Dear Fellow Stockholders,
As the entire country and our Arizona and New Mexico communities continue to be challenged by one of
the greatest health threats of a generation, our thoughts and prayers go out to those so horribly affected
by the COVID-19 pandemic through lost loved ones and continued illnesses, and we wish to thank the
healthcare workers and first responders who have stepped up to guide us through the darkness.
Throughout our 87-year history, Bank 34 has risen up to support our clients and communities at the most
critical times. We weathered unprecedented challenges throughout 2020 and will continue to do so until
this pandemic and its harsh realities are in the rear-view mirror. We know our support during this crisis
is essential in keeping our local economies strong, and our actions in that regard will define us well into
the future.
PANDEMIC RESPONSE
The spread of the coronavirus caused us to modify business practices. Those activities included
temporary branch lobby closures, restricting employee travel, rearranging client contact areas and
cancellation of physical participation in meetings, events and conferences. We continue to have some
employees working remotely and may take further actions as we determine what are in the best interests
of employees, clients and business partners from a safety perspective.
Other COVID-19 pandemic effects on our business included:
• Paycheck Protection Program (PPP). In the second quarter of 2020, Bank 34 funded 278 PPP
loans with principal balances of $36 million. The bank began processing applications for the
second round of PPP loans in January 2021.
• Loan Modifications. Bank 34 offered its loan clients experiencing liquidity challenges due to the
pandemic loan payment deferrals on a case-by-case basis to assist them through this difficult
period. Deferrals peaked around June 30, 2020, with 63 modified loans with $59 million in
principal balances representing 19% of total non-PPP balances. By December 31, 2020, only
seven loans were on deferral with principal balances totaling $9 million, representing 3% of total
non-PPP balances.
• Provision for Loan Losses. The $1.9 million 2020 provision for loan losses included $1.6 million
specifically for potential COVID-19 related losses representing 55% of the December 31, 2019
pre-COVID-19 credit reserve balance. The Bank continues to closely monitor the effects of the
pandemic on its borrowers and re-assess their ability to repay their debt obligations.
We entered 2021 in a position of strength and will continue to focus on those strategic initiatives that
allow us to remain strong, resilient, and well-positioned to provide that support for our clients, employees
and communities while never losing sight of our responsibility to provide a reasonable return and
increasing franchise value for our stockholders.
A review of our accomplishments in 2020 is appropriate given they provide the foundation for the success
of our franchise through this pandemic and into the future.
In 2020 we saw material growth in loans and deposits, reduced our reliance on wholesale funds, improved
credit quality and increased stockholder total returns through stock repurchases, dividends and improved
core operating fundamentals.
STRONG AND GROWING BALANCE SHEET
GROWTH – Portfolio loan growth excluding PPP loans was $32 million, or 11%, in 2020 compared to
3% in 2019 which was hampered by late fourth quarter payoffs. We increased commercial and industrial
loans (excluding PPP loans) 71% in 2020, compared to 15% in 2019 and 42% in 2018 as we continue to
diversify our loan portfolio by adding commercial relationships encompassing loan and deposit elements.
Our portfolio loan five-year compound annual growth rate excluding PPP loans was 11%. We
accomplished a $67 million, or 22%, increase in total deposits compared to 15% growth in 2019. Savings
and NOW deposits increased $54 million, or 32%, and non-interest bearing demand deposits grew $20
million, or 35%. Time deposits decreased $7 million. Our deposit five-year compound annual growth rate
was 10%.
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 four years. Our allowance
for loan losses represented 1.47% of total gross loans excluding PPP loans at year end compared to
0.99% at year-end 2019. We’ve achieved four consecutive years of contraction in our nonperforming
assets to total assets ratio dropping from 1.81% at year-end 2016 to 0.64% in 2020. 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 87% of our nonperforming loan balances are guaranteed by the Small
Business Administration.
CAPITAL - In terms of capital strength, Bancorp 34’s equity to assets at December 31, 2020 was a healthy
10.4% and Bank 34’s Tier 1 Risk-Based Capital Ratio was 11.9%. 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 2020 was $1.8 million compared with $710,000 in 2019. Diluted net income per share for
the year was $0.59, compared with $0.23 for 2019. The year ended December 31, 2019 included $2.0
million of net income from continuing operations partially offset by a $1.3 million loss from discontinued
mortgage banking operations including a $845,000 net loss on disposal. 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.
Net income from continuing operations was $1.8 million for 2020 compared to $2.0 million in 2019. The
decrease was primarily caused by an additional $1.6 million in the provision for loan loss for
COVID/recession-related losses, $304,000 of officer transition expenses and a $241,000 fixed asset
impairment. Net interest income increased $1.9 million or 13% primarily due to a 13% increase in average
interest earning assets, partially offset by a six basis point decrease in net interest margin. Average
interest bearing liability rates decreased 58 basis points compared to a 54 basis point decrease in
average interest earning assets yield. Low PPP loan yields caused an 11 basis point reduction in the
2020 net interest margin.
CAPITAL ACTIVITIES & STOCKHOLDER RETURN
STOCK REPURCHASES - Bancorp 34 adopted its first stock repurchase program in 2017 and its second
in 2019. From 2017 through 2019 Bancorp 34 repurchased 328,934 shares at an average price of $15.42
per share. In 2020 the Company completed its second and third repurchase programs with another
69,845 shares repurchased at an average cost per share of $10.17. 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. In May 2018, 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. 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 – Despite a 4.5% increase in tangible book value per share, your
Bancorp 34 stock finished 2020 at $11.30 per share, 26% below the $15.27 at December 31, 2019. Since
the trading range for all small-cap bank stocks remains depressed, it appears the market is discounting
them under concerns they may be less prepared than larger banks to weather the storm, maintain their
earnings and grow and prosper through and after the recovery. We cannot and will not manage the
company specifically to enhance our stock price in the short run, but do hope the stock price recovers in
the long run and reflects the substantial progress this company has achieved over time. 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 through December 31, 2019, pre-
pandemic, Bancorp 34 stock appreciated 108% and our 127% total return to stockholders (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
acceptable 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!
James T. Crotty
President and Chief Executive Officer
CONTENTS
Report of Independent 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
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2
3
4
5
6
7
1
Report of Independent Auditors
To the Stockholders and the Board of Directors
Bancorp 34, Inc.
