UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES |
For the quarterly period ended June 30, 2008
¨ |
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES |
Commission file number 000-53181
SOLERA NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
02-0774841 |
(State or other jurisdiction |
|
(IRS Employer Identification No.) |
of incorporation or organization) |
|
|
319 S. Sheridan Blvd.
Lakewood, CO 80226
303-209-8600
(Address and telephone number of principal executive offices and principal place of business)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the last practicable date: As of August 13, 2008, 2,553,671 shares of the registrants common stock, $0.01 par value, were issued and outstanding.
FORM 10-Q
SOLERA NATIONAL BANCORP, INC.
2
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) 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. (sometimes referred to herein as on a consolidated basis as the Company, we, us, or similar phrasing) undertakes no obligation to update any forward-looking statement.
These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Companys beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including managements expectations and estimates with respect to revenues, expenses, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Companys results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:
· the Company has a very limited operating history upon which to base an estimate of its future financial performance;
· the Company expects to incur losses during its initial years of operations;
· Solera National Banks failure to implement its business strategies may adversely affect the Companys financial performance;
· the departures of key personnel or directors may impair Solera National Banks operations;
· Solera National Banks legal lending limits may impair its ability to attract borrowers;
· an economic downturn, especially one affecting Solera National Banks primary service areas, may have an adverse effect on its financial performance;
· the Company could be negatively affected by changes in interest rates;
· the Company is subject to extensive regulatory oversight, which could restrain our growth and profitability;
· the Company may not be able to raise additional capital on terms favorable to it;
· the liquidity of the Company common stock will be affected by its limited trading market;
· monetary policy and other economic factors could adversely affect the Companys profitability;
· the Companys certificate of incorporation and bylaws, and the employment agreements of our Executive Officers, contain provisions that could make a takeover more difficult;
· management of Solera National Bank may be unable to adequately measure and limit credit risk associated with Solera National Banks loan portfolio, which would affect the Companys profitability;
3
· government regulation may have an adverse effect on the Companys profitability and growth;
· the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer, and the Internet; and
· managements ability to manage these and other risks.
For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the Companys 2007 Annual Report filed on Form 10-KSB with the SEC, which is available on the SECs website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof. New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise. In addition, the Company cannot assess the impact of each factor on the Companys business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
4
Solera National Bancorp, Inc.
Balance Sheets as of June 30, 2008 and December 31, 2007
(Unaudited)
|
|
June 30, |
|
December 31, |
|
||
|
|
2008 |
|
2007 |
|
||
ASSETS |
|
|
|
|
|
||
Cash and due from banks |
|
$ |
934,411 |
|
$ |
336,126 |
|
Federal funds sold |
|
2,835,000 |
|
4,970,000 |
|
||
Total cash and cash equivalents |
|
3,769,411 |
|
5,306,126 |
|
||
Investment securities, available-for-sale |
|
30,553,641 |
|
13,860,781 |
|
||
Interest-bearing deposits with banks |
|
598,422 |
|
|
|
||
Loans |
|
11,519,437 |
|
3,814,842 |
|
||
Allowance for loan losses |
|
(134,500 |
) |
(47,396 |
) |
||
Net loans |
|
11,384,937 |
|
3,767,446 |
|
||
Federal Home Loan Bank (FHLB) and Federal Reserve Bank stock |
|
995,150 |
|
525,000 |
|
||
Premises and equipment, net |
|
910,436 |
|
946,681 |
|
||
Interest receivable |
|
255,307 |
|
100,257 |
|
||
Subscriptions receivable |
|
|
|
1,600,000 |
|
||
Other assets |
|
129,306 |
|
281,906 |
|
||
Total assets |
|
$ |
48,596,610 |
|
$ |
26,388,197 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Deposits |
|
|
|
|
|
||
Noninterest-bearing demand |
|
$ |
511,849 |
|
$ |
147,407 |
|
Interest-bearing demand |
|
5,319,135 |
|
315,373 |
|
||
Savings and money market |
|
6,720,859 |
|
1,284,212 |
|
||
Time deposits |
|
5,884,576 |
|
3,252,388 |
|
||
Total deposits |
|
18,436,419 |
|
4,999,380 |
|
||
|
|
|
|
|
|
||
Accrued interest payable |
|
29,497 |
|
16,773 |
|
||
Accounts payable and other liabilities |
|
255,146 |
|
221,772 |
|
||
Federal Home Loan Bank advances |
|
10,000,000 |
|
|
|
||
Deferred rent liability |
|
48,462 |
|
30,254 |
|
||
Capital lease liability |
|
174,366 |
|
191,528 |
|
||
Liability for abandoned lease |
|
72,831 |
|
79,155 |
|
||
|
|
|
|
|
|
||
Total liabilities |
|
$ |
29,016,721 |
|
$ |
5,538,862 |
|
|
|
|
|
|
|
||
COMMITMENTS AND CONTINGENCIES (see Note 11) |
|
|
|
|
|
||
|
|
|
|
|
|
||
STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Common stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 shares issued and outstanding at June 30, 2008 and December 31, 2007 |
|
$ |
25,536 |
|
$ |
25,536 |
|
Additional paid-in capital |
|
25,472,154 |
|
25,347,342 |
|
||
Accumulated deficit |
|
(5,631,487 |
) |
(4,525,955 |
) |
||
Accumulated other comprehensive income (loss) |
|
(286,314 |
) |
2,412 |
|
||
Total stockholders equity |
|
$ |
19,579,889 |
|
$ |
20,849,335 |
|
|
|
|
|
|
|
||
Total liabilities and stockholders equity |
|
$ |
48,596,610 |
|
$ |
26,388,197 |
|
See Notes to Financial Statements.
5
Solera National Bancorp, Inc.
