BCTF 10-K & 10-Q changes, risk factors and insider trading

More specifically, the market conditions in the markets in which we have a presence may be different from, and could be worse than, the economic conditions conditions in the United States as a whole. As of July 2023, the unemployment rates in Arizona and New Mexico were each 3.6% while the United States unemployment rate was 3.8%. For the first quarter of 2023 as compared to the fourth quarter of 2022, Arizona and New Mexico had gross domestic product (GDP) growth of 0.7% and 0.4%, respectively, as compared to 1.5% GDP growth for the United States over the same time period. Additionally, for the first quarter of 2023 each of Arizona and New Mexico had deposit growth of $3.5 billion and $34 million, respectively. As discussed elsewhere in these Risk Factors, inflationary pressures have causedWhile the Federal Reserve torecently recently increasebegan lowering interest ratesrates, althoughif inflation persists or if circumstances otherwise dictate the Federal Reserve has indicated that there could be required to begin increasing interest raterates decreases in 2024.again. Increases in interest rates in the past have led to recessions of various lengths and intensities and might lead to such a recession in the near future. Such a recession or any other adverse changes in business and economic conditions generally or specifically in the markets in which we operate could affect our business, including causing one or more of the following negative developments:

The United States generally and the regions in which we operate specifically have recently experienced, for the first time in decades,recent years experienced significant inflationary pressures, evidenced by higher gas prices, higher food prices and higher prices for other consumer items. Accordingly, while inflation has since moderated, it can result in material adverse effects upon our customers, their businesses and, as a result, our financial position and results of operation. Inflation also can and does generally lead to higher interest rates, which have their own separate risks. Decreased deposit balances could result in our reliance upon higher cost funding sources. See Lending and Interest Rate Risks included in these Risk Factors below.

To illustrate: in response to the recession in 2008-09 and the following uneven recovery, the Federal Reserve implemented a series of domestic monetary initiatives designed to lower rates and make credit easier to obtain. The Federal Reserve changed course in 2015, raising rates several times through 2018. The last raise in 2018 was accompanied by a substantial and broad stock market decline. In 2019, the Federal Reserve began to lower rates. In 2020, in response to economic disruption associated with the COVID-19 pandemic, the Federal Reserve quickly reduced short-term rates to extremely low levels and acted to influence the markets to reduce long-term rates as well. During 2021, the Federal Reserve significantly reduced its “easing” actions that held down long-term rates. During 2022, the Federal Reserve switched to a tightening policy. It raised short term rates significantly and rapidly over most of the year. Those actions triggered a significant decline in the values of most categories of U.S. stocks and bonds; impacted bank asset values, funding costs, and liquidity resources; significantly raised recessionary expectations for the U.S.; and inverted the yield curve through the second quarter of 2023. The Federal Reserve has slowed the rate of increases in 2023 withand 25began basislower point increases occurringrates in February, March, May, and July. The Federal Reserve has not increased interest rates since July and has indicated that interest rate decreases may occur inlate 2024.

TheseDespite the recent cuts in interest rates, rates remain higher than they have been in the recent past and these increases in interest rates accordingly may have significant and adverse effects upon our business as well as the business of many of our customers. For example, the raising of short-term interest rates: (i) increases our cost of funds due largely to overall increases in the cost of our deposits which may decrease our net interest margin; (ii) increases the cost of our other funding sources such as borrowings from the Federal Home Loan Bank, which we utilize for liquidity, may further decrease our net interest margins; (iii) may cause a further decline in the value of our investment portfolio which could result in unrealized or realized losses if the investments are sold; (iv) may cause a decline in the demand for our products if borrowers are no longer able to afford our loans or if our competitors offer more attractive rates for loans or deposits; and (v) may cause an increase in the number of customers who default on their loans or obligations to us as they may not be able to fund higher loan payments on floating interest rate loans or have the ability to refinance maturing loans at higher interest rates. Risks associated with interest rates and the yield curve and their potential effects on financial institutions are further discussed in these Risk Factors under the Caption Lending and Interest Rate Risks.

The application of the acquisition method of accounting in any future acquisitions, including the proposed merger with CBOA,acquisitions will impact our allowance for credit losses. Under the acquisition method of accounting, all acquired loans will be recorded in our consolidated financial statements at their estimated fair value at the time of acquisition. To the extent that our estimates of fair value are too high, we will incur losses associated with the acquired loans.

WeIn recently2023 we experienced the deterioration of a large out of market commercial real estate credit, and future deterioration in our commercial real estate loan portfolio could adversely affect our results of operations and financial condition.

To diversify the geographic scope of our commercial real estate loan portfolio, a portion of our commercial real estate and construction loan portfolios is secured by real estate outside of our market areas. At December 31, 2023,2024, approximately 9.8%83.7% of our commercial real estate and construction loan portfolios were collateralized with out of market real estate. As of September 30, 2023, we experienced a deterioration of a large out of market commercial real estate loan which resulted in this loan becoming nonperforming as of September 30, 2023. As of December 31, 2023, a $3.3 million loss was recognized, and the remaining $3 million balance was transferred to other real estate owned. Subsequent to the December 31, 2023, balance sheet date, theThe note associated with the loan was sold for $2.5$2.6 million and an additional $0.5$0.4 million loss was taken in the first quarter of 2024. The additional deterioration in the value occurred due to the decline in rent collections in January and February of 2024 compared to December of 2023.

