Solera National Bancorp Announces Third Quarter 2020 Financial Results

LAKEWOOD, Colo., Oct. 22, 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 third quarter and nine months ended September 30, 2020. 

Highlights for the quarter and nine-months ended September 30, 2020 include:

• Third quarter 2020 net income eclipsed the prior-quarter’s record-setting net income, growing 70% to $2.12 million, compared to $1.25 million for second quarter 2020.
• YTD net income is up 52% at $4.09 million for the nine-months ended September 30, 2020 compared to $2.69 million for the nine-months ended September 30, 2019.
• Cost of funds improved to 27 basis points for the third quarter; year-to-date costs of funds have improved over 50% from 2019 going from 78 basis points for the nine-months ended September 30, 2019 to 36 basis points for the nine-months ended September 30, 2020.
• Robust quarterly growth in traditional gross loans, which rose $18.58 million during the third quarter to $238.40 million, as of September 30, 2020.

• Noninterest-bearing deposits continued their steady upward trajectory, growing $22.62 million during the third quarter to $210.50 million at September 30, 2020.
• Asset quality measures weakened during the quarter as more loans were put on watch given the current economic uncertainty. As of September 30, 2020 criticized assets represent 5.4% of total assets, compared to 3.5% as of June 30, 2020 and 3.6% at September 30, 2019.
• Return on average assets was 2.12% for third quarter 2020 and a healthy 1.58% for the nine-months ended September 30, 2020.
• Return on average equity was 18.95% for the third quarter 2020 compared to 11.71% for the second quarter 2020 and 12.70% for the nine-months ended September 30, 2020.

For the three-months ended September 30, 2020, the Company reported net income of $2.12 million, or $0.51 per share, compared to net income of $1.25 million or $0.30 per share, for the three-months ended June 30, 2020, and net income of $952,000, or $0.23 per share, for the three-months ended September 30, 2019. The third quarter results included $355,000, or $0.09 per share, in provision expense compared to $504,000 for the linked-quarter and $79,000, or $0.02 per share, for the three-months ended September 30, 2019.

For the nine-months ended September 30, 2020, the Company reported net income of $4.09 million, or $0.98 per share, compared to $2.69 million, or $0.66 per share, for the nine-months ended September 30, 2019. The year-to-date 2020 results were hindered by $1.37 million, or $0.33 per share, in provision expense compared to $162,000, or $0.04 per share, for the nine-months ended September 30, 2019. However, the year-to-date 2020 results were bolstered by $1.16 million, or $0.28 per share, in gains on the sale of investment securities compared to $165,000, or $0.04 per share, for the nine-months ended September 30, 2019.

Martin P. May, President and CEO, commented: “The challenges of 2020 have required our team to adjust quickly to unprecedented market conditions. Thus far, we have been able to identify opportunities that have allowed us to deliver solid results. However, the pandemic has caused headwinds for numerous clients. Those in the hospitality industry have been hit especially hard. These uncertainties have required us to increase our reserves. We continue to work closely with our clients to help them through these trying times.”

Operational Highlights

Net interest income after provision for loan and lease losses was $3.02 million for the quarter ended September 30, 2020 compared to $2.55 million for the quarter ended June 30, 2020 and $2.30 million for the quarter ended September 30, 2019. Net interest income after provision for loan and lease losses for the nine-months ended September 30, 2020 of $7.76 million increased $1.16 million, or 18%, from the same prior year period despite the $1.20 million increase in provision expense during this time. The increase in the provision for loan and lease losses during the nine months of 2020 was primarily due to the downgrading of several credit relationships as a result of uncertainty in the market caused by COVID-19.

Despite declining interest rates, loan growth has led to an $822,000, or 12%, increase in interest and fees on traditional loans for the first nine 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 $1.04 million during the nine-months ended 2020. Further contributing to the growth in net interest income was the $348,000 decline in interest expense for the first nine months of 2020 compared to the same period in 2019 despite the $105.59 million increase in total deposits since September 30, 2019. Mr. May commented: “Revenue growth, driven by a growing loan portfolio, along with expanding low-cost core deposits, has allowed Solera to increase its net interest income, despite the low interest rate environment.”

