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 six months ended June 30, 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 or remain open. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, including those in our Arizona markets, which have been particularly negatively affected by COVID-19, the Company could be subject to any of the following risks which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:
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|
●
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demand for products and services may decline, making it difficult to grow assets and income;
|
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●
|
if the economy is unable to substantially reopen or remain open, 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;
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●
|
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
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●
|
the allowance for loan losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
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●
|
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
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●
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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;
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●
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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;
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●
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cyber security risks are increased as the result of an increase in the number of employees working remotely; and
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●
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FDIC premiums may increase if the agency experiences additional resolution costs.
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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:
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●
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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.
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|
●
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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.
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|
|
|
|
|
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●
|
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 tables set 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.
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|
|
Three Months Ended June 30,
|
|
|
|
|
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
|
|
$
|
342,522
|
|
|
$
|
4,467
|
|
|
|
5.25
|
%
|
|
$
|
295,516
|
|
|
$
|
4,414
|
|
|
|
5.99
|
%
|
|
Securities
|
|
|
60,010
|
|
|
|
357
|
|
|
|
2.39
|
%
|
|
|
34,502
|
|
|
|
230
|
|
|
|
2.67
|
%
|
|
Other interest earning assets
|
|
|
13,804
|
|
|
|
18
|
|
|
|
0.52
|
%
|
|
|
20,930
|
|
|
|
128
|
|
|
|
2.45
|
%
|
|
Total interest-earning assets - continuing operations
|
|
|
416,336
|
|
|
|
4,841
|
|
|
|
4.68
|
%
|
|
|
350,948
|
|
|
|
4,772
|
|
|
|
5.45
|
%
|
|
Loans held for sale - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,302
|
|
|
|
190
|
|
|
|
4.40
|
%
|
|
Total interest-earning assets
|
|
|
416,336
|
|
|
|
4,841
|
|
|
|
4.68
|
%
|
|
|
368,250
|
|
|
|
4,962
|
|
|
|
5.40
|
%
|
|
Noninterest-earning assets
|
|
|
25,938
|
|
|
|
|
|
|
|
|
|
|
|
22,992
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
442,274
|
|
|
|
|
|
|
|
|
|
|
$
|
391,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking, money market and savings accounts
|
|
$
|
177,390
|
|
|
$
|
450
|
|
|
|
1.02
|
%
|
|
$
|
148,638
|
|
|
$
|
509
|
|
|
|
1.37
|
%
|
|
Certificates of deposit
|
|
|
77,062
|
|
|
|
402
|
|
|
|
2.09
|
%
|
|
|
78,721
|
|
|
|
403
|
|
|
|
2.05
|
%
|
|
Total deposits
|
|
|
254,452
|
|
|
|
852
|
|
|
|
1.35
|
%
|
|
|
227,359
|
|
|
|
912
|
|
|
|
1.61
|
%
|
|
Advances from FHLB of Dallas - continuing operations
|
|
|
61,868
|
|
|
|
212
|
|
|
|
1.38
|
%
|
|
|
60,967
|
|
|
|
266
|
|
|
|
1.75
|
%
|
|
Total interest-bearing liabilities - continuing operations
|
|
|
316,320
|
|
|
|
1,064
|
|
|
|
1.35
|
%
|
|
|
288,326
|
|
|
|
1,178
|
|
|
|
1.64
|
%
|
|
Advances from FHLB of Dallas - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
Total interest-bearing liabilities
|
|
|
316,320
|
|
|
|
1,064
|
|
|
|
1.35
|
%
|
|
|
288,326
|
|
|
|
1,282
|
|
|
|
1.78
|
%
|
|
Non-interest bearing deposits
|
|
|
73,105
|
|
|
|
|
|
|
|
|
|
|
|
51,390
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
7,024
|
|
|
|
|
|
|
|
|
|
|
|
4,165
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
