Bancorp 34, Inc 10-Q for FY2020 Q1
Bancorp 34, Inc. (BCTF)
About this 10-Q
Bancorp 34, Inc filed this 10-Q on May 5, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $278.06K
- up 574.8% from net income of $41.21K a year earlier
- Diluted EPS
- $0.09
- up 800.0% from $0.01 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
☒ |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
|
|
|
|
For the quarterly period ended March 31, 2020 |
OR
|
☐ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
|
|
|
|
For the transition period from _______________ to ______________________ |
Commission File No. 001-37912
Bancorp 34, Inc.
(Exact name of registrant as specified in its charter)
|
Maryland |
74-2819148 |
|
(State or other jurisdiction of |
(I.R.S. Employer |
|
incorporation or organization) |
Identification Number) |
|
|
|
|
500 East 10th Street, Alamogordo, New Mexico |
88310 |
|
(Address of Principal Executive Offices) |
(Zip Code) |
(575) 437-9334
(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common Stock, par value $0.01 per share |
BCTF |
The NASDAQ Stock Market, LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such 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 |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of May 4, 2020 were 3,208,618.
Index
|
|
|
Page |
|
|
||
|
Item 1. |
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 |
2 |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited) |
5 |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
|
|
|
|
|
Item 3. |
32 |
|
|
|
|
|
|
Item 4. |
32 |
|
|
|
|
|
|
|
|
|
|
Item 1. |
33 |
|
|
|
|
|
|
Item 1A. |
33 |
|
|
|
|
|
|
Item 2. |
33 |
|
|
|
|
|
|
Item 3. |
33 |
|
|
|
|
|
|
Item 4. |
33 |
|
|
|
|
|
|
Item 5. |
33 |
|
|
|
|
|
|
Item 6. |
33 |
|
|
|
|
|
|
34 |
||
Item 1. Financial Statements
|
CONSOLIDATED BALANCE SHEETS - UNAUDITED |
|
March 31, 2020 |
December 31, 2019 |
|||||||
|
ASSETS |
||||||||
|
Cash and due from banks |
$ | 5,158,689 | $ | 4,496,465 | ||||
|
Interest-bearing deposits with banks |
3,260,000 | 24,990,000 | ||||||
|
Total cash and cash equivalents |
8,418,689 | 29,486,465 | ||||||
|
Available-for-sale securities, at fair value |
61,374,800 | 44,517,178 | ||||||
|
Loans held for investment |
312,839,927 | 294,660,719 | ||||||
|
Allowance for loan losses |
(3,396,861 | ) | (2,921,931 | ) | ||||
|
Loans held for investment, net |
309,443,066 | 291,738,788 | ||||||
|
Premises and equipment, net |
8,852,926 | 8,990,955 | ||||||
| Operating lease right-of-use assets | 1,138,139 | - | ||||||
|
Stock in financial institutions, restricted, at cost |
4,037,061 | 4,016,761 | ||||||
|
Accrued interest receivable |
1,335,776 | 961,105 | ||||||
|
Deferred income tax asset, net |
1,702,078 | 1,907,876 | ||||||
|
Bank owned life insurance |
10,915,586 | 10,850,085 | ||||||
|
Core deposit intangible, net |
124,190 | 133,052 | ||||||
|
Prepaid and other assets |
1,045,645 | 1,137,090 | ||||||
|
TOTAL ASSETS |
$ | 408,387,956 | $ | 393,739,355 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
|
Liabilities |
||||||||
|
Deposits |
||||||||
|
Demand deposits |
$ | 56,293,286 | $ | 56,401,370 | ||||
|
Savings and NOW deposits |
172,840,472 | 166,107,428 | ||||||
|
Time deposits |
76,985,230 | 81,387,861 | ||||||
|
Total deposits |
306,118,988 | 303,896,659 | ||||||
|
Federal Home Loan Bank advances |
50,000,000 | 40,000,000 | ||||||
|
Escrows |
379,206 | 254,593 | ||||||
| Operating lease liabilities |
1,244,187 |
- | ||||||
|
Accrued interest and other liabilities |
4,343,907 | 4,271,437 | ||||||
|
Accrued interest and other liabilities - discontinued operations |
182,777 | 233,427 | ||||||
|
Total liabilities |
362,269,065 | 348,656,116 | ||||||
|
Commitments and contingencies (note 5) |
- | - | ||||||
|
Stockholders’ equity |
||||||||
|
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding |
- | - | ||||||
|
Common stock, $0.01 par value, 100,000,000 authorized, 3,208,618 and 3,208,618 issued and outstanding. |
32,086 | 32,086 | ||||||
|
Additional paid-in capital |
23,249,796 | 23,168,176 | ||||||
|
Retained earnings |
23,276,758 | 23,157,134 | ||||||
|
Accumulated other comprehensive income (loss), net of tax |
1,126,862 | 307,255 | ||||||
|
Unearned employee stock ownership plan (ESOP) shares |
(1,566,611 | ) | (1,581,412 | ) | ||||
|
Total stockholders’ equity |
46,118,891 | 45,083,239 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 408,387,956 | $ | 393,739,355 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED |
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Interest income |
||||||||
|
Interest and fees on loans |
$ | 4,621,226 | $ | 4,153,207 | ||||
|
Interest on securities |
287,227 | 223,807 | ||||||
|
Interest on other interest-earning assets |
73,439 | 121,989 | ||||||
|
Total interest income |
4,981,892 | 4,499,003 | ||||||
|
Interest expense |
||||||||
|
Interest on deposits |
985,569 | 861,269 | ||||||
|
Interest on borrowings |
190,215 | 278,165 | ||||||
|
Total interest expense |
1,175,784 | 1,139,434 | ||||||
|
Net interest income |
3,806,108 | 3,359,569 | ||||||
|
Provision for loan losses |
472,000 | 87,500 | ||||||
|
Net interest income after provision for loan losses |
3,334,108 | 3,272,069 | ||||||
|
Noninterest income |
||||||||
|
Gain on sale of loans |
- | 26,907 | ||||||
|
Service charges and fees |
121,717 | 56,836 | ||||||
|
Bank owned life insurance |
90,812 | 91,261 | ||||||
|
Other |
47,367 | 11,157 | ||||||
|
Total noninterest income |
259,896 | 186,161 | ||||||
|
Noninterest expense |
||||||||
|
Salaries and benefits |
1,759,550 | 1,587,526 | ||||||
|
Occupancy |
368,707 | 351,416 | ||||||
|
Data processing fees |
461,827 | 484,725 | ||||||
|
FDIC and other insurance expense |
51,928 | 85,603 | ||||||
|
Professional fees |
291,437 | 182,159 | ||||||
|
Advertising |
60,662 | 66,057 | ||||||
|
Other |
201,014 | 195,126 | ||||||
|
Total noninterest expense |
3,195,125 | 2,952,612 | ||||||
|
Income from continuing operations before provision for income taxes |
398,879 | 505,618 | ||||||
|
Provision for income taxes |
120,822 | 118,475 | ||||||
|
Net income from continuing operations |
278,057 | 387,143 | ||||||
|
Discontinued operations |
||||||||
|
Loss from discontinued operations |
- | (458,401 | ) | |||||
|
Benefit for income taxes |
- | (112,466 | ) | |||||
|
Net loss from discontinued operations |
- | (345,935 | ) | |||||
|
NET INCOME |
278,057 | 41,208 | ||||||
|
Other comprehensive income |
||||||||
|
Unrealized gain on available-for-sale securities |
1,099,405 | 353,919 | ||||||
|
Tax effect of unrealized gain on available-for-sale securities |
(279,798 | ) | (90,072 | ) | ||||
|
Unrealized gain on available-for-sale securities, net of tax |
819,607 | 263,847 | ||||||
|
COMPREHENSIVE INCOME |
$ | 1,097,664 | $ | 305,055 | ||||
|
Earnings per common share - Basic |
||||||||
|
Earnings per common share - continuing operations |
$ | 0.09 | $ | 0.12 | ||||
|
Loss per common share - discontinued operations |
- | (0.11 | ) | |||||
|
Earnings per common share - Basic |
$ | 0.09 | $ | 0.01 | ||||
|
Earnings per common share - Diluted |
||||||||
|
Earnings per common share - continuing operations |
$ | 0.09 | $ | 0.12 | ||||
|
Loss per common share - discontinued operations |
- | (0.11 | ) | |||||
|
Earnings per common share - Diluted |
$ | 0.09 | $ | 0.01 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED |
|
Accumulated |
||||||||||||||||||||||||||||
|
Other |
||||||||||||||||||||||||||||
|
Additional |
Comprehensive |
Unearned |
Total |
|||||||||||||||||||||||||
|
Common |
Common |
Paid-In |
Retained |
Income |
ESOP |
Stockholders' |
||||||||||||||||||||||
|
Shares |
Stock |
Capital |
Earnings |
(Loss) |
Shares |
Equity |
||||||||||||||||||||||
|
BALANCE, DECEMBER 31, 2018 |
3,374,565 | $ | 33,746 | $ | 25,500,873 | $ | 22,928,777 | $ | (396,148 | ) | $ | (1,644,514 | ) | $ | 46,422,734 | |||||||||||||
|
Net income |
- | - | - | 41,208 | - | - | 41,208 | |||||||||||||||||||||
|
Unrealized loss on available-for-sale securities, net |
- | - | - | - | 263,847 | - | 263,847 | |||||||||||||||||||||
|
Amortization of equity awards |
- | - | 85,680 | - | - | 18,059 | 103,739 | |||||||||||||||||||||
|
Share repurchase |
(18,410 | ) | (185 | ) | (277,486 | ) | - | - | - | (277,671 | ) | |||||||||||||||||
|
BALANCE MARCH 31, 2019 |
3,356,155 | $ | 33,561 | $ | 25,309,067 | $ | 22,969,985 | $ | (132,301 | ) | $ | (1,626,455 | ) | $ | 46,553,857 | |||||||||||||
|
BALANCE, DECEMBER 31, 2019 |
3,208,618 | $ | 32,086 | $ | 23,168,176 | $ | 23,157,134 | $ | 307,255 | $ | (1,581,412 | ) | $ | 45,083,239 | ||||||||||||||
|
Net income |
- | - | - | 278,057 | - | - | 278,057 | |||||||||||||||||||||
|
Unrealized gain on available-for-sale securities, net |
- | - | - | - | 819,607 | - | 819,607 | |||||||||||||||||||||
|
Amortization of equity awards |
- | - | 81,620 | - | - | 14,801 | 96,421 | |||||||||||||||||||||
|
Dividends paid - $0.05 per share |
- | - | - | (158,433 | ) | - | - | (158,433 | ) | |||||||||||||||||||
|
BALANCE MARCH 31, 2020 |
3,208,618 | $ | 32,086 | $ | 23,249,796 | $ | 23,276,758 | $ | 1,126,862 | $ | (1,566,611 | ) | $ | 46,118,891 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED |
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Cash flows from operating activities |
||||||||
|
Net income |
$ | 278,057 | $ | 41,208 | ||||
|
Less: Net loss from discontinued operations |
- | (345,935 | ) | |||||
|
Net income from continuing operations |
278,057 | 387,143 | ||||||
|
Adjustments to reconcile net income to net cash from operating activities: |
||||||||
|
Depreciation and amortization |
138,029 | 162,472 | ||||||
|
Stock dividends on financial institution stock |
(20,300 | ) | (27,000 | ) | ||||
|
Amortization of premiums and discounts on securities, net |
54,512 | 27,718 | ||||||
|
Amortization of equity awards |
96,421 | 103,739 | ||||||
|
Amortization of core deposit intangible |
8,862 | 10,215 | ||||||
|
Gain on sale of loans |
- | (26,907 | ) | |||||
|
Proceeds from sale of loans |
- | 458,011 | ||||||
|
Provision for loan losses |
472,000 | 87,500 | ||||||
|
Net appreciation on bank-owned life insurance |
(65,501 | ) | (68,312 | ) | ||||
|
Deferred income tax expense |
(38,665 | ) | - | |||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accrued interest receivable |
(374,671 | ) | (88,229 | ) | ||||
|
Prepaid and other assets |