Net interest margin fell to 3.62% for the nine-months ended September 30, 2020, a 29 basis points decline from 3.91% for the nine-months ended September 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 2.65%, which accounts for approximately 16 basis points of the 29 basis points decline in net interest margin year-over-year. For the third quarter 2020, net interest margin was 3.55%. Removing the impact of the PPP loans, net interest margin would have been 3.80%, only one basis point less than the net interest margin in the third quarter of 2019.

Total noninterest income in third quarter 2020 was $1.09 million compared to $483,000 and $105,000 in second quarter 2020 and third quarter 2019, respectively. The increase in third quarter 2020 was primarily due to gains on the sale of investment securities totaling $866,000 compared to $279,000 for second quarter 2020 and $11,000 for third quarter 2019. Additionally, customer service and other fees improved 59% year-over-year, from $180,000 for the nine months ended September 30, 2019 to $287,000 for same period in the current year. Additionally, other income, consisting primarily of rental income, increased $252,000 year-over-year.

Total noninterest expense in third quarter 2020 was $1.43 million, compared with $1.47 million for second quarter 2020. For the nine-months ended September 30, 2020, total noninterest expense was $4.36 million compared with $3.50 million for the same prior-year period. Compared to prior year, employee compensation and benefits increased $413,000 due to additional staffing to support franchise growth and occupancy expenses increased $171,000 due to the office building purchased in fourth quarter 2019. Other general and administrative expenses increased $271,000 as a result of higher data processing expenses due to the continued surge in new customer accounts. However, as a percentage of average assets, noninterest expenses have remained well managed throughout the Bank’s rapid growth, at 1.99% for the nine-months ended September 30, 2020 compared to 1.92% for the nine-months ended September 30, 2019. [Note: the increase in total assets due to the PPP loans has been removed for purposes of this calculation.]

The Company’s third quarter 2020 efficiency ratio (noninterest expense divided by the sum of net interest income and noninterest income) reached an impressive 39.71%. Chief Financial Officer, Melissa K. Larkin noted, “This efficiency ratio is exceptional for a community bank of our size. While we are continually mindful of controlling overhead costs, the boost to earnings from the PPP loans is aiding this result and will continue to skew the efficiency ratio for all of 2020 and into 2021. However, our team did earn this impressive result. We worked tirelessly to process over 600 loan applications and disburse over $93 million in relief funds, without increasing our staff.” The efficiency ratio for the nine-months ended September 30, 2020 was 44.78% compared to 49.76% for the nine-months ended September 30, 2019.

Income tax expense for the nine months of 2020 benefitted from the purchase of tax-exempt municipal securities in the Company’s available-for-sale investment portfolio, reducing the Company’s effective tax yield to 21.1% in 2020 from 23.9% in 2019.

Balance Sheet Review and Asset Quality Strength

Total assets of $404.68 million at September 30, 2020 increased from $395.20 million at June 30, 2020 and $277.82 million at September 30, 2019. The increase compared to the linked-quarter was primarily due the $18.58 million growth in the Bank’s traditional loan portfolio, partially offset by a reduction in investment securities, for bonds that were sold during the third quarter 2020. Total asset growth from September 30, 2019 to September 30, 2020 consisted of PPP loans ($93.37 million), a 24% expansion in traditional loans ($45.65 million), additions to the investment portfolio ($18.75 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 $233.51 million at September 30, 2020 compared to $215.43 million at June 30, 2020 and $189.74 million at September 30, 2019. Net loan growth of $18.09 million during the third quarter of 2020 was driven by commercial loan originations of $24.06 million partly offset by payoffs, pay downs and an increase in the allowance for loan losses totaling $5.97 million. For the nine-months ended September 30, 2020, the $21.49 million expansion in net traditional loans consisted primarily of commercial loan originations totaling $45.26 million, a net decrease in student loans of $1.08 million and payoffs, pay downs and an increase in the allowance for loan losses totaling $22.69 million. Additionally, the Company funded 665 PPP loans during 2020 totaling $93.72 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 2.65% year-to-date, compared to 4.70% on average for our traditional loans.