396,449
|
|
|
|
|
|
|
|
|
|
|
|
343,881
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
45,825
|
|
|
|
|
|
|
|
|
|
|
|
47,361
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
442,274
|
|
|
|
|
|
|
|
|
|
|
$
|
391,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - continuing operations
|
|
|
|
|
|
$
|
3,777
|
|
|
|
|
|
|
|
|
|
|
$
|
3,594
|
|
|
|
|
|
|
Net interest rate spread - continuing operations (2)
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
|
Net interest margin - continuing operations (4)
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
3,777
|
|
|
|
|
|
|
|
|
|
|
$
|
3,680
|
|
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
|
Net interest-earning assets (3)
|
|
$
|
100,016
|
|
|
|
|
|
|
|
|
|
|
$
|
79,924
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
131.62
|
%
|
|
|
|
|
|
|
|
|
|
|
127.72
|
%
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
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
|
|
$
|
323,049
|
|
|
$
|
9,088
|
|
|
|
5.66
|
%
|
|
$
|
292,466
|
|
|
$
|
8,567
|
|
|
|
5.91
|
%
|
|
Securities
|
|
|
52,581
|
|
|
|
644
|
|
|
|
2.46
|
%
|
|
|
33,961
|
|
|
|
454
|
|
|
|
2.70
|
%
|
|
Other interest earning assets
|
|
|
15,933
|
|
|
|
91
|
|
|
|
1.15
|
%
|
|
|
20,233
|
|
|
|
250
|
|
|
|
2.49
|
%
|
|
Total interest-earning assets - continuing operations
|
|
|
391,563
|
|
|
|
9,823
|
|
|
|
5.05
|
%
|
|
|
346,660
|
|
|
|
9,271
|
|
|
|
5.39
|
%
|
|
Loans held for sale - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,191
|
|
|
|
369
|
|
|
|
4.60
|
%
|
|
Total interest-earning assets
|
|
|
391,563
|
|
|
|
9,823
|
|
|
|
5.05
|
%
|
|
|
362,851
|
|
|
|
9,640
|
|
|
|
5.36
|
%
|
|
Noninterest-earning assets
|
|
|
25,164
|
|
|
|
|
|
|
|
|
|
|
|
23,303
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
416,727
|
|
|
|
|
|
|
|
|
|
|
$
|
386,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking, money market and savings accounts
|
|
$
|
175,454
|
|
|
$
|
1,009
|
|
|
|
1.16
|
%
|
|
$
|
146,991
|
|
|
$
|
976
|
|
|
|
1.34
|
%
|
|
Certificates of deposit
|
|
|
79,407
|
|
|
|
828
|
|
|
|
2.10
|
%
|
|
|
79,387
|
|
|
|
797
|
|
|
|
2.02
|
%
|
|
Total deposits
|
|
|
254,861
|
|
|
|
1,837
|
|
|
|
1.45
|
%
|
|
|
226,378
|
|
|
|
1,773
|
|
|
|
1.58
|
%
|
|
Advances from FHLB of Dallas - continuing operations
|
|
|
47,418
|
|
|
|
403
|
|
|
|
1.71
|
%
|
|
|
60,630
|
|
|
|
544
|
|
|
|
1.81
|
%
|
|
Total interest-bearing liabilities - continuing operations
|
|
|
302,279
|
|
|
|
2,240
|
|
|
|
1.49
|
%
|
|
|
287,008
|
|
|
|
2,317
|
|
|
|
1.63
|
%
|
|
Advances from FHLB of Dallas - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
Total interest-bearing liabilities
|
|
|
302,279
|
|
|
|
2,240
|
|
|
|
1.49
|
%
|
|
|
287,008
|
|
|
|
2,515
|
|
|
|
1.77
|
%
|
|
Non-interest bearing deposits
|
|
|
62,695
|
|
|
|
|
|
|
|
|
|
|
|
47,810
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
5,937
|
|
|
|
|
|
|
|
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
370,911
|
|
|
|
|
|
|
|
|
|
|
|
338,982
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
45,816
|
|
|
|
|
|
|
|
|
|
|
|
47,172
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
416,727
|
|
|
|
|
|
|
|
|
|
|
$
|
386,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - continuing operations
|
|
|
|
|
|
$
|
7,584
|
|
|
|
|
|
|
|
|
|
|
$
|
6,954
|
|
|
|
|
|
|
Net interest rate spread - continuing operations (2)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
|
Net interest margin - continuing operations (4)
|
|
|
|
|
|
|
|
|
|
|
3.90
|
%
|
|
|
|
|
|
|
|
|
|
|
4.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
7,584
|
|
|
|
|
|
|
|
|
|
|
$
|
7,125
|
|
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
3.59
|
%
|
|
Net interest-earning assets (3)
|
|
$
|
89,284
|
|
|
|
|
|
|
|
|
|
|
$
|
75,843
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.90
|
%
|
|
|
|
|
|
|
|
|
|
|
3.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
129.54
|
%
|
|
|
|
|
|
|
|
|
|
|
126.43
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Yield/Rate for the six-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 June 30, 2020 and December 31, 2019
Cash and cash equivalents were $17.4 million at June 30, 2020 and $29.5 million at December 31, 2019. Daily cash and cash equivalent balances generally vary 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 $19.1 million, or 42.8%, during the six months ended June 30, 2020 to $63.6 million. We sold five securities for proceeds of $1.9 million and purchased $23.1 million in the six months ended June 30, 2020. Purchases included one $10.0 million security with an attractive yield available as some national, leveraged funds were forced to liquidate their holdings.
