What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-08-07 · 169 added, 138 removed, 883 unchanged (26% of the section changed)

4 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

2020 December 31,

22 unchanged sentences

Advance payments from borrowers for taxes and insurance 1,678 1,305

Subordinated debt, net 11,676 —

Total liabilities 785,048 642,127

2 unchanged sentences

Preferred stock, $ 0.01 par value, 10,000,000 shares authorized, none issued or outstanding

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,593,152 and 2,567,389 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Common stock, $ 0.01 par value, 40,000,000 shares authorized, 2,595,289 and 2,567,389 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 27,018 26,343

9 unchanged sentences

(In thousands, except share and per share amounts)

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

40 unchanged sentences

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

1 unchanged sentence

Available for sale securities:

Unrealized holding gains arising during the period 134 39 110 92

Income tax expense related to unrealized gains/losses

( 28 ) ( 8 ) ( 23 ) ( 19 )

Other comprehensive income, net of tax 106 31 87 73

Unrealized holding (losses) gains arising during the period ( 4 ) ( 3 ) 106 90

Income tax expense (benefit) related to unrealized gains/losses 1 1 ( 22 ) ( 19 )

Other comprehensive (loss) income, net of tax ( 3 ) ( 2 ) 84 71

Comprehensive income $ 2,332 $ 1,546 $ 5,527 $ 4,880

3 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

(In thousands, except share and per share amounts)

7 unchanged sentences

Stockholders’

Balance, at March 31, 2020 2,591,494 $ 25 $ 26,776 $ ( 198 ) $ 51,488 $ 156 $ 78,247

Balance, at June 30, 2020 2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

Net income 2,335 2,335

Other comprehensive income, net of tax 106 106

Other comprehensive loss, net of tax ( 3 ) ( 3 )

Share-based compensation 52 52

2 unchanged sentences

Common stock surrendered ( 2,842 ) —

Restricted shares forfeited ( 1,510 ) —

Common stock options exercised 4,979 23 23

Allocation of ESOP shares 49 28 — 77

Balance, at June 30, 2020 2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

Balance, at September 30, 2020 2,595,289 $ 25 $ 27,018 $ ( 142 ) $ 55,170 $ 259 $ 82,330

Balance, at December 31, 2019 2,567,389 $ 25 $ 26,343 $ ( 227 ) $ 51,410 $ 175 $ 77,726

9 unchanged sentences

Allocation of ESOP shares 153 85 — 238

Balance, at June 30, 2020 2,593,152 $ 25 $ 26,894 $ ( 170 ) $ 53,224 $ 262 $ 80,235

Balance, at September 30, 2020 2,595,289 $ 25 $ 27,018 $ ( 142 ) $ 55,170 $ 259 $ 82,330

Shares Common

6 unchanged sentences

Stockholders’

Balance, at March 31, 2019 2,563,828 $ 25 $ 25,802 $ ( 312 ) $ 47,252 $ 156 $ 72,923

Balance, at June 30, 2019 2,563,488 $ 25 $ 25,926 $ ( 283 ) $ 48,710 $ 187 $ 74,565

Net income 1,548 1,548

Other comprehensive income, net of tax 31 31

Other comprehensive loss, net of tax ( 2 ) ( 2 )

Share-based compensation 72 72

2 unchanged sentences

Common stock surrendered ( 1,032 ) —

Restricted shares forfeited — —

Common stock options exercised 5,490 93 93

Allocation of ESOP shares 71 28 99

Balance, at June 30, 2019 2,563,488 $ 25 $ 25,926 $ ( 283 ) $ 48,710 $ 187 $ 74,565

Balance, at September 30, 2019 2,567,946 $ 25 $ 26,162 $ ( 255 ) $ 49,899 $ 185 $ 76,016

Balance, at December 31, 2018 2,544,059 $ 25 $ 25,663 $ ( 340 ) $ 46,165 $ 114 $ 71,627

8 unchanged sentences

Allocation of ESOP shares 209 85 294

Balance, at June 30, 2019 2,563,488 $ 25 $ 25,926 $ ( 283 ) $ 48,710 $ 187 $ 74,565

Balance, at September 30, 2019 2,567,946 $ 25 $ 26,162 $ ( 255 ) $ 49,899 $ 185 $ 76,016

See notes to condensed consolidated financial statements

3 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

6 unchanged sentences

Fair value adjustment on mortgage servicing rights 1,423 576

Change in right of use assets amortization 475 503

Change in lease liabilities ( 449 ) ( 416 )

Right of use assets amortization 696 756

Increase in cash surrender value of BOLI ( 207 ) ( 267 )

8 unchanged sentences

Accrued interest payable ( 13 ) 75

Change in lease liabilities ( 662 ) ( 656 )

Other liabilities ( 585 ) 883

11 unchanged sentences

Repayment of borrowings ( 87,991 ) ( 162,775 )

FHLB stock redeemed (purchased) ( 4 ) 2,624

Proceeds from subordinated debt, net 11,676 —

FHLB stock (purchased) redeemed ( 4 ) 2,776

Allocation of ESOP shares 238 294

30 unchanged sentences

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides relief from certain accounting and financial reporting requirements under U.S.

