Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark one)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 000-53181
SOLERA
NATIONAL BANCORP, INC.
(Exact name of registrant as
specified in its charter)
Delaware
|
|
02-0774841
|
(State or other
jurisdiction
|
|
(IRS Employer
Identification No.)
|
of incorporation or
organization)
|
|
|
319 S.
Sheridan Blvd.
Lakewood,
CO 80226
303-209-8600
(Address and telephone
number of principal executive offices and principal place of business)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
¨
No
¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
Large accelerated filer
¨
|
|
Accelerated filer
¨
|
|
|
|
Non-accelerated filer
¨
|
|
Smaller reporting company
x
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the last
practicable date: As of November 9,
2010, 2,553,671 shares of the registrants common stock, $0.01 par value, were
issued and outstanding.
Table of
Contents
INTRODUCTORY NOTE. CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION AND RISK FACTORS
This Quarterly Report on Form 10-Q
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 about Solera National Bancorp, Inc.
(the Company) and our subsidiary, Solera National Bank (the Bank,
collectively with the Company, sometimes referred to as we, us and our)
that are subject to risks and uncertainties. Forward-looking statements
include information concerning future financial performance, business strategy,
projected plans and objectives. Statements preceded by, followed by or
that otherwise include the words anticipates, believes, estimates, expects,
intends, plans, may increase, may fluctuate and similar expressions of
future or conditional verbs such as will, should, would, and could are
generally forward-looking in nature and not historical facts. Actual
results may differ materially from those projected, implied, anticipated or
expected in the forward-looking statements.
Readers of this quarterly report should not rely solely on the
forward-looking statements and should consider all uncertainties and risks
throughout this report. The statements are representative only as of the date
they are made, and Solera National Bancorp, Inc. undertakes no obligation
to update any forward-looking statement.
These forward-looking statements,
implicitly and explicitly, include the assumptions underlying the statements
and other information with respect to the Companys beliefs, plans, objectives,
goals, expectations, anticipations, estimates, financial condition, results of
operations, future performance and business, including managements
expectations and estimates with respect to revenues, expenses, return on
equity, return on assets, efficiency ratio, asset quality and other financial
data and capital and performance ratios.
Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable,
these statements involve risks and uncertainties that are subject to change
based on various important factors, some of which are beyond the control of the
Company. The following factors, among others, could cause the Companys results
or financial performance to differ materially from its goals, plans,
objectives, intentions, expectations and other forward-looking statements:
·
the Companys business may be adversely affected by
conditions in the financial markets and economic conditions generally;
·
continuation of the economic downturn could reduce our
customer base, our level of deposits and demand for financial products such as
loans;
·
management of Solera National Bank may be unable to
adequately measure and limit credit risk associated with the Banks loan
portfolio, which would affect our profitability;
·
we are exposed to higher credit risk by commercial real
estate, commercial business, and construction lending;
·
our allowance for probable loan losses may be insufficient;
·
interest rate volatility could harm our business;
·
funding to provide liquidity may not be available to us on
favorable terms or at all;
·
we may not be able to raise additional capital on terms
favorable to us;
·
the liquidity of our common stock is affected by its
limited trading market;
·
the departures of key personnel or directors may impair our
operations;
·
the Banks legal lending limits may impair its ability to
attract borrowers;
·
the Company is subject to extensive government regulation
which may have an adverse effect on the Companys profitability and growth;
3
Table
of Contents
·
managing reputational risk is important to attracting and
maintaining customers, investors and employees;
·
monetary policy and other economic factors could adversely
affect the Companys profitability;
·
the Companys certificate of incorporation and bylaws, and
the employment agreements of our executive officers, contain provisions that
could make a takeover more difficult;
·
our directors and executive
officers could have the ability to influence stockholder actions;
·
the effects of competition from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual
funds, and other financial institutions operating in our market area and
elsewhere, including institutions operating regionally, nationally, and
internationally, together with such competitors offering banking products and
services by mail, telephone, computer, and the Internet; and
·
managements ability to manage these and other risks.
For a discussion of these and other
risks and uncertainties that could cause actual results to differ from those
contained in the forward-looking statements, see Risk Factors in Item 1A of
the Companys 2009 Annual Report filed on Form 10-K with the SEC, which is
available on the SECs website at www.sec.gov. All forward-looking
statements are qualified in their entirety by this cautionary statement, and
the Company undertakes no obligation to revise or update this Quarterly Report
on Form 10-Q to reflect events or circumstances after the date
hereof. New factors emerge from time to
time, and it is not possible for us to predict which factors, if any, will
arise. In addition, the Company cannot
assess the impact of each factor on the Companys business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
4
Table of
Contents
PART I FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Solera
National Bancorp, Inc.
Balance Sheets as of September 30, 2010 and December 31,
2009
(unaudited)
|
|
September 30,
|
|
December 31,
|
|
($ in thousands, except share data)
|
|
2010
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
698
|
|
$
|
1,696
|
|
Federal
funds sold
|
|
|
|
820
|
|
Total
cash and cash equivalents
|
|
698
|
|
2,516
|
|
Interest-bearing
deposits with banks
|
|
266
|
|
3,784
|
|
Investment
securities, available-for-sale
|
|
72,876
|
|
73,441
|
|
Gross
loans
|
|
60,378
|
|
50,504
|
|
Net
deferred (fees)/expenses
|
|
(85
|
)
|
(114
|
)
|
Allowance
for loan losses
|
|
(1,200
|
)
|
(830
|
)
|
Net
loans
|
|
59,093
|
|
49,560
|
|
Federal
Home Loan Bank (FHLB) and Federal Reserve Bank stocks
|
|
1,165
|
|
1,131
|
|
Premises
and equipment, net
|
|
768
|
|
875
|
|
Accrued
interest receivable
|
|
749
|
|
814
|
|
Prepaid
FDIC insurance
|
|
320
|
|
471
|
|
Other
assets
|
|
278
|
|
248
|
|
Total assets
|
|
$
|
136,213
|
|
$
|
132,840
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$
|
1,894
|
|
$
|
2,624
|
|
Interest-bearing
demand
|
|
11,224
|
|
6,830
|
|
Savings
and money market
|
|
53,535
|
|
55,318
|
|
Time
deposits
|
|
41,708
|
|
39,629
|
|
Total
deposits
|
|
108,361
|
|
104,401
|
|
|
|
|
|
|
|
Federal
funds purchased and securities sold under agreements to repurchase
|
|
1,085
|
|
326
|
|
Accrued
interest payable
|
|
99
|
|
82
|
|
Accounts
payable and other liabilities
|
|
340
|
|
344
|
|
Federal
Home Loan Bank advances
|
|
6,000
|
|
8,750
|
|
Deferred
rent liability
|
|
95
|
|
85
|
|
Capital
lease liability
|
|
87
|
|
118
|
|
Total liabilities
|
|
$
|
116,067
|
|
$
|
114,106
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (see Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Common
stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 shares issued
and outstanding at September 30, 2010 and December 31, 2009
|
|
$
|
26
|
|
$
|
26
|
|
Additional
paid-in capital
|
|
25,916
|
|
25,768
|
|
Accumulated
deficit
|
|
(8,298
|
)
|
(8,016
|
)
|
Accumulated
other comprehensive income
|
|
2,502
|
|
956
|
|
Total stockholders equity
|
|
$
|
20,146
|
|
$
|
18,734
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
136,213
|
|
$
|
132,840
|
|
See Notes to Consolidated Financial
Statements.
5
Table of Contents
Solera
National Bancorp, Inc.
Statements
of Operations for the Three and Nine Months Ended September 30, 2010 and
2009
(unaudited)
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
($ in thousands, except share data)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
901
|
|
$
|
598
|
|
$
|
2,503
|
|
$
|
1,380
|
|
Interest
on federal funds sold
|
|
|
|
2
|
|
2
|
|
3
|
|
Interest
on investment securities
|
|
713
|
|
752
|
|
2,261
|
|
2,000
|
|
Other
interest income
|
|
1
|
|
|
|
7
|
|
1
|
|
Dividends
on FHLB and Federal Reserve Bank stocks
|
|
10
|
|
11
|
|
32
|
|
31
|
|
Total
interest income
|
|
1,625
|
|
1,363
|
|
4,805
|
|
3,415
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
466
|
|
517
|
|
1,476
|
|
1,180
|
|
Federal
Home Loan Bank advances
|
|
58
|
|
78
|
|
202
|
|
256
|
|
Federal
funds purchased and securities sold under agreements to repurchase
|
|
2
|
|
2
|
|
5
|
|
10
|
|
Other
borrowings
|
|
2
|
|
3
|
|
7
|
|
10
|
|
Total
interest expense
|
|
528
|
|
600
|
|
1,690
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
1,097
|
|
763
|
|
3,115
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
780
|
|
180
|
|
1,075
|
|
432
|
|
Net
interest income after provision for loan losses
|
|
317
|
|
583
|
|
2,040
|
|
1,527
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
|
19
|
|
80
|
|
55
|
|
220
|
|
Other
income
|
|
16
|
|
|
|
16
|
|
4
|
|
Gain on
sale of other real estate owned
|
|
10
|
|
|
|
10
|
|
|
|
Gain on
sale of investment securities
|
|
332
|
|
98
|
|
863
|
|
205
|
|
Total
noninterest income
|
|
377
|
|
178
|
|
944
|
|
429
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
619
|
|
591
|
|
1,756
|
|
1,889
|
|
Occupancy
|
|
137
|
|
142
|
|
418
|
|
417
|
|
Professional
fees
|
|
134
|
|
53
|
|
319
|
|
237
|
|
Other
general and administrative
|
|
297
|
|
236
|
|
773
|
|
680
|
|
Total
noninterest expense
|
|
1,187
|
|
1,022
|
|
3,266
|
|
3,223
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
(493
|
)
|
(261
|
)
|
(282
|
)
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(493
|
)
|
$
|
(261
|
)
|
$
|
(282
|
)
|
$
|
(1,267
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
(0.19
|
)
|
(0.10
|
)
|
(0.11
|
)
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
(0.19
|
)
|
(0.10
|
)
|
(0.11
|
)
|
(0.50
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
|
|
|
|
|
|
|
|
|
|
Basic
|
|
2,553,671
|
|
2,553,671
|
|
2,553,671
|
|
2,553,671
|
|
Diluted
|
|
2,553,671
|
|
2,553,671
|
|
2,553,671
|
|
2,553,671
|
|
See Notes to Consolidated Financial
Statements.
6
Table
of Contents
Solera
National Bancorp, Inc.
Statements of Changes in Stockholders Equity for the Nine
Months Ended September 30, 2010 and 2009
(unaudited)
|
|
|
|
|
|
Additional
|
|
|
|
Accumulated
Other
|
|
|
|
($ in thousands, except share data)
|
|
Shares
Outstanding
|
|
Common
Stock
|
|
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Comprehensive
Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
2,553,671
|
|
$
|
26
|
|
$
|
25,558
|
|
$
|
(6,740
|
)
|
$
|
148
|
|
$
|
18,992
|
|
Stock-based
compensation
|
|
|
|
|
|
156
|
|
|
|
|
|
156
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
(1,267
|
)
|
|
|
(1,267
|
)
|
Net
change in unrealized gains on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
1,819
|
|
1,819
|
|
Less:
reclassification adjustment for net gains included in income
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
(205
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
Balance at September 30, 2009
|
|
2,553,671
|
|
$
|
26
|
|
$
|
25,714
|
|
$
|
(8,007
|
)
|
$
|
1,762
|
|
$
|
19,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
2,553,671
|
|
$
|
26
|
|
$
|
25,768
|
|
$
|
(8,016
|
)
|
$
|
956
|
|
$
|
18,734
|
|
Stock-based
compensation
|
|
|
|
|
|
148
|
|
|
|
|
|
148
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
(282
|
)
|
|
|
(282
|
)
|
Net
change in unrealized gains on investment securities available-for-sale
|
|
|
|
|
|
|
|
|
|
2,409
|
|
2,409
|
|
Less:
reclassification adjustment for net gains included in income
|
|
|
|
|
|
|
|
|
|
(863
|
)
|
(863
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
1,264
|
|
Balance at September 30, 2010
|
|
2,553,671
|
|
$
|
26
|
|
$
|
25,916
|
|
$
|
(8,298
|
)
|
$
|
2,502
|
|
$
|
20,146
|
|
See Notes to Consolidated Financial
Statements.
7
Table of Contents
Solera
National Bancorp, Inc.
