What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-06 · 250 added, 204 removed, 471 unchanged (49% of the section changed)

5 unchanged sentences

Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020 (“2019 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10-Q for the quarter ended March 31, 2020 and in Item 1A of this Form 10-Q, and the following:

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020 (“2019 10-K”), the matters described in “Risk Factors” in Item 1A of our Form 10-Q for the quarters ended March 31, 2020, June 30, 2020 and in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

28 unchanged sentences

The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2020 , and our consolidated results of operations for the three and six months ended June 30, 2020 , compared to the same period in the prior fiscal year for the three and six months ended June 30, 2019 .

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2020, and our consolidated results of operations for the three and nine months ended September 30, 2020, compared to the same period in the prior fiscal year for the three and nine months ended September 30, 2019.

This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2019 10-K.

24 unchanged sentences

The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired.

A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment

for which complete, discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of June 30, 2020 which is related to its banking activities.

A reporting unit is defined as any distinct, separately

identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of September 30, 2020 which is related to its banking activities.

The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2019.

The Company performed a goodwill impairment analysis as of June 30, 2020 , due to triggering events being identified, and determined that goodwill was not impaired.

The Company performed a goodwill impairment analysis as of September 30, 2020, due to triggering events being identified, and determined that goodwill was not impaired.

Fair Value Measurements and Valuation Methodologies.

18 unchanged sentences

We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements.

As of June 30, 2020 , management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

As of September 30, 2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

6 unchanged sentences

Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and six-month periods ended June 30, 2020 and June 30, 2019, respectively.

Net interest income was $12.3 million for the three months ended June 30, 2020 and $25.0 million for the six months ended June 30, 2020, compared to $10.1 million for the three months ended June 30, 2019 and $20.1 million of the six months ended June 30, 2019.

The growth in net interest income was due to the growth in average assets from the F&M acquisition, increase in accretion of purchase credit impaired loans and organic loan growth, partially offset by a decrease in net interest margin percentage.

In addition, the three months ended June 30, 2020 benefited from the margin related to the Bank’s origination of $137 million of SBA PPP loans.

The net interest margin for the three-month period ended June 30, 2020 was 3.34%, compared to 3.30% for the three-month period ended June 30, 2019.

The increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts.

The net interest margin, after subtracting the positive 8 basis point impact of accretion due to the payoff of purchased credit impaired loans and scheduled accretion of 7 basis points, was 3.19%.

In addition, the impact of SBA PPP loans originated in the second quarter of 2020 was 4 basis points.

For the quarter ended June 30, 2019, the net interest margin of 3.30%, after subtracting the positive two basis point impact of accretion of purchased credit impaired loans and scheduled accretion of seven basis points was 3.21%.

The net interest margin for the six-months ended June 30, 2020 was 3.48%, compared to 3.36% for the six-month period ended June 30, 2019.

The increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts.

The net interest margin for the six-month period ending June 30, 2020, after subtracting the positive 18 basis point impact of accretion due to the payoff of purchased credit impaired loans and scheduled accretion of 7 basis points, was 3.23%.

For the six months ended June 30, 2019, the net interest margin of 3.36%, after subtracting the positive one basis point impact of accretion of purchased credit impaired loans and scheduled accretion of seven basis points was 3.28%.

This decrease is largely due to lower interest rate spreads between loans and deposits in 2019 due to the competitive market for deposits and higher cost wholesale funding required to replace deposits lost due to the May 2019 branch sale and to a lesser extent, the impact of 2020 second quarter SBA PPP originations.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2020 and September 30, 2019, respectively.

Net interest income was $11.9 million for the three months ended September 30, 2020 and $36.9 million for the nine months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019 and $31.7 million of the nine months ended September 30, 2019.

For the three months ended September 30, 2020, net interest income benefited from the origination of $139 million of SBA Paycheck Protection Program (“PPP”) loans and organic loan growth partially offset by a decrease in net interest margin percentage.

The net interest margin for the three-month period ended September 30, 2020 was 3.11%, compared to 3.34% for the three-month period ended September, 2019.

The decrease in net interest margin was largely due to:

(1) the impact of the Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 12 days and (2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields;

partially offset by lower deposit rates due to management action to reduce interest rates.

The impact of higher cash and cash equivalents balances decreased the interest margin percentage by two basis points as the rate impact is covered above.

Higher non-accretable difference accretion of two basis points offset the negative impact of higher cash balances above.

The net interest margin for the nine-months ended September 30, 2020 was 3.36%, compared to 3.35% for the nine-month period ended September 30, 2019.

The modest increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts, which increased net interest margin by 11 basis points.

Other factors affecting the net interest margin for the nine month periods of 2020 to 2019 are similar to those discussed above, with a two basis point decrease in net interest margin due to the impact of higher cash and cash equivalent balances as the rate impact is discussed above.

Average Balances, Net Interest Income, Yields Earned and Rates Paid.

The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three and six-month periods ended June 30, 2020, and for the three and six-month periods ended June 30, 2019.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three and nine-month periods ended September 30, 2020, and for the three and nine-month periods ended September 30, 2019.

Non-accruing loans have been included in the table as loans carrying a zero yield.

