10-Q 1 t1601814_10q.htm FORM 10-Q
 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQuarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from _______________ to ______________________

 

Commission File No. 000-29655

 

 

 

Alamogordo Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

 

United States   74-2819148
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
     
500 East 10th Street, Alamogordo, New Mexico   88310
(Address of Principal Executive Offices)   Zip Code

 

(575) 437-9334

(Registrant’s telephone number)

 

  N/A  

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

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x NO ¨.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO ¨.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

  Large accelerated filer ¨ Accelerated filer ¨  
  Non-accelerated filer ¨ Smaller reporting company x  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

 

Shares of the Registrant’s common stock, par value $0.10 per share, issued and outstanding as of August 9, 2016 were 1,679,500.

 

 
   

 

 

Alamogordo Financial Corp.
FORM 10-Q

 

Index

 

    Page
     
  Part I. Financial Information  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 2
     
  Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited) 3
     
  Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited) 4
   
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited) 5
     
  Notes to Consolidated Financial Statements (unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
     
Item 4. Controls and Procedures 37
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 38
Signatures 39

 

   

 

 

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2016   December 31, 2015 
         
ASSETS          
Cash and due from banks  $3,660,802   $5,959,864 
Interest-bearing deposits with banks   2,960,000    13,865,000 
Total cash and cash equivalents   6,620,802    19,824,864 
           
Loans held for investment   203,435,209    194,031,590 
Allowance for loan losses   (2,152,565)   (1,894,196)
Loans held for investment, net   201,282,644    192,137,394 
           
Loans held for sale   25,424,352    11,380,627 
Available-for-sale securities   34,270,128    28,630,551 
Other real estate   195,558    306,000 
Premises and equipment, net   9,702,636    9,801,328 
Stock in financial institutions   1,598,961    1,546,847 
Accrued interest receivable   701,641    698,904 
Bank owned life insurance   5,417,685    5,355,013 
Core deposit intangible   319,694    362,780 
Prepaid and other assets   1,572,981    940,099 
           
TOTAL ASSETS  $287,107,082   $270,984,407 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities          
Deposits          
Demand deposits  $38,000,107   $37,969,000 
Savings and NOW deposits   122,793,002    113,624,419 
Time deposits   65,595,994    74,106,894 
Total deposits   226,389,103    225,700,313 
           
Federal Home Loan Bank advances   27,000,000    13,000,000 
Escrows   363,840    277,370 
Accrued interest and other liabilities   2,881,924    2,363,000 
Total liabilities   256,634,867    241,340,683 
           
Commitments and contingencies   -    - 
           
Stockholders’ equity          
Common stock, $0.10 par value; 20,000,000 shares authorized,  1,685,132 issued, 1,679,500 outstanding at  June 30, 2016 and December 31, 2015.   168,513    168,513 
Additional paid-in capital   9,719,295    9,713,894 
Retained earnings   20,896,386    20,404,880 
Accumulated other comprehensive income (loss)   90,050    (216,047)
Treasury stock, at cost; 5,632 shares   (139,332)   (139,332)
Unearned employee stock ownership plan (ESOP) shares   (262,697)   (288,184)
Total stockholders’ equity   30,472,215    29,643,724 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $287,107,082   $270,984,407 

 

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

 

 2 

  

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

  Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
Interest income                    
Interest and fees on loans  $3,217,582   $2,833,426   $6,135,813   $5,470,542 
Interest on securities   121,460    128,203    241,867    292,812 
Interest on other interest-earning assets   16,880    31,095    39,179    52,549 
Total interest income   3,355,922    2,992,724    6,416,859    5,815,903 
                     
Interest expense                    
Interest on deposits   364,962    336,644    729,770    669,510 
Interest on borrowings   13,887    17,807    24,695    26,733 
Total interest expense   378,849    354,451    754,465    696,243 
                     
Net interest income   2,977,073    2,638,273    5,662,394    5,119,660 
Provision for loan losses   99,000    75,000    151,000    175,000 
                     
Net interest income after provision for loan losses   2,878,073    2,563,273    5,511,394    4,944,660 
                     
Noninterest income                    
Gain on sale of loans   2,595,003    1,162,993    4,283,437    2,051,193 
Service charges and fees   93,961    60,413    193,118    110,532 
Loss on sale and impairments of other real estate   (93,012)   -    (93,012)   (200,000)
Loss on sale of securities   -    -    -    (13,800)
Bank owned life insurance income   43,289    33,028    86,313    65,442 
Other   23,760    33,838    76,911    78,732 
Total noninterest income   2,663,001    1,290,272    4,546,767    2,092,099 
                     
Noninterest expense                    
Salaries and benefits   3,248,954    1,909,580    5,830,138    3,835,201 
Occupancy   453,115    408,179    904,644    834,479 
Data processing fees   607,221    369,082    965,911    734,554 
FDIC and other insurance expense   25,800    50,658    97,200    111,258 
Professional fees   337,281    224,492    740,232    456,793 
Merger-related expenses   -    5,253    -    99,577 
Advertising   62,813    65,652    115,202    103,221 
Net other real estate expenses   548    6,809    3,304    13,754 
Other   319,692    452,113    895,024    750,452 
Total noninterest expense   5,055,424    3,491,818    9,551,655    6,939,289 
                     
Income before income taxes   485,650    361,727    506,506    97,470 
Provision for income taxes   -    -    15,000    - 
                     
NET INCOME   485,650    361,727    491,506    97,470 
                     
Other comprehensive income                    
Unrealized gain (loss) on available-for-sale securities   80,414    (33,943)   306,097    (53,857)
                     
COMPREHENSIVE INCOME  $566,064   $327,784   $797,603   $43,613 
                     
Income per common share:                    
Basic  $0.29   $0.22   $0.30   $0.06 
Diluted  $0.29   $0.22   $0.30   $0.06 

 

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

 

 3 

  

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

               Accumulated             
               Other             
       Additional       Comprehensive       Unearned   Total 
   Common   Paid-In   Retained   Income   Treasury   ESOP   Stockholders' 
   Stock   Capital   Earnings   (Loss)     Stock   Shares   Equity 
                             
BALANCE, DECEMBER 31, 2014  $168,552   $9,714,459   $20,084,266   $(148,446)  $(139,332)  $(343,168)  $29,336,331 
                                    
Net income   -    -    97,470    -    -    -    97,470 
Unrealized (loss) on available-for-sale securities   -    -    -    (53,857)   -    -    (53,857)
Amortization of ESOP award   -    (1,492)   -    -    -    27,492    26,000 
Other   (39)   39    -    -    -    -    - 
                                    
BALANCE, JUNE 30, 2015  $168,513   $9,713,006   $20,181,736   $(202,303)  $(139,332)  $(315,676)  $29,405,944 
                                    
BALANCE, DECEMBER 31, 2015  $168,513   $9,713,894   $20,404,880   $(216,047)  $(139,332)  $(288,184)  $29,643,724 
                                    
Net income   -    -    491,506    -    -    -    491,506 
Unrealized gain on available-for-sale securities   -    -    -    306,097    -    -    306,097 
Amortization of ESOP award   -    5,401    -    -    -    25,487    30,888 
BALANCE, JUNE 30, 2016  $168,513   $9,719,295   $20,896,386   $90,050   $(139,332)  $(262,697)  $30,472,215 

 

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

 

 4 

  

ALAMOGORDO FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   Six Months Ended June 30, 
   2016   2015 
Cash flows from operating activities          
Net income  $491,506   $97,470 
Adjustments to reconcile net income to net cash from operating activities:          
Depreciation and amortization   305,518    327,963 
Stock dividend on financial institution stock   (8,314)   (5,012)
Loss on sale and impairments of other real estate   93,012    200,000 
Amortization of premiums and discounts on securities, net   250,588    300,008 
ESOP expense   30,888    26,000 
Amortization of core deposit intangible   43,086    55,248 
Loss on sale of available-for-sale securities   -    13,800 
Gain on sale of loans   (4,283,437)   (2,051,193)
Proceeds from sale of loans held for sale   113,641,280    71,948,919 
Funding of loans held for sale   (120,908,892)   (72,114,938)
Provision for loan losses   151,000    175,000 
Net increase in bank-owned life insurance   (62,672)   (65,442)
Changes in operating assets and liabilities:          
Accrued interest receivable   (2,737)   (9,598)
Prepaid and other assets   (632,882)   (410,843)
Accrued interest and other liabilities   244,429    (739,785)
Other   -    23,365 
Net cash used for operating activities   (10,647,627)   (2,229,038)
           
