LUTHER BURBANK CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion and analysis is based on and should be read in conjunction with Part II. Item 6. Selected Financial Data and our consolidated financial statements and the accompanying notes thereto contained elsewhere in this Annual Report on Form 10-K. Because we conduct all of our material business operations through our bank subsidiary,Luther Burbank Savings , the discussion and analysis relates to activities primarily conducted by the Bank. The following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our business that accounted for the changes in our results of operations for the year endedDecember 31, 2021 , as compared to our results of operations for the year endedDecember 31, 2020 , and our financial condition atDecember 31, 2021 as compared to our financial condition atDecember 31, 2020 . 29 -------------------------------------------------------------------------------- Table of Contents In addition to historical information, this discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this Annual Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Please read these sections carefully. We assume no obligation to update any of these forward-looking statements. Overview We are a bank holding company headquartered inSanta Rosa, California , and the parent company ofLuther Burbank Savings , aCalifornia -chartered commercial bank headquartered inGardena, California with$7.2 billion in assets atDecember 31, 2021 . 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 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 theWest Coast .
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with 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 Financial Statements for the year endedDecember 31, 2021 . 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. Pursuant to the JOBS Act, as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the standard for the private company. We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company. In accordance with the requirements of the JOBS Act, our eligibility as an emerging growth company is expected to expire onDecember 31, 2022 , which is the last day of the fiscal year following the five year anniversary from the date of our initial public offering. Allowance for Loan Losses The allowance for loan losses is provided for probable incurred credit losses inherent in the loan portfolio at the statement of financial condition date. The allowance is increased by a provision charged to expense and can be reduced by loan principal charge-offs, net of recoveries. The allowance can also be reduced by recapturing provisions when management determines that the allowance for loan losses is more than adequate to absorb the probable incurred credit losses in the portfolio. The allowance is based on management's assessment of various factors including, but not limited to, the nature of the loan portfolio, previous loss experience, known and inherent risks in the portfolio, the estimated value of underlying collateral, information that may affect a borrower's ability to repay, current economic conditions and the results of our ongoing reviews of the portfolio. In addition, various 30 -------------------------------------------------------------------------------- Table of Contents 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. While we use available information, including independent appraisals for collateral, to estimate the extent of probable incurred loan losses within the loan portfolio, inherent uncertainties in the estimation process make it reasonably possible that ultimate losses may vary significantly from our original estimates. In addition, we utilize a number of economic variables in estimating the allowance, with the most significant drivers being unemployment and the home price index. Changes in these economic variables will typically result in incremental changes in the estimated level of our allowance. Generally, loans are partially or fully charged off when it is determined that the unpaid principal balance exceeds the current fair value of the collateral with no other likely source of repayment.
Fair value measurement
We use estimates of fair value in applying various accounting standards for our 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 consolidated statements of income.
Impairment of investment securities
We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a security in which we have an unrealized loss is impaired on an other-than-temporary basis. In any instance, we would consider many factors, including the severity and duration of the impairment, the portion of any unrealized loss attributable to a decline in the credit quality of the issuer, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and, for debt securities, external credit ratings and recent downgrades. Securities with respect to which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value.
Non-GAAP Financial Measures
Some of the financial measures discussed in Item 6. Selected Financial Data and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation are ''non-GAAP financial measures.'' In accordance withSEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time inthe United States in our consolidated statements financial condition, income or cash flows. Pre-tax, pre-provision net earnings is defined as net income before taxes and provision for (reversal of) loan losses. We believe the most directly comparable GAAP financial measure is income before taxes. Disclosure of this measure enables investors to compare our operations to those of other banking companies before consideration of taxes and provision expense, as well as recaptures from the allowance for loan losses. For the year endedDecember 31, 2017 , we calculated our pro forma net income, return on average assets, return on average equity and per share amounts by adding back our franchise S-Corporation tax to net income, and using a combined C-Corporation effective tax rate for federal andCalifornia income taxes of 42.0%. This calculation reflects only the change in our status as an S-Corporation and does not give effect to any other transaction. BeginningJanuary 1, 2018 , our pro forma income tax expense is our actual C-Corporation tax provision. Tangible book value is defined as total assets less goodwill and total liabilities. Efficiency ratio is defined as noninterest expenses divided by operating revenue, which is equal to net interest income plus noninterest income. For the year endedDecember 31 , 31 -------------------------------------------------------------------------------- Table of Contents 2020, we calculated a pro forma net income and efficiency ratio to reverse the impact of a material non-recurring cost incurred in connection with the prepayment of long-term FHLB borrowings. We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our consolidated statements of financial condition, income and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, 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.
The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
(Dollars in thousands, except per As of or For the Years Ended December 31, share data) 2021 2020 2019 2018 2017 Pre-tax, Pre-provision Net Earnings Income before provision for income taxes$ 124,000 $ 56,659
Plus: (Reversal of) allowance for loan losses
(10,800) 10,550 1,250 3,600 (3,372)
Net profit before tax and before provision
Efficiency ratio Non-interest expense (numerator)
$ 59,145 $ 73,934 $ 62,368 $ 62,687 $ 56,544 Net interest income 170,459 138,623 128,407 125,087 110,895 Noninterest income 1,886 2,520 4,675 4,131 7,508 Operating revenue (denominator)$ 172,345 $ 141,143
Efficiency report
34.32 % 52.38 % 46.86 % 48.51 % 47.76 % Pro Forma Efficiency Ratio (1) Noninterest expense$ 73,934 Less: Non-recurring noninterest expense item, before income taxes (10,443) Pro forma noninterest expense (numerator)$ 63,491 Operating revenue (denominator)$ 141,143 Pro forma efficiency ratio 44.98 % Pro Forma Net Income (1) Net income$ 39,912 Add: Non-recurring noninterest expense item, net income taxes 7,352 Pro forma net income$ 47,264 Actual/Pro Forma Net Income (2) Income before provision for income taxes$ 124,000 $ 56,659 $ 69,464 $ 62,931 $ 65,231 Actual/pro forma provision for income taxes 36,247 16,747 20,603 17,871 27,397 Actual/pro forma net income (numerator)$ 87,753 $ 39,912 $ 48,861 $ 45,060 $ 37,834 Actual/Pro Forma Diluted Earnings Per Share (2) Weighted average common shares outstanding - diluted (denominator) (3) 51,769,098 53,146,298 56,219,892 56,825,402 42,957,936 Actual/pro forma diluted earnings per share$ 1.70 $ 0.75
Actual/pro forma return on average assets (2)
Actual/pro forma net income (numerator)$ 87,753 $ 39,912
Average assets (denominator)
$ 7,183,172 $ 7,092,407
Actual/pro forma return on average assets
1.22 % 0.56 % 0.69 % 0.70 % 0.69 %
Actual/pro forma return on average equity (2)
Actual/pro forma net income (numerator)$ 87,753 $ 39,912
Average equity (denominator)
$ 643,492 $ 610,770 $ 599,574 $ 566,275 $ 425,698 Actual/pro forma return on average stockholders' equity 13.64 % 6.53 % 8.15 % 7.96 % 8.89 % 32
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(Dollars in thousands, except As of or For the Years Ended December 31, per share data) 2021 2020 2019 2018 2017 Tangible Book Value Per Share Total assets$ 7,179,957 $ 6,906,104 $ 7,045,828 $ 6,937,212 $ 5,704,380 Less: Goodwill (3,297) (3,297) (3,297) (3,297) (3,297) Tangible assets 7,176,660 6,902,807 7,042,531 6,933,915 5,701,083 Less: Total liabilities (6,510,824) (6,292,413)
(6,431,364) (6,356,067) (5,154,635) Tangible equity (numerator)
$ 665,836 $ 610,394
Shares outstanding at end of period (denominator)
51,682,398 52,220,266 55,999,754 56,379,066 56,422,662
Tangible book value per share
(1) For the year endedDecember 31, 2020 , net income and efficiency ratio are adjusted to reverse the impact of a non-recurring cost incurred in connection with the prepayment of$150 million of long-term FHLB advances inDecember 2020 . (2) For the year endedDecember 31, 2017 , we calculated our pro forma net income, return on average assets and return on average stockholders' equity by adding back our franchise S-Corporation tax to net income, and using a combined C-Corporation effective tax rate for federal andCalifornia income taxes of 42.0%. This calculation reflects only the change in our status as an S-Corporation and does not give effect to any other transaction. BeginningJanuary 1, 2018 , our pro forma provision for tax expense is our actual C-Corporation provision. (3) Weighted average common shares outstanding - diluted has been adjusted retroactively for the year endedDecember 31, 2017 to reflect a 200-for-1 stock split effectiveApril 27, 2017 .