Due to this event, management engaged an external third-party to complete a loan review in the 4thfourth quarter of 2023. This loan review included a review of approximately 90% 90% of our out of market collateral loan portfolio. In addition, management conducted a review of the largest out of market credits, which which included a review of the real estate appraisals for the out of market collateral real estate securing these credits. While the external external third-party and management reviews did not indicate significant deterioration in our out of market collateral loan portfolio, we may experience material deteriorations with other existing real estate loans, including real estate loans in our out of market commercial real estate loan portfolio. In addition, management plans to limit out of market lending in the future.

The measure of our allowance for credit losses has been impacted by the adoption and interpretation of accounting standards. The Financial Accounting Standards Board, or FASB, has issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which became applicable to us in 2023. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment, unused commitments, and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the estimated collectability of loans held-for-investment, unfunded commitments, and held-to-maturity debt securities. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model previously required under GAAP, which delayed recognition until it is probable a loss was incurred. Accordingly, the CECL model may create more volatility in the level of our allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. Upon adoption, we recorded an increase to the allowance for credit losses (ACL) on loans held-for-investment of $604,000, established an ACL on unfunded commitments of $165,000, established an ACL on held-to-maturity investments of $38,000, recorded an increase to deferred tax assets of $153,000, and a corresponding one-time cumulative reduction to retained earnings, net of tax, of $654,000 in the consolidated balance sheet as of January 1, 2023.

The majority of our banking assets are subject to changes in interest rates. For example, as of December 31, 2023,2024, 34%42.3% of our loan portfolio, including including loan level derivative instruments, consisted of floating andor adjustable interest rate loans. Like most financial institutions, our earnings significantly depend on our net interest income, the principal component of our operating results, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. Many factors beyond our control impact interest rates, including economic conditions, governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and disorder and instability in domestic and foreign financial markets. Changes in monetary policies of the various government agencies could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets and liabilities.

In response to the COVID-19 pandemic, the Federal Open Market Committee cut short-term interest rates to a record low range of 0% to 0.25%. Over Over the course of 2022 and throughout 2023 these record low rates were reversed, with the Federal Reserve continuing to signal its concerns with respect to inflation. Interest Rates have remained constant in the second half of 2023 with theThe Federal Reserve signalingbegan thatdecreasing interest raterates decreases could occurlate in 2024.

We have traditionally obtained funds through local deposits and thus we have a base of lower cost transaction deposits. Generally, we believe local deposits are less expensive and more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from the Federal Reserve or from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Further, economic conditions and rising interest rates could result in a decrease in our transaction deposit account balances as customers seek to obtain maximum federal deposit insurance coverage or to seek higher interest rates. Our cost of funds has increased in the past 12 months due largely to overall increases in the cost of our deposits. Additionally, our costs of funds, operating results and liquidity are likely to be adversely affected if, and to the extent, we have to rely upon higher cost borrowings from the Federal Reserve or other institutional lenders, such as the Federal Home Loan Bank (“FHLB”), or upon brokers to fund liquidity needs, and changes in our deposit mix, pricing, and growth could adversely affect our profitability and the ability to expand our loan portfolio.

The yield curve is a reflection of interest rates applicable to short and long-term debt. The yield curve is upward sloping when short-term rates are lower than long-term rates; it is flat when short-term rates and long-term rates are nearly the same; and it is inverted when short-term rates exceed long-term rates. Historically, the yield curve is usually upward sloping (higher rates for longer terms). However, the yield curve can be relatively flat or inverted (downward sloping), which has happened several times in the past few years, and in fact was common in the second half of 2022 and throughout 2023.years. A flat or inverted yield curve, which tends to decrease net interest margin, would adversely impact our lending businesses and investment portfolio. The Federal Reserve, consistent with long-term goals, has been raising rates in response to inflation. We cannot predict how long those conditions will exist. In 20242025 there is significant risk, especially if yield curve inversion remains common and a recession begins, that our net interest margin could compress.

In addition, we are subject to the growing risk of climate change. Among the risks associated with climate change are more frequent severe weather events. Severe weather events such as droughts, heat waves, fires, hurricanes, tropical storms, tornados, winter storms, freezes, flooding and and other large-scale weather catastrophes in our markets subject us to significant risks and more frequent severe weather events magnify those risks. Large-scale weather catastrophes or other significant climate change effects that either damage or destroy residential or multifamily real estate underlying mortgage loans or real estate collateral, or negatively affects the value of real estate collateral or the ability of borrowers to continue to make payments on loans, could decrease the value of our real estate collateral or increase our delinquency rates in the affected areas and thus diminish the value of our loan portfolio. Such events could also cause downturns in economic and market conditions generally, which could have an adverse effect on our business and results of operations. The potential potential losses and costs associated with climate change related risks are difficult to predict and could have a material adverse effect on our business, financial condition and results of operation.