Cash flows from investing activities          
Proceeds from principal payments on available-for-sale securities   2,872,704    3,183,467 
Proceeds from sales of available-for-sale securities   -    2,286,200 
Purchases of available-for-sale securities   (8,456,771)   (9,742,836)
Net change in loans held for investment   (11,709,988)   (12,838,011)
Purchases of premises and equipment   (206,826)   (207,219)
(Purchase) Redemption of stock in financial institutions   (43,800)   201,400 
Net proceeds from sales of other real estate   212,988    - 
Net cash used for investing activities   (17,331,693)   (17,116,999)
           
Cash flows from financing activities          
Net change in deposits   688,789    9,189,889 
Net change in escrows   86,469    29,661 
Net change in Federal Home Loan Bank advances   14,000,000    15,000,000 
Net cash provided by financing activities   14,775,258    24,219,550 
           
Net (decrease) increase in cash and cash equivalents   (13,204,062)   4,873,513 
           
Cash and cash equivalents, beginning of period   19,824,864    14,823,973 
           
Cash and cash equivalents, end of period  $6,620,802   $19,697,486 
           
Supplemental disclosures:          
Interest on deposits and advances paid  $758,253   $701,157 
Income taxes paid  $15,000   $- 
Noncash investing and financing activities:          
Transfers of loans to other real estate  $195,558   $28,317 

 

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

 

 5 

 

Alamogordo Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

 

Alamogordo Financial Corp. (the “Company”) is a savings and loan holding company that owns 100% of Bank 34 (the “Bank”). On June 30, 2008, the Bank changed its name from Alamogordo Federal Savings and Loan Association to Bank 34. Alamogordo Financial Corp. (the “Parent”) was incorporated on April 30, 1997 and is a majority-owned subsidiary of AF Mutual Holding Company. As of June 30, 2016, AF Mutual Holding Company owned 54.7% of the Company’s outstanding shares of common stock.

 

The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico, and Scottsdale and Peoria, Arizona. The Bank also operates eight loan production offices in El Paso, Texas, Phoenix and Tubac, Arizona, Albuquerque, New Mexico, Kirkland and Puyallup, Washington, Medford, Oregon, and Littleton, Colorado. The loan production offices in Kirkland and Puyallup, Washington, Medford, Oregon, Tubac, Arizona, and Littleton, Colorado were opened in 2016.

 

A large portion of the Bank’s New Mexico loans are secured by real estate in Otero and Dona Ana Counties. The economy for these counties is heavily dependent on two U.S. Government military installations located in those counties. Accordingly, the ultimate collectability of the Bank’s New Mexico loans are susceptible to changes in U.S. Government military operations in southern New Mexico.

 

The primary deposit products are demand deposits, certificates of deposit, NOW, savings and money market accounts. The primary lending products are real estate mortgage loans and commercial loans. The Bank is subject to competition from other financial institutions, regulation by certain federal agencies and undergoes periodic examinations by regulatory authorities.

 

Rising and falling interest rate environments can have various impacts on the Bank’s net interest income, depending on the short-term interest rate gap that the Bank maintains. The Bank’s net interest income is also affected by prepayments of loans and early withdrawals of deposits.

 

On March 7, 2016, the Boards of Directors of AF Mutual Holding Company, the Parent and the Bank adopted a Plan of Conversion and Reorganization (the “Plan”). Pursuant to the Plan, AF Mutual Holding Company will convert from the mutual holding company form of organization to the fully public form in a “second-step” stock offering. AF Mutual Holding Company will be merged into the Parent, and AF Mutual Holding Company will no longer exist. The Parent will then merge into a new Maryland corporation named Bancorp 34, Inc. The existing publicly held shares of the Parent, which represent the remaining ownership interest in the Parent, will be exchanged for new shares of common stock of the new Maryland corporation.

 

On August 3, 2016, AF Mutual Holding Company received preliminary regulatory approval with respect to the conversion, and on August 5, 2016 Bancorp 34, Inc.’s registration statement was declared effective by the Securities and Exchange Commission.

 

Basis of Presentation – The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations at the dates and for the periods presented. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations for the full fiscal year. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Basis of Consolidation – The consolidated financial statements include the accounts of Alamogordo Financial Corp. and the Bank. All significant intercompany accounts and transactions have been eliminated.

 

Reclassifications – Certain reclassifications have been made to prior periods financial information to conform to the current period presentation.

 

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 6 

 

Significant estimates include, but are not limited to, allowance for loan losses, useful lives used in depreciation and amortization, deferred income taxes and related valuation allowance, valuation of other real estate and core deposit intangibles.

 

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

 

Summary of Recent Accounting Pronouncements:

 

Debt Issuance Costs - In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). This update requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt and would be applied using a retrospective approach. This guidance is effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 did not have a material impact on the Company’s financial statements.

 

Business Combinations - In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The new standard is effective for public companies prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The adoption of ASU 2015-16 did not have a material impact on the Company’s financial statements.

 

Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for public companies for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

 

Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The amendments in this update replace  the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to create credit loss estimates. The new guidance is effective for public companies that are U.S. Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. For all other public companies, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The guidance is required to be applied by the modified retrospective approach. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

 

 7 

 

NOTE 2 – AVAILABLE-FOR-SALE SECURITIES

 

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at June 30, 2016 and December 31, 2015. The carrying amount of such securities and their approximate fair values were as follows:

 

   Gross   Gross   Gross     
   Amortized   Unrealized   Unrealized     
   Cost   Gains   Losses   Fair Value 
                     
June 30, 2016                    
Available-for-sale securities                    
Mortgage-backed securities  $29,218,032   $129,960   $(114,431)  $29,233,561 
U.S. Government agencies   3,086,407    46,951    -    3,133,358 
Municipal obligations   1,875,639    28,224    (654)   1,903,209 
                     
   $34,180,078   $205,135   $(115,085)  $34,270,128 
                     
December 31, 2015                    
Available-for-sale securities                    
Mortgage-backed securities  $23,449,558   $52,498   $(231,560)  $23,270,496 
U.S. Government agencies   3,498,469    10,429    (50,085)   3,458,813 
Municipal obligations   1,898,571    3,317    (646)   1,901,242 
                     
   $28,846,598   $66,244   $(282,291)  $28,630,551 

  

Proceeds from the sale of available-for-sale securities and resulting net gains and net losses were as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
Proceeds from sale  $-   $-   $-   $2,286,200 
(Losses), net  $-   $-   $-   $(13,800)

 

The last sale of available-for-sale securities was in the first quarter of 2015.

 

Amortized cost and fair value of securities by contractual maturity as of June 30, 2016 are shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the actual contractual maturities of underlying collateral. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

 

 8 

 

The scheduled maturities of available-for-sale securities at June 30, 2016 were as follows:

 

   June 30, 2016 
   Amortized   Fair 
   Cost   Value 
         
Due in one year or less  $-   $- 
Due after one to five years   31,744,542    31,825,285 
Due after five to ten years   2,435,536    2,444,843 
Due after ten years   -    - 
           
Totals  $34,180,078   $34,270,128 

 

At June 30, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

At June 30, 2016 and December 31, 2015, mortgage-backed securities included collateralized mortgage obligations of $9.5 million and $5.9 million, respectively, which are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.

 

Gross Unrealized Losses and Fair Value – The following tables show the gross unrealized losses and fair values of securities by length of time that individual securities in each category have been in a continuous loss position.

 

   June 30, 2016 
   Less Than 12 Months   12 Months or More   Total 
       Gross       Gross       Gross 
Description of      Unrealized       Unrealized       Unrealized 
Securities  Fair Value   Losses   Fair Value   Losses   Fair Value   Losses 
                         
Available-for-sale securities:                              
Mortgage-backed securities  $3,141,765   $(17,920)  $7,893,320   $(96,511)  $11,035,085   $(114,431)
U.S. Government agencies   -    -    -    -    -    - 
Municipal obligations   35,093    (654)   -    -    35,093    (654)
                               
Total temporarily impaired securities  $3,176,858   $(18,574)  $7,893,320   $(96,511)  $11,070,178   $(115,085)

 

   December 31, 2015 
   Less Than 12 Months   12 Months or More   Total 
       Gross       Gross       Gross 
Description of      Unrealized       Unrealized       Unrealized 
Securities  Fair Value   Losses   Fair Value   Losses   Fair Value   Losses 
                         
Available-for-sale securities:                              
Mortgage-backed securities  $13,002,963   $(133,816)  $5,833,352   $(97,744)  $18,836,315   $(231,560)
U.S. Government agencies   1,242,250    (6,715)   1,477,876    (43,370)   2,720,126    (50,085)
Municipal obligations   35,541    (646)   -    -    35,541    (646)
                               
Total temporarily impaired securities  $14,280,754   $(141,177)  $7,311,228   $(141,114)  $21,591,982   $(282,291)

 

At June 30, 2016, all of the government agencies and mortgage-backed securities held by the Company were issued by U.S. Government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the

 

 9 

 

Company does not consider these securities to be other-than-temporarily impaired at June 30, 2016 or December 31, 2015.

