the quality represented at the transaction date and do not pertain to a decline in value or future payment defaults. In circumstances where the Company breaches its representations and warranties, the Company would generally be required to cure such instances through a repurchase or substitution of the subject loan(s).
With respect to the securitization transaction, the Company also has continuing involvement through a reimbursement agreement executed with Freddie Mac. To the extent the ultimate resolution of defaulted loans results in contractual principal and interest payments that are deficient, the Company is obligated to reimburse Freddie Mac for such amounts, not to exceed 10 % of the original principal amount of the loans comprising the securitization pool at the closing date of September 27, 2017.
The following table provides cash flows associated with the Company's loan sale activities:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Proceeds from loan sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Servicing fees | ||||||||||||||||||||||||||
The following table provides information about the loans transferred through sales or securitization and not recorded in the consolidated statements of financial condition, for which the Company's continuing involvement includes sub-servicing or servicing responsibilities and/or reimbursement obligations:
| (Dollars in thousands) | Single Family Residential | Multifamily Residential | |||||||||
| As of September 30, 2023: | |||||||||||
| Principal balance of loans | $ | $ | |||||||||
| Loans 90+ days past due | |||||||||||
| Charge-offs, net | |||||||||||
| As of December 31, 2022: | |||||||||||
| Principal balance of loans | $ | $ | |||||||||
| Loans 90+ days past due | |||||||||||
| Charge-offs, net | |||||||||||
17. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments represent commitments to originate fixed and variable rate loans and loans in process, and involve, to varying degrees, credit risk and interest rate risk in excess of the amount recognized in the Company’s consolidated statements of financial condition. The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance sheet instruments. As it relates to interest rate risk, the Company's exposure is generally limited to increases in interest rates that may result during the short period of time between the commitment and funding of fixed rate credit facilities and adjustable rate credit facilities with initial fixed rate periods. The limited timing risk associated with these credit facilities are considered within the Company's asset liability management process.
Commitments to fund loans and lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have expiration dates or other termination clauses. In addition, external market forces may impact the probability of commitments
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being exercised; therefore, total commitments outstanding do not necessarily represent future cash requirements.
At September 30, 2023 and December 31, 2022, the Company had outstanding commitments of approximately $21.0 million and $37.7 million, respectively, for loans. Unfunded commitment reserves totaled $190 thousand and $125 thousand at September 30, 2023 and December 31, 2022, respectively. The Company adopted the CECL accounting standard on January 1, 2023. Upon adoption, the Company increased the allowance for unfunded loan commitments by $330 thousand, which represented the difference between the allowance calculated under the CECL methodology as of January 1, 2023 and the incurred loss methodology as of December 31, 2022. The $330 thousand increase in the allowance for unfunded loan commitments was primarily due to higher lifetime expected losses on unfunded commitments on construction loans under the CECL methodology.
Contingencies
At present, there are no pending or threatened proceedings against the Company which, if determined adversely, would have a material effect on the Company’s business, financial position, results of operations or cash flows. In the ordinary course of operations, as well as in connection with the pending merger with WAFD, the Company may be party to various legal proceedings.
Correspondent Banking Agreements
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our financial condition at September 30, 2023 and December 31, 2022 and our results of operations for the three months ended September 30, 2023 and June 30, 2023 and the nine months ended September 30, 2023 and 2022, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 that was filed with the SEC on February 22, 2023 (our “Annual Report”) and with the accompanying Notes to Unaudited Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 (this “Report”). Because we conduct all of our material business operations through our bank subsidiary, Luther Burbank Savings (the "Bank"), the discussion and analysis relates to activities primarily conducted by the Bank.
Overview
We are a bank holding company headquartered in Santa Rosa, California, and the parent company of Luther Burbank Savings, a California-chartered commercial bank with $8.1 billion in assets at September 30, 2023. Our principal business is providing high-value, relationship-based banking products and services to our customers, which include real estate investors, professionals, entrepreneurs, depositors and commercial businesses. We generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is retail deposits and we place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank ("FHLB") and brokered deposits. Our largest expenses are interest on deposits and borrowings along with salaries and related employee benefits. Our principal lending products are real estate secured loans, consisting primarily of multifamily residential properties and jumbo single family residential properties on the West Coast.
Recent Developments
As announced in November of last year, Luther Burbank Corporation entered into an agreement to merge with and into Washington Federal, Inc. ("WAFD"). On May 4, 2023, shareholders of each entity approved the transaction, and on October 13, 2023, the Washington State Department of Financial Institutions granted conditional approval of the merger. The merger remains subject to the receipt of approvals from the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System.
Selected Financial Data
The following table sets forth the Company’s selected historical consolidated financial data for the periods and as of the dates indicated. You should read this information together with the Company’s audited consolidated financial statements included in our Annual Report and the unaudited consolidated financial statements and related notes included elsewhere in this Report. The selected historical consolidated financial data as of and for the three and nine months September 30, 2023 and 2022 are derived from our unaudited consolidated financial statements, which are included elsewhere in this Report. The selected historical consolidated financial data for the three months ended June 30, 2023 are derived from our unaudited consolidated financial statements which are included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 filed with SEC on August 4, 2023. The Company’s historical results for any prior period are not necessarily indicative of future performance.
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| (Dollars in thousands, except per share data) | As of or For the Three Months Ended | As of or For the Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| Statements of Income and Financial Condition Data | ||||||||||||||||||||||||||
| Net Income | $ | 1,907 | $ | 6,917 | $ | 22,266 | $ | 66,509 | ||||||||||||||||||
Pre-tax, pre-provision net earnings (1) | $ | 5,560 | $ | 11,107 | $ | 34,954 | $ | 94,456 | ||||||||||||||||||
| Total assets | $ | 8,133,913 | $ | 8,360,070 | $ | 8,133,913 | $ | 7,921,584 | ||||||||||||||||||
| Per Common Share | ||||||||||||||||||||||||||
| Diluted earnings per share | $ | 0.04 | $ | 0.14 | $ | 0.44 | $ | 1.30 | ||||||||||||||||||
| Book value per share | $ | 13.62 | $ | 13.71 | $ | 13.62 | $ | 13.25 | ||||||||||||||||||
Tangible book value per share (1) | $ | 13.56 | $ | 13.64 | $ | 13.56 | $ | 13.18 | ||||||||||||||||||
| Selected Ratios | ||||||||||||||||||||||||||
| Return on average: | ||||||||||||||||||||||||||
| Assets | 0.09 | % | 0.33 | % | 0.36 | % | 1.20 | % | ||||||||||||||||||
| Stockholders' equity | 1.09 | % | 3.94 | % | 4.25 | % | 13.11 | % | ||||||||||||||||||
| Dividend payout ratio | — | % | — | % | — | % | 27.80 | % | ||||||||||||||||||
| Net interest margin | 0.97 | % | 1.27 | % | 1.32 | % | 2.52 | % | ||||||||||||||||||
Efficiency ratio (1) | 73.00 | % | 59.18 | % | 57.90 | % | 31.88 | % | ||||||||||||||||||
| Noninterest expense to average assets | 0.73 | % | 0.76 | % | 0.78 | % | 0.80 | % | ||||||||||||||||||
| Loan to deposit ratio | 118.53 | % | 118.50 | % | 118.53 | % | 118.29 | % | ||||||||||||||||||
| Credit Quality Ratios | ||||||||||||||||||||||||||
| Allowance for credit losses on loans to total loans | 0.58 | % | 0.54 | % | 0.58 | % | 0.53 | % | ||||||||||||||||||
| Allowance for credit losses on loans to nonperforming loans | 601.95 | % | 751.04 | % | 601.95 | % | 940.86 | % | ||||||||||||||||||
| Nonperforming assets to total assets | 0.08 | % | 0.06 | % | 0.08 | % | 0.05 | % | ||||||||||||||||||
| Net charge-offs to average loans | 0.03 | % | — | % | 0.01 | % | — | % | ||||||||||||||||||
| Capital Ratios | ||||||||||||||||||||||||||
| Tier 1 leverage ratio | 9.66 | % | 9.40 | % | 9.66 | % | 9.99 | % | ||||||||||||||||||
| Total risk-based capital ratio | 20.86 | % | 20.39 | % | 20.86 | % | 19.20 | % | ||||||||||||||||||
(1) Considered a non-GAAP financial measure. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ‘‘Non-GAAP Financial Measures’’ for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Pre-tax, pre-provision net earnings is defined as net income before taxes and provision for credit losses. Tangible book value per share is defined as total assets less goodwill and total liabilities divided by period end shares outstanding. Efficiency ratio is defined as the ratio of noninterest expense to net interest income plus noninterest income. | ||||||||||||||||||||||||||
Critical Accounting Policies and Estimates
Our unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with general practices within the financial services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Our most significant accounting policies are described in Note 1 to our audited financial statements for the year ended December 31, 2022, included in our Annual Report. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are reasonable and appropriate.
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Allowance for Credit Losses ("ACL") on Loans
The Company adopted the current expected credit loss ("CECL") allowance methodology on January 1, 2023. 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. Loans are charged-off against the allowance when management believes that the uncollectibility of a loan is confirmed. Recoveries will never exceed the aggregate of amounts previously charged-off.
While management estimates the ACL balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts, inherent uncertainties in the estimation process make it reasonably possible that ultimate losses may vary significantly from our original estimates.
Fair Value Measurement
We use estimates of fair value in applying various accounting standards for our unaudited consolidated financial statements. Fair value is defined as the exit price at which an asset may be sold or a liability may be transferred in an orderly transaction between willing and able market participants. When available, fair value is measured by looking at observable market prices for identical assets and liabilities in an active market. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, prepayment speeds and credit spreads. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.
Changes in the fair value of debt securities available for sale are recorded in our consolidated statements of financial condition and comprehensive income (loss) while changes in the fair value of equity securities, loans held for sale and derivatives are recorded in the consolidated statements of financial condition and in the unaudited consolidated statements of income.
Non-GAAP Financial Measures
Some of the financial measures discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations contain financial measures that are not measures recognized under GAAP and therefore, are considered non-GAAP financial measures, including pre-tax, pre-provision net earnings, efficiency ratio, tangible assets, tangible stockholders' equity and tangible book value per share.
Our management uses these non-GAAP financial measures in their analysis of the Company’s performance, financial condition and the efficiency of its operations. We believe that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods and other companies, as well as demonstrate the effects of significant changes in the current period. We also believe that investors find these non-GAAP financial measures useful as they assist investors in understanding our underlying operating performance and the analysis of ongoing operating trends. However, we acknowledge that our non-GAAP financial measures have a number of limitations. You should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons.
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The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||
| Pre-tax, Pre-provision Net Earnings | |||||||||||||||||||||||
| Income before taxes | $ | 2,559 | $ | 9,895 | $ | 31,536 | $ | 93,956 | |||||||||||||||
| Plus: Provision for credit losses | 3,001 | 1,212 | 3,418 | 500 | |||||||||||||||||||
| Pre-tax, pre-provision net earnings | $ | 5,560 | $ | 11,107 | $ | 34,954 | $ | 94,456 | |||||||||||||||
| Efficiency Ratio | |||||||||||||||||||||||
| Noninterest expense (numerator) | $ | 15,035 | $ | 16,104 | $ | 48,073 | $ | 44,213 | |||||||||||||||
| Net interest income | $ | 19,563 | $ | 26,320 | 79,869 | 137,980 | |||||||||||||||||
| Noninterest income | 1,032 | 891 | 3,158 | 689 | |||||||||||||||||||
| Operating revenue (denominator) | $ | 20,595 | $ | 27,211 | $ | 83,027 | $ | 138,669 | |||||||||||||||
| Efficiency ratio | 73.00 | % | 59.18 | % | 57.90 | % | 31.88 | % | |||||||||||||||
| (Dollars in thousands, except per share data) | September 30, 2023 | June 30, 2023 | September 30, 2022 | ||||||||||||||
| Tangible Book Value Per Share | |||||||||||||||||
| Total assets | $ | 8,133,913 | $ | 8,360,070 | $ | 7,921,584 | |||||||||||
| Less: Goodwill | (3,297) | (3,297) | (3,297) | ||||||||||||||
| Tangible assets | 8,130,616 | 8,356,773 | 7,918,287 | ||||||||||||||
| Less: Total liabilities | (7,438,908) | (7,660,723) | (7,244,915) | ||||||||||||||
| Tangible stockholders' equity (numerator) | $ | 691,708 | $ | 696,050 | $ | 673,372 | |||||||||||
| Period end shares outstanding (denominator) | 51,027,878 | 51,027,878 | 51,074,605 | ||||||||||||||
| Tangible book value per share | $ | 13.56 | $ | 13.64 | $ | 13.18 | |||||||||||
Results of Operations - Three Months Ended September 30, 2023 and June 30, 2023
Overview
For the three months ended September 30, 2023, our net income was $1.9 million as compared to $6.9 million for the three months ended June 30, 2023. The decrease of $5.0 million, or 72.4%, was attributable to a decrease in net interest income of $6.8 million and an increase in the provision for credit losses of $1.8 million, partially offset by a decrease in provision for income taxes of $2.3 million and a decrease in noninterest expense of $1.1 million. Pre-tax, pre-provision net earnings decreased by $5.5 million, or 49.9%, for the three months ended September 30, 2023 as compared to the linked quarter.