Two traditional areas, deposit fraud (check kiting, wire fraud, etc.) and loan fraud, continue to be major sources of fraud attempts and loss, and we incurred loss.a $0.7 million expense related to a check kiting incident in the fourth quarter of 2024. The sophistication and methods used to perpetrate fraud continue to evolve as technology changes. In addition to cybersecurity risk (discussed below), new technologies have made it easier for bad actors to obtain and use client personal information, mimic signatures and otherwise create false documents that look genuine. The industry fraud threat continues to evolve, including but not limited to card fraud, check fraud, social engineering and phishing attacks for identity theft and account takeover. Our anti-fraud measures are both preventive and, when necessary, responsive; however, some level of fraud loss is unavoidable, and the risk of a major loss cannot be eliminated.

To date, we have experienced cybersecurity incidents. For example, we recently experienced cybersecurity incidents in June of 2023 in which an unauthorized third party gained access to the email accounts of two of our employees. After investigation, we could not definitively determine that sensitive customer information in these email accounts were not accessed by the unauthorized party. In response, we notified the affected customers of the incident in early September 2023,2023 and have taken steps to mitigate our and our customers’ exposure to unauthorized activity. To date, we have incurred expenses of approximately $25,000 related to the cybersecurity incidents.

Combining Bancorp Bancorp 34 and CBOA may be more difficult, costly or time consumingtime-consuming than expected and we may fail to realize the anticipated benefits and and cost savings of the merger.

The success success of our proposed merger with CBOA will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of Bancorp 34 and CBOA. To realize the anticipated benefits and cost savings from the proposed merger, Bancorpwe 34 and CBOA must successfully integrate and combine their the businesses in a manner that permits those cost savings to be realized. If Bancorp 34 and CBOAwe are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the proposed merger could be less than anticipated, and integration may result in additional unforeseen expenses.

An inability to realize the full extent of the anticipated benefits of the proposed merger and the other transactions contemplated by the merger agreement,merger, as well as any delays encountered in the integration process, could have an adverse effect on theour revenues, levels of expenses and operating results of the combined company following the completion of the merger,results, which may adversely affect the value of the common stock of theour combined company following the completion of the merger.common stock.

BancorpIt 34 and CBOA have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of our ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect each company’sour ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts may also divert management attention, attention during this transition period and for an undetermined period after completion of the merger, which may have an adverse effect on the combined company.

The FDIC insures deposits at FDIC-insured depository institutions, such as Bankthe 34,Bank, up to $250,000 per depositor for each account ownership category. Our regular assessments are based on average consolidated total assets minus average tangible equity as well as by risk classification, which includes regulatory capital levels and the level of supervisory concern. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.

The extremely low interest rate environment in recent years ended in 2022. Contrary to the expectations outlined in the paragraph above, deposit levels prior to 2022 climbed, possibly buoyed by the severe volatility experienced by the stock markets in 2018-2020 coupled with Federal pandemic assistance, particularly direct cash payments to most citizens, in 2020 and 2021. Significant market volatility resumed in 2022,2022 and 2023, and we have generally raised deposit interest rates to attract and maintain clients. We are unsure whether or not deposit levels will rise appreciably in 2024.2025. In addition, recent economic events have highlighted the current market volatility related to deposits, and regulators are taking action to strengthen public confidence in the banking system and protect depositors. We are unable to predict how current economic conditions might affect our deposits and whether these regulatory actions will be successful.

The Federal Reserve continues to signal its concerns with respect to inflation. Interest rates have remained constant in the second half of 2023 with the Federal Reserve signaling that interest rate decreases could occuroccurring in late 2024. Additional information concerning monetary policy changes appears in these Risk Factors under the caption Economic and Geographic-Related Risks.

Our merger and acquisition activities, such as our proposed merger with CBOA, could be material and could require us to issue a significant number of shares of our common stock or other securities and/or to use a substantial amount of cash, other liquid assets, and/or incur debt.

Our merger and acquisition activities, including our proposed merger with CBOA, could involve a number of additional risks, including the risks of:

There is no assurance that, following any future mergers or acquisitions, including our proposed merger with CBOA, our integration efforts will be successful or that we, after giving effect to the acquisition, will achieve the strategic objectives, operating efficiencies, increased revenues comparable to or better than our expectations, or other benefits expected in the acquisition, and failure to realize such strategic objectives, operating efficiencies, expected revenue increases, cost savings, increases in market presence or other benefits could have a material adverse effect on our business, financial condition, and results of operations.

We operate in an extensively regulated industry and we are subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Bancorp 34 is subject to Federal Reserve regulations, and the Bank 34 is subject to regulation, supervision and examination by the OCC. Our compliance with banking regulations is costly and restricts some of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our business. If, as a result of an examination, a banking agency were to determine that the financial condition, capital adequacy, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management are in violation of any law or regulation, the banking agency could take a number of different remedial actions as it deems appropriate.

The Federal Reserve may require us to commit capital resources to support Bankthe 34.Bank.

The Federal Reserve requires a bank holding company to act as a source of financial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance tothe Bank 34 if it experiences financial distress.

Sales of substantial amounts of Bancorp 34 common stock, including following the proposed merger with CBOA, or in future offerings, or the perception that these sales could occur, could cause the market price of Bancorp 34 common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future, at a time and place that we deem appropriate. Castle Creek and Brush Creek are party to a Registration Rights Agreement under which we may be required to register their approximately 1.5 million shares of Bancorp 34 common stock under the Securities Act of 1933, as amended (the “Securities Act”). See “Certain Relationships and Related Transactions, and Director Independence—Registration Rights Agreement.” Accordingly, the market price of Bancorp 34 common stock could be adversely affected by actual or anticipated sales of a significant number of shares of Bancorp 34 common stock in the future.

