Companies: 10,793     total market cap: $134.237 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Home Bancorp
HBCP
#7248
Rank
$0.48 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$61.39
Share price
-0.62%
Change (1 day)
47.39%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Home Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q3

Home Bancorp - 10-Q quarterly report FY2020 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(Mark One)
☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2020
or
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 001-34190
 
HOME BANCORP, INC.
(Exact name of Registrant as specified in its charter)
 

Louisiana71-1051785
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification Number)
503 Kaliste Saloom Road, Lafayette, Louisiana
70508
(Address of Principal Executive Offices)(Zip Code)
Registrant’s telephone number, including area code: (337) 237-1960
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock HBCP  
NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    NO  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐  Accelerated filer☒
Non-accelerated filer☐  Smaller reporting company☐
   Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    NO  ☒

At November 4, 2020, the registrant had 8,755,250 shares of common stock, $0.01 par value, outstanding.


HOME BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
  Page
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements (unaudited)
Consolidated Statements of Financial Condition
1
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Changes in Shareholders’ Equity
4
Consolidated Statements of Cash Flows
6
Notes to Unaudited Consolidated Financial Statements
7
Item 2.
35
Item 3.
54
Item 4.
54
PART II - OTHER INFORMATION
Item 1.
55
Item 1A.
55
Item 2.
55
Item 3.
56
Item 4.
56
Item 5.
56
Item 6.
56
57

i

HOME BANCORP, INC. and SUBSIDIARY
GLOSSARY OF DEFINED TERMS

Below is a listing of certain acronyms, abbreviations and defined terms, among others, used throughout this Quarterly Report on Form 10-Q, including in "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." The terms "we," "our" or "us" refer to Home Bancorp, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

ACL–Allowance for credit losses
ALL–Allowance for loan losses
AOCI–Accumulated other comprehensive income
ASC–Accounting Standards Codification
ASU–Accounting Standards Update
Bank–
Home Bank, N.A., a wholly-owned subsidiary of the Company
BOLI–Bank-owned life insurance
bps–
basis points, 100 basis points being equal to 1.0%
C&D–Construction and land
C&I–Commercial and industrial
CARES Act–
Coronavirus Aid, Relief, and Economic Security Act
CECL–Current expected credit losses
Company –
Home Bancorp, Inc., a Louisiana corporation and the holding company for Home Bank, N.A.
COVID-19–
The novel coronavirus
CRE–Commercial real estate
EPS–Earnings per common share
FASB–Financial Accounting Standards Board
FHLB–Federal Home Loan Bank
GAAP–Generally Accepted Accounting Principles
LTV–Loan-to-value
NPA(s)–Nonperforming asset(s)
OCI–Other comprehensive income
ORE–Other real estate
PCD–Purchased credit deteriorated
PCI–Purchased credit impaired
PPP–Paycheck Protection Program
SBA–Small Business Association
SEC–Securities and Exchange Commission
TDR–Troubled debt restructuring
TE–Taxable equivalent
U.S.–United States

ii

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)(Audited)
September 30,December 31,
(dollars in thousands)20202019
Assets
Cash and cash equivalents$185,836 $39,847 
Interest-bearing deposits in banks349 449 
Investment securities available for sale, at fair value251,578 257,321 
Investment securities held to maturity (fair values of $3,008 and $7,194, respectively)
2,942 7,149 
Mortgage loans held for sale21,045 6,990 
Loans, net of unearned income1,955,297 1,714,361 
Allowance for loan losses(33,002)(17,868)
Total loans, net of unearned income and allowance for loan losses1,922,295 1,696,493 
Office properties and equipment, net45,696 46,425 
Cash surrender value of bank-owned life insurance40,184 39,466 
Goodwill and core deposit intangibles63,439 64,472 
Accrued interest receivable and other assets45,836 41,853 
Total Assets2,579,200 2,200,465 
Liabilities
Deposits:
Noninterest-bearing629,345 437,828 
Interest-bearing1,578,149 1,383,147 
Total Deposits2,207,494 1,820,975 
Other borrowings5,539 5,539 
Long-term Federal Home Loan Bank advances31,445 40,620 
Accrued interest payable and other liabilities21,398 17,002 
Total Liabilities2,265,876 1,884,136 
Shareholders’ Equity
Preferred stock, $0.01 par value - 10,000,000 shares authorized; none issued
— — 
Common stock, $0.01 par value - 40,000,000 shares authorized; 8,831,406 and 9,252,418
shares issued and outstanding, respectively
88 93 
Additional paid-in capital
165,522 168,545 
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)(2,857)(3,124)
Recognition and Retention Plan (RRP)(23)(35)
Retained earnings145,373 150,158 
Accumulated other comprehensive income5,221 692 
Total Shareholders’ Equity313,324 316,329 
Total Liabilities and Shareholders’ Equity$2,579,200 $2,200,465 
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
1

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands, except per share data)2020201920202019
Interest Income
Loans, including fees$24,769 $23,562 $72,839 $70,572 
Investment securities:
Taxable interest897 1,401 3,308 4,655 
Tax-exempt interest
70 114 253 397 
Other investments and deposits106 397 361 1,140 
Total interest income25,842 25,474 76,761 76,764 
Interest Expense
Deposits2,368 4,050 9,047 11,116 
Other borrowings 53 53 159 159 
Short-term Federal Home Loan Bank advances— — 23 — 
Long-term Federal Home Loan Bank advances149 230 520 751 
Total interest expense2,570 4,333 9,749 12,026 
Net interest income23,272 21,141 67,012 64,738 
Provision for loan losses— 1,146 12,728 2,301 
Net interest income after provision for loan losses23,272 19,995 54,284 62,437 
Noninterest Income
Service fees and charges1,123 1,516 3,529 4,396 
Bank card fees1,331 1,141 3,595 3,414 
Gain on sale of loans, net904 355 1,843 758 
Income from bank-owned life insurance231 1,464 718 1,831 
Loss on sale of assets, net— (8)(11)(336)
Other income205 306 581 853 
Total noninterest income3,794 4,774 10,255 10,916 
Noninterest Expense
Compensation and benefits9,740 10,266 28,518 28,977 
Occupancy1,686 1,791 5,075 5,405 
Marketing and advertising288 418 746 997 
Data processing and communication1,851 1,764 5,430 4,782 
Professional services197 227 665 684 
Forms, printing and supplies140 172 471 514 
Franchise and shares tax378 399 1,156 1,196 
Regulatory fees526 127 1,004 717 
Foreclosed assets and ORE, net162 47 324 328 
Amortization of acquisition intangible338 393 1,033 1,201 
Provision for credit losses on unfunded commitments— — 1,272 — 
Other expenses810 1,006 2,563 3,052 
Total noninterest expense16,116 16,610 48,257 47,853 
Income before income tax expense10,950 8,159 16,282 25,500 
Income tax expense2,168 1,303 3,102 4,174 
Net Income$8,782 $6,856 $13,180 $21,326 
Earnings per share:
Basic$1.01 $0.76 $1.51 $2.34 
Diluted$1.01 $0.75 $1.51 $2.32 
Cash dividends declared per common share$0.22 $0.21 $0.66 $0.62 
 The accompanying Notes are an integral part of these Consolidated Financial Statements.
2

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2020201920202019
Net Income$8,782 $6,856 $13,180 $21,326 
Other Comprehensive Income
Unrealized gains on available for sale investment securities39 14 5,815 4,287 
Unrealized gains (losses) on cash flow hedges76 — (82)— 
Tax effect(24)(3)(1,204)(900)
Other comprehensive income, net of taxes91 11 4,529 3,387 
Comprehensive Income$8,873 $6,867 $17,709 $24,713 
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)


(dollars in thousands, except per share data)Common
stock		Additional
Paid-in
capital		Unallocated
Common Stock
Held by ESOP		Unallocated
Common Stock
Held by RRP		Retained
Earnings		Accumulated Other Comprehensive IncomeTotal
Balance, June 30, 2019$94 $169,233 $(3,303)$(48)$146,348 $1,170 $313,494 
Net income6,856 6,856 
Other comprehensive income11 11 
Purchase of Company’s common stock at cost, 123,902 shares
(1)(1,238)(3,385)(4,624)
Cash dividends declared, $0.21 per share
(1,976)(1,976)
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 5,071 shares
— 130 (2)128 
Exercise of stock options— 143 143 
RRP shares released for allocation(1)1 — 
ESOP shares released for allocation318 90 408 
Share-based compensation cost237 237 
Balance, September 30, 2019$93 $168,822 $(3,213)$(47)$147,841 $1,181 $314,677 
Balance, June 30, 2020$90 $166,494 $(2,946)$(24)$140,582 $5,130 $309,326 
Net income8,782 8,782 
Other comprehensive income91 91 
Purchase of Company’s common stock at cost, 135,224 shares
(2)(1,351)(2,020)(3,373)
Cash dividends declared, $0.22 per share
(1,970)(1,970)
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 529 shares
— — (1)(1)
Exercise of stock options— — — 
RRP shares released for allocation(1)1 — 
ESOP shares released for allocation201 89 290 
Share-based compensation cost179 179 
Balance, September 30, 2020$88 $165,522 $(2,857)$(23)$145,373 $5,221 $313,324 

The accompanying Notes are an integral part of these Consolidated Financial Statements.
4

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - CONTINUED
(Unaudited)

(dollars in thousands, except per share data)Common
stock		Additional
Paid-in
capital		Unallocated
Common Stock
Held by ESOP		Unallocated
Common Stock
Held by RRP		Retained
Earnings		Accumulated Other Comprehensive (Loss) IncomeTotal
Balance, December 31, 2018$95 $168,243 $(3,481)$(58)$141,447 $(2,206)$304,040 
Net income21,326 21,326 
Other comprehensive income3,387 3,387 
Purchase of Company’s common stock at cost, 341,095 shares
(3)(3,408)(9,008)(12,419)
Cash dividends declared, $0.62 per share
(5,858)(5,858)
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 24,392 shares
— 233 (66)167 
Exercise of stock options1 2,228 2,229 
RRP shares released for allocation(11)11 — 
ESOP shares released for allocation922 268 1,190 
Share-based compensation cost615 615 
Balance, September 30, 2019$93 $168,822 $(3,213)$(47)$147,841 $1,181 $314,677 
Balance, December 31, 2019$93 $168,545 $(3,124)$(35)$150,158 $692 $316,329 
Cumulative effect of change in accounting principle due the adoption of ASC Topic 326, net of tax(4,725)(4,725)
Net income13,180 13,180 
Other comprehensive income4,529 4,529 
Purchase of Company’s common stock at cost, 438,892 shares
(5)(4,384)(7,219)(11,608)
Cash dividends declared, $0.66 per share
(5,978)(5,978)
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 16,175 shares
— 34 (43)(9)
Exercise of stock options— 30 30 
RRP shares released for allocation(12)12 — 
ESOP shares released for allocation680 267 947 
Share-based compensation cost629 629 
Balance, September 30, 2020$88 $165,522 $(2,857)$(23)$145,373 $5,221 $313,324 
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5

HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 For the Nine Months Ended
September 30,
(dollars in thousands)20202019
Cash flows from operating activities:
Net income$13,180 $21,326 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses12,728 2,301 
Depreciation2,288 2,107 
Amortization and accretion of purchase accounting valuations and intangibles3,458 4,768 
Net amortization of mortgage servicing asset56 83 
Federal Home Loan Bank stock dividends(56)(119)
Net amortization of discount on investments2,168 1,605 
Gain on loans sold, net(1,843)(758)
Proceeds, including principal payments, from loans held for sale192,232 81,021 
Originations of loans held for sale(204,444)(85,086)
Non-cash compensation1,576 1,805 
Deferred income tax (benefit) expense(2,424)176 
Increase in accrued interest receivable and other assets(2,072)(3,961)
Increase in cash surrender value of bank-owned life insurance(718)(636)
Increase in accrued interest payable and other liabilities1,980 6,404 
Net cash provided by operating activities18,109 31,036 
Cash flows from investing activities:
Purchases of securities available for sale(57,187)(46,914)
Proceeds from maturities, prepayments and calls on securities available for sale66,653 54,775 
Proceeds from maturities, prepayments and calls on securities held to maturity4,130 3,517 
Increase in loans, net(245,440)(63,679)
Reimbursement from FDIC for covered assets— 142 
Decrease in interest-bearing deposits in banks100 490 
Proceeds from sale of foreclosed assets3,039 1,720 
Purchase of bank-owned life insurance— (10,000)
Proceeds from bank-owned life insurance— 2,163 
Purchases of office properties and equipment(1,570)(3,009)
Proceeds from sale of office properties and equipment4 53 
Purchase of Federal Home Loan Bank stock(1,592)— 
Net cash used in investing activities(231,863)(60,742)
Cash flows from financing activities:
Increase in deposits, net386,509 58,152 
Borrowings on Federal Home Loan Bank advances119,700 6,010 
Repayments of Federal Home Loan Bank advances(128,901)(16,904)
Proceeds from exercise of stock options30 2,229 
Issuance of stock under incentive plans(9)167 
Dividends paid to shareholders(5,978)(5,858)
Purchase of Company’s common stock(11,608)(12,419)
Net cash provided by financing activities359,743 31,377 
Net change in cash and cash equivalents145,989 1,671 
Cash and cash equivalents, beginning39,847 59,618 
Cash and cash equivalents, ending$185,836 $61,289 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
6

HOME BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. Certain reclassifications have been made to prior period balances to conform to the current period presentation. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results which may be expected for the entire fiscal year. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019.

