Bancorp 34, Inc. - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - Bancorp 34, Inc.	v471028_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Bancorp 34, Inc.	v471028_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Bancorp 34, Inc.	v471028_ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2017

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ______________________

Commission File No. 001-37912

Bancorp 34, Inc.

(Exact name of registrant as specified in its charter)

Maryland		74-2819148
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

500 East 10^thStreet, Alamogordo, New Mexico		88310
(Address of Principal Executive Offices)		Zip Code

(575) 437-9334

(Registrant’s telephone number)

N/A

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

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

YES x NO ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨.

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

	Large accelerated filer ¨		Accelerated filer ¨
	Non-accelerated filer ¨		(Do not check if a smaller reporting company)
			Smaller reporting company x
			Emerging growth company x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of July 27, 2017 were 3,438,190.

Bancorp 34, Inc.
FORM 10-Q

Index

		Page

Part I. Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	3

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

Part II. Other Information

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38

Page 2 of 38

Item 1. Financial Statements

BANCORP 34, INC.

CONSOLIDATED BALANCE SHEETS - UNAUDITED

	June 30, 2017			December 31, 2016

ASSETS
Cash and due from banks	$	4,327,042		$	4,766,344
Interest-bearing deposits with banks		7,775,000			11,645,000
Total cash and cash equivalents		12,102,042			16,411,344

Loans held for investment		264,706,736			243,905,382
Allowance for loan losses		(2,919,733	)		(2,506,033	)
Loans held for investment, net		261,787,003			241,399,349

Loans held for sale		11,371,448			14,221,163
Available-for-sale securities		28,319,755			31,499,132
Premises and equipment, net		10,053,152			10,113,470
Stock in financial institutions		3,597,461			3,575,061
Accrued interest receivable		769,236			790,085
Deferred income taxes, net		4,274,477			4,317,017
Bank owned life insurance		5,542,147			5,481,168
Core deposit intangible, net		249,332			282,932
Prepaid and other assets		753,941			776,477

TOTAL ASSETS	$	338,819,994		$	328,867,198

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits	$	38,508,399		$	36,426,382
Savings and NOW deposits		126,604,271			124,535,039
Time deposits		64,008,657			63,560,582
Total deposits		229,121,327			224,522,003

Federal Home Loan Bank advances		55,000,000			50,000,000
Escrows		317,089			315,175
Accrued interest and other liabilities		3,383,021			3,253,443
Total liabilities		287,821,437			278,090,621

Commitments and contingencies		-			-

Stockholders’ equity
Common stock, $0.01 per value, 20,000,000 authorized, 3,438,190 issued and outstanding		34,382			34,382
Additional paid-in capital		27,171,456			27,161,856
Retained earnings		25,840,355			25,700,007
Accumulated other comprehensive loss, net of tax		(319,335	)		(363,437	)
Unearned employee stock ownership plan (ESOP) shares		(1,728,301	)		(1,756,231	)
Total stockholders’ equity		50,998,557			50,776,577

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	338,819,994		$	328,867,198

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

Page 3 of 38

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017		2016

Interest income
Interest and fees on loans	$	3,814,226	$	3,217,582		$	7,252,496	$	6,135,813
Interest on securities		144,847		121,460			275,313		241,867
Interest on other interest-earning assets		46,375		16,880			100,356		39,179
Total interest income		4,005,448		3,355,922			7,628,165		6,416,859

Interest expense
Interest on deposits		390,643		364,962			766,951		729,770
Interest on borrowings		142,806		13,887			245,881		24,695
Total interest expense		533,449		378,849			1,012,832		754,465

Net interest income		3,471,999		2,977,073			6,615,333		5,662,394
Provision for loan losses		150,000		99,000			400,000		151,000

Net interest income after provision for loan losses		3,321,999		2,878,073			6,215,333		5,511,394

Noninterest income
Gain on sale of loans		2,544,599		2,595,003			4,509,071		4,283,437
Service charges and fees		89,219		93,961			175,176		193,118
Loss on sale and impairments of other real estate		-		(93,012	)		-		(93,012	)
Bank owned life insurance income		43,363		43,289			86,176		86,313
Other		16,806		23,760			23,597		76,911
Total noninterest income		2,693,987		2,663,001			4,794,020		4,546,767

Noninterest expense
Salaries and benefits		3,550,403		3,248,954			6,849,749		5,830,138
Occupancy		486,860		453,115			910,618		904,644
Data processing fees		584,342		607,221			1,191,365		965,911
FDIC and other insurance expense		32,696		25,800			89,307		97,200
Professional fees		303,560		337,281			681,430		740,232
Advertising		101,474		62,813			243,355		115,202
Net other real estate expenses		-		548			80		3,304
Other		468,797		319,692			899,017		895,024
Total noninterest expense		5,528,132		5,055,424			10,864,921		9,551,655

Income before income taxes		487,854		485,650			144,432		506,506
Provision for income taxes		149,756		-			4,084		15,000

NET INCOME		338,098		485,650			140,348		491,506

Other comprehensive income
Unrealized gain on available-for-sale securities		35,590		80,414			44,102		306,097

COMPREHENSIVE INCOME	$	373,688	$	566,064		$	184,450	$	797,603

Income per common share:
Basic	$	0.10	$	0.14		$	0.04	$	0.14
Diluted	$	0.10	$	0.14		$	0.04	$	0.14

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

Page 4 of 38

BANCORP 34, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

							Accumulated
							Other
			Additional				Comprehensive						Unearned			Total
	Common		Paid-In		Retained		Income			Treasury			ESOP			Stockholders'
	Stock		Capital		Earnings		(Loss)			Stock			Shares			Equity

BALANCE, DECEMBER 31, 2015	$	168,513	$	9,713,894	$	20,404,880	$	(216,047	)	$	(139,332	)	$	(288,184	)	$	29,643,724

Net income		-		-		491,506		-			-			-			491,506
Change in unrealized value of available-for-sale securities		-		-		-		306,097			-			-			306,097
Amortization of ESOP award		-		5,401		-		-			-			25,487			30,888
Other		-		-		-		-			-			-			-

BALANCE, JUNE 30, 2016	$	168,513	$	9,719,295	$	20,896,386	$	90,050		$	(139,332	)	$	(262,697	)	$	30,472,215

BALANCE, DECEMBER 31, 2016	$	34,382	$	27,161,856	$	25,700,007	$	(363,437	)	$	-		$	(1,756,231	)	$	50,776,577

Net income		-		-		140,348		-			-			-			140,348
Change in unrealized value of available-for-sale securities		-		-		-		44,102			-			-			44,102
Amortization of ESOP award		-		9,600		-		-			-			27,930			37,530
BALANCE, JUNE 30, 2017	$	34,382	$	27,171,456	$	25,840,355	$	(319,335	)	$	-		$	(1,728,301	)	$	50,998,557

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

Page 5 of 38

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities
Net income	$	140,348		$	491,506
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		325,872			305,518
Stock dividend on financial institution stock		(22,400	)		(8,314	)
Loss on sale and impairments of other real estate		-			93,012
Amortization of premiums and discounts on securities, net		217,505			250,588
ESOP expense		37,530			30,888
Amortization of core deposit intangible		33,600			43,086
Gain on sale of loans		(4,509,071	)		(4,283,437	)
Proceeds from sale of loans held for sale		122,584,202			113,641,280
Funding of loans held for sale		(112,663,013	)		(120,908,892	)
Provision for loan losses		400,000			151,000
Net increase in bank-owned life insurance		(60,979	)		(62,672	)
Deferred income tax expense		136,544			-
Changes in operating assets and liabilities:
Accrued interest receivable		20,849			(2,737	)
Prepaid and other assets		(98,167	)		(632,882	)
Accrued interest and other liabilities		129,578			244,429
Net cash used for operating activities		6,672,398			(10,647,627	)

Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities		3,032,673			2,872,704
Purchases of available-for-sale securities		-			(8,456,771	)
Net change in loans held for investment		(23,350,057	)		(11,709,988	)
Purchases of premises and equipment		(265,554	)		(206,826	)
(Purchase) Redemption of stock in financial institutions		-			(43,800	)
Net proceeds from sales of other real estate		-			212,988
Net cash used for investing activities		(20,582,938	)		(17,331,693	)

Cash flows from financing activities
Net change in deposits		4,599,324			688,789
Net change in escrows		1,914			86,469
Net change in Federal Home Loan Bank advances		5,000,000			14,000,000
Net cash provided by financing activities		9,601,238			14,775,258

Net (decrease) increase in cash and cash equivalents		(4,309,302	)		(13,204,062	)

Cash and cash equivalents, beginning of period		16,411,344			19,824,864

Cash and cash equivalents, end of period	$	12,102,042		$	6,620,802

Supplemental disclosures:
Interest on deposits and advances paid	$	1,005,142		$	758,253
Income taxes paid	$	74,089		$	15,000
Noncash investing and financing activities:
Transfers of loans to other real estate	$	-		$	195,558

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

Page 6 of 38

BANCORP 34, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

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

Bancorp 34, Inc. (“Bancorp 34” or the “Company”) is a Maryland corporation organized in 2016 to be the successor to Alamogordo Financial Corp (“AFC”), a savings and loan holding company, upon completion of the second-step conversion of Bank 34 (the “Bank”) from the two-tier mutual holding company structure to the stock holding company structure. AF Mutual Holding Company (the “MHC”) was the former mutual holding company for AFC prior to completion of the second-step conversion. In conjunction with the second-step conversion, both the MHC and AFC ceased to exist. The second-step conversion was completed on October 11, 2016 at which time Bancorp 34 sold 1,879,484 shares of its common stock (including 150,358 shares purchased by the Bank’s employee stock ownership plan) at $10.00 per share for gross proceeds of approximately $18.8 million. Expenses related to the stock offering totaled $1.3 million and were netted against proceeds. As part of the second-step conversion, each of the outstanding shares of common stock of AFC held by persons other than the MHC were converted into 2.0473 shares of Bancorp 34 common stock with cash paid in lieu of fractional shares. As a result, a total of 1,558,706 shares were issued to persons previously owning AFC shares in the second-step conversion. After the conversion and stock offering 3,438,190 shares of Bancorp 34 common stock were outstanding.

Because the conversion occurred on October 11, 2016, the financial information included in this report for all periods prior to that date is that of AFC and all share and per share information prior to that date has been revised to reflect the 2.0473-to-1 exchange ratio. The historical financial results of the MHC are immaterial to the results of the Company and therefore its net assets have been reflected as an increase in stockholders’ equity at Bancorp 34 in the fourth quarter of 2016. As a result of the conversion, Bancorp 34 now owns 100% of the Bank.

The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico, and Scottsdale and Peoria, Arizona. The Bank also operates nine loan production offices in El Paso, Texas, Phoenix and Tubac, Arizona, Albuquerque, New Mexico, Lynnwood and Puyallup, Washington, and Medford and Portland, Oregon. The loan production offices in Lynnwood and Puyallup, Washington, Medford, Oregon, and Tubac, Arizona were opened in 2016 and Portland, Oregon was opened in 2017.

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

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

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

Basis of Presentation – The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (GAAP). In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations at the dates and for the periods presented. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results of operations for the full fiscal year or for any other period. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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.

Page 7 of 38

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

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

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

Subsequent Events – Subsequent events have been evaluated through the date the consolidated financial statements were issued.

Summary of Recent Accounting Pronouncements:

Leases – In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

Share-Based Payments – In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies certain aspects of accounting for share-based payment transactions, including transactions in which an employee uses shares to satisfy the employer’s minimum statutory income tax withholding obligation, forfeitures and income taxes when awards vest or are settled. The guidance also requires that tax benefits from employee share-based transactions be run directly through the income statement when realized as adjustments to tax expense or benefit. Therefore, diluted earnings per share computations no longer include an adjustment for estimated tax benefits. This guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU No. 2016-09 beginning as of January 1, 2017 and the adoption did not have a material impact on the Company’s financial statements.

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

Page 8 of 38

NOTE 2 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at June 30, 2017 and December 31, 2016. The carrying amount of such securities and their approximate fair values were as follows:

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
June 30, 2017
Available-for-sale securities
Mortgage-backed securities	$	24,637,634	$	25,350	$	(353,590	)	$	24,309,394
U.S. Government agencies		2,249,132		3,319		(56,429	)		2,196,022
Municipal obligations		1,814,071		1,597		(1,329	)		1,814,339

Total	$	28,700,837	$	30,266	$	(411,348	)	$	28,319,755

December 31, 2016
Available-for-sale securities
Mortgage-backed securities	$	27,524,834	$	45,866	$	(442,303	)	$	27,128,397
U.S. Government agencies		2,588,843		-		(63,107	)		2,525,736
Municipal obligations		1,837,337		7,823		(161	)		1,844,999

Total	$	31,951,014	$	53,689	$	(505,571	)	$	31,499,132

There were no sales of available-for-sale securities during the six months ended June 30, 2017 or 2016.

Amortized cost and fair value of securities by contractual maturity as of June 30, 2017 are shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the actual contractual maturities of underlying collateral. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

The scheduled maturities of available-for-sale securities at June 30, 2017 were as follows:

	June 30, 2017
	Amortized		Fair
	Cost		Value

Due in one year or less	$	376,655	$	377,300
Due after one to five years		26,480,763		26,107,602
Due after five to ten years		1,843,419		1,834,853
Due after ten years		-		-

Total	$	28,700,837	$	28,319,755

At June 30, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

At June 30, 2017 and December 31, 2016, mortgage-backed securities included collateralized mortgage obligations of $9.0 million and $9.5 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.

Page 9 of 38

	June 30, 2017
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
Description of			Unrealized					Unrealized					Unrealized
Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses

Available-for-sale securities:
Mortgage-backed securities	$	13,742,625	$	(193,733	)	$	7,675,428	$	(159,857	)	$	21,418,053	$	(353,590	)
U.S. Government agencies		1,713,007		(56,429	)		-		-			1,713,007		(56,429	)
Municipal obligations		1,011,087		(1,329	)		-		-			1,011,087		(1,329	)

Total temporarily impaired securities	$	16,466,719	$	(251,491	)	$	7,675,428	$	(159,857	)	$	24,142,147	$	(411,348	)

	December 31, 2016
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
Description of			Unrealized					Unrealized					Unrealized
Securities	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses

Available-for-sale securities:
Mortgage-backed securities	$	17,377,335	$	(337,092	)	$	5,351,384	$	(105,211	)	$	22,728,719	$	(442,303	)
U.S. Government agencies		2,525,737		(63,107	)		-		-			2,525,737		(63,107	)
Municipal obligations		20,054		(161	)		-		-			20,054		(161	)

Total temporarily impaired securities	$	19,923,126	$	(400,360	)	$	5,351,384	$	(105,211	)	$	25,274,510	$	(505,571	)

At June 30, 2017, all of the government agency 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 did not consider these securities to be other-than-temporarily impaired at June 30, 2017 or December 31, 2016.