In this section, unless the context suggests otherwise, references to “we,” “us,” and “our” mean the combined business of Bancorp 34 and its wholly-owned subsidiary, BankSouthwest 34.Heritage Bank.

Comments regarding Bancorp 34’s business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary StatementNote Regarding Forward-Looking Statements” beginning on page 1 of this Annual report on Form 10-K.

We offer a full range of relationship-focused services to meet our client’sclients’ business and personal financial objectives, with branches in Arizona and New Mexico.objectives. Our product lines include commercial loans, commercial real estate loans, and a variety of commercial and consumer deposit products, including noninterest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

BancorpWe generate 34 generates most of itsour income from interest income on loans, investment securities and deposits in other financial institutions, and service charges on customer accounts. BancorpWe 34 incursincur interest expenseexpenses on deposits and other borrowed funds and noninterestnon-interest expenses such as salaries and employee benefits, occupancy expenses, and technology expenses. Net interest income is the largest source of Bancorp 34’s revenue. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in the market interest rates and interest rates Bancorpwe 34 earnsearn on interest-earning assets or payspay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin, and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions, and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in BankSouthwest 34’sHeritage Bank’s loan portfolio are affected by, among other factors, economic and competitive conditions in Arizona and New Mexico, as well as developments affecting the real estate, technology, financial services, services, insurance, transportation, manufacturing and homebuilding sectors within BankSouthwest 34’sHeritage Bank’s target market.

Bancorp 34 manages its operations as one unit,unit and thus does not have separate operating segments.

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles, or “GAAP,” and follow general practices within the banking industry. These policies require thereliance reliance on estimates, assumptions and judgments, which may prove inaccurate and are subject to variations. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the following as critical accounting estimates: (i) determination of the allowance for credit losses for collectively evaluated loans and individually evaluated loans; (ii) determining the fair values of the assets acquired and liabilities assumed and the fair value of the common stock consideration issued in connection with the CBOA Merger; and, (iii) other fair value measurements to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors.

Our significant accounting policies are presented in Note 1—Nature of Operations and Significant Accounting Policies of our audited consolidated financial statements included in this Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes notes, and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Recent accounting pronouncements and standards that have impacted or could potentially affect us are also discussed in Note 1 of our audited consolidated financial statements.

One significant significant accounting policy is our accounting policy related to the allowance for credit losses (“ACL”). Effective January 1, 2023, we adopted ASU 2016-13, Financial Instruments – Measurement of Current Expected Credit Losses on Financial Instruments (“CECL”), using the modified retrospective method for our financial assets measured at amortized cost. CECL changed our method of accounting for credit losses from an incurred loss model to an expected credit loss model. Under the prior incurred loss model, credit losses on financial instruments were recognized when a probable loss was incurred, while CECL is an “expected credit loss” model. The expected credit loss model represents management’s estimate of expected credit losses to the full contractual maturity of the financial asset and is based on historical experience, current conditionsconditions, and reasonable and supportable forecasts. We believe the determination of the ACL involves a greater amount of judgment and complexity when compared with our other significant accounting policies.

The Company Company uses a 12-month forecast that is reasonable and supportable within the ACL calculation and then reverts to historical credit loss experience on a straight-line basis over a one-year timeline. Historical credit loss experience is then used for the remaining life of the assets. The Company uses several economic variables in the calculation of the ACL, the most significant of which is the economic forecast for the national unemployment rate. In theour December 31, 2023,2024, ACL estimate, the Company assumed a forecasted unemployment rate of 4.7%, 4.4%, which has slightly improved from the JanuaryDecember 1,31, 2023, forecasted rate of 5.7%.4.7%. Changes in the economic forecast for unemployment rates could significantly affect the estimated credit losses which could potentially lead to materially different ACL levels from one reporting period to the next.

Qualitative adjustments adjustments to historical loss data are made based on management’s assessment of the risks that may lead to a future loan loss or differences in current loan-specific risk characteristics such as differences.characteristics. A ratings scale is used to tie risk metrics within lending policies and procedures, economic factors note encompassed in the quantitative model, changes in nature of the volumes and terms of loans, changes in the volume and severity of past due assets, and concentrations within the loan portfolio. Additional factors such as staffing, loan review, collateral values, regulatory, legal, and technological risks are also reviewed on a more qualitative basis. The ratings scale used in the qualitative modeling is derived from the bank’sBank’s historical loss percentages in which the highest risk metrics would align with the highest historical loss percentages adjusted for the expected life of the current portfolio.

The ACL is a contra-asset on our balance sheet that is deducted from the amortized cost of loans held-for-investment to present on our balance sheet the net amount expected to be collected. Loans are charged-offcharged off against the ACL when management believes the full or partial uncollectibility non-collectability is confirmed.

We estimate expected credit losses on unfunded commitments over the contractual period in which we are exposed to credit risk via our contractual obligations obligations to extend credit,credit unless such obligations are unconditionally cancellable by us. The probability of funding such commitments in the future is based on historical utilization statistics for unfunded commitments. The credit loss rates used are calculated using the same assumptions as the associated funded balance.

