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 June 30, 2019

OR

[   ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _______________ to ______________________

Commission File No. 001-37912

Bancorp 34, Inc.

(Exact name of registrant as specified in its charter)

Maryland	74-2819148
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
500 East 10th Street, Alamogordo, New Mexico	88310
(Address of Principal Executive Offices)	(Zip Code)

(575) 437-9334

(Registrant’s telephone number)

                                           N/A                                            

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	BCTF	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES  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 August 06, 2019 were 3,332,260.

Bancorp 34, Inc.
FORM 10-Q

Index 

		Page
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018	2
	Consolidated Statements of Comprehensive (loss) Income for the Three and Six Months ended June 30, 2019 and 2018 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months ended June 30, 2019 (unaudited) and Year Ended December 31, 2018	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39
	Part II. Other Information
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

Page 1 of 41

Item 1. Financial Statements

BANCORP 34, INC.

CONSOLIDATED BALANCE SHEETS - UNAUDITED

	June 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	6,323,991		$	6,374,457
Interest-bearing deposits with banks		18,885,000			5,400,000
Total cash and cash equivalents		25,208,991			11,774,457
Available-for-sale securities, at fair value		34,670,131			33,428,658
Loans held for sale - discontinued operations		2,980,149			26,884,014
Loans held for investment		292,636,761			285,691,372
Allowance for loan losses		(3,068,291	)		(2,901,091	)
Loans held for investment, net		289,568,470			282,790,281
Premises and equipment, net		9,268,280			9,558,943
Premises and equipment, net - discontinued operations		26,542			56,683
Stock in financial institutions, restricted, at cost		3,965,161			3,910,361
Accrued interest receivable		1,000,195			863,513
Accrued interest receivable - discontinued operations		11,665			11,527
Deferred income taxes, net		2,074,309			2,196,928
Bank owned life insurance		10,711,034			10,573,069
Core deposit intangible, net		151,678			172,108
Prepaid and other assets		900,699			815,950
Prepaid and other assets - discontinued operations		54,207			241,415
TOTAL ASSETS	$	380,591,511		$	383,277,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits	$	47,948,494		$	45,350,477
Savings and NOW deposits		151,264,736			142,349,920
Time deposits		80,197,909			77,538,576
Total deposits		279,411,139			265,238,973
Federal Home Loan Bank advances		50,000,000			67,000,000
Escrows		243,837			228,816
Escrows - discontinued operations		44,011			149,776
Accrued interest and other liabilities		3,626,504			3,520,201
Accrued interest and other liabilities - discontinued operations		939,732			717,407
Total liabilities		334,265,223			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, 3,339,220 and 3,374,565 issued and outstanding.		33,392			33,746
Additional paid-in capital		25,099,268			25,500,873
Retained earnings		22,464,648			22,928,777
Accumulated other comprehensive income (loss), net of tax		340,420			(396,148	)
Unearned employee stock ownership plan (ESOP) shares		(1,611,440	)		(1,644,514	)
Total stockholders’ equity		46,326,288			46,422,734
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	380,591,511		$	383,277,907

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

Page 2 of 41

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME - UNAUDITED

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income
Interest and fees on loans	$	4,414,091		$	3,793,706		$	8,567,298		$	7,542,681
Interest on securities		230,266			147,407			454,073			295,988
Interest on other interest-earning assets		128,265			73,546			250,254			141,576
Total interest income		4,772,622			4,014,659			9,271,625			7,980,245
Interest expense
Interest on deposits		912,081			512,966			1,773,350			1,006,702
Interest on borrowings		265,698			165,876			543,863			253,070
Total interest expense		1,177,779			678,842			2,317,213			1,259,772
Net interest income		3,594,843			3,335,817			6,954,412			6,720,473
Provision for loan losses		85,000			71,000			172,500			93,000
Net interest income after provision for loan losses		3,509,843			3,264,817			6,781,912			6,627,473
Noninterest income
Gain on sale of loans		31,390			15,043			58,297			122,988
Service charges and fees		114,068			94,575			209,267			178,964
Bank owned life insurance income		92,709			91,149			183,971			179,746
Other		9,835			2,335			20,991			26,941
Total noninterest income		248,002			203,102			472,526			508,639
Noninterest expense
Salaries and benefits		1,644,543			1,486,626			3,232,069			3,029,092
Occupancy		349,276			351,194			700,692			698,006
Data processing fees		507,933			367,954			992,659			768,954
FDIC and other insurance expense		60,460			51,332			146,063			101,865
Professional fees		227,331			216,518			409,490			511,383
Advertising		38,141			31,469			104,198			81,064
Other		269,152			295,000			502,640			594,600
Total noninterest expense		3,096,836			2,800,093			6,087,811			5,784,964
Income from continuing operations before provision for income taxes		661,009			667,826			1,166,627			1,351,148
Provision for income taxes		148,277			162,295			266,752			309,824
Net income from continuing operations		512,732			505,531			899,875			1,041,324
Discontinued operations
Loss from discontinued operations	$	(1,132,237	)	$	(168,969	)	$	(1,590,638	)	$	(386,521	)
Benefit for income taxes		(279,727	)		(42,999	)		(392,193	)		(95,385	)
Net loss from discontinued operations		(852,510	)		(125,970	)		(1,198,445	)		(291,136	)
NET (LOSS) INCOME		(339,778	)		379,561			(298,570	)		750,188
Other comprehensive income
Unrealized gain (loss) on available-for-sale securities		634,099			(143,091	)		988,018			(490,359	)
Tax effect of unrealized (gain) loss on available-for-sale securities		(161,378	)		36,417			(251,450	)		125,097
Unrealized gain (loss) on available-for-sale securities, net of tax		472,721			(106,674	)		736,568			(365,262	)
COMPREHENSIVE INCOME	$	132,943		$	272,887		$	437,998		$	384,926
(Loss) Earnings per common share - Basic
Earnings per common share - continuing operations	$	0.16		$	0.16		$	0.29		$	0.32
Loss per common share - discontinued operations		(0.27	)		(0.04	)		(0.38	)		(0.09	)
(Loss) Earnings per common share - Basic	$	(0.11	)	$	0.12		$	(0.09	)	$	0.23
(Loss) Earnings per common share - Diluted
Earnings per common share - continuing operations	$	0.16		$	0.16		$	0.29		$	0.32
Loss per common share - discontinued operations		(0.27	)		(0.04	)		(0.38	)		(0.09	)
(Loss) Earnings per common share - Diluted	$	(0.11	)	$	0.12		$	(0.09	)	$	0.23

