Bancorp 34 (BCTF) 10-Q 2024 Q3 Quarterly report

0001668340 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2023-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2024

OR

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

For the transition period from _______ to _______

Commission File Number 001-39068

BANCORP 34, INC.

(Exact name of registrant as specified in its charter)

Maryland	333-273901	74-2819148
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

8777 E. Hartford Drive, Suite 100

Scottsdale, Arizona 85255

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (623) 334-6064

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Act: None

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 filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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	☒
Smaller reporting company	☒	Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 13, 2024, the registrant had 6,609,615 shares of common stock, par value $0.01 per share, issued and outstanding.

BANCORP 34, INC.

Quarterly Report on Form 10-Q

September 30, 2024

Table of Contents

		Page Number
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	68
PART II. OTHER INFORMATION		69
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	69
Signature Page		70
Exhibit Index		71

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are not statements of historical or current fact nor are they assurances of future performance and generally can be identified by the use of forward-looking terminology, such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “plan,” “predict,” “project,” “forecast,” “guidance,” “goal,” “objective,” “prospects,” “possible” or “potential,” by future conditional verbs such as “assume,” “will,” “would,” “should,” “could” or “may,” or by variations of such words or by similar expressions. These forward-looking statements include, but are not limited to, statements related to our belief that sources of available liquidity are adequate to meet our current and expected liquidity needs, our plans to meet future cash needs through the generation of deposits, and statements regarding our business plan and strategies. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time, are difficult to predict and are generally beyond our control.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

· the possibility that the anticipated benefits of our merger (the “Merger”) with CBOA Financial, Inc. (“CBOA”), including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where the Company and CBOA do business or as a result of other unexpected factors or events;

· the impact of purchase accounting with respect to the Merger, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

· diversion of management’s attention from ongoing business operations and opportunities;

· potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the Merger;

· the integration of the business and operations of CBOA, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to CBOA’s existing business;

· challenges retaining or hiring key personnel;

· business disruptions following the Merger;

· the outcome of pending or threatened litigation or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to cybersecurity breaches or the Merger;

· increased capital requirements, other regulatory requirements or enhanced regulatory supervision;

· the inability to increase revenue and earnings;

· the inability to efficiently manage operating expenses;

· changes in capital markets;

· changes in asset quality and credit risk;

· changes in deposit costs and liquidity risk;

· adverse changes in economic conditions;

· Deterioration of the market for commercial real estate, including as a result of continued increasing ecommerce volumes, hybrid or remote work arrangements following the COVID-19 pandemic, higher vacancy rates, higher interest rates, property fraud and other factors;

· customer borrowing, repayment, investment and deposit practices;

· the impact, extent and timing of technological changes;

· changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental or legislative action, including, but not limited to, changes pertaining to banking, securities, taxation, rent regulation and housing, financial accounting and reporting, environmental protection and insurance, and the ability to comply with such changes in a timely manner;

· changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve;

· changes in interest rates, which may affect the Company’s net income and other future cash flows, or the market value of the Company’s assets, including its investment securities;

· our ability to lower our funding costs at a rate commensurate with any decreases in the rates that we can charge for loans;

· changes in accounting principles, policies, practices or guidelines;

· failure to attract new customers and retain existing customers in the manner anticipated;

· any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit, loan or other systems;

· the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation; and

· other actions of state and federal banking regulators and legislative and regulatory actions and reforms.

We caution readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and readers should not place undue reliance on any forward-looking statements. You should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section of our 2023 Annual Report on Form 10-K. Further, any forward-looking statement speaks only as of the date on which it is made, and we do not intend to and disclaim any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws.

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BANCORP 34, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	(Unaudited) September 30, 2024			December 31, 2023
ASSETS
Cash and due from banks	$	66,940		$	27,182
Federal funds sold		60,860			1,715
Total cash and cash equivalents		127,800			28,897
Available-for-sale securities, at fair value		58,191			56,690
Held-to-maturity securities, at amortized cost, net of allowance for credit losses		5,638			5,684
Loans held for investment		703,135			457,027
Allowance for credit losses		(10,523	)		(5,860	)
Loans held for investment, net		692,612			451,167
Other real estate owned		—			3,000
Premises and equipment, net		8,441			7,350
Operating leases right-of-use assets		4,301			1,819
Other investments		6,186			4,063
Accrued interest receivable		2,619			1,597
Deferred income tax asset, net		8,508			4,884
Bank owned life insurance		12,054			11,847
Core deposit intangible, net		8,004			—
Prepaid and other assets		5,060			4,267
Total assets	$	939,414		$	581,265

See accompanying notes to unaudited consolidated financial statements. 

2

BANCORP 34, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value data)

	(Unaudited) September 30, 2024			December 31, 2023
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand deposits	$	204,418		$	88,091
Savings and NOW deposits		343,114			243,505
Time deposits		237,649			128,403
Total deposits		785,181			459,999
Federal Reserve Bank BTFP Advances		27,000			29,000
Subordinated debt, net of issuance costs		23,135			24,595
Subordinated debentures, trust preferred securities		4,183			—
Escrows		181			168
Operating lease liabilities		4,869			2,011
Accrued interest and other liabilities		7,743			4,771
Total liabilities		852,292			520,544
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value Authorized: 100,000,000 shares, including 1,100,000 shares of non-voting common stock
Voting common stock, $0.01 par value Issued and outstanding: 6,614,315 and 3,873,895 on September 30, 2024, and December 31, 2023, respectively		66			39
Non-voting common stock, $0.01 par value Issued and outstanding: 820,115 on September 30, 2024, and December 31, 2023		8			8
Additional paid-in capital		66,705			43,279
Retained earnings		25,842			24,301
Accumulated other comprehensive loss		(4,197	)		(5,560	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,302	)		(1,346	)
Total stockholders’ equity		87,122			60,721
Total liabilities and stockholders’ equity	$	939,414		$	581,265

See accompanying notes to unaudited consolidated financial statements. 

3

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2024		2023			2024			2023
Interest and dividend income:
Interest and fees on loans	$	12,314	$	6,631		$	32,238		$	19,082
Interest on securities		478		395			1,444			1,218
Interest on other interest-earning assets		1,376		146			3,037			420
Total interest income		14,168		7,172			36,719			20,720
Interest expense:
Interest on deposits		5,087		2,994			13,604			7,813
Interest on borrowings		695		474			2,086			1,316
Total interest expense		5,782		3,468			15,690			9,129
Net interest income		8,386		3,704			21,029			11,591
Provision (benefit) for credit losses		—		3,146			3,866			3,280
Net interest income after provision for credit losses		8,386		558			17,163			8,311
Noninterest income:
Service charges on deposit accounts		167		106			424			328
Bank owned life insurance		70		63			207			183
Gain on sale of loans, net		22		17			27			83
Loss on sale of other real estate owned		—		—			(432	)		—
Preliminary bargain purchase gain on the merger (Note 2)		—		—			5,018			—
Other income		8		(22	)		11			(65	)
Total noninterest income		267		164			5,255			529
Noninterest expense:
Salaries and employee benefits		3,129		1,488			9,057			5,144
Occupancy		700		293			1,817			843
Data processing		929		622			2,720			1,908
FDIC and other insurance expense		173		70			554			224
Professional Fees		402		153			1,259			486
Merger Costs		—		529			3,762			1,333
Advertising		97		4			193			31
Core Deposit Intangible Amortization		430		—			926			—
Other expenses		741		441			1,764			1,023
Total noninterest expense		6,601		3,600			22,052			10,992
(Loss) income before provision for income taxes		2,052		(2,878	)		366			(2,152	)
(Benefit from) provision for income taxes		477		(603	)		(1,175	)		(426	)
Net (loss) income	$	1,575	$	(2,275	)	$	1,541		$	(1,726	)
Earnings per share:
Basic	$	0.22	$	(0.52	)	$	0.24		$	(0.48	)
Diluted	$	0.22	$	(0.52	)	$	0.24		$	(0.48	)

See accompanying notes to unaudited consolidated financial statements.

4

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024			2023			2024			2023
Net income (loss)	$	1,575		$	(2,275	)	$	1,541		$	(1,726	)
Other comprehensive (loss) gain:
Change in net unrealized gain (loss) on securities available for sale		2,115			(1,423	)		2,029			(906	)
Tax effect		(534	)		354			(511	)		179
Reclassification of gains on hedged items		(206	)		—			(206	)		—
Tax effect		51			—			51			—
Comprehensive income (loss)	$	3,001		$	(3,344	)	$	2,904		$	(2,453	)

See accompanying notes to unaudited consolidated financial statements.

5

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except share data)
Three Months Ended September 30, 2024, and 2023 

	Shares								Balances
																						Accumulated
																						Other
	Voting			Non-voting		Series A			Voting		Non-voting		Series A			Additional						Comprehensive			Unearned
	Common			Common		Preferred			Common		Common		Preferred			Paid-In			Retained			Income			ESOP
	Shares			Shares		Shares			Stock		Stock		Stock			Capital			Earnings			(Loss), Net			Shares			Total
BALANCE, JUNE 30, 2023		3,875,945			—		820,115		$	39	$	—	$	8		$	43,249		$	28,251		$	(6,431	)	$	(1,376	)	$	63,740
Net income		—			—		—			—		—		—			—			(2,275	)		—			—			(2,275	)
Other comprehensive loss		—			—		—			—		—		—			—			—			(1,069	)		—			(1,069	)
Equity awards		(1,250	)		—		—			—		—		—			(9	)		—			—			15			6
Conversion of Series A preferred stock to non-voting common stock		—			820,115		(820,115	)		—		8		(8	)		—			—			—			—			—
BALANCE, SEPTEMBER 30, 2023		3,874,695			820,115		—			39		8		—			43,240			25,976			(7,500	)		(1,361	)		60,402
BALANCE, JUNE 30, 2024		6,614,315			820,115		—		$	66	$	8	$	—		$	66,697		$	24,267		$	(5,623	)	$	(1,316	)	$	84,099
Net income		—			—		—			—		—		—			—			1,575			—			—			1,575
Other comprehensive income		—			—		—			—		—		—			—			—			1,426			—			1,426
Equity awards		—			—		—			—		—		—			8			—			—			14			22
BALANCE, SEPTEMBER 30, 2024		6,614,315			820,115		—		$	66	$	8	$	—		$	66,705		$	25,842		$	(4,197	)	$	(1,302	)	$	87,122

See accompanying notes to unaudited consolidated financial statements.

6

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except share data)
Nine Months Ended September 30, 2024, and 2023

	Shares							Balances
																					Accumulated
																					Other
	Voting			Non-voting		Series A		Voting		Non-voting		Series A			Additional						Comprehensive			Unearned
	Common			Common		Preferred		Common		Common		Preferred			Paid-In			Retained			Income			ESOP
	Shares			Shares		Shares		Stock		Stock		Stock			Capital			Earnings			(Loss), Net			Shares			Total
BALANCE, JANUARY 1, 2023		3,032,606			—		521,849	$	30	$	—	$	5		$	28,369		$	29,013		$	(6,773	)	$	(1,406	)	$	49,238
Cumulative adjustment for day one adoption of ASU 2016-13, net of tax		—			—		—		—		—		—			—			(654	)		—			—			(654	)
																			—									—
																			—									—
BALANCE, JANUARY 1, 2023 (as adjusted for the adoption of ASU 2016-13)		3,032,606			—		521,849	$	30	$	—	$	5		$	28,369		$	28,359		$	(6,773	)	$	(1,406	)	$	48,584
Net loss		—			—		—		—		—		—			—			(1,726	)		—			—			(1,726	)
Other comprehensive loss		—			—		—		—		—		—			—			—			(727	)		—			(727	)
Equity awards, net		9,000			—		—		—		—		—			—			—			—			—			—
Share repurchase		(15,000	)		—		—		—		—		—			(210	)		—			—			—			(210	)
Issuance of common shares, net of cost		848,089			—		—		9		—		—			10,857			—			—			—			10,866
Issuance of Series A preferred shares, net of cost		—			—		298,266		—		—		3			4,173			—			—			—			4,176
Conversion of Series A preferred stock to non-voting common stock		—			—		—		—		8		(8	)		—			—			—			—			—
Dividends		—			—		—		—		—		—			—			(656	)		—			—			(656	)
BALANCE, SEPTEMBER 30, 2023		3,874,695			820,115		—	$	39	$	8	$	—		$	43,240		$	25,976		$	(7,500	)	$	(1,361	)	$	60,402
BALANCE, January 1, 2024		3,873,895			820,115		—	$	39	$	8	$	—		$	43,279		$	24,301		$	(5,560	)	$	(1,346	)		60,721
Net income		—			—		—		—		—		—			—			1,541			—			—			1,541
Other comprehensive income		—			—		—		—		—		—			—			—			1,363			—			1,363
Equity awards		(1,824	)		—		—		—		—		—			143			—			—			44			187
Issuance of common stock for the Merger, (Note 2)		2,742,244			—		—		27		—		—			23,283			—			—			—			23,310
BALANCE, SEPTEMBER 30, 2024		6,614,315			820,115		—	$	66	$	8	$	—		$	66,705		$	25,842		$	(4,197	)	$	(1,302	)	$	87,122

See accompanying notes to unaudited consolidated financial statements.

7

BANCORP 34, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine months ended September 30,
	2024			2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	1,541		$	(1,726	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization		754			419
Stock dividends on other investments		(263	)		(32	)
Amortization of premiums and discounts on securities, net		118			200
Amortization of equity awards		187			105
Originations of loans held for sale		(1,866	)		(924	)
Gain on sale of loans		(27	)		(83	)
Proceeds from sale of loans		3,088			1,007
Loss on sale other real estate owned		432			—
Provision for credit losses		3,866			3,280
Net appreciation on bank-owned life insurance		(207	)		(183	)
Deferred income tax (benefit) expense		(995	)		1
Preliminary bargain purchase gain from CBOA Financial, Inc. merger		(5,018	)		—
Accretion of discount on loans		(2,602	)		—
Core deposit intangible amortization		926			—
Amortization of discount on time deposits		173			—
Amortization of discount on subordinated debt		40			—
Changes in operating assets and liabilities:
Accrued interest receivable		556			16
Prepaid and other assets		300			695
Accrued interest and other liabilities		1,054			1,519
Other, net		291			—
Net cash provided by operating activities		2,348			4,304
CASH FLOWS FROM INVESTING ACTIVITIES
CBOA Financial, Inc. merger, cash acquired		30,927			—
Proceeds from calls, sales, maturities, or principal payments on available-for-sale securities		59,933			4,136
Purchases of available-for-sale securities		(4,953	)		—
Net (purchase) redemptions of other investments		—			(1,606	)
Net change in loans held for investment		67,003			(17,173	)
Proceeds from sale of other real estate owned		2,568			—
Purchases of premises and equipment		(242	)		(100	)
Net cash provided by (used in) investing activities		155,236			(14,743	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(21,721	)		(19,146	)
Proceeds from Federal Home Loan Bank advances and other borrowings		1,663			242,398
Repayments of Federal Home Loan Bank advances and other borrowings		(38,623	)		(229,398	)
Common stock repurchases		—			(210	)
Common stock issuance, net		—			10,866
Preferred stock issuance, net		—			4,176
Payment of dividends		—			(656	)
Net cash (used in) provided by financing activities		(58,681	)		8,030
NET CHANGE IN CASH AND CASH EQUIVALENTS		98,903			(2,409	)
CASH AND CASH EQUIVALENTS, beginning of period		28,897			16,947
CASH AND CASH EQUIVALENTS, end of period	$	127,800		$	14,538
SUPPLEMENTAL DISCLOSURES
Interest paid on deposits and borrowings	$	14,110		$	8,867
Income taxes paid (refunds received)	$	7		$	124
Right-of-use assets obtained in exchange for new operating lease liabilities	$	156		$	—

See accompanying notes to unaudited consolidated financial statements. 

8

BANCORP 34, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2024

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bancorp 34, Inc. (“Bancorp 34” or the “Company”) is a Maryland corporation organized in 2016 and owns 100% of Southwest Heritage Bank (formerly Bank 34) (the “Bank”) and CBOA Financial Statutory Trust #1. On March 19, 2024, Bancorp 34 acquired CBOA Financial, Inc. (“CBOA”). Immediately following the acquisition, CBOA’s wholly-owned subsidiary, Commerce Bank of Arizona, was merged with and into Bancorp 34’s wholly-owned subsidiary, Bank 34, a federally chartered stock covered savings association. Bank 34 was subsequently rebranded as Southwest Heritage Bank. Also, as part of the acquisition of CBOA, the company acquired CBOA Financial Statutory Trust #1, a trust formed by CBOA in November 2005 to close a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. Southwest Heritage Bank provides a variety of banking services to individuals and businesses through its eight full-service community bank branches, three in Maricopa County, Arizona, in the cities of Scottsdale and Gilbert; three in Pima County, Arizona, in the cities of Tucson and Green Valley; one branch in Otero County, New Mexico in the city of Alamogordo; and one branch in Dona Ana County New Mexico, in the city of Las Cruces.

Basis of presentation – The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and may not include all the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and related footnote disclosures although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2023 Annual Report on Form 10-K.

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.

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 credit losses, the fair value marks used in accounting for the acquisition of CBOA (including estimate of consideration paid, fair value estimates of CBOA’s loans, deposits, long-term debt and a Core Deposit Intangible asset as a result of the Merger) and estimating the effective tax rate for the Company for 2024 in full. The Company holds collateral dependent loans that are categorized as level three investments and are valued on a non-recurring basis using unobservable inputs further described in Note 14.

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

Cash and cash equivalents – Cash and cash equivalents include cash, due from banks, and federal funds sold. Generally, the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. In monitoring credit risk associated with deposits in other banks, the Bank periodically evaluates the stability of the correspondent financial institutions. Banks may be required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. No reserves were required at September 30, 2024, and December 31, 2023.

Securities – If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held-to-maturity and carried at amortized historical cost less the allowance for credit losses. Securities to be held for an undeterminable period of time and not intended to be held until maturity are classified as available-for-sale and carried at fair value, with unrealized gains and losses reported in other comprehensive income or loss, net of tax. Securities classified as available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk, and other factors. Management determines the appropriate classification of securities at the time of purchase but may reassess the classification.

Net purchase premiums and discounts on securities are recognized in interest income using the level yield method over the estimated life of the security. Premiums are amortized to the earliest call date. Gains and losses on the sale of securities are determined using the specific identification method.

For available-for-sale (AFS) securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income. For AFS securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of applicable taxes.

