ALAMOGORDO FINANCIAL CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - ALAMOGORDO FINANCIAL CORP	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - ALAMOGORDO FINANCIAL CORP	v393081_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - ALAMOGORDO FINANCIAL CORP	v393081_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - ALAMOGORDO FINANCIAL CORP	v393081_ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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 10^thStreet, 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 November 17, 2014 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 September 30, 2014 and June 30, 2014 (unaudited)	3

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2014 and 2013 (unaudited)	4

	Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2014 and 2013 (unaudited)	5

	Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2014 and 2013 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
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	37
Signatures		39

Item 1. Financial Statements

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2014			June 30, 2014

ASSETS
Cash and due from banks	$	4,298,519		$	9,367,899
Interest-bearing deposits with banks		4,600,467			577,861
Total cash and cash equivalents		8,898,986			9,945,760

Loans held for investment		163,274,765			92,642,550
Allowance for loan losses		(1,668,581	)		(1,644,550	)
Loans held for investment, net		161,606,184			90,998,000

Loans held for sale		9,920,256			10,278,801
Available-for-sale securities		53,837,520			38,958,910
Other real estate		820,000			836,888
Premises and equipment, net		10,178,688			9,979,320
Stock in financial institutions		1,602,935			648,235
Accrued interest receivable		755,368			476,962
Income taxes receivable		224,111			224,111
Bank owned life insurance		5,187,546			5,151,898
Core deposit intangible		492,792			-
Prepaid and other assets		443,806			286,531

TOTAL ASSETS	$	253,968,192		$	167,785,416

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits	$	19,152,688		$	13,926,745
Savings and NOW deposits		98,887,184			52,886,361
Time deposits		86,625,132			67,859,876
Total deposits		204,665,004			134,672,982

Federal Home Loan Bank advances		16,220,231			8,809,932
Escrows		377,146			266,409
Accrued interest and other liabilities		2,136,063			1,852,487
Total liabilities		223,398,444			145,601,810

Commitments and contingencies		-			-

Stockholders’ equity
Common stock, $0.10 par value; 20,000,000 shares authorized, 1,684,741 issued, 1,679,109 outstanding at September 30, 2014, 1,324,106 issued and 1,318,474 outstanding at June 30, 2014.		168,474			132,411
Additional paid-in capital		9,715,814			3,969,421
Retained earnings		21,860,775			19,135,293
Accumulated other comprehensive loss		(682,119	)		(549,627	)
Treasury stock, at cost; 5,632 shares		(139,332	)		(139,332	)
Unearned employee stock ownership plan (ESOP) shares		(353,864	)		(364,560	)
Total stockholders’ equity		30,569,748			22,183,606

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	253,968,192		$	167,785,416

See accompanying notes.

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended September 30,
	2014			2013

Interest income
Interest and fees on loans	$	1,772,820		$	1,513,351
Interest on securities		209,156			205,805
Interest on other interest-earning assets		5,462			4,253
Total interest income		1,987,438			1,723,409

Interest expense
Interest on deposits		260,162			262,424
Interest on borrowings		91,660			125,017
Total interest expense		351,822			387,441

Net interest income		1,635,616			1,335,968
Provision for loan losses		-			-

Net interest income after provision for loan losses		1,635,616			1,335,968

Noninterest income
Gain on sale of loans		976,248			573,379
Service charges and fees		50,804			48,592
Gain on sale and impairments of other real estate		-			1,329
(Loss) on sale of securities		-			(4,534	)
Bank owned life insurance income		35,648			39,158
Bargain purchase gain		2,898,847			-
Other		50,594			38,803
Total noninterest income		4,012,141			696,727

Noninterest expense
Salaries and benefits		1,561,595			1,269,383
Occupancy		323,257			287,541
Data processing fees		181,941			148,286
FDIC and other insurance expense		47,899			55,639
Professional fees		101,751			125,779
Merger-related expenses		311,441			126,413
Advertising		34,559			36,760
Net other real estate expenses		12,310			5,493
Other		347,522			204,728
Total noninterest expense		2,922,275			2,260,022

Income (loss) before income taxes		2,725,482			(227,327	)
Provision for income taxes		-			-

NET INCOME (LOSS)		2,725,482			(227,327	)

Other comprehensive loss
Unrealized loss on available-for-sale securities		(132,492	)		(1,639,555	)

COMPREHENSIVE INCOME (LOSS)	$	2,592,990		$	(1,866,882	)

Income (loss) per common share:
Basic	$	1.89		$	(0.17	)
Diluted	$	1.89		$	(0.17	)

See accompanying notes.

ALAMOGORDO FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

(Unaudited)

									Accumulated
									Other
			Additional						Comprehensive						Unearned			Total
	Common		Paid-In			Retained			Income			Treasury			ESOP			Stockholders'
	Stock		Capital			Earnings			(Loss)			Stock			Shares			Equity

BALANCE, JUNE 30, 2013	$	132,411	$	4,090,889		$	20,369,869		$	(511,443	)	$	(484,406	)	$	-		$	23,597,320

Net loss		-		-			(227,327	)		-			-			-			(227,327	)
Stock repurchases		-		-			-			-						-			-
Stock-based compensation		-		-			-						-			-			-
Unrealized loss on available-for-sale securities		-		-			-			(1,639,555	)		-			-			(1,639,555	)
Other		-		-			(21	)		-			-			-			(21	)

BALANCE, SEPTEMBER 30, 2013	$	132,411	$	4,090,889		$	20,142,521		$	(2,150,998	)	$	(484,406	)	$	-		$	21,730,417


BALANCE, JUNE 30, 2014	$	132,411	$	3,969,421		$	19,135,293		$	(549,627	)	$	(139,332	)	$	(364,560	)	$	22,183,606

Net income		-		-			2,725,482			-			-			-			2,725,482
Unrealized loss on available-for-sale securities		-		-			-			(132,492	)		-			-			(132,492	)
Issuance of common stock in merger		36,063		5,747,365															5,783,428
Amortization of ESOP award		-		(972	)		-			-			-			10,696			9,724

BALANCE, SEPTEMBER 30, 2014	$	168,474	$	9,715,814		$	21,860,775		$	(682,119	)	$	(139,332	)	$	(353,864	)	$	30,569,748

See accompanying notes.

