PART II AND III 2 filename2.htm

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An offering statement pursuant to Regulation A relating to these securities has been filed with the United States Securities and Exchange Commission (the “Commission”). Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Offering Circular was filed may be obtained.

 

PRELIMINARY OFFERING CIRCULAR DATED SEPTEMBER 15, 2017

 

 

Purchase One Share of Common Stock for Every Two Shares Owned
at $7.25 Per Share
(1)

 

We are offering for sale up to 1,362,906 shares of our common stock on a “best efforts” basis by distributing, at no charge to our stockholders, non-transferable subscription rights to purchase all 1,362,906 of such shares as described further below, in addition to a related over-subscription privilege. The purchase price is $7.25 per share. Subscription rights will be distributed to persons who owned shares of our common stock as of 5:00 p.m., Mountain Time, on [·], 2017, the record date for the rights offering. There is no minimum purchase requirement and we are not required to sell any minimum number of shares in this offering. We will not escrow your subscription funds. See “TERMS OF THE OFFERING.”

 

Although our common stock is quoted on the OTC-Pink (symbol “SLRK”), there has been a limited trading market in our common stock and it is not anticipated that an active market will develop as a result of this offering. See “RISK FACTORS” and “MARKET INFORMATION AND DIVIDEND POLICY AND RELATED MATTERS.” As of September 6, 2017, the last reported sales price of our common stock was $8.10.

 

Investing in our common stock involves risks. See “RISK FACTORS” beginning on page 14.

 

The United States Securities and Exchange Commission (the “Commission”) does not pass upon the merits of or give its approval to any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.

 

Neither the Commission nor any states securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this offering circular. Any representation to the contrary is a criminal offense.

 

The shares of common stock offered hereby are not deposits and are not insured by the FDIC or any other governmental agency. The shares of common stock may not be used as collateral to secure a loan from Solera National Bank and loans from Solera National Bank may not be used to purchase this stock.

 

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Per Share

 

Total(2)

 

 

 

 

 

 

 

Offering Price

 

$

7.25

 

$

9,881,068

 

Underwriting Discounts and Commissions(1)

 

$

 

$

 

Proceeds to Us from this Offering to the Public (Before Expenses)

 

$

7.25

 

$

9,881,068

 

 


(1 )This offering is not underwritten. We are offering the shares of common stock directly to the public through our officers and directors without the services of an underwriter or selling agent. Our officers and directors will not receive any discounts or commissions for selling any shares, but may be reimbursed for reasonable expenses they incur, if any.

 

(2 )Represents the maximum proceeds from the sale of all 1,362,906 shares at $7.25 per share before deduction of estimated offering expenses of $50,000.

 

The date of this offering circular is [·], 2017

 

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TABLE OF CONTENTS

 

ABOUT THIS OFFERING CIRCULAR

4

 

 

FORWARD-LOOKING STATEMENTS

4

 

 

QUESTIONS AND ANSWERS RELATING TO THE OFFERING

5

 

 

WHERE YOU CAN FIND MORE INFORMATION

9

 

 

OFFERING SUMMARY

10

 

 

SUMMARY FINANCIAL DATA

12

 

 

RISK FACTORS

14

 

 

TERMS OF THE OFFERING

30

 

 

USE OF PROCEEDS

32

 

 

PLAN OF DISTRIBUTION

33

 

 

MARKET INFORMATION AND DIVIDEND POLICY AND RELATED MATTERS

33

 

 

CAPITALIZATION

35

 

 

BUSINESS

36

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

44

 

 

DIRECTORS AND EXECUTIVE OFFICERS

67

 

 

EXECUTIVE OFFICER AND DIRECTOR COMPENSATION

69

 

 

RELATED PARTY TRANSACTIONS

70

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

70

 

 

DESCRIPTION OF CAPITAL STOCK

71

 

 

LEGAL MATTERS

73

 

 

EXPERTS

73

 

 

INDEX TO FINANCIAL STATEMENTS

74

 

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ABOUT THIS OFFERING CIRCULAR

 

You should rely only on the information contained in this offering circular. Solera National Bancorp, Inc. (the “Company”) have not authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this offering circular is accurate only as of the date hereof. The Company’s business, financial condition, results of operations and prospects may have changed since that date.

 

The offering statement that contains this offering circular (including the exhibits to the offering statement) contains additional information about us and the securities offered under this offering circular. That offering statement can be read at the Commission’s website or at the Commission’s offices mentioned under the heading “Where You Can Find More Information.”

 

Unless otherwise indicated or unless the context requires otherwise, all references in this offering circular to “we,” “us,” “our” or similar references mean the Company and its wholly owned subsidiaries.

 

FORWARD-LOOKING STATEMENTS

 

Certain of the statements contained in this offering circular may constitute “forward-looking statements” within the meaning of the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “would,” “endeavor,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “potential,” “plan,” “predict,” “project,” “seek,” “should,” “will” or the negative of such terms and other similar words and expressions of future intent. These forward-looking statements are subject to certain known and unknown risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 

·            significant volatility and deterioration in the credit and financial markets; and adverse changes in general economic conditions;

 

·            deterioration in our asset or credit quality, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets;

 

·            inflation and changes in the interest rate environment (including changes in the shape of the yield curve) that reduce our margins or the fair value of financial instruments;

 

·            fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

 

·            the availability of capital;

 

·            changes in laws or government regulations affecting financial institutions, including changes in regulatory costs and capital requirements, as well as changes in monetary and fiscal policies;

 

·            the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

 

·            our ability to attract and retain deposits and loans in view of increased competitive pressures and other factors;

 

·            further increases in premiums for deposit insurance;

 

·            our ability to control general operating costs and expenses;

 

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·            the soundness of other financial institutions;

 

·            the potential for regulatory action against us or our wholly owned bank subsidiary, Solera National Bank (the “Bank”), which could require us to increase our allowance for loan losses, write down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

 

·            environmental conditions, including natural disasters, or the impacts of war or terrorist attacks, any of which may disrupt our business, our operations or our borrowers;

 

·            the failure or security breach of computer systems on which we depend;

 

·            the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other changes in laws, regulations, and accounting rules, or their interpretations;

 

·            general economic or business conditions in Colorado, including but not limited to adverse changes in economic conditions resulting from a prolonged economic downturn;

 

·            our ability to enter new markets successfully and capitalize on growth opportunities;

 

·            changes in consumer spending, borrowing and savings habits;

 

·            changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board;

 

·            other risks that are described in this offering circular under “RISK FACTORS;” and

 

·            our ability to manage the risks involved in the foregoing.

 

The statements under “RISK FACTORS” and other sections of this offering circular address additional facts that could cause our actual results to differ from those set forth in the forward-looking statements. We caution investors not to place significant reliance on the forward-looking statements contained in this offering circular.

 

Because of these and other uncertainties, our actual future results, performance or achievements, or industry results, may be materially different from the results contemplated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Please take into account that forward-looking statements speak only as of the date of, and are based on our beliefs and assumptions as of the date of this offering circular. We do not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise. We qualify all of our forward-looking statements by these cautionary statements.

 

QUESTIONS AND ANSWERS RELATING TO THE OFFERING

 

What is the rights portion of the offering?

 

We are distributing at no charge, to holders of our shares of common stock, non-transferable subscription rights to purchase shares of our common stock at a price of $7.25 per share, as described below. You will receive subscription rights to purchase one share for every two shares of common stock you owned as of 5:00 p.m., Mountain Time, on [·], 2017, the record date. The subscription rights entitle the holder to exercise these subscription rights as well as an over-subscription privilege, both of which are described below.

 

What are the subscription rights?

 

The subscription rights give our stockholders the right to purchase a specified number of shares of our common stock at a subscription price of $7.25 per share. We have granted to you, as a stockholder of record as of 5:00 p.m., Mountain Time, on [·], 2017, subscription rights to purchase one share of our common stock for every two shares of our common stock you owned on that date. We will not issue fractional shares through the exercise of the subscription rights, and any fractional share interests resulting from the exercise of the subscription rights will be

 

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eliminated by rounding down to the nearest whole share. For example, if you owned 99 shares of our common stock on the record date, you would receive subscription rights to purchase 49 shares of common stock for $7.25 per share, and if you choose to exercise your subscription rights in full, you would receive a total of 49 shares. You may exercise all or a portion of your subscription rights or you may choose not to exercise any subscription rights at all. However, if you exercise less than your full subscription rights, you will not be entitled to purchase any additional shares by using your over-subscription privilege.

 

If you are a “registered” stockholder, i.e., hold your stock directly in certificate form, the number of shares you may purchase pursuant to your subscription rights is indicated on the enclosed stockholder subscription agreement. If you should lose your stockholder subscription agreement, we have a record of all subscription rights and can send you a duplicate if time permits. If you hold your shares in the name of a custodian bank, broker, dealer or other nominee, the rights will be issued to the nominee record holder. If you are not contacted by your custodian bank, broker, dealer or other nominee, you should contact your nominee as soon as possible.

 

What is the over-subscription privilege?

 

Stockholders who hold subscription rights are also being given an over-subscription privilege in the offering to purchase up to an additional one share for every two shares owned as of [·], 2017. If you wish to purchase more shares than are covered by your subscription rights, you may subscribe for shares pursuant to this over-subscription privilege, at the same purchase price of $7.25 per share. You should indicate on your subscription agreement how many additional shares you would like to purchase pursuant to your over-subscription privilege.  In totality between your subscriptions rights and your over-subscription rights, you may subscribe for up to the total number of shares that you currently own.

 

Unlike the subscription rights, however, the over-subscription privilege does not entitle you to purchase any specific number of shares. We reserve the right to allocate shares and to accept such subscriptions in our sole discretion, and to reject any such subscription, in whole or in part. We will notify you as soon as practicable after the close of the rights portion of the offering whether and to what extent your subscription has been accepted.

 

In order to properly exercise your over-subscription privilege, you must deliver the subscription payment related to your over-subscription privilege at the time you deliver payment to exercise your subscription rights. We will not know the actual number of unsubscribed shares prior to the expiration of the rights offering, so if you wish to maximize the number of shares you purchase pursuant to your over-subscription privilege, you will need to deliver full payment for the maximum number of shares you wish to purchase under your over-subscription privilege.

 

Am I required to exercise all of the subscription rights I receive in the rights offering?

 

No. You may exercise any portion of your subscription rights, or you may choose not to exercise any subscription rights. However, if you do not exercise your subscription rights in full, your ownership interest will be diluted as a result of the stock offering. See “RISK FACTORS.”

 

How soon must I act to exercise my subscription rights?

 

In order to exercise any or all of your subscription rights or your over-subscription privilege, you must make sure that we receive your completed and signed subscription agreement and payment prior to 5:00 p.m., Mountain Time, on December 31, 2017. This deadline applies both to your subscription rights and to your over-subscription privilege. If you hold your shares in the name of a custodian bank, broker, dealer or other nominee, your nominee may establish a deadline prior to 5:00 p.m., Mountain Time, on December 31, 2017, by which you must provide it with your instructions to exercise your subscription rights and payment for your shares. Our board of directors may, in its discretion, extend the rights offering without notice to subscribers, and may cancel or amend the rights offering at any time. In the event that the rights offering is cancelled, all subscription payments received will be returned promptly, without interest or penalty.

 

Although we will make reasonable attempts to provide this offering circular to holders of subscription rights, the rights offering and all subscription rights will expire at 5:00 p.m., Mountain Time, on December 31, 2017 (unless extended), whether or not we have been able to locate each person entitled to subscription rights.

 

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May I transfer my subscription rights?

 

No. The subscription rights are non-transferable.

 

Is there a minimum purchase requirement to participate in the rights offering?

 

No. There is no individual minimum purchase requirement.

 

Are there any limits on the number of shares I may purchase?

 

Yes. The maximum total number of shares you may subscribe for, between the subscription and the over-subscription rights is the equivalent of the number of shares you owned as of 5:00 pm, Mountain Time, on [·], 2017.  Additionally, we reserve the right to allocate the over-subscription shares and to accept over-subscriptions in our sole discretion, and to reject any over-subscription, in whole or in part.

 

How do I exercise my subscription rights if I am a registered stockholder?

 

If you hold your shares directly in certificate form and wish to participate in the rights offering, you must deliver a properly completed and signed subscription agreement, together with payment in full, to us before 5:00 p.m., Mountain Time, on December 31, 2017. In certain cases, you may be required to provide additional documentation or signature guarantees.

 

Please follow the delivery instructions in the subscription agreement. You are solely responsible for completing delivery to us of your subscription documents and payment. We urge you to allow sufficient time for delivery of your subscription materials to us so that they are received by us and all funds have cleared by 5:00 p.m., Mountain Time, on December 31, 2017.

 

If you send a payment that is insufficient to purchase the number of shares you requested, or if the number of shares you requested is not specified in the forms, we will apply your payment to exercise your subscription rights to the fullest extent possible based on the amount of the payment received, subject to the availability of shares under the over-subscription privilege and the elimination of fractional shares.

 

What form of payment is required to purchase the shares?

 

As described in the instructions accompanying the subscription agreement, payments submitted to us must be made in full United States currency by check, ACH or wire transfer:

 

·                  Make check payable to “Solera National Bancorp, Inc. Stock Offering Account.”

 

·                  Wire transfer funds to:

Bankers Bank of the West
ABA# 102003743
1099 18
th St., Suite 2700
Denver, CO 80202
For Credit To:  Solera National Bank, Account No. 1001891, Attention:  [INSERT YOUR NAME HERE] Stock Purchase

·                  ACH funds to:

Bank Name:  Solera National Bank

Routing No.: 107007281

Account Name:  [INSERT YOUR NAME HERE] Stock Purchase

Account No.:  2012368

 

Please remember that in order for us to accept payments by the expiration date, the funds for such payments must have cleared by that date. If you plan to use a personal check, please bear this in mind and send in your subscription so that we receive it at least five business days prior to the expiration date to allow the funds to clear.

 

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What should I do if I want to participate in the rights offering, but my shares are held in the name of a custodian bank, broker, dealer or other nominee?

 

If you hold your shares of common stock through a custodian bank, broker, dealer or other nominee, then your nominee is the record holder of the shares you own. If you are not contacted by your nominee, you should contact your nominee as soon as possible. Your nominee must exercise the subscription rights on your behalf for the shares of common stock you wish to purchase. You will not receive a subscription agreement. Please follow the instructions of your nominee. Your nominee may establish a deadline that may be before the December 31, 2017 expiration date that we have established for the rights offering.

 

After I send in my subscription agreement and my payment, may I cancel my subscription or my exercise of subscription rights?

 

No. Once you submit the subscription agreement and your payment, you will not be allowed to revoke your subscription or request a refund of monies paid. All subscriptions are irrevocable, even if you learn information about us that you consider to be unfavorable. Therefore, you should not submit a subscription agreement unless you are certain that you wish to purchase shares of our common stock.

 

What fees or charges apply if I purchase shares of the common stock in the rights offering?

 

We are not charging any fee or sales commission to issue subscription rights or shares to you, other than the subscription price. If you exercise your subscription rights or purchase shares through a custodian bank, broker, dealer or other nominee, you are responsible for paying any fees your nominee may charge you.

 

How does a “best efforts” offering work?

 

When shares are offered to the public on a “best efforts” basis, we are only required to use our best efforts to sell our common stock. No party has a firm commitment or obligation to purchase any of our common stock.

 

May I make an investment through my IRA or other tax-deferred retirement account?

 

Generally, yes. We currently accept investments through IRAs maintained with certain custodians.

 

What will you do with the proceeds from your offering?

 

We expect to use substantially all of the net proceeds from this offering (after paying or reimbursing offering expenses) for general corporate purposes, including broadening our business lines, funding organic growth, establishing new offices and recruiting additional teams. Until used for any of the foregoing purposes, we may invest the net proceeds in short-term securities or hold the net proceeds in deposit accounts in the Bank.

 

How long will this offering last?

 

We currently expect that this offering will remain open for investors until we raise the maximum amount being offered, unless terminated by us at an earlier time.

 

Has our board of directors made a recommendation to our stockholders regarding the rights offering or the purchase of shares in this offering?

 

No. Our board of directors is making no recommendation regarding your exercise of subscription rights. Persons who exercise subscription rights risk investment loss on new money invested. We cannot predict the price at which our shares of common stock will trade; therefore, we cannot assure you that the market price for our common stock will be above the subscription price or that anyone purchasing shares at the subscription price will be able to sell those shares in the future at the same price or a higher price. We urge you to make your decision based on your own assessment of our business, the rights offering and any public offering of unsubscribed shares. Please see “RISK FACTORS” for a discussion of some of the risks involved in investing in our common stock.