Statements
of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
(unaudited)
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
($ in thousands)
|
|
2010
|
|
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(282
|
)
|
$
|
(1,267
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
137
|
|
127
|
|
Provision
for loan losses
|
|
1,075
|
|
432
|
|
Net
accretion of deferred loan fees/expenses
|
|
(29
|
)
|
(48
|
)
|
Net
amortization of premiums on investment securities
|
|
348
|
|
46
|
|
Gain on
sale of other real estate owned
|
|
(10
|
)
|
|
|
Gain on
sale of investment securities
|
|
(863
|
)
|
(205
|
)
|
Federal
Home Loan Bank stock dividend
|
|
(10
|
)
|
(10
|
)
|
Recognition
of stock-based compensation on stock options
|
|
148
|
|
156
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Interest
receivable
|
|
65
|
|
(294
|
)
|
Other
assets
|
|
(53
|
)
|
(16
|
)
|
Prepaid
FDIC insurance
|
|
151
|
|
|
|
Accrued
interest payable
|
|
17
|
|
59
|
|
Accounts
payable and other liabilities
|
|
(4
|
)
|
(46
|
)
|
Deferred
loan fees/expenses, net
|
|
|
|
126
|
|
Deferred
rent liability
|
|
10
|
|
19
|
|
Net cash provided by (used in) operating activities
|
|
$
|
700
|
|
$
|
(921
|
)
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Purchase
of investment securities, available-for-sale
|
|
$
|
(46,154
|
)
|
$
|
(56,583
|
)
|
Proceeds
from sales of investment securities, available-for-sale
|
|
30,461
|
|
18,118
|
|
Proceeds
from maturities/calls/pay downs of investment securities, available-for-sale
|
|
18,319
|
|
9,790
|
|
Originated
loans, net of pay downs
|
|
(11,391
|
)
|
(27,077
|
)
|
Proceeds
from sale of other real estate owned
|
|
823
|
|
|
|
Purchase
of premises and equipment
|
|
(8
|
)
|
(12
|
)
|
Purchase
of stock in Federal Reserve Bank
|
|
(24
|
)
|
(2
|
)
|
Purchase
of interest-bearing deposits with banks
|
|
(1,006
|
)
|
(2,241
|
)
|
Maturity
of interest-bearing deposits with banks
|
|
4,524
|
|
|
|
Net cash used in investing activities
|
|
$
|
(4,456
|
)
|
$
|
(58,007
|
)
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net
increase in deposits
|
|
$
|
3,960
|
|
$
|
65,240
|
|
Net
increase/(decrease) in federal funds purchased and securities sold under
agreements to repurchase
|
|
759
|
|
(372
|
)
|
Repayment
of FHLB advances
|
|
(2,750
|
)
|
(2,250
|
)
|
Principal
payments on capital lease
|
|
(31
|
)
|
(29
|
)
|
Net cash provided by financing activities
|
|
$
|
1,938
|
|
$
|
62,589
|
|
|
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalents
|
|
$
|
(1,818
|
)
|
$
|
3,661
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
Beginning
of period
|
|
2,516
|
|
2,401
|
|
End of
period
|
|
$
|
698
|
|
$
|
6,062
|
|
(continued)
8
Table of Contents
Solera
National Bancorp, Inc.
Statements of Cash Flows for the Nine Months Ended September 30,
2010 and 2009, (continued)
(unaudited)
|
|
For the Nine Months
Ended September 30,
|
|
($ in thousands)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
1,673
|
|
$
|
1,397
|
|
Non-cash
investing transactions:
|
|
|
|
|
|
Unrealized
gain on investment securities, available-for-sale
|
|
$
|
1,546
|
|
$
|
1,614
|
|
Loans
transferred to other real estate owned
|
|
$
|
813
|
|
$
|
|
|
See Notes to Consolidated Financial
Statements.
9
Table of Contents
SOLERA
NATIONAL BANCORP, INC.
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 SUMMARY
OF ORGANIZATION
Solera National Bancorp, Inc.
(the Company), is a Delaware corporation that was incorporated in 2006 to
organize and serve as the holding company for Solera National Bank (the Bank),
a national bank that opened for business on September 10, 2007. Solera National Bank is a full-service
community, commercial bank headquartered in Lakewood, Colorado serving the
Denver metropolitan area.
NOTE 2 BASIS OF
PRESENTATION
The accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of September 30,
2010, and the results of its operations for the three and nine months ended September 30,
2010 and 2009. Cash flows are presented
for the nine months ended September 30, 2010 and 2009. Certain
reclassifications have been made to the consolidated financial statements and
related notes of prior periods to conform to the current presentation. These
reclassifications had no impact on stockholders equity or net loss for the
periods. Additionally, certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to rules and
regulations of the U.S. Securities and Exchange Commission. The Company
believes that the disclosures in the unaudited condensed consolidated financial
statements are adequate to make the information presented not misleading.
However, these unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K as of and for
the year ended December 31, 2009.
The Company received approval as a
bank in organization in the first quarter of 2007, conducted an initial closing
of its common stock offering and commenced banking operations during the third
quarter of 2007. Successful completion of the Companys development
program and, ultimately, the attainment of sustained profitable operations are
dependent on future events, including the successful execution of the Companys
business plan and achieving a level of revenue adequate to support the Companys
cost structure.
Critical Accounting Policies
The following is a
description of the Companys significant accounting policies used in the
preparation of the accompanying consolidated financial statements.
Allowance
for
loan losses:
Implicit in the Companys
lending activities is the fact that loan losses will be experienced and that
the risk of loss will vary with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. The allowance for
loan losses represents the Companys recognition of the risks of extending
credit and its evaluation of the loan portfolio. The allowance for loan losses
is maintained at a level considered adequate to provide for probable loan
losses based on managements assessment of various factors affecting the loan
portfolio, including a review of problem loans, business conditions, historical
loss experience, evaluation of the quality of the underlying collateral, and
holding and disposal costs. In addition, because the Bank has limited history
on which to base future loan losses, a comparison of peer group allowance
ratios to gross loans is made with the intention of maintaining similar levels
during the Banks early years of operation.
The allowance for loan losses is increased by provisions charged to
expense and reduced by loans charged off, net of recoveries. Loan losses are charged against the allowance
for loan losses when management believes all, or a portion of, the loan balance
is uncollectible.
The Company has established
a formal process for determining an adequate allowance for loan losses. The allowance for loan losses calculation has
two components. The first component
represents the allowance for loan losses for impaired loans; that is loans
where the Company believes collection of the contractual principal and interest
payments is not probable. To determine
this component of the calculation, collateral-dependent impaired loans are
evaluated using internal analyses as well as third-party information, such as
appraisals. If an impaired loan is
unsecured, it is evaluated using a discounted cash flow of the payments
expected over the life
10
Table of Contents
of the loan using the loans
effective interest rate and giving consideration to currently existing factors
that would impact the amount or timing of the cash flows. The second component of the allowance for
loan losses represents contingent losses the estimated probable losses
inherent within the portfolio due to uncertainties. Factors considered by management to estimate
inherent losses include, but are not limited to, 1) historical and current
trends in downgraded loans; 2) the level of the allowance in relation to total
loans; 3) the level of the allowance in relation to the Banks peer group; 4)
the levels and trends in non-performing and past due loans; and 5) managements
assessment of economic conditions and certain qualitative factors as defined by
bank regulatory guidance, including but not limited to, changes in the size,
composition and concentrations of the loan portfolio, changes in the legal and
regulatory environment, and changes in lending management. The recorded allowance for loan losses is the
aggregate of the impaired loans component and the contingent loss component.
At September 30, 2010,
the Company had an allowance for loan losses of $1.2 million. Management believes that this allowance for
loan losses is adequate to cover probable losses based on all currently
available evidence. Future additions to the allowance for loan losses may be
required based on managements continuing evaluation of the inherent risks in
the portfolio. Additional provisions for
loan losses may need to be recorded if the economy declines, asset quality
deteriorates, or the loss experience changes.
Also, federal regulators, when reviewing the Banks loan portfolio in
the future, may require the Bank to increase the allowance for loan losses.
Share-based
compensation:
The Company grants stock
options as incentive compensation to employees and directors. The cost of employee/director services
received in exchange for an award of equity instruments is based on the
grant-date fair value of the award, which is determined using a
Black-Scholes-Merton model. This cost,
net of estimated forfeitures, is expensed to salaries and employee benefits
over the period which the recipient is required to provide services in exchange
for the award, generally the vesting period.
Estimation
of fair value:
The estimation of fair value
is significant to a number of the Companys assets, including
available-for-sale investment securities. These are all recorded at either fair
value or at the lower of cost or fair value.
Furthermore, accounting principles generally accepted in the United
States require disclosure of the fair value of financial instruments as a part
of the notes to the consolidated financial statements. Fair values are volatile and may be
influenced by a number of factors, including market interest rates, prepayment
speeds, discount rates and the shape of the yield curve.
Impairment
of investment securities:
Investment securities are evaluated for impairment on at least a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation to determine whether a decline in their value below
amortized cost is other-than-temporary. Securities are evaluated for
impairment utilizing criteria such as the magnitude and duration of the
decline, current market conditions, payment history, the credit worthiness of
the obligator, the intent of the Company to retain the security or whether it
is more likely than not that the Company will be required to sell the security
before recovery of the value, as well as other qualitative factors. If a decline in value below amortized cost is
determined to be other-than-temporary, which does not necessarily indicate that
the decline is permanent, but indicates that the prospects for a near-term
recovery of value is not favorable, the security is reviewed in more detail in
order to determine the portion of the impairment that relates to credit
(resulting in a charge to earnings) versus the portion of the impairment that
is noncredit related (resulting in a charge to accumulated other comprehensive income). A credit loss is determined by comparing the
amortized cost basis to the present value of cash flows expected to be
collected, computed using the original yield as the discount rate.
Recently Issued Accounting Pronouncements
In
January 2010, the FASB issued guidance requiring increased fair value
disclosures. There are two components to the increased disclosure
requirements set forth in the update: (1) a description of, as well
as the disclosure of, the dollar amount of transfers in or out of level one or
level two; and (2) in the reconciliation for fair value measurements using
significant unobservable inputs (level three), a reporting entity should
present separately information about purchases, sales, issuances and
settlements (that is, gross amounts shall be disclosed as opposed to a single
net figure). Increased disclosures regarding the transfers in/out of level one
and two are required for interim and annual periods beginning after
December 15, 2009. The adoption of this portion of the standard did
not have a material impact on the Companys consolidated financial position,
results of operations or cash flows.
Increased disclosures regarding the level three fair value
reconciliation are required for fiscal years beginning after
11
Table of
Contents
December 15,
2010. The adoption of this portion of the standard is not expected to have a
material impact on the Companys consolidated financial position, results of
operations or cash flows.
In
April 2010, the FASB issued accounting guidance for loan modifications
when the loan is part of a pool of loans accounted for as a single asset.
Diversity in practice developed surrounding how to account for loans that are
part of a pool subsequent to a modification that would constitute a troubled
debt restructuring. To eliminate the
diversity in practice, the new guidance requires loans that are accounted for
as part of a pool to continue to be accounted for as part of the pool
subsequent to a modification, even if the modification constitutes a troubled
debt restructuring. Upon adoption of the update an entity may make a one
time election to terminate accounting for loans in a pool, and the election may
be applied on a pool by pool basis. This accounting treatment for the
modification of loans accounted for as part of pools is effective for all
interim and annual reporting periods beginning on or after July 15,
2010. As the Company does not currently have any pools of loans
accounted for as a single asset, the adoption of this standard did not have a
material impact on the Companys consolidated financial position, results of
operations or cash flows.
In
July 2010, the FASB updated disclosure requirements with respect to the
credit quality of loans and leases and the allowance for credit losses.
According to the guidance there are two levels of detail at which credit
information will be presented - the portfolio segment level and the class
level. The portfolio segment level is the aggregated level used by the
company in developing their systematic method for calculating the allowance for
credit losses. The class level represents a more detailed level of
categorization than the portfolio segment level. Companies will be
required to provide the following new or amended disclosures as a result of
this update:
1. A roll
forward schedule of the allowance for credit losses from the beginning of the
reporting period to the end of the reporting period on a portfolio segment
basis, with the ending balance further disaggregated on the basis of the
impairment method
2. For each
disaggregated ending balance in item (1) above, the related recorded
investment in loans and leases
3. The
nonaccrual status of loans and leases by class
4. Impaired
loans and leases by class
5. Credit
quality indicators of loans and leases as of each balance sheet date, presented
by class
6. The aging
of past due loans and leases at the end of the reporting period by class
7. The nature
and extent of troubled debt restructurings that occurred during the period by
class and their effect on the allowance for credit losses
8. The nature
and extent of loans and leases modified as troubled debt restructurings within
the previous 12 months that defaulted during the period by class and their
effect on the allowance for credit losses
9.
Significant purchases and sales of loans and leases during the reporting
period disaggregated by portfolio segment.
The
increased disclosure requirements become effective for periods ending on or
after December 15, 2010. The provisions of this update will expand
our current disclosures with respect to the Allowance for Loan Losses.
NOTE 3
INVESTMENTS
The amortized costs and estimated
fair values of investment securities as of September 30, 2010 and December 31,
2009 are as follows:
|
|
September 30, 2010
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
($ in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
6,871
|
|
$
|
63
|
|
$
|
|
|
$
|
6,934
|
|
Corporate
|
|
10,176
|
|
311
|
|
(40
|
)
|
10,447
|
|
State
and municipal
|
|
21,927
|
|
1,193
|
|
(9
|
)
|
23,111
|
|
Residential
agency mortgage-backed securities (MBS)
|
|
31,400
|
|
1,001
|
|
(17
|
)
|
32,384
|
|
Total
securities available-for-sale
|
|
$
|
70,374
|
|
$
|
2,568
|
|
$
|
(66
|
)
|
$
|
72,876
|
|
12
Table of Contents
|
|
December 31, 2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
($ in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
5,176
|
|
$
|
28
|
|
$
|
(35
|
)
|
$
|
5,169
|
|
Corporate
|
|
9,822
|
|
306
|
|
(5
|
)
|
10,123
|
|
State
and municipal
|
|
22,101
|
|
395
|
|
(295
|
)
|
22,201
|
|
Residential
agency MBS
|
|
35,386
|
|
760
|
|
(198
|
)
|
35,948
|
|
Total
securities available-for-sale
|
|
$
|
72,485
|
|
$
|
1,489
|
|
$
|
(533
|
)
|
$
|
73,441
|
|
The amortized cost and
estimated fair value of debt securities by contractual maturity at September 30,
2010 and December 31, 2009 are shown below. Agency mortgage-backed securities are
classified in accordance with their contractual lives. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without call or prepay penalties. Additionally, accelerated principal payments
are routinely received on agency mortgage-backed securities making it common
for them to mature prior to the contractual maturity date.