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(Dollar amounts in thousands)

Three months ended June 30, 2020 compared to the three months ended June 30, 2019 :

Three months ended June 30, 2020

Three months ended June 30, 2019

Three months ended September 30, 2020 compared to the three months ended September 30, 2019:

Three months ended September 30, 2020 Three months ended September 30, 2019

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 77,774 $ 18 0.09 % $ 32,376 $ 203 2.49 %

Loans 1,258,224 14,154 4.48 % 1,143,252 14,646 5.08 %

Interest-bearing deposits 3,752 23 2.44 % 5,577 34 2.42 %

5 unchanged sentences

Demand deposits 285,993 231 0.32 % 219,955 550 0.99 %

Money market 255,160 280 0.44 % 200,647 593 1.17 %

CD’s 297,691 1,469 1.96 % 381,331 1,870 1.95 %

IRA’s 41,852 177 1.68 % 44,184 203 1.82 %

Total deposits $ 1,064,077 $ 2,255 0.84 % $ 1,005,084 $ 3,371 1.33 %

6 unchanged sentences

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended June 30, 2020 and June 30, 2019 .

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $35 thousand for the three months ended June 30, 2020 and June 30, 2019 , respectively.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended September 30, 2020 and September 30, 2019.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $27 thousand for the three months ended September 30, 2020 and September 30, 2019, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Six months ended June 30, 2020 compared to the six months ended June 30, 2019 :

Six months ended June 30, 2020

Six months ended June 30, 2019

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019:

Nine months ended September 30, 2020 Nine months ended September 30, 2019

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 42,946 $ 141 0.44 % $ 29,489 $ 542 2.46 %

Loans 1,232,678 44,300 4.8 % 1,054,492 40,036 5.08 %

Interest-bearing deposits 3,967 73 2.46 % 6,153 107 2.33 %

5 unchanged sentences

Demand deposits 262,748 865 0.44 % 200,387 1,288 0.86 %

Money market 244,965 1,240 0.68 % 172,671 1,423 1.10 %

CD’s 326,776 5,021 2.05 % 348,139 5,163 1.98 %

IRA’s 42,221 568 1.80 % 41,576 537 1.73 %

Total deposits $ 1,046,464 $ 8,042 1.03 % $ 919,624 $ 8,890 1.29 %

6 unchanged sentences

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended June 30, 2020 and June 30, 2019 .

The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand and $77 thousand for the six months ended June 30, 2020 and June 30, 2019 , respectively.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the nine months ended September 30, 2020 and September 30, 2019.

The FTE adjustment to net interest income included in the rate calculations totaled $1 thousand and $103 thousand for the nine months ended September 30, 2020 and September 30, 2019, respectively.

Rate/Volume Analysis.

5 unchanged sentences

holding the initial balance constant).

Volume changes are largely due to the F&M acquisition for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 and to a lesser extent, the impact of organic loan growth.

Rate changes have been discussed previously.

For the three months ended September 30, 2020, compared to the three months ended September 30, 2019, the loan volume increase is primarily due to SBA PPP originations, and the impact of organic growth since October 1, 2019.

The decrease in certificate volumes is due to planned runoff of brokered CD’s and to a lesser extent, retail CD’s, partially offset by growth in non-maturity deposits.

Volume change factors for the nine month period are similar to the three month period, along with the impact of having nine months of F&M balances in 2020 compared to only three months in the comparable 2019 period, as the F&M acquisition closed July 1, 2019.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended June 30, 2020 compared to the three months ended June 30, 2019 .

Three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ 181 $ (366) $ (185)

Loans 1,393 (1,885) (492)

Interest-bearing deposits (11) — (11)

6 unchanged sentences

Money market accounts 135 (448) (313)

CD’s (413) 12 (401)

IRA’s (10) (16) (26)

Total deposits (131) (985) (1,116)

2 unchanged sentences

Net interest income $ 1,576 $ (1,260) $ 316

Six months ended June 30, 2020 compared to the six months ended June 30, 2019 .

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ 191 $ (592) $ (401)

Loans 6,504 (2,240) 4,264

Interest-bearing deposits (40) 6 (34)

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Money market accounts 497 (680) (183)

CD’s (324) 182 (142)

IRA’s 8 23 31

Total deposits 555 (1,403) (848)

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We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.

Total provision for loan losses expense for the three and six months ended June 30, 2020 was $1,750 and $3,750, respectively.

In continued anticipation of COVID-19 related adverse economic impacts, management recorded provision for loan losses of $1,250 and $2,000 for the three and six months ended June 30, 2020, respectively, related to COVID-19.

“Stay-at-Home Orders” continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain business, including bank borrowers.

Approximately $100 and $700 of the provision was related to loan growth in the three and six months ended June 30, 2020 The remaining provision was related to net loan charge-offs of $212 and $697 for the three and six months ended June 30, 2020, and necessary increases in unallocated and specific allowance for loan losses.

Total provision for loan losses expense for the three and nine months ended September 30, 2020 was $1,500 and $5,250, respectively.

The provision for loan losses was impacted by loan growth, net loan charge offs, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

Management believes that the provision taken for the current year three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.

3 unchanged sentences

Non-interest Income .

The following table reflects the various components of non-interest income for the three and six month periods ended June 30, 2020 and 2019, respectively.

Three months ended June 30,

Six months ended June 30,

The following table reflects the various components of non-interest income for the three and nine month periods ended September 30, 2020 and 2019, respectively.

Three months ended September 30, Nine months ended September 30,

2020 2019 % Change 2020 2019 % Change

Non-interest Income:

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Net gains on investment securities ( 1 ) 96 (101.04) % 97 151 (35.76) %

Net gain on sale of branch

Net gain on sale of insurance agency

Settlement proceeds

Net gain on sale of branch — — N/M — 2,295 N/M

Net gain on sale of acquired business lines 180 — N/M 432 — N/M

Settlement proceeds — — N/M 131 — N/M

Other 445 363 22.59 % 928 827 12.21 %

Total non-interest income $ 5,062 $ 3,621 39.80 % $ 13,678 $ 11,191 22.22 %

The growth in most line items, year over year, are due to the impact of the F&M acquisition on July 1, 2019.

