Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 
| **x** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|---------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2010**

 
| ** ̈** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|------------|----------------------------------------------------------------------------------------------------|

 

**Commissionfile number 000-53181**

 

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**SOLERANATIONAL BANCORP, INC.**

(Exact name of registrant asspecified in its charter)

 

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| **Delaware**                       | ** ** | **02-0774841**                     |
|------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction      |       | (IRS Employer  Identification No.) |
| of incorporation or  organization) |       |                               |

 

**319 S.Sheridan Blvd.**

**Lakewood,CO 80226**

**303-209-8600**(Address and telephonenumber of principal executive offices and principal place of business)

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No ̈

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  ̈  No  ̈

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.

 

| Large accelerated filer  ̈ |   | Accelerated filer  ̈    |
|--------------------------------|--------|-----------------------------|
|                           |   |                        |
| Non-accelerated filer  ̈   |   | Smaller reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  ̈  No x

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the lastpracticable date:  As of November 9,2010, 2,553,671 shares of the registrant’s common stock, $0.01 par value, wereissued and outstanding.

 

 

** **

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**FORM 10-Q**

**SOLERANATIONAL BANCORP, INC.**

 

**INDEX**

 
| ** **                                                                                                         | **PAGE** |
|--------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                               |     |
| **INTRODUCTORY NOTE.  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS**                | 3        |
|                                                                                                               |     |
| **PART I — FINANCIAL INFORMATION**                                                                       | 5        |
|                                                                                                               |     |
| **ITEM 1. FINANCIAL STATEMENTS (unaudited)**                                                                       | 5        |
|                                                                                                               |     |
| **Balance Sheets as of September 30, 2010 and  December 31, 2009**                                       | 5        |
|                                                                                                               |     |
| **Statements of Operations for the Three and Nine Months  Ended September 30, 2010 and 2009**                 | 6        |
|                                                                                                               |     |
| **Statements of Changes in Stockholders’ Equity for the  Nine Months Ended September 30, 2010 and 2009** | 7        |
|                                                                                                               |     |
| **Statements of Cash Flows for the Nine Months Ended  September 30, 2010 and 2009**                           | 8        |
|                                                                                                               |     |
| **UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**                                                | 10       |
|                                                                                                               |     |
| **ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS**           | 22       |
|                                                                                                               |     |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                            | 38       |
|                                                                                                               |     |
| **ITEM 4(T). CONTROLS AND PROCEDURES**                                                                             | 38       |
|                                                                                                               |     |
| **PART II  — OTHER INFORMATION**                                                                         | 40       |
|                                                                                                               |     |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                                     | 40       |
|                                                                                                               |     |
| **ITEM  1A. RISK FACTORS**                                                                                         | 40       |
|                                                                                                               |     |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                           | 40       |
|                                                                                                               |     |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                                        | 40       |
|                                                                                                               |     |
| **ITEM 4. [Removed and Reserved]**                                                                                 | 40       |
|                                                                                                               |     |
| **ITEM  5. OTHER INFORMATION**                                                                                     | 40       |
|                                                                                                               |     |
| **ITEM 6.  EXHIBITS**                                                                                              | 40       |
|                                                                                                               |     |
| **SIGNATURES**                                                                                                     | 41       |
|                                                                                                               |     |
| **EXHIBIT INDEX**                                                                                             | 42       |

 

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**INTRODUCTORY NOTE.  CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION AND RISK FACTORS**

 

This Quarterly Report on Form 10-Qcontains “forward-looking statements” within the meaning of the PrivateSecurities 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 statementsinclude information concerning future financial performance, business strategy,projected plans and objectives.  Statements preceded by, followed by orthat otherwise include the words “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “may increase,” “may fluctuate” and similar expressions offuture or conditional verbs such as “will,” “should,” “would,” and “could” aregenerally forward-looking in nature and not historical facts.  Actualresults may differ materially from those projected, implied, anticipated orexpected in the forward-looking statements. Readers of this quarterly report should not rely solely on theforward-looking statements and should consider all uncertainties and risksthroughout this report. The statements are representative only as of the datethey are made, and Solera National Bancorp, Inc. undertakes no obligationto update any forward-looking statement.

 

These forward-looking statements,implicitly and explicitly, include the assumptions underlying the statementsand other information with respect to the Company’s beliefs, plans, objectives,goals, expectations, anticipations, estimates, financial condition, results ofoperations, future performance and business, including management’sexpectations and estimates with respect to revenues, expenses, return onequity, return on assets, efficiency ratio, asset quality and other financialdata and capital and performance ratios.

 

Although the Company believes thatthe expectations reflected in the forward-looking statements are reasonable,these statements involve risks and uncertainties that are subject to changebased on various important factors, some of which are beyond the control of theCompany. The following factors, among others, could cause the Company’s resultsor financial performance to differ materially from its goals, plans,objectives, intentions, expectations and other forward-looking statements:

 

·                  the Company’s business may be adversely affected byconditions in the financial markets and economic conditions generally;

 

·                  continuation of the economic downturn could reduce ourcustomer base, our level of deposits and demand for financial products such asloans;

 

·                  management of Solera National Bank may be unable toadequately measure and limit credit risk associated with the Bank’s loanportfolio, which would affect our profitability;

 

·                  we are exposed to higher credit risk by commercial realestate, commercial business, and construction lending;

 

·                  our allowance for probable loan losses may be insufficient;

 

·                  interest rate volatility could harm our business;

 

·                  funding to provide liquidity may not be available to us onfavorable terms or at all;

 

·                  we may not be able to raise additional capital on termsfavorable to us;

 

·                  the liquidity of our common stock is affected by itslimited trading market;

 

·                  the departures of key personnel or directors may impair ouroperations;

 

·                  the Bank’s legal lending limits may impair its ability toattract borrowers;

 

·                  the Company is subject to extensive government regulationwhich may have an adverse effect on the Company’s profitability and growth;

 

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·                  managing reputational risk is important to attracting andmaintaining customers, investors and employees;

 

·                  monetary policy and other economic factors could adverselyaffect the Company’s profitability;

 

·                  the Company’s certificate of incorporation and bylaws, andthe employment agreements of our executive officers, contain provisions thatcould make a takeover more difficult;

 

·                  our directors and executiveofficers could have the ability to influence stockholder actions;

 

·                  the effects of competition from other commercial banks,thrifts, mortgage banking firms, consumer finance companies, credit unions,securities brokerage firms, insurance companies, money market and other mutualfunds, and other financial institutions operating in our market area andelsewhere, including institutions operating regionally, nationally, andinternationally, together with such competitors offering banking products andservices by mail, telephone, computer, and the Internet; and

 

·                  management’s ability to manage these and other risks.

 

For a discussion of these and otherrisks and uncertainties that could cause actual results to differ from thosecontained in the forward-looking statements, see “Risk Factors” in Item 1A ofthe Company’s 2009 Annual Report filed on Form 10-K with the SEC, which isavailable on the SEC’s website at www.sec.gov.  All forward-lookingstatements are qualified in their entirety by this cautionary statement, andthe Company undertakes no obligation to revise or update this Quarterly Reporton Form 10-Q to reflect events or circumstances after the datehereof.  New factors emerge from time totime, and it is not possible for us to predict which factors, if any, willarise.  In addition, the Company cannotassess the impact of each factor on the Company’s business or the extent towhich any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

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**PART I — FINANCIALINFORMATION**

** **

**ITEM 1. FINANCIAL STATEMENTS (unaudited)**

 

**SoleraNational Bancorp, Inc.**

 

**Balance Sheets as of September 30, 2010 and December 31,2009**

**(unaudited)**

 
| ** **                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in thousands, except share data)**                                                                                            | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                                  |       |                   |       |                  |       |
| Cash  and due from banks                                                                                                                                    |       | $                      | 698        |                  | $          | 1,696 |   |
| Federal  funds sold                                                                                                                                         |       | —                 |       | 820                   |       |
| Total  cash and cash equivalents                                                                                                                            |       | 698                    |       | 2,516                 |       |
| Interest-bearing  deposits with banks                                                                                                                       |       | 266                    |       | 3,784                 |       |
| Investment  securities, available-for-sale                                                                                                                  |       | 72,876                 |       | 73,441                |       |
| Gross  loans                                                                                                                                                |       | 60,378                 |       | 50,504                |       |
| Net  deferred (fees)/expenses                                                                                                                               |       | (85                    | )          | (114                  | )          |
| Allowance  for loan losses                                                                                                                                  |       | (1,200                 | )          | (830                  | )          |
| Net  loans                                                                                                                                                  |       | 59,093                 |       | 49,560                |       |
| Federal  Home Loan Bank (FHLB) and Federal Reserve Bank stocks                                                                                              |       | 1,165                  |       | 1,131                 |       |
| Premises  and equipment, net                                                                                                                                |       | 768                    |       | 875                   |       |
| Accrued  interest receivable                                                                                                                                |       | 749                    |       | 814                   |       |
| Prepaid  FDIC insurance                                                                                                                                     |       | 320                    |       | 471                   |       |
| Other  assets                                                                                                                                               |       | 278                    |       | 248                   |       |
| **Total assets**                                                                                                                                            |       | $                      | 136,213    |                  | $          | 132,840 |   |
|                                                                                                                                                        |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                               |       |                   |       |                  |       |
| Deposits                                                                                                                                                    |       |                   |       |                  |       |
| Noninterest-bearing  demand                                                                                                                                 |       | $                      | 1,894      |                  | $          | 2,624 |   |
| Interest-bearing  demand                                                                                                                                    |       | 11,224                 |       | 6,830                 |       |
| Savings  and money market                                                                                                                                   |       | 53,535                 |       | 55,318                |       |
| Time  deposits                                                                                                                                              |       | 41,708                 |       | 39,629                |       |
| Total  deposits                                                                                                                                             |       | 108,361                |       | 104,401               |       |
|                                                                                                                                                        |       |                   |       |                  |       |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                                 |       | 1,085                  |       | 326                   |       |
| Accrued  interest payable                                                                                                                                   |       | 99                     |       | 82                    |       |
| Accounts  payable and other liabilities                                                                                                                     |       | 340                    |       | 344                   |       |
| Federal  Home Loan Bank advances                                                                                                                            |       | 6,000                  |       | 8,750                 |       |
| Deferred  rent liability                                                                                                                                    |       | 95                     |       | 85                    |       |
| Capital  lease liability                                                                                                                                    |       | 87                     |       | 118                   |       |
| **Total liabilities**                                                                                                                                       |       | $                      | 116,067    |                  | $          | 114,106 |   |
|                                                                                                                                                        |       |                   |       |                  |       |
| 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 at September 30, 2010 and December 31, 2009 |       | $                      | 26         |                  | $          | 26 |   |
| Additional  paid-in capital                                                                                                                                 |       | 25,916                 |       | 25,768                |       |
| Accumulated  deficit                                                                                                                                        |       | (8,298                 | )          | (8,016                | )          |
| Accumulated  other comprehensive income                                                                                                                     |       | 2,502                  |       | 956                   |       |
| **Total stockholders’ equity**                                                                                                                         |       | $                      | 20,146     |                  | $          | 18,734 |   |
|                                                                                                                                                        |       |                   |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                         |       | $                      | 136,213    |                  | $          | 132,840 |   |

 

See Notes to Consolidated FinancialStatements.

 

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**SoleraNational Bancorp, Inc.**

 

**Statementsof Operations for the Three and Nine Months Ended September 30, 2010 and2009**

**(unaudited)**

 
| ** **                                                                  | ** ** | **For the Three Months********Ended September 30,** | ** ** | **For the Nine Months********Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **($ in thousands, except share data)**            | ** ** | **2010**                                                                     | ** ** | **2009**                                                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest  income:                                                           |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Interest  and fees on loans                                                 |       | $                                                                            | 901        |                                                                        | $          | 598 |   | $ | 2,503 |   | $ | 1,380 |   |
| Interest  on federal funds sold                                             |       | —                                                                       |       | 2                                                                           |       | 2 |   | 3 |   |
| Interest  on investment securities                                          |       | 713                                                                          |       | 752                                                                         |       | 2,261 |   | 2,000 |   |
| Other  interest income                                                      |       | 1                                                                            |       | —                                                                      |       | 7 |   | 1 |   |
| Dividends  on FHLB and Federal Reserve Bank stocks                          |       | 10                                                                           |       | 11                                                                          |       | 32 |   | 31 |   |
| Total  interest income                                                      |       | 1,625                                                                        |       | 1,363                                                                       |       | 4,805 |   | 3,415 |   |
| Interest  expense:                                                          |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Deposits                                                                    |       | 466                                                                          |       | 517                                                                         |       | 1,476 |   | 1,180 |   |
| Federal  Home Loan Bank advances                                            |       | 58                                                                           |       | 78                                                                          |       | 202 |   | 256 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 2                                                                            |       | 2                                                                           |       | 5 |   | 10 |   |
| Other  borrowings                                                           |       | 2                                                                            |       | 3                                                                           |       | 7 |   | 10 |   |
| Total  interest expense                                                     |       | 528                                                                          |       | 600                                                                         |       | 1,690 |   | 1,456 |   |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net  interest income                                                        |       | 1,097                                                                        |       | 763                                                                         |       | 3,115 |   | 1,959 |   |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Provision  for loan losses                                                  |       | 780                                                                          |       | 180                                                                         |       | 1,075 |   | 432 |   |
| Net  interest income after provision for loan losses                        |       | 317                                                                          |       | 583                                                                         |       | 2,040 |   | 1,527 |   |
| Noninterest  income:                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Service  charges and fees                                                   |       | 19                                                                           |       | 80                                                                          |       | 55 |   | 220 |   |
| Other  income                                                               |       | 16                                                                           |       | —                                                                      |       | 16 |   | 4 |   |
| Gain on  sale of other real estate owned                                    |       | 10                                                                           |       | —                                                                      |       | 10 |   | — |   |
| Gain on  sale of investment securities                                      |       | 332                                                                          |       | 98                                                                          |       | 863 |   | 205 |   |
| Total  noninterest income                                                   |       | 377                                                                          |       | 178                                                                         |       | 944 |   | 429 |   |
| Noninterest  expense:                                                       |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Salaries  and employee benefits                                             |       | 619                                                                          |       | 591                                                                         |       | 1,756 |   | 1,889 |   |
| Occupancy                                                                   |       | 137                                                                          |       | 142                                                                         |       | 418 |   | 417 |   |
| Professional  fees                                                          |       | 134                                                                          |       | 53                                                                          |       | 319 |   | 237 |   |
| Other  general and administrative                                           |       | 297                                                                          |       | 236                                                                         |       | 773 |   | 680 |   |
| Total  noninterest expense                                                  |       | 1,187                                                                        |       | 1,022                                                                       |       | 3,266 |   | 3,223 |   |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net  loss before income taxes                                               |       | (493                                                                         | )          | (261                                                                        | )          | (282 | ) | (1,267 | ) |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Income taxes                                                                |       | —                                                                       |       | —                                                                      |       | — |   | — |   |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Net  loss                                                                   |       | $                                                                            | (493       | )                                                                           | $          | (261 | ) | $ | (282 | ) | $ | (1,267 | ) |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Basic  earnings (loss) per share                                            |       | (0.19                                                                        | )          | (0.10                                                                       | )          | (0.11 | ) | (0.50 | ) |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Diluted  earnings (loss) per share                                          |       | (0.19                                                                        | )          | (0.10                                                                       | )          | (0.11 | ) | (0.50 | ) |
|                                                                        |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Weighted-average  common shares                                             |       |                                                                         |       |                                                                        |       |   |   |   |   |
| Basic                                                                       |       | 2,553,671                                                                    |       | 2,553,671                                                                   |       | 2,553,671 |   | 2,553,671 |   |
| Diluted                                                                     |       | 2,553,671                                                                    |       | 2,553,671                                                                   |       | 2,553,671 |   | 2,553,671 |   |

 

See Notes to Consolidated FinancialStatements.