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

Page 3 of 41

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
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

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

Page 4 of 41

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net (Loss) Income	$	(298,570	)	$	750,188
Less: Net loss from discontinued operations		(1,198,445	)		(291,136	)
Net income from continuing operations		899,875			1,041,324
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		323,710			355,997
Stock dividends on financial institution stock		(54,800	)		(35,100	)
Amortization of premiums and discounts on securities, net		51,133			149,740
Amortization of ESOP awards		33,074			27,929
Amortization of stock-based compensation		164,054			189,191
Amortization of core deposit intangible		20,430			26,202
Gain on sale of loans		(58,297	)		(122,988	)
Proceeds from sale of loans		993,026			1,566,494
Provision for loan losses		172,500			93,000
Net appreciation on bank-owned life insurance		(137,965	)		(139,298	)
Deferred income tax (benefit) expense		(128,832	)		64,144
Changes in operating assets and liabilities:
Accrued interest receivable		(136,820	)		(60,793	)
Prepaid and other assets		102,459			(585,001	)
Accrued interest and other liabilities		328,628			493,398
Net cash from operating activities - continuing operations		2,572,175			3,064,239
Net cash from operating activities - discontinued operations		22,705,420			(6,175,485	)
Net cash from operating activities		25,277,595			(3,111,246	)
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities		2,874,659			2,559,998
Purchases of available-for-sale securities		(3,179,247	)		(8,033,591	)
Purchase of bank-owned life insurance		-			(155,000	)
Net change in loans held for investment		(7,885,418	)		(20,200,083	)
Purchases of premises and equipment		(2,905	)		(170,617	)
Net cash from investing activities		(8,192,911	)		(25,999,293	)
Cash flows from financing activities
Net change in deposits		14,172,166			10,946,882
Net change in escrows		(90,744	)		94,956
Proceeds from Federal Home Loan Bank advances		30,000,000			80,000,000
Repayments of Federal Home Loan Bank advances		(47,000,000	)		(45,000,000	)
Exercise of stock options		70,058			149,228
Dividends paid		(165,559	)		(4,161,114	)
Common stock repurchases		(636,071	)		(1,572,050	)
Net cash from financing activities		(3,650,150	)		40,457,902
Net change in cash and cash equivalents		13,434,534			11,347,363
Cash and cash equivalents, beginning of period		11,774,457			9,873,178
Cash and cash equivalents, end of period	$	25,208,991		$	21,220,541
Supplemental disclosures:
Interest on deposits and advances paid	$	2,272,650		$	1,281,600
Income taxes paid	$	21,000		$	109,100
Loans transferred to loans held for sale	$	934,729		$	1,443,506

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

Page 5 of 41

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 will be 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.

A large portion of the Bank’s New Mexico loans are secured by real estate in Otero and Dona Ana Counties. The economy for these counties is heavily dependent on two U.S. Government military installations located in those counties. Accordingly, the ultimate collectability of the Bank’s New Mexico loans is susceptible to changes in U.S. Government military operations in southern New Mexico.

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 six months ended June 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 (loss) 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.

Page 6 of 41

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.

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 will replace most existing revenue recognition guidance in GAAP when it becomes 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 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.

Page 7 of 41

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. 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. ASU 2017-08 is not expected to 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.

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 third quarter of 2019. Subject to customary closing conditions, all related transactions are expected to be completed by September 30, 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.

Page 8 of 41

The following table summarizes the net loss on disposal of discontinued operations:

	Three Months		Six Months
	Ended		Ended
	June 30, 2019		June 30, 2019
Severance benefits	$	147,948	$	147,948
Leases, software & other contractual obligations		360,613		360,613
Fixed asset losses		30,423		30,423
Other costs		212,998		212,998
Net Loss on Disposal	$	751,982	$	751,982

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net interest income	$	85,484		$	97,079		$	170,782		$	161,876
Gain on sale of loans		2,095,986			4,044,704			4,813,660			7,290,152
Other		190			-			190			-
Total noninterest income		2,096,176			4,044,704			4,813,850			7,290,152
Salaries and benefits		1,919,033			3,372,779			4,480,025			6,060,290
Occupancy		84,314			173,517			232,360			332,656
Data processing fees		282,503			367,471			584,369			689,877
Professional fees		51,993			43,481			107,972			75,672
Advertising		70,469			89,279			118,801			195,710
Net loss on disposal		751,982			-			751,982			-
Other		153,603			264,225			299,761			484,344
Total noninterest expense		3,313,897			4,310,752			6,575,270			7,838,549
Loss from discontinued operations		(1,132,237	)		(168,969	)		(1,590,638	)		(386,521	)
Benefit for income taxes		(279,727	)		(42,999	)		(392,193	)		(95,385	)
Net loss from discontinued operations	$	(852,510	)	$	(125,970	)	$	(1,198,445	)	$	(291,136	)

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 June 30, 2019, and prior year balances have been adjusted to conform with the current period presentation.

Page 9 of 41

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:

	June 30, 2019		December 31, 2018
Loans held for sale - discontinued operations	$	2,980,149	$	26,884,014
Premises and equipment, net - discontinued operations		26,542		56,683
Accrued interest receivable - discontinued operations		11,665		11,527
Prepaid and other assets - discontinued operations		54,207		241,415
Total assets	$	3,072,563	$	27,193,639
Escrows - discontinued operations		44,011		149,776
Accrued interest and other liabilities - discontinued operations		939,732		717,407
Total liabilities	$	983,743	$	867,183
Net assets	$	2,088,820	$	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 June 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
June 30, 2019
Available-for-sale securities
Mortgage-backed securities	$	26,467,688	$	429,033	$	(197,730	)	$	26,698,991
U.S. Government agencies		1,291,408		4,090		(20,332	)		1,275,166
Municipal obligations		6,454,203		241,771		-			6,695,974
Total	$	34,213,299	$	674,894	$	(218,062	)	$	34,670,131
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

Page 10 of 41

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

Amortized cost and fair value of securities by contractual maturity as of June 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.

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

	June 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		23,546,233		23,794,584		23,040,618		22,482,300
Due after five to ten years		7,488,721		7,563,485		10,515,614		10,543,434
Due after ten years		3,178,345		3,312,062		-		-
Totals	$	34,213,299	$	34,670,131	$	33,959,844	$	33,428,658

At June 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 June 30, 2019 and December 31, 2018, mortgage-backed securities included collateralized mortgage obligations of $13.0 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.

Page 11 of 41

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.

