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Preliminary Offering Circular

 

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange 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 Final Offering Circular or the offering statement in which such Final Offering Circular was filed may be obtained.

 

OFFERING CIRCULAR

 

FIRST LIGHT BANCORP

20 N.W. 4th Street, Suite 101
Evansville, Indiana 47708

(812) 492-1801

 

1,538,462 SHARES OF COMMON STOCK

including up to 769,231 Shares of Common Stock
issuable upon the exercise of Subscription Rights at $6.50 per Share

 

First Light Bancorp (the “Company”, “we”, “us” or “our”) is an Indiana corporation and the sole shareholder of The Commerce Bank (the “Bank”), an Indiana banking corporation.  We are offering, pursuant to this Offering Circular, to sell up to 1,538,462 Shares of our common stock (the “Shares”).  See “Description of the Shares” on page 44 for a discussion of the terms of the Shares.  Up to 769,231 Shares will be offered to persons who own our common stock as of the close of business on September 22, 2015 (the “Rights Offering”).  Concurrently with the Rights Offering, we are also offering to sell a minimum of an additional 769,231 Shares to investors residing in the greater Clarksville, Indiana community. The Shares are being offered by the Company on a best efforts basis without the services or expenses of an underwriter or selling agent.

 

In the Rights Offering, Shareholders of record as of September 22, 2015 (the “Record Date”) will receive one subscription right for every 1.986103 Shares of our common stock owned on the Record Date, subject to certain limitations and subject to allotment. Each subscription right will entitle you to purchase 1 Share, rounded down to the nearest whole number, of our common stock at the subscription price of $6.50 per Share. For example, an eligible shareholder who owns 1,000 Shares of stock will initially be entitled to purchase an additional 503 Shares (1,000/1.986103 = 503.49855; rounded to 503).  If you fully exercise your basic subscription privilege and other shareholders do not fully exercise their basic subscription privileges, you will be entitled to exercise an oversubscription privilege, subject to certain limitations and subject to allotment, to purchase a portion of the unsubscribed Shares of our common stock at the same subscription price of $6.50 per Share. To the extent you properly exercise your oversubscription privilege for an amount of Shares that exceeds the number of the unsubscribed Shares available to you, any excess subscription payments received by the Company will be returned to you promptly, without interest, following the expiration of the Rights Offering. The subscription rights will expire if they are not exercised by 5:00 pm., Eastern Standard Time, on November 30, 2015. We reserve the right to extend the expiration date one or more times.  You should carefully consider whether to exercise your subscription rights before the expiration of the Rights Offering. All exercises of subscription rights are irrevocable. The subscription rights may not be sold, transferred or assigned. The Rights Offering is not contingent upon the sale of any minimum number of Shares and no escrow account will be utilized.

 

Concurrently with the Rights Offering, we are also offering to sell a minimum of an additional 769,231 Shares at $6.50 per Share to investors in the Clarksville/Floyd County, Indiana, market (the “Clarksville Offering).  The Clarksville Offering is contingent upon the sale of a minimum of 769,231 Shares. Proceeds from investors in the Clarksville Offering will be held in escrow until the minimum number of Shares is sold. If the minimum number of Shares of 769,231 is not sold in the Clarksville Offering, the Clarksville Offering will not close and any payments received by the Escrow Agent will be returned to you promptly, without interest, following the expiration of the Clarksville Offering.  In addition, we may offer any of the Shares of common stock that remain unsubscribed (after taking into account all over-subscription privileges exercised) at the expiration of the Rights Offering in the Clarksville Offering at $6.50 per Share.  The Clarksville Offering will close on February 29, 2016.  We reserve the right to extend the expiration date one or more times.

 

We may in our sole discretion cancel or terminate the Rights Offering or the Clarksville Offering, or both, at any time. If we cancel the Rights Offering or the Clarksville Offering, we or the Escrow Agent will return all subscription payments received with respect to the cancelled offering without interest or penalty.

 

		Price to Public			Underwriting discount and commissions		Proceeds to issuer(1)			Proceeds to other persons
Per Share:		$	6.50		n/a		$	6.50		n/a
Total Minimum:		$	500,001.50		n/a		$	500,001.50		n/a
Total Maximum:		$	10,000,003.00		n/a		$	10,000,003.00		n/a

 

(1)           Prior to payment of expenses of the Rights and Clarksville Offering, estimated to be $100,000.

 

THE SHARES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF THE COMPANY, THE BANK, OR ANY NON-BANK AFFILIATE OF THE COMPANY, AND THEY ARE NOT

 

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INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.

 

OUR COMMON STOCK IS NOT LISTED OR TRADED ON ANY NATIONAL SECURITIES EXCHANGE, AND NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE 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 UNITED STATES SECURITIES AND EXCHANGE 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.

 

This investment involves risks, including the possible loss of principal.  See “Risk Factors” beginning on page 9 to read about factors you should consider before investing in the Shares.

 

The date of this Offering Circular is September 22, 2015.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the information in this Offering Circular, including the risk factors set forth herein, contains or incorporates by reference certain forward-looking projections, goals, assumptions and statements about the Company’s and the Bank’s financial condition, results of operations and business that are based on its current and future expectations.  You can find many of these statements by looking for words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology.  Such statements reflect the Company’s and the Bank’s current views with respect to future events and are subject to risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this Offering Circular that could cause actual results to differ materially from those contemplated in such forward-looking statements.  Factors that could cause the Company’s and the Bank’s actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:

 

·                  legislative or regulatory changes that affect the Company’s or the Bank’s business including the Dodd-Frank Act and its impact on the Company’s or the Bank’s compliance costs;

·                  deterioration of the credit quality of the Bank’s loan portfolio, increased default rates and loan losses or adverse changes in the industry concentrations of the Bank’s loan portfolio;

·                  the Bank’s ability to manage the impact of changes in interest rates, spreads on interest earning assets and interest-bearing liabilities, and interest rate sensitivity;

·                  the financial health of certain entities, including government sponsored enterprises, the securities of which the Bank owns or acquires;

·                  increased competitive pressures among financial services companies;

·                  failures of counterparties or third party vendors to perform their obligations;

·                  prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

·                  adverse changes in the securities market;

·                  implementation of the “qualified mortgage” rule;

·                  implementation of the TILA-RESPA Integrated Disclosure rule;

·                  the economic impact of past and any future terrorist attacks, acts of war, or threats thereof and the response of the United States to any such threats and attacks;

·                  the amount of assessments and premiums the Bank is required to pay for FDIC deposit insurance;

·                  the costs, effects, and outcomes of existing or future litigation;

·                  the failure to successfully implement the Company’s business plan in the Clarksville, Indiana market;

·                  the ability of the Company and the Bank to manage the risks associated with the foregoing factors as well as anticipated risk factors; and

·                  such other factors discussed throughout the “Risk Factors” section of this Offering Circular.

 

You are cautioned that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this Offering Circular.  There may be events in the future that the Company or Bank has little control or is unable to accurately predict.  These statements are representative only as of the date this Offering Circular.  Before you invest in the Shares, you should be aware that the occurrence of the events described in these risk factors, and elsewhere in this Offering Circular, could have a material adverse effect on the Company’s and Bank’s business, operating results and financial condition.

 

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OFFERING CIRCULAR SUMMARY	1
SELECTED FINANCIAL DATA	8
RISK FACTORS	9
USE OF PROCEEDS	15
THE COMPANY	16
BUSINESS	16
DESCRIPTION OF PROPERTY	24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	24
MANAGEMENT	37
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS	40
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS	43
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS	44
DESCRIPTION OF THE SHARES	44
DILUTION	45
DESCRIPTION OF SUBSCRIPTION PROCEDURES	46
PLAN OF DISTRIBUTION	53
LEGAL MATTERS	54
FINANCIAL STATEMENTS	54
ADDITIONAL INFORMATION	54
INDEX TO FINANCIAL STATEMENTS	F-1

 

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OFFERING CIRCULAR SUMMARY

 

This section sets forth in summary form certain information regarding the Company and the offering and highlights some of the information in this Offering Circular.  Because this section is a summary, it does not contain all of the information that you should consider before exercising your subscription rights in the Rights Offering or subscribing to purchase shares of our common stock in the Clarksville Offering.  You should read the entire Offering Circular carefully, including the “Risk Factors” section.  For convenience, references in this Offering Circular to “we,” “us,” “our,” or the “Company” mean First Light Bancorp and its consolidated subsidiary, The Commerce Bank, except where the context indicates otherwise.   References to “Bank” mean The Commerce Bank.

 

First Light Bancorp

 

First Light Bancorp (the “Company”) owns 100% of The Commerce Bank.  Both the Company and the Bank maintain headquarters located at 20 NW 4th Street Evansville, Indiana 47708. The directors and management of the Company and the Bank are focused on providing traditional “hometown” community bank services, emphasizing the establishment of personalized long-term financial relationships with individuals and small businesses who value the availability of working with experienced, local decision makers.  The President and Chief Executive Officer of the Company is Thomas L. Austerman.

