SLRK-2013.09.30-10Q

 

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 September 30, 2013

¨
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 þ  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 October 30, 2013, 2,678,390 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 




FORM 10-Q
SOLERA NATIONAL BANCORP, INC.
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


INTRODUCTORY NOTE.  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about Solera National Bancorp, Inc. (the “Company”) and our subsidiary, Solera National Bank (the “Bank,” collectively with the Company, sometimes referred to as “we,” “us” and “our”) that are subject to risks and uncertainties.  Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives.  Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts.  Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements.  Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made, and the Company. 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:

•
the Company has a limited operating history upon which to base an estimate of its future financial performance;

•
we may be unable to limit credit risk associated with our loan portfolio, which would affect the Company's profitability;
 
•
general economic conditions may be less favorable than expected, causing an adverse impact on our financial performance;
  
•
we operate in an industry that is subject to extensive regulatory oversight, which could restrain our growth and profitability;
 
•
our residential mortgage lending division may expose us to increased operating and compliance risks;

•
interest rate volatility could significantly harm our business;

•
the Company may not be able to raise additional capital on terms favorable to it; and
 
•
the effects of 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 2012 Annual Report filed on Form 10-K with the SEC, which is available on the SEC’s website at www.sec.gov and the Company’s website at www.solerabank.com.  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 we cannot predict which factors, if any, will arise.  In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.



3


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Solera National Bancorp, Inc.
Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012
(unaudited)
($ in thousands, except share data)
September 30,
2013
 
December 31,
2012
ASSETS
Cash and cash equivalents
$
1,822

 
$
2,738

Interest-bearing deposits with banks
257

 
257

Investment securities, available-for-sale
77,648

 
84,710

Gross loans
72,595

 
59,632

Net deferred expenses/(fees)
47

 
175

Allowance for loan and lease losses
(1,101
)
 
(1,063
)
NET LOANS
71,541

 
58,744

Loans held for sale
9,672

 
180

Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stocks
2,350

 
1,189

Bank-owned life insurance
4,277

 
2,067

Other real estate owned (OREO)
1,776

 
1,776

Premises and equipment, net
937

 
998

Accrued interest receivable
724

 
707

Other assets
1,293

 
531

TOTAL ASSETS
$
172,297

 
$
153,897

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
 

 
 

Noninterest-bearing demand
$
4,742

 
$
3,387

Interest-bearing demand
9,562

 
8,218

Savings and money market
52,429

 
55,358

Time deposits
60,639

 
57,769

TOTAL DEPOSITS
127,372

 
124,732

Accrued interest payable
78

 
56

Accounts payable and other liabilities
1,143

 
668

FHLB advances
25,447

 
8,500

TOTAL LIABILITIES
$
154,040

 
$
133,956

COMMITMENTS AND CONTINGENCIES (see Notes 12 and 15)


 


Stockholders' equity
 

 
 

Common stock (1)
$
26

 
$
26

Additional paid-in capital
26,493

 
26,206

Accumulated deficit
(7,377
)
 
(7,359
)
Accumulated other comprehensive (loss) income
(885
)
 
1,068

TOTAL STOCKHOLDERS' EQUITY
$
18,257

 
$
19,941

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
172,297

 
$
153,897

 
 
 
 
(1) $0.01 par value; 10,000,000 shares authorized; 2,678,390 shares issued and outstanding at September 30, 2013, which includes 85,000 shares of unvested restricted stock; 5,000,000 shares authorized; 2,653,671 shares issued and outstanding at December 31, 2012, which includes 100,000 shares of unvested restricted stock.

See Notes to Consolidated Financial Statements.

4


Solera National Bancorp, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
Three and Nine Months Ended September 30, 2013 and 2012
(unaudited)
($ in thousands, except share data)
For the Three Months 
 Ended September 30,
 
For the Nine Months  
 Ended September 30,
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
949

 
$
862

 
$
2,607

 
$
2,437

Interest on loans held for sale
112

 
—

 
327

 
—

Interest on investment securities
432

 
505

 
1,289

 
1,548

Dividends on FHLB and FRB stocks
17

 
11

 
51

 
29

Other interest income
3

 
3

 
6

 
8

TOTAL INTEREST INCOME
1,513

 
1,381

 
4,280

 
4,022

INTEREST EXPENSE:
 

 
 

 
 

 
 