Loans and securities carried at approximately $136.9 million at June 30, 2017 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities carried at approximately $4.9 million at June 30, 2017 were pledged to secure public deposits.

Page 10 of 38

NOTE 3 – LOANS HELD FOR INVESTMENT, NET

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

	June 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent

Loans held for investment, net:
Commercial real estate	$	219,771,635			82.7	%	$	195,814,205			80.0	%
One- to four-family residential real estate		29,352,468			11.0	%		29,976,625			12.2	%
Commercial and industrial		11,628,480			4.4	%		9,876,020			4.0	%
Consumer and other		5,017,936			1.9	%		9,191,249			3.8	%
Total gross loans		265,770,519			100.0	%		244,858,099			100.0	%
Unamortized loan fees		(1,063,783	)					(952,717	)
Loans held for investment		264,706,736						243,905,382
Allowance for loan losses		(2,919,733	)					(2,506,033	)
Loans held for investment, net	$	261,787,003					$	241,399,349

At June 30, 2017 and December 31, 2016 commercial real estate loans include construction loans of $13.2 million and $7.9 million, respectively.

Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses and recorded investment in loans as of June 30, 2017 and December 31, 2016:

	As of June 30, 2017
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Allowance for loan losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment		1,884,249		599,595		408,868		27,021		2,919,733

Total	$	1,884,249	$	599,595	$	408,868	$	27,021	$	2,919,733

Gross loans
Ending balance: individually evaluated for impairment	$	6,817,669	$	1,630,232	$	2,099,837	$	183,067	$	10,730,805
Ending balance: collectively evaluated for impairment		212,953,966		27,722,236		9,528,643		4,834,869		255,039,714
Ending balance: loans acquired with deteriorated credit quality		-		-		-		-		-
Total	$	219,771,635	$	29,352,468	$	11,628,480	$	5,017,936	$	265,770,519

Page 11 of 38

	As of December 31, 2016
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Allowance for loan losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment		1,688,448		617,912		147,371		52,302		2,506,033

Total	$	1,688,448	$	617,912	$	147,371	$	52,302	$	2,506,033

Gross loans
Ending balance: individually evaluated for impairment	$	3,441,874	$	1,744,062	$	801,078	$	194,068	$	6,181,082
Ending balance: collectively evaluated for impairment		192,372,331		28,232,563		9,074,942		8,997,181		238,677,017
Ending balance: loans acquired with deteriorated credit quality		-		-		-		-		-
Total	$	195,814,205	$	29,976,625	$	9,876,020	$	9,191,249	$	244,858,099

The following is a summary of activities for the allowance for loan losses for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016

Beginning balance	$	2,763,483	$	2,052,365	$	2,506,033	$	1,894,196

Provision for loan losses		150,000		99,000		400,000		151,000

Charge-offs:
Commercial real estate		-		-		-		-
One- to four-family residential real estate		-		-		-		(10,756	)
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
Total charge-offs		-		-		-		(10,756	)

Recoveries:
Commercial real estate		-		-		1,200		116,125
One- to four-family residential real estate		6,250		1,200		12,500		2,000
Commercial and industrial		-		-				-
Consumer and other		-		-				-
Total recoveries		6,250		1,200		13,700		118,125
Net recoveries		6,250		1,200		13,700		107,369

Ending balance	$	2,919,733	$	2,152,565	$	2,919,733	$	2,152,565

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of June 30, 2017 and December 31, 2016. 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.

Page 12 of 38

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables

June 30, 2017
Commercial real estate	$	-	$	-	$	3,680,700	$	3,680,700	$	216,090,935	$	219,771,635
One- to four-family residential real estate		-		271,485		414,766		686,251		28,666,217		29,352,468
Commercial and industrial		-		-		1,568,907		1,568,907		10,059,573		11,628,480
Consumer and other		-		-				-		5,017,936		5,017,936

Totals	$	-	$	271,485	$	5,664,373	$	5,935,858	$	259,834,661	$	265,770,519

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables

December 31, 2016
Commercial real estate	$	550,000	$	-	$	-	$	550,000	$	195,264,205	$	195,814,205
One- to four-family residential real estate		108,080		501,316		68,906		678,302		29,298,323		29,976,625
Commercial and industrial		1,139,634		-		461,021		1,600,655		8,275,365		9,876,020
Consumer and other		-		-		-		-		9,191,249		9,191,249

Totals	$	1,797,714	$	501,316	$	529,927	$	2,828,957	$	242,029,142	$	244,858,099

The following table sets forth nonperforming assets at June 30, 2017 and December 31, 2016:

	June 30,			December 31,
	2017			2016

Nonaccrual loans
Commercial real estate	$	3,680,700		$	3,718,686
One- to four-family residential real estate		618,138			648,880
Commercial and industrial		1,568,907			1,600,655
Consumer and other		-			-
Total nonaccrual loans		5,867,745			5,968,221

Other real estate (ORE)		-			-

Total nonperforming assets	$	5,867,745		$	5,968,221

Nonperforming assets to gross loans held for investment and ORE		2.21	%		2.44	%
Nonperforming assets to total assets		1.73	%		1.81	%

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at June 30, 2017 and December 31, 2016. 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.

Page 13 of 38

	As of June 30, 2017
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	212,953,966	$	27,722,236	$	9,528,643	$	4,834,869	$	255,039,714
Special mention		916,262		-		234,533		-		1,150,795
Substandard		5,351,407		1,630,232		1,571,106		183,067		8,735,812
Doubtful		550,000		-		294,198		-		844,198
Loss		-		-		-		-		-

Totals	$	219,771,635	$	29,352,468	$	11,628,480	$	5,017,936	$	265,770,519

	As of December 31, 2016
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	187,069,284	$	28,232,563	$	7,697,960	$	8,997,181	$	231,996,988
Special mention		523,207		65,457		267,327		-		855,991
Substandard		8,221,714		1,678,605		1,614,733		194,068		11,709,120
Doubtful		-		-		296,000		-		296,000
Loss		-		-		-		-		-

Totals	$	195,814,205	$	29,976,625	$	9,876,020	$	9,191,249	$	244,858,099

The Bank’s internally assigned grades are as follows:

Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

Doubtful – All the weakness inherent in one classified as substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

Impaired Loans – The following table includes 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.

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	As of June 30, 2017
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	3,680,700	$	3,680,700	$	-	$	3,723,960
One- to four-family residential real estate		618,138		618,138		-		623,907
Commercial and industrial		1,568,907		1,568,907		-		1,594,869
Consumer and other		-		-		-		-

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	3,680,700	$	3,680,700	$	-	$	3,723,960
One- to four-family residential real estate		618,138		618,138		-		623,907
Commercial and industrial		1,568,907		1,568,907		-		1,594,869
Consumer and other		-		-		-		-

	As of December 31, 2016
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	3,718,686	$	3,718,686	$	-	$	1,385,277
One- to four-family residential real estate		648,880		648,880		-		656,495
Commercial and industrial		1,600,655		1,600,655		-		1,075,536
Consumer and other		-		-		-		-

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	3,718,686	$	3,718,686	$	-	$	1,385,277
One- to four-family residential real estate		648,880		648,880		-		656,495
Commercial and industrial		1,600,655		1,600,655		-		1,075,536
Consumer and other		-		-		-		-

During the six months ended June 30, 2017 and 2016, no interest income was recognized on these loans as interest collected was credited to loan principal.