Net Interest Income
Net interest income decreased by $6.8 million, or 25.7%, to $19.6 million for the three months ended September 30, 2023 from $26.3 million for the prior quarter primarily due to higher interest expense on our deposit portfolio, partially offset by lower interest expense on FHLB advances.
As of September 30, 2023, the Company held swaps with an aggregate notional amount of $1.8 billion, carrying a weighted average fixed payment rate of 3.78%, while receiving a federal funds weighted average rate of 5.33%. The Company's swaps provide a partial hedge against the interest rate risk associated with hybrid adjustable loans in their fixed period, as well as a pool of fixed rate single family loans. The net hedging impact associated with our swaps is reported in interest income on loans. During the quarters ended September 30 and June 30, 2023, interest income earned on these swaps totaled $6.4 million and $8.0 million, respectively. The decline in interest income on swaps was attributable to the maturity of a $300 million swap at the end of the prior quarter. The Company replaced this swap with a new $300 million swap at the end of the current quarter.
Our net interest margin was 0.97% during the three months ended September 30, 2023 compared to 1.27% during the prior quarter. Our net interest margin reflects the net impact of an increase in the cost of interest bearing liabilities, partially offset by an increase in the yield on interest earning assets. Due to the liability sensitivity of our balance sheet, our interest-bearing liabilities generally reprice more quickly than our interest-earning assets, which will result in lower net interest income during periods of rising interest rates. During the third quarter, the cost of our
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interest bearing liabilities increased by 34 basis points primarily due to an increase in the cost of our deposits, while the yield on our interest earning assets increased by 6 basis points primarily due to increases in yields on our cash and investment holdings. Our net interest spread in the third quarter was 0.70%, a decrease of 28 basis points as compared to the linked quarter.
Average balance sheet, interest and yield/rate analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the three months ended September 30, 2023 and June 30, 2023. The average balances are daily averages.
| For the Three Months Ended | |||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest Inc/Exp | Yield/Rate | Average Balance | Interest Inc/Exp | Yield/Rate | |||||||||||||||||||||||||||||||||||
| Interest-Earning Assets | |||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 4,391,926 | $ | 49,176 | 4.48 | % | $ | 4,487,735 | $ | 50,780 | 4.53 | % | |||||||||||||||||||||||||||||
| Single family residential | 2,301,841 | 23,085 | 4.01 | % | 2,317,880 | 22,249 | 3.84 | % | |||||||||||||||||||||||||||||||||
| Commercial real estate | 159,917 | 2,279 | 5.70 | % | 164,733 | 2,256 | 5.48 | % | |||||||||||||||||||||||||||||||||
| Construction and land | 20,947 | 576 | 10.91 | % | 24,753 | 729 | 11.81 | % | |||||||||||||||||||||||||||||||||
Total loans (1) | 6,874,631 | 75,116 | 4.37 | % | 6,995,101 | 76,014 | 4.35 | % | |||||||||||||||||||||||||||||||||
| Investment securities | 569,925 | 5,711 | 4.01 | % | 595,223 | 5,613 | 3.77 | % | |||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 610,788 | 8,243 | 5.35 | % | 683,409 | 8,623 | 5.06 | % | |||||||||||||||||||||||||||||||||
| Total interest-earning assets | 8,055,344 | 89,070 | 4.42 | % | 8,273,733 | 90,250 | 4.36 | % | |||||||||||||||||||||||||||||||||
Noninterest-earning assets (2) | 159,413 | 147,474 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 8,214,757 | $ | 8,421,207 | |||||||||||||||||||||||||||||||||||||
| Interest-Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Transaction accounts | $ | 125,908 | 245 | 0.76 | % | $ | 132,927 | 186 | 0.55 | % | |||||||||||||||||||||||||||||||
| Money market demand accounts | 1,881,449 | 16,453 | 3.42 | % | 1,943,861 | 14,870 | 3.03 | % | |||||||||||||||||||||||||||||||||
| Time deposits | 3,715,204 | 38,401 | 4.05 | % | 3,662,985 | 32,661 | 3.54 | % | |||||||||||||||||||||||||||||||||
| Total deposits | 5,722,561 | 55,099 | 3.77 | % | 5,739,773 | 47,717 | 3.30 | % | |||||||||||||||||||||||||||||||||
| FHLB advances | 1,453,821 | 11,722 | 3.20 | % | 1,640,939 | 13,630 | 3.33 | % | |||||||||||||||||||||||||||||||||
| Junior subordinated debentures | 61,857 | 1,112 | 7.13 | % | 61,857 | 1,008 | 6.54 | % | |||||||||||||||||||||||||||||||||
| Senior debt | 94,857 | 1,574 | 6.64 | % | 94,826 | 1,575 | 6.64 | % | |||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 7,333,096 | 69,507 | 3.72 | % | 7,537,395 | 63,930 | 3.38 | % | |||||||||||||||||||||||||||||||||
| Noninterest-bearing deposit accounts | 69,777 | 71,865 | |||||||||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 109,858 | 110,391 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities | 7,512,731 | 7,719,651 | |||||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | 702,026 | 701,556 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,214,757 | $ | 8,421,207 | |||||||||||||||||||||||||||||||||||||
Net interest spread (3) | 0.70 | % | 0.98 | % | |||||||||||||||||||||||||||||||||||||
Net interest income/margin (4) | $ | 19,563 | 0.97 | % | $ | 26,320 | 1.27 | % | |||||||||||||||||||||||||||||||||
(1) Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred loan costs, net of deferred loan fees. Net deferred loan cost amortization totaled $1.5 million and $1.4 million for the three months ended September 30, 2023 and June 30, 2023, respectively.
(2) Noninterest-earning assets includes the allowance for credit losses on loans.
(3) Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities.
(4) Net interest margin is net interest income divided by total average interest-earning assets.
Interest rates and operating interest differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest
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earned from our interest-earning assets and interest incurred on our interest-bearing liabilities during the periods indicated. The effect of changes in volume is determined by multiplying the change in volume by the prior period’s average rate. The effect of rate changes is calculated by multiplying the change in average rate by the prior period’s volume. The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.
| Three Months Ended September 30 vs June 30, 2023 | |||||||||||||||||
| Variance Due To | |||||||||||||||||
| (Dollars in thousands) | Volume | Yield/Rate | Total | ||||||||||||||
| Interest-Earning Assets | |||||||||||||||||
| Multifamily residential | $ | (1,057) | $ | (547) | $ | (1,604) | |||||||||||
| Single family residential | (153) | 989 | 836 | ||||||||||||||
| Commercial real estate | (67) | 90 | 23 | ||||||||||||||
| Construction and land | (102) | (51) | (153) | ||||||||||||||
| Total loans | (1,379) | 481 | (898) | ||||||||||||||
| Investment securities | (246) | 344 | 98 | ||||||||||||||
| Cash and cash equivalents | (890) | 510 | (380) | ||||||||||||||
| Total interest-earning assets | (2,515) | 1,335 | (1,180) | ||||||||||||||
| Interest-Bearing Liabilities | |||||||||||||||||
| Transaction accounts | (10) | 69 | 59 | ||||||||||||||
| Money market demand accounts | (441) | 2,024 | 1,583 | ||||||||||||||
| Time deposits | 516 | 5,224 | 5,740 | ||||||||||||||
| Total deposits | 65 | 7,317 | 7,382 | ||||||||||||||
| FHLB advances | (1,422) | (486) | (1,908) | ||||||||||||||
| Junior subordinated debentures | — | 104 | 104 | ||||||||||||||
| Senior debt | (1) | — | (1) | ||||||||||||||
| Total interest-bearing liabilities | (1,358) | 6,935 | 5,577 | ||||||||||||||
| Net Interest Income | $ | (1,157) | $ | (5,600) | $ | (6,757) | |||||||||||
Total interest income decreased by $1.2 million, or 1.3%, for the three months ended September 30, 2023 as compared to the prior quarter. This decrease was primarily due to a $898 thousand decline in interest income earned on loans due to a $2.0 million decrease in income earned on interest rate swaps primarily related to multifamily residential loans due to a maturity of a swap in the prior quarter, as discussed above. This decrease was partially offset by an increase in the average yield on our loans due to the repricing of loans, as well as the recent origination of loans at higher current rates relative to the existing coupon on our loan portfolio. Interest income was also affected by a decrease in interest income on cash and cash equivalents due to a $72.6 million decline in the average balance, partially offset by a 29 basis point increase in the average yield compared to the linked quarter.
The volume of new loan originations totaled $62.8 million and $69.8 million for the three months ended September 30, 2023 and June 30, 2023, respectively. Loan originations remained low primarily due to slowing demand resulting from the general rise in interest rates and our desire to achieve a reasonable risk adjusted return on new loan volume in light of the elevated cost of new funding. The weighted average rate on new loans for the three months ended September 30, 2023 was 6.89% as compared to 6.78% for the linked quarter. Loan prepayment speeds were 6.5% and 6.6% during the three months ended September 30, 2023 and June 30, 2023, respectively. The continued low prepayment speeds were due to rising market interest rates, which continued to impact purchase and refinancing activity. The weighted average rate on loan payoffs/curtailments during both the three months ended September 30, 2023 and June 30, 2023 was 5.07%.
Total interest expense increased $5.6 million, or 8.7%, to $69.5 million, for the three months ended September 30, 2023 from $63.9 million for the prior quarter. Interest expense on deposits increased $7.4 million, to $55.1 million, for the three months ended September 30, 2023 from $47.7 million for the prior quarter. The increase was due to a 47 basis point increase in the cost of interest-bearing deposits predominantly due to rate increases in both retail and brokered deposits. This increase was partially offset by a $1.9 million decline in interest expense on FHLB advances
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compared to the prior quarter due to decreases in the average balance and cost of advances of $187.1 million and 13 basis points, respectively. We use long-term FHLB advances as a hedge of interest rate risk, as we can strategically control the duration of those funds. A discussion of instruments used to mitigate interest rate risk can be found under Part II - Item 7A. ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’
Provision for Credit Losses
During the three months ended September 30, 2023 and June 30, 2023, the Company recorded loan loss provisions of $3.1 million and $1.3 million, respectively. The provisions recorded during the current and prior quarters were primarily related to forecasted declines in multifamily property values. Our ACL on loans as a percentage of total loans was 0.58% at September 30, 2023 compared to 0.52% at December 31, 2022. The Company adopted the CECL methodology on January 1, 2023 using the modified retrospective method and results for reporting periods beginning January 1, 2023 are reported under the CECL methodology, while prior period results continue to be reported under previously applicable GAAP.
Nonperforming assets totaled $6.6 million, or 0.08% of total assets, at September 30, 2023 compared to $6.5 million, or 0.08% of total assets, at December 31, 2022. Classified loans, which includes loans graded Substandard and of greater risk, totaled $19.8 million and $18.9 million at September 30, 2023 and December 31, 2022, respectively. Criticized loans, which includes loans graded Special Mention and classified loans, were $31.2 million at September 30, 2023 compared to $22.3 million at December 31, 2022. This increase was primarily caused by the downgrade of three loans to Special Mention during the current quarter. The Company's exposure to nonresidential commercial real estate remains limited, totaling $154.0 million, or 2.3% of our loan portfolio, at the end of the current quarter. See further detail of our nonresidential commercial real estate below in this item under "Loan Portfolio Composition - Commercial real estate loans."
Noninterest Income
Noninterest income increased by $141 thousand, or 15.8%, to $1.0 million for the three months ended September 30, 2023 from $891 thousand for the prior quarter. The following table presents the major components of our noninterest income:
| For the Three Months Ended | |||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||
| Noninterest Income | |||||||||||||||||||||||
| FHLB dividends | $ | 886 | $ | 625 | $ | 261 | 41.8 | % | |||||||||||||||
| Fee income | 128 | 98 | 30 | 30.6 | % | ||||||||||||||||||
| Other | 18 | 168 | (150) | (89.3) | % | ||||||||||||||||||
| Total noninterest income | $ | 1,032 | $ | 891 | $ | 141 | 15.8 | % | |||||||||||||||
The increase in noninterest income for the quarter ended September 30, 2023 compared to the quarter ended June 30, 2023 was primarily attributable to a $261 thousand increase in FHLB dividends due to a 75 basis point increase in the annualized dividend rate compared to the prior quarter. The $150 thousand decrease in other noninterest income was attributable to a decrease in the fair value of equity securities during the current quarter compared to the prior quarter. Changes in fair value are primarily attributable to changes in market interest rates.