 

Loans and securities carried at approximately $122.1 million at June 30, 2016 were pledged to secure FHLB advances. In addition, securities carried at approximately $6.3 million at June 30, 2016 were pledged to secure public deposits.

 

NOTE 3 – LOANS HELD FOR INVESTMENT, NET

 

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

 

   June 30, 2016   December 31, 2015 
   Amount   Percent   Amount   Percent 
                 
Loans held for investment, net:                    
Commercial real estate  $155,581,765    76.2%  $146,643,998    75.3%
One- to four-family residential real estate   29,650,957    14.5    31,412,437    16.1 
Commercial and industrial   10,489,296    5.2    10,235,492    5.3 
Consumer and other   8,441,865    4.1    6,428,765    3.3 
Total gross loans   204,163,883    100.0%   194,720,692    100.0%
Unamortized loan fees   (728,674)        (689,102)     
Loans held for investment   203,435,209         194,031,590      
Allowance for loan losses   (2,152,565)        (1,894,196)     
Loans held for investment, net  $201,282,644        $192,137,394      

 

At June 30, 2016 and December 31, 2015 commercial real estate loans include construction loans of $12.8 million and $7.8 million, respectively.

 

 10 

 

Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses and recorded investment in loans as of June 30, 2016 and December 31, 2015:

 

   As of June 30, 2016 
   Commercial
Real Estate
   One- to Four-
Family
Residential Real
Estate
   Commercial and
Industrial
   Consumer and
Other
   Total 
         
Allowance for loan losses                         
Ending balance:  individually evaluated for impairment  $-   $-   $-   $-   $- 
Ending balance:  collectively evaluated for impairment   1,337,667    565,960    199,418    49,520    2,152,565 
                          
Total  $1,337,667   $565,960   $199,418   $49,520   $2,152,565 
                          
Gross loans                         
Ending balance:  individually evaluated for impairment  $3,029,853   $1,273,661   $624,244   $22,468   $4,950,226 
Ending balance:  collectively evaluated for impairment   152,551,912    28,377,296    9,865,052    8,419,397    199,213,657 
Ending balance:  loans acquired with deteriorated credit quality   -    -    -    -    - 
Total  $155,581,765   $29,650,957   $10,489,296   $8,441,865   $204,163,883 

 

   As of December 31, 2015 
   Commercial
Real Estate
   One- to Four-
Family
Residential Real
Estate
   Commercial and
Industrial
   Consumer and
Other
   Total 
             
Allowance for loan losses                         
Ending balance:  individually evaluated for impairment  $-   $-   $-   $-   $- 
Ending balance:  collectively evaluated for impairment   1,136,458    656,089    63,527    38,122    1,894,196 
                          
Total  $1,136,458   $656,089   $63,527   $38,122   $1,894,196 
                          
Gross loans                         
Ending balance:  individually evaluated for impairment  $2,221,619   $1,830,826   $354,208   $-   $4,406,653 
Ending balance:  collectively evaluated for impairment   144,422,379    29,581,611    9,881,284    6,428,765    190,314,039 
Ending balance:  loans acquired with deteriorated credit quality   -    -    -    -    - 
Total  $146,643,998   $31,412,437   $10,235,492   $6,428,765   $194,720,692 

 

 11 

  

The following is a summary of activities for the allowance for loan losses for the three and six months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
                 
Beginning balance  $2,052,365   $1,990,668   $1,894,196   $1,707,282 
                     
Provision for loan losses   99,000    75,000    151,000    175,000 
                     
Charge-offs:                    
Commercial real estate   -    -    -    - 
One- to four-family residential real estate   -    -    (10,756)   - 
Commercial and industrial   -    -    -    - 
Consumer and other   -    -    -    (160)
Total charge-offs   -    -    (10,756)   (160)
                     
Recoveries:                    
Commercial real estate   -    -    116,125    183,546 
One- to four-family residential real estate   1,200    2,400    2,000    2,400 
Commercial and industrial   -    -    -    - 
Consumer and other   -    80    -    80 
Total recoveries   1,200    2,480    118,125    186,026 
Net recoveries   1,200    2,480    107,369    185,866 
                     
Ending balance  $2,152,565   $2,068,148   $2,152,565   $2,068,148 

 

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of June 30, 2016 and December 31, 2015. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Per Company policy, loans past due 90 days or more no longer accrue interest.

 

   Past Due       Total 
           90 Days           Financing 
   30 - 59 Days   60 - 89 Days   or More   Total   Current   Receivables 
                         
June 30, 2016                              
Commercial real estate  $-   $-   $-   $-   $155,581,765   $155,581,765 
One- to four-family residential real estate   -    130,072    683,797    813,869    28,837,088    29,650,957 
Commercial and industrial   -    -    304,144    304,144    10,185,152    10,489,296 
Consumer and other   -    -    -    -    8,441,865    8,441,865 
                               
Totals  $-   $130,072   $987,941   $1,118,013   $203,045,870   $204,163,883 

 

 12 

  

   Past Due       Total 
           90 Days           Financing 
   30 - 59 Days   60 - 89 Days   or More   Total   Current   Receivables 
                         
December 31, 2015                              
Commercial real estate  $-   $-   $-   $-   $146,643,998   $146,643,998 
One- to four-family residential real estate   314,541    173,467    788,159    1,276,167    30,136,270    31,412,437 
Commercial and industrial   -    -    -    -    10,235,492    10,235,492 
Consumer and other   -    -    -    -    6,428,765    6,428,765 
                               
Totals  $314,541   $173,467   $788,159   $1,276,167   $193,444,525   $194,720,692 

 

The following table sets forth nonaccrual loans and other real estate at June 30, 2016 and December 31, 2015:

 

   June 30,   December 31, 
   2016   2015 
         
Nonaccrual loans          
Commercial real estate  $-   $- 
One- to four-family residential real estate   1,037,964    1,489,851 
Commercial and industrial   304,144    354,208 
Consumer and other   -    - 
Total nonaccrual loans   1,342,108    1,844,059 
Other real estate (ORE)   195,558    306,000 
           
Total nonperforming assets  $1,537,666   $2,150,059 
           
Nonperforming assets to gross loans held for investment and ORE   0.75%   1.10%
Nonperforming assets to total assets   0.54%   0.79%

 

Other real estate consisted of one one- to four-family residence at June 30, 2016 and one commercial property at December 31, 2015, which was sold at a loss of $93,000 in June 2016.

 

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at June 30, 2016 and December 31, 2015. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Bank’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.

 

 13 

  

   As of June 30, 2016 
   Commercial
Real Estate
   One- to Four-
Family
Residential Real
Estate
   Commercial and
Industrial
   Consumer and
Other
   Total 
                     
Grade                         
Pass  $152,298,978   $28,165,236   $9,780,729   $8,419,397   $198,664,340 
Special mention   252,934    212,060    84,323    -    549,317 
Substandard   3,029,853    1,273,661    320,100    22,468    4,646,082 
Doubtful   -    -    304,144    -    304,144 
Loss   -    -    -    -    - 
                          
Totals  $155,581,765   $29,650,957   $10,489,296   $8,441,865   $204,163,883 

  

   As of December 31, 2015 
   Commercial
Real Estate
   One- to Four-
Family
Residential Real
Estate
   Commercial and
Industrial
   Consumer and
Other
   Total 
                     
Grade                         
Pass  $142,560,320   $29,434,236   $9,785,619   $6,428,765   $188,208,940 
Special mention   1,862,059    147,375    95,665    -    2,105,099 
Substandard   2,221,619    1,830,826    -    -    4,052,445 
Doubtful   -    -    354,208    -    354,208 
Loss   -    -    -    -    - 
                          
Totals  $146,643,998   $31,412,437   $10,235,492   $6,428,765   $194,720,692 

 

The Bank’s internally assigned grades are as follows:

 

Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.

 

Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

 

Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

 

Doubtful – All the weakness inherent in one classified as substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

 

Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

 

 14 

 

Impaired Loans – The following table includes the recorded investment and unpaid principal balances, net of charge-offs for impaired loans with the associated allowance amount, if applicable. Management determined the allocated allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the allocated allowance recorded.