Critical Accounting Policies and Estimates
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could reflect materially different results under different assumptions and conditions. Methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates are included in its Annual Report on Form 10-K for the year ended December 31, 2019.

Accounting Policy for the Allowance for Credit Losses
During the first quarter of 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard significantly changed the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. Determining the appropriateness of the allowance requires judgment by management about the effect of matters that are inherently uncertain. Changes in factors and forecasts used in evaluating the overall loan portfolio may result in significant changes in the allowance for credit losses and related provision expense in future periods. The allowance level is influenced by loan volumes, loan asset quality ratings, delinquency status, historical credit loss experience, loan performance characteristics, forecasted information and other conditions influencing loss expectations. Changes to the assumptions in the model in future periods could have a material impact on the Company's Consolidated Financial Statements. See Note 2. Recent Accounting Pronouncements for a detailed discussion of the Company's methodologies for estimating expected credit losses.

Accounting Policy for Derivative Instruments and Hedging Activities

During the second quarter of 2020, the Company entered into a derivative financial instrument designated as a cash flow hedge to manage interest rate risk. Refer to Note 6. Derivatives and Hedging Activities for additional disclosures pertaining to the three and nine months ended September 30, 2020. FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

7

In accordance with the FASB’s fair value measurement guidance (in ASU 2011-04), the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

There have been no other material changes from the critical accounting policies disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 
2. Recent Accounting Pronouncements
Accounting Standards Adopted in 2020
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new model known as CECL. ASC Topic 326 requires financial assets measured on an amortized cost basis, including loans and held to maturity debt securities, to be presented at an amount net of an allowance for credit losses, which reflects expected losses for the full life of the financial asset. Unfunded lending commitments are also within the scope of this amendment. Under former GAAP, credit losses were not recognized until the occurrence of the loss was probable and entities, in general, did not attempt to estimate credit losses for the full life of financial assets.

ASC Topic 326 also amended the accounting model for purchased financial assets and replaced the guidance for PCI financial assets with the concept of PCD financial assets. For non-PCD assets, the CECL estimate is recognized through an ACL and provision for credit losses. For PCD assets, the CECL estimate is recognized through an ACL with an offset to the cost basis of the PCD asset at the date of acquisition. Subsequent changes in the ACL for PCD assets are recognized through a provision for loan losses. The financial assets formerly classified as PCI are now classified as PCD assets under ASC Topic 326. Under former GAAP, an allowance and related provision expense was only recorded for purchased financial assets if the amount of estimated probable losses exceeded the fair value discount for the financial assets.

In addition, ASC Topic 326 requires expected credit related losses for available for sale debt securities to be recorded through an ACL, while non-credit related losses will continue to be recognized through OCI. The guidance under ASC Topic 326 had no impact on the Company's available for sale debt securities at January 1 or September 30, 2020. Management determined that the declines in the fair value of these securities at such dates were not attributable to credit losses. The Company’s held to maturity debt securities are also required to utilize the CECL approach to estimate expected credit losses. The guidance under ASC Topic 326 had no impact on the Company's held to maturity debt securities at January 1 or September 30, 2020.

The Company applied the guidance under ASC Topic 326 using the modified retrospective approach for all non-PCD loans and unfunded lending commitments. Upon adoption on January 1, 2020, the Company recorded an after-tax decrease to retained earnings of $4.7 million. The transition adjustment included $3.6 million due to the increase in allowance for non-PCD loan losses and $2.4 million due to the ACL on unfunded lending commitments.

For PCD loans, formerly classified as PCI, the Company applied the guidance under ASC Topic 326 using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify $1.0 million of purchase discount to the ALL on January 1, 2020.


8

The results for reporting periods beginning on or after January 1, 2020 are presented under ASC Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The following table illustrates the impact of ASC Topic 326.

(dollars in thousands)December 31, 2019ASC Topic 326 Adoption ImpactJanuary 1, 2020
Allowance for credit losses




One- to four-family first mortgage$2,715 $986 $3,701 
Home equity loans and lines1,084 (1)1,083 
Commercial real estate6,541 1,974 8,515 
Construction and land2,670 519 3,189 
Multi-family residential572 (245)327 
Commercial and industrial3,694 1,243 4,937 
Consumer592 157 749 
Total allowance for loan losses17,868 4,633 22,501 
Unfunded lending commitments(1)
— 2,365 2,365 
Total allowance for credit losses$17,868 $6,998 $24,866 
Retained Earnings
Total allowance increase$6,998 
Balance sheet reclassification(2)
(996)
Decrease to retained earnings, pre-tax6,002 
Tax effect(1,277)
Decrease to retained earnings, net of tax effect$4,725 
(1)The ACL for unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
(2)For PCD loans, formerly classified as PCI, the Company applied the guidance under CECL using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify the purchase discount to the ALL on January 1, 2020.
Under ASC Topic 326, the ACL is measured on a pool basis when similar risk characteristics exist and is maintained at an amount which management believes is a current estimate of the expected credit losses for the full life of the relevant pool of loans and related unfunded lending commitments. The Company's CECL calculation estimates loan losses using the discounted cash flow method for all loan pools, except for the Company's credit card portfolio. Loan losses for the credit card portfolio are estimated using the remaining life method due to the limited complexity and size of this portfolio. The discounted cash flow analysis uses loan-level term information (e.g., maturity date, payment amount, interest rate, etc.) and pool-level assumptions (e.g., default rates, prepayment speeds, etc.) to produce expected future cash flows for the full life of every loan in the pool. The expected future cash flows are discounted and results are then aggregated to produce a net present value of the pool and ultimately the ACL requirement for the pool. The remaining life method applies a loss rate to a given pool of loans over the estimate remaining life of the given pool. The remaining life of the pool is based on historical data. The loss rates computed for each pool and expected pool-level funding rates are applied to the related unfunded lending commitments to calculate an ACL on unfunded amounts. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry.

9

Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis. Individually analyzed loans generally include larger commercial real estate loans, multi-family residential loans, construction and land loans, commercial and industrial loans and other loans as deem appropriate by management for which it is probable that all the amounts due under the contractual terms of the loan will not be collected. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans.

The Company has identified the following portfolio segments based on the risk characteristics described in the table for its pooled loan analysis under ASC Topic 326:
Loan PoolRisk Characteristics
One- to four-family first mortgageThis category consists of loans secured by first liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment. Generally, these loans are for longer terms than home equity loans and lines.
Home equity loans and linesThis category consists of loans secured by first and junior liens on residential real estate. The performance of these loans may be adversely affected by, among other factors, unemployment rates, local residential real estate market conditions and the interest rate environment.
Commercial real estateThis category consists of loans primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. The performance of CRE loans may be adversely affected by, among other factors, conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located.
Construction and landThis category consists of loans to finance the ground-up construction and/or improvement of residential and commercial properties and loans secured by land. The performance of C&D loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development may be adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays.
Multi-family residentialThis category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions.
Commercial and industrialThis category consists of secured and unsecured loans to purchase capital equipment, agriculture operating loans and other business loans for working capital and operating purposes. Secured loans are primarily secured by accounts receivable, inventory and other business assets. The performance of C&I loans may be adversely affected by, among other factors, conditions specific to the relevant industry, fluctuations in the value of the collateral and individual performance factors related to the borrower.
ConsumerThis category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower's income available to service the debt.
Credit cardsThis category consists of unsecured revolving lines of credit for personal and commercial use. Credit card loans are generally smaller in size and are less complex relative to larger loan categories. Due to their unsecured nature, historical loss rates for credit card loans are generally higher than the loss rates on loans secured by real estate.


10

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU removed, modified and added certain disclosure requirements for fair value measurements. Under the ASU, public entities are no longer required to disclose the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average used to develop significant unobservable inputs and the change in unrealized gains and losses included in other comprehensive income for Level 3 fair value measurements. The ASU also removed the requirement to disclose transfers between Level 1 and Level 2 fair value measurements and the policy for those transfers. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019 and did not impact our Consolidated Financial Statements, as the update only revises disclosure requirements.
Issued but Not Yet Adopted Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)." The amendments in this ASU simplified the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improved the consistent application of and simplified GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in the ASU are effective for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect the adoption of this ASU to impact the Consolidated Financial Statements.
3. Investment Securities
The following table summarizes the Company’s available for sale and held to maturity investment securities at September 30, 2020 and December 31, 2019.
(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross Unrealized LossesFair Value
September 30, 2020  Less Than
1 Year		Over 1
Year		 
Available for sale:
U.S. agency mortgage-backed$118,843 $4,352 $43 $— $123,152 
Collateralized mortgage obligations97,371 1,853 62 5 99,157 
Municipal bonds20,315 549 47 — 20,817 
U.S. government agency6,358 67 — 12 6,413 
Corporate bonds2,000 39 — — 2,039 
Total available for sale$244,887 $6,860 $152 $17 $251,578 
Held to maturity:
Municipal bonds$2,942 $66 $— $— $3,008 
Total held to maturity$2,942 $66 $— $— $3,008 

(dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross Unrealized LossesFair Value
December 31, 2019  Less Than
1 Year		Over 1
Year		 
Available for sale:
U.S. agency mortgage-backed$94,446 $1,081 $292 $63 $95,172 
Collateralized mortgage obligations142,408 701 300 358 142,451 
Municipal bonds15,895 166 56 — 16,005 
U.S. government agency3,696 11 4 10 3,693 
Total available for sale$256,445 $1,959 $652 $431 $257,321 
Held to maturity:
Municipal bonds$7,149 $45 $— $— $7,194 
Total held to maturity$7,149 $45 $— $— $7,194 

11

The estimated fair value and amortized cost by contractual maturity of the Company’s investment securities as of September 30, 2020 are shown in the following tables. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of prepayments or the exercise of call options. Accordingly, actual maturities may differ from contractual maturities.
(dollars in thousands)One Year
or Less		After One
Year 
through
Five Years		After Five
Years
through 
Ten Years		After Ten
Years		Total
Fair Value
Available for sale:
U.S. agency mortgage-backed$16 $16,352 $47,727 $59,057 $123,152 
Collateralized mortgage obligations1,455 15,591 30,339 51,772 99,157 
Municipal bonds1,325 2,297 8,659 8,536 20,817 
U.S. government agency— — 5,991 422 6,413 
Corporate bonds— — 2,039 — 2,039 
Total securities available for sale$2,796 $34,240 $94,755 $119,787 $251,578 
Held to maturity:
Municipal bonds$— $803 $2,205 $— $3,008 
Total securities held to maturity$— $803 $2,205 $— $3,008 
(dollars in thousands)One Year
or Less		After One
Year 
through
Five Years		After Five
Years
through 
Ten Years		After Ten
Years		Total
Amortized Cost
Available for sale:
U.S. agency mortgage-backed$16 $15,802 $45,105 $57,920 $118,843 
Collateralized mortgage obligations1,455 14,930 29,529 51,457 97,371 
Municipal bonds1,318 2,273 8,265 8,459 20,315 
U.S. government agency— — 5,929 429 6,358 
Corporate bonds— — 2,000 — 2,000 
Total securities available for sale$2,789 $33,005 $90,828 $118,265 $244,887 
Held to maturity:
Municipal bonds$— $800 $2,142 $— $2,942 
Total securities held to maturity$— $800 $2,142 $— $2,942 

Management evaluates securities for impairment from credit losses at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to numerous factors including, but not limited to, the extent to which the fair value is less than the amortized cost basis; adverse conditions causing changes in the financial condition of the issuer of the security or underlying loan guarantors; changes to the rating of the security by a rating agency; and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to determine whether the decline in the fair value of securities has resulted from credit losses or other factors. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. If this evaluation indicates the existence of credit losses, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost basis, an ACL is recorded, limited by the amount that the fair value of the security is less than its amortized cost.

12

The Company's investment securities with unrealized losses, aggregated by type and length of time that individual securities have been in a continuous loss position, are summarized in the following tables.

