UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019
	OR

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _________ to _________

~~For the quarterly period ended September 30, 2018~~

~~[ ]~~

~~TRANSITION REPORT PURS~~~~UANT TO SECTION 13 OR 15 (d) OF~~ ~~THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the transition period from _________ to _________~~

Commission File Number 0-24100

HMN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-1777397
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1016 Civic Center Drive N.W., Rochester, MN		55901
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:		(507) 535-1200

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	HMNF	Nasdaq

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by checkmark 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.

Class		Outstanding at October 26, ~~2018~~2019
Common stock, $0.01 par value		~~4,824,413~~4,843,822

Table of Contents

	September 30,			December 31,
(Dollars in thousands)	2019			2018
	(unaudited)
Assets
Cash and cash equivalents	$	62,507			20,709
Securities available for sale:
Mortgage-backed and related securities (amortized cost $22,126 and $8,159)		22,187			8,023
Other marketable securities (amortized cost $62,757 and $73,222)		62,665			71,836
		84,852			79,859

Equity securities		163			121
Loans held for sale		7,819			3,444
Loans receivable, net		583,102			586,688
Accrued interest receivable		2,217			2,356
Real estate, net		580			414
Federal Home Loan Bank stock, at cost		853			867
Mortgage servicing rights, net		1,994			1,855
Premises and equipment, net		10,325			9,635
Goodwill		802			802
Core deposit intangible		181			255
Prepaid expenses and other assets		5,608			2,668
Deferred tax asset, net		2,225			2,642
Total assets	$	763,228			712,315

Liabilities and Stockholders’ Equity
Deposits	$	659,608			623,352
Accrued interest payable		377			346
Customer escrows		2,924			1,448
Accrued expenses and other liabilities		9,129			4,022
Total liabilities		672,038			629,168
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock ($.01 par value): authorized 500,000 shares; issued 0		0			0
Common stock ($.01 par value): authorized 16,000,000 shares; issued 9,128,662		91			91
Additional paid-in capital		40,259			40,090
Retained earnings, subject to certain restrictions		106,311			99,754
Accumulated other comprehensive loss		(21	)		(1,096	)
Unearned employee stock ownership plan shares		(1,692	)		(1,836	)
Treasury stock, at cost 4,284,840 and 4,292,838 shares		(53,758	)		(53,856	)
Total stockholders’ equity		91,190			83,147
Total liabilities and stockholders’ equity	$	763,228			712,315

September 30,

December 31,

(Dollars in thousands)

2018

2017

(unaudited)

Assets

Cash and cash equivalents
$ 48,076 37,564
Securities available for sale:

Mortgage-backed and related securities (amortized cost $8,593 and $5,148)
8,207 5,068
Other marketable securities (amortized cost $73,367 and $73,653)
71,397 72,404
79,604 77,472

Loans held for sale
2,109 1,837
Loans receivable, net
586,092 585,931
Accrued interest receivable
2,225 2,344
Real estate, net
414 627
Federal Home Loan Bank stock, at cost
867 817
Mortgage servicing rights, net
1,845 1,724
Premises and equipment, net
9,754 8,226
Goodwill
802 802
Core deposit intangible
280 355
Prepaid expenses and other assets
1,418 1,314
Deferred tax asset, net
3,959 3,672
Total assets
$ 737,445 722,685

Liabilities and Stockholders’ Equity

Deposits
$ 651,429 635,601
Accrued interest payable
279 146
Customer escrows
2,187 1,147
Accrued expenses and other liabilities
3,556 4,973
Total liabilities
657,451 641,867
Commitments and contingencies

Stockholders’ equity:

Serial preferred stock ($.01 par value): authorized 500,000 shares; issued and outstanding shares 0
0 0
Common stock ($.01 par value): authorized 16,000,000; issued shares 9,128,662
91 91
Additional paid-in capital
42,578 50,623
Retained earnings, subject to certain restrictions
97,402 91,448
Accumulated other comprehensive loss
(1,697 ) (957 )
Unearned employee stock ownership plan shares
(1,885 ) (2,030 )
Treasury stock, at cost 4,519,222 and 4,631,124 shares
(56,495 ) (58,357 )
Total stockholders’ equity
79,994 80,818
Total liabilities and stockholders’ equity
$ 737,445 722,685

For the ~~Nine-Month~~Three and Nine Month Periods Ended September 30, 20189 and 2018


											Unearned																			Unearned
											Employee																			Employee
								Accumulated			Stock						Total										Accumulated			Stock						Total
			Additional					Other			Ownership						Stock-					Additional					Other			Ownership						Stock-
	Common		Paid-in			Retained		Comprehensive			Plan			Treasury			Holders’			Common		Paid-in			Retained		Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings		Loss			Shares			Stock			Equity			Stock		Capital			Earnings		Loss			Shares			Stock			Equity
Balance, December 31, 2017	$	91		50,623			91,448		(957	)		(2,030	)		(58,357	)		80,818

Balance, June 30, 2019																				$	91		40,153			104,235		(170	)		(1,740	)		(53,758	)		88,811
Net income							5,884											5,884								2,076											2,076
Amounts reclassified from accumulated other comprehensive loss							70		(70	)								0
Other comprehensive loss									(670	)								(670	)
Stock warrants purchased				(6,453	)													(6,453	)
Exercise of stock warrants				(1,674	)										1,674			0
Other comprehensive gain																												149									149
Amortization of restricted stock awards																							48														48
Earned employee stock ownership plan shares																							58								48						106
Balance, September 30, 2019																				$	91		40,259			106,311		(21	)		(1,692	)		(53,758	)		91,190

Balance, December 31, 2018																				$	91		40,090			99,754		(1,096	)		(1,836	)		(53,856	)		83,147
Net income																										6,557											6,557
Other comprehensive gain																												1,075									1,075
Stock compensation expense				13														13					1														1
Restricted stock awards				(188	)										188			0					(143	)										143			0
Stock awards withheld for tax withholding																																		(45	)		(45	)
Amortization of restricted stock awards				104														104					138														138
Earned employee stock ownership plan shares				153								145						298					173								144						317
Balance, September 30, 2018	$	91		42,578			97,402		(1,697	)		(1,885	)		(56,495	)		79,994

Balance, September 30, 2019																				$	91		40,259			106,311		(21	)		(1,692	)		(53,758	)		91,190

											Unearned
											Employee
								Accumulated			Stock						Total
			Additional					Other			Ownership						Stock-
	Common		Paid-in			Retained		Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings		Loss			Shares			Stock			Equity

Balance, June 30, 2018	$	91		46,950			94,690		(1,479	)		(1,933	)		(56,494	)		81,825
Net income							2,712											2,712
Other comprehensive loss									(218	)								(218	)
Stock warrants purchased				(4,464	)													(4,464	)
Stock compensation expense				5														5
Restricted stock awards				1											(1	)		0
Amortization of restricted stock awards				31														31
Earned employee stock ownership plan shares				55								48						103
Balance, September 30, 2018	$	91		42,578			97,402		(1,697	)		(1,885	)		(56,495	)		79,994

Balance, December 31, 2017	$	91		50,623			91,448		(957	)		(2,030	)		(58,357	)		80,818
Net income							5,884											5,884
Amounts reclassified from accumulated other comprehensive loss							70		(70	)								0
Other comprehensive loss									(670	)								(670	)
Stock warrants purchased				(6,453	)													(6,453	)
Exercise of stock warrants				(1,674	)										1,674			0
Stock compensation expense				13														13
Restricted stock awards				(188	)										188			0
Amortization of restricted stock awards				104														104
Earned employee stock ownership plan shares				153								145						298
Balance, September 30, 2018	$	91		42,578			97,402		(1,697	)		(1,885	)		(56,495	)		79,994

	Nine Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	5,884			4,017		$	6,557			5,884
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		(482	)		(582	)		(1,452	)		(482	)
Depreciation		806			704			838			806
Amortization of (discounts) premiums, net		20			(1	)		(10	)		20
Amortization of deferred loan fees		(254	)		(192	)		(153	)		(254	)
Amortization of core deposit intangible		75			75			74			75
Amortization of other purchased fair value adjustments		(63	)		(74	)
Amortization of purchased asset fair value adjustments								(29	)		(63	)
Amortization of mortgage servicing rights		412			411			535			412
Capitalized mortgage servicing rights		(533	)		(461	)		(674	)		(533	)
Securities losses, net		12			0
Gain on sale of premises and equipment		0			(8	)
Securities (gains) losses, net								(42	)		12
Loss on sale of premises and equipment								20			0
Gain on sales of real estate		(80	)		(72	)		0			(80	)
Gain on sales of loans		(1,612	)		(1,528	)		(1,835	)		(1,612	)
Proceeds from sales of loans held for sale		68,590			63,449			77,289			68,590
Disbursements on loans held for sale		(59,079	)		(54,551	)		(75,833	)		(59,079	)
Amortization of restricted stock awards		104			109			138			104
Amortization of unearned Employee Stock Ownership Plan shares		145			145			144			145
Earned Employee Stock Ownership Plan shares priced above original cost		153			108			173			153
Stock option compensation expense		13			31			1			13
Decrease in accrued interest receivable		119			46			139			119
Increase (decrease) in accrued interest payable		133			(124	)
(Increase) decrease in other assets		(101	)		376
Increase in accrued interest payable								31			133
Decrease (increase) in other assets								1,285			(101	)
Increase (decrease) in other liabilities		(1,434	)		57			923			(1,434	)
Other, net		(2	)		51			22			(2	)
Net cash provided by operating activities		12,826			11,986			8,141			12,826
Cash flows from investing activities:
Principal collected on securities available for sale		1,478			636			1,347			1,478
Proceeds collected on maturities of securities available for sale		310			20,100			10,400			310
Purchases of securities available for sale		(4,888	)		(20,035	)		(15,246	)		(4,888	)
Purchase of Federal Home Loan Bank stock		(322	)		(3,999	)		(1,040	)		(322	)
Redemption of Federal Home Loan Bank stock		272			3,952			1,054			272
Proceeds from sales of real estate		367			309			0			367
Net increase in loans receivable		(7,614	)		(39,044	)
Net decrease (increase) in loans receivable								1,008			(7,614	)
Proceeds from sale of premises and equipment		0			8			195			0
Purchases of premises and equipment		(2,333	)		(772	)		(1,748	)		(2,333	)
Net cash used by investing activities		(12,730	)		(38,845	)		(4,030	)		(12,730	)
Cash flows from financing activities:
Increase in deposits		15,829			36,165			36,256			15,829
Warrants purchased		(6,453	)		0			0			(6,453	)
Stock awards withheld for tax withholding		0			(54	)		(45	)		0
Proceeds from borrowings		6,800			99,200			26,000			6,800
Repayment of borrowings		(6,800	)		(106,200	)		(26,000	)		(6,800	)
Increase in customer escrows		1,040			787			1,476			1,040
Net cash provided by financing activities		10,416			29,898			37,687			10,416
Increase in cash and cash equivalents		10,512			3,039			41,798			10,512
Cash and cash equivalents, beginning of period		37,564			27,561			20,709			37,564
Cash and cash equivalents, end of period	$	48,076			30,600		$	62,507			48,076
Supplemental cash flow disclosures:
Cash paid for interest	$	1,448			1,485		$	2,394			1,448
Cash paid for income taxes		3,395			1,817			2,189			3,395
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale		8,187			8,144			4,054			8,187
Loans held for sale transferred to loans		0			164
Transfer of loans to real estate		74			40			166			74
Right to use assets and lease obligations								4,241			0

~~(3)~~

(3) New Accounting Standards

In ~~February~~June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2016-02,~~ ~~Leases (Topic 842).~~ ~~The amendments in the ASU create~~ ~~Topic 842, Leases~~~~, and supersede the lease requirements in~~ ~~Topic 840, Leases~~. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between previous GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendment requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply that will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified. As entities started to implement the new leases standard, many preparers were encountering some unanticipated costs and complexities associated with the modified retrospective transition method, particularly the comparative period reporting requirements. In response to these issues, the FASB in July of 2018 issued ASU 2018-11. The amendments in this ASU provide lessors with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in these ASU’s, for public business entities, are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of these ASU’s in the first quarter of 2019 is not anticipated to have a material impact on the Company’s consolidated financial statements.

