PINX:SLRK Solera National Bancorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
þ
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨
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 of incorporation or organization)
 
(IRS Employer  Identification No.)
 
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 þ 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   o Accelerated filer o
Non-accelerated filer o Smaller reporting company   þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:  As of May 10, 2012, 2,553,671 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.
 


 
 

 
FORM 10-Q
SOLERA NATIONAL BANCORP, INC.

INDEX
 
     
PAGE
 
INTRODUCTORY NOTE.  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS     3  
           
PART I -FINANCIAL INFORMATION     4  
           
ITEM 1.
FINANCIAL STATEMENTS (unaudited)
    4  
           
 
Balance Sheets as of March 31, 2012 and December 31, 2011
    4  
           
 
Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011
    5  
           
 
Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and 2011
    6  
           
 
Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
    7  
           
 
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    9  
           
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    29  
           
ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    40  
           
ITEM 4.  
CONTROLS AND PROCEDURES
    40  
           
PART II -OTHER INFORMATION     41  
           
ITEM 1.
LEGAL PROCEEDINGS
    41  
           
ITEM 1A.  
RISK FACTORS
    41  
           
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    41  
           
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
    41  
           
ITEM 4.
MINE SAFETY DISCLOSURE
    41  
           
ITEM 5.
OTHER INFORMATION
    41  
           
ITEM 6.
EXHIBITS
    41  
           
SIGNATURES     42  
           
EXHIBIT INDEX     43  

 
2

 

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 Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's 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 Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:

 
management of Solera National Bank may be unable to limit credit risk associated with our loan portfolio, which would affect the Company’s profitability;
 
 
general economic conditions in the U.S. and within our market area may be less favorable than expected, causing an adverse impact on our financial performance;
 
 
the Company is subject to extensive regulatory oversight, which could restrain our growth and profitability;
 
 
the Company could facepotential regulatory actions if we fail to comply with our Consent Order;
 
 
interest rate volatility could adversely impact our business;
 
 
the Company may not be able to raise additional capital on terms favorable to us;
 
 
the Company continues to hold other real estate owned which has led to increased operating costs and vulnerability to declines in real estate values;
 
 
the liquidity of our common stock is affected by its limited trading market; and
 
 
the Company faces competition from a variety of competitors.

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 Company’s 2011 Annual Report filed on Form 10-K with the SEC, which is available on the SEC’s 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 Company’s 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.

 
3

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)
 
Solera National Bancorp, Inc.

Balance Sheets as of March 31, 2012 and December 31, 2011
(unaudited)
 
($ in thousands, except share data)
 
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
Cash and cash equivalents
  $ 729     $ 1,800  
Interest-bearing deposits with banks
    357       1,357  
Investment securities, available-for-sale
    84,498       83,195  
Gross loans
    55,086       55,645  
Net deferred expenses/(fees)
    1       (77 )
Allowance for loan and lease losses
    (1,077 )     (1,067 )
Net loans
    54,010       54,501  
Federal Home Loan Bank (FHLB) and Federal Reserve Bank stocks
    1,148       1,134  
Bank-owned life insurance
    2,008        
Other real estate owned
    1,776       1,776  
Premises and equipment, net
    571       599  
Accrued interest receivable
    666       584  
Other assets
    411       420  
Total assets
  $ 146,174     $ 145,366  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Deposits
               
Noninterest-bearing demand
  $ 3,217       3,550  
Interest-bearing demand
    8,724       9,355  
Savings and money market
    57,503       58,854  
Time deposits
    49,688       47,225  
Total deposits
    119,132       118,984  
                 
Securities sold under agreements to repurchase and federal funds purchased
    663       253  
Accrued interest payable
    62       56  
Accounts payable and other liabilities
    368       534  
FHLB advances
    6,500       6,500  
Total liabilities
  $ 126,725     $ 126,327  
                 
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
  $ 26     $ 26  
Additional paid-in capital
    26,159       26,146  
Accumulated deficit
    (7,679 )     (7,640 )
Accumulated other comprehensive income
    943       507  
Total stockholders’ equity
  $ 19,449     $ 19,039  
Total liabilities and stockholders’ equity
  $ 146,174     $ 145,366  

See Notes to Consolidated Financial Statements.