Key Factors Affecting Our Business
Interest rate
Net interest income is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets and the interest expense incurred in connection with interest-bearing liabilities. Net interest income is primarily a function of the average balances and yields of these interest-earning assets and interest-bearing liabilities. These factors are influenced by internal considerations such as product mix and risk appetite, as well as external influences such as economic conditions, competition for loans and deposits and market interest rates. The cost of our deposits and short-term wholesale borrowings is primarily based on short-term interest rates, which are largely driven by theFederal Reserve's actions and market competition. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates, which are driven by market competition and market rates often impacted by theFederal Reserve's actions. The level of net interest income is influenced by movements in such interest rates and the pace at which such movements occur. Based on our liability sensitivity as discussed in Item 7A. ''Quantitative and Qualitative Disclosures About Market Risk'', increases in interest rates and/or a flatter yield curve could have an adverse impact on our net interest income. Conversely, decreases in interest rates, particularly at the short end, and/or a steepened yield curve would be expected to benefit our net interest income.
Operational efficiency
We have invested heavily in our infrastructure, including our management, our lending teams, our technology systems and our risk management practices. As we began to leverage these investments, our efficiency generally improved.
Credit quality
We have well established loan policies and underwriting practices that have generally resulted in very low levels of charge-offs and nonperforming assets. We strive to originate quality loans that will maintain the credit quality of our loan portfolio. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition and results of operations.
Competetion
The industry and businesses in which we operate are highly competitive. We may
see increased competition in different areas including interest rates,
underwriting standards and product offerings and loan structure. While we seek
to maintain an appropriate return on our investments, we may experience
continued pressure on our net
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interest margin as we operate in this competitive environment.
Economic conditions
Our business and financial performance are affected by economic conditions generally inthe United States and more directly in the markets ofCalifornia ,Washington andOregon where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates.
Factors affecting the comparability of financial results
S corporation status
We terminated our status as a "Subchapter S" corporation as ofDecember 1, 2017 , in connection with our IPO. Prior to this date, we elected to be taxed forU.S. federal income tax purposes as an S-Corporation. As a result, our earnings were not subject to, and we did not pay,U.S. federal income tax, and we were not required to make any provision or recognize any liability forU.S. federal income tax in our financial statements. While we were not subject to and did not payU.S. federal income tax, we were subject to, and paid,California S-Corporation income tax at a rate of 3.50%. Upon the termination of our status as an S-Corporation onDecember 1, 2017 , we commenced payingU.S. federal income tax and a higherCalifornia income tax on our taxable earnings and our financial statements reflect a provision for bothU.S. federal income tax andCalifornia income tax. As a result of this change, the net income and earnings per share data presented in our historical financial statements and the other financial information set forth in this Annual Report, which unless otherwise specified, do not include any provision forU.S. federal income tax, will not be comparable with our net income and earnings per share in periods after we commenced being taxed as a C-Corporation. As a C-Corporation, our net income is calculated by including a provision forU.S. federal income tax, currently at 21.00%, and aCalifornia income tax rate, currently at 10.84%. As an S-Corporation, we made quarterly cash distributions to our shareholders in amounts estimated by us to be sufficient for them to pay estimated individualU.S. federal andCalifornia income tax liabilities resulting from our taxable income that was ''passed through'' to them. However, these distributions were not consistent, as sometimes the distributions were less than or in excess of the shareholders' estimatedU.S. federal andCalifornia income tax liabilities resulting from their ownership of our stock. In addition, these estimates were based on individual income tax rates, which may differ from the rates imposed on the income of C-Corporations. Subsequent to the termination of our S-Corporation status onDecember 1, 2017 , other than our obligations under the tax sharing agreement with prior S-Corporation shareholders, no further income will be ''passed through'' to shareholders for any estimated tax liabilities.
Public Company Costs
As a result of our initial public offering completed inDecember 2017 , we are incurring additional costs associated with operating as a public company. These costs include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules adopted by theSEC and national securities exchanges, requires public companies to implement specified corporate governance practices that were inapplicable to us as a private company. These additional rules and regulations increased our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly.
COVID-19[female[feminine
Beginning in early 2020 and continuing throughDecember 2021 , the COVID-19 pandemic caused a disruption to almost every aspect of the economy. As a result, inMarch 2020 , the Company implemented a lending modification initiative to support our customers financially impacted by the COVID-19 pandemic and unable to make their scheduled loan payments. The program provided borrowers the opportunity to modify their existing real estate loans by temporarily deferring payments for a specified period of time. Modified loans under this program were generally downgraded from a Pass risk rating to a Watch risk rating at the time of their respective modification. Subsequent to the modification period, loan grades were adjusted, as necessary, in connection with the Company's proactive reassessment of loans impacted by the pandemic. Loan risk ratings are an integral part of the quantitative 34 -------------------------------------------------------------------------------- Table of Contents calculation of our allowance for loan losses. Further, in early 2020, we established a qualitative loan loss reserve in connection with the uncertainty related to the pandemic. This supplemental reserve has been slowly reduced as the impact of the pandemic on our loan portfolio has become less uncertain. Qualitative adjustments to our allowance specific to COVID-19 were$2.5 million and$8.4 million as ofDecember 31, 2021 and 2020, respectively. Management intends to closely monitor the level of this reserve and make any necessary adjustments as conditions related to the pandemic change. All of the loans modified for pandemic related payment deferral in 2020 and 2021 had returned to scheduled monthly payments or paid off in full byJune 2021 . Additionally, total criticized loans have declined to$16.7 million atDecember 31, 2021 , as compared to$57.0 million atDecember 31, 2020 . The decline in criticized loans from the prior year end was generally attributable to the continued performance of our loans that were initially impacted by the pandemic. During the years endedDecember 2021 and 2020, the Company incurred no loan losses for pandemic impacted loans. The Company's exposure to nonresidential commercial real estate remains limited, totaling$187.1 million , or 3.0% of our loan portfolio, atDecember 31, 2021 .
Results of operations – Years ended
Overview
For the year endedDecember 31, 2021 our net income was$87.8 million as compared to$39.9 million for the year endedDecember 31, 2020 . The increase of$47.8 million , or 119.9%, was primarily attributable to an increase of$31.8 million in net interest income, a$21.4 million decrease in the provision for loan losses, and a$14.8 million decrease in noninterest expense, partially offset by an increase of$19.5 million in the provision for income taxes as compared to the prior year. Pre-tax, pre-provision net earnings increased by$46.0 million , or 68.4%, for the year endedDecember 31, 2021 as compared to the prior year. Excluding the impact of a$10.4 million non-recurring cost incurred in connection with the prepayment of$150.0 million of long-term fixed rate FHLB borrowings inDecember 2020 , pre-tax, pre-provision net income would have increased$35.5 million , or 45.8%, for the year endedDecember 31, 2021 as compared to the prior year.
