EX-99.2 5 tm2021255d1_ex99-2.htm EXHIBIT 99.2

 

Exhibit 99.2

 

Unaudited Consolidated Financial Statements of

 

OPUS BANK

 

as of March 31, 2020 and for the three months ended March 31, 2020 and 2019

 

 

 

 

CONTENTS

 

UNAUDITED FINANCIAL INFORMATION PAGE
   
Consolidated Balance Sheets 3
   
Consolidated Statements of Income and Comprehensive Income 4
   
Consolidated Statements of Changes in Stockholders’ Equity 6
   
Consolidated Statements of Cash Flows 7
   
Notes to Interim Consolidated Financial Statements 8

 

2

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

($ in thousands, except share amounts)  March 31,
2020
   December 31, 2019 
Assets          
Cash and due from banks  $30,808   $30,451 
Due from banks – interest-bearing   768,107    317,190 
Cash and cash equivalents   798,915    347,641 
Investment securities, available-for-sale, at fair value   991,261    1,039,596 
Loans   5,990,190    5,900,520 
Less allowance for credit losses on loans (1)   (51,424)   (40,844)
Loans, net of allowance for credit losses   5,938,766    5,859,676 
Premises and equipment, net   20,803    21,339 
Goodwill   235,603    331,832 
Other intangible assets, net   32,866    33,875 
Deferred tax assets, net   21,958    8,107 
Cash surrender value of bank-owned life insurance, net   188,808    190,435 
Accrued interest receivable   26,163    25,690 
Federal Home Loan Bank stock   17,250    17,250 
Other assets   110,801    116,959 
Total assets  $8,383,194   $7,992,400 
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Noninterest-bearing demand  $836,301   $768,936 
Interest-bearing demand   2,686,803    2,680,793 
Money market and savings   2,332,912    2,196,603 
Time deposits   846,805    827,261 
Total deposits   6,702,821    6,473,593 
Federal Home Loan Bank advances   450,000    200,000 
Subordinated debt, net   133,342    133,275 
Accrued interest payable   2,299    4,175 
Other liabilities   88,432    82,210 
Total liabilities   7,376,894    6,893,253 
Stockholders’ equity:          
Preferred stock:          
Authorized 200,000,000 shares; issued 31,111 and 31,111 shares, respectively   29,110    29,110 
Common stock, no par value per share:          
Authorized 200,000,000 shares; issued 37,640,279 and 37,571,545 shares, respectively   700,220    700,220 
Additional paid-in capital   90,241    87,702 
Retained earnings   213,588    305,399 
Treasury stock, at cost; 1,265,361 and 1,223,930 shares, respectively   (30,721)   (29,611)
Accumulated other comprehensive income   3,862    6,327 
Total stockholders’ equity   1,006,300    1,099,147 
Total liabilities and stockholders’ equity  $8,383,194   $7,992,400 

 

(1) The allowance for credit losses on loans as of March 31, 2020 reflects adoption of the current expected credit losses (“CECL”) model under Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses, that the Company adopted on January 1, 2020. Prior periods reflect the incurred loss methodology.
 
See accompanying notes to consolidated financial statements.

 

3

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)

(Unaudited)

 

   For the three months ended March 31, 
($ in thousands, except share data)  2020   2019 
Interest income:          
Loans  $60,148   $57,007 
Investment securities   7,694    8,577 
Due from banks   1,057    1,324 
Total interest income   68,899    66,908 
Interest expense:          
Deposits   14,696    13,425 
Federal Home Loan Bank advances   1,204    756 
Subordinated debt   1,923    1,923 
Total interest expense   17,823    16,104 
Net interest income   51,076    50,804 
Provision for credit losses (1)   7,557    2,197 
Net interest income after provision for credit losses   43,519    48,607 
Noninterest income:          
Fees and service charges on deposit accounts   1,328    1,440 
Escrow and exchange fees   1,502    1,353 
Trust administrative fees   7,366    6,685 
Bank-owned life insurance, net   1,046    980 
Loss on sale of loans       (111)
Gain on sale of assets   3     
Gain on sale of investment securities       113 
Other income   2,655    640 
Total noninterest income   13,900    11,100 
Noninterest expense:          
Compensation and benefits   22,803    26,875 
Professional services   4,325    2,216 
Occupancy expense   3,814    3,830 
Depreciation and amortization   1,599    1,833 
Deposit insurance and regulatory assessments   28    773 
Insurance expense   335    344 
Data processing   1,010    565 
Software licenses and maintenance   1,277    1,301 
Office services   1,630    1,639 
Amortization of other intangible assets   1,009    1,415 
Advertising and marketing   952    723 
Goodwill impairment loss   96,229     
Other expenses   4,025    3,896 
Total noninterest expense   139,036    45,410 
(Loss) income before income tax expense   (81,617)   14,297 
Income tax expense   3,226    3,436 

 

4

 

 

   For the three months ended March 31, 
($ in thousands, except share data)  2020   2019 
Net (loss) income   (84,843)   10,861 
(1) The provision for credit losses for reporting periods after January 1, 2020 reflects the Company's adoption of CECL.  
See accompanying notes to consolidated financial statements.  
Less: Dividends on Series A Preferred Stock   171    171 
Net (loss) income available to common stockholders  $(85,014)  $10,690 
Net (loss) income per common share, basic  $(2.34)  $0.29 
Net (loss) income per common share, diluted   (2.34)   0.28 
Weighted average common shares outstanding, basic   36,373,280    36,187,431 
Weighted average common shares outstanding, diluted   36,373,280    38,133,705 
           
Net (loss) income  $(84,843)  $10,861 
Other comprehensive income (loss), net of tax:          
Unrealized net holding (losses) gains on investment securities, available-for-sale   (3,455)   696 
Income tax benefit (expense) related to net unrealized holding gains (losses) on investment securities, available-for-sale   990    (192)
Unrealized net holding (losses) gains  on investment securities, securities available-for-sale, net of tax   (2,465)   504 
Reclassification adjustment for net gains included in net income       (113)
Income tax expense related to reclassification adjustment       31 
Reclassification adjustment for net gains included in net income, net of tax       (82)
Other comprehensive (loss) income net of tax   (2,465)   422 
Comprehensive (loss) income  $(87,308)  $11,283 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2020 and 2019

(Unaudited)

 