Loans held for investment increased $56.6 million, or 19.2%, to $351.3 million at June 30, 2020 from $294.7 million at December 31, 2019, including $36.1 million in Paycheck Protection Program ("PPP") loans and $20.5 million from organic growth. In the six months ended June 30, 2020, commercial real estate loans increased $15.2 million, or 6.3% to $257.9 million and represented 73.1% of the gross loan portfolio at June 30, 2020, compared to 82.1% at December 31, 2019. Commercial and industrial loans increased $46.7 million, or 232.6%, from $20.1 million at December 31, 2019 to $66.8 million at June 30, 2020, including $36.1 million in new PPP loans originated beginning in April 2020.
Total deposits increased $27.0 million, or 8.9%, to $330.9 million at June 30, 2020 from $303.9 million at December 31, 2019. The increase included a $15.3 million, or 27.2%, increase in non-interest bearing demand deposits and a $15.3 million, or 9.2%, increase in savings and NOW deposits, partially offset by a $3.6 million, or 4.5%, decrease in time deposits. We believe a majority of the increase in non-interest bearing demand deposits was due to PPP loan proceeds being left on deposit at the Bank.
Federal Home Loan Bank advances increased $35.0 million, or 87.5%, to $75.0 million at June 30, 2020 compared to $40.0 million at December 31, 2019. The additional advances were primarily used to fund PPP loans, other portfolio loans and available-for-sale security growth. We generally utilize short-term borrowings to fund short-term needs and long-term borrowings and some short-term borrowings to fund net growth in loans held for investment or available-for-sale securities.
Accrued interest and other liabilities increased $409,000, or 9.6%, to $4.7 million at June 30, 2020 compared to $4.3 million at December 31, 2019.
Total stockholders’ equity increased $565,000 to $45.6 million at June 30, 2020 from $45.1 million at December 31, 2019. The largest changes in stockholders’ equity for the six months ended June 30, 2020 were increases of $1.2 million in the fair value of available-for-sale securities net of tax and $464,000 in retained earnings, and a $1.1 million decrease for previously unrecognized defined benefit plan prior service cost. The change in retained earnings included a $780,000 increase from net income and a decrease of $316,000 for dividends. Equity award amortization for non-cash benefits included as expense in our income statements increased equity $188,000 and share repurchases reduced equity $111,000.
Comparison of Operating Results for the Three Months Ended June 30, 2020 and 2019
General. We had net income from continuing operations of $502,000 for the three months ended June 30, 2020, which was $11,000, or 2.1%, less than net income from continuing operations of $513,000 for the three months ended June 30, 2019. The decrease was primarily caused by $550,000 in additional COVID-19-related ALLL provisions and a $257,0000, or 103.7%, decrease in noninterest income, including a $206,000 fixed asset impairment, partially offset by a $518,000, or 16.7%, decrease in noninterest expense and a $183,000, or 5.1%, increase in net interest income.
We had no net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, for the quarter ended June 30, 2020 compared to a net loss from discontinued operations of $853,000 for the three months ended June 30, 2019 including a $752,000 net loss on disposal of discontinued operations. The decrease was due to the mortgage banking business exit in June 2019.
Interest Income. Interest income from continuing operations increased $69,000, or 1.4%, and was $4.8 million for the three months ended June 30, 2020. The increase was due to a $65.4 million, or 18.6%, increase in average interest-earning assets from continuing operations partially offset by a 77 basis point decrease in average yields. The average balance of loans, our highest yielding asset, increased $47.0 million, or 15.9%, but decreased to 82.3% of average interest-earning assets from 84.2% of average interest-earning assets. PPP loans, mostly originated in the early part of the second quarter of 2020, represented $28.7 million, or 43.9%, of the $65.4 million increase in average loan balances and contributed to the decrease in yields since the interest rate on them is 1.00% and their yield with deferred origination fee income and cost averaged 1.96%, well below traditional loan yields.
The decrease in yield on average interest earning assets included a 74 basis point decrease in the yield on loans and a 28 basis point decrease in securities yield caused by rapid declines in market interest rates and the introduction of low yielding PPP loans as noted above. Interest income on loans increased $57,000, or 1.3%, due to a $47.0 million, or 15.9%, increase in average loan balances due to PPP loans and organic growth and a 74 basis point decrease in yield discussed above. Interest income on securities increased $127,000, or 55.2%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to a $25.5 million, or 73.9%, increase in average securities balances partially offset by a 28 basis point decrease in yield from the lower interest rate environment.
