Quarterly Report (10-q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended September 30, 2019

[ ]	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 10^th 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 X 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 X 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	X

		Emerging growth company	X

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 X

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of October 24, 2019 were 3,209,218.

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Table of Contents

Bancorp 34, Inc.
FORM 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	3

	Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2019 and 2018 (unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months ended September 30, 2019 (unaudited) and Year Ended December 31, 2018	5

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

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	33

Part II. Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

Signatures		35

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Item 1. Financial Statements

BANCORP 34, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED

	September 30, 2019			December 31, 2018

ASSETS
Cash and due from banks	$	6,829,878		$	6,374,457
Interest-bearing deposits with banks		8,835,000			5,400,000
Total cash and cash equivalents		15,664,878			11,774,457

Available-for-sale securities, at fair value		40,572,382			33,428,658
Loans held for sale, at fair value		1,607,168			-
Loans held for sale - discontinued operations		190,675			26,884,014

Loans held for investment		302,305,425			285,691,372
Allowance for loan losses		(3,071,322	)		(2,901,091	)
Loans held for investment, net		299,234,103			282,790,281

Premises and equipment, net		9,134,011			9,558,943
Premises and equipment, net - discontinued operations		-			56,683
Stock in financial institutions, restricted, at cost		3,992,960			3,910,361
Accrued interest receivable		969,247			863,513
Accrued interest receivable - discontinued operations		894			11,527
Deferred income taxes, net		1,892,171			2,196,928
Bank owned life insurance		10,781,728			10,573,069
Core deposit intangible, net		141,914			172,108
Prepaid and other assets		1,091,830			815,950
Prepaid and other assets - discontinued operations		-			241,415

TOTAL ASSETS	$	385,273,961		$	383,277,907

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits	$	52,070,216		$	45,350,477
Savings and NOW deposits		163,372,460			142,349,920
Time deposits		80,093,824			77,538,576
Total deposits		295,536,500			265,238,973

Federal Home Loan Bank advances		40,000,000			67,000,000
Escrows		397,455			228,816
Escrows - discontinued operations		665			149,776
Accrued interest and other liabilities		4,081,205			3,520,201
Accrued interest and other liabilities - discontinued operations		452,424			717,407
Total liabilities		340,468,249			336,855,173

Commitments and contingencies (note 5)		-			-

Stockholders’ equity
Preferred stock, $0.01 par value, 50,000,000 authorized, 0 issued and outstanding		-			-
Common stock, $0.01 par value, 100,000,000 authorized, 3,205,218 and 3,374,565 issued and outstanding.		32,052			33,746
Additional paid-in capital		23,085,254			25,500,873
Retained earnings		22,759,198			22,928,777
Accumulated other comprehensive income (loss), net of tax		525,634			(396,148	)
Unearned employee stock ownership plan (ESOP) shares		(1,596,426	)		(1,644,514	)
Total stockholders’ equity		44,805,712			46,422,734

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	385,273,961		$	383,277,907

The accompanying notes are an integral part of these consolidated financial statements.

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BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

		Three Months Ended September 30,						Nine Months Ended September 30,
		2019			2018			2019			2018

Interest income
Interest and fees on loans		$	4,392,927		$	4,137,941		$	12,960,225		$	11,680,622
Interest on securities			242,638			172,342			696,711			468,330
Interest on other interest-earning assets			131,181			103,818			381,435			245,394
Total interest income			4,766,746			4,414,101			14,038,371			12,394,346

Interest expense
Interest on deposits			999,703			635,340			2,773,053			1,642,042
Interest on borrowings			242,055			258,699			785,918			511,769
Total interest expense			1,241,758			894,039			3,558,971			2,153,811

Net interest income			3,524,988			3,520,062			10,479,400			10,240,535
Provision for loan losses			-			-			172,500			93,000

Net interest income after provision for loan losses	,		3,524,988			3,520,062			10,306,900			10,147,535

Noninterest income
Gain on sale of loans			199,834			-			258,131			122,988
Service charges and fees			150,915			94,581			360,182			273,545
Bank owned life insurance			93,859			93,214			277,830			272,960
Other			11,223			6,449			32,214			33,390
Total noninterest income			455,831			194,244			928,357			702,883

Noninterest expense
Salaries and benefits			1,773,253			1,635,943			5,005,322			4,665,035
Occupancy			389,598			363,656			1,090,290			1,061,662
Data processing fees			602,029			383,802			1,594,688			1,152,756
FDIC and other insurance (credit) expense			(17,962	)		48,941			128,101			150,806
Professional fees			221,744			245,749			631,234			757,132
Advertising			98,203			33,968			202,401			115,032
Other			276,995			298,485			779,635			893,085
Total noninterest expense			3,343,860			3,010,544			9,431,671			8,795,508

Income from continuing operations before provision for income taxes			636,959			703,762			1,803,586			2,054,910
Provision for income taxes			184,575			159,820			451,327			469,645

Net income from continuing operations			452,384			543,942			1,352,259			1,585,265

Discontinued operations
Loss from discontinued operations			-			(537,080	)		(1,590,638	)		(923,601	)
Benefit for income taxes			-			(135,380	)		(392,193	)		(230,766	)
Net loss from discontinued operations			-			(401,700	)		(1,198,445	)		(692,835	)

NET INCOME			452,384			142,242			153,814			892,430

Other comprehensive income
Unrealized gain (loss) on available-for-sale securities			224,934			(183,705	)		1,212,952			(674,063	)
Tax effect of unrealized (gain) loss on available-for-sale securities			(39,720	)		46,753			(291,170	)		171,849
Unrealized gain (loss) on available-for-sale securities, net of tax			185,214			(136,952	)		921,782			(502,214	)

COMPREHENSIVE INCOME		$	637,598		$	5,290		$	1,075,596		$	390,216

Earnings per common share - Basic
Earnings per common share - continuing operations		$	0.15		$	0.17		$	0.43		$	0.50
Loss per common share - discontinued operations			-			(0.13	)		(0.38	)		(0.22	)
Earnings per common share - Basic		$	0.15		$	0.04		$	0.05		$	0.28

Earnings per common share - Diluted
Earnings per common share - continuing operations		$	0.15		$	0.17		$	0.43		$	0.49
Loss per common share - discontinued operations			-			(0.13	)		(0.38	)		(0.22	)
Earnings per common share - Diluted		$	0.15		$	0.04		$	0.05		$	0.27

The accompanying notes are an integral part of these consolidated financial statements.

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BANCORP 34, INC.

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, 2017		3,490,672		$	34,907		$	26,849,822		$	26,060,598		$	(274,266	)	$	(1,700,372	)	$	50,970,689

Net income		-		$	-		$	-		$	370,627		$	-		$	-		$	370,627
Unrealized loss on available-for-sale securities, net		-			-			-			-			(258,588	)		-			(258,588	)
Restricted stock awards		429			4			(4	)		-			-			-			-
Amortization of equity awards		-			-			93,672			-			-			13,964			107,636
Share repurchase		(102,500	)		(1,025	)		(1,571,025	)		-			-			-			(1,572,050	)
BALANCE MARCH 31, 2018		3,388,601		$	33,886		$	25,372,465		$	26,431,225		$	(532,854	)	$	(1,686,408	)	$	49,618,314

Net income		-		$	-		$	-		$	379,561		$	-		$	-		$	379,561
Unrealized loss on available-for-sale securities, net		-			-			-			-			(106,674	)		-			(106,674	)
Stock option exercise		15,464			155			149,073			-			-			-			149,228
Amortization of equity awards		-			-			95,519			-			-			13,965			109,484
Dividend paid - $1.25 per share		-			-			-			(4,161,114	)		-			-			(4,161,114	)
BALANCE JUNE 30, 2018		3,404,065		$	34,041		$	25,617,057		$	22,649,672		$	(639,528	)	$	(1,672,443	)	$	45,988,799

Net income		-		$	-		$	-		$	142,242		$	-		$	-		$	142,242
Unrealized loss on available-for-sale securities, net		-			-			-			-			(136,952	)		-			(136,952	)
Amortization of equity awards		-			-			154,956			-			-			13,964			168,920
BALANCE SEPTEMBER 30, 2018		3,404,065		$	34,041		$	25,772,013		$	22,791,914		$	(776,480	)	$	(1,658,479	)	$	46,163,009

