What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 146 added, 233 removed, 548 unchanged (41% of the section changed)

3 unchanged sentences

(dollars in thousands)

September 30,

Cash and due from banks

Interest earning deposits with other banks (restricted cash of $ 0 and $ 27,355

at September 30, 2020 and December 31, 2019, respectively)

Interest earning deposits with other banks (restricted cash of $ 0

at March 31, 2021 and December 31, 2020)

Investment securities, available for sale, at fair value

14 unchanged sentences

Principal amount $ 10,000 (less unamortized debt issuance costs of $ 4

and $ 21 at September 30, 2020 and December 31, 2019, respectively)

and $ 7 at March 31, 2021 and December 31, 2020, respectively)

Junior subordinated debentures

Principal amount $ 3,609 (less unamortized debt issuance costs of $ 24

and $ 26 at September 30, 2020 and December 31, 2019, respectively)

and $ 25 at March 31, 2021 and December 31, 2020, respectively)

Deferred compensation

5 unchanged sentences

Preferred stock, no par value:

25,000,000 shares at September 30, 2020 and December 31, 2019;

25,000,000 shares at March 31, 2021 and December 31, 2020;

issued and outstanding:

zero shares at September 30, 2020 and December 31, 2019

zero shares at March 31, 2021 and December 31, 2020

Common stock, no par value:

300,000,000 shares at September 30, 2020 and December 31, 2019;

11,930,243 voting shares at September 30, 2020 issued and outstanding

and 11,913,885 voting shares at December 31, 2019 issued and outstanding

300,000,000 shares at March 31, 2021 and December 31, 2020;

11,988,636 shares at March 31, 2021 issued and outstanding

and 11,954,327 shares at December 31, 2020 issued and outstanding

Retained earnings

6 unchanged sentences

(dollars in thousands, except for per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

INTEREST AND DIVIDEND INCOME

17 unchanged sentences

Gain on sales of loans, net

Gain on sales of securities, net

Total noninterest income

2 unchanged sentences

Data processing

Software licenses, maintenance and subscriptions

Director and staff expenses

13 unchanged sentences

(dollars in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

OTHER COMPREHENSIVE INCOME, before tax

2 unchanged sentences

Income tax benefit (expense) related to unrealized holding

Reclassification adjustment for net gain from sale of

investment securities available for sale included

Income tax provision related to net gain from sale of

investment securities available for sale included in income

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax

7 unchanged sentences

Income (Loss)

BALANCE, June 30, 2019

Exercise of stock options

Stock-based compensation

Other comprehensive income

BALANCE, September 30, 2019

BALANCE, June 30, 2020

Exercise of stock options

Stock-based compensation

Other comprehensive loss

BALANCE, September 30, 2020

BALANCE, December 31, 2019

4 unchanged sentences

Other comprehensive income

BALANCE, September 30, 2019

BALANCE, March 31, 2020

BALANCE, December 31, 2020

Issuance of restricted stock awards

Forfeiture of restricted stock awards

Vesting of restricted stock units

Exercise of stock options

Stock-based compensation

Other comprehensive income

BALANCE, September 30, 2020

Other comprehensive loss

BALANCE, March 31, 2021

S ee accompanying Notes to Condensed Consolidated Financial Statements.

2 unchanged sentences

(dollars in thousands)

Nine Months Ended September 30,

Three months ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES

6 unchanged sentences

Gain on sales of loans

Gain on sale of securities, net

Proceeds from sale of loans

Net premium amortization (discount accretion) on investment securities

3 unchanged sentences

Net change in other assets and liabilities

Total adjustments

Net cash provided by operating activities

2 unchanged sentences

Purchase of investment securities available for sale

Purchase of investment securities held-to-maturity

Proceeds from sale of available for sale securities

Change in other investments, net

2 unchanged sentences

Maturities and calls of investment securities available-for-sale

Purchase of participation loans

Proceeds from sale of loans

Increase in loans receivable, net

3 unchanged sentences

Net increase in demand deposits, NOW and money market, and savings

Net decrease in time deposits

Net (decrease) increase in time deposits

Net repayments from short term FHLB borrowing

8 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

10 unchanged sentences

The Company is a Washington state corporation that was organized in 2003.

