HV Bancorp, Inc. - Quarter Report: 2020 September (Form 10-Q)

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

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to to

Commission file number: 001-37981

HV BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania

46-4351868

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2005 South Easton Road, Suite 304, Doylestown, Pennsylvania 18901

(Address of Principal Executive Offices and Zip Code)

(267) 280-4000

(Registrant's Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	HVBC	The NASDAQ Stock Market, LLC

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” or an “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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 10, 2020, there were 2,221,745 outstanding shares of the issuer’s common stock.

INDEX

PART I – FINANCIAL INFORMATION				2

		Item 1 – Consolidated Financial Statements – Unaudited		2

			Notes to Unaudited Consolidated Financial Statements	8

		Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

		Item 3 – Quantitative and Qualitative Disclosures about Market Risk		58

		Item 4 – Controls and Procedures		59

	PART II OTHER INFORMATION			59

		Item 1 – Legal Proceedings		59

		Item 1A – Risk Factors		59

		Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		59

		Item 3 – Defaults upon Senior Securities		60

		Item 4 – Mine Safety Disclosures		60

		Item 5 – Other Information		60

		Item 6 – Exhibits		60

SIGNATURES				61

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements – Unaudited

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Financial Condition as of September 30, 2020 and December 31, 2019 (Dollars in thousands, except share and per share data)

	At September 30,			At December 31,
	2020			2019
Assets
Cash and due from banks	$	1,747		$	1,473
Interest-earning deposits with banks		43,229			19,152
Federal funds sold		2,150			—
Cash and cash equivalents		47,126			20,625
Investment securities available-for-sale, at fair value		17,961			21,156
Equity securities		500			500
Loans held for sale, at fair value		100,101			37,876
Loans receivable, net of allowance for loan losses of $1,909 at September 30, 2020 and $1,437 at December 31, 2019		315,823			255,032
Bank-owned life insurance		6,370			6,255
Restricted investment in bank stock		1,714			1,552
Premises and equipment, net		2,813			2,501
Operating lease right-of-use assets		7,867			5,979
Accrued interest receivable		1,278			967
Mortgage banking derivatives		3,820			1,204
Mortgage servicing rights		1,127			—
Other assets		1,239			939
Total Assets	$	507,739		$	354,586

Liabilities and Shareholders' Equity

Liabilities
Deposits	$	371,116		$	283,767
Advances from the Federal Home Loan Bank		26,228			27,000
Advances from the Federal Reserve's Paycheck Protection Program liquidity facility ("PPPLF")		57,714			—
Operating lease liabilities		8,119			6,023
Advances from borrowers for taxes and insurance		1,561			2,138
Deferred income taxes, net		1,009			97
Other liabilities		4,757			1,962
Total Liabilities		470,504			320,987

Shareholders’ Equity
Preferred Stock, $0.01 par value, 2,000,000 shares authorized; no shares issued and outstanding as of June 30, 2020 and December 31, 2019		—			—
Common Stock, $0.01 par value, 20,000,000 shares authorized; 2,270,725 and 2,269,125 shares issued as of September 30, 2020 and December 31, 2019, respectively; 2,222,802 and 2,268,917 shares outstanding as of September 30, 2020 and December 31, 2019, respectively		23			23
Treasury Stock, at cost (47,923 shares at September 30, 2020 and 208 shares at December 31, 2019)		(585	)		(3	)
Additional paid-in capital		20,952			20,740
Retained earnings		18,681			14,973
Accumulated other comprehensive income (loss)		189			(18	)
Unearned Employee Stock Option Plan		(2,025	)		(2,116	)
Total Shareholders' Equity		37,235			33,599
Total Liabilities and Shareholders' Equity	$	507,739		$	354,586

See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019; (Dollars in thousands, except per share data)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Interest Income
Interest and fees on loans	$	3,383	$	2,789	$	9,329	$	7,639
Interest and dividends on investments:
Taxable		101		104		289		325
Nontaxable		7		70		30		214
Interest on mortgage-backed securities and collateralized mortgage obligations		25		53		117		241
Interest on interest-earning deposits and federal funds sold		23		95		128		279
Total Interest Income		3,539		3,111		9,893		8,698
Interest Expense
Interest on deposits		567		877		1,919		2,287
Interest on advances from the Federal Home Loan Bank		104		158		424		319
Interest on advances from the Federal Reserve PPPLF		49		—		68		—
Interest on securities sold under agreements to repurchase		—		1		—		3
Total Interest Expense		720		1,036		2,411		2,609
Net interest income		2,819		2,075		7,482		6,089
Provision for Loan Losses		424		244		985		772
Net interest income after provision for loan losses		2,395		1,831		6,497		5,317
Non-Interest Income
Fees for customer services		41		51		111		119
Increase in cash surrender value of bank-owned life insurance		39		41		115		120
Gain on sale of loans, net		3,044		1,680		7,000		2,977
Gain on sale of available-for-sale securities, net		—		211		141		219
Gain from derivative instruments, net		1,015		177		2,479		1,341
Change in fair value of loans held-for-sale		1,988		40		2,281		346
Other		68		5		157		13
Total Non-Interest Income		6,195		2,205		12,284		5,135
Non-Interest Expense
Salaries and employee benefits		3,720		2,192		8,501		5,696
Occupancy		473		465		1,356		1,171
Federal deposit insurance premiums		69		4		189		119
Data processing related operations		331		214		806		590
Professional fees		186		169		522		450
Other expenses		963		558		2,276		1,420
Total Non-Interest Expense		5,742		3,602		13,650		9,446
Income before income taxes		2,848		434		5,131		1,006
Income Tax Expense		785		101		1,423		203
Net Income	$	2,063	$	333	$	3,708	$	803
Net Income per share:
Basic	$	1.02	$	0.16	$	1.82	$	0.39
Diluted	$	1.02	$	0.16	$	1.82	$	0.39
See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2020		2019			2020			2019
Comprehensive Income, Net of Taxes
Net Income	$	2,063	$	333		$	3,708		$	803
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities (pre-tax $44 and $66, and $127 and $885, respectively)		31		61			306			685
Reclassification for gains included in income (pre-tax ($(0) and ($211) and ($141) and ($219), respectively) (1)		—		(162	)		(99	)		(168	)
Other comprehensive income (loss)		31		(101	)		207			517
Comprehensive Income	$	2,094	$	232		$	3,915		$	1,320

(1)	Amounts are included in gain on sale of available-for-sale securities on the Consolidated Statements of Income as a separate element within non-interest income. Income tax expense is included in the Consolidated Statements of Income.

See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands, except per share data)

	Common Stock Shares			Common Stock Amount		Treasury Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Unearned ESOP Shares			Total
Balance, July 1, 2020		2,239,253		$	23	$	(379	)	$	20,893		$	16,618	$	158	$	(2,056	)	$	35,257
ESOP shares committed to be released		—			—		—			(1	)		—		—		31			30
Treasury stock purchased		(16,451	)		—		(206	)		—			—		—		—			(206	)
Stock option expense		—			—		—			15			—		—		—			15
Restricted stock expense		—			—		—			45			—		—		—			45
Net income		—			—		—			—			2,063		—		—			2,063
Other comprehensive income		—			—		—			—			—		31		—			31
Balance, September 30, 2020		2,222,802		$	23	$	(585	)	$	20,952		$	18,681	$	189	$	(2,025	)	$	37,235

	Common Stock Shares		Common Stock Amount		Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Unearned ESOP Shares			Total
Balance, July 1, 2019		2,268,917	$	23	$	(3	)	$	20,611	$	14,156	$	70		$	(2,177	)	$	32,680
ESOP shares committed to be released		—		—		—			4		—		—			30			34
Treasury stock purchased		—		—		—			—		—		—			—			—
Stock option expense		—		—		—			15		—		—			—			15
Restricted stock expense		—		—		—			46		—		—			—			46
Net income		—		—		—			—		333		—			—			333
Adoption of ASU 2016-02, Leases		—		—		—			—		277		—			—			277
Other comprehensive loss		—		—		—			—		—		(101	)		—			(101	)
Balance, September 30, 2019		2,268,917	$	23	$	(3	)	$	20,676	$	14,766	$	(31	)	$	(2,147	)	$	33,284


	Common Stock Shares			Common Stock Amount		Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Unearned ESOP Shares			Total
Balance, January 1, 2020		2,268,917		$	23	$	(3	)	$	20,740	$	14,973	$	(18	)	$	(2,116	)	$	33,599
ESOP shares committed to be released		—			—		—			4		—		—			91			95
Treasury stock purchased (47,424 shares)		(47,715	)		—		(582	)		—		—		—			—			(582	)
Stock option exercise		1,600			—		—			24		—		—			—			24
Stock option expense		—			—		—			45		—		—			—			45
Restricted stock expense		—			—		—			139		—		—			—			139
Net income		—			—		—			—		3,708		—			—			3,708
Other comprehensive income		—			—		—			—		—		207			—			207
Balance, September 30, 2020		2,222,802		$	23	$	(585	)	$	20,952	$	18,681	$	189		$	(2,025	)	$	37,235


	Common Stock Shares			Common Stock Amount		Treasury Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Unearned ESOP Shares			Total
Balance, January 1, 2019		2,255,125		$	23	$	—		$	20,487	$	13,686	$	(548	)	$	(2,237	)	$	31,411
ESOP shares committed to be released		—			—		—			9		—		—			90			99
Treasury stock purchased ( 0 shares)		(208	)		—		(3	)		—		—		—			—			(3	)
Stock option expense		—			—		—			43		—		—			—			43
Restricted stock expense		—			—		—			137		—		—			—			137
Net income		—			—		—			—		803		—			—			803
Adoption of ASU 2016-02, Leases		—			—		—			—		277		—			—			277
Other comprehensive income		—			—		—			—		—		517			—			517
Restricted stock awards		14,000			—		—			—		—		—			—			—
Balance, September 30, 2019		2,268,917		$	23	$	(3	)	$	20,676	$	14,766	$	(31	)	$	(2,147	)	$	33,284

See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

Nine Months Ended September 30,	2020			2019
Cash Flows from Operating Activities
Net income	$	3,708		$	803
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		440			363
Amortization of net deferred loan (fees) costs		(7	)		255
Amortization of net securities premiums		14			68
Amortization of operating lease right-of-use assets		455			73
Gain on sale of available-for-sale securities, net		(141	)		(219	)
Gain from derivative instruments, net		(2,479	)		(1,341	)
Provision for loan losses		985			772
Deferred income taxes		825			325
Accretion of deferred gain on sale-leaseback transaction		—			(7	)
Earnings on bank owned life insurance		(115	)		(120	)
Stock based compensation expense		184			180
ESOP compensation expense		95			99
Loans held for sale:
Originations, net of prepayments		(415,956	)		(167,140	)
Proceeds from sales		363,012			146,789
Gain on sales		(7,000	)		(2,977	)
Change in fair value of loans held for sale		(2,281	)		(346	)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(311	)		60
Other assets		(1,427	)		(337	)
Other liabilities		2,328			882
Net cash used in operating activities		(57,671	)		(21,818	)
Cash Flows from Investing Activities
Net increase in loans receivable		(61,769	)		(17,620	)
Activity in available-for-sale securities:
Proceeds from sales		4,883			19,145
Maturities and repayments		6,110			4,864
Purchases		(7,377	)		—
Activity in held-to-maturity securities:
Maturities and repayments		—			12
Purchases of restricted investment in bank stock		(1,536	)		(1,390	)
Redemption of restricted investment in bank stock		1,374			574
Purchases of premises and equipment		(631	)		(672	)
Net cash (used in) provided by investing activities		(58,946	)		4,913
Cash Flows from Financing Activities
Net increase in deposits		87,349			11,115
Net decrease in advances from borrowers for taxes and insurance		(577	)		(585	)
Net decrease in securities sold under agreements to repurchase		—			(359	)
Proceeds from long-term borrowings from FHLB		26,190			20,000
Repayment of long-term borrowings from FHLB		(27,000	)		(3,000	)
Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility		57,714			—
Proceeds from stock option exercise		24			—
Purchase of treasury stock		(582	)		(3	)
Net cash provided by financing activities		143,118			27,168
Increase in Cash and Cash Equivalents		26,501			10,263
Cash and Cash Equivalents, beginning of year		20,625			16,992
Cash and Cash Equivalents, end of year	$	47,126		$	27,255
Supplementary Disclosure of Cash Flow Information
Cash paid during the year of interest	$	1,893		$	2,715
Cash paid during the year for income taxes	$	127		$	—
Recognition of operating lease right-of-use assets	$	2,240		$	2,106
Recognition of operating lease obligations	$	2,228		$	2,086

See Notes to Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION, BASIS OF PRESENTATION and RECENT ACCOUNTING PRONOUNCEMENTS

Organization

HV Bancorp, Inc., a Pennsylvania Corporation (the “Company”) is the holding company of Huntingdon Valley Bank (the “Bank”) and was formed in connection with the conversion of the Bank from the mutual to the stock form of organization. On January 11, 2017, the mutual to stock conversion of the Bank was completed and the Company became the parent holding company for the Bank. Shares of the Company began trading on the Nasdaq Capital Market on January 12, 2017. The Company is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Bank”).

The Bank is a stock savings bank organized under the laws of the Commonwealth of Pennsylvania and is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities (“PADOBS”). The Bank was organized in 1871, and currently provides residential and commercial loans to its general service area (Montgomery, Bucks and Philadelphia Counties of Pennsylvania, New Castle County, Delaware and Burlington County, New Jersey) as well as offering a wide variety of savings, checking and certificate of deposit accounts to its retail and business customers.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2019 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Annual Report on Form 10-KT filed by the Company with the U.S. Securities and Exchange Commission on March 27, 2020. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year-ending December 31, 2020.

The Company has evaluated subsequent events through the date of issuance of the financial statements included herein.

