HV Bancorp, Inc. - Quarter Report: 2020 June (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 June 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 August 10, 2020, there were 2,235,160 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		38

		Item 3 – Quantitative and Qualitative Disclosures about Market Risk		57

		Item 4 – Controls and Procedures		58

	PART II OTHER INFORMATION			58

		Item 1 – Legal Proceedings		58

		Item 1A – Risk Factors		58

		Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		58

		Item 3 – Defaults upon Senior Securities		59

		Item 4 – Mine Safety Disclosures		59

		Item 5 – Other Information		59

		Item 6 – Exhibits		59

SIGNATURES				60

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements – Unaudited

HV BANCORP, INC. AND SUBSIDIARY

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

	At June 30,			At December 31,
	2020			2019
Assets
Cash and due from banks	$	1,553		$	1,473
Interest-earning deposits with banks		26,360			19,152
Federal funds sold		738			—
Cash and cash equivalents		28,651			20,625
Investment securities available-for-sale, at fair value		18,639			21,156
Equity securities		500			500
Loans held for sale, at fair value		43,485			37,876
Loans receivable, net of allowance for loan losses of $1,845 at June 30, 2020 and $1,437 at December 31, 2019		309,563			255,032
Bank-owned life insurance		6,331			6,255
Restricted investment in bank stock		1,618			1,552
Premises and equipment, net		2,762			2,501
Operating lease right-of-use assets		7,937			5,979
Accrued interest receivable		1,251			967
Mortgage banking derivatives		2,716			1,204
Mortgage servicing rights		508			—
Other assets		777			939
Total Assets	$	424,738		$	354,586

Liabilities and Shareholders' Equity

Liabilities
Deposits	$	300,571		$	283,767
Advances from the Federal Home Loan Bank		27,000			27,000
Advances from the Federal Reserve's Paycheck Protection Program liquidity facility ("PPPLF")		47,834			—
Operating lease liabilities		8,117			6,023
Advances from borrowers for taxes and insurance		2,492			2,138
Deferred income taxes, net		499			97
Other liabilities		2,968			1,962
Total Liabilities		389,481			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 June 30, 2020 and December 31, 2019, respectively; 2,239,253 and 2,268,917 shares outstanding as of June 30, 2020 and December 31, 2019, respectively		23			23
Treasury Stock, at cost (31,472 shares at June 30, 2020 and 208 December 31, 2019)		(379	)		(3	)
Additional paid-in capital		20,893			20,740
Retained earnings		16,618			14,973
Accumulated other comprehensive income (loss)		158			(18	)
Unearned Employee Stock Option Plan		(2,056	)		(2,116	)
Total Shareholders' Equity		35,257			33,599
Total Liabilities and Shareholders' Equity	$	424,738		$	354,586

See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2020		2019		2020		2019
Interest Income
Interest and fees on loans	$	3,170	$	2,520	$	5,946	$	4,850
Interest and dividends on investments:
Taxable		92		112		188		221
Nontaxable		12		72		23		144
Interest on mortgage-backed securities and collateralized mortgage obligations		39		86		92		188
Interest on interest-earning deposits and federal funds sold		15		69		105		184
Total Interest Income		3,328		2,859		6,354		5,587
Interest Expense
Interest on deposits		575		721		1,352		1,410
Interest on advances from the Federal Home Loan Bank		164		116		320		161
Interest on advances from the Federal Reserve PPPLF		19		—		19		—
Interest on securities sold under agreements to repurchase		—		1		—		2
Total Interest Expense		758		838		1,691		1,573
Net interest income		2,570		2,021		4,663		4,014
Provision for Loan Losses		450		287		561		528
Net interest income after provision for loan losses		2,120		1,734		4,102		3,486
Non-Interest Income
Fees for customer services		31		38		70		68
Increase in cash surrender value of bank-owned life insurance		38		40		76		79
Gain on sale of loans, net		2,327		407		3,956		1,297
Gain on sale of available-for-sale securities, net		141		4		141		8
Gain from derivative instruments, net		1,080		769		1,464		1,164
Change in fair value of loans held-for-sale		287		682		293		306
Other		41		4		89		8
Total Non-Interest Income		3,945		1,944		6,089		2,930
Non-Interest Expense
Salaries and employee benefits		2,368		1,913		4,781		3,504
Occupancy		450		384		883		706
Federal deposit insurance premiums		63		53		120		115
Data processing related operations		246		187		475		376
Professional fees		145		149		336		281
Other expenses		707		458		1,313		862
Total Non-Interest Expense		3,979		3,144		7,908		5,844
Income before income taxes		2,086		534		2,283		572
Income Tax Expense		590		126		638		102
Net Income	$	1,496	$	408	$	1,645	$	470
Net Income per share:
Basic	$	0.73	$	0.20	$	0.80	$	0.23
Diluted	$	0.73	$	0.20	$	0.80	$	0.23
See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Comprehensive Income, Net of Taxes
Net Income	$	1,496		$	408		$	1,645		$	470
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities (pre-tax $264 and $533, and $391 and $885, respectively)		186			375			275			624
Reclassification for gains included in income (pre-tax ($141) and ($4) and ($141) and ($8), respectively) (1)		(99	)		(3	)		(99	)		(6	)
Other comprehensive income		87			372			176			618
Comprehensive Income	$	1,583		$	780		$	1,821		$	1,088

(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 Six Months Ended June 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		Unearned ESOP Shares			Total
Balance, April 1, 2020		2,259,052		$	23	$	(148	)	$	20,831	$	15,122	$	71	$	(2,086	)	$	33,813
ESOP shares committed to be released		—			—		—			—		—		—		30			30
Treasury stock purchased		(19,799	)		—		(231	)		—		—		—		—			(231	)
Stock option expense		—			—		—			15		—		—		—			15
Restricted stock expense		—			—		—			47		—		—		—			47
Net income		—			—		—			—		1,496		—		—			1,496
Other comprehensive income		—			—		—			—		—		87		—			87
Balance, June 30, 2020		2,239,253		$	23	$	(379	)	$	20,893	$	16,618	$	158	$	(2,056	)	$	35,257

			Common Stock Shares						Common Stock Amount					Treasury Stock							Additional Paid-In Capital					Retained Earnings					Accumulated Other Comprehensive Income (Loss)							Unearned ESOP Shares							Total
Balance, April 1, 2019				2,259,125					$		23			$		—					$		20,548			$		13,748			$		(302		)			$		(2,208		)			$		31,809
ESOP shares committed to be released				—							—					—							3					—					—							31							34
Treasury stock purchased				(208		)					—					(3		)					—					—					—							—							(3		)
Stock option expense				—							—					—							14					—					—							—							14
Restricted stock expense				—							—					—							46					—					—							—							46
Net income				—							—					—							—					408					—							—							408
Other comprehensive income				—							—					—							—					—					372							—							372
Restricted stock awards				10,000							—					—							—					—					—							—							—
Balance, June 30, 2019				2,268,917					$		23			$		(3		)			$		20,611			$		14,156			$		70					$		(2,177		)			$		32,680

		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	—									—					—							5					—					—							60							65
Treasury stock purchased	(31,264				)					—					(376		)					—					—					—							—							(376		)
Stock option exercise	1,600									—					—							24					—					—							—							24
Stock option expense	—									—					—							30					—					—							—							30
Restricted stock expense	—									—					—							94					—					—							—							94
Net income	—									—					—							—					1,645					—							—							1,645
Other comprehensive income	—									—					—							—					—					176							—							176
Balance, June 30, 2020	2,239,253						$			23		$			(379		)		$			20,893		$			16,618		$			158				$			(2,056		)		$			35,257


	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		—				—			—				5			—			—				60				65
Treasury stock purchased		(208	)			—			(3	)			—			—			—				—				(3	)
Stock option expense		—				—			—				28			—			—				—				28
Restricted stock expense		—				—			—				91			—			—				—				91
Net income		—				—			—				—			470			—				—				470
Other comprehensive income		—				—			—				—			—			618				—				618
Restricted stock awards		14,000				—			—				—			—			—				—				—
Balance, June 30, 2019		2,268,917			$	23		$	(3	)		$	20,611		$	14,156		$	70			$	(2,177	)		$	32,680