Service charges on deposit accounts decreased to $345 and $905 for the three and six months ended June 30, 2020, from $581 and $1,131 in the comparable prior year periods.

This decrease was due to lower retail customer activity and due to higher balances of retail checking accounts primarily in the three months ended June 30, 2020.

Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in both the current three and six-month periods.

Gain on sale of loans increased in both the current three and six-month periods due to higher mortgage loan origination sold volumes.

The increase in loan fees and service charges for the six months ended June 30, 2020, is largely due to higher commercial loan customer activity, which occurred primarily in the first quarter of 2020

The growth in most line items, for the nine months ended September 30, are due to the impact of the F&M acquisition on July 1, 2019.

Service charges on deposit accounts decreased to $431 and $1,336 for the three and nine months ended September 30, 2020, from $625 and $1,756 in the comparable prior year periods.

This decrease was due to lower retail customer activity and due to higher balances of retail checking accounts, primarily in the three months ended September 30, 2020.

Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in both the current three and nine-month periods.

Gain on sale of loans increased in both the current three and nine-month periods due to higher mortgage loan origination sold volumes.

The change in loan fees and service charges for the three and nine months ended September 30, 2020, is largely due to changes in commercial loan customer activity, which was significantly higher in the first quarter of 2020

The Company recognized a gain on sale of its Michigan branch of $2,295 in the second quarter of 2019.

The Company sold the Wells Insurance Agency in June 2020, realizing a net gain of $252.

In the quarter ended September 30, 2020, the Bank’s acquired wealth management business partner exercised their contractual call originated prior to the acquisition, resulting in the sale of the wealth management business.

The sale resulted in a $180 gain, Also, the Company sold the Wells Insurance Agency in June 2020, realizing a net gain of $252.

During the quarter ended June 30, 2020, the Company recognized $131 of non-interest income related to a private mortgage-backed security claim.

1 unchanged sentence

Non-interest Expense.

The following table reflects the various components of non-interest expense for the three and six month periods ended June 30, 2020 and 2019, respectively.

Three months ended June 30,

Six months ended June 30,

The following table reflects the various components of non-interest expense for the three and nine month periods ended September 30, 2020 and 2019, respectively.

Three months ended September 30, Nine months ended September 30,

2020 2019 % Change 2020 2019 % Change

Non-interest Expense:

Compensation and related benefits $ 5,538 $ 5,295 4.59 % $ 16,881 $ 14,605 15.58 %

Occupancy 993 905 9.72 % 2,898 2,725 6.35 %

Office 532 599 (11.19) % 1,650 1,649 0.06 %

Data processing 1,145 1,092 4.85 % 3,165 2,953 7.18 %

5 unchanged sentences

Gains on repossessed assets, net ( 105 ) (16) (556.25) % (195) (143) (36.36) %

Other 737 3,409 (78.38) % 2,266 5,309 (57.32) %

Total non-interest expense $ 10,724 $ 12,975 (17.35) % $ 32,847 $ 32,258 1.83 %

Non-interest expense (annualized) / Average assets 2.62 % 3.54 % (25.95) % 2.78 % 3.15 % (11.88) %

The growth in most line items, year over year, are due to the impact of the F&M acquisition on July 1, 2019.

Compensation expense, for both the three and six-month periods ended June 30, 2020 was higher than the comparable prior year period due primarily to the impact of the F&M acquisition, and to a lesser extent, higher variable mortgage production compensation related to all-time high mortgage loan origination activity, primarily in the second quarter of 2020.

The growth in most line items for the nine months September 30 are due to the impact of the F&M acquisition on July 1, 2019.

Compensation expense, for the nine-month period ended September 30, 2020 was higher than the comparable prior year period due primarily to the impact of the F&M acquisition, and to a lesser extent, higher variable mortgage production compensation related to higher mortgage loan origination activity, primarily in the second and third quarter of 2020.

Compensation expense for three months ended September 30, 2020 compared to September 30, 2019 was higher largely due to higher variable mortgage production compensation related to higher mortgage loan activity.

Data processing expense increases were due primarily to higher loan origination activity and larger deposit balances.

Mortgage servicing rights expense increased during the three and six months ended June 30, 2020 by $685 and $1,230, respectively, compared to the comparable prior year periods.

The Company recognized related impairment charges of $650 and $1,130, respectively in 2020 compared to $110 for the three and six-months ended June 30, 2019, largely due to the impact of higher actual and forecasted prepayment rates.

The remaining increase is due to higher amortization based on the interest rate environment.

Professional services expenses were lower during the three and six months ended June 30, 2020 compared to the comparable prior year periods, primarily due to lower audit costs.

Mortgage servicing rights expense increased during the three and nine months ended September 30, 2020 by $278 and $1,508 respectively, compared to the comparable prior year periods.

The Company recognized related impairment charges of $250 and $1,422 respectively in the three and nine-month periods ended September 30, 2020 compared to $100 and $210 for the three and nine months ended September 30, 2019, largely due to the impact of higher actual and forecasted prepayment rates.

The remaining increase is due to higher amortization based on the current interest rate environment.

Professional services expenses were lower during the three months ended September 30, 2020 compared to the prior period due to merger costs in third quarter 2019.

For the nine months ended September 30, 2020 compared to the comparable prior year periods, professional service expenses were lower primarily due to lower audit costs and third quarter 2019 acquisition costs.

Higher 2019 audit costs were largely due to the transition period audit required due to the change in the Company’s fiscal year-end.

