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SLRK > SEC Filings for SLRK > Form 10-Q on 14-May-2013All 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.


14-May-2013

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 March 31, 2013 and results of operations for the three months ended March 31, 2013 and 2012. 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 noninterest income earned from gains on the sale of residential mortgage loans and net interest income, which is interest income less interest expense, offset by noninterest expense and provision for loan and lease 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.

In December 2012, the Company launched a residential mortgage division with five loan production offices in Colorado including Boulder, two locations in Colorado Springs, the Denver Tech Center and Durango. With the addition of more than 50 mortgage professionals, the Bank now offers residential mortgage loans, the vast majority of which will be sold on the secondary market. In the aftermath of the recent economic recession and the changing regulatory environment, we concluded that a combination of disruption in the residential mortgage lending market, the stringent underwriting standards which followed, and the historically low interest rate environment, presented a significant opportunity to expand our residential mortgage lending capabilities. As a result, we spent considerable effort exploring options, and in 2012, we identified a group of mortgage professionals seeking to align with a bank. After an extended due diligence period, we determined that this group brought the skills and experience required to enter this line of business thereby increasing franchise value. As of December 31, 2012, the Bank had 63 full-time equivalent employees. That number reached 82 employees during the first quarter 2013 after the new residential mortgage division became fully operational.

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").

Comparative Results of Operations for the Three Months Ended March 31, 2013 and 2012

The following discussion focuses on the Company's financial condition and results of operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Net income for the quarter ended March 31, 2013 was $181,000, or $0.07 per share, compared to a net loss of $39,000, or $0.02 per share, for the first quarter of 2012. The $220,000 increase was primarily the result of a $1.5 million increase in noninterest income due substantially to our new residential mortgage division which contributed $1.4 million in noninterest income from gains on the sales of loans. This $1.5 million increase in noninterest income was largely offset by a $1.4 million


increase in noninterest expenses due also to our new residential mortgage division. First quarter results were hindered by the launch of the residential mortgage division given the time necessary to build the loan pipeline. Also contributing to the $220,000 improvement was an $81,000 increase in net interest income after the 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 $4.6 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)                         March 31, 2013                                 March 31, 2012
                             Average                                        Average
                             Balance        Interest      Yield / Cost      Balance        Interest      Yield / Cost
Assets:
Interest-earning assets:
Gross loans, net of
unearned fees (1) (2)      $   62,358     $      790           5.14 %     $   54,541     $      788           5.81 %
Loans held for sale            11,202             94           3.39                -              -              -
Investment securities (3)      79,528            446           2.27           83,555            503           2.42
FHLB and FRB stocks             1,567             15           3.84            1,139              8           2.86
Federal funds sold                244              -           0.24              623              -           0.23
Interest-bearing deposits
with banks                        257              1           2.94              412              2           1.97
Total interest-earning
assets                        155,156     $    1,346           3.52 %        140,270     $    1,301           3.73 %
Noninterest-earning assets      6,658                                          4,335
Total assets               $  161,814                                     $  144,605
Liabilities and Stockholders' Equity:
Interest-bearing
liabilities:
Money market and savings
deposits                   $   55,050     $       63           0.46 %     $   58,660     $      111           0.76 %
Interest-bearing checking
accounts                        7,469             14           0.78            8,969             19           0.87
Time deposits                  57,521            180           1.27           47,195            170           1.45
Securities sold under
agreements to
repurchase/federal funds
purchased                         125              -           0.56              509              1           0.78
FHLB advances                  17,590             39           0.90            6,500             31           1.90
Other borrowings                    -              -              -               26              -           8.89
Total interest-bearing
liabilities                   137,755     $      296           0.87 %        121,859     $      332           1.10 %
Noninterest-bearing
checking accounts               3,909                                          3,219
Noninterest-bearing
liabilities                       511                                            452
Stockholders' equity           19,639                                         19,075
Total liabilities and
stockholders' equity       $  161,814                                     $  144,605
Net interest income                       $    1,050                                     $      969
Net interest spread                             2.65 %                                         2.63 %
Net interest margin                             2.75 %                                         2.78 %

(1) The loan average balances and rates include nonaccrual loans.
(2) Net loans expenses of $20,000 and net loan fees of $5,000 for the three months ended March 31, 2013 and 2012, respectively, are included in the yield computation.
(3) 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
($ in thousands)                                    Three Months Ended March 31, 2013 Compared to Three Months Ended March 31,
                                                                                       2012
                                                        Net Change                   Rate                       Volume
Interest income:
Gross loans, net of unearned fees                   $           2             $          (8 )           $             10
Loans held for sale                                            94                         -                           94
Investment securities                                         (57 )                     (32 )                        (25 )
FHLB and FRB stocks                                             7                         3                            4
Federal funds sold                                              -                         -                            -
Interest-bearing deposits with banks                           (1 )                       -                           (1 )
Total interest income                               $          45             $         (37 )           $             82
Interest expense:
Money market and savings deposits                   $         (48 )           $         (41 )           $             (7 )
Interest-bearing checking accounts                             (5 )                      (2 )                         (3 )
Time deposits                                                  10                       (13 )                         23
Securities sold under agreements to repurchase and
federal funds purchased                                        (1 )                      (3 )                          2
FHLB advances                                                   8                        (4 )                         12
Total interest expense                              $         (36 )           $         (63 )           $             27
Net interest income                                 $          81             $          26             $             55

