Bancorp 34, Inc. [BCTF] Filings

 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2020

 

OR

 

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

 

Commission File No. 001-37912

 

Bancorp 34, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland	74-2819148
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
500 East 10th Street, Suite 100, Alamogordo, New Mexico	88310
(Address of Principal Executive Offices)	(Zip Code)

         

(575) 437-9334

(Registrant’s telephone number)

 

                                           N/A                                            

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

 

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

 

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

 

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

YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒   NO ☐

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐   NO ☒

 

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of July 27, 2020 were 3,199,913.

 

 

 

 

 

		June 30, 2020				December 31, 2019
ASSETS
Cash and due from banks		$	6,810,445			$	4,496,465
Interest-bearing deposits with banks			10,635,000				24,990,000
Total cash and cash equivalents			17,445,445				29,486,465
Available-for-sale securities, at fair value			63,568,281				44,517,178
Loans held for investment			351,347,449				294,660,719
Allowance for loan losses			(3,975,620	)			(2,921,931	)
Loans held for investment, net			347,371,829				291,738,788
Premises and equipment, net			8,555,144				8,990,955
Operating lease right-of-use assets			1,227,981				-
Stock in financial institutions, restricted, at cost			4,052,961				4,016,761
Accrued interest receivable			1,723,368				961,105
Deferred income tax asset, net			1,725,312				1,907,876
Bank owned life insurance			10,980,816				10,850,085
Core deposit intangible, net			115,328				133,052
Prepaid and other assets			1,249,765				1,137,090
TOTAL ASSETS		$	458,016,230			$	393,739,355
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits		$	71,746,775			$	56,401,370
Savings and NOW deposits			181,434,344				166,107,428
Time deposits			77,753,625				81,387,861
Total deposits			330,934,744				303,896,659
Federal Home Loan Bank advances			75,000,000				40,000,000
Escrows			258,140				254,593
Operating lease liabilities			1,325,960				-
Accrued interest and other liabilities			4,680,197				4,271,437
Accrued interest and other liabilities - discontinued operations			169,380				233,427
Total liabilities			412,368,421				348,656,116
Commitments and contingencies (note 5)			-				-
Stockholders’ equity
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding			-				-
Common stock, $0.01 par value, 100,000,000 authorized, 3,199,913 and 3,208,618 issued and outstanding.			31,999				32,086
Additional paid-in capital			23,215,821				23,168,176
Retained earnings			23,620,996				23,157,134
Accumulated other comprehensive income			330,803				307,255
Unearned employee stock ownership plan (ESOP) shares			(1,551,810	)			(1,581,412	)
Total stockholders’ equity			45,647,809				45,083,239
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	458,016,230			$	393,739,355

