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) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2009**

 

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

 

**Commissionfile number 000-53181**

 

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**SOLERANATIONAL BANCORP, INC.**

(Exact name of registrant as specified inits 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 telephone number ofprincipal executive offices and principal place of business)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the 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 the registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller 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  ̈  Nox

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the last practicabledate:  As of August 10, 2009,2,553,671 shares of the registrant’s common stock, $0.01 par value, were issuedand outstanding.

 

 

 

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**FORM 10-Q**

**SOLERANATIONAL BANCORP, INC.**

 

**INDEX**

 
| ** **                                                                                                   | **PAGE**   |
|--------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** |
| **INTRODUCTORY NOTE**                                                                                        | **3**      |
| **PART I —  FINANCIAL INFORMATION**                                                                | **5**      |
| **ITEM  1. FINANCIAL STATEMENTS (Unaudited)**                                                                | **5**      |
| **Balance  Sheets as of June 30, 2009 and December 31, 2008**                                      | **5**      |
| **Statements  of Operations for the Three and Six Months Ended June 30, 2009 and 2008**                 | **6**      |
| **Statements of Changes in Stockholders’ Equity for the  Six Months Ended June 30, 2009 and 2008** | **7**      |
| **Statements  of Cash Flows for the Six Months Ended June 30, 2009 and 2008**                           | **8**      |
| **UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL  STATEMENTS**                                          | **10**     |
| **ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS**     | **21**     |
| **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK**                                      | **34**     |
| **ITEM 4(T). CONTROLS AND PROCEDURES**                                                                       | **34**     |
| **PART II  — OTHER INFORMATION**                                                                   | **35**     |
| **ITEM  1. LEGAL PROCEEDINGS**                                                                               | **35**     |
| **ITEM  1A. RISK FACTORS**                                                                                   | **35**     |
| **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS**                                     | **35**     |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                                  | **35**     |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                             | **35**     |
| **ITEM  5. OTHER INFORMATION**                                                                               | **35**     |
| **ITEM 6.  EXHIBITS**                                                                                        | **37**     |
| **SIGNATURES**                                                                                               | **38**     |
| **EXHIBIT  INDEX**                                                                                           | **39**     |

 

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# **INTRODUCTORYNOTE**

#  

ThisQuarterly Report on Form 10-Q contains “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995 aboutSolera National Bancorp, Inc. (the “Company”) and our subsidiary, SoleraNational Bank (the “Bank,” collectively with the Company, sometimes referred toas “we,” “us” and “our”) that are subject to risks and uncertainties. Forward-looking statements include information concerning future financialperformance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “anticipates,”“believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “mayfluctuate” and similar expressions of future or conditional verbs such as “will,”“should,” “would,” and “could” are generally forward-looking in nature and nothistorical facts.  Actual results may differ materially from thoseprojected, implied, anticipated or expected in the forward-lookingstatements.  Readers of this quarterlyreport should not rely solely on the forward-looking statements and shouldconsider all uncertainties and risks throughout this report. The statements arerepresentative only as of the date they are made, and Solera National Bancorp, Inc.undertakes no obligation to update any forward-looking statement.

 

Theseforward-looking statements, implicitly and explicitly, include the assumptionsunderlying the statements and other information with respect to the Company’sbeliefs, plans, objectives, goals, expectations, anticipations, estimates,financial condition, results of operations, future performance and business,including management’s expectations and estimates with respect to revenues,expenses, return on equity, return on assets, efficiency ratio, asset qualityand other financial data and capital and performance ratios.

 

Althoughthe Company believes that the expectations reflected in the forward-lookingstatements are reasonable, these statements involve risks and uncertaintiesthat are subject to change based on various important factors, some of whichare beyond the control of the Company. The following factors, among others,could cause the Company’s results or financial performance to differ materiallyfrom its goals, plans, objectives, intentions, expectations and otherforward-looking statements:

 

·                  theCompany has a very limited operating history upon which to base an estimate ofits future financial performance;

 

·                  theCompany expects to incur losses during its initial years of operations;

 

·                  SoleraNational Bank’s failure to implement its business strategies may adverselyaffect the Company’s financial performance;

 

·                  thedepartures of key personnel or directors may impair Solera National Bank’soperations;

 

·                  SoleraNational Bank’s legal lending limits may impair its ability to attractborrowers;

 

·                  aneconomic downturn, especially one affecting Solera National Bank’s primaryservice areas, may have an adverse effect on its financial performance;

 

·                  theCompany could be negatively affected by changes in interest rates;

 

·                  theCompany is subject to extensive regulatory oversight, which could restrain ourgrowth and profitability;

 

·                  theCompany may not be able to raise additional capital on terms favorable to it;

 

·                  theliquidity of the Company common stock will be affected by its limited tradingmarket;

 

·                  monetarypolicy and other economic factors could adversely affect the Company’sprofitability;

 

·                  theCompany’s certificate of incorporation and bylaws, and the employmentagreements of our Executive Officers, contain provisions that could make atakeover more difficult;

 

·                  managementof Solera National Bank may be unable to adequately measure and limit creditrisk associated with Solera National Bank’s loan portfolio, which would affectthe Company’s profitability;

 

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·                  governmentregulation may have an adverse effect on the Company’s profitability and growth;

 

·                  the Federal Deposit Insurance Corporation, (“FDIC”),has increased deposit insurance premiums to rebuild and maintain the federaldeposit insurance fund, which could have a material affect on earnings;

 

·                  the Company cannot predict the effect of therecently enacted federal rescue plan;

 

·                  theeffects of competition from other commercial banks, thrifts, mortgage bankingfirms, consumer finance companies, credit unions, securities brokerage firms,insurance companies, money market and other mutual funds, and other financialinstitutions operating in our market area and elsewhere, including institutionsoperating regionally, nationally, and internationally, together with suchcompetitors offering banking products and services by mail, telephone, computer,and the Internet; and

 

·                  management’sability to manage these and other risks.

 

Fora discussion of these and other risks and uncertainties that could cause actualresults to differ from those contained in the forward-looking statements, see “RiskFactors” in Item 1A of the Company’s 2008 Annual Report filed on Form 10-Kwith the Securities and Exchange Commission (SEC), which is available on theSEC’s website at www.sec.gov.  All forward-looking statements arequalified in their entirety by this cautionary statement, and the Companyundertakes no obligation to revise or update this Quarterly Report on Form 10-Qto reflect events or circumstances after the date hereof.  New factors emerge from time to time, and itis not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess theimpact of each factor on the Company’s business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

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# **PART I— FINANCIAL INFORMATION**

#  

# **ITEM 1. FINANCIAL STATEMENTS(Unaudited)**

#  

**SoleraNational Bancorp, Inc.**

 

**Balance Sheets as of June 30,2009 and December 31, 2008**

**(Unaudited)**

 
| ** **                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                            |       |              |       |                  |       |
| Cash  and due from banks                                                                                                                              |       | $                 | 718,401    |                  | $          | 1,436,241 |   |
| Federal  funds sold                                                                                                                                   |       | 385,000           |       | 965,000               |       |
| Total  cash and cash equivalents                                                                                                                      |       | 1,103,401         |       | 2,401,241             |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Investment  securities, available-for-sale                                                                                                            |       | 53,718,003        |       | 41,557,461            |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Gross  loans                                                                                                                                          |       | 39,307,887        |       | 21,412,957            |       |
| Net  deferred (fees)/expenses                                                                                                                         |       | (102,977          | )          | (56,747               | )          |
| Allowance  for loan losses                                                                                                                            |       | (520,000          | )          | (268,000              | )          |
| Net  loans                                                                                                                                            |       | 38,684,910        |       | 21,088,210            |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Federal  Home Loan Bank (FHLB) and Federal Reserve Bank stocks                                                                                        |       | 1,063,900         |       | 1,079,550             |       |
| Premises  and equipment, net                                                                                                                          |       | 947,975           |       | 1,011,579             |       |
| Interest receivable                                                                                                                                   |       | 657,487           |       | 382,761               |       |
| Other  assets                                                                                                                                         |       | 213,664           |       | 222,038               |       |
| **Total assets**                                                                                                                                      |       | $                 | 96,389,340 |                  | $          | 67,742,840 |   |
|                                                                                                                                                  |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                         |       |              |       |                  |       |
| Deposits                                                                                                                                              |       |              |       |                  |       |
| Noninterest-bearing  demand                                                                                                                           |       | $                 | 5,637,098  |                  | $          | 3,910,236 |   |
| Interest-bearing  demand                                                                                                                              |       | 2,772,715         |       | 2,603,923             |       |
| Savings  and money market                                                                                                                             |       | 13,218,889        |       | 6,873,260             |       |
| Time  deposits                                                                                                                                        |       | 44,630,205        |       | 24,274,807            |       |
| Total  deposits                                                                                                                                       |       | 66,258,907        |       | 37,662,226            |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                           |       | 1,541,431         |       | 398,162               |       |
| Accrued  interest payable                                                                                                                             |       | 113,535           |       | 80,274                |       |
| Accounts  payable and other liabilities                                                                                                               |       | 419,735           |       | 393,498               |       |
| Federal  Home Loan Bank advances                                                                                                                      |       | 9,500,000         |       | 10,000,000            |       |
| Deferred  rent liability                                                                                                                              |       | 74,097            |       | 60,505                |       |
| Capital  lease liability                                                                                                                              |       | 137,557           |       | 156,388               |       |
| **Total liabilities**                                                                                                                                 |       | $                 | 78,045,262 |                  | $          | 48,751,053 |   |
|                                                                                                                                                  |       |              |       |                  |       |
| COMMITMENTS  AND CONTINGENCIES (see Note 10)                                                                                                          |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY                                                                                                                            |       |              |       |                  |       |
| Common  stock, $0.01 par value; 5,000,000 shares authorized; 2,553,671 sharesissued and outstanding at June 30,  2009 and December 31, 2008 |       | $                 | 25,536     |                  | $          | 25,536 |   |
| Additional  paid-in capital                                                                                                                           |       | 25,660,367        |       | 25,558,098            |       |
| Accumulated  deficit                                                                                                                                  |       | (7,745,555        | )          | (6,739,883            | )          |
| Accumulated  other comprehensive income                                                                                                               |       | 403,730           |       | 148,036               |       |
| **Total stockholders’ equity**                                                                                                                   |       | $                 | 18,344,078 |                  | $          | 18,991,787 |   |
|                                                                                                                                                  |       |              |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                   |       | $                 | 96,389,340 |                  | $          | 67,742,840 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Operations for the Threeand Six Months Ended June 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **For  the Three Months** | ** ** | **For the Six  Months** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|
| ** **                                                                  | ** ** | **Ended June 30,**   | ** ** | **Ended June 30,**      | ** ** |
| ** **                                                                  | ** ** | **2009**                  | ** ** | **2008**                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  income:                                                           |       |                      |       |                              |       |   |   |   |   |
| Interest and fees on loans                                                  |       | $                         | 468,664    |                              | $          | 141,440 |   | $ | 782,414 |   | $ | 228,602 |   |
| Interest on federal funds sold                                              |       | 109                       |       | 15,891                            |       | 1,096 |   | 53,066 |   |
| Interest on investment securities                                           |       | 650,134                   |       | 322,009                           |       | 1,248,353 |   | 552,811 |   |
| Other  interest income                                                      |       | 12                        |       | 7,545                             |       | 13 |   | 13,457 |   |
| Dividends  on FHLB and Federal Reserve Bank stocks                          |       | 9,702                     |       | 10,402                            |       | 19,795 |   | 18,277 |   |
| Total  interest income                                                      |       | 1,128,621                 |       | 497,287                           |       | 2,051,671 |   | 866,213 |   |
| Interest  expense:                                                          |       |                      |       |                              |       |   |   |   |   |
| Deposits                                                                    |       | 368,342                   |       | 98,854                            |       | 662,417 |   | 186,804 |   |
| Federal  Home Loan Bank advances                                            |       | 86,221                    |       | 42,346                            |       | 178,376 |   | 42,346 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 4,332                     |       | 82                                |       | 7,522 |   | 82 |   |
| Other  borrowings                                                           |       | 3,353                     |       | 4,197                             |       | 6,924 |   | 8,593 |   |
| Total  interest expense                                                     |       | 462,248                   |       | 145,479                           |       | 855,239 |   | 237,825 |   |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Net  interest income                                                        |       | 666,373                   |       | 351,808                           |       | 1,196,432 |   | 628,388 |   |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Provision  for loan losses                                                  |       | 134,500                   |       | 50,038                            |       | 252,000 |   | 87,104 |   |
| Net  interest income after provision for loan losses                        |       | 531,873                   |       | 301,770                           |       | 944,432 |   | 541,284 |   |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Noninterest  income:                                                        |       |                      |       |                              |       |   |   |   |   |
| Service  charges and fees                                                   |       | 71,039                    |       | 11,644                            |       | 139,942 |   | 17,254 |   |
| Sublease  income                                                            |       | 217                       |       | 4,950                             |       | 4,324 |   | 8,700 |   |
| Gain  on sale of securities                                                 |       | 30,089                    |       | 5,644                             |       | 107,024 |   | 45,264 |   |
| Total  noninterest income                                                   |       | 101,345                   |       | 22,238                            |       | 251,290 |   | 71,218 |   |
| Noninterest  expense:                                                       |       |                      |       |                              |       |   |   |   |   |
| Salaries  and employee benefits                                             |       | 685,848                   |       | 481,050                           |       | 1,297,451 |   | 985,120 |   |
| Occupancy                                                                   |       | 139,151                   |       | 113,114                           |       | 275,171 |   | 230,881 |   |
| Professional  fees                                                          |       | 67,600                    |       | 73,510                            |       | 184,027 |   | 145,545 |   |
| Other  general and administrative                                           |       | 264,011                   |       | 189,276                           |       | 444,745 |   | 356,488 |   |
| Total  noninterest expense                                                  |       | 1,156,610                 |       | 856,950                           |       | 2,201,394 |   | 1,718,034 |   |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Income taxes                                                                |       | —                    |       | —                            |       | — |   | — |   |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Net  (loss)                                                                 |       | $                         | (523,392   | )                                 | $          | (532,942 | ) | $ | (1,005,672 | ) | $ | (1,105,532 | ) |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Basic  earnings (loss) per share                                            |       | (0.20                     | )          | (0.21                             | )          | (0.39 | ) | (0.43 | ) |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| Diluted  earnings (loss) per share                                          |       | (0.20                     | )          | (0.21                             | )          | (0.39 | ) | (0.43 | ) |
|                                                                        |       |                      |       |                              |       |   |   |   |   |
| 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 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