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 gain 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

Net loss		-		$	-		$	-		$	(339,778	)	$	-		$	-		$	(339,778	)
Unrealized gain on available-for-sale securities, net		-			-			-			-			472,721			-			472,721
Stock option exercise		7,260			73			69,985			-			-			-			70,058
Restricted stock forfeitures		(1,200	)		(12	)		12			-			-			-			-
Amortization of equity awards		-			-			78,374			-			-			15,015			93,389
Share repurchase		(22,995	)		(230	)		(358,170	)		-			-			-			(358,400	)
Dividend paid - $0.05 per share		-			-			-			(165,559	)		-			-			(165,559	)
BALANCE JUNE 30, 2019		3,339,220		$	33,392		$	25,099,268		$	22,464,648		$	340,420		$	(1,611,440	)	$	46,326,288

Net income		-		$	-		$	-		$	452,384		$	-		$	-		$	452,384
Unrealized gain on available-for-sale securities, net		-			-			-			-			185,214			-			185,214
Stock option net settlement		40			-			(23	)		-			-			-			(23	)
Amortization of equity awards		-			-			81,246			-			-			15,014			96,260
Share repurchase		(134,042	)		(1,340	)		(2,095,237	)		-			-			-			(2,096,577	)
Dividend paid - $0.05 per share		-			-			-			(157,834	)		-			-			(157,834	)
BALANCE SEPTEMBER 30, 2019		3,205,218		$	32,052		$	23,085,254		$	22,759,198		$	525,634		$	(1,596,426	)	$	44,805,712

The accompanying notes are an integral part of these consolidated financial statements.

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BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net Income	$	153,814		$	892,430
Less: Net loss from discontinued operations		(1,198,445	)		(692,835	)
Net income from continuing operations		1,352,259			1,585,265
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		467,643			533,643
Stock dividends on financial institution stock		(82,599	)		(58,600	)
Amortization of premiums and discounts on securities, net		80,952			207,696
Amortization of ESOP awards		48,088			41,893
Stock-based compensation expense		245,300			344,147
Amortization of core deposit intangible		30,194			38,341
Gain on sale of loans		(258,131	)		(122,988	)
Proceeds from sale of loans		2,093,318			1,566,494
Provision for loan losses		172,500			93,000
Net appreciation on bank-owned life insurance		(208,659	)		(211,878	)
Deferred income tax expense (benefit)		13,588			(147,095	)
Changes in operating assets and liabilities:
Accrued interest receivable		(95,101	)		(80,992	)
Prepaid and other assets		(34,465	)		(416,994	)
Accrued interest and other liabilities		296,021			756,395
Net cash from operating activities - continuing operations		4,120,908			4,128,327
Net cash from operating activities - discontinued operations		25,494,894			(5,488,401	)
Net cash from operating activities		29,615,802			(1,360,074	)

Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities		4,361,749			4,874,620
Purchases of available-for-sale securities		(10,373,473	)		(9,286,764	)
Purchase of bank-owned life insurance		-			(155,000	)
Net change in loans held for investment		(20,058,679	)		(23,870,830	)
Net disposals (purchases) of premises and equipment		13,973			(188,912	)
Net cash from investing activities		(26,056,430	)		(28,626,886	)

Cash flows from financing activities
Net change in deposits		30,297,527			15,952,080
Net change in escrows		19,528			145,353
Proceeds from Federal Home Loan Bank advances		30,000,000			105,000,000
Repayments of Federal Home Loan Bank advances		(57,000,000	)		(80,000,000	)
Exercise of stock options		70,035			149,228
Dividends paid		(323,393	)		(4,161,114	)
Common stock repurchases		(2,732,648	)		(1,572,050	)
Net cash from financing activities		331,049			35,513,497

Net change in cash and cash equivalents		3,890,421			5,526,537

Cash and cash equivalents, beginning of period		11,774,457			9,873,178

Cash and cash equivalents, end of period	$	15,664,878		$	15,399,715

Supplemental disclosures:
Interest on deposits and advances paid	$	3,518,595		$	2,253,176
Income taxes paid	$	21,000		$	187,600
Loans transferred to loans held for sale	$	3,425,119		$	1,443,506

The accompanying notes are an integral part of these consolidated financial statements.

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BANCORP 34, INC.

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 and nine months ended September 30, 2019 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, 2018.

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.

Emerging Growth Company Status - Bancorp 34 is an emerging growth company under the JOBS Act and expects to lose its status as an emerging growth company at the end of 2019. Bancorp 34 has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.

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.

Subsequent Events – Subsequent events have been evaluated through the date the unaudited consolidated financial statements were issued.

Summary of Recent Accounting Pronouncements:

Bancorp 34 is an emerging growth company and has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. The Company expects to lose its status as an emerging growth company at the end of 2019.

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Revenue Recognition - In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU replaced the most existing revenue recognition guidance in GAAP when it became effective. ASU 2014-09 would have been initially effective for the Company's reporting period beginning January 1, 2018. However, in August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which deferred the effective date by one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606. We adopted the standard on January 1, 2019, using the modified retrospective method, which resulted in no cumulative effect and no other adjustment or significant impact to the timing of revenue recognition.

Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy the performance obligations. Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into categories beyond what is presented in the Consolidated Statements of Income was not necessary. For revenue sources that are within the scope of Topic 606, we fully satisfy our performance obligations and recognize revenue in the period it is earned as services are rendered. Transaction prices are typically fixed, charged on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with our customers.

All of our revenue from contracts with customers in the scope of Accounting Standards Codification (ASC) 606 is recognized in Non-Interest Income. Sources of revenue from contracts with customers that are in the scope of ASC 606 include the following:

• Service Charges on Deposit accounts - We earn monthly account fees and transaction-based fees from our customers for services rendered on deposit accounts. Fees charged to deposit accounts on a monthly basis are recognized as the performance obligation is satisfied at the end of the service period.

• Transaction-based fees - We earn fees based on specific services provided to our customer. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

• ATM and Point of Sale fees – We earn fees when debit cards we issued are used in transactions through card processing networks. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account. The fees are recognized monthly.

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 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 for public companies, but the Company will have 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 are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements and collecting the data necessary for that assessment and adoption.

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.

Premium on Callable Debt - In March 2017, the FASB issued ASU No. 2017-08, “Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20)” to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The adoption of ASU 2017-08 in January 2019 did not have a significant impact on our consolidated financial statements.

Reporting Tax Effects of Tax Cuts and Jobs Act - In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the 2017 Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, and information about the other income tax effects that are reclassified. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We adopted ASU 2018-02 effective December 2018 and reclassified the stranded tax effects from AOCI to retained earnings. Adoption did not have a significant impact on our consolidated financial statements.

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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 are expected to be consummated in the second half of 2019. Subject to customary closing conditions, all related transactions are expected to be completed by December 31, 2019. The Company will not have continuing involvement with the mortgage banking operations once those transactions are complete. 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		212,998
Net Loss on Disposal		751,982

The following table presents results of discontinued operations for the three and nine months ended September 30, 2019, and 2018:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018


Net interest income	$	-	$	84,524		$	170,782		$	246,400

Gain on sale of loans		-		3,409,098			4,813,660			10,699,250
Other		-		-			190			-
Total noninterest income		-		3,409,098			4,813,850			10,699,250

Salaries and benefits		-		3,024,779			4,480,025			9,085,069
Occupancy		-		183,547			232,360			516,203
Data processing fees		-		373,774			584,369			1,063,651
Professional fees		-		57,930			107,972			133,602
Advertising		-		101,857			118,801			297,567
Net loss on disposal		-		-			751,982			-
Other		-		288,815			299,761			773,159
Total noninterest expense		-		4,030,702			6,575,270			11,869,251

Loss from discontinued operations		-		(537,080	)		(1,590,638	)		(923,601	)
Benefit for income taxes		-		(135,380	)		(392,193	)		(230,766	)

Net loss from discontinued operations	$	-	$	(401,700	)	$	(1,198,445	)	$	(692,835	)

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 sheet as of September 30, 2019, and prior year balances have been adjusted to conform with the current period presentation.