(Unaudited)
|
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
||||||||
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
Interest income: |
|
|
|
|
|
|
|
|
|
||||
Interest and fees on loans |
|
$ |
141,440 |
|
$ |
|
|
$ |
228,602 |
|
$ |
|
|
Interest on federal funds sold |
|
15,891 |
|
|
|
53,066 |
|
|
|
||||
Interest on investment securities |
|
322,009 |
|
|
|
552,811 |
|
|
|
||||
Other interest income |
|
7,545 |
|
1,328 |
|
13,457 |
|
1,328 |
|
||||
Dividends on FHLB and Federal Reserve Bank stocks |
|
10,402 |
|
|
|
18,277 |
|
|
|
||||
Total interest income |
|
497,287 |
|
1,328 |
|
866,213 |
|
1,328 |
|
||||
Interest expense: |
|
|
|
|
|
|
|
|
|
||||
Deposits |
|
98,854 |
|
|
|
186,804 |
|
|
|
||||
Note payable |
|
|
|
42,884 |
|
|
|
74,569 |
|
||||
Federal Home Loan Bank advances |
|
42,346 |
|
|
|
42,346 |
|
|
|
||||
Federal funds purchased |
|
82 |
|
|
|
82 |
|
|
|
||||
Other borrowings |
|
4,197 |
|
|
|
8,593 |
|
|
|
||||
Total interest expense |
|
145,479 |
|
42,884 |
|
237,825 |
|
74,569 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net interest income (expense) |
|
351,808 |
|
(41,556 |
) |
628,388 |
|
(73,241 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Provision for loan loss |
|
50,038 |
|
|
|
87,104 |
|
|
|
||||
Net interest income (expense) after provision for loan loss |
|
301,770 |
|
(41,556 |
) |
541,284 |
|
(73,241 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
||||
Service charges and fees |
|
11,644 |
|
|
|
17,254 |
|
|
|
||||
Sublease income |
|
4,950 |
|
|
|
8,700 |
|
|
|
||||
Gain on sale of securities |
|
5,644 |
|
|
|
45,264 |
|
|
|
||||
Total noninterest income |
|
22,238 |
|
|
|
71,218 |
|
|
|
||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
||||
Salaries and employee benefits |
|
481,050 |
|
|
|
985,120 |
|
|
|
||||
Management fees |
|
|
|
204,396 |
|
|
|
406,312 |
|
||||
Occupancy |
|
113,114 |
|
54,097 |
|
230,881 |
|
108,583 |
|
||||
Professional fees |
|
73,510 |
|
29,200 |
|
145,545 |
|
68,297 |
|
||||
Consulting fees |
|
|
|
6,075 |
|
|
|
42,700 |
|
||||
Other general and administrative |
|
189,276 |
|
162,144 |
|
356,488 |
|
236,728 |
|
||||
Total noninterest expense |
|
856,950 |
|
455,912 |
|
1,718,034 |
|
862,620 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income taxes |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(532,942 |
) |
$ |
(497,468 |
) |
$ |
(1,105,532 |
) |
$ |
(935,861 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic earnings (loss) per share |
|
(0.21 |
) |
NA |
|
(0.43 |
) |
NA |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings (loss) per share |
|
(0.21 |
) |
NA |
|
(0.43 |
) |
NA |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares |
|
|
|
|
|
|
|
|
|
||||
Basic |
|
2,553,671 |
|
NA |
|
2,553,671 |
|
NA |
|
||||
Diluted |
|
2,553,671 |
|
NA |
|
2,553,671 |
|
NA |
|
See Notes to Financial Statements.
6
Solera National Bancorp, Inc.
Statements of Changes in Stockholders Equity for the Six Months Ended June 30, 2008 (Unaudited)
|
|
|
|
|
|
Additional |
|
|
|
Accumulated |
|
|
|
|||||
|
|
Shares |
|
Common |
|
Paid-in |
|
Accumulated |
|
Comprehensive |
|
|
|
|||||
|
|
Outstanding |
|
Stock |
|
Capital |
|
Deficit |
|
Income (loss) |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance at December 31, 2007 |
|
2,553,671 |
|
$ |
25,536 |
|
$ |
25,347,342 |
|
$ |
(4,525,955 |
) |
$ |
2,412 |
|
$ |
20,849,335 |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net loss |
|
|
|
|
|
|
|
(1,105,532 |
) |
|
|
(1,105,532 |
) |
|||||
Net change in unrealized gains (losses) on investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
(288,726 |
) |
(288,726 |
) |
|||||
Total comprehensive income (loss) |
|
|
|
|
|
|
|
(1,105,532 |
) |
(288,726 |
) |
(1,394,258 |
) |
|||||
Stock-based compensation |
|
|
|
|
|
124,812 |
|
|
|
|
|
124,812 |
|
|||||
Balance at June 30, 2008 |
|
2,553,671 |
|
$ |
25,536 |
|
$ |
25,472,154 |
|
$ |
(5,631,487 |
) |
$ |
(286,314 |
) |
$ |
19,579,889 |
|
See Notes to Financial Statements.
7
Solera National Bancorp, Inc.
(Unaudited)
|
|
For the Six Months Ended June 30, |
|
||||
|
|
2008 |
|
2007 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
Net (loss) |
|
$ |
(1,105,532 |
) |
$ |
(935,861 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
54,109 |
|
31,541 |
|
||
Provision for loan losses |
|
87,104 |
|
|
|
||
Net amortization of deferred loan fees/expenses |
|
(653 |
) |
|
|
||
Discount accretion on interest-bearing deposits with banks |
|
(11,796 |
) |
|
|
||
Federal Home Loan Bank stock dividend |
|
(2,500 |
) |
|
|
||
Net amortization of premiums on investment securities |
|
26,983 |
|
|
|
||
Gain on sale of investment securities |
|
(45,264 |
) |
|
|
||
Recognition of stock-based compensation on stock options |
|
124,812 |
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Interest receivable |
|
(155,050 |
) |
|
|
||
Other assets |
|
152,600 |
|
7,590 |
|
||
Deferred offering costs |
|
|
|
(45,181 |
) |
||
Accrued interest payable |
|
12,724 |
|
(4,728 |
) |
||
Accounts payable and other liabilities |
|
9,888 |
|
160,050 |
|
||
Deferred rent liability |
|
18,208 |
|
3,761 |
|
||
Net cash used in operating activities |
|
$ |
(834,367 |
) |
$ |
(782,828 |
) |
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
||
Purchase of investment securities, available-for-sale |
|
$ |
(25,889,302 |
) |
$ |
|
|
Proceeds from sales of investment securities, available-for-sale |
|
4,849,038 |
|
|
|
||
Proceeds from maturities/calls/pay downs of investment securities, available-for-sale |
|
4,076,959 |
|
|
|
||
Issuance of loans, net of paydowns |
|
(7,703,942 |
) |
|
|
||
Purchase of premises and equipment |
|
(17,864 |
) |
(642,142 |
) |
||
Purchase of Federal Home Loan Bank stock |
|
(500,000 |
) |
|
|
||
Proceeds from redemption of Federal Reserve Bank stock |
|
32,350 |
|
|
|
||
Proceeds from maturity of interest-bearing deposits with banks |
|
100,000 |
|
|
|
||
Purchase of interest-bearing deposits with banks |
|
(686,626 |
) |
|
|
||
Net cash used in investing activities |
|
$ |
(25,739,387 |
) |
$ |
(642,142 |
) |
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
Net change in deposits |
|
$ |
13,437,039 |
|
$ |
|
|
Advances from Organizers |
|
|
|
450,000 |
|
||
Proceeds from Federal Home Loan Bank advances |
|
10,000,000 |
|
|
|
||
Proceeds from note payable |
|
|
|
987,890 |
|
||
Proceeds from subscriptions receivable |
|
1,600,000 |
|
|
|
||
Net cash provided by financing activities |
|
$ |
25,037,039 |
|
$ |
1,437,890 |
|
|
|
|
|
|
|
||
Net (decrease)/increase in cash and cash equivalents |
|
$ |
(1,536,715 |
) |
$ |
12,920 |
|
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
||
Beginning of period |
|
5,306,126 |
|
6,978 |
|
||
End of period |
|
$ |
3,769,411 |
|
$ |
19,898 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
225,101 |
|
$ |
|
|
Assets acquired under capital leases |
|
$ |
|
|
$ |
192,350 |
|
Non-cash investing transactions: |
|
|
|
|
|
||
Unrealized loss on investment securities available-for-sale |
|
$ |
(288,726 |
) |
$ |
|
|
See Notes to Financial Statements.