 

The Company filed an Offering Statement on Form 1-A with the Securities and Exchange Commission in connection with this Offering, of which this Offering Circular is a part.  The Offering Statement contained various exhibits, many of which are referenced in this Offering Circular.  Copies of these exhibits are available upon request by any prospective purchaser of the Shares.

 

Summary of the Offering Terms

 

Offering Size:		Up to approximately $10 million of shares of common stock, consisting of a minimum of approximately $5 million to be sold to investors residing in the Clarksville, Indiana market (the “Clarksville Offering”), and up to approximately $5 million to shareholders of the Company as of September 22, 2015 (the “Rights Offering”).
Manner of Offering:		We are distributing, at no charge to our existing shareholders as of September 22, 2015, non-transferable subscription rights to purchase up to an aggregate of 769,231 shares of our common stock in the Rights Offering. Concurrently with the Rights Offering, we are also offering to sell a minimum of an additional 769,231 shares in the Clarksville Offering.
		Other than the shares offered pro rata pursuant to the basic subscription privilege in the Rights Offering, allocation of all shares purchased will be strictly in our sole and absolute discretion.
Purchase Price:		$6.50 per share. This was determined by the Board of Directors based upon various factors, including the per share book value of our common stock as of July 31, 2015, the trading history of our common stock, our operating history and our prospects for further earnings, our current performance and the prices of equity securities of comparable companies.
Minimum Investment:		The minimum subscription per individual or entity in the Clarksville Offering is 3,077 Shares, or $20,000.50. A

 

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		purchaser in the Clarksville Offering will be entitled to purchase a maximum of 92,307 Shares, or $599,995.50.
		Existing shareholders of the Company will be entitled to purchase in the Rights Offering a number of shares equal to:
		·                  the number of shares held of record as of the record date of September 22, 2015;
		·                  divided by 1.986103, rounded down to the nearest whole number.
Conditions to Closing:		The Clarksville Offering is conditioned upon the sale of all 769,231 Shares offered in the Clarksville Offering. All proceeds from the Clarksville Offering will be held in an escrow account until this minimum number of Shares is sold. If this minimum is not achieved prior to the termination date of the Clarksville Offering, no subscriptions will be accepted by the Company in the Clarksville Offering and the invested funds will be returned, without interest, to subscribers. If all 769,231 Shares offered in the Clarksville Offering are sold, and all shares offered by the Company in the Rights Offering are not sold, the shares not sold in the Rights Offering may be offered for sale by the Company in the Clarksville Offering.
		Closing of the Rights Offering is not conditioned upon the sale of any minimum number of Shares, and is not conditioned upon the success of the Clarksville Offering. There will be no escrow of the proceeds of the Rights Offering.
Shares of Common Stock Offered:		Up to 1,538,462 Shares, comprised of 769,231 shares in the Clarksville Offering and 769,231 shares in the Rights Offering. The number of Shares being offered represents 100.7% of the issued and outstanding common stock as of September 22, 2015, excluding the 262,523 shares issuable upon exercise of stock warrants outstanding as of July 31, 2015.
Shares of Common Stock Authorized and Outstanding:		5,000,000 shares of common stock authorized, with 1,527,772 shares outstanding as of the date of this Offering Circular. This number excludes 262,523 shares issuable upon exercise of stock warrants outstanding as of July 31, 2015.
Shares of Common Stock to be Outstanding after Completion of this Offering:		If the Clarksville Offering and the Rights Offering are fully subscribed, the Company will issue 1,538,462 new shares of common stock. As a result, the Company would have 3,066,234 shares of common stock outstanding immediately after the Offering, an increase of 100.7% in the number of outstanding shares of common stock.
Shares of Common Stock Owned by the Company’s Directors and Executive Officers:		The Company’s directors and executive officers beneficially own in the aggregate 588,487 shares, or 36.79% of its total outstanding common stock as of the date of this Offering

 

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		Circular.  The Company’s directors and executive officers have indicated a non binding intent to purchase up to approximately 192,300 shares in the Rights Offering.
Dividends:		The Company does not currently pay a dividend on the shares and does not have an intention to pay a dividend in the reasonably foreseeable future.
		The primary source of funds for the Company is dividends from the Bank. In this respect, the Bank is currently prohibited from paying dividends under Indiana law. As of August 31, 2015, the Company had cash of approximately $10,500.
Reasons for the Offering:		The Company and the Bank are committed to maintaining high capital levels in order to allow for additional growth, increase the Bank’s competitive position through increased lending limits and enhance the Bank’s ability to take advantage of opportunities which may arise from time to time.
		In addition, management believes the Bank has an opportunity to establish a presence in the Clark and Floyd County, Indiana banking market. In this respect, the Bank has received approval to open a banking office at 1122 Veterans Parkway, Clarksville, Indiana. If the Company does not sell at least 769,231 shares in the Clarksville Offering, the Clarksville Offering will not close and the Bank will not open the new banking office.
		As such, because of the growth of the Bank and the proposed opening of the new banking office in Clarksville, management believes it is beneficial to increase the Bank’s capital at this time in order to better support this growth and anticipated growth.
Use of Proceeds:		Except for $500,000 which the Company will retain, the Company will contribute all of the remaining net proceeds of the Clarksville Offering and the Rights Offering into the capital account of the Bank. The $500,000 retained by the Company will be used for debt service, which is approximately $135,000 per year, and general corporate purposes.
		If the Clarksville Offering closes, the Bank intends to use the net proceeds contributed by the Company to finance and support the Bank’s proposed de novo branch located in Clarksville, Indiana, for working capital, to support internal and external growth, and for general corporate purposes.
		If the Clarksville Offering does not close, the Bank intends to use the net proceeds contributed by the Company from the Rights Offering for working capital, to support internal and external growth, and for general corporate purposes.
Eligible Purchasers:		Residents of the greater Clarksville, Indiana community are eligible to purchase shares in the Clarksville Offering.

 

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		Shareholders of record as of September 22, 2015 are eligible to purchase shares in the Rights Offering.
Rights Offering
Subscription Rights:		If you are a shareholder of record as of September 22, 2015, you will receive subscription rights to purchase in the Rights Offering a number of shares equal to:
		·                  the number of shares held of record as of the record date of September 22, 2015;
		·                  divided by 1.986103, rounded down to the nearest whole number.
		For each whole subscription right you own, you will have a basic subscription privilege to buy from us one share of our common stock at a subscription price of $6.50 per share.
		Subscription rights may only be exercised in whole numbers; we will not issue fractional rights and will round all of the subscription rights down to the nearest whole number. You may exercise your basic subscription privilege for some, or all of your rights or you may choose not to exercise your rights. If any subscription rights remain unexercised after the expiration of the Rights Offering, they will expire and have no value.
Non-Transferability of Rights:		The subscription rights may not be sold, transferred, or assigned and will not be listed for trading on any stock exchange or trading market.
Oversubscription:		Investors in the Rights Offering who exercise all of their subscription rights may have the opportunity to purchase additional shares of common stock. The shares available for purchase pursuant to the exercise of over-subscription privileges will be allocated on a pro-rata basis based upon the number of shares owned by each oversubscribing shareholder on the record date. The oversubscription privilege will be available exclusively to our shareholders as of September 22, 2015 until the expiration of the Rights Offering. Thereafter, such shares will be available for sale in the Clarksville Offering.
		If you are not allocated the full amount of shares for which you oversubscribe, you will receive a refund of the subscription price, without interest or penalty, that you delivered for those shares of our common stock that are not allocated to you. We will mail such refunds as soon as practicable after the completion of the Rights Offering.

 

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How to Subscribe in the Rights Offering:		To exercise your subscription rights, you must take the following steps:
		·                  If you are a registered holder of our common stock, you may deliver payment and a properly completed Rights Offering subscription agreement to the Company before 5:00 p.m. Eastern Standard Time on November 30, 2015, unless the expiration is extended. You may deliver the documents and payments by mail or commercial carrier. If regular mail is used for this purpose, we recommend using registered mail, properly insured, with return receipt requested.
		·                  If you are a beneficial owner of shares that are registered in the name of a broker, dealer, custodian bank, or other nominee, or if you would rather an institution conduct the transaction on your behalf, you should instruct your broker, dealer, custodian bank, or other nominee to exercise your subscription rights on your behalf and deliver all documents and payments before 5:00 p.m. Eastern Standard Time on November 30, 2015. If you wish to purchase shares of our common stock in this manner, please promptly contact your broker, dealer, custodian bank, or other nominee as record holder of your shares. We will ask your record holder to notify you of this Offering. You should complete and return to your record holder the form entitled “Beneficial Owner Election Form.”
		·                  If you do not deliver your Rights Offering subscription agreement to us prior to the expiration of the Rights Offering, your subscription rights will expire.
Expiration of Rights Offering:		5:00 p.m. Eastern Standard Time on November 30, 2015, unless the expiration is extended or earlier terminated. We reserve the right to extend or terminate the Rights Offering in our sole discretion.
Clarksville Offering
Shares Offered:		Concurrently with the Rights Offering, we will be offering a minimum of 769,231 shares at $6.50 per share in the Clarksville Offering. These shares will be offered by our officers and directors on a best efforts basis to individuals in the Clarksville, Indiana area as identified by our officers and directors.
		If all 769,231 Shares offered in the Clarksville Offering are sold, and all shares offered by the Company in the Rights Offering are not sold, the shares not sold in the Rights Offering may be offered for sale by the Company in the Clarksville Offering.

