Bancorp 34 Inc

Previous wording

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 March 31, 2024; and (ii) on our results of operations for the three months ended March 31, 2024, and 2023. 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.

Current wording

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 June 30, 2024; and (ii) on our results of operations for the three and six months ended June 30, 2024, and 2023. 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.

Previous wording

Bancorp 34 generates most of its income from interest income on loans, investment securities and deposits in other financial institutions, and service charges on customer accounts. Bancorp 34 incurs interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits, occupancy expenses, and technology expenses. Net interest income is the largest source of Bancorp 34’s 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.

Current wording

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 noninterest expenses such as salaries and employee benefits, occupancy expenses, and technology expenses. Net interest income is the largest source of our 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.

Previous wording

Changes in the market interest rates and interest rates Bancorp 34 earns on interest-earning assets or pays 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.

Current wording

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.

Previous wording

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 determination of the allowance for credit losses and fair value measurements 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.

Current wording

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) determining the fair values of the net assets acquired and the fair value of the common stock consideration in connection with the CBOA Merger; (ii) determination of the allowance for credit losses; (iii) other fair value measurements; and (iv) 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.

Previous wording

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 the March 31, 2024, estimate, the Company assumed a forecasted unemployment rate of 4.5%, which has 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.

Current wording

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 June 30, 2024, ACL estimate, the Company assumed a forecasted unemployment rate of 4.3%, which has 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.

Previous wording

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 2,742,257 shares of Bancorp 34 common stock, which had a fair value of approximately $23.3 million based on a common shares valuation completed by an independent third party as of the Merger date. Each outstanding share of Bancorp 34 common stock remained outstanding and was unaffected by the Merger.

Current wording

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 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 completed by an independent third party as of the Merger date. Each outstanding share of Bancorp 34 common stock remained outstanding and was unaffected by the Merger.

Previous wording

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 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 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. Through March 31, 2024, Bancorp 34 incurred approximately $6.4 million of merger-related expenses, $3.3 million of which was incurred during the first quarter of 2024.

Current wording

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 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 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 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. Through June 30, 2024, Bancorp 34 incurred approximately $6.8 million of merger-related expenses, $414,000 of which was incurred during the second quarter of 2024. These amounts exclude pre-Merger date CBOA merger-related expenses.

Previous wording

We had a net loss of $1.5 million and net income of $0.4 million for the first quarters ended March 31, 2024, and 2023, respectively. The first quarter 2024 net loss includes: (i) a one-time preliminary bargain purchase gain on the Merger of $5.1 million (none of which is taxable); (ii) $3.3 million of Merger expenses (a portion of which is not deductible for income taxes); (iii) a $4.1 million pre-tax non-PCD loan provision related to the Merger; (iv) a $0.4 million pre-tax loss on the sale of a note associated with a loan which was classified as other real estate owned; and (v) an income tax benefit of $2 million. Our net income in the first quarter of 2023 primarily reflects net interest income of $4 million, operating expenses of $3.6 million, and an income tax provision of $0.2 million. There were no Merger expenses incurred during the first quarter of 2023.

Current wording

For the six months ended June 30, 2024, and 2023, we had a cumulative net loss of $34,000 and net income of $549,000, respectively. The 2024 net loss reflects the positive results from the second quarter noted above, substantially all offset by non-recurring material Merger-related items reflected in our first quarter 2024 results, which included: (i) a one-time preliminary bargain purchase gain on the Merger of $5.1 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 $4.1 million pre-tax non-PCD loan provision related to the Merger. Merger costs expensed during the six months ended June 30, 2023, were $805,000.

Previous wording

Average earning assets were $585.7 million and $543.3 million during the first quarter of 2024 and 2023. This increase of $42.4 million, or 7.8%, partially reflects the post-Merger date (March 19 th, 2024) partial month of March 2024 during which the Commerce Bank of Arizona loans were legally owned by Southwest Heritage Bank. Average earning asset yields in the first quarter of 2024 and 2023 were 5.44% and 4.98%, respectively and is reflective of our loan portfolio repricing in the current interest rate environment.

Current wording

Reflecting the positive impact of the CBOA Merger, average earning assets were $936.9 million and $582.3 million during the second quarter of 2024 and 2023, respectively. Average earning asset yields in the second quarter of 2024 and 2023 were 6.56% and 4.99%, respectively and reflective of our loan portfolio repricing in the current interest rate environment.

Previous wording

Comparing average interest-bearing liabilities in the first quarter of 2024 and 2023, we experienced an increase of $35.3 million, or 8.6%. This increase 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 bank deposit rate environment. Additionally, this increase also includes the post-Merger date impact of Commerce Bank of Arizona deposits for the partial month of March 2024. Average brokered deposits, sometimes referred to as “brokered CDs”, are included in average time deposits and were $27.9 million in the first quarter of 2024.

Current wording

Average interest-bearing liabilities in the second quarter of 2024 of $657.9 million reflect the impacts of the March 2024 CBOA Merger. Average interest-bearing liabilities in the second quarter of 2023 were $415.1 million. Unrelated to the 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 bank deposit rate environment.

Previous wording

At March 31, 2024, and March 31, 2023, our ACL for loans held for investment was $10.7 million and $5.9 million, respectively, which represents 1.42% and 1.28% of loans held for investment, respectively. We maintain 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; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off. Our ACL at March 31, 2024, and in connection the Merger, included: (i) a $4.1 million provision expense related to the performing loans, “Non-PCD” loans of $300 million; and (ii) a $1.2 million on-balance sheet gross up of loans identified as purchased credit deteriorated loans, “PCD” loans of $30 million. For more information on the Merger, Non-PCD loans, and PCD loans, please see Note 2 in our unaudited financial statements herein.

Current wording

At June 30, 2024, and 2023, our ACL for loans held for investment was $10.8 million and $5.2 million, respectively, which represents 1.47% and 1.09% 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; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off. Our ACL at March 31, 2024, and in connection the Merger, included: (i) a $4.1 million provision expense related to the performing loans, “Non-PCD” loans of $300 million; and (ii) a $1.2 million on-balance sheet gross up of loans identified as purchased credit deteriorated loans, “PCD” loans of $30 million. For more information on the Merger, Non-PCD loans, and PCD loans, please see Note 2 in our unaudited financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Previous wording

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 $1,000 in the first quarter of 2024 and 2023, respectively. The first quarter 2024 $3.9 million provision for credit loss expense primarily reflects the Merger-related $4.1 million charge for Non-PCD loans described above, partially offset by a $0.2 benefit caused by the decline in loans amounts at the existing institution. The relatively low provision for credit loss expense in the first quarter of 2023, reflects the impact from our CECL adoption effective January 1, 2023, which resulted in a one-time net of income tax charge to retained earnings of $654,000.

Current wording

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 $133,000 for the six months ended June 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 described above. The relatively low provision for credit loss expense in the first six months of 2023 reflects the impact from our CECL adoption effective January 1, 2023, which resulted in a one-time net of income tax charge to retained earnings of $654,000.

Previous wording

Our noninterest income for the first quarter of 2024, primarily reflects a $5.1 million one-time preliminary bargain purchase gain, none of which is taxable for income tax purposes, partially offset by a $0.4 million pre-tax loss on the sale of a note associated with a loan which was classified as other real estate owned. For further information regarding the 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.

Current wording

Our noninterest income for the first six 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 classified as other real estate owned. For further information regarding the 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.

Previous wording

Three months ended March 31, 2024, and 2023

Current wording

Our efficiency ratio was 80.15% and 93.64% for the three months ended June 30, 2024, and 2023, and was 87.64% and 89.59% the six months ended June 30, 2024, and 2023, respectively. This improvement is partially reflective of the March 19, 2024, CBOA Merger and related non-recurring, material charges in connection with the March 19, 2024, Merger. For more information on the Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Previous wording

We had a $2 million income tax benefit for the first quarter of 2024, which represents a 56.6% effective income tax rate. This first quarter 2024 relatively high effective income tax rate reflects two Merger-related items: (i) non-taxable preliminary bargain purchase gain of $5.1 million; and (ii) partially deductible Merger costs of $3.3 million. Our effective rate for the first quarter of 2023 was 26.3%. 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.

Current wording

We had a $1.7 million income tax benefit for the six months ended June 30, 2024, on a $1.7 million net loss. This relatively high effective income tax rate reflects two 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 24.4% for the six months ended June 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.

Previous wording

Our total assets were $980.2 million at March 31, 2024, and $581.3 million at December 31, 2023. Our total loans held for investment were $750.3 million at March 31, 2024, and $457 million at December 31, 2023. The 68.6% and 64.2% 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, which were acquired in connection with the Merger. The legacy loan portfolio reduced approximately $20 million during the first quarter of 2024 as well. For further information regarding the Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Current wording

Our total assets were $922.3 million at June 30, 2024, and $581.3 million at December 31, 2023. Our total loans held for investment were $735.5 million at June 30, 2024, and $457.0 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, which were acquired in connection with the Merger. For further information regarding the Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Previous wording

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 March 31, 2024, and December 31, 2023.All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest.

Current wording

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 June 30, 2024, and December 31, 2023. All available-for-sale securities are carried at fair value and may be used for liquidity purposes.

Previous wording

Our securities available-for-sale were $102.2 million and $56.7 million at March 31, 2024, and December 31, 2023, respectively. This 80.3% increase largely reflects the $58.2 million of securities available for sale, as adjusted for estimated fair values, which were acquired in connection with the Merger. For further information regarding the Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q. After the Merger date, management liquidated the entire $58.2 million acquired 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 investment portfolio effective as of the Merger date.

Current wording

Our securities available-for-sale were $56.3 million and $56.7 million at June 30, 2024, and December 31, 2023, respectively. After the CBOA Merger date, management liquidated the entire $58.2 million acquired 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 investment portfolio effective as of the Merger date. For further information regarding the Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Previous wording

Commercial real estate loans include owner occupied and non-owner occupied commercial real estate mortgage loans to 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.

Current wording

Commercial real estate (“CRE”) loans include owner occupied and non-owner occupied commercial real estate mortgage loans to 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.

Previous wording

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:

Current wording

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):

Previous wording

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

Current wording

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 Merger, also see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Previous wording

Total nonperforming assets were $3.4 million as of March 31, 2024, compared to $5.2 million at December 31, 2023. The decrease was due to the sale of the note for the prior OREO balance, being slightly offset by the non-accrual loans acquired through the Merger.

Current wording

Total nonperforming assets were $4.5 million as of June 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 the non-accrual loans acquired through the CBOA Merger on March 19, 2024.

Previous wording

The following table presents the changes in the ACL on unfunded loan commitments for the three months ended March 31, 2024:

Current wording

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

Previous wording

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 increased $318.9 million as of March 31, 2024, compared to December 31, 2023. The primary reason for the increase was the Merger with CBOA. Brokered deposits decreased $11.4 million from $19.5 million on December 31, 2023, to $8.1 at March 31, 2024, through maturities that were not renewed. Total time deposits, or CDs, continued to increase and represented 27% of total deposits at March 31, 2024. Customers continued to migrate toward the higher yielding CDs to lock in yields.

Current wording

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 $769.7 million and $460.0 million as of June 30, 2024, and December 31, 2023, respectively. The primary reason for this large increase was the March 19, 2024, Merger with CBOA.

Previous wording

For the three months ended March 31, 2024, and March 31, 2023, average certificates of deposit included average brokered CD balances of $12.0 million and $1.1 million, respectively. This growth in our brokered CD deposits in 2024 was used to supplement deposit growth, to assist in the management of interest rate risk through less volatile funding costs, and to reduce the reliance on short-term FHLB borrowings.

Current wording

For the three months ended June 30, 2024, and June 30, 2023, average certificates of deposit included average brokered CD balances of $8.1 million and $19.8 million, respectively. For the six months ended June 30, 2024, and June 30, 2023, average certificates of deposit included average brokered CD balances of $10.0 million and $15.3 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.

Previous wording

As of March 31, 2024, and December 31, 2023, approximately $352.2 million and $195.6 million of our total deposit portfolio was uninsured. The estimates are based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Current wording

As of June 30, 2024, and December 31, 2023, approximately $179.5 million and $195.6 million of our total deposit portfolio was uninsured. The estimates are based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

Previous wording

Other than deposits, we also utilize Federal Home Loan Bank (FHLB) advances and Federal Reserve Bank (FRB) advances as supplementary funding sources to finance our operations. At March 31, 2024 we had $49 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 March 31, 2024, we had $16.2 million in availability through the FRB’s Discount Window. As of March 31, 2024, we had $144.8 million in borrowing capacity at the FHLB of San Francisco.

Current wording

Other than deposits, we also utilize Federal Home Loan Bank (FHLB) advances and Federal Reserve Bank (FRB) advances as supplementary funding sources to finance our operations. At June 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 June 30, 2024, we had $28.8 million in availability through the FRB’s Discount Window. As of June 30, 2024, we had $243.9 million in borrowing capacity at the FHLB of San Francisco.

Previous wording

The following table presents certain attributes of debt. The maximum month-end balance represents the high indebtedness at any month end during the first three months of 2024.

Current wording

The following table presents certain attributes of debt. The maximum month-end balance represents the high indebtedness at any month end during the first six months of 2024.

Previous wording

In addition to our FRB advances, we also have subordinated debt amounting to $23.1 million at March 31, 2024 and $4.1 million of trust preferred securities acquired in the CBOA Merger. See Note 7—BORROWINGS in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Current wording

In addition to our FRB advances, we also have subordinated debt amounting to $23.1 million at June 30, 2024, trust preferred securities acquired in the CBOA Merger totaling $4.2 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.

Previous wording

Bancorp 34 has routine cash needs 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 March 31, 2024, Bancorp 34 had cash and equivalents of $17 million, a $1.5 million note receivable from the Southwest Heritage Bank ESOP, and debt outstanding of $28.7 million, which includes $5.2 million related to trust preferred debt assumed in connection with the merger with Commerce Bank of Arizona. 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.

Current wording

Bancorp 34 has routine cash needs 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 June 30, 2024, Bancorp 34 had cash and equivalents of $4.6 million, a $1.5 million note receivable from the Southwest Heritage Bank ESOP, and debt outstanding of $28.7 million, which includes $5.2 million related to trust preferred debt assumed in connection with the merger with Commerce Bank of Arizona. 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. Cash balances declined from the prior quarter primarily due to a $10 million capital injection into the Bank.

Previous wording

Federal banking laws regulate the dollar amount of 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 first quarter of 2024, Southwest Heritage Bank did not pay a dividend to Bancorp 34.

Current wording

Federal banking laws regulate the dollar amount of 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 first half of 2024, Southwest Heritage Bank did not pay a dividend to Bancorp 34.

Previous wording

At March 31, 2024, Southwest Heritage Bank’s cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $72.7 million, or 7.4% 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 the first quarter of 2024, reflects: (i) $30.9 million of cash acquired in connection with the Merger; (ii) $8.4 million of proceeds received from the sale of available-for-sale debt securities; and (iii) $2.6 million of proceeds received in connection with the final sale and settlement of an out-of-market OREO property.

Current wording

At June 30, 2024, Southwest Heritage Bank’s cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $78.7 million, or 8.5% 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 the first half of 2024, reflects cash acquired in the Merger, proceeds from the sale of the marked investment portfolio acquired in the Merger, loan payoffs, and the sale of a parcel of other real estate owned. These cash increases were partially offset by the decline in deposit balances and the payoff of borrowings.

Previous wording

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 March 31, 2024, net loans as a percentage of deposits were 91.7%, compared to 98.1% at December 31, 2023. For additional information related to our deposits, see the “Deposits” section above.

Current wording

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 June 30, 2024, net loans as a percentage of deposits were 94.2%, compared to 98.1% at December 31, 2023. For additional information related to our deposits, see the “Deposits” section above.

Previous wording

We also have 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 March 31, 2024, Southwest Heritage Bank had: (i) $49 million in advances from the FRB’s BTFP; (ii) $16.2 million in availability through the FRB’s Discount Window; (iii) $145 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 $52.8 million.

Current wording

We also have 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 June 30, 2024, Southwest Heritage Bank had: (i) $27 million in advances from the FRB’s BTFP; (ii) $28.8 million in availability through the FRB’s Discount Window; (iii) $244 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.

Previous wording

Stockholders’ equity at March 31, 2024, and December 31, 2023 was $82.2 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 Merger during the first quarter of 2024.

Current wording

Stockholders’ equity at June 30, 2024, and December 31, 2023, was $84.1 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 Merger during the first quarter of 2024.