 

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**SoleraNational Bancorp, Inc.**

 

**Statements of Changes in Stockholders’ Equity for the NineMonths Ended September 30, 2010 and 2009**

**(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, 2008**                                       | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **                 | **$**      | **25,558**               | ** ** | **$**                     | **(6,740** | **)**      | **$**      | **148** | ** ** | **$** | **18,992** | ** ** |
| Stock-based  compensation                                                   |       | —                  |       | —            |       | 156                        |       | —                   |       | —                    |       | 156        |       |
| Comprehensive  income:                                                      |       |                    |       |              |       |                       |       |                     |       |                      |       | ** ** |       |
| Net  loss                                                                   |       | —                  |       | —            |       | —                     |       | (1,267                   | )          | —                    |       | (1,267     | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                  |       | —            |       | —                     |       | —                   |       | 1,819                     |       | 1,819      |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                  |       | —            |       | —                     |       | —                   |       | (205                      | )          | (205       | )          |
| Total comprehensive income                                                  |       |                    |       |              |       |                       |       |                     |       |                      |       | 347        |       |
| **Balance at September 30, 2009**                                      | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **                 | **$**      | **25,714**               | ** ** | **$**                     | **(8,007** | **)**      | **$**      | **1,762** | ** ** | **$** | **19,495** | ** ** |
|                                                                        |       |                    |       |              |       |                       |       |                     |       |                      |       |       |       |
|                                                                        |       |                    |       |              |       |                       |       |                     |       |                      |       |       |       |
| **Balance at December 31, 2009**                                       | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **                 | **$**      | **25,768**               | ** ** | **$**                     | **(8,016** | **)**      | **$**      | **956** | ** ** | **$** | **18,734** | ** ** |
| Stock-based  compensation                                                   |       | —                  |       | —            |       | 148                        |       | —                   |       | —                    |       | 148        |       |
| Comprehensive  income:                                                      |       |                    |       |              |       |                       |       |                     |       |                      |       |       |       |
| Net  loss                                                                   |       | —                  |       | —            |       | —                     |       | (282                     | )          | —                    |       | (282       | **)**      |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                  |       | —            |       | —                     |       | —                   |       | 2,409                     |       | 2,409      |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                  |       | —            |       | —                     |       | —                   |       | (863                      | )          | (863       | )          |
| Total comprehensive income                                                  |       |                    |       |              |       |                       |       |                     |       |                      |       | 1,264      |       |
| **Balance at September 30, 2010**                                      | ** ** | **2,553,671**           | ** ** | **$**             | **26**     | ** **                 | **$**      | **25,916**               | ** ** | **$**                     | **(8,298** | **)**      | **$**      | **2,502** | ** ** | **$** | **20,146** | ** ** |

 

See Notes to Consolidated FinancialStatements.

 

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**SoleraNational Bancorp, Inc.**

** **

**Statementsof Cash Flows for the Nine Months Ended September 30, 2010 and 2009**

**(unaudited)**

 
| ** **                                                                                              | ** ** | **For the Nine Months** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **Ended September 30,**      | ** ** |
| **($ in thousands)**                                                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                                   |       |                                   | ** ** |   | ** ** |
| Net  loss                                                                                               |       | $                                      | (282       | ) | $ | (1,267 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities:              |       |                                   |       |   |   |
| Depreciation  and amortization                                                                          |       | 137                                    |       | 127 |   |
| Provision  for loan losses                                                                              |       | 1,075                                  |       | 432 |   |
| Net  accretion of deferred loan fees/expenses                                                           |       | (29                                    | )          | (48 | ) |
| Net  amortization of premiums on investment securities                                                  |       | 348                                    |       | 46 |   |
| Gain on  sale of other real estate owned                                                                |       | (10                                    | )          | — |   |
| Gain on  sale of investment securities                                                                  |       | (863                                   | )          | (205 | ) |
| Federal  Home Loan Bank stock dividend                                                                  |       | (10                                    | )          | (10 | ) |
| Recognition  of stock-based compensation on stock options                                               |       | 148                                    |       | 156 |   |
| Changes  in operating assets and liabilities:                                                           |       |                                   |       |   |   |
| Interest  receivable                                                                                    |       | 65                                     |       | (294 | ) |
| Other  assets                                                                                           |       | (53                                    | )          | (16 | ) |
| Prepaid  FDIC insurance                                                                                 |       | 151                                    |       | — |   |
| Accrued  interest payable                                                                               |       | 17                                     |       | 59 |   |
| Accounts  payable and other liabilities                                                                 |       | (4                                     | )          | (46 | ) |
| Deferred  loan fees/expenses, net                                                                       |       | —                                 |       | 126 |   |
| Deferred  rent liability                                                                                |       | 10                                     |       | 19 |   |
| **Net cash provided by (used in) operating activities**                                                 |       | $                                      | 700        |   | $ | (921 | ) |
|                                                                                                    |       |                                   |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                                   |       |                                   |       |   |   |
| Purchase  of investment securities, available-for-sale                                                  |       | $                                      | (46,154    | ) | $ | (56,583 | ) |
| Proceeds  from sales of investment securities, available-for-sale                                       |       | 30,461                                 |       | 18,118 |   |
| Proceeds  from maturities/calls/pay downs of investment securities, available-for-sale                  |       | 18,319                                 |       | 9,790 |   |
| Originated  loans, net of pay downs                                                                     |       | (11,391                                | )          | (27,077 | ) |
| Proceeds  from sale of other real estate owned                                                          |       | 823                                    |       | — |   |
| Purchase  of premises and equipment                                                                     |       | (8                                     | )          | (12 | ) |
| Purchase  of stock in Federal Reserve Bank                                                              |       | (24                                    | )          | (2 | ) |
| Purchase  of interest-bearing deposits with banks                                                       |       | (1,006                                 | )          | (2,241 | ) |
| Maturity  of interest-bearing deposits with banks                                                       |       | 4,524                                  |       | — |   |
| **Net cash used in investing activities**                                                               |       | $                                      | (4,456     | ) | $ | (58,007 | ) |
|                                                                                                    |       |                                   |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                                   |       |                                   |       |   |   |
| Net  increase in deposits                                                                               |       | $                                      | 3,960      |   | $ | 65,240 |   |
| Net  increase/(decrease) in federal funds purchased and securities sold under  agreements to repurchase |       | 759                                    |       | (372 | ) |
| Repayment  of FHLB advances                                                                             |       | (2,750                                 | )          | (2,250 | ) |
| Principal  payments on capital lease                                                                    |       | (31                                    | )          | (29 | ) |
| **Net cash provided by financing activities**                                                           |       | $                                      | 1,938      |   | $ | 62,589 |   |
|                                                                                                    |       |                                   |       |   |   |
| **Net (decrease) / increase in cash and cash equivalents**                                              |       | $                                      | (1,818     | ) | $ | 3,661 |   |
|                                                                                                    |       |                                   |       |   |   |
| CASH  AND CASH EQUIVALENTS                                                                              |       |                                   |       |   |   |
| Beginning  of period                                                                                    |       | 2,516                                  |       | 2,401 |   |
| End of  period                                                                                          |       | $                                      | 698        |   | $ | 6,062 |   |

 

(continued)

 

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**SoleraNational Bancorp, Inc.**

 

**Statements of Cash Flows for the Nine Months Ended September 30,2010 and 2009, (continued)**

**(unaudited)**

 
| ** **                                                    | ** ** | **For the Nine Months**** ****Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **($ in thousands)**                                | ** ** | **2010**                                                                          | ** ** | **2009** | ** ** |
|                                                          |       |                                                                              |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION             |       |                                                                              |       |   |   |
| Cash  paid during the period for:                             |       |                                                                              |       |   |   |
| Interest                                                      |       | $                                                                                 | 1,673      |   | $ | 1,397 |   |
| Non-cash  investing transactions:                             |       |                                                                              |       |   |   |
| Unrealized  gain on investment securities, available-for-sale |       | $                                                                                 | 1,546      |   | $ | 1,614 |   |
| Loans  transferred to other real estate owned                 |       | $                                                                                 | 813        |   | $ | — |   |

 

See Notes to Consolidated FinancialStatements.

 

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**SOLERANATIONAL BANCORP, INC.**

 

**UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 — SUMMARYOF ORGANIZATION**

 

Solera National Bancorp, Inc.(the “Company”), is a Delaware corporation that was incorporated in 2006 toorganize 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-servicecommunity, commercial bank headquartered in Lakewood, Colorado serving theDenver metropolitan area.

 

**NOTE 2 — BASIS OFPRESENTATION**

 

The accompanying unauditedcondensed consolidated financial statements contain all adjustments (consistingonly of normal recurring adjustments) which, in the opinion of management, arenecessary to present fairly the financial position of the Company as of September 30,2010, and the results of its operations for the three and nine months ended September 30,2010 and 2009.  Cash flows are presentedfor the nine months ended September 30, 2010 and 2009.  Certainreclassifications have been made to the consolidated financial statements andrelated notes of prior periods to conform to the current presentation. Thesereclassifications had no impact on stockholders’ equity or net loss for theperiods. Additionally, certain information and footnote disclosures normallyincluded in financial statements have been condensed or omitted pursuant to rules andregulations of the U.S. Securities and Exchange Commission.  The Companybelieves that the disclosures in the unaudited condensed consolidated financialstatements are adequate to make the information presented not misleading. However, these unaudited condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K as of and forthe year ended December 31, 2009.

 

The Company received approval as abank in organization in the first quarter of 2007, conducted an initial closingof its common stock offering and commenced banking operations during the thirdquarter of 2007.  Successful completion of the Company’s developmentprogram and, ultimately, the attainment of sustained profitable operations aredependent on future events, including the successful execution of the Company’sbusiness plan and achieving a level of revenue adequate to support the Company’scost structure.

 

*Critical Accounting Policies*

 

The following is adescription of the Company’s significant accounting policies used in thepreparation of the accompanying consolidated financial statements.

 

Allowancefor loan losses:  Implicit in the Company’slending activities is the fact that loan losses will be experienced and thatthe risk of loss will vary with the type of loan being made and thecreditworthiness of the borrower over the term of the loan. The allowance forloan losses represents the Company’s recognition of the risks of extendingcredit and its evaluation of the loan portfolio. The allowance for loan lossesis maintained at a level considered adequate to provide for probable loanlosses based on management’s assessment of various factors affecting the loanportfolio, including a review of problem loans, business conditions, historicalloss experience, evaluation of the quality of the underlying collateral, andholding and disposal costs. In addition, because the Bank has limited historyon which to base future loan losses, a comparison of peer group allowanceratios to gross loans is made with the intention of maintaining similar levelsduring the Bank’s early years of operation. The allowance for loan losses is increased by provisions charged toexpense and reduced by loans charged off, net of recoveries.  Loan losses are charged against the allowancefor loan losses when management believes all, or a portion of, the loan balanceis uncollectible.

 

The Company has establisheda formal process for determining an adequate allowance for loan losses.  The allowance for loan losses calculation hastwo components.  The first componentrepresents the allowance for loan losses for impaired loans; that is loanswhere the Company believes collection of the contractual principal and interestpayments is not probable.  To determinethis component of the calculation, collateral-dependent impaired loans areevaluated using internal analyses as well as third-party information, such asappraisals.  If an impaired loan isunsecured, it is evaluated using a discounted cash flow of the paymentsexpected over the life 

 

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of the loan using the loan’seffective interest rate and giving consideration to currently existing factorsthat would impact the amount or timing of the cash flows.  The second component of the allowance forloan losses represents contingent losses — the estimated probable lossesinherent within the portfolio due to uncertainties.  Factors considered by management to estimateinherent losses include, but are not limited to, 1) historical and currenttrends in downgraded loans; 2) the level of the allowance in relation to totalloans; 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’sassessment of economic conditions and certain qualitative factors as defined bybank regulatory guidance, including but not limited to, changes in the size,composition and concentrations of the loan portfolio, changes in the legal andregulatory environment, and changes in lending management.  The recorded allowance for loan losses is theaggregate of the impaired loans component and the contingent loss component.

 

At September 30, 2010,the Company had an allowance for loan losses of $1.2 million.  Management believes that this allowance forloan losses is adequate to cover probable losses based on all currentlyavailable evidence. Future additions to the allowance for loan losses may berequired based on management’s continuing evaluation of the inherent risks inthe portfolio.  Additional provisions forloan losses may need to be recorded if the economy declines, asset qualitydeteriorates, or the loss experience changes. Also, federal regulators, when reviewing the Bank’s loan portfolio inthe future, may require the Bank to increase the allowance for loan losses.

 

Share-basedcompensation:  The Company grants stockoptions as incentive compensation to employees and directors.  The cost of employee/director servicesreceived in exchange for an award of equity instruments is based on thegrant-date fair value of the award, which is determined using aBlack-Scholes-Merton model.  This cost,net of estimated forfeitures, is expensed to salaries and employee benefitsover the period which the recipient is required to provide services in exchangefor the award, generally the vesting period.

 

Estimationof fair value:  The estimation of fair valueis significant to a number of the Company’s assets, includingavailable-for-sale investment securities. These are all recorded at either fairvalue or at the lower of cost or fair value. Furthermore, accounting principles generally accepted in the UnitedStates require disclosure of the fair value of financial instruments as a partof the notes to the consolidated financial statements.  Fair values are volatile and may beinfluenced by a number of factors, including market interest rates, prepaymentspeeds, discount rates and the shape of the yield curve.

 

Impairmentof investment securities: Investment securities are evaluated for impairment on at least aquarterly basis and more frequently when economic or market conditions warrantsuch an evaluation to determine whether a decline in their value belowamortized cost is other-than-temporary.  Securities are evaluated forimpairment utilizing criteria such as the magnitude and duration of thedecline, current market conditions, payment history, the credit worthiness ofthe obligator, the intent of the Company to retain the security or whether itis more likely than not that the Company will be required to sell the securitybefore recovery of the value, as well as other qualitative factors.  If a decline in value below amortized cost isdetermined to be other-than-temporary, which does not necessarily indicate thatthe decline is permanent, but indicates that the prospects for a near-termrecovery of value is not favorable, the security is reviewed in more detail inorder to determine the portion of the impairment that relates to credit(resulting in a charge to earnings) versus the portion of the impairment thatis noncredit related (resulting in a charge to accumulated other comprehensive income).  A credit loss is determined by comparing theamortized cost basis to the present value of cash flows expected to becollected, computed using the original yield as the discount rate.

 

*Recently Issued Accounting Pronouncements*

 

InJanuary 2010, the FASB issued guidance requiring increased fair valuedisclosures.  There are two components to the increased disclosurerequirements set forth in the update:  (1) a description of, as wellas the disclosure of, the dollar amount of transfers in or out of level one orlevel two; and (2) in the reconciliation for fair value measurements usingsignificant unobservable inputs (level three), a reporting entity shouldpresent separately information about purchases, sales, issuances andsettlements (that is, gross amounts shall be disclosed as opposed to a singlenet figure). Increased disclosures regarding the transfers in/out of level oneand two are required for interim and annual periods beginning afterDecember 15, 2009.  The adoption of this portion of the standard didnot have a material impact on the Company’s consolidated financial position,results of operations or cash flows. Increased disclosures regarding the level three fair valuereconciliation are required for fiscal years beginning after 

 

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December 15,2010. The adoption of this portion of the standard is not expected to have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

InApril 2010, the FASB issued accounting guidance for loan modificationswhen the loan is part of a pool of loans accounted for as a single asset. Diversity in practice developed surrounding how to account for loans that arepart of a pool subsequent to a modification that would constitute a troubleddebt restructuring.  To eliminate thediversity in practice, the new guidance requires loans that are accounted foras part of a pool to continue to be accounted for as part of the poolsubsequent to a modification, even if the modification constitutes a troubleddebt restructuring.  Upon adoption of the update an entity may make a onetime election to terminate accounting for loans in a pool, and the election maybe applied on a pool by pool basis.  This accounting treatment for themodification of loans accounted for as part of pools is effective for allinterim and annual reporting periods beginning on or after July 15,2010.  As the Company does not currently have any pools of loansaccounted for as a single asset, the adoption of this standard did not have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

 

InJuly 2010, the FASB updated disclosure requirements with respect to thecredit quality of loans and leases and the allowance for credit losses. According to the guidance there are two levels of detail at which creditinformation will be presented - the portfolio segment level and the classlevel.  The portfolio segment level is the aggregated level used by thecompany in developing their systematic method for calculating the allowance forcredit losses.  The class level represents a more detailed level ofcategorization than the portfolio segment level.  Companies will berequired to provide the following new or amended disclosures as a result ofthis update:

 

1.  A rollforward schedule of the allowance for credit losses from the beginning of thereporting period to the end of the reporting period on a portfolio segmentbasis, with the ending balance further disaggregated on the basis of theimpairment method

2.  For eachdisaggregated ending balance in item (1) above, the related recordedinvestment in loans and leases

3.  Thenonaccrual status of loans and leases by class

4.  Impairedloans and leases by class

5.  Creditquality indicators of loans and leases as of each balance sheet date, presentedby class

6.  The agingof past due loans and leases at the end of the reporting period by class

7.  The natureand extent of troubled debt restructurings that occurred during the period byclass and their effect on the allowance for credit losses

8.  The natureand extent of loans and leases modified as troubled debt restructurings withinthe previous 12 months that defaulted during the period by class and theireffect on the allowance for credit losses

9. Significant purchases and sales of loans and leases during the reportingperiod disaggregated by portfolio segment.

 

Theincreased disclosure requirements become effective for periods ending on orafter December 15, 2010.  The provisions of this update will expandour current disclosures with respect to the Allowance for Loan Losses.