~~Table of Contents~~

~~In June 2016, the FASB issued ASU~~ 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. The amendments in this ASU, for public business entities that are filers with the Securities and Exchange Commission (SEC), are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Management has accumulated the charge off information necessary to calculate the appropriate life of loan loss percentages for the various loan categories, has identified several key metrics to help identify and project anticipated changes in the credit quality of our loan portfolio upon enactment, and is in the process of evaluating the determination of potential qualitative reserve amounts and the impact that the adoption of this ASU ~~in the first quarter of 2020~~ will have on the Company’s consolidated financial statements.

~~In March 2017,~~ On July 17, 2019, the FASB ~~issued ASU 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.~~ ~~The amendments~~proposed a delay in the implementation date for this ASU ~~shorten the amortization period~~ for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount,small SEC reporting companies, such as discounts continue to be amortized to maturity. This ASU is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates and price securities to maturity when the coupon is below market rates. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. This ASU is intended to reduce diversity in practice and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. Upon adoption, the amendments should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principles. The adoption of this ASU inHMN, from the first quarter of 2020 to the first quarter of 2023. The proposed delay was reaffirmed by a tentative Board decision at the FASB Board meeting held on October 16, 2019 ~~is not anticipated to have a material impact~~after reviewing comments received on the ~~Company’s consolidated financial statements.~~proposed delay. Management will monitor the progress of the proposed implementation date delay and will implement this ASU when the required implementation date is determined by the FASB.

Table of Contents

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), ~~Disclo~~s~~ure~~Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The Amendments in this ASU apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. The ASU removed, modified, and added various disclosure requirements in Topic 820. The amendments also eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditor when evaluating disclosure requirements. The amendments in the ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the implementation of any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The Company has not opted to early adopt any portion of this ASU and the adoption in the first quarter of 2020 is not anticipated to have a material impact on the Company’s consolidated financial statements.

~~Table of Contents~~

(4) 4)

Fair Value Measurements

ASC 820, Fair Value Measurements, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system consisting of 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. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following table summarizes the assets and liabilities of the Company for which fair values are determined on a recurring basis as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

	Carrying value at September 30, 2018								Carrying value at September 30, 2019
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Securities available for sale	$	79,604		0		79,604		0	$	84,852		0		84,852		0
Equity securities										163		0		163		0
Mortgage loan commitments		13		0		13		0		19		0		19		0
Total	$	79,617		0		79,617		0	$	85,034		0		85,034		0

There were no transfers between Levels 1, 2, or 3 during the three or nine month periods ended September 30, ~~2018.~~2019.

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of the lower-of-cost-or-market accounting or write-downs of individual assets. ~~For assets measured at fair value on a nonrecurring basis that were held at December 31, 2017 and at September 30, 2018, the~~The following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

(5)	*~~Fair Value of Financial Instruments~~*

~~Generally accepted accounting principles require~~(5)Fair Value of Financial Instruments

ASC 825, Disclosures about Fair Values of Financial Instruments requires interim reporting period disclosure about the fair value of financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value ~~hierarchy level for each asset and liability,~~estimates are made as ~~defined in Note 4, have been included in the following table for~~of September 30, ~~2018~~2019 and December 31, ~~2017. The fair value estimates are made~~2018 based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.

The estimated fair value of the Company’s financial instruments as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are shown in the following table.

	September 30, 2018							December 31, 2017									September 30, 2019											December 31, 2018
				Fair value hierarchy								Fair value hierarchy									Fair value hierarchy													Fair value hierarchy
(Dollars in thousands)	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3	Contract amount	Carrying amount		Estimated fair value		Level 1	Level 2	Level 3	Contract amount		Carrying amount		Estimated fair value		Level 1		Level 2		Level 3	Contract amount		Carrying amount			Estimated fair value			Level 1		Level 2		Level 3	Contract amount

Financial assets:																Financial assets:
Cash and cash equivalents	$	48,076	48,076	48,076				37,564		37,564		37,564					$	62,507		62,507		62,507							20,709			20,709			20,709
Securities available for sale		79,604	79,604		79,604			77,472		77,472			77,472					84,852		84,852				84,852					79,859			79,859					79,859
Equity securities																		163		163				163					121			121					121
Loans held for sale		2,109	2,109		2,109			1,837		1,837			1,837					7,819		7,819				7,819					3,444			3,444					3,444
Loans receivable, net		586,092	578,676		578,676			585,931		585,494			585,494					583,102		587,285				587,285					586,688			578,978					578,978
Federal Home Loan Bank stock		867	867		867			817		817			817					853		853				853					867			867					867
Accrued interest receivable		2,225	2,225		2,225			2,344		2,344			2,344					2,217		2,217				2,217					2,356			2,356					2,356
Financial liabilities:
Deposits		651,429	645,417		645,417			635,601		635,905			635,905					659,608		659,604				659,604					623,352			623,439					623,439
Accrued interest payable		279	279		279			146		146			146					377		377				377					346			346					346
Off-balance sheet financial instruments:
Commitments to extend credit		13	13				225,242	28		28					173,645			19		19							183,781		40			40								146,978
Commitments to sell loans		18	18				8,334	(11	)	(11	)				5,629			4		4							25,554		(56	)		(56	)							7,289

The fair values of securities were based upon quoted market prices for identical or similar instruments in active markets.

The fair values of loans held for sale were based upon quoted market prices for loans with similar interest rates and terms to maturity.

The fair value of the loan portfolio, with the exception of the adjustable rate portfolio, was calculated by discounting the scheduled cash flows through the estimated maturity using anticipated prepayment speeds and using discount rates that reflect the credit and interest rate risk inherent in each loan portfolio. The fair value of the adjustable loan portfolio was estimated by grouping the loans with similar characteristics and comparing the characteristics of each group to the prices quoted for similar types of loans in the secondary market. The fair value disclosures for both the fixed and adjustable rate portfolios were adjusted to reflect the exit price amount anticipated to be received from the sale of the portfolio in an open market ~~transaction as required upon adoption of ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities~~ ~~beginning in the first quarter of 2018.~~transaction.

The carrying amount of Federal Home Loan Bank (FHLB) stock approximates its fair value.

The carrying amount of accrued interest receivable approximates its fair value since it is short-term in nature and does not present unanticipated credit concerns.

The fair value of demand deposits, savings accounts and ~~certain~~ money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit isare estimated by discounting the future cash flows using the ~~rates currently offered for deposits of similar remaining maturities. The fair value disclosures for all of~~FHLB yield curve to the ~~deposits were adjusted to reflect the exit price amount anticipated to be received from the sale of the deposits in an open market transaction as required upon adoption of ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities~~ ~~beginning in the first quarter of 2018.~~given maturity date.

The carrying amount of accrued interest payable approximates its fair value since it is short-term in nature.

The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties.

The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.

(6)Other ComprehensiveIncome (Loss)

~~Other~~ ~~Comprehensive~~~~Income~~ ~~(Loss)~~

Other comprehensive income (loss) is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income (loss), which for the Company is comprised of unrealized gains and losses on securities available for sale. The components of other comprehensive income (loss) and the related tax effects were as follows:

	For the three months ended September 30,																		For the three months ended September 30,
(Dollars in thousands)	2018									2017									2019						2018
Securities available for sale:	Before tax			Tax effect			Net of tax			Before tax			Tax effect			Net of tax			Before tax		Tax effect		Net of tax		Before tax			Tax effect			Net of tax
Net unrealized losses arising during the period	$	(303	)		(85	)		(218	)		(7	)		(3	)		(4	)
Other comprehensive loss	$	(303	)		(85	)		(218	)		(7	)		(3	)		(4	)
Net unrealized gains (losses) arising during the period																			$	206		57		149		(303	)		(85	)		(218	)
Other comprehensive income (loss)																			$	206		57		149		(303	)		(85	)		(218	)

(7)

(7)Securities Available For Sale

~~Securities Available For Sale~~

The following table shows the gross unrealized losses and fair value for the securities available for sale portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, ~~2018~~2019 and December 31, ~~2017.~~

2018.


	Less Than Twelve Months						Twelve Months or More						Total					Less Than Twelve Months							Twelve Months or More							Total
(Dollars in thousands)	# of Investments	Fair Value		Unrealized Losses			# of Investments	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018

September 30, 2019
Mortgage-backed securities:
Federal National Mortgage Association (FNMA)	0	$	0		0		2	$	3,846		(250	)	$	3,846		(250	)		2	$	5,744		(17	)		0	$	0		0		$	5,744		(17	)
Federal Home Loan Mortgage Corporation (FHLMC)	2		4,171		(123	)	0		0		0			4,171		(123	)
Collateralized mortgage obligations:
FNMA	0		0		0		1		190		(13	)		190		(13	)

Other marketable securities:
U.S. Government agency obligations	0		0		0		14		68,125		(1,844	)		68,125		(1,844	)		1		5,000		(6	)		10		49,894		(97	)		54,894		(103	)
Municipal obligations	12		2,058		(21	)	0		0		0			2,058		(21	)
Corporate obligations	1		172		(1	)	0		0		0			172		(1	)		0		0		0			1		108		(1	)		108		(1	)
Corporate preferred stock	0		0		0		1		595		(105	)		595		(105	)		0		0		0			1		665		(35	)		665		(35	)
Total temporarily impaired securities	15	$	6,401		(145	)	18	$	72,756		(2,212	)	$	79,157		(2,357	)		3	$	10,744		(23	)		12	$	50,667		(133	)	$	61,411		(156	)

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the market liquidity for the investment, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and our intent and ability to hold the investment for a period of time sufficient to recover the temporary loss.

The unrealized losses on impaired securities other than the corporate preferred stock are the result of changes in interest rates. The unrealized losses reported for the corporate preferred stock at September 30, ~~2018~~2019 relates to a single trust preferred security that was issued by the holding company of a small community bank. As of September 30, ~~2018~~2019 all payments were current on the trust preferred security and the issuer’s subsidiary bank was considered to be “well capitalized” based on its most recent regulatory filing. Based on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at September 30, ~~2018.~~2019. The Company does not intend to sell the preferred stock and has the intent and ability to hold it for a period of time sufficient to recover the temporary loss. Management believes that the Company will receive all principal and interest payments contractually due on the security and that the decrease in the market value is primarily due to a lack of liquidity in the market for trust preferred securities. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.

A summary of securities available for sale at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 is as follows:

The following table indicates amortized cost and estimated fair value of securities available for sale at September 30, ~~2018~~2019 based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.

The allocation of mortgage-backed securities in the table above is based upon the anticipated future cash flow of the securities using estimated mortgage prepayment speeds. The allocation of other marketable securities that have call features is based on the anticipated cash flows to the call date if it is anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.