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
Amortized
|
|
Estimated Fair
|
|
Amortized
|
|
Estimated Fair
|
|
($ in thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$499
|
|
$507
|
|
$1,538
|
|
$1,560
|
|
Due
after one year through five years
|
|
5,040
|
|
5,180
|
|
5,602
|
|
5,823
|
|
Due
after five years through ten years
|
|
29,376
|
|
30,732
|
|
19,566
|
|
19,735
|
|
Due
after ten years
|
|
35,459
|
|
36,457
|
|
45,779
|
|
46,323
|
|
Total securities available-for-sale
|
|
$70,374
|
|
$72,876
|
|
$72,485
|
|
$73,441
|
|
The following tables show
the estimated fair value and gross unrealized losses, aggregated by investment
category and length of time the individual securities have been in a continuous
loss position as of September 30, 2010 and December 31, 2009.
|
|
September 30, 2010
|
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
($ in thousands)
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Description
of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
|
|
$
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
Corporate
|
|
2,960
|
|
(40
|
)
|
4
|
|
|
|
|
|
|
|
2,960
|
|
(40
|
)
|
4
|
|
State
and municipal
|
|
1,725
|
|
(9
|
)
|
3
|
|
|
|
|
|
|
|
1,725
|
|
(9
|
)
|
3
|
|
Residential
agency MBS
|
|
2,943
|
|
(17
|
)
|
3
|
|
|
|
|
|
|
|
2,943
|
|
(17
|
)
|
3
|
|
Total
temporarily-impaired
|
|
$
|
7,628
|
|
$
|
(66
|
)
|
10
|
|
$
|
|
|
$
|
|
|
|
|
$
|
7,628
|
|
$
|
(66
|
)
|
10
|
|
|
|
December 31, 2009
|
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
($ in thousands)
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Estimated
Fair Value
|
|
Unrealized
Losses
|
|
# of
Securities
|
|
Description
of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
3,726
|
|
$
|
(35
|
)
|
7
|
|
$
|
|
|
$
|
|
|
|
|
$
|
3,726
|
|
$
|
(35
|
)
|
7
|
|
Corporate
|
|
517
|
|
(5
|
)
|
1
|
|
|
|
|
|
|
|
517
|
|
(5
|
)
|
1
|
|
State
and municipal
|
|
7,768
|
|
(243
|
)
|
10
|
|
945
|
|
(52
|
)
|
3
|
|
8,713
|
|
(295
|
)
|
13
|
|
Residential
agency MBS
|
|
10,520
|
|
(198
|
)
|
21
|
|
|
|
|
|
|
|
10,520
|
|
(198
|
)
|
21
|
|
Total
temporarily-impaired
|
|
$
|
22,531
|
|
$
|
(481
|
)
|
39
|
|
$
|
945
|
|
$
|
(52
|
)
|
3
|
|
$
|
23,476
|
|
$
|
(533
|
)
|
42
|
|
13
Table
of Contents
Management evaluates
investment securities for other-than-temporary impairment taking into
consideration the extent and length of time the fair value has been less than
cost, the financial condition of the issuer, whether the Company has the intent
to retain the security and whether it is more-likely-than-not that the Company
will be required to sell the security before recovery of the value, as well as
other qualitative factors. As of September 30,
2010, no securities were in a continuous unrealized loss position for 12 months
or longer. The Company has the intent
to hold the ten securities in an unrealized loss position as of September 30,
2010 and does not anticipate that these securities will be required to be sold
before recovery of value, which may be upon maturity. Accordingly, as of September 30,
2010, no decline in value was deemed to be other than temporary. Similarly, managements evaluation of the
three securities in a continuous unrealized loss position for 12 months or
longer at December 31, 2009, determined these securities were not other
than temporarily impaired.
The Company recorded a net
unrealized gain in the investment portfolio of $2.5 million at September 30,
2010. This was an increase over the
$956,000 unrealized gain at December 31, 2009.
In an effort to both
capitalize on current market conditions, while funding our loan portfolio
growth, as well as to liquidate some odd-lots within the investment portfolio,
the Company sold securities for gross realized gains of $885,000 and gross
realized losses of $22,000 during the first nine months of 2010. The Company sold securities for gross
realized gains of $332,000 during the third quarter 2010. The Company sold securities for gross
realized gains of $213,000 and gross realized losses of $8,000 during the first
nine months of 2009. The Company sold
securities for gross realized gains of $101,000 and gross realized losses of
$3,000 during the third quarter 2009.
Realized gains and losses on sales are computed on a specific
identification basis based on amortized cost on the date of sale.
Securities with carrying
values of $17.5 million at September 30, 2010 and $16.9 million at December 31,
2009, were pledged as collateral to secure public deposits, borrowings from the
FHLB, repurchase agreements and for other purposes as required or permitted by
law.
NOTE 4 LOANS
The
composition of the loan portfolio follows:
($ in thousands)
|
|
September 30, 2010
|
|
December 31, 2009
|
|
Real estate commercial
|
|
$
|
39,347
|
|
$
|
26,063
|
|
Real estate residential
|
|
8,054
|
|
8,059
|
|
Construction and land development
|
|
2,007
|
|
7,067
|
|
Commercial and industrial
|
|
8,954
|
|
8,324
|
|
Lease financing
|
|
1,452
|
|
|
|
Consumer
|
|
564
|
|
991
|
|
Gross loans
|
|
60,378
|
|
50,504
|
|
Less:
|
Deferred loan (fees) / expenses, net Allowance for
loan losses
|
|
(85
|
)
|
(114
|
)
|
|
Allowance for loan losses
|
|
(1,200
|
)
|
(830
|
)
|
Loans, net
|
|
$
|
59,093
|
|
$
|
49,560
|
|
As
of September 30, 2010, the Bank had two nonaccrual loans totaling $650,000
after partial charge-offs of $520,000 taken during the third quarter. Also
during the third quarter, the Bank had one loan that was transferred to Other
Real Estate Owned (OREO) property and sold for a gain of approximately
$10,000. The Bank had $0 in OREO
properties as of September 30, 2010.
There were no loans past due more than 90 days and still accruing
interest as of the end of the third quarter 2010. During all of 2009, no loans were impaired,
no loans were transferred to foreclosed properties and one loan, with a
principal balance of approximately $3,000, was past due more than 90 days but
still accruing interest.
In the ordinary course of business,
and only if consistent with permissible exceptions to Section 402 of the
Sarbanes- Oxley Act of 2002, the Bank may make loans to directors, executive
officers, principal stockholders (holders of more than five percent of the
outstanding common shares) and the businesses with which they are
associated. In the Companys opinion,
all loans and loan commitments to such parties are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons.
14
Table
of Contents
There
were approximately $2.1 million and $2.6 million in loans receivable from
related parties at September 30, 2010 and December 31, 2009,
respectively.
NOTE 5 ALLOWANCE
FOR LOAN LOSSES
Activity
in the allowance for loan losses for the three and nine months ended September 30,
2010 and 2009 is summarized as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
($ in thousands)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
940
|
|
$
|
520
|
|
$
|
830
|
|
$
|
268
|
|
Loans charged off
|
|
(520
|
)
|
|
|
(705
|
)
|
|
|
Recoveries on loans previously charged off
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
780
|
|
180
|
|
1,075
|
|
432
|
|
Balance, end of period
|
|
$
|
1,200
|
|
$
|
700
|
|
$
|
1,200
|
|
$
|
700
|
|
The
following table details information regarding impaired loans at the dates
indicated:
($ in thousands)
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance:
|
|
$
|
|
|
$
|
|
|
Impaired loans without a valuation allowance:
|
|
749
|
|
|
|
Total impaired loans
|
|
$
|
749
|
|
$
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
|
|
$
|
|
|
Two of
the three impaired loans did not have a specific valuation allowance, as the
loans were partially charged-off during the third quarter 2010, bringing them
to their net realizable value. The other
impaired loan is considered impaired because it is a troubled debt
restructuring; however, the loan is performing in accordance with its new
contractual terms and has an abundance of collateral and, therefore, does not
have a specific valuation allowance.
Interest income recognized while these loans have been classified as
impaired was approximately $2,000. The
gross interest income that would have been recorded for the nine months ended September 30,
2010 if all impaired loans had been current throughout this period in
accordance with their original terms was approximately $16,000.
Troubled
debt restructurings are included in impaired loans above. At September 30, 2010, there was one
loan for $99,000 with terms that were modified in a troubled debt
restructuring, with no specific allowance for loan losses because the loan is
well collateralized. The Company has not
committed additional funds to the borrower whose loan is classified as a
troubled debt restructuring. There were
no troubled debt restructurings at December 31, 2009.
NOTE 6 DEPOSITS
Deposits
are summarized as follows:
|
|
September 30, 2010
|
|
December 31, 2009
|
|
($ in thousands)
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Noninterest-bearing demand
|
|
$
|
1,894
|
|
2
|
%
|
$
|
2,624
|
|
2
|
%
|
Interest-bearing demand
|
|
11,224
|
|
10
|
|
6,830
|
|
7
|
|
Money market accounts
|
|
7,640
|
|
7
|
|
3,555
|
|
3
|
|
Savings accounts
|
|
45,895
|
|
42
|
|
51,763
|
|
50
|
|
Certificates of deposit, less than $100,000
|
|
10,212
|
|
10
|
|
16,624
|
|
16
|
|
Certificates of deposit, greater than $100,000
|
|
31,496
|
|
29
|
|
23,005
|
|
22
|
|
Total deposits
|
|
$
|
108,361
|
|
100
|
%
|
$
|
104,401
|
|
100
|
%
|
15
Table
of Contents
In
the ordinary course of business, certain officers, directors, stockholders, and
employees of the Bank have deposits with the Bank. In the Banks opinion, all deposit
relationships with such parties are made on substantially the same terms
including interest rates and maturities, as those prevailing at the time for
comparable transactions with other persons.
The balance of related party deposits at September 30, 2010 and December 31,
2009 was approximately $4.4 million and $4.0 million, respectively.
NOTE 7
STOCK-BASED COMPENSATION
The Companys 2007 Stock
Incentive Plan (the Plan) was approved by the Companys Board of Directors
(the Board) with an effective date of September 10, 2007 and was approved
by the Companys stockholders at the annual meeting held on September 17,
2008. Under the terms of the Plan,
officers and key employees may be granted both nonqualified and incentive stock
options and directors and other consultants, who are not also officers or
employees, may only be granted nonqualified stock options. The Board reserved
510,734 shares of common stock for issuance under the Plan. The Plan
provides for options to purchase shares of common stock at a price not less
than 100% of the fair market value of the stock on the date of grant. Stock options expire no later than ten years
from the date of the grant and generally vest over four years. The Plan provides for accelerated vesting if
there is a change of control, as defined in the Plan. The Company recognized stock-based
compensation cost of approximately $148,000 and $156,000 during the nine months
ended September 30, 2010 and 2009, respectively. During the third quarter 2010, the Company
revised its estimated forfeiture rate on the nonqualified stock options granted
to Directors in September 2007 to decrease the rate from 33% to 10%, which
more accurately reflects the turnover rate of our Directors. This resulted in approximately $7,000 of
additional stock-based compensation expense during the third quarter 2010.
The Company accounts for its
stock-based compensation under the provisions of ASC 718-20
Stock Compensation Awards Classified as Equity
. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes-Merton option pricing
model. The Company granted 10,000
options during the third quarter 2010 as incentive compensation to an executive
officer and 45,000 nonqualified options to directors. The director options vest over one year,
expire ten years from the date of grant and directors have one year to exercise
vested options upon termination. The
Company granted 1,250 options during the second quarter 2010 as incentive
compensation to newly hired employees and 16,500 options during the first quarter
2010 as incentive compensation to existing and newly hired employees. Similarly, the Company granted 42,000 options
as incentive compensation primarily to the President & CEO and also to
newly hired employees during the third quarter of 2009.
During the nine months ended
September 30, 2010, 5,688 options were forfeited and 5,125 vested options
expired unexercised. No options were
exercised during the nine months ended September 30, 2010 or 2009. The Company recognized expense for
approximately 20,000 options, representing a pro-rata amount of the options
earned during the third quarter 2010 that are expected to vest. As of September 30, 2010, there was
approximately $272,000 of total unrecognized compensation cost related to the
outstanding stock options that will be recognized over a weighted-average
period of 1.3 years.
The following is a summary
of the Companys outstanding stock options at September 30, 2010:
|
|
Options
|
|
Weighted-Average Grant
Date Fair Value
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at January 1, 2010
|
|
305,353
|
|
$
|
2.44
|
|
$
|
9.19
|
|
Granted
|
|
72,750
|
|
0.79
|
|
4.67
|
|
Exercised
|
|
|
|
|
|
|
|
Forfeited
|
|
(5,688
|
)
|
1.77
|
|
7.52
|
|
Expired
|
|
(5,125
|
)
|
2.46
|
|
9.39
|
|
Outstanding
at September 30, 2010
|
|
367,290
|
|
$
|
2.12
|
|
$
|
8.32
|
|
NOTE 8 WARRANTS
During
our initial public offering, each of the Companys initial stockholders were
granted one warrant to purchase an additional share, at an exercise price of
$12.50 per share, for every five shares purchased. All of these stockholder warrants expired
unexercised on September 10, 2010.
