UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2017

OR

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

 

Commission File No. 001-37912

 

Bancorp 34, Inc.

(Exact name of registrant as specified in its charter)

Maryland

74-2819148

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

 

	500 East 10th Street, 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.

 

	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 November 13, 2017 were 3,443,922.   

 

 

BANCORP 34, INC. 

FORM 10-Q 

 

	Index
		Page
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	40
	Part II. Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6	Exhibits	41
Signatures		42

 

 

BANCORP 34, INC.

CONSOLIDATED BALANCE SHEETS - UNAUDITED

 

		September 30, 2017				December 31, 2016
ASSETS
Cash and due from banks		$	8,565,963			$	4,766,344
Interest-bearing deposits with banks			26,330,000				11,645,000
Total cash and cash equivalents			34,895,963				16,411,344
Loans held for investment			269,124,145				243,905,382
Allowance for loan losses			(3,067,133	)			(2,506,033	)
Loans held for investment, net			266,057,012				241,399,349
Loans held for sale			10,479,140				14,221,163
Available-for-sale securities			26,715,509				31,499,132
Premises and equipment, net			10,024,544				10,113,470
Stock in financial institutions			3,808,861				3,575,061
Accrued interest receivable			834,887				790,085
Deferred income taxes, net			3,861,032				4,317,017
Bank owned life insurance			5,573,114				5,481,168
Core deposit intangible, net			233,765				282,932
Prepaid and other assets			712,097				776,477
TOTAL ASSETS		$	363,195,924			$	328,867,198
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits		$	37,330,257			$	36,426,382
Savings and NOW deposits			132,178,571				124,535,039
Time deposits			70,629,478				63,560,582
Total deposits			240,138,306				224,522,003
Federal Home Loan Bank advances			67,000,000				50,000,000
Escrows			391,509				315,175
Accrued interest and other liabilities			3,747,397				3,253,443
Total liabilities			311,277,212				278,090,621
Commitments and contingencies			-				-
Stockholders’ equity
Common stock, $0.01 par value, 100,000,000 authorized, 3,443,922 and 3,438,190 issued and outstanding, respectively			34,439				34,382
Additional paid-in capital			27,233,051				27,161,856
Retained earnings			26,652,084				25,700,007
Accumulated other comprehensive loss, net of income tax expense			(286,525	)			(363,437	)
Unearned employee stock ownership plan (ESOP) shares			(1,714,337	)			(1,756,231	)
Total stockholders’ equity			51,918,712				50,776,577
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	363,195,924			$	328,867,198

 

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

 

 

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Interest income
Interest and fees on loans		$	3,972,449			$	3,333,737			$	11,224,945			$	9,469,550
Interest on securities			128,649				113,849				403,962				355,716
Interest on other interest-earning assets			42,151				24,345				142,507				63,524
Total interest income			4,143,249				3,471,931				11,771,414				9,888,790
Interest expense
Interest on deposits			423,373				368,437				1,190,324				1,098,207
Interest on borrowings			187,060				73,968				432,941				98,663
Total interest expense			610,433				442,405				1,623,265				1,196,870
Net interest income			3,532,816				3,029,526				10,148,149				8,691,920
Provision for loan losses			150,000				155,000				550,000				306,000
Net interest income after provision for loan losses			3,382,816				2,874,526				9,598,149				8,385,920
Noninterest income
Gain on sale of loans			3,557,724				3,241,642				8,066,795				7,525,079
Service charges and fees			102,657				89,847				277,833				282,965
Gain (Loss) on sale and impairments of other real estate			-				3,233				-				(89,779	)
Bank owned life insurance income			43,642				43,676				129,818				129,989
Other			18,992				17,659				42,589				94,570
Total noninterest income			3,723,015				3,396,057				8,517,035				7,942,824
Noninterest expense
Salaries and benefits			3,702,578				3,636,894				10,552,327				9,467,031
Occupancy			538,956				469,075				1,449,574				1,373,718
Data processing fees			574,578				537,456				1,765,943				1,503,367
FDIC and other insurance expense			50,809				66,701				140,116				163,901
Professional fees			311,201				356,333				992,630				1,096,565
Advertising			107,089				65,318				350,444				180,520
Net other real estate expenses			-				347				80				3,651
Other			521,683				527,829				1,420,700				1,422,853
Total noninterest expense			5,806,894				5,659,953				16,671,814				15,211,606
Income before income taxes			1,298,937				610,629				1,443,370				1,117,138
Provision for income taxes			487,209				27,000				491,293				42,000
NET INCOME			811,728				583,629				952,077				1,075,138
Other comprehensive income
Change in unrealized gain on available-for-sale securities, net of income tax			32,810				(85,785	)			76,912				220,312
COMPREHENSIVE INCOME		$	844,538			$	497,844			$	1,028,989			$	1,295,450
Income per common share:
Basic		$	0.25			$	0.17			$	0.29			$	0.32
Diluted		$	0.25			$	0.17			$	0.29			$	0.32

 

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

 

 

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			-				-				1,075,138				-				-				-				1,075,138
Change in unrealized value of available-for-sale securities			-				-				-				220,312				-				-				220,312
Amortization of ESOP award			-				9,342				-				-				-				37,228				46,570
BALANCE, SEPTEMBER 30, 2016		$	168,513			$	9,723,236			$	21,480,018			$	4,265			$	(139,332	)		$	(250,956	)		$	30,985,744
BALANCE, DECEMBER 31, 2016		$	34,382			$	27,161,856			$	25,700,007			$	(363,437	)		$	-			$	(1,756,231	)		$	50,776,577
Net income			-				-				952,077				-				-				-				952,077
Change in unrealized value of available-for-sale securities			-				-				-				76,912				-				-				76,912
Stock option exercise			57				55,257				-				-				-				-				55,314
Amortization of ESOP award			-				15,938				-				-				-				41,894				57,832
BALANCE, SEPTEMBER 30, 2017		$	34,439			$	27,233,051			$	26,652,084			$	(286,525	)		$	-			$	(1,714,337	)		$	51,918,712

 

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

 

 