Report on the Financial Statements
We have audited the accompanying consolidated balance sheets of Bancorp 34, Inc. (the “Company”) as
of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes
in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial
statements (collectively referred to as the “consolidated financial statements”).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America;
this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Bancorp 34, Inc. as of December 31, 2020 and 2019, and the results of
their operations and their cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Phoenix, Arizona
February 9, 2021
2
BANCORP 34, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
December 31, 2020December 31, 2019ASSETSCash and due from banks8,201,201$ 4,496,465$ Interest-bearing deposits with banks3,785,000 24,990,000 Total cash and cash equivalents11,986,201 29,486,465 Available-for-sale securities, at fair value54,343,254 44,517,178 Loans held for investment353,565,535 294,660,719 Allowance for loan losses(4,820,883) (2,921,931) Loans held for investment, net348,744,652291,738,788Premises and equipment, net8,304,432 8,990,955 Operating lease right-of-use assets950,042 - Stock in financial institutions, restricted, at cost1,324,361 4,016,761 Accrued interest receivable1,657,014 961,105 Deferred income tax asset, net2,111,019 1,907,876 Bank owned life insurance11,111,634 10,850,085 Core deposit intangible, net97,604 133,052 Prepaid and other assets1,291,463 1,137,090 TOTAL ASSETS441,921,676$ 393,739,355$ LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilitiesDepositsDemand deposits76,492,839$ 56,401,370$ Savings and NOW deposits219,777,876 166,107,428 Time deposits74,479,109 81,387,861 Total deposits370,749,824 303,896,659 Federal Home Loan Bank advances19,000,000 40,000,000 Escrows267,503 254,593 Operating lease liabilities1,032,758 - Accrued interest and other liabilities4,838,206 4,271,437 Accrued interest and other liabilities - - discontinued operations- 233,427 Total liabilities395,888,291 348,656,116 Stockholders’ equityPreferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding- - Common stock, $0.01 par value, 100,000,000 authorized,3,137,573 and 3,208,618 issued and outstanding. 31,376 32,086 Additional paid-in capital22,811,166 23,168,176 Retained earnings24,324,634 23,157,134 Accumulated other comprehensive income388,416 307,255 Unearned employee stock ownership plan shares(1,522,207) (1,581,412) Total stockholders’ equity46,033,385 45,083,239 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY441,921,676$ 393,739,355$ 3
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended December 31,20202019Interest incomeInterest and fees on loans18,285,426$ 17,489,918$ Interest on securities1,290,725 972,524 Interest on other interest-earning assets115,574 484,546 Total interest income19,691,725 18,946,988 Interest expenseInterest on deposits3,155,902 3,799,642 Interest on borrowings552,990 1,020,368 Total interest expense3,708,892 4,820,010 Net interest income15,982,833 14,126,978 Provision for loan losses 1,944,000 22,500 Net interest income after provision for loan losses14,038,833 14,104,478 Noninterest income Gain on sale of loans24,959 272,293 Gain on sale of securities10,157 - Service charges and fees443,901 202,865 Bank owned life insurance363,904 370,388 Loss on disposal of fixed assets(240,663) - Other151,774 14,225 Total noninterest income754,032 859,771 Noninterest expenseSalaries and benefits7,023,314 6,619,148 Occupancy1,393,807 1,462,077 Data processing fees2,009,382 2,092,060 FDIC and other insurance expense263,497 181,206 Professional fees783,273 815,278 Advertising193,402 260,440 Other834,001 901,980 Total noninterest expense12,500,676 12,332,189 Income from continuing operations before provision for income taxes2,292,189 2,632,060 Provision for income taxes496,930 665,953 Net income from continuing operations1,795,259 1,966,107 Discontinued operationsLoss from discontinued operations- (1,683,555) Benefit for income taxes- (427,627) Net loss from discontinued operations- (1,255,928) NET INCOME1,795,259 710,179 Other comprehensive incomeOther comprehensive income107,653943,533Tax effect of other comprehensive income(26,492)(240,130) Other comprehensive income, net of tax81,161703,403COMPREHENSIVE INCOME1,876,420$ 1,413,582$ Earnings per common share - BasicEarnings per common share - continuing operations0.59$ 0.64$ Loss per common share - discontinued operations- (0.41) Earnings per common share - Basic0.59$ 0.23$ Earnings per common share - DilutedEarnings per common share - continuing operations0.59$ 0.64$ Loss per common share - discontinued operations- (0.41) Earnings per common share - Diluted0.59$ 0.23$ 4
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
AccumulatedOtherAdditionalComprehensiveUnearnedTotalCommonCommonPaid-In RetainedIncomeESOPStockholders'SharesStockCapitalEarnings(Loss) SharesEquityBALANCE, DECEMBER 31, 20183,374,56533,746$ 25,500,873$ 22,928,777$ (396,148)$ (1,644,514)$ 46,422,734$ Net income- -$ -$ 710,179$ -$ -$ 710,179$ Unrealized gain on available-for-sale securities, net- - - - 703,403 - 703,403 Stock option exercise7,300 73 69,962 - - - 70,035 Restricted stock awards4,000 40 (40) - - - - Restricted stock forfeitures(1,800) (18) 18 - - - - Amortization of equity awards- - 328,256 - - 63,102 391,358 Share repurchase(175,447) (1,755) (2,730,893) - - - (2,732,648) Dividends paid - $0.15 per share- - - (481,822) - - (481,822) BALANCE DECEMBER 31, 20193,208,61832,086$ 23,168,176$ 23,157,134$ 307,255$ (1,581,412)$ 45,083,239$ Net income- -$ -$ 1,795,259$ -$ -$ 1,795,259$ Unrealized gain on available-for-sale securities, net- - - - 1,427,516 - 1,427,516 Unrecognized pension liability- - - - (1,346,355) - (1,346,355) Restricted stock awards2,000 20 (20) - - - - Restricted stock forfeitures(3,200) (32) 32 - - - - Amortization of equity awards- - 352,886 - - 59,205 412,091 Share repurchase(69,845) (698) (709,908) - - - (710,606) Dividends paid - $0.20 per share- - - (627,759) - - (627,759) BALANCE DECEMBER 31, 20203,137,57331,376$ 22,811,166$ 24,324,634$ 388,416$ (1,522,207)$ 46,033,385$ 5
BANCORP 34, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
20202019Cash flows from operating activitiesNet income1,795,259$ 710,179$ Less: Net loss from discontinued operations- (1,255,928) Net income from continuing operations1,795,2591,966,107Adjustments to reconcile net income to net cash from operating activities:Depreciation and amortization522,751611,200Stock dividends on financial institution stock(52,500)(106,400)Amortization of premiums and discounts on securities, net338,284122,057Amortization of equity awards412,091391,358Amortization of core deposit intangible35,44839,056Gain on sale of loans(24,959) (272,293)Proceeds from sale of loans565,030 3,714,648Gain on sale of securities(10,157)- Provision for loan losses1,944,00022,500Fixed asset impairment240,663- Net appreciation on bank-owned life insurance(261,549)(277,016)Deferred income tax expense (230,489) 48,922 Changes in operating assets and liabilities:Accrued interest receivable(695,909)(86,065)Prepaid and other assets(435,843)(79,725)Accrued interest and other liabilities(875,381)267,256Net cash from operating activities - continuing operations3,266,739 6,361,605 Net cash from operating activities - discontinued operations(233,427) 25,628,086 Net cash from operating activities3,033,312 31,989,691 Cash flows from investing activitiesProceeds from principal payments on available-for-sale securities18,554,7005,940,620Proceeds from sales of available-for-sale securities1,854,871- Purchases of available-for-sale securities(28,648,931) (16,207,664) Redemptions of stock in financial institutions2,744,900 - Net change in loans held for investment(59,489,935)(12,413,363)Proceeeds from disposals of premises and equipment- 33,516Purchases of premises and equipment(76,891)(20,044)Net cash from investing activities(65,061,286)(22,666,935)Cash flows from financing activitiesNet change in deposits66,853,16538,657,686Net change in escrows12,910(123,999)Proceeds from Federal Home Loan Bank advances176,000,00030,000,000Repayments of Federal Home Loan Bank advances(197,000,000)(57,000,000)Exercise of stock options- 70,035Common stock repurchases(710,606)(2,732,648)Dividends paid(627,759)(481,822)Net cash from financing activities44,527,7108,389,252Net change in cash and cash equivalents(17,500,264)17,712,008Cash and cash equivalents, beginning of period29,486,465 11,774,457 Cash and cash equivalents, end of period11,986,201$ 29,486,465$ Supplemental disclosures: Interest on deposits and advances paid3,828,390$ 4,802,125$ Income taxes paid782,781$ 19,553$ Loans transferred to loans held for sale540,071$ 3,423,909$ Operating lease assets recorded on ASU 2016-20 adoption1,138,139$ -$ Operating lease liabilities recorded on ASU 2016-20 adoption1,138,139$ -$ Year Ended December 31,6
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 October 2016 second-step conversion of Bank 34 (the “Bank”) from the two-tier mutual holding
company structure to the stock holding company structure. Bancorp 34 owns 100% of the Bank.