Interest Expense. Interest expense from continuing operations decreased $115,000, or 9.8%, to $1.1 million for the three months ended June 30, 2020 from $1.2 million for the three months ended June 30, 2019. The decrease was the result of a decrease of $61,000, or 6.7%, in interest expense on deposits and a decrease of $54,000, or 20.3%, in interest expense on borrowings. Both decreases were the result of repricing and new fund balances at much lower rates than in 2019 or earlier periods due to rapid market rate decreases which accelerated in March 2020.
Interest paid on checking, money market and savings accounts decreased $59,000, or 11.6%, to $450,000 for the three months ended June 30, 2020 from $509,000 for the three months ended June 30, 2019. The average rate we paid on such deposit accounts decreased 35 basis points to 1.02% for the three months ended June 30, 2020 from 1.37% for the three months ended June 30, 2019. The average balance increased $28.8 million, or 19.3%, to $177.4 million for the three months ended June 30, 2020 from $148.6 million for the three months ended June 30, 2019. Interest expense on certificates of deposit decreased $2,000 due to an average balance decrease of $1.7 million partially offset by a four basis point increase in average rates paid.
The average rates we pay on deposits is considerably higher in our Arizona market.
Interest expense on borrowings – continuing operations decreased $54,000, or 20.3%, from the quarter ended June 30, 2019 to the quarter ended June 30, 2020 due to a 37 basis point, or 21.2% decrease in average rate paid partially offset by a $901,000, or 1.5% increase in average balance.
Net Interest Income. Net interest income from continuing operations increased $189,000, or 5.3%, and was $3.8 million for the three months ended June 30, 2020 compared to $3.6 million for the three months ended June 30, 2019, due to a $65.4 million, or 18.6% increase in average interest earning assets partially offset by a 49 basis point, or 12.7% decrease in net interest rate spread to 3.33% for the three months ended June 30, 2020 from 3.82% for the three months ended June 30, 2019. Average interest earning assets yield for continuing operations decreased 72 basis points, or 13.3%, compared to a 29 basis point decrease in average interest bearing liability rates. Continuing operations average net interest-earning assets represented 131.62% of average interest bearing liabilities for the three months ended June 30, 2020, compared to 127.72% for the three months ended June 30, 2019 due to PPP loans originated early in the quarter and organic loan growth and PPP loan proceeds retained by clients in non-interest bearing demand deposit accounts.
We had no net interest income from discontinued operations for the three months ended June 30, 2020 compared to $86,000 for the three months ended June 301, 2019 due to the mortgage banking business exit in June 2019. Average mortgage loans held for sale was $0 for the three months ended June 30, 2020 compared to $17.3 million for the three months ended June 30, 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 $577,000 and $85,000 for the three months ended June 30, 2020 and 2019, respectively. In the three months ended June 30, 2020, the allowance for loan losses increased $579,000, reflecting $577,000 in provisions and $2,000 in net recoveries. The provision for the three months ended June 30, 2020 included $550,000 for probable losses from the effects of COVID-19 and the recession and $27,000 for non-PPP loan growth in the quarter. The $550,000 COVID-19 provision in the second quarter of 2020 was in addition to the $350,000 provision increase in the first quarter of 2020. The total $900,000 allowance for loan loss provisions taken in the first six months of 2020 for COVID-19 and the recession represent 30.8% of the December 31, 2019 allowance for loan losses. The Company will continue to closely monitor the effects of the pandemic and recession on the ability of its borrowers to repay their debt going forward.
To the best of our knowledge, at June 30, 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 decreased $257,000, or 103.7%, to a net loss of $9,000 for the three months ended June 30, 2020 compared to income of $248,000 for the three months ended June 30, 2019 due primarily to a $206,000 loss on disposal of fixed assets in the three months ended June 30, 2020 and a $29,000 decrease in SBA and USDA sales gains.
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 June 30, 2020 compared to $2.1 million for the three months ended June 30, 2019. We sold $70.4 million of mortgage loans during the three months ended June 30, 2019 and realized sales gains equal to 4.2% of loans sold.