(dollars in thousands)Less Than 1 YearOver 1 YearTotal
September 30, 2020Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Securities available for sale:
U.S. agency mortgage-backed
$14,660 $43 $— $— $14,660 $43 
Collateralized mortgage obligations
21,557 62 2,314 5 23,871 67 
Municipal bonds4,222 47 — — 4,222 47 
U.S. government agency— — 1,276 12 1,276 12 
Corporate bonds— — — — — — 
Total available for sale$40,439 $152 $3,590 $17 $44,029 $169 
Held to maturity:
Municipal bonds$— $— $— $— $— $— 
Total held to maturity$— $— $— $— $— $— 


(dollars in thousands)Less Than 1 YearOver 1 YearTotal
December 31, 2019Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Securities available for sale:
U.S. agency mortgage-backed
$28,847 $292 $5,148 $63 $33,995 $355 
Collateralized mortgage obligations
50,004 300 37,131 358 87,135 658 
Municipal bonds3,044 56 — — 3,044 56 
U.S. government agency1,213 4 466 10 1,679 14 
Total available for sale$83,108 $652 $42,745 $431 $125,853 $1,083 
Held to maturity:
Municipal bonds$— $— $— $— $— $— 
Total held to maturity$— $— $— $— $— $— 

At September 30, 2020, 36 of the Company’s debt securities had unrealized losses totaling 0.4% of the individual securities’ amortized cost basis and 0.1% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 3 of the 36 securities had been in a continuous loss position for over 12 months. Management has determined that the declines in the fair value of these securities were not attributable to credit losses. As a result, no ACL was recorded for available for sale investment securities at September 30, 2020.
At September 30, 2020, it was determined that no ACL was required for the Company's held-to-maturity investment securities. The Company monitors credit quality of debt securities held-to-maturity through the use of credit ratings. The following table presents the amortized cost of the Company's held-to-maturity securities by credit quality rating at September 30, 2020.
Credit Ratings
(dollars in thousands)AAA/AA/ABBB/BB/BTotal
September 30, 2020
Held to maturity:
Municipal bonds2,942 — 2,942 

13

Accrued interest receivable on the Company's investment securities was $695,000 and $894,000 at September 30, 2020 and December 31, 2019, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.
At September 30, 2020 and December 31, 2019, the Company had $131,668,000 and $157,091,000, respectively, of securities pledged to secure public deposits.
4. Earnings Per Share
Earnings per common share were computed based on the following:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(in thousands, except per share data)2020201920202019
Numerator:
Net income available to common shareholders$8,782 $6,856 $13,180 $21,326 
Denominator:
Weighted average common shares outstanding8,627 9,059 8,737 9,114 
Effect of dilutive securities:
Restricted stock7 9 9 12 
Stock options17 39 23 63 
Weighted average common shares outstanding – assuming dilution8,651 9,107 8,769 9,189 
Basic earnings per common share$1.01 $0.76 $1.51 $2.34 
Diluted earnings per common share$1.01 $0.75 $1.51 $2.32 
Options on 160,282 and 100,288 shares of common stock were not included in the computation of diluted EPS for the three months ended September 30, 2020 and 2019, respectively, because the effect of these shares was anti-dilutive. Options on 129,559 and 90,511 shares of common stock were not included in the computation of diluted EPS for the nine months ended September 30, 2020 and 2019, respectively, because the effect of these shares was anti-dilutive.

14


5. Credit Quality and Allowance for Credit Losses
The following briefly describes the distinction between originated and acquired loans and certain significant accounting policies relevant to each category.

Originated Loans
Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recorded as income is earned. The accrual of interest on an originated loan is discontinued when it is probable the borrower will not be able to meet payment obligations as they become due. For reporting periods prior to January 1, 2020, the Company maintained an ALL on originated loans that represented management’s estimate of probable losses incurred in this portfolio category. For reporting periods beginning on and after January 1, 2020, the Company maintains an ACL on all loans that reflects management's estimate of expected credit losses for the full life of the loan portfolio due to the adoption of the guidance under ASC Topic 326. Refer to Note 2 for more information on the adoption of ASC Topic 326.

Acquired Loans
Loans that were acquired as a result of business combinations are referred to as “acquired loans.” The Company's acquired loans were purchased prior to the adoption of ASC Topic 326 on January 1, 2020 and were recorded at estimated fair value at the acquisition date with no carryover of the related ALL. The acquired loans were segregated between those considered to be performing and those with evidence of credit deterioration (purchased credit impaired or "PCI"), and then further segregated into loan pools designed to facilitate the estimation of expected cash flows. The fair value estimate for each pool of acquired performing and PCI loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at prevailing market interest rates. The difference between the fair value of an acquired loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool.

For reporting periods beginning on and after January 1, 2020 and the adoption of ASC Topic 326:
Management estimates the ACL for acquired loans under the same methodology as originated loans. Changes in the ACL for acquired loans are recognized through the provision for loan losses and the provision for credit losses on unfunded lending commitments.

ASC Topic 326 replaced the guidance for PCI loans with the concept of purchased credit deteriorated ("PCD"). For reporting periods beginning on and after January 1, 2020, PCI loans have been re-classified as PCD loans. For PCD loans, the Company applied the guidance under ASC Topic 326 using the prospective transition approach. As a result, the Company adjusted the amortized cost basis of the PCD loans to reclassify $1.0 million of purchase discount to the ALL on January 1, 2020. The Company applied the guidance under ASC Topic 326 using the modified retrospective approach for all non-PCD assets, which resulted in an increase in the ALL and a corresponding decrease to retained earnings. Refer to Note 2 for more information on the adoption of ASC Topic 326.

PCD loans, under prior accounting policies, were excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level. With the adoption of ASC Topic 326, the pools were discontinued and performance is based on contractual terms for individual loans.

For reporting periods prior to January 1, 2020 and the adoption of ASC Topic 326:
Management estimated the ALL for acquired performing loans using a methodology similar to that used for originated loans. The allowance determined for each loan pool was compared to the remaining fair value discount for that pool. If the allowance amount calculated under the Company’s methodology was greater than the Company’s remaining discount, the additional amount called for was added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology was less than the Company’s recorded discount, no additional allowance or provision was recognized. Actual losses first reduced any remaining nonaccretable discount for the loan pool. Once the nonaccretable discount was fully depleted, losses were applied against the allowance established for that pool. Acquired performing loans were placed on nonaccrual status and were considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
The excess of cash flows expected to be collected from a PCI loan pool over the pool’s estimated fair value at acquisition was referred to as the accretable yield and was recognized in interest income using an effective yield method over the remaining life
15

of the pool. Each pool of PCI loans was accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Management estimated cash flows expected to be collected on each PCI loan pool periodically. If the present value of expected cash flows for a pool was less than its carrying value, an impairment was recognized by an increase in the ALL and a charge to the provision for loan losses. If the present value of expected cash flows for a pool was greater than its carrying value, any previously established ALL was reversed and any remaining difference increased the accretable yield, which was taken into interest income over the remaining life of the loan pool. PCI loans were generally not subject to individual evaluation for impairment and were not reported with impaired loans, even if they otherwise qualified for such treatment.

The Company’s loans, net of unearned income, consisted of the following as of the dates indicated.

(dollars in thousands)September 30,
2020		December 31,
2019
Real estate loans:
       One- to four-family first mortgage
$409,282 $430,820 
Home equity loans and lines67,766 79,812 
Commercial real estate707,638 722,807 
Construction and land201,575 195,748 
Multi-family residential86,619 54,869 
Total real estate loans1,472,880 1,484,056 
Other loans:
Commercial and industrial443,480 184,701 
Consumer38,937 45,604 
Total other loans482,417 230,305 
Total loans$1,955,297 $1,714,361 


The net discount on the Company’s loans was $8,343,000 and $12,315,000 at September 30, 2020 and December 31, 2019, respectively. In addition, loan balances as of September 30, 2020 and December 31, 2019 are reported net of unearned income of $10,621,000 and $3,114,000, respectively. Unearned income at September 30, 2020 included $7,606,000 of deferred lender fees related to PPP loans.

Accrued interest receivable on the Company's loans was $9,435,000 and $6,575,000 at September 30, 2020 and December 31, 2019, respectively, and is excluded from the estimate of the ACL. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.

16

Allowance for Credit Losses
The ACL, which includes the ALL and the ACL on unfunded lending commitments, and recorded investment in loans as of the dates indicated are as follows.

 September 30, 2020
(dollars in thousands)Collectively
Evaluated		Individually
Evaluated		Total
Allowance for credit losses:
       One- to four-family first mortgage
$3,413 $— $3,413 
Home equity loans and lines771 — 771 
Commercial real estate17,662 689 18,351 
Construction and land4,078 — 4,078 
Multi-family residential1,067 — 1,067 
Commercial and industrial4,006 431 4,437 
Consumer885 — 885 
Total allowance for loan losses$31,882 $1,120 $33,002 
Unfunded lending commitments(1)
3,637 — 3,637 
Total allowance for credit losses$35,519 $1,120 $36,639 


 September 30, 2020
(dollars in thousands)Collectively
Evaluated
Individually
Evaluated(2)
Total
Loans:
       One- to four-family first mortgage
$409,282 $— $409,282 
Home equity loans and lines67,766 — 67,766 
Commercial real estate700,402 7,236 707,638 
Construction and land201,575 — 201,575 
Multi-family residential86,619 — 86,619 
Commercial and industrial442,868 612 443,480 
Consumer38,937 — 38,937 
Total loans$1,947,449 $7,848 $1,955,297 


17


 December 31, 2019
(dollars in thousands)Collectively
Evaluated
for
Impairment		Individually
Evaluated
for
Impairment		Acquired with Deteriorated Credit QualityTotal
Allowance for loan losses:
       One- to four-family first mortgage
$2,715 $— $— $2,715 
Home equity loans and lines736 348 — 1,084 
Commercial real estate6,243 298 — 6,541 
Construction and land2,670 — — 2,670 
Multi-family residential572 — — 572 
Commercial and industrial2,969 701 24 3,694 
Consumer592 — 592 
Total allowance for loan losses$16,497 $1,347 $24 $17,868 
 December 31, 2019
(dollars in thousands)Collectively
Evaluated
for
Impairment		Individually
Evaluated
for
Impairment
Acquired with Deteriorated Credit Quality(3)
Total
Loans:
       One- to four-family first mortgage
$429,745 $187 $888 $430,820 
Home equity loans and lines78,446 784 582 79,812 
Commercial real estate711,282 6,518 5,007 722,807 
Construction and land195,374 — 374 195,748 
Multi-family residential54,690 — 179 54,869 
Commercial and industrial183,141 1,223 337 184,701 
Consumer45,573 — 31 45,604 
Total loans$1,698,251 $8,712 $7,398 $1,714,361 
(1)At September 30, 2020, $3.6 million of the ACL related to unfunded lending commitments of $326.8 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
(2)At September 30, 2020, loans individually evaluated for impairment included $1.9 million of loans acquired with deteriorated credit quality.
(3)At December 31, 2019, loans acquired with deteriorated credit quality were deemed to be PCI and were accounted for under ASC 310-30.

18

A summary of activity in the ACL and ALL for the nine months ended September 30, 2020 and September 30, 2019 follows.
 
 Nine Months Ended September 30, 2020
(dollars in thousands)Beginning
Balance
ASC Topic 326 Adoption Impact(1)
Charge-offsRecoveriesProvisionEnding
Balance
Allowance for credit losses:
One- to four-family first mortgage
$2,715 $986 $(55)$12 $(245)$3,413 
Home equity loans and lines1,084 (1)(575)15 248 771 
Commercial real estate6,541 1,974 (5)55 9,786 18,351 
Construction and land2,670 519 (688)— 1,577 4,078 
Multi-family residential572 (245)— — 740 1,067 
Commercial and industrial3,694 1,243 (977)91 386 4,437 
Consumer592 157 (222)122 236 885 
Total allowance for loan losses$17,868 $4,633 $(2,522)$295 $12,728 $33,002 
Unfunded lending commitments— 2,365 — — 1,272 3,637 
Total allowance for credit losses$17,868 $6,998 $(2,522)$295 $14,000 $36,639 
(1)On January 1, 2020 the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new model known as CECL. Refer to Note 2 for more information on the adoption of ASC Topic 326.

 Nine Months Ended September 30, 2019
(dollars in thousands)Beginning
Balance		Charge-offsRecoveriesProvisionEnding
Balance
Allowance for loan losses:
One- to four-family first mortgage
$2,136 $(4)$— $271 $2,403 
Home equity loans and lines1,079 (42)10 41 1,088 
Commercial real estate6,125 (139)— 829 6,815 
Construction and land2,285 — — (113)2,172 
Multi-family residential550 — — 22 572 
Commercial and industrial3,228 (744)23 1,343 3,850 
Consumer945 (189)34 (92)698 
Total allowance for loan losses$16,348 $(1,118)$67 $2,301 $17,598 

19

Credit Quality
The following table presents the Company’s loan portfolio by credit quality classification and origination year as of September 30, 2020

Term Loans by Origination Year
(dollars in thousands)20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
One- to four-family first mortgage:
Pass$41,018 $70,884 $50,516 $51,480 $39,087 $128,564 $18,474 $1,149 $401,172 
Special Mention— 123 170 796 23 1,057 — — 2,169 
Substandard134 — — 239 1,270 4,298 — — 5,941 
Doubtful— — — — — — — — — 
Total one- to four-family first mortgages$41,152 $71,007 $50,686 $52,515 $40,380 $133,919 $18,474 $1,149 $409,282 
Home equity loans and lines:
Pass$707 $1,341 $2,155 $1,133 $2,098 $6,409 $53,065 $420 $67,328 
Special Mention— 43 — 43 — 77 — 166 329 
Substandard— — — 1 — 108 — — 109 
Doubtful— — — — — — — — — 
Total home equity loans and lines$707 $1,384 $2,155 $1,177 $2,098 $6,594 $53,065 $586 $67,766 
Commercial real estate:
Pass$161,064 $167,785 $99,240 $106,999 $63,987 $71,310 $18,890 $55 $689,330 
Special Mention1,015 — — 54 54 — — — 1,123 
Substandard475 1,758 2,285 321 2,306 10,040 — — 17,185 
Doubtful— — — — — — — — — 
Total commercial real estate loans$162,554 $169,543 $101,525 $107,374 $66,347 $81,350 $18,890 $55 $707,638 
Construction and land:
Pass$56,923 $99,081 $19,765 $5,858 $2,735 $2,109 $2,141 $449 $189,061 
Special Mention875 — — — — 624 — 10,415 11,914 
Substandard— 53 — — 285 262 — — 600 
Doubtful— — — — — — — — — 
Total construction and land loans$57,798 $99,134 $19,765 $5,858 $3,020 $2,995 $2,141 $10,864 $201,575 
20