In August 2020, Bancorp 34, Inc. voluntarily delisted from the NASDAQ Capital Market and joined the
OTCQB Market. As a result of delisting, Bancorp 34, Inc. is no longer a public reporting company obligated
to file periodic reports with the SEC, including proxy materials and reports on Forms 10-K, 10-Q and 8-K.
The decision was based on numerous factors, including the significant cost savings of no longer filing
periodic SEC reports and reductions in accounting fees, legal fees and other costs.
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.
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 – 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. The
Consolidated Financial Statements. 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. Additional information on discontinued
operations can be found in The Consolidated Financial Statements, Note 2 – Discontinued Operations.
Basis of Consolidation – The Consolidated Financial Statements include the accounts of Bancorp 34 and
the Bank. All significant intercompany accounts and transactions have been eliminated.
Reclassifications – Certain reclassifications have been made to prior period’s financial information to
conform to the current period presentation.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, allowance for loan losses, 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.
7
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. Banks are required to
maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at
December 31, 2020 and 2019 were $0 and $1.1 million, respectively, and is included in cash and cash
equivalents in the consolidated balance sheets.
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. There were no loans held for sale at December 31, 2020 or 2019.
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.
8
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 The Independent Bankers Bank (TIB),
Pacific Coast Bankers’ Bancshares (PCBB) and the Federal Home Loan Bank (FHLB) of Dallas. The Bank
is a member of FHLB system. 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. Financial institution stock is carried at cost, is classified as a restricted security and is periodically
evaluated for impairment based on ultimate recovery. The carrying value of financial institution stocks at
December 31, 2020 and 2019 was $1.3 million and $4.0 million, respectively. 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.
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:
9
● 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.
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, 2020 and 2019 were $193,000 and $260,000,
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
10
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), net
unrealized gains and losses on securities available-for-sale, net of taxes and unrecognized pension liability.
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 non-forfeitable 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.
Summary of Recent Accounting Pronouncements:
Bancorp 34 was an emerging growth company under the JOBS Act and elected to use the extended
transition period to delay adoption of new or revised accounting pronouncements applicable to public
companies until such pronouncements were made applicable to private companies. Accordingly, our
financial statements may not have been comparable to the financial statements of public companies that
complied with such new or revised accounting standards. The Company lost its status as an emerging
growth company at the end of 2019.
Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires
entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and
obligations created by those leases. The standard was effective for fiscal years and interim periods within
those fiscal years beginning after December 15, 2018 for public companies, but the Company had until the
first quarter of 2020 to adopt due to its emerging growth company status. The guidance is required to be
applied by the modified retrospective transition approach. Early adoption is permitted. We adopted the
standard effective January 1, 2020 on a prospective basis and elected to apply several allowable practical
expedients, including carryover of historical lease determinations, classification conclusions and direct cost
balances. Adoption of the standard resulted in balance sheet recognition of approximately $1.3 million in
operating lease right-of-use assets and $1.4 million operating lease liabilities as of January 1, 2020. These
amounts represent the present value of remaining minimum lease payments, discounted using the
Company’s incremental borrowing rate at the date of adoption. There was no material impact on the timing
of expense or income recognition in the consolidated statements of income. Prior periods were not
11
restated. Further information regarding the Company’s leasing activities are included in Note 5 – Financial
Instruments with Off-Balance-Sheet Credit Risk.
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 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, for
the year ended December 31, 2019:
The following table presents results of discontinued operations for the years ended December 31, 2020,
and 2019:
Severance benefits147,948$ Leases, software & other contractual obligations360,613 Fixed asset losses30,423 Other costs305,915 Net Loss on Disposal844,899$ Year Ended December 31,20202019Net interest income-$ 170,782$ Gain on sale of loans- 4,813,660 Other- 190 Total noninterest income- 4,813,850 Salaries and benefits- 4,480,025 Occupancy- 232,360 Data processing fees- 584,369 Professional fees- 107,972 Advertising- 118,801 Net loss on disposal - 844,899 Other- 299,761 Total noninterest expense- 6,668,187 Loss from discontinued operations- (1,683,555) Benefit for income taxes- (427,627) Net loss from discontinued operations-$ (1,255,928)$ 12
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.