Net interest income
Net interest income totaled$170.5 million for the year endedDecember 31, 2021 , an increase of$31.8 million , compared to the prior year. The increase in net interest income was primarily impacted by lower interest expense driven by a 72 basis point decline in the cost of interest-bearing deposits and a$640.5 million decrease in the average balance of time deposits. Interest expense was further reduced by a decrease in the average balance and cost of FHLB advances of$96.9 million and 58 basis points, respectively. These improvements were partially offset by a decline in interest income resulting from a 26 basis point decrease in the yield on our loans and a 23 basis point decline in the yield on our investment securities, partially offset by$136.0 million increase in the average balance of multifamily loans. Net interest margin for the year endedDecember 31, 2021 was 2.40%, compared to 1.97% for the prior year. The increase in our margin was primarily related to the decline in the cost of our interest-bearing deposits, partially offset by the decline in the yields of our loan and investment portfolios, as discussed above. Over the year, the yield on our interest-earning assets decreased by 23 basis points, while the cost of our interest-bearing liabilities decreased by 70 basis points. Our net interest spread for the year endedDecember 31, 2021 was 2.30%, increasing by 47 basis points as compared to last year. 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 years endedDecember 31, 2021 , 2020 and 2019. The average balances are daily averages. 35
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For the Years Ended December 31,
2021 2020 2019
Interest Interest Interest
(Dollars in thousands) Average Balance Inc/Exp Yield/Rate Average Balance Inc/Exp Yield/Rate Average Balance Inc/Exp Yield/Rate
Interest-Earning Assets
Multifamily residential $ 4,199,639 $ 155,509 3.70 % $ 4,063,607 $ 155,104 3.82 % $ 3,870,897 $ 162,328 4.19 %
Single family residential 1,897,575 53,695 2.83 % 1,907,940 65,030 3.41 % 2,139,517 76,766 3.59 %
Commercial real estate 196,456 8,893 4.53 % 206,639 9,530 4.61 % 196,903 9,353 4.75 %
Construction and land 18,920 1,148 6.07 % 20,199 1,332 6.59 % 15,907 1,083 6.81 %
Total loans (1) 6,312,590 219,245 3.47 % 6,198,385 230,996 3.73 % 6,223,224 249,530 4.01 %
Investment securities 653,479 8,451 1.29 % 647,174 9,856 1.52 % 661,574 15,461 2.34 %
Cash, cash equivalents and
restricted cash 150,166 223 0.15 % 185,246 538 0.29 % 105,042 2,151 2.05 %
Total interest-earning assets 7,116,235 227,919 3.20 % 7,030,805 241,390 3.43 % 6,989,840 267,142 3.82 %
Noninterest-earning assets (2) 66,937 61,602 76,707
Total assets $ 7,183,172 $ 7,092,407 $ 7,066,547
Interest-Bearing Liabilities
Transaction accounts $ 158,956 358 0.22 % $ 178,655 876 0.48 % $ 210,743 2,686 1.26 %
Money market demand accounts 2,427,599 11,889 0.48 % 1,652,109 14,862 0.88 % 1,402,608 18,181 1.28 %
Time deposits 2,750,461 23,365 0.84 % 3,390,992 57,593 1.67 % 3,538,223 84,225 2.35 %
Total deposits 5,337,016 35,612 0.66 % 5,221,756 73,331 1.38 % 5,151,574 105,092 2.01 %
FHLB advances 868,591 14,535 1.67 % 965,490 21,761 2.25 % 1,056,557 24,896 2.36 %
Junior subordinated debentures 61,857 1,015 1.64 % 61,857 1,373 2.22 % 61,857 2,447 3.96 %
Senior debt 94,596 6,298 6.66 % 94,473 6,302 6.67 % 94,350 6,300 6.68 %
Total interest-bearing liabilities 6,362,060 57,460 0.90 % 6,343,576 102,767 1.60 % 6,364,338 138,735 2.16 %
Noninterest-bearing deposit
accounts 112,436 69,208 41,821
Noninterest-bearing liabilities 65,184 68,853 60,814
Total liabilities 6,539,680 6,481,637 6,466,973
Total stockholders' equity 643,492 610,770 599,574
Total liabilities and stockholders'
equity $ 7,183,172 $ 7,092,407 $ 7,066,547
Net interest spread (3) 2.30 % 1.83 % 1.66 %
Net interest income/margin (4) $ 170,459 2.40 % $ 138,623 1.97 % $ 128,407 1.84 %
(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 $19.6 million , $16.2 million and $14.6
million for the years ended December 31, 2021 , 2020 and 2019, respectively.
(2) Noninterest-earning assets includes the allowance for loan 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 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 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.
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For the Years Ended December 31, 2021 vs 2020
Variance Due To
(Dollars in thousands) Volume Yield/Rate Total
Interest-Earning Assets
Multifamily residential $ 5,240 $ (4,835) $ 405
Single family residential (350) (10,985) (11,335)
Commercial real estate (471) (166) (637)
Construction and land (82) (102) (184)
Total Loans 4,337 (16,088) (11,751)
Investment securities 95 (1,500) (1,405)
Cash, cash equivalents and restricted cash (89) (226) (315)
Total interest-earning assets 4,343 (17,814) (13,471)
Interest-Bearing Liabilities
Transaction accounts (88) (430) (518)
Money market demand accounts 5,204 (8,177) (2,973)
Time deposits (9,426) (24,802) (34,228)
Total deposits (4,310) (33,409) (37,719)
FHLB advances (2,025) (5,201) (7,226)
Junior subordinated debentures - (358) (358)
Senior debt 7 (11) (4)
Total interest-bearing liabilities (6,328) (38,979) (45,307)
Net Interest Income $ 10,671 $ 21,165 $ 31,836
For the Years Ended December 31, 2020 vs 2019
Variance Due To
(Dollars in thousands) Volume Yield/Rate Total
Interest-Earning Assets
Multifamily residential $ 7,723 $ (14,947) $ (7,224)
Single family residential (8,021) (3,715) (11,736)
Commercial real estate 456 (279) 177
Construction and land 285 (36) 249
Total Loans 443 (18,977) (18,534)
Investment securities (328) (5,277) (5,605)
Cash, cash equivalents and restricted cash 981 (2,594) (1,613)
Total interest-earning assets 1,096 (26,848) (25,752)
Interest-Bearing Liabilities
Transaction accounts 928 (1,825) (897)
Money market demand accounts 1,425 (5,657) (4,232)
Time deposits (3,348) (23,284) (26,632)
Total deposits (995) (30,766) (31,761)
FHLB advances (2,035) (1,100) (3,135)
Junior subordinated debentures - (1,074) (1,074)
Senior debt 9 (7) 2
Total interest-bearing liabilities (3,021) (32,947) (35,968)
Net Interest Income $ 4,117 $ 6,099 $ 10,216
Total interest income decreased by $13.5 million , or 5.6%, for the year ended
December 31, 2021 as compared to the prior year. Interest income on loans
decreased $11.8 million to $219.2 million for the year ended December 31, 2021
from $231.0 million for the prior year. The decline was primarily due to a 26
basis point decrease in our loan yield, as compared to the prior year due to the
prepayment of higher yielding loans, which are being replaced by loans at lower
current interest rates, as well as a $3.4 million increase in accelerated loan
cost amortization on
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prepaid loans, partially offset by a $136.0 million increase in the average
balance of multifamily residential loans and a $3.2 million decline in the cost
of our interest rate swaps as compared to the prior year. Additionally, interest
income on investments decreased by $1.4 million primarily due to a reduced yield
on investment securities of 23 basis points. The decline in our investment yield
was generally caused by variable rate securities repricing to lower current
interest rates, as well as the accelerated prepayment of securities backed by
mortgages.
During the year ended December 31, 2021 , total loans increased $247.6 million
compared to a decrease of $181.2 million during the year ended December 31,
2020 . The volume of new loans originated totaled $2.4 billion and $1.4 billion
for the years ended December 31, 2021 and 2020, respectively. Volume for the
current year includes the purchase of a $287.8 million pool of fixed rate single
family loans in February 2021 . The weighted average rate on new loans for the
year ended December 31, 2021 was 3.30% compared to 3.71% for the prior year. The
decline in the average coupon for current year originations compared to the
prior year was due to the general lower level of market interest rates and
competitive market pressures compounded by excess liquidity in financial
markets. Loan payoffs and paydowns totaled $2.1 billion and $1.6 billion for the
years ended December 31, 2021 and 2020, respectively. Elevated loan prepayment
speeds were primarily related to customers refinancing their hybrid-ARM loans to
take advantage of lower long-term interest rates. The weighted average rate on
loan payoffs during the year ended December 31, 2021 was 3.93% as compared to
4.15% for the prior year.
Total interest expense decreased $45.3 million to $57.5 million for the year
ended December 31, 2021 from $102.8 million for the prior year. Interest expense
on deposits decreased $37.7 million to $35.6 million for the year ended December
31, 2021 from $73.3 million for the prior year. This decrease was primarily due
to the cost of interest-bearing deposits decreasing 72 basis points
predominantly due to our deposit portfolio repricing to lower current market
interest rates, as well an increase in the proportion of non-maturity deposits
within the portfolio which totaled 57.8% at year ended December 31, 2021
compared to 41.9% at December 31, 2020 . Interest expense on advances from the
FHLB decreased by $7.2 million during the year ended December 31, 2021 as
compared to the prior year. This decrease was due to a decline in the average
balance and cost of FHLB advances of $96.9 million and 58 basis points,
respectively. We generally use both deposits and FHLB advances to fund net loan
growth. We also use FHLB advances, with or without embedded interest rate caps,
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.''