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Interest income
Interest and fees on loans		$	4,466,516			$	4,414,091			$	9,087,742			$	8,567,298
Interest on securities			356,845				230,266				644,072				454,073
Interest on other interest-earning assets			17,956				128,265				91,395				250,254
Total interest income			4,841,317				4,772,622				9,823,209				9,271,625
Interest expense
Interest on deposits			851,395				912,081				1,836,964				1,773,350
Interest on borrowings			212,374				265,698				402,589				543,863
Total interest expense			1,063,769				1,177,779				2,239,553				2,317,213
Net interest income			3,777,548				3,594,843				7,583,656				6,954,412
Provision for loan losses			577,000				85,000				1,049,000				172,500
Net interest income after provision for loan losses			3,200,548				3,509,843				6,534,656				6,781,912
Noninterest income
Gain on sale of loans			2,641				31,390				2,641				58,297
Gain on sale of securities			10,157				-				10,157				-
Service charges and fees			73,687				114,068				195,404				209,267
Bank owned life insurance			90,550				92,709				181,362				183,971
Loss on disposal of fixed assets			(205,663	)			-				(205,663	)			-
Other			19,398				9,835				66,765				20,991
Total noninterest income (loss)			(9,230	)			248,002				250,666				472,526
Noninterest expense
Salaries and benefits			1,300,507				1,644,543				3,060,057				3,232,069
Occupancy			351,003				349,276				719,710				700,692
Data processing fees			518,628				507,933				980,455				992,659
FDIC and other insurance expense			44,408				60,460				96,336				146,063
Professional fees			141,917				227,331				433,354				409,490
Advertising			43,063				38,141				103,725				104,198
Other			179,607				269,152				380,621				502,640
Total noninterest expense			2,579,133				3,096,836				5,774,258				6,087,811
Income from continuing operations before provision for income taxes			612,185				661,009				1,011,064				1,166,627
Provision for income taxes			110,049				148,277				230,871				266,752
Net income from continuing operations			502,136				512,732				780,193				899,875
Discontinued operations
Loss from discontinued operations			-				(1,132,237	)			-				(1,590,638	)
Benefit for income taxes			-				(279,727	)			-				(392,193	)
Net loss from discontinued operations			-				(852,510	)			-				(1,198,445	)
NET INCOME (LOSS)			502,136				(339,778	)			780,193				(298,570	)
Other comprehensive income (loss)
Unrealized gain on available-for-sale securities			473,260				634,099				1,572,665				988,018
Tax effect of unrealized gain on available-for-sale securities			(120,444	)			(161,378	)			(400,243	)			(251,450	)
Unrealized gain on available-for-sale securities, net of tax			352,816				472,721				1,172,422				736,568
Unrecognized defined benefit ("DB") plan prior service cost			(1,542,112	)			-				(1,542,112	)			-
Tax effect of unrecognized DB plan prior service cost			393,237				-				393,237				-
Unrecognized DB plan prior service cost, net of tax			(1,148,875	)			-				(1,148,875	)			-
Other comprehensive income (loss), net of tax			(796,059	)			472,721				23,547				736,568
COMPREHENSIVE (LOSS) INCOME		$	(293,923	)		$	132,943			$	1,952,615			$	437,998
Earnings per common share - Basic
Earnings per common share - continuing operations		$	0.17			$	0.16			$	0.26			$	0.29
Loss per common share - discontinued operations			-				(0.27	)			-				(0.38	)
Earnings per common share - Basic		$	0.17			$	(0.11	)		$	0.26			$	(0.09	)
Earnings per common share - Diluted
Earnings per common share - continuing operations		$	0.17			$	0.16			$	0.26			$	0.29
Loss per common share - discontinued operations			-				(0.27	)			-				(0.38	)
Earnings per common share - Diluted		$	0.17			$	(0.11	)		$	0.26			$	(0.09	)

 

																		Accumulated
																		Other
										Additional								Comprehensive				Unearned				Total
		Common				Common				Paid-In				Retained				Income				ESOP				Stockholders'
		Shares				Stock				Capital				Earnings				(Loss)				Shares				Equity
BALANCE, DECEMBER 31, 2018			3,374,565			$	33,746			$	25,500,873			$	22,928,777			$	(396,148	)		$	(1,644,514	)		$	46,422,734
Net income			-				-				-				41,208				-				-				41,208
Unrealized loss on available-for-sale securities, net			-				-				-				-				263,847				-				263,847
Amortization of equity awards			-				-				85,680				-				-				18,059				103,739
Share repurchase			(18,410	)			(185	)			(277,486	)			-				-				-				(277,671	)
BALANCE MARCH 31, 2019			3,356,155			$	33,561			$	25,309,067			$	22,969,985			$	(132,301	)		$	(1,626,455	)		$	46,553,857
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			(22,985	)			(230	)			(358,170	)			-				-				-				(358,400	)
Dividends paid - $0.05 per share			-				-				-				(165,559	)			-				-				(165,559	)
BALANCE JUNE 30, 2019			3,339,230			$	33,392			$	25,099,268			$	22,464,648			$	340,420			$	(1,611,440	)		$	46,326,288
BALANCE, DECEMBER 31, 2019			3,208,618			$	32,086			$	23,168,176			$	23,157,134			$	307,255			$	(1,581,412	)		$	45,083,239
Net income			-			$	-			$	-			$	278,057			$	-			$	-			$	278,057
Unrealized gain on available-for-sale securities, net			-				-				-				-				819,607				-				819,607
Amortization of equity awards			-				-				81,620				-				-				14,801				96,421
Dividends paid - $0.05 per share			-				-				-				(158,433	)			-				-				(158,433	)
BALANCE MARCH 31, 2020			3,208,618			$	32,086			$	23,249,796			$	23,276,758			$	1,126,862			$	(1,566,611	)		$	46,118,891
Net income			-			$	-			$	-			$	502,136			$	-			$	-			$	502,136
Other comprehensive income (loss)			-				-				-				-				(796,059	)			-				(796,059	)
Restricted stock awards			2,000				20				(20	)			-				-				-				-
Amortization of equity awards			-				-				76,559				-				-				14,801				91,360
Share repurchase			(10,705	)			(108	)			(110,513	)			-				-				-				(110,621	)
Dividends paid - $0.05 per share			-				-				-				(157,898	)			-				-				(157,898	)
BALANCE JUNE 30, 2020			3,199,913			$	31,998			$	23,215,822			$	23,620,996			$	330,803			$	(1,551,810	)		$	45,647,809