 

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		We will hold funds received in payment for shares of our common stock in the Clarksville Offering in an escrow account pending receipt of subscriptions for a minimum of 769,231 shares (the “Minimum Offering”). This money will be held in escrow until the Minimum Offering has been sold. If the Minimum Offering is not sold in the Clarksville Offering, the funds will be returned, without interest. Once the Minimum Offering Proceeds are received and the Initial Closing has occurred, we will receive the proceeds from any subsequent Clarksville Offering Subscription Agreements delivered to the escrow agent upon acceptance by us of the Subscription Agreement.
How to Subscribe in the Clarksville Offering:		If you are subscribing for Shares in the Clarksville Offering, complete and sign the enclosed Clarksville Offering Subscription Agreement provided with this Offering Circular and send it to the Escrow Agent at the address provided in the Clarksville Offering Subscription Agreement. Concurrently with the delivery of the Subscription Agreement, you must deliver funds for the full subscription amount to the escrow agent, by check payable to “JCB Escrow Agent for First Light Bancorp”.
Expiration of Clarksville Offering:		5:00 p.m. Eastern Standard Time on February 29, 2016, unless the expiration is extended or earlier terminated. We reserve the right to extend or terminate the Clarksville Offering in our sole discretion.
Acceptance of Subscriptions:		Subscriptions for our common stock are not binding on the Company unless accepted by us. We reserve the right, in our sole discretion, to reject any subscription received in the Clarksville Offering, in whole or in part. If we do not accept, in whole or in part, any particular subscription, we will mail a refund to that subscriber in an amount equal to the purchase price for the common stock as to which such subscription is not accepted. We will not pay any interest on funds submitted with subscriptions. All refunds will be mailed as soon as reasonably practicable after the expiration of the Clarksville Offering.
Initial Closing Date:		Upon receipt of subscriptions and payment for the Minimum Offering in the Clarksville Offering, we will be entitled to receive the proceeds from the Minimum Offering and allocate and release for delivery any shares subscribed for as of such date (the “Initial Closing Date”). We intend for the Initial Closing Date to occur no later than ten business days following the receipt of the Minimum Offering Proceeds, subject to adjustment at our discretion.
Final Closing Date:		As soon as reasonably practicable following the expiration of the Clarksville Offering, we intend to complete the allocation of any remaining shares and return any funds paid for subscriptions that we have not accepted. We intend for the

 

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		final allocations to occur no later than ten business days following the expiration of the Clarksville Offering (the “Final Closing Date”).
No Underwriters		The Offering is being sold directly by the Company, and is not being underwritten.
No Revocation		Shareholders who exercise rights in the Rights Offering and potential investors who subscribe for common stock in the Clarksville Offering are not allowed to revoke or reduce the principal amount of common stock subscribed, even if such shareholders later learn information about us that they consider to be unfavorable. You should not exercise your subscription rights or subscribe for our common stock unless you are certain that you wish to purchase shares of our common stock offered pursuant to this Offering.
No Board of Directors Recommendation		Our Board is not making a recommendation regarding your exercise of the subscription rights or the purchase of shares of our common stock. You are urged to make your decision based on your own assessment of our business and this Offering. Please see “Risk Factors” for a discussion of some of the risks involved in investing in our common stock.
Extension, Cancellation, and Amendment		We have the option to extend the Rights Offering and the Clarksville Offering expiration dates, although we do not presently intend to do so. Our Board may cancel the Rights Offering or the Clarksville Offering, or both, at any time prior to the expiration the expiration for any reason. In the event either the Rights Offering or the Clarksville Offering is canceled, all subscription payments received with respect to such Offering will be returned, without interest or penalty, as soon as practicable. We also reserve the right to amend or modify the terms of either the Rights Offering or the Clarksville Offering.
Risk Factors		See “Risk Factors” beginning on Page 9 of this Offering Circular to read about important factors you should consider before exercising your subscription rights or subscribing to purchase shares of our common stock.

 

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SELECTED FINANCIAL DATA

 

The following selected financial data for the fiscal years ended December 31, 2014 and 2013 are derived from audited financial statements of the Company. The financial data for the six months ended June 30, 2015 and 2014 is derived from unaudited financial statements of the Company.  The financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes accompanying this Offering Circular.

 

Consolidated Summary Financial Data

(in thousands, except per-share data)

 

		Fiscal Year Ended December 31,						Six Months Ended June 30,
		2014			2013			2015			2014
		(audited)						(unaudited)
Statements of Income:
Net interest income		$	2,892		$	2,435		$	1,611		$	1,348
Provision for loan losses		108			—			125			—
Non interest income		755			905			432			324
Non interest expense		3,178			3,019			1,805			1,555
Income before income taxes		360			321			113			117
Income taxes		155			(1,559		)	50			52
Net income		$	204		$	1,880		$	63		$	65
Period-end Balances:
Loans (net)		$	71,248		$	55,327		$	79,950		$	63,174
Securities		2,793			3,493			2,481			3,114
Total assets		102,781			78,016			113,079			85,148
Deposits		82,269			66,752			89,787			71,048
Borrowings		11,306			2,663			13,500			5,000
Shareholders’ equity		9,206			8,601			9,379			8,848
Average Balances:
Loans (net)		$	63,163		$	49,453		$	76,127		$	57,440
Securities		3,134			4,033			2,664			3,309
Total assets		84,664			69,162			107,710			78,837
Deposits		70,631			61,659			86,464			66,583
Borrowings		4,864			1,430			11,566			3,373
Shareholders’ equity		8,869			5,881			9,330			8,676
Selected Ratios and Other Data:
Earnings per share		$	0.14		$	1.53		$	0.04		$	0.05
Book value per share		$	6.11		$	6.00		$	6.14		$	6.04
Return on average assets		0.24		%	2.72		%	0.12		%	0.17		%
Return on average equity		2.30		%	31.96		%	1.36		%	1.51		%
Net interest margin		3.57		%	3.65		%	3.18		%	3.62		%
Average equity to average assets		10.48		%	8.50		%	8.66		%	11.00		%
Nonperforming assets to total assets		0.46		%	0.92		%	0.80		%	0.83		%

 

See the Financial Statements and accompanying footnotes beginning on Page F-1 of this Offering Circular.

 

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RISK FACTORS

 

You should carefully consider the risks and uncertainties described below and the other information in this Offering Circular before deciding whether to invest in this Offering.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.  If any of the following risks identified actually occur, our business, financial condition and operating results could be materially adversely affected.  In such case, you may lose part or all of your investment.

 

Caution Regarding Forward Looking Statements

 

Some of the information in this Offering Circular, including the risk factors listed below, contains or incorporates by reference certain forward-looking statements about our financial condition, results of operations and business that are based on our current and future expectations.  You can find many of these statements by looking for words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology.  Such statements reflect our current views with respect to future events and are subject to risks and uncertainties, including those discussed under “Risk Factors” and elsewhere in this Offering Circular that could cause actual results to differ materially from those contemplated in such forward-looking statements.

 

You are cautioned that no forward-looking statement is a guarantee of future performance and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this Offering Circular.  There may be events in the future that we are not able to predict accurately or over which we have no control. These statements are representative only of the date hereof.

 

The risk factors listed below, as well as any cautionary language in this Offering Circular, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Offering Circular could have a material adverse effect on our business, operating results and financial condition.

 

Risks Related to the Shares

 

The Shares are not insured.

 

The Shares are not deposits or other obligations of a bank, nor are they insured by the Federal Deposit Insurance Corporation (the “FDIC”) or by any other governmental agency.

 

The Shares have not been registered with the Securities and Exchange Commission or any state securities commission.

 

The Shares have not been registered under the Securities Act of 1933 (the “Act”) in reliance upon Regulation A promulgated thereunder.  In addition, the Company may rely upon available exemptions from securities registration under applicable state securities laws.  As such, the Company does not intend at this time to register the Shares with the Securities and Exchange Commission or with any state securities commission.  For this reason, investors do not and will not enjoy the benefits or security, if any, which may be derived from such a registration and corresponding review by regulatory officials.

 

The Company is dependent upon the Bank for its income, and the Bank currently is prohibited from paying dividends.

 

We conduct substantially all of our business through our bank subsidiary, The Commerce Bank.  Although we have the ability to raise capital, such as through the sale of additional shares of stock or the issuance of debt, our cash flow is largely dependent upon the cash flow of the Bank and the payment of funds by the Bank to us.  In this respect, because the retained earnings capital account of the Bank is negative, the Bank is prohibited by applicable Indiana law from paying dividends.  We can offer no assurance when the Bank will be able to declare and pay a dividend to the Company or the amount of such dividend if such dividend is allowed.

 

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The Company could default on its debt and lose the stock of the Bank.