Management measures measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Our held-to-maturity debt securities is largely comprised of bank subordinated debt. The ACL on held-to-maturity debt securities is adjusted through provision for credit losses and is recorded as a contra asset to held-to-maturity debt securities. Management has determined that calculating an ACL amount for accrued interest receivable on held-to-maturity debt securities would not be significant, and this is excluded from our estimate of credit losses for held-to-maturity debt securities.

Upon our January 1, 2023, CECL adoption, we recorded an increase to the ACL on loans held-for-investment of $604,000, established an ACL on unfunded commitments of $165,000, established an ACL on held-to-maturity investments of $38,000, recorded an increase to deferred tax assets of $153,000, and a corresponding one-time cumulative reduction to retained earnings, net of tax, of $654,000 in the consolidated balance sheet as of January 1, 2023.

The significant assumptions used in the models are independently verified against observable market data where possible. When observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on our judgment regarding the value that market participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, Also, there are inherent limitations to any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

For further information regarding the valuation of our financial instruments, see Note 1 – Summary of Significant Accounting Policies and Note 1516 - – Fair Value Information in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Pending Merger with CBOA Financial, Inc. Merger

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loansloans, investment securities, and interest-bearing investmentbank securities.balances. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, deposits, FHLB advancesand andFRB advances, as well as other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term, and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. Net interest spread spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin margin is calculated as the annualized net interest income divided by average interest-earning assets.

At December 31, 2024, and 2023, our ACL for loans held for investment was $10.2 million and $5.9 million, respectively, which represents 1.50% and 1.28% of loans held for investment, respectively. We maintain the ACL was $5.9 million, or 1.28% of loans held-for-investment, an increase of $1.1 million, or 23% when compared to the allowance for loan losses at December 31, 2022, which was based on an incurred loss model, not CECL. We maintain ACL at a level that management believes is adequate to absorb expected credit losses over the lifetime of the bank’sour loans held-for-investment. Specifically, identifiable and quantifiable losses are immediately charged off against the allowance; and recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.

The provision for credit losses, lossesfrom istime to time, includes a charge to earningsour operating results in order to maintain the ACL at a level consistent with management’s assessment assessment of the collectability of the loans held-for-investment in light of current economic conditions and market trends. Our provision for credit losses was,was $3.8 million and $4.2 million for 20232024 and $2.42023, respectively. The 2024 $3.8 million provision for 2022.credit Inloss expense primarily reflects the fourthmerger-related quarter$4.1 million charge for Non-PCD loans. The 2023 provision for credit losses reflects one problem credit which resulted in $3 million of 2023,provision wefor chargedcredit offlosses $3.4and million ofwas an outreflective of marketmanagement’s commercialbest estimate, at the time, of the real estate loanvalue whichunderlying accountedthis forone problem credit. The impact from our CECL adoption effective January 1, 2023, resulted in a largeone-time portionnet of theincome provisiontax expensecharge into 2023.retained The remaining loan balanceearnings of $3 million is categorized as OREO in our December 31, 2023, balance sheet. In the fourth quarter of 2022, we charged off $2.9 million of a commercial loan which led to higher provision expense in 2022.$654,000.

Our non-interest noninterest income increased $185,000$4.8 million to $730,000$5.6 million in 2023,2024, from $545,000$0.7 million in the prior year. The increase in noninterest income for 2023, 2024, compared to 2022,2023, was primarily due to the $5.0 million bargain purchase gain as a $99,000 increase in gains on salesresult of fixedthe assets,CBOA aMerger $41,000offsetting increasethe in serviceloss charges and fees and a $32,000 gain on salethe disposal of loansan inOREO 2023.parcel of $0.4 million.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Part I – Item 1A – Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities. Subject to the foregoing, there have been no material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 2023, except as otherwise disclosed herein.

The purpose of this discussion and analysis is to focus on significant changes in: (i) the financial condition of Bancorp 34, Inc. and our wholly owned subsidiary, Southwest Heritage Bank, from December 31, 2023, through JuneSeptember 30, 2024; and (ii) on our results of operations for the three and six nine months ended JuneSeptember 30, 2024, and 2023.2023, respectively. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10-Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.

Bancorp 34, headquartered headquartered in Scottsdale, Arizona, is the holding company for Southwest Heritage Bank (formerly Bank 34). On March 19, 2024, Bancorp 34 acquired CBOA Financial, Inc. (“CBOA”). Immediately following the acquisition, CBOA’s wholly-owned subsidiary, Commerce Bank of Arizona, was merged with and into Bancorp 34’s wholly-owned subsidiary, Bank 34, a federally chartered stock covered savings association association.(“the CBOA Merger”). Bank 34 was subsequently rebranded as Southwest Heritage Bank. Southwest Heritage Bank provides a variety of banking services to individuals and businesses through its eight full-service community bank branches, three in Maricopa County, Arizona, in the cities of Scottsdale and Gilbert; three in Pima County, Arizona, in the cities of Tucson and Green Valley; one branch in Otero County, New Mexico in the city of Alamogordo; and one branch in Dona Ana County New Mexico, in the city of Las Cruces.