8
SOLERA NATIONAL BANCORP, INC.
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, a national bank that opened for business on September 10, 2007. Solera National Bank is a full-service commercial bank headquartered in Lakewood, Colorado initially serving the Denver metropolitan area.
NOTE 2 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of June 30, 2008, and the results of its operations for the three and six months ended June 30, 2008 and 2007. Cash flows are presented for the six months ended June 30, 2008 and 2007. Certain reclassifications have been made to the consolidated financial statements and related notes of prior periods to conform to the current presentation. These reclassifications had no impact on stockholders equity or net loss for the periods. Additionally, certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission. The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. However, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-KSB as of and for the year ended December 31, 2007.
The Company received approval as a bank in organization in the first quarter of 2007, conducted an initial closing of its common stock offering and commenced banking operations during the third quarter of 2007. Successful completion of the Companys development program and, ultimately, the attainment of profitable operations are dependent on future events, including the successful execution of the Companys business plan and achieving a level of revenue adequate to support the Companys cost structure.
Critical Accounting Policies
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.
Securities available-for-sale: Securities available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things.
Stock-based compensation: The Company accounts for stock-based compensation to employees as outlined in FASB Statement No. 123(R), Share-Based Payment, (SFAS 123R). The cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award.
9
Provision for loan losses: The allowance for loan losses represents the Companys recognition of the risks of extending credit and its evaluation of the loan portfolio. The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses based on managements assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions, historical loss experience, evaluation of the quality of the underlying collateral, and holding and disposal costs. The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. Loan losses are charged against the allowance for loan losses when management believes the loan balance is uncollectible.
The Company has established a formal process for determining an adequate allowance for loan losses. The allowance for loan losses calculation process has two components. The first component represents the allowance for loan losses for impaired loans computed in accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114 Component), as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures - an amendment of FASB Statement No. 114. To determine the SFAS 114 Component, collateral dependent impaired loans are evaluated using internal analyses as well as third-party information, such as appraisals. If an impaired loan is unsecured, it is evaluated using a discounted cash flow of the payments expected over the life of the loan using the loans effective interest rate and giving consideration to currently existing factors that would impact the amount or timing of the cash flows. The second component is the allowance for loan losses calculated under FASB Statement No. 5, Accounting for Contingencies (SFAS 5 Component), and represents the estimated probable losses inherent within the portfolio due to uncertainties in economic conditions, delays in obtaining information about a borrowers financial condition, delinquent loans that have not been determined to be impaired, trends in speculative construction real estate lending, results of internal and external loan reviews, and other factors. This component of the allowance for loan losses is calculated by assigning a certain risk weighting, within a predetermined range, to each identified risk factor. The recorded allowance for loan losses is the aggregate of the SFAS 114 Component and SFAS 5 Component.
Recently Issued Accounting Pronouncements
In May 2008, the FASB issued Financial Accounting Standard No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the hierarchy of principles to be used in the preparation of financial statements that are presented in conformity with GAAP in the United States. The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Companys financial statements.
NOTE 3 INVESTMENTS
The amortized costs and fair values of investment securities as of June 30, 2008 are as follows:
|
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
||||
U.S. government agencies |
|
$ |
4,223,122 |
|
$ |
1,044 |
|
$ |
(63,381 |
) |
$ |
4,160,785 |
|
State and municipal |
|
1,120,227 |
|
|
|
(60,582 |
) |
1,059,645 |
|
||||
Mortgage-backed securities |
|
25,496,606 |
|
32,685 |
|
(196,080 |
) |
25,333,211 |
|
||||
Total securities available-for-sale |
|
$ |
30,839,955 |
|
$ |
33,729 |
|
$ |
(320,043 |
) |
$ |
30,553,641 |
|
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 and whether the Company has the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. All of the Banks investment securities were purchased during either the fourth quarter of 2007 or the first six months of 2008, therefore, no securities have been in a continuous loss position for over twelve months. As of June 30, 2008, no declines in value are deemed to be other than temporary.
As a consequence of higher long-term interest rates due to wider spreads, increased volatility and a shift in Federal Reserve sentiment, the Company recorded a net unrealized loss in the investment portfolio of $286,000 at June 30, 2008. Management continued to build the Companys investment portfolio which increased $16.9 million, or 122%, from an amortized cost of $13.9 million at December 31, 2007 to an amortized cost of $30.8 million at June 30, 2008.
10
The Company sold six securities during the first quarter 2008 for a realized gain of $39,620 and the Company sold five securities during the second quarter 2008 for a net realized gain of $5,644.
Securities with carrying values of $3.7 million at June 30, 2008 and $495,000 at December 31, 2007, were pledged as collateral to secure public deposits. Securities with carrying values of $892,000 and $0 were pledged to secure a line-of-credit with the Bankers Bank of the West at June 30, 2008 and December 31, 2007, respectively. Securities with carrying values of $13.9 million and $0 were pledged to secure Federal Home Loan Bank advances at June 30, 2008 and December 31, 2007, respectively.
NOTE 4 INTEREST-BEARING DEPOSITS WITH BANKS
During the first quarter 2008, the Company invested approximately $700,000 in FDIC-insured certificates of deposit that earn a weighted-average yield of 4.13% and mature between June and September 2008. During the second quarter 2008, $100,000 of such deposits matured.
NOTE 5 LOANS
Loans consist of the following:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|||
Real estate commercial |
|
$ |
5,324,162 |
|
$ |
3,003,274 |
|
|
Construction and land development |
|
2,904,619 |
|
399,732 |
|
|||
Commercial and industrial |
|
1,018,414 |
|
188,684 |
|
|||
Real estate residential |
|
2,045,911 |
|
190,557 |
|
|||
Consumer |
|
249,449 |
|
29,407 |
|
|||
Gross loans |
|
11,542,555 |
|
3,811,654 |
|
|||
Less: |
Allowance for loan losses |
|
(134,500 |
) |
(47,396 |
) |
||
|
Deferred loan fees and expenses, net |
|
(23,118 |
) |
3,188 |
|
||
Loans, net |
|
$ |
11,384,937 |
|
$ |
3,767,446 |
|
During the first six months of 2008, no loans were impaired, transferred to foreclosed properties or past due.