Allowance for loan losses
During the year endedDecember 31, 2021 , we reversed provisions for loan losses totaling$10.8 million , compared to recording provisions for loan losses of$10.6 million for the year endedDecember 31, 2020 . The recaptured loan loss provisions during the current year primarily related to the reversal of reserves initially established during the year endedDecember 31, 2020 for the uncertain economic impact associated with the COVID-19 pandemic. Additionally, we recognized further reserve releases for general improvements in asset quality within our loan portfolio. The Company continues to maintain approximately$2.5 million in qualitative reserves attributed to the pandemic. Nonperforming loans totaled$2.3 million and$6.3 million , or 0.04% and 0.10% of total loans, atDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , total criticized loans decreased by$40.3 million , or 70.7%, compared to the prior year, and finished the current year at$16.7 million . The decline in criticized loan balances was attributable to both the improvement in our loans that were initially impacted by the pandemic, as well as the upgrade and payoff of criticized and classified loans that were downgraded for reasons unrelated to the pandemic. As ofJune 2021 , all loans modified for pandemic related payment deferral during 2020 and 2021 had returned to scheduled payments or paid off in full. Our allowance for loan losses as a percentage of total loans was 0.56% atDecember 31, 2021 as compared to 0.76% atDecember 31, 2020 .
Non-interest income
Noninterest income decreased by$634 thousand to$1.9 million for the year endedDecember 31, 2021 from$2.5 million for the year endedDecember 31, 2020 . The following table presents the major components of our noninterest income: 38
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For the years ended
$ Increase % Increase (Dollars in thousands) 2021 2020 (Decrease) (Decrease) Noninterest Income FHLB dividends$ 1,558 $ 1,650 $ (92) (5.6) % Fee income 420 232 188 81.0 % Other (92) 638 (730) (114.4) % Total noninterest income$ 1,886 $ 2,520 $ (634) (25.2) % The decrease in noninterest income for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was primarily due to a$344 thousand decline in market value on equity securities recorded during the current year compared to an increase in market value of$255 thousand recorded during the prior year. This decrease was partially offset by a$188 thousand increase in fee income due to additional deposit account fees earned primarily related our specialty deposit accounts.
Non-interest expenses
Noninterest expense decreased$14.8 million , or 20.0%, to$59.1 million for the year endedDecember 31, 2021 from$73.9 million for 2020. The following table presents the components of our noninterest expense: For the Years Ended December 31, $ Increase % Increase (Dollars in thousands) 2021 2020 (Decrease) (Decrease) Noninterest Expense Compensation and related benefits$ 38,624 $ 43,100 $ (4,476) (10.4) % FHLB advance prepayment penalty - 10,443 (10,443) (100.0) % Deposit insurance premium 1,920 1,905 15 0.8 % Professional and regulatory fees 1,976 1,844 132 7.2 % Occupancy 4,933 4,585 348 7.6 % Depreciation and amortization 2,561 2,685 (124) (4.6) % Data processing 3,785 3,911 (126) (3.2) % Marketing 1,240 1,683 (443) (26.3) % Other expenses 4,106 3,778 328 8.7 % Total noninterest expense$ 59,145 $ 73,934 $ (14,789) (20.0) % The decrease in noninterest expense during the year endedDecember 31, 2021 as compared to the prior year was primarily attributable to a non-recurring$10.4 million prepayment fee incurred in connection with the prepayment of$150.0 million of FHLB borrowings inDecember 2020 . The prepayments were a strategic decision to utilize low yielding excess liquidity to reduce high cost borrowings to benefit our net interest margin in future quarters. The decrease in noninterest expense was further impacted by a$4.5 million decline in compensation costs primarily due to an increase in capitalized loan origination costs related to higher loan volumes compared to the prior year. Our efficiency ratio was 34.3% for the year endedDecember 31, 2021 compared to 52.4% for the prior year. Excluding the impact of the nonrecurring cost of the prepayment fee on FHLB borrowings discussed above, our efficiency ratio would have been 45.0% for the year endedDecember 31, 2020 .
income tax expense
For the years endedDecember 31, 2021 and 2020, we recorded income tax expense of$36.2 million and$16.7 million , respectively, with effective tax rates of 29.2% and 29.6%, respectively.
Financial situation – As of
Total assets at
39 -------------------------------------------------------------------------------- Table of Contents investment securities, partially offset by a$40.4 million decrease in cash as compared toDecember 31, 2020 . Total liabilities were$6.5 billion atDecember 31, 2021 , an increase of$218.4 million , or 3.5%, fromDecember 31, 2020 . The increase in total liabilities was primarily attributable to growth in our deposits of$273.9 million compared to the prior year end, partially offset by a decrease in FHLB advances of$55.1 million .
Composition of loan portfolio
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 ofDecember 31, 2021 and 2020, our total loans amounted to$6.3 billion and$6.0 billion , respectively. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated. As of December 31, 2021 2020 2019 2018 2017 (Dollars in thousands) Amount % of total Amount % of total Amount % of total Amount % of total Amount % of total Real estate loans Multifamily residential$ 4,183,194 66.9 %$ 4,075,893 67.9 %$ 3,962,929 64.1 %$ 3,650,967 60.1 %$ 2,887,438 57.7 % Single family residential 1,859,524 29.8 % 1,700,119 28.3 % 1,993,484 32.3 % 2,231,802 36.7 % 1,957,546 39.2 % Commercial real estate 186,531 3.0 % 202,189 3.4 % 202,452 3.3 % 183,559 3.0 % 112,492 2.3 % Construction and land 18,094 0.3 % 22,241 0.4 % 20,665 0.3 % 12,756 0.2 % 41,215 0.8 % Total loans held for investment before deferred items 6,247,343 100.0 % 6,000,442 100.0 % 6,179,530 100.0 % 6,079,084 100.0 % 4,998,691 100.0 % Deferred loan costs, net 50,077 49,374 51,447 51,546 42,856 Total loans$ 6,297,420 $ 6,049,816 $ 6,230,977 $ 6,130,630 $ 5,041,547 The relative composition of the loan portfolio has not changed significantly over the past few years. Our primary focus remains multifamily real estate lending, which constitutes 67% and 68% of our portfolio atDecember 31, 2021 and 2020, respectively. Single family residential lending is our secondary lending emphasis and represents 30% and 28% of our portfolio atDecember 31, 2021 and 2020, respectively. The increase in the percentage of single family residential loans during the current year was augmented by the purchase of a$287.8 million pool of fixed-rate loans inFebruary 2021 . 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 551% and 575% as ofDecember 31, 2021 and 2020, respectively. Our single family loans as a percentage of risk-based capital were 246% and 242% as of the same dates. Additionally, our loans are geographically concentrated with borrowers and collateral properties on theWest Coast . AtDecember 31, 2021 , 63%, 26% and 9% of our real estate loans were collateralized by properties in southernCalifornia counties, northernCalifornia counties andWashington , respectively, compared to 62%, 26% and 10%, respectively, atDecember 31, 2020 . 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 have a small portfolio of construction loans with commitments (funded and unfunded) totaling$38.1 million and$34.7 million atDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , the average loan commitment for our single family construction product, which includes small tract housing and condominium projects, and multifamily residential construction loans was$5.1 million and$6.4 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$15.0 million or less. 40 -------------------------------------------------------------------------------- Table of Contents The following table presents the activity in our loan portfolio for the periods shown: For the Years Ended December 31, (Dollars in thousands) 2021 2020 2019 2018 2017 Loan Inflows: Multifamily residential$ 1,282,311 $ 904,588 $ 891,116 $ 1,119,617 $ 1,302,896 Single family residential 768,614 494,753 591,177 828,907 726,485 Commercial real estate 2,000 12,106 38,088 84,808 63,893 Construction and land 27,612 9,583 33,618 14,555 29,010
Mortgage banking originations - - - - 18,041 Purchases 287,751 20,380 10,052 - - Total loans originated and purchased 2,368,288 1,441,410 1,564,051 2,047,887 2,140,325 Loan Outflows: Loan principal reductions and payoffs (2,095,438) (1,640,597) (1,376,413) (956,578) (909,387) Portfolio loan sales (1,706) (825) (68,325) (19,603) (652,705) Mortgage banking loan sales - - - - (25,187) Other (1) (23,540) 18,851 (18,966) 17,377 10,109 Total loan outflows (2,120,684) (1,622,571) (1,463,704) (958,804) (1,577,170) Net change in total loan portfolio$ 247,604 $ (181,161)
(1) Other changes in loan balances primarily represent the net change in disbursements on unfunded commitments, deferred loan fees, fair value adjustments and, to the extent possible, may include foreclosures, write-offs , negative amortizations and capitalized interest as a result of COVID-19 Amendments.