(9)8)Loans Receivable, Net

A summary of loans receivable at September 30, 2019 and December 31, 2018 is as follows:

(Dollars in thousands)	September 30, 2019			December 31, 2018
Single family	$	113,062			110,698
Commercial real estate:
Real estate rental and leasing		181,904			195,564
Other		156,341			140,566
		338,245			336,130
Consumer		73,125			72,532
Commercial business		66,330			75,496
Total loans		590,762			594,856
Less:
Unamortized discounts		16			17
Net deferred loan costs		(551	)		(535	)
Allowance for loan losses		8,195			8,686
Total loans receivable, net	$	583,102			586,688

(9)Allowance for Loan Losses and Credit Quality Information

~~Allowance for Loan Losses and Credit Quality Information~~

The allowance for loan losses is summarized as follows:

(Dollars in thousands)

Single Family

Commercial
Real Estate

Consumer

Commercial Business

Total

For the three months ended September 30, 2018:
Balance, June 30, 2018
$ 881 5,242 1,623 1,582 9,328
Provision for losses
(10 ) (287 ) 61 (416 ) (652 )
Charge-offs
0 0 (16 ) (15 ) (31 )
Recoveries
0 0 5 182 187
Balance, September 30, 2018
$ 871 4,955 1,673 1,333 8,832

For the nine months ended September 30, 2018:
Balance, December 31, 2017
$ 900 5,073 1,630 1,708 9,311
Provision for losses
(6 ) (316 ) 169 (329 ) (482 )
Charge-offs
(24 ) 0 (141 ) (270 ) (435 )
Recoveries
1 198 15 224 438
Balance, September 30, 2018
$ 871 4,955 1,673 1,333 8,832

Allocated to:

Specific reserves
$ 192 441 263 177 1,073
General reserves
708 4,632 1,367 1,531 8,238
Balance, December 31, 2017
$ 900 5,073 1,630 1,708 9,311

Allocated to:

Specific reserves
$ 104 688 187 82 1,061
General reserves
767 4,267 1,486 1,251 7,771
Balance, September 30, 2018
$ 871 4,955 1,673 1,333 8,832

Loans receivable at December 31, 2017:

Individually reviewed for impairment
$ 1,523 1,364 880 507 4,274
Collectively reviewed for impairment
105,482 332,753 72,887 79,402 590,524
Ending balance
$ 107,005 334,117 73,767 79,909 594,798

Loans receivable at September 30, 2018:

Individually reviewed for impairment
$ 1,407 3,689 946 371 6,413
Collectively reviewed for impairment
107,086 328,814 73,575 78,511 587,986
Ending balance
$ 108,493 332,503 74,521 78,882 594,399

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business			Total				Single Family			Commercial Real Estate			Consumer			Commercial Business			Total
For the three months ended September 30, 2017:
Balance, June 30, 2017	$	1,004			5,490			1,544			2,007			10,045
For the three months ended September 30, 2019:																For the three months ended September 30, 2019:
Balance, June 30, 2019																	$	867			4,762			1,632			1,363			8,624
Provision for losses		(63	)		(509	)		141			(150	)		(581	)			24			(42	)		(37	)		(365	)		(420	)
Charge-offs		(6	)		0			(45	)		(300	)		(351	)			(2	)		0			(46	)		0			(48	)
Recoveries		0			32			6			126			164				0			0			2			37			39
Balance, September 30, 2017	$	935			5,013			1,646			1,683			9,277
Balance, September 30, 2019																	$	889			4,720			1,551			1,035			8,195

For the nine months ended September 30, 2017:
Balance, December 31, 2016	$	1,186			4,953			1,613			2,151			9,903
For the nine months ended September 30, 2019:																For the nine months ended September 30, 2019:
Balance, December 31, 2018																	$	833			4,869			1,622			1,362			8,686
Provision for losses		(245	)		(147	)		257			(447	)		(582	)			58			(1,834	)		13			311			(1,452	)
Charge-offs		(6	)		0			(263	)		(300	)		(569	)			(2	)		0			(92	)		(869	)		(963	)
Recoveries		0			207			39			279			525				0			1,685			8			231			1,924
Balance, September 30, 2017	$	935			5,013			1,646			1,683			9,277
Balance, September 30, 2019																	$	889			4,720			1,551			1,035			8,195

Allocated to:
Specific reserves																	$	98			451			172			73			794
General reserves																		735			4,418			1,450			1,289			7,892
Balance, December 31, 2018																	$	833			4,869			1,622			1,362			8,686

Allocated to:
Specific reserves																	$	52			459			101			55			667
General reserves																		837			4,261			1,450			980			7,528
Balance, September 30, 2019																	$	889			4,720			1,551			1,035			8,195

Loans receivable at December 31, 2018:
Individually reviewed for impairment																	$	1,226			1,311			856			303			3,696
Collectively reviewed for impairment																		109,472			334,819			71,676			75,193			591,160
Ending balance																	$	110,698			336,130			72,532			75,496			594,856

Loans receivable at September 30, 2019:
Individually reviewed for impairment																	$	908			1,291			838			235			3,272
Collectively reviewed for impairment																		112,154			336,954			72,287			66,095			587,490
Ending balance																	$	113,062			338,245			73,125			66,330			590,762

The following table summarizes the amount of classified and unclassified loans at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

Classified loans represent special mention, substandard (performing and non-performing), and non-performing loans categorized as doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet may not be warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.

The aging of past due loans at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 is summarized as follows:

Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

The following tables summarize average recorded investment and interest income recognized on impaired loans during the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018.

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, non-accruing loans totaled ~~$5.5~~$1.5 million and ~~$3.1~~$2.7 million, respectively, for which the related allowance for loan losses was ~~$0.9~~$0.1 million and ~~$0.9~~$0.7 million, respectively. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded, because management determined that the value of the collateral was sufficient to repay the loan, totaled ~~$0.7~~$0.6 million and $0.4 million, at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.

The non-accrual loans at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized as follows:

At September 30, ~~2018~~2019 and December 31, ~~2017~~2018 there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling ~~$2.4~~$2.2 million and ~~$3.0~~$2.5 million, respectively. ~~The amount of loans restructured in the third quarter of 2018 was not considered meaningful. For~~Of the loans that were restructured in the third quarter of ~~2017, $34,000~~2019, none were classified but performing, and ~~$0.2~~$0.1 million were non-performing at September 30, ~~2017.~~2019. The loans that were restructured in the third quarter of 2018 were not considered material.

The following table summarizes TDRs at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

As of September 30, 2018, the Bank had commitments to lend an additional $1.0 million to a borrower who has TDR and non-accrual loans. These additional funds are for the construction of single family homes with a maximum loan-to-value ratio of 75%. These loans are secured by the home under construction. At December 31, 2017, there were commitments to lend additional funds of $0.8 million to this same borrower.

TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after 12 months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for the entire 12 month period. All loans classified as TDRs are considered to be impaired.

When a loan is modified as a TDR, there may be a direct, material impact on the loans within the balance sheet, as principal balances may be partially forgiven. The financial effects of TDRs are presented in the following tables and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three month and nine month periods ended September 30, ~~2018~~2019 and ~~2017.~~2018.

	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
(Dollars in thousands)	Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment		Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Troubled debt restructurings:
Single family		0	$	0		0		3	$	176		181
Consumer		1		58		58		4		118		118
Total		1	$	58		58		7	$	294		299

Three Months Ended
September 30, 2018

Nine Months Ended
September 30, 2018

(Dollars in thousands)

Number of Contracts

Pre-modification Outstanding Recorded Investment

Post-modification Outstanding
Recorded
Investment

Number of Contracts

Pre-modification Outstanding Recorded Investment

Post-modification Outstanding
Recorded
Investment

Troubled debt restructurings:

Single family
0 $ 0 0 1 $ 55 58
Commercial real estate:

Real estate rental and leasing
0 0 0 1 54 54
Other
0 0 0 2 1,518 1,518
Consumer
2 2 2 10 335 336
Commercial business
0 0 0 1 70 70
Total
2 $ 2 2 15 $ 2,032 2,036

There were no loans that were restructured in the 12 months preceding September 30, 2019 and 2018 that subsequently defaulted during the three and nine months ended September 30, ~~2018. The following table summarizes the loans that were restructured in the 12 months preceding September 30, 2017~~2019 and ~~subsequently defaulted during the nine months ended September 30, 2017. There were no restructured loans that defaulted in the three months ended September 30, 2017.~~2018, respectively.

The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement. Loans that were non-accrual prior to modification remain on non-accrual status for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accrual status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.

TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral-dependent, the value of the collateral is reviewed and additional reserves may be added to specific reserves as needed. Loans that are not collateral-dependent may have additional reserves established if deemed necessary. The reserves for TDRs were $0.6 million, or 7.2%, of the total ~~$8.8~~$8.2 million in loan loss reserves at September 30, ~~2018~~2019 and ~~$0.9~~$0.6 million, or ~~9.8%~~7.2%, of the total ~~$9.3~~$8.7 million in loan loss reserves at December 31, ~~2017.~~2018.

The following is additional information with respect to loans acquired through acquisitions:

As a result of acquisitions, the Company has loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount of those loans as of September 30, ~~2018~~2019 was $0.2 million.

No material provision for loan losses was recognized during the period ended September 30, ~~2018~~2019 related to acquired loans, as there was no significant change to the credit quality of those loans.

All of the loans ~~being serviced were single family~~sold where the Company continues to service the loans are serviced for FNMA under the individual loan sale program.

The following is a summary of the risk characteristics of the loans being serviced for FNMA at September 30, ~~2018.~~2019.

The gross carrying amount of intangible assets and the associated accumulated amortization at September 30, ~~2018~~2019 and ~~2017~~2018 is presented in the following table. No amortization expense relating to goodwill is recorded as ~~generally accepted accounting principles do~~GAAP does not allow goodwill to be amortized, but ~~require~~requires that it be tested for impairment at least annually, or sooner, if there are indications that impairment may exist. Amortization expense for amortizing intangible assets was $0.6 million and $0.5 million for ~~both~~the nine month periods ended September 30, 2019 and 2018, ~~and 2017.~~respectively.

The following table indicates the estimated future amortization expense for amortizing intangible assets:

Projections of amortization are based on existing asset balances and the existing interest rate environment as of September 30, ~~2018.~~2019. The Company's actual experience may be significantly different depending upon changes in mortgage interest rates and other market conditions.

(11) Leases

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and as of September 30, 2019 a $4.2 million right-of-use asset and an offsetting lease payment obligation liability were recorded on the consolidated balance sheet in other assets and other liabilities, respectively.

Operating lease right-of-use assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. Because the Company only has operating leases and the right-of-use asset is offset by a lease payment obligation liability, the lease payments are the only amount that is recorded in occupancy expense in the consolidated statements of comprehensive income.

The Company’s leases relate to office space and bank branches with remaining lease terms between 35 and 67 months. Certain leases contain extension options which typically range from 3 to 10 years. Because these extension options are not considered reasonably certain of exercise, they are not included in the lease term. As of September 30, 2019, operating lease right-of-use assets and liabilities were $4.2 million.

The table below summarizes our net lease cost:

(Dollars in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	221		667

The table below summarizes other information related to our operating leases:

(Dollars in thousands)	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	221			667
Weighted-average remaining lease term – operating leases, in years		5.0			5.0
Weighted-average discount rate – operating leases		2.19	%		2.19	%

The table below summarizes the maturity of remaining lease liabilities:

(Dollars in thousands)	September 30, 2019
2019	$	221
2020		886
2021		895
2022		932
2023		807
2024 and thereafter		743
Total lease payments		4,484
Less: Interest		(243	)
Present value of lease liabilities	$	4,241

Table of Contents

(12)11)

Earnings per Common Share

The following table reconciles the weighted average shares outstanding and the earnings available to common shareholders used for basic and diluted earnings per share:

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands, except per share data)

2018

2017

2018

2017

Weighted average number of common shares outstanding used in basic earnings per share calculation
�� 4,358 4,220 4,296 4,212
Net dilutive effect of:

Restricted stock awards, options, and warrants
252 650 458 651
Weighted average number of shares outstanding adjusted for effect of dilutive securities
4,610 4,870 4,754 4,863
Income available to common shareholders
$ 2,712 1,780 5,884 4,017
Basic earnings per common share
$ 0.62 0.42 1.37 0.95
Diluted earnings per common share
$ 0.59 0.37 1.24 0.83

~~Table of Contents~~

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2019		2018		2019		2018
Weighted average number of common shares outstanding used in basic earnings per share calculation		4,614		4,358		4,606		4,296
Net dilutive effect of:
Restricted stock awards, options, and warrants		28		252		29		458
Weighted average number of shares outstanding adjusted for effect of dilutive securities		4,642		4,610		4,635		4,754
Income available to common shareholders	$	2,076		2,712		6,557		5,884
Basic earnings per common share	$	0.45		0.62		1.42		1.37
Diluted earnings per common share	$	0.45		0.59		1.41		1.24

(13)2)

Regulatory Capital and Oversight

The Company and the Bank are subject to the ~~regulatory requirements of the~~ Basel III regulatory capital ~~reforms.~~requirements. The Basel III requirements, among other things, (i) apply a ~~strengthened~~ set of capital requirements to the Bank (the Company is exempt, pursuant to the Small Bank Holding Company Policy Statement (Policy Statement) described below), including requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum Tier 1 capital requirement, and (iii) ~~revise the~~set forth rules for calculating risk-weighted assets for purposes of such requirements. The rules made corresponding revisions to the prompt corrective action framework and include capital ratios and buffer requirements which ~~are being~~became fully phased in ~~incrementally, with full implementation scheduled for~~on January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of ~~their~~its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Board of Governors of the Federal Reserve System (FRB) amended its Policy Statement, to exempt small bank holding companies with assets less than $3 billion from the above capital requirements. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company currently meets the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table and defined in the regulation) of ~~common equity~~Common Equity Tier 1 capital to risk weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk weighted assets, and total capital to risk weighted assets.

