What changed in this filing

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Item 1. Financial Statements

2020-11-03 compared with 2020-08-04 · 322 added, 370 removed, 860 unchanged (45% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

2020 December 31,

(In Thousands, Except Share Data)

5 unchanged sentences

Loans held for sale 128,105 67,834

Loans 1,492,720 1,043,371

Allowance for loan losses ( 21,683 ) ( 19,088 )

Net loans 1,471,037 1,024,283

Purchased receivables, net 13,520 24,373

3 unchanged sentences

Operating lease right-of-use asset 12,943 14,306

Goodwill 15,017 15,017

Other intangible assets, net 1,041 1,077

Other assets 72,369 58,076

Total assets $ 2,097,738 $ 1,643,996

Demand $ 697,363 $ 451,896

Interest-bearing demand 427,811 320,264

Savings 272,624 229,918

Money market 227,106 205,801

Certificates of deposit less than $250,000 94,743 90,702

1 unchanged sentence

Total deposits 1,806,133 1,372,351

Borrowings 13,737 8,891

Junior subordinated debentures 10,310 10,310

4 unchanged sentences

Preferred stock, $ 1 par value, 2,500,000 shares authorized, none issued or outstanding

Common stock, $1 par value, 10,000,000 shares authorized, 6,368,046 and 6,558,809 issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Common stock, $ 1 par value, 10,000,000 shares authorized, 6,279,304 and 6,558,809 issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 42,966 50,512

6 unchanged sentences

Consolidated Statements of Income

Three Months Ended

Six Months Ended

Three Months Ended Nine Months Ended

September 30, September 30,

(In Thousands, Except Per Share Data) 2020 2019 2020 2019

13 unchanged sentences

Net Interest Income 18,294 16,306 51,441 48,032

Provision for loan losses

Provision (benefit) for loan losses 567 ( 2,075 ) 3,031 ( 1,025 )

Net Interest Income After Provision for Loan Losses 17,727 18,381 48,410 49,057

8 unchanged sentences

Gain on sale of investment securities available for sale, net — — — 23

Other income 1,040 887 2,270 2,466

Total Other Operating Income 21,628 10,509 45,596 27,611

7 unchanged sentences

Intangible asset amortization expense 12 15 36 45

OREO (income), net rental income and gains on sale

OREO expense (income), net rental income and gains on sale 23 ( 31 ) 8 ( 186 )

Other operating expense 2,053 1,660 5,321 4,567

2 unchanged sentences

Provision for income taxes 3,994 2,028 6,251 4,334

Net Income $ 11,855 $ 7,538 $ 22,788 $ 16,111

Earnings Per Share, Basic $ 1.87 $ 1.13 $ 3.57 $ 2.38

5 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

Net income $ 11,855 $ 7,538 $ 22,788 $ 16,111

Other comprehensive income (loss), net of tax:

2 unchanged sentences

Reclassification of net gains included in net income, net of tax expense

of $0 for the second quarters of 2020 and 2019, and $28 and $7 for the

six months ended June 30, 2020 and 2019, respectively

of $ 0 for the third quarters of 2020 and 2019, and $ 28 and $ 7 for the

nine months ended September 30, 2020 and 2019, respectively — — ( 70 ) ( 16 )

Derivatives and hedging activities:

Unrealized losses arising during the period

Unrealized gains (losses) arising during the period 245 ( 691 ) ( 1,622 ) ( 1,672 )

Income tax (expense) benefit related to unrealized gains and losses ( 85 ) ( 23 ) 549 ( 742 )

4 unchanged sentences

Consolidated Statements of Changes in Shareholders’ Equity

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss), Net of Tax

Number of Shares

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), net of Tax Total

Number of Shares Par Value

(In Thousands)

1 unchanged sentence

Cash dividend on common stock ($ 0.30 per share)

— — — ( 2,087 ) — ( 2,087 )

Stock-based compensation expense — — 196 — — 196

2 unchanged sentences

Other comprehensive income, net of tax — — — — 675 675

Net income — — — 4,312 — 4,312

Balance as of March 31, 2019 6,879 $ 6,879 $ 62,127 $ 139,677 $ 155 $ 208,838

Cash dividend on common stock ($ 0.30 per share)

— — — ( 2,060 ) — ( 2,060 )

Stock-based compensation expense — — 155 — — 155

1 unchanged sentence

Other comprehensive income, net of tax — — — — 342 342

Net income — — — 4,261 — 4,261

Balance as of June 30, 2019 6,729 $ 6,729 $ 57,234 $ 141,878 $ 497 $ 206,338

Cash dividend on common stock ($ 0.33 per share)

— — — ( 2,199 ) — ( 2,199 )

Stock-based compensation expense — — 193 — — 193

2 unchanged sentences

Other comprehensive loss, net of tax — — — — ( 631 ) ( 631 )

Net income — — — 7,538 — 7,538

Balance as of September 30, 2019 6,540 $ 6,540 $ 50,416 $ 147,217 ($ 134 ) $ 204,039

Cash dividend on common stock ($ 0.33 per share)

— — — ( 2,182 ) — ( 2,182 )

Stock-based compensation expense — — 288 — — 288

1 unchanged sentence

Other comprehensive income, net of tax — — — — 565 565

Net income — — — 4,580 — 4,580

Balance as of December 31, 2019 6,559 $ 6,559 $ 50,512 $ 149,615 $ 431 $ 207,117

1 unchanged sentence

Consolidated Statements of Changes in Shareholders’ Equity

Additional Paid-in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss), Net of Tax

Number of Shares

Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss), net of Tax Total

Number of Shares Par Value

(In Thousands)

1 unchanged sentence

Cash dividend on common stock ($ 0.34 per share)

— — — ( 2,223 ) — ( 2,223 )

Stock-based compensation expense — — 242 — — 242

2 unchanged sentences

Cumulative effect of adoption of accounting principles related to equity compensation expense — — 139 ( 139 ) — —

Net income — — — 1,033 — 1,033

Balance as of March 31, 2020 6,366 $ 6,366 $ 44,776 $ 148,286 ($ 1,705 ) $ 197,723

Cash dividend on common stock ($ 0.34 per share)

— — — ( 2,188 ) — ( 2,188 )

Stock-based compensation expense — — 238 — — 238

1 unchanged sentence

Other comprehensive income, net of tax — — — — 1,256 1,256

Net income — — — 9,900 — 9,900

Balance as of June 30, 2020 6,368 $ 6,368 $ 45,006 $ 155,998 ($ 449 ) $ 206,923

Cash dividend on common stock ($ 0.35 per share)

— — — ( 2,247 ) — ( 2,247 )