Noninterest Expense
Noninterest expense decreased $1.1 million, or 6.6%, to $15.0 million for the three months ended September 30, 2023 from $16.1 million for the three months ended June 30, 2023.
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The following table presents the major components of our noninterest expense:
| For the Three Months Ended | |||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||
| Noninterest Expense | |||||||||||||||||||||||
| Compensation and related benefits | $ | 8,527 | $ | 10,118 | $ | (1,591) | (15.7) | % | |||||||||||||||
| Deposit insurance premium | 960 | 943 | 17 | 1.8 | % | ||||||||||||||||||
| Professional and regulatory fees | 638 | 499 | 139 | 27.9 | % | ||||||||||||||||||
| Occupancy | 1,115 | 1,134 | (19) | (1.7) | % | ||||||||||||||||||
| Depreciation and amortization | 368 | 373 | (5) | (1.3) | % | ||||||||||||||||||
| Data processing | 1,039 | 1,025 | 14 | 1.4 | % | ||||||||||||||||||
| Marketing | 860 | 955 | (95) | (9.9) | % | ||||||||||||||||||
| Merger costs | 555 | 41 | 514 | 1253.7 | % | ||||||||||||||||||
| Other expenses | 973 | 1,016 | (43) | (4.2) | % | ||||||||||||||||||
| Total noninterest expense | $ | 15,035 | $ | 16,104 | $ | (1,069) | (6.6) | % | |||||||||||||||
The decrease in noninterest expense during the quarter ended September 30, 2023 compared to the linked quarter was predominantly due to a $1.6 million decrease in compensation costs primarily due to an approximate 10% workforce reduction during the second quarter, which predominantly impacted our loan production team, and to a lesser extent, a decline in the required accrual for post-retirement benefits due to rising long-term interest rates during the period. Noninterest expense was negatively affected by a $514 thousand increase in costs incurred in connection with our previously announced merger with WAFD compared to the prior quarter.
Income Tax Expense
For the three months ended September 30, 2023, we recorded income tax expense of $652 thousand as compared to $3.0 million for the prior quarter with effective tax rates of 25.5% and 30.1%, respectively. The decline in income tax expense was due to lower pre-tax income during the current quarter compared to the prior quarter, while the decrease in effective tax rate was primarily due to true-ups related to updated state apportionment factors.
Results of Operations - Nine Months Ended September 30, 2023 and 2022
Overview
For the nine months ended September 30, 2023, our net income was $22.3 million as compared to $66.5 million for the nine months ended September 30, 2022. The decrease of $44.2 million, or 66.5%, was primarily attributable to a decrease of $58.1 million in net interest income, partially offset by a $18.2 million decrease in provision for income tax as compared to the same period last year. Pre-tax, pre-provision net earnings decreased by $59.5 million, or 63.0%, for the nine months ended September 30, 2023 as compared to the same period last year.
Net Interest Income
Net interest income decreased by $58.1 million, or 42.1%, to $79.9 million for the nine months ended September 30, 2023 from $138.0 million for the same period last year due to higher interest expense on deposits and FHLB advances, partially offset by higher interest income on loans, cash and cash equivalents and investments.
Net interest margin for the nine months ended September 30, 2023 was 1.32% compared to 2.52% for the same period last year. The decrease in our margin was primarily related to a 237 basis point increase in the cost of our interest-bearing liabilities, partially offset by a 99 basis point increase in the yield of our interest-earning assets.
Average balance sheet, interest and yield/rate analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned and rates paid for the nine months ended September 30, 2023 and 2022. The average balances are daily averages.
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| For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest Inc/Exp | Yield/Rate | Average Balance | Interest Inc/Exp | Yield/Rate | |||||||||||||||||||||||||||||||||||
| Interest-Earning Assets | |||||||||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 4,466,559 | $ | 148,917 | 4.45 | % | $ | 4,327,355 | $ | 120,306 | 3.71 | % | |||||||||||||||||||||||||||||
| Single family residential | 2,301,224 | 68,325 | 3.96 | % | 1,976,356 | 45,115 | 3.04 | % | |||||||||||||||||||||||||||||||||
| Commercial real estate | 164,605 | 6,682 | 5.41 | % | 189,499 | 6,597 | 4.64 | % | |||||||||||||||||||||||||||||||||
| Construction and land | 23,112 | 1,810 | 10.47 | % | 21,960 | 893 | 5.44 | % | |||||||||||||||||||||||||||||||||
Total loans (1) | 6,955,500 | 225,734 | 4.33 | % | 6,515,170 | 172,911 | 3.54 | % | |||||||||||||||||||||||||||||||||
| Investment securities | 593,062 | 16,812 | 3.78 | % | 660,069 | 9,290 | 1.88 | % | |||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 529,803 | 20,169 | 5.09 | % | 118,452 | 812 | 0.92 | % | |||||||||||||||||||||||||||||||||
| Total interest-earning assets | 8,078,365 | 262,715 | 4.34 | % | 7,293,691 | 183,013 | 3.35 | % | |||||||||||||||||||||||||||||||||
Noninterest-earning assets (2) | 152,221 | 110,459 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 8,230,586 | $ | 7,404,150 | |||||||||||||||||||||||||||||||||||||
| Interest-Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Transaction accounts | $ | 136,332 | 592 | 0.57 | % | $ | 171,148 | 279 | 0.21 | % | |||||||||||||||||||||||||||||||
| Money market demand accounts | 2,030,683 | 45,280 | 2.94 | % | 3,007,085 | 14,603 | 0.64 | % | |||||||||||||||||||||||||||||||||
| Time deposits | 3,550,675 | 94,551 | 3.52 | % | 2,250,523 | 12,136 | 0.71 | % | |||||||||||||||||||||||||||||||||
| Total deposits | 5,717,690 | 140,423 | 3.24 | % | 5,428,756 | 27,018 | 0.66 | % | |||||||||||||||||||||||||||||||||
| FHLB advances | 1,474,669 | 34,614 | 3.14 | % | 899,838 | 12,071 | 1.79 | % | |||||||||||||||||||||||||||||||||
| Junior subordinated debentures | 61,856 | 3,086 | 6.67 | % | 61,857 | 1,220 | 2.64 | % | |||||||||||||||||||||||||||||||||
| Senior debt | 94,826 | 4,723 | 6.64 | % | 94,704 | 4,724 | 6.65 | % | |||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 7,349,041 | 182,846 | 3.29 | % | 6,485,155 | 45,033 | 0.92 | % | |||||||||||||||||||||||||||||||||
| Noninterest-bearing deposit accounts | 76,140 | 159,504 | |||||||||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 106,993 | 82,935 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities | 7,532,174 | 6,727,594 | |||||||||||||||||||||||||||||||||||||||
| Total stockholders' equity | 698,412 | 676,556 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,230,586 | $ | 7,404,150 | |||||||||||||||||||||||||||||||||||||
Net interest spread (3) | 1.05 | % | 2.43 | % | |||||||||||||||||||||||||||||||||||||
Net interest income/margin (4) | $ | 79,869 | 1.32 | % | $ | 137,980 | 2.52 | % | |||||||||||||||||||||||||||||||||
(1) Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred loan costs, net of deferred loan fees. Net deferred loan cost amortization totaled $4.3 million and $11.2 million for the nine months ended September 30, 2023 and 2022, respectively.
(2) Noninterest-earning assets includes the allowance for credit losses.
(3) Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities.
(4) Net interest margin is net interest income divided by total interest-earning assets.
Interest rates and operating interest differential. The following table shows the effect that changes in volume and average interest rates had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities during the periods indicated.
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| Nine Months Ended September 30, 2023 vs 2022 | |||||||||||||||||
| Variance Due To | |||||||||||||||||
| (Dollars in thousands) | Volume | Yield/Rate | Total | ||||||||||||||
| Interest-Earning Assets | |||||||||||||||||
| Multifamily residential | $ | 3,973 | $ | 24,638 | $ | 28,611 | |||||||||||
| Single family residential | 8,169 | 15,041 | 23,210 | ||||||||||||||
| Commercial real estate | (929) | 1,014 | 85 | ||||||||||||||
| Construction and land | 49 | 868 | 917 | ||||||||||||||
| Total loans | 11,262 | 41,561 | 52,823 | ||||||||||||||
| Investment securities | (1,031) | 8,553 | 7,522 | ||||||||||||||
| Cash and cash equivalents | 8,396 | 10,961 | 19,357 | ||||||||||||||
| Total interest-earning assets | 18,627 | 61,075 | 79,702 | ||||||||||||||
| Interest-Bearing Liabilities | |||||||||||||||||
| Transaction accounts | (65) | 378 | 313 | ||||||||||||||
| Money market demand accounts | (6,055) | 36,732 | 30,677 | ||||||||||||||
| Time deposits | 10,491 | 71,924 | 82,415 | ||||||||||||||
| Total deposits | 4,371 | 109,034 | 113,405 | ||||||||||||||
| FHLB advances | 10,338 | 12,205 | 22,543 | ||||||||||||||
| Junior subordinated debentures | — | 1,866 | 1,866 | ||||||||||||||
| Senior debt | 2 | (3) | (1) | ||||||||||||||
| Total interest-bearing liabilities | 14,711 | 123,102 | 137,813 | ||||||||||||||
| Net Interest Income | $ | 3,916 | $ | (62,027) | $ | (58,111) | |||||||||||
Total interest income increased by $79.7 million, or 43.5%, for the nine months ended September 30, 2023 as compared to the same period last year. The increase was primarily due to an 79 basis point increase in loan yields and a $440.3 million increase in the average balance of loans. The increase in loan yields was attributable to loans originated in the past year at increasing interest rates, as well as a $19.4 million increase in interest income earned on our interest rate swaps. The average balance of loans increased due to strong prior year loan originations and slowing prepayment speeds. Additionally, interest income on cash and cash equivalents increased $19.4 million due to an increase in the average balance and yield of $411.4 million and 417 basis points, respectively, compared to the prior year. Interest income on investments increased $7.5 million primarily due to a 190 basis point increase in yield compared to the same period last year. The increases in yield on both cash and investments was due to continued increases in market interest rates. At September 30, 2023, over 62% of our available for sale securities portfolio consisted of floating rate securities with an average repricing period of approximately 13 months.
The volume of new loans originated totaled $222.9 million and $1.8 billion for the nine months ended September 30, 2023 and 2022, respectively. The decline in loan originations was primarily attributable to slowing demand resulting from the general rise in interest rates and our desire to achieve a reasonable risk adjusted return on new loan volume in light of the elevated cost of new funding. The weighted average interest rate on new loans for the nine months ended September 30, 2023 was 6.67% as compared to 3.74% for the same period last year. The increase in the average coupon on originations was primarily due to the rising interest rate environment. Loan prepayment speeds were 5.8% and 22.0% during the nine months ended September 30, 2023 and 2022, respectively. The decrease in prepayment speeds was due to rising market interest rates, which slowed purchase and refinancing activity during the current year-to-date period. The weighted average rate on loan payoffs/curtailments during the nine months ended September 30, 2023 was 4.90% as compared to 3.81% for the same period last year.
Total interest expense increased $137.8 million, or 306.0%, to $182.8 million for the nine months ended September 30, 2023 from $45.0 million for the same period last year. Interest expense on deposits increased $113.4 million primarily due to the cost of interest-bearing deposits increasing 258 basis points due to continued increases in market interest rates. Interest expense on advances from the FHLB increased by $22.5 million during the nine months ended September 30, 2023, compared to the same period last year, due to an increase in the average balance and cost of FHLB advances of $574.8 million and 135 basis points, respectively. The increase in FHLB
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advances has been utilized to mitigate interest rate risk and increase on-balance sheet liquidity. The increase in the cost of FHLB advances is due to continued increases in market interest rates. A discussion of instruments used to mitigate interest rate risk can be found under Part II - Item 7A. ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’
Provision for Credit Losses
For the nine months ended September 30, 2023, we recorded $3.8 million in provisions for loan losses compared to $500 thousand in provisions during the same period last year. During the nine months ended September 30, 2023, provisions were recorded primarily related to forecasted declines in multifamily property values, partially offset by the elimination of a specific reserve previously established on a collateral dependent loan. As discussed above, the Company adopted the CECL methodology on January 1, 2023. During the prior year loan loss provisions recorded in the second and third quarters were primarily due to loan growth and incremental changes in classified loan balances. These loan loss provisions were partially offset by a reversal of loan loss provisions recorded in the first quarter related to the remaining portion of qualitative reserves for uncertain economic risks established early in the pandemic that were deemed unnecessary.
Noninterest Income
Noninterest income increased to $3.2 million for the nine months ended September 30, 2023 from $689 thousand for the same period last year.