The Bank’s average total assets for the quarter ended September 30, ~~2018~~2019 were ~~$733.0~~$743.2 million, its adjusted total assets were ~~$731.3~~$742.0 million, and its risk-weighted assets were ~~$606.0~~$613.2 million. The following table presents the Bank’s capital amounts and ratios at September 30, ~~2018~~2019 for actual capital, required capital, and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective action regulations.

	Actual					Required to be Adequately Capitalized					Excess Capital					To Be Well Capitalized Under Prompt Corrective Action Provisions					Actual					Required to be Adequately Capitalized					Excess Capital					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets			Amount		Percent of Assets
September 30, 2018
September 30, 2019
Common equity tier 1 capital	$	76,689		12.65	%	$	27,272		4.50	%	$	49,417		8.15	%	$	39,393		6.50	%	$	81,642		13.31	%	$	27,596		4.50	%	$	54,046		8.81	%	$	39,861		6.50	%
Tier 1 capital leverage		76,689		10.49			29,252		4.00			47,437		6.49			36,564		5.00			81,642		11.00			29,679		4.00			51,963		7.00			37,098		5.00
Tier 1 risk-based capital		76,689		12.65			36,362		6.00			40,327		6.65			48,483		8.00			81,642		13.31			36,795		6.00			44,847		7.31			49,060		8.00
Total risk-based capital		84,280		13.91			48,483		8.00			35,797		5.91			60,604		10.00			89,314		14.56			49,060		8.00			40,254		6.56			61,325		10.00

The Bank must maintain a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. ~~For 2018,~~On January 1, 2019, the capital conservation buffer ~~is 1.875% and in 2019 the buffer~~ amount ~~will increase~~increased to 2.50% and beis fully phased in. Management believes that, as of September 30, ~~2018,~~2019, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the current prompt corrective action regulations, including the capital conservation buffer described above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The Office of the Comptroller of the Currency has extensive discretion in its supervisory and enforcement activities, and can adjust the requirement to be “well-capitalized” in the future.

(13)	*~~Stockholders’ Equity~~*

The Company's certificate of incorporation authorizes the issuance of up to 500,000 shares of preferred stock, and on December 23, 2008, the Company completed the sale of 26,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) to the U.S. Department of the Treasury (Treasury). The Preferred Stock had a liquidation value of $1,000 per share and a related warrant was also issued to purchase 833,333 shares of HMN common stock at an exercise price of $4.68 per share (the Warrant). The transaction was part of the Treasury’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008.

On February 17, 2015, the Company redeemed the final 10,000 shares of outstanding Preferred Stock. On May 21, 2015, the Treasury sold the Warrant at an exercise price of $4.68 per share to three unaffiliated third party investors for an aggregate purchase price of $5.7 million.

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On May 21, 2018, the Company entered into a warrant repurchase agreement with one of the warrant holders, pursuant to which the Company purchased, at a purchase price of $14.32 per warrant, warrants to purchase 138,888.66 shares of HMN common stock for an aggregate purchase price of $2.0 million. The warrants purchased by the Company were cancelled. Simultaneously with the repurchase, the warrant holder engaged in a cashless exercise of the remainder of its warrant, resulting in the issuance of 104,678 shares of HMN common stock to the warrant holder out of treasury stock.

On August 29, 2018, the Company entered into a warrant repurchase agreement with a second warrant holder, pursuant to which the Company purchased, at a purchase price of $16.07 per warrant, warrants to purchase 277,777.67 shares of HMN common stock for an aggregate purchase price of $4.5 million. The warrants purchased by the Company were cancelled.

~~On October 2, 2018, the final warrant holder engaged in a cashless exercise of its warrant, resulting in the issuance of 214,973 shares of HMN common stock to the warrant holder out of treasury stock.~~

~~As a result of the above transactions, the Company no longer has any obligations under the Warrant.~~

(15)Commitments and Contingencies

The Bank issues standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit issued and available at September 30, ~~2018~~2019 were approximately ~~$2.7~~$5.1 million, expire over the next 4635 months, and are collateralized primarily with commercial real estate mortgages. Since the conditions under which the Bank is required to fund the standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments.

From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. The Company is, and expects to become, engaged in foreclosure proceedings, collection actions, and other litigation as part of its normal banking activities. Among the various current litigation matters, the Company is involved in a bankruptcy litigation claim where the bankruptcy trustee is attempting to recover $3.7 million related to the principal and interest payments made to the Bank prior to the bankruptcy filing of a former customer of the Bank.

The Company examines each legal matter, and, in those situations where it determines that a particular legal matter presents loss contingencies that are both probable and reasonably estimable, establishes an appropriate accrual. In many situations, the Company is not able to estimate reasonably possible losses due to the preliminary nature of the legal matter, as well as a variety of other factors and uncertainties. For those legal matters where the Company is able to estimate a range of reasonably possible losses, management currently estimates that the aggregate range of losses from all of our outstanding litigation is from $0 to $1.4 million in excess of the amounts accrued, if any. This estimated aggregate range is based on an assessment of the information currently available to the Company and the actual aggregate losses could be higher. However, the Company does not believe these losses are probable to occur at this time. The Company reassesses all of its potential loss positions based on the available information each quarter and the estimated range of reasonably possible losses may change in the future. The Company typically vigorously pursues all available defenses related to litigation but may consider other alternatives, including settlement, in situations where there is an opportunity to resolve a legal matter on terms that are considered to be favorable to the Company when considering the continued expense and distraction of defending against any particular legal action.

Based on the Company’s current understanding of all of the outstanding legal matters, management does not believe that judgments or settlements arising from any pending or threatened litigation, individually or in the aggregate, would have a material adverse effect on the consolidated financial condition or results of operations. However, litigation is unpredictable and the actual results of litigation cannot be determined with any certainty. Therefore, the ultimate aggregate resolution of any, or all, of the current outstanding legal matters could have a material adverse effect on the Company’s results of operations in the future.

~~(16)~~(16) Business Segments

The Bank has been identified as a reportable operating segment in accordance with the provisions of ASC 280. HMN, the holding company, did not meet the quantitative thresholds for ~~determining~~a reportable ~~segments~~segment and therefore is included in the “Other” category.

The Company evaluates performance and allocates resources based on the segment’s net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of ~~directors, some of whom may overlap between the corporations.~~directors.

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The following table sets forth certain information about the ~~reconciliation~~reconciliations of reported profit and assets for each of the Company’s reportable segments.

(Dollars in thousands)	Home Federal Savings Bank		Other			Eliminations			Consolidated Total		Home Federal Savings Bank			Other			Eliminations			Consolidated Total
At or for the nine months ended September 30, 2019:
Interest income - external customers											$	24,029			2			(2	)		24,029
Non-interest income - external customers												5,939			0			0			5,939
Intersegment non-interest income												176			7,015			(7,191	)		0
Interest expense												2,427			0			(2	)		2,425
Provision for loan losses												(1,452	)		0			0			(1,452	)
Non-interest expense												19,363			574			(176	)		19,761
Income tax expense												2,791			(114	)		0			2,677
Net income												7,015			6,557			(7,015	)		6,557
Total assets												762,445			91,388			(90,605	)		763,228

At or for the nine months ended September 30, 2018:
Interest income - external customers	$	22,584		0			0			22,584	$	22,584			0			0			22,584
Non-interest income - external customers		5,766		0			0			5,766		5,766			0			0			5,766
Intersegment non-interest income		164		6,328			(6,492	)		0		164			6,328			(6,492	)		0
Interest expense		1,583		0			0			1,583		1,583			0			0			1,583
Provision for loan losses												(482	)		0			0			(482	)
Non-interest expense		18,703		542			(164	)		19,081		18,703			542			(164	)		19,081
Income tax expense		2,382		(98	)		0			2,284		2,382			(98	)		0			2,284
Net income		6,328		5,884			(6,328	)		5,884		6,328			5,884			(6,328	)		5,884
Total assets		737,289		79,228			(79,072	)		737,445		737,289			79,228			(79,072	)		737,445

At or for the nine months ended September 30, 2017:
At or for the quarter ended September 30, 2019:
Interest income - external customers	$	20,913		0			0			20,913	$	7,998			2			(2	)		7,998
Non-interest income - external customers		5,695		0			0			5,695		2,227			0			0			2,227
Intersegment non-interest income		158		4,596			(4,754	)		0		59			2,235			(2,294	)		0
Interest expense		1,056		306			0			1,362		908			0			(2	)		906
Provision for loan losses												(420	)		0			0			(420	)
Non-interest expense		18,653		550			(158	)		19,045		6,604			202			(59	)		6,747
Income tax expense		3,043		(277	)		0			2,766		957			(41	)		0			916
Net income		4,596		4,017			(4,596	)		4,017		2,235			2,076			(2,235	)		2,076
Total assets		715,827		79,516			(78,733	)		716,610		762,445			91,388			(90,605	)		763,228

At or for the quarter ended September 30, 2018:
Interest income - external customers	$	7,970		0			0			7,970	$	7,970			0			0			7,970
Non-interest income - external customers		1,936		0			0			1,936		1,936			0			0			1,936
Intersegment non-interest income		59		2,864			(2,923	)		0		59			2,864			(2,923	)		0
Interest expense		587		0			0			587		587			0			0			587
Provision for loan losses												(652	)		0			0			(652	)
Non-interest expense		6,087		186			(59	)		6,214		6,087			186			(59	)		6,214
Income tax expense		1,079		(34	)		0			1,045		1,079			(34	)		0			1,045
Net income		2,864		2,712			(2,864	)		2,712		2,864			2,712			(2,864	)		2,712
Total assets		737,289		79,228			(79,072	)		737,445		737,289			79,228			(79,072	)		737,445

At or for the quarter ended September 30, 2017:
Interest income - external customers	$	7,255		0			0			7,255
Non-interest income - external customers		1,909		0			0			1,909
Intersegment non-interest income		53		1,960			(2,013	)		0
Interest expense		416		77			0			493
Non-interest expense		6,124		188			(53	)		6,259
Income tax expense		1,298		(85	)		0			1,213
Net income		1,960		1,780			(1,960	)		1,780
Total assets		715,827		79,516			(78,733	)		716,610

This quarterly report and other reports filed by the Company with the Securities ~~and~~ Exchange Commission (SEC) may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to growing our core deposit relationships and loan balances, enhancing the financial performance of our core banking operations, maintaining credit quality, maintaining net interest margins, reducing non-performing assets, and generating improved financial results (including profitability); ~~the extent of the positive impact of the lower federal tax rates on the deferred tax asset balance and future earnings;~~ the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for maintenance thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and composition of interest-earning assets; the amount of yield enhancements relating to non-accruing and purchased loans; the amount and composition of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer of the trust preferred securities held by the Bank; the anticipated results of litigation and our assessment of the impact on our financial statements; the ability of the Bank to pay dividends to HMN; the ability to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.

A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as continued shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with traditional and alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank (FHLB); technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; domestic and international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the Company’s most recent filings on ~~Form~~Forms 10-K and 10-Q with the ~~Securities and Exchange Commission.~~SEC. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 and Part II, Item 1A of its subsequently filed quarterly reports on Form 10-Q.

All statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and we undertake no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q.