In the ordinary course of business, and only if consistent with permissible exceptions to Section 402 of the Sarbanes- Oxley Act of 2002, the Bank may make loans to directors, executive officers, principal stockholders (holders of more than five percent of the outstanding common shares) and the businesses with which they are associated. In the Companys opinion, all loans and loan commitments to such parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons.
The following table details loans receivable from related parties as of June 30, 2008:
|
|
2008 |
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
$ |
|
|
New loans |
|
811,000 |
|
|
Payments |
|
6,733 |
|
|
Balance at June 30, 2008 |
|
$ |
804,267 |
|
There were no loans receivable from related parties at December 31, 2007.
11
NOTE 6 ALLOWANCE FOR LOAN LOSSES
Activity in the allowance is summarized as follows:
|
|
2008 |
|
2007 |
|
||
|
|
|
|
|
|
||
Allowance at January 1, |
|
$ |
47,396 |
|
$ |
|
|
Loans charged off |
|
|
|
|
|
||
Recoveries on loans previously charged off |
|
|
|
|
|
||
Provision for loan losses |
|
87,104 |
|
|
|
||
Allowance at June 30, |
|
$ |
134,500 |
|
$ |
|
|
NOTE 7 DEPOSITS
Deposits are summarized as follows:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
||||||
|
|
Amount |
|
% of |
|
Amount |
|
% of |
|
||
Noninterest-bearing demand |
|
$ |
511,849 |
|
3 |
% |
$ |
147,407 |
|
3 |
% |
Interest-bearing demand |
|
5,319,135 |
|
29 |
|
315,373 |
|
6 |
|
||
Money market accounts |
|
6,600,700 |
|
36 |
|
1,271,665 |
|
26 |
|
||
Savings accounts |
|
120,159 |
|
|
|
12,547 |
|
|
|
||
Certificates of deposits, less than $100,000 |
|
1,598,778 |
|
9 |
|
352,388 |
|
7 |
|
||
Certificates of deposits, greater than $100,000 |
|
4,285,798 |
|
23 |
|
2,900,000 |
|
58 |
|
||
Total deposits |
|
$ |
18,436,419 |
|
100 |
% |
$ |
4,999,380 |
|
100 |
% |
In the ordinary course of business, certain officers, directors, stockholders, and employees of the Bank have deposits with the Bank. In the Banks opinion, all deposit relationships with such parties are made on substantially the same terms including interest rates and maturities, as those prevailing at the time for comparable transactions with other persons. The balance of related party deposits at June 30, 2008 and December 31, 2007 was approximately $2.5 million and $2.1 million, respectively.
NOTE 8 STOCK-BASED COMPENSATION
The Companys 2007 Stock Incentive Plan (the Plan) was approved by the Companys Board of Directors (the Board) with an effective date of September 10, 2007 and was approved by the Companys stockholders at the annual meeting held on June 17, 2008. Under the terms of the Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also officers or employees, may only be granted nonqualified stock options. The Board reserved 510,734 shares of common stock for issuance under the Plan. The Plan provides for options to purchase shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant. Stock options expire no later than ten years from the date of the grant and generally vest over four years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. The Company recognized stock-based compensation cost of approximately $62,000 and $125,000 during the three and six months ended June 30, 2008, respectively. The Company recognized stock-based compensation cost of $0 during both the three and six months ended June 30, 2007. No tax benefit related to stock-based compensation will be recognized until the Company is profitable.
The Company accounts for its stock-based compensation under the provisions of SFAS 123R. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model. No options were granted during the first quarter 2008 and 1,250 options were granted during the second quarter 2008. No options were granted during the six months ended June 30, 2007.
No options were exercised or vested and 500 options were forfeited during the six months ended June 30, 2008. During this same period, the Company recognized expense for approximately 49,000 options, representing a pro-rata amount of the options that will vest at the end of year one. As of June 30, 2008, there was approximately $807,000
12
of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted-average period of 3.23 years.
The following is a summary of the Companys non-vested options at June 30, 2008:
|
|
Shares |
|
Weighted- |
|
|
Non-vested at January 1, 2008 |
|
397,846 |
|
$ |
2.74 |
|
Granted |
|
1,250 |
|
2.13 |
|
|
Vested |
|
|
|
|
|
|
Forfeited |
|
(500 |
) |
2.75 |
|
|
Non-vested at June 30, 2008 |
|
398,596 |
|
$ |
2.73 |
|
NOTE 9 NONINTEREST EXPENSE
The following table details the items comprising Other general and administrative expenses:
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
||||||||
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
Marketing and promotions |
|
$ |
58,739 |
|
$ |
64,500 |
|
$ |
125,897 |
|
$ |
72,129 |
|
Data processing |
|
51,742 |
|
411 |
|
98,652 |
|
430 |
|
||||
Printing, stationery and supplies |
|
23,462 |
|
26,324 |
|
32,898 |
|
46,225 |
|
||||
Regulatory and reporting fees |
|
15,548 |
|
881 |
|
29,304 |
|
881 |
|
||||
Travel and entertainment |
|
8,040 |
|
13,837 |
|
12,682 |
|
23,304 |
|
||||
Telephone/communication |
|
6,104 |
|
8,239 |
|
13,287 |
|
11,497 |
|
||||
Insurance |
|
4,373 |
|
2,065 |
|
9,118 |
|
3,510 |
|
||||
Dues and memberships |
|
2,961 |
|
|
|
8,011 |
|
|
|
||||
Training and education |
|
2,758 |
|
|
|
5,243 |
|
|
|
||||
Postage and shipping |
|
2,465 |
|
4,901 |
|
4,416 |
|
6,219 |
|
||||
Temporary staffing |
|
|
|
33,294 |
|
|
|
63,987 |
|
||||
Miscellaneous |
|
13,084 |
|
7,692 |
|
16,980 |
|
8,546 |
|
||||
Total |
|
$ |
189,276 |
|
$ |
162,144 |
|
$ |
356,488 |
|
$ |
236,728 |
|
NOTE 10 INCOME TAXES
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset account recognized in the accompanying statements of financial condition:
13
|
|
June 30, 2008 |
|
December 31, 2007 |
|
||
Deferred tax assets: |
|
|
|
|
|
||
Start-up and organizational expenses |
|
$ |
1,251,436 |
|
$ |
1,295,346 |
|
Net operating loss carryforward |
|
681,674 |
|
283,720 |
|
||
Allowance for loan losses |
|
20,480 |
|
7,235 |
|
||
Other |
|
80,636 |
|
71,070 |
|
||
Total deferred tax assets |
|
2,034,226 |
|
1,657,371 |
|
||
Deferred liabilities: |
|
|
|
|
|
||
Federal Home Loan Bank stock dividend |
|
(926 |
) |
|
|
||
Tax over book depreciation |
|
(9,000 |
) |
(1,895 |
) |
||
Total deferred tax liabilities |
|
(9,926 |
) |
(1,895 |
) |
||
|
|
|
|
|
|
||
Net deferred tax assets |
|
2,024,300 |
|
1,655,476 |
|
||
|
|
|
|
|
|
||
Valuation allowance |
|
(2,024,300 |
) |
(1,655,476 |
) |
||
|
|
|
|
|
|
||
Net deferred taxes |
|
$ |
|
|
$ |
|
|
The Company has provided a 100% valuation allowance for its net deferred tax asset due to uncertainty of realization during the carryforward period. The Company has net operating loss carryforwards of approximately $1.8 million for federal income tax purposes. Federal net operating loss carry forwards, to the extent not used, will expire beginning in 2027.
