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SLRK > SEC Filings for SLRK > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for SOLERA NATIONAL BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SOLERA NATIONAL BANCORP, INC.


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents the Company's consolidated financial condition as of September 30, 2012 and results of operations for the three and nine months ended September 30, 2012 and 2011. 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 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 primarily serving the six-county 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 net interest income, which is interest income less interest expense, and noninterest income earned from gains on sales of investment securities, increased cash surrender value on bank-owned life insurance policies, and banking service fees, offset by noninterest expense and provision for loan losses. As the majority of assets are interest-earning and liabilities are interest-bearing, changes in interest rates impact net interest margin. 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. We manage interest-earning assets and interest-bearing liabilities to reduce the impact of interest rate changes on 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 broad range of services, customized and tailored to fit the individual needs of its clients. While the Bank seeks to serve the entire market, it focuses on serving the local Hispanic and other minority populations which it believes are currently underserved. Since opening the bank in September of 2007, management has successfully executed its strategy of delivering prudent and controlled growth to efficiently leverage the Company's capital and expense base with the goal of achieving sustained profitability.

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

On June 29, 2012, the OCC terminated the Bank's Consent Order; as such, the Bank is no longer subject to any formal or informal regulatory agreement.


Financial Condition

At September 30, 2012, the Company had total assets of $154.7 million, a $9.4 million, or 6% increase from $145.4 million in total assets at December 31, 2011 primarily due to increases in gross loans, up 11%, and a $2.0 million new investment in bank-owned life insurance made in the first quarter of 2012. As of September 30, 2012, stockholders' equity was $20.0 million, a $929,000 increase versus $19.0 million at December 31, 2011. The increase was primarily due to the $723,000 increase in other comprehensive income related to changes in the fair value of available-for-sale securities, $168,000 of net income for the nine months ended September 30, 2012 and $38,000 of stock-based compensation expense related to the Company's stock incentive plan.

Key Ratios

                                    September 30,      December 31,
Ratio                                   2012               2011

Return on Average Assets                      0.15 %            0.17 %
Return on Average Equity                      1.15 %            1.29 %
Average Equity to Average Assets             12.97 %           13.39 %

Comparative Results of Operations for the Three Months Ended September 30, 2012 and 2011

The following discussion focuses on the Company's financial condition and results of operations for the three months ended September 30, 2012 compared to the financial condition and results of operations for the three months ended September 30, 2011.

Net income for the quarter ended September 30, 2012 was $74,000, or $0.03 per share, compared with net income of $159,000, or $0.06 per share, for the third quarter of 2011. The $85,000 decrease was primarily the result of a $125,000 increase in noninterest expense primarily due to a legal settlement and associated legal fees. This was partially offset by a $38,000 increase in net interest income after provision for loan and lease losses primarily due to reduced cost of funds and stabilizing asset quality which enabled the Bank to record no provision for loan and lease loss despite the $3.1 million increase in gross loans during the quarter. These and other changes are discussed in more detail in the ensuing discussion.

The following table presents, for the periods indicated, average assets, liabilities and stockholders' equity, as well as the components of net interest income and the resultant annualized yields / costs expressed in percentages.


Table 1
                                       Three Months Ended                                   Three Months Ended
 ($ in thousands)                      September 30, 2012                                   September 30, 2011
                                                                                Average
                       Average Balance        Interest       Yield / Cost       Balance        Interest       Yield / Cost
Assets:
Interest-earning
assets:
Gross loans, net of
unearned fees            $        60,255     $      862               5.69 %   $   57,704     $      841               5.78 %
Investment
securities**                      87,012            505               2.31         76,226            578               3.01
FHLB and FRB stocks                1,170             11               3.70          1,137              8               2.87
Federal funds sold                   565              1               0.21          1,168              1               0.22
Interest-bearing
deposits with banks                  357              2               2.19            705              1               0.84
Total
interest-earning
assets                           149,359     $    1,381               3.68 %      136,940     $    1,429               4.14 %
Noninterest-earning
assets                             6,417                                            2,039
Total assets             $       155,776                                       $  138,979

Liabilities and Stockholders' Equity:
Interest-bearing
liabilities:
Money market and
savings deposits         $        56,805     $       83               0.58 %   $   61,298     $      157               1.01 %
Interest-bearing
checking accounts                  8,662             18               0.83         10,821             28               1.02
Time deposits                     57,822            184               1.26         37,566            158               1.67
Securities sold under
agreements to
repurchase and
federal funds
purchased                            481              1               1.27            368              1               0.94
FHLB advances                      8,561             34               1.56          6,521             51               3.09
Other borrowings                       -              -                  -             49              1               9.27
Total
interest-bearing
liabilities                      132,331     $      320               0.96 %      116,623     $      396               1.35 %
Noninterest-bearing
checking accounts                  3,129                                            2,604
Noninterest-bearing
liabilities                          422                                              414
Stockholders' equity              19,894                                           19,338
Total liabilities and
stockholders' equity     $       155,776                                       $  138,979