Other expenses for the six-month period ended June 30, 2020 decreased compared to June 30, 2019 largely due to lower merger-related expenses, partially offset by higher commercial loan and deposit costs.

Other expenses for the three and nine-month period ended September 30, 2020 decreased compared to September 30, 2019, largely due to lower merger-related expenses.

Income Taxes.

Income tax expense was $1,105 and $2,042 for the three and six months ended June 30, 2020 compared to $1,500 and $1,822 for the three and six months ended June 30, 2019.

Income tax expense was $1,267 and $3,309 for the three and nine months ended September 30, 2020 compared to $430 and $2,252 for the three and nine months ended September 30, 2019.

The impact of higher non-taxable municipal income in 2019 was offset by higher non-deductible merger costs, netting to approximately the same effective tax rates in both periods.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

Cash and cash equivalents increased to $115.5 million at September 30, 2020 from $55.8 million at December 31, 2019.

Deposit levels remain robust, while the Bank experienced loan growth primarily due to SBA PPP loan originations and chose to modestly shrink the investment portfolio due to current low yielding investment options.

As such, the Company has chosen to maintain a higher level of liquidity.

Investment Securities.

2 unchanged sentences

In the first quarter, the Bank sold approximately $10.7 million of fixed-rate mortgage-backed certificates, (“MBS”) and these were replaced with similar, lower premium MBS.

Securities available for sale, which represent the majority of our investment portfolio, were $162.7 million at June 30, 2020, compared with $180.1 million at December 31, 2019.

Securities held to maturity increased to $10.5 million at June 30, 2020, compared to $2.9 million at December 31, 2019.

This increase was due to the purchase of agency mortgage-backed securities in the first quarter of 2020.

Securities available for sale, which represent the majority of our investment portfolio, were $150.9 million at September 30, 2020, compared with $180.1 million at December 31, 2019.

The reduction in the AFS portfolio is due to maturities and calls of U.S government agency obligations.

The maturities and calls in the corporate asset-based securities in 2020 were replaced with bank holding company issued subordinated debt of which the Bank purchased $7.3 million in the third quarter.

Securities held to maturity increased to $16.9 million at September 30, 2020, compared to $2.9 million at December 31, 2019.

This increase was due to the purchase of agency mortgage-backed securities in the first quarter and third quarter of 2020.

The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:

Securities available for sale

June 30, 2020

Securities available for sale Amortized

September 30, 2020

government agency obligations $ 34,059 $ 34,379

4 unchanged sentences

Trust preferred securities 13,938 13,724

Totals $ 149,661 $ 150,908

December 31, 2019

5 unchanged sentences

Trust preferred securities 11,167 11,123

Totals $ 180,768 $ 180,119

The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:

Securities held to maturity

June 30, 2020

Securities held to maturity Amortized

September 30, 2020

Obligations of states and political subdivisions $ 300 $ 300

Mortgage-backed securities 16,627 16,933

Totals $ 16,927 $ 17,233

December 31, 2019

1 unchanged sentence

Mortgage-backed securities 2,551 2,655

Totals $ 2,851 $ 2,957

The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:

June 30, 2020

December 31, 2019

Available for sale securities

September 30, 2020 December 31, 2019

Available for sale securities Amortized

Value Amortized

Agency $ 83,929 $ 86,135 $ 122,826 $ 123,136

AAA 11,185 10,885 4,383 4,245

AA 25,398 24,798 23,475 22,749

A 6,909 7,019 18,776 18,725

BBB 22,240 22,071 11,167 11,123

Non-rated — — 141 141

Total available for sale securities $ 149,661 $ 150,908 $ 180,768 $ 180,119

The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:

June 30, 2020

December 31, 2019

Securities held to maturity

September 30, 2020 December 31, 2019

Securities held to maturity Amortized

Value Amortized

government agency $ 16,627 $ 16,933 $ 2,551 $ 2,655

At June 30, 2020, securities with a market value of $1.4 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis.

As of June 30, 2020, this line of credit had a zero-outstanding balance.

At June 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $4.0 million and U.S.

AA 125 125 125 126

Non-rated 175 175 175 176

Total $ 16,927 $ 17,233 $ 2,851 $ 2,957

At September 30, 2020, securities with a market value of $1.3 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis.

As of September 30, 2020, this line of credit had a zero-outstanding balance.

At September 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $3.9 million and U.S.

government agency securities with a market value of $0.6 million as collateral against municipal deposits.

At June 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.6 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $103.8 million, to $1.28 billion as of June 30, 2020, from $1.18 billion at December 31, 2019.

This was due to the impact of the growth in the SBA PPP origination of $137.3 million, partially offset by the net remaining deferred origination fees of $4.7 million.

This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio reductions in residential mortgage loans and indirect consumer loans of $13.0 million and $7.5 million, respectively.

The following table reflects the composition, or mix of our loan portfolio at June 30, 2020 and December 31, 2019:

June 30, 2020

December 31, 2019

At September 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.5 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $53 million, to $1.23 billion as of September 30, 2020, from $1.18 billion at December 31, 2019.

This growth was due to the impact of the growth in the SBA PPP origination of $139.2 million, partially offset by the net remaining deferred origination fees of $4.0 million.

This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio.

In addition, residential mortgage loans and indirect consumer loans of $36.4 million and $11.0 million, respectively, decreased.