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:
NOTE 3 – AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities have been classified in the consolidated balance sheets according to
management’s intent at December 31, 2020 and 2019. The amortized cost of such securities and their
approximate fair values were as follows:
Gross proceeds from the sale of available-for-sale securities and resulting gains and losses in 2020 and
2019 were as follows:
December 31,20202019Accrued interest and other liabilities - discontinued operations- 233,427 Total liabilities-$ 233,427$ Net (liabilities) assets-$ (233,427)$ GrossGrossGrossAmortizedUnrealizedUnrealizedCostGainsLossesFair ValueDecember 31, 2020Available-for-sale securitiesMortgage-backed securities25,852,963$ 1,028,433$ (2,045)$ 26,879,351$ U.S. Government agencies816,937 5,725 (1,097) 821,565 Municipal obligations23,546,166 1,296,941 (769) 24,842,338 Corporate debt1,800,000 - - 1,800,000 Total52,016,066$ 2,331,099$ (3,911)$ 54,343,254$ December 31, 2019Available-for-sale securitiesMortgage-backed securities30,722,958$ 415,564$ (119,774)$ 31,018,748$ U.S. Government agencies1,102,532 1,739 (24,824) 1,079,447 Municipal obligations12,279,341 254,521 (114,879) 12,418,983 Total44,104,831$ 671,824$ (259,477)$ 44,517,178$ Years Ended December 31,202020191,854,871$ -$ Sales gains15,013$ -$ Sales losses(4,856)$ -$ Proceeds from sale13
Amortized cost and fair value of securities by contractual maturity as of December 31, 2020 and 2019 are
shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the actual contractual maturities of
underlying collateral. Expected maturities may differ from contractual maturities because borrowers may
call or prepay obligations.
The scheduled maturities of available-for-sale securities at December 31, 2020 and 2019 were as follows:
At December 31, 2020 and 2019, mortgage-backed securities included collateralized mortgage obligations
of $9.8 million and $13.4 million, respectively, which are backed by single-family mortgage loans. The
Company does not hold any securities backed by commercial real estate loans.
Gross Unrealized Losses and Fair Value – The following tables show the gross unrealized losses and
fair values of securities by length of time that individual securities in each category have been in a
continuous loss position.
Less Than 12 Months
12 Months or More
Total
December 31, 2019
Description of
Securities
Available-for-sale securities:
Mortgage-backed securities
U.S. Government agencies
Municipal obligations
Total temporarily impaired
securities
Gross
Unrealized
Losses
Gross
Unrealized
Losses
Fair Value
Fair Value
Fair Value
Gross
Unrealized
Losses
$ 10,201,840 $ (64,195 ) $ 6,459,069 $ (55,579 ) $ 16,660,909 $ (119,774 )
(24,824 )
4,676,851 (114,879 )
4,676,851 (114,879 )
(24,824 ) 843,719
843,719
-
-
-
-
$ 14,878,691 $ (179,074 ) $ 7,302,788 $ (80,403 ) $ 22,181,479 $ (259,477 )
December 31, 2020December 31, 2019AmortizedFairAmortizedFairCostValueCostValue2,978,393$ 3,030,784$ -$ -$ Due after one to five years29,673,627 30,980,536 27,151,751 27,510,536 Due after five to ten years13,379,347 14,244,927 14,048,273 14,163,270 Due after ten years5,984,699 6,087,007 2,904,807 2,843,372 Totals52,016,066$ 54,343,254$ 44,104,831$ 44,517,178$ Due in one year or lessDecember 31, 2020GrossGrossGrossDescription ofUnrealizedUnrealizedUnrealizedSecuritiesFair ValueLossesFair ValueLossesFair ValueLossesAvailable-for-sale securities:Mortgage-backed securities1,133,125$ (2,045)$ -$ -$ 1,133,125$ (2,045)$ U.S. Government agencies424,680 (830) 210,371 (267) 635,051 (1,097) Municipal obligations1,789,908 (769) - - 1,789,908 (769) Total temporarily impaired securities3,347,713$ (3,644)$ 210,371$ (267)$ 3,558,084$ (3,911)$ Less Than 12 Months12 Months or MoreTotal14
At December 31, 2020 and 2019, all of the government agencies and mortgage-backed securities held by
the Company were issued by U.S. Government-sponsored entities and agencies, primarily Fannie Mae and
Freddie Mac, institutions which the government has affirmed its commitment to support. Because the
decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and
because the Company does not have the intent to sell these securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at December 31, 2020.
Loans and securities carried at approximately $171.7 million at December 31, 2020 were pledged to secure
FHLB advances. In addition, securities carried at approximately $7.7 million at December 31, 2020 were
pledged to secure public deposits.
NOTE 4 – LOANS HELD FOR INVESTMENT, NET
The components of loans held for investment, net in the consolidated balance sheets were as follows:
At December 31, 2020 and 2019 commercial real estate loans include construction loans of $20.0 million
and $16.1 million, respectively.
The spread of the coronavirus caused us to modify business practices. The following includes information
on two of our responses to COVID-19, and the effects of the pandemic on our business.
At December 31, 2020 commercial and industrial loans included $27.1 million of Paycheck
Protection Program (PPP) loans fully guaranteed by the Small Business Administration.
The Company handles loan payment modification requests on a case-by-case basis considering
the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on
our customer and their current and projected cash flows through the term of the loan. At December
31, 2020, portfolio loans included seven modified loans with principal balances totaling
$9.0 million, representing 3% of total non-PPP loan balances. Accrued interest income on those 7
loans with payment deferrals was $138,000 at December 31, 2020.
Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the
allowance for loan losses and recorded investment in loans as of December 31, 2020 and 2019:
AmountPercentAmountPercentLoans held for investment, net:Commercial real estate268,121,092$ 75.6%242,682,721$ 82.1%One- to four-family residential real estate residential real estate22,463,037 6.328,849,640 9.8Commercial and industrial61,326,222 17.320,075,236 6.8Consumer and other 2,716,760 0.83,860,991 1.3Total gross loans354,627,111 100.0%295,468,588 100.0%Unamortized loan fees(1,061,576) (807,869) Loans held for investment353,565,535 294,660,719 Allowance for loan losses(4,820,883) (2,921,931) Loans held for investment, net348,744,652$ 291,738,788$ December 31, 2020December 31, 201915
The following is a summary of activities for the allowance for loan losses for the years ended December
31, 2020 and 2019:
As of December 31, 2020 Commercial Real EstateOne- to Four-Family Residential Real EstateCommercial and IndustrialOtherTotalAllowance for loan lossesEnding balance: individually evaluated for impairment-$ -$ -$ -$ -$ Ending balance: collectivelyevaluated for impairment4,051,438 299,007 426,409 44,029 4,820,883 Total4,051,438$ 299,007$ 426,409$ 44,029$ 4,820,883$ Gross loansEnding balance: individually evaluated for impairment2,442,002$ 279,063$ -$ -$ 2,721,065$ Ending balance: collectivelyevaluated for impairment265,679,090 22,183,974 61,326,222 2,716,760 351,906,046 Total268,121,092$ 22,463,037$ 61,326,222$ 2,716,760$ 354,627,111$ As of December 31, 2019 Commercial Real EstateOne- to Four-Family Residential Real EstateCommercial and IndustrialOtherTotalAllowance for loan lossesEnding balance: individually evaluated for impairment-$ -$ -$ -$ -$ Ending balance: collectivelyevaluated for impairment2,588,714 187,345 115,502 30,370 2,921,931 Total2,588,714$ 187,345$ 115,502$ 30,370$ 2,921,931$ Gross loansEnding balance: individually evaluated for impairment2,718,731$ 786,557$ -$ -$ 3,505,288$ Ending balance: collectivelyevaluated for impairment239,963,990 28,063,083 20,075,236 3,860,991 291,963,300 Total242,682,721$ 28,849,640$ 20,075,236$ 3,860,991$ 295,468,588$ Commercial Real EstateOne- to Four-Family Residential Real EstateCommercial and IndustrialConsumer and OtherTotalBalance December 31, 20192,588,714$ 187,345$ 115,502$ 30,370$ 2,921,931$ Provision for loan losses1,462,724 156,710 310,907 13,659 1,944,000 Charge-offs- (53,254) - - (53,254) Recoveries- 8,206 - - 8,206 Net (charge-offs) recoveries- (45,048) - - (45,048) Balance December 31, 20204,051,438$ 299,007$ 426,409$ 44,029$ 4,820,883$ Balance December 31, 20182,130,124$ 359,705$ 377,180$ 34,082$ 2,901,091$ Provision for loan losses458,590 (169,193) (263,185) (3,712) 22,500 Charge-offs- (8,686) - - (8,686) Recoveries- 5,519 1,507 - 7,026 Net (charge-offs) recoveries- (3,167) 1,507 - (1,660) Balance December 31, 20192,588,714$ 187,345$ 115,502$ 30,370$ 2,921,931$ 16
Nonperforming Assets – The following tables present an aging analysis of the recorded investment of
past due loans as of December 31, 2020 and 2019. Payment activity is reviewed by management on a
monthly basis to determine the performance of each loan. Per Company policy, loans past due 90 days or
more no longer accrue interest.
The following table sets forth nonaccrual loans and other real estate at December 31, 2020 and 2019:
Nonaccrual loan balances guaranteed by the SBA are $2.3 million, or 87%, and $2.3 million, or 66%, of the
nonaccrual loan balances at December 31, 2020 and December 31, 2019, respectively.
Total90 DaysFinancing30 - 59 Days60 - 89 Daysor MoreTotalCurrentReceivablesDecember 31, 2020Commercial real estate-$ -$ -$ -$ 268,121,092$ 268,121,092$ One- to four-family residential real estate15,230 286,180 96,350 397,760 22,065,277 22,463,037 Commercial and industrial- - - - 61,326,222 61,326,222 Consumer and other- - - - 2,716,760 2,716,760 Totals15,230$ 286,180$ 96,350$ 397,760$ 354,229,351$ 354,627,111$ Past DueTotal90 DaysFinancing30 - 59 Days60 - 89 Daysor MoreTotalCurrentReceivablesDecember 31, 2019Commercial real estate-$ -$ 2,718,731$ 2,718,731$ 239,963,990$ 242,682,721$ One- to four-family residential real estate758,197 36,520 638,623 1,433,340 27,416,300 28,849,640$ Commercial and industrial- - - - 20,075,236 20,075,236$ Consumer and other- - - - 3,860,991 3,860,991$ Totals758,197$ 36,520$ 3,357,354$ 4,152,071$ 291,316,517$ 295,468,588$ Past DueDecember 31,December 31,20202019Nonaccrual loansCommercial real estate2,442,002$ 2,718,731$ One- to four-family residential real estate211,319 786,557 Commercial and industrial- - Consumer and other- - Total nonaccrual loans2,653,321 3,505,288 Other real estate (ORE)- - Total nonperforming assets2,653,321$ 3,505,288$ 17
Credit Quality Indicators – The following table represents the credit exposure by internally assigned
grades at December 31, 2020 and 2019. 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.
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.
Commercial Real EstateOne- to Four-Family Residential Real EstateCommercial and IndustrialConsumer and OtherTotalGradePass262,638,648$ 21,093,219$ 59,978,982$ 2,716,760$ 346,427,609$ Special mention1,555,127 573,370 1,137,001 - 3,265,498 Substandard3,927,317 796,448 210,239 - 4,934,004 Doubtful- - - - - Loss- - - - - Totals268,121,092$ 22,463,037$ 61,326,222$ 2,716,760$ 354,627,111$ As of December 31, 2020Commercial Real EstateOne- to Four-Family Residential Real EstateCommercial and IndustrialConsumer and OtherTotalGradePass237,546,684$ 26,969,204$ 19,774,797$ 3,860,991$ 288,151,676$ Special mention508,201 375,054 - - 883,255 Substandard4,627,836 1,505,382 300,439 - 6,433,657 Doubtful- - - - - Loss- - - - - Totals242,682,721$ 28,849,640$ 20,075,236$ 3,860,991$ 295,468,588$ As of December 31, 201918
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.
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.
PrincipalAverageRecordedNet ofRelatedRecordedInvestmentCharge-offsAllowanceInvestmentWith no related allowance recorded:Commercial real estate2,442,002$ 2,442,002$ -$ 2,476,009$ One- to four-family residential real estate279,063 279,063 - 282,181 Commercial and industrial- - - - Consumer and other - - - - 2,721,065$ 2,721,065$ -$ 2,758,190$ With an allowance recorded:-$ -$ -$ -$ Total:Commercial real estate2,442,002$ 2,442,002$ -$ 2,476,009$ One- to four-family residential real estate279,063 279,063 - 282,181 Commercial and industrial- - - - Consumer and other - - - - 2,721,065$ 2,721,065$ -$ 2,758,190$ As of December 31, 2020PrincipalAverageRecordedNet ofRelatedRecordedInvestmentCharge-offsAllowanceInvestmentWith no related allowance recorded:Commercial real estate2,718,731$ 2,718,731$ -$ 2,738,545$ One- to four-family residential real estate786,557 786,557 - 791,476 Commercial and industrial- - - - Consumer and other - - - - 3,505,288$ 3,505,288$ -$ 3,530,021$ With an allowance recorded:-$ -$ -$ -$ Total:Commercial real estate2,718,731$ 2,718,731$ -$ 2,738,545$ One- to four-family residential real estate786,557 786,557 - 791,476 Commercial and industrial- - - - Consumer and other - - - - 3,505,288$ 3,505,288$ -$ 3,530,021$ As of December 31, 201919
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, 2020 and 2019.
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, 2020 and December 31, 2019.
NOTE 5 – PREMISES AND EQUIPMENT, NET
Components of premises and equipment, net included in the consolidated balance sheets at December 31,
2020 and 2019 were as follows:
Depreciation and amortization expense was $522,000 and $611,000 for the years ended December 31,
2020 and 2019, respectively.