Term Loans by Origination Year
(dollars in thousands)20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term LoansTotal
Multi-family residential:
Pass$34,726 $26,721 $10,466 $3,892 $2,944 $5,550 $2,121 $— $86,420 
Special Mention— — — — — — — — — 
Substandard— 92 — — — 107 — — 199 
Doubtful— — — — — — — — — 
Total multi-family residential loans$34,726 $26,813 $10,466 $3,892 $2,944 $5,657 $2,121 $— $86,619 
Commercial and industrial:
Pass$287,757 $35,391 $22,512 $7,150 $7,010 $3,030 $71,928 $506 $435,284 
Special Mention2,725 1,156 164 15 — — 1,000 553 5,613 
Substandard27 — 433 25 156 18 1,924 — 2,583 
Doubtful— — — — — — — — — 
Total commercial and industrial loans$290,509 $36,547 $23,109 $7,190 $7,166 $3,048 $74,852 $1,059 $443,480 
Consumer:
Pass$4,533 $3,312 $1,399 $2,388 $1,383 $19,357 $6,090 $15 $38,477 
Special Mention— — 4 — 21 159 — — 184 
Substandard— 29 2 15 16 213 1 — 276 
Doubtful— — — — — — — — — 
Total consumer loans$4,533 $3,341 $1,405 $2,403 $1,420 $19,729 $6,091 $15 $38,937 
Total loans:
Pass$586,728 $404,515 $206,053 $178,900 $119,244 $236,329 $172,709 $2,594 $1,907,072 
Special Mention4,615 1,322 338 908 98 1,917 1,000 11,134 21,332 
Substandard636 1,932 2,720 601 4,033 15,046 1,925 — 26,893 
Doubtful— — — — — — — — — 
Total loans$591,979 $407,769 $209,111 $180,409 $123,375 $253,292 $175,634 $13,728 $1,955,297 

21

The following tables present the Company’s loan portfolio by credit quality classification as of December 31, 2019.
 December 31, 2019
(dollars in thousands)PassSpecial
Mention		SubstandardDoubtfulTotal
Originated loans:
One- to four-family first mortgage$248,483 $730 $2,133 $— $251,346 
Home equity loans and lines56,029 53 882 — 56,964 
Commercial real estate517,615 207 11,317 — 529,139 
Construction and land164,310 8,107 1,270 — 173,687 
Multi-family residential48,661 — — — 48,661 
Commercial and industrial153,286 — 2,438 — 155,724 
Consumer35,545 46 89 — 35,680 
Total originated loans$1,223,929 $9,143 $18,129 $— $1,251,201 
Acquired loans:
One- to four-family first mortgage$173,482 $1,429 $4,563 $— $179,474 
Home equity loans and lines22,370 128 350 — 22,848 
Commercial real estate181,090 1,593 10,985 — 193,668 
Construction and land19,877 747 1,437 — 22,061 
Multi-family residential5,487 502 219 — 6,208 
Commercial and industrial24,856 56 4,065 — 28,977 
Consumer9,668 166 90 — 9,924 
Total acquired loans$436,830 $4,621 $21,709 $— $463,160 
Total loans:
One- to four-family first mortgage$421,965 $2,159 $6,696 $— $430,820 
Home equity loans and lines78,399 181 1,232 — 79,812 
Commercial real estate698,705 1,800 22,302 — 722,807 
Construction and land184,187 8,854 2,707 — 195,748 
Multi-family residential54,148 502 219 — 54,869 
Commercial and industrial178,142 56 6,503 — 184,701 
Consumer45,213 212 179 — 45,604 
Total loans$1,660,759 $13,764 $39,838 $— $1,714,361 
The above classifications follow regulatory guidelines and can generally be described as follows:
 
•Pass loans are of satisfactory quality.
•Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.
•Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial performance. Such loans may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.
•Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.
In addition, residential loans are classified using an inter-agency regulatory methodology that incorporates, among other factors, the extent of delinquencies and loan-to-value ratios. These classifications were the most current available as of the dates indicated and were generally updated within the quarter.

22

Age analysis of past due loans as of the dates indicated are as follows.
 September 30, 2020
(dollars in thousands)30-59
Days
Past
Due		60-89
Days
Past
Due		Greater
Than
90 Days
Past
Due		Total
Past
Due		Current
Loans		Total
Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage
$500 $36 $1,147 $1,683 $259,246 $260,929 
Home equity loans and lines106 — 45 151 51,491 51,642 
Commercial real estate75 — 7,000 7,075 533,126 540,201 
Construction and land525 — — 525 186,044 186,569 
Multi-family residential1,499 — — 1,499 79,692 81,191 
Total real estate loans2,705 36 8,192 10,933 1,109,599 1,120,532 
Other loans:
Commercial and industrial638 — 607 1,245 422,464 423,709 
Consumer221 52 130 403 31,950 32,353 
Total other loans859 52 737 1,648 454,414 456,062 
Total originated loans$3,564 $88 $8,929 $12,581 $1,564,013 $1,576,594 
Acquired loans:
Real estate loans:
One- to four-family first mortgage
$3,567 $437 $1,210 $5,214 $143,139 $148,353 
Home equity loans and lines44 — 20 64 16,060 16,124 
Commercial real estate1,860 — 4,198 6,058 161,379 167,437 
Construction and land— — 434 434 14,572 15,006 
Multi-family residential— — — — 5,428 5,428 
Total real estate loans5,471 437 5,862 11,770 340,578 352,348 
Other loans:
Commercial and industrial4 — 945 949 18,822 19,771 
Consumer67 23 63 153 6,431 6,584 
Total other loans71 23 1,008 1,102 25,253 26,355 
Total acquired loans$5,542 $460 $6,870 $12,872 $365,831 $378,703 
Total loans:
Real estate loans:
One- to four-family first mortgage
$4,067 $473 $2,357 $6,897 $402,385 $409,282 
Home equity loans and lines150 — 65 215 67,551 67,766 
Commercial real estate1,935 — 11,198 13,133 694,505 707,638 
Construction and land525 — 434 959 200,616 201,575 
Multi-family residential1,499 — — 1,499 85,120 86,619 
Total real estate loans8,176 473 14,054 22,703 1,450,177 1,472,880 
Other loans:
Commercial and industrial642 — 1,552 2,194 441,286 443,480 
Consumer288 75 193 556 38,381 38,937 
Total other loans930 75 1,745 2,750 479,667 482,417 
Total loans$9,106 $548 $15,799 $25,453 $1,929,844 $1,955,297 

23

 December 31, 2019
(dollars in thousands)30-59
Days
Past
Due		60-89
Days
Past
Due		Greater
Than
90 Days
Past
Due		Total
Past
Due		Current
Loans		Total
Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage
$1,524 $173 $967 $2,664 $248,682 $251,346 
Home equity loans and lines174 — 98 272 56,692 56,964 
Commercial real estate1,124 1,448 8,056 10,628 518,511 529,139 
Construction and land— — 1,171 1,171 172,516 173,687 
Multi-family residential— — — — 48,661 48,661 
Total real estate loans2,822 1,621 10,292 14,735 1,045,062 1,059,797 
Other loans:
Commercial and industrial213 100 869 1,182 154,542 155,724 
Consumer533 57 34 624 35,056 35,680 
Total other loans746 157 903 1,806 189,598 191,404 
Total originated loans$3,568 $1,778 $11,195 $16,541 $1,234,660 $1,251,201 
Acquired loans:
Real estate loans:
One- to four-family first mortgage
$4,555 $1,116 $1,108 $6,779 $172,695 $179,474 
Home equity loans and lines267 93 330 690 22,158 22,848 
Commercial real estate337 466 1,945 2,748 190,920 193,668 
Construction and land413 — 1,170 1,583 20,478 22,061 
Multi-family residential— — — — 6,208 6,208 
Total real estate loans5,572 1,675 4,553 11,800 412,459 424,259 
Other loans:
Commercial and industrial3 57 792 852 28,125 28,977 
Consumer259 127 60 446 9,478 9,924 
Total other loans262 184 852 1,298 37,603 38,901 
Total acquired loans$5,834 $1,859 $5,405 $13,098 $450,062 $463,160 
Total loans:
Real estate loans:
One- to four-family first mortgage
$6,079 $1,289 $2,075 $9,443 $421,377 $430,820 
Home equity loans and lines441 93 428 962 78,850 79,812 
Commercial real estate1,461 1,914 10,001 13,376 709,431 722,807 
Construction and land413 — 2,341 2,754 192,994 195,748 
Multi-family residential— — — — 54,869 54,869 
Total real estate loans8,394 3,296 14,845 26,535 1,457,521 1,484,056 
Other loans:
Commercial and industrial216 157 1,661 2,034 182,667 184,701 
Consumer792 184 94 1,070 44,534 45,604 
Total other loans1,008 341 1,755 3,104 227,201 230,305 
Total loans$9,402 $3,637 $16,600 $29,639 $1,684,722 $1,714,361 

At September 30, 2020, $10,000 of loans were greater than 90 days past due and accruing. At December 31, 2019, excluding PCI loans, the Company did not have any loans greater than 90 days past due and accruing.
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The following table summarizes information pertaining to nonaccrual loans as of dates indicated.

September 30, 2020December 31,
2019
(dollars in thousands)With Related AllowanceWithout Related Allowance
Total(1)
Total(2)
Nonaccrual loans:
       One- to four-family first mortgage
$4,609 $— $4,609 $3,948 
Home equity loans and lines109 — 109 1,244 
Commercial real estate15,486 — 15,486 13,325 
Construction and land515 — 515 2,469 
Multi-family residential95 — 95 — 
Commercial and industrial1,750 — 1,750 3,224 
Consumer279 — 279 176 
Total$22,843 $— $22,843 $24,386 
(1)Due to the adoption of ASC Topic 326, PCD loans of $2.1 million are included in nonaccrual loans at September 30, 2020. Prior to January 1, 2020, these loans were classified as PCI and excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level. At adoption, the pools were discontinued and performance is based on contractual terms for individual loans.
(2)PCI loans which were being accounted for under ASC 310-30 were excluded from nonaccrual loans because they continued to earn interest from accretable yield regardless of their status as past due or otherwise not in compliance with their contractual terms. PCI loans which were being accounted for under ASC 310-30 and which were 90 days or more past due totaled $2.2 million as of December 31, 2019.
All payments received while on nonaccrual status are applied against the principal balance of nonaccrual loans. The Company does not recognize interest income while loans are on nonaccrual status.

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Collateral Dependent Loans
The Company held loans that were individually evaluated for impairment at September 30, 2020 for which the repayment, on the basis of our assessment at the reporting date, is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The ACL for these collateral-dependent loans is primarily based on the fair value of the underlying collateral at the reporting date. The following describes the types of collateral that secure collateral dependent loans:
•One- to four-family first mortgages are primarily secured by first liens on residential real estate.
•Home equity loans and lines are primarily secured by first and junior liens on residential real estate.
•Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants.
•Construction and land loans are primarily secured by residential and commercial properties, which are under construction and/or redevelopment, and by raw land.
•Commercial and industrial loans considered collateral dependent are primarily secured by accounts receivable, inventory and equipment.
The table below summarizes collateral dependent loans and the related ACL at September 30, 2020 for which the borrower is experiencing financial difficulty.
(dollars in thousands)LoansACL
       One- to four-family first mortgage
$— $— 
Home equity loans and lines— — 
Commercial real estate7,236 689 
Construction and land— — 
Multi-family residential— — 
Commercial and industrial612 431 
Consumer— — 
Total$7,848 $1,120 

At September 30, 2020, collateral dependent commercial real estate loans included one loan acquired with deteriorated credit quality totaling $1.9 million.
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Foreclosed Assets and ORE
Foreclosed assets and ORE include real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE totaled $1,985,000 and 4,156,000 at September 30, 2020 and December 31, 2019, respectively. These amounts are recorded in accrued interest receivable and other assets on the Consolidated Statements of Financial Condition.

The carrying amount of foreclosed residential real estate properties held at September 30, 2020 and December 31, 2019 totaled $996,000 and $1,737,000, respectively.

Foreclosed assets and ORE included certain bank buildings that meet the criteria to be classified as assets held for sale. The carrying value of these assets totaled $729,000 and $1,275,000 at September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020, the Company sold five of these properties, with a total carrying value of $410,000, for a gain of $64,000 recorded in foreclosed assets and ORE, net expense on the Consolidated Statements of Income. The expected timing of the sale of the remaining properties is uncertain due to the effects of the COVID-19 pandemic.
Troubled Debt Restructurings
During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. Loans are TDRs when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession either is granted through an agreement with the customer or is imposed by a court or by law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:
 
•a reduction of the stated interest rate for the remaining original life of the debt,
•an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,
•a reduction of the face amount or maturity amount of the debt or
•a reduction of accrued interest receivable on the debt.