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) under ASC 310-40 for loan modifications related to the coronavirus disease (“COVID-19”) pandemic.

In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs.

1 unchanged sentence

Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan.

The interagency statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to the COVID-19 pandemic, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government.

The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government.

Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

The Company adopted this guidance effective March 27, 2020.

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”).

ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period.

ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848).

4 unchanged sentences

2) Modifications of contracts within the scope of Topics 840, Leases, and 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate (for example, the incremental borrowing rate) or remeasurements of lease payments that otherwise would be required under those Topics for modifications not accounted for as separate contracts;

and 3) Modifications of contracts do not require an entity to reassess its original

conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives.

and 3) Modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives.

The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022.

37 unchanged sentences

The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships.

In addition, the ASU requires an entity to present

the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted.

40 unchanged sentences

The amendments in this ASU include determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, requiring cash received from lessors from sales-type and direct financing leases to be presented in the cash flow statement within investing activities, and clarifying interim disclosure requirements.

The effective date and transition requirements for the first and second items of this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted.

adoption is permitted.

We have adopted the third item of this ASU and provided the required interim disclosures in this report.

3 unchanged sentences

Losses Estimated

June 30, 2020

September 30, 2020

Treasury bills $ 1,976 $ — $ — $ 1,976

Municipal bonds 5,060 196 ( 2 ) 5,254

5 unchanged sentences

Total $ 9,085 $ 229 $ ( 8 ) $ 9,306

The amortized cost and fair value of AFS securities at June 30, 2020, by contractual maturity, are shown below (in thousands).

The amortized cost and fair value of AFS securities at September 30, 2020, by contractual maturity, are shown below (in thousands).

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

Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.

June 30, 2020

September 30, 2020

Due within one year $ 3,014 $ 3,016

4 unchanged sentences

Total $ 12,968 $ 13,296

There were no pledged securities at June 30, 2020 or December 31, 2019.

There were no sales of AFS securities during the three and six months ended June 30, 2020 or 2019.

There were no securities in gross unrealized position at June 30, 2020.

The following table summarizes the aggregate fair value and gross unrealized loss by length of time of those investments that have been in a continuous unrealized loss position at December 31, 2019 (in thousands):

There were no pledged securities at September 30, 2020 or December 31, 2019.

There were no sales of AFS securities during the three and nine months ended September 30, 2020 or 2019.

September 30, 2020

Less Than 12 Months 12 Months or Longer Total

Value Unrealized

Treasury bills $ 1,033 $ — $ — $ — $ 1,033 $ —

Municipal bonds 909 ( 2 ) — — 909 ( 2 )

Agency mortgage-backed securities 210 ( 1 ) — — 210 ( 1 )

$ 2,152 $ ( 3 ) $ — $ — $ 2,152 $ ( 3 )

December 31, 2019

5 unchanged sentences

Total $ 3,387 $ ( 8 ) $ — $ — $ 3,387 $ ( 8 )

There were no credit losses recognized in earnings during the three and six months ended June 30, 2020 or 2019 relating to the Company’s securities.

At June 30, 2020, the securities portfolio consisted of 14 agency mortgage-backed securities and nine municipal securities with a total portfolio fair value of $ 10.2 million.

At December 31, 2019, the securities portfolio consisted of 13 agency mortgage-

backed securities and eight municipal securities with a fair value of $ 9.3 million.

At June 30, 2020, there were no securities in an unrealized loss position for less than 12 months or more than 12 months.

There were no credit losses recognized in earnings during the three and nine months ended September 30, 2020 or 2019 relating to the Company’s securities.

At September 30, 2020, the securities portfolio consisted of 16 agency mortgage-backed securities, ten municipal bonds and three short-term treasury bills with a total portfolio fair value of $ 13.3 million.

At December 31, 2019, the securities portfolio consisted of 13 agency mortgage-backed securities and eight municipal bonds with a fair value of $ 9.3 million.

At September 30, 2020, there were four securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

At December 31, 2019, there were five securities in an unrealized loss position for less than 12 months, and there were no securities in an unrealized loss position for more than 12 months.

1 unchanged sentence

It is expected that these securities will not be settled at a price less than the amortized cost of each investment.