 

   As of June 30, 2016 
       Principal       Average 
   Recorded   Net of   Related   Recorded 
   Investment   Charge-offs   Allowance   Investment 
                 
With no related allowance recorded:                    
Commercial real estate  $-   $-   $-   $- 
One- to four-family residential real estate   1,037,964    1,037,964    -    1,091,933 
Commercial and industrial   304,144    304,144    -    311,725 
Consumer and other   -    -    -    - 
                     
With an allowance recorded:  $-   $-   $-   $- 
                     
Total:                    
Commercial real estate  $-   $-   $-   $- 
One- to four-family residential real estate   1,037,964    1,037,964    -    1,091,933 
Commercial and industrial   304,144    304,144    -    311,725 
Consumer and other   -    -    -    - 

 

   As of December 31, 2015 
       Principal       Average 
   Recorded   Net of   Related   Recorded 
   Investment   Charge-offs   Allowance   Investment 
                 
With no related allowance recorded:                    
Commercial real estate  $-   $-   $-   $- 
One- to four-family residential real estate   1,489,851    1,489,851    -    1,949,279 
Commercial and industrial   354,208    354,208    -    733,940 
Consumer and other   -    -    -    - 
                     
With an allowance recorded:  $-   $-   $-   $- 
                     
Total:                    
Commercial real estate  $-   $-   $-   $- 
One- to four-family residential real estate   1,489,851    1,489,851    -    1,949,279 
Commercial and industrial   354,208    354,208    -    733,940 
Consumer and other   -    -    -    - 

 

During the six months ended June 30, 2016 and 2015, no interest income was recognized on these loans as interest collected was credited to loan principal.

 

 15 

 

Certain loans within the Company’s loan and ORE portfolios are guaranteed by the Veterans Administration (VA). In the event of default by the borrower, the VA can elect to pay the guaranteed amount or take possession of the property. If the VA takes possession of the property, the Company is entitled to be reimbursed for the outstanding principal balance, accrued interest and certain other expenses. There were no commitments from the VA to take title to foreclosed VA properties at June 30, 2016 and December 31, 2015.

 

Troubled Debt Restructurings – Restructured loans are considered “troubled debt restructurings” if due to the borrower’s financial difficulties, the Bank has granted a concession that they would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, rates, or a combination of the two. All troubled debt restructurings placed on nonaccrual status must show no less than six consecutive months of repayment performance by the borrower in accordance with contractual terms to return to accrual status. Once a loan has been identified as a troubled debt restructuring, it will continue to be reported as such until the loan is paid in full.

 

There were no troubled debt restructurings as of June 30, 2016 or December 31, 2015.

 

In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a troubled debt restructuring. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to existing underwriting standards which include review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance, and projections intended to assess repayment ability going forward.

 

NOTE 4 – CORE DEPOSIT INTANGIBLE

 

The gross carrying value and accumulated amortization of core deposit intangible is as follows:

 

   June 30,   December 31, 
   2016   2015 
         
Gross carrying value  $502,000   $502,000 
Less accumulated amortization   (182,306)   (139,220)
           
Core deposit intangible  $319,694   $362,780 

 

Amortization of core deposit intangible was $43,086 and $55,248 for the six months ended June 30, 2016 and 2015, respectively.

 

NOTE 5 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

In the normal course of business, the Bank has outstanding commitments to extend credit and may have standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for instruments that are included in the consolidated balance sheets.

 

 16 

 

Financial instruments whose contract amounts represent off-balance-sheet credit risk are as follows as of June 30, 2016 and December 31, 2015:

 

   June 30,   December 31, 
   2016   2015 
         
Commitments to originate and sell mortgage loans  $46,199,200   $15,661,263 
Commitments to extend credit   30,161,113    18,695,121 
Unused lines of credit   5,292,872    4,591,908 
           
Totals  $81,653,185   $38,948,292 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies by and may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. There were no standby letters of credit at June 30, 2016 and December 31, 2015.

 

NOTE 6 – REGULATORY MATTERS

 

Bank 34 is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets. Management believes, as of June 30, 2016 and December 31, 2015, the Bank meets all capital adequacy requirements to which it is subject.

 

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

 

As of June 30, 2016, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank has to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events that management believes have changed the Bank’s prompt corrective action category.

 

 17 

 

The Bank’s actual and required capital amounts and ratios are as follows:

 

                   To be Well 
                   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
As of June 30, 2016:                              
(Dollars in thousands)                              
                               
Total Capital                              
(to Risk-Weighted Assets)  $32,302    15.91%  $16,243    ³8.00%  $20,304    ³10.00%
                               
Tier I Capital                              
(to Risk-Weighted Assets)  $30,149    14.85%  $12,182    ³6.00%  $16,243    ³8.00%
                               
Common Equity Tier 1 Capital                              
(to Risk-Weighted Assets)  $30,149    14.85%  $9,137    ³4.50%  $13,198    ³6.50%
                               
Tier I Capital                              
(to Average Assets)  $30,149    10.89%  $11,078    ³4.00%  $13,848    ³5.00%
                               
As of December 31, 2015:                              
(Dollars in thousands)                              
                               
Total Capital                              
(to Risk-Weighted Assets)  $31,584    16.93%  $14,928    ³8.00%  $18,660    ³10.00%
                               
Tier I Capital                              
(to Risk-Weighted Assets)  $29,690    15.91%  $11,196    ³6.00%  $14,928    ³8.00%
                               
Common Equity Tier 1 Capital                              
(to Risk-Weighted Assets)  $29,690    15.91%  $8,397    ³4.50%  $12,129    ³6.50%
                               
Tier I Capital                              
(to Average Assets)  $29,690    11.06%  $10,742    ³4.00%  $13,428    ³5.00%

 

NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS

 

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2016 and December 31, 2015.

 

Available-for-sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly-liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

 

 18 

 

Level 2 securities include certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.

 

Loans Held for Sale – The fair value of loans held for sale is based on quoted market prices from Freddie Mac. Freddie Mac quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

 

Other Real Estate – Other real estate is fair valued under Level 3 based on property appraisals less estimated disposition costs, which include both observable and unobservable inputs, at the time of transfer and as appropriate thereafter.

 

Loans Held for Investment – Loans held for investment are generally not recorded at fair value on a recurring basis. Periodically, the Bank records nonrecurring adjustments to the carrying value of these loans based on fair value measurements for loans subject to impairment. The fair value of impaired loans is typically determined using a combination of observable inputs, such as interest rates, contract terms, appraisals of collateral supporting the loan and recent comparable sales of similar properties, and unobservable inputs such as creditworthiness, disposition costs and underlying cash flows associated with the loan. Since the estimates of fair value utilized for loans also involve unobservable inputs, valuations of impaired loans have been classified as Level 3.

 

 The following table sets forth by level, within the fair value hierarchy, the Company’s assets at fair value:

 

   Fair Value Measurements Using 
   Quoted Prices   Significant         
   in Active   Other   Significant     
   Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   Level 1   Level 2   Level 3   Fair Value 
                 
June 30, 2016                    
Recurring basis                    
Mortgage-backed securities  $-   $29,233,561   $-   $29,233,561 
U.S. Government agencies    -    3,133,358    -    3,133,358 
Municipal obligations   -    1,903,209    -    1,903,209 
Nonrecurring basis                    
Loans held for sale   -    25,424,352    -    25,424,352 
Other real estate   -    -    195,558    195,558 
Impaired loans   -    -    1,342,108    1,342,108 
                     
Totals  $-   $59,694,480   $1,537,666   $61,232,146 
                     
December 31, 2015                    
Recurring basis                    
Mortgage-backed securities  $-   $23,270,496   $-   $23,270,496 
U.S. Government agencies    -    3,458,813    -    3,458,813 
Municipal obligations   -    1,901,242    -    1,901,242 
Nonrecurring basis                    
Loans held for sale   -    11,380,627    -    11,380,627 
Other real estate   -    -    306,000    306,000 
Impaired loans   -    -    1,844,059    1,844,059 
                     
Totals  $-   $40,011,178   $2,150,059   $42,161,237 

 

 19 

 

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

 

The following tables present estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015.