ALAMOGORDO FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended September 30,
	2014			2013

Cash flows from operating activities
Net income (loss)	$	2,725,482		$	(227,327	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization		131,713			129,439
Stock dividend on financial institution stock		-			(600	)
Gain on sale and impairments of other real estate		-			(1,329	)
Amortization of premiums and discounts on securities, net		161,973			255,016
ESOP expense		9,724			-
Bargain purchase gain		(2,898,847	)		-
Loss on sale of available-for-sale securities		-			4,534
Gain on sale of loans		(976,248	)		(573,379	)
Proceeds from sale of loans held for sale		23,174,118			26,225,265
Funding of loans held for sale		(21,839,325	)		(23,726,691	)
Earnings on bank-owned life insurance		(35,648	)		(39,158	)
Changes in operating assets and liabilities:
Accrued interest receivable		80,228			(20,645	)
Prepaid and other assets		(11,079	)		(107,282	)
Accrued interest and other liabilities		(7,390	)		(44,953	)
Net cash (used for) provided by operating activities		514,701			1,872,890

Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities		1,528,602			2,997,145
Proceeds from sales of available-for-sale securities		-			1,942,834
Purchases of available-for-sale securities		-			(6,893,469	)
Net change in loans held for investment		(3,224,269	)		100,489
Purchases of premises and equipment		(4,653	)		(8,373	)
Redemption (purchases) of stock in financial institutions		(290,500	)		-
Net proceeds from sales of other real estate		16,888			170,817
Cash paid for acquisition		(3,804,414	)		-
Cash received for acquisition		2,208,730			-
Net cash provided by investing activities		(3,569,616	)		(1,690,557	)

Cash flows from financing activities
Net change in deposits		(5,512,895	)		(330,908	)
Net increase in escrows		110,737			94,888
Net increase in Federal Home Loan Bank advances		7,410,299			619,775
Net cash used for financing activities		2,008,141			383,755

Net increase (decrease) in cash and cash equivalents		(1,046,774	)		566,088

Cash and cash equivalents, beginning of period		9,945,760			4,216,296

Cash and cash equivalents, end of period	$	8,898,986		$	4,782,384

Supplemental disclosures:
Interest on deposits and advances paid	$	336,808		$	377,086
Income taxes paid (refund)	$	-		$	-
Noncash investing and financing activities:
Transfers of loans to other real estate	$	-		$	36,000
Sale and financing of other real estate	$	-		$	-

See accompanying notes.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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

Alamogordo Financial Corp. is a savings and loan holding company that owns 100% of BANK’34 (the “Bank”). On March 31, 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.

The Company completed its acquisition of Bank 1440 on August 29, 2014. Merger consideration was $9.6 million, including $3.8 million in cash and 360,635 shares of Alamogordo Financial Corp. common stock valued at $5.8 million. In the merger, the Company received assets valued at $88.3 million and assumed liabilities of $75.8 million. The transaction resulted in an increase in stockholders’ equity of $8.7 million, including $5.8 million due to the fair value of shares issued and the $2.9 million bargain purchase gain recorded in the consolidated statements of comprehensive income (loss).

The consolidated financial statements of the Company at September 30, 2014 (unaudited) and for the three months ended September 30, 2014 and 2013 (unaudited) have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and predominant practices followed by the financial services industry. However, in management’s opinion, the interim data at September 30, 2014 and for the three months ended September 30, 2014 and 2013 includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 as filed with the Securities and Exchange Commission (SEC) on August 29, 2014.

The Bank provides a variety of banking services to individuals and businesses through its four full-service branches in Alamogordo and Las Cruces, New Mexico and Phoenix and Peoria, Arizona.

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

The primary deposit products are demand deposits, certificates of deposit, NOW and money market accounts. The primary lending products are real estate mortgages and commercial loans. The Bank is subject to competition from other financial institutions and regulations by certain federal agencies and undergoes periodic examinations by these 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. Relative changes in interest rates occur when the Bank’s various assets and liabilities reprice causing unscheduled repayments of loans, early withdrawals of deposits and other factors.

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).

Basis of Consolidation – The consolidated financial statements include the accounts of Alamogordo Financial Corp. and the Bank (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Reclassifications – Certain reclassifications have been made to the 2013 financial information to conform to the 2014 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.

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, and valuation of other real estate.

Subsequent Events – Subsequent events have been evaluated through November 19, 2014 which is the date the consolidated financial statements were issued.

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This ASU provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 with early adoption permitted. Since the Company does not have any unrecognized tax benefits, the adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 2 – BUSINESS COMBINATION

On August 29, 2014 (“acquisition date”), the Company acquired 100% of the outstanding stock of Bank 1440, a state-chartered commercial bank headquartered in Phoenix, Arizona with approximately $88.3 million in assets at fair value and 2 branches. Bank 1440 shareholders received $0.94 in cash and 0.17064 shares of the Company’s common stock in exchange for each share of Bank 1440 common stock and Series A preferred stock, resulting in the Company issuing 360,635 shares of its common stock, subject to adjustment for cash paid in lieu of fractional shares. The acquisition resulted from a combination of expected synergies and the intent to expand business operations in Phoenix, Arizona.

The Bank 1440 transaction was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date. Per the applicable accounting guidance for business combinations, these fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

A provisional bargain purchase gain of $2.9 million was recognized in noninterest income, which is calculated as the excess of net identifiable assets acquired at $12.5 million over consideration transferred of $9.6 million. No tax benefit or expense was recognized on the fair market value adjustments since the Company and Bank 1440 both have 100% valuation allowances against their net deferred tax assets and neither has been imputing tax benefits or expense on current income due to past years net operating losses.

The following tables provide the preliminary purchase price calculation as of the acquisition date and the identifiable assets purchased and the liabilities assumed at their estimated fair value. These fair value measurements are provisional based on third-party valuations that are currently under review and are subject to refinement for up to one year after the acquisition date based on additional information obtained by management that existed as of the acquisition date.