In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:
 
•whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,
•whether the customer has declared or is in the process of declaring bankruptcy,
•whether there is substantial doubt about the customer’s ability to continue as a going concern,
•whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future and
•whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.
If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. For purposes of the determination of an ACL, larger (i.e., TDRs with balances of $250,000 or greater) commercial TDRs are individually evaluated for impairment. The ACL for loans that are individually evaluated is based on a comparison of the recorded investment in the loan with either the expected cash flows discounted using the loan’s original effective interest rate, observable market price for the loan or the fair value of the collateral underlying certain collateral-dependent loans. Residential, consumer and smaller balance commercial TDRs are included in the Company's pooled-loan analysis to calculate the ACL and, generally, do not have a material impact on the overall ACL.
As of September 30, 2020, the Company had modified loans with an aggregate outstanding loan balance of $70.2 million, or 4% of total outstanding loans, via payment relief in the nature of principal and/or interest deferrals for 90 days. These modifications were done in accordance with Section 4013 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and the Interagency Statement on Loan Modifications on Reporting for Financial Institutions Working With Customers Affected by the Coronavirus. Accordingly, these loans were not categorized as TDRs.
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The following table summarizes information pertaining to TDRs modified during the periods indicated.

 Nine Months Ended September 30,
 20202019
(dollars in thousands)Number of
Contracts		Pre-
modification
Outstanding
Recorded
Investment		Post-
modification
Outstanding
Recorded
Investment		Number of
Contracts		Pre-
modification
Outstanding
Recorded
Investment		Post-
modification
Outstanding
Recorded
Investment
Troubled debt restructurings:
One- to four-family first mortgage
7 $990 $385 6 $924 $911 
Home equity loans and lines— — — — — — 
Commercial real estate4 1,044 992 1 89 88 
Construction and land— — — — — — 
Multi-family residential— — — — — — 
Commercial and industrial3 41 38 — — — 
Other consumer2 13 10 2 11 10 
Total16 $2,088 $1,425 9 $1,024 $1,009 

Two residential mortgages totaling $543,000, one commercial real estate loan totaling $77,000 and one consumer loan totaling $4,000 were modified during the nine months ended September 30, 2020 and defaulted during the same period. The defaults did not have a significant impact on our allowance for credit losses at September 30, 2020.

Two residential mortgages totaling $619,000 and one consumer loan totaling $6,000 were modified during nine months ended September 30, 2019 and defaulted within twelve months of modification. The defaults did not have a significant impact on our allowance for loan losses at September 30, 2019.
6. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, during the quarter ended June 30, 2020, the Company entered into certain derivative financial instruments in its efforts to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s variable rate liabilities.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. As part of its efforts to accomplish this objective, during the second quarter of 2020, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2020, such derivatives were used to hedge the variable cash flows associated with existing variable rate liabilities.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate liabilities. During the next twelve months, the Company estimates that an additional $63,000 will be reclassified as additional interest expense.
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Fair Values of Derivative Instruments
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statement of Financial Condition as of September 30, 2020.

Derivative Liabilities(1)
(dollars in thousands)Notional AmountFair Value
Derivatives designated as hedging instruments:
Interest rate swaps - variable rate liabilities$40,000 $87 
Netting adjustments— 
Less: Cash posted as collateral(2)
(87)
Net derivative amounts$— 

(1)Derivative liabilities are reported at fair value in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.
(2)Cash posted as collateral is held by the Company's derivative counterparties. At September 30, 2020, the Company had excess collateral compared to total exposure due to initial margin requirements for day-to-day volatility. The excess collateral is not reflected above.


Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of September 30, 2020.

Three Months Ended September 30, 2020
Amount of Gain Recognized in OCILocation of Gain Reclassified from AOCI into IncomeAmount of Loss Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities$60 $60 Interest expense$(16)$(16)
Nine Months Ended September 30, 2020
Amount of Loss Recognized in OCILocation of Loss Reclassified from AOCI into IncomeAmount of Loss Reclassified from AOCI into Income
(dollars in thousands)TotalIncluded ComponentTotalIncluded Component
Derivatives in cash flows hedging relationships:
Interest rate swaps - variable rate liabilities$(110)$(110)Interest expense$(28)$(28)




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Effect of Cash Flow Hedge Accounting on the Consolidated Statements of Income
The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income as of September 30, 2020.
(dollars in thousands)Location of Loss Reclassified from AOCI into IncomeThree Months Ended September 30, 2020Nine Months Ended September 30, 2020
Effects of cash flow hedging
Interest rate swaps - variable rate liabilitiesInterest expense$(16)$(28)


Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company (either) defaults (or is capable of being declared in default) on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has agreements with certain of its derivative counterparties that contain a provision where if the company fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to post additional collateral.

As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $87,000. As of September 30, 2020, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $493,000 in excess of thresholds. If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $87,000.
7. Fair Value Measurements and Disclosures
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company groups assets and liabilities measured or disclosed at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels used to measure fair value are as follows:
 
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.

Recurring Basis
Investment Securities Available for Sale
Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities bids, offers and other reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values are estimated primarily by the use of pricing models. Level 2 investment securities are primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use
30

of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets, by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of September 30, 2020, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

Derivative Liabilities
The fair value of these derivative financial instruments is obtained from a third-party pricing service that uses widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company has determined that its derivative valuations are classified in Level 2 of the fair vale hierarchy.

The following tables present the balances of assets measured for fair value on a recurring basis as of September 30, 2020 and December 31, 2019.

(dollars in thousands)September 30, 2020Level 1Level 2Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed$123,152 $— $123,152 $— 
Collateralized mortgage obligations99,157 — 99,157 — 
Municipal bonds20,817 — 20,817 — 
U.S. government agency6,413 — 6,413 — 
Corporate bonds2,039 — 2,039 — 
Total$251,578 $— $251,578 $— 
Liabilities
Derivative liabilities(1)
$87 $— $87 $— 

(1)For more information, refer to Note 6. Derivatives and Hedging Activities.
(dollars in thousands)December 31, 2019Level 1Level 2Level 3
Assets
Available for sale securities:
U.S. agency mortgage-backed$95,172 $— $95,172 $— 
Collateralized mortgage obligations142,451 — 142,451 — 
Municipal bonds16,005 — 16,005 — 
U.S. government agency3,693 — 3,693 — 
Total$257,321 $— $257,321 $— 
The Company did not record any liabilities at fair value as of December 31, 2019 for which the measurement of the fair value was made on a recurring basis.
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Nonrecurring Basis
The Company records loans individually evaluated for impairment at fair value on a nonrecurring basis. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from third parties of the collateral less any prior liens and when there is no observable market price.
Foreclosed assets and ORE are also recorded at fair value on a nonrecurring basis. Foreclosed assets are initially recorded at fair value less estimated costs to sell. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. The fair value of foreclosed assets and ORE is based on property appraisals and an analysis of similar properties available. As such, the Company classifies foreclosed and ORE assets as Level 3 assets.

The Company has segregated all financial assets that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date as reflected in the table below.
  Fair Value Measurements Using
(dollars in thousands)September 30, 2020Level 1Level 2Level 3
Assets
Individually evaluated for impairment$6,728 $— $— $6,728 
Foreclosed assets and ORE1,985 — — 1,985 
Total$8,713 $— $— $8,713 
  Fair Value Measurements Using
(dollars in thousands)December 31, 2019Level 1Level 2Level 3
Assets
Individually evaluated for impairment$7,365 $— $— $7,365 
Foreclosed assets and ORE4,156 — — 4,156 
Total$11,521 $— $— $11,521 

The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets.

(dollars in thousands)Fair
Value		Valuation TechniqueUnobservable
Inputs		Range of
Discounts		Weighted
Average
Discount
As of September 30, 2020:
Individually evaluated for impairment$6,728 Third party appraisals and discounted cash flowsCollateral values, market discounts and estimated costs to sell
3% - 80%
14%
Foreclosed assets and ORE$1,985 Third party appraisals, sales contracts, broker price opinionsCollateral values, market discounts and estimated costs to sell
6% - 52%
12%
(dollars in thousands)Fair
Value		Valuation TechniqueUnobservable
Inputs		Range of
Discounts		Weighted
Average
Discount
As of December 31, 2019:
Individually evaluated for impairment$7,365 Third party appraisals and discounted cash flowsCollateral values, market discounts and estimated costs to sell
0% - 84%
13%
Foreclosed assets and ORE$4,156 Third party appraisals, sales contracts, broker price opinionsCollateral values, market discounts and estimated costs to sell
6% - 61%
14%
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ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statements. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
•The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.
•The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third party pricing services or quoted market prices of securities with similar characteristics.
•The carrying value of mortgage loans held for sale approximates their fair value.
•The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.
•The cash surrender value of BOLI approximates its fair value.
•The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
•The fair value of other borrowings and long-term FHLB advances is estimated by discounting the future cash flows using the rates currently offered for borrowings of similar maturities.
•The fair value of derivative liabilities are obtained from a third-party pricing service that uses the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).
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The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.

  Fair Value Measurements at September 30, 2020
(dollars in thousands)Carrying
Amount		TotalLevel 1Level 2Level 3
Financial Assets
Cash and cash equivalents$185,836 $185,836 $185,836 $— $— 
Interest-bearing deposits in banks349 349 349 — — 
Investment securities available for sale251,578 251,578 — 251,578 — 
Investment securities held to maturity2,942 3,008 — 3,008 — 
Mortgage loans held for sale21,045 21,045 — 21,045 — 
Loans, net1,922,295 1,945,125 — 1,938,397 6,728 
Cash surrender value of BOLI40,184 40,184 40,184 — — 
Financial Liabilities
Deposits$2,207,494 $2,210,331 $— $2,210,331 $— 
Other borrowings5,539 6,233 — 6,233 — 
Long-term FHLB advances31,445 32,399 — 32,399 — 
Derivative liabilities(1)
87 87 — 87 — 
(1)Derivative liabilities are reported at fair value in accrued interest payable and other liabilities in the Consolidated Statements of Financial Condition.
  Fair Value Measurements at December 31, 2019
(dollars in thousands)Carrying
Amount		TotalLevel 1Level 2Level 3
Financial Assets
Cash and cash equivalents$39,847 $39,847 $39,847 $— $— 
Interest-bearing deposits in banks449 449 449 — — 
Investment securities available for sale257,321 257,321 — 257,321 — 
Investment securities held to maturity7,149 7,194 — 7,194 — 
Mortgage loans held for sale6,990 6,990 — 6,990 — 
Loans, net1,696,493 1,690,308 — 1,682,943 7,365 
Cash surrender value of BOLI39,466 39,466 39,466 — — 
Financial Liabilities
Deposits$1,820,975 $1,821,868 $— $1,821,868 $— 
Other borrowings5,539 5,895 — 5,895 — 
Long-term FHLB advances40,620 40,580 — 40,580 — 

34


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of the Company and the Bank, from December 31, 2019 through September 30, 2020 and on its results of operations for the three and nine months ended September 30, 2020 and 2019. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes appearing in Item 1.

Forward-Looking Statements
To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or Bank, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as “plan”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions, or by future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly”. The Company’s or the Bank’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Factors that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, the risk factors described under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019, as supplemented by the additional risk factor included in Part II, Item 1A of this Quarterly Report on Form 10-Q.
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. Given its ongoing and dynamic nature, it is difficult to predict the full impact of COVID-19 on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the national and local economies may be reopened. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, our forward-looking statements are subject to the following additional risks, uncertainties and assumptions, among others:
•Demand for our products and services may decline;
•If high levels of unemployment continue, our loan delinquencies, non-performing assets and loan foreclosures may increase;
•Collateral for loans, especially real estate, may decline in value;
•Our allowance for loan losses may have to be increased if our borrowers continue to experience financial difficulties;
•As a result of the reduction in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our interest-earning assets may decline more than the decline in the cost of our interest-bearing liabilities;
•A material decrease in our net income or a net loss over several quarters could result in a suspension of our stock repurchase program and/or a reduction of our quarterly stock dividend;
•Our cyber security risks may be increased as a result of more of our employees working remotely; and
•FDIC deposit insurance premiums may increase if the agency experiences additional resolution costs.

The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
35

EXECUTIVE OVERVIEW
The Company reported net income for the third quarter of 2020 of $8.8 million, or $1.01 diluted EPS, compared to $6.9 million, or $0.75 diluted EPS, reported for the third quarter of 2019. For the nine months ended September 30, 2020, the Company reported net income of $13.2 million, or $1.51 diluted EPS, compared to $21.3 million, or $2.32 diluted EPS, reported for the nine months ended September 30, 2019.

Key components of the Company’s performance during the three and nine months ended September 30, 2020 include:

•Assets increased $378.7 million, or 17.2%, from December 31, 2019 to $2.6 billion at September 30, 2020.

•Total loans were $2.0 billion, up $240.9 million, or 14.1%, from December 31, 2019, primarily due to the recorded net investment in PPP loans of $254.5 million.

•On January 1, 2020, the Company adopted the CECL framework, which resulted in a $7.0 million, or 39.2%, increase in the ACL at the adoption date.

•The Company recorded no provisions for credit losses for the third quarter of 2020 primarily due to limited changes to our assessment of the economic impact of the COVID-19 pandemic and the absence of loan growth from the previous quarter. In the aggregate, the provisions for credit losses on loans and unfunded lending commitments totaled $14.0 million for the nine months ended September 30, 2020.