See Notes to the Unaudited Consolidated Financial Statements

HV BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

Six Months Ended June 30,	2020			2019
Cash Flows from Operating Activities
Net income	$	1,645		$	470
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		291			216
Amortization of net deferred loan costs		246			147
Amortization of net securities premiums		38			49
Amortization of operating lease right-of-use assets		282			—
Gain on sale of available-for-sale securities, net		(141	)		(8	)
Gain from derivative instruments, net		(1,464	)		(1,164	)
Provision for loan losses		561			528
Deferred income taxes		328			307
Accretion of deferred gain on sale-leaseback transaction		—			(7	)
Earnings on bank owned life insurance		(76	)		(79	)
Stock based compensation expense		124			119
ESOP compensation expense		65			65
Loans held for sale:
Originations, net of prepayments		(211,528	)		(84,062	)
Proceeds from sales		210,169			67,256
Gain on sales		(3,956	)		(1,297	)
Change in fair value of loans held for sale		(293	)		(306	)
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable		(284	)		(77	)
Other assets		(346	)		(212	)
Other liabilities		691			180
Net cash used in operating activities		(3,648	)		(17,875	)
Cash Flows from Investing Activities
Net increase in loans receivable		(55,338	)		(9,473	)
Activity in available-for-sale securities:
Proceeds from sales		3,961			5,018
Maturities and repayments		4,138			5,295
Purchases		(5,229	)		—
Activity in held-to-maturity securities:
Maturities and repayments		—			12
Purchases of restricted investment in bank stock		(1,290	)		(1,095	)
Redemption of restricted investment in bank stock		1,224			170
Purchases of premises and equipment		(432	)		(441	)
Net cash used in investing activities		(52,966	)		(514	)
Cash Flows from Financing Activities
Net increase in deposits		16,804			1,669
Net increase in advances from borrowers for taxes and insurance		354			639
Net increase in securities sold under agreements to repurchase		—			1,326
Proceeds from long-term borrowings from FHLB		—			25,000
Repayment of long-term borrowings from FHLB		—			(7,000	)
Proceeds from the Federal Reserve Paycheck Protection Program Lending Facility		47,834			—
Proceeds from stock option exercise		24			—
Purchase of treasury stock		(376	)		(3	)
Net cash provided by financing activities		64,640			21,631
Increase in Cash and Cash Equivalents		8,026			3,242
Cash and Cash Equivalents, beginning of year		20,625			16,992
Cash and Cash Equivalents, end of year	$	28,651		$	20,234
Supplementary Disclosure of Cash Flow Information
Cash paid during the year of interest	$	1,893		$	1,502
Cash paid during the year for income taxes	$	59		$	—
Recognition of operating lease right-of-use assets	$	2,240		$	—
Recognition of operating lease obligations	$	2,228		$	—

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 and New Castle County, Delaware) 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 six months ended June 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 June 30, 2020, the Company entered into 73 loan modification agreement with an outstanding balance of $29.0 million.

•

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 June 30, 2020, the Company had received over 450 applications from new and existing customers with an outstanding balance of approximately $73.2 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 6, Fair Value Presentation.

2. INVESTMENT SECURITIES

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

	June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
U.S. Governmental securities	$	406	$	5	$	—		$	411
Corporate notes		5,900		92		(10	)		5,982
Collateralized mortgage obligations - agency residential		5,544		63		(48	)		5,559
Mortgage-backed securities - agency residential		3,555		91		—			3,646
Municipal securities		1,762		6		—			1,768
Bank CDs		1,248		25		—			1,273
	$	18,415	$	282	$	(58	)	$	18,639

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 June 30, 2020 were as follows:

	June 30, 2020
	Available-for-Sale
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	2,024	$	2,033
Due from one to five years		2,986		3,030
Due from after five to ten years		3,001		3,061
Due after ten years		10,404		10,515
	$	18,415	$	18,639

Securities with a fair value of $6.5 million and $7.4 million at June 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 six months ended June 30, 2020 was $4.0 million. For the three months and six months ended June 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 six months ended June 30, 2019 were $3.0 million and $5.0 million. Gross realized gains on such sales were approximately $4,000 and gross realized losses were $0 for the three months ended June 30, 2019. For the six months ended June 30, 2019, gross realized gain on such sales were approximately $9,000 and gross realized losses were $1,000.

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

	June 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		—		—			1,490		(10	)		1,490		(10	)
Collateralized mortgage obligations		960		(37	)		902		(11	)		1,862		(48	)
Mortgage-backed securities		—		—			—		—			—		—
Municipal securities		—		—			—		—			—		—
Bank CDs		—		—			—		—			—		—
	$	960	$	(37	)	$	2,392	$	(21	)	$	3,352	$	(58	)

	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 June 30, 2020 and December 31, 2019, the investment portfolio included two U.S. Government securities with total fair values of $411,000 and $436,000, respectively. There were no securities in an unrealized loss position as of June 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 June 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 June 30, 2020 and December 31, 2019, the investment portfolio included nine corporate notes, respectively with total fair values of $6.0 million and $5.6 million at the end of each of period, respectively. Of these securities, three were in an unrealized loss position as of June 30, 2020 and December 31, 2019, respectively. At the time of purchase and as of June 30, 2020 and December 31, 2019, the three bonds in an unrealized loss position continue to maintain investment grade ratings. As of June 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 June 30, 2020 and December 31, 2019, the investment portfolio included twenty-nine and thirty collateralized mortgage obligations (“CMOs”) with total fair values of $5.6 million and $6.5 million, respectively. Of these securities, ten and twenty-seven were in an unrealized loss position as of June 30, 2020 and December 31, 2019, respectively. The CMO portfolio is comprised of 100% agency (FHLMC, FNMA and GNMA) investment grade bonds. As of June 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 June 30, 2020 and December 31, 2019, the investment portfolio included thirteen mortgage backed securities (“MBS”) with a total fair value of $3.6 million and $4.1 million, respectively. There were no securities in an unrealized loss position as of June 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 June 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 June 30, 2020 and December 31, 2019, the investment portfolio included four and five municipal securities with a total fair value of $1.8 million and $2.1 million for both periods. Of these securities, zero were in an unrealized loss position as of June 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 June 30, 2020 and December 31, 2019, continue to maintain investment grade ratings. As of June 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 June 30, 2020 and December 31, 2019, the investment portfolio included five and ten Bank Certificate of Deposits (“CDs”) with a total fair value of $1.3 million and $2.5 million, respectively. As of June 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 June 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 June 30, 2020, and December 31, 2019. As of June 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 June 30, 2020, and December 31, 2019:

	June 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 June 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:

	June 30,			December 31,
(Dollars in thousands)	2020			2019
Residential:
One-to-four family	$	168,047		$	197,547
Home equity and HELOCs		4,085			4,383
Commercial:
Commercial real estate		44,802			35,188
Commercial business		13,962			11,119
SBA PPP loans		73,188			—
Construction		2,464			784
Consumer:
Medical education		5,660			6,097
Other		27			8

		312,235			255,126

Unearned discounts, origination and commitment fees and costs, net		(827	)		1,343
Allowance for loan losses		(1,845	)		(1,437	)

	$	309,563		$	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 June 30, 2020, the balance of the private education loans was $5.7 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At June 30, 2020, there were three loans with a balance of approximately $61,000 that are 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 $27,000 and $8,000 at June 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 June 30, 2020 and 2019.

Allowance for Loan Losses	For the three months ended June 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	$	760	$	—		$	—	$	8	$	768	$	—	$	768
Home equity and HELOCs		13		—			—		26		39		—		39
Commercial:
Commercial real estate		269		—			—		63		332		—		332
Commercial business		154		—			—		3		157		—		157
SBA PPP loans		—		—			—		—		—		—		—
Construction		22		—			—		5		27		—		27
Consumer:
Medical education		331		(154	)		—		161		338		—		338
Other		—		—			—		—		—		—		—
Unallocated		—		—			—		184		184		—		184

	$	1,549	$	(154	)	$	—	$	450	$	1,845	$	—	$	1,845

Allowance for Loan Losses	For the three months ended June 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	$	729	$	—		$	3	$	(21	)	$	711	$	—	$	711
Home equity and HELOCs		46		—			—		—			46		—		46
Commercial:
Commercial real estate		61		—			—		38			99		—		99
Commercial business		66		—			—		42			108		13		95
Construction		15		—			—		(7	)		8		—		8
Consumer:
Medical education		138		(164	)		—		236			210		—		210
Other		—		—			1		(1	)		—		—		—

	$	1,055	$	(164	)	$	4	$	287		$	1,182	$	13	$	1,169

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

Allowance for Loan Losses	For the six months ended June 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	$	—		$	—	$	67		$	768	$	—	$	768
Home equity and HELOCs		44		—			—		(5	)		39		—		39
Commercial:
Commercial real estate		229		—			—		103			332		—		332
Commercial business		122		—			—		35			157		—		157
SBA PPP loans		—		—			—		—			—		—		—
Construction		8		—			—		19			27		—		27
Consumer:
Medical education		333		(154	)		1		158			338		—		338
Other		—		—			—		—			—		—		—
Unallocated		—		—			—		184			184		—		184

	$	1,437	$	(154	)	$	1	$	561		$	1,845	$	—	$	1,845

Allowance for Loan Losses	For the six months ended June 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	$	(14	)	$	711	$	—	$	711
Home equity and HELOCs		46		—			—		—			46		—		46
Commercial:
Commercial real estate		59		—			—		40			99		—		99
Commercial business		59		—			—		49			108		13		95
Construction		13		—			—		(5	)		8		—		8
Consumer:
Medical education		56		(305	)		—		459			210		—		210
Other		1		—			—		(1	)		—		—		—