 

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When will I receive my new shares?

 

If you are currently a registered stockholder, i.e., you hold your stock directly in certificate form, we will send via electronic mail information about how to login to your account to view your statement of ownership for your new book-entry shares.  This information will be provided as soon as practicable after the close of the applicable portion of the offering. If you specifically request a stock certificate instead of book entry shares, we will accommodate your request. If you exercised subscription rights, your shares will be issued as soon as practicable after December 31, 2017, the rights expiration date, which date may be extended in our sole discretion. In addition, we reserve the right to have multiple closings of the offering should we determine this to be advisable in our sole discretion, in which case you will receive your shares shortly after the close of that portion of the offering during which you subscribed.

 

If your shares as of [·], 2017 were held by a custodian bank, broker, dealer or other nominee, you will not receive stock certificates or statements of ownership from us for your new shares. Instead, your nominee will be credited with the shares of common stock you purchase, according to the same timeframe as described above with respect to stock certificates.

 

Who can help answer my other questions?

 

If you have other questions regarding the Company, the Bank or the stock offering, please contact Melissa K. Larkin, EVP and Chief Financial Officer, at (303) 937-6423.

 

WHERE YOU CAN FIND MORE INFORMATION

 

The Company does not have a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and it is not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act. Accordingly, the Company does not file periodic documents and reports with the Commission. The historical financial statements of the Company are included elsewhere in this offering circular and the Offering Statement of which this offering circular is a part was filed electronically with the Commission. You may access the Commission’s web site at http://www.sec.gov. A copy of this offering circular as well as related subscription materials are also available on our website. Go to https://www.solerabank.com, click on “Investor Relations,” then “Shareholder Materials”, then “Documents”.

 

The Bank files call reports with the FDIC, all of which are available electronically at the FDIC’s web site at http://www.fdic.gov.

 

The Company’s Proxy Statement for its 2017 Annual Meeting of Shareholders and 2016 Annual Report to Shareholders are available electronically at https://www.solerabank.com/. Click on “Investor Relations,” then “Shareholder Materials”,  then “Documents”.  You may also request copies of these documents, as well as additional copies of this offering circular, at no cost by contacting us at the following address:

 

Solera National Bancorp, Inc.
319 South Sheridan Boulevard
Lakewood, CO 80226
Attention: Melissa K. Larkin
(303) 209-8600

 

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OFFERING SUMMARY

 

This offering summary highlights material information regarding our business and this offering that is not otherwise addressed in the “Questions and Answers About this Offering” section of this offering circular. Because it is a summary, it may not contain all of the information that is important to you. To understand this offering fully, you should read the entire offering circular carefully, including the “Risk Factors” section before making a decision to invest in our common shares.

 

Who We Are

 

Solera National Bancorp, Inc. is a bank holding company headquartered in Lakewood, Colorado. Solera National Bank has been our wholly owned subsidiary since our formation.  Our principal offices are located at 319 South Sheridan Boulevard, Lakewood, Colorado 80226. Our telephone number is (303) 209-8600, and our website address is www.solerabank.com. As of March 31, 2017, we had total assets of approximately $157.1 million; total deposits of approximately $128.0 million; loans, net of unearned fees of $103.5 million; and stockholders’ equity of $23.4 million.

 

The Company was incorporated in 2006 to organize and serve as the holding company for the Bank which opened for business on September 10, 2007. The Bank is a traditional, community, commercial bank with a specialized focus serving the diverse Denver Metro market.  The Bank currently operates one service location in Lakewood, Colorado.

 

We offer a broad range of commercial and consumer banking services to small and medium-sized businesses, licensed professionals and individuals who are particularly responsive to the personalized service that the Bank provides to its customers. We believe that local ownership and control allows the Bank to serve customers efficiently and effectively. The Bank competes on the basis of providing a personalized banking experience combined with a broad range of services, customized and tailored to fit the individual needs of its clients. The Company remains focused on executing its strategy since its inception of delivering prudent and controlled growth to efficiently leverage the Company’s capital and expense base with the goal of achieving sustained profitability.

 

As a community-oriented bank, we offer a wide array of personal, consumer and commercial services generally offered by a locally-managed, independently-operated bank. We provide a broad range of deposit instruments and general banking services, including checking, savings accounts (including money market demand accounts), certificates of deposit for both business and personal accounts; internet banking services, such as cash management and Bill Pay; telebanking (banking by phone); courier services and mobile banking.

 

Since we operate in Colorado, our operating results are significantly influenced by economic conditions in Colorado, particularly the health of the real estate market.  Additionally, we are subject to competition from other financial institutions and are impacted by fiscal and regulatory policies of the federal government as well as regulatory oversight by the Office of the Comptroller of the Currency, (the “OCC”).

 

The Company’s ultimate objective is to create stockholder value through its recognition as the premier community bank in Colorado. We are committed to running a lean and efficient organization that can execute on business decisions quickly.

 

The Company’s common stock is traded over-the-counter under the ticker symbol SLRK.

 

As of June 30, 2017, the Bank had 19 full-time equivalent employees.

 

Our Focus and Strategic Plan

 

The Bank is a community-oriented bank focused on serving the needs of the local community, including small businesses and business owners.

 

During 2016 we enjoyed significant increases in deposits and loans without having to raise our average cost of funds. Deposits increased by approximately $5.5 million during 2016 to $126.3 million at year end.

 

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While we have not expanded our geographic footprint since inception, we will continue to explore attractive opportunities, and to grow our loans and deposits through organic growth in our existing branch. Through technology improvements such as mobile banking, improved online banking services and remote deposit capture, we have been able to further expand our footprint without the added cost of additional physical locations. We believe it is prudent at this time to increase our capital in order to provide an additional capital cushion to support future growth, although we are currently well capitalized at both the bank and holding company levels.

 

Our business strategy over the next several years will be to continue to solidify market share with moderate growth in order to achieve improved efficiency through economies of scale.

 

Our Mission

 

Since inception, our mission has been to be a respected and stable provider of financial services to the diverse community in the Denver metropolitan area. Our primary objective as a community bank is to serve the financial needs of small businesses and individuals.

 

This Offering

 

Securities Offered

 

Up to 1,362,906 shares of common stock on a best efforts basis and non-transferable subscription rights to stockholders of record as of 5:00 p.m., Mountain Time, on [·], 2017. All 1,362,906 shares being offered are subject to stockholder subscription rights to purchase shares for $7.25 per share. Holders of subscription rights will also be entitled to subscribe for shares pursuant to an over-subscription privilege, at the same purchase price but with acceptance of such over-subscriptions being in our sole discretion.  

 

 

 

Offering Price Per Share

 

$7.25 per share.

 

 

 

Subscription Rights

 

The subscription rights will entitle you to purchase one share of our common stock for every two shares you owned as of the record date, at a subscription price of $7.25 per share; however, fractional shares resulting from the exercise of the subscription rights will be eliminated by rounding down to the nearest whole share. You must own at least two shares as of the record date to be eligible to participate in the rights offering.

 

 

 

Over-subscription Privilege

 

We do not expect all of the subscription rights to be exercised. If you fully exercise your subscription rights, the over-subscription privilege entitles you to subscribe for additional shares of our common stock unclaimed by other holders of rights in this offering at the same subscription price of $7.25 per share. Subscriptions received pursuant to the over-subscription privilege will be accepted by us, in whole or in part, in our sole discretion.

 

 

 

Record Date for Subscription Rights

 

5:00 p.m., Mountain Time on [·], 2017.

 

 

 

Minimum Investment

 

None

 

 

 

Common Stock Outstanding

 

As of [·], 2017 we had 2,725,813 shares of common stock outstanding, excluding 25,776 shares of treasury stock. Assuming the sale of all shares offered in the offering, we would have approximately 4,088,719 shares outstanding upon completion of the offering.

 

 

 

OTC-Pink Symbol

 

SLRK

 

 

 

Plan of Distribution

 

We are offering the shares on a “best efforts” basis through our directors and officers, who will not receive any discounts or commissions for selling such shares.  The shares are being offered to existing stockholders on a subscription rights basis.

 

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Participation of Directors and Executive Officers

 

Our executive officers and directors may purchase shares in the offering in their discretion, but they have made no commitments to do so. Our board of directors is not making a recommendation regarding your exercise of the subscription rights or purchase of shares in the offering. You should make your decision to invest based on your assessment of our business and the offering. Please see “Risk Factors” beginning on page 14 for a discussion of some of the risks involved in investing in our common stock.

 

 

 

How to Subscribe

 

To subscribe for shares of our common stock, complete the subscription agreement accompanying this offering circular and deliver it to us on or before the applicable expiration date, together with full payment for all shares subscribed for by certified check, bank check, personal check, wire transfer, ACH, or money order payable to the order of “Solera National Bancorp, Inc. Stock Offering Account.” Once you subscribe, your subscription is irrevocable.

 

 

 

Use of Proceeds

 

We intend to use the net proceeds from this offering to increase our capital and for general corporate purposes, including funding for loans and to support future growth, and enabling our subsidiary, the Bank, to continue to meet the applicable capital requirements. 

 

Expiration Date

 

Subscription rights and over-subscription privileges granted to existing stockholders will expire, if not exercised, by 5:00 p.m., Mountain Time, on December 31, 2017, unless this offering is terminated earlier or either date is extended without notice to subscribers.

 

 

 

Dividends

 

We have not historically paid any cash dividends to our stockholders. Our only source of income for cash dividends is dividends paid to us by the Bank. We intend to continue our current policy of retaining earnings to increase our net worth and reserves and accordingly do not anticipate paying any cash dividends for the foreseeable future. See “Market Information and Dividend Policy and Related Matters — Dividends.”

 

 

 

Best Efforts Offering

 

There is no minimum number of shares that must be sold in order to close this offering and accept your subscription.

 

 

 

Risk Factors

 

An investment in our common stock involves certain risks. You should carefully consider the risks described under “Risk Factors” beginning on page 14 of this offering circular, as well as other information included in this offering circular, including our financial statements and notes thereto, before making an investment decision.

 

SUMMARY FINANCIAL DATA

 

The following table sets forth selected historical financial data of Solera National Bancorp, Inc.  The selected historical financial data as of and for the years ended December 31, 2016 and 2015 is derived from Solera National Bancorp, Inc.’s audited financial statements.  The selected historical financial data as of March 31, 2017 and 2016 and for the three-month periods then ended are derived from Solera National Bancorp, Inc.’s unaudited interim financial statements, but Solera National Bancorp, Inc.’s management believes that such amounts reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of its financial position and results of operations as of the dates and for the periods indicated.  You should not assume that the results of operations for past periods and for any interim period indicate results for any future period.

 

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As of and for
the Three Months
Ended March 31,

 

As of and for the
Years Ended
December 31,

 

 

 

2017

 

2016

 

2016

 

2015

 

Statements of Operations Data:

 

 

 

 

 

 

 

 

 

Interest income

 

$

1,438

 

$

1,360

 

$

5,477

 

$

5,342

 

Interest expense

 

334

 

314

 

1,300

 

1,135

 

Net interest income

 

1,104

 

1,046

 

4,177

 

4,207

 

Provision for loan losses

 

 

 

 

(50

)

Net interest income after provision for loan losses

 

1,104

 

1,046

 

4,177

 

4,257

 

Noninterest income

 

55

 

242

 

522

 

745

 

Noninterest expense

 

841

 

834

 

3,781

 

3,224

 

Income before income taxes

 

318

 

454

 

918

 

1,778

 

Income tax (expense) benefit

 

(118

)

 

2,209

 

 

Net income

 

$

200

 

$

454

 

$

3,127

 

$

1,778

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.07

 

$

0.17

 

$

1.15

 

$

0.65

 

Tangible book value per share

 

$

8.52

 

$

7.54

 

$

8.39

 

$

7.18

 

Weighted average common shares outstanding, basic

 

2,723,062

 

2,723,062

 

2,723,062

 

2,722,473

 

Shares outstanding at end of period

 

2,753,588

 

2,752,839

 

2,753,588

 

2,773,839

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

Total assets

 

$

157,094

 

$

140,559

 

$

156,091

 

$

146,073

 

Investment securities

 

39,544

 

48,252

 

40,633

 

52,874

 

Gross loans, net of unearned fees

 

105,114

 

79,975

 

104,983

 

82,109

 

Allowance for loan losses

 

1,601

 

1,557

 

1,599

 

1,518

 

Deposits

 

128,043

 

114,299

 

126,325

 

120,839

 

Stockholders’ equity

 

23,400

 

20,815

 

23,072

 

19,837

 

 

 

 

 

 

 

 

 

 

 

Average Balance Sheet Data:

 

 

 

 

 

 

 

 

 

Total assets

 

$

154,897

 

$

141,847

 

$

146,107

 

$

140,738

 

Investment securities

 

40,718

 

51,021

 

45,335

 

48,633

 

Gross loans, net of unearned fees

 

104,474

 

81,817

 

91,891

 

83,231

 

Total deposits

 

128,940

 

117,597

 

120,623

 

115,288

 

Stockholders’ equity

 

21,546

 

18,682

 

19,468

 

17,684

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

Return on average assets

 

0.51

%

1.27

%

2.12

%

1.25

%

Return on average equity

 

3.44

%

8.93

%

14.42

%

9.12

%

Net yield on average earning assets

 

3.97

%

4.03

%

3.92

%

3.98

%

Efficiency ratio(1)

 

72.56

%

67.42

%

83.25

%

66.94

%

Average equity to average assets

 

14.84

%

14.18

%

14.73

%

13.71

%

Gross loans, net of unearned fees, to deposits

 

82.09

%

69.96

%

83.10

%

67.94

%

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

Nonperforming assets to total loans and foreclosed assets

 

%

%

%

%

Net charge-offs to average gross loans, net of unearned fees

 

(0.00

)%

(0.19

)%

(0.08

)%

(0.03

)%

Allowance for loan losses to gross loans

 

1.52

%

1.95

%

1.52

%

1.85

%

Allowance for loan losses to nonaccrual loans

 

N/A

 

N/A

 

N/A

 

1,159

%

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

Tier 1 leverage ratio

 

13.7

%

13.5

%

14.0

%

13.2

%

Tier 1 risk-based capital ratio

 

18.7

%

19.4

%

18.7

%

18.8

%

Total risk-based capital ratio

 

19.9

%

20.7

%

20.0

%

20.0

%

 

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RISK FACTORS

 

The following discussion details risks related to this offering and our common stock.  It is not intended to be an exhaustive list.

 

We are selling our securities on a “best efforts” basis and there is no minimum aggregate offering amount.

 

The shares are being offered on a “best efforts” basis. There is no requirement that we sell any particular number of shares. If we sell less than the full amount offered, the lesser amount sold would not necessarily help us fully accomplish our goals. See “Terms of the Offering” and “Use of Proceeds.”

 

As the offering is not underwritten, no underwriter has conducted an independent review to verify the statements we make in this offering circular.

 

Our offering is not underwritten. Thus, there has not been an independent “due diligence” review of matters covered by this offering circular, such as might be conducted by an underwriter had one been affiliated with this offering.

 

The offering price of our common stock has been determined independently by us and should not be considered as an indication of our present or future value.

 

The offering price of our common stock has been determined by our board of directors based on our general evaluation of our business and prospects and the current trading market for our common stock. However, we have not conducted a detailed marketing or feasibility study covering the pricing and terms of this offering, nor have we sought an independent third party valuation of our common stock. You should not consider the subscription price for the shares as an indication of our present or future value.

 

You may not be able to sell your shares at the times and in the amounts you want, as the trading market for our common stock is not active.

 

Shares of our common stock are not listed on any exchange or quoted by the Nasdaq Stock Market, although they are quoted on the OTC-Pink under the ticker symbol “SLRK.” The OTC-Pink is an electronic, screen-based market maintained and operated by the OTC Markets Group, which imposes considerably less stringent listing standards than does the Nasdaq. The volume of trading in our common stock is limited and does not constitute an active trading market, and it is not anticipated that a more active trading market will develop as a result of this stock offering. We do not expect to qualify for or seek a listing on any securities exchange in the foreseeable future. There can be no assurance that you will be able to sell your shares of common stock at any time in the future or at all, or that an active trading market will develop in the foreseeable future, if ever. See “Market Information and Dividend Policy and Related Matters — Trading History.”

 

The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock at times or at prices you find attractive.

 

The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock.