56,111 | (27,839 | ) | |||||
|
Accrued interest and other liabilities |
178,517 | 4,894,116 | ||||||
|
Net cash from operating activities - continuing operations |
783,372 | 5,892,627 | ||||||
|
Net cash from operating activities - discontinued operations |
(50,650 | ) | 11,923,500 | |||||
|
Net cash from operating activities |
732,722 | 17,816,127 | ||||||
|
Cash flows from investing activities |
||||||||
|
Proceeds from principal payments on available-for-sale securities |
1,669,149 | 1,183,980 | ||||||
|
Purchases of available-for-sale securities |
(17,481,879 | ) | - | |||||
|
Net change in loans held for investment |
(18,176,278 | ) | (4,603,053 | ) | ||||
|
Purchases of premises and equipment |
- | (11,556 | ) | |||||
|
Net cash from investing activities |
(33,989,008 | ) | (3,430,629 | ) | ||||
|
Cash flows from financing activities |
||||||||
|
Net change in deposits |
2,222,329 | 2,646,139 | ||||||
|
Net change in escrows |
124,613 | 45,457 | ||||||
|
Proceeds from Federal Home Loan Bank advances |
20,000,000 | 5,000,000 | ||||||
|
Repayments of Federal Home Loan Bank advances |
(10,000,000 | ) | (22,000,000 | ) | ||||
|
Common stock repurchases |
- | (277,671 | ) | |||||
|
Dividends paid |
(158,433 | ) | ||||||
|
Net cash from financing activities |
12,188,509 | (14,586,075 | ) | |||||
|
Net change in cash and cash equivalents |
(21,067,777 | ) | (200,577 | ) | ||||
|
Cash and cash equivalents, beginning of period |
29,486,465 | 11,774,457 | ||||||
|
Cash and cash equivalents, end of period |
$ | 8,418,689 | $ | 11,573,880 | ||||
|
Supplemental disclosures: |
||||||||
|
Interest on deposits and advances paid |
$ | 1,157,504 | $ | 1,171,513 | ||||
|
Loans transferred to loans held for sale |
$ | - | $ | 431,104 | ||||
| Operating lease right-of-use assets recorded on adoption of ASU 2016-02 | $ | 1,260,089 | $ | - | ||||
| Operating lease liabilities recorded on adoption of ASU 2016-02 | $ | 1,369,149 | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Bancorp 34, Inc. (“Bancorp 34” or the “Company”) is a Maryland corporation and savings and loan holding company which owns 100% of the common stock of Bank 34 (the “Bank”).
The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico, and Scottsdale and Peoria, Arizona.
In May 2019, Bank 34 took steps to exit the Bank's operations with respect to originating residential mortgage loans for sale into the secondary market ("Mortgage Banking"). The Mortgage Banking operations that were disposed of, and that represent a strategic shift that will have a major effect on operations and financial results, are accounted for as discontinued operations. Additional information on discontinued operations can be found in Note 2 – Discontinued Operations.
The primary deposit products are demand deposits, time deposits, NOW, savings and money market accounts. The primary lending products are real estate mortgage loans and commercial loans. The Bank is subject to competition from other financial institutions and regulated and non-regulated financial services providers, regulation by certain federal agencies and undergoes periodic examinations by regulatory authorities.
Rising and falling interest rate environments can have various impacts on the Bank’s net interest income, depending on the interest rate gap that the Bank maintains. The Bank’s net interest income is also affected by prepayments of loans and early withdrawals of deposits.
Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition, cash flows and results of operations at the dates and for the periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations for the full fiscal year or for any other period. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Discontinued Operations – As discussed in Note 2 - Discontinued Operations, current and prior periods presented in the consolidated statements of comprehensive income as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of discontinued operations for comparative purposes. The consolidated balance sheets and related note disclosures for prior periods also reflect the reclassification of certain assets and liabilities to discontinued operations.
Basis of Consolidation – The consolidated financial statements include the accounts of Bancorp 34 and the Bank. All significant intercompany accounts and transactions have been eliminated.
Reclassifications – Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, allowance for loan losses, other-than-temporary impairment of securities, useful lives used in depreciation and amortization, deferred income taxes, valuation of other real estate and core deposit intangibles.
Summary of Recent Accounting Pronouncements:
Bancorp 34 was an emerging growth company under the JOBS Act and elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that have complied with such new or revised accounting standards. The Company lost its status as an emerging growth company at the end of 2019.
Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 for public companies, but the Company had until the first quarter of 2020 to adopt due to its emerging growth company status. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We adopted the standard effective January 1, 2020 on a prospective basis and elected to apply several allowable practical expedients, including carryover of historical lease determinations, classification conclusions and direct cost balances. Adoption of the standard resulted in balance sheet recognition of approximately $1.3 million in operating lease right-of-use assets and $1.4 million operating lease liabilities as of January 1, 2020. These amounts represent the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate at the date of adoption. There was no material impact on the timing of expense or income recognition in the consolidated statements of income. Prior periods were not restated. Further information regarding the Company’s leasing activities are included in Note 5 – Financial Instruments with Off-Balance-Sheet Credit Risk.
Credit Losses - 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 update replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to create credit loss estimates. The new guidance is effective for public companies that are U.S. Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. For all other public companies, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. On October 16, 2019, FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies, as defined in Securities and Exchange Commission Regulations, such as the Company, to adopt effective for the first fiscal year beginning after December 15, 2022. The guidance is required to be applied by the modified retrospective approach. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.
NOTE 2 – DISCONTINUED OPERATIONS
On May 9, 2019, the Company entered into a purchase and assumption agreement to transfer its mortgage banking operations to another financial institution. Under the agreement, the other financial institution would offer employment to a majority of the Company’s mortgage operations employees. Assuming a majority of key employees at those locations agreed to transfer, the other financial institution would assume certain leases and fixed assets at those locations. Subsequent to that transaction, a majority of the mortgage operation employees made arrangements to transfer to different financial institutions, which similarly agreed to assume certain leases and fixed assets at those respective locations. Some sales and assumption agreements with these different financial institutions were consummated in the second quarter of 2019 and the remainder were consummated in the second half of 2019. All related transactions were completed by December 31, 2019. The Company does not have continuing involvement with the mortgage banking operations. The Company discontinued issuing mortgage interest rate lock commitments (IRLC's) in its name in May 2019 and originating mortgage loans held for sale in its name in June 2019.
Income and expense related to mortgage banking operations are included in discontinued operations and prior period financial information has been retrospectively adjusted for the impact of discontinued operations.
Liabilities for costs associated with discontinued operations were recognized and measured initially at their fair values during the quarter ended June 30, 2019. Those costs include, but are not limited to, involuntary employee termination benefits, cost to terminate contracts, and other associated costs. The liability itself consists of future cash flows expected to be incurred in the exit and disposal activity, which are discounted at a credit-adjusted risk-free interest rate.
The following table summarizes the one-time charge on net loss on disposal of discontinued operations:
|
Severance benefits |
$ | 147,948 | ||
|
Leases, software & other contractual obligations |
360,613 | |||
|
Fixed asset losses |
30,423 | |||
|
Other costs |
305,915 | |||
|
Net Loss on Disposal |
$ | 844,899 |
The following table presents results of discontinued operations for the three months ended March 31, 2020, and 2019:
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Net interest income |
$ | - | $ | 85,298 | ||||
|
Gain on sale of loans |
- | 2,717,674 | ||||||
|
Other |
- | - | ||||||
|
Total noninterest income |
- | 2,717,674 | ||||||
|
Salaries and benefits |
- | 2,560,992 | ||||||
|
Occupancy |
- | 148,046 | ||||||
|
Data processing fees |
- | 301,866 | ||||||
|
Professional fees |
- | 55,979 | ||||||
|
Advertising |
- | 48,332 | ||||||
|
Other |
- | 146,158 | ||||||
|
Total noninterest expense |
- | 3,261,373 | ||||||
|
Loss from discontinued operations |
- | (458,401 | ) | |||||
|
Benefit for income taxes |
- | (112,466 | ) | |||||
|
Net loss from discontinued operations |
$ | - | $ | (345,935 | ) | |||
Net interest income from discontinued operations includes interest income on mortgage loans held for sale less interest expense allocated to mortgage banking operations equal to the average mortgage loans held for sale times the average rate on FHLB short-term borrowings.
Material assets and liabilities of mortgage banking operations are classified as Discontinued Operations in the consolidated balance sheets as of March 31, 2020, and prior year balances have been adjusted to conform with the current period presentation.