	June 30, 2019
	Less Than 12 Months				12 Months or More					Total
			Gross				Gross					Gross
Description of			Unrealized				Unrealized					Unrealized
Securities	Fair Value		Losses		Fair Value		Losses			Fair Value		Losses
Available-for-sale securities:
Mortgage-backed securities	$	-	$	-	$	13,244,444	$	(197,730	)	$	13,244,444	$	(197,730	)
U.S. Government agencies		-		-		997,341		(20,332	)		997,341		(20,332	)
Total temporarily impaired securities	$	-	$	-	$	14,241,785	$	(218,062	)	$	14,241,785	$	(218,062	)

	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 June 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 June 30, 2019.

Loans and securities with a carrying value of approximately $151.3 million at June 30, 2019 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities with a carrying value of approximately $3.6 million at June 30, 2019 were pledged to secure public deposits.

Page 12 of 41

NOTE 4 – LOANS HELD FOR INVESTMENT, NET

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

	June 30, 2019						December 31, 2018
	Amount			Percent			Amount			Percent
Loans held for investment, net:
Commercial real estate	$	240,468,282			81.9	%	$	233,102,637			81.3	%
One- to four-family residential real estate		29,671,016			10.1			29,855,462			10.4
Commercial and industrial		19,105,548			6.5			17,508,258			6.1
Consumer and other		4,391,098			1.5			6,374,532			2.2
Total gross loans		293,635,944			100.0	%		286,840,889			100.0	%
Unamortized loan fees		(999,183	)					(1,149,517	)
Loans held for investment		292,636,761						285,691,372
Allowance for loan losses		(3,068,291	)					(2,901,091	)
Loans held for investment, net	$	289,568,470					$	282,790,281

At June 30, 2019 and December 31, 2018, loans held for investment includes construction loans of $17.7 million and $20.8 million, respectively. 

Page 13 of 41

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 June 30, 2019 and December 31, 2018:

	As of June 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		2,426,902		219,630		398,339		23,420		3,068,291
Total	$	2,426,902	$	219,630	$	398,339	$	23,420	$	3,068,291
Gross loans
Ending balance: individually evaluated for impairment	$	2,982,136	$	608,403	$	-	$	-	$	3,590,539
Ending balance: collectively evaluated for impairment		237,486,146		29,062,613		19,105,548		4,391,098		290,045,405
Total	$	240,468,282	$	29,671,016	$	19,105,548	$	4,391,098	$	293,635,944

	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

Page 14 of 41

The following tables summarize activities for the allowance for loan losses for the six months ended June 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
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

Page 15 of 41

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of June 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
June 30, 2019
Commercial real estate	$	-	$	-	$	2,744,405	$	2,744,405	$	237,723,877	$	240,468,282
One- to four-family residential real estate		-		171,336		490,158		661,494		29,009,522		29,671,016
Commercial and industrial		-		-		-		-		19,105,548		19,105,548
Consumer and other		-		-		-		-		4,391,098		4,391,098
Totals	$	-	$	171,336	$	3,234,563	$	3,405,899	$	290,230,045	$	293,635,944

	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 June 30, 2019 and December 31, 2018:

	June 30,			December 31,
	2019			2018
Nonaccrual loans
Commercial real estate	$	2,982,136		$	2,993,923
One- to four-family residential real estate		608,403			649,685
Commercial and industrial		-			-
Consumer and other		-			-
Total nonaccrual loans		3,590,539			3,643,608
Other real estate (ORE)		-			-
Total nonperforming assets	$	3,590,539		$	3,643,608
Nonperforming assets to gross loans held for investment and ORE		1.22	%		1.27	%
Nonperforming assets to total assets		0.94	%		0.95	%

One large loan relationship, 75% guaranteed by the SBA and partially secured by real estate, comprises $2.7 million, or 76.4%, of the $3.6 million in nonaccrual loans at June 30, 2019 and $2.3 million, or 64.2% of the total June 30, 2019 nonaccrual loan balance, is guaranteed by the SBA.

Page 16 of 41

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at June 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 June 30, 2019
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Grade
Pass	$	235,347,875	$	28,133,783	$	18,869,322	$	4,391,098	$	286,742,078
Special mention		-		-		-		-		-
Substandard		5,120,407		1,537,233		236,226		-		6,893,866
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
Totals	$	240,468,282	$	29,671,016	$	19,105,548	$	4,391,098	$	293,635,944

	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.

Page 17 of 41

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 June 30, 2019
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment
With no related allowance recorded:
Commercial real estate	$	2,982,136	$	2,982,136	$	-	$	2,989,009
One- to four-family residential real estate		608,403		608,403		-		611,824
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,590,539	$	3,590,539	$	-	$	3,600,833
With an allowance recorded:	$	-	$	-	$	-	$	-
Total:
Commercial real estate	$	2,982,136	$	2,982,136	$	-	$	2,989,009
One- to four-family residential real estate		608,403		608,403		-		611,824
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,590,539	$	3,590,539	$	-	$	3,600,833

	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
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	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
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,643,608	$	3,643,608	$	-	$	3,663,931

Page 18 of 41

During the six months ended June 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 June 30, 2019 and December 31, 2018.

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 $51,000 and $54,000, as of June 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 June 30, 2019 and December 31, 2018:

	June 30, 2019		December 31, 2018
Commitments to originate and sell mortgage loans	$	-	$	34,268,309
Commitments to extend credit		20,015,686		25,323,822
Unused lines of credit		20,407,301		18,281,453
Totals	$	40,422,987	$	77,873,584

There were no commitments to originate and sell mortgage loans at June 30, 2019 due to the Company exiting mortgage banking operations by transferring employees, lease obligations and fixed assets to other financial institutions before that date. For more information in that regard, 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.

Page 19 of 41

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 June 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 June 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.