	August 31,
Purchase Price	2014

Gross AFC Shares Issued on Exchange		360,635
Closing price per share of the Company's Common Stock	$	16.00

Stock Consideration (0.17064 ratio)	$	5,770,160

Option and Warrant consideration	$	1,298,629
20% Cash & Cash in Lieu		2,105,785
Dissenters Payments		400,000

Cash Consideration	$	3,804,414

Total purchase price	$	9,574,574

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Preliminary Statement of Net Assets Acquired at Fair Value:

ASSETS
Cash and due from banks	$	2,208,730
Available-for-sale securities		17,365,877
Loans held for investment, net		67,383,915
Premises and equipment, net		326,428
Core deposit intangible		502,000
Accrued interest receivable and other assets		482,354
Total Assets	$	88,269,304	$	88,269,304

LIABILITIES
Deposits	$	75,504,917
Federal Home Loan Bank Advances		-
Accrued interest and other liabilities		290,966
Total liabilities	$	75,795,883		(75,795,883	)

Net identifiable assets acquired			$	12,473,421

Total purchase price			$	(9,574,574	)

Bargain purchase gain			$	2,898,847

The operating results of the Company for the three month period ended September 30, 2014 include the operating results of the acquired assets and assumed liabilities subsequent to the Acquisition Date. The operations of Bank 1440 provided approximately $354,000 in interest income and approximately $80,000 in net income for the period from the Acquisition Date to September 30, 2014, ignoring purchase accounting fair value adjustment amortization. Bank 1440’s results of operations prior to the Acquisition Date are not included in the Company’s consolidated statements of comprehensive income (loss).

Merger-related charges of $311,000 and $126,000 were recorded in the Company’s consolidated statements of comprehensive income (loss) as noninterest expense for the three months ended September 30, 2014 and 2013, respectively, and include incremental costs to integrate the operations of the Company and Bank 1440. Such expenses were for professional services including legal fees, costs related to termination of existing contractual arrangements for various services including the write off of tenant improvements as a result of planned relocation of the Phoenix office, travel costs, printing, supplies and other costs. The integration of Bank 1440 into the Company continues to progress as scheduled. Core operating systems are expected to be converted in March 2015.

The following table provides the unaudited pro forma information for the results of operations for the three months ended September 30, 2014 and 2013 as if the acquisition had occurred July 1 of each year. These adjustments include the impact of certain purchase accounting adjustments including accretion of loan discounts, core deposit intangible amortization, fixed asset depreciation and deposit premium amortization as well as a bargain purchase gain of $2.9 million in August 2014. In addition, the merger expenses previously discussed are included in each period presented. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts. These unaudited pro-forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined corporation that would have been achieved had the acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Pro-Forma Results of Operations

	Three Months Ended September 30,
	2014		2013

Total revenue, net of interest expense	$	5,754,442	$	3,712,187
Net income		2,251,120		439,625

In many cases, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Bank 1440’s previously established allowance for loan losses.

All of the acquired loans were evaluated for evidence of credit quality deterioration and none were found to be accountable under ASC 310-30 (acquired impaired). All acquired loans are accounted for under ASC 310-20 (acquired non-impaired). The fair value of the acquired loans at the Acquisition Date was $67.4 million. The gross contractually required principal and interest payments receivable for acquired loans was $68.5 million.

The fair value of the investment securities acquired was approximately $17.4 million.

NOTE 3 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at September 30, 2014 and June 30, 2014. The carrying amount of such securities and their approximate fair values were as follows:

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

September 30, 2014
Available-for-sale securities
Mortgage-backed securities	$	35,312,062	$	130,830	$	(469,672	)	$	34,973,220
U.S. Government agencies		8,922,872		2,318		(291,852	)		8,633,338
Corporate bonds		4,238,709		3,812		(56	)		4,242,465
Municipal obligations		6,045,996		19,410		(76,909	)		5,988,497

	$	54,519,639	$	156,370	$	(838,489	)	$	53,837,520

June 30, 2014
Available-for-sale securities
Mortgage-backed securities	$	30,094,054	$	150,181	$	(425,084	)	$	29,819,151
U.S. Government agencies		9,105,345		-		(274,499	)		8,830,846
Corporate bonds		-		-		-			-
Municipal obligations		309,138		-		(225	)		308,913

	$	39,508,537	$	150,181	$	(699,808	)	$	38,958,910

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

	Three Months Ended September 30,
	2014		2013

Proceeds from sale	$	-	$	1,942,834
Losses, net	$	-	$	4,534

Amortized cost and fair value of securities by contractual maturity as of September 30, 2014 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. The mortgage-backed securities may mature earlier than their actual contractual maturities because of principal prepayments. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

The scheduled maturities of securities available-for-sale at September 30, 2014 were as follows:

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

	Available-for-Sale Securities
	Amortized		Fair
	Cost		Value

Due in one year or less	$	1,030,473	$	1,032,266
Due from one to five years		8,072,160		7,996,584
Due from five to ten years		8,025,282		7,830,285
Due after ten years		37,391,724		36,978,385

Totals	$	54,519,639	$	53,837,520

At September 30, 2014 and June 30, 2014, 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 September 30, 2014, mortgage-backed securities included collateralized mortgage obligations of $11.6 million, 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.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

	September 30, 2014
	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	$	9,492,549	$	(41,140	)	$	16,100,657	$	(428,532	)	$	25,593,206	$	(469,672	)
Government securities		-		-			7,746,034		(291,852	)		7,746,034		(291,852	)
Corporate bonds		1,089,355		(56	)		-		-			1,089,355		(56	)
Municipal obligations		3,619,345		(76,909	)		-		-			3,619,345		(76,909	)

Total temporarily impaired securities	$	14,201,249	$	(118,105	)	$	23,846,691	$	(720,384	)	$	38,047,940	$	(838,489	)

	June 30, 2014
	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	$	7,092,004	$	(144,288	)	$	15,296,013	$	(280,796	)	$	22,388,017	$	(425,084	)
Government securities		939,203		(3,258	)		7,891,643		(271,241	)		8,830,846		(274,499	)
Corporate bonds		-		-			-		-			-		-
Municipal obligations		308,913		(225	)		-		-			308,913		(225	)

Total temporarily impaired securities	$	8,340,120	$	(147,771	)	$	23,187,656	$	(552,037	)	$	31,527,776	$	(699,808	)

At September 30, 2014 and June 30, 2014, 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 Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014 and June 30, 2014.