The following table reflects the composition, or mix of our loan portfolio at September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

Amount Amount

Real estate loans:

17 unchanged sentences

Gross loans before C&I SBA PPP loans 1,102,718 1,187,264

C&I SBA PPP loans

SBA PPP loans 139,166 —

Gross loans $ 1,241,884 $ 1,187,264

Unearned net deferred fees and costs and loans in process (5,033) (393)

20 unchanged sentences

In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors.

We believe that any modifications or changes to the ALL methodology would be to enhance the ALL.

believe that any modifications or changes to the ALL methodology would be to enhance the ALL.

However, any such modifications could result in materially different ALL levels in future periods.

1 unchanged sentence

In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral.

At June 30, 2020, the Company had identified impaired loans of $51.7 million, consisting of $13.1 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $15.1 million of substandard non-TDR loans.

At September 30, 2020, the Company had identified impaired loans of $51.7 million, consisting of $19.8 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $8.5 million of substandard non-TDR loans.

The $51.7 million total of impaired loans includes $12.6 million of performing TDR loans.

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The $63.2 million total of impaired loans includes $5.4 million of performing TDR loans.

At June 30, 2020 and December 31, 2019, we had 343 and 389 such impaired loans, respectively, all secured by real estate or personal property.

At September 30, 2020 and December 31, 2019, we had 342 and 389 such impaired loans, respectively, all secured by real estate or personal property.

Of the impaired loans, there were 19 individual loans where estimated fair value was less than their book value (i.e.

we deemed impairment to exist) totaling $5.2 million for which $1.1 million in specific ALL was recorded as of June 30, 2020.

The allowance for loan and lease losses increased to $13.4 million at June 30, 2020 representing 1.04% of loans receivable or 1.16% of loans receivable, less the 100% SBA guaranteed PPP loans.

A significant portion of the current loan portfolio includes loans purchased through whole bank acquisitions in recent years resulting in purchase credit impairments which are not included in the allowance for loan losses.

The allowance for loan and lease losses was $10.3 million at December 31, 2019, representing 0.88% of total loans.

The increase in the allowance was primarily due to loan loss provisions largely associated with anticipated COVID-19 related adverse economic impact of $2.0 million.

In addition, the allowance grew due to approximately $0.8 million of provision for loan growth, with the remaining growth largely due to growth in unallocated.

Allowance for Loan Losses to Loans, net of C&I SBA PPP Loans

we deemed impairment to exist) totaling $5.3 million for which $1.2 million in specific ALL was recorded as of September 30, 2020.

The allowance for loan and losses increased to $14.8 million at September 30, 2020 representing 1.21% of loans receivable, less the 100% SBA guaranteed PPP loans.

A significant portion of the current loan portfolio includes loans purchased through whole bank acquisitions in recent years resulting in purchased credit impairments which are not included in the allowance for loan losses.

The Allowance for loan losses was $10.3 million at December 31, 2019, representing 0.88% of loans receivable.

The increase in the allowance was due to loan growth, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

Allowance for Loan Losses to Loans, net of SBA PPP Loans

(in thousands, except ratios)

September 30,

2020 June 30,

2020 December 31,

2019 September 30, 2019

Loans, end of period $ 1,230,139 $ 1,281,175 $ 1,177,380 $ 1,134,708

C&I SBA PPP loans, net of deferred fees

Loans, net of C&I SBA PPP loans and deferred fees

SBA PPP loans, net of deferred fees (135,177) (132,800) — —

Loans, net of SBA PPP loans and deferred fees $ 1,094,962 $ 1,148,375 $ 1,177,380 $ 1,134,708

Allowance for loan losses $ 14,836 $ 13,373 $ 10,320 $ 9,177

ALL to loans net of C&I SBA PPP loans and deferred fees

ALL to loans net of SBA PPP loans and deferred fees 1.35 % 1.16 % 0.88 % 0.81 %

ALL to loans, end of period 1.21 % 1.04 % 0.88 % 0.81 %

All the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL.

All of the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL.

The impact of the factors in general categories are subject to change;

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These refinements could also cause increases or decreases in the ALL.

In anticipation of a COVID-19-related economic slowdown, management added an additional qualitative factor in the quarters ended March 31, 2020 and June 30, 2020 and increased the ALL by $750,000 and $1.25 million, respectively, for this qualitative factor.

See Provision for loan losses in the Consolidated Statements of Operations (unaudited) for further details.

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Nonperforming Loans, Potential Problem Loans and Foreclosed Properties.

We practice early identification of non-accrual and problem loans in order to minimize the Bank’s risk of loss.

Non-performing loans are defined as non-accrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted.

We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss.

Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted.

The accrual of interest income is discontinued on our loans according to the following schedule:

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TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:

June 30, 2020 and Six Months Then Ended

December 31, 2019 and Twelve Months Then Ended

The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:

September 30, 2020 and Nine Months Then Ended December 31, 2019 and Twelve Months Then Ended

Nonperforming assets:

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(in thousands, except ratios)

June 30, 2020 and Three Months Ended

March 31, 2020 and Three Months Ended

December 31, 2019 and Three Months Ended

June 30, 2019 and Three Months Ended

September 30, 2020 and Three Months Ended December 31, 2019 and Three Months Ended September 30, 2019 and Three Months Ended

Nonperforming assets:

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Acquired NPAs to total assets 0.65 % 1.04 % 1.06 %

Nonperforming assets decreased by $4.2 million to $17.4 million at June 30, 2020 from December 31, 2019, largely due to decreases in nonaccrual loans acquired in the F&M acquisition.

In the quarter ended June 30, 2020, nonaccrual acquired loans of $1.7 million were returned to accrual status based on their current payment status and history, and in accordance with the Bank’s policy.

Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to non-performing loans.