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations for the six months ended June 30, 2008 and the twelve months ended December 31, 2007 due to the following:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
||
Computed expected tax benefit |
|
$ |
(386,937 |
) |
$ |
(851,948 |
) |
Change in income taxes resulting from: |
|
|
|
|
|
||
Change in valuation allowance |
|
368,824 |
|
881,024 |
|
||
Other |
|
18,113 |
|
(29,076 |
) |
||
Income tax provision |
|
$ |
|
|
$ |
|
|
NOTE 11 COMMITMENTS AND CONTINGENCIES
The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
At June 30, 2008 and December 31, 2007 the following financial instruments were outstanding whose contract amounts represent credit risk:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
||
Financial instruments whose contractual amounts
represent |
|
|
|
|
|
||
Commitments to extend credit |
|
$ |
4,095,655 |
|
$ |
2,522,059 |
|
Letters of credit |
|
|
|
9,000 |
|
||
Total commitments |
|
$ |
4,095,655 |
|
$ |
2,531,059 |
|
14
Total commitments of $4.1 million were outstanding at June 30, 2008 and consisted of $4.0 million at variable rates and $145,000 at fixed rates. Total commitments of $2.5 million were outstanding at December 31, 2007 and consisted of $2.4 million at variable rates and $88,000 at fixed rates.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitments do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained is based on managements credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
NOTE 12 FAIR VALUE MEASUREMENTS (SFAS 157 DISCLOSURE)
Effective January 1, 2008, the Company determines the fair market values of its financial instruments based on the fair value hierarchy established in SFAS No. 157, Fair Value Measurements (SFAS 157), which 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, as follows, that may be used to measure fair value.
Level 1 |
|
inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
|
|
|
Level 2 |
|
inputs are other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-based valuation techniques for which all significant assumptions are observable in the market. |
|
|
|
Level 3 |
|
valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
The Company carries its available-for-sale securities at fair value. Fair value measurement is obtained from independent pricing services which utilize observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and conditions, among other things. As of June 30, 2008, all of the Companys available-for-sale securities, $30.5 million, were valued using Level 2 inputs.
15
The following discussion and analysis presents the Companys consolidated financial condition as of June 30, 2008 and results of operations for the three and six months ended June 30, 2008 and 2007, respectively. The discussion should be read in conjunction with the financial statements and the notes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.
EXECUTIVE OVERVIEW
We are a Delaware corporation that was incorporated on January 12, 2006 to organize and serve as the holding company for Solera National Bank, a national bank that opened for business on September 10, 2007. Solera National Bank is a full-service commercial bank headquartered in Lakewood, Colorado serving the Denver metropolitan area. Our main banking office is located at 319 S. Sheridan Blvd., Lakewood, Colorado 80226. Our telephone number is (303) 209-8600.
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 more efficiently and effectively. Solera National Bank competes on the basis of providing a unique and personalized banking experience combined with a full range of services, customized and tailored to fit the individual needs of its clients. Solera National Bank serves the entire market area and, in addition, has a special niche focus on the local Hispanic population due to the significant growth of this demographic.
As of June 30, 2008, the Company had, on a consolidated basis, total assets of $48.6 million, net loans of $11.4 million, total deposits of $18.4 million, and stockholders equity of $19.6 million. In 2007, the Company completed an initial public offering of its common stock, issuing 2,553,671 shares at a price of $10.00 per share. The gross proceeds received from the offering were approximately $25.5 million.
Results of Operations for the Three Months Ended June 30, 2008
The following discussion focuses on the Companys financial condition and results of operations for the three months ended June 30, 2008. The Companys principal operations for the three months ended June 30, 2008 consisted of the operations of Solera National Bank, which opened for business September 10, 2007. The following discussion is limited and does not include a discussion of the comparison to prior financial results for the three months ended June 30, 2007, since the Bank was not open for business during the second quarter of 2007. As such, a discussion of the comparison to prior financial results is not meaningful to an understanding of our current business and, therefore, has been omitted from this Report.
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income, principally from loan and investment security portfolios, and interest expense, principally on customer deposits and borrowings. Net interest income is our principal source of earnings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income was $352,000 in the second quarter of 2008. Our annualized net interest margin was 3.55% for the three months ended June 30, 2008.
Total interest income was $497,000 for the second quarter of 2008 consisting primarily of interest on investment securities of $322,000, interest and fees on loans of $141,000 and dividends on bank stocks of $10,000. Average net loans were $9.1 million, and other average interest-earning assets were $30.6 million, consisting primarily of average available-for-sale securities of $26.9 million, average federal funds sold of $3.0 million and average certificates of deposits with banks of $682,000.
16
Total interest expense was $145,000 in the second quarter of 2008. This consisted primarily of interest expense on certificates of deposit over $100,000 of $47,000, interest expense on Federal Home Loan bank advances of $42,000 and interest expense on money market accounts of $40,000.
Provision for Loan Losses
We determine a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the section of this discussion and analysis captioned Allowance for Loan Losses.
In the second quarter of 2008, our provision for loan losses was $50,000 relating to the growth of our loan portfolio and the estimated probable losses inherent within the portfolio due to uncertainties in economic conditions. There were no loans specifically reserved for under the SFAS 114 Component of the loan loss reserve. Furthermore, there were no charge-offs or non-performing loans during the second quarter of 2008.
Noninterest Income
The noninterest income for the quarter ended June 30, 2008 was $22,000, consisting primarily of deposit service charges and fees of $12,000. Additionally, the Company earned $5,000 in sublease income for offices within the Banks main office building that are leased to third parties and $6,000 in net gains on investment securities sold during the second quarter.
Noninterest Expense
Our total noninterest expense was $857,000 for the quarter ended June 30, 2008. This consisted of salaries and benefits of $481,000, occupancy expenses of $113,000, primarily for lease expense for the banks main office building, and professional fees of $73,000, for external audit, legal and consulting fees. The Company employed 18 full-time equivalent employees as of June 30, 2008.