 

		Six Months Ended June 30,
		2020				2019
Cash flows from operating activities
Net income (loss)		$	780,193			$	(298,570	)
Less: Net loss from discontinued operations			-				(1,198,445	)
Net income from continuing operations			780,193				899,875
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			274,386				323,710
Stock dividends on financial institution stock			(36,200	)			(54,800	)
Amortization of premiums and discounts on securities, net			168,951				51,133
Amortization of equity awards			187,781				197,128
Amortization of core deposit intangible			17,724				20,430
Gain on sale of loans			(2,641	)			(58,297	)
Proceeds from sale of loans			168,555				993,026
Gain on sale of securities			(10,157	)			-
Provision for loan losses			1,049,000				172,500
Fixed asset impairment			205,663
Net appreciation on bank-owned life insurance			(130,731	)			(137,965	)
Deferred income tax expense			(182,343	)			(128,832	)
Changes in operating assets and liabilities:
Accrued interest receivable			(762,263	)			(136,820	)
Prepaid and other assets			(1,296,884	)			102,459
Accrued interest and other liabilities			506,739				328,628
Net cash from operating activities - continuing operations			937,773				2,572,175
Net cash from operating activities - discontinued operations			(64,047	)			22,705,420
Net cash from operating activities			873726				25,277,595
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities			3,564,344				2,874,659
Proceeds from sales of available for sale securities			1,854,871				-
Purchases of available-for-sale securities			(23,056,448	)			(3,179,247	)
Net change in loans held for investment			(56,847,955	)			(7,885,418	)
Purchases of premises and equipment			(44,238	)			(2,905	)
Net cash from investing activities			(74,529,426	)			(8,192,911	)
Cash flows from financing activities
Net change in deposits			27,038,085				14,172,166
Net change in escrows			3,548				(90,744	)
Proceeds from Federal Home Loan Bank advances			76,000,000				30,000,000
Repayments of Federal Home Loan Bank advances			(41,000,000	)			(47,000,000	)
Exercise of stock options			-				70,058
Common stock repurchases			(110,621	)			(636,071	)
Dividends paid			(316,331	)			(165,559	)
Net cash from financing activities			61,614,681				(3,650,150	)
Net change in cash and cash equivalents			(12,041,020	)			13,434,534
Cash and cash equivalents, beginning of period			29,486,465				11,774,457
Cash and cash equivalents, end of period		$	17,445,445			$	25,208,991
Supplemental disclosures:
Interest on deposits and advances paid		$	2,334,568			$	2,272,650
Income taxes paid		$	56,000			$	21,000
Loans transferred to loans held for sale		$	-			$	934,729
Operating lease right-of-use assets recorded on ASU 2016-20 adoption		$	1,138,139			$	-
Operating lease liabilities recorded on ASU 2016-20 adoption		$	1,138,139			$	-

 

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

 

Bancorp 34, Inc. (“Bancorp 34” or the “Company”) is a Maryland corporation and savings and loan holding company which owns 100% of the common stock of Bank 34 (the “Bank”).