The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (“Federal Reserve”) state member bank.

The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank that is a Federal Reserve member bank.

Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch, which the Bank leases from the LLC.

The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 15 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application.

The Company opened its 15 th branch in Arlington, Washington during the second quarter 2020.

The Company provides a full range of banking products and services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application.

The Company previously announced the sale of its Freeland Branch, which was effective April 30, 2021, which brought the total branch locations to 14 .

The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington.

The Bank’s deposits are insured in whole or in part by the FDIC.

The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (the “FDIC”).

The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers.

The Bank also provides banking as a service (“BaaS”) that allow the Company’s broker dealers and digital financial service providers to offer their customers banking services.

In 2021, the Bank expects to introduce a digital bank offering in collaboration with Google.

The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks.

The Federal Reserve also has supervisory authority over the Company.

The CCBX division provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services.

In addition, the Bank expects to introduce a digital bank offering in collaboration with Google.

The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Washington State Department of Financial Institutions Division of Banks.

The Federal Reserve also has regulatory and supervisory authority over the Company.

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S.

2 unchanged sentences

Securities and Exchange Commission (“SEC”) on March 12, 2021.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for future periods.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for future periods.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars.

2 unchanged sentences

These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation.

Principles of consolidation - The consolidated financial statements include the accounts of the Company and the Bank.

Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank and the LLC.

All significant intercompany accounts have been eliminated in consolidation.

2 unchanged sentences

Actual results could differ significantly from those estimates.

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2020 for potential recognition or disclosure.

Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2021 for potential recognition or disclosure.

To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions.

The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.

As referenced above, the sale of the Freeland branch was effective April 30, 2021, which included approximately $ 1.9 million in loans and $ 24.1 million in deposits.

Other than the sale of the Freeland branch, the Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

1 unchanged sentence

Recent Accounting Guidance

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (the “agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

Under Accounting Standards Codification 310-40, Receivables – Troubled Debt Restructurings by Creditors , a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs.

This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

To be eligible a loan modification must be (1) related to COVID-19;

Under Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors , a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The CARES Act specified that, to be eligible not to be considered a TDR, a loan modification must be (1) related to the COVID-19 pandemic;

(2) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the federal National Emergency or (B) December 31, 2020.

and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the federal national emergency or (B) December 31, 2020 (which has since been extended to January 1, 2022 by the Consolidated Appropriations Act, 2021, as discussed below).

Additionally, under guidance from the federal bank regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40.

These modifications include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.

The federal banking agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that such short-term modifications not to be considered TDRs.

See Note 4 of the Condensed Consolidated Financial Statements of this Report for disclosure of the impact to date .

Consolidated Appropriations Act, 2021.

In response to the COVID-19 pandemic, Congress, through the enactment of the Consolidated Appropriations Act, 2021 on December 27, 2020, took a series of actions to provide national emergency economic relief measures.

Such action included extending the relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier.

The suspension of GAAP is applicable for the entire term of the modification.

The Bank is applying this guidance to qualifying COVID-19 Modifications.

Recent Accounting Guidance Not Yet Effective

3 unchanged sentences

The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods.

As a smaller reporting company, the Company’s implementation will be effective January 1, 2023.

The Company is actively assessing the data and the model needs and are evaluating the impact of adopting the amendment.

The Company’s implementation of ASU 2016-13 will be effective January 1, 2023.

The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment.

The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023, in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

2 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Available-for-sale

11 unchanged sentences

Treasury securities

Government agencies

Agency collateralized mortgage obligations

5 unchanged sentences

Total investment securities

The amortized cost and fair value of debt securities at September 30, 2020, by contractual maturity, are shown below.

The amortized cost and fair value of debt securities at March 31, 2021, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

3 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Amounts maturing in

3 unchanged sentences

collateralized mortgage obligations

Investment securities with carrying values of $ 21,958,000 and $ 16,843,000 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were no sales of available for sale securities during the three or nine months ended September 30, 2020.