Other general and administrative expenses totaled $189,000 for the quarter ended June 30, 2008 and consisted of marketing and promotional expenses of $59,000 as the Bank continued to raise community awareness of the Banks products and services. Data processing fees were $52,000 and include the costs to operate the Banks primary banking software. Printing, stationery and supplies were $23,000 primarily associated with the printing of the Annual Report and Proxy statement for the first annual meeting of shareholders. Regulatory and reporting fees were $16,000 primarily attributable to bank assessment fees paid to the Office of the Comptroller of the Currency, the Federal Reserve Bank, and the Federal Deposit Insurance Corporation as well as fees associated with filing reports with the Securities and Exchange Commission. Other expenses of $39,000 included $8,000 for travel and entertainment, $6,000 for telephone and communication lines, $4,000 for insurance, $3,000 for dues and memberships, $3,000 for training and education, $2,000 for postage and shipping, and $13,000 for other miscellaneous expenses.
Income Taxes
No federal or state tax expense has been recorded for the quarter ended June 30, 2008, based upon net operating losses. Since it is uncertain that the Company will become profitable, the deferred tax benefit accumulated to date has a full valuation allowance so that the net deferred tax benefit at June 30, 2008 is $0.
Results of Operations for the Six Months Ended June 30, 2008
The following discussion focuses on the Companys financial condition and results of operations for the six months ended June 30, 2008. The Companys principal operations for the six months ended June 30, 2008 consisted of the operations of Solera National Bank, which opened for business September 10, 2007. The following discussion is limited and does not include a discussion of the comparison to prior financial results for the six months ended June 30, 2007, since the Bank was not open for business during the first six months of 2007. As such, a discussion of the comparison to prior financial results is not meaningful to an understanding of our current business and, therefore, has been omitted from this Report.
17
Net Interest Income and Net Interest Margin
Net interest income was $628,000 for the six months ended June 30, 2008. Our annualized net interest margin was 3.68% for the same period.
Total interest income was $866,000 for the six months ended June 30, 2008 consisting primarily of interest on investment securities of $553,000 and interest on loans of $229,000. During this period, average net loans were $7.2 million and other average interest-earning assets were $27.3 million.
Total interest expense was $238,000 in the first six months of 2008. This consisted primarily of interest expense on certificates of deposit over $100,000 of $97,000, interest expense on money market accounts of $72,000, and $51,000 for interest on other borrowings.
Provision for Loan Losses
During the first six months of 2008, our provision for loan losses was $87,000 relating to the growth of our loan portfolio and the estimated probable losses inherent within the portfolio due to uncertainties in economic conditions. There were no loans specifically reserved for under the SFAS 114 Component of the loan loss reserve. Furthermore, there were no charge-offs or non-performing loans during this period.
Noninterest Income
The noninterest income for the six months ended June 30, 2008 was $71,000, consisting primarily of gains on the sale of investment securities of $45,000. Additionally, the Company earned $17,000 in deposit service charges and fees, and $9,000 in sublease income for an office within the Banks main office building that is leased to a third party.
Noninterest Expense
Our total noninterest expense was $1.7 million for the six months ended June 30, 2008. This consisted of salaries and benefits of $985,000, occupancy expenses of $231,000, primarily for rental expense for the banks main office building, and professional fees of $146,000 for external audit, legal and consulting fees.
Other general and administrative expenses totaled $356,000 for the six months ended June 30, 2008 and consisted of marketing and promotional expenses of $126,000 as management focused on raising awareness in the community of the Banks products and services. Data processing fees were $99,000 and include the costs to run the Banks main banking software. Printing, stationery and supplies were $33,000 and include the costs to print the Annual Report and Proxy statement. The remainder of the expenses included regulatory and reporting fees of $29,000, travel and entertainment expenses of $13,000, telephone and communication expenses of $13,000, insurance expenses of $9,000, dues and memberships of $8,000, training and education of $5,000, postage and shipping of $4,000 and other miscellaneous office expenses of $17,000.
Financial Condition
Customer deposits, Federal Home Loan Bank advances, and proceeds from the initial public offering completed in 2007 were primarily invested in loans, investment securities and federal funds sold, resulting in total assets as of June 30, 2008 of $48.6 million.
As of June 30, 2008, stockholders equity was $19.6 million, as a result of the initial public offering, partially offset by the inception-to-date losses from start-up activities and current operations.
Short-Term Investments and Interest-bearing Deposits in Other Financial Institutions
At June 30, 2008, Solera National Bank had $2.8 million in federal funds sold and $598,000 in interest-bearing deposits with other financial institutions. These short-term investments and interest-bearing deposits allow Solera National Bank to meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested.
18
Federal Home Loan Bank and Federal Reserve Bank Stock
At June 30, 2008, the Bank had a total of $995,000 invested in bank stocks carried at amortized cost consisting of $493,000 in Federal Reserve Bank stock and $502,000 in Federal Home Loan Bank stock. These investments allow Solera National Bank to conduct business with these entities. As of June 30, 2008, the Federal Reserve Bank stock is yielding an average of 6.0% and the Federal Home Loan Bank stock is yielding an average interest rate of 4.2%.
Investment Securities
Our investment portfolio serves as a source of interest income and, secondarily, as a source of liquidity and a management tool for our interest rate sensitivity. We manage our investment portfolio according to a written investment policy established by our Board of Directors.
At June 30, 2008, Solera National Banks securities consisted of available-for-sale securities of $30.6 million. The following table provides additional detail on the Companys investment securities as of June 30, 2008 and December 31, 2007:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
||||||
|
|
Estimated Fair |
|
Weighted |
|
Estimated Fair |
|
Weighted |
|
||
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
||
U.S. government agencies |
|
$ |
4,160,785 |
|
5.08 |
% |
$ |
3,508,333 |
|
5.09 |
% |
State and municipal |
|
1,059,645 |
|
5.43 |
|
1,117,262 |
|
5.43 |
|
||
Mortgage-backed securities |
|
25,333,211 |
|
5.19 |
|
9,235,186 |
|
5.34 |
|
||
Total securities available-for-sale |
|
$ |
30,553,641 |
|
5.18 |
% |
$ |
13,860,781 |
|
5.29 |
% |
Loan Portfolio
Our primary focus is income from interest on loans. The following table presents the composition of our loan portfolio by category as of the dates indicated:
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|||||||
|
|
Amount |
|
% of |
|
Amount |
|
% of |
|
|||
Real estate commercial |
|
$ |
5,324,162 |
|
46 |
% |
$ |
3,003,274 |
|
79 |
% |
|
Construction and land development |
|
2,904,619 |
|
25 |
|
399,732 |
|
10 |
|
|||
Commercial and industrial |
|
1,018,414 |
|
9 |
|
188,684 |
|
5 |
|
|||
Real estate residential |
|
2,045,911 |
|
18 |
|
190,557 |
|
5 |
|
|||
Consumer |
|
249,449 |
|
2 |
|
29,407 |
|
1 |
|
|||
Gross loans |
|
11,542,555 |
|
100 |
% |
3,811,654 |
|
100 |
% |
|||
Less: |
Allowance for loan losses |
|
(134,500 |
) |
|
|
(47,396 |
) |
|
|
||
|
Deferred loan fees and expenses, net |
|
(23,118 |
) |
|
|
3,188 |
|
|
|
||
Loans, net |
|
$ |
11,384,937 |
|
|
|
$ |
3,767,446 |
|
|
|
As of June 30, 2008, net loans were $11.4 million, a 202%, or $7.6 million increase from $3.8 million at December 31, 2007. Net loans as a percentage of total assets were 23% as of June 30, 2008, compared to 14% at December 31, 2007.