We offer a full range range of relationship-focused services to meet our clients’ business and personal financial objectives, with branches in Arizona and New Mexico.objectives. Our product lines include commercial loans, commercial real estate loans, and a variety of commercial and consumer deposit products, including noninterest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We generate most of our income from interest income on loans, investment securities and deposits in other financial institutions, and service charges charges on customer accounts. We incur interest expenses on deposits and other borrowed funds and noninterestnon-interest expenses such as salaries and employee benefits, occupancy expenses, and technology expenses. Net interest income is the largest source of our revenue. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Our consolidated financial financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles, principles, or “GAAP,” and follow general practices within the banking industry. These policies require thereliance reliance on estimates, assumptions and judgments, which may prove inaccurate and are subject to variations. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the following as critical accounting estimates: (i) determination of the allowance for credit losses; (ii) determining the fair values of the net assets acquired and the fair value of the common stock consideration in connection with the CBOA Merger; (ii) determination of the allowance for credit losses; (iii) other fair value measurements; (iv) accounting for derivatives and hedging activities; and (ivv) estimating the effective tax rate for the Company for 2024 in full to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors.

The Company uses a 12-month forecast that is reasonable and supportable within the ACL calculation and then reverts to historical credit loss experience experience on a straight-line basis over a one-year timeline. Historical credit loss experience is then used for the remaining life of the assets. The Company uses several economic variables in the calculation of the ACL, the most significant of which is the economic forecast for the national unemployment rate. In our JuneSeptember 30, 2024, ACL estimate, the Company assumed a forecasted unemployment rate of 4.3%, 4.6%, which hasslightly improved from the December 31, 2023, forecasted rate of 4.7%. Changes in the economic forecast for unemployment rates could significantly affect the estimated credit losses which could potentially lead to materially different ACL levels from one reporting period to the next.

Qualitative adjustments adjustments to historical loss data are made based on management’s assessment of the risks that may lead to a future loan loss or differences in current loan-specific risk characteristics such as differences.characteristics. A ratings scale is used to tie risk metrics within lending policies and procedures, economic factors note encompassed in the quantitative model, changes in nature of the volumes and terms of loans, changes in the volume and severity of past due assets, and concentrations within the loan portfolio. Additional factors such staffing, loan review, collateral values, regulatory, legal, and technological risks are also reviewed on a more qualitative basis. The ratings scale used in the qualitative modeling is derived from the Bank’s historical loss percentages in which the highest risk metrics would align with the highest historical loss percentages adjusted for the expected life of the current portfolio.

The ACL also excludes excludes loans held-for-sale and loans accounted for under the fair value option. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is bookedrecorded directly to the ACL. Any subsequent changes changes in the ACL on PCD assets isare recorded through the provision for credit losses.

The ACL is a contra-asset contra-asset on our balance sheet that is deducted from the amortized cost of loans held-for-investment to present on our balance sheet the net amount expected to be collected. Loans are charged-offcharged off against the ACL when management believes the full or partial collectability non-collectability is confirmed.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Our held-to-maturity debt securities is comprised of bank subordinated debt. The ACL on held-to-maturity debt securities is adjusted through provision for credit losses and is recorded as a contra asset to held-to-maturity debt securities. Management has determined that calculating an ACL amount for accrued interest receivable on held-to-maturity debt securities would not be significant, and this is excluded from our estimate of credit losses for held-to-maturity debt securities.

Assets acquired, including including identified intangible assets such as core deposit intangibles, and liabilities assumed as a result of a merger or acquisition transaction transaction are recorded at their estimated fair values. The difference between the net fair value of assets acquired and liabilities assumed, and the consideration paid is recorded as a bargain purchase gain.gain or goodwill. Management engages third-party specialists to assist in the development of fair value estimates. Significant estimates and assumptions used to value acquired assets and liabilities assumed include, but are not limited to, projected cash flows, future growth rates, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within as part of the acquisition accounting. The allowance for credit losses for non-PCD assetsloans is recognized as provision for credit losses in the same reporting period as the merger or acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated lives of the acquired assets and assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of bargain purchase gain or goodwill recognized in connection with the merger or acquisition.

Preliminary estimates estimates of fair values may be adjusted for a period of time no greater than one year subsequent to the merger or acquisition date if new information is obtained about facts and circumstances that existed as of the merger or acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this measurement period are recognized in the current reporting period. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

The significant assumptions assumptions used in the models are independently verified against observable market data where possible. When observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on our judgment regarding the value that market participants would assign to the asset or liability. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally,Also, there are inherent limitations to any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

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 continuing as the surviving entity (“the “CBOA Merger”). Immediately following the completion of the CBOA Merger, CBOA’s wholly-owned wholly-owned subsidiary, Commerce Bank of Arizona, an Arizona state-chartered bank, was merged with and into the Bank, with the Bank continuing continuing as the surviving bank.

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

We accounted for the CBOA Merger using the acquisition method of accounting in accordance the Financial Accounting Standards Board’s Accounting Standards Code 805 (“ASC 805”), Business Combinations, and accordingly, the assets and liabilities of CBOA were recorded at their respective Mergermerger date fair values. The fair values of assets and liabilities are preliminary and subject to refinement for up to one year after the Mergermerger date as additional information relativerelated to the Mergermerger date fair values becomes available. Effective in March 2024, we recognized a preliminary bargain purchase gain of $5.1 million in connection with the CBOA Merger (not taxable for income tax purposes), which was recognized recognized in our first quarter 2024 operating results. The core deposit intangible asset of $8.9 million represents the estimated value of Commerce Bank of Arizona’s long-term deposit relationships with its customers and will be amortized over an estimated weighted average life of ten years using an accelerated method, which approximates the estimated run-off of the acquired deposits. Through June 30, 2024, Bancorp 34 incurred approximately $6.8 million of merger-related expenses, $414,000 of which was incurred during the second quarter of 2024. These amounts exclude pre-Merger date CBOA merger-related expenses.