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 June 30, 2017 and December 31, 2016.

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 consecutive 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.

Page 15 of 38

There were no troubled debt restructurings as of June 30, 2017 or December 31, 2016.

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.

NOTE 4 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business, the Bank has outstanding commitments to extend credit and may have standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for instruments that are included in the consolidated balance sheets.

Financial instruments whose contract amounts represent off-balance-sheet credit risk are as follows as of June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016

Commitments to originate and sell mortgage loans	$	39,800,871	$	27,206,868
Commitments to extend credit		29,217,244		27,430,757
Unused lines of credit		17,181,688		8,662,628

Totals	$	86,199,803	$	63,300,253

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. There were no standby letters of credit at June 30, 2017 and December 31, 2016.

NOTE 5 – 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.

Page 16 of 38

The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establish the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) set forth the acceptable scope of deductions/adjustments to the specified capital measures. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions fully phased in on January 1, 2019.

Additionally, the Basel III Capital Rules require that we maintain a capital conservation buffer with respect to each of the CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2017 is 1.25% and was 0.625% during 2016. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets. Management believes, as of June 30, 2017 and December 31, 2016, the Bank meets all capital adequacy requirements to which it is subject.

Banks are also subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval.

As of June 30, 2017, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank has to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events that management believes have changed the Bank’s prompt corrective action category.

Page 17 of 38

The Bank’s actual and required capital amounts and ratios are as follows:

											To be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of June 30, 2017:
(Dollars in thousands)

Total Capital
(to Risk-Weighted Assets)	$	42,990		16.95	%	$	20,285		≥8.00	%	$	25,356		≥10.00	%

Tier I Capital
(to Risk-Weighted Assets)	$	39,935		15.75	%	$	15,214		≥6.00	%	$	20,285		≥8.00	%

Common Equity Tier 1 Capital
(to Risk-Weighted Assets)	$	39,935		15.75	%	$	11,410		≥4.50	%	$	16,482		≥6.50	%

Tier I Capital
(to Average Assets)	$	39,935		11.96	%	$	13,361		≥4.00	%	$	16,701		≥5.00	%

As of December 31, 2016:
(Dollars in thousands)

Total Capital
(to Risk-Weighted Assets)	$	42,265		18.14	%	$	18,644		≥8.00	%	$	23,305		≥10.00	%

Tier I Capital
(to Risk-Weighted Assets)	$	39,681		17.03	%	$	13,983		≥6.00	%	$	18,644		≥8.00	%

Common Equity Tier 1 Capital
(to Risk-Weighted Assets)	$	39,681		17.03	%	$	10,487		≥4.50	%	$	15,148		≥6.50	%

Tier I Capital
(to Average Assets)	$	39,681		11.91	%	$	13,331		≥4.00	%	$	16,664		≥5.00	%

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2017 and December 31, 2016.

Page 18 of 38

Available-for-sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly-liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.

Loans Held for Sale – The fair value of loans held for sale is based on quoted market prices from Freddie Mac. Freddie Mac quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Other Real Estate – Other real estate is fair valued under Level 3 based on property appraisals less estimated disposition costs, which include both observable and unobservable inputs, at the time of transfer and as appropriate thereafter.

Loans Held for Investment – Loans held for investment are generally not recorded at fair value on a recurring basis. Periodically, the Bank records nonrecurring adjustments to the carrying value of these loans based on fair value measurements for loans subject to impairment. The fair value of impaired loans is typically determined using a combination of observable inputs, such as interest rates, contract terms, appraisals of collateral supporting the loan and recent comparable sales of similar properties, and unobservable inputs such as creditworthiness, disposition costs and underlying cash flows associated with the loan. Since the estimates of fair value utilized for loans also involve unobservable inputs, valuations of impaired loans have been classified as Level 3.

Page 19 of 38

The following table sets forth by level, within the fair value hierarchy, the Company’s assets at fair value:

	Fair Value Measurements Using
	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Fair Value

June 30, 2017
Recurring basis
Mortgage-backed securities	$	-	$	24,309,394	$	-	$	24,309,394
U.S. Government agencies		-		2,196,022		-		2,196,022
Municipal obligations		-		1,814,339		-		1,814,339
Nonrecurring basis
Loans held for sale		-		11,371,448		-		11,371,448
Impaired loans		-		-		5,867,745		5,867,745

Totals	$	-	$	39,691,203	$	5,867,745	$	45,558,948

December 31, 2016
Recurring basis
Mortgage-backed securities	$	-	$	27,128,396	$	-	$	27,128,396
U.S. Government agencies		-		2,525,737		-		2,525,737
Municipal obligations		-		1,844,999		-		1,844,999
Nonrecurring basis
Loans held for sale		-		14,221,163		-		14,221,163
Impaired loans		-		-		5,968,221		5,968,221

Totals	$	-	$	45,720,295	$	5,968,221	$	51,688,516

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.

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The following table presents estimated fair values of the Company’s financial instruments at June 30, 2017 and December 31, 2016.

					Quoted Prices		Significant
					in Active		Other		Significant
					Markets for		Observable		Unobservable
	Carrying				Identical Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
At June 30, 2017
Financial assets:
Cash and due from banks	$	4,327	$	4,327	$	4,327	$	-	$	-
Interest-bearing deposits with banks		7,775		7,775		7,775		-		-
Available-for-sale securities		28,320		28,320		-		28,320		-
Loans held for sale		11,371		11,371		-		11,371		-
Loans held for investment, net		261,787		262,071		-		-		262,071
Stock in financial institutions		3,597		3,597		-		3,597		-

Financial liabilities:
Demand deposits, savings and NOW deposits		165,113		158,829		158,829		-		-
Time deposits		64,009		64,052		-		64,052		-
Federal Home Loan Bank advances		55,000		55,056		-		55,056		-

At December 31, 2016
Financial assets:
Cash and due from banks	$	4,766	$	4,766	$	4,766	$	-	$	-
Interest-bearing deposits with banks		11,645		11,645		11,645		-		-
Available-for-sale securities		31,499		31,499		-		31,499		-
Loans held for sale		14,221		14,221		-		14,221		-
Loans held for investment, net		241,399		241,440		-		-		241,440
Stock in financial institutions		3,575		3,575		-		3,575		-

Financial liabilities:
Demand deposits, savings and NOW deposits		160,961		156,529		156,529		-		-
Time deposits		63,561		63,588		-		63,588		-
Federal Home Loan Bank advances		50,000		50,176		-		50,176		-

The following methods and assumptions were used to estimate the fair value of the additional classes of financial instruments shown:

Cash and Due from Banks, Interest-Bearing Deposits with Banks and Stock in Financial Institutions – The carrying amount approximates fair value.

Deposits and FHLB Advances – Deposits include demand deposits, savings accounts, NOW accounts and money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits and FHLB advances is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits and advances of similar remaining maturities.