16
Table
of Contents
NOTE 9
NONINTEREST EXPENSE
The
following table details the items comprising other general and administrative
expenses:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
($ in thousands)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Data processing
|
|
$
|
80
|
|
$
|
70
|
|
$
|
211
|
|
$
|
200
|
|
FDIC assessment
|
|
52
|
|
45
|
|
147
|
|
125
|
|
Regulatory and reporting fees
|
|
26
|
|
22
|
|
90
|
|
75
|
|
Marketing and promotions
|
|
38
|
|
34
|
|
80
|
|
90
|
|
Travel and entertainment
|
|
18
|
|
16
|
|
39
|
|
33
|
|
Telephone/communication
|
|
10
|
|
10
|
|
31
|
|
30
|
|
Loan and collection expenses
|
|
14
|
|
1
|
|
24
|
|
3
|
|
Printing, stationery and supplies
|
|
7
|
|
11
|
|
24
|
|
31
|
|
Dues and memberships
|
|
7
|
|
7
|
|
24
|
|
23
|
|
Directors fees
|
|
20
|
|
|
|
23
|
|
|
|
Insurance
|
|
6
|
|
5
|
|
17
|
|
14
|
|
Franchise taxes
|
|
3
|
|
2
|
|
14
|
|
7
|
|
Postage and shipping
|
|
5
|
|
5
|
|
13
|
|
16
|
|
ATM and debit card fees
|
|
4
|
|
3
|
|
12
|
|
11
|
|
Training and education
|
|
2
|
|
1
|
|
6
|
|
9
|
|
Miscellaneous
|
|
5
|
|
4
|
|
18
|
|
13
|
|
Total
|
|
$
|
297
|
|
$
|
236
|
|
$
|
773
|
|
$
|
680
|
|
NOTE 10
COMMITMENTS AND
CONTINGENCIES
The
Company is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial
instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet. The
Companys exposure to credit loss is represented by the contractual amount of
these commitments. The Company follows
the same credit policies in making commitments as it does for on-balance-sheet
instruments.
At
September 30, 2010 and December 31, 2009, the following financial
instruments were outstanding whose contract amounts represent credit risk:
($ in thousands)
|
|
September 30, 2010
|
|
December 31, 2009
|
|
Financial instruments whose contractual amounts
represent credit risk:
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
7,212
|
|
$
|
7,182
|
|
Letters of credit
|
|
|
|
|
|
Total commitments
|
|
$
|
7,212
|
|
$
|
7,182
|
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the commitments do not necessarily represent
future cash requirements. The Company
evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained is based on
managements credit evaluation.
Collateral held varies, but may include accounts receivable, inventory,
property, plant and equipment and income producing commercial properties.
Letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
17
Table
of Contents
NOTE 11
FAIR VALUE
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the most advantageous market for the asset
or liability in an orderly transaction between market participants. The fair
value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair values:
Level 1
inputs are unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access at
the measurement date.
Level 2
inputs are other than quoted prices included in Level 1
that are observable for the asset or liability either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or model-based valuation techniques for which all
significant assumptions are observable in the market.
Level 3
valuation is generated from model-based techniques that use
at least one significant assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the
asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar
techniques.
The Company carries its
available-for-sale securities at fair value.
Fair value measurement is obtained from independent pricing services
which utilize observable data that may include dealer quotes, market spreads,
cash flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, credit information and the bonds
terms and conditions, among other things.
As of September 30, 2010 and December 31, 2009, all of the
Companys available-for-sale securities were valued using Level 2 inputs.
Impaired loans are valued at the
lower of cost or fair value and are generally classified as Level 3 in the fair
value hierarchy. Fair value is measured
based on the value of the collateral securing the loan or discounting estimated
future cash flows. Collateral is valued
based on appraisals performed by qualified licensed appraisers. Such appraisal values may be discounted based
on managements historical knowledge, changes in market conditions from the
time of valuation and/or similar factors.
Impaired loans that are not secured by collateral are valued by using
the discounted estimated future cash flows at the loans effective interest
rate. The cash flow estimates are made
by management using historical knowledge, market conditions, and knowledge of
the borrowers business, among other factors.
18
Table
of Contents
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities
measured at fair value on a recurring basis are summarized below:
($ in thousands)
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Assets
at September 30, 2010
|
|
|
|
|
|
|
|
|
|
Investment
securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
|
|
$
|
6,934
|
|
$
|
|
|
$
|
6,934
|
|
Corporate
|
|
|
|
10,447
|
|
|
|
10,447
|
|
State
and municipal
|
|
|
|
23,111
|
|
|
|
23,111
|
|
Agency
MBS
|
|
|
|
32,384
|
|
|
|
32,384
|
|
Total
|
|
$
|
|
|
$
|
72,876
|
|
$
|
|
|
$
|
72,876
|
|
Assets
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
Investment
securities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
|
|
$
|
5,169
|
|
$
|
|
|
$
|
5,169
|
|
Corporate
|
|
|
|
10,123
|
|
|
|
10,123
|
|
State
and municipal
|
|
|
|
22,201
|
|
|
|
22,201
|
|
Agency
MBS
|
|
|
|
35,948
|
|
|
|
35,948
|
|
Total
|
|
$
|
|
|
$
|
73,441
|
|
$
|
|
|
$
|
73,441
|
|
There were no transfers in
or out of Level 1 and Level 2 during the periods presented.
Assets and Liabilities Measured on a Nonrecurring Basis
Assets and liabilities
measured at fair value on a nonrecurring basis are summarized below:
($ in thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
Assets
at September 30, 2010
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
|
|
$
|
|
|
$
|
749
|
|
$
|
749
|
|
|
|
|
|
|
|
|
|
|
|
Assets
at December 31, 2009
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Fair Value of Financial
Instruments
Disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheets, for which it is practicable to estimate that value
is required. Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument.
Because no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective in nature, involve
uncertainties and matters of judgment, and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value information is
not required to be disclosed for certain financial instruments and all
nonfinancial instruments. Accordingly,
the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.
Fair value estimates are based on financial instruments both on and off
the balance sheet without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the
realization of the unrealized gains and losses can have a potential effect on
fair value estimates and have not been considered in many of the estimates.
19
Table
of Contents
The following methods and
assumptions were used to estimate the fair value of significant financial
instruments:
Cash
and cash equivalents
: The
carrying amounts of cash and due from banks and federal funds sold approximate
their fair values.
Interest-bearing
deposits with banks:
The carrying
amount of interest-bearing deposits with banks approximates fair values due to
the relatively stable level of short-term interest rates.
Investment
securities
: Fair value
measurement is obtained from independent pricing services which utilize
observable data that may include dealer quotes, market spreads, cash flows, the
U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bonds terms and
conditions, among other things.
Loans, net:
The fair value of fixed rate loans is
estimated by discounting the future cash flows using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are estimated to be equivalent to carrying values. Variable rate loans that are currently priced
at their contractual floor or ceiling, and thus similar to fixed rate loans,
are reviewed to determine the interest rate that would be currently offered on
similar credits. If the current
floor/ceiling rate is equivalent to current market rates, fair value is
estimated to be equivalent to carrying value.
If the current market rates differ from the loans current rate, the
contractual cash flows are discounted using the current market rate to derive
the loans estimated fair value. Both
the estimated fair value and the carrying value have been reduced by specific
and general reserves for loan losses.
Investment
in FHLB and Federal Reserve Bank (FRB) stocks:
It is not practical to determine the fair value of bank stocks due to
the restrictions placed on the transferability of FHLB stock and FRB stock.
Interest
receivable:
The carrying
value of interest receivable approximates fair value due to the short period of
time between accrual and receipt of payment.
Deposits:
The fair value of noninterest-bearing demand
deposits, interest-bearing demand deposits and savings and money market
accounts is determined to be the amount payable on demand at the reporting
date. The fair value of fixed rate time
deposits is estimated using a discounted cash flow calculation that utilizes
interest rates currently being offered for deposits of similar remaining
maturities. Carrying value is assumed to
approximate fair value for all variable rate time deposits.
Federal
funds purchased and securities sold under agreements to repurchase:
The carrying amount of
federal funds purchased and securities sold under agreements to repurchase
approximates fair value due to the short-term nature of these agreements, which
generally mature within one to four
days from the transaction date.
Capital
lease liability:
Management did
not fair value the capital lease liability as it is specifically excluded from
the disclosure requirements.
Federal
Home Loan Bank advances:
Fair value of
the Federal Home Loan Bank advances is estimated using a discounted cash flow
model that utilizes current market rates for similar types of borrowing
arrangements with similar remaining maturities.
Interest
payable:
The carrying
value of interest payable approximates fair value due to the short period of
time between accrual and payment.
Loan
commitments and letters of credit:
The fair values
of commitments are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. The difference between the carrying value of
commitments to fund loans or standby letters of credit and their fair values
are not significant and, therefore, are not included in the following table.
20
Table of Contents
The carrying amounts and
estimated fair values of financial instruments are summarized as follows:
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
Estimated Fair
|
|
Carrying
|
|
Estimated Fair
|
|
($ in thousands)
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
698
|
|
$
|
698
|
|
$
|
2,516
|
|
$
|
2,516
|
|
Interest-bearing
deposits with banks
|
|
266
|
|
266
|
|
3,784
|
|
3,784
|
|
Investment
securities
|
|
72,876
|
|
72,876
|
|
73,441
|
|
73,441
|
|
Loans,
net
|
|
59,093
|
|
59,052
|
|
49,560
|
|
49,230
|
|
FHLB
and FRB stocks
|
|
1,165
|
|
1,165
|
|
1,131
|
|
1,131
|
|
Interest
receivable
|
|
749
|
|
749
|
|
814
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits,
demand, savings and money market
|
|
$
|
66,653
|
|
$
|
66,653
|
|
$
|
64,772
|
|
$
|
64,772
|
|
Time
deposits
|
|
41,708
|
|
42,180
|
|
39,629
|
|
39,036
|
|
Federal
funds purchased and securities sold under agreements to repurchase
|
|
1,085
|
|
1,085
|
|
326
|
|
326
|
|
Federal
Home Loan Bank advances
|
|
6,000
|
|
5,928
|
|
8,750
|
|
8,508
|
|
Interest
payable
|
|
99
|
|
99
|
|
82
|
|
82
|
|
NOTE 12 PENDING
TRANSACTION
On August 5, 2010, the Bank
entered into a purchase and assumption agreement with Liberty Savings Bank, FSB
(Liberty), a wholly-owned subsidiary of Liberty Capital, Inc. to assume
approximately $40 million in customer deposits from Libertys branch located in
Lakewood, Colorado. Additionally, the
Bank agreed to acquire approximately $30 million in Colorado-based, performing
loans. The transaction is expected to
close in the fourth quarter 2010 conditioned upon receiving approval from the
appropriate bank regulatory agencies.
The Bank will pay a 3.8% premium for deposits and will acquire the loans
at par value.
The Bank expects to account for
this as a purchase of assets in accordance with ASC 805-50,
Acquisition of Assets Rather than a Business.
The assets purchased and
liabilities assumed will be recognized at cost plus allocated transaction costs,
which will be allocated based on the relative fair values of the assets
acquired and liabilities assumed. Since
the Bank is assuming $10 million more deposits than loans, the Company will
have a net increase in cash rather than a cash outflow.
NOTE 13
SUBSEQUENT EVENTS
As of the date of issuance of this
Report on Form 10-Q, the Company has determined that no subsequent event
disclosure is necessary.
21
Table of Contents
ITEM 2. MANAGEMENT
S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis presents the Companys consolidated financial condition as of September 30,
2010 and results of operations for the three and nine months ended September 30,
2010 and 2009. The discussion should be
read in conjunction with the financial statements and the notes related thereto
which appear elsewhere in this Quarterly Report on Form 10-Q.
Executive Overview
We are a Delaware corporation that
was incorporated on January 12, 2006 to organize and serve as the holding
company for Solera National Bank, a national bank that opened for business on
September 10, 2007. Solera National
Bank is a full-service commercial bank headquartered in Lakewood, Colorado
serving the Denver metropolitan area.
Our main banking office is located at 319 S. Sheridan Blvd., Lakewood,
Colorado 80226. Our telephone number is
(303) 209-8600.
Earnings
are derived primarily from our net interest income, which is interest income
less interest expense, and our noninterest income earned from gains on
investment securities and banking service fees, offset by noninterest expense.
As the majority of our assets are interest-earning and our liabilities are
interest-bearing, changes in interest rates impact our net interest
margin. We manage our interest-earning
assets and interest-bearing liabilities to reduce the impact of interest rate
changes on our operating results.
We
offer a broad range of commercial and consumer banking services to small and
medium-sized businesses, licensed professionals and individuals who are
particularly responsive to the personalized service that Solera National Bank
provides to its customers. We believe
that local ownership and control allows the Bank to serve customers efficiently
and effectively. Solera National Bank
competes on the basis of providing a unique and personalized banking experience
combined with a full range of services, customized and tailored to fit the
individual needs of its clients. Solera
National Bank serves the entire market area and, in addition, has a special focus
serving the local Hispanic population due to the significant growth of this
demographic. Since opening the bank in September of
2007, management has successfully executed its strategy of delivering prudent
and controlled growth to efficiently leverage the Companys capital and expense
base with the goal of achieving sustained profitability.
During the third quarter, the Bank
entered into a definitive purchase and assumption agreement (the Agreement)
with Liberty Savings Bank, FSB (Liberty) to assume approximately $40 million
in customer deposits from Libertys branch located in Lakewood, Colorado. Additionally, the Bank agreed to acquire
approximately $30 million in Colorado-based, performing loans from
Liberty. Pursuant to the Agreement, the
Bank will pay a deposit premium of 3.8% and will acquire the loans at par
value. For further disclosure, see Note
13,
Pending Transaction
, to our consolidated
financial statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On
July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (the Act), was signed into legislation. The Act includes, among others,
the creation of a new Consumer Financial Protection Bureau with power to
promulgate and enforce consumer protection laws; the creation of a Financial
Stability Oversight Council with authority to identify institutions and
practices that might pose a systemic risk; provisions affecting corporate
governance and executive compensation of all companies whose securities are
registered with the SEC; a provision that would broaden the base for FDIC
insurance assessments; a provision under which interchange fees for debit cards
would be set by the Federal Reserve; a provision that would require bank
regulators to set minimum capital levels for bank holding companies that are as
strong as those required for their insured depository subsidiaries; and new
restrictions on how mortgage brokers and loan originators may be compensated.