 

**NOTE 3 —INVESTMENTS**

 

The amortized costs and estimatedfair values of investment securities as of September 30, 2010 and December 31,2009 are as follows:

 
| ** **                                                       | ** ** | **September 30, 2010** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | ** **                       | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Amortized**                    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **($ in thousands)**                                   | ** ** | **Cost**                         | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities available-for-sale:**                               |       |                             |       |   |   |   |   |   |   |
| U.S.  government agencies                                        |       | $                                | 6,871      |   | $ | 63 |   | $ | — |   | $ | 6,934 |   |
| Corporate                                                        |       | 10,176                           |       | 311 |   | (40 | ) | 10,447 |   |
| State  and municipal                                             |       | 21,927                           |       | 1,193 |   | (9 | ) | 23,111 |   |
| Residential  agency mortgage-backed securities (“MBS”) |       | 31,400                           |       | 1,001 |   | (17 | ) | 32,384 |   |
| **Total  securities available-for-sale**                         |       | $                                | 70,374     |   | $ | 2,568 |   | $ | (66 | ) | $ | 72,876 |   |

 

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| ** **                               | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | ** **                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| **($ in thousands)**           | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities available-for-sale:**       |       |                            |       |   |   |   |   |   |   |
| U.S.  government agencies                |       | $                               | 5,176      |   | $ | 28 |   | $ | (35 | ) | $ | 5,169 |   |
| Corporate                                |       | 9,822                           |       | 306 |   | (5 | ) | 10,123 |   |
| State  and municipal                     |       | 22,101                          |       | 395 |   | (295 | ) | 22,201 |   |
| Residential  agency MBS                  |       | 35,386                          |       | 760 |   | (198 | ) | 35,948 |   |
| **Total  securities available-for-sale** |       | $                               | 72,485     |   | $ | 1,489 |   | $ | (533 | ) | $ | 73,441 |   |

 

The amortized cost andestimated fair value of debt securities by contractual maturity at September 30,2010 and December 31, 2009 are shown below.  Agency mortgage-backed securities areclassified in accordance with their contractual lives.  Expected maturities may differ fromcontractual maturities because borrowers may have the right to prepayobligations with or without call or prepay penalties.  Additionally, accelerated principal paymentsare routinely received on agency mortgage-backed securities making it commonfor them to mature prior to the contractual maturity date.

 
| ** **                              | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Amortized**                | ** ** | **Estimated Fair**     | ** ** | **Amortized** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**          | ** ** | **Cost**                     | ** ** | **Value**                   | ** ** | **Cost** | ** ** | **Value** | ** ** |
| Securities  available-for-sale          |       |                         |       |                        |       |   |   |   |   |
| Due  within one year                    |       | $499                         |       | $507                        |       | $1,538 |   | $1,560 |   |
| Due  after one year through five years  |       | 5,040                        |       | 5,180                       |       | 5,602 |   | 5,823 |   |
| Due  after five years through ten years |       | 29,376                       |       | 30,732                      |       | 19,566 |   | 19,735 |   |
| Due  after ten years                    |       | 35,459                       |       | 36,457                      |       | 45,779 |   | 46,323 |   |
| Total securities available-for-sale     |       | $70,374                      |       | $72,876                     |       | $72,485 |   | $73,441 |   |

 

The following tables showthe estimated fair value and gross unrealized losses, aggregated by investmentcategory and length of time the individual securities have been in a continuousloss position as of September 30, 2010 and December 31, 2009.

 
| ** **                     | ** ** | **September 30, 2010**       | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| **($ in thousands)** | ** ** | **Estimated  Fair Value**         | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** |
| Description  of securities:    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies      |       | $                                      | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   | — |   | $ | — |   | $ | — |   | — |   |
| Corporate                      |       | 2,960                                  |       | (40 | ) | 4 |   | — |   | — |   | — |   | 2,960 |   | (40 | ) | 4 |   |
| State  and municipal           |       | 1,725                                  |       | (9 | ) | 3 |   | — |   | — |   | — |   | 1,725 |   | (9 | ) | 3 |   |
| Residential  agency MBS        |       | 2,943                                  |       | (17 | ) | 3 |   | — |   | — |   | — |   | 2,943 |   | (17 | ) | 3 |   |
| Total  temporarily-impaired    |       | $                                      | 7,628      |   | $ | (66 | ) | 10 |   | $ | — |   | $ | — |   | — |   | $ | 7,628 |   | $ | (66 | ) | 10 |   |

 
| ** **                     | ** ** | **December 31, 2009**        | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| **($ in thousands)** | ** ** | **Estimated  Fair Value**         | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** | **Estimated  Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **# of   Securities** | ** ** |
| Description  of securities:    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies      |       | $                                      | 3,726      |   | $ | (35 | ) | 7 |   | $ | — |   | $ | — |   | — |   | $ | 3,726 |   | $ | (35 | ) | 7 |   |
| Corporate                      |       | 517                                    |       | (5 | ) | 1 |   | — |   | — |   | — |   | 517 |   | (5 | ) | 1 |   |
| State  and municipal           |       | 7,768                                  |       | (243 | ) | 10 |   | 945 |   | (52 | ) | 3 |   | 8,713 |   | (295 | ) | 13 |   |
| Residential  agency MBS        |       | 10,520                                 |       | (198 | ) | 21 |   | — |   | — |   | — |   | 10,520 |   | (198 | ) | 21 |   |
| Total  temporarily-impaired    |       | $                                      | 22,531     |   | $ | (481 | ) | 39 |   | $ | 945 |   | $ | (52 | ) | 3 |   | $ | 23,476 |   | $ | (533 | ) | 42 |   |

 

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Management evaluatesinvestment securities for other-than-temporary impairment taking intoconsideration the extent and length of time the fair value has been less thancost, the financial condition of the issuer, whether the Company has the intentto retain the security and whether it is more-likely-than-not that the Companywill be required to sell the security before recovery of the value, as well asother qualitative factors.  As of September 30,2010, no securities were in a continuous unrealized loss position for 12 monthsor longer.   The Company has the intentto hold the ten securities in an unrealized loss position as of September 30,2010 and does not anticipate that these securities will be required to be soldbefore recovery of value, which may be upon maturity. Accordingly, as of September 30,2010, no decline in value was deemed to be other than temporary.  Similarly, management’s evaluation of thethree securities in a continuous unrealized loss position for 12 months orlonger at December 31, 2009, determined these securities were not otherthan temporarily impaired.

 

The Company recorded a netunrealized gain in the investment portfolio of $2.5 million at September 30,2010.  This was an increase over the$956,000 unrealized gain at December 31, 2009.

 

In an effort to bothcapitalize on current market conditions, while funding our loan portfoliogrowth, as well as to liquidate some odd-lots within the investment portfolio,the Company sold securities for gross realized gains of $885,000 and grossrealized losses of $22,000 during the first nine months of 2010.  The Company sold securities for grossrealized gains of $332,000 during the third quarter 2010.  The Company sold securities for grossrealized gains of $213,000 and gross realized losses of $8,000 during the firstnine months of 2009.  The Company soldsecurities for gross realized gains of $101,000 and gross realized losses of$3,000 during the third quarter 2009. Realized gains and losses on sales are computed on a specificidentification basis based on amortized cost on the date of sale.

 

Securities with carryingvalues of $17.5 million at September 30, 2010 and $16.9 million at December 31,2009, were pledged as collateral to secure public deposits, borrowings from theFHLB, repurchase agreements and for other purposes as required or permitted bylaw.

 

**NOTE 4 — LOANS**

 

Thecomposition of the loan portfolio follows:

 
| **($ in thousands)**    | ** **                                                      | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------|-----------------------------------------------------------------|----------------------------------|------------|---------------------------------|------------|
| Real estate – commercial     |                                                            | $                                | 39,347     |                            | $          | 26,063 |   |
| Real estate – residential    |                                                            | 8,054                            |       | 8,059                           |       |
| Construction and land development |                                                            | 2,007                            |       | 7,067                           |       |
| Commercial and industrial         |                                                            | 8,954                            |       | 8,324                           |       |
| Lease financing                   |                                                            | 1,452                            |       | —                          |       |
| Consumer                          |                                                            | 564                              |       | 991                             |       |
| Gross loans                       |                                                            | 60,378                           |       | 50,504                          |       |
| Less:                             | Deferred loan (fees) / expenses, net Allowance for  loan losses |                             | (85        | )                               | (114       | ) |
|                              | Allowance for loan losses                                       |                             | (1,200     | )                               | (830       | ) |
| Loans, net                        |                                                            | $                                | 59,093     |                            | $          | 49,560 |   |

 

Asof September 30, 2010, the Bank had two nonaccrual loans totaling $650,000after partial charge-offs of $520,000 taken during the third quarter. Alsoduring the third quarter, the Bank had one loan that was transferred to OtherReal Estate Owned (OREO) property and sold for a gain of approximately$10,000.  The Bank had $0 in OREOproperties as of September 30, 2010. There were no loans past due more than 90 days and still accruinginterest as of the end of the third quarter 2010.  During all of 2009, no loans were impaired,no loans were transferred to foreclosed properties and one loan, with aprincipal balance of approximately $3,000, was past due more than 90 days butstill accruing interest.

 

In the ordinary course of business,and only if consistent with permissible exceptions to Section 402 of theSarbanes- Oxley Act of 2002, the Bank may make loans to directors, executiveofficers, principal stockholders (holders of more than five percent of theoutstanding common shares) and the businesses with which they areassociated.  In the Company’s opinion,all loans and loan commitments to such parties are made on substantially thesame terms, including interest rates and collateral, as those prevailing at thetime for comparable transactions with other persons.

 

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Therewere approximately $2.1 million and $2.6 million in loans receivable fromrelated parties at September 30, 2010 and December 31, 2009,respectively.

 

**NOTE 5 — ALLOWANCEFOR LOAN LOSSES**

 

Activityin the allowance for loan losses for the three and nine months ended September 30,2010 and 2009 is summarized as follows:

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **($ in thousands)**             | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                       |       |                                                 |       |                                                      |       |   |   |   |   |
| Balance, beginning of period               |       | $                                                    | 940        |                                                      | $          | 520 |   | $ | 830 |   | $ | 268 |   |
| Loans charged off                          |       | (520                                                 | )          | —                                                    |       | (705 | ) | — |   |
| Recoveries on loans previously charged off |       | —                                               |       | —                                                    |       | — |   | — |   |
| Provision for loan losses                  |       | 780                                                  |       | 180                                                       |       | 1,075 |   | 432 |   |
| Balance, end of period                     |       | $                                                    | 1,200      |                                                      | $          | 700 |   | $ | 1,200 |   | $ | 700 |   |

 

Thefollowing table details information regarding impaired loans at the datesindicated:

 
| **($ in thousands)**                | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                          |       |                         |       |                        |       |
| Impaired loans with a valuation allowance:    |       | $                            | —     |                        | $          | — |   |
| Impaired loans without a valuation allowance: |       | 749                          |       | —                      |       |
| Total impaired loans                          |       | $                            | 749        |                        | $          | — |   |
| Valuation allowance related to impaired loans |       | $                            | —     |                        | $          | — |   |

 

Two ofthe three impaired loans did not have a specific valuation allowance, as theloans were partially charged-off during the third quarter 2010, bringing themto their net realizable value.  The otherimpaired loan is considered impaired because it is a troubled debtrestructuring; however, the loan is performing in accordance with its newcontractual terms and has an abundance of collateral and, therefore, does nothave a specific valuation allowance. Interest income recognized while these loans have been classified asimpaired was approximately $2,000.  Thegross interest income that would have been recorded for the nine months ended September 30,2010 if all impaired loans had been current throughout this period inaccordance with their original terms was approximately $16,000.

 

Troubleddebt restructurings are included in impaired loans above.  At September 30, 2010, there was oneloan for $99,000 with terms that were modified in a troubled debtrestructuring, with no specific allowance for loan losses because the loan iswell collateralized.  The Company has notcommitted additional funds to the borrower whose loan is classified as atroubled debt restructuring.  There wereno troubled debt restructurings at December 31, 2009.

 

**NOTE 6 — DEPOSITS**

 

Depositsare summarized as follows:

 
| ** **                                     | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **($ in thousands)**                 | ** ** | **Amount**                       | ** ** | **% of   Total**      | ** ** | **Amount** | ** ** | **% of   Total** | ** ** |
| Noninterest-bearing demand                     |       | $                                | 1,894      |                            | 2          | % | $ | 2,624 |   | 2 | % |
| Interest-bearing demand                        |       | 11,224                           |       | 10                              |       | 6,830 |   | 7 |   |
| Money market accounts                          |       | 7,640                            |       | 7                               |       | 3,555 |   | 3 |   |
| Savings accounts                               |       | 45,895                           |       | 42                              |       | 51,763 |   | 50 |   |
| Certificates of deposit, less than $100,000    |       | 10,212                           |       | 10                              |       | 16,624 |   | 16 |   |
| Certificates of deposit, greater than $100,000 |       | 31,496                           |       | 29                              |       | 23,005 |   | 22 |   |
| Total deposits                                 |       | $                                | 108,361    |                            | 100        | % | $ | 104,401 |   | 100 | % |

 

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Inthe ordinary course of business, certain officers, directors, stockholders, andemployees of the Bank have deposits with the Bank.  In the Bank’s opinion, all depositrelationships with such parties are made on substantially the same termsincluding interest rates and maturities, as those prevailing at the time forcomparable transactions with other persons. The balance of related party deposits at September 30, 2010 and December 31,2009 was approximately $4.4 million and $4.0 million, respectively.

 

**NOTE 7 —STOCK-BASED COMPENSATION**

 

The Company’s 2007 StockIncentive Plan (the “Plan”) was approved by the Company’s Board of Directors(the “Board”) with an effective date of September 10, 2007 and was approvedby the Company’s stockholders at the annual meeting held on September 17,2008.  Under the terms of the Plan,officers and key employees may be granted both nonqualified and incentive stockoptions and directors and other consultants, who are not also officers oremployees, may only be granted nonqualified stock options. The Board reserved510,734 shares of common stock for issuance under the Plan.  The Planprovides for options to purchase shares of common stock at a price not lessthan 100% of the fair market value of the stock on the date of grant.  Stock options expire no later than ten yearsfrom the date of the grant and generally vest over four years.  The Plan provides for accelerated vesting ifthere is a change of control, as defined in the Plan.  The Company recognized stock-basedcompensation cost of approximately $148,000 and $156,000 during the nine monthsended September 30, 2010 and 2009, respectively.  During the third quarter 2010, the Companyrevised its estimated forfeiture rate on the nonqualified stock options grantedto Directors in September 2007 to decrease the rate from 33% to 10%, whichmore accurately reflects the turnover rate of our Directors.  This resulted in approximately $7,000 ofadditional stock-based compensation expense during the third quarter 2010.

 

The Company accounts for itsstock-based compensation under the provisions of ASC 718-20 — *Stock Compensation — Awards Classified as Equity*.  The fair value of each option grant isestimated on the date of grant using the Black-Scholes-Merton option pricingmodel.  The Company granted 10,000options during the third quarter 2010 as incentive compensation to an executiveofficer and 45,000 nonqualified options to directors.  The director options vest over one year,expire ten years from the date of grant and directors have one year to exercisevested options upon termination.  TheCompany granted 1,250 options during the second quarter 2010 as incentivecompensation to newly hired employees and 16,500 options during the first quarter2010 as incentive compensation to existing and newly hired employees.  Similarly, the Company granted 42,000 optionsas incentive compensation primarily to the President & CEO and also tonewly hired employees during the third quarter of 2009.

