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SLRK > SEC Filings for SLRK > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for SOLERA NATIONAL BANCORP, INC.

Form 10-Q for SOLERA NATIONAL BANCORP, INC.


13-Aug-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 June 30, 2013 and results of operations for the three and six months ended June 30, 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 Colorado Front Range. 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 approximately 60 mortgage professionals, the Bank now offers residential mortgage loans, the vast majority of which are 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 87 employees during the second 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 June 30, 2013 and 2012

The following discussion focuses on the Company's financial condition and results of operations for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Net income for the quarter ended June 30, 2013 was $439,000, or $0.17 per share, compared to net income of $133,000, or $0.05 per share, for the second quarter of 2012. The $306,000 increase was primarily the result of a $2.5 million increase in noninterest income due substantially to our new residential mortgage division which contributed $2.4 million in noninterest income from gains on the sales of loans. This $2.5 million increase in noninterest income was largely offset by a $2.3 million increase in noninterest expenses due also to our new residential mortgage division. Also contributing to the $306,000 improvement in net income was a $98,000 increase in net interest income after the provision for loan and lease losses, primarily due to increased interest income on loans due to a growing portfolio and an increase in loans held for sale generated from the mortgage division, in conjunction with reduced cost of funds. These and other changes are described 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.

                                       Three Months Ended                             Three Months Ended
 ($ in thousands)                          June 30, 2013                                  June 30, 2012
                             Average                                        Average
                             Balance        Interest      Yield / Cost      Balance        Interest      Yield / Cost
Assets:
Interest-earning assets:
Gross loans, net of
unearned fees (1) (2)      $   67,123     $      868           5.19 %     $   56,309     $      787           5.62 %
Loans held for sale            14,411            121           3.38                -              -              -
Investment securities (3)      75,994            411           2.17           86,102            540           2.52
FHLB and FRB stocks             2,110             19           3.56            1,156             10           3.43
Federal funds sold                245              -           0.21              730              1           0.22
Interest-bearing deposits
with banks                        257              2           2.94              357              2           2.12
Total interest-earning
assets                        160,140     $    1,421           3.56 %        144,654     $    1,340           3.72 %
Noninterest-earning assets      8,417                                          6,067
Total assets               $  168,557                                     $  150,721
Liabilities and Stockholders' Equity:
Interest-bearing
liabilities:
Money market and savings
deposits                   $   50,910     $       58           0.45 %     $   56,875     $       85           0.60 %
Interest-bearing checking
accounts                        8,245             16           0.77            8,905             18           0.82
Time deposits                  59,214            183           1.24           52,782            176           1.34
Other borrowings                  139              -           0.57              579              2           0.97
FHLB advances                  24,603             40           0.66            8,526             33           1.56
Total interest-bearing
liabilities                   143,111     $      297           0.83 %        127,667     $      314           0.99 %
Noninterest-bearing
checking accounts               4,663                                          3,137
Noninterest-bearing
liabilities                       517                                            366
Stockholders' equity           20,266                                         19,551
Total liabilities and
stockholders' equity       $  168,557                                     $  150,721
Net interest income                       $    1,124                                     $    1,026
Net interest spread                             2.73 %                                         2.73 %
Net interest margin                             2.82 %                                         2.85 %


(1) The loan average balances and rates include nonaccrual loans.
(2) Net loan expenses of $11,000 and net loan fees of $2,000 for the three months ended June 30, 2013 and 2012, respectively, are included in the yield computation.
(3) Yields on investment securities have not been adjusted to a tax-equivalent basis since the Company does not own any tax-free securities.

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.

($ in thousands)                                      Three Months Ended June 30, 2013 Compared to Three Months Ended
                                                                               June 30, 2012
                                                        Net Change                   Rate                   Volume
Interest income:
Gross loans, net of unearned fees                   $          81             $         (54 )           $         135
Loans held for sale                                           121                         -                       121
Investment securities                                        (129 )                     (70 )                     (59 )
FHLB and FRB stocks                                             9                         -                         9
Federal funds sold                                             (1 )                       -                        (1 )
Interest-bearing deposits with banks                            -                         -                         -
Total interest income                               $          81             $        (124 )           $         205
Interest expense:
Money market and savings deposits                   $         (27 )           $         (19 )           $          (8 )
Interest-bearing checking accounts                             (2 )                      (1 )                      (1 )
Time deposits                                                   7                       (12 )                      19
Securities sold under agreements to repurchase and
federal funds purchased                                        (2 )                       -                        (2 )
FHLB advances                                                   7                      (116 )                     123
Total interest expense                              $         (17 )           $        (148 )           $         131
Net interest income                                 $          98             $          24             $          74