	$	956	$	(305	)	$	3	$	528		$	1,182	$	13	$	1,169

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. 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 June 30, 2020 and December 31, 2019:

June 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	$	168,047	$	933	$	167,114
Home equity and HELOCs		4,085		—		4,085
Commercial
Commercial real estate		44,802		309		44,493
Commercial business		13,962		108		13,854
SBA PPP loans		73,188		—		73,188
Construction		2,464		—		2,464
Consumer:
Medical education		5,660		—		5,660
Other		27		—		27

	$	312,235	$	1,350	$	310,885

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 June 30, 2020 and December 31, 2019:

	June 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	$	933	$	1,039	$	—	$	1,566	$	1,703	$	—
Home equity and HELOCs		—		—		—		308		308		—
Commercial:
Commercial real estate		309		309		—		317		317		—
Commercial business		108		108		—		—		—		—
SBA PPP loans		—		—		—		—		—		—
		1,350		1,456		—		2,191		2,328		—
With an allowance recorded
Commercial:
Commercial business		—		—		—		120		121		12
		—		—		—		120		121		12
	$	1,350	$	1,456	$	—	$	2,311	$	2,449	$	12

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

	Three Months Ended June 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	$	1,236	$	—	$	1,568	$	—
Home equity and HELOCs		140		—		192		—
Commercial:
Commercial real estate		311		5		355		2
Commercial business		111		2		—		—
Consumer:
Medical education		—		—		—		—
		1,798		7		2,115		2
With an allowance recorded
Commercial business		—		—		134		2
		—		—		134		2
	$	1,798	$	7	$	2,249	$	4

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 June 30, 2020, and 2019, respectively.

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

	Six Months Ended June 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	$	1,346	$	—	$	1,568	$	—
Home equity and HELOCs		196		—		192		—
Commercial:
Commercial real estate		313		11		355		9
Commercial business		114		3		—		—
		1,969		14		2,115		9
With an allowance recorded
Commercial business		—		—		134		4
		—		—		134		4
	$	1,969	$	14	$	2,249	$	13

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

have increased approximately $38,000 and $58,000 for the six months ended June 30, 2020, and 2019, respectively.

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

	June30,		December 31,
(Dollars in thousands)	2020		2019
Residential:
One-to-four family	$	1,047	$	1,686
Home equity and HELOCs		—		308
Commercial:
Commercial real estate		—		—
Commercial business		—		—
SBA PPP loans		—		—
Construction		—		—
Consumer:
Medical education		1,728		1,710
Other		—		—

	$	2,775	$	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 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 June 30, 2020, and December 31, 2019:

	June 30, 2020
			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential:
One-to-four family	$	167,000	$	—	$	1,047	$	—	$	168,047
Home equity and HELOCs		4,085		—		—		—		4,085
Commercial:
Commercial real estate		44,294		199		309		—		44,802
Commercial business		13,789		—		173		—		13,962
SBA PPP Loans		73,188		—		—		—		73,188
Construction		2,464		—		—		—		2,464
Consumer:
Medical education		3,932		—		1,728		—		5,660
Other		27		—		—		—		27

	$	308,779	$	199	$	3,257	$	—	$	312,235

	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 June 30, 2020, and December 31, 2019:

	June 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	$	676	$	158	$	274	$	1,108	$	166,939	$	168,047	$	—
Home equity and HELOCs		109		1		—		110		3,975		4,085		—
Commercial:
Commercial real estate		—		—		—		—		44,802		44,802		—
Commercial business		109		—		—		109		13,853		13,962		—
SBA PPP loans		—		—		—		—		73,188		73,188		—
Construction		—		—		—		—		2,464		2,464		—
Consumer:
Medical education		194		618		61		873		4,787		5,660		—
Other		—		—		—		—		27		27		—

	$	1,088	$	777	$	335	$	2,200	$	310,035	$	312,235	$	—

	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 June 30, 2020, we had processed 73 deferrals of either the full loan payment or the principal component of the loan payment on outstanding loan balances of $23.0 million in connection with the COVID-19 relief provided by the CARES Act.

As of June 30, 2020, and December 31, 2019, the Company had two loans identified as TDRs totaling $243,000 and $259,000, respectively. At June 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 six months ended June 30, 2020 and 2019. No additional loan commitments were outstanding to these borrowers at June 30, 2020, and December 31, 2019. At June 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 June 30, 2020:

	As of June 30, 2020
	Number		Accrual		Non-Accrual
(Dollars in thousands)	Of Loans		Status		Status		Total TDRs
Commercial real estate		1	$	135	$	—	$	135
Commercial business		1		108		—		108
Total		2	$	243	$	—	$	243

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 $387,000 and $403,000 at June 30, 2020 and December 31, 2019, respectively.

5. MORTGAGE SERVICING RIGHTS

During the quarter ending June 30, 2020, the Company sold a portfolio of residential mortgage loans to a third party, while retaining the rights to service the loans. As of June 30, 2020, the value of the mortgage servicing rights associated with the loan sales totaled $508,000 . 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 $7,000 for the three and six months ended June 30, 2020. Servicing income is recorded in non-interest income in the Company’s consolidated statements of income.

For the three and six months ended June 30, 2020, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method was as follows:

(dollars in thousands)	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
Balance at Beginning of Period	$	—		$	—
Servicing Rights that Resulted From Asset Transfers		514			514
Amortization		(6	)		(6	)
Valuation Allowance Provision		—			—
Balance at End of Period	$	508		$	508

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	$	—	$	—
End of Period	$	543	$	543

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

	June 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 June 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 June 30, 2020, and December 31, 2019 (in thousands):

June 30, 2020
Asset Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Mortgage banking derivatives	$	2,681	$	103,751
Forward loan sales commitments	Mortgage banking derivatives		35		934
To Be Announced securities ("TBAs")	Mortgage banking derivatives		—		—


Liability Derivatives
	Balance Sheet			Notional
	Presentation	Fair Value		Amount
Interest rate lock commitments	Other liabilities	$	91	$	14,594
Forward loan sales commitments	Other liabilities		27		5,231
TBA securities	Other liabilities		56		14,500

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 ended June 30, 2020 and 2019 (in thousands):

		Gain/(Loss)
	Consolidated Statements of Income	Three Months Ended
	Presentation	June 30, 2020			June 30, 2019
Interest rate lock commitments	Gain from derivative instruments	$	683		$	393
Forward loan sales commitments	(Loss) gain from derivative instruments		(202	)		404
TBA securities	Gain (loss) from derivative instruments		599			(28	)
	Total gain from derivative instruments	$	1,080		$	769

		Gain/(Loss)
	Consolidated Statements of Income	Six Months Ended
	Presentation	June 30, 2020			June 30, 2019
Interest rate lock commitments	Gain from derivative instruments	$	1,805		$	846
Forward loan sales commitments	(Loss) gain from derivative instruments		(336	)		390
TBA securities	Loss from derivative instruments		(5	)		(72	)
	Total gain from derivative instruments	$	1,464		$	1,164

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 June 30, 2020, and December 31, 2019:

	June 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Investment securities available-for-sale:
U.S. Governmental securities	$	—	$	411	$	—	$	411
Corporate notes		—		2,021		3,961		5,982
Collateralized mortgage obligations - agency residential		—		5,559		—		5,559
Mortgage-backed securities - agency residential		—		3,646		—		3,646
Municipal securities		—		1,768		—		1,768
Bank CDs		—		1,273		—		1,273
Loans held for sale		—		43,485		—		43,485
Interest rate lock commitments		—		—		2,681		2,681
Forward loan sales commitments		—		35		—		35
TBA securities		—		—		—		—
	$	—	$	58,198	$	6,642	$	64,840

	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 June 30, 2020, and December 31, 2019.

	June 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Interest rate lock commitments	$	—	$	—	$	91	$	91
Forward loan sales commitments		—		27		—		27
TBA securities		—		56		—		56
	$	—	$	83	$	91	$	174

	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 measures at a fair value on a recurring basis at June 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 six months ended June 30, 2020 and 2019:


(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: April 1, 2020	$	3,033	$	1,939	$	(32	)
Total unrealized losses:
Included in other comprehensive income		28		—		—
Total gains or (losses) included in earnings and held at reporting date		—		742		(59	)
Purchases, sales and settlements		900
Transfers in and/or out of Level 3		—		—		—
Ending Balance: June 30, 2020	$	3,961	$	2,681	$	(91	)
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held as of June 30, 2020		—		742		(59	)
Change in unrealized gains for the period included other comprehensive income for assets held as of June 30, 2020	$	28	$	—	$	—

(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		2		—		—
Total gains or (losses) included in earnings and held at reporting date		—		1,871		(66	)
Purchases, sales and settlements		900
Transfers in and/or out of Level 3		—		—		—
Ending Balance: June 30, 2020	$	3,961	$	2,681	$	(91	)
Change in unrealized gains or (losses) for the period included in earnings (or changes in net assets) for assets held as of June 30, 2020		—		1,871		(66	)
Change in unrealized gains for the period included other comprehensive income for assets held as of June 30, 2020	$	2	$	—	$	—

(Dollars in thousands)	Corporate notes		IRLC- Asset		IRLC- Liability
Beginning Balance: April 1, 2019	$	492	$	680	$	(27	)
Total unrealized losses:
Included in other comprehensive income		38		—		—
Total gains or (losses) included in earnings and held at reporting date		—		420		(27	)
Transfers in and/or out of Level 3		2,500		—		—
Ending Balance: June 30, 2019	$	3,030	$	1,100	$	(54	)

(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		36		—		—
Total gains or (losses) included in earnings and held at reporting date		—		882		(36	)
Transfers in and/or out of Level 3		2,500		—		—
Ending Balance: June 30, 2019	$	3,030	$	1,100	$	(54	)

At June 30, 2020, the Company has classified $4.0 million of Corporate notes as Level 3. The fair value of $1.1 million of Corporate notes includes an adjustable rate corporate security and sub-debt bond. 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 $97.55 to $106.60. In addition, classified as Level 3 are two sub-debt bonds with a fair value of $2.9 million. The Company’s methodology to value the two sub-debt bonds is to obtain market 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. Since the Corporate notes are not widely traded, the Company considered the inputs as unobservable

At June 30, 2020, the Company has classified $2.6 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 67% to 100%.