Loans and securities carried at approximately $89.0 million at September 30, 2014 were pledged to secure FHLB advances. In addition, securities carried at approximately $2.8 million at September 30, 2014 were pledged to secure public deposits.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

NOTE 4 – LOANS HELD FOR INVESTMENT, NET

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

	September 30, 2014						June 30, 2014
	Amount			Percent			Amount			Percent

Loans held for investment, net:
Commercial real estate	$	118,257,314			72.2	%	$	55,103,109			59.3	%
Residential real estate		33,541,298			20.4	%		34,014,516			36.6	%
Commercial and industrial		7,335,838			4.5	%		2,786,992			3.0	%
Consumer and other		4,737,899			2.9	%		1,007,106			1.1	%
Total gross loans		163,872,349			100.0	%		92,911,723			100.0	%
Unamortized loan fees		(597,584	)					(269,173	)
Loans held for investment		163,274,765						92,642,550
Allowance for loan losses		(1,668,581	)					(1,644,550	)

Loans held for investment, net	$	161,606,184					$	90,998,000

At September 30, 2014 and June 30, 2014, commercial real estate loans include construction loans of $7.9 million and $4.8 million, respectively. Unamortized loan fees increased $328,000 in the quarter ended September 30, 2014 with $273,000 due to the addition of Bank 1440 deferred fees in the merger.

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 September 30, 2014
	Commercial		Residential		Commercial		Consumer and
	Real Estate		Real Estate		and Industrial		Other		Total

Allowance for loan losses
Ending balance: individually
evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively
evaluated for impairment		1,085,439		429,631		137,922		15,589		1,668,581

Total	$	1,085,439	$	429,631	$	137,922	$	15,589	$	1,668,581

Gross loans
Ending balance: individually
evaluated for impairment	$	4,448,291	$	521,473	$	16,795	$	520,096	$	5,506,655
Ending balance: collectively
evaluated for impairment		113,809,023		33,019,825		7,319,043		4,217,803		158,365,694
Total	$	118,257,314	$	33,541,298	$	7,335,838	$	4,737,899	$	163,872,349

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

	As of June 30, 2014
	Commercial		Residential		Commercial		Consumer and
	Real Estate		Real Estate		and Industrial		Other		Total

Allowance for loan losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment		1,125,650		374,476		129,309		15,115		1,644,550

Total	$	1,125,650	$	374,476	$	129,309	$	15,115	$	1,644,550

Gross loans
Ending balance: individually evaluated for impairment	$	326,958	$	-	$	16,795	$	-	$	343,753
Ending balance: collectively evaluated for impairment		54,776,151		34,014,516		2,770,197		1,007,106		92,567,970

Total	$	55,103,109	$	34,014,516	$	2,786,992	$	1,007,106	$	92,911,723

The following is a summary of activities for the allowance for loan losses:

	Three Months Ended
	September 30,
	2014			2013

Beginning balance	$	1,644,550		$	1,824,388
Provision for loan losses		-			-
Charge-offs:
Commercial real estate		-			-
Residential real estate		-			-
Consumer and other		(722	)		(357	)
Total charge-offs		(722	)		(357	)

Recoveries:
Commercial real estate		1,264			-
Residential real estate		23,089			-
Consumer and other		400			-
Total recoveries		24,753			-
Net recoveries (charge-offs)		24,031			(357	)

Ending balance	$	1,668,581		$	1,824,031

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Nonperforming Assets – The following table presents an aging analysis of the recorded investment of past due loans as of September 30, 2014 and June 30, 2014. 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 are no longer accruing interest.

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables
September 30, 2014
Commercial real estate	$	184,062	$	-	$	-	$	184,062	$	118,073,252	$	118,257,314
Residential real estate		-		41,570		-		41,570		33,499,728		33,541,298
Commercial and industrial		-		-		-		-		7,335,838		7,335,838
Consumer and other		-		-		-		-		4,737,899		4,737,899

Totals	$	184,062	$	41,570	$	-	$	225,632	$	163,646,717	$	163,872,349

June 30, 2014
Commercial real estate	$	162,403	$	-	$	-	$	162,403	$	54,940,706	$	55,103,109
Residential real estate		-		43,123		-		43,123		33,971,393		34,014,516
Commercial and industrial		-		-		-		-		2,786,992		2,786,992
Consumer and other		-		-		-		-		1,007,106		1,007,106

Totals	$	162,403	$	43,123	$	-	$	205,526	$	92,706,197	$	92,911,723

The following table sets forth nonaccrual loans and other real estate:

	September 30,			June 30,
	2014			2014

Nonaccrual loans
Commercial real estate	$	480,770		$	326,958
Residential real estate		111,009			99,209
Commercial and industrial		16,795			16,795
Consumer and other		-			-
Total nonaccrual loans		608,574			442,962
Other real estate (ORE)		820,000			836,888

Total nonperforming assets	$	1,428,574		$	1,279,850

Nonperforming assets to gross loans held for investment and ORE		0.87	%		1.37	%
Nonperforming assets to total assets		0.56	%		0.76	%

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at September 30, 2014 and June 30, 2014. 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.

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 a loan 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.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

	As of September 30, 2014
	Commercial		Residential		Commercial		Consumer and
	Real Estate		Real Estate		and Industrial		Other		Total

Grade
Pass	$	115,200,138	$	33,019,825	$	7,319,043	$	4,737,899	$	160,276,905
Special mention		574,808		-		-		-		574,808
Substandard		2,482,368		521,473		16,795		-		3,020,636
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Totals	$	118,257,314	$	33,541,298	$	7,335,838	$	4,737,899	$	163,872,349

	As of June 30, 2014
	Commercial		Residential		Commercial		Consumer and
	Real Estate		Real Estate		and Industrial		Other		Total

Grade
Pass	$	52,371,807	$	33,471,548	$	2,770,197	$	1,007,106	$	89,620,658
Special mention		853,708		-		-		-		853,708
Substandard		1,877,594		542,968		16,795		-		2,437,357
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Totals	$	55,103,109	$	34,014,516	$	2,786,992	$	1,007,106	$	92,911,723

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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 specific 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 specific allowance recorded.

	As of September 30, 2014
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	2,933,633	$	2,933,633	$	-	$	1,662,886
Residential real estate		111,009		111,009		-		37,003
Commercial and industrial		16,795		16,795		-		16,795
Consumer and other		520,096		520,096		-		173,365

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	2,933,633	$	2,933,633	$	-	$	1,662,886
Residential real estate		111,009		111,009		-		37,003
Commercial and industrial		16,795		16,795		-		16,795
Consumer and other		520,096		520,096		-		173,365

	As of June 30, 2014
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	326,958	$	326,958	$	-	$	341,606
Residential real estate		-		-		-		-
Commercial and industrial		16,795		16,795		-		23,866
Consumer and other		-		-		-		-

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	326,958	$	326,958	$	-	$	341,606
Residential real estate		-		-		-		-
Commercial and industrial		16,795		16,795		-		23,866
Consumer and other		-		-		-		-

During the three months ended September 30, 2014 and 2013, no interest income was recognized on these loans as interest collected was credited to loan principal.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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 September 30, 2014 and June 30, 2014.

