Solera National Bancorp Announces Second Quarter 2020 Financial Results

Quarterly earnings hit new record topping $2.0 million, pre-tax and pre-provision expense

LAKEWOOD, Colo., July 23, 2020 (GLOBE NEWSWIRE) -- Solera National Bancorp, Inc. (OTC:SLRK) (“Company”), the holding company for Solera National Bank (“Bank”), a business-focused bank primarily serving the Denver metropolitan area, today reported financial results for the second quarter and first half of 2020. 

Highlights for the quarter and six-months ended June 30, 2020 include:

• Second quarter 2020 net income was the strongest in the Bank’s history at $1.25 million, a 72% jump from first quarter 2020.
• YTD net income was up 13% at $1.97 million for the six-months ended June 30, 2020 compared to $1.74 million for the six-months ended June 30, 2019.
• Cost of funds improved to an impressive 35 basis points for the second quarter; year-to-date costs of funds reduced 50% going from 82 basis points for the six-months ended June 30, 2019 to 41 basis points for the six-months ended June 30, 2020. 
• Traditional gross loans rose $8.1 million since first quarter 2020 ending the second quarter at $219.8 million.  Additionally, the Bank originated $93.7 million in Paycheck Protection Program (PPP) loans during the second quarter 2020. 
• Noninterest-bearing deposits climbed 64%, or $73.4 million, year-over-year ending the quarter at $187.9 million.
• Asset quality measures declined given an increase in criticized loans.  As of June 30, 2020 criticized assets represent 31.6% of total equity, compared to 20.7% as March 31, 2020 and 21.4% at June 30, 2019.  Generally, we disclose asset quality in relation to total assets, but given the increase in assets with the PPP loans, we believe reporting this as a percentage of equity is more meaningful.
• Return on average assets stayed healthy at 1.25% for the six-months ended June 30, 2020, despite the $1.0 million provision for loan losses recorded during 2020.
• Return on average equity was 9.56% for the six-months ended June 30, 2020 compared to 9.60% for the six-months ended June 30, 2019.

For the six-months ended June 30, 2020, the Company reported net income of $1.97 million, or $0.48 per share, compared to $1.74 million, or $0.43 per share, for the six-months ended June 30, 2019.  Martin P. May, President and CEO, commented: “We are proud to deliver another quarter of improving net income despite the unprecedented challenges facing every company around the world today.  And, we are poised to remain solid even if the pandemic lingers on.  We are committed to working tirelessly to deliver the products and services our customers need.  Additionally, we are making careful decisions to advance our strategic initiatives for tomorrow.” 

Operational Highlights

Net interest income after provision for loan and lease losses was $4.74 million for the six-months ended June 30, 2020 compared to $4.30 million for the six-months ended June 30, 2019.  The Company recorded provision for loan and lease losses of $1.01 million for the six-months ended June 30, 2020 compared with $83,000 for the same prior year period.  The increase in the provision for loan and lease losses during the six months of 2020 was primarily due to the uncertainty in the market due to COVID-19.    

Despite declining interest rates, loan growth has led to a $583,000, or 13%, increase in interest and fees on loans for the first six months of 2020 compared to the same period in 2019.  Additionally, interest income was aided by an influx of PPP loans during the second quarter that bolstered earnings $426,000 compared with prior periods.  Further contributing to the growth in net interest income was the $206,000 decline in interest expense for the first six months of 2020 compared to the same period in 2019 despite the $140.1 million increase in total deposits during this time.  Mr. May commented:  “We increased total deposits 70% year-over-year.  At the same time, we reduced interest expense on those deposits 29%.  That’s a story of success.  Unfortunately, the events of the last four months have muted the impact of this progress on the Bank’s net interest income.  With the Federal Reserve swiftly moving interest rates down 150 basis points in March, many of our assets repriced lower reducing the average yield on loans 58 basis points year-over-year. We are grateful for the progress we’ve made in reducing our cost of funds, as this has allowed our net interest spread (the difference between the yield earned on assets and the rate paid on deposits) to remain unchanged, at 3.04%, despite the drastically lower interest rate environment.”