Noninterest Expense. Noninterest expense from continuing operations decreased $518,000, or 16.7%, to $2.6 million for the three months ended June 30, 2020 from $3.1 million for the three months ended June 30, 2019. Average assets from continuing operations for the quarter ended June 30, 2020 were $51.0 million, or 13.0%, larger than for the quarter ended June 30, 2019. The primary reasons for the decrease included a $344,000, or 20.9% decrease in salaries and benefits, an $85,000, or 37.6% decrease in professional fees and a $90,000, or 33.3%, decrease in other noninterest expense. The reduced salaries and benefits was primarily due to expenses related to PPP loan originations being deferred and amortized over the 24 month contractual PPP loan terms on a level yield basis. The reduction in professional fees included decreases in legal and other professional fee expense. The reduction in other noninterest expense was primarily due to decreased travel and entertainment expense due to Company-imposed travel restrictions due to the COVID-19 pandemic.
Provision for Income Tax. Provision for income tax expense from continuing operations was $110,000 for the three months ended June 30, 2020, representing an effective tax rate of 18.0% 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 $148,000 for the three months ended June 30, 2019 representing 22.4% of the $661,000 income from continuing operations before income taxes.
There was no benefit or expense for income taxes from discontinued operations for the three months ended June 30, 2020. We recognized a benefit for income taxes from discontinued operations of $280,000 for the three months ended June 30, 2019 representing 24.7% of the $1.1 million loss before benefit for income taxes.
Comparison of Operating Results for the Six Months Ended June 30, 2020 and 2019
General. We had net income from continuing operations of $780,000 for the six months ended June 30, 2020, which was $120,000, or 13.3%, less than net income from continuing operations of $900,000 for the six months ended June 30, 2019. The decrease was primarily caused by an $877,000 increase in the provision for loan losses and a $222,000, or 47.0%, decrease in noninterest income, partially offset by a $314,000, or 5.2%, decrease in noninterest expense.
We had no net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, for the six months ended June 30, 2020 compared to a net loss from discontinued operations of $1.2 million for the six months ended June 30, 2019 including a $752,000 net loss on disposal of discontinued operations. We ceased mortgage banking operations in June 2019.
Interest Income. Interest income from continuing operations increased $552,000, or 5.9%, to $9.8 million for the six months ended June 30, 2020 from $9.3 million for the six months ended June 30, 2019. The increase was due to a $44.9 million, or 13.0%, increase in average interest-earning assets from continuing operations partially offset by a 34 basis point decrease in average yields. The average balance of loans, our highest yielding asset, increased $30.6 million, or 10.5%, but decreased to 82.5% of average interest-earning assets from 84.4% of average interest-earning assets. The decrease in yield on average interest earning assets was primarily due to a 25 basis point decrease in the yield on loans and a 23 basis point decrease in yields on securities. Interest income on loans increased $527,000, or 6.2%, due to a $30.6 million, or 10.5%, increase in average loan balances due to the addition of PPP loans and organic growth partially offset by a 25 basis point decrease in yield as discussed above. Interest income on securities increased $190,000, or 41.9%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to an $18.6 million, or 54.8%, increase in average securities balances partially offset by a 23 basis point decrease in yield from the lower interest rate environment.
Interest Expense. Interest expense from continuing operations decreased $78,000, or 3.4%, to $2.2 million for the six months ended June 30, 2020 from $2.3 million for the six months ended June 30, 2019. The decrease was the result of a decrease of $141,000, or 26.0%, in interest expense on borrowings, partially offset by an increase of $64,000, or 3.6%, in interest expense on deposits.
Interest paid on checking, money market and savings accounts increased $33,000, or 3.4%, to $1.0 million for the six months ended June 30, 2020 from $976,000 for the six months ended June 30, 2019. The average rate we paid on such deposit accounts decreased 18 basis points to 1.16% for the six months ended June 30, 2020 from 1.34% for the six months ended June 30, 2019. The average balance increased $28.5 million, or 19.4%, to $175.5 million for the six months ended June 30, 2020 from 147.0 million for the six months ended June 30, 2019.
Interest on certificates of deposit increased $31,000, or 3.9%, to $828,000 for the six months ended June 30, 2020 from $797,000 for the six months ended June 30, 2019. The average rate paid on certificates of deposit increased eight basis points to 2.10% for the six months ended June 30, 2020 compared to 2.02% for the six months ended June 30, 2019 due to increases in market interest rates in the early part of 2020.
The average rates we pay on deposits is considerably higher in our Arizona market.
The average balance of borrowings – continuing operations decreased $13.2 million, or 21.8%, from the six months ended June 30, 2019 to the six months ended June 30, 2020 and the average rate paid decreased 10 basis points to 1.71% for the six months ended June 30, 2020 from 1.81% for the six months ended June 30, 2019.