 

The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico, and Scottsdale and Peoria, Arizona.

 

In May 2019, Bank 34 took steps to exit the Bank's operations with respect to originating residential mortgage loans for sale into the secondary market ("Mortgage Banking"). The Mortgage Banking operations that were disposed of, and that represent a strategic shift that will have a major effect on operations and financial results, are accounted for as discontinued operations. Additional information on discontinued operations can be found in Note 2 – Discontinued Operations.

 

The primary deposit products are demand deposits, time deposits, NOW, savings and money market accounts. The primary lending products are real estate mortgage loans and commercial loans. The Bank is subject to competition from other financial institutions and regulated and non-regulated financial services providers, regulation by certain federal agencies and undergoes periodic examinations by regulatory authorities.

 

Rising and falling interest rate environments can have various impacts on the Bank’s net interest income, depending on the interest rate gap that the Bank maintains. The Bank’s net interest income is also affected by prepayments of loans and early withdrawals of deposits.

 

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition, cash flows and results of operations at the dates and for the periods presented. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations for the full fiscal year or for any other period. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Discontinued Operations – As discussed in Note 2 - Discontinued Operations, current and prior periods presented in the consolidated statements of comprehensive income as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of discontinued operations for comparative purposes. The consolidated balance sheets and related note disclosures for prior periods also reflect the reclassification of certain assets and liabilities to discontinued operations.

 

Basis of Consolidation – The consolidated financial statements include the accounts of Bancorp 34 and the Bank. All significant intercompany accounts and transactions have been eliminated.

 

Reclassifications – Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.

 

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Significant estimates include, but are not limited to, allowance for loan losses, other-than-temporary impairment of securities, useful lives used in depreciation and amortization, deferred income taxes, valuation of other real estate and core deposit intangibles.

 

Summary of Recent Accounting Pronouncements:

 

Prior to 2020, Bancorp 34 was an emerging growth company under the JOBS Act and elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that have complied with such new or revised accounting standards. The Company lost its status as an emerging growth company at the end of 2019.

    

Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 for public companies, but the Company had until the first quarter of 2020 to adopt due to its emerging growth company status. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We adopted the standard effective January 1, 2020 on a prospective basis and elected to apply several allowable practical expedients, including carryover of historical lease determinations, classification conclusions and direct cost balances.  Adoption of the standard resulted in balance sheet recognition of approximately $1.3 million in operating lease right-of-use assets and $1.4 million operating lease liabilities as of January 1, 2020. These amounts represent the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate at the date of adoption.  There was no material impact on the timing of expense or income recognition in the consolidated statements of income.  Prior periods were not restated.  Further information regarding the Company’s leasing activities are included in Note 5 – Financial Instruments with Off-Balance-Sheet Credit Risk.

 

Credit Losses - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to create credit loss estimates. The new guidance is effective for public companies that are U.S. Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. For all other public companies, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. On October 16, 2019, FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies, as defined in Securities and Exchange Commission Regulations, such as the Company, to adopt effective for the first fiscal year beginning after December 15, 2022. The guidance is required to be applied by the modified retrospective approach. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

 

Compensation, Retirement Benefits - In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement benefits (Topic 715-20). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other post-retirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for post-retirement health care benefits. This ASU is effective for fiscal years ending after December 15, 2020 and was applied on a retrospective basis.  The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

 

NOTE 2 – DISCONTINUED OPERATIONS

 

On May 9, 2019, the Company entered into a purchase and assumption agreement to transfer its mortgage banking operations to another financial institution. Under the agreement, the other financial institution would offer employment to a majority of the Company’s mortgage operations employees. Assuming a majority of key employees at those locations agreed to transfer, the other financial institution would assume certain leases and fixed assets at those locations. Subsequent to that transaction, a majority of the mortgage operation employees made arrangements to transfer to different financial institutions, which similarly agreed to assume certain leases and fixed assets at those respective locations. Some sales and assumption agreements with these different financial institutions were consummated in the second quarter of 2019 and the remainder were consummated in the second half of 2019. All related transactions were completed by December 31, 2019. The Company does not have continuing involvement with the mortgage banking operations. The Company discontinued issuing mortgage interest rate lock commitments (IRLC's) in its name in May 2019 and originating mortgage loans held for sale in its name in June 2019.