•The ALL totaled $33.0 million, or 1.69% of total loans, at September 30, 2020. The ACL, which includes the allowance for unfunded lending commitments, totaled $36.6 million, or 1.87% of total loans at September 30, 2020. Excluding PPP loans, the ratios of ALL to total loans and ACL to total loans were 1.94% and 2.15%, respectively.

•Nonperforming assets were down $3.7 million, or 13.0%, from the December 31, 2019.

•Total deposits increased $386.5 million, or 21.2%, from December 31, 2019 to $2.2 billion at September 30, 2020.

•The net interest margin was 3.82% for the third quarter of 2020, down 30 bps compared to the third quarter of 2019, and 3.91% for the nine months ended September 30, 2020, down 39 bps compared to the nine months ended September 30, 2019, primarily due to the decrease in the average yield on interest-earning assets during 2020.

•The average yield paid on total interest-bearing deposits was 0.60%, down 56 bps from the third quarter of 2019. For the nine months ended September 30, 2020, the average yield paid on total interest-bearing deposits was 0.80%, down 29 bps from the nine months ended September 30, 2019.

•Noninterest income decreased $980,000, or 20.5%, and $661,000, or 6.1%, for the three and nine months ended September 30, 2020, respectively, from the comparable periods in 2019. Income from BOLI for the for the three months ended September 30, 2019 included a non-taxable death benefit of $1.2 million. For the nine months ended September 30, 2019, the impact of the BOLI benefit on noninterest income was partially offset by asset write-downs totaling $347,000 (pre-tax) recorded during the second quarter of 2019.

•Noninterest expense for the third quarter of 2020 decreased $494,000, or 3.0%, compared to the third quarter of 2019 primarily due to decreases in compensation and benefits (down $526,000), marketing and advertising (down $130,000) and occupancy expenses (down $105,000), partiality offset by an increase in regulatory fees (up $399,000). For the nine months ended September 30, 2020, noninterest expense was up $404,000, or 0.8%, from the comparable period in 2019 primarily due to the provisions for credit losses on unfunded lending commitments recorded during the first half of 2020 ($1.3 million) and an increase in data processing and communication expense (up $648,000), partially offset by decreases in compensation and benefits (down $459,000), occupancy (down $330,000), marketing and advertising (down $251,000) and other expenses (down $489,000).


36

COVID-19 RESPONSE
Banking operations have not been restrained by state and local government COVID-19 restrictions. However, we have adapted to protect our employees and customers by working remotely, enhancing cleaning procedures, and enacting several other measures to reduce the risk of transmission of the virus. State government imposed restrictions were relaxed in September 2020 within our Louisiana and Mississippi markets, though the states have not fully reopened. The changes in restrictions primarily increased capacity limits of certain businesses and relaxed social distancing guidelines.

During the second and third quarters of 2020, the Company funded approximately 3,072 loans totaling $262.2 million under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). At September 30, 2020, the total recorded net investment in PPP loans was $254.5 million, of which approximately 2,160 loans with an aggregate outstanding balance of $35.2 million were for amounts of $50,000 or less.

To give immediate financial support to our customers, the Company began providing principal and/or interest payment relief options in March 2020. When we last reported the level of such deferrals in our second quarter Form 10-Q (as of August 4, 2020), $113.9 million, or 6% of total loans, were under deferral agreements. As of September 30, 2020, the level of deferrals decreased to $70.2 million, or 4% of total loans. The level of COVID-19 related deferrals formerly totaled $558.8 million, or 28% of total loans, at June 30, 2020. Of the loans that have exited deferral agreements, $469.0 million, or 98%, were current and performing as of September 30, 2020.
FINANCIAL CONDITION

Loans, Allowance for Credit Losses and Asset Quality

Loans
Loans outstanding at September 30, 2020 were $2.0 billion, an increase of $240.9 million, or 14.1%, from December 31, 2019 primarily due to PPP loans. At September 30, 2020, the total recorded investment in PPP loans was $254.5 million, which is included with commercial and industrial loans. The recorded investment in PPP loans is net of $7.6 million in deferred lender fees, which will be amortized into interest income over the life of the loans. Excluding PPP loans, loans decreased $13.6 million, or 0.8%, from December 31, 2019.
The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.

 September 30,December 31,Increase/(Decrease)
(dollars in thousands)20202019AmountPercent
Real estate loans:
One-to four-family first mortgage
$409,282 $430,820 $(21,538)(5.0)%
Home equity loans and lines67,766 79,812 (12,046)(15.1)
Commercial real estate707,638 722,807 (15,169)(2.1)
Construction and land201,575 195,748 5,827 3.0 
Multi-family residential86,619 54,869 31,750 57.9 
Total real estate loans1,472,880 1,484,056 (11,176)(0.8)%
Other loans:
Commercial and industrial443,480 184,701 258,779 140.1 
Consumer38,937 45,604 (6,667)(14.6)
Total other loans482,417 230,305 252,112 109.5 
Total loans$1,955,297 $1,714,361 $240,936 14.1 %




37

Adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Due to the adoption of ASC Topic 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses ("CECL") for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For reporting periods prior to January 1, 2020, management maintained an ALL at a level which reflected losses that were probable and reasonably estimable at the relevant reporting date.

The ACL and ALL policies described below are supplemented by periodic reviews and validations performed by independent loan reviewers. The results of the reviews are reported to the Audit Committee of the Board of Directors. The establishment of the ACL and ALL is and was significantly affected by management judgment. There is likelihood that different amounts would be reported under different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically review our ACL and ALL. Such agencies may require management to make additional provisions for estimated losses based upon judgments different from those of management.

We continue to monitor and modify our ACL as conditions warrant. No assurance can be given that our level of ACL will cover all of the losses on our loans or that future adjustments to the ACL will not be necessary if economic and other conditions differ substantially from the conditions used by management to determine the current level of the ACL.
For reporting periods beginning on and after January 1, 2020 and the adoption of ASC Topic 326:
The ACL which equals the sum of the ALL and the ACL on unfunded lending commitments, is established through provisions for credit losses. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. Under ASC Topic 326, the ACL is measured on a pool basis when similar risk characteristics exist. For each pool of loans, management also evaluates and applies qualitative adjustments to the calculated ACL based on several factors, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis. Refer to Note 2 of the Consolidated Financial Statements for more information on the adoption of ASC Topic 326 and its impact on the Consolidated Financial Statements.

For reporting periods prior to January 1, 2020 and the adoption of ASC Topic 326:
The ALL estimation process included, among other things, an analysis of delinquency trends, nonperforming loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of loans, the value of collateral securing loans, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, economic conditions and industry experience. Based on the evaluation, management assigned risk ratings to segments of the loan portfolio. Such risk ratings were periodically reviewed by management and revised as deemed appropriate.
With respect to acquired loans, prior to January 1, 2020, the Company followed the reserve standard set forth in ASC 310, Receivables. At acquisition, the Company reviewed each loan to determine whether there is evidence of deterioration in credit quality since origination and if it was probable that the Company would be unable to collect all amounts due according to the loan’s contractual terms. The Company considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows for each loan pool meeting the criteria above, and determined the excess of the loan pool’s scheduled contractual principal and interest payments in excess of cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the fair value, was accreted into interest income over the remaining life of the pool (accretable yield). The Company recorded a discount on these loans at acquisition to record them at their estimated fair values. As a result, acquired loans subject to ASC 310 were excluded from the calculation of the ALL at the acquisition date. If the present value of expected cash flows for a pool was less than its carrying value, an impairment was recognized by an increase in the ALL and a charge to the provision for loan losses. See Note 5 to the Unaudited Consolidated Financial Statements for additional information concerning our allowance for acquired loans prior to the adoption of ASC Topic 326.

38

Reserve Build and Additional Information on Loan Portfolio Composition
At September 30, 2020, the ALL totaled $33.0 million, or 1.69% of total loans, and the ACL, which includes the reserve for unfunded lending commitments, totaled $36.6 million, or 1.87% of total loans. The Company recorded no provision for loan losses for the third quarter of 2020 primarily due to limited changes in our assessment of the economic impact of the COVID-19 pandemic, our assessment of all other risk factors in the loan portfolio and the absence of loan growth from the previous quarter. For the nine months ended September 30, 2020, the provision for loan losses was $12.7 million, up $10.4 million from the nine months ended September 30, 2019. The provision for loan losses during 2020 reflected our assessment of the change in expected losses due primarily to the economic impact of the COVID-19 pandemic.
As the fallout of the COVID-19 pandemic continues to impact the national, regional and local economies, management continues to proactively monitor the loan portfolio to identify potential weaknesses that may develop. Specifically, management has identified and is monitoring exposures to borrowers and industries that may be impacted more immediately and acutely than others. In many instances, management has directly reached out to specific borrowers to provide guidance and assistance as appropriate. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments for changes in asset quality, payment performance and liquidity levels. Additionally, management is monitoring unfunded commitments, such as lines of credit and overdraft protection, to monitor liquidity and funding issues that may arise with our customers.
39

The following table provides a summary of the loan portfolio and related reserves at September 30, 2020. We have separately identified certain information regarding PPP loans which, due to the existence of full repayment guarantees from the SBA as well as the likelihood that the vast majority of such loans will be forgiven, we believe entail minimal credit risk to the Company.


(dollars in thousands)Total LoansPPP LoansTotal ACLACL to
Total Loans		ACL to
Total Non-PPP Loans
September 30, 2020
Retail CRE$189,757 $— $6,833 3.60 %3.60 %
Hotels and short-term rentals100,029 4,067 5,099 5.10 5.31 
Restaurants and bars92,715 31,488 3,108 3.35 5.08 
Energy31,652 — 1,701 5.37 5.37 
Credit cards3,725 — 375 10.07 10.07 
Other loans1,537,419 218,932 15,886 1.03 1.20 
Total$1,955,297 $254,487 $33,002 1.69 %1.94 %
Unfunded lending commitments(2)
— — 3,637 — — 
Total$1,955,297 $254,487 $36,639 1.87 %2.15 %
(1)At September 30, 2020, the allowance of $3.6 million related to unfunded lending commitments of $326.8 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.
40

Asset Quality
One of management’s key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as “special mention,” classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to their ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.
An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger (i.e., loans with balances of $250,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans and commercial and industrial loans are individually evaluated for impairment. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer at the Bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans.
At September 30, 2020 and December 31, 2019, loans identified as impaired and individually evaluated for impairment were $7.8 million and $8.7 million, respectively. Due to the adoption of ASC Topic 326, total loans identified as impaired and individually evaluated at September 30, 2020 included $2.2 million of acquired loans, of which $1.9 million was acquired with deteriorated credit quality. Under the former accounting guidance, acquired loans were evaluated on a pool basis and excluded from total loans individually evaluated for impairment at December 31, 2019.
The following tables provide a summary of loans individually evaluated for impairment as of the dates indicated.
September 30, 2020
(dollars in thousands)Recorded investmentAllowance for Loan LossesAllowance to Total Loans
Loans Individually Evaluated for Impairment
One- to four-family first mortgage
$— $— — %
Home equity loans and lines— — — 
Commercial real estate7,236 689 9.52 
Construction and land— — — 
Multi-family residential— — — 
Commercial and industrial612 431 70.42 
Consumer— — — 
Total$7,848 $1,120 14.27 %
41

December 31, 2019
(dollars in thousands)Recorded investmentAllowance for Loan LossesAllowance to Total Loans
Loans Individually Evaluated for Impairment
One- to four-family first mortgage
$187 $— — %
Home equity loans and lines784 348 44.39 
Commercial real estate6,518 298 4.57 
Construction and land— — — 
Multi-family residential— — — 
Commercial and industrial1,223 701 57.32 
Consumer— — — 
Total$8,712 $1,347 15.46 %

Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
At September 30, 2020 and December 31, 2019, substandard loans, excluding acquired loans, were $12.7 million and $18.1 million, respectively. At September 30, 2020 and December 31, 2019, acquired loans classified as substandard were $14.2 million and $21.7 million, respectively. There were no assets classified as doubtful or loss at September 30, 2020 and December 31, 2019.
The following tables provide a summary of loans classified as special mention and substandard as of the dates indicated.