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The following table summarizes the major categories of assets and liabilities classified as held for sale related to discontinued operations in the consolidated balance sheet as of:

	September 30, 2019			December 31, 2018

Loans held for sale - discontinued operations	$	190,675		$	26,884,014
Premises and equipment, net - discontinued operations		-			56,683
Accrued interest receivable - discontinued operations		894			11,527
Prepaid and other assets - discontinued operations		-			241,415

Total assets	$	191,569		$	27,193,639

Escrows - discontinued operations		665			149,776
Accrued interest and other liabilities - discontinued operations		452,424			717,407

Total liabilities	$	453,089		$	867,183

Net (liabilities) assets	$	(261,520	)	$	26,326,456

NOTE 3 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at September 30, 2019 and December 31, 2018. 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
September 30, 2019
Available-for-sale securities
Mortgage-backed securities	$	30,677,663	$	452,357	$	(123,641	)	$	31,006,379
U.S. Government agencies		1,169,731		3,923		(15,051	)		1,158,603
Municipal obligations		8,043,221		364,179		-			8,407,400

Total	$	39,890,615	$	820,459	$	(138,692	)	$	40,572,382

December 31, 2018
Available-for-sale securities
Mortgage-backed securities	$	28,799,904	$	115,824	$	(605,370	)	$	28,310,358
U.S. Government agencies		1,487,917		-		(42,885	)		1,445,032
Municipal obligations		3,672,023		2,363		(1,118	)		3,673,268

Total	$	33,959,844	$	118,187	$	(649,373	)	$	33,428,658

There were no sales of available-for-sale securities during the nine months ended September 30, 2019 or 2018.

Amortized cost and fair value of securities by contractual maturity as of September 30, 2019 and December 31, 2018 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.

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The scheduled maturities of available-for-sale securities at September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019				December 31, 2018
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Due in one year or less	$	-	$	-	$	403,612	$	402,924
Due after one to five years		29,736,583		30,099,735		23,040,618		22,482,300
Due after five to ten years		8,188,302		8,426,229		10,515,614		10,543,434
Due after ten years		1,965,730		2,046,418		-		-

Totals	$	39,890,615	$	40,572,382	$	33,959,844	$	33,428,658

At September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, mortgage-backed securities included collateralized mortgage obligations of $14.3 million and $13.8 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.

September 30, 2019

Less Than 12 Months

12 Months or More

Total

Gross

Description of

Unrealized

Securities

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Available-for-sale securities:

Mortgage-backed securities

7,826,934

(44,719

)

6,846,201

(78,922

)

14,673,135

(123,641

)

U.S. Government agencies

920,252

(15,051

)

920,252

(15,051

)

Total temporarily impaired securities

7,826,934

(44,719

)

7,766,453

(93,973

)

15,593,387

(138,692

)

	December 31, 2018
	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	$	8,605,742	$	(200,190	)	$	10,740,671	$	(405,180	)	$	19,346,413	$	(605,370	)
U.S. Government agencies		302,219		(885	)		1,142,814		(42,000	)		1,445,033		(42,885	)
Municipal obligations		1,747,571		(430	)		402,924		(688	)		2,150,495		(1,118	)

Total temporarily impaired securities	$	10,655,532	$	(201,505	)	$	12,286,409	$	(447,868	)	$	22,941,941	$	(649,373	)

At September 30, 2019 and December 31, 2018, 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 September 30, 2019.

Loans and securities with a carrying value of approximately $147.4 million at September 30, 2019 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities with a carrying value of approximately $3.4 million at September 30, 2019 were pledged to secure public deposits.

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NOTE 4 – LOANS HELD FOR INVESTMENT, NET

The components of loans held for investment, net in the consolidated balance sheets were as follows:

	September 30, 2019						December 31, 2018
	Amount			Percent			Amount			Percent

Loans held for investment, net:
Commercial real estate	$	248,954,014			82.1	%	$	233,102,637			81.3	%
One- to four-family residential real estate		29,055,811			9.6			29,855,462			10.4
Commercial and industrial		20,131,619			6.6			17,508,258			6.1
Consumer and other		5,112,520			1.7			6,374,532			2.2
Total gross loans		303,253,964			100.0	%		286,840,889			100.0	%
Unamortized loan fees		(948,539	)					(1,149,517	)
Loans held for investment		302,305,425						285,691,372
Allowance for loan losses		(3,071,322	)					(2,901,091	)
Loans held for investment, net	$	299,234,103					$	282,790,281

At September 30, 2019 and December 31, 2018, loans held for investment includes commercial construction loans of $12.5 million and $20.8 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 September 30, 2019 and December 31, 2018:

As of September 30, 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

2,400,458

178,708

463,141

29,015

3,071,322

Total

2,400,458

178,708

463,141

29,015

3,071,322

Gross loans

Ending balance: individually evaluated for impairment

2,976,737

586,200

3,562,937

Ending balance: collectively evaluated for impairment

245,977,277

28,469,611

20,131,619

5,112,520

299,691,027

Total

248,954,014

29,055,811

20,131,619

5,112,520

303,253,964

	As of December 31, 2018
	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		2,130,124		359,705		377,180		34,082		2,901,091

Total	$	2,130,124	$	359,705	$	377,180	$	34,082	$	2,901,091

Gross loans
Ending balance: individually evaluated for impairment	$	2,993,923	$	649,685	$	-	$	-	$	3,643,608
Ending balance: collectively evaluated for impairment		230,108,714		29,205,777		17,508,258		6,374,532		283,197,281
Total	$	233,102,637	$	29,855,462	$	17,508,258	$	6,374,532	$	286,840,889

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The following tables summarize activities for the allowance for loan losses for the nine months ended September 30, 2019 and 2018 by quarter:

	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

Provision for loan losses		85,605			(2,388	)		9,914			(8,131	)		85,000

Charge-offs		-			-			-			-			-
Recoveries		-			1,879			-			-			1,879
Net recoveries		-			1,879			-			-			1,879

Balance June 30, 2019	$	2,426,902		$	219,630		$	398,339		$	23,420		$	3,068,291

Provision for loan losses		(26,444	)		(43,953	)		64,802			5,595			-

Charge-offs		-			-			-			-			-
Recoveries		-			3,031			-			-			3,031
Net recoveries		-			3,031			-			-			3,031

Balance September 30, 2019	$	2,400,458		$	178,708		$	463,141		$	29,015		$	3,071,322


Balance December 31, 2017	$	2,055,911		$	567,290		$	462,406		$	31,583		$	3,117,190

Provision for loan losses		10,374			(46,975	)		51,901			6,700			22,000

Charge-offs		-			(23,269	)		-			-			(23,269	)
Recoveries		-			6,249			-			-			6,249
Net charge-offs		-			(17,020	)		-			-			(17,020	)

Balance March 31, 2018	$	2,066,285		$	503,295		$	514,307		$	38,283		$	3,122,170

Provision for loan losses		77,026			(22,165	)		13,138			3,001			71,000

Charge-offs		-			-			-			-			-
Recoveries		-			6,250			-			-			6,250
Net recoveries		-			6,250			-			-			6,250

Balance June 30, 2018	$	2,143,311		$	487,380		$	527,445		$	41,284		$	3,199,420

Provision for loan losses		108,118			(94,439	)		(15,171	)		1,492			-

Charge-offs		-			(12,827	)		-			-			(12,827	)
Recoveries		-			-			47,220			-			47,220
Net recoveries		-			(12,827	)		47,220			-			34,393

Balance September 30, 2018	$	2,251,429		$	380,114		$	559,494		$	42,776		$	3,233,813

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Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of September 30, 2019 and December 31, 2018. 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

September 30, 2019

Commercial real estate

2,744,405

246,209,609

248,954,014

One- to four-family residential real estate

424,537

28,631,274

29,055,811

Commercial and industrial

20,131,619

Consumer and other

5,112,520

Totals

3,168,942

300,085,022

303,253,964

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables

December 31, 2018
Commercial real estate	$	-	$	2,744,405	$	-	$	2,744,405	$	230,358,232	$	233,102,637
One- to four-family residential real estate		782,835		234,524		393,068		1,410,427		28,445,035		29,855,462
Commercial and industrial		-		-		-		-		17,508,258		17,508,258
Consumer and other		-		-		-		-		6,374,532		6,374,532

Totals	$	782,835	$	2,978,929	$	393,068	$	4,154,832	$	282,686,057	$	286,840,889

The following table sets forth nonaccrual loans and other real estate at September 30, 2019 and December 31, 2018:

	September 30,			December 31,
	2019			2018

Nonaccrual loans
Commercial real estate	$	2,976,737		$	2,993,923
One- to four-family residential real estate		586,200			649,685
Commercial and industrial		-			-
Consumer and other		-			-
Total nonaccrual loans		3,562,937			3,643,608
Other real estate (ORE)		-			-

Total nonperforming assets	$	3,562,937		$	3,643,608

Nonperforming assets to gross loans held for investment and ORE		1.17	%		1.27	%
Nonperforming assets to total assets		0.92	%		0.95	%

Nonaccrual loan balances guaranteed by the SBA are $2.3 million or 65% and $2.3 million or 63% of the nonaccrual loan balances at September 30, 2019 and December 31, 2018, respectively.