The following table presents the major components of our noninterest income:
| For the Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||
| Noninterest Income | |||||||||||||||||||||||
| FHLB dividends | $ | 2,088 | $ | 1,059 | $ | 1,029 | 97.2 | % | |||||||||||||||
| Fee income | 364 | 640 | (276) | (43.1) | % | ||||||||||||||||||
| Other | 706 | (1,010) | 1,716 | (169.9) | % | ||||||||||||||||||
| Total noninterest income | $ | 3,158 | $ | 689 | $ | 2,469 | 358.3 | % | |||||||||||||||
The increase in noninterest income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a $1.0 million net increase in the fair value of equity securities during the current period compared to the same period last year, as well as a $1.0 million increase in FHLB dividends due to increases in the quarterly dividend rate.
Noninterest Expense
Noninterest expense increased $3.9 million, or 8.7%, to $48.1 million for the nine months ended September 30, 2023 from $44.2 million for the same period last year.
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The following table presents the major components of our noninterest expense:
| For the Nine Months Ended September 30, | |||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||
| Noninterest Expense | |||||||||||||||||||||||
| Compensation and related benefits | $ | 29,316 | $ | 26,146 | $ | 3,170 | 12.1 | % | |||||||||||||||
| Deposit insurance premium | 2,787 | 1,468 | 1,319 | 89.9 | % | ||||||||||||||||||
| Occupancy | 3,433 | 3,590 | (157) | (4.4) | % | ||||||||||||||||||
| Depreciation and amortization | 1,390 | 2,155 | (765) | (35.5) | % | ||||||||||||||||||
| Professional and regulatory fees | 1,573 | 1,812 | (239) | (13.2) | % | ||||||||||||||||||
| Data processing | 2,926 | 3,039 | (113) | (3.7) | % | ||||||||||||||||||
| Marketing | 2,554 | 2,194 | 360 | 16.4 | % | ||||||||||||||||||
| Merger costs | 1,149 | — | 1,149 | N/A | |||||||||||||||||||
| Other expenses | 2,945 | 3,809 | (864) | (22.7) | % | ||||||||||||||||||
| Total noninterest expense | $ | 48,073 | $ | 44,213 | $ | 3,860 | 8.7 | % | |||||||||||||||
The increase in noninterest expense during the nine months ended September 30, 2023 as compared to the same period last year was primarily attributable to a $3.2 million increase in compensation expense due to a decline in capitalized salary costs due to lower loan origination volume, partially offset by a decrease in salaries and related benefits due to a reduction in our lending workforce. Additionally, FDIC deposit insurance premiums increased $1.3 million compared to the same period last year due to an increase in assessment rates effective at the beginning of 2023. During the nine months ended September 30, 2023, $1.1 million of external costs were incurred in connection with our previously announced merger with WAFD. These increases were partially offset by a $845 thousand decline in loan down payment assistance costs due to the slowing in loan originations, as well as a $765 thousand decrease in depreciation and amortization caused by a reduction in leased office space.
Income Tax Expense
For the nine months ended September 30, 2023, we recorded income tax expense of $9.3 million as compared to $27.4 million for the same period last year with effective tax rates of 29.4% and 29.2%, respectively. The decline in income tax expense was due to lower pre-tax earnings during the current year-to-date period compared to the same period last year.
Financial Condition - As of September 30, 2023 and December 31, 2022
Total assets at September 30, 2023 were $8.1 billion, an increase of $159.3 million, or 2.0%, from December 31, 2022. The increase was primarily due to a $393.8 million increase in cash and cash equivalents as compared to the prior year end, partially offset by a $183.2 million decline in loans and a $71.4 million decrease in available for sale securities. Total liabilities were $7.4 billion at quarter end, an increase of $146.8 million, or 2.0%, from December 31, 2022. The increase in total liabilities was primarily attributable to a $218.5 million increase in FHLB advances, partially offset by a $79.2 million decline in deposits.
Loan Portfolio Composition
Our loan portfolio is our largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which we attempt to mitigate with strong underwriting. As of September 30, 2023 and December 31, 2022, our total loans amounted to $6.8 billion and $7.0 billion, respectively. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
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| As of September 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||||
| (Dollars in thousands) | Amount | % of total | Amount | % of total | ||||||||||||||||||||||
| Real estate loans | ||||||||||||||||||||||||||
| Multifamily residential | $ | 4,319,138 | 63.8 | % | $ | 4,500,500 | 64.8 | % | ||||||||||||||||||
| Single family residential | 2,273,660 | 33.6 | % | 2,253,987 | 32.4 | % | ||||||||||||||||||||
| Commercial real estate | 153,594 | 2.3 | % | 171,767 | 2.5 | % | ||||||||||||||||||||
| Construction and land | 20,370 | 0.3 | % | 22,533 | 0.3 | % | ||||||||||||||||||||
| Total loans before deferred items | 6,766,762 | 100.0 | % | 6,948,787 | 100.0 | % | ||||||||||||||||||||
| Deferred loan costs, net | 60,457 | 61,658 | ||||||||||||||||||||||||
| Total loans | $ | 6,827,219 | $ | 7,010,445 | ||||||||||||||||||||||
The relative composition of the loan portfolio has not changed significantly over the past several years. Our primary focus remains multifamily real estate lending, which constituted 64% and 65% of our portfolio at September 30, 2023 and December 31, 2022, respectively. Single family residential lending is our secondary lending emphasis and represented 34% and 32% of our portfolio at September 30, 2023 and December 31, 2022, respectively.
We recognize that our multifamily and single family residential loan products represent concentrations within our balance sheet. Multifamily loan balances as a percentage of risk-based capital were 522% and 560% as of September 30, 2023 and December 31, 2022, respectively. Our single family loans as a percentage of risk-based capital were 275% and 281%, respectively, as of the same dates. Additionally, our loans are geographically concentrated with borrowers and collateral properties on the West Coast. At both September 30, 2023 and December 31, 2022, 61%, 27% and 9% of our real estate loans were collateralized by properties in southern California counties, northern California counties and Washington, respectively.
Our lending strategy has been to focus on products and markets where we have significant expertise. Given our concentrations, we have established strong risk management practices including risk-based lending standards, self-established product and geographical limits, annual cash flow evaluations of income property loans and semi-annual stress testing.
We had a small portfolio of construction loans with commitments (funded and unfunded) totaling $24.7 million and $38.7 million at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the average loan commitment for our single family construction product, which includes small tract housing and condominium projects, and our multifamily residential construction loans was $5.7 million and $3.9 million, respectively. Our construction lending typically focuses on non-owner occupied single family residential projects with completed per-unit values of $4.0 million or less and multifamily projects with loan commitments of $15.0 million or less. In late 2022, we stopped accepting any new construction loan applications.
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The following table presents the activity in our loan portfolio for the periods shown:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||
| Loan increases: | |||||||||||||||||||||||
| Multifamily residential | $ | 19,554 | $ | 18,994 | $ | 61,928 | $ | 1,084,956 | |||||||||||||||
| Single family residential | 43,248 | 50,825 | 161,000 | 714,596 | |||||||||||||||||||
| Commercial real estate | — | — | — | 24,471 | |||||||||||||||||||
| Construction and land | — | — | — | 7,992 | |||||||||||||||||||
| Total loans originated and purchased | 62,802 | 69,819 | 222,928 | 1,832,015 | |||||||||||||||||||
| Loan decreases: | |||||||||||||||||||||||
| Loan principal reductions and payoffs | (149,697) | (148,028) | (403,013) | (1,264,011) | |||||||||||||||||||
Other (1) | (6,881) | (24,276) | (3,141) | (10,969) | |||||||||||||||||||
| Total loan outflows | (156,578) | (172,304) | (406,154) | (1,274,980) | |||||||||||||||||||
| Net change in total loan portfolio | $ | (93,776) | $ | (102,485) | $ | (183,226) | $ | 557,035 | |||||||||||||||
(1) Other changes in loan balances primarily represent the net change in disbursements on unfunded commitments, deferred loan costs, fair value adjustments and, to the extent applicable, may include foreclosures and charge-offs. Fair value adjustments totaled $(13.7) million and $(26.2) million for the three months ended September 30, 2023 and June 30, 2023, respectively, and totaled $(13.0) million and $(24.1) million for the nine months ended September 30, 2023 and 2022, respectively. | |||||||||||||||||||||||
Multifamily residential loans. We provide multifamily residential loans for the purchase or refinance of apartment buildings of five units or more, with the financed properties serving as collateral for the loan. Our multifamily lending is built around three core principles: market selection, deal selection and sponsor selection. We focus on markets with a high barrier to entry for new development, where there is a limited supply of new housing and where there is a high variance between the cost to rent and the cost to own. We typically lend on stabilized and seasoned assets and focus on older, smaller properties with rents at or below market levels, catering to low and middle income renters. Our customers are generally experienced real estate professionals who desire regular income/cash flow streams and are focused on building wealth steadily over time. We have instituted strong lending policies to mitigate credit and concentration risk. At September 30, 2023, our multifamily real estate portfolio had an average loan balance of $1.6 million, a weighted average loan to value of 55.9%, a weighted average debt service coverage ratio of 1.6 times and supporting collateral averaging 13.6 housing units, as compared to an average loan balance of $1.7 million, a weighted average loan to value of 56.7%, a weighted average debt service coverage ratio of 1.5 times and supporting collateral averaging 13.7 housing units at December 31, 2022.
Single family residential loans. We provide permanent financing on single family residential properties primarily located in our market areas, which are both owner-occupied and investor owned. We conduct this business primarily through a network of third-party mortgage brokers with the intention of retaining these loans in our portfolio. The majority of our originations are for purchase transactions, but we also provide loans to refinance single family properties. Our underwriting criteria focuses on debt ratios, credit scores, liquidity of the borrower and the borrower’s cash reserves. At September 30, 2023, our single family residential real estate portfolio had an average loan balance of $904 thousand, a weighted average loan to value of 63.9% and a weighted average borrower credit score at origination/refreshed of 759. At December 31, 2022, our single family residential real estate portfolio had an average loan balance of $907 thousand, a weighted average loan to value of 64.0% and a weighted average borrower credit score at origination/refreshed of 759.
Commercial real estate loans. While not a large part of our portfolio during any period presented, we also lend on nonresidential commercial real estate. Our nonresidential commercial real estate loans are generally used to finance the purchase or refinance of established multi-tenant industrial, office and retail sites. At September 30, 2023, our commercial real estate portfolio had an average loan balance of $2.1 million, a weighted average loan to value of 52.0% and a weighted average debt service coverage ratio of 1.6 times, as compared to an average loan balance of $2.2 million, a weighted average loan to value of 53.9% and a weighted average debt service coverage ratio of 1.7 times at December 31, 2022. Our exposure to nonresidential commercial real estate is limited.
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Additional detail is provided within the table below as of September 30, 2023:
| (Dollars in thousands) | Count | Balance | Weighted Average LTV | % of Total Loans | ||||||||||||||||||||||
| Multifamily Real Estate | 2,675 | $ | 4,349,645 | 55.9% | 63.7% | |||||||||||||||||||||
| Single Family Real Estate | 2,553 | 2,303,280 | 63.9% | 33.7% | ||||||||||||||||||||||
| Commercial Real Estate Type: | ||||||||||||||||||||||||||
| Mid Rise Office | 7 | 37,281 | 56.3% | 0.5% | ||||||||||||||||||||||
| Strip Retail | 12 | 19,682 | 48.3% | 0.3% | ||||||||||||||||||||||
| Medical Office | 5 | 18,314 | 58.6% | 0.3% | ||||||||||||||||||||||
| Shopping Center | 5 | 17,748 | 56.0% | 0.3% | ||||||||||||||||||||||
| Unanchored Retail | 8 | 14,399 | 43.9% | 0.2% | ||||||||||||||||||||||
| Low Rise Office | 7 | 11,254 | 51.3% | 0.2% | ||||||||||||||||||||||
| More than 50% commercial | 10 | 10,729 | 47.1% | 0.2% | ||||||||||||||||||||||
| Anchored Retail | 2 | 7,851 | 47.9% | 0.1% | ||||||||||||||||||||||
| Multi-Tenant Industrial | 5 | 6,888 | 41.0% | 0.1% | ||||||||||||||||||||||
| Shadow Retail | 3 | 3,876 | 60.8% | 0.1% | ||||||||||||||||||||||
| Flex Industrial | 2 | 2,340 | 60.3% | 0.0% | ||||||||||||||||||||||
| Warehouse | 3 | 2,323 | 43.6% | 0.0% | ||||||||||||||||||||||
| Restaurant | 2 | 1,231 | 25.6% | 0.0% | ||||||||||||||||||||||
| Other | 1 | 70 | 13.3% | 0.0% | ||||||||||||||||||||||
| Commercial Real Estate | 72 | 153,986 | 52.0% | 2.3% | ||||||||||||||||||||||
Construction (1) | 5 | 20,308 | 58.6% | 0.3% | ||||||||||||||||||||||
| Total | 5,305 | $ | 6,827,219 | 58.5% | 100.0% | |||||||||||||||||||||
(1) Construction LTV is calculated based on an "as-completed" property value. Undisbursed commitments for construction loans totaled $4.3 million at September 30, 2023.