The real estate commercial loan portfolio consists primarily of lines of credit or term loans to businesses that are secured by real estate. At June 30, 2008, there were $5.3 million real estate commercial loans in the loan portfolio, an increase of 77%, or $2.3 million from $3.0 million at December 31, 2007.
The construction and land development loan portfolio is comprised of construction loans for owner-occupied construction and development loans for property being constructed and sold to third parties. At June 30, 2008,
19
construction and land development loans totaled $2.9 million, an increase of $2.5 million from $400,000 at December 31, 2007.
The commercial and industrial loan portfolio consists of loans to businesses primarily for working capital lines of credit. At June 30, 2008, commercial and industrial loans totaled $1.0 million, an $830,000 increase from $189,000 at December 31, 2007.
The real estate residential loan portfolio consists of residential second mortgage loans, home equity loans and lines of credit and home improvement loans. At June 30, 2008, $2.0 million was outstanding for residential real estate loans, an increase of $1.9 million from $191,000 outstanding at December 31, 2007.
The consumer and other loan portfolio consists of personal lines of credit, loans to acquire personal assets such as automobiles and boats and overdraft protection balances for our deposit customers. As of June 30, 2008, there were $249,000 consumer and other loans in the loan portfolio, an increase of $220,000 from December 31, 2007.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. The Banks loan portfolio generally consists of loans to borrowers within Colorado. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, the Banks 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. Also, since the Banks loan portfolio is in the initial stages, it contains only 62 funded loans, with the four largest loans comprising approximately 52% of the portfolios gross value. However, management expects this concentration to diminish over time as the Banks loan portfolio continues to grow. No single borrower can be approved for a loan over the Banks current legal lending limit of approximately $2.5 million. This regulatory requirement helps to ensure the Banks exposure to one individual customer is limited.
Management may renew loans at maturity when requested by a customer whose financial strength appears to support such a renewal or when such a renewal appears to be in the best interest of Solera National Bank. Solera National Bank requires payment of accrued interest in such instances and may adjust the rate of interest, require a principal reduction, or modify other terms of the loan at the time of renewal.
Loan terms vary according to loan type. The following table shows the contractual maturity distribution of loans as of June 30, 2008:
|
|
As of June 30, 2008 |
|
||||||||||||||||
|
|
|
|
Over 1 Year |
|
Over 5 Years |
|
|
|
||||||||||
|
|
One Year |
|
Fixed |
|
Floating or |
|
Fixed |
|
Floating or |
|
Total |
|
||||||
Real estate commercial |
|
$ |
|
|
$ |
2,989,649 |
|
$ |
1,334,513 |
|
$ |
1,000,000 |
|
$ |
|
|
$ |
5,324,162 |
|
Construction and land development |
|
560,000 |
|
920,000 |
|
1,424,619 |
|
|
|
|
|
2,904,619 |
|
||||||
Commercial and industrial |
|
869,011 |
|
3,243 |
|
146,160 |
|
|
|
|
|
1,018,414 |
|
||||||
Real estate residential |
|
|
|
40,000 |
|
|
|
47,308 |
|
1,958,603 |
|
2,045,911 |
|
||||||
Consumer |
|
231,499 |
|
17,950 |
|
|
|
|
|
|
|
249,449 |
|
||||||
Gross loans |
|
$ |
1,660,510 |
|
$ |
3,970,842 |
|
$ |
2,905,292 |
|
$ |
1,047,308 |
|
$ |
1,958,603 |
|
$ |
11,542,555 |
|
Nonperforming Loans, Leases and Assets
Nonperforming assets consist of loans and leases on nonaccrual status, loans 90 days or more past due and still accruing interest, loans that have been restructured resulting in a reduction or deferral of interest or principal, OREO, and other repossessed assets. As of June 30, 2008, there were no nonperforming assets.
A potential problem loan is defined as a loan where information about possible credit problems of the borrower is known, causing management to have serious doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the inclusion of such loan in one of the nonperforming asset categories. An
20
internally classified loan list is maintained that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as special mention are those that contain a weakness that, if left unattended, could develop into a problem affecting the ultimate collectibility of the loan. Loans classified as substandard are those loans with clear and defined weaknesses, such as highly leveraged positions, unfavorable financial ratios, uncertain repayment resources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as doubtful are those loans that have characteristics similar to substandard loans, but also have an increased risk that loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as loss are those loans that are in the process of being charged-off. Solera National Bank had no loans classified in these categories at June 30, 2008.
Allowance for Loan Losses
Implicit in Solera National Banks lending activities is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the creditworthiness of the borrower over the term of the loan. To reflect the currently perceived risk of loss associated with the loan portfolio, additions are made to the allowance for loan losses in the form of direct charges against income to ensure that the allowance is available to absorb possible loan losses. The factors that influence the amount include, among others, the remaining collateral and/or financial condition of the borrowers, historical loan loss, changes in the size and composition of the loan portfolio, and general economic conditions.
The amount of the allowance equals the cumulative total of the provisions made from time to time, reduced by loan charge-offs and increased by recoveries of loans previously charged-off. Until management has adequate historical data upon which to base the estimate of the allowance for loan losses, information regarding the ability of the borrower to repay the loan, current economic conditions and other pertinent factors will be considered. The allowance was $134,500, or 1.17% of outstanding principal as of June 30, 2008.
Credit and loan decisions are made by management and the Board of Directors in conformity with loan policies established by the Board of Directors. Solera National Banks practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrowers failure to meet repayment terms, the borrowers deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loans classification as a loss by regulatory examiners, or other reasons. During the six months ended June 30, 2008, there were no charge-offs.
Non-earning Assets
Premises, leasehold improvements and equipment totaled $910,000 at June 30, 2008. Due to the Banks growth, management has decided to re-occupy property that was abandoned in July 2007. Management anticipates the re-occupancy to occur on approximately September 1, 2008 with the space to be used for administrative purposes. Upon re-occupying the space, the remaining lease abandonment liability will be reversed resulting in a credit to rent expense during the third quarter 2008. Subsequently, rent expense will increase for the monthly rental expense associated with occupying the premises. At the present time, management anticipates occupying the premises for the remainder of the lease term, which expires in August 2011, and will determine prior to the expiration of the lease whether to renew for an additional 5-year term.