 

Among the factors that could affect our common stock price in the future are:

 

·                                          actual or anticipated quarterly fluctuations in our operating results and financial condition;

 

·                                          changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;

 

·                                          speculation in the press or investment community;

 

·                                          strategic actions by us or our competitors, such as acquisitions or restructurings;

 

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·                                          actions by stockholders;

 

·                                          fluctuations in the stock price, trading volumes, and operating results of our competitors;

 

·                                          general market conditions and, in particular, market conditions for the financial services industry;

 

·                                          proposed or adopted regulatory changes or developments;

 

·                                          regulatory action against us;

 

·                                          anticipated or pending investigations, proceedings, or litigation that involve or affect us; and

 

·                                          economic factors unrelated to our performance.

 

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility over the past several years. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of shares of our common stock also depends on many other factors which may change from time to time including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities and other factors identified elsewhere in this offering circular. The capital and credit markets have been experiencing volatility and disruption for several years, at times reaching unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength.

 

The Company has not paid cash dividends in the past and has no specific plans to pay cash dividends in the foreseeable future.

 

The Company has not paid cash dividends in the past and has no specific plans to declare cash dividends in the foreseeable future. Any decision to pay cash dividends will be made by the board of directors in its discretion based on a number of factors. See “Market Information and Dividend Policy and Related Matters — Dividends.”

 

There is limited public information concerning us and our business, operations and financial condition.

 

There is limited publicly available information about us. Our common stock is not registered, and we do not file quarterly, annual or other reports with the Commission under the Exchange Act. We provide investors with periodic financial and other information, but do not make periodic disclosures of the type that would be available if we were subject to the reporting requirements of the Exchange Act.

 

We are substantially reliant on the payment of dividends from our subsidiary, the Bank.

 

Our ability to meet debt service requirements and to pay dividends depends on the ability of our banking subsidiary to pay dividends to us, as we have no other significant source of income. However, the Bank is subject to regulations limiting the amount of dividends it may pay. For example, the payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the OCC. If (i) any capital ratio requirements are increased; (ii) the total risk-weighted assets of the Bank increase significantly; and/or (iii) the Bank’s income declines significantly, the Bank’s board of directors may decide or be required to retain a greater portion of the Bank’s earnings to achieve and maintain the required capital or asset ratios. This would reduce the amount of funds available for the payment of dividends by the Bank to us. Further, the OCC could prohibit the Bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices. The Bank’s ability to pay dividends to us is also limited by the national banking laws. While we have not historically and have no plans to pay cash dividends to our stockholders in the foreseeable future, whether any such dividends are paid, and the frequency and amount of such dividends will also depend on the financial condition and performance of the Bank and the decision of the Bank’s board of directors. Information concerning our dividend policy and historical dividend practices is set forth below under “Market Information and Dividend Policy and Related Matters — Dividends.”

 

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We may pursue additional capital in the future, which may not be available on acceptable terms or at all, could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock.

 

In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at relatively attractive prices present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot provide any assurance that such capital will be available to us on acceptable terms or at all. Any such capital raising alternatives could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock and our performance measures such as earnings per share.

 

Your investment may be diluted because of the ability of management to offer stock to others.

 

The shares of our common stock do not have preemptive rights. This means that you may not be entitled to buy additional shares if shares are offered to others in the future. We are authorized to issue 10,000,000 shares of common stock, and as of [•], 2017 we had 2,725,813 shares of our common stock outstanding, excluding treasury stock. Nothing restricts our ability to offer additional shares of stock for fair value to others in the future. Any issuances of common stock would dilute our stockholders’ ownership interests and may dilute the per share book value of our common stock.

 

Because we have discretion in the use of the proceeds, we may not apply these funds effectively which could have an adverse effect on our business.

 

We cannot specify with certainty the amounts we will spend on particular uses from the net proceeds we will receive from the offering. Our board of directors will have broad discretion in the application of the net proceeds. Our board of directors currently intends to use the net proceeds as described in “Use of Proceeds.” The failure by our board of directors to apply these funds effectively could have an adverse effect on our financial position, liquidity and results of operations by reducing or eliminating our net income from operations.

 

The offering may not be fully subscribed.

 

The rights offering is only being made to existing stockholders. However, there can be no assurance that all or any portion of the shares offered will be sold. To the extent that less than all of the shares offered are sold, we will have fewer funds for the uses described in “Use of Proceeds.”

 

Because we may terminate or cancel the offering at any time, your participation in the offering is not assured.

 

We may terminate or cancel the Rights Offering at any time before December 31, 2017 (or any extension thereof), for any reason. If the offering is terminated or cancelled for any reason, then we will not issue you any of the shares of common stock you may have subscribed for and we will not have any obligation with respect to the rights except to return any subscription price payments, as soon as practicable, without interest.

 

If you do not act promptly and follow the subscription instructions, then your exercise of rights may be rejected.

 

Stockholders who desire to purchase shares of common stock must act promptly to ensure that all required forms and payments are actually received before December 31, 2017 (or any extension thereof). If your shares are held through a broker, dealer, custodian bank or other nominee, as the record holder, then you must act promptly to ensure that your broker, dealer, bank or other nominee acts for you and that all required forms and payments are actually received by us before December 31, 2017. We will not be responsible if your broker, dealer, bank, financial institution or other nominee fails to ensure that all required forms and payments are actually received by us before December 31, 2017. If you fail to complete and sign the subscription agreement or the forms specified by your broker, dealer, custodian bank or other nominee, deliver an incorrect payment amount, pay by an unauthorized payment form, or otherwise fail to follow the subscription procedures that apply to your exercise of rights, then we may, depending on the circumstances, reject your subscription or accept it only to the extent of the payment

 

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received. We will not undertake to contact you concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment. We have the sole discretion to determine whether a holder of rights exercise follows the proper procedures. You bear the risk of delivery of all documents and payments, and we do not have any responsibility for such documents and payments.

 

You will not receive interest on subscription funds, including any funds ultimately returned to you.

 

You will not earn any interest on your payment of the subscription price while it is being held by us pending the closing of the offering. In addition, if we cancel the offering, we will have no obligation with respect to the rights except to return to you, without interest, any payment of the subscription price.

 

Our directors and executive officers control a large amount of our stock, and your interests may not always be the same as those of the board and management.

 

As of [·], 2017, our directors and executive officers together with their affiliates beneficially owned approximately 33% of the Company’s outstanding voting stock. As a result, if all of these stockholders were to take a common position, they could be able to affect the election of directors as well as the outcome of corporate actions requiring stockholder approval, such as the approval of mergers or other business combinations. Such concentration may also have the effect of delaying or preventing a change in control of our company. In some situations, the interests of our directors and executive officers may be different from the stockholders. However, our directors and executive officers have a fiduciary duty to act in the best interest of the stockholders, rather than in their own best interests, when considering a proposed business combination or any of these types of matters.

 

Our use of Form 1-A and our reliance on Regulation A for this offering may make it more difficult to raise capital as and when we need it, as compared to if we were conducting a traditional initial public offering on Form S-1.

 

Because of the exemptions from various reporting requirements provided to us under Regulation A and because we are only permitted to raise up to $20 million in any 12 month period under a Tier 1 - Regulation A offering (although we may raise capital in other ways), we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

 

Risks Related to Our Business

 

As a non-listed company conducting an exempt offering pursuant to Regulation A, we are not subject to a number of corporate governance requirements, including certain requirements relating to the board of directors or independent board committees.

 

As a non-listed company conducting an exempt offering pursuant to Regulation A, we are not subject to a number of corporate governance requirements that an issuer conducting an offering on Form S-1 or listing on a national stock exchange would be. Accordingly, we are not required to have: (i) a board of directors of which a majority consists of “independent” directors under the listing standards of a national stock exchange; (ii) an audit committee composed entirely of independent directors and a written audit committee charter meeting a national stock exchange’s requirements; (iii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting a national stock exchange’s requirements; (iv) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of a national stock exchange; or (v) independent audits of our internal controls. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of a national stock exchange.

 

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We rely heavily on our management and directors, and the unexpected loss of key individuals may adversely affect our operations.

 

We are, and for the foreseeable future will be, dependent on the services of key management personnel, particularly Martin P. May, the Company’s President and Chief Executive Officer and Melissa K. Larkin, the Company’s Chief Financial Officer. The loss of any of them, or any other key employee, could have a material adverse effect on the condition, financial or otherwise, and results of our operations. No assurance can be given that we would be able to find replacement personnel of comparable ability were this to occur. Currently, none of our executive officers is subject to an employment agreement with the Company or the Bank.

 

Additionally, our directors’ community involvement, diverse backgrounds and extensive local business relationships are important to our success. If the composition of our board of directors changes materially, our banking business could suffer.

 

Our growth strategy involves operation and acquisition risks which may negatively impact our profits.

 

We face risks in our growth strategy, including the risks that we will be unable to expand our business by internal growth or through the acquisition of other financial institutions, bank branches or other assets. Our ability to grow profitably through internal growth involves the risks that the growth depends primarily on our identifying attractive markets, attracting and retaining qualified management and acquiring or establishing branch locations in those markets at reasonable costs. In addition, we must attract the necessary deposits and locate quality loans in those markets, and must attract and have sufficient qualified personnel to operate the new locations.

 

Acquiring other financial institutions, bank branches or other assets involves these same risks, as well as additional risks, including:

 

·                                          adverse change in the results of operations of the acquired entities or assets;

 

·                                          unforeseen liabilities or asset quality problems of the acquired entities or assets;

 

·                                          greater than anticipated costs of integrating acquisitions;

 

·                                          retention of employees;

 

·                                          adverse personnel relations; and

 

·                                          loss of customers.

 

The risks discussed above, including not securing all necessary legal and regulatory approvals, may inhibit or restrict our strategy to grow through acquisition and branch expansion, negatively impact our revenue growth and ultimately reduce or eliminate profits.

 

Our pace of growth may require us to attempt to raise additional capital in the future, but sufficient capital may not be available when it is needed, if at all, or on terms acceptable to us.

 

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our regulators require that the Bank maintain a minimum Tier 1 leverage ratio and a minimum total risk-based capital ratio. There can be no assurance that we will be successful in maintaining such capital levels or that our regulators will not in the future increase capital requirements and thereby require us to raise additional capital.

 

We anticipate that our existing capital resources, including the net proceeds from this offering, will satisfy our immediately foreseeable capital requirements. However, to the extent we expand our asset base further, whether through organic growth or by acquisition, we will be required to support this growth by increasing our capital to acceptable regulatory levels. Accordingly, we may need to raise additional capital in the future to support continued asset growth. In addition, if we suffer operating losses, we may also need to raise capital to meet regulatory requirements.

 

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Our ability to raise additional capital if we need it to meet regulatory requirements or to support loan growth in the future will depend on, among other things, conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital when needed or on terms acceptable to us. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and our business. These restrictions could negatively impact our ability to further expand our operations through acquisitions or the establishment or acquisition of additional branches and will likely result in increases in operating expenses and reductions in revenues that would negatively affect our operating results.

 

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is unknown.

 

In 2013, the FDIC, the OCC and the Federal Reserve Board approved a new rule that substantially amends the regulatory risk-based capital rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

 

The final rule includes minimum risk-based capital and leverage ratios which became effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The minimum capital requirements to be considered “adequately capitalized” are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6.0%, which was increased from 4.0%; (iii) a total capital ratio of 8.0%, which was unchanged from the previous rules; and (iv) a Tier 1 leverage ratio of 4.0%. The final rule also established a “capital conservation buffer” of 2.5% above the regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum capital ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. The capital conservation buffer requirement began phasing in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. If an institution does not meet or exceed these minimum capital ratios it will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its buffer level falls below the required buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities.

 

The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as a prohibition on the payment of dividends, the payment of bonuses to employees or the repurchase of shares if we were unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to restructure our business models or increase our holdings of liquid assets. Implementation of changes in asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers could result in management modifying our business strategy.

 

The Company is currently subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (the “Policy Statement”). The Policy Statement provides that the Basel III capital rules and reporting requirements will not apply to a bank holding company with under $1 billion in assets that: (a) is not engaged in significant non-bank activities; (b) has no significant off-balance sheet activities conducted through a non-bank subsidiary; and (c) subject to certain limited exceptions, has no material amount of registered debt or equity securities outstanding. As of March 31, 2017, the Company had $157.1 million in consolidated assets and satisfied the other criteria described above, and so the holding company is not subject to the Basel III capital rules and reporting requirements, however; the Bank is subject to Basel III capital rules.

 

There can be no assurance, however, that the Company’s assets will not increase above $1.0 billion or that the Company will fail to satisfy one of the other conditions required for non-applicability of Basel III. The application of more stringent capital requirements for the Company could, among other things, result in lower returns on equity, require the raising of additional capital, or result in regulatory actions such as a prohibition on the payment of dividends, the payment of bonuses to employees or the repurchase of shares if the Company were unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in the Company having to restructure the Company’s business models, or increase the Company’s holdings of liquid assets. Implementation of changes in asset risk the weightings for risk-

 

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based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers could result in management modifying the Company’s business strategy.

 

We may not be successful in implementing our internal growth strategy due to numerous factors that affect earnings.

 

We intend to pursue an organic growth strategy, the success of which is dependent on our ability to generate an increasing level of loans and deposits at acceptable risk levels without incurring corresponding increases in noninterest expense. We may not be successful in our organic growth strategy due to, among other factors, delays in introducing and implementing new products and services and other impediments resulting from regulatory oversight, lack of qualified personnel, and scarcity of branch sites or deficient site selection of bank branches. Further, the success of our internal growth strategy will depend on maintaining sufficient regulatory capital levels and on favorable economic conditions in our primary market area.

 

We face intense competition in all phases of our business from other banks and financial institutions.

 

We compete for deposits with a large number of depository institutions including commercial banks, savings and loan associations, credit unions, money market funds and other financial institutions and financial intermediaries serving our market area. Principal competitive factors with respect to deposits include interest rates paid on deposits, customer service, convenience and location. We compete for loans with other banks headquartered in our market area, with loan production offices of large money center banks headquartered in other states, as well as with savings and loan associations, credit unions, finance companies, mortgage bankers, leasing companies and other institutions. Competitive factors with respect to loans include interest rates charged, customer service and responsiveness in tailoring financial products to the needs of customers. Many of the entities that we compete with are substantially larger in size, and have greater financial and human resources than we do. In addition, many non-bank financial intermediaries are not subject to the regulatory restrictions applicable to the Bank.

 

Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our stockholders.

 

We may enter into interest rate swap agreements or pursue other interest rate hedging strategies. Our hedging activity, if any, will continue to vary in scope based on the level of interest rates, the type of investments held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

 

·                  interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

 

·                  available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

 

·                  the duration of the hedge may not match the duration of the related liability or asset;

 

·                  the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

 

·                  the party owing money in the hedging transaction may default on its obligation to pay; and

 

·                  we may purchase a hedge that turns out not to be necessary, i.e., a hedge that is out of the money.

 

Any hedging activity we engage in may adversely affect our earnings. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall earnings than if we had not engaged in any such hedging transactions.

 

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We are subject to significant governmental regulation.

 

We are subject to extensive regulation and supervision, in particular by the Federal Reserve and the OCC. Any change in applicable regulations or federal or state legislation could have a substantial impact on us and our operations as well as those of any banks we may acquire in the future. Such changes in applicable laws or in their application by regulatory agencies cannot necessarily be predicted, although recently enacted, proposed and future legislation and regulations have had, and likely will continue to have, a significant impact on the banking industry. Some of the legislative and regulatory changes may benefit us while others may increase our costs of doing business, assist our competitors, or otherwise have an adverse effect on our financial condition, results of operations and cash flows. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power may have a negative impact on our financial position, results of operations and cash flows.

 

Our operations are also subject to a wide variety of state and federal consumer protection and similar statutes and regulations, including privacy regulations covering consumer financial information. Such federal and state regulatory restrictions limit the manner in which we may conduct business. Those laws and regulations can and do change significantly from time to time and any such change could adversely affect our business. See “Supervision and Regulation.”

 

Regulatory guidance and regulations on incentive compensation could adversely affect us.

 

In 2010, the federal bank regulators jointly issued final guidance on sound incentive compensation policies (“SICP”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging imprudent risk-taking. The SICP guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage employees to expose the organization to imprudent risk; (ii)be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any identified deficiencies in compensation practices may be incorporated into an organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The SICP guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management, control or governance processes pose a risk to the organization’s safety and soundness, particularly when the organization is not taking prompt and effective measures to correct the deficiencies. In February 2011, the federal financial regulators issued joint proposed regulations to implement the Dodd-Frank Act requirement that the federal financial regulators prohibit, at any financial institution with consolidated assets of at least $1 billion, incentive pay that they determine encourages inappropriate risks.

