Edgar Filing: Solera National Bancorp, Inc.

slrk_10q.htm

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

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.

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.

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.

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.

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)

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.

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.

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).

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.

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

($ 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			Estimated Fair Value			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

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.

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.

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

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

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

	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.

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		45
Total	$	139	$	1,210	$	—	$	610	$	1,959	$	53,686	$	55,645

Credit Quality Information

The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance and are the same for all classes of loans:

Special Mention:

Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment at some future date.

Substandard:

Loans in this category are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. These loans have well-defined weaknesses that jeopardize the liquidation of the debt and have the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful:

Loans in this category have all the weaknesses inherent in those classified as substandard, above, with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss:

Loans in this category are deemed not collectible and are charged-off.

Loans not meeting any of the definitions above are considered to be pass rated loans.

As of March 31, 2012, and based on the most recent analysis performed during the month of March 2012, the recorded investment in each risk category of loans by class of loan is as follows:

	Credit Quality of Loans by Class as of March 31, 2012
($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
CRE – owner occupied	$	13,512	$	1,759	$	1,521	$	—	$	16,792
CRE – non-owner occupied		15,549		1,107		251		—		16,907
Commercial and industrial		4,825		169		331		89		5,414
Residential real estate		13,989		—		657