 

The Company currently has cash of $10,500 and annual debt expense of $135,000.  In the event that the Bank remains prohibited from paying dividends, as discussed above, the Company may be unable to timely service its debt and therefore may default.  Because the Company has pledged all of the stock of the Bank as collateral, in the event the Company defaults on its debt, it could lose the stock of the Bank.  The Company intends to retain $500,000 of the net proceeds in order to service its outstanding debt for the next four quarters.

 

We do not expect to pay cash dividends on our common stock.

 

We have not paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.  As discussed above, the Bank is currently prohibited from declaring and paying a dividend to the Company and we can offer no assurance when the Bank will be able to declare and pay a dividend to the Company or the amount of such dividend if such dividend is allowed. Even if dividends from the Bank are permitted in the future, future earnings of the Bank and resulting dividends to the Company may not be sufficient to permit the legal payment of dividends to you.

 

Finally, even if the Company may legally declare dividends, the amount and timing of such dividends is at the sole discretion of the Company’s Board of Directors, which will take into account our consolidated earnings, financial condition, liquidity and capital requirements, applicable governmental regulations and policies, and other factors deemed relevant.

 

There is no public trading market for the Shares.

 

There is no existing market for the Shares.  The Shares will not be listed or quoted on any stock exchange or an over-the-counter market.  It is unlikely that a public market for the Shares will develop.  There can be no assurance as to whether or how quickly a share of common stock may be resold or the price for which you may resell such shares.

 

The price of the Shares may not indicate present or future value.

 

The price for the Shares of $6.50 per share was determined by the Board based on several considerations, including the book value of the stock of the Company and the most recent trades of the stock of the Company of which management was aware.  Notwithstanding the Board’s determination, however, the price may not accurately reflect the present or future market value of the Company’s common stock.  The Shares to be issued in the Offering will bear restrictions upon transferability which will restrict your ability to shift your investment in the Shares to an alternative investment in the future.  Because there is not an established public trading market for the Shares, the offering price of $6.50 may not reflect the price which would be paid for the Shares on an active market.  The offering price should not necessarily be relied upon when determining the value of your investment, which may be less than $6.50 per share.

 

We may need additional capital in the future, which could require the issuance of additional common or preferred stock, and which could dilute existing shareholders or have terms superior to the terms of the common stock.

 

Because the Bank is currently prohibited from paying dividends and the Company is dependent upon the Bank for its income, it may be necessary to raise additional capital in the future in order to satisfy the obligations of the Company.  The annual debt service of the Company is currently $135,000.

 

Further, although we believe the net proceeds of this offering will be sufficient to satisfy the Company’s and the Bank’s capital needs for the foreseeable future, in the event the Company or the Bank needs additional capital, it may be necessary for the Company to issue additional shares of common or preferred stock.  If the Company issues additional common shares, the price of the shares may be greater or less than the price of shares issued in this offering.  Additionally, the issuance of the common shares would cause a decrease in each existing shareholder’s ownership percentage in the Company.

 

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If the Board of Directors decides to issue preferred stock, the Board is authorized by the Company’s Articles of Incorporation to designate the terms of the preferred stock.  As a result, the preferred stock may have rights, such as mandatory cumulative dividends, that are superior to the rights of holders of common stock.

 

Risks Related to the Company

 

We have exposure to unsecured and under-collateralized loans.

 

Although our loans are usually collateralized and/or guaranteed, we have in the past made loans on a fully or partially unsecured basis.  As of December 31, 2014, we had commitments $4.8 million in unsecured loans, which represented 52.3% of our total capital and 6.67% of total loans.  There were $2.4 million in unused, unsecured loan commitments at December 31, 2014. As of June 30, 2015, we had $6.2 million in unsecured loans, representing 66.3% of our total capital and 7.7% of total loans.  There were $1.4 million in unused, unsecured loan commitments at June 30, 2015.  These numbers do not reflect loans which are not currently fully collateralized.  If the borrowers default on any unsecured or undercollateralized loans, we may not be able to collect the outstanding principal and interest.  In the event of a foreclosure, bankruptcy, liquidation, winding up, reorganization or other similar proceeding relating to such borrowers, and in certain other events, such borrower’s assets may only be available to pay obligations on our unsecured loans after the borrower’s other indebtedness has been paid. As a result, there may not be sufficient assets remaining to pay the principal or interest on the unsecured loans we may make.

 

Our allowance for loan losses may prove to be insufficient to absorb probable losses in our loan portfolio.

 

Lending money is a substantial part of our business. However, every loan we make carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

 

·                  cash flow of the borrower and/or the project being financed;

 

·                  in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;

 

·                  the credit history of a particular borrower;

 

·                  changes in economic and industry conditions; and

 

·                  the duration of the loan.

 

We maintain an allowance for loan losses which we believe is appropriate to provide for what we believe to be any probable losses in our loan portfolio. The amount of this allowance is determined by management through a periodic review and consideration of several factors, including industry concentrations; specific credit risks; historical loan loss experience; amount of non-performing loans; current loan portfolio quality; the amount and quality of collateral, including guarantees, securing the loans; present economic, political and regulatory conditions; and unidentified 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 requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.  Depending upon the strength of the economy and our loan portfolio, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.

 

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At December 31, 2014, our allowance for loan losses as a percentage of total loans was 1.27%, and as a percentage of total non-performing loans was 0.07%.  For 2015, through June 30, the Bank has made provision for loan losses of $125,000 so that our allowance for loan losses at June 30 as a percentage of total loans was 1.25% and as a percentage of total non-performing loans was 0.41%.

 

Our future earnings may be reduced if we are unable to successfully implement our business plan in the Clarksville market.

 

We will be entering a banking market in which we currently have no offices or presence if the Clarksville Offering closes.  There can be no assurance as to our ability to successfully implement our business plan in the Clarksville market, which could adversely impact our earnings.

 

The Bank’s concentration of credit in small to medium-sized businesses may contribute to higher risk of loss.

 

The risk of non-payment of loans is inherent in banking. Such non-payment, if it occurs, may have a material adverse effect on the Bank’s earnings and overall financial condition as well as the value of our common stock. Moreover, the Bank’s focus on small and medium-sized businesses may result in a large concentration by the Bank of loans to such businesses. As a result, the Bank may assume greater lending risks than banks which have a lesser concentration of such loans and which tend to make loans to larger companies.

 

Commercial loans rely primarily on the operations of the borrower for repayment and secondarily on the underlying collateral. Underwriting commercial loans involves an assessment of certain criteria, including, among others, management, products, markets, cash flow, capital, income and collateral of the borrower. Failure of the Bank’s management to properly assess such underwriting criteria or the deterioration of a borrower’s business or collateral could result in credit losses.

 

The Bank’s management attempts to minimize the Bank’s credit exposure by carefully monitoring the concentration of its loans within specific industries and by prudent loan application and approval procedures. The Bank’s management also manages credit risk and the credit approval process by adhering to written policies which generally specify underwriting standards for each type of loan. All such policies are reviewed by the Board of Directors of the Bank. However, there can be no assurance that such monitoring, procedures and policies will reduce certain lending risks. Loan losses can cause insolvency and failure of a financial institution. If this happens, shareholders of such institutions could lose their entire investment.

 

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

 

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. For example, we could lose access to our federal funds lines, or the costs of such funds could increase. We might not be able to replace such funds in the future if, among other things, market conditions or our results of operations or financial condition were to change.

 

We may be adversely affected by interest rate changes.

 

Like other financial institutions, our operating results are largely dependent on our net interest income. Net interest income is the difference between interest earned on loans and investments and interest expense incurred on deposits and other borrowings. Our net interest income is impacted by changes in market rates of interest, the interest rate sensitivity of our assets and liabilities, prepayments on our loans and investments and limits on increases in the rates of interest charged on our loans.

 

Our interest-earning assets and our interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types may lag behind. We continually take measures intended to manage the risks from changes in market interest rates.

 

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The regulatory system under which we operate, and recent changes thereto, could have a material adverse effect on our business.

 

We are subject to extensive federal and state legislation, regulation, examination and supervision. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material adverse effect on our business and operations. Our success depends on our continued ability to maintain compliance with these laws and regulations. In addition, the banking regulations are intended to protect depositors and the Federal Deposit Insurance Corporation, not our other creditors or shareholders. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us by future legislation. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes or interpretations could be materially adverse to us.

 

Because our business primarily is in southern Indiana, a downturn in the economy in our market area may adversely affect our business.

 

Substantially all of the Bank’s loans are to businesses and individuals in southern Indiana. Any decline in the economy of this area could have an adverse impact on the Bank. Unlike larger regional and multi-state banking operations that do not depend upon only a few markets, the Bank’s loan and deposit growth relies predominately on southern Indiana.  Like most banking institutions, the Bank’s net interest spread and margin are affected by general economic conditions and other factors that influence market interest rates and the Bank’s ability to respond to changes to such rates.

 

We face substantial competition.

 

The Company faces strong competition for deposits, loans and other financial services from a variety of sources.  Its competitors include:

 

·                  numerous Indiana and out-of-state banks, thrifts, credit unions and other financial institutions; and

·                  other companies which provide financial services, including consumer finance companies, securities brokerage firms, mortgage brokers, equipment leasing companies, insurance companies, mutual funds, and other lending sources and investment alternatives.