Significant Event

The COVID-19 pandemic has adversely affected economic activity globally, nationally and locally. It has caused substantial disruption in international and U.S. economies, markets, and employment. In response to the COVID-19 national emergency, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provides an estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and other types of relief. Some of the applicable provisions of the Cares Act to the Company include, but are not limited to:

•

Accounting for Loan Modifications – Under Section 4013 of the CARES Act, a financial institution may elect to temporarily suspend (1) the requirements under GAAP for certain loan modifications that would

otherwise be categorized as a Troubled Debt Restructuring (“TDR”) and (2) does not need to determine impairment associated with the loan modifications. As of September 30, 2020, the Company had 4 loan modification agreements with a balance of $1.8 million outstanding.

•

Paycheck Protection Program - The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). In early April 2020, the Company began accepting and processing applications for loans under the Paycheck Protection Program. As of September 30, 2020, the Company had received over 450 applications from new and existing customers with an outstanding balance of approximately $75.7 million with an estimated processing fee income of approximately $2.3 million.

For further discussion, see COVID-19 update section of Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Principles of Consolidation

The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Statement of Financial Condition and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairments of securities (“OTTI”), interest rate lock commitments (“IRLCs”), mandatory sales commitments, the valuation of mortgage loans held-for-sale and the valuation of deferred tax assets.

Recent Accounting Pronouncements

The Company qualifies under the Jumpstart Our Business Startups Act (the “JOBS Act”) as an emerging growth company. As an emerging growth company, the Company has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements until such pronouncements are made applicable to private companies.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company. In anticipation of the ASU, the Company has entered into a contract with a third party, compiled data for the modeling and is working on developing an estimate using historically and qualitative data based on the requirements of ASU 2016-13. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities

upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s consolidated financial statements.

Adoption of New Accounting Standards

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the accounting standard on January 1, 2020. As ASU 2018-13 primarily affected disclosure requirements, it did not have a material impact on the Company’s consolidated statement of financial condition. We have included the additional disclosures in Note 7, Fair Value Presentation.

2. INVESTMENT SECURITIES

Investment securities available-for-sale was comprised of the following:

	September 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
U.S. Governmental securities	$	405	$	11	$	—		$	416
Corporate notes		6,928		121		(2	)		7,047
Collateralized mortgage obligations - agency residential		4,431		46		(7	)		4,470
Mortgage-backed securities - agency residential		3,058		77		—			3,135
Municipal securities		1,872		6		(4	)		1,874
Bank CDs		999		20		—			1,019
	$	17,693	$	281	$	(13	)	$	17,961

Investment securities available-for-sale was comprised of the following:

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
U.S. Governmental securities	$	438	$	—	$	(2	)	$	436
Corporate notes		5,500		75		(6	)		5,569
Collateralized mortgage obligations - agency residential		6,562		4		(102	)		6,464
Mortgage-backed securities - agency residential		4,070		12		(19	)		4,063
Municipal securities		2,114		3		—			2,117
Bank CDs		2,498		9		—			2,507
	$	21,182	$	103	$	(129	)	$	21,156

The scheduled maturities of securities available-for-sale at September 30, 2020 were as follows:

	September 30, 2020
	Available-for-Sale
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	1,275	$	1,281
Due from one to five years		3,506		3,555
Due from after five to ten years		4,407		4,496
Due after ten years		8,505		8,629
	$	17,693	$	17,961

Securities with a fair value of $5.3 million and $7.4 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes as required by law.

Proceeds from the sale of available-for-sale securities for the three and nine months ended September 30, 2020 was $422,000 and $4.9 million. For the three months ended September 30, 2020, there were $10,000 in gross realized gains and $10,000 in gross realized losses. For the nine months ended September 30, 2020, gross realized gains were $141,000 and there were no gross realized losses.

Proceeds from the sale of available-for-sale securities for the three and nine months ended September 30, 2019 were $12.1 million and $19.1 million. Gross realized gains on such sales were approximately $211,000 and gross realized losses were $0 for the three months ended September 30, 2019. For the nine months ended September 30, 2019, gross realized gain on such sales were approximately $220,000 and gross realized losses were $1,000.

The following tables summarize the unrealized loss positions of securities available-for-sale as of September 30, 2020 and December 31, 2019:

	September 30, 2020
	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Loss			Value		Loss			Value		Loss
Available-for-sale:
U.S. Governmental securities	$	—	$	—		$	—	$	—		$	—	$	—
Corporate notes		998		(2	)		—		—			998		(2	)
Collateralized mortgage obligations		655		(7	)		—		—			655		(7	)
Mortgage-backed securities		—		—			—		—			—		—
Municipal securities		—		—			607		(4	)		607		(4	)
Bank CDs		—		—			—		—			—		—
	$	1,653	$	(9	)	$	607	$	(4	)	$	2,260	$	(13	)

	December 31, 2019
	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Loss			Value		Loss			Value		Loss
Available-for-sale:
U.S. Governmental securities	$	—	$	—		$	436	$	(2	)	$	436	$	(2	)
Corporate notes		—		—			1,494		(6	)		1,494		(6	)
Collateralized mortgage obligations		1,486		(10	)		3,810		(92	)		5,296		(102	)
Mortgage-backed securities		922		(7	)		1,438		(12	)		2,360		(19	)
Municipal securities		—		—			—		—			—		—
Bank CDs		—		—			250		—			250		—
	$	2,408	$	(17	)	$	7,428	$	(112	)	$	9,836	$	(129	)

At September 30, 2020 and December 31, 2019, the investment portfolio included two U.S. Government securities with total fair values of $416,000 and $436,000, respectively. There were no securities in an unrealized loss position as of September 30, 2020. As of December 31, 2019, there were two securities in an unrealized loss position. These securities are zero risk weighted for capital purposes and are guaranteed for repayment of principal and interest. As of September 30, 2020 and December 31, 2019, management found no evidence of OTTI on any of the U.S. Governmental securities in an unrealized loss position held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2020 and December 31, 2019, the investment portfolio included ten and nine corporate notes, respectively with total fair values of $7.0 million and $5.6 million at the end of each of period, respectively. Of these securities, two and three were in an unrealized loss position as of September 30, 2020 and December 31, 2019, respectively. At the time of purchase and as of September 30, 2020 and December 31, 2019, the six bonds in an unrealized loss position continue to maintain investment grade ratings. As of September 30, 2020, and December 31, 2019, management found no evidence of OTTI on any of the corporate notes held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2020 and December 31, 2019, the investment portfolio included twenty-seven and thirty collateralized mortgage obligations (“CMOs”) with total fair values of $4.5 million and $6.5 million, respectively. Of these securities, ten and twenty-seven were in an unrealized loss position as of September 30, 2020 and December 31, 2019, respectively. The CMO portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of September 30, 2020, and December 31, 2019, management found no evidence of OTTI on any of the CMOs held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2020 and December 31, 2019, the investment portfolio included twelve and thirteen mortgage backed securities (“MBS”) with a total fair value of $3.1 million and $4.1 million, respectively. There were no securities in an unrealized loss position as of September 30, 2020. As of December 31, 2019, seven securities were in an unrealized loss position. The MBS portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of September 30, 2020, and December 31, 2019, management found no evidence of OTTI on any of the MBS held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2020 and December 31, 2019, the investment portfolio included four and five municipal securities with a total fair value of $1.9 million and $2.1 million for both periods. Of these securities, one and zero were in an unrealized loss position as of September 30, 2020 and December 31, 2019, respectively. The Company’s municipal portfolio issuers are located in Pennsylvania and at the time of purchase, and as of September 30, 2020 and December 31, 2019, continue to maintain investment grade ratings. As of September 30, 2020 and December 31, 2019, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

At September 30, 2020 and December 31, 2019, the investment portfolio included four and ten Bank Certificate of Deposits (“CDs”) with a total fair value of $1.0 million and $2.5 million, respectively. As of September 30, 2020, there were no securities in an unrealized loss position. As of December 31, 2019, one of these securities was in an unrealized loss position. The Bank CDs are fully insured by the FDIC. As of September 30, 2020 and December 31, 2019, management found no evidence of OTTI on any of the Bank CDs held in the investment securities portfolio. The Company has the ability to hold to maturity and more likely than not, will not be required to sell the securities before a recovery of the cost has occurred.

3. EQUITY SECURITIES

The Company maintains an equity security portfolio that consists of $500,000 at September 30, 2020, and December 31, 2019. As of September 30, 2020 and December 31, 2019, the Company determined that the equity investment did not have a readily determinable fair value measure and is carrying the equity investment at cost, less impairment, adjusted for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table presents the carrying amount of the Company’s equity investment at September 30, 2020, and December 31, 2019:

	September 30, 2020
(dollars in thousands)	Year-to-date		Life-to-date
Amortized cost	$	500	$	500
Impairment		—		—
Observable price changes		—		—
Carrying value	$	500	$	500

	December 31, 2019
(dollars in thousands)	Year-to-date		Life-to-date
Amortized cost	$	500	$	500
Impairment		—		—
Observable price changes		—		—
Carrying value	$	500	$	500

At September 30, 2020 and December 31, 2019, the Company performed a qualitative assessment considering impairment indictors to evaluate whether the investment was impaired and determined the investment was not impaired.

4. LOANS RECEIVABLE

Loans receivable were comprised of the following:

	September 30,			December 31,
(Dollars in thousands)	2020			2019
Residential:
One-to-four family	$	153,935		$	197,547
Home equity and HELOCs		4,259			4,383
Commercial:
Commercial real estate		56,585			35,188
Commercial business		18,974			11,119
SBA PPP loans		75,736			—
Construction		4,006			784
Consumer:
Medical education		5,176			6,097
Other		3			8

		318,674			255,126

Unearned discounts, origination and commitment fees and costs		(942	)		1,343
Allowance for loan losses		(1,909	)		(1,437	)

	$	315,823		$	255,032

In November 2017, the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending American Medical Association (“AMA”) approved medical schools in Caribbean Nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. At September 30, 2020, the balance of the private education loans was $5.2 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At September 30, 2020, there was one loan with a balance of approximately $44,000 that was past due 90 days or more.

Overdraft deposits are reclassified as other consumer and are included in the total loans on the statements of financial condition. Overdrafts were $3,000 and $8,000 at September 30, 2020, and December 31, 2019, respectively.

The following tables summarize the activity in the allowance for loan losses by loan class for the three months ended September 30, 2020 and 2019.

Allowance for Loan Losses	For the three months ended September 30, 2020
(Dollars in thousands)	Beginning Balance		Charge- offs			Recoveries		(Credit) Provisions			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairments
Residential:
One-to-four family	$	768	$	—		$	—	$	(73	)	$	695	$	—	$	695
Home equity and HELOCs		39		—			—		(23	)		16		—		16
Commercial:
Commercial real estate		332		—			—		96			428		—		428
Commercial business		157		—			—		64			221		—		221
SBA PPP loans		—		—			—		—			—		—		—
Construction		27		—			—		13			40		—		40
Consumer:
Medical education		338		(360	)		—		379			357		—		357
Other		—		—			—		—			—		—		—
Unallocated		184		—			—		(32	)		152		—		152

	$	1,845	$	(360	)	$	—	$	424		$	1,909	$	—	$	1,909

Allowance for Loan Losses	For the three months ended September 30, 2019
(Dollars in thousands)	Beginning Balance		Charge- offs			Recoveries		(Credit) Provisions			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairments
Residential:
One-to-four family	$	711	$	—		$	—	$	8		$	719	$	—	$	719
Home equity and HELOCs		46		—			—		(6	)		40		—		40
Commercial:
Commercial real estate		99		—			—		29			128		—		128
Commercial business		108		—			—		9			117		13		104
Construction		8		—			—		1			9		—		9
Consumer:
Medical education		210		(93	)		1		203			321		—		321
Other		—		—			—		—			—		—		—


	$	1,182	$	(93	)	$	1	$	244		$	1,334	$	13	$	1,321

The following tables summarize the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2020 and 2019.

Allowance for Loan Losses	For the nine months ended September 30, 2020
(Dollars in thousands)	Beginning Balance		Charge- offs			Recoveries		(Credit) Provisions			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairments

Residential:
One-to-four family	$	701	$	—		$	—	$	(6	)	$	695	$	—	$	695
Home equity and HELOCs		44		—			—		(28	)		16		—		16
Commercial:
Commercial real estate		229		—			—		199			428		—		428
Commercial business		122		—			—		99			221		—		221
SBA PPP loans		—		—			—		—			—		—		—
Construction		8		—			—		32			40		—		40
Consumer:
Medical education		333		(514	)		1		537			357		—		357
Other		—		—			—		—			—		—		—
Unallocated		—		—			—		152			152		—		152

	$	1,437	$	(514	)	$	1	$	985		$	1,909	$	—	$	1,909

Allowance for Loan Losses	For the nine months ended September 30, 2019
(Dollars in thousands)	Beginning Balance		Charge- offs			Recoveries		(Credit) Provisions			Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairments

Residential:
One-to-four family	$	722	$	—		$	3	$	(6	)	$	719	$	—	$	719
Home equity and HELOCs		46		—			—		(6	)		40		—		40
Commercial:
Commercial real estate		59		—			—		69			128		—		128
Commercial business		59		—			—		58			117		13		104
Construction		13		—			—		(4	)		9		—		9
Consumer:
Medical education		56		(398	)		1		662			321		—		321
Other		1		—			—		(1	)		—		—		—

	$	956	$	(398	)	$	4	$	772		$	1,334	$	13	$	1,321

The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared. Since the SBA fully guarantees the principle and interest of the PPP loans, unless the lender violated an obligation under the agreement, there is no allowance for loan loss calculation for the PPP

loans as the loan losses, if any, are anticipated to be immaterial. Due to uncertainty of economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the calculation of the allowance for loan losses. However, due to the uncertainty of the impact, the Company will continue to monitor and additional adjustments to the allowance for loan losses may be necessary.