Page 20 of 41

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 June 30, 2019:
Total Capital (to Risk-Weighted Assets)	$	41,643		14.41	%	$	23,119		≥8.00	%	$	28,898		≥10.00	%
Tier I Capital (to Risk-Weighted Assets)	$	38,505		13.32	%	$	17,339		≥6.00	%	$	23,119		≥8.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	$	38,505		13.32	%	$	13,004		≥4.50	%	$	18,784		≥6.50	%
Tier I Capital (to Average Assets)	$	38,505		9.88	%	$	15,589		≥4.00	%	$	19,486		≥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	%

Page 21 of 41

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 six months ended June 30, 2019 and 2018 is presented below:

	For the Six Months Ended June 30, 2019
						Average
				Weighted-		Remaining
				Average		Contractual
	Shares			Exercise Price		Term (years)
Outstanding, December 31, 2018		164,410		$	14.69	5.8
Granted		1,000			14.63	7.0
Exercised		(7,260	)		9.65	-
Forfeited or expired		(4,800	)		14.90	-
Outstanding, June 30, 2019		153,350		$	14.92	5.5
Exercisable, June 30, 2019		31,430		$	14.91	5.4

	For the Six Months Ended June 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	7.0
Exercised		(15,464	)		9.65	-
Forfeited or expired		(7,734	)		11.08	-
Outstanding, June 30, 2018		188,910		$	14.71	6.2
Exercisable, June 30, 2018		7,260		$	9.65	1.0

The exercise price of outstanding stock options at June 30, 2019 range from $14.63 to $15.48 per share. The grant date fair value of stock options awarded in the six months ended June 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

Page 22 of 41

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

				Weighted		Average
				Average		Remaining
				Grant Date		Contractual
	Shares			Price		Term (years)
	For the Six Months Ended June 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, June 30, 2019		48,544		$	14.90		3.5

	For the Six Months Ended June 30, 2018
Outstanding, December 31, 2017		74,750	$	14.90	4.9
Granted		429		15.48	5.0
Vested		-		-	-
Forfeited or expired		-		-	-
Outstanding, June 30, 2018		75,179	$	14.90	4.5

Compensation and benefits included $147,000 and $267,000 of stock-based expense for the six months ended June 30, 2019 and 2018, respectively. Restricted stock award dividends included in stock-based expense were $2,000 and $94,000 for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, there was $1.0 million of total unrecognized stock-based expense including $388,000 related to unvested stock options and $619,000 from restricted stock awards granted under the 2017 Equity Incentive Plan that is expected to be recognized ratably over the next 3.5 years.

Page 23 of 41

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 June 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
June 30, 2019
Recurring basis
Mortgage-backed securities	$	-	$	26,698,991		$	-	$	26,698,991
U.S. Government agencies		-		1,275,166			-		1,275,166
Municipal obligations		-		6,695,974			-		6,695,974
Loans held for sale		-		2,980,149			-		2,980,149
Nonrecurring basis
Impaired loans		-		-			3,590,539		3,590,539
Totals	$	-	$	37,650,280		$	3,590,539	$	41,240,819
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 six months ended June 30, 2019 or 2018. 

Page 24 of 41

The following table presents estimated fair values of the Company’s financial instruments at June 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 June 30, 2019:
Financial assets:
Cash and due from banks	$	6,324		$	6,324		$	6,324	$	-		$	-
Interest-bearing deposits with banks		18,885			18,885			18,885		-			-
Available-for-sale securities		34,670			34,670			-		34,670			-
Loans held for sale - discontinued operations		2,980			2,980			-		2,980			-
Loans held for investment, net		289,568			290,986			-		-			290,986
Stock in financial institutions		3,965			3,965			-		3,965			-
Financial liabilities:
Demand deposits, savings and NOW deposits		199,213			191,893			191,893		-			-
Time deposits		80,198			80,521			-		80,521			-
Federal Home Loan Bank advances		50,000			50,027			-		50,027			-
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.

Page 25 of 41

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 – The fair value of 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 June 30, 2019
Impaired loans
Commercial real estate	$	2,982,136	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
One- to four-family residential real estate		608,403	Appraisal	Appraisal discount and estimated selling costs	17	-	18%
Total Impaired Loans	$	3,590,539
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%

Page 26 of 41

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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Basic:
Net income from continuing operations	$	512,732		$	505,531		$	899,875		$	1,041,324
Net loss from discontinued operations		(852,510	)		(125,970	)		(1,198,445	)		(291,136	)
Less: Earnings (loss) allocated to participating securities (1)		5,212			(8,844	)		4,768			(17,336	)
Net (loss) income allocated to common shareholders	$	(334,566	)	$	370,717		$	(293,802	)	$	732,852
Weighted-average common shares outstanding including participating securities		3,355,929			3,402,706			3,358,183			3,423,430
Less: Average participating securities		(48,864	)		(75,179	)		(49,331	)		(75,042	)
Less: Average unallocated ESOP Shares		(170,316	)		(176,102	)		(170,316	)		(176,102	)
Average shares		3,136,749			3,151,425			3,138,536			3,172,287
Basic earnings per common share - continuing operations	$	0.16		$	0.16		$	0.29		$	0.32
Basic loss per common share - discontinued operations		(0.27	)		(0.04	)		(0.38	)		(0.09	)
Basic (loss) earnings per common share	$	(0.11	)	$	0.12		$	(0.09	)	$	0.23
Diluted:
Net (loss) income allocated to common shareholders	$	(334,566	)	$	370,717		$	(293,802	)	$	732,852
Weighted-average common shares outstanding for basic earnings per common share		3,136,749			3,151,425			3,138,536			3,172,287
Add: Dilutive effects of assumed exercises of stock options		4,747			12,788			3,399			11,516
Weighted average shares and dilutive potential common shares		3,141,497			3,164,212			3,141,935			3,183,803
Diluted earnings per common share - continuing operations	$	0.16		$	0.16		$	0.29		$	0.32
Diluted loss per common share - discontinued operations		(0.27	)		(0.04	)		(0.38	)		(0.09	)
Diluted (loss) earnings per common share	$	(0.11	)	$	0.12		$	(0.09	)	$	0.23

(1) Our participating securities are restricted stock awards which participate in common stock dividends.

Page 27 of 41

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

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section as of and for the three and six months ended June 30, 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.

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.

Page 28 of 41

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. 

Page 29 of 41

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 June 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	$	295,516		$	4,414		5.99	%	$	266,723		$	3,794		5.71	%
Securities		34,502			230		2.67	%		26,709			147		2.21	%
Other interest earning assets		20,930			128		2.45	%		16,281			74		1.82	%
Total interest-earning assets - continuing operations		350,948			4,772		5.45	%		309,713			4,015		5.20	%
Loans held for sale - discontinued operations		17,302			190		4.40	%		17,230			205		4.77	%
Total interest-earning assets		368,250			4,962		5.40	%		326,943			4,220		5.18	%
Noninterest-earning assets		22,992								23,437
Total assets	$	391,242							$	350,380
Interest-bearing liabilities:
Checking, money market and savings accounts	$	148,638		$	509		1.37	%	$	128,912		$	295		0.92	%
Certificates of deposit		78,721			403		2.05	%		64,495			218		1.36	%
Total deposits		227,359			912		1.61	%		193,407			513		1.06	%
Advances from FHLB of Dallas - continuing operations		60,967			266		1.75	%		64,011			166		1.04	%
Total interest-bearing liabilities - continuing operations		288,326			1,178		1.64	%		257,418			679		1.06	%
Advances from FHLB of Dallas - discontinued operations		-			104		-			-			108		-
Total interest-bearing liabilities		288,326			1,282		1.78	%		257,418			787		1.23	%
Non-interest bearing deposits		51,390								40,530
Non-interest bearing liabilities		4,165								5,597
Total liabilities		343,881								303,545
Stockholders' equity		47,361								46,835
Total liabilities and stockholders' equity	$	391,242							$	350,380
Net interest income - continuing operations				$	3,594							$	3,336
Net interest rate spread - continuing operations (2)							3.82	%							4.14	%
Net interest margin - continuing operations (4)							4.11	%							4.32	%
Net interest income				$	3,680							$	3,433
Net interest rate spread (2)							3.62	%							3.95	%
Net interest-earning assets (3)	$	79,924							$	69,525
Net interest margin (4)							4.01	%							4.21	%
Average interest-earning assets to average interest-bearing liabilities		127.72	%							127.01	%