Page 21 of 38

NOTE 7 – EARNINGS PER SHARE

Earnings Per Share – Basic earnings per share have been calculated based upon the weighted-average number of common shares outstanding. For earning per share computations, unallocated ESOP shares are treated like treasury shares and not considered outstanding. The calculation of diluted weighted-average shares outstanding for the three and six months ended June 30, 2017 and 2016 exclude 34,188 and 36,892 shares issuable pursuant to outstanding stock options because their effect would be anti-dilutive, respectively.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016

Net income	$	338,098	$	485,650	$	140,348	$	491,506

Weighted-average shares outstanding:
Basic		3,256,303		3,402,828		3,256,303		3,402,828
Diluted		3,265,521		3,406,468		3,265,032		3,403,904

Earnings per share:
Basic	$	0.10	$	0.14	$	0.04	$	0.14
Diluted	$	0.10	$	0.14	$	0.04	$	0.14

Shares outstanding and basic and diluted income per common share in the above discussion and table for all periods prior to October 2016 have been restated at the second step-conversion exchange rate of 2.0473 to one.

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

Management’s discussion and analysis of financial condition at June 30, 2017 and December 31, 2016 and results of operations for the three and six months ended June 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions. Because of these and other uncertainties, Bancorp 34’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. Bancorp 34 is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Bancorp 34 qualifies all of its forward-looking statements by these cautionary statements.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of investment securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair values of financial instruments.

Allowance for Loan Losses. The allowance for loan losses is calculated with the objective of maintaining an allowance necessary to absorb credit losses inherent in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the probable losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

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The allowance for loan losses consists primarily of specific allocations and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, including adjustments for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting and payment history. We also analyze delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance. The principal assumption used in calculating the allowance for loan losses is the estimate of loss for each risk rating. Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.

Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).

Valuation of Deferred Tax Assets. In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income. In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies. We also utilize a monthly forecasting tool to incorporate activity throughout the calendar year. These assumptions require us to make judgments about our future taxable income that are consistent with the plans and estimates we use to manage our business.

Fair Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A three-level of fair value hierarchy prioritizes the inputs used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities; includes certain U.S. Treasury and other U.S. Government agency debt that is highly liquid and actively traded in over-the-counter markets.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Average Balance Sheets

The following tables set forth average balances, yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

	Three Months Ended June 30,
	2017							2016
	Average							Average
	Outstanding				Yield/			Outstanding				Yield/
	Balance		Interest		Rate (1)			Balance		Interest		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	271,059	$	3,814		5.64	%	$	218,396	$	3,218		5.93	%
Interest-earning deposits		11,046		29		1.05	%		7,549		10		0.51	%
Securities		29,495		145		1.97	%		29,432		121		1.66	%
Federal Home Loan Bank stock		3,203		12		1.50	%		1,170		2		0.77	%
Other		383		5		5.24	%		382		5		5.26	%
Total interest-earning assets		315,186		4,005		5.10	%		256,929		3,356		5.25	%
Noninterest-earning assets		21,525							19,485
Total assets	$	336,711						$	276,414

Interest-bearing liabilities:
Checking, money market and savings accounts	$	126,288		250		0.79	%	$	123,517		226		0.74	%
Certificates of deposit		61,550		140		0.91	%		69,054		139		0.81	%
Total deposits		187,838		390		0.83	%		192,571		365		0.76	%
Advances from FHLB of Dallas		56,637		143		1.00	%		11,373		14		0.49	%
Total interest-bearing liabilities		244,475		533		0.87	%		203,944		379		0.75	%
Non-interest bearing deposits		37,784							39,275
Non-interest bearing liabilities		3,027							2,579
Total liabilities		285,286							245,798
Stockholders' equity		51,425							30,616
Total liabilities and stockholders' equity	$	336,711						$	276,414

Net interest income			$	3,472						$	2,977
Net interest rate spread (2)						4.22	%						4.51	%
Net interest-earning assets (3)	$	70,711						$	52,985

Net interest margin (4)						4.42	%						4.66	%
Average interest-earning assets to average interest-bearing liabilities						128.92	%						125.98	%

(1)

Yield/rate for the three-month periods have been annualized.

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(2)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income as a percentage of average total interest-earning assets.

	Six Months Ended June 30,
	2017							2016
	Average							Average
	Outstanding				Yield/			Outstanding				Yield/
	Balance		Interest		Rate (1)			Balance		Interest		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	262,908	$	7,252		5.53	%	$	211,067	$	6,136		5.85	%
Interest-earning deposits		13,593		62		0.91	%		10,487		26		0.49	%
Securities		30,332		275		1.82	%		28,876		242		1.68	%
Federal Home Loan Bank stock		3,197		23		1.44	%		1,169		5		0.84	%
Other		383		16		8.39	%		383		8		4.47	%
Total interest-earning assets		310,413		7,628		4.93	%		251,982		6,417		5.12	%
Noninterest-earning assets		21,906							19,478
Total assets	$	332,319						$	271,460

Interest-bearing liabilities:
Checking, money market and savings accounts	$	125,909		490		0.78	%	$	120,415	$	440		0.73	%
Certificates of deposit		61,792		277		0.90	%		70,840		290		0.82	%
Total deposits		187,701		767		0.82	%		191,255		730		0.77	%
Advances from FHLB of Dallas		52,981		247		0.93	%		10,564		24		0.47	%
Total interest-bearing liabilities		240,682		1,014		0.84	%		201,819		754		0.75	%
Non-interest bearing deposits		37,042							36,690
Non-interest bearing liabilities		3,263							2,551
Total liabilities		280,987							241,060
Stockholders' equity		51,332							30,400
Total liabilities and stockholders' equity	$	332,319						$	271,460

Net interest income			$	6,614						$	5,663
Net interest rate spread (2)						4.08	%						4.37	%
Net interest-earning assets (3)	$	69,731						$	50,163

Net interest margin (4)						4.27	%						4.52	%
Average interest-earning assets to average interest-bearing liabilities						128.97	%						124.86	%

(1)

Yield/rate for the six-month periods have been annualized.

(2)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(3)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents net interest income as a percentage of average total interest-earning assets.

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Comparison of Financial Condition at June 30, 2017 and December 31, 2016

Cash and cash equivalents decreased $4.3 million, or 26.3%, to $12.1 million at June 30, 2017 from $16.4 million at December 31, 2016. The decrease is due to the variability in timing of deposits.

Loans held for investment increased $20.8 million, or 8.5%, to $264.7 million at June 30, 2017 from $243.9 million at December 31, 2016, due to organic growth. The increase was due to an increase in commercial real estate loans, which increased $24.0 million, or 12.2%, to $219.8 million at June 30, 2017 from $195.8 million at December 31, 2016. During the six months ended June 30, 2017, commercial real estate loans increased to 82.7% of the gross loan portfolio from 80.0%, while one- to four-family residential real estate loans decreased to 11.0% of the portfolio from 12.2%. The residential mortgage loan portfolio experienced natural run-off as the Bank continued to focus on the secondary mortgage lending program whereby new loans are originated and sold for fee income as opposed to being held in the portfolio.

Loans held for sale at June 30, 2017 and December 31, 2016 totaled $11.4 million and $14.2 million, respectively, consisting entirely of residential mortgage loans. We currently sell a significant majority of our residential mortgage loans in the secondary market. The balances at any date vary based upon the timing and volume of loan originations and sales.

Available for sale securities decreased $3.2 million, or 10.1%, during the six months ended June 30, 2017, due to normal payments in the portfolio.