The following tables summarize information with respect to the recorded investment in loans receivable by loan class as of September 30, 2020 and December 31, 2019:

September 30, 2020
Loans Receivable
(Dollars in thousands)	Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment
Residential
One-to-four family	$	153,935	$	838	$	153,097
Home equity and HELOCs		4,259		39		4,220
Commercial
Commercial real estate		56,585		305		56,280
Commercial business		18,974		102		18,872
SBA PPP loans		75,736		—		75,736
Construction		4,006		—		4,006
Consumer:
Medical education		5,176		—		5,176
Other		3		—		3

	$	318,674	$	1,284	$	317,390

December 31, 2019
Loans Receivable
(Dollars in thousands)	Ending Balance		Ending Balance: Individually Evaluated for Impairment		Ending Balance: Collectively Evaluated for Impairment
Residential
One-to-four family	$	197,547	$	1,566	$	195,981
Home equity and HELOCs		4,383		308		4,075
Commercial
Commercial real estate		35,188		317		34,871
Commercial business		11,119		120		10,999
Construction		784		—		784
Consumer:
Medical education		6,097		—		6,097
Other		8		—		8
	$	255,126	$	2,311	$	252,815

The following table summarizes information about impaired loans by loan portfolio class as of September 30, 2020 and December 31, 2019:

	September 30, 2020						December 31, 2019
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Residential:
One-to-four family	$	838	$	942	$	—	$	1,566	$	1,703	$	—
Home equity and HELOCs		39		39		—		308		308		—
Commercial:
Commercial real estate		305		305		—		317		317		—
Commercial business		102		102		—		—		—		—
SBA PPP loans		—		—		—		—		—		—
		1,284		1,388		—		2,191		2,328		—
With an allowance recorded
Commercial:
Commercial business		—		—		—		120		121		12
		—		—		—		120		121		12
	$	1,284	$	1,388	$	—	$	2,311	$	2,449	$	12

The following table presents additional information regarding the impaired loans for the three months ended September 30, 2020 and September 30, 2019:

	Three Months Ended September 30,
	2020				2019
(Dollars in thousands)	Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized
With no related allowance recorded
Residential:
One-to-four family	$	886	$	—	$	1,544	$	—
Home equity and HELOCs		19		—		170		—
Commercial:
Commercial real estate		307		6		363		12
Commercial business		105		2		—		—
		1,317		8		2,077		12
With an allowance recorded
Commercial business		—		—		136		2
		—		—		136		2
	$	1,317	$	8	$	2,213	$	14

If these loans were performing under the original contractual rate, interest income on such loans would

have increased approximately $14,000 and $36,000 for the three months ended September 30, 2020, and 2019, respectively.

The following table presents additional information regarding the impaired loans for the nine months ended September 30, 2020 and September 30, 2019:

	Nine Months Ended September 30,
	2020				2019
(Dollars in thousands)	Average Record Investment		Interest Income Recognized		Average Record Investment		Interest Income Recognized
With no related allowance recorded
Residential:
One-to-four family	$	1,219	$	—	$	1,599	$	—
Home equity and HELOCs		157		—		187		—
Commercial:
Commercial real estate		311		17		355		21
Commercial business		111		5		—		—
		1,798		22		2,141		21
With an allowance recorded
Commercial business		—		—		133		6
		—		—		133		6
	$	1,798	$	22	$	2,274	$	27

If these loans were performing under the original contractual rate, interest income on such loans would

have increased approximately $52,000 and $88,000 for the nine months ended September 30, 2020, and 2019, respectively.

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2020, and December 31, 2019:

	September 30,		December 31,
(Dollars in thousands)	2020		2019
Residential:
One-to-four family	$	950	$	1,686
Home equity and HELOCs		39		308
Commercial:
Commercial real estate		—		—
Commercial business		—		—
SBA PPP loans		—		—
Construction		—		—
Consumer:
Medical education		1,269		1,710
Other		—		—

	$	2,258	$	3,704

Credit quality risk ratings include regulatory classifications of Special Mention, Substandard, Doubtful and Loss. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified

are rated pass. Included in the non-performing category medical education loans are non-accrual loans that have been brought current through a status change to deferred status. The deferred status generally means the student is in medical residency. Generally, the loan may be restored to accrual status when the obligation is in accordance with the contractual terms for a reasonable period of time, generally six months.

The following tables summarize the aggregate Pass and criticized categories of Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of September 30, 2020, and December 31, 2019:

	September 30, 2020
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential:
One-to-four family	$	152,985	$	—	$	950	$	—	$	153,935
Home equity and HELOCs		4,220		—		39		—		4,259
Commercial:
Commercial real estate		56,083		197		305		—		56,585
Commercial business		18,817		—		157		—		18,974
SBA PPP Loans		75,736		—		—		—		75,736
Construction		4,006		—		—		—		4,006
Consumer:
Medical education		3,907		—		1,269		—		5,176
Other		3		—		—		—		3

	$	315,757	$	197	$	2,720	$	—	$	318,674

	December 31, 2019
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential:
One-to-four family	$	195,861	$	—	$	1,686	$	—	$	197,547
Home equity and HELOCs		4,075		—		308		—		4,383
Commercial:
Commercial real estate		34,667		204		317		—		35,188
Commercial business		10,924		—		195		—		11,119
Construction		784		—		—		—		784
Consumer:
Medical education		4,387		—		1,710		—		6,097
Other		8		—		—		—		8
	$	250,706	$	204	$	4,216	$	—	$	255,126

The following tables present the segments of the loan portfolio summarized by aging categories as of September 30, 2020, and December 31, 2019:

	September 30, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable >90 Days and Accruing
Residential:
One-to-four family	$	105	$	213	$	467	$	785	$	153,150	$	153,935	$	—
Home equity and HELOCs		—		—		39		39		4,220		4,259		—
Commercial:
Commercial real estate		1,383		—		—		1,383		55,202		56,585		—
Commercial business		—		—		—		—		18,974		18,974		—
SBA PPP loans		—		—		—		—		75,736		75,736		—
Construction		—		—		—		—		4,006		4,006		—
Consumer:
Medical education		69		540		44		653		4,523		5,176		—
Other		—		—		—		—		3		3		—

	$	1,557	$	753	$	550	$	2,860	$	315,814	$	318,674	$	—

	December 31, 2019
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable >90 Days and Accruing
Residential:
One-to-four family	$	365	$	94	$	359	$	818	$	196,729	$	197,547	$	—
Home equity and HELOCs		—		—		—		—		4,383		4,383		—
Commercial:
Commercial real estate		—		—		—		—		35,188		35,188		—
Commercial business		—		—		—		—		11,119		11,119		—
Construction		—		—		—		—		784		784		—
Consumer:
Medical education		103		53		709		865		5,232		6,097		—
Other		—		—		—		—		8		8		—

	$	468	$	147	$	1,068	$	1,683	$	253,443	$	255,126	$	—

The Company may grant a concession or modification for economic or legal reasons related to a borrower's financial condition that it would not otherwise consider resulting in a modified loan that is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers' operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company's allowance for loan losses. TDRs are restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower's financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

The Company began offering short-term loan modifications to provide assistance to borrowers during the COVID-19 pandemic. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made on a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. As of September 30, 2020, we had 4 deferrals of either the full loan payment or the principal component of the loan payment on outstanding loan balances of $1.8 million in connection with the COVID-19 relief provided by the CARES Act.

As of September 30, 2020, and December 31, 2019, the Company had two loans to two unrelated borrowers identified as TDRs totaling $236,000 and $259,000, respectively. At September 30, 2020, and December 31, 2019, the two TDRs were performing in compliance with their restructured terms and on accrual status. There were no modifications to loans classified as TDRs during the three and nine months ended September 30, 2020 and 2019. No additional loan commitments were outstanding to these borrowers at September 30 2020, and December 31, 2019. At September 30, 2020, there was no specific reserves related to the TDRs. At December 31, 2019, there was a specific reserve of $12,000 related to one TDR.

The following table details the Company’s TDRs that are on accrual status and non-accrual status at September 30, 2020:

	As of September 30, 2020
	Number		Accrual		Non-Accrual
(Dollars in thousands)	Of Loans		Status		Status		Total TDRs
Commercial real estate		1	$	133	$	—	$	133
Commercial business		1		103		—		103
Total		2	$	236	$	—	$	236

The following table details the Company’s TDRs that are on accrual status and non-accrual status at December 31, 2019:

	As of December 31, 2019
	Number		Accrual		Non-Accrual
(Dollars in thousands)	Of Loans		Status		Status		Total TDRs
Commercial real estate		1	$	139	$	—	$	139
Commercial business		1		120		—		120
Total		2	$	259	$	—	$	259

The carrying amount of residential mortgage loans in the process of foreclosure was $294,000 and $403,000 at September 30, 2020 and December 31, 2019, respectively.

5. MORTGAGE SERVICING RIGHTS

During the quarter ending June 30, 2020, the Company began selling a portfolio of residential mortgage loans to a third party, while retaining the rights to service the loans. As of September 30, 2020, the value

of the mortgage servicing rights associated with the loan sales totaled $1.1 million. These loans were sold to the third party with mortgage servicing rights retained on a non-recourse basis. These retained servicing rights were recorded as a servicing asset and were initially recorded at fair value and changes to the balance of mortgage servicing rights are recorded in non-interest income in the Company’s consolidated statements of income.

The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; and accounting for and remitting principal and interest payments to the investor. Servicing income, which includes late and ancillary fees, was $6,000 and $8,000 for the three and nine months ended September 30, 2020. Servicing income is recorded in non-interest income in the Company’s consolidated statements of income.

The following is a summary of the changes in the carrying value of the Company’s mortgage servicing rights, accounted for under the amortization method for the three and nine months ended September 30, 2020:

(dollars in thousands)	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
Balance at Beginning of Period	$	508		$	—
Servicing Rights retained from loans sold		655			1,168
Amortization		(36	)		(41	)
Valuation Allowance Provision		—			—
Balance at End of Period	$	1,127		$	1,127

Valuation Allowance:
Balance at Beginning of Period	$	—	$	—
Valuation Allowance Provision		—		—
Balance at End of Period	$	—	$	—

Fair Value of Mortgage Servicing Rights Accounted for under the Amortization Method
Beginning of Period	$	543	$	—
End of Period	$	1,205	$	1,205

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2020 were as follows:

	September 30, 2020
Long run Constant Prepayment Rate	10.24		%
Weighted-Average Life (in years)		26.3
Weighted-Average Note Rate	3.296		%
Weighted-Average Discount Rate	9.25		%

6. DERIVATIVES AND RISK MANAGEMENT ACTIVITIES

The Company did not have any derivative instruments designated as hedging instruments or subject to master netting and collateral agreements as of September 30, 2020, and December 31, 2019. The following tables summarize the amounts recorded in the Company’s consolidated statements of financial condition for derivatives not designated as hedging instruments as of September 30, 2020, and December 31, 2019 (in thousands):

September 30, 2020
Asset Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Mortgage banking derivatives	$	3,720	$	167,681
Forward loan sales commitments	Mortgage banking derivatives		100		1,891
To Be Announced securities ("TBAs")	Mortgage banking derivatives		—		—


Liability Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Other liabilities	$	87	$	12,453
Forward loan sales commitments	Other liabilities		127		18,825
TBA securities	Other liabilities		49		13,500

December 31, 2019
Asset Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Mortgage banking derivatives	$	810	$	25,059
Forward loan sales commitments	Mortgage banking derivatives		389		11,036
TBA securities	Mortgage banking derivatives		5		3,500

Liability Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Other liabilities	$	25	$	3,820
Forward loan sales commitments	Other liabilities		45		10,595
TBA securities	Other liabilities		56		24,500

The following table summarizes the amounts recorded in the Company’s consolidated statements of income for derivative instruments not designated as hedging instruments for the three months and nine months ended September 30, 2020 and 2019 (in thousands):

		Gain/(Loss)
	Consolidated Statements of Income	Three Months Ended
	Presentation	September 30, 2020			September 30, 2019
Interest rate lock commitments	Gain from derivative instruments	$	1,043		$	146
Forward loan sales commitments	Loss from derivative instruments		(35	)		(38	)
TBA securities	Gain from derivative instruments		7			69
	Total gain from derivative instruments	$	1,015		$	177

		Gain/(Loss)
	Consolidated Statements of Income	Nine Months Ended
	Presentation	September 30, 2020			September 30, 2019
Interest rate lock commitments	Gain from derivative instruments	$	2,848		$	992
Forward loan sales commitments	(Loss) gain from derivative instruments		(371	)		352
TBA securities	Gain (loss) from derivative instruments		2			(3	)
	Total gain from derivative instruments	$	2,479		$	1,341

7. FAIR VALUE PRESENTATION

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is determined at a reasonable point within the range that is most representative of fair value under current market conditions. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends, and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of September 30, 2020, and December 31, 2019:

	September 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Governmental securities	$	—	$	416	$	—	$	416
Corporate notes		—		1,524		5,523		7,047
Collateralized mortgage obligations - agency residential		—		4,470		—		4,470
Mortgage-backed securities - agency residential		—		3,135		—		3,135
Municipal securities		—		1,874		—		1,874
Bank CDs		—		1,019		—		1,019
Loans held for sale		—		100,101		—		100,101
Interest rate lock commitments		—		—		3,720		3,720
Forward loan sales commitments		—		100		—		100
TBA securities		—		—		—		—
	$	—	$	112,639	$	9,243	$	121,882

	December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Governmental securities	$	—	$	436	$	—	$	436
Corporate notes		—		2,510		3,059		5,569
Collateralized mortgage obligations - agency residential		—		6,464		—		6,464
Mortgage-backed securities - agency residential		—		4,063		—		4,063
Municipal securities		—		2,117		—		2,117
Bank CDs		—		2,507		—		2,507
Loans held for sale		—		37,876		—		37,876
Interest rate lock commitments		—		—		810		810
Forward loan sales commitments		—		389		—		389
TBA securities		—		5		—		5
	$	—	$	56,367	$	3,869	$	60,236

The following tables provide the fair value for liabilities required to be measured and reported at fair value on a recurring basis as of September 30, 2020, and December 31, 2019.