BANCORP 34, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

		Nine Months Ended September 30,
		2017				2016
Cash flows from operating activities
Net income		$	952,077			$	1,075,138
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			504,538				462,236
Stock dividend on financial institution stock			(36,600	)			(10,614	)
Loss on sale and impairments of other real estate			-				89,779
Amortization of premiums and discounts on securities, net			317,530				415,573
ESOP expense			57,832				46,570
Amortization of core deposit intangible			49,167				63,048
Gain on sale of loans			(8,066,795	)			(7,525,079	)
Proceeds from sale of loans held for sale			199,313,427				200,814,873
Funding of loans held for sale			(184,451,594	)			(203,873,331	)
Provision for loan losses			550,000				306,000
Net increase in bank-owned life insurance			(91,946	)			(94,448	)
Deferred income tax expense			529,855				-
Changes in operating assets and liabilities:
Accrued interest receivable			(44,802	)			(82,617	)
Prepaid and other assets			(56,323	)			(3,799,456	)
Accrued interest and other liabilities			493,954				687,933
Net cash used for operating activities			10,020,320				(11,424,395	)
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities			4,589,838				4,978,150
Purchases of available-for-sale securities			-				(8,456,771	)
Net change in loans held for investment			(28,260,678	)			(35,564,164	)
Purchases of premises and equipment			(415,613	)			(266,317	)
Purchase of stock in financial institutions			(197,200	)			(1,970,800	)
Net proceeds from sales of other real estate			-				411,778
Net cash used for investing activities			(24,283,653	)			(40,868,124	)
Cash flows from financing activities
Net change in deposits			15,616,303				18,609,572
Net change in escrows			76,335				206,572
Net change in Federal Home Loan Bank advances			17,000,000				36,000,000
Stock option exercise			55,314				-
Net cash provided by financing activities			32,747,952				54,816,144
Net increase in cash and cash equivalents			18,484,619				2,523,625
Cash and cash equivalents, beginning of period			16,411,344				19,824,864
Cash and cash equivalents, end of period		$	34,895,963			$	22,348,490
Supplemental disclosures:
Interest on deposits and advances paid		$	1,341,890			$	1,240,123
Income taxes paid		$	48,200			$	42,000
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.

 

 

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, Tubac and Yuma, 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. The loan production offices in Portland, Oregon and Yuma, Arizona were 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 nine months ended September 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.

 

Reclassifications – Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation. There was no impact on stockholder’s equity or net income resulting from these reclassifications.

 

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.

 

Derivative Financial Instruments - All contracts that satisfy the definition of a derivative are recorded at fair value in other assets and other liabilities in the consolidated balance sheets. We record the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. For additional information on derivative financial instruments, see Note 8 - "Derivative Financial Instruments."

 

 Summary of Recent Accounting Pronouncements:

 

Revenue Recognition - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015-4 “Revenue from Contracts with Customers – Deferral of the Effective Date” deferred the effective date of ASU 2014-09 by one year and as a result, the new standard will be effective the first quarter of 2018. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company does not expect adoption of ASU 2014-09 will have a material impact on our consolidated financial statements and disclosures. We plan to adopt the revenue recognition guidance in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if management deems such adjustment significant. Our implementation efforts to date include identification of revenue streams within the scope of the guidance.

 

Financial Instruments - In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)." The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for annual and interim reporting periods beginning after December 15, 2017 and is not expected to have a significant impact to the Company’s consolidated financial statements.

 

Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and 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.

 

Premium on Callable Debt - In March 2017, the FASB issued ASU No. 2017-08, "Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20)" to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The Company is evaluating the potential impact of the amendment on the Company’s consolidated financial statements.    

Share-Based Payment Modification - In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We did not early adopt ASU 2017-09. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 is not expected to have a significant impact on our consolidated financial statements.

NOTE 2 – AVAILABLE-FOR-SALE SECURITIES

 

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at September 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
September 30, 2017
Available-for-sale securities
Mortgage-backed securities		$	23,277,441			$	24,527			$	(307,542	)		$	22,994,426
U.S. Government agencies			2,083,027				2,040				(53,815	)			2,031,252
Municipal obligations			1,683,180				6,651				-				1,689,831
Total		$	27,043,648			$	33,218			$	(361,357	)		$	26,715,509
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 nine months ended September 30, 2017 or 2016.

 

Amortized cost and fair value of securities by contractual maturity as of September 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 September 30, 2017 were as follows:

 

 

		September 30, 2017
		Amortized				Fair
		Cost				Value
Due in one year or less		$	1,594,256			$	1,602,511
Due after one to five years			22,206,122				21,906,863
Due after five to ten years			3,243,270				3,206,135
Due after ten years			-				-
Total		$	27,043,648			$	26,715,509

 

 

At September 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 September 30, 2017 and December 31, 2016, mortgage-backed securities included collateralized mortgage obligations of $8.5 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.

 

		September 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		$	11,168,062			$	(108,806	)		$	10,059,582			$	(198,736	)		$	21,227,644			$	(307,542	)
U.S. Government agencies			650,912				(16,428	)			965,531				(37,387	)			1,616,443				(53,815	)
Total temporarily impaired securities		$	11,818,974			$	(125,234	)		$	11,025,113			$	(236,123	)		$	22,844,087			$	(361,357	)

 

 

		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 September 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 September 30, 2017 or December 31, 2016.

 

 

Loans and securities carried at approximately $137.3 million at September 30, 2017 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities carried at approximately $4.7 million at September 30, 2017 were pledged to secure public deposits.