The following table summarizes the major categories of assets and liabilities classified as held for sale related to discontinued operations in the consolidated balance sheets as of:
|
March 31, 2020 |
December 31, 2019 |
|||||||
|
Accrued interest and other liabilities - discontinued operations |
182,777 | 233,427 | ||||||
|
Total liabilities |
$ | 182,777 | $ | 233,427 | ||||
|
Net (liabilities) |
$ | (182,777 | ) | $ | (233,427 | ) | ||
NOTE 3 – AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at March 31, 2020 and December 31, 2019. The amortized cost of such securities and their approximate fair values were as follows:
|
Gross |
Gross |
Gross |
||||||||||||||
|
Amortized |
Unrealized |
Unrealized |
||||||||||||||
|
Cost |
Gains |
Losses |
Fair Value |
|||||||||||||
|
March 31, 2020 |
||||||||||||||||
|
Available-for-sale securities |
||||||||||||||||
|
Mortgage-backed securities |
$ | 33,484,461 | $ | 1,054,762 | $ | (14,660 | ) | $ | 34,524,563 | |||||||
|
U.S. Government agencies |
961,651 | 4,123 | (12,652 | ) | 953,122 | |||||||||||
|
Municipal obligations |
25,416,937 | 496,604 | (16,426 | ) | 25,897,115 | |||||||||||
|
Total |
$ | 59,863,049 | $ | 1,555,489 | $ | (43,738 | ) | $ | 61,374,800 | |||||||
|
December 31, 2019 |
||||||||||||||||
|
Available-for-sale securities |
||||||||||||||||
|
Mortgage-backed securities |
$ | 30,722,958 | $ | 415,564 | $ | (119,774 | ) | $ | 31,018,748 | |||||||
|
U.S. Government agencies |
1,102,532 | 1,739 | (24,824 | ) | 1,079,447 | |||||||||||
|
Municipal obligations |
12,279,341 | 254,521 | (114,879 | ) | 12,418,983 | |||||||||||
|
Total |
$ | 44,104,831 | $ | 671,824 | $ | (259,477 | ) | $ | 44,517,178 | |||||||
There were no sales of available-for-sale securities during the three months ended March 31, 2020 or 2019.
Amortized cost and fair value of securities by contractual maturity as of March 31, 2020 and December 31, 2019 are shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the actual contractual maturities of underlying collateral. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.
The scheduled maturities of available-for-sale securities at March 31, 2020 and December 31, 2019 were as follows:
|
March 31, 2020 |
December 31, 2019 |
|||||||||||||||
|
Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
|
Cost |
Value |
Cost |
Value |
|||||||||||||
|
Due in one year or less |
$ | 10,079,265 | $ | 10,083,100 | $ | - | $ | - | ||||||||
|
Due after one to five years |
30,524,131 | 31,550,267 | 27,151,751 | 27,510,536 | ||||||||||||
|
Due after five to ten years |
16,355,991 | 16,811,943 | 14,048,273 | 14,163,270 | ||||||||||||
|
Due after ten years |
2,903,662 | 2,929,490 | 2,904,807 | 2,843,372 | ||||||||||||
|
Totals |
$ | 59,863,049 | $ | 61,374,800 | $ | 44,104,831 | $ | 44,517,178 | ||||||||
At March 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
At March 31, 2020 and December 31, 2019, mortgage-backed securities included collateralized mortgage obligations of $13.2 million and $13.4 million, respectively, which are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.
Gross Unrealized Losses and Fair Value – The following tables show the gross unrealized losses and fair values of securities by length of time that individual securities in each category have been in a continuous loss position.
|
March 31, 2020 |
||||||||||||||||||||||||
|
Less Than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
|
Gross |
Gross |
Gross |
||||||||||||||||||||||
|
Description of |
Unrealized |
Unrealized |
Unrealized |
|||||||||||||||||||||
|
Securities |
Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
||||||||||||||||||
|
Available-for-sale securities: |
||||||||||||||||||||||||
|
Mortgage-backed securities |
$ | 437,108 | $ | (2,756 | ) | $ | 1,242,786 | $ | (11,904 | ) | $ | 1,679,894 | $ | (14,660 | ) | |||||||||
|
U.S. Government agencies |
- | - | 746,879 | (12,652 | ) | 746,879 | (12,652 | ) | ||||||||||||||||
|
Municipal obligations |
2,975,852 | (16,426 | ) | - | - | 2,975,852 | (16,426 | ) | ||||||||||||||||
|
Total temporarily impaired securities |
$ | 3,412,960 | $ | (19,182 | ) | $ | 1,989,665 | $ | (24,556 | ) | $ | 5,402,625 | $ | (43,738 | ) | |||||||||
|
December 31, 2019 |
||||||||||||||||||||||||
|
Less Than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
|
Gross |
Gross |
Gross |
||||||||||||||||||||||
|
Description of |
Unrealized |
Unrealized |
Unrealized |
|||||||||||||||||||||
|
Securities |
Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
||||||||||||||||||
|
Available-for-sale securities: |
||||||||||||||||||||||||
|
Mortgage-backed securities |
$ | 10,201,840 | $ | (64,195 | ) | $ | 6,459,069 | $ | (55,579 | ) | $ | 16,660,909 | $ | (119,774 | ) | |||||||||
|
U.S. Government agencies |
- | - | 843,719 | (24,824 | ) | 843,719 | (24,824 | ) | ||||||||||||||||
|
Municipal obligations |
4,676,851 | (114,879 | ) | - | - | 4,676,851 | (114,879 | ) | ||||||||||||||||
|
Total temporarily impaired securities |
$ | 14,878,691 | $ | (179,074 | ) | $ | 7,302,788 | $ | (80,403 | ) | $ | 22,181,479 | $ | (259,477 | ) | |||||||||
At March 31, 2020 and December 31, 2019, all of the government agencies and mortgage-backed securities held by the Company were issued by U.S. Government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2020.
Loans and securities with a carrying value of approximately $149.6 million at March 31, 2020 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities with a carrying value of approximately $4.0 million at March 31, 2020 were pledged to secure public deposits.
NOTE 4 – LOANS HELD FOR INVESTMENT, NET
The components of loans held for investment, net in the consolidated balance sheets were as follows:
|
March 31, 2020 |
December 31, 2019 |
|||||||||||||||
|
Amount |
Percent |
Amount |
Percent |
|||||||||||||
|
Loans held for investment, net: |
||||||||||||||||
|
Commercial real estate |
$ | 248,763,039 | 79.3 | % | $ | 242,682,721 | 82.1 | % | ||||||||
|
One- to four-family |
27,693,590 | 8.8 | 28,849,640 | 9.8 | ||||||||||||
|
Commercial and industrial |
34,081,604 | 10.9 | 20,075,236 | 6.8 | ||||||||||||
|
Consumer and other |
3,141,308 | 1.0 | 3,860,991 | 1.3 | ||||||||||||
|
Total gross loans |
313,679,541 | 100.0 | % | 295,468,588 | 100.0 | % | ||||||||||
|
Unamortized loan fees |
(839,614 | ) | (807,869 | ) | ||||||||||||
|
Loans held for investment |
312,839,927 | 294,660,719 | ||||||||||||||
|
Allowance for loan losses |
(3,396,861 | ) | (2,921,931 | ) | ||||||||||||
|
Loans held for investment, net |
$ | 309,443,066 | $ | 291,738,788 | ||||||||||||
At March 31, 2020 and December 31, 2019, loans held for investment includes commercial construction loans of $19.2 million and $16.1 million, respectively.
Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses and recorded investment in loans as of March 31, 2020 and December 31, 2019:
|
As of March 31, 2020 |
||||||||||||||||||||
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Other |
Total |
||||||||||||||||
|
Allowance for loan losses |
||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Ending balance: collectively evaluated for impairment |
2,856,106 | 239,647 | 263,483 | 37,625 | 3,396,861 | |||||||||||||||
|
Total |
$ | 2,856,106 | $ | 239,647 | $ | 263,483 | $ | 37,625 | $ | 3,396,861 | ||||||||||
|
Gross loans |
||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 2,642,676 | $ | 766,952 | $ | - | $ | - | $ | 3,409,628 | ||||||||||
|
Ending balance: collectively evaluated for impairment |
246,120,363 | 26,926,638 | 34,081,604 | 3,141,308 | 310,269,913 | |||||||||||||||
|
Total |
$ | 248,763,039 | $ | 27,693,590 | $ | 34,081,604 | $ | 3,141,308 | $ | 313,679,541 | ||||||||||
|
As of December 31, 2019 |
||||||||||||||||||||
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Other |
Total |
||||||||||||||||
|
Allowance for loan losses |
||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Ending balance: collectively evaluated for impairment |
2,588,714 | 187,345 | 115,502 | 30,370 | 2,921,931 | |||||||||||||||
|
Total |
$ | 2,588,714 | $ | 187,345 | $ | 115,502 | $ | 30,370 | $ | 2,921,931 | ||||||||||
|
Gross loans |
||||||||||||||||||||
|
Ending balance: individually evaluated for impairment |
$ | 2,718,731 | $ | 786,557 | $ | - | $ | - | $ | 3,505,288 | ||||||||||
|
Ending balance: collectively evaluated for impairment |
239,963,990 | 28,063,083 | 20,075,236 | 3,860,991 | 291,963,300 | |||||||||||||||
|
Total |
$ | 242,682,721 | $ | 28,849,640 | $ | 20,075,236 | $ | 3,860,991 | $ | 295,468,588 | ||||||||||
The COVID-19 pandemic is expected to materially affect our determination of an adequate allowance for loan losses going forward. Based upon the uncertainties related to COVID-19, the Company increased its March 31, 2020 allowance for loan losses $350,000, or 12%, and plans to continue to closely monitor the effects of the pandemic on the ability of its borrowers to repay their debt going forward. It is possible larger increases in the allowance for loan losses will be necessary in the future due to the COVID-19 pandemic, or the after-effects of it.