Certain provisions of the Act only apply to institutions with more than
$10 billion in assets.
We
are monitoring developments as the various agencies draft regulations required
by the Act. We expect that some
provisions of the Act may have an adverse impact due to, among others, the cost
of complying with the numerous new regulations and reporting requirements
mandated by the Act. Some provisions of
the Act will benefit our
22
Table of Contents
business,
such as the permanent exemption from Sarbanes-Oxley Section 404(b) for
companies with market capitalization of less than $75 million, which should
maintain our external audit fees at current levels as our external auditors
will not be required to provide an attestation report on our internal control
over financial reporting in our annual report on Form 10-K.
Comparative Results of Operations for the Three Months Ended September 30,
2010 and 2009
The
following discussion focuses on the Companys financial condition and results
of operations for the three months ended September 30, 2010 compared to
the financial condition and results of operations for the three months ended September 30,
2009.
Net loss for the quarter ended September 30,
2010 was $493,000, or ($0.19) per share, compared with a loss of $261,000, or
($0.10) per share for the third quarter of 2009. The increased loss
during the third quarter 2010 was primarily the result of a $600,000 increase
in provision expense partially offset by increases in net interest income and
increased gains on the sale of investment securities.
As
of September 30, 2010, the Company had total assets of $136.2 million, an
increase of $3.4 million, or 3%, from December 31, 2009. Net loans increased $9.5 million, or 19%,
from $49.6 million at December 31, 2009 to $59.1 million at September 30,
2010. Similarly, the Companys total
deposits grew $4.0 million, or 4%, from $104.4 million at December 31,
2009 to $108.4 million as of September 30, 2010. This growth was achieved as a result of an
effective business development program.
23
Table of Contents
The following table
presents, for the periods indicated, average assets, liabilities and
stockholders equity, as well as the net interest income from average
interest-earning assets and the resultant annualized yields expressed in
percentages.
Table 1
|
|
Three Months Ended
September 30, 2010
|
|
Three Months Ended
September 30, 2009
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of unearned fees
|
|
$
|
60,632
|
|
$
|
901
|
|
5.89
|
%
|
$
|
43,485
|
|
$
|
598
|
|
5.46
|
%
|
Investment securities**
|
|
70,747
|
|
713
|
|
4.00
|
|
58,203
|
|
752
|
|
5.13
|
|
FHLB and FRB stocks
|
|
1,150
|
|
10
|
|
3.41
|
|
1,081
|
|
11
|
|
4.00
|
|
Federal funds sold
|
|
908
|
|
|
|
|
|
2,885
|
|
2
|
|
0.25
|
|
Interest-bearing deposits with banks
|
|
787
|
|
1
|
|
0.58
|
|
441
|
|
|
|
|
|
Total interest-earning assets
|
|
134,224
|
|
$
|
1,625
|
|
4.81
|
%
|
106,095
|
|
$
|
1,363
|
|
5.10
|
%
|
Noninterest-earning assets
|
|
4,589
|
|
|
|
|
|
3,170
|
|
|
|
|
|
Total assets
|
|
$
|
138,813
|
|
|
|
|
|
$
|
109,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and savings deposits
|
|
$
|
54,625
|
|
$
|
203
|
|
1.48
|
%
|
$
|
25,441
|
|
$
|
172
|
|
2.68
|
%
|
Interest-bearing checking accounts
|
|
11,197
|
|
43
|
|
1.51
|
|
6,302
|
|
40
|
|
2.55
|
|
Time deposits
|
|
43,865
|
|
220
|
|
1.99
|
|
45,092
|
|
305
|
|
2.68
|
|
Federal funds purchased and securities sold under
agreements to repurchase
|
|
646
|
|
2
|
|
1.25
|
|
610
|
|
2
|
|
1.48
|
|
Federal Home Loan Bank advances
|
|
5,645
|
|
58
|
|
4.09
|
|
8,120
|
|
78
|
|
3.81
|
|
Other borrowings
|
|
93
|
|
2
|
|
9.31
|
|
134
|
|
3
|
|
9.26
|
|
Total interest-bearing liabilities
|
|
116,071
|
|
$
|
528
|
|
1.81
|
%
|
85,699
|
|
$
|
600
|
|
2.78
|
%
|
Noninterest-bearing checking accounts
|
|
1,801
|
|
|
|
|
|
4,353
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
537
|
|
|
|
|
|
531
|
|
|
|
|
|
Stockholders equity
|
|
20,404
|
|
|
|
|
|
18,682
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
138,813
|
|
|
|
|
|
$
|
109,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
1,097
|
|
|
|
|
|
$
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
3.00
|
%
|
|
|
|
|
2.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
3.24
|
%
|
|
|
|
|
2.85
|
%
|
|
|
**Yields on investment
securities have not been adjusted to a tax-equivalent basis.
24
Table
of Contents
The following table
presents the dollar amount of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities. The information details the
changes attributable to a change in volume (i.e. change in average balance
multiplied by the prior-period average rate) and changes attributable to a
change in rate (i.e. change in average rate multiplied by the prior-period
average balance). There is a component
that is attributable to both a change in volume and a change in rate. This component has been allocated
proportionately to the rate and volume columns.
Table 2
|
|
Three Months Ended September 30, 2010 Compared to
Three Months Ended September 30, 2009
|
|
($ in thousands)
|
|
Net Change
|
|
Rate
|
|
Volume
|
|
Interest income:
|
|
|
|
|
|
|
|
Gross loans, net of unearned fees
|
|
$
|
303
|
|
$
|
51
|
|
$
|
252
|
|
Investment securities
|
|
(39
|
)
|
(2,144
|
)
|
2,105
|
|
FHLB and FRB stocks
|
|
(1
|
)
|
(2
|
)
|
1
|
|
Federal funds sold
|
|
(2
|
)
|
(2
|
)
|
|
|
Interest-bearing deposits with banks
|
|
1
|
|
|
|
1
|
|
Total interest income
|
|
$
|
262
|
|
$
|
(2,097
|
)
|
$
|
2,359
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
Money market and savings deposits
|
|
$
|
31
|
|
$
|
(20
|
)
|
$
|
51
|
|
Interest-bearing checking accounts
|
|
3
|
|
(2
|
)
|
5
|
|
Time deposits
|
|
(85
|
)
|
(76
|
)
|
(9
|
)
|
Federal funds purchased and securities sold under
agreements to repurchase
|
|
|
|
(1
|
)
|
1
|
|
Federal Home Loan Bank advances
|
|
(20
|
)
|
6
|
|
(26
|
)
|
Other borrowings
|
|
(1
|
)
|
|
|
(1
|
)
|
Total interest expense
|
|
$
|
(72
|
)
|
$
|
(93
|
)
|
$
|
21
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
334
|
|
$
|
(2,004
|
)
|
$
|
2,338
|
|
Net Interest Income and Net Interest Margin
Net
interest income is the difference between interest and fee income, principally
from loan and investment security portfolios, and interest expense, principally
on customer deposits and borrowings. Net
interest income is our principal source of earnings. Changes in net interest income result from
changes in volume, spread and margin. Volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Margin refers to net interest income divided by
average interest-earning assets, and is influenced by the level and relative
mix of interest-earning assets and interest-bearing liabilities.
The
Federal Reserve Board influences the general market rates of short-term
interest, including the deposit and loan rates offered by the Bank. The Banks
loan portfolio is significantly affected by changes in the prime interest
rate. The prime interest rate, which is
the rate offered on loans to borrowers with strong credit, has remained
unchanged throughout 2009 and thus far in 2010 at 3.25%. Rates on our loan portfolio have increased
slightly, up 43 basis points over the third quarter 2009, primarily due to a
shift in the loan mix to more fixed-rate loans at higher interest rates.
The
113 basis points decrease in the Banks investment portfolio compared to the
third quarter of 2009 is primarily due to the sale of longer-maturity,
higher-yielding investments which were reinvested in shorter-term,
lower-yielding bonds to help shorten the duration of the investment portfolio.
25
Table of Contents
The
impact of the 29 basis point decrease in the Companys yield on
interest-earning assets was more than offset by decreases in the cost of
interest-bearing liabilities, resulting in a 39 basis point increase in net
interest margin year-over-year. As
reflected in Table 1, the cost of money market and savings deposits decreased
120 basis points, the cost of interest-bearing checking decreased 104 basis
points and the cost of time deposits decreased 69 basis points year-over-year,
primarily due to eliminating the promotional rates that were offered during our
first two years of business and the general decline in the level of interest
rates compared to the prior year.
The
Companys balance sheet is marginally asset sensitive, meaning that
interest-earning assets generally reprice quicker than interest-bearing
liabilities. Therefore, the Company could experience expansion in its net
interest margin during periods of rising interest rates.
Total
interest income was $1.6 million for the third quarter 2010, consisting
primarily of interest on loans of $901,000 and interest on investment
securities of $713,000. This compared to
total interest income of $1.4 million for the same period of 2009, consisting
primarily of interest on investment securities of $752,000 and interest on
loans of $598,000. Average loans, net of
unearned fees, increased $17.1 million, from $43.5 million for the three months
ended September 30, 2009 to $60.6 million for the three months ended September 30,
2010. Average investment securities
increased $12.5 million from $58.2 million for the three months ended September 30,
2009 to $70.7 million for the three months ended September 30, 2010. These increases were funded with increased
average deposits which grew $32.9 million from $76.8 million for the three
months ended September 30, 2009 to $109.7 million for the three months
ended September 30, 2010.
Additionally, the growth in deposits enabled the Company to reduce its
reliance on FHLB advances which decreased, on average, $2.5 million
year-over-year.
Total
interest expense was $528,000 in the third quarter of 2010, a decrease of $72,000
from $600,000 during the third quarter of 2009.
As evident in Table 2 above, this cost savings was attributable to
decreases in rate as volume increased significantly in all deposit categories
except time deposits which only decreased marginally, 3%, year-over-year. Overall, the interest rate on total
interest-bearing liabilities decreased 97 basis points from 2.78% at September 30,
2009 to 1.81% at September 30, 2010.
Net
interest income was $1.1 million in the third quarter 2010, an increase of
$334,000, or 44%, from $763,000 in the third quarter of 2009. Our annualized net interest margin was 3.24%
for the three months ended September 30, 2010, a 39 basis point
improvement over the 2.85% net interest margin for the three months ended September 30,
2009.
Provision for Loan Losses
We
determine a provision for loan losses that we consider sufficient to maintain
an allowance to absorb probable losses inherent in our portfolio as of the
balance sheet date. For additional information concerning this determination,
see the section of this discussion and analysis captioned
Allowance for Loan Losses.
During
the third quarter of 2010, our provision for loan losses was $780,000
reflecting the growth of our loan portfolio and the estimated probable losses
inherent within the portfolio due to uncertainties in economic conditions. There were three impaired loans at September 30,
2010, two of which were written down to their estimated net realizable value
during the third quarter, resulting in a charge-off of $520,000 (see additional
discussion below under
Financial Condition Loan
Portfolio
).
Noninterest Income
Noninterest
income for the quarter ended September 30, 2010 was $377,000, an increase
of $199,000 from $178,000 for the third quarter ended September 30,
2009. The Company sold securities for
net gains of $332,000 during the third quarter 2010 compared to net gains of
$98,000 during the third quarter of 2009.
Service charges on deposits decreased $61,000 from $80,000 during the
third quarter 2009 to $19,000 during the third quarter 2010 due to the loss of
a significant money-services-business customer in October 2009. Other income increased to $16,000 during the
third quarter 2010 primarily due to the Banks new residential mortgage lending
partnership. Additionally, during the
third quarter of 2010 the Bank had a gain on sale of other real estate owned
which generated $10,000 of noninterest income during the quarter.
26
Table of Contents
Noninterest Expense
Our
total noninterest expense for the quarter ended September 30, 2010 was
$1.2 million, an increase of $165,000 from the quarter ended September 30,
2009. This consisted of an increase in
salaries and employee benefits of $28,000, or 5%, primarily related to
increased incentive compensation expense during the third quarter 2010. Occupancy expense remained constant
quarter-over-quarter decreasing only $5,000 during the third quarter 2010. Professional fees increased $81,000, or 153%,
quarter-over-quarter, primarily due to the timing of outsourced internal audit
reviews, which were conducted during the third quarter this year and during the
second quarter last year as well as the timing of interim testing by our
external auditors which was accelerated to the third quarter 2010, versus the
fourth quarter last year, as well as increased Compliance and Bank Secrecy Act
consulting costs.
Other
general and administrative expenses increased $61,000, or 26%,
quarter-over-quarter, as detailed in the following table:
($ in thousands)
|
|
Three Months Ended
September 30,
|
|
Increase/
|
|
Other general and administrative expenses:
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Data processing
|
|
$
|
80
|
|
$
|
70
|
|
$
|
10
|
|
FDIC assessment
|
|
52
|
|
45
|
|
7
|
|
Regulatory and reporting fees
|
|
26
|
|
22
|
|
4
|
|
Marketing and promotions
|
|
38
|
|
34
|
|
4
|
|
Travel and entertainment
|
|
18
|
|
16
|
|
2
|
|
Telephone/communication
|
|
10
|
|
10
|
|
|
|
Loan and collection expenses
|
|
14
|
|
1
|
|
13
|
|
Printing, stationery and supplies
|
|
7
|
|
11
|
|
(4
|
)
|
Dues and memberships
|
|
7
|
|
7
|
|
|
|
Directors fees
|
|
20
|
|
|
|
20
|
|
Insurance
|
|
6
|
|
5
|
|
1
|
|
Franchise taxes
|
|
3
|
|
2
|
|
1
|
|
Postage and shipping
|
|
5
|
|
5
|
|
|
|
ATM and debit card fees
|
|
4
|
|
3
|
|
1
|
|
Training and education
|
|
2
|
|
1
|
|
1
|
|
Miscellaneous
|
|
5
|
|
4
|
|
1
|
|
Total
|
|
$
|
297
|
|
$
|
236
|
|
$
|
61
|
|
The
most significant changes include an increase of $20,000 in directors fees as
the Company began compensating directors for their attendance at meetings in July 2010;
an increase of $13,000 in loan and collection expenses related to two new loan
products that were added to the Bank in late 2009/early 2010 that are
outsourced to third parties who collect transaction-based fees; a $10,000
increase in data processing due to overall increases in customer and account
activity; and a $7,000 increase in Federal Deposit Insurance Corporation (FDIC)
fees due to increases in average deposit volumes.