($ in thousands, except share data)  Common stock shares   Preferred stock shares   Common stock   Preferred stock   Treasury stock   Additional paid-in capital   Accumulated other comprehensive income (loss)   Retained earnings   Total stockholders' equity 
Balance, December 31, 2018   36,060,375    31,111   $700,220   $29,110   $(14,983)  $69,954   $(3,792)  $260,304   $1,040,813 
Net income                               10,861    10,861 
Other comprehensive income, net of tax                           422        422 
Net issuance of common stock under share-based compensation plans   118,605                (10,420)   9,514            (906)
Dividends paid:                                             
Common stock ($0.11 per share)                               (3,973)   (3,973)
Preferred stock ($5.50 per share)                               (171)   (171)
Share-based compensation                        1,060            1,060 
Balance, March 31, 2019   36,178,980    31,111   $700,220   $29,110   $(25,403)  $80,528   $(3,370)  $267,021   $1,048,106 
Balance, December 31, 2019   36,347,615    31,111   $700,220   $29,110   $(29,611)  $87,702   $6,327   $305,399   $1,099,147 
Impact of adoption of CECL, net of the related tax effect                               (2,744)   (2,744)
Net loss                               (84,843)   (84,843)
Other comprehensive loss, net of tax                           (2,465)       (2,465)
Net issuance of common stock under share-based compensation plans   27,303                (1,110)   976            (134)
Dividend & dividend equivalents:                                             
Common stock ($0.11 per share)                       34        (4,053)   (4,019)
Preferred stock ($5.50 per share)                               (171)   (171)
Share-based compensation                       1,529            1,529 
Balance, March 31, 2020   36,374,918    31,111   $700,220   $29,110   $(30,721)  $90,241   $3,862   $213,588   $1,006,300 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the three months ended March 31, 
($ in thousands)  2020   2019 
Cash flows from operating activities:          
Net income (loss)  $(84,843)  $10,861 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,523    3,121 
Goodwill impairment   96,229     
Amortization of low income housing tax credit investments   1,417    1,608 
Provision for credit losses on loans   7,557    2,197 
Increase in cash surrender value of bank-owned life insurance   (1,046)   (980)
Amortization of deferred loan fees and costs   (2,316)   (1,683)
Share-based compensation expense   1,529    1,059 
Accretion and amortization of discounts and premiums, net   365    387 
Decrease (increase) in net deferred tax assets   (11,758)   8,086 
Gain on sale of investment securities       (113)
Gain on sale or disposition of assets   (3)    
Loss on sale of loans       111 
Decrease (increase) in accrued interest receivable and other assets   4,267    (46,414)
Increase (decrease) in accrued expenses and other liabilities   5,483    48,465 
Net cash provided by operating activities   19,404    26,705 
Cash flows from investing activities:          
Proceeds from pay down/maturity/redemption/calls of investment securities, available-for-sale   44,132    37,428 
Proceeds from sale of investment securities, available-for-sale       19,875 
Purchase of investment securities, available-for-sale       (69,520)
Net increase in loans   (86,443)   (304,136)
Proceeds from loan sales       11,134 
Investment in low-income housing tax credits   (2,304)   (3,391)
Purchase of bank-owned life insurance       (28)
Proceeds to fund liquidation of deferred compensation plan   2,673     
Purchase of premises and equipment   (1,063)   (998)
Proceeds from sale of premises and equipment   3     
Net cash used in investing activities   (43,002)   (309,636)
Cash flows from financing activities:          
Net increase in deposits   229,229    124,878 
Net increase in short-term Federal Home Loan Bank advances   50,000    130,000 
Increase in long-term Federal Home Loan Bank advances   200,000    200,000 
Proceeds from exercise of stock options       9,514 
Purchase of treasury shares   (134)   (10,420)
Cash dividends paid to stockholders   (4,223)   (4,144)
Net cash provided by financing activities   474,872    449,828 
Net increase in cash and cash equivalents   451,274    166,897 
Cash and cash equivalents at beginning of period   347,641    254,636 
Cash and cash equivalents at end of period  $798,915   $421,533 
See accompanying notes to consolidated financial statements.          
Supplemental disclosures of cash flow information:          
Cash paid during the period for:        
Interest   $19,699   $17,434 
Income taxes, net of refunds    8    10 
Noncash investing and financing activities:           
Transfer of loan receivables to loans held-for-sale   $   $10,111 

 

See accompanying notes to consolidated financial statements.

 

7

 

 

 

Notes to Interim Consolidated Financial Statements (unaudited)

 

(1)Description of Business

 

Opus Bank is a publicly traded California state-chartered commercial bank headquartered in Irvine, California, which, together with its subsidiaries, is referred to as the Company, we, our, or us. Opus Bank offers a wide range of loan products, which primarily includes multifamily residential, commercial real estate, and commercial business loan products, as well as a suite of treasury and cash management and depository solutions. We serve our clients through our headquarters and 46 banking offices located in major metropolitan markets within California, Washington, Oregon, and Arizona. Our primary focus is to serve our clients by offering a variety of financial products, services, and solutions, while maintaining a disciplined approach to risk management. We service our clients through our lines of business which include Commercial Real Estate Banking, Commercial Banking, Retail Banking, and our Alternative Asset IRA Custodian subsidiary, PENSCO Trust Company (“PENSCO”).

 

(2)Summary of Significant Accounting Policies

 

The following is a summary of the significant accounting policies used in preparing the Company’s consolidated financial statements:

 

(a)      Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Federal Deposit Insurance Corporation (“FDIC”) and conform to general practices within the Company’s industry. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto, as of and for the year ended December 31, 2019 (“2019 Consolidated Financial Statements”) included in the Annual Report on Form 10-K filed with the FDIC on February 28, 2020, as amended by the Amendment No. 1 to Annual Report on Form 10-K/A filed with the FDIC on March 24, 2020 (collectively, our “2019 Form 10-K”).

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the consolidated financial statements. Actual results could differ from those estimates.

 

Our financial statements reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for any future periods.

 

Certain items in prior periods were reclassified to conform to the current presentation. For further information, refer to the 2019 Consolidated Financial Statements – Note 2, “Summary of Significant Accounting Policies.”

 

(b)       Risks and Uncertainties related to the COVID-19 pandemic

 

We considered the impact of the COVID-19 pandemic on the assumptions and estimates used in the determination of our allowance for credit losses. In addition, given the volatility in the stock market triggered by the COVID-19 pandemic, we performed an evaluation of goodwill for potential impairment, which resulted in a $96.2 million goodwill impairment loss for the three months ended March 31, 2020.

 

8

 

 

If COVID-19 is not successfully eradicated, or if it takes longer than expected to contain and manage the spread of COVID-19, we may experience additional material adverse impacts on our business, financial condition, results of operations, and prospects. Unexpected and significant changes or events may result in the need for additional provision for credit losses in order to maintain an allowance for credit losses that complies with our credit risk and accounting policies. Further and prolonged deterioration of the economic environment and the Company’s stock price could cause additional non-cash goodwill impairment losses. Prolonged effects of COVID-19 would also result in increased demand for liquidity from our clients.

 

It is difficult to predict the full impact that the COVID-19 pandemic, and the measures taken by federal, state and local governments in response thereto, will have on our operations. While our on-balance sheet liquidity as of March 31, 2020 was strong and, when combined with our contingent liquidity resources, was sufficient to meet the liquidity needs of our clients, no assurance can be given that these resources will be sufficient to meet our clients’ demands, or will be available at all, in the future.

 

(c)       Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and variable interest entities (“VIEs”) where the Company is the primary beneficiary. All significant intercompany accounts and transactions with consolidated entities have been eliminated. The Company evaluates its associations with VIEs, both at inception and when there is a change in circumstance that requires reconsideration, to determine if the Company is the primary beneficiary and consolidation is required. A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) the power to direct the activities that most significantly impact the VIEs economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. During the periods presented we did not provide financial or other support to any VIE that we were not previously contractually required to provide.