Stock-based compensation expense — — 237 — — 237

Repurchase of common stock ( 89 ) ( 89 ) ( 2,277 ) — — ( 2,366 )

Other comprehensive income, net of tax — — — — 214 214

Net income — — — 11,855 — 11,855

Balance as of September 30, 2020 6,279 $ 6,279 $ 42,966 $ 165,606 ($ 235 ) $ 214,616

See notes to consolidated financial statements

1 unchanged sentence

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(In Thousands) 2020 2019

Operating Activities:

Net income $ 22,788 $ 16,111

Adjustments to Reconcile Net Income to Net Cash Used by Operating Activities:

Gain on sale of securities, net ( 98 ) ( 23 )

Loss on disposal of premises and equipment 22 —

Depreciation and amortization of premises and equipment 2,337 2,231

6 unchanged sentences

Deferred loan fees and amortization, net of costs 9,399 137

Provision for loan losses

Provision (benefit) for loan losses 3,031 ( 1,025 )

Benefit for purchased receivables ( 7 ) ( 103 )

24 unchanged sentences

Purchases of premises and equipment ( 2,552 ) ( 1,697 )

Net Cash (Used) Provided by Investing Activities

Net Cash (Used) by Investing Activities ( 390,651 ) ( 34,515 )

Financing Activities:

Increase in deposits 433,782 122,941

Increase in securities sold under repurchase agreements

Increase (decrease) in borrowings

Decrease in securities sold under repurchase agreements — ( 34,278 )

Increase in borrowings 4,846 1,692

Repurchase of common stock ( 8,676 ) ( 12,569 )

24 unchanged sentences

The Company has evaluated subsequent events and transactions for potential recognition or disclosure.

Operating results for the interim period ended June 30, 2020 are not necessarily indicative of the results anticipated for the year ending December 31, 2020 .

Operating results for the interim period ended September 30, 2020 are not necessarily indicative of the results anticipated for the year ending December 31, 2020.

These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

20 unchanged sentences

The Company adopted ASU 2020-04 as of March 31, 2020.

The adoption of ASU 2020-04 did not have a material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date.

The adoption of ASU 2020-04 did not have a

material impact on the Company’s consolidated financial position or results of operations because no contract modifications have been made to date.

Accounting pronouncements to be implemented in future periods

13 unchanged sentences

We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL.

We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan

models during 2020.

Our current planned approach for estimating expected life-time credit losses for loans and debt securities

includes the following key components:

We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020.

Our current planned approach for estimating expected life-time credit losses for loans and debt securities includes the following key components:

• An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and off balance-sheet credit exposures.

7 unchanged sentences

The ACL on available-for-sale debt securities will be subject to a limitation based on the fair value of the debt securities.

Based on the credit quality of our existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities to be significant.

of June 30, 2020, the Company does not hold any debt securities classified as held-to-maturity.

Based on the credit quality of our

existing debt securities portfolio, we do not expect the ACL for held-to-maturity and available-for-sale debt securities to be significant.

As of September 30, 2020, the Company does not hold any debt securities classified as held-to-maturity.

The ultimate effect of CECL on our ACL will depend on the size and composition of our loan and investment portfolios, the portfolios' credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions.

2 unchanged sentences

The Company is required to maintain cash balances or deposits with the Federal Reserve Bank of San Francisco ("Federal Reserve Bank") sufficient to meet its statutory reserve requirements and for purposes of settling financial transactions and charges for the Federal Reserve Bank services.

The average reserve requirement for the maintenance period for the quarter ended June 30, 2020 , was zero .

The average reserve requirement for the maintenance period for the quarter ended September 30, 2020, was zero .

The Company is required to maintain a $ 500,000 balance with a correspondent bank for outsourced servicing of ATMs.

As of June 30, 2020 , the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure of its interest rate swap, respectively.

As of September 30, 2020, the Company was required to maintain a $ 100,000 and $ 2.8 million balance with a correspondent bank to collateralize the initial margin and the fair value exposure, respectively, of its interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures.

Investment Securities

The carrying values and estimated fair values of investment securities at the periods indicated are presented below:

(In Thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

June 30, 2020

The amortized cost and estimated fair values of investment securities at the periods indicated are presented below:

(In Thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

September 30, 2020

Securities available for sale

11 unchanged sentences

Total securities available for sale $ 274,788 $ 1,444 ($ 94 ) $ 276,138

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019 were as follows:

Less Than 12 Months

More Than 12 Months

(In Thousands)

Unrealized Losses

June 30, 2020:

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019 were as follows:

Less Than 12 Months More Than 12 Months Total

(In Thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses

September 30, 2020:

Securities available for sale

Corporate bonds

Treasury and government sponsored entities $ 36,286 ($ 48 ) $ — $ — $ 36,286 ($ 48 )

Collateralized loan obligations 21,812 ( 223 ) 2,947 ( 44 ) 24,759 ( 267 )

Total $ 58,098 ($ 271 ) $ 2,947 ($ 44 ) $ 61,045 ($ 315 )

December 31, 2019:

2 unchanged sentences

Collateralized loan obligations 14,972 ( 17 ) 7,951 ( 40 ) 22,923 ( 57 )

Total $ 54,769 ($ 50 ) $ 10,947 ($ 44 ) $ 65,716 ($ 94 )

The unrealized losses on investments in U.S.

treasury and government sponsored entities, corporate bonds, collateralized loan obligations, and municipal securities in both periods were caused by changes in interest rates.

At June 30, 2020 and December 31, 2019 , there were 9 and 8 available-for-sale securities with unrealized losses that have been in a loss position for less than twelve months, respectively.

There were 1 and 3 securities as of June 30, 2020 and December 31, 2019 that have been in an unrealized loss position for more than twelve months, respectively.

treasury and government sponsored entities and collateralized loan obligations in both periods were caused by changes in interest rates.

At September 30, 2020 and December 31, 2019, there were 11 and 8 available-for-sale securities with unrealized losses that have been in a loss position for less than twelve months, respectively.

There were 1 and 3 securities as of September 30, 2020 and December 31, 2019 that have been in an unrealized loss position for more than twelve months, respectively.

The contractual terms of the investments in a loss position do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.

Because it is more likely than not that the Company will hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At June 30, 2020 and December 31, 2019 , $ 94.3 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively.

The amortized cost and estimated fair values of debt securities at June 30, 2020 , are distributed by contractual maturity as shown below.

At September 30, 2020 and December 31, 2019, $ 85.0 million and $ 30.6 million in securities were pledged for deposits and borrowings, respectively.