Construction and land. Other categories of loans included in our portfolio consist of construction and land loans. Construction loans include a single family construction product, which includes small tract housing and condominium projects, and multifamily construction projects. As of September 30, 2023 and December 31, 2022, the Company had no land loans outstanding.
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The following table sets forth the contractual maturity distribution of our loan portfolio:
| (Dollars in thousands) | Due in 1 year or less | Due after 1 year through 5 years | Due after 5 years through 15 years | Due after 15 years | Total | ||||||||||||
| As of September 30, 2023: | |||||||||||||||||
| Loans | |||||||||||||||||
| Real estate mortgage loans: | |||||||||||||||||
| Multifamily residential | $ | — | $ | 571 | $ | 37,597 | $ | 4,280,970 | $ | 4,319,138 | |||||||
| Single family residential | 49 | 269 | 49,147 | 2,224,195 | 2,273,660 | ||||||||||||
| Commercial real estate | 934 | 66,482 | 86,178 | — | 153,594 | ||||||||||||
| Construction and land | 19,680 | 690 | — | — | 20,370 | ||||||||||||
| Total loans | $ | 20,663 | $ | 68,012 | $ | 172,922 | $ | 6,505,165 | $ | 6,766,762 | |||||||
| Fixed interest rates | $ | — | $ | 193 | $ | 42,418 | $ | 265,730 | $ | 308,341 | |||||||
| Floating or hybrid adjustable rates | 20,663 | 67,819 | 130,504 | 6,239,435 | 6,458,421 | ||||||||||||
| Total loans | $ | 20,663 | $ | 68,012 | $ | 172,922 | $ | 6,505,165 | $ | 6,766,762 | |||||||
| As of December 31, 2022: | |||||||||||||||||
| Loans | |||||||||||||||||
| Real estate mortgage loans: | |||||||||||||||||
| Multifamily residential | $ | 72 | $ | 537 | $ | 39,917 | $ | 4,459,974 | $ | 4,500,500 | |||||||
| Single family residential | 27 | 468 | 51,443 | 2,202,049 | 2,253,987 | ||||||||||||
| Commercial real estate | — | 41,505 | 130,262 | — | 171,767 | ||||||||||||
| Construction and land | 17,464 | 5,069 | — | — | 22,533 | ||||||||||||
| Total loans | $ | 17,563 | $ | 47,579 | $ | 221,622 | $ | 6,662,023 | $ | 6,948,787 | |||||||
| Fixed interest rates | $ | — | $ | 197 | $ | 45,045 | $ | 270,285 | $ | 315,527 | |||||||
| Floating or hybrid adjustable rates | 17,563 | 47,382 | 176,577 | 6,391,738 | 6,633,260 | ||||||||||||
| Total loans | $ | 17,563 | $ | 47,579 | $ | 221,622 | $ | 6,662,023 | $ | 6,948,787 | |||||||
Our fixed interest rate loans generally consist of 30 and 40-year loans that are primarily secured by single family residential properties, often in conjunction with our efforts to provide affordable housing financing to low-to-moderate income individuals. Our floating and adjustable rate loans are largely hybrid interest rate programs that provide an initial fixed term of three to ten years and then convert to quarterly or semi-annual repricing adjustments thereafter. As of September 30, 2023 and December 31, 2022, $4.2 billion and $4.6 billion, respectively, of our floating or hybrid adjustable rate loans were at their floor rates. The weighted average minimum interest rate on loans at their floor rates was 3.64% and 3.66% at September 30, 2023 and December 31, 2022, respectively. Hybrid adjustable rate loans still within their initial fixed term totaled $5.4 billion and $5.7 billion at September 30, 2023 and December 31, 2022, respectively. These loans had a weighted average term to first repricing date of 3.2 years and 3.7 years at September 30, 2023 and December 31, 2022, respectively.
Asset Quality
Our primary objective is to maintain a high level of asset quality in our loan portfolio. We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio. These policies are continually evaluated and updated as necessary. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction such as collateral type, collateral cash flow, collateral coverage and borrower strength. We believe that we have a comprehensive methodology to proactively monitor our credit quality after origination. Particular emphasis is placed on our commercial portfolio where risk assessments are re-evaluated as a result of reviewing commercial property operating statements and borrower financials on at least an annual basis. Single family residential loans are subject to an annual regrading based upon a credit score refresh, among other factors. On an ongoing basis, we also monitor payment performance, delinquencies, and tax and property insurance compliance, as well as any other pertinent information that may be available to determine the collectability of a loan. We believe our practices
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facilitate the early detection and remediation of problems within our loan portfolio. We periodically employ the use of an outside independent consulting firm to evaluate our underwriting and risk assessment processes. Like other financial institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions.
Nonperforming assets. Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any. It is our policy to place a loan on non-accrual status in the event that the borrower is 90 days or more delinquent, unless the loan is well secured and in the process of collection, or earlier if the timely collection of contractual payments appears doubtful. Cash payments subsequently received on non-accrual loans are recognized as income only where the future collection of the remaining principal is considered by management to be probable. Loans are restored to accrual status only when the loan is less than 90 days delinquent and not in foreclosure, and the borrower has demonstrated the ability to make future payments of principal and interest.
The following table provides details of our nonperforming assets as of the dates presented and certain other related information:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||||||||
| Non-accrual loans | |||||||||||||||||
| Multifamily residential portfolio | $ | 3,494 | $ | 3,509 | |||||||||||||
| Single family residential portfolio | 3,132 | 2,962 | |||||||||||||||
| Total non-accrual loans | 6,626 | 6,471 | |||||||||||||||
| Real estate owned | — | — | |||||||||||||||
| Total nonperforming assets | $ | 6,626 | $ | 6,471 | |||||||||||||
| Allowance for credit losses on loans to period end nonperforming loans | 601.95 | % | 566.91 | % | |||||||||||||
| Nonperforming loans to period end loans | 0.10 | % | 0.09 | % | |||||||||||||
| Nonperforming assets to total assets | 0.08 | % | 0.08 | % | |||||||||||||
When assessing whether a loan should be placed on non-accrual status because contractual payments appear doubtful, consideration is given to information we collect from third parties and our borrowers to substantiate their future ability to repay principal and interest due on their loans as contractually agreed.
Interest income recognized on non-accrual loans subsequent to their classification as non-accrual totaled $23 thousand and $18 thousand for the three months ended September 30, 2023 and June 30, 2023, respectively, and $69 thousand and $99 thousand for the nine months ended September 30, 2023 and 2022, respectively. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was $144 thousand and $142 thousand for the three months ended September 30, 2023 and June 30, 2023, respectively, and $431 thousand and $122 thousand for the nine months ended September 30, 2023 and 2022, respectively.
Allowance for credit losses. The Company adopted the CECL allowance methodology on January 1, 2023. 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. 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 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, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.
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. Loans are charged-off against the allowance when management believes that the uncollectibility of a loan is confirmed. Recoveries will never exceed the aggregate of amounts previously charged-off. The Company also 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
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with the ACL for loans, which includes consideration of the likelihood that funding will occur. Adjustments to the ACL for unfunded commitments are included in the provision for (or reversal of) credit losses on the unaudited consolidated statements of income. All ACL balances are neither indicative of the specific amounts of future charge-offs that may occur, nor are they an indicator of any future loss trends.
The following tables provide information on the activity within the allowance as of and for the periods indicated:
| (Dollars in thousands) | Beginning Balance | Impact of CECL Adoption | Charge-Offs | Recoveries | Provision | Ending Balance | |||||||||||||||||||||||||||||
| Three months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 29,223 | $ | — | $ | — | $ | — | $ | 2,203 | $ | 31,426 | |||||||||||||||||||||||
| Single family residential | 6,874 | — | (463) | — | 718 | 7,129 | |||||||||||||||||||||||||||||
| Commercial real estate | 776 | — | — | — | 207 | 983 | |||||||||||||||||||||||||||||
| Construction and land | 341 | — | — | — | 6 | 347 | |||||||||||||||||||||||||||||
| Allowance for credit losses on loans | 37,214 | — | (463) | — | 3,134 | 39,885 | |||||||||||||||||||||||||||||
| Allowance for credit losses on off-balance sheet credit exposures | 570 | — | — | — | (133) | 437 | |||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 37,784 | $ | — | $ | (463) | $ | — | $ | 3,001 | $ | 40,322 | |||||||||||||||||||||||
| Three months ended June 30, 2023 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 27,292 | $ | — | $ | — | $ | — | $ | 1,931 | $ | 29,223 | |||||||||||||||||||||||
| Single family residential | 7,431 | — | — | — | (557) | 6,874 | |||||||||||||||||||||||||||||
| Commercial real estate | 777 | — | — | — | (1) | 776 | |||||||||||||||||||||||||||||
| Construction and land | 414 | — | — | — | (73) | 341 | |||||||||||||||||||||||||||||
| Allowance for credit losses on loans | 35,914 | — | — | — | 1,300 | 37,214 | |||||||||||||||||||||||||||||
| Allowance for credit losses on off-balance sheet credit exposures | 658 | — | — | — | (88) | 570 | |||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 36,572 | $ | — | $ | — | $ | — | $ | 1,212 | $ | 37,784 | |||||||||||||||||||||||
| Nine months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 26,417 | $ | 2,882 | $ | — | $ | — | $ | 2,127 | $ | 31,426 | |||||||||||||||||||||||
| Single family residential | 8,564 | (2,472) | (463) | — | 1,500 | 7,129 | |||||||||||||||||||||||||||||
| Commercial real estate | 1,539 | (784) | — | — | 228 | 983 | |||||||||||||||||||||||||||||
| Construction and land | 165 | 282 | — | — | (100) | 347 | |||||||||||||||||||||||||||||
| Allowance for credit losses on loans | 36,685 | (92) | (463) | — | 3,755 | 39,885 | |||||||||||||||||||||||||||||
| Allowance for credit losses on off-balance sheet credit exposures | 563 | 211 | — | — | (337) | 437 | |||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | 37,248 | $ | 119 | $ | (463) | $ | — | $ | 3,418 | $ | 40,322 | |||||||||||||||||||||||
| Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Multifamily residential | $ | 26,043 | $ | — | $ | — | $ | — | $ | 161 | $ | 26,204 | |||||||||||||||||||||||
| Single family residential | 7,224 | — | — | — | 933 | 8,157 | |||||||||||||||||||||||||||||
| Commercial real estate | 2,094 | — | — | — | (551) | 1,543 | |||||||||||||||||||||||||||||
| Construction and land | 174 | — | — | — | (43) | 131 | |||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 35,535 | $ | — | $ | — | $ | — | $ | 500 | $ | 36,035 | |||||||||||||||||||||||
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| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Allowance for credit losses on loans to period end loans | 0.58 | % | 0.54 | % | 0.58 | % | 0.53 | % | ||||||||||||||||||
| Annualized net charge-offs to average loans: | ||||||||||||||||||||||||||
| Multifamily residential | — | % | — | % | — | % | — | % | ||||||||||||||||||
| Single family residential | 0.08 | % | — | % | 0.03 | % | — | % | ||||||||||||||||||
| Commercial real estate | — | % | — | % | — | % | — | % | ||||||||||||||||||
| Construction and land | — | % | — | % | — | % | — | % | ||||||||||||||||||
| Annualized net charge-offs to average loans | 0.03 | % | — | % | 0.01 | % | — | % | ||||||||||||||||||
Investment Portfolio
Our investment portfolio is generally comprised of government agency securities which are high-quality liquid investments under Basel III, with over 97.9% classified as available for sale. The portfolio is primarily maintained to serve as a contingent, on-balance sheet source of liquidity. We manage our investment portfolio according to written investment policies approved by our board of directors. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk which is reflective in the yields obtained on those securities. Most of our securities are classified as available for sale, although we occasionally purchase long-term fixed rate mortgage backed securities or municipal securities for community reinvestment purposes and classify those as held to maturity. In addition, we have equity securities which consist of investments in a qualified community reinvestment fund.