HMN Financial, Inc. (HMN or the Company) is the stock savings bank holding company for Home Federal Savings Bank (the Bank), which operates community banking and loan production offices in Minnesota, Iowa and Wisconsin. The earnings of the Company are primarily dependent on the Bank's net interest income, which is the difference between interest earned on loans and investments, and the interest paid on interest-bearing liabilities such as deposits and other borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the "interest rate spread". Net interest income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and composition of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net earnings are also affected by the generation of non-interest income, which consists primarily of gains from the sale of loans and real estate owned, fees for servicing loans, commissions on the sale of uninsured investment products, and ~~fees earned~~service charges on deposit accounts. The Bank incurs expenses in addition to interest expense in the form of compensation and benefits, occupancy and equipment expenses, provisions for loan losses, professional services, ~~deposit insurance, amortization expense on mortgage servicing assets,~~ data processing costs, other non-interest expenses and income taxes. The earnings of financial institutions, such as the Bank, are also significantly affected by prevailing economic and competitive conditions, particularly changes in interest rates, government monetary and fiscal policies, and regulations of various regulatory authorities. Lending activities are influenced by the demand for and supply of business credit, single family and commercial properties, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of deposits are influenced by prevailing market rates of interest on competing investments, account maturities and the levels of personal income and savings.

Critical accounting policies are those policies that the Company's management believes are the most important to understanding the Company’s financial condition and operating results. These critical accounting policies often involve estimates and assumptions that could have a material impact on the Company’s financial statements. The Company has identified the following critical accounting policies that management believes involve the most difficult, subjective, and/or complex judgments that are inherently uncertain. Therefore, actual financial results could differ significantly depending upon the estimates, assumptions and other factors used.

The allowance for loan losses is based on periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national and regional economic conditions such as unemployment data, loan delinquencies, local economic conditions, demand for single family homes, demand for commercial real estate and building lots, loan portfolio composition, historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the appropriateness of the loan loss allowance for its homogeneous single family and consumer loan portfolios and its non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single family and consumer loan portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate and multi-family loan portfolios involves assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Company's own loss experience and are assigned to all loans without identified credit weaknesses. For each non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans, or portions thereof, that are deemed uncollectible.

The appropriateness of the allowance for loan losses is dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans is typically based on the appraised value of the property less estimated selling costs. The estimates are reviewed periodically and adjustments, if any, are recorded in the provision for loan losses in the periods in which the adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios and the actual loss experience. The Company increases its allowance for loan losses by charging the provision for loan losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for loan losses and ~~by charging off loans.~~recording loan charge-offs. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified. Although management believes that based on current conditions the allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for loan losses and adjustments may be required in the future.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

The Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relates to the allowance for loan and real estate losses. For tax purposes only the net charge-offs are deductible while the entire provision for loan losses is used to determine book income. A deferred tax asset is created because of the timing difference of when the expense is recognized for book and tax purposes. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax planning strategies, and assessments of the current and future economic and business conditions. The Company considers both positive and negative evidence regarding the ultimate realizability of deferred tax assets. Positive evidence includes the Company’s cumulative net income in the prior three year period, the ability to implement tax planning strategies to accelerate taxable income recognition, and the probability that taxable income will be generated in future periods. The Company could not currently identify any negative evidence. It is possible that future conditions may differ substantially from those anticipated in determining that no valuation allowance was required on deferred tax assets, and adjustments may be required in the future.

Determining the ultimate settlement of any tax position requires significant estimates and judgments in arriving at the amount of tax benefits to be recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 20189 COMPARED TO THE SAME PERIODS ENDED SEPTEMBER 30, 20178

Net income was $2.1 million for the third quarter of 2019, a decrease of $0.6 million, compared to net income of $2.7 million for the third quarter of ~~2018, an increase of $0.9 million, compared to net income of $1.8 million for the third quarter of 2017.~~2018. Diluted earnings per share for the third quarter of ~~2018~~2019 was ~~$0.59, an increase~~$0.45, a decrease of ~~$0.22,~~$0.14 per share, compared to diluted earnings per share of ~~$0.37~~$0.59 for the third quarter of ~~2017.~~2018. The decrease in net income between the periods was primarily because of a $0.5 million increase in non-interest expenses primarily related to increased compensation and professional services costs, a $0.3 million decrease in net interest income due to an increase in the average rates paid on deposits, and a $0.3 million increase in the loan loss provision. These decreases in net income were partially offset by a $0.4 million increase in the gain on sales of loans between the periods and a $0.1 million decrease in income tax expense as a result of the decreased pre-tax income between the periods.

Net income was $6.6 million for the nine month period ended September 30, 2019, an increase of $0.7 million, or 11.4%, compared to net income of $5.9 million for the nine month period ended September 30, 2018. Diluted earnings per share for the nine month period ended September 30, 2019 was $1.41, an increase of $0.17 per share, compared to diluted earnings per share of $1.24 for the same period in 2018. The increase in net income between the periods was primarily because of a $1.0 million decrease in the provision for loan losses, a $0.6 million increase in net interest income, ~~primarily because of an~~and a $0.2 million increase in the ~~average interest-earning assets,~~gain on sales of loans. These increases in net income were partially offset by a ~~$0.2~~$0.4 million ~~decrease~~increase in compensation expense related to the increased mortgage loan production and annual salary increases, a $0.4 million increase in income tax expense as a result of the ~~reduced federal corporate~~increased pre-tax income, ~~tax rate for 2018,~~ and a ~~$0.1~~$0.2 million ~~decrease~~increase in ~~other non-interest expense primarily related to decreases in advertising and compensation and benefit~~professional services expenses between the periods.

Net income was $5.9 million for the nine month period ended September 30, 2018, an increase of $1.9 million, or 46.5%, compared to net income of $4.0 million for the nine month period ended September 30, 2017. Diluted earnings per share for the nine month period ended September 30, 2018 was $1.24, an increase of $0.41 per share compared to diluted earnings per share of $0.83 for the same period in 2017. The increase in net income between the periods was primarily because of a $1.4 million increase in net interest income primarily due to an increase in the average interest-earning assets and a $0.5 million decrease in income tax expense as a result of the reduced federal corporate income tax rate for 2018.

Net interest income was $7.1 million for the third quarter of 2019, a decrease of $0.3 million, or 3.9%, from $7.4 million for the third quarter of ~~2018, an increase of $0.6 million, or 9.2%, from $6.8 million for the third quarter of 2017.~~2018. Interest income was $8.0 million for the third quarter of ~~2018, an increase of $0.7 million, or 9.9%, from $7.3 million~~2019, the same as for the ~~same period in 2017.~~third quarter of 2018. Interest income ~~increased between~~remained flat despite the ~~periods primarily because of an~~ increase in the average ~~interest-earning assets, a change in the composition of the average interest-earning assets, and an increase in the~~ federal funds rate between the periods ~~which resulted~~as competitive pricing in ~~higher earnings on~~our markets did not allow for increased loan ~~cash, and investment balances. While~~rates when the ~~average interest-earning assets~~federal funds rate increased $23.7 million between the periods, the average interest-earning assets held in higher yielding loans decreased $3.3 million, and the amount of average interest-earning assets held in lower yielding cash and investments increased $27.0 million between the periods. The decrease in the ~~average outstanding loans between the periods was primarily the result~~fourth quarter of ~~a decrease in the commercial loan portfolio, which occurred because of an increase in loan payoffs between the periods.~~2018. The average yield earned on interest-earning assets was 4.47% for the third quarter of ~~2018, an increase of 26 basis points from 4.21%~~2019, the same as for the third quarter of ~~2017.~~2018.

Interest expense was $0.9 million for the third quarter of 2019, an increase of $0.3 million, or 54.3%, from $0.6 million for the third quarter of ~~2018, an increase of $0.1 million, or 19.1%, from $0.5 million for the third quarter of 2017.~~2018. The average interest rate paid on interest-bearing liabilities and non-interest-bearing deposits was 0.56% for the third quarter of 2019, an increase of 20 basis points from 0.36% for the third quarter of ~~2018, an~~2018. The increase in the interest paid on interest-bearing liabilities was primarily because of ~~5 basis points from 0.31% for~~ the ~~third quarter of 2017. The~~increase in the average ~~interest~~federal funds rate ~~paid increased~~ between the periods ~~due to an increase in~~which increased the ~~rates paid on certain money market accounts and certificates~~cost of ~~deposit and a change in the composition of the average interest-bearing liabilities and non-interest-bearing~~ deposits held between the periods. While the average interest-bearing liabilities and non-interest-bearing deposits increased $18.3 million between the periods, the average amount held in higher rate premium money market accounts increased $16.8 million, the average amount held in lower rate checking, savings, and money market accounts decreased $0.5 million, and the average amount held in higher rate borrowings and certificates of deposit increased $2.0 million between the periods.

Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of ~~2018~~2019 was ~~4.14%~~3.97%, ~~an increase~~a decrease of 2217 basis points, compared to ~~3.92%~~4.14% for the third quarter of ~~2017.~~

Net interest income was ~~$21.0~~$21.6 million for the first nine months of ~~2018,~~2019, an increase of ~~$1.4~~$0.6 million, or ~~7.4%~~2.9%, from ~~$19.6~~$21.0 million for the same period in ~~2017.~~2018. Interest income was ~~$22.6~~$24.0 million for the nine month period ended September 30, ~~2018,~~2019, an increase of ~~$1.7~~$1.4 million, or ~~8.0%~~6.4%, from ~~$20.9~~$22.6 million for the same nine month period in ~~2017.~~2018. Interest income increased primarily because of the higher interest amounts earned on interest-earning assets as a result of the increase in the average federal funds rate between the ~~periods primarily~~periods. Interest income also increased $0.3 million because of an increase in the ~~average interest-earning assets, a change in the composition~~amount of ~~the average interest-earning assets, and an increase in the federal funds rate~~yield enhancements recognized between the periods ~~which resulted in higher earnings~~ on ~~loan, cash, and investment balances. While the average interest-earning assets increased $34.5 million between the periods, the average interest-earning assets held in higher yielding~~non-accruing loans increased $15.3 million and the amount of average interest-earning assets held in lower yielding cash and investments increased $19.2 million between the periods. The increase in the average outstanding loans between the periods was primarily the result of an increase in the commercial loan portfolio, which occurred because of a reduction in loan payoffs between the periods.that were paid off. The average yield earned on interest-earning assets was 4.60% for the nine month period ended September 30, 2019, an increase of 28 basis points from 4.32% for the ~~first~~same nine ~~months of 2018, an increase of 11~~month period in 2018. The average yield earned on the average interest-earning assets increased 5 basis points ~~from 4.21% for~~as a result of the ~~first nine months of 2017.~~change in yield enhancements recognized between the periods.

Interest expense was ~~$1.6~~$2.4 million for the first nine months of ~~2018,~~2019, an increase of ~~$0.2~~$0.8 million, or ~~16.2%~~53.2%, compared to ~~$1.4~~$1.6 million in the first nine months of ~~2017.~~2018. The average interest rate paid on interest-bearing liabilities and non-interest-bearing deposits was 0.51% for the first nine months of 2019, an increase of 18 basis points from 0.33% for the first nine months of ~~2018, an~~2018. The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of ~~3 basis points from 0.30% for~~ the ~~first nine months of 2017. The~~increase in the average ~~interest~~federal funds rate ~~paid increased~~ between the periods ~~due to an increase in~~which increased the ~~rates paid on certain money market accounts and certificates~~cost of deposit and a change in the composition of the average interest-bearing liabilities and non-interest-bearing deposits held between the periods. While the average interest-bearing liabilities and non-interest-bearing deposits increased $27.4 million between the periods, the average amount held in higher rate premium money market accounts increased $19.3 million, the average amount held in lower rate checking, savings, and money market accounts increased $6.3 million, and the average amount held in higher rate borrowings and certificates of deposit increased $1.8 million between the periods.deposits.

Net interest margin (net interest income divided by average interest-earning assets) for the first nine months of ~~2018~~2019 was ~~4.02%~~4.14%, an increase of 812 basis points, compared to ~~3.94%~~4.02% for the first nine months of ~~2017.~~2018. The increase in the net interest margin is primarily related to the increase in interest income between the periods as a result of the increase in the average federal funds rate.