Deposits
271

 
285

 
785

 
864

FHLB advances
40

 
34

 
119

 
98

Other
—

 
1

 
—

 
4

TOTAL INTEREST EXPENSE
311

 
320

 
904

 
966

NET INTEREST INCOME BEFORE PROVISION
1,202

 
1,061

 
3,376

 
3,056

Provision for loan and lease losses
—

 
—

 
—

 
—

NET INTEREST INCOME AFTER PROVISION
1,202

 
1,061

 
3,376

 
3,056

NONINTEREST INCOME:
 

 
 

 
 

 
 

Service charges and fees
31

 
20

 
73

 
54

Other income
39

 
20

 
94

 
49

Gain on loans sold
1,564

 
—

 
5,576

 
25

Gain on sale of available-for-sale securities, net
49

 
289

 
294

 
569

TOTAL NONINTEREST INCOME
1,683

 
329

 
6,037

 
697

NONINTEREST EXPENSE:
 

 
 

 
 

 
 

Employee compensation and benefits
2,429

 
635

 
6,509

 
1,789

Occupancy
257

 
120

 
777

 
367

Professional fees
157

 
123

 
394

 
345

Other general and administrative
680

 
438

 
1,751

 
1,084

TOTAL NONINTEREST EXPENSE
3,523

 
1,316

 
9,431

 
3,585

INCOME BEFORE INCOME TAXES
(638
)
 
74

 
(18
)
 
168

Provision for income taxes
—

 
—

 
—

 
—

NET (LOSS) INCOME
$
(638
)
 
$
74

 
$
(18
)
 
$
168

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
 
 

 
 

 
 

Net change in unrealized gains (losses) on securities
33

 
533

 
(1,659
)
 
1,292

Less: net gains included in net income
(49
)
 
(289
)
 
(294
)
 
(569
)
OTHER COMPREHENSIVE (LOSS) INCOME
$
(16
)
 
$
244

 
$
(1,953
)
 
$
723

COMPREHENSIVE (LOSS) INCOME
$
(654
)
 
$
318

 
$
(1,971
)
 
$
891

PER SHARE DATA
 

 
 

 
 

 
 

(Loss) earnings per share - basic
$
(0.25
)
 
$
0.03

 
$
(0.01
)
 
$
0.07

Weighted-average common shares outstanding - basic
2,568,708

 
2,553,671

 
2,566,460

 
2,553,671

(Loss) earnings per share - diluted
$
(0.25
)
 
$
0.03

 
$
(0.01
)
 
$
0.07

Weighted-average common shares outstanding - diluted
2,568,708

 
2,565,105

 
2,566,460

 
2,559,020

See Notes to Consolidated Financial Statements.

5


Solera National Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity for the
Nine Months Ended September 30, 2013 and 2012
(unaudited)

($ in thousands, except share data)
Shares
Outstanding
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive Income (Loss)
 
Total
Balance at December 31, 2011
2,553,671

 
$
26

 
$
26,146

 
$
(7,640
)
 
$
507

 
$
19,039

Stock-based compensation
—

 
—

 
38

 
—

 
—

 
38

Net income
—

 
—

 
—

 
168

 
—

 
168

Other comprehensive income
—

 
—

 
—

 
—

 
723

 
723

Balance at September 30, 2012
2,553,671

 
$
26

 
$
26,184

 
$
(7,472
)
 
$
1,230

 
$
19,968

Balance at December 31, 2012
2,653,671

 
$
26

 
$
26,206

 
$
(7,359
)
 
$
1,068

 
$
19,941

Options exercised
14,719

 
—

 
50

 
—

 
—

 
50

Stock compensation awards
10,000

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
—

 
—

 
237

 
—

 
—

 
237

Net loss
—

 
—

 
—

 
(18
)
 
—

 
(18
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(1,953
)
 
(1,953
)
Balance at September 30, 2013
2,678,390

 
$
26

 
$
26,493

 
$
(7,377
)
 
$
(885
)
 
$
18,257


See Notes to Consolidated Financial Statements.