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 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.

	Number of Modifications		Recorded Investment Pre-Modification		Recorded Investment Post-Modification		Principal Net of Charge-offs

September 30, 2014
Commercial real estate		4	$	3,167,739	$	3,308,672	$	2,702,533
Residential real estate		-		-		-		-
Commercial and industrial		1		99,040		113,053		16,795
Consumer and other		1		602,315		632,671		520,096

Totals		6	$	3,869,094	$	4,054,396	$	3,239,424

June 30, 2014
Commercial real estate		3	$	859,028	$	985,048	$	816,563
Residential real estate		-		-		-		-
Commercial and industrial		1		99,040		113,053		16,795
Consumer and other		-		-		-		-

Totals		4	$	958,068	$	1,098,101	$	833,358

Nonaccrual troubled debt restructurings as of September 30, 2014 and June 30, 2014 totaled $266,000 and $344,000, respectively. There were no commitments to lend additional amounts to these customers as of September 30, 2014 and June 30, 2014.

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, to assess repayment ability going forward.

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

In the normal course of business, the Bank has outstanding commitments to extend credit and 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.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

Financial instruments whose contractual amounts represent off-balance-sheet credit risk are as follows as of September 30, 2014 and June 30, 2014:

	September 30,		June 30,
	2014		2014

Commitments to originate and sell mortgage loans	$	9,235,370	$	9,311,118
Commitments to extend credit		27,060,172		19,286,473
Unused lines of credit		5,286,151		3,446,483
Standby letters of credit		100,236		144,560

Totals	$	41,681,929	$	32,188,634

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.

NOTE 6 – REGULATORY MATTERS

The Bank 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 September 30, 2014 and June 30, 2014, that 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 September 30, 2014, 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.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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 September 30, 2014:
(Dollars in thousands)

Total Capital (to Risk-Weighted Assets)	$	32,203		17.99	%	$	14,324		>8.00	%	$	17,905		>10.00	%

Tier I Capital (to Risk-Weighted Assets)	$	30,525		17.05	%	$	7,162		>4.00	%	$	10,743		> 6.00	%

Tier I Capital (to Average Assets)	$	30,525		12.02	%	$	10,159		>4.00	%	$	12,699		>5.00	%

As of June 30, 2014:
(Dollars in thousands)

Total Capital (to Risk-Weighted Assets)	$	23,739		23.89	%	$	7,948		³8.00	%	$	9,935		>10.00	%

Tier I Capital (to Risk-Weighted Assets)	$	22,492		22.64	%	$	3,974		³4.00	%	$	5,961		>6.00	%

Tier I Capital (to Average Assets)	$	22,492		13.36	%	$	6,734		³4.00	%	$	8,417		>5.00	%

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 September 30, 2014 and June 30, 2014.

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. 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 FHLMC. FHLMC quotes are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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

September 30, 2014
Recurring basis
Mortgage-backed securities	$	-		34,973,220		-		34,973,220
U.S. Government agencies		-		8,633,338		-		8,633,338
Corporate bonds		-		4,242,465		-		4,242,465
Municipal obligations		-		5,988,497		-		5,988,497
Nonrecurring basis
Loans held for sale		-		9,920,256		-		9,920,256
Other real estate		-		-		820,000		820,000
Impaired loans		-		-		3,581,533		3,581,533

Totals	$	-		63,757,776		4,401,533		68,159,309

June 30, 2014
Recurring basis
Mortgage-backed securities	$	-		29,819,151		-		29,819,151
U.S. Government agencies		-		8,830,846		-		8,830,846
Corporate bonds		-		-		-		-
Municipal obligations		-		308,913		-		308,913
Nonrecurring basis
Loans held for sale		-		10,278,801		-		10,278,801
Other real estate		-		-		836,888		836,888
Impaired loans		-		-		343,753		343,753

Totals	$	-		49,237,711		1,180,641		50,418,352

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.

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

The following tables present estimated fair values of the Company’s financial instruments at September 30, 2014 and June 30, 2014.

	September 30, 2014
					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
	(In thousands)
Financial assets:
Cash and due from banks	$	4,299	$	4,299	$	4,299	$	-	$	-
Interest-bearing deposits with banks		4,600		4,600	$	4,600		-		-
Available-for-sale securities		53,838		53,838		-		53,838		-
Loans held for sale		9,920		9,920		-		9,920		-
Loans held for investment, net		161,606		163,405		-		-		163,405
Stock in financial institutions		1,603		1,603		-		1,603		-

Financial liabilities:
Demand deposits and savings and NOW deposits	$	118,040	$	117,373	$	117,373	$	-	$	-
Time deposits		86,625		86,846		-		86,846		-
Federal Home Loan Bank advances		16,220		16,548		-		16,548		-

	June 30, 2014
					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
	(In thousands)
Financial assets:
Cash and due from banks	$	9,368	$	9,368	$	9,368	$	-	$	-
Interest-bearing deposits with banks		578		578	$	578		-		-
Available-for-sale securities		38,959		38,959		-		38,959		-
Loans held for sale		10,279		10,279		-		10,279		-
Loans held for investment, net		90,998		92,593		-		-		92,593
Stock in financial institutions		648		648		-		648		-

Financial liabilities:
Demand deposits and savings and NOW deposits	$	66,813	$	66,063	$	66,063	$	-	$	-
Time deposits		67,860		68,061		-		68,061		-
Federal Home Loan Bank advances		8,810		9,187		-		9,187		-

ALAMOGORDO FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and JUNE 30, 2014

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 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

Basic earnings (loss) per share have been calculated based upon the weighted-average number of common shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding. The calculation of diluted weighted-average shares outstanding for both 2014 and 2013 excludes 21,420 shares issuable pursuant to outstanding stock options because their effect would be anti-dilutive.