 

In May 2016 the federal regulatory agencies issued for public comment revised proposed rules as part of a joint rule-making effort designed to prohibit certain incentive-based compensation arrangements deemed to encourage inappropriate risk taking by covered financial institutions by providing “excessive” compensation, fees or benefits or that could lead to material losses. Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and retain qualified employees.

 

The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees.

 

Our access to liquidity may be negatively impacted due to circumstances beyond our control, and we may not be able to meet the cash flow requirements of our depositors and borrowers.

 

While we aim to actively manage our liquidity risk and maintain liquidity at least sufficient to cover forecasted funding requirements, our liquidity may be adversely affected by unforeseen or extraordinary demands on cash and

 

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our inability to access sources of deposits for the Bank. This situation may arise due to circumstances beyond our control.

 

Liquidity is the ability to meet current and future cash flow needs on a timely basis at a reasonable cost and is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our liquidity is used to make loans and to repay deposit liabilities as they become due or are demanded by customers. We regularly monitor our overall liquidity position to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Potential alternative sources of liquidity include the sale of loans, the acquisition of national market, non-core deposits, the issuance of additional collateralized borrowings such as Federal Home Loan Bank (“FHLB”) advances, access to the Federal Reserve Bank discount window and the issuance of additional equity securities. We also maintain a portfolio of securities that can be used as a secondary source of liquidity. If such sources are unavailable or are not available on reasonable terms, our financial condition, growth and future prospects could be adversely affected.

 

In addition, if the Bank is at a future date not considered “well capitalized” under applicable prompt corrective action statutes and regulations, it would be unable to roll over or renew brokered deposits or accept any new brokered deposits and would not be able to solicit deposits by offering interests rates higher than those permissible for brokered deposits without regulatory approval, thereby further limiting its access to liquidity.

 

Although we believe that the Bank currently has sufficient liquidity and access to sources of additional liquidity, there can be no assurance that such level of, and access to sources of, liquidity will be available to the Bank in the future.

 

Concern of customers over deposit insurance may cause a decrease in deposits.

 

Customers have become in recent years more concerned and aware about the extent to which their deposits are insured by the FDIC. As a result, customers may either withdraw deposits or elect not to increase their deposits in an effort to ensure that the amount they have on deposit with any one bank is fully insured. Decreases in deposits may adversely affect our funding costs and net income.

 

Our deposit insurance premiums could increase in the future, which could have a material adverse effect on our future earnings.

 

The FDIC insures deposits at certain financial institutions, including the Bank, and charges insured financial institutions a premium to maintain the Deposit Insurance Fund (the “DIF”) at a certain level. Economic conditions in recent years have increased bank failures, in which case the FDIC ensures payments of deposits up to insured limits from the DIF.

 

In 2011, the FDIC implemented new rules required by the Dodd-Frank Act with respect to the FDIC assessments. In particular, the definition of an institution’s deposit insurance assessment base was changed from total deposits to total assets less tangible equity. In addition, the FDIC revised the deposit insurance assessment rates down. The new initial base assessment rates range from 5 to 9 basis points for Risk Category I banks to 35 basis points for Risk Category IV banks. Risk Category II and III banks have an initial base assessment rate of 14 and 23 basis points, respectively. There can be no assurance that the FDIC will not increase assessment rates in the future or that the Bank will not be subject to higher assessment rates as a result of a change in its risk category, either of which could have an adverse effect on our earnings.

 

In addition, the FDIC may terminate an institution’s deposit insurance if it determines that the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.

 

Negative developments in the financial services industry and in the U.S. and global credit markets in recent years may continue to adversely impact our operations, financial condition and earnings.

 

Negative developments in the financial services industry from 2008 through 2011 resulted in uncertainty in the financial markets in general and an economic recession. As a consequence of the recession, businesses across a wide range of industries faced numerous challenges, including decreases in consumer spending, consumer confidence and

 

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credit market liquidity. While conditions have gradually improved, many of these circumstances continue to represent challenges and continue to create a degree of economic uncertainty. In addition, declining oil prices, the implementation, repeal or replacement of the employer mandate under the Patient Protection and Affordable Care Act and the level of U.S. debt may have a destabilizing effect on financial markets.

 

As a result of these financial and economic crises, many lending institutions, including us, experienced declines in the performance of their loans. In addition, the values of real estate collateral supporting many commercial loans and home mortgages declined and may decline again in the future. The ability of banks to raise capital or borrow in the debt markets became more difficult compared to previous periods. As a result, bank regulatory agencies have been and are expected to continue to be very aggressive in responding to concerns and trends identified in examinations. The impact of legislation enacted in response to these developments may negatively impact our operations by restricting our business operations, including the Bank’s ability to originate or sell loans, and adversely impact our financial performance.

 

Negative economic developments, including another recession, may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact the Bank’s charge-offs and provision for credit losses. Although economic conditions in Colorado and in the U.S. in general have improved, there can be no assurances that the economic environment will continue to improve in the near- or long-term. Declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on the Bank’s borrowers or their customers, which could adversely our business, financial condition, results of operations and cash flows.

 

If economic conditions deteriorate, our revenues could decrease.

 

Declines in the local economies of the market area we serve could impair our ability to collect loans and would have a negative effect on our financial condition and our results of operations. Our financial results may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest rates and corresponding decreases in interest rate spreads, adverse employment conditions and the monetary and fiscal policies of the federal government. For example, declines in real estate values could adversely affect the value of property used as collateral.

 

In addition, substantially all of our loans are to individuals and businesses in the Denver metropolitan area. Any decline in these local economies or in the statewide economy could have an adverse impact on our financial performance. There can be no assurance that positive trends or developments will evolve or that negative trends or developments will not have significant downward effects on our revenues.

 

The small and medium-sized businesses that make up a portion of our target market may have insufficient financial resources to weather a sustained downturn in the economy.

 

We target the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital borrowing capacity than larger entities, have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the managerial talents and efforts of one person or a small group of persons, and the death, disability or resignation of one or more of these persons would likely have an adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact these businesses in the markets in which we operate, our business, financial condition, and results of operation could be adversely affected.

 

Our business is subject to credit risks which may adversely affect our earnings.

 

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates. Increases in interest rates could adversely impact borrowers’ ability to repay outstanding loans or the value of the collateral securing these loans.

 

We seek to mitigate the risks inherent in our loan portfolio by adhering to conservative underwriting practices, including analyzing the credit risk, valuing the underlying collateral, monitoring loan concentration within specific

 

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industries and geographic locations and obtaining periodic reviews of outstanding loans by our loan review and audit departments. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may nevertheless incur losses on loans that meet our underwriting criteria and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

 

Should the economic climate deteriorate, borrowers may experience difficulty repaying loans, and the level of non-performing loans, charge-offs, and delinquencies could rise and require further increases in the provision for loan losses, which would adversely affect our business, financial condition, and results of operation.

 

A large percentage of our loans are secured by real estate, and adverse changes in the real estate market may result in losses.

 

As of March 31, 2017, approximately 80% of the Bank’s loan portfolio consisted of real estate loans. The majority of these real estate loans are located in Colorado, and the Bank’s loan portfolio may be affected by a downturn in the residential and commercial real estate market. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. Any decline in the real estate markets in our primary market area could adversely affect our business, results of operations and financial condition. If real estate values declined, the collateral for our loans would provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished and we would be more likely to suffer losses on defaulted loans. The events and conditions described in this risk factor could therefore have a material adverse effect on our business, results of operations and financial condition.

 

The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny.

 

The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify potential concentrations in commercial real estate lending. A financial institution may have such a concentration if, among other factors: (i)total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital (“CRE 1 Concentration”); or (ii)total reported loans for construction, land development and other land and loans secured by multifamily and non-owner occupied non-farm, non-residential properties (excluding loans secured by owner-occupied properties) represent 300% or more of total risk-based capital (“CRE 2 Concentration”) and the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36-month period. In such an instance, management should employ heightened risk management practices, including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.

 

As of March 31, 2017, the Bank’s CRE 1 Concentration level was 14% and its CRE 2 Concentration level was 149%. While each of these levels is beneath regulatory maximums, there can be no assurance that that will remain the case, and if the Bank is considered to have a concentration in the future and our risk management practices are found to be deficient, it could result in increased reserves and capital costs as well as potential regulatory enforcement action.

 

The Bank’s allowance for loan losses may prove to be insufficient to absorb losses in the Bank’s loan portfolio.

 

As a lender, the Bank is exposed to the risk that its borrowers may not repay their loans according to the terms of these loans and that the collateral securing the payment of a particular loan may be insufficient to fully compensate for the outstanding balance of the loan and the costs to dispose of the underlying collateral. The Bank maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable incurred losses within the Bank’s existing portfolio of loans. Additional credit losses will likely occur in the future and may occur at a rate greater than the Bank has experienced to date. The level of the allowance reflects management’s ongoing evaluation of specific credit risks, loan loss experience, loan portfolio quality, economic conditions, loan industry concentrations, and other potential but

 

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unidentifiable losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires management to make significant estimates of current credit risks, future trends, and general economic conditions, all of which may undergo material changes.

 

Further, the measure of the Bank’s allowance for loan losses is also dependent on the adoption of new accounting standards. The Financial Accounting Standards Board recently issued an Accounting Standards Update that presents a new credit impairment model, the Current Expected Credit Loss (“CECL”) model, which would require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, the CECL model could require financial institutions such as the Bank to increase their allowances for loan losses. Moreover, the CECL model could create more volatility in the Bank’s level of allowance for loan losses.  The Bank is still evaluating the effects that CECL may have on its financial results, but anticipates that it will add complexity and cost to its current credit loss evaluation process.

 

Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Bank’s control, may require an increase in the allowance for loan losses. Likewise, increases in nonperforming loans have a significant impact on the Bank’s allowance for loan losses. If real estate values decline, the Bank could experience increased delinquencies and credit losses, particularly with respect to commercial real estate loans. Likewise, if management’s assumptions prove to be incorrect or if the Bank experiences significant loan losses in future periods, the Bank’s current level of allowance may not be sufficient to cover actual loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the Bank’s loan portfolio. A material change to the allowance could cause net income and possibly capital to decrease.

 

In addition, federal and state regulators periodically review the Bank’s allowance for loan losses and may require the Bank to increase its allowance for loan losses or recognize loan charge-offs based on judgments different than those of management. Any increase in the Bank’s allowance for loan losses or charge-offs as required by these regulatory agencies could have a material adverse effect on our financial condition and results of operations.

 

Non-performing assets take significant time to resolve and may adversely affect our results of operations and financial condition, and could result in losses in the future.

 

As of March 31, 2017, we had no non-performing loans (which consist of nonaccrual loans and troubled debt restructurings on accrual status) or non-performing assets (which include foreclosed real estate). Non-performing assets adversely affect net income in various ways. We do not record interest income on non-accrual loans or on other real estate owned (“OREO”), thereby adversely affecting our income and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and OREO also increase our risk profile and the capital requirements that our regulators believe are appropriate in light of such risks. While the Company works to reduce its problem assets through workouts, restructurings and otherwise, decreases in the values of these assets, the underlying collateral, or in the borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of non-performing assets requires significant commitments of time from management and directors, which can decrease their ability to perform their other responsibilities.

 

An additional risk related to OREO assets is our potential exposure to losses as a result of a decline in the fair market value of an individual OREO parcel. There can be no assurance that we will not experience increases in non-performing loans in the future, or that our non-performing assets will not result in losses in the future.

 

We are subject to interest rate risk.

 

Fluctuations in interest rates may negatively impact our banking business. Our primary source of income from operations is net interest income, which is the difference between the interest income received on interest-earning assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing

 

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liabilities (usually deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve System (the “FOMC”) and market interest rates.

 

The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, the level of which is driven primarily by the FOMC’s actions. However, the yields generated by our loans and securities are typically driven by longer-term interest rates, which are set by the market or, at times the FOMC’s actions, and generally vary from day to day. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. If the interest rates on our interest-bearing liabilities increase faster than the interest rates on our interest-earning assets, our net interest income may decline and with it, a decline in our earnings may occur. Our net interest income and earnings would be similarly affected if the interest rates on our interest-earning assets declined faster than the interest rates on our interest-bearing liabilities. As a result, our business, results of operations or financial condition may be adversely affected, perhaps materially.

 

Changes in interest rates can also affect the slope of the yield curve. A decline in the current yield curve or a flatter or inverted yield curve could cause our net interest income and net interest margin to contract, which could have a material adverse effect on our net income and cash flows, as well as the value of our assets. An inverted yield curve may also adversely affect the yield on investment securities by increasing the prepayment risk of any securities purchased at a premium.

 

An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to make payments under their current adjustable-rate loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for loan losses, which may materially and adversely affect our business, results of operations or financial condition.

 

Prolonged lower interest rates may adversely affect our net income.

 

Prolonged lower interest rates, particularly medium and longer-term rates, may have an adverse impact on the composition of our earning assets, our net interest margin, our net interest income and our net income. Among other things, a period of prolonged lower rates may cause prepayments to increase as our clients seek to refinance existing home loans. Such an increase in prepayments and refinancing activity would likely result in a decrease in the weighted average yield of our earning assets, an increase in salary and bonus expense as a result of higher loan volume and an increase in provision expense for new loans added to the portfolio.

 

Our cost of funds may increase as a result of numerous factors, which may reduce our profitability and subject us to additional liquidity and funding risks.

 

Our cost of funds may increase because of, among other things, general economic conditions, unfavorable conditions in capital markets, changes in interest rates, government intervention and support of competitors, government price controls and competitive pressures. We obtain funds principally through deposits and, to a lesser extent, other borrowings. As a general rule, deposits are a cheaper and more stable source of funds than borrowings. Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other non-depository investments, as providing superior returns or seek to spread their deposits over multiple banks to maximize FDIC insurance coverage. Furthermore, technological and other changes have made it more convenient for bank customers to transfer funds into alternative investments, including products offered by other financial institutions and non-bank service providers. As a result, increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs. If, as a result of general economic conditions, market interest rates, competitive pressures or other factors, our level of deposits decreases relative to our overall banking activities, we may need to

 

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rely more heavily on borrowings and wholesale funding as sources of funds, and this may negatively impact our net interest margin and subject us to additional liquidity and funding risks.

 

The value of securities in our portfolio may be negatively affected by disruptions in securities markets.

 

The market for some of the investment securities held in our portfolio has been volatile in recent years. Volatile market conditions may negatively affect the value of these securities due to the perception of heightened credit and liquidity risks. There can be no assurance that the potential declines in market value associated with these disruptions will not result in other-than-temporary impairments of these assets, which would lead to impairment charges that could have a material adverse effect on our net income and capital levels.

 

We depend on the accuracy and completeness of information about clients and counterparties and our financial condition could be adversely affected if we rely on misleading information.

 

We rely heavily upon information supplied to us by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, we may fund a loan that we would not have otherwise funded or we may fund a loan on terms that we would not have otherwise extended. Whether a misrepresentation is made by the applicant or by another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentation are often difficult to locate, and it is often difficult to recover any of the monetary losses we may suffer.

 

New lines of business or new products and services may subject us to additional risks.

 

From time to time, we may implement or may acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products and services, we may invest significant time and resources. We may not achieve target timetables for the introduction and development of new lines of business and new products or services and price and profitability targets may not prove feasible. External factors, such as regulatory compliance obligations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

 

We could be adversely affected if we or any of our officers or directors fail to comply with bank or other laws and regulations.

 

As a bank holding company, we are subject to extensive regulation by U.S. federal and state regulatory agencies and face risks associated with investigations and proceedings by regulatory agencies, including those that we may believe to be immaterial. Like any company, we are also subject to risk arising from potential employee misconduct, including noncompliance with our internal policies. Any interventions by authorities may result in adverse judgments, settlements, fines, penalties, injunctions, suspension or expulsion of our officers or directors from the banking industry or other relief. In addition to the potential monetary consequences, these measures could, for example, impact our ability to engage in, or impose limitations on, certain aspects of our businesses. The number of these investigations and proceedings, as well as the amount of penalties and fines sought, has increased substantially in recent years with respect to many banks in the industry. Significant regulatory action against us or our officers or directors could materially and adversely affect our business, financial condition or results of operations or cause us significant reputational harm, which in turn could seriously harm our business.

 

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Changes in tax law may adversely affect our net income, effective tax rate and our overall results of operations and financial condition.

 

Our financial performance is impacted by federal and state tax laws. The enactment of new tax legislation, or changes in the interpretation of existing law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have a material adverse effect on our financial condition and results of operations.

 

Our internal controls and procedures may not be adequate or may fail or be circumvented.

 

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system will be met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, cash flows and financial condition.