Our loan portfolio increased$247.6 million during the year endedDecember 31, 2021 . The growth of our loan portfolio was primarily due to an increase of$659.5 million in new loan origination volume and a purchase of a$287.8 million pool of fixed-rate single family loans, partially offset by a$454.8 million increase in loan principal reductions and payoffs. Loan curtailments increased during the current year as compared to 2020 primarily as a result of refinancing activity. In early 2020, long-termTreasury rates, which are generally correlated to lending rates, declined significantly allowing borrowers the opportunity to lock in less expensive borrowing costs. Loan prepayment speeds were 27.4% and 22.4% during the years endedDecember 31, 2021 and 2020, respectively. During 2017, we closed a securitization transaction resulting in the sale of$626.1 million of multifamily loans. The primary purpose of this transaction was to enable us to redeploy capital and funding to support higher-yielding assets while also reducing our reliance on wholesale funding, improving liquidity measures and reducing our concentration of multifamily loans. In that same year, mortgage banking loan sales primarily consisted of 30-year fixed rate single family residential loans that were sold through our retail mortgage banking division, which was closed during the first quarter of 2017. 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. AtDecember 31, 2021 , our multifamily real estate portfolio had an average loan balance of$1.6 million , an average unit count of 14.0 units, a weighted average loan to value of 56.9% and a weighted average debt service coverage ratio of 1.5, as compared to an average loan balance of$1.6 million , an average unit count of 14.6 units, a weighted average loan to value of 56.6% and a weighted average debt service coverage ratio of 1.5 atDecember 31, 2020 . 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. 41 -------------------------------------------------------------------------------- Table of Contents 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. AtDecember 31, 2021 , our single family residential real estate portfolio had an average loan balance of$859 thousand , a weighted average loan to value of 62.5% and a weighted average credit score at origination/refreshed of 759. AtDecember 31, 2020 , our single family residential real estate portfolio had an average loan balance of$941 thousand , a weighted average loan to value of 63.9% and a weighted average credit score at origination/refreshed of 751. Compared to the prior year end, the declines in the average loan balance and weighted average loan to value, as well as the improvement in the weighted average credit score were due to the single family loan pool purchase inFebruary 2021 , discussed above. 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 commercial real estate loans are generally used to finance the purchase or refinance of established multi-tenant industrial, office and retail sites. AtDecember 31, 2021 , our commercial real estate portfolio had an average loan balance of$2.1 million , a weighted average loan to value of 54.2% and a weighted average debt service coverage ratio of 1.70, as compared to an average loan balance of$2.1 million , a weighted average loan to value of 55.1% and a weighted average debt service coverage ratio of 1.52 atDecember 31, 2020 . Lending in nonresidential commercial real estate has been intentionally limited since the start of the pandemic.
Construction and land. Other categories of loans included in our portfolio include construction loans and land. Construction loans include a single-family construction product, which includes small-lot housing and condominium projects, and multi-family construction projects.
The following table sets forth the contractual maturity distribution of our loan
portfolio:
Due after 5
Due in 1 year Due after 1 year years through 15 Due after 15
(Dollars in thousands) or less through 5 years years years Total
As of December 31, 2021 :
Loans
Real estate mortgage loans:
Multifamily residential $ 30 $ 2,225 $ 37,730 $ 4,143,209 $ 4,183,194
Single family residential 27 631 56,858 1,802,008 1,859,524
Commercial real estate - 11,403 175,128 - 186,531
Construction and land 10,648 7,446 - - 18,094
Total loans $ 10,705 $ 21,705 $ 269,716 $ 5,945,217 $ 6,247,343
Fixed interest rates $ - $ 201 $ 49,385 $ 240,337 $ 289,923
Floating or hybrid adjustable rates 10,705 21,504 220,331 5,704,880 5,957,420
Total loans $ 10,705 $ 21,705 $ 269,716 $ 5,945,217 $ 6,247,343
As of December 31, 2020 :
Loans
Real estate mortgage loans:
Multifamily residential $ 9 $ 6,336 $ 31,569 $ 4,037,979 $ 4,075,893
Single family residential 35 1,143 4,989 1,693,952 1,700,119
Commercial real estate - 4,451 195,945 1,793 202,189
Construction and land 19,030 3,211 - - 22,241
Total loans $ 19,074 $ 15,141 $ 232,503 $ 5,733,724 $ 6,000,442
Fixed interest rates $ - $ 11 $ 583 $ 24,263 $ 24,857
Floating or hybrid adjustable rates 19,074 15,130 231,920 5,709,461 5,975,585
Total loans $ 19,074 $ 15,141 $ 232,503 $ 5,733,724 $ 6,000,442
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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. As discussed above, the increase in fixed rate loans atDecember 31, 2021 compared to the prior year was due to our purchase of a pool of fixed rate single family loans inFebruary 2021 . 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 ofDecember 31, 2021 and 2020,$4.8 billion and$4.3 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 3.75% and 4.03% atDecember 31, 2021 and 2020, respectively. Hybrid adjustable rate loans still within their initial fixed term totaled$5.1 billion and$5.3 billion atDecember 31, 2021 and 2020, respectively. These loans had a weighted average term to first repricing date of 3.6 years and 3.3 years atDecember 31, 2021 and 2020, 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 facilitate the
early detection and remediation of problems within our loan portfolio. Assigned
risk ratings, as well as the evaluation of other credit metrics, are an integral
part of management assessing the adequacy of our allowance for loan losses. 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.
Troubled debt restructurings. Loans for which the terms have been modified
resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered TDRs. Concessions could include reductions of
interest rates, extension of the maturity date at a rate lower than the current
market rate for a new loan with similar risk, reduction of accrued interest,
principal forgiveness, forbearance, or other material modifications. The
assessment of whether a borrower is experiencing or will likely experience
financial difficulty and whether a concession has been granted is highly
subjective in nature, and management's judgment is required when determining
whether a modification is classified as a TDR.
In conjunction with the passage of the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act"), as well as the revised interagency guidance issued
in April 2020 , "Interagency Statement on Loan Modifications and Reporting for
Financial Institutions Working With Customers Affected by the Coronavirus
(Revised)", banks were provided the option, for loans meeting specific criteria,
to temporarily suspend certain requirements under GAAP related to TDRs for a
limited time to account for the effects of COVID-19. As a result, the Company
did not recognize eligible COVID-19 loan modifications as TDRs. Additionally,
loans qualifying for these modifications were not required to be reported as
delinquent, nonaccrual, impaired or criticized solely as a result of a COVID-19
loan modification. Since June 2021 , all loans modified for pandemic related
payment deferral had returned to scheduled payments or paid off in full.