 

(d)       Recent Accounting Pronouncements

 

The following is a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) applicable to the Company that were adopted or became effective during the three months ended March 31, 2020:

 

Adopted

 

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to change the way entities recognize impairment of financial instruments by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. In addition to ASU 2016-13, there have been additional amendments that relate to Topic 326, including ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02, and ASU 2020- 03.

 

On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP standards. The Company recorded a net decrease to retained earnings of $2.7 million, net of tax as of January 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment relates to changes in the estimation of credit losses required under ASC 326, net of the related tax effect. Under the prior accounting standards, the allowance for loan losses was estimated based upon an incurred loss methodology for credit losses deemed to be “probable” and “estimable.” Under ASC 326, the current expected credit losses (“CECL”) model requires entities to establish an allowance for credit losses (“ACL”) that reflects expected credit losses, regardless of whether they have reached the “probable” and “estimable” thresholds, taking into consideration a broad range of information that includes historical data as well as forward-looking information.

 

9

 

 

The Company adopted ASC 326 using the prospective transition approach for debt securities available-for-sale. The Company had not recorded any other-than-temporary impairment prior to the adoption of ASC 326, and the amortized cost basis as well as the effective interest rate did not change on our debt securities, and no allowance for credit losses was recorded on the Company’s debt securities, available-for-sale with the adoption of ASC 326.

 

The following table summarizes the financial statement impact of ASC 326:

 

   January 1, 2020 
($ in thousands)  As reported under ASC 326   Pre-ASC 326 adoption   Impact of ASC 326 adoption 
Assets:            
Loans            
Single-family residential  $415   $114   $301 
Multifamily residential   14,266    14,191    75 
Commercial real estate   8,962    6,598    2,364 
Construction   2,276    602    1,674 
Commercial and industrial   16,714    18,799    (2,085)
Small Business Administration   593    538    55 
Consumer and other   15    2    13 
Allowance for credit losses on loans  $43,241   $40,844   $2,397 
                
Deferred tax assets  $9,209   $8,107   $1,102 
                
Liabilities:               
Allowance for credit losses on unfunded loan commitments  $2,463   $1,014   $1,449 
                
Stockholders’ equity:               
Retained earnings  $302,655   $305,399   $(2,744)

 

In connection with the Company’s adoption of ASC 326, we considered the following areas in our ACL:

 

Loans

 

Upon adoption of ASC 326, the Company made an accounting policy election to exclude accrued interest receivable from its estimated ACL on loans. The balance of accrued interest receivable is not included in loans, and is instead separately reported on the consolidated balance sheet as of each reporting date.

 

The calculation of ACL under ASC 326 is inherently subjective as it requires management to exercise judgment in determining appropriate factors and assumptions used to determine the allowance. The Company’s established framework over ACL includes a systematic, risk-based, and consistently-applied methodology, with underlying data to support key assumptions. Specifically, our methodology is predominantly segregated as follows:

 

10

 

 

Pooled loans

 

The majority of our loan portfolio is reserved using loan pools established by the Company, taking into consideration common credit risk attributes, including loan product type and risk ratings. Loan product types, including multifamily, owner-occupied commercial real estate, non-owner occupied commercial real estate, commercial and industrial, reflect common characteristics of underwriting, collateral security, and sources of repayment, all of which are relevant in assessing risk characteristics. Additionally, risk ratings (i.e. pass, special mention, substandard, doubtful, loss), are individually assigned to all loans within our portfolio using predefined risk rating definitions that are derived from regulatory guidance and loan policies.

 

Our methodology utilizes a loss-rate based approach to estimate credit losses, taking into consideration company-specific historical loss experience and predefined peer historical loss experience for pools that lack loss history. The historical loss rates are adjusted for qualitative environmental factors, based upon management's analysis of current and expected economic conditions, lending environment, underwriting standards, and trends in relevant credit metrics. Additionally, we utilize a reasonable and supportable economic forecast to estimate future credit losses for each loan pool, derived from a third party provider of historical and forecasted state and national macroeconomic and demographic data. Such credit loss estimates cover the estimated weighted-average remaining contractual maturities of the loan portfolio, adjusted for expected prepayments derived from the Company's actual historical prepayment experience. Our reasonable and supportable forecast generally extends for two years, followed by a one year straight-line reversion to historical average loss rates.

 

Non-pooled loans

 

As part of the Company’s risk management and credit administration processes, the Company continually evaluates the credit quality and ongoing performance of the loan portfolio. When individual loan relationships no longer share common credit risk characteristics of the established loan pools, the Company removes them from the loan pools and evaluates them on an individual basis. This typically occurs when borrowers have experienced financial difficulty, including, but not limited to, delinquent loan payments, troubled debt restructurings, non-accrual payment status, bankruptcy, delinquent taxes, and previous charge offs. Such individually identified loan relationships are evaluated to determine whether they are collateral dependent by considering whether repayment is expected to be provided substantially through the operation or sale of the underlying collateral. For loan relationships deemed collateral dependent, credit losses are estimated using collateral valuations, which are generally supported by various data points, including, but not limited to, independent appraisal valuations, terms of sale transactions executed with willing buyers, or independent broker price opinions that reflect actual sales transactions for similar collateral types. For loan relationships that are not deemed collateral dependent, the Company estimates credit losses using a discounted cash flow approach, which generally captures all estimated future loan payments anticipated from the borrower, discounted using the effective interest rate at the time of origination.

 

Unfunded loan commitments

 

Management follows a methodology to estimate the ACL on unfunded loan commitments. The Company applies a probability of funding to the unfunded commitment amount for each portfolio and the loss factors estimated for pooled loans. Such allowance is recorded to other liabilities and the corresponding provision is recorded to other non-interest expense.

 

11

 

 

Debt securities, available-for-sale

 

Debt securities that are in an unrealized loss position as of each reporting date are evaluated to assess the nature of decline in fair value. Specifically, management first evaluates whether it intends, or it is more likely than not that it will be required to sell the security prior to recovery of its amortized cost basis. If either one of the aforementioned conditions are met, the cost basis of the security is written down to its fair value, and the impact is recognized in the consolidated statement of income. For securities that do not meet the aforementioned conditions, management evaluates the decline in fair value to assess whether such decline resulted from credit- or non-credit related factors. Such considerations include, but are not limited to, changes in the rating of the security, quality of the underlying collateral, repayment capacity of the issuer, and extent of decline in fair value below the amortized cost basis. If the decline in fair value is attributable to credit-related factors, the amount of impairment is measured using the present value of expected cash flows as compared to the amortized cost basis of the security. The amount of shortfall in cash flows driven by credit-related factors is recognized as an ACL, limited by the amount that fair value is less than amortized cost basis. For all periods following the initial recognition of ACL, management will record changes in the ACL through the provision for credit losses on the consolidated statement of income.