Net interest margin fell to 3.66% for the six-months ended June 30, 2020, a 26 basis points decline from 3.92% for the six-months ended June 30, 2019.  The decline was exasperated by the Bank’s participation in PPP loans, which have a lower effective yield than the Bank’s traditional commercial loans.  The PPP loans are currently yielding 2.59%, which accounts for approximately 9 basis points of the 26 basis points decline in net interest margin year-over-year.  Chief Financial Officer, Melissa K. Larkin noted, “We’re hopeful the effective yield on the PPP loans will improve later in the year as balances are forgiven and the Bank receives payoffs from the SBA; however, that target continues to move as the timeline gets longer and longer.  Our original estimates were the PPP loans would have an average life of 6 months. We’ve had to revise those estimates to 12 - 18 months given the changes made to the PPP program in recent weeks.  All of this will create noise in our financial results, which is why we’ve tried to bifurcate the PPP totals in our financial schedules.”  For the second quarter 2020 interest margin was 3.50%. Removing the impact of the PPP loans, net interest margin would have been 3.68%, or an 18 basis point decline from 3.86% for the linked quarter.

Total noninterest income in second quarter 2020 was $483,000 compared to $210,000 for the linked quarter.  The increase in second quarter 2020 was due to gains on the sale of investment securities totaling $279,000 compared to $15,000 for first quarter 2020. Additionally, customer service and other fees improved 30% quarter-over-quarter, from $80,000 for first quarter 2020 to $104,000 for second quarter 2020 due, primarily, to the Bank’s expanding customer base. For the six-months ended June 30, 2020, noninterest income was $693,000, a $372,000 improvement over the $321,000 earned during the first six months of 2019.  $162,000 of this change was due to rental income earned on the Bank’s office building purchased during fourth quarter 2019.  The $70,000 increase in customer service and other fees year-over-year is directly correlated with the increase in customers. 

Total noninterest expense in second quarter 2020 was $1.47 million, compared with $1.46 million for first quarter 2020.  For the six-months ended June 30, 2020, total noninterest expense was $2.94 million compared with $2.34 million for the same prior-year period.   Compared to prior year, employee compensation and benefits increased $239,000 due to additional staffing to support franchise growth, occupancy expenses increased $109,000 due to the office building purchased in fourth quarter 2019, and other general and administrative expenses increased $204,000 as a result of higher data processing expenses due to the surge in customer accounts.  However, as a percentage of average assets, noninterest expenses have remained well managed throughout the Bank’s rapid growth, at 2.09% for the six-months ended June 30, 2020 compared to 2.06% for the six-months ended June 30, 2019.  [Note:  the increase in total assets due to the PPP loans during second quarter 2020 has been removed for purposes of this calculation.]

The Company’s second quarter 2020 efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) improved to a notable 45.21% compared to 50.61% for the linked quarter.  The efficiency ratio for the six-months ended June 30, 2020 was 47.75% compared to 51.47% for the six-months ended June 30, 2019.

Income tax expense for the six months of 2020 benefitted from the purchase of tax-exempt municipal securities in the Company’s available-for-sale investment portfolio during the year.  Despite the $215,000 growth in pre-tax net income from 2019, the Company recorded income tax expense of $527,000 for the six-months ended June 30, 2020 compared to $543,000 for the six-months ended June 30, 2019. 

Balance Sheet Review and Asset Quality Strength

Total assets of $395.20 million at June 30, 2020 increased from $300.26 million at March 31, 2020 and $243.34 million at June 30, 2019.  The increase compared to the linked quarter was primarily due to $93.68 million in PPP loans processed during the second quarter, as well as the $8.12 million growth in the Bank’s traditional loan portfolio. Total asset growth from June 2019 to June 2020 consisted of PPP loans ($93.68 million), a 21% expansion in traditional loans ($38.36 million), additions to the investment portfolio ($31.52 million) and the acquisition of an office building ($6.68 million) purchased in fourth quarter 2019. 

Net traditional loans, after allowance for loan and lease losses, were $215.43 million at June 30, 2020 compared to $207.82 million at March 31, 2020 and $178.58 million at June 30, 2019.  Net loan growth of $7.61 million during the second quarter of 2020 was driven by commercial loan originations of $15.33 million partly offset by payoffs, pay downs and an increase in the allowance for loan losses totaling $7.72 million.  For the six-months ended June 30, 2020, the $3.40 million expansion in net traditional loans consisted primarily of commercial loan originations totaling $21.20 million, a net decrease in student loans of $758,000, partly offset by payoffs, pay downs and an increase in the allowance for loan losses totaling $17.03 million.  Additionally, the Company funded 662 PPP loans during second quarter 2020 totaling $93.68 million.  These loans are fully guaranteed by the Small Business Administration and were issued to provide emergency relief to small businesses while businesses were closed due to the government’s stay-at-home order.  The yield on the PPP loans is substantially lower than those in our traditional loan portfolio, averaging 2.59%, compared to 4.64% on average for our traditional loans.

The allowance for loan and lease losses at June 30, 2020 was $3.77 million, or 1.72% of gross traditional loans, compared to $3.27 million, or 1.55% at March 31, 2020, and $2.34 million, or 1.29% of gross loans at June 30, 2019.  The 43 basis point increase in the allowance for loan and lease losses year-over-year was largely due to increased uncertainty surrounding the loans granted payment deferrals at the height of the pandemic, in conjunction with an increase in substandard assets and overall growth in the loan portfolio. Total criticized assets of $13.72 million at June 30, 2020 increased compared to the linked-quarter, up $5.08 million from $8.64 million at March 31, 2020 and increased from $8.16 million at June 30, 2019.  Despite the increase, criticized assets to total assets remain manageable at 3.47% of total assets as of June 30, 2020 compared to 3.35% as of June 30, 2019. 

Total investment securities available-for-sale increased modestly during the quarter to $58.50 million at June 30, 2020 compared to $58.32 million at March 31, 2020.  The portfolio increased $31.52 million from $26.98 million at June 30, 2019 primarily due to the purchase of tax-exempt municipal bonds, which had favorable pricing in March 2020 as a result of prevailing market conditions. Investment securities held-to-maturity of $6.41 million have remained unchanged since June 2019.  For the six-months ended June 30, 2020, the Company realized $294,000 in gains on the sale of $5.34 million in corporate and municipal bonds.

Total deposits at June 30, 2020 were $340.72 million compared to $253.20 million at March 31, 2020 and $200.64 million at June 30, 2019.  Noninterest-bearing demand deposits of $187.88 million, which represent 55% of total deposits, at June 30, 2020 increased $18.15 million, or 11%, versus the linked-quarter, and increased $73.43 million from $114.44 million at June 30, 2019. 

Commercial and residential loans past due have remained inconsequential for all periods presented, with the only notable past dues coming from the student loan participation pool.  However, 29% of the Bank’s traditional loan portfolio were granted payment deferrals to provide some relief to borrowers during the COVID-19 lock-down.  $2.71 million of the student loan participation pool were 30 days+ past due at June 30, 2020.  This was up slightly from $2.54 million 30 days+ past due at March 31, 2020.  Of the $2.71 million past due, $1.21 million were 90 days+ past due as of June 30, 2020.  The student loans are backed by an approximately 97.5% guarantee of the U.S. Treasury under the Higher Education Act of 1965.  This guarantee includes all principal and interest so net credit losses in this portfolio are expected to be minimal.  Additionally, the Bank purchased the pool at a discount resulting in the Bank’s maximum exposure to credit losses slightly less than 1%.     

Capital Strength

The Company’s capital ratios continue to be well in excess of the highest required regulatory benchmark levels.  The Bank elected to adopt the community bank leverage ratio (CBLR) as allowed by federal banking agencies for qualified institutions in first quarter 2020.  The CBLR provides for a simple measure of capital adequacy and is calculated by taking Tier 1 capital divided by average total assets for the quarter.  Solera calculates the CBLR using Bank-only financial statements.  As of June 30, 2020, the Bank’s CBLR was 11.0%, well above the required 9% minimum to qualify for using this simplified method.  The growth in total assets associated with the PPP loans originated during the second quarter 2020 was the primary driver of the decline in the Bank’s CBLR.  Excluding the PPP loans, the Bank’s second quarter 2020 CBLR would have been 13.3%, just slightly lower than 13.4% for first quarter 2020 and 15.6% as of June 30, 2019.

Tangible book value per share, including accumulated other comprehensive income, was $10.47 at June 30, 2020 compared to $10.06 at March 31, 2020, and $9.36 at June 30, 2019.   Total stockholders' equity was $43.40 million at June 30, 2020 compared to $41.70 million at March 31, 2020 and $38.10 million at June 30, 2019.   The fair value of the Bank's available-for-sale investment portfolio has improved from a year ago due to a decline in longer-term interest rates. As of June 30, 2020, the available-for-sale investment portfolio had a gain of $1.02 million compared to gains of $560,000 and $59,000 at March 31, 2020 and June 30, 2019, respectively.