(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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	Six Months Ended June 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	$	292,466		$	8,567		5.91	%	$	264,130		$	7,543		5.76	%
Securities		33,961			454		2.70	%		26,817			296		2.23	%
Other interest earning assets		20,233			250		2.49	%		15,744			141		1.81	%
Total interest-earning assets - continuing operations		346,660			9,271		5.39	%		306,691			7,980		5.25	%
Loans held for sale - discontinued operations		16,191			369		4.60	%		14,557			332		4.60	%
Total interest-earning assets		362,851			9,640		5.36	%		321,248			8,312		5.22	%
Noninterest-earning assets		23,303								23,808
Total assets	$	386,154							$	345,056
Interest-bearing liabilities:
Checking, money market and savings accounts	$	146,991		$	976		1.34	%	$	129,719		$	577		0.90	%
Certificates of deposit		79,387			797		2.02	%		65,663			430		1.32	%
Total deposits		226,378			1,773		1.58	%		195,382			1,007		1.04	%
Advances from FHLB of Dallas - continuing operations		60,630			544		1.81	%		52,681			253		0.97	%
Total interest-bearing liabilities - continuing operations		287,008			2,317		1.63	%		248,063			1,260		1.02	%
Advances from FHLB of Dallas - discontinued operations		-			198		-			-			170		-
Total interest-bearing liabilities		287,008			2,515		1.77	%		248,063			1,430		1.16	%
Non-interest bearing deposits		47,810								43,107
Non-interest bearing liabilities		4,164								5,030
Total liabilities		338,982								296,200
Stockholders' equity		47,172								48,856
Total liabilities and stockholders' equity	$	386,154							$	345,056
Net interest income - continuing operations				$	6,954							$	6,720
Net interest rate spread - continuing operations (2)							3.77	%							4.22	%
Net interest margin - continuing operations (4)							4.05	%							4.42	%
Net interest income				$	7,125							$	6,882
Net interest rate spread (2)							3.59	%							4.06	%
Net interest-earning assets (3)	$	75,843							$	73,185
Net interest margin (4)							3.96	%							4.32	%
Average interest-earning assets to average interest-bearing liabilities		126.43	%							129.50	%

(1)	Yield/Rate for the six-month periods have been annualized.
(2)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)	Net interest margin represents net interest income as a percentage of average total interest-earning assets.

Page 31 of 41

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

Cash and cash equivalents were $25.2 million at June 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, mortgage loans held for sale and FHLB advances. Cash and cash equivalents were above normal target level at June 30, 2019 due to the rapid reduction in mortgage loans held for sale in June 2019, and $10.0 million of the excess was used to pay off an FHLB Advance due July 10, 2019.

Available-for-sale securities increased $1.2 million, or 3.7%, during the six months ended June 30, 2019 to $34.7 million. There were no sales of available-for-sale securities and we purchased $3.2 million of securities in the six months ended June 30, 2019.

Loans held for sale at June 30, 2019 totaled $3.0 million, consisting entirely of residential mortgage loans. Up to 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. The balances at any date vary based upon the timing and volume of current loan originations and sales. 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 $6.9 million, or 2.4%, to $292.6 million at June 30, 2019 from $285.7 million at December 31, 2018, due to organic growth. In the six months ended June 30, 2019, commercial real estate loans increased $7.4 million to $240.5 million and represented 81.9% of the gross loan portfolio at June 30, 2019, compared to 81.3% at December 31, 2018.

Total deposits increased $14.2 million, or 5.3%, to $279.4 million at June 30, 2019 from $265.2 million at December 31, 2018. The increase included an $8.9 million, or 6.3%, increase in savings and NOW deposits, a $2.7 million, or 3.4%, increase in time deposits and a $2.6 million, or 5.7%, increase in demand deposits.

Federal Home Loan Bank advances were down $17.0 million, or 25.4%, to $50.0 million at June 30, 2019 compared to $67.0 million at December 31, 2018. The decrease was primarily due to a $23.9 million decrease in loans held for sale, partially offset by a $6.9 million increase in loans held for investment. 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 $329,000, or 7.8%, to $4.6 million at June 30, 2019 compared to $4.2 million at December 31, 2018.

Total stockholders’ equity decreased $96,000 to $46.3 million at June 30, 2019 from $46.4 million at December 31, 2018. The largest changes in stockholders’ equity were a $737,000 increase due to available-for-sale securities fair value appreciation and a $636,000 reduction due to common stock repurchases.

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

General. We had net income from continuing operations of $513,000 for the three months ended June 30, 2019, which was $7,000 more than net income from continuing operations of $506,000 for the three months ended June 30, 2018. The increase was primarily caused by a $259,000, or 7.8%, increase in net interest income, and a $45,000 increase in noninterest income, partially offset by a $297,000, or 10.6%, increase in noninterest expense.

We had a net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, of $853,000 for the three months ended June 30, 2019, which was $727,000 more than net loss from discontinued operations of $126,000 for the three months ended June 30, 2018. The increase was primarily caused by a $752,000 net loss on disposal of discontinued operations.