The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of June 30, 2020, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

The unrealized losses on these investments are not considered other-than-temporary impairment ("OTTI") as of September 30, 2020, because the decline in fair value is not attributable to credit quality and because we do not intend, and it is not likely that we will be required, to sell these securities before recovery of their amortized cost basis .

Additional deterioration in market and economic conditions related to the COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges.

Note 4 – Loans

During the second quarter of 2020, as a qualified U.S.

Small Business Administration’s (“SBA”) lender, the Company was automatically authorized to participate in the SBA Paycheck Protection Program (“PPP”).

As of June 30, 2020, the Bank had funded PPP loans totaling $ 73.1 million.

The composition of the loans-held-for portfolio at the dates indicated, excluding loans held-for-sale, was as follows (in thousands):

September 30,

2020 December 31,

12 unchanged sentences

Total loans held-for-portfolio 692,749 621,907

Deferred fees ( 3,531 ) ( 2,020 )

Deferred fees, net ( 3,315 ) ( 2,020 )

Total loans held-for-portfolio, gross 689,434 619,887

1 unchanged sentence

Total loans held-for-portfolio, net $ 683,446 $ 614,247

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2020 (in thousands):

The Company was automatically authorized to participate in the SBA Paycheck Protection Program (“PPP”), as a qualified U.S.

Small Business Administration’s (“SBA”) lender.

As of September 30, 2020, the Bank had funded PPP loans totaling $ 74.8 million, which are included in commercial business loans above.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2020 (in thousands):

Individually evaluated for impairment Allowance:

13 unchanged sentences

Unallocated — 1,088 1,088 — — —

$ 729 $ 5,302 $ 6,031 $ 9,079 $ 685,155 $ 694,234

Total $ 446 $ 5,542 $ 5,988 $ 9,118 $ 683,631 $ 692,749

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2019 (in thousands):

15 unchanged sentences

Total $ 724 $ 4,916 $ 5,640 $ 12,393 $ 609,514 $ 621,907

The following tables summarize the activity in the allowance for loan losses for the three and six months ended June 30, 2020 (in thousands):

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 (in thousands):

Three Months Ended September 30, 2020

Allowance Charge-offs Recoveries Provision (Recapture) Ending

9 unchanged sentences

Total $ 6,031 $ ( 332 ) $ 14 $ 275 $ 5,988

Nine Months Ended September 30, 2020

Allowance Charge-offs Recoveries Provision (Recapture) Ending

9 unchanged sentences

Total $ 5,640 $ ( 649 ) $ 72 $ 925 $ 5,988

The following tables summarize the activity in the allowance for loan losses for the three and six months ended June 30, 2019 (in thousands):

The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 (in thousands):

Three Months Ended September 30, 2019

Allowance Charge-offs Recoveries (Recapture) Provision Ending

9 unchanged sentences

Total $ 5,370 $ ( 9 ) $ 7 $ 250 $ 5,618

Nine Months Ended September 30, 2019

Allowance Charge-offs Recoveries Provision (Recapture) Ending

21 unchanged sentences

Pass rated loans are loans that are not otherwise classified or criticized.

The following table presents the internally assigned grades as of June 30, 2020, by type of loan (in thousands):

The following table presents the internally assigned grades as of September 30, 2020, by type of loan (in thousands):

four family Home

31 unchanged sentences

Loans are not placed on nonaccrual for short-term loan modifications made in response to the COVID-19 pandemic.

The following table presents the recorded investment in nonaccrual loans as of June 30, 2020, and December 31, 2019, by type of loan (in thousands):

June 30, 2020 December 31, 2019

The following table presents the recorded investment in nonaccrual loans as of September 30, 2020, and December 31, 2019, by type of loan (in thousands):

September 30, 2020 December 31, 2019

One-to-four family $ 1,602 $ 2,090

4 unchanged sentences

Floating homes 529 290

Other consumer — —

Commercial business — 260

Total $ 3,316 $ 4,657

The following table presents the aging of the recorded investment in past due loans as of June 30, 2020, by type of loan (in thousands):

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020, by type of loan (in thousands):

Past Due 60-89 Days

25 unchanged sentences

Loans are considered nonperforming when they are placed on nonaccrual.

The following table presents the credit risk profile of our loan portfolio based on payment activity as of June 30, 2020, by type of loan (in thousands):

The following table presents the credit risk profile of our loan portfolio based on payment activity as of September 30, 2020, by type of loan (in thousands):

equity Commercial

24 unchanged sentences

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.