 

 20 

  

           Quoted Prices   Significant     
           in Active   Other   Significant 
           Markets for   Observable   Unobservable 
   Carrying       Identical Assets   Inputs   Inputs 
   Amount   Fair Value   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
At June 30, 2016                         
Financial assets:                         
Cash and due from banks  $3,661   $3,661   $3,661   $-   $- 
Interest-bearing deposits with banks   2,960    2,960    2,960    -    - 
Available-for-sale securities   34,270    34,270    -    34,270    - 
Loans held for sale   25,424    25,424    -    25,424    - 
Loans held for investment, net   201,283    201,258    -    -    201,258 
Stock in financial institutions   1,599    1,599    -    1,599    - 
                          
Financial liabilities:                         
Demand deposits, savings and NOW deposits   160,793    159,175    159,175    -    - 
Time deposits   65,596    65,643    -    65,643    - 
Federal Home Loan Bank advances   27,000    27,000    -    27,000    - 
                          
At December 31, 2015                         
Financial assets:                         
Cash and due from banks  $5,960   $5,960   $5,960   $-   $- 
Interest-bearing deposits with banks   13,865    13,865    13,865    -    - 
Available-for-sale securities   28,631    28,631    -    28,631    - 
Loans held for sale   11,381    11,381    -    11,381    - 
Loans held for investment, net   192,137    195,631    -    -    195,631 
Stock in financial institutions   1,547    1,547    -    1,547    - 
                          
Financial liabilities:                         
Demand deposits, savings and NOW deposits   151,593    147,947    147,947    -    - 
Time deposits   74,107    74,149    -    74,149    - 
Federal Home Loan Bank advances   13,000    13,004    -    13,004    - 

 

The following methods and assumptions were used to estimate the fair value of the additional classes of financial instruments shown:

 

Cash and Due from Banks, Interest-Bearing Deposits with Banks and Stock in Financial Institutions– The carrying amount approximates fair value.

 

Deposits and Federal Home Loan Bank (FHLB) Advances – Deposits include demand deposits, savings accounts, NOW accounts and money market deposits. The carrying amount approximates fair value. The fair value

  

 21 

 

of fixed-maturity time deposits and FHLB advances is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits and advances of similar remaining maturities.

 

NOTE 8 –EARNINGS (LOSS) PER SHARE

 

Earnings (Loss) Per Share – Basic earnings (loss) per share have been calculated based upon the weighted-average number of common shares outstanding. For earning per share computations, unallocated ESOP shares are treated like treasury shares and not considered outstanding. The calculation of diluted weighted-average shares outstanding for the three and six months ended June 30, 2015 excludes 18,020 shares issuable pursuant to outstanding stock options because their effect would be anti-dilutive.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
                 
Net income (loss)  $485,650   $361,727   $491,506   $97,470 
                     
Weighted-average common shares outstanding applicable to basic EPS   1,662,105    1,679,500    1,662,105    1,679,500 
Effect of dilutive potential common shares   1,778    0    526    0 
                     
Weighted-average common shares outstanding applicable to diluted EPS   1,663,883    1,679,500    1,662,631    1,679,500 
                     
Income (loss) per common share:                    
Basic  $0.29   $0.22   $0.30   $0.06 
Diluted  $0.29   $0.22   $0.30   $0.06 

 

 22 

 

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

 

Management’s discussion and analysis of financial condition at June 30, 2016 and December 31, 2015 and results of operations for the three and six months ended June 30, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

 

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

 

Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses, the evaluation of other-than-temporary impairment of investment securities, the valuation of and our ability to realize deferred tax assets and the measurement of fair values of financial instruments.

 

Allowance for Loan Losses. The allowance for loan losses is calculated with the objective of maintaining an allowance necessary to absorb credit losses inherent in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.

 

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for loan losses. The allowance for loan losses is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision for loan losses based on our evaluation of the probable losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

 

The allowance for loan losses consists primarily of specific allocations and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, including adjustments for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting and payment

 

 23 

  

history. We also analyze delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allowance. The principal assumption used in calculating the allowance for loan losses is the estimate of loss for each risk rating. Actual loan losses may be significantly more than the allowance we have established, which could have a material negative effect on our financial results.

 

Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of investment securities, securities are evaluated on at least a quarterly basis, to determine whether a decline in their value is other-than-temporary. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not we intend to sell or expect that it is more likely than not that we will be required to sell the investment security prior to an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).

 

Valuation of Deferred Tax Assets. In evaluating our ability to realize deferred tax assets, management considers all positive and negative information, including our past operating results and our forecast of future taxable income. In determining future taxable income, management utilizes a budget process that makes business assumptions and the implementation of feasible and prudent tax planning strategies. We also utilize a monthly forecasting tool to incorporate activity throughout the calendar year. These assumptions require us to make judgments about our future taxable income that are consistent with the plans and estimates we use to manage our business. The net deferred tax asset is offset by an equal valuation allowance. Any change in estimated future taxable income may result in a reduction of the valuation allowance against the deferred tax asset which would result in income tax benefit in the period.

 

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

 

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

 

·Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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

 

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. 

 

 24 

  

Average Balance Sheets

 

The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

 

   Three Months Ended June 30, 
   2016   2015 
   Average           Average         
   Outstanding       Yield/   Outstanding       Yield/ 
   Balance   Interest   Rate (1)   Balance   Interest   Rate (1) 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $218,396   $3,218    5.93%  $199,060   $2,833    5.71%
Interest-earning deposits   7,549    10    0.51%   6,495    3    0.19%
Securities   29,432    121    1.66%   34,108    128    1.51%
Federal Home Loan Bank stock   1,170    2    0.77%   1,245    24    7.73%
Other   382    5    5.26%   481    5    4.17%
Total interest-earning assets   256,929    3,356    5.25%   241,389    2,993    4.97%
Noninterest-earning assets   19,485              17,656           
Total assets  $276,414             $259,045           
                               
Interest-bearing liabilities:                              
Checking, money market and savings accounts  $123,517    226    0.74%  $101,673    176    0.69%
Certificates of deposit   69,054    139    0.81%   78,636    161    0.82%
Total deposits   192,571    365    0.76%   180,309    337    0.75%
Advances from FHLB of Dallas   11,373    14    0.49%   25,890    18    0.28%
Total interest-bearing liabilities   203,944    379    0.75%   206,199    355    0.69%
Non-interest bearing deposits   39,275              21,395           
Non-interest bearing liabilities   2,579              2,253           
Total liabilities   245,798              229,847           
Stockholders' equity   30,616              29,198           
Total liabilities and stockholders' equity  $276,414             $259,045           
                               
Net interest income       $2,977             $2,638      
Net interest rate spread  (2)             4.51%             4.28%
Net interest-earning assets (3)  $52,985             $35,190           
                               
Net interest margin (4)             4.66%             4.38%
Average interest-earning assets to average interest-bearing liabilities             125.98%             117.07%

 

(1)Yield/Rate for the three month periods have been annualized.

 

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

 

(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

 

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

 

 25 

  

   Six Months Ended June 30, 
   2016   2015 
   Average           Average         
   Outstanding       Yield/   Outstanding       Yield/ 
   Balance   Interest   Rate (1)   Balance   Interest   Rate (1) 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans  $211,067   $6,136    5.85%  $193,307   $5,471    5.71%
Interest-earning deposits   10,487    26    0.49%   5,935    7    0.24%
Securities   28,876    242    1.68%   34,234    293    1.73%
Federal Home Loan Bank stock   1,169    5    0.84%   1,068    33    6.17%
Other   383    8    4.47%   634    12    3.88%
Total interest-earning assets   251,982    6,417    5.12%   235,178    5,816    4.99%
Noninterest-earning assets   19,478              18,610           
Total assets  $271,460             $253,788           
                               
Interest-bearing liabilities:                              
Checking, money market and savings accounts  $120,415    440    0.73%  $101,044   $338    0.67%
Certificates of deposit   70,840    290    0.82%   79,761    331    0.84%
Total deposits   191,255    730    0.77%   180,805    669    0.75%
Advances from FHLB of Dallas   10,564    24    0.47%   20,889    27    0.26%
Total interest-bearing liabilities   201,819    754    0.75%   201,694    696    0.70%
Non-interest bearing deposits   36,690              20,290           
Non-interest bearing liabilities   2,551              2,518           
Total liabilities   241,060              224,502           
Stockholders' equity   30,400              29,286           
Total liabilities and stockholders' equity  $271,460             $253,788           
                               
Net interest income       $5,663             $5,120      
Net interest rate spread  (2)             4.37%             4.29%
Net interest-earning assets (3)  $50,163             $33,484           
                               
Net interest margin (4)             4.52%             4.39%
Average interest-earning assets to average interest-bearing liabilities             124.86%             116.60%

 

(1)Yield/Rate for the six month periods have been annualized.

 

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

 

(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

 

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

 

Comparison of Financial Condition at June 30, 2016 and December 31, 2015

 

Cash and cash equivalents decreased $13.2 million, or 66.6%, to $6.6 million at June 30, 2016 from $19.8 million at December 31, 2015. The decrease is due to our using excess cash from December 31, 2015 to fund loan originations and purchases of securities during the six months ended June 30, 2016.

 

 26 

  

Loans held for investment increased $9.4 million, or 4.8%, to $203.4 million at June 30, 2016 from $194.0 million at December 31, 2015, due to organic growth. The increase was specifically due to an increase in commercial real estate loans, which increased $8.9 million, or 6.1%, to $155.6 million at June 30, 2016 from $146.6 million at December 31, 2015. During the six months ended June 30, 2016, commercial real estate loans increased to 76.2% of the gross loan portfolio from 75.3%, while one- to four-family residential real estate loans decreased to 14.5% of the portfolio from 16.1%. The residential mortgage loan portfolio experienced natural run-off as the Bank continued to focus on the secondary mortgage lending program whereby new loans are originated and sold for fee income as opposed to being held in the portfolio.

 

Loans held for sale at June 30, 2016 totaled $25.4 million, consisting entirely of residential mortgage loans. We currently sell a significant majority of our residential mortgage loans in the secondary market. At December 31, 2015, loans held for sale totaled $11.4 million. The balances at any date vary based upon the timing and volume of current loan originations and sales; however, the record high quarter end balance at June 30, 2016 was primarily due to the addition of four new loan production offices in February 2016 and another in May 2016 and a decrease in market interest rates in the second quarter.

 

Available for sale securities increased $5.6 million, or 19.7%, during the six months ended June 30, 2016, due to the investment of excess liquid funds during the second quarter.

 

Other real estate decreased $110,000 to $196,000 at June 30, 2016. In the six months ended June 30, 2016 a property was added as a result of a foreclosure on a one- to four-family residential property; however, in June 2016 the commercial property held at December 31, 2015 was sold and a $93,000 loss on sale was recognized.

 

Total deposits increased $689,000, or 0.3%, to $226.4 million at June 30, 2016 from $225.7 million at December 31, 2015. The increase included a $9.2 million, or 8.1% increase in savings and money market deposits, partially offset by an $8.5 million, or 11.5%, decrease in time deposits. The increase in savings and money market  deposits is primarily due to maturing certificates of deposit customers preferring not to lock into term deposits, and growth from new and existing Arizona customers. We have been growing saving and money market balances while allowing both retail and wholesale certificates of deposit to run off at maturity to improve the deposit mix and reduce the cost of funds.

 

Borrowings, consisting solely of Federal Home Loan Bank advances, increased $14.0 million to $27.0 million at June 30, 2016 from $13.0 million at December 31, 2015. We generally utilize short term borrowings to fund loans held for sale, which were $25.4 million at June 30, 2016 compared to $11.4 million at December 31, 2015.

 

Total stockholders’ equity increased $828,000, or 2.8%, to $30.5 million at June 30, 2016 from $29.6 million at December 31, 2015. The growth was due to net income for the six-month period of $492,000 and an increase in accumulated other comprehensive income resulting from the $306,000 improvement in the fair value of available-for-sale securities for the six months ended June 30, 2016.

 

Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

 

General. In the fall of 2015 and again in February and May 2016, the Company expanded its mortgage banking program, which included the addition of new loan production offices in Scottsdale and Tubac, Arizona, Albuquerque, New Mexico, Kirkland and Puyallup, Washington, Medford, Oregon and Littleton, Colorado. Operating results for the three months ended June 30, 2016 were negatively affected as the start-up period operating costs

 

 27 

  

exceeded revenue generated by these new operations. Despite these additional expenses, we had net income of $486,000 for the three months ended June 30, 2016, compared to net income of $362,000 for the three months ended June 30, 2015.

 

Interest Income. Interest income increased $363,000, or 12.1%, to $3.4 million for the three months ended June 30, 2016 from $3.0 million for the three months ended June 30, 2015. The increase was due to a $15.5 million, or 6.4%, increase in average interest-earning assets and an improvement in asset mix as loans, our highest yielding assets, increased to 85.0% of average interest-earning assets from 82.5% of average interest-earning assets. The yield on average interest-earning assets increased 28 basis points to 5.25% for the three months ended June 30, 2016 from 4.97% for the three months ended June 30, 2015 due primarily to the improvement in asset mix. Interest and fees on loans increased $384,000, or 13.6%, to $3.2 million for the three months ended June 30, 2016, from $2.8 million for the three months ended June 30, 2015. Interest income on loans increased due primarily to a $19.3 million, or 9.7%, increase in average loan balances, due to organic growth and a 22 basis point increase in yield. The average balance of securities decreased $4.7 million, or 13.7%, to $29.4 million for the three months ended June 30, 2016, compared to $34.1 million for the three months ended June 30, 2015, and the average yield increased from 1.51% to 1.66% for the three months ended June 30, 2015 and 2016, respectively.

 

Interest Expense. Interest expense increased $24,000, or 6.9%, to $379,000 for the three months ended June 30, 2016 from $354,000 for the three months ended June 30, 2015. The increase was the result of an increase in interest expense on deposits, which increased $28,000, or 8.4%, to $365,000 for the three months ended June 30, 2016 from $337,000 for the three months ended June 30, 2015.

 

Average interest-bearing deposits for the three months ended June 30, 2016 were $192.6 million, representing a $12.3 million, or 6.8%, increase compared to average interest-bearing deposits of $180.3 million for the three months ended June 30, 2015. The average rate paid on interest-bearing deposits was 0.76% compared to 0.75% for the 2015 period.

 

Interest paid on checking, money market and savings accounts increased $50,000, or 28.4%, to $226,000 for the three months ended June 30, 2016 from $176,000 for the three months ended June 30, 2015. The average rate we paid on such deposit accounts increased five basis points to 0.74% for the three months ended June 30, 2016 from 0.69% for the three months ended June 30, 2015 and the average balance increased $21.8 million, or 21.5%, to $123.5 million for the three months ended June 30, 2016 from $101.7 million for the three months ended June 30, 2015. The average rates we pay on these accounts is considerably higher in the Arizona market.

 

Interest on certificates of deposits decreased $22,000, or 13.7%, to $139,000 for the three months ended June 30, 2016 from $161,000 for the three months ended June 30, 2015. The average balance of certificates of deposit decreased $9.6 million, or 12.2%, to $69.1 million for the three months ended June 30, 2016 from $78.6 million for the three months ended June 30, 2015. In addition, the average rate paid on certificates of deposit decreased one basis point to 0.81% for the three months ended June 30, 2016 from 0.82% for the three months ended June 30, 2015.

 

The increase in checking, savings and money market deposits and decrease in certificates of deposit is primarily due to maturing certificate of deposit customers preferring not to lock into term deposits, and growth from new and existing Arizona customers.

 

Net Interest Income. Net interest income increased $339,000, or 12.8%, to $3.0 million for the three months ended June 30, 2016 from $2.6 million for the three months ended June 30, 2015, as a result of a higher balance of net interest-earning assets and a higher net interest rate spread. Our average net interest-earning assets increased by $17.8 million, or 50.6%, to $53.0 million for the three months ended June 30, 2016 from $35.2 million for the three months ended June 30, 2015, due primarily to organic growth. Our net interest rate spread improved by 23 basis points to 4.51% for the three months ended June 30, 2016 from 4.28% for the three months ended June 30, 2015, as we carried 85.0% of our average interest-earning assets in loans, our highest yielding assets, for the three months ended June 30, 2016, compared to 82.5% in loans for the comparable quarter in 2015. This repositioning of our asset portfolio was achieved principally through organic loan growth. Our cost of borrowings increased to 0.49% for the quarter ended June 30, 2016 from 0.28% for the quarter ended June 30, 2015 due to the increase in short

 

 28 

  

term interest rates following the 25 basis point increase in the target Federal Funds rate in December 2015.

 

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

 

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

 

After an evaluation of these factors, we recorded a provision for loan losses of $99,000 for the three months ended June 30, 2016, compared to $75,000 for the three months ended June 30, 2015. In the three months ended June 30, 2016, the allowance for loan losses grew $100,000, or 4.9%, and gross loans held for investment grew $6.5 million, or 3.3%.

 

To the best of our knowledge, at June 30, 2016 we have recorded all loan losses that are both probable and reasonable to estimate as of June 30, 2016.  However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about the recoverability of our loan balances based upon information available to it at the time of its examination.

 

Noninterest Income. Noninterest income increased $1.4 million, or 106.4%, to $2.7 million for the three months ended June 30, 2016 from $1.3 million for the three months ended June 30, 2015 due to a higher volume of loan sales and related gains, partially offset by a $93,000 loss on sale of other real estate compared to no impairment charge or loss on sale for the comparable quarter in 2015.

 

Gain on sale of loans increased $1.4 million, or 123.1%, to $2.6 million for the three months ended June 30, 2016 from $1.2 million for the three months ended June 30, 2015 as the Company has continued to expand its secondary mortgage loan operations. During the three months ended June 30, 2016, we sold $65.6 million of mortgage loans for a gain of $2.5 million and $1.2 million of SBA loans for a gain of $95,000, compared to $39.9 million of mortgage loan sales and $758,000 of SBA loan sales during the three months ended June 30, 2015 for gains of $1.1 million and $86,000, respectively. We realized a 3.8% average premium (gain on sale/sold loans) on the sales of mortgage loans for the three months ended June 30, 2016 and 2.9% for the three months ended June 30, 2015. The Bank has experienced higher premiums on sales of mortgage loans since mid-2015 when we enhanced our pipeline management with the addition of more experienced personnel. Premiums vary from period to period based upon the mix of government Federal Housing Administration (FHA) and Veterans Administration (VA) loans to conventional loans, geographic markets and market interest rates, specifically 10-year U.S. Treasury rates.

 

Noninterest Expense. Noninterest expense increased $1.6 million, or 44.8%, to $5.1 million for the three months ended June 30, 2016 from $3.5 million for the three months ended June 30, 2015, due primarily to higher salaries and benefits, data processing fees, professional fees and occupancy, which were partially offset by a decrease in other noninterest expense. The increases were primarily related to the expansion of our mortgage banking operations in the fall of 2015 and again in 2016. Average assets for the quarter ended June 30, 2016 were 6.7% greater than for the quarter ended June 30, 2015.

 

 29 

  

Income Tax Expense. No provision for income tax expense or income tax benefits were recorded for the three months ended June 30, 2016 and 2015. The Company has net operating loss carry-forwards from prior periods, which offset income for both periods, so no other income tax expense or income tax benefits were recorded.

 

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

 

General. In the fall of 2015 and again in February and May 2016, the Company expanded its mortgage banking program, which included the addition of new loan production offices in Scottsdale and Tubac, Arizona, Albuquerque, New Mexico, Kirkland and Puyallup, Washington, Medford, Oregon and Littleton, Colorado. Operating results for the six months ended June 30, 2016 were negatively affected as the start-up period operating costs exceeded revenue generated by these new operations. Despite these additional expenses, we had net income of $492,000 for the six months ended June 30, 2016, compared to net income of $97,000 for the six months ended June 30, 2015.

 

Interest Income. Interest income increased $601,000, or 10.3%, to $6.4 million for the six months ended June 30, 2016 from $5.8 million for the six months ended June 30, 2015. The increase was due to a 7.1% increase in average interest-earning assets and a 13 basis point increase in yields due primarily to improvement in asset mix as loans, our highest yielding assets, increased from 82.2% to 83.8% of average interest-earning assets. Interest and fees on loans increased $665,000, or 12.2%, to $6.1 million for the six months ended June 30, 2016, from $5.5 million for the six months ended June 30, 2015, partially offset by a $51,000, or 17.4%, decrease in interest income on available-for-sale securities. Interest income on loans increased due primarily to a 9.2% increase in average loan balances, due to organic growth and a 14 basis point increase in average yield. The average balance of securities decreased $5.4 million, or 15.7%, to $28.9 million for the six months ended June 30, 2016, compared to $34.2 million for the six months ended June 30, 2015 and the average yield decreased five basis points.

 

Interest Expense. Interest expense increased $58,000, or 8.4%, to $754,000 for the six months ended June 30, 2016 from $696,000 for the six months ended June 30, 2015. The increase was caused by an increase in interest expense on deposits, which increased $60,000, or 9.0%, to $730,000 for the six months ended June 30, 2016 from $670,000 for the six months ended June 30, 2015.

 

Average interest-bearing deposits for the six months ended June 30, 2016 were $191.3 million, representing a $10.5 million, or 5.8%, increase compared to average interest-bearing deposits of $180.8 million for the six months ended June 30, 2015. The average rate paid on interest-bearing deposits was 0.77% compared to 0.75% for the 2015 period.

 

Interest paid on checking, money market and savings accounts increased $102,000, or 30.2%, to $440,000 for the six months ended June 30, 2016 from $338,000 for the six months ended June 30, 2015. The average rate we paid on such deposit accounts increased six basis points to 0.73% for the six months ended June 30, 2016 from 0.67% for the six months ended June 30, 2015 and the average balance increased $19.4 million, or 19.2%, to $120.4 million for the six months ended June 30, 2016 from $101.0 million for the six months ended June 30, 2015. The increase in checking, savings and money market deposits is primarily due to maturing certificate of deposit customers preferring not to lock into term deposits, and growth from new and existing Arizona customers. The average rates we pay on these accounts is considerably higher in the Arizona market.

 

Net Interest Income. Net interest income increased $543,000, or 10.6%, to $5.7 million for the six months ended June 30, 2016 from $5.1 million for the six months ended June 30, 2015, as a result of a higher balance of net interest-earning assets and a higher net interest rate spread. Our average net interest-earning assets increased by $16.7 million, or 49.8%, to $50.2 million for the six months ended June 30, 2016 from $33.5 million for the six months ended June 30, 2015 due primarily to organic growth. Our net interest rate spread improved by eight basis points to 4.37% for the six months ended June 30, 2016 from 4.29% for the six months ended June 30, 2015, as we carried 83.8% of our average

 

 30 

  

interest-earning assets in loans, our highest yielding asset, for the six months ended June 30, 2016 compared to 82.2% in loans for the comparable period in 2015. This repositioning of our asset portfolio was achieved principally through organic loan growth and sales of securities in December 2014 and early 2015, which were not completely replaced through reinvestment. Our cost of borrowings increased to 0.47% for the six months ended June 30, 2016 from 0.26% for the six months ended June 30, 2015 due to the increase in short term interest rates following the 25 basis point increase in the target Federal Funds rate in December 2015.

 

Provision for Loan Losses. We recorded a provision for loan losses of $151,000 for the six months ended June 30, 2016, compared to $175,000 for the six months ended June 30, 2015. In addition, $118,000 in recoveries of previously charged-off balances were received during the six months ended June 30, 2016 compared to $186,000 in the six months ended June 30, 2015. In the six months ended June 30, 2016, the allowance for loan losses increased $258,000, or 13.6%, and gross loans held for investment grew $9.4 million, or 4.8%.

 

Noninterest Income. Noninterest income increased $2.5 million, or 117.3%, to $4.5 million for the six months ended June 30, 2016 from $2.1 million for the six months ended June 30, 2015 primarily due to a higher volume of loan sales and related gains, and a decrease in loss on sale and impairments of other real estate.

 

Gain on sale of loans increased $2.2 million, or 108.8%, to $4.3 million for the six months ended June 30, 2016 from $2.1 million for the six months ended June 30, 2015 as the Company has continued to expand its secondary mortgage loan operation. During the six months ended June 30, 2016, we sold $107.1 million of mortgage loans for a gain of $4.1 million and $2.2 million of SBA loans for a gain of $194,000, compared to $69.1 million of mortgage loan sales and $758,000 of SBA loan sales during the six months ended June 30, 2015 for gains of $2.0 million and $86,000, respectively. The average premium (gain on sale/sold loans) for 2016 was 3.8% compared to 3.0% for 2015. The Bank has experienced higher premiums on sales of mortgage loans since mid-2015 when we enhanced our pipeline management with the addition of more experienced personnel. Premiums vary from period to period based upon the mix of government FHA and VA loans to conventional loans, geographic markets and market interest rates, specifically 10-year Treasury rates.

 

We incurred a $93,000 loss on sale of other real estate in the six months ended June 30, 2016 compared to a $200,000 impairment charge on other real estate in the six months ended June 30, 2015.

 

Noninterest Expense. Noninterest expense increased $2.6 million, or 37.6%, to $9.6 million for the six months ended June 30, 2016 from $6.9 million for the six months ended June 30, 2015 due primarily to higher salaries and benefits, professional fees, data processing fees, other expense and occupancy, partially offset by lower merger-related expenses. The increase in expense resulted primarily from the expansion of our mortgage banking program. Average assets for the six months ended June 30, 2016 were 7.0% larger than the six months ended June 30, 2015.

 

Merger-related expenses decreased $100,000, or 100.0%, to $0 for the six months ended June 30, 2016 compared to $100,000 for the six months ended June 30, 2015. 

 

Provision for Income Taxes. Income tax expense was $15,000 and $0 for the six months ended June 30, 2016 and 2015, respectively. The $15,000 income tax expense for the six months ended June 30, 2016 represented a tax extension payment expected to be applied to cover an alternative minimum tax liability. The Company has net operating loss carry-forwards from prior periods, which offset income for both periods, so no other income tax expense or income tax benefits were recorded.

 

 31 

  

Asset Quality

 

We review loans on a regular basis, and place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, we place loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six consecutive months of payment performance before the loan is eligible to return to accrual status.

 

Non-Performing Loans and Non-Performing Assets. The following table sets forth information regarding our non-performing assets. As of June 30, 2016 and December 31, 2015, we had no troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates materially less than current market rates.

 

   At June 30,   At December 31, 
   2016   2015 
   (Dollars in thousands) 
Nonaccrual loans          
Real estate loans:          
One- to four-family residential real estate  $1,038   $1,490 
Commercial real estate   -    - 
Commercial and industrial loans   304    354 
Consumer and other loans   -    - 
Total nonaccrual loans   1,342    1,844 
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more   -    - 
Total nonaccrual loans and accruing loans past due 90 days or more   1,342    1,844 
Other real estate (ORE)          
One- to four-family residential real estate   196    - 
Commercial real estate   -    306 
Total other real estate   196    306 
Other nonperforming assets   -    - 
Total nonperforming assets  $1,538   $2,150 
           
Ratios:          
Nonperforming loans to gross loans held for investment   0.66%   0.95%
Nonperforming assets to total assets   0.54%   0.79%
Nonperforming assets to gross loans held for investment and ORE   0.75%   1.10%

 

The nonperforming asset ratios decreased due to the $502,000 decrease in nonperforming loans and the $110,000 decrease in other real estate along with increases in both loans and assets. In the six months ended June 30, 2016 one one- to four-family residential property was added to other real estate and one commercial real estate property was sold at a loss of $93,000.

 

Interest income that would have been recorded for the six months ended June 30, 2016, had nonaccruing loans been current according to their original terms amounted to $42,000. We recognized no interest income on these nonaccrual loans for the six months ended June 30, 2016.

 

At June 30, 2016, we had no loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible credit problems of borrowers caused

 

 32 

  

management to have serious concerns as to the ability of the borrowers to comply with existing loan repayment terms and that could result in disclosure as non-accrual, 90 days past due or troubled debt restructurings.

 

Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on the current level of net loan losses, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

 

 33 

  

The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

   Six Months Ended June 30, 
   2016   2015 
   (Dollars in thousands) 
         
Balance at beginning of period  $1,894   $1,707 
Provision for loan losses   151    175 
Charge-offs:          
One- to four-family residential real estate loans   (11)   - 
Commercial real estate loans   -    - 
Commercial and industrial loans   -    - 
Consumer and other loans   -    - 
Total charge-offs   (11)   - 
Recoveries:          
One- to four-family residential real estate loans   2    2 
Commercial real estate loans   116    184 
Commercial and industrial loans   -    - 
Consumer and other loans   -    - 
Total recoveries   118    186 
Net recoveries   107    186 
           
Balance at end of period  $2,152   $2,068 
           
ALLL to nonperforming loans   160.37%   182.87%
ALLL to total gross loans   1.05%   1.10%
ALLL to total gross loans less acquired loans   1.32%   1.61%
Net (charge-offs) recoveries to average loans outstanding during the period   0.10%   0.19%

 

The allowance for loan losses to nonperforming loans ratio decreased due to the 18.7% increase in nonperforming loans from June 2015 to June 2016 compared to the 4.1% increase in the allowance for loan losses. The allowance for loan losses to total gross loans ratio decreased due to a 8.2% increase in total gross loans compared to the 4.1% increase in the allowance for loan losses. The net recoveries to average loans outstanding ratio decreased due to an 9.2% increase in average loans outstanding between the periods, and a 42.5% decrease in net recoveries. 

 

 34 

  

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, FHLB borrowings, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.

 

We believe that we have enough sources of liquidity to satisfy our short-term liquidity needs as of June 30, 2016.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2016, cash and cash equivalents totaled $6.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $34.3 million at June 30, 2016. In addition, at June 30, 2016, we had the ability to borrow an additional $94.8 million from the Federal Home Loan Bank of Dallas. On that date, we had $27.0 million of advances outstanding. The Bank also has two lines of credit available with other financial institutions of $6.0 million and 2.0 million, respectively.

 

At June 30, 2016, we had $30.2 million in loan commitments outstanding, and an additional $46.2 million in commitments to originate and sell mortgage loans. In addition, we had $5.3 million in unused lines of credit and no commitments issued under standby letters of credit. Time deposits due within one year as of June 30, 2016 totaled $39.7 million, or 17.5% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us, either as certificates of deposit or as other deposit products. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

We have no material commitments or demands that are likely to affect our liquidity other than set forth above. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the Federal Home Loan Bank of Dallas or the other financial institutions, or increase our deposits by offering higher interest rates.

 

Our primary investing activities are the origination of loans and the purchase of securities. During the six months ended June 30, 2016, we originated $41.5 million of loans held for investment and $120.9 million of mortgage loans held for sale, compared to $23.2 million of loans held for investment and $72.1 million of mortgage loans held for sale  during the six months ended June 30, 2015. In the six months ended June 30, 2016 and 2015, we purchased $8.5 million and $9.7 million of securities, respectively. We have not purchased any whole loans in recent periods.

 

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced net increases of $0.7 million and $9.2 million in total deposits for the six months ended June 30, 2016 and 2015, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits so that we are competitive in our market area.

 

 35 

  

Federal Home Loan Bank advances increased $14.0 million and $15.0 million for the six months ended June 30, 2016 and 2015, respectively. In 2016 we have been funding our loans held for sale with short term FHLB borrowings. At June 30, 2016 loans held for sale were $25.4 million and FHLB borrowings were $27.0 million. During the six months ended June 30, 2015, we were able to utilize proceeds from FHLB advances and excess liquid funds held at December 31, 2014 to fund new loan originations and the purchase of $9.7 million in available-for-sale securities.

 

Alamogordo Financial Corp. is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to stockholders, to repurchase its common stock, and for other corporate purposes. Alamogordo Financial Corp’s. primary source of liquidity is dividend payments it may receive from the Bank. At June 30, 2016, Alamogordo Financial Corp. (on an unconsolidated basis) had liquid assets of $410,000.

 

The net proceeds from the “second-step” stock offering will significantly increase our liquidity and capital resources.  Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including funding loans.  Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, which will increase our net interest-earning assets and net interest income.  However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity will be adversely affected following the stock offering.

 

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2016 and December 31, 2015, Bank 34 exceeded all regulatory capital requirements. Bank 34 is considered “well-capitalized” under regulatory guidelines.

 

 36 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable, as the Registrant is a smaller reporting company.

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended June 30, 2016, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

Item 1A. Risk Factors

 

Not applicable, as the Registrant is a smaller reporting company.

 

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

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)There were no issuer repurchases of securities during the period covered by this report.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 37 

  

Item 6. Exhibits

 

3.1Charter of Alamogordo Financial Corp. (1)

 

3.2Bylaws of Alamogordo Financial Corp. (1)

 

3.3Amendment to Bylaws of Alamogordo Financial Corp. (2)

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101The following financial statements from the Alamogordo Financial Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Statements of Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

 

(1)Incorporated by reference to the Registration Statement on Form SB-2 of Alamogordo Financial Corp. (File No. 333-92913), originally filed with the Securities and Exchange Commission on December 16, 1999.

 

(2)Incorporated by reference to the Current Report on Form 8-K of Alamogordo Financial Corp. (File No. 000-29655), filed with the Securities and Exchange Commission on December 24, 2014.

 

 38 

 

SIGNATURES

 

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

 

      ALAMOGORDO FINANCIAL CORP.
         
Date: August 15, 2016   /s/ Jill Gutierrez  
      Jill Gutierrez  
      Chief Executive Officer  
         
Date: August 15, 2016   /s/ Jan R. Thiry  
      Jan R. Thiry  
      Executive Vice President and Chief Financial Officer

 

 39