6


Solera National Bancorp, Inc.
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2013 and 2012 (unaudited)
 
For the Nine Months  
 Ended September 30,
($ in thousands)
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 

Net (loss) income
$
(18
)
 
$
168

Adjustments to reconcile net (loss) income to cash flows from operating activities:
 

 
 

Depreciation and amortization
214

 
88

Net amortization / (accretion) of deferred loan fees/expenses
37

 
(3
)
Net amortization of premiums on investment securities
1,073

 
1,122

Recognition of stock-based compensation on stock options/restricted stock awards
237

 
38

Loans originated for sale
(198,663
)
 
—

Proceeds from the sale of loans held for sale
194,635

 
—

Gain on sale of loans held for sale
(5,464
)
 
—

Gain on sale of available-for-sale securities, net
(294
)
 
(569
)
Gain on sale of SBA loans
(112
)
 
25

Proceeds from the sale of SBA loans
1,531

 
—

Federal Home Loan Bank stock dividend
(26
)
 
(6
)
Increase in bank-owned life insurance cash surrender value
(210
)
 
(47
)
Changes in operating assets and liabilities:
 

 
 

Accrued interest receivable
(17
)
 
(123
)
Other assets
(348
)
 
3

Accrued interest payable
22

 
18

Accounts payable and other liabilities
475

 
(50
)
Deferred loan fees/expenses, net
91

 
(289
)
Net cash (used in) / provided by operating activities
$
(6,837
)
 
$
375

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Purchases of investment securities, available-for-sale
$
(23,296
)
 
$
(44,095
)
Proceeds from sales of investment securities, available-for-sale
15,173

 
31,828

Proceeds from maturity/call/paydown of investment securities, available-for-sale
12,453

 
10,711

Maturity of interest-bearing deposits with banks, net
—

 
1,000

Purchases of FHLB / FRB bank stocks, net
(1,135
)
 
(35
)
Purchases of bank-owned life insurance
(2,000
)
 
(2,000
)
Loan (originations)/principal collections, net
(14,344
)
 
(6,078
)
Purchases of premises and equipment
(99
)
 
(21
)
Net cash used in investing activities
$
(13,248
)
 
$
(8,690
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Net increase in deposits
$
2,640

 
$
6,487

Cash paid for acquisition of core deposits
(468
)
 
—

Net increase in FHLB advances
16,947

 
2,000

Principal payments on capital lease
—

 
(28
)
Proceeds from stock options exercised
50

 
—

Net cash provided by financing activities
$
19,169

 
$
8,459

Net (decrease) / increase in cash and cash equivalents
$
(916
)
 
$
144

CASH AND CASH EQUIVALENTS
 

 
 

Beginning of period
$
2,738

 
$
1,800

End of period
$
1,822

 
$
1,944

(continued)

7


Solera National Bancorp, Inc.

Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2013 and 2012, (continued)
(unaudited)

 
For the Nine Months  
 Ended September 30,
($ in thousands)
2013
 
2012
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
Cash paid during the period for:
 
 
 
Interest
$
882

 
$
948

Income taxes paid
$
—

 
$
—

Non-cash investing transactions:
 

 
 

Charge-off of uncollectable receivables related to an OREO property
$
(139
)
 
—

Unrealized (loss)/gain on investment securities, available-for-sale
$
(1,953
)
 
$
723

 
See Notes to Consolidated Financial Statements.

8


SOLERA NATIONAL BANCORP, INC.

UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 — SUMMARY OF ORGANIZATION

Solera National Bancorp, Inc., a bank holding company, is a Delaware corporation that formed in 2006 to organize and serve as the holding company for Solera National Bank (the “Bank”). The Bank, which is chartered as a national bank by the Office of the Comptroller of the Currency, (“OCC”), is a wholly-owned subsidiary of Solera National Bancorp, Inc. The Bank is a full-service commercial bank headquartered in Lakewood, Colorado that commenced banking operations in the third quarter of 2007. The Bank provides a variety of financial services to individuals, businesses, and not-for-profit organizations primarily located in the six-county Denver metropolitan area. Its primary lending products are residential mortgage loans, commercial loans and home-equity lines of credit. Its primary deposit products are checking, money market, savings and time deposit accounts. In December 2012, the Company added approximately 60 mortgage professionals in five loan production offices throughout Colorado including Boulder, Colorado Springs (two offices), the Denver Tech Center and Durango.


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 September 30, 2013, and the results of its operations for the three and nine months ended September 30, 2013 and 2012.  Cash flows are presented for the nine months ended September 30, 2013 and 2012.  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 income 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, 2012.

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

9


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.  To determine this component, management calculates a weighted-average loss rate based on actual loss rates over the last two to three years for all banks in Colorado and for similarly-sized commercial banks with two or fewer locations in a metropolitan area.  Management then adjusts the loss rate for environmental factors which 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 levels and trends in non-performing and past due loans; and 4) 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.  Classified and criticized loans, which are closely monitored by management, are taken out of their original category for calculating their contingent loss rate and are assigned a loss rate ranging between 2.50% and 15.65% of the loan’s principal balance.  The aggregate of above described segments represents the contingent losses in the loan portfolio.

