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 ended December 31, 2021, as compared to our results of operations for the year ended December 31, 2020, and our financial condition at December 31, 2021as compared to our financial condition at December 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 in Santa Rosa, California, and the parent company of Luther Burbank Savings, a California-chartered commercial bank headquartered in Gardena, Californiawith $7.2 billionin assets at December 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 the West 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 ended
December 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 on December 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 with
SECrules, 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 in the United Statesin 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 ended December 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 and Californiaincome 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. Beginning January 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 ended December 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 $ 56,544Net 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
34.32 % 52.38 % 46.86 % 48.51 % 47.76 % Pro Forma Efficiency Ratio (1) Noninterest expense
$ 73,934Less: Non-recurring noninterest expense item, before income taxes (10,443) Pro forma noninterest expense (numerator) $ 63,491Operating revenue (denominator) $ 141,143Pro forma efficiency ratio 44.98 % Pro Forma Net Income (1) Net income $ 39,912Add: Non-recurring noninterest expense item, net income taxes 7,352 Pro forma net income $ 47,264Actual/Pro Forma Net Income (2) Income before provision for income taxes $ 124,000 $ 56,659 $ 69,464 $ 62,931 $ 65,231Actual/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 $ 37,834Actual/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 $ 425,698Actual/pro forma return on average stockholders' equity 13.64 % 6.53 % 8.15 % 7.96 % 8.89 % 32
(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 $ 5,704,380Less: 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 ended
December 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 millionof long-term FHLB advances in December 2020. (2) For the year ended December 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 and Californiaincome 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. Beginning January 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 ended December 31, 2017to reflect a 200-for-1 stock split effective April 27, 2017.
Key Factors Affecting Our Business
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 the
Federal Reserve'sactions 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 the Federal Reserve'sactions. 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.
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.
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.
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 33 -------------------------------------------------------------------------------- Table of Contents interest margin as we operate in this competitive environment.
Our business and financial performance are affected by economic conditions generally in
the United Statesand more directly in the markets of California, Washingtonand Oregonwhere 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 of
December 1, 2017, in connection with our IPO. Prior to this date, we elected to be taxed for U.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 for U.S.federal income tax in our financial statements. While we were not subject to and did not pay U.S.federal income tax, we were subject to, and paid, CaliforniaS-Corporation income tax at a rate of 3.50%. Upon the termination of our status as an S-Corporation on December 1, 2017, we commenced paying U.S.federal income tax and a higher Californiaincome tax on our taxable earnings and our financial statements reflect a provision for both U.S.federal income tax and Californiaincome 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 for U.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 for U.S.federal income tax, currently at 21.00%, and a Californiaincome 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 individual U.S.federal and Californiaincome 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' estimated U.S.federal and Californiaincome 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 on December 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 in
December 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 the SECand 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.
Beginning in early 2020 and continuing through
December 2021, the COVID-19 pandemic caused a disruption to almost every aspect of the economy. As a result, in March 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 millionand $8.4 millionas of December 31, 2021and 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 by June 2021. Additionally, total criticized loans have declined to $16.7 millionat December 31, 2021, as compared to $57.0 millionat December 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 ended December 2021and 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, at December 31, 2021.
Results of operations – Years ended
For the year ended
December 31, 2021our net income was $87.8 millionas compared to $39.9 millionfor the year ended December 31, 2020. The increase of $47.8 million, or 119.9%, was primarily attributable to an increase of $31.8 millionin net interest income, a $21.4 milliondecrease in the provision for loan losses, and a $14.8 milliondecrease in noninterest expense, partially offset by an increase of $19.5 millionin 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 ended December 31, 2021as compared to the prior year. Excluding the impact of a $10.4 millionnon-recurring cost incurred in connection with the prepayment of $150.0 millionof long-term fixed rate FHLB borrowings in December 2020, pre-tax, pre-provision net income would have increased $35.5 million, or 45.8%, for the year ended December 31, 2021as compared to the prior year.