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Table of Contents The following table provides details of our nonperforming and restructured assets as of the dates presented and certain other related information:
As of December 31, (Dollars in thousands) 2021 2020 2019 2018 2017 Non-accrual loans Multifamily residential portfolio$ 505 $ 522 $ 541 $ 564 $ 2,250 Single family residential portfolio 1,788 5,791 5,792 1,448 4,016 Commercial real estate - - - - 656 Construction and land - - - - - Total non-accrual loans 2,293 6,313 6,333 2,012 6,922 Real estate owned - - - - - Total nonperforming assets$ 2,293 $ 6,313 $ 6,333 $ 2,012 $ 6,922 Performing troubled debt restructurings$ 1,204 $ 1,260 $ 1,305 $ 4,434 $ 4,857 Allowance for loan losses to period end nonperforming loans 1549.72 % 732.04 % 568.47 % 1705.47 % 437.91 % Nonperforming loans to period end loans 0.04 % 0.10 % 0.10 % 0.03 % 0.14 % Nonperforming assets to total assets 0.03 % 0.09 % 0.09 % 0.03 % 0.12 % Nonperforming loans plus performing TDRs to total loans 0.06 % 0.13 % 0.12 % 0.11 % 0.23 % 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. For the years endedDecember 31, 2021 and 2020,$125 thousand and$122 thousand , respectively, in interest income was recognized on non-accrual loans subsequent to their classification as non-accrual. For the years endedDecember 31, 2021 and 2020, the Company recorded$94 thousand and$57 thousand , respectively, of interest income related to performing TDR loans. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with their original terms was$15 thousand and$169 thousand for the years endedDecember 31, 2021 and 2020, respectively. Potential Problem Loans. We utilize a risk grading system for our loans to aid us in evaluating the overall credit quality of our real estate loan portfolio and assessing the adequacy of our allowance for loan losses. All loans are categorized into a risk category at the time of origination, re-evaluated at least annually for proper classification in conjunction with our review of property and borrower financial information and re-evaluated for proper risk grading as new information such as payment patterns, collateral condition and other relevant information comes to our attention. We use the following industry accepted definitions for risk ratings. •Pass: Assets 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 loan is still valid and all payments have essentially been made as planned.
• One to Watch: The assets are expected to experience an event within the next 90-120 days that will cause the risk rating to change, with the change being either favorable or unfavourable. These assets require increased 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 our credit position
at some future date. Special mention assets are not adversely classified and do
not expose us 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 we will sustain some loss, either directly or indirectly (i.e.,
the cost of monitoring), if the deficiencies are not corrected. 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.
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•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 its
continuance as an asset, 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 achieved in the future.
The banking industry defines loans graded Special Mention or higher risk as
''criticized'' and loans graded Substandard or greater risk as ''classified''
loans. The following table shows our level of criticized and classified loans as
of the periods indicated:
Special
(Dollars in thousands) Mention Substandard Doubtful Loss Total Criticized Total Classified
As of December 31, 2021 :
Multifamily residential $ 4,586 $ 10,320 $ - $ - $ 14,906 $ 10,320
Single family residential - 1,788 - - 1,788 1,788
Commercial real estate - - - - - -
Construction and land - - - - - -
Total $ 4,586 $ 12,108 $
-$-$16,694
Loans classified as end-of-period loans
0.19 % As ofDecember 31, 2020 : Multifamily residential$ 19,547 $ 20,204 $ - $ - $ 39,751$ 20,204 Single family residential 7,132 6,547 - - 13,679 6,547 Commercial real estate 3,599 - - - 3,599 - Construction and land - - - - - - Total$ 30,278 $ 26,751 $
-$-$57,029
Loans classified as end-of-period loans
0.44 % As ofDecember 31, 2019 : Multifamily residential$ 19,708 $ 1,700 $ - $ - $ 21,408 $ 1,700 Single family residential 13,635 8,808 1,600 - 24,043 10,408 Commercial real estate - - - - - - Construction and land - - - - - - Total$ 33,343 $ 10,508 $
$1,600 – $45,451
Loans classified as end-of-period loans
0.20 % As ofDecember 31, 2018 : Multifamily residential$ 2,631 $ 1,937 $ - $ - $ 4,568 $ 1,937 Single family residential 380 5,532 - - 5,912 5,532 Commercial real estate 1,489 - - - 1,489 - Construction and land 2,537 - - - 2,537 - Total$ 7,037 $ 7,469 $
– $ – $ $14,506 $7,469 Loans classified as period-end loans
0.12 % As ofDecember 31, 2017 : Multifamily residential$ 6,621 $ 7,799 $ - $ - $ 14,420 $ 7,799 Single family residential 9,106 4,276 - - 13,382 4,276 Commercial real estate - 1,638 - - 1,638 1,638 Construction and land - - - - - - Total$ 15,727 $ 13,713 $
-$-$29,440
Loans classified as end-of-period loans
0.27 %
Potential problem loans represent loans that are currently performing but for which there is known information
45 -------------------------------------------------------------------------------- Table of Contents us about possible credit problems that may result in disclosure of such loans as nonperforming at some time in the future. We define ''potential problem loans'' as loans with a risk rating of ''Substandard'', ''Doubtful'' or ''Loss'' that are not included in the amounts of non-accrual or restructured loans. As we cannot predict all circumstances that may cause our borrowers to default, there can be no assurance that these loans will not be placed on non-accrual status or become restructured. AtDecember 31, 2021 and 2020, we have identified potential problem loans totaling$9.8 million and$20.4 million , respectively, that were all classified as ''Substandard''. Allowance for loan losses. Our allowance for loan losses is maintained at a level management believes is adequate to account for probable incurred credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk. That evaluation gives consideration to the nature of the loan portfolio, historical loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower's ability to repay, current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews of the loan portfolio. This process involves a considerable degree of judgment and subjectivity. 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. Our allowance is established through charges to the provision for loan losses. Loans, or portions of loans, deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to our allowance for loan losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends. As of December 31, 2021 2020 2019 2018 2017 Allowance for % of Loans in
Provision for % of Loans in Provision for % of Loans in Provision for % of Loans in Provision for % of Loans in (in thousands of dollars) Loan Losses Each Category Loan Losses Each Category Loan Losses Each Category Loan Losses Each Category Loan losses
Each Category Multifamily residential$ 26,043 66.9 %$ 33,259 67.9 %$ 23,372 64.1 %$ 21,326 60.1 %$ 18,588 57.7 % Single family residential 7,224 29.8 % 9,372 28.3 % 10,076 32.3 % 10,125 36.7 % 9,044 39.2 % Commercial real estate 2,094 3.0 % 3,347 3.4 % 2,341 3.3 % 2,441 3.0 % 1,734 2.3 % Construction and land 174 0.3 % 236 0.4 % 212 0.3 % 422 0.2 % 946 0.8 % Total$ 35,535 100.0 %$ 46,214 100.0 %$ 36,001 100.0 %$ 34,314 100.0 %$ 30,312 100.0 % 46
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The following table provides information on the activity within the allowance
for loan losses as of and for the periods indicated:
Years Ended December 31,
(Dollars in thousands) 2021 2020 2019 2018 2017
Loans held-for-investment $ 6,297,420 $ 6,049,816
Allowance for loan losses at the beginning of the period
$ 46,214 $ 36,001
Dump :
Single family residential - (722) - - (5)
Recoveries:
Multifamily residential - - - - -
Single family residential 64 85 12 12 12
Commercial real estate - - - 90 -
Construction and land 57 300 425 300 379
Total recoveries 121 385 437 402 391
Net recoveries (charge-offs) 121 (337) 437 402 386
(Reversal of) provision for loan losses (10,800) 10,550 1,250 3,600 (3,372)
Allowance for loan losses at end of period
Provision for loan losses on loans at the end of the period held for investment
0.56 % 0.76 % 0.58 % 0.56 % 0.60 %
(Recoveries) net annualized write-offs on average loans:
Multifamily residential 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Single family residential (0.00) % 0.03 % (0.00) % (0.00) % (0.00) %
Commercial real estate - % - % - % (0.06) % 0.00 %
Construction and land (0.30) % (1.49) % (2.67) % (1.11) % (0.83) %
Annualized total net (recoveries)
charge-offs total to average loans (0.00) % 0.01 % (0.01) % (0.01) % (0.01) %
Investment Portfolio
Our investment portfolio is generally comprised of government agency securities
which are high-quality liquid investments under Basel III. The portfolio is
primarily maintained to serve as a contingent, on-balance sheet source of
liquidity and as such, is kept unencumbered. 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.