**Statements of Changes inStockholders’ Equity forthe Six Months Ended June 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                | ** ** | ** **          | ** ** | **Additional**       | ** ** | ** **                 | ** ** | **Accumulated   Other**           | ** **     | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|----------------------|------------|----------------------------|------------|-----------------------------------|----------------|------------|------------|
| ** **                                                                  | ** ** | **Shares    Outstanding** | ** ** | **Common    Stock** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated    Deficit** | ** ** | **Comprehensive   Income (Loss)** | ** **     | **Total**  | ** ** |
| ** **                                                                  | ** ** | ** **                | ** ** | ** **          | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **                        | ** **     | ** ** | ** ** |
| **Balance at December 31, 2007**                                            | ** ** | **2,553,671**             | ** ** | **$**               | **25,536** | ** **           | **$**      | **25,347,342**             | ** ** | **$**                             | **(4,525,955** | **)**      | **$**      | **2,412** | ** ** | **$** | **20,849,335** | ** ** |
| Stock-based  compensation                                                   |       | —                    |       | —              |       | 124,812              |       | —                     |       | —                            |           | 124,812    |       |
| Comprehensive  income (loss):                                               | ** ** | ** **                | ** ** | ** **          | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **                        | ** **     | ** ** | ** ** |
| Net  (loss)                                                                 |       | —                    |       | —              |       | —               |       | (1,105,532                 | )          | —                            |           | (1,105,532 | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                    |       | —              |       | —               |       | —                     |       | (243,462                          | )              | (243,462   | )          |
| Less:  reclassification adjustment for net gains included in income         |       | —                    |       | —              |       | —               |       | —                     |       | (45,264                           | )              | (45,264    | )          |
| Total comprehensive income (loss)                                           |       |                      |       |                |       |                 |       |                       |       |                              |           | (1,394,258 | )          |
| **Balance at June 30, 2008**                                                | ** ** | **2,553,671**             | ** ** | **$**               | **25,536** | ** **           | **$**      | **25,472,154**             | ** ** | **$**                             | **(5,631,487** | **)**      | **$**      | **(286,314** | **)** | **$** | **19,579,889** | ** ** |
| ** **                                                                  | ** ** | ** **                | ** ** | ** **          | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **                        | ** **     | ** ** | ** ** |
| **Balance at December 31, 2008**                                            | ** ** | **2,553,671**             | ** ** | **$**               | **25,536** | ** **           | **$**      | **25,558,098**             | ** ** | **$**                             | **(6,739,883** | **)**      | **$**      | **148,036** | ** ** | **$** | **18,991,787** | ** ** |
| Stock-based  compensation                                                   |       | —                    |       | —              |       | 102,269              |       | —                     |       | —                            |           | 102,269    |       |
| Comprehensive  income (loss):                                               |       |                      |       |                |       |                 |       |                       |       |                              |           |       |       |
| Net  (loss)                                                                 |       | —                    |       | —              |       | —               |       | (1,005,672                 | )          | —                            |           | (1,005,672 | )          |
| Net  change in unrealized gains on investment securities available-for-sale |       | —                    |       | —              |       | —               |       | —                     |       | 362,718                           |           | 362,718    |       |
| Less:  reclassification adjustment for net gains included in income         |       | —                    |       | —              |       | —               |       | —                     |       | (107,024                          | )              | (107,024   | )          |
| Total comprehensive income (loss)                                           |       |                      |       |                |       |                 |       |                       |       |                              |           | (749,978   | )          |
| **Balance at June 30, 2009**                                                | ** ** | **2,553,671**             | ** ** | **$**               | **25,536** | ** **           | **$**      | **25,660,367**             | ** ** | **$**                             | **(7,745,555** | **)**      | **$**      | **403,730** | ** ** | **$** | **18,344,078** | ** ** |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Cash Flows for the Six MonthsEnded June 30, 2009 and 2008**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **For  the Six Months** | ** **  |
|----------------------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                                   | ** ** | **Ended  June 30,**     | ** **  |
| ** **                                                                                   | ** ** | **2009**                | ** **  | **2008** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                        |       |                    |        |   |   |
| Net  (loss)                                                                                  |       | $                       | (1,005,672  | ) | $ | (1,105,532 | ) |
| Adjustments  to reconcile net (loss) to net cash used in operating activities:               |       |                    |        |   |   |
| Depreciation  and amortization                                                               |       | 83,084                  |        | 54,109 |   |
| Provision  for loan losses                                                                   |       | 252,000                 |        | 87,104 |   |
| Net  amortization of deferred loan fees/expenses                                             |       | (36,123                 | )           | (653 | ) |
| Discount  accretion on interest-bearing deposits with banks                                  |       | —                  |        | (11,796 | ) |
| Net  amortization of premiums on investment securities                                       |       | 33,667                  |        | 26,983 |   |
| Gain  on sale of investment securities                                                       |       | (107,024                | )           | (45,264 | ) |
| Federal  Home Loan Bank stock dividend                                                       |       | (6,400                  | )           | (2,500 | ) |
| Recognition  of stock-based compensation on stock options                                    |       | 102,269                 |        | 124,812 |   |
| Changes  in operating assets and liabilities:                                                |       |                    |        |   |   |
| Interest  receivable                                                                         |       | (274,726                | )           | (155,050 | ) |
| Other  assets                                                                                |       | (478                    | )           | 152,600 |   |
| Accrued  interest payable                                                                    |       | 33,261                  |        | 12,724 |   |
| Accounts  payable and other liabilities                                                      |       | 26,237                  |        | 27,050 |   |
| Deferred  loan fees/expenses, net                                                            |       | 82,353                  |        | 22,153 |   |
| Deferred  rent liability                                                                     |       | 13,592                  |        | 18,208 |   |
| **Net cash used in operating activities**                                                    |       | $                       | (803,960    | ) | $ | (795,052 | ) |
|                                                                                         |       |                    |        |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                        |       |                    |        |   |   |
| Purchase  of investment securities, available-for-sale                                       |       | $                       | (29,684,814 | ) | $ | (25,889,302 | ) |
| Proceeds  from sales of investment securities, available-for-sale                            |       | 10,072,517              |        | 4,849,038 |   |
| Proceeds  from maturities/calls/pay downs of investment securities, available-for-sale       |       | 7,780,806               |        | 4,076,959 |   |
| Originated  loans, net of pay downs                                                          |       | (17,894,930             | )           | (7,726,095 | ) |
| Purchase  of premises and equipment                                                          |       | (10,628                 | )           | (17,864 | ) |
| Purchase  of Federal Home Loan Bank stock                                                    |       | —                  |        | (500,000 | ) |
| Proceeds  from redemption of Federal Reserve Bank stock                                      |       | 22,050                  |        | 32,350 |   |
| Proceeds  from maturity of interest-bearing deposits with banks                              |       | —                  |        | 100,000 |   |
| Purchase  of interest-bearing deposits with banks                                            |       | —                  |        | (686,626 | ) |
| **Net cash used in investing activities**                                                    |       | $                       | (29,714,999 | ) | $ | (25,761,540 | ) |
|                                                                                         |       |                    |        |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                        |       |                    |        |   |   |
| Net  increase in deposits                                                                    |       | $                       | 28,596,681  |   | $ | 13,437,039 |   |
| Net  increase in federal funds purchased and securities sold under agreements to  repurchase |       | 1,143,269               |        | — |   |
| Principal  payments on capital lease                                                         |       | (18,831                 | )           | (17,162 | ) |
| Proceeds  from FHLB advances                                                                 |       | 1,750,000               |        | — |   |
| Repayment  of FHLB advances                                                                  |       | (2,250,000              | )           | 10,000,000 |   |
| Proceeds  from subscriptions receivable                                                      |       | —                  |        | 1,600,000 |   |
| **Net cash provided by financing activities**                                                |       | $                       | 29,221,119  |   | $ | 25,019,877 |   |
|                                                                                         |       |                    |        |   |   |
| **Net decrease in cash and cash equivalents**                                                |       | $                       | (1,297,840  | ) | $ | (1,536,715 | ) |
|                                                                                         |       |                    |        |   |   |
| CASH  AND CASH EQUIVALENTS                                                                   |       |                    |        |   |   |
| Beginning  of period                                                                         |       | 2,401,241               |        | 5,306,126 |   |
| End  of period                                                                               |       | $                       | 1,103,401   |   | $ | 3,769,411 |   |

 

SeeNotes to Financial Statements.

 

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**SoleraNational Bancorp, Inc.**

 

# **Statementsof Cash Flows for the Six Months Ended June 30, 2009 and 2008, (continued)**

**(Unaudited)**

 
| ** **                                                          | ** ** | **For  the Six Months** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **Ended  June 30,**     | ** ** |
| ** **                                                          | ** ** | **2009**                | ** ** | **2008** | ** ** |
|                                                                |       |                    |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                   |       |                    |       |   |   |
| Cash  paid during the period for:                                   |       |                    |       |   |   |
| Interest                                                            |       | $                       | 821,978    |   | $ | 225,101 |   |
| Non-cash  investing transactions:                                   |       |                    |       |   |   |
| Unrealized  gain (loss) on investment securities available-for-sale |       | $                       | 255,694    |   | $ | (288,726 | ) |

 

SeeNotes to Financial Statements.

 

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**SOLERANATIONAL BANCORP, INC.**

 

# **UNAUDITED CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

#  

**NOTE 1 — SUMMARY OF ORGANIZATION**

 

SoleraNational Bancorp, Inc. (the “Company”), is a Delaware corporation that wasincorporated in 2006 to organize and serve as the holding company for SoleraNational Bank (the “Bank”), a national bank that opened for business on September10, 2007.  Solera National Bank is afull-service community, commercial bank headquartered in Lakewood, Coloradoserving the Denver metropolitan area.

 

**NOTE 2 — BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements contain alladjustments (consisting only of normal recurring adjustments) which, in theopinion of management, are necessary to present fairly the financial positionof the Company as of June 30, 2009, and the results of its operations for thethree and six months ended June 30, 2009 and 2008.  Cash flows are presented for the six monthsended June 30, 2009 and 2008.  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 rulesand regulations of the U.S. Securities and Exchange Commission.  The Company believes that the disclosures inthe unaudited condensed consolidated financial statements are adequate to makethe information presented not misleading.  However, these unaudited condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K as of and for the year ended December 31, 2008.

 

TheCompany received approval as a bank in organization in the first quarter of2007, conducted an initial closing of its common stock offering and commencedbanking operations during the third quarter of 2007.  Successful completion of the Company’sdevelopment program and, ultimately, the attainment of profitable operationsare dependent on future events, including the successful execution of theCompany’s business plan and achieving a level of revenue adequate to supportthe Company’s cost structure.

 

**CriticalAccounting Policies**

 

Income taxes:  Deferredtaxes are provided on a liability method whereby deferred tax assets arerecognized for deductible temporary differences and operating losscarryforwards, and deferred tax liabilities are recognized for taxabletemporary differences.  Temporarydifferences are the differences between the reported amounts of assets andliabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in theopinion of management, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of the enactment.

 

Securities available-for-sale: Securities available-for-sale are reported at fair value utilizing Level2 inputs (see Note 11).  For thesesecurities, the Company obtains fair value measurements from independentpricing services.  The fair valuemeasurements consider observable data that may include dealer quotes, marketspreads, cash flows, the U.S. Treasury yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.  Unrealized gains and losses are reported as aseparate component of accumulated other comprehensive income.

 

Securities are also evaluated for impairmentutilizing criteria such as the magnitude and duration of the decline, currentmarket conditions, payment history, the credit worthiness of the obligator, theintent of the Company to retain the security or whether it ismore-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 

 

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the impairment that is noncredit related(resulting in a charge to accumulated other comprehensive income).  A credit loss is determined by comparing thepresent value of cash flows expected to be collected, computed using theoriginal yield as the discount rate, to the amortized cost basis.

 

Stock-based compensation:  The Company accounts for stock-basedcompensation to employees as outlined in FASB Statement No. 123(R), *Share-Based Payment*, (FAS 123R).  The cost ofemployee services received in exchange for an award of equity instruments isbased on the grant-date fair value of the award.

 

Provision for loan losses: The allowance for loan losses represents the Company’s recognition ofthe risks of extending credit and its evaluation of the loan portfolio. Theallowance for loan losses is maintained at a level considered adequate toprovide for probable loan losses based on management’s assessment of variousfactors affecting the loan portfolio, including a review of problem loans,business conditions, historical loss experience, evaluation of the quality ofthe underlying collateral, and holding and disposal costs. The allowance forloan losses is increased by provisions charged to expense and reduced by loanscharged off, net of recoveries.  Loanlosses are charged against the allowance for loan losses when managementbelieves the loan balance is uncollectible.

 

The Company hasestablished a formal process for determining an adequate allowance for loanlosses.  The allowance for loan lossescalculation process has two components. The first component represents the allowance for loan losses forimpaired loans computed in accordance with FASB Statement No. 114, *Accounting by Creditors for Impairment of a Loan*(FAS 114 Component), as amended by FASB Statement No. 118, *Accounting by Creditors for Impairment of a Loan —Income Recognition and Disclosures - an amendment of FASB Statement No. 114*.  To determine the FAS 114 Component,collateral dependent impaired loans are evaluated using internal analyses aswell as third-party information, such as appraisals.  If an impaired loan is unsecured, it isevaluated using a discounted cash flow of the payments expected over the lifeof the loan using the loan’s effective interest rate and giving considerationto currently existing factors that would impact the amount or timing of thecash flows.  The second component is theallowance for loan losses calculated under FASB Statement No. 5, *Accounting for Contingencies* (FAS 5Component), and represents the estimated probable losses inherent within theportfolio due to uncertainties in economic conditions, delays in obtaininginformation about a borrower’s financial condition, delinquent loans that havenot been determined to be impaired, results of internal and external loanreviews, and other factors.  Thiscomponent of the allowance for loan losses is calculated by assigning aprobable loss range, to each identified risk factor.  The recorded allowance for loan losses is theaggregate of the FAS 114 Component and FAS 5 Component.

 

**RecentlyIssued Accounting Pronouncements**

 

During the second quarter2009, the Company adopted Financial Accounting Standards No. 165, *Subsequent Events* (FAS 165). FAS 165establishes the accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. It requires the disclosure of the date through which an entityhas evaluated subsequent events and the basis for that date, that is, whetherthat date represents the date the financial statements were issued or wereavailable to be issued. See “Note 12 — Subsequent Events” for the relateddisclosure. The adoption of FAS 165 did not have a material impact on ourconsolidated financial statements.

 

In April 2009, the FASBissued FSP FAS 115-2 and FAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments* (FSP FAS115-2/124-2). FSP FAS 115-2/124-2 requires entities toseparate an other-than-temporary impairment of a debt security into twocomponents when there are credit related losses associated with the impaireddebt security for which management asserts that it does not have the intent tosell the security, and it is more likely than not that it will not be requiredto sell the security before recovery of its cost basis. The amount of theother-than-temporary impairment related to a credit loss is recognized inearnings, and the amount of the other-than-temporary impairment related toother factors is recorded in other comprehensive loss. FSP FAS115-2/124-2 is effective for periods ending after June 15, 2009.The Company adopted FSP FAS 115-2/124-2 during the quarter ended June30, 2009. Adoption of this Statement did not have a significant impact on theCompany’s financial position and results of operations.