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Allowance for credit losses - held-to-maturity securities: Held-to maturity securities are carried at amortized cost net of allowance for credit losses (“ACL”) when management has the positive intent and ability to hold them to maturity. The Company’s held-to maturity portfolio consists solely of bank subordinated debt. Management measures expected credit losses on held-to-maturity debt securities on an individual basis. When accrued interest is reversed or charged-off in a timely manner, the CECL standard provides a practical expedient to exclude accrued interest from ACL measurement. The Company considers it’s nonaccrual and charge-off policies to be timely for all investments and securities, as such, accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Loans held for investment, net – Loans the Bank originates and that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs and net of any deferred fees or costs. Loans are considered past due, or delinquent based on the contractual terms in the loan agreement and how recently repayments have been received. Interest income is recognized based upon principal amounts outstanding. The accrual of interest is discontinued at the time the loan is 90 days past due or when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal, unless the credit is well secured and in process of collection. Interest previously accrued but uncollected on such loans is reversed and charged against current income. Loans are charged-off as uncollectible when, in the opinion of management, collectability of principal is improbable. If payment is received on a nonaccrual loan, generally the payment is first applied to the remaining principal balance. Payments are then applied to recover any charged-off amounts related to the loan. Finally, if both the principal balance and any charge-offs have been recovered, then the payment will be recorded as fee and interest income. Personal loans are typically charged off when no later than 180 days past due.

Loan origination fees on loans the Bank originates, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. See Note 2 - Business Combination, for our accounting methodology for the loans acquired in the Merger.

Allowance for credit losses - loans: The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL excludes loans held-for-sale and loans accounted for under the fair value option. The Company elected to not measure an ACL for accrued interest receivables, as we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued but uncollected interest is reversed from current income. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. An industry index is used in the model to provide historical credit loss experience and provides the basis for the estimation of expected credit losses. The Company identified and grouped portfolio segments based on risk characteristics and underlying collateral.

The principal segments of our loan portfolio are discussed below:

Commercial loans. We provide a mix of variable and fixed rate commercial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs and business expansion. Commercial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with business operations as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, and equipment. Personal guarantees are typically obtained on commercial loans as well.

Commercial real estate loans. Our commercial real estate loans consist of both real estate occupied by the borrower for ongoing operations and non-owner occupied real estate properties. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner and non-owner-occupied offices, warehouses and production facilities, office buildings, hotels, mobile home parks, retail centers, and assisted living facilities.

Multifamily. Our multifamily portfolio includes properties with 5 or more dwellings where the use is primarily residential.

Construction and land development loans. Our construction and land development loans are comprised of residential construction, commercial construction, and land acquisition and development loans.

Residential real estate loans. Our residential real estate loans consist of residential properties that generally do not qualify for secondary market sale.

Consumer loans. Our consumer loans include direct personal loans and automobile loans. Personal loans are generally unsecured or secured by cash held at the bank.

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The ACL for pooled loans is estimated using a non-discounted cash flow methodology. The bank then applies probability of default and loss given default to the cash flow methodology to calculate expected losses within the model. This allows the bank to identify the timing of default as compared to when the actual loss event may occur. The results are then aggregated to produce segment level results and reserve requirements for each segment. The Company uses a 12-month forecast that is reasonable and supportable within the ACL calculation and then reverts to historical credit loss experience on a straight-line basis over a one-year timeline. Historical loss experience is then used for the remaining life of the assets. The Company uses several economic variables in the calculation of the ACL, the most significant of which is the economic forecast for the national unemployment rate. Changes in the economic forecast for unemployment rates could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled loan evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Qualitative adjustments to historical loss data are made based on management’s assessment of the risks that may lead to a future loan loss or differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, changes in environmental and economic conditions, or other relevant factors.

The allowance is increased by a provision for credit losses, which is charged to expense and reduced by charge-offs, net of recoveries.

Acquired Loans – At the purchase or acquisition date, loans are evaluated to determine whether there has been more than insignificant credit deterioration since origination. Loans that have experienced more than insignificant credit deterioration since origination are referred to as purchase credit deteriorated (PCD) loans. In its evaluation of whether a loan has experienced more than insignificant deterioration in credit quality since origination, the Company takes into consideration loan grades, payment performance, past due status, and nonaccrual status. The Company also considered the results of an independent external credit review completed during the due diligence phase to identify other loans that have experienced deterioration. At the purchase or acquisition date, the amortized cost basis of PCD loans is equal to the purchase price and an initial estimate of credit losses. The initial recognition of expected credit losses on PCD loans is reflected as a “Day 2” on-balance sheet gross-up to the allowance for credit losses and as an increase to PCD loans. When the initial measurement of expected credit losses on PCD loans is calculated on a pooled loan basis, the expected credit losses are allocated to each loan within the pool. Any difference between the initial amortized cost basis and the unpaid principal balance of the loan represents a noncredit discount or premium, which is accreted (or amortized) into interest income over the life of the loan. Subsequent changes to the ACL on PCD loans are recorded through the provision for credits losses. For purchased loans that are not deemed to have experienced more than insignificant credit deterioration since origination and are therefore not deemed PCD, any discounts or premiums included in the purchase price are accreted (or amortized) over the contractual life of the individual loan. See Note 2 - Business Combination for further information related to PCD and Non-PCD loans acquired in connection with the Merger.

Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the assets which range from three to seven years for equipment and 15 to 40 years for leasehold improvements and buildings. Maintenance and repairs that do not extend the useful lives of premises and equipment are charged to expense as incurred.

Leases – Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

Other investments – The Bank has investments in The Independent Bankers Bank (TIB), Pacific Coast Bankers’ Bancshares (PCBB) and the Federal Home Loan Bank (FHLB) of Dallas. The Bank is a member of FHLB system. The Bank is required to maintain minimum levels of FHLB stock-based on various factors, including the amount of borrowings outstanding, mortgage assets, and the Bank’s total assets. Financial institution stock is carried at cost, is classified as a restricted security, and is periodically evaluated for impairment based on ultimate recovery. The carrying value of financial institution stocks at September 30, 2024, and December 31, 2023, was $4,665,000 and $3,254,000, respectively. Cash and stock dividends are recorded in Other Income in the Consolidated Statement of Comprehensive Income.

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The Company invested in the Castle Creek Launchpad Fund I, LP in April 2022. The Company has committed to funding up to $2 million over a 4-year funding period. As of September 30, 2024, the investment has a carrying value of $982,000 compared to $828,000 as of December 31, 2023. As of both dates, the investment was valued using the net asset value practical expedient. The scope of the NAV practical expedient is limited to investments without readily determinable fair values in entities that calculate NAV per share consistently with the measurement principles of ASC 946, Financial Services — Investment Companies. Both criteria were present at each of the balance sheet dates noted above.

Transfers of financial assets – Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank Owned Life Insurance (BOLI) – The Bank holds BOLI representing life insurance on the lives of certain executives of the Bank purchased in order to help offset the costs of the Bank’s benefit expenses. BOLI is carried on our consolidated balance sheets at the net cash surrender value of the policies and increases in the net cash surrender value are recorded in noninterest income in the consolidated statements of comprehensive income (loss) as bank owned life insurance income.

Other real estate owned – Other real estate owned is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. Generally, these properties are initially recorded at fair value, less estimated cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management; other real estate owned is carried at the lower of the carrying amount or fair value, less the estimated cost to sell. Expenses, gains and losses on disposition, and reductions in carrying value are reported as non-interest expenses. There was no other real estate owned as of September 30, 2024, and $3,000,000 of other real estate owned at December 31, 2023.

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

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

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

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

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Escrow accounts – Funds collected from loan customers for insurance, real estate taxes and other purposes are maintained in escrow accounts and carried as a liability in the Consolidated Balance Sheets. These funds are periodically remitted to the appropriate entities to satisfy those claims.

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Financial Instruments with off-balance-sheet risk – In the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in The Consolidated Financial Statements when they are funded or related fees are incurred or received. The credit risk associated with these instruments is generally evaluated using the same methodology as for loans held for investment. 

Allowance for credit losses - off-balance sheet credit exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancelable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the Provision for credit losses and is recorded in other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments that are not unconditionally cancelable by the Company. The loss rates used are calculated using the same assumptions as the associated funded balance.

Advertising cost – The Bank conducts direct and non-direct response advertising and purchases prospective customer lists from various sources. These costs are expensed as incurred. Advertising costs from continuing operations are not material.

Employee Stock Ownership Plan (ESOP) – The Bank sponsors an internally leveraged ESOP. The cost of shares issued to the ESOP but not yet released is shown as unearned ESOP shares, an element of stockholders’ equity in our consolidated balance sheets. As shares are committed to be released, compensation expense is recorded equal to the market price of the shares, and the shares become outstanding for purposes of earnings per share calculations. To the extent that the fair value of ESOP shares committed differs from the cost of such shares, the difference is charged or credited to additional paid-in capital in stockholders’ equity.

Cash dividends on unallocated ESOP shares may be used to make payments on the ESOP loan and may be allocated to participant accounts in proportion to their account balances. Cash dividends paid on allocated shares are recorded as a reduction of retained earnings and, at the direction of the employer may be: a) credited directly to participant accounts in proportion to their account balances, or b) distributed directly to participants (outside the plan) in proportion to their account balances, or c) used to make payments on the ESOP loan requiring the release of shares with at least a similar fair market value be allocated to participant accounts. In addition, participants have the right to receive an immediate distribution of their vested cash dividends paid on shares of common stock credited to their accounts.

Other stock-based compensation – The Company has stock-based compensation plans which provide for the award of various benefits to directors and employees, including restricted stock and options to purchase stock. Each restricted stock award is separated into vesting tranches and compensation expense is recognized based on the fair value at the date of grant for each tranche on a straight-line basis over the vesting period reduced for estimated forfeitures. Cash dividends on unvested restricted shares are charged to compensation expense. The fair value of stock option awards granted is estimated using the Black-Scholes-Merton option pricing model using inputs including the option exercise price and risk-free rate of return, and assumptions for expected dividend yield, expected stock price volatility and the expected life of the awards. The closing market price of the Company’s stock on the date of grant is the exercise price for the stock options and the estimated fair value of the restricted stock awards. Expense is recognized over the required service period, defined as the vesting period. The Company’s accounting policy is to recognize expense net of actual forfeitures.

Employee retention credit – The Company qualified for identified refunds based upon federal laws that allow an eligible employer to obtain a refundable employment tax credit under the Coronavirus Aid, Relief, and Economic Security Act, as amended by Taxpayer Certainty and Disaster Tax Relief Act of 2020, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act. A portion of the credits the Company received, $254,000, met the substantial authority to file a claim with the IRS. However, based on uncertainty associated with the IRS’s regulation and notices associated with qualifying under the governmental order eligibility criteria, the Company has concluded the claim does not meet the probable threshold required to recognize the benefits of the credit. As such, the Company will not recognize the income until the statute of limitations has elapsed.

Income taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Accrued interest and penalties associated with uncertain tax positions are recognized as part of the income tax provision. The Company has no uncertain tax positions. 

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Comprehensive income (loss) – Comprehensive income (loss) consists of unrealized gains and losses on securities available for sale, net of gains or losses reclassified on securities designated as hedged items in fair value hedges as of September 30, 2024, and solely of unrealized gains and losses on available for sale securities as of December 31, 2023.

Earnings per common share – Basic earnings per common share is net income divided by the weighted-average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Maryland corporate law does not provide for treasury shares; therefore, shares repurchased are removed from issued and outstanding immediately and would not be considered outstanding. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings per share are restated for all stock splits and stock dividends through the date of issuance of the consolidated financial statements. The two-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. 

Derivatives – At the inception of derivative contracts, the Company designates derivatives as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are: (i) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”); and (ii) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”).

For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged.

The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the consolidated balance sheet under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income.

The Company discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.

The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. We anticipate that the counterparties will be able to fully satisfy their obligation under our derivative contracts with them. All the contracts to which we are a party have cash flows that settle monthly.

Recent Accounting Guidance That Has Not Yet Been Adopted – The following new accounting standard has yet to be adopted by the Company but may have an impact on financial statements and/or related disclosures once implemented.

In December 2023, the Financial Accounting Standards Board issued a final standard on improvements to income tax disclosures. The standard requires, among other things, disaggregated information regarding effective tax rate reconciliation components, as well as information on income taxes paid. This standard, Accounting Standards Update No. 2023-9, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, applies to all entities subject to income taxes. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted.

On November 27, 2023, the FASB issued ASU 2023-07, “Segment Reporting (ASC 280): Improvements to Reportable Segment Disclosures”, intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an interim and annual basis. The amendments in the update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. For public business entities, amendments in the update should be applied retrospectively to all periods presented in the financial statements. The Company is currently evaluating the impact of this standard on its disclosures, however does not expect adoption of the update to have a material impact on the consolidated financial statements.

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NOTE 2 – BUSINESS COMBINATION

On March 19, 2024, Bancorp 34 completed its previously announced merger with CBOA pursuant to the Agreement and Plan of Merger, dated as of April 27, 2023, as amended (the “Merger Agreement”). Under the Merger Agreement, CBOA was merged with and into Bancorp 34, with Bancorp 34 continuing as the surviving entity (the “Merger”). Immediately following the completion of the Merger, CBOA’s wholly-owned subsidiary, Commerce Bank of Arizona, an Arizona state-chartered bank, was merged with and into the Bank, with the Bank continuing as the surviving bank.

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each CBOA shareholder had the right to receive 0.2628 shares of Bancorp 34 common stock, for each share of CBOA common stock owned by the CBOA shareholder, with cash to be paid in lieu of fractional shares. Additionally, each outstanding CBOA restricted stock unit vested and was cancelled and converted automatically into the right to receive 0.2628 shares of Bancorp 34 common stock with respect to each share of CBOA common stock underlying such restricted stock unit. In connection with the Merger, Bancorp 34 issued approximately 2.7 million shares of Bancorp 34 common stock, which had a fair value of approximately $23.3 million based on a common shares valuation as of the Merger date. Each outstanding share of Bancorp 34 common stock remained outstanding and was unaffected by the Merger. 

Commerce Bank of Arizona operated five full-service offices serving customers in Gilbert, Green Valley, Oro Valley, Scottsdale and Tucson, Arizona. Completing the Merger further enhanced the Bank’s Arizona footprint, allowed for greater efficiencies based on size and scale, and strengthened the depth of the management team. The combined banks operate as Southwest Heritage Bank and serve customers from eight full-service offices in Arizona and southern New Mexico. The core system conversion was executed in March 2024. 

We accounted for the Merger using the acquisition method of accounting in accordance the Financial Accounting Standards Board’s Accounting Standards Code 805 (“ASC 805”), Business Combinations, and accordingly, the assets and liabilities of CBOA were recorded at their respective Merger date estimated fair values. The estimated fair values of assets and liabilities are preliminary and subject to refinement during the measurement period (which cannot exceed one year from the Merger date), as additional information relative to the Merger date fair values becomes available. Effective in March 2024, we recognized a preliminary bargain purchase gain of $5.1 million in connection with the Merger (not taxable for income tax purposes), which is recognized in our first quarter 2024 operating results. The core deposit intangible asset of $8.9 million represents the estimated value of Commerce Bank of Arizona’s long-term deposit relationships with its customers and will be amortized over an estimated weighted average life of ten years using an accelerated method, which approximates the estimated run-off of the acquired deposits. During 2023 and through September 30, 2024, Bancorp 34 incurred, on a cumulative basis, approximately $6.8 million of Merger-related expenses.

The primary cause of the March 2024 $5.1 million preliminary bargain purchase gain was a decrease in Bancorp 34, Inc.’s common share valuation from April 2023 to March 2024. In April 2023 and upon the announcement of the Merger, the common share exchange ratio was 0.24, and Bancorp 34, Inc’s common share valuation was estimated to be $12.16 per share, based upon a third-party fairness opinion obtained in connection with the Merger. As of the Merger date in March 2024 and before Bancorp 34, Inc. issued its 2.7 million shares for the Merger, the common share exchange ratio was 0.2628 and Bancorp, Inc’s common share valuation was estimated to be $8.50, based on a March 2024 common share valuation completed by an independent third party. 

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The following table includes the: (i) total consideration paid on March 19, 2024, in connection with the Merger; (ii) fair values of the assets acquired; (iii) fair values of the liabilities assumed; and (iv) resulting preliminary bargain purchase gain (in thousands).

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

(in thousands)	As Recorded by CBOA			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by Bancorp 34
Fair Value of the common stock consideration							$	23,310
Identifiable assets acquired:
Cash and cash equivalents	$	30,927		$	—		$	30,927
Debt securities available-for-sale, at fair value		57,844			376			58,220
Loans
Purchased performing		300,080			(15,357	)		284,723
Purchased credit deteriorated		30,425			(4,262	)		26,163
Allowance for credit losses on loans		(3,855	)		3,855			—
Deferred loan fees		(1,033	)		1,033			—
Deferred tax on assets acquired		—			1,233			1,233
Operating right-of-use assets		2,866			—			2,866
Core deposit intangibles		—			8,930			8,930
Other assets		6,284			(20	)		6,264
Total identifiable assets acquired	$	423,538		$	(4,212	)	$	419,326
Identifiable liabilities assumed:
Deposits		346,995			(252	)		346,743
Short-term borrowings		35,000			—			35,000
Long-term borrowings		5,155			(1,012	)		4,143
Deferred taxes on liabilities assumed		—			253			253
Other liabilities		4,661			80			4,741
Total identifiable liabilities assumed	$	391,811		$	(931	)	$	390,880
Net identifiable assets acquired	$	31,727		$	(3,281	)	$	28,446
Preliminary bargain purchase gain							$	(5,136	)

As permitted by ASC 805, Business Combinations, the above preliminary estimates may be refined during the measurement period (which cannot exceed one year from the Merger date), to reflect any new information obtained about facts and circumstances existing at the Merger date. Any changes in the above preliminary estimates will be recognized in the period identified.

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During the nine months ended September 30, 2024, certain measurement period adjustments were recognized as shown in the table below:

Schedule of certain measurement period adjustments

(in thousands)	Estimated Fair Values as Recorded by Bancorp 34			Measurement Period Adjustments for the nine months ended September 30, 2024			September 30, 2024
Fair Value of the common stock consideration	$	23,310		$	—		$	23,310
Identifiable assets acquired:
Cash and cash equivalents		30,927			—			30,927
Debt securities available-for-sale, at fair value		58,220			—			58,220
Loans:
Purchased performing		284,723			—			284,723
Purchased credit deteriorated		26,163			—			26,163
Allowance for credit losses on loans		—			—			—
Deferred Loan Fees		—			—			—
Deferred tax on assets acquired		1,233			(157	)		1,076
Operating right-of-use assets		2,866			—			2,866
Core deposit intangibles		8,930			—			8,930
Other assets		6,264			39			6,303
Total identifiable assets acquired	$	419,326		$	(118	)	$	419,208
Identifiable liabilities assumed:
Deposits		346,743			—			346,743
Short-term borrowings		35,000			—			35,000
Long-term borrowings		4,143			—			4,143
Deferred taxes on liabilities assumed		253			—			253
Other liabilities		4,741			—			4,741
Total identifiable liabilities assumed	$	390,880		$	—		$	390,880
Net identifiable assets acquired	$	28,446		$	(118	)	$	28,328
Preliminary bargain purchase gain	$	(5,136	)	$	118		$	(5,018	)

There were no measurement period adjustments during the three months ended September 30, 2024.