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

	Quantitative Information about Level 3 Fair Value Measurements at June 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	$	1,061	Pricing model	Offered quotes	$97.55-$106.60			$	102.45
	$	2,900	Market comparable securities	Offered quotes		$101.63		$	101.63
Net derivative asset and liability:
IRLC	$	2,590	Discounted cash flows	Pull-through rates	67%-100%			82%

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

					Quoted
					Prices in
					Active		Significant
					Markets for		Other		Significant
					Identical		Observable		Unobservable
June 30, 2020	Carrying		Estimated		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	28,651	$	28,651	$	28,651	$	—	$	—
Equity securities		500		500		—		—		500
Loans receivable, net (1)		309,563		319,530		—		—		319,530
Bank-owned life insurance		6,331		6,331		6,331		—		—
Restricted investment in bank stock		1,618		1,618		1,618		—		—
Accrued interest receivable		1,251		1,251		1,251		—		—
Mortgage servicing rights		508		543		—		—		543
Liabilities:
Deposits	$	300,571	$	302,512	$	247,858	$	54,654	$	—
Advances from the FHLB		27,000		27,684		—		27,684		—
Federal Reserve PPPLF advances		47,834		47,834		—		47,834		—
Advances from borrowers for taxes and insurance		2,492		2,492		2,492		—		—
Accrued interest payable		103		103		103		—		—
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 (1)		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 six months ended June 30, 2020 and June 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 six months ended
(Dollars in thousands)	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Balance at beginning period	$	71		$	(302	)	$	(18	)	$	(548	)
Unrealized holding gain on available-for-sale securities before reclassification		186			375			275			624
Amount reclassified for investment securities gains included in net income		(99	)		(3	)		(99	)		(6	)
Net current-period other comprehensive income		87			372			176			618
Balance at ending period	$	158		$	70		$	158		$	70

(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 six months ended June 30, 2020 and 2019, respectively.

The following table present reclassifications out of AOCI by component for the three and six months ended June 30, 2020 and June 30, 2019.

	For the three months ended June 30, 2020		For the three months ended June 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)	$	141	$	4	Gain on sale of available-for-sale securities, net
Tax Effect		(42)		(1)	Income tax expense
	$	99	$	3

	For the six months ended June 30, 2020		For the six months ended June 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	$	8	Gain on sale of available-for-sale securities, net
Tax Effect		(42)		(2)	Income tax expense
	$	99	$	6

(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 June 30, 2020, there were 216,400 stock options outstanding of which 59,600 of the stock options were vested and exercisable at June 30, 2020. At June 30, 2020, there 87,000 restricted stock shares outstanding of which 24,140 restricted stock shares were vested and exercisable at June 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 six months ended June 30, 2020 as their effect would have been anti-dilutive. At June 30, 2019, there were 218,000 stock options outstanding and 87,000 restricted stock shares outstanding which 30,080 and 11,680 of the stock options and restricted stock shares were vested and exercisable at June 30, 2019. The 218,000 stock options outstanding and 75,320 restricted stock awards outstanding were not included in the computation of diluted net income per share for the three and six months ended June 30, 2019, as their effect would have been anti-dilutive.

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

	For the Three Months Ended June 30						For the Six Months Ended June 30
	2020			2019			2020			2019
Net income	$	1,496,000		$	408,000		$	1,645,000		$	470,000
Weighted average number of shares issued		2,270,725			2,260,993			2,270,452			2,259,136
Less weighted average number of treasury shares		(26,449	)		(39	)		(14,468	)		(20	)
Less weighted average number of unearned ESOP shares		(144,772	)		(153,500	)		(145,863	)		(154,585	)
Less weighted average number of unvested restricted stock awards		(63,951	)		(68,858	)		(65,501	)		(68,529	)
Basic weighted average shares outstanding		2,035,553			2,038,596			2,044,620			2,036,002
Add dilutive effect of stock options		—			—			—			—
Add dilutive effect of restricted stock awards		—			—			—			—
Diluted weighted average shares outstanding		2,035,553			2,038,596			2,044,620			2,036,002

Net income per share:
Basic	$	0.73		$	0.20		$	0.80		$	0.23
Diluted	$	0.73		$	0.20		$	0.80		$	0.23

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 June 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 $30,000 for the three months and six months ended June 30, 2020 and $14,000 and $28,000 for the three months and six months ended June 30, 2019, respectively. At June 30, 2020, total unrecognized compensation cost related to stock options was $308,000.

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

	June 30, 2020									June 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		9.9		—
Exercised		(1,600	)		14.80		—		—		—		—		—		—
Forfeited		—			—		—		—		—		—		—		—
Outstanding, June 30		216,400		$	14.93		8.1	$	—		218,000	$	14.92		9.1	$	61,040
Exercisable, June 30		59,600		$	14.87		8.1	$	—		30,080	$	14.80		9.0	$	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:

		Six Months Ended June 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 June 30, 2020 and June 30, 2019 was $47,000 and $46,000, respectively. Restricted stock expense for the six months ended June 30, 2020 and June 30,

2019 was $94,000 and $91,000, respectively. At June 30, 2020, the expected future compensation expense relating to non-vested restricted stock outstanding was $938,000.

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

	June 30, 2020					June 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 June 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 $8.1 million at June 30, 2020, for which the Company received no fees for customer services for the three months ended June 30, 2020, and approximately $2,000 for the six months ended June 30, 2020. For the three and six months ended June 30, 2019, we received approximately $2,000 and $7,000 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 $30,000 in consulting fees to the director for three and six months ended June 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 six months ended June 30, 2020 and June 30, 2019:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2020		2019		2020		2019
Non-Interest Income
In-scope of Topic 606:
Fee income	$	—	$	1	$	3	$	7
Insufficient fund fees		7		15		23		26
Other service charges		22		20		40		31
ATM interchange fee income		2		2		4		4
Other income		1		3		1		2
Total Non-Interest Income (in-scope of Topic 606)	$	32	$	41	$	71	$	70

Out-of-scope of Topic 606:
Increase in cash surrender value of bank-owned life insurance	$	38	$	40	$	76	$	79
Gain on sale of loans, net		2,327		407		3,956		1,297
Gain on sale of available-for-sale securities		141		4		141		8
Gain from derivative instruments		1,080		769		1,464		1,164
Change in fair value for loans held-for-sale		287		682		293		306
Other		40		1		88		6
Total Non-Interest Income (out-scope of Topic 606)		3,913		1,903		6,018		2,860
Total Non-Interest Income (in-scope of Topic 606)		32		41		71		70
Total Noninterest Income	$	3,945	$	1,944	$	6,089	$	2,930

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:

		June 30, 2020		December 31, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Operating lease right-of-use assets	$	7,937	$	5,979
Total Lease Right-of-Use Assets		$	7,937	$	5,979

		June 30, 2020		December 31, 2019
Lease Liabilities	Classification
Operating lease liabilities	Operating lease liabilities	$	8,117	$	6,023
Total Lease Liabilities		$	8,117	$	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.

	June 30, 2020			December 31, 2019
Weighted-average remaining lease term
Operating leases		12.8			12.7
Weighted-average discount rate
Operating leases		2.23	%		2.34	%

The components of the lease expense are as follows:

(dollars in thousands)		For the three months ended June 30, 2020		For the six months ended June 30, 2020
Operating lease cost	$	150	$	282
Short-term lease cost		3		21
Total	$	153	$	303

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

(dollars in thousands)	June 30, 2020			December 31, 2019
Twelve Months Ended:
Within one year	$	714		$	440
After one but within two years		789			632
After two but within three years		777			583
After three but within four years		790			594
After four but within five years		761			596
After five years		5,562			4,164
Total Future Minimum Lease Payments		9,393			7,009
Amounts Representing Interest		(1,276	)		(986	)
Present Value of Net Future Minimum Lease Payments	$	8,117		$	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. 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 and Wilmington, Delaware 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 and New Castle Counties in Delaware. 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 COVID-19 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.