Annual Meeting

Mr. May commented:  “We’d like to alert everyone that your Annual Meeting material should be arriving via mail this week.  Please be sure to review the material, vote and return the Direct Deposit Authorization Form.  While we have concerns related to COVID-19 and public gatherings, we still plan to convene the Annual Meeting.  We will conduct the meeting with these concerns in mind and take the necessary precautions, including sanitization, masks and social distancing.  Despite these precautions, we encourage shareholders to vote electronically rather than attend the meeting in person.  That is why we included a letter to shareholders in the meeting material this year – to update all shareholders on the health of the Company, the Company’s intent to begin paying dividends and to remind shareholders that we provide quarterly financial results, such as this earnings release, to ensure everyone is aware of the financial health of their investment.  We thank you for your continued support of Solera.” 

About Solera National Bancorp, Inc.

Solera National Bancorp, Inc. was incorporated in 2006 to organize and serve as the holding company for Solera National Bank, which opened for business in September 2007.  Solera National Bank is a community bank serving the needs of emerging businesses and real estate investors.  At the core of Solera National Bank is welcoming, attentive and respectful customer service, a focus on supporting a diverse economy, and a passion to serve our community through service, education and volunteerism. For more information, please visit http://www.SoleraBank.com.

This press release contains statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements contained in this release, which are not historical facts and that relate to future plans or projected results of Solera National Bancorp, Inc. and its wholly-owned subsidiary, Solera National Bank, are forward-looking statements.  These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. We undertake no obligation to update or revise any forward-looking statement.  Readers of this release are cautioned not to put undue reliance on forward-looking statements.  

Contact:	Martin P. May, President & CEO [phone]
	-or-
	Melissa K. Larkin, EVP & CFO [phone]

FINANCIAL TABLES FOLLOW

SOLERA NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
($000s)		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
ASSETS
Cash and due from banks		$	4,016			$	1,708			$	1,403			$	1,860			$	1,761
Federal funds sold			1,100				7,500				300				27,400				5,265
Interest-bearing deposits with banks			792				774				16,033				14,599				14,041
Investment securities, available-for-sale			58,503				58,319				29,094				27,485				26,979
Investment securities, held-to-maturity			6,414				6,413				6,411				6,409				6,408
FHLB and Federal Reserve Bank stocks, at cost			1,256				1,250				1,247				1,246				1,239
Paycheck Protection Program (PPP) loans, gross			93,682				—				—				—				—
Net deferred (fees)/expenses, PPP loans			(2,707	)			—				—				—				—
Net PPP loans			90,975				—				—				—				—
Traditional loans, gross			219,818				211,703				215,459				192,752				181,461
Net deferred (fees)/expenses, traditional loans			(619	)			(615	)			(665	)			(618	)			(543	)
Allowance for loan and lease losses			(3,773	)			(3,272	)			(2,770	)			(2,395	)			(2,337	)
Net traditional loans			215,426				207,816				212,024				189,739				178,581
Premises and equipment, net			8,310				8,330				8,316				1,622				1,627
Accrued interest receivable			1,450				1,522				1,076				1,026				1,091
Bank-owned life insurance			4,883				4,857				4,830				4,803				4,775
Other assets			2,073				1,769				1,379				1,630				1,573
TOTAL ASSETS		$	395,198			$	300,258			$	282,113			$	277,819			$	243,340
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits		$	187,876			$	169,726			$	154,105			$	147,731			$	114,444
Interest-bearing demand deposits			9,234				15,713				7,955				5,728				5,307
Savings and money market deposits			65,460				35,150				39,624				43,111				42,246
Time deposits			78,150				32,607				35,285				37,526				38,638
Total deposits			340,720				253,196				236,969				234,096				200,635
Accrued interest payable			84				112				120				127				124
Short-term borrowings			5,000				—				—				—				—
Long-term FHLB borrowings			4,000				4,000				4,000				4,000				4,000
Accounts payable and other liabilities			1,993				1,255				494				383				483
TOTAL LIABILITIES			351,797				258,563				241,583				238,606				205,242
Common stock			41				41				41				41				41
Additional paid-in capital			37,587				37,587				37,587				37,194				37,194
Retained earnings			4,753				3,507				2,784				1,912				960
Accumulated other comprehensive gain			1,020				560				118				222				59
Treasury stock, at cost			—				—				—				(156	)			(156	)
TOTAL STOCKHOLDERS' EQUITY			43,401				41,695				40,530				39,213				38,098
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	395,198			$	300,258			$	282,113			$	277,819			$	243,340