Comparative Results of Operations for the Nine Months Ended September 30,
2010 and 2009
The
following discussion focuses on the Companys financial condition and results
of operations for the nine months ended September 30, 2010 compared to the
financial condition and results of operations for the nine months ended September 30,
2009. The Companys principal operations
for each of these periods consisted of the operations of Solera National Bank,
which opened for business September 10, 2007.
Net loss for the nine months ended September 30,
2010 was $282,000, or ($0.11) per share compared with a net loss $1.3 million,
or ($0.50) per share for the nine months ended September 30,
2009. The improved results of the
nine months ended September 30, 2010 were primarily the result of
increases in net interest income combined with increased gains on the sale of
investment securities while holding noninterest expenses relatively flat.
The following table
presents, for the periods indicated, average assets, liabilities and
stockholders equity, as well as the net interest income from average
interest-earning assets and the resultant annualized yields expressed in
percentages.
27
Table of Contents
Table 3
|
|
Nine Months Ended
September 30, 2010
|
|
Nine Months Ended
September 30, 2009
|
|
($ in thousands)
|
|
Average
Balance
|
|
Interest
|
|
Yield /
Cost
|
|
Average
Balance
|
|
Interest
|
|
Yield /
Cost
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of unearned fees
|
|
$
|
57,243
|
|
$
|
2,503
|
|
5.85
|
%
|
$
|
34,095
|
|
$
|
1,380
|
|
5.41
|
%
|
Investment securities**
|
|
72,462
|
|
2,261
|
|
4.17
|
|
52,623
|
|
2,000
|
|
5.08
|
|
FHLB and FRB stocks
|
|
1,131
|
|
32
|
|
3.78
|
|
1,073
|
|
31
|
|
3.82
|
|
Federal funds sold
|
|
1,358
|
|
2
|
|
0.21
|
|
1,526
|
|
3
|
|
0.25
|
|
Interest-bearing deposits with banks
|
|
1,295
|
|
7
|
|
0.76
|
|
149
|
|
1
|
|
0.65
|
|
Total interest-earning assets
|
|
133,489
|
|
$
|
4,805
|
|
4.81
|
%
|
89,466
|
|
$
|
3,415
|
|
5.10
|
%
|
Noninterest-earning assets
|
|
4,022
|
|
|
|
|
|
1,862
|
|
|
|
|
|
Total assets
|
|
$
|
137,511
|
|
|
|
|
|
$
|
91,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and savings deposits
|
|
$
|
56,513
|
|
$
|
692
|
|
1.66
|
%
|
$
|
13,986
|
|
$
|
271
|
|
2.59
|
%
|
Interest-bearing checking accounts
|
|
8,413
|
|
101
|
|
1.61
|
|
4,593
|
|
73
|
|
2.13
|
|
Time deposits
|
|
42,863
|
|
683
|
|
2.13
|
|
39,167
|
|
836
|
|
2.85
|
|
Federal funds purchased and securities sold under
agreements to repurchase
|
|
496
|
|
5
|
|
1.35
|
|
1,181
|
|
10
|
|
1.11
|
|
Federal Home Loan Bank advances
|
|
6,973
|
|
202
|
|
3.87
|
|
9,467
|
|
256
|
|
3.62
|
|
Other borrowings
|
|
103
|
|
7
|
|
9.43
|
|
143
|
|
10
|
|
9.39
|
|
Total interest-bearing liabilities
|
|
115,361
|
|
$
|
1,690
|
|
1.96
|
%
|
68,537
|
|
$
|
1,456
|
|
2.84
|
%
|
Noninterest-bearing checking accounts
|
|
2,001
|
|
|
|
|
|
3,546
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
448
|
|
|
|
|
|
466
|
|
|
|
|
|
Stockholders equity
|
|
19,701
|
|
|
|
|
|
18,779
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
137,511
|
|
|
|
|
|
$
|
91,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
3,115
|
|
|
|
|
|
$
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
2.85
|
%
|
|
|
|
|
2.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
3.12
|
%
|
|
|
|
|
2.93
|
%
|
|
|
** Yields on investment securities have not been
adjusted to a tax-equivalent basis.
28
Table of Contents
The following table
presents the dollar amount of changes in interest income and interest expense
for the major categories of interest-earning assets and interest-bearing
liabilities. The information details the
changes attributable to a change in volume (i.e. change in average balance
multiplied by the prior-period average rate) and changes attributable to a
change in rate (i.e. change in average rate multiplied by the prior-period
average balance). There is a component
that is attributable to both a change in volume and a change in rate. This component has been allocated
proportionately to the rate and volume columns.
Table 4
|
|
Nine Months Ended September 30, 2010 Compared to
Nine Months Ended September 30, 2009
|
|
($ in thousands)
|
|
Net Change
|
|
Rate
|
|
Volume
|
|
Interest income:
|
|
|
|
|
|
|
|
Gross loans, net of unearned fees
|
|
$
|
1,123
|
|
$
|
118
|
|
$
|
1,005
|
|
Investment securities
|
|
261
|
|
(236
|
)
|
497
|
|
FHLB and FRB stocks
|
|
1
|
|
|
|
1
|
|
Federal funds sold
|
|
(1
|
)
|
(1
|
)
|
|
|
Interest-bearing deposits with banks
|
|
6
|
|
|
|
6
|
|
Total interest income
|
|
$
|
1,390
|
|
$
|
(119
|
)
|
$
|
1,509
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
Money market and savings deposits
|
|
$
|
421
|
|
$
|
(58
|
)
|
$
|
479
|
|
Interest-bearing checking accounts
|
|
28
|
|
(11
|
)
|
39
|
|
Time deposits
|
|
(153
|
)
|
(244
|
)
|
91
|
|
Federal funds purchased and securities sold under
agreements to repurchase
|
|
(5
|
)
|
3
|
|
(8
|
)
|
Federal Home Loan Bank advances
|
|
(54
|
)
|
19
|
|
(73
|
)
|
Other borrowings
|
|
(3
|
)
|
|
|
(3
|
)
|
Total interest expense
|
|
$
|
234
|
|
$
|
(291
|
)
|
$
|
525
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,156
|
|
$
|
172
|
|
$
|
984
|
|
Net Interest Income and Net Interest Margin
Net
interest income is the difference between interest income, principally from
loan and investment security portfolios, and interest expense, principally on
customer deposits and borrowings. Net
interest income is our principal source of earnings. Changes in net interest income result from
changes in volume, spread and margin. Volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Margin refers to net interest income divided by
average interest-earning assets, and is influenced by the level and relative
mix of interest-earning assets and interest-bearing liabilities.
The
Federal Reserve Board influences the general market rates of short-term
interest, including the deposit and loan rates offered by the Bank. The Banks
loan portfolio is significantly affected by changes in the prime interest
rate. The prime interest rate has
remained at 3.25% since December 2008 and, thus, has had no impact on the
change in loan yields during this time period.
The
federal funds rate, which is the cost of immediately available, overnight
funds, has behaved in a similar manner, changing insignificantly since the end
of 2008.
The
Companys net interest margin increased slightly, up 19 basis points, from
2.93% at September 30, 2009 to 3.12% at September 30, 2010. Overall, the Bank has recorded a lower yield
on interest-earning assets of 29 basis points from 5.10% for the nine months
ended September 30, 2009 to 4.81% for the nine months ended September 30,
2010. This decline is primarily due to a
decrease in the Banks yield on its investment securities which
29
Table of
Contents
decreased
91 basis points during this time period.
This decrease is primarily due to the sale of longer-maturity,
higher-yielding investments which were reinvested in shorter-term,
lower-yielding bonds to shorten the duration of the investment portfolio. Also contributing to the decrease was the
action taken by Fannie Mae and the Federal Home Loan Mortgage Corporation to repurchase
delinquent mortgages during the first and second quarters of 2010. This resulted in higher than normal pay downs
on our agency mortgage-backed securities causing an increase in premium
amortization on those securities which adversely impacted the portfolios
yield. The loss in yield on the
investment portfolio was partially offset by an increase in the loan yield,
which increased 44 basis points year-over-year.
This increase was primarily due to a shift in the loan mix to more
fixed-rate loans at higher interest rates.
The
decrease in the cost of interest-bearing liabilities was more than sufficient
to offset the loss of yield on interest-earning assets, which enabled the Banks
overall net interest margin to increase slightly. The cost of all deposit accounts decreased as
the Bank eliminated the promotional rates that were offered during the first
two years in business along with the general decline in the level of interest
rates compared to the prior year. This
combined with decreased volumes in FHLB advances enabled the Bank to reduce the
cost of interest-bearing liabilities by 88 basis points during the nine months
ended September 30, 2010 as compared to the same period of 2009.
The
Companys balance sheet is currently marginally asset sensitive, meaning that
interest-earning assets generally reprice more quickly than interest-bearing
assets. Therefore, the Company could experience gains in its net interest
margin during periods of rising short-term interest rates.
Total
interest income was $4.8 million for the nine months ended September 30,
2010, consisting primarily of interest on loans of $2.5 million and interest on
investment securities of $2.3 million.
This compared to total interest income of $3.4 million during the nine
months ended September 30, 2009, consisting primarily of interest on
investment securities of $2.0 million and interest on loans of $1.4
million. Average gross loans, net of
unearned fees, increased $23.1 million, from $34.1 million for the nine months
ended September 30, 2009 to $57.2 million for the nine months ended September 30,
2010. Average investment securities
increased $19.8 million from $52.6 million for the nine months ended September 30,
2009 to $72.5 million for the nine months ended September 30, 2010.
Total
interest expense was $1.7 million for the nine months ended September 30,
2010, an increase of $234,000 from $1.5 million during the same period of
2009. This increase was due to increased
deposit volumes which grew, on average, $50.0 million from September 2009
to September 2010.
Net
interest income was $3.1 million for the first nine months of 2010, an increase
of $1.2 million, or 59%, from $2.0 million for the same period of 2009. Our annualized net interest margin was 3.12%
for the nine months ended September 30, 2010 compared to 2.93% for the
nine months ended September 30, 2009.
Provision for Loan Losses
We
determine a provision for loan losses that we consider sufficient to maintain
an allowance to absorb probable losses inherent in our portfolio as of the
balance sheet date. For additional information concerning this determination,
see the section of this discussion and analysis captioned
Allowance for Loan Losses.
During
the first nine months of 2010, our provision for loan losses was $1.1 million
compared to $432,000 for the same time period of 2009. The amount of the provision reflects the
growth of our loan portfolio and the estimated probable losses inherent within
the portfolio due to uncertainties in economic conditions. There have been four impaired loans during
the nine months ended September 30, 2010, three of which were written-down
to their net realizable value during the year resulting in charge-offs of
$705,000 and one troubled debt restructuring (see additional discussion below
under
Financial Condition Loan Portfolio
). One previously impaired loan is no longer on
the Banks books as it was sold for a gain of $10,000 during the third
quarter. There were no impaired or
charged-off loans during the same period in 2009.
Noninterest Income
Noninterest
income for the nine months ended September 30, 2010 was $944,000, an
increase of $515,000 from $429,000 for the nine months ended September 30,
2009. The increase was due to a $658,000
increase in gains on sales of investment securities as the Bank capitalized on
current market conditions and sold securities for gains, while shortening the
overall duration of the investment portfolio.
This increase was offset by a decrease of $165,000 in service charges
and fees on deposits a direct result of the loss of a significant
money-services-business
30
Table of Contents
deposit
customer. Also contributing to the
increase was a $10,000 gain on the sale of other real estate owned and a
$12,000 increase in other income primarily due to the Banks new residential
mortgage lending partnership.
Noninterest Expense
Our
total noninterest expense was $3.3 million for the nine months ended September 30,
2010, a 1%, or $43,000, increase from the nine months ended September 30,
2009. This consisted of an increase in
professional fees of $82,000, or 35%, due primarily to increased Compliance and
Bank Secrecy Act consulting costs, and timing differences for internal and
external audits. This increase was
offset by a decrease in salaries and employee benefits of $133,000, or 7%,
related primarily to reduced incentive compensation expense during 2010. Occupancy expense remained unchanged and
other general and administrative expenses increased $93,000, or 14%,
year-over-year, as detailed in the following table:
($ in thousands)
|
|
Nine Months Ended
September 30,
|
|
Increase/
|
|
Other general and administrative expenses:
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
Data processing
|
|
$
|
211
|
|
$
|
200
|
|
$
|
11
|
|
FDIC assessment
|
|
147
|
|
125
|
|
22
|
|
Regulatory and reporting fees
|
|
90
|
|
75
|
|
15
|
|
Marketing and promotions
|
|
80
|
|
90
|
|
(10
|
)
|
Travel and entertainment
|
|
39
|
|
33
|
|
6
|
|
Telephone/communication
|
|
31
|
|
30
|
|
1
|
|
Loan and collection expenses
|
|
24
|
|
3
|
|
21
|
|
Printing, stationery and supplies
|
|
24
|
|
31
|
|
(7
|
)
|
Dues and memberships
|
|
24
|
|
23
|
|
1
|
|
Directors fees
|
|
23
|
|
|
|
23
|
|
Insurance
|
|
17
|
|
14
|
|
3
|
|
Franchise taxes
|
|
14
|
|
7
|
|
7
|
|
Postage and shipping
|
|
13
|
|
16
|
|
(3
|
)
|
ATM and debit card fees
|
|
12
|
|
11
|
|
1
|
|
Training and education
|
|
6
|
|
9
|
|
(3
|
)
|
Miscellaneous
|
|
18
|
|
13
|
|
5
|
|
Total
|
|
$
|
773
|
|
$
|
680
|
|
$
|
93
|
|
The
most significant other general and administrative expense changes included a
$23,000 increase in directors fees as the Company began compensating directors
for their attendance at meetings in July 2010; a $22,000 increase in FDIC
assessments due to increased deposit volumes; a $21,000 increase in loan and
collection expense due to transaction-based fees paid to third parties for
various loan products that are partially outsourced. These loan products were added in late
2009/early 2010 which accounts for the variance between years. Additionally, there was a $15,000 increase in
regulatory and reporting fees due to increases in OCC assessment fees that
correlate with the Companys overall growth; an increase of $11,000 in data
processing charges related to increases in customer and account activity; and a
$7,000 increase in franchise taxes due to an increase in the tax rate.