There were five securities sold totaling $ 30.0 million during the three and nine months ended September 30, 2019, resulting in gross gains of $ 242,000 and gross losses of $ 71,000 .

There were no gross unrealized losses as of September 30, 2020.

Information pertaining to securities with gross unrealized losses at the date indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

Less Than 12 Months

12 Months or Greater

(dollars in thousands)

December 31, 2019

Available-for-sale

Treasury securities

Government agencies

Total available-for-sale securities

Held-to-maturity

Agency residential mortgage-backed

Total investment securities

At September 30, 2020 and December 31, 2019, there were zero and six securities in an unrealized loss position, respectively.

Unrealized losses have not been recognized into income because management does not intend to sell and does not expect that it will be required to sell the investments.

The decline is largely due to changes in market conditions and interest rates, rather than credit quality.

The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve.

The Company did no t consider these securities to be other than temporarily impaired at December 31, 2019.

Investment securities with carrying values of $ 21.5 million and $ 22.0 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

During the quarter ended March 31, 2021 three U.S.

Treasury Bills were purchased for a total of $ 15.0 million, to replace maturing securities.

There were no sales of securities during the three months ended March 31, 2021 or 2020.

There were no gross unrealized losses or securities in an unrealized loss position as of the quarter ended March 31, 2021, or December 31, 2020.

Note 4 - Loans and Allowance for Loan Losses

The composition of the loan portfolio is as follows as of the periods indicated:

September 30,

Commercial and industrial loans

7 unchanged sentences

Loans receivable

Included in consumer and other loans are overdrafts of $ 11,000 and $ 26,000 at September 30, 2020 and December 31, 2019, respectively.

The Company has pledged loans totaling $ 378,645,000 and $ 163,522,000 at September 30, 2020 and December 31, 2019, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (“FRB”).

The balance of Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans was $ 487,536,000 and $ 36,592,000 at September 30, 2020 and December 31, 2019, respectively.

Paycheck Protection Plan (“PPP”) loans totaling $ 452,846,000 at September 30, 2020 are included in the commercial and industrial loans balance.

Net deferred origination fees and premiums include $ 8,586,000 of net fees from PPP loans as of September 30, 2020.

Included in these totals are SBA and USDA loans serviced for others amounting to $ 20,700,000 and $ 21,498,000 at September 30, 2020 and December 31, 2019, respectively .

Included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $ 543.8 million at March 31, 2021 and $ 365.8 million at December 31, 2020.

PPP loans are 100 % guaranteed by the Small Business Administration (“SBA”).

Also included in commercial and industrial loans as of March 31, 2021 and December 31, 2020, is $ 102.2 million and $ 65.6 million, respectively in capital call lines, provided to venture capital firms through one of our BaaS clients.

These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our BaaS client and the underwriting is reviewed and approved by the Bank on every loan.

Included in consumer and other loans are overdrafts of $ 11,000 and $ 31,000 at March 31, 2021 and December 31, 2020, respectively.

The Company has pledged loans totaling $ 346.1 million and $ 326.8 million at March 31, 2021 and December 31, 2020, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (“FRB”).

The balance of SBA and United States Department of Agriculture (“USDA”) loans and participations sold and serviced for others totaled was $ 21.6 million and $ 20.6 million at March 31, 2021 and December 31, 2020, respectively.

The balance of Main Street Lending Program (“MSLP”) loans participated and serviced totaled $ 56.3 million at March 31, 2021 and December 31, 2020.

The Company, at times, purchases individual loans at fair value as of the acquisition date.

Purchased loans with remaining balances totaled $ 20,920,000 and $ 32,937,000 as of September 30, 2020 and December 31, 2019, respectively.

Unamortized premiums totaled $ 324,000 and $ 527,000 as of September 30, 2020 and December 31, 2019, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $ 41,465,000 and $ 31,352,000 as of September 30, 2020 and December 31, 2019, respectively.

Purchased loans with remaining balances totaled $ 18.6 million and $ 19.3 million as of March 31, 2021 and December 31, 2020, respectively.

Unamortized premiums totaled $ 302,000 and $ 306,000 as of March 31, 2021 and December 31, 2020, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $ 46.7 million and $ 44.9 million as of March 31, 2021 and December 31, 2020, respectively.