Net Interest Income. Net interest income from continuing operations increased $635,000, or 9.1%, and was $7.6 million for the six months ended June 30, 2020 compared to $7.0 million for the six months ended June 30, 2019, due to a $44.9 million, or 13.0%, increase in average interest earning assets and a 21 basis point decrease in net interest rate spread to 3.56% for the six months ended June 30, 2020 from 3.77% for the six months ended June 30, 2019. Average interest earning assets yield for continuing operations decreased 34 basis points compared to a 28 basis point decrease in average interest bearing liability rates. Continuing operations average net interest-earning assets represented 129.54% of average interest bearing liabilities for the six months ended June 30, 2020, compared to 126.43% for the six months ended June 30, 2019 due to organic and PPP loan growth.
We had no net interest income from discontinued operations for the six months ended June 30, 2020 compared to $171,000 for the six months ended June 301, 2019 due to the mortgage banking business exit in June 2019. Average mortgage loans held for sale was $0 for the six months ended June 30, 2020 compared to $16.2 million for the six months ended June 30, 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 $1.0 million and $173,000 for the six months ended June 30, 2020 and 2019, respectively. In the six months ended June 30, 2020, the allowance for loan losses increased $1.1 million, reflecting $1.0 million in provisions and $4,000 in net recoveries. The larger provision for the six months ended June 30, 2020 was primarily due to probable losses from the effects of COVID-19 and the $20.6 million loan growth excluding PPP loans. Based upon the uncertainties related to COVID-19, the Company increased its June 30, 2020 allowance for loan losses $900,000, or 30.8% compared to the December 31, 2019 ALLL balance, 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 June 30, 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 decreased $222,000, or 47.0%, to $251,000 for the six months ended June 30, 2020 from $473,000 for the six months ended June 30, 2019 due primarily to a $206,000 loss on disposal of fixed assets in the six months ended June 30, 2020. There was a $3,000 gain on sale of SBA and USDA loans from continuing operations for the six months ended June 30, 2020 compared to $58,000 for the six months ended June 30, 2019. We had one SBA loan sale and $3,000 sale gain recognized directly into income in the six months ended June 30, 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 six months ended June 30, 2020 compared to $4.8 million for the six months ended June 30, 2019. We sold $143.7 million of mortgage loans during the six months ended June 30, 2019 and realized sales gains equal to 4.2% of loans sold.
Noninterest Expense. Noninterest expense from continuing operations decreased $314,000, or 5.2%, to $5.8 million for the six months ended June 30, 2020 from $6.1 million for the six months ended June 30, 2019. Average assets from continuing operations for the six months ended June 30, 2020 were 7.9% larger than for the six months ended June 30, 2019. The decrease in noninterest expense was primarily related to lower salaries and benefits, professional fees and travel and entertainment. The reduced salaries and benefits was primarily due to expenses related to PPP loan originations being deferred and amortized over the 24 month contractual PPP loan terms on a level yield basis. The reduction in professional fees included decreases in legal and other professional fee expense. The reduction in other noninterest expense was primarily due to decreased travel and entertainment expense due to Company-imposed travel restrictions due to the COVID-19 pandemic.
Provision for Income Tax. Provision for income tax expense from continuing operations was $231,000 for the six months ended June 30, 2020, representing an effective tax rate of 22.8% 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. Provision for income tax expense from continuing operations was $267,000 for the six months ended June 30, 2019 representing 22.97% of the $1.2 million income from continuing operations before income taxes.
There was no benefit or expense for income taxes from discontinued operations for the six months ended June 30, 2020. We recognized a benefit for income taxes from discontinued operations of $392,000 for the six months ended June 30, 2019 representing 24.7% of the $1.6 million 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.
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
$
|
754
|
|
|
$
|
787
|
|
|
Commercial real estate ("CRE")
|
|
|
2,578
|
|
|
|
2,719
|
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
-
|
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
Total nonaccrual loans
|
|
|
3,332
|
|
|
|
3,506
|
|
|
Accruing loans past due 90 days or more
|
|
|
-
|
|
|
|
-
|
|
|
Total nonaccrual loans and accruing loans past due 90 days or more
|
|
|
3,332
|
|
|
|
3,506
|
|
|
Other real estate
|
|
|
-
|
|
|
|
-
|
|
|
Total nonperforming assets
|
|
$
|
3,332
|
|
|
$
|
3,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to gross loans held for investment
|
|
|
0.94
|
%
|
|
|
1.19
|
%
|
|
Excluding PPP loans
|
|
|
1.05
|
%
|
|
|
1.19
|
%
|
|
Nonperforming assets to total assets
|
|
|
0.73
|
%
|
|
|
0.89
|
%
|
|
Excluding PPP loans
|
|
|
0.79
|
%
|
|
|
0.89
|
%
|
|
Nonperforming assets to gross loans held for investment and ORE
|
|
|
0.94
|
%
|
|
|
1.19
|
%
|
|
Excluding PPP loans
|
|
|
1.05
|
%
|
|
|
1.19
|
%
|
Nonaccrual loan balances guaranteed by the SBA were $2.3 million, or 69.0%, and $2.3 million, or 66.0%, of the nonaccrual loan balances at June 30, 2020 and December 31, 2019, respectively.