Fixed asset impairment expenses of $241,000 and $0 were reported in 2020 and 2019, respectively, to
bring the carrying value of remote ATM properties held for sale at December 31, 2020 to estimated market
value less cost to sell.
20202019Cost: Land and improvements2,281,240$ 2,452,807$ Building and improvements12,079,605 12,250,011 Furniture and equipment1,852,760 1,790,529 Automobiles91,387 91,387 Total cost16,304,99216,584,734Accumulated depreciation and amortization(8,000,560)(7,593,779)Net book value8,304,432$ 8,990,955$ At December 31,20
NOTE 6 – CORE DEPOSIT INTANGIBLE
The gross carrying value and accumulated amortization of core deposit intangible is as follows:
Amortization of core deposit intangible was $35,000 and $39,000 for the years ended December 31, 2020
and 2019, respectively.
The future amortization expense related to core deposit intangible remaining as of December 31, 2020 is
as follows:
NOTE 7 – TIME DEPOSITS
Following are maturities of time deposits at December 31, 2020 and 2019:
At December 31, 2020 and 2019, the Bank had $17.6 million and $12.4 million, respectively, in time deposits
of $250,000 or more. At December 31, 2020 and 2019, $12.6 million and $10.8 million, respectively, of
such time deposits mature within one year.
Interest expense on time deposits in denominations of $250,000 or more amounted to $227,000 and
$212,000 for the years ended December 31, 2020 and 2019, respectively.
December 31,20202019Gross carrying value502,000$ 502,000$ Less accumulated amortization(404,396) (368,948) Core deposit intangible97,604$ 133,052$ Year one35,443$ Year two35,443 Year three26,718 Core deposit intangible97,604$ Weighted-Weighted-AverageAverageMaturityRateAmountRateAmountOne year or less1.35%49,458,925$ 2.09%55,567,378$ Over one through three years1.14%21,367,838 2.08%22,461,008 Over three through five years1.50%3,652,347 1.85%3,359,475 1.30%74,479,109$ 2.08%81,387,861$ 20202019At December 31,21
NOTE 8 – BORROWINGS
The Bank has established a borrowing line with the FHLB of Dallas. As of December 31, 2020 and 2019,
the Bank had outstanding advances totaling $19.0 million and $40.0 million, respectively, carrying interest
rates from 0.14% to 1.40% in 2020 and 1.32% to 3.03% in 2019. As of December 31, 2020, the Bank had
unused credit available under the FHLB blanket pledge agreement of $150.9 million. The following are
maturities of outstanding FHLB advances at December 31, 2020:
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, 2020 and 2019.
NOTE 9 – 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, 2020:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the
Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies by and
may include accounts receivable, inventory, property and equipment, and income-producing commercial
properties.
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.
At December 31,Maturity2020Year one$9,000,000Year two5,000,000 Year three5,000,000 Total borrowings$19,000,000December 31,2020Commitments to extend credit35,583,898$ Unused lines of credit21,396,660 Totals56,980,558$ 22
NOTE 10 – LEASES
The Bank has non-cancelable 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 $613,000 and $664,000 for the years ended December 31, 2020 and 2019,
respectively.
Approximate future minimum rental commitments under non-cancelable leases are:
NOTE 11 – 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. From 2014 through 2019, 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 was guaranteed. The Company elected not to adopt a safe harbor matching contribution for
2021.
Profit sharing plan expense was $178,000 and $336,000 for the years ended December 31, 2020 and 2019,
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 $266,000 used to pay off already outstanding
ESOP loans used to purchase shares in 2012 and 2014. Principal and interest payments on the note are
made every December 31 and the interest rate on the loan adjusts annually on January 1st to the prime
rate of interest as published in the Wall Street Journal. The Bank makes at least annual discretionary
contributions to the ESOP and the ESOP uses all funds it receives to repay the loan. When loan payments
are made, ESOP shares are allocated to participants based on relative compensation for that plan year. At
the discretion of the employer, participants may receive the shares, cash, or a combination of stock and
cash at the end of employment.
Since the Bank is the primary source of repayment on ESOP loans, the Bank records the note payable and
an equal contra-equity account on its balance sheet and interest expense and ESOP benefit plan expense
on its statement of comprehensive income equal to the annual loan payments. As inter-company
borrowings, all bank-recorded balance sheet items, Bancorp 34 interest income and Bank 34 interest
December 31, 2020YearOperating Leases20202021577,7172022442,705202330,526Total minimum lease payments1,050,948$ Amounts representing interest (present value discount)(18,190)Operating lease liabilities (present value of minimum lease payments)1,032,75823
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.
Shares held by the ESOP at December 31, 2020 and 2019 were as follows:
ESOP expense was $71,000 and $99,000 for the years ended December 31, 2020 and 2019,
respectively.
DEFINED BENEFIT PLAN - Defined benefit pension plan expense for the years ended December 31, 2020
and 2019 was $184,000 and $158,000, respectively.
Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”)
Through March 31, 2020, the Company was a participant in the Pentegra DB Plan, a multiple employer
defined benefit pension plan. On June 1, 2006, the Company froze the benefits available under the
Pentegra DB Plan. The Company’s cash contributions to the Pentegra DB Plan were $0 and $225,000
during the years ended December 31, 2020 and 2019, respectively, all of which represented less than 5%
of total plan contributions. As of July 1, 2019 (the most recent valuation report available), the unfunded
pension liability for this plan was approximately $572,000 (87% funded).
Bank 34 Employees DB Retirement Plan
Effective April 1, 2020, the Company withdrew from the Pentegra DB Plan and established the Bank 34
Employee Defined Benefit Retirement Plan (“Bank DB Plan”). On June 2, 2020, all assets and liabilities
were transferred from the Pentegra DB Plan to the newly established Bank DB Plan.
The Bank DB Plan is a funded noncontributory defined benefit pension plan covering 49 current and former
employees. Similar to its predecessor plan, benefits available under the Bank DB Plan are frozen. The plan
provides defined benefits based on years of service and final average salary. The Company uses December
31 as the measurement date for this plan. The initial plan year was April 1, 2020 through December 31,
2020.
The fair value of plan assets and accumulated benefit obligation on the April 1, 2020 Bank DB Plan adoption
date were $2,392,111 and $3,951,473, respectively.
Accumulated other comprehensive income at December 31, 2020, included $1,346,355 which represented
$1,807,189 prior service cost related to this plan net of $460,834 estimated tax benefits.
Weighted-average assumptions used to determine pension benefit obligations at December 31, 2020
include a 2.50% discount rate and a 0% rate of compensation increase. The weighted average
20202019Allocated and committed to be allocated to participants40,247 35,566 Unallocated/unearned 157,613 163,745 Total ESOP shares197,860 199,311 Fair value of unallocated/unearned shares $1,826,735$2,500,386At December 31,24
assumptions used to determine net periodic pension cost include 2.50% discount rate, 2.50% expected
return on plan assets and a 0% rate of compensation increase.