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 a significant component 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 March 31, 2013, the Company's net interest income increased $81,000, or 8%, compared to the three months ended March 31, 2012 despite the 3 basis point decrease in net interest margin which declined from 2.78% to 2.75%. Most notable was the $94,000 increase in interest income from loans held for sale due to the new residential mortgage division. This increase was partially offset by an unfavorable decrease in yield on the Company's loan portfolio which decreased 67 basis points as the Bank continues to be impacted by extremely low interest rates and intense competition for well-qualified borrowers that demand competitive rates. Additionally, the yield on our investment securities declined 15 basis points from the prior year which was attributable to principal payments received on mortgage-backed securities and the sale of longer-maturity municipal bonds both of which were reinvested in lower yielding securities.

These unfavorable decreases in rate were partially offset by a favorable decrease in the cost of interest-bearing liabilities, which declined 23 basis points from the comparable period in the prior year. Contributing most significantly to the decline in interest-bearing liability costs was the $48,000 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. The volume of time deposits and FHLB advances increased significantly during the three-months ended March 31, 2013 as compared to the same quarter in the prior year. These increases were necessary to support the Company's increase in loans; the average balance in loans held for investment increased $7.8 million and the average balance in loans held for sale was $11.2 million during the Bank's first quarter of significant activity for the new residential mortgage division. The increases in FHLB advances were from borrowings on an overnight basis at interest


rates significant less than the portfolio average. This resulted in a 100 basis point decrease in the overall cost of FHLB advances.

The combination of the aforementioned factors led to a 2 basis point expansion in the Company's net interest spread (the yield earned on interest-earning assets less the cost of interest-bearing liabilities) which increased from 2.63% for the quarter ended March 31, 2012 to 2.65% for the quarter ended March 31, 2013.

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 first quarters of 2013 and 2012, we did not recognize any provision for loan and lease losses reflecting improved asset quality. See additional discussion below under Financial Condition, Loan Portfolio.

Noninterest Income

Noninterest income for the quarter ended March 31, 2013 was $1.7 million, an increase of $1.5 million from $138,000 for the first quarter 2012. The most notable increase in noninterest income for the quarter was due to the gain on loans sold, which increased $1.5 million from zero for the three months ended March 31, 2012. Most of this related to gains earned on residential mortgage loans sold to secondary market investors. Additionally, $111,000 of the gain pertains to the sale of the guaranteed portion of SBA 7(a) loans. The Company sold securities for gains of $100,000 during the first quarter 2013 as compared to $114,000 during the first quarter 2012.

The following table summarizes the Bank's residential mortgage loan activity during the first quarter 2013. It should be noted the Bank's mortgage division was formed during the fourth quarter of 2012 so no material activity existed before the first quarter of 2013.

($ in thousands)                       As of or for the Quarter Ended
                                               March 31, 2013
Gain on Loans Sold                    $                      1,414
Residential Mortgage Loans Originated $                     52,137
Residential Mortgage Loans Sold       $                     33,096
Purpose of Loan: (1)
Purchase                                                        72 %
Refinance                                                       28 %


(1) indicates the percentage of loans originated during the period

Noninterest Expense

Our total noninterest expense for the quarter ended March 31, 2013 was $2.5 million, which was $1.4 million, or 121%, higher than the $1.1 million for the quarter ended March 31, 2012. The reasons for this increase are discussed in more detail below.

Employee Compensation and Benefit Expense Employee compensation and benefit expense increased $1.1 million from first quarter 2012 due to an additional 57 employees, (from an average of 25 full-time equivalent employees during the first quarter of 2012 to an average of 82 for the first quarter of 2013). It should be noted that 17 employees are commission-based loan officers who are compensated based upon the sale of residential mortgage loans.

Occupancy
Occupancy expense increased $129,000 due to the addition of five locations associated with the residential mortgage division.


Professional Fees
Professional fees decreased $10,000, or 7%, primarily due to timing differences
for internal audits that were conducted during the first quarter of 2012 but did
not occur during the first quarter of 2013, partially offset by increased
information technology consulting costs.

Other General and Administrative Expenses:
($ in thousands)                                 Three Months Ended
                                                      March 31,               Increase/
Other general and administrative expenses:          2013             2012     (Decrease)
Data processing                            $       117              $  74    $       43
FDIC assessment                                     35                 47           (12 )
Regulatory and reporting fees                       33                 33             -
Marketing and promotions                            37                 19            18
Directors' fees                                     27                 20             7
Other loan expenses                                 73                 31            42
OREO expense                                        12                 22           (10 )
Insurance                                           13                 12             1
Telephone/communication                             23                 12            11
Travel and entertainment                            20                 12             8
Dues and memberships                                12                  5             7
Printing, stationery and supplies                   15                  6             9
ATM and debit card fees                              5                  4             1
Postage and shipping                                 8                  3             5
Franchise taxes                                      1                  2            (1 )
Training, education and conferences                 25                  3            22
Operating losses / legal settlements                10                  -            10
Miscellaneous other                                  3                  3             -
Total                                      $       469              $ 308    $      161