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

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

(In Thousands)

Amortized Cost

Weighted Average Yield

(In Thousands) Amortized Cost Fair Value Weighted Average Yield

US Treasury and government sponsored entities

Within 1 year $ 69,006 $ 69,784 2.22 %

1-5 years 86,965 87,768 1.15 %

Total $ 155,971 $ 157,552 1.63 %

Corporate bonds

Within 1 year

1-5 years $ 26,750 $ 27,215 1.45 %

Total $ 26,750 $ 27,215 1.45 %

Collateralized loan obligations

5-10 years $ 5,090 $ 5,053 1.89 %

Over 10 years 23,436 23,213 1.70 %

Total $ 28,526 $ 28,266 1.73 %

Municipal securities

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three and six -month periods ending June 30, 2020 and 2019 , are as follows:

(In Thousands)

Three Months Ended June 30, 2020

1-5 years $ 2,295 $ 2,336 3.92 %

Total $ 2,295 $ 2,336 3.92 %

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three and nine-month periods ending September 30, 2020 and 2019, are as follows:

(In Thousands) Proceeds Gross Gains Gross Losses

Three Months Ended September 30, 2020

Available for sale securities $ — $ — $ —

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Available for sale securities $ — $ — $ —

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Available for sale securities $ — $ — $ —

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Available for sale securities $ 4,219 $ 23 $ —

A summary of interest income for the three and six -month periods ending June 30, 2020 and 2019 , on available for sale investment securities are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

A summary of interest income for the three and nine-month periods ending September 30, 2020 and 2019, on available for sale investment securities are as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

US Treasury and government sponsored entities $ 680 $ 943 $ 2,839 $ 3,085

Other 237 573 1,040 1,671

Total taxable interest income $ 917 $ 1,516 $ 3,879 $ 4,756

1 unchanged sentence

Total tax-exempt interest income $ 23 $ 12 $ 72 $ 94

Total $ 940 $ 1,528 $ 3,951 $ 4,850

Loans and Credit Quality

The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on the Company's asset quality rating ("AQR") criteria:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

June 30, 2020

(In Thousands) Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deeds of trust Consumer other Total

September 30, 2020

AQR Pass $ 821,117 $ 37,256 $ 82,661 $ 138,886 $ 302,902 $ 40,191 $ 13,726 $ 23,023 $ 1,459,762

AQR Special Mention 5,782 — — 2,677 17,178 2,172 176 — 27,985

AQR Substandard 8,971 702 — 7,430 613 1,176 148 110 19,150

AQR Doubtful 308 — — — — — — — 308

Subtotal $ 836,178 $ 37,958 $ 82,661 $ 148,993 $ 320,693 $ 43,539 $ 14,050 $ 23,133 $ 1,507,205

Unearned origination fees, net of origination costs ( 14,485 )

Total loans $ 1,492,720

December 31, 2019

AQR Pass $ 394,107 $ 34,132 $ 61,808 $ 129,959 $ 295,482 $ 38,771 $ 15,860 $ 24,464 $ 994,583

AQR Special Mention 2,279 3,337 — 3,828 17,478 2,559 179 — 29,660

AQR Substandard 16,304 1,349 — 5,104 — 1,176 159 121 24,213

Subtotal $ 412,690 $ 38,818 $ 61,808 $ 138,891 $ 312,960 $ 42,506 $ 16,198 $ 24,585 $ 1,048,456

Unearned origination fees, net of origination costs ( 5,085 )

Total loans $ 1,043,371

The above table includes $ 375.6 million in Paycheck Protection Program ("PPP") loans administered by the U.S.

Small Business Administration ("SBA") within the Commercial loan segment.

Small Business Administration ("SBA") within the Commercial loan segment as of September 30, 2020.

Additionally, unearned origination fee, net of origination costs includes $ 8.8 million associated with SBA PPP loans.

Nonaccrual loans:

Nonaccrual loans net of government guarantees totaled $ 12.7 million and $ 14.0 million at June 30, 2020 and December 31, 2019 , respectively.

Nonaccrual loans net of government guarantees totaled $ 11.0 million and $ 14.0 million at September 30, 2020 and December 31, 2019, respectively.

Nonaccrual loans at the periods indicated are presented below by segment:

(In Thousands)

90 Days Past Due

June 30, 2020

(In Thousands) 30-59 Days

Past Due 60-89 Days

Past Due Greater Than

90 Days Past Due Current Total

September 30, 2020

Commercial $ 115 $ — $ 4,634 $ 2,082 $ 6,831

Real estate construction one-to-four family — — 702 — 702

7 unchanged sentences

December 31, 2019

Commercial $ 270 $ 385 $ 2,862 $ 5,636 $ 9,153

Real estate construction one-to-four family — — 1,349 — 1,349

8 unchanged sentences

Past due loans and nonaccrual loans at the periods indicated are presented below by segment:

(In Thousands)

June 30, 2020

(In Thousands) 30-59 Days

Accruing 60-89 Days

Accruing Greater Than

Accruing Total Past

Due Nonaccrual Current Total

September 30, 2020

Commercial $ — $ — $ — $ — $ 6,831 $ 829,347 $ 836,178

Real estate construction one-to-four family — — — — 702 37,256 37,958

5 unchanged sentences

Consumer other — — — — 109 23,024 23,133

Subtotal $ 236 $ 2,112 $ — $ 2,348 $ 12,647 $ 1,492,210 $ 1,507,205

Unearned origination fees, net of origination costs ( 14,485 )

Total $ 1,492,720

December 31, 2019

Commercial $ 270 $ — $ — $ 270 $ 9,153 $ 403,267 $ 412,690

Real estate construction one-to-four family — — — — 1,349 37,469 38,818

5 unchanged sentences

Consumer other 150 — — 150 121 24,314 24,585

Subtotal $ 1,534 $ — $ — $ 1,534 $ 15,356 $ 1,031,566 $ 1,048,456

Unearned origination fees, net of origination costs ( 5,085 )

Total $ 1,043,371

Impaired Loans:

The following table presents information about impaired loans by class as of the periods indicated:

(In Thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

June 30, 2020

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

September 30, 2020

With no related allowance recorded

Commercial - AQR substandard $ 8,668 $ 8,872 $—

Commercial - AQR doubtful 308 308 —

Real estate construction one-to-four family - AQR substandard 702 702 —

6 unchanged sentences

Consumer secured by 1st deeds of trust - AQR substandard 148 148 —

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard 84 88 —

Subtotal $ 19,744 $ 20,037 $—

With an allowance recorded

Commercial - AQR substandard $ 202 $ 202 $ 41

Subtotal $ 202 $ 202 $ 41

Commercial - AQR substandard $ 8,870 $ 9,074 $ 41

Commercial - AQR doubtful 308 308 —

Real estate construction one-to-four family - AQR substandard 702 702 —

6 unchanged sentences

Consumer secured by 1st deeds of trust - AQR substandard 148 148 —

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard 84 88 —

(In Thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

Total $ 19,946 $ 20,239 $ 41

(In Thousands) Recorded Investment Unpaid Principal Balance Related Allowance

December 31, 2019

9 unchanged sentences

Consumer other - AQR substandard 90 94 —

Subtotal $ 24,112 $ 24,185 $—

With an allowance recorded

Commercial - AQR substandard $ 561 $ 561 $ 17

Subtotal $ 561 $ 561 $ 17

Commercial - AQR substandard $ 16,078 $ 16,143 $ 17

7 unchanged sentences

Consumer other - AQR substandard 90 94 —

Total $ 24,673 $ 24,746 $ 17

The unpaid principal balance included in the tables above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.