 

Unanticipated economic events that affect the U.S. economy could cause a change in expectations for current conditions and economic forecasts that could result in an increase to the ACL. In addition, changes in our portfolio mix or credit characteristics could also increase the ACL. Unexpected and significant changes or events may result in the need for additional provision for credit losses in order to maintain an ACL that complies with our credit risk and accounting policies.

 

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 was issued to require that entities no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Refer to Note 6, “Goodwill and other intangibles” for further information on the Company’s goodwill and intangible assets.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 was issued to improve the effectiveness of disclosure requirements on a narrow set of concepts relating to fair value measurements. For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Adoption of this guidance did not have a material impact on the consolidated financial statements.

 

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 was issued to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Adoption of this guidance did not have a material impact on the consolidated financial statements given that (1) the changes under the ASU were generally in line with the Company's existing accounting treatment of implementation costs incurred in a hosting arrangement that is a service contract and (2) the Company has not incurred a material amount of implementation costs in a hosting arrangement.

 

12

 

 

Issued but Not Yet Adopted

 

ASU 2020-01, Clarifying interactions between Investments—Equity Securities (Topic 321), Investments— Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). ASU 2020-01 was issued to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. The amendment also clarifies scope considerations for forward contracts and purchased options on certain securities. For public business entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Adoption of this guidance is not expected to have a material impact on the consolidated financial statements. This update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and will be applied if that situation arises. The update regarding forward contracts and purchased options on certain securities is not applicable, as the Company does not have any forward contracts and purchased options.

 

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). Modifications of contracts within the scope of Receivables (Topics 310) and Debt (Topic 470) should be accounted for prospectively by adjusting the effective interest rate. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of the adoption of this guidance.

 

(3)Fair Value

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is not a forced transaction) between willing market participants at the measurement date. Financial instruments recorded at fair value on a recurring basis include the Company’s debt securities available-for-sale and equity warrant assets. Additionally, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as impaired loans or other repossessed assets. These nonrecurring fair value measurements typically involve write-downs of individual assets or application of lower of cost or fair value accounting.

 

Fair value is best determined based upon quoted market prices; however, in many instances, there are no quoted market prices for the Company’s various financial instruments available. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These valuation techniques require considerable judgement and the resulting estimates of fair value can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

 

Refer to Note 2, “Summary of Significant Accounting Policies.” in the 2019 Consolidated Financial Statements for information on the fair value hierarchy, valuation methodologies, and key inputs used to measure financial assets and liabilities recorded at fair value, as well as the significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis.

 

13

 

 

 

The following tables present information about the significant unobservable inputs used in the Level 3 fair value measurements of financial instruments recorded at fair value on a recurring and nonrecurring basis as of March 31, 2020 and December 31, 2019.

 

($ in thousands)  Fair value as
of March 31, 2020
  Valuation
Technique
  Significant
Unobservable Inputs
  Range
(Weighted Average)
Collateral-dependent impaired loans  $ 543  Market  - Adjustments to external
  appraised values
- Probability weighting of    broker price opinions
  (1)
Equity warrants  $ 5,169  Black-Scholes
option pricing
model
  - Volatility
- Risk-free interest rate
- Marketability discount
  30.00% to 74.04% (31.3%)
 0.11% to 0.37% (0.31%)
 6% to 33% (13.62%)

 

(1) Adjustments to appraised values and probability weighting of broker price opinions vary depending on the type of property, geographic region, recent trends in comparable sales, and management’s assessment of the valuation of the property. These factors are specific to each type of property and a weighted average or range of values of the unobservable inputs is not meaningful.

 

($ in thousands)  Fair value as of
December 31, 2019
  Valuation
Technique
  Significant
Unobservable Inputs
  Range
(Weighted Average)
Collateral-dependent impaired loans  $ 1,805  Market  - Adjustments to external
  appraised values
- Probability weighting of   broker price opinions
  (1)
Equity warrants  $ 3,755  Black-Scholes
option pricing
model
  - Volatility
- Risk-free interest rate
- Marketability discount
  27.69% to 60.60% (44.88%)
1.55% to 1.76% (1.62%)
6% to 33% (11.83%)

 

(1) Adjustments to appraised values and probability weighting of broker price opinions vary depending on the type of property, geographic region, recent trends in comparable sales, and management’s assessment of the valuation of the property. These factors are specific to each type of property and a weighted average or range of values of the unobservable inputs is not meaningful.

 

Financial Instruments Recorded at Fair Value on a Recurring Basis

 

The following tables present the financial instruments that are measured at fair value on a recurring basis by fair value hierarchy as of March 31, 2020 and December 31, 2019:

 

   Fair value measurement 
($ in thousands)  Balance as of
March 31,
2020
   Quoted Prices
in Active
Markets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through other comprehensive income:                    
Debt securities available-for-sale:                    
Government-sponsored entities mortgage backed securities  $583,933   $   $583,933   $ 
Government-sponsored entities notes   7,987        7,987     
Corporate debt   301,350        301,350     
Collateralized loan obligations   97,991        97,991     
Fair value through net income:                    
Equity warrants   5,169            5,169 
Total assets at fair value  $996,430   $   $991,261   $5,169 

 

14

 

 

   Fair value measurement 
($ in thousands)  Balance as of
December 31,
2019
   Quoted
Prices
in Active
Markets
(Level 1)
   Significant
Observable
 Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                    
Fair value through other comprehensive income:                    
Debt securities available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $622,134   $   $622,134   $ 
Government-sponsored entities notes   8,640        8,640     
Corporate debt   304,450        304,450     
Collateralized loan obligations   104,372        104,372     
Fair value through net income:                    
Equity warrants   3,755            3,755 
Total assets at fair value  $1,043,351   $   $1,039,596   $3,755 

 

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1, Level 2, or Level 3 during the three months ended March 31, 2020 and 2019.

 

The following table is a reconciliation of the fair value of the Company’s assets that are classified as Level 3 and measured on a recurring basis:

 

($ in thousands)  Beginning
balance
   Receipt or
purchases
   Sales   Changes in
fair value (1)
   Ending
balance
 
Three Months Ended March 31, 2020                         
Equity warrants  $3,755   $   $   $1,414   $5,169 
Total Level 3 assets  $3,755   $   $   $1,414   $5,169 
Three Months Ended March 31, 2019                         
Equity warrants  $3,773   $   $   $49   $3,822 
SBIC Fund investments   17,160                17,160 
Total Level 3 assets  $20,933   $   $   $49   $20,982 

 

(1) The changes in fair value are included in other income on the consolidated statement of income.

 

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

 

The following table presents financial instruments recorded at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019.

 

   Fair value measurement 
($ in thousands)  Balance as of
March 31,
2020
   Quoted
Prices
in Active
Markets 
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through net income:                    
Collateral-dependent impaired loans (1)  $543   $   $   $543 
Total assets at fair value  $543   $   $   $543 

 

(1) Balances exclude estimated selling costs.