The recorded allowance for loan and lease losses is the aggregate of the impaired loan and lease component and the contingent loss component.  We aggregate our loans into four portfolio segments:  Commercial Real Estate Secured; Residential Real Estate Secured; Commercial and Industrial; and Consumer.  These segments are based upon the loan’s categorization in the Consolidated Report of Condition and Income, as set forth by banking regulators, (the “Call Report”).  Our methodology for estimating the allowance has not changed materially during the current or prior reporting period and is consistent across all portfolio segments and classes of loans. 

At September 30, 2013, the Company had an allowance for loan and lease losses of $1.1 million.  We believe that this is adequate to cover probable losses based on currently available information.  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 be needed 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-offs and the allowance for loan and lease losses.

Credit and loan decisions are made by management and the Board of Directors’ Credit Committee in conformity with established loan policies.  The Company’s practice is to charge-off any loan or portion of a loan when the loan is determined 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 each 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

10


on nonaccrual loans is subsequently recognized only to the extent that cash is received and the Bank’s recorded investment in the loan (the customer’s balance less any partial charge-offs) is deemed collectible.  Interest accruals are resumed on such loans only when they are brought current and when, in the judgment of management, the loans are estimated to be fully collectible as to all interest and the Bank’s recorded investment.

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.

Loans Held for Sale / Gains and Losses on Sales of Mortgage Loans: Residential mortgage loans originated and held for sale are marked to market with gains and losses recognized in noninterest income. The market value is based on committed secondary market prices.

Loan Commitments and Related Financial Instruments: In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 12. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Interest Rate Lock Commitments and Forward Sales Commitments: Interest rate lock commitments are commitments to fund residential mortgage loans at specified interest rates within a specified time, generally up to 60 days from the time of the rate lock. An interest rate lock commitment related to a loan that will be held for sale is a derivative instrument under accounting principles generally accepted in the United States (U.S. GAAP), and is recognized at fair value on the consolidated balance sheets in other assets and other liabilities with changes in its value recorded in gain on loans sold within noninterest income on the consolidated statements of operations and comprehensive (loss) income. To eliminate the exposure of changes in interest rates impacting the fair value of interest rate lock commitments, the Company utilizes “best efforts” forward loan sale commitments. These contracts are entered into at the same time as the interest rate lock commitments, and lock in the sale and price of the loan with the Company's secondary market investors. Since these are “best efforts” contracts, the Company does not incur a penalty in the event the committed loans are not delivered. These forward loan sales commitments are not considered derivative instruments under U.S. GAAP, but in accordance with U.S. GAAP, the Company has elected to mark these instruments to market. As such, both the interest rate lock commitments and forward sales commitments are accounted for at fair value. See additional discussion in Note 6, Loans Held for Sale and Interest Rate Lock Commitments.

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 employee compensation and 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, interest rate lock commitments and forward sales commitments.  Additionally, U.S. GAAP requires 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.  Current accounting standards describe three levels of inputs that may be used to measure fair values:


11


 
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.

Income (Loss) per Common Share:  Basic earnings (loss) per common share, (EPS), is based on the weighted-average number of common shares outstanding during the period.  Diluted earnings (loss) per share is similar to basic EPS except that the weighted-average number of common shares outstanding is increased by the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued at the beginning of the period.  Given the loss for the three and nine months ended September 30, 2013, diluted EPS did not differ from basic EPS as all dilutive-potential shares were anti-dilutive. Diluted EPS did not differ from basic EPS for the three and nine months ended September 30, 2012, given the small amount of dilutive-potential stock options.  For the three months ended September 30, 2013 and 2012, respectively, approximately 129,000 and 311,000 anti-dilutive options were not included in the calculation of diluted EPS. For the nine months ended September 30, 2013 and 2012, respectively, 70,000 and 253,000 anti-dilutive options were not included in the calculation of diluted EPS. Amounts used in the determination of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012, are shown below:

($ in thousands, except share data)
 
For the Three Months 
 Ended September 30,
 
For the Nine Months  
 Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Basic earnings (loss) per share computation
 
 
 
 
 
 
 
 
Net (loss) earnings to common stockholders
 
$
(638
)
 