 

Some of the Bank’s competitors are not subject to the same degree of regulation as the Bank.  Additionally, several different financial institutions aggressively compete for business in the Company’s market area.  Many of these financial institutions have the advantage of:

 

·                  having higher lending limits than the Bank;

·                  being able to offer some services the Bank does not offer or expect to offer in the near future; and

·                  having greater capital resources than the Bank, allowing them to offer their services at more favorable prices to customers.

 

Because of this competition, we may have to pay higher rates of interest to attract deposits. In addition, because of our smaller size, the amount we can loan to one borrower is less than that for most of our competitors. This may impact our ability to seek relationships with larger businesses in our market area. Trends toward the consolidation of the banking industry and the lifting of interstate banking and branching restrictions may make it more difficult for us to compete effectively with large national and super-regional banking institutions.

 

We could be adversely affected by the loss of one or more principal members of our senior management team or by an inability to attract and retain qualified senior management.

 

The success of our business will depend upon the services of our senior management team. Our business may suffer if we lose the services of any of these individuals and there can be no assurances of their continued services. The loss of the services of our senior management team, or any one of them, could have a material adverse

 

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effect on the operations of the Company and the Bank. Our future success also depends on our ability to identify, attract and retain qualified senior officers and other employees in our identified market.

 

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

 

We believe that the net proceeds of the offering will be sufficient to satisfy the Bank’s capital requirements, as currently planned.  However, if additional capital is needed, there can be no assurance that it will be available when desired or on such terms as we may find acceptable. Future efforts to raise capital through the sale of securities of the Company could reduce the proportionate interest of our shareholders.

 

Risks Relating to the Offering

 

If you are a shareholder and do not participate in the Rights Offering or do not exercise all of your subscription rights, or if the Clarksville Offering closes, you may suffer dilution of your percentage ownership of our common stock.

 

This Rights Offering is designed to enable the Company to raise capital while allowing all shareholders to avoid or limit dilution of their ownership interest of the Company.  To the extent that you do not exercise your subscription rights and shares are purchased by other shareholders in the Rights Offering, your proportionate voting interest will be reduced, and the percentage that your original shares represent of our expanded equity after exercise of the subscription rights will be disproportionately diluted.

 

If the Clarksville Offering closes, the percentage that your original shares represent of our expanded equity after the Rights Offering and the Clarksville Offering will be disproportionately diluted.  Further, if all 769,231 Shares offered in the Clarksville Offering are sold, and all shares offered by the Company in the Rights Offering are not sold, the shares not sold in the Rights Offering may be offered for sale by the Company in the Clarksville Offering.  This could further dilute your voting interest in the Company.

 

The price of our common stock may decline before or after the Offering expires.

 

We cannot assure you that the market price of our common stock will not decline after you elect to exercise your subscription rights in the Rights Offering or subscribe to purchase shares in the Clarksville Offering. If that occurs, you will have committed to buy shares of common stock at a price above the prevailing market price and you will have an immediate unrealized loss. Moreover, we cannot assure you that following your purchase of shares of our common stock, you will be able to sell your shares of common stock at a price equal to or greater than the offering price. Until shares are delivered upon expiration of the offering, you may not be able to sell the shares of our common stock that you purchase in the offering. We will not pay you interest on funds delivered pursuant to the exercise of rights in the Rights Offering or the subscription to purchase in the Clarksville Offering.

 

Once you subscribe in the Offering, you may not revoke the subscription.

 

Once a shareholder exercises his or her rights in the Rights Offering or a potential investor subscribes for common stock in the Clarksville Offering, they are not allowed to revoke or reduce the principal amount of common stock subscribed, even if the subscriber later learns information about us considered to be unfavorable, and even if less than all of the shares that we are offering are actually purchased.

 

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.

 

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The Offering may not be fully subscribed.

 

The Rights Offering is only being made to existing shareholders, and the Clarksville Offering is only being made to potential investors residing in the greater Clarksville, Indiana community.  Accordingly, there can be no assurance that all or any portion of the Shares will be sold.  The Rights Offering is not conditioned upon the sale of any minimum amount of Shares and funds paid with subscriptions will be deposited by the Company upon delivery of such funds to the Company, and the Clarksville Offering is conditioned upon the sale of no less than 769,231 Shares.  To the extent that less than all of the Shares are sold, or to the extent that the Clarksville Offering does not close, the Company will have fewer funds for the uses described in Use of Proceeds.

 

If the Clarksville Offering does not close, the Company does not intend to expand its operations into the Clarksville banking market.

 

USE OF PROCEEDS

 

Except for $500,000 which the Company will retain, the Company anticipates that it will contribute all of the remaining net proceeds of the Clarksville Offering and the Rights Offering into the capital account of the Bank as Tier 1 capital.  The $500,000 retained by the Company will be used for debt service, which is approximately $135,000 per year, and general corporate purposes.

 

Management believes that the Bank has an opportunity to establish a banking presence in the Clark/Floyd County market, and has received regulatory approval to establish a banking office at 1122 Veterans Parkway, Clarksville, Indiana.  The Bank has had discussions with and anticipates that it will be assisted in establishing its banking presence in the Clark/Floyd County banking market by three individuals whom the Bank believes have the relationships, tenure and experience in both business and banking in this market to assist the Bank in this regard.  One of these individuals was a former banker in this market who, if the Clarksville Offering closes, the Bank anticipates hiring to manage the new Clarksville office, and the other two individuals are former bank directors in this market.  The Bank believes that these individuals will be of significant value to establishing a banking presence in the Clark/Floyd County through their ability to migrate old relationships from existing lenders and by making inroads with new clients via the Bank’s service delivery and corporate values: care, pro-activity and accountability.

 

If the Clarksville Offering closes, the Bank intends to use the net proceeds contributed by the Company to finance and support the Bank’s proposed de novo branch located in Clarksville, Indiana, for working capital, to support internal and external growth, and for general corporate purposes.  In the event the Company is not successful in selling all of the offered shares in the Clarksville Offering, the Company will not close on the sale of those shares and will cease its plans to open a branch in Clarksville, and the Bank intends to use the net proceeds contributed by the Company as a result of the Rights Offering for working capital, to support internal and external growth, and for general corporate purposes.

 

None of the net proceeds will be used to compensate or otherwise make payments to officers or directors of the Company or any of its subsidiaries. Management of the Company reserves the right to change the use of proceeds if it determines to be necessary.

 

The following table summarizes the anticipated use of proceeds, assuming all of the offered shares are sold:

 

Offering Expenses		$	100,000
Working Capital and General Corporate Purposes		$	9,900,000
Total		$	10,000,000

 

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The following table summarizes the anticipated use of proceeds, assuming the Clarksville Offering does not close and the maximum number of shares are sold in the Rights Offering:

 

Offering Expenses		$	100,000
Working Capital and General Corporate Purposes		$	4,900,000
Total		$	5,000,000

 

THE COMPANY

 

First Light Bancorp was formed on February 5, 2014, for purposes of acquiring all of the common stock of The Commerce Bank in a share exchange transaction consummated in August 2014, as a result of which the Bank became a wholly-owned subsidiary of the Company.  On July 13, 2015, the Bank changed its name to The Commerce Bank from Evansville Commerce Bank.

 

The Company and the Bank are both located at 20 NW 4th Street, Evansville, Indiana 47708. The directors and management of the Company and the Bank are focused on providing traditional ‘hometown’ community bank services, emphasizing the establishment of personalized long-term financial relationships with individuals and small businesses who value the availability of working with experienced, local decision makers.  The President and Chief Executive Officer of the Company is Thomas L. Austerman.

 

The Company’s principal executive offices are located at 20 NW 4th Street, Evansville, Indiana 47708, and the telephone number is (812) 492-1800.

 

BUSINESS

 

General

 

The Company is an Indiana corporation and bank holding company (“BHC”), within the meaning of the Bank Holding Company Act of 1956, as amended (“BHC Act”).  The Company is headquartered in Evansville, Indiana.  The principal activity of the Company is the ownership and management of its wholly-owned subsidiary, The Commerce Bank, an Indiana state chartered bank.  The Bank is a full-service commercial bank located in Evansville, Indiana.  The Bank has one wholly-owned subsidiary, EvCB Real Estate Holdings, LLC, which holds certain assets previously foreclosed by the Bank.  The Company is subject to regulation by the Board of Governors of the Federal Reserve (“FRB”), and the Bank is subject to regulation by certain state and federal regulatory agencies, including the FDIC and the Indiana Department of Financial Institutions (“IDFI”).

 

The Bank operates a single branch banking office located at 20 NW 4th Street, Evansville, Indiana.

 

Through the Bank, the Company offers various financial services, including accepting time and transaction deposits and making consumer, commercial and real estate mortgage loans.  The Bank also provides other financial services such as letters of credit.

 

Loans.  The Bank’s lending activities are separated into the categories of construction and land development, residential real estate, commercial and consumer.  Loans are originated by the Bank’s lending officers and approved by a committee of officers and lending officers, subject to various limitations set forth in the Bank’s lending policies.  The lending policies are designed to manage the risks inherent in making loans, including concentrations of credit and underwriting practices.