The following tables summarize activities for the allowance for loan losses for the three months ended March 31, 2020 and 2019:
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Consumer and Other |
Total |
||||||||||||||||
|
Balance December 31, 2019 |
$ | 2,588,714 | $ | 187,345 | $ | 115,502 | $ | 30,370 | $ | 2,921,931 | ||||||||||
|
Provision for loan losses |
267,392 | 49,372 | 147,981 | 7,255 | 472,000 | |||||||||||||||
|
Charge-offs |
- | - | - | - | - | |||||||||||||||
|
Recoveries |
- | 2,930 | - | 2,930 | ||||||||||||||||
|
Net (charge-offs) recoveries |
- | 2,930 | - | - | 2,930 | |||||||||||||||
|
Balance March 31, 2020 |
$ | 2,856,106 | $ | 239,647 | $ | 263,483 | $ | 37,625 | $ | 3,396,861 | ||||||||||
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Consumer and Other |
Total |
||||||||||||||||
|
Balance December 31, 2018 |
$ | 2,130,124 | $ | 359,705 | $ | 377,180 | $ | 34,082 | $ | 2,901,091 | ||||||||||
|
Provision for loan losses |
211,173 | (130,880 | ) | 9,738 | (2,531 | ) | 87,500 | |||||||||||||
|
Charge-offs |
- | (8,686 | ) | - | - | (8,686 | ) | |||||||||||||
|
Recoveries |
- | - | 1,507 | - | 1,507 | |||||||||||||||
|
Net (charge-offs) recoveries |
- | (8,686 | ) | 1,507 | - | (7,179 | ) | |||||||||||||
|
Balance March 31, 2019 |
$ | 2,341,297 | $ | 220,139 | $ | 388,425 | $ | 31,551 | $ | 2,981,412 | ||||||||||
Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of March 31, 2020 and December 31, 2019. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Per Company policy, loans past due 90 days or more no longer accrue interest.
|
Past Due |
Total |
|||||||||||||||||||||||
|
90 Days |
Financing |
|||||||||||||||||||||||
|
30 - 59 Days |
60 - 89 Days |
or More |
Total |
Current |
Receivables |
|||||||||||||||||||
|
March 31, 2020 |
||||||||||||||||||||||||
|
Commercial real estate |
$ | - | $ | - | $ | - | $ | - | $ | 248,763,039 | $ | 248,763,039 | ||||||||||||
|
One- to four-family |
1,052,985 | - | 209,162 | 1,262,147 | 26,431,443 | 27,693,590 | ||||||||||||||||||
|
Commercial and industrial |
- | - | - | - | 34,081,604 | 34,081,604 | ||||||||||||||||||
|
Consumer and other |
- | - | - | - | 3,141,308 | 3,141,308 | ||||||||||||||||||
|
Totals |
$ | 1,052,985 | $ | - | $ | 209,162 | $ | 1,262,147 | $ | 312,417,394 | $ | 313,679,541 | ||||||||||||
|
Past Due |
Total |
|||||||||||||||||||||||
|
90 Days |
Financing |
|||||||||||||||||||||||
|
30 - 59 Days |
60 - 89 Days |
or More |
Total |
Current |
Receivables |
|||||||||||||||||||
|
December 31, 2019 |
||||||||||||||||||||||||
|
Commercial real estate |
$ | - | $ | - | $ | 2,718,731 | $ | 2,718,731 | $ | 239,963,990 | $ | 242,682,721 | ||||||||||||
|
One- to four-family |
758,197 | 36,520 | 638,623 | 1,433,340 | 27,416,300 | $ | 28,849,640 | |||||||||||||||||
|
Commercial and industrial |
- | - | - | - | 20,075,236 | $ | 20,075,236 | |||||||||||||||||
|
Consumer and other |
- | - | - | - | 3,860,991 | $ | 3,860,991 | |||||||||||||||||
|
Totals |
$ | 758,197 | $ | 36,520 | $ | 3,357,354 | $ | 4,152,071 | $ | 291,316,517 | $ | 295,468,588 | ||||||||||||
The following table sets forth nonaccrual loans and other real estate at March 31, 2020 and December 31, 2019:
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Nonaccrual loans |
||||||||
|
Commercial real estate |
$ | 2,642,676 | $ | 2,718,731 | ||||
|
One- to four-family residential real estate |
766,952 | 786,557 | ||||||
|
Commercial and industrial |
- | - | ||||||
|
Consumer and other |
- | - | ||||||
|
Total nonaccrual loans |
3,409,628 | 3,505,288 | ||||||
|
Other real estate (ORE) |
- | - | ||||||
|
Total nonperforming assets |
$ | 3,409,628 | $ | 3,505,288 | ||||
|
Nonperforming assets to gross loans held for investment and ORE |
1.09 | % | 1.19 | % | ||||
|
Nonperforming assets to total assets |
0.83 | % | 0.89 | % | ||||
Nonaccrual loan balances guaranteed by the SBA are $2.3 million or 68% and $2.3 million or 66% of the nonaccrual loan balances at March 31, 2020 and December 31, 2019, respectively.
Credit Quality Indicators – The following tables represent the credit exposure by internally assigned grades at March 31, 2020 and December 31, 2019. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Bank’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.
|
As of March 31, 2020 |
||||||||||||||||||||
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Consumer and Other |
Total |
||||||||||||||||
|
Grade |
||||||||||||||||||||
|
Pass |
$ | 243,791,555 | $ | 25,855,307 | $ | 33,836,430 | $ | 3,141,308 | $ | 306,624,600 | ||||||||||
|
Special mention |
504,150 | 359,216 | - | - | 863,366 | |||||||||||||||
|
Substandard |
4,467,334 | 1,479,067 | 245,174 | - | 6,191,575 | |||||||||||||||
|
Doubtful |
- | - | - | - | - | |||||||||||||||
|
Loss |
- | - | - | - | - | |||||||||||||||
|
Totals |
$ | 248,763,039 | $ | 27,693,590 | $ | 34,081,604 | $ | 3,141,308 | $ | 313,679,541 | ||||||||||
|
As of December 31, 2019 |
||||||||||||||||||||
|
Commercial Real Estate |
One- to Four-Family Residential Real Estate |
Commercial and Industrial |
Consumer and Other |
Total |
||||||||||||||||
|
Grade |
||||||||||||||||||||
|
Pass |
$ | 237,546,684 | $ | 26,969,204 | $ | 19,774,797 | $ | 3,860,991 | $ | 288,151,676 | ||||||||||
|
Special mention |
508,201 | 375,054 | - | - | 883,255 | |||||||||||||||
|
Substandard |
4,627,836 | 1,505,382 | 300,439 | - | 6,433,657 | |||||||||||||||
|
Doubtful |
- | - | - | - | - | |||||||||||||||
|
Loss |
- | - | - | - | - | |||||||||||||||
|
Totals |
$ | 242,682,721 | $ | 28,849,640 | $ | 20,075,236 | $ | 3,860,991 | $ | 295,468,588 | ||||||||||
The Bank’s internally assigned grades are as follows:
Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.
Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.
Doubtful – All the weakness inherent in one classified as substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.
Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.
Impaired Loans – The following tables include the recorded investment and unpaid principal balances, net of charge-offs for impaired loans with the associated allowance amount, if applicable. Management determined the allocated allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the allocated allowance recorded.
|
As of March 31, 2020 |
||||||||||||||||
|
Principal |
Average |
|||||||||||||||
|
Recorded |
Net of |
Related |
Recorded |
|||||||||||||
|
Investment |
Charge-offs |
Allowance |
Investment |
|||||||||||||
|
With no related allowance recorded: |
||||||||||||||||
|
Commercial real estate |
$ | 2,642,676 | $ | 2,642,676 | $ | - | $ | 2,682,032 | ||||||||
|
One- to four-family residential real estate |
766,952 | 766,952 | - | 780,818 | ||||||||||||
|
Commercial and industrial |
- | - | - | - | ||||||||||||
|
Consumer and other |
- | - | - | - | ||||||||||||
| $ | 3,409,628 | $ | 3,409,628 | $ | - | $ | 3,462,850 | |||||||||
|
With an allowance recorded: |
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Total: |
||||||||||||||||
|
Commercial real estate |
$ | 2,642,676 | $ | 2,642,676 | $ | - | $ | 2,682,032 | ||||||||
|
One- to four-family residential real estate |
766,952 | 766,952 | - | 780,818 | ||||||||||||
|
Commercial and industrial |
- | - | - | - | ||||||||||||
|
Consumer and other |
- | - | - | - | ||||||||||||
| $ | 3,409,628 | $ | 3,409,628 | $ | - | $ | 3,462,850 | |||||||||
|
As of December 31, 2019 |
||||||||||||||||
|
Principal |
Average |
|||||||||||||||
|
Recorded |
Net of |
Related |
Recorded |
|||||||||||||
|
Investment |
Charge-offs |
Allowance |
Investment |
|||||||||||||
|
With no related allowance recorded: |
||||||||||||||||
|
Commercial real estate |
$ | 2,718,731 | $ | 2,718,731 | $ | - | $ | 2,738,545 | ||||||||
|
One- to four-family residential real estate |
786,557 | 786,557 | - | 791,476 | ||||||||||||
|
Commercial and industrial |
- | - | - | - | ||||||||||||
|
Consumer and other |
- | - | - | - | ||||||||||||
| $ | 3,505,288 | $ | 3,505,288 | $ | - | $ | 3,530,021 | |||||||||
|
With an allowance recorded: |
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Total: |
||||||||||||||||
|
Commercial real estate |
$ | 2,718,731 | $ | 2,718,731 | $ | - | $ | 2,738,545 | ||||||||
|
One- to four-family residential real estate |
786,557 | 786,557 | - | 791,476 | ||||||||||||
|
Commercial and industrial |
- | - | - | - | ||||||||||||
|
Consumer and other |
- | - | - | - | ||||||||||||
| $ | 3,505,288 | $ | 3,505,288 | $ | - | $ | 3,530,021 | |||||||||
During each of the three months ended March 31, 2020 and 2019, no interest income was recognized on nonaccrual loans.
Certain loans within the Company’s loan portfolio are guaranteed by the Veterans Administration (VA). In the event of default by the borrower, the VA can elect to pay the guaranteed amount or take possession of the property. If the VA takes possession of the property, the Company is entitled to be reimbursed for the outstanding principal balance, accrued interest and certain other expenses. There were no commitments from the VA to take title to properties collateralizing Company loans at March 31, 2020 and December 31, 2019.
Troubled Debt Restructurings – Restructured loans are considered “troubled debt restructurings” if due to the borrower’s financial difficulties, the Bank has granted a concession that they would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, rates, or a combination of the two. All troubled debt restructurings placed on nonaccrual status must show no less than six months of repayment performance by the borrower in accordance with contractual terms to return to accrual status. Once a loan has been identified as a troubled debt restructuring, it will continue to be reported as such until the loan is paid in full.
In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a troubled debt restructuring. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to existing underwriting standards which include review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance, and projections intended to assess repayment ability going forward.
There was one troubled debt restructuring with a current payment status and principal balances of $70,000 and $71,000, as of March 31, 2020 and December 31, 2019, respectively.
NOTE 5 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
In the normal course of business, the Bank has outstanding commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for instruments that are included in the consolidated balance sheets.