 

15

 

 

   Fair value measurement 
($ in thousands)  Balance as of
December 31,
2019
   Quoted
Prices
in Active
Markets
(Level 1)
   Significant
Observable
 Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through net income:                    
Collateral-dependent impaired loans (1)  $1,805   $   $   $1,805 
Total assets at fair value  $1,805   $   $   $1,805 

 

(1) Balances exclude estimated selling costs.

 

Gains or losses from fair value adjustments related to nonrecurring fair value measurements reflect changes in the underlying values of collateral-dependent impaired loans and are valued using external appraised values or business assets that may include adjustments for assumptions of market conditions that are not directly observable.

 

For collateral-dependent impaired loans measured on a nonrecurring basis, fair value adjustments through specific reserve or charge-off resulted in losses of $18,000 and $210,000 for the three months ended March 31, 2020 and 2019, respectively.

 

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value on a Recurring Basis

 

The carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 were as follows:

 

   March 31, 2020 
   Carrying    Estimated fair    Fair value measurements using 
($ in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $798,915   $798,915   $798,915   $   $ 
Loans, net   5,938,766    5,932,516            5,932,516 
Financial liabilities:                         
Time deposits   846,805    855,638            855,638 
Federal Home Loan Bank advances   450,000    451,232            451,232 
Subordinated debt, net   133,342    133,980            133,980 

 

   December 31, 2019 
   Carrying    Estimated fair    Fair value measurements using 
($ in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $347,641   $347,641   $347,641   $   $ 
Loans, net   5,859,676    5,853,022            5,853,022 
Financial liabilities:                         
Time deposits   827,261    828,929            828,929 
Federal Home Loan Bank advances   200,000    202,271            202,271 
Subordinated debt, net   133,275    134,060            134,060 

 

16

 

 

 

(4)Investment Securities Available-for-Sale

 

The following table summarizes the amortized cost and estimated fair value for the major categories of the Company’s investment securities as of March 31, 2020 and December 31, 2019:

 

($ in thousands)  Amortized
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
   Fair value 
March 31, 2020                    
Debt securities, available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $575,274   $13,379   $(4,720)  $583,933 
Government-sponsored entities notes   8,008        (21)   7,987 
Corporate debt   298,298    3,455    (403)   301,350 
Collateralized loan obligations   104,268        (6,277)   97,991 
Total investment securities  $985,848   $16,834   $(11,421)  $991,261 
December 31, 2019                    
Debt securities, available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $619,757   $7,110   $(4,733)  $622,134 
Government-sponsored entities notes   8,671        (31)   8,640 
Corporate debt   298,095    6,528    (173)   304,450 
Collateralized loan obligations   104,205    363    (196)   104,372 
Total investment securities  $1,030,728   $14,001   $(5,133)  $1,039,596 

 

Excluded from the amortized cost basis disclosed above is accrued interest receivable on debt securities, available-for-sale of $4.6 million and $5.7 million as of March 31, 2020 and December 31, 2020, respectively. Upon adoption of ASC 326, the Company elected to exclude applicable accrued interest from debt securities, which is reported in accrued interest receivable on our consolidated balance sheets.

 

The following table provides a summary of the gross unrealized losses and fair value of investment securities that were not deemed to be other-than-temporarily impaired and the corresponding length of time that the securities have been in a continuous unrealized loss position as of March 31, 2020 and December 31, 2019:

 

   Less than 12 months   12 months or greater   Total 
($ in thousands)  Fair value   Estimated
unrealized
losses
   Fair value   Estimated
unrealized
losses
   Fair value   Estimated
unrealized
losses
 
March 31, 2020                        
Debt securities, available-for-sale:                              
Government-sponsored entities mortgage-backed securities  $140,751   $1,356   $151,253   $3,364   $292,004   $4,720 
Government-sponsored entities notes   7,987    21            7,987    21 
Corporate debt   52,545    403            52,545    403 
Collateralized loan obligations   97,991    6,277            97,991    6,277 
Total investment securities  $299,274   $8,057   $151,253   $3,364   $450,527   $11,421 
December 31, 2019                              
Debt securities, available-for-sale:                              
Government-sponsored entities mortgage-backed securities  $205,452   $3,337   $159,693   $1,396   $365,145   $4,733 
Government-sponsored entities notes   8,640    31            8,640    31 
Corporate debt   14,827    173            14,827    173 
Collateralized loan obligations   34,614    61    14,271    135    48,885    196 
Total investment securities  $263,533   $3,602   $173,964   $1,531   $437,497   $5,133 

 

17

 

 

As of March 31, 2020, the Company had 38 debt securities, available-for-sale totaling $450.5 million that were in an unrealized loss position. The securities in an unrealized loss position included one government-sponsored entity note totaling $8.0 million, 16 government-sponsored entities mortgage-backed securities totaling $292.0 million, five corporate debt securities totaling $52.5 million, and 16 collateralized loan obligations totaling $98.0 million. Of the 38 securities, three government-sponsored entity mortgage-backed securities totaling $151.3 million had been in a continuous unrealized loss position for over 12 months as of March 31, 2020.

 

As of December 31, 2019, the Company had 30 securities totaling $437.5 million that were in an unrealized loss position. The securities in an unrealized loss position included one government-sponsored entity note totaling $8.6 million, 20 government-sponsored entity mortgage-backed securities totaling $365.1 million, two corporate debt securities totaling $14.8 million, and seven collateralized loan obligations totaling $48.9 million. Of the 30 securities, 17 had been in a continuous unrealized loss position for over 12 months as of December 31, 2019.

 

The securities with an unrealized loss position have fluctuated in value since their purchase dates as market interest rates have fluctuated. The Company does not currently intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis. Based upon our evaluation of the securities, we do not believe the decline in fair value was driven by credit related factors, and we expect that the fair value will recover prior to maturity. Therefore, no allowance for credit losses or other-than-temporary impairment was recognized as of March 31, 2020 and December 31, 2019, respectively.

 

The scheduled maturities of investment securities as of March 31, 2020 are presented in the table below:

 

   March 31, 2020 
($ in thousands)  Amortized cost   Estimated fair
value
 
Debt securities, available-for-sale:          
Due within one year  $53,823   $54,219 
Due after one year through five years   118,475    119,833 
Due after five years through ten years   167,391    166,708 
Due after ten years   646,159    650,501 
Total investment securities  $985,848   $991,261 

 

Actual maturities of mortgage-backed securities can differ from contractual maturities due to borrowers’ rights to prepay loans. Prepayments and interest rates can affect the yields on the carrying value of mortgage-backed securities.

 

During the three months ended March 31, 2020, there were neither any purchases nor sales of investment securities.

 

During the three months ended March 31, 2019, the Company purchased three government-sponsored mortgage-backed securities totaling $44.8 million, one corporate debt security totaling $20.0 million, and one collateralized loan obligation totaling $6.0 million. During the three months ended March 31, 2019, the Company sold one corporate debt security for which it received proceeds of $19.9 million and recognized a gain of $113,000.

 

There were no securities pledged to secure Federal Home Loan Bank (“FHLB”) advances as of March 31, 2020 and December 31, 2019.