	September 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Interest rate lock commitments	$	—	$	—	$	87	$	87
Forward loan sales commitments		—		127		—		127
TBA securities		—		49		—		49
	$	—	$	176	$	87	$	263

	December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Interest rate lock commitments	$	—	$	—	$	25	$	25
Forward loan sales commitments		—		45		—		45
TBA securities		—		56		—		56
	$	—	$	101	$	25	$	126

There were no assets measured at a fair value on a non-recurring basis at September 30, 2020 and December 31, 2019.

The following tables represent the change in the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019:


(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: July 1, 2020	$	3,961	$	2,681	$	(91	)
Total unrealized losses:
Included in other comprehensive income		34		—		—
Total gains included in earnings and held at reporting date		—		1,039		4
Purchases, sales and settlements		1,528
Transfers in and/or out of Level 3		—		—		—
Ending Balance: September 30, 2020	$	5,523	$	3,720	$	(87	)
Change in unrealized gains for the period included in earnings (or changes in net assets) for assets held as of September 30, 2020		—		1,039		4
Change in unrealized gains for the period included other comprehensive income for assets held as of September 30, 2020	$	34	$	—	$	—

(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: January 1, 2020	$	3,059	$	810	$	(25	)
Total unrealized losses:
Included in other comprehensive income		36
Total gains or (losses) included in earnings and held at reporting date		—		2,910		(62	)
Purchases, sales and settlements		2,428
Transfers in and/or out of Level 3		—		—		—
Ending Balance: September 30, 2020	$	5,523	$	3,720	$	(87	)
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held as of September 30, 2020		—		2,910		(62	)
Change in unrealized gains for the period included other comprehensive income for assets held as of September 30, 2020	$	36	$	—	$	—

(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: July 1, 2019	$	3,030	$	1,100	$	(54	)
Total unrealized losses:
Included in other comprehensive income		32		—		—
Total gains included in earnings and held at reporting date		—		109		37
Ending Balance: September 30, 2019	$	3,062	$	1,209	$	(17	)

(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: January 1, 2019	$	494	$	218	$	(18	)
Total unrealized losses:
Included in other comprehensive income		68		—		—
Total gains included in earnings and held at reporting date		—		991		1
Transfers in and/or out of Level 3		2,500		—		—
Ending Balance: September 30, 2019	$	3,062	$	1,209	$	(17	)

At September 30, 2020, the Company has classified $5.5 million of Corporate notes as Level 3. The fair value of $3.5 million of Corporate notes includes an adjustable rate corporate security and sub-debt bonds. The Company’s methodology for valuing these Corporate notes is to obtain market quotes through a third-party pricing model. The weighted average of the market quotes applied range from 99.15% to 106.55%. In addition, classified as Level 3 are two sub-debt bonds with a fair value of $2.0 million. The Company’s methodology to value the two sub-debt bonds is to obtain fair values of similar sub-debt bonds issuances over the past twelve months from a broker/investment firm. The weighted average of the market quotes applied is 102.75%. Since the Corporate notes are not widely traded, the Company considered the inputs as unobservable.

At September 30, 2020, the Company has classified $3.6 million of net derivative assets and liabilities related to IRLC as Level 3. The fair value of IRLCs is based on prices obtained for loans with similar characteristics from third parties, adjusted by the pull-through rate, which represents the Company’s best estimate of the probability that a committed loan will fund. The weighted average pull-through rates applied ranged from 55% to 100%.

Significant unobservable inputs for assets and liabilities measured at fair value on a recurring basis at September 30, 2020:

	Quantitative Information about Level 3 Fair Value Measurements at September 30, 2020
(Dollars in thousands)	Fair Value		Valuation Technique	Significant Unobservable Input	Range			Weighted Average
Measured at Fair Value on a Recurring Basis:

Corporate notes	$	3,468	Pricing model	Offered quotes		99.15%-106.55%				101.80%
	$	2,055	Market comparable securities	Offered quotes			102.75%			102.75%
Net derivative asset and liability:
IRLC	$	3,633	Discounted cash flows	Pull-through rates		55%-100%			83%

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

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Statements of Financial Condition as of September 30, 2020 and December 31, 2019:

					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
September 30, 2020	Carrying		Estimated		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	47,126	$	47,126	$	47,126	$	—	$	—
Equity securities		500		500		—		—		500
Loans receivable, net		315,823		326,851		—		—		326,851
Bank-owned life insurance		6,370		6,370		6,370		—		—
Restricted investment in bank stock		1,714		1,714		1,714		—		—
Accrued interest receivable		1,278		1,278		1,278		—		—
Mortgage servicing rights		1,127		1,205		—		—		1,205
Liabilities:
Deposits	$	371,116	$	373,098	$	308,289	$	64,809	$	—
Advances from the FHLB		26,228		27,170		—		27,170		—
Federal Reserve PPPLF advances		57,714		57,708		—		57,708		—
Advances from borrowers for taxes and insurance		1,561		1,561		1,561		—		—
Accrued interest payable		131		131		131		—		—
Off-balance sheet:
Commitment to extend credit	$	—	$	—	$	—	$	—	$	—

					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
December 31, 2019	Carrying		Estimated		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	20,625	$	20,625	$	20,625	$	—	$	—
Equity securities		500		500		—		—		500
Loans receivable, net		255,032		254,884		—		—		254,884
Bank-owned life insurance		6,255		6,255		6,255		—		—
Restricted investment in bank stock		1,552		1,552		1,552		—		—
Accrued interest receivable		967		967		967		—		—
Liabilities:
Deposits	$	283,767	$	284,055	$	215,471	$	68,584	$	—
Advances from the FHLB		27,000		27,333		—		27,333		—
Advances from borrowers for taxes and insurance		2,138		2,138		2,138		—		—
Accrued interest payable		305		305		305		—		—
Off-balance sheet:
Commitment to extend credit	$	—	$	—	$	—	$	—	$	—

8. CHANGES IN AND RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in the balances of each component of accumulated other comprehensive income (loss) (“AOCI”) for the three and nine months ended September 30, 2020 and September 30, 2019. All amounts are presented net of tax.

Net unrealized holding gains on available-for-sales securities (1):
	For the three months ended					For the nine months ended
(Dollars in thousands)	September 30, 2020		September 30, 2019			September 30, 2020			September 30, 2019
Balance at beginning period	$	158	$	70		$	(18	)	$	(548	)
Unrealized holding gain on available-for-sale securities before reclassification		31		61			306			685
Amount reclassified for investment securities gains included in net income		—		(162	)		(99	)		(168	)
Net current-period other comprehensive income		31		(101	)		207			517
Balance at ending period	$	189	$	(31	)	$	189		$	(31	)

(1)

All amounts are net of tax. Related tax expense or benefit is calculated using an income tax rate of approximately 29.5% and 29.5% and 29.5% and 29.5% for the three and nine months ended September 30, 2020 and 2019, respectively.

The following table present reclassifications out of AOCI by component for the three and nine months end September 30, 2020 and September 30, 2019.

	For the three months ended September 30, 2020		For the three months ended September 30, 2019

(Dollars in thousands)	Amount reclassified from accumulated other comprehensive income (loss) (2)		Amount reclassified from accumulated other comprehensive income (loss) (2)		Affected line item in the Consolidated Statements of Income
Net unrealized gain on available-for securities (1)	$	—	$	211	Gain on sale of available-for-sale securities, net
Tax Effect		—		(49)	Income tax expense
	$	—	$	162

	For the nine months ended September 30, 2020		For the nine months ended September 30, 2019

(Dollars in thousands)	Amount reclassified from accumulated other comprehensive income (2)		Amount reclassified from accumulated other comprehensive income (2)		Affected line item in the Consolidated Statements of Income
Net unrealized gain on available-for securities (1)	$	141	$	219	Gain on sale of available-for-sale securities, net
Tax Effect		(42)		(51)	Income tax expense
	$	99	$	168

(1)

For additional details related to unrealized gains on investment securities and related amounts reclassified from accumulated other comprehensive income (loss), See Note 2, “Investment securities.”

(2)

Amounts in parentheses indicate debits.

9. EARNINGS PER SHARE

Earnings per share ("EPS") consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. The diluted EPS calculation reflects the EPS if all outstanding instruments convertible to common stock were exercised. The computation of diluted earnings per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect. At September 30, 2020, there were 216,400 stock options outstanding of which 59,600 of the stock options were vested and exercisable at September 30, 2020. At September 30, 2020, there 87,000 restricted stock shares outstanding of which 24,140 restricted stock shares were vested and exercisable at September 30, 2020. The 216,400 stock options outstanding and 62,860 restricted stock shares outstanding were not included in the computation of diluted net income per share for the three and nine months ended September 30, 2020 as their effect would have been anti-dilutive. At September 30, 2019, there were 218,000 stock options outstanding and 87,000 restricted stock shares outstanding which 30,080 of the stock options and 11,680 of restricted stock shares were vested and exercisable at September 30, 2019. The 218,000 stock options outstanding and 87,000 restricted stock awards outstanding were not included in the computation of diluted net income per share for the three months ended September 30, 2019, as their effect would have been anti-dilutive. For the nine months ended September 30, 2019, 218,000 stock options outstanding and 77,000 restricted stock awards outstanding were not included in the computation of diluted net income per share as their effect would have been anti-dilutive.

The calculation of basic and diluted EPS for the three and nine months ended September 30, 2020 and 2019 is as follows:

	For the Three Months Ended September 30						For the Nine Months Ended September 30
	2020			2019			2020			2019
Net income	$	2,063,000		$	333,000		$	3,708,000		$	803,000
Weighted average number of shares issued		2,270,725			2,269,125			2,270,544			2,262,502
Less weighted average number of treasury shares		(39,033	)		(208	)		(22,716	)		(83	)
Less weighted average number of unearned ESOP shares		(142,598	)		(151,326	)		(144,766	)		(153,487	)
Less weighted average number of unvested restricted stock awards		(62,219	)		(73,288	)		(63,956	)		(70,133	)
Basic weighted average shares outstanding		2,026,875			2,044,303			2,039,106			2,038,799
Add dilutive effect of stock options		—			—			—			—
Add dilutive effect of restricted stock awards		—			—			—			4,671
Diluted weighted average shares outstanding		2,026,875			2,044,303			2,039,106			2,043,470

Net income per share:
Basic	$	1.02		$	0.16		$	1.82		$	0.39
Diluted	$	1.02		$	0.16		$	1.82		$	0.39

10. EMPLOYEE BENFITS

Equity Incentive Plan

The Company’s shareholders approved the HV Bancorp, Inc. 2018 Equity Incentive Plan (the “2018 Equity Incentive Plan”) at a Special Meeting of shareholders on June 13, 2018. An aggregate of 305,497 shares of authorized but unissued common stock of the Company was reserved for future grants of incentive and non-qualified stock options, restricted stock awards and restricted stock units under the 2018 Equity Incentive Plan. Of the 305,497 authorized shares, the maximum number of shares of the Company’s common stock that may be issued under the 2018 Equity Incentive Plan pursuant to the exercise of stock options is 218,212 shares, and the maximum number of shares of the Company’s common stock that may be issued as restricted stock awards or restricted stock units is 87,285 shares.

The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock under the Company’s 2018 Equity Incentive plan. Management recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the requisite service period for the entire award. As of September 30, 2020, there were 497 shares available for future awards under this plan, which includes 212 shares available for incentive and non-qualified stock options and 285 shares available for restricted stock awards. The restricted shares and stock options vest over a seven year period.

Stock option expense was $15,000 and $45,000 for the three months and nine months ended September 30, 2020 and $15,000 and $43,000 for the three months and nine months ended September 30, 2019, respectively. At September 30, 2020, total unrecognized compensation cost related to stock options was $293,000.

A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2020 and September 30, 2019 was as follows:

	September 30, 2020									September 30, 2019
	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)		Average Intrinsic Value		Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)		Average Intrinsic Value
Outstanding, Jan 1		218,000		$	14.92		8.6	$	452,400		188,000	$	14.80		9.4	$	33,840
Granted		—			—		—		—		30,000		15.71		9.6		—
Exercised		(1,600	)		14.80		—		—		—		—		—		—
Forfeited		—			—		—		—		—		—		—		—
Outstanding, September 30		216,400		$	14.93		7.9	$	—		218,000	$	14.92		8.8	$	61,040
Exercisable, September 30		59,600		$	14.87		7.8	$	—		30,080	$	14.80		8.7	$	8,422

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Nine Months Ended September 30,
		2019
Dividend yield		3.14%-3.29%
Expected life		10 years
Expected volatility		19.68%-24.07%
Risk-free interest rate		1.96%-2.56%
Weighted average grant date fair value		$2.39-$2.98

The excepted volatility is based on blended rate of historical volatility and SNL US Index of Banks between $250 million and $500 million in assets as the Company’s shares of common stock did not begin trading on the Nasdaq Capital Market until January 12, 2017. The expected life is an estimate based on management review of the various factors. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Restricted stock expense for the three months ended September 30, 2020 and September 30, 2019 was $45,000 and $46,000, respectively. Restricted stock expense for the nine months ended September 30, 2020 and September 30, 2019 was $139,000 and $137,000, respectively. At September 30, 2020, the expected future compensation expense relating to non-vested restricted stock outstanding was $892,000 over the remaining 4.75 years.

A summary of the Company’s restricted stock activity and related information for the nine months ended September 30, 2020 and September 30, 2019 was as follows:

	September 30, 2020					September 30, 2019
	Number of Shares			Weighted- Average Grant Date Fair Value		Number of Shares			Weighted- Average Grant Date Fair Value
Non-vested, Jan 1		75,320		$	14.97		73,000		$	14.80
Vested		(12,460	)		14.97		(11,680	)		14.80
Granted		—			—		14,000			15.72
Forfeited		—			—		—			—
Non-vested at September 30		62,860		$	14.97		75,320		$	14.97

11. RELATED PARTY TRANSACTIONS

In November 2017, the Company engaged a third party to provide services for certain customers with large deposit balances, by offering both a competitive rate of return and FDIC insurance. Related party balances in this program totaled $6.5 million at September 30, 2020, for which the Company received no fees for customer services for the three months ended September 30, 2020, and approximately $2,000 for the nine months ended September 30, 2020. For the three and nine months ended September 30, 2019, we received approximately $7,000 and $14,000 in fees for customer service for related party balances.