Total deposits increased $4.6 million, or 2.0%, to $229.1 million at June 30, 2017 from $224.5 million at December 31, 2016. The increase included a $2.1 million, or 5.7% increase in non-interest bearing demand accounts, $2.1 million or 1.7% increase in savings and NOW deposits, and $448,000 or 0.7% increase in time deposits.

Borrowings, consisting solely of FHLB advances, increased $5.0 million to $55.0 million at June 30, 2017 from $50.0 million at December 31, 2016.

Total stockholders’ equity increased $222,000, or 0.4%, to $51.0 million at June 30, 2017 from $50.8 million at December 31, 2016. The growth was due primarily to net income for the six-month period of $140,000 and an increase in accumulated other comprehensive income resulting from improvement in the fair value of available-for-sale securities.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

General. Net income was $338,000 for the three months ended June 30, 2017 and $148,000, or 30.4%, less than net income of $486,000 for the three months ended June 30, 2016. Pre-tax income was $488,000 for the three months ended June 30, 2017 and $486,000 for the three months ended June 30, 2016. The provision for income taxes for the three months ended June 30, 2017 was $150,000 compared to $0 for the similar period in 2016. In 2016 we carried a 100% valuation reserve against our net deferred tax assets and had net operating loss carryforwards available to offset current tax liabilities.

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Interest Income. Interest income increased $650,000, or 19.4%, to $4.0 million for the three months ended June 30, 2017 from $3.4 million for the three months ended June 30, 2016. The increase was due to a $58.2 million, or 22.7%, increase in average interest-earning assets and an improvement in asset mix as loans, our highest yielding assets, increased to 86.0% of average interest-earning assets from 85.0% of average interest-earning assets. The yield on average interest-earning assets decreased 15 basis points, however, to 5.10% for the three months ended June 30, 2017 from 5.25% for the three months ended June 30, 2016. Interest and fees on loans increased $597,000, or 18.5%, to $3.8 million for the three months ended June 30, 2017, from $3.2 million for the three months ended June 30, 2016. Interest income on loans increased due primarily to a $52.7 million, or 24.1%, increase in average loan balances, due to organic growth, partially offset by a 29 basis point decrease in yield. The average balance of securities increased $63,000, to $29.5 million for the three months ended June 30, 2017, compared to $29.4 million for the three months ended June 30, 2016, and the average yield increased from 1.66% to 1.97% for the three months ended June 30, 2016 and 2017, respectively.

The 15 basis point decrease in yield on interest-earning assets from the three months ended June 30, 2016 to the three months ended June 30, 2017 was primarily due to a 29 basis point decrease in loan yield, which was mostly due to large prepayment penalties boosting loan yields in May and June 2016.

Interest Expense. Interest expense increased $154,000, or 40.6%, to $533,000 for the three months ended June 30, 2017 from $379,000 for the three months ended June 30, 2016. The increase was the result of an increase in interest expense on borrowings, which increased $129,000 to $143,000 for the three months ended June 30, 2017 from $14,000 for the three months ended June 30, 2016. Average interest-bearing deposits for the three months ended June 30, 2017 were $187.8 million, representing a $4.8 million, or 2.5%, decrease compared to average interest-bearing deposits of $192.6 million for the three months ended June 30, 2016. The average rate paid on interest-bearing deposits was 0.83% for the three months ended June 30, 2017 compared to 0.76% for the similar 2016 period.

The $129,000 increase in interest expense on borrowings from the three months ended June 30, 2016 to the three months ended June 30, 2017 was due to a $45.3 million increase in average balances and a 51 basis point increase in average rates paid. Borrowings were primarily being used to fund loans held for sale in the first six months of 2016. Beginning in the third quarter of 2016 we also began to borrow to fund portfolio loan growth. The 51 basis point increase in average rates paid on FHLB borrowings was partially due to gradual Federal Funds target rate increases affecting our short-term borrowings and the addition of two longer term FHLB advances later in 2016. The first Federal Funds rate increase since 2008 was a 25 basis point increase announced in mid-December 2015. Short term borrowing rates continued to gradually increase after that date and two additional 25 basis point Federal Funds target rate increases were announced in March and June 2017. We utilized only short term FHLB advances in 2015 and the first half of 2016, but added $20.0 million consisting of $10.0 million in two and $10.0 million in four-year fixed rate advances averaging 1.11% in the second half of 2016 to lock in those rates in anticipation of further market rate increases.

Interest paid on checking, money market and savings accounts increased $24,000, or 10.6%, to $250,000 for the three months ended June 30, 2017 from $226,000 for the three months ended June 30, 2016. The average rate we paid on such deposit accounts increased five basis points to 0.79% for the three months ended June 30, 2017 from 0.74% for the three months ended June 30, 2016 and the average balance increased $2.8 million, or 2.3%, to $126.3 million for the three months ended June 30, 2017 from $123.5 million for the three months ended June 30, 2016. The average rates we pay on these accounts is considerably higher in the Arizona market.

Interest on time deposits increased $1,000 to $140,000 for the three months ended June 30, 2017 from $139,000 for the three months ended June 30, 2016. The increase in expense was primarily due to a 10 basis point increase in the average rate paid on time deposits to 0.91% for the three months ended June 30, 2017 from 0.81% for the three months ended June 30, 2016, partially offset by the effect of a $7.5 million, or 10.9%, decrease in average balances.

The average balance of time deposits decreased $7.5 million, or 10.9%, to $61.6 million for the three months ended June 30, 2017 from $69.1 million for the three months ended June 30, 2016. The increase in checking, savings and money market deposits and decrease in time deposits is primarily due to maturing certificate of deposit customers preferring not to lock into term deposits, and growth from new and existing Arizona customers.

Net Interest Income. Net interest income increased $495,000, or 16.6%, to $3.5 million for the three months ended June 30, 2017 from $3.0 million for the three months ended June 30, 2016, as a result of an increase in the balance of net interest-earning assets, partially offset by a 29 basis point decrease in net interest rate spread. Our average net interest-earning assets increased by $17.7 million, or 33.5%, to $70.7 million for the three months ended June 30, 2017 from $53.0 million for the three months ended June 30, 2016, due primarily to organic growth. Our net interest rate spread decreased by 29 basis points to 4.22% for the three months ended June 30, 2017 from 4.51% for the three months ended June 30, 2016. Our cost of borrowings increased to 1.00% for the quarter ended June 30, 2017 from 0.49% for the quarter ended June 30, 2016 due to the increase in short-term interest rates following the 25 basis point increases in the target Federal Funds rate in December 2016 and March 2017.

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Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. If the allowance for loan losses is larger than necessary, we post a negative provision as a benefit to earnings. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews.

See “- Allowance for Loan Losses” for additional information.

After an evaluation of these factors, we recorded a provision for loan losses of $150,000 for the three months ended June 30, 2017, compared to $99,000 for the three months ended June 30, 2016. In the three months ended June 30, 2017, the allowance for loan losses grew $156,000, or 5.7%, and gross loans held for investment grew $4.2 million, or 1.6%.

To the best of our knowledge, at June 30, 2017 we have recorded all loan losses that are both probable and reasonable to estimate as of June 30, 2017. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about the recoverability of our loan balances based upon information available to it at the time of its examination.

Noninterest Income. Noninterest income increased $31,000, or 1.2%, and was $2.7 million for each of the three months ended June 30, 2017 and 2016.