 

In April 2009, the FASB issued FSP FAS 157-4, *Determining Fair Value When Volume and Level of Activity for the Assetor Liability Have Significantly Decreased and Identifying Transactions that areNot Orderly* (FSP FAS 157-4). Under FSP FAS 157-4, if anentity determines that there has been a significant decrease in the volume and 

 

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level of activity for the asset or the liability inrelation to the normal market activity for the asset or liability (or similarassets or liabilities), then transactions or quoted prices may not accuratelyreflect fair value. In addition, if there is evidence that the transaction forthe asset or liability is not orderly, the entity shall place little, if any, weighton that transaction price as an indicator of fair value. FSP FAS 157-4 iseffective for periods ending after June 15, 2009. The Company adopted FSP FAS157-4 during the quarter ended June 30, 2009. Adoption of this Statement did not have a significant impact on theCompany’s financial position and results of operations.

 

In April 2009, the FASB issued FSP FAS 107-1 andAPB 28-1, *Interim Disclosures about Fair Value ofFinancial Instruments* (FSP FAS 107-1 and APB 28-1). FSPFAS 107-1 and APB 28-1 require disclosures about fair value offinancial instruments in interim and annual financial statements. FSP FAS107-1 and APB 28-1 are effective for periods ending after June 15,2009. The Company adopted FSP FAS 107-1 and APB 28-1 during thequarter ended June 30, 2009. Adoption did not have an impact on the Company’sfinancial position and results of operations.

 

In June 2009, the FASB issued Financial AccountingStandard No. 168, *The FASB Accounting Standards Codification**TM and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162”*(FAS168).  Under this Statement, *The FASB Accounting Standards Codification*(Codification)will become the source of authoritative U.S. generally accepted accountingprinciples (GAAP) recognized by the FASB to be applied by nongovernmentalentities.  Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. On the effective date of FAS 168,the Codification will supersede all then-existing non-SEC accounting andreporting standards. All other nongrandfathered, non-SEC accounting literaturenot included in the Codification will become nonauthoritative.  After the effective date, the FASB will notissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates.  FAS 168 is effective for financial statementsissued for interim and annual periods ending after September 15, 2009.  The Codification does not change GAAP, and,therefore, the Company does not expect that the adoption of FAS 168 will have amaterial impact on the Company’s financial position or results of operations.

 

**NOTE 3 — INVESTMENTS**

 

The amortized costs and estimated fair values ofinvestment securities as of June 30, 2009 and December 31, 2008 are as follows:

 
| ** **                               | ** ** | **June 30, 2009** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | ** **        | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**     | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Cost**          | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** |
| **Securities  available-for-sale:**      |       |              |       |   |   |   |   |   |   |
| U.S. government  agencies                |       | $                 | 2,696,148  |   | $ | 56,718 |   | $ | (4,952 | ) | $ | 2,747,914 |   |
| Corporate                                |       | 4,500,083         |       | 81,945 |   | (9,109 | ) | 4,572,919 |   |
| State and municipal                      |       | 20,806,516        |       | 146,976 |   | (322,548 | ) | 20,630,944 |   |
| Residential  mortgage-backed securities  |       | 25,311,526        |       | 472,530 |   | (17,830 | ) | 25,766,226 |   |
| **Total securities  available-for-sale** |       | $                 | 53,314,273 |   | $ | 758,169 |   | $ | (354,439 | ) | $ | 53,718,003 |   |

 
| ** **                               | ** ** | **December  31, 2008** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair  Value** | ** ** |
| **Securities  available-for-sale:**      |       |                   |       |   |   |   |   |   |   |
| U.S. government  agencies                |       | $                      | 5,700,100  |   | $ | 46,500 |   | $ | (866 | ) | $ | 5,745,734 |   |
| Corporate                                |       | 1,516,323              |       | 3,475 |   | (16,236 | ) | 1,503,562 |   |
| State and municipal                      |       | 3,043,274              |       | 2,109 |   | (115,545 | ) | 2,929,838 |   |
| Residential mortgage-backed  securities  |       | 31,149,728             |       | 345,360 |   | (116,761 | ) | 31,378,327 |   |
| **Total securities  available-for-sale** |       | $                      | 41,409,425 |   | $ | 397,444 |   | $ | (249,408 | ) | $ | 41,557,461 |   |

 

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The amortized cost and estimated fair value of debtsecurities by contractual maturity at June 30, 2009 and December 31, 2008 areshown below. Mortgage-backed securities are classified in accordance with theircontractual lives.  Expected maturitiesmay differ from contractual maturities because borrowers may have the right toprepay obligations with or without call or prepay penalties.  Additionally, accelerated principal paymentsare commonly received on mortgage-backed securities making it common for themto mature prior to the contractual maturity date.

 
| ** **                             | ** ** | **Amortized Cost** | ** ** | **Estimated Fair Value** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **June 30,**       | ** ** | **December 31,**         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2009**           | ** ** | **2008**                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Securities  available-for-sale         |       |               |       |                     |       |   |   |   |   |
| Due within one year                    |       | $                  | 1,527,158  |                     | $          | 1,516,323 |   | $ | 1,549,402 |   | $ | 1,503,562 |   |
| Due after one year through five years  |       | 3,910,169          |       | 497,361                  |       | 3,976,092 |   | 499,470 |   |
| Due after five years through ten years |       | 12,077,430         |       | 6,167,986                |       | 12,033,820 |   | 6,160,151 |   |
| Due after ten years                    |       | 35,799,516         |       | 33,227,755               |       | 36,158,689 |   | 33,394,278 |   |
| Total securities  available-for-sale   |       | $                  | 53,314,273 |                     | $          | 41,409,425 |   | $ | 53,718,003 |   | $ | 41,557,461 |   |

 

The following tables shows the estimated fair valueand gross unrealized losses, aggregated by investment category and length oftime the individual securities have been in a continuous loss position as of June30, 2009 and December 31, 2008.

 
| ** **                  | ** ** | **June 30, 2009**       | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **Estimated**           | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Unrealized** | ** ** |
| ** **                  | ** ** | **Fair Value**          | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Losses** | ** ** | **Fair Value** | ** ** | **Losses** | ** ** |
| Description  of securities: |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                       | 242,118    |   | $ | (4,952 | ) | $ | — |   | $ | — |   | $ | 242,118 |   | $ | (4,952 | ) |
| Corporate                   |       | 519,360                 |       | (9,109 | ) | — |   | — |   | 519,360 |   | (9,109 | ) |
| State  and municipal        |       | 10,375,989              |       | (239,755 | ) | 548,385 |   | (82,793 | ) | 10,924,374 |   | (322,548 | ) |
| Mortgage-backed  securities |       | 1,389,758               |       | (14,300 | ) | 608,999 |   | (3,530 | ) | 1,998,757 |   | (17,830 | ) |
| Total temporarily  impaired |       | $                       | 12,527,225 |   | $ | (268,116 | ) | $ | 1,157,384 |   | $ | (86,323 | ) | $ | 13,684,609 |   | $ | (354,439 | ) |

 
| ** **                  | ** ** | **December 31, 2008**      | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Less than 12 months**    | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized   Losses** | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized   Losses** | ** ** | **Estimated   Fair Value** | ** ** | **Unrealized   Losses** | ** ** |
| Description  of securities: |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S.  government agencies   |       | $                          | 453,254    |   | $ | (866 | ) | $ | — |   | $ | — |   | $ | 453,254 |   | $ | (866 | ) |
| Corporate                   |       | 1,010,852                  |       | (16,236 | ) | — |   | — |   | 1,010,852 |   | (16,236 | ) |
| State  and municipal        |       | 2,430,368                  |       | (115,545 | ) | — |   | — |   | 2,430,368 |   | (115,545 | ) |
| Mortgage-backed  securities |       | 9,370,807                  |       | (102,508 | ) | 373,988 |   | (14,253 | ) | 9,744,795 |   | (116,761 | ) |
| Total  temporarily impaired |       | $                          | 13,265,281 |   | $ | (235,155 | ) | $ | 373,988 |   | $ | (14,253 | ) | $ | 13,639,269 |   | $ | (249,408 | ) |

 

Management evaluates investment securities forother-than-temporary impairment taking into consideration the extent and lengthof time the fair value has been less than cost, the financial condition of theissuer, whether the Company has the intent to retain the security andwhether it is more-likely-than-not that the Company will be required to sellthe security before recovery of the value, as well as other qualitativefactors.  The five individual securities that have been in acontinuous unrealized loss position for 12 months or longer at June 30, 2009,have fluctuated in value since their purchase dates as a result of changes inmarket interest rates and not as a result of the underlying issuer’s ability torepay.  Management has reviewed thecredit rating for all securities in a continuous unrealized loss position for12 months or longer and determined that all securities are highly rated.  Additionally, the Company has the intent tohold these securities and the Company does not anticipate that these securitieswill be required to be sold before recovery of value, which may be uponmaturity. Accordingly, as of June 30, 2009, no declines in value are deemed tobe other than temporary.  Only onesecurity was in a continuous unrealized loss 

 

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position at December 31, 2008, and management’sevaluation of that security determined it was not other than temporarilyimpaired.

 

The Company recorded a net unrealized gain in theinvestment portfolio of $404,000 at June 30, 2009.  This was an improvement over the $148,000unrealized gain at December 31, 2008.

 

The Company sold nineteen securities for grossrealized gains of $112,000 and one security for a loss of $5,000 during thefirst six months of 2009.  The Companysold eleven securities for gross realized gains of $46,000 and one security fora loss of $1,000 during the first six months of 2008.  Realized gains and losses on sales arecomputed on a specific identification basis based on amortized cost on the dateof sale.

 

Securities with carrying values of $12.8 million at June30, 2009 and $15.4 million at December 31, 2008, were pledged as collateral tosecure public deposits, borrowings from the FHLB, repurchase agreements and forother purposes as required or permitted by law.

 

**NOTE 4 — LOANS**

 

Loans consisted of the following:

 
| ** **                                  | ** ** | **June 30, 2009** | ** ** | **December  31, 2008** | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------|------------|
| Real estate –  commercial              |       | $                 | 19,335,581 |                   | $          | 7,478,806 |   |
| Real estate –  residential             |       | 5,975,755         |       | 5,043,352              |       |
| Construction and  land development          |       | 6,444,183         |       | 3,848,555              |       |
| Commercial and  industrial                  |       | 6,479,888         |       | 4,083,633              |       |
| Consumer                                    |       | 1,072,480         |       | 958,611                |       |
| Gross loans                                 |       | 39,307,887        |       | 21,412,957             |       |
| Less:  Allowance for loan losses       |       | (520,000          | )          | (268,000               | )          |
|   Deferred loan (fees) / expenses, net |       | (102,977          | )          | (56,747                | )          |
| Loans, net                                  |       | $                 | 38,684,910 |                   | $          | 21,088,210 |   |

 

Duringthe first six months of 2009 and all of 2008, no loans were impaired,transferred to foreclosed properties or past due more than 90 days.

 

Inthe ordinary course of business, and only if consistent with permissibleexceptions to Section 402 of the Sarbanes- Oxley Act of 2002, the Bank may makeloans to directors, executive officers, principal stockholders (holders of morethan five percent of the outstanding common shares) and the businesses withwhich they are associated.  In theCompany’s opinion, all loans and loan commitments to such parties are made onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with other persons.

 

There were approximately $2.6 million in loansreceivable from related parties at June 30, 2009 and December 31, 2008.

 

**NOTE 5 — ALLOWANCE FOR LOAN LOSSES**

 

Activityin the allowance for loan losses for the first six months of 2009 and 2008 issummarized as follows:

 
| ** **                                 | ** ** | **Six-Month Period Ended** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **June 30,  2009**         | ** ** | **June 30, 2008** | ** ** |
| Balance, beginning of period               |       | $                          | 268,000    |   | $ | 47,396 |   |
| Loans charged off                          |       | —                     |       | — |   |
| Recoveries on loans previously charged off |       | —                     |       | — |   |
| Provision  for loan losses                 |       | 252,000                    |       | 87,104 |   |
| Balance, end of period                     |       | $                          | 520,000    |   | $ | 134,500 |   |

 

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**NOTE 6 — DEPOSITS**

 

Deposits are summarized as follows:

 
| ** **                                     | ** ** | **June 30,  2009** | ** ** | **December  31, 2008** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Amount**         | ** ** | **% of   Total**       | ** ** | **Amount** | ** ** | **% of   Total** | ** ** |
| Noninterest-bearing demand                     |       | $                  | 5,637,098  |                   | 9          | % | $ | 3,910,236 |   | 10 | % |
| Interest-bearing demand                        |       | 2,772,715          |       | 4                      |       | 2,603,923 |   | 7 |   |
| Money market accounts                          |       | 3,651,495          |       | 6                      |       | 6,488,427 |   | 17 |   |
| Savings accounts                               |       | 9,567,394          |       | 14                     |       | 384,833 |   | 1 |   |
| Certificates of deposit, less than $100,000    |       | 17,361,920         |       | 26                     |       | 6,521,937 |   | 18 |   |
| Certificates of deposit, greater than $100,000 |       | 27,268,285         |       | 41                     |       | 17,752,870 |   | 47 |   |
| Total deposits                                 |       | $                  | 66,258,907 |                   | 100        | % | $ | 37,662,226 |   | 100 | % |

 

In the ordinary course ofbusiness, certain officers, directors, stockholders, and employees of the Bankhave deposits with the Bank.  In the Bank’sopinion, all deposit relationships with such parties are made on substantiallythe same terms including interest rates and maturities, as those prevailing atthe time for comparable transactions with other persons.  The balance of related party deposits at June30, 2009 and December 31, 2008 was approximately $1.5 million and $2.7 million,respectively.

 

**NOTE 7 — STOCK-BASED COMPENSATION**

 

The Company’s 2007 Stock Incentive Plan (the “Plan”)was approved by the Company’s Board of Directors (the “Board”) with aneffective date of September 10, 2007 and was approved by the Company’sstockholders at the annual meeting held on June 17, 2008.  Under the terms of the Plan, officers and keyemployees may be granted both nonqualified and incentive stock options anddirectors and other consultants, who are not also officers or employees, mayonly be granted nonqualified stock options. The Board reserved 510,734 sharesof common stock for issuance under the Plan.  The Plan provides for options to purchaseshares of common stock at a price not less than 100% of the fair market valueof the stock on the date of grant.  Stockoptions expire no later than ten years from the date of the grant and generallyvest over four years.  The Plan providesfor accelerated vesting if there is a change of control, as defined in thePlan.  The Company recognized stock-basedcompensation cost of approximately $102,000 and $125,000 during the six monthsended June 30, 2009 and 2008, respectively. No tax benefit related to stock-based compensation will be recognizeduntil the Company is profitable.

 

The Company accounts for its stock-based compensationunder the provisions of FAS 123R.  Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes-Merton option pricing model. The Company granted 7,250 options during the second quarter 2009 asincentive compensation to new Bank employees. Similarly, the Company granted 1,250 options to new employees during thesecond quarter of 2008.