 

During the nine months endedSeptember 30, 2010, 5,688 options were forfeited and 5,125 vested optionsexpired unexercised.  No options wereexercised during the nine months ended September 30, 2010 or 2009.  The Company recognized expense forapproximately 20,000 options, representing a pro-rata amount of the optionsearned during the third quarter 2010 that are expected to vest.  As of September 30, 2010, there wasapproximately $272,000 of total unrecognized compensation cost related to theoutstanding stock options that will be recognized over a weighted-averageperiod of 1.3 years.

 

The following is a summaryof the Company’s outstanding stock options at September 30, 2010:

 
| ** **                              | ** ** | **Options** | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** | **Weighted-  Average   Exercise Price** | ** ** |
|-----------------------------------------|------------|-------------|------------|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Outstanding at January 1, 2010     |       | 305,353     |       | $                                                          | 2.44       |                                              | $          | 9.19 |   |
| Granted                                 |       | 72,750      |       | 0.79                                                       |       | 4.67                                              |       |
| Exercised                               |       | —      |       | —                                                     |       | —                                            |       |
| Forfeited                               |       | (5,688      | )          | 1.77                                                       |       | 7.52                                              |       |
| Expired                                 |       | (5,125      | )          | 2.46                                                       |       | 9.39                                              |       |
| Outstanding  at September 30, 2010 |       | 367,290     |       | $                                                          | 2.12       |                                              | $          | 8.32 |   |

 

**NOTE 8 — WARRANTS**

 

Duringour initial public offering, each of the Company’s initial stockholders weregranted one warrant to purchase an additional share, at an exercise price of$12.50 per share, for every five shares purchased.  All of these stockholder warrants expiredunexercised on September 10, 2010.

 

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**NOTE 9 —NONINTEREST EXPENSE**

 

Thefollowing table details the items comprising other general and administrativeexpenses:

 
| ** **                        | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **($ in thousands)**    | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Data processing                   |       | $                                                          | 80         |                                                      | $          | 70 |   | $ | 211 |   | $ | 200 |   |
| FDIC assessment                   |       | 52                                                         |       | 45                                                        |       | 147 |   | 125 |   |
| Regulatory and reporting fees     |       | 26                                                         |       | 22                                                        |       | 90 |   | 75 |   |
| Marketing and promotions          |       | 38                                                         |       | 34                                                        |       | 80 |   | 90 |   |
| Travel and entertainment          |       | 18                                                         |       | 16                                                        |       | 39 |   | 33 |   |
| Telephone/communication           |       | 10                                                         |       | 10                                                        |       | 31 |   | 30 |   |
| Loan and collection expenses      |       | 14                                                         |       | 1                                                         |       | 24 |   | 3 |   |
| Printing, stationery and supplies |       | 7                                                          |       | 11                                                        |       | 24 |   | 31 |   |
| Dues and memberships              |       | 7                                                          |       | 7                                                         |       | 24 |   | 23 |   |
| Directors’ fees              |       | 20                                                         |       | —                                                    |       | 23 |   | — |   |
| Insurance                         |       | 6                                                          |       | 5                                                         |       | 17 |   | 14 |   |
| Franchise taxes                   |       | 3                                                          |       | 2                                                         |       | 14 |   | 7 |   |
| Postage and shipping              |       | 5                                                          |       | 5                                                         |       | 13 |   | 16 |   |
| ATM and debit card fees           |       | 4                                                          |       | 3                                                         |       | 12 |   | 11 |   |
| Training and education            |       | 2                                                          |       | 1                                                         |       | 6 |   | 9 |   |
| Miscellaneous                     |       | 5                                                          |       | 4                                                         |       | 18 |   | 13 |   |
| Total                             |       | $                                                          | 297        |                                                      | $          | 236 |   | $ | 773 |   | $ | 680 |   |

 

**NOTE 10 —****COMMITMENTS ANDCONTINGENCIES**

 

TheCompany is a party to credit related financial instruments withoff-balance-sheet risk in the normal course of business to meet the financingneeds of its customers.  These financialinstruments include commitments to extend credit and letters of credit.  Such commitments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated balance sheet.  TheCompany’s exposure to credit loss is represented by the contractual amount ofthese commitments.  The Company followsthe same credit policies in making commitments as it does for on-balance-sheetinstruments.

 

AtSeptember 30, 2010 and December 31, 2009, the following financialinstruments were outstanding whose contract amounts represent credit risk:

 
| **($ in thousands)**                                          | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Financial instruments whose contractual amounts  represent credit risk: |       |                             |       |                            |       |
| Commitments to extend credit                                            |       | $                                | 7,212      |                            | $          | 7,182 |   |
| Letters of credit                                                       |       | —                           |       | —                          |       |
| Total commitments                                                       |       | $                                | 7,212      |                            | $          | 7,182 |   |

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without being drawn upon, the commitments do not necessarily representfuture cash requirements.  The Companyevaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained is based onmanagement’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory,property, plant and equipment and income producing commercial properties.

 

Lettersof credit are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers.

 

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**NOTE 11****—****FAIR VALUE**

 

Fairvalue is the exchange price that would be received for an asset or paid totransfer a liability (exit price) in the most advantageous market for the assetor liability in an orderly transaction between market participants. The fairvalue hierarchy requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair values:

 

Level 1 —          inputs are unadjusted quoted prices in active markets foridentical assets or liabilities that the Company has the ability to access atthe measurement date.

 

Level 2 —          inputs are other than quoted prices included in Level 1that are observable for the asset or liability either directly or indirectly,such as quoted prices for similar assets or liabilities; quoted prices inmarkets that are not active; or model-based valuation techniques for which allsignificant assumptions are observable in the market.

 

Level 3 —          valuation is generated from model-based techniques that useat least one significant assumption not observable in the market.  These unobservable assumptions reflectestimates of assumptions that market participants would use in pricing theasset or liability.  Valuation techniquesinclude use of option pricing models, discounted cash flow models and similartechniques.

 

The Company carries itsavailable-for-sale securities at fair value. Fair value measurement is obtained from independent pricing serviceswhich utilize observable data that may include dealer quotes, market spreads,cash flows, the U.S. Treasury yield curve, live trading levels, trade executiondata, market consensus prepayment speeds, credit information and the bonds’terms and conditions, among other things. As of September 30, 2010 and December 31, 2009, all of theCompany’s available-for-sale securities were valued using Level 2 inputs.

 

Impaired loans are valued at thelower of cost or fair value and are generally classified as Level 3 in the fairvalue hierarchy.  Fair value is measuredbased on the value of the collateral securing the loan or discounting estimatedfuture cash flows.  Collateral is valuedbased on appraisals performed by qualified licensed appraisers.  Such appraisal values may be discounted basedon management’s historical knowledge, changes in market conditions from thetime of valuation and/or similar factors. Impaired loans that are not secured by collateral are valued by usingthe discounted estimated future cash flows at the loans’ effective interestrate.  The cash flow estimates are madeby management using historical knowledge, market conditions, and knowledge ofthe borrower’s business, among other factors.

 

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***Assets and Liabilities Measured on a Recurring Basis***

 

Assets and liabilitiesmeasured at fair value on a recurring basis are summarized below:

 
| **($ in thousands)**              | ** ** | **Quoted   Prices in   Active   Markets for   Identical   Assets  (Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs  (Level 3)** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------|------------|
| Assets  at September 30, 2010          |       |                                                                                                                  |       |                                                                               |       |                                                              |       |      |       |
| Investment  securities, available-for-sale: |       |                                                                                                                  |       |                                                                               |       |                                                              |       |      |       |
| U.S.  government agencies                   |       | $                                                                                                                     | —     |                                                                               | $          | 6,934                                                             |       | $         | —     |   | $ | 6,934 |   |
| Corporate                                   |       | —                                                                                                                |       | 10,447                                                                             |       | —                                                            |       | 10,447    |       |
| State  and municipal                        |       | —                                                                                                                |       | 23,111                                                                             |       | —                                                            |       | 23,111    |       |
| Agency  MBS                                 |       | —                                                                                                                |       | 32,384                                                                             |       | —                                                            |       | 32,384    |       |
| Total                                       |       | $                                                                                                                     | —     |                                                                               | $          | 72,876                                                            |       | $         | —     |   | $ | 72,876 |   |
| Assets  at December 31, 2009           |       |                                                                                                                  |       |                                                                               |       |                                                              |       |      |       |
| Investment  securities, available-for-sale: |       |                                                                                                                  |       |                                                                               |       |                                                              |       |      |       |
| U.S.  government agencies                   |       | $                                                                                                                     | —     |                                                                               | $          | 5,169                                                             |       | $         | —     |   | $ | 5,169 |   |
| Corporate                                   |       | —                                                                                                                |       | 10,123                                                                             |       | —                                                            |       | 10,123    |       |
| State  and municipal                        |       | —                                                                                                                |       | 22,201                                                                             |       | —                                                            |       | 22,201    |       |
| Agency  MBS                                 |       | —                                                                                                                |       | 35,948                                                                             |       | —                                                            |       | 35,948    |       |
| Total                                       |       | $                                                                                                                     | —     |                                                                               | $          | 73,441                                                            |       | $         | —     |   | $ | 73,441 |   |

 

There were no transfers inor out of Level 1 and Level 2 during the periods presented.

 

***Assets and Liabilities Measured on a Nonrecurring Basis***

 

Assets and liabilitiesmeasured at fair value on a nonrecurring basis are summarized below:

 
| **($ in thousands)**     | ** ** | **Quoted Prices   in Active   Markets for   Identical Assets  (Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs  (Level 3)** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------|------------|
| Assets  at September 30, 2010 |       |                                                                                                              |       |                                                                               |       |                                                              |       |      |       |
| Impaired  loans                    |       | $                                                                                                                 | —     |                                                                               | $          | —                                                            |       | $         | 749        |   | $ | 749 |   |
|                               |       |                                                                                                              |       |                                                                               |       |                                                              |       |      |       |
| Assets  at December 31, 2009  |       |                                                                                                              |       |                                                                               |       |                                                              |       |      |       |
| Impaired  loans                    |       | $                                                                                                                 | —     |                                                                               | $          | —                                                            |       | $         | —     |   | $ | — |   |

 

***Fair Value of FinancialInstruments***

 

Disclosure of fair valueinformation about financial instruments, whether or not recognized in theconsolidated balance sheets, for which it is practicable to estimate that valueis required. Fair value estimates are made at a specific point in time based onrelevant market information and information about the financial instrument.Because no market value exists for a significant portion of the financialinstruments, fair value estimates are based on judgments regarding futureexpected loss experience, current economic conditions, risk characteristics ofvarious financial instruments, and other factors.  These estimates are subjective in nature, involveuncertainties and matters of judgment, and therefore cannot be determined withprecision. Changes in assumptions could significantly affect the estimates.

 

Fair value information isnot required to be disclosed for certain financial instruments and allnonfinancial instruments.  Accordingly,the aggregate fair value amounts presented may not necessarily represent theunderlying fair value of the Company. Fair value estimates are based on financial instruments both on and offthe balance sheet without attempting to estimate the value of anticipatedfuture business and the value of assets and liabilities that are not consideredfinancial instruments. Additionally, tax consequences related to therealization of the unrealized gains and losses can have a potential effect onfair value estimates and have not been considered in many of the estimates.

 

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The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

 

*Cashand cash equivalents*:  Thecarrying amounts of cash and due from banks and federal funds sold approximatetheir fair values.

 

*Interest-bearingdeposits with banks: *The carryingamount of interest-bearing deposits with banks approximates fair values due tothe relatively stable level of short-term interest rates.

 

*Investmentsecurities*:  Fair valuemeasurement is obtained from independent pricing services which utilizeobservable data that may include dealer quotes, market spreads, cash flows, theU.S. Treasury yield curve, live trading levels, trade execution data, marketconsensus prepayment speeds, credit information and the bonds’ terms andconditions, among other things.

 

*Loans, net:*  The fair value of fixed rate loans isestimated by discounting the future cash flows using interest rates currentlybeing offered for loans with similar terms to borrowers of similar creditquality.  For variable rate loans thatreprice frequently and with no significant change in credit risk, fair valuesare estimated to be equivalent to carrying values.  Variable rate loans that are currently pricedat their contractual floor or ceiling, and thus similar to fixed rate loans,are reviewed to determine the interest rate that would be currently offered onsimilar credits.  If the currentfloor/ceiling rate is equivalent to current market rates, fair value isestimated to be equivalent to carrying value. If the current market rates differ from the loan’s current rate, thecontractual cash flows are discounted using the current market rate to derivethe loan’s estimated fair value.  Boththe estimated fair value and the carrying value have been reduced by specificand general reserves for loan losses.

 

*Investmentin FHLB and Federal Reserve Bank (FRB) stocks: *It is not practical to determine the fair value of bank stocks due tothe restrictions placed on the transferability of FHLB stock and FRB stock.

 

*Interestreceivable:*  The carryingvalue of interest receivable approximates fair value due to the short period oftime between accrual and receipt of payment.

 

*Deposits:*  The fair value of noninterest-bearing demanddeposits, interest-bearing demand deposits and savings and money marketaccounts is determined to be the amount payable on demand at the reportingdate.  The fair value of fixed rate timedeposits is estimated using a discounted cash flow calculation that utilizesinterest rates currently being offered for deposits of similar remainingmaturities.  Carrying value is assumed toapproximate fair value for all variable rate time deposits.

 

*Federalfunds purchased and securities sold under agreements to repurchase: *The carrying amount offederal funds purchased and securities sold under agreements to repurchaseapproximates fair value due to the short-term nature of these agreements, whichgenerally mature within one to fourdays from the transaction date.

 

*Capitallease liability: *Management didnot fair value the capital lease liability as it is specifically excluded fromthe disclosure requirements.

 

*FederalHome Loan Bank advances: *Fair value ofthe Federal Home Loan Bank advances is estimated using a discounted cash flowmodel that utilizes current market rates for similar types of borrowingarrangements with similar remaining maturities.

 

*Interestpayable:*  The carryingvalue of interest payable approximates fair value due to the short period oftime between accrual and payment.

 

*Loancommitments and letters of credit: *The fair valuesof commitments are estimated using the fees currently charged to enter intosimilar agreements, taking into account the remaining terms of the agreementsand the present creditworthiness of the counterparties.  The difference between the carrying value ofcommitments to fund loans or standby letters of credit and their fair valuesare not significant and, therefore, are not included in the following table.

 

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The carrying amounts andestimated fair values of financial instruments are summarized as follows:

 
| ** **                                                                  | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**                     | ** ** | **Estimated Fair**         | ** ** | **Carrying** | ** ** | **Estimated Fair** | ** ** |
| **($ in thousands)**                                              | ** ** | **Value**                        | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial  Assets:                                                          |       |                             |       |                            |       |   |   |   |   |
| Cash  and cash equivalents                                                  |       | $                                | 698        |                            | $          | 698 |   | $ | 2,516 |   | $ | 2,516 |   |
| Interest-bearing  deposits with banks                                       |       | 266                              |       | 266                             |       | 3,784 |   | 3,784 |   |
| Investment  securities                                                      |       | 72,876                           |       | 72,876                          |       | 73,441 |   | 73,441 |   |
| Loans,  net                                                                 |       | 59,093                           |       | 59,052                          |       | 49,560 |   | 49,230 |   |
| FHLB  and FRB stocks                                                        |       | 1,165                            |       | 1,165                           |       | 1,131 |   | 1,131 |   |
| Interest  receivable                                                        |       | 749                              |       | 749                             |       | 814 |   | 814 |   |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Financial  Liabilities:                                                     |       |                             |       |                            |       |   |   |   |   |
| Deposits,  demand, savings and money market                                 |       | $                                | 66,653     |                            | $          | 66,653 |   | $ | 64,772 |   | $ | 64,772 |   |
| Time  deposits                                                              |       | 41,708                           |       | 42,180                          |       | 39,629 |   | 39,036 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 1,085                            |       | 1,085                           |       | 326 |   | 326 |   |
| Federal  Home Loan Bank advances                                            |       | 6,000                            |       | 5,928                           |       | 8,750 |   | 8,508 |   |
| Interest  payable                                                           |       | 99                               |       | 99                              |       | 82 |   | 82 |   |

 

**NOTE 12 — PENDINGTRANSACTION**

 

On August 5, 2010, the Bankentered into a purchase and assumption agreement with Liberty Savings Bank, FSB(“Liberty”), a wholly-owned subsidiary of Liberty Capital, Inc. to assumeapproximately $40 million in customer deposits from Liberty’s branch located inLakewood, Colorado.  Additionally, theBank agreed to acquire approximately $30 million in Colorado-based, performingloans.  The transaction is expected toclose in the fourth quarter 2010 conditioned upon receiving approval from theappropriate bank regulatory agencies. The Bank will pay a 3.8% premium for deposits and will acquire the loansat par value.