 
4

 

Solera National Bancorp, Inc.

Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011
(unaudited)
 
($ in thousands, except share data)
 
For the Three Months
Ended March 31,
 
   
2012
   
2011
 
INTEREST INCOME:
           
  Interest and fees on loans
  $ 788     $ 824  
  Interest on investment securities
    503       673  
  Dividends on FHLB and Federal Reserve Bank stocks
    8       9  
  Other interest income
    2       1  
            Total interest income
    1,301       1,507  
INTEREST EXPENSE:
               
  Deposits
    300       369  
  FHLB advances
    31       57  
  Securities sold under agreements to repurchase and federal funds purchased
    1       4  
Total interest expense
    332       430  
NET INTEREST INCOME BEFORE PROVISION
    969       1,077  
Provision for loan and lease losses
    -       -  
NET INTEREST INCOME AFTER PROVISION
    969       1,077  
NONINTEREST INCOME:
               
  Service charges and fees
    15       18  
  Other income
    9       -  
  Gain / (loss) on available-for-sale securities
    114       (2 )
Total noninterest income
    138       16  
NONINTEREST EXPENSE:
               
  Salaries and employee benefits
    567       705  
  Occupancy
    127       133  
  Professional fees
    144       126  
  Other general and administrative
    308       312  
Total noninterest expense
    1,146       1,276  
LOSS BEFORE INCOME TAXES
    (39 )     (183 )
Provision for income taxes
    -       -  
NET LOSS
  $ (39 )   $ (183 )
                 
OTHER COMPREHENSIVE INCOME, NET OF TAX:
               
  Change in net unrealized gains on securities
    550       73  
  Less:  Reclassification adjustment for net (gains) / losses included in net loss
    (114 )     2  
OTHER COMPREHENSIVE INCOME
  $ 436     $ 75  
                 
COMPREHENSIVE INCOME / (LOSS)
  $ 397     $ (108 )
                 
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
  $ (39 )   $ (183 )
                 
LOSS PER COMMON SHARE:
               
  Basic (2,553,671 weighted-average common shares)
  $ (0.02 )   $ (0.07 )
  Diluted  (2,553,671 weighted-average diluted shares)
  $ (0.02 )   $ (0.07 )

See Notes to Consolidated Financial Statements.

 
5

 

Solera National Bancorp, Inc.

Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and 2011
(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, 2010
    2,553,671     $ 26     $ 25,980     $ (7,882 )   $ 201     $ 18,325  
Stock-based compensation
    -       -       61       -       -       61  
Comprehensive loss:
                                               
Net loss
    -       -       -       (183 )     -       (183 )
Other comprehensive income
    -       -       -       -       75       75  
Total comprehensive loss
                                            (108 )
Balance at March 31, 2011
    2,553,671     $ 26     $ 26,041     $ (8,065 )   $ 276     $ 18,278  

Balance at December 31, 2011
    2,553,671     $ 26     $ 26,146     $ (7,640 )   $ 507     $ 19,039  
Stock-based compensation
    -       -       13       -       -       13  
Comprehensive income:
                                               
Net loss
    -       -       -       (39 )     -       (39 )
Other comprehensive income
    -       -       -       -       436       436  
Total comprehensive income
                                            397  
Balance at March 31, 2012
    2,553,671     $ 26     $ 26,159     $ (7,679 )   $ 943     $ 19,449  

See Notes to Consolidated Financial Statements.

 
6

 

Solera National Bancorp, Inc.

Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
(unaudited)
 
   
For the Three Months
 
   
Ended March 31,
 
($ in thousands)
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (39 )   $ (183 )
Adjustments to reconcile net loss to net cash (used in) / provided by operating activities:
               
   Depreciation and amortization
    34       60  
   Net accretion of deferred loan fees/expenses
    (5 )     (12 )
   Net amortization of premiums on investment securities
    366       149  
   (Gain) / loss on available-for-sale investment securities
    (114 )     2  
   Federal Home Loan Bank stock dividend
    (1 )     (1 )
   Recognition of stock-based compensation on stock options
    13       61  
   Increase in bank-owned life insurance cash surrender value
    (8 )      
Changes in operating assets and liabilities:
               
   Accrued interest receivable
    (82 )     56  
   Other assets
    9       20  
   Accrued interest payable
    6       (12 )
   Accounts payable and other liabilities
    (155 )     70  
   Deferred loan fees/expenses, net
    (73 )     5  
Net cash (used in) / provided by operating activities
  $ (49 )   $ 215  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of investment securities, available-for-sale
  $ (12,203 )   $ (14,844 )
Proceeds from sales of investment securities, available-for-sale
    7,483       11,350  
Proceeds from maturities/calls/pay downs of investment securities, available-for-sale
    3,601       3,048  
Loan payments received / (originations funded), net
    569       699  
(Purchase) / redemption of Federal Reserve Bank stock
    (13 )     54  
Purchase of bank-owned life insurance
    (2,000 )      
Purchase of premises and equipment
    (6 )      
Maturity of interest-bearing deposits with banks
    1,000        
Net cash (used in) / provided by investing activities
  $ (1,569 )   $ 307  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposits
  $ 148     $ 3,497  
Net increase in securities sold under agreements to repurchase and federal funds purchased
    410       614  
Repayment of FHLB advances
          (4,500 )
Principal payments on capital lease
    (11 )     (11 )
Net cash provided by / (used in) financing activities
  $ 547     $ (400 )
                 
Net (decrease) / increase in cash and cash equivalents
  $ (1,071 )   $ 122  
                 
CASH AND CASH EQUIVALENTS
               
Beginning of period
    1,800       936  
End of period
  $ 729     $ 1,058  
(continued)
 

 
7

 

Solera National Bancorp, Inc.

Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011, (continued)
(unaudited)

   
For the Three Months 
Ended March 31,
 
($ in thousands)
 
2012
    2011  
             
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION  
           
  Cash paid during the period for:
           
     Interest
  $ 326     $ 442  
     Income taxes paid
  $     $  
  Non-cash investing transactions:
               
     Unrealized gain on investment securities, available-for-sale   $ 436     $ 75  
 
See Notes to Consolidated Financial Statements.

 
8

 
 
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 primarily serving the six-county 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 March 31, 2012, and the results of its operations for the three months ended March 31, 2012 and 2011.  Cash flows are presented for the three months ended March 31, 2012 and 2011.  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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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.  The attainment of sustained profitable operations are dependent on future events, including the successful execution of the Company’s business plan and achieving a level of revenue adequate to support the Company’s cost structure.

Critical Accounting Policies

The following is a description of the Company’s significant accounting policies used in the preparation of the accompanying consolidated financial statements.
 
Provision and allowance for loan and lease losses:  Implicit in the Company’s lending activities is the fact that loan and lease losses will be experienced and that the risk of loss will vary with the type of loans being made and the creditworthiness of the borrowers over the terms of the loans. The allowance for loan and lease losses represents the Company’s recognition of the risks of extending credit and its evaluation of the loan portfolio.  The evaluation of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance for loan and lease losses is maintained at a level considered adequate to provide for probable loan and lease losses based on management’s 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 and lease losses, a comparison of peer group allowance ratios to gross loans is made with the intention of maintaining similar levels until the Bank has sufficient historical data to see trends in our own loss history.  The allowance for loan and lease losses is increased by provisions charged to expense and reduced by loans and leases charged-off, net of recoveries.  Loan and lease losses are charged against the allowance for loan and lease losses when management believes the balance is uncollectible.
 
 
9

 

The Company has established a formal process for determining an adequate allowance for loan and lease losses.  The allowance for loan and lease losses calculation has two components.  The first component represents the allowance for loan and lease 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, impaired loans and leases are individually evaluated by either discounting the expected future cash flows or determining the fair value of the collateral, if repayment is expected solely from collateral.  The fair value of the collateral is determined using internal analyses as well as third-party information, such as appraisals.  That value, less estimated costs to sell, is compared to the recorded investment in the loan and any shortfall is charged-off.  Unsecured loans and loans that are not collateral-dependent are evaluated by calculating the discounted cash flow of the payments expected over the life of the loan using the loan’s effective interest rate and giving consideration to currently existing factors that would impact the amount or timing of the cash flows.  The shortfall between the recorded investment in the loan and the discounted cash flows, or the fair value of the collateral less estimated costs to sell, represents the first component of the allowance for loan and lease losses.