Net interest income
Net interest income totaled
$170.5 millionfor the year ended December 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 milliondecrease 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 millionand 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 millionincrease in the average balance of multifamily loans. Net interest margin for the year ended December 31, 2021was 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 ended December 31, 2021was 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 ended December 31, 2021, 2020 and 2019. The average balances are daily averages. 35
Table of Contents 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 $ 155,5093.70 % $ 4,063,607 $ 155,1043.82 % $ 3,870,897 $ 162,3284.19 % 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 $ 7,066,547Interest-Bearing Liabilities Transaction accounts $ 158,956358 0.22 % $ 178,655876 0.48 % $ 210,7432,686 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 $ 7,066,547Net interest spread (3) 2.30 % 1.83 % 1.66 % Net interest income/margin (4) $ 170,4592.40 % $ 138,6231.97 % $ 128,4071.84 % (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 millionand $14.6 millionfor 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. 36
Table of Contents 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) $ 405Single 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 $ 31,836For 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 $ 10,216Total interest income decreased by $13.5 million, or 5.6%, for the year ended December 31, 2021as compared to the prior year. Interest income on loans decreased $11.8 millionto $219.2 millionfor the year ended December 31, 2021from $231.0 millionfor 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 millionincrease in accelerated loan cost amortization on 37 -------------------------------------------------------------------------------- Table of Contents prepaid loans, partially offset by a $136.0 millionincrease in the average balance of multifamily residential loans and a $3.2 milliondecline in the cost of our interest rate swaps as compared to the prior year. Additionally, interest income on investments decreased by $1.4 millionprimarily 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 millioncompared to a decrease of $181.2 millionduring the year ended December 31, 2020. The volume of new loans originated totaled $2.4 billionand $1.4 billionfor the years ended December 31, 2021and 2020, respectively. Volume for the current year includes the purchase of a $287.8 millionpool of fixed rate single family loans in February 2021. The weighted average rate on new loans for the year ended December 31, 2021was 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 billionand $1.6 billionfor the years ended December 31, 2021and 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, 2021was 3.93% as compared to 4.15% for the prior year. Total interest expense decreased $45.3 millionto $57.5 millionfor the year ended December 31, 2021from $102.8 millionfor the prior year. Interest expense on deposits decreased $37.7 millionto $35.6 millionfor the year ended December 31, 2021from $73.3 millionfor 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, 2021compared to 41.9% at December 31, 2020. Interest expense on advances from the FHLB decreased by $7.2 millionduring the year ended December 31, 2021as compared to the prior year. This decrease was due to a decline in the average balance and cost of FHLB advances of $96.9 millionand 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 ended
December 31, 2021, we reversed provisions for loan losses totaling $10.8 million, compared to recording provisions for loan losses of $10.6 millionfor the year ended December 31, 2020. The recaptured loan loss provisions during the current year primarily related to the reversal of reserves initially established during the year ended December 31, 2020for 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 millionin qualitative reserves attributed to the pandemic. Nonperforming loans totaled $2.3 millionand $6.3 million, or 0.04% and 0.10% of total loans, at December 31, 2021and 2020, respectively. During the year ended December 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 of June 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% at December 31, 2021as compared to 0.76% at December 31, 2020.
Noninterest income decreased by
$634 thousandto $1.9 millionfor the year ended December 31, 2021from $2.5 millionfor the year ended December 31, 2020. The following table presents the major components of our noninterest income: 38
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 ended December 31, 2021compared to the year ended December 31, 2020was primarily due to a $344 thousanddecline in market value on equity securities recorded during the current year compared to an increase in market value of $255 thousandrecorded during the prior year. This decrease was partially offset by a $188 thousandincrease in fee income due to additional deposit account fees earned primarily related our specialty deposit accounts.
Noninterest expense decreased
$14.8 million, or 20.0%, to $59.1 millionfor the year ended December 31, 2021from $73.9 millionfor 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 ended December 31, 2021as compared to the prior year was primarily attributable to a non-recurring $10.4 millionprepayment fee incurred in connection with the prepayment of $150.0 millionof FHLB borrowings in December 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 milliondecline 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 ended December 31, 2021compared 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 ended December 31, 2020.
income tax expense
For the years ended
December 31, 2021and 2020, we recorded income tax expense of $36.2 millionand $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 milliondecrease in cash as compared to December 31, 2020. Total liabilities were $6.5 billionat December 31, 2021, an increase of $218.4 million, or 3.5%, from December 31, 2020. The increase in total liabilities was primarily attributable to growth in our deposits of $273.9 millioncompared 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 of
December 31, 2021and 2020, our total loans amounted to $6.3 billionand $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 $ 4,183,19466.9 % $ 4,075,89367.9 % $ 3,962,92964.1 % $ 3,650,96760.1 % $ 2,887,43857.7 % 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 $ 5,041,547The 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 at December 31, 2021and 2020, respectively. Single family residential lending is our secondary lending emphasis and represents 30% and 28% of our portfolio at December 31, 2021and 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 millionpool of fixed-rate loans in February 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 of December 31, 2021and 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 the West Coast. At December 31, 2021, 63%, 26% and 9% of our real estate loans were collateralized by properties in southern Californiacounties, northern Californiacounties and Washington, respectively, compared to 62%, 26% and 10%, respectively, at December 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 millionand $34.7 millionat December 31, 2021and 2020, respectively. As of December 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 millionand $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 millionor less and multifamily projects with loan commitments of $15.0 millionor 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 $ 1,302,896Single 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 millionduring the year ended December 31, 2021. The growth of our loan portfolio was primarily due to an increase of $659.5 millionin new loan origination volume and a purchase of a $287.8 millionpool of fixed-rate single family loans, partially offset by a $454.8 millionincrease 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-term Treasuryrates, 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 ended December 31, 2021and 2020, respectively. During 2017, we closed a securitization transaction resulting in the sale of $626.1 millionof 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. At December 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 at December 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. At December 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. At December 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 in February 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. At December 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 at December 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 $ 4,183,194Single 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 $ 6,247,343Fixed interest rates $ - $ 201 $ 49,385 $ 240,337 $ 289,923Floating 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 $ 6,247,343As of December 31, 2020: Loans Real estate mortgage loans: Multifamily residential $ 9 $ 6,336 $ 31,569 $ 4,037,979 $ 4,075,893Single 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 $ 6,000,442Fixed interest rates $ - $ 11 $ 583 $ 24,263 $ 24,857Floating 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 $ 6,000,44242
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 at
December 31, 2021compared to the prior year was due to our purchase of a pool of fixed rate single family loans in February 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 of December 31, 2021and 2020, $4.8 billionand $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% at December 31, 2021and 2020, respectively. Hybrid adjustable rate loans still within their initial fixed term totaled $5.1 billionand $5.3 billionat December 31, 2021and 2020, respectively. These loans had a weighted average term to first repricing date of 3.6 years and 3.3 years at December 31, 2021and 2020, respectively.
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. 43
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 $ 2,250Single 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 $ 6,922Performing troubled debt restructurings $ 1,204 $ 1,260 $ 1,305 $ 4,434 $ 4,857Allowance 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 ended December 31, 2021and 2020, $125 thousandand $122 thousand, respectively, in interest income was recognized on non-accrual loans subsequent to their classification as non-accrual. For the years ended December 31, 2021and 2020, the Company recorded $94 thousandand $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 thousandand $169 thousandfor the years ended December 31, 2021and 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. 44 -------------------------------------------------------------------------------- Table of Contents •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 $ 10,320Single family residential - 1,788 - - 1,788 1,788 Commercial real estate - - - - - - Construction and land - - - - - - Total $ 4,586 $ 12,108$
Loans classified as end-of-period loans
0.19 % As of
December 31, 2020: Multifamily residential $ 19,547 $ 20,204$ - $ - $ 39,751 $ 20,204Single 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$
Loans classified as end-of-period loans
0.44 % As of
December 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 of
December 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 of
December 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$
Loans classified as end-of-period loans
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. At
December 31, 2021and 2020, we have identified potential problem loans totaling $9.8 millionand $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
$ 26,04366.9 % $ 33,25967.9 % $ 23,37264.1 % $ 21,32660.1 % $ 18,58857.7 % 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 $ 35,535100.0 % $ 46,214100.0 % $ 36,001100.0 % $ 34,314100.0 % $ 30,312100.0 % 46
-------------------------------------------------------------------------------- Table of Contents 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
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. 47 -------------------------------------------------------------------------------- Table of Contents 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")
$ 200,13330.19 % $ 216,72435.34 % 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 $ 662,839100.00 % $ 613,238100.00 % 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 % $ 200,0431.27 % $ - - % $ 200,1331.27 % 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 $ - - % $ 25,9940.78 % $ 104,8480.59 % $ 520,3041.23 % $ 11,6931.15 % $ 662,8391.11 % 48
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) $ 200,133Commercial 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) $ 663,028As of December 31, 2020: Available for sale: Government and Government Sponsored Entities: Residential MBS and CMOs $ 213,279 $ 3,459 $ (14) $ 216,724Commercial 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$
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 the
U.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.