Interest Income. Interest income from continuing operations increased $758,000, or 18.9%, to $4.8 million for the three months ended June 30, 2019 from $4.0 million for the three months ended June 30, 2018. The increase was due to a $41.2 million, or 13.3%, increase in average interest-earning assets and a 25 basis point increase in average yields, partially offset by a change in asset mix as loans, our highest yielding assets, decreased to 84.2% of average interest-earning assets from 86.1% of average interest-earning assets. The 25 basis point increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of 28 basis points, 46 basis points and 63 basis points, respectively. Interest income on loans increased due primarily to a $28.8 million, or 10.8%, increase in average loan balances due to organic growth and a 28 basis point increase in yield to 5.99% for the three months ended June 30, 2019 from 5.71% for the three months ended June 30, 2018. Interest on securities increased $83,000, or 56.2%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 due primarily to a $7.8 million, or 29.2%, increase in average securities balances due to fourth quarter 2018 purchases and a 46 basis point increase in yield due to favorable rates on the most recent securities purchased.

Interest Expense. Interest expense from continuing operations increased $499,000, or 73.5%, to $1.2 million for the three months ended June 30, 2019 from $679,000 for the three months ended June 30, 2018. The increase was the result of increases of $399,000, or 77.8%, in interest expense on deposits and $100,000, or 60.2%, in interest expense on borrowings. The average balance of borrowings decreased $3.0 million, or 4.8%, from the quarter ended June 30, 2018 to the quarter ended June 30, 2019 and the average rate paid increased 71 basis points to 1.75% for the three months ended June 30, 2019 from 1.04% for the three months ended June 30, 2018.

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Interest paid on checking, money market and savings accounts increased $214,000, or 72.5%, to $509,000 for the three months ended June 30, 2019 from $295,000 for the three months ended June 30, 2018. The average rate we paid on such deposit accounts increased 45 basis points to 1.37% for the three months ended June 30, 2019 from 0.92% for the three months ended June 30, 2018 due to the increase in market interest rates, and the average balance increased $19.7 million, or 15.3%, to $148.6 million for the three months ended June 30, 2019 from $128.9 million for the three months ended June 30, 2018.

Interest on certificates of deposit increased $185,000, or 84.9%, to $403,000 for the three months ended June 30, 2019 from $218,000 for the three months ended June 30, 2018. The average rate paid on certificates of deposit increased 69 basis points, or 50.7%, to 2.05% for the three months ended June 30, 2019 compared to 1.36% for the three months ended June 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $14.2 million, or 22.1%, to $78.7 million for the three months ended June 30, 2019 from $64.5 million for the three months ended June 30, 2018.

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

Net Interest Income. Net interest income from continuing operations increased $259,000, or 7.8%, to $3.6 million for the three months ended June 30, 2019 from $3.3 million for the three months ended June 30, 2018, primarily due to a 13.3% increase in average interest earning assets mostly offset by a 33 basis point decrease in net interest rate spread to 3.82% for the three months ended June 30, 2019 from 4.14% for the three months ended June 30, 2018. Average interest bearing liability rates for continuing operations increased 58 basis points compared to a 25 basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $10.4 million, or 15.0%, to $79.9 million for the three months ended June 30, 2019 from $69.5 million for the three months ended June 30, 2018 due primarily to organic growth.

Net interest income from discontinued operations decreased $12,000, or 11.9%, to $85,000 for the three months ended June 30, 2019 from $97,000 for the three months ended June 30, 2018, primarily due to a 34 basis point decrease in average yield on mortgage loans held for sale to 4.44% for the three months ended June 30, 2019 from 4.78% for the three months ended June 30, 2018. Average mortgage loans held for sale increased by $72,000, or 0.4%, to $17.3 million for the three months ended June 30, 2019 from $17.2 million for the three months ended June 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 a provision for loan losses of $85,000 for the three months ended June 30, 2019, compared to $71,000 for the three months ended June 30, 2018. In the three months ended June 30, 2019, the allowance for loan losses increased $87,000 or 2.9%, including $85,000 from provisions and $2,000 in net recoveries.

To the best of our knowledge, at June 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 $45,000, or 22.1%, to $248,000 for the three months ended June 30, 2019 from $203,000 for the three months ended June 30, 2018 due primarily to a $16,000, or 108.7%, increase in loan sales gains, and an $19,000, or 20.6%, increase in service charges and fees.

The gain on sale of loans from continuing operations increased $16,000, or 108.7%, to $31,000 for the three months ended June 30, 2019 from $15,000 for the three months ended June 30, 2018. We sold $504,000 of SBA loans during the three months ended June 30, 2019 and recognized $31,000 of sales gains directly into income compared to $171,000 of SBA loan sales in the quarter ended June 30, 2018 with gains of $15,000.

Noninterest income from discontinued operations, represented by loan sales gains, decreased $1.9 million, or 48.2%, to $2.1 million for the three months ended June 30, 2019 from $4.0 million for the three months ended June 30, 2018. The gain on sale of loans from discontinued operations decreased due primarily to the effects of pipeline fair value adjustments on sales gain. During the three months ended June 30, 2019, we sold $70.4 million of mortgage loans for a gain of $2.1 million, compared to $86.6 million of mortgage loan sales during the three months ended June 30, 2018 for a gain of $4.0 million.  We realized a 4.2% average premium (gain on sale/sold loans) on the sales of mortgage loans for the three months ended June 30, 2019 and 3.9% for the three months ended June 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 $297,000, or 10.6%, to $3.1 million for the three months ended June 30, 2019 from $2.8 million for the three months ended June 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees. Average assets from continuing operations for the quarter ended June 30, 2019 were 12.2% larger than for the quarter ended June 30, 2018.

Noninterest expense from discontinued operations decreased $997,000, or 23.1%, to $3.3 million for the three months ended June 30, 2019 from $4.3 million for the three months ended June 30, 2018. The decrease was primarily related to lower salaries and benefits, occupancy and data processing fees, partially offset by the net loss on disposal for the quarter ended June 30, 2019. Loans held for sale decreased $23.9 million, or 88.9%, from December 31, 2018 due to the mortgage banking business exit.

Provision for Income Tax. Provision for income tax expense from continuing operations was $148,000 for the three months ended June 30, 2019, representing an effective tax rate of 22.4% 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 $162,000 for the three months ended June 30, 2018 representing 24.3% of the $668,000 income from continuing operations before income taxes.

Benefit for income taxes from discontinued operations was $280,000 for the three months ended June 30, 2019, representing an effective tax rate of 24.7% on pre-tax loss from discontinued operations. There are numerous differences between pre-tax loss and actual taxable loss that have an effect on the effective income tax rate for any given period. We recognized a benefit for income taxes from discontinued operations of $43,000 for the three months ended June 30, 2018 representing 25.4% of the $169,000 loss before benefit for income taxes.