The most significant changes in other general and administrative expenses included increases of:
A) $43,000 in data processing due to the licensing and operating costs of the software applications used for the residential mortgage division;

B) $42,000 in other loan expense related to costs incurred to underwrite residential mortgage loans;

C) $22,000 in training, education and conferences primarily associated with increased costs for personnel training as we worked to integrate our new residential mortgage division;

D) $18,000 in marketing and promotion expenses partially due to increased business development efforts and partially due to increases for our residential mortgage division;

E) $11,000 in telephone and communication expense and $9,000 in printing, stationery and supplies both related to our five new residential mortgage locations;

F) $8,000 in travel and entertainment correlated to an increase in loan demand; and

G) $10,000 in operating losses related to isolated costs from the start-up of the new residential mortgage division.

These increases were partially offset by decreases of:
A) $12,000 in FDIC fees due to lower assessment rates;

B) $10,000 in OREO expense. Although OREO expense decreased during the first quarter of 2013, as compared to the first quarter of 2012, we do expect OREO expenses to continue to impact our 2013 operating results as we incur costs such as taxes, insurance, repairs and maintenance, among others, on these properties. Additionally, management realizes there is some exposure to additional impairment on these properties if there are declines in real estate values.


All other general and administrative costs remained relatively stable.

Income Taxes

No federal or state tax expense was recorded for the three months ended March 31, 2013 and 2012, based upon net operating loss carry-forwards that can be used to offset approximately $3.1 million and $3.4 million, respectively, 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 March 31, 2013 and December 31, 2012 was $0.

Financial Condition

At March 31, 2013, the Company had total assets of $169.2 million, a $15.3 million, or 10% increase from $153.9 million in total assets at December 31, 2012 primarily due to: increases in gross loans, up 8%, the $19.4 million increase in loans held for sale, and the $1.0 million additional investment in bank-owned life insurance partially offset by an 11% decline in investment securities, which were reduced to help fund the growth in loans.

As of March 31, 2013, stockholders' equity was $20.3 million, a $329,000 increase versus $19.9 million at December 31, 2012. The increase was primarily due to the $181,000 of net income for the three months ended March 31, 2013, the $100,000 increase in other comprehensive income related to changes in the fair value of available-for-sale securities and $48,000 of stock-based compensation expense related to the Company's stock incentive plan.

Key Ratios
Ratio                             March 31, 2013     December 31, 2012
Return on Average Assets                 0.43 %                0.19 %
Return on Average Equity                 3.69 %                1.43 %
Average Equity to Average Assets        12.14 %               12.95 %

Federal Home Loan Bank (FHLB) and Federal Reserve Bank Stocks

At March 31, 2013, the Bank had a total of $1.9 million invested in FHLB and Federal Reserve Bank stocks carried at cost consisting of $533,400 in Federal Reserve Bank stock and $1.3 million in FHLB stock. These investments allow Solera National Bank to conduct business with these entities. As of March 31, 2013, the Federal Reserve Bank stock was yielding an average annual rate of 6.0% and the FHLB stock was yielding an average annual rate of 2.6%.

Investment Securities

Our investment portfolio serves as a source of interest income, a source of liquidity and a management tool for managing interest rate sensitivity. We manage our investment portfolio according to a written investment policy approved by our Board of Directors.


At March 31, 2013, Solera National Bank's investment portfolio consisted of available-for-sale securities of $75.7 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 March 31, 2013 and December 31, 2012:

($ in thousands)                                                     March 31, 2013
                                                       After One Year but    After Five Years but
                                 Within One Year       within Five Years       within Ten Years         After Ten Years
                                 Amount      Yield      Amount      Yield       Amount      Yield       Amount      Yield
Securities available-for-sale
Corporate                     $    1,012     5.63 %   $   5,230     2.80 %   $    8,603     2.89 %   $        -        - %
State and municipal                    -        -         1,916     5.06         12,332     3.29          3,141     3.25
Residential agency MBS/CMOs            -        -             -        -            361     3.86         43,144     1.82
Total                         $    1,012     5.63 %   $   7,146     3.40 %   $   21,296     3.14 %   $   46,285     1.92 %



($ in thousands)                                                   December 31, 2012
                                                       After One Year but    After Five Years but
                                 Within One Year       within Five Years       within Ten Years         After Ten Years
                                 Amount      Yield      Amount      Yield       Amount      Yield       Amount      Yield
Securities available-for-sale
Corporate                     $    1,023     5.63 %   $   4,532     2.69 %   $    8,895     3.08 %   $        -        - %
State and municipal                    -        -         1,923     5.06         13,636     3.30          6,558     3.20
Residential agency MBS/CMOs            -        -             -        -            711     2.67         47,432     1.79
Total                         $    1,023     5.63 %   $   6,455     3.40 %   $   23,242     3.19 %   $   53,990     1.96 %

Loan Portfolio
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