The second component of the allowance for loan and lease 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 Bank’s peer group; 4) the levels and trends in non-performing and past due loans; and 5) management’s 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 qualitative factors also consider the risk elements within each segment of the loan portfolio.  The primary risk comes from the difference between the expected and actual cash flows of the borrower and is influenced by the type of collateral securing the loans.  For real estate secured loans, conditions in the real estate markets as well as the general economy influence real estate values and may impact the Company’s ability to recover its investment due to declines in the fair value of the underlying collateral.  The risks in non real-estate secured loans include general economic conditions as well as interest rate changes.  We aggregate our loans into portfolio segments including:  Commercial Real Estate Secured; Residential Real Estate Secured; Commercial and Industrial; and Consumer.  We then evaluate the above factors by segment and assign probable loss ranges to each segment.  The aggregate of these segments represents the contingent losses in the portfolio.

The recorded allowance for loan and lease losses is the aggregate of the impaired loan and lease component and the contingent loss component.  Our methodology for estimating the allowance has not changed during the current or prior reporting period and is consistent across all portfolio segments and classes of loans. 

At March 31, 2012, the Company had an allowance for loan and lease losses of $1.1 million.  Management believes that this allowance for loan and lease losses is adequate to cover probable losses based on currently available evidence. Future additions to the allowance for loan and lease losses may be required based on management’s continuing evaluation of the inherent risks in the portfolio.  Additional provisions for loan and lease losses may need to be recorded if the economy declines, asset quality deteriorates, or the loss experience changes.
 
Loans receivable:  Loans receivable that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances net of any deferred fees or costs, and reduced by any charge-offsand the allowance for loan and lease losses.

Credit and loan decisions are made by management and the Board of Directors in conformity with loan policies established by the Board of Directors. The Company’s 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 borrower’s failure to meet repayment terms, the borrower’s deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss, or for other reasons.

The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans (see Interest and fees on loans, below).
 
 
10

 

Interest and fees on loans:  Interest income is recognized daily in accordance with the terms of the note based on the outstanding principal balance. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is 90 days past due based on contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.

Generally, for all classes of loans, loans are considered past due when contractual payments are delinquent by 30 days or more.

Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan using the effective interest method and without anticipating prepayments.

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 in 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 Company’s 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.  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.

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 obligor, 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).  If it is more likely than not that sale of the security will be required prior to recovery of its amortized cost, the entire impairment is recognized in earnings equal to the difference between the amortized cost basis and the fair value.  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.
 
 
11

 

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued an accounting standards update intended to improve the comparability of fair value accounting and reporting requirements between United States Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). Additional disclosures required by the update are incorporated in Note 11 and include: (i) disclosure of quantitative information regarding the unobservable inputs used in any  Level 3 measurement  including an explanation of the valuation techniques used and the sensitivity to changes in the values assigned to unobservable inputs; (ii) categorization by level for the fair value of financial instruments; and (iii) instances where the fair values disclosed for non-financial assets were based on a highest and best use assumption when in fact the assets are not being utilized in that capacity. The amendments in the update are effective for the Company’s interim and annual reports beginning with the first quarter 2012. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows but did cause changes to the Company’s fair value disclosure (see Note 11).

In June 2011, the FASB issued an accounting standards update to increase the prominence of items included in Other Comprehensive Income and facilitate the convergence of U.S. GAAP with IFRS. The update prohibits continued exclusive presentation of Other Comprehensive Income in the statement of stockholders’ equity.  The update requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but continuous statements.  The amendments in the update are effective for the Company’s interim and annual reports beginning with the first quarter 2012.  The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows but did cause changes to the presentation of the Company’s Statements of Operations.