Comparison of Operating Results for the Six Months Ended June 30, 2019 and 2018

General. We had net income from continuing operations of $900,000 for the six months ended June 30, 2019, which was $141,000 less than net income from continuing operations of $1.0 million for the six months ended June 30, 2018. The decrease was primarily caused by a $303,000, or 5.2%, increase in noninterest expense and an $80,000 larger provision for loan losses, partially offset by a $234,000, or 3.5%, increase in net interest income.

We had a net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, of $1.2 million for the six months ended June 30, 2019, which was $907,000 more than net loss from discontinued operations of $291,000 for the six months ended June 30, 2018. The increase was primarily caused by a $2.5 million, or 34.0%, decrease in noninterest income, partially offset by a $1.3 million, or 16.1%, decrease in noninterest expense, and a $297,000 increase in benefit for income taxes. Noninterest expense for the six months ended June 30, 2019 included a $752,000 loss on disposal of discontinued operations.

Interest Income. Interest income from continuing operations increased $1.3 million, or 16.2%, to $9.3 million for the six months ended June 30, 2019 from $8.0 million for the six months ended June 30, 2018. The increase was due to a $40.0 million, or 13.0%, increase in average interest-earning assets and a 14 basis point increase in average yields, partially offset by a change in asset mix as loans, our highest yielding assets, decreased to 84.4% of average interest-earning assets from 86.1% of average interest-earning assets. The 14 basis point increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of 15 basis points, 47 basis points and 68 basis points, respectively. Interest income on loans increased due primarily to a $28.3 million, or 10.7%, increase in average loan balances due to organic growth and a 15 basis point increase in yield to 5.91% for the six months ended June 30, 2019 from 5.76% for the six months ended June 30, 2018. Interest on securities increased $158,000, or 53.4%, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 due primarily to a $7.1 million, or 26.6%, increase in average securities balances due to fourth quarter 2018 purchases and a 47 basis point increase in yield due to favorable market rate increases.

Interest Expense. Interest expense from continuing operations increased $1.1 million, or 83.9%, to $2.3 million for the six months ended June 30, 2019 from $1.3 million for the six months ended June 30, 2018. The increase was the result of increases of $767,000, or 76.2%, in interest expense on deposits and $291,000, or 114.9%, in interest expense on borrowings. The average balance of borrowings increased $7.9 million, or 15.1%, from the six months ended June 30, 2018 to the six months ended June 30, 2019 and the average rate paid increased 84 basis points to 1.81% for the six months ended June 30, 2019 from 0.97% for the six months ended June 30, 2018.

Interest paid on checking, money market and savings accounts increased $399,000, or 69.2%, to $976,000 for the six months ended June 30, 2019 from $577,000 for the six months ended June 30, 2018. The average rate we paid on such deposit accounts increased 44 basis points to 1.34% for the six months ended June 30, 2019 from 0.90% for the six months ended June 30, 2018 due to the increase in market interest rates, and the average balance increased $17.3 million, or 13.3%, to $147.0 million for the six months ended June 30, 2019 from $129.7 million for the six months ended June 30, 2018.

Interest on certificates of deposit increased $367,000, or 85.3%, to $797,000 for the six months ended June 30, 2019 from $430,000 for the six months ended June 30, 2018. The average rate paid on certificates of deposit increased 70 basis points, or 53.0%, to 2.02% for the six months ended June 30, 2019 compared to 1.32% for the six months ended June 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $13.7 million, or 20.9%, to $79.4 million for the six months ended June 30, 2019 from $65.7 million for the six months ended June 30, 2018.

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

Net Interest Income. Net interest income from continuing operations increased $234,000, or 3.5%, to $7.0 million for the six months ended June 30, 2019 from $6.7 million for the six months ended June 30, 2018, primarily due to a 13.0% increase in average interest earning assets mostly offset by a 45 basis point decrease in net interest rate spread to 3.77% for the six months ended June 30, 2019 from 4.22% for the six months ended June 30, 2018. Average interest bearing liability rates for continuing operations increased 61 basis points compared to a 14 basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $2.7 million, or 3.6%, to $75.8 million for the six months ended June 30, 2019 from $73.2 million for the six months ended June 30, 2018 due primarily to organic growth.

Net interest income from discontinued operations increased $9,000, or 5.5%, to $171,000 for the six months ended June 30, 2019 from $162,000 for the six months ended June 30, 2018, primarily due to an 11.2% increase in average mortgage loans held for sale to $16.2 million for the six months ended June 30, 2019 from $14.6 million for the six months ended June 30, 2018.

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Provision for Loan Losses. We recorded a provision for loan losses of $173,000 for the six months ended June 30, 2019, compared to $93,000 for the six months ended June 30, 2018. In the six months ended June 30, 2019, the allowance for loan losses increased $167,000, or 5.8%, including an $173,000 increase from provisions, partially offset by $6,000 in net charge-offs.

Noninterest Income. Noninterest income from continuing operations decreased $36,000, or 7.1%, to $473,000 for the six months ended June 30, 2019 from $509,000 for the six months ended June 30, 2018 due primarily to an 52.6% decrease in loan sales gains.

The gain on sale of loans from continuing operations decreased $65,000, or 52.6%, to $58,000 for the six months ended June 30, 2019 from $123,000 for the six months ended June 30, 2018. We sold $935,000 of SBA loans during the six months ended June 30, 2019 and recognized $58,000 of sales gains directly into income compared to $1.4 million of SBA loan sales in the six months ended June 30, 2018 with gains of $123,000.

Noninterest income from discontinued operations, represented by loan sales gains, decreased $2.5 million, or 34.0%, to $4.8 million for the six months ended June 30, 2019 from $7.3 million for the six months ended June 30, 2018.The gain on sale of loans from discontinued operations decreased due primarily to the effects of pipeline fair value adjustments on sales gain. During the six months ended June 30, 2019, we sold $143.7 million of mortgage loans for a gain of $4.8 million, compared to $159.4 million of mortgage loan sales during the six months ended June 30, 2018 for a gain of $7.3 million.  We realized a 4.2% average premium (gain on sale/sold loans) on the sales of mortgage loans for the six months ended June 30, 2019 and 4.2% for the six months ended June 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 $303,000, or 5.2%, to $6.1 million for the six months ended June 30, 2019 from $5.8 million for the six months ended June 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees, partially offset by a decrease in professional fees. Average assets from continuing operations for the six months ended June 30, 2019 were 11.9% larger than for the six months ended June 30, 2018.

Noninterest expense from discontinued operations decreased $1.3 million, or 16.1%, to $6.6 million for the six months ended June 30, 2019 from $7.8 million for the six months ended June 30, 2018. The decrease was primarily related to lower salaries and benefits, occupancy and data processing fees, partially offset by the net loss on disposal for the quarter ended June 30, 2019. Loans held for sale decreased $23.9 million, or 88.9%, from December 31, 2018 due to the mortgage banking business exit.