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The following table presents the book value of our investment portfolio as of
the dates indicated:
As of December 31,
2021 2020
(Dollars in thousands) Book Value % of Total Book Value % of Total
Available for sale debt securities:
Government and Government Sponsored Entities:
Residential mortgage backed securities
("MBS") and collateralized mortgage
obligations ("CMOs") $ 200,133 30.19 % $ 216,724 35.34 %
Commercial MBS and CMOs 407,746 61.52 % 361,988 59.03 %
Agency bonds 10,831 1.63 % 15,022 2.45 %
Other asset backed securities ("ABS") 28,607 4.32 % - - %
Total available for sale debt securities 647,317 97.66 % 593,734 96.82 %
Held to maturity:
Government Sponsored Entities:
Residential MBS 3,761 0.57 % 7,391 1.21 %
Other investments 68 0.01 % 76 0.01 %
Total held to maturity debt securities 3,829 0.58 % 7,467 1.22 %
Equity securities 11,693 1.76 % 12,037 1.96 %
Total investment securities $ 662,839 100.00 % $ 613,238 100.00 %
The following table presents the book value of our investment portfolio by their
stated maturities, as well as the weighted average yields for each maturity
range at December 31, 2021 . The weighted average yield on investments is
calculated based on the net interest earnings during the year divided by the
average investment balance throughout the year.
Due after one year through five Due after five years through
Due in one year or less years ten years Due after ten years Equity securities Total
Weighted Weighted Weighted Weighted Weighted Weighted
(Dollars in thousands) Book Value average yield Book Value average yield Book Value average yield Book Value average yield Book Value average yield Book Value average yield
Available for sale:
Government and Government Sponsored Entities:
Residential MBS and CMOs $ - - % $ 21 1.59 % $ 69 2.69 % $ 200,043 1.27 % $ - - % $ 200,133 1.27 %
Commercial MBS and CMOs - - % 25,973 0.78 % 96,996 0.57 % 284,777 1.24 % - - % 407,746 1.05 %
Agency bonds - - % - - % 7,715 0.76 % 3,116 0.76 % - - % 10,831 0.76 %
Other ABS - - % - - % - - % 28,607 0.72 % - - % 28,607 0.72 %
Held to maturity:
Government Sponsored Entities:
Residential MBS - - % - - % - % 3,761 3.12 % - - % 3,761 3.12 %
Other investments - - % - - % 68 3.88 % - - % - - % 68 3.88 %
Equity Securities - - % - - % - - % - - % 11,693 1.15 % 11,693 1.15 %
Total $ - - % $ 25,994 0.78 % $ 104,848 0.59 % $ 520,304 1.23 % $ 11,693 1.15 % $ 662,839 1.11 %
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The following table shows the fair value of our securities:
Gross Gross
Unrealized Unrealized
(Dollars in thousands) Amortized Cost Gains Losses Fair Value
As of December 31, 2021 :
Available for sale:
Government and Government Sponsored
Entities:
Residential MBS and CMOs $ 200,775 $ 1,225 $ (1,867) $ 200,133
Commercial MBS and CMOs 407,111 3,281 (2,646) 407,746
Agency bonds 10,587 244 - 10,831
Other ABS 28,720 37 (150) 28,607
Total available for sale 647,193 4,787 (4,663) 647,317
Held to maturity:
Government Sponsored Entities:
Residential MBS 3,761 189 - 3,950
Other investments 68 - - 68
Total held to maturity 3,829 189 - 4,018
Equity securities 11,693 - - 11,693
Total investment securities $ 662,715 $ 4,976 $ (4,663) $ 663,028
As of December 31, 2020 :
Available for sale:
Government and Government Sponsored
Entities:
Residential MBS and CMOs $ 213,279 $ 3,459 $ (14) $ 216,724
Commercial MBS and CMOs 355,963 6,337 (312) 361,988
Agency bonds 14,998 69 (45) 15,022
Total available for sale 584,240 9,865 (371) 593,734
Held to maturity:
Government Sponsored Entities:
Residential MBS 7,391 403 - 7,794
Other investments 76 - - 76
Total held to maturity 7,467 403 - 7,870
Equity securities 12,037 - - 12,037
Total investment securities $ 603,744 $
10,268
The unrealized losses on securities are attributed to interest rate changes rather than the marketability of the securities or the issuer's ability to honor redemption of the obligations, as the securities with losses are primarily obligations of or guaranteed by agencies sponsored by theU.S. government. We have adequate liquidity with the ability and intent to hold these securities to maturity resulting in full recovery of the indicated impairment. Accordingly, none of the unrealized losses on these securities have been determined to be other than temporary.
AT
Deposits
Representing 85.1% of our total liabilities as ofDecember 31, 2021 , deposits are our primary source of funding for our business operations. We have historically maintained and grown our deposit customer base in various rate environments based on our strong customer relationships, evidenced in part by increased deposits over recent years, as well as our reputation as a safe, sound, secure and "well-capitalized" institution and our commitment to excellent customer service. We are focused on growing our 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 and transaction accounts. When competitively priced and/or for asset liability management purposes, we will supplement our deposits with wholesale deposits. 49 -------------------------------------------------------------------------------- Table of Contents Total deposits increased by$273.9 million , or 5.2%, to$5.5 billion atDecember 31, 2021 from$5.3 billion atDecember 31, 2020 . Retail deposits increased$298.1 million , while brokered deposits declined by$24.2 million . The increase in retail deposits was primarily related to growth within our specialty deposits, while the decrease in brokered deposits was a purposeful decision by the Company to allow wholesale deposits to expire to reduce excess, low yielding cash from the balance sheet that was partially the result of the expansion in our retail deposits. During the year, the proportion of non-maturity deposits within the portfolio increased to 57.8% compared to 41.9% atDecember 31, 2020 , while our portfolio of time deposits decreased to 42.2% from 58.1%, respectively. The change in the composition of our deposit portfolio was attributed to a combination of consumer preferences to maintain flexibility in low interest rate environments, as well as our strategic goal of increasing transaction accounts. We consider approximately 74.6% of our retail deposits atDecember 31, 2021 to be core deposits based on our internal methodology, which gives consideration to the tenure of customer relationships, product penetration and the relative cost of the deposit accounts. Our loan to deposit ratio was 114% and 115% atDecember 31, 2021 and 2020, 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 table summarizes the composition of our deposits by average deposits and average rates paid for the years indicated:
December 31, 2021 December 31, 2020
Weighted average Percent of Weighted average Percent of
(Dollars in thousands) Average amount rate paid total deposits Average amount rate paid total deposits
Noninterest-bearing deposit accounts $ 112,436 - % 2.1 % $ 69,208 - % 1.3 %
Interest-bearing transaction accounts 158,956 0.22 % 2.9 % 178,655 0.48 % 3.4 %
Money market demand accounts 2,427,599 0.48 % 44.5 % 1,652,109 0.88 % 31.2 %
Time deposits 2,750,461 0.84 % 50.5 % 3,390,992 1.67 % 64.1 %
Total $ 5,449,452 0.64 % 100.0 % $ 5,290,964 1.36 % 100.0 %
The following table shows the maturity of term deposits at
(Dollars in thousands, except for column headings) Insured Uninsured Remaining maturity: Three months or less$ 520,585 $ 178,145 Over three through six months 416,749
81,665
Over six through twelve months 777,727 180,961 Over twelve months 149,411 29,898 Total$ 1,864,472 $ 470,669 Percent of total deposits 33.67 % 8.50 % The Company estimated its balance of uninsured deposits at approximately$1.4 billion at bothDecember 31, 2021 and 2020. At the same dates, the Company had$25.8 million and$50.0 million of wholesale deposits, respectively.