The following table presents the book value of our investment portfolio:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| (Dollars in thousands) | Book Value | % of Total | Book Value | % of Total | ||||||||||||||||||||||
| Available for sale debt securities: | ||||||||||||||||||||||||||
| Government and Government Sponsored Entities: | ||||||||||||||||||||||||||
| Commercial mortgage backed securities ("MBS") and collateralized mortgage obligations ("CMOs") | $ | 298,906 | 54.45 | % | $ | 340,736 | 54.89 | % | ||||||||||||||||||
| Residential MBS and CMOs | 178,125 | 32.45 | % | 199,384 | 32.11 | % | ||||||||||||||||||||
| Agency bonds | 37,008 | 6.74 | % | 42,630 | 6.87 | % | ||||||||||||||||||||
| Other asset backed securities | 21,885 | 3.99 | % | 24,598 | 3.96 | % | ||||||||||||||||||||
| Total available for sale debt securities | 535,924 | 97.63 | % | 607,348 | 97.83 | % | ||||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||||
| Government Sponsored Entities: | ||||||||||||||||||||||||||
| Residential MBS | 2,971 | 0.54 | % | 3,047 | 0.49 | % | ||||||||||||||||||||
| Other investments | 54 | 0.01 | % | 61 | 0.01 | % | ||||||||||||||||||||
| Total held to maturity debt securities | 3,025 | 0.55 | % | 3,108 | 0.50 | % | ||||||||||||||||||||
| Equity securities | 10,018 | 1.82 | % | 10,340 | 1.67 | % | ||||||||||||||||||||
| Total investment securities | $ | 548,967 | 100.00 | % | $ | 620,796 | 100.00 | % | ||||||||||||||||||
The net unrealized losses in the Company's available for sale and held to maturity portfolios were $62.3 million and $369 thousand, respectively, and represented 10.20% and 0.06%, respectively, of the total amortized cost of our investment portfolio at September 30, 2023. Unrealized losses in our AFS portfolio are reported in our stockholders' equity, net of any tax impact. Over 62% of our available for sale securities portfolio consisted of floating rate securities with an average repricing period of approximately 13 months. As of September 30, 2023, securities with a book value totaling $517.1 million were pledged to the FHLB and Federal Reserve Bank ("FRB"). There were no advances against these pledged securities during the nine months ended September 30, 2023. No securities were pledged as of December 31, 2022.
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Deposits
Representing 77.4% of our total liabilities as of September 30, 2023, deposits are our primary source of funding for our business operations. Retail deposit activity appears to have stabilized following volatility in the first quarter of this year primarily caused by the recent banking turmoil. We continue to remain focused on growing deposits by deepening our relationships with our existing loan and deposit customers and looking to expand our traditional product footprint with newer emphasis placed on specialty/business affiliations. When competitively priced, or when there is market disruption, and/or for asset liability management purposes, we will supplement our retail deposits with wholesale fundings, including brokered deposits.
Deposits totaled $5.8 billion at both September 30, 2023 and December 31, 2022. Retail and brokered deposits decreased $65.2 million and $14.1 million, respectively, from December 31, 2022. The 1.2% decline in retail deposits during the year to date period was primarily in money market savings accounts, partially offset by increases in time deposits. Consequently, the proportion of non-maturity deposits within the portfolio decreased to 36.7% at September 30, 2023 compared to 46.3% at December 31, 2022, while our portfolio of time deposits increased to 63.3% from 53.7% as of the same dates. Retail deposit declines began after the events in the banking industry that occurred in mid-March, and resulted in large first quarter outflows which were partially offset by retail deposit increases during the second and third quarters of 2023. Our cost of interest bearing deposits was 3.77% and 3.30% during the quarters ended September 30, 2023 and June 30, 2023, respectively, and 3.24% and 0.66% during the nine months ended September 30, 2023 and 2022, respectively. The increase in our cost of interest bearing deposits compared to the prior periods was predominantly due to competitive pricing pressures, which have caused increases in the cost of both retail and brokered deposits.
Our loan to deposit ratio was 119% and 120% at September 30, 2023 and December 31, 2022, respectively. It is common for us to operate with a loan to deposit ratio exceeding those commonly seen at other banks. Our higher than average ratio is attributed to our use of FHLB borrowings to supplement loan growth and to strategically manage our interest rate risk, as well as our preference to maintain a large proportion of our assets in real estate loans which generally provide a better yield than high-quality liquid investments.
The following tables summarize our deposit composition by average deposits and average rates paid for the periods indicated:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average amount | Weighted average rate paid | Percent of total deposits | Average amount | Weighted average rate paid | Percent of total deposits | |||||||||||||||||||||||||||||
| Noninterest-bearing deposit accounts | $ | 69,777 | — | % | 1.2 | % | $ | 71,865 | — | % | 1.2 | % | |||||||||||||||||||||||
| Interest-bearing transaction accounts | 125,908 | 0.76 | % | 2.2 | % | 132,927 | 0.55 | % | 2.3 | % | |||||||||||||||||||||||||
| Money market demand accounts | 1,881,449 | 3.42 | % | 32.5 | % | 1,943,861 | 3.03 | % | 33.4 | % | |||||||||||||||||||||||||
| Time deposits | 3,715,204 | 4.05 | % | 64.1 | % | 3,662,985 | 3.54 | % | 63.1 | % | |||||||||||||||||||||||||
| Total | $ | 5,792,338 | 3.72 | % | 100.0 | % | $ | 5,811,638 | 3.25 | % | 100.0 | % | |||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average amount | Weighted average rate paid | Percent of total deposits | Average amount | Weighted average rate paid | Percent of total deposits | |||||||||||||||||||||||||||||
| Noninterest-bearing deposit accounts | $ | 76,140 | — | % | 1.3 | % | $ | 159,504 | — | % | 2.9 | % | |||||||||||||||||||||||
| Interest-bearing transaction accounts | 136,332 | 0.57 | % | 2.4 | % | 171,148 | 0.21 | % | 3.1 | % | |||||||||||||||||||||||||
| Money market demand accounts | 2,030,683 | 2.94 | % | 35.0 | % | 3,007,085 | 0.64 | % | 53.8 | % | |||||||||||||||||||||||||
| Time deposits | 3,550,675 | 3.52 | % | 61.3 | % | 2,250,523 | 0.71 | % | 40.2 | % | |||||||||||||||||||||||||
| Total | $ | 5,793,830 | 3.20 | % | 100.0 | % | $ | 5,588,260 | 0.64 | % | 100.0 | % | |||||||||||||||||||||||
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The Company estimated its balance of uninsured deposits at approximately $1.0 billion, or 17.6% of total deposits, and $1.3 billion, or 22.5% of total deposits, at September 30, 2023 and December 31, 2022, respectively. The following table summarizes our deposit composition by source and segregates balances between estimated insured and uninsured balances for each deposit category as of September 30, 2023 and December 31, 2022.
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| (Dollars in thousands) | Insured | Uninsured | Insured | Uninsured | ||||||||||||||||||||||
| Consumer | $ | 3,372,444 | $ | 818,831 | $ | 3,090,797 | $ | 931,454 | ||||||||||||||||||
| Business | 930,719 | 196,359 | 981,692 | 379,560 | ||||||||||||||||||||||
| Brokered | 441,749 | — | 455,837 | — | ||||||||||||||||||||||
| Total deposits | $ | 4,744,912 | $ | 1,015,190 | $ | 4,528,326 | $ | 1,311,014 | ||||||||||||||||||
The following table sets forth the maturity of time deposits and estimated insured and uninsured balances as of September 30, 2023:
| (Dollars in thousands) | Insured | Uninsured | ||||||||||||
| Remaining maturity: | ||||||||||||||
| Three months or less | $ | 935,284 | $ | 215,940 | ||||||||||
| Over three through six months | 832,461 | 178,258 | ||||||||||||
| Over six through twelve months | 978,915 | 217,673 | ||||||||||||
| Over twelve months | 249,639 | 39,652 | ||||||||||||
| Total | $ | 2,996,299 | $ | 651,523 | ||||||||||
| Percent of time deposits to total deposits | 52.02 | % | 11.31 | % | ||||||||||
FHLB Advances and Other Borrowings
In addition to deposits, we utilize collateralized FHLB borrowings to fund our asset growth and, more recently, to add liquidity to our balance sheet. FHLB advances can, at times, have attractive rates and we have commonly used them to strategically extend the duration of our liabilities as part of our interest rate risk management efforts to reduce the liability sensitive position of our balance sheet. FHLB advances totaled $1.4 billion and $1.2 billion at September 30, 2023 and December 31, 2022, respectively. As of the same dates, the Bank had a FHLB letter of credit outstanding totaling $62.6 million. The increase in FHLB advances during the nine months ended September 30, 2023 was primarily utilized to supplement our liquidity in response to the unexpected bank failures in March 2023 and offset first quarter declines in retail deposits, discussed above.
Historically, we have utilized other instruments such as trust preferred securities and senior debt at the bank holding company level as a source of capital for our Bank to support asset growth. We have established two trusts (the "Trusts") of which we own all the common securities, that have issued trust preferred securities, ("Trust Securities"), to investors in private placement transactions. The proceeds of the securities qualify as Tier 1 capital under the applicable regulations for community banks with total assets less than $15 billion. In accordance with GAAP, the Trusts are not consolidated in our consolidated statements of financial condition but rather, the common securities are included in our other assets and the junior subordinated debentures ("Notes") issued to the Trusts are shown as a liability. The following table is a summary of our outstanding Trust Securities and related Notes as of the dates indicated:
| September 30, 2023 | December 31, 2022 | Date | Maturity | Rate Index | ||||||||||||||||||||||||||||||||||||||||
| Issuer | Amount | Rate | Amount | Rate | Issued | Date | (Quarterly Reset) | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Luther Burbank Statutory Trust I | $ | 41,238 | 7.05 | % | $ | 41,238 | 6.15 | % | 3/1/2006 | 6/15/2036 | 3 month CME Term SOFR + Tenor Spread Adjustment (0.26%) + 1.38% | |||||||||||||||||||||||||||||||||
| Luther Burbank Statutory Trust II | $ | 20,619 | 7.29 | % | $ | 20,619 | 6.39 | % | 3/1/2007 | 6/15/2037 | 3 month CME Term SOFR + Tenor Spread Adjustment (0.26%) + 1.62% | |||||||||||||||||||||||||||||||||
We have the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the relevant
53
Note.During any such extension period, distributions on the Trust Securities will also be deferred, and our ability to pay dividends on our common stock will be restricted.
We have entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Securities; (ii) the redemption price with respect to any Trust Securities called for redemption by the Trusts; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trusts. The Trust Securities are mandatorily redeemable upon maturity of the Notes, or upon earlier redemption as provided in the indenture. We have the right to redeem the Notes purchased by the Trusts, in whole or in part, on or after the redemption date. As specified in the indenture, if the Notes are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
In 2014, we issued senior debt totaling $95.0 million to qualified institutional investors. These senior notes are unsecured, carry a fixed interest coupon of 6.5%, pay interest only on a quarterly basis and mature on September 30, 2024. The senior debt is redeemable at any time prior to August 31, 2024, at a redemption price equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the calculated rate for a U.S. Treasury security having a comparable remaining maturity, plus 30 basis points, plus in each case, accrued and unpaid interest. On or after September 1, 2024, the senior debt may be redeemed at 100% of the principal amount plus accrued and unpaid interest.
The following table presents information regarding our FHLB advances and other borrowings as of or for the periods indicated:
| As of or For the Three Months Ended | As of or For the Nine Months Ended | |||||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| FHLB advances | ||||||||||||||||||||||||||
| Average amount outstanding during the period | $ | 1,453,821 | $ | 1,640,939 | $ | 1,474,669 | $ | 899,838 | ||||||||||||||||||
| Maximum amount outstanding at any month-end during the period | 1,451,647 | 1,701,647 | 1,701,647 | 1,201,647 | ||||||||||||||||||||||
| Balance outstanding at end of period | 1,426,647 | 1,576,647 | 1,426,647 | 1,201,647 | ||||||||||||||||||||||
| Weighted average maturity (in years) | 1.1 | 1.5 | 1.1 | 1.7 | ||||||||||||||||||||||
| Weighted average interest rate at end of period | 3.40 | % | 3.34 | % | 3.40 | % | 2.34 | % | ||||||||||||||||||
| Weighted average interest rate during the period | 3.20 | % | 3.33 | % | 3.14 | % | 1.79 | % | ||||||||||||||||||
| Junior subordinated deferrable interest debentures | ||||||||||||||||||||||||||
| Balance outstanding at end of period | $ | 61,857 | $ | 61,857 | $ | 61,857 | $ | 61,857 | ||||||||||||||||||
| Weighted average maturity (in years) | 13.2 | 13.5 | 13.2 | 14.3 | ||||||||||||||||||||||
| Weighted average interest rate at end of period | 7.13 | % | 7.01 | % | 7.13 | % | 4.75 | % | ||||||||||||||||||
| Weighted average interest rate during the period | 7.13 | % | 6.54 | % | 6.67 | % | 2.64 | % | ||||||||||||||||||
| Senior unsecured term notes | ||||||||||||||||||||||||||
| Balance outstanding at end of period | $ | 94,877 | $ | 94,846 | $ | 94,877 | $ | 94,754 | ||||||||||||||||||
| Weighted average maturity (in years) | 1.0 | 1.3 | 1.0 | 2.0 | ||||||||||||||||||||||
| Weighted average interest rate at end of period | 6.64 | % | 6.64 | % | 6.64 | % | 6.65 | % | ||||||||||||||||||
| Weighted average interest rate during the period | 6.64 | % | 6.64 | % | 6.64 | % | 6.65 | % | ||||||||||||||||||
Our level of FHLB advances can fluctuate on a daily basis depending on our funding needs and the availability of other sources of funds to satisfy those needs. Short-term advances allow us flexibility in funding our daily liquidity needs.