 

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Commercial loans represent the largest component of the Bank’s loan portfolio, and include both commercial real estate loans and industrial loans.  Commercial loans represented over 77% of the Bank’s loan portfolio as of December 31, 2014.  Commercial real estate loans typically involve larger principal amounts and repayment of these loans is generally dependent upon the successful operations of the property securing the loan or the business conducted on the property securing the loan.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market area.

 

The commercial portfolio also includes commercial industrial loans, which are loans to commercial customers for use in financing working capital needs, equipment purchases and expansions.  The loans in this category are repaid primarily from the business operations of the borrower.

 

The principal source of the Company’s revenue is interest and fees on loans, which accounted for 81% of total revenues in 2014.

 

Deposits.  The Bank also offers a wide range of deposit accounts designed to attract small to medium-sized commercial businesses, professionals and residents in Evansville and the surrounding areas.  These accounts include personal and business checking and savings accounts, money market accounts and time certificates of deposit.

 

Other Services.  To compensate for the Bank’s single location, certain convenience-oriented services are available to customers, including courier service, free nationwide use of ATMs, remote deposit capabilities, an internet banking system and telephone banking.  Both telephone banking and internet banking permit customers to obtain account information, transfer money between accounts and make stop-payments.  Additionally, customers can pay bills though the Bank’s internet web site.

 

Market Area and Competition

 

The Bank currently has a single location in Evansville, Indiana and its customers come from Vanderburgh County and the surrounding counties.  Vanderburgh County is home to several large banks, including the largest bank headquartered in the state of Indiana.  As a result, the Bank faces aggressive competition for banking customers.

 

Employees

 

As of August 31, 2015, the Company and its subsidiaries had 20 employees, of which 19 were full-time equivalent employees.

 

Legal Proceedings

 

The Company and its subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of its business.  Management of the Company is not presently aware of any material pending or contemplated legal proceedings.

 

Regulation and Supervision

 

The Company is a BHC within the meaning of the BHC Act.  As a BHC, the Company is subject to regulation and supervision by the FRB. The Bank is an Indiana state chartered bank subject to supervision and regulation by the FDIC and the IDFI.  The following is a discussion of material statutes and regulations affecting the Company and the Bank.  The discussion is qualified in its entirety by reference to such statutes and regulations.

 

BHC Act of 1956, as amended

 

Generally, the BHC Act governs the acquisition and control of banks and nonbanking companies by BHCs.  A BHC is subject to regulation by, and is required to register with, the FRB under the BHC Act.  The BHC Act requires a BHC to file an annual report of its operations and such additional information as the FRB may require.  The FRB has issued regulations under the BHC Act requiring a BHC to serve as a source of financial and managerial strength to its subsidiary banks.  It is the policy of the FRB that, pursuant to this requirement, a BHC should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity.

 

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A BHC’s acquisition of 5% or more of the voting shares of any other bank or BHC generally requires the prior approval of the FRB and is subject to applicable federal and state law.  The FRB evaluates acquisition applications based on, among other things, competitive factors, supervisory factors, adequacy of financial and managerial resources, and banking and community needs considerations.

 

The BHC Act also prohibits, with certain exceptions, a BHC from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any “nonbanking” company unless the FRB finds the nonbanking activities be “so closely related to banking . . . as to be a proper incident thereto.”  The current regulations of the FRB permit a BHC and its nonbank subsidiaries, among other activities, to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, and securities brokerage services.  The BHC Act does not place territorial restrictions on the activities of a BHC or its nonbank subsidiaries.

 

Federal law prohibits acquisition of “control” of a bank or BHC without prior notice to certain federal bank regulators.  The BHC Act defines “control,” in certain cases, as the acquisition of as little as 10% of the outstanding shares of any class of voting stock.  Furthermore, under certain circumstances, a BHC may not be able to purchase its own shares, where the gross consideration will equal 10% or more of the company’s net worth, without obtaining approval of the FRB.  The Federal Reserve Act subjects banks and their affiliates to certain requirements and restrictions when dealing with each other (affiliate transactions include transactions between a bank and its BHC).

 

Bank Secrecy Act and USA Patriot Act

 

In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (the “BSA”).  The BSA requires financial institutions to maintain records of certain customers and currency transactions and to report certain domestic and foreign currency transactions, which may have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.  This law requires financial institutions to develop a BSA compliance program.

 

In 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act.  Title III of the USA Patriot Act requires financial institutions, including the Company and the Bank, to help prevent and detect international money laundering and the financing of terrorism and prosecute those involved in such activities.  The Department of the Treasury has adopted additional requirements to further implement Title III.

 

These regulations have established a mechanism for law enforcement officials to communicate names of suspected terrorists and money launderers to financial institutions, enabling financial institutions to promptly locate accounts and transactions involving those suspects.  Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”).  Each financial institution must designate a point of contact to receive information requests.  These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection of a statutory safe harbor if each financial institution notifies FinCEN of its intent to share information.  The Department of the Treasury has also adopted regulations to prevent money laundering and terrorist financing through correspondent accounts that U.S. financial institutions maintain on behalf of foreign banks.  These regulations also require financial institutions to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks.  In addition, banks must have procedures to verify the identity of their customers.

 

Prompt Corrective Regulatory Action

 

The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the common equity Tier 1 risk-based capital ratio, and the leverage ratio.

 

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A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

 

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

 

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

 

The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

 

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

 

The Company believes that, as of June 30, 2015, the Bank was “well capitalized” based on the aforementioned ratios.  See “Management’s Discussion and Analysis — Comparison and Discussion of June 30, 2015 Balance Sheet to June 30, 2014 — Capital Resources” on page 32 for the capital ratios of the Bank as of June 30, 2015 under the Basel III capital framework.

 

Deposit Insurance Fund

 

The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of the Bank to the maximum extent that law permits.  The Federal Deposit Insurance Reform Act of 2005 (the “FDI Act”) created the DIF in 2006 as the

 

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result of the merger of the Bank Insurance Fund and the Savings Association Insurance Fund. The FDIC maintains the DIF by assessing depository institutions an insurance premium.  The Dodd-Frank Act requires the FDIC to set a DIF reserve ratio of 1.35% of estimated insured deposits and to achieve this ratio by September 30, 2020.

 

The FDIC’s risk-based assessment system requires insured institutions to pay deposit insurance premiums based on the risk that each institution poses to the DIF.  The FDIC assigns an institution’s risk category after assessing the institution’s regulatory capital levels, supervisory evaluations, and certain other factors.  The institution’s risk category determines its assessment rate.  The Dodd-Frank Act requires the FDIC to calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital), as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments.  The Dodd-Frank Act requires the FDIC to place institutions into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

 

Dividends

 

The Company is a legal entity separate and distinct from the Bank.  There are various legal limitations on the extent to which the Bank can supply funds to the Company.  The principal source of the Company’s funds consists of dividends from the Bank.  State and Federal law restricts the amount of dividends that banks may pay to its shareholders or BHC.  The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and regulatory status.  Currently, the Bank is prohibited by applicable Indiana law from paying a dividend to the Company because of the negative retained earnings account at the Bank.  See “RISK FACTORS — “The Company is dependent upon the Bank for its income, and the Bank currently is prohibited from paying dividends” and — “The Company could default on its debt and lose the stock of the Bank” on page 9.

 

The regulators are authorized, and under certain circumstances are required, to determine that the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment.  For example, the FDI Act generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its BHC if the distribution would cause the bank to become undercapitalized.

 

Beginning in 2016, applicable regulations will limit a depository institution’s ability to make capital distributions if it does not hold a specified level of a “capital conservation buffer” above the required minimum risk-based capital ratios as discussed below under “— Capital Requirements and BASEL III.”  Regulators also review and limit proposed dividend payments as part of the supervisory process and review of an institution’s capital planning.  In addition to dividend limitations, the Bank is subject to certain restrictions on extensions of credit to the Company, on investments in the shares or other securities of the Company and in taking such shares or securities as collateral for loans.

 

Community Reinvestment Act

 

The CRA requires that the federal banking regulators evaluate the records of a financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods.  Regulators also consider these factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank.

 

Capital Requirements and BASEL III

 

In July 2013, the federal banking agencies published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital

 

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requirements applicable to bank holding companies with consolidated assets in excess of $1 billion and depository institutions.  As such, the Basel III Capital rules apply to the Bank, but not to the Company at this time.  The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules became effective on January 1, 2015 (subject to a phase-in period).

 

The Basel III Capital Rules, among other things:

 

·                  introduce a new capital measure called “Common Equity Tier 1” (“CET1”);

·                  specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements;

·                  define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and

·                  expand the scope of the deductions/adjustments as compared to existing regulations.

 

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain:

 

·                  a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation);

·                  a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);

·                  a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and

·                  a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

 

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 are as follows:

 

·                  4.5% CET1 to risk-weighted assets;

·                  6.0% Tier 1 capital to risk-weighted assets;

·                  8.0% Total capital to risk-weighted assets.