The allowance for loan and lease losses at September 30, 2020 was $4.12 million, or 1.73% of gross traditional loans, compared to $3.77 million, or 1.72% at June 30, 2020, and $2.40 million, or 1.24% of gross loans at September 30, 2019. The 49 basis point increase in the allowance for loan and lease losses year-over-year was largely due to increased uncertainty surrounding loans that were granted payment deferrals at the height of the pandemic, in conjunction with an increase in criticized loans and overall growth in the loan portfolio. Total criticized assets of $21.77 million at September 30, 2020 increased compared to the linked-quarter, up $8.05 million from $13.72 million at June 30, 2020 and increased from $9.94 million at September 30, 2019. Despite the increase, criticized assets to total assets remain manageable at 5.38% of total assets as of September 30, 2020.

Total investment securities available-for-sale decreased $16.28 million at September 30, 2020 compared to $58.50 million at June 30, 2020 and $27.49 million at September 30, 2019. CFO Larkin noted, “The Bank capitalized on the market stress that occurred due to the global pandemic and purchased approximately $30.0 million in municipal bonds at relatively cheap prices in March 2020. We then sold approximately 70% of those bonds for gains totaling over $935,000 in June, July and August 2020.” Investment securities held-to-maturity increased $4.00 million during the quarter to $10.42 million, compared to $6.41 million at both June 30, 2020 and September 30, 2019. For the nine-months ended September 30, 2020, the Company realized $1.16 million in gains on the sale of $24.11 million in corporate and municipal bonds.

Total deposits at September 30, 2020 were $339.69 million compared to $340.72 million at June 30, 2020 and $234.10 million at September 30, 2019. Noninterest-bearing demand deposits of $210.50 million, which represent 62% of total deposits, at September 30, 2020 increased $22.62 million, or 12%, versus the linked-quarter, and increased $62.77 million from $147.73 million at September 30, 2019. CEO May commented: “Our team continues to execute our plan to grow core deposits, especially noninterest bearing deposits. We have focused our attention on expanding this customer base and our deposit customers will continue to drive our strategic initiatives.”

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. Approximately 8% of the Bank’s traditional loan portfolio remained on payment deferral as of September 30, 2020, down from the 29% originally granted payment deferral. These concessions were granted to provide some relief to borrowers during the COVID-19 lock-down. $2.91 million of the student loan participation pool were 30 days+ past due at September 30, 2020. This was up slightly from $2.71 million 30 days+ past due at June 30, 2020. Of the $2.91 million past due, $1.50 million were 90 days+ past due as of September 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 September 30, 2020, the Bank’s CBLR was 11.4%, 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 year-over-year. Excluding the PPP loans, the Bank’s third quarter 2020 CBLR would have been 14.7%, a 1.4% improvement from the linked-quarter and consistent with prior year’s 14.8%.

Tangible book value per share, including accumulated other comprehensive income, was $10.75 at September 30, 2020 compared to $10.47 at June 30, 2020, and $9.64 at September 30, 2019. Total stockholders' equity was $45.98 million at September 30, 2020 compared to $43.40 million at June 30, 2020 and $39.21 million at September 30, 2019. The $2.58 million increase in total equity is primarily due to retained earnings and secondarily due to the exercise of vested stock-options.

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 September 30, 2020, the available-for-sale investment portfolio had a gain of $549,000 compared to gains of $1.02 million and $222,000 at June 30, 2020 and September 30, 2019, respectively. The decline from the linked-quarter is primarily due to the realization of gains through the sale of securities that occurred during third quarter 2020.

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.

Source: Solera National Bank

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