During the first quarter 2012, the FASB issued other accounting standards updates which may impact the banking community or other entities but do not, and are not expected to, have a material impact on our financial position, results of operations or cash flows.
 
NOTE 3 — INVESTMENTS

The amortized costs and estimated fair values of investment securities as of March 31, 2012 and December 31, 2011 are as follows:

($ in thousands)
March 31, 2012
 
     
Gross
 
Gross
     
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
Securities available-for-sale:
                       
Corporate
  $ 14,708     $ 295     $ (262 )   $ 14,741  
State and municipal
    11,050       220       (80 )     11,190  
Residential agency mortgage-backed securities (“MBS”)
    57,797       811       (41 )     58,567  
Total securities available-for-sale
  $ 83,555     $ 1,326     $ (383 )   $ 84,498  

 
12

 
 
($ in thousands)
December 31, 2011
 
     
Gross
 
Gross
     
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
Securities available-for-sale:
                       
Corporate
  $ 15,117     $ 161     $ (460 )   $ 14,818  
State and municipal
    3,691       198       (4 )     3,885  
Residential agency MBS
    63,880       747       (135 )     64,492  
Total securities available-for-sale
  $ 82,688     $ 1,106     $ (599 )   $ 83,195  
 
The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2012 and December 31, 2011 are shown below.  The timing of principal payments received differs from the contractual maturity because borrowers may be required to make contractual principal payments and often have the right to call or prepay obligations with or without call or prepayment penalties.  As a result, the timing with which principal payments are received on mortgage-backed securities (“MBS”) is not represented in the tables below.  For instance, we received $3.6 million in proceeds from the maturity/call/prepayment of securities during the three months ended March 31, 2012 (see our Consolidated Statements of Cash Flows on page 7) versus no dollars contractually maturing within one year as set forth in the table below.
 
 ($ in thousands)
March 31, 2012
 
December 31, 2011
 
 
Amortized
 
Estimated Fair
Value
 
Amortized
 
Estimated Fair
 
Securities available-for-sale:
Cost
 
Cost
 
Value
 
Due within one year
  $     $     $     $  
Due after one year through five years
    6,987       7,122       8,540       8,583  
Due after five years through ten years
    20,417       20,546       13,799       13,720  
Due after ten years
    56,151       56,830       60,349       60,892  
Total securities available-for-sale
  $ 83,555     $ 84,498     $ 82,688     $ 83,195  

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 March 31, 2012 and December 31, 2011.

 
March 31, 2012
 
($ in thousands)
Less than 12 months
   
12 months or more
   
Total
 
Description of securities:
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
   
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
   
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
 
  Corporate
  $ 1,506     $ (44 )     3     $ 4,282     $ (218 )     7     $ 5,788     $ (262 )     10  
  State and municipal
    5,005       (80 )     9                           5,005       (80 )     9  
  Residential agency MBS
    11,287       (41 )     12                           11,287       (41 )     12  
Total temporarily-impaired
  $ 17,798     $ (165 )     24     $ 4,282     $ (218 )     7     $ 22,080     $ (383 )     31  
 
 
December 31, 2011
 
($ in thousands)
Less than 12 months
   
12 months or more
   
Total
 
Description of securities:
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
   
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
   
Estimated Fair Value
 
Unrealized Losses
   
# of Securities
 
  Corporate
  $ 4,033     $ (180 )     8     $ 4,220     $ (280 )     7     $ 8,253     $ (460 )     15  
  State and municipal
    502       (4 )     1                         502       (4 )     1  
  Residential agency MBS
    18,266       (135 )     20                         18,266       (135 )     20  
Total temporarily-impaired
  $ 22,801     $ (319 )     29     $ 4,220     $ (280 )     7     $ 27,021     $ (599 )     36  

 
13

 

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 March 31 2012, no declines were deemed to be other than temporary.  The seven corporate securities that were in a continuous loss position for 12 months or longer at March 31, 2012 and December 31, 2011 fluctuated in value primarily as a result of changes in market interest rates rather than due to a material deterioration in credit quality.  Further, the Company has the intent to hold the securities in an unrealized loss position as of March 31, 2012 and does not anticipate that these securities will be required to be sold before recovery of value, which may be upon maturity.  Accordingly, the securities detailed in the table above, are not other than temporarily impaired.  Similarly, management’s evaluation of the securities in an unrealized loss position at December 31, 2011, determined these securities were not other than temporarily impaired.

