Bancorp 34 Inc
For the period ended Dec 31, 2024. Filed Mar 6, 2025.
View on SEC.govAbout this filing
A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Mar 6, 2025
BCTF$15.290.0%Stored close · as of Jun 29, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-03-08.
0001552781-24-000084
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-03-06.
0001552781-25-000058
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 159 previous paragraphs and 164 current paragraphs.
82 unchanged; 44 reworded; 37 added; 32 removed; 1 previous and 1 current paragraphs rearranged.
Tables are not compared: 20 previous and 21 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (37)
Current report
Business Combinations
Current report
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 ACL for PCD loans is recognized as part of the acquisition accounting. The ACL 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.
Current report
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 consolidated financial statements included in this Annual Report on Form 10-K.
Current report
CBOA****Financial, Inc. Merger
Current report
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.
Current report
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.
Current report
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 seven full-service offices in Arizona and southern New Mexico. The core system conversion was executed in March 2024.
Current report
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 $5.0 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.
Current report
For further information regarding the CBOA Merger, see Note 2 in our consolidated financial statements included in Annual Report on Form 10-K.
Current report
We had net income of $1.7 million for the year ended December 31, 2024, compared to a net loss of $3.4 million for the year ended December 31, 2023. Our 2024 net income is comprised of pre-tax income of $0.6 million and an income tax benefit of $1.1 million. Non-recurring merger-related items also are reflected in our 2024 results, which include: (i) a one-time preliminary bargain purchase gain on the CBOA Merger of $5.0 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. Our 2023 net loss includes provision for credit loss of $4.2 million and $3.0 million of merger expenses.
Current report
Our net interest income was $29.3 million for 2024, an increase of $14.1 million, or 93%, compared to the $15.2 of net interest income in 2023. This reflects the positive impacts from the March 19, 2024, CBOA Merger, including $3.7 million of accretion income on the CBOA loan fair value mark. The 100bp decrease in the Federal Funds rate by the Federal Reserve had a negative impact on net interest income as yields on immediately re-priceable cash and floating rate loans moved down more quickly than funding costs during the quarter.
Current report
Reflecting the positive impact of the CBOA Merger, average earning assets were $804.8 million and $550.7 million during 2024 and 2023, respectively. Average earning asset yields in 2024 and 2023 were 6.33% and 5.11%, respectively. Average loan yield in 2024 was 127 basis points higher than 2023, most notably due to the accretion of the CBOA loan fair value mark and the continued upward repricing trend of the legacy loan portfolio. Interest income from investment securities in 2024 was slightly higher than 2023 as average yield and balances increased due to purchases made in 2024. Average other interest earning assets, which primarily consists of interest earning cash and equivalents, increased by $64.0 million primarily due to the liquidation of the CBOA investment portfolio immediately after the CBOA Merger and the decline in loan balances after the CBOA Merger due to portfolio restructuring. The increase in average other interest earning assets led to a $3.9 million improvement in interest income year-over-year.
Current report
Average interest-bearing liabilities in 2024 of $576.0 million reflect the impacts of the March 2024 CBOA Merger. Average interest-bearing liabilities in 2023 were $420.4 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 higher interest rate environment. This, coupled with market rates peaking during the first nine months of 2024, led to costs on interest bearing liabilities increasing from 3.08% to 3.74% when comparing 2023 to 2024. Average noninterest bearing deposits were $187.8 million and $89.2 million for 2024 and 2023, respectively, and this increase reflects the CBOA Merger as previously described.
Current report
Average total borrowings increased to $50.5 million in 2024 as the CBOA Merger resulted in the acquisition of trust preferred security debt and the Bank carrying Bank Term Funding Program Borrowings (“BTFP”) from the Federal Reserve due to the favorable spread of the borrowings in relation to cash yields. The BTFP borrowings were paid off using excess cash in the fourth quarter as the Federal Reserve eased in monetary policy and interest rates declined.
Current report
Our net interest margin was 3.65% for 2024, compared to 2.76% for 2023, an increase of 89 basis points. The increase is a result of the merger improving loan yield, which outpaced increases in funding costs.
Current report
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 $3.8 million and $4.2 million for 2024 and 2023, respectively. The 2024 $3.8 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.
Current report
Our non-interest income increased $4.8 million to $5.6 million in 2024, from $0.7 million in the prior year. The increase in noninterest income for 2024, compared to 2023, was primarily due to the $5.0 million bargain purchase gain as a result of the CBOA Merger offsetting the loss on the disposal of an OREO parcel of $0.4 million.
Current report
Our non-interest expense increased $14.9 million to $30.4 million for the year ended December 31, 2024, from $15.5 million for 2023. The increase reflects, in large part, the addition of CBOA to the Bank’s operations as a result of the March 19, 2024, CBOA Merger and a non-recurring $0.7 million expense related to a check kiting incident in the fourth quarter of 2024.
Current report
Merger costs were slightly higher in 2024 compared to 2023, primarily due to the expenses incurred when the CBOA merger was completed, the most significant of which were core processing termination fees, online banking termination fees, and a change-in-control charge. Merger expenses in 2023 primarily consisted of termination of an IT servicing contract, expenses related to becoming an SEC registrant, merger consulting fees, due diligence fees, and investment banker fees. Merger expenses in 2024 primarily consisted of core processing and online banking termination fees, related to termination of an IT servicing contract, employee change-in-control and board severance payments, conversion related expenses, merger consulting fees, investment banker success fees, and legal expenses.
Current report
For the year, and in connection with the CBOA Merger, we expensed $1.3 million of amortization expense on the merger-related core deposit intangible. For more information on the CBOA Merger, see Note 2 in our consolidated financial statements included in this Annual Report on Form 10-K.
Current report
Our efficiency ratio was 87.26% and 97.69% for the years ended December 31, 2024, and 2023. 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 consolidated financial statements included in this Annual Report on Form 10-K.
Current report
Our total assets were $918.1 million at December 31, 2024, and $581.3 million at December 31, 2023. Our total loans held for investment were $676.1 million at December 31, 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 million, which were acquired in connection with the CBOA Merger. For further information regarding the CBOA Merger, see Note 2 in our consolidated financial statements included in this Annual Report on Form 10-K.
Current report
Our securities available-for-sale were $78.7 million and $56.7 million at December 31, 2024, and December 31, 2023, respectively. Following the CBOA Merger, 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 consolidated financial statements included in this Annual Report on Form 10-K. To use excess liquidity on hand, management purchased $28.6 million in available-for-sale securities, primarily during the fourth quarter. Purchases included $15.8 million in agency mortgage-backed securities, $10.8 million in asset-backed securities, and $2.0 million in AAA rated private label mortgage-backed securities.
Current report
Our held-to-maturity securities which are carried on our balance sheet at amortized costs and net of an allowance for credit losses, were $5.7 million and $5.7 million as of December 31, 2024, and December 31, 2023, respectively.
Current report
Derivatives and Hedging activities
Current report
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.
Current report
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.
Current report
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.
Current report
The following items are included on the December 31, 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 and (ii) mark-to-market values of $356,000 as an increase to prepaid and other assets. During the year ended December 31, 2024, the interest rate swap contract provided $127,000 of income that was included in interest income on the consolidated income statement. As of December 31, 2024, the amortized cost of the underlying available-for-sale investments being hedged by the Pay Fixed Swap Agreements was $51.2 million.
Current report
The ACL increased by $4.3 million during the year ended December 31, 2024, primarily reflecting 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 consolidated financial statements included in this Annual Report on Form 10-K.
Current report
Total nonperforming assets were $4.7 million as of December 31, 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 increase in non-performing loans.
Current report
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 $792.6 million and $460.0 million as of December 31, 2024, and December 31, 2023, respectively. The primary reason for this large increase in total deposits was the CBOA Merger. Unrelated to the CBOA Merger, there has been a migration to time deposits which is consistent with the broader market trends in which customers have reduced non-interest- and interest-bearing demand deposits in favor of term CDs given the higher rates paid on the term CDs and the ability to lock in a stated rate in the midst of the market rate declines in the fourth quarter.
Current report
For the years ended December 31, 2024, and December 31, 2023, average certificates of deposit includes average brokered CD balances of $9.1 million and $19.7 million, respectively. This decline in our brokered CD deposits is attributed improved on-hand liquidity levels allowing for the departure of the maturing brokered CDs.
Current report
Other Debt
Current report
Southwest Heritage Bank
Current report
At December 31, 2024, Southwest Heritage Bank’s cash and cash equivalents were $113.6 million, or 12.4% 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 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.
Current report
Our consolidated stockholders’ equity at December 31, 2024, and December 31, 2023, was $86.5 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.
Removed paragraphs (32)
Previous report
For further information regarding our Allowance for Credit Losses see Note 1 and Note 3—LOANS AND ALLOWANCE FOR CREDIT LOSSES in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Previous report
Pending Merger with CBOA Financial, Inc.
Previous report
On April 27, 2023, Bancorp 34 and CBOA entered into the merger agreement, which was amended on December 21, 2023. Under the merger agreement, CBOA will merge with and into Bancorp 34, with Bancorp 34 continuing as the surviving entity. Immediately following the merger, Commerce Bank of Arizona will merge with and into our wholly-owned subsidiary bank, Bank 34, with Bank 34 continuing as the surviving bank in the bank merger. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of CBOA common stock will be converted into the right to receive 0.2628 shares of Bancorp 34 common stock. The merger agreement was approved by the boards of directors of Bancorp 34 and CBOA, and is subject to customary closing conditions, including receipt of required regulatory approvals and the approvals of the shareholders of CBOA and stockholders of Bancorp 34. A special shareholder meeting of CBOA to approve the merger agreement is scheduled for March 18, 2024, and a special stockholder meeting of Bancorp 34 to approve the merger agreement is also scheduled for March 18, 2024. The proposed merger is expected to close in the first quarter of 2024.
Previous report
During 2023, we incurred pre-tax merger related costs of approximately $3.0 million related to the proposed merger with CBOA.
Previous report
We had a net loss of $3.4 million for the year ended December 31, 2023, compared to net income of $1.3 million for the year ended December 31, 2022. The $4.7 million decrease for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a decrease of $3.3 million in net interest income and a $1.8 million increase in the provision for credit losses. Noninterest expenses increased $353,000 due to merger costs of $3 million in the year ended December 31, 2023, and data processing fees increased by $558,000 during the year ended December 31, 2023. The favorable impact from the decline in salaries and employee benefits expense of $3.1 million in the year ended December 31, 2023, partially offset the aforementioned unfavorable variances.
Previous report
Interest earned on our loan portfolio is the largest component of our interest income. Our loan portfolio is presented at the principal amount outstanding net of deferred origination fees and unamortized discounts and premiums. Interest income is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.
Previous report
Our net interest income was $15.2 million for 2023, a decrease of $3.3 million, or 18%, from 2022. This decrease was primarily attributable to the rapid increase in market interest rates causing the average rates paid on interest bearing liabilities to increase much faster than the average rates paid on interest earning assets. We incurred a $7.6 million, or 144%, increase in interest expense, partially offset by a $4.4 million, or 18%, increase in interest income for 2023, compared to 2022. These results were largely driven by a 183 basis point increase in average rates paid on interest bearing liabilities to 3.08% in 2023 compared to 1.25% in 2022. The average rate paid on interest earning assets increased 74 basis points from 2022 to 2023.
Previous report
Average earning assets for 2023 were $550.7 million, an increase of $6.5 million, or 1%, compared to 2022. Total average loans in 2023 were $472.1 million, which was $15.8, or 3%, larger than 2022. Average loan yield in 2023 was 68 basis points higher than 2022. Interest income from investment securities in 2023 was slightly lower than 2022 due to a $8.7 million, or 12%, decrease in average balance, partially offset by a 27 basis point increase in yield.
Previous report
Average interest-bearing liabilities decreased $4.5 million, or 4%, in 2023, compared to 2022. A $28.4 million, or 65%, decrease in average FHLB and FRB borrowings was partially offset by a $23.8 million, or 7%, increase in average interest-bearing deposits. The FRB borrowings consisted solely of term borrowings from the new Bank Term Funding Program implemented in March to minimize the need for banks to sell securities at a loss in times of stress. The increase in average interest earning deposits was caused by a $57.6 million, or 92%, increase in time deposits, partially offset by a $33.8 million, or 16%, decrease in average interest-bearing demand deposits over those same time periods. Average brokered deposits, sometimes referred to as “brokered CDs”, are included in average time deposits and were $19.7 million in 2023, compared to $1.1 million during 2022.
Previous report
Average noninterest bearing deposits decreased $12.6 million in 2023, compared to 2022. These trends reflect 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, to assist with the management of overall interest rate risk and to save on funding costs, fixed rate CDs were used to reduce exposure to higher-cost short-term FHLB borrowings. The average rate on the brokered CD deposits during 2023 was 4.45%, which represented a 53-basis point, or 11%, reduction in interest expense when compared to the average rate on FHLB and FRB borrowings during the year. Replacing the FHLB borrowings with CDs, including brokered CDs, did not increase on-balance sheet liquidity but did increase our available borrowing capacity at the FHLB, due to the decline in FHLB borrowed balances.
Previous report
Our net interest margin was 2.76% for 2023, compared to 3.39% for 2022, a decrease of 63 basis points. While our total cost of funds increased 194 basis points year over year, we also experienced a 74 basis point increase in yield on our earning assets over the same period, due to the overall increase in market interest rates. The Federal Open Market Committee (FOMC) target Federal Funds rates increased 525 basis points through 11 rate hikes between March 2022 and July 2023.
Previous report
The provision for credit losses is a charge to earnings 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, $4.2 million for 2023 and $2.4 million for 2022. In the fourth quarter of 2023, we charged off $3.4 million of an out of market commercial real estate loan which accounted for a large portion of the provision expense in 2023. The remaining loan balance of $3 million is categorized as OREO in our December 31, 2023, balance sheet. In the fourth quarter of 2022, we charged off $2.9 million of a commercial loan which led to higher provision expense in 2022.
Previous report
At December 31, 2023, management believes the ACL is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for credit losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for credit losses.
Previous report
Allowance for Credit Losses – Off Balance Sheet Credit Exposures
Previous report
We estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. 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. Upon adoption of CECL, we recorded an ACL on unfunded commitments of $165,000.
Previous report
Our noninterest income increased $185,000 to $730,000 in 2023, from $545,000 in the prior year. The increase in noninterest income for 2023, compared to 2022, was primarily due to a $99,000 increase in gains on sales of fixed assets, a $41,000 increase in service charges and fees and a $32,000 gain on sale of loans in 2023.
Previous report
Our noninterest expense increased $353,000 to $15.5 million for year ended December 31, 2023, from $15.3 million for 2022. The increase in noninterest expense in 2023, compared to 2022, was primarily due to merger-related expense of $3 million in 2023, and a $558,000 increase in data processing fees. Those increases were partially offset by decreases of $3.1 million in salaries and employee benefits, $198,000 in other expense, and $144,000 in occupancy expense.
Previous report
Salary and employee benefits expense is the largest component of our noninterest expense and includes employee payroll expense, incentive compensation, health benefits and payroll taxes. Salary and employee benefits decreased $3.1 million for 2023, compared to the prior year, due primarily to a $1.6 million decrease in pension expense due to costs related to a defined benefit pension plan terminated in 2022, lower incentives resulting from a decline in loan demand, the reduction in force in April 2023, and no employee recruiting expense in 2023. These reductions were partially offset by the benefit of the $547,000 Employee Retention Credit (ERC) booked in the first quarter of 2022 under the 2021 Consolidated Appropriations (CARES) Act.
Previous report
Merger costs of $3 million was incurred in 2023 compared to none in 2022. Merger costs included systems termination and conversion costs of $983,000, external audit expenses of $560,000, and legal fees of $526,000.
Previous report
Data processing fees in 2023 were $558,000 larger than 2022 due to system upgrades and product expansion.
Previous report
Our efficiency ratio was 97.69% and 80.07% for the years ended December 31, 2023, and 2022, respectively. The efficiency ratio for the year ended December 31, 2023, reflects $3 million of non-interest expense related to merger costs. Excluding these 2023 merger costs, our efficiency ratio was 78.77% for the year ended December 21, 2023.
Previous report
Our total assets were $581.3 million at December 31, 2023, compared to $574.3 million at December 31, 2022. Our total loans held for investment were $457.0 million at December 31, 2023, a decrease of $6.3 million, compared to $463.4 million at December 31, 2022.
Previous report
Our securities available-for-sale decreased by $1.9 million to $56.7 million at December 31, 2023, compared to December 31, 2022. The decrease was primarily due to maturities and regular monthly payments on mortgage-backed securities being offset by purchases of $2 million. Securities held-to-maturity were $5.7 million at December 31, 2023, and $5.8 million at December 31, 2022.
Previous report
The ACL increased by $1.1 million during the year ended December 31, 2023, including $604,000 from the adoption of CECL. The change in methodologies from an incurred loss model to an expected loss model resulted in allowance allocations increasing across the construction, non-owner occupied commercial real estate, owner occupied commercial real estate, 1-4 Family residential real estate, and multifamily portfolios. The CECL adoption also resulted in lower allowance allocations in the commercial and consumer and other portfolios.
Previous report
Total nonperforming assets were $5.2 million as of December 31, 2023, compared to $4.2 million at December 31, 2022. The increase was due to the increase in OREO, with paydowns of existing nonaccrual loans.
Previous report
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 decreased $27.6 million as of December 31, 2023, compared to $487.6 million at December 31, 2022. Consistent with industry trends, we experienced an outflow of deposits as large deposit customers diversified their deposit holdings and sought out other forms of investment. Deposit outflows in 2023 were partially offset by growth in brokered CDs, which increased $14.6 million from $5 million at December 31, 2022, to $19.5 million on December 31, 2023, and a new high yield savings account offered through an online banking platform which grew by $9.1 million during the same period. The high-yield savings account offering is through a platform administered by a third-party which we believed would offer better reach in terms of potential depositors, and we do not classify them as brokered deposits. The savings accounts provided additional diversity to our funding sources and represented modest savings over non-core funding alternatives. Our total time deposits, or CDs, increased $54.9 million from December 31, 2022, to December 31, 2023, primarily due to customers wishing to lock in higher interest rates for longer periods, CD promotions to attract new customers, and the $14.6 million growth in brokered CDs.
Previous report
For the years ended December 31, 2023, and December 31, 2022, average certificates of deposit includes average brokered CD balances of $19.7 million and $1.1 million, respectively. This growth in our brokered CD deposits in 2023 has been used to supplement deposit growth, assist in the management of interest rate risk through less volatile funding costs, and to reduce the reliance on short-term FHLB borrowings.
Previous report
Subordinated Debt
Previous report
Bank 34
Previous report
At December 31, 2023, our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $28.9 million, or 5% of total assets, compared to $16.9 million, or 3% of total assets, at December 31, 2022. The increase in our liquid assets was primarily due to an increase in cash held at the Federal Reserve. Our available-for-sale securities at December 31, 2023, were $56.7 million, or 10% of total assets, compared to $58.6 million, or 10% of total assets, at December 31, 2022. Investment securities with an aggregate carrying value of $43.1 million and $8.2 million at December 31, 2023, and December 31, 2022, respectively, were pledged to secure various liquidity sources.
Previous report
Stockholders’ equity at December 31, 2023, was $60.7 million, compared to $49.2 million at December 31, 2022, an increase of $11.5 million, or 23%. The increase was primarily driven by the private placement of common and preferred shares generating $15.0 million in new equity, partially offset by the net loss and dividends paid in 2023. The private placement of equity was completed on January 27, 2023, representing the second round of the capital raise begun on December 30, 2022.
Previous report
Off-Balance Sheet items
Reworded paragraphs (44)
Previous wording
In this section, unless the context suggests otherwise, references to “we,” “us,” and “our” mean the combined business of Bancorp 34 and its wholly-owned subsidiary, Bank 34.
Current wording
In this section, unless the context suggests otherwise, references to “we,” “us,” and “our” mean the combined business of Bancorp 34 and its wholly-owned subsidiary, Southwest Heritage Bank.
Previous wording
Comments regarding Bancorp 34’s business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 1 of this Annual report on Form 10-K.
Current wording
Comments regarding Bancorp 34’s business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this Annual report on Form 10-K.
Previous wording
Bancorp 34, headquartered in Scottsdale, Arizona, is the holding company for Bank 34. We conduct a full-service community banking business through our wholly-owned subsidiary Bank 34.
Current wording
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 seven full-service community bank branches, two 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. Following the CBOA merger, our retail services offered at the two Scottsdale locations were combined into one branch, reducing the number of branches from eight to its current seven.
Previous wording
We offer a full range of relationship-focused services to meet our client’s business and personal financial objectives, with branches in Arizona and New Mexico. 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.
Current wording
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.
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 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.
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 Bank 34’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 Bank 34’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
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 the 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.
Current wording
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.
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) determination of the allowance for credit losses for collectively evaluated loans and individually evaluated loans; (ii) determining the fair values of the assets acquired and liabilities assumed and the fair value of the common stock consideration issued in connection with the CBOA Merger; and, (iii) other 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.
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 December 31, 2023, estimate, the Company assumed a forecasted unemployment rate of 4.7%, which has improved from the January 1, 2023, forecasted rate of 5.7%. 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 December 31, 2024, ACL estimate, the Company assumed a forecasted unemployment rate of 4.4%, 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.
Previous wording
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. A ratings scale is used to tie risk metrics within lending policies and procedures, economic factors note 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, 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.
Current wording
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 as 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.
Previous wording
The ACL also excludes loans held-for-sale and loans accounted for under the fair value option.
Current wording
The ACL also excludes loans held-for-sale and loans accounted for under the fair value option. Assets purchased with credit deterioration (“PCD”) 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.
Previous wording
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 the net amount expected to be collected. Loans are charged-off against the ACL when management believes the full or partial uncollectibility is confirmed.
Current wording
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.
Previous wording
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 largely comprised of bank subordinated debt. The ACL on held-to-maturity securities is adjusted through provision for credit losses and is recorded as a contra asset to held-to-maturity 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.
Current wording
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.
Previous wording
Upon 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.
Current wording
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.
Previous wording
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. Additionally, 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.
Current wording
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.
Previous wording
For further information regarding the valuation of our financial instruments, see Note 1 and Note 15 - Fair Value Information in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Current wording
For further information regarding the valuation of our financial instruments, see Note 1 – Summary of Significant Accounting Policies and Note 16 – Fair Value Information in our consolidated financial statements included in this Annual Report on Form 10-K.
Previous wording
Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loans and investment securities. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term, and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. 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 the annualized net interest income divided by average interest-earning assets.
Current wording
Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loans, investment securities, and interest-bearing bank balances. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, FHLB and FRB advances, as well as other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term, and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. 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 the annualized net interest income divided by average interest-earning assets.
Previous wording
At December 31, 2023, the ACL was $5.9 million, or 1.28% of loans held-for-investment, an increase of $1.1 million, or 23% when compared to the allowance for loan losses at December 31, 2022, which was based on an incurred loss model, not CECL. We maintain ACL at a level that management believes is adequate to absorb expected credit losses over the lifetime of the bank’s 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.
Current wording
At December 31, 2024, and 2023, our ACL for loans held for investment was $10.2 million and $5.9 million, respectively, which represents 1.50% and 1.28% 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 against the allowance; and recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.
Previous wording
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 and non-interest income.
Current wording
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.
Previous wording
We had an income tax benefit for the year ended 2023 of $453,000 compared to income tax expense of $58,000 for the year ended 2022. The 2023 income tax benefit was due to our pre-tax loss in 2023. Our effective tax rate was 11.75% for the year ended 2023, compared to 4.18% for the year ended 2022. The effective tax rate for the year ended 2023 includes an unfavorable impact of $2.2 million of non-deductible merger costs. This unfavorable impact was partially offset by favorable state tax credits which were proportionally greater to our 2023 pre-tax loss as compared to our 2022 pre-tax income.
Current wording
We had an income tax benefit for the year ended 2024 of $1.1 million compared to an income tax benefit of $0.5 million for the year ended 2023. The 2024 income tax benefit was due to the non-taxable $5.0 bargain purchase gain which caused the book pre-tax income to be reflected as a loss for tax purposes. Our effective tax rate was (174.8%) for the year ended 2024, compared to 11.75% for the year ended 2023. The effective tax rate for the year ended 2024 included the favorable impact of the $5.0 million bargain purchase gain and state tax credits.
Previous wording
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 funds 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.
Current wording
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.
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 December 31, 2023, and December 31, 2022. 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 December 31, 2024, and December 31, 2023. All available-for-sale securities are carried at fair value and may be used for liquidity purposes.
Previous wording
Gross loans as of December 31, 2023, were $458.2 million, compared to $464.7 million as of December 31, 2022.
Current wording
Gross loans as of December 31, 2024, were $676.1 million, compared to $457.0 million as of December 31, 2023.
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 marketplace, some of the loans have out of market properties. In response to the deterioration of the 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 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 marketplace, some of the loans have out of market properties. In response to the deterioration of the 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 during 2024. Additionally, management reviewed the property appraisals associated with the out of market loans and plans to limit out of market lending moving forward.
Previous wording
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. Bank 34 held $3 million of OREO, represented by one out of market commercial real estate property, at December 31, 2023, and no OREO at December 31, 2022.
Current wording
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 December 31, 2024.
Previous wording
Potential problem loans are impaired 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.
Current wording
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.
Previous wording
As of December 31, 2023, and December 31, 2022, approximately $195.6 million and $283.5 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 December 31, 2024, and December 31, 2023, approximately $194.0 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 December 31, 2023, we had $29 million of borrowings through the FRB’s Bank Term Funding Program (BTFP) established in March 2023. At December 31, 2022, we had $5 million in term FHLB borrowings. Our advances from the FRB are collateralized by pledged securities. Collateral for FHLB borrowings is provided by a blanket lien on our loan portfolio. At December 31, 2023, we had $1.3 million in availability through the FRB’s BTFP and $15.4 million in availability through the FRB’s Discount Window. As of December 31, 2023, we had $145.6 million in borrowing capacity at the FHLB of San Francisco.
Current wording
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 December 31, 2024, we no longer had 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. As of December 31, 2024, we had $233.8 million in borrowing capacity at the FHLB of San Francisco. Also at December 31, 2024, we had $49.3 million in availability through the FRB’s Discount Window and $49.8 in unsecured Federal Funds lines of credit at various correspondent banks.
Previous wording
The following table presents certain attributes of our FRB and FHLB Advances. The maximum month-end balance represents the high indebtedness at any month end during 2023.
Current wording
The following table presents certain attributes of debt as of and for the year ended December 31, 2024. The maximum month-end balance represents the high indebtedness at any month end during 2024.
Previous wording
In addition to our FHLB advances, we also have subordinated debt amounting to $24.6 million at December 31, 2023, and $24.5 million at December 31, 2022, net of remaining origination fees. For more information about these borrowings, see Note 6—Borrowings in our audited consolidated financial statements included elsewhere in Annual Report on Form 10-K.
Current wording
In addition to our FRB advances, we also had subordinated debt amounting to $23.1 million at December 31, 2024, and trust preferred securities assumed in connection with the CBOA Merger totaling $5.2 million. See Note 7—Borrowings in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Previous wording
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. Bancorp 34 will use the net proceeds from these private placements to fund organic growth, transact on potential acquisition opportunities, enter complementary new business lines, and to enhance capital ratios.
Current wording
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.
Previous wording
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 7 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.
Current wording
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.
Previous wording
For more information about these private placements, see Note 17--Private Placements of Common and Preferred Stock, in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Current wording
For more information about these private placements, see Note 19—Private Placement of Common and Preferred Stock, in our financial statements included in this Annual Report on Form 10-K.
Previous wording
Bancorp 34 has routine cash needs consisting primarily of operating expenses, debt service, and funds used for acquisitions. Bancorp 34 can obtain funding to meet its obligations from dividends collected from its subsidiary, Bank 34, and through the issuance of varying forms of debt and equity. At December 31, 2023, Bancorp 34 has cash and cash equivalents of $19.2 million, a $1.5 million note receivable from the Bank 34 ESOP, and debt outstanding, net of issuance costs, of $24.6 million. 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 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 December 31, 2024, Bancorp 34 had cash and equivalents of $4.4 million, a $1.5 million note receivable from the Southwest Heritage Bank ESOP, and net debt outstanding of $27.4 million, which includes $4.2 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.
Previous wording
Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. Bank 34 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 and is not currently required. At December 31, 2023, Bank 34 could pay dividends to Bancorp 34 of approximately $5.5 million without prior regulatory approval. During the year ended December 31, 2023, Bank 34 did not pay a dividend to Bancorp 34.
Current wording
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 2024, Southwest Heritage Bank did not pay a dividend to Bancorp 34.
Previous wording
Bank 34’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 and 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.
Current wording
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.
Previous wording
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 or equity securities.
Current wording
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.
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 December 31, 2023, net loans as a percentage of deposits were 98%, compared with 94% at December 31, 2022. 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 December 31, 2024, net loans as a percentage of the Bank’s deposits were 83.6%, compared to 98.1% at December 31, 2023. For additional information related to our deposits, see the “Deposits” section above.
Previous wording
We are also borrowing capacity at the 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 qualifying loans be pledged to secure any advances. At December 31, 2023, we had $29.0 million in advances from the FRB’s BTFP. At December 31, 2023, we had $1.3 million in availability through the FRB’s BTFP and $15.4 million in availability through the FRB’s Discount Window. As of December 31, 2023, we had $145.6 million in borrowing capacity at the FHLB of San Francisco.
Current wording
As of December 31, 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 December 31, 2024, the Bank had: (i) $233.8 million in borrowing capacity at the FHLB of San Francisco; (ii) $49.3 million in availability through the FRB’s Discount Window; and (iii) fully available unsecured Federal funds lines-of-credit with certain other financial institutions totaling $49.8 million.
Previous wording
Management believes the Bank 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
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.
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Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
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.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
In addition, we have unused Federal funds lines-of-credit with certain other financial institutions totaling $39.8 million as of December 30, 2023.