 

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

 

A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own or foreclose on and take title to properties securing certain loans and could be subject to environmental liabilities with respect to these properties. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation costs and clean-up costs incurred by these parties in connection with the environmental contamination, or we may be required to investigate or clean up the hazardous or toxic substances. The costs associated with investigation or remediation activities could be substantial. Further, the discovery or presence of hazardous or toxic substances may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, cash flows, liquidity and results of operations could be materially and adversely affected.

 

We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.

 

We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and the risk of unauthorized transactions or operational errors by employees, including clerical or record-keeping errors or errors resulting from faulty or disabled computer or telecommunications systems.

 

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could diminish our ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as result in potential liability to clients, reputational damage and regulatory intervention, which in turn could materially and adversely affect our business, financial condition and results of operations.

 

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We are subject to security, transactional and operational risks relating to the use of technology that could damage our reputation and our business.

 

We rely heavily on communications and information systems to conduct our business, serving both internal and customer constituencies. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures, security applications and fraud mitigation applications designed to prevent or limit the effect of a failure, interruption or security breach of, or a fraud attack on, our information systems, there can be no assurance that any such failures, interruptions, fraud attacks or security breaches will not occur or, if they do occur, that they will be adequately addressed. Additionally, we outsource our data processing to a third party. If our third party provider encounters difficulties or if we have difficulty in communicating with the third party, it will significantly impair our ability to adequately process and account for customer transactions, which would significantly affect our business operations. Furthermore, breaches of the third party provider’s technology may also cause reimbursable loss to our consumer and business customers through no fault of our own. Fraud attacks targeting customer-controlled devices, plastic payment card terminals and merchant data collection points provide another source of potential loss, again which would be through no fault of our own. The occurrence of any failures, interruptions or security breaches of, or fraud attacks on, information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

Unauthorized disclosure of sensitive or confidential customer information, whether through a cyber-attack, other breach of our computer systems or otherwise, could severely harm our business.

 

In the normal course of our business, we collect, process and retain sensitive and confidential customer information. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, and other similar events.

 

Information security risks for financial institutions such as us have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies, including mobile devices, to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions designed to disrupt key business services such as customer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types. Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

 

We also face risks related to cyber-attacks and other security breaches in connection with debit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on external vendors to conduct other aspects of our business operations and face similar risks relating to them. Irrespective of how much diligence we may conduct with respect to these external vendors, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.

 

Any cyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect our business.

 

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We continually encounter technological change.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition, results of operations and cash flows.

 

TERMS OF THE OFFERING

 

General

 

We are offering up to 1,362,906 shares of our common stock, par value $0.01 per share. We are offering the shares first to our existing stockholders on a subscription rights basis and pursuant to a related over-subscription privilege. The purchase price in both cases is $7.25 per share. Stockholders must own at least two shares as of the record date to be eligible to participate in the rights portion of the offering. There is no minimum purchase requirement. Once you subscribe, your subscription is irrevocable.

 

Stockholders may subscribe for any number of shares being offered hereby, as described more fully below.

 

With respect to the over-subscription privilege, we reserve the right to reject any subscription, in whole or in part, in our sole discretion. In determining which over-subscriptions to accept, in whole or in part, we may take into account a subscriber’s potential to do business with, or to direct customers to, Solera National Bank, and the order in which such subscriptions are received.

 

In the event we reject all or a portion of a requested over-subscription, we will refund to the subscriber all, or the appropriate portion, of the amount remitted with the subscription agreement, without interest or deduction. We will decide which over-subscriptions to accept, and will mail all appropriate refunds, no later than 30 days after the expiration of the offering, when and as extended, or the partial closing of the offering relating to the period during which such subscription is received.

 

Stockholder subscription rights will expire if not exercised by 5:00 p.m., Mountain Time, on December 31, 2017 unless it is terminated earlier or either date is extended without notice to subscribers. Except in connection with subscription rights, we may, in our sole discretion, reject any subscriptions, in whole or in part, for any reason whatsoever. With respect to subscription rights exercised by rights holders and received by us no later than 5:00 p.m., Mountain Time, on December 31, 2017, we agree not to reject any such subscriptions unless we elect to withdraw the offering in its entirety, in which case payments received from holders in connection with the exercise of their subscription rights will be returned in full without interest or deduction.

 

We may cancel this offering at any time, and accepted subscriptions are subject to cancellation in the event that we elect to terminate the offering. With respect to the over-subscription privilege, we reserve the right to reject any subscription, in whole or in part, in our sole discretion.

 

Plan of Distribution

 

We are offering these shares on a “best efforts” basis through our directors and officers, who will not be compensated in connection with their procurement of subscriptions, but who will be reimbursed for any reasonable out-of-pocket expenses incurred in connection with the offering, if any. We do not expect that any such expenses will be material. We do not presently intend to engage an underwriter or placement agent in connection with this offering. We are offering the shares to existing stockholders on a subscription rights basis. See “Plan of Distribution” for further details.

 

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Subscription Procedure

 

For Registered Stockholders

 

If you wish to exercise your subscription rights in this offering, and you are a “registered” stockholder, i.e., you hold your shares directly in certificate form, you must complete the following steps before December 31, 2017:

 

·                                          Login to the website using the credentials included on your Notice of Rights Offering and electronically complete and sign the stockholder subscription agreement (a sample of which accompanies this offering circular);

 

·                                          Make full payment of the entire purchase price for the shares subscribed for in U.S. currency by ACH, wire transfer, or check payable to “Solera National Bancorp, Inc. Stock Offering Account.”

 

·                                          Wire Transfer Instructions:

Bankers Bank of the West

ABA# 102003743

1099 18th St., Suite 2700

Denver, CO 80202

For Credit To:  Solera National Bank, Account No. 1001891, Attention:  [INSERT YOUR NAME HERE] Stock Purchase

 

·                                          ACH Instructions:

Bank Name:  Solera National Bank

Routing No.: 107007281

Account Name:  [INSERT YOUR NAME HERE] Stock Purchase

Account No.:  2012368

 

The number of shares covered by each stockholder’s subscription rights and the aggregate purchase price for the full exercise of such subscription rights are set forth on each stockholder’s subscription agreement. To exercise your subscription rights, your completed agreement and payment must be received by us by December 31, 2017, unless such date is extended. If you wish to subscribe for additional shares pursuant to your over-subscription privilege please so indicate on your subscription agreement.

 

Important: The full subscription price for the shares must be remitted with the stockholder subscription agreement in order to be valid. Failure to include the full purchase price will give us the right to reject the subscription. If we do not receive your stockholder subscription agreement and payment in full by 5:00 p.m., Mountain Time, on December 31, 2017, your subscription rights in this offering will be waived, unless such date is extended.

 

The subscription price will be deemed to have been received by us only upon: (i) receipt by us of any certified check or cashier’s check or money order; or (ii) receipt of ACH or wired funds in the stock offering account designated above.

 

Please note that all stockholders who currently own their shares in certificate form will automatically receive a statement for book-entry shares for the new shares they purchase, unless they specifically request a stock certificate instead.

 

If you have other questions regarding the Company, the Bank or the stock offering, please contact Melissa Larkin, EVP and Chief Financial Officer, at (303) 937-6423.

 

For “Street Name” Stockholders

 

If you do not hold your shares directly in certificate form, but hold them instead through a custodian bank, broker, dealer or other nominee, then your nominee is the record holder of the shares you own. If you are not contacted by your nominee, you should contact your nominee as soon as possible. Your nominee must exercise the subscription rights on your behalf for the shares of common stock you wish to purchase. You will not receive a stockholder

 

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subscription agreement. Please follow the instructions of your nominee. Your nominee may establish a deadline that may be before the December 31, 2017 expiration date that we have established for the rights offering.

 

If you have other questions regarding the Company, the Bank or the stock offering, please contact Melissa Larkin, EVP and Chief Financial Officer, at (303) 937-6423.

 

Expiration Date

 

The subscription rights granted to stockholders of record as of [·], 2017 will expire if not validly exercised by 5:00 p.m., Mountain Time, on December 31, 2017, unless extended. We may also extend the expiration date without notice to subscribers. Any such extension shall not affect the rights of those who have already subscribed.

 

Closings and Issuance of Shares

 

The offering will close on December 31, 2017, which date may be extended in our sole discretion. In addition, we reserve the right to have multiple closings of the offering should we determine this to be advisable in our sole discretion.

 

If you currently hold your stock directly in certificate form, we will send, via electronic mail, information about how to login to your account to view your statement of ownership for your new book-entry shares.  This information will be provided as soon as practicable after the close of the applicable portion of the offering. You may specifically request a stock certificate instead of a book-entry statement of ownership. If your shares as of [•], 2017 were held by a custodian bank, broker, dealer or other nominee, you will not receive stock certificates or statements of ownership from us for your new shares. Instead, your nominee will be credited with the shares of common stock you purchase, according to the same timeframe as described above with respect to stock certificates or book-entry shares.

 

Determination of the Offering Price

 

Prior to this offering there has been a very limited trading market in our common stock. See “MARKET INFORMATION AND DIVIDEND POLICY AND RELATED MATTERS — Trading History.” We determined the offering price after analyzing and taking into consideration several factors including, but not limited to, our current financial condition, recent trading prices and volumes of our common stock, book value per share, management’s analysis of our growth potential, the prices of shares of common stock of similarly situated independent banks, and our market position in the geographical areas in which we operate. The offering price will not necessarily reflect the market price of our common stock after this offering.

 

No Board Recommendation

 

An investment in the common stock must be made pursuant to each investor’s evaluation of such security. Accordingly, neither our board of directors nor management makes any recommendation to potential investors regarding whether they should subscribe for or purchase any shares.

 

USE OF PROCEEDS

 

The net proceeds to us from the sale of the common stock offered in the offering are expected to be approximately $9,831,000, net of offering expenses, assuming the sale of all shares offered hereby. The actual net proceeds to be raised in the offering will depend upon the number of shares sold in the offering and the actual amount of offering expenses incurred, which may differ from the foregoing estimate.

 

We intend to use the net proceeds from this offering for general and corporate working capital purposes, including funding for loans and to support future growth, and enabling our subsidiary, the Bank, to continue to meet applicable capital requirements. Some of these funds may be used to pay the salaries of our officers and employees in the ordinary course of business. Future growth may occur by establishing new branch offices or increasing loans and deposits at our existing branch. The amount and timing of the use of proceeds from this offering will depend on our capital needs and local loan demand, and we reserve the right to modify the use of proceeds accordingly. No

 

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assurance can be given that any new branches will be established in the future or, if established, that the resulting impact on our financial condition will be favorable.

 

PLAN OF DISTRIBUTION

 

General

 

We are offering these shares on a “best efforts” basis through our directors and officers, who will not be entitled to receive any discounts or commissions for selling any shares, but may be reimbursed for any reasonable out-of-pocket expenses incurred in connection with the offering, if any. We do not expect that any such expenses will be material. The offering is not underwritten and we do not presently intend to engage an underwriter or placement agent in connection with this offering.

 

Distribution to Stockholders

 

Holders of record of our common stock as of the close of business on [·], 2017 are being given non-transferable subscription rights in this offering. Such stockholders will have subscription rights to purchase one share for every two shares owned of record on that date, at a purchase price of $7.25 per share, and an “over-subscription privilege” whereby they may subscribe for additional shares of our common stock unclaimed by other holders of rights in this offering at the same subscription price up to the number of shares owned as of the record date.

 

We believe that it is in our best interests and those of our stockholders to give these subscription rights, although our common stock does not carry any preemptive rights and such subscription rights are therefore not legally required. These subscription rights will enable stockholders to eliminate the potential dilution of their respective percentage ownership of our stock which may occur through this offering.

 

The number of shares for which each stockholder is entitled to subscribe by virtue of these subscription rights, along with the aggregate price required for full exercise of these subscription rights, are set forth in the stockholder subscription agreement accompanying this offering circular. If any stockholder loses or misplaces his or her subscription agreement, the number of shares for which each stockholder is entitled to subscribe can be calculated by dividing by two the number of shares owned of record by such stockholder as of [·], 2017. If the resulting number contains a fraction, the fraction should be rounded down to the nearest whole number.

 

If you have other questions regarding the Company, the Bank or the stock offering, please contact Melissa Larkin, EVP and Chief Financial Officer, at (303) 937-6423.

 

MARKET INFORMATION AND DIVIDEND POLICY AND RELATED MATTERS

 

Trading History

 

Shares of our common stock are not listed on any exchange or quoted by the Nasdaq Stock Market, although they are quoted on the OTC-Pink under the ticker symbol “SLRK.” Trades may also occur in unreported private transactions. The OTC-Pink is an electronic, screen-based market maintained and operated by the OTC Markets Group, which imposes considerably less stringent listing standards than the Nasdaq. The OTC-Pink is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities.

 

Trading volume in the Company’s stock has not been extensive and such trades cannot be characterized as constituting an active trading market. There can be no assurance that a more active trading market will develop in the future, or if developed, that it will be maintained. Management is aware of the following securities dealers which make a market in the Company’s common stock: Raymond James and PCS Community Banking Group, Wedbush Securities.

 

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The information in the following table indicates the high and low sales prices and approximate trading volume for our common stock for each quarterly period since January 1, 2015, and is based upon information provided by S&P Global Market Intelligence. The information does not include transactions for which no public records are available.

 

 

 

Sales Prices

 

Approximate

Number of

 

Calendar Quarter Ended

 

High

 

Low

 

Shares Traded

 

 

 

 

 

 

 

 

 

March 31, 2015

 

$

4.75

 

$

4.30

 

94,841

 

June 30, 2015

 

$

5.75

 

$

4.70

 

81,272

 

September 30, 2015

 

$

5.80

 

$

5.50

 

113,122

 

December 31, 2015

 

$

5.85

 

$

5.41

 

80,112

 

March 31, 2016

 

$

5.41

 

$

4.80

 

83,116

 

June 30, 2016

 

$

6.00

 

$

5.15

 

123,088

 

September 31, 2016

 

$

6.36

 

$

5.85

 

71,352

 

December 31, 2016

 

$

7.50

 

$

6.15

 

136,819

 

March 31, 2017

 

$

7.65

 

$

7.15

 

92,637

 

June 30, 2017

 

$

7.80

 

$

7.40

 

57,066

 

 

Holders

 

As of [·], 2017 there were approximately 730 stockholders of our common stock, including approximately 560 registered holders, and approximately 170 beneficial owners whose shares were held in street name.

 

Dividends

 

The Company has never declared or paid dividends on its common stock. In addition, the Company expects to retain future earnings, if any, for use in the operation and expansion of the Bank’s business and does not anticipate paying any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of the Board of Directors and will, among other factors, depend upon regulatory requirements and restrictions, the Company’s results of operations, its financial condition and capital requirements.

 

Because it is a holding company, the Company conducts no material activities at this time other than holding the common stock of the Bank and its ability to pay dividends depends on the receipt of dividends from the Bank. The Board of Directors of the Bank intends to retain earnings to promote growth and build capital and to recover any losses incurred in prior periods. Accordingly, the Company does not expect to receive dividends from the Bank in the foreseeable future. In addition, banks and bank holding companies are both subject to certain regulatory restrictions on the payment of cash dividends. In the case of the holding company, for example, cash to pay dividends to stockholders of the holding company, is substantially dependent on the earnings of the Bank and the payment of dividends by the Bank to the holding company, as the Bank’s sole stockholder.

 

Stockholders are entitled to receive dividends only when and if declared by our board of directors. To date, we have not received cash dividends from the Bank. No assurance can be given that our earnings will permit the payment of dividends of any kind in the future.

 

The Bank’s ability to pay cash dividends to us is also subject to certain legal limitations under federal laws and regulations. No national bank may, pursuant to 12 U.S.C. Section 56, pay dividends from its capital; all dividends must be paid out of net profits then on hand, after deducting for expenses including losses and bad debts. The payment of dividends out of net profits of a national bank is further limited by 12 U.S.C. Section 60(a) which prohibits a bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock, or if the surplus fund does not equal the amount of capital stock, until one-tenth of the Bank’s net profits of the preceding half-year in the case of quarterly or semiannual dividends, or the preceding two consecutive half-year periods are transferred to the surplus fund before each dividend is declared.

 

Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year exceed the total of the Bank’s net profits for that year combined with its net profits for the

 

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two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The OCC has adopted guidelines which set forth factors which are to be considered by a national bank in determining the payment of dividends. A national bank, in assessing the payment of dividends, is to evaluate the bank’s capital position, its maintenance of an adequate allowance for loan losses, and the need to review or develop a comprehensive capital plan, complete with financial projections, budgets and dividend guidelines. Therefore, the payment of dividends by the Bank is also governed by its ability to maintain minimum required capital levels and an adequate allowance for loan and lease losses. Additionally, pursuant to 12 U.S.C. Section 1818(b), the OCC may prohibit the payment of any dividend which would constitute an unsafe and unsound banking practice.

 

We are incorporated in Delaware and are governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under Delaware law, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

 

CAPITALIZATION

 

The following table shows the Company’s regulatory capital ratios (unaudited) as of March 31, 2017 on a historical basis, and on an as adjusted basis to reflect the sale of the Maximum Offering Amount in this offering. You should read the following table with the consolidated financial statements and notes that are included elsewhere in this Memorandum.

 

 

 

(Unaudited)
March 31, 2017

 

 

 

Actual

 

As adjusted

for the

offering(2)

 

Stockholders’ Equity

 

 

 

 

 

Common stock: par value $0.01 per share, 10 million share authorized; 2,753,588 shares issued and outstanding actual, and 4,116,494 total shares issued and outstanding as adjusted for this offering (1)

 

27

 

41

 

Additional paid-in capital

 

$

27,180

 

$

37,047

 

Retained earnings (accumulated deficit)

 

(3,343

)

(3,343

)

Accumulated other comprehensive income (loss)

 

(308

)

(308

)

Treasury stock, at cost

 

(156

)

(156

)

Total Stockholders’ Equity

 

$

23,400

 

$

33,240

 

 

 

 

 

 

 

Company’s Regulatory Capital Ratios: (2)

 

 

 

 

 

Total risk-based capital ratio

 

19.92

%

26.40

%

Common Equity Tier 1 capital ratio

 

18.67

%

25.15

%

Tier 1 risk-based capital ratio

 

18.67

%

25.15

%

Tier 1 leverage ratio

 

13.74

%

18.94

%

 


(1)         For purposes of the table above, it is assumed that the Maximum Offering Amount will be sold and issued in this offering. The shares issued and outstanding includes 4,750 shares of restricted stock that are granted but not vested and 25,776 shares of treasury stock. Neither the restricted stock nor the treasury stock is included in the total number of shares outstanding when calculating earnings per share.

 

(2)         Assumes estimated net proceeds of $9,831,000 from the sale of the Maximum Offering Amount of Common Stock. Assumes entire amount is invested in the Bank. The Company’s capital ratios are those of the Bank’s.

 

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BUSINESS

 

The Company and the Bank

 

Solera National Bancorp, Inc. is a bank holding company headquartered in Lakewood, Colorado. Solera National Bank has been our wholly owned subsidiary since our formation. Our principal offices are located at 319 South Sheridan Boulevard, Lakewood, Colorado 80226. Our telephone number is (303) 209-8600, and our website address is www.solerabank.com.

 

Solera National Bancorp, Inc. was incorporated in 2006 to organize and serve as the holding company for Solera National Bank which opened for business on September 10, 2007. Solera National Bank is a traditional, community, commercial bank focused on serving the diverse local market. Solera National Bank currently operates one service location in Lakewood, Colorado.

 

We offer a broad range of commercial and consumer banking services to small and medium-sized businesses, licensed professionals and individuals who are particularly responsive to the personalized service that the Bank provides to its customers. We believe that local ownership and control allows the Bank to serve customers efficiently and effectively. The Bank competes on the basis of providing a personalized banking experience combined with a broad range of services, customized and tailored to fit the individual needs of its clients. The Company remains focused on executing its strategy since its inception of delivering prudent and controlled growth to efficiently leverage the Company’s capital and expense base with the goal of achieving sustained profitability.

 

The Company’s ultimate objective is to create stockholder value through its recognition as the premier community bank in Colorado. We are committed to running a lean and efficient organization that can execute on business decisions quickly. Additionally, the Company believes in providing transparent financial reporting to our stakeholders through publication of quarterly earnings releases and annual audited financial statements. The Company’s common stock is traded over-the-counter under the ticker symbol SLRK.

 

As a community-oriented bank, we offer a wide array of personal, consumer and commercial services generally offered by a locally-managed, independently-operated bank. We provide a broad range of deposit instruments and general banking services, including checking, savings accounts (including money market demand accounts), certificates of deposit for both business and personal accounts; internet banking services, such as cash management and Bill Pay; telebanking (banking by phone); courier services and mobile banking.

 

Since we operate in Colorado, our operating results are significantly influenced by economic conditions in Colorado, particularly the health of the real estate market.  Additionally, we are subject to competition from other financial institutions and are impacted by fiscal and regulatory policies of the federal government as well as regulatory oversight by the Office of the Comptroller of the Currency, (the “OCC”).

 

Recent Accounting Pronouncements

 

Information on recent accounting pronouncements is contained in Note A to the 2016 consolidated financial statements included herein.

 

Market Area and Competition

 

The banking business in Colorado tends to be highly competitive, including in our specific market areas. Continued consolidation within the banking industry has contributed to the competitive environment in recent periods, following on the heels of a relatively large number of FDIC-assisted takeovers of failed banks and other acquisitions of troubled financial institutions in the aftermath of the Great Recession. There are also a number of unregulated companies competing for business in our markets with financial products targeted at profitable customer segments. Many of those companies are able to compete across geographic boundaries and provide meaningful alternatives to significant banking products and services. These competitive trends are likely to continue.

 

With respect to commercial bank competitors, the business is dominated by a relatively small number of major banks that operate a large number of offices within our geographic footprint. These banks have, among other

 

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advantages, the ability to finance businesses and geographic area with effective advertising campaigns and to allocate their investment resources to regions of highest yield and demand. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than the Company.

 

In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, asset management groups, mortgage banking firms and internet-based companies. Technological innovations have lowered traditional barriers of entry and enabled many of these companies to offer services that previously were considered traditional banking products, and we have witnessed increased competition from specialized companies, including those that circumvent the banking system by facilitating payments via the internet, wireless devices, prepaid cards, or other means.

 

Strong competition for deposits and loans among financial institutions and non-banks alike affects interest rates and other terms on which financial products are offered to customers. Mergers between financial institutions have created additional pressures within the financial services industry to streamline operations, reduce expenses, and increase revenues in order to remain competitive. Competition is also impacted by federal and state interstate banking laws which permit banking organizations to expand into other states.

 

In an effort to compete effectively, the Company provides quality, personalized service with prompt, local decision-making, which cannot always be matched by major banks. The Company relies on local promotional activities, personal relationships established by the Company’s officers, directors, and employees with the Company’s customers, and specialized services tailored to meet the needs of the Company’s primary service area.

 

The Company competes in its service area by using to the fullest extent possible the flexibility that its independent status and strong community ties permit. This status includes an emphasis on specialized services, local promotional activity, and personal contacts by the Company’s officers, directors, organizers and employees. Programs have and will continue to be developed which are specifically addressed to the needs of small businesses, professionals and consumers. If our customers’ loan demands exceed the Company’s lending limit, the Company is able to arrange for such loans on a participation basis with other financial institutions and intermediaries. The Company can also assist those customers requiring other services not offered by the Company to obtain such services from its correspondent banks.

 

Employees

 

As of June 30, 2017, the Bank had 19 full-time equivalent employees.

 

Properties

 

The Bank’s main office and administrative headquarters as well as the Company’s principal offices are located at 319 South Sheridan Boulevard, Lakewood, Colorado 80226. The Company leased the property until purchased on April 30, 2015 at a purchase price of $1.4 million. The building consists of approximately 6,100 square feet of space. The office has a vault, teller windows, customer parking and one automated teller machine located on the exterior of the building.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

At a meeting on May 11, 2016, the Audit Committee dismissed Fortner, Bayens, Levkulich & Garrison, P.C. as the Company’s principal independent auditors. At the same meeting, the Audit Committee selected the accounting firm of Eide Bailly LLP as the independent auditors for the Company’s 2016 fiscal year.

 

Fortner, Bayens, Levkulich & Garrison, P.C. audited the Company’s consolidated financial statements for the fiscal years ended December 31, 2015 and 2014. Fortner, Bayens, Levkulich & Garrison, P.C.’s report on the Company’s financial statements for 2015 and 2014 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles.

 

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During the subsequent interim period from January 1, 2016 through December 2016 and for the fiscal years ended December 31, 2015 and 2014, there were no disagreements between Fortner, Bayens, Levkulich & Garrison, P.C. and the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Fortner, Bayens, Levkulich & Garrison, P.C., would have caused it to make reference to the subject matter of the disagreements in connection with its reports.

 

Legal Proceedings

 

From time to time, the Company and the Bank may be involved in litigation relating to claims arising out of its normal course of business. As of the date of this offering circular, we did not have any material pending legal matters or litigation for either entity.

 

Supervision and Regulation

 

Banks and bank holding companies are heavily regulated by federal and state laws and regulations. Most banking regulations are intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of stockholders. The following is a summary of certain statutes, regulations and regulatory guidance affecting the Company and the Bank. This summary is not intended to be a complete explanation of such statutes, regulations and guidance, all of which are subject to change in the future, nor does it fully address their effects and potential effects on the Company and the Bank.

 

The Company’s activities are governed by the Bank Holding Company Act of 1956, as amended (“BHCA”). We are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the BHCA. We file quarterly reports and other information with the Federal Reserve. Shares of our common stock are quoted on the OTC-Pink under the ticker symbol “SLRK.”

 

The Bank is organized as a national banking association under the National Bank Act, and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”) and the FDIC as well as being subject to regulation by certain other federal and state agencies. The OCC has primary supervisory responsibility for the Bank and performs examinations concerning safety and soundness, the quality of management and directors, information technology and compliance with applicable laws and regulations. The Bank files quarterly reports of condition and income with the FDIC, which provides insurance for certain of the Bank’s deposits. In addition, Consumer Financial Protection Bureau (“CFPB”) regulations and guidance apply to all financial institutions, including the Bank, although only banks with $10 billion or more in assets are subject to examination by the CFPB. Banks with less than $10 billion in assets, including the Bank, are examined for compliance by their primary federal banking agency.

 

Bank Holding Company Regulation.    The BHCA limits our business to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be closely related to banking. We, through the Bank, engage in traditional banking activities that are deemed financial in nature. In order for us to undertake new activities permitted by the BHCA, we and the Bank must be considered “well capitalized” (as discussed below) and well managed, the Bank must have received a rating of at least satisfactory in its most recent examination under the Community Reinvestment Act and we would be required to notify the Federal Reserve within 30 days of engaging in the new activity.

 

Under Federal Reserve policy, now codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Company is expected to act as a source of financial and managerial strength to the Bank and to commit resources to its support. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. The Company could in certain circumstances be required to guarantee the capital plan of the Bank if it became undercapitalized.

 

With certain limited exceptions, the BHCA prohibits a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority

 

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of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.

 

If, in the opinion of the applicable federal bank regulatory authorities, a depository institution or holding company is engaged in or is about to engage in an unsafe or unsound practice (which could include the payment of dividends), such authority may require, generally after notice and hearing, that such institution or holding company cease and desist such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such an unsafe or unsound banking practice. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that financial holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.

 

Regulation of the Bank by the OCC. National banks are subject to regulation, supervision and examination by the OCC. The OCC regulates or monitors all areas of a national bank’s operations, including security devices and procedures, adequacy of capitalization and loss reserves, accounting treatment and impact on capital determinations, loans, investments, borrowings, deposits, liquidity, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe and sound lending and deposit gathering practices. The OCC requires national banks to maintain specified capital ratios and imposes limitations on their aggregate investment in real estate, bank premises and furniture and fixtures. National banks are required by the OCC to file quarterly reports of their financial condition and results of operations and to obtain an annual audit of their financial statements in compliance with minimum standards and procedures prescribed by the OCC.

 

Capital Adequacy Requirements.    Federal banking regulators have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies that is based upon the 1988 capital accord of the Bank for International Settlements’ Committee on Banking Supervision (the “Basel Committee”), a committee of central banks and bank regulators from the major industrialized countries that coordinates international standards for bank regulation. Under the guidelines, specific categories of assets and off-balance-sheet activities such as letters of credit are assigned risk weights, based generally on the perceived credit or other risks associated with the asset. Off-balance-sheet activities are assigned a credit conversion factor based on the perceived likelihood that they will become on-balance-sheet assets. These risk weights are multiplied by corresponding asset balances to determine a “risk weighted” asset base which is then measured against various measures of capital to produce capital ratios.

 

An organization’s capital is classified in one of two tiers, Core Capital, or Tier 1, and Supplementary Capital, or Tier 2. Tier 1 capital includes common stock, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in the equity of consolidated subsidiaries, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level, less goodwill and most intangible assets. Tier 2 capital includes perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, mandatory convertible debt securities, subordinated debt, and allowances for loan and lease losses. Each category is subject to a number of regulatory definitional and qualifying requirements.

 

The Basel Committee in 2010 released a set of recommendations for strengthening international capital and liquidity regulation of banking organizations, known as Basel III. In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules became effective for many financial institutions on January 1, 2015, with certain transition provisions phasing in over a period ending on January 1, 2019.

 

The Basel III Capital Rules, among other things, (i) specify a capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures.

 

The Basel III Capital Rules set risk-based capital requirements and the total risk-based requirements to a minimum of 6.0% and 8.0%, respectively, plus a capital conservation buffer of 2.5% producing targeted ratios of 8.5% and 10.5%, respectively. The leverage ratio requirement under the Basel III Capital Rules is 5.0%. In order to be well

 

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capitalized under the rules now in effect, banks must maintain a CET1 capital ratio, Tier 1 capital ratio and total capital ratio that is equal to or greater than 6.5%, 8.0% and 10.0%, respectively.

 

Additionally, the Basel III Capital Rules specify a capital conservation buffer with respect to each of the CET1, Tier 1 and total capital to risk-weighted assets ratios, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2016 was 0.625%. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

 

The Company is currently subject to the Federal Reserve’s Small Bank Holding Company Policy Statement (the “Policy Statement”). The Policy Statement provides that the Basel III capital rules and reporting requirements will not apply to a bank holding company with under $1 billion in assets that: (a) is not engaged in significant non-bank activities; (b) has no significant off-balance sheet activities conducted through a non-bank subsidiary; and (c) subject to certain limited exceptions, has no material amount of SEC-registered debt or equity securities outstanding. As of March 31, 2017, the Company had $157.1 million in consolidated assets and satisfied the other criteria described above, and so the Holding Company is not subject to the Basel III capital rules and reporting requirements, however; the Bank is subject to Basel III capital rules.

 

Regulators may change capital and liquidity requirements, including previous interpretations of practices related to risk weights, which could require an increase to the allocation of capital to assets held by the Bank. Regulators could also require us to make retroactive adjustments to financial statements to reflect such changes. A regulatory capital ratio or category may not constitute an accurate representation of the Bank’s overall financial condition or prospects. Our regulatory capital status is addressed in more detail under the heading “Capital Resources” within Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note U in the accompanying notes to the consolidated financial statements included elsewhere in this Offering Circular.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) sets forth five capital categories for insured depository institutions under the prompt corrective action regulations:

 

·                                          Well capitalized-equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to maintain a specific level for any capital measure;

 

·                                          Adequately capitalized-equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, and 4% leverage ratio;

 

·                                          Undercapitalized-total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, or a leverage ratio of less than 4%;

 

·                                          Significantly undercapitalized-total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 3%; and

 

·                                          Critically undercapitalized-a ratio of tangible equity to total assets equal to or less than 2%.

 

Federal bank regulatory agencies are required to implement arrangements for “prompt corrective action” for institutions failing to meet minimum requirements to be at least adequately capitalized. FDICIA imposes an increasingly stringent array of restrictions, requirements and prohibitions as an organization’s capital levels deteriorate. An adequately capitalized institution may not accept or roll over brokered deposits without an FDIC waiver. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The OCC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator (the FDIC) if the capital deficiency is not corrected promptly.

 

Under the Federal Deposit Insurance Act (“FDIA”), “critically undercapitalized” banks may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt (subject to certain limited exceptions). In addition, under Section 18(i) of the FDIA, banks are required to obtain the advance consent of the FDIC to retire any part of their subordinated notes. Under the FDIA, a bank may not pay

 

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interest on its subordinated notes if such interest is required to be paid only out of net profits, or distribute any of its capital assets, while it remains in default on any assessment due to the FDIC.

 

Federal bank regulators may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve and OCC guidelines provide that banking organizations experiencing significant growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Concentration of credit risks arising from non-traditional activities, as well as an institution’s ability to manage these risks, are important factors taken into account by regulatory agencies in assessing an organization’s overall capital adequacy.

 

The OCC and the Federal Reserve also use a leverage ratio as an additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. A minimum leverage ratio of 3.0% is required for banks and bank holding companies that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other banks and bank holding companies are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. In order to be considered well capitalized the leverage ratio must be at least 5.0%.

 

The Bank’s leverage ratio was 13.74% at March 31, 2017 and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective action regulations.

 

The risk-based and leverage capital ratios established by federal banking regulators are minimum supervisory ratios generally applicable to banking organizations that meet specified criteria, assuming that they otherwise have received the highest regulatory ratings in their most recent examinations. Banking organizations not meeting these criteria are expected to operate with capital positions in excess of the minimum ratios. Regulators can, from time to time, change their policies or interpretations of banking practices to require changes in risk weights, which may require the Bank to obtain additional capital to support future growth or reduce asset balances in order to meet minimum acceptable capital ratios.

 

Gramm-Leach-Bliley Financial Modernization Act of 1999 (“Gramm-Leach-Bliley Act”).    The Gramm-Leach-Bliley Act:

 

·                              allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies;

 

·                              allows insurers and other financial services companies to acquire banks;

 

·                              removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

 

·                              establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

 

The Gramm-Leach-Bliley Act also modified other financial laws, including laws related to financial privacy. The financial privacy provisions generally prohibit financial institutions, including us, from disclosing non-public personal financial information to non-affiliated third parties unless customers have the opportunity to “opt out” of the disclosure.

 

Community Reinvestment Act.    The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence new activity permitted by the BHCA, each insured depository institution subsidiary

 

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of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA.

 

The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank Secrecy Act.    A major focus of U.S. government policy regarding financial institutions in recent years has been combating money laundering, terrorist financing and other illegal payments. The USA Patriot Act of 2001 and the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act of 1970, and expanded the extra-territorial jurisdiction of the U.S. government in this area. Regulations issued under these laws impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with relevant laws or regulations, could have serious legal, reputational and financial consequences for the institution. Because of the significance of regulatory emphasis on these requirements, we will continue to expend significant staffing, technology and financial resources to maintain programs designed to ensure compliance with applicable laws and regulations and an effective audit function for testing our compliance with the Bank Secrecy Act on an ongoing basis.

 

Safe and Sound Banking Practices; Enforcement.    Banks and bank holding companies are prohibited from engaging in unsafe and unsound banking practices. Bank regulators have broad authority to prohibit and penalize activities of bank holding companies and their subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws, regulations or written directives of or agreements with regulators. Regulators have considerable discretion in identifying what they deem to be unsafe and unsound practices and in pursuing enforcement actions in response to them.

 

Enforcement actions against us, the Bank and our officers and directors may include the issuance of a written directive, the issuance of a cease-and-desist order that can be judicially enforced, the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties, the imposition of restrictions and sanctions under prompt corrective action provisions, the termination of deposit insurance (in the case of the Bank) and the appointment of a conservator or receiver for the Bank. Civil money penalties can be as high as $1.0 million for each day a violation continues.

 

Transactions with Affiliates and Insiders.    The Bank is subject to Section 23A of the Federal Reserve Act which places limits on, among other covered transactions, the amount of loans or extensions of credit to affiliates that may be made by the Bank. Extensions of credit to affiliates must be adequately collateralized by specified amounts and types of collateral. Section 23A also limits the amount of loans or advances by the Bank to third party borrowers which are collateralized by our securities or obligations or those of our subsidiaries. The Bank also is subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.

 

We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders and their related interests. These restrictions are contained in the Federal Reserve Act and Federal Reserve Regulation O and apply to all insured institutions as well as their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests, which cannot exceed the institution’s total unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Additional restrictions on transactions with affiliates and insiders are discussed in the Dodd-Frank Act section below.

 

Restrictions on Dividends and Repurchases.    The primary source of funding of the Company’s financial obligations has been dividends paid by the Bank. The Bank is subject to statutory dividend restrictions. Under such restrictions, national banks may not, without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits plus the retained net profits from the prior two years, less any required transfers to surplus. Capital rules further limit the amount of dividends that may be paid by the Bank. In addition, under the

 

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FDICIA, the Bank may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized.

 

Limits on Compensation.    The Federal Reserve, OCC and FDIC in 2010 issued comprehensive final guidance on incentive compensation policies for executive management of banks and bank holding companies. This guidance was intended to ensure that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging excessive risk-taking. The objective of the guidance is to assure that incentive compensation arrangements (i) provide incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management and (iii) are supported by strong corporate governance, including oversight by the board of directors.

 

In 2016, the U.S. financial regulators proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets. The proposed revised rules would establish general requirements applicable to all covered entities, which would include: (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping. Under the proposed rule, larger financial institutions with total average consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers”. These rules would not be directly applicable to the Company, which currently has less than $1 billion in assets.

 

The Dodd-Frank Act.    The Dodd-Frank Act became law in 2010 and has had a broad impact on the financial services industry, imposing significant regulatory and compliance changes. A significant volume of financial services regulations required by the Dodd-Frank Act have not yet been finalized by banking regulators, Congress continues to consider legislation that would make significant changes to the law and courts are addressing significant litigation arising under the Act, making it difficult to predict the ultimate effect of the Dodd-Frank Act on our business. The following discussion provides a brief summary of certain provisions of the Dodd-Frank Act that may have an effect on us.

 

The Dodd-Frank Act significantly reduced the ability of national banks to rely upon federal preemption of state consumer financial laws. Although the OCC, as the primary regulator of national banks, has the ability to make preemption determinations where certain conditions are met, the broad rollback of federal preemption has the potential to create a patchwork of federal and state compliance obligations and enforcement. This could, in turn, result in significant new regulatory requirements applicable to us and certain of our lending activities, with potentially significant changes in our operations and increases in our compliance costs.

 

The Dodd-Frank Act made permanent the general $250,000 deposit insurance limit for insured deposits. Amendments to the FDIA also revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s deposit insurance fund (“DIF”) are calculated. The assessment base now consists of average consolidated total assets less average tangible equity. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. These changes contributed to an increase in the FDIC deposit insurance premiums paid by us in 2015 and 2016 and may contribute to increasing and less predictable deposit insurance expense in future years.

 

The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of restrictions on loans to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

 

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The Dodd-Frank Act increases the risk of “secondary actor liability” for lenders such as the Bank that provide financing or other services to customers offering financial products or services to consumers. The Act can impose liability on a service provider for knowingly or recklessly providing substantial assistance to a customer found to have engaged in unfair, deceptive or abusive practices that injure a consumer. This exposure contributes to increased compliance and other costs in connection with administration of credit extended to entities engaged in activities covered by the Dodd-Frank Act.

 

The Dodd-Frank Act may continue to impact the profitability of our business activities, require further changes to certain of our business practices, impose upon us more stringent compliance, capital, liquidity and leverage requirements or otherwise adversely affect our business. These developments may also require us to invest significant management attention and resources to evaluate and make changes to our business as necessary to comply with changing statutory and regulatory requirements.

 

The Volcker Rule.    The Dodd-Frank Act amended the BHCA to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading in designated types of financial instruments and from investing in and sponsoring certain hedge funds and private equity funds. The final rule became effective in July 2015. It is highly complex, and many aspects of its application remain uncertain. We do not currently anticipate that the Volcker Rule will have a material effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule. Unanticipated effects of the Volcker Rule’s provisions or future interpretations may have an adverse effect on our business or services provided to the Bank by other financial institutions.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Offering Circular. Our future operating results may be affected by various trends and factors that are beyond our control. These include the factors set forth in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Information.” Accordingly, past results and trends may not be reliable indicators of future results or trends. With the exception of historical information, the matters discussed below include forward-looking statements that involve risks and uncertainties. We caution readers that a number of important factors discussed below could affect our actual results and cause actual results to differ materially from those in the forward-looking statements.

 

Overview

 

We are a community bank offering full-service banking through our single branch location.

 

At March 31, 2017, our total consolidated assets were $157.1 million, representing a $1.0 million increase since December 31, 2016. At March 31, 2017, our total net loans were $103.5 million and our total deposits were $128.0 million compared to total net loans of $103.4 million and total deposits of $126.3 million at December 31, 2016.

 

Our net income for the year ended December 31, 2016 was $3.1 million compared to net income of $1.8 million for the year ended December 31, 2015, representing an increase of $1.3 million. The 2016 results included a full reversal of our deferred tax asset valuation allowance resulting in a one-time tax benefit of $2.2 million. Partially offsetting this one-time income tax benefit was a loss contingency of $515,000 as a result of a jury verdict awarding a severance payment and related interest to our former CEO. Our net income for the quarter ended March 31, 2017 was $200,000 compared to net income of $454,000 for the quarter ended March 31, 2016. First quarter 2016 was bolstered by a $125,000 gain earned on the sale of the guaranteed portion of an SBA loan.

 

Significant Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base our estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

 

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We consider accounting estimates to be critical to our reported financial results if: (a) the accounting estimate requires management to make assumptions about matters that are highly uncertain; and (b) different estimates that our management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Accounting policies related to allowance for loan losses and loss contingencies are considered to be critical as these policies involve considerable subjective judgment and estimation by our management.

 

Significant accounting policies, and our procedures related to these policies, are described at Note A, “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this Offering Circular.

 

Recent Financial Trends

 

Key Financial Measures and Results. The following tables set forth certain key financial measures and results for the Company for the periods indicated.

 

For the year ended and as of December 31,

 

(derived from audited statements)

 

2016

 

2015

 

Change

Favorable

(Unfavorable)

 

 

 

(Dollars in thousands, except per share)

 

Income Statement Data:

 

 

 

 

 

 

 

Net Income

 

$

3,127

 

$

1,778

 

$

1,349

 

Earnings per share

 

$

1.15

 

$

0.65

 

$

0.50

 

 

 

 

 

 

 

 

 

End of Period Balance Sheet Data:

 

 

 

 

 

 

 

Total assets

 

$

156,091

 

$

146,073

 

$

10,018

 

Gross loans, net of unearned fees

 

104,983

 

82,109

 

22,874

 

Net loans

 

103,384

 

80,591

 

22,793

 

Deposits

 

126,325

 

120,839

 

5,486

 

Stockholders’ equity

 

23,072

 

19,837

 

3,235

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

Net interest margin

 

2.99

%

3.13

%

(0.14

)%

Efficiency ratio (1)

 

83.25

%

66.94

%

(16.31

)%

Return on average assets

 

2.12

%

1.25

%

0.87

%

Return on average common equity

 

14.42

%

9.12

%

5.30

%

 


(1)         Efficiency measures the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding gain (loss) on sale of securities.

 

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For the quarter ended and as of March 31,

 

(unaudited)

 

2017

 

2016

 

Change
Favorable
(Unfavorable)

 

 

 

(Dollars in thousands, except per share)

 

Income Statement Data:

 

 

 

 

 

 

 

Net Income

 

$

200

 

$

454

 

$

(254

)

Earnings per share

 

$

0.07

 

$

0.17

 

$

(0.10

)

 

 

 

 

 

 

 

 

End of Period Balance Sheet Data:

 

 

 

 

 

 

 

Total assets

 

$

157,094

 

$

140,559

 

$

16,535

 

Gross loans, net of unearned fees

 

105,114

 

79,975

 

25,139

 

Net loans

 

103,513

 

78,418

 

25,095

 

Deposits

 

128,043

 

114,299

 

13,744

 

Stockholders’ equity

 

23,400

 

20,815

 

2,585

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

Net interest margin

 

3.04

%

3.09

%

(0.05

)%

Efficiency ratio (1)

 

72.56

%

67.42

%

(5.14

)%

Return on average assets

 

0.51

%

1.27

%

(0.76

)%

Return on average common equity

 

3.44

%

8.93

%

(5.49

)%

 


(1)         Efficiency measures the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding gain (loss) on sale of securities.

 

 

 

As of December 31,

 

Percent
Increase

 

(derived from audited statements)

 

2016

 

2015

 

(Decrease)

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Ratios(1) :

 

 

 

 

 

 

 

Total risk based capital to risk weighted assets

 

20.00

%

20.00

%

%

Tier 1 capital to average assets

 

13.98

%

13.19

%

0.79

%

Gross loans, net of unearned fees, to deposits

 

83.10

%

67.94

%

15.16

%

 

 

 

 

 

 

 

 

Selected Asset Quality Ratios:

 

 

 

 

 

 

 

Non-performing loans (NPLs) to gross loans

 

%

0.16

%

(0.16

)%

Non-performing assets to total assets

 

%

0.09

%

(0.09

)%

Allowance for loan losses to gross loans

 

1.52

%

1.85

%

(0.33

)%

Criticized assets to total assets

 

3.92

%

3.36

%

0.56

%

 


(1)         Capital ratios are presented for the bank only.  Capital ratios are not presented on a consolidated basis, as they are only applicable for bank holding companies with consolidated assets of $500 million or more, or for those bank holding companies that are engaged in significant nonbanking activities.

 

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Table of Contents

 

 

 

As of March 31,

 

Percent
Increase

 

(unaudited)

 

2017

 

2016

 

(Decrease)

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Ratios(1):

 

 

 

 

 

 

 

Total risk based capital to risk weighted assets

 

19.92

%

20.69

%

(0.77

)%

Tier 1 capital to average assets

 

13.74

%

13.46

%

0.28

%

Gross loans, net of unearned fees, to deposits

 

82.09

%

69.96

%

12.13

%

 

 

 

 

 

 

 

 

Selected Asset Quality Ratios:

 

 

 

 

 

 

 

Non-performing loans (NPLs) to gross loans

 

%

%

%

Non-performing assets to total assets

 

%

%

%

Allowance for loan losses to gross loans

 

1.52

%

1.95

%

(0.43

)%

Criticized assets to total assets

 

3.90

%

5.16

%

(1.26

)%

 


(1)         Capital ratios are presented for the bank only. Capital ratios are not presented on a consolidated basis, as they are only applicable for bank holding companies with consolidated assets of $500 million or more, or for those bank holding companies that are engaged in significant nonbanking activities.

 

Return on Average Common Equity.  Given the Company’s single class of common stock, all net income is net income available to stockholders. Net income for the year ended December 31, 2016 was $3.1 million compared to net income of $1.8 million for the year ended December 31, 2015. Return on average common equity for the year ended December 31, 2016 was 14.42% as compared to 9.12% for the year ended December 31, 2015, based on average common equity amounts of $21.7 million and $19.5 million, respectively. The increase in net income for 2016 was due to a full reversal of the Company’s deferred tax asset valuation allowance resulting in a one-time tax benefit of $2.2 million. Partially offsetting this one-time income tax benefit was a loss contingency of $515,000 as a result of a jury verdict awarding a severance payment and related interest to our former CEO.

 

Net income for the three months ended March 31, 2017 was $200,000 compared to net income of $454,000 for the three months ended March 31, 2016. Return on average common equity for the three months ended March 31, 2017 was 3.44% as compared to 8.93% for the three months ended March 31, 2016, based on average common equity amounts of $23.2 million and $20.3 million, respectively. First quarter 2016 was bolstered by a $125,000 gain on the sale of the guaranteed portion of an SBA 7(a) loan as well as $51,000 in gains on the sale of investment securities. During the first quarter of 2017, the Company did not recognize any gains from the sale of loans or investment securities.

 

Return on Average Assets (“ROAA”).  ROAA for the year ended December 31, 2016 was 2.12% as compared to 1.25% for the year ended December 31, 2015, based on average total asset amounts of $147.2 million and $142.3 million, respectively. ROAA for the three months ended March 31, 2017 was 0.51%, as compared to 1.27% for the three months ended March 31, 2016, based on average total asset amounts of $156.6 million and $143.3 million, respectively.

 

Net Interest Margin.  Net interest margin decreased from 3.13% for the year ended December 31, 2015 to 2.99% for the year ended December 31, 2016 primarily due to increased interest expense on time deposits given increases in both the average rate (up 8 basis points) and the average balance, up 18%, in 2016. This negative impact on net interest margin was mitigated by an increase in interest income on loans, due to increased volumes. Average loans increased $8.7 million, or 10%, in 2016. However, the average yield on loans decreased 32 basis points, or 6%, due to the mix of the loan portfolio. In 2016, the Company purchased an interest in a pool of rehabilitated student loans. These loans earn at a rate substantially below the rest of the loan portfolio, but they also have a lower risk of loss as approximately 98% of the balance is government guaranteed.