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 June 30, 2013, the Company's net interest income increased $98,000, or 10%, compared to the three months ended June 30, 2012 despite the 3 basis point decrease in net interest margin which declined from 2.85% to 2.82%. Most notable was the $121,000 increase in interest income from loans held for sale due to the new residential mortgage division and the $81,000 increase in interest income on loans primarily due to the $10.8 million increase in average loan balance during the second quarter 2013 compared to the second quarter 2012. These increases were partially offset by an unfavorable decrease in interest income on investment securities, which decreased $129,000, partially due to a decrease in yield (down 35 basis points) and partially due to a decrease in average balances (down $10.1 million). The average yield on loans decreased 43 basis from the second quarter a year ago as the Bank continues to be impacted by low interest rates and significant competition for well-qualified borrowers that demand competitive rates.

Although we have experienced decreases in yields on our interest-earning assets, we have also been able to reduce rates on our interest-bearing liabilities which enabled us to maintain the same net interest spread of 2.73%. Net interest spread is the yield


earned on interest-earning assets less the cost of interest-bearing liabilities. Overall, the cost of interest-bearing liabilities has decreased 16 basis points from the comparable period in the prior year. Contributing most significantly to this decline was the $27,000 decrease in interest expense related to money market and savings deposits which is a result of management's action in May of 2012 to implement a tiered rate structure on savings accounts and to reduce deposit rates across all balance tiers. The volume of FHLB advances increased significantly during the second quarter of 2013 compared to the same quarter in the prior year. These increases supported the Company's increase in loans; the average balance in loans held for investment increased $10.8 million and the average balance in loans held for sale was $14.4 million. The increases in FHLB advances were from borrowings on an overnight basis at interest rates significantly less than the portfolio average. This resulted in a 90 basis point decrease in the overall cost of FHLB advances.

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 second 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 June 30, 2013 was $2.7 million, an increase of $2.5 million from $230,000 for the second quarter 2012. The most notable increase in noninterest income for the quarter was due to the gain on loans sold, which increased $2.5 million from $25,000 for the three months ended June 30, 2012 due to gains earned on residential mortgage loans sold to secondary market purchasers. The Company sold securities for gains of $145,000 during the second quarter 2013 compared to $166,000 during the second quarter 2012.

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

($ in thousands)                               For the Quarter Ended
                                                   June 30, 2013
Gain on Loans Sold                          $                  2,487
Residential Mortgage Loans Originated       $                 86,091
Residential Mortgage Loans Sold             $                 88,125
Purpose of Loan: (1)
Purchase                                                          64 %
Refinance                                                         36 %


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

Although we anticipate a slowdown in refinance activity due to the recent rise in longer-term interest rates, continued improvement in the housing market should lead to increased purchase volume and help offset some of the decline in refinance activity.

Noninterest Expense

Our total noninterest expense for the quarter ended June 30, 2013 was $3.4 million, which was $2.3 million, or 201%, higher than the $1.1 million for the quarter ended June 30, 2012. The reasons for this increase are discussed in more detail below.

Employee Compensation and Benefit Expense Employee compensation and benefit expense increased $1.8 million from second quarter 2012 due to an additional 62 employees, (from an average of 25 full-time equivalent employees during the second quarter of 2012 to an average of 87 for the second quarter of 2013).


Occupancy
Occupancy expense increased $144,000 due to the addition of five locations
associated with the residential mortgage division.

Professional Fees
Professional fees increased $25,000, or 32%, partially due to outsourced Bank
Secrecy Act consulting services and partially due to increased information
technology consulting costs.

Other General and Administrative Expenses:
($ in thousands)                                 Three Months Ended
                                                       June 30,               Increase/
Other general and administrative expenses:          2013             2012     (Decrease)
Data processing                            $       187              $  84    $      103
Other loan expenses                                 89                 21            68
Marketing and promotions                            63                 29            34
Regulatory and reporting fees                       36                 41            (5 )
FDIC assessment                                     30                 50           (20 )
Travel and entertainment                            34                 11            23
Telephone/communication                             29                 12            17
Directors' fees                                     22                 23            (1 )
Printing, stationery and supplies                   30                  8            22
Training, education and conferences                 13                  2            11
Insurance                                           13                 12             1
OREO expense                                        12                 11             1
Dues and memberships                                11                 10             1
Postage and shipping                                 8                  4             4
ATM and debit card fees                              4                  4             -
Core deposit intangible amortization                 5                  -             5
Franchise taxes                                      4                  3             1
Operating losses / legal settlements                10                 10             -
Miscellaneous other                                  2                  3            (1 )
Total                                      $       602              $ 338    $      264