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 June 30, 2020, the Company had received over 450 applications from new and existing customers with an outstanding balance of $73.2 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 forgive. For the three months ended, the Company recognized approximately $138,000 in interest income. 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 PPLF. 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 June 30, 2020, the Company had the following sources of liquidity available:

	At June 30,
	2020
Sources of Liquidity:	(Dollars in thousands)
Cash and cash equivalents	$	28,651
Market value of unencumbered securities		12,134
PPPLF availability		25,362
Collateral value of unencumbered pledged loans (FHLB borrowing availability)		125,417
Total sources of liquidity	$	191,564

In addition as of June 30, 2020, the Company also had access to $3.0 million unused borrowing capacity from the Atlantic Community Bankers Bank and a $1.3 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 June 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 13.8%, tier 1 capital (to risk-weighted assets) was 14.7%, tier capital (to average assets) was 8.2%, and tier 1 common equity (to risk-weighted assets) was 13.7%.

Deferral Requests

The Company has worked with the customers impacted by COVID-19 to provide short-term assistance up to six 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 TDRS under the Cares Act as they met the requirements under section 4013. Residential borrowers needing assistance have been offered a 90-day principal and interest deferral with a potential additional 90-day deferral. As of June 30, 2020, the Company had processed 73 deferral requests, representing $29.0 million in total outstanding loans. Management expects deferral requests could continue throughout the 2020.

The following table provides a breakdown of loans deferred under the payment deferral program by category as of June 30, 2020:

	At June 30,
	2020
	(Dollars in thousands)
Residential one-to-four family	$	21,328
Commercial real estate		4,511
Commercial business		3,168
Total loans outstanding	$	29,007

Loan Portfolio Analysis

Certain industries 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 June 30, 2020.

	At June 30, 2020
	(Dollars in thousands)
Type of Loan	Number of loans		Balance		% Gross Loans
Residential non-owner occupied		60	$	32,498		10.5	%
Nonresidential buildings		18		12,637		4.1	%
Other real estate properties		7		3,212		1.0	%
Residential building construction		8		2,849		0.9	%
Restaurants and Food Service		18		2,083		0.7	%
Religious Organizations		5		1,197		0.4	%
Total outstanding exposure		116	$	54,476		17.6	%

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 as well as the local and national economies as a whole.

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 June 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 June 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 June 30, 2020 and at December 31, 2019

Total Assets

Total assets increased $70.1 million, or 19.8% to $424.7 million at June 30, 2020, from $354.6 million at December 31, 2019. The growth in total assets was primarily due to increases of $54.6 million in loans receivable, $8.0 million in cash and cash equivalents, $5.6 million in loans held for sale and $1.9 million in the operating lease right-of-use asset and $1.5 million in the mortgage banking derivatives offset by a decrease of $2.6 million in available-for-sale investment securities.

Cash and cash equivalents

Cash and cash equivalents increased $8.0 million, to $28.6 million at June 30, 2020, from $20.6 million at December 31, 2019, with the expectation that excess liquidity will be used to fund growth of the loan portfolio.

Investment Securities

Investment securities decreased $2.6 million or 12.3%, to $18.6 million at June 30, 2020, from $21.2 million at December 31, 2019. The decrease was primarily due to $8.1 million in proceeds from sales and maturities and principal repayments offset by purchases of $5.2 million during the six months ended June 30, 2020, and a $250,000 increase in net unrealized gain on available-for-sale.

Net Loans

Net loans increased $54.6 million to $309.6 million at June 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 $73.2 million as of June 30, 2020. Commercial real estate loans increased by $9.6 million to $44.8 million at June 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 $2.9 million to $14.0 million at June 30, 2020, from $11.1 million at December 31, 2019. The construction loans increased $1.7 million to $2.5 million at June 30, 2020, from $784,000 at December 31, 2019. Offsetting these increases was a $29.5 million decrease in one- to four-family residential real estate loans from $197.5 million at December 31, 2019, to $168.0 million at June 30, 2020, and a $298,000 decrease in home equity and HELOC loans from $4.4 million at December 31, 2019, to $4.1 million at June 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 June 30, 2020, the balance of the private education loans was $5.7 million. The private student loans were made following a proven credit criteria and were underwritten in accordance with the Bank’s policies. At June 30, 2020, there were three loans with a balance of approximately $61,000 that are past due 90 days or more.

Loans Held For Sale

Loans held for sale increased $5.6 million to $43.5 million at June 30, 2020, from $37.9 million at December 31, 2019, as a result of an increase in the pipeline of one- to four family residential real estate loans.

Deposits

Deposits increased $16.8 million, or 5.9%, to $300.6 million at June 30, 2020, from $283.8 million at December 31, 2019. The increase was primarily because $32.4 increase in our core deposits (consisting of demand deposits, money market, passbook and statement and checking accounts) to $247.9 million at June 30, 2020, from $215.5 million at December 31, 2019. Offsetting this increase was a $15.6 million, or 22.8% decrease in certificates of deposit to $52.7 million at June 30, 2020, from $68.3 million at December 31, 2019. The decrease of $15.6 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 and a $3.1 million decrease in retail certificates of deposits.

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 June 30, 2020, the Company had $47.8 million in PPPLF advances outstanding.

Total Shareholders’ Equity

Total shareholders’ equity increased $1.7 million, or 5.1% to $35.3 million at June 30, 2020 compared to $33.6 million at December 31, 2019, primarily as a result of net income of $1.6 million for the six months ended June 30, 2020, share based compensation expense of $124,000, other comprehensive income of $176,000 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 $65,000 and a stock option exercise of $24,000 contributed to the increase of total shareholders’ equity. Offsetting these increases was $376,000 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 June 30, 2020 and June 30, 2019

General

Net income increased $1.1 million to $1.5 million for the three months ended June 30, 2020 from $408,000 for the three months ended June 30, 2019. The increase in net income for the three months ended June 30, 2020, was primarily due to an increases of $2.0 million in non-interest income and $549,000 in net interest income offset by increases of $835,000 million in non-interest expense, $464,000 in income tax expense and $163,000 increase in provision for loan losses.

Interest Income

Total interest income increased $469,000, or 16.4%, to $3.3 million for the three months ended June 30, 2020, from $2.9 million for the three months ended June 30, 2019. The increase was primarily the result of an increase in interest and fees on loans of $650,000 offset by a decrease in interest on investment securities of $123,000 and a decrease in interest on interest-earning deposits with banks of $54,000. Total average interest-earning assets increased $66.1 million to $373.3 million for the three months ended June 30, 2020, from $307.2 million for the same period in 2019. The increase was primarily as a result of an increase in the average balance of loans of $71.7 million and $12.0 million in average balance of interest-earning deposits with banks partially offset by a decrease of $18.4 million in the average balance of investment securities. The average yield on our interest-earning assets decreased 15 basis points to 3.57% for the three months ended June 30, 2020, as compared to 3.72% for the three months ended June 30, 2019.

Interest and fees on loans increased $650,000 to $3.2 million for the three months ended June 30, 2020 from $2.5 million for the same period in 2019. This increase was primarily due to an increase in average loans outstanding of $71.7 million, which increased to a total of $326.9 million for the three months ended June 30, 2020, from $255.2 million for the three months ended June 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 7 basis point to 3.88% for the three months ended June 30, 2020, versus 3.95% for the three months ended June 30, 2019.

Interest income on interest-earning deposits decreased by $54,000 to $15,000 for the three months ended June 30, 2020, from $69,000 for the three months ended June 30, 2019. The decrease was primarily due to a reduction in average yield on interest-earning deposits with banks of 219 basis points, to 0.26% for the three months ended June 30, 2020, from 2.45% for the three months ended June 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 $12.0 million to $23.3 million for the three months ended June 30, 2020, from $11.3 million for the three months ended June 30, 2019.

Interest on investment securities decreased by $123,000 to $127,000 for the three months ended June 30, 2020, from $250,000 for the three months ended June 30, 2019, respectively. Interest on investment securities decreased as a result of a $76,000 decrease in income on taxable and non-taxable interest and dividend investments as well as a $47,000 decrease in interest income on mortgage backed securities and collateralized mortgage obligation securities which decreased to $39,000 for the three months ended June 30, 2020, from $86,000 for the three months ended June 30, 2019. The average yield on total securities decreased to 2.41% for the three months ended June 30, 2020, from 2.53% for the same period in 2019. The average balance of investment securities decreased by $18.4 million to $21.1 million for the three months ended June 30, 2020, from $39.5 million for the three months ended June 30, 2019.

Interest Expense

Total interest expense decreased $80,000 to $758,000 for the three months ended June 30, 2020, from $838,000 for the three months ended June 30, 2019, primarily due to a $146,000 decrease in interest expense on deposits offset by an increase of $48,000 in interest expenses on advances from the FHLB and an $19,000 increase in interest expense on advances from the PPPLF.