In January 2018, the Company entered into a business consulting agreement with one of our directors to provide deposit sales training, grow deposit market share and identify deposit opportunities. This agreement terminated on December 31, 2019. The Company has paid $15,000 and $45,000 in consulting fees to the director for three and nine months ended September 30, 2019.

12. REVENUE RECOGNITION

On July 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The following is a discussion of key revenues of fees for customer services that are within the scope of the revenue guidance:

• Fee income – Fee income primarily consists of a fee received for placing customer deposits in a deposit placement network such that amounts are under the standard FDIC insurance maximum of $250,000 making the deposits eligible for FDIC insurance. The Company acts as an intermediary between the customer and the deposit placement network. The Company’s performance obligation is generally satisfied upon placement of the customer’s deposit in deposit placement network.

• Insufficient fund fees and other service charges– Revenue from service charges on deposit accounts is earned through cash management, wire transfer, and other deposit-related services; as well as overdraft, non-sufficient funds, account management and other deposit-related fees. Revenue is recognized for these services either over time, corresponding with deposit accounts’ monthly cycle, or at a point in time for transactional related services and fees. These revenues are included in insufficient funds fees and other service charges in the table below.

• ATM interchange and fee income – ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder used a Company’s ATM. The Company’s performance obligation for ATM fee income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

The following table presents noninterest income for the three and nine months ended September 30, 2020 and September 30, 2019:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		2020		2019
Non-Interest Income
In-scope of Topic 606:
Fee income	$	—	$	13	$	3	$	20
Insufficient fund fees		16		15		40		41
Other service charges		22		21		61		52
ATM interchange fee income		3		2		7		6
Other income		—		—		2		2
Total Non-Interest Income (in-scope of Topic 606)	$	41	$	51	$	113	$	121

Out-of-scope of Topic 606:
Increase in cash surrender value of bank-owned life insurance	$	39	$	41	$	115	$	120
Gain on sale of loans, net		3,044		1,680		7,000		2,977
Gain on sale of available-for-sale securities		—		211		141		219
Gain from derivative instruments		1,015		177		2,479		1,341
Change in fair value for loans held-for-sale		1,988		40		2,281		346
Other		68		5		155		11
Total Non-Interest Income (out-scope of Topic 606)		6,154		2,154		12,171		5,014
Total Non-Interest Income (in-scope of Topic 606)		41		51		113		121
Total Noninterest Income	$	6,195	$	2,205	$	12,284	$	5,135

13. Leases

On July 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. The Company elected to adopt the transition relief under ASC Topic 842 using the modified retrospective transition method. All lease agreements are accounted for as operating leases.

The majority of the Company’s leases are comprised of operating leases for real estate property for branches and office spaces with terms extending through 2039. The operating lease agreements are recognized on the consolidated statements of financial condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Company elected not to include short-term leases with initial terms of twelve months or less on the consolidated statements of financial condition.

The following table represents the classification of the Company’s ROU assets and lease liabilities in the consolidated statements of financial condition:

		September 30, 2020		December 31, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	7,867	$	5,979
Total Lease Right-of-Use Assets		$	7,867	$	5,979

		September 30, 2020		December 31, 2019
Lease Liabilities	Classification
Operating lease liabilities	Operating lease liabilities	$	8,119	$	6,023
Total Lease Liabilities		$	8,119	$	6,023

The Company’s lease agreements frequently include one or more options to renew at the Company’s discretion. If at the beginning of the lease, the Company is reasonably certain that the renewal option will be exercised, the Company will include the extended term in the calculation of the ROU asset and lease liability. For the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. If the rate is not readily determinable in the lease, the Company used its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

	September 30, 2020			December 31, 2019
Weighted-average remaining lease term
Operating leases		12.4			12.7
Weighted-average discount rate
Operating leases		2.22	%		2.34	%

The components of the lease expense are as follows:

(dollars in thousands)	For the three months ended September 30, 2020		For the nine months ended September 30, 2020		For the three months ended September 30, 2019		For the nine months ended September 30, 2019
Operating lease cost	$	173	$	455	$	73	$	73
Short-term lease cost		6		27		63		63
Total	$	179	$	482	$	136	$	136

Future minimum payments for operating leases as of September 30, 2020 and December 31, 2019 were as follows:

(dollars in thousands)	September 30, 2020			December 31, 2019
Twelve Months Ended:
Within one year	$	831		$	440
After one but within two years		803			632
After two but within three years		799			583
After three but within four years		794			594
After four but within five years		746			596
After five years		5,378			4,164
Total Future Minimum Lease Payments		9,351			7,009
Amounts Representing Interest		(1,232	)		(986	)
Present Value of Net Future Minimum Lease Payments	$	8,119		$	6,023

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Certain factors that could cause actual results to differ materially from expected results include, the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus COVID-19 on our operations, current customers and the economy in general, changes in the interest rate environment, increases in nonperforming loans, legislative and regulatory changes that adversely affect the business of the Company, and changes in the securities markets. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Overview

The Bank provides financial services to individuals and businesses from our main office in Doylestown, Pennsylvania, and from our full-service banking offices located in Plumsteadville, Warrington and Huntingdon Valley, Pennsylvania. As of October 1, 2020, we added two full-service banking offices located in Philadelphia and Doylestown, Pennsylvania. We also operate a limited service branch in Philadelphia, Pennsylvania. We have a loan production office located in Philadelphia, Pennsylvania, a sales office in Doylestown, Pennsylvania, Wilmington, Delaware and Mount Laurel, New Jersey and a loan origination office in Montgomeryville, Pennsylvania. Our business banking office is located in Philadelphia, Pennsylvania. Our primary market area includes Montgomery, Bucks and Philadelphia Counties in Pennsylvania, New Castle County in Delaware and Burlington County in New Jersey. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations and borrowings, primarily in one- to four-family residential mortgage loans, commercial real estate loans (including multi-family loans), home equity loans and lines of credit and, to a lesser extent, consumer and construction loans. We retain our loans in portfolio depending on market conditions, but we primarily sell our fixed-rate one- to four-family residential mortgage loans in the secondary market. We also invest in various investment securities. Our revenue is derived principally from interest on loans and investments and loan sales. Our primary sources of funds are deposits, Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”), Federal Home Loan Bank, (“FHLB”) advances and principal and interest payments on loans and securities.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of gains recognized from the sale of residential mortgage loans in the secondary market, fees for customer services, gain or loss from derivative instruments and change in fair value of loans held for sale. Non-interest expense primarily consists of expenses related to salaries and employee benefits, occupancy, data processing related operations, professional fees, and other expenses.

Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

COVID-19 Update

From the beginning of the COVID-19 crisis, our focus has been and remains on navigating the complexities, impact and ongoing challenges of the pandemic. The safety and well-being of our employees and customers has been our focus while continuing to provide our customers with full access to our banking services. The Company took the following preemptive measures as the COVID-19 pandemic evolved:

Business Continuity Plan

During March 2020, management launched its previously developed Business Continuity Plan in response to the COVID-19 pandemic. Initially, the Company implemented drive-up service only, increased the use of virtual and distance communications with customers and employees, and mandated expansive work at home procedures for employees. We will continue to monitor governmental guidelines and follow mandates as set by authorities.

By end of June 2020, our employees began returning to their offices on a rotating basis and the branch lobby services have been reopened to accommodate customers’ needs. This gradual process was met with close adherence to health and safety-related requirements.

To date, the Company has not had any employee layoffs or furloughs and presently does not anticipate future furloughs or layoffs related to the COVID-19 pandemic.

Paycheck Protection Program

In April 2020, our team in business banking and retail began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) implemented by the Small Business Association (“SBA”) with support from the Department of Treasury under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As of September 30, 2020, the Company had received over 450 applications from new and existing customers with an outstanding balance of $75.7 million and received approximately $2.3 million in processing fee income. The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated if the loan is forgiven. For the three and nine months ended September 30, 2020, the Company recognized approximately $190,000 and $328,000 in interest income related to PPP loans. The PPP loans have a two-year term and earn interest at 1%. The Company funded these short-term loans primarily from available liquidity through participation in the Federal Reserve’s PPPLF. The SBA fully guarantees the principle and interest, unless the lender violated an obligation under the agreement. The Company did not include the PPP loans in the allowance for loan loss calculation as loan losses, if any, are anticipated to be immaterial.

Liquidity Sources

The Company has reviewed all sources of liquidity in anticipation of any potential funding needs due to the COVID-19 pandemic and prioritized based on available capacity, terms, and cost of funds. As of September 30, 2020, the Company had the following sources of liquidity available:

	At September 30,
	2020
Sources of Liquidity:	(Dollars in thousands)
Cash and cash equivalents	$	47,126
Market value of unencumbered securities		12,894
PPPLF availability		18,019
Collateral value of unencumbered pledged loans (FHLB borrowing availability)		122,658
Total sources of liquidity	$	200,697

In addition as of September 30, 2020, the Company also had access to $3.0 million unused borrowing capacity from the Atlantic Community Bankers Bank and a $1.1 million line of credit with Federal Reserve Bank of Philadelphia. The Company also has access to brokered certificate of deposits as an additional funding source.

Capital Strength

At September 30, 2020, the Bank’s exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.



•	Total risk-based capital (to risk-weighted assets) was 12.9%, tier 1 capital (to risk-weighted assets) was 12.2%, tier capital (to average assets) was 8.4%, and tier 1 common equity (to risk-weighted assets) was 12.2%.

See “Regulatory Capital” below for more information.

Deferral Requests

The Company has worked with the customers impacted by COVID-19 to provide short-term assistance up to nine months in accordance with regulatory guidelines. Commercial borrowers requesting assistance have been offered either a 90-day principal and interest deferral or a 90-day interest only with a potential deferral of up to two additional months. These deferrals do not constitute Troubled Debt Restructurings (“TDRS”) because they met the requirements under section 4013 of the CARES Act. Under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 modifications. A financial institution can then use FASB agreed upon temporary changes to GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Residential borrowers needing assistance have been offered a 90-day principal and interest deferral with a potential additional 90-day deferral. As of September 30, 2020, the Company had 4 residential one-to-four family loan deferral requests, representing $1.8 million in total outstanding loans compared to 73 deferral requests processed with an outstanding balance of $29.0 million as of June 30, 2020. Management expects deferral requests could continue throughout the 2020.

Loan Portfolio Analysis

Certain industries such as those included in the Company’s commercial lending portfolio are anticipated to suffer greater economic impact as a result of the COVID-19 pandemic. The following table provides the outstanding exposure in regard to the Company’s commercial loan portfolio by type as of September 30, 2020.

	At September 30, 2020
	(Dollars in thousands)
Type of Loan	Number of loans		Balance		% Gross Loans
Residential non-owner occupied		73	$	31,454		9.9	%
Nonresidential buildings		21		17,517		5.5	%
Other real estate properties		7		3,256		1.0	%
Residential building construction		8		2,782		0.9	%
Restaurants and Food Service		18		2,077		0.7	%
Religious Organizations		5		1,197		0.4	%
Total outstanding exposure		132	$	58,283		18.4	%

The extent of the impact of the COVID-19 pandemic to the Company’s loan portfolio is uncertain and cannot be predicted as it will depend on certain developments including the duration of the pandemic and its impact on the local and national economy as a whole and the response thereto.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations, which may significantly affect our reported results and financial condition for the current period or in future periods.

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2020 have remained unchanged from the disclosures presented in our Annual Report on Form 10-KT, for the six-month transition period ended December 31, 2019.

The Jumpstart Our Business Startups Act (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of September 30, 2020, and December 31, 2019, there is not a significant difference in the presentation of our consolidated financial statements as compared to other public companies as a result of this transition guidance. The complete list of Critical Accounting Policies are described in the Annual Report on Form 10-KT, for the six-month transition period ended December 31, 2019.

Comparison of Statements of Financial Condition at September 30, 2020 and at December 31, 2019

Total Assets

Total assets increased $153.1 million, or 43.2% to $507.7 million at September 30, 2020, from $354.6 million at December 31, 2019. The growth in total assets was primarily due to increases of $62.2 million in loans held for sale, $60.8 million in loans receivable, $26.5 million in cash and cash equivalents, and $2.6 million in the mortgage banking derivatives and $1.9 million in the operating lease right-of-use asset offset by a decrease of $3.2 million in available-for-sale investment securities.

Cash and cash equivalents

Cash and cash equivalents increased $26.5 million, to $47.1 million at September 30, 2020, from $20.6 million at December 31, 2019. The growth in cash and cash equivalents was due to growth in retail deposits, public fund deposits, growth in retail CDs obtained through a listing service and proceeds from use of the PPPLF facility. We anticipate that excess liquidity will be used to fund growth of the loan portfolio.

Investment Securities

Investment securities decreased $3.2 million or 15.1%, to $18.0 million at September 30, 2020, from $21.2 million at December 31, 2019. The decrease was primarily due to $11.0 million in proceeds from sales and maturities and principal repayments offset by purchases of $7.4 million during the nine months ended September 30, 2020, and a $268,000 increase in net unrealized gain on available-for-sale.

Net Loans

Net loans increased $60.8 million to $315.8 million at September 30, 2020, from $255.0 million at December 31, 2019. In April 2020, the Company begin participating in the PPP program and processed over 450 applications with an outstanding balance of $75.7 million as of September 30, 2020. Commercial real estate loans increased by $21.4 million to $56.6 million at September 30, 2020, from $35.2 million at December 31, 2019, primarily as a result of originations from the business banking division, whose continued focus is growth of the commercial lending and commercial business loan portfolios. Commercial business loans increased by $7.9 million to $19.0 million at September 30, 2020, from $11.1 million at December 31, 2019. The construction loans increased $3.2 million to $4.0 million at September 30, 2020, from $784,000 at December 31, 2019. Offsetting these increases was a $43.6 million decrease in one- to four-family residential real estate loans from $197.5 million at December 31, 2019, to $153.9 million at September 30, 2020, and a $124,000 decrease in home equity and HELOC loans from $4.4 million at December 31, 2019, to $4.3 million at September 30, 2020.