 

During the six months ended June 30, 2009, 54,279options were forfeited and 16,499 vested options expired unexercised.  No options were exercised during the three orsix months ended June 30, 2009.  TheCompany recognized expense for approximately 23,000 options, representing apro-rata amount of the options earned during the second quarter 2009 that areexpected to vest.  As of June 30, 2009,there was approximately $329,000 of total unrecognized compensation costrelated to the outstanding stock options that will be recognized over aweighted-average period of 2.4 years.

 

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The following is a summary of the Company’soutstanding stock options at June 30, 2009:

 
| ** **                      | ** ** | **Options** | ** ** | **Weighted-  Average   Grant Date   Fair Value** | ** ** |
|---------------------------------|------------|-------------|------------|--------------------------------------------------|------------|
| Outstanding at  January 1, 2009 |       | 360,255     |       | $                                                | 2.71       |   |
| Granted                         |       | 20,250      |       | 1.42                                             |       |
| Exercised                       |       | —      |       | —                                           |       |
| Forfeited                       |       | (54,279     | )          | 2.73                                             |       |
| Expired                         |       | (16,499     | )          | 2.75                                             |       |
| Outstanding at June 30,  2009   |       | 309,727     |       | $                                                | 2.62       |   |

 

**NOTE 8 — NONINTEREST EXPENSE**

 

The following table details the items comprising other general andadministrative expenses:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2009**                        | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Data processing                   |       | $                               | 63,862     |                          | $          | 51,742 |   | $ | 130,151 |   | $ | 98,652 |   |
| FDIC Assessment                   |       | 63,922                          |       | 4,055                         |       | 79,955 |   | 5,955 |   |
| Marketing and promotions          |       | 35,012                          |       | 58,739                        |       | 55,581 |   | 125,897 |   |
| Printing, stationery and supplies |       | 24,669                          |       | 23,462                        |       | 31,535 |   | 32,898 |   |
| Regulatory and reporting fees     |       | 23,668                          |       | 11,493                        |       | 41,959 |   | 23,349 |   |
| Travel and entertainment          |       | 10,020                          |       | 8,040                         |       | 16,695 |   | 12,682 |   |
| Telephone/communication           |       | 9,371                           |       | 6,104                         |       | 20,220 |   | 13,287 |   |
| Dues and memberships              |       | 5,945                           |       | 2,961                         |       | 16,207 |   | 8,011 |   |
| Insurance                         |       | 4,778                           |       | 4,373                         |       | 9,581 |   | 9,118 |   |
| Postage and shipping              |       | 5,072                           |       | 2,465                         |       | 11,225 |   | 4,416 |   |
| Training and education            |       | 5,149                           |       | 2,758                         |       | 7,410 |   | 5,243 |   |
| Miscellaneous                     |       | 12,543                          |       | 13,084                        |       | 24,226 |   | 16,980 |   |
| Total                             |       | $                               | 264,011    |                          | $          | 189,276 |   | $ | 444,745 |   | $ | 356,488 |   |

 

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**NOTE 9 — INCOME TAXES**

 

Deferred taxes are aresult of differences between income tax accounting and generally acceptedaccounting principles with respect to income and expense recognition.  The following is a summary of the componentsof the net deferred tax asset account recognized in the accompanyingconsolidated statements of financial condition:

 
| ** **                                            | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| Deferred tax assets:                                  |       |              |       |                  |       |
| Start-up and  organizational expenses                 |       | $                 | 1,163,616  |                  | $          | 1,207,526 |   |
| Net operating loss  carryforward                      |       | 1,385,008         |       | 1,096,123             |       |
| Allowance for loan  losses                            |       | 169,462           |       | 76,082                |       |
| Non-qualified stock  options                          |       | 22,190            |       | 16,045                |       |
| Other                                                 |       | 53,284            |       | 40,651                |       |
| Total deferred tax  assets                            |       | 2,793,560         |       | 2,436,427             |       |
| Deferred tax  liabilities:                            |       |              |       |                  |       |
| Net unrealized gain on  securities available-for-sale |       | (149,605          | )          | (54,856               | )          |
| Federal Home Loan Bank  stock dividend                |       | (6,633            | )          | (4,261                | )          |
| Tax over book  depreciation                           |       | (25,150           | )          | (23,814               | )          |
| Total deferred tax  liabilities                       |       | (181,388          | )          | (82,931               | )          |
|                                                  |       |              |       |                  |       |
| Net deferred tax assets                               |       | 2,612,172         |       | 2,353,496             |       |
|                                                  |       |              |       |                  |       |
| Valuation allowance                                   |       | (2,612,172        | )          | (2,353,496            | )          |
|                                                  |       |              |       |                  |       |
| Net deferred taxes                                    |       | $                 | —     |                  | $          | — |   |

 

TheCompany has provided a 100% valuation allowance for its net deferred tax assetdue to uncertainty of realization during the carryforward period.  As of June 30, 2009, the Company has netoperating loss carryforwards of approximately $3.7 million for federal incometax purposes.  Federal net operating losscarryforwards, to the extent not used, will expire beginning in 2027.

 

The income tax provision differs from the amount ofincome tax determined by applying the U.S. federal income tax rate of 35% topretax income from continuing operations for the three and six months ended June30, 2009 and 2008 due to the following:

 
| ** **                                 | ** ** | **June 30, 2009**        | ** ** | **June 30, 2008**      | ** ** |
|--------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Three Months   Ended** | ** ** | **Six Months   Ended** | ** ** | **Three Months   Ended** | ** ** | **Six Months   Ended** | ** ** |
| Computed “expected” tax  benefit |       | $                        | (183,187   | )                      | $          | (351,985 | ) | $ | (186,530 | ) | $ | (386,937 | ) |
| Change in income taxes  resulting from:    |       |                     |       |                   |       |   |   |   |   |
| Change in valuation  allowance             |       | 100,674                  |       | 258,676                |       | 177,200 |   | 368,824 |   |
| Other                                      |       | 82,513                   |       | 93,310                 |       | 9,330 |   | 18,113 |   |
| Income tax provision                       |       | $                        | —     |                   | $          | — |   | $ | — |   | $ | — |   |

 

**NOTE 10 —****COMMITMENTSAND CONTINGENCIES**

 

The Company 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 sheets.  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.

 

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At June30, 2009 and December 31, 2008, the following financial instruments wereoutstanding whose contract amounts represent credit risk:

 
| ** **                                                             | ** ** | **June 30,  2009** | ** ** | **December  31, 2008** | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Financial instruments whose contractual amounts represent credit risk: |       |               |       |                   |       |
| Commitments to extend credit                                           |       | $                  | 5,387,415  |                   | $          | 6,715,658 |   |
| Letters of credit                                                      |       | —             |       | —                 |       |
| Total commitments                                                      |       | $                  | 5,387,415  |                   | $          | 6,715,658 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without being drawn upon, the commitments do not necessarilyrepresent future cash requirements.  TheCompany evaluates each customer’s creditworthiness on a case-by-casebasis.  The amount of collateral obtainedis based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory,property, plant and equipment and income producing commercial properties.

 

Letters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.

 

**NOTE 11****—****FAIR VALUE**

 

TheCompany determines the fair market values of its financial instruments based onthe fair value hierarchy established in FAS No. 157, *Fair ValueMeasurements* (FAS 157), which requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value.  The standard describes threelevels of inputs, as follows, that may be used to measure fair value.

 

Level1 —          inputsare unadjusted quoted prices in active markets for identical assets orliabilities that the Company has the ability to access at the measurement date.

 

Level2 —          inputsare other than quoted prices included in Level 1 that are observable for theasset or liability either directly or indirectly, such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; ormodel-based valuation techniques for which all significant assumptions areobservable in the market.

 

Level3 —          valuationis generated from model-based techniques that use at least one significantassumption not observable in the market. These unobservable assumptions reflect estimates of assumptions thatmarket participants would use in pricing the asset or liability.  Valuation techniques include use of optionpricing models, discounted cash flow models and similar techniques.

 

TheCompany carries its available-for-sale securities at fair value.  Fair value measurement is obtained from independent pricingservices which utilize observable data that may include dealer quotes, marketspreads, cash flows, the U.S. Treasury yield curve, live trading levels, tradeexecution data, market consensus prepayment speeds, credit information and thebonds’ terms and conditions, among other things.  Asof June 30, 2009 and December 31, 2008, all of the Company’s available-for-salesecurities were valued using Level 2 inputs.

 

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***Assets andLiabilities Measured on a Recurring Basis***

 

Assets and liabilities measured at fair value on arecurring basis are summarized below:

 
| ** **                                 | ** ** | **Quoted Prices   in Active   Markets for   Identical   Assets********(Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant   Unobservable   Inputs********(Level 3)** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------|------------|
| Assets at June 30, 2009                    |       |                                                                              |       |                                                      |       |                                                     |       |      |       |
| Investment securities,  available-for-sale |       | $                                                                                 | —     |                                                      | $          | 53,718,003                                               |       | $         | —     |   | $ | 53,718,003 |   |
|                                       |       |                                                                              |       |                                                      |       |                                                     |       |      |       |
| Assets at December 31,  2008               |       |                                                                              |       |                                                      |       |                                                     |       |      |       |
| Investment securities,  available-for-sale |       | $                                                                                 | —     |                                                      | $          | 41,557,461                                               |       | $         | —     |   | $ | 41,557,461 |   |

 

There were no assets or liabilities measured at fairvalue on a non-recurring basis as of June 30, 2009 or December 31, 2008.

 

***Fair Value of FinancialInstruments***

 

The fair value of a financial instrument is determinedunder the framework established by FAS 157. Fair value estimates aremade at a specific point in time based on relevantmarket information and information about the financial instrument. Because nomarket value exists for a significant portion of the financial instruments,fair value estimates are based on judgments regarding future expected lossexperience, current economic conditions, risk characteristics of variousfinancial instruments, and other factors. These estimates are subjective in nature, involve uncertainties andmatters of judgment, and therefore cannot bedetermined with precision. Changes in assumptionscould significantly affect the estimates.

 

FAS 107 excludes certain financial instruments and allnonfinancial instruments for its disclosure requirements.  Accordingly, the aggregate fair value amountspresented may not necessarily represent the underlying fair value of theCompany.  Fair value estimates are based on financialinstruments both on and off the balance sheet without attempting to estimatethe value of anticipated future business and the value of assets andliabilities that are not considered financial instruments. Additionally, taxconsequences related to the realization of the unrealized gains and losses canhave a potential effect on fair value estimates and have not been considered inmany of the estimates.

 

The following methods and assumptions were used toestimate the fair value of significant financial instruments:

 

*Cash and cash equivalents*: The carrying amounts of cash and due from banks and federal funds soldapproximate their fair values.

 

*Investment securities*: 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, in accordance with the frameworkprovided by FAS 157.

 

*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.

 

*Investment in FHLB and Federal Reserve Bankstocks: *It is not practical to determine the fair value ofbank stocks due to the restrictions placed on the transferability of FederalHome Loan Bank stock and Federal Reserve Bank stock, which are the two types ofstock that comprise the balance of investment in bank stocks.

 

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

 

*Deposits:*  The fair valueof noninterest-bearing deposits, interest-bearing demand deposits and savingsaccounts 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 appliesinterest rates currently being offered for deposits of similar remainingmaturities.  Carrying value is assumed toapproximate fair value for all variable rate time deposits.

 

*Federal funds purchased and securities sold underagreements to repurchase: *The carrying amount of federal fundspurchased and securities sold under agreements to repurchase approximates fairvalue due to the short-term nature of these agreements, which generally mature within one to four days fromthe transaction date.

 

*Capital lease liability: *Management did not fair value the capital leaseliability as it is specifically excluded from the provisions of FAS 107.

 

*Federal Home Loan Bank advances: *Fair value of the Federal Home Loan Bank advances isestimated using a discounted cash flow model based on current market rates forsimilar types of borrowing arrangements including similar remaining maturities.

 

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

 

*Loan commitments and letters of credit: *The fair values of commitments are estimated using thefees currently charged to enter into similar agreements, taking into accountthe remaining terms of the agreements and the present creditworthiness of thecounterparties.  The difference betweenthe carrying value of commitments to fund loans or stand by letters of creditand their fair values are not significant and, therefore, are not included inthe following table.

 

The carrying amounts and estimated fair values offinancial instruments are summarized as follows:

 
| ** **                                                                  | ** ** | **June 30,  2009** | ** ** | **December  31, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **Carrying**       | ** ** | **Fair**               | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                  | ** ** | **Value**          | ** ** | **Value**              | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial Assets:                                                           |       |               |       |                   |       |   |   |   |   |
| Cash and cash  equivalents                                                  |       | $                  | 1,103,401  |                   | $          | 1,103,401 |   | $ | 2,401,241 |   | $ | 2,401,241 |   |
| Investment securities                                                       |       | 53,718,003         |       | 53,718,003             |       | 41,557,461 |   | 41,557,461 |   |
| Loans, net                                                                  |       | 38,684,910         |       | 39,100,605             |       | 21,088,210 |   | 21,126,635 |   |
| FHLB and FRB stocks                                                         |       | 1,063,900          |       | 1,063,900              |       | 1,079,550 |   | 1,079,550 |   |
| Interest receivable                                                         |       | 657,487            |       | 657,487                |       | 382,761 |   | 382,761 |   |
|                                                                        |       |               |       |                   |       |   |   |   |   |
| Financial Liabilities:                                                      |       |               |       |                   |       |   |   |   |   |
| Deposits, demand and  savings                                               |       | $                  | 21,628,702 |                   | $          | 21,628,702 |   | $ | 13,387,419 |   | $ | 13,387,419 |   |
| Time deposits                                                               |       | 44,630,205         |       | 43,850,891             |       | 24,274,807 |   | 23,656,602 |   |
| Federal funds purchased  and securities sold under agreements to repurchase |       | 1,541,431          |       | 1,541,431              |       | 398,162 |   | 398,162 |   |
| Federal Home Loan Bank  advances                                            |       | 9,500,000          |       | 9,108,609              |       | 10,000,000 |   | 9,468,902 |   |
| Interest payable                                                            |       | 113,535            |       | 113,535                |       | 80,274 |   | 80,274 |   |

 

**NOTE 12 — SUBSEQUENT EVENTS**

 

TheCompany has considered subsequent events through August 12, 2009, the date ofissuance of this Report on Form 10-Q, and has determined that no additionaldisclosure is necessary.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis presents the Company’s consolidated financialcondition as of June 30, 2009 and results of operations for the three and sixmonths ended June 30, 2009 and 2008.  Thediscussion should be read in conjunction with the financial statements and thenotes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

 

**EXECUTIVE OVERVIEW**

 

We are a Delaware corporation that wasincorporated on January 12, 2006 to organize and serve as the holding companyfor Solera National Bank, a national bank that opened for business on September10, 2007.  Solera National Bank is afull-service community, 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.