For further information information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report Report on Form 10-Q.

Results of of Operations for the Three and SixNine Months Ended JuneSeptember 30, 2024, and 2023

Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans, investment securities and other short-term investments, and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent on our generation of non-interest income, consisting primarily of income from service charges on deposit accounts, interchange and ATM fees, and gains on sales of loans. Other factors contributing to our results of operations include our provisions for credit losses, income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy, amortization of intangible assets, and other operating costs.

We had net income of $1.5$1.6 million and $104,000a net loss of $2.3 million for the secondthird quarters endedof June 30, 2024,2024 and 2023, respectively. Our secondthird quarter 2024 net income reflects reflects the firstsecond full quarter thatinclusive reflectsof CBOA’s operating results and Merger costs of $414,000.results. Our net incomeloss for the second third quarter of 20232023, primarilyin large part, reflects: net(i) interesta income$3 million provision for credit losses related to a troubled commercial real estate credit; and (ii) $529,000 of $3.8 million, operating expenses of $3.8 million (including $766,000 of Mergermerger costs), and non-interest income of $228,000.costs.

For the sixnine months ended JuneSeptember 30, 2024, and 2023, we had net income of $1.5 million and a cumulative net loss of $34,000$1.7 andmillion, respectively. Our year-to-date 2024 net income is comprised of $549,000,pre-tax respectively.income Theof 2024$366,000 net lossand reflectsan theincome positivetax resultsbenefit fromof the$1.2 secondmillion. quarterNon-recurring noted above, substantially all offset by non-recurring material Merger-relatedmerger-related items also are reflected in our first quarteryear-to-date 2024 results, which includedinclude: (i) a one-time preliminary bargain purchase gain on the CBOA Merger of $5.1 $5 million (none of which is taxable); (ii) $3.8 million of Mergermerger expenses (a portion of which is not deductible for income taxes); and (iii) a Day-2 $4.1 million pre-tax non-PCD loan provision relatedfor tocredit losses in connection with the CBOA Merger. MergerWe costsalso expensedincurred a during$432,000 loss on the sixsale of other real estate owned in the 2024 period. Our $1.7 million net loss for the nine months ended September June 30, 2023, wereincludes $805,000.the $3 million provision for credit losses noted above and $1.3 million of merger expenses.

Our net interest income income was $9.0$8.4 million and $3.7 million for the secondthird quarter of 2024 and 2023, respectively. This $5.3$4.9 million increase reflects the full quarter inclusion of CBOA in our 2024 results, given the closing of the CBOA Merger on March 19, 2024, including $1.4 million $936,000 of accretion income on the CBOA loan fair value mark. Net interest income for the sixnine months ended JuneSeptember 30, 2024, and 2023, was $12.6$21 million and $7.9$11.6 million, respectively and this increase similarly reflects the positive impacts from the March 19, 2024, CBOA Merger with CBOA,Merger, including $1.6$2.6 million of accretion income on the CBOA loan fair value mark. The Company expects that easing of monetary policy by the Federal Reserve Bank, which commenced in late September 2024, will exert downward pressure on earning asset yields as interest bearing bank balances and variable rate commercial loans reprice lower. The expected decline in earning asset yields will be partially offset by deposit costs repricing lower.

Reflecting the positive positive impact of the CBOA Merger, average earning assets were $936.9$926.7 million and $582.3$581.9 million during the secondthird quarter of 2024 and 2023, respectively. Average earning asset yields in the secondthird quarter of 2024 and 2023 were 6.56%6.52% and 4.99%,5.15%, respectively and reflective of our loan portfolio repricing in the current interest rate environment.

Average interest-bearing liabilities in the secondthird quarter of 2024 of $657.9$614.0 million reflect the impacts of the March 2024 CBOA Merger. Average interest-bearing liabilities in the secondthird quarter of 2023 were $415.1$417.7 million. Unrelated to the CBOA Merger, the changing deposit mix reflects a continued increase in time deposits and the broader market trends in which customers have reduced non-interest- and interest-bearing demand deposits deposits in favor of term CDs given the rising bank depositinterest rate environment.

Average noninterest bearing deposits were $184.3$214.5 million and $93.7$91.5 million for the secondthird quarter of 2024 and 2023, and this increase reflects the CBOA Merger as previously described.