In November 2017, the Bank entered into a loan purchase agreement with a broker to purchase a portfolio of private education loans made to American citizens attending AMA-approved medical schools in Caribbean nations. The broker serves as a lender, holder, program designer and developer, administrator, and secondary market for the loan portfolios they generate. At September 30, 2020, the balance of the private education loans was $5.2 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At September 30, 2020, there was one loan with a balance of approximately $44,000 that was past due 90 days or more.

Loans Held For Sale

Loans held for sale increased $62.2 million to $100.1 million at September 30, 2020, from $37.9 million at December 31, 2019, primarily as a result of originations of $416.0 million of one- to four-family residential real estate loans during the nine months ended September 30, 2020 and principle sales of $363.0 million of loans in the secondary market during this same period.

Deposits

Deposits increased $87.3 million, or 30.8%, to $371.1 million at September 30, 2020, from $283.8 million at December 31, 2019. The increase was primarily because $92.8 million increase in our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) to $308.3 million at September 30, 2020, from $215.5 million at December 31, 2019 as a result of new customer relationships developed through the PPP program as well as growth in public fund deposits. Offsetting this increase was a $5.5 million, or 8.1% decrease in certificates of deposit to $62.8 million at September 30, 2020, from $68.3 million at December 31, 2019. The decrease of $5.5 million in certificate in deposits was primarily the result of a $12.5 million decrease in certificate of deposits issued through a broker which have a higher cost of funds offset by a $7.0 million increase in retail certificates of deposits obtained through a listing service at a lower cost of funds.

Advances from the Federal Home Loan Bank

During July 2020, the Company refinanced advances of $27.0 million from the Federal Home Loan Bank to reduce the cost of borrowing. The Company incurred a prepayment fee of $810,000. The advances of $27.0 million were refinanced to a five year term at 85 basis points with an effective rate of 1.45% including the impact of the prepayment fee. The refinancing was accounted for as a loan modification. As of September 30, 2020 and December 31, 2019, the Company had $27.0 million in advances outstanding.

Advances from the Federal Reserve’s Paycheck Protection Program Liquidity Facility

During the second quarter of 2020, the Company utilized the Federal Reserve’s PPPLF to fund a portion of PPP loans. As of September 30, 2020, the Company had $57.7 million in PPPLF advances outstanding.

Total Shareholders’ Equity

Total shareholders’ equity increased $3.6 million, or 10.7% to $37.2 million at September 30, 2020 compared to $33.6 million at December 31, 2019, primarily as a result of net income of $3.7 million for the nine months ended September 30, 2020, share based compensation expense of $184,000, other comprehensive income of $207,000 due to the fair value adjustments, net of deferred tax, on the investment securities available-for-sale portfolio. In addition, ESOP shares committed to be released totaling $95,000 and a stock option exercise of $24,000 contributed to the increase of total shareholders’ equity. Offsetting these increases was $582,000 in treasury stock repurchases primarily as part of the stock repurchase plan approved in April 2019.

Comparison of Statements of Income for the Three Months Ended September 30, 2020 and September 30, 2019

General

Net income increased $1.7 million to $2.1 million for the three months ended September 30, 2020, from $333,000 for the three months ended September 30, 2019. The increase in net income for the three months ended September 30, 2020, was primarily due to an increases of $4.0 million in non-interest income and $744,000 in net interest income offset by increases of $2.1 million in non-interest expense, $684,000 in income tax expense and $180,000 increase in provision for loan losses.

Interest Income

Total interest income increased $428,000, or 13.8%, to $3.5 million for the three months ended September 30, 2020, from $3.1 million for the three months ended September 30, 2019. The increase was primarily the result of an increase in interest and fees on loans of $594,000 offset by a decrease in interest on investment securities of $105,000 and a decrease in interest on interest-earning deposits with banks of $72,000. Total average interest-earning assets increased $98.8 million to $428.0 million for the three months ended September 30, 2020, from $329.2 million for the same period in 2019. The increase was primarily as a result of an increase in the average balance of loans of $98.2 million and $18.0 million in average balance of interest-earning deposits with banks partially offset by a decrease of $17.5 million in the average balance of investment securities. The average yield on our interest-earning assets decreased 47 basis points to 3.31% for the three months ended September 30, 2020, as compared to 3.78% for the three months ended September 30, 2019.

Interest and fees on loans increased $594,000 to $3.4 million for the three months ended September 30, 2020 from $2.8 million for the same period in 2019. This increase was primarily due to an increase in average loans outstanding of $98.2 million, which increased to a total of $375.6 million for the three months ended September 30, 2020, from $277.4 million for the three months ended September 30, 2019. The increase in average loans was primarily a result of growth in the average balances of PPP loans, loans held for sale, commercial real estate and other commercial business offset by a decrease in the average balance in one-to four-family residential real estate loans. The average yield on loans decreased 42 basis point to 3.60% for the three months ended September 30, 2020, versus 4.02% for the three months ended September 30, 2019 primarily as a result of PPP loans which were originated at 1%.

Interest income on interest-earning deposits decreased by $72,000 to $23,000 for the three months ended September 30, 2020, from $95,000 for the three months ended September 30, 2019. The decrease was primarily due to a reduction in average yield on interest-earning deposits with banks of 207 basis points, to 0.27% for the three months ended September 30, 2020, from 2.34% for the three months ended September 30, 2019 as a result of a decline in interest rates following the COVID-19 pandemic. The targeted federal funds rate was cut to 0% on March 16^th and the 10-year Treasury bond falling below 1.00% on March 3, 2020. Offsetting this decrease, was an increase in the average balance of interest-

earning deposits of $18.0 million to $34.2 million for the three months ended September 30, 2020, from $16.2 million for the three months ended September 30, 2019.

Interest on investment securities decreased by $105,000 to $95,000 for the three months ended September 30, 2020, from $200,000 for the three months ended September 30, 2019, respectively. Interest on investment securities decreased as a result of a $77,000 decrease in income on taxable and non-taxable interest and dividend investments as well as a $28,000 decrease in interest income on mortgage backed securities and collateralized mortgage obligation securities which decreased to $25,000 for the three months ended September 30, 2020, from $53,000 for the three months ended September 30, 2019. The average yield on total securities decreased to 2.30% for the three months ended September 30, 2020, from 2.35% for the same period in 2019. The average balance of investment securities decreased by $17.6 million to $16.5 million for the three months ended September 30, 2020, from $34.1 million for the three months ended September 30, 2019.

Interest Expense

Total interest expense decreased $316,000 to $720,000 for the three months ended September 30, 2020, from $1.0 million for the three months ended September 30, 2019, primarily due to a $310,000 decrease in interest expense on deposits and a $54,000 decrease in interest expenses on advances from the FHLB offset by an $49,000 increase in interest expense on advances from the PPPLF.

Interest expense on deposits decreased $310,000 to $567,000 for the three months ended September 30, 2020, from $877,000 for the three months ended September 30, 2019, primarily as a result of a decrease of 58 basis points in the average cost of deposits from September 30, 2019, to 81 basis point from 139 basis points. Offsetting this decrease was an increase in the average balance of interest bearing deposits of $28.3 million from $252.6 million as of September 30, 2019, to $280.9 million as of September 30, 2020, and was primarily as a result of a $51.7 million increase in the average balance of our core deposit accounts offset by a decrease of $23.4 million in the average balance of our certificates of deposit. The average rate paid on money market deposits decreased to 0.68% for the three months ended September 30, 2020, from 0.79% for the three months ended September 30, 2019. The decrease in the balance of our certificates of deposits of $23.4 million from $81.1 million for the three months ended September 30, 2019 to $57.7 million for the three months ended September 30, 2020. This was primarily the result of a $27.4 million reduction in the average balance of certificates of deposit issued through brokers from $38.5 million for the three months ended September 30, 2019 to $11.1 million for the three months ended September 30, 2020, offset by an increase of $4.0 million in the average balance in retail certificate of deposits. The average cost of certificates of deposit was 1.39% for the three months ended September 30, 2020 as compared to 2.28% for the three months ended September 30, 2019.

Interest expense on advances from the FHLB decreased $54,000 to $104,000 for the three months ended September 30, 2020 from $158,000 for the three months ended September 30, 2019, primarily as a result of a decrease of 72 basis points in the average rate on FHLB advances from 1.57% for the three months ended September 30, 2019, to 2.29% for the three months ended September 30, 2020. The average balance of the FHLB advances decreased $1.2 million to $26.4 million for the three months ended September 30, 2020, from $27.6 million for the three months ended September 30, 2019. During the July 2020, the Company refinanced advances of $27.0 million from the Federal Home Loan Bank to reduce the cost of borrowings.

Interest expense on advances from the PPPLF was $49,000 as the Company utilized this borrowing facility to fund the PPP loans. The cost of borrowing was 37 basis points on the outstanding balance of the facility.

Net Interest Income

Net interest income increased $744,000 to $2.8 million for the three months ended September 30, 2020, from $2.1 million for the three months ended September 30, 2019. Our net interest-earning assets increased $21.2 million to $67.5 million for the three months ended September 30, 2020, from $46.3

million for the three months ended September 30, 2019. Our interest rate spread increased by 20 basis points to 2.51% for the three months ended September 30, 2020, from 2.31% for the three months ended September 30, 2019. Our net interest margin increased by 11 basis points to 2.63% for the three months ended September 30, 2020, from 2.52% for the three months ended September 30, 2020.

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

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

	For the Three Months Ended September 30,
	2020							2019
	Average Balance		Interest Income/ Expense		Yield/ Cost (5)			Average Balance		Interest Income/ Expense		Yield/ Cost (5)
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	375,631	$	3,383		3.60	%	$	277,350	$	2,789		4.02	%
Interest-earning deposits with banks		34,241		23		0.27	%		16,248		95		2.34	%
Investment securities		16,542		95		2.30	%		34,053		200		2.35	%
Restricted investment in bank stock		1,635		38		9.30	%		1,502		27		7.19	%
Total interest-earning assets		428,049		3,539		3.31	%		329,153		3,111		3.78	%
Non-interest-earning assets		19,497							11,669
Total assets	$	447,546						$	340,822

Interest-bearing liabilities:
Demand deposits	$	109,132		190		0.70	%	$	101,038		286		1.13	%
Money market deposit accounts		56,756		97		0.68	%		30,271		60		0.79	%
Passbook and statement savings accounts		27,145		10		0.15	%		26,735		13		0.19	%
Checking accounts-Municipal		30,220		70		0.93	%		13,434		55		1.64	%
Certificates of deposit		57,670		200		1.39	%		81,144		463		2.28	%
Total deposits		280,923		567		0.81	%		252,622		877		1.39	%
Federal Home Loan Bank advances		26,438		104		1.57	%		27,574		158		2.29	%
Federal Reserve PPPLF advances		53,179		49		0.37	%		—		—		—
Securities sold under agreements to repurchase		—		—		0.00	%		2,651		1		0.15	%
Total interest-bearing liabilities		360,540		720		0.80	%		282,847		1,036		1.47	%
Non-interest-bearing liabilities:
Checking		44,820							22,018
Other		11,412							3,657
Total liabilities		416,772							308,522
Shareholders' Equity		30,774							32,300
Total liabilities and Shareholders' equity	$	447,546						$	340,822

Net interest income			$	2,819						$	2,075
Interest rate spread (2)						2.51	%						2.31	%
Net interest-earning assets (3)	$	67,509						$	46,306
Net interest margin (4)						2.63	%						2.52	%
Average interest-earning assets to average interest-bearing liabilities						118.72	%						116.37	%

(1)	Includes loans held for sale.

(2)	Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)	Net interest-earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)	Net interest margin represents net interest income divided by total average interest-earning assets.

(5)	Annualized.

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns.

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	For the Three Months Ended September 30, 2020 vs 2019
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	1,340		$	(746	)	$	594
Interest-earning deposits with banks		143			(215	)		(72	)
Investment securities		(89	)		(16	)		(105	)
Restricted investment in bank stock		1			10			11
Total interest-earning assets		1,395			(967	)		428
Interest-bearing liabilities:
Demand deposits		39			(135	)		(96	)
Money market deposit accounts		63			(26	)		37
Passbook and statement savings accounts		—			(3	)		(3	)
Checking accounts		86			(71	)		15
Certificates of deposit		(41	)		(222	)		(263	)
Total deposits		147			(457	)		(310	)
Federal Home Loan Bank advances		(2	)		(52	)		(54	)
Federal Reserve PPPLF		—			49			49
Securities sold under agreements to repurchase		—			(1	)		(1	)
Total interest-bearing liabilities		145			(461	)		(316	)
Change in net interest income	$	1,250		$	(506	)	$	744

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimated at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates, as more information becomes available or economic conditions change. Due to uncertainty of economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the calculation of the allowance for loan losses. However, due to the uncertainty of the impact, the Company will continue to monitor and additional adjustment to the allowance for loan losses may be necessary.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed on a quarterly basis and provisions are made for loan losses as required in order to maintain the allowance for loan losses.

Provision for loan losses increased by $180,000 to $424,000 for the three months ended September 30, 2020, from $244,000 for the three months ended September 30, 2019, primarily as result of net charge-offs of $360,000 related to the medical education loans during the three months ended September 30, 2020. Due to the continued uncertainty of changes in economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the allowance for loan losses across the loan portfolio. Non-performing loans decreased $1.4 million, or 37.8% from $3.7 million at December 31, 2019 to $2.3 million as of September 30, 2020, as a result of decreases of $736,000 in one-to four-family residential real estate loans, $441,000 in medical education loans and $269,000 in home equity and HELOCs loans compared to December 31, 2019. During the three months ended September 30, 2020, there were $360,000 net charge-offs recorded. During the three months ended September 30, 2019, there were $92,000 in net charge-offs recorded.