Nonaccrual Loans Rollforward:

Nonperforming assets decreased by $6.7 million to $14.9 million at September 30, 2020 from December 31, 2019.

This decrease is largely due to reductions in acquired non-performing loans.

Part of this reduction, included the return to accrual status of nonaccrual acquired loans totaling $1.7 million in the second quarter of 2020, based on their current payment status and history and in accordance with the Bank’s policy.

Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to nonperforming loans.

Nonaccrual Loans Roll forward:

Quarter Ended

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

June 30, 2019

September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019

Balance, beginning of period $ 14,787 $ 16,090 $ 19,056 $ 19,022 $ 13,612

Additions 716 1,907 1,811 2,641 1,493

Acquired nonaccrual loans — — — — 5,898

Charge offs (141) (175) (452) (198) (134)

Transfers to OREO (172) — (1,100) (425) (209)

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Payments received (1,744) (1,292) (2,887) (1,957) (1,539)

Other, net (127) (41) (218) (13) (46)

Balance, end of period $ 13,154 $ 14,787 $ 16,090 $ 19,056 $ 19,022

Nonaccrual TDR loans decreased $206,000 to $7.0 million at June 30, 2020 from $7.2 million at December 31, 2019.

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

Modifications

Nonaccrual TDR loans remained at $7.2 million at both September 30, 2020 and December 31, 2019.

September 30, 2020 December 31, 2019 September 30, 2019

Modifications Recorded

Investment Number of

Modifications Recorded

Investment Number of

Modifications Recorded

Troubled debt restructurings:

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Consumer installment 7 53 7 67 11 82

Classified assets decreased to $35.9 million at June 30, 2020, from $39.9 million at December 31, 2019 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets The table below shows a summary of the decrease in substandard loans by quarter since the first impact of the F&M acquisition on September 30, 2019 levels.

While special mention loans increased in the first quarter of 2020, the growth moderated in the second quarter of 2020.

Total loans 73 $ 12,579 63 $ 5,396 68 $ 5,899

Classified assets decreased to $32.9 million at September 30, 2020, from $39.9 million at December 31, 2019 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets.

Nonperforming assets decreased to $14.9 million or 0.92% of total assets at September 30, 2020 compared to $21.6 million or 1.41% of total assets at December 31, 2019.

Included in nonperforming assets at September 30, 2020 are $10.6 million of nonperforming assets acquired during recent whole-bank acquisitions.

The table below shows a summary of the decrease in substandard loans by quarter since the first impact of the F&M acquisition on September 30, 2019 levels.

While special mention loans increased in the first quarter of 2020 and more modestly in the second quarter of 2020, the balances decreased in the third quarter of 2020 due to resolution.

See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.

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September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30, 2019

Special mention loan balances $ 7,777 $ 19,958 $ 19,387 $ 10,856 $ 12,959

Substandard loan balances 32,922 35,911 38,393 39,892 38,527

Balances, end of period

Total impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was $51.7 million at June 30, 2020 compared to $63.2 million at December 31, 2019.

This decrease was largely due to payoff and reduction in acquired purchased credit impaired loans due to the decrease in classified assets and certain other acquired loan decreases, largely from the F&M acquisition.

COVID-19-related portfolio concentrations and modifications - Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the COVID-19 pandemic.

These sector loans totaled approximately $109 million and $42 million, respectively at June 30, 2020.

The weighted-average loan-to-value percentage and debt service

coverage ratio on these hotel industry sector loans was 58.5% and 1.75 times.

Criticized loans, end of period $ 40,699 $ 55,869 $ 57,780 $ 50,748 $ 51,486

Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the recent pandemic and related government actions.

These sector loans totaled approximately $102 million and $39 million, respectively at September 30, 2020.

The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans was 58% and 2.2 times.

Approximately $18 million of restaurant sector loans are to franchise quick-service restaurants.

As of June 30, 2020, the Bank had completed $197.3 million of loan modifications due to COVID-19-related borrower requests, all of which were done in the second quarter of 2020.

Approximately 55% of the deferrals were full payment deferrals.

The remaining 45% of deferrals require interest only payments.

Hotel and restaurant industry sectors represent approximately $784 million and $25 million, respectively of the approved deferrals.

While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current COVID-19 pandemic-affected environment has been considered.

See “Allowance for Loan Losses” section above for discussion of COVID-19 qualitative factor, and related provision for loan losses.

Acquired loans represent much of the reduction in non-performing loans and classified loans.

The table below shows the changes in the Bank’s non-accretable differences on purchased credit impaired loans.

The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discounts as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions.

This transferred accretion is accreted over the remaining maturity of the loan or until payoff, whichever is shorter.

Non-accretable Differences:

As of September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests.

Approximately $50 million of modifications are scheduled to resume their regular principal and interest payments in the fourth quarter.

Hotel industry sector loans represent approximately $70 million of the approved deferrals projected at December 31, 2020.

Of these, $48 million represent a second deferral under the CARES ACT, with the customer making an interest only payment and the Bank generally receives the reserve accounts pledge.

While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current pandemic-affected environment has been considered.

See “Allowance for Loan Losses” section above for discussion of pandemic-related qualitative factor, and related provision for loan losses.

The table below shows the changes in the Bank’s non-accretable difference on purchased credit impaired loans.

Payoffs of purchased credit impaired loans, including selected nonaccrual loans discussed above resulted in associated non-accretable differences being realized as interest income as shown below.

The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discount as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions.

This transferred accretion is accreted over the remaining contractual term of the loan or until payoff, whichever is shorter.