 

We offer a broad range of commercial andconsumer banking services to small and medium-sized businesses, licensedprofessionals and individuals who are particularly responsive to thepersonalized service that Solera National Bank provides to its customers.  We believe that local ownership and controlallows the Bank to serve customers more efficiently and effectively.  Solera National Bank competes on the basis ofproviding a unique and personalized banking experience combined with a fullrange of services, customized and tailored to fit the individual needs of itsclients.  Solera National Bank serves theentire market area and, in addition, has a special niche focus on the localHispanic population due to the significant growth of this demographic.

 

****Comparative Results ofOperations for the Three Months Ended June 30, 2009 and 2008****

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the three months ended June 30, 2009 compared to thefinancial condition and results of operations for the three months ended June 30,2008.  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 quarterended June 30, 2009 was $523,000, or ($.20) per share, compared with a $533,000loss, or ($.21) per share for the second quarter of 2008.  Net loss for the second quarter 2009 wasimpacted by higher deposit insurance premiums.  The FDIC adopted a revised risk-based depositinsurance assessment schedule on February 27, 2009, which raised depositinsurance premiums. On May 22, 2009, the FDIC also implemented a five basispoint special assessment of each insured depository institution’s assets minusTier 1 capital as of June 30, 2009, but no more than 10 basis points times theinstitution’s assessment base for the second quarter of 2009, to be collectedon September 30, 2009.  This specialassessment resulted in a second quarter charge of approximately $41,000.  Additional special assessments may be imposedby the FDIC in future periods.

 

As of June 30, 2009, the Company had total assets of$96.4 million, an increase of $28.6 million, or 42%, from December 31,2008.  Net loans increased $17.6 million,or 83%, from $21.1 million at December 31, 2008 to $38.7 million at June 30,2009.  Similarly, the Company’s totaldeposits grew $28.6 million, or 76%, from $37.7 million at December 31, 2008 to$66.3 million as of June 30, 2009.   Thisgrowth was achieved as a result of our successful business development program.

 

**Thefollowing table presents, for the periods indicated, average assets,liabilities and stockholders’ equity, as well as the net interest income fromaverage interest-earning assets and the resultant annualized yields expressedin percentages.**

 

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****Table 1****

 
| ** **                                                                  | ** ** | **Three Months Ended********June 30, 2009** | ** ** | **Three Months Ended********June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **Average   Balance**                       | ** ** | **Interest**                                | ** ** | **Yield  /  Cost** | ** ** | **Average   Balance** | ** ** | **Interest** | ** ** | **Yield  /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                           | 33,992,931 |                                        | $          | 468,664 |   | 5.53 | % | $ | 9,190,140 |   | $ | 141,440 |   | 6.19 | % |
| Investment  securities**                                                    |       | 51,391,542                                  |       | 650,134                                     |       | 5.07 |   | 26,087,326 |   | 322,009 |   | 4.96 |   |
| FHLB  and Federal Reserve Bank stocks                                       |       | 1,065,488                                   |       | 9,702                                       |       | 3.65 |   | 769,303 |   | 10,402 |   | 5.44 |   |
| Federal  funds sold                                                         |       | 252,802                                     |       | 109                                         |       | 0.17 |   | 3,022,582 |   | 15,891 |   | 2.11 |   |
| Interest-bearing  deposits in banks                                         |       | 16,181                                      |       | 12                                          |       | 0.30 |   | 700,035 |   | 7,545 |   | 4.33 |   |
| Total  interest-earning assets                                              |       | 86,718,944                                  |       | $                                           | 1,128,621  |   | 5.22 | % | 39,769,386 |   | $ | 497,287 |   | 5.03 | % |
| Noninterest-earning  assets                                                 |       | 2,505,147                                   |       |                                        |       |   |   | 1,736,313 |   |   |   |   |   |
| Total  assets                                                               |       | $                                           | 89,224,091 |                                        |       |   |   |   | $ | 41,505,699 |   |   |   |   |   |
|                                                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Money  market and savings deposits                                          |       | $                                           | 9,385,793  |                                        | $          | 59,795 |   | 2.56 | % | $ | 7,478,147 |   | $ | 39,945 |   | 2.15 | % |
| Interest-bearing  checking                                                  |       | 4,114,307                                   |       | 20,379                                      |       | 1.99 |   | 2,160,553 |   | 1,392 |   | 0.26 |   |
| Time  deposits                                                              |       | 40,409,308                                  |       | 288,168                                     |       | 2.86 |   | 5,603,688 |   | 57,517 |   | 4.13 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 2,023,019                                   |       | 4,332                                       |       | 0.86 |   | 19,277 |   | 82 |   | 1.71 |   |
| Federal  Home Loan Bank advances                                            |       | 10,302,198                                  |       | 86,221                                      |       | 3.36 |   | 4,983,516 |   | 42,346 |   | 3.42 |   |
| Other  borrowings                                                           |       | 142,982                                     |       | 3,353                                       |       | 9.41 |   | 179,532 |   | 4,197 |   | 9.40 |   |
| Total  interest-bearing liabilities                                         |       | 66,377,607                                  |       | $                                           | 462,248    |   | 2.79 | % | 20,424,713 |   | $ | 145,479 |   | 2.86 | % |
|                                                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                                               |       | 3,500,404                                   |       |                                        |       |   |   | 488,658 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 653,285                                     |       |                                        |       |   |   | 358,122 |   |   |   |   |   |
| Stockholders’  equity                                                  |       | 18,692,795                                  |       |                                        |       |   |   | 20,234,206 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                            |       | $                                           | 89,224,091 |                                        |       |   |   |   | $ | 41,505,699 |   |   |   |   |   |
|                                                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                        |       |                                        |       | $                                           | 666,373    |   |   |   |   |   | $ | 351,808 |   |   |   |
|                                                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                        |       |                                        |       | 2.43                                        | %          |   |   |   |   | 2.16 | % |   |   |
|                                                                        |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                        |       |                                        |       | 3.08                                        | %          |   |   |   |   | 3.56 | % |   |   |

 

****

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

 

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**Thefollowing table presents the dollar amount of changes in interest income andinterest expense for the major categories of interest-earning assets andinterest-bearing liabilities.  Theinformation details the changes attributable to a change in volume (i.e. changein average balance multiplied by the prior-period average rate) and changesattributable to a change in rate (i.e. change in average rate multiplied by thecurrent-period average balance).**

 

****Table 2****

 
| ** **                                                                  | ** ** | **Three  Months Ended June 30, 2009 Compared to Three  Months Ended June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Net  Change**                                                                     | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest  income:**                                                       |       |                                                                                |       |   |   |   |   |
| Gross loans, net  of unearned fees                                          |       | $                                                                                   | 327,224    |   | $ | (55,782 | ) | $ | 383,006 |   |
| Investment  securities                                                      |       | 328,125                                                                             |       | 14,006 |   | 314,119 |   |
| FHLB and Federal  Reserve Bank stocks                                       |       | (700                                                                                | )          | (4,732 | ) | 4,032 |   |
| Federal funds  sold                                                         |       | (15,782                                                                             | )          | (1,220 | ) | (14,562 | ) |
| Interest-bearing  deposits in banks                                         |       | (7,533                                                                              | )          | (162 | ) | (7,371 | ) |
| Total interest  income                                                      |       | $                                                                                   | 631,334    |   | $ | (47,890 | ) | $ | 679,224 |   |
|                                                                        |       |                                                                                |       |   |   |   |   |
| **Interest  expense:**                                                      |       |                                                                                |       |   |   |   |   |
| Money market and  savings deposits                                          |       | $                                                                                   | 19,850     |   | $ | 9,497 |   | $ | 10,353 |   |
| Interest-bearing  checking                                                  |       | 18,987                                                                              |       | 17,673 |   | 1,314 |   |
| Time deposits                                                               |       | 230,651                                                                             |       | (127,386 | ) | 358,037 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |       | 4,250                                                                               |       | (4,285 | ) | 8,535 |   |
| Federal Home  Loan Bank advances                                            |       | 43,875                                                                              |       | (1,555 | ) | 45,430 |   |
| Other borrowings                                                            |       | (844                                                                                | )          | 1 |   | (845 | ) |
| Total interest  expense                                                     |       | $                                                                                   | 316,769    |   | $ | (106,055 | ) | $ | 422,824 |   |
|                                                                        |       |                                                                                |       |   |   |   |   |
| **Net  interest income**                                                    |       | $                                                                                   | 314,565    |   | $ | 58,165 |   | $ | 256,400 |   |

 

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

 

Net interest income is the difference between interestincome, principally from loan and investment security portfolios, and interestexpense, principally on customer deposits and borrowings.  Net interest income is our principal sourceof earnings.  Changes in net interestincome result from changes in volume, spread and margin. Volume refers to theaverage dollar level of interest-earning assets and interest-bearingliabilities.  Spread refers to thedifference between the average yield on interest-earning assets and the averagecost of interest-bearing liabilities. Margin refers to net interest incomedivided by average interest-earning assets, and is influenced by the level andrelative mix of interest-earning assets and interest-bearing liabilities.

 

The Federal Reserve Boardinfluences the general market rates of short-term interest, including thedeposit and loan rates offered by the Bank. The Bank’s loan portfolio issignificantly affected by changes in the prime interest rate.  The prime interest rate, which is the rateoffered on loans to borrowers with strong credit, was 5.25% at the start of thesecond quarter 2008 and fell 25 basis points to end the quarter at 5.00%.  During the last six months of 2008, it fellanother 175 basis points to end the 2008 year at 3.25%.  The prime interest rate has remained at 3.25%for the first six months of 2009.

 

The federal funds rate,which is the cost of immediately available, overnight funds, has moved in asimilar manner.  It averaged 2.11% duringthe second quarter of 2008 compared to 0.17% during the second quarter of 2009.

 

The impact of declining interest rates can be seen in the Company’sdecreasing net interest margin, which declined 48 basis points, or 13%, fromthe second quarter 2008 to the second quarter 2009.  As evident in Table 2, the reason for thisdecline is due to the declining rate environment; however, the impact has beenmitigated by the fact that the Company’s volumes have increasedsignificantly.   Since a considerableportion of the Bank’s loan portfolio is tied 

 

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to the prime interest rate, the average yield on loans has decreasedfrom 6.19% at June 30, 2008 to 5.53% at June 30, 2009.  However, the Bank’s average yield on totalinterest-earning assets has increased from 5.03% during the second quarter of2008 to 5.22% during the first quarter of 2009, due primarily to a change inthe asset mix from lower-yielding assets (federal funds sold) to higher-yieldingassets (loans and investments).  Higheryields on the investment portfolio also contributed to the increase.  Since the second quarter 2008, the Companyhas invested a larger portion of its investment portfolio in longer-term,higher-yielding, state and municipal bonds. The Company’s balance sheet is currently asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience expansion in its net interestmargin during periods of rising short-term interest rates.

 

Total interest income was$1.1 million for the second quarter of 2009, consisting primarily of intereston investment securities of $650,000 and interest and fees on loans of$469,000.  This compared to totalinterest income of $497,000 during the second quarter of 2008, consistingprimarily of interest on investment securities of $322,000, interest and feeson loans of $141,000 and interest on federal funds sold of $16,000.  Average loans, net of unearned fees,increased $24.8 million from $9.2 million during the second quarter ended June 30,2008 to $34.0 million during the second quarter ended June 30, 2009.  Average investment securities increased $25.3million from $26.1 million during the second quarter ended June 30, 2008 to$51.4 million during the second quarter ended June 30, 2009.  As more of the Company’s resources weredeployed in loans and investment securities, average federal funds solddecreased $2.8 million from $3.0 million during the second quarter ended June 30,2008 to $253,000 during the second quarter ended June 30, 2009.

 

Total interest expensewas $462,000 in the second quarter of 2009, an increase of $317,000 from$145,000 during the second quarter of 2008. $269,000 of this increase was due to higher average deposits whichincreased $38.7 million from $15.2 million during the second quarter 2008 to$53.9 million during the second quarter 2009. An additional $44,000 of this increase was due to interest expense on$10.3 million of average Federal Home Loan Bank advances.  Overall, the interest rate on totalinterest-bearing liabilities decreased from 2.86% at June 30, 2008 to 2.79% at June30, 2009, primarily due to the falling interest rate environment, partly offsetby higher interest rates on the Bank’s savings and tiered interest-bearingchecking accounts in order to attract new deposits to support the Bank’sgrowth.

 

Net interest income was$666,000 in the second quarter of 2009, an increase of $314,000, or 89%, from $352,000during the second quarter of 2008.  Thisincrease was primarily the result of increased volumes.  Our annualized net interest margin was 3.08%for the three months ended June 30, 2009 compared to 3.56% for the three monthsended June 30, 2008.  The net interestmargin compression was partially due to lower interest rates which negativelyimpacted the Bank given its asset sensitive balance sheet, and partially due tochanges in the Bank’s funding mix which shifted from federal funds sold (moneynot yet deployed from the initial capital raise) to higher-cost customerdeposits and FHLB advances.

 

****Provisionfor Loan Losses****

 

We determine a provision for loan losses that weconsider sufficient to maintain an allowance to absorb probable losses inherentin our portfolio as of the balance sheet date. For additional informationconcerning this determination, see the section of this discussion and analysiscaptioned **“Allowancefor Loan Losses.”**

 

During the second quarterof 2009, our provision for loan losses was $134,500 relating to the growth ofour loan portfolio and the estimated probable losses inherent within theportfolio due to uncertainties in economic conditions.  There were no loans specifically reserved forunder the FAS 114 Component of the loan loss reserve.  Furthermore, there were no charge-offs ornon-performing loans during this period.

 

****NoninterestIncome****

 

The noninterest incomefor the quarter ended June 30, 2009 was $101,000, an increase of $79,000 from$22,000 for the quarter ended June 30, 2008. The Company sold seven securities for a gain of $30,000 during thesecond quarter of 2009, compared to a net gain of $6,000 during the secondquarter of 2008 for the sale of securities. Service charges on deposits increased $59,000 from $12,000 during thesecond quarter of 2008 to $71,000 during the second quarter of 2009, due to thesignificant increase in customer relationships and the addition of amoney-services-business deposit customer. Sublease income decreased from $5,000 during the second quarter of 2008to only $200 during the second quarter of 2009 as the Bank’s lease agreementwith a third party tenant expired.

 

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****NoninterestExpense****

 

Our totalnoninterest expense was $1.2 million for the quarter ended June 30, 2009,a 35%, or $300,000, increase from $857,000 at June 30, 2008.  This consisted of an increase in salaries andemployee benefits of $205,000, or 43%, primarily due to the separationagreement of an employee who also served as a director and secondarily due toan increase in the number of full-time equivalent employees, which increasedfrom 18 to 22 as of June 30, 2009. Occupancy expense increased $26,000, or 23%, quarter-over-quarterprimarily due to the re-occupancy of the Bank’s administrative officesresulting in increased rent expense. Professional fees remained substantially unchanged quarter-over-quarter,decreasing 8%, or $6,000.