Interest expense on deposits decreased $146,000 to $575,000 for the three months ended June 30, 2020, from $721,000 for the three months ended June 30, 2019, primarily as a result of a decrease of 30 basis points in the average cost of deposits from June 30, 2019, to 91 basis point from 121 basis points. Offsetting this decrease was an increase in the average balance of interest bearing deposits of $13.6 million from $238.8 million as of June 30, 2019, to $252.4 million as of June 30, 2020, and was primarily as a result of a $26.4 million increase in the average balance of our core deposit accounts offset by a decrease of $12.8 million in the average balance of our certificates of deposit. The average rate paid on money market deposits was flat at 0.72% for the three months ended June 30, 2020, from 0.71% for the three months ended June 30, 2019. The decrease in the balance of our certificates of deposits of $12.8 million from $72.4 million for the three months ended June 30, 2019 to $59.6 million for the three months ended June 30, 2020. This was primarily the result of a $15.7 million reduction in the average balance of certificates of deposit issued through brokers from $30.6 million for the three months ended June 30, 2019 to $14.9 million for the three months ended June 30, 2020, offset by an increase of $2.9 million in the average balance in retail certificate of deposits. The average cost of certificates of deposit was 1.85% for the three months ended June 30, 2020 as compared to 2.13% for the three months ended June 30, 2019.

Interest expense on advances from the FHLB increased $48,000 to $164,000 for the three months ended June 30, 2020 from $116,000 for the three months ended June 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 $13.3 million to $34.7 million for the three months ended June 30, 2020, from $21.4 million for the three months ended June 30, 2019, primarily due to funding of the loan portfolio. Offsetting the increase in the average balance was a decrease of 28 basis points in the average rate on FHLB advances from 2.17% for the three months ended June 30, 2019, to 1.89% for the three months ended June 30, 2020.

Interest expense on advances from the PPPLF was $19,000 as the Company utilized this borrowing facility to fund the PPP loans during the three months ended June 30, 2020.

Net Interest Income

Net interest income increased $549,000 to $2.6 million for the three months ended June 30, 2020, from $2.0 million for the three months ended June 30, 2019. Our net interest-earning assets increased $26.5 million to $70.6 million for the three months ended June 30, 2020, from $44.1 million for the three months ended June 30, 2019. Our interest rate spread increased by 12 basis points to 2.57% for the three months ended June 30, 2020, from 2.45% for the three months ended June 30, 2019. Our net interest margin increased by 12 basis points from 2.63% for the three months ended June 30, 2019, to 2.75% for the three months ended June 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 June 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)	$	326,936	$	3,170		3.88	%	$	255,176	$	2,520		3.95	%
Interest-earning deposits with banks		23,301		15		0.26	%		11,288		69		2.45	%
Investment securities		21,101		127		2.41	%		39,547		250		2.53	%
Restricted investment in bank stock		1,935		16		3.31	%		1,234		20		6.48	%
Total interest-earning assets		373,273		3,328		3.57	%		307,245		2,859		3.72	%
Non-interest-earning assets		17,538							10,461
Total assets	$	390,811						$	317,706

Interest-bearing liabilities:
Demand deposits	$	98,307		142		0.58	%	$	98,400		228		0.93	%
Money market deposit accounts		42,847		77		0.72	%		28,855		51		0.71	%
Passbook and statement savings accounts		25,998		10		0.15	%		27,675		16		0.23	%
Checking accounts-Municipal		25,673		70		1.09	%		11,472		41		1.43	%
Certificates of deposit		59,619		276		1.85	%		72,407		385		2.13	%
Total deposits		252,444		575		0.91	%		238,809		721		1.21	%
Federal Home Loan Bank advances		34,675		164		1.89	%		21,374		116		2.17	%
Federal Reserve PPPLF advances		15,543		19		0.49	%		—		—		—
Securities sold under agreements to repurchase		—		—		0.00	%		3,002		1		0.13	%
Total interest-bearing liabilities		302,662		758		1.00	%		263,185		838		1.27	%
Non-interest-bearing liabilities:
Checking		45,070							20,094
Other		8,848							2,451
Total liabilities		356,580							285,730
Shareholders' Equity		34,231							31,976
Total liabilities and Shareholders' equity	$	390,811						$	317,706

Net interest income			$	2,570						$	2,021
Interest rate spread (2)						2.57	%						2.45	%
Net interest-earning assets (3)	$	70,611						$	44,060
Net interest margin (4)						2.75	%						2.63	%
Average interest-earning assets to average interest-bearing liabilities						123.33	%						116.74	%

(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 June 30, 2020 vs 2019
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	807		$	(157	)	$	650
Interest-earning deposits with banks		101			(155	)		(54	)
Investment securities		(87	)		(36	)		(123	)
Restricted investment in bank stock		17			(21	)		(4	)
Total interest-earning assets		838			(369	)		469
Interest-bearing liabilities:
Demand deposits		—			(86	)		(86	)
Money market deposit accounts		23			3			26
Passbook and statement savings accounts		—			(6	)		(6	)
Checking accounts		61			(32	)		29
Certificates of deposit		(27	)		(82	)		(109	)
Total deposits		57			(203	)		(146	)
Federal Home Loan Bank advances		92			(44	)		48
Federal Reserve PPPLF		—			19			19
Securities sold under agreements to repurchase		—			(1	)		(1	)
Total interest-bearing liabilities		149			(229	)		(80	)
Change in net interest income	$	689		$	(140	)	$	549

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 $163,000 to $450,000 for the three months ended June 30, 2020, from $287,000 for the three months ended June 30, 2019, primarily as result of net charge-offs of $154,000 related to the medical education loans during the three months ended June 30, 2020. Non-performing loans decreased $929,000, or 25.1% from $3.7 million at December 31, 2019 to $2.8 million as of June 30, 2020, as a result of a decrease of $639,000 in one-to four-family residential real estate loans and $308,000 in home equity and HELOCs loans compared to December 31, 2019. During the three months ended June 30, 2020, there were $154,000 net charge-offs recorded. During the three months ended June 30, 2019, there were $160,000 in net charge-offs recorded. 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-Interest Income

Non-interest income increased $2.0 million to $3.9 million for the three months ended June 30, 2020, from $1.9 million for the three months ended June 30, 2019. The increase in non-interest income compared to the same period in 2019 was primarily due to a $1.9 million increase in the gain on sale of loans, net, $311,000 increase on gain on derivative instruments offset by a $395,000 decrease in change in fair value of loans held for sale. The gain on sale of loans, net increased $1.9 million to $2.3 million for the three months ended June 30, 2020, compared to $407,000 for the three months ended June 30, 2019 primarily as a result of higher loan sales which increased $92.0 million from $38.8 million for the three months ended June 30, 2019, to $130.8 million for the three months ended June 30, 2020. The increase of $311,000 in gain on derivative instruments to $1.1 million for the three months ended June 30, 2020, from $769,000 from for the three months ended June 30, 2019 was a result of increased volume of locked loans associated with hedging. Offsetting these increases, was a $395,000 decrease in the change in fair value of loans held for sale from $682,000 for the three months ended June 30, 2019, to $287,000 for the three months ended June 30, 2020. Gain on sale of available-for-sale securities increased $137,000 to $141,000 for the three months ended June 30, 2020, from $4,000 gain on sale of available-for-sale securities for the three months ended June 30, 2019.

Non-Interest Expense

Non-interest expense increased $835,000 or 26.6% to $4.0 million for the three months ended June 30, 2020, from $3.1 million for the three months ended June 30, 2019. The increase for the three months ended June 30, 2020, compared to the three months of June 30, 2019, was primarily as a result of an increase of $455,000 in salaries and employee benefits, $249,000 in other expenses and $66,000 in occupancy expenses and $59,000 in data processing related operations costs.

Salaries and employee benefits expense increased by $455,000 to $2.4 million for the three months ended June 30, 2020, from $1.9 million for the three months ended June 30, 2019. Salaries increased as full time equivalent (FTE) employees increased to one-hundred as of June 30, 2020, from ninety-two as of June 30, 2019 primarily as a result of the expansion of the Company’s lending and business banking operations. The other expenses increased $249,000, or 54.4%, to $707,000 for the three months ended June 30, 2020, from $458,000 for the three months ended June 30, 2019, due to increased expenses related to organizational expenses as we continue to grow and expand into new markets. Occupancy expenses increased approximately $66,000 to $450,000 for the three months ended June 30, 2020 from $384,000 for the three months ended June 30, 2019, primarily as a result of an increase in rental expense due to the move of our headquarters to Doylestown, PA, as well as leases of additional offices space compared to the same period in 2019. In addition, depreciation expense increased approximately $38,000 primarily due to furniture and equipment placed in service during the three-months ended June 30, 2020, compared to the same period in 2019. Data processing related operations costs increased $59,000, or 31.6% to $246,000 for the three months ended June 30, 2020 from $187,000 for the three months ended June 30, 2019.