Gain on sale of loans decreased $50,000, or 1.9%, to $2.5 million for the three months ended June 30, 2017 from $2.6 million for the three months ended June 30, 2016. During the three months ended June 30, 2017, we sold $63.2 million of mortgage loans for a gain of $2.3 million and $2.3 million of SBA loans for a gain of $226,000, compared to $65.6 million of mortgage loan sales and $1.2 million of SBA loan sales during the three months ended June 30, 2016 for gains of $2.5 million and $95,000, respectively. We realized a 3.7% average premium (gain on sale/sold loans) on the sales of mortgage loans for the three months ended June 30, 2017 and 3.8% for the three months ended June 30, 2016. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and Veterans Administration (VA) loans to conventional loans, geographic markets and market interest rates, specifically 10-year U.S. Treasury rates.

Noninterest Expense. Noninterest expense increased $473,000, or 9.4%, to $5.5 million for the three months ended June 30, 2017 from $5.1 million for the three months ended June 30, 2016 due primarily to an increase in salaries and benefits. The increases were primarily related to the expansion of our mortgage banking operations. Average assets for the quarter ended June 30, 2017 were 21.8% greater than for the quarter ended June 30, 2016.

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Income Tax Expense. Income tax expense was $150,000 and $0 for the quarters ended June 30, 2017 and 2016, respectively. The Company had net operating loss carry-forwards from prior periods which offset income for 2016 so no other income tax expense or income tax benefits were recorded.

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

General. We had net income of $140,000 for the six months ended June 30, 2017, compared to net income of $492,000 for the six months ended June 30, 2016. Results in the first six months of 2017 were negatively affected by lower net profits in the mortgage banking operation as sales gains were lower than the added cost of the expanded operation and the provision for loan losses was $250,000 larger in the six months ended June 30, 2017 than the six months ended June 30, 2016 due to more rapid loan growth.

Interest Income. Interest income increased $1.2 million, or 18.9%, to $7.6 million for the six months ended June 30, 2017 from $6.4 million for the six months ended June 30, 2016. The increase was due to a 23.2% increase in average interest-earning assets partially offset by a 19 basis point decrease in yield. Loans, our highest yielding asset, increased from 83.8% to 84.7% of average interest-earning assets. Interest and fees on loans increased $1.2 million, or 18.2%, to $7.3 million for the six months ended June 30, 2017, from $6.1 million for the six months ended June 30, 2016. Interest income on loans increased due primarily to a 24.6% increase in average loan balances, due to organic growth, partially offset by a 32 basis point decrease in average yield. The average balance of securities increased $1.5 million, or 5.0%, to $30.3 million for the six months ended June 30, 2017, compared to $28.9 million for the six months ended June 30, 2016 and the average yield increased 14 basis points.

The 19 basis point decrease in yield on interest-earning assets from the six months ended June 30, 2016 to the six months ended June 30, 2017 was primarily due to a 32 basis point decrease in loan yield, which was partially due to large prepayment penalties boosting loan yields in May and June 2016 and a gradual decrease in loan yields throughout 2016 due to competitive pressure on rates, and older, higher fixed rate loans being paid off and replaced with lower rate loans.

Interest Expense. Interest expense increased $258,000, or 34.2%, to $1.0 million for the six months ended June 30, 2017 from $754,000 for the six months ended June 30, 2016. The increase was caused by an increase in interest expense on borrowings, which increased $221,000 to $246,000 for the six months ended June 30, 2017 from $25,000 for the six months ended June 30, 2016. Average interest-bearing deposits for the six months ended June 30, 2017 were $187.7 million, representing a $3.6 million, or 1.9%, decrease compared to average interest-bearing deposits of $191.3 million for the six months ended June 30, 2016. The average rate paid on interest-bearing deposits was 0.82% for the six months ended June 30, 2017 compared to 0.77% for the 2016 period.

The $221,000 increase in interest expense on borrowings from the six months ended June 30, 2016 to the six months ended June 30, 2017 was due to a $42.4 million increase in average balances and a 46 basis point increase in average rates paid. Borrowings were primarily being used to fund loans held for sale in the first six months of 2016. Beginning in the third quarter of 2016 we also began to borrow to fund portfolio loan growth. The 46 basis point increase in average rates paid on FHLB borrowings was partially due to gradual Federal Funds target rate increases affecting our short term borrowings and the addition of two longer term FHLB advances later in 2016. Short term borrowing rates have continued to gradually increase after that date. We utilized only short term FHLB advances in 2015 and the first half of 2016, but added $20.0 million consisting of $10.0 million in two and $10.0 million in four-year fixed rate advances averaging 1.11% in the second half of 2016 to lock in those rates in anticipation of further market rate increases.

Interest paid on checking, money market and savings accounts increased $50,000, or 11.4%, to $490,000 for the six months ended June 30, 2017 from $440,000 for the six months ended June 30, 2016. The average rate we paid on such deposit accounts increased five basis points to 0.78% for the six months ended June 30, 2017 from 0.73% for the six months ended June 30, 2016 and the average balance increased $5.5 million, or 4.6%, to $125.9 million for the six months ended June 30, 2017 from $120.4 million for the six months ended June 30, 2016. The increase in checking, savings and money market deposits is primarily due to maturing certificate of deposit customers preferring not to lock into term deposits, and growth from new and existing Arizona customers. The average rates we pay on these accounts is considerably higher in the Arizona market.

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Net Interest Income. Net interest income increased $953,000, or 16.8%, to $6.6 million for the six months ended June 30, 2017 from $5.7 million for the six months ended June 30, 2016, as a result of a higher balance of net interest-earning assets and a higher net interest rate spread. Our average net interest-earning assets increased by $19.6 million, or 39.0%, to $69.7 million for the six months ended June 30, 2017 from $50.2 million for the six months ended June 30, 2016 due primarily to organic growth. Our net interest rate spread declined by 29 basis points to 4.08% for the six months ended June 30, 2017 from 4.37% for the six months ended June 30, 2016. We carried 84.7% of our average interest-earning assets in loans, our highest yielding asset, for the six months ended June 30, 2017 compared to 83.8% in loans for the comparable period in 2016. This repositioning of our asset portfolio was achieved principally through organic loan growth. Our cost of borrowings increased to 0.93% for the six months ended June 30, 2017 from 0.47% for the six months ended June 30, 2016 due to the increase in short term interest rates following the 25 basis point increase in the target Federal Funds rate in December 2016 and March 2017.

Provision for Loan Losses. We recorded a provision for loan losses of $400,000 for the six months ended June 30, 2017, compared to $151,000 for the six months ended June 30, 2016. In addition, $14,000 in recoveries of previously charged-off balances were received during the six months ended June 30, 2017 compared to $118,000 in the six months ended June 30, 2016. In the six months ended June 30, 2017, the allowance for loan losses increased $414,000, or 16.5%, and gross loans held for investment grew $20.8 million, or 8.5%.

Noninterest Income. Noninterest income increased $247,000, or 5.4%, to $4.8 million for the six months ended June 30, 2017 from $4.5 million for the six months ended June 30, 2016 primarily due to a higher volume of loan sales and related gains, and a decrease in loss on sale and impairments of other real estate.