	Three Months Ended September 30,
	2014		2013

Net Income (loss)	$	2,725,482	$	(227,327	)

Weighted-average shares outstanding		1,443,903		1,304,526

Income (Loss) per common share:
Basic	$	1.89	$	(0.17	)
Diluted	$	1.89	$	(0.17	)

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

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section as of September 30, 2014 and for the three months ended September 30, 2014 and 2013 has been derived from the unaudited consolidated financial statements that appear elsewhere in this report. You should read the information in this section 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.

Merger

The Company completed its acquisition of Bank 1440 on August 29, 2014. Merger consideration was $9.6 million including $3.8 million in cash and 360,635 shares of Alamogordo Financial Corp. common stock valued at $5.8 million. In the merger, the Company received assets valued at $88.3 million and assumed liabilities of $75.8 million. The transaction resulted in an increase in stockholders’ equity of $8.7 million, including $5.8 million due to the fair value of shares issued and the $2.9 million bargain purchase gain recorded in the consolidated statements of comprehensive income (loss).

Further information regarding the merger transaction can be found in Note 2 of the Unaudited Consolidated Financial Statements in Item 1 of this document.

Average Balance Sheets

The following tables set forth average balances, average yields and costs, and certain other information at and 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.

	For the Three Months Ended September 30,
	2014							2013
	Average							Average
	Outstanding				Yield/			Outstanding				Yield/
	Balance		Interest		Rate (4)			Balance		Interest		Rate (4)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	123,013	$	1,773		5.72	%	$	93,263	$	1,513		6.44	%
Interest-earning deposits		9,486		5		0.21			6,219		4		0.26
Securities		44,169		208		1.87			55,091		205		1.48
Federal Home Loan Bank of Dallas stock		489		1		0.81			956		1		0.41
Other		206		-		0.00			-		-
Total interest-earning assets		177,363		1,987		4.44			155,529		1,723		4.40
Noninterest-earning assets		17,262							18,979
Total assets	$	194,625						$	174,508

Interest-bearing liabilities:
Checking, money market and savings accounts	$	68,837		94		0.54	%	$	51,433	$	60		0.46	%
Certificates of deposit		73,020		166		0.90			72,175		202		1.11
Total deposits		141,857		260		0.73			123,608		262		0.84
Borrowings		10,254		92		3.56			13,089		125		3.79
Total interest-bearing liabilities		152,111		352		0.92			136,697		387		1.12
Non-interest bearing deposits		15,027							12,902
Non-interest bearing liabilities		2,156							1,817
Total liabilities		169,294							151,416
Stockholders' equity		25,331							23,092
Total liabilities and stockholders' equity	$	194,625						$	174,508

Net interest income			$	1,635						$	1,336
Net interest rate spread (1)						3.52	%						3.28	%
Net interest-earning assets (2)	$	25,252						$	18,832
Net interest margin (3)						3.66	%						3.41	%
Average interest-earning assets to average interest-bearing liabilities						116.60	%						113.78	%

(1)

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.

(2)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(3)

Net interest margin represents net interest income divided by average total interest-earning assets.

(4)

Annualized.

Comparison of Financial Condition at September 30, 2014 and June 30, 2014

Total assets increased $86.2 million, or 51.4%, to $254.0 million at September 30, 2014 from $167.8 million at June 30, 2014. Assets increased $84.5 million due to the merger with Bank 1440 on August 29, 2014. Assets other than those acquired in the merger increased by $1.7 million, or 1.0%.

Since the largest changes in the balance sheet for the quarter ended September 30, 2014 were the result of the merger, the following table provides a summary of changes in the assets and liabilities separately identifying those changes due to the merger and all other changes:

				Change
	September 30,			Due to									June 30,
	2014			Merger			Other			Total			2014
	(Dollars in Thousands)
Summary Balance Sheet:

Cash and cash equivalents	$	8,899		$	(1,582	)	$	535		$	(1,047	)	$	9,946
Loans held for investment, net		163,275			67,384			3,248			70,632			92,643
Allowance for loan losses		(1,669	)		-			(24	)		(24	)		(1,645	)
Loans held for sale		9,920			-			(359	)		(359	)		10,279
Available-for-sale securities		53,838			17,366			(2,487	)		14,879			38,959
Other assets		19,705			1,310			792			2,102			17,603
Total Assets	$	253,968		$	84,478		$	1,705		$	86,183		$	167,785

Deposits	$	204,665		$	75,505		$	(5,513	)	$	69,992		$	134,673
Borrowings		16,220			-			7,410			7,410			8,810
Other liabilities		2,513			291			103			394			2,119
Total Liabilities	$	223,398		$	75,796		$	2,000		$	77,796		$	145,602

Stockholders' Equity	$	30,570		$	8,682		$	(295	)	$	8,387		$	22,183

Total Liabilities and Stockholders' Equity	$	253,968		$	84,478		$	1,705		$	86,183		$	167,785

The $1.6 million decrease in cash and cash equivalents due to merger was caused by the $3.8 million cash portion of merger consideration paid less the $1.3 million option and warrant consideration paid by Bank 1440 just prior to the merger, partially offset by the addition of the $0.9 million of cash and cash equivalents held by Bank 1440 on the merger date. The $8.7 million addition to stockholders equity in the table above in the “Due to Merger” column includes the $5.8 million estimated fair market value of shares issued to former stockholders of Bank 1440 in the merger (the stock consideration) and the $2.9 million bargain purchase gain recorded in the income statement. For further information regarding the merger, see Note 2 – Business Combination in Part I of this report.

The $1.7 million increase in total assets not due to the merger was due primarily to an increase in loans held for investment, net, partially offset by a decrease in available-for-sale securities, each of which is discussed in more detail below.

Available for sale securities other than from the merger, decreased $2.5 million in the quarter ended September 30, 2014 as the Company allowed mortgage-backed securities to pay down to reduce the portfolio in order to maintain liquidity for funding merger and potential growth in loans held for investment.

Loans held for investment, net, increased $70.6 million in the quarter ended September 30, 2014 including $67.4 million acquired in the merger and $3.2 million from organic growth. Major changes in the mix of loans from June 30, 2014 to September 30, 2014 included an increase in commercial real estate loans from 59.3% to 72.2% of the gross loan portfolio and a decrease in residential real estate loans from 36.6% of the portfolio to 20.5%. The changes in our loan portfolio were primarily due to the acquisition of these types of loans in the merger.