At JuneSeptember 30, 2024, 2024, and 2023, our ACL for loans held for investment was $10.8$10.5 million and $5.2$8.4 million, respectively, which represents 1.47% 1.52% and 1.09% 1.74% of loans held for investment, respectively. We maintain the ACL at a level that management believes is adequate to absorb expected credit losses over the lifetime of our loans held-for-investment. Specifically, identifiable and quantifiable losses are immediately charged off against the allowance; and recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off. Our ACL at March 31, 2024, and in connection the Merger, included: (i) a $4.1 million provision expense related to the performing loans, “Non-PCD” loans of $300 million; and (ii) a $1.2 million on-balance sheet gross up of loans identified as purchased credit deteriorated loans, “PCD” loans of $30 million. For more information on the Merger, Non-PCD loans, and PCD loans, please see Note 2 in our unaudited financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

The provision for credit losses, from time to time, includes a charge to our operating results in order to maintain the ACL at a level consistent with management’s assessment of the collectability of the loans held-for-investment in light of current economic conditions and market trends. Our provision for credit losses was $3.9 million and $133,000$3.3 million for the sixnine months ended JuneSeptember 30, 2024, and 2023, respectively. The 2024 $3.9 million provision for credit loss expense primarily reflects the Merger-relatedmerger-related $4.1 million charge for Non-PCD loans described above.loans. The relatively2023 provision lowfor credit losses reflects one problem credit which resulted in $3 million of provision for credit losslosses expenseand inwas reflective of management’s best estimate, at the first six monthstime, of 2023the reflects thereal estate value underlying this one problem credit. The impact from our CECL adoption effective January 1, 2023, which resulted in a one-time net of income tax charge to retained earnings of $654,000.

Our noninterest income income for the first sixnine months of 2024, primarily reflects a $5.0 million one-time preliminary bargain purchase gain, inclusive of a $118,000 reduction related to certain second quarter 2024 measurement period adjustments, partially offset by a $432,000 pre-tax loss on the sale of a note associated with a loan which was previously classified as other real estate owned. For further information regarding the CBOA Merger and the preliminary bargain purchase gain, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our noninterest expense increased $3.5$3 million in the secondthird quarter of 2024 from the secondthird quarter of 2023, and $8$11 million for the sixnine months ended JuneSeptember 30, 30, 2024, from the sixnine months ended JuneSeptember 30, 2023. Both of these increases reflect, in large part, the addition of CBOA to the Bank’s Bank’s operations as a result of the March 19, 2024, Merger,CBOA partially offset by $352,000 of lower Merger costs.Merger. Merger costs were nil in the second third quarter of 2024 are primarily relatedcompared to $529,000 in the digitalthird conversionquarter of the bank’s mobile and online banking platform which occurred in May.2023. Included within the $3.8 million of Mergermerger costs incurred during the sixnine months ended June September 30, 2024, is $1.2 million in core processing and online banking contract termination fees. Additionally, our sixnine months ended June September 30, 2024, noninterest expense includes a one-time change-in-control charge of $654,000, in connection with the MergerCBOA with CBOA.Merger. For the three and sixnine months ended June September 30, 20242024, and in connection with the CBOA Merger, we expensed $434,000$430,000 and $496,000,$926,000, respectively,respectively of amortization expense on the Merger-related merger-related core deposit intangible. For more information on the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our efficiency ratio was 80.15%76.15% and 93.64%90.69% for the three months ended JuneSeptember 30, 2024, and 2023, and was 87.64%83.90% and 89.59%90.84% the sixnine months ended June September 30, 2024, and 2023, respectively. This improvement is partially reflective of the March 19, 2024, CBOA Merger and related non-recurring,non-recurring material financial chargesimpacts in connection with the March 19, 2024,CBOA Merger. For more information on the CBOA Merger, see Note 2 in our unaudited consolidated financial financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Return on equityaverage assets and assetsaverage equity

The following table sets forth our ROAA, ROAE, dividend payout and average stockholders’ equity to average assets ratio for the periods indicated endedbelow:

We had a $1.7$1.2 million income tax benefit for the sixnine months ended JuneSeptember 30, 2024, on a$366,000 $1.7of millionpre-tax net loss.income. This relativelywas highprimarily effectivea incomeresult tax rate reflectsof two CBOA Merger-related items: (i) non-taxable preliminary bargain purchase gain of $5 million; and (ii) partially deductible Merger merger costs of $3.8 million. Our effective rate was 24.4%19.8% for the sixnine months ended JuneSeptember 30, 2023. For further information on income taxes, please reference Note 10 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our total assets were were $922.3$939.4 million at JuneSeptember 30, 2024, and $581.3 million at December 31, 2023. Our total loans held for investment were $735.5$703.1 million million at JuneSeptember 30, 2024, and $457.0$457 million at December 31, 2023. The increase in our total assets and total loans, respectively, largely largely reflects total assets, as adjusted for estimated fair values of $419.3 million, and total loans, as adjusted for estimated fair values, of $310.9,$310.9 million, which were acquired in connection with the CBOA Merger. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities in in our investment portfolio as of JuneSeptember 30, 2024, and December 31, 2023. All available-for-sale securities are carried at fair value value and may be used for liquidity purposes.

Our securities available-for-sale available-for-sale were $56.3$58.2 million and $56.7 million at JuneSeptember 30, 2024, and December 31, 2023, respectively. After the CBOA Merger date, management liquidated the entire $58.2acquired millionCBOA acquiredavailable-for-sale investment portfolio in late March and early April, and management determined determined that these sales prices were the best indicator of the fair value of the investmentCBOA available-for-sale-investment portfolio effective as of the CBOA Merger date. For further information regarding the CBOA Merger, see Note 2 in our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q.

Our loan portfolio represents a broad range of borrowersborrowers, primarily in our markets in Arizona and New Mexico, comprised of construction, commercial, commercial commercial real estate, residential real estate, and consumer financing loans.