Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section as of and for the three and nine months ended September 30, 2019 and 2018, has been derived from the consolidated financial statements that appear elsewhere in this report. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “tend,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions. Because of these and other uncertainties, Bancorp 34’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. Bancorp 34 is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Bancorp 34 qualifies all of its forward-looking statements by these cautionary statements.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair values of financial instruments.
Allowance for Loan Losses. The allowance for loan losses is calculated with the objective of maintaining an allowance necessary to absorb probable credit losses inherent in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the losses for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.
We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the probable losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.
The allowance for loan losses consists primarily of specific allocations and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, including adjustments for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting and payment history. We also analyze delinquency trends, general economic conditions, trends in historical loss experience and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance. The principal assumption used in calculating the allowance for loan losses is the estimate of loss for each risk rating. Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.
Other-Than-Temporary Impairment. Securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in operations. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive loss.
Valuation of Deferred Tax Assets. In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income. In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies, if any. These assumptions require us to make judgments about our future taxable income that are consistent with the plans and estimates we use to manage our business. Any change in estimated future taxable income or effective tax rates may result in changes to the carrying balance of our net deferred tax assets which would result in an income tax benefit or expense in the same period.
Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A three-level of fair value hierarchy prioritizes the inputs used to measure fair value:
|
●
|
Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government agency debt that is highly liquid and actively traded in over-the-counter markets.
|
|
|
|
|
●
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
|
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.
|
|
Three Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Yield/
|
|
|
Outstanding
|
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate (1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate (1)
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans - continuing operations
|
|
$
|
297,590
|
|
|
$
|
4,393
|
|
|
|
5.86
|
%
|
|
$
|
281,576
|
|
|
$
|
4,138
|
|
|
|
5.83
|
%
|
Securities
|
|
|
35,985
|
|
|
|
243
|
|
|
|
2.68
|
%
|
|
|
29,492
|
|
|
|
172
|
|
|
|
2.31
|
%
|
Other interest earning assets
|
|
|
21,713
|
|
|
|
131
|
|
|
|
2.39
|
%
|
|
|
19,041
|
|
|
|
104
|
|
|
|
2.17
|
%
|
Total interest-earning assets - continuing operations
|
|
|
355,288
|
|
|
|
4,767
|
|
|
|
5.32
|
%
|
|
|
330,109
|
|
|
|
4,414
|
|
|
|
5.30
|
%
|
Loans held for sale - discontinued operations
|
|
|
672
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
17,962
|
|
|
|
206
|
|
|
|
4.56
|
%
|
Total interest-earning assets
|
|
|
355,960
|
|
|
|
4,767
|
|
|
|
5.31
|
%
|
|
|
348,071
|
|
|
|
4,620
|
|
|
|
5.27
|
%
|
Noninterest-earning assets
|
|
|
23,963
|
|
|
|
|
|
|
|
|
|
|
|
24,012
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
379,923
|
|
|
|
|
|
|
|
|
|
|
$
|
372,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking, money market and savings accounts
|
|
$
|
158,815
|
|
|
$
|
579
|
|
|
|
1.45
|
%
|
|
$
|
130,941
|
|
|
$
|
325
|
|
|
|
0.99
|
%
|
Certificates of deposit
|
|
|
79,707
|
|
|
|
421
|
|
|
|
2.10
|
%
|
|
|
72,948
|
|
|
|
309
|
|
|
|
1.68
|
%
|
Total deposits
|
|
|
238,522
|
|
|
|
1,000
|
|
|
|
1.66
|
%
|
|
|
203,889
|
|
|
|
634
|
|
|
|
1.23
|
%
|
Advances from FHLB of Dallas - continuing operations
|
|
|
41,150
|
|
|
|
242
|
|
|
|
2.33
|
%
|
|
|
73,205
|
|
|
|
259
|
|
|
|
1.40
|
%
|
Total interest-bearing liabilities - continuing operations
|
|
|
279,672
|
|
|
|
1,242
|
|
|
|
1.76
|
%
|
|
|
277,094
|
|
|
|
893
|
|
|
|
1.28
|
%
|
Advances from FHLB of Dallas - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
Total interest-bearing liabilities
|
|
|
279,672
|
|
|
|
1,242
|
|
|
|
1.76
|
%
|
|
|
277,094
|
|
|
|
1,015
|
|
|
|
1.45
|
%
|
Non-interest bearing deposits
|
|
|
49,697
|
|
|
|
|
|
|
|
|
|
|
|
43,253
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
4,683
|
|
|
|
|
|
|
|
|
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
334,052
|
|
|
|
|
|
|
|
|
|
|
|
325,259
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
45,871
|
|
|
|
|
|
|
|
|
|
|
|
46,824
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
379,923
|
|
|
|
|
|
|
|
|
|
|
$
|
372,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - continuing operations
|
|
|
|
|
|
$
|
3,525
|
|
|
|
|
|
|
|
|
|
|
$
|
3,521
|
|
|
|
|
|
Net interest rate spread - continuing operations (2)
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
4.02
|
%
|
Net interest margin - continuing operations (4)
|
|
|
|
|
|
|
|
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
3,525
|
|
|
|
|
|
|
|
|
|
|
$
|
3,605
|
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
Net interest-earning assets (3)
|
|
$
|
76,288
|
|
|
|
|
|
|
|
|
|
|
$
|
70,978
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
127.28
|
%
|
|
|
|
|
|
|
|
|
|
|
125.62
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Yield/Rate for the three-month periods have been annualized.
|
|
(2)
|
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income as a percentage of average total interest-earning assets.
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Yield/
|
|
|
Outstanding
|
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate (1)
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate (1)
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans - continuing operations
|
|
$
|
294,192
|
|
|
$
|
12,960
|
|
|
|
5.89
|
%
|
|
$
|
270,009
|
|
|
$
|
11,681
|
|
|
|
5.78
|
%
|
Securities
|
|
|
34,643
|
|
|
|
697
|
|
|
|
2.69
|
%
|
|
|
27,719
|
|
|
|
468
|
|
|
|
2.26
|
%
|
Other interest earning assets
|
|
|
20,732
|
|
|
|
381
|
|
|
|
2.46
|
%
|
|
|
17,024
|
|
|
|
246
|
|
|
|
1.93
|
%
|
Total interest-earning assets - continuing operations
|
|
|
349,567
|
|
|
|
14,038
|
|
|
|
5.37
|
%
|
|
|
314,752
|
|
|
|
12,395
|
|
|
|
5.27
|
%
|
Loans held for sale - discontinued operations
|
|
|
10,961
|
|
|
|
370
|
|
|
|
4.51
|
%
|
|
|
15,704
|
|
|
|
538
|
|
|
|
4.59
|
%
|
Total interest-earning assets
|
|
|
360,528
|
|
|
|
14,408
|
|
|
|
5.34
|
%
|
|
|
330,456
|
|
|
|
12,933
|
|
|
|
5.23
|
%
|
Noninterest-earning assets
|
|
|
23,526
|
|
|
|
|
|
|
|
|
|
|
|
23,713
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
384,054
|
|
|
|
|
|
|
|
|
|
|
$
|
354,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking, money market and savings accounts
|
|
$
|
150,976
|
|
|
$
|
1,555
|
|
|
|
1.38
|
%
|
|
$
|
130,131
|
|
|
$
|
902
|
|
|
|
0.93
|
%
|
Certificates of deposit
|
|
|
79,495
|
|
|
|
1,218
|
|
|
|
2.05
|
%
|
|
|
68,118
|
|
|
|
740
|
|
|
|
1.45
|
%
|
Total deposits
|
|
|
230,471
|
|
|
|
2,773
|
|
|
|
1.61
|
%
|
|
|
198,249
|
|
|
|
1,642
|
|
|
|
1.11
|
%
|
Advances from FHLB of Dallas - continuing operations
|
|
|
54,065
|
|
|
|
786
|
|
|
|
1.94
|
%
|
|
|
59,596
|
|
|
|
512
|
|
|
|
1.15
|
%
|
Total interest-bearing liabilities - continuing operations
|
|
|
284,536
|
|
|
|
3,559
|
|
|
|
1.67
|
%
|
|
|
257,845
|
|
|
|
2,154
|
|
|
|
1.12
|
%
|
Advances from FHLB of Dallas - discontinued operations
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292
|
|
|
|
-
|
|
Total interest-bearing liabilities
|
|
|
284,536
|
|
|
|
3,757
|
|
|
|
1.77
|
%
|
|
|
257,845
|
|
|
|
2,446
|
|
|
|
1.27
|
%
|
Non-interest bearing deposits
|
|
|
48,446
|
|
|
|
|
|
|
|
|
|
|
|
43,156
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
4,338
|
|
|
|
|
|
|
|
|
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
337,320
|
|
|
|
|
|
|
|
|
|
|
|
305,998
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
46,734
|
|
|
|
|
|
|
|
|
|
|
|
48,171
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
384,054
|
|
|
|
|
|
|
|
|
|
|
$
|
354,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - continuing operations
|
|
|
|
|
|
$
|
10,479
|
|
|
|
|
|
|
|
|
|
|
$
|
10,241
|
|
|
|
|
|
Net interest rate spread - continuing operations (2)
|
|
|
|
|
|
|
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
4.15
|
%
|
Net interest margin - continuing operations (4)
|
|
|
|
|
|
|
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,651
|
|
|
|
|
|
|
|
|
|
|
$
|
10,487
|
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
|
|
3.96
|
%
|
Net interest-earning assets (3)
|
|
$
|
75,992
|
|
|
|
|
|
|
|
|
|
|
$
|
72,611
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
126.71
|
%
|
|
|
|
|
|
|
|
|
|
|
128.16
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
Yield/Rate for the nine-month periods have been annualized.
|
|
(2)
|
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income as a percentage of average total interest-earning assets.
|
Comparison of Financial Condition at September 30, 2019 and December 31, 2018
Cash and cash equivalents were $15.7 million at September 30, 2019 and $11.8 million at December 31, 2018. Daily cash and cash equivalent balances vary around our target levels of $5.0 to $10.0 million primarily due to the timing of commercial loan fundings and payoffs and changes in deposit balances and FHLB advances. Cash and cash equivalents were above normal target level at September 30, 2019 due to the further reduction in mortgage loans held for sale during the quarter ended September 30, 2019.
Available-for-sale securities increased $7.1 million, or 21.4%, during the nine months ended September 30, 2019 to $40.6 million. There were no sales of available-for-sale securities and we purchased $10.4 million of securities in the nine months ended September 30, 2019.
Loans held for sale at September 30, 2019 totaled $1.8 million, consisting of one USDA loan for $1.6 million and one residential mortgage loan of $191,000. Until June 30, 2019 we sold a significant majority of our residential mortgage loans in the secondary market. At December 31, 2018, loans held for sale totaled $26.9 million and all were residential mortgage loans. As discussed in Note 2 - Discontinued Operations, the Company discontinued originating mortgage loans held for sale in its name in June 2019 due to the mortgage banking business exit.
Loans held for investment increased $16.6 million, or 5.8%, to $302.3 million at September 30, 2019 from $285.7 million at December 31, 2018, due to organic growth. In the nine months ended September 30, 2019, commercial real estate loans increased $15.9 million to $249.0 million and represented 82.1% of the gross loan portfolio at September 30, 2019, compared to 81.3% at December 31, 2018.
Total deposits increased $30.3 million, or 11.4%, to $295.5 million at September 30, 2019 from $265.2 million at December 31, 2018. The increase included an $21.0 million, or 14.8%, increase in savings and NOW deposits, a $2.6 million, or 3.3%, increase in time deposits and a $6.7 million, or 14.8%, increase in demand deposits.
Federal Home Loan Bank advances were down $27.0 million, or 40.3%, to $40.0 million at September 30, 2019 compared to $67.0 million at December 31, 2018. The reduction was due to a $26.7 million decrease in residential mortgage loans held for sale. We utilize short-term borrowings to fund loans held for sale, and long-term borrowings and some short-term borrowings to fund net growth in loans held for investment.
Accrued interest and other liabilities increased $296,000, or 7.0%, to $4.5 million at September 30, 2019 compared to $4.2 million at December 31, 2018.
Total stockholders’ equity decreased $1.6 million to $44.8 million at September 30, 2019 from $46.4 million at December 31, 2018. The largest changes in stockholders’ equity were a $2.7 million reduction due to common stock repurchases and a $922,000 increase due to available-for-sale securities fair value appreciation.
Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018
General. We had net income from continuing operations of $452,000 for the three months ended September 30, 2019, which was $92,000 less than net income from continuing operations of $544,000 for the three months ended September 30, 2018. The decrease was primarily caused by a $333,000, or 11.1%, increase in noninterest expense, and a $25,000 increase in provision for income taxes, partially offset by a $262,000, or 134.7%, increase in noninterest income.
We had no net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, compared to net loss from discontinued operations of $402,000 for the three months ended September 30, 2018. The decrease was due to the mortgage banking business exit in June 2019.
Interest Income. Interest income from continuing operations increased $353,000, or 8.0%, to $4.8 million for the three months ended September 30, 2019 from $4.4 million for the three months ended September 30, 2018. The increase was due to a $25.2 million, or 7.6%, increase in average interest-earning assets from continuing operations and a two basis point increase in average yields. Loans, which are our highest yielding asset, decreased to 83.8% of average interest-earning assets from 85.3% of average interest-earning assets. The increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of three basis points, 37 basis points and 22 basis points, respectively. Interest income on loans increased due to a $16.0 million, or 5.7%, increase in average loan balances due to organic growth and a three basis point increase in yield to 5.86% for the three months ended September 30, 2019 from 5.83% for the three months ended September 30, 2018. Interest income on securities increased $70,000, or 40.8%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to a $6.5 million, or 22.0%, increase in average securities balances due to fourth quarter 2018 and second and third quarter 2019 purchases and a 37 basis point increase in yield due to favorable rates on the most recent securities purchased.
Interest Expense.
Interest expense from continuing operations increased $348,000, or 38.9%, to $1.2 million for the three months ended September 30, 2019 from $894,000 for the three months ended September 30, 2018. The increase was the result of an increase of $364,000, or 57.3%, in interest expense on deposits, partially offset by a decrease of $17,000, or 6.4%, in interest expense on borrowings.
Interest paid on checking, money market and savings accounts increased $254,000, or 78.2%, to $579,000 for the three months ended September 30, 2019 from $325,000 for the three months ended September 30, 2018. The average rate we paid on such deposit accounts increased 46 basis points to 1.45% for the three months ended September 30, 2019 from 0.99% for the three months ended September 30, 2018 due to the increase in market interest rates. The average balance increased $27.9 million, or 21.3%, to $158.8 million for the three months ended September 30, 2019 from $130.9 million for the three months ended September 30, 2018.
Interest on certificates of deposit increased $112,000, or 36.2%, to $421,000 for the three months ended September 30, 2019 from $309,000 for the three months ended September 30, 2018. The average rate paid on certificates of deposit increased 42 basis points, or 24.7%, to 2.10% for the three months ended September 30, 2019 compared to 1.68% for the three months ended September 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $6.8 million, or 9.3%, to $79.7 million for the three months ended September 30, 2019 from $72.9 million for the three months ended September 30, 2018.
The average rates we pay on deposits is considerably higher in our Arizona market.
The average balance of borrowings decreased $32.1 million, or 43.8%, from the quarter ended September 30, 2018 to the quarter ended September 30, 2019 and the average rate paid increased 93 basis points to 2.33% for the three months ended September 30, 2019 from 1.40% for the three months ended September 30, 2018.
Net Interest Income. Net interest income from continuing operations increased $5,000, or 0.1%, and was $3.5 million for the three months ended September 30, 2019 and 2018, due to a 7.6% increase in average interest earning assets mostly offset by a 46 basis point decrease in net interest rate spread to 3.56% for the three months ended September 30, 2019 from 4.02% for the three months ended September 30, 2018. Average interest bearing liability rates for continuing operations increased 48 basis points compared to a two basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $5.3 million, or 7.5%, to $76.3 million for the three months ended September 30, 2019 from $71.0 million for the three months ended September 30, 2018 due primarily to organic growth.
We had no net interest income from discontinued operations for the three months ended September 30, 2019 compared to $85,000 for the three months ended September 30, 2018 due to the mortgage banking business exit in June 2019. Average mortgage loans held for sale decreased by $17.3 million, or 96.3%, to $672,000 for the three months ended September 30, 2019 from $18.0 million for the three months ended September 30, 2018.
Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. If the allowance for loan losses is larger than necessary, we post a negative provision as a benefit to earnings. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews.
See “Asset Quality - Allowance for Loan Losses” for additional information.
After an evaluation of these factors, we recorded no provision for loan losses for the three months ended September 30, 2019 and for the three months ended September 30, 2018. In the three months ended September 30, 2019, the allowance for loan losses increased $3,000, reflecting $3,000 in net recoveries.
To the best of our knowledge, at September 30, 2019 we have recorded all loan losses that are both probable and reasonable to estimate. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about the recoverability of our loan balances based upon information available to it at the time of its examination.
Noninterest Income. Noninterest income from continuing operations increased $262,000, or 134.7%, to $456,000 for the three months ended September 30, 2019 from $194,000 for the three months ended September 30, 2018 due primarily to a $200,000, or 100.0%, increase in loan sales gains, and an $56,000, or 59.6%, increase in service charges and fees.
The gain on sale of loans from continuing operations was $200,000 for the three months ended September 30, 2019 compared to no gain on sale of loans from continuing operations for the three months ended September 30, 2018. We sold $1.0 million of SBA loans during the three months ended September 30, 2019 and recognized $59,000 of sales gains directly into income and recognized $141,000 gain on one USDA loan classified as held for sale at September 30, 2019. We had no SBA loan sales and no sales gains recognized directly into income in the quarter ended September 30, 2018.
Noninterest income from discontinued operations, represented by loan sales gains, decreased $3.4 million, or 100.0%, to $0 for the three months ended September 30, 2019. The gain on sale of loans from discontinued operations decreased due to the mortgage banking business exit in June 2019. During the three months ended September 30, 2019, we sold $2.6 million of mortgage loans with zero gain recognized directly into income, compared to $84.0 million of mortgage loan sales during the three months ended September 30, 2018 for a gain of $3.4 million. We realized no average premium (gain on sale/sold loans) on the sales of mortgage loans for the three months ended September 30, 2019 and 4.5% for the three months ended September 30, 2018. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.
Noninterest Expense. Noninterest expense from continuing operations increased $333,000, or 11.1%, to $3.3 million for the three months ended September 30, 2019 from $3.0 million for the three months ended September 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees, partially offset by $84,000 in FDIC credits recognized in the quarter ended September 30, 2019 which reduced expense. Average assets from continuing operations for the quarter ended September 30, 2019 were 7.1% larger than for the quarter ended September 30, 2018.
Noninterest expense from discontinued operations decreased $4.0 million, or 100.0%, to $0 for the three months ended September 30, 2019. The decrease was due to the mortgage banking business exit in June 2019.
Provision for Income Tax. Provision for income tax expense from continuing operations was $185,000 for the three months ended September 30, 2019, representing an effective tax rate of 29.0% on pre-tax income from continuing operations. There are numerous differences between pre-tax income and actual taxable income that have an effect on the effective income tax rate for any given period. We recognized an income tax expense from continuing operations of $160,000 for the three months ended September 30, 2018 representing 22.7% of the $704,000 income from continuing operations before income taxes.
There was no benefit or expense for income taxes from discontinued operations for the three months ended September 30, 2019. We recognized a benefit for income taxes from discontinued operations of $135,000 for the three months ended September 30, 2018 representing 25.1% of the $537,000 loss before benefit for income taxes.
Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018
General. We had net income from continuing operations of $1.4 million for the nine months ended September 30, 2019, which was $233,000 less than net income from continuing operations of $1.6 million for the nine months ended September 30, 2018. The decrease was primarily caused by a $636,000, or 7.2%, increase in noninterest expense and an $80,000 larger provision for loan losses, partially offset by a $239,000, or 2.3%, increase in net interest income and a $225,000, or 32.1%, increase in noninterest income.
We had a net loss from discontinued operations, as discussed in Note 2 – Discontinued Operations, of $1.2 million for the nine months ended September 30, 2019, which was $506,000 more than net loss from discontinued operations of $693,000 for the nine months ended September 30, 2018. The increased net loss from discontinued operations was primarily caused by a $5.9 million, or 55.0%, decrease in noninterest income, partially offset by a $5.3 million, or 44.6%, decrease in noninterest expense, and a $161,000 increase in benefit for income taxes. Noninterest expense for the nine months ended September 30, 2019 included a $752,000 loss on disposal of discontinued operations.
Interest Income. Interest income from continuing operations increased $1.6 million, or 13.3%, to $14.0 million for the nine months ended September 30, 2019 from $12.4 million for the nine months ended September 30, 2018. The increase was due to a $34.8 million, or 11.1%, increase in average interest-earning assets and a 10 basis point increase in average yields. Loans, which are our highest yielding asset, decreased to 84.2% of average interest-earning assets from 85.8% of average interest-earning assets. The increase in yield on average interest earning assets included yield increases on loans, securities and other interest earning assets of 11 basis points, 43 basis points and 53 basis points, respectively. Interest income on loans increased due to a $24.2 million, or 9.0%, increase in average loan balances due to organic growth and an 11 basis point increase in yield to 5.89% for the nine months ended September 30, 2019 from 5.78% for the nine months ended September 30, 2018. Interest on securities increased $228,000, or 48.8%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due primarily to a $6.9 million, or 25.0%, increase in average securities balances due to fourth quarter 2018 and second and third quarter 2019 purchases and a 43 basis point increase in yield due to favorable market rate increases.
Interest Expense. Interest expense from continuing operations increased $1.4 million, or 65.2%, to $3.6 million for the nine months ended September 30, 2019 from $2.2 million for the nine months ended September 30, 2018. The increase was the result of increases of $1.1 million, or 68.9%, in interest expense on deposits and $274,000, or 53.6%, in interest expense on borrowings.
Interest paid on checking, money market and savings accounts increased $653,000, or 72.4%, to $1.6 million for the nine months ended September 30, 2019 from $902,000 for the nine months ended September 30, 2018. The average rate we paid on such deposit accounts increased 45 basis points to 1.38% for the nine months ended September 30, 2019 from 0.93% for the nine months ended September 30, 2018 due to the increase in market interest rates. The average balance increased $20.8 million, or 16.0%, to $151.0 million for the nine months ended September 30, 2019 from $130.1 million for the nine months ended September 30, 2018.
Interest on certificates of deposit increased $478,000, or 64.6%, to $1.2 million for the nine months ended September 30, 2019 from $740,000 for the nine months ended September 30, 2018. The average rate paid on certificates of deposit increased 60 basis points, or 41.0%, to 2.05% for the nine months ended September 30, 2019 compared to 1.45% for the nine months ended September 30, 2018 due to the increase in market interest rates. The average balance of certificates of deposit increased $11.4 million, or 16.7%, to $79.5 million for the nine months ended September 30, 2019 from $68.1 million for the nine months ended September 30, 2018.
The average balance of borrowings decreased $5.5 million, or 9.3%, from the nine months ended September 30, 2018 to the nine months ended September 30, 2019 and the average rate paid increased 80 basis points to 1.94% for the nine months ended September 30, 2019 from 1.15% for the nine months ended September 30, 2018.
Net Interest Income. Net interest income from continuing operations increased $239,000, or 2.3%, to $10.5 million for the nine months ended September 30, 2019 from $10.2 million for the nine months ended September 30, 2018, primarily due to an 11.1% increase in average interest earning assets, mostly offset by a 45 basis point decrease in net interest rate spread to 3.70% for the nine months ended September 30, 2019 from 4.15% for the nine months ended September 30, 2018. Average interest bearing liability rates for continuing operations increased 56 basis points compared to a 10 basis point increase in the average interest earning assets yield for continuing operations. Our average net interest-earning assets increased by $3.4 million, or 4.7%, to $76.0 million for the nine months ended September 30, 2019 from $72.6 million for the nine months ended September 30, 2018 due primarily to organic growth.
Net interest income from discontinued operations decreased $76,000, or 30.7%, to $171,000 for the nine months ended September 30, 2019 from $246,000 for the nine months ended September 30, 2018, primarily due to an 30.2% decrease in average mortgage loans held for sale to $11.0 million for the nine months ended September 30, 2019 from $15.7 million for the nine months ended September 30, 2018.
Provision for Loan Losses. We recorded a provision for loan losses of $173,000 for the nine months ended September 30, 2019, compared to $93,000 for the nine months ended September 30, 2018. In the nine months ended September 30, 2019, the allowance for loan losses increased $170,000, or 5.9%, including an $173,000 increase from provisions, partially offset by $3,000 in net charge-offs.
Noninterest Income. Noninterest income from continuing operations increased $225,000, or 32.1%, to $928,000 for the nine months ended September 30, 2019 from $703,000 for the nine months ended September 30, 2018 due primarily to an $135,000, or 109.9%, increase in loan sales gains, and an $87,000, or 31.7%, increase in service charges and fees.
The gain on sale of loans from continuing operations increased $135,000, or 109.9%, to $258,000 for the nine months ended September 30, 2019 from $123,000 for the nine months ended September 30, 2018. We sold $2.0 million of SBA loans during the nine months ended September 30, 2019 and recognized $117,000 of sales gains directly into income, and recognized $141,000 gain on one USDA loan classified as held for sale at September 30, 2019, compared to $1.4 million of SBA loan sales in the nine months ended September 30, 2018 with gains of $123,000.
Noninterest income from discontinued operations, represented by loan sales gains, decreased $5.9 million, or 55.0%, to $4.8 million for the nine months ended September 30, 2019 from $10.7 million for the nine months ended September 30, 2018. The gain on sale of loans from discontinued operations decreased due primarily to the mortgage banking business exit in the second quarter of 2019.
During the nine months ended September 30, 2019, we sold $146.3 million of mortgage loans for a gain of $4.8 million, compared to $243.3 million of mortgage loan sales during the nine months ended September 30, 2018 for a gain of $10.7 million. We realized a 4.2% average premium (gain on sale/sold loans) on the sales of mortgage loans for the nine months ended September 30, 2019 and 4.1% for the nine months ended September 30, 2018. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.
Noninterest Expense. Noninterest expense from continuing operations increased $636,000, or 7.2%, to $9.4 million for the nine months ended September 30, 2019 from $8.8 million for the nine months ended September 30, 2018. The increase was primarily related to higher salaries and benefits and data processing fees, partially offset by a decrease in professional fees, partially offset by $84,000 in FDIC credits recognized in 2019 which reduced expense. Average assets from continuing operations for the nine months ended September 30, 2019 were 10.2% larger than for the nine months ended September 30, 2018.
Noninterest expense from discontinued operations decreased $5.3 million, or 44.6%, to $6.6 million for the nine months ended September 30, 2019 from $11.9 million for the nine months ended September 30, 2018. The decrease was primarily related to the mortgage banking business exit in the second quarter of 2019, partially offset by the net loss on disposal for the quarter ended June 30, 2019.
Provision for Income Tax. Provision for income tax expense from continuing operations was $451,000 for the nine months ended September 30, 2019, representing an effective tax rate of 25.0% on pre-tax income from continuing operations. There are numerous differences between pre-tax income and actual taxable income that have an effect on the effective income tax rate for any given period. We recognized an income tax expense from continuing operations of $470,000 for the nine months ended September 30, 2018 representing 22.9% of the $2.1 million income from continuing operations before income taxes.
Benefit for income taxes from discontinued operations was $392,000 for the nine months ended September 30, 2019, representing an effective tax rate of 24.7% on pre-tax loss from discontinued operations. We recognized a benefit for income taxes from discontinued operations of $231,000 for the nine months ended September 30, 2018 representing 25.0% of the $924,000 loss before benefit for income taxes.
Asset Quality
We review loans on a regular basis, and place loans on nonaccrual status when either principal or interest is 90 days or more past due, or earlier if we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status.
Non-Performing Loans and Non-Performing Assets The following table sets forth information regarding our nonperforming assets.
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
$
|
586
|
|
|
$
|
650
|
|
Commercial real estate
|
|
|
2,977
|
|
|
|
2,994
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
Total nonaccrual loans
|
|
|
3,563
|
|
|
|
3,644
|
|
Accruing loans past due 90 days or more
|
|
|
-
|
|
|
|
-
|
|
Total nonaccrual loans and accruing loans past due 90 days or more
|
|
|
3,563
|
|
|
|
3,644
|
|
Other real estate (ORE)
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
Total other real estate
|
|
|
-
|
|
|
|
-
|
|
Total nonperforming assets
|
|
$
|
3,563
|
|
|
$
|
3,644
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Nonperforming loans to gross loans held for investment
|
|
|
1.17
|
%
|
|
|
1.27
|
%
|
Nonperforming assets to total assets
|
|
|
0.92
|
%
|
|
|
0.95
|
%
|
Nonperforming assets to gross loans held for investment and ORE
|
|
|
1.17
|
%
|
|
|
1.27
|
%
|
Nonaccrual loan balances guaranteed by the SBA are $2.3 million or 65% and $2.3 million or 63% of the nonaccrual loan balances at September 30, 2019 and December 31, 2018, respectively.
Due to the decrease in nonaccrual loans, the nonperforming asset ratios decreased from December 31, 2018 to September 30, 2019.
Interest income that would have been recorded for the nine months ended September 30, 2019, had nonaccruing loans been current according to their original terms amounted to $175,000 and $3,000 had troubled debt restructurings been current according to their original terms. We recognized $0 in interest income on nonaccrual loans and $23,000 related to troubled debt restructurings for the nine months ended September 30, 2019.
As of September 30, 2019 and December 31, 2018 we had $72,000 and $54,000 in current troubled debt restructurings, respectively.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on the current level of net loan losses, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
Three Months Ended September 30,
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|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3,068
|
|
|
$
|
3,199
|
|
|
$
|
2,901
|
|
|
$
|
3,117
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
|
|
93
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate loans
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(9
|
)
|
|
|
(36
|
)
|
Commercial real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total charge-offs
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(9
|
)
|
|
|
(36
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate loans
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
12
|
|
Commercial real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
48
|
|
|
|
2
|
|
|
|
48
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total recoveries
|
|
|
3
|
|
|
|
48
|
|
|
|
7
|
|
|
|
60
|
|
Net (charge-offs) recoveries
|
|
|
3
|
|
|
|
35
|
|
|
|
(2
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,071
|
|
|
$
|
3,234
|
|
|
$
|
3,071
|
|
|
$
|
3,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
86.20
|
%
|
|
|
60.52
|
%
|
|
|
86.20
|
%
|
|
|
60.52
|
%
|
Allowance for loan losses to total loans
|
|
|
1.02
|
%
|
|
|
1.14
|
%
|
|
|
1.02
|
%
|
|
|
1.14
|
%
|
Allowance for loan losses to total loans less acquired loans
|
|
|
1.02
|
%
|
|
|
1.17
|
%
|
|
|
1.02
|
%
|
|
|
1.17
|
%
|
Net (charge-offs) recoveries to average loans outstanding during the period
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
The ratio of our allowance for loan losses to nonperforming loans increased due to a 33.3% decrease in nonperforming loans partially offset by a 5.0% decrease in the allowance for loan losses. The allowance for loan losses to total loans ratios decreased because total gross loans increased 6.6% and the allowance for loan losses decreased 5.0%.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, FHLB borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.
We believe that we have enough sources of liquidity to satisfy our short-term liquidity needs as of September 30, 2019.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2019, cash and cash equivalents totaled $15.7 million. Available-for-sale securities, which provide additional sources of liquidity, totaled $40.6 million at September 30, 2019. In addition, at September 30, 2019, we had $40.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to borrow an additional $105.6 million from the FHLB, $9.8 million from the Independent Bankers Bank (TIB), and $6.0 million from the Pacific Coast Bankers Bank (PCBB).
At September 30, 2019, we had $24.9 million in loan commitments outstanding. In addition, we had $20.4 million in unused lines of credit. Time deposits due within one year of September 30, 2019 totaled $37.0 million, or 12.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2020. We believe, however, based on past experience that a significant portion of our time deposits will remain with us, either as time deposits or as other deposit products. We have the ability to attract and retain deposits by adjusting the interest rates offered.
We have no material commitments or demands that are likely to affect our liquidity other than set forth above. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the Federal Home Loan Bank of Dallas or the other financial institutions, or increase our deposits by offering higher interest rates.
Our primary investing activities are the origination of loans and the purchase of securities. During the nine months ended September 30, 2019, we originated $70.6 million of loans held for investment and $19.8 million of mortgage loans held for sale, compared to $90.3 million of loans held for investment and $238.1 million of mortgage loans held for sale during the nine months ended September 30, 2018. In the nine months ended September 30, 2019 and 2018 we purchased $10.4 million and $8.0 million in securities, respectively. We have not purchased any whole loans in the past two years.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases of $30.3 million and $16.0 million in total deposits for the nine months ended September 30, 2019 and 2018, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits so that we are competitive in our market area.
We had $40.0 million in Federal Home Loan Bank advances at September 30, 2019, compared to $67.0 million at December 31, 2018.
Bancorp 34, Inc. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to stockholders, to repurchase its common stock, and for other corporate purposes. Bancorp 34, Inc.’s primary source of liquidity is dividend payments it may receive from the Bank. At September 30, 2019, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $2.0 million. In June and September 2019, the Company paid quarterly cash dividends of $0.05 per share each. Dividends paid in 2019 through September totaled $323,000.
The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2019 and December 31, 2018, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.