 

The Bank expects to account forthis as a purchase of assets in accordance with ASC 805-50, *Acquisition of Assets Rather than a Business. *The assets purchased andliabilities assumed will be recognized at cost plus allocated transaction costs,which will be allocated based on the relative fair values of the assetsacquired and liabilities assumed.  Sincethe Bank is assuming $10 million more deposits than loans, the Company willhave a net increase in cash rather than a cash outflow.

 

**NOTE 13 —SUBSEQUENT EVENTS**

 

As of the date of issuance of thisReport on Form 10-Q, the Company has determined that no subsequent eventdisclosure is necessary.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion andanalysis presents the Company’s consolidated financial condition as of September 30,2010 and results of operations for the three and nine months ended September 30,2010 and 2009.  The discussion should beread in conjunction with the financial statements and the notes related theretowhich appear elsewhere in this Quarterly Report on Form 10-Q.

 

**Executive Overview**

 

We are a Delaware corporation thatwas incorporated on January 12, 2006 to organize and serve as the holdingcompany for Solera National Bank, a national bank that opened for business onSeptember 10, 2007.  Solera NationalBank is a full-service commercial bank headquartered in Lakewood, Coloradoserving the Denver metropolitan area. Our main banking office is located at 319 S. Sheridan Blvd., Lakewood,Colorado 80226.  Our telephone number is(303) 209-8600.

 

Earningsare derived primarily from our net interest income, which is interest incomeless interest expense, and our noninterest income earned from gains oninvestment securities and banking service fees, offset by noninterest expense.As the majority of our assets are interest-earning and our liabilities areinterest-bearing, changes in interest rates impact our net interestmargin.  We manage our interest-earningassets and interest-bearing liabilities to reduce the impact of interest ratechanges on our operating results.

 

Weoffer a broad range of commercial and consumer banking services to small andmedium-sized businesses, licensed professionals and individuals who areparticularly responsive to the personalized service that Solera National Bankprovides to its customers.  We believethat local ownership and control allows the Bank to serve customers efficientlyand effectively.  Solera National Bankcompetes on the basis of providing a unique and personalized banking experiencecombined with a full range of services, customized and tailored to fit theindividual needs of its clients.  SoleraNational Bank serves the entire market area and, in addition, has a special focusserving the local Hispanic population due to the significant growth of thisdemographic.  Since opening the bank in September of2007, management has successfully executed its strategy of delivering prudentand controlled growth to efficiently leverage the Company’s capital and expensebase with the goal of achieving sustained profitability.

 

During the third quarter, the Bankentered into a definitive purchase and assumption agreement (the “Agreement”)with Liberty Savings Bank, FSB (“Liberty”) to assume approximately $40 millionin customer deposits from Liberty’s branch located in Lakewood, Colorado.  Additionally, the Bank agreed to acquireapproximately $30 million in Colorado-based, performing loans fromLiberty.  Pursuant to the Agreement, theBank will pay a deposit premium of 3.8% and will acquire the loans at parvalue.  For further disclosure, see Note13, *Pending Transaction*, to our consolidatedfinancial statements.

 

*Dodd-Frank Wall Street Reform and Consumer Protection Act*

 

OnJuly 21, 2010, the Dodd-Frank Wall Street Reform and Consumer ProtectionAct, (the “Act”), was signed into legislation. The Act includes, among others,the creation of a new Consumer Financial Protection Bureau with power topromulgate and enforce consumer protection laws; the creation of a FinancialStability Oversight Council with authority to identify institutions andpractices that might pose a systemic risk; provisions affecting corporategovernance and executive compensation of all companies whose securities areregistered with the SEC; a provision that would broaden the base for FDICinsurance assessments; a provision under which interchange fees for debit cardswould be set by the Federal Reserve; a provision that would require bankregulators to set minimum capital levels for bank holding companies that are asstrong as those required for their insured depository subsidiaries; and newrestrictions on how mortgage brokers and loan originators may be compensated.Certain provisions of the Act only apply to institutions with more than$10 billion in assets.

 

Weare monitoring developments as the various agencies draft regulations requiredby the Act.  We expect that someprovisions of the Act may have an adverse impact due to, among others, the costof complying with the numerous new regulations and reporting requirementsmandated by the Act.  Some provisions ofthe Act will benefit our 

 

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business,such as the permanent exemption from Sarbanes-Oxley Section 404(b) forcompanies with market capitalization of less than $75 million, which shouldmaintain our external audit fees at current levels as our external auditorswill not be required to provide an attestation report on our internal controlover financial reporting in our annual report on Form 10-K.

 

**Comparative Results of Operations for the Three Months Ended September 30,2010 and 2009**

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the three months ended September 30, 2010 compared tothe financial condition and results of operations for the three months ended September 30,2009.

 

Net loss for the quarter ended September 30,2010 was $493,000, or ($0.19) per share, compared with a loss of $261,000, or($0.10) per share for the third quarter of 2009.  The increased lossduring the third quarter 2010 was primarily the result of a $600,000 increasein provision expense partially offset by increases in net interest income andincreased gains on the sale of investment securities.

 

Asof September 30, 2010, the Company had total assets of $136.2 million, anincrease of $3.4 million, or 3%, from December 31, 2009.  Net loans increased $9.5 million, or 19%,from $49.6 million at December 31, 2009 to $59.1 million at September 30,2010.  Similarly, the Company’s totaldeposits grew $4.0 million, or 4%, from $104.4 million at December 31,2009 to $108.4 million as of September 30, 2010.   This growth was achieved as a result of aneffective business development program.

 

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The following tablepresents, for the periods indicated, average assets, liabilities andstockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields expressed inpercentages.

 

**Table 1**

 
| ** **                                                                  | ** ** | **Three Months Ended  September 30, 2010** | ** ** | **Three Months Ended  September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Average   Balance**                                          | ** ** | **Interest**                                                   | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/  Cost** | ** ** |
|                                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| **Assets:**                                                                 |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                    |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Gross loans, net of unearned fees                                           |       | $                                                              | 60,632     |                                                           | $          | 901 |   | 5.89 | % | $ | 43,485 |   | $ | 598 |   | 5.46 | % |
| Investment securities**                                                     |       | 70,747                                                         |       | 713                                                            |       | 4.00 |   | 58,203 |   | 752 |   | 5.13 |   |
| FHLB and FRB stocks                                                         |       | 1,150                                                          |       | 10                                                             |       | 3.41 |   | 1,081 |   | 11 |   | 4.00 |   |
| Federal funds sold                                                          |       | 908                                                            |       | —                                                         |       | — |   | 2,885 |   | 2 |   | 0.25 |   |
| Interest-bearing deposits with banks                                        |       | 787                                                            |       | 1                                                              |       | 0.58 |   | 441 |   | — |   | — |   |
| Total interest-earning assets                                               |       | 134,224                                                        |       | $                                                              | 1,625      |   | 4.81 | % | 106,095 |   | $ | 1,363 |   | 5.10 | % |
| Noninterest-earning assets                                                  |       | 4,589                                                          |       |                                                           |       |   |   | 3,170 |   |   |   |   |   |
| Total assets                                                                |       | $                                                              | 138,813    |                                                           |       |   |   |   | $ | 109,265 |   |   |   |   |   |
|                                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’  Equity:**                             |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                               |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Money market and savings deposits                                           |       | $                                                              | 54,625     |                                                           | $          | 203 |   | 1.48 | % | $ | 25,441 |   | $ | 172 |   | 2.68 | % |
| Interest-bearing checking accounts                                          |       | 11,197                                                         |       | 43                                                             |       | 1.51 |   | 6,302 |   | 40 |   | 2.55 |   |
| Time deposits                                                               |       | 43,865                                                         |       | 220                                                            |       | 1.99 |   | 45,092 |   | 305 |   | 2.68 |   |
| Federal funds purchased and securities sold under  agreements to repurchase |       | 646                                                            |       | 2                                                              |       | 1.25 |   | 610 |   | 2 |   | 1.48 |   |
| Federal Home Loan Bank advances                                             |       | 5,645                                                          |       | 58                                                             |       | 4.09 |   | 8,120 |   | 78 |   | 3.81 |   |
| Other borrowings                                                            |       | 93                                                             |       | 2                                                              |       | 9.31 |   | 134 |   | 3 |   | 9.26 |   |
| Total interest-bearing liabilities                                          |       | 116,071                                                        |       | $                                                              | 528        |   | 1.81 | % | 85,699 |   | $ | 600 |   | 2.78 | % |
| Noninterest-bearing checking accounts                                       |       | 1,801                                                          |       |                                                           |       |   |   | 4,353 |   |   |   |   |   |
| Noninterest-bearing liabilities                                             |       | 537                                                            |       |                                                           |       |   |   | 531 |   |   |   |   |   |
| Stockholders’ equity                                                   |       | 20,404                                                         |       |                                                           |       |   |   | 18,682 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                             |       | $                                                              | 138,813    |                                                           |       |   |   |   | $ | 109,265 |   |   |   |   |   |
|                                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net interest income                                                         |       |                                                           |       | $                                                              | 1,097      |   |   |   |   |   | $ | 763 |   |   |   |
|                                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net interest spread                                                         |       |                                                           |       | 3.00                                                           | %          |   |   |   |   | 2.32 | % |   |   |
|                                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net interest margin                                                         |       |                                                           |       | 3.24                                                           | %          |   |   |   |   | 2.85 | % |   |   |

 

----

**Yields on investmentsecurities have not been adjusted to a tax-equivalent basis.

 

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The following tablepresents the dollar amount of changes in interest income and interest expensefor the major categories of interest-earning assets and interest-bearingliabilities.  The information details thechanges attributable to a change in volume (i.e. change in average balancemultiplied by the prior-period average rate) and changes attributable to achange in rate (i.e. change in average rate multiplied by the prior-periodaverage balance).  There is a componentthat is attributable to both a change in volume and a change in rate.  This component has been allocatedproportionately to the rate and volume columns.

 

**Table 2**

 
| ** **                                                                  | ** ** | **Three Months Ended September 30, 2010 Compared to  Three Months Ended September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Net Change**                                                                                                                                      | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest income:**                                                        |       |                                                                                                                                                     |       |   |   |   |   |
| Gross loans, net of unearned fees                                           |       | $                                                                                                                                                        | 303        |   | $ | 51 |   | $ | 252 |   |
| Investment securities                                                       |       | (39                                                                                                                                                      | )          | (2,144 | ) | 2,105 |   |
| FHLB and FRB stocks                                                         |       | (1                                                                                                                                                       | )          | (2 | ) | 1 |   |
| Federal funds sold                                                          |       | (2                                                                                                                                                       | )          | (2 | ) | — |   |
| Interest-bearing deposits with banks                                        |       | 1                                                                                                                                                        |       | — |   | 1 |   |
| Total interest income                                                       |       | $                                                                                                                                                        | 262        |   | $ | (2,097 | ) | $ | 2,359 |   |
|                                                                        |       |                                                                                                                                                     |       |   |   |   |   |
| **Interest expense:**                                                       |       |                                                                                                                                                     |       |   |   |   |   |
| Money market and savings deposits                                           |       | $                                                                                                                                                        | 31         |   | $ | (20 | ) | $ | 51 |   |
| Interest-bearing checking accounts                                          |       | 3                                                                                                                                                        |       | (2 | ) | 5 |   |
| Time deposits                                                               |       | (85                                                                                                                                                      | )          | (76 | ) | (9 | ) |
| Federal funds purchased and securities sold under  agreements to repurchase |       | —                                                                                                                                                   |       | (1 | ) | 1 |   |
| Federal Home Loan Bank advances                                             |       | (20                                                                                                                                                      | )          | 6 |   | (26 | ) |
| Other borrowings                                                            |       | (1                                                                                                                                                       | )          | — |   | (1 | ) |
| Total interest expense                                                      |       | $                                                                                                                                                        | (72        | ) | $ | (93 | ) | $ | 21 |   |
|                                                                        |       |                                                                                                                                                     |       |   |   |   |   |
| **Net interest income**                                                     |       | $                                                                                                                                                        | 334        |   | $ | (2,004 | ) | $ | 2,338 |   |

 

***Net Interest Income and Net Interest Margin***

 

Netinterest income is the difference between interest and fee income, principallyfrom loan and investment security portfolios, and interest expense, principallyon customer deposits and borrowings.  Netinterest income is our principal source of earnings.  Changes in net interest income result fromchanges in volume, spread and margin. Volume refers to the average dollar levelof interest-earning assets and interest-bearing liabilities.  Spread refers to the difference between theaverage yield on interest-earning assets and the average cost ofinterest-bearing liabilities. Margin refers to net interest income divided byaverage interest-earning assets, and is influenced by the level and relativemix of interest-earning assets and interest-bearing liabilities.

 

TheFederal Reserve Board influences the general market rates of short-terminterest, including the deposit and loan rates offered by the Bank. The Bank’sloan portfolio is significantly affected by changes in the prime interestrate.  The prime interest rate, which isthe rate offered on loans to borrowers with strong credit, has remainedunchanged throughout 2009 and thus far in 2010 at 3.25%.  Rates on our loan portfolio have increasedslightly, up 43 basis points over the third quarter 2009, primarily due to ashift in the loan mix to more fixed-rate loans at higher interest rates.

 

The113 basis points decrease in the Bank’s investment portfolio compared to thethird quarter of 2009 is primarily due to the sale of longer-maturity,higher-yielding investments which were reinvested in shorter-term,lower-yielding bonds to help shorten the duration of the investment portfolio.

 

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Theimpact of the 29 basis point decrease in the Company’s yield oninterest-earning assets was more than offset by decreases in the cost ofinterest-bearing liabilities, resulting in a 39 basis point increase in netinterest margin year-over-year.  Asreflected in Table 1, the cost of money market and savings deposits decreased120 basis points, the cost of interest-bearing checking decreased 104 basispoints and the cost of time deposits decreased 69 basis points year-over-year,primarily due to eliminating the promotional rates that were offered during ourfirst two years of business and the general decline in the level of interestrates compared to the prior year.

 

TheCompany’s balance sheet is marginally asset sensitive, meaning thatinterest-earning assets generally reprice quicker than interest-bearingliabilities. Therefore, the Company could experience expansion in its netinterest margin during periods of rising interest rates.

 

Totalinterest income was $1.6 million for the third quarter 2010, consistingprimarily of interest on loans of $901,000 and interest on investmentsecurities of $713,000.  This compared tototal interest income of $1.4 million for the same period of 2009, consistingprimarily of interest on investment securities of $752,000 and interest onloans of $598,000.  Average loans, net ofunearned fees, increased $17.1 million, from $43.5 million for the three monthsended September 30, 2009 to $60.6 million for the three months ended September 30,2010.  Average investment securitiesincreased $12.5 million from $58.2 million for the three months ended September 30,2009 to $70.7 million for the three months ended September 30, 2010.  These increases were funded with increasedaverage deposits which grew $32.9 million from $76.8 million for the threemonths ended September 30, 2009 to $109.7 million for the three monthsended September 30, 2010. Additionally, the growth in deposits enabled the Company to reduce itsreliance on FHLB advances which decreased, on average, $2.5 millionyear-over-year.

 

Totalinterest expense was $528,000 in the third quarter of 2010, a decrease of $72,000from $600,000 during the third quarter of 2009. As evident in Table 2 above, this cost savings was attributable todecreases in rate as volume increased significantly in all deposit categoriesexcept time deposits which only decreased marginally, 3%, year-over-year.  Overall, the interest rate on totalinterest-bearing liabilities decreased 97 basis points from 2.78% at September 30,2009 to 1.81% at September 30, 2010.

 

Netinterest income was $1.1 million in the third quarter 2010, an increase of$334,000, or 44%, from $763,000 in the third quarter of 2009.  Our annualized net interest margin was 3.24%for the three months ended September 30, 2010, a 39 basis pointimprovement over the 2.85% net interest margin for the three months ended September 30,2009.