The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

(In Thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three and nine-month periods ended September 30, 2020 and 2019:

Three Months Ended September 30, 2020 2019

(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded

Commercial - AQR pass

Commercial - AQR substandard $ 8,564 $ 42 $ 17,616 $ 107

Commercial - AQR doubtful 308 — — —

Real estate construction one-to-four family - AQR substandard 488 — 1,482 —

6 unchanged sentences

Consumer secured by 1st deeds of trust - AQR substandard 269 — 93 2

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard 84 — 93 —

Subtotal $ 19,200 $ 120 $ 27,183 $ 158

With an allowance recorded

Commercial - AQR substandard $ 226 $ 8 $ 391 $ —

Commercial - AQR pass

Consumer secured by 1st deeds of trust - AQR substandard — — 74 —

Subtotal $ 226 $ 8 $ 465 $ —

Commercial - AQR substandard $ 8,790 $ 50 $ 18,007 $ 107

Commercial - AQR doubtful 308 — — —

Real estate construction one-to-four family - AQR substandard 488 — 1,482 —

6 unchanged sentences

Consumer secured by 1st deeds of trust - AQR substandard 269 — 167 2

Consumer secured by 1st deeds of trust - AQR loss

Consumer other - AQR substandard 84 — 93 —

Total Impaired Loans $ 19,426 $ 128 $ 27,648 $ 158

Six Months Ended June 30,

(In Thousands)

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Nine Months Ended September 30, 2020 2019

(In Thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded

1 unchanged sentence

Commercial - AQR substandard 9,899 138 17,205 292

Commercial - AQR doubtful 103 — — —

Real estate construction one-to-four family - AQR substandard 808 — 2,109 —

8 unchanged sentences

Consumer other - AQR substandard 87 — 63 —

Subtotal $ 19,858 $ 325 $ 28,357 $ 463

With an allowance recorded

2 unchanged sentences

Consumer secured by 1st deeds of trust - AQR substandard — — 97 —

Subtotal $ 1,794 $ 8 $ 1,030 $ —

Commercial - AQR pass $ — $ — $ 711 $ 35

Commercial - AQR substandard 11,693 146 17,920 292

Commercial - AQR doubtful 103 — — —

Real estate construction one-to-four family - AQR substandard 808 — 2,109 —

10 unchanged sentences

Troubled Debt Restructurings:

Loans classified as troubled debt restructurings (“TDR”) totaled $ 10.6 million and $ 10.1 million at June 30, 2020 and December 31, 2019 , respectively.

Loans classified as troubled debt restructurings (“TDR”) totaled $ 8.5 million and $ 10.1 million at September 30, 2020 and December 31, 2019, respectively.

A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.

2 unchanged sentences

The Company has elected to adopt these provisions of the CARES Act.

As of June 30, 2020, the Company has made the following loan modifications related to COVID-19, which are not classified as TDRs:

(Dollars in thousands)

Interest Only

Full Payment Deferral

As of September 30, 2020, the Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:

(Dollars in thousands) Interest Only Full Payment Deferral Total

Portfolio loans $ 46,056 $ 74,337 $ 120,393

13 unchanged sentences

All of the Company's TDRs are included in impaired loans.

The following table presents the breakout between newly restructured loans that occurred during the six months ended June 30, 2020 and restructured loans that occurred prior to 2020 that are still included in portfolio loans.

The following table presents the breakout between newly restructured loans that occurred during the nine months ended September 30, 2020 and restructured loans that occurred prior to 2020 that are still included in portfolio loans.

As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019.

The below disclosed restructurings were not related to COVID-19 modifications:

Accrual Status

Nonaccrual Status

Total Modifications

Accrual Status Nonaccrual Status Total Modifications

(In Thousands)

1 unchanged sentence

Commercial - AQR substandard $ 1,565 $ 163 $ 1,728

Subtotal $ 1,565 $ 163 $ 1,728

Existing Troubled Debt Restructurings $ 802 $ 5,946 $ 6,748

The following tables present newly restructured loans that occurred during the six months ended June 30, 2020 and 2019, by concession (terms modified):

June 30, 2020

Number of Contracts

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications

Total $ 2,367 $ 6,109 $ 8,476

The following tables present newly restructured loans that occurred during the nine months ended September 30, 2020 and 2019, by concession (terms modified):

September 30, 2020

Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

(In Thousands)

1 unchanged sentence

Commercial - AQR substandard 2 $ — $ 3,249 $ 164 $ — $ 3,413

Total 2 $ — $ 3,249 $ 164 $ — $ 3,413

Post-Modification Outstanding Recorded Investment:

Commercial - AQR substandard 2 $ — $ 1,565 $ 163 $ — $ 1,728

June 30, 2019

Number of Contracts

Rate Modification

Term Modification

Payment Modification

Combination Modification

Total Modifications

Total 2 $ — $ 1,565 $ 163 $ — $ 1,728

September 30, 2019

Number of Contracts Rate Modification Term Modification Payment Modification Combination Modification Total Modifications

(In Thousands)

2 unchanged sentences

Real estate term owner occupied- AQR substandard 1 — — 192 — 192

Total 6 $ — $ — $ 701 $ 1,350 $ 2,051

Post-Modification Outstanding Recorded Investment:

1 unchanged sentence

Real estate term owner occupied- AQR substandard 1 — — 188 — 188

Total 6 $ — $ — $ 613 $ 1,340 $ 1,953

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs.

There were no in charge-offs in the six months ended June 30, 2020 on loans that were newly classified as TDRs during the same period.

There were no in charge-offs in the nine months ended September 30, 2020 on loans that were newly classified as TDRs during the same period.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses ("Allowance").

There were no TDRs with specific impairment at June 30, 2020 and December 31, 2019 , respectively.

The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the six months ended June 30, 2020 and 2019, respectively.

There were no TDRs with specific impairment at September 30, 2020 and December 31, 2019, respectively.

The Company had no TDRs that defaulted within twelve months of restructure and defaulted during the nine months ended September 30, 2020 and 2019, respectively.