A summary of the Company’s net interest margin for the three and nine month periods ended September 30, ~~2018~~2019 and ~~2017~~2018 is as follows:

	For the nine-month period ended														For the three-month period ended
	September 30, 2018							September 30, 2017							September 30, 2019							September 30, 2018
(Dollars in thousands)	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
Interest-earning assets:
Securities available for sale	$	79,436		991		1.67	%	$	76,695		850		1.48	%	$	80,286		365		1.80	%	$	79,755		337		1.68	%
Loans held for sale		1,739		62		4.80			1,863		69		4.95			3,557		43		4.72			1,757		24		5.45
Single family loans, net		112,252		3,412		4.06			113,372		3,411		4.02			115,844		1,236		4.23			112,221		1,154		4.08
Commercial loans, net		401,850		15,075		5.02			384,321		13,885		4.83			398,674		5,229		5.20			399,517		5,349		5.31
Consumer loans, net		72,238		2,675		4.95			73,270		2,626		4.79			73,788		920		4.95			72,257		914		5.02
Cash equivalents		30,105		349		1.55			13,564		64		0.63
Federal Home Loan Bank stock		859		20		3.10			892		8		1.20
Other																37,355		205		2.18			42,344		192		1.80
Total interest-earning assets	$	698,479		22,584		4.32		$	663,977		20,913		4.21		$	709,504		7,998		4.47		$	707,851		7,970		4.47

Interest-bearing liabilities and non-interest-bearing deposits:
NOW accounts		87,468		41		0.06			87,783		66		0.10
Checking accounts																93,024		23		0.10			84,491		19		0.09
Savings accounts		78,075		46		0.08			77,015		47		0.08			80,269		16		0.08			78,191		16		0.08
Money market accounts		198,149		610		0.41			175,388		390		0.30			173,606		303		0.69			204,599		221		0.43
Certificates		114,412		884		1.03			104,362		532		0.68			127,888		564		1.75			115,620		331		1.14
Advances and other borrowings		188		2		1.71			8,469		327		5.16
Total interest-bearing liabilities	$	478,292						$	453,017						$	474,787						$	482,901
Non-interest checking		156,026							154,085							166,972							160,410
Other non-interest bearing deposits		1,567							1,361							2,415							1,709
Total interest-bearing liabilities and non-interest- bearing deposits	$	635,885		1,583		0.33		$	608,463		1,362		0.30
Total interest-bearing liabilities and non-interest-bearing deposits															$	644,174		906		0.56		$	645,020		587		0.36
Net interest income				21,001							19,551							7,092							7,383
Net interest rate spread						3.99	%						3.91	%						3.91	%						4.11	%
Net interest margin						4.02	%						3.94	%						3.97	%						4.14	%

The provision for loan losses was ($~~0.7)~~0.4) million for the third quarter of ~~2018, a decrease~~2019, an increase of ~~$0.1~~$0.3 million from the ($~~0.6)~~0.7) million provision for loan losses for the third quarter of ~~2017.~~ 2018. The credit provision amount for the period was primarily the result of certain adversely classified commercial loans being paid off during the period. These payoffs, combined with the continued improvement in the credit quality of the loan portfolio, resulted in a reduction of the overall allowance for loan losses required between the periods.

The provision for loan losses was ($~~0.5)~~1.5) million for the first nine months of ~~2018, an increase~~2019, a decrease of ~~$0.1~~$1.0 million compared to the ($~~0.6)~~0.5) million provision for loan losses for the first nine months of ~~2017.~~2018. The ~~changes~~credit provision amount for the period was primarily the result of the increase in net recoveries received during the nine month period ended September 30, 2019 when compared to the same period of 2018. The net recoveries, combined with the continued improvement in the ~~provision~~credit quality of the loan portfolio, resulted in a reduction of the overall allowance for loan losses ~~relate primarily to changes in the payments received on certain adversely classified commercial loans~~required between the periods.

A reconciliation of the Company’s allowance for loan losses for the three and nine month periods ended September 30, ~~2018~~2019 and ~~September 30, 2017~~2018 is summarized as follows:

Non-interest income was $2.2 million for the third quarter of 2019, an increase of $0.3 million, or 15.0%, from $1.9 million for the third quarter of ~~2018, the same as the third quarter~~2018. Gain on sales of ~~2017. Loan servicing fees~~loans increased ~~slightly~~$0.4 million between the periods ~~due~~ primarily tobecause of an increase in ~~commercial~~single family loan ~~servicing fees.~~sales. Fees and service charges ~~increased slightly~~decreased $0.1 million due to ~~an increase~~a decrease in the loan commitment fees earned between the periods. ~~These increases in non-interest income were offset by slight decreases~~Loan servicing fees decreased slightly between the periods due to a decrease in the ~~gain on sales of~~commercial loans ~~and other non-interest income.~~servicing fees earned.

Non-interest income was ~~$5.8~~$5.9 million for the first nine months of ~~2018,~~2019, an increase of $0.1 million, or ~~1.2%~~3.0%, from ~~$5.7~~$5.8 million for the ~~first nine months~~same period of ~~2017.~~2018. Gain on sales of loans increased ~~$0.1~~$0.2 million between the periods primarily because of an increase in single family loan sales. Other non-interest income increased ~~slightly~~$0.1 million due primarily to an increase in the ~~sales of uninsured investment products~~gains recognized on equity securities between the periods. Fees and service charges decreased $0.1 million due to a decrease in the loan commitment fees earned between the periods. Loan servicing fees increased slightly between the periods ~~primarily because of~~due to an increase in ~~mortgage~~single family loan servicing ~~fees. These increases in non-interest income were partially offset by a $0.1 million decrease in~~ fees ~~and service charges earned between the periods due primarily to a decrease in overdraft fees.~~earned.

Non-interest expense was $6.7 million for the third quarter of 2019, an increase of $0.5 million, or 8.6%, from $6.2 million for the third quarter of ~~2018, a decrease of $0.1 million, or 0.7%, from $6.3 million for the third quarter of 2017. Other non-interest expense decreased $0.1 million due to a decrease in advertising expense, and compensation~~2018. Compensation and benefits expense ~~decreased $0.1~~increased $0.3 million primarily because of annual salary increases and an increase in the compensation paid as a ~~decrease in employees~~result of the increased mortgage loan production between the periods. These decreases in non-interest expense were partially offset by a $0.1 million increase in data processing expense primarily related to an increase in mobile banking and on-line banking costs between the periods. Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and real estate taxes. Professional services expense increased ~~slightly~~$0.1 million due primarily to an increase in legal expenses between the periods.

~~Non-interest expense was $19.1 million for the first nine months of 2018, an increase of $0.1 million, or 0.2%, from $19.0 million for the same period of 2017.~~ Other non-interest expense increased ~~$0.2~~$0.1 million due primarily to ~~increases in deposit insurance costs and the losses incurred on deposit accounts between the periods. Data processing expense increased $0.1 million primarily related to~~ an increase in ~~mobile and on-line banking costs~~mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods. Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and maintenance costs. ~~These increases in non-interest~~

Non-interest expense ~~were partially offset by a $0.3~~was $19.8 million ~~decrease in compensation~~for the first nine months of 2019, an increase of $0.7 million, or 3.6%, from $19.1 million for the same period of 2018. Compensation and benefits expense increased $0.4 million primarily because of annual salary increases and an increase in the compensation paid as a ~~decrease in employees~~result of the increased mortgage loan production between the ~~periods and a $0.1 million decrease in professional~~periods. Professional services expense increased $0.2 million due primarily to ~~a decrease~~an increase in legal expenses between the periods. Other non-interest expense increased slightly due to an increase in mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods. Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and maintenance costs.

Income tax expense was $0.9 million for the third quarter of 2019, a decrease of $0.1 million from $1.0 million for the third quarter of ~~2018, a decrease of $0.2 million from $1.2~~2018. Income tax expense was $2.7 million for the ~~third quarter~~first nine months of ~~2017. Income tax expense was~~2019, an increase of $0.4 million from $2.3 million for the first nine months of ~~2018, a decrease of $0.5 million from $2.8 million for the first nine months of 2017. Income~~2018. The change in income tax expense ~~decreased~~ between the periods ~~despite an increase~~is primarily the result of a change in pre-tax ~~income, because of the decrease in the federal corporate income tax rate as a result of the tax law changes enacted in the fourth quarter of 2017.~~income.

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, ~~2017.~~2018.

Total non-performing assets were ~~$5.9~~$2.1 million at September 30, ~~2018, an increase~~2019, a decrease of ~~$2.2~~$1.0 million, or ~~58.1%~~34.1%, from ~~$3.7~~$3.1 million at June 30, 2019 and a decrease of $1.0 million, or 33.4%, from $3.1 million at December 31, 2018. Non-performing loans ~~increased $2.5~~decreased $1.2 million and foreclosed and repossessed assets ~~decreased $0.3~~increased $0.2 million ~~during~~for both the ~~third quarter~~three and nine month periods of ~~2018.~~2019. The ~~increase~~decrease in the non-performing loans was primarily related to a ~~$2.2~~$1.3 million ~~commercial~~non-performing loan relationship that was ~~downgraded~~reclassified as an accruing loan during the third quarter of ~~2018.~~2019.

The declaration of dividends is subject to, among other things, the Company's financial condition and results of operations, the Bank's compliance with regulatory capital requirements and other regulatory restrictions, tax considerations, industry standards, economic conditions, ~~anticipated growth,~~ general business practices and other factors. The Company has not made any dividend payments to common stockholders during the three year period ended September 30, ~~2018.~~2019.

For the nine months ended September 30, ~~2018,~~2019, the net cash provided by operating activities was ~~$12.8~~$8.1 million. The Company ~~collected $0.3~~received $10.4 million from ~~the maturities of~~maturing or called securities, ~~$1.5~~$1.3 million from principal repayments on securities, ~~$0.3~~$1.1 million from the redemption of FHLB stock, and ~~$0.4~~$0.2 million ~~in proceeds~~ from the sale of ~~real estate.~~premises and equipment. The Company purchased ~~securities of $4.9~~$1.0 million ~~purchased $0.3 million of~~in FHLB stock and paid ~~out $2.3~~$1.7 million for the purchase of premises and equipment. Net loans receivable ~~also~~decreased $1.0 million, customer escrows increased ~~$7.6 million. The~~$1.5 million, and the Company had a net increase in deposit balances of ~~$15.8 million and customer escrows increased $1.0~~$36.3 million. The Company also received ~~$6.8~~and repaid $26.0 million in ~~proceeds from borrowings, repaid borrowings of $6.8 million, and paid $6.5 million to repurchase outstanding warrants.~~borrowings.

The Company has certificates of deposits with outstanding balances of ~~$72.3~~$80.3 million that mature over the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that cash outflow from certificates that do not renew will be replaced with other deposits or FHLB advances. Federal Reserve Bank borrowings or proceeds from the sale of securities could also be used to fund unanticipated outflows of certificates of deposits.

The Company had ~~five~~four deposit customers that individually had aggregate deposits greater than $5.0 million as of September 30, ~~2018.~~2019. The ~~$73.8~~$45.9 million in funds held by these customers may be withdrawn at any time, but management believes that the majority of these deposits will not be withdrawn from the Bank over the next twelve months. If these deposits are withdrawn, it is anticipated that they would be replaced with deposits from other customers or FHLB advances. Federal Reserve Bank borrowings or proceeds from the sale of securities could also be used to replace unanticipated outflows of large checking and money market deposits.

The Company had the ability to borrow ~~$174.6~~$187.0 million from the FHLB at September 30, ~~2018,~~2019, based on the collateral value of the loans pledged. The credit policy of the FHLB relating to the collateral value of the loans collateralizing the available line of credit with the FHLB may change such that the current collateral pledged to secure future advances is no longer acceptable or the formulas for determining the excess pledged collateral may change. The FHLB could also reduce the amount of funds it will lend to the Bank. It is not anticipated that the Bank will need to find alternative funding sources in the next twelve months to replace the available borrowings from the FHLB. However, if needed, excess collateral currently pledged to the FHLB could be pledged to the Federal Reserve Bank and the Bank could borrow additional funds from the Federal Reserve Bank based on the increased collateral levels or obtain additional deposits.

The Company’s primary source of cash is dividends from the Bank. At September 30, ~~2018,~~2019, the Company had ~~$2.4~~$7.7 million in cash and other assets that could readily be turned into cash. The primary use of cash by the Company is the payment of operating expenses.