 

Income and expense related to mortgage banking operations are included in discontinued operations and prior period financial information has been retrospectively adjusted for the impact of discontinued operations.

 

Liabilities for costs associated with discontinued operations were recognized and measured initially at their fair values during the quarter ended June 30, 2019. Those costs include, but are not limited to, involuntary employee termination benefits, cost to terminate contracts, and other associated costs. The liability itself consists of future cash flows expected to be incurred in the exit and disposal activity, which are discounted at a credit-adjusted risk-free interest rate.

 

 

 The following table summarizes the one-time charge on net loss on disposal of discontinued operations:

 

 

The following table presents results of discontinued operations for the three and six months ended June 30, 2020, and 2019:

 

 

Net interest income from discontinued operations includes interest income on mortgage loans held for sale less interest expense allocated to mortgage banking operations equal to the average mortgage loans held for sale times the average rate on FHLB short-term borrowings.

 

Material assets and liabilities of mortgage banking operations are classified as Discontinued Operations in the consolidated balance sheets as of June 30, 2020, and prior year balances have been adjusted to conform with the current period presentation.

 

The following table summarizes the major categories of assets and liabilities related to discontinued operations in the consolidated balance sheets as of:

 

 

 

 

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, 2020 and December 31, 2019. The amortized cost of such securities and their approximate fair values were as follows:

 

 

Gross proceeds from the sale of available-for-sale securities and resulting gains and losses were as follows:

 

 

 

Amortized cost and fair value of securities by contractual maturity as of June 30, 2020 and December 31, 2019 are shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the actual contractual maturities of underlying collateral. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

 

The scheduled maturities of available-for-sale securities at June 30, 2020 and December 31, 2019 were as follows:

 

 

At June 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

At June 30, 2020 and December 31, 2019, mortgage-backed securities included collateralized mortgage obligations of $12.3 million and $13.4 million, respectively, which are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.

  

 

Gross Unrealized Losses and Fair Value – The following tables show the gross unrealized losses and fair values of securities by length of time that individual securities in each category have been in a continuous loss position.

 

 

 

 

 

At June 30, 2020 and December 31, 2019, all of the government agencies and mortgage-backed securities held by the Company were issued by U.S. Government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2020.

 

Loans and securities with a carrying value of approximately $153.7 million at June 30, 2020 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, at June 30, 2020, securities with a carrying value of $3.5 million were pledged to secure public deposits and securities with a carrying value of $14.7 million were pledged to the FRB for potential overnight discount window borrowings.

 

 

 

NOTE 4 – LOANS HELD FOR INVESTMENT, NET

 

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

 

 

At June 30, 2020 and December 31, 2019, loans held for investment includes commercial construction loans of $23.5 million and $16.1 million and Paycheck Protection Program ("PPP") loans of $36.1 million and -0-, respectively. 

 

Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses and recorded investment in loans as of June 30, 2020 and December 31, 2019:

  

 

  

 

  

The COVID-19 pandemic has, and is expected to going forward, materially affect our determination of an adequate allowance for loan losses ("ALLL").  In addition to its normal ALLL provision determined based upon loan growth and other risk factor changes, the Company increased its allowance for loan losses an additional $900,000, or 31% compared to the December 31, 2019 ALLL balance for uncertainties related to COVID-19 pandemic and the recession.  The Company plans to continue to closely monitor the effects of the pandemic on the ability of its borrowers to repay their debt going forward.  It is possible larger increases in the allowance for loan losses will be necessary in the future due to the COVID-19 pandemic and recession, or the after-effects of it. 

 

The following tables summarize activities for the allowance for loan losses for the six months ended June 30, 2020 and 2019:

 

 

 

 

 

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of June 30, 2020 and December 31, 2019. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Per Company policy, loans past due 90 days or more no longer accrue interest.

 

 

 

 

The following table sets forth nonaccrual loans and other real estate at June 30, 2020 and December 31, 2019: