Our mission is to be the preferred financial
services provider in the communities we serve
by building solid client relationships to earn their
loyalty, and increase shareholder value and
employee satisfaction. In this tumultuous time,
rest assured your board of directors is intensely
focused on the efficiency of our core operation
and maximizing capital allocation opportunities
to enhance franchise value.
– Randal L. Rabon, Chairman of the Board
BANK34.COM
2019 ANNUAL REPORT
Dear Fellow Stockholders,
As I write this letter to you, the world is confronting one of the greatest health threats of a generation, one that
profoundly impacts the global, U.S. and our local economies and citizens. Our thoughts remain with the communities
and individuals, including healthcare workers and first responders, most deeply hit by this COVID-19 pandemic.
Throughout our 86-year history, our Company has built its reputation on being there to support our clients and
communities at the most critical times. We have weathered some unprecedented challenges, as we will with this
current pandemic, but that will not stop us from accomplishing our mission. We know our support during this crisis
is essential in keeping our local economies strong, and our performance in that regard defines us, and will continue
to do so for years to come. We entered 2020 in a position of strength and we must continue to focus on those
strategic initiatives intended for us to remain strong and resilient, and well-positioned to provide that needed support
for our clients, employees and communities.
Although 2019 seems like a distant memory, we believe a review of our accomplishments last year is appropriate
given they set the foundation for the success of our franchise in the current difficult economic environment and into
the future.
In 2019 we saw economic expansion in both of our major banking hubs, the Phoenix metropolitan area and New
Mexico, growth in our loan portfolio and deposits, improved credit quality and increased stockholder value aided by
stock repurchases and dividends.
STRONG AND GROWING BALANCE SHEET
GROWTH - Balance sheet growth was more sporadic in 2019 than 2018. Portfolio loan growth was 3% compared
to 10% in 2018 due primarily to late fourth quarter payoffs. We increased commercial and industrial loans 15% in
2019 following 42% in 2018 as we continue to diversify our loan portfolio by adding commercial relationships
encompassing loan and deposit elements. Despite the more muted growth in 2019, our portfolio loan five-year
compound annual growth rate was 11%. Every category of deposits grew for the second straight year. We
accomplished a 15% increase in total deposits compared to 13% in 2018. Non-interest bearing demand deposits
led the way with 24% growth, followed by 17% growth in savings and NOW deposits and 5% in time deposits. Our
deposit five-year compound annual growth rate was 9%.
CREDIT QUALITY AND RESERVES – Credit quality has continuously improved over the past few years. We have
carried no foreclosed properties on our balance sheet for the past three years. Our allowance for loan losses
represented 0.99% of total gross loans at year end. We have had three consecutive years of contraction in our
nonperforming assets to total assets ratio dropping from 1.81% at year-end 2016 to 0.89% in 2019. We believe the
current carrying values of those assets are at realistic levels and the risk of material credit losses on those assets
is mitigated as 66% of our nonperforming loan balances are guaranteed by the Small Business Administration. Our
five-year compound annual growth rate for nonperforming assets net of government guarantees was a negative
13%.
CAPITAL - In terms of capital strength, Bancorp 34’s equity to assets at December 31, 2019 was a healthy 11.5%
and Bank 34’s Tier 1 Risk-Based Capital Ratio was 13.6%. This level of capital provides significant flexibility in
supporting organic growth and/or acquisitions, and ample capital resources if needed to offset the potential financial
impacts of unanticipated loan quality problems or other unforeseen operating losses.
OPERATING PERFORMANCE
Net income for 2019 was $710,000 compared to $1.1 million for 2018; however, 2019 results included $845,000
in pre-tax, one-time disposal charges from exiting the mortgage banking business.
We had a net loss from mortgage banking operations (discontinued operations) of $1.3 million for 2019, $454,000
more than the $802,000 net loss for 2018, due primarily to the $845,000 pre-tax, one-time disposal charges. The
discontinuation of mortgage banking operations reduced our reliance on an earnings stream that can be more
cyclical and volatile in order to focus on expanding the more stable earnings from our core commercial banking
business. We previously conducted operations through nine loan production offices and four full-service banking
centers. We continue to offer traditional banking services through those four full-service banking centers.
Net income from continuing operations for 2019 was $2.0 million, 5% larger than $1.9 million in 2018. The increase
was primarily caused by a $437,000, or 3%, increase in net interest income, a $296,000, or 93%, smaller provision
for loan losses, and a $118,000, or 13% increase in noninterest income, partially offset by a $769,000, or 7%,
increase in noninterest expense. The increase in net interest income from continuing operations was primarily due
to a 10.5% increase in average interest earning assets, partially offset by a 39 basis point decrease in net interest
rate spread. Average interest bearing liability rates increased 48 basis points compared to a nine basis point
increase in average interest earning assets yield. Our average net interest-earning assets increased 5.2% due to
organic growth.
CAPITAL ACTIVITIES & STOCKHOLDER RETURN
STOCK REPURCHASES - In an effort to improve long-term stockholder return by leveraging existing capital and
improving go-forward return on equity, Bancorp 34 adopted its first stock repurchase program in October 2017
authorizing repurchases of up to 5% of its shares. Between December 2017 and February 2019, 171,910 shares
were purchased under that program at an average cost of $15.23 per share. In 2019 a second 5% stock repurchase
program was adopted and another 157,042 shares were purchased in 2019 at an average cost per share of $15.63.
We will consider similar activities in the future taking into consideration liquidity, share availability, pricing and other
strategic initiatives.
DIVIDENDS –Bancorp 34 suspended the payment of regular dividends in July 2012 due to operating losses, and
chose to invest in franchise growth after its return to profitability in the second half of 2014. In 2016, a $15.9 million
capital infusion from a well-received stock offering and another $4.2 million from returning deferred tax assets to
our balance sheet boosted our capital. Recognizing our stockholders had been patient, our balance sheet was
strong and operating earnings were improving, Bancorp 34 paid a special dividend of $1.25 per share on May 9,
2018. Since June 2019 we have been paying regular quarterly dividends of $0.05 per share. We continue to
consider dividends a key element of capital planning and stockholder return.
STOCK PRICE & TOTAL RETURN – Bancorp 34 stock finished the year at $15.27 per share compared to $14.79
a year earlier. We don't run the company worrying about the stock price in the short run; however, in the long run
our stock price is a measure of the progress we have made over the years. We believe in continual investment, in
good times and bad, expanding the core strengths of the franchise. This positions our company to grow and prosper
in the long run. In the five years ended December 31, 2019, Bancorp 34 stock appreciated 108% and our 127%
total return to shareholders (including dividends) outperformed both the S&P 500 and SNL U.S. Bank indexes.
We assure you we have been, and will continue to, strive for long-term franchise value improvement and reasonable
stockholder returns. On behalf of every member of the Bancorp 34 team and the Board of Directors, we thank you
for your continued support and for entrusting us with your financial assets.
Be safe out there!
Jill Gutierrez
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 Number: 001-37912
Bancorp 34, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of Incorporation
or Organization)
500 East 10th Street, Alamogordo, New Mexico
(Address of Principal Executive Offices)
74-2819148
(I.R.S. Employer Identification Number)
88310
(Zip Code)
(575) 437-9334
(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Common Stock, par value $0.01 per share
BCTF
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which
registered
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ☐ No ☒
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 reports),
and (2) has been subject to such filing 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 such shorter period that the registrant was required to
submit such files). Yes ☒ No ☐
1
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 ☒
As of February 17, 2020 there were 3,168,574 shares outstanding of the registrant’s common stock. The aggregate value of the
voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the
common stock as of June 30, 2019 of $15.46, was $48.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders. (Part III)
2
TABLE OF CONTENTS
PART I
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
ITEM 6.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
ITEM 8.
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
ITEM 15. Exhibits and Financial Statement Schedules
ITEM 16.
SIGNATURES
Principal Accountant Fees and Services
Form 10-K Summary
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ITEM 1.
Business
Forward Looking Statements
PART I
This Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,”
“project,” “intend,” “plans,” “seek,” “will,” “would,” “may,” “expect,” “anticipate,” “should,” “planned,” “estimated” and
“potential.” These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently
subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.
In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that
are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other
expectations expressed in the forward-looking statements:
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general economic conditions, either nationally or in our market areas, including employment prospects, that are worse
than expected;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins or reduce our mortgage banking
revenues or the fair value of financial instruments, or reduce the origination levels in our lending business, or increase
the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in
the secondary markets;
adverse changes in the securities markets;
changes in laws or government regulations or policies affecting financial institutions, as well as the impact of laws
and regulations, including changes in regulatory fees and capital requirements;
changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board;
our ability to manage operations in current economic conditions;
our ability to manage market risk, credit risk and operational risk;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to implement changes in our business strategies;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management
personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within
expected time frames and any acquisition goodwill charges related thereto;
changes in consumer demand, borrowing and savings habits;
our ability to access cost-effective funding;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial
Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting
Oversight Board;
changes in the level of government support for housing finance;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of
the allowance for loan losses;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other
systems to obtain unauthorized access to confidential information and destroy data or disable our systems;
technological changes that may be more difficult or expensive than expected;
our ability to attract and retain key employees;
the ability of third-party providers to perform their obligations to us;
the ability of the U.S. Government to manage federal debt limits;
demand for loans and deposits in our market area;
our ability to attract and retain key employees;
changes in our organization, compensation and benefit plans; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by
these forward-looking statements.
Bancorp 34, Inc.
Bancorp 34, Inc. (the “Company”), a Maryland corporation that was organized in 2016, is a savings and loan holding
company headquartered in Alamogordo, New Mexico. Bancorp 34, Inc.’s common stock is quoted on NASDAQ under the symbol
“BCTF.” Bancorp 34, Inc. conducts its operations primarily through its wholly owned subsidiary, Bank 34, a federally chartered
savings association. Bancorp 34, Inc. manages its operations as one unit, and thus does not have separate operating segments. At
December 31, 2019, Bancorp 34, Inc. had total assets of $393.7 million, loans held for investment of $291.7 million, available-for-
sale securities of $44.5 million, deposits of $303.9 million, and stockholders’ equity of $45.1 million.
5
The Company was formed to be the successor to Alamogordo Financial Corp. upon completion of the second step mutual-
to-stock conversion (the “Conversion”) of AF Mutual Holding Company (the “MHC”), the top tier mutual holding company of
Alamogordo Financial Corp. Alamogordo Financial Corp. was the former mid-tier holding company for Bank 34. Prior to completion
of the Conversion, approximately 54.7% of the shares of common stock of Alamogordo Financial Corp. were owned by the MHC.
In conjunction with the Conversion, the MHC and Alamogordo Financial Corp. merged into the Company. The Conversion was
completed on October 11, 2016. The Company sold a total of 1,879,484 shares of common stock at $10.00 per share in the second-
step offering. Concurrent with the completion of the stock offering, each share of Alamogordo Financial Corp. stock owned by
public stockholders (stockholders other than the MHC) was exchanged for 2.0473 shares of Company common stock. The
Conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of
the MHC are immaterial to the results of the Company and therefore the net assets of the MHC have been reflected as an increase to
stockholders’ equity.
As a result of the Conversion, all share and per share information for periods prior to October 11, 2016 has been revised to
reflect the 2.0473-to-one exchange ratio. Such revised financial information presented in this Form 10-K is derived from the
consolidated financial statements of Alamogordo Financial Corp. and its subsidiaries.
The executive offices of Bancorp 34, Inc. are located at 500 East 10th Street, Alamogordo, New Mexico 88310, and its
telephone number is (575) 437-9334. Bancorp 34, Inc. is subject to comprehensive regulation and examination by the Board of
Governors of the Federal Reserve System.
Bank 34
Bank 34 operates four full-service banking centers, one each in Otero and Dona Ana counties in New Mexico and two in
Maricopa County, Arizona. Bank 34’s New Mexico offices include the main office and corporate headquarters located in
Alamogordo and a branch office in Las Cruces. The Bank’s Arizona branch offices include the regional headquarters located in
Scottsdale and a branch office in Peoria.
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 The consolidated financial statements, Note 2 – Discontinued
Operations.
Bank 34’s business model focuses on two primary areas. The commercial focus is on the credit, deposit and treasury
management needs of small businesses and real estate professionals and investors. Bank 34 originates conventional, SBA and USDA
loans within its primary market areas. Commercial loan types offered include: owner and non-owner occupied real estate (including
construction loans), multi-family loans, and commercial and industrial loans. The consumer focus is on deposit, online banking and
ancillary financial service needs of families and businesses served by Bank 34. While most of Bank 34’s real estate loans are secured
by properties in the counties served by its branch offices, it does actively seek business in other areas of New Mexico, Arizona and
the surrounding states.
Bank 34 originates deposits from its business and consumer customers predominantly from the areas where its branch
offices are located. Bank 34’s emphasis is on generating business operating accounts and consumer checking and money market
accounts.
Bank 34 is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Bank
34 is a member of the Federal Home Loan Bank system. Our website address is www.Bank 34.com. Information on our website is
not considered a part of this report.
6
Business Strategy
Our goal is to enhance long-term stockholder and franchise value by executing a safe and sound growth strategy that
produces increasing earnings. We have sought to accomplish this objective by implementing a business strategy designed to grow
our loan portfolio while maintaining a strong capital position and solid asset quality.
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Our current business strategy consists of the following:
Continued commercial loan growth. The Arizona market continues to provide a significant source of new commercial clients
to supplement the New Mexico region of our franchise. Our Arizona market has experienced strong population and job growth,
contributing to favorable economic conditions for generating new commercial loans. Our commercial real estate loans are
generally secured by properties used for business purposes such as hotels, office buildings and industrial and retail facilities.
In addition to commercial real estate loans, we originate multi-family real estate loans to experienced, growing small- and mid-
size owners and investors in our market areas and commercial and industrial loans. Our multi-family real estate loans are
generally secured by properties consisting of five to 40 rental units. In all of our markets, we seek commercial loan customers
with whom we can establish multiple lending relationships and provide other services, such as business checking accounts. We
target new commercial loan originations to experienced, growing small- and mid-size owners and investors in our market area.
We grew commercial real estate loans and commercial and industrial loans 4.8% in 2019, 10.3% in 2018 and 10.4% in
2017. Commercial loans in our Arizona region represented 72%, 70% and 69% of our total commercial loans outstanding
as of December 31, 2019, 2018 and 2017, respectively. Commercial real estate and commercial and industrial loans totaled
88.9% of our loan portfolio at December 31, 2019, compared to 87.4% of our loan portfolio at December 31, 2018 and
86.7% at December 31, 2017.
In addition, we continue to seek and originate Small Business Administration (“SBA”) credits and we are actively pursuing
other government-sponsored loan programs, such as those offered through the U.S. Department of Agriculture, as a way to
generate government-guaranteed loans with the opportunity to sell the guaranteed portion of the loan at a premium and
retain the non- guaranteed portion as well as the servicing rights. We sold $2.0 million, $1.6 million and $11.7 million of
SBA and USDA loans in the secondary market during the years ended December 31, 2019, 2018 and 2017, respectively,
recognizing gains of $272,000, $129,000 and $1.0 million directly into income during those periods. We also intend to
build on our experience of selectively pursuing construction lending to established builders with proven track records.
Disciplined expansion through organic growth and opportunistic bank or branch acquisitions. We completed our acquisition
of Bank 1440 in August 2014. While we expect organic growth will be our primary strategic focus, we will also consider
acquisition opportunities that we believe would enhance the value of our franchise and yield potential financial benefits for our
stockholders.
Manage credit risk to maintain a low level of nonperforming assets. We believe strong asset quality is a key to our long-term
financial success, and we have maintained this focus through our acquisition of Bank 1440 and our subsequent increase in
commercial lending from 2015 through 2019. Our strategy for credit risk management focuses on having a very experienced
team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit
monitoring. Our nonperforming assets to total assets ratio was 0.89% at December 31, 2019, 0.95% as of December 31, 2018
and 1.62% as of December 31, 2017. Approximately 66% of our nonperforming assets as of December 31, 2019 are covered
by government guarantees.
Increase core deposits, with emphasis on low cost commercial demand deposits. We seek core deposits to provide a stable
source of funds for loan growth, at costs consistent with improving our interest rate spread and profitability. Core deposits also
help us maintain loan-to-deposit ratios at levels consistent with our risk tolerance and regulatory expectations. We consider our
core deposits to include demand deposits, negotiable orders of withdrawal (NOW) and automatic transfer service accounts,
money market deposit accounts, other savings deposits, and certificates of deposit under $250,000, excluding wholesale and
brokered deposits. As part of our focus on commercial loan growth, our lenders are expected to source business checking
accounts from our borrowers. Noninterest bearing deposits were $56.4 million, or 18.6% of deposits at December 31, 2019,
$45.4 million, or 17.1% of deposits, at December 31, 2018, and $37.5 million, or 15.9% of deposits, at December 31, 2017.
7
Competition
We face significant competition in originating loans and attracting deposits. Our primary market area and other areas in
which we operate have a high concentration of financial institutions, many of which are significantly larger institutions that have
greater financial resources than we have, and many of which are our competitors to varying degrees. Our competition for loans and
leases comes principally from commercial banks, savings the U.S. Government, credit unions, leasing companies, insurance
companies, real estate conduits and other companies that provide financial services to businesses and individuals. Our most direct
competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional
competition for deposits from online financial institutions and non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies.
We seek to meet this competition by emphasizing personalized service and efficient decision-making tailored to individual
needs. In addition, we reward long-standing relationships with preferred rates and terms on deposit products based on existing and
prospective lending business. We do not rely on any individual, group or entity for a material portion of our loans or deposits.
As of June 30, 2019 (the latest date for which information is available), Bank 34’s deposit market share was 13.12% of total
deposits in Otero County, New Mexico, representing the third largest market share of nine institutions in Otero County; 2.05% of
total deposits in Dona Ana County, New Mexico, representing the 13th largest market share of 18 institutions in Dona Ana County;
and 0.15% of total deposits in Maricopa County, Arizona, representing the 36th largest market share of 62 institutions in Maricopa
County.
Market Area
Bank 34 operates four full-service banking centers, one each in Otero and Dona Ana counties in New Mexico and two in
Maricopa County, Arizona.
Arizona. 2019 brought diverse employment growth as year-to–date job growth through October 2019 exceeded 73,000.
The economy has diversified from a population-driven model and has attracted higher value-added industries since the end of the
Great Recession. Arizona is currently the third fastest growing state for job growth with much of that growth centered in metropolitan
Phoenix area. The combination of new residents and an aging Baby Boomer cohort is pushing demand for health care, construction,
restaurants, and retailing. Based on data through October 2019, Arizona saw an increase in personal income of 5.9%, increase in
population of 112,000 and a decrease in unemployment from 4.7% to 4.5%. Arizona’s home prices, in comparison to other western
states, are still considered very affordable. It is anticipated that Arizona’s economy will continue with solid growth, driven by a mix
of new and long established drivers. A consensus forecast for the metropolitan Phoenix area has employment increasing 2.8% and
unemployment dropping below 4.0% by the end of 2020.
8
New Mexico. Las Cruces’ metropolitan statistical area (MSA) unemployment as of October 2019 was 5.6% while Otero
county’s was 4.6% as compared to 5.7% and 5.0%, respectively, a year before. October 2019 state unemployment was at 4.8%. New
Mexico’s total population has been consistently around or slightly below 2.1 million since crossing 2 million in 2008 followed by
population decreases in 2014 and 2015. New Mexico gained a little over 2,000 residents between July 1, 2017 and July 1, 2018. New
Mexico is beginning to attract higher-wage employment with commitments from Facebook, Netflix, Safelite and Union Pacific. One
of the main advantages that New Mexico has to offer is very affordable housing and; therefore, an overall affordable cost of living.
Lending Activities
At December 31, 2019, our gross loans held for investment consisted of $242.7 million, or 82.1%, commercial real estate
loans (including multi-family); $28.9 million, or 9.8%, one- to four-family residential real estate loans; $20.1 million, or 6.8%,
commercial and industrial loans, and $3.9 million, or 1.3%, consumer and other loans. At December 31, 2019, commercial real estate
and multi-family loans included construction loans of $16.1 million.
Commercial Real Estate Loans. At December 31, 2019, commercial real estate loans were $242.7 million, or 82.1%, of
our total gross loans held for investment. This amount includes $37.8 million of multi-family residential real estate loans which are
described below. Our commercial real estate loans are generally secured by properties used for business purposes such as office
buildings, industrial and retail facilities. At December 31, 2019, $39.8 million of our commercial real estate portfolio was owner
occupied commercial real estate, and $202.9 million was secured by income producing, or non-owner occupied commercial real
estate. We currently target new commercial real estate loan originations to experienced, growing small- and mid-size owners and
investors in our market area. The average outstanding loan in our commercial real estate portfolio was $678,000 as of December 31,
2019, although we originate commercial real estate loans with balances significantly larger than this average. At December 31, 2019,
our ten largest commercial real estate loans had an average balance of $3.4 million.
We focus our commercial real estate lending on properties within our primary market areas, but we will originate
commercial real estate loans on properties located outside this area based on an established relationship with a strong borrower. We
intend to continue to grow our commercial real estate loan portfolio while maintaining prudent underwriting standards.
We originate a variety of fixed and adjustable rate commercial real estate loans with terms and amortization periods
generally up to 25 years, although our commercial real estate loans generally have balloon terms. Interest rates and payments on our
adjustable rate loans generally adjust daily and generally are indexed to the prime rate as published in The Wall Street Journal, plus
a margin. We generally include pre-payment penalties on commercial real estate loans we originate. Commercial real estate loan
amounts generally do not exceed 75% to 80% of the property’s appraised value at the time the loan is originated., Aggregate debt
service ratios, including the guarantor’s cash flow and the borrower’s other projects, have a guideline minimum income to debt
service ratio of 1.30x. For commercial real estate loans in excess of $500,000, we require independent appraisals from an approved
appraisers list. For such loans below $500,000, we require formal evaluations but do not require an independent appraisal. We require
commercial real estate loan borrowers with loan relationships in excess of $100,000 to submit annual financial statements and/or
rent rolls on the subject property. We may request such information for smaller loans on a case-by-case basis. Commercial real estate
properties may also be subject to annual inspections with pictures as evidence appropriate maintenance is being performed by the
owner/borrower. The loan and its borrowers and/or guarantors are subject to an annual loan review verifying the loan is properly
risk rated based upon covenant compliance and other terms as provided for in the loan agreements. While this process does not
prevent loans from becoming delinquent, it provides us with the opportunity to better identify problem loans in a timely manner and
to work with the borrower.
9
Our three largest commercial real estate loans at December 31, 2019 included a $4.5 million school loan originated in May
2016 and increased in April 2017, a $3.7 million retail strip center and restaurant building loan originated in March 2017 and a $3.5
million apartment complex loan originated in July 2019. The collateral securing these loans is all located in our primary lending
areas. At December 31, 2019, all of these loans were performing in accordance with their terms.
Multi-Family Real Estate Loans. At December 31, 2019, multi-family real estate loans were $37.8 million, or 12.8%, of
our total loan portfolio. We originate individual multi-family real estate loans to experienced, growing small- and mid-size owners
and investors in our market areas. Our multi-family real estate loans are generally secured by properties consisting of five to 40
rental units. The average outstanding loan size in our multi-family real estate portfolio was $858,000 as of December 31, 2019. We
generally do not make multi-family real estate loans outside our primary market areas.
We originate a variety of fixed and adjustable rate multi-family real estate loans with balloon and amortization terms up to
30 years. Interest rates and payments on our adjustable rate loans generally adjust daily and generally are indexed to the prime rate
as published in The Wall Street Journal, plus a margin. We generally include pre-payment penalties on loans we originate. Multi-
family real estate loan amounts generally do not exceed 65% to 70% of the property’s appraised value at the time the loan is
originated. Aggregate debt service ratios, including the guarantor’s cash flow and the borrower’s other projects, have a guideline
minimum income to debt service ratio of 1.30x. We require multi-family real estate loan borrowers with loan relationships in excess
of $100,000 to submit annual financial statements and/or rent rolls on the subject property. We may request such information for
smaller loans on a case-by-case basis. These properties may also be subject to annual inspections with pictures as evidence
appropriate maintenance is being performed.
Our largest multi-family real estate loan at December 31, 2019 totaled $3.5 million, was originated in July 2019 and is
secured by a 47-unit apartment complex. At December 31, 2019, this loan was performing in accordance with its terms.
Commercial and Industrial Loans. We make commercial and industrial loans. primarily in our market area, to a variety of
professionals, sole proprietorships and small businesses. These loans are generally secured by business assets, and we may support
this collateral with junior liens on real property. At December 31, 2019, commercial and industrial loans were $20.1 million, or 6.8%
of our total loan portfolio. As part of our relationship driven focus, we encourage our commercial borrowers to maintain their primary
deposit accounts with us, which enhances our interest rate spread and profitability.
Commercial lending products include term loans and revolving lines of credit. Commercial loans and lines of credit are
made with either adjustable or fixed rates of interest. Adjustable rates and fixed rates are based on the prime rate as published in The
Wall Street Journal, plus a margin. We are focusing our efforts on experienced, growing small- to medium-sized, privately-held
companies with solid historical and projected cash flow that operate in our market areas.
When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history
with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows
of the business and the value of the collateral, accounts receivable, inventory and equipment. Depending on the collateral used to
secure the loans, commercial and industrial loans are made in amounts of up to 80% of the value of the collateral securing the loan.
All of these loans are secured by assets of the respective borrowers.
A portion of our commercial and industrial loans are guaranteed by the U.S. Small Business Administration (“SBA”)
through the SBA 7(a) loan program. The SBA 7(a) loan program supports, through a U.S. Government guarantee, some portion of
the traditional commercial loan underwriting that might not be fully covered absent the guarantee. A typical example would be a
business acquiring another business, where the value purchased is an enterprise value (as opposed to tangible assets), which results
in a collateral shortfall under traditional loan underwriting requirements. In addition, SBA 7(a) loans, through term loans, can provide
a good source of permanent working capital for growing companies.
Our largest commercial and industrial loan at December 31, 2019 was a $1.9 million equipment loan originated in October
2019. This loan is to an equipment leasing company and is secured by 89 tractors and trailers, an assignment of leases, and all other
business assets of the company.
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Construction and Land Development Loans. At December 31, 2019, construction and land development loans were $22.3
million, or 7.6% of our total loan portfolio, consisting of $16.1 million of commercial and multi-family real estate loans, $5.1 million
of residential land or development loans and $1.1 million of consumer one- to four-family residential loans, At December 31, 2019,
none of our consumer one- to four-family residential construction loans and $15.7 million of our commercial and multi-family real
estate construction loans are expected to convert to permanent loans upon completion of the construction phase. The majority of the
balance of these loans is secured by properties located in our primary lending area.
We primarily make construction loans for commercial development projects, including hotels, small industrial, retail, office
and apartment buildings. Most of our construction loans are interest-only loans that provide for the payment of interest during the
construction phase, which is usually up to 12 to 24 months. At the end of the construction phase, the loan may convert to a permanent
mortgage loan or the loan may be paid in full. Construction loans generally can be made with a maximum loan-to-value ratio of 80%
of the estimated appraised market value upon completion of the project. Before making a commitment to fund a construction loan,
we require an appraisal of the property by an independent licensed appraiser for loans in excess of $500,000. We also generally
require inspections of the property before disbursements of funds during the term of the construction loan.
We also originate construction and land development loans to contractors and builders to finance the construction of single-
family homes and subdivisions. While we may originate these loans whether or not the collateral property underlying the loan is
under contract for sale, we consider each project carefully in light of current residential real estate market conditions. We actively
monitor the number of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an
appropriate balance between home sales and new loan originations. We generally will limit the maximum number of speculative
units (units that are not pre-sold) approved for each builder. We have attempted to diversify the risk associated with speculative
construction lending by doing business with experienced small and mid-sized builders within our market area.
Our largest construction loan at December 31, 2019 totaled $2.3 million, was originated in November 2018 and is secured
by 21 townhomes and an assisted living residence located in our primary market area. At December 31, 2019, this loan was
performing in accordance with its terms.
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One- to Four-Family Residential Real Estate Loans. Our one- to four-family residential real estate loan portfolio consists
of mortgage loans that enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of
the owner. At December 31, 2019, $28.9 million, or 9.8% of our loan portfolio, consisted of one- to four-family residential real estate
loans, compared to $29.9 million, or 10.4% of total loans, at December 31, 2018.
Generally, one- to four-family residential real estate loans are originated in amounts up to 80% of the lesser of the appraised
value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of
80%. We will not make loans with a loan-to-value ratio in excess of 100% for loans secured by single family homes. Fixed rate one-
to four-family residential real estate loans generally are originated for terms of 10 to 30 years. Generally, all fixed rate one- to four-
family residential real estate loans are underwritten according to Freddie Mac, FHA, VA, USDA and Correspondent Investors
policies and procedures.
In an effort to provide financing for moderate income home buyers, we offer Veterans Administration (VA), Federal
Housing Administration (FHA) and bond loans specific to the states where we conduct business. These programs offer one- to four-
family residential real estate loans to qualified individuals. These loans are offered with fixed rates of interest and terms of up to 30
years, and are secured by one- to four-family residential properties. All of these loans are originated using agency underwriting
guidelines.
We also offer adjustable rate mortgage loans for one- to four-family properties, with an interest rate based on the one-year
Constant Maturity Treasury Bill Index, which adjusts annually from the outset of the loan or which adjusts annually after a three-,
five-, seven-, or ten-year initial fixed rate period. We originated $6.9 million of adjustable rate one-to four-family residential loans
during the year ended December 31, 2019, all of which was sold in the secondary market. Our adjustable rate mortgage loans
generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 6% above the
initial rate, regardless of the initial rate. Our adjustable rate one- to four-family residential real estate loans amortize over terms of
up to 30 years.
Regulations limit the amount that an institution may lend relative to the appraised value of the real estate securing the loan,
as determined by an appraisal of the property at the time the loan is originated. All borrowers are required to obtain title insurance.
We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warrant, flood insurance, on
properties securing real estate loans. At December 31, 2019, our largest one- to four-family residential real estate loan had a principal
balance of $593,000 and was secured by a residence located in Arizona. At December 31, 2019, this loan was performing in
accordance with its original terms.
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Consumer and Other Loans. We offer a limited range of consumer and other loans, principally to customers with other
relationships residing in our primary market area with acceptable credit ratings. Our consumer and other loans generally consist of
home equity loans or lines of credit, loans secured by deposit accounts, loans on new and used automobiles and unsecured personal
loans. At December 31, 2019, consumer loans were $3.9 million, or 1.3% of total loans. The underwriting standards utilized for
home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet
existing obligations and payments on the proposed loan and the value of the collateral securing the loan. The loan-to-value ratio for
a home equity line of credit is generally limited to 75%. The procedures for underwriting other consumer loans include an assessment
of the applicant’s payment history on other debts and ability to meet existing obligations plus payments on the proposed loan.
Loan Underwriting Risks
Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate generally
have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. Of primary concern
in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of
the project. Payments on loans secured by income properties often depend on successful operation and management of the properties.
As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in the
real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide
annual financial statements on commercial and multi-family real estate loans. In reaching a decision on whether to make a
commercial or multi-family real estate loan, we consider and review a global cash flow analysis of the borrower and consider the
net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying
property. We have generally required that the properties securing these real estate loans have an aggregate debt service ratio,
including the guarantor’s cash flow and the borrower’s other projects, of at least 1.30x. An environmental phase one report is obtained
when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining
properties that handled hazardous materials.
If we foreclose on a commercial real estate or multi-family loan, the marketing and liquidation period to convert the real
estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market
stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time
it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent
losses on commercial real estate loans can be unpredictable and substantial.
Construction and Land Development Loans. Our construction loans are based upon estimates of costs and values
associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated
ability to produce a quality product and effectively market and manage their operations.
Construction lending involves additional risks when compared with permanent lending because funds are advanced upon
the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property,
it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. In
addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest
reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment
substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain
permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised
value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion
of construction of the project and may incur a loss.
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Commercial and Industrial Loans. Unlike residential real estate loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose
value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of
the borrower’s ability to make repayment from the cash flow of the borrower’s business and the collateral securing these loans may
fluctuate in value. Our commercial and industrial loans are originated primarily based on the identified cash flow of the borrower
and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of real estate, accounts
receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment
is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, the availability of
funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further,
any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Adjustable Rate Loans. While we anticipate that adjustable rate loans will better offset the adverse effects of an increase
in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and defaults. In a high interest rate environment, the marketability
of the underlying collateral may be adversely affected as the value of the underlying collateral decreases. For our adjustable rate
one- to four-family real estate loans, upward adjustment of the contractual interest rate is also limited by the maximum periodic and
lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate real estate loans
may be limited during periods of rapidly rising interest rates.
Consumer and Other Loans. Consumer loans may entail greater risk than residential real estate loans, particularly in the
case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining
deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on
the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Loan Originations, Purchases and Sales
Lending activities are conducted primarily by our loan personnel operating at our four full-service banking offices. All
loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable-rate and fixed-rate
loans. Our ability to originate fixed or adjustable-rate loans is dependent upon competition for such loans and the relative customer
demand for such loans, which is affected by current and expected future levels of market interest rates.
We participate out interests in commercial real estate loans to other financial institutions, including the guaranteed portions
of SBA or USDA loans, the portion of other loans exceeding our borrowing limits and periodically other loans when portfolio growth
surges and the balances exceeds target portfolio loan levels. At December 31, 2019, we were servicing $33.2 million of commercial
real estate loans where we had participated out an interest to other financial institutions. For the years ended December 31, 2019 and
2018, we participated out loan participations of $8.6 million and $9.2 million, respectively.
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Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures
established by management and approved by the Board of Directors. The Board of Directors has granted loan approval authority to
certain officers up to prescribed limits, depending on the officer’s experience, the type of loan and whether the loan is secured or
unsecured. Loans to relationships of $2.0 million and below require approval by members of senior management. Loans to
relationships greater than $2.0 million require approval by the Director’s Loan Committee. Loans that involve exceptions to loan
policy must be authorized by senior management. Loan policy exceptions are fully disclosed to the approving authority, either an
individual officer or the appropriate management or Director’s Loan Committee prior to commitment. Exceptions are reported to
the Board of Directors monthly.
Loans-to-One Borrower Limit
The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by
regulation, to 15% of our unimpaired capital and surplus. At December 31, 2019, our regulatory limit on loans-to-one borrower was
$6.4 million. At that date, the largest aggregate amount loaned to one borrower was $5.6 million, consisting of a 28-unit apartment
complex and 39 condominium units. The loans comprising this lending relationship were performing in accordance with their
original repayment terms at December 31, 2019.
Investment Activities
Bank 34 has an Asset/Liability Committee which is responsible, among other duties, for implementing the Bank’s
Investment Policy. The Investment Policy is reviewed annually and any changes to the policy are recommended to, and subject to
the approval of, our board of directors. While general investment strategies are developed and authorized by the Asset/Liability
Committee, the execution of specific actions rests with the Chief Financial Officer, who is Bank 34’s designated Investment Officer.
In the absence of the Chief Financial Officer, the Chief Executive Officer will be the designated Investment Officer. The Investment
Officer is responsible for ensuring that the guidelines and requirements included in the Investment Policy are followed and that all
securities are considered prudent for investment. The Investment Officer is authorized to execute investment transactions (purchases
and sales) without the prior approval of the Asset/Liability Committee and within the scope of the established investment policy;
however, all transactions shall be reviewed and ratified by the Asset/Liability Committee and Board of Directors.
Bank 34 utilizes the services of an independent investment advisor to assist in managing the investment portfolio. The
investment advisor is responsible for maintaining current information regarding securities dealers with whom they are conducting
business on our behalf. A list of appropriate dealers is provided annually to the board of directors for approval and authorization
prior to execution of trades. The investment advisor, through its assigned portfolio manager, must contact our designated Investment
Officer to review all investment recommendations and transactions and receive approval from the designated Investment Officer
prior to execution of any transaction that might be executed on our behalf. Upon receipt of approval, the investment advisor, or its
assigned portfolio manager, is authorized to conduct all investment business on our behalf.
We have legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury
obligations, securities of various government-sponsored enterprises, residential mortgage-backed securities and municipal
governments, deposits at the Federal Home Loan Bank of Dallas, certificates of deposit of federally insured institutions, investment
grade corporate bonds and investment grade marketable equity securities, including common stock and money market mutual funds.
Our equity securities generally pay dividends. We also are required to maintain an investment in Federal Home Loan Bank of Dallas
stock, which investment is based on the level of our Federal Home Loan Bank borrowings. We have the authority under applicable
law to invest in derivative securities. At December 31, 2019, due to our exit from mortgage banking operations in June 2019, the
Company had no mortgage interest rate lock commitment ("IRLC") assets and no liabilities to national investment brokers. At
December 31, 2018, the Company had $381,000 in fair value of mortgage IRLC assets and $154,000 in liabilities to national
investment brokers representing the net fair value of forward trade commitments utilized to hedge loans in our mortgage banking
pipeline with a notional value of $21.5 million. Our investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide a use of funds when demand for loans is weak and to generate a favorable
return.
15
At December 31, 2019 our investment security portfolio had a fair value of $44.5 million, and consisted primarily of
mortgage-backed securities, taxable municipal bonds and securities of U.S. Government Agencies. All investment securities as of
December 31, 2019 were classified as available-for-sale. Bonds secured by adjustable rate loans were 3.0% of the total portfolio.
Each reporting period, we evaluate all securities with a decline in fair value below the amortized cost to determine whether
or not the impairment is deemed to be other than temporary. Other than temporary impairment is required to be recognized if (1) we
intend to sell the security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized
cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost
basis. At December 31, 2019 our investment securities had a fair value of $44.5 million and a net unrealized gain of $412,000. The
Bank does not have the intent to sell these securities before maturity and it is unlikely that it will be required to sell them before their
maturity. No other-than-temporary impairment was recognized for any periods from 2012 through 2019.
Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac
and Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative
expense, and lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae and Ginnie Mae.
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that
is less than the interest rates on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in
a pool of single-family or multi-family mortgages, although we focus our investments on mortgage-backed securities backed by one-
to four-family mortgages. The issuers of such securities (generally U.S. government agencies and government-sponsored enterprises,
including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors
such as Putnam Bank, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield
less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However,
mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our specific
liabilities and obligations.
At December 31, 2019 mortgage-backed securities totaled $31.0 million, or 69.7% of total securities, of which 4.4% were
backed by adjustable rate mortgage loans and 95.6% were backed by fixed rate mortgage loans. The mortgage-backed securities
portfolio had a weighted average yield of 2.60% at December 31, 2019.
Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments
over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating
to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows
from such securities or if such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
U.S. Government and Government-Sponsored Securities. At December 31, 2019, our U.S. Government and government-
sponsored securities portfolio totaled $1.1 million, or 2.4% of total securities. While U.S. Government and government-sponsored
securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments,
to the extent appropriate, for liquidity purposes, as collateral for borrowings and prepayment protection.
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Municipal Obligations. At December 31, 2019 our investment in municipal obligations totaled $12.4 million or 27.9% of
total securities and 3.2% of total assets. The Bank’s investment in municipal bonds may not exceed 5% of total assets. Municipal
obligations generally carry a higher interest rate than U.S. Government obligations but also carry a higher credit risk.
Deposit Activities
Our deposit accounts consist principally of certificates of deposit, savings accounts, checking accounts and money market
accounts. We provide commercial checking accounts and related services, such as online cash management. We also provide low-
cost checking account services.
Our deposits are generated mainly from residents and businesses within our primary deposit market area. Deposit account
terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit
and the interest rate.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis, supported by third
party reporting of competitive deposit rates by market. Deposit rates and terms are based primarily on current operating strategies
and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service and long-
standing relationships with customers are relied upon to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other
prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and
responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the
ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected
by market conditions.
At December 31, 2019, our deposits totaled $303.9 million. Interest-bearing deposits totaled $247.5 million and noninterest-
bearing deposits totaled $56.4 million. Savings, money market and checking deposits totaled $166.1 million, and certificates of
deposit totaled $81.4 million, of which $55.6 million had maturities of one year or less.
Subsidiary Activities
Bancorp 34, Inc. has no subsidiaries other than Bank 34.
Personnel
At December 31, 2019, Bank 34 had 54 full-time employees and 3 part-time employees, none of whom was party to a
collective bargaining agreement. Bank 34 believes it has a good working relationship with its employees.
TAXATION
Bancorp 34 and Bank 34 are subject to federal and state income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain
pertinent tax matters and is not a comprehensive description of the tax rules applicable to Bancorp 34 or Bank 34.
Our federal and state tax returns have not been audited for the past five years.
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Federal Taxation
Method of Accounting. For federal income tax purposes, Bancorp 34 and Bank 34 currently report their income and
expenses on the accrual method of accounting and use a tax year ending December 31 for filing their federal income tax returns.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject
to recapture into taxable income if Bank 34 failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated
these thrift-related recapture rules. At December 31, 2019, our total federal pre-1988 base year reserve was approximately $2.7
million, or $680,000 tax-effected. However, under current law, pre-1988 base year reserves remain subject to recapture if Bank 34
makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases
to maintain a bank charter.
Alternative Minimum Tax. Prior to January 1, 2018, the Internal Revenue Code imposes an alternative minimum tax
(“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences, which we refer to as “alternative minimum
taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount
and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative minimum taxable
income. Certain AMT payments may be used as credits against regular tax liabilities in future years Effective January 1, 2018, the
corporate AMT is repealed. At December 31, 2019, the Company had no AMT credit carryforwards.
Net Operating Loss Carryovers. Prior to January 1, 2018, subject to certain limitations, a company may carry back net
operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net operating losses generated
beginning January 1, 2018, there are no carry backs allowed and an unlimited carry forward period. At December 31, 2019, Bancorp
34 had $3.8 million in net operating loss carry forwards for federal income tax purposes.
Corporate Dividends-Received Deduction. Bancorp 34 may exclude from its income 100% of dividends received from
Bank 34 as a member of the same affiliated group of corporations. Through December 31, 2017, the corporate dividends-received
deduction is 80% in the case of dividends received from a corporation in which a corporate recipient owns at least 20% of its stock,
and corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf. Effective January 1, 2018, the dividends received deduction decreases from 80% to 65% and
70% to 50% for corporate recipients owning at least 20% or less than 20%, respectively, of a corporation’s stock.
State Taxation
Bank 34’s full service branches and loan production offices in New Mexico and Arizona subject Bank 34 to taxation in
those states. During 2019, Bank 34 closed loan production offices in Oregon, Texas, and Washington. Bank 34 regularly assesses
where it is doing business and has state income tax nexus. As a Maryland business corporation, Bancorp 34 is required to file an
annual report with and pay franchise taxes to the state of Maryland.
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SUPERVISION AND REGULATION
General
As a federal savings association, Bank 34 is subject to examination and regulation by the Office of the Comptroller of the
Currency, and is also subject to examination by the Federal Deposit Insurance Corporation (FDIC). The federal system of regulation
and supervision establishes a comprehensive framework of activities in which Bank 34 may engage and is intended primarily for the
protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund. This regulation and supervision
establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders.
Bank 34 also is a member of and owns stock in the Federal Home Loan Bank of Dallas, which is one of the 11 regional banks in the
Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory,
enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels;
restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves
for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination
authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality,
management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory
rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less
than satisfactory rating may also prevent a financial institution, such as Bank 34 or its holding company, from obtaining necessary
regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community
Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose
monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly
affect our business activities, including our ability to acquire other financial institutions or expand our branch network.
As a savings and loan holding company, Bancorp 34 is required to comply with the rules and regulations of the Federal
Reserve Board. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the
enforcement authority of the Federal Reserve Board. Bancorp 34 is also subject to the rules and regulations of the Securities and
Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Federal Reserve Board, the Securities and Exchange Commission or Congress, could have a material
adverse impact on the operations and financial performance of Bancorp 34 and Bank 34.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to Bank 34 and
Bancorp 34. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be
a complete description of such statutes and regulations and their effects on Bank 34 and Bancorp 34.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan
Act, as amended, and applicable federal regulations. Under these laws and regulations, Bank 34 may invest in mortgage loans secured
by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other
assets, subject to applicable limits. Bank 34 may also establish subsidiaries that may engage in certain activities not otherwise
permissible for Bank 34, including real estate investment and securities and insurance brokerage.
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Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a
total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including
certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight
factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for
asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity
and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1
capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier
2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include
cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock
and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive
Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair values. Calculation
of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s
capital adequacy, the Office of the Comptroller of the Currency takes into consideration not only these numeric factors, but
qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed
necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of
2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital
requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted
assets and increased each year until fully implemented at 2.5% of risk-weighted assets on January 1, 2019.
At December 31, 2019, Bank 34’s capital exceeded all applicable requirements.
Legislation enacted in May 2018 required the federal banking agencies, including the Office of the Comptroller of the
Currency, to establish a “community bank leverage ratio” of between 8% to 10% of average total consolidated assets for qualifying
institutions with assets of less than $10 billion of assets. Institutions with capital meeting the specified requirement and electing to
follow the alternative framework would be deemed to comply with the applicable regulatory capital requirements, including the risk-
based requirements. The federal regulators have adopted a final rule that set the ratio at 9%, Tier 1 capital to average total
consolidated assets, effective January 1, 2020.
Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
As of December 31, 2019, Bank 34 was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Bank 34 must satisfy the qualified thrift lender, or “QTL,”
test. Under the QTL test, Bank 34 must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily
residential mortgages and related investments, including mortgage-backed securities) in at least nine months of every 12-month
period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
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Bank 34 also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal
Revenue Code of 1986, as amended. This test generally requires a savings association to have at least 75% of its deposits held by
the public and earn at least 25% of its income from loans and U.S. government obligations. Alternatively, a savings association can
satisfy this test by maintaining at least 60% of its assets in cash, real estate loans and U.S. Government or state obligations.
A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home
Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation
of law. At December 31, 2019, Bank 34 satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association
must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income
for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings association is not eligible for expedited treatment of its filings, generally due to an unsatisfactory
CAMELS rating or being subject to a cease and desist order or formal written agreement that requires action to
improve the institution’s financial condition.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding
company, such as Bank 34, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
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the federal savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital
distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A
federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount
required for the liquidation account established in connection with its conversion to stock form.
Community Reinvestment Act and Fair Lending Laws. All Federal Deposit Insurance Corporation-insured institutions
have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their
communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association,
the Office of the Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the
Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act
could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair
Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory
agencies and the Department of Justice.
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The Community Reinvestment Act requires all institutions insured by the Federal Deposit Insurance Corporation to publicly
disclose their rating. Bank 34 received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is
limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls,
or is under common control with, an insured depository institution such as Bank 34. Bancorp 34 is an affiliate of Bank 34 because
of its control of Bank 34. In general, transactions between an insured depository institution and its affiliates are subject to certain
quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of
its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of
any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices,
not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with
non-affiliates.
Bank 34’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled
by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation
O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of Bank 34’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Bank 34’s board of directors. Extensions
of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings
associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers,
stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on a federal savings association. Formal enforcement action by the Office of the Comptroller of the Currency may
range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and
the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $50,000
per day (as adjusted for inflation), unless a finding of reckless disregard is made, in which case penalties may be as high as $2 million
per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or recommend to the Office
of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If such action
is not taken, the Federal Deposit Insurance Corporation has authority to take the action under specified circumstances.
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Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for
all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and
managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If
the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the
agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution
fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable
compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and
desist order or the imposition of civil money penalties.
Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire
banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate
mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things,
recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that
branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take “prompt corrective
action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital
categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or
greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of
6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-
based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An
institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than
6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be
“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than
4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be
“critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less
than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions,
including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends,
and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the
undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the
holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-
capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an
unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is
required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of
the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized.
If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly
undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to a regulatory
order to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, ceasing receipt of deposits
from correspondent banks, dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to
additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it
obtains such status.
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At December 31, 2019, Bank 34 met the criteria for being considered “well capitalized.”
The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital
requirement provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that
framework will be considered “well-capitalized” for purposes of prompt corrective action.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits
at Federal Deposit Insurance Corporation insured financial institutions such as Bank 34. Deposit accounts in Bank 34 are insured by
the Federal Deposit Insurance Corporation generally up to a maximum of $250,000 per separately insured depositor. The Federal
Deposit Insurance Corporation charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions were assigned to one
of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates were based on
each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky paid lower rates while
institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) ranged from 2 1/2 to 45 basis points
of each institution’s total assets less tangible capital.
Effective in 2016, the Federal Deposit Insurance Corporation adopted changes that eliminated the risk categories.
Assessments for most institutions are now based on financial measures and supervisory ratings derived from statistical modeling
estimating the probability of failure within three years. The assessment range (inclusive of possible adjustments) for most banks and
savings associations is currently 1.5 basis points to 30 basis points.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits
to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation was required to seek to achieve the 1.35% ratio
by September 30, 2020. The Federal Deposit Insurance Corporation indicated that the 1.35% ratio was exceeded in 2018. Insured
institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio
between 1.15% and 1.35%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the
Federal Deposit Insurance Corporation, and the Federal Deposit Insurance Corporation has exercised that discretion by establishing
a long-range fund ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases
would have an adverse effect on the operating expenses and results of operations of Bank 34. We cannot predict what assessment
rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any
practice, condition or violation that may lead to termination of our deposit insurance.
Privacy Regulations. Federal regulations generally require that Bank 34 disclose its privacy policy, including identifying
with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer
relationship and annually thereafter. In addition, Bank 34 is required to provide its customers with the ability to “opt-out” of having
their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated
third parties for marketing purposes. Bank 34 currently has a privacy protection policy in place and believes that such policy is in
compliance with the regulations.
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USA PATRIOT Act. Bank 34 is subject to the USA PATRIOT Act, which gives federal agencies additional powers to
address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions,
such as enhanced recordkeeping and customer identification requirements.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor
of the institution.
Other Regulations
Interest and other charges collected or contracted for by Bank 34 are subject to state usury laws and federal laws concerning
interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal
laws.
The deposit operations of Bank 34 also are subject to, among others, the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the original paper check; and
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
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Federal Reserve System
The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). For 2019, the Federal Reserve Board regulations generally
require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts
aggregating $124.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the
amounts greater than $124.2 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between
8.0% and 14.0%). The first $16.3 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board)
are exempted from the reserve requirements. Bank 34 was in compliance with these requirements at December 31, 2019.
Federal Home Loan Bank System
Bank 34 is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks.
The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home
Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Bank 34 was in compliance with
this requirement at December 31, 2019. Based on redemption provisions of the Federal Home Loan Bank of Dallas, the stock has no
quoted market value and is carried at cost. Bank 34 reviews for impairment, based on the ultimate recoverability, the cost basis of
the Federal Home Loan Bank of Dallas stock. As of December 31, 2019, no impairment had been recognized.
Final Federal Regulation
Effective July 1, 2019, the Office of the Comptroller of the Currency issued a final rule implementing a section of the
Economic Growth, Relief and Consumer Protection Act that permits an eligible federal savings association with total consolidated
assets of $20 billion or less as of December 31, 2017, to elect to operate with national bank powers without converting to a national
bank charter. An eligible savings association is a federal savings association that: (1) is well capitalized; (2) has a CAMELs
composite rating of 1 or 2; (3) has a consumer compliance rating of 1 or 2; (4) has a Community Reinvestment Act rating of
“outstanding” or “satisfactory,” if applicable; and (5) is not subject to an enforcement action.
Holding Company Regulation
Bancorp 34 is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve
Board. The Federal Reserve Board has enforcement authority over Bancorp 34 and its non-savings institution subsidiaries. Among
other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Bank
34.
As a savings and loan holding company, Bancorp 34’s activities are limited to those activities permissible by law for
financial holding companies (if Bancorp 34 makes an election to be treated as a financial holding company and meets the other
requirements to be a financial holding company) or multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such
activities include lending and other activities permitted for bank holding companies under Section 4(c) (8) of the Bank Holding
Company Act, insurance and underwriting equity securities. Multiple savings and loan holding companies are authorized to engage
in activities specified by federal regulation, including activities permitted for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from
acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the
Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit
Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board
must consider such things as the financial and managerial resources and future prospects of the company and institution involved,
the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and
competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target
institution as a separate subsidiary unless it is a supervisory acquisition or the law of the state in which the target is located authorizes
such acquisitions by out-of-state companies.
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Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The
Dodd-Frank Act required the Federal Reserve Board to establish minimum consolidated capital requirements for all depository
institution holding companies that were as stringent as those required for the insured depository subsidiaries. However, pursuant to
federal legislation, the Federal Reserve Board maintains a “small holding company” exception to the applicability of consolidated
holding company capital requirements. That exception generally applies to holding companies with less than $3 billion of
consolidated assets, such as Bancorp 34. Such holding companies are not subject to the requirements unless otherwise advised by
the Federal Reserve Board.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal
Reserve Board has promulgated regulations implementing the “source of strength” doctrine that require holding companies to act as
a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial
stress.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares
of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends
should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears
consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior
regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the
past four quarters, net of capital distributions previously paid over that period, is insufficient to fully fund the dividend or the
company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The
ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement
also states that a holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing
common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or
redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared
with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability
of Bancorp 34 to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Securities Laws
Bancorp 34 common stock is registered with the Securities and Exchange Commission. Bancorp 34 is subject to the
information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock issued in Bancorp 34’s public offering does
not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Bancorp 34 may be
resold without registration. Shares purchased by an affiliate of Bancorp 34 are subject to the resale restrictions of Rule 144 under
the Securities Act of 1933. If Bancorp 34 meets the current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of Bancorp 34 that complies with the other conditions of Rule 144, including those that require the affiliate’s
sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares
not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Bancorp 34, or the average weekly volume
of trading in the shares during the preceding four calendar weeks. In the future, Bancorp 34 may permit affiliates to have their shares
registered for sale under the Securities Act of 1933.
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Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability
of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these
regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these
regulations.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company, such as
Bancorp 34, unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving
the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer
and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding
irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of
the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a
controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and
loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain
circumstances including where, as is the case with Bancorp 34, the issuer has registered securities under Section 12 of the Securities
Exchange Act of 1934.
In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without
the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding
company” subject to registration, examination and regulation by the Federal Reserve Board.
Emerging Growth Company Status
Bancorp 34 was an emerging growth company under the JOBS Act. The Company lost its status as an emerging growth
company at the end of 2019.
Bancorp 34 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, these financial
statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting
standards.
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ITEM 1A.
Risk Factors
Not applicable, as Bancorp 34, Inc. is a “Smaller Reporting Company.”
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We conduct business through our main office in Alamogordo, New Mexico and three branch offices located in Las Cruces,
New Mexico and Peoria and Scottsdale, Arizona. At December 31, 2019, the total net book value of our premises, land and equipment
was $9.0 million.
ITEM 3.
Legal Proceedings
Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on
properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues
incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NASDAQ Capital Market under the symbol “BCTF.” As of February 12, 2020, we had
364 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage
firms), and 3,168,574 shares of common stock outstanding.
There were no sales of unregistered securities during the quarter ended December 31, 2019.
On October 24, 2017, the Company adopted its initial stock 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 was authorized
to repurchase up to 167,747 shares of its common stock, or approximately 5.0% of the Company’s outstanding shares. 157,042
shares were repurchased under this program through December 31, 2019. The Company did not repurchase common stock in the
three months ended December 31, 2019.
29
ITEM 6.
Selected Financial Data
You should read the following summary financial information in connection with our historical financial information, which
appears elsewhere in this annual report. The selected historical financial data at December 31, 2019 and 2018 and for the years ended
December 31, 2019 and 2018 is derived in part from the audited consolidated financial statements that appear in this report. The
information at December 31, 2017, 2016 and 2015 is derived in part from audited consolidated financial statements that do not
appear in this report.
The following summary financial tables comprise of total operations, including continuing and discontinued.
Selected Financial Condition:
Total assets
Cash and cash equivalents
Available-for-sale securities, at fair value
Loans held for investment, net
Loans held for sale
Deposits
Federal Home Loan Bank advances
Stockholders' equity
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
$
$
Net interest income after provision for loan losses
Non-interest income
Non-interest expense (1)
Income before income taxes
Income taxes (2)
Net income
Earnings per share - basic (3)
Earnings per share - diluted (3)
$
$
$
2019
2018
At December 31,
2017
(Dollars in thousands)
2016
2015
393,739 $
29,486
44,517
291,739
-
303,897
40,000
45,083
383,278 $
11,774
33,429
282,790
26,884
265,239
67,000
46,423
336,221 $
9,873
24,400
257,896
15,424
235,561
45,000
50,971
328,867 $
16,411
31,499
241,399
14,221
224,522
50,000
50,777
270,984
19,825
28,631
192,137
11,381
225,700
13,000
29,644
2019
Years Ended December 31,
2018
2016
2017
(In thousands, except per share data)
2015
19,316 $
5,018
14,298
23
14,275
5,833
19,160
948
238
710 $
17,622 $
3,605
14,016
318
13,698
15,194
27,403
1,489
416
1,074 $
15,965 $
2,272
13,693
575
13,118
11,906
22,695
2,329
1,968
361 $
13,502 $
1,684
11,818
1,019
10,799
11,213
20,888
1,124
(4,171 )
5,295 $
12,224
1,434
10,790
694
10,096
4,903
14,658
341
20
321
0.23 $
0.23 $
0.33 $
0.33 $
0.11 $
0.11 $
1.57 $
1.57 $
0.09
0.09
(1) Non-interest expense for the year ended December 31, 2015 includes merger-related expenses of $100,000.
(2) As a result of the reduction in the Federal corporate tax rate effective in 2018 under the Tax Cuts and Jobs Act signed into law in
December 2017, income tax expense for 2017 includes a $1.2 million deferred tax asset re-measurement adjustment. An $4.2
million net income tax benefit was recognized in 2016 primarily due to the reversal of all valuation reserves on net deferred tax
assets.
(3) Basic and diluted earnings per share amounts in the above table for all periods prior to October 2016 have been restated at the
second-step conversion exchange rate of 2.0473 to one.
30
2019
At or For the Years Ended December 31,
2017
2018
2016
2015
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)
Return on average equity (ratio of net income to
average stockholders' equity)
Net interest rate spread (1)
Net interest margin (2)
Noninterest expense to average assets
Dividend payout ratio
Efficiency ratio (3)
Average interest-earning assets to average interest-
0.18 %
0.30 %
0.11 %
1.78 %
0.12 %
1.53 %
3.58 %
3.95 %
4.97 %
67.85 %
95.18 %
2.24 %
3.87 %
4.17 %
7.61 %
387.62 %
93.81 %
0.69 %
4.19 %
4.38 %
6.66 %
- %
88.05 %
16.31 %
4.11 %
4.26 %
7.52 %
- %
90.70 %
1.08 %
4.36 %
4.47 %
5.64 %
- %
93.41 %
bearing liabilities
127.06 %
127.87 %
125.95 %
123.69 %
118.80 %
Capital Ratios:
Total capital to risk-weighted assets (Bank only)
Tier 1 capital to risk-weighted assets (Bank only)
Tier 1 capital to average assets (Bank only)
Average stockholders' equity to average total assets
14.59 %
13.58 %
10.30 %
12.03 %
14.50 %
13.46 %
10.29 %
13.29 %
17.21 %
15.96 %
11.96 %
15.22 %
18.14 %
17.03 %
11.91 %
10.91 %
16.93 %
15.91 %
11.06 %
11.46 %
Asset Quality Ratios:
Allowance for loan losses to total gross loans
Allowance for loan losses to total gross loans less
acquired loans
Allowance for loan losses to nonperforming loans
Net (charge-offs) recoveries to average loans
Nonperforming loans to total gross loans
Nonperforming loans to total assets
Nonperforming assets and accruing troubled debt
restructurings to total assets
Other Data:
Number of full service offices
Full time equivalent employees
0.99 %
1.02 %
1.19 %
1.03 %
0.97 %
0.99 %
83.36 %
(0.00 )%
1.19 %
0.89 %
1.04 %
79.62 %
(0.20 )%
1.27 %
0.95 %
1.29 %
57.33 %
0.01 %
2.08 %
1.62 %
1.19 %
41.99 %
(0.20 )%
2.44 %
1.81 %
1.28 %
102.71 %
(0.25 )%
0.95 %
0.68 %
0.91 %
0.96 %
1.62 %
1.81 %
0.79 %
4
56
4
166
4
145
4
138
4
98
(1) Net interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(3) Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
31
The following selected financial data for the years ended December 31, 2019 and 2018 consists of continuing operations
only.
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes - continuing operations
Income taxes
Net income from continuing operations
Basic earnings per share - continuing operations
Diluted earnings per share - continuing operations
Performance Ratios:
Return on average assets (ratio of net income
to average total assets)
Net interest rate spread (1)
Net interest margin (2)
Noninterest expense to average assets
Efficiency ratio (3)
Years Ended December 31,
2019
2018
(In thousands, except per share data)
$
$
$
$
18,947
4,820
14,127
23
14,104
1,019
12,491
2,632
666
1,966
0.64
0.64
$
$
$
$
16,864
3,174
13,690
318
13,372
901
11,723
2,550
675
1,875
0.59
0.59
For the Years Ended December 31,
2019
2018
0.52 %
3.67 %
4.00 %
3.31 %
82.47 %
0.55 %
4.06 %
4.28 %
3.42 %
80.34 %
(1) Net interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(3) Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
ITEM 7.
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
year ended December 31, 2019 and 2018, has been derived from the consolidated financial statements that appear elsewhere in this
annual report. You should read the information in this section in conjunction with the business and financial information regarding
Bancorp 34, Inc. and the financial statements provided in Part II, Item 8 of this annual report.
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.
32
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. As a result of the reduction in the Federal corporate tax rate effective in 2018 under the
Tax Cuts and Jobs Act signed into law in December 2017, income tax expense for 2017 includes a $1.2 million deferred tax asset
re-measurement adjustment. Effective December 31, 2016, we reversed 100% of our net deferred tax asset valuation allowances and
recognized an income tax benefit based upon our assessment of net deferred tax assets that are more-likely-than-not to be realized.
The net deferred tax asset had been offset by an equal valuation allowance from June 2012 through November 2016. 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.
33
Average Balance Sheet
The following table sets forth average balances, average yields and costs, and certain other information for the years
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.
2019
For the Years Ended December 31,
2018
2017
Average
Outstanding
Balance
Yield/
Interest Rate
Average
Outstanding
Balance
Yield/
Interest Rate
Average
Outstanding
Balance
Yield/
Interest Rate
(Dollars in thousands)
$
295,755
36,603
21,092
$ 17,490
973
484
5.91 % $ 273,839 $ 15,847
654
28,477
2.66 %
362
17,673
2.29 %
5.79 % $ 259,791 $ 14,794
529
28,744
2.30 %
215
13,866
2.05 %
5.69 %
1.84 %
1.55 %
$
$
353,450
18,947
5.36 %
319,989 16,863
5.27 %
302,401 15,538
5.14 %
8,398
361,848
23,539
385,387
369
19,316
4.39 %
5.34 %
16,196
758
336,185 17,621
4.68 %
5.24 %
10,247
427
312,648 15,965
4.17 %
5.11 %
23,770
$ 359,955
28,347
$ 340,995
$
154,843
79,432
234,275
2,160
1,640
3,800
1.39 % $ 132,347 $
70,363
2.06 %
202,710
1.62 %
1,324
1,106
2,430
1.00 % $ 128,835 $
63,415
1.57 %
192,250
1.20 %
1,049
624
1,673
0.81 %
0.98 %
0.87 %
50,518
1,020
2.02 %
60,209
743
1.23 %
55,984
439
0.78 %
284,793
4,820
1.69 %
262,919
3,173
1.21 %
248,234
2,112
0.85 %
-
284,793
49,813
4,427
339,033
46,354
385,387
198
5,018
432
3,605
-
1.76 %
-
262,919
44,215
4,978
312,112
47,843
$ 359,955
-
1.37 %
-
248,234
37,361
3,493
289,088
51,907
$ 340,995
160
2,272
-
0.92 %
Interest-earning assets:
Loans - continuing operations
Securities
Other interest earning assets
Total interest-earning assets -
continuing operations
Loans held for sale - discontinued
operations
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Checking, money market and savings
accounts
Certificates of deposit
Total deposits
Advances from FHLB of Dallas -
continuing operations
Total interest-bearing liabilities -
continuing operations
Advances from FHLB of Dallas -
discontinued operations
Total interest-bearing liabilities
Non-interest bearing deposits
Non-interest bearing liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity $
Net interest income - continuing
operations
Net interest rate spread - continuing
operations (1)
Net interest margin - continuing
operations (3)
Net interest income
Net interest rate spread (1)
Net interest-earning assets (2)
Net interest margin (3)
$ 14,127
$ 13,690
$ 13,426
3.67 %
4.00 %
4.06 %
4.28 %
$ 14,298
$ 14,016
$ 13,693
$
77,055
3.58 %
$
3.95 %
73,266
3.87 %
$
4.17 %
64,414
4.29 %
4.44 %
4.19 %
4.38 %
Average interest-earning assets to average
interest-bearing liabilities
127.06 %
127.87 %
125.95 %
(1) 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.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of average total interest-earning assets.
34
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated.
The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column
shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to
rate and the changes due to volume.
Years Ended December 31,
2019 vs. 2018
2018 vs. 2017
Increase (Decrease)
Due to
Total
Increase
Increase (Decrease)
Due to
Volume
Rate
(Decrease) Volume
(Dollars in thousands)
Rate
Total
Increase
(Decrease)
$
1,329 $
229
70
314 $
90
52
1,643 $
319
122
458 $
9
4
595 $
116
143
1,053
125
147
1,628
456
2,084
471
854
1,325
(347 )
1,281
(42 )
414
(389 )
1,695
273
744
58
912
331
1,656
Interest-earning assets:
Loans - continuing operations
Securities
Other interest earning assets
Total interest-earning assets -
continuing operations
Loans held for sale - discontinued
operations
Total interest-earning assets
Interest-bearing liabilities:
Checking, money-market and
savings accounts
Certificates of deposit
Total deposits
Advances from FHLB of Dallas -
continuing operations
Total interest-bearing liabilities -
continuing operations
Advances from FHLB of Dallas -
discontinued operations
Total interest-bearing liabilities
Change in net interest income -
287
146
433
549
388
937
836
534
1,370
35
248
283
241
234
475
(208 )
485
277
49
255
276
482
758
304
225
1,422
1,647
332
730
1,062
-
225
(234 )
1,188
(234 )
1,413
-
332
139 $
412 $
271
1,001
124 $
(89 ) $
271
1,333
263
323
continuing operations
Change in net interest income
$
$
1,403 $
1,056 $
(966 ) $
(774 ) $
437 $
282 $
Comparison of Financial Condition at December 31, 2019 and December 31, 2018
Cash and cash equivalents were $29.5 million at December 31, 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 December 31, 2019 due to the reduction in mortgage loans held for sale during the year ended December 31, 2019.
Available-for-sale securities increased $11.1 million, or 33.2%, during the year ended December 31, 2019 to $44.5 million.
There were no sales of available-for-sale securities and we purchased $16.2 million of securities in the year ended December 31,
2019.
There were no loans held for sale at December 31, 2019. 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 The consolidated financial statements, 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.
35
Loans held for investment increased $9.0 million, or 3.1%, to $294.7 million at December 31, 2019 from $285.7 million at
December 31, 2018, due to organic growth. In the year ended December 31, 2019, commercial real estate loans increased $9.6
million to $242.7 million and represented 82.1% of the gross loan portfolio at December 31, 2019, compared to 81.3% at December
31, 2018.
The core deposit intangible recorded in connection with the acquisition of Bank 1440 decreased $39,000 to $133,000 at
December 31, 2019 from $172,000 at December 31, 2018, reflecting normal amortization.
Total deposits increased $38.7 million, or 14.6%, to $303.9 million at December 31, 2019 from $265.2 million at December
31, 2018. The increase included an $23.8 million, or 16.7%, increase in savings and NOW deposits, a $3.8 million, or 5.0%, increase
in time deposits and a $11.1 million, or 24.4%, increase in demand deposits.
Federal Home Loan Bank advances were down $27.0 million, or 40.3%, to $40.0 million at December 31, 2019 compared to
$67.0 million at December 31, 2018. The reduction was due to a $26.9 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 $267,000, or 6.3%, to $4.5 million at December 31, 2019 compared to $4.2
million at December 31, 2018.
Total stockholders’ equity decreased $1.3 million to $45.1 million at December 31, 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
$703,000 increase due to available-for-sale securities fair value appreciation.
Comparison of Operating Results for the Years Ended December 31, 2019 and December 31, 2018
General. We had net income of $710,000 for the year ended December 31, 2019, which was $363,000 less than net income
of $1.1 million for the year ended December 31, 2018. This includes net income from continuing operations of $2.0 million and net
loss from discontinued operations of $1.3 million for the year ended December 31, 2019, and net income from continuing operations
of $1.9 million and net loss from discontinued operations of $802,000 for the year ended December 31, 2018. The comparison of
operating results is discussed in more detail between continuing operations and discontinued operations.
We had net income from continuing operations of $2.0 million for the year ended December 31, 2019, which was $91,000
more than net income from continuing operations of $1.9 million for the year ended December 31, 2018. The increase was primarily
caused by a $437,000, or 3.2%, increase in net interest income, a $296,000, or 92.9%, smaller provision for loan losses, and a
$265,000, or 35.2% increase in noninterest income, partially offset by a $916,000, or 7.9%, increase in noninterest expense.
We had a net loss from discontinued operations, as discussed in The consolidated financial statements, Note 2 – Discontinued
Operations, of $1.3 million for the year ended December 31, 2019, which was $454,000 more than the net loss from discontinued
operations of $802,000 for the year ended December 31, 2018. The increased net loss from discontinued operations was primarily
caused by a $9.5 million, or 66.3%, decrease in noninterest income, partially offset by a $9.0 million, or 57.5%, decrease in
noninterest expense. Noninterest expense for the year ended December 31, 2019 included an $845,000 loss on disposal of
discontinued operations.
Interest Income. Interest income from continuing operations increased $2.1 million, or 12.4%, to $18.9 million for the year
ended December 31, 2019 from $16.9 million for the year ended December 31, 2018. The increase was due to a $33.5 million, or
10.5%, increase in average interest-earning assets and a nine basis point increase in average yields. Loans, which are our highest
yielding asset, decreased to 83.7% of average interest-earning assets from 85.6% 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 12 basis
points, 36 basis points and 24 basis points, respectively. Interest income on loans increased due to a $21.9 million, or 8.0%, increase
in average loan balances due to organic growth and a 12 basis point increase in yield to 5.91% for the year ended December 31, 2019
from 5.79% for the year ended December 31, 2018. Interest on securities increased $319,000, or 48.8%, for the year ended December
31, 2019 compared to the year ended December 31, 2018 due primarily to an $8.1 million, or 28.5%, increase in average securities
balances due to second, third and fourth quarter 2019 purchases and a 36 basis point increase in yield due to favorable market rate
increases.
Interest Expense. Interest expense from continuing operations increased $1.6 million, or 51.9%, to $4.8 million for the year
ended December 31, 2019 from $3.2 million for the year ended December 31, 2018. The increase was the result of increases of $1.4
million, or 56.4%, in interest expense on deposits and $277,000, or 37.3%, in interest expense on borrowings.
Interest paid on checking, money market and savings accounts increased $836,000, or 63.1%, to $2.2 million for the year
ended December 31, 2019 from $1.3 million for the year ended December 31, 2018. The average rate we paid on such deposit
accounts increased 39 basis points to 1.39% for the year ended December 31, 2019 from 1.00% for the year ended December 31,
2018 due to the increase in market interest rates. The average balance increased $22.5 million, or 17.0%, to $154.8 million for the
year ended December 31, 2019 from $132.3 million for the year ended December 31, 2018.
Interest on certificates of deposit increased $534,000, or 48.3%, to $1.6 million for the year ended December 31, 2019 from
$1.1 million for the year ended December 31, 2018. The average rate paid on certificates of deposit increased 49 basis points, or
31.4%, to 2.06% for the year ended December 31, 2019 compared to 1.57% for the year ended December 31, 2018 due to the increase
in market interest rates. The average balance of certificates of deposit increased $9.1 million, or 12.9%, to $79.4 million for the year
ended December 31, 2019 from $70.4 million for the year ended December 31, 2018.
36
The average balance of borrowings decreased $9.7 million, or 16.1%, from the year ended December 31, 2018 to the year
ended December 31, 2019 and the average rate paid increased 79 basis points to 2.02% for the year ended December 31, 2019 from
1.23% for the year ended December 31, 2018.
Net Interest Income. Net interest income from continuing operations increased $437,000, or 3.2%, to $14.1 million for the
year ended December 31, 2019 from $13.7 million for the year ended December 31, 2018, primarily due to a 10.5% increase in
average interest earning assets, mostly offset by a 39 basis point decrease in net interest rate spread to 3.67% for the year ended
December 31, 2019 from 4.06% for the year ended December 31, 2018. Average interest bearing liability rates for continuing
operations increased 48 basis points compared to a nine basis point increase in the average interest earning assets yield for continuing
operations. Our average net interest-earning assets increased by $3.8 million, or 5.2%, to $77.1 million for the year ended December
31, 2019 from $73.3 million for the year ended December 31, 2018 due primarily to organic growth.
Net interest income from discontinued operations decreased $156,000, or 47.7%, to $171,000 for the year ended December
31, 2019 from $326,000 for the year ended December 31, 2018, primarily due to an 48.1% decrease in average mortgage loans held
for sale to $8.4 million for the year ended December 31, 2019 from $16.2 million for the year ended December 31, 2018.
Provision for Loan Losses. We recorded a provision for loan losses of $23,000 for the year ended December 31, 2019,
compared to $318,000 for the year ended December 31, 2018. In the year ended December 31, 2019, the allowance for loan losses
increased $21,000, or 0.7%, including an $23,000 increase from provisions, partially offset by $2,000 in net charge-offs.
Noninterest Income. Noninterest income from continuing operations increased $118,000, or 13.1%, to $1.0 million for the
year ended December 31, 2019 from $901,000 for the year ended December 31, 2018 due primarily to an $143,000, or 110.7%,
increase in loan sales gains.
The gain on sale of loans from continuing operations increased $143,000, or 110.7%, to $272,000 for the year ended
December 31, 2019 from $129,000 for the year ended December 31, 2018. We sold $3.4 million of SBA and USDA loans during
the year ended December 31, 2019 and recognized $272,000 of sales gains directly into income, compared to $1.6 million of SBA
and USDA loan sales in the year ended December 31, 2018 with gains of $129,000.
Noninterest income from discontinued operations, represented by loan sales gains, decreased $9.5 million, or 66.3%, to
$4.8 million for the year ended December 31, 2019 from $14.3 million for the year ended December 31, 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 year ended December 31, 2019, we sold $146.3 million of mortgage loans for a gain of $4.8 million, compared
to $305.8 million of mortgage loan sales during the year ended December 31, 2018 for a gain of $14.3 million. We realized a 4.2%
average premium (gain on sale/sold loans) on the sales of mortgage loans for the year ended December 31, 2019 and 4.25% for the
year ended December 31, 2018. Premiums vary from period to period based upon the mix of government Federal Housing
Administration (FHA) and Veterans Administration (VA) loans to conventional loans, geographic markets and market interest rates,
specifically 10-year U.S. Treasury rates.
Noninterest Expense. Noninterest expense from continuing operations increased $769,000, or 6.6%, to $12.5 million for
the year ended December 31, 2019 from $11.7 million for the year ended December 31, 2018. The increase was primarily related to
higher salaries and benefits and data processing fees, partially offset by a decrease in professional fees, and by $84,000 in FDIC
credits recognized in 2019 which reduced expense. Average assets from continuing operations for the year ended December 31,
2019 were 9.7% larger than for the year ended December 31, 2018.
Noninterest expense from discontinued operations decreased $9.0 million, or 57.5%, to $6.7 million for the year ended
December 31, 2019 from $15.7 million for the year ended December 31, 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 $666,000 for the year ended
December 31, 2019, representing an effective tax rate of 25.3% 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 $675,000 for the year ended December 31, 2018
representing 26.5% of the $2.5 million income from continuing operations before income taxes.
37
Benefit for income taxes from discontinued operations was $428,000 for the year ended December 31, 2019, representing
an effective tax rate of 25.4% on pre-tax loss from discontinued operations. We recognized a benefit for income taxes from
discontinued operations of $259,000 for the year ended December 31, 2018 representing 24.4% of the $1.1 million loss before benefit
for income taxes.
Loans Held for Investment
We originate residential real estate loans, as well as commercial real estate loans, including multi-family residential real
estate loans, construction loans, commercial and industrial loans and consumer and other loans. The following tables set forth the
composition of our loans held for investment by type at the dates indicated.
2019
Amount Percent
2018
At December 31,
2017
2016
2015
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
$ 242,683
82.1 % $ 233,103
81.3 % $ 214,872
82.0 % $ 195,814
80.0 % $ 146,644
75.3 %
28,850
9.8 % 29,855
10.4 % 29,114
11.1 % 29,977
12.2 % 31,412
16.1 %
Commercial real
estate (1)
One- to four-family
residential real
estate
Commercial and
industrial
Consumer and other
Total gross loans
20,075
3,861
5.3 %
3.3 %
295,469 100.0 % 286,841 100.0 % 262,022 100.0 % 244,858 100.0 % 194,720 100.0 %
6.8 % 17,508
6,375
1.3 %
6.1 % 12,296
5,740
2.2 %
4.0 % 10,235
6,429
3.8 %
9,876
9,191
4.7 %
2.2 %
Less:
Unamortized loan
fees
Allowance for
loan losses
Loans held for
investment, net
(808 )
(2,922 )
(1,150 )
(2,901 )
(1,010 )
(3,117 )
(953 )
(689 )
(2,506 )
(1,894 )
$ 291,739
$ 282,790
$ 257,895
$ 241,399
$ 192,137
(1) Includes multi-family real estate loans.
38
The following table sets forth the contractual maturities of our loans held for investment at December 31, 2019. Demand
loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The
table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
Commercial real estate
Amount
Weighted
Average
Rate
One- to four-family
residential real estate
Amount
Weighted
Average
Rate
Due during the years ending
December 31,
2020
2021 to 2024
2025 and beyond
$
$
19,748
135,636
87,299
242,683
(Dollars in thousands)
5.51 % $
5.39 %
5.29 %
5.37 % $
601
1,700
26,549
28,850
5.86 %
5.46 %
5.09 %
5.13 %
Commercial and industrial
Consumer and other
Total
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Due during the years ending
December 31,
2020
2021 to 2024
2025 and beyond
(Dollars in thousands)
$
$
8,913
9,597
1,565
20,075
5.51 % $
5.41 %
5.73 %
5.48 % $
2,055
1,702
104
3,861
5.42 % $
5.80 %
7.14 %
5.63 % $
31,317
148,635
115,517
295,469
5.51 %
5.40 %
5.25 %
5.35 %
The following table sets forth our fixed and adjustable-rate loans at December 31, 2019 that are contractually due after
December 31, 2020.
Due after December 31, 2020
Fixed
Adjustable
(Dollars in thousands)
Total
$
$
145,789 $
25,514
9,702
188
181,193 $
77,146 $
2,735
1,460
1,618
82,959 $
222,935
28,249
11,162
1,806
264,152
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
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.
39
Nonperforming Assets. The following table sets forth information regarding our nonperforming assets.
Nonaccrual loans
Real estate loans:
One- to four-family residential real estate
Commercial real estate
$
Commercial and industrial loans
Consumer and other loans
Total nonaccrual loans
Accruing loans past due 90 days or more
Total nonaccrual loans and accruing loans past
due 90 days or more
Other real estate (ORE)
2019
2018
At December 31,
2017
(Dollars in thousands)
2016
2015
$
787
2,719
-
-
3,506
-
650 $
2,994
-
-
3,644
-
679 $
3,483
1,275
-
5,437
-
649 $
3,719
1,600
-
5,968
-
1,490
-
354
-
1,844
-
3,506
3,644
5,437
5,968
1,844
One- to four-family residential real estate
Commercial real estate
Total other real estate
Total nonperforming assets
-
-
-
3,506
$
-
-
-
3,644 $
-
-
-
5,437 $
-
-
-
5,968 $
-
306
306
2,150
$
Ratios:
Nonperforming loans to gross loans held for
investment
Nonperforming assets to total assets
Nonperforming assets to gross loans held for
investment and ORE
1.19 %
0.89 %
1.27 %
0.95 %
2.08 %
1.62 %
2.44 %
1.81 %
0.95 %
0.79 %
1.19 %
1.27 %
2.08 %
2.44 %
1.10 %
Nonaccrual loan balances guaranteed by the SBA are $2.3 million, or 66.0% of the nonaccrual loan balances at December
31, 2019.
The largest nonaccrual relationship, with a $2.7 million outstanding balance, 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 and increases in gross loans and total assets, the nonperforming asset ratios
decreased from December 31, 2018 to December 31, 2019.
Interest income that would have been recorded for the year ended December 31, 2019, had nonaccruing loans been current
according to their original terms amounted to $243,000 and $4,000 had troubled debt restructurings been current according to their
original terms. We recognized $10,000 in interest income on nonaccrual loans and $24,000 related to troubled debt restructurings for
the year ended December 31, 2019.
In addition to nonperforming assets, as of December 31, 2019, we had $71,000 in accruing troubled debt restructurings.
There were no accruing troubled debt restructurings as of December 31, 2018, 2017, 2016 and 2015.
40
Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.
30 to 59
Days
Past Due
60 to 89
Days
Past Due
(In thousands)
90 Days
or more
Past Due
At December 31, 2019
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
At December 31, 2018
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
At December 31, 2017
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
At December 31, 2016
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
At December 31, 2015
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
$
$
$
$
$
$
$
$
$
$
- $
37
-
-
37 $
2,744 $
235
-
-
2,979 $
- $
117
-
-
117 $
- $
501
-
-
501 $
- $
173
-
-
173 $
2,719
639
-
-
3,358
-
393
-
-
393
550
525
1,275
-
2,350
-
69
461
-
530
-
788
-
-
788
- $
758
-
-
758 $
- $
783
-
-
783 $
246 $
236
-
-
482 $
550 $
108
1,140
-
1,798 $
- $
315
-
-
315 $
41
Classified Assets. Federal regulations require loans and other assets of lesser quality be classified as “substandard”,
“doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct
possibility” that we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the
weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or
liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets
classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. We designate an asset as “special mention” if the asset has a potential
weakness that warrants management’s close attention.
The following table sets forth our amounts of classified assets and assets designated as special mention as of December 31,
2019, 2018 and 2017. The classified assets total at December 31, 2019 includes $3.5 million of nonperforming loans. Three loan
relationships secured by real estate comprise $4.4 million of classified loans at December 31, 2019, and $2.3 million of those,
representing 36% of total classified loans, are guaranteed by the SBA. The classified assets total at December 31, 2018 includes $3.6
million of nonperforming loans.
Classified assets:
Substandard loans
Substandard ORE
Substandard assets
Doubtful
Loss
Total classified assets
Special mention
2019
At December 31,
2018
(In thousands)
2017
$
$
$
6,434 $
-
6,434
-
-
6,434 $
6,477 $
-
6,477
-
-
6,477 $
8,529
-
8,529
550
-
9,079
883 $
2,251 $
955
Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is
adequate to absorb probable 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
probable 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.
42
The following table sets forth activity in our allowance for loan losses (ALLL) for the years indicated.
2019
2018
Years Ended December 31,
2017
(Dollars in thousands)
2016
2015
Balance at beginning of year
Provision for loan losses
Charge-offs:
$
$
2,901
23
$
3,117
318
2,506 $
575
$
1,894
1,019
1,707
694
One- to four-family residential real estate loans
Commercial real estate loans
Commercial and industrial loans
Consumer and other loans
Total charge-offs
Recoveries:
One- to four-family residential real estate loans
Commercial real estate loans
Commercial and industrial loans
Consumer and other loans
Total recoveries
Net (charge-offs) recoveries
(9 )
-
-
-
(9 )
6
-
1
-
7
(2 )
(36 )
(550 )
(10 )
-
(596 )
12
-
50
-
62
(534 )
(21 )
-
-
-
(21 )
25
1
31
-
57
36
(141 )
-
(384 )
-
(525 )
2
116
-
-
118
(407 )
(339 )
-
(359 )
-
(698 )
3
183
-
-
186
(512 )
Balance at end of year
$
2,922
$
2,901
$
3,117 $
2,506
$
1,889
Allowance for loan losses to nonperforming loans
Allowance for loan losses to total loans
Allowance for loan losses to total loans less acquired
loans
Net (charge-offs) recoveries to average loans
83.36 %
0.99 %
79.62 %
1.02 %
57.33 %
1.19 %
41.99 %
1.03 %
102.71 %
0.97 %
0.99 %
1.04 %
1.29 %
1.19 %
1.28 %
outstanding during the period
(0.00 )%
(0.20 )%
0.01 %
(0.20 )%
(0.25 )%
The ratio of our allowance for loan losses to nonperforming loans increased in the year ended December 31, 2019 due to a
3.8% decrease in nonperforming loans and a 0.7% increase in the allowance for loan losses and increased in the year ended December
31, 2018 due to a 33.0% decrease in nonperforming loans partially offset by a 6.9% decrease in the allowance for loan losses.
43
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan
category and the percent of loans in each category to total loans held for investment at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use
of the allowance to absorb losses in other categories.
2019
2018
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
At December 31,
2017
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
(Dollars in thousands)
2016
2015
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
One- to four-family residential
real estate loans
$
Commercial real estate loans
Commercial and industrial loans
Consumer and other loans
Total allocated allowance
$
Investments
187
2,589
116
30
9.76 % $
82.14 %
6.79 %
1.31 %
2,922 100.00 % $
360
2,130
377
34
2,901
10.4 % $
81.3 %
6.1 %
2.2 %
100.0 % $
567
2,056
462
32
3,117
11.1 % $
82.0 %
4.7 %
2.2 %
100.0 % $
618
1,689
147
52
2,506
12.2 % $
80.0 %
4.0 %
3.8 %
100.0 % $
656
1,136
64
38
1,894
16.1 %
75.3 %
5.3 %
3.3 %
100.0 %
Our investment policy is established by our Board of Directors. The policy emphasizes safety of the investment, liquidity
requirements, potential returns, cash flow targets, and consistency with our interest rate risk management strategy.
44
The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the
dates indicated.
2019
Amortized
Cost
Estimated
Fair Value
At December 31,
2018
Amortized
Cost
(Dollars in thousands)
Estimated
Fair Value
2017
Amortized
Cost
Estimated
Fair Value
Mortgage-backed securities (1)
Agency securities
Municipal obligations
Total
$
$
30,723 $
1,103
12,279
44,105 $
31,019 $
1,079
12,419
44,517 $
28,800 $
1,488
3,672
33,960 $
28,310 $
1,445
3,673
33,428 $
21,029 $
2,007
1,672
24,708 $
20,769
1,958
1,673
24,400
(1) Includes Freddie Mac, Ginnie Mae and Fannie Mae.
At December 31, 2019, 2018 and 2017, 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.
Portfolio Maturities and Yields. The composition and maturities of the securities portfolio at December 31, 2019, are
summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of
scheduled principal repayments, prepayments, or early redemptions that may occur. Tax-equivalent yield adjustments have not been
made for tax-exempt securities, as the effect thereof was not material.
One Year or Less
Amortized
Cost
Weighted
Average
Yield
More than One Year
Through Five Year
More than Five Years
Through Ten Years
More Than Ten
Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(Dollars in thousands)
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Total
Estimated
Fair
Value
Weighted
Average
Yield
Mortgage-backed
securities (1)
Agency securities
Municipal obligations
$
$
-
-
-
-
- % $
- %
- %
- % $
23,716
1,103
2,333
27,152
2.59 % $
2.05 %
3.24 %
2.63 % $
7,007
-
7,041
14,048
2.61 % $
- %
2.97 %
2.79 % $
-
-
2,905
2,905
- % $
- %
2.62 %
2.62 % $
30,723 $
1,103
12,279
44,105 $
31,019 2.60 %
1,079 2.05 %
12,419 2.94 %
44,517 2.68 %
(1) Includes Freddie Mac, Ginnie Mae and Fannie Mae.
Sources of Funds
General. Deposits traditionally have been our primary source of funds for use in lending and investment activities. We also
use Federal Home Loan Bank of Dallas advances to supplement cash flow needs, lengthen the maturities of liabilities, for interest
rate risk purposes and to manage the cost of funds. Funds are derived from scheduled loan payments, securities maturities, loan
prepayments, loan sales, and income on earning assets. While scheduled loan payments and income on earning assets are relatively
stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of competition.
45
Deposits. The following tables set forth the distribution of average total deposits by account type, for the years indicated.
2019
For the Years Ended December 31,
2018
2017
Average
Balance Percent
Weighted
Average
Rate
Average
Balance Percent
Weighted
Average
Rate
Average
Balance Percent
Weighted
Average
Rate
(Dollars in thousands)
Deposit Type:
$ 49,813
Non-interest bearing
26,337
Checking
121,408
Money market
Savings
7,098
Certificates of deposit 79,432
17.5 %
9.3 %
42.7 %
2.6 %
27.9 %
$ 284,088 100.0 %
Total deposits
-
17.9 %
$ 44,215
10.5 %
0.48 % 25,967
40.7 %
1.66 % 100,399
2.5 %
0.18 %
5,981
2.06 % 70,363
28.4 %
1.34 % $ 246,925 100.0 %
18.7 %
- $ 44,285
11.2 %
0.49 % 26,521
40.9 %
1.18 % 96,751
2.4 %
0.18 %
5,545
1.57 % 63,406
26.8 %
0.98 % $ 236,508 100.0 %
-
0.49 %
0.94 %
0.15 %
1.07 %
0.78 %
As of December 31, 2019, the aggregate amount of all our certificates of deposit in amounts greater than or equal to
$250,000 was $12.4 million. The $12.4 million excludes $20.0 million of brokered certificates of deposit as individual investors
only invest in $1,000 increments up to the $250,000 insured limit. The following table sets forth the maturity of these certificates of
deposit as of December 31, 2019:
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total
At December 31,
2019
(In thousands)
$
$
1,398
1,430
8,004
1,547
12,379
Borrowings. As of December 31, 2019, 2018 and 2017 our borrowings consisted solely of Federal Home Loan Bank of
Dallas advances. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank
advances at the dates and for the years indicated.
2019
At or For the Years Ended December 31,
2018
(Dollars in thousands)
2017
50,518
$
60,209 $
55,984
75,000
$
2.02 %
$
2.34 %
40,000
80,000 $
1.95 %
67,000 $
2.45 %
67,000
1.07 %
45,000
1.26 %
Average amount outstanding during the year
Highest amount outstanding at any month end during the
year
Weighted average interest rate during the year
Balance outstanding at end of year
Weighted average interest rate at end of year
$
$
$
46
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of
market risk is interest rate risk. Our assets, consisting primarily of real estate loans, have longer maturities than our liabilities,
consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the
exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an
Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in our assets and liabilities,
for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and
performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Senior
management monitors the level of interest rate risk on a regular basis and the Asset/Liability Management Committee reviews our
asset/liability policies and position and the implementation of interest rate risk strategies.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes
in interest rates. We have implemented the following strategies to manage our interest rate risk:
●
●
●
●
●
forward commitments were used to mitigate our exposure to interest rate risk associated with interest rate lock
commitments and mortgage loans held for sale in our mortgage banking operation;
offering a variety of adjustable rate loan products;
using alternate funding sources, such as advances from the Federal Home Loan Bank of Dallas;
maintaining pricing strategies that encourage “core” deposits;
selling longer-term, fixed rate loans into the secondary market.
By following these strategies, we believe that we are better positioned to react to increases in market interest rates.
Economic Value of Equity. We monitor interest rate risk through the use of a simulation model that estimates the amounts
by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range
of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying,
measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.
47
The table below sets forth, as of December 31, 2019 and 2018, the estimated changes in our EVE that would result from
the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results.
December 31, 2019
December 31, 2018
Change in
Interest
Rates
(basis points)(1)
Estimated
EVE (2)
Estimated Increase
(Decrease) in EVE
Amount
Percent
Change in
Interest
Rates
(basis points)(1)
Estimated
EVE (2)
Estimated Increase
(Decrease) in EVE
Amount
Percent
$
+400
+300
+200
+100
-
-100
-200
22,644 $
32,741
40,055
46,474
51,291
52,945
49,016
(28,647 )
(18,550 )
(11,236 )
(4,817 )
-
1,654
(2,275 )
(Dollars in thousands)
-55.85 %
-36.17 %
-21.91 %
-9.39 %
-
3.22 %
-4.44 %
+400
+300
+200
+100
-
-100
-200
$
33,264 $
40,599
46,541
51,908
56,026
57,682
52,643
(22,762 )
(15,427 )
(9,485 )
(4,118 )
-
1,656
(3,383 )
-40.63 %
-27.54 %
-16.93 %
-7.35 %
-
2.96 %
-6.04 %
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
The table above indicates that at December 31, 2019, in the event of a 100 basis point decrease in interest rates, we would
experience a 3.22% increase in EVE. In the event of a 200 basis point increase in interest rates at December 31, 2019, we would
experience a 21.91% decrease in EVE. At December 31, 2018, in the event of a 100 basis point decrease in interest rates, we would
experience a 2.96% increase in EVE. In the event of a 200 basis point increase in interest rates at December 31, 2018, we would
experience a 16.93% decrease in EVE.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes
in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to
changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets
and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular
change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE
and will differ from actual results.
EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest
rates can increase the fair values of our loans, deposits and borrowings.
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, 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.
48
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- and long-term liquidity needs as of December 31,
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 December 31, 2019, cash and cash equivalents totaled $29.5 million.
Available-for-sale securities, which provide additional sources of liquidity, totaled $44.5 million at December 31, 2019. In addition,
at December 31, 2019, we had $40.0 million of advances outstanding from the Federal Home Loan Bank of Dallas and the ability to
borrow an additional $105.4 million from the FHLB, $9.8 million from The Independent BankersBank (TIB) and $6.0 million from
the Pacific Coast Bankers Bank (PCBB).
At December 31, 2019, we had $25.7 million in loan commitments outstanding. In addition, we had $17.8 million in unused
lines of credit.
Time deposits due within one year of December 31, 2019 totaled $55.6 million, or 68.3% of total time deposits. If these
deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit 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 December 31, 2019. We believe, however, based
on past experience that a significant portion of our certificates of deposit will remain with us, either as certificates of deposit or as
other deposit products. We expect that we will be able 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.
During the year ended December 31, 2019 net cash provided for operating activities was $32.0 million representing net
income adjusted for non-cash items. The largest cash inflow was the $25.6 million in proceeds from sales of loans held for sale.
Our primary investing activities are the origination of loans and the purchase of securities. In the years ended December
31, 2019 and 2018, we originated $119.0 million and $437.1 million of loans and purchased $16.2 million and $15.5 million of
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 a net increase in total deposits of $38.7 million during the year ended December 31, 2019 including $23.8 million in
savings and NOW deposits, $11.1 million in noninterest bearing demand deposits and $3.8 million in time deposits.
Federal Home Loan Bank advances decreased $27.0 million during the year ended December 31, 2019 primarily due to our
exit from mortgage banking operations.
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 December 31, 2019, Bancorp 34, Inc. (on an unconsolidated basis) had liquid
assets of $2.0 million. In June, September and December 2019, the Company paid quarterly cash dividends of $0.05 per share each.
Dividends paid in 2019 totaled $482,000.
Bank 34 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 December 31, 2019, Bank 34 exceeded all regulatory capital requirements.
Bank 34 is categorized as “well-capitalized” under regulatory guidelines.
49
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-
sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our
potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.
Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional
information, see Note 12 of the Notes to the Consolidated Financial Statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such
obligations include operating leases for premises and equipment, agreements with respect to borrowings and deposits and agreements
with respect to securities.
Derivative Financial Instrument. We used forward commitments to mitigate our exposure to interest rate risk associated
with interest rate lock commitments and mortgage loans held for sale when we were actively involved in mortgage banking operation.
Recent Accounting Pronouncements
For recent accounting pronouncements see Note 1 of the Notes to the Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Bancorp 34, Inc. have been prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. GAAP generally requires the
measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates
have a greater impact on performance than the effects of inflation.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations”.
50
ITEM 8.
Financial Statements and Supplementary Data
CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
53
54
55
56
57
58
51
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
Management, including the principal executive officer and principal financial officer, has assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal control — Integrated
Framework (2013). Based on such assessment, management concluded that, as of December 31, 2019, the Company’s internal
control over financial reporting is effective based upon those criteria.
Because the Company is a smaller reporting company, it is not required to receive, and has not received, a report with
respect to the effectiveness of internal control over financial reporting from an independent registered public accounting firm.
/s/ Jill Gutierrez
Jill Gutierrez
President and Chief Executive Officer
/s/ Jan R. Thiry
Jan R. Thiry
Executive Vice President, Chief Financial Officer & Treasurer
52
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Bancorp 34, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bancorp 34, Inc. (the “Company”) as of December 31, 2019
and 2018, the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for the
years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of
December 31, 2019 and 2018, and the consolidated results of its operations, and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws, and the applicable rules and regulations of the Securities and
Exchange Commission, and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Moss Adams LLP
Phoenix, Arizona
February 18, 2020
We have served as the Company’s auditor since 2017.
53
BANCORP 34, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Total cash and cash equivalents
Available-for-sale securities, at fair value
Loans held for sale - discontinued operations
Loans held for investment
Allowance for loan losses
Loans held for investment, net
Premises and equipment, net
Premises and equipment, net - discontinued operations
Stock in financial institutions, restricted, at cost
Accrued interest receivable
Accrued interest receivable - discontinued operations
Deferred income tax asset, net
Bank owned life insurance
Core deposit intangible, net
Prepaid and other assets
Prepaid and other assets - discontinued operations
December 31, 2019 December 31, 2018
$
4,496,465 $
24,990,000
29,486,465
44,517,178
-
6,374,457
5,400,000
11,774,457
33,428,658
26,884,014
294,660,719
(2,921,931 )
291,738,788
285,691,372
(2,901,091 )
282,790,281
8,990,955
-
4,016,761
961,105
-
1,907,876
10,850,085
133,052
1,137,090
-
9,558,943
56,683
3,910,361
863,513
11,527
2,196,928
10,573,069
172,108
815,950
241,415
TOTAL ASSETS
$
393,739,355 $
383,277,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits
Savings and NOW deposits
Time deposits
Total deposits
Federal Home Loan Bank advances
Escrows
Escrows - discontinued operations
Accrued interest and other liabilities
Accrued interest and other liabilities - discontinued operations
Total liabilities
Commitments and contingencies (note 12)
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, 3,208,618 and 3,374,565 issued and outstanding.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Unearned employee stock ownership plan (ESOP) shares
Total stockholders’ equity
$
56,401,370 $
166,107,428
81,387,861
303,896,659
40,000,000
254,593
-
4,271,437
233,427
348,656,116
45,350,477
142,349,920
77,538,576
265,238,973
67,000,000
228,816
149,776
3,520,201
717,407
336,855,173
-
-
-
32,086
23,168,176
23,157,134
307,255
(1,581,412 )
45,083,239
-
33,746
25,500,873
22,928,777
(396,148 )
(1,644,514 )
46,422,734
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
393,739,355 $
383,277,907
The accompanying notes are an integral part of these consolidated financial statements.
54
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
2018
2019
Interest income
Interest and fees on loans
Interest on securities
Interest on other interest-earning assets
Total interest income
Interest expense
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Gain on sale of loans
Service charges and fees
Bank owned life insurance
Other
Total noninterest income
Noninterest expense
Salaries and benefits
Occupancy
Data processing fees
FDIC and other insurance expense
Professional fees
Advertising
Other
Total noninterest expense
Income from continuing operations before provision for income taxes
Provision for income taxes
Net income from continuing operations
Discontinued operations
Loss from discontinued operations
Benefit for income taxes
Net loss from discontinued operations
NET INCOME
Other comprehensive income
Unrealized gain (loss) on available-for-sale securities
Tax effect of unrealized (gain) loss on available-for-sale securities
Unrealized gain (loss) on available-for-sale securities, net of tax
$
17,489,918 $
972,524
484,546
18,946,988
3,799,642
1,020,368
4,820,010
14,126,978
22,500
14,104,478
272,293
362,293
370,388
14,225
1,019,199
6,619,148
1,462,077
2,092,060
181,206
815,278
260,440
1,061,408
12,491,617
2,632,060
665,953
1,966,107
15,846,938
654,444
362,047
16,863,429
2,430,616
743,196
3,173,812
13,689,617
318,000
13,371,617
129,231
367,346
365,705
38,888
901,170
6,131,107
1,426,701
1,566,001
206,633
944,932
170,723
1,276,723
11,722,820
2,549,967
674,712
1,875,255
(1,683,555 )
(427,627 )
(1,255,928 )
(1,060,754 )
(259,013 )
(801,741 )
710,179
1,073,514
943,533
(240,130 )
703,403
(223,210 )
57,107
(166,103 )
COMPREHENSIVE INCOME
$
1,413,582 $
907,411
Earnings per common share - Basic
Earnings per common share - continuing operations
Loss per common share - discontinued operations
Earnings per common share - Basic
Earnings per common share - Diluted
Earnings per common share - continuing operations
Loss per common share - discontinued operations
Earnings per common share - Diluted
The accompanying notes are an integral part of these consolidated financial statements.
55
$
$
$
$
0.64 $
(0.41 )
0.23 $
0.64 $
(0.41 )
0.23 $
0.59
(0.26 )
0.33
0.59
(0.26 )
0.33
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common
Common
Shares
Stock
Additional
Paid-In
Capital
Retained
Earnings
Comprehensive Unearned
Income
(Loss)
ESOP
Shares
Total
Stockholders'
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
Unrealized loss on available-for-sale securities,
net
Stock option exercise
Restricted stock awards
Restricted stock forfeitures
Amortization of equity awards
Tax rate effect reclassification (1)
Share repurchase
Dividend paid - $1.25 per share
BALANCE DECEMBER 31, 2018
Net income
Unrealized gain on available-for-sale securities,
net
Stock option exercise
Restricted stock awards
Restricted stock forfeitures
Amortization of equity awards
Share repurchase
Dividends paid - $0.15 per share
BALANCE DECEMBER 31, 2019
-
-
- 1,073,514
-
- 1,073,514
-
15,464
429
(6,500 )
-
-
(125,500 )
-
3,374,565 $
-
155
4
(65 )
-
-
-
149,073
(4 )
65
427,382
-
(1,255 ) (1,925,465 )
-
-
-
-
-
(44,221 )
-
- (4,161,114 )
33,746 $ 25,500,873 $ 22,928,777 $
-
(166,103 )
-
-
-
-
44,221
-
-
-
(166,103 )
-
149,228
-
-
-
-
55,858
483,240
-
-
- (1,926,720 )
- (4,161,114 )
(396,148 ) $ (1,644,514 ) $ 46,422,734
- $
- $
- $
710,179 $
- $
- $
710,179
-
7,300
4,000
(1,800 )
-
(175,447 )
-
3,208,618 $
-
73
40
(18 )
-
-
69,962
(40 )
18
328,256
(1,755 ) (2,730,893 )
-
-
-
-
-
-
-
(481,822 )
32,086 $ 23,168,176 $ 23,157,134 $
-
-
-
-
-
63,102
703,403
-
-
-
-
-
-
703,403
70,035
-
-
391,358
- (2,732,648 )
(481,822 )
-
307,255 $ (1,581,412 ) $ 45,083,239
(1) The stranded tax element of accumulated other comprehensive income created by the 2017 Tax Cuts and Jobs Act is reclassified to retained earnings.
The accompanying notes are an integral part of these consolidated financial statements.
56
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Less: Net loss from discontinued operations
Net income from continuing operations
Adjustments to reconcile net income to net cash from operating activities:
$
Depreciation and amortization
Stock dividends on financial institution stock
Amortization of premiums and discounts on securities, net
Amortization of ESOP awards
Stock-based compensation expense
Amortization of core deposit intangible
Gain on sale of loans
Proceeds from sale of loans
Provision for loan losses
Net appreciation on bank-owned life insurance
Deferred income tax (benefit) expense
Changes in operating assets and liabilities:
Accrued interest receivable
Prepaid and other assets
Accrued interest and other liabilities
Net cash from operating activities - continuing operations
Net cash from operating activities - discontinued operations
Net cash from operating activities
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities
Purchases of available-for-sale securities
Purchase of bank-owned life insurance
Net change in loans held for investment
Proceeds from disposals of premises and equipment
Purchases of premises and equipment
Net cash from investing activities
Cash flows from financing activities
Net change in deposits
Net change in escrows
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Exercise of stock options
Dividends paid
Common stock repurchases
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Year Ended December 31,
2019
2018
710,179 $
(1,255,928 )
1,966,107
611,200
(106,400 )
122,057
99,367
291,991
39,056
(272,293 )
3,714,648
22,500
(277,016 )
48,922
(86,065 )
(79,725 )
267,256
6,361,605
25,628,086
31,989,691
5,940,620
(16,207,664 )
-
(12,413,363 )
33,516
(20,044 )
(22,666,935 )
38,657,686
(123,999 )
30,000,000
(57,000,000 )
70,035
(481,822 )
(2,732,648 )
8,389,252
1,073,514
(801,741 )
1,875,255
702,956
(84,500 )
250,556
89,883
393,357
48,556
(129,231 )
1,703,987
318,000
(282,397 )
(36,975 )
(36,080 )
325,921
(154,044 )
4,985,244
(12,222,996 )
(7,237,752 )
6,014,670
(15,517,212 )
(155,000 )
(26,826,528 )
-
(197,678 )
(36,681,748 )
29,677,640
81,745
132,000,000
(110,000,000 )
149,228
(4,161,114 )
(1,926,720 )
45,820,779
17,712,008
1,901,279
11,774,457
9,873,178
Cash and cash equivalents, end of period
$
29,486,465 $
11,774,457
Supplemental disclosures:
Interest on deposits and advances paid
Income taxes paid
Loans transferred to loans held for sale
$
$
$
4,802,125 $
19,553 $
3,423,909 $
3,470,186
352,600
2,037,039
The accompanying notes are an integral part of these consolidated financial statements.
57
BANCORP 34, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 organized in 2016 to be the successor to Alamogordo
Financial Corp (“AFC”), a savings and loan holding company, upon completion of the second-step conversion of Bank 34 (the
“Bank”) from the two-tier mutual holding company structure to the stock holding company structure. AF Mutual Holding Company
(the “MHC”) was the former mutual holding company for AFC prior to completion of the second-step conversion. In conjunction
with the second-step conversion, both the MHC and AFC ceased to exist. The second-step conversion was completed on October
11, 2016 at which time Bancorp 34 sold 1,879,484 shares of its common stock (including 150,358 shares purchased by the Bank’s
employee stock ownership plan) at $10.00 per share for gross proceeds of approximately $18.8 million. Expenses related to the stock
offering totaled $1.3 million and were netted against proceeds. As part of the second-step conversion, each of the outstanding shares
of common stock of AFC held by persons other than the MHC were converted into 2.0473 shares of Bancorp 34 common stock with
cash paid in lieu of fractional shares. As a result, a total of 1,558,706 shares were issued to persons previously owning AFC shares
in the second-step conversion. After the conversion and stock offering 3,438,190 shares of Bancorp 34 common stock were
outstanding. As a result of the conversion, Bancorp 34 now owns 100% of 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 The consolidated financial statements, Note 2 – Discontinued Operations.