Impaired loans at June 30, 2020 and December 31, 2019, by type of loan were as follows (in thousands):

June 30, 2020

Impaired loans at September 30, 2020 and December 31, 2019, by type of loan were as follows (in thousands):

September 30, 2020

Recorded Investment

29 unchanged sentences

Total $ 12,526 $ 10,072 $ 2,321 $ 12,393 $ 724

The following tables present the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2020 and 2019, respectively, by loan types (in thousands):

Three Months Ended June 30, 2020 Three Months Ended June 30, 2019

The following tables present the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2020 and 2019, respectively, by loan types (in thousands):

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019

Investment Interest Income

10 unchanged sentences

Total $ 9,100 $ 140 $ 7,937 $ 96

Six Months Ended June 30, 2020 Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019

Investment Interest Income

10 unchanged sentences

Total $ 10,084 $ 325 $ 8,148 $ 216

Forgone interest on nonaccrual loans was $ 109,000 and $ 91,000 for the six months ended June 30, 2020 and 2019, respectively.

There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at June 30, 2020 and December 31, 2019.

Forgone interest on nonaccrual loans was $ 62,000 and $ 126,000 for the three and nine months ended September 30, 2020, respectively, compared to $ 74,000 and $ 165,000 for the three and nine months ended September 30, 2019, respectively.

There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual or impaired at September 30, 2020 and December 31, 2019.

Troubled debt restructurings.

2 unchanged sentences

Once a TDR has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, we remove the TDR from nonperforming status.

Loans classified as TDRs totaled $ 5.7 million and $ 7.9 million at June 30, 2020 and December 31, 2019, respectively, and are included in impaired loans.

Loans classified as TDRs totaled $ 5.6 million and $ 7.9 million at September 30, 2020 and December 31, 2019, respectively, and are included in impaired loans.

The Company has granted, in its TDRs, a variety of concessions to borrowers in the form of loan modifications.

9 unchanged sentences

Any other type of modification, including the use of multiple categories above.

There was one loan totaling $ 431,000 modified as a TDR during the three months ended June 30, 2020 and three loans totaling $ 649,000 modified as TDRs during the six months ended June 30, 2020.

There was one TDR loan totaling $ 2.8 million paid-off during the six months ended June 30, 2020.

There were no loans modified as TDRs during the three and six months ended June 30, 2019.

Two TDR loans totaling $ 40,000 were paid off during the three months ended June 30, 2019, and three TDR loans totaling $ 145,000 were paid-off during the six months ended June 30, 2019.

There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three and six months ended June 30, 2020 and 2019.

There was one loan totaling $ 161,000 modified as a TDR for which there was a payment default within the first 12 months of modification during the six months ended June 30, 2020.

During the six months ended June 30, 2019, there were six loans totaling $ 297,000 modified as TDRs for which there was a payment default within the first 12 months of modification.

There was one loan totaling $ 146,000 modified as a TDR during the three months ended September 30, 2020 and four loans totaling $ 795,000 modified as TDRs during the nine months ended September 30, 2020.

One TDR loan totaling $ 161,000 was paid-off during the three months ended September 30, 2020 and two TDR loan totaling $ 2.9 million were paid-off during the nine months ended September 30, 2020.

There were four loans totaling $ 5.1 million modified as TDRs during the three and nine months ended September 30, 2019.

There were no TDR loans paid off during the three months ended September 30, 2019, and three TDR loans totaling $ 145,000 were paid-off during the nine months ended September 30, 2019.

There were no post-modification changes for the unpaid principal balance in loans, net of partial charge-offs, that were recorded as a result of the TDRs for the three and nine months ended September 30, 2020 and 2019.

There was one loan totaling $ 161,000 modified as a TDR for which there was a payment default within the first 12 months of modification during the nine months ended September 30, 2020.

During the nine months ended September 30, 2019, there was one loan totaling $ 97,000 modified as TDRs for which there was a payment default within the first 12 months of modification.

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

1 unchanged sentence

The CARES Act and related bank regulatory guidance provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be accounted for as a TDR.

As of June 30, 2020, the Company had approved 122 loan modifications related to the COVID-19 pandemic with an outstanding loan balance totaling $ 51.3 million in accordance with the CARES Act.

As of September 30, 2020, we have provided payment relief related to COVID-19 on 49 commercial loans totaling $ 37.4 million and 72 residential loans totaling $ 16.3 million, of which 12 commercial loans totaling $ 14.7 million and 25 residential loans totaling $ 4.7 million have resumed their normal loan payments or matured.

There were $ 34.3 million of loans still under payment relief at September 30, 2020.

Accordingly, the Company does not account for such loan modifications as TDRs.

5 unchanged sentences

ASC 820 defines fair values for financial instruments as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.

The Company’s fair values for financial instruments at June 30, 2020 were determined based on these requirements.

The Company’s fair values for financial instruments at September 30, 2020 were determined based on these requirements.

The following methods and assumptions were used to estimate the fair value of other financial instruments:

Cash and cash equivalents - The estimated fair value is equal to the carrying amount.