Provision for Income Tax. Provision for income tax expense from continuing operations was $267,000 for the six months ended June 30, 2019, representing an effective tax rate of 22.9% 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 $310,000 for the six months ended June 30, 2018 representing 22.9% of the $1.4 million income from continuing operations before income taxes.

Benefit for income taxes from discontinued operations was $392,000 for the six months ended June 30, 2019, representing an effective tax rate of 24.7% on pre-tax loss from discontinued operations. There are numerous differences between pre-tax loss and actual taxable loss that have an effect on the effective income tax rate for any given period. We recognized a benefit for income taxes from discontinued operations of $95,000 for the six months ended June 30, 2018 representing 24.7% of the $387,000 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 June 30,			At December 31,
	2019			2018
Nonaccrual loans	(Dollars in thousands)
Real estate loans:
One- to four-family residential real estate	$	608		$	650
Commercial real estate		2,982			2,994
Commercial and industrial loans		-			-
Consumer and other loans		-			-
Total nonaccrual loans		3,590			3,644
Accruing loans past due 90 days or more		-			-
Total nonaccrual loans and accruing loans past due 90 days or more		3,590			3,644
Other real estate (ORE)
One- to four-family residential real estate		-			-
Commercial real estate		-			-
Total other real estate		-			-
Total nonperforming assets	$	3,590		$	3,644
Ratios:
Nonperforming loans to gross loans held for investment		1.22	%		1.27	%
Nonperforming assets to total assets		0.94	%		0.95	%
Nonperforming assets to gross loans held for investment and ORE		1.22	%		1.27	%

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One loan relationship secured by real estate comprises $2.7 million, or 76%, of the $3.6 million in nonaccrual loans at June 30, 2019, and $2.3 million, or 64%, of the total June 30, 2019 nonaccrual loan balance, is guaranteed by the SBA. This is a loan to an operating commercial entity that has filed for Chapter 11 bankruptcy protection. The loan is 75% SBA guaranteed and the outstanding balance is collateralized by the real estate and all business assets.

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

Interest income that would have been recorded for the six months ended June 30, 2019, had nonaccruing loans been current according to their original terms amounted to $119,000. We recognized $0 in interest income on nonaccrual loans and $0 related to troubled debt restructurings for the six months ended June 30, 2019.

As of June 30, 2019 and December 31, 2018 we had $51,000 and $54,000 in current troubled debt restructurings, respectively.

Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on the current level of net loan losses, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

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The following table sets forth activity in our allowance for loan losses for the periods indicated.

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Balance at beginning of period	$	2,981		$	3,122		$	2,901		$	3,117
Provision for loan losses		85			71			172			93
Charge-offs:
One- to four-family residential real estate loans		-			-			(9	)		(23	)
Commercial real estate loans		-			-			-			-
Commercial and industrial loans		-			-			-			-
Consumer and other loans		-			-			-			-
Total charge-offs		-			-			(9	)		(23	)
Recoveries:
One- to four-family residential real estate loans		2			6			2			12
Commercial real estate loans		-			-			-			-
Commercial and industrial loans		-			-			2			-
Consumer and other loans		-			-			-			-
Total recoveries		2			6			4			12
Net (charge-offs) recoveries		2			6			(5	)		(11	)
Balance at end of period	$	3,068		$	3,199		$	3,068		$	3,199
Allowance for loan losses to nonperforming loans		85.45	%		57.27	%		85.45	%		57.27	%
Allowance for loan losses to total loans		1.05	%		1.14	%		1.05	%		1.14	%
Allowance for loan losses to total loans less acquired loans		1.05	%		1.20	%		1.05	%		1.20	%
Net (charge-offs) recoveries to average loans outstanding during the period		0.00	%		0.00	%		(0.00	)%		0.00	%

The ratio of our allowance for loan losses to nonperforming loans increased due to a 36.7% decrease in nonperforming loans partially offset by a 4.5% decrease in the allowance for loan losses. The allowance for loan losses to total loans ratios decreased because total gross loans increased 10.9% and the allowance for loan losses decreased 4.5%.   

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, FHLB borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and 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 June 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 June 30, 2019, cash and cash equivalents totaled $25.2 million. Available-for-sale securities, which provide additional sources of liquidity, totaled $34.7 million at June 30, 2019. In addition, at June 30, 2019, we had $50.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to borrow an additional $98.4 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 June 30, 2019, we had $20.0 million in loan commitments outstanding. In addition, we had $20.4 million in unused lines of credit. Time deposits due within one year of June 30, 2019 totaled $38.4 million, or 13.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 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 six months ended June 30, 2019, we originated $44.6 million of loans held for investment and $19.8 million of mortgage loans held for sale, compared to $70.8 million of loans held for investment and $165.0 million of mortgage loans held for sale during the six months ended June 30, 2018. In the six months ended June 30, 2019 and 2018 we purchased $3.2 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 $14.2 million and $10.9 million in total deposits for the six months ended June 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 $50.0 million in Federal Home Loan Bank advances at June 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 June 30, 2019, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $4.1 million. In May 2019, the Company announced the payment of a quarterly cash dividend and the initial cash dividend of $0.05 per share, $166,000 in total, was paid in June 2019.

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2019 and December 31, 2018, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.

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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 June 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 June 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.

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. 2,500 and 20,495 shares were repurchased in May and June 2019, respectively.

The Company’s repurchases of common stock for the three months ended June 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 (1)
April 1, 2019 through April 30, 2019		---	$	---		---		167,747
May 1, 2019 through May 31, 2019		2,500	$	15.30		2,500		165,247
June 1, 2019 through June 30, 2019		20,495	$	15.56		20,495		144,752
		22,995				22,995

(1)  On October 24, 2017, the Company adopted a repurchase program under which it would repurchase up to 171,910 shares of its common stock, or approximately 5.0% of the Company’s outstanding shares.  This repurchase program was completed in February 2019. On May 24, 2019, the Company adopted a second repurchase program under which it would repurchase up to 167,747 shares of its common stock, or approximately 5.0% of the Company’s outstanding shares. This repurchase program will continue until it is completed or terminated by the Company’s Board of Directors.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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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 June 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:     August 8, 2019	/s/ Jill Gutierrez
	Jill Gutierrez
	President and Chief Executive Officer
Date:     August 8, 2019	/s/ Jan R. Thiry
	Jan R. Thiry
	Executive Vice President and Chief Financial Officer

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