 

18

 

 

(5)Loans and Allowance for Loan Losses

 

The following is a summary of the carrying value of major loan categories, including originated and acquired loans:

 

($ in thousands)  March 31,
2020
   December 31,
2019
 
Real estate mortgage loans:          
Single-family residential  $47,908   $49,949 
Multifamily residential   3,912,287    3,784,461 
Commercial   1,076,482    1,072,568 
Construction and land loans   49,253    55,739 
Commercial business loans   867,038    901,006 
Small Business Administration loans   34,038    33,641 
Consumer and other loans   3,184    3,156 
Total loans  $5,990,190   $5,900,520 

 

There were $6.0 billion and $5.9 billion in loans as of March 31, 2020 and December 31, 2019, respectively. Included in consumer and other loans above are overdraft deposit accounts that were reclassified to loans totaling $14,000 and $38,000 as of March 31, 2020 and December 31, 2019, respectively. The loan carrying values above included unamortized deferred loan origination costs, net of unamortized deferred loan origination fees, of $27.3 million and $25.9 million as of March 31, 2020 and December 31, 2019, respectively. Accrued interest receivable on loans totaled $20.5 million and $19.9 million as of March 31, 2020 and December 31, 2019, respectively, and was reported in accrued interest receivable on our consolidated balance sheets.

 

As discussed in Note 2, “Summary of Significant Accounting Policies,” the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020, which replaced the incurred loss methodology with an expected loss methodology, CECL. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326, while prior periods continue to be presented in accordance with previously applicable GAAP standards.

 

As of March 31, 2020 and December 31, 2019, the loan portfolio included acquired loans reported at carrying value of $106.8 million and $109.8 million, respectively, net of unamortized fair value discount of $1.4 million and $1.7 million, respectively. Acquired loans that were deemed purchase credit deteriorated (“PCD”) subsequent to the adoption of ASC 326 had a carrying value of $65.4 million and an outstanding balance of $67.0 million as of March 31, 2020. The Company did not reassess classification of acquired impaired assets, and all such assets were classified as PCD upon adoption of ASC 326. Acquired impaired loans as of December 31, 2019 had a carrying value of $65.7 million and an outstanding balance of $67.6 million.

 

19

 

 

The Company had pledged $4.0 billion and $3.8 billion of its loans to the FHLB and Federal Reserve Bank of San Francisco as of March 31, 2020 and December 31, 2019, respectively.

 

(a)       Loan Portfolio Aging Analysis

 

A loan is considered past due if the required contractual principal and interest payment has not been received as of the day after such payment was due. The following tables present an aging analysis of loans and loans reported as nonaccrual by class as of March 31, 2020 and December 31, 2019.

 

($ in thousands)

  30-59 days
past due
   60-89
days
past due
   90+ days
past due
   Total past
due
   Current   Total loans   90+ days
past due and
accruing
   Nonaccrual 
March 31, 2020                                        
Real estate mortgage loans:                                        
Single-family residential  $503   $   $   $503   $47,405   $47,908   $   $75 
Multifamily residential           1,636    1,636    3,910,651    3,912,287        1,636 
Commercial                   1,076,482    1,076,482        2,396 
Construction and land loans                   49,253    49,253         
Commercial business loans   184            184    866,854    867,038         
Small Business Administration loans   42        710    752    33,286    34,038        1,177 
Consumer and other loans   117            117    3,067    3,184        483 
Total loan portfolio  $846   $   $2,346   $3,192   $5,986,998   $5,990,190   $   $5,767 

 

($ in thousands)  30-59 days
past due
   60-89
days
past due
   90+ days
past due
   Total
 past due
   Current   Total loans   90+ days
past due and
accruing
   Nonaccrual 
December 31, 2019                                        
Real estate mortgage loans:                                        
Single-family residential  $674   $   $138   $812   $49,137   $49,949   $   $215 
Multifamily residential   2,914            2,914    3,781,547    3,784,461         
Commercial                   1,072,568    1,072,568        2,409 
Construction and land loans                   55,739    55,739         
Commercial business loans   724            724    900,282    901,006         
Small Business Administration loans   42        2,361    2,403    31,238    33,641        2,842 
Consumer and other loans   98    38        136    3,020    3,156        508 
Total loan portfolio  $4,452   $38   $2,499   $6,989   $5,893,531   $5,900,520   $   $5,974 

 

The accrual of interest income on loans is discontinued when the full collection of principal and interest is in doubt. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income, and future accruals of interest are discontinued. Payments received from borrowers for loans on nonaccrual are applied to the unpaid principal balance. A loan is returned to accrual status when, in management’s judgement, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, the Company requires a minimum of six consecutive months of timely payments in accordance with the contractual terms prior to returning a loan to accrual status.

 

Of the $5.8 million and $6.0 million of loans reported as nonaccrual as of March 31, 2020 and December 31, 2019, respectively, $3.2 million and $3.2 million, respectively, were current.

 

Loans reported as nonaccrual as of March 31, 2020 and December 31, 2019 contributed $14,000 and $25,000 of interest income during the three months ended March 31, 2020 and December 31, 2019, respectively.

 

20

 

 

(b)      Troubled Debt Restructurings (“TDRs”)

 

The adoption of ASC 326 impacts the timing of recognition for TDRs, advancing the recognition to when a TDR is reasonably expected, which may result in recognition before the concessions have been granted.

 

As of both March 31, 2020 and December 31, 2019, there were no loans reported as TDRs. There was no allowance for loan loss recorded for any loans modified as TDRs for the periods presented.

 

There were no loans modified as TDRs during the three months ended March 31, 2020 and March 31, 2019.

 

There were no TDR loans with payment defaults during the three months ended March 31, 2020. There was one commercial business loan with a payment default during the three months ended March 31, 2019 that was modified as a TDR in the previous 12 months, and had a recorded investment of $3.7 million as of March 31, 2019.

 

(c)       Credit Quality Monitoring

 

As part of the Company’s credit policies, the Company monitors contractual payments and performs annual or more frequent reviews of multifamily, commercial real estate, construction, and commercial business loans. Commercial business loans are more typically reviewed on a quarterly basis. As part of the annual review of borrowers, financial statements of the property and/or borrowing entity are reviewed, including occupancy levels, revenue, and expenses to determine any variation from expected performance or deterioration in the underlying credit risk of the loan. The risk rating assigned to each loan is adjusted based on the updated information. The Company actively monitors loans that management believes indicate increased potential credit risk. Each acquired loan portfolio is reviewed within a short period of time following its acquisition to determine whether the loan portfolio classification is consistent with the Company’s internal risk rating standards.

 

The Company’s internal loan risk ratings apply to all loans and are as follows:

 

Pass – Loans are performing substantially as agreed with no current identified weakness in the borrower’s ability to repay.

 

Special Mention – Loans have a potential weakness and deserve management’s attention. If left uncorrected, the potential weakness could result in additional deterioration of the borrower’s ability to repay. These loans have not experienced credit deterioration to the point that exposes the Company to a level of risk to warrant adverse classification.

 

Substandard – Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the timely liquidation of the loan.

 

Doubtful – Loans have weaknesses that make repayment in full from collection or liquidation highly improbable. The possibility of some loss is highly likely but certain factors are outstanding, which impact the quantification of loss that is deferring downgrade to a risk rating of “loss.”

 

Loss – Loans are considered uncollectible and of such little value that their continuance as assets without establishment of a specific reserve or charge off is not warranted.

 

Loans assigned an internal risk rating of “substandard” or worse are considered classified loans. Loans assigned an internal risk rating of “special mention” or worse are considered criticized loans.

 

Classified loans and other portions of the portfolio specifically identified by management are reviewed at least quarterly. This includes evaluating market conditions, collateral conditions, and borrower or guarantor financial status to determine the appropriateness of the risk rating, accrual/nonaccrual status designations, and pooled/non-pooled designations under ASC 326. The Company’s Credit Review Department also performs a review of loans throughout the year, including classified loans, based upon scoping criteria that considers various credit risk-related factors. The results of the loan reviews are presented on a quarterly basis to the Credit Risk Management Committee (“CRMC”), as well as the Risk Oversight Committee of the Board of Directors. The CRMC is made up of members of senior management involved in various credit risk-related activities and is responsible for the authorization and evaluation of credit policies, lending authorities, credit risk reporting, reporting from the special credits group, and lending concentrations to facilitate an appropriate level of oversight and management of credit risk related processes.

 

The Company evaluates whether a modification, extension, or renewal of a loan is a current period origination in accordance with GAAP. Renewals that are subject to a full credit evaluation are considered current year originations for purposes of the table below. The following table presents the loan portfolio by vintage and risk rating as of March 31, 2020, in conformance with the adoption of ASC 326.

 

21

 

 

 

As of March 31, 2020  Term Loans Amortized Cost Basis by Origination Year   Revolving loans amortized   Revolving loans converted     
($ in thousands)  2020   2019   2018   2017   2016   Prior   cost basis   to term   Total 
Real estate mortgage loans:                                             
Single-family residential  $   $   $   $   $   $47,908   $   $   $47,908 
Pass                       47,551            47,551 
Special Mention                       67            67 
Substandard                       290            290 
Doubtful                                    
Loss                                    
Multi-family residential  $306,545   $1,556,718   $786,469   $595,961   $239,768   $426,826   $   $   $3,912,287 
Pass   306,545    1,555,082    786,469    595,961    239,768    425,960            3,909,785 
Special Mention                                    
Substandard       1,636                866            2,502 
Doubtful                                    
Loss                                    
Commercial real estate  $100,845   $329,869   $161,388   $64,748   $135,671   $280,944   $3,017   $   $1,076,482 
Pass   93,292    312,966    161,388    64,062    135,119    277,614    2,994        1,047,435 
Special Mention   7,553    16,903        686            23        25,165 
Substandard                   552    3,330            3,882 
Doubtful                                    
Loss                                    
Construction  $3,792   $3,853   $30,111   $11,203   $   $294   $   $   $49,253 
Pass   3,792    3,853    10,814    11,203        294            29,956 
Special Mention           19,297                        19,297 
Substandard                                    
Doubtful                                    
Loss                                    
Commercial and industrial  $8,510   $257,358   $235,275   $222,316   $48,631   $3,238   $91,634   $76   $867,038 
Pass   8,510    257,213    229,709    222,223    41,764    1,428    83,383        844,230 
Special Mention       145    2,565        1,445        1,951        6,106 
Substandard           3,001    93    5,422    1,810    6,300    76    16,702 
Doubtful                                    
Loss                                    
Small Business Administration  $1,027   $8,250   $5,930   $3,799   $616   $11,769   $2,647   $   $34,038 
Pass   1,027    8,250    5,930    790    448    8,883    2,647        27,975 
Special Mention               1,818        152            1,970 
Substandard               1,191    168    2,734            4,093 
Doubtful                                    
Loss                                    
Consumer and other  $   $   $9   $11   $1,235   $1,657   $272   $   $3,184 
Pass           9    11    1,068    1,186    272        2,546 
Special Mention                       52            52 
Substandard                   167    419            586 
Doubtful                                    
Loss                                    
Total Loans  $420,719   $2,156,048   $1,219,182   $898,038   $425,921   $772,636   $97,570   $76   $5,990,190 
Pass   413,166    2,137,364    1,194,319    894,250    418,167    762,916    89,296        5,909,478 
Special Mention   7,553    17,048    21,862    2,504    1,445    271    1,974        52,657 
Substandard       1,636    3,001    1,284    6,309    9,449    6,300    76    28,055 
Doubtful                                    
Loss                                    

 

22

 

 

The following table presents the loan portfolio by risk rating and by class as of December 31, 2019:

 

($ in thousands)

  Pass   Special
mention
   Substandard   Doubtful   Loss   Total   Criticized
total
 
As of December 31, 2019                            
Real estate mortgage loans:                                   
Single-family residential  $49,442   $69   $438   $   $   $49,949   $507 
Multifamily residential   3,783,589        872            3,784,461    872 
Commercial   1,052,918    12,753    6,897            1,072,568    19,650 
Construction and land loans   36,983    18,756                55,739    18,756 
Commercial business loans   874,118    8,471    18,417            901,006    26,888 
Small Business Administration loans   27,525    154    5,962            33,641    6,116 
Consumer and other loans   2,489    53    614            3,156    667 
Total  $5,827,064   $40,256   $33,200   $   $   $5,900,520   $73,456 

 

(d)       Allowance for Credit Losses (ASC 326)

 

The Company adopted ASC 326, Financial Instruments - Credit Losses, on January 1, 2020, as prescribed in ASC 326-10-65, Transition and Open Effective Date Information. The adoption impact of ASC 326 was based upon our ACL methodology, as discussed in the Company’s significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” and was recorded using the cumulative-effect adjustment to the Company’s beginning retained earnings as of January 1, 2020. This resulted in an adjustment to the allowance for credit losses on loans of $2.4 million and a $1.4 million increase in our allowance for credit losses on unfunded loan commitments. Collectively, our allowance for credit losses on loans and unfunded loan commitments increased by $3.8 million as of January 1, 2020.

 

($ in thousands)  Loans   Unfunded loan
commitments
   Total 
Balance at 12/31/2019   $40,844   $1,014   $41,858 
Cumulative Adjustment    2,397    1,449    3,846 
Balance at 1/1/2020    43,241    2,463    45,704 
Provision for credit losses    7,557        7,557 
Provision for unfunded loan commitments        1,185    1,185 
Total provision    7,557    1,185    8,742 
Loan charged-off    (202)       (202)
Recoveries collected    828        828 
Balance at 3/31/2020   $51,424   $3,648   $55,072 

 

23

 

 

The following table presents the activity in the allowance for credit losses on loans by class during the three months ended March 31, 2020.

 

($ in thousands)  For the three months ended March 31, 2020 
Allowance for credit losses on loans:  Single-
family
residential
   Multifamily
residential
   Commercial
real estate
   Construction   Commercial
and
industrial
   Small Business
Administration
   Consumer
and other
   Total 
Beginning balance, prior to adoption of ASC 326  $114   $14,191   $6,598   $602   $18,799   $538   $2   $40,844 
Impact of adopting ASC 326   301    75    2,364    1,674    (2,085)   55    13    2,397 
Balance as of January 1, 2020   415    14,266    8,962    2,276    16,714    593    15    43,241 
Provision for loan loss expense   149    3,242    2,222    9    1,803    123    9    7,557 
Loans charged-off                   (182)   (18)   (2)   (202)
Recoveries collected                   748    80        828 
Total ending allowance as of March 31, 2020  $564   $17,508   $11,184   $2,285   $19,083   $778   $22   $51,424 

 

The Company’s allowance for credit losses as of March 31, 2020 increased $10.6 million, or 25.9%, to $51.4 million as of March 31, 2020 from $40.8 million as of December 31, 2019. In addition to the $2.4 million adoption impact, the Company calculated its CECL estimate as of March 31, 2020, which resulted in an $8.2 million increase to the allowance for credit losses on loans. The increase in allowance was primarily attributed to the following factors and resulted in a $7.6 million provision for credit losses:

 

Changes to the reasonable and supportable forecast: our forecast assumed the adverse effects of the COVID-19 pandemic, including GDP contraction in 2020 and a sustained increase in unemployment rates. Additionally, the economic forecast reflected the changes to fiscal and monetary policy related to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), including the over $2 trillion stimulus package, the Federal Reserve’s near-zero policy rate, and the forecasted expansion of their balance sheet.

 

Changes to qualitative environmental factors: our allowance for credit losses includes a qualitative component to consider credit risks that are otherwise not captured in the other areas of our ACL methodology, including the Company’s historical loss rates or reasonable and supportable forecast. While the trends in our asset quality were stable through March 31, 2020, we believed that we were exposed to heightened risks specifically from increased requests for loan modifications as part of the CARES Act and economic volatility more generally.

 

As of March 31, 2020, the Company’s allowance for credit losses on loans was comprised of $51.4 million allocated to pooled loans, and we had no recorded allowance on non-pooled loans. Additionally, there was no recorded allowance for credit losses on loans reported as non accrual as the fair value of these loans exceeded the collateral value as of March 31, 2020.

 

24

 

 

 

When individual loan relationships no longer share common credit risk characteristics of the established loan pools, the Company removes them from the loan pools and evaluates them on an individual (non-pooled) basis. This typically occurs when borrowers have experienced financial difficulty, including, but not limited to, delinquent loan payments, TDRs, non-accrual status, bankruptcy, delinquent taxes, and previous charge offs. Such individually identified loan relationships are evaluated to determine whether they are collateral dependent, by considering whether repayment is expected to be provided substantially through the operation or sale of the underlying collateral. The following table presents the amortized cost basis of collateral-dependent loans by class of loan and collateral type as of March 31, 2020.

 

   As of March 31, 2020 
($ in thousands)  Real estate
secured
   Other business
assets
   Total 
Real estate mortgage loans:               
Single-family residential  $   $   $ 
Multifamily residential   1,636        1,636 
Commercial real estate   2,396        2,396 
Construction            
Commercial and industrial            
Small Business Administration       711    711 
Consumer and other   578        578 
Total  $4,610   $711   $5,321 

 

In addition to the allowance for credit losses on loans, the Company recorded a provision for unfunded loan commitments of $1.2 million during the three months ended March 31, 2020. The Company’s allowance for credit losses on unfunded loan commitments totaled $3.6 million as of March 31, 2020. The allowance for credit losses for unfunded loan commitments was recorded to other liabilities and the corresponding provision for unfunded loan commitments was recorded to other non-interest expense.

 

(e)        Allowance for Loan Losses (Prior GAAP)

 

The allowance for loan losses reflects the Company’s estimate of probable losses inherent within the loan portfolio. The allowance is estimated based upon an established methodology described in the Company's significant accounting policies in the 2019 Consolidated Financial Statements – Note 2, “Summary of Significant Accounting Policies.”

 

Loans are evaluated under the Company’s allowance for loan losses methodology, including the individual evaluation of loans deemed to be impaired. As of December 31, 2019, there were $5.5 million of loans individually evaluated for impairment with no recorded allowance. The allowance for loan losses for loans collectively evaluated for impairment as of December 31, 2019 totaled $40.8 million.

 

The Company recorded a provision for loan losses expense of $2.2 million for the three months ended March 31, 2019.

 

The following table presents an analysis of the allowance for loan losses segregated by portfolios evaluated individually for impairment, which excludes acquired impaired loans, as of December 31, 2019:

 

   As of December 31, 2019 
($ in thousands)  Recorded
investment
   No related  
specific
reserve
   With related
specific
reserve
   Specific
reserve
   Unpaid
principal
balance
 
Real estate mortgage loans:                         
Single-family residential  $138   $138   $   $   $141 
Multifamily residential                    
Commercial   2,409    2,409            2,402 
Construction and land loans                    
Commercial business loans                    
Small Business Administration loans   2,361    2,361            2,744 
Consumer and other loans   606    606            962 
Total loan portfolio  $5,514   $5,514   $   $   $6,249 

 

25

 

 

The recorded investment of an impaired loan includes carrying value increased by accrued interest. The average recorded investment on impaired loans, and the corresponding interest income recognized, is summarized in the following table.

 

   For the three months ended March 31, 
   2019 
($ in thousands)  Average recorded investment   Interest income recognized 
Real estate mortgage loans:          
Single-family residential  $47   $ 
Multifamily residential        
Commercial   2,453     
Construction and land loans        
Commercial business loans   16,040     
Small Business Administration loans   7,154     
Consumer and other loans   645    2 
Total impaired loans  $26,339   $2 

 

The following is a summary of activity in the allowance for loan losses for the periods indicated:

 

   Real estate mortgage loans                     
($ in thousands)  Single- family
residential
   Multifamily
residential
   Commercial   Construction
and land
   Commercial
business
   Small
business
administration
   Consumer
and other
   Total 
Three months ended March 31, 2019                                
Beginning balance  $178   $10,236   $10,663   $698   $32,545   $336   $8   $54,664 
Provision (negative provision) for loan losses   (34)   1,367    (82)   (99)   801    244        2,197 
Charge-offs                   (187)   (196)       (383)
Recoveries                   1,999    6        2,005 
Net recoveries (charge-offs)                   1,812    (190)       1,622 
Ending balance  $144   $11,603   $10,581   $599   $35,158   $390   $8   $58,483 

 

   Real estate mortgage loans                     
($ in thousands)  Single-
family residential
   Multifamily
residential
   Commercial   Construction and land   Commercial business   Small Business Administration   Consumer and other   Total 
As of December 31, 2019                                        
Ending allowance balance allocated to:                                        
Loans collectively evaluated for impairment  $114   $14,191   $6,598   $602   $18,799   $538   $2   $40,844 
Loans individually evaluated for impairment