Income Tax Expense

Income tax expense was $590,000 for the three months ended June 30, 2020 compared to $126,000 in expense for the three months ended June 30, 2019. Federal income taxes included in total taxes for the three months ended June 30, 2020 and 2019 was $406,000 and $94,000, respectively, with effective federal tax rates of 19.4% and 17.6%. The increase in the effective tax rate for the three months ended June 30, 2020, compared to the same period a year ago reflected an increase in income before taxes.

For the three months ended June 30, 2020 and 2019, Pennsylvania state tax was $165,000 and $32,000, respectively with effective rate of 7.9% and 6.0%, respectively. The increase in the effective tax rate for the three months ended June 30, 2020, compared to the same period a year ago reflected an increase in income before taxes. In addition, for the three months ended June 30, 2020, New Jersey state tax was $19,000.

Comparison of Statements of Income for the Six Months Ended June 30, 2020 and June 30, 2019

General

Net income increased $1.2 million to $1.6 million for the six months ended June 30, 2020, from $470,000 for the six months ended June 30, 2019. The increase in net income for the six months ended June 30, 2020, was primarily due to an increases of $3.2 million in non-interest income and $649,000 in net interest income offset by increases of $2.1 million in non-interest expense and $536,000 in income tax expense.

Interest Income

Total interest income increased $767,000, or 13.7%, to $6.4 million for the six months ended June 30, 2020, from $5.6 million for the three months ended June 30, 2019. The increase was primarily the result of an increase in interest and fees on loans of $1.1 million offset by a decrease in interest on investment securities of $261,000 and a decrease in interest on interest-earning deposits with banks of $79,000. Total average interest-earning assets increased $52.0 million to $356.5 million for the six months ended June 30, 2020, from $304.5 million for the same period in 2019. The increase was primarily as a result of an increase in the average balance of loans of $62.4 million and $9.8 million in average balance of interest-earning deposits with banks partially offset by a $21.0 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 11 basis points to 3.56% for the three months ended June 30, 2020, as compared to 3.67% for the three months ended June 30, 2019.

Interest and fees on loans increased $1.1 million to $5.9 million for the six months ended June 30, 2020, from $4.8 million for the same period in 2019. This increase was primarily due to an increase in average loans outstanding of $62.4 million, which increased to $309.5 million for the three months ended June 30, 2020, from $247.1 million for the three months ended June 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 9 basis point to 3.84% for the six months ended June 30, 2020, versus 3.93% for the three months ended June 30, 2019.

Interest income on interest-earning deposits decreased by $79,000 to $105,000 for the six months ended June 30, 2020, from $184,000 for the six months ended June 30, 2019. The decrease was primarily due to a decrease average yield on interest-earning deposits with banks decreased 171 basis points, to 0.88% for the six months ended June 30, 2020, from 2.59% for the six months ended June 30, 2019, due to 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 $9.8 million to $24.0 million for the six months ended June 30, 2020, from $14.2 million for the six months ended June 30, 2019.

Interest on investment securities decreased by $261,000 to $260,000 for the six months ended June 30, 2020, from $521,000 for the six months ended June 30, 2019, respectively. Interest on investment securities decreased as a result of a $165,000 decrease in income on taxable and non-taxable interest and dividend investments as well as a $96,000 decrease in interest income on mortgage backed securities and collateralized mortgage obligation securities which decreased to $92,000 for the six months ended June 30, 2020, from $188,000 for the six months ended June 30, 2019. The average yield on total securities decreased to 2.44% for the six months ended June 30, 2020, from 2.47% for the same period in 2019. The average balance of investment securities decreased by $21.0 million to $21.3 million for the six months ended June 30, 2020, from $42.3 million for the six months ended June 30, 2019 as cash flows from investments were redeployed into higher yielding loan balances.

Interest Expense

Total interest expense increased $118,000 to $1.7 million for the six months ended June 30, 2020, from $1.6 million for the six months ended June 30, 2019, primarily due to a $159,000 increase in interest expense on advances from the FHLB and a $19,000 increase in interest expense on advances from the PPPLF offset by $58,000 decrease in interest expense on deposits.

Interest expense on advances from the FHLB increased $159,000 to $320,000 for the six months ended June 30, 2020, from $161,000 for the six months ended June 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 $16.5 million to $31.4 million for the six months ended June 30, 2020, from $14.9 million for the six months ended June 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 12 basis points from 2.16% for the six months ended June 30, 2019, to 2.04% for the six months ended June 30, 2020.

Interest expense on deposits decreased $58,000 to $1.4 million for the six months ended June 30, 2020, from $1.4 million for the six months ended June 30, 2019, primarily as the average cost of deposits decreased to 107 basis points for the six months ended June 30, 2020 from 115 basis points for the six months ended June 30, 2019. Offsetting this decrease, was an increase of $9.0 million in the average balance of interest bearing deposits from June 30, 2019. The increase in the average balance of interest bearing deposits of $9.0 million from $244.4 million as of June 30, 2019, to $253.4 million as of June 30, 2020, was primarily as a result of a $18.8 million increase in the average balance of our core deposit accounts offset by a decrease of $9.8 million in the average balance of our certificates of deposit. The average rate paid on money market deposits increased 8 basis points to 0.77% for the six months ended June 30, 2020, from 0.69% for the six months ended June 30, 2019. The decrease in the balance of our certificates of deposits of $9.8 million from $72.8 million for the six months ended June 30, 2019, to $63.0 million for the six months ended June 30, 2020, was primarily the result of a $11.6 million decrease in the average balance of certificates of deposit issued through brokers from $29.5 million for the six months ended June 30, 2019 to $17.9 million for the six months ended June 30, 2020, offset by an increase of $1.8 million in the average balance in retail certificate of deposits. The average cost of certificates of deposit was 1.94% for the six months ended June 30, 2020, as compared to 2.05% for the six months ended June 30, 2019.

Net Interest Income

Net interest income increased $649,000 to $4.7 million for the six months ended June 30, 2020, from $4.0 million for the six months ended June 30, 2019. Our net interest-earning assets increased $19.9 million to $62.8 million for the six months ended June 30, 2020, from $42.9 million for the six months ended June 30, 2019. Our interest rate spread decreased by 6 basis points to 2.41% for the six months ended June 30, 2020 from 2.47%, for the six months ended June 30, 2019. Our net interest margin was 2.62% for the six months ended June 30, 2020, compared to 2.64% for the six months ended June 30, 2019.

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

	For the Six Months Ended June 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)	$	309,463	$	5,946		3.84	%	$	247,086	$	4,850		3.93	%
Interest-earning deposits with banks		23,964		105		0.88	%		14,225		184		2.59	%
Investment securities		21,328		260		2.44	%		42,260		521		2.47	%
Restricted investment in bank stock		1,773		43		4.85	%		950		32		6.74	%
Total interest-earning assets		356,528		6,354		3.56	%		304,521		5,587		3.67	%
Non-interest-earning assets		17,175							10,493
Total assets	$	373,703						$	315,014

Interest-bearing liabilities:
Demand deposits	$	99,704		396		0.79	%	$	99,745		437		0.88	%
Money market deposit accounts		39,414		152		0.77	%		31,219		108		0.69	%
Passbook and statement savings accounts		25,771		22		0.17	%		28,582		31		0.22	%
Checking accounts-Municipal		25,499		172		1.35	%		11,958		86		1.44	%
Certificates of deposit		62,998		610		1.94	%		72,847		748		2.05	%
Total deposits		253,386		1,352		1.07	%		244,351		1,410		1.15	%
Federal Home Loan Bank advances		31,417		320		2.04	%		14,882		161		2.16	%
Federal Reserve PPPLF advances		8,945		19		0.42	%		—		—		—
Securities sold under agreements to repurchase		—		—		0.00	%		2,388		2		0.17	%
Total interest-bearing liabilities		293,748		1,691		1.15	%		261,621		1,573		1.20	%
Non-interest-bearing liabilities:
Checking		37,218							19,073
Other		8,894							2,712
Total liabilities		339,860							283,406
Shareholders' Equity		33,843							31,608
Total liabilities and Shareholders' equity	$	373,703						$	315,014

Net interest income			$	4,663						$	4,014
Interest rate spread (2)						2.41	%						2.47	%
Net interest-earning assets (3)	$	62,780						$	42,900
Net interest margin (4)						2.62	%						2.64	%
Average interest-earning assets to average interest-bearing liabilities						121.37	%						116.40	%

(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 Six Months Ended June 30, 2020 vs 2019
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	1,290		$	(194	)	$	1,096
Interest-earning deposits with banks		139			(218	)		(79	)
Investment securities		(250	)		(11	)		(261	)
Restricted investment in bank stock		29			(18	)		11
Total interest-earning assets		1,208			(441	)		767
Interest-bearing liabilities:
Demand deposits		—			(41	)		(41	)
Money market deposit accounts		23			21			44
Passbook and statement savings accounts		(2	)		(7	)		(9	)
Checking accounts-Municipal		97			(11	)		86
Certificates of deposit		(75	)		(63	)		(138	)
Total deposits		43			(101	)		(58	)
Federal Home Loan Bank advances		178			(19	)		159
Federal Reserve PPPLF		—			19			19
Securities sold under agreements to repurchase		(1	)		(1	)		(2	)
Total interest-bearing liabilities		220			(102	)		118
Change in net interest income	$	988		$	(339	)	$	649