Gain on sale of loans increased $226,000, or 5.3%, to $4.5 million for the six months ended June 30, 2017 from $4.3 million for the six months ended June 30, 2016 as the Company has continued to expand its secondary mortgage loan operation. During the six months ended June 30, 2017, we sold $115.5 million of mortgage loans for a gain of $4.3 million and $2.4 million of SBA loans for a gain of $242,000, compared to $107.1 million of mortgage loan sales and $2.2 million of SBA loan sales during the six months ended June 30, 2016 for gains of $4.1 million and $194,000, respectively. The average premium (gain on sale/sold loans) for 2017 was 3.7% compared to 3.8% for 2016. Premiums vary from period to period based upon the mix of government FHA and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.

We incurred no gain or loss on sale of other real estate in the six months ended June 30, 2017 compared to a $93,000 loss on sale of other real estate in the six months ended June 30, 2016.

Noninterest Expense. Noninterest expense increased $1.3 million, or 13.7%, to $10.9 million for the six months ended June 30, 2017 from $9.6 million for the six months ended June 30, 2016 due primarily to higher salaries and benefits and data processing fees, partially offset by lower professional fees. The increase in salaries and benefits expense resulted primarily from the expansion of our mortgage banking program. Average assets for the six months ended June 30, 2017 were 22.4% larger than the six months ended June 30, 2016.

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Asset Quality

We review loans on a regular basis, and place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six consecutive months of payment performance before the loan is eligible to return to accrual status.

Non-Performing Loans and Non-Performing Assets. The following table sets forth information regarding our non-performing assets. As of June 30, 2017 and December 31, 2016, we had no troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates materially less than current market rates.

	At June 30,			At December 31,
	2017			2016
	(Dollars in thousands)
Nonaccrual loans
Real estate loans:
One- to four-family residential real estate	$	618		$	649
Commercial real estate		3,681			3,719
Commercial and industrial loans		1,569			1,600
Consumer and other loans		-			-
Total nonaccrual loans		5,868			5,968
Other real estate (ORE)		-			-
Total nonperforming assets	$	5,868		$	5,968

Ratios:
Nonperforming loans to gross loans held for investment		2.21	%		2.44	%
Nonperforming assets to total assets		1.73	%		1.81	%
Nonperforming assets to gross loans held for investment and ORE		2.21	%		2.44	%

The nonperforming asset ratios decreased due to the $100,000 decrease in nonperforming loans along with increases of 8.5% in gross loans held for investment and 3.0% in total assets.

Interest income that would have been recorded for the six months ended June 30, 2017, had nonaccruing loans been current according to their original terms amounted to $166,000. We recognized no interest income on these nonaccrual loans for the six months ended June 30, 2017.

At June 30, 2017, we had no loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with existing loan repayment terms and that could result in disclosure as non-accrual, 90 days past due or troubled debt restructurings.

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

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

	Six Months Ended June 30,
	2017			2016
	(Dollars in thousands)

Balance at beginning of period	$	2,506		$	1,894
Provision for loan losses		400			151
Charge-offs:
One- to four-family residential real estate loans		-			(11	)
Commercial real estate loans		-			-
Commercial and industrial loans		-			-
Consumer and other loans		-			-
Total charge-offs		-			(11	)
Recoveries:
One- to four-family residential real estate loans		13			2
Commercial real estate loans		1			116
Commercial and industrial loans		-			-
Consumer and other loans		-			-
Total recoveries		14			118
Net recoveries		14			107

Balance at end of period	$	2,920		$	2,152

ALLL to nonperforming loans		49.76	%		160.37	%
ALLL to total gross loans		1.10	%		1.05	%
ALLL to total gross loans less acquired loans		1.23	%		1.32	%
Net (charge-offs) recoveries to average loans outstanding during the period		0.01	%		0.10	%

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The allowance for loan losses to nonperforming loans ratio decreased due to the 337.2% increase in nonperforming loans from June 2016 to June 2017 compared to the 35.6% increase in the allowance for loan losses. The allowance for loan losses to total gross loans ratio increased due to a 30.2% increase in total gross loans compared to the 35.6% increase in the allowance for loan losses.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, FHLB borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.

We believe that we have enough sources of liquidity to satisfy our short-term liquidity needs as of June 30, 2017.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2017, cash and cash equivalents totaled $12.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $28.3 million at June 30, 2017. In addition, at June 30, 2017, we had the ability to borrow an additional $81.6 million from the FHLB of Dallas. On that date, we had $55.0 million of advances outstanding. The Bank also had two lines of credit available with other financial institutions of $6.0 million and 2.0 million, respectively.

At June 30, 2017, we had $29.2 million in portfolio loan commitments outstanding, and an additional $39.8 million in commitments to originate and sell mortgage loans. In addition, we had $17.2 million in unused lines of credit and no commitments issued under standby letters of credit. Time deposits due within one year as of June 30, 2017 totaled $37.6 million, or 16.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and FHLB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before June 30, 2018. We believe, however, based on past experience that a significant portion of our time deposits will remain with us, either as time deposits or as other deposit products. We have the ability to attract and retain deposits by adjusting the interest rates offered.

We have no material commitments or demands that are likely to affect our liquidity other than set forth above. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB of Dallas or the other financial institutions, or increase our deposits by offering higher interest rates.

Our primary investing activities are the origination of loans and the purchase of securities. During the six months ended June 30, 2017, we originated $51.1 million of loans held for investment and $112.7 million of mortgage loans held for sale, compared to $41.5 million of loans held for investment and $120.9 million of mortgage loans held for sale during the six months ended June 30, 2016. In the six months ended June 30, 2017 and 2016, we purchased $0 and $8.5 million of securities, respectively. We have not purchased any whole loans in recent periods.

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Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced net increases of $4.6 million and $689,000 in total deposits for the six months ended June 30, 2017 and 2016, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits so that we are competitive in our market area.

FHLB advances increased $5.0 million and $14.0 million for the six months ended June 30, 2017 and 2016, respectively. In 2017 we have been funding our loans held for sale with short term FHLB borrowings. At June 30, 2017 loans held for sale were $11.4 million and FHLB borrowings were $55.0 million. During the six months ended June 30, 2016, we were able to utilize proceeds from FHLB advances and excess liquid funds held at December 31, 2015 to fund new loan originations and the purchase of $9.7 million in available-for-sale securities.

Bancorp 34, Inc. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to stockholders, to repurchase its common stock, and for other corporate purposes. Bancorp 34, Inc’s primary source of liquidity is dividend payments it may receive from the Bank. At June 30, 2017, Bancorp 34, Inc. (on an unconsolidated basis) had liquid assets of $6.9 million held in deposit accounts at Bank 34.

The net proceeds from the “second-step” stock offering increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity has been adversely affected by the stock offering.

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2017 and December 31, 2016, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2017. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2017, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A. Risk Factors

Not applicable, as the Registrant is a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this report.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

3.1

Articles of Incorporation of Bancorp 34, Inc. (1)

3.2

Bylaws of Bancorp 34, Inc. (1)

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial statements from the Bancorp 34, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Statements of Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

(1)

Incorporated by reference to the Registration Statement on Form S-1 of Bancorp 34, Inc. (File No. 333-21182), originally filed with the Securities and Exchange Commission on June 3, 2016.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BANCORP 34, INC.

Date: July 31, 2017	/s/ Jill Gutierrez
	Jill Gutierrez
	Chief Executive Officer

Date: July 31, 2017	/s/ Jan R. Thiry
	Jan R. Thiry
	Executive Vice President and Chief Financial Officer

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Bancorp 34, Inc. - FORM 10-Q - July 31, 2017

Attached files

Bancorp 34, Inc. Reports