 

***Provision for Loan Losses***

 

Wedetermine a provision for loan losses that we consider sufficient to maintainan allowance to absorb probable losses inherent in our portfolio as of thebalance sheet date. For additional information concerning this determination,see the section of this discussion and analysis captioned *“Allowance for Loan Losses.”*

 

Duringthe third quarter of 2010, our provision for loan losses was $780,000reflecting the growth of our loan portfolio and the estimated probable lossesinherent within the portfolio due to uncertainties in economic conditions.  There were three impaired loans at September 30,2010, two of which were written down to their estimated net realizable valueduring the third quarter, resulting in a charge-off of $520,000 (see additionaldiscussion below under *Financial Condition — LoanPortfolio*).

 

***Noninterest Income***

 

Noninterestincome for the quarter ended September 30, 2010 was $377,000, an increaseof $199,000 from $178,000 for the third quarter ended September 30,2009.  The Company sold securities fornet gains of $332,000 during the third quarter 2010 compared to net gains of$98,000 during the third quarter of 2009. Service charges on deposits decreased $61,000 from $80,000 during thethird quarter 2009 to $19,000 during the third quarter 2010 due to the loss ofa significant money-services-business customer in October 2009.  Other income increased to $16,000 during thethird quarter 2010 primarily due to the Bank’s new residential mortgage lendingpartnership.  Additionally, during thethird quarter of 2010 the Bank had a gain on sale of other real estate ownedwhich generated $10,000 of noninterest income during the quarter.

 

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***Noninterest Expense***

 

Ourtotal noninterest expense for the quarter ended September 30, 2010 was$1.2 million, an increase of $165,000 from the quarter ended September 30,2009.  This consisted of an increase insalaries and employee benefits of $28,000, or 5%, primarily related toincreased incentive compensation expense during the third quarter 2010.  Occupancy expense remained constantquarter-over-quarter decreasing only $5,000 during the third quarter 2010.  Professional fees increased $81,000, or 153%,quarter-over-quarter, primarily due to the timing of outsourced internal auditreviews, which were conducted during the third quarter this year and during thesecond quarter last year as well as the timing of interim testing by ourexternal auditors which was accelerated to the third quarter 2010, versus thefourth quarter last year, as well as increased Compliance and Bank Secrecy Actconsulting costs.

 

Othergeneral and administrative expenses increased $61,000, or 26%,quarter-over-quarter, as detailed in the following table:

 
| **($ in thousands)**                                     | ** ** | **Three Months Ended********September 30,** | ** ** | **Increase/** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------|------------|
| **Other general and administrative expenses:** | ** ** | **2010**                                                   | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** |
| Data processing                                                    |       | $                                                          | 80         |          | $          | 70 |   | $ | 10 |   |
| FDIC assessment                                                    |       | 52                                                         |       | 45            |       | 7 |   |
| Regulatory and reporting fees                                      |       | 26                                                         |       | 22            |       | 4 |   |
| Marketing and promotions                                           |       | 38                                                         |       | 34            |       | 4 |   |
| Travel and entertainment                                           |       | 18                                                         |       | 16            |       | 2 |   |
| Telephone/communication                                            |       | 10                                                         |       | 10            |       | — |   |
| Loan and collection expenses                                       |       | 14                                                         |       | 1             |       | 13 |   |
| Printing, stationery and supplies                                  |       | 7                                                          |       | 11            |       | (4 | ) |
| Dues and memberships                                               |       | 7                                                          |       | 7             |       | — |   |
| Directors’ fees                                               |       | 20                                                         |       | —        |       | 20 |   |
| Insurance                                                          |       | 6                                                          |       | 5             |       | 1 |   |
| Franchise taxes                                                    |       | 3                                                          |       | 2             |       | 1 |   |
| Postage and shipping                                               |       | 5                                                          |       | 5             |       | — |   |
| ATM and debit card fees                                            |       | 4                                                          |       | 3             |       | 1 |   |
| Training and education                                             |       | 2                                                          |       | 1             |       | 1 |   |
| Miscellaneous                                                      |       | 5                                                          |       | 4             |       | 1 |   |
| Total                                                              |       | $                                                          | 297        |          | $          | 236 |   | $ | 61 |   |

 

Themost significant changes include an increase of $20,000 in directors’ fees asthe Company began compensating directors for their attendance at meetings in July 2010;an increase of $13,000 in loan and collection expenses related to two new loanproducts that were added to the Bank in late 2009/early 2010 that areoutsourced to third parties who collect transaction-based fees; a $10,000increase in data processing due to overall increases in customer and accountactivity; and a $7,000 increase in Federal Deposit Insurance Corporation (FDIC)fees due to increases in average deposit volumes.

 

**Comparative Results of Operations for the Nine Months Ended September 30,2010 and 2009**

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the nine months ended September 30, 2010 compared to thefinancial condition and results of operations for the nine months ended September 30,2009.  The Company’s principal operationsfor each of these periods consisted of the operations of Solera National Bank,which opened for business September 10, 2007.

 

Net loss for the nine months ended September 30,2010 was $282,000, or ($0.11) per share compared with a net loss $1.3 million,or ($0.50) per share for the nine months ended September 30,2009.   The improved results of thenine months ended September 30, 2010 were primarily the result ofincreases in net interest income combined with increased gains on the sale ofinvestment securities while holding noninterest expenses relatively flat.

 

The following tablepresents, for the periods indicated, average assets, liabilities andstockholders’ equity, as well as the net interest income from averageinterest-earning assets and the resultant annualized yields expressed inpercentages.

 

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**Table 3**

 
| ** **                                                                  | ** ** | **Nine Months Ended  September 30, 2010** | ** ** | **Nine Months Ended  September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Average  Balance**                                          | ** ** | **Interest**                                                  | ** ** | **Yield /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                    |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Gross loans, net of unearned fees                                           |       | $                                                             | 57,243     |                                                          | $          | 2,503 |   | 5.85 | % | $ | 34,095 |   | $ | 1,380 |   | 5.41 | % |
| Investment securities**                                                     |       | 72,462                                                        |       | 2,261                                                         |       | 4.17 |   | 52,623 |   | 2,000 |   | 5.08 |   |
| FHLB and FRB stocks                                                         |       | 1,131                                                         |       | 32                                                            |       | 3.78 |   | 1,073 |   | 31 |   | 3.82 |   |
| Federal funds sold                                                          |       | 1,358                                                         |       | 2                                                             |       | 0.21 |   | 1,526 |   | 3 |   | 0.25 |   |
| Interest-bearing deposits with banks                                        |       | 1,295                                                         |       | 7                                                             |       | 0.76 |   | 149 |   | 1 |   | 0.65 |   |
| Total interest-earning assets                                               |       | 133,489                                                       |       | $                                                             | 4,805      |   | 4.81 | % | 89,466 |   | $ | 3,415 |   | 5.10 | % |
| Noninterest-earning assets                                                  |       | 4,022                                                         |       |                                                          |       |   |   | 1,862 |   |   |   |   |   |
| Total assets                                                                |       | $                                                             | 137,511    |                                                          |       |   |   |   | $ | 91,328 |   |   |   |   |   |
|                                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’  Equity:**                             |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                               |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Money market and savings deposits                                           |       | $                                                             | 56,513     |                                                          | $          | 692 |   | 1.66 | % | $ | 13,986 |   | $ | 271 |   | 2.59 | % |
| Interest-bearing checking accounts                                          |       | 8,413                                                         |       | 101                                                           |       | 1.61 |   | 4,593 |   | 73 |   | 2.13 |   |
| Time deposits                                                               |       | 42,863                                                        |       | 683                                                           |       | 2.13 |   | 39,167 |   | 836 |   | 2.85 |   |
| Federal funds purchased and securities sold under  agreements to repurchase |       | 496                                                           |       | 5                                                             |       | 1.35 |   | 1,181 |   | 10 |   | 1.11 |   |
| Federal Home Loan Bank advances                                             |       | 6,973                                                         |       | 202                                                           |       | 3.87 |   | 9,467 |   | 256 |   | 3.62 |   |
| Other borrowings                                                            |       | 103                                                           |       | 7                                                             |       | 9.43 |   | 143 |   | 10 |   | 9.39 |   |
| Total interest-bearing liabilities                                          |       | 115,361                                                       |       | $                                                             | 1,690      |   | 1.96 | % | 68,537 |   | $ | 1,456 |   | 2.84 | % |
| Noninterest-bearing checking accounts                                       |       | 2,001                                                         |       |                                                          |       |   |   | 3,546 |   |   |   |   |   |
| Noninterest-bearing liabilities                                             |       | 448                                                           |       |                                                          |       |   |   | 466 |   |   |   |   |   |
| Stockholders’ equity                                                   |       | 19,701                                                        |       |                                                          |       |   |   | 18,779 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                             |       | $                                                             | 137,511    |                                                          |       |   |   |   | $ | 91,328 |   |   |   |   |   |
|                                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest income                                                         |       |                                                          |       | $                                                             | 3,115      |   |   |   |   |   | $ | 1,959 |   |   |   |
|                                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest spread                                                         |       |                                                          |       | 2.85                                                          | %          |   |   |   |   | 2.26 | % |   |   |
|                                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net interest margin                                                         |       |                                                          |       | 3.12                                                          | %          |   |   |   |   | 2.93 | % |   |   |

 

----

**  Yields on investment securities have not beenadjusted to a tax-equivalent basis.

 

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The following tablepresents the dollar amount of changes in interest income and interest expensefor the major categories of interest-earning assets and interest-bearingliabilities.  The information details thechanges attributable to a change in volume (i.e. change in average balancemultiplied by the prior-period average rate) and changes attributable to achange in rate (i.e. change in average rate multiplied by the prior-periodaverage balance).  There is a componentthat is attributable to both a change in volume and a change in rate.  This component has been allocatedproportionately to the rate and volume columns.

 

**Table 4**

 
| ** **                                                                  | ** ** | **Nine Months Ended September 30, 2010 Compared to  Nine Months Ended September 30, 2009** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                                              | ** ** | **Net Change**                                                                                                                                    | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest income:**                                                        |       |                                                                                                                                                   |       |   |   |   |   |
| Gross loans, net of unearned fees                                           |       | $                                                                                                                                                      | 1,123      |   | $ | 118 |   | $ | 1,005 |   |
| Investment securities                                                       |       | 261                                                                                                                                                    |       | (236 | ) | 497 |   |
| FHLB and FRB stocks                                                         |       | 1                                                                                                                                                      |       | — |   | 1 |   |
| Federal funds sold                                                          |       | (1                                                                                                                                                     | )          | (1 | ) | — |   |
| Interest-bearing deposits with banks                                        |       | 6                                                                                                                                                      |       | — |   | 6 |   |
| Total interest income                                                       |       | $                                                                                                                                                      | 1,390      |   | $ | (119 | ) | $ | 1,509 |   |
|                                                                        |       |                                                                                                                                                   |       |   |   |   |   |
| **Interest expense:**                                                       |       |                                                                                                                                                   |       |   |   |   |   |
| Money market and savings deposits                                           |       | $                                                                                                                                                      | 421        |   | $ | (58 | ) | $ | 479 |   |
| Interest-bearing checking accounts                                          |       | 28                                                                                                                                                     |       | (11 | ) | 39 |   |
| Time deposits                                                               |       | (153                                                                                                                                                   | )          | (244 | ) | 91 |   |
| Federal funds purchased and securities sold under  agreements to repurchase |       | (5                                                                                                                                                     | )          | 3 |   | (8 | ) |
| Federal Home Loan Bank advances                                             |       | (54                                                                                                                                                    | )          | 19 |   | (73 | ) |
| Other borrowings                                                            |       | (3                                                                                                                                                     | )          | — |   | (3 | ) |
| Total interest expense                                                      |       | $                                                                                                                                                      | 234        |   | $ | (291 | ) | $ | 525 |   |
|                                                                        |       |                                                                                                                                                   |       |   |   |   |   |
| **Net interest income**                                                     |       | $                                                                                                                                                      | 1,156      |   | $ | 172 |   | $ | 984 |   |

 

***Net Interest Income and Net Interest Margin***

 

Netinterest income is the difference between interest income, principally fromloan and investment security portfolios, and interest expense, principally oncustomer deposits and borrowings.  Netinterest income is our principal source of earnings.  Changes in net interest income result fromchanges in volume, spread and margin. Volume refers to the average dollar levelof interest-earning assets and interest-bearing liabilities.  Spread refers to the difference between theaverage yield on interest-earning assets and the average cost ofinterest-bearing liabilities. Margin refers to net interest income divided byaverage interest-earning assets, and is influenced by the level and relativemix of interest-earning assets and interest-bearing liabilities.

 

TheFederal Reserve Board influences the general market rates of short-terminterest, including the deposit and loan rates offered by the Bank. The Bank’sloan portfolio is significantly affected by changes in the prime interestrate.  The prime interest rate hasremained at 3.25% since December 2008 and, thus, has had no impact on thechange in loan yields during this time period.

 

Thefederal funds rate, which is the cost of immediately available, overnightfunds, has behaved in a similar manner, changing insignificantly since the endof 2008.

 

TheCompany’s net interest margin increased slightly, up 19 basis points, from2.93% at September 30, 2009 to 3.12% at September 30, 2010.  Overall, the Bank has recorded a lower yieldon interest-earning assets of 29 basis points from 5.10% for the nine monthsended September 30, 2009 to 4.81% for the nine months ended September 30,2010.  This decline is primarily due to adecrease in the Bank’s yield on its investment securities which

 

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decreased91 basis points during this time period. This decrease is primarily due to the sale of longer-maturity,higher-yielding investments which were reinvested in shorter-term,lower-yielding bonds to shorten the duration of the investment portfolio.  Also contributing to the decrease was theaction taken by Fannie Mae and the Federal Home Loan Mortgage Corporation to repurchasedelinquent mortgages during the first and second quarters of 2010.  This resulted in higher than normal pay downson our agency mortgage-backed securities causing an increase in premiumamortization on those securities which adversely impacted the portfolio’syield.  The loss in yield on theinvestment portfolio was partially offset by an increase in the loan yield,which increased 44 basis points year-over-year. This increase was primarily due to a shift in the loan mix to morefixed-rate loans at higher interest rates.

 

Thedecrease in the cost of interest-bearing liabilities was more than sufficientto offset the loss of yield on interest-earning assets, which enabled the Bank’soverall net interest margin to increase slightly.  The cost of all deposit accounts decreased asthe Bank eliminated the promotional rates that were offered during the firsttwo years in business along with the general decline in the level of interestrates compared to the prior year.  Thiscombined with decreased volumes in FHLB advances enabled the Bank to reduce thecost of interest-bearing liabilities by 88 basis points during the nine monthsended September 30, 2010 as compared to the same period of 2009.

 

TheCompany’s balance sheet is currently marginally asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingassets. Therefore, the Company could experience gains in its net interestmargin during periods of rising short-term interest rates.

 

Totalinterest income was $4.8 million for the nine months ended September 30,2010, consisting primarily of interest on loans of $2.5 million and interest oninvestment securities of $2.3 million. This compared to total interest income of $3.4 million during the ninemonths ended September 30, 2009, consisting primarily of interest oninvestment securities of $2.0 million and interest on loans of $1.4million.  Average gross loans, net ofunearned fees, increased $23.1 million, from $34.1 million for the nine monthsended September 30, 2009 to $57.2 million for the nine months ended September 30,2010.  Average investment securitiesincreased $19.8 million from $52.6 million for the nine months ended September 30,2009 to $72.5 million for the nine months ended September 30, 2010.

 

Totalinterest expense was $1.7 million for the nine months ended September 30,2010, an increase of $234,000 from $1.5 million during the same period of2009.  This increase was due to increaseddeposit volumes which grew, on average, $50.0 million from September 2009to September 2010.

 

Netinterest income was $3.1 million for the first nine months of 2010, an increaseof $1.2 million, or 59%, from $2.0 million for the same period of 2009.  Our annualized net interest margin was 3.12%for the nine months ended September 30, 2010 compared to 2.93% for thenine months ended September 30, 2009.

 

***Provision for Loan Losses***

 

Wedetermine a provision for loan losses that we consider sufficient to maintainan allowance to absorb probable losses inherent in our portfolio as of thebalance sheet date. For additional information concerning this determination,see the section of this discussion and analysis captioned *“Allowance for Loan Losses.”*

 

Duringthe first nine months of 2010, our provision for loan losses was $1.1 millioncompared to $432,000 for the same time period of 2009.  The amount of the provision reflects thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There have been four impaired loans duringthe nine months ended September 30, 2010, three of which were written-downto their net realizable value during the year resulting in charge-offs of$705,000 and one troubled debt restructuring (see additional discussion belowunder *Financial Condition — Loan Portfolio*).  One previously impaired loan is no longer onthe Bank’s books as it was sold for a gain of $10,000 during the thirdquarter.  There were no impaired orcharged-off loans during the same period in 2009.

 

***Noninterest Income***

 

Noninterestincome for the nine months ended September 30, 2010 was $944,000, anincrease of $515,000 from $429,000 for the nine months ended September 30,2009.  The increase was due to a $658,000increase in gains on sales of investment securities as the Bank capitalized oncurrent market conditions and sold securities for gains, while shortening theoverall duration of the investment portfolio. This increase was offset by a decrease of $165,000 in service chargesand fees on deposits — a direct result of the loss of a significantmoney-services-business 

 

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depositcustomer.  Also contributing to theincrease was a $10,000 gain on the sale of other real estate owned and a$12,000 increase in other income primarily due to the Bank’s new residentialmortgage lending partnership.

 

***Noninterest Expense***

 

Ourtotal noninterest expense was $3.3 million for the nine months ended September 30,2010, a 1%, or $43,000, increase from the nine months ended September 30,2009.  This consisted of an increase inprofessional fees of $82,000, or 35%, due primarily to increased Compliance andBank Secrecy Act consulting costs, and timing differences for internal andexternal audits.  This increase wasoffset by a decrease in salaries and employee benefits of $133,000, or 7%,related primarily to reduced incentive compensation expense during 2010.  Occupancy expense remained unchanged andother general and administrative expenses increased $93,000, or 14%,year-over-year, as detailed in the following table:

 
| **($ in thousands)**                                     | ** ** | **Nine Months Ended********September 30,** | ** ** | **Increase/** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------|------------|
| **Other general and administrative expenses:** | ** ** | **2010**                                                  | ** ** | **2009**      | ** ** | **(Decrease)** | ** ** |
| Data processing                                                    |       | $                                                         | 211        |          | $          | 200 |   | $ | 11 |   |
| FDIC assessment                                                    |       | 147                                                       |       | 125           |       | 22 |   |
| Regulatory and reporting fees                                      |       | 90                                                        |       | 75            |       | 15 |   |
| Marketing and promotions                                           |       | 80                                                        |       | 90            |       | (10 | ) |
| Travel and entertainment                                           |       | 39                                                        |       | 33            |       | 6 |   |
| Telephone/communication                                            |       | 31                                                        |       | 30            |       | 1 |   |
| Loan and collection expenses                                       |       | 24                                                        |       | 3             |       | 21 |   |
| Printing, stationery and supplies                                  |       | 24                                                        |       | 31            |       | (7 | ) |
| Dues and memberships                                               |       | 24                                                        |       | 23            |       | 1 |   |
| Directors’ fees                                               |       | 23                                                        |       | —        |       | 23 |   |
| Insurance                                                          |       | 17                                                        |       | 14            |       | 3 |   |
| Franchise taxes                                                    |       | 14                                                        |       | 7             |       | 7 |   |
| Postage and shipping                                               |       | 13                                                        |       | 16            |       | (3 | ) |
| ATM and debit card fees                                            |       | 12                                                        |       | 11            |       | 1 |   |
| Training and education                                             |       | 6                                                         |       | 9             |       | (3 | ) |
| Miscellaneous                                                      |       | 18                                                        |       | 13            |       | 5 |   |
| Total                                                              |       | $                                                         | 773        |          | $          | 680 |   | $ | 93 |   |

 

Themost significant other general and administrative expense changes included a$23,000 increase in directors’ fees as the Company began compensating directorsfor their attendance at meetings in July 2010; a $22,000 increase in FDICassessments due to increased deposit volumes; a $21,000 increase in loan andcollection expense due to transaction-based fees paid to third parties forvarious loan products that are partially outsourced.  These loan products were added in late2009/early 2010 which accounts for the variance between years.  Additionally, there was a $15,000 increase inregulatory and reporting fees due to increases in OCC assessment fees thatcorrelate with the Company’s overall growth; an increase of $11,000 in dataprocessing charges related to increases in customer and account activity; and a$7,000 increase in franchise taxes due to an increase in the tax rate.

 

**Income Taxes**

 

Nofederal or state tax expense has been recorded for the three or nine monthsended September 30, 2010 and 2009, based upon significant operating losscarry-forwards that can be used to offset approximately $3.6 million of taxableincome.  Since it is uncertain that theCompany will become profitable, the deferred tax benefit accumulated to datehas a full valuation allowance so that the net deferred tax benefit at September 30,2010 is $0.

 

**Financial Condition**

 

AtSeptember 30, 2010, the Company had total assets of $136.2 million, a $3.4million increase from $132.8 million in total assets at December 31,2009.  The increase in assets isprimarily due to the $9.9 million increase in gross loans during this period,offset primarily by decreases in interest-bearing deposits with banks whichwere not renewed in order to help fund loan growth.

 

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Asof September 30, 2010, stockholders’ equity was $20.1 million, an increaseof $1.4 million from December 31, 2009, as a result of increases inaccumulated other comprehensive income, which increased $1.5 million duringthis period, partially offset by a small increase in the accumulated deficit,due to the $282,000 net loss for the nine months ended September 30, 2010.

 

***Federal Home Loan Bank (FHLB) and FederalReserve Bank Stocks***

 

At September 30,2010, the Bank had a total of $1.2 million invested in FHLB and Federal ReserveBank stocks carried at cost consisting of $523,000 in Federal Reserve Bankstock and $642,000 in FHLB stock.  Theseinvestments allow Solera National Bank to conduct business with these entities.  As of September 30, 2010, the FederalReserve Bank stock is yielding an average of 6.0% and the FHLB stock isyielding an average rate of 2.1%.

 

***Investment Securities***

 

Ourinvestment portfolio serves as a source of interest income and, secondarily, asa source of liquidity and a management tool for our interest rate sensitivity.  We manage our investment portfolio accordingto a written investment policy established by our Board of Directors.

 

AtSeptember 30, 2010, Solera National Bank’s securities consisted ofavailable-for-sale securities of $73.0 million. The following tables set forth the estimated market values andapproximate weighted average yields of the debt securities in the investmentportfolio by contractual maturity at September 30, 2010 and December 31,2009:

 
| ** **                        | ** ** | **At September 30, 2010** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **Within One Year**            | ** ** | **After One Year but  within Five Years** | ** ** | **After Five Years  but within Ten  Years** | ** ** | **After Ten Years** | ** ** |
| **($ in thousands)**    | ** ** | **Amount**                               | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities available-for-sale** |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies          |       | $                                        | —     |   | — | % | $ | — |   | — | % | $ | 2,911 |   | 3.33 | % | $ | 4,023 |   | 2.50 | % |
| Corporate                         |       | 507                                      |       | 5.05 |   | 4,344 |   | 3.84 |   | 5,596 |   | 4.85 |   | — |   | — |   |
| State and municipal               |       | —                                   |       | — |   | 836 |   | 5.47 |   | 21,761 |   | 4.52 |   | 514 |   | 5.23 |   |
| Residential agency MBS            |       | —                                   |       | — |   | — |   | — |   | 464 |   | 4.31 |   | 31,920 |   | 3.83 |   |
| **Total**                         |       | $                                        | 507        |   | 5.05 | % | $ | 5,180 |   | 4.11 | % | $ | 30,732 |   | 4.46 | % | $ | 36,457 |   | 3.70 | % |

 
| ** **                        | ** ** | **At December 31, 2009** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Within One Year**           | ** ** | **After One Year but  within Five Years** | ** ** | **After Five Years  but within Ten  Years** | ** ** | **After Ten Years** | ** ** |
| **($ in thousands)**    | ** ** | **Amount**                              | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| **Securities available-for-sale** |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. government agencies          |       | $                                       | —     |   | — | % | $ | — |   | — | % | $ | 2,954 |   | 3.81 | % | $ | 2,215 |   | 5.43 | % |
| Corporate                         |       | 1,560                                   |       | 5.99 |   | 4,845 |   | 5.35 |   | 3,718 |   | 5.09 |   | — |   | — |   |
| State and municipal               |       | —                                  |       | — |   | 978 |   | 5.66 |   | 12,563 |   | 5.23 |   | 8,660 |   | 5.59 |   |
| Residential agency MBS            |       | —                                  |       | — |   | — |   | — |   | 500 |   | 3.05 |   | 35,448 |   | 4.52 |   |
| **Total**                         |       | $                                       | 1,560      |   | 5.99 | % | $ | 5,823 |   | 5.49 | % | $ | 19,735 |   | 4.97 | % | $ | 46,323 |   | 4.77 | % |

 

Asevidenced by the above tables, the weighted-average book yield decreased duringthe first nine months of 2010 in nearly every category.  This was due partially to declines in marketrates, the sale of longer-maturity state and municipal bonds to reduce pricerisk, and partially due to the Federal Home Loan Mortgage Corporation’s (FHLMC)and Fannie Mae’s repurchase of substantially all 120 days or more delinquentmortgage loans, which resulted in larger than normal principal pay downs on ouragency mortgage-backed securities.  TheFHLMC’s and Fannie Mae’s repurchase of delinquent loans caused increasedamortization on the purchase premiums associated with these securities.  The increased premium amortization negativelyimpacted our investment yields.

 

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***Loan Portfolio***

 

Thefollowing table presents the composition of our loan portfolio by category asof the dates indicated:

 
| ** **                                 | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **($ in thousands)**             | ** ** | **Amount**                       | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real estate — commercial              |       | $                                | 39,347     |                            | 65         | % | $ | 26,063 |   | 52 | % |
| Real estate — residential             |       | 8,054                            |       | 13                              |       | 8,059 |   | 16 |   |
| Construction and land development          |       | 2,007                            |       | 3                               |       | 7,067 |   | 14 |   |
| Commercial and industrial                  |       | 8,954                            |       | 15                              |       | 8,324 |   | 16 |   |
| Lease financing                            |       | 1,452                            |       | 3                               |       | — |   | — |   |
| Consumer                                   |       | 564                              |       | 1                               |       | 991 |   | 2 |   |
| Gross loans                                |       | 60,378                           |       | 100                             | %          | 50,504 |   | 100 | % |
| Less: Deferred loan (fees) / expenses, net |       | (85                              | )          |                            |       | (114 | ) |   |   |
| Allowance for loan losses                  |       | (1,200                           | )          |                            |       | (830 | ) |   |   |
| Loans, net                                 |       | $                                | 59,093     |                            |       |   | $ | 49,560 |   |   |   |

 

Asof September 30, 2010, net loans were $59.1 million, a $9.5 million, or19%, increase from $49.6 million at December 31, 2009.  Net loans as a percentage of total assetswere 43% as of September 30, 2010, compared to 37% at December 31,2009.  Given the tepid economic recoveryunderway, loan demand has been weakening during the course of the year.

 

Thereal estate — commercial loan portfolio consists primarily of lines of creditor term loans to businesses that are secured by real estate.  Our primary focus is on owner-occupiedcommercial real estate, including SBA 504 loans.  At September 30, 2010, there were $39.3million of commercial real estate loans in the loan portfolio, an increase of51%, or $13.3 million, from $26.1 million at December 31, 2009.  Given our focus on this loan category, it nowrepresents 65% of our total portfolio, which is well within our establishedconcentration guidelines.

 

Thereal estate — residential loan portfolio consists of residential secondmortgage loans, home equity loans and lines of credit and home improvementloans.  The $8.1 million of residential real estate loans outstanding at September 30,2010 remained unchanged from December 31, 2009.

 

Theconstruction and land development loan portfolio is comprised of constructionloans for owner-occupied construction and development loans for property beingconstructed and sold to third parties. At September 30, 2010, construction and land development loanstotaled $2.0 million, a decrease of $5.1 million, or 72%, from $7.1 million at December 31,2009.  This decrease is primarily theresult of the weak economy which has dampened new construction opportunities.

 

Thecommercial and industrial loan portfolio consists of loans to businessesprimarily for working capital lines of credit.  At September 30,2010, commercial and industrial loans totaled $9.0 million, a $630,000, or 8%,increase from $8.3 million at December 31, 2009.

 

Duringthe second quarter 2010, the Bank closed its first lease financing agreementfor the purchase of equipment.  At September 30,2010, lease financing comprised 3% of the Bank’s loan portfolio.

 

Theconsumer and other loan portfolio consists of personal lines of credit, loansto acquire personal assets such as automobiles and overdraft protectionbalances for our deposit customers.  Asof September 30, 2010, consumer and other loans comprised 1% of the totalloan portfolio at $564,000, a decrease of $427,000 from December 31, 2009.

 

Loanconcentrations are considered to exist when there are amounts loaned to amultiple number of borrowers engaged in similar activities that would causethem to be similarly impacted by economic or other conditions.  The Company’s loan portfolio generallyconsists of loans to borrowers within Colorado. Although the Company seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, the Company’s loanportfolio consists primarily of real estate loans secured by real estatelocated in Colorado, making the value of the portfolio more susceptible todeclines in real estate values and other changes in economic conditions inColorado.  As the Bank’s loan portfoliocontinues to grow, the concentration to any single borrower diminishes.  As of 

 

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September 30,2010, the Bank’s five largest loans represented approximately 17% of the totalloan portfolio compared to 20% of the total loan portfolio as of December 31,2009.  No single borrower can be approvedfor a loan over the Bank’s current legal lending limit of approximately $2.4million.  This regulatory requirementhelps to ensure the Bank’s exposure to one individual customer is limited.

 

Managementmay renew loans at maturity when requested by a customer whose financialstrength appears to support such a renewal or when such a renewal appears to bein the best interest of Solera National Bank. Solera National Bank requirespayment of accrued interest in such instances and may adjust the rate ofinterest, require a principal reduction, or modify other terms of the loan atthe time of renewal.

 

The following tables setforth information at September 30, 2010 and December 31, 2009,regarding the dollar amount of loans maturing in the Bank’s portfolio based onthe contractual terms to maturity. The tables do not give effect to potentialprepayments or contractual principal payments.

 
| ** **                         | ** ** | **September 30, 2010** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| **($ in thousands)**     | ** ** | **<1 Year**              | ** ** | **1 - 5 Years** | ** ** | **5 - 15  Years** | ** ** | **Over 15  Years** | ** ** | **Total Loans** | ** ** |
| Real  estate — commercial     |       | $                                | 6,100      |   | $ | 11,482 |   | $ | 21,765 |   | $ | — |   | $ | 39,347 |   |
| Real  estate — residential    |       | —                           |       | 344 |   | — |   | 7,710 |   | 8,054 |   |
| Construction  and land development |       | 2,007                            |       | — |   | — |   | — |   | 2,007 |   |
| Commercial  and industrial         |       | 4,032                            |       | 3,102 |   | 1,820 |   | — |   | 8,954 |   |
| Lease  financing                   |       | —                           |       | 1,452 |   | — |   | — |   | 1,452 |   |
| Consumer                           |       | 10                               |       | 399 |   | — |   | 155 |   | 564 |   |
| Gross  Loans Receivable            |       | $                                | 12,149     |   | $ | 16,779 |   | $ | 23,585 |   | $ | 7,865 |   | $ | 60,378 |   |

 
| ** **                         | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| **($ in thousands)**     | ** ** | **<1 Year**             | ** ** | **1 - 5 Years** | ** ** | **5 - 15  Years** | ** ** | **Over 15  Years** | ** ** | **Total Loans** | ** ** |
| Real  estate — commercial     |       | $                               | 3,482      |   | $ | 10,559 |   | $ | 12,022 |   | $ | — |   | $ | 26,063 |   |
| Real  estate — residential    |       | —                          |       | 348 |   | — |   | 7,711 |   | 8,059 |   |
| Construction  and land development |       | 6,861                           |       | 206 |   | — |   | — |   | 7,067 |   |
| Commercial  and industrial         |       | 5,129                           |       | 2,348 |   | 845 |   | 2 |   | 8,324 |   |
| Consumer                           |       | 14                              |       | 728 |   | — |   | 249 |   | 991 |   |
| Gross  Loans Receivable            |       | $                               | 15,486     |   | $ | 14,189 |   | $ | 12,867 |   | $ | 7,962 |   | $ | 50,504 |   |

 

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***Nonperforming Loans, Leases and Assets***

 

Nonperformingassets consist of loans and leases on nonaccrual status, loans 90 days or morepast due and still accruing interest, loans that have been restructuredresulting in a reduction or deferral of interest or principal, other realestate owned (OREO), and other repossessed assets. As of September 30,2010, there was $749,000 in nonperforming assets, consisting of three loans.

 

Thefollowing table summarizes information regarding nonperforming assets:

 
| **($ in thousands)**                                     | ** ** | **September  30, 2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Nonaccrual loans and leases                                        |       | $                            | 650        |                        | $          | — |   |
| Other impaired loans                                               |       | 99                           |       | —                      |       |
| Total nonperforming loans                                          |       | $                            | 749        |                        | $          | — |   |
|                                                               |       |                         |       |                        |       |
| Impaired loans                                                     |       | $                            | 749        |                        | $          | — |   |
| Allocated allowance for loan losses to impaired  loans             |       | —                       |       | —                      |       |
| Net investment in impaired loans                                   |       | $                            | 749        |                        | —     |   |
| Accruing loans past due 90 days or more                            |       | —                       |       | 3                           |       |
| Loans past due 30-89 days                                          |       | $                            | 2,200      |                        | $          | 1,298 |   |
|                                                               |       |                         |       |                        |       |
| Loans charged-off, year-to-date                                    |       | $                            | 705        |                        | $          | — |   |
| Recoveries, year-to-date                                           |       | —                       |       | —                      |       |
| Net charge-offs, year-to-date                                      |       | $                            | 705        |                        | $          | — |   |
| Allowance for loan losses                                          |       | $                            | 1,200      |                        | $          | 830 |   |
|                                                               |       |                         |       |                        |       |
| Allowance for loan losses to loans, net of  deferred fees/expenses |       | 1.99                         | %          | 1.64                        | %          |
| Allowance for loan losses to nonaccrual loans                      |       | 184.62                       | %          | NA                          |       |
| Allowance for loan losses to nonperforming loans                   |       | 160.21                       | %          | NA                          |       |
| Nonaccrual loans to loans, net of deferred  fees/expenses          |       | 1.08                         | %          | NA                          |       |
| Loans 30-89 days past due to loans, net of  deferred fees/expenses |       | 3.65                         | %          | 2.56                        | %          |

 

Federalregulations require that each insured financial institution classify its assetson a regular basis. In addition, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them. The Bank has established three classificationsfor potential problem assets: “substandard,” “doubtful” and “loss.” Loansclassified as “substandard” are those loans with well-defined weaknesses, suchthat future capacity to repay the loan has been negatively impacted.  Loans classified as “doubtful” are thoseloans that have characteristics similar to substandard loans, but theweaknesses have moved to the point where complete collection of the obligationfrom all sources is unlikely and a portion of the principal may becharged-off.  Although loans classifiedas substandard do not duplicate loans classified as doubtful, both substandardand doubtful loans may include some loans that are past due at least 90 days,are on nonaccrual status or have been restructured. Loans classified as “loss”are those loans that are in the process of being charged-off.  At September 30, 2010, Solera NationalBank had substandard loans totaling $5.2 million, a doubtful loan totaling$176,000, and no loans classified as loss. Of the $5.2 million in substandard loans, only $674,000 was 30 days ormore past due.  As of December 31,2009, the Bank had no loans classified as doubtful or loss and had substandardloans totaling $3.8 million.  Of the $3.8million of substandard loans, only $953,000 was 30 days or more past due.

 

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***Allowance for Loan Losses***

 

Implicitin Solera National Bank’s lending activities is the fact that loan losses willbe experienced and that the risk of loss will vary with the type of loan beingmade and the creditworthiness of the borrower over the term of the loan. Toreflect the currently perceived risk of loss associated with the loanportfolio, additions are made to the allowance for loan losses in the form ofdirect charges against income to ensure that the allowance is available toabsorb possible loan losses.  The Bank’sallowance for estimated loan losses is based on a number of quantitative andqualitative factors.  Factors used toassess the adequacy of the allowance for loan losses are established based uponmanagement’s assessment of the credit risk in the portfolio, historical loanloss, changes in the size, composition and concentrations of the loanportfolio, general economic conditions, and changes in the legal and regulatoryenvironment, among others.  In addition,because the Bank has limited history on which to base future loan losses, acomparison of peer group allowance ratios to gross loans is made with theintention of maintaining similar levels during the Bank’s de novo period ofoperation.

 

Provisionsfor loan losses may be provided both on a specific and general basis. Specificand general valuation allowances are increased by provisions charged to expenseand decreased by charge-offs of loans, net of recoveries. Specific allowancesare provided for impaired loans for which the expected loss is measurable.General valuation allowances are provided based on a formula that incorporatesthe factors discussed above. The Bank periodically reviews the assumptions andformula by which additions are made to the specific and general valuationallowances for losses in an effort to refine such allowances in light of thecurrent status of the aforementioned factors.

 

Theamount of the allowance equals the cumulative total of the provisions made fromtime to time, reduced by loan charge-offs and increased by recoveries of loanspreviously charged-off.  The allowancewas $1.2 million, or 1.99% of outstanding principal as of September 30,2010 compared to $830,000, or 1.64% of outstanding principal as of December 31,2009. The provision for loan losses increased $600,000 from $180,000 during thethree months ended September 30, 2009 to $780,000 during the three months endedSeptember 30, 2010. This increase was primarily the result of net credit losseson two real estate development loan participations from the Bank’s early stagesof operation. The Bank does not have any other purchased loan participations onits balance sheet and minimal remaining exposure to real estate construction ordevelopment.

 

Creditand loan decisions are made by management and the Board of Directors inconformity with loan policies established by the Board of Directors. SoleraNational Bank’s practice is to charge-off any loan or portion of a loan whenthe loan is determined by management to be uncollectible due to the borrower’sfailure to meet repayment terms, the borrower’s deteriorating or deterioratedfinancial condition, the depreciation of the underlying collateral, the loan’sclassification as a loss by regulatory examiners, or other reasons. During thenine months ended September 30, 2010, the Bank recorded charge-offs of$705,000 related to three impaired loans. No charge-offs were recorded during the nine months ended September 30,2009.

 

***Off-Balance-Sheet Arrangements***

 

Inthe ordinary course of business, the Company enters into variousoff-balance-sheet commitments and other arrangements to extend credit that arenot reflected in the consolidated balance sheets of the Company.  The business purpose of theseoff-balance-sheet commitments is the routine extension of credit.  The total amounts of off-balance-sheetfinancial instruments with credit risk were as follows:

 
| **($ in thousands)**                                          | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Financial instruments whose contractual amounts  represent credit risk: |       |                             |       |                            |       |
| Commitments to extend credit                                            |       | $                                | 7,212      |                            | $          | 7,182 |   |
| Letters of credit                                                       |       | —                           |       | —                          |       |
| Total commitments                                                       |       | $                                | 7,212      |                            | $          | 7,182 |   |

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Commitments also include revolving lines ofcredit arrangements and unused commitments for commercial and real estatesecured loans.  Since many of thecommitments are expected to expire without being drawn upon, the commitments donot necessarily represent future cash requirements.

 

Lettersof credit are conditional commitments issued by the Company to guarantee theperformance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending 

 

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loanfacilities to customers and, therefore, the Company applies the same rigorousunderwriting standards to letters of credit.

 

TheCompany faces the risk of deteriorating credit quality of borrowers to whom acommitment to extend credit has been made; however, no significant credit lossesare expected from these commitments and arrangements.

 

***Borrowings***

 

Asof September 30, 2010, the Bank had $5.5 million in fixed-rate borrowingsfrom the Federal Home Loan Bank of Topeka (FHLB) with varying maturity datesbetween April 2011 and June 2013 and a weighted-average fixedinterest rate of 4.19%.  Additionally,the Bank had $500,000 in variable-rate, overnight borrowings from theFHLB.  As of September 30, 2010, theovernight advance rate was 0.28%.

 

TheBank has also established unsecured Federal Funds lines-of-credit totaling $8.7million with various correspondent banks. Additionally, the Bank has access to secured Federal Funds lines withtwo correspondent banks and access to the Federal Discount window.  As of September 30, 2010, the Companyhad no balances outstanding on these lines.

 

***Loan Commitments***

 

AtSeptember 30, 2010, the Company had $7.2 million in outstanding loanorigination commitments.  Managementbelieves Solera National Bank has sufficient funds available to meet currentorigination and other lending commitments.

 

***Capital Resources and Capital AdequacyRequirements***

 

Therisk-based capital regulations established and administered by the bankingregulatory agencies are applicable to Solera National Bank. Risk-based capitalguidelines are designed to make regulatory capital requirements more sensitiveto differences in risk profiles among banks, to account for off-balance-sheetexposure, and to minimize disincentives for holding liquid assets. Under theregulations, assets and off-balance-sheet items are assigned to broad riskcategories, each with appropriate weights. The resulting capital ratiosrepresent capital as a percentage of total risk-weighted assets andoff-balance-sheet items. Under the prompt corrective action regulations, to beadequately capitalized a bank must maintain minimum ratios of total capital torisk-weighted assets of 8.0%, Tier 1 capital to risk-weighted assets of 4.0%,and Tier 1 capital to total average assets of 4.0%. Failure to meet thesecapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a directmaterial effect on Solera National Bank’s financial statements.

 

Asof September 30, 2010, Solera National Bank was categorized aswell-capitalized. A well-capitalized institution must maintain a minimum ratioof total capital to risk-weighted assets of at least 10.0%, a minimum ratio ofTier 1 capital to risk-weighted assets of at least 6.0%, and a minimum ratio ofTier 1 capital to total average assets of at least 5.0% and must not be subjectto any written order, agreement, or directive requiring it to meet or maintaina specific capital level.

 

Thefollowing table summarizes the ratios of the Bank and the regulatory minimumcapital requirements at September 30, 2010:

 
| **As of September 30, 2010** | ** ** | **Actual** | ** ** | **For Capital Adequacy  Purposes** | ** ** | **To Be Well-Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **($ in thousands)**                   | ** ** | **Amount** | ** ** | **%**                                        | ** ** | **Amount**                                                                                      | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Total capital (to risk-weighted assets)          |       | $          | 16,075     |                                         | 18.7       | %                                                                                               | $          | 6,894 |   | >8.0 | % | $ | 8,617 |   | >10.0 | % |
| Tier 1 capital (to risk-weighted assets)         |       | $          | 14,996     |                                         | 17.4       | %                                                                                               | $          | 3,447 |   | >4.0 | % | $ | 5,170 |   | >6.0 | % |
| Tier 1 capital (to average assets)               |       | $          | 14,996     |                                         | 10.9       | %                                                                                               | $          | 5,509 |   | >4.0 | % | $ | 6,886 |   | >5.0 | % |

 

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**Liquidity**

 

Theprimary source of liquidity for the Company will be dividends paid by SoleraNational Bank.  Solera National Bank iscurrently restricted from paying dividends without regulatory approval thatwill not be granted until the accumulated deficit has been eliminated.

 

SoleraNational Bank’s liquidity is monitored by its staff, the Asset LiabilityCommittee and the Board of Directors, who review historical fundingrequirements, the current liquidity position, sources and stability of funding,marketability of assets, options for attracting additional funds, andanticipated future funding needs, including the level of unfunded commitments.

 

SoleraNational Bank’s primary sources of funds are retail and commercial deposits,loan and securities repayments, other short-term borrowings, and other fundsprovided by operations. While scheduled loan repayments and maturinginvestments are relatively predictable, deposit flows and early loanprepayments are more influenced by interest rates, general economic conditions,and competition. Solera National Bank will maintain investments in liquidassets based upon management’s assessment of (1) the need for funds, (2) expecteddeposit flows, (3) yields available on short-term liquid assets, and (4) objectivesof the asset/liability management program.

 

Asloan demand increases, greater pressure will be exerted on Solera National Bank’sliquidity. However, it is management’s intention to maintain a conservativeloan to deposit ratio in the range of 80 - 90% over time. Given this goal,Solera National Bank will not aggressively pursue lending opportunities ifsufficient funding sources (e.g.,deposits, Federal Funds, etc.) are not available, nor will Solera NationalBank seek to attract transient volatile, non-local deposits with above marketinterest rates. As of September 30, 2010, the loan to deposit ratio was56% an increase from 48% at December 31, 2009.

 

SoleraNational Bank had cash and cash equivalents of $698,000, or 0.5% of total Bankassets, at September 30, 2010. Additionally, the Bank had $72.9 million in available-for-saleinvestment securities, or 54% of the Company’s total assets, at September 30,2010.  Management feels Solera NationalBank should have adequate liquidity to meet anticipated future funding needs.

 

Duringthe third quarter, the Bank signed a purchase and assumption agreement withLiberty Savings Bank, FSB, to acquire approximately $30 million in loans andassume approximately $40 million in deposits. This transaction, if consummated, will provide approximately $8 millionin additional cash and cash equivalents during the fourth quarter 2010, whenthe transaction is expected to close. However, our liquidity position could be affected by a higher thananticipated run-off of acquired deposits.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Asa smaller reporting company, the Company is not required to provide theinformation required by this Item.

 

**ITEM 4(T). CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

Management is responsiblefor maintaining effective disclosure controls and procedures.  As of theend of the period covered by this Quarterly Report on Form 10-Q,management evaluated the effectiveness and operation of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)).  Based on that evaluation, both the Company’s PrincipalExecutive Officer and Principal Accounting and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that the information required to be disclosed by the Company inreports that are filed or submitted under the Exchange Act are recorded,processed, summarized and reported to management within the time periodsspecified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to management asappropriate to allow timely decisions regarding disclosure.

 

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**Changes in Internal Control overFinancial Reporting**

 

There have been no changesin internal controls over financial reporting during the Company’s last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

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**PART II —OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Notapplicable.

 

**ITEM1A.  RISK FACTORS**

 

Asa smaller reporting company, the Company is not required to provide theinformation required by this Item.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

Not applicable.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM 4. [Removed and Reserved]**

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6. EXHIBITS**

 
| 2.1  |   | Purchase and Assumption Agreement  dated August 5, 2010 (incorporated by reference to Exhibit 2.1 to  the Company’s Form 8-K filed on August 11, 2010).                                             |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 |   | Employment Agreement dated  September 10, 2010 by and between the Company, the Bank and Robert J.  Fenton (incorporated by reference to Exhibit 10.1 to the Company’s 8-K  filed on September 14, 2010). |
| 31.1 |   | Certification of the Principal  Executive Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act.*                                                                                                     |
| 31.2 |   | Certification of the Principal  Accounting and Financial Officer pursuant to Rule 13a-14(a) of the  Securities Exchange Act.*                                                                                      |
| 32.1 |   | Certification pursuant to  Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350.*                                                                                                                |

 

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* Filed herewith.

 

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**SOLERA NATIONAL BANCORP, INC.**

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
| * *                     | *SOLERA NATIONAL  BANCORP, INC.*              |
|------------------------------|----------------------------------------------------|
| * *                     | *(Registrant)*                                     |
|                         |                                               |
| Date: November 10, 2010 | /s/ Douglas Crichfield                             |
|                         | Douglas Crichfield                                 |
|                         | President and Chief Executive  Officer             |
|                         | (Principal Executive Officer)                      |
|                         |                                               |
|                         |                                               |
|                         | /s/ Robert J. Fenton                               |
|                         | Robert J. Fenton                                   |
|                         | Executive Vice President, Chief  Financial Officer |
|                         | (Principal Accounting and  Financial Officer)      |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                         |
| 2.1         |       | Purchase and Assumption Agreement  dated August 5, 2010 (incorporated by reference to Exhibit 2.1 to  the Company’s Form 8-K filed on August 11, 2010).                                             |
|        |       |                                                                                                                                                                                                                         |
| 10.1        |       | Employment Agreement dated  September 10, 2010 by and between the Company, the Bank and Robert J.  Fenton (incorporated by reference to Exhibit 10.1 to the Company’s 8-K  filed on September 14, 2010). |
|        |       |                                                                                                                                                                                                                         |
| 31.1        |       | Certification pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                                                                                                           |
|        |       |                                                                                                                                                                                                                         |
| 31.2        |       | Certification pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                                                                                                           |
|        |       |                                                                                                                                                                                                                         |
| 32.1        |       | Certification pursuant to  Rule 13a-14(b) of the Securities Exchange Act and 18 U.S.C. §1350                                                                                                                  |

 

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