 

NOTE 3 – LOANS HELD FOR INVESTMENT, NET

 

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

 

		September 30, 2017								December 31, 2016
		Amount				Percent				Amount				Percent
Loans held for investment, net:
Commercial real estate		$	220,427,379				81.6	%		$	195,814,205				80.0	%
One- to four-family residential real estate			30,135,267				11.2	%			29,976,625				12.2	%
Commercial and industrial			14,593,471				5.4	%			9,876,020				4.0	%
Consumer and other			5,105,251				1.8	%			9,191,249				3.8	%
Total gross loans			270,261,368				100.0	%			244,858,099				100.0	%
Unamortized loan fees			(1,137,223	)							(952,717	)
Loans held for investment			269,124,145								243,905,382
Allowance for loan losses			(3,067,133	)							(2,506,033	)
Loans held for investment, net		$	266,057,012							$	241,399,349

 

 

At September 30, 2017 and December 31, 2016 commercial real estate loans include construction loans of $14.0 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 September 30, 2017 and December 31, 2016:

 

		As of September 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			1,924,782				555,277				559,926				27,148				3,067,133
Total		$	1,924,782			$	555,277			$	559,926			$	27,148			$	3,06,7133
Gross loans
Ending balance: individually evaluated for impairment		$	6,648,908			$	1,658,571			$	2,047,212			$	177,458			$	10,532,149
Ending balance: collectively evaluated for impairment			213,778,471				28,476,696				12,546,259				4,927,793				259,729,219
Ending balance: loans acquired with deteriorated credit quality			-				-				-				-				-
Total		$	220,427,379			$	30,135,267			$	14,593,471			$	5,105,251			$	270,261,368

 

		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 nine months ended September 30, 2017 and 2016:

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Beginning balance		$	2,919,733			$	2,152,565			$	2,506,033			$	1,894,196
Provision for loan losses			150,000				155,000				550,000				306,000
Charge-offs:
Commercial real estate			-				-				-				-
One- to four-family residential real estate			(8,850	)			(107,385	)			(8,850	)			(118,141	)
Commercial and industrial			-				-				-				-
Consumer and other			-				-				-				-
Total charge-offs			(8,850	)			(107,385	)			(8,850	)			(118,141	)
Recoveries:
Commercial real estate			-				-				1,200				116,125
One- to four-family residential real estate			6,250				-				18,750				2,000
Commercial and industrial			-				-				-				-
Consumer and other			-				-				-				-
Total recoveries			6,250				-				19,950				118,125
Net (charge-offs) recoveries			(2,600	)			(107,385	)			11,100				(16	)
Ending balance		$	3,067,133			$	2,200,180			$	3,067,133			$	2,200,180

 

 

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of September 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.

 

 

		Past Due																				Total
										90 Days												Financing
		30 - 59 Days				60 - 89 Days				or More				Total				Current				Receivables
September 30, 2017
Commercial real estate		$	-			$	3,026,297			$	550,000			$	3,576,297			$	216,851,082			$	220,427,379
One- to four-family residential real estate			-				236,374				405,916				642,290				29,492,977				30,135,267
Commercial and industrial			-				-				1,568,908				1,568,908				13,024,563				14,593,471
Consumer and other			-				-					-			-				5,105,251				5,105,251
Totals		$	-			$	3,262,671			$	2,524,824			$	5,787,495			$	264,473,873			$	270,261,368

 

		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

 

At December 31, 2016 there were two large commercial real estate loans in nonaccrual status due to deteriorating financial positions and cash flows that were not past due.  They became past due in 2017 and remain past due as of September 30, 2017.

 

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

 

		September 30,				December 31,
		2017				2016
Nonaccrual loans
Commercial real estate		$	3,576,297			$	3,718,686
One- to four-family residential real estate			657,421				648,880
Commercial and industrial			1,568,908				1,600,655
Consumer and other			-				-
Total nonaccrual loans			5,802,626				5,968,221
Other real estate (ORE)			-				-
Total nonperforming assets		$	5,802,626			$	5,968,221
Nonperforming assets to gross loans held for investment and ORE			2.15	%			2.44	%
Nonperforming assets to total assets			1.60	%			1.81	%

 

 

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at September 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.

 

 

		As of September 30, 2017
		Commercial Real Estate				One- to Four- Family Residential Real Estate				Commercial and Industrial				Consumer and Other				Total
Grade
Pass		$	213,778,471			$	28,476,696			$	12,546,259			$	4,927,793			$	259,729,219
Special mention			914,163				-				-				-				914,163
Substandard			5,184,745				1,642,573				1,753,014				177,458				8,757,790
Doubtful			550,000				15,998				294,198				-				860,196
Loss			-				-				-				-				-
Totals		$	220,427,379			$	30,135,267			$	14,593,471			$	5,105,251			$	270,261,368

 

 

		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.

 

 

		As of September 30, 2017
						Principal								Average
		Recorded				Net of				Related				Recorded
		Investment				Charge-offs				Allowance				Investment
With no related allowance recorded:
Commercial real estate		$	3,576,297			$	3,576,297			$	-			$	3,627,001
One- to four-family residential real estate			657,421				657,421				-				665,003
Commercial and industrial			1,568,908				1,568,908				-				1,591,938
Consumer and other			-				-				-				-
With an allowance recorded:		$	-			$	-			$	-			$	-
Total:
Commercial real estate		$	3,576,297			$	3,576,297			$	-			$	3,627,001
One- to four-family residential real estate			657,421				657,421				-				665,003
Commercial and industrial			1,568,908				1,568,908				-				1,591,938
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 nine months ended September 30, 2017 interest income in the amount of $2,700 was recognized on nonaccrual loans, and during the nine months ended September 30, 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 September 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.

 

There were no troubled debt restructurings as of September 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 September 30, 2017 and December 31, 2016:

 

 

		September 30,				December 31,
		2017				2016
Commitments to originate and sell mortgage loans		$	27,343,176			$	27,206,868
Commitments to extend credit			34,312,331				27,430,757
Unused lines of credit			11,596,085				8,662,628
Standby letters of credit			125,000				-
Totals
		$	73,376,592			$	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 was one standby letters of credit at September 30, 2017 and none as of 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.

 

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 September 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 September 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.

 

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
		(Dollars in thousands)
As of September 30, 2017:
Total Capital (to Risk-Weighted Assets)		$	44,587				16.93	%		$	21,069				>8.00	%		$	26,336				>10.00	%
Tier I Capital (to Risk-Weighted Assets)		$	41,360				15.70	%		$	15,806				>6.00	%		$	21,075				>8.00	%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		$	41,360				15.70	%		$	11,855				>4.50	%		$	17,124				>6.50	%
Tier I Capital (to Average Assets)		$	41,360				11.95	%		$	13,844				>4.00	%		$	17,305				>5.00	%
As of December 31, 2016:
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 September 30, 2017 and December 31, 2016.