Treasury Bills - The estimated fair value is equal to the carrying amount.

Available-for-Sale Securities – Available-for-sale securities are recorded at fair value based on quoted market prices, if available.

4 unchanged sentences

The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from government sponsored enterprises.

At June 30, 2020 and December 31, 2019, loans held-for-sale were carried at cost, as no impairment was required.

At September 30, 2020 and December 31, 2019, loans held-for-sale were carried at cost, as no impairment was required.

Loans Held-for-Portfolio - The estimated fair value of loans-held-for portfolio consists of a credit adjustment to reflect the estimated adjustment to the carrying value of the loans due to credit-related factors and a yield adjustment, to reflect the estimated adjustment to the carrying value of the loans due to a differential in yield between the portfolio loan yields and estimated current market rate yields on loans with similar characteristics.

6 unchanged sentences

Borrowings - The fair value of borrowings are estimated using the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Subordinated Debt - The fair value of subordinated debt is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.

A description of the valuation methodologies used for impaired loans and OREO is as follows:

3 unchanged sentences

The estimated fair value of these commitments is not significant.

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020 Fair Value Measurements Using:

The following tables present information about the level in the fair value hierarchy for the Company’s financial assets and liabilities, whether or not recognized or recorded at fair value as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020 Fair Value Measurements Using:

Value Estimated

11 unchanged sentences

241,038 245,062 — 245,062 —

FHLB and other Borrowings 79,841 79,841 — 79,841 —

Borrowings 7,500 7,500 — 7,500 —

Subordinated debt 11,676 11,676 — 11,676 —

December 31, 2019 Fair Value Measurements Using:

13 unchanged sentences

251,387 255,261 — 255,261 —

FHLB Borrowings 7,500 7,500 — 7,500 —

The following tables present the balance of assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):

Fair Value at June 30, 2020

Borrowings 7,500 7,500 — 7,500 —

The following tables present the balance of assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):

Fair Value at September 30, 2020

Description Total Level 1 Level 2 Level 3

Treasury bills $ 1,976 $ 1,976 $ — $ —

Municipal bonds 5,253 — 5,253 —

6 unchanged sentences

Mortgage servicing rights 3,239 — — 3,239

The following tables provide 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 basis at June 30, 2020 and December 31, 2019:

June 30, 2020

September 30, 2020

Financial Instrument Valuation Technique Unobservable Input(s) Range

10 unchanged sentences

An increase in the weighted average life assumptions will result in a decrease in the constant prepayment rate and conversely, a decrease in the weighted-average life will result in an increase of the constant prepayment rate.

There were no assets or liabilities (excluding mortgage servicing rights) measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2020 and June 30, 2019.

Mortgage servicing rights are measured at fair value using a significant unobservable input (Level 3) on a recurring basis - additional information is included in Note 6 – Mortgage Servicing Rights.

The following tables present the balance of assets measured at fair value on a nonrecurring basis at the dates indicated (in thousands):

Fair Value at June 30, 2020

Fair Value at September 30, 2020

Total Level 1 Level 2 Level 3

5 unchanged sentences

Impaired loans 12,393 — — 12,393

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at June 30, 2020 and December 31, 2019.

The following tables provide a description of the valuation technique, observable 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 nonrecurring basis at June 30, 2020 and December 31, 2019:

June 30, 2020

There were no liabilities carried at fair value, measured on a recurring or nonrecurring basis, at September 30, 2020 and December 31, 2019.

September 30, 2020

Instrument Valuation Technique(s) Unobservable Input(s) Range (Weighted Average)

11 unchanged sentences

Note 6 – Mortgage Servicing Rights

The Company’s mortgage servicing rights portfolio totaled $ 397.2 million at June 30, 2020 compared to $ 377.3 million at December 31, 2019.

Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at June 30, 2020 and December 31, 2019 were $ 385.9 million and $ 363.3 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions at June 30, 2020 and December 31, 2019, totaled $ 11.3 million and $ 14.0 million, respectively.

The Company’s mortgage servicing rights portfolio totaled $ 444.3 million at September 30, 2020 compared to $ 377.3 million at December 31, 2019.

Of this total balance, the unpaid principal balance of loans serviced for Federal National Mortgage Association (“Fannie Mae”) at September 30, 2020 and December 31, 2019 were $ 433.2 million and $ 363.3 million, respectively.

The unpaid principal balance of loans serviced for other financial institutions at September 30, 2020 and December 31, 2019, totaled $ 11.1 million and $ 14.0 million, respectively.

Loans serviced for others are not included in the Company’s financial statements as they are not assets of the Company.

A summary of the change in the balance of mortgage servicing assets during the three and six months ended June 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended March 31, Six Months Ended June 30,

A summary of the change in the balance of mortgage servicing assets during the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

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

2020 2019 2020 2019

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The key economic assumptions used in determining the fair value of mortgage servicing rights at the dates indicated are as follows:

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Prepayment speed (Public Securities Association “PSA” model) 244 % 187 %

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The amount of contractually specified servicing, late and ancillary fees earned on the mortgage servicing rights are included in

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 235,000 and $ 479,000 for the three and six months ended June 30, 2020, respectively, and $ 256,000 and $ 498,000 for the three and six months ended June 30, 2019, respectively.

mortgage servicing income on the Condensed Consolidated Statements of Income and totaled $ 260,000 and $ 739,000 for the three and nine months ended September 30, 2020, respectively, and $ 259,000 and $ 756,000 for the three and nine months ended September 30, 2019, respectively.

Note 7 – Commitments and Contingencies

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These transactions are used primarily to manage clients’ requests for funding and take the form of loan commitments and lines of credit.

Note 8 – Borrowings and FHLB Stock

Note 8 – Borrowings, FHLB Stock and Subordinated Debt

The Company utilizes a loan agreement with the FHLB of Des Moines.

The terms of the agreement call for a blanket pledge of a portion of the Company’s mortgage and commercial and multifamily loan portfolio based on the outstanding balance.

At June 30, 2020 and December 31, 2019, the amount available to borrow under this credit facility was $ 332.0 million and $ 321.9 million, respectively, subject to eligible pledged collateral.

At June 30, 2020, the credit facility was collateralized as follows:

At September 30, 2020 and December 31, 2019, the amount available to borrow under this credit facility was $ 392.3 million and $ 321.9 million, respectively, subject to eligible pledged collateral.

At September 30, 2020, the credit facility was collateralized as follows:

one-to-four family mortgage loans with an advance equivalent of $ 96.8 million, commercial and multifamily mortgage loans with an advance equivalent of $ 126.2 million and home equity loans with an advance equivalent of $ 3.7 million.

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one-to-four family mortgage loans with an advance equivalent of $ 111.4 million, commercial and multifamily mortgage loans with an advance equivalent of $ 126.1 million and home equity loans with an advance equivalent of $ 6.9 million.

The Company had outstanding borrowings under this arrangement of $ 7.5 million at both June 30, 2020 and December 31, 2019.

The weighted-average interest rate of our borrowings was 3.05 % at both June 30, 2020 and December 31, 2019.

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 19.6 million and $ 19.1 million at June 30, 2020 and December 31, 2019, respectively, to secure public deposits.

The remaining amount available to borrow as of June 30, 2020 and December 31, 2019, was $ 218.7 million and $ 217.8 million, respectively.

The Company had outstanding borrowings under this arrangement of $ 7.5 million at both September 30, 2020 and December 31, 2019.

The weighted-average interest rate of our borrowings was 3.05 % at both September 30, 2020 and December 31, 2019.

Additionally, the Company had outstanding letters of credit from the FHLB of Des Moines with a notional amount of $ 20.6 million and $ 19.1 million at September 30, 2020 and December 31, 2019, respectively, to secure public deposits.

The remaining amount available to borrow as of September 30, 2020 and December 31, 2019, was $ 198.6 million and $ 217.8 million, respectively.

As a member of the FHLB, the Company is required to maintain a minimum level of investment in FHLB of Des Moines stock based on specific percentages of its outstanding FHLB advances.

At June 30, 2020 and December 31, 2019, the Company had an investment of $ 1.2 million in FHLB of Des Moines stock.

The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window and the PPP Liquidity Facility.

At September 30, 2020 and December 31, 2019, the Company had an investment of $ 1.2 million in FHLB of Des Moines stock.

The Company participates in the Federal Reserve Bank Borrower-in-Custody program, which gives the Company access to the discount window and the Paycheck Protection Program Liquidity Facility (“PPPLF”).

The terms of both programs call for a pledge of specific assets.

The Company pledges commercial and consumer loans as collateral for this borrower-in-custody line of credit.

The Company had unused borrowing capacity of $ 33.4 million and $ 41.7 million and no outstanding borrowings under this program at June 30, 2020 and December 31, 2019, respectively.

At June 30, 2020, the Company pledged $ 72.3 million PPP loans supporting the same amount of borrowings under the PPP Liquidity Facility.

The Company pledges commercial and consumer loans as collateral for this borrower-in-custody line of credit and PPP loans for the PPPLF.

The Company had unused borrowing capacity of $ 29.4 million and $ 41.7 million and no outstanding borrowings under these programs at September 30, 2020 and December 31, 2019, respectively.

The Company has access to an unsecured Fed Funds line of credit from Pacific Coast Banker’s Bank.

The line has a 1 year term maturing on June 30, 2021 and is renewable annually.