The following is a summary of the Company’s loan portfolio segments:

6 unchanged sentences

In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

The Company also has capital call lines which are provided to venture capital firms through one of our BaaS clients.

Also included in this category are SBA 7(a) loans, which allow small business owners to apply for financial assistance via the PPP as prescribed in the CARES Act.

2 unchanged sentences

To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.

The Paycheck Protection Program Liquidity Facility extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

The interest rate is 0.35 % and as PPP loans are paid down, the borrowing line must also be paid down.

The Paycheck Protection Program Liquidity Facility (“PPPLF”) extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

The interest rate is 0.35 % and as PPP loans are paid down, the PPPLF borrowing line must also be paid down.

Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area.

15 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Commercial and industrial loans

18 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

December 31, 2020

2 unchanged sentences

Residential real estate

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2020 and 2019:

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30, 2020

September 30, 2019

Interest Income

(dollars in thousands)

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Nine Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

Interest Income

3 unchanged sentences

Real estate loans

Construction, land and land development

Residential real estate

Commercial real estate

Consumer loans

The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms.

1 unchanged sentence

In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100 % of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

No loans were restructured in the three or nine months ended September 30, 2020 and September 30, 2019 that qualified as troubled debt restructurings (“TDRs”).

The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at September 30, 2020, as there were no outstanding TDRs at September 30, 2020.

The Company is in contact with borrowers with existing loans that have been impacted by COVID-19.

The Company has modified payments for loan customers during this uncertain time to help alleviate financial hardships.

There are 44 loans, representing $ 52.5 million in outstanding loans, and $ 1.4 million in unused commitments, that remain on deferred or modified payment status as of September 30, 2020.

In accordance with GAAP and interagency guidance issued on March 22, 2020, these short-term modifications, six months or less, made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief, are not considered troubled debt restructurings.

No loans were restructured in the three months ended March 31, 2021 and March 31, 2020 that qualified as TDRs.

The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at March 31, 2021, as there were no outstanding TDRs at March 31, 2021.

Pursuant to federal guidance, the Company deferred or modified payments on existing loans to assist customers financially during the COVID-19 pandemic and economic shutdown.

There are three loans, representing $ 13.3 million in outstanding loans, that remain on deferred or modified payment status as of March 31, 2021.

In accordance with GAAP and interagency guidance issued on March 22, 2020, these short-term modifications, made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief, are not considered troubled debt restructurings.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings.

3 unchanged sentences

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

September 30,

(dollars in thousands)

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Total nonaccrual loans

14 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Commercial and industrial loans

22 unchanged sentences

An estimated loss rate calculated from the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The $ 452.8 million in PPP loans as of September 30, 2020 are 100% guaranteed and were not subject to the allowance analysis or assigned an allowance.

The Company’s provision for credit losses of $ 2.2 million and $ 5.7 million during the three and nine months ended September 30, 2020, respectively, is related to an increase in qualitative factors primarily related to the uncertainties in the economic outlook from the COVID-19 pandemic and growth in the loan portfolio.

The $ 543.8 million in PPP loans as of March 31, 2021 are 100% guaranteed and were not subject to the allowance analysis or assigned an allowance.

The Company’s provision for credit losses of $ 357,000 for the three months ended March 31, 2021, is primarily the result of growth in the loan portfolio.

The $ 1.6 million provision for credit losses during the three months ended March 31, 2020, is related to an increase in qualitative factors primarily related to the uncertainties in the economic outlook from the COVID-19 pandemic and growth in the loan portfolio.

The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model.