During the first quarter of 2011, the Company recognized other-than-temporary impairment of approximately $67,000 related to five securities that management had the intent to sell before recovery of value.  No other securities were determined to be other than temporarily impaired.

The Company recorded a net unrealized gain in the investment portfolio of $943,000 at March 31, 2012, an 86% increase over the $507,000 net unrealized gain at December 31, 2011.

Sales of available-for-sale securities were as follows:

($ in thousands)
 
Three Months Ended March 31,
   
2012
   
2011
Proceeds
  $ 7,483     $ 11,350  
Gross gains
  $ 114     $ 146  
Gross losses
  $     $ (81 )

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 $20.5 million at March 31, 2012 and $20.4 million at December 31, 2011, 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 following table sets forth the composition of the loan portfolio according to the loan’s purpose, which may differ from the categorization of the loan in subsequent tables which categorize the loan according to the underlying collateral:
 
($ in thousands)
 
March 31,
2012
   
December 31,
2011
 
Commercial real estate (“CRE”)
  $ 37,265     $ 37,862  
Commercial and industrial
    5,790       5,971  
Residential real estate
    10,704       10,460  
Construction and land development
    1,275       1,307  
Consumer
    52       45  
GROSS LOANS
    55,086       55,645  
Net deferred loan expenses / (fees)
    1       (77 )
Allowance for loan and lease losses
    (1,077 )     (1,067 )
LOANS, NET
  $ 54,010     $ 54,501  

During the first quarter of 2012, the Bank purchased one loan with a principal balance of approximately $500,000.  No loans were purchased during the first quarter of 2011.
 
 
14

 

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 Company’s 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.

There were approximately $301,000 and $481,000 in loans receivable from related parties at March 31, 2012 and December 31, 2011, respectively.
 
The Company’s 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 Company’s 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.  No single borrower can be approved for a loan over the Bank’s current legal lending limit of approximately $2.5 million.  This regulatory requirement helps to ensure the Bank’s exposure to one individual customer is limited.
 
NOTE 5 — ALLOWANCE FOR LOAN AND LEASE LOSSES
 
Activity in the allowance for loan and lease losses for the three months ended March 31, 2012 and 2011 is summarized as follows:
 
($ in thousands)
 
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Balance, beginning of period
  $ 1,067     $ 1,175  
      Charge-offs
    (3 )      
      Recoveries
    13        
      Provision for loan and lease losses
           
  Balance, end of period
  $ 1,077     $ 1,175  

The following allowance for loan and lease loss disclosures are broken out by portfolio segment.  Portfolio segment is defined, under current U.S. GAAP, as the level of aggregation used by the Company to calculate its allowance for loan and lease losses.  Our portfolio segments are based on how loans are categorized on the Consolidated Report of Condition and Income, as set forth by banking regulators, (the “Call Report”), which is primarily based on the collateral securing the loan.  We have four main portfolio segments as follows:
 
Commercial Real Estate (CRE) Secured – loans secured by nonfarm, nonresidential properties
Residential Real Estate Secured – loans secured by 1-4 family residential properties or land
Commercial and Industrial – loans to businesses not secured by real estate, and
Consumer – loans to individuals not secured by real estate.
 
The portfolio segment categorization of loans differs from the categorization shown in Note 4 – Loans.  Portfolio segment categorization is based on the Call Report and the loan’s underlying collateral while the loan categorization in Note 4 – Loans is based on the loan’s purpose as determined during the underwriting process.

 
15

 

The tables below provide a rollforward, by portfolio segment, of the allowance for loan and lease losses for the three months ended March 31, 2012 and 2011, respectively.

Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
 
March 31, 2012
 
($ in thousands)
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and Industrial
   
Consumer
   
Total
 
Balance at December 31, 2011
  $ 726     $ 244     $ 97     $     $ 1,067  
   Charge-offs
                      (3 )     (3 )
   Recoveries
          13                   13  
   Provision for loan and lease losses
    (27 )     (10 )     33       4        
Balance at March 31, 2012
  $ 699     $ 247     $ 130     $ 1     $ 1,077  
 
Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
 
March 31, 2011
 
($ in thousands)
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and Industrial
   
Consumer
   
Total
 
Balance at December 31, 2010
  $ 360     $ 478     $ 336     $ 1     $ 1,175  
   Charge-offs
                             
   Recoveries
                             
   Provision for loan and lease losses
    58       23       (81 )            
Balance at March 31, 2011
  $ 418     $ 501     $ 255     $ 1     $ 1,175  

The following tables present the ending balance in loans and allowance for loan and lease losses, broken down by portfolio segment as of March 31, 2012 and December 31, 2011.  The tables also identify the recorded investment in loans and the related allowance that correspond to individual versus collective impairment evaluation as derived from the Company’s methodology of estimating the allowance for loan and lease losses (see additional discussion about our allowance methodology under Note 2:  Critical Accounting Policies, Provision and allowance for loan and lease losses).

Ending Balances in Loans and Allowance for Loan and Lease Losses by Portfolio Segment
 
March 31, 2012
 
($ in thousands)
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and Industrial
   
Consumer
   
Total
 
Loans
                             
Individually evaluated for impairment
  $ 647     $     $ 332     $     $ 979  
Collectively evaluated for impairment
    33,780       15,193       5,082       52       54,107  
Total
  $ 34,427     $ 15,193     $ 5,414     $ 52     $ 55,086  
Allowance for loan losses
                                       
Individually evaluated for impairment
  $ 11     $     $ 44     $     $ 55  
Collectively evaluated for impairment
    688       247       86       1       1,022  
Total
  $ 699     $ 247     $ 130     $ 1     $ 1,077  
 
 
16

 
 
Ending Balances in Loans and Allowance for Loan and Lease Losses by Portfolio Segment
 
December 31, 2011
 
($ in thousands)
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and Industrial
   
Consumer
   
Total
 
Loans
                             
Individually evaluated for impairment
  $ 274     $     $ 336     $     $ 610  
Collectively evaluated for impairment
    35,159       14,586       5,245       45       55,035  
Total
  $ 35,433     $ 14,586     $ 5,581     $ 45     $ 55,645  
Allowance for loan losses
                                       
Individually evaluated for impairment
  $     $     $     $     $  
Collectively evaluated for impairment
    726       244       97             1,067  
Total
  $ 726     $ 244     $ 97     $     $ 1,067  

The remaining tables in the allowance for loan and lease losses footnote provide detail about loans according to their class, rather than their segment, as reflected above.  The class level provides more detail than the portfolio segment level.  The following tables contain reconciliation information between the portfolio segment levels and class levels:

Reconciliation between Portfolio Segment and Class
 
March 31, 2012 (Principal Balance)
 
($ in thousands)
 
Portfolio Segment
 
Class
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and
Industrial
   
Consumer
   
Total
 
CRE – owner occupied
  $ 16,792     $     $     $     $ 16,792  
CRE – non-owner occupied
    16,907                         16,907  
Commercial and industrial
                5,414             5,414  
Residential real estate
          14,646                   14,646  
Construction and land development
    728       547                   1,275  
Consumer
                      52       52  
Total
  $ 34,427     $ 15,193     $ 5,414     $ 52     $ 55,086  
 
Reconciliation between Portfolio Segment and Class
 
December 31, 2011 (Principal Balance)
 
($ in thousands)
 
Portfolio Segment
 
Class
 
Commercial Real Estate Secured
   
Residential Real Estate Secured
   
Commercial and
Industrial
   
Consumer
   
Total
 
CRE – owner occupied
  $ 16,337     $     $     $     $ 16,337  
CRE – non-owner occupied
    18,367                         18,367  
Commercial and industrial
                5,581             5,581  
Residential real estate
          14,008                   14,008  
Construction and land development
    729       578                   1,307  
Consumer
                      45       45  
Total
  $ 35,433     $ 14,586     $ 5,581     $ 45     $ 55,645  

 
17

 

Impaired Loans
The following tables provide detail of impaired loans broken out according to class as of March 31, 2012 and December 31, 2011.  The class level represents a slightly more detailed level than the portfolio segment level.  There were four impaired loans, totaling $979,000, as of March 31, 2012 compared to three impaired loans totaling $610,000 as of December 31, 2011. The recorded investment represents the customer balance less any partial charge-offs and excludes any accrued interest receivable since the majority of the loans were on nonaccrual status and therefore did not have interest accruing.  The unpaid principal balance represents the unpaid principal prior to any partial charge-off.