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The following table sets forth the amount of short-term borrowings outstanding, comprised entirely of FHLB advances, as well as the weighted average interest rate thereon, as of or for the dates indicated:
| As of or For the Three Months Ended | As of or For the Nine Months Ended | |||||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||||
| Outstanding at period end | $ | 175,000 | $ | 125,000 | $ | 175,000 | $ | 200,000 | ||||||||||||||||||
| Average amount outstanding | 6,522 | 123,352 | 59,467 | 128,227 | ||||||||||||||||||||||
| Maximum amount outstanding at any month end | 175,000 | 150,000 | 175,000 | 288,900 | ||||||||||||||||||||||
| Weighted average interest rate at end of period | 5.77 | % | 5.35 | % | 5.77 | % | 2.99 | % | ||||||||||||||||||
| Weighted average interest rate during the period | 5.60 | % | 5.27 | % | 5.22 | % | 2.04 | % | ||||||||||||||||||
Stockholders’ Equity
The Company's stockholders’ equity totaled $695.0 million at September 30, 2023, an increase of $12.5 million, or 1.8%, compared to December 31, 2022. The increase in stockholders' equity was primarily due to net income of $22.3 million, partially offset by unrealized losses on securities, net of taxes, of $10.0 million during the nine months ended September 30, 2023.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions that are not included in our consolidated statements of financial condition in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business including commitments to fund new loans and undisbursed funds, as well as certain guarantees and derivative transactions.
Loan commitments represent contractual cash requirements to a borrower although, a portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts, shown below, do not necessarily represent future cash obligations. The following is a summary of our off-balance sheet arrangements outstanding as of the dates presented.
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Commitments to fund loans | $ | 20,957 | $ | 37,741 | ||||||||||
In connection with our Freddie Mac multifamily loan securitization, we entered into a reimbursement agreement pursuant to which we may be required to reimburse Freddie Mac for the first losses in the underlying loan portfolio, not to exceed 10% of the unpaid principal amount at settlement, or approximately $62.6 million. A $62.6 million letter of credit with the FHLB is pledged as collateral in connection with this reimbursement agreement. We have recorded a reserve for estimated losses with respect to the reimbursement obligation of $247 thousand and $439 thousand at September 30, 2023 and December 31, 2022, respectively, which is included in other liabilities and accrued expenses in the consolidated statements of financial condition. In connection with the adoption of the CECL accounting standard on January 1, 2023, the Company decreased the allowance for the reimbursement obligation by $119 thousand, which represented the difference between the CECL methodology and the prior methodology utilized for estimating losses for its reimbursement obligation. The prior period allowance is reported in accordance with previous GAAP.
As of September 30, 2023, the Company held eleven interest rate swaps with a total notional amount of $1.8 billion. The swaps provide a partial hedge against the interest rate risk associated with both hybrid adjustable loans in their fixed rate period and a pool of fixed rate single family loans. Our swaps involve the payment of a fixed rate amount to a counterparty in exchange for the Company receiving a variable rate payment over the life of the swaps without the exchange of the underlying notional amounts. As of September 30, 2023, these swaps carried a weighted average fixed payment rate of 3.78%, while receiving a federal funds weighted average rate of 5.33%. The net hedging impact associated with our swaps is reported in interest income on loans.
We guarantee distributions and payments for redemption or liquidation of the Trust Securities issued by the Trusts to the extent of funds held by the Trusts. Although this guarantee is not separately recorded, the obligation underlying the guarantee is fully reflected on our consolidated statements of financial condition as junior
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subordinated debentures held by the Trusts. The junior subordinated debentures currently qualify as Tier 1 capital under the Federal Reserve capital adequacy guidelines. With the exception of our obligations in connection with its Trust Securities and the other items detailed above, we have no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.
Contractual Obligations
The following table presents, as of September 30, 2023, our significant contractual obligations to third parties on debt and lease agreements and service obligations. For more information about our contractual obligations, see Part I, Item 1, "Financial Statements and Supplementary Data", Note 17. ‘‘Commitments and Contingencies,’’ in the Notes to Our Unaudited Consolidated Financial Statements in this Report.
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Total | |||||||||||||||||||||||||||||||
| Contractual Cash Obligations | ||||||||||||||||||||||||||||||||
Time deposits (1) | $ | 3,358,531 | $ | 279,142 | $ | 10,149 | $ | — | $ | 3,647,822 | ||||||||||||||||||||||
FHLB advances (1) | 625,000 | 801,500 | — | 147 | 1,426,647 | |||||||||||||||||||||||||||
Senior debt (1) | 95,000 | — | — | — | 95,000 | |||||||||||||||||||||||||||
Junior subordinated debentures (1) | — | — | — | 61,857 | 61,857 | |||||||||||||||||||||||||||
| Operating leases | 3,420 | 6,045 | 4,650 | 1,169 | 15,284 | |||||||||||||||||||||||||||
Significant contract (2) | 1,684 | 2,707 | — | — | 4,391 | |||||||||||||||||||||||||||
| Total | $ | 4,083,635 | $ | 1,089,394 | $ | 14,799 | $ | 63,173 | $ | 5,251,001 | ||||||||||||||||||||||
(1) Amounts exclude interest. | ||||||||||||||||||||||||||||||||
(2) We have one significant, long-term contract for core processing services which expires May 9, 2026. The actual obligation is unknown and dependent on certain factors including volume and activities. For purposes of this disclosure, future obligations are estimated using our year-to-date 2023 average monthly expense extrapolated over the remaining life of the contract. | ||||||||||||||||||||||||||||||||
We believe that we will be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.
Liquidity Management and Capital Adequacy
Liquidity Management
Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions, the banking industry, such as bank failures, or exposure to rapid changes in interest rates, as well as credit, market, operational, legal and reputational risks also could affect the Company’s liquidity risk profile and are considered in the assessment of liquidity management.
We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Company, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems including stress tests that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory,
56
or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Company’s liquidity risk management process.
Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, unrestricted cash at third-party banks, investments available for sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and proceeds from the sale of loans. Other sources of funding include borrowings from the FRB discount window and the FRB Bank Term Funding Program ("BTFP"), draws on established federal funds lines from unaffiliated commercial banks and the issuance of debt or equity securities. Our reliance on wholesale funding sources may fluctuate as economic conditions and customer preferences change.
We proactively and prudently manage liquidity, which became even more important this year in light of the bank failures and other deposit dislocations resulting from the rapidly rising interest rate environment. During the nine months ended September 30, 2023, we increased our on-balance sheet liquidity by an additional $322.1 million primarily through an increase in FHLB advances and decreases in loan balances attributable to loan prepayments exceeding loan originations due to slowing demand resulting from the general rise in interest rates, coupled with our desire to achieve a reasonable risk adjusted return on new loan volume in light of the high cost of new funding. Usage of our FHLB line to augment our liquidity is consistent with our past borrowing practices. We have pledged substantially all of our pledgeable investment and loan portfolios to the FHLB and FRB. Although the Bank has access to an aggregate borrowing capacity of $1.2 billion under the FRB's BTFP and discount window, we have not utilized either FRB line during the current year. As of September 30, 2023, our total on-balance sheet liquidity and borrowing capacity, as shown below, represented 348% of our estimated uninsured deposit balances. As of September 30, 2023, we maintained the following liquidity position:
| (Dollars in thousands) | As of September 30, 2023 | % of Assets | ||||||||||||
| Unrestricted cash & cash equivalents | $ | 579,724 | 7.13% | |||||||||||
| Unpledged liquid securities | 31,903 | 0.39% | ||||||||||||
Unutilized brokered deposit capacity(1) | 422,266 | 5.19% | ||||||||||||
Unutilized FHLB borrowing capacity(2)(3) | 1,276,920 | 15.70% | ||||||||||||
Unutilized FRB borrowing capacity(2) | 1,197,853 | 14.73% | ||||||||||||
Commercial line of credit | 25,000 | 0.31% | ||||||||||||
| Total liquidity | $ | 3,533,666 | 43.44% | |||||||||||
(1) Capacity based on internal guidelines.
(2) Capacity based on pledged collateral specific to the FHLB or FRB, as applicable.
(3) Availability to borrow from the FHLB is permitted up to 40% of Luther Burbank Savings’ (the “Bank”) assets or $3.3 billion, subject to collateral capacity.
Our total deposits at both September 30, 2023 and December 31, 2022 were $5.8 billion. Based on the values of loans and securities pledged as collateral, our $1.4 billion of FHLB advances outstanding and our $62.6 million FHLB letter of credit outstanding, we had $1.3 billion of additional borrowing capacity with the FHLB at September 30, 2023. Based on the values of other loans and securities pledged as collateral, we had $1.2 billion of borrowing capacity with the FRB at September 30, 2023. There were no outstanding advances with the FRB at September 30, 2023. In addition to the liquidity provided by the FHLB and FRB described above, we have established a federal funds line of credit with an unaffiliated bank totaling $25.0 million at September 30, 2023, which had no advances as of that date. In the ordinary course of business, we maintain correspondent bank accounts with unaffiliated banks which are used for normal business activity including ordering cash for our branch network, the purchase of investment securities and the receipt of principal and interest on those investments. Available cash balances at correspondent banks, including amounts at the FRB, totaled $579.7 million at September 30, 2023.
The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its senior notes and junior subordinated debentures. The Company’s main source of cash flow is dividends declared and paid to it by the Bank. There are
57
statutory and regulatory limitations that affect the ability of our Bank to pay dividends to the Company. We believe that these limitations will not impact our ability to meet our ongoing short-term cash obligations. For contingency purposes, the Company typically maintains a minimum level of cash to fund one year’s projected operating cash flow needs.
Capital Adequacy
We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As of September 30, 2023 and December 31, 2022, we were in compliance with all applicable regulatory capital requirements, including the capital conservation buffer, and the Bank qualified as ‘‘well-capitalized’’ for purposes of the FDIC’s prompt corrective action regulations.
The vast majority of our multifamily residential loans and single family residential loans are currently eligible for 50% risk-weighting for purposes of calculating our regulatory capital levels. Risk-weighting requirements of multifamily residential loans and single family residential loans are contingent upon meeting specific criteria, which, if not adequately met, would increase the required risk-weighting percentage for these loans. Commercial real estate lending collateralized by real estate other than multifamily residential properties are generally risk weighted at 100%. Our leverage ratio is not affected by the composition of our assets.