Net interest income                          $    1,061                                       $    1,033

Net interest spread                                2.72     %                                       2.79     %

Net interest margin                                2.83     %                                       2.99     %

**Yields on investment securities have not been adjusted to a tax-equivalent basis.


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, 2012
($ in thousands)                                          Compared to Three Months Ended September 30, 2011
                                                      Net Change                 Rate                  Volume
Interest income:
Gross loans, net of unearned fees                    $          21         $            (12 )       $          33
Investment securities                                          (73 )                   (186 )                 113
FHLB and FRB stocks                                              3                        2                     1
Federal funds sold                                               -                        -                     -
Interest-bearing deposits with banks                             1                        1                     -
Total interest income                                $         (48 )       $           (195 )       $         147

Interest expense:
Money market and savings deposits                    $         (74 )       $            (63 )       $         (11 )
Interest-bearing checking accounts                             (10 )                     (5 )                  (5 )
Time deposits                                                   26                      (20 )                  46
Securities sold under agreements to repurchase and
federal funds purchased                                          -                        -                     -
FHLB advances                                                  (17 )                    (88 )                  71
Other borrowings                                                (1 )                      -                    (1 )
Total interest expense                               $         (76 )       $           (176 )       $         100

Net interest income                                  $          28         $            (19 )       $          47

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.


For the three months ended September 30, 2012, the Company's net interest income increased $28,000, or 3%, compared to the three months ended September 30, 2011 despite the 16 basis point decrease in net interest margin which declined from 2.99% to 2.83%. Most notable was the unfavorable decrease in yield on the Company's investment securities, down 70 basis points from the prior year which was primarily attributable to the sale of longer-maturity, higher-yielding investments, along with principal payments received on mortgage-backed securities, which were reinvested in bonds that are earning at historically low rates. This unfavorable decrease in rate was partially offset by a favorable decrease in the cost of interest-bearing liabilities, which declined 39 basis points from the comparable period in the prior year. Contributing most significantly to the decline in interest-bearing liability costs was the $74,000 decrease in interest expense related to money market and savings deposits which is a result of management's action in the second quarter of 2012 to implement a tiered rate structure on savings accounts and to significantly lower deposit rates across all balance tiers. Additionally, the Company realized an $88,000 favorable rate decrease on FHLB advances due to the restructuring of $3.5 million in fixed-rate advances during the fourth quarter of 2011 that reduced the effective interest rate from 4.37% to 2.14% and extended the average maturity of those borrowings. Although loan yields declined 9 basis points, total interest income from loans increased $21,000 due to the $2.6 million increase in the average volume of gross loans for the third quarter of 2012 compared to the third quarter of 2011.

The combination of the aforementioned factors resulted in further compression in the Company's net interest spread (the yield earned on interest-earning assets less the cost of interest-bearing liabilities) which declined 7 basis points from 2.79% for the quarter ended September 30, 2011 to 2.72% for the quarter ended September 30, 2012.

Provision for Loan and Lease Losses

We determine a provision for loan and lease 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 Financial Condition, Allowance for Loan and Lease Losses.

During the third quarter of 2012, we did not recognize any provision for loan and lease losses reflecting improving asset quality. See additional discussion below under Financial Condition, Loan Portfolio.

Noninterest Income

Noninterest income for the quarter ended September 30, 2012 was $329,000, a decrease of $2,000 from $327,000 for the third quarter 2011. The Company sold securities for net gains of $289,000 during the third quarter 2012 as compared to $333,000 during the third quarter 2011. Gains on the sale of securities are not part of the Bank's expected ongoing operations and should not be considered recurring. Additionally, the Company recognized $20,000 of other income during the third quarter 2012, compared to $3,000 during the third quarter 2011 primarily due to increases in the cash surrender value of bank-owned life insurance which the Company purchased during the first quarter 2012. Service charges on deposits increased $4,000, or 25%, from third quarter 2011 primarily due to an increase in not-sufficient-fund fees.

Noninterest Expense

Our total noninterest expense for the quarter ended September 30, 2012 was $1.3 million, which was $125,000, or 10%, higher than the $1.2 million for the quarter ended September 30, 2011. This increase included an increase in salaries and employee benefits of $22,000, or 4%, partially due to more employees and employee recruiting fees, partly offset by lower stock option expense. Additionally, other general and administrative expense increased $124,000 primarily related to the settlement of a legal action and other items as detailed in Table 3, below:


Table 3
                                                Three Months Ended
($ in thousands)                                   September 30,            Increase/
Other general and administrative expenses:     2012            2011        (Decrease)