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Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at September 30, 2019 and December 31, 2018. 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 September 30, 2019

Commercial

Real Estate

One- to Four-Family Residential Real Estate

Commercial

and Industrial

Consumer

and Other

Total

Grade

Pass

243,963,223

27,309,481

19,802,931

5,112,520

296,188,155

Special mention

41,491

433,571

475,062

Substandard

4,949,300

1,312,759

328,688

6,590,747

Doubtful

Loss

Totals

248,954,014

29,055,811

20,131,619

5,112,520

303,253,964

	As of December 31, 2018
	Commercial Real Estate		One- to Four-Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	226,510,803	$	27,990,417	$	17,237,690	$	6,374,532	$	278,113,442
Special mention		1,981,667		268,892		-		-		2,250,559
Substandard		4,610,167		1,596,153		270,568		-		6,476,888
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Totals	$	233,102,637	$	29,855,462	$	17,508,258	$	6,374,532	$	286,840,889

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.

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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 September 30, 2019

Principal

Average

Recorded

Net of

Related

Recorded

Investment

Charge-offs

Allowance

Investment

With no related allowance recorded:

Commercial real estate

2,976,737

2,981,161

One- to four-family residential real estate

586,200

593,766

3,562,937

3,574,927

With an allowance recorded:

Total:

Commercial real estate

2,976,737

2,981,161

One- to four-family residential real estate

586,200

593,766

3,562,937

3,574,927

	As of December 31, 2018
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	2,993,923	$	2,993,923	$	-	$	3,007,495
One- to four-family residential real estate		649,685		649,685		-		656,436
	$	3,643,608	$	3,643,608	$	-	$	3,663,931

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	2,993,923	$	2,993,923	$	-	$	3,007,495
One- to four-family residential real estate		649,685		649,685		-		656,436
	$	3,643,608	$	3,643,608	$	-	$	3,663,931

During the nine months ended September 30, 2019 and 2018, $0 and $4,000 of interest income, respectively, 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 September 30, 2019 and December 31, 2018.

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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 $72,000 and $54,000, as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018:

	September 30, 2019		December 31, 2018

Commitments to originate and sell mortgage loans	$	-	$	34,268,309
Commitments to extend credit		24,940,030		25,323,822
Unused lines of credit		20,367,632		18,281,453
Totals	$	45,307,662	$	77,873,584

There were no commitments to originate and sell mortgage loans at September 30, 2019 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.

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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 September 30, 2019 and December 31, 2018, 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 September 30, 2019, 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 September 30, 2019:

Total Capital (to Risk-Weighted Assets)	$	42,442	14.38	%	$	23,612	≥8.00	%	$	29,515	≥10.00	%

Tier I Capital (to Risk-Weighted Assets)	$	39,317	13.32	%	$	17,710	≥6.00	%	$	23,614	≥8.00	%

Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	39,317	13.32	%	$	13,283	≥4.50	%	$	19,186	≥6.50	%

Tier I Capital (to Average Assets)	$	39,317	10.38	%	$	15,151	≥4.00	%	$	18,939	≥5.00	%

As of December 31, 2018:

Total Capital (to Risk-Weighted Assets)	$	41,685	14.50	%	$	22,999	≥8.00	%	$	28,748	≥10.00	%

Tier I Capital (to Risk-Weighted Assets)	$	38,703	13.46	%	$	17,252	≥6.00	%	$	23,003	≥8.00	%

Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	38,703	13.46	%	$	12,939	≥4.50	%	$	18,690	≥6.50	%

Tier I Capital (to Average Assets)	$	38,703	10.29	%	$	15,045	≥4.00	%	$	18,806	≥5.00	%

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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 nine months ended September 30, 2019 and 2018 is presented below:

For the Nine Months Ended September 30, 2019

Average

Weighted-

Remaining

Average

Contractual

Exercise Price

Term (years)

Outstanding, December 31, 2018

164,410

14.69

5.8

Granted

1,000

14.63

Exercised

(8,460

)

10.39

Forfeited or expired

(8,800

)

14.90

Outstanding, September 30, 2019

148,150

14.91

5.2

Exercisable, September 30, 2019

29,430

14.92

5.2

	For the Nine Months Ended September 30, 2018
						Average
				Weighted-		Remaining
				Average		Contractual
	Shares			Exercise Price		Term (years)

Outstanding, December 31, 2017		207,108		$	14.18		6.2
Granted		5,000			15.48		-
Exercised		(15,464	)		9.65		-
Forfeited or expired		(7,734	)		11.08		-

Outstanding, September 30, 2018		188,910		$	14.71		6.0

Exercisable, September 30, 2018		7,260		$	9.65		0.8

The exercise price of outstanding stock options at September 30, 2019 range from $14.63 to $15.48 per share. The grant date fair value of stock options awarded in the nine months ended September 30, 2019 was $3.77 using the Black-Scholes-Merton options pricing model with the following inputs and assumptions:

Grant date stock price	$	14.63
Dividend yield		0.00	%
Expected volatility		19.55	%
Risk-free interest rate		2.63	%
Expected life in years		6

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A summary of restricted stock activity during the nine months ended September 30, 2019 and 2018 is presented below:

Weighted

Average

Remaining

Grant Date

Contractual

Price

Term (years)

For the Nine Months Ended September 30, 2019

Outstanding, December 31, 2018

49,829

14.90

4.0

Granted

Vested

(85

)

15.48

Forfeited or expired

(1,200

)

14.90

Outstanding, September 30, 2019

48,544

14.90

3.5

	For the Nine Months Ended September 30, 2018

Outstanding, December 31, 2017		74,750	$	14.90	4.9

Granted		429		15.48	-
Vested		-		-	-
Forfeited or expired		-		-	-

Outstanding, September 30, 2018		75,179	$	14.90	4.5

Compensation and benefits included $222,000 and $413,000 of stock-based expense for the nine months ended September 30, 2019 and 2018, respectively. Restricted stock award dividends included in stock-based expense were $5,000 and $94,000 for the nine months ended September 30, 2019 and 2018, respectively. In September 2018 we recognized an additional $59,000 in stock-based expense related to accrual for a settlement agreement reached with our outgoing President who resigned effective October 2, 2018.

As of September 30, 2019, there was $921,000 of total unrecognized stock-based expense including $347,000 related to unvested stock options and $574,000 from restricted stock awards granted under the 2017 Equity Incentive Plan that is expected to be recognized ratably over the next 3.2 years.

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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 September 30, 2019 and December 31, 2018.

	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

September 30, 2019
Recurring basis
Mortgage-backed securities	$	-	$	31,006,379		$	-	$	31,006,379
U.S. Government agencies		-		1,158,603			-		1,158,603
Municipal obligations		-		8,407,400			-		8,407,400
Loans held for sale		-		1,797,843			-		1,797,843

Nonrecurring basis
Impaired loans		-		-			3,562,937		3,562,937

Totals	$	-	$	42,370,225		$	3,562,937	$	45,933,162

December 31, 2018:
Recurring basis
Mortgage-backed securities	$	-	$	28,310,358		$	-	$	28,310,358
U.S. Government agencies		-		1,445,032			-		1,445,032
Municipal obligations		-		3,673,268			-		3,673,268
Loans held for sale		-		26,884,014			-		26,884,014
Derivative IRLC's - discontinued operations		-		-			380,866		380,866
Derivative forward commitments		-		(153,906	)		-		(153,906	)
Nonrecurring basis
Impaired loans		-		-			3,643,608		3,643,608

Totals	$	-	$	60,158,766		$	4,024,474	$	64,183,240

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 nine months ended September 30, 2019 or 2018.