Due to the decrease in nonaccrual loans, the nonperforming asset ratios decreased from December 31, 2019 to June 30, 2020.
Interest income that would have been recorded for the six months ended June 30, 2020, had nonaccruing loans been current according to their original terms amounted to $103,000. We recognized no interest income on nonaccrual loans and $2,000 related to troubled debt restructurings for the six months ended June 30, 2020.
As of June 30, 2020 and December 31, 2019 we had $69,000 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3,397
|
|
|
$
|
2,981
|
|
|
$
|
2,922
|
|
|
$
|
2,901
|
|
|
Provision for loan losses
|
|
|
577
|
|
|
|
85
|
|
|
|
1,049
|
|
|
|
172
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
Commercial real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate loans
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
2
|
|
|
Commercial real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total recoveries
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
4
|
|
|
Net (charge-offs) recoveries
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,976
|
|
|
$
|
3,068
|
|
|
$
|
3,976
|
|
|
$
|
3,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
119.33
|
%
|
|
|
85.45
|
%
|
|
|
119.33
|
%
|
|
|
85.45
|
%
|
|
Allowance for loan losses to total loans
|
|
|
1.13
|
%
|
|
|
1.05
|
%
|
|
|
1.13
|
%
|
|
|
1.05
|
%
|
|
Excluding PPP
|
|
|
1.26
|
%
|
|
|
1.05
|
%
|
|
|
1.26
|
%
|
|
|
1.05
|
%
|
|
Allowance for loan losses to total loans less acquired loans
|
|
|
1.13
|
%
|
|
|
1.05
|
%
|
|
|
1.13
|
%
|
|
|
1.05
|
%
|
|
Excluding PPP
|
|
|
1.26
|
%
|
|
|
1.05
|
%
|
|
|
1.26
|
%
|
|
|
1.05
|
%
|
|
Net (charge-offs) recoveries to average loans outstanding during the period
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
|
Excluding PPP
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
The ratio of our allowance for loan losses to nonperforming loans increased due to a 29.6% increase in the allowance for loan losses primarily due to COVID-19 additions and a 7.2% decrease in nonperforming loans. The allowance for loan losses to total loans ratios increased because the allowance for loan losses increased 29.6% and total gross loans increased 19.7%. In addition, the allowance for loan losses ratios are decreased due to the $36.1 million of PPP loans in the June 30, 2020 loan balances, for which we have not provided for loan losses.
See “Additional COVID-19 Information” at the end of this "Management's Discussion and Analysis . . . " for information regarding Paycheck Protection Loans, loan modifications and SBA 7(a) loan payments.
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 June 30, 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 June 30, 2020, cash and cash equivalents totaled $17.4 million. Available-for-sale securities, which provide additional sources of liquidity, totaled $63.6 million at June 30, 2020. In addition, at June 30, 2020, we had $75.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to borrow an additional $76.9 million from the FHLB, and $9.8 million and $6.0 million through Fed Funds facilities from other correspondent banks. In April 2020 we were approved to borrow from the Federal Reserve Bank ("FRB") through their discount window for up to $14.3 million and from their Paycheck Protection Program Liquidity Facility ("PPPLF") for up to 100% of our $36.1 million principal balance of PPP loans at 25 basis points. Through June 30, 2020, we have not utilized either of the FRB programs.
At June 30, 2020, we had $29.7 million in loan commitments outstanding. In addition, we had $22.4 million in unused lines of credit. Time deposits due within one year of June 30, 2020 totaled $60.8 million, or 18.4% 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 June 30, 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 six months ended June 30, 2020, we originated $97.4 million of loans held for investment, including $36.1 million in PPP loans, and zero mortgage loans held for sale, compared to $44.6 million of loans held for investment and $19.8 million of mortgage loans held for sale during the six months ended June 30, 2019. In the six months ended June 30, 2020 and 2019 we purchased $23.1 million and $3.2 million 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 $27.0 million and $14.2 million in total deposits for the six months ended June 30, 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. Deposit growth in 2020 included PPP loan proceeds not withdrawn from the Bank through June 30, 2020.