FHLB advances and other borrowings
In addition to deposits, we utilize collateralized FHLB borrowings to fund our asset growth. 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. Total FHLB advances decreased$55.1 million , or 6.8%, to$751.6 million atDecember 31, 2021 compared to$806.7 million atDecember 31, 2020 . The decrease in FHLB advances outstanding atDecember 31, 2021 as compared to the prior year, was due to maturing advances not being replaced during the current year. As of bothDecember 31, 2021 and 2020, the Bank had a FHLB letter of credit outstanding totaling$62.6 million . 50 -------------------------------------------------------------------------------- Table of Contents 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$15 billion . In accordance with GAAP, the Trusts are not consolidated in our consolidated statements of financial condition but rather, the common securities are included in our other assets and the junior subordinated debentures ("Notes") issued to the Trusts are shown as a liability. The following table is a summary of our outstandingTrust Securities and related Notes as of the dates indicated: December 31, 2021 December 31, 2020 Date Maturity Rate Index Issuer Amount Rate Amount Rate Issued Date (Quarterly Reset) (Dollars in thousands) Luther Burbank Statutory Trust I$ 41,238 1.58 %$ 41,238 1.60 % 3/1/2006 6/15/2036 3 month LIBOR + 1.38% Luther Burbank Statutory Trust II$ 20,619 1.82 %$ 20,619 1.84 % 3/1/2007 6/15/2037 3 month LIBOR + 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 Note. During any such extension period, distributions on theTrust 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 theTrust Securities ; (ii) the redemption price with respect to anyTrust 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 onSeptember 30, 2024 . The senior debt is redeemable at any time prior toAugust 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 afterSeptember 1, 2024 , the senior debt may be redeemed at 100% of the principal amount plus accrued and unpaid interest. 51
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The following table presents information concerning our FHLB advances and other borrowings on the dates or for the periods indicated:
As of and for the Years Ended December 31, (Dollars in thousands) 2021 2020 FHLB advances Average amount outstanding during the period $ 868,591$ 965,490
Maximum amount remaining due at any end of the month during the period
1,048,647 1,040,199 Balance outstanding at end of period 751,647 806,747 Weighted average maturity (in years) 2.3 1.7 Weighted average interest rate at end of period 1.68 % 2.07 % Weighted average interest rate during the period 1.67 % 2.25 %
Subordinated carry-forward debentures Outstanding balance at end of period
$ 61,857 $ 61,857
Weighted average maturity (in years) 15.0 16.0
Weighted average interest rate at end of period 1.66 % 1.68 %
Weighted average interest rate during the period 1.64 % 2.22 %
Senior unsecured term notes
Balance outstanding at end of period $ 94,662 $ 94,539
Weighted average maturity (in years) 2.7 3.8
Weighted average interest rate at end of period 6.66 % 6.67 %
Weighted average interest rate during the period 6.66 % 6.67 %
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.
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 Years Ended December 31,
(Dollars in thousands) 2021 2020
Outstanding at period end $ - $ -
Average amount outstanding 110,837 6,724
Maximum amount outstanding at any month end 346,900 63,000
Weighted average interest rate:
During period 0.14 % 1.43 % End of period - % - % Stockholders' Equity Stockholders' equity totaled$669.1 million and$613.7 million atDecember 31, 2021 and 2020, respectively. The increase in stockholders' equity was primarily related to net income of$87.8 million , partially offset by dividends paid of$18.5 million , stock repurchases of$8.8 million and a decline in the fair value of available for sale investment securities, net of tax, of$6.6 million during the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , the Company repurchased 761,844 of its shares in connection with its stock repurchase program at an average price of$11.61 per share, or a 9.9% discount to tangible book value atDecember 31, 2021 , and a total cost of$8.8 million . As ofDecember 31, 2021 , there were$9.7 million of authorized funds remaining under the current share repurchase program. 52 -------------------------------------------------------------------------------- Table of Contents 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. December 31, (Dollars in thousands) 2021 2020
Financing commitments for loans and lines of credit
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$727 thousand and$959 thousand atDecember 31, 2021 and 2020, respectively, which is included in other liabilities and accrued expenses in the consolidated statements of financial condition. The Company entered into two new two-year swap agreements, with an aggregate notional amount of$650 million during the year endedDecember 31, 2021 . 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. The weighted average fixed pay interest rate on the new swaps is 0.16%. 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. We guarantee distributions and payments for redemption or liquidation of theTrust 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 subordinated debentures held by the Trusts. The junior subordinated debentures currently qualify as Tier 1 capital under theFederal Reserve capital adequacy guidelines. With the exception of our obligations in connection with itsTrust 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 ofDecember 31, 2021 , our significant contractual obligations to third parties on debt and lease agreements and service obligations. For more information about our contractual obligations, see Part II, Item 8. "Financial Statements and Supplementary Data", Note 19. ''Commitments and Contingencies,'' in the notes to our consolidated financial statements. 53
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Payments Due by Period
More than 5
(Dollars in thousands) Less than 1 Year 1 to 3 Years 3 to 5 Years Years Total
Contractual Cash Obligations
Time deposits (1) $ 2,155,832 $ 127,815 $ 51,494 $ - $ 2,335,141
FHLB advances (1) 100,000 450,000 201,500 147 751,647
Senior debt (1) - 95,000 - - 95,000
Junior subordinated debentures (1) - - - 61,857 61,857
Operating leases 3,962 4,472 2,322 1,148 11,904
Significant contract (2) 1,744 3,488 2,367 - 7,599
Total $ 2,261,538 $
680 775
(1) Amounts exclude interest (2) We have a large long-term contract for core processing services expiring
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
Cash 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 or
exposure to 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, 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. Less commonly used sources of
funding include borrowings from the FRB discount window, draws on established
federal funds lines from unaffiliated commercial banks and the issuance of debt
or equity securities. We believe we have ample liquidity resources to fund
future growth and meet other cash needs as necessary.
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Our total deposits at December 31, 2021 and 2020 were $5.5 billion and $5.3
billion , respectively. Based on the values of loans pledged as collateral, our
$751.6 million of FHLB advances outstanding and our $62.6 million FHLB letter of
credit outstanding, we had $963.5 million of additional borrowing capacity with
the FHLB at December 31, 2021 . Based on the values of other loans pledged as
collateral, we had $211.3 million of borrowing capacity with the FRB at
December 31, 2021 . There were no outstanding advances with the FRB at
December 31, 2021 . In addition to the liquidity provided by the FHLB and FRB
described above, we have established federal funds lines of credit with
unaffiliated banks totaling $50.0 million at December 31, 2021 , none of which
were advanced at 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 $138.4 million at December 31, 2021 .
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 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 ofDecember 31, 2021 and 2020, 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 theFDIC's prompt corrective action regulations. AtDecember 31, 2021 , the capital conservation buffer was 2.50%. 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 impacted by the composition of our assets. 55 -------------------------------------------------------------------------------- Table of Contents The following table presents our regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required byFDIC regulations to maintain ''well-capitalized'' status: Minimum Required For Capital Adequacy Plus Capital Conservation For Well- Capitalized Actual Purposes Buffer Institution (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount RatioLuther Burbank Corporation As ofDecember 31, 2021 Tier 1 Leverage Ratio$ 727,606 10.12 %$ 287,509 4.00 % N/A N/A N/A N/A Common Equity Tier 1 Risk-Based Ratio 665,749 17.09 % 175,296 4.50 %$ 272,683 7.00 %
N/AN/A Tier 1 risk-based capital ratio 727,606 18.68% 233,728 6.00%
331,115 8.50 % N/A N/A Total Risk-Based Capital Ratio 764,048 19.61 % 311,638 8.00 % 409,025 10.50 % N/A N/A As ofDecember 31, 2020 Tier 1 Leverage Ratio$ 665,514 9.45 %$ 281,564 4.00 % N/A N/A N/A N/A Common Equity Tier 1 Risk-Based Ratio 603,657 15.75 % 172,420 4.50 %$ 268,209 7.00 %
N/AN/A Tier risk-based capital ratio 1,665,514 17.37% 229,893 6.00%
325,682 8.50 % N/A N/A Total Risk-Based Capital Ratio 712,837 18.60 % 306,524 8.00 % 402,313 10.50 % N/A N/ALuther Burbank Savings As ofDecember 31, 2021 Tier 1 Leverage Ratio$ 799,457 11.13 %$ 287,407 4.00 % N/A N/A$ 359,259 5.00 % Common Equity Tier 1 Risk-Based Ratio 799,457 20.54 % 175,190 4.50 %$ 272,518 7.00 %
253,052 6.50% Tier risk-based capital ratio 1,799,457 20.54% 233,587 6.00%
330,915 8.50 % 311,449 8.00 % Total Risk-Based Capital Ratio 835,899 21.47 % 311,449 8.00 % 408,777 10.50 % 389,311 10.00 % As ofDecember 31, 2020 Tier 1 Leverage Ratio$ 729,054 10.36 %$ 281,453 4.00 % N/A N/A$ 351,816 5.00 % Common Equity Tier 1 Risk-Based Ratio 729,054 19.04 % 172,340 4.50 %$ 268,085 7.00 %
248,936 6.50% Tier risk-based capital ratio 1,729,054 19.04% 229,787 6.00%
325,532 8.50 %
306,383 8.00% Total risk-based capital ratio 776,377 20.27% 306,383 8.00%
402,128 10.50 %
382,979 10.00%
Impact of inflation and price changes
Our 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.
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