Income Taxes
No
federal or state tax expense has been recorded for the three or nine months
ended September 30, 2010 and 2009, based upon significant operating loss
carry-forwards that can be used to offset approximately $3.6 million of taxable
income. Since it is uncertain that the
Company will become profitable, the deferred tax benefit accumulated to date
has a full valuation allowance so that the net deferred tax benefit at September 30,
2010 is $0.
Financial Condition
At
September 30, 2010, the Company had total assets of $136.2 million, a $3.4
million increase from $132.8 million in total assets at December 31,
2009. The increase in assets is
primarily due to the $9.9 million increase in gross loans during this period,
offset primarily by decreases in interest-bearing deposits with banks which
were not renewed in order to help fund loan growth.
31
Table of Contents
As
of September 30, 2010, stockholders equity was $20.1 million, an increase
of $1.4 million from December 31, 2009, as a result of increases in
accumulated other comprehensive income, which increased $1.5 million during
this period, partially offset by a small increase in the accumulated deficit,
due to the $282,000 net loss for the nine months ended September 30, 2010.
Federal Home Loan Bank (FHLB) and Federal
Reserve Bank Stocks
At September 30,
2010, the Bank had a total of $1.2 million invested in FHLB and Federal Reserve
Bank stocks carried at cost consisting of $523,000 in Federal Reserve Bank
stock and $642,000 in FHLB stock. These
investments allow Solera National Bank to conduct business with these entities. As of September 30, 2010, the Federal
Reserve Bank stock is yielding an average of 6.0% and the FHLB stock is
yielding an average rate of 2.1%.
Investment Securities
Our
investment portfolio serves as a source of interest income and, secondarily, as
a source of liquidity and a management tool for our interest rate sensitivity. We manage our investment portfolio according
to a written investment policy established by our Board of Directors.
At
September 30, 2010, Solera National Banks securities consisted of
available-for-sale securities of $73.0 million.
The following tables set forth the estimated market values and
approximate weighted average yields of the debt securities in the investment
portfolio by contractual maturity at September 30, 2010 and December 31,
2009:
|
|
At September 30, 2010
|
|
|
|
Within One Year
|
|
After One Year but
within Five Years
|
|
After Five Years
but within Ten
Years
|
|
After Ten Years
|
|
($ in thousands)
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
|
|
|
%
|
$
|
|
|
|
%
|
$
|
2,911
|
|
3.33
|
%
|
$
|
4,023
|
|
2.50
|
%
|
Corporate
|
|
507
|
|
5.05
|
|
4,344
|
|
3.84
|
|
5,596
|
|
4.85
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
836
|
|
5.47
|
|
21,761
|
|
4.52
|
|
514
|
|
5.23
|
|
Residential agency MBS
|
|
|
|
|
|
|
|
|
|
464
|
|
4.31
|
|
31,920
|
|
3.83
|
|
Total
|
|
$
|
507
|
|
5.05
|
%
|
$
|
5,180
|
|
4.11
|
%
|
$
|
30,732
|
|
4.46
|
%
|
$
|
36,457
|
|
3.70
|
%
|
|
|
At December 31, 2009
|
|
|
|
Within One Year
|
|
After One Year but
within Five Years
|
|
After Five Years
but within Ten
Years
|
|
After Ten Years
|
|
($ in thousands)
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
|
|
|
%
|
$
|
|
|
|
%
|
$
|
2,954
|
|
3.81
|
%
|
$
|
2,215
|
|
5.43
|
%
|
Corporate
|
|
1,560
|
|
5.99
|
|
4,845
|
|
5.35
|
|
3,718
|
|
5.09
|
|
|
|
|
|
State and municipal
|
|
|
|
|
|
978
|
|
5.66
|
|
12,563
|
|
5.23
|
|
8,660
|
|
5.59
|
|
Residential agency MBS
|
|
|
|
|
|
|
|
|
|
500
|
|
3.05
|
|
35,448
|
|
4.52
|
|
Total
|
|
$
|
1,560
|
|
5.99
|
%
|
$
|
5,823
|
|
5.49
|
%
|
$
|
19,735
|
|
4.97
|
%
|
$
|
46,323
|
|
4.77
|
%
|
As
evidenced by the above tables, the weighted-average book yield decreased during
the first nine months of 2010 in nearly every category. This was due partially to declines in market
rates, the sale of longer-maturity state and municipal bonds to reduce price
risk, and partially due to the Federal Home Loan Mortgage Corporations (FHLMC)
and Fannie Maes repurchase of substantially all 120 days or more delinquent
mortgage loans, which resulted in larger than normal principal pay downs on our
agency mortgage-backed securities. The
FHLMCs and Fannie Maes repurchase of delinquent loans caused increased
amortization on the purchase premiums associated with these securities. The increased premium amortization negatively
impacted our investment yields.
32
Table of Contents
Loan Portfolio
The
following table presents the composition of our loan portfolio by category as
of the dates indicated:
|
|
September 30, 2010
|
|
December 31, 2009
|
|
($ in thousands)
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Real estate commercial
|
|
$
|
39,347
|
|
65
|
%
|
$
|
26,063
|
|
52
|
%
|
Real estate residential
|
|
8,054
|
|
13
|
|
8,059
|
|
16
|
|
Construction and land development
|
|
2,007
|
|
3
|
|
7,067
|
|
14
|
|
Commercial and industrial
|
|
8,954
|
|
15
|
|
8,324
|
|
16
|
|
Lease financing
|
|
1,452
|
|
3
|
|
|
|
|
|
Consumer
|
|
564
|
|
1
|
|
991
|
|
2
|
|
Gross loans
|
|
60,378
|
|
100
|
%
|
50,504
|
|
100
|
%
|
Less: Deferred loan (fees) / expenses, net
|
|
(85
|
)
|
|
|
(114
|
)
|
|
|
Allowance for loan losses
|
|
(1,200
|
)
|
|
|
(830
|
)
|
|
|
Loans, net
|
|
$
|
59,093
|
|
|
|
$
|
49,560
|
|
|
|
As
of September 30, 2010, net loans were $59.1 million, a $9.5 million, or
19%, increase from $49.6 million at December 31, 2009. Net loans as a percentage of total assets
were 43% as of September 30, 2010, compared to 37% at December 31,
2009. Given the tepid economic recovery
underway, loan demand has been weakening during the course of the year.
The
real estate commercial loan portfolio consists primarily of lines of credit
or term loans to businesses that are secured by real estate. Our primary focus is on owner-occupied
commercial real estate, including SBA 504 loans. At September 30, 2010, there were $39.3
million of commercial real estate loans in the loan portfolio, an increase of
51%, or $13.3 million, from $26.1 million at December 31, 2009. Given our focus on this loan category, it now
represents 65% of our total portfolio, which is well within our established
concentration guidelines.
The
real estate residential loan portfolio consists of residential second
mortgage loans, home equity loans and lines of credit and home improvement
loans. The $8.1 million of residential real estate loans outstanding at September 30,
2010 remained unchanged from December 31, 2009.
The
construction and land development loan portfolio is comprised of construction
loans for owner-occupied construction and development loans for property being
constructed and sold to third parties.
At September 30, 2010, construction and land development loans
totaled $2.0 million, a decrease of $5.1 million, or 72%, from $7.1 million at December 31,
2009. This decrease is primarily the
result of the weak economy which has dampened new construction opportunities.
The
commercial and industrial loan portfolio consists of loans to businesses
primarily for working capital lines of credit. At September 30,
2010, commercial and industrial loans totaled $9.0 million, a $630,000, or 8%,
increase from $8.3 million at December 31, 2009.
During
the second quarter 2010, the Bank closed its first lease financing agreement
for the purchase of equipment. At September 30,
2010, lease financing comprised 3% of the Banks loan portfolio.
The
consumer and other loan portfolio consists of personal lines of credit, loans
to acquire personal assets such as automobiles and overdraft protection
balances for our deposit customers. As
of September 30, 2010, consumer and other loans comprised 1% of the total
loan portfolio at $564,000, a decrease of $427,000 from December 31, 2009.
Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause
them to be similarly impacted by economic or other conditions. The Companys loan portfolio generally
consists of loans to borrowers within Colorado.
Although the Company seeks to avoid concentrations of loans to a single
industry or based upon a single class of collateral, the Companys loan
portfolio consists primarily of real estate loans secured by real estate
located in Colorado, making the value of the portfolio more susceptible to
declines in real estate values and other changes in economic conditions in
Colorado. As the Banks loan portfolio
continues to grow, the concentration to any single borrower diminishes. As of
33
Table of Contents
September 30,
2010, the Banks five largest loans represented approximately 17% of the total
loan portfolio compared to 20% of the total loan portfolio as of December 31,
2009. No single borrower can be approved
for a loan over the Banks current legal lending limit of approximately $2.4
million. This regulatory requirement
helps to ensure the Banks exposure to one individual customer is limited.
Management
may renew loans at maturity when requested by a customer whose financial
strength appears to support such a renewal or when such a renewal appears to be
in the best interest of Solera National Bank. Solera National Bank requires
payment of accrued interest in such instances and may adjust the rate of
interest, require a principal reduction, or modify other terms of the loan at
the time of renewal.
The following tables set
forth information at September 30, 2010 and December 31, 2009,
regarding the dollar amount of loans maturing in the Banks portfolio based on
the contractual terms to maturity. The tables do not give effect to potential
prepayments or contractual principal payments.
|
|
September 30, 2010
|
|
($ in thousands)
|
|
<1 Year
|
|
1 - 5 Years
|
|
5 - 15
Years
|
|
Over 15
Years
|
|
Total Loans
|
|
Real
estate commercial
|
|
$
|
6,100
|
|
$
|
11,482
|
|
$
|
21,765
|
|
$
|
|
|
$
|
39,347
|
|
Real
estate residential
|
|
|
|
344
|
|
|
|
7,710
|
|
8,054
|
|
Construction
and land development
|
|
2,007
|
|
|
|
|
|
|
|
2,007
|
|
Commercial
and industrial
|
|
4,032
|
|
3,102
|
|
1,820
|
|
|
|
8,954
|
|
Lease
financing
|
|
|
|
1,452
|
|
|
|
|
|
1,452
|
|
Consumer
|
|
10
|
|
399
|
|
|
|
155
|
|
564
|
|
Gross
Loans Receivable
|
|
$
|
12,149
|
|
$
|
16,779
|
|
$
|
23,585
|
|
$
|
7,865
|
|
$
|
60,378
|
|
|
|
December 31, 2009
|
|
($ in thousands)
|
|
<1 Year
|
|
1 - 5 Years
|
|
5 - 15
Years
|
|
Over 15
Years
|
|
Total Loans
|
|
Real
estate commercial
|
|
$
|
3,482
|
|
$
|
10,559
|
|
$
|
12,022
|
|
$
|
|
|
$
|
26,063
|
|
Real
estate residential
|
|
|
|
348
|
|
|
|
7,711
|
|
8,059
|
|
Construction
and land development
|
|
6,861
|
|
206
|
|
|
|
|
|
7,067
|
|
Commercial
and industrial
|
|
5,129
|
|
2,348
|
|
845
|
|
2
|
|
8,324
|
|
Consumer
|
|
14
|
|
728
|
|
|
|
249
|
|
991
|
|
Gross
Loans Receivable
|
|
$
|
15,486
|
|
$
|
14,189
|
|
$
|
12,867
|
|
$
|
7,962
|
|
$
|
50,504
|
|
34
Table
of Contents
Nonperforming Loans, Leases and Assets
Nonperforming
assets consist of loans and leases on nonaccrual status, loans 90 days or more
past due and still accruing interest, loans that have been restructured
resulting in a reduction or deferral of interest or principal, other real
estate owned (OREO), and other repossessed assets. As of September 30,
2010, there was $749,000 in nonperforming assets, consisting of three loans.