Non-Interest Income

Non-interest income increased $4.0 million to $6.2 million for the three months ended September 30, 2020, from $2.2 million for the three months ended September 30, 2019. The increase in non-interest income compared to the same period in 2019 was primarily due to an increase of $1.9 million in change in fair value of loans held for sale, $1.3 million increase in the gain on sale of loans, net, and an $838,000 increase on gain on derivative instruments. Change in fair value of loans held for sale increased from $40,000 for the three months ended September 30, 2019, to $2.0 million for the three months ended September 30, 2020. The gain on sale of loans, net increased $1.3 million to $3.0 million for the three months ended September 30, 2020, compared to $1.7 million for the three months ended September 30, 2019 primarily as a result of higher loan sales which increased $73.3 million from $79.5 million for the three months ended September 30, 2019, to $152.8 million for the three months ended September 30, 2020. The increase of $838,000 in gain on derivative instruments, net to $1.0 million for the three months ended September 30, 2020, from $177,000 from for the three months ended September 30, 2019 was a result of increased volume of locked loans. There was no gain on sale of available-for-sale securities for the three months ended September 30, 2020 compared to $211,000 gain on sale of available-for-sale securities for the three months ended September 30, 2019.

Non-Interest Expense

Non-interest expense increased $2.1 million or 59.4% to $5.7 million for the three months ended September 30, 2020, from $3.6 million for the three months ended September 30, 2019. The increase for the three months ended September 30, 2020, compared to the three months of September 30, 2019, was primarily as a result of an increase of $1.5 million in salaries and employee benefits, $405,000 in other expenses and $117,000 in data processing related operations costs.

Salaries and employee benefits expense increased by $1.5 million to $3.7 million for the three months ended September 30, 2020, from $2.2 million for the three months ended September 30, 2019. Salaries increased as full time equivalent (FTE) employees increased to 118 as of September 30, 2020, from 95 as of September 30, 2019 primarily as a result of the expansion of the Company’s lending and business banking operations. The other expenses increased $405,000, or 72.6%, to $963,000 for the three months ended September 30, 2020, from $558,000 for the three months ended September 30, 2019, due to increased expenses related to organizational expenses as we continue to grow and expand into new markets. In addition, other expense increased as a result of increases in the reserves for early payoffs (EPO) for loan pay-offs within six-months to the sale of an investor where the premium is to be paid back and pair-off fees for failure to deliver into a Best Efforts commitment when the subject Mortgage Loan has closed. Data processing related operations costs increased $117,000, or 54.7% to $331,000 for the three months ended September 30, 2020 from $214,000 for the three months ended September 30, 2019.

Income Tax Expense

Income tax expense was $785,000 for the three months ended September 30, 2020 compared to $101,000 in expense for the three months ended September 30, 2019. Federal income taxes included in total taxes for the three months ended September 30, 2020 and 2019 was $544,000 and $69,000, respectively, with effective federal tax rates of 19.1% and 15.9%. The increase in the effective tax rate for the three months ended September 30, 2020, compared to the same period a year ago reflected an increase in income before taxes.

For the three months ended September 30, 2020 and 2019, Pennsylvania state tax was $231,000 and $32,000, respectively with effective rate of 8.1% and 6.1%, respectively. The increase in the effective tax rate for the three months ended September 30, 2020, compared to the same period a year ago reflected an increase in income before taxes. In addition, for the three months ended September 30, 2020, New Jersey state tax was $10,000.

Comparison of Statements of Income for the Nine Months Ended September 30, 2020 and September 30, 2019

General

Net income increased $2.9 million to $3.7 million for the nine months ended September 30, 2020, from $803,000 for the nine months ended September 30, 2019. The increase in net income for the nine months ended September 30, 2020, was primarily due to an increases of $7.2 million in non-interest income and $1.4 million in net interest income offset by increases of $4.3 million in non-interest expense and $1.2 million in income tax expense.

Interest Income

Total interest income increased $1.2 million, or 13.7%, to $9.9 million for the nine months ended September 30, 2020, from $8.7 million for the nine months ended September 30, 2019. The increase was primarily the result of an increase in interest and fees on loans of $1.7 million offset by a decrease in interest on investment securities of $366,000 and a decrease in interest on interest-earning deposits with banks of $151,000. Total average interest-earning assets increased $65.4 million to $378.5 million for the nine months ended September 30, 2020, from $313.1 million for the same period in 2019. The increase was primarily as a result of an increase in the average balance of loans of $74.7 million and $11.5 million in average balance of interest-earning deposits with banks partially offset by a $21.3 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 22 basis points to 3.48% for the nine months ended September 30, 2020, as compared to 3.70% for the nine months ended September 30, 2019.

Interest and fees on loans increased $1.7 million to $9.3 million for the nine months ended September 30, 2020, from $7.6 million for the same period in 2019. This increase was primarily due to an increase in average loans outstanding of $74.7 million, which increased to $332.0 million for the nine months ended September 30, 2020, from $257.3 million for the nine months ended September 30, 2019 primarily as a result of an increase in the average balance of PPP loans, loans held for sale, commercial real estate and other commercial business offset by a decrease in the average balance in one-to four-family residential real estate loans. The average yield on loans decreased 21 basis point to 3.75% for the nine months ended September 30, 2020, versus 3.96% for the nine months ended September 30, 2019.

Interest income on interest-earning deposits decreased by $151,000 to $128,000 for the nine months ended September 30, 2020, from $279,000 for the nine months ended September 30, 2019. The decrease was primarily due to a decrease average yield on interest-earning deposits with banks decreased 181 basis points, to 0.64% for the nine months ended September 30, 2020, from 2.45% for the nine months ended September 30, 2019, due to decline in interest rates following the COVID-19 pandemic. The targeted federal funds rate was cut to 0.25% on March 16, 2020. Offsetting this decrease, was an increase in the average balance of interest-earning deposits of $11.5 million to $26.7 million for the nine months ended September 30, 2020, from $15.2 million for the nine months ended September 30, 2019.

Interest on investment securities decreased by $366,000 to $355,000 for the nine months ended September 30, 2020, from $721,000 for the nine months ended September 30, 2019, respectively. Interest on investment securities decreased as a result of a $242,000 decrease in income on taxable and non-taxable interest and dividend investments as well as a $124,000 decrease in interest income on mortgage backed securities and collateralized mortgage obligation securities which decreased to $117,000 for the nine months ended September 30, 2020, from $241,000 for the nine months ended September 30, 2019. The average yield on total securities increased to 2.60% for the nine months ended September 30, 2020, from 2.43% for the same period in 2019. The average balance of investment securities decreased by $21.3 million to $18.2 million for the nine months ended September 30, 2020, from $39.5 million for the nine months ended September 30, 2019 as cash flows from investments were redeployed into higher yielding loan balances.

Interest Expense

Total interest expense decreased $198,000 to $2.4 million for the nine months ended September 30, 2020, from $2.6 million for the nine months ended September 30, 2019, primarily due to a $368,000 decrease in interest expense on deposits offset by $105,000 increase in interest expense on advances from the FHLB and a $68,000 increase in interest expense on advances from the PPPLF.

Interest expense on deposits decreased $368,000 to $1.9 million for the nine months ended September 30, 2020, from $2.3 million for the nine months ended September 30, 2019, primarily as the average cost of deposits decreased to 97 basis points for the nine months ended September 30, 2020 from 123 basis points for the nine months ended September 30, 2019. Offsetting this decrease, was an increase of $16.5 million in the average balance of interest bearing deposits from September 30, 2019. The increase in the average balance of interest bearing deposits of $16.5 million from $248.1 million as of September 30, 2019, to $264.6 million as of September 30, 2020, was primarily as a result of a $31.1 million increase in the average balance of our core deposit accounts offset by a decrease of $14.6 million in the average balance of our certificates of deposit. The average rate paid on money market deposits remained relatively flat at 0.73% for the nine months ended September 30, 2020 and 0.72% for the nine months ended September 30, 2019. The decrease in the balance of our certificates of deposits of $14.6 million from $76.0 million for the nine months ended September 30, 2019, to $61.4 million for the nine months ended September 30, 2020, was primarily the result of a $17.1 million decrease in the average balance of certificates of deposit issued through brokers from $32.6 million for the nine months ended September 30, 2019 to $15.5 million for the nine months ended September 30, 2020, offset by an increase of $2.5 million in the average balance in retail certificate of deposits. The average cost of certificates of deposit was 1.76% for the nine months ended September 30, 2020, as compared to 2.12% for the nine months ended September 30, 2019.

Interest expense on advances from the FHLB increased $105,000 to $424,000 for the nine months ended September 30, 2020, from $319,000 for the nine months ended September 30, 2019 primarily as a result of an increase in the average balance of the FHLB advances. The average balance of the FHLB advances increased $11.2 million to $29.8 million for the nine months ended September 30, 2020, from $18.6 million for the nine months ended September 30, 2019, primarily due to increase in funding requirements for the loan portfolio. Offsetting the increase in the average balance was a decrease in the average rate of 39 basis points from 2.28% for the nine months ended September 30, 2019, to 1.89% for the nine months ended September 30, 2020. During the July 2020, the Company refinanced advances of $27.0 million from the Federal Home Loan Bank to take advantage of the lower interest rate environment.

Net Interest Income

Net interest income increased $1.4 million to $7.5 million for the nine months ended September 30, 2020, from $6.1 million for the nine months ended September 30, 2019. Our net interest-earning assets increased $17.3 million to $61.3 million for the nine months ended September 30, 2020, from $44.0 million for the nine months ended September 30, 2019. Our interest rate spread increased by 6 basis points to 2.47% for the nine months ended September 30, 2020 from 2.41%, for the nine months ended

September 30, 2019. Our net interest margin was 2.64% for the nine months ended September 30, 2020, compared to 2.59% for the nine months ended September 30, 2019.

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

	For the Nine Months Ended September 30,
	2020							2019
	Average Balance		Interest Income/ Expense		Yield/ Cost (5)			Average Balance		Interest Income/ Expense		Yield/ Cost (5)
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	331,954	$	9,329		3.75	%	$	257,324	$	7,639		3.96	%
Interest-earning deposits with banks		26,663		128		0.64	%		15,160		279		2.45	%
Investment securities		18,184		355		2.60	%		39,504		721		2.43	%
Restricted investment in bank stock		1,730		81		6.24	%		1,114		59		7.06	%
Total interest-earning assets		378,531		9,893		3.48	%		313,102		8,698		3.70	%
Non-interest-earning assets		18,015							10,966
Total assets	$	396,546						$	324,068

Interest-bearing liabilities:
Demand deposits	$	104,281		586		0.75	%	$	100,351		723		0.96	%
Money market deposit accounts		45,602		249		0.73	%		31,042		168		0.72	%
Passbook and statement savings accounts		26,200		32		0.16	%		27,962		44		0.21	%
Checking accounts-Municipal		27,061		242		1.19	%		12,717		141		1.48	%
Certificates of deposit		61,443		810		1.76	%		76,022		1,211		2.12	%
Total deposits		264,587		1,919		0.97	%		248,094		2,287		1.23	%
Federal Home Loan Bank advances		29,845		424		1.89	%		18,619		319		2.28	%
Federal Reserve PPPLF advances		22,784		68		0.40	%		—		—		—
Securities sold under agreements to repurchase		—		—		0.00	%		2,363		3		0.17	%
Total interest-bearing liabilities		317,216		2,411		1.01	%		269,076		2,609		1.29	%
Non-interest-bearing liabilities:
Checking		39,192							20,091
Other		9,953							3,054
Total liabilities		366,361							292,221
Shareholders' Equity		30,185							31,847
Total liabilities and Shareholders' equity	$	396,546						$	324,068

Net interest income			$	7,482						$	6,089
Interest rate spread (2)						2.47	%						2.41	%
Net interest-earning assets (3)	$	61,315						$	44,026
Net interest margin (4)						2.64	%						2.59	%
Average interest-earning assets to average interest-bearing liabilities						119.33	%						116.36	%

(1)	Includes loans held for sale.

(2)	Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)	Net interest-earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)	Net interest margin represents net interest income divided by total average interest-earning assets.

(5)	Annualized.

Rate/ Volume Analysis

	For the Nine Months Ended September 30, 2020 vs 2019
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	2,440		$	(750	)	$	1,690
Interest-earning deposits with banks		231			(382	)		(151	)
Investment securities		(456	)		90			(366	)
Restricted investment in bank stock		35			(13	)		22
Total interest-earning assets		2,250			(1,055	)		1,195
Interest-bearing liabilities:
Demand deposits		55			(192	)		(137	)
Money market deposit accounts		80			1			81
Passbook and statement savings accounts		(3	)		(9	)		(12	)
Checking accounts-Municipal		153			(52	)		101
Certificates of deposit		(240	)		(161	)		(401	)
Total deposits		45			(413	)		(368	)
Federal Home Loan Bank advances		206			(101	)		105
Federal Reserve PPPLF		—			68			68
Securities sold under agreements to repurchase		(4	)		1			(3	)
Total interest-bearing liabilities		247			(445	)		(198	)
Change in net interest income	$	2,003		$	(610	)	$	1,393

Provision for Loan Losses

Provision for loan losses increased by $213,000 to $985,000 for the nine months ended September 30, 2020, from $772,000 for the nine months ended September 30, 2019. Non-performing loans decreased $1.4 million, or 37.8% from $3.7 million at December 31, 2019 to $2.3 million as of September 30, 2020, as a result of decreases of $736,000 in one-to-four family residential real estate loans, $441,000 in medical education loans and $269,000 in home equity and HELOCs loans compared to December 31, 2019. During the nine months ended September 30, 2020, there were charge-offs recorded of $514,000 and $1,000 received in recoveries. During the nine months ended September 30, 2019, there were $394,000 in net charge-offs recorded. Due to uncertainty of the changes in economic conditions from the COVID-19 pandemic, the Company increased the qualitative factors in the allowance for loan losses across the loan portfolio.