 

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the former capital standards, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company, may

 

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make a one-time permanent election to continue to exclude these items. The Company and the Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio. The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The Company has no trust preferred securities.

 

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

 

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specifics changes from the former capital rules impacting the Company’s determination of risk-weighted assets include, among other things:

 

·                  Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;

·                  Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due;

·                  Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); and

·                  Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.

 

Management believes that, as of June 30, 2015 the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.  See “Management’s Discussion and Analysis — Comparison and Discussion of June 30 2015 Balance Sheet to June 30, 2014 — Capital Resources” on page 32 for the capital ratios of the Bank as of June 30, 2015 under the Basel III capital framework.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act

 

On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank Act”). This law affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act provides various federal agencies with significant discretion in drafting and implementing a variety of new rules and regulations, many of which are undecided or incomplete.

 

Certain provisions of the Dodd-Frank Act currently are effective and have been fully implemented, including the revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Federal regulators implemented the following provisions in 2013: (i) final new capital rules, (ii) a final rule to implement the so called “Volcker rule” restrictions on certain proprietary trading and investment activities, and (iii) final rules and increased enforcement action by the Consumer Finance Protection Bureau (“CFPB”).

 

Key provisions of the Dodd-Frank Act include:

 

·                  eliminating the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts;

·                  broadening the base for FDIC insurance assessments;

 

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·                  requiring publicly traded companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments;

·                  broadening the scope of derivative instruments, and subjecting covered institutions to increase regulation of its derivative business, including margin requirements, record keeping and reporting requirements, and heightened supervision;

·                  creating a new CFPB with broad powers to supervise and enforce consumer protection laws.  The primary regulators for banks and savings institutions with $10 billion or less in assets will continue to examine financial institutions for compliance with consumer laws. The CFPB, along with the Department of Justice and bank regulatory authorities, also seek to enforce discriminatory lending laws. In such actions, the CFPB and others have used a disparate impact analysis, which measures discriminatory results without regard to intent; and

·                  requiring that debit card and interchange fees must be reasonable and proportional to the issuer’s cost for processing the transaction.

 

The FRB has approved a debit card interchange regulation which caps an issuer’s base fee at $0.21 per transaction plus an additional fee computed at five basis-points of the transaction value. These standards apply to issuers that, together with their affiliates, have assets of $10 billion or more. The Company’s consolidated assets are under $10 billion and therefore it is not directly impacted by these provisions.

 

S.A.F.E. Act Requirements

 

Regulations issued under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “S.A.F.E. Act”) require residential mortgage loan originators who are employees of institutions regulated by the foregoing agencies, including national banks, to meet the registration requirements of the S.A.F.E. Act. The S.A.F.E. Act requires residential mortgage loan originators who are employees of regulated financial institutions to register with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states.  The S.A.F.E. Act generally prohibits employees of regulated financial institutions from originating residential mortgage loans unless they are registered.

 

Consumer Laws

 

Additionally, the Bank must comply with a number of federal consumer protection laws, including, among others:

 

·                  the Gramm-Leach-Bliley Act, which requires the Bank to maintain privacy with respect to certain consumer data in the Company’s possession and to periodically communicate with consumers on privacy matters;

·                  the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications;

·                  the Truth in Lending Act and Regulation Z thereunder, which requires certain disclosures to mortgagors regarding the terms of their mortgage loans;

·                  the Fair Credit Reporting Act, which regulates the use and reporting of information related to the credit history of consumers;

·                  the Equal Credit Opportunity Act and Regulation B thereunder, which prohibits discrimination on the basis of age, race and certain other characteristics, in the extension of credit;

·                  the Homeowners Equity Protection Act, which requires, among other things, the cancellation of mortgage insurance once certain equity levels are reached;

·                  the Home Mortgage Disclosure Act and Regulation C thereunder, which require mortgage lenders to report certain public loan data; and

·                  the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics.

 

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Mortgage Origination

 

On January 10, 2013, the CFPB issued a final rule implementing the “ability to repay” requirement in the Dodd-Frank Act.  This rule, among other things, requires lenders to consider a consumer’s ability to repay a mortgage loan before extending credit to the consumer, and limits prepayment penalties. The rule also establishes certain protections from liability for mortgage lenders with regard to the “qualified mortgages” they originate.  This rule includes within the definition of a “qualified mortgage” a loan with a borrower debt-to-income ratio of less than or equal to 43% or, alternatively, a loan eligible for purchase by Fannie Mae or Freddie Mac while they operate under Federal conservatorship or receivership, and loans eligible for insurance or guarantee by the FHA, VA or USDA. Additionally, a qualified mortgage may not: (i) contain excess upfront points and fees; (ii) have a term greater than 30 years; or (iii) include interest-only or negative amortization payments. This rule became effective January 10, 2014 and the Company does not anticipate a significant impact on its mortgage production operations since most of the loans the Company currently originates would constitute “qualified mortgages” under the rule.

 

Future Legislation

 

In addition to the specific legislation described above, Congress is considering additional legislation. This legislation may change banking statutes and the Company’s operating environment in substantial and unpredictable ways and may increase reporting governance requirements. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on its business, results of operations, or financial condition.

 

DESCRIPTION OF PROPERTY

 

The Bank and the Company lease the office located at 20 NW 4th Street, Evansville, Indiana 47708, which was opened in 2006.  The Company and the Bank occupy aproximately14,190 square feet.

 

The proposed branch location in Clarksville is located at 1122 Veterans Parkway, Clarksville, Indiana 47129, and has approximately 2,000 square feet.

 

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

 

Critical Accounting Policies and Estimates

 

The Company’s critical accounting policies are disclosed in detail within the audited financial statements included in this Offering Circular.

 

Results of Operations — Comparison of 2014 to 2013

 

Net income for 2014 was $0.2 million, or $0.14 per share compared to $1.9 million, or $1.53 per share in 2013.  In 2013, the Corporation reversed a $1.6 million valuation allowance against its deferred tax assets.  Return on assets at December 31, 2014 was 0.24% compared to 2.72% at December 31, 2013.  Return on equity for the years ending December 31, 2014 and 2013 was 2.30% and 31.96%, respectively.

 

The primary components of income and expense affecting net income are discussed in the following analysis.

 

Net Interest Income

 

The principal source of the Corporation’s earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income increased in 2014 to $2.9 million compared to $2.4 million in 2013. Total average interest earning assets increased to $81.1 million in 2014 from $66.8 million in 2013. The yield on these assets decreased to 4.08% in 2014 from 4.17% in 2013. Total average interest-bearing liabilities increased to $64.0 million

 

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in 2014 from $52.6 million in 2013. The average cost of these interest-bearing liabilities was 0.66% in 2014 and 0.67% in 2013.

 

The net interest margin decreased from 3.65% in 2013 to 3.57% in 2014. This decrease is primarily the result of lower earning assets yields while the rate on interest-bearing liabilities remained the same.

 

Consolidated Balance Sheet — Average Balances and Interest Rates

 

		December 31,
		2014								2013
(Dollar amounts in thousands)		Average Balance			Interest			Yield/ Rate		Average Balance			Interest			Yield/ Rate
ASSETS
Interest-earning assets:
Loans (1)		$	63,163		3,127			4.92	%	$	49,453		2,621			5.30	%
Investment securities		3,134			52			1.67	%	4,033			47			1.16	%
Deposits with banks		13,795			108			0.79	%	12,088			93			0.77	%
Federal funds sold & other		1,009			24			2.39	%	1,204			27			2.25	%
Total interest-earning assets		81,101			3,311			4.08	%	66,778			2,788			4.17	%
Non-interest earning assets:
Cash and due from banks		1,330								1,218
Premises and equipment, net		481								518
Other assets		2,627								1,530
Less allowance for loan losses		(875		)						(882		)
TOTALS		$	84,664							$	69,162
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Transaction accounts		$	31,109		126			0.41	%	$	24,287		95			0.39	%
Time deposits		27,875			263			0.96	%	26,902			252			0.94	%
FHLB Borrowings		4,864			26			0.53	%	1,430			5			0.38	%
Other borrowings		74			4			5.58	%	—			—			0.00	%
Total interest-bearing liabilities:		63,922			419			0.66	%	52,619			353			0.67	%
Non interest-bearing liabilities:
Demand deposits		11,647								10,470
Other		226								192
		75,795								63,281
Shareholders’ equity		8,869								5,881
TOTALS		$	84,664							$	69,162
Net interest earnings					$	2,892							$	2,435
Net yield on interest- earning assets								3.57	%							3.65	%

 

(1)For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.

 

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The following table sets forth the components of net interest income due to changes in volume and rate. The table information compares 2014 to 2013.