Non-accretable Difference:

(in thousands)

September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30, 2019

Non-accretable difference, beginning of period $ 3,355 $ 4,327 $ 6,290 $ 6,737 $ 3,889

2 unchanged sentences

Transfers from non-accretable difference to accretable discount.

(1,294) (741) (669) — —

Non-accretable difference used to reduce loan principal balance (270) (35) — — —

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Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset decreased from $4.3 million at December 31, 2019 to $3.5 million at June 30, 2020, primarily due to $41.2 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity, increased amortization and $1.2 million of impairment partially offset by capitalized servicing on newly sold mortgage originations.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of June 30, 2020 and December 31, 2019 were $538.3 million and $524.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2020 and December 31, 2019 was 0.65% and 0.82%, respectively.

Deposits increased $76.5 million to $1.272 billion at June 30, 2020, from $1.196 billion at December 31, 2019.

Approximately $12.7 million of December 31, 2019 deposits represented draws on lines of credit by a single customer, taken on December 31, 2019, with the proceeds deposited into the customer’s money market accounts and subsequently repaid on January 2, 2020.

Retail non-maturity deposits increased $35 million, and commercial non-maturity deposits increased $91 million in the three months ended June 30, 2020.

Approximately $16 million of the commercial non-maturity deposits related to growth from customers who borrowed under the SBA PPP loan program and were depositors of the Bank.

Approximately $3 million of the commercial non-maturity deposit growth was growth in deposit accounts from SBA PPP loan customers with no previous lending or deposit relationship with the Bank prior to the pandemic.

The strong non-maturity deposit growth allowed

the Company to reduce reliance on higher cost brokered and institutional deposits.

This planned reduction in brokered and institutional deposits resulted in a reduction to $20 million at June 30, 2020 from $54 million at December 31, 2019.

The fair market value of the Company’s MSR asset decreased from $4.3 million at December 31, 2019 to $3.5 million at September 30, 2020, primarily due to $1.4 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity and partially offset by increased capitalized servicing on newly sold mortgage originations.

The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2020 and December 31, 2019 were $555.7 million and $524.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2020 and December 31, 2019 was 0.63% and 0.82%, respectively.

Deposits increased $75.0 million to $1.271 billion at September 30, 2020, from $1.196 billion at December 31, 2019.

The strong non-maturity deposit growth allowed the Company to reduce reliance on higher cost brokered and institutional deposits.

This planned reduction in brokered and institutional deposits resulted in a reduction to $3.3 million at September 30, 2020 from $50.4 million at December 31, 2019.

Additionally, retail certificates of deposit decreased by $28 million as the Company chose not to match higher rate local retail certificate competition.

The following is a summary of deposits by type at June 30, 2020 and December 31, 2019, respectively:

June 30, 2020

December 31, 2019

The following is a summary of deposits by type at September 30, 2020 and December 31, 2019, respectively:

September 30, 2020 December 31, 2019

Non-interest bearing demand deposits $ 229,217 $ 168,157

4 unchanged sentences

Total deposits $ 1,270,778 $ 1,195,702

Our objective is to grow deposits and build customer relationships in our core markets through our branch network, deposit product offerings, including Treasury Management, and providing excellent customer service.

Management expects to continue to place emphasis on both retaining and generating additional deposits in 2020 through competitive pricing of deposit products, our established branch delivery systems and electronic banking.

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings.

FHLB advances were $124.5 million as of June 30, 2020 and $131.0 million as of December 31, 2019, as we continue to utilize these advances, as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to manage the Bank’s cost of funds.

FHLB advances were $124.5 million as of September 30, 2020 and $131.0 million as of December 31, 2019, as we continue to utilize these advances, as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to manage the Bank’s cost of funds.

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank.

This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances.

The Bank’s current unused borrowing capacity, supported by loan collateral as of June 30, 2020 is approximately $189.2 million.

The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2020 is approximately $105.9 million.

In the quarter ended June 30, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”), whereby the Bank can pledged SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut.

The Bank borrowed twice under this facility in the second quarter of 2020.

Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at June 30, 2020.

Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at June 30, 2020 or at any time during the quarter ending September 30, 2020.

The Bank could borrow $139.2 million under this facility in 2020.

During the first quarter of 2020, the Bank added $12.5 million of 10-year maturity advances that can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months from the initial advance.

At June 30, 2020 and December 31, 2019, the Bank had $55 million and $42.5 million, respectively, of these 10-year, three-month callable advances.

In the first quarter of 2020, the Bank extended overnight advances with $5 million maturing in each quarter of 2023, 2024 and $5 million maturing in the first quarter of 2025.

See Note 6, “Federal Home Loan Bank Advances and Other Borrowings” for more information.

At June 30, 2020, the Bank has pledged $816.7 million of loans to secure the current FHLB outstanding advances, letters of credit and to provide the unused borrowing capacity compared to $792.9 million of loans pledged at December 31, 2019.

At September 30, 2020 and December 31, 2019, the Bank had $55 million and $42.5 million, respectively, of these 10-year, three-month callable advances.

In the first quarter of 2020, the Bank extended overnight advances with $5 million maturing in each quarter of 2023 and 2024, and $5 million maturing in the first quarter of 2025.

See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.

At September 30, 2020, the Bank has pledged $682.0 million of loans to secure the current FHLB outstanding advances, letters of credit and to provide the unused borrowing capacity compared to $792.9 million of loans pledged at December 31, 2019.

In August 2020, the Company issued ten-year, 6% fixed to floating subordinated notes totaling $15 million.

The notes have a five-year non-call feature.

Stockholders’ Equity.

Total stockholders’ equity increased to $152.8 million at June 30, 2020 from $150.6 million at December 31, 2019, largely due to net income of $5.7 million.