The following table presents our regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by FDIC regulations to maintain ‘‘well-capitalized’’ status:
| Minimum Required | ||||||||||||||||||||||||||
| Actual | For Capital Adequacy Purposes | For Well- Capitalized Institution | ||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
| Luther Burbank Corporation | ||||||||||||||||||||||||||
| As of September 30, 2023 | ||||||||||||||||||||||||||
| Tier 1 Leverage Ratio | $ | 797,767 | 9.66 | % | $ | 330,443 | 4.00 | % | N/A | N/A | ||||||||||||||||
| Common Equity Tier 1 Risk-Based Ratio | 735,910 | 18.31 | % | 281,267 | 7.00 | % | N/A | N/A | ||||||||||||||||||
| Tier 1 Risk-Based Capital Ratio | 797,767 | 19.85 | % | 341,539 | 8.50 | % | N/A | N/A | ||||||||||||||||||
| Total Risk-Based Capital Ratio | 838,111 | 20.86 | % | 421,901 | 10.50 | % | N/A | N/A | ||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||
| Tier 1 Leverage Ratio | $ | 775,259 | 9.72 | % | $ | 319,051 | 4.00 | % | N/A | N/A | ||||||||||||||||
| Common Equity Tier 1 Risk-Based Ratio | 713,402 | 16.80 | % | 297,214 | 7.00 | % | N/A | N/A | ||||||||||||||||||
| Tier 1 Risk-Based Capital Ratio | 775,259 | 18.26 | % | 360,902 | 8.50 | % | N/A | N/A | ||||||||||||||||||
| Total Risk-Based Capital Ratio | 812,529 | 19.14 | % | 445,820 | 10.50 | % | N/A | N/A | ||||||||||||||||||
| Luther Burbank Savings | ||||||||||||||||||||||||||
| As of September 30, 2023 | ||||||||||||||||||||||||||
| Tier 1 Leverage Ratio | $ | 875,418 | 10.60 | % | $ | 330,331 | 4.00 | % | $ | 412,913 | 5.00 | % | ||||||||||||||
| Common Equity Tier 1 Risk-Based Ratio | 875,418 | 21.80 | % | 281,072 | 7.00 | % | 260,995 | 6.50 | % | |||||||||||||||||
| Tier 1 Risk-Based Capital Ratio | 875,418 | 21.80 | % | 341,301 | 8.50 | % | 321,225 | 8.00 | % | |||||||||||||||||
| Total Risk-Based Capital Ratio | 915,762 | 22.81 | % | 421,608 | 10.50 | % | 401,531 | 10.00 | % | |||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||
| Tier 1 Leverage Ratio | $ | 856,631 | 10.74 | % | $ | 318,970 | 4.00 | % | $ | 398,712 | 5.00 | % | ||||||||||||||
| Common Equity Tier 1 Risk-Based Ratio | 856,631 | 20.19 | % | 297,026 | 7.00 | % | 275,809 | 6.50 | % | |||||||||||||||||
| Tier 1 Risk-Based Capital Ratio | 856,631 | 20.19 | % | 360,674 | 8.50 | % | 339,458 | 8.00 | % | |||||||||||||||||
| Total Risk-Based Capital Ratio | 893,901 | 21.07 | % | 445,538 | 10.50 | % | 424,322 | 10.00 | % | |||||||||||||||||
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Impact of Inflation and Changing Prices
Our unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the exposure to unanticipated changes in net interest earnings or loss due to changes in the market value of assets and liabilities as a result of fluctuations in interest rates. As a financial institution, our primary market risk is interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves (basis risk).
We manage market risk though our Asset Liability Council ("ALCO") which is comprised of senior management who are responsible for ensuring that board approved strategies, policy limits, and procedures for managing interest rate risk are appropriately executed within the designated lines of authority and responsibility. The ALCO meets monthly to review, among other things, the composition of our assets and liabilities, the sensitivity of our assets and liabilities to interest rate changes, our actual and forecasted liquidity position, investment activity and our interest rate hedging transactions. The chairperson of the ALCO reports regularly to our board of directors. Our board reviews all policies impacting asset and liability management and establishes risk tolerance limits for business operations on at least an annual basis.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. In recognition of this, we endeavor to actively manage our assets and liabilities to maximize our net interest income and return on equity, while managing our risk exposure and maintaining adequate liquidity and capital positions.
Given the nature of our loan and deposit activities, we are liability sensitive to volatility in interest rates. A liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin. Conversely, an asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding net interest margin.
We use two primary modeling techniques to assess our exposure to interest rates that simulate the earnings and valuation effects of variations in interest rates: Net Interest Income at Risk ("NII at Risk") and the Economic Value of Equity ("EVE"). These models require that we use numerous assumptions, including asset and liability pricing and repricing, future growth, prepayment rates, non-maturity deposit sensitivity and decay rates. These assumptions are inherently uncertain and, as a result, the models cannot precisely predict the fluctuations in market interest rates or precisely measure the impact of future changes in interest rates. Notably, actual deposit characteristics experienced in our portfolio since mid-2022 have been less predictable than our historical patterns, which management attributes to the unprecedented rise in market interest rates. Given the uncertainties discussed above, actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of -400 to +400 basis points is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve.
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Instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk, implement hedging transactions if the metric rises above policy limits for interest rate risk, and track the movement of the Company's interest rate risk position over a historical time frame for comparison purposes.
On a quarterly basis, we measure and report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The following table illustrates the results of our NII at Risk analysis to determine the extent to which our net interest income over the following 12 months may change if prevailing interest rates increased or decreased by the specified amounts at September 30, 2023. It models instantaneous parallel shifts in market interest rates, implied by the forward yield curve over the next one year period.
| Interest Rate Risk to Earnings (NII) | ||||||||
| September 30, 2023 | ||||||||
| (Dollars in millions) | ||||||||
| Change in Interest Rates (basis points) | $ Change NII | % Change NII | ||||||
| +400 BP | $(12.0) | (55.0)% | ||||||
| +300 BP | (7.5) | (34.6)% | ||||||
| +200 BP | (4.0) | (18.3)% | ||||||
| +100 BP | (1.6) | (7.5)% | ||||||
| -100 BP | 0.8 | 3.8% | ||||||
| -200 BP | 1.9 | 8.9% | ||||||
| -300 BP | 2.7 | 12.6% | ||||||
| -400 BP | 3.4 | 15.8% | ||||||
The NII at Risk reported at September 30, 2023 reflects that our earnings were in a liability sensitive position in which an increase in interest rates is expected to generate lower net interest income. During the nine months ended September 30, 2023, our NII at Risk increased as compared to December 31, 2022 primarily due to higher interest rates and declining net interest income.
EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. The EVE results included in the table below reflect the analysis reviewed monthly by management. It models instantaneous parallel shifts in market interest rates, implied by the forward yield curve. The EVE model calculates the market value of capital by taking the present value of all asset cash flows less the present value of all liability cash flows.
| Interest Rate Risk to Capital (EVE) | ||||||||
| September 30, 2023 | ||||||||
| (Dollars in millions) | ||||||||
| Change in Interest Rates (basis points) | $ Change EVE | % Change EVE | ||||||
| +400 BP | $(310.8) | (59.6)% | ||||||
| +300 BP | (198.7) | (38.1)% | ||||||
| +200 BP | (114.3) | (21.9)% | ||||||
| +100 BP | (49.1) | (9.4)% | ||||||
| -100 BP | 32.2 | 6.2% | ||||||
| -200 BP | 47.4 | 9.1% | ||||||
| -300 BP | 49.2 | 9.4% | ||||||
| -400 BP | 45.0 | 8.6% | ||||||
The EVE reported at September 30, 2023 reflects that our market value of capital was in a liability sensitive position in which an increase in interest rates is expected to generate lower market values of capital. During the nine months ended September 30, 2023, our EVE at risk decreased slightly as compared to December 31, 2022 primarily due to a decrease in the months to repricing of our loan balances, an increase in our hedge positions, partially offset by higher interest rates, slower loan prepayments and lower loan market values.
Certain shortcomings are inherent in the NII at Risk and EVE analyses presented above. Both the NII at Risk and
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EVE simulations include assumptions regarding balances, asset prepayment speeds, deposit repricing and runoff and interest rate relationships among balances that we believe to be reasonable for the various interest rate environments. Differences in actual occurrences from these assumptions, as well as nonparallel changes in the yield curve, may change our market risk exposure. Simulated results are not intended to be used as a forecast of the actual effect of changes in market interest rates on our results, but rather as a means to better plan and execute appropriate interest rate risk strategies.
Hedge Positions
In managing our market risk, our board of directors has authorized the ALCO to utilize long-term borrowings and derivatives, including interest rate caps and swaps, to mitigate interest rate risk in accordance with regulations and our internal policy. We use or expect to use borrowings, interest rate caps and swaps as macro hedges against interest rate sensitivity in our loan portfolio, other interest-earning assets and our interest-bearing liabilities. Positions for hedging purposes are undertaken as mitigation to exposure primarily from mismatches between the repricing of assets and liabilities.
We are currently utilizing FHLB advances and interest rate swaps to hedge our liability sensitive interest rate risk position. As of September 30, 2023, the Company maintained 11 interest rate swaps with an aggregate notional amount of $1.8 billion to partially hedge the interest rate risk associated with both fixed rate loans and hybrid adjustable loans in their fixed rate period. All of our swaps are designated as fair value hedges and involve the payment of a fixed rate amount to a counterparty in exchange for the Company receiving a variable rate payment over the life of the swaps without the exchange of the underlying notional amount. The gain or loss on derivatives, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk are recognized in interest income for loans in our unaudited consolidated statements of income. The Company recognized an increase in interest income in connection with interest rate swaps of $6.4 million and $8.0 million during the three months ended September 30, 2023 and June 30, 2023, respectively, and $22.7 million and $3.3 million during the nine months ended September 30, 2023 and 2022, respectively.
The following table summarizes derivative instruments utilized by us as interest rate risk hedge positions as of September 30, 2023:
| (Dollars in thousands) | Fair Value | |||||||||||||||||||||||||
| Hedging Instrument | Hedge Accounting Type | Months to Maturity | Notional | Other Assets | Other Liabilities | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 6 | $ | 100,000 | $ | 1,574 | $ | — | ||||||||||||||||||
| Interest rate swap | Fair value hedge | 9 | 100,000 | 1,750 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 20 | 100,000 | 3,807 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 24 | 300,000 | 106 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 29 | 200,000 | 3,662 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 30 | 100,000 | 1,152 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 33 | 200,000 | 1,990 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 47 | 100,000 | 5,206 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 48 | 200,000 | 4,859 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 49 | 200,000 | 3,898 | — | |||||||||||||||||||||
| Interest rate swap | Fair value hedge | 55 | 200,000 | 4,819 | — | |||||||||||||||||||||
| $ | 1,800,000 | $ | 32,823 | $ | — | |||||||||||||||||||||
Counterparty Credit Risk
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Our policies require that counterparties must be approved by our ALCO. Additionally, contracts are in place to ensure that minimum transfer amounts and collateral requirements are established.
Item 4. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of September 30, 2023, of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and
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procedures were effective as of September 30, 2023 in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management of the Company as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, such controls.
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PART II.
Item 1. Legal Proceedings
On March 24, 2023, Martin Siegel, a purported Luther Burbank Corporation shareholder, filed and served a putative class action on behalf of our shareholders in the Superior Court for the County of Sonoma, California captioned Siegel v. Lagomarsino, et al. (Case No. SCV-272922). The Siegel complaint alleges that our board of directors breached their fiduciary duty by failing to disclose certain internal projections and other information allegedly underlying the fairness opinion of our financial adviser, Piper Sandler & Co., in connection with our pending merger transaction with Washington Federal, Inc. Following the filing of our Current Report on Form 8-K on April 10, 2023 containing certain supplemental information regarding unaudited prospective financial estimates received and considered by Piper Sandler & Co., Mr. Siegel withdrew his request for a preliminary injunction to require us to disclose the internal projections and other information and to delay our May 4, 2023 shareholders meeting, but reserved the right to seek an award of attorney’s fees and expenses. On May 9, 2023, Siegel and his counsel filed an amended complaint alleging unjust enrichment and seeking an award of attorney's fees and expenses and removing their prior disclosure based claims.
In addition, two other purported Luther Burbank Corporation shareholders have filed similar actions in the United States District Court for the Southern District of New York alleging violations of the Securities Exchange Act of 1934, as amended in matters captioned Wang v. Luther Burbank Corporation, et al. (Civil Action No. 23-cv-01949) and O’Dell v. Luther Burbank Corporation, et al. (Civil Action No. 23-cv-1912), and one other purported Luther Burbank Corporation shareholder has filed a similar action in the Superior Court for the County of Sonoma, California captioned Coffman v. Luther Burbank Corporation, et al. (Case No. SCV-273074). None of the plaintiffs have taken any action to serve these actions or otherwise prosecute their claims.
We believe the allegations and claims in the Siegel action and the other complaints are without merit.
In addition to the matters described above, from time to time, we are party to legal actions that are routine and incidental to our business. In addition, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, we, like all banking organizations, are subject to heightened regulatory compliance and legal risk. However, based on available information, management does not expect the ultimate disposition of any or a combination of these actions, including those described above, to have a material adverse effect on our business, financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risks disclosed in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases or unregistered sales of the Company’s stock during the quarter.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Filed Herewith | Form | File No. | Exhibit | Filing Date | ||||||||||||||||||||||||||||||||
| 2.1 | 8-K | 001-38317 | 2.1 | 11/14/2022 | ||||||||||||||||||||||||||||||||||
| 3.1 | S-1 | 333-221455 | 3.1 | 11/9/2017 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-38317 | 3.1 | 4/27/2018 | ||||||||||||||||||||||||||||||||||
| 4.1 | S-1 | 333-221455 | 4.1 | 11/9/2017 | ||||||||||||||||||||||||||||||||||
| Pursuant to Item 601(b) (4) (iii) (A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the SEC upon request. | ||||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definitions Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
| *Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished. | ||||||||||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LUTHER BURBANK CORPORATION | |||||||||||
DATED: | NOVEMBER 3, 2023 | By: /s/ Simone Lagomarsino | |||||||||
Simone Lagomarsino | |||||||||||
President and Chief Executive Officer | |||||||||||
DATED: | NOVEMBER 3, 2023 | By: /s/ Laura Tarantino | |||||||||
Laura Tarantino | |||||||||||
Executive Vice President and Chief Financial Officer | |||||||||||
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