The Bank DB Plan was first funded in the second quarter of 2020 and the overall investment strategy and
target investment allocations were determined in November 2020. The 2.50% weighted average expected
long term rate of return is estimated based on current trends in similar plan assets as well as projected
future rates of returns on similar assets. The plan does not have prohibited investments.
From initial funding in the second quarter of 2020 through October 2020, all assets of the Bank DB Plan
were invested in the MassMutual Premier U.S. Gov’t Money Market Fund (“Fund”). In November 2020,
and as of December 31, 2020, all assets of the Bank DB Plan were invested in a mix of bond funds
specifically chosen to match durations to the projected cash payments to participants in the future. Those
funds included: Western Select Strategic Bond Fund, Select MetWest Total Return Bond Fund, Barings
Long Duration Bond Fund, PIMCO Extended Duration Bond Fund and Vanguard Short Term Bond Index
Fund.
At December 31, 2020, the fair value of Bank DB Plan assets was $4,431,250, determined by quoted
market prices (Level 1), representing 106% of the $4,172,402 accumulated benefit obligation. Contributions
to the Bank 34 DB Plan in 2020 totaled $2,137,186.
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 5.0% and 5.5%, in the years
ended December 31, 2020 and 2019, respectively. Interest expense for the deferred plans was $86,000
and $77,000, for the years ended December 31, 2020 and 2019, respectively. Deferred plan liabilities,
included in accrued interest and other liabilities on the balance sheet, were $1.8 million and $1.5 million, as
of December 31, 2020 and 2019, respectively.
NOTE 12 – 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 $268,000 at December 31, 2020 and 2019.
NOTE 13 – INCOME TAXES
The provision for income taxes from continuing operations for the years ended December 31, 2020 and
2019, includes these components:
25
Income tax expense from continuing operations differs from the amounts computed by applying the federal
income tax rate of 21% in 2020 and 2019, to earnings before federal income tax expense. These differences
are primarily caused by state income taxes, net of federal tax benefit, income that is not taxable for federal
and state income tax purposes, expenses that are not deductible for tax purposes and tax adjustments
related to prior federal income tax returns.
A reconciliation of income tax expense from continuing operations at the Federal statutory rate to the
Company’s actual income tax expense for all periods presented is shown below:
The tax effects of temporary differences related to deferred taxes were:
A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
20202019Current Federal581,600$ 510,945$ State145,819 106,086 Deferred expense(230,489) 48,922 Provision for income taxes from continuing operations496,930$ 665,953$ Years Ended December 31, 20202019Federal tax at the statutory rate (21%)481,360$ 552,733$ Benefit from permanent differences: State income taxes, net of Federal tax benefit81,323 109,048 Bank-owned life insurance(54,926) (47,093) Other, net(10,827) 51,265 Provision for income taxes from continuing operations496,930$ 665,953$ Years Ended December 31, 20202019Deferred tax assets: Allowance for loan losses1,224,614$ 734,048$ Net operating loss carryforwards735,000 787,500 Deferred compensation713,432 519,370 Accrued bonus269,570 192,331 Lease liability262,352 - Organizational costs29,905 50,451 Other, net 283,966 278,581 Total deferred tax assets3,518,839 2,562,281 Deferred tax liabilities: Unrealized gains on AFS securities(591,159) (105,091) Loan origination costs(325,038) (218,615) Right of use assets(241,333) - Depreciation and amortization(200,274) (217,321) FHLB stock dividends(25,222) (79,953) Purchase accounting(24,794) (33,425) Total deferred tax liabilities(1,407,820) (654,405) Net deferred tax asset2,111,019$ 1,907,876$ As of December 31, 26
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, 2020.
At December 31, 2020, the Company had federal operating loss carry-forwards of approximately $3.5
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, 2020,
the Company has recorded deferred tax assets of $735,000 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, 2020 and 2019, 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. Our federal and state tax returns
have not been audited for the past six years.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in
response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and
carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the
CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding
taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact
of the CARES Act and determined that none of the changes would result in a material income tax benefit
to the Company.
NOTE 14 – 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, 2020 and 2019, 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, 2020, 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
27
category. The Bank has not opted into the Community Bank Leverage Ratio (“CBLR”) and therefore is
required to continue calculating and reporting risk-based capital ratios.
The Bank’s actual and required capital amounts and ratios are as follows:
NOTE 15 – RELATED PARTY TRANSACTIONS
The Bank periodically enters into transactions with its executive officers, directors, significant stockholders,
and their affiliates (related parties). Transactions with such related parties in 2020 and 2019 included:
There were no loans to such related parties in 2020 or 2019.
NOTE 16 – STOCK-BASED COMPENSATION
Stock-based expense for the years ended December 31, 2020 and 2019, included in Salaries and Benefits
in our Consolidated Statements of Comprehensive Income, was $316,000 and $299,000, respectively.
Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands)As of December 31, 2020:Total Capital(to Risk-Weighted Assets)46,789$ 13.15%28,465$ 8.00%35,582$ 10.00%Tier I Capital(to Risk-Weighted Assets)42,337$ 11.90%21,349$ 6.00%28,465$ 8.00%Common Equity Tier 1 Capital(to Risk-Weighted Assets)42,337$ 11.90%16,012$ 4.50%23,128$ 6.50%Tier I Capital(to Average Assets)42,337$ 9.41%17,995$ 4.00%22,494$ 5.00%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)39,982$ 13.58%13,249$ 4.50%19,138$ 6.50%Tier I Capital(to Average Assets)39,982$ 10.30%15,529$ 4.00%19,411$ 5.00%To be WellCapitalized UnderFor CapitalPrompt CorrectiveActualAdequacy PurposesAction Provisions20202019Fees and bonuses paid to directors during the period227,755$ 218,475$ Consulting fees paid to directors during the period30,000$ -$ Deposits from related parties held by the Bank at end of period2,381,064$ 2,392,225$ Years Ended December 31,28
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.
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 anniversary of date of grant and have a maximum term of seven years.
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. There were no net
settlements in 2020 and in 2019, 40 shares of common stock were issued in net settlements.
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. In 2020, 30,000 stock options were
granted and 2,000 shares of restricted stock were issued. The average grant-date fair value of stock option
awards granted in 2020 was $3.32. Grant-date fair values for 2020 and 2019 were computed using the
Black Scholes Merton options pricing model with the following weighted average inputs and assumptions:
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.