Deposits other than deposits acquired in the merger decreased $5.5 million in the quarter ended September 30, 2014. Due to the merger and other deposit changes in the quarter, time deposits as a percent of total deposits decreased from 50.4% at June 30, 2014 to 42.3% at September 30, 2014 and savings and now account balances increased from 39.3% to 48.3%, respectively. In the recent past the Company has allowed non-core certificates of deposit to run off at maturity to improve our deposit mix and reduce our cost of funds.

Borrowings increased $7.4 million during the quarter, to $16.2 million at September 30, 2014 from $8.8 million at June 30, 2014. Short term FHLB advances at favorable rates were used to maintain liquidity for merger funding purposes and to assist in funding loan growth during the quarter. We did not acquire any borrowings in the merger.

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

General. Since the merger was consummated on August 29, 2014, income for the quarter ended September 30, 2014 includes two months without and one month with the operating results of Bank 1440.

We generated net income of $2,725,000 in the three months ended September 30, 2014 compared to a net loss of $227,000 for the three months ended September 30, 2013. In the September 2014 quarter a bargain purchase gain of $2.9 million was recorded. Out-of-pocket merger-related expenses were $311,000 in the quarter ended September 30, 2014, an increase of $185,000 over the $126,000 incurred in the quarter ended September 30, 2013. Other than the bargain purchase gain and merger-related expenses, the Company had $138,000 in net income in the quarter ended September 30, 2014 compared to a loss of $101,000 in the quarter ended September 30, 2013.

Interest Income. Interest income increased $264,000, or 15.2%, to $2.0 million for the three months ended September 30, 2014 from $1.7 million for the three months ended September 30, 2013.

Most of the increase in interest income was due to interest and fees on loans which increased $260,000, or 17.2%, to $1.8 million for the three months ended September 30, 2014, from $1.5 million for the three months ended September 30, 2013 due to the increase in loans from the merger and, to a lesser extent, organic loan portfolio growth as noted above. The increase in interest and fees on loans was due primarily to the increase in average balances, which increased $29.7 million, or 31.9%, to $123.0 million for the three months ended September 30, 2014 from $93.3 million for the three months ended September 30, 2013. This was partially offset by the 72 basis point decrease in our average loan yield to 5.72% for the three months ended September 30, 2014 from 6.44% for the three months ended September 30, 2013, due primarily to a decrease in market rates on new originated loans and principal payments on older higher yielding loans. The average interest rates on loans acquired in the merger were somewhat higher than those already in our portfolio.

Interest on securities increased $3,000, or 1.5%, to $208,000 for the three months ended September 30, 2014 from $205,000 for the three months ended September 30, 2013 as the securities acquired from the merger replaced the balances the Company had been allowing to decline through normal monthly payments. The average balance of securities was $44.2 million for the quarter ended September 30, 2014 compared to $55.1 million in 2013. The increase in interest income on securities resulted from a higher yield, which more than offset the lower average balance. Our average yield on securities increased by 39 basis points to 1.87% for the three months ended September 30, 2014 from 1.48% for the three months ended September 30, 2013. The average interest rates on securities acquired in the merger were higher than those already in our portfolio.

Interest Expense. Interest expense decreased $35,000, or 9.0%, to $352,000 for the three months ended September 30, 2014 from $387,000 for the three months ended September 30, 2013.

The decrease was primarily caused by a decrease in interest expense on borrowings which decreased $33,000, or 26.7%, to $92,000 for the three months ended September 30, 2014 from $125,000 for the three months ended September 30, 2013 due to decreases in both the average balance and rate. The average balance of borrowings decreased $2.8 million, or 22%, to $10.3 million for the three months ended September 30, 2014 from $13.1 million for the three months ended September 30, 2013. The average rate paid on borrowings decreased 23 basis points to 3.56% for the three months ended September 30, 2014 from 3.79% for the three months ended September 30, 2013. We reduced borrowings gradually from $13.9 million on September 30, 2013 to $8.8 million on August 31, 2014, and then borrowed $7.5 million in low-rate, short-term FHLB advances in September 2014 due to loan demand and the cash requirements of the merger. No borrowings were assumed in the merger.

Interest expense on deposits decreased $2,000, or 0.9%, to $260,000 for the three months ended September 30, 2014 from $262,000 for the three months ended September 30, 2013. Interest paid on certificates of deposit decreased $36,000, or 17.8%, to $166,000 for the three months ended September 30, 2014 from $202,000 for the three months ended September 30, 2013. The average rate we paid on certificates of deposit decreased 21 basis points to 0.90% for the three months ended September 30, 2014 from 1.11% for the three months ended September 30, 2013 and the average balance increased $845,000, or 1.2%, to $73.0 million for the three months ended September 30, 2014 from $72.2 million for the three months ended September 30, 2013.

Net Interest Income. Net interest income increased $299,000 to $1.6 million for the three months ended September 30, 2014 compared to $1.3 million in the quarter ended September 30, 2013 due to higher average interest-earning assets in the three months ended September 30, 2014 as a result of the merger and the impact of a 26 basis point increase in our interest rate spread to 3.52% from 3.28%.

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 allowance for loan losses is larger than necessary, we post a negative provision, 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.

After an evaluation of these factors, we made no provision for loan losses for the three months ended September 30, 2014 or 2013.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate. 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 $3.3 million, or 475.9%, to $4.0 million for the three months ended September 30, 2014 from $697,000 for the three months ended September 30, 2013. The bargain purchase gain from the merger in 2014 accounted for $2.9 million of the increase. In addition, gain on sale of loans increased $403,000, or 70.3%, to $976,000 for the three months ended September 30, 2014 from $573,000 for the three months ended September 30, 2013. We sold $21.6 million of mortgage loans and $1.6 million of SBA loans during the three months ended September 30, 2014, compared to sales of $25.7 million of mortgage loans and no sales of SBA loans during the three months ended September 30, 2013. We realized a more attractive average premium (gain on sale/sold loans) on mortgage loan sales for 2014. The premium increased to 3.2% of mortgage loans sold for 2014, compared to 2.2% for 2013. 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.