As of June 30, 2020, the amount available under this line of credit was $ 10.0 million.

There was no balance on this line of credit as of June 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, the amount available under this line of credit was $ 10.0 million.

There was no balance on this line of credit as of September 30, 2020 and December 31, 2019, respectively.

The Company has access to an unsecured Fed Funds line of credit from The Independent Bank.

As of June 30, 2020, the amount available under this line of credit was $ 10.0 million.

As of September 30, 2020, the amount available under this line of credit was $ 10.0 million.

The agreement may be terminated by either party.

There was no balance on this line of credit as of June 30, 2020 and December 31, 2019, respectively.

There was no balance on this line of credit as of September 30, 2020 and December 31, 2019, respectively.

The Company completed a private placement of $ 12.0 million in aggregate principal amount of 5.25 % Fixed-to-Floating Rate Subordinated Notes due 2030 resulting in net proceeds, after placement fees and offering expenses, of approximately $ 11.7 million during the quarter ended September 30, 2020.

The Company contributed $ 5.5 million of the net proceeds from the sale of the Notes to the Bank and intends to use the remaining net proceeds from the sale of the notes for general corporate purposes, including stock repurchases and to pay dividends on Company common stock.

Note 9 – Earnings Per Common Share

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Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the Company’s earnings.

Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards.

Diluted earnings per common share is

computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards.

The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company's stock for the period.

The following table summarizes the calculation of earnings per share for the periods indicated (in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

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Earnings per share, diluted $ 0.90 $ 0.60 $ 2.09 $ 1.87

There were 6,809 anti-dilutive securities at June 30, 2020 and no anti-dilutive securities at June 30, 2019.

There were 19,281 anti-dilutive securities at September 30, 2020 and no anti-dilutive securities at September 30, 2019.

Note 10 – Stock-based Compensation

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Under the 2013 Plan, 181,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 116,700 shares of common stock were approved for awards for restricted stock and restricted stock units.

As of June 30, 2020, on an adjusted basis, awards for stock options totaling 267,752 shares and awards for restricted stock totaling 134,148 shares of Company common stock have been granted, net of any forfeitures, to participants in the Plans.

Share-based compensation expense was $ 46,000 and $ 231,000 for the three and six months ended June 30, 2020, respectively, and was $ 48,000 and $ 87,000 or the three and six months ended June 30, 2019, respectively.

As of September 30, 2020, on an adjusted basis, awards for stock options totaling 261,019 shares and awards for restricted stock totaling 134,148 shares of Company common stock have been granted, net of any forfeitures, to participants in the 2013 Plan and the 2008 Plan.

Share-based compensation expense was $ 52,000 and $ 283,000 for the three and nine months ended September 30, 2020, respectively, and was $ 72,000 and $ 159,000 or the three and nine months ended September 30, 2019, respectively.

Stock Option Awards

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All of the options granted under the 2008 Plan and the 2013 Plan are exercisable for a period of 10 years from the date of grant, subject to vesting.

The following is a summary of the Company’s stock option award activity during the six months ended June 30, 2020:

The following is a summary of the Company’s stock option award activity during the nine months ended September 30, 2020:

Shares Weighted-

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Forfeited ( 2,205 ) 29.25

Outstanding at June 30, 2020 112,846 22.38 4.74 501,807

Expired ( 6,733 ) 28.96

Outstanding at September 30, 2020 101,134 22.02 4.97 873,423

Exercisable 85,334 19.99 4.36 851,612

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14,099 $ 34.96 8.75 $ —

As of June 30, 2020, there was $ 89,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

As of September 30, 2020, there was $ 82,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans.

The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.83 years.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model.

The fair value of options granted for the six months ended June 30, 2020 and 2019 were determined using the following weighted-average assumptions as of the grant date.

June 30, 2020 June 30, 2019

The fair value of options granted for the nine months ended September 30, 2020 and 2019 were determined using the following weighted-average assumptions as of the grant date.

September 30, 2020 September 30, 2019

Annual dividend yield 1.60 % 1.72 %

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The restricted stock awards granted to date under the 2013 Plan provide for immediate vesting of a portion of the award with the balance of the award vesting on the anniversary date of each of the grant date in equal annual installments over periods of one -to- four years subject to the continued service of the participant with the Company.

The following is a summary of the Company’s non-vested restricted stock award activity during the six months ended June 30, 2020:

The following is a summary of the Company’s non-vested restricted stock award activity during the nine months ended September 30, 2020:

Shares Weighted-Average

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Forfeited ( 1,690 ) 34.15

Non-Vested at June 30, 2020 17,384 $ 35.03 $ 24.15

Non-Vested at September 30, 2020 17,384 $ 35.03 $ 29.63

Expected to vest assuming a 0 % forfeiture rate over the vesting term

17,384 $ 35.03 $ 29.63

As of June 30, 2020, there was $ 535,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

As of September 30, 2020, there was $ 490,000 of unrecognized compensation cost related to non-vested restricted stock granted under the Plans.