A summary of stock option activity for the year ended December 31, 2020 is presented below:
20202019Grant date stock price and exercise price$10.20$14.71Dividend yield1.97%0.86%Expected volatility41.93%25.10%Risk-free interest Rate0.43%1.84%Expected life in years66Years Ended December 31,AverageWeighted-RemainingAggregateAverageContractualIntrinsicSharesExercise PriceTerm (years)ValueOutstanding, December 31, 2019146,300$14.925.0$53,166 Granted30,00010.20Exercised-Forfeited or expired(2,550)14.82Outstanding, December 31, 2020173,750$14.104.4$- Exercisable, December 31, 202085,190$14.914.0$- For the Year Ended December 31, 202029
Information related to stock options during each year is as follows:
A summary of restricted stock activity for the year ended December 31, 2020 is presented below:
As of December 31, 2020, there was $300,000 and $368,000 of total unrecognized equity-based expense
related to unvested stock options and restricted stock awards granted under the 2017 Equity Incentive Plan,
respectively, that is expected to be recognized over the next 5 years as follows:
NOTE 17– FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents information about assets and liabilities measured at fair value on a recurring
and non-recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to
determine such fair values as of December 31, 2020 and 2019.
20202019Intrinsic value of options exercised-$ 42,616$ Cash received from option exercises-$ 70,035$ Tax benefit from option exercises-$ 10,708$ Total weighted average fair value of options granted99,550$ 10,230$ Years Ended December 31,WeightedAverageAverageRemainingGrant DateContractualSharesPriceTerm (years)Outstanding, December 31, 201940,044$14.892.6Granted2,00011.93Forfeited(3,200)14.76Vested(12,785)14.90Outstanding, December 31, 202026,059$14.681.8For the Year Ended December 31, 2020YearExpense2021309,0002022290,000202327,000202425,000202517,000668,00030
The fair values of certain of these instruments were calculated by discounting expected cash flows, which
involves significant judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments
and because management does not intend to sell these financial instruments, the Bank does not know
whether the fair values shown represent values at which the respective financial instruments could be sold
individually or in the aggregate.
There were no transfers between levels of the fair value hierarchy during the years ended December 31,
2020 or 2019.
The following table presents the significant unobservable inputs used in the fair value measurements for
Level 3 financial assets measured on a non-recurring basis:
Quoted PricesSignificantin ActiveOtherSignificantMarkets forObservableUnobservableIdentical AssetsInputsInputsLevel 1Level 2Level 3Fair ValueDecember 31, 2020:Recurring basisMortgage-backed securities-$ 26,879,351$ -$ 26,879,351$ - 821,565 - 821,565 Municipal obligations - 24,842,338 - 24,842,338 Corporate debt- 1,800,000 - 1,800,000 Nonrecurring basisImpaired loans- - 2,721,065 2,721,065 Totals-$ 54,343,254$ 2,721,065$ 57,064,319$ December 31, 2019:Recurring basisMortgage-backed securities-$ 31,018,748$ -$ 31,018,748$ - 1,079,447 - 1,079,447 Municipal obligations - 12,418,983 - 12,418,983 Nonrecurring basisImpaired loans- - 3,505,288 3,505,288 Totals-$ 44,517,178$ 3,505,288$ 48,022,466$ Fair Value Measurements UsingU.S. Government agencies U.S. Government agencies Fair ValueValuation MethodologiesValuation ModelUnobservable Input ValuationAt December 31, 2020Impaired loansCommercial real estate2,442,002$ AppraisalAppraisal discount and estimated selling costs17-18%One- to four-family residential real estate279,063 AppraisalAppraisal discount and estimated selling costs17-18%Total Impaired Loans2,721,065$ At December 31, 2019Impaired loansCommercial real estate2,718,731$ AppraisalAppraisal discount and estimated selling costs17-18%One- to four-family residential real estate786,557 AppraisalAppraisal discount and estimated selling costs17-18%Total Impaired Loans3,505,288$ 31
The following tables present estimated fair values of the Company’s financial instruments at December 31,
2020 and 2019.
NOTE 18 –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:
Quoted PricesSignificantin ActiveOtherSignificantMarkets forObservableUnobservableCarryingIdentical AssetsInputsInputsAmountFair ValueLevel 1Level 2Level 3At December 31, 2020:Financial assets:Cash and due from banks8,201,201$ 8,201,201$ 8,201,201$ -$ -$ Interest-bearing deposits with banks3,785,000 3,785,000 3,785,000 - - Available-for-sale securities54,343,254 54,343,254 - 54,343,254 - Loans held for investment, net348,744,652 349,043,000 - - 349,043,000 Stock in financial institutions1,324,361 1,324,361 - 1,324,361 - Financial liabilities:Demand deposits, savings and NOWdeposits296,270,715 295,046,736 295,046,736 - - Time deposits74,479,109 74,955,000 - 74,955,000 - Federal Home Loan Bank advances19,000,000 19,187,000 - 19,187,000 - At December 31, 2019Financial assets:Cash and due from banks4,496$ 4,496$ 4,496$ -$ -$ Interest-bearing deposits with banks24,990 24,990 24,990 - - Available-for-sale securities44,517 44,517 - 44,517 - Loans held for investment, net291,739 292,246 - - 292,246 Stock in financial institutions4,017 4,017 - 4,017 - Financial liabilities:Demand deposits, savings and NOWdeposits222,509 214,611 214,611 - - Time deposits81,388 81,638 - 81,638 - Federal Home Loan Bank advances40,000 40,075 - 40,075 - (Dollars in thousands)32
Participating securities are restricted stock awards since they participate in common stock dividends. Stock
options for 149,000 and 4,000 shares of common stock were not considered in computing diluted earnings
per common share for 2020 and 2019, because they were antidilutive.
20202019Basic:Net income from continuing operations1,795,259$ 1,966,107$ Net loss from discontinued operations- (1,255,928) Less: Earnings allocated to participating securities (23,520) (11,456)Net income allocated to common shareholders1,771,739$ 698,723$ Weighted-average common shares outstanding including participating securities3,185,0813,298,548Less: Average participating securities (39,660) (48,982)Less: Average unallocated ESOP Shares(157,876)(164,096) Average shares2,987,5453,085,470 Basic earnings per common share - continuing operations0.59$ 0.64$ Basic loss per common share - discontinued operations- (0.41) Basic earnings per common share0.59$ 0.23$ Diluted:Net income allocated to common shareholders1,771,739$ 698,723$ Weighted-average common shares outstanding for basic earnings per common share2,987,5453,085,470Add: Dilutive effects of assumed exercises of stock options 3,755 2,766 Weighted average shares and dilutive potential common shares2,991,3003,088,236 Diluted earnings per common share - continuing operations0.59$ 0.64$ Diluted loss per common share - discontinued operations- (0.41) Diluted earnings per common share0.59$ 0.23$ Year Ended December 31,33