Allowance for Loan Losses

1 unchanged sentence

Three Months Ended

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

September 30, Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deed of trust Consumer other Unallocated Total

Balance, beginning of period $ 7,366 $ 690 $ 1,215 $ 2,533 $ 5,421 $ 702 $ 258 $ 447 $ 2,021 $ 20,653

Charge-Offs ( 56 ) — — ( 85 ) — — — — — ( 141 )

Recoveries 600 — — — — 1 — 3 — 604

Provision (benefit) 285 10 58 21 61 55 ( 2 ) ( 7 ) 86 567

7 unchanged sentences

Balance, beginning of period $ 7,123 $ 739 $ 1,112 $ 2,281 $ 6,231 $ 761 $ 322 $ 486 $ 1,463 $ 20,518

Charge-Offs ( 22 ) — — — — — — ( 7 ) — ( 29 )

Recoveries 709 — — — — 1 — 13 — 723

Provision (benefit) ( 1,340 ) ( 122 ) ( 101 ) ( 299 ) ( 703 ) ( 48 ) ( 49 ) ( 62 ) 649 ( 2,075 )

6 unchanged sentences

for impairment $ 6,373 $ 617 $ 1,011 $ 1,982 $ 5,528 $ 714 $ 268 $ 430 $ 2,112 $ 19,035

Six Months Ended June 30,

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

Nine Months Ended September 30, Commercial Real estate construction one-to-four family Real estate construction other Real estate term owner occupied Real estate term non-owner occupied Real estate term other Consumer secured by 1st deed of trust Consumer other Unallocated Total

Balance, beginning of period $ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088

Charge-Offs ( 1,011 ) — — ( 85 ) — — — ( 14 ) — ( 1,110 )

Recoveries 656 — — — — 2 — 16 — 674

Provision (benefit) 1,946 57 256 366 302 85 ( 14 ) 5 28 3,031

7 unchanged sentences

Balance, beginning of period $ 5,660 $ 675 $ 1,275 $ 2,027 $ 5,799 $ 716 $ 306 $ 426 $ 2,635 $ 19,519

Charge-Offs ( 195 ) — — — — — — ( 11 ) — ( 206 )

Recoveries 801 — — — — 28 — 20 — 849

Provision (benefit) 204 ( 58 ) ( 264 ) ( 45 ) ( 271 ) ( 30 ) ( 33 ) ( 5 ) ( 523 ) ( 1,025 )

7 unchanged sentences

The following is a detail of the recorded investment, including unearned origination fees, net of origination costs, in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deed of trust

Consumer other

June 30, 2020

September 30, 2020

Balance, end of period $ 825,702 $ 37,751 $ 81,772 $ 148,167 $ 318,738 $ 43,245 $ 14,037 $ 23,308 $ 1,492,720

14 unchanged sentences

The following represents the balance of the Allowance for the periods indicated segregated by segment and class:

(In Thousands)

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

June 30, 2020

September 30, 2020

Individually evaluated for impairment:

1 unchanged sentence

Collectively evaluated for impairment:

AQR Pass 8,009 700 1,273 2,421 5,343 719 251 439 — 19,155

AQR Special Mention 141 — — 48 139 39 5 — — 372

AQR Substandard 4 — — — — — — 4 — 8

AQR Doubtful — — — — — — — — — —

Unallocated — — — — — — — — 2,107 2,107

$ 8,195 $ 700 $ 1,273 $ 2,469 $ 5,482 $ 758 $ 256 $ 443 $ 2,107 $ 21,683

December 31, 2019

2 unchanged sentences

Collectively evaluated for impairment:

AQR Pass 6,514 588 1,017 2,125 4,829 629 266 431 — 16,399

AQR Special Mention 64 55 — 63 351 42 4 — — 579

AQR Substandard 9 — — — — — — 5 — 14

Unallocated — — — — — — — — 2,079 2,079

$ 6,604 $ 643 $ 1,017 $ 2,188 $ 5,180 $ 671 $ 270 $ 436 $ 2,079 $ 19,088

Purchased Receivables

2 unchanged sentences

Management evaluates the adequacy of the reserve for purchased receivable losses based on historical loss experience by class of receivable and its assessment of current economic conditions.

As of June 30, 2020 , the Company has one class of purchased receivables.

There were no purchased receivables past due at June 30, 2020 or December 31, 2019 , and there were no restructured purchased receivables at June 30, 2020 or December 31, 2019 .

As of September 30, 2020, the Company has one class of purchased receivables.

There were no purchased receivables past due at September 30, 2020 or December 31, 2019, and there were no restructured purchased receivables at September 30, 2020 or December 31, 2019.

Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal.

Purchased receviables of $ 1.2 million related to one customer relationship are considered nonperforming assets as of June 30, 2020 for which the Company is not accruing and recognizing income.

Purchased receivables of $ 410,000 related to one customer relationship are considered nonperforming assets as of September 30, 2020 for which the Company is not accruing and recognizing income.

There were no nonperforming purchased receivables as of December 31, 2019.

The following table summarizes the components of net purchased receivables for the periods indicated:

(In Thousands)

June 30, 2020

December 31, 2019

(In Thousands) September 30, 2020 December 31, 2019

Purchased receivables $ 13,607 $ 24,467

Reserve for purchased receivable losses ( 87 ) ( 94 )

The following table sets forth information regarding changes in the purchased receivable reserve for the three and six-month periods ending June 30, 2020 and 2019 , respectively:

Three Months Ended June 30,

Six Months Ended June 30,

Total $ 13,520 $ 24,373

The following table sets forth information regarding changes in the purchased receivable reserve for the three and nine-month periods ending September 30, 2020 and 2019, respectively:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

Balance, beginning of period $ 93 $ 98 $ 94 $ 190

Charge-offs — — — —

Recoveries — — — —

Charge-offs net of recoveries — — — —

Reserve (benefit) for purchased receivables

Benefit for purchased receivables ( 6 ) ( 11 ) ( 7 ) ( 103 )

Balance, end of period $ 87 $ 87 $ 87 $ 87

1 unchanged sentence

Mortgage servicing rights

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

Six Months Ended June 30,

The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and nine-month periods ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

3 unchanged sentences

Due to changes in model inputs of assumptions (1)

( 699 ) ( 378 ) ( 2,291 ) ( 1,385 )

( 806 ) ( 285 ) ( 2,072 ) ( 902 )

Balance, end of period $ 10,589 $ 11,206 $ 10,589 $ 11,206

1 unchanged sentence

(2) Represents changes due to collection/realization of expected cash flows over time.

The following table details information related to our serviced mortgage loan portfolio as of June 30, 2020 and December 31, 2019 :

(In Thousands)

June 30, 2020

December 31, 2019

The following table details information related to our serviced mortgage loan portfolio as of September 30, 2020 and December 31, 2019:

(In Thousands) September 30, 2020 December 31, 2019

Balance of mortgage loans serviced for others $ 655,733 $ 659,048

MSR as a percentage of serviced loans 1.61 % 1.81 %

The Company recognized servicing fees of $ 639,000 and $ 588,000 during the three-month periods ending June 30, 2020 and 2019 , respectively and $ 1.3 million and $ 1.1 million during the six-month periods ending June 30, 2020 and 2019 , respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of June 30, 2020 and December 31, 2019 :

The Company recognized servicing fees of $ 671,000 and $ 616,000 during the three-month periods ending September 30, 2020 and 2019, respectively and $ 2.0 million and $ 1.8 million during the nine-month periods ending September 30, 2020 and 2019, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.

The following table outlines the weighted average key assumptions used in measuring the fair value of MSR as of September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

Constant prepayment rate 14.31 % 10.61 %

Discount rate 7.75 % 8.52 %

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at June 30, 2020 and December 31, 2019 were as follows:

(In Thousands)

June 30, 2020

December 31, 2019

Key economic assumptions and the sensitivity of the current fair value for MSR to immediate adverse changes in those assumptions at September 30, 2020 and December 31, 2019 were as follows:

(In Thousands) September 30, 2020 December 31, 2019

Aggregate portfolio principal balance $ 655,733 $ 659,048

Weighted average rate of note 3.74 % 3.90 %

June 30, 2020

1.0% Adverse Rate Change

2.0% Adverse Rate Change

September 30, 2020 Base 1.0% Adverse Rate Change 2.0% Adverse Rate Change

Constant prepayment rate 14.31 % 42.34 % 50.41 %

18 unchanged sentences

Commercial servicing rights

The commercial servicing right asset ("CSR") has a carrying value $ 1.2 million at both June 30, 2020 and December 31, 2019 , and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 242.0 million and $ 252.9 million at June 30, 2020 and December 31, 2019 , respectively.

Key assumptions used in measuring the fair value of the CSR as of June 30, 2020 and December 31, 2019 include a constant prepayment rate of 12.25 % and a discount rate of 11.70 % .

The commercial servicing right asset ("CSR") has a carrying value $ 1.3 million and $ 1.2 million at September 30, 2020 and December 31, 2019, respectively, and is included in other assets and carried at fair value on the Company's Consolidated Balance Sheets.

Total commercial loans serviced for others were $ 267.9 million and $ 252.9 million at September 30, 2020 and December 31, 2019, respectively.

Key assumptions used in measuring the fair value of the CSR as of September 30, 2020 and December 31, 2019 include a constant prepayment rate of 12.25 % and a discount rate of 11.70 %.

We adopted ASU 2016-02 Leases (Topic 842) ("ASU 2016-02") using the modified retrospective approach with an effective date as of January 1, 2019.

2 unchanged sentences

Additionally, the Company has elected to not apply ASU 2016-02 to short-term leases.

term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

Short-term leases are those leases that, at the lease commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

The Company has lease agreements for land and office facilities that it occupies to operate several of its retail branch locations, as well as one storage facility, that are classified as operating leases and are recognized on the balance sheet as right-of-use ("ROU") assets and lease liabilities.

7 unchanged sentences

The incremental borrowing rate is the rate that the Company would have incurred to borrow the funds necessary to purchase the leased asset over a similar term.

As of June 30, 2020, the Company has operating lease ROU assets of $ 13.2 million and operating lease liabilities of $ 13.1 million .

As of September 30, 2020, the Company has operating lease ROU assets of $ 12.9 million and operating lease liabilities of $ 12.9 million.

As of December 31, 2019, the Company had operating lease ROU assets of $ 14.3 million and operating lease liabilities of $ 14.2 million.

The Company did not have any agreements that are classified as finance leases in 2020 or 2019.

The Company did not have any agreements that are classified as finance leases as of September 30, 2020 or December 31, 2019.

The following table presents additional information about the Company's operating leases:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

Operating lease cost (1)

$ 710 $ 675 $ 2,111 $ 2,030

Short term lease cost (1)

6 unchanged sentences

The table below reconciles the remaining undiscounted cash flows for the next five years for each twelve-month period presented (unless otherwise indicated) and the total of the subsequent remaining years to the operating lease liabilities recorded on the balance sheet:

(In Thousands)

Operating Leases

2020 (Six months)

(In Thousands) Operating Leases

2020 (Three months) $ 678

Thereafter 6,607

Total minimum lease payments $ 15,765

33 unchanged sentences

Payments are typically received immediately or in the following month.

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six-month periods ended June 30, 2020 and 2019 :

(In Thousands)

Three Months Ended June 30,

Six Months Ended June 30,

The following presents other operating income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine-month periods ended September 30, 2020 and 2019:

(In Thousands) Three Months Ended September 30, Nine Months Ended September 30,

Other operating income 2020 2019 2020 2019

2 unchanged sentences

Service charges on deposit accounts 269 398 802 1,224

Other 389 433 1,123 1,249

Other operating income (in-scope of Topic 606) $ 1,428 $ 1,651 $ 4,019 $ 4,687

2 unchanged sentences

Gains on the sale of other real estate owned ("OREO") are also within the scope of Topic 606 and are recorded within other operating expense on the Company's Consolidated Statements of Income.

Gains on the sale of OREO properties were $ 38,000 and $ 0 for the three months ended June 30, 2020 and 2019 , respectively, and $ 75,000 and $ 316,000 for the six months ended June 30, 2020 and 2019 , respectively .

Interest rates swaps related to community banking activities

Gains on the sale of OREO properties were $ 100,000 and $ 63,000 for the three months ended September 30, 2020 and 2019, respectively, and $ 176,000 and $ 380,000 for the nine months ended September 30, 2020 and 2019, respectively .

Derivatives swaps related to community banking activities

The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty").

2 unchanged sentences

Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

The Company pledged $ 9.2 million as of June 30, 2020 and $ 4.7 million as of December 31, 2019 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 92.4 million and $ 94.4 million at June 30, 2020 and December 31, 2019 , respectively.

At June 30, 2020 , the notional amount of interest rate swaps is made up of eight variable to fixed rate swaps to commercial loan customers totaling $ 46.2 million , and eight fixed to variable rate swaps with a counterparty totaling $ 46.2 million .

Changes in fair value from these eight interest rate swaps offset each other in the first six months of 2020 .

The Company recognized $ 17,000 and $ 734,000 fee income related to interest rate swaps in the three and six-month periods ending June 30, 2020 and June 30, 2019 , respectively.

The Company pledged $ 10.7 million as of September 30, 2020 and $ 4.7 million as of December 31, 2019 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.

The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $ 172.8 million and $ 94.4 million at September 30, 2020 and December 31, 2019, respectively.

At September 30, 2020, the notional amount of interest rate swaps is made up of thirteen variable to fixed rate swaps to commercial loan customers totaling $ 86.4 million, and thirteen fixed to variable rate swaps with a counterparty totaling $ 86.4 million.

Changes in fair value from these thirteen interest rate swaps offset each other in the first six months of 2020.

The Company recognized $ 726,000 and zero in fee income related to interest rate swaps in the three month periods ending September 30, 2020 and September 30, 2019, respectively, and $ 743,000 and $ 734,000 in fee income related to interest rate swaps in the nine month periods ending September 30, 2020 and September 30, 2019, respectively.

Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income.

4 unchanged sentences

The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 % which reprices quarterly on the payment date.

This rate was 1.68 % as of June 30, 2020 .

The Company pledged $ 2.9 million and $ 1.3 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2020 and December 31, 2019 , respectively.

This rate was 1.62 % as of September 30, 2020.

The Company pledged $ 2.9 million and $ 1.3 million in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of September 30, 2020 and December 31, 2019, respectively.

Changes in the fair value of this interest rate swap are reported in other comprehensive income.

The unrealized loss on this interest rate swap was $ 2.4 million as of June 30, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019 .

Interest rates swaps related to home mortgage banking activities

The unrealized loss on this interest rate swap was $ 2.2 million as of September 30, 2020 and the unrealized loss was $ 534,000 as of December 31, 2019.

Derivatives related to home mortgage banking activities

The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments.

3 unchanged sentences

Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates.

RML had commitments to originate mortgage loans held for sale totaling $ 206.3 million and $ 48.8 million at June 30, 2020 and December 31, 2019 , respectively.

RML had commitments to originate mortgage loans held for sale totaling $ 257.3 million and $ 48.8 million at September 30, 2020 and December 31, 2019, respectively.

Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income.

None of these derivatives are designated as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at June 30, 2020 and December 31, 2019 :

(In Thousands)

Asset Derivatives

June 30, 2020

December 31, 2019

Balance Sheet Location

Interest rate swaps

Interest rate lock commitments

(In Thousands)

Liability Derivatives

June 30, 2020

December 31, 2019

Balance Sheet Location

Interest rate swaps

Other liabilities

Retail interest rate contracts

Other liabilities

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for the three and six-month periods ending June 30, 2020 and 2019:

Three Months Ended June 30,

Six Months Ended June 30,

(In Thousands)

Income Statement Location

Retail interest rate contracts

Mortgage banking income

Interest rate lock commitments

Mortgage banking income

None of these derivatives are designed as hedging instruments.

The following table presents the fair value of derivatives not designated as hedging instruments at September 30, 2020 and December 31, 2019:

(In Thousands) Asset Derivatives

September 30, 2020 December 31, 2019

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other assets $ 8,846 $ 2,950

Interest rate lock commitments Other assets 6,519 810

Total $ 15,365 $ 3,760

(In Thousands) Liability Derivatives

September 30, 2020 December 31, 2019

Balance Sheet Location Fair Value Fair Value

Interest rate swaps Other liabilities $ 8,846 $ 2,950

Retail interest rate contracts Other liabilities 466 71

Total $ 9,312 $ 3,021

The following table presents the net gains (losses) of derivatives not designated as hedging instruments for the three and nine-month periods ending September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) Income Statement Location 2020 2019 2020 2019

Retail interest rate contracts Mortgage banking income ($ 1,823 ) ($ 242 ) ($ 6,525 ) ($ 934 )

Interest rate lock commitments Mortgage banking income 1,781 ( 692 ) 5,372 313

Total ($ 42 ) ($ 934 ) ($ 1,153 ) ($ 621 )

Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements include "right of set-off" provisions.

1 unchanged sentence

We do not offset such financial instruments for financial reporting purposes.

The following table summarizes the derivatives that have a right of offset as of June 30, 2020 and December 31, 2019 :

June 30, 2020

Gross amounts not offset in the Statement of Financial Position

(In Thousands)

Gross amounts of recognized assets and liabilities

Gross amounts offset in the Statement of Financial Position

Net amounts of assets and liabilities presented in the Statement of Financial Position

Financial Instruments

Collateral Posted

The following table summarizes the derivatives that have a right of offset as of September 30, 2020 and December 31, 2019:

September 30, 2020 Gross amounts not offset in the Statement of Financial Position

(In Thousands) Gross amounts of recognized assets and liabilities Gross amounts offset in the Statement of Financial Position Net amounts of assets and liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount

Asset Derivatives

3 unchanged sentences

Retail interest rate contracts 466 — 466 — — 466

December 31, 2019

Gross amounts not offset in the Statement of Financial Position

(In Thousands)

Gross amounts of recognized assets and liabilities

Gross amounts offset in the Statement of Financial Position

Net amounts of assets and liabilities presented in the Statement of Financial Position

Financial Instruments

Collateral Posted

December 31, 2019 Gross amounts not offset in the Statement of Financial Position

Asset Derivatives

19 unchanged sentences

Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value.

Although the Company has determined that the majority of inputs used to

value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of June 30, 2020 , the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

Although the Company has determined that the

majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.

However, as of September 30, 2020, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives.

As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.

23 unchanged sentences

Estimated fair values as of the periods indicated are as follows:

June 30, 2020

December 31, 2019

(In Thousands)

Carrying Amount

September 30, 2020 December 31, 2019

(In Thousands) Carrying Amount Fair Value Carrying Amount Fair Value

Financial assets:

16 unchanged sentences

Level 2 inputs:

Deposits $ 1,806,133 $ 1,808,534 $ 1,372,351 $ 1,373,647

Borrowings 13,737 15,119 8,891 9,216

Accrued interest payable 139 139 23 23

4 unchanged sentences

The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:

(In Thousands)

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

June 30, 2020

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

September 30, 2020

Available for sale securities

31 unchanged sentences

Total other liabilities $ 3,555 $ — $ 3,555 $ —

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the six -month periods ended June 30, 2020 and 2019 :

(In Thousands)

Beginning balance

Change included in earnings

Purchases and issuances

Sales and settlements

Ending balance

Net change in unrealized gains (losses) relating to items held at end of period

Three Months Ended June 30, 2020

The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine-month periods ended September 30, 2020 and 2019:

(In Thousands) Beginning balance Change included in earnings Purchases and issuances Sales and settlements Ending balance Net change in unrealized gains (losses) relating to items held at end of period

Three Months Ended September 30, 2020

Interest rate lock commitments $ 4,653 ($ 1,784 ) $ 15,329 ($ 11,679 ) $ 6,519 $ 6,519

1 unchanged sentence

Commercial servicing rights 1,162 ( 101 ) 225 — 1,286 —

Three Months Ended June 30, 2019

Total $ 16,536 ($ 3,390 ) $ 16,927 ($ 11,679 ) $ 18,394 $ 6,519

Three Months Ended September 30, 2019

Interest rate lock commitments $ 2,072 ($ 553 ) $ 4,569 ($ 4,725 ) $ 1,363 $ 1,363

1 unchanged sentence

Commercial servicing rights 999 ( 20 ) 39 — 1,018 —

(In Thousands)

Beginning balance

Change included in earnings

Purchases and issuances

Sales and settlements

Ending balance

Net change in unrealized gains (losses) relating to items held at end of period

Six Months Ended June 30, 2020

Total $ 13,907 ($ 1,236 ) $ 5,641 ($ 4,725 ) $ 13,587 $ 1,363

Nine Months Ended September 30, 2020

Interest rate lock commitments $ 810 ($ 4,923 ) $ 40,441 ($ 29,809 ) $ 6,519 $ 6,519

1 unchanged sentence

Commercial servicing rights 1,214 ( 180 ) 252 — 1,286 —

Six Months Ended June 30, 2019

Total $ 13,944 ($ 9,466 ) $ 43,725 ($ 29,809 ) $ 18,394 $ 6,519

Nine Months Ended September 30, 2019

Interest rate lock commitments $ 978 ($ 1,431 ) $ 12,759 ($ 10,943 ) $ 1,363 $ 1,363

1 unchanged sentence

Commercial servicing rights 1,030 ( 118 ) 106 — 1,018 —

There were no changes in unrealized gains and losses for the three and six-month periods ending June 30, 2020 and 2019 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending June 30, 2020 and December 31, 2019 , except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

Total $ 12,829 ($ 3,836 ) $ 15,537 ($ 10,943 ) $ 13,587 $ 1,363

There were no changes in unrealized gains and losses for the three and nine-month periods ending September 30, 2020 and 2019 included in other comprehensive income for recurring Level 3 fair value measurements.

As of and for the periods ending September 30, 2020 and December 31, 2019, except for certain assets as shown in the following table, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis.

For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as Level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as Level 3 valuations in the fair value hierarchy.

(In Thousands)

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

June 30, 2020

(In Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

September 30, 2020

Loans measured for impairment $ 202 $ — $ — $ 202

Total $ 202 $ — $ — $ 202

December 31, 2019

Loans measured for impairment $ 561 $ — $ — $ 561

The following table presents the gains and (losses) resulting from nonrecurring fair value adjustments for the three and six -month periods ended June 30, 2020 and 2019 :

Three Months Ended June 30,

Six Months Ended June 30,

Total $ 561 $ — $ — $ 561

The following table presents the gains resulting from nonrecurring fair value adjustments for the three and nine-month periods ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

(In Thousands) 2020 2019 2020 2019

2 unchanged sentences

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and nonrecurring basis at June 30, 2020 and December 31, 2019 :

Financial Instrument

Valuation Technique

Unobservable Input

Weighted Average Rate Range

June 30, 2020

Loans measured for impairment

In-house valuation of collateral

Discount rate

Interest rate lock commitment

External pricing model

Pull through rate

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

8.10% - 14.56%

Financial Instrument Valuation Technique Unobservable Input Weighted Average Rate Range

September 30, 2020

Loans measured for impairment In-house valuation of collateral Discount rate 40 %

Interest rate lock commitment External pricing model Pull through rate 90.24 %

Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.54 % - 14.50 %

Discount rate 7.75 %

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

7.64% - 15.67%

Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64 % - 15.67 %

Discount rate 11.70 %

December 31, 2019

Loans measured for impairment

In-house valuation of collateral

Discount rate

Interest rate lock commitment

External pricing model

Pull through rate

Mortgage servicing rights

Discounted cash flow

Constant prepayment rate

9.11% - 10.67%

Loans measured for impairment In-house valuation of collateral Discount rate 25 %

Interest rate lock commitment External pricing model Pull through rate 92.65 %

Mortgage servicing rights Discounted cash flow Constant prepayment rate 9.11 % - 10.67 %

Discount rate 8.51 % - 8.66 %

8.51% - 8.66%

Commercial servicing rights

Discounted cash flow

Constant prepayment rate

7.64% - 15.67%

Commercial servicing rights Discounted cash flow Constant prepayment rate 7.64 % - 15.67 %

Discount rate 11.70 %

3 unchanged sentences

The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas.

As of June 30, 2020 , the Community Banking segment operated 16 branches throughout Alaska.

As of September 30, 2020, the Community Banking segment operated 16 branches throughout Alaska.

The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.

Summarized financial information for the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:

Three Months Ended June 30, 2020

(In Thousands)

Community Banking

Home Mortgage Lending

Three Months Ended September 30, 2020

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 18,821 $ 973 $ 19,794

6 unchanged sentences

Provision (benefit) for income taxes 1,249 2,745 3,994

Three Months Ended June 30, 2019

(In Thousands)

Community Banking

Home Mortgage Lending

Net income $ 4,915 $ 6,940 $ 11,855

Three Months Ended September 30, 2019

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 17,108 $ 729 $ 17,837

6 unchanged sentences

Provision for income taxes 1,550 478 2,028

Six Months Ended June 30, 2020

(In Thousands)

Community Banking

Home Mortgage Lending

Net income $ 6,343 $ 1,195 $ 7,538

Nine Months Ended September 30, 2020

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 53,818 $ 2,319 $ 56,137

6 unchanged sentences

Provision for income taxes 1,391 4,860 6,251

Six Months Ended June 30, 2019

(In Thousands)

Community Banking

Home Mortgage Lending

Net income $ 10,570 $ 12,218 $ 22,788

Nine Months Ended September 30, 2019

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Interest income $ 50,377 $ 1,644 $ 52,021

6 unchanged sentences

Provision for income taxes 3,689 645 4,334

June 30, 2020

(In Thousands)

Community Banking

Home Mortgage Lending

Net income $ 14,500 $ 1,611 $ 16,111

September 30, 2020

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Total assets $ 1,928,465 $ 169,273 $ 2,097,738

Loans held for sale $ — $ 128,105 $ 128,105

December 31, 2019

(In Thousands)

Community Banking

Home Mortgage Lending

(In Thousands) Community Banking Home Mortgage Lending Consolidated

Total assets $ 1,540,869 $ 103,127 $ 1,643,996

Loans held for sale $ — $ 67,834 $ 67,834

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