 

Net interest margin decreased from 3.09% for the three months ended March 31, 2016 to 3.04% for the three months ended March 31, 2017 primarily due to a 64 basis point decline in yield on loans given the mix of the

 

47



Table of Contents

 

loan portfolio. During first quarter 2016, the Bank had no investment in student loans. The average balance in student loans during the first quarter 2017 was $14.1 million, yielding 2.79% on average. This negative impact to net interest margin was partially offset by a 24 basis point increase in the yield on investment securities. The cost of interest-bearing liabilities increased 2 basis points from 1.06% for the three months ended March 31, 2016 to 1.08% for the three months ended March 31, 2017. This was primarily driven by increases in the federal funds rate which raised the cost of demand deposits. The Federal Reserve raised interest rates 25 basis points in December 2015, December 2016 and March 2017.

 

Asset Quality.  For banks, asset quality plays a significant role in the overall financial condition of the institution and results of operations. The Company defines a non-performing loan as a loan past due 90 days or more and still accruing and nonaccrual loans. The Company does not include government guaranteed loans past due 90 days or more and still accruing as non-performing loans, as most of the principal and accrued interest will be recovered on these loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The Company had no non-performing loans, no other real estate owned (OREO) nor any foreclosed assets as of December 31, 2016, March 31, 2016 and March 31, 2017. As of December 31, 2015, the Company had one non-performing loan totaling $131,000 and no OREO or other foreclosed assets.

 

As of December 31, 2016, non-performing assets were $0 compared to $131,000 at December 31, 2015. Non-performing assets as a percentage of total assets were 0% as of December 31, 2016 compared to 0.09% as of December 31, 2015. For the year ended December 31, 2016, the Company recorded net recoveries of approximately, $81,000 or 0.08% recoveries as a percentage of average gross loans, net of unearned fees, compared to net charge-offs of $32,000 or 0.03% for the year ended December 31, 2015.

 

The Company had no non-performing assets as of March 31, 2017 or 2016. For the three months ended March 31, 2017, the Company recorded net recoveries of $1,600 compared to net recoveries of $39,000 for the three months ended March 31, 2016.

 

The tables below present information regarding our provision and allowance for loan losses for the periods indicated:

 

 

 

At December 31,

 

(derived from audited statements)

 

2016

 

2015

 

 

 

(Dollars in thousands)

 

Beginning allowance for loan losses

 

$

1,518

 

$

1,600

 

 

 

 

 

 

 

Provision (reversal of) for loan losses

 

 

(50

)

 

 

 

 

 

 

Loan charge-offs

 

(1

)

(117

)

Recoveries

 

82

 

85

 

Net (charge-offs) recoveries

 

81

 

(32

)

Ending allowance for loan losses

 

$

1,599

 

$

1,518

 

 

 

 

 

 

 

ALLL to gross loans, net of unearned fees

 

1.52

%

1.84

%

ALLL to non-performing loans

 

%

%

Net (recoveries) charge-offs to average gross loans, net of unearned fees

 

(0.08

)%

0.03

%

 

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Table of Contents

 

 

 

At March 31,

 

(unaudited)

 

2017

 

2016

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Beginning allowance for loan losses

 

$

1,599

 

$

1,518

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

 

 

 

 

 

Loan charge-offs

 

(20

)

(1

)

Recoveries

 

22

 

40

 

Net (charge-offs) recoveries

 

2

 

39

 

Ending allowance for loan losses

 

$

1,601

 

$

1,557

 

 

 

 

 

 

 

ALLL to gross loans, net of unearned fees

 

1.52

%

1.94

%

ALLL to non-performing loans

 

%

%

Net (recoveries) charge-offs to average gross loans, net of unearned fees

 

(0.00

)%

(0.19

)%

 

The ratio of our allowance for loan and lease losses (ALLL) to gross loans, net of unearned fees, declined from 1.84% on December 31, 2015 to 1.52% on December 31, 2016 and from 1.94% on March 31, 2016 to 1.52% on March 31, 2017.  The decline primarily relates to the volume of government guaranteed student loans within the loan portfolio as these loans have a substantially lower risk of loss than the remainder of the portfolio.

 

Asset and Deposit Growth.  The ability to produce loans and generate deposits is fundamental to our growth. Our assets and liabilities are comprised primarily of loans and deposits, respectively. Total assets were $156.1 million at December 31, 2016, an increase of $10.0 million from $146.1 million at December 31, 2015. Total net loans increased $22.8 million, or 28%, to $103.4 million at December 31, 2016 from $80.6 million at December 31, 2015. Total deposits increased by $5.5 million to $126.3 million at December 31, 2016 from $120.8 million at December 31, 2015.

 

Total assets were $157.1 million at March 31, 2017, an increase of $1.0 million from $156.1 million at December 31, 2016 and up from $140.6 million at March 31, 2016. Total net loans increased to $103.5 million at March 31, 2017 from $103.4 million at December 31, 2016 and up from $78.4 million at March 31, 2016. Total deposits increased by $1.7 million to $128.0 million at March 31, 2017 from $126.3 million at December 31, 2016 and up from $114.3 million at March 31, 2016.

 

Loan Mix.  At March 31, 2017, real estate-secured loans represented our largest concentration of loans by collateral type. Real estate loans were primarily comprised of commercial real estate loans, representing 49% of total gross loans. Construction and land development loans represented 3%, and loans secured by one-to-four family properties were 28%. Commercial and industrial loans represented 7% of total gross loans. Consumer-related loans, including government-guaranteed student loans represented 13% of total loans.

 

Deposit Mix.  We are focused on maintaining and increasing core deposits to improve net interest margin in the current low interest rate environment. Total interest-bearing accounts, which include demand and NOW deposits (checking accounts), savings and money market deposits, and certificates of deposit (“CDs”) decreased from 91.4% of total deposits at December 31, 2016 to 90.6% at March 31, 2017.

 

Operating Efficiency.  Operating efficiency is measured in terms of how efficiently income before income taxes is generated as a percentage of revenue. Our efficiency ratio (noninterest expenses divided by the sum of net interest income and noninterest income, excluding gain (loss) on sale of securities) was 83.25% for the year ended December 31, 2016 as compared to 66.94% for the year ended December 31, 2015. The negative change in the 2016 efficiency ratio was primarily driven by increased noninterest expenses associated with a lawsuit between the Company and a former President and Chief Executive Officer which resulted in increased legal costs as well as a $515,000 expense as a result of a jury verdict awarding a severance payment and related interest to this former executive. Additionally, the efficiency ratio for 2015 was bolstered by a one-time bank owned life insurance benefit of $293,000.

 

The Company’s efficiency ratio for the first quarter 2017 was 72.56% compared to 67.42% for the first quarter of 2016. The efficiency ratio for the first quarter of 2016 was bolstered by a $125,000 gain on the sale of the guaranteed portion of an SBA loan.

 

Asset Sensitive.  Management uses various modeling strategies to manage the repricing characteristics of our assets and liabilities. These models contain a number of assumptions and cannot take into account all the various factors that influence the sensitivities of our assets and liabilities. Despite these limitations, most of our models at March 31, 2017 indicated that our balance sheet was slightly liability sensitive. A company is considered to be

 

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Table of Contents

 

liability sensitive if the amount of its interest earning assets maturing or repricing within a certain time period are less than the amount of its interest-bearing liabilities also maturing or repricing within the same period. Being liability sensitive means generally that in times of rising interest rates, a company’s net interest income will decrease, and in times of falling interest rates, net interest income will increase.

 

Results of Operations

 

Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans receivable, securities and other short-term investments, and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent upon our generation of noninterest income, consisting of income from banking, deposit, and other service fees. Other factors contributing to our results of operations include our provisions for loan losses, gains or losses on sales of securities and income taxes, as well as the level of our noninterest expenses, such as compensation and benefits, occupancy and equipment and other miscellaneous operating expenses.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

The following table sets forth a summary of our results of operations for the years ended December 31, 2016 and 2015:

 

 

 

 

 

 

 

Change
Favorable

 

 

 

 

 

 

 

(Unfavorable)

 

(derived from audited statements)

 

2016

 

2015

 

2016 v 2015

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Results of Operations:

 

 

 

 

 

 

 

Interest income

 

$

5,477

 

$

5,342

 

$

135

 

Interest expense

 

1,300

 

1,135

 

(165

)

Net interest income

 

4,177

 

4,207

 

(30

)

 

 

 

 

 

 

 

 

Provision (reversal of) for loan losses

 

 

(50

)

(50

)

Net interest income after provision for loan losses

 

4,177

 

4,257

 

(80

)

 

 

 

 

 

 

 

 

Noninterest income

 

522

 

745

 

(223

)

Noninterest expense

 

3,781

 

3,224

 

(557

)

Income before income taxes

 

918

 

1,778

 

(860

)

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

2,209

 

 

2,209

 

Net income

 

$

3,127

 

$

1,778

 

$

1,349

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

1.15

 

$

0.65

 

$

0.50

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

2,723,062

 

2,722,473

 

589

 

 

 

 

 

 

 

 

 

Return on average assets

 

2.12

%

1.25

%

0.87

%

Return on average equity

 

14.42

%

9.12

%

5.30

%

Average equity to average assets

 

14.73

%

13.71

%

1.02

%

 

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Table of Contents

 

Net income for the year ended December 31, 2016 was $3.1 million compared to net income of $1.8 million for the year ended December 31, 2015. The 2016 results included a full reversal of our deferred tax asset valuation allowance resulting in a one-time tax benefit of $2.2 million. Partially offsetting this one-time income tax benefit was a loss contingency of $515,000 as a result of a jury verdict awarding a severance payment and related interest to our former CEO. Our net interest income after provision for loan and lease losses decreased by $80,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015. The Company recorded no provision for loan and lease losses in 2016 compared to a $50,000 credit to the provision for loan and lease losses in 2015. Our noninterest income decreased by $223,000 in 2016. This decline was due to a one-time bank owned life insurance benefit of $293,000 along with a higher gain on the sale of available-for-sale securities in 2015, partially offset by a gain on loans sold of $125,000 in 2016.  Our noninterest expense increased by $557,000 as a result of the loss contingency and related legal expenses incurred to defend the lawsuit with our former CEO.

 

Net Interest Income and Net Interest Margin

 

Net interest income, which is our primary source of income, represents the difference between interest earned on assets and interest paid on liabilities. The interest rate spread is the difference between the yield on our interest-bearing assets and liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

 

The following table sets forth daily average balances, interest income and expense amounts, and average yields and cost of funds for our significant classes of interest-earning assets and interest-bearing liabilities for the periods indicated. The table also presents net interest income, net interest margin and net interest spread for the periods indicated. With respect to loans, average balances include loans which are on nonaccrual status.

 

 

 

Year Ended December 31,

 

 

 

2016

 

2015

 

(Dollars in thousands)
(derived from audited statements)

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Yield/
Cost

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Yield/
Cost

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans, net of unearned fees(1)

 

$

91,891

 

$

4,383

 

4.77

%

$

83,231

 

$

4,237

 

5.09

%

Investment securities

 

45,335

 

1,036

 

2.29

 

48,633

 

1,044

 

2.15

 

Federal funds sold

 

982

 

5

 

0.51

 

635

 

2

 

0.31

 

Other interest-earning assets

 

1,340

 

53

 

3.96

 

1,731

 

59

 

3.41

 

Total interest earning assets

 

139,548

 

$

5,477

 

3.92

%

134,230

 

$

5,342

 

3.98

%

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

687

 

 

 

 

 

802

 

 

 

 

 

Other assets

 

5,872

 

 

 

 

 

5,706

 

 

 

 

 

Total assets

 

$

146,107

 

 

 

 

 

$

140,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

7,937

 

$

60

 

0.76

%

$

7,388

 

$

55

 

0.74

%

Money market

 

19,035

 

82

 

0.43

 

18,502

 

68

 

0.37

 

Savings

 

21,528

 

116

 

0.54

 

27,738

 

139

 

0.50

 

Time deposits

 

67,633

 

971

 

1.44

 

57,247

 

779

 

1.36

 

Total interest-bearing deposits

 

116,133

 

1,230

 

1.06

 

110,875

 

1,041

 

0.94

 

Fed funds purchased

 

3

 

 

1.01

 

18

 

 

0.79

 

Federal home loan bank advances

 

5,641

 

71

 

1.26

 

7,369

 

94

 

1.28

 

Other borrowed funds

 

47

 

 

0.29

 

55

 

 

0.30

 

Total interest bearing liabilities

 

$

121,824

 

$

1,300

 

1.07

%

$

118,317

 

$

1,135

 

0.96

%

Noninterest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

4,490

 

 

 

 

 

4,413

 

 

 

 

 

Other liabilities

 

325

 

 

 

 

 

324

 

 

 

 

 

Total liabilities

 

126,639

 

 

 

 

 

123,054

 

 

 

 

 

Stockholders’ equity

 

19,468

 

 

 

 

 

17,684

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

146,107

 

 

 

 

 

$

140,738

 

 

 

 

 

Net interest income/ margin(2)

 

 

 

$

4,177

 

2.99

%

 

 

$

4,207

 

3.13

%

Net interest spread(3)

 

 

 

 

 

2.86

%

 

 

 

 

3.02

%

Ratio of average interest-bearing assets to average interest-earning liabilities

 

 

 

 

 

114.50

%

 

 

 

 

113.39

%

 

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Table of Contents

 


(1)         Average loans include nonaccrual loans of $11,000 and $163,000 in 2016 and 2015, respectively.

(2)         Net interest margin is computed by dividing net interest income by total average earning assets.

(3)         Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

 

Net interest income decreased $30,000 to $4.2 million in 2016. Net interest margin decreased to 2.99% for 2016 from 3.13% for 2015.

 

The yield on our average interest-earning assets was 3.92% for the year ended December 31, 2016, compared to 3.98% for the year ended December 31, 2015. The yields on our average loan balances and securities portfolio were 4.77% and 2.29%, respectively, for the year ended December 31, 2016, compared to 5.09% and 2.15%, respectively, for the year ended December 31, 2015. The decreased yield on loans was primarily due to the mix of the loan portfolio. In 2016, the Company purchased an interest in a pool of rehabilitated government-guaranteed student loans, which have earned an average rate of 2.86% during 2016. Additionally, the Company’s local environment is intensely competitive, which has driven down yields on high-quality loans. The increased yield on the investment portfolio is primarily due to the Company investing in longer, fixed rate bonds and reducing its concentration in lower-yielding residential agency mortgage-backed securities.

 

The cost of funds on our average interest-bearing liabilities was 1.07% for the year ended December 31, 2016, compared to 0.96% for the year ended December 31, 2015. The increase in cost of funds was primarily the impact of two Federal Reserve rate increases and an increase in both the volume and rate of time deposits. The Company is committed to increasing non-interest bearing deposits to help reduce the Company’s cost of funds. Progress has been made in this area during 2017.

 

 

 

Year ended December 31, 2016
Compared to

Year ended December 31, 2015

 

 

 

Increase (Decrease) due to

 

(derived from audited statements)

 

Volume

 

Rate

 

Total

 

 

 

(Dollars in thousands)

 

Interest income:

 

 

 

 

 

 

 

Gross loans, net of unearned fees

 

$

370

 

$

(224

)

$

146

 

Investment securities

 

(165

)

157

 

(8

)

Federal funds

 

1

 

2

 

3

 

Other interest-earning assets

 

(21

)

15

 

(6

)

Total increase (decrease) in interest income

 

$

185

 

$

(50

)

$

135

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

NOW

 

$

4

 

$

1

 

$

5

 

Money market

 

2

 

12

 

14

 

Savings

 

(35

)

12

 

(23

)

Time deposits

 

147

 

45

 

192

 

Federal funds purchased

 

 

 

 

Other borrowed funds

 

(22

)

(1

)

(23

)

Total increase (decrease) in interest expense

 

96

 

69

 

165

 

Increase (decrease) in net interest income

 

$

120

 

$

(150

)

$

(30

)

 

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Table of Contents

 

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

The following tables set forth summaries of our results of operations for the periods indicated:

 

 

 

Three Months Ended

 

Change

 

 

 

March 31,

 

Favorable

 

(unaudited)

 

2017

 

2016

 

(Unfavorable)

 

 

 

(Dollars in thousands)

 

Results of Operations:

 

 

 

 

 

 

 

Interest income

 

$

1,438

 

$

1,360

 

$

78

 

Interest expense

 

334

 

314

 

(20

)

Net interest income

 

1,104

 

1,046

 

58

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

Net interest income after provision for loan losses

 

1,104

 

1,046

 

58

 

 

 

 

 

 

 

 

 

Noninterest income

 

55

 

242

 

(187

)

Noninterest expense

 

841

 

834

 

(7

)

Income before income taxes

 

318

 

454

 

(136

)

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(118

)

 

(118

)

Net income

 

$

200

 

$

454

 

(254

)

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.07