Provision for Loan Losses

Provision for loan losses increased by $33,000 to $561,000 for the six months ended June 30, 2020, from $528,000 for the six months ended June 30, 2019. Non-performing loans decreased $929,000, or 25.1% from $3.7 million at December 31, 2019, to $2.8 million as of June 30, 2020, as a result of a decreases of $639,000 in one-to four-family residential real estate loans and $308,000 in home equity and HELOCs loans compared to December 31, 2019. During the six months ended June 30, 2020, there were charge-offs recorded of $154,000 and $1,000 received in recoveries. During the six months ended June 30, 2019, there were $302,000 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 $3.2 million to $6.1 million for the six months ended June 30, 2020, from $2.9 million for the six months ended June 30, 2019. The increase in non-interest income compared to

the same period in 2019 was primarily due to a $2.7 million increase in the gain on sale of loans, net and a $300,000 increase in gain in fair value of loans held for sale. The gain on sale of loans, net increased $2.7 million to $4.0 million for the six months ended June 30, 2020, compared to $1.3 million for the six months ended June 30, 2019, primarily as a result of higher loan sales which increased $142.9 million from $67.3 million for the six months ended June 30, 2019, to $210.2 million for the six months ended June 30, 2020. The increase in fair value of loans held for sale of $300,000 for six months end June 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 June 30, 2019, to $43.5 million at June 30, 2020. In addition, gain on sale of available-for-sale securities, net increased $133,000 to $141,000 for six months ended June 30, 2020, from $8,000 for six months ended June 30, 2019.

Non-Interest Expense

Non-interest expense increased $2.1 million or 35.3% to $7.9 million for the six months ended June 30, 2020, from $5.8 million for the six months ended June 30, 2019. The increase was primarily as a result of an increase of $1.3 million in salaries and employee benefits, $451,000 in other expenses and $177,000 in occupancy expenses.

Salaries and employee benefits expense increased by $1.3 million to $4.8 million for the six months ended June 30, 2020, from $3.5 million for the six months ended June 30, 2019. Salaries increased as FTE employees increased to one-hundred FTEs as of June 30, 2020, from ninety-two June 30, 2019. The increase was primarily a result of the expansion of the Company’s lending and business banking operations. The other expenses increased $451,000 or 52.3%, to $1.3 million for the six months ended June 30, 2020, from $862,000 million for the six months ended June 30, 2019, due to increased expenses related to other consulting fees and organizational expenses as we continue to grow and expand into new markets. Occupancy expenses increased approximately $177,000 to $883,000 for the six months ended June 30, 2020, from $706,000 for the six months ended June 30, 2019, primarily because of an increase in rental expense due to the move of our headquarters to Doylestown, PA, as well as leases of additional offices space compared to the same period in 2019. In addition, depreciation expense increased approximately $75,000 primarily due to furniture and equipment placed in service during the six month ended June 30, 2020, compared to the same period in 2019.

Income Tax Expense

Income tax expense was $638,000 for the six months ended June 30, 2020, compared to $102,000 in expense for the six months ended June 30, 2019. Federal income taxes included in total taxes for the six months ended June 30, 2020 and 2019 was $444,000 and $91,000, respectively, with effective federal tax rates of 19.4% and 15.9%. The increase in the effective tax rate for the six months ended June 30, 2020, compared to the same period a year ago reflected an increase in income before taxes.

For the six months ended June 30, 2020 and 2019, Pennsylvania state tax was $176,000 and $11,000, respectively with effective rate of 7.7% and 1.9%, respectively. The increase in the effective tax rate for the six months ended June 30, 2020, compared to the same period a year ago reflected an increase in income before taxes. In addition, for the six months ended June 30, 2020, New Jersey state tax was $19,000.

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 troubled debt restructurings. Non-performing assets, including non-performing loans and other real estate owned, totaled $2.8 million, or 0.9% of total assets, at June 30, 2020. There were no non-accruing troubled debt restructurings at June 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 June 30, 2020 and at December 31, 2019.

	At June 30,			At December 31,
	2020			2019
	(Dollars in thousands)
Non-accrual loans:
Residential:
One- to four-family	$	1,047		$	1,686
Home equity & HELOCs		—			308
Consumer:
Medical education		1,728			1,710
Total non-accrual loans		2,775			3,704

Loans accruing past 90 days		—			—

Total non-performing loans		2,775			3,704

Real estate owned		—			—
Other non-performing assets		—			—
Total non-performing assets	$	2,775		$	3,704

Ratios:
Total non-performing loans to total loans receivable		0.89	%		1.45	%
Total non-performing loans to total assets		0.65	%		1.04	%
Total non-performing assets to total assets		0.65	%		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 June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of year	$	1,549		$	1,055		$	1,437		$	956

Charge-offs:
Residential:
One- to four-family		—			—			—			—
Home equity & HELOCs		—			—			—			—
Commercial real estate		—			—			—			—
Commercial business		—			—			—			—
Construction		—			—			—			—
Consumer:		—			—			—			—
Medical education		(154	)		(164	)		(154	)		(305	)
Other		—			—			—			—
Total charge-offs		(154	)		(164	)		(154	)		(305	)

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

Net (charge-offs) recoveries		(154	)		(160	)		(153	)		(302	)
Provision for loan losses		450			287			561			528
Balance at end of period	$	1,845		$	1,182		$	1,845		$	1,182

Ratios:
Net charge-offs to average loans outstanding		0.05	%		0.07	%		0.06	%		0.13	%
Allowance for loan losses to non-performing loans at end of period		66.49	%		36.08	%		66.49	%		36.08	%
Allowance for loan losses to total loans at end of period		0.59	%		0.49	%		0.59	%		0.49	%

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 June 30, 2020, and December 31, 2019, the Company had $10.0 million, or 2.4% 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 $47.8 million with unused borrowing capacity of $25.4 million as of June 30, 2020. The Bank also had FHLB advances of $27.0 million outstanding and $24.2 million in letters of credit with unused borrowing capacity of $125.4 million as of June 30, 2020. Additionally, at June 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 $1.3 million at June 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 six months ended June 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 June 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 June 30, 2020, cash and cash equivalents totaled $28.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $18.6 million at June 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 $3.6 million and $17.9 million for the six months ended June 30, 2020, and June 30, 2019, respectively. Net cash used in 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 $53.0 million and $514,000 for the six months ended June 30, 2020, and June 30, 2019, respectively. During the six months ended June 30, 2020, there was $4.0 million in available-for-sale securities sold compared to $5.0 million available-for-sale securities sold for the six months ended June 30, 2019. Net cash provided by financing activities was $64.6 million and $21.6 million for the six months ended June 30, 2020, and 2019, respectively. Net cash provided by financing activities for the six months ended June 30, 2020, consisted primarily of increases in deposits of $16.8 million and proceeds of $47.8 million in proceeds from the PPPLF. Net cash provided by financing activities for the six months ended June 30, 2019 primarily consisted of $18.0 million increase in net long-term borrowing from the FHLB advances, $1.7 million net increase in deposits and $1.3 million net increase in securities sold under agreements to repurchase.

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 June 30, 2020, totaled $39.4 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 June 30, 2020, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

Regulatory Capital

Information presented for June 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 June 30, 2020, the Bank met all the capital adequacy requirements to which it was subject. At June 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 June 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 June 30, 2020

Total risk-based capital (to

risk-weighted assets)

33,407

14.7

$>18,204

> 8.0%

$>22,755

>10.0%

Tier 1 capital (to risk-weighted

assets)

31,562

13.9

>13,653

> 6.0%

>18,204

> 8.0%

Tier 1 capital (to average assets)

31,562

8.2

>15,327

> 4.0%

>19,158

> 5.0%

Tier 1 common equity (to risk

-weighted assets)

31,562

13.9

>10,240

> 4.5%

>14,791

> 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 June 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 June 30, 2020, the Bank is required to maintain a capital conservation buffer of 2.50%. At June 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 recently enacted 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 June 30, 2020, we had outstanding commitments to originate loans of $91.2 million, unused lines of credit totaling $27.5 million and $24.2 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 June 30, 2020, totaled $39.4 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 June 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 second 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 June 30, 2020, the Company is 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 June 30, 2020 are set forth in the table below:

Period	Total Number of Shares (1)		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 (2)
April 1, 2020-April 30, 2020		18,044	$	11.59		18,044		70,782
May 1, 2020-May 31, 2020		761		12.73		761		70,021
June 1, 2020-June 30, 2020		994		12.60		994		69,027
Total		19,799	$	11.68		19,799

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

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