SOLERA NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
		Three Months Ended																				Six Months Ended
($000s, except per share data)		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019				6/30/2020				6/30/2019
Interest and dividend income
Interest and fees on traditional loans		$	2,485			$	2,597			$	2,486			$	2,357			$	2,291			$	5,082			$	4,499
Interest and fees on PPP loans			426				—				—				—				—				426				—
Investment securities			414				289				226				238				289				703				567
Dividends on bank stocks			15				17				17				16				17				32				34
Other			4				98				118				149				41				102				90
Total interest income			3,344				3,001				2,847				2,760				2,638				6,345				5,190
Interest expense
Deposits			257				290				313				365				363				547				766
FHLB & Fed borrowings			33				17				17				17				19				50				37
Total interest expense			290				307				330				382				382				597				803
Net interest income			3,054				2,694				2,517				2,378				2,256				5,748				4,387
Provision for loan and lease losses			504				506				378				79				12				1,010				83
Net interest income after provision for loan and lease losses			2,550				2,188				2,139				2,299				2,244				4,738				4,304
Noninterest income
Customer service and other fees			104				80				81				66				71				184				114
Other income			100				115				74				28				27				215				53
Gain on sale of securities			279				15				113				11				154				294				154
Total noninterest income			483				210				268				105				252				693				321
Noninterest expense
Employee compensation and benefits			918				889				831				704				915				1,807				1,568
Occupancy			104				101				80				47				52				205				96
Professional fees			29				65				63				61				13				94				55
Other general and administrative			422				407				377				340				333				829				625
Total noninterest expense			1,473				1,462				1,351				1,152				1,313				2,935				2,344
Net Income Before Taxes		$	1,560			$	936			$	1,056			$	1,252			$	1,183			$	2,496			$	2,281
Income Tax Expense			314				213				184				300				282				527				543
Net Income		$	1,246			$	723			$	872			$	952			$	901			$	1,969			$	1,738
Income Per Share		$	0.30			$	0.17			$	0.21			$	0.23			$	0.22			$	0.48			$	0.43
Tangible Book Value Per Share		$	10.47			$	10.06			$	9.77			$	9.64			$	9.36			$	9.77			$	9.36
WA Shares outstanding			4,143,620				4,143,620				4,123,620				4,063,620				4,063,620				4,143,620				4,063,620
Net Interest Margin			3.50	%			3.86	%			3.82	%			3.81	%			3.96	%			3.66	%			3.92	%
Cost of Funds			0.35	%			0.48	%			0.56	%			0.70	%			0.77	%			0.41	%			0.82	%
Efficiency Ratio			45.21	%			50.61	%			50.56	%			46.60	%			55.78	%			47.75	%			51.47	%
Return on Average Assets			1.43	%			0.99	%			1.25	%			1.46	%			1.11	%			1.25	%			1.53	%
Return on Average Equity			11.71	%			7.03	%			8.75	%			9.85	%			9.64	%			9.56	%			9.60	%
Community bank leverage ratio (CBLR)			11.0	%			13.4	%			14.2	%			14.8	%			15.6	%
Asset Quality:
Non-performing loans to gross loans			0.46	%			0.47	%			0.01	%			0.01	%			0.23	%
Non-performing assets to total assets			0.25	%			0.33	%			0.00	%			0.00	%			0.17	%
Allowance for loan losses to gross loans			1.72	%			1.55	%			1.29	%			1.24	%			1.29	%
Criticized loans/assets:
Special mention		$	4,572			$	4,640			$	7,613			$	5,423			$	1,465
Substandard: Accruing			7,570				2,421				3,170				3,926				5,687
Substandard: Nonaccrual			1,002				1,002				11				10				425
Doubtful			—				—				—				—				—
Total criticized loans		$	13,144			$	8,063			$	10,794			$	9,359			$	7,577
Other real estate owned			—				—				—				—				—
Investment securities			577				579				580				581				583
Total criticized assets		$	13,721			$	8,642			$	11,374			$	9,940			$	8,160
Criticized assets to total equity			31.61	%			20.73	%			28.06	%			25.35	%			21.42	%