 
Impaired Loans by Class as of March 31, 2012
 
($ in thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment YTD
   
Interest Income Recognized YTD
 
Impaired loans with no related allowance
                         
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
    251       471             265        
Commercial and industrial
    243       243             243        
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $ 494     $ 714     $     $ 508     $  
                                         
Impaired loans with a related allowance
                                 
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
    396       396       11       397       3  
Commercial and industrial
    89       89       44       90       2  
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $ 485     $ 485     $ 55     $ 487     $ 5  
                                         
Total impaired loans
                                       
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
    647       867       11       662       3  
Commercial and industrial
    332       332       44       333       2  
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $ 979     $ 1,199     $ 55     $ 995     $ 5  

 
18

 
 
 
Impaired Loans by Class as of December 31, 2011
 
($ in thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment YTD
   
Interest Income Recognized YTD
 
Impaired loans with no related allowance
                         
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
    274       494             345        
Commercial and industrial
    336       336             517       15  
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $ 610     $ 830     $     $ 862     $ 15  
                                         
Impaired loans with a related allowance
                                 
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
                             
Commercial and industrial
                             
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $     $     $     $     $  
                                         
Total impaired loans
                                       
CRE – owner occupied
  $     $     $     $     $  
CRE – non-owner occupied
    274       494             345        
Commercial and industrial
    336       336             517       15  
Residential real estate
                             
Construction and land development
                             
Consumer
                             
Total
  $ 610     $ 830     $     $ 862     $ 15  

As of both March 31, 2012 and December 31, 2011, the impaired loans without a valuation allowance did not have a related allowance because they have either been partially charged-off, bringing them to their net realizable value, or are well-secured.

Troubled debt restructurings (TDRs) are included in impaired loans above.  No loans were modified as TDRs during the three months ended March 31, 2012.  The Company has not committed additional funds to any of the borrowers whose loans are classified as a TDR.  A TDR is considered to be in payment default once it is 90 days past due under the modified terms or when the loan is determined to be uncollectible and is classified as loss and charged-off.  None of the Company’s loans restructured in the last 12 months have subsequently defaulted.
 
 
19

 

Age Analysis of Loans
The following tables summarize, by class, our past due and nonaccrual loans as of the dates indicated.

   
Age Analysis of Loans by Class as of March 31, 2012
 
($ in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
Past Due 90 Days or More and Still Accruing
   
Nonaccrual
   
Total Past Due and Nonaccrual
   
Current
   
Total
 
CRE – owner occupied
  $     $     $     $     $     $ 16,792     $ 16,792  
CRE – non-owner occupied
                396       251       647       16,260       16,907  
Commercial and industrial
    169                   332       501       4,913       5,414  
Residential real estate
                                  14,646       14,646  
Construction and land development
                                  1,275       1,275  
Consumer
                                  52       52  
Total
  $ 169     $     $ 396     $ 583     $ 1,148     $ 53,938     $ 55,086  
 
   
Age Analysis of Loans by Class as of December 31, 2011
 
($ in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
Past Due 90 Days or More and Still Accruing
   
Nonaccrual
   
Total Past Due and Nonaccrual
   
Current
   
Total
 
CRE – owner occupied
  $     $ 1,040     $     $     $ 1,040     $ 15,297     $ 16,337  
CRE – non-owner occupied
                      274       274       18,093       18,367  
Commercial and industrial
                      336       336       5,245       5,581  
Residential real estate
    139       170                   309       13,699       14,008  
Construction and land development
                                  1,307       1,307  
Consumer
                                  45