$
74

 
$
(18
)
 
$
168

Weighted average shares outstanding - basic
 
2,568,708

 
2,553,671

 
2,566,460

 
2,553,671

 
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
$
(0.25
)
 
$
0.03

 
$
(0.01
)
 
$
0.07

Diluted earnings (loss) per share computation
 
 
 
 
 
 
 
 
Net (loss) earnings to common stockholders
 
$
(638
)
 
$
74

 
$
(18
)
 
$
168

Weighted average shares outstanding - basic
 
2,568,708

 
2,553,671

 
2,566,460

 
2,553,671

Shares assumed issued:
 
 
 
 
 
 
 
 
Stock options
 
—

 
11,434

 
—

 
5,349

Restricted stock
 
—

 
—

 
—

 
—

Weighted average shares outstanding - diluted
 
2,568,708

 
2,565,105

 
2,566,460

 
2,559,020

 
 
 
 
 
 
 
 
 
 Diluted (loss) earnings per share
 
$
(0.25
)
 
$
0.03

 
$
(0.01
)
 
$
0.07


12




Business Segments: The Company uses the "management approach" for reporting information about segments and has determined that as of September 30, 2013, its business is comprised of two operating segments: community banking and residential mortgage banking.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, (FASB), issued an accounting standards update to finalize the reporting for reclassifications of amounts out of accumulated other comprehensive income (AOCI). Items reclassified from AOCI to net income, in their entirety, must have the effect of the reclassification disclosed according to the respective statement of operations line item. This information must be provided either on the face of the financial statements by statement of operations line item, or in a footnote. This accounting standards update became effective for interim and annual periods beginning on or after December 15, 2012. Currently, the impact of this update on the Company is minimal as the only changes to AOCI are changes in the market values related to available-for-sale securities.

In July 2013, the FASB issued an accounting standards update on the presentation of unrecognized tax benefits. This update requires separate presentation of tax benefits related to net operating loss carryforwards and credit carryforwards apart from other deferred tax assets. This accounting standards update will become effective for us in first quarter 2014. Currently, there is no impact on the Company due to this update as our deferred tax assets have a full valuation allowance.

During the first nine months of 2013, the FASB issued other accounting standards updates which may impact banks 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 September 30, 2013 and December 31, 2012 are as follows:
($ in thousands)
September 30, 2013
 
Amortized
Cost
 
Gross
 Unrealized
Gains
 
Gross
 Unrealized
Losses
 
Estimated
Fair Value
Securities available-for-sale:
 

 
 

 
 

 
 

Corporate
$
14,337

 
$
142

 
$
(367
)
 
$
14,112

State and municipal
19,207

 
85

 
(769
)
 
18,523

Residential agency mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs)
44,989

 
371

 
(347
)
 
45,013

Total securities available-for-sale
$
78,533

 
$
598

 
$
(1,483
)
 
$
77,648

 
($ in thousands)
December 31, 2012
 
Amortized
Cost
 
Gross
 Unrealized
Gains
 
Gross
 Unrealized
Losses
 
Estimated
Fair Value
Securities available-for-sale:
 

 
 

 
 

 
 

Corporate
$
14,148

 
$
457

 
$
(155
)
 
$
14,450

State and municipal
21,752

 
412

 
(47
)
 
22,117

Residential agency MBS/CMOs
47,742

 
570

 
(169
)
 
48,143

Total securities available-for-sale
$
83,642

 
$
1,439

 
$
(371
)
 
$
84,710


The amortized cost and estimated fair value of investment securities by contractual maturity at September 30, 2013 and December 31, 2012 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 prepay obligations with or without 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 $12.5 million from the maturity /

13


prepayment of securities during the nine months ended September 30, 2013 (see our Consolidated Statements of Cash Flows ) versus $1.0 million contractually maturing within one year as of December 31, 2012, as set forth in the table below.
 
 ($ in thousands)
September 30, 2013
 
December 31, 2012
 
Amortized
Cost
 
Estimated Fair
Value
 
Amortized
Cost
 
Estimated Fair
Value
Securities available-for-sale:
 
 
 
 
 
 
Due within one year
$
—

 
$
—

 
$
1,003

 
$
1,023

Due after one year through five years
7,048

 
7,171

 
6,180

 
6,455

Due after five years through ten years
25,578

 
24,691

 
22,869

 
23,242

Due after ten years
45,907

 
45,786

 
53,590

 
53,990

Total securities available-for-sale
$
78,533

 
$
77,648

 
$
83,642

 
$
84,710


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 September 30, 2013 and December 31, 2012.