 

		2014 Compared to 2013 Increase (Decrease) Due to
(Dollar amounts in thousands)		Volume			Rate			Volume/ Rate			Total
Interest earned on interest-earning assets:
Loans (1)		$	747		$	(188	)	$	(53	)	$	506
Investment securities		(10		)	20			(5		)	5
Deposits with banks		13			2			—			15
Federal funds sold and Other		(4		)	2			(1		)	(3		)
Total interest income		$	746		$	(164	)	$	(59	)	$	523
Interest paid on interest-bearing liabilities:
Transaction accounts		27			5			(1		)	31
Time deposits		9			2			—			11
FHLB borrowings		13			2			6			21
Other borrowings		—			—			4			4
Total interest expense		49			9			9			67
Net interest income		$	697		$	(173	)	$	(68	)	$	456

 

(1)For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.

 

Provision for Loan Losses

 

The provision for loan losses charged to expense is based upon credit loss experience and the results of a comprehensive and yet subjective analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under Accounting Standards Codification (ASC-310), pooled loans as prescribed under ASC 450-10, and economic and other risk factors as outlined in various Joint Interagency Statements issued by the bank regulatory agencies. For the year ended December 31, 2014, the provision for loan losses was $108 thousand compared to $0 in 2013.

 

Net charge-offs for 2014 were $64 thousand as compared to $42 thousand for 2013. Non-accrual loans increased from $0 at December 31, 2013 to $55 thousand at December 31, 2014.

 

Non-Interest Income

 

Non-interest income of $755 thousand decreased $150 thousand from the $905 thousand earned in 2013. This decrease resulted from the following:

 

·                                          $21 thousand reduction from NSF and other customer service fees.

·                                          $84 thousand reduction in mortgage banking related income.  This was primarily driven from an increase in market rates for mortgage loans in 2014 which significantly reduced refinancing volume compared to 2013.

·                                          $38 thousand reduction in rental income on OREO properties as a result of the continued sales of OREO assets.

 

Non-Interest Expenses

 

Non-interest expenses increased to $3.2 million for 2014 from $3.0 million for 2013. Salaries and Benefits, the Corporation’s largest expense category, increased $130 thousand in 2014, or 7.7% over 2013.

 

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Income Taxes

 

The Corporation’s income tax provision was $156 thousand in 2014 compared to an income tax credit of $1.6 million in 2013.

 

The credit in 2013 is directly related to the reversal of a valuation allowance against the Corporation’s deferred tax asset.  Recognition of deferred tax assets are subject to valuation adjustments if it is more likely than not that some portion or all of the deferred tax assets may not be realized.  Determination of whether realization is more likely than not is based on available evidence and judgment.  As of December 31, 2013, management reviewed the Corporation’s deferred tax asset and determined that it was more likely than not that the asset will be fully utilized based upon projections of future income.  As a result, the Corporation fully reversed the valuation allowance that was recorded in a prior period.

 

Results of Operations — Comparison of Six Months Ended June 30, 2015 to Six Months Ended June 30, 2014

 

Net income for the first six months ended June 30, 2015 was $63 thousand, or $0.04 per share compared to net income of $65 thousand, or $0.05 per share for the six months ended June 30, 2014.  Return on average assets for the first six months of 2015 was 0.12% compared to 0.17% for the six months of 2014.  Return on equity for the six months ending June 30, 2015 and June 30, 2014 was 1.36% and 1.51%, respectively.

 

The primary components of income and expense affecting net income are discussed in the following analysis.

 

Net Interest Income

 

The principal source of the Corporation’s earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income increased for the first six months of 2015 to $1.6 million compared to $1.3 million for the first six months of 2014. Total average interest earning assets increased to $102.2 million for the six months ended June 30, 2015 from $75.1 million for the six months ended June 30, 2014. The yield on these assets decreased to 3.85% for the six months ended June 30, 2015 from 4.12% for the six months ended June 30, 2014. Total average interest-bearing liabilities increased to $83.7 million for the first six months of 2015 from $59.0 million for the first six months of 2014. The average cost of these interest-bearing liabilities was 0.82% for the first six months in 2015 and 0.63% in 2014.

 

The net interest margin decreased from 3.62% for the first six months in 2014 to 3.18% for the first six months in 2015. This decrease is primarily the result of lower earning assets yields while the rate on interest-bearing liabilities increased as a result of a $3.0 million loan that the Corporation obtained in the 4th quarter of 2014 as a means to provide additional capital support the Corporation’s subsidiary bank.  The average cost for this loan was 4.56% for the first six months of 2015.

 

Provision for Loan Losses

 

The provision for loan losses charged to expense is based upon credit loss experience and the results of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under Accounting Standards Codification (ASC-310), pooled loans as prescribed under ASC 450-10, and economic and other risk factors as outlined in various Joint Interagency Statements issued by the bank regulatory agencies. For the six months ended June 30, 2015, the provision for loan losses was $125 thousand compared to $0 for the first six months of 2014.

 

Net charge-offs for the first six months of 2015 were $27 thousand as compared to $1 thousand for the first six months of 2014. Non-accrual loans increased from $0 at June 30, 2014 to $331 thousand at June 30, 2015.

 

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Non-Interest Income

 

Non-interest income of $432 thousand for the first six months of 2015 increased $108 thousand from the $324 thousand earned in the first six months of 2014. This increase resulted from the following:

 

·                  $87 thousand increase in mortgage banking related income.

·                  $31 thousand increase in increase in the cash surrender value of Bank Owned Life Insurance Policies (BOLI) which were purchased in the first quarter of 2015.

 

Non-Interest Expenses

 

Non-interest expenses increased to $1.8 million for the first six months of 2015 from $1.6 million for the first six months of 2014. Salaries and Benefits, the Corporation’s largest expense category, increased $221 thousand for the first six months of 2015 compared to the first six months of 2014.

 

Income Taxes

 

The Corporation’s income tax provision was $50 thousand for the first six months of 2015 compared to $52 thousand for the first six months of 2014.

 

Comparison and Discussion of 2014 Balance Sheet to 2013

 

The Corporation’s total assets increased 31.7% or $24.8 million at December 31, 2014, from a year earlier. Available-for-sale securities decreased $0.7 million at December 31, 2014, from the previous year. Loans, net of deferred fees and costs, increased by $16.0 million to $72.2 million. Deposits increased $15.5 million, or 23.2% while borrowings increased from $2.5 million at December 31, 2013 to $8.0 million at December 31, 2014. Long-term debt increased from $0 in 2013 to $3.0 million at the end of 2014.  Total shareholders’ equity increased $0.6 million to $9.2 million at December 31, 2014.

 

Following is an analysis of the components of the Corporation’s balance sheet.

 

Securities

 

The Corporation’s investment strategy seeks to maximize income from the investment portfolio while using it as a risk management tool and ensuring safety of principal and capital.

 

2014		1 year and less					1 to 5 years					5 to 10 years					Over 10 Years					2014
(Dollar amounts in thousands)		Balance			Rate		Balance			Rate		Balance			Rate		Balance			Rate		Total
U.S. government sponsored entity mortgage-backed securities and agencies (1)		$	—		—	%	$	2,793		1.67	%	$	—		—	%	$	—		—	%	$	2,793
(1) Distribution of maturities is based on the estimated life of the asset.
2013		1 year and less					1 to 5 years					5 to 10 years					Over 10 Years					2013
(Dollar amounts in thousands)		Balance			Rate		Balance			Rate		Balance			Rate		Balance			Rate		Total
U.S. government sponsored entity mortgage-backed securities and agencies (1)		$	—		—	%	$	3,494		1.16	%	$	—		—	%	$	—		—	%	$	3,494

 

(1) Distribution of maturities is based on the estimated life of the asset.

 

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Loan Portfolio

 

Loans outstanding by major category as of December 31 for each of the last two years and the maturities at year end 2014 are set forth in the following analyses.

 

		As of December 31,
(Dollar amounts in thousands)		2014			2013
Loan Category
Construction & Land Development		$	2,161		$	3,122
Residential Real Estate		13,646			9,863
Commercial		55,769			42,855
Consumer		589			360
TOTAL		$	72,165		$	56,200

 

		Within			After One But Within			After Five
(Dollar amounts in thousands)		One Year			Five Years			Years			Total
Maturity Distribution
Commercial and Construction & Land Development		$	12,684		$	35,313		$	9,933		$	57,930
TOTAL
Residential											13,646
Consumer											589
TOTAL											72,165
Loans maturing after one year with:
Fixed interest rates					$	32,780		$	7,578
Variable interest rates					2,533			2,355
TOTAL					$	35,313		$	9,933

 

Allowance for Loan Losses

 

The activity in the Corporation’s allowance for loan losses is shown in the following analysis:

 

(Dollar amounts in thousands)		2014			2013
Amount of loans outstanding at December 31,		$	72,165		$	56,200
Average amount of loans by year		$	63,163		$	49,453
Allowance for loan losses at beginning of year		$	873		$	915
Loans charged off:
Construction & Land Development		—			—
Residential real estate		—			43
Commercial		65			—
Consumer		—			—
Total loans charged off		65			43
Recoveries of loans previously charged off:
Construction & Land Development		—			—
Residential real estate		—			—
Commercial		1			1
Consumer		—			—
Total recoveries		1			1
Net loans charged off		64			42
Provision charged to expense		108			—
Balance at end of year		$	917		$	873
Ratio of net charge-offs during period to average loans outstanding		0.10		%	0.08		%

 

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