Financial instruments whose contract amounts represent off-balance-sheet credit risk are as follows as of March 31, 2020 and December 31, 2019:
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Commitments to extend credit |
$ | 22,617,514 | $ | 25,739,246 | ||||
|
Unused lines of credit |
16,182,394 | 17,765,580 | ||||||
|
Totals |
$ | 38,799,908 | $ | 43,504,826 | ||||
There were no commitments to originate and sell mortgage loans at March 31, 2020 due to the Company exiting mortgage banking operations, see Note 2 – Discontinued Operations.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies by and may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
The Company enters into leases in the normal course of business primarily for branch facilities or loan production offices. The leases have remaining terms ranging from one to three years, some of which include renewal options to extend the lease and options to terminate the lease. In addition, the Company has entered into subleases for space in certain vacated mortgage loan production offices, the terms of which range from one to two years. The Company’s leases and subleases do not include residual value guarantees or covenants. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. The Company has elected not to recognize leases with original least terms of 12 months or less (short-term leases) on the balance sheet. Leases are recognized as operating or financing leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities are recognized at lease commencement date based upon the estimated present value of lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The discount rates used to calculate the present value of lease liabilities were based upon the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standard or lease commencement date. At March 31, 2020 the balance sheet included $1.1 million operating lease right-of-use assets and $1.2 million operating lease liabilities.
The following table shows the future minimum lease payments, weighted average remaining lease terms and weighted average discount rates under operating lease arrangements as of March 31, 2020.
|
March 31, 2020 |
|||||
| Year |
Operating Leases |
||||
| 2020 | $ | 399,613 | |||
| 2021 | 507,522 | ||||
| 2022 | 370,816 | ||||
|
Total minimum lease payments |
1,277,951 | ||||
| Amounts representing interest (present value discount) | (33,764 | ) | |||
|
Operating lease liabilities (present value of minimum lease payments) |
$ | 1,244,187 | |||
NOTE 6 – REGULATORY MATTERS
Bank 34 is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets. Management believes, as of March 31, 2020 and December 31, 2019, the Bank meets all capital adequacy requirements to which it is subject.
Banks are also subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval.
As of March 31, 2020, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank has to maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events that management believes have changed the Bank’s prompt corrective action category.
The Bank’s actual and required capital amounts and ratios are as follows:
|
To be Well |
||||||||||||||||||||||||
|
Capitalized Under |
||||||||||||||||||||||||
|
For Capital |
Prompt Corrective |
|||||||||||||||||||||||
|
Actual |
Adequacy Purposes |
Action Provisions |
||||||||||||||||||||||
|
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||||||||
|
As of March 31, 2020: |
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets) |
$ |
43,855 |
14.00 | % | $ | 25,046 | >8.00 | % | $ | 31,325 | >10.00 | % | ||||||||||||
|
Tier I Capital (to Risk-Weighted Assets) |
$ | 40,418 | 12.91 | % | $ | 18,785 | >6.00 | % | $ | 25,046 | >8.00 | % | ||||||||||||
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
$ | 40,418 | 12.91 | % | $ | 14,088 | >4.50 | % | $ | 20,350 | >6.50 | % | ||||||||||||
|
Tier I Capital (to Average Assets) |
$ | 40,418 | 10.36 | % | $ | 15,605 | >4.00 | % | $ | 19,507 | >5.00 | % | ||||||||||||
|
As of December 31, 2019: |
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets) |
$ | 42,944 | 14.59 | % | $ | 23,554 | >8.00 | % | $ | 29,443 | >10.00 | % | ||||||||||||
|
Tier I Capital (to Risk-Weighted Assets) |
$ | 39,982 | 13.58 | % | $ | 17,666 | >6.00 | % | $ | 23,554 | >8.00 | % | ||||||||||||
|
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
$ | 39,982 | 13.58 | % | $ | 13,249 | >4.50 | % | $ | 19,138 | >6.50 | % | ||||||||||||
|
Tier I Capital (to Average Assets) |
$ | 39,982 | 10.30 | % | $ | 15,529 | >4.00 | % | $ | 19,411 | >5.00 | % | ||||||||||||
NOTE 7 – STOCK-BASED COMPENSATION
The Company has fully vested and unvested stock options and unvested restricted stock awards outstanding under the 2017 Equity Incentive Plan.
A summary of stock option activity during the three months ended March 31, 2020 is presented below:
|
For the three Months Ended March 31, 2020 |
||||||||||||||||
|
Average |
||||||||||||||||
|
Weighted- |
Remaining |
Aggregate |
||||||||||||||
|
Average |
Contractual |
Intrinsic |
||||||||||||||
|
Shares |
Exercise Price |
Term (years) |
Value |
|||||||||||||
|
Outstanding, December 31, 2019 |
146,300 | $ | 14.92 | 5.0 | $ | 53,166 | ||||||||||
|
Granted |
- | |||||||||||||||
|
Exercised |
- | |||||||||||||||
|
Forfeited or expired |
(900 | ) | 14.90 | |||||||||||||
|
Outstanding, March 31, 2020 |
145,400 | $ | 14.91 | 4.9 | $ | - | ||||||||||
|
Exercisable, March 31, 2020 |
57,260 | $ | 14.92 | 4.9 | $ | - | ||||||||||
A summary of restricted stock activity during the three months ended March 31, 2020 is presented below:
| For the three Months Ended March 31, 2020 | ||||||||||||
|
Weighted |
Average |
|||||||||||
|
Average |
Remaining |
|||||||||||
|
Grant Date |
Contractual |
|||||||||||
|
Shares |
Price |
Term (years) |
||||||||||
|
Outstanding, December 31, 2019 |
40,044 | $ | 14.89 | 2.6 | ||||||||
|
Vested |
(85 | ) | 15.48 | |||||||||
|
Outstanding, March 31, 2020 |
39,959 | $ | 14.89 | 2.4 | ||||||||
Compensation and benefits included $76,000 and $75,000 of stock-based expense for the three months ended March 31, 2020 and 2019, respectively. Restricted stock award dividends included in stock-based expense were $2,000 and $-0- for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, there was $824,000 of total unrecognized stock-based expense including $290,000 related to unvested stock options and $534,000 from restricted stock awards granted under the 2017 Equity Incentive Plan that is expected to be recognized ratably over the next 2.7 years.
NOTE 8 – FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents information about assets and liabilities measured at fair value on a recurring and non-recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair values as of March 31, 2020 and December 31, 2019.
|
Fair Value Measurements Using |
||||||||||||||||
|
Quoted Prices |
Significant |
|||||||||||||||
|
in Active |
Other |
Significant |
||||||||||||||
|
Markets for |
Observable |
Unobservable |
||||||||||||||
|
Identical Assets |
Inputs |
Inputs |
||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Fair Value |
|||||||||||||
|
March 31, 2020: |
||||||||||||||||
|
Recurring basis |
||||||||||||||||
|
Mortgage-backed securities |
$ | - | $ | 34,524,563 | $ | - | $ | 34,524,563 | ||||||||
|
U.S. Government agencies |
- | 953,122 | - | 953,122 | ||||||||||||
|
Municipal obligations |
- | 25,897,115 | - | 25,897,115 | ||||||||||||
|
Nonrecurring basis |
||||||||||||||||
|
Impaired loans |
- | - | 3,409,628 | 3,409,628 | ||||||||||||
|
Totals |
$ | - | $ | 61,374,800 | $ | 3,409,628 | $ | 64,784,428 | ||||||||
|
December 31, 2019: |
||||||||||||||||
|
Recurring basis |
||||||||||||||||
|
Mortgage-backed securities |
$ | - | $ | 31,018,748 | $ | - | $ | 31,018,748 | ||||||||
|
U.S. Government agencies |
- | 1,079,447 | - | 1,079,447 | ||||||||||||
|
Municipal obligations |
- | 12,418,983 | - | 12,418,983 | ||||||||||||
|
Nonrecurring basis |
||||||||||||||||
|
Impaired loans |
- | - | 3,505,288 | 3,505,288 | ||||||||||||
|
Totals |
$ | - | $ | 44,517,178 | $ | 3,505,288 | $ | 48,022,466 | ||||||||
The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Bank does not know whether the fair values shown represent values at which the respective financial instruments could be sold individually or in the aggregate.
There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2020 or 2019.
The following methods and assumptions were used to estimate the fair value of the classes of financial instruments shown:
Available-for-sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly-liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.
Loans Held for Investment, Net – Loans held for investment are generally not recorded at fair value on a recurring basis. Periodically, the Bank records nonrecurring adjustments to the carrying value of these loans based on fair value measurements for loans subject to impairment. The fair value of impaired loans is typically determined using a combination of observable inputs, such as interest rates, contract terms, appraisals of collateral supporting the loan and recent comparable sales of similar properties, and unobservable inputs such as creditworthiness, disposition costs and underlying cash flows associated with the loan. Since the estimates of fair value utilized for loans also involve unobservable inputs, valuations of impaired loans have been classified as Level 3.
The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 financial assets measured on a non-recurring basis:
|
Fair Value |
Valuation Methodologies |
Valuation Model |
Unobservable Input Valuation |
|||||||||
|
At March 31, 2020 |
||||||||||||
|
Impaired loans |
||||||||||||
|
Commercial real estate |
$ | 2,642,676 |
Appraisal |
Appraisal discount and estimated selling costs |
17 | - | 18% | |||||
|
One- to four-family residential real estate |
766,952 |
Appraisal |
Appraisal discount and estimated selling costs |
17 | - | 18% | ||||||
|
Total Impaired Loans |
$ | 3,409,628 | ||||||||||
|
At December 31, 2019 |
||||||||||||
|
Impaired loans |
||||||||||||
|
Commercial real estate |
$ | 2,718,731 |
Appraisal |
Appraisal discount and estimated selling costs |
17 | - | 18% | |||||
|
One- to four-family residential real estate |
786,557 |
Appraisal |
Appraisal discount and estimated selling costs |
17 | - | 18% | ||||||
|
Total Impaired Loans |
$ | 3,505,288 | ||||||||||
The following table presents estimated fair values of the Company’s financial instruments at March 31, 2020 and December 31, 2019.