 

Other general andadministrative expenses increased $75,000, or 39%, quarter-over-quarter.  This increase was primarily the result of a$60,000 increase in Federal Deposit Insurance Corporation (FDIC) fees dueprimarily to the special assessment of $41,000 to help build insurance reservesand secondarily due to increases in average deposit volumes, as well asincreases in FDIC rates.  Regulatory andreporting fees increased $12,000, or 106%, due in part to increased Office ofthe Comptroller of the Currency (OCC) assessment fees and increasedcorrespondent bank fees due to increased activity.  Data processing increased $12,000, or 23%,primarily due to increased fees from our core banking processor as a result ofincreased loan and deposit volume.  Theseincreases were partially offset by a $24,000, or 40%, decrease in marketing andpromotions as the Company focused its marketing expenditures on morecost-effective programs.

 

****Income Taxes****

 

No federal or state taxexpense has been recorded for the quarters ended June 30, 2009 and 2008,based upon net operating losses.  Sinceit is uncertain that the Company will become profitable, the deferred taxbenefit accumulated to date has a full valuation allowance so that the netdeferred tax benefit at June 30, 2009 is $0.

 

****Comparative Results ofOperations for the Six Months Ended June 30, 2009 and 2008****

 

Thefollowing discussion focuses on the Company’s financial condition and resultsof operations for the six months ended June 30, 2009 compared to thefinancial condition and results of operations for the six months ended June 30,2008.  The Company’s principal operationsfor each of these periods consisted of the operations of Solera National Bank,which opened for business September 10, 2007.

 

Netloss for the six months ended June 30, 2009 was $1,006,000, or ($.39) pershare, compared with a $1,106,000 loss, or ($.43) per share for the six monthsended June 30, 2008.  Net loss for the six months ended June 30,2009 was impacted by higher deposit insurance premiums, as discussed earlier,as well as higher operating expenses.  Since June 30, 2008, theCompany has hired additional staff and re-occupied administrative offices tosupport the Bank’s significant growth.  The Company expects thisinfrastructure investment to support the continued growth anticipated over thenext several quarters.

 

**Thefollowing table presents, for the periods indicated, average assets,liabilities and stockholders’ equity, as well as the net interest income fromaverage interest-earning assets and the resultant annualized yields expressedin percentages.**

 

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****Table 3****

 
| ** **                                                                  | ** ** | **Six Months Ended********June 30, 2009** | ** ** | **Six Months Ended********June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Average  Balance**                           | ** ** | **Interest**                                   | ** ** | **Yield  /  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield  /  Cost** | ** ** |
| **Assets:**                                                                 |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                   |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                              | 29,322,132 |                                           | $          | 782,414 |   | 5.38 | % | $ | 7,263,139 |   | $ | 228,602 |   | 6.33 | % |
| Investment  securities**                                                    |       | 48,805,962                                     |       | 1,248,353                                      |       | 5.16 |   | 22,085,918 |   | 552,811 |   | 5.03 |   |
| FHLB  and Federal Reserve Bank stocks                                       |       | 1,069,462                                      |       | 19,795                                         |       | 3.73 |   | 647,168 |   | 18,277 |   | 5.68 |   |
| Federal  funds sold                                                         |       | 835,116                                        |       | 1,096                                          |       | 0.26 |   | 3,687,060 |   | 53,066 |   | 2.89 |   |
| Interest-bearing  deposits in banks                                         |       | 16,125                                         |       | 13                                             |       | 0.16 |   | 576,995 |   | 13,457 |   | 4.69 |   |
| Total  interest-earning assets                                              |       | 80,048,797                                     |       | $                                              | 2,051,671  |   | 5.17 | % | 34,260,280 |   | $ | 866,213 |   | 5.08 | % |
| Noninterest-earning  assets                                                 |       | 2,399,333                                      |       |                                           |       |   |   | 1,823,975 |   |   |   |   |   |
| Total  assets                                                               |       | $                                              | 82,448,130 |                                           |       |   |   |   | $ | 36,084,255 |   |   |   |   |   |
|                                                                        |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:**                              |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                              |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Money  market and savings                                                   |       | $                                              | 8,163,798  |                                           | $          | 98,888 |   | 2.14 | % | $ | 5,853,508 |   | $ | 71,798 |   | 2.47 | % |
| Interest-bearing  checking                                                  |       | 3,723,630                                      |       | 32,642                                         |       | 1.77 |   | 1,281,310 |   | 1,777 |   | 0.28 |   |
| Time  deposits                                                              |       | 36,213,403                                     |       | 530,887                                        |       | 2.96 |   | 5,092,381 |   | 113,229 |   | 4.47 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 1,471,211                                      |       | 7,522                                          |       | 1.03 |   | 9,641 |   | 82 |   | 1.71 |   |
| Federal  Home Loan Bank advances                                            |       | 10,151,934                                     |       | 178,376                                        |       | 3.54 |   | 2,491,758 |   | 42,346 |   | 3.42 |   |
| Other  borrowings                                                           |       | 147,873                                        |       | 6,924                                          |       | 9.44 |   | 183,844 |   | 8,593 |   | 9.40 |   |
| Total  interest-bearing liabilities                                         |       | 59,871,849                                     |       | $                                              | 855,239    |   | 2.88 | % | 14,912,442 |   | $ | 237,825 |   | 3.21 | % |
| Noninterest-bearing  checking                                               |       | 3,136,245                                      |       |                                           |       |   |   | 367,556 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                            |       | 612,361                                        |       |                                           |       |   |   | 302,425 |   |   |   |   |   |
| Stockholders’  equity                                                  |       | 18,827,675                                     |       |                                           |       |   |   | 20,501,832 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                            |       | $                                              | 82,448,130 |                                           |       |   |   |   | $ | 36,084,255 |   |   |   |   |   |
|                                                                        |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest income                                                        |       |                                           |       | $                                              | 1,196,432  |   |   |   |   |   | $ | 628,388 |   |   |   |
|                                                                        |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest spread                                                        |       |                                           |       | 2.29                                           | %          |   |   |   |   | 1.88 | % |   |   |
|                                                                        |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Net  interest margin                                                        |       |                                           |       | 3.01                                           | %          |   |   |   |   | 3.69 | % |   |   |

 

****

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

 

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**Thefollowing table presents the dollar amount of changes in interest income andinterest expense for the major categories of interest-earning assets andinterest-bearing liabilities.  Theinformation details the changes attributable to a change in volume (i.e. changein average balance multiplied by the prior-period average rate) and changesattributable to a change in rate (i.e. change in average rate multiplied by thecurrent-period average balance).**

 

****Table 4****

 
| ** **                                                                  | ** ** | **Six Months Ended June 30, 2009 Compared to Six  Months Ended June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **Net Change**                                                                           | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| **Interest income:**                                                        |       |                                                                                     |       |   |   |   |   |
| Gross  loans, net of unearned fees                                          |       | $                                                                                        | 553,812    |   | $ | (138,306 | ) | $ | 692,118 |   |
| Investment  securities                                                      |       | 695,542                                                                                  |       | 30,206 |   | 665,336 |   |
| FHLB  and Federal Reserve Bank stocks                                       |       | 1,518                                                                                    |       | (10,353 | ) | 11,871 |   |
| Federal  funds sold                                                         |       | (51,970                                                                                  | )          | (10,920 | ) | (41,050 | ) |
| Interest-bearing  deposits in banks                                         |       | (13,444                                                                                  | )          | (363 | ) | (13,081 | ) |
| Total  interest income                                                      |       | $                                                                                        | 1,185,458  |   | $ | (129,736 | ) | $ | 1,315,194 |   |
|                                                                        |       |                                                                                     |       |   |   |   |   |
| **Interest expense:**                                                       |       |                                                                                     |       |   |   |   |   |
| Money  market and savings deposits                                          |       | $                                                                                        | 27,090     |   | $ | (973 | ) | $ | 28,063 |   |
| Interest-bearing  checking                                                  |       | 30,865                                                                                   |       | 27,488 |   | 3,377 |   |
| Time  deposits                                                              |       | 417,658                                                                                  |       | (272,843 | ) | 690,501 |   |
| Federal  funds purchased and securities sold under agreements to repurchase |       | 7,440                                                                                    |       | (4,970 | ) | 12,410 |   |
| Federal  Home Loan Bank advances                                            |       | 136,030                                                                                  |       | 6,345 |   | 129,685 |   |
| Other  borrowings                                                           |       | (1,669                                                                                   | )          | 31 |   | (1,700 | ) |
| Total  interest expense                                                     |       | $                                                                                        | 617,414    |   | $ | (244,922 | ) | $ | 862,336 |   |
|                                                                        |       |                                                                                     |       |   |   |   |   |
| **Net interest income**                                                     |       | $                                                                                        | 568,044    |   | $ | 115,186 |   | $ | 452,858 |   |

 

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

 

Net interest income isthe difference between interest income, principally from loan and investmentsecurity portfolios, and interest expense, principally on customer deposits andborrowings.  Net interest income is ourprincipal source of earnings.  Changes innet interest income result from changes in volume, spread and margin. Volumerefers to the average dollar level of interest-earning assets andinterest-bearing liabilities.  Spreadrefers to the difference between the average yield on interest-earning assetsand the average cost of interest-bearing liabilities. Margin refers to netinterest income divided by average interest-earning assets, and is influencedby the level and relative mix of interest-earning assets and interest-bearingliabilities.

 

The Federal Reserve Boardinfluences the general market rates of short-term interest, including thedeposit and loan rates offered by the Bank. The Bank’s loan portfolio issignificantly affected by changes in the prime interest rate.  The prime interest rate, which is the rateoffered on loans to borrowers with strong credit, was 7.25% on January 1,2008.  During the first six months of2008, the prime interest rate fell 225 basis points to end the second quarterat 5.00%.  During the second half of2008, it fell another 175 basis points to end the 2008 year at 3.25%.  The prime interest rate has remained at 3.25%for the first six months of 2009.

 

The federal funds rate,which is the cost of immediately available, overnight funds, has moved in asimilar manner.  The average rate theBank has been able to earn on federal funds sold averaged 2.89% during thefirst six months of 2008 compared to 0.26% during the same period of 2009.

 

The impact ofthese decreases in interest rates can be seen in the Company’s decreasing netinterest margin, which declined 68 basis points, or 18%, from the six monthsended June 30, 2008 to the six months ended June 30, 2009.  As evident in Table 3, the reason for thisdecline is due to the declining rate environment; however, the impact has 

 

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been mitigated bythe fact that the Company’s volumes have drastically increased.   Since a considerable portion of the Bank’sloan portfolio is tied to the prime interest rate, the average yield on loanshas decreased from 6.33% at June 30, 2008 to 5.38% at June 30,2009.  However, the Bank’s average yieldon total interest-earning assets has increased 9 basis points, from 5.08%during the six months ended June 30, 2008 to 5.17% for the same period in2009, due primarily to a change in the Company’s asset mix from lower-yieldingassets (federal funds sold) to higher-yielding assets (loans andinvestments).  Higher yields on theinvestment portfolio also contributed to the increase.  Since the second quarter 2008, the Companyhas invested a larger portion of its investment portfolio in longer-term,higher-yielding, state and municipal bonds. The Company’s balance sheet is currently asset sensitive, meaning thatinterest-earning assets generally reprice more quickly than interest-bearingliabilities. Therefore, the Company could experience expansion in its netinterest margin during periods of rising short-term interest rates.

 

Total interest income was$2.1 million for the six months ended June 30, 2009, consisting primarilyof interest on investment securities of $1.2 million and interest and fees onloans of $782,000.  This compared tototal interest income of $866,000 during the six months ended June 30,2008, consisting primarily of interest on investment securities of $553,000,interest and fees on loans of $229,000 and interest on federal funds sold of$53,000.  Average gross loans, net ofunearned fees, increased $22.1 million, from $7.3 million at June 30, 2008to $29.3 million at June 30, 2009. Average investment securities increased $26.7 million from $22.1 millionat June 30, 2008 to $48.8 million at June 30, 2009.  As more of the Company’s resources weredeployed in loans and investment securities, average federal funds solddecreased $2.9 million from $3.7 million at June 30, 2008 to $835,000 at June 30,2009.

 

Total interest expensewas $855,000 in the six months ended June 30, 2009, an increase of$617,000 from $238,000 during the same period of 2008.  $476,000 of this increase was due to interestexpense on higher average deposits which increased $35.9 million from $12.2million at June 30, 2008 to $48.1 million at June 30, 2009.  An additional $136,000 of this increase wasdue to interest expense on $10.2 million of average Federal Home Loan Bankadvances.  Overall, the interest rate ontotal interest-bearing liabilities decreased from 3.21% during the six monthsended June 30, 2008 to 2.88% for the same period of 2009; primarily due tothe falling interest rate environment.

 

Net interest income was$1.2 million for the first six months of 2009, an increase of $568,000, or 90%,from $628,000 during the same period of 2008. This increase was primarily the result of increased volumes.  Our annualized net interest margin was 3.01%for the six months ended June 30, 2009 compared to 3.69% for the sixmonths ended June 30, 2008.  The netinterest margin compression was partially due to lower interest rates whichnegatively impacted the Bank given its asset sensitive balance sheet andpartially due to changes in the Bank’s funding mix which shifted from federalfunds sold (money not yet deployed from the initial capital raise) tohigher-cost customer deposits and FHLB advances.

 

****Provisionfor Loan Losses****

 

We determine a provisionfor loan losses that we consider sufficient to maintain an allowance to absorbprobable losses inherent in our portfolio as of the balance sheet date. Foradditional information concerning this determination, see the section of thisdiscussion and analysis captioned **“Allowance for Loan Losses.”**

 

During the first sixmonths of 2009, our provision for loan losses was $252,000 relating to thegrowth of our loan portfolio and the estimated probable losses inherent withinthe portfolio due to uncertainties in economic conditions.  There were no loans specifically reserved forunder the FAS 114 Component of the loan loss reserve.  Furthermore, there were no charge-offs ornon-performing loans during this period.

 

****NoninterestIncome****

 

Noninterest income forthe six months ended June 30, 2009 was $251,000, an increase of $180,000from $71,000 for the six months ended June 30, 2008.  The increase was due, in-part, to the$123,000 increase in service charges and fees on deposits — a direct result ofthe increased number of deposit accounts, as well as the addition of asignificant money-services-business deposit customer.  The remainder of the increase in noninterestincome was due to realized gains on the sale of investment securities, whichincreased $62,000.  Investment securitiesare sold for a gain when it is in the Company’s best interest, which mightinclude replacing lower-yielding bonds with higher-yielding bonds, or modifyingthe cash flow streams from bond payments to coincide with the Bank’s expectedliquidity needs.  Sublease incomedecreased $4,000, as the Bank’s lease agreement with a third-party tenantexpired.