Noninterest Expense. Noninterest expense increased $662,000, or 29.3%, to $2.9 million for the three months ended September 30, 2014 from $2.3 million for the three months ended September 30, 2013. Salaries and benefits were $1.6 million for the three months ended September 30, in 2014, an increase of $292,000 over the three months ended September 30, 2013, due primarily to the expense related to the Bank 1440 personnel for the month of September 2014 and higher commissions on loans originated for sale. Out-of-pocket merger-related expenses (including legal fees) related to our merger with Bank 1440 during the three months ended September 30, 2014 were $311,000, an increase of $185,000 over the $126,000 incurred in the three months ended September 30, 2013. Other expense in the quarter ended September 30, 2014 was $348,000, an increase of $143,000 over the quarter ended September 30, 2013, due primarily to increases in loan related expenses and the additional expenses from Bank 1440 operations for September 2014.

Income Tax Expense. Due to past and recent pre-tax losses incurred, and the inability to project future taxable income, no income tax expense or income tax benefits were recorded in the quarters ended September 30, 2014 and 2013.

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 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. In addition to the assets listed below, as of September 30, 2014 and June 30, 2014 we had $3.0 million and $489,000, respectively, of accruing troubled debt restructurings. All of the $2.5 million increase in troubled debt restructurings was due to loans designated as such from Bank 1440 acquired in the merger. 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. The troubled debt restructurings as of September 30, 2014 consisted of four commercial real estate loans, one commercial and industrial loan and one consumer loan and the troubled debt restructurings as of June 30, 2014 consisted of three commercial real estate loans and one commercial and industrial loan. As of September 30, 2014 and June 30, 2014, there were no specific reserves related to these loans, and at each date we had no commitments to lend additional amounts to the customers.

	September 30,			June 30,
	2014			2014

Nonaccrual loans
Commercial real estate	$	480,770		$	326,958
Residential real estate		111,009			99,209
Commercial and industrial		16,795			16,795
Consumer and other		-			-
Total nonaccrual loans		608,574			442,962
Other real estate (ORE)		820,000			836,888

Total nonperforming assets	$	1,428,574		$	1,279,850

Nonperforming assets to gross loans held for investment and ORE		0.87	%		1.37	%
Nonperforming assets to total assets		0.56	%		0.76	%

The nonperforming asset ratios decreased due primarily to the increase in total loans resulting from the merger. Bank 1440 had no nonaccrual loans as of the merger date.

Interest income that would have been recorded for the three months ended September 30, 2014, had nonaccruing loans been current according to their original terms amounted to $14,000. Of such amounts, $8,000 is related to troubled debt restructurings. We recognized no interest income on these nonaccrual loans for the three months ended September 30, 2014.

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.

Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

Loans secured by commercial real estate and multi-family real estate generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate and multi-family real estate are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property that is generally more marketable and whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

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

	Three Months Ended
	September 30,
	2014			2013

Beginning balance	$	1,644,550		$	1,824,388
Provision for loan losses		-			-
Charge-offs:
Commercial real estate		-			-
Residential real estate		-			-
Consumer and other		(722	)		(357	)
Total charge-offs		(722	)		(357	)

Recoveries:
Commercial real estate		1,264			-
Residential real estate		23,089			-
Consumer and other		400			-
Total recoveries		24,753			-
Net recoveries (charge-offs)		24,031			(357	)

Ending balance	$	1,668,581		$	1,824,031

The allowance for loan losses to nonaccrual loans coverage ratio decreased from 371% at June 30, 2014 to 274% at September 30, 2014 due to a 37% increase in nonaccrual loans; however, the ratio of nonaccrual loans to total gross loans decreased from 0.48% at June 30, 2014 to 0.37% at September 30, 2014. The allowance for loan losses to total loans ratio decreased from 1.77% at June 30, 2014 to 1.02% at September 30, 2014. These ratios were affected by the acquisition of $67.4 million in loans in the merger that were recorded at fair value and are not eligible for inclusion in the allowance for loan loss computations. Bank 1440’s allowance for loan loss was eliminated in the merger as required in business combinations under GAAP.

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, 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- and long-term liquidity needs as of September 30, 2014.

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 September 30, 2014, cash and cash equivalents totaled $8.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $53.8 million at September 30, 2014. In addition, at September 30, 2014, we had the ability to borrow an additional $72.3 million from the Federal Home Loan Bank of Dallas. On that date, we had $16.2 million of advances outstanding.

At September 30, 2014, we had $27.1 million in loan commitments outstanding, and an additional $9.2 million in commitments to originate and sell mortgage loans. In addition to commitments to originate loans, we had $5.3 million in unused lines of credit and $0.1 million of commitments issued under standby letters of credit. Certificates of deposit due within one year as of September 30, 2014 totaled $46.4 million, or 23% 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 September 30, 2015. 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.

Our primary investing activities are the origination of loans and the purchase of securities. In the three months ended September 30, 2014 and 2013, we originated $27.9 million and $32.5 million, respectively, of loans, and purchased $0 and $6.9 million, respectively, of securities. 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 a net increase in total deposits of $70.0 million primarily due to the merger for the three months ended September 30, 2014 and a decrease of $331,000 for the three months ended June 30, 2013. 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.

Federal Home Loan Bank advances increased by $7.4 million and $620,000 for the three months ended September 30, 2014 and 2013, respectively. We used short term advances to cover funding needs in the September 2014 quarter due to the cash consideration used in the merger and to provide liquidity following post-merger deposit withdrawals.

BANK’34 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 September 30, 2014, BANK’34 exceeded all regulatory capital requirements. BANK’34 is considered “well-capitalized” under regulatory guidelines.

Off Balance-Sheet Arrangements

See Note 5 – Financial Instruments with Off-Balance Sheet Risk in Part I of this report.

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 President and Chief Executive Officer and the Senior 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 and Exchange Act of 1934, as amended) as of September 30, 2014. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2014, 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.

Item 6. Exhibits

3.1

Charter of Alamogordo Financial Corp. (1)

3.2

Bylaws of Alamogordo Financial Corp. (1)

3.3

Amendment to Bylaws of Alamogordo Financial Corp (2)

31.1

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

31.2

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

32.1

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

101

The following financial statements from the Alamogordo Financial Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income (Loss); (iii) Consolidated Statements of Changes in 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 Exhibit 3 to the Current Report on Form 8-K (file no. 000-29655) filed with the SEC on October 20, 2014.

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:	November 19, 2014	/s/ Jill Gutierrez
		Jill Gutierrez
		President and Chief Executive Officer

Date:	November 19, 2014	/s/ Jan R. Thiry
		Jan R. Thiry
		Senior Vice President and Chief Financial Officer

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