 
September 30, 2013
($ 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
$
6,878

 
$
(334
)
 
13

 
$
2,467

 
$
(33
)
 
4

 
$
9,345

 
$
(367
)
 
17

State and municipal
14,985

 
(733
)
 
32

 
468

 
(36
)
 
1

 
15,453

 
(769
)
 
33

Residential agency MBS/CMOs
16,135

 
(258
)
 
19

 
7,285

 
(89
)
 
10

 
23,420

 
(347
)
 
29

Total temporarily-impaired
$
37,998

 
$
(1,325
)
 
64

 
$
10,220

 
$
(158
)
 
15

 
$
48,218

 
$
(1,483
)
 
79

 
 
December 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
$
1,436

 
$
(8
)
 
2

 
$
3,353

 
$
(147
)
 
6

 
$
4,789

 
$
(155
)
 
8

State and municipal
4,512

 
(47
)
 
9

 
—

 
—

 
—

 
4,512

 
(47
)
 
9

Residential agency MBS/CMOs
17,267

 
(164
)
 
16

 
1,134

 
(5
)
 
2

 
18,401

 
(169
)
 
18

Total temporarily-impaired
$
23,215

 
$
(219
)
 
27

 
$
4,487

 
$
(152
)
 
8

 
$
27,702

 
$
(371
)
 
35


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 September 30, 2013, no declines were deemed to be other than temporary.  The four corporate securities that were in a continuous loss position for 12 months or longer at September 30, 2013 fluctuated in value primarily as a result of changes in market interest rates and the widening of spreads on financial services/banking securities. However, the amount of unrealized loss on these corporate bonds has declined in 2013.

The one municipal bond that was in a continuous loss position for 12 months or longer at September 30, 2013 was due to changes in interest rates, as the bond was purchased when the ten year treasury rate was near its historical low. The bond continues to maintain high credit ratings.


14


Significant prepayment speeds is the primary driver of the loss on the ten mortgage-backed securities in a continuous loss position for 12 months or longer at September 30, 2013.  The Company has determined there is no credit impairment on these bonds since they carry the implicit guarantee of the U.S. government.  

The Company has the intent to hold the securities in an unrealized loss position as of September 30, 2013 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, 2012, determined these securities were not other than temporarily impaired.

The Company recorded a net unrealized loss in the investment portfolio of $885,000 at September 30, 2013, a $2.0 million decrease from the $1.1 million net unrealized gain at December 31, 2012. The decline in the value of the portfolio since year-end was due to the increase in longer-term interest rates in the second quarter of 2013.

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

($ in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Proceeds
$
2,325

 
$
12,384

 
$
15,173

 
$
31,828

Gross gains
$
49

 
$
300

 
$
301

 
$
580

Gross losses
$
—

 
$
(11
)
 
$
(7
)
 
$
(11
)

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 $29.2 million at September 30, 2013 and $25.5 million at December 31, 2012, 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 our loan portfolio, excluding loans held for sale, according to each loan’s purpose, which may differ from the categorization of the loan in subsequent tables which categorize the loan according to its underlying collateral:
 
($ in thousands)
September 30,
2013
 
December 31,
2012
Commercial real estate (“CRE”)
$
45,462

 
$
38,230

Commercial and industrial
9,870

 
9,383

Residential real estate
14,100

 
10,608

Construction and land development
1,012

 
791

Consumer
2,151

 
620

GROSS LOANS
72,595

 
59,632

Net deferred loan expenses / (fees)
47

 
175

Allowance for loan and lease losses
(1,101
)
 
(1,063
)
LOANS, NET
$
71,541

 
$
58,744


During the first nine months of 2013, the Bank purchased four loans with principal balances totaling approximately $413,000.  During the first nine months of 2012, the Bank purchased fourteen loans with principal balances of approximately $4.5 million.  During the first nine months of 2013, the Bank sold the guaranteed portion of three SBA 7(a) notes totaling approximately $1.5 million resulting in gains of $145,000, of which $112,000 was recognized in income immediately with the balance to be recognized as interest income over the remaining life of the loans.  One loan was sold during the first nine months of 2012 resulting in a gain of approximately $25,000.