We had $75.0 million in Federal Home Loan Bank advances at June 30, 2020, compared to $40.0 million at December 31, 2019. The $35.0 million in additional borrowings was primarily used to fund PPP loans.
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 June 30, 2020, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $1.4 million. In each of the quarters from June 2019 through June 30, 2020, the Company paid quarterly cash dividends of $0.05 per share to shareholders. Dividends paid in the six months ended June 30, 2020 totaled $316,000. Cash used to repurchase shares in the six months ended June 30, 2020 totaled $111,000.
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 June 30, 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 June 30, 2020, Bank 34 funded 277 PPP loans with total principal balances of $36.1 million. Bank 34 has limited PPP loans to 135% of Tier 1 Capital plus allowance for loan loss, or approximately $45.0 million using June 30, 2020 data.
Paycheck Protection Program Liquidity Facility. The CARES Act also allocated a limited amount of funds to the 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 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 lends funds to eligible institutions for short-term needs. Through June 30, 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. 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. At June 30, 2020 portfolio loans included 63 modified loans with principal balances totaling $59.2 million representing 18.7% of total non-PPP 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. Deferral periods began in April and May for most of of these loans. It is too early to determine if these modified loans will perform in accordance with their modified terms when they go back into regular monthly payment status.
The following tables give further information regarding loan payment deferrals granted as of June 30, 2020.
|
Commercial Payment Deferrals by Industry as of June 30, 2020
|
|
|
|
|
Loan Balance
|
|
|
% of Industry Total
|
|
|
Average Balance
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
CRE - Multifamily
|
|
$
|
13,171
|
|
|
|
23%
|
|
|
$
|
2,195
|
|
|
Hotel - Owner Managed
|
|
|
11,926
|
|
|
|
53%
|
|
|
|
1,491
|
|
|
CRE - Retail
|
|
|
10,524
|
|
|
|
70%
|
|
|
|
1,169
|
|
|
CRE - Other
|
|
|
6,485
|
|
|
|
50%
|
|
|
|
649
|
|
|
CRE - Retail Strip Center
|
|
|
6,311
|
|
|
|
33%
|
|
|
|
1,262
|
|
|
CRE - National Credit Tenant
|
|
|
3,645
|
|
|
|
35%
|
|
|
|
3,645
|
|
|
CRE - Office
|
|
|
2,854
|
|
|
|
14%
|
|
|
|
951
|
|
|
CRE - Mobile Home Park
|
|
|
796
|
|
|
|
3%
|
|
|
|
398
|
|
|
CRE - Industrial
|
|
|
691
|
|
|
|
8%
|
|
|
|
345
|
|
|
Commercial and Industrial
|
|
|
432
|
|
|
|
2%
|
|
|
|
108
|
|
|
One-to-Four Family Investment
|
|
|
53
|
|
|
|
0%
|
|
|
|
53
|
|
|
Total Deferrals
|
|
$
|
56,888
|
|
|
|
|
|
|
|
|
|
The above includes 51 loans representing 34 relationships and 20% of our commercial portfolio.
|
Commercial Payment Deferrals by Deferral Type as of June 30, 2020
|
|
|
|
|
Loan Balance
|
|
|
% of Total
|
|
|
|
|
|
(dollars in thousands)
|
|
|
Interest Only
|
|
$
|
18,951
|
|
|
|
33%
|
|
|
Three Month Principal and Interest
|
|
|
24,405
|
|
|
|
43%
|
|
|
Six Month Principal and Interest
|
|
|
13,532
|
|
|
|
24%
|
|
|
Total Deferrals
|
|
$
|
56,888
|
|
|
|
|
|
|
Residential Mortgage Deferrals as of June 30, 2020
|
|
|
|
|
Dollars
|
|
|
% of Portfolio
|
|
|
Average Balance
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
12 Loans
|
|
$
|
2,334
|
|
|
|
9%
|
|
|
$
|
195
|
|
SBA 7(a) Loan Payments. As part of the CARES Act, the SBA agreed to make six months of loan payments on new SBA loans originated between March 27, 2020 and September 27, 2020 and existing current SBA loans beginning with payments due on or after March 27, 2020. Bank 34 had $7.5 million in SBA loans at June 30, 2020 which qualify and are receiving payments from the SBA under that program.
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 allowance for loan losses by $900,000, or 30.8% of the pre-COVID-19 December 31, 2019 ALLL balance, 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.