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2020:

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2021:

Construction,

(dollars in thousands)

Three Months Ended September 30, 2020

ALLL balance, June 30, 2020

Provision for loan losses or (recapture)

Loans charged-off

Recoveries of loans previously charged-off

Net (charge-offs) recoveries

ALLL balance, September 30, 2020

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

ALLL balance, December 31, 2020

3 unchanged sentences

Net (charge-offs) recoveries

ALLL balance, September 30, 2020

As of September 30, 2020

ALLL balance, March 31, 2021

As of March 31, 2021

ALLL amounts allocated to

1 unchanged sentence

Collectively evaluated for impairment

ALLL balance September 30, 2020

ALLL balance, March 31, 2021

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Loan balance, September 30, 2020

The following tables summarize the allocation of the ALLL , as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30 , 2019 :

Loan balance, March 31, 2021

Construction,

(dollars in thousands)

Three months ended September 30, 2019

Balance, June 30, 2019

Provision for loan losses or (recapture)

Loans charged-off

Recoveries of loans previously charged-off

Net (charge-offs) recoveries

Balance, September 30, 2019

Nine months ended September 30, 2019

Balance, December 31, 2018

Three Months Ended March 31, 2020

ALLL balance, December 31, 2019

Provision for loan losses or (recapture)

2 unchanged sentences

Net (charge-offs) recoveries

Balance, September 30, 2019

As of September 30, 2019

ALLL balance, March 31, 2020

As of March 31, 2020

ALLL amounts allocated to

1 unchanged sentence

Collectively evaluated for impairment

ALLL balance, September 30, 2019

ALLL balance, March 31, 2020

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Loan balance, September 30, 2019

Loan balance, March 31, 2020

The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2020.

11 unchanged sentences

The composition of consolidated deposits consisted of the following at the periods indicated:

September 30,

(dollars in thousands)

1 unchanged sentence

NOW and money market

Total core deposits

BaaS-brokered deposits

2 unchanged sentences

Total deposits

The following table presents the maturity distribution of time deposits as of September 30, 2020 (dollars in thousands):

The following table presents the maturity distribution of time deposits as of March 31, 2021 (dollars in thousands):

(dollars in thousands)

Twelve months

5 unchanged sentences

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

The Company adopted the provisions of ASU 2016-02 (Topic 842) on January 1, 2019.

Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term.

Operating lease liabilities represent an obligation to make lease payments arising from the lease.

Operating lease ROU assets and operating lease liabilities were recognized in the Company’s Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.

ROU assets were further adjusted for lease incentives.

Operating leases entered into after the adoption date were recognized as an operating lease ROU asset and operating lease liability at the commencement date of the new lease.

An operating lease ROU asset and operating lease liability will be recognized for any new operating leases at the commencement of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities.

There were no new leases during the period.

There was one lease that renewed during the quarter ended March 31, 2021.

The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately.

2 unchanged sentences

Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis .

As of September 30, 2020, the Company does no t have any leases that have not yet commenced.

At September 30, 2020, lease expiration dates ranged from six months to 25 years , with additional renewal options on certain leases typically ranging from 5 to 10 years .

At September 30, 2020, the weighted average remaining lease term for the Company’s operating leases was 10.5 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 461,000 and $ 342,000 , respectively, for the three months ended September 30, 2020 and 2019 and $ 1.1 million for both the nine months ended September 30, 2020 and 2019.

As of March 31, 2021, the Company does no t have any leases that have not yet commenced.

At March 31, 2021, lease expiration dates ranged from nine months to 24 years , with additional renewal options on certain leases typically ranging from 5 to 10 years .

At March 31, 2021, the weighted average remaining lease term for the Company’s operating leases was 8.8 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 341,000 and $ 343,000 , respectively, for the three months ended March 31, 2021 and 2020.

Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at September 30, 2020:

September 30,

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at March 31, 2021:

(dollars in thousands)

October 1, 2020 to December 31, 2020

April 1, 2021 to December 31, 2021

2026 and thereafter

2 unchanged sentences

Present value of lease liabilities

The following table presents the components of total lease expense and operating cash flows for the nine months ended September 30, 2020:

September 30,

The following table presents the components of total lease expense and operating cash flows for the three months ended March 31, 2021:

(dollars in thousands)

5 unchanged sentences

(1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited).

The Company entered into a five-year prepaid capital lease for ATM machines beginning October 1, 2020.

The equipment is recorded as fixed assets on the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the term of the lease.

Depreciation expense was $ 33,000 for the three months ended March 31, 2021, with $ 599,000 remaining as of March 31, 2021.