The primary deposit products are demand deposits, certificates of deposit, NOW, savings and money market accounts. The primary
lending products are commercial loans. The Bank is subject to competition from other financial institutions, 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 short-
term 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 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).
Discontinued Operations – As discussed in The consolidated financial statements, 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.
58
Emerging Growth Company Status - Bancorp 34 was an emerging growth company under the JOBS Act and lost its status as an
emerging growth company at the end of 2019. Bancorp 34 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. We remain a smaller reporting company, which still permits us to provide streamlined financial statement and other
disclosures, and exempts us from external attestation of our internal controls.
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, useful lives used in depreciation and amortization,
deferred income taxes and related valuation allowance and core deposit intangibles.
Subsequent Events - Subsequent events have been evaluated through the date the consolidated financial statements were issued.
Cash and Cash Equivalents – Cash and cash equivalents include cash, due from banks, and federal funds sold. Generally, the
Company considers all highly-liquid instruments with original maturities of three months or less to be cash equivalents. In monitoring
credit risk associated with deposits in other banks, the Bank periodically evaluates the stability of the correspondent financial
institutions.
Available for Sale Securities – The Company reviews its financial position, liquidity, and future plans in evaluating the criteria for
classifying securities. Available-for-sale securities consist of bonds, notes, debentures, mortgage-backed securities, municipal
obligations and certain equity securities not classified as trading securities or as held-to-maturity securities. Unrealized holding gains
and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of stockholders’ equity.
Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Declines in the
fair value of individual available-for-sale securities below their cost that are other-than-temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included in earnings as realized losses. Premiums and discounts
are recognized in interest income using the interest method over the expected life of the security.
Loans Held for Sale – Loans held for sale includes one- to four-family residential real estate loans, and periodically, a portion of
Small Business Administration (“SBA”) or United States Department of Agriculture (USDA) loans the Bank intends to sell. They
are carried at fair value. Gains and losses on the sale of mortgage loans are recognized upon sale and are determined by the difference
between the sales proceeds and carrying value of the loans. As discussed in The consolidated financial statements, Note 2 –
Discontinued Operations, the Company discontinued originating mortgage loans held for sale in its name in June 2019. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to operations. The December 31, 2019 and 2018 loans
held for sale portfolio totaled $0 and $26.9 million, respectively, all of which were one- to four-family residential real estate loans.
Derivative Financial Instruments - In connection with its mortgage banking operation, the Company had the following derivative
financial instruments which were carried at fair value and included in Prepaid and other assets or Other liabilities in the Consolidated
Balance Sheets with fair value changes recorded in Gain on sale of loans in the Consolidated Statement of Comprehensive Income:
●
Interest Rate Lock Commitments – The Company entered into Interest Rate Lock Commitments (“IRLCs”) to set mortgage
loan interest rates with its mortgage loan customers prior to funding.
● Forward Commitments – The Company entered into forward commitments as part of its strategy to manage its exposure to
changes in interest rates related to its interest rate lock commitments provided to customers to fund mortgages and on mortgage
loans held for sale. These forward commitments were not designated as hedges for accounting purposes under GAAP.
As discussed in The consolidated financial statements, Note 2 – Discontinued Operations, the Company discontinued issuing
mortgage interest rate lock commitments (IRLCs) in its name in May 2019. Fair values of IRLCs at December 31, 2019 and 2018
were $0 and $381,000, respectively, and fair value losses of forward commitments were $0 and $154,000 at December 31, 2019 and
2018, respectively.
59
Loans Held for Investment, Net – Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific allowances and
net of any deferred fees or costs. Loans are considered past due or delinquent based on the contractual terms in the loan agreement
and how recently repayments have been received. Interest income is recognized based upon principal amounts outstanding. The
accrual of interest is discontinued at the time the loan is 90 days past due or when, in the opinion of management, there is doubt
about the ability of the borrower to pay interest or principal, unless the credit is well secured and in process of collection. Interest
previously accrued but uncollected on such loans is reversed and charged against current income. Subsequent interest collected on
such loans is credited to loan principal if, in the opinion of management, collectability of principal is doubtful; otherwise, the interest
collected is recognized as income and resumption of interest accruals may occur. Loans are charged-off as uncollectible when, in
the opinion of management, collectability of principal is improbable. Personal loans are typically charged off when no later than 180
days past due.
The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable 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; and 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 probable 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 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.
Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method.
Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line method in amounts sufficient to relate the cost of
depreciable assets to operations over the estimated useful lives of the assets which range from three to seven years for equipment
and fifteen to forty years for leasehold improvements and buildings. Maintenance and repairs that do not extend the useful lives of
premises and equipment are charged to expense as incurred.
Stock in Financial Institutions - The Bank has investments in other financial institutions including the Federal Home Loan Bank
(FHLB) and other correspondent banks. The Bank is a member of FHLB system. Members are required to own stock in the FHLB.
The level of stock ownership is based on the level of borrowing and other factors, and member banks may invest in additional
amounts at times. Financial institution stock is carried at cost, is classified as a restricted security and is periodically evaluated for
impairment based on ultimate recovery. Cash and stock dividends are recorded in Other income in the Consolidated Statement of
Comprehensive Income.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the
transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
60
Bank Owned Life Insurance (BOLI) – The Bank holds BOLI representing life insurance on the lives of certain executives of the
Bank purchased in order to help offset the costs of the Bank’s benefit expenses. BOLI is carried on our consolidated balance sheets
at the net cash surrender value of the policies and increases in the net cash surrender value are recorded in noninterest income in the
consolidated statements of comprehensive income (loss) as bank owned life insurance income.
Core deposit intangible (CDI) – Core deposit intangible represents a premium paid to acquire core deposits representing the net
present value of core deposits acquired over their book value on the acquisition date. The core deposit intangible is amortized using
the double declining balance method over the 9-year estimated useful lives of the core deposits. Core deposit intangibles are tested
for impairment whenever events or changes in circumstances indicate the carrying value of the assets may be larger than the value
of the future undiscounted cash flows.
Other Real Estate (ORE) – ORE consists of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu
of foreclosure. These properties are carried at fair value based on appraisal value less estimated sales costs. Loan losses arising from
the acquisition of such properties are charged against the allowance for loan losses; any subsequent valuation adjustments are charged
to expense, and the basis of the properties is reduced accordingly. These properties are not held for the production of income and,
therefore, are not depreciated. Significant improvements expected to increase the resale value are capitalized and added to the value
of the property.
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 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 is actively traded in over-the-counter markets.
● Level 2 – Inputs 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. Valuation techniques used need to maximize the use of observable inputs and minimize
the use of unobservable inputs.
Escrow Accounts – Funds collected from loan customers for insurance, real estate taxes and other purposes are maintained in escrow
accounts and carried as a liability in the Consolidated Balance Sheets. These funds are periodically remitted to the appropriate entities
to satisfy those claims.
Financial Instruments with Off-Balance-Sheet Risk – In the ordinary course of business, the Bank enters into off-balance-sheet
financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they are funded or related fees are incurred or received. The credit risk associated with these
instruments is evaluated using the same methodology as for loans held for investment.
61
Advertising Cost – The Bank conducts direct and non-direct response advertising and purchases prospective customer lists from
various sources. These costs are expensed as incurred. Advertising costs from continuing operations for the years ended December
31, 2019 and 2018 were $260,000 and $171,000, respectively.
Employee Stock Ownership Plan (ESOP) – The Bank sponsors an internally leveraged ESOP. The cost of shares issued to the
ESOP but not yet released is shown as unearned employee stock ownership plan (ESOP) shares, an element of stockholders’ equity
in our consolidated balance sheets. As shares are committed to be released, compensation expense is recorded equal to the market
price of the shares, and the shares become outstanding for purposes of earnings per share calculations. To the extent that the fair
value of ESOP shares committed differs from the cost of such shares, the difference is charged or credited to additional paid-in
capital in stockholders’ equity.
Cash dividends on unallocated ESOP shares may be used to make payments on the ESOP loan and may be allocated to participant
accounts in proportion to their account balances. Cash dividends paid on allocated shares are recorded as a reduction of retained
earnings and, at the direction of the employer may be: a) credited directly to participant accounts in proportion to their account
balances, or b) distributed directly to participants (outside the plan) in proportion to their account balances, or c) used to make
payments on the ESOP loan requiring the release of shares with at least a similar fair market value be allocated to participant
accounts. In addition, participants have the right to receive an immediate distribution of their vested cash dividends paid on shares
of common stock credited to their accounts.
Other Stock-Based Compensation – The Company has stock-based compensation plans which provide for the award of various
benefits to Directors and employees, including restricted stock and options to purchase stock. Each restricted stock award is separated
into vesting tranches and compensation expense is recognized based on the fair value at the date of grant for each tranche on a
straight-line basis over the vesting period reduced for estimated forfeitures. Cash dividends on unvested restricted shares are charged
to compensation expense. The fair value of stock option awards granted is estimated using the Black-Scholes-Merton option pricing
model using inputs including the option exercise price and risk free rate of return, and assumptions for expected dividend yield,
expected stock price volatility and the expected life of the awards. The closing market price of the Company’s stock on the date of
grant is the exercise price for the stock options and the estimated fair value of the restricted stock awards. Expense is recognized
over the required service period, defined as the vesting period. For awards with graded vesting, expense is recognized on a straight-
line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize expense net of
actual forfeitures.
Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized. Accrued interest and penalties associated with uncertain tax positions are
recognized as part of the income tax provision. The Company has no uncertain tax provisions.
Comprehensive Income (Loss) – Comprehensive income (loss) consists of net income (loss) and net unrealized gains and losses
on securities available-for-sale, net of taxes when applicable.
Earnings per Common Share - Basic earnings per common share is net income divided by the weighted average number of
common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned.
Maryland corporate law does not provide for treasury shares; therefore, shares repurchased are removed from issued and outstanding
immediately and would not be considered outstanding. All outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the
dilutive effect of additional potential common shares issuable under stock options. Earnings per share are restated for all stock splits
and stock dividends through the date of issuance of the financial statements. The Company has restricted stock awards that participate
in dividends (“participating securities”), and is required to apply the two-class method to compute earnings per share. The two-class
method is an earnings allocation method under which earnings per share is calculated for each class of common stock and
participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if
all such earnings had been distributed during the period.
62
Business Combinations – The Company accounts for business combinations under the acquisition method of accounting in
accordance with ASC 805, “Business Combinations” (“ASC 805”). The Company recognizes the full estimated fair value of the
assets received and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from
the business combination. There is no recognition of the acquired allowance for loan losses on our consolidated balance sheet as
credit related factors are incorporated directly into the estimated fair value of the loans recorded at the effective date of the business
combination. The excess of the cost of the merger over the fair value of the net tangible and intangible assets acquired, if any, is
recorded as goodwill. Alternatively, a bargain purchase gain is recorded equal to the amount by which the estimated fair value of
assets received exceeds the estimated fair value of liabilities assumed and consideration paid. Results of operations of the
acquired business are included in our statement of comprehensive income (loss) from the effective date of the business combination.
Summary of Recent Accounting Pronouncements:
Revenue Recognition - In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU replaced the most existing
revenue recognition guidance in GAAP when it became effective. ASU 2014-09 would have been initially effective for the
Company's reporting period beginning January 1, 2018. However, in August 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 Comprehensive Income was not necessary. For revenue sources that are
within the scope of Topic 606, we fully satisfy our performance obligations and recognize revenue in the period it is earned as
services are rendered. Transaction prices are typically fixed, charged on a periodic basis or based on activity. Because performance
obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying
Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with our customers.
All of our revenue from contracts with customers in the scope of Accounting Standards Codification (ASC) 606 is recognized in
Non-Interest Income. Sources of revenue from contracts with customers that are in the scope of ASC 606 include the following:
• Service Charges on Deposit accounts - We earn monthly account fees and transaction-based fees from our customers for services
rendered on deposit accounts. Fees charged to deposit accounts on a monthly basis are recognized as the performance obligation
is satisfied at the end of the service period.
• Transaction-based fees - We earn fees based on specific services provided to our customer. The performance obligation is
completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
• ATM and Point of Sale fees – We earn fees when debit cards we issued are used in transactions through card processing networks.
The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’
account. The fees are recognized monthly.
Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to
recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective
for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 for public companies, but the
Company will have until the first quarter of 2020 to adopt due to its emerging growth company status. The guidance is required to
be applied by the modified retrospective transition approach. Early adoption is permitted. We have performed an analysis of our
existing leases and expect to recognize a new right-of-use asset and related lease liability between $1.3 million and $1.4 million
upon implementation of this ASU, effective January 1, 2020.
63
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 were to be effective for
fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. On
October 16, 2019, FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting
companies, as defined in Securities and Exchange Commission regulations, such as the Company, to adopt effective for the first
fiscal year beginning after December 15, 2022. The guidance is required to be applied by the modified retrospective approach. Early
adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.
Premium on Callable Debt - In March 2017, the FASB issued ASU No. 2017-08, “Receivables–Nonrefundable Fees and Other
Costs (Subtopic 310-20)” to shorten the amortization period for certain purchased callable debt securities held at a premium to the
earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security.
The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance
is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is
permitted, including in an interim period. The adoption of ASU 2017-08 in January 2019 did not have a significant impact on our
consolidated financial statements.
Reporting Tax Effects of Tax Cuts and Jobs Act - In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income” that helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI)
resulting from the 2017 Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded
tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income
tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires financial statement preparers to disclose a
description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income
tax effects from the Tax Cuts and Jobs Act, and information about the other income tax effects that are reclassified. The amendments
are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively
to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs
Act is recognized. We adopted ASU 2018-02 effective December 2018 and reclassified the stranded tax effects from AOCI to
retained earnings. Adoption did not have a significant impact on our consolidated financial statements.
64
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. Sales and assumption agreements with different financial institutions
were consummated in 2019. All related transactions were completed by December 31, 2019. The Company no longer has continuing
involvement with mortgage banking operations. The Company discontinued issuing mortgage interest rate lock commitments
(IRLCs) 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 and adjusted on December 31, 2019. Those costs include, but are not limited to, involuntary employee
termination benefits, cost to terminate contracts, and other associated costs. The liability itself consists of future cash flows expected
to be incurred in the exit and disposal activity, which are discounted at a credit-adjusted risk-free interest rate.
The following table summarizes the one-time charge on net loss on disposal of discontinued operations:
Severance benefits
Leases, software & other contractual obligations
Fixed asset losses
Other costs
Net Loss on Disposal
$
$
147,948
360,613
30,423
305,915
844,899
The following table presents results of discontinued operations for the years ended December 31, 2019, and 2018:
Net interest income
Gain on sale of loans
Other
Total noninterest income
Salaries and benefits
Occupancy
Data processing fees
Professional fees
Advertising
Net loss on disposal
Other
Total noninterest expense
Loss from discontinued operations
Benefit for income taxes
Year Ended December 31,
2018
2019
$
170,782 $
326,446
4,813,660
190
4,813,850
4,480,025
232,360
584,369
107,972
118,801
844,899
299,761
6,668,187
14,292,592
-
14,292,592
12,067,023
674,977
1,394,464
178,906
356,419
-
1,008,003
15,679,792
(1,683,555 )
(427,627 )
(1,060,754 )
(259,013 )
Net loss from discontinued operations
$
(1,255,928 ) $
(801,741 )
65
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 December 31, 2019, 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 classified as held for sale related to discontinued
operations in the consolidated balance sheet as of:
Loans held for sale - discontinued operations
Premises and equipment, net - discontinued operations
Accrued interest receivable - discontinued operations
Prepaid and other assets - discontinued operations
Total assets
Escrows - discontinued operations
Accrued interest and other liabilities - discontinued operations
Total liabilities
Net (liabilities) assets
December 31,
2019
December 31,
2018
$
$
$
$
- $
-
-
-
26,884,014
56,683
11,527
241,415
- $
27,193,639
-
233,427
149,776
717,407
233,427 $
867,183
(233,427 ) $
26,326,456
66
NOTE 3 – RESTRICTIONS ON CASH AND DUE FROM BANKS
Banks are required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at December
31, 2019 and 2018 were $1.1 million and $1.1 million, respectively, and is included in cash and cash equivalents in the consolidated
balance sheets.
NOTE 4 – AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at December
31, 2019 and 2018. The amortized cost of such securities and their approximate fair values were as follows:
December 31, 2019
Available-for-sale securities
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Gross
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
$ 30,722,958 $
1,102,532
12,279,341
415,564 $
1,739
254,521
(119,774 ) $ 31,018,748
(24,824 )
1,079,447
(114,879 ) 12,418,983
Total
$ 44,104,831 $
671,824 $
(259,477 ) $ 44,517,178
December 31, 2018
Available-for-sale securities
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
$ 28,799,904 $
1,487,917
3,672,023
115,824 $
-
2,363
(605,370 ) $ 28,310,358
1,445,032
(42,885 )
3,673,268
(1,118 )
Total
$ 33,959,844 $
118,187 $
(649,373 ) $ 33,428,658
There were no sales of available-for-sale securities in 2019 or 2018.
67
Amortized cost and fair value of securities by contractual maturity as of December 31, 2019 and 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 December 31, 2019 and 2018 were as follows:
December 31, 2019
Amortized
Cost
Fair
Value
Amortized
December 31, 2018
Fair
Value
Cost
Due in one year or less
Due after one to five years
Due after five to ten years
Due after ten years
- $
$
402,924
- $
27,151,751 27,510,536 23,040,618 22,482,300
14,048,273 14,163,270 10,515,614 10,543,434
-
2,843,372
2,904,807
403,612 $
-
Totals
$ 44,104,831 $ 44,517,178 $ 33,959,844 $ 33,428,658
At December 31, 2019 and 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 December 31, 2019 and 2018, mortgage-backed securities included collateralized mortgage obligations of $13.4 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.
68
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.
Description of
Securities
Available-for-sale securities:
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Total temporarily impaired
securities
Description of
Securities
Available-for-sale securities:
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Less Than 12 Months
Gross
Unrealized
Losses
Fair Value
December 31, 2019
12 Months or More
Total
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
Fair Value
$ 10,201,840 $
-
4,676,851
(64,195 ) $ 6,459,069 $
843,719
-
-
(114,879 )
(55,579 ) $ 16,660,909 $
843,719
(24,824 )
- 4,676,851
(119,774 )
(24,824 )
(114,879 )
$ 14,878,691 $
(179,074 ) $ 7,302,788 $
(80,403 ) $ 22,181,479 $
(259,477 )
Less Than 12 Months
Gross
Unrealized
Losses
Fair Value
December 31, 2018
12 Months or More
Total
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
Fair Value
$ 8,605,742 $
302,219
1,747,571
(200,190 ) $ 10,740,671 $
(885 ) 1,142,814
402,924
(430 )
(405,180 ) $ 19,346,413 $
(42,000 ) 1,445,033
(688 ) 2,150,495
(605,370 )
(42,885 )
(1,118 )
Total temporarily impaired securities $ 10,655,532 $
(201,505 ) $ 12,286,409 $
(447,868 ) $ 22,941,941 $
(649,373 )
At December 31, 2019 and 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 December 31, 2019.
Loans and securities carried at approximately $147.2 million at December 31, 2019 were pledged to secure FHLB advances. In
addition, securities carried at approximately $4.2 million at December 31, 2019 were pledged to secure public deposits.
69
NOTE 5 – LOANS HELD FOR INVESTMENT, NET
The components of loans held for investment, net in the consolidated balance sheets were as follows:
Loans held for investment, net:
Commercial real estate
One- to four-family residential real estate residential real
estate
Commercial and industrial
Consumer and other
Total gross loans
Unamortized loan fees
Loans held for investment
Allowance for loan losses
Loans held for investment, net
December 31, 2019
December 31, 2018
Amount
Percent
Amount
Percent
$ 242,682,721
82.1 % $ 233,102,637
81.3 %
28,849,640
20,075,236
3,860,991
295,468,588
(807,869 )
294,660,719
(2,921,931 )
$ 291,738,788
9.8
6.8
1.3
29,855,462
17,508,258
6,374,532
100.0 % 286,840,889
(1,149,517 )
285,691,372
(2,901,091 )
$ 282,790,281
10.4
6.1
2.2
100.0 %
At December 31, 2019 and 2018 commercial real estate loans include construction loans of $16.1 million and $20.8 million,
respectively.
Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses
and recorded investment in loans as of December 31, 2019 and 2018:
Allowance for loan losses
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Total
Gross loans
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
As of December 31, 2019
Commercial
Real Estate
One- to Four-
Family Residential
Real Estate
Commercial
and
Industrial
Other
Total
$
- $
- $
- $
- $
-
2,588,714
187,345
115,502
30,370 2,921,931
$ 2,588,714 $
187,345 $
115,502 $
30,370 $ 2,921,931
$
2,718,731
$
786,557
$
- $
- $ 3,505,288
239,963,990
242,682,721
$
28,063,083
28,849,640
$
3,860,991 291,963,300
20,075,236
20,075,236 $ 3,860,991 $ 295,468,588
$
70
As of December 31, 2018
Commercial
Real Estate
One- to Four-
Family Residential
Real Estate
Commercial
and
Industrial
Other
Total
$
- $
- $
- $
- $
-
2,130,124
359,705
377,180
34,082
2,901,091
$ 2,130,124 $
359,705 $
377,180 $
34,082 $ 2,901,091
Allowance for loan losses
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Total
Gross loans
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Total
$ 2,993,923 $
649,685 $
- $
- $ 3,643,608
230,108,714
$ 233,102,637 $
29,205,777 17,508,258 6,374,532 283,197,281
29,855,462 $ 17,508,258 $ 6,374,532 $ 286,840,889
71
The following is a summary of activities for the allowance for loan losses for the years ended December 31, 2019 and 2018:
One- to
Four-
Family
Residential
Real Estate
Commercial
and
Industrial
Commercial
Real
Estate
Consumer
and
Other
Total
Balance December 31, 2018
$ 2,130,124 $ 359,705 $
377,180 $
34,082 $ 2,901,091
Provision for loan losses
458,590
(169,193 )
(263,185 )
(3,712 )
22,500
Charge-offs
Recoveries
Net (charge-offs) recoveries
-
-
-
(8,686 )
5,519
(3,167 )
-
1,507
1,507
-
-
-
(8,686 )
7,026
(1,660 )
Balance December 31, 2019
$ 2,588,714 $ 187,345 $
115,502 $
30,370 $ 2,921,931
Balance December 31, 2017
$ 2,055,911 $ 567,290 $
462,406 $
31,583 $ 3,117,190
Provision for loan losses
624,213
(183,988 )
(124,724 )
2,499
318,000
Charge-offs
Recoveries
Net (charge-offs) recoveries
(550,000 )
-
(550,000 )
(36,096 )
12,499
(23,597 )
(10,322 )
49,820
39,498
-
-
-
(596,418 )
62,319
(534,099 )
Balance December 31, 2018
$ 2,130,124 $ 359,705 $
377,180 $
34,082 $ 2,901,091
72
Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of
December 31, 2019 and 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
30 - 59 Days 60 - 89 Days
90 Days
or More
Total
Current
Total
Financing
Receivables
December 31, 2019
$
Commercial real estate
One- to four-family residential real
estate
Commercial and industrial
Consumer and other
- $
- $ 2,718,731 $ 2,718,731 $ 239,963,990 $ 242,682,721
758,197
-
-
36,520
-
-
638,623 1,433,340 27,416,300 28,849,640
- 20,075,236 20,075,236
3,860,991
-
3,860,991
-
-
Totals
$
758,197 $
36,520 $ 3,357,354 $ 4,152,071 $ 291,316,517 $ 295,468,588
73
Past Due
30 - 59 Days 60 - 89 Days
90 Days
or More
Total
Current
Total
Financing
Receivables
December 31, 2018
$
Commercial real estate
One- to four-family residential real
estate
Commercial and industrial
Consumer and other
- $ 2,744,405 $
- $ 2,744,405 $ 230,358,232 $ 233,102,637
782,835
-
-
234,524
-
-
393,068 1,410,427 28,445,035 29,855,462
- 17,508,258 17,508,258
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 December 31, 2019 and 2018:
Nonaccrual loans
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
Total nonaccrual loans
Other real estate (ORE)
Total nonperforming assets
December 31,
December 31,
2019
2018
$
2,718,731 $
786,557
-
-
3,505,288
-
2,993,923
649,685
-
-
3,643,608
-
$
3,505,288 $
3,643,608
Nonperforming assets to gross loans held for investment and ORE
Nonperforming assets to total assets
1.19%
0.89%
1.27%
0.95%
Nonaccrual loan balances guaranteed by the SBA are $2.3 million, or 66%, and $2.3 million, or 63%, of the nonaccrual loan balances
at December 31, 2019 and December 31, 2018, respectively.
74
Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at December 31, 2019
and 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.
Grade
Pass
Special mention
Substandard
Doubtful
Loss
Totals
Grade
Pass
Special mention
Substandard
Doubtful
Loss
Totals
As of December 31, 2019
Commercial
Real Estate
One- to Four-
Family
Residential Real
Estate
Commercial and
Industrial
Consumer and
Other
Total
$ 237,546,684 $
508,201
4,627,836
-
-
26,969,204 $
375,054
1,505,382
-
-
19,774,797 $
-
300,439
-
-
3,860,991 $ 288,151,676
883,255
6,433,657
-
-
-
-
-
-
$ 242,682,721 $
28,849,640 $
20,075,236 $
3,860,991 $ 295,468,588
As of December 31, 2018
Commercial
Real Estate
One- to Four-
Family
Residential Real
Estate
Commercial and
Industrial
Consumer and
Other
Total
$ 226,510,803 $
1,981,667
4,610,167
-
-
27,990,417 $
268,892
1,596,153
-
-
17,237,690 $
-
270,568
-
-
6,374,532 $ 278,113,442
2,250,559
6,476,888
-
-
-
-
-
-
$ 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.
75
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 December 31, 2019
Principal
Net of
Average
Recorded
Recorded
Investment Charge-offs Allowance Investment
Related
With no related allowance recorded:
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
$ 2,718,731 $ 2,718,731 $
786,557
-
-
$ 3,505,288 $ 3,505,288 $
786,557
-
-
- $ 2,738,545
791,476
-
-
-
-
-
- $ 3,530,021
With an allowance recorded:
$
- $
- $
- $
-
Total:
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
$ 2,718,731 $ 2,718,731 $
786,557
-
-
$ 3,505,288 $ 3,505,288 $
786,557
-
-
- $ 2,738,545
791,476
-
-
-
-
-
- $ 3,530,021
As of December 31, 2018
Principal
Net of
Average
Recorded
Recorded
Investment Charge-offs Allowance Investment
Related
With no related allowance recorded:
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
$ 2,993,923 $ 2,993,923 $
649,685
-
-
$ 3,643,608 $ 3,643,608 $
649,685
-
-
- $ 3,007,495
656,436
-
-
-
-
-
- $ 3,663,931
With an allowance recorded:
$
- $
- $
- $
-
Total:
Commercial real estate
One- to four-family residential real estate
Commercial and industrial
Consumer and other
$ 2,993,923 $ 2,993,923 $
649,685
-
-
$ 3,643,608 $ 3,643,608 $
649,685
-
-
- $ 3,007,495
656,436
-
-
-
-
-
- $ 3,663,931
76
During the years ended December 31, 2019 and 2018, no interest income was recognized on these loans while in nonaccrual status
as interest collected was credited to loan principal. We recognized $10,000 of income in 2019 and $4,000 in 2018 prior to the loans
being placed on non-accrual.
Certain loans within the Company’s loan and ORE portfolios 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 foreclosed VA properties at December 31, 2019 and 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 principal balance of less than $75,000 as of December 31, 2019 and December 31,
2018.
NOTE 6 – STOCK IN FINANCIAL INSTITUTIONS
The Bank has stock in the FHLB of Dallas, The Independent Bankers Bank (TIB) and Pacific Coast Bankers’ Bancshares (PCBB).
The carrying value of the stocks at December 31, 2019 and 2018 was $4.0 million and $3.9 million, respectively, and is accounted
for using the cost basis of accounting. The Bank is required to maintain minimum levels of FHLB stock based on various factors,
including the amount of borrowings outstanding, mortgage assets and the Bank’s total assets.
NOTE 7 – PREMISES AND EQUIPMENT, NET
Components of premises and equipment, net included in the consolidated balance sheets at December 31, 2019 and 2018 were as
follows:
Cost:
Land and improvements
Building and improvements
Furniture and equipment
Automobiles
Total cost
Accumulated depreciation and amortization
At December 31,
2019
2018
$
2,452,807 $
12,250,011
1,790,529
91,387
16,584,734
(7,593,779 )
2,452,807
12,264,369
2,073,474
91,387
16,882,037
(7,323,094 )
Net book value
$
8,990,955 $
9,558,943
Depreciation and amortization expense was $611,000 and $703,000 for the years ended December 31, 2019 and 2018, respectively.
77
NOTE 8 – CORE DEPOSIT INTANGIBLE
The gross carrying value and accumulated amortization of core deposit intangible is as follows:
Gross carrying value
Less accumulated amortization
Core deposit intangible
December 31,
2019
2018
$
$
502,000 $
(368,948 )
502,000
(329,892 )
133,052 $
172,108
Amortization of core deposit intangible was $39,000 and $49,000 for the years ended December 31, 2019 and 2018, respectively.
The future amortization expense related to core deposit intangible remaining as of December 31, 2019 is as follows:
Year one
Year two
Year three
Year four
Year five
Core deposit intangible
$
$
35,443
35,443
35,443
26,723
-
133,052
78
NOTE 9 – TIME DEPOSITS
Following are maturities of time deposits at December 31, 2019 and 2018:
At December 31, 2019
At December 31, 2018
Maturity
Rate
Amount
Rate
Amount
Weighted-
Average
Weighted-
Average
One year or less
Over one through three years
Over three through five years
2.09 % $ 55,567,378
2.08 % 22,461,008
3,359,475
1.85 %
1.51 % $ 30,457,540
2.20 % 43,552,518
3,528,518
1.58 %
2.08 % $ 81,387,861
1.90 % $ 77,538,576
At December 31, 2019 and 2018, the Bank had $12.4 million and $10.7 million, respectively, in time deposits of $250,000 or more.
At December 31, 2019 and 2018, $10.8 million and $6.4 million, respectively, of such time deposits mature within one year.
Interest expense on time deposits in denominations of $250,000 or more amounted to $212,000 and $133,000 for the years ended
December 31, 2019 and 2018, respectively.
NOTE 10 – BORROWINGS
The Bank has established a borrowing line with the FHLB of Dallas. As of December 31, 2019 and 2018, the Bank had outstanding
advances totaling $40.0 million and $67.0 million, respectively, carrying interest rates from 1.32% to 3.03%. As of December 31,
2019, the Bank had unused credit available under the FHLB blanket pledge agreement of $105.4 million. The following are maturities
of outstanding FHLB advances at December 31, 2019 and 2018:
Maturity
Year one
Year two
Year three
Year four
Total borrowings
At December 31,
2019
40,000,000 $
-
-
-
40,000,000 $
2018
27,000,000
40,000,000
-
-
67,000,000
$
$
The Bank has two lines of credit available with other financial institutions of $9.8 and $6.0 million with no outstanding balances at
December 31, 2019 and 2018.
79
NOTE 11 – DERIVATIVES
As discussed in The consolidated financial statements, Note 2 – Discontinued Operations, the Company discontinued issuing
mortgage interest rate lock commitments (IRLCs) in its name in May 2019. These derivatives are not designated as hedge accounting
under GAAP and accordingly the fair value of these derivatives is included in Prepaid and other assets or Other liabilities in the
Consolidated Balance Sheets with fair value changes recorded in Gain on sale of loans in the Consolidated Statements of
Comprehensive Income.
The following table shows the fair value of derivatives included in Gain on sale of loans as part of the results of discontinued
operations in The consolidated financial statements, Note 2 - Discontinued Operations:
Forward Commitments
Interest rate lock commitments
For the Year Ended December 31,
2019
2018
$
$
(272,012 ) $
(380,866 )
(652,878 ) $
(58,344 )
197,779
139,435
The following table shows the fair value of derivatives included in Prepaid and other assets in the Consolidated Balance Sheets:
As of December 31,
2019
2018
Forward Commitments
Interest rate lock commitments
Notional
Amount
$
$
Fair Value
- $
-
- $
Notional
Amount
- $ 21,500,000 $
- 27,000,000
- $ 48,500,000 $
Fair Value
(153,906 )
380,886
226,980
NOTE 12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET 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 December 31, 2019 and
2018:
Commitments to originate and sell mortgage loans
Commitments to extend credit
Unused lines of credit
Totals
December 31,
2019
December 31,
2018
$
$
- $
25,739,246
17,765,580
43,504,826 $
34,268,309
25,323,822
18,281,453
77,873,584
There were no commitments to originate and sell mortgage loans at December 31, 2019 due to the Company exiting mortgage
banking operations, see The consolidated financial statements, 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.
80
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.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-
party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making
commitments to extend credit.
NOTE 13 – LEASES
The Bank has noncancelable operating leases that expire over the next three years that require the payment of base lease amounts
and executory costs such as taxes, maintenance and insurance. Rental expense for leases was $664,000 and $938,000 for the years
ended December 31, 2019 and 2018, respectively.
Approximate future minimum rental commitments under noncancelable leases are:
For the Year Ending
December 31,
2020
2021
2022
Amount
$
$
581,943
507,522
363,921
1,453,386
NOTE 14 – EMPLOYEE RETIREMENT BENEFIT PLANS
Profit Sharing Plan – The Company has established a profit-sharing 401(k) type salary reduction plan (Plan) for all employees that
meet the necessary eligibility requirements and participants are fully vested after six years of service. For Company matching
contributions made for plan years prior to 2014, annual Company contributions were at the discretion of the Board of Directors.
Effective January 1, 2014, the Company adopted a Safe Harbor matching contribution provision, whereby it agreed to match 100%
of participant’s contributions up to the first 3% of salary and 50% of the next 2%, for a total maximum Company matching
contribution of 4% of participant salary, as defined by the Plan. The Safe Harbor matching contribution is guaranteed.
Profit sharing plan expense was $336,000 and $375,000 for the years ended December 31, 2019 and 2018, respectively.
Employee Stock Ownership Plan – The ESOP covers substantially all employees that meet certain age and service requirements.
Under the plan, annual retirement expense is generally defined as a percentage of employee compensation, net of forfeitures from
employees who have terminated employment.
In October 2016, the ESOP borrowed $1.5 million from the Company to purchase 150,358 shares of common stock from the
Company at $10 per share. Bancorp 34 accepted a $1.8 million note from the ESOP secured by all unallocated shares in the plan
with a 30-year repayment term. The principal balance includes $1.5 million used to purchase stock in 2016 and $266,000 used to
pay off already outstanding ESOP loans used to purchase shares in 2012 and 2014. Principal and interest payments on the note are
made every December 31 and the interest rate on the loan adjusts annually on January 1st to the prime rate of interest as published
in the Wall Street Journal. The Bank makes at least annual discretionary contributions to the ESOP and the ESOP uses all funds it
receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation
for that plan year. At the discretion of the employer, participants may receive the shares, cash, or a combination of stock and cash at
the end of employment.
Since the Bank is the primary source of repayment on ESOP loans, the Bank records the note payable and an equal contra-equity
account on its balance sheet and interest expense and ESOP benefit plan expense on its statement of comprehensive income equal
to the annual loan payments. As inter-company borrowings, all bank-recorded balance sheet items, Bancorp 34 interest income and
Bank 34 interest expense on the ESOP loan are eliminated in consolidation. Bancorp 34 consolidated financial statements include a
contra-equity account with a balance equal to the purchase price of all unallocated shares in the ESOP.
81
Shares held by the ESOP at December 31, 2019 and 2018 were as follows:
Allocated and committed to be allocated to participants
Unallocated/unearned
Total ESOP shares
Fair value of unallocated/unearned shares
At December 31,
2019
2018
35,566
163,745
199,311
33,318
170,316
203,634
$
2,500,386 $
2,452,557
ESOP expense was $99,000 and $90,000 for the years ended December 31, 2019 and 2018, respectively.
Defined Benefit Plan – The Company contributes to a multi-employer defined benefit pension plan, the Pentegra Defined Benefit
Plan for Financial Institutions (“Pentegra DB Plan”, EIN 13-5645888 and Plan No. 333). On June 1, 2006, the Company froze the
benefits available under the defined benefit pension plan. The risk of participating in the Pentegra DB Plan is different from single-
employer plans in the following aspects:
● Assets contributed to the Pentegra DB Plan may be used to provide benefits to employees of other participating employers.
●
If a participating employer stops contributing to the Pentegra DB Plan, the unfunded obligations may be borne by the remaining
participating employers.
●
If the Company chooses to stop participating in the Pentegra DB Plan, it may be required to pay a withdrawal liability.
The Company’s cash contributions to the Pentegra DB Plan were $225,000 and $82,000 during the years ended December 31, 2019
and 2018, respectively, all of which represented less than 5% of the total plan contributions. As of July 1, 2019 (the most recent
valuation report available), the unfunded pension liability was approximately $572,000 (87% funded). Pension plan expense (benefit)
for the years ended December 31, 2019 and 2018 was $158,000 and $44,000, respectively. There are no funding improvement or
rehabilitation plans pending, and no future minimum contributions required by collective-bargaining or other contractual agreements.
Under U.S. legislation regarding multi-employer pension plans, a company is required to pay an amount that represents its
proportionate share of a plan’s unfunded vested benefits in the event of withdrawal (as defined by the legislation) from a plan or
upon plan termination.
In January 2020 the Company gave notice of its intention to withdraw from the Pentegra DB Plan and transfer the assets and liabilities
to a new single-employer plan. An estimated $1.5 million contribution will be required to be made by June 30, 2020 to cover the
unfunded liabilities before full withdrawal from the Pentegra DB Plan.
Deferred Compensation and Directors Fee Plans – A deferred compensation plan covers all senior officers and a deferred directors
fee plan covers all directors. Under these plans, the company pays each participant that elects to defer, or their beneficiary, the
amount deferred plus interest over a pre-selected period up to 10 years, beginning with the participant’s termination of service. A
liability is accrued monthly for the deferred amount plus interest earned. The interest rate on deferred balances is determined annually
on January 1st at the greater of Wall Street Journal Prime or 5%, and was 5.5% and 5.0%, in the years ended December 31, 2019
and 2018, respectively. Interest expense for the deferred plans was $77,000 and $57,000, for the years ended December 31, 2019
and 2018, respectively. Deferred plan liabilities, included in accrued interest and other liabilities on the balance sheet, were $1.5
million and $1.3 million, as of December 31, 2019 and 2018, respectively.
NOTE 15 – BOARD OF DIRECTORS’ RETIREMENT POLICY
The Bank has entered into director retirement agreements with three current Board members, which were amended in 2013. Each
agreement provides for a normal retirement benefit equal to each director’s accrual balance of $74,238 amortized with interest and
payable upon the later of the director’s normal retirement date (age 70) or his separation from service, in monthly installments over
a 15-year period. The director’s account balance is payable to the director or the director’s beneficiary under certain circumstances
as set forth in the director’s individual agreement.
The Board previously had a deferred compensation policy (Policy) to compensate Board members for their service to the Company.
The retirement date for directors was the later of the last month in which they reached age 70 or completion of their term if they
were elected to the Board during the annual meeting resulting in service beyond age 70. Upon retirement, Board members receive
deferred compensation for the remainder of their life up to a maximum of $2,000 per month. Board members vested in the Policy
based on service as follows: zero to four years of service (20%), five years of service (40%), six years of service (60%), seven years
of service (80%) and eight years of service (100%). On September 21, 2011, the Board rescinded this retirement policy for current
directors. The total liability for the combined policies and agreements was $268,000 at December 31, 2019 and 2018.
82
NOTE 16 – INCOME TAXES
The provision for income taxes from continuing operations for the years ended December 31, 2019 and 2018, includes these
components:
Current
Federal
State
Deferred expense
Provision for income taxes from continuing operations
Years Ended December 31,
2019
2018
$
$
510,945 $
106,086
48,922
665,953 $
508,165
114,841
51,706
674,712
Income tax expense from continuing operations differs from the amounts computed by applying the federal income tax rate of 21%
in 2019 and 2018, to earnings before federal income tax expense. These differences are primarily caused by state income taxes, net
of federal tax benefit, income that is not taxable for federal and state income tax purposes, expenses that are not deductible for tax
purposes and tax adjustments related to prior federal income tax returns.
A reconciliation of income tax expense from continuing operations at the Federal statutory rate to the Company’s actual income tax
expense for all periods presented is shown below:
Federal tax at the statutory rate (21%)
Benefit from permanent differences:
State income taxes, net of Federal tax benefit
Bank-owned life insurance
Meals & entertainment
Other, net
Years Ended December 31,
2019
2018
$
552,733 $
535,493
109,048
(58,173 )
11,080
51,265
216,188
(59,303 )
6,486
(24,152 )
Provision for income taxes from continuing operations
$
665,953 $
674,712
83
The tax effects of temporary differences related to deferred taxes were:
Deferred tax assets:
Allowance for loan losses
Unrealized losses on AFS securities
Board of Directors retirement plan
Other, net
Deferred compensation
Accrued bonus
Organizational costs
Net operating loss carryforwards
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Depreciation and amortization
Loan origination costs
Purchase accounting
Unrealized gains on AFS securities
Total deferred tax liabilities
$
As of December 31,
2019
2018
734,048 $
-
271,099
278,581
248,271
192,331
50,451
787,500
2,562,281
(79,953 )
(217,321 )
(218,615 )
(33,425 )
(105,091 )
(654,405 )
721,765
135,038
239,957
311,762
215,033
216,254
70,638
840,001
2,750,448
(52,709 )
(276,802 )
(195,770 )
(28,239 )
-
(553,520 )
Net deferred tax asset
$
1,907,876 $
2,196,928
A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
and tax planning strategies which will create taxable income during the periods in which those temporary differences become
deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, NOL carry-
back potential, and tax planning strategies in making this assessment. Based upon the Company’s assessment of all available
evidence, management determined it was more-likely-than-not that the net deferred tax asset would be realized at December 31,
2019.
At December 31, 2019, the Company had federal operating loss carry-forwards of approximately $3.8 million, all of which are
subject to Internal Revenue Code (“IRC”) Section 382 limitations, which limit the annual use of acquired losses to $250,000 per
year, and begin to expire in 2028. At December 31, 2019, the Company has recorded deferred tax assets of $788,000 related to the
Federal net operating loss carry-forwards.
It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31,
2019, 2018 and 2017, there were no material uncertain tax positions related to federal and state income tax matters. The Company
does not expect the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months.
The Company files consolidated U.S. federal and various state income/franchise tax returns. The Company is no longer subject to
examination by U.S. federal taxing authorities for years before 2016 and is no longer subject to examination by state taxing
authorities for years before 2015 or 2016. Our federal and state tax returns have not been audited for the past five years.
84
NOTE 17 – 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 December 31, 2019 and 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 December 31, 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, 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.