|
Quoted Prices |
Significant |
|||||||||||||||||||
|
in Active |
Other |
Significant |
||||||||||||||||||
|
Markets for |
Observable |
Unobservable |
||||||||||||||||||
|
Carrying |
Identical Assets |
Inputs |
Inputs |
|||||||||||||||||
|
Amount |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||||
|
At March 31, 2020: |
||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Cash and due from banks |
$ | 5,159 | $ | 5,159 | $ | 5,159 | $ | - | $ | - | ||||||||||
|
Interest-bearing deposits with banks |
3,260 | 3,260 | 3,260 | - | - | |||||||||||||||
|
Available-for-sale securities |
61,375 | 61,375 | - | 61,375 | - | |||||||||||||||
|
Loans held for investment, net |
309,443 | 308,210 | - | - | 308,210 | |||||||||||||||
|
Stock in financial institutions |
4,037 | 4,037 | - | 4,037 | - | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Demand deposits, savings and NOW deposits |
229,134 | 228,963 | 228,963 | - | - | |||||||||||||||
|
Time deposits |
76,985 |
77,588 |
- | 77,588 | - | |||||||||||||||
|
Federal Home Loan Bank advances |
50,000 | 50,244 | - | 50,244 | - | |||||||||||||||
|
At December 31, 2019 |
||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Cash and due from banks |
$ | 4,496 | $ | 4,496 | $ | 4,496 | $ | - | $ | - | ||||||||||
|
Interest-bearing deposits with banks |
24,990 | 24,990 | 24,990 | - | - | |||||||||||||||
|
Available-for-sale securities |
44,517 | 44,517 | - | 44,517 | - | |||||||||||||||
|
Loans held for investment, net |
291,739 | 292,246 | - | - | 292,246 | |||||||||||||||
|
Stock in financial institutions |
4,017 | 4,017 | - | 4,017 | - | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Demand deposits, savings and NOW deposits |
222,509 | 214,611 | 214,611 | - | - | |||||||||||||||
|
Time deposits |
81,388 | 81,638 | - | 81,638 | - | |||||||||||||||
|
Federal Home Loan Bank advances |
40,000 | 40,075 | - | 40,075 | - | |||||||||||||||
NOTE 9 – EARNINGS PER SHARE
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The earnings per share computations follow:
|
Three Months Ended March 31, |
||||||||
|
2020 |
2019 |
|||||||
|
Basic: |
||||||||
|
Net income from continuing operations |
$ | 278,057 | $ | 387,143 | ||||
|
Net loss from discontinued operations |
- | (345,935 | ) | |||||
|
Less: Earnings allocated to participating securities |
(3,654 | ) | (643 | ) | ||||
|
Net income allocated to common shareholders |
$ | 274,403 | $ | 40,565 | ||||
|
Weighted-average common shares outstanding including participating securities |
3,208,618 | 3,360,612 | ||||||
|
Less: Average participating securities |
(40,012 | ) | (49,798 | ) | ||||
|
Less: Average unallocated ESOP Shares |
(164,096 | ) | (170,316 | ) | ||||
|
Average shares |
3,004,510 | 3,140,498 | ||||||
|
Basic earnings per common share - continuing operations |
$ | 0.09 | $ | 0.12 | ||||
|
Basic loss per common share - discontinued operations |
- | (0.11 | ) | |||||
|
Basic earnings per common share |
$ | 0.09 | $ | 0.01 | ||||
|
Diluted: |
||||||||
|
Net income allocated to common shareholders |
$ | 497,432 | $ | 40,565 | ||||
|
Weighted-average common shares outstanding for basic earnings per common share |
3,004,510 | 3,140,498 | ||||||
|
Add: Dilutive effects of assumed exercises of stock options |
- | 4,712 | ||||||
|
Weighted average shares and dilutive potential common shares |
3,004,510 | 3,145,210 | ||||||
|
Diluted earnings per common share - continuing operations |
$ | 0.09 | $ | 0.12 | ||||
|
Diluted loss per common share - discontinued operations |
- | (0.11 | ) | |||||
|
Diluted earnings per common share |
$ | 0.09 | $ | 0.01 | ||||
(1) Our participating securities are restricted stock awards which participate in common stock dividends.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section as of and for the three and three months ended March 31, 2020 and 2019, has been derived from the consolidated financial statements that appear elsewhere in this report. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “tend,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions. Because of these and other uncertainties, Bancorp 34’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. Bancorp 34 is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Bancorp 34 qualifies all of its forward-looking statements by these cautionary statements.
Further, given the ongoing and dynamic nature of the COVID-19 outbreak, it is difficult to predict the full impact on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks which could have a material, adverse effect on its or our business, financial condition, liquidity, and results of operations:
|
● |
demand for products and services may decline, making it difficult to grow assets and income; |
|
● |
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; |
|
● |
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; |
|
● |
the allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income; |
|
● |
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments; |
|
● |
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in the cost of interest-bearing liabilities, reducing net interest margin and spread, and reducing net income; |
|
● |
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of, or full suspension of, quarterly cash dividends; |
|
● |
cyber security risks are increased as the result of an increase in the number of employees working remotely; and |
|
● |
FDIC premiums may increase if the agency experiences additional resolution costs. |
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair values of financial instruments.
Allowance for Loan Losses. The allowance for loan losses is calculated with the objective of maintaining an allowance necessary to absorb probable credit losses inherent in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the losses for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.
We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the probable losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.
The allowance for loan losses consists primarily of specific allocations and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, including adjustments for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting and payment history. We also analyze delinquency trends, general economic conditions, trends in historical loss experience and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance. The principal assumption used in calculating the allowance for loan losses is the estimate of loss for each risk rating. Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.
Other-Than-Temporary Impairment. Securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in operations. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive loss.
Valuation of Deferred Tax Assets. In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income. In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies, if any. These assumptions require us to make judgments about our future taxable income that are consistent with the plans and estimates we use to manage our business. Any change in estimated future taxable income or effective tax rates may result in changes to the carrying balance of our net deferred tax assets which would result in an income tax benefit or expense in the same period.
Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A three-level of fair value hierarchy prioritizes the inputs used to measure fair value:
|
|
● |
Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government agency debt that is highly liquid and actively traded in over-the-counter markets. |
|
|
|
|
|
|
● |
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
|
|
|
|
● |
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.
|
Three Months Ended March 31, |
||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Average |
Average |
|||||||||||||||||||||||
|
Outstanding |
Yield/ |
Outstanding |
Yield/ |
|||||||||||||||||||||
|
Balance |
Interest |
Rate (1) |
Balance |
Interest |
Rate (1) |
|||||||||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||||||||
|
Interest-earning assets: |
||||||||||||||||||||||||
|
Loans - continuing operations |
$ | 303,576 | $ | 4,621 | 6.12 | % | $ | 286,036 | $ | 4,153 | 5.89 | % | ||||||||||||
|
Securities |
45,151 | 287 | 2.56 | % | 33,405 | 224 | 2.72 | % | ||||||||||||||||
|
Other interest earning assets |
18,063 | 73 | 1.64 | % | 19,538 | 122 | 2.53 | % | ||||||||||||||||
|
Total interest-earning assets - continuing operations |
366,790 | 4,982 | 5.46 | % | 338,979 | 4,499 | 5.38 | % | ||||||||||||||||
|
Loans held for sale - discontinued operations |
- | - | - | 18,413 | 179 | 3.94 | % | |||||||||||||||||
|
Total interest-earning assets |
366,790 | 4,982 | 5.46 | % | 357,392 | 4,678 | 5.31 | % | ||||||||||||||||
|
Noninterest-earning assets |
24,380 | 23,617 | ||||||||||||||||||||||
|
Total assets |
$ | 391,170 | $ | 381,009 | ||||||||||||||||||||
|
Interest-bearing liabilities: |
||||||||||||||||||||||||
|
Checking, money market and savings accounts |
$ | 173,519 | $ | 559 | 1.29 | % | $ | 145,326 | $ | 467 | 1.30 | % | ||||||||||||
|
Certificates of deposit |
81,752 | 427 | 2.10 | % | 80,060 | 394 | 2.00 | % | ||||||||||||||||
|
Total deposits |
255,271 | 986 | 1.55 | % | 225,386 | 861 | 1.55 | % | ||||||||||||||||
|
Advances from FHLB of Dallas - continuing operations |
32,967 | 190 | 2.32 | % | 60,289 | 278 | 1.87 | % | ||||||||||||||||
|
Total interest-bearing liabilities - continuing operations |
288,238 | 1,176 | 1.64 | % | 285,675 | 1,139 | 1.62 | % | ||||||||||||||||
|
Advances from FHLB of Dallas - discontinued operations |
- | - | - | - | 94 | - | ||||||||||||||||||
|
Total interest-bearing liabilities |
288,238 | 1,176 | 1.64 | % | 285,675 | 1,233 | 1.75 | % | ||||||||||||||||
|
Non-interest bearing deposits |
52,285 | 44,191 | ||||||||||||||||||||||
|
Non-interest bearing liabilities |
4,838 | 4,162 | ||||||||||||||||||||||
|
Total liabilities |
345,360 | 334,028 | ||||||||||||||||||||||
|
Stockholders' equity |
45,810 | 46,981 | ||||||||||||||||||||||
|
Total liabilities and stockholders' equity |
$ | 391,170 | $ | 381,009 | ||||||||||||||||||||
|
Net interest income - continuing operations |
$ | 3,806 | $ | 3,360 | ||||||||||||||||||||
|
Net interest rate spread - continuing operations (2) |
3.82 | % | 3.77 | % | ||||||||||||||||||||
|
Net interest margin - continuing operations (4) |
4.17 | % | 4.02 | % | ||||||||||||||||||||
|
Net interest income |
$ | 3,806 | $ | 3,445 | ||||||||||||||||||||
|
Net interest rate spread (2) |
3.82 | % | 3.56 | % | ||||||||||||||||||||
|
Net interest-earning assets (3) |
$ | 78,552 | $ | 71,717 | ||||||||||||||||||||
|
Net interest margin (4) |
4.17 | % | 3.91 | % | ||||||||||||||||||||
|
Average interest-earning assets to average interest-bearing liabilities |
127.25 | % | 125.10 | % | ||||||||||||||||||||
|
|
(1) |
Yield/Rate for the three-month periods have been annualized. |
|
|
(2) |
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
|
|
(3) |
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
|
|
(4) |
Net interest margin represents net interest income as a percentage of average total interest-earning assets. |
Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Cash and cash equivalents were $8.4 million at March 31, 2020 and $29.5 million at December 31, 2019. Daily cash and cash equivalent balances generally vary around target levels of $5.0 to $7.0 million primarily due to the timing of commercial loan fundings and payoffs and changes in deposit and FHLB advance balances. Cash and cash equivalents were above normal target levels at December 31, 2019 due to a large increase in loan payoffs in December 2019 and $10.0 million held for an early 2020 FHLB advance maturity.
Available-for-sale securities increased $16.9 million, or 37.9%, during the three months ended March 31, 2020 to $61.4 million. There were no sales of available-for-sale securities and we purchased $17.5 million of securities in the three months ended March 31, 2020 to take advantage of attractive yields in a declining rate environment available as some national, leveraged funds were forced to liquidate their holdings.
Loans held for investment increased $18.2 million, or 6.2%, to $312.8 million at March 31, 2020 from $ 294.7 million at December 31, 2019, due to organic growth. In the three months ended March 31, 2020, commercial real estate loans increased $6.1 million, or 2.5% to $248.8 million and represented 79.3% of the gross loan portfolio at March 31, 2020, compared to 82.1% at December 31, 2019. Commercial and industrial loans increased $14.0 million, or 69.8%, from $20.1 million at December 31, 2019 to $34.1 million at March 31, 2020.