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The following table presents estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018.

							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 September 30, 2019:
Financial assets:
Cash and due from banks	$	6,830		$	6,830		$	6,830	$	-		$	-
Interest-bearing deposits with banks		8,835			8,835			8,835		-			-
Available-for-sale securities		40,572			40,572			-		40,572			-
Loans held for sale, at fair value		1,607			1,607			-		1,607			-
Loans held for sale - discontinued operations		191			191			-		191			-
Loans held for investment, net		299,234			303,476			-		-			303,476
Stock in financial institutions		3,993			3,993			-		3,993			-

Financial liabilities:
Demand deposits, savings and NOW deposits		215,443			207,863			207,863		-			-
Time deposits		80,094			80,540			-		80,540			-
Federal Home Loan Bank advances		40,000			40,105			-		40,105			-

At December 31, 2018:
Financial assets:
Cash and due from banks	$	6,374		$	6,374		$	6,374	$	-		$	-
Interest-bearing deposits with banks		5,400			5,400			5,400		-			-
Available-for-sale securities		33,429			33,429			-		33,429			-
Loans held for sale - discontinued operations		26,884			26,884			-		26,884			-
Loans held for investment, net		282,790			283,466			-		-			283,466
Derivative IRLC's - discontinued operations		381			381			-		-			381
Derivative forward commitments - discontinued operations		(154	)		(154	)		-		(154	)		-
Stock in financial institutions		3,910			3,910			-		3,910			-

Financial liabilities:
Demand deposits, savings and NOW deposits		187,700			172,049			172,049		-			-
Time deposits		77,359			77,688			-		77,688			-
Federal Home Loan Bank advances		67,000			66,653			-		66,653			-

The following methods and assumptions were used to estimate the fair value of the classes of financial instruments shown:

Cash and Due from Banks, Interest-Bearing Deposits with Banks and Stock in Financial Institutions– The carrying amount approximates fair value.

Deposits and FHLB Advances – Deposits include demand deposits, savings accounts, NOW accounts and money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits and FHLB advances is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits and advances of similar remaining maturities.

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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 Sale – Loans held for sale at September 30, 2019 include one first mortgage at $191,000 expected to be sold in the fourth quarter of 2019 and one USDA loan carried at $1.6 million, which the Company has elected to carry at fair value. Fair value on this loan was based on estimated selling price indications from brokers less estimated costs to sell. The unrealized gain on this loan of $141,000 is included in gain on sale of loans for the quarter ended September 30, 2019. The fair value of mortgage loans held for sale is based on quoted market prices from FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Other Real Estate – Other real estate is fair valued under Level 3 based on property appraisals less estimated disposition costs, which include both observable and unobservable inputs, at the time of transfer and as appropriate thereafter.

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 September 30, 2019
Impaired loans
Commercial real estate	$	2,976,737	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
One- to four-family residential real estate		586,200	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
Total Impaired Loans	$	3,562,937

At December 31, 2018
Impaired loans
Commercial real estate	$	2,993,923	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
One- to four-family residential real estate		649,685	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
Total Impaired Loans	$	3,643,608

Derivative IRLC's - discontinued operations	$	380,866	Internal pricing model	Pull-through rate		77%

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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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Basic:
Net income from continuing operations	$	452,384		$	543,942		$	1,352,259		$	1,585,265
Net loss from discontinued operations		-			(401,700	)		(1,198,445	)		(692,835	)
Less: Earnings allocated to participating securities (1)		(7,082	)		(3,313	)		(2,466	)		(21,681	)

Net income allocated to common shareholders	$	445,302		$	138,929		$	151,348		$	870,749

Weighted-average common shares outstanding including participating securities		3,271,001			3,404,065			3,328,806			3,416,900
Less: Average participating securities		(48,544	)		(75,179	)		(49,069	)		(75,083	)
Less: Average unallocated ESOP Shares		(170,316	)		(176,102	)		(170,316	)		(176,102	)

Average shares		3,052,141			3,152,784			3,109,421			3,165,715

Basic earnings per common share - continuing operations	$	0.15		$	0.17		$	0.43		$	0.50
Basic loss per common share - discontinued operations		-			(0.13	)		(0.38	)		(0.22	)
Basic earnings per common share	$	0.15		$	0.04		$	0.05		$	0.28
Diluted:
Net income allocated to common shareholders	$	445,302		$	138,929		$	151,348		$	870,749

Weighted-average common shares outstanding for basic earnings per common share		3,052,141			3,152,784			3,109,421			3,165,715
Add: Dilutive effects of assumed exercises of stock options		4,095			13,362			3,554			9,480

Weighted average shares and dilutive potential common shares		3,056,236			3,166,146			3,112,975			3,175,195

Diluted earnings per common share - continuing operations	$	0.15		$	0.17		$	0.43		$	0.49
Diluted loss per common share - discontinued operations		-			(0.13	)		(0.38	)		(0.22	)
Diluted earnings per common share	$	0.15		$	0.04		$	0.05		$	0.27

(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 nine months ended September 30, 2019 and 2018, 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.

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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:

	●	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.

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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 September 30,
	2019								2018
	Average								Average
	Outstanding					Yield/			Outstanding					Yield/
	Balance			Interest		Rate (1)			Balance			Interest		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans - continuing operations	$	297,590		$	4,393		5.86	%	$	281,576		$	4,138		5.83	%
Securities		35,985			243		2.68	%		29,492			172		2.31	%
Other interest earning assets		21,713			131		2.39	%		19,041			104		2.17	%
Total interest-earning assets - continuing operations		355,288			4,767		5.32	%		330,109			4,414		5.30	%
Loans held for sale - discontinued operations		672			-		0.00	%		17,962			206		4.56	%
Total interest-earning assets		355,960			4,767		5.31	%		348,071			4,620		5.27	%
Noninterest-earning assets		23,963								24,012
Total assets	$	379,923							$	372,083

Interest-bearing liabilities:
Checking, money market and savings accounts	$	158,815		$	579		1.45	%	$	130,941		$	325		0.99	%
Certificates of deposit		79,707			421		2.10	%		72,948			309		1.68	%
Total deposits		238,522			1,000		1.66	%		203,889			634		1.23	%
Advances from FHLB of Dallas - continuing operations		41,150			242		2.33	%		73,205			259		1.40	%
Total interest-bearing liabilities - continuing operations		279,672			1,242		1.76	%		277,094			893		1.28	%
Advances from FHLB of Dallas - discontinued operations		-			-		-			-			122		-
Total interest-bearing liabilities		279,672			1,242		1.76	%		277,094			1,015		1.45	%
Non-interest bearing deposits		49,697								43,253
Non-interest bearing liabilities		4,683								4,912
Total liabilities		334,052								325,259
Stockholders' equity		45,871								46,824
Total liabilities and stockholders' equity	$	379,923							$	372,083

Net interest income - continuing operations				$	3,525							$	3,521
Net interest rate spread - continuing operations (2)							3.56	%							4.02	%
Net interest margin - continuing operations (4)							3.94	%							4.23	%

Net interest income				$	3,525							$	3,605
Net interest rate spread (2)							3.55	%							3.82	%
Net interest-earning assets (3)	$	76,288							$	70,978
Net interest margin (4)							3.93	%							4.11	%

Average interest-earning assets to average interest-bearing liabilities		127.28	%							125.62	%

	(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.