85
The Bank’s actual and required capital amounts and ratios are as follows:
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
As of December 31, 2019:
Total Capital (to Risk-Weighted Assets) $
42,944
14.59 % $
23,554
≥8.00 % $
29,443
≥10.00 %
Tier I Capital (to Risk-Weighted Assets) $
39,982
13.58 % $
17,666
≥6.00 % $
23,554
≥8.00 %
Common Equity Tier 1 Capital (to Risk-
Weighted Assets)
Tier I Capital (to Average Assets)
$
$
As of December 31, 2018:
Total Capital (to Risk-Weighted Assets) $
39,982
13.58 % $
13,249
≥4.50 % $
19,138
≥6.50 %
39,982
10.30 % $
15,529
≥4.00 % $
19,411
≥5.00 %
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)
Tier I Capital (to Average Assets)
$
$
38,703
13.46 % $
12,939
≥4.50 % $
18,690
≥6.50 %
38,703
10.29 % $
15,045
≥4.00 % $
18,806
≥5.00 %
86
NOTE 18 – RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its executive officers, directors, significant stockholders, and their affiliates (related
parties).
The activity of loans to such related parties is as follows:
Beginning balance
New loans
Repayments
Ending balance
Fees and bonuses paid to directors during the period
Deposits from related parties held by the Bank at end of period
Years Ended December 31,
2019
2018
$
$
$
$
- $
-
-
- $
218,475 $
2,392,225 $
-
500,000
(500,000 )
-
244,125
2,470,696
In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and
were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable
transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability
or present other unfavorable features.
NOTE 19 – STOCK-BASED COMPENSATION
Stock-based expense for the years ended December 31, 2019 and 2018, was $299,000 and $487,000 of which $188,000 and $354,000
was charged to stock-based compensation expense and $111,000 and $133,000 was charged to stock-based other noninterest
expense, respectively.
The Company accounts for forfeitures when they occur by reversing any previously accrued compensation expense on forfeited
options in accordance with ASC 718 Compensation – Stock Compensation.
The stock option plan allows for net settlement of vested options. In a net settlement, the Company, at the direction of the optionee,
net settles the options by issuing new shares to the optionee with a value, at the current per share trading price, equal to the total in-
the-money or intrinsic value of the options less any necessary tax withholdings on the disqualifying disposition of Incentive Stock
Options. The optionee is granted newly issued shares and a small amount of cash in lieu of partial shares. In 2019, 40 shares of
common stock were issued in net settlements. There were no net settlements in 2018.
On November 17, 2017 the stockholders approved the adoption of the 2017 Equity Incentive Plan (“Incentive Plan”). The Incentive
Plan provides for the grant of a maximum of 263,127 shares of the Company’s common stock of which up to 187,948 shares of
common stock may be granted for stock options and 75,179 shares of common stock may be issued as restricted stock to Directors
and employees of the Company. Stock options and restricted stock awards under the Incentive Plan vest at 20% per year beginning
on the first university of date of grant and have a maximum term of seven years.
On February 27, 2018 the Company awarded options to purchase 5,000 shares of the Company’s common stock and issued 439
shares of restricted stock. All stock option awards were granted with an exercise price equal to the grant date closing price of the
Company’s common stock of $15.48 per share.
In 2019, 2,750 stock options were granted and 4,000 shares of restricted stock were issued. The average grant-date fair value of stock
option awards granted in 2019 was $3.72 using the Black Scholes Merton options pricing model with the following weighted average
inputs and assumptions:
Grant date stock price and exercise price
Dividend yield
Expected volatility
Risk-free interest rate
Expected life in years
$
14.71
0.86 %
25.10 %
1.84 %
6
Historical data is used to estimate expected volatility and the term of options expected to be outstanding and takes into account that
options are not transferable. The risk-free interest rate is based on the U.S. Treasury yield curve for the expected term in effect at the
date of grant.
87
A summary of stock option activity during the years ended December 31, 2019 and 2018 is presented below:
Outstanding, December 31, 2018
Granted
Exercised
Forfeited or expired
Outstanding, December 31, 2019
Exercisable, December 31, 2019
For the Year Ended December 31, 2019
Weighted-
Average
Exercise Price
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
Shares
164,410 $
2,750
(8,460)
(12,400)
146,300 $
57,910 $
14.68
14.71
10.39
14.90
14.92
14.91
5.8
$
37,316
5.0
4.9
$
$
53,166
21,131
88
Information related to stock options during each year is as follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit from option exercises
Total weighted average fair value of options granted
Year Ended December 31,
2018
2019
$
$
$
$
42,616 $
70,035 $
10,708 $
10,230 $
89,080
149,228
24,866
20,200
A summary of restricted stock activity during the years ended December 31, 2019 and 2018 is presented below:
Weighted
Average
Grant Date
Price
Average
Remaining
Contractual
Term (years)
Shares
For the Year Ended December 31, 2019
Outstanding, December 31, 2018
49,829 $
14.90
4.0
Granted
Vested
Forfeited or expired
4,000 $
(11,985 )
(1,800 )
14.76
14.90
14.90
Outstanding, December 31, 2019
40,044 $
14.89
3.4
As of December 31, 2019, there was $319,000 and $581,000 of total unrecognized equity-based expense related to unvested stock
options and restricted stock awards granted under the 2017 Equity Incentive Plan, respectively, that is expected to be recognized
ratably over the next 3 years.
89
NOTE 20– 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 December 31, 2019 and
2018.
Fair Value Measurements Using
Significant
Other
Quoted Prices
in Active
Markets for
Identical Assets
Level 1
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
Fair Value
December 31, 2019:
Recurring basis
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Nonrecurring basis
Impaired loans
Totals
December 31, 2018:
Recurring basis
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Loans held for sale
Derivative IRLCs
Derivative forward commitments
Nonrecurring basis
Impaired loans
Totals
$
- $
-
-
-
31,018,748 $
1,079,447
12,418,983
- $
-
-
31,018,748
1,079,447
12,418,983
-
3,505,288
3,505,288
$
- $
44,517,178 $
3,505,288 $
48,022,466
$
- $
-
-
-
-
-
-
28,310,358 $
1,445,032
3,673,268
26,884,014
-
(153,906 )
- $
-
-
-
380,866
-
28,310,358
1,445,032
3,673,268
26,884,014
380,866
(153,906 )
-
3,643,608
3,643,608
$
- $
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.
90
There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2019 or 2018.
The following tables present estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018.
Quoted
Prices
in Active
Significant
Significant
Other
Markets for Observable Unobservable
Carrying
Amount
Identical
Assets
Fair Value Level 1
Inputs
Level 2
Inputs
Level 3
(Dollars in thousands)
$
4,496 $
24,990
44,517
291,739
4,017
4,496 $
24,990
44,517
292,246
4,017
4,496 $
24,990
-
-
-
- $
-
44,517
-
4,017
-
-
-
292,246
-
At December 31, 2019:
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Available-for-sale securities
Loans held for investment, net
Stock in financial institutions
Financial liabilities:
Demand deposits, savings and NOW deposits
Time deposits
Federal Home Loan Bank advances
222,509
81,388
40,000
214,611
81,638
40,075
214,611
-
-
-
81,638
40,075
-
-
-
At December 31, 2018
Financial assets:
Cash and due from banks
Interest-bearing deposits with banks
Available-for-sale securities
Loans held for sale
Loans held for investment, net
Derivative IRLCs
Derivative forward commitments
Stock in financial institutions
Financial liabilities:
$
6,374 $
5,400
33,429
26,884
282,790
381
(154 )
3,910
6,374 $
5,400
33,429
26,884
283,466
381
(154 )
3,910
6,374 $
5,400
-
-
-
-
-
-
- $
-
33,429
26,884
-
-
(154 )
3,910
-
-
-
-
283,466
381
-
-
Demand deposits, savings and NOW deposits
Time deposits
Federal Home Loan Bank advances
187,700
77,539
67,000
172,049
77,688
66,653
172,049
-
-
-
77,688
66,653
-
-
-
91
The following methods and assumptions were used to estimate the fair value of the additional 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.
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 – Loans held for investment, which are recorded at amortized cost, now incorporate the exit price notion
reflecting factors such as a liquidity premium. 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.
92
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 December 31, 2019
Impaired loans
Commercial real estate
$
2,718,731
Appraisal
One- to four-family residential real estate
Total Impaired Loans
786,557
3,505,288
$
Appraisal
Appraisal discount and
estimated selling costs
Appraisal discount and
estimated selling costs
17 - 18%
17 - 18%
At December 31, 2018
Impaired loans
Commercial real estate
$
2,993,923
Appraisal
One- to four-family residential real estate
Total Impaired Loans
649,685
3,643,608
$
Appraisal
Appraisal discount and
estimated selling costs
Appraisal discount and
estimated selling costs
17 - 18%
17 - 18%
Derivative IRLCs
$
380,866
Internal pricing
model
Pull-through rate
77%
93
As of December 31,
2019
2018
$
1,960,863 $
40,934,500
1,672,606
520,270
4,993,568
39,044,001
1,700,795
684,370
$
45,088,239 $
46,422,734
$
5,000 $
5,000
-
-
-
33,746
25,500,873
22,928,777
(396,148 )
(1,644,514 )
46,422,734
NOTE 21 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information as of December 31, 2019 and 2018, pertaining only to Bancorp 34 is as follows:
BALANCE SHEETS
ASSETS
Cash and due from banks
Investment in wholly owned subsidiary
ESOP note receivable
Prepaid and other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable
Total liabilities
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, 3,208,618 and 3,374,565 issued
and outstanding.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Unearned employee stock ownership plan (ESOP) shares
Total stockholders’ equity
-
32,086
23,168,176
23,157,134
307,255
(1,581,412 )
45,083,239
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
45,088,239 $
46,422,734
94
STATEMENTS OF COMPREHENSIVE INCOME
Interest income on ESOP note receivable
Noninterest income
Equity in income of subsidiary
Noninterest expense
Professional fees and other
Income before income taxes
Provision (benefit) for income taxes
Net income
Other comprehensive income (loss)
Unrealized income (loss) on available-for-sale securities
Year Ended December 31,
2018
2019
$
93,544 $
77,917
795,761
1,100,091
175,833
121,957
713,472
1,056,051
3,293
(17,463 )
710,179
1,073,514
703,403
(121,882 )
COMPREHENSIVE INCOME
$
1,413,582 $
951,632
95
STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from operating activities:
Equity in (income) of subsidiary
Changes in operating assets and liabilities
Prepaid and other assets
Accrued interest and other liabilities
Net cash provided by (used for) operating activities
Cash flows from investing activities -
Principal collections on ESOP note receivable
Net cash provided by investing activities
Cash flows from financing activities -
Dividend from subsidiary
Stock option exercise
Share repurchase
Dividends paid - $0.15 per share 2019, $1.25 per share 2018
Net cash provided by financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks, beginning of period
Year Ended December 31,
2018
2019
$
710,179 $
1,073,514
(795,761 )
(1,100,091 )
164,100
5,000
83,518
(325,408 )
(35,828 )
(387,813 )
28,189
28,189
30,699
30,699
-
70,058
(2,732,648 )
(481,822 )
(3,144,412 )
4,800,000
149,228
(1,926,720 )
(4,161,114 )
(1,138,606 )
(3,032,705 )
(1,495,720 )
4,993,568
6,489,288
Cash and due from banks, end of period
$
1,960,863 $
4,993,568
96
NOTE 22 –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 factors used in the earnings per share
computation follow:
Basic:
Net income from continuing operations
Net loss from discontinued operations
Less: Earnings allocated to participating securities
Year Ended December 31,
2018
2019
$
1,966,107 $
(1,255,928 )
(11,456 )
1,875,255
(801,741 )
(24,642 )
Net income allocated to common shareholders
$
698,723 $
1,048,872
Weighted-average common shares outstanding including participating securities
Less: Average participating securities
Less: Average unallocated ESOP Shares
3,298,548
(48,982 )
(164,096 )
3,410,670
(70,988 )
(176,102 )
Average shares
3,085,470
3,163,581
Basic earnings per common share - continuing operations
Basic loss per common share - discontinued operations
Basic earnings per common share
Diluted:
Net income allocated to common shareholders
$
$
$
0.64 $
(0.41 )
0.23 $
0.59
(0.26 )
0.33
698,723 $
1,048,872
Weighted-average common shares outstanding for basic earnings per common
share
Add: Dilutive effects of assumed exercises of stock options
3,085,470
2,766
3,163,581
8,076
Weighted average shares and dilutive potential common shares
3,088,236
3,171,655
Diluted earnings per common share - continuing operations
Diluted loss per common share - discontinued operations
Diluted earnings per common share
$
$
0.64 $
(0.41 )
0.23 $
0.59
(0.26 )
0.33
Participating securities are restricted stock awards since they participate in common stock dividends. Stock options for 4,000 shares
of common stock were not considered in computing diluted earnings per common share for 2019 and 2018, because they were
antidilutive.
97
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, our disclosure controls and procedures were effective.
There were no changes made in our internal controls during the quarter ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Management’s Report On Internal Control Over Financial Reporting - filed herewith under Part II, Item 8,
“Financial Statements and Supplementary Data.”
ITEM 9B.
Other Information
None.
ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
Bancorp 34, Inc. has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on
Bancorp 34, Inc.’s website at www.Bank 34online.com under “About Bank 34 – Investor Relations.”
The information contained under the sections captioned “Proposal I – Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the 2020 Annual
Meeting of Stockholders (The “Proxy Statement”) is incorporated herein by reference or will be filed by amendment to
this Annual Report on Form 10-K.
ITEM 11.
Executive Compensation
The information contained under the section captioned “Executive Compensation” in the definitive Proxy Statement is
incorporated herein by reference or will be filed by amendment to this Annual Report on Form 10-K.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)
Securities Authorized for issuance under Stock-Based Compensation Plans
Set forth below is information as of December 31, 2019 with respect to compensation plans (other than our employee
stock ownership plan) under which equity securities of the Registrant are authorized for issuance. Other than our
Employee Stock Ownership Plan, we do not have any equity compensation plans that were not approved by our
stockholders. Equity compensation plans approved by stockholders consist of our 2001 Stock Option Plan and our 2017
Equity Incentive Plan.
98
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price
of outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under stock-based
compensation plans
(excluding securities
reflected in first
column)
Equity compensation plans approved by security
holders
146,300
$14.92
44,748
Equity compensation plans not approved by security
holders
N/A
N/A
Total
146,300
$14.92
N/A
44,748
(b)
Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by reference to the section captioned “Voting Securities
and Principal Holders” in the Proxy Statement or will be filed by amendment to this Annual Report on Form 10-K.
(c)
Security Ownership of Management
The information required by this item is incorporated herein by reference to the section captioned “Proposal I – Election
of Directors” in the Proxy Statement or will be filed by amendment to this Annual Report on Form 10-K.
(d)
Changes in Control
Management of the Company know of no arrangements, including any pledge by any person of securities of the
Company, the operation of which may at a subsequent date result in a change in control of the registrant.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the section captioned “Proposal I – Election of
Directors – Certain Relationships and Related Transactions” of the Proxy Statement or will be filed by amendment to this Annual
Report on Form 10-K.
ITEM 14.
Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Proposal II – Ratification
of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement or will be filed by amendment to this
Annual Report on Form 10-K.
99
ITEM 15.
Exhibits and Financial Statement Schedules
PART IV
Articles of Incorporation of Bancorp 34, Inc. (1)
Bylaws of Bancorp 34, Inc. (1)
Form of Common Stock Certificate of Bancorp 34, Inc. (1)
Description of Registrant’s Securities
Amended and Restated Employee Stock Ownership Plan, including amendments (2) †
Deferred Compensation Agreement with Jill Gutierrez (3) †
Deferred Compensation Plan Agreement with Jan R. Thiry (3) †
Intentionally omitted
Split Dollar Life Insurance Agreement with Jill Gutierrez (3) †
Form of Director Retirement Agreement, as amended (3) †
Form of Director Split Dollar Life Insurance Agreement (3) †
Alamogordo Financial Corp. 2001 Stock Option Plan (4) †
Alamogordo Financial Corp. 2001 Recognition and Retention Plan (4) †
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 Form of Amendment to Deferred Compensation Plan Agreement with Jill Gutierrez and Jan R. Thiry (5) †
10.11 Director Deferred Fee Plan (6) †
10.12 Retention Bonus Agreement with Jan R. Thiry (7) †
10.13 Employment Agreement By and Between Bancorp 34, Inc. and Jill Gutierrez (8) †
10.14
10.15 Employment Agreement By and Between Bancorp 34, Inc. and Jan R. Thiry (10) †
10.16 Employment Agreement By and Between Bank 34 and Jill Gutierrez (11) †
10.17
10.18 Employment Agreement By and Between Bank 34 and Jan R. Thiry (13) †
10.19 Bancorp 34, Inc. 2017 Equity Incentive Plan (14) †
10.20 Form of Incentive Stock Option Award Agreement (15) †
10.21 Form of Non-Qualified Stock Option Award Agreement (16) †
10.22 Form of Restricted Stock Award Agreement (17) †
10.23 Second Amendment to Deferred Compensation Agreement with Jill Gutierrez †
10.24 Second Amendment to Deferred Compensation Agreement with Jan R. Thiry †
21
23
31.1
Intentionally omitted
Intentionally omitted
Subsidiaries of Registrant
Consent of Moss Adams LLP
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K, formatted in XBRL: (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in
Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial
Statements
_______________________________
†
(1)
Management contract or compensation plan or arrangement.
Incorporated by reference to the Registration Statement on Form S-1 of Bancorp 34, Inc. (File No. 333-21182), initially filed
with the Securities and Exchange Commission on June 30, 2016.
Incorporated by reference to Exhibit 10.1 to Alamogordo Financial Corp.’s Annual Report on Form 10-K for the year ended
December 31, 2015 (File No. 000-29655) as filed with the Securities and Exchange Commission on March 28, 2016.
Incorporated by reference to the Registration Statement on Form S-4 of Alamogordo Financial Corp. (File No. 333-192233),
originally filed with the Securities and Exchange Commission on November 8, 2013, as amended.
31.2
32
101
(2)
(3)
100
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Incorporated by reference to the exhibits to Alamogordo Financial Corp.’s Definitive Proxy Statement for the Special
Meeting of Stockholders (File No. 000-29655) as filed with the Securities and Exchange Commission on May 5, 2001.
Incorporated by reference to Exhibit 10.1 to Alamogordo Financial Corp.’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2015 (File No. 000-29655) as filed with the Securities and Exchange Commission on July 30, 2015.
Incorporated by reference to Exhibit 10.11 to Alamogordo Financial Corp.’s Annual Report on Form 10-K for the year ended
December 31, 2015 (File No. 000-29655) as filed with the Securities and Exchange Commission on March 28, 2016.
Incorporated by reference to Exhibit 10.12 to Alamogordo Financial Corp.’s Annual Report on Form 10-K for the year ended
December 31, 2015 (File No. 000-29655) as filed with the Securities and Exchange Commission on March 28, 2016.
Incorporated by reference to Exhibit 10.13 to Bancorp 34, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2016 (File No. 001-37912) as filed with the Securities and Exchange Commission on March 23, 2017.
Intentionally omitted.
Incorporated by reference to Exhibit 10.15 to Bancorp 34, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2016 (File No. 001-37912) as filed with the Securities and Exchange Commission on March 23, 2017.
Incorporated by reference to Exhibit 10.16 to Bancorp 34, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2016 (File No. 001-37912) as filed with the Securities and Exchange Commission on March 23, 2017.
Intentionally omitted
Incorporated by reference to Exhibit 10.18 to Bancorp 34, Inc.’s Annual Report on Form 10-K for the year ended December
31, 2016 (File No. 001-37912) as filed with the Securities and Exchange Commission on March 23, 2017.
Incorporated by reference to Appendix A to Bancorp 34, Inc.’s definitive proxy statement for the Annual Meeting of
Stockholders (File No. 001-37912) as filed with the Securities and Exchange Commission on October 13, 2017.
Incorporated by reference to Exhibit 10.1 to Bancorp 34, Inc.’s Current Report on Form 8-K (File No. 001-37912) as filed
with the Securities and Exchange Commission on December 8, 2017.
Incorporated by reference to Exhibit 10.2 to Bancorp 34, Inc.’s Current Report on Form 8-K (File No. 001-37912) as filed
with the Securities and Exchange Commission on December 8, 2017.
Incorporated by reference to Exhibit 10.3 to Bancorp 34, Inc.’s Current Report on Form 8-K (File No. 001-37912) as filed
with the Securities and Exchange Commission on December 8, 2017.
ITEM 16.
Form 10-K Summary
Not applicable.
101
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 18, 2020
BANCORP 34, INC.
By: /s/ Jill Gutierrez
Jill Gutierrez
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
/s/ Jill Gutierrez
Jill Gutierrez
/s/ Jan R. Thiry
Jan R. Thiry
/s/ William F. Burt
William F. Burt
/s/ Wortham A. (Pete) Cook
Wortham A. (Pete) Cook
/s/ James D. Harris
James D. Harris
/s/ Randal L. Rabon
Randal L. Rabon
/s/ Elaine E. Ralls
Elaine E. Ralls
/s/ Don P. Van Winkle
Don P. Van Winkle
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date
February 18, 2020
February 18, 2020
Vice Chairman
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
Director
Director
Chairman
Director
Director
102
Our mission is to be the preferred financial
services provider in the communities we serve
by building solid client relationships to earn their
loyalty, and increase shareholder value and
employee satisfaction. In this tumultuous time,
rest assured your board of directors is intensely
focused on the efficiency of our core operation
and maximizing capital allocation opportunities
to enhance franchise value.
– Randal L. Rabon, Chairman of the Board
BANK34.COM
2019 ANNUAL REPORT