15



During the third quarter of 2013, the Bank purchased one loan with a principal balance totaling approximately $188,000.  During the third quarter of 2012, the Bank purchased four loans with aggregate principal balances of approximately $2.2 million.  During the third quarter of 2013, the Bank sold the guaranteed portion of one SBA 7(a) note totaling approximately $22,000 resulting in a gain of $1,000 that was recognized in income immediately.  No loans were sold during the third quarter of 2012.

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 $147,000 and $163,000 in loans receivable from related parties at September 30, 2013 and December 31, 2012, 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 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 $2.7 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 and nine months ended September 30, 2013 and 2012 is summarized as follows:
 
($ in thousands)
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
1,088

 
$
1,009

 
$
1,063

 
$
1,067

Charge-offs
—

 
—

 
(7
)
 
(88
)
Recoveries
13

 
24

 
45

 
54

Provision for loan and lease losses
—

 
—

 
—

 
—

Balance, end of period
$
1,101

 
$
1,033

 
$
1,101

 
$
1,033


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 Call Report, which is primarily based on the collateral securing the loan.  We have four 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 and nine months ended September 30, 2013 and 2012, respectively.


16


Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
Three Months Ended September 30, 2013
($ in thousands)
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
Balance at June 30, 2013
$
674

 
$
308

 
$
105

 
$
1

 
$
1,088

Charge-offs
—

 
—

 
—

 
—

 
—

Recoveries
—

 
12

 
1

 
—

 
13

Provision for loan and lease losses
(19
)
 
(18
)
 
38

 
(1
)
 
—

Balance at September 30, 2013
$
655

 
$
302

 
$
144

 
$
—

 
$
1,101



Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
Nine Months Ended September 30, 2013
($ in thousands)
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
Balance at December 31, 2012
$
784

 
$
222

 
$
57

 
$
—

 
$
1,063

Charge-offs
(7
)
 
—

 
—

 
—

 
(7
)
Recoveries
—

 
40

 
5

 
—

 
45

Provision for loan and lease losses
(122
)
 
40

 
82

 
—

 
—

Balance at September 30, 2013
$
655

 
$
302

 
$
144

 
$
—

 
$
1,101



Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
Three Months Ended September 30, 2012
($ in thousands)
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
Balance at June 30, 2012
$
665

 
$
247

 
$
96

 
$
1

 
$
1,009

Charge-offs
—

 
—

 
—

 
—

 
—

Recoveries
—

 
14

 
10

 
—

 
24

Provision for loan and lease losses
32

 
(27
)
 
(5
)
 
—

 
—

Balance at September 30, 2012
$
697

 
$
234

 
$
101

 
$
1

 
$
1,033

 

Rollforward of Allowance for Loan and Lease Losses by Portfolio Segment
Nine Months Ended September 30, 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
—

 
—

 
(85
)
 
(3
)
 
(88
)
Recoveries
—

 
44

 
10

 
—

 
54

Provision for loan and lease losses
(29
)
 
(54
)
 
79

 
4

 
—

Balance at September 30, 2012
$
697

 
$
234

 
$
101

 
$
1

 
$
1,033



The following tables present the ending balance in loans and allowance for loan and lease losses, broken down by portfolio segment as of September 30, 2013 and December 31, 2012.  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

17


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
September 30, 2013
($ in thousands)
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
Loans
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
38,708

 
21,642

 
12,190

 
55

 
72,595

Total
$
38,708

 
$
21,642

 
$
12,190

 
$
55

 
$
72,595

Allowance for loan losses
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
655

 
302

 
144

 
—

 
1,101

Total
$
655

 
$
302

 
$
144

 
$
—

 
$
1,101

 
Ending Balances in Loans and Allowance for Loan and Lease Losses by Portfolio Segment
December 31, 2012
($ in thousands)
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
Loans
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
13

 
$
—

 
$
13

Collectively evaluated for impairment
34,634

 
15,873

 
9,062

 
50

 
59,619

Total
$
34,634

 
$
15,873

 
$
9,075

 
$
50

 
$
59,632

Allowance for loan losses
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
784

 
222

 
57

 
—

 
1,063

Total
$
784

 
$
222

 
$
57

 
$
—

 
$
1,063


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
September 30, 2013 (Principal Balance)
($ in thousands)
Portfolio Segment
Class
Commercial Real Estate Secured
 
Residential Real Estate Secured
 
Commercial and Industrial
 
Consumer
 
Total
CRE – owner occupied
$
21,634

 
$
—

 
$
—

 
$
—

 
$
21,634

CRE – non-owner occupied
17,074

 
—

 
—

 
—

 
17,074

Commercial and industrial
—

 
—

 
9,501

 
—

 
9,501

Residential real estate
—

 
20,630

 
—

 
—

 
20,630

Construction and land development
—

 
1,012

 
—

 
—

 
1,012

Government guaranteed
—

 
—

 
2,689

 
—

 
2,689

Consumer
—

 
—

 
—

 
55

 
55

Total
$
38,708

 
$
21,642

 
$
12,190

 
$
55

 
$
72,595

 

18


Reconciliation between Portfolio Segment and Class
December 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
$
13,544

 
$
—

 
$
—

 
$
—

 
$
13,544

CRE – non-owner occupied
20,462

 
—

 
—

 
—

 
20,462

Commercial and industrial
—

 
—

 
6,156

 
—

 
6,156

Residential real estate
—

 
15,515

 
—

 
—

 
15,515

Construction and land development
628

 
358

 
—

 
—

 
986

Government guaranteed
—

 
—

 
2,919

 
—

 
2,919

Consumer
—

 
—

 
—

 
50

 
50

Total
$
34,634

 
$
15,873

 
$
9,075

 
$
50

 
$
59,632


Impaired Loans
 
There were no impaired loans as of September 30, 2013 compared to one impaired loan totaling $13,000 as of December 31, 2012.  The following table provides detail of impaired loans broken out according to class as of December 31, 2012. The recorded investment represents the customer balance less any partial charge-offs and excludes any accrued interest receivable since the majority of the loans are on nonaccrual status and therefore do not have interest accruing.  The unpaid principal balance represents the unpaid principal prior to any partial charge-off.  There were no impaired loans with a related allowance as of September 30, 2013 or December 31, 2012.

 
Impaired Loans by Class as of December 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
—

 
—

 
—

 
—

 
—

Commercial and industrial
13

 
13

 
—

 
58

 
2

Residential real estate
—

 
—

 
—

 
—

 
—

Construction and land development
—

 
—

 
—

 
—

 
—

Government guaranteed
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

Total
$
13

 
$
13

 
$
—

 
$
58

 
$
2


The impaired commercial and industrial loan did not have a related allowance because the loan is well-secured. Additionally, this loan was fully paid off in August 2013.

Troubled debt restructurings (TDRs) are included in impaired loans above.  No loans were modified as TDRs during the three and nine months ended September 30, 2013 or 2012.  Additionally, no loans were restructured as TDRs during the last 12 months.

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


19


 
Age Analysis of Loans by Class as of September 30, 2013
($ 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
CRE – owner occupied
$
250

 
$
—

 
$
—

 
$
—

 
$
250

CRE – non-owner occupied
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
—

 
—

Residential real estate
—

 
550

 
—

 
—

 
550

Construction and land development
—

 
—

 
—

 
—

 
—

Government guaranteed
—

 
—

 
—

 
—

 
—

Consumer
—

 
—

 
—

 
—

 
—

Total
$
250

 
$
550

 
$
—

 
$
—

 
$
800

 
As of October 31, 2013, the past due loans listed above have been brought current.
 
Age Analysis of Loans by Class as of December 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
CRE – owner occupied
$
—

 
$
—

 
$
—

 
$
—

 
$
—

CRE – non-owner occupied
—

 
—

 
—

 
—

 
—

Commercial and industrial
—

 
—

 
—

 
13

 
13

Residential real estate
135

 
—

 
—

 
—

 
135

Construction and land development
—

 
—

 
—

 
—

 
—

Government guaranteed
—

 
—

 
—

 
—

 
—

Consumer
—

 
12

 
—

 
—

 
12

Total
$
135

 
$
12

 
$
—

 
$
13

 
$
160


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.


20


As of September 30, 2013, and based on the most recent analysis performed during the month of September 2013, the recorded investment in each risk category of loans by class of loan is as follows:

($ in thousands)
Credit Quality of Loans by Class as of September 30, 2013
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
CRE – owner occupied
$
19,182

 
$
182

 
$
2,270

 
$
—

 
$
21,634

CRE – non-owner occupied
16,233

 
841

 
—

 
—

 
17,074

Commercial and industrial
8,981

 
350

 
170

 
—

 
9,501

Residential real estate
19,832

 
—

 
798

 
—

 
20,630

Construction and land development
1,012

 
—

 
—

 
—

 
1,012

Government guaranteed
2,689

 
—