Data processing                              $      83       $      73     $        10
FDIC assessment                                     33              48             (15 )
Regulatory and reporting fees                       30              36              (6 )
Marketing and promotions                            46              23              23
Directors' fees                                     27              22               5
Loan and collection expenses                        11              41             (30 )
OREO expense                                        11               -              11
Insurance                                           12               8               4
Telephone/communication                             12              12               -
Travel and entertainment                            12              11               1
Dues and memberships                                10               8               2
Printing, stationery and supplies                    8               6               2
ATM and debit card fees                              4               4               -
Postage and shipping                                 3               3               -
Franchise taxes                                      3               3               -
Training and education                               2               3              (1 )
Operating losses / legal settlements               127               8             119
Miscellaneous other                                  4               5              (1 )
Total                                        $     438       $     314     $       124

Marketing and promotions costs increased $23,000 primarily due to increased business development efforts. OREO expenses were $11,000 and are expected to continue to impact our operating results in the near term as we incur costs such as taxes, insurance, repairs and maintenance, among others, on two properties. The $10,000 increase in data processing was primarily volume related. The Company experienced a $15,000 decrease in FDIC assessments due to lower assessment rates. Similarly, regulatory and reporting fees decreased due to lower fees imposed by the OCC, our primary regulator. The $30,000 decrease in loan and collection expenses was the result of improved asset quality. As reflected in the table above, all other costs remained fairly consistent with the third quarter 2011.

Income Taxes

No federal or state tax expense has been recorded for the three months ended September 30, 2012 and 2011, based upon net operating loss carry-forwards that can be used to offset approximately $3.3 million of taxable income for federal tax purposes. Since it is uncertain when the Company will achieve sustained profitability, the deferred tax benefit accumulated to date has a full valuation allowance so that the net deferred tax benefit at September 30, 2012 and December 31, 2011 is $0.


Comparative Results of Operations for the Nine Months Ended September 30, 2012 and 2011

The following discussion focuses on the Company's financial condition and results of operations for the nine months ended September 30, 2012 compared to the financial condition and results of operations for the nine months ended September 30, 2011. The Company's principal operations for each of these periods consisted of the operations of Solera National Bank.

The Company recorded net income of $168,000, or $0.07 per share, for the nine months ended September 30, 2012 compared with a net income of $76,000, or $0.03 per share, for the nine months ended September 30, 2011. The most notable items contributing to the increase in net income were a $109,000 increase in noninterest income, partially offset by a $21,000 decline in net interest income after the provision for loan and lease losses. These variances are discussed in more detail in the ensuing narrative.

As of September 30, 2012, the Company had total assets of $154.7 million, an increase of $9.4 million, or 6%, from December 31, 2011. Net loans increased 12%, from $54.5 million at December 31, 2011 to $60.8 million at September 30, 2012. Similarly, the Company's total deposits increased 5% to $125.5 million as of September 30, 2012.

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 average interest-bearing liabilities and the resultant annualized yields expressed in percentages.

Table 4
                                       Nine Months Ended                                    Nine Months Ended
 ($ in thousands)                      September 30, 2012                                   September 30, 2011
                                                                                Average
                       Average Balance        Interest       Yield / Cost       Balance        Interest       Yield / Cost
Assets:
Interest-earning
assets:
Gross loans, net of
unearned fees            $        57,047     $    2,437               5.71 %   $   58,011     $    2,512               5.79 %
Investment
securities**                      85,416          1,548               2.42         75,102          1,897               3.38
FHLB and FRB stocks                1,155             29               3.34          1,137             25               2.98
Federal funds sold                   640              2               0.22          1,072              2               0.22
Interest-bearing
deposits with banks                  375              6               2.09            720              3               0.59
Total
interest-earning
assets                           144,633     $    4,022               3.71 %      136,042     $    4,439               4.36 %
Noninterest-earning
assets                             5,755                                            2,470
Total assets             $       150,388                                       $  138,512

Liabilities and Stockholders' Equity:
Interest-bearing
liabilities:
Money market and
savings deposits         $        57,444     $      278               0.65 %   $   61,610     $      511               1.11 %
Interest-bearing
checking accounts                  8,845             55               0.84         11,287             95               1.12
Time deposits                     52,619            531               1.35         37,685            460               1.63
Securities sold under
agreements to
repurchase and
federal funds
purchased                            532              4               1.13            564              5               1.09
FHLB advances                      7,865             98               1.66          5,860            157               3.59
Other borrowings                       -              -                  -             60              4               9.42
Total
interest-bearing
liabilities                      127,305     $      966               1.01 %      117,066     $    1,232               1.41 %
Noninterest-bearing
checking accounts                  3,162                                            2,387
Noninterest-bearing
liabilities                          413                                              381
Stockholders' equity              19,508                                           18,678
Total liabilities and
stockholders' equity     $       150,388                                       $  138,512

Net interest income                          $    3,056                                       $    3,207

Net interest spread                                2.70     %                                       2.95     %

Net interest margin                                2.82     %                                       3.15     %

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