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	Nine Months Ended September 30,
	2019								2018
	Average								Average
	Outstanding					Yield/			Outstanding					Yield/
	Balance			Interest		Rate (1)			Balance			Interest		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans - continuing operations	$	294,192		$	12,960		5.89	%	$	270,009		$	11,681		5.78	%
Securities		34,643			697		2.69	%		27,719			468		2.26	%
Other interest earning assets		20,732			381		2.46	%		17,024			246		1.93	%
Total interest-earning assets - continuing operations		349,567			14,038		5.37	%		314,752			12,395		5.27	%
Loans held for sale - discontinued operations		10,961			370		4.51	%		15,704			538		4.59	%
Total interest-earning assets		360,528			14,408		5.34	%		330,456			12,933		5.23	%
Noninterest-earning assets		23,526								23,713
Total assets	$	384,054							$	354,169

Interest-bearing liabilities:
Checking, money market and savings accounts	$	150,976		$	1,555		1.38	%	$	130,131		$	902		0.93	%
Certificates of deposit		79,495			1,218		2.05	%		68,118			740		1.45	%
Total deposits		230,471			2,773		1.61	%		198,249			1,642		1.11	%
Advances from FHLB of Dallas - continuing operations		54,065			786		1.94	%		59,596			512		1.15	%
Total interest-bearing liabilities - continuing operations		284,536			3,559		1.67	%		257,845			2,154		1.12	%
Advances from FHLB of Dallas - discontinued operations		-			198		-			-			292		-
Total interest-bearing liabilities		284,536			3,757		1.77	%		257,845			2,446		1.27	%
Non-interest bearing deposits		48,446								43,156
Non-interest bearing liabilities		4,338								4,997
Total liabilities		337,320								305,998
Stockholders' equity		46,734								48,171
Total liabilities and stockholders' equity	$	384,054							$	354,169

Net interest income - continuing operations				$	10,479							$	10,241
Net interest rate spread - continuing operations (2)							3.70	%							4.15	%
Net interest margin - continuing operations (4)							4.01	%							4.35	%

Net interest income				$	10,651							$	10,487
Net interest rate spread (2)							3.58	%							3.96	%
Net interest-earning assets (3)	$	75,992							$	72,611
Net interest margin (4)							3.95	%							4.24	%

Average interest-earning assets to average interest-bearing liabilities		126.71	%							128.16	%

	(1)	Yield/Rate for the nine-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.

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Comparison of Financial Condition at September 30, 2019 and December 31, 2018

Cash and cash equivalents were $15.7 million at September 30, 2019 and $11.8 million at December 31, 2018. Daily cash and cash equivalent balances vary around our target levels of $5.0 to $10.0 million primarily due to the timing of commercial loan fundings and payoffs and changes in deposit balances and FHLB advances. Cash and cash equivalents were above normal target level at September 30, 2019 due to the further reduction in mortgage loans held for sale during the quarter ended September 30, 2019.

Available-for-sale securities increased $7.1 million, or 21.4%, during the nine months ended September 30, 2019 to $40.6 million. There were no sales of available-for-sale securities and we purchased $10.4 million of securities in the nine months ended September 30, 2019.

Loans held for sale at September 30, 2019 totaled $1.8 million, consisting of one USDA loan for $1.6 million and one residential mortgage loan of $191,000. Until June 30, 2019 we sold a significant majority of our residential mortgage loans in the secondary market. At December 31, 2018, loans held for sale totaled $26.9 million and all were residential mortgage loans. As discussed in Note 2 - Discontinued Operations, the Company discontinued originating mortgage loans held for sale in its name in June 2019 due to the mortgage banking business exit.

Loans held for investment increased $16.6 million, or 5.8%, to $302.3 million at September 30, 2019 from $285.7 million at December 31, 2018, due to organic growth. In the nine months ended September 30, 2019, commercial real estate loans increased $15.9 million to $249.0 million and represented 82.1% of the gross loan portfolio at September 30, 2019, compared to 81.3% at December 31, 2018.

Total deposits increased $30.3 million, or 11.4%, to $295.5 million at September 30, 2019 from $265.2 million at December 31, 2018. The increase included an $21.0 million, or 14.8%, increase in savings and NOW deposits, a $2.6 million, or 3.3%, increase in time deposits and a $6.7 million, or 14.8%, increase in demand deposits.

Federal Home Loan Bank advances were down $27.0 million, or 40.3%, to $40.0 million at September 30, 2019 compared to $67.0 million at December 31, 2018. The reduction was due to a $26.7 million decrease in residential mortgage loans held for sale. We 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 $296,000, or 7.0%, to $4.5 million at September 30, 2019 compared to $4.2 million at December 31, 2018.

Total stockholders’ equity decreased $1.6 million to $44.8 million at September 30, 2019 from $46.4 million at December 31, 2018. The largest changes in stockholders’ equity were a $2.7 million reduction due to common stock repurchases and a $922,000 increase due to available-for-sale securities fair value appreciation.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

General. We had net income from continuing operations of $452,000 for the three months ended September 30, 2019, which was $92,000 less than net income from continuing operations of $544,000 for the three months ended September 30, 2018. The decrease was primarily caused by a $333,000, or 11.1%, increase in noninterest expense, and a $25,000 increase in provision for income taxes, partially offset by a $262,000, or 134.7%, increase in noninterest income.

We had no net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, compared to net loss from discontinued operations of $402,000 for the three months ended September 30, 2018. The decrease was due to the mortgage banking business exit in June 2019.

Interest Income. Interest income from continuing operations increased $353,000, or 8.0%, to $4.8 million for the three months ended September 30, 2019 from $4.4 million for the three months ended September 30, 2018. The increase was due to a $25.2 million, or 7.6%, increase in average interest-earning assets from continuing operations and a two basis point increase in average yields. Loans, which are our highest yielding asset, decreased to 83.8% of average interest-earning assets from 85.3% of average interest-earning assets. The increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of three basis points, 37 basis points and 22 basis points, respectively. Interest income on loans increased due to a $16.0 million, or 5.7%, increase in average loan balances due to organic growth and a three basis point increase in yield to 5.86% for the three months ended September 30, 2019 from 5.83% for the three months ended September 30, 2018. Interest income on securities increased $70,000, or 40.8%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to a $6.5 million, or 22.0%, increase in average securities balances due to fourth quarter 2018 and second and third quarter 2019 purchases and a 37 basis point increase in yield due to favorable rates on the most recent securities purchased.

Interest Expense.

Interest expense from continuing operations increased $348,000, or 38.9%, to $1.2 million for the three months ended September 30, 2019 from $894,000 for the three months ended September 30, 2018. The increase was the result of an increase of $364,000, or 57.3%, in interest expense on deposits, partially offset by a decrease of $17,000, or 6.4%, in interest expense on borrowings.

Interest paid on checking, money market and savings accounts increased $254,000, or 78.2%, to $579,000 for the three months ended September 30, 2019 from $325,000 for the three months ended September 30, 2018. The average rate we paid on such deposit accounts increased 46 basis points to 1.45% for the three months ended September 30, 2019 from 0.99% for the three months ended September 30, 2018 due to the increase in market interest rates. The average balance increased $27.9 million, or 21.3%, to $158.8 million for the three months ended September 30, 2019 from $130.9 million for the three months ended September 30, 2018.

Interest on certificates of deposit increased $112,000, or 36.2%, to $421,000 for the three months ended September 30, 2019 from $309,000 for the three months ended September 30, 2018. The average rate paid on certificates of deposit increased 42 basis points, or 24.7%, to 2.10% for the three months ended September 30, 2019 compared to 1.68% for the three months ended September 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $6.8 million, or 9.3%, to $79.7 million for the three months ended September 30, 2019 from $72.9 million for the three months ended September 30, 2018.

The average rates we pay on deposits is considerably higher in our Arizona market.

The average balance of borrowings decreased $32.1 million, or 43.8%, from the quarter ended September 30, 2018 to the quarter ended September 30, 2019 and the average rate paid increased 93 basis points to 2.33% for the three months ended September 30, 2019 from 1.40% for the three months ended September 30, 2018.

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Net Interest Income. Net interest income from continuing operations increased $5,000, or 0.1%, and was $3.5 million for the three months ended September 30, 2019 and 2018, due to a 7.6% increase in average interest earning assets mostly offset by a 46 basis point decrease in net interest rate spread to 3.56% for the three months ended September 30, 2019 from 4.02% for the three months ended September 30, 2018. Average interest bearing liability rates for continuing operations increased 48 basis points compared to a two basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $5.3 million, or 7.5%, to $76.3 million for the three months ended September 30, 2019 from $71.0 million for the three months ended September 30, 2018 due primarily to organic growth.

We had no net interest income from discontinued operations for the three months ended September 30, 2019 compared to $85,000 for the three months ended September 30, 2018 due to the mortgage banking business exit in June 2019. Average mortgage loans held for sale decreased by $17.3 million, or 96.3%, to $672,000 for the three months ended September 30, 2019 from $18.0 million for the three months ended September 30, 2018.