17

Purchased Performing Loans (Non-Purchased Credit Deteriorated Loans)

Non-purchased credit deteriorated loans (“non-PCD loans”) are loans, of the date of the Merger and based upon management’s assessment, which have not experienced a more-than-insignificant deterioration in credit quality since the date the loans were originated. The loan’s purchase price becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the unpaid principal balance of the loan is a discount, which is comprised of a credit and non-credit component, and is accreted as interest income over the life of the loan.

An allowance for credit losses is determined using the same methodology as other loans held for investment. A $4.1 million “Day Two” allowance for credit losses for non-PCD loans was recorded through the provision expense for credit losses. This $4.1 million allowance for credit losses for non-PCD loans represents management’s estimate of lifetime credit losses on these non-PCD loans.

Purchased Credit Deteriorated Loans

Purchased credit deteriorated loans (“PCD loans”) represent loans, as of the date of the Merger and based upon management’s assessment, which had experienced a more-than-insignificant deterioration in credit quality since the date the loans were originated. An allowance for credit losses for PCD loans was determined using the same methodology as other loans held for investment. The initial allowance for credit losses for PCD loans was determined on a collective basis and was allocated to individual PCD loans. This allowance for credit losses is reflected as a “Day 2” on-balance sheet gross-up to the allowance for credit losses and as an increase to PCD loans. The PCD loans’ purchase price of $26.2 million plus the allowance for credit losses of $1.1 million, becomes the initial amortized cost basis of $27.3 million for the PCD loans. The difference between the initial amortized cost basis and the unpaid principal balance of the PCD loans of $30.4 million, results in a non-credit discount for the PCD loans of $3.1 million, which is accreted as interest income over the life of the PCD loans. Thereafter, the PCD loans are subject to the same interest rate recognition and credit model as non-PCD loans, with changes to the allowance for credit losses recorded through provision expense.

As of the Merger date and as described above, the PCD Loans included the following components (in thousands):

Schedule of  Purchased Credit Deteriorated Loans

Unpaid principal balance	$	30,425
Allowance for credit losses at acquisition		(1,164	)
Non-credit discount		(3,098	)
Purchase price	$	26,163

Pro Forma Information

The pro forma revenues and pro forma earnings in the following table, for each of the periods presented, combine CBOA’s consolidated operating results and Bancorp 34’s consolidated operating results as if the Merger occurred on January 1, 2023.

Pro forma amounts for the three months ended September 30, 2024, primarily reflect the following pro forma adjustments: (i) interest and fee income decrease related to lower loan discount accretion income of $162,000 and related taxes of $40,000; (ii) interest expense decrease related to lower deposit liability and long-term debt discount expense of $66,000 and related taxes of $17,000; and (iii) non-interest expense decrease due to lower Core Deposit Intangible amortization expense of $60,000 and related taxes of $15,000.

18

Pro forma amounts for the three months ended September 30, 2023, primarily reflect the following pro forma adjustments: (i) interest and fee income increase related to loan discount accretion income of $775,000 and related taxes of $194,000; (ii) interest and fee income decrease, due to the removal of CBOA’s pre-Merger loan fee income of $230,000 and related taxes of $58,000 (iii) interest expense increase related to deposit liability and long-term debt discount expense of $52,000 and related taxes of $13,000; (iii) non-interest expense decrease due to removal of Merger expenses for both CBOA and the Bank of $660,000 and related taxes of $36,000; and (iv) non-interest expense increase due to Core Deposit Intangible amortization expense of $415,000 and related taxes of $104,000. The pro forma net loss for the three months ended September 30, 2023, also reflects a $3 million pre-tax provision for credit losses in connection with one troubled real estate credit.

Pro forma amounts for the nine months ended September 30, 2024, primarily reflect the following pro forma adjustments: (i) interest and fee income decrease related to lower loan discount accretion income of $277,000 and related taxes of $70,000; (ii) interest and fee income decrease due to the removal of CBOA’s pre-Merger loan fee income of $175,000 and related taxes of $44,000; (iii) interest expense decrease related to deposit liability and long-term debt discount expense of $141,000 and related taxes of $35,000; (iv) provision for credit losses decrease due to removal of the Merger-related non-recurring Day 2 Non-PCD Loan charge of $4.1 million and related taxes of $1 million; and (v) non-interest income decrease due to removal of a non-recurring non-taxable $5 million preliminary bargain purchase gain. Additionally, there were non-interest expense pro forma adjustments, which were primarily comprised of: (i) removal of Merger expenses for both CBOA and the Bank of $4.4 million and related taxes of $962,000; (ii) removal of Merger-related non-recurring change-in-control charges of $654,000 and related taxes of $164,000; and (iii) Core Deposit Intangible amortization expense increase of $221,000 and related taxes of $55,000.

Pro forma amounts for the nine months ended September 30, 2023, primarily reflect the following pro forma adjustments: (i) interest and fee income increase related to loan discount accretion income of $2.3 million and related taxes of $581,000; (ii) interest and fee income decrease due to the removal of CBOA’s pre-Merger loan fee income of $576,000 and related taxes of $144,000; (iii) interest expense increase related to deposit liability and long-term debt discount expense of $246,000 and related taxes of $62,000; (iv) non-interest expense decrease related to removal of Merger expenses for both CBOA and the Bank of $1.8 million and related taxes of $54,000; and (iii) non-interest expense increase related to Core Deposit Intangible amortization expense of $1.3 million and related taxes of $320,000. The pro forma earnings for the nine months ended September 30, 2023, also reflect a $3 million pre-tax provision for credit losses in connection with one troubled real estate credit.

Management prepared these pro forma results for comparative purposes only and these pro forma results are not necessarily indicative of the actual results that would have been obtained had the Merger actually occurred on January 1, 2023. No assumptions have been applied to the pro forma revenues and pro forma earnings regarding, for example, possible revenue enhancements, expense efficiencies, fixed cost leverage opportunities, or non-earning asset dispositions.

Additionally, the pro forma amounts for Bancorp 34’s weighted average basic and diluted common shares outstanding are based upon: (i) Bancorp 34’s actual weighted average basic and diluted common shares outstanding for each of the periods presented; together with and as adjusted for (ii) Bancorp 34’s approximate 2.7 million common shares issued in connection with the Merger, as if the Merger had occurred on January 1, 2023.

19

Business Combination Pro Forma Information

	Pro Forma
	Three months ended September 30,					Nine months ended September 30,
(in thousands, except per share data)	2024		2023			2024		2023
Total revenues (net interest income and non-interest income)	$	8,557	$	8,603		$	26,284	$	26,152
Net income (loss)	$	1,547	$	(832	)	$	5,016	$	2,125
Earnings (loss) per share - basic	$	0.21	$	(0.12	)	$	0.67	$	0.31
Earnings (loss) per share - diluted	$	0.21	$	(0.12	)	$	0.67	$	0.31

Separately, management has determined that it is impractical to report amounts of revenue and earnings of CBOA after the Merger date of March 19, 2024. Bank core systems and related data conversions occurred, after the Merger date, from March 22, 2024, through March 25, 2024. Accordingly, management believes that reliable, accurate, separate, and complete revenue and earnings information for CBOA is no longer available.

NOTE 3 – SECURITIES

Available-for-sale and held-to-maturity securities have been classified in the consolidated balance sheets according to management’s intent on September 30, 2024, and December 31, 2023. The amortized cost of such securities and their approximate fair values were as follows (dollars in thousands):

Schedule of Available-for-sale and held-to-maturity securities

Available-for-sale	September 30, 2024
	Gross		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
Mortgage-backed securities	$	35,262	$	6	$	(3,324	)	$	31,944
U.S. Treasuries		5,044		—		(189	)		4,855
U.S. government agencies		214		—		(6	)		208
Municipal obligations		22,058		—		(1,760	)		20,298
Corporate debt		1,000		—		(114	)		886
Total	$	63,578	$	6	$	(5,393	)	$	58,191

Held-to-maturity	September 30, 2024
	Gross			Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost			Gains		Losses			Value
Corporate debt	$	5,774		$	—	$	(417	)	$	5,357
Total	$	5,774		$	—	$	(417	)	$	5,357
Allowance for Credit Losses	$	(136	)
Net Carrying Value of Held-to-maturity securities	$	5,638

20

Available-for-sale	December 31, 2023
	Gross		Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
Mortgage-backed securities	$	36,829	$	—	$	(4,362	)	$	32,467
U.S. Treasuries		3,069		—		(277	)		2,792
U.S. government agencies		287		—		(17	)		270
Municipal obligations		22,921		—		(2,593	)		20,328
Corporate debt		1,000		—		(167	)		833
Total	$	64,106	$	—	$	(7,416	)	$	56,690

Held-to-maturity	December 31, 2023
	Gross			Gross		Gross			Estimated
	Amortized			Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost			Gains		Losses			Value
Corporate debt	$	5,799		$	—	$	(692	)	$	5,107
Total	$	5,799		$	—	$	(692	)	$	5,107
Allowance for Credit Losses	$	(115	)
Net Carrying Value of Held-to-maturity securities	$	5,684

There was no allowance for credit losses related to available-for-sale securities as of September 30, 2024, or December 31, 2023.

Securities with unrealized losses on September 30, 2024, and December 31, 2023, that have not been recognized in income are as follows (dollars in thousands):

Schedule of  Securities with unrealized losses

	Continued Unrealized Loss for Less than 12 Months					Continued Unrealized Loss for 12 Months or More					Total
Description of securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available-for-sale, September 30, 2024
Mortgage-backed securities	$	1,967	$	(4	)	$	27,191	$	(3,320	)	$	29,158	$	(3,324	)
U.S. Treasuries		1,985		(1	)		2,870		(188	)		4,855		(189	)
U.S. government agencies		—		—			208		(6	)		208		(6	)
Municipal obligations		—		—			19,722		(1,760	)		19,722		(1,760	)
Corporate debt		—		—			886		(114	)		886		(114	)
Total temporarily impaired	$	3,952	$	(5	)	$	50,877	$	(5,388	)	$	54,829	$	(5,393	)

Held to Maturity: September 30, 2024
Corporate debt	$	—	$	—	$	5,357	$	(417	)	$	5,357	$	(417	)
Total temporarily impaired	$	—	$	—	$	5,357	$	(417	)	$	5,357	$	(417	)

21

	Continued Unrealized Loss for Less than 12 Months				Continued Unrealized Loss for 12 Months or More					Total
Description of securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available-for-sale, December 31, 2023
Mortgage-backed securities	$	—	$	—	$	30,462	$	(4,362	)	$	30,462	$	(4,362	)
U.S. Treasuries		—		—		2,792		(277	)		2,792		(277	)
U.S. government agencies		—		—		270		(17	)		270		(17	)
Municipal obligations		—		—		20,328		(2,593	)		20,328		(2,593	)
Corporate debt		—		—		833		(167	)		833		(167	)
Total temporarily impaired	$	—	$	—	$	54,685	$	(7,416	)	$	54,685	$	(7,416	)

Held to Maturity December 31, 2023
Corporate debt	$	904	$	(96	)	$	4,203	$	(596	)	$	5,107	$	(692	)
Total temporarily impaired	$	904	$	(96	)	$	4,203	$	(596	)	$	5,107	$	(692	)

Unrealized losses on U.S. Treasury bonds and U.S. Agency bonds have not been recognized through the income statement due to the bonds being backed in full by the United States government. Management has no intent to sell the securities, the Company can hold the securities to maturity, and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the securities approach their maturity date.

Unrealized losses on mortgage-backed securities have not been recognized into income. At September 30, 2024, 84% of the mortgage-backed securities portfolio were issued by U.S. government sponsored entities or agencies. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not intend to sell the mortgage-backed securities, no unrealized losses have been recognized into income.

The remainder of the mortgage-backed securities portfolio includes non-agency structured commercial mortgage-backed securities (CMBS) with a fair value of $5,020,000 which had unrealized losses of $447,000 at September 30, 2024. Each CMBS was rated AAA at September 30, 2024. These bonds have significant credit enhancement and have performed as agreed. Management does not intend to sell the CMBS and it is likely that management will not be required to sell the securities prior to their anticipated recovery.

Unrealized losses on available-for-sale municipal obligation securities have not been recognized through the income statement. As of September 30, 2024, the credit rating for these securities ranges from A+ to AAA. General Obligation bonds represent 30% of the municipal bond portfolio. The remaining 70% of the portfolio consists of revenue bonds, the majority of which are essential purpose or have an insurance wrapper. Management has no intent to sell these securities and can hold the securities to maturity. The decline in fair value is largely due to changes in market interest rates and management expects the fair value to recover as the securities approach their maturity date.

Management evaluated the foregoing available-for-sale securities for potential impairment as of September 30, 2024. Based on this evaluation, including the preceding analysis summary, management has determined that the unrealized losses on available-for-sale securities are primarily attributable to increases in market interest rates and do not reflect credit losses. Accordingly, as of September 30, 2024, management concluded that an allowance for credit losses on available-for-sale securities is not necessary, as the decline in fair value is not indicative of credit losses. Management will continue to monitor the fair value of these available-for-sale securities and reassess the need for an allowance for credit losses if circumstances change.

22

Certain information concerning the sale of debt securities available-for-sale for the three and nine months ended September 30, 2024, and 2023, was as follows (dollars in thousands):

Schedule of Information regarding Sale of Debt Securities Available-for-Sale

	Three months ended
	September 30, 2024		September 30, 2023
Proceeds from sale	$	—	$	—
Gross realized gains	$	—	$	—
Gross realized losses	$	—	$	—

	Nine months ended
	September 30, 2024		September 30, 2023
Proceeds from sale	$	54,085	$	—
Gross realized gains	$	—	$	—
Gross realized losses	$	—	$	—

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

As of September 30, 2024, the amortized cost and estimated fair value of the debt securities portfolio are shown by contractual maturity dates (dollars in thousands).

Schedule of Amortized Cost and Fair Value of Investment Securities

	Amortized Cost		Fair Value		Average Yield
Available-for-sale
Due in one year or less	$	3,027	$	3,020		4.51	%
Due from one to five years		13,778		12,861		1.74	%
Due from five to ten years		11,511		10,366		2.41	%
Due after ten years		—		—		—
Mortgage-backed securities		35,262		31,944		2.36	%
Total	$	63,578	$	58,191		2.37	%
	Amortized Cost		Fair Value		Average Yield
Held-to-maturity
Due in one year or less	$	—	$	—		—
Due from one to five years		—		—		—
Due from five to ten years		5,774		5,357		4.31	%
Due after ten years		—		—		—
Total	$	5,774	$	5,357		4.31	%

Securities pledged at September 30, 2024, and December 31, 2023, are comprised of available-for-sale securities and had fair values totaling $55,611,000 and $43,070,000, respectively.

The Company had no investment in securities of issuers outside of the United States as of September 30, 2024, or December 31, 2023.

23

Allowance for Credit Losses for HTM Securities

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The held-to-maturity investment portfolio consists solely of bank holding company subordinated debt. Accrued interest receivable on held-to-maturity debt securities totaled $52,000 at September 30, 2024, and is excluded from the estimate of credit losses. Refer to Note 1 – Nature of Operations and Significant Accounting Policies for additional information on the Company’s methodology on estimating credit losses. The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity by major security type (dollars in thousands):

Schedule of Allowance for Credit Losses for Securities Held-To-Maturity

For the three months ended September 30, 2024	Corporate Bonds
Allowance for credit losses:
Beginning balance June 30, 2024	$	136
Provision for credit losses		—
Securities charged off (recoveries)		—
Total ending allowance balance September 30, 2024		136

For the nine months ended September 30, 2024	Corporate Bonds
Allowance for credit losses:
Beginning balance December 31, 2023	$	115
Provision for credit losses		21
Securities charged off (recoveries)		—
Total ending allowance balance September 30, 2024		136

The Company monitors the credit quality of held-to-maturity securities on a quarterly basis. As of September 30, 2024, there were no held-to-maturity securities past due or on non-accrual.

NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

On January 1, 2023, the Company adopted the new CECL standard, ASU 2016-13, using the modified retrospective method for all financial assets measured at amortized cost. For comparability, the Company has adjusted certain prior period loan amounts to conform to the current presentation of segmentation under CECL. Refer to Note 1 - Summary of Significant Accounting Policies for additional information related to the Company’s methodology for estimating the allowance for credit losses.

The following presents a summary of the Company’s loans at amortized cost as of the dates noted (dollars in thousands):

Schedule of Company's Loan

	September 30,			December 31,
	2024			2023
1-4 Family residential real estate	$	71,279		$	61,645
Commercial		120,510			50,169
Consumer and other		902			698
Construction		30,630			34,538
Non-Owner Occupied (NOO) CRE		259,966			167,203
Owner Occupied (OO) CRE		157,184			82,228
Multifamily		62,664			60,546
Loans held for investment		703,135			457,027
Less: allowance for credit losses		(10,523	)		(5,860	)
Loans, net	$	692,612		$	451,167

24

Allowance for Credit Losses on Loans

Beginning January 1, 2023, the allowance for credit losses for loans is measured on the loan’s amortized cost basis, excluding interest receivable. Interest receivable excluded at September 30, 2024, and December 31, 2023, was $2.3 million and $1.3 million, respectively, presented in accrued interest receivable on the Condensed Consolidated Balance Sheets. Refer to Note 1 - Summary of Significant Accounting Policies for additional information related to the Company’s methodology for estimating the allowance for credit losses.

Allocation of a portion of the allowance for credit losses to one category of loans does not preclude its availability to absorb losses in other categories. The following table presents the activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2024, and September 30, 2023, (dollars in thousands):

Schedule of Allowance for Credit Losses

	1–4 Family											NOO		OO
	Residential						Consumer					Commercial		Commercial
	Real Estate			Commercial			and Other		Construction			Real Estate		Real Estate			Multifamily			Total
Changes in allowance for credit losses for the three months ended September 30, 2024
Beginning balance	$	977		$	2,688		$	9	$	729		$	3,374	$	2,245		$	779		$	10,801
Provision (credit) for loan losses		(49	)		194			—		(215	)		258		(134	)		(54	)		—
Loans charged off		—			(350	)		—		—			—		—			—			(350	)
Recoveries		2			70			—		—			—		—			—			72
Balance on September 30, 2024	$	930		$	2,602		$	9	$	514		$	3,632	$	2,111		$	725		$	10,523

	1–4 Family											NOO		OO
	Residential					Consumer						Commercial		Commercial
	Real Estate		Commercial			and Other			Construction			Real Estate		Real Estate		Multifamily		Total
Changes in allowance for credit losses for the nine months ended September 30, 2024
Beginning balance	$	736	$	924		$	8		$	512		$	1,859	$	1,201	$	620	$	5,860
Acquisition of CBOA Financial PCD Loans		34		777			1			258			83		11		—		1,164
Provision (credit) for loan losses		152		1,260			2			(256	)		1,690		899		105		3,852
Loans charged off		—		(558	)		(2	)		—			—		—		—		(560	)
Recoveries		8		199			—			—					—		—		207
Balance on September 30, 2024	$	930	$	2,602		$	9		$	514		$	3,632	$	2,111	$	725	$	10,523

25

	1–4 Family										NOO		OO
	Residential					Consumer					Commercial		Commercial
	Real Estate		Commercial			and Other		Construction			Real Estate		Real Estate		Multifamily			Total
Changes in allowance for credit losses for the three months ended September 30, 2023
Beginning balance	$	452	$	476		$	7	$	745		$	2,043	$	926	$	571		$	5,220
Provision (credit) for loan losses		34		213			—		(167	)		2,880		216		(1	)		3,175
Loans charged off		—		(6	)		—		—			—		—		—			(6	)
Recoveries		2		—			—		—			—		—		—			2
Balance on September 30, 2023	$	488	$	683		$	7	$	578		$	4,923	$	1,142	$	570		$	8,391

	1–4 Family												NOO		OO
	Residential						Consumer						Commercial		Commercial
	Real Estate			Commercial			and Other			Construction			Real Estate		Real Estate		Multifamily		Total
Changes in allowance for credit losses for the nine months ended September 30, 2023
Beginning balance	$	454		$	1,382		$	56		$	222		$	1,680	$	555	$	429	$	4,778
Impact of adopting of ASU 2016-13		(33	)		(307	)		(50	)		441			271		142		140		604
Provision (credit) for loan losses		62			(71	)		1			(85	)		2,972		445		1		3,325
Loans charged off		—			(321	)		—			—			—		—		—		(321	)
Recoveries		5			—			—			—			—		—		—		5
Balance on September 30, 2023	$	488		$	683		$	7		$	578		$	4,923	$	1,142	$	570	$	8,391

26

The following tables present the aging of the recorded investment in contractually past due loans, as of September 30, 2024, and December 31, 2023. It is shown by class of loans (dollars in thousands):

Schedule of Loan Category and Aging Analysis of Loans

	Loans Contractually Past Due
	30–59		60–89		Over 90				Loans Not
September 30, 2024	Days		Days		Days		Total		Past Due		Total
1-4 Family residential real estate	$	—	$	200	$	—	$	200	$	71,079	$	71,279
Commercial		2,110		—		1,875		3,985		116,525		120,510
Consumer and other		—		—		—		—		902		902
Construction		2,263		—		—		2,263		28,367		30,630
NOO CRE		—		—		—		—		259,966		259,966
OO CRE		—		—		—		—		157,184		157,184
Multifamily		—		—		129		—		62,535		62,664
Total	$	4,373	$	200	$	2,004	$	6,577	$	696,558	$	703,135

	Loans Contractually Past Due
December 31, 2023	30–59 Days		60–89 Days		Over 90 Days		Total		Loans Not Past Due		Total
1-4 Family residential real estate	$	409	$	—	$	—	$	409	$	61,236	$	61,645
Commercial		—		—		589		589		49,580		50,169
Consumer and other		—		—		—		—		698		698
Construction		—		—		—		—		34,538		34,538
NOO CRE		—		—		—		—		167,203		167,203
OO CRE		—		—		—		—		82,228		82,228
Multifamily		—		—		—		—		60,546		60,546
Total	$	409	$	—	$	589	$	998	$	456,029	$	457,027

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Credit quality indicators – The following tables represent the credit exposure by internally assigned grades. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Bank’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan. The Company uses the following definitions for risk ratings:

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 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.

The following tables present the amortized cost basis of loans by credit quality indicator, by class of financing receivable, and year of origination for term loans as of September 30, 2024, and December 31, 2023. For revolving lines of credit that are converted to term loans, if the conversion involved a credit decision, such loans are included in the origination year in which the credit decision was made. If revolving lines of credit converted to term loans without a credit decision, such lines of credit are included in the “Revolving lines of credit converted to term” column in the following tables (dollars in thousands).

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Schedule of loan category and loan by risk categories

	Term Loans Amortized Cost by Origination
September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
1-4 Family
Pass	$	2,690	$	4,465	$	26,695	$	11,763	$	7,317	$	11,578	$	6,274	$	—	$	70,782
Special Mention		—		—		—		437		—		—		—		—		437
Substandard		—		—		—		—		—		60		—		—		60
Doubtful		—		—		—		—		—		—		—		—		—
Total 1-4 Family		2,690		4,465		26,695		12,200		7,317		11,638		6,274		—		71,279
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Commercial
Pass		11,427		34,091		20,270		8,221		3,121		3,181		33,700		—		114,011
Special Mention		—		33		1,062		460		1,835		155		274		—		3,819
Substandard		—		—		1,920		—		524		236		—		—		2,680
Doubtful		—		—		—		—		—		—		—		—		—
Total Commercial		11,427		34,124		23,252		8,681		5,480		3,572		33,974		—		120,510
Current year-to-date gross write-offs		—		—		350		—		208		—		—		—		558
Consumer and other
Pass		80		—		61		—		—		100		641		—		902
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total Consumer and Other		80		—		61		—		—		100		641		—		902
Current year-to-date gross write-offs		—		—		—		—		—		2		—		—		2
Construction
Pass		4,809		8,149		10,088		2,026		22		2,134		18		—		27,246
Special Mention		—		—		1,651		613		—		—		—		—		2,264
Substandard		—		—		—		—		—		1,120		—		—		1,120
Doubtful		—		—		—		—		—		—		—		—		—
Total Construction		4,809		8,149		11,739		2,639		22		3,254		18		—		30,630
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
NOO CRE
Pass		1,237		37,448		48,184		72,951		32,612		55,145		6,058		—		253,635
Special Mention		—		—		4,683		—		—		—		—		—		4,683
Substandard		—		—		1,648		—		—		—		—		—		1,648
Doubtful		—		—		—		—		—		—		—		—		—
Total NOO CRE		1,237		37,448		54,515		72,951		32,612		55,145		6,058		—		259,966
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
OO CRE
Pass		1,603		36,647		36,414		44,571		12,238		22,102		549		—		154,124
Special Mention		—		225		—		—		—		1,647		—		—		1,872
Substandard		—		—		—		—		33		1,155		—		—		1,188
Doubtful		—		—		—		—		—		—		—		—		—
Total OO CRE		1,603		36,872		36,414		44,571		12,271		24,904		549		—		157,184
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Multi Family
Pass		—		499		19,850		22,947		6,367		10,263		1,004		—		60,930
Special Mention		—		—		—		—		1,012		—		—		—		1,012
Substandard		—		—		—		722		—		—		—		—		722
Doubtful		—		—		—		—		—		—		—		—		—
Total Multi Family		—		499		19,850		23,669		7,379		10,263		1,004		—		62,664
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Total	$	21,866	$	121,557	$	172,526	$	164,711	$	65,081	$	108,876	$	48,518	$	—	$	703,135
Total year-to-date gross write-offs	$	—	$	—	$	350	$	—	$	208	$	2	$	—	$	—	$	560

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	Term Loans Amortized Cost by Origination
December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
1-4 Family
Pass	$	4,244	$	24,009	$	12,236	$	7,928	$	1,466	$	9,622	$	1,717	$	—	$	61,222
Special Mention		—		—		—		—		—		357		—		—		357
Substandard		—		—		—		—		—		67		—		—		67
Doubtful		—		—		—		—		—		—		—		—		—
Total 1-4 Family		4,244		24,009		12,236		7,928		1,466		10,045		1,717		—		61,645
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Commercial
Pass		13,150		15,405		3,234		3,176		87		1,546		10,139		779		46,737
Special Mention		—		163		—		2,018		—		—		—		—		2,181
Substandard		—		—		—		903		96		—		—		—		999
Doubtful		—		—		—		—		252		—		—		—		252
Total Commercial		13,150		15,568		3,234		6,097		435		1,546		10,139		779		50,169
Current year-to-date gross write-offs		—		—		—		—		321		—		—		—		321
Consumer and other
Pass		43		138		—		5		10		3		499		—		698
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total Consumer and Other		43		138		—		5		10		3		499		—		698
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Construction
Pass		7,788		21,551		3,938		38		310		592		321		—		34,538
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total Construction		7,788		21,551		3,938		38		310		592		321		—		34,538
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
NOO CRE
Pass		7,187		35,899		52,241		21,091		13,491		30,911		6,140		—		166,960
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		243		—		—		—		—		243
Doubtful		—		—		—		—		—		—		—		—		—
Total NOO CRE		7,187		35,899		52,241		21,334		13,491		30,911		6,140		—		167,203
Current year-to-date gross write-offs		3,382		—		—		—		—		—		—		—		3,382
OO CRE
Pass		20,726		12,365		20,807		7,966		5,806		4,214		—		—		71,884
Special Mention		228		—		7,196		—		—		1,690		—		—		9,114
Substandard		—		—		—		37		1,193		—		—		—		1,230
Doubtful		—		—		—		—		—		—		—		—		—
Total OO CRE		20,954		12,365		28,003		8,003		6,999		5,904		—		—		82,228
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Multi Family
Pass		500		15,652		22,007		7,572		6,369		7,105		371		—		59,575
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		970		—		—		—		—		—		970
Doubtful		—		—		—		—		—		—		—		—		—
Total Multi Family		500		15,652		22,977		7,572		6,369		7,105		371		—		60,546
Current year-to-date gross write-offs		—		—		—		—		—		—		—		—		—
Total	$	53,866	$	125,182	$	122,629	$	50,977	$	29,080	$	56,106	$	19,187	$	779	$	457,027
Current year-to-date gross write-offs	$	3,382	$	—	$	—	$	—	$	321	$	—	$	—	$	—	$	3,703

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Non-accrual loans – The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection or renewal due to maturity. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful. There was no interest income recognized from non-accrual loans in the income statement for the nine months ended September 30, 2024, or September 30, 2023. The following presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing by class as of the date noted (dollars in thousands).

Schedule of Nonaccrual Loans

	As of September 30, 2024
	Non-accrual loans				Loans past due
	with		Total non-accrual		over 89 days and
	no ACL		loans		still accruing
1-4 Family residential real estate	$	60	$	60	$	—
Commercial		432		2,509		—
Consumer and other		—		—		—
Construction		—		—		—
NOO CRE		—		—		—
OO CRE		—		—		—
Multifamily		722		722		—
Total	$	1,214	$	3,291	$	—
	As of December 31, 2023
	Non-accrual loans with no ACL		Total non-accrual loans		Loans past due over 89 days and still accruing
1-4 Family residential real estate	$	66	$	66	$	—
Commercial		847		1,208		—
Consumer and other		—		—		—
Construction		—		—		—
NOO CRE		—		—		—
OO CRE		—		—		—
Multifamily		970		970		—
Total	$	1,883	$	2,244	$	—

Non-accrual loan balances guaranteed by the SBA are $2,026,000, or 61.5%, and $589,000, or 26.3%, of the nonaccrual loan balances at September 30, 2024, and December 31, 2023, respectively.

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Collateral dependent loans – Non-accrual loans are classified as collateral dependent loans and are individually evaluated. The following presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses by class of loans as of the date noted (dollars in thousands):

Schedule of Collateral Dependent Loans

	As of September 30, 2024 Collateral Dependent Loans
	Secured by		Secured by
	Real Estate		Other		Total
1-4 Family residential real estate	$	60	$	—	$	60
Commercial		—		2,509		2,509
Consumer and other		—		—		—
Construction		—		—		—
NOO CRE		—		—		—
OO CRE		—		—		—
Multifamily		722		—		722
Total	$	782	$	2,509	$	3,291

Loan Modifications Made to Borrowers Experiencing Financial Difficulty – The ACL incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The analysis includes losses from modifications of receivables to borrowers experiencing financial difficulty. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL allowance for credit losses, a change to the ACL is generally not recorded when a loan is modified. Currently, the bank does not hold any loans having modified terms related to economic distress and none were modified during the nine months ended September 30, 2024, and 2023.

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NOTE 5 – PREMISES AND EQUIPMENT, NET

Components of premises and equipment, net included in the consolidated balance sheets were as follows (dollars in thousands):

Schedule of Premises and equipment

	September 30,			December 31,
	2024			2023
Land and improvements	$	3,316		$	1,806
Buildings and improvements		12,668			12,482
Furniture and equipment		3,670			1,953
Total cost		19,516			16,241
Accumulated depreciation and amortization		(11,213	)		(8,891	)
Net book value	$	8,441		$	7,350

Depreciation and amortization expenses were $284,000 and $150,000 for the three months ended September 30, 2024, and 2023, respectively. Depreciation and amortization expenses were $754,000 and $419,000 for the nine months ended September 30, 2024, and 2023, respectively.

NOTE 6 – TIME DEPOSITS

Maturities of time deposits on September 30, 2024, and December 31, 2023, were (dollars in thousands):

Schedule of Maturities of Time Deposits

	September 30,		December 31,
Maturity	2024		2023
One year or less	$	202,870	$	93,675
Over one through three years		30,142		30,390
Over three through five years		4,637		4,338
Totals	$	237,649	$	128,403

On September 30, 2024, and December 31, 2023, the Bank had $82.6 million and $43.9 million, respectively, in time deposits of $250,000 or more. On September 30, 2024, and December 31, 2023, $61 million and $27.5 million, respectively, of such time deposits mature within one year.

On September 30, 2024, and December 31, 2023, certificate of deposits included brokered CD balances of $8.1 million and $19.5 million, respectively.

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NOTE 7 – BORROWINGS

On March 12, 2023, the Federal Reserve Board announced it would make additional funding available to eligible depository institutions to help ensure banks could meet the needs of depositors made available through the creation of a new Bank Term Funding Program (“BTFP”). The BTFP is a liquidity resource with capacity based on the pledging of high-quality securities. The intention of the program was to eliminate an institution’s need to quickly sell those securities in times of stress. Effective March 11, 2024, the Federal Reserve ceased lending under the programs terms. Outstanding borrowings were not impacted. As of September 30, 2024, the Bank had pledged available-for-sale securities totaling $55.6 million to secure a borrowing in the amount of $27 million at a rate of 4.76% with a January 10, 2025, maturity date. Additionally, as of September 30, 2024, the Bank had approximately $29.2 million in availability at the Federal Reserve Bank of San Francisco’s Discount Window.

The Bank has established a borrowing line at the Federal Home Loan Bank of San Francisco. As of September 30, 2024, borrowing capacity totaled $229.4 million and collateral consists of a blanket lien on the loan portfolio. There were no outstanding borrowings on the borrowing line as of September 30, 2024, or December 31, 2023.

As of September 30, 2024, and December 31, 2023, the Bank had available unsecured Federal Funds lines of credit at correspondent banks totaling $49.8 million and $39.8 million, respectively. The terms of the borrowings are overnight at the applicable fed funds borrowing rate. As of September 30, 2024, the Bank had no borrowings under these lines of credit.

On September 29, 2021, the Company completed a private placement of $25.0 million of 10 year, fixed-to-floating rate subordinated notes. The subordinated notes initially bear interest at 4.00% per annum for five years, floating at Three-Month SOFR plus 328 basis points quarterly thereafter. The ten-year notes mature on July 15, 2031, and are callable at the Company’s option after five years. The subordinated notes have unamortized origination fees of $365,000 at September 30, 2024. As part of the Merger with CBOA, $1.5 million of the subordinated debt was acquired in the transaction and subsequently retired.

As part of the Merger with CBOA, the Company acquired CBOA Financial Statutory Trust #1, a trust formed by CBOA in November 2005. The trust closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. CBOA made a required equity contribution of $155,000 to form the trust and issued $5 million of subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the preferred securities sold by the trust. The Company is able to redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, at 100% of the principal amount, plus accrued and unpaid interest until maturity in 2036. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. Bancorp 34 has the option to defer interest payments on the subordinated debentures from time to time, for a period not to exceed five consecutive years. Bancorp 34 has elected not to defer interest payments on the subordinated debentures. The trust preferred securities have a variable rate of interest, reset quarterly on the 23rd of each February, May, August, and November, equal to the sum of 3-month CME term SOFR plus 1.70%. As of September 30, 2024, the rate was 7.06%. Bancorp 34’s investment in the common stock of the trust is $155,000, which is included in other assets and is accounted for as an unconsolidated cost-method investment. Bancorp 34 is not considered the primary beneficiary of this trust, and therefore the trust is not consolidated in the financial statements. Rather the subordinated debentures are shown as a liability. The remaining Merger-related fair value mark on the CBOA Financial Statutory Trust #1 subordinated debt was $972,000 as of September 30, 2024.

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Maturities of outstanding borrowings as of September 30, 2024, were (dollars in thousands):

Schedule of maturities of outstanding borrowings

One year or less	$	27,000
Over one through three years		0
Over three through five years		0
Over five through ten years		23,500
Over ten years		5,000
Totals	$	57,163

NOTE 8 – FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

In the normal course of business, and from time to time, the Bank has had outstanding commitments to extend credit and standby letters of credit which, consistent with U.S. GAAP, are not reflected 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 amounts 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.

Contractual or notional amounts of financial instruments representing off-balance-sheet credit risk are as follows as of the dates indicated (dollars in thousands):

Schedule of  Financial Instruments with Off-Balance-Sheet Risk

	September 30, 2024				December 31, 2023
	Fixed		Variable		Fixed		Variable
Commitments to extend credit	$	7,069	$	25,493	$	5,327	$	6,966
Unused lines of credit		3,551		39,781		3,962		18,859
Totals	$	10,620	$	65,274	$	9,289	$	25,825

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Schedule of Credit Losses on Off-Balance Sheet Credit

	For the three months ended September 30, 2024
Beginning Balance:	$	350,000
(Release) provision for credit losses		—
Ending Balance	$	350,000

	For the nine months ended September 30, 2024
Beginning Balance:	$	135,000
Impact of merger with CBOA Financial, Inc.		222,000
(Release) provision for credit losses		(7,000	)
Ending Balance	$	350,000

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.

35

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. The Bank had one standby letter of credit totaling $75,000 at September 30, 2024, and no standby letters of credit at December 31, 2023.

NOTE 9 – LEASES

As of September 30, 2024, the Bank has noncancelable operating leases for office space that expire over the next eight years that require the payment of base lease amounts and executory costs such as taxes, maintenance, and insurance. As of September 30, 2024, the bank has six active operating leases. Rental expenses for leases were $284,000 and $94,000 for the three months ended September 30, 2024, and 2023, respectively. Rental expenses for leases were $740,000 and $270,000 for the nine months ended September 30, 2024, and 2023, respectively.

The following presents the classification of the right-of-use assets and corresponding liabilities as of the dates presented (dollars in thousands):

Schedule of Lease Information

	September 30,		December 31,
	2024		2023
Lease right-of-use assets
Operating lease right-of-use assets	$	4,301	$	1,819
Lease Liabilities
Operating lease liabilities	$	4,869	$	2,011

36

Approximate future minimum rental commitments under non-cancelable leases as of September 30, 2024, are (dollars in thousands): 

Schedule of Future Undiscounted Operating Lease Payments

2024	$	217
2025		1,001
2026		877
2027		740
2028		621
2029		652
2030		622
2031		119
2032		20
Operating lease liabilities (present value of minimum lease payments)	$	4,869
Weighted-average remaining term (in years)		5.4
Weighted-average discount rate		2.86	%

NOTE 10 – INCOME TAXES

The Company’s income tax expense (benefit) differs from the amounts computed by applying the federal income tax rate of 21% to income (loss) before federal income tax expense. These differences, historically, are primarily caused by state income taxes, net of federal tax benefit, income that is not taxable for federal and state income tax purposes, expenses that are not deductible for tax purposes, and tax adjustments related to income tax returns.

Specifically, for the nine months ended September 30, 2024, these differences reflect: (i) a non-taxable $5.0 million preliminary bargain purchase gain in connection with the Merger; and (ii) certain non-deductible merger costs, including success-based fees for completing the Merger of $340,000.

During the three months ended September 30, 2024, the Company recorded an income tax provision of $477,000, reflecting an effective tax rate of 23.3%. During the nine months ended September 30, 2024, the Company recorded an income tax benefit of $1.2 million and pre-tax income of $365,000.

During the three and nine months ended September 30, 2023, the Company recorded income tax benefits of $603,000 and $426,000, respectively, reflecting an effective tax rate of 21.0% and 19.8%, respectively. The relatively lower income tax rates during these 2023 periods reflect a favorable adjustment to the year-to-date tax accrual.

NOTE 11 – REGULATORY MATTERS

Southwest Heritage Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts, and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets. Management believes, as of September 30, 2024, and December 31, 2023, the Bank meets all capital adequacy requirements to which it is subject.

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

As of September 30, 2024, 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 has not opted into the Community Bank Leverage Ratio (“CBLR”) and therefore is required to continue calculating and reporting risk-based capital ratios.

The Bank’s actual and required capital amounts and ratios are as follows as of the dates indicated below (dollars in thousands):

Schedule of actual capital amounts and ratios as well as minimum amounts for each regulatory defined category for the bank and the company

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2024
Total Capital to risk-weighted assets:	$	110,572		14.28	%	$	61,945		8	%	$	77,431		10	%
Tier 1 (Core) Capital to risk weighted assets:	$	100,878		13.03	%	$	46,452		6	%	$	61,936		8	%
Common Tier 1 Capital to risk weighted assets (CET1):	$	100,878		13.03	%	$	34,839		4.50	%	$	50,323		6.50	%
Tier 1 (Core) Capital to average assets:	$	100,878		10.98	%	$	36,750		4	%	$	45,937		5	%
	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2023
Total Capital to risk-weighted assets:	$	74,142		14.79	%	$	40,114		8	%	$	50,143		10	%
Tier 1 (Core) Capital to risk weighted assets:	$	68,032		13.57	%	$	30,086		6	%	$	40,114		8	%
Common Tier 1 Capital to risk weighted assets (CET1):	$	68,032		13.57	%	$	22,564		4.50	%	$	32,593		6.50	%
Tier 1 (Core) Capital to average assets:	$	68,032		11.66	%	$	23,347		4	%	$	29,184		5	%

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NOTE 12 – RELATED PARTY TRANSACTIONS

The Bank periodically enters into transactions with its executive officers, directors, significant stockholders, and their affiliates (related parties). Transactions with such related parties included (dollars in thousands):

	Nine months ended September 30, 2024		Year ended December 31, 2023
Fees and bonuses paid to directors during the period	$	188	$	269
Deposits from related parties held by the bank at the end of period	$	2,967	$	2,607

There was one fully drawn line of credit, totaling $100,000, to one related party on September 30, 2024. There were no additional loans to related parties as of September 30, 2024.

During the nine months ended September 30, 2024, Bancorp 34 paid $216,000 to outgoing directors no longer serving on the board. This amount is included in Merger Costs on the income statement and is also included in the relevant pro forma adjustments in Note 2 herein.

NOTE 13 – STOCK BASED COMPENSATION

Stock-based expense for the nine months ended September 30, 2024, and September 30, 2023, was $145,000 and $44,000, respectively.

The Company accounts for forfeitures when they occur by reversing any previously accrued compensation expense on forfeited options in accordance with ASC 718, Compensation – Stock Compensation.

On November 17, 2017, the Company’s stockholders approved the adoption of the 2017 Equity Incentive Plan (“2017 Plan”). The 2017 Plan provided for the grant of a maximum of 263,127 shares of the Company’s common stock of which up to 187,948 shares of common stock could be granted for stock options and 75,179 shares of common stock could be issued as restricted stock to Directors and employees of the Company. Stock options and restricted stock awards currently issued under the 2017 Plan vest at 20% per year beginning on the first anniversary of date of grant and the options expire seven years after the grant date.

On May 25, 2022, the Company’s stockholders approved the adoption of the 2022 Equity Incentive Plan (“2022 Plan”). The 2022 Plan provided for the grant of a maximum of 252,340 shares of the Company’s common stock of which up to 168,227 shares of common stock could be issued as restricted stock and 84,113 shares of common stock could be granted for stock options to directors and employees of the Company. The board of directors’ compensation committee specified the vesting schedules for the restricted stock and options. Option expiration dates were flexible as well but could not exceed ten years from the grant date.

On September 25, 2024, the Company’s Board of Directors approved the termination of the 2017 Plan and the 2022 Plan. While outstanding awards issued under those plans were not affected by the plans’ termination, no further awards may be granted under either the 2017 Plan or the 2022 Plan. In connection with the termination of the 2017 Plan and the 2022 Plan, the Board of Directors approved and adopted the Bancorp 34, Inc. 2024 Equity Incentive Plan (the “2024 Plan”). The 2024 Plan provides for the grant of a maximum of 525,000 shares of the Company’s common stock pursuant to a variety of equity incentive awards, including restricted stock, stock options, and other awards. As of September 30, 2024, no awards had been issued under the 2024 Plan.

The stock option plans allow for net settlement of vested options. In a net settlement, the Company, at the direction of the optionee, net settles the options by issuing new shares to the optionee with a value, at the current per share trading price, equal to the total in-the-money or intrinsic value of the options less any necessary tax withholdings on the disqualifying disposition of Incentive Stock Options. The optionee is granted newly issued shares and a small amount of cash in lieu of partial shares. There were no net settlements for the first nine months of 2024 or 2023.

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For the nine months ended September 30, 2024, no stock compensation was issued under any equity incentive plan. For the nine months ended September 30, 2023, 10,250 stock options were granted and 10,250 shares of restricted stock were issued. Stock option grant-date fair values for 2023 were computed using the Black Scholes Merton options pricing model with the following weighted-average inputs and assumptions:

Schedule of Weighted Average Inputs and Assumptions

	September 30,		September 30,
	2024		2023
Grant date stock price and exercise price	$	—	$	12.03
Dividend yield		—		2.89	%
Expected stock price volatility		—		23.37	%
Risk-free interest rate		—		3.50	%
Expected option life in years		—		6
Total weighted-average fair value of options granted	$	—	$	2.42

A summary of stock option activity for the first nine months of 2024 is presented below (Aggregate Intrinsic Value in thousands):

Schedule of Stock Option Activity

	Shares Subject to Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		137,500		$	13.86		2.1 years		—
Granted		—			—		—		—
Exercised		—			—		—		—
Forfeited or expired		(25,000	)		14.90		0.7 years		—
Outstanding on September 30, 2024		112,500		$	13.63		0.7 years	$	33
Exercisable on September 30, 2024		106,300		$	13.63		0.6 years	$	33

Schedule of Non-Vested Restricted Stock Activity

	Shares			Weighted- Average Grant Date Fair Value		Average Remaining Contractual Term
Non-vested on January 1, 2024		13,400		$	12.97		3.9 years
Granted		—			—		—
Vested		(8,700	)		13.00		0.7 years
Forfeited		—			—		—
Non-vested on September 30, 2024		4,700		$	12.91		3.1 years

As of September 30, 2024, there was $11,000 and $52,000 of total unrecognized equity-based expense related to unvested stock options and restricted stock awards, respectively, granted under the equity plans that is expected to be recognized over the next five years as follows (dollars in thousands):

Schedule of Unrecognized Equity-Based Expense under 2017 Equity Incentive Plan

Year
2024	$	5
2025		21
2026		21
2027		13
2028		3
Totals	$	63

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NOTE 14 – FAIR VALUE INFORMATION

The following table presents information about assets and liabilities measured at fair value on a recurring and non-recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair values (dollars in thousands):

Schedule of Assets and Liabilities measured at Fair Value

September 30, 2024	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Fair Value
Recurring:
Securities available-for-sale:
Mortgage-backed securities	$	—	$	31,944	$	—	$	31,944
U.S. Treasuries		—		4,855		—		4,855
U.S. Government Agencies		—		208		—		208
Municipal obligations		—		20,298		—		20,298
Corporate debt		—		886		—		886
Total available-for-sale:	$	—	$	58,191	$	—	$	58,191
Interest Rate Derivative Contracts – Assets	$	—	$	—	$	—	$	—
Interest Rate Derivative Contracts – Liabilities	$	—	$	201	$	—	$	201
Nonrecurring basis:
Collateral Dependent Loans	$	—	$	—	$	1,994	$	1,994
December 31, 2023	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Fair Value
Recurring:
Assets:
Securities available-for-sale:
Mortgage-backed securities	$	—	$	32,467	$	—	$	32,467
U.S. Treasuries		—		2,792		—		2,792
U.S. Government Agencies		—		270		—		270
Municipal obligations		—		20,328		—		20,328
Corporate debt		—		833		—		833
Total available-for-sale:	$	—	$	56,690	$	—	$	56,690
Nonrecurring basis:
Collateral dependent loans	$	—	$	—	$	1,071	$	1,071
Other Real Estate Owned	$	—	$	—	$	3,000	$	3,000

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The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Bank does not know whether the fair values shown represent values at which the respective financial instruments could be sold individually or in the aggregate.

There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2024, or the year ended December 31, 2023.

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 financial assets measured on a non-recurring basis (dollars in thousands):

Fair Value Measurement Inputs and Valuation Techniques

September 30, 2024	Fair Value		Valuation Methodologies	Valuation Model	Unobservable Input Valuation
Collateral Dependent Loans Commercial		1,994	Appraisal/Borrower Financial Statements	Receivables Discount/Liquidation Discount	0–95	%
Total collateral dependent loans	$	1,994
December 31, 2023	Fair Value		Valuation Methodologies	Valuation Model	Unobservable Input Valuation
Collateral Dependent Loans Commercial		1,071	Appraisal/Borrower Financial Statements	Receivables Discount/Liquidation Discount	0–50	%
Total collateral dependent loans	$	1,071
Other Assets
Other Real Estate Owned	$	3,000	Appraisal	Appraisal Discount/Estimated Selling Costs	23	%

The estimated fair values of the Company’s consolidated financial instruments on the dates noted are as follows (dollars in thousands):

Schedule of Fair Value of Financial Instruments

		September 30,						December 31,
		2024						2023
	Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	66,940		$	66,940		$	27,182		$	27,182
Federal funds sold	Level 2		60,860			60,860			1,715			1,715
Securities available-for-sale	Level 2		58,191			56,257			56,690			56,690
Securities held-to-maturity	Level 2		5,638			5,357			5,684			5,107
Loans held for investment	Level 3		692,612			677,516			451,167			437,878
Other investments	Level 2		6,186			6,186			4,063			4,063
Accrued interest receivable	Level 1		2,619			2,619			1,597			1,597
Financial liabilities
Nonmaturity Deposits	Level 1	$	(547,532	)	$	(547,532	)	$	(331,596	)	$	(331,596	)
Time deposits	Level 2		(237,649	)		(238,124	)		(128,403	)		(128,108	)
FRB and FHLB advances	Level 2		(27,000	)		(27,000	)		(29,000	)		(29,000	)
Subordinate debt	Level 3		(23,135	)		(20,171	)		(24,595	)		(20,421	)
Subordinated debentures, trust preferred securities	Level 3		4,183			4,183			—			—
Accrued interest payable	Level 1		(2,096	)		(2,096	)		(521	)		(521	)

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NOTE 15 – EARNINGS PER SHARE

For the three and nine months ended September 30, 2024, the Company had voting common stock, restricted stock awards, and non-voting common stock that were all eligible to participate in dividends equal to the voting common stock dividends on a per share basis. For the three and nine months ended September 30, 2023, the Company had voting common stock, restricted stock awards, and non-voting preferred stock that were all eligible to participate in dividends. Securities that participate in dividends are considered “participating securities.” The Company calculates net income available to voting common shareholders using the two-class method required for capital structures that include participating securities.

In applying the two-class method, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive. Potentially dilutive common stock equivalents consist of employee stock options and warrants. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants. The factors used in the earnings per share computation follow: 

Schedule of Earning Per Share

	Three Months Ended September 30,
(in thousands, except for per common share amounts)	2024			2023
Net income (loss)	$	1,575		$	(2,275	)
Less: earnings allocated to participating securities		(1	)		8
Net income (loss) allocated to common shareholders	$	1,574		$	(2,267	)
Basic weighted average common shares outstanding - Voting		6,470			4,374
Basic weighted average common shares outstanding - Non-Voting		820			—
Diluted weighted average common shares outstanding - Voting		6,476			4,375
Diluted weighted average common shares outstanding - Non-Voting		820			—
Basic earnings (loss) per common share - Voting	$	0.22		$	(0.52	)
Basic earnings per common share - Non-Voting	$	0.22			—
Diluted earnings (loss) per common share - Voting	$	0.22		$	(0.52	)
Diluted earnings per common share - Non-Voting	$	0.22			—

	Nine Months Ended September 30,
(in thousands, except for per common share amounts)	2024			2023
Net income (loss)	$	1,541		$	(1,726	)
Less: earnings allocated to participating securities		(2	)		(110	)
Net income (loss) allocated to common shareholders	$	1,539		$	(1,836	)
Basic weighted average common shares outstanding - Voting		5,692			3,858
Basic weighted average common shares outstanding - Non-Voting		820			—
Diluted weighted average common shares outstanding - Voting		5,692			3,861
Diluted weighted average common shares outstanding - Non-Voting		820			—
Basic earnings (loss) per common share - Voting	$	0.24		$	(0.48	)
Basic earnings per common share - Non-Voting	$	0.24			—
Diluted earnings (loss) per common share - Voting	$	0.24		$	(0.48	)
Diluted earnings per common share - Non-Voting	$	0.24			—

Participating securities include restricted stock awards since they participate in common stock dividends. Stock options for 112,500 and 125,270 shares of common stock and warrants totaling 211,667 and 211,667 were not considered in computing diluted earnings per common share for 2024 and 2023, respectively, because they were antidilutive.

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NOTE 16 – REAL ESTATE OWNED

Real estate owned activity was as follows (dollars in thousands):

Schedule of Other Real Estate Owned

	Nine months ended September 30, 2024			Nine months ended September 30, 2023
Beginning balance	$	3,000		$	—
Foreclosures and additions		—			—
Loss on sale		(432	)		—
Sales		(2,568	)		—
Ending balance	$	—		$	—

There was no real estate owned activity during the three months ended September 30, 2024, and 2023.

As of September 30, 2023, the Bank experienced a deterioration of one large out of market commercial real estate loan which resulted in this loan becoming nonperforming. As of December 31, 2023, a $3.3 million loss was reflected in the Bank’s operating results, and the remaining $3 million balance was transferred to other real estate owned. During the nine months ended September 30, 2024, the note associated with this loan was sold for $2.6 million and a $432,000 pre-tax loss was reflected in the Bank’s operating results. 

At September 30, 2024, and December 31, 2023, there were no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the properties. In addition, at September 30, 2024, and December 31, 2023, there were no recorded investments of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

NOTE 17 – PRIVATE PLACEMENT OF COMMON AND PREFERRED STOCK

In December 2022 and January 2023, the Company completed one private placement of common stock and one private placement of preferred stock, respectively. The Company issued 1,359,497 shares of common stock and 820,115 shares of convertible, non-voting Series A perpetual preferred stock at $14.00 per share each, generating net cash proceeds of approximately $28.6 million. The Company used the net proceeds from these private placements to support the acquisition of CBOA Financial, Inc. and to enhance capital ratios.

In conjunction with the private placements, the Company issued warrants to purchase up to 211,667 shares of Common Stock at a price of $14.00. The approximate fair value of the warrants was deemed immaterial by management. The Warrants are exercisable at any time after their grant date, and from time to time, in whole or in part, for 7 years from their grant dates, on December 30, 2029, and January 27, 2030. The exercise of such Warrants remains subject to certain contractual provisions and a “cashless exercise” may be executed.

Non-voting common stock – In accordance with the capital raise, and in conjunction with shareholder approval at the Annual Meeting that occurred on September 29, 2023, a class of non-voting common stock was created on July 19, 2023. On said date, the State of Maryland approved the Articles Supplementary to the Articles of Incorporation for Bancorp 34, Inc. in which a class of authorized stock containing 1,100,000 shares of non-voting common stock was established. In accordance with the stipulations established during the capital raise, the preferred stock issued during the raise was converted to the newly established class of non-voting common stock as of the date the class was created. Except for voting privileges, the new class of non-voting common stock is treated pari-passu with common stock.

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NOTE 18 – DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. As such, from time to time, the Company will enter into interest rate derivatives as part of its asset liability management strategy to help manage interest rate risk. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the derivative contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives may also be implicit in certain contracts and commitments.

Derivative financial instruments in the consolidated financial statements are recognized at fair value regardless of the purpose or intent for holding the instrument. Derivative assets and derivative liabilities on the balance sheet are recorded within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

As part of the Company’s interest rate risk management strategy, two pay-fixed/receive-floating interest rate swaps (the “Pay Fixed Swap Agreements”) were entered into on August 30, 2024, for a total notional amount of $30 million, both of which were designated as fair value hedges. The Pay Fixed Swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the derivative contracts without the exchange of the underlying notional amount. Each swap agreement was effective immediately and each expire August 30, 2027.

The table below presents fair values of derivative instruments as well as the classification within the consolidated balance sheets:

Schedule of Fair value of Derivative Instruments

	September 30, 2024			December 31, 2023
(in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate swap contracts	Accrued interest and other liabilities	$	201	Accrued interest and other liabilities	$	—

The table below presents the effect of fair value hedge accounting on the consolidated statements of income (loss) for the periods presented:

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships					Location and Amount of Gain or (Loss) Recognized in Income on Fair Value Hedging Relationships
	Nine months ended September 30, 2024					Year Ended December 31, 2023
(in thousands)	Interest on securities			Interest Expense		Interest on securities		Interest Expense
Total amounts of income and expense line items presented in consolidated statements of income (loss) in which effects of the fair value hedges are recorded	$	1,444		$	0	$	0	$	0
Gain or (loss) on fair value hedging relationships:
Interest rate swap contracts:
Hedged items	$	206		$	0	$	0	$	0
Derivatives designated as hedging instruments	$	(201	)	$	0	$	0	$	0
Amount excluded from effectiveness testing recognized in earnings based on amortization approach	$	0		$	0	$	0	$	0

The table below presents cumulative basis adjustments of hedged items designated as fair value hedges and related amortized cost of those items as of the date presented:

Schedule of Cumulative Basis Adjustment of Hedge Items

(in thousands)	As of September 30, 2024
Line Item in consolidated balance sheet in which hedged item is included	Amortized cost of Hedged Assets		Cumulative amount of Fair Value Hedging Adjustments included in carrying amount of Hedged Asset
Securities available for sale	$	52,053	$	(206	)

NOTE 19 – SUBSEQUENT EVENTS

Subsequent to the September 30, 2024, date of this Form 10-Q, the Bank used cash on hand to pay off the entire $27.0 million Bank Term Funding Program (“BTFP”) borrowing from the Federal Reserve Bank and purchased $22.8 million in debt securities. The $22.8 million in debt securities purchased were comprised of the following: (i) $12.0 million of agency mortgage-backed securities; (ii) $8.8 million of asset-backed securities; and, (iii) $2.0 million of private label mortgage-backed securities.

The available-for-sale securities pledged to secure the BTFP borrowing were transferred to the Federal Reserve Bank of San Francisco’s Discount Window to increase its available borrowing capacity. In addition, $990,000 of accrued interest payable was paid off in connection with the full pay off of the BTFP borrowing described above.

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

In this section, unless the context suggests otherwise, references to “we,” “us,” “our,” and “the Company” mean the combined business of Bancorp 34 and its wholly-owned subsidiary, Southwest Heritage Bank.

The purpose of this discussion and analysis is to focus on significant changes in: (i) the financial condition of Bancorp 34, Inc. and our wholly owned subsidiary, Southwest Heritage Bank, from December 31, 2023, through September 30, 2024; and (ii) our results of operations for the three and nine months ended September 30, 2024, and 2023, respectively. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1. 

Overview

Bancorp 34, headquartered in Scottsdale, Arizona, is the holding company for Southwest Heritage Bank (formerly Bank 34). On March 19, 2024, Bancorp 34 acquired CBOA Financial, Inc. (“CBOA”). Immediately following the acquisition, CBOA’s wholly-owned subsidiary, Commerce Bank of Arizona, was merged with and into Bancorp 34’s wholly-owned subsidiary, Bank 34, a federally chartered stock covered savings association (“the CBOA Merger”). Bank 34 was subsequently rebranded as Southwest Heritage Bank. Southwest Heritage Bank provides a variety of banking services to individuals and businesses through its eight full-service community bank branches, three in Maricopa County, Arizona, in the cities of Scottsdale and Gilbert; three in Pima County, Arizona, in the cities of Tucson and Green Valley; one branch in Otero County, New Mexico in the city of Alamogordo; and one branch in Dona Ana County New Mexico, in the city of Las Cruces.

We offer a full range of relationship-focused services to meet our clients’ business and personal financial objectives. Our product lines include commercial loans, commercial real estate loans, and a variety of commercial and consumer deposit products, including noninterest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We generate most of our income from interest income on loans, investment securities and deposits in other financial institutions, and service charges on customer accounts. We incur interest expenses on deposits and other borrowed funds and non-interest expenses such as salaries and employee benefits, occupancy expenses, and technology expenses. Net interest income is the largest source of revenue. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin, and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in Southwest Heritage Bank’s loan portfolio are affected by, among other factors, economic and competitive conditions in Arizona and New Mexico, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and homebuilding sectors within Southwest Heritage Bank’s target market.

Bancorp 34 manages its operations as one unit, and thus does not have separate operating segments.

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Critical Accounting Estimates

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles, or “GAAP,” and follow general practices within the banking industry. These policies require reliance on estimates, assumptions and judgments, which may prove inaccurate and are subject to variations. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the following as critical accounting estimates: (i) determination of the allowance for credit losses; (ii) determining the fair values of the net assets acquired and the fair value of the common stock consideration in connection with the CBOA Merger; (iii) other fair value measurements; (iv) accounting for derivatives and hedging activities; and (v) estimating the effective tax rate for the Company for 2024 in full to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors.

Our significant accounting policies are presented in our audited consolidated financial statements, Note 1—Nature of Operations and Significant Accounting Policies, for the year ended December 31, 2023, included in our Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and, in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Recent accounting pronouncements and standards that have impacted or could potentially affect us are also discussed in Note 1 of our audited consolidated financial statements, included in our 2023 Annual Report on Form 10-K.

Allowance for credit losses

One significant accounting policy is our accounting policy related to the allowance for credit losses (“ACL”). Effective January 1, 2023, we adopted ASU 2016-13, Financial Instruments – Measurement of Current Expected Credit Losses on Financial Instruments (“CECL”), using the modified retrospective method for our financial assets measured at amortized cost. CECL changed our method of accounting for credit losses from an incurred loss model to an expected credit loss model. Under the prior incurred loss model, credit losses on financial instruments were recognized when a probable loss was incurred, while CECL is an “expected credit loss” model. The expected credit loss model represents management’s estimate of expected credit losses to the full contractual maturity of the financial asset and is based on historical experience, current conditions, and reasonable and supportable forecasts. We believe the determination of the ACL involves a greater amount of judgment and complexity when compared with our other significant accounting policies.

Qualitative factors are used in the CECL model to address various internal and external factors that may not be captured by the quantitative modeling or historical data needed to assess the expected credit losses. Qualitative factors considered include, but may not be limited to, the following: lending policies and procedures; changes in underwriting standards; nature and volume of financial assets; changes in lending staff; volume and severity of past due or adversely classified assets; changes in collateral values; and the internal credit review function.

The Company uses a 12-month forecast that is reasonable and supportable within the ACL calculation and then reverts to historical credit loss experience on a straight-line basis over a one-year timeline. Historical credit loss experience is then used for the remaining life of the assets. The Company uses several economic variables in the calculation of the ACL, the most significant of which is the economic forecast for the national unemployment rate. In our September 30, 2024, ACL estimate, the Company assumed a forecasted unemployment rate of 4.6%, which slightly improved from the December 31, 2023, forecasted rate of 4.7%. Changes in the economic forecast for unemployment rates could significantly affect the estimated credit losses which could potentially lead to materially different ACL levels from one reporting period to the next.

For our bank, CECL requires a separate ACL for each of: (i) loans held-for-investment; (ii) unfunded commitments; and (iii) held-to-maturity debt securities.

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ACL – Loans held-for-investment

The level of the ACL on loans held-for-investment is calculated to maintain a credit loss reserve level that management considers sufficient to absorb estimated credit losses. Management’s determination of the adequacy of the ACL is based on the periodic evaluation of borrowers’ abilities to make loan payments, local and national economic conditions, and other subjective factors. The evaluation has subjective components requiring significant estimates that include default probabilities, expected loss given default, and estimated credit losses based on historical credit loss experience and forecasted economic conditions. All these factors may be susceptible to significant change and when actual results differ from the estimates, additional provisions for credit losses may be required, which would adversely impact profitability.

The ACL for pooled loans is estimated using a non-discounted cash flow methodology. The Bank then applies probability of default and loss given default to the cashflow methodology to calculate expected losses within the model. This allows the Bank to identify the timing of default as compared to when the actual loss event may occur. The results are then aggregated to produce segment level results and reserve requirements for each segment. The quantitative model also incorporates forward-looking macroeconomic information over a reasonable and supportable period of twelve months with a reversion to historical losses occurring on straight line basis over the next 12 months.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled loan evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Qualitative adjustments to historical loss data are made based on management’s assessment of the risks that may lead to a future loan loss or differences in current loan-specific risk characteristics. A ratings scale is used to tie risk metrics within lending policies and procedures, economic factors encompassed in the quantitative model, changes in nature of the volumes and terms of loans, changes in the volume and severity of past due assets, and concentrations within the loan portfolio. Additional factors such staffing, loan review, collateral values, regulatory, legal, and technological risks are also reviewed on a more qualitative basis. The ratings scale used in the qualitative modeling is derived from the Bank’s historical loss percentages in which the highest risk metrics would align with the highest historical loss percentages adjusted for the expected life of the current portfolio.

Management has determined that calculating an ACL amount for accrued interest receivable on loans held-for-investment would not be significant, and this is excluded from our estimate of credit losses for loans held-for-investment. Additionally, we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued interest, not received in cash, is reversed from interest income.

The ACL also excludes loans held-for-sale and loans accounted for under the fair value option. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is recorded directly to the ACL. Any subsequent changes in the ACL on PCD assets are recorded through the provision for credit losses.

The ACL is a contra-asset on our balance sheet that is deducted from the amortized cost of loans held-for-investment to present on our balance sheet the net amount expected to be collected. Loans are charged off against the ACL when management believes the full or partial non-collectability is confirmed.

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ACL – Unfunded commitments

We estimate expected credit losses on unfunded commitments over the contractual period in which we are exposed to credit risk via our contractual obligations to extend credit unless such obligations are unconditionally cancellable by us. The probability of funding such commitments in the future is based on historical utilization statistics for unfunded commitments. The credit loss rates used are calculated using the same assumptions as the associated funded balance.

The ACL on unfunded commitments is categorized in other liabilities on our balance sheet and, from time to time, is adjusted as a provision for credit loss expense.

ACL – Held-to-maturity debt securities

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Our held-to-maturity debt securities is comprised of bank subordinated debt. The ACL on held-to-maturity debt securities is adjusted through provision for credit losses and is recorded as a contra asset to held-to-maturity debt securities. Management has determined that calculating an ACL amount for accrued interest receivable on held-to-maturity debt securities would not be significant, and this is excluded from our estimate of credit losses for held-to-maturity debt securities.

Upon our January 1, 2023, CECL adoption, we recorded an increase to the ACL on loans held-for-investment of $604,000, established an ACL on unfunded commitments of $165,000, established an ACL on held-to-maturity investments of $38,000, recorded an increase to deferred tax assets of $153,000, and a corresponding one-time cumulative reduction to retained earnings, net of tax, of $654,000 in the consolidated balance sheet as of January 1, 2023.

Business Combinations

Assets acquired, including identified intangible assets such as core deposit intangibles, and liabilities assumed as a result of a merger or acquisition transaction are recorded at their estimated fair values. The difference between the net fair value of assets acquired and liabilities assumed, and the consideration paid is recorded as a bargain purchase gain or goodwill. Management engages third-party specialists to assist in the development of fair value estimates. Significant estimates and assumptions used to value acquired assets and liabilities assumed include, but are not limited to, projected cash flows, future growth rates, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized as part of the acquisition accounting. The allowance for credit losses for non-PCD loans is recognized as provision for credit losses in the same reporting period as the merger or acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated lives of the acquired assets and assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of bargain purchase gain or goodwill recognized in connection with the merger or acquisition.

Preliminary estimates of fair values may be adjusted for a period of no greater than one year subsequent to the merger or acquisition date if new information is obtained about facts and circumstances that existed as of the merger or acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this measurement period are recognized in the current reporting period. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

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Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices, or if market prices are not available, is estimated using models employing various techniques.

The significant assumptions used in the models are independently verified against observable market data where possible. When observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on our judgment regarding the value that market participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Also, there are inherent limitations to any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

A portion of our assets and liabilities are carried at fair value on our consolidated balance sheet. The majority of these assets and liabilities are measured at fair value on a recurring basis, however, certain assets are measured at fair value on a nonrecurring basis based on the fair value of the underlying collateral.

For further information regarding the valuation of our financial instruments, see Note 1 – Summary of Significant Accounting Policies and Note 14 – Fair Value Information in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Derivatives and Hedging activities

At the inception of derivative contracts, we designate derivatives as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are: (i) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”); and (ii) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”).

For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged.

The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the consolidated balance sheet under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income.

We discontinue hedge accounting when we determine the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.

We are exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. We anticipate that the counterparties will be able to fully satisfy their obligation under our derivative contracts with them. All the contracts to which we are a party have cash flows that settle monthly or semi-annually.

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Income Taxes

Our income tax expense, deferred tax assets and liabilities, current income taxes payable and receivable, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid or refunded. We are subject to income taxes in the United States and multiple states. Significant judgments and estimates are required in the determination of the consolidated income tax expense and related income tax assets and liabilities.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent and future operations. In projecting future taxable income, we begin with historical results adjusted for the CBOA Merger and incorporate assumptions about the amount of future state, federal, and foreign pre-tax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

We believe that it is more likely than not that the benefit from certain state NOL carryforwards will be realized. As such, we have not provided a valuation allowance on the deferred tax assets related to these state NOL carryforwards. If our assumptions change and we determine that we will not be able to realize these NOLs, the tax benefits would then be subject to an estimated valuation allowance on deferred tax assets, that management would be required to estimate.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our U.S. operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment or refund that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences would then be reflected as increases or decreases to income tax expense in the period in which new information is available.

CBOA Financial, Inc. Merger

On March 19, 2024, Bancorp 34 completed its previously announced merger with CBOA pursuant to the Agreement and Plan of Merger, dated as of April 27, 2023, as amended (the “Merger Agreement”). Under the Merger Agreement, CBOA was merged with and into Bancorp 34, with Bancorp 34 continuing as the surviving entity (“the CBOA Merger”). Immediately following the completion of the CBOA Merger, CBOA’s wholly-owned subsidiary, Commerce Bank of Arizona, an Arizona state-chartered bank, was merged with and into the Bank, with the Bank continuing as the surviving bank.

Pursuant to the terms of the Merger Agreement, at the effective time of the CBOA Merger, each CBOA shareholder had the right to receive 0.2628 shares of Bancorp 34 common stock, for each share of CBOA common stock owned by the CBOA shareholder, with cash to be paid in lieu of fractional shares. Additionally, each outstanding CBOA restricted stock unit vested and was cancelled and converted automatically into the right to receive 0.2628 shares of Bancorp 34 common stock with respect to each share of CBOA common stock underlying such restricted stock unit. In connection with the CBOA Merger, Bancorp 34 issued approximately 2.7 million shares of Bancorp 34 common stock, which had a fair value of approximately $23.3 million based on a common share valuation completed by an independent third party as of the CBOA Merger date. Each outstanding share of Bancorp 34 common stock remained outstanding and was unaffected by the CBOA Merger.

Commerce Bank of Arizona operated five full-service offices serving customers in Gilbert, Green Valley, Oro Valley, Scottsdale and Tucson, Arizona. The combined banks operate as Southwest Heritage Bank and serve customers from eight full-service offices in Arizona and southern New Mexico. The core system conversion was executed in March 2024.

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We accounted for the CBOA Merger using the acquisition method of accounting in accordance the Financial Accounting Standards Board’s Accounting Standards Code 805 (“ASC 805”), Business Combinations, and accordingly, the assets and liabilities of CBOA were recorded at their respective merger date fair values. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the merger date as additional information related to the merger date fair values becomes available. Effective in March 2024, we recognized a preliminary bargain purchase gain of $5.1 million in connection with the CBOA Merger (not taxable for income tax purposes), which was recognized in our first quarter 2024 operating results. The core deposit intangible asset of $8.9 million represents the estimated value of Commerce Bank of Arizona’s long-term deposit relationships with its customers and will be amortized over an estimated weighted average life of ten years using an accelerated method, which approximates the estimated run-off of the acquired deposits.

For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Results of Operations for the Three and Nine Months Ended September 30, 2024, and 2023

General

Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans, investment securities and other short-term investments, and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent on our generation of non-interest income, consisting primarily of income from service charges on deposit accounts, interchange and ATM fees, and gains on sales of loans. Other factors contributing to our results of operations include our provisions for credit losses, income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy, amortization of intangible assets, and other operating costs.

We had net income of $1.6 million and a net loss of $2.3 million for the third quarters of 2024 and 2023, respectively. Our third quarter 2024 net income reflects the second full quarter inclusive of CBOA’s operating results. Our net loss for the third quarter of 2023, in large part, reflects: (i) a $3 million provision for credit losses related to a troubled commercial real estate credit; and (ii) $529,000 of merger costs.

For the nine months ended September 30, 2024, and 2023, we had net income of $1.5 million and a net loss of $1.7 million, respectively. Our year-to-date 2024 net income is comprised of pre-tax income of $366,000 and an income tax benefit of $1.2 million. Non-recurring merger-related items also are reflected in our year-to-date 2024 results, which include: (i) a one-time preliminary bargain purchase gain on the CBOA Merger of $5 million (none of which is taxable); (ii) $3.8 million of merger expenses (a portion of which is not deductible for income taxes); and (iii) a Day-2 $4.1 million non-PCD loan provision for credit losses in connection with the CBOA Merger. We also incurred a $432,000 loss on the sale of other real estate owned in the 2024 period. Our $1.7 million net loss for the nine months ended September 30, 2023, includes the $3 million provision for credit losses noted above and $1.3 million of merger expenses.

For more information on the CBOA Merger, please see Note 2 in our unaudited financial statements included in Item 1. of this Quarterly Report on Form 10-Q. 

Net Interest Income

Our net interest income was $8.4 million and $3.7 million for the third quarter of 2024 and 2023, respectively. This $4.9 million increase reflects the full quarter inclusion of CBOA in our 2024 results, given the closing of the CBOA Merger on March 19, 2024, including $936,000 of accretion income on the CBOA loan fair value mark. Net interest income for the nine months ended September 30, 2024, and 2023, was $21 million and $11.6 million, respectively and this increase similarly reflects the positive impacts from the March 19, 2024, CBOA Merger, including $2.6 million of accretion income on the CBOA loan fair value mark. The Company expects that easing of monetary policy by the Federal Reserve Bank, which commenced in late September 2024, will exert downward pressure on earning asset yields as interest bearing bank balances and variable rate commercial loans reprice lower. The expected decline in earning asset yields will be partially offset by deposit costs repricing lower.

Reflecting the positive impact of the CBOA Merger, average earning assets were $926.7 million and $581.9 million during the third quarter of 2024 and 2023, respectively. Average earning asset yields in the third quarter of 2024 and 2023 were 6.52% and 5.15%, respectively and reflective of our loan portfolio repricing in the current interest rate environment.

Average interest-bearing liabilities in the third quarter of 2024 of $614.0 million reflect the impacts of the March 2024 CBOA Merger. Average interest-bearing liabilities in the third quarter of 2023 were $417.7 million. Unrelated to the CBOA Merger, the changing deposit mix reflects a continued increase in time deposits and the broader market trends in which customers have reduced non-interest- and interest-bearing demand deposits in favor of term CDs given the rising interest rate environment.

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Average noninterest bearing deposits were $214.5 million and $91.5 million for the third quarter of 2024 and 2023, and this increase reflects the CBOA Merger as previously described. 

	For the Three Months Ended September 30,
	2024							2023
	Average Outstanding Balance		Interest(2)		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans(1)	$	705,817	$	12,314		6.94	%	$	478,781	$	6,631		5.49	%
Securities		62,283		478		3.05	%		61,122		396		2.57	%
Other interest earning assets		96,913		1,376		5.65	%		12,307		146		4.71	%
Total interest-earning assets		865,013		14,168		6.52	%		552,210		7,173		5.15	%
Noninterest-earning assets		60,678							29,706
Total assets	$	925,691						$	581,916
Interest-bearing liabilities:
Checking, money market and savings accounts	$	342,687	$	2,685		3.12	%	$	250,427	$	1,782		2.82	%
Time deposits		216,596		2,401		4.41	%		127,996		1,212		3.76	%
Total interest-bearing deposits		559,283		5,086		3.62	%		378,423		2,994		3.14	%
Advances from FRB SF BTFP		27,000		328		4.83	%		14,674		211		5.70	%
Other Debt		27,689		367		5.27	%		24,575		264		4.26	%
Total interest-bearing liabilities		613,972		5,781		3.75	%		417,672		3,469		3.30	%
Non-interest bearing deposits		214,523							91,462
Non-interest bearing liabilities		11,373							8,671
Total liabilities		839,868							517,805
Stockholders’ equity		85,823							64,111
Total liabilities and stockholders’ equity	$	925,691						$	581,916
Net interest income			$	8,387						$	3,704
Net interest rate spread						2.77	%						1.86	%
Net interest margin						3.86	%						2.66	%

(1)	Includes nonaccrual loans.
(2)	Accretion and amortization of the fair value marks from the CBOA Merger are included in this column.

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	For the Nine Months Ended September 30,
	2024							2023
	Average Outstanding Balance		Interest(2)		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans(1)	$	637,783	$	32,238		6.78	%	$	473,328	$	19,083		5.39	%
Securities		64,804		1,444		2.99	%		62,645		1,217		2.60	%
Other interest earning assets		71,404		3,037		5.70	%		13,459		420		4.17	%
Total interest-earning assets		773,991		36,719		6.36	%		549,432		20,720		5.04	%
Noninterest-earning assets		54,901							29,966
Total assets	$	828,892						$	579,398
Interest-bearing liabilities:
Checking, money market and savings accounts	$	316,879	$	7,326		3.10	%	$	261,012	$	4,938		2.53	%
Time deposits		189,312		6,278		4.45	%		114,769		2,875		3.35	%
Total interest-bearing deposits		506,191		13,604		3.60	%		375,781		7,813		2.78	%
Advances from FRB SF BTFP		29,029		1,089		5.03	%		14,404		525		4.87	%
Other Debt		26,964		997		4.96	%		24,561		791		4.31	%
Total interest-bearing liabilities		562,184		15,690		3.74	%		414,746		9,129		2.94	%
Non-interest bearing deposits		178,212							93,137
Non-interest bearing liabilities		10,091							8,759
Total liabilities		750,487							516,642
Stockholders’ equity		78,405							62,756
Total liabilities and stockholders’ equity	$	828,892						$	579,398
Net interest income			$	21,029						$	11,591
Net interest rate spread						2.62	%						2.10	%
Net interest margin						3.64	%						2.82	%

(1)	Includes nonaccrual loans.
(2)	Accretion and amortization of the fair value marks from the CBOA Merger are included in this column.

Rate-Volume Analysis

The table below presents the effect of volume and rate changes on interest income and expense. Changes in volume are based on the current period’s average balance multiplied by the previous period’s average rate. Changes in rate are based on the current period’s average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. In the following table, subtotals and totals may not add up due to rounding. Rounding differences may occur in the presentation of numbers, and these variances do not impact the accuracy or reliability of the underlying financial data. All figures are presented in thousands unless otherwise stated.

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2024 Compared to 2023 Volume and Rate Analysis

	Three Months Ended September 30,							Nine Months Ended September 30,
	2024 vs. 2023							2024 vs. 2023
	Increase (Decrease)					Total		Increase (Decrease)				Total
	Due to					Increase		Due to				Increase
	Volume		Rate			(Decrease)		Volume		Rate		(Decrease)
Interest-earning assets:	(Dollars in thousands)							(Dollars in thousands)
Loans	$	3,655	$	2,028		$	5,683	$	7,559	$	5,596	$	13,155
Securities		8		74			82		42		185		227
Other interest-earning assets		1,195		35			1,230		2,412		205		2,617
Total interest-earning assets	$	4,858	$	2,137		$	6,995	$	10,013	$	5,986	$	15,999
Interest-bearing liabilities:
Checking, money-market and savings accounts	$	704	$	199		$	903	$	1,163	$	1,225	$	2,388
Certificates of deposit		950		239			1,189		2,262		1,141		3,403
Total deposits		1,654		438			2,092		3,426		2,365		5,791
Advances from FRB SF BTFP		143		(26	)		117		547		17		564
Other Debt		36		67			103		81		125		206
Total interest-bearing liabilities		1,833		479			2,312		4,053		2,508		6,561
Change in net interest income	$	3,024	$	1,659		$	4,683	$	5,960	$	3,478	$	9,438

Allowance and Provision for Credit Losses – Loans held-for-investment

At September 30, 2024, and 2023, our ACL for loans held for investment was $10.5 million and $8.4 million, respectively, which represents 1.52% and 1.74% of loans held for investment, respectively. We maintain the ACL at a level that management believes is adequate to absorb expected credit losses over the lifetime of our loans held-for-investment. Specifically, identifiable and quantifiable losses are immediately charged off against the allowance; and recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.  

The provision for credit losses, from time to time, includes a charge to our operating results in order to maintain the ACL at a level consistent with management’s assessment of the collectability of the loans held-for-investment in light of current economic conditions and market trends. Our provision for credit losses was $3.9 million and $3.3 million for the nine months ended September 30, 2024, and 2023, respectively. The 2024 $3.9 million provision for credit loss expense primarily reflects the merger-related $4.1 million charge for Non-PCD loans. The 2023 provision for credit losses reflects one problem credit which resulted in $3 million of provision for credit losses and was reflective of management’s best estimate, at the time, of the real estate value underlying this one problem credit. The impact from our CECL adoption effective January 1, 2023, resulted in a one-time net of income tax charge to retained earnings of $654,000.

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Noninterest Income

	Three months ended September 30,					Nine months ended September 30,
	2024		2023			2024			2023
(In thousands)
Service charges and fees	$	167	$	106		$	424		$	328
Gain on sale of loans		22		17			27			83
Preliminary bargain purchase gain on the CBOA Merger		—		—			5,018			—
Bank owned life insurance income		70		63			207			183
Loss on Sale of OREO		—		—			(432	)		—
Other		8		(22	)		11			(65	)
Total noninterest income	$	267	$	164		$	5,255		$	529

Our noninterest income for the first nine months of 2024, primarily reflects a $5.0 million one-time preliminary bargain purchase gain, inclusive of a $118,000 reduction related to certain second quarter 2024 measurement period adjustments, partially offset by a $432,000 pre-tax loss on the sale of a note associated with a loan which was previously classified as other real estate owned. For further information regarding the CBOA Merger and the preliminary bargain purchase gain, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Noninterest Expense

	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2024		2023		2024		2023
Salary and employee benefits	$	3,129	$	1,488	$	9,057	$	5,144
Occupancy		700		293		1,817		843
Data processing		929		622		2,720		1,908
Federal insurance premiums and other insurance		173		70		554		224
Professional fees		402		153		1,259		486
Advertising		97		4		193		31
Merger costs		—		529		3,762		1,333
Core deposit intangible amortization		430		—		926		—
Other		741		441		1,764		1,023
Total noninterest expense	$	6,601	$	3,600	$	22,052	$	10,992

Our noninterest expense increased $3 million in the third quarter of 2024 from the third quarter of 2023, and $11 million for the nine months ended September 30, 2024, from the nine months ended September 30, 2023. Both of these increases reflect, in large part, the addition of CBOA to the Bank’s operations as a result of the March 19, 2024, CBOA Merger. Merger costs were nil in the third quarter of 2024 compared to $529,000 in the third quarter of 2023. Included within the $3.8 million of merger costs incurred during the nine months ended September 30, 2024, is $1.2 million in core processing and online banking contract termination fees. Additionally, our nine months ended September 30, 2024, noninterest expense includes a one-time change-in-control charge of $654,000, in connection with the CBOA Merger. For the three and nine months ended September 30, 2024, and in connection with the CBOA Merger, we expensed $430,000 and $926,000, respectively of amortization expense on the merger-related core deposit intangible. For more information on the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q. 

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Efficiency ratio

The efficiency ratio is one measure of profitability in the banking industry. This ratio measures the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing non-interest expense by the sum of net interest income, before provision expense for credit losses, and non-interest income.

Our efficiency ratio was 76.15% and 90.69% for the three months ended September 30, 2024, and 2023, and was 83.90% and 90.84% the nine months ended September 30, 2024, and 2023, respectively. This improvement is partially reflective of the CBOA Merger and related non-recurring material financial impacts in connection with the CBOA Merger. For more information on the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q. 

Return on average assets and average equity

The following table sets forth our ROAA, ROAE, dividend payout and average stockholders’ equity to average assets ratio for the periods indicated below:

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2024			2023			2024			2023
Return on average assets (ROAA)		0.67	%		-1.55	%		0.25	%		-0.40	%
Return on average equity (ROAE)		7.30	%		-14.08	%		2.74	%		-3.68	%
Dividend payout ratio		0.00	%		0.00	%		0.00	%		-29.17	%
Average stockholders’ equity to average assets		9.16	%		11.01	%		9.39	%		10.83	%

Income Taxes

We had a $1.2 million income tax benefit for the nine months ended September 30, 2024, on $366,000 of pre-tax income. This was primarily a result of two CBOA Merger-related items: (i) non-taxable preliminary bargain purchase gain of $5 million; and (ii) partially deductible merger costs of $3.8 million. Our effective rate was 19.8% for the nine months ended September 30, 2023. For further information on income taxes, please reference Note 10 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Financial Condition

Balance Sheet

Our total assets were $939.4 million at September 30, 2024, and $581.3 million at December 31, 2023. Our total loans held for investment were $703.1 million at September 30, 2024, and $457 million at December 31, 2023. The increase in our total assets and total loans, respectively, largely reflects total assets, as adjusted for estimated fair values of $419.3 million, and total loans, as adjusted for estimated fair values, of $310.9 million, which were acquired in connection with the CBOA Merger. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

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Investment Securities

Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investment in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and available sources of funds and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.

Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities in our investment portfolio as of September 30, 2024, and December 31, 2023. All available-for-sale securities are carried at fair value and may be used for liquidity purposes.

Our securities available-for-sale were $58.2 million and $56.7 million at September 30, 2024, and December 31, 2023, respectively. After the CBOA Merger date, management liquidated the entire acquired CBOA available-for-sale investment portfolio in late March and early April, and management determined that these sales prices were the best indicator of the fair value of the CBOA available-for-sale-investment portfolio effective as of the CBOA Merger date. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our held-to-maturity securities which are carried on our balance sheet at amortized costs and net of an allowance for credit losses, were $5.6 million and $5.7 million as of September 30, 2024, and December 31, 2023, respectively.

Derivatives and Hedging activities

Southwest Heritage Bank is exposed to certain risks relating to its ongoing business operations. As such, from time to time, we enter into interest rate derivatives as part of our asset liability management strategy to help manage the Bank’s interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the derivative contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives may also be implicit in certain contracts and commitments.

We recognize derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. We record derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in fair values of derivative financial instruments are either recognized in income or shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

As part of our interest rate risk management strategy to manage the Bank’s exposure to interest rate movements as a result of the Bank’s available-for-sale fixed rate bond portfolio and in the third quarter of 2024, we entered into two pay-fixed/receive-floating interest rate swaps (the “Pay Fixed Swap Agreements”) for a total notional amount of $30 million, both of which were designated as fair value hedges. The Pay Fixed Swap Agreements involve the Bank’s receipt of variable-rate amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the derivative contracts without the exchange of the underlying notional amount. For all period presented, there were no other derivatives.

The following items are included on the September 30, 2024, consolidated balance sheet in connection with the Pay Fixed Swap Agreements: (i) $300,000 related to a cash margin account included in cash and cash equivalents; (ii) mark-to-market values of $200,000 as an increase to accrued interest and other liabilities; and (iv) a $205,000 pre-tax charge as part of accumulated other comprehensive income in equity. Our third quarter income statement also includes a $45,000 increase to interest income in connection with the Pay Fixed Swap Agreements. As of September 30, 2024, the amortized cost of the underlying available-for-sale investments being hedged by the Pay Fixed Swap Agreements was $52 million.

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Loans

Our loan portfolio represents a broad range of borrowers, primarily in our markets in Arizona and New Mexico, comprised of construction, commercial, commercial real estate, residential real estate, and consumer financing loans.

The following tables set forth the composition of our loan portfolio, as of the periods presented:

	September 30, 2024					December 31, 2023
(In thousands)	Amount		% of total loans			Amount		% of total loans
1-4 Family residential real estate	$	71,279		10.1	%	$	61,645		13.5	%
Commercial		120,510		17.1	%		50,169		10.9	%
Consumer and other		902		0.1	%		698		0.2	%
Construction		30,630		4.4	%		34,538		7.5	%
NOO CRE		259,966		37.0	%		168,404		36.8	%
OO CRE		157,184		22.4	%		82,228		17.9	%
Multifamily		62,664		8.9	%		60,546		13.2	%
Total loans	$	703,135		100	%	$	458,228		100	%

Family residential real estate loans represent loans to consumers collateralized by a mortgage on a residence and include purchase money, refinancing, secondary mortgages, and home equity loans and lines of credit.

Commercial loans include commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. SBA, USDA and other small business lending products are also categorized as commercial loans. These loans are made primarily in our market areas are underwritten on the basis of the borrower’s ability to service the debt from revenue, and are generally extended under our normal credit standards, controls and monitoring systems.

Consumer and other loans include direct consumer installment loans, overdrafts and other revolving loans.

Construction loans include both residential and commercial projects. Construction loan terms are dependent upon the project, but in some cases will be longer term and include both the construction phase as well as longer term financing.

Commercial real estate (“CRE”) loans include owner occupied and non-owner occupied commercial real estate mortgage loans for operating commercial businesses and include loans for long-term financing of land and buildings. No significant concentrations are present within the CRE portfolio as the bank has made an effort to diversify across various industries and geographic locations. While the majority of these loans are made primarily in our market area, some of the loans have out of market properties. In response to the deterioration of a large out of market commercial real estate loan during 2023, management engaged an external party to complete a loan review that included approximately 90% of the out of market collateral portfolio. Additionally, management reviewed the property appraisals associated with the out of market loans and plans to limit out of market lending moving forward. There is currently heightened CRE loan credit risk across the U.S. due to continued increasing ecommerce volumes, hybrid or remote work arrangements in many industries following the COVID-19 pandemic, higher vacancy rates, higher interest rates, property fraud and other factors. In addition, higher interest rates have exacerbated the declining property values of CRE by increasing initial financing and refinancing costs for CRE borrowers.

Multifamily loans are for those properties that have five or more units with borrowers who are primarily commercial entities. The Bank finances loans in several different multifamily types but does not have a concentration in any one type and does not do any specialty lending in this area. These loans are made primarily in our market area.

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Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following table summarizes the loan maturity distribution by type and related interest rate characteristics as of the periods presented (in thousands):

As of September 30, 2024	One year or less		After one through five years				After five through 15 years				After 15 years				Total
			Fixed		Variable		Fixed		Variable		Fixed		Variable
1-4 Family residential real estate	$	4,218	$	34,727	$	2,390	$	13,020	$	4,434	$	4,075	$	8,414	$	71,279
Commercial		33,309		29,491		14,126		22,180		19,001		9		2,394		120,511
Consumer and other		841		60		—		—		—		3		—		903
Construction		12,105		9,411		1,267		1,477		6,370		—		—		30,630
NOO CRE		29,113		83,851		13,256		42,873		73,165		1,883		15,822		259,965
OO CRE		7,440		36,751		12,829		39,380		58,088		1,877		817		157,183
Multifamily		6,154		28,715		5,680		17,020		5,094		—		—		62,663
Total loans	$	93,180	$	223,007	$	49,549	$	135,950	$	166,152	$	7,848	$	27,448	$	703,135

Allocation of Allowance for Credit Losses

The following tables present the allocation of the ACL on loans held-for-investment and the percentage of the total amount of loans held-for-investment in each category listed and as of the dates indicated:

	September 30, 2024					December 31, 2023
(Dollars in thousands)	Allowance Amount		% of Portfolio			Allowance Amount		% of Portfolio
1-4 Family residential real estate	$	930		1.30	%	$	736		1.19	%
Commercial		2,602		2.16	%		924		1.84	%
Consumer and other		9		1.00	%		8		1.15	%
Construction		514		1.68	%		512		1.48	%
NOO CRE		3,632		1.40	%		1,859		1.10	%
OO CRE		2,111		1.34	%		1,201		1.46	%
Multifamily		725		1.16	%		620		1.02	%
Total	$	10,523		1.52	%	$	5,860		1.28	%

The ACL increase from December 31, 2023, primarily reflects impacts from the March 19, 2024, CBOA Merger as more fully discussed above. For further information regarding the CBOA Merger, also see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

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Nonperforming Assets

We have established policies and procedures to guide us in originating, monitoring and maintaining the credit quality of our loan portfolio. These policies and procedures are required to be followed by our bankers and underwriters and exceptions to these policies require elevated levels of approval and are reported to our board of directors.

Nonperforming assets include all loans categorized as nonaccrual, other real estate owned and other repossessed assets. The accrual of interest on loans is discontinued, or the loan is placed on nonaccrual, when the full collection of principal and interest is in doubt. We do not generally accrue interest on loans that are 90 days or more past due. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income and future accruals of interest are discontinued. Payments by borrowers for loans on nonaccrual are applied to loan principal. Loans are returned to accrual status when, in our judgment, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, we require a minimum of six consecutive months of timely payments in accordance with the contractual terms before returning a loan to accrual status.

Historically other real estate owned (OREO) represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO generally are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We typically have incurred recurring expenses relating to OREO in the form of maintenance, taxes, insurance, and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. Southwest Heritage Bank held $3 million of OREO, represented by one out of market commercial real estate property, at December 31, 2023, and no OREO at September 30, 2024.

The following tables set forth our non-performing assets and related ratios as of each balance sheet date indicated below:

Nonperforming assets
(Dollars in thousands)	September 30, 2024			December 31, 2023
Nonaccrual loans:
1-4 Family residential real estate	$	60		$	66
Commercial		2,509			1,208
Consumer and other		—			—
Construction		—			—
NOO CRE		—			—
OO CRE		—			—
Multifamily		722			970
Total nonaccrual loans		3,291			2,244
Accrual loans greater than 90 days past due		—			—
Total nonperforming loans (NPLs)		3,291			2,244
Other real estate owned and foreclosed assets, net		—			3,000
Total nonperforming assets (NPAs)	$	3,291		$	5,244
ACL		10,523			5,860
NPLs		3,291			2,244
ACL to NPLs		319.75	%		261.14	%
NPA’s		3,291			5,244
Total Assets		935,414			581,265
NPAs to total assets		0.35	%		0.90	%
NPLs		3,291			2,244
Total Loans		703,135			457,027
NPLs to total loans		0.47	%		0.49	%

Total nonperforming assets were $3.3 million as of September 30, 2024, compared to $5.2 million at December 31, 2023. The decrease reflects the sale of the note for the prior OREO balance, partially offset by certain non-accrual loans acquired through the CBOA Merger on March 19, 2024.

Potential problem loans are loans which management has serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. Management has not identified any potential problem loans not included in the nonperforming assets table above. 

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Allowance for Credit Losses – Unfunded loan commitments

The following tables present the changes in the ACL on unfunded loan commitments for the three and nine months ended September 30, 2024:

Three months ended September 30, 2024 (In thousands)	Unfunded Loan Commitments
Allowance for credit losses:
Beginning balance	$	350
Provision for credit losses		—
Ending balance	$	350
Nine months ended September 30, 2024 (In thousands)	Unfunded Loan Commitments
Allowance for credit losses:
Beginning balance	$	135
Impact of the CBOA merger		222
Provision for credit losses		(7	)
Ending balance	$	350

Deposits

Deposits represent our primary source of funds. We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. Total deposits were $785.2 million and $460.0 million as of September 30, 2024, and December 31, 2023, respectively. The primary reason for this large increase was the CBOA Merger.

The following table sets forth the average balance amounts and the average rates paid on deposits held by us for the periods presented:

	For the three months ended September 30,
	2024					2023
(Dollars in thousands)	Average Balance		Average Rate Paid			Average Balance		Average Rate Paid
Noninterest-bearing demand deposits	$	214,523		—	%	$	91,462		—	%
Interest-bearing demand and NOW deposits		342,687		3.12			250,427		2.82
Certificates of deposit		216,596		4.41			127,996		3.76
Total deposits	$	773,806		2.63	%	$	469,885		2.55	%
	For the nine months ended September 30,
	2024					2023
(Dollars in thousands)	Average Balance		Average Rate Paid			Average Balance		Average Rate Paid
Noninterest-bearing demand deposits	$	178,212		—	%	$	93,137		—	%
Interest-bearing demand and NOW deposits		316,879		3.10			261,012		2.53
Certificates of deposit		189,312		4.45			114,768		3.35
Total deposits	$	684,403		2.64	%	$	468,918		2.22	%

For the three months ended September 30, 2024, and September 30, 2023, average certificates of deposit included average brokered CD balances of $8.1 million and $20.0 million, respectively. For the nine months ended September 30, 2024, and September 30, 2023, average certificates of deposit included average brokered CD balances of $9.4 million and $17.6 million, respectively. The decline in our brokered CD deposits in 2024 is due to brokered CD maturities which were paid off with excess cash on hand.

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The following table sets forth the portion of the Bank’s time deposits in excess of the FDIC insurance limit, by remaining maturity and as of September 30, 2024:

(In thousands)
Three months or less	$	19,239
Over three months through six months		29,193
Over six months through twelve months		12,611
Over twelve months		21,517
Total	$	82,560

As of September 30, 2024, and December 31, 2023, approximately $189.9 million and $195.6 million of our total deposit base was uninsured. The estimates are based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Federal Reserve Bank and Federal Home Loan Bank Advances

Other than deposits, at times the Bank may utilize Federal Home Loan Bank (“FHLB”) advances and Federal Reserve Bank (“FRB”) advances as supplementary funding sources to finance our operations. At September 30, 2024, we had $27 million of borrowings through the FRB’s Bank Term Funding Program (“BTFP”) established in March 2023. At December 31, 2023, we had $29 million borrowings through the BTFP. Our advances from the FRB are collateralized by pledged securities. At September 30, 2024, we had $29.2 million in availability through the FRB’s Discount Window. As of September 30, 2024, we had $229.4 million in borrowing capacity at the FHLB of San Francisco.

The following table presents certain attributes of debt as of and for the nine months ended September 30, 2024. The maximum month-end balance represents the high indebtedness at any month end during the first nine months of 2024.

						Maximum
	Ending		Period			Month End		Period Average
(Dollars in thousands)	Balance		End Rate			Balance		Balance		Rate
Federal Home Loan Bank Advances	$	0		0.00	%		0	$	0		0.00	%
FRB BTFP Advances		27,000		4.83	%		49,000		29,029		5.03	%
Other Debt, net		27,319		4.54	%		29,145		26,964		4.96	%
Total	$	54,319		4.68	%	$	78,145	$	55,993		5.00	%

In October 2024, the Bank paid off in full its $27 million BTFP borrowing from the FRB and transferred the related pledged available-for-sale securities of $27.6 million, securing this BTFP borrowing, to the Federal Reserve Bank of San Francisco’s Discount Window. In addition, $990,000 of accrued interest payable was paid off in connection with the October 2024 full pay off of the BTFP borrowing described above.

Other Debt

In addition to our FRB advances, we also have subordinated debt amounting to $23.1 million at September 30, 2024, trust preferred securities assumed in connection with the CBOA Merger totaling $5.2 million, and $1.7 million of Federal Funds purchased. See Note 7—Borrowings in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 

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Capital Raises

During December 2022 and January 2023, Bancorp 34 completed two private placements of common and preferred stock. Bancorp 34 issued a total of 1,359,497 shares of common stock and 820,115 shares of convertible, non-voting Series A perpetual preferred Stock at $14.00 per share each, generating net cash proceeds of approximately $28.6 million. The Company used the net proceeds from these private placements to support the CBOA Merger and to enhance capital ratios.

In conjunction with the private placements, Bancorp 34 issued warrants to purchase up to 211,667 shares of common stock at a price of $14.00. The approximate fair value of the warrants at the date of grant was not considered significant. The warrants are exercisable at any time after their grant date, and from time to time, in whole or in part, for seven years from their grant dates, between December 2029 and January 2030. The exercise of such warrants remains subject to certain contractual provisions and a “cashless exercise” may be executed.

For more information about these private placements, see Note 17—Private Placement of Common and Preferred Stock, in our unaudited financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Bancorp 34 (Parent Company)

Bancorp 34 has routine cash outlays consisting primarily of operating expenses and debt service. Bancorp 34 can obtain funding to meet its obligations from dividends collected from its subsidiary, Southwest Heritage Bank, and through the issuance of varying forms of debt and equity. At September 30, 2024, Bancorp 34 had cash and equivalents of $3.8 million, a $1.5 million note receivable from the Southwest Heritage Bank ESOP, and debt outstanding of $27.7 million, which includes $5.2 million related to trust preferred debt assumed in connection with the CBOA Merger. Management believes Bancorp 34 has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.

Federal banking laws regulate dividends that may be paid by banking subsidiaries without prior approval. Southwest Heritage Bank may declare dividends without prior regulatory approval that do not exceed the total of retained net income for the current year combined with its retained net income for the preceding two years, subject to maintenance of minimum capital requirements. Prior regulatory approval to pay dividends was not required in 2022 or 2023. During the nine months ended September 30, 2024, Southwest Heritage Bank did not pay a dividend to Bancorp 34.

Southwest Heritage Bank (the Bank)

Southwest Heritage Bank’s liquidity management policy and our asset and liability management policy, or ALM policy, provides the framework that we use to seek to maintain adequate liquidity and sources of available liquidity at levels that will enable us to meet all reasonably foreseeable short-term, long-term, and strategic liquidity demands. Our Asset and Liability Management Committee, or ALCO, is responsible for oversight of our liquidity risk management activities in accordance with the provisions of our ALM Policy and applicable bank regulatory capital and liquidity laws and regulations. Our liquidity risk management process includes (i) ongoing analysis and monitoring of our funding requirements under various economic and interest rate scenarios, (ii) review and monitoring of lenders, depositors, brokers and other liability holders to ensure appropriate diversification of funding sources, and (iii) liquidity contingency planning to address liquidity needs in the event of unforeseen market disruption, including appropriate allocation of funds to a liquid portfolio of marketable securities and investments. We continuously monitor our liquidity position in order for our assets and liabilities to be managed in a manner that we believe will meet our immediate and long-term funding requirements. We seek to manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return-on-investment objectives of our stockholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of our securities, loan portfolios and deposits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control when we make investment decisions.

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Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers and capital expenditures. These liquidity requirements are met primarily through our deposits, FHLB advances, subordinated debt and the principal and interest payments we receive on loans and investment securities. Cash, interest-bearing deposits in third party banks, securities available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are available to us include the sale of loans we hold for investment, the ability to acquire additional national market non-core deposits, borrowings through the Federal Reserve’s discount window and the issuance of additional debt.

At September 30, 2024, Southwest Heritage Bank’s cash and cash equivalents were $127.8 million, or 13.6% of Southwest Heritage Bank’s total assets, compared to $28.9 million, or 5.0% of total assets, at December 31, 2023. The increase in Southwest Heritage Bank’s liquid assets, during nine months ended September 30, 2024, reflects cash acquired in the CBOA Merger, proceeds from the sale of the marked investment portfolio acquired in the CBOA Merger, and loan payoffs. These cash increases were partially offset by the decline in deposit balances and the payoff of borrowings since the CBOA Merger.

The liability portion of our balance sheet serves as a primary source of liquidity. We plan to meet our future cash needs primarily through the generation of deposits. Customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At September 30, 2024, net loans as a percentage of deposits were 87.8%, compared to 98.1% at December 31, 2023. For additional information related to our deposits, see the “Deposits” section above.

As of September 30, 2024, we also had borrowing capacity at the Federal Reserve Bank (“FRB”) of San Francisco and the FHLB of San Francisco, from which we can borrow for leverage or liquidity purposes. Both the FRB and FHLB require that securities and/or qualifying loans be pledged to secure any advances. At September 30, 2024, Southwest Heritage Bank had: (i) $27 million in advances from the FRB’s BTFP; (ii) $29.2 million in availability through the FRB’s Discount Window; (iii) $229.4 million in borrowing capacity at the FHLB of San Francisco; and (iv) fully available unsecured Federal funds lines-of-credit with certain other financial institutions totaling $49.8 million.

In October 2024, the Bank paid off in full its $27 million BTFP borrowing from the FRB and transferred the related pledged available-for-sale securities of $27.6 million, securing this BTFP borrowing, to the Federal Reserve Bank of San Francisco’s Discount Window. In addition, $990,000 of accrued interest payable was paid off in connection with the October 2024 full pay off of the BTFP borrowing described above.

Management believes Southwest Heritage Bank has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and long-term.

Capital Resources

Our consolidated stockholders’ equity at September 30, 2024, and December 31, 2023, was $87.1 million and $60.7 million, respectively. This increase primarily reflects the $23.3 million estimated fair value of our 2.7 million common shares issued as consideration in connection with the CBOA Merger in March 2024.

We are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on our financial statements.

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Regulatory capital rules adopted in July 2013 and fully phased in as of January 1, 2019, which we refer to as the Basel III rules, impose minimum capital requirements for bank holding companies and banks. The Basel III rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with consolidated assets of more than $3 billion. While Bancorp 34 is not subject to the regulation, the ratios are monitored by management should compliance be required.

To avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain the fully phased in “capital conservation buffer” of 2.5% on top of its minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1 risk-based capital, but the buffer applies to all three measurements (common equity Tier 1 risk-based capital, Tier 1 capital and total capital). At September 30, 2024, Southwest Heritage Bank exceeded the regulatory minimums and met the regulatory definition of well-capitalized.

The following table shows the regulatory capital ratios for Bancorp 34 (consolidated) at the dates indicated:

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required To be Well- Capitalized under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2024
Total risk-based capital to risk-weighted assets	$	115,973		14.98	%	$	61,938		8.00	%		$N/A		N/A	%
Tier 1 risk-based capital to risk-weighted assets		82,500		10.66			46,454		6.00			N/A		N/A
Common Equity Tier 1 (CET 1) to risk-weighted assets		N/A		N/A			N/A		N/A			N/A		N/A
Tier 1 leverage capital to average assets		82,500		8.95			36,883		4.00			N/A		N/A
As of December 31, 2023
Total risk-based capital to risk-weighted assets	$	96,761		19.20	%	$	40,311		8.00	%		$N/A		N/A	%
Tier 1 risk-based capital to risk-weighted assets		65,651		13.03			30,234		6.00			N/A		N/A
Common Equity Tier 1 (CET 1) to risk-weighted assets		N/A		N/A			N/A		N/A			N/A		N/A
Tier 1 leverage capital to average assets		65,651		11.20			23,446		4.00			N/A		N/A

The following table shows the regulatory capital ratios for Southwest Heritage Bank at the dates indicated:

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2024
Total Capital to risk-weighted assets:	$	110,572		14.28	%	$	61,945		8	%	$	77,431		10	%
Tier 1 (Core) Capital to risk weighted assets:	$	100,878		13.03	%	$	46,452		6	%	$	61,936		8	%
Common Tier 1 Capital to risk weighted assets (CET1):	$	100,878		13.03	%	$	34,839		4.50	%	$	50,323		6.50	%
Tier 1 (Core) Capital to average assets:	$	100,878		10.98	%	$	36,750		4	%	$	45,937		5	%
December 31, 2023
Total Capital to risk-weighted assets:	$	74,142		14.79	%	$	40,114		8	%	$	50,143		10	%
Tier 1 (Core) Capital to risk weighted assets:	$	68,032		13.57	%	$	30,086		6	%	$	40,114		8	%
Common Tier 1 Capital to risk weighted assets (CET1):	$	68,032		13.57	%	$	22,564		4.50	%	$	32,593		6.50	%
Tier 1 (Core) Capital to average assets:	$	68,032		11.66	%	$	23,347		4	%	$	29,184		5	%

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Off-Balance Sheet Items

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and unused lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

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 amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate, including income producing commercial properties.

Commitments to make loans are generally made for periods of 90 days or less.

Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for funded instruments. We do not anticipate any material losses as a result of the commitments and standby letters of credit.

The following table summarizes commitments as of the dates presented (In thousands):

	September 30,				December 31,
	2024				2023
	Fixed		Variable		Fixed		Variable
Commitments to extend credit	$	7,069	$	25,493	$	5,327	$	6,966
Unused lines of credit		3,551		39,781		3,962		18,859
Totals	$	10,620	$	65,274	$	9,289	$	25,825

Contractual Obligations

We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk, and liquidity risk.

The following table summarizes our contractual obligations as of September 30, 2024, and December 31, 2023:

			Less than		1-3		3-5		More than
September 30, 2024 (In thousands)	Total		1 Year		Years		Years		5 Years
Long-term debt:
FRB term advances	$	27,000	$	27,000	$	—	$	—	$	—
Subordinated debt		23,500		—		—		—		23,500
Trust preferred securities		5,155		—		—		—		5,155
Total long-term debt		55,655		27,000		—		—		28,655
Operating leases		4,869		990		1,695		1,578		606
Certificates of deposit		237,649		202,870		30,142		4,637		0
Total	$	298,173	$	230,860	$	31,837	$	6,215	$	29,261
			Less than		1-3		3-5		More than
December 31, 2023 (In thousands)	Total		1 Year		Years		Years		5 Years
Long-term debt:
FRB term advances	$	29,000	$	29,000	$	—	$	—	$	—
Subordinated debt		25,000		—		—		—		25,000
Total long-term debt		54,000		29,000		—		—		25,000
Operating leases		2,344		325		726		749		544
Certificates of deposit		128,403		93,675		30,390		4,338		0
Total	$	184,747	$	123,000	$	31,116	$	5,087	$	25,544

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required of smaller reporting companies.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2024. The Company’s disclosure controls and procedures are designed to ensure information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2024.

During the quarter ended September 30, 2024, there was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company continually monitors and assesses changes in processes and activities to determine any potential impact on the design and operating effectiveness of internal controls over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and the Bank are defendants, from time-to-time, in legal actions at various points of the legal process arising from transactions conducted in the ordinary course of business. Management believes that, after consultation with legal counsel, it is not probable that the outcome of current legal actions will result in a liability that would have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows. In the event that such a legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income or cash flows.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Part I – Item 1A – Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities. Subject to the foregoing, there have been no material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, except as otherwise disclosed herein.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, and this Exhibit Index is incorporated herein by reference. 

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SIGNATURES

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

	BANCORP 34, INC.
Date: November 13, 2024	By:	/s/ Ciaran McMullan
	Name:	Ciaran McMullan
	Title:	Chairman and Chief Executive Officer
Date: November 13, 2024	By:	/s/ Kevin Vaughn
	Name:	Kevin Vaughn
	Title:	Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1**	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	Inline XBRL Instance Document.
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.SCH*	Inline XBRL Taxonomy Extension Schema Document
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*	line XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*	Filed herewith.
**	Furnished herewith.

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