September 30,December 31,Increase/(Decrease)
(dollars in thousands)20202019AmountPercent
Special Mention Loans
One- to four-family first mortgage
$2,169 $2,159 $10 0.5 %
Home equity loans and lines329 181 148 81.8 
Commercial real estate1,123 1,800 (677)(37.6)
Construction and land11,914 8,854 3,060 34.6 
Multi-family residential— 502 (502)(100.0)
Commercial and industrial5,613 56 5,557 9923.2 
Consumer184 212 (28)(13.2)
Total special mention loans$21,332 $13,764 $7,568 55.0 %
42

September 30,December 31,Increase/(Decrease)
(dollars in thousands)20202019AmountPercent
Substandard Loans
One- to four-family first mortgage
$5,941 $6,696 $(755)(11.3)%
Home equity loans and lines109 1,232 (1,123)(91.2)
Commercial real estate17,185 22,302 (5,117)(22.9)
Construction and land600 2,707 (2,107)(77.8)
Multi-family residential199 219 (20)(9.1)
Commercial and industrial2,583 6,503 (3,920)(60.3)
Consumer276 179 97 54.2 
Total substandard loans$26,893 $39,838 $(12,945)(32.5)%
Substandard loans decreased $12.9 million, or 32.5%, from December 31, 2019 to $26.9 million at September 30, 2020 primarily due to pay-downs.
A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Due to the adoption of ASC Topic 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For reporting periods prior to January 1, 2020, management maintained an ALL at a level which reflected losses that were probable and reasonably estimable at the relevant reporting date. For all reporting periods, actual losses are uncertain and dependent upon future events and, as such, further additions to the level of ACL may become necessary.
Foreclosed assets and ORE includes real property and other assets that have been acquired as a result of foreclosure, and real property no longer used in the Bank's business. Foreclosed assets and ORE are classified as such until sold or disposed. Foreclosed assets are recorded at fair value less estimated selling costs based on third party property valuations which are obtained at the time the asset is repossessed and periodically until the property is liquidated. ORE is recorded at the lower of its net book value or fair value at the date of transfer to ORE. Foreclosed assets and ORE holding costs are charged to expense. Gains and losses on the sale of foreclosed assets and ORE are charged to operations, as incurred. Costs associated with acquiring and improving a foreclosed property or ORE are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs.

43

The following table sets forth the composition of the Company’s nonperforming assets and performing troubled debt restructurings as of the dates indicated.

 September 30, 2020December 31, 2019
(dollars in thousands)Originated
Acquired(1)
TotalOriginated
Acquired(1)
Total 
Nonaccrual loans(2):
Real estate loans:
One- to four-family first mortgage
$2,287 $2,322 $4,609 $2,133 $1,815 $3,948 
Home equity loans and lines73 36 109 883 361 1,244 
Commercial real estate9,062 6,424 15,486 8,750 4,575 13,325 
Construction and land— 515 515 1,170 1,299 2,469 
Multi-family residential— 95 95 — — — 
Other loans:
Commercial and industrial607 1,143 1,750 1,603 1,621 3,224 
Consumer175 104 279 89 87 176 
Total nonaccrual loans12,204 10,639 22,843 14,628 9,758 24,386 
Accruing loans 90 days or more past due10 — 10 — — — 
Total nonperforming loans 
12,214 10,639 22,853 14,628 9,758 24,386 
Foreclosed assets and ORE956 1,029 1,985 1,793 2,363 4,156 
Total nonperforming assets13,170 11,668 24,838 16,421 12,121 28,542 
Performing troubled debt restructurings910 480 1,390 1,903 475 2,378 
Total nonperforming assets and troubled debt restructurings$14,080 $12,148 $26,228 $18,324 $12,596 $30,920 
Nonperforming loans to total loans1.17 %1.42 %
Nonperforming loans to total assets0.89 %1.11 %
Nonperforming assets to total assets0.96 %1.30 %
(1)Due to the adoption of ASC Topic 326, PCD loans of $2.1 million are included in nonperforming acquired loans at September 30, 2020. Prior to January 1, 2020, these loans were classified as PCI and excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level. At adoption, the pools were discontinued and performance is based on contractual terms for individual loans. Refer to Note 2 to the Consolidated Financial statements for more information on the adoption of ASC Topic 326. At December 31, 2019, PCI loans that were 90 days or more past due totaled $2.2 million and were accounted for under ASC 310-30.
(2)Nonaccrual loans include originated restructured loans placed on nonaccrual totaling $7.2 million and $7.6 million at September 30, 2020 and December 31, 2019, respectively. Acquired restructured loans placed on nonaccrual totaled $1.2 million and $2.2 million at September 30, 2020 and December 31, 2019, respectively.

As previously indicated, as a result of Section 4013 of the CARES Act and recent interagency guidance issued by Federal banking regulators, modifications, such as deferrals of principal and/or interest payments, to borrowers affected by the COVID-19 pandemic are not deemed to be TDRs if such modifications are made on loans that were current as of December 31, 2019. Such deferrals and loan modifications totaled $70.2 million, or 4% of total loans at September 30, 2020 compared to $558.8 million (28% of total loans) at June 30, 2020. We will continue to follow the guidance of Federal banking regulators in making any TDR determinations.

44

Investment Securities
The Company’s investment securities portfolio totaled $254.5 million as of September 30, 2020, a decrease of $10.0 million, or 3.8%, from December 31, 2019. At September 30, 2020, the Company had a net unrealized gain on its available for sale investment securities portfolio of $6.7 million, compared to a net unrealized gain of $876,000 at December 31, 2019.
The following table summarizes activity in the Company’s investment securities portfolio during the first nine months of 2020.

(dollars in thousands)Available for SaleHeld to Maturity
Balance, December 31, 2019$257,321 $7,149 
Purchases57,187 — 
Sales— — 
Principal maturities, prepayments and calls(66,653)(4,130)
Amortization of premiums and accretion of discounts(2,092)(77)
Increase in market value5,815 — 
Balance, September 30, 2020$251,578 $2,942 


Funding Sources
Deposits
Deposits totaled $2.2 billion at September 30, 2020, an increase of $386.5 million, or 21.2%, compared to December 31, 2019. The following table summarizes the changes in the Company’s deposits from December 31, 2019 to September 30, 2020.

 September 30,December 31,Increase/(Decrease)
(dollars in thousands)20202019AmountPercent
Demand deposit$629,345 $437,828 $191,517 43.7 %
Savings242,849 201,887 40,962 20.3 
Money market336,310 273,741 62,569 22.9 
NOW620,081 512,054 108,027 21.1 
Certificates of deposit378,909 395,465 (16,556)(4.2)
Total deposits$2,207,494 $1,820,975 $386,519 21.2 %
The average rate paid on interest-bearing deposits was 0.60% for the third quarter of 2020, down 56 bps compared to the third quarter of 2019. For the nine months ended September 30, 2020, the average rate paid on interest-bearing deposits was 0.80%, down 29 bps from the comparable period in 2019.
At September 30, 2020, certificates of deposit maturing within the next 12 months totaled $290.8 million.

Federal Home Loan Bank Advances
The average balance of total FHLB advances was $34.6 million for the third quarter of 2020, down $16.6 million compared to the third quarter of 2019. The average yield paid on total FHLB advances for the third quarter of 2020 was 1.73%, down 7 bps compared to the third quarter of 2019.
For the nine months ended September 30, 2020, the average balance of total FHLB advances was $50.2 million, down $5.3 million compared to the nine months ended September 30, 2019. The average yield paid on total FHLB advances for the nine months ended September 30, 2020 was 1.44%, down 36 bps compared to the nine months ended September 30, 2019.
At September 30, 2020, the Company had $31.4 million in total outstanding FHLB advances and had $775.3 million in additional FHLB advances available.


45

Shareholders’ Equity
Shareholders’ equity decreased $3.0 million, or 0.9%, from $316.3 million at December 31, 2019 to $313.3 million at September 30, 2020. The Company’s purchases of its common stock during the nine months ended September 30, 2020 and the transition adjustment for the adoption of ASC Topic 326 on January 1, 2020 decreased shareholders' equity by $11.6 million and $4.7 million, respectively. These decreases were partially offset by the net positive impact of comprehensive income of $17.7 million less cash dividends of $6.0 million for the nine months ended September 30, 2020.
At September 30, 2020, the Bank had regulatory capital amounts that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2020 based on the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules were fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
 ActualMinimum Capital
Required – Basel
III Fully Phased-In		To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
(dollars in thousands)AmountRatioAmountRatioAmountRatio
Bank:
Common equity Tier 1 capital (to risk-weighted assets)$237,231 14.03 %$118,367 7.00 %$109,912 6.50 %
Tier 1 risk-based capital237,231 14.03 143,732 8.50 135,277 8.00 
Total risk-based capital258,559 15.29 177,551 10.50 169,096 10.00 
Tier 1 leverage capital237,231 9.44 100,546 4.00 125,682 5.00 

LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity Management
Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring adequate cash flow exists to meet the Company’s needs, including operating, strategic and capital. The Company develops its liquidity management strategies as part of its overall asset/liability management process. Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity.

The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. At September 30, 2020, certificates of deposit maturing within the next 12 months totaled $290.8 million. Based upon historical experience, the Company anticipates that a significant portion of the maturing certificates of deposit will be redeposited with us.

In addition to cash flow from loan and securities payments and prepayments as well as from sales of securities available for sale, the Company has significant borrowing capacity available to fund liquidity needs. In recent years, the Company has utilized borrowings as a cost efficient addition to deposits as a source of funds. Borrowings consist of advances from the FHLB of Dallas, of which the Company is a member. Under terms of the collateral agreement with the FHLB, the Company pledges residential mortgage loans and investment securities as well as the Company’s stock in the FHLB as collateral for such advances. For the three months ended September 30, 2020, the average balance of outstanding FHLB advances was $34.6 million. At September 30, 2020, the Company had $31.4 million in total outstanding FHLB advances and had $775.3 million in additional FHLB advances available.


46

The following table summarizes the Company's primary and secondary sources of liquidity as of the date indicated.



September 30,
(dollars in thousands)

2020
Cash and cash equivalents$185,836 
Unpledged investment securities, amortized cost116,161 
FHLB advance availability 775,313 
Unsecured lines of credit55,000 
Federal Reserve discount window availability500 
Total primary and secondary liquidity$1,132,810 

Asset/Liability Management
The objective of asset/liability management is to implement strategies for the funding and deployment of the Company’s financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company’s interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of September 30, 2020.

Shift in Interest Rates
(in bps)		% Change in Projected
Net Interest Income
2002.1
1001.2
(100)(3.2)
The actual impact of changes in interest rates will depend on many factors. These factors include the Company’s ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of asset and liability repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads and the level of success of asset/liability management strategies.
During the second quarter of 2020, the Company entered into certain interest rate swap agreements as part of its interest rate risk management strategy. The Company’s objectives in using interest rate derivatives are to manage its exposure to interest rate movements. During 2020, such derivatives were used to hedge the variable cost associated with existing variable rate liabilities. Refer to Note 6. Derivatives and Hedging Activities for more information on the effects of the derivative financial instruments on the consolidated financial statements.

47

Off-Balance Sheet Activities
To meet the financing needs of its customers, the Bank issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. The Company’s exposure to credit losses from these financial instruments is represented by their contractual amounts.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans as of the periods indicated.

 Contract Amount
 September 30,December 31,
(dollars in thousands)20202019
Standby letters of credit$6,388 $6,098 
Available portion of lines of credit267,546 247,670 
Undisbursed portion of loans in process85,371 111,466 
Commitments to originate loans142,400 87,446 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company.
48

RESULTS OF OPERATIONS
Net income for the third quarter of 2020 was $8.8 million, up $1.9 million, or 28.1%, compared to the third quarter of 2019. Diluted EPS for the third quarter of 2020 was $1.01, up $0.26 compared to the third quarter of 2019. The increase in net income for the third quarter of 2020 compared to the same period in 2019 was primarily due to a substantial decrease in interest expense and the absence of a provision for loan losses, partially offset by a reduction in income from BOLI due to a death benefit totaling $1.2 million received during the third quarter of 2019. The Company recorded no provision for loan losses for the third quarter of 2020 primarily due to limited changes in our assessment of the economic impact of the COVID-19 pandemic, our assessment of all other risk factors in the loan portfolio and the absence of loan growth from the previous quarter.

Net income for the nine months ended September 30, 2020 was $13.2 million, down $8.1 million, or 38.2%, compared to the nine months ended September 30, 2019. Diluted EPS for the nine months ended September 30, 2020 was $1.51, down $0.81 compared to the nine months ended September 30, 2019. The decrease in net income for the nine months ended September 30, 2020 compared to the same period in 2019 was primarily due to the provisions for loan losses and unfunded lending commitments in the first and second quarters of 2020. In aggregate, the Company made provisions of $14.0 million to the allowances for loan losses and unfunded lending commitments during the nine months ended September 30, 2020, reflecting our assessment of expected losses due primarily to the economic impact of the COVID-19 pandemic.

Net Interest Income
Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Company’s net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s tax-equivalent net interest spread was 3.62% and 3.79% for the quarters ended September 30, 2020 and 2019, respectively, and 3.64% and 3.97% for the nine months ended September 30, 2020 and 2019, respectively.

Net interest income totaled $23.3 million for the third quarter of 2020, up $2.1 million, or 10.1%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, net interest income totaled $67.0 million, up $2.3 million, or 3.5%, compared to the nine months ended September 30, 2019. Loan income from deferred PPP lender fees totaled $1.1 million during the third quarter of 2020 and $882,000 during the second quarter of 2020. The Company recognized $1.1 million and $1.9 million of PPP lender fees in loan interest income for the three and nine months ended September 30, 2020, respectively. The remaining balance of $7.6 million in deferred lender fees will be amortized into interest income over the life of the PPP loans.

Though net interest income increased, outstanding PPP loans negatively impacted the average loan yield by 34 bps and the net interest margin by 14 bps during the third quarter of 2020. During the nine months ended September 30, 2020, outstanding PPP loans negatively impacted the average loan yield by 19 bps and the net interest margin by 7 bps.