The
following table summarizes information regarding nonperforming assets:
($ in thousands)
|
|
September
30, 2010
|
|
December 31,
2009
|
|
Nonaccrual loans and leases
|
|
$
|
650
|
|
$
|
|
|
Other impaired loans
|
|
99
|
|
|
|
Total nonperforming loans
|
|
$
|
749
|
|
$
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
749
|
|
$
|
|
|
Allocated allowance for loan losses to impaired
loans
|
|
|
|
|
|
Net investment in impaired loans
|
|
$
|
749
|
|
|
|
Accruing loans past due 90 days or more
|
|
|
|
3
|
|
Loans past due 30-89 days
|
|
$
|
2,200
|
|
$
|
1,298
|
|
|
|
|
|
|
|
Loans charged-off, year-to-date
|
|
$
|
705
|
|
$
|
|
|
Recoveries, year-to-date
|
|
|
|
|
|
Net charge-offs, year-to-date
|
|
$
|
705
|
|
$
|
|
|
Allowance for loan losses
|
|
$
|
1,200
|
|
$
|
830
|
|
|
|
|
|
|
|
Allowance for loan losses to loans, net of
deferred fees/expenses
|
|
1.99
|
%
|
1.64
|
%
|
Allowance for loan losses to nonaccrual loans
|
|
184.62
|
%
|
NA
|
|
Allowance for loan losses to nonperforming loans
|
|
160.21
|
%
|
NA
|
|
Nonaccrual loans to loans, net of deferred
fees/expenses
|
|
1.08
|
%
|
NA
|
|
Loans 30-89 days past due to loans, net of
deferred fees/expenses
|
|
3.65
|
%
|
2.56
|
%
|
Federal
regulations require that each insured financial institution classify its assets
on a regular basis. In addition, in connection with examinations of insured
institutions, federal examiners have authority to identify problem assets and,
if appropriate, classify them. The Bank has established three classifications
for potential problem assets: substandard, doubtful and loss. Loans
classified as substandard are those loans with well-defined weaknesses, such
that future capacity to repay the loan has been negatively impacted. Loans classified as doubtful are those
loans that have characteristics similar to substandard loans, but the
weaknesses have moved to the point where complete collection of the obligation
from all sources is unlikely and a portion of the principal may be
charged-off. Although loans classified
as substandard do not duplicate loans classified as doubtful, both substandard
and doubtful loans may include some loans that are past due at least 90 days,
are on nonaccrual status or have been restructured. Loans classified as loss
are those loans that are in the process of being charged-off. At September 30, 2010, Solera National
Bank had substandard loans totaling $5.2 million, a doubtful loan totaling
$176,000, and no loans classified as loss.
Of the $5.2 million in substandard loans, only $674,000 was 30 days or
more past due. As of December 31,
2009, the Bank had no loans classified as doubtful or loss and had substandard
loans totaling $3.8 million. Of the $3.8
million of substandard loans, only $953,000 was 30 days or more past due.
35
Table of Contents
Allowance for Loan Losses
Implicit
in Solera National Banks lending activities is the fact that loan losses will
be experienced and that the risk of loss will vary with the type of loan being
made and the creditworthiness of the borrower over the term of the loan. To
reflect the currently perceived risk of loss associated with the loan
portfolio, additions are made to the allowance for loan losses in the form of
direct charges against income to ensure that the allowance is available to
absorb possible loan losses. The Banks
allowance for estimated loan losses is based on a number of quantitative and
qualitative factors. Factors used to
assess the adequacy of the allowance for loan losses are established based upon
managements assessment of the credit risk in the portfolio, historical loan
loss, changes in the size, composition and concentrations of the loan
portfolio, general economic conditions, and changes in the legal and regulatory
environment, among others. In addition,
because the Bank has limited history on which to base future loan losses, a
comparison of peer group allowance ratios to gross loans is made with the
intention of maintaining similar levels during the Banks de novo period of
operation.
Provisions
for loan losses may be provided both on a specific and general basis. Specific
and general valuation allowances are increased by provisions charged to expense
and decreased by charge-offs of loans, net of recoveries. Specific allowances
are provided for impaired loans for which the expected loss is measurable.
General valuation allowances are provided based on a formula that incorporates
the factors discussed above. The Bank periodically reviews the assumptions and
formula by which additions are made to the specific and general valuation
allowances for losses in an effort to refine such allowances in light of the
current status of the aforementioned factors.
The
amount of the allowance equals the cumulative total of the provisions made from
time to time, reduced by loan charge-offs and increased by recoveries of loans
previously charged-off. The allowance
was $1.2 million, or 1.99% of outstanding principal as of September 30,
2010 compared to $830,000, or 1.64% of outstanding principal as of December 31,
2009. The provision for loan losses increased $600,000 from $180,000 during the
three months ended September 30, 2009 to $780,000 during the three months ended
September 30, 2010. This increase was primarily the result of net credit losses
on two real estate development loan participations from the Banks early stages
of operation. The Bank does not have any other purchased loan participations on
its balance sheet and minimal remaining exposure to real estate construction or
development.
Credit
and loan decisions are made by management and the Board of Directors in
conformity with loan policies established by the Board of Directors. Solera
National Banks practice is to charge-off any loan or portion of a loan when
the loan is determined by management to be uncollectible due to the borrowers
failure to meet repayment terms, the borrowers deteriorating or deteriorated
financial condition, the depreciation of the underlying collateral, the loans
classification as a loss by regulatory examiners, or other reasons. During the
nine months ended September 30, 2010, the Bank recorded charge-offs of
$705,000 related to three impaired loans.
No charge-offs were recorded during the nine months ended September 30,
2009.
Off-Balance-Sheet Arrangements
In
the ordinary course of business, the Company enters into various
off-balance-sheet commitments and other arrangements to extend credit that are
not reflected in the consolidated balance sheets of the Company. The business purpose of these
off-balance-sheet commitments is the routine extension of credit. The total amounts of off-balance-sheet
financial instruments with credit risk were as follows:
($ in thousands)
|
|
September 30, 2010
|
|
December 31, 2009
|
|
Financial instruments whose contractual amounts
represent credit risk:
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
7,212
|
|
$
|
7,182
|
|
Letters of credit
|
|
|
|
|
|
Total commitments
|
|
$
|
7,212
|
|
$
|
7,182
|
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Commitments also include revolving lines of
credit arrangements and unused commitments for commercial and real estate
secured loans. Since many of the
commitments are expected to expire without being drawn upon, the commitments do
not necessarily represent future cash requirements.
Letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending
36
Table of Contents
loan
facilities to customers and, therefore, the Company applies the same rigorous
underwriting standards to letters of credit.
The
Company faces the risk of deteriorating credit quality of borrowers to whom a
commitment to extend credit has been made; however, no significant credit losses
are expected from these commitments and arrangements.
Borrowings
As
of September 30, 2010, the Bank had $5.5 million in fixed-rate borrowings
from the Federal Home Loan Bank of Topeka (FHLB) with varying maturity dates
between April 2011 and June 2013 and a weighted-average fixed
interest rate of 4.19%. Additionally,
the Bank had $500,000 in variable-rate, overnight borrowings from the
FHLB. As of September 30, 2010, the
overnight advance rate was 0.28%.
The
Bank has also established unsecured Federal Funds lines-of-credit totaling $8.7
million with various correspondent banks.
Additionally, the Bank has access to secured Federal Funds lines with
two correspondent banks and access to the Federal Discount window. As of September 30, 2010, the Company
had no balances outstanding on these lines.
Loan Commitments
At
September 30, 2010, the Company had $7.2 million in outstanding loan
origination commitments. Management
believes Solera National Bank has sufficient funds available to meet current
origination and other lending commitments.
Capital Resources and Capital Adequacy
Requirements
The
risk-based capital regulations established and administered by the banking
regulatory agencies are applicable to Solera National Bank. Risk-based capital
guidelines are designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks, to account for off-balance-sheet
exposure, and to minimize disincentives for holding liquid assets. Under the
regulations, assets and off-balance-sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items. Under the prompt corrective action regulations, to be
adequately capitalized a bank must maintain minimum ratios of total capital to
risk-weighted assets of 8.0%, Tier 1 capital to risk-weighted assets of 4.0%,
and Tier 1 capital to total average assets of 4.0%. Failure to meet these
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Solera National Banks financial statements.
As
of September 30, 2010, Solera National Bank was categorized as
well-capitalized. A well-capitalized institution must maintain a minimum ratio
of total capital to risk-weighted assets of at least 10.0%, a minimum ratio of
Tier 1 capital to risk-weighted assets of at least 6.0%, and a minimum ratio of
Tier 1 capital to total average assets of at least 5.0% and must not be subject
to any written order, agreement, or directive requiring it to meet or maintain
a specific capital level.
The
following table summarizes the ratios of the Bank and the regulatory minimum
capital requirements at September 30, 2010:
As of September 30, 2010
|
|
Actual
|
|
For Capital Adequacy
Purposes
|
|
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
|
|
($ in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Total capital (to risk-weighted assets)
|
|
$
|
16,075
|
|
18.7
|
%
|
$
|
6,894
|
|
>8.0
|
%
|
$
|
8,617
|
|
>10.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
$
|
14,996
|
|
17.4
|
%
|
$
|
3,447
|
|
>4.0
|
%
|
$
|
5,170
|
|
>6.0
|
%
|
Tier 1 capital (to average assets)
|
|
$
|
14,996
|
|
10.9
|
%
|
$
|
5,509
|
|
>4.0
|
%
|
$
|
6,886
|
|
>5.0
|
%
|
37
Table of Contents
Liquidity
The
primary source of liquidity for the Company will be dividends paid by Solera
National Bank. Solera National Bank is
currently restricted from paying dividends without regulatory approval that
will not be granted until the accumulated deficit has been eliminated.
Solera
National Banks liquidity is monitored by its staff, the Asset Liability
Committee and the Board of Directors, who review historical funding
requirements, the current liquidity position, sources and stability of funding,
marketability of assets, options for attracting additional funds, and
anticipated future funding needs, including the level of unfunded commitments.
Solera
National Banks primary sources of funds are retail and commercial deposits,
loan and securities repayments, other short-term borrowings, and other funds
provided by operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions,
and competition. Solera National Bank will maintain investments in liquid
assets based upon managements assessment of (1) the need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets, and (4) objectives
of the asset/liability management program.
As
loan demand increases, greater pressure will be exerted on Solera National Banks
liquidity. However, it is managements intention to maintain a conservative
loan to deposit ratio in the range of 80 - 90% over time. Given this goal,
Solera National Bank will not aggressively pursue lending opportunities if
sufficient funding sources (e.g.,
deposits, Federal Funds, etc.) are not available, nor will Solera National
Bank seek to attract transient volatile, non-local deposits with above market
interest rates. As of September 30, 2010, the loan to deposit ratio was
56% an increase from 48% at December 31, 2009.
Solera
National Bank had cash and cash equivalents of $698,000, or 0.5% of total Bank
assets, at September 30, 2010.
Additionally, the Bank had $72.9 million in available-for-sale
investment securities, or 54% of the Companys total assets, at September 30,
2010. Management feels Solera National
Bank should have adequate liquidity to meet anticipated future funding needs.
During
the third quarter, the Bank signed a purchase and assumption agreement with
Liberty Savings Bank, FSB, to acquire approximately $30 million in loans and
assume approximately $40 million in deposits.
This transaction, if consummated, will provide approximately $8 million
in additional cash and cash equivalents during the fourth quarter 2010, when
the transaction is expected to close.
However, our liquidity position could be affected by a higher than
anticipated run-off of acquired deposits.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, the Company is not required to provide the
information required by this Item.
ITEM 4(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Management is responsible
for maintaining effective disclosure controls and procedures. As of the
end of the period covered by this Quarterly Report on Form 10-Q,
management evaluated the effectiveness and operation of the Companys
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on that evaluation, both the Companys Principal
Executive Officer and Principal Accounting and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective
to ensure that the information required to be disclosed by the Company in
reports that are filed or submitted under the Exchange Act are recorded,
processed, summarized and reported to management within the time periods
specified in the Securities and Exchange Commissions rules and forms and
that such information is accumulated and communicated to management as
appropriate to allow timely decisions regarding disclosure.
38
Table of Contents
Changes in Internal Control over
Financial Reporting
There have been no changes
in internal controls over financial reporting during the Companys last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting.
39
Table of Contents
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not
applicable.
ITEM
1A. RISK FACTORS
As
a smaller reporting company, the Company is not required to provide the
information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. [Removed and Reserved]
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
2.1
|
|
Purchase and Assumption Agreement
dated August 5, 2010 (incorporated by reference to Exhibit 2.1 to
the Companys Form 8-K filed on August 11, 2010).
|
10.1
|
|
Employment Agreement dated
September 10, 2010 by and between the Company, the Bank and Robert J.
Fenton (incorporated by reference to Exhibit 10.1 to the Companys 8-K
filed on September 14, 2010).
|
31.1
|
|
Certification of the Principal
Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.*
|
31.2
|
|
Certification of the Principal
Accounting and Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act.*
|
32.1
|
|
Certification pursuant to
Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.*
|
* Filed herewith.
40
Table of Contents
SOLERA NATIONAL BANCORP, INC.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
|
SOLERA NATIONAL
BANCORP, INC.
|
|
(Registrant)
|
|
|
Date: November 10, 2010
|
/s/ Douglas Crichfield
|
|
Douglas Crichfield
|
|
President and Chief Executive
Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ Robert J. Fenton
|
|
Robert J. Fenton
|
|
Executive Vice President, Chief
Financial Officer
|
|
(Principal Accounting and
Financial Officer)
|
41
Table of Contents
EXHIBIT INDEX
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
|
2.1
|
|
Purchase and Assumption Agreement
dated August 5, 2010 (incorporated by reference to Exhibit 2.1 to
the Companys Form 8-K filed on August 11, 2010).
|
|
|
|
10.1
|
|
Employment Agreement dated
September 10, 2010 by and between the Company, the Bank and Robert J.
Fenton (incorporated by reference to Exhibit 10.1 to the Companys 8-K
filed on September 14, 2010).
|
|
|
|
31.1
|
|
Certification pursuant to
Rule 13a-14(a) of the Securities Exchange Act
|
|
|
|
31.2
|
|
Certification pursuant to
Rule 13a-14(a) of the Securities Exchange Act
|
|
|
|
32.1
|
|
Certification pursuant to
Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350
|
42
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