The Company also serves as a source of capital, liquidity, and financial support to the Bank. Depending upon the operating performance of the Bank and the Company’s other liquidity and capital needs, including Company level expenses, the Company may find it prudent, subject to prevailing capital market conditions and other factors, to raise additional capital through issuance of its common stock or other equity securities. Additional capital would also potentially permit the Company to implement a strategy of growing Bank assets. Depending on the circumstances, if it were to raise capital, the Company may deploy it to the Bank for general banking purposes, or may retain some or all of it for use by the Company.

If the Company were to raise capital through the issuance of additional shares of common stock or other equity securities, it would dilute the ownership interests of existing stockholders, and, if issued at a price less than the Company’s book value, would dilute the per share book value of the Company’s common stock, and could result in a change in control of the Company and the Bank. New investors may also have rights, preferences and privileges senior to the Company’s current stockholders, which may adversely impact the Company’s current stockholders. The Company’s ability to raise additional capital through the issuance of equity securities, if deemed prudent, will depend on, among other factors, conditions in the capital markets at that time, which are outside of its control, and on the Company’s financial performance and plans.

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure.

The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located in the following Asset/Liability Management section of this report discloses the Company’s projected changes in net interest income based upon immediate interest rate changes called rate shocks. The Company utilizes a model that uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities under different interest rate changes.

The following table discloses the projected changes in market value to the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on September 30, ~~2018.~~2019.

The preceding table was prepared utilizing a model using the following assumptions (the Model Assumptions) regarding prepayment and decay ratios that were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 2% to ~~34%~~52%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 5% and ~~50%~~59%, depending on the note rate and the period to maturity. Mortgage-backed securities were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook accounts and retail money market accounts were assumed to decay at an annual rate of 3%6% and 1%9%, respectively. Retail checking accounts were assumed to decay at an annual rate of 9%11%. Commercial checking and money market accounts were assumed to decay at annual rates of ~~28%~~20% and ~~32%~~31%, respectively. Callable investments were projected to be called at the first call date where the projected interest rate on similar remaining term instruments is less than the interest rate on the callable advance or investment.

Certain shortcomings are inherent in the method of analysis presented in the above table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the Interest Spread) will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets that are approaching their lifetime interest rate caps could be different from the values disclosed in the table. Certain liabilities, such as certificates of deposit, have fixed rates that restrict interest rate changes until maturity. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may also decrease in the event of a substantial sustained increase in interest rates.

The Company’s management reviews the impact that changing interest rates will have on the Company’s net interest income projected for the next twelve months to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income during the twelve month period ending September 30, ~~2019~~2020 of immediate interest rate changes called rate shocks.

The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income.

The increase in interest income in a rising rate environment is primarily because there are more adjustable rate loans that would re-price to higher interest rates than there are deposits that would re-price higher to the same extent in the next twelve months. The decrease in interest income in a declining rate environment is primarily because there are more loans and investments that would re-price to lower interest rates than there are deposits that would be able to be re-priced lower to the same extent in the next twelve months.

In an attempt to manage ~~the Company’s~~its exposure to changes in interest rates, management closely monitors interest rate risk. The Bank has an Asset/Liability Committee that meets frequently to discuss changes in the interest rate risk position and projected profitability. This Committee makes adjustments to the asset/liability position of the Bank that are reviewed by the Board of Directors of the Bank. This Committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions as intended to assure attainment of the Bank's objectives in an effective manner. In addition, each quarter the Board reviews the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios.

In managing its asset/liability composition, the Bank may, at times, depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, in certain situations, provide high enough returns to justify the increased exposure to sudden and unexpected changes in interest rates.

To the extent consistent with its interest rate spread objectives, the Bank attempts to manage its interest rate risk and has taken a number of steps to restructure its balance sheet in order to better match the maturities of its assets and liabilities. In the past, more long-term fixed rate loans were placed into the single family loan portfolio. In recent years, the Bank has continued to focus its 30 year fixed rate single family residential lending program on loans that are saleable to third parties and generally places only adjustable rate or shorter-term fixed rate loans that meet certain risk characteristics into its loan portfolio. A significant portion of the Bank’s commercial loan production continues to be in adjustable rate loans that reprice every one, two, or three years.

The Company has no off-balance sheet arrangements other than commitments to originate, fund, and sell loans in the ordinary course of business.

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the Company’s 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)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective 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 ~~Securities and Exchange Commission~~SEC rules and forms.

Changes in internal controls. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. ~~The Company is,~~See Note 15- Commitments and ~~expects to become, engaged in a number~~Contingencies of foreclosure proceedings and other collection actions as part of its collection activities. Based on its current understanding of these pending legal proceedings, management does not believe that judgments or settlements, if any and if determined adverselythe Notes to the Company, arising from pending legal matters individually or in the aggregate, would have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. Litigation is often unpredictable and the actual results of litigation cannot be determined with any certainty.Consolidated Financial Statements for more information.

There have been no material changes to the Company’s risk factors contained in its Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. For a further discussion of our Risk Factors, see Part I, Item ~~1A.~~1A of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

(c) On November 28, 2018, the Board of Directors announced a new share repurchase program pursuant to which the Company may purchase shares of its common stock for an aggregate purchase price not to exceed $6 million. The share repurchase program does not obligate the Company to purchase any shares and has no set expiration date. No shares were repurchased by the Company during the three or nine month periods ended September 30, 2019.

⁽¹⁾~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 29, 2018, filed on August 30, 2018. (File No. 000-24100).~~

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.

PART I - FINANCIAL INFORMATION
			Page

	Item 1:	Financial Statements	3

		Consolidated Balance Sheets at September 30, 2019 and December 31, 2018	3

		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018	4

		Consolidated Statements of Stockholders' Equity for the Three and Nine Month Periods Ended September 30, 2019 and 2018	5

		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	6

		Notes to Consolidated Financial Statements	7

	Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 3:	Quantitative and Qualitative Disclosures about Market Risk	34

	Item 4:	Controls and Procedures	34

PART II - OTHER INFORMATION

	Item 1:	Legal Proceedings	35

	Item 1A:	Risk Factors	35

	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 3:	Defaults Upon Senior Securities	35

	Item 4:	Mine Safety Disclosures	35

	Item 5:	Other Information	35

	Item 6:	Exhibits	36

	Signatures		37

		~~Page~~

~~PART I - FINANCIAL INFORMATION~~

~~Item 1:~~	~~Financial Statements~~	3

	~~Consolidated Balance Sheets at September 30, 2018 and December 31, 2017~~	3

	~~Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2018 and 2017~~	4

	~~Consolidated Statement of Stockholders' Equity for the Nine-Month Period Ended September 30, 2018~~	5

	~~Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017~~	6

	~~Notes to Consolidated Financial Statements~~	7

~~Item 2:~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~	25

~~Item 3:~~	~~Quantitative and Qualitative Disclosures about Market Risk~~	34

~~Item 4:~~	~~Controls and Procedures~~	34

~~PART II - OTHER INFORMATION~~

~~Item 1:~~	~~Legal Proceedings~~	35

~~Item 1A:~~	~~Risk Factors~~	35

~~Item 2:~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	35

~~Item 3:~~	~~Defaults Upon Senior Securities~~	35

~~Item 4:~~	~~Mine Safety Disclosures~~	35

~~Item 5:~~	~~Other Information~~	35

~~Item 6:~~	~~Exhibits~~	36

~~Signatures~~		37

(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due less than one year	$	1,844		1,777	$	45,667		45,642
Due after one year through five years		76,425		74,370		32,938		32,953
Due after five years through ten years		2,767		2,643		5,481		5,495
Due after ten years		780		670		797		762
No stated maturity		144		144
Total	$	81,960		79,604	$	84,883		84,852

	September 30, 2018														September 30, 2019
	Classified										Unclassified				Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans		Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	257		2,119		42		0		2,418		106,075		108,493	$	1,134		1,703		36		0		2,873		110,189		113,062
Commercial real estate:
Real estate rental and leasing		5,312		4,881		0		0		10,193		177,180		187,373		4,905		3,727		0		0		8,632		173,272		181,904
Other		2,896		7,535		0		0		10,431		134,699		145,130		4,132		4,683		0		0		8,815		147,526		156,341
Consumer		0		765		42		128		935		73,586		74,521		0		739		30		69		838		72,287		73,125
Commercial business		5,744		2,834		0		0		8,578		70,304		78,882		5,748		1,857		0		0		7,605		58,725		66,330
	$	14,209		18,134		84		128		32,555		561,844		594,399	$	15,919		12,709		66		69		28,763		561,999		590,762

(Dollars in thousands)	Contractual Principal Receivable			Accretable Difference			Carrying Amount			Contractual Principal Receivable			Accretable Difference			Carrying Amount
Purchased performing loans:
Balance at June 30, 2018	$	8,556			(206	)		8,350
Balance at June 30, 2019										$	5,842			(157	)		5,685
Change due to payments/refinances		(538	)		15			(523	)		(486	)		8			(478	)
Balance at September 30, 2018	$	8,018			(191	)		7,827
Balance at September 30, 2019										$	5,356			(149	)		5,207

	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2018			2017			2018			2017				2019			2018			2019			2018
Interest income:													Interest income:
Loans receivable	$	7,441			6,930			21,225			19,991			$	7,428			7,441			22,597			21,225
Securities available for sale:
Mortgage-backed and related		52			16			148			29				56			52			146			148
Other marketable		285			270			842			821				309			285			905			842
Other		192			39			369			72				205			192			381			369
Total interest income		7,970			7,255			22,584			20,913				7,998			7,970			24,029			22,584

Interest expense:
Deposits		587			413			1,581			1,035				906			587			2,418			1,581
Advances and other borrowings		0			80			2			327
Federal Home Loan Bank advances and other borrowings															0			0			7			2
Total interest expense		587			493			1,583			1,362				906			587			2,425			1,583
Net interest income		7,383			6,762			21,001			19,551				7,092			7,383			21,604			21,001
Provision for loan losses		(652	)		(581	)		(482	)		(582	)			(420	)		(652	)		(1,452	)		(482	)
Net interest income after provision for loan losses		8,035			7,343			21,483			20,133				7,512			8,035			23,056			21,483

Non-interest income:
Fees and service charges		870			848			2,421			2,517				820			870			2,305			2,421
Loan servicing fees		343			299			941			906				324			343			957			941
Gain on sales of loans		489			521			1,612			1,528				845			489			1,835			1,612
Other		234			241			792			744				238			234			842			792
Total non-interest income		1,936			1,909			5,766			5,695				2,227			1,936			5,939			5,766

Non-interest expense:
Compensation and benefits		3,574			3,642			11,076			11,366				3,849			3,574			11,496			11,076
Occupancy and equipment		1,073			1,050			3,242			3,115				1,142			1,073			3,284			3,242
Data processing		310			243			939			795				319			310			925			939
Professional services		326			307			873			983				428			326			1,081			873
Other		931			1,017			2,951			2,786				1,009			931			2,975			2,951
Total non-interest expense		6,214			6,259			19,081			19,045				6,747			6,214			19,761			19,081
Income before income tax expense		3,757			2,993			8,168			6,783				2,992			3,757			9,234			8,168
Income tax expense		1,045			1,213			2,284			2,766				916			1,045			2,677			2,284
Net income		2,712			1,780			5,884			4,017				2,076			2,712			6,557			5,884
Other comprehensive (loss) income, net of tax		(218	)		(4	)		(670	)		357
Other comprehensive income (loss), net of tax															149			(218	)		1,075			(670	)
Comprehensive income available to common shareholders	$	2,494			1,776			5,214			4,374			$	2,225			2,494			7,632			5,214
Basic earnings per share	$	0.62			0.42			1.37			0.95			$	0.45			0.62			1.42			1.37
Diluted earnings per share	$	0.59			0.37			1.24			0.83			$	0.45			0.59			1.41			1.24

	Carrying value at December 31, 2017								Carrying value at December 31, 2018
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Securities available for sale	$	77,472		0		77,472		0	$	79,859		0		79,859		0
Equity securities										121		0		121		0
Mortgage loan commitments		28		0		28		0		40		0		40		0
Total	$	77,500		0		77,500		0	$	80,020		0		80,020		0

