See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

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

Alamogordo Financial Corp. (the “Company”) is a savings and loan holding company that owns 100% of Bank’34 (the “Bank”). On June 30, 2008, the Bank changed its name from Alamogordo Federal Savings and Loan Association to Bank’34. Alamogordo Financial Corp. was incorporated on April 30, 1997 and is a majority-owned subsidiary of AF Mutual Holding Company. As of June 30, 2015, AF Mutual Holding Company owned 54.7% of the Company's outstanding shares of common stock.

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 June 30, 2015 (unaudited) and for the three and six months ended June 30, 2015 and 2014 (unaudited) have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and predominant practices followed by the financial services industry. However, in management’s opinion, the interim data at June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial position and the results of operations in 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.

Effective December 31, 2014, the Company changed its fiscal year from the twelve months ended June 30 to the twelve months ended December 31.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s transition report on Form 10-KT for the period July 1, 2014 through December 31, 2014 as filed with the Securities Exchange Commission (“SEC”) on March 30, 2015.

The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico and Scottsdale and Peoria, Arizona. The Bank opened a loan production office in El Paso, Texas in early 2015.

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

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

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

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. All significant intercompany accounts and transactions have been eliminated.

Provision for Income Taxes – No provision for income tax expense or income tax benefits were recorded for the three and six months ended June 30, 2015 and 2014. The Company had pre-tax losses for 2014 and no income tax benefit was recorded due to the inability to project future taxable income as was considered necessary to ensure utilization of those benefits in the future. The Company had pre-tax income for 2015 and no provision for income tax (expense) was recorded due to net operating loss carry-forwards from prior periods available to offset that income.

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

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

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

Recent Accounting Pronouncements – 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 did not have a material impact on the Company's Consolidated Financial Statements.

NOTE 2 – BUSINESS COMBINATION

On August 29, 2014 (the “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 two 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 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 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.

A bargain purchase gain of $2.9 million was recognized in noninterest income during the quarter ended September 30, 2014, 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 each of the Company and Bank 1440 had 100% valuation allowances against their net deferred tax assets and neither had been imputing tax benefits or expense on current income due to past years net operating losses. The following tables provide the purchase price calculation as of the acquisition date and the identifiable assets purchased and the liabilities assumed at their estimated fair value.

Bank 1440’s results of operations are not included in the Company’s consolidated statements of comprehensive income (loss) for the three or six months ended June 30, 2014.

Merger-related charges of $100,000 and $576,000 were recorded in the Company’s consolidated statements of comprehensive income (loss) as noninterest expense for the six months ended June 30, 2015 and 2014, 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 and other costs. Core operating systems were converted in March 2015.

The following table provides the unaudited pro forma information for the results of operations for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 as if the acquisition had occurred January 1, 2014. 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. In addition, the merger expenses previously discussed are included in each period presented. The Company expects to achieve 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.

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.

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

Amortized cost and fair value of securities by contractual maturity as of June 30, 2015 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 available-for-sale securities at June 30, 2015 were as follows:

At June 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government, its agencies and U.S. Government-Sponsored Enterprises (GSEs) in an amount greater than 10% of stockholders’ equity.

At June 30, 2015, mortgage-backed securities included collateralized mortgage obligations of $6.5 million, which are backed by one-to-four 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. At June 30, 2015, 99% of the securities held by the Company were issued by U.S. Government-sponsored enterprises 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 June 30, 2015 or December 31, 2014.

Loans and securities of approximately $115.4 million at June 30, 2015 were pledged to secure FHLB advances. In addition, securities carried at approximately $3.2 million at June 30, 2015 were pledged to secure public deposits.

At June 30, 2015 and December 31, 2014, commercial real estate loans include construction loans of $14.7 million  and $13.0 million, respectively.

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:

The following is a summary of activities for the allowance for loan losses for the three and six months ended June 30, 2015 and 2014:

Nonperforming Assets – The following table presents an aging analysis of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. As of June 30, 2015 and December 31, 2014, all loans past due 90 days or more are no longer accruing interest.