 

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****NoninterestExpense****

 

Our totalnoninterest expense was $2.2 million for the six months ended June 30,2009, a 28%, or $483,000, increase from $1.7 million for the six months ended June 30,2008.  This consisted of an increase in salariesand employee benefits of $312,000, or 32%, related primarily due to theseparation agreement of an employee who also served as a director andsecondarily due to an increase in the number of full-time equivalent employees,which increased from 18 to 22 as of June 30, 2009.  Occupancy expense increased $44,000, or 19%,primarily due to the re-occupancy of the Bank’s administrative officesresulting in increased rent expense. Professional fees increased $38,000, or 26%, primarily due to increasedfees for our external audit.

 

Other general andadministrative expenses increased $88,000, or 25%, from the six months ended June 30,2008 to the same period in 2009.  Thisincrease was primarily the result of a $74,000 increase in Federal DepositInsurance Corporation (FDIC) fees due primarily to the special assessment of$41,000 to help build insurance reserves and secondarily due to increases inaverage deposit volumes, as well as increases in FDIC rates.  Regulatory and reporting fees increased$19,000, or 80%, due in part to increased OCC assessment fees and increasedcorrespondent bank fees due to increased activity.  Data processing increased $31,000, or 32%,primarily due to increased fees from our core banking processor as a result ofincreased loan and deposit volumes.  Duesand memberships increased $8,000 as the Bank joined more community groups tohelp build relationships.  Telephone andcommunication expense increased $7,000, or 52%, primarily due to additionaldata and telephone lines for our administrative offices that were occupiedthroughout 2009, but only during the last quarter of 2008.  Postage and shipping increased $7,000primarily due to increased armored courier expenses related to ourmoney-services business clients.  Theseincreases were partially offset by a $70,000, or 56%, decrease in marketing andpromotions as the Company focused its marketing expenditures on morecost-effective programs.

 

****IncomeTaxes****

 

No federal or state taxexpense has been recorded for the six months ended June 30, 2009 and 2008,based upon net operating losses.  Sinceit is uncertain that the Company will become profitable, the deferred taxbenefit accumulated to date has a full valuation allowance so that the netdeferred tax benefit at June 30, 2009 is $0.

 

****Federal HomeLoan Bank (FHLB) and Federal Reserve Bank Stocks****

 

**At June 30,2009, the Bank had a total of $1.1 million invested in FHLB and Federal ReserveBank stocks carried at cost consisting of $440,000 in Federal Reserve Bankstock and $624,000 in FHLB stock.  Theseinvestments allow Solera National Bank to conduct business with theseentities.  As of June 30, 2009, theFederal Reserve Bank stock is yielding an average of 6.0% and the FHLB stock isyielding an average rate of 2.1%.**

 

****InvestmentSecurities****

 

Our investment portfolioserves as a source of interest income and, secondarily, as a source ofliquidity 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.

 

At June 30, 2009,Solera National Bank’s securities consisted of available-for-sale securities of$53.7 million.  The following tableprovides additional detail on the Company’s investment securities as of June 30,2009 and December 31, 2008:

 
| ** **                              | ** ** | **June 30,  2009**    | ** ** | **December 31,  2008**  | ** ** |
|-----------------------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Estimated  Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** | **Estimated  Fair  Value** | ** ** | **Weighted  Average  Yield** | ** ** |
| Securities available-for-sale           |       |                       |       |                         |       |   |   |   |   |
| U.S. government  agencies               |       | $                          | 2,747,914  |                         | 4.95       | % | $ | 5,745,734 |   | 5.38 | % |
| Corporate                               |       | 4,572,919                  |       | 5.82                         |       | 1,503,562 |   | 5.99 |   |
| State and municipal                     |       | 20,630,944                 |       | 5.65                         |       | 2,929,838 |   | 5.59 |   |
| Residential  mortgage-backed securities |       | 25,766,226                 |       | 4.75                         |       | 31,378,327 |   | 5.20 |   |
| Total securities available-for-sale     |       | $                          | 53,718,003 |                         | 5.19       | % | $ | 41,557,461 |   | 5.28 | % |

 

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****Loan Portfolio****

 

Our primary focus isincome from interest on loans. The following table presents the composition ofour loan portfolio by category as of the dates indicated:

 
| ** **                         | ** **                            | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|---------------------------------------|------------------------|------------|----------------------------|------------|
| ** **                         | ** **                            | **Amount**             | ** ** | **% of  Total**            | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| Real  estate — commercial     |                                  | $                      | 19,335,581 |                       | 49         | % | $ | 7,478,806 |   | 35 | % |
| Real  estate — residential    |                                  | 5,975,755              |       | 15                         |       | 5,043,352 |   | 24 |   |
| Construction  and land development |                                  | 6,444,183              |       | 16                         |       | 3,848,555 |   | 18 |   |
| Commercial  and industrial         |                                  | 6,479,888              |       | 17                         |       | 4,083,633 |   | 19 |   |
| Consumer                           |                                  | 1,072,480              |       | 3                          |       | 958,611 |   | 4 |   |
| Gross  loans                       |                                  | 39,307,887             |       | 100                        | %          | 21,412,957 |   | 100 | % |
| Less:                              | Allowance  for loan losses            |                   | (520,000   | )                          |       |   | (268,000 | ) |   |   |
|                               | Deferred  loan (fees) / expenses, net |                   | (102,977   | )                          |       |   | (56,747 | ) |   |   |
| Loans,  net                        |                                  | $                      | 38,684,910 |                       |       |   | $ | 21,088,210 |   |   |   |

 

As of June 30, 2009,net loans were $38.7 million, a $17.6 million, or 83%, increase from $21.1million at December 31, 2008.  Netloans as a percentage of total assets were 40% as of June 30, 2009,compared to 31% at December 31, 2008.

 

The real estate —commercial loan portfolio consists primarily of lines of credit or term loansto businesses that are secured by real estate. At June 30, 2009, there were $19.3 million commercial real estateloans in the loan portfolio, an increase of 159%, or $11.9 million, from $7.5million at December 31, 2008.

 

The real estate —residential loan portfolio consists of residential second mortgage loans, homeequity loans and lines of credit and home improvement loans.  At June 30,2009, $6.0 million was outstanding for residential real estate loans, anincrease of 18% from $5.0 million outstanding at December 31, 2008.

 

The construction and landdevelopment loan portfolio is comprised of construction loans forowner-occupied construction and development loans for property beingconstructed and sold to third parties. At June 30, 2009, construction and land development loans totaled$6.4 million, an increase of $2.6 million, or 67%, from $3.8 million at December 31,2008.

 

The commercial andindustrial loan portfolio consists of loans to businesses primarily for workingcapital lines of credit.  At June 30, 2009, commercial and industrialloans totaled $6.5 million, a $2.4 million, or 59%, increase from $4.1 millionat December 31, 2008.

 

The consumer and otherloan portfolio consists of personal lines of credit, loans to acquire personalassets such as automobiles and boats and overdraft protection balances for ourdeposit customers.  As of June 30,2009, consumer loans totaled $1.1 million, an increase of $114,000 from December 31,2008.

 

Loan concentrations areconsidered to exist when there are amounts loaned to a multiple number of borrowersengaged in similar activities that would cause them to be similarly impacted byeconomic or other conditions. The Bank’s loan portfolio generally consists ofloans to borrowers within Colorado. Although the Bank seeks to avoid concentrations of loans to a singleindustry or based upon a single class of collateral, the Bank’s loan portfolioconsists primarily of real estate loans secured by real estate located inColorado, making the value of the portfolio more susceptible to declines inreal estate values and other changes in economic conditions in Colorado.  Although the Colorado economy hasoutperformed the majority of other metropolitan areas nationally, it too hasshown signs of weakness in recent quarters with unemployment rates andforeclosures rising.  However, othereconomic indicators show positive trends for the Colorado economy, but, at thispoint, extrapolating trends is premature given the fragile nature of thecurrent economic environment.  Managementis diligently monitoring the impact the economic environment may have on ourColorado loan portfolio.  At this time,management believes the allowance for loan losses is adequate to absorbpotential losses as a result of the overall weakness in the Colorado economy.

 

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Additional loanconcentrations exist because the Bank’s loan portfolio is stilldeveloping.  As of June 30, 2009,the Bank’s loan portfolio contained only 103 funded loans, with the fivelargest loans comprising approximately 26% of the portfolio’s gross value.  However, management expects thisconcentration to diminish over time as the Bank’s loan portfolio continues togrow.  No single borrower can be approvedfor a loan over the Bank’s current legal lending limit of approximately $2.3million.  This regulatory requirementhelps to ensure the Bank’s exposure to one individual customer is limited.

 

Management may renewloans at maturity when requested by a customer whose financial strength appearsto support such a renewal or when such a renewal appears to be in the bestinterest of Solera National Bank. Solera National Bank requires payment ofaccrued interest in such instances and may adjust the rate of interest, requirea principal reduction, or modify other terms of the loan at the time ofrenewal.

 

Loan terms vary accordingto loan type. The following table shows the contractual maturity distributionof loans as of June 30, 2009 and December 31, 2008:

 
| **** ****                     | **** **** | ****As of June 30, 2009****      | ** **     |
|------------------------------------|----------------|---------------------------------------|----------------|
| **** ****                     | **** **** | ** **                            | **** **** | ****Over 1 Year************through 5 Years**** | ** ** | ****Over 5 Years**** | ** ** | ** ** | ** ** |
| **** ****                     | **** **** | ****One Year************or Less****   | **** **** | ****Fixed************Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | **** **** | ****Fixed************Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | **** **** | ****Total**** | **** **** |
| Real  estate — commercial     |           | $                                     | 3,670,641      |   | $ | 6,699,355 |   | $ | 600,000 |   | $ | 6,265,585 |   | $ | 2,100,000 |   | $ | 19,335,581 |   |
| Real  estate — residential    |           | —                                |           | 39,036 |   | — |   | — |   | 5,936,719 |   | 5,975,755 |   |
| Construction  and land development |           | 5,495,208                             |           | 729,795 |   | 219,180 |   | — |   | — |   | 6,444,183 |   |
| Commercial  and industrial         |           | 3,356,968                             |           | 1,675,540 |   | 328,017 |   | 1,119,363 |   | — |   | 6,479,888 |   |
| Consumer                           |           | 19,031                                |           | 736,418 |   | — |   | 11,553 |   | 305,478 |   | 1,072,480 |   |
| Gross  loans                       |           | $                                     | 12,541,848     |   | $ | 9,880,144 |   | $ | 1,147,197 |   | $ | 7,396,501 |   | $ | 8,342,197 |   | $ | 39,307,887 |   |
|                               |           |                                  |           |   |   |   |   |   |   |   |   |   |   |
| ** **                         | ** **     | ****As of  December 31, 2008**** | ** **     |
| ** **                         | **** **** | ** **                            | ** **     | ****Over 1 Year  through 5 Years**** | ** ** | ****Over 5 Years**** | ** ** | ** ** | ** ** |
| ** **                         | **** **** | ****One Year  or Less****             | **** **** | ****Fixed  Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | **** **** | ****Fixed  Rate**** | **** **** | ****Floating or  Adjustable  Rate**** | ** ** | ****Total**** | ** ** |
| Real  estate — commercial     |           | $                                     | 30,000         |   | $ | 5,182,139 |   | $ | 991,531 |   | $ | 1,275,136 |   | $ | — |   | $ | 7,478,806 |   |
| Real  estate — residential    |           | 1,550                                 |           | 415,995 |   | — |   | — |   | 4,625,807 |   | 5,043,352 |   |
| Construction  and land development |           | 3,103,333                             |           | — |   | 745,222 |   | — |   | — |   | 3,848,555 |   |
| Commercial  and industrial         |           | 2,267,209                             |           | 993,550 |   | 575,207 |   | 247,667 |   | — |   | 4,083,633 |   |
| Consumer                           |           | 242,389                               |           | 716,222 |   | — |   | — |   | — |   | 958,611 |   |
| Gross  loans                       |           | $                                     | 5,644,481      |   | $ | 7,307,906 |   | $ | 2,311,960 |   | $ | 1,522,803 |   | $ | 4,625,807 |   | $ | 21,412,957 |   |

 

****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, OREO, and otherrepossessed assets.

 

An internal list ofclassified and criticized loans is maintained to help management assess theoverall quality of the loan portfolio and the adequacy of the allowance forloan losses. Loans classified as “substandard” are those loans with welldefined weaknesses, such that future capacity to repay the loan has beennegatively impacted.  Loans classified as“doubtful” are those loans that have characteristics similar to substandardloans, but the weaknesses have declined to the point where complete collectionof the obligation from all sources is unlikely and a portion of the principalmay be charged-off.  Although loansclassified as substandard do not duplicate loans classified as doubtful, bothsubstandard and doubtful loans may include some loans that are past due atleast 90 days, are on 

 

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nonaccrual status or havebeen restructured. Loans classified as “loss” are those loans that are in theprocess of being charged-off. At June 30, 2009, Solera National Bank hadno nonperforming assets, no loans classified as doubtful or loss and no loansat least 90 days past due.

 

****Allowance forLoan Losses****

 

Implicit in SoleraNational Bank’s lending activities is the fact that loan losses will beexperienced 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 factors that influence the amount include,among others, the remaining collateral and/or financial condition of theborrowers, historical loan loss, changes in the size and composition of theloan portfolio, and general economic conditions.

 

The amount of theallowance equals the cumulative total of the provisions made from time to time,reduced by loan charge-offs and increased by recoveries of loans previouslycharged-off.  Until management hasadequate historical data upon which to base the estimate of the allowance forloan losses, information regarding the ability of the borrower to repay theloan, current economic conditions and other pertinent factors will be considered.  The allowance was $520,000, or 1.32% ofoutstanding principal as of June 30, 2009 compared to $268,000, or 1.25%of outstanding principal as of December 31, 2008.

 

Credit and loan decisionsare made by management and the Board of Directors in conformity with loanpolicies established by the Board of Directors. Solera National Bank’s practiceis to charge-off any loan or portion of a loan when the loan is determined bymanagement to be uncollectible due to the borrower’s failure to meet repaymentterms, the borrower’s deteriorating or deteriorated financial condition, thedepreciation of the underlying collateral, the loan’s classification as a lossby regulatory examiners, or other reasons. During the six months ended June 30,2009 and 2008, there were no charge-offs.

 

****Off-Balance-SheetArrangements****

 

In the ordinary course ofbusiness, the Company enters into various off-balance-sheet commitments andother arrangements to extend credit that are not reflected in the consolidatedbalance sheets of the Company.  Thebusiness purpose of these off-balance-sheet commitments is the routineextension of credit.  The total amountsof off-balance-sheet financial instruments with credit risk were as follows:

 
| ** **                   | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------|------------|------------------------|------------|----------------------------|------------|
| Commitments to extend credit |       | $                      | 5,387,415  |                       | $          | 6,715,658 |   |
| Letters of credit            |       | —                 |       | —                     |       |
| Total commitments            |       | $                      | 5,387,415  |                       | $          | 6,715,658 |   |

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Commitments also includerevolving lines of credit arrangements and unused commitments for commercialand real estate secured loans.  Sincemany of the commitments are expected to expire without being drawn upon, thecommitments do not 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 loan facilities to customers and, therefore,the Company applies the same rigorous underwriting 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 creditlosses are expected from these commitments and arrangements.