This capital lease began in October 2020, therefore there was no depreciation expense for the ATM capital lease as of March 31, 2020.

Note 7 - Stock-Based Compensation

4 unchanged sentences

Existing awards under the previous plans will vest under the terms granted and no further awards will be made under these plans.

Shares available to be granted under the 2018 Plan totaled 275,323 at September 30, 2020.

Shares available to be granted under the 2018 Plan totaled 175,304 at March 31, 2021.

Stock Option Awards

In January 2019, the Company granted 26,737 nonqualified stock options under the 2018 Plan to an employee, which vest ratably over 10 years.

In January 2019, the Company also granted 99,100 qualified stock options under the 2018 Plan to employees, which vest ratably over 10 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table.

4 unchanged sentences

Compensation expense related to unvested stock option awards is reversed at date of forfeiture.

The following assumptions were used to estimate the value of options granted under the 2018 Plan as applicable in the period indicated.

There were no new stock options granted in the nine months ended September 30, 2020:

Nine months ended

September 30, 2019

Expected term

Expected stock price volatility

Risk-free interest rate

Expected dividends

Weighted average grant date fair value

A summary of stock option activity under the 2018 Plan and 2006 Plan during the nine months ended September 30, 2020:

There were no new stock options granted in the three months ended March 31, 2021 and 2020.

A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended March 31, 2021:

Intrinsic Value

2 unchanged sentences

Forfeited or expired

Outstanding at September 30, 2020

Vested or expected to vest at September 30, 2020

Exercisable at September 30, 2020

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and nine months ended September 30, 2020 was $ 28,000 and $ 121,000 , respectively, and was $ 35,000 and $ 170,000 for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, there was $ 2.0 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan.

Outstanding at March 31, 2021

Vested or expected to vest at March 31, 2021

Exercisable at March 31, 2021

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three months ended March 31, 2021 and 2020, was $ 357,000 and $ 91,000 , respectively.

As of March 31, 2021, there was $ 1.8 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan.

Total unrecognized compensation costs are adjusted for unvested forfeitures.

The Company expects to recognize that cost over a weighted-average period of approximately 6.5 years.

Compensation expense recorded related to stock options was $ 94,000 and $ 281,000 for the three and nine months ended September 30, 2020, respectively, and $ 101,000 and $ 295,000 for the three and nine months ended September 30, 2019, respectively.

Compensation expense recorded related to stock options was $ 89,000 and $ 94,000 for the three months ended March 31, 2021 and 2020, respectively.

Restricted Stock Units

In February 2020, the Company granted 78,756 restricted stock units under the 2018 Plan to employees, which vest ratably over 10 years .

In April 2020, the Company granted 1,490 restricted stock units under the 2018 Plan to an employee, which vest ratably over 10 years.

In July 2020, the Company granted 6,902 restricted stock units under the 2018 Plan to employees, which cliff vest after 5 years.

In January 2021, the Company granted 84,258 restricted stock units under the 2018 Plan to employees, which vest ratably over 5 years.

The fair value of restricted stock units is equal to the fair value of the Company’s stock at the date of grant.

1 unchanged sentence

Restricted stock units are nonparticipating securities.

As of September 30, 2020, there was $ 1.3 million of total unrecognized compensation cost related to nonvested restricted stock units.

As of March 31, 2021, there was $ 3.1 million of total unrecognized compensation cost related to nonvested restricted stock units.

The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 6.4 years.

Compensation expense recorded related to restricted stock units was $ 39,000 and $ 96,000 for the three and nine months ended September 30, 2020, respectively.

There were no restricted stock units and no compensation expense recorded related to restricted stock units for the three and nine months ended September 30, 2019.

A summary of the Company’s nonvested shares at September 30, 2020 and changes during the nine-month period is presented below:

Compensation expense recorded related to restricted stock units was $ 101,000 and $ 23,000 for the three months ended March 31, 2021 and 2020, respectively.

A summary of the Company’s nonvested shares at March 31, 2021 and changes during the three-month period is presented below:

Nonvested shares

3 unchanged sentences

Nonvested shares at December 31, 2020

Nonvested shares at September 30, 2020

Nonvested shares at March 31, 2021

Restricted Stock Awards

In February 2020, there were 4,000 shares granted to an employee at an estimated fair value of $ 17.81 per share, vesting over eight years .