Non-Interest Income

Non-interest income increased $7.2 million to $12.3 million for the nine months ended September 30, 2020, from $5.1 million for the nine months ended September 30, 2019. The increase in non-interest income compared to the same period in 2019 was primarily due to an increase of $4.0 million in the gain on sale of loans, net to $7.0 million for the nine months ended September 30, 2020, compared to $3.0 million for the nine months ended September 30, 2019, primarily as a result of higher loan sales which increased $216.2 million from $146.8 million for the nine months ended September 30, 2019, to $363.0 million for the nine months ended September 30, 2020. The increase in fair value of loans held for sale of $1.9 million for nine months end September 30, 2020 compared to same period in 2019 was primarily due to an increase in the loans held for sale balance, from $37.9 million at December 31, 2019, to $100.1 million at September 30, 2020. Gain from derivative instruments, net increased $1.2 million from $1.3 million for the nine months ended September 30, 2019 to $2.5 million for the nine months ended September 30, 2020, Offsetting these increases was a $78,000 decrease in gain on sale of available-for-sale securities, net from $219,000 for nine months ended September 30, 2019 to $141,000 for nine months ended September 30, 2020.

Non-Interest Expense

Non-interest expense increased $4.3 million or 45.7% to $13.7 million for the nine months ended September 30, 2020, from $9.4 million for the nine months ended September 30, 2019. The increase was primarily as a result of an increase of $2.8 million in salaries and employee benefits, $856,000 in other expenses and $216,000 in data processing related operations costs.

Salaries and employee benefits expense increased by $2.8 million to $8.5 million for the nine months ended September 30, 2020, from $5.7 million for the nine months ended September 30, 2019. Salaries increased as FTE employees increased to 118 FTEs as of September 30, 2020, from 95 September 30, 2019. The increase was primarily a result of the expansion of the Company’s lending and business banking operations. The other expenses increased $856,000 or 60.3%, to $2.3 million for the nine months ended September 30, 2020, from $1.4 million for the nine months ended September 30, 2019, due to increased expenses related to organizational expenses as we continue to grow and expand into new markets. In addition, other expense increased as a result of increases in the reserves for early payoffs (EPO) for loan pay-offs within six-months to the sale of an investor where the premium is to be paid back and pair-off fees for failure to deliver into a Best Efforts commitment when the subject Mortgage Loan has closed. Data processing related operations costs increased approximately $216,000 to $806,000 for the nine months ended September 30, 2020, from $590,000 for the nine months ended September 30, 2019.

Income Tax Expense

Income tax expense was $1.4 million for the nine months ended September 30, 2020, compared to $203,000 in expense for the nine months ended September 30, 2019. Federal income taxes included in total taxes for the nine months ended September 30, 2020 and 2019 was $988,000 and $160,000, respectively, with effective federal tax rates of 19.3% and 15.9%. The increase in the effective tax rate for the nine months ended September 30, 2020, compared to the same period a year ago reflected an increase in income before taxes.

For the nine months ended September 30, 2020 and 2019, Pennsylvania state tax was $406,000 and $43,000, respectively with effective rate of 7.9% and 4.3%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2020, compared to the same period a year ago reflected an increase in income before taxes. In addition, for the nine months ended September 30, 2020, New Jersey state tax was $29,000.

Non-Performing Assets We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due and non-accruing TDRs. Non-performing assets, including non-performing loans and other real estate owned, totaled $2.3 million, or 0.4% of total assets, at September 30, 2020. There were no non-accruing troubled debt restructurings at September 30, 2020 and December 31, 2019. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. There were no accruing loans past due 90 days or more at September 30, 2020 and at December 31, 2019.

	At September 30,			At December 31,
	2020			2019
	(Dollars in thousands)
Non-accrual loans:
Residential:
One- to four-family	$	950		$	1,686
Home equity & HELOCs		39			308
Consumer:
Medical education		1,269			1,710
Total non-accrual loans		2,258			3,704

Loans accruing past 90 days		—			—

Total non-performing loans		2,258			3,704

Real estate owned		—			—
Other non-performing assets		—			—
Total non-performing assets	$	2,258		$	3,704

Ratios:
Total non-performing loans to total loans receivable		0.71	%		1.45	%
Total non-performing loans to total assets		0.44	%		1.04	%
Total non-performing assets to total assets		0.44	%		1.04	%

Allowance for Loan Losses

The following table sets forth activity in our allowance for loan losses for the periods indicated.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of year	$	1,845		$	1,182		$	1,437		$	956

Charge-offs:
Residential:
One- to four-family		—			—			—			—
Home equity & HELOCs		—			—			—			—
Commercial real estate		—			—			—			—
Commercial business		—			—			—			—
Construction		—			—			—			—
Consumer:		—			—			—			—
Medical education		(360	)		(93	)		(514	)		(398	)
Other		—			—			—			—
Total charge-offs		(360	)		(93	)		(514	)		(398	)

Recoveries:
Residential:
One- to four-family		—			—			—			3
Home equity & HELOCs		—			—			—			—
Commercial real estate		—			—			—			—
Commercial business		—			—			—			—
Construction		—			—			—			—
Consumer:
Medical education		—			1			1			1
Other		—			—			—			—
Total recoveries		—			1			1			4

Net (charge-offs) recoveries		(360	)		(92	)		(513	)		(394	)
Provision for loan losses		424			244			985			772
Balance at end of period	$	1,909		$	1,334		$	1,909		$	1,334

Ratios:
Net charge-offs to average loans outstanding		0.12	%		0.04	%		0.18	%		0.17	%
Allowance for loan losses to non-performing loans at end of period		84.54	%		37.55	%		84.54	%		37.55	%
Allowance for loan losses to total loans at end of period		0.60	%		0.54	%		0.60	%		0.54	%

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from sales of loans and securities, and matured loans and securities. In addition, we may use brokered certificates of deposit as a funding source of our asset base. As of September 30, 2020, and December 31, 2019, the Company had $10.0 million, or 2.0% of total assets, and $22.5 million, or 6.3% of total assets, of brokered certificates of deposit, respectively. We also have the ability to borrow from the FHLB and from the PPPLF. The Bank had advances from PPPLF of $57.7 million with unused borrowing capacity of $18.0 million as of September 30, 2020. The Bank also had FHLB advances of $27.0 million outstanding and $37.2 million in letters of credit with unused borrowing capacity of $122.7 million as of September 30, 2020. Additionally, at September 30, 2020, we had the ability to borrow $3.0 million from the Atlantic Community Bankers Bank and we maintained a line of credit equal to 95% of the fair value of collateral held by the Federal Reserve Bank of Philadelphia, which was $1.1 million at September 30, 2020. We have not borrowed against the credit lines with the Atlantic Community Bankers Bank and the Federal Reserve Bank of Philadelphia during the nine months ended September 30, 2020.

The board of directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have sufficient sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2020.

We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2020, cash and cash equivalents totaled $47.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $18.0 million at September 30, 2020. Please refer to the section titled COVID-19 Update for additional information.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $57.7 million and $21.8 million for the nine months ended September 30, 2020, and September 30, 2019, respectively. Net cash (used in) provided by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was ($58.9) million and $4.9 million for the nine months ended September 30, 2020, and September 30, 2019, respectively. During the nine months ended September 30, 2020, there was $4.9 million in available-for-sale securities sold compared to $19.1 million available-for-sale securities sold for the nine months ended September 30, 2019. Net cash provided by financing activities was $143.1 million and $27.2 million for the nine months ended September 30, 2020, and 2019, respectively. Net cash provided by financing activities for the nine months ended September 30, 2020, consisted primarily of increases in deposits of $87.3 million and proceeds of $57.7 million in proceeds from the PPPLF. Net cash provided by financing activities for the nine months ended September 30, 2019 primarily consisted of $17.0 million increase in net long-term borrowing from the FHLB advances and $11.1 million net increase in deposits.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2020, totaled $51.5 million of total deposits which included brokered certificates of deposit of $10.0 million. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings

than we currently pay. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management. The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2020, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

Regulatory Capital

Information presented for September 30, 2020, and December 31 2019, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

Federal bank regulators require the Bank maintain minimum ratios of core capital to adjusted average assets of 4.0%, common equity Tier 1 capital to risk-weighted assets of 4.5%, Tier 1 capital to risk-weighted assets of 6.0% and total risk-based capital to risk-weighted assets of 8.0%. At September 30, 2020, the Bank met all the capital adequacy requirements to which it was subject. At September 30, 2020, the Bank was “well capitalized” under the regulatory framework for prompt corrective action. To be “well capitalized,” the Bank must maintain minimum leverage, common equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios of at least 5.0%, 6.5%, 8.0% and 10.0%, respectively. Management believes that no conditions or events have occurred since September 30, 2020 that would materially adversely change the Bank’s capital classifications.

The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

To Be Well Capitalized

Under the Prompt

Capital Adequacy

Corrective Action

Actual

Purposes

Provision

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2020

Total risk-based capital (to

risk-weighted assets)

35,605

12.9

$>22,068

> 8.0%

$>27,585

>10.0%

Tier 1 capital (to risk-weighted

assets)

33,696

12.2

>16,551

> 6.0%

>22,068

> 8.0%

Tier 1 capital (to average assets)

33,696

8.4

>16,120

> 4.0%

>20,150

> 5.0%

Tier 1 common equity (to risk

-weighted assets)

33,696

12.2

>12,413

> 4.5%

>17,930

> 6.5%

As of December 31, 2019

Total risk-based capital (to

risk-weighted assets)

31,203

14.7

$>16,981

> 8.0%

$>21,227

>10.0%

Tier 1 capital (to risk-weighted

assets)

29,766

14.0

>12,736

> 6.0%

>16,981

> 8.0%

Tier 1 capital (to average assets)

29,766

8.5

>13,981

> 4.0%

>17,476

> 5.0%

Tier 1 common equity (to risk

-weighted assets)

29,766

14.0

>9,552

> 4.5%

>13,797

> 6.5%

As a licensed mortgagee, the Bank is subject to the rules and regulations of the Department of Housing and Urban Development (“HUD”), Federal Housing Authority (“FHA”) and state regulatory authorities with respect to originating, processing and selling loans. Those rules and regulations, among other things, require the maintenance of minimum net worth levels (which vary based on the portfolio of FHA loans

originated by the Bank). Failure to meet the net worth requirements could adversely impact the ability of the Bank to originate loans and access secondary markets. As of September 30, 2020, and December 31, 2019, the Bank maintained the minimum required net worth levels.

The Bank must hold a capital conservation buffer, subject to a phase-in from January 1, 2016, through December 31, 2019, above its minimum risk-based capital requirements. As of September 30, 2020, the Bank is required to maintain a capital conservation buffer of 2.50%. At September 30, 2020, the Bank met the capital conservation buffer requirements. Failure to maintain the full amount of the buffer will result in restrictions on the Bank’s ability to make capital distributions and to pay discretionary bonuses to executive officers. The phase-in requires the Bank to increase its capital conservation buffer from 0.625% as of June 30, 2016 to 2.50% as of June 30, 2019 and thereafter.

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition. On September 17, 2019, the board of the Federal Deposit Insurance Corporation passed a final rule on the community bank leverage ratio, setting the minimum required community bank leverage ratio at 9%. The rule went into effect January 1, 2020. On April 6, 2020, the Federal Deposit Insurance Corporation (“FDIC”), Board of Governors of the Federal Reserve System, and Office of the Comptroller of the Currency issued two interim final rules that make changes to the community bank leverage ratio framework and implemented Section 4012 of the CARES Act. These changes related to the minimum Tier 1 leverage ratio that can be used to take advantage of the simplified community bank leverage ratio framework. The two interim final rules are applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. The lower Tier 1 leverage ratio modification is temporary to 8% and will revert back to the existing 9 percent ratio effective January 1, 2022.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2020, we had outstanding commitments to originate loans of $124.2 million, unused lines of credit totaling $24.9 million and $37.8 million in stand-by letters of credit outstanding. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2020, totaled $51.5 million of total deposits which included brokered certificates of deposit of $10.0 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for equipment, agreements with respect to borrowed funds and deposit liabilities.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies

Item 4 – Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated 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 (the "Exchange Act")) as of September 30, 2020. Based on their evaluation of the Company's disclosure controls and procedures, the Company's Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the third fiscal quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At September 30, 2020, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.

Item 1A – Risk Factors

Not required for smaller reporting companies

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable

(b)

Not applicable

(c)

Purchase of Equity Securities

The Company’s repurchases of its common stock made during the quarter ended September 30, 2020 are set forth in the table below:

Period	Total Number of Shares		Average Price Paid per share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2020 - July 31, 2020		1,365	$	13.13		1,365		67,662
August 1, 2020 - August 31, 2020		12,821		12.34		12,821		54,841
September 1, 2020- September 30, 2020		2,265		13.07		2,265		52,576
Total		16,451	$	12.51		16,451

(1) In April 2019, a stock repurchase plan was approved to repurchase up to 100,000 shares of the Company’s outstanding common stock. There is no expiration date for this plan.

Item 3 – Defaults upon Senior Securities

Not Applicable

Item 4 – Mine Safety Disclosures

Not Applicable

Item 5 – Other Information

None

Item 6 – Exhibits


31.1		Rule 13a-14(a) Certification of the Chief Executive Officer *

31.2		Rule 13a-14(a) Certification of the Chief Financial Officer *

32		Section 1350 Certification *

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

Filed herewith

SIGNATURES

HV BANCORP, INC.

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.

		HV BANCORP, INC.

Date: November 13, 2020	By:	/s/ Travis J. Thompson
		Travis J. Thompson
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: November 13, 2020	By:	/s/ Joseph C. O’Neill, Jr.
		Joseph C. O’Neill, Jr.
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)