Representing 85.1% of our total liabilities as of
December 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 billionat December 31, 2021from $5.3 billionat December 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% at December 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 at December 31, 2021to 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% at December 31, 2021and 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 $ 5,449,4520.64 % 100.0 % $ 5,290,9641.36 % 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 $ 178,145Over three through six months 416,749
Over six through twelve months 777,727 180,961 Over twelve months 149,411 29,898 Total
$ 1,864,472 $ 470,669Percent of total deposits 33.67 % 8.50 % The Company estimated its balance of uninsured deposits at approximately $1.4 billionat both December 31, 2021and 2020. At the same dates, the Company had $25.8 millionand $50.0 millionof 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 millionat December 31, 2021compared to $806.7 millionat December 31, 2020. The decrease in FHLB advances outstanding at December 31, 2021as compared to the prior year, was due to maturing advances not being replaced during the current year. As of both December 31, 2021and 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 outstanding Trust Securitiesand 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 $ 41,2381.58 % $ 41,2381.60 % 3/1/2006 6/15/2036 3 month LIBOR + 1.38% Luther Burbank Statutory Trust II $ 20,6191.82 % $ 20,6191.84 % 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 the Trust Securitieswill also be deferred, and our ability to pay dividends on our common stock will be restricted. We have entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the Trust Securities; (ii) the redemption price with respect to any Trust Securitiescalled for redemption by the Trusts; and (iii) payments due upon a voluntary or involuntary dissolution, winding up or liquidation of the Trusts. The Trust Securitiesare 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 millionto qualified institutional investors. These senior notes are unsecured, carry a fixed interest coupon of 6.5%, pay interest only on a quarterly basis and mature on September 30, 2024. The senior debt is redeemable at any time prior to August 31, 2024, at a redemption price equal to the greater of (i) 100% of the principal amount, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the calculated rate for a U. S. Treasurysecurity having a comparable remaining maturity, plus 30 basis points, plus in each case, accrued and unpaid interest. On or after September 1, 2024, the senior debt may be redeemed at 100% of the principal amount plus accrued and unpaid interest. 51
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
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 millionand $613.7 millionat December 31, 2021and 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 millionand a decline in the fair value of available for sale investment securities, net of tax, of $6.6 millionduring the year ended December 31, 2021. During the year ended December 31, 2021, the Company repurchased 761,844 of its shares in connection with its stock repurchase program at an average price of $11.61per share, or a 9.9% discount to tangible book value at December 31, 2021, and a total cost of $8.8 million. As of December 31, 2021, there were $9.7 millionof 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 millionletter 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 thousandand $959 thousandat December 31, 2021and 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 millionduring the year ended December 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 the Trust Securitiesissued 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 the Federal Reservecapital adequacy guidelines. With the exception of our obligations in connection with its Trust Securitiesand 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.
The following table presents, as of
December 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
Table of Contents 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$ - $ 2,335,141FHLB 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$
(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
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. 54 -------------------------------------------------------------------------------- Table of Contents Our total deposits at
December 31, 2021and 2020 were $5.5 billionand $5.3 billion, respectively. Based on the values of loans pledged as collateral, our $751.6 millionof FHLB advances outstanding and our $62.6 millionFHLB letter of credit outstanding, we had $963.5 millionof additional borrowing capacity with the FHLB at December 31, 2021. Based on the values of other loans pledged as collateral, we had $211.3 millionof 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 millionat 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 millionat 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.
We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital management consists of providing equity to support our current operations and future growth. Failure to meet minimum regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As of
December 31, 2021and 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 the FDIC'sprompt corrective action regulations. At December 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 by FDICregulations 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 Ratio Luther Burbank CorporationAs of December 31, 2021Tier 1 Leverage Ratio $ 727,60610.12 % $ 287,5094.00 % N/A N/A N/A N/A Common Equity Tier 1 Risk-Based Ratio 665,749 17.09 % 175,296 4.50 % $ 272,6837.00 %
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 of
December 31, 2020Tier 1 Leverage Ratio $ 665,5149.45 % $ 281,5644.00 % N/A N/A N/A N/A Common Equity Tier 1 Risk-Based Ratio 603,657 15.75 % 172,420 4.50 % $ 268,2097.00 %
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/A
Luther Burbank SavingsAs of December 31, 2021Tier 1 Leverage Ratio $ 799,45711.13 % $ 287,4074.00 % N/A N/A $ 359,2595.00 % Common Equity Tier 1 Risk-Based Ratio 799,457 20.54 % 175,190 4.50 % $ 272,5187.00 %
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 of
December 31, 2020Tier 1 Leverage Ratio $ 729,05410.36 % $ 281,4534.00 % N/A N/A $ 351,8165.00 % Common Equity Tier 1 Risk-Based Ratio 729,054 19.04 % 172,340 4.50 % $ 268,0857.00 %
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 %
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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