In January 2021, there were 5,978 shares granted to an employee at an estimated fair value of $ 20.91 per share, vesting immediately.

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant.

1 unchanged sentence

Restricted stock awards are participating securities.

As of September 30, 2020, there was $ 65,000 of total unrecognized compensation cost related to nonvested restricted stock awards.

As of March 31, 2021, there was $ 61,000 of total unrecognized compensation cost related to nonvested restricted stock awards.

The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 6.8 years.

Compensation expense recorded related to restricted stock awards was $ 2,000 and $ 5,000 for the three and nine months ended September 30, 2020, respectively, and was $ 2,000 and $ 5,000 for the three and nine months ended September 30, 2019, respectively.

Compensation expense recorded related to restricted stock awards was $ 127,000 and $ 3,000 for the three months ended March 31, 2021 and 2020, respectively.

Director’s Stock Bonus

The Company adopted and subsequently amended the Director’s Stock Bonus Plan (“Bonus Plan”).

The Bonus Plan would have expired on May 31, 2018 but was replaced on April 30, 2018, when the shareholders approved the 2018 Plan.

Stock is granted to directors who attended at least 75 % of the scheduled board meetings during the prior year.

Grants cliff vest over two years from date awarded, contingent on the director still being a director of the Company.

Stock was previously granted to directors who attended at least 75 % of the scheduled board meetings during the prior year.

Grants cliff vest over one or two years from date awarded, contingent on the director still being a director of the Company.

During the vesting period, the grants are considered participating securities.

Awards previously granted under the Bonus Plan will vest under the term granted.

Under the 2018 Plan, eligible directors are granted stock with a total market value of $ 5,000 .

Under the 2018 Plan, eligible directors are granted stock with a total market value of $ 15,000 , and the Board Chair is granted stock with a total market value of $ 25,000 .

Stock will be granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date.

For stock granted in 2020, $ 5,000 is subject to a two-year cliff vesting period, and the remaining stock will cliff vest one day prior to the next annual meeting date.

Directors unable to receive stock will receive cash in lieu upon completion of the vesting period.

Cash awards are recognized over the vesting period and recorded in other liabilities until paid.

In February 2020, there were 2,248 shares granted to eight directors at an estimated fair value of $ 17.81 per share.

In January 2019, there were 2,352 shares granted to seven directors at an estimated fair value of $ 14.91 per share.

Compensation expense recorded related to the 2018 Plan totaled $ 8,000 and $ 26,000 for the three and nine months ended September 30, 2020, respectively, and $ 8,000 and $ 25,000 for the three and nine months ended September 30, 2019, respectively.

A summary of the Company’s nonvested shares at September 30, 2020 and changes during the nine-month period is presented below:

No new shares have been granted for the three months ended March 31, 2021.

Compensation expense recorded related to the 2018 Plan totaled $ 46,000 and $ 9,000 for the three months ended March 31, 2021 and 2020, respectively.

A summary of the Company’s nonvested shares at March 31, 2021 and changes during the three-month period is presented below:

Nonvested shares

3 unchanged sentences

Nonvested shares at December 31, 2020

Nonvested shares at September 30, 2020

Nonvested shares at March 31, 2021

Note 8 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

September 30, 2020

March 31, 2021

Fair Value Measurements Using

24 unchanged sentences

Financial liabilities

Paycheck Protection Program Liquidity Facility

FHLB advances

3 unchanged sentences

The Company measures and discloses certain assets and liabilities at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

(that is, not a forced liquidation or distressed sale).

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale).

GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements.

16 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Available-for-sale

5 unchanged sentences

Treasury securities

Government agencies

Agency collateralized mortgage obligations

2 unchanged sentences

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2020 and December 31, 2019.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2021 and December 31, 2020.

The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

3 unchanged sentences

Unobservable Inputs

September 30, 2020

March 31, 2021

December 31, 2020

4 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Impaired loans

12 unchanged sentences

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(dollars in thousands, except share data)

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements