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ITEM 1. Business
Forward Looking Statements
This Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “project,” “intend,” “plans,” “seek,” “will,” “would,” “may,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” These forward-looking statements include, but are not limited to:
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Bancorp 34, Inc.
Bancorp 34, Inc. (the “Company”), a Maryland corporation that was organized in 2016, is a savings and loan holding company headquartered in Alamogordo, New Mexico. Bancorp 34, Inc.’s common stock is quoted on NASDAQ under the symbol “BCTF.” Bancorp 34, Inc. conducts its operations primarily through its wholly owned subsidiary, Bank 34, a federally chartered savings association. Bancorp 34, Inc. manages its operations as one unit, and thus does not have separate operating segments. At December 31, 2016, Bancorp 34, Inc. had total assets of $328.9 million, loans held for investment of $243.9 million, available-for-sale securities of $31.5 million, deposits of $224.5 million, and stockholders’ equity of $50.8 million.
The Company was formed to be the successor to Alamogordo Financial Corp. upon completion of the second step mutual-to-stock conversion (the “Conversion”) of AF Mutual Holding Company (the “MHC”), the top tier mutual holding company of Alamogordo Financial Corp. Alamogordo Financial Corp. was the former mid-tier holding company for Bank 34. Prior to completion of the Conversion, approximately 54.7% of the shares of common stock of Alamogordo Financial Corp. were owned by the MHC. In conjunction with the Conversion, the MHC and Alamogordo Financial Corp. merged into the Company. The Conversion was completed on October 11, 2016. The Company sold a total of 1,879,484 shares of common stock at $10.00 per share in the second-step offering. Concurrent with the completion of the stock offering, each share of Alamogordo Financial Corp. stock owned by public stockholders (stockholders other than the MHC) was exchanged for 2.0473 shares of Company common stock. The Conversion was accounted for as a capital raising transaction by entities under common control. The historical financial results of the MHC are immaterial to the results of the Company and therefore the net assets of the MHC have been reflected as an increase to stockholders’ equity.
As a result of the Conversion, all share and per share information for periods prior to October 11, 2016 has been revised to reflect the 2.0473-to-one exchange ratio. Such revised financial information presented in this Form 10-K is derived from the consolidated financial statements of Alamogordo Financial Corp. and its subsidiaries.
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The executive offices of Bancorp 34, Inc. are located at 500 East 10th Street, Alamogordo, New Mexico 88310, and its telephone number is (575) 437-9334. Bancorp 34, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System.
Bank 34 operates four full-service banking centers, one each in Otero and Dona Ana counties in New Mexico and two in Maricopa County, Arizona. Bank 34’s New Mexico offices include the main office and corporate headquarters located in Alamogordo and a branch office in Las Cruces. The Bank’s Arizona branch offices include the regional headquarters located in Scottsdale and a branch office in Peoria. Bank 34 also operates eight residential mortgage and commercial loan production offices, one each in El Paso, Texas, Phoenix, Arizona, Albuquerque, New Mexico, Tubac, Arizona, Littleton, Colorado, Medford, Oregon, Puyallup, Washington, and Lynnwood, Washington. We also began building a loan production team in Portland, Oregon in December 2016.
Bank 34’s business model focuses on two primary areas. The commercial focus is on the credit, deposit and treasury management needs of small businesses and real estate professionals and investors. Bank 34 originates both conventional and SBA loans within its primary market areas. Commercial loan types offered include: owner and non-owner occupied real estate (including construction loans), multi-family loans, and commercial and industrial loans.
The consumer focus is on residential construction and mortgage loan needs together with deposit, online banking and ancillary financial service needs of families and businesses served by Bank 34. While most of Bank 34’s one- to four-family residential real estate loans are secured by properties in the counties served by its branch offices and its loan origination offices, it does actively seek business in other areas of New Mexico and Arizona and surrounding states.
Bank 34 originates deposits from its business and consumer customers predominantly from the areas where its branch offices are located. While Bank 34’s savings and loan origins still reflect a relatively high percentage of certificate of deposit balances to total deposits, the recent emphasis on business operating accounts and checking and money market accounts of consumers is consistent with Bank 34’s ongoing migration to a bank business model. Bank 34 does not solicit brokered deposits and generally does not solicit public funds.
Bank 34 is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. Bank 34 is a member of the Federal Home Loan Bank system. Our website address is www.Bank 34.com. Information on our website is not considered a part of this report.
Change in Fiscal Year
Effective December 31, 2014, Alamogordo Financial Corp, AF Mutual Holding Company, and Bank 34 changed their fiscal year ends to December 31 from June 30.
Business Strategy
Our goal is to enhance long-term stockholder and franchise value by executing a safe and sound growth strategy that produces increasing earnings. We have sought to accomplish this objective by implementing a business strategy designed to grow our loan portfolio while maintaining a strong capital position and solid asset quality.
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Our current business strategy consists of the following:
Continued commercial loan growth. Our expansion to the Arizona market with our acquisition of Bank 1440 continues to provide a significant source of new commercial clients to supplement the New Mexico region of our franchise. Our Arizona market has experienced strong population and job growth, contributing to favorable economic conditions for generating new commercial loans. Our commercial real estate loans are generally secured by properties used for business purposes such as hotels, office buildings and industrial and retail facilities. In all of our markets, we seek commercial loan customers (both commercial real estate and commercial and industrial) with whom we can establish multiple lending relationships and provide other services, such as business checking accounts. We target new commercial real estate loan originations to experienced, growing small- and mid-size owners and investors in our market area. In addition to commercial real estate loans, we originate multi-family real estate loans to experienced, growing small- and mid-size owners and investors in our market areas. Our multi-family real estate loans are generally secured by properties consisting of five to 40 rental units. We recently expanded our commercial credit review and administration departments to support our anticipated continued commercial loan growth. We grew our commercial real estate loans (including multi-family real estate loans) and commercial and industrial loans by 13.2% to $156.9 million at December 31, 2015 from $138.5 million at December 31, 2014, and further grew these balances to $205.7 million at December 31, 2016. We originated $54.1 million of commercial loans in our Arizona region during 2015, with commercial loans in our Arizona region representing 67% and 72% of our total commercial loans outstanding as of December 31, 2016 and December 31, 2015, respectively. Commercial real estate and commercial and industrial loans totaled 84.0% of our loan portfolio at December 31, 2016, compared to 80.6% at December 31, 2015 and 78.6% at December 31, 2014.
In addition, we continue to seek and originate Small Business Administration (“SBA”) credits and we are actively pursuing other government-sponsored loan programs, such as those offered through the U.S. Department of Agriculture, as a way to generate government-guaranteed loans with the opportunity to sell the guaranteed portion of the loan at a premium and retain the non- guaranteed portion as well as the servicing rights. We sold $10.6 million and $5.1 million of SBA and USDA loans in the secondary market during the years ended December 31, 2016 and 2015, respectively, recognizing gains of $839,000 and $500,000 directly into income during those periods. We also intend to build on our experience of selectively pursuing construction lending to established builders with proven track records.
Continued expansion of our mortgage banking footprint and corresponding areas of operational strength. In our New Mexico markets, we are a significant originator of fixed-rate, one- to four-family residential mortgage loans that we sell in the secondary market, and we are gaining market share in our Arizona markets. For 2014 (the latest date for which information is available), we ranked as the top originator of conforming one- to four-family residential first mortgage loans in Otero County and ranked in the top five in origination market share of such loans in Dona Ana County. We sold $259.4 million of mortgage loans during the year ended December 31, 2016, generating $9.8 million in noninterest income and $143.6 million of mortgage loans during the year ended December 31, 2015, generating $4.3 million in noninterest income. We continue to add experienced mortgage lending personnel, consistent with recent and future growth opportunities, to further leverage our overall scalable business model, including secondary market management and compliance specialists. In early 2015, we expanded our mortgage banking operations to El Paso, Texas by opening a loan production office. In September 2015, we further expanded our mortgage banking operations in Maricopa County, Arizona and established a loan production office in Albuquerque, New Mexico. In February 2016, we expanded our physical mortgage origination footprint to Lynnwood and Puyallup, Washington, Medford, Oregon and Tucson, Arizona (subsequently moved to Tubac, Arizona), with loan production offices and established mortgage origination teams in each market area. We conducted similar expansion to Littleton, Colorado in May 2016 and began building a loan production team in Portland, Oregon in December 2016. Subject to market conditions, and particularly changes in the interest rate environment, we intend to continue to grow our mortgage banking business. Such growth may occur through regional expansion, online origination, or both. We seek experienced lending teams in attractive market areas. We believe we have managed our mortgage banking operations to provide cost- management flexibility in the event of unfavorable economic conditions or increases in market interest rates.