 

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 or contractual market prices from active investors. Quotes are updated daily and represent prices at which loans may be exchanged in bulk bids 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.

 

Derivative Financial Instruments - The estimated fair value of interest rate lock commitments is based on the value of the underlying mortgage loan, quoted MBS prices and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of commission and other marginal direct expenses. The Company estimates the fair value of forward sales commitments based on quoted MBS prices, which are considered Level 2. With respect to its interest rate lock commitments ("IRLCs"), management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its IRLCs. Changes in fair value of the Company's derivative financial instruments are recognized through "Gain on sale of loans" on its consolidated statements of operations.

 

 

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
September 30, 2017
Recurring basis
Mortgage-backed securities		$	-			$	22,994,426			$	-			$	22,994,426
U.S. Government agencies			-				2,031,252				-				2,031,252
Municipal obligations			-				1,689,831				-				1,689,83
Derivative assets (IRLC's)			-				-				235,401				235,401
Derivative assets (MBS forward trades)			-				21,016				-				21,016
Nonrecurring basis
Loans held for sale			-				10,479,140				-				10,479,140
Impaired loans			-				-				5,802,626				5,802,626
Totals		$	-			$	37,215,665			$	6,038,027			$	43,253,692
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.

 

 

The following table presents estimated fair values of the Company’s financial instruments at September 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 September 30, 2017
Financial assets:
Cash and due from banks		$	8,566			$	8,566			$	8,566			$	-			$	-
Interest-bearing deposits with banks			26,330				26,330				26,330				-				-
Available-for-sale securities			26,716				26,716				-				26,716				-
Loans held for sale			10,479				10,479				-				10,479				-
Loans held for investment, net			266,057				266,301				-				-				266,301
Stock in financial institutions			3,809				3,809				-				3,809				-
Derivative assets (IRLC's)			235,401				235,401				-				-				235,401
Derivative assets (MBS forward trades)			21,016				21,016				-				21,016				-
Financial liabilities:
Demand deposits, savings and NOW deposits			169,509				162,458				162,458				-				-
Time deposits			70,629				70,426				-				70,426				-
Federal Home Loan Bank advances			67,000				66,968				-				66,968				-
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.

 

 

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. Diluted earnings per share have been calculated using the weighted average number of shares outstanding plus common stock equivalents computed under the treasury stock method. For earning per share computations, unallocated ESOP shares are treated like treasury shares and not considered outstanding.

 

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Net income		$	811,728			$	583,629			$	952,077			$	1,075,138
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		$	0.25			$	0.17			$	0.29			$	0.32
Diluted		$	0.25			$	0.17			$	0.29			$	0.32

 

 

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

 

NOTE 8 - Derivative Financial Instruments

 

In September 2017 the Company began originating and selling mortgage loans under mandatory delivery sales commitments in an effort to realize greater sales gains and entering into fixed-rate MBS forward commitments to mitigate the resulting pipeline interest rate risk. Although the MBS forward sales commitments serve as financial interest rate hedges, the Company does not designate any of its derivative financial instruments as hedges for accounting purposes. Outstanding derivative financial instrument assets at September 30, 2017 include $235,000 in interest rate lock commitments and $21,000 in derivative hedge instruments. Net gains recognized by the Company on its derivative financial instruments, which are included in "Gain on sale of loans" on its consolidated statements of operations for the three and nine months ended September 30, 2017 were $260,000, including $235,000 from interest rate lock commitments and $24,000 from MBS forward trades. The notional amount of open MBS forward trades at September 30, 2017 was $12.2 million.

 

The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties and counterparties to the over-the-counter derivative financial instruments that the Company uses in its interest rate risk management activities. The Company manages this credit risk by selecting only top-tier national investment firms the Company believes to be financially strong, spreading the credit risk among at least three such broker/dealer counterparties and by entering into netting agreements with the counterparties, as appropriate. The Company has entered into agreements with three derivative counterparties, a portion of which include netting arrangements whereby the counterparties are entitled to settle their positions on a net basis. However, with respect to this portion of its derivatives, the Company presents such amounts on a gross basis in its financial statements. In certain circumstances, the Company may be required to provide certain derivative counterparties collateral against derivative financial instruments. As of September 30, 2017, these counterparties did not hold any of the Company’s cash or cash equivalents in margin accounts as collateral (which would be classified as "Restricted cash" on the Company's consolidated balance sheets). The Company was in a $24,000 net credit/gain position to those counterparties at September 30, 2017. The Company has never incurred credit losses due to non-performance of its counterparties.

 

NOTE 9 – SUBSEQUENT EVENT

 

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

 

Stock Repurchase Program - On October 26, 2017, the Company announced that is has adopted a stock repurchase program for up to approximately 5% of its outstanding common stock, or 171,910 shares of its common stock.  This is Bancorp 34's first stock repurchase program since completing its mutual-to-stock conversion and related stock offering in October 2016.  Repurchases may be made no sooner than the termination of Bancorp 34's regular quarterly trading blackout after Bancorp 34 publicly releases its results of operations for the fiscal quarter ended September 30, 2017, and consistent with Bancorp 34's trading policies.  Shares may be repurchased in open market or private transactions, through block trades, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.  The repurchase program has no expiration date.  Repurchases will be made at management's discretion at prices management considers to be attractive and in the best interests of both Bancorp 34 and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and Bancorp 34's financial performance.  Open market purchases will be subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements. The timing and amount of share repurchases under this authorization may be suspended, terminated or modified by Bancorp 34 at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. Bancorp 34 is not obligated to repurchase any particular number of shares or any shares in any specific time period.

 

 

 

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

 

Management’s discussion and analysis of financial condition at September 30, 2017 and December 31, 2016 and results of operations for the three and nine months ended September 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,” "tend," “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

 

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

 

Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of 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.

 

 

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.