Total deposits increased $2.2 million, or 0.7%, to $306.1 million at March 31, 2020 from $303.9 million at December 31, 2019. The increase included a $6.7 million, or 4.1%, increase in savings and NOW deposits, partially offset by a $4.4 million, or 5.4%, decrease in time deposits.
Federal Home Loan Bank advances increased $10.0 million, or 25.0 %, to $50.0 million at March 31, 2020 compared to $40.0 million at December 31, 2019. The additional advances were primarily used to fund available-for-sale security growth. We generally utilize short-term borrowings to fund loans held for sale, and long-term borrowings and some short-term borrowings to fund net growth in loans held for investment.
Accrued interest and other liabilities increased $72,000, or 1.7%, to $4.4 million at March 31, 2020 compared to $4.3 million at December 31, 2019.
Total stockholders’ equity increased $1.0 million to $46.1 million at March 31, 2020 from $45.1 million at December 31, 2019. The largest changes in stockholders’ equity for the three months ended March 31, 2020 were increases of $820,000 in the fair value of available-for-sale securities net of tax and a $120,000 increase in retained earnings, including a $278,000 increase from net income and a $158,000 reduction from dividends paid.
Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019
General. We had net income from continuing operations of $278,000 for the three months ended March 31, 2020, which was $109,000, or 28.2%, less than net income from continuing operations of $387,000 for the three months ended March 31, 2019. The decrease was primarily caused by a $385,000 increase in the provision for loan losses and a $243,000, or 8.2%, increase in noninterest expense, partially offset by a $447,000, or 13.3%, increase in net interest income and a $74,000, or 39.6%, increase in noninterest income.
We had no net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, for the quarter ended March 31, 2020 compared to a net loss from discontinued operations of $346,000 for the three months ended March 31, 2019. The decrease was due to the mortgage banking business exit in June 2019.
Interest Income. Interest income from continuing operations increased $483,000, or 10.7%, to $5.0 million for the three months ended March 31, 2020 from $4.5 million for the three months ended March 31, 2019. The increase was due to a $27.8 million, or 8.2%, increase in average interest-earning assets from continuing operations and a 15 basis point increase in average yields. The average balance of loans, our highest yielding asset, increased $17.5 million, or 6.1%, but decreased to 82.8% of average interest-earning assets from 84.4% of average interest-earning assets. The increase in yield on average interest earning assets was primarily due to a 23 basis point increase in the yield on loans, partially offset by a 16 basis point decrease in yields on securities. Interest income on loans increased $468,000, or 11.3%, due to a $17.5 million, or 6.1%, increase in average loan balances due to organic growth and a 23 basis point increase in yield discussed above. Interest income on securities increased $63,000, or 28.2%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 due to an $11.7 million, or 35.2%, increase in average securities balances partially offset by a 16 basis point decrease in yield from the lower interest rate environment.
Interest Expense.
Interest expense from continuing operations increased $36,000, or 3.2%, to $1.2 million for the three months ended March 31, 2020 from $1.1 million for the three months ended March 31, 2019. The increase was the result of an increase of $124,000, or 14.4%, in interest expense on deposits, partially offset by a decrease of $88,000, or 31.6%, in interest expense on borrowings.
Interest paid on checking, money market and savings accounts increased $92,000, or 19.6%, to $559,000 for the three months ended March 31, 2020 from $467,000 for the three months ended March 31, 2019. The average rate we paid on such deposit accounts decreased one basis point to 1.29% for the three months ended March 31, 2020 from 1.30% for the three months ended March 31, 2019. The average balance increased $28.2 million, or 19.4%, to $173.5 million for the three months ended March 31, 2020 from $145.3 million for the three months ended March 31, 2019.
Interest on certificates of deposit increased $33,000, or 8.4%, to $427,000 for the three months ended March 31, 2020 from $394,000 for the three months ended March 31, 2019. The average rate paid on certificates of deposit increased 10 basis points, or 5.0%, to 2.10% for the three months ended March 31, 2020 compared to 2.00% for the three months ended March 31, 2019 due to the increase in market interest rates. The average balance of certificates of deposit increased $1.7 million, or 2.1%, to $81.7 million for the three months ended March 31, 2020 from $80.1 million for the three months ended March 31, 2019.
The average rates we pay on deposits is considerably higher in our Arizona market.
The average balance of borrowings – continuing operations decreased $27.3 million, or 45.3%, from the quarter ended March 31, 2019 to the quarter ended March 31, 2020 and the average rate paid increased 45 basis points to 2.32% for the three months ended March 31, 2020 from 1.87% for the three months ended March 31, 2019.
Net Interest Income. Net interest income from continuing operations increased $447,000, or 13.3%, and was $3.8 million for the three months ended March 31, 2020 compared to $3.4 million for the three months ended March 31, 2019, due to an 8.2% increase in average interest earning assets and a five basis point increase in net interest rate spread to 3.82% for the three months ended March 31, 2020 from 3.77% for the three months ended March 31, 2019. Average interest earning assets yield for continuing operations increased eight basis points compared to a two basis point increase in average interest bearing liability rates. Continuing operations average net interest-earning assets represented 127.25% of average interest bearing liabilities for the three months ended March 31, 2020, compared to 125.10% for the three months ended March 31, 2019 due to organic growth.
We had no net interest income from discontinued operations for the three months ended March 31, 2020 compared to $85,000 for the three months ended March 31, 2019 due to the mortgage banking business exit in June 2019. Average mortgage loans held for sale was $0 for the three months ended March 31, 2020 compared to $18.4 million for the three months ended March 31, 2019.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. If the allowance for loan losses is larger than necessary, we post a negative provision as a benefit to earnings. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews.
See “Asset Quality - Allowance for Loan Losses” for additional information.
After an evaluation of these factors, we recorded provisions for loan losses of $472,000 and $87,500 for the three months ended March 31, 2020 and 2019, respectively. In the three months ended March 31, 2020, the allowance for loan losses increased $475,000, reflecting $472,000 in provisions and $3,000 in net recoveries. The larger provision for the three months ended March 31, 2020 was primarily due projected losses from the effects of COVID-19 and the $18.2 million, or 6.2% loan growth in the quarter. Based upon the uncertainties related to COVID-19, the Company increased its March 31, 2020 allowance for loan losses $350,000, or 12%, and plans to continue to closely monitor the effects of the pandemic on the ability of its borrowers to repay their debt going forward.
To the best of our knowledge, at March 31, 2020 we have recorded all loan losses that are both probable and reasonable to estimate. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about the recoverability of our loan balances based upon information available to it at the time of its examination.
Noninterest Income. Noninterest income from continuing operations increased $74,000, or 39.6%, to $260,000 for the three months ended March 31, 2020 from $186,000 for the three months ended March 31, 2019 due primarily to an increase in loan brokerage fees, partially offset by a decrease in SBA and USDA sales gains.
There was no gain on sale of SBA and USDA loans from continuing operations for the three months ended March 31, 2020 compared to $27,000 for the three months ended March 31, 2019. We had no SBA or USDA loan sales and no sales gains recognized directly into income in the quarter ended March 31, 2020.
Due to the mortgage banking business exit in June 2019, there was no noninterest income from discontinued operations, represented by loan sales gains, for the three months ended March 31, 2020 compared to $2.7 million for the three months ended March 31, 2019. We sold $73.8 million of mortgage loans during the three months ended March 31, 2019 and realized sales gains equal to 4.0% of loans sold.
Noninterest Expense. Noninterest expense from continuing operations increased $243,000, or 8.2%, to $3.2 million for the three months ended March 31, 2020 from $2.9 million for the three months ended March 31, 2019. Average assets from continuing operations for the quarter ended March 31, 2020 were 7.9% larger than for the quarter ended March 31, 2019. The increase was primarily related to higher salaries and benefits and professional fees.
Provision for Income Tax. Provision for income tax expense from continuing operations was $121,000 for the three months ended March 31, 2020, representing an effective tax rate of 30.3% on pre-tax income from continuing operations. There are numerous differences between pre-tax income and actual taxable income that have an effect on the effective income tax rate for any given period. We recognized an income tax expense from continuing operations of $118,000 for the three months ended March 31, 2019 representing 23.4% of the $506,000 income from continuing operations before income taxes.
There was no benefit or expense for income taxes from discontinued operations for the three months ended March 31, 2020. We recognized a benefit for income taxes from discontinued operations of $112,000 for the three months ended March 31, 2019 representing 24.5% of the $458,000 loss before benefit for income taxes.
Asset Quality
We review loans on a regular basis, and place loans on nonaccrual status when either principal or interest is 90 days or more past due, or earlier if we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status.
Non-Performing Loans and Non-Performing Assets The following table sets forth information regarding our nonperforming assets.
|
March 31, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Nonaccrual loans |
(Dollars in thousands) |
|||||||
|
Real estate loans: |
||||||||
|
One- to four-family residential real estate |
$ | 767 | $ | 787 | ||||
|
Commercial real estate |
2,643 | 2,719 | ||||||
|
Commercial and industrial loans |
- | - | ||||||
|
Consumer and other loans |
- | - | ||||||
|
Total nonaccrual loans |
3,410 | 3,506 | ||||||
|
Accruing loans past due 90 days or more |
- | - | ||||||
|
Total nonaccrual loans and accruing loans past due 90 days or more |
3,410 | 3,506 | ||||||
|
Other real estate (ORE) |
- | - | ||||||
|
Total nonperforming assets |
$ | 3,410 | $ | 3,506 | ||||
|
Ratios: |
||||||||
|
Nonperforming loans to gross loans held for investment |
1.09 | % | 1.19 | % | ||||
|
Nonperforming assets to total assets |
0.83 | % | 0.89 | % | ||||
|
Nonperforming assets to gross loans held for investment and ORE |
1.09 | % | 1.19 | % | ||||
Nonaccrual loan balances guaranteed by the SBA are $2.3 million or 68% and $2.3 million or 66.0% of the nonaccrual loan balances at March 31, 2020 and December 31, 2019, respectively.
Due to the decrease in nonaccrual loans, the nonperforming asset ratios decreased from December 31, 2019 to March 31, 2020.
Interest income that would have been recorded for the three months ended March 31, 2020, had nonaccruing loans been current according to their original terms amounted to $57,000 and $1,000 had troubled debt restructurings been current according to their original terms. We recognized no interest income on nonaccrual loans and $1,000 related to troubled debt restructurings for the three months ended March 31, 2020.
