BUSINESS COMBINATION

6 Months Ended

Jun. 30, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

BUSINESS COMBINATION

NOTE 2 – BUSINESS COMBINATION

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

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

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

We accounted for the Merger using the acquisition method of accounting in accordance the Financial Accounting Standards Board’s Accounting Standards Code 805 (“ASC 805”), Business Combinations, and accordingly, the assets and liabilities of CBOA were recorded at their respective Merger date estimated fair values. The estimated fair values of assets and liabilities are preliminary and subject to refinement during the measurement period (which cannot exceed one year from the Merger date), as additional information relative to the Merger date fair values becomes available. Effective in March 2024, we recognized a preliminary bargain purchase gain of $5.1 million in connection with the Merger (not taxable for income tax purposes), which is recognized in our first quarter 2024 operating results. The core deposit intangible asset of $8.4 million represents the estimated value of Commerce Bank of Arizona’s long-term deposit relationships with its customers and will be amortized over an estimated weighted average life of ten years using an accelerated method, which approximates the estimated run-off of the acquired deposits. During 2023 and through June 30, 2024, Bancorp 34 incurred, on a cumulative basis, approximately $6.8 million of Merger-related expenses.

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

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

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

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

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

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

Purchased Performing Loans (Non-Purchased Credit Deteriorated Loans)

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

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

Purchased Credit Deteriorated Loans

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

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

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

Pro Forma Information

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

Pro forma amounts for the three months ended June 30, 2024, primarily reflect the following pro forma adjustments: (i) interest and fee income decrease related to lower loan discount accretion income of $583,000 and related taxes of $146,000; (ii) interest expense decrease related to lower deposit liability and long-term debt discount expense of $84,000 and related taxes of $21,000; (iii) non-interest income increase due to removal of preliminary bargain purchase gain unfavorable measurement period adjustments of $118,000, none of which is taxable; (iv) non-interest expense decrease due to removal of Merger expenses of $414,000 and related income tax benefits of $104,000; and (v) non-interest expense decrease due to lower Core Deposit Intangible amortization expense of $52,000 and related taxes of $13,000.

Pro forma amounts for the three months ended June 30, 2023, primarily reflect the following pro forma adjustments: (i) interest and fee income increase related to loan discount accretion income of $775,000 and related taxes of $194,000; (ii) interest and fee income decrease, due to the removal of CBOA’s loan fee income of $152,000 and related taxes of $38,000 (iii) interest expense increase related to deposit liability and long-term debt discount expense of $80,000 and related taxes of $20,000; (iii) non-interest expense decrease due to removal of Merger expenses of $1 million and related taxes of $20,000; and (iv) non-interest expense increase due to Core Deposit Intangible amortization expense of $427,000 and related taxes of $107,000.

Pro forma amounts for the six months ended June 30, 2024, primarily reflect the following pro forma adjustments: (i) interest and fee income decrease related to lower loan discount accretion income of $117,000 and related taxes of $29,000; (ii) interest and fee income decrease due to the removal of CBOA’s pre-Merger loan fee income of $175,000 and related taxes of $44,000; (iii) interest expense decrease related to deposit liability and long-term debt discount expense of $75,000 and related taxes of $20,000; and (iv) provision for credit losses decrease due to removal of the Merger-related non-recurring Day 2 Non-PCD Loan charge of $4.1 million and related taxes of $1 million; and (v) non-interest income decrease due to removal of a non-recurring non-taxable $5 million preliminary bargain purchase gain. Additionally, there were non-interest expense pro forma adjustments, which were primarily comprised of: (i) removal of Merger expenses of $4.4 million and related taxes of $962,000; (ii) removal of Merger-related non-recurring change-in-control charges of $654,000 and related taxes of $164,000; and (iii) Core Deposit Intangible amortization expense increase of $280,000 and related taxes of $70,000.

Pro forma amounts for the six months ended June 30, 2023, primarily reflect the following pro forma adjustments: (i) interest and fee income increase related to loan discount accretion income of $1.6 million and related taxes of $388,000; (ii) interest and fee income decrease due to the removal of CBOA’s pre-Merger loan fee income of $346,000 and related taxes of $87,000; (iii) interest expense increase related to deposit liability and long-term debt discount expense of $195,000 and related taxes of $50,000; (iv) non-interest expense decrease related to removal of Merger expenses of $1.1 million and related taxes of $21,000; and (iii) non-interest expense increase related to Core Deposit Intangible amortization expense of $864,000 and related taxes of $216,000.

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

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

Business Combination Pro Forma Information

	Pro Forma
	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2024		2023		2024		2023
Total revenues (net interest income and non-interest income)	$	8,596	$	8,666	$	17,719	$	17,547
Net income	$	1,806	$	1,687	$	3,467	$	3,021
Earnings per share - basic	$	0.28	$	0.25	$	0.52	$	0.46
Earnings per share - diluted	$	0.28	$	0.25	$	0.52	$	0.46

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