Total stockholders’ equity increased to $157.3 million at September 30, 2020 from $150.6 million at December 31, 2019, largely due to net income of $9.2 million.

This increase was offset by the annual cash dividend paid to common stockholders of $2.4 million during the first quarter of 2020.

1 unchanged sentence

On March 20, 2020, the Company announced the Board of Directors had suspended this stock buyback authorization and on July 27, 2020, the Board of Directors terminated the stock buyback authorization, which was previously scheduled to expire on September 30, 2020.

Book value per share increased to $13.70 at June 30, 2020, from $13.36 per share at December 31, 2019.

Tangible book value per share (non-GAAP) was $10.31 at June 30, 2020, compared to $9.89 December 31, 2019.

Tangible book value (non-GAAP) is calculated as total stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.

As of June 30, 2020 and December 31, 2019, (1) stockholders’ equity was $152.8 million and $150.6 million, respectively, (2) goodwill was $31.5 million for both periods, (3) intangible assets were $6.3 million and $7.6 million, respectively and (4) common shares outstanding were 11,150,695 and 11,266,954, respectively.

Tangible book value per share

is a non-GAAP financial measure that management believes enhances investors’ ability to better understand the Company’s financial position.

Liquidity and Asset / Liability Management .

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We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity.

At June 30, 2020, our on-balance sheet liquidity ratio was 12.2%.

At September 30, 2020, our on-balance sheet liquidity ratio was 16.2%.

While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are influenced by factors partially outside of the Bank’s control, including general interest rates, economic conditions and competition.

Although $227.5 million of our $350.2 million (65%) CD portfolio as of June 30, 2020 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate may decrease in the future.

Although $216.9 million of our $323.8 million (67%) CD portfolio as of September 30, 2020 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s.

However, due to strategic pricing decisions

regarding rate matching and branch closures, our retention rate may decrease in the future.

Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits.

2 unchanged sentences

Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets.

As of June 30, 2020, we had approximately $189.2 million available under this arrangement, supported by loan collateral, as compared to $203.9 million at December 31, 2019.

As of September 30, 2020, we had approximately $105.9 million available under this arrangement, supported by loan collateral, as compared to $203.9 million at December 31, 2019.

In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank can pledge SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut.

The Bank borrowed twice under this facility in the second quarter of 2020.

Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowing under this facility at June 30, 2020.

The Bank could borrow $137.3 million under this facility in 2020.

Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowing under this facility at June 30, 2020 or at any time during the quarter ended September 30, 2020.

The Bank could borrow $139.2 million under this facility at September 30, 2020.

As the SBA PPP loans are forgiven, the collateral will reduce and our borrowing capacity under this facility will be reduced.

We maintain a line of credit with the Federal Reserve Bank which has a $1.0 million capacity, based on our current pledged collateral position.

5 unchanged sentences

These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit.

As of June 30, 2020, the Company had $213.9 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.

As of September 30, 2020, the Company had $260.8 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.

Capital Resources.

As of June 30, 2020, as shown in the table below, our Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for both the Bank and at the Company level.

As of September 30, 2020, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank.

For Capital Adequacy

To Be Well Capitalized

Actual For Capital Adequacy

Purposes To Be Well Capitalized

Under Prompt Corrective

Action Provisions

As of June 30, 2020 (Unaudited)

Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2020 (Unaudited)

Total capital (to risk weighted assets) $ 170,610 15.0 % $ 91,021 > = 8.0 % $ 113,776 > = 10.0 %

7 unchanged sentences

Tier 1 leverage ratio (to adjusted total assets) 149,982 10.4 % 57,834 > = 4.0 % 72,293 > = 5.0 %

At June 30, 2020 , the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

At September 30, 2020, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Company.

For Capital Adequacy

To Be Well Capitalized

Actual For Capital Adequacy

Purposes To Be Well Capitalized

Under Prompt Corrective

Action Provisions

As of June 30, 2020 (Unaudited)

Total capital (to risk weighted assets)

Tier 1 capital (to risk weighted assets)

Common equity tier 1 capital (to risk weighted assets)

Tier 1 leverage ratio (to adjusted total assets)

Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2020 (Unaudited)

Total capital (to risk weighted assets) $ 163,250 14.3 % $ 91,021 > = 8.0 % N/A N/A

Tier 1 capital (to risk weighted assets) 119,028 10.5 % 68,266 > = 6.0 % N/A N/A

Common equity tier 1 capital (to risk weighted assets) 119,028 10.5 % 51,199 > = 4.5 % N/A N/A

Tier 1 leverage ratio (to adjusted total assets) 119,028 7.5 % 63,465 > = 4.0 % N/A N/A

As of December 31, 2019 (Audited)

Total capital (to risk weighted assets)

Tier 1 capital (to risk weighted assets)

Common equity tier 1 capital (to risk weighted assets)

Tier 1 leverage ratio (to adjusted total assets)

At June 30, 2020 , the Company was categorized as “Well Capitalized” under Prompt Corrective Action Provisions.

Total capital (to risk weighted assets) $ 137,259 11.2 % $ 98,174 > = 8.0 % N/A N/A

Tier 1 capital (to risk weighted assets) 111,939 9.1 % 73,631 > = 6.0 % N/A N/A

Common equity tier 1 capital (to risk weighted assets) 111,939 9.1 % 55,223 > = 4.5 % N/A N/A

Tier 1 leverage ratio (to adjusted total assets) 111,939 7.7 % 57,834 > = 4.0 % N/A N/A

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 2. Management’s Discussion and Analysis