The most significant changes in other general and administrative expenses included increases of:
A) $103,000 in data processing due to the licensing and operating costs of the software applications used for the residential mortgage division as well as a nonrecurring charge of $50,000 incurred to integrate the deposits acquired from a branch of Liberty Savings Bank, FSB;

B) $68,000 in other loan expense related to costs incurred to underwrite residential mortgage loans;

C) $34,000 in marketing and promotion expenses partially due to increased business development efforts and partially due to increases for our residential mortgage division;

D) $23,000 in travel and entertainment correlated to an increase in loan demand for both the community bank division and the residential mortgage division;

E) $22,000 in printing, stationery and supplies and $17,000 in telephone and communication expense both related to our five new residential mortgage locations;

F) $11,000 in training, education and conferences primarily associated with increased costs for personnel training which correlates with our increase in employees.

These increases were partially offset by a decrease of $20,000 in FDIC fees due to lower assessment rates. All other general and administrative costs remained relatively stable.


Income Taxes

No federal or state tax expense was recorded for the three months ended June 30, 2013 and 2012, based upon net operating loss carry-forwards that can be used to offset approximately $3.3 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 June 30, 2013 and December 31, 2012 was $0.

Comparative Results of Operations for the Six Months Ended June 30, 2013 and 2012

The following discussion focuses on the Company's financial condition and results of operations for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Net income for the six months ended June 30, 2013 was $620,000, or $0.24 per share, compared to net income of $94,000, or $0.04 per share, for the six months ended June 30, 2012. The $526,000 increase was primarily the result of a $4.0 million increase in noninterest income due substantially to our new residential mortgage division which contributed $3.9 million in noninterest income from gains on the sales of loans. This $4.0 million increase in noninterest income was largely offset by a $3.6 million increase in noninterest expenses due also primarily to our new residential mortgage division. These and other changes are described 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.


                                        Six Months Ended                               Six Months Ended
 ($ in thousands)                          June 30, 2013                                  June 30, 2012
                             Average                                        Average
                             Balance        Interest      Yield / Cost      Balance        Interest      Yield / Cost
Assets:
Interest-earning assets:
Gross loans, net of
unearned fees (1) (2)      $   64,754     $    1,658           5.16 %     $   55,425     $    1,575           5.71 %
Loans held for sale            12,815            215           3.38                -              -              -
Investment securities (3)      77,751            857           2.22           84,609          1,043           2.48
FHLB and FRB stocks             1,840             34           3.68            1,148             18           3.15
Federal funds sold                245              -           0.23              677              1           0.22
Interest-bearing deposits
with banks                        257              3           2.94              385              4           2.04
Total interest-earning
assets                        157,662     $    2,767           3.54 %        142,244     $    2,641           3.73 %
Noninterest-earning assets      7,856                                          5,421
Total assets               $  165,518                                     $  147,665
Liabilities and Stockholders' Equity:
Interest-bearing
liabilities:
Money market and savings
deposits                   $   53,107     $      121           0.46 %     $   57,768     $      195           0.68 %
Interest-bearing checking
accounts                        7,980             30           0.76            8,937             37           0.84
Time deposits                  58,376            363           1.25           49,989            347           1.39
Other borrowings                  135              -           0.54              558              3           1.07
FHLB advances                  21,117             79           0.76            7,513             64           1.71
Total interest-bearing
liabilities                   140,715     $      593           0.85 %        124,765     $      646           1.04 %
Noninterest-bearing
checking accounts               4,339                                          3,178
Noninterest-bearing
liabilities                       510                                            409
Stockholders' equity           19,954                                         19,313
Total liabilities and
stockholders' equity       $  165,518                                     $  147,665
Net interest income                       $    2,174                                     $    1,995
Net interest spread                             2.69 %                                         2.69 %
Net interest margin                             2.78 %                                         2.82 %

(1) The loan average balances and rates include nonaccrual loans.
(2) Net loan expenses of $31,000 and net loan fees of $7,000 for the six months ended June 30, 2013 and 2012, respectively, are included in the yield computation.
(3) Yields on investment securities have not been adjusted to a tax-equivalent basis since the Company does not own any tax-free securities.


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.

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