In addition, the increase in average cash and cash equivalents from the third quarter of 2019 to the third quarter of 2020 negatively impacted the average yield on total interest-earning assets and the net interest margin by 21 and 19 bps, respectively. For the nine months ended September 30, 2020, the increase in average cash and cash equivalents from the comparable period in 2019 negatively impacted the average yield on total interest-earning assets and the net interest margin by 15 and 12 bps, respectively. Average cash and cash equivalents are reflected in the increases in the average balances of other interest-earning assets. Average other interest-earning assets for the third quarter of 2020 were up $112.1 million compared to the average of $58.9 million during the third quarter of 2019. For the nine months ended September 30, 2020, average other interest-earning assets were up $71.7 million compared to the average of $56.8 million during the nine months ended September 30, 2019.

Acquired loan discount accretion included in interest income totaled $847,000 and $420,000 for the quarters ended September 30, 2020 and 2019, respectively. Acquired loan discount for the third quarter of 2019 was reduced by $680,000 (pre-tax) due to the write-off of the Company's FDIC loss sharing indemnification receivable. For the nine months ended September 30, 2020 and 2019, acquired loan discount accretion included in interest income totaled $2.4 million and $2.5 million, respectively.

The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 3.82% and 4.12% for the quarters ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company's tax-equivalent net interest margin was 3.91% and 4.30%, respectively.
49

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent yields are calculated using a marginal tax rate of 21%.


 Three Months Ended September 30,
 20202019
(dollars in thousands)Average BalanceInterestAverage
Yield/Rate		Average BalanceInterestAverage
Yield/Rate
Interest-earning assets:
Loans receivable(1)
$1,971,174 $24,769 4.94 %$1,698,046 $23,562 5.46 %
Investment securities
Taxable240,830 897 1.49 241,475 1,401 2.32 
Tax-exempt (TE)
11,484 70 3.10 20,303 114 2.83 
Total investment securities252,314 967 1.56 261,778 1,515 2.36 
Other interest-earning assets170,957 106 0.25 58,878 397 2.68 
Total interest-earning assets (TE)
2,394,445 $25,842 4.25 2,018,702 $25,474 4.98 
Noninterest-earning assets187,794 198,476 
Total assets$2,582,239 $2,217,178 
Interest-bearing liabilities:
Deposits:
Savings, checking and money market$1,195,455 $1,136 0.38 %$991,248 $2,215 0.89 %
Certificates of deposit381,949 1,232 1.28 392,214 1,835 1.86 
Total interest-bearing deposits1,577,404 2,368 0.60 1,383,462 4,050 1.16 
Other borrowings5,539 53 3.81 5,550 53 3.80 
Short-term FHLB advances— — — 22 — 2.45 
Long term FHLB advances34,612 149 1.73 51,144 230 1.80 
Total interest-bearing liabilities1,617,555 $2,570 0.63 1,440,178 $4,333 1.19 
Noninterest-bearing liabilities651,843 462,227 
Total liabilities2,269,398 1,902,405 
Shareholders’ equity312,841 314,773 
Total liabilities and shareholders’ equity$2,582,239 $2,217,178 
Net interest-earning assets$776,890 $578,524 
Net interest spread (TE)
$23,272 3.62 %$21,141 3.79 %
Net interest margin (TE)
3.82 %4.12 %
(1)Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process.


50


 Nine Months Ended September 30,
 20202019
(dollars in thousands)Average BalanceInterestAverage
Yield/Rate		Average BalanceInterestAverage
Yield/Rate
Interest-earning assets:
Loans receivable(1)
$1,878,533 $72,839 5.12 %$1,671,348 $70,572 5.59 %
Investment securities
Taxable242,913 3,308 1.82 244,555 4,655 2.54 
Tax-exempt (TE)
14,210 253 3.01 24,001 397 2.79 
Total investment securities257,123 3,561 1.88 268,556 5,052 2.56 
Other interest-earning assets128,518 361 0.37 56,808 1,140 2.68 
Total interest-earning assets (TE)
2,264,174 $76,761 4.48 1,996,712 $76,764 5.10 
Noninterest-earning assets191,594 194,840 
Total assets$2,455,768 $2,191,552 
Interest-bearing liabilities:
Deposits:
Savings, checking and money market$1,114,205 $4,305 0.52 %$986,623 $6,318 0.86 %
Certificates of deposit388,642 4,742 1.63 381,148 4,798 1.68 
Total interest-bearing deposits1,502,847 9,047 0.80 1,367,771 11,116 1.09 
Other borrowings5,539 159 3.84 5,543 159 3.84 
Short-term FHLB advances10,795 23 0.28 22 — 2.58 
Long term FHLB advances39,415 520 1.76 55,466 751 1.80 
Total interest-bearing liabilities1,558,596 $9,749 0.84 1,428,802 $12,026 1.13 
Noninterest-bearing liabilities583,076 451,945 
Total liabilities2,141,672 1,880,747 
Shareholders’ equity314,096 310,805 
Total liabilities and shareholders’ equity$2,455,768 $2,191,552 
Net interest-earning assets$705,578 $567,910 
Net interest spread (TE)
$67,012 3.64 %$64,738 3.97 %
Net interest margin (TE)
3.91 %4.30 %
(1)Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process.
51

The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).

Three Months Ended September 30,Nine Months Ended September 30,
2020 Compared to 2019
2020 Compared to 2019
Change Attributable ToChange Attributable To
Total
Increase/		Total
Increase/
(dollars in thousands)RateVolume(Decrease)RateVolume(Decrease)
Interest income:
Loans receivable$(2,372)$3,579 $1,207 $(1,301)$3,568 $2,267 
Investment securities(485)(63)(548)(920)(571)(1,491)
Other interest-earning assets(704)413 (291)(797)18 (779)
Total interest income(3,561)3,929 368 (3,018)3,015 (3)
Interest expense:
Savings, checking and money market accounts(1,409)330 (1,079)(1,573)(440)(2,013)
Certificates of deposit(560)(43)(603)(69)13 (56)
FHLB advances(8)(73)(81)(106)(102)(208)
Total interest expense(1,977)214 (1,763)(1,748)(529)(2,277)
Increase (decrease) in net interest income$(1,584)$3,715 $2,131 $(1,270)$3,544 $2,274 

Noninterest Income
Noninterest income for the third quarter of 2020 totaled $3.8 million, down $980,000, or 20.5%, from $4.8 million earned for the same period in 2019. Noninterest income for the nine months ended September 30, 2020 totaled $10.3 million, down $661,000, or 6.1%, from $10.9 million earned for the same period in 2019.

Income from BOLI for the three and nine months ended September 30, 2020 was down $1.2 million, or 84.2%, and $1.1 million, or 60.8%, respectively, from the comparable periods in 2019. During the third quarter of 2019, the Company received a non-taxable BOLI benefit of $1.2 million following the death of a former employee.

Income from service fees and charges for the three and nine months ended September 30, 2020 was down $393,000, or 25.9%, and $867,000, or 19.7%, respectively, from the comparable periods in 2019. Service fees and charges decreased primarily due to a decline in income from overdraft fees on deposit accounts.

Gains on the sale of loans for the three and nine months ended September 30, 2020 were up $549,000, or 154.6%, and $1.1 million, or 143.1%, respectively, from the comparable periods in 2019. Due to the changes in the interest rate environment during 2020, borrowers found it advantageous to refinance residential mortgages.

Losses on the sale of assets for the nine months ended September 30, 2020 were down $325,000, or 96.7%, compared to the same period in 2019. During the second quarter of 2019, the Company recorded asset write-downs totaling $347,000 (pre-tax).


52

Noninterest Expense
Noninterest expense for the third quarter of 2020 totaled $16.1 million, down $494,000, or 3.0%, from the third quarter of 2019. Noninterest expense for the nine months ended September 30, 2020 totaled $48.3 million, up $404,000, or 0.8%, from the same period in 2019.

Compensation and benefits expense for the three and nine months ended September 30, 2020 was down $526,000, or 5.1%, and $459,000, or 1.6%, respectively, from the comparable periods in 2019 primarily due to decreases in health insurance costs and compensation expense related to the Company's ESOP driven primarily by the decline in market value of shares of the Company's common stock held by the ESOP.

Occupancy expense for the three and nine months ended September 30, 2020 was down $105,000, or 5.9%, and $330,000, or 6.1%, respectively, from the comparable periods in 2019. During the third quarter of 2020, occupancy expense decreased primarily due to a decline in building maintenance costs. Occupancy expense for nine months ended September 30, 2019 included $291,000 (pre-tax) of costs to terminate an office lease during the second quarter of 2019.

Marketing and advertising expense for the three and nine months ended September 30, 2020 was down $130,000, or 31.1%, and $251,000, or 25.2%, respectively, from the comparable periods in 2019 primarily due to a general decline across all marketing activities.

Data processing and communication expense for the three and nine months ended September 30, 2020 was up $87,000, or 4.9%, and $648,000, or 13.6%, respectively, from the comparable periods in 2019 primarily due to increased costs of software contracts.

Regulatory fees for the three and nine months ended September 30, 2020 were up $399,000, or 314.2%, and $287,000, or 40.0%, respectively, from the comparable periods in 2019 primarily due to an increase in FDIC assessments. Large provisions for loan losses, the impact of CECL adoption and dividends during the first half of 2020 reduced total shareholders' equity and resulted in a less favorable leverage ratio, which is used to compute FDIC assessments. In addition, the Company benefited from FDIC assessment credits during the third quarter of 2019. The credits were exhausted during the first quarter of 2020.

The provision for credit losses on unfunded lending commitments for the nine months ended September 30, 2020 totaled $1.3 million. The Company recorded no provision for credit losses on unfunded lending commitments for the third quarter of 2020 primarily due to limited changes in our assessment of the economic impact of the COVID-19 pandemic and the absence of growth in loan commitments from the previous quarter.

Other noninterest expense for the three and nine months ended September 30, 2020 was down $196,000, or 19.5%, and $489,000, or 16.0%, respectively, from the comparable periods in 2019 primarily due to declines in several expense categories.
Income Taxes
Income tax expense for the third quarter of 2020 increased $865,000, or 66.4%, compared to the third quarter of 2019 primarily due to an increase in taxable earnings. The Company recorded no provisions for credit losses on loans and unfunded lending commitments during the third quarter of 2020. During the third quarter of 2019, the Company received a non-taxable BOLI benefit of $1.2 million following the death of a former employee.

For the nine months ended September 30, 2020, income tax expense decreased $1.1 million, or 25.7%, from the comparable period in 2019 primarily due to the decrease in taxable earnings. The Company's effective tax rate for the three and six months ended June 30, 2020 was 19.8% and 19.1%, respectively, compared to 16.0% and 16.4%, respectively, from the comparable periods in 2019.
53


Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative disclosures about market risk are presented in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2019, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management and Market Risk”. Additional information at September 30, 2020 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management”.

Item 4.Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer and the Bank's Senior Vice President and Director of Financial Management (who was performing the duties of acting principal financial officer at the time of filing of this Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and the Bank's Senior Vice President and Director of Financial Management (who was performing the duties of acting principal financial officer at the time of filing of this Form 10-Q have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the third quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

54

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings.
Not applicable.

Item 1A.
Risk Factors.
Other than the following additional risk factor which supplements the “Risk Factors” section in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 ("Form 10-K") filed with the Securities and Exchange Commission, there have been no material changes from the risk factors previously disclosed by the Company in the Form 10-K:

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in Louisiana and many other states and communities. Global markets for oil and gas have, and may continue to be, adversely impacted by the COVID-19 pandemic and/or other events beyond our control, and further volatility in commodity prices could have a negative impact on the economies of energy-dominated states in which we operate. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily limited access to certain of our branches and offices. In response to the pandemic, we have also suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and are offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, small business and personal lending customers, and future governmental actions may require these and other types of customer-related responses. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.


Item 2.
Unregistered Sales of Equity Securities and the Use of Proceeds.
The Company’s purchases of its common stock made during the quarter consisted of stock repurchases under the Company’s approved plans and are set forth in the following table.
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet be Purchased Under the Plan or Programs(1)
July 1 – July 31, 2020
10,894 $24.91 10,894 516,022 
August 1 – August 31, 2020
53,296 24.71 53,296 462,726 
September 1 – September 30, 2020
71,034 25.11 71,034 391,692 
Total135,224 $24.94 135,224 391,692 
(1)During the third quarter of 2020, the Company completed the remaining share repurchases under the 2019 Repurchase Plan. On August 31, 2020, the Company announced the approval of a new repurchase program (the "2020 Repurchase Plan"). Under the 2020 Repurchase Plan, the Company may purchase up to 444,000 shares, or approximately 5% of the its common stock outstanding, through open market or privately negotiated transactions.
55


Item 3.
Defaults Upon Senior Securities.
None.

Item 4.
Mine Safety Disclosures.
None.

Item 5.
Other Information.
None.

Item 6.
Exhibits and Financial Statement Schedules.

No.      Description
31.1
  
31.2
  
32.0
  
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

56

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOME BANCORP, INC.
November 6, 2020By:/s/ John W. Bordelon
John W. Bordelon
Chairman of the Board, President and Chief Executive Officer
November 6, 2020By:/s/ Mary H. Hopkins
Mary H. Hopkins
Home Bank, N.A. Senior Vice President and Director of Financial Management (authorized to sign this report as acting principal financial officer at the time this Form 10-Q is signed)

57

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