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 no provision for loan losses for the three months ended September 30, 2019 and for the three months ended September 30, 2018. In the three months ended September 30, 2019, the allowance for loan losses increased $3,000, reflecting $3,000 in net recoveries.

To the best of our knowledge, at September 30, 2019 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 $262,000, or 134.7%, to $456,000 for the three months ended September 30, 2019 from $194,000 for the three months ended September 30, 2018 due primarily to a $200,000, or 100.0%, increase in loan sales gains, and an $56,000, or 59.6%, increase in service charges and fees.

The gain on sale of loans from continuing operations was $200,000 for the three months ended September 30, 2019 compared to no gain on sale of loans from continuing operations for the three months ended September 30, 2018. We sold $1.0 million of SBA loans during the three months ended September 30, 2019 and recognized $59,000 of sales gains directly into income and recognized $141,000 gain on one USDA loan classified as held for sale at September 30, 2019. We had no SBA loan sales and no sales gains recognized directly into income in the quarter ended September 30, 2018.

Noninterest income from discontinued operations, represented by loan sales gains, decreased $3.4 million, or 100.0%, to $0 for the three months ended September 30, 2019. The gain on sale of loans from discontinued operations decreased due to the mortgage banking business exit in June 2019. During the three months ended September 30, 2019, we sold $2.6 million of mortgage loans with zero gain recognized directly into income, compared to $84.0 million of mortgage loan sales during the three months ended September 30, 2018 for a gain of $3.4 million. We realized no average premium (gain on sale/sold loans) on the sales of mortgage loans for the three months ended September 30, 2019 and 4.5% for the three months ended September 30, 2018. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.

Noninterest Expense. Noninterest expense from continuing operations increased $333,000, or 11.1%, to $3.3 million for the three months ended September 30, 2019 from $3.0 million for the three months ended September 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees, partially offset by $84,000 in FDIC credits recognized in the quarter ended September 30, 2019 which reduced expense. Average assets from continuing operations for the quarter ended September 30, 2019 were 7.1% larger than for the quarter ended September 30, 2018.

Noninterest expense from discontinued operations decreased $4.0 million, or 100.0%, to $0 for the three months ended September 30, 2019. The decrease was due to the mortgage banking business exit in June 2019.

Provision for Income Tax. Provision for income tax expense from continuing operations was $185,000 for the three months ended September 30, 2019, representing an effective tax rate of 29.0% 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 $160,000 for the three months ended September 30, 2018 representing 22.7% of the $704,000 income from continuing operations before income taxes.

There was no benefit or expense for income taxes from discontinued operations for the three months ended September 30, 2019. We recognized a benefit for income taxes from discontinued operations of $135,000 for the three months ended September 30, 2018 representing 25.1% of the $537,000 loss before benefit for income taxes.

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Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018

General. We had net income from continuing operations of $1.4 million for the nine months ended September 30, 2019, which was $233,000 less than net income from continuing operations of $1.6 million for the nine months ended September 30, 2018. The decrease was primarily caused by a $636,000, or 7.2%, increase in noninterest expense and an $80,000 larger provision for loan losses, partially offset by a $239,000, or 2.3%, increase in net interest income and a $225,000, or 32.1%, increase in noninterest income.

We had a net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, of $1.2 million for the nine months ended September 30, 2019, which was $506,000 more than net loss from discontinued operations of $693,000 for the nine months ended September 30, 2018. The increased net loss from discontinued operations was primarily caused by a $5.9 million, or 55.0%, decrease in noninterest income, partially offset by a $5.3 million, or 44.6%, decrease in noninterest expense, and a $161,000 increase in benefit for income taxes. Noninterest expense for the nine months ended September 30, 2019 included a $752,000 loss on disposal of discontinued operations.

Interest Income. Interest income from continuing operations increased $1.6 million, or 13.3%, to $14.0 million for the nine months ended September 30, 2019 from $12.4 million for the nine months ended September 30, 2018. The increase was due to a $34.8 million, or 11.1%, increase in average interest-earning assets and a 10 basis point increase in average yields. Loans, which are our highest yielding asset, decreased to 84.2% of average interest-earning assets from 85.8% of average interest-earning assets. The increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of 11 basis points, 43 basis points and 53 basis points, respectively. Interest income on loans increased due to a $24.2 million, or 9.0%, increase in average loan balances due to organic growth and an 11 basis point increase in yield to 5.89% for the nine months ended September 30, 2019 from 5.78% for the nine months ended September 30, 2018. Interest on securities increased $228,000, or 48.8%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due primarily to a $6.9 million, or 25.0%, increase in average securities balances due to fourth quarter 2018 and second and third quarter 2019 purchases and a 43 basis point increase in yield due to favorable market rate increases.

Interest Expense. Interest expense from continuing operations increased $1.4 million, or 65.2%, to $3.6 million for the nine months ended September 30, 2019 from $2.2 million for the nine months ended September 30, 2018. The increase was the result of increases of $1.1 million, or 68.9%, in interest expense on deposits and $274,000, or 53.6%, in interest expense on borrowings.

Interest paid on checking, money market and savings accounts increased $653,000, or 72.4%, to $1.6 million for the nine months ended September 30, 2019 from $902,000 for the nine months ended September 30, 2018. The average rate we paid on such deposit accounts increased 45 basis points to 1.38% for the nine months ended September 30, 2019 from 0.93% for the nine months ended September 30, 2018 due to the increase in market interest rates. The average balance increased $20.8 million, or 16.0%, to $151.0 million for the nine months ended September 30, 2019 from $130.1 million for the nine months ended September 30, 2018.

Interest on certificates of deposit increased $478,000, or 64.6%, to $1.2 million for the nine months ended September 30, 2019 from $740,000 for the nine months ended September 30, 2018. The average rate paid on certificates of deposit increased 60 basis points, or 41.0%, to 2.05% for the nine months ended September 30, 2019 compared to 1.45% for the nine months ended September 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $11.4 million, or 16.7%, to $79.5 million for the nine months ended September 30, 2019 from $68.1 million for the nine months ended September 30, 2018.

The average balance of borrowings decreased $5.5 million, or 9.3%, from the nine months ended September 30, 2018 to the nine months ended September 30, 2019 and the average rate paid increased 80 basis points to 1.94% for the nine months ended September 30, 2019 from 1.15% for the nine months ended September 30, 2018.

Net Interest Income. Net interest income from continuing operations increased $239,000, or 2.3%, to $10.5 million for the nine months ended September 30, 2019 from $10.2 million for the nine months ended September 30, 2018, primarily due to an 11.1% increase in average interest earning assets, mostly offset by a 45 basis point decrease in net interest rate spread to 3.70% for the nine months ended September 30, 2019 from 4.15% for the nine months ended September 30, 2018. Average interest bearing liability rates for continuing operations increased 56 basis points compared to a 10 basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $3.4 million, or 4.7%, to $76.0 million for the nine months ended September 30, 2019 from $72.6 million for the nine months ended September 30, 2018 due primarily to organic growth.

Net interest income from discontinued operations decreased $76,000, or 30.7%, to $171,000 for the nine months ended September 30, 2019 from $246,000 for the nine months ended September 30, 2018, primarily due to an 30.2% decrease in average mortgage loans held for sale to $11.0 million for the nine months ended September 30, 2019 from $15.7 million for the nine months ended September 30, 2018.

Provision for Loan Losses. We recorded a provision for loan losses of $173,000 for the nine months ended September 30, 2019, compared to $93,000 for the nine months ended September 30, 2018. In the nine months ended September 30, 2019, the allowance for loan losses increased $170,000, or 5.9%, including an $173,000 increase from provisions, partially offset by $3,000 in net charge-offs.

Noninterest Income. Noninterest income from continuing operations increased $225,000, or 32.1%, to $928,000 for the nine months ended September 30, 2019 from $703,000 for the nine months ended September 30, 2018 due primarily to an $135,000, or 109.9%, increase in loan sales gains, and an $87,000, or 31.7%, increase in service charges and fees.

The gain on sale of loans from continuing operations increased $135,000, or 109.9%, to $258,000 for the nine months ended September 30, 2019 from $123,000 for the nine months ended September 30, 2018. We sold $2.0 million of SBA loans during the nine months ended September 30, 2019 and recognized $117,000 of sales gains directly into income, and recognized $141,000 gain on one USDA loan classified as held for sale at September 30, 2019, compared to $1.4 million of SBA loan sales in the nine months ended September 30, 2018 with gains of $123,000.