 

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****Borrowings****

 

As of June 30, 2009,the Bank had $9.5 million in borrowings from the Federal Home Loan Bank ofTopeka.  Of this amount, $1.7 million wasin variable-rate, overnight borrowings at an average rate of 0.28% and $7.8million was in term-advances with varying maturity dates between April 2010and June 2013 at a weighted-average fixed interest rate of 3.97%.

 

The Bank has alsoestablished unsecured Federal Funds lines-of-credit totaling $11.3 million withBankers Bank of the West, First Tennessee Bank N.A., the Independent BankersBank, and Wells Fargo.  Additionally, theBank has access to a secured Federal Funds line with Bankers Bank of the Westand the ability to borrow at the Federal Reserve Bank Discount Window, on asecured basis.  As of June 30, 2009,the Company had no amount outstanding on these lines.

 

****Loan Commitments****

 

At June 30, 2009,the Company had $5.4 million in outstanding loan origination commitments.  Management believes Solera National Bank hassufficient funds available to meet current origination and other lendingcommitments.

 

****CapitalResources and Capital Adequacy Requirements****

 

The risk-based capitalregulations established and administered by the banking regulatory agencies areapplicable to Solera National Bank. Risk-based capital guidelines are designedto make regulatory capital requirements more sensitive to differences in riskprofiles among banks, to account for off-balance-sheet exposure, and tominimize disincentives for holding liquid assets. Under the regulations, assetsand off-balance-sheet items are assigned to broad risk categories, each withappropriate weights. The resulting capital ratios represent capital as apercentage of total risk-weighted assets and off-balance-sheet items. Under theprompt corrective action regulations, to be adequately capitalized a bank mustmaintain minimum ratios of total capital to risk-weighted assets of 8.0%, Tier1 capital to risk-weighted assets of 4.0%, and Tier 1 capital to total averageassets of 4.0%. Failure to meet these capital requirements can initiate certainmandatory, and possibly additional discretionary, actions by regulators that,if undertaken, could have a direct material effect on Solera National Bank’sfinancial statements.

 

As of June 30,2009, Solera National Bank was categorized as well-capitalized. Awell-capitalized institution must maintain a minimum ratio of total capital torisk-weighted assets of at least 10.0%, a minimum ratio of Tier 1 capital torisk-weighted assets of at least 6.0%, and a minimum ratio of Tier 1 capital tototal average assets of at least 5.0% and must not be subject to any writtenorder, agreement, or directive requiring it to meet or maintain a specificcapital level.

 

Thefollowing table summarizes the ratios of the Bank and the regulatory minimumcapital requirements at June 30, 2009:

 
| ****As of June 30, 2009****          | **** **** | ****Actual**** | **** **** | ****For Capital Adequacy  Purposes**** | ** ** | ****To Be Well-Capitalized  Under Prompt Corrective  Action Problems**** | ** ** |
|-------------------------------------------|----------------|----------------|----------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **($ in thousands)**                 | ** **     | **Amount**     | ** **     | **%**                                  | ** ** | **Amount**                                                               | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Total  capital (to risk-weighted assets)  |           | $              | 15,572         |                                   | 26.9       | %                                                                        | $          | 4,631 |   | >8.0 | % | $ | 5,789 |   | >10.0 | % |
| Tier  1 capital (to risk-weighted assets) |           | $              | 15,052         |                                   | 26.0       | %                                                                        | $          | 2,316 |   | >4.0 | % | $ | 3,473 |   | >6.0 | % |
| Tier  1 capital (to average assets)       |           | $              | 15,052         |                                   | 16.9       | %                                                                        | $          | 3,553 |   | >4.0 | % | $ | 4,442 |   | >5.0 | % |

 

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****Liquidity****

 

The primary source ofliquidity for the Company will be dividends paid by Solera National Bank.  Solera National Bank is currently restrictedfrom paying dividends without regulatory approval that will not be granteduntil the accumulated deficit has been eliminated.  During the second quarter 2009, the Companypurchased $1.0 million of Solera National Bank stock.  The Bank utilized these funds to increase itscapital ratios, thereby enabling the Bank to maintain its legal lending limits.

 

Solera National Bank’sliquidity is monitored by its staff, the Asset Liability Committee and theBoard of Directors, who review historical funding requirements, currentliquidity position, sources and stability of funding, marketability of assets,options for attracting additional funds, and anticipated future funding needs,including the level of unfunded commitments.

 

Solera National Bank’sprimary sources of funds are retail and commercial deposits, loan andsecurities repayments, other short-term borrowings, and other funds provided byoperations. While scheduled loan repayments and maturing investments arerelatively predictable, deposit flows and early loan prepayments are moreinfluenced by interest rates, general economic conditions, and competition.Solera National Bank will maintain investments in liquid assets based uponmanagement’s assessment of the need for funds, expected deposit flows, yieldsavailable on short-term liquid assets, and objectives of the asset/liabilitymanagement program.

 

As loan demand increases,greater pressure will be exerted on Solera National Bank’s liquidity. However,it is management’s intention to maintain a conservative loan to deposit ratioin the range of 80 - 90% over time. Given this goal, Solera National Bank willnot aggressively pursue lending opportunities if sufficient funding sources (**e.g.**,deposits, Federal Funds, etc.) are not available, nor will Solera National Bankseek to attract transient, volatile, non-local deposits with above marketinterest rates. As of June 30, 2009, the loan to deposit ratio was 59%, aslight increase from 57% at December 31, 2008.

 

Solera National Bank hadcash and cash equivalents of $1.1 million, or 1.1% of total Bank assets, at June 30,2009.  Management feels Solera NationalBank should have adequate liquidity to meet anticipated future funding needs.

 

# **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

#  

As a smaller reportingcompany, the Company is not required to provide the information required bythis Item.

 

# **ITEM4(T). CONTROLS AND PROCEDURES**

#  

**Disclosure Controls andProcedures**

 

Management is responsible for maintaining effectivedisclosure controls and procedures.  As of the end of the period coveredby this Quarterly Report on Form 10-Q, management evaluated the effectivenessand operation of the Company’s disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on thatevaluation, both the Company’s Principal Executive Officer and PrincipalAccounting and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures are effective to ensure that the informationrequired to be disclosed by the Company in reports that are filed or submittedunder the Exchange Act are recorded, processed, summarized and reported tomanagement within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to management as appropriate to allow timely decisions regardingdisclosure.

 

**Changes in Internal Control over FinancialReporting**

 

There have been no changes in internal controls overfinancial reporting during the Company’s last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal controls over financial reporting.

 

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# **PART II — OTHER INFORMATION**

#  

# **ITEM 1.LEGAL PROCEEDINGS**

#  

Notapplicable.

 

# **ITEM 1A.  RISK FACTORS**

#  

As a smaller reportingcompany, the Company is not required to provide the information required bythis Item.

 

# **ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

#  

Notapplicable.

 

# **ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

#  

Notapplicable.

 

# **ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

#  

OnMay 21, 2009, the Company held its annual meeting of stockholders. At thatmeeting, the stockholders voted on the following items:

 

1.  Election of directors.  The following thirteen directors, comprisingall of the nominees for election to the board of directors, were reelected asdirectors of the Company to serve until the next annual meeting ofstockholders:

 
| **Name**           | ** ** | **Term** | ** ** | **Votes Cast  For Election** | ** ** | **Votes  Withheld** | ** ** |
|--------------------|------------|----------|------------|------------------------------|------------|---------------------|------------|
|               |       |     |       |                         |       |                |       |
| Norma R. Akers     |       | 1 year   |       | 1,392,397                    |       | 34,322              |       |
| Rob L. Alvarado    |       | 1 year   |       | 1,402,019                    |       | 24,700              |       |
| Maria G. Arias     |       | 1 year   |       | 1,381,019                    |       | 45,700              |       |
| Douglas Crichfield |       | 1 year   |       | 1,397,019                    |       | 29,700              |       |
| Robert M. Gallegos |       | 1 year   |       | 1,396,519                    |       | 30,200              |       |
| Steve D. Gutterman |       | 1 year   |       | 1,381,019                    |       | 45,700              |       |
| Ronald E. Montoya  |       | 1 year   |       | 1,401,519                    |       | 25,200              |       |
| Ray L. Nash        |       | 1 year   |       | 1,396,519                    |       | 30,200              |       |
| Joel S. Rosenstein |       | 1 year   |       | 1,366,019                    |       | 60,700              |       |
| Basil Sabbah       |       | 1 year   |       | 1,347,617                    |       | 79,102              |       |
| F. Stanley Sena    |       | 1 year   |       | 1,396,519                    |       | 30,200              |       |
| Mark R. Smith      |       | 1 year   |       | 1,376,897                    |       | 49,822              |       |
| Kent C. Veio       |       | 1 year   |       | 1,381,519                    |       | 45,200              |       |

 

2.         Stockholdersvoted to ratify the selection of McGladrey & Pullen, LLP as SoleraNational Bancorp Inc.’s independent registered public accounting firm for thefiscal year ending December 31, 2009. The results of the vote were as follows: votes cast for the proposal were 1,359,817; votes cast against theproposal were 5,152; and abstentions were 61,750.

 

# **ITEM 5.OTHER INFORMATION**

#  

On August 7, 2009,the Company, the Bank and Douglas Crichfield, our current President and ChiefExecutive Officer, entered into an Executive Employment Agreement (the “Agreement”)with the following terms and 

 

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conditions of employmentas approved by the Company’s Board of Directors, effective August 1, 2009(the “Effective Date”).

 

The Agreement will expireand terminate by its own terms three years after the Effective Date. Following the initial three year term, unless either party gives writtennotice ninety days prior to the end of the initial three year term, theAgreement shall automatically renew annually for additional one year terms.

 

Pursuant to theAgreement, Mr. Crichfield will continue to serve as President and ChiefExecutive Officer of the Company and the Bank and will receive an annual basesalary of $175,000 and is eligible for a bonus of up to 100% of his base salarydepending on meeting or exceeding certain thresholds and goals as set forth inthe Agreement and in the 2009 CEO short term incentive comp program adopted inconnection with the Agreement as follows:

0-10% if meets goals

10-25% if exceeds goalsby 10%

25-50% if exceeds goalsby 25%

50-100% if exceeds goalsby 50%

 

In connection withexecuting the Agreement, Mr. Crichfield was granted options to purchase upto 40,000 sharesof the Company’s common stock, exercisable at $6.40 per share, which was theclosing market price on the date of grant.  The options vest ratably on amonthly basis over four years and expire ten years from the date ofgrant.  Mr. Crichfield is also entitled to receive employee anddependent health insurance, dental insurance, paid sick leave and four weeks ofpaid vacation per year, and any additional benefits provided to all Bankemployees.  The Bank also shall provide Mr. Crichfield with term lifeinsurance coverage at the Bank’s expense in an initial amount of two times hisannual base salary, and having a term not less than one year.

 

In addition to thecompensation as set forth above and provided for in the Agreement, Mr. Crichfieldwill continue to receive a monthly housing allowance of $2,000 andreimbursement for mileage according to the current IRS stated rate for weekendtravel to and from his residence in Eagle, Colorado through December 31,2009.

 

The Bank may terminatethe Agreement at any time for Cause.  In the event of termination forCause, the Bank shall have no liability for any additional payments of salaryor any benefits beyond the termination date, except as otherwise required bylaw.  Also, the Bank may terminate the Agreement at any time if, in thereasonable discretion of the Board of Directors, it is determined that theAgreement or the employment of Mr. Crichfield may prevent or otherwiseencumber the Bank’s ability to enter into any agreement or transaction that isin the best interest of the Bank.  In the event of termination of theAgreement in the best interest of the Bank, Mr. Crichfield shall beentitled to receive a severance payment in an amount equal to one hundred twentydays of his then-current base salary.  Finally, the Bank may terminate theAgreement at any time for any or “no reason.”  In the event that theAgreement is terminated for “no reason,” Mr. Crichfield shall be entitledto receive a severance payment in an amount equal to the payment of histhen-current base salary for the lesser of the remaining term of the Agreementor six months.

 

The Bank or Mr. Crichfieldmay terminate the Agreement at any time for a Change of Control and, in such anevent, he shall be entitled to receive a severance payment in an amount equalto 1.99 times his then-current annual base salary.  All options which havenot vested as of the termination date shall automatically vest as of thetermination date.  A Change of Control shall mean (i) a sale ofsubstantially all of the assets of the Bank to a third party, or (ii) asale, or acquisition, by merger or otherwise, of a controlling interest of theequity securities of the Bank or the Company.

 

The Agreement alsocontains customary non-solicitation and non-competition provisions that areeffective during the term of the Agreement and for a period of one yearfollowing termination of the Agreement.

 

The above description ofthe Agreement is qualified in its entirety by reference to the Agreement, acopy of which is attached to this Form 10-Q as Exhibit 10.2.

 

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# Tableof Contents

 

# **ITEM 6.EXHIBITS**

#  

| 10.1 |   | Separation Agreement by  and between Solera National Bank, Solera National Bancorp, Inc., and  James C. Foster dated April 28, 2009.*                                                     |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Executive Employment  Agreement by and between Solera National Bank, Solera National  Bancorp, Inc., and Douglas Crichfield dated August 1, 2009.*                                        |
| 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 Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act.*                                                       |
| 32.1 |   | Certification  of Principal Executive Officer and Principal Accounting and Chief Financial  Officer 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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Table of Contents

 

**SOLERA NATIONAL BANCORP, INC.**

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| * *                         | *SOLERA  NATIONAL BANCORP, INC.*                      |
|----------------------------------|-------------------------------------------------------|
| *** ***                     | *(Registrant)*                                        |
| *** ***                     | *** ***                                          |
| Date: August 12,  2009      | /s/ Douglas Crichfield                                |
|                             | Douglas Crichfield                                    |
|                             | President and Chief  Executive Officer                |
|                             | (Principal Executive  Officer)                        |
|                             |                                                  |
|                             |                                                  |
|  Date: August 12, 2009 | /s/ Robert J. Fenton                                  |
|                             | Robert J. Fenton                                      |
|                             | Executive Vice  President and Chief Financial Officer |
|                             | (Principal Accounting  and Chief Financial Officer)   |

 

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# Tableof Contents

 

# **EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                        |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Exhibit**                                                                                                                                                                       |
|        |       |                                                                                                                                                                                              |
| 10.1        |       | Separation Agreement by  and between Solera National Bank, Solera National Bancorp, Inc. and  James C. Foster dated April 28, 2009                                                      |
|        |       |                                                                                                                                                                                              |
| 10.2        |       | Executive Employment  Agreement by and between Solera National Bank, Solera National  Bancorp, Inc., and Douglas Crichfield dated August 1, 2009                                        |
|        |       |                                                                                                                                                                                              |
| 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 Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act                                                       |
|        |       |                                                                                                                                                                                              |
| 32.1        |       | Certification of  Principal Executive Officer and Principal Accounting and Chief Financial  Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  and 18 U.S.C. §1350 |

 

39

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