	For the nine months ended September 30,															For the nine months ended September 30,
(Dollars in thousands)	2018									2017						2019						2018
Securities available for sale:	Before tax			Tax effect			Net of tax			Before tax		Tax effect		Net of tax		Before tax		Tax effect		Net of tax		Before tax			Tax effect			Net of tax
Net unrealized (losses) gains arising during the period	$	(928	)		(258	)		(670	)		593		236		357
Other comprehensive (loss) income	$	(928	)		(258	)		(670	)		593		236		357
Net unrealized gains (losses) arising during the period																$	1,491		416		1,075		(928	)		(258	)		(670	)
Other comprehensive income (loss)																$	1,491		416		1,075		(928	)		(258	)		(670	)

(Dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
September 30, 2018:
September 30, 2019:
Mortgage-backed securities:
FNMA	$	4,096		0		(250	)		3,846	$	13,424		16		(17	)		13,423
FHLMC		4,294		0		(123	)		4,171		8,522		60		0			8,582
Collateralized mortgage obligations:
FNMA		203		0		(13	)		190		180		2		0			182
		8,593		0		(386	)		8,207		22,126		78		(17	)		22,187
Other marketable securities:
U.S. Government agency obligations		69,969		0		(1,844	)		68,125		59,978		41		(103	)		59,916
Municipal obligations		2,381		1		(21	)		2,361		1,971		6		0			1,977
Corporate debt		173		0		(1	)		172
Corporate obligations											108		0		(1	)		107
Corporate preferred stock		700		0		(105	)		595		700		0		(35	)		665
Corporate equity		144		0		0			144
		73,367		1		(1,971	)		71,397		62,757		47		(139	)		62,665
	$	81,960		1		(2,357	)		79,604	$	84,883		125		(156	)		84,852

(Dollars in thousands)	September 30, 2018			December 31, 2017
Single family	$	108,493			107,005
Commercial real estate:
Real estate rental and leasing		187,373			175,177
Other		145,130			158,940
		332,503			334,117
Consumer		74,521			73,767
Commercial business		78,882			79,909
Total loans		594,399			594,798
Less:
Unamortized discounts		18			19
Net deferred loan costs		(543	)		(463	)
Allowance for loan losses		8,832			9,311
Total loans receivable, net	$	586,092			585,931

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
September 30, 2018
September 30, 2019
Single family	$	897		0		222		1,119		107,374		108,493		0	$	386		78		61		525		112,537		113,062		0
Commercial real estate:
Real estate rental and leasing		0		0		210		210		187,163		187,373		0		738		0		0		738		181,166		181,904		0
Other		0		2,227		0		2,227		142,903		145,130		0		531		0		105		636		155,705		156,341		0
Consumer		324		115		335		774		73,747		74,521		0		287		40		323		650		72,475		73,125		0
Commercial business		30		24		33		87		78,795		78,882				589		0		0		589		65,741		66,330		0
	$	1,251		2,366		800		4,417		589,982		594,399		0	$	2,531		118		489		3,138		587,624		590,762		0
December 31, 2017
December 31, 2018
Single family	$	727		294		669		1,690		105,315		107,005		0	$	680		325		77		1,082		109,616		110,698		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		175,177		175,177		0		0		0		0		0		195,564		195,564		0
Other		0		0		0		0		158,940		158,940		0		0		0		0		0		140,566		140,566		0
Consumer		734		117		235		1,086		72,681		73,767		0		391		100		279		770		71,762		72,532		0
Commercial business		34		0		180		214		79,695		79,909		0		21		0		0		21		75,475		75,496		0
	$	1,495		411		1,084		2,990		591,808		594,798		0	$	1,092		425		356		1,873		592,983		594,856		0

	For the three months ended September 30, 2018				For the nine months ended September 30, 2018				For the three months ended September 30, 2019				For the nine months ended September 30, 2019
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	511		6		467		18	$	551		6		499		17
Commercial real estate:
Real estate rental and leasing		34		15		34		30
Other		95		29		95		77		0		0		13		0
Consumer		608		4		508		14		612		3		530		17
Loans with an allowance recorded:
Single family		840		0		882		0		579		1		684		2
Commercial real estate:
Real estate rental and leasing		105		1		53		7		191		0		195		0
Other		2,327		0		1,821		57		1,061		20		1,065		22
Consumer		358		4		409		9		192		3		241		8
Commercial business		318		3		406		12		248		3		286		8
Total:
Single family		1,351		6		1,349		18		1,130		7		1,183		19
Commercial real estate:
Real estate rental and leasing		139		16		87		37		191		0		195		0
Other		2,422		29		1,916		134		1,061		20		1,078		22
Consumer		966		8		917		23		804		6		771		25
Commercial business		318		3		406		12		248		3		286		8
	$	5,196		62		4,675		224	$	3,434		36		3,513		74

	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(Dollars in thousands)	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Troubled debt restructurings:
Single family		0	$	0		0		1	$	55		58
Commercial real estate:
Real estate rental and leasing		0		0		0		1		54		54
Other		0		0		0		2		1,518		1,518
Consumer		2		2		2		10		335		336
Commercial business		0		0		0		1		70		70
Total		2	$	2		2		15	$	2,032		2,036

	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017						Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(Dollars in thousands)	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment		Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Troubled debt restructurings:
Single family		0	$	0		0		3	$	282		514		0	$	0		0		1	$	55		58
Commercial real estate:
Real estate rental and leasing														0		0		0		1		54		54
Other														0		0		0		2		1,518		1,518
Consumer		6		104		105		13		462		465		2		2		2		10		335		336
Commercial business		1		416		116		1		416		116		0		0		0		1		70		70
Total		7	$	520		221		17	$	1,160		1,095		2	$	2		2		15	$	2,032		2,036

(Dollars in thousands)	Contractual Principal Receivable			Non-Accretable Difference			Carrying Amount			Contractual Principal Receivable		Non-Accretable Difference			Carrying Amount
Purchased credit impaired loans:
Balance at June 30, 2018	$	396			(36	)		360
Balance at June 30, 2019										$	185		(4	)		181
Change due to payments/refinances		(210	)		29			(181	)		0		1			1
Balance at September 30, 2018	$	186			(7	)		179
Balance at September 30, 2019										$	185		(3	)		182

(Dollars in thousands)	Nine Months ended September 30, 2018			Twelve Months ended December 31, 2017			Nine Months ended September 30, 2017			Nine Months ended September 30, 2019			Twelve Months ended December 31, 2018			Nine Months ended September 30, 2018
Balance, beginning of period	$	1,724			1,604			1,604		$	1,855			1,724			1,724
Originations		533			675			461			674			682			533
Amortization		(412	)		(555	)		(411	)		(535	)		(551	)		(412	)
Balance, end of period	$	1,845			1,724			1,654		$	1,994			1,855			1,845
Fair value of mortgage servicing rights	$	3,641			3,196			3,003		$	2,922			3,901			3,641

			Weighted			Weighted
	Loan		Average			Average
	Principal		Interest			Remaining		Number
(Dollars in thousands)	Balance		Rate			Term (months)		of Loans
Original term 30 year fixed rate	$	292,980		4.13	%		307		2,252
Original term 15 year fixed rate		98,179		3.16			132		991
Adjustable rate		54		4.38			272		2

	September 30, 2018							September 30, 2019
	Gross							Gross
(Dollars in thousands)	Carrying Amount		Accumulated Amortization			Unamortized Amount		Carrying Amount		Accumulated Amortization			Unamortized Amount
Mortgage servicing rights	$	4,457		(2,612	)		1,845	$	4,788		(2,794	)		1,994
Core deposit intangible		574		(294	)		280		574		(393	)		181
Goodwill		802		0			802		802		0			802
Total	$	5,833		(2,906	)		2,927	$	6,164		(3,187	)		2,977

(Dollars in thousands)	Mortgage Servicing Rights		Core Deposit Intangible		Total Amortizing Intangible Assets		Mortgage Servicing Rights		Core Deposit Intangible		Total Amortizing Intangible Assets
Year ended December 31,
2018	$	122		25		147
2019		445		99		544	$	129		25		154
2020		371		99		470		460		99		559
2021		326		47		373		413		47		460
2022		265		10		275		358		10		368
2023								284		0		284
Thereafter		316		0		316		350		0		350
Total	$	1,845		280		2,125	$	1,994		181		2,175

	September 30,			June 30,			December 31,			September 30,			June 30,			December 31,
(Dollars in thousands)	2018			2018			2017			2019			2019			2018
Non-Performing Loans:
Single family	$	1,073		$	960		$	949		$	574		$	854		$	730
Commercial real estate		3,689			1,432			1,364			293			1,212			1,311
Consumer		526			551			553			513			458			489
Commercial business		197			73			278			99			144			148
Total		5,485			3,016			3,144			1,479			2,668			2,678

Foreclosed and Repossessed Assets:
Single family		0			74			0			166			30			0
Commercial real estate		414			627			627			414			414			414
Consumer		0			15			0			0			12			0
Total non-performing assets	$	5,899		$	3,732		$	3,771		$	2,059		$	3,124		$	3,092
Total as a percentage of total assets		0.80	%		0.51	%		0.52	%		0.27	%		0.43	%		0.43	%
Total non-performing loans	$	5,485		$	3,016		$	3,144		$	1,479		$	2,668		$	2,678
Total as a percentage of total loans receivable, net		0.94	%		0.51	%		0.54	%		0.25	%		0.45	%		0.46	%
Allowance for loan losses to non-performing loans		161.02	%		309.31	%		296.11	%		554.16	%		323.18	%		324.27	%

Delinquency Data:
Delinquencies ⁽¹⁾
30+ days	$	1,298		$	1,585		$	1,789		$	2,541		$	1,991		$	1,453
90+ days		0			0			0			0			0			0
Delinquencies as a percentage of loan portfolio ⁽¹⁾
30+ days		0.22	%		0.26	%		0.30	%		0.42	%		0.33	%		0.24	%
90+ days		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

	Market Value												Market Value
(Dollars in thousands) Basis point change in interest rates	-100			0			+100			+200
(Dollars in thousands)
Basis point change in interest rates														-200		-100		0		+100			+200
Total market risk sensitive assets	$	731,450			719,082			706,828			694,523		$	772,714		765,786		752,957			742,858			728,588
Total market risk sensitive liabilities		621,098			584,526			553,049			526,250			748,172		698,133		654,329			615,692			582,926
Off-balance sheet financial instruments		(194	)		0			(58	)		(87	)		209		85		0			(243	)		(446	)
Net market risk	$	110,546			134,556			153,837			168,360		$	24,333		67,568		98,628			127,409			146,108
Percentage change from current market value		(17.84	)%		0.00	%		14.33	%		25.12	%		(75.33	)%	(31.49	)%	0.00	%		29.18	%		48.14	%

Exhibit		Filing
Number	Exhibit	Status

~~10.1~~	~~Warrant Repurchase Agreement by and between the Company and Arbiter Partners QP, LP, dated August 29, 2018~~	~~Incorporated by Reference~~ ⁽¹⁾

31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO	Filed Electronically

31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO	Filed Electronically

32	Section 1350 Certifications of CEO and CFO	Filed Electronically

101	Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended September 30, ~~2018,~~2019, filed with the ~~Securities and Exchange Commission~~SEC on November ~~2, 2018,~~1, 2019, formatted in Extensible Business Reporting Language (XBRL); (i) the Consolidated Balance Sheets at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, (ii) the Consolidated Statements of Comprehensive Income for the Three Month and Nine Month Periods Ended September 30, ~~2018~~2019 and ~~2017,~~2018, (iii) the Consolidated ~~Statement~~Statements of Stockholders’ Equity for the Three and Nine Month ~~Period~~Periods Ended September 30, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2018~~2019 and ~~2017,~~2018, and (v) Notes to Consolidated Financial Statements.	Filed Electronically

	HMN FINANCIAL, INC. Registrant


Date: November ~~2, 2018~~1, 2019	By:	~~/s/~~ /s/ Bradley Krehbiel
		Bradley Krehbiel, President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)



Date: November ~~2, 2018~~	~~By:~~	~~/s/ Jon Eberle~~
	1, 2019	By: /s/ Jon Eberle Jon Eberle, Senior Vice President, Chief Financial Officer, and Treasurer ~~(Principal~~ (Principal Financial Officer)