Noninterest income from discontinued operations, represented by loan sales gains, decreased $5.9 million, or 55.0%, to $4.8 million for the nine months ended September 30, 2019 from $10.7 million for the nine months ended September 30, 2018. The gain on sale of loans from discontinued operations decreased due primarily to the mortgage banking business exit in the second quarter of 2019.

During the nine months ended September 30, 2019, we sold $146.3 million of mortgage loans for a gain of $4.8 million, compared to $243.3 million of mortgage loan sales during the nine months ended September 30, 2018 for a gain of $10.7 million. We realized a 4.2% average premium (gain on sale/sold loans) on the sales of mortgage loans for the nine months ended September 30, 2019 and 4.1% for the nine months ended September 30, 2018. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.

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Noninterest Expense. Noninterest expense from continuing operations increased $636,000, or 7.2%, to $9.4 million for the nine months ended September 30, 2019 from $8.8 million for the nine months ended September 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees, partially offset by a decrease in professional fees, partially offset by $84,000 in FDIC credits recognized in 2019 which reduced expense. Average assets from continuing operations for the nine months ended September 30, 2019 were 10.2% larger than for the nine months ended September 30, 2018.

Noninterest expense from discontinued operations decreased $5.3 million, or 44.6%, to $6.6 million for the nine months ended September 30, 2019 from $11.9 million for the nine months ended September 30, 2018. The decrease was primarily related to the mortgage banking business exit in the second quarter of 2019, partially offset by the net loss on disposal for the quarter ended June 30, 2019.

Provision for Income Tax. Provision for income tax expense from continuing operations was $451,000 for the nine months ended September 30, 2019, representing an effective tax rate of 25.0% 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 $470,000 for the nine months ended September 30, 2018 representing 22.9% of the $2.1 million income from continuing operations before income taxes.

Benefit for income taxes from discontinued operations was $392,000 for the nine months ended September 30, 2019, representing an effective tax rate of 24.7% on pre-tax loss from discontinued operations. We recognized a benefit for income taxes from discontinued operations of $231,000 for the nine months ended September 30, 2018 representing 25.0% of the $924,000 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.

	At September 30,			At December 31,
	2019			2018
	(Dollars in thousands)
Nonaccrual loans
Real estate loans:
One- to four-family residential real estate	$	586		$	650
Commercial real estate		2,977			2,994
Commercial and industrial loans		-			-
Consumer and other loans		-			-
Total nonaccrual loans		3,563			3,644
Accruing loans past due 90 days or more		-			-
Total nonaccrual loans and accruing loans past due 90 days or more		3,563			3,644
Other real estate (ORE)
One- to four-family residential real estate		-			-
Commercial real estate		-			-
Total other real estate		-			-
Total nonperforming assets	$	3,563		$	3,644

Ratios:
Nonperforming loans to gross loans held for investment		1.17	%		1.27	%
Nonperforming assets to total assets		0.92	%		0.95	%
Nonperforming assets to gross loans held for investment and ORE		1.17	%		1.27	%

Nonaccrual loan balances guaranteed by the SBA are $2.3 million or 65% and $2.3 million or 63% of the nonaccrual loan balances at September 30, 2019 and December 31, 2018, respectively.

Due to the decrease in nonaccrual loans, the nonperforming asset ratios decreased from December 31, 2018 to September 30, 2019.

Interest income that would have been recorded for the nine months ended September 30, 2019, had nonaccruing loans been current according to their original terms amounted to $175,000 and $3,000 had troubled debt restructurings been current according to their original terms. We recognized $0 in interest income on nonaccrual loans and $23,000 related to troubled debt restructurings for the nine months ended September 30, 2019.

As of September 30, 2019 and December 31, 2018 we had $72,000 and $54,000 in current troubled debt restructurings, respectively.

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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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
				(Dollars in thousands)

Balance at beginning of period	$	3,068		$	3,199		$	2,901		$	3,117
Provision for loan losses		-			-			172			93
Charge-offs:
One- to four-family residential real estate loans		-			(13	)		(9	)		(36	)
Commercial real estate loans		-			-			-			-
Commercial and industrial loans		-			-			-			-
Consumer and other loans		-			-			-			-
Total charge-offs		-			(13	)		(9	)		(36	)
Recoveries:
One- to four-family residential real estate loans		3			-			5			12
Commercial real estate loans		-			-			-			-
Commercial and industrial loans		-			48			2			48
Consumer and other loans		-			-			-			-
Total recoveries		3			48			7			60
Net (charge-offs) recoveries		3			35			(2	)		24

Balance at end of period	$	3,071		$	3,234		$	3,071		$	3,234

Allowance for loan losses to nonperforming loans		86.20	%		60.52	%		86.20	%		60.52	%
Allowance for loan losses to total loans		1.02	%		1.14	%		1.02	%		1.14	%
Allowance for loan losses to total loans less acquired loans		1.02	%		1.17	%		1.02	%		1.17	%
Net (charge-offs) recoveries to average loans outstanding during the period		0.00	%		0.01	%		0.00	%		0.01	%

The ratio of our allowance for loan losses to nonperforming loans increased due to a 33.3% decrease in nonperforming loans partially offset by a 5.0% decrease in the allowance for loan losses. The allowance for loan losses to total loans ratios decreased because total gross loans increased 6.6% and the allowance for loan losses decreased 5.0%.

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 mortgage 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 September 30, 2019.

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 September 30, 2019, cash and cash equivalents totaled $15.7 million. Available-for-sale securities, which provide additional sources of liquidity, totaled $40.6 million at September 30, 2019. In addition, at September 30, 2019, we had $40.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to borrow an additional $105.6 million from the FHLB, $9.8 million from the Independent Bankers Bank (TIB), and $6.0 million from the Pacific Coast Bankers Bank (PCBB).

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At September 30, 2019, we had $24.9 million in loan commitments outstanding. In addition, we had $20.4 million in unused lines of credit. Time deposits due within one year of September 30, 2019 totaled $37.0 million, or 12.5% 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 September 30, 2020. 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 nine months ended September 30, 2019, we originated $70.6 million of loans held for investment and $19.8 million of mortgage loans held for sale, compared to $90.3 million of loans held for investment and $238.1 million of mortgage loans held for sale during the nine months ended September 30, 2018. In the nine months ended September 30, 2019 and 2018 we purchased $10.4 million and $8.0 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 $30.3 million and $16.0 million in total deposits for the nine months ended September 30, 2019 and 2018, 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 $40.0 million in Federal Home Loan Bank advances at September 30, 2019, compared to $67.0 million at December 31, 2018.

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 September 30, 2019, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $2.0 million. In June and September 2019, the Company paid quarterly cash dividends of $0.05 per share each. Dividends paid in 2019 through September totaled $323,000.

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 September 30, 2019 and December 31, 2018, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.

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 September 30, 2019. 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 September 30, 2019, 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.

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Part II – Other Information

Item 1. Legal Proceedings

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.

Item 1A. Risk Factors

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. The repurchase program will continue until it is completed or terminated by the Company’s Board of Directors. 5,000 and 129,042 shares were repurchased in July and August 2019, respectively.

The Company’s repurchases of common stock for the three months ended September 30, 2019 were as follows:

					Total Number of		Maximum Number
	Total				Shares Purchased as		of Shares that May
	Number of		Average Price		Part of Publicly		Be Purchased Yet
	Shares		Paid		Announced Plans or		Under the Plans
Period	Purchased		per Share		Programs		or Programs

July 1, 2019 through July 31, 2019		5,000		$15.40		5,000		139,752

August 1, 2019 through August 31, 2019		129,042		$15.60		129,042		10,710

September 1, 2019 through September 30, 2019		---		---		---		10,710

		134,042				134,042

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1		Articles of Incorporation of Bancorp 34, Inc. (1)

3.2		Bylaws of Bancorp 34, Inc. (1)

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		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following financial statements from the Bancorp 34, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BANCORP 34, INC.

Date: October 25, 2019	/s/ Jill Gutierrez
	Jill Gutierrez
	President and Chief Executive Officer

Date: October 25, 2019	/s/ Jan R. Thiry
	Jan R. Thiry
	Executive Vice President and Chief Financial Officer