Off-Balance Sheet Arrangements
Neither the Company nor Solera National Bank has any material off-balance sheet arrangements.
21
Borrowings
During the second quarter 2008, the Bank borrowed $10.0 million from the Federal Home Loan Bank of Topeka (FHLB) in order to finance the purchase of investment securities. The FHLB advances mature between April 16, 2009 and June 20, 2013. The advances have a weighted-average fixed interest rate of 3.73%.
The Bank has also established an unsecured Fed Funds line-of-credit with Bankers Bank of the West and First Tennessee as well as a secured Fed Funds line with Bankers Bank of the West. As of June 30, 2008, the Company had $0 outstanding on these lines.
Loan Commitments
At June 30, 2008, the Company had $4.1 million in outstanding loan origination commitments. Management believes Solera National Bank has sufficient funds available to meet current origination and other lending commitments.
Capital Resources and Capital Adequacy Requirements
The risk-based capital regulations established and administered by the banking regulatory agencies are applicable to Solera National Bank. Risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under the regulations, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8.0%, Tier 1 capital to risk-weighted assets of 4.0%, and Tier 1 capital to total average assets of 4.0%. Failure to meet these capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Solera National Banks financial statements.
As of June 30, 2008, Solera National Bank was categorized as well-capitalized. A well-capitalized institution must maintain a minimum ratio of total capital to risk-weighted assets of at least 10.0%, a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, and a minimum ratio of Tier 1 capital to total average assets of at least 5.0% and must not be subject to any written order, agreement, or directive requiring it to meet or maintain a specific capital level.
The following table summarizes the ratios of the Bank and the regulatory minimum capital requirements at June 30, 2008:
As of June 30, 2008 |
|
Actual |
|
For Capital Adequacy |
|
To Be Well Capitalized |
|
|||||||||
($ in thousands) |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||
Total Capital (to risk-weighted assets) |
|
$ |
16,033 |
|
75.4 |
% |
$ |
1,701 |
|
>8.0 |
% |
$ |
2,127 |
|
>10.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
$ |
15,899 |
|
74.8 |
% |
$ |
851 |
|
>4.0 |
% |
$ |
1,276 |
|
>6.0 |
% |
Tier 1 capital (to average assets) |
|
$ |
15,899 |
|
38.4 |
% |
$ |
1,657 |
|
>4.0 |
% |
$ |
2,071 |
|
>5.0 |
% |
22
Liquidity
The primary source of liquidity for the Company will be dividends paid by Solera National Bank. Solera National Bank is currently restricted from paying dividends without regulatory approval that will not be granted until the accumulated deficit has been eliminated.
Solera National Banks liquidity is monitored by its staff, the Asset Liability Committee and the Board of Directors, who will review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.
Solera National Banks primary sources of funds will be retail and commercial deposits, loan and securities repayments, other short-term borrowings, and other funds provided by operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions, and competition. Solera National Bank will maintain investments in liquid assets based upon managements assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset/liability management program.
As loan demand increases, greater pressure will be exerted on Solera National Banks liquidity. However, it is managements intention to maintain a conservative loan to deposit ratio in the range of 80 - 90% over time. Given this goal, Solera National Bank will not aggressively pursue lending opportunities if sufficient funding sources (e.g., deposits, Federal Funds, etc.) are not available, nor will Solera National Bank seek to attract transient volatile, non-local deposits with above market interest rates. As of June 30, 2008, the loan to deposit ratio was 62%.
Solera National Bank had cash and cash equivalents of $3.8 million, or 8% of total Bank assets, at June 30, 2008. Management feels Solera National Bank should have more than adequate liquidity to meet anticipated future funding needs.
As a smaller reporting company, the Company is not required to provide the information required by this Item.
Disclosure Controls and Procedures
Management is responsible for maintaining effective disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, management evaluated the effectiveness and operation of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, both the Companys Principal Executive Officer and Principal Accounting and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported to management within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in internal controls over financial reporting during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.
23
Not applicable.
As a smaller reporting company, the Company is not required to provide the information required by this Item.
Not applicable.
Not applicable.
On June 17, 2008, the Company held its annual meeting of stockholders. At that meeting, the security holders voted on the following items:
1. Election of directors. The following fifteen directors, comprising the entire board of directors on that date, were reelected as directors of the Company to serve until the next annual meeting of stockholders:
Name |
|
Term |
|
Votes Cast |
|
Votes |
|
|
|
|
|
|
|
|
|
Norma R. Akers |
|
1 year |
|
1,667,440 |
|
850 |
|
Rob L. Alvarado |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Maria G. Arias |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Douglas Crichfield |
|
1 year |
|
1,641,346 |
|
26,944 |
|
Paul M. Ferguson |
|
1 year |
|
1,656,056 |
|
12,234 |
|
James C. Foster |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Robert M. Gallegos |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Steve D. Gutterman |
|
1 year |
|
1,657,440 |
|
10,850 |
|
Ronald E. Montoya |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Ray L. Nash |
|
1 year |
|
1,657,440 |
|
10,850 |
|
Joel S. Rosenstein |
|
1 year |
|
1,649,440 |
|
18,850 |
|
Basil Sabbah |
|
1 year |
|
1,649,440 |
|
18,850 |
|
F. Stanley Sena |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Mark R. Smith |
|
1 year |
|
1,664,940 |
|
3,350 |
|
Kent C. Veio |
|
1 year |
|
1,649,940 |
|
18,350 |
|
2. Stockholders voted to approve the 2007 Stock Incentive Plan. The results of the vote were as follows: votes cast for the proposal were 1,514,953; votes cast against the proposal were 81,231; and abstentions were 21,856.
3. Stockholders voted to ratify the selection of McGladrey & Pullen, LLP as Solera National Bancorps independent registered public accounting firm for the fiscal year ending December 31, 2008. The results of the vote were as follows: votes cast for the proposal were 1,651,196; votes cast against the proposal were 13,594; and abstentions were 3,500.
24
Not applicable.
31.1 |
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.* |
31.2 |
|
Certification of Principal Accounting and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.* |
32.1 |
|
Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.* |
* Filed herewith.
25
SOLERA NATIONAL BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
SOLERA NATIONAL BANCORP, INC. |
|
(Registrant) |
|
|
Date: August 14, 2008 |
/s/ Paul M. Ferguson |
|
Paul M. Ferguson |
|
President |
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ Robert J. Fenton |
|
Robert J. Fenton |
|
Vice President, Secretary & Treasurer |
|
(Principal Accounting and Chief Financial Officer) |
26
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
31.1 |
|
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act |
|
|
|
31.2 |
|
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act |
|
|
|
32.1 |
|
Certification pursuant to Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350 |
27