The cost is expected to be recognized over the weighted-average vesting period of 2.87 years.

The total fair value of shares vested for the six months ended June 30, 2020 and 2019 was $ 236,000 and $ 95,000 , respectively.

The total fair value of shares vested for the nine months ended September 30, 2020 and 2019 was $ 236,000 and $ 365,000 , respectively.

Employee Stock Ownership Plan

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The interest rate on the loan is fixed at 2.25 % per annum.

As of June 30, 2020, the remaining balance of the ESOP loan was $ 126,000 .

As of September 30, 2020, the remaining balance of the ESOP loan was $ 126,000 .

Neither the loan balance nor the related interest expense is reflected on the condensed consolidated financial statements.

For the calendar year 2020, the ESOP was committed to release 11,340 shares of the Company’s common stock to participants and held 11,340 unallocated shares remaining to be released in 2021.

The fair value of the 142,463 shares held by the ESOP trust was $ 3.4 million at June 30, 2020.

ESOP compensation expense included in salaries and benefits was $ 174,000 and $ 348,000 for the three and six months ended June 30, 2020, respectively, and was $ 168,000 and $ 336,000 for the three and six months ended June 30, 2019, respectively.

The fair value of the 140,679 shares held by the ESOP trust was $ 4.2 million at September 30, 2020.

ESOP compensation expense included in salaries and benefits was $ 126,000 and $ 474,000 for the three and nine months ended September 30, 2020, respectively, and was $ 168,000 and $ 504,000 for the three and nine months ended September 30, 2019, respectively.

Note 11 – Revenue from Contracts with Customers

All of the Company's revenue from contracts with customers in the scope of ASC 606 - Revenue from Contracts with Customers ("ASC 606") is recognized in Noninterest Income with the exception of the net loss on OREO and repossessed assets, which is included in Noninterest Expense.

The following table presents the Company's sources of Noninterest Income for the three and six months ended June 30, 2020 and 2019 (in thousands).

The following table presents the Company's sources of Noninterest Income for the three and nine months ended September 30, 2020 and 2019 (in thousands).

Items outside of the scope of ASC 606 are noted as such.

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

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In determining the gain or loss on sale, we adjust the transaction price and related gain or loss on sale if a significant financing component is present.

Company incurred expenses on OREO properties of zero for the three and six months ended June 30, 2020, compared to $ 7,000 and $ 9,000 for the three and six months ended 2019, respectively, which are included in Noninterest Expense on the Company’s Condensed Consolidated Statements of Income.

Company incurred no expenses on OREO properties for the three and nine months ended September 30, 2020, compared to $ 1,000 and $ 11,000 for the three and nine months ended 2019, respectively, which are included in Noninterest Expense on the Company’s Condensed Consolidated Statements of Income.

Note 12 – Leases

We have operating leases for branch locations, loan production offices, our corporate office and certain equipment.

We have operating leases for branch locations, a loan production office, our corporate office and certain equipment.

The lease term for our leases begins on the date we become legally obligated for the rent payments or we take possession of the building, whichever is earlier.

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The operating leases generally contain renewal options and require us to pay property taxes and operating expenses for the properties.

The following table represents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020 December 31, 2019

The following table represents the lease right-of-use assets and lease liabilities recorded on the condensed consolidated balance sheet at September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020 December 31, 2019

Operating lease right-of-use assets $ 6,945 $ 7,641

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The following table represents the components of lease expense (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

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The following table represents the maturity of lease liabilities:

June 30, 2020

September 30, 2020

Office leases Equipment leases

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Lease term and discount rate by lease type consist of the following:

June 30, 2020

September 30, 2020

Weighted-average remaining lease term (in years):

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Supplemental cash flow information related to leases was as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

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

2020 2019 2020 2019

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Note 13 – Subsequent Event

On July 24, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $ 0.15 per common share, payable on August 19, 2020 to stockholders of record at the close of business on August 5, 2020.

On October 27, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $ 0.15 per common share, payable on November 24, 2020 to stockholders of record at the close of business on November 10, 2020.

On October 27, 2020, the Company announced that its Board of Directors authorized a stock repurchase program.

Under this repurchase program, the Company may repurchase its outstanding shares in the open market in an amount up to $ 2.0 million, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on October 28, 2020, continuing until the earlier of the completion of the repurchase or the next six months , depending upon market conditions.

The Company’s Board of Directors also authorized management to enter into a trading plan with a registered broker-dealer in

accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common

stock pursuant to the above mentioned stock repurchase program.

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