As of March 31, 2020 and December 31, 2019 we had $70,000 and $71,000 in current troubled debt restructurings, respectively.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on the current level of net loan losses, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
Three Months Ended March 31, |
|||||||||
|
2020 |
2019 |
||||||||
|
(Dollars in thousands) |
|||||||||
|
Balance at beginning of period |
$ | 2,922 | $ | 2,901 | |||||
|
Provision for loan losses |
472 | 87 | |||||||
|
Charge-offs: |
|||||||||
|
One- to four-family residential real |
- | (9 | ) | ||||||
|
Commercial real estate loans |
- | - | |||||||
|
Commercial and industrial loans |
- | - | |||||||
|
Consumer and other loans |
- | - | |||||||
|
Total charge-offs |
- | (9 | ) | ||||||
|
Recoveries: |
|||||||||
|
One- to four-family residential real |
- | 0 | |||||||
|
Commercial real estate loans |
3 | - | |||||||
|
Commercial and industrial loans |
- | 2 | |||||||
|
Consumer and other loans |
- | - | |||||||
|
Total recoveries |
3 | 2 | |||||||
|
Net (charge-offs) recoveries |
3 | (7 | ) | ||||||
|
Balance at end of period |
$ | 3,397 | $ | 2,981 | |||||
|
Allowance for loan losses to nonperforming loans |
99.63 | % | 82.68 | % | |||||
|
Allowance for loan losses to total loans |
1.09 | % | 1.02 | % | |||||
|
Allowance for loan losses to total loans less acquired loans |
1.09 | % | 1.04 | % | |||||
|
Net (charge-offs) recoveries to average loans outstanding during the period |
0.00 | % | 0.00 | % | |||||
The ratio of our allowance for loan losses to nonperforming loans increased due to a 14.0% increase in the allowance for loan losses primarily due to COVID-19 additions and a 5.4% decrease in nonperforming loans. The allowance for loan losses to total loans ratios increased because the allowance for loan losses increased 14.0% and total gross loans increased 7.5%.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, FHLB borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.
We believe that we have enough sources of liquidity to satisfy our short-term liquidity needs as of March 31, 2020.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2020, cash and cash equivalents totaled $8.4 million. Available-for-sale securities, which provide additional sources of liquidity, totaled $61.4 million at March 31, 2020. In addition, at March 31, 2020, we had $50.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to borrow an additional $97.8 million from the FHLB, and $9.8 million and $6.0 million through Fed Funds facilities from other correspondent banks.
At March 31, 2020, we had $22.6 million in loan commitments outstanding. In addition, we had $16.2 million in unused lines of credit. Time deposits due within one year of March 31, 2020 totaled $56.8 million, or 18.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2021. We believe, however, based on past experience that a significant portion of our time deposits will remain with us, either as time deposits or as other deposit products. We have the ability to attract and retain deposits by adjusting the interest rates offered.
We have no material commitments or demands that are likely to affect our liquidity other than set forth above. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the Federal Home Loan Bank of Dallas or the other financial institutions, or increase our deposits by offering higher interest rates.
Our primary investing activities are the origination of loans and the purchase of securities. During the three months ended March 31, 2020, we originated $35.8 million of loans held for investment and zero mortgage loans held for sale, compared to $21.6 million of loans held for investment and $61.1 million of mortgage loans held for sale during the three months ended March 31, 2019. In the three months ended March 31, 2020 and 2019 we purchased $17.5 million and zero in securities, respectively. We have not purchased any whole loans in the past two years.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases of $2.2 million and $2.7 million in total deposits for the three months ended March 31, 2020 and 2019, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits so that we are competitive in our market area.
We had $50.0 million in Federal Home Loan Bank advances at March 31, 2020, compared to $40.0 million at December 31, 2019. The $10.0 million in additional borrowings was primarily used to fund securities purchases and loan growth.
Bancorp 34, Inc. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to stockholders, to repurchase its common stock, and for other corporate purposes. Bancorp 34, Inc.’s primary source of liquidity is dividend payments it may receive from the Bank. At March 31, 2020, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $1.7 million. In each of the quarters from June 2019 through March 2020, the Company paid quarterly cash dividends of $0.05 per share to shareholders. Dividends paid in that quarter ended March 31, 2020 totaled $158,000.
The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2020 and December 31, 2019, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.
Additional COVID-19 Information
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity, a steep, rapid increase in unemployment, and stock markets have declined in value. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. In addition, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners from a safety perspective.
The following describes some of our responses to COVID-19, and other effects of the pandemic on our business.
Paycheck Protection Program. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans and chose to participate.
Through April 28, 2020, Bank 34 funded 185 PPP loans with total principal balances of $30.7 million and received SBA approval for another 61 PPP loans for $4.1 million, which must be funded within 10 days of approval. Bank 34 has limited PPP loans to 135% of Tier 1 Capital plus allowance for loan loss, or approximately $59.2 million using March 31, 2020 data.
Paycheck Protection Program Liquidity Facility. The CARES Act also allocated a limited amount of funds to the Federal Reserve Board (FRB) with a broad mandate to provide liquidity to eligible businesses, states or municipalities in light of COVID-19. On April 9, 2020, the U.S. Department of the Treasury announced several new or expanded lending programs to provide relief for businesses and governments. One of these programs was the Paycheck Protection Program Liquidity Facility (PPPLF). Under the PPPLF, all depository institutions that originate PPP loans are eligible to borrow on a non-recourse basis from their regional Federal Reserve Bank using SBA PPP loans as collateral. The principal amount of loans will be equal to the PPP loans pledged as collateral. There are no fees associated with these loans and the interest rate will be 35 basis points. The maturity date of PPPLF loans will be the same as the maturity date of the PPP loans pledged as collateral. The PPPLF loan maturity date will be accelerated if the underlying PPP loan goes into default and the lender sells the PPP loan to the SBA under the SBA guarantee. The PPPLF loan maturity date also will be accelerated for any loan forgiveness reimbursement received by the lender from the SBA.
In April 2020, Bank 34 received approval to borrow from the FRB under the PPPLF program to assist in funding PPP loans, and the FRB Discount Window for short-term borrowing needs. The FRB Discount Window currently lends funds to eligible institutions for short-term needs at 25 basis points. Through April 28, 2020, Bank 34 had not utilized either FRB program for funding.
Loan Modifications/Troubled Debt Restructurings. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Bank 34 has made that election. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief will not be considered TDRs.
Prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.
Bank 34 handles loan payment modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on our customer and their current and projected cash flows through the term of the loan. Through April 29, 2020, we modified 42 loans with principal balances totaling $42.1 million representing 13.5% of our March 31, 2020 loan balances and have 25 additional applications on loan balances of $23.5 million which would represent another 7.5% of March 31, 2020 loan balances. Payment deferral terms vary, but generally include three or six month deferrals of total payments or continuing interest-only payments over those periods. A majority of deferrals are for three-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. It is too early to determine if these modified loans will perform in accordance with their modified terms.
Allowance for Loan Losses. The Company maintains the allowance for loan losses at a level adequate to absorb all estimated inherent losses in the loan and lease portfolio. The COVID-19 pandemic has materially affected our determination of an adequate allowance for loan losses and may continue to going forward. Based upon the uncertainties related to COVID-19, the Company increased the March 31, 2020 allowance for loan losses by $350,000, or 12%, and plans to continue to closely monitor the effects of the pandemic on the ability of its borrowers to repay their debt going forward. It is possible larger increases in the allowance for loan losses will be necessary in the future due to the COVID-19 pandemic or its after-effects.
Liquidity and Capital Resources Effects. It is possible significant deposit withdrawals, reductions in interest and principal payments on loans, tightening of the capital markets, or other COVID-19 pandemic-related activities will have a negative effect on the liquidity and capital resources of the Company in the future. The ability to pay dividends or conduct stock repurchases is limited under applicable banking regulations and regulatory policies, due to losses for the period, expected losses for future periods and/or the inability to upstream funds from a financial institution to its holding company as a result of lower income or regulatory capital levels. The Company may consider, or be required to, suspend stock repurchase activities, or may suspend, or reduce the level of quarterly dividends.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable, as the Registrant is a smaller reporting company.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2020. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended March 31, 2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Not applicable, as the Registrant is a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
|
(a) |
Not applicable. |
|
|
|
|
|
|
(b) |
Not applicable. |
|
|
|
|
|
|
(c) |
On May 24, 2019, the Company adopted a second repurchase program under which it was authorized to repurchase up to 167,747 shares of its common stock, or approximately 5.0% of the Company’s outstanding shares. Through March 31, 2020, stock repurchased under this program totaled 157,042, or 94% of authorized shares. The program will continue until it is completed or terminated by the Company’s Board of Directors.
The Company did not repurchase common stock in the three months ended March 31, 2020. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
101 |
|
The following financial statements from the Bancorp 34, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Statements of Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Incorporated by reference to the Registration Statement on Form S-1 of Bancorp 34, Inc. (File No. 333-21182), originally filed with the Securities and Exchange Commission on September 3, 2016. |
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.
|
|
BANCORP 34, INC. |
|
|
|
|
|
|
Date: May 5, 2020 |
/s/ Jill Gutierrez |
|
|
|
Jill Gutierrez |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
Date: May 5, 2020 |
/s/ Jan R. Thiry |
|
|
|
Jan R. Thiry |
|
|
|
Executive Vice President and Chief Financial Officer |
|
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jill Gutierrez, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Bancorp 34, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within the entity, particularly during the period in which this report is being prepared; |
|
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: |
May 5, 2020 |
/s/ Jill Gutierrez |
|
|
|
|
Jill Gutierrez |
|
|
|
|
President and Chief Executive Officer |
|
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jan R. Thiry, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Bancorp 34, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within the entity, particularly during the period in which this report is being prepared; |
|
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: |
May 5, 2020 |
/s/ Jan R. Thiry |
|
|
|
|
Jan R. Thiry |
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Jill Gutierrez, President and Chief Executive Officer of Bancorp 34, Inc. (the “Company”), and Jan R. Thiry, Executive Vice President and Chief Financial Officer of the Company, each certify in his or her capacity as an officer of the Company that they have reviewed the quarterly report on Form 10-Q for the quarter ended March 31, 2020 (the “Report”) and that to the best of their knowledge:
|
|
1. |
the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
Date: |
May 5, 2020 |
/s/ Jill Gutierrez |
|
|
|
|
Jill Gutierrez |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: |
May 5, 2020 |
/s/ Jan R. Thiry |
|
|
|
|
Jan R. Thiry |
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.