 

 

●

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 September 30,
		2017												2016
		Average												Average
		Outstanding								Yield/				Outstanding								Yield/
		Balance				Interest				Rate (1)				Balance				Interest				Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	285,425			$	3,972				5.52	%		$	236,806			$	3,334				5.60	%
Interest-earning deposits			7,858				28				1.41	%			17,833				22				0.49	%
Securities			27,943				129				1.83	%			33,268				114				1.36	%
Federal Home Loan Bank stock			3,203				14				1.73	%			2,373				2				0.34	%
Other			383				-				0.00	%			383				-				0.00	%
Total interest-earning assets			324,812				4,143				5.06	%			290,663				3,472				4.75	%
Noninterest-earning assets			23,568												19,461
Total assets		$	348,380											$	310,124
Interest-bearing liabilities:
Checking, money market and savings accounts		$	129,785				270				0.83	%		$	129,742				233				0.71	%
Time deposits			63,061				153				0.96	%			63,985				135				0.84	%
Total deposits			192,846				423				0.87	%			193,727				368				0.76	%
Advances from FHLB of Dallas			63,554				187				1.16	%			49,882				74				0.59	%
Total interest-bearing liabilities			256,400				610				0.94	%			243,609				442				0.72	%
Non-interest bearing deposits			36,209												32,378
Non-interest bearing liabilities			3,747												2,992
Total liabilities			296,356												278,979
Stockholders' equity			52,024												31,145
Total liabilities and stockholders' equity		$	348,380											$	310,124
Net interest income						$	3,533											$	3,030
Net interest rate spread (2)											4.12	%											4.03	%
Net interest-earning assets (3)		$	68,412											$	47,054
Net interest margin (4)											4.32	%											4.15	%
Average interest-earning assets to average interest-bearing liabilities											126.68	%											119.32	%

 

(1)

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

(2)

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

(3)

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

(4)

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

 

 

		Nine Months Ended September 30,
		2017												2016
		Average												Average
		Outstanding								Yield/				Outstanding								Yield/
		Balance				Interest				Rate (1)				Balance				Interest				Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans		$	270,560			$	11,224				5.55	%		$	219,646			$	9,470				5.76	%
Interest-earning deposits			11,613				90				1.04	%			12,993				48				0.49	%
Securities			29,523				404				1.83	%			30,330				356				1.57	%
Federal Home Loan Bank stock			3,260				37				1.52	%			1,573				7				0.59	%
Other			383				16				5.59	%			383				8				2.79	%
Total interest-earning assets			315,339				11,771				4.99	%			264,925				9,889				4.99	%
Noninterest-earning assets			22,333												19,446
Total assets		$	337,672											$	284,371
Interest-bearing liabilities:
Checking, money market and savings accounts		$	127,217				760				0.80	%		$	123,524			$	673				0.73	%
Time deposits			62,212				430				0.92	%			68,555				425				0.83	%
Total deposits			189,429				1,190				0.84	%			192,079				1,098				0.76	%
Advances from FHLB of Dallas			56,564				433				1.02	%			23,670				99				0.56	%
Total interest-bearing liabilities			245,993				1,623				0.88	%			215,749				1,197				0.74	%
Non-interest bearing deposits			36,758												35,253
Non-interest bearing liabilities			3,358												2,721
Total liabilities			286,109												253,723
Stockholders' equity			51,563												30,648
Total liabilities and stockholders' equity		$	337,672											$	284,371
Net interest income						$	10,148											$	8,692
Net interest rate spread (2)											4.11	%											4.24	%
Net interest-earning assets (3)		$	69,346											$	49,176
Net interest margin (4)											4.30	%											4.38	%
Average interest-earning assets to average interest-bearing liabilities											128.19	%											122.79	%

 

(1)

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

(2)

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

(3)

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

(4)

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

 

 

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

 

Cash and cash equivalents increased $18.5 million, or 112.6%, to $34.9 million at September 30, 2017 from $16.4 million at December 31, 2016. The increase is due to retaining enough funds to pay off a $25.0 million FHLB advance that matures in October.

 

Loans held for investment increased $25.2 million, or 10.3%, to $269.1 million at September 30, 2017 from $243.9 million at December 31, 2016, due to organic growth. The increase was primarily due to an increase in commercial real estate loans, which increased $24.6 million, or 12.6%, to $220.4 million at September 30, 2017 from $195.8 million at December 31, 2016. During the nine months ended September 30, 2017, commercial real estate loans increased to 81.6% of the gross loan portfolio from 80.0%, while one- to four-family residential real estate loans decreased to 11.2% 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 September 30, 2017 and December 31, 2016 totaled $10.5 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 $4.8 million, or 15.2%, from $31.5 million to $26.7 million during the nine months ended September 30, 2017, due to normal payments in the portfolio.

 

Total deposits increased $15.6 million, or 7.0%, to $240.1 million at September 30, 2017 from $224.5 million at December 31, 2016. The increase included a $904,000, or 2.5% increase in non-interest bearing demand accounts, $7.6 million, or 6.1%, increase in savings and NOW deposits, and $7.1 million, or 11.1%, increase in time deposits. The increase in time deposits includes $10.0 million in brokered deposits originated in late September 2017 with $5.0 million at a rate of 1.75% maturing in 18 months and $5.0 million at a rate of 1.90% maturing in 30 months.

 

Borrowings, consisting solely of FHLB advances, increased $17.0 million, or 34.0%, to $67.0 million at September 30, 2017 from $50.0 million at December 31, 2016.

 

Total stockholders’ equity increased $1.1 million or 2.2%, to $51.9 million at September 30, 2017 from $50.8 million at December 31, 2016. The growth was due primarily to net income for the nine-month period of $952,000.

 

 

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

 

General. Net income was $812,000 for the three months ended September 30, 2017 and $228,000, or 39.1%, more than net income of $584,000 for the three months ended September 30, 2016. Pre-tax income was $1.3 million for the three months ended September 30, 2017 and $611,000 for the three months ended September 30, 2016. The provision for income taxes for the three months ended September 30, 2017 was $487,000 compared to $27,000 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.

 

 

Interest Income. Interest income increased $671,000, or 19.3%, to $4.1 million for the three months ended September 30, 2017 from $3.5 million for the three months ended September 30, 2016. The increase was due to a $34.1 million, or 11.7%, increase in average interest-earning assets and an improvement in asset mix as loans, our highest yielding assets, increased to 87.9% of average interest-earning assets from 81.5% of average interest-earning assets. The yield on average interest-earning assets increased 31 basis points to 5.06% for the three months ended September 30, 2017 from 4.75% for the three months ended September 30, 2016. Interest and fees on loans increased $638,000, or 19.1%, to $4.0 million for the three months ended September 30, 2017, from $3.3 million for the three months ended September 30, 2016. Interest and fees on loans increased due primarily to a $48.6 million, or 20.5%, increase in average loan balances, due to organic growth, partially offset by an eight basis point decrease in yield. The average balance of securities decreased $5.3 million to $27.9 million for the three months ended September 30, 2017, compared to $33.3 million for the three months ended September 30, 2016, and the average yield increased from 1.36% to 1.83% for the three months ended September 30, 2016 and 2017, respectively.

 

Interest Expense. Interest expense increased $168,000, or 38.0%, to $610,000 for the three months ended September 30, 2017 from $442,000 for the three months ended September 30, 2016. The increase was the result of an increase in interest expense on borrowings, which increased $113,000 to $187,000 for the three months ended September 30, 2017 from $74,000 for the three months ended September 30, 2016. Average interest-bearing deposits for the three months ended September 30, 2017 were $192.8 million, representing an $881,000, or 0.5%, decrease compared to average interest-bearing deposits of $193.7 million for the three months ended September 30, 2016. The average rate paid on interest-bearing deposits was 0.87% for the three months ended September 30, 2017 compared to 0.76% for the similar 2016 period.

 

The $113,000 increase in interest expense on borrowings was due to a $13.7 million increase in average balances and a 57 basis point increase in average rates paid. Borrowings were primarily 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 57 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 with 25 basis point increases in December 2016 and March and June 2017. In the second half of 2016 we added $20.0 million in long-term borrowings consisting of $10.0 million in two-year and $10.0 million in four-year fixed rate advances, averaging 1.11%, to lock in those rates in anticipation of further market rate increases.

 

Interest paid on checking, money market and savings accounts increased $37,000, or 18.5%, to $270,000 for the three months ended September 30, 2017 from $233,000 for the three months ended September 30, 2016. The average rate we paid on such deposit accounts increased 12 basis points to 0.83% for the three months ended September 30, 2017 from 0.71% for the three months ended September 30, 2016 and the average balance increased $43,000 or 0.03%, to $129.8 million for the three months ended September 30, 2017 from $129.7 million for the three months ended September 30, 2016. The average rates we pay on these accounts is considerably higher in our Arizona market.

 

 

Interest on time deposits increased $18,000 to $153,000 for the three months ended September 30, 2017 from $135,000 for the three months ended September 30, 2016. The increase in expense was primarily due to a 12 basis point increase in the average rate paid on time deposits to 0.96% for the three months ended September 30, 2017 from 0.84% for the three months ended September 30, 2016, partially offset by the effect of a $924,000, or 1.4%, decrease in average balances.

 

Net Interest Income. Net interest income increased $503,000, or 16.6%, to $3.5 million for the three months ended September 30, 2017 from $3.0 million for the three months ended September 30, 2016, as a result of an increase in the balance of net interest-earning assets and a nine basis point increase in net interest rate spread. Our average net interest-earning assets increased by $21.4 million, or 45.4%, to $68.4 million for the three months ended September 30, 2017 from $47.1 million for the three months ended September 30, 2016, due primarily to organic growth. Our net interest rate spread increased by nine basis points to 4.12% for the three months ended September 30, 2017 from 4.03% for the three months ended September 30, 2016. Our cost of borrowings increased to 1.16% for the quarter ended September 30, 2017 from 0.59% for the quarter ended September 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, March 2017, and June 2017.

 

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

 

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

 

After an evaluation of these factors, we recorded a provision for loan losses of $150,000 for the three months ended September 30, 2017, compared to $155,000 for the three months ended September 30, 2016. In the three months ended September 30, 2017, the allowance for loan losses grew $147,000 or 5.0%, and gross loans held for investment grew $4.5 million, or 1.7%.

 

To the best of our knowledge, at September 30, 2017 we have recorded all loan losses that are both probable and reasonable to estimate as of September 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 $327,000, or 9.6%, to $3.7 million for the three months ending September 30, 2017 compared to $3.4 million for the three months ended 2016.

 

 

Gain on sale of loans increased $316,000, or 9.8%, to $3.6 million for the three months ended September 30, 2017 from $3.2 million for the three months ended September 30, 2016.

 

During the three months ended September 30, 2017, we sold $72.7 million of mortgage loans and recognized gains of $3.5 million compared to $79.1 million of mortgage loan sales during the three months ended September 30, 2016 for gains of $2.9 million. Mortgage sales gain 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. Sales gains include fair value adjustments for interest rate lock commitments and loans held for sale. In September 2017 we began originating and selling mortgage loans under mandatory delivery sales commitments in an effort to realize greater sales gains, since loan sales under mandatory delivery contracts generally realize greater prices than loans sold under best efforts agreements. We also began entering into counterparty trades with similar notional amounts designed to react inversely to market interest rate movements to reduce our interest rate risk on mandatory delivery loans. The implementation of those activities represented $668,000 of the gain on sale of loans for the three months ended September 30, 2017.

 

During the three months ended September 30, 2017, we sold $491,000 of SBA loans for a gain of $31,000, compared to $3.2 million of SBA loan sales during the three months ended September 30, 2016 for gains of $62,000.

 

Noninterest Expense. Noninterest expense increased $147,000, or 2.6%, to $5.8 million for the three months ended September 30, 2017 from $5.7 million for the three months ended September 30, 2016 due primarily to an increase in salaries and benefits and occupancy. The salaries and benefits increases were primarily related to the expansion of our mortgage banking operations. The occupancy increase included increases in repairs and maintenance, depreciation and building leases.  Average assets for the quarter ended September 30, 2017 were 12.3% greater than for the quarter ended September 30, 2016.

 

Income Tax Expense. Income tax expense was $487,000 and $27,000 for the quarters ended September 30, 2017 and 2016, respectively. The Company had net operating loss carry-forwards from prior periods which offset income for the quarter ended September 30, 2016 and a 100% reserve against deferred tax assets; therefore, 2016 income tax expense consisted only of Federal alternative minimum tax and state tax expense. In December 2016 the reserve against deferred tax assets was removed and tax expense starting with the first quarter of 2017 was recorded at more common effective tax rates.

  

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

 

General. We had net income of $952,000 for the nine months ended September 30, 2017, compared to net income of $1.1 million for the nine months ended September 30, 2016. Results in the first nine months of 2017 were negatively affected by higher compensation, primarily in the mortgage banking operation, $449,000 in increased income tax expense and a $244,000 larger provision for loan losses due to more rapid loan growth compared to the nine months ended September 30, 2016.   

 

Interest Income. Interest income increased $1.9 million, or 19.0%, to $11.8 million for the nine months ended September 30, 2017 from $9.9 million for the nine months ended September 30, 2016. The increase was due to a 19.0% increase in average interest-earning assets while yield remained unchanged. Loans, our highest yielding asset, increased from 82.9% to 85.8% of average interest-earning assets. Interest and fees on loans increased $1.8 million, or 18.5%, to $11.2 million for the nine months ended September 30, 2017, from $9.5 million for the nine months ended September 30, 2016. Interest income on loans increased due primarily to a 23.2% increase in average loan balances, due to organic growth, partially offset by a 21 basis point decrease in average yield. The average balance of securities decreased $807,000, or 2.7%, to $29.5 million for the nine months ended September 30, 2017, compared to $30.3 million for the nine months ended September 30, 2016 and the average yield increased 26 basis points.

 

Interest Expense. Interest expense increased $426,000, or 35.6%, to $1.6 million for the nine months ended September 30, 2017 from $1.2 million for the nine months ended September 30, 2016. The increase was caused by an increase in interest expense on borrowings, which increased $334,000 to $433,000 for the nine months ended September 30, 2017 from $99,000 for the nine months ended September 30, 2016. Average interest-bearing deposits for the nine months ended September 30, 2017 were $189.4 million, representing a $2.7 million, or 1.4%, decrease compared to average interest-bearing deposits of $192.1 million for the nine months ended September 30, 2016. The average rate paid on interest-bearing deposits was 0.84% for the nine months ended September 30, 2017 compared to 0.76% for the 2016 period.

 

 

The $334,000 increase in interest expense on borrowings was due to a $33.0 million, or 139.0%, increase in average balances and a 46 basis point increase in average rates paid. Borrowings were primarily 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.  In the second half of 2016 we added $20.0 million consisting of $10.0 million in two-year and $10.0 million in four-year fixed rate advances, averaging 1.11%, to lock in those rates in anticipation of further market rate increases.

 

Interest paid on checking, money market and savings accounts increased $87,000, or 12.9%, to $760,000 for the nine months ended September 30, 2017 from $673,000 for the nine months ended September 30, 2016. The average rate we paid on such deposit accounts increased seven basis points to 0.80% for the nine months ended September 30, 2017 from 0.73% for the nine months ended September 30, 2016 and the average balance increased $3.7 million, or 3.0%, to $127.2 million for the nine months ended September 30, 2017 from $123.5 million for the nine months ended September 30, 2016. The increase in checking, savings and money market deposits is primarily due to maturing time 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 our Arizona market.

 

Net Interest Income. Net interest income increased $1.5 million or 16.8%, to $10.1 million for the nine months ended September 30, 2017 from $8.7 million for the nine months ended September 30, 2016, as a result of a higher balance of net interest-earning assets and a more favorable mix, partially offset by a lower net interest rate spread. Our average net interest-earning assets increased by $20.2 million, or 41.0%, to $69.3 million for the nine months ended September 30, 2017 from $49.2 million for the nine months ended September 30, 2016 due primarily to organic growth. Our net interest rate spread declined by 13 basis points to 4.11% for the nine months ended September 30, 2017 from 4.24% for the nine months ended September 30, 2016. We carried 85.8% of our average interest-earning assets in loans, our highest yielding asset, for the nine months ended September 30, 2017 compared to 82.9% 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 1.02% for the nine months ended September 30, 2017 from 0.56% for the nine months ended September 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, March 2017, and June 2017 and the additional $20.0 million in long-term, higher rate, borrowings.

 

Provision for Loan Losses. We recorded a provision for loan losses of $550,000 for the nine months ended September 30, 2017, compared to $306,000 for the nine months ended September 30, 2016. In addition, $20,000 in recoveries of previously charged-off balances were received during the nine months ended September 30, 2017 compared to $118,000 in the nine months ended September 30, 2016. In the nine months ended September 30, 2017, the allowance for loan losses increased $867,000, or 39.4%, and gross loans held for investment grew $46.7 million, or 21.0%.

 

Noninterest Income. Noninterest income increased $574,000, or 7.2%, to $8.5 million for the nine months ended September 30, 2017 from $7.9 million for the nine months ended September 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 $542,000, or 7.2%, to $8.1 million for the nine months ended September 30, 2017 from $7.5 million for the nine months ended September 30, 2016 as the Company has continued to expand its secondary mortgage loan operation.

 

During the nine months ended September 30, 2017, we sold $188.2 million of mortgage loans and recognized gains of $7.8 million compared to $188.7 million of mortgage loan sales during the nine months ended September 30, 2016 for gains of $7.0 million. Mortgage sales gain 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. Sales gains include fair value adjustments for interest rate lock commitments and loans held for sale. As discussed above, in September 2017 we began originating and selling mortgage loans under mandatory delivery sales commitments. We also began entering into counterparty trades with similar notional amounts designed to react inversely to market interest rate movements to reduce our interest rate risk on mandatory delivery loans. The implementation of those activities represented $668,000 of the gain on sale of loans for the nine months ended September 30, 2017.

 

During the nine months ended September 30, 2017, we sold $2.9 million of SBA loans for a gain of $273,000, compared to $5.5 million of sales during the nine months ended September 30, 2016 for gains of $504,000.

 

We incurred no loss on sale or impairments of other real estate in the nine months ended September 30, 2017 compared to $90,000 in the nine months ended September 30, 2016.

 

Noninterest Expense. Noninterest expense increased $1.5 million, or 9.6%, to $16.7 million for the nine months ended September 30, 2017 from $15.2 million for the nine months ended September 30, 2016 due primarily to higher salaries and benefits, data processing fees and advertising costs, 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 nine months ended September 30, 2017 were 18.7% larger than the nine months ended September 30, 2016.

 

Income Tax Expense. Income tax expense increased $449,000 to $491,000 for the nine months ended September 30, 2017 compared to $42,000 for the nine months ended September 30, 2016. The Company had net operating loss carry-forwards from prior periods which offset income for the nine months ended September 30, 2016 and a 100% reserve against deferred tax assets; therefore, 2016 income tax expense consisted only of Federal alternative minimum tax and state tax expense. In December 2016 the reserve against deferred tax assets was removed and tax expense starting with the first quarter of 2017 was recorded at more common effective tax rates.

 

 

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 September 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 September 30,				At December 31,
		2017				2016
		(Dollars in thousands)
Nonaccrual loans
Real estate loans:
One- to four-family residential real estate		$	657			$	649
Commercial real estate			3,576				3,719
Commercial and industrial			1,569				1,600
Consumer and other			-				-
Total nonaccrual loans			5,802				5,968
Other real estate (ORE)			-				-
Total nonperforming assets		$	5,802			$	5,968
Ratios:
Nonperforming loans to gross loans held for investment			2.15	%			2.44	%
Nonperforming assets to total assets			1.60	%			1.81	%
Nonperforming assets to gross loans held for investment and ORE			2.15	%			2.44	%

 

The nonperforming asset ratios decreased due to the $166,000 decrease in nonperforming loans along with increases of 10.4% in gross loans held for investment and total assets.

 

Interest income that would have been recorded for the nine months ended September 30, 2017, had nonaccruing loans been current according to their original terms amounted to $256,000. We recognized $2,700 interest income on these nonaccrual loans for the nine months ended September 30, 2017.

 

At September 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.

 

 

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.

		Nine Months Ended September 30,
		2017				2016
		(Dollars in thousands)
Balance at beginning of period		$	2,506			$	1,894
Provision for loan losses			550				306
Charge-offs:
One- to four-family residential real estate loans			(9	)			(118	)
Commercial real estate loans			-				-
Commercial and industrial loans			-				-
Consumer and other loans			-				-
Total charge-offs			(9	)			(118	)
Recoveries:
One- to four-family residential real estate loans			19				2
Commercial real estate loans			1				116
Commercial and industrial loans			-				-
Consumer and other loans			-				-
Total recoveries			20				118
Net recoveries			11				-
Balance at end of period		$	3,067			$	2,200
ALLL to nonperforming loans			52.86	%			132.32	%
ALLL to total gross loans			1.13	%			0.99	%
ALLL to total gross loans less acquired loans			1.26	%			1.19	%
Net recoveries to average loans outstanding during the period			0.01	%			0.00	%

 

The allowance for loan losses to nonperforming loans ratio decreased due to the 373.0% increase in nonperforming loans from September 2016 to September 2017 compared to the 39.4% increase in the allowance for loan losses. The allowance for loan losses to total gross loans ratio increased due to a 21.1% increase in total gross loans compared to the 39.4% 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 September 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 September 30, 2017, cash and cash equivalents totaled $34.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $26.7 million at September 30, 2017. In addition, at September 30, 2017, we had the ability to borrow an additional $69.7 million from the FHLB of Dallas. On that date, we had $67.0 million of advances outstanding. The Bank also had two lines of credit available with other financial institutions of $6.0 million and $9.8 million, respectively.

 

At September 30, 2017, we had $34.3 million in portfolio loan commitments outstanding, and an additional $27.3 million in commitments to originate and sell mortgage loans. In addition, we had $11.6 million in unused lines of credit and $125,000 commitment issued under standby letters of credit. Time deposits due within one year as of September 30, 2017 totaled $36.4 million, or 15.2% 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 September 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 nine months ended September 30, 2017, we originated $82.4 million of loans held for investment and $184.5 million of mortgage loans held for sale, compared to $80.4 million of loans held for investment and $203.9 million of mortgage loans held for sale during the nine months ended September 30, 2016. In the nine months ended September 30, 2017 and 2016, we purchased $0 and $8.5 million of securities, respectively. We have not purchased any whole loans in recent periods.

 

 

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced net increases of $11.0 million and $18.5 million in total deposits for the nine months ended September 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 $17.0 million and $36.0 million for the nine months ended September 30, 2017 and 2016, respectively. In 2017 we have been funding our loans held for sale and some portfolio loan growth with short-term FHLB borrowings. At September 30, 2017 loans held for sale were $10.5 million and FHLB borrowings were $67.0 million. During the nine months ended September 30, 2016, we were able to utilize proceeds from FHLB advances and excess liquid funds held at December 31, 2016 to fund new loan originations.

 

Bancorp 34, Inc. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to stockholders, to repurchase its common stock, and for other corporate purposes. Bancorp 34, Inc.’s primary source of liquidity is dividend payments it may receive from the Bank. At September 30, 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 September 30, 2017 and December 31, 2016, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.

 

 

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 September 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 September 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.  On October 26, 2017, the Company announced that it had adopted a stock repurchase program for up to 5% of its outstanding stock, or 171,910 shares of its common stock. Shares may be repurchased in open market or private transactions, through block trades, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.  The repurchase program has no expiration date.

 

 

Item 3. Defaults Upon Senior Securities 

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

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

 

32.2

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 September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income; (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.

 

 

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:      November 14, 2017	/s/ Jill Gutierrez
	Jill Gutierrez
	Chief Executive Officer
Date:      November 14, 2017	/s/ Jan R